Oblicon Mid Full Text

PRESCRIPTION
SPOUSES FRANCISCO SIERRA (substituted by DONATO, TERESITA,

TEODORA, LORENZA, LUCINA, IMELDA, VILMA, and MILAGROS SIERRA) and
ANTONINA SANTOS, SPOUSES ROSARIO SIERRA and EUSEBIO CALUMA
LEYVA, and SPOUSES SALOME SIERRA and FELIX GATLABAYAN (substituted
by BUENA VENTURA, ELPIDIO, PAULINO, CATALINA, GREGORIO, and
EDGARDO GATLABAYAN, LORETO REILLO, FERMINA PEREGRINA, and NIDA
HASHIMOTO) vs. PAIC SAVINGS AND MORTGAGE BANK, INC., G.R. No.
197857, September 10, 2014, J. Perlas-Bernabe
G.R. No. 197857
September 10, 2014
SPOUSES FRANCISCO SIERRA (substituted by DONATO, TERESITA, TEODORA, LORENZA,

LUCINA, IMELDA, VILMA, and MILAGROS SIERRA) and ANTONINA SANTOS, SPOUSES
ROSARIO SIERRA and EUSEBIO CALUMA LEYVA, and SPOUSES SALOME SIERRA and
FELIX GATLABAYAN (substituted by BUENA VENTURA, ELPIDIO, PAULINO, CATALINA,
GREGORIO, and EDGARDO GATLABAYAN, LORETO REILLO, FERMINA PEREGRINA, and
NIDA HASHIMOTO), Petitioners,
vs.
PAIC SAVINGS AND MORTGAGE BANK, INC., Respondent.
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari is the Decision dated June 27, 2011 of the Court of
Appeals (CA) in CA-G.R. CV No. 91999 which reversed and set aside the Decision dated April 24,
2006 of the Regional Trial Court of Antipolo City, Branch 74 (RTC) in Civil Case No. 91-2153,
dismissing petitioners complaint for declaration of nullity of real estate mortgage and extrajudicial
foreclosure proceedings.
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The Facts
On May 31, 1983, Goldstar Conglomerates, Inc. (GCI), represented by Guillermo Zaldaga (Zaldaga),
obtained from First Summa Savings and Mortgage Bank (Summa Bank), now respondent Paic
Savings and Mortgage Bank, Inc. (PSMB), a loan in the amount of P1,500,000.00 as evidenced by
a Loan Agreement dated May 31, 1983. As security therefor, GCI executed in favor of PSMB six (6)
promissory notes in the aggregate amount ofP1,500,000.00 as well as a Deed of Real Estate
Mortgage over a parcel of land covered by Transfer Certificate of Title (TCT) No. 308475. As
additional security, petitioners Francisco Sierra, Rosario Sierra, and Spouses Felix Gatlabayan and
Salome Sierra mortgaged four(4) parcels of land in Antipolo City, covered by TCT Nos. 308476,
308477, 308478, and 308479, and respectively registered in their names (subject properties).
Records show that after the signing of the mortgage deed, Zaldaga gave petitioner Francisco
Sierra four (4) managers checks with an aggregate amount of P200,000.00, which werelater
successfully encashed, as well as several post-dated checks.
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Eventually, GCI defaulted in the payment of its loan to PSMB, thereby prompting the latter to
extrajudicially foreclose the mortgage on the subject properties in accordance with Act No. 3135, as
amended, with due notice to petitioners. In the process, PSMB emerged as the highest bidder in
the public auction sale held on June 27, 1984 for a total bid price of P2,467,272.66. Since
petitioners failed to redeem the subject properties within the redemption period, their certificates of
title were cancelled and new ones were issued in PSMBs name.
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On September 16, 1991, petitioners filed a complaint for the declaration of nullity ofthe real estate
mortgage and its extrajudicial foreclosure, and damages against PSMB and Summa Bank before the
RTC, docketed as Civil Case No. 91-2153.
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In the said complaint, petitioners averred that under pressing need of money, with very limited
education and lacking proper instructions, they fell prey to a group who misrepresented to have
connectionswith Summa Bank and, thus, could help them secure a loan. They were made to
believe that they applied for a loan, the proceeds of which would be released through checks drawn
against Summa Bank. Relying in good faith on the checks issued to them, petitioners
unsuspectingly signed a document denominated as Deed of Real Estate Mortgage (subject deed),
couched in highly technical legal terms, which was notinterpreted in a language/dialect known to
them, and which was not accompanied by the loan documents. However, when they presented for
payment the earliest-dated checks to the drawee bank, the same were dishonored for the reason
"Account Closed." Upon confrontation, some members of the group assured petitioners that there
was only a misunderstanding and that their certificates of titles would be returned. Subsequently,
petitioners learned that: (a) the loan account secured by the real estate mortgage was in the nameof
another person and not in their names as they were made to understand; (b) despite lack of special
authority from them, foreclosure proceedings over the subject properties were initiated by PSMB and
not Summa Bank in whose favor the mortgage was executed; (c) the period of redemption had
already lapsed; and (d) the ownership over the subject properties had already been consolidated in
the name of PSMB. Petitioners likewise lamented that they were not furnished copies of the loan
and mortgage documents, or notified/apprised of the assignment to PSMB, rendering them unable to
comply with their obligations under the subject deed. They further claimed that theywere not
furnished a copy of the statement of account, which was bloated with unconscionable and unlawful
charges, assessments, and fees, nor a copy of the petition for foreclosure prior to the precipitate
extrajudicial foreclosure and auction sale which failed to comply with the posting and notice
requirements. In light of the foregoing, petitioners prayed that the real estate mortgage and the
subsequent foreclosure proceedings, and all derivative titles and rights arising therefrom be declared
null and void ab initio, and that the subject properties be reconveyed back to them, with further
prayer for compensatory and exemplary damages, and attorneys fees.
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PSMB filed its answer, averring that PSMB and Summa Bank are one and the same entity. It
prayed for the dismissal of the complaint, claiming that petitioners have no cause of action against it
because it never extended any loan to them. PSMB maintained that: (a) it acted in good faith with
respect to the subject transactions and that petitioners action should be directed against the group
who deceived them; (b) the subject properties were mortgaged to securean obligation covered by
the loan agreement with GCI; (c) the mortgage was valid, having been duly signed by petitioners
before a notary public; (d) the foreclosure proceedings were regular, having complied with the
formalities required by law; and (e) petitioners allowed time topass without pursuing their purported
right against Summa Bank and/or PSMB. PSMB thereby interposed a counterclaim for
compensatory, moral and exemplary damages, and attorneys fees for the baseless suit.
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The RTC Ruling

In a Decision dated April 24, 2006, the RTC: (a) declared the subject deed and the extrajudicial
foreclosure proceedings null and void; (b) cancelled the certificates of title of PSMB; and (c) directed
the reinstatement of petitioners certificates of title.
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While the RTC ruled that the loan transaction was a valid and binding agreement between Summa
Bank and GCI, it held that the subject deed did not reflect the true intent and agreement between
Summa Bank and petitioners who were made tobelieve that they were the principal obligors in the
loan, thereby invalidating their consent to the mortgage. It likewise held that petitioners cannot be
faulted for failing to heed the notice of extrajudicial foreclosure sale by PSMB considering their lackof
notice that Summa Bank had changed its name to PSMB. Nonetheless, considering that petitioners
had received partial loan proceeds of P200,000.00, the RTC heldthem liable for such amount and
accordingly directed PSMB to (a) allow petitioners to pay for their loan in the amount ofP200,000.00
plus 12% interest, and (b) pay moral and exemplary damages, attorneysfees, and the costs of suit.
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Aggrieved, PSMB filed a motion for reconsideration, while petitioners filed a motion for discretionary
execution which were, however, denied in an Order dated February 11, 2008. Dissatisfied, PSMB
interposed an appeal to the CA.
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The CA Ruling
In a Decision dated June 27, 2011, the CAreversed and set aside the RTC Decision and dismissed
petitioners complaint for lack of merit.
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It held that petitioners were not able to sufficiently prove their claim that they were uneducated
and/or unschooled, rejecting the self-serving and uncorroborated testimony of petitioner Francisco
Sierra on such claim. In this relation, it pointed out that petitioners had knowingly and voluntarily
executed the subject deed, observing that: (a) prior to its execution, petitioners Francisco and
Rosario Sierra had previously mortgaged their properties twice to the Rural Bank of Antipolo,
showing that they were familiar with the intricacies of obtaining a loan and of the terms and
conditions of a mortgage, and (b) the page on which the parties affixed their signatures clearly
indicated petitioners as the mortgagors and GCI as the borrowers. Moreover, petitioners did not
demand for the release of the remaining amount of their alleged loan, raising issue thereon only in
their complaint filed in 1991.
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The CA likewise ruled that the action to annul the subject deed had already prescribed, since the
same was brought more than four (4) years from the discovery of the mistake orfraud, reckoned from
the time the earliest checks issued to petitioners were dishonored, or on January 9, 1984, this being
the time the consideration orprice for the execution of the subject deed turned out to be false.
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The CA further held that petitioners were barred by lachesfrom asserting any claim on the subject
properties considering that despite receipt of the letter dated June 11, 1984 informing them of the
scheduled auction sale, they failed to attend the sale or file an adverse claim, or to thereafter
redeem the subject properties.
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Unperturbed, petitioners filed the instant petition.

The Issues Before The Court
The essential issues in this case are whether or not the CA erred in: (a) ruling that petitioners were
aware that they were mere accommodation mortgagors, and (b) dismissing the complaint on the
grounds of prescription and laches.
The Courts Ruling
The petition lacks merit.
A. Vitiation of Consent.
Time and again, the Court has stressed that allegations must be proven by sufficient evidence
because mere allegation is not evidence. Thus,one who alleges any defect or the lack ofa valid
consent toa contract must establish the same by full, clear, and convincing evidence, not merely by
preponderance of evidence. The rule is that he who alleges mistake affecting a transaction must
substantiatehis allegation, since it is presumed that a person takes ordinary care of his concerns and
that private transactions have been fair and regular. Where mistake or error is alleged by parties
who claim to have not had the benefit of a good education, as in this case, they must establish that
their personal circumstances prevented them from giving their free, voluntary, and spontaneous
consent to a contract.
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After a judicious perusal of the records, the Court finds petitioners claim of mistake or error (that
they acted merely as accommodation mortgagors) grounded on their "very limited education" and
"lack of proper instruction" not to be firmly supported by the evidence on record.
As correctly observed by the CA, the testimony of petitioner Francisco Sierra as to petitioners
respective educational backgrounds remained uncorroborated. The other petitioners-signatories to
the deed never testified that their educational background prevented them from knowingly executing
the subject deed as mere accommodation mortgagors. Petitioners claim of lack of "proper
instruction on the intricacies in securing [the] loan from the bank" is further belied by the fact that
petitioners Francisco and Rosario Sierra had previously mortgaged two (2) of the subject properties
twiceto the Rural Bank of Antipolo.Moreover, petitioners did not: (a) demand for any loan document
containingthe details of the transaction, i.e., monthly amortization, interest rate, added charges, etc.,
and the release of the remaining amount of their alleged loan; and (b) offer to pay the purported
partial loan proceeds they received at any time, complaining thereof only in 1991 when they filed
their complaint. Indeed, the foregoing circumstances clearly show that petitioners are aware that
they were mere accommodation mortgagors, debunking their claim that mistake vitiated their
consent to the mortgage.
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Thus, there being valid consent on the part of petitioners to act as accommodation mortgagors, no
reversible error was committed by the CA in setting aside the RTCs Decision declaring the real
estate mortgage as void for vices of consent and awardingdamages to petitioners. As mere
accommodation mortgagors, petitioners are not entitled to the proceeds of the loan, nor were
required to be furnished with the loan documents or notice of the borrowers default in payingthe
principal, interests, penalties, and other charges on due date, or of the extrajudicial foreclosure
proceedings, unless stipulated in the subject deed. As jurisprudence states, an accommodation
mortgagor is a third person who is not a debtor to a principal obligation but merely secures it by
mortgaging his or her own property. Like an accommodation party to a negotiable instrument, the
accommodation mortgagor in effect becomes a surety to enable the accommodated debtor to obtain
credit, as petitioners in this case.
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B. Prescription.
On a second matter, petitioners insist that the CA erred in ruling that their action for nullification of
the subject deed had already prescribed, contending that the applicable provision is the ten-year
prescriptive period of mortgage actions under Article 1142 of the Civil Code.
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The contention is bereft of merit.

Based on case law, a "mortgage action" refers to an action to enforcea right necessarily arising from
a mortgage. In the present case, petitioners are not "enforcing"their rights under the mortgage but
are, in fact, seeking to be relieved therefrom.The complaint filed by petitioners is, therefore, not a
mortgage actionas contemplated under Article 1142.
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Considering, however, petitioners failure to establish that their consent to the mortgage was vitiated,
rendering them without a cause of action, much less a right of action to annul the mortgage, the
question of whether or not the complaint has prescribed becomes merely academic.
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In any event, even assuming that petitioners have a valid cause of action, the four-year prescriptive
period on voidable contracts shall apply. Since the complaint for annulment was anchored on a
claim of mistake, i.e., that petitioners are the borrowers under the loan secured by the mortgage, the
action should have been brought withinfour (4) years from its discovery.
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A perusal of the complaint, however, failed to disclose when petitioners learned that they were not
the borrowers under the loan secured by the subject mortgage. Nonetheless, considering that
petitioners admitted receipt on June 19, 1984 of PSMBs letter dated June 11, 1984 informing them
of the scheduled foreclosure sale on June 27, 1984 due to GCIs breach of its loan obligation
secured by the subject properties, the discovery of the averred mistake should appear to be
reckoned from June 19, 1984, and not from the dishonor of the checks on January 9, 1984 as ruled
by the CA.
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C. Laches.
As to this final issue, the Court holds that !aches applies.
As the records disclose, despite notice on June 19, 1984 of the scheduled foreclosure sale,
petitioners, for unexplained reasons, failed to impugn the real estate mortgage and oppose the
public auction sale for a period of more than seven (7) years from said notice. As such, petitioners'
action is already barred by !aches, which, as case law holds, operates not really to penalize neglect
or sleeping on one's rights, but rather to avoid recognizing a right when to do so would result in a
clearly inequitable situation. As mortgagors desiring to attack a mortgage as invalid, petitioners
should act with reasonable promptness, else its unreasonable delay may amount to
ratification. Verily, to allow petitioners to assert their right to the subject properties now after their
unjustified failure to act within a reasonable time would be grossly unfair to PSMB, and perforce
should not be sanctioned.
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WHEREFORE, the petition is DENIED. The Decision dated June 27, 2011 of the Court of Appeals
(CA) in CA-G.R. CV No. 91999 is hereby AFFIRMED.
SO ORDERED.
PURE AND CONDITIONAL

OBLIGATIONS
GOLDEN VALLEY EXPLORATION, INC. vs. PINKIAN MINING COMPANY and
COPPER VALLEY, INC., G.R. No. 190080, June 11, 2014, J. Perlas-Bernabe
G.R. No. 190080
June 11, 2014
GOLDEN VALLEY EXPLORATION, INC., Petitioner,

vs.
PINKIAN MINING COMPANY and COPPER VALLEY, INC., Respondents.
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari are the Decision dated July 23, 2009 and the
Resolution dated October 23, 2009 of the Court of Appeals (CA) in CA-G.R. CV. No. 90682 which
reversed the Decision dated August 18, 2006 of the Regional Trial Court of Makati City, Branch 145
(RTC) in Civil Case No. 01-324 and, consequently, affirmed the validity of the rescission of the
Operating Agreement between petitioner Golden Valley Exploration, Inc. (GVEI) and respondent
Pinkian Mining Company (PMC) covering various mining claims in Kayapa, Nueva Vizcaya, as well
as the Memorandum of Agreement between PMC and respondent Copper Valley, Inc. (CVI).
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The Facts
PMC is the owner of 81 mining claims located in Kayapa, Nueva Vizcaya, 15 of which were covered
by Mining Lease Contract (MLC) No. MRD-56, while the remaining 66 had pending applications for
lease. On October 30, 1987, PMC entered into an Operating Agreement (OA) with GVEI, granting
the latter "full, exclusive and irrevocable possession, use, occupancy , and control over the [mining
claims], and every matter pertaining to the examination, exploration, development and mining of the
[mining claims] and the processing and marketing of the products x x x ," for a period of 25 years.
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In a Letter dated June 8, 1999, PMC extra-judicially rescinded the OA upon GVEIs violation of
Section 5.01, Article V thereof. Cited as further justification for its action were reasons such as: (a)
violation of Section 2.03, Article II of the OA, or the failure of GVEI to advance the actual cost for the
perfection of the mining claims or for the acquisition of mining rights, cost of lease applications, lease
surveys and legal expenses incidental thereto; (b) GVEIs non-reimbursement of the expenses
incurred by PMC General Manager Benjamin Saguid in connection with the visit of a financier to the
mineral property in 1996; (c) its non-remittance of the US$300,000.00 received from Excelsior
Resources, Ltd.; (d) its nondisclosure of contracts entered into with other mining companies with
respect to the mining claims; (e) its being a mere "promoter/broker" of PMCs mining claims instead
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of being the operator thereof; and (f) its nonperformance of the necessary works on the mining
claims.
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GVEI contested PMCs extra-judicial rescission of the OA through a Letter dated December 7, 1999,
averring therein that its obligation to pay royalties to PMC arises only when the mining claims are
placed in commercial production which condition has not yet taken place. It also reminded PMC of
its prior payment of the amount ofP185,000.00 as future royalties in exchange for PMCs express
waiver of any breach or default on the part of GVEI.
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PMC no longer responded to GVEIs letter. Instead, it entered into a Memorandum of Agreement
dated May 2, 2000 (MOA) with CVI, whereby the latter was granted the right to "enter, possess,
occupy and control the mining claims" and "to explore and develop the mining claims, mine or
extract the ores, mill, process and beneficiate and/or dispose the mineral products in any method or
process," among others, for a period of 25 years.
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Due to the foregoing, GVEI filed a Complaint for Specific Performance, Annulment of Contract and
Damages against PMC and CVI before the RTC, docketed as Civil Case No. 01-324.
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The RTC Ruling

On August 18, 2006, the RTC rendered a Decision in favor of GVEI, holding that since the mining
claims have not been placed in commercial production, there is no demandable obligation yet for
GVEI to pay royalties to PMC. It further declared that no fault or negligence may be attributed to
GVEI for the delay in the commercial production of the mining claims because the non-issuance of
the requisite Mineral Production Sharing Agreement (MPSA) and other government permits,
licenses, and consent were all affected by factors beyond GVEIs control. The RTC, thus, declared
the rescission of the OA void and the execution of the MOA between PMC and CVI without force and
effect. In this relation, it ordered PMC to comply with the terms and conditions of the OA until the
expiration of its period.
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At odds with the RTCs ruling, PMC elevated the case on appeal to the CA.
The CA Ruling
In a Decision dated July 23, 2009, the CA reversed the RTC ruling, finding that while the OA gives
PMC the right to rescind only on the ground of (GVEIs) failure to pay the stipulated royalties, Article
1191 of the Civil Code allows PMC the right to rescind the agreement based on a breach of any of its
provisions. It further held that the inaction of GVEI for a period of more than seven (7) years to
operate the areas that were already covered by a perfected mining lease contract and to acquire the
necessary permits and licenses amounted to a substantial breach of the OA, the very purpose of
which was the mining and commercial distribution of derivative products that may be recovered from
the mining property. For the foregoing reasons, the CA upheld the validity of PMCs rescission of
the OA and its subsequent execution of the MOA with CVI.
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Dissatisfied with the CAs ruling, GVEI filed a motion for reconsideration which was, however, denied
by the CA in a Resolution dated October 23, 2009, hence, this petition.
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The Issue Before the Court
The central issue for the Courts resolution is whether or not there was a valid rescission of the OA.
The Courts Ruling
The Court resolves the issue in the affirmative.
In reciprocal obligations, either party may rescind the contract upon the others substantial breach of
the obligation/s he had assumed thereunder. The basis therefor is Article 1191 of the Civil Code
which states as follows:
Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with the
payment of damages in either case. He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a
period.
This is understood to be without prejudice to the rights of third persons who have acquired the thing,
in accordance with Articles 1385 and 1388 and the Mortgage Law.
More accurately referred to as resolution, the right of rescission under Article 1191 is predicated on a
breach of faith that violates the reciprocity between parties to the contract. This retaliatory remedy
is given to the contracting party who suffers the injurious breach on the premise that it is "unjust that
a party be held bound to fulfill his promises when the other violates his."
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As a general rule, the power to rescind an obligation must be invoked judicially and cannot be
exercised solely on a partys own judgment that the other has committed a breach of the
obligation. This is so because rescission of a contract will not be permitted for a slight or casual
breach, but only for such substantial and fundamental violations as would defeat the very object of
the parties in making the agreement. As a well-established exception, however, an injured party
need not resort to court action in order to rescind a contract when the contract itself provides that it
may be revoked or cancelled upon violation of its terms and conditions. As elucidated in Froilan v.
Pan Oriental Shipping Co., "there is x x x 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." Similarly, in Dela Rama Steamship Co., Inc. v. Tan, it was held that
judicial permission to rescind an obligation is not necessary if a contract contains a special provision
granting the power of cancellation to a party.
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With this in mind, the Court therefore affirms the correctness of the CAs Decision upholding PMCs
unilateral rescission of the OA due to GVEIs non-payment of royalties considering the parties
express stipulation in the OA that said agreement may be cancelled on such ground. This is found in
Section 8.01, Article VIII in relation to Section 5.01, Article V of the OA which provides:
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ARTICLE VIII
CANCELLATION/TERMINATION OF AGREEMENT
8.01 This Agreement may be cancelled or terminated prior to the expiration of the period, original or
renewal mentioned in the next preceding Section only in either of the following ways:
a. By written advance notice of sixty (60) days from OPERATOR to PINKIAN with or without
cause by registered mail or personal delivery of the notice to PINKIAN.
b. By written notice from PINKIAN by registered or personal deliver of the notice to
OPERATOR based on the failure to OPERATOR to make any payments determined to be
due PINKIAN under Section 5.01 hereof after written demand for payment has been made
on OPERATOR: Provided that OPERATOR shall have a grace period of ninety (90) days
from receipt of such written demand within which to make the said payments to PINKIAN.
ARTICLE V
ROYALTIES
5.01 Should the PROPERTIES be placed in commercial production the PINKIAN shall be entitled to
a Royalty computed as follows:
(a) For gold 3.0 percent of net realizable value of gold
(b) For copper and others 2.0 percent of net realizable value
"Net REALIZABLE Value" is gross value less the sum of the following:
(1) marketing expenses including freight and insurance;
(2) all smelter charges and deductions;
(3) royalty payments to the government;
(4) ad valorem and export taxes, if any, paid to the government.
The aforesaid royalties shall be paid to PINKIAN within five (5) days after receipt of the smelter or
refinery returns. (Emphases and underscoring supplied)
By expressly stipulating in the OA that GVEIs non-payment of royalties would give PMC sufficient
cause to cancel or rescind the OA, the parties clearly had considered such violation to be a
substantial breach of their agreement. Thus, in view of the above-stated jurisprudence on the matter,
PMCs extra-judicial rescission of the OA based on the said ground was valid.
In this relation, the Court finds it apt to clarify that the following defenses raised by GVEI in its
petition would not impel a different conclusion:
First, GVEI cannot excuse its non-payment of royalties on the argument that no commercial mining
was yet in place. This is precisely because the obligation to develop the mining areas and put them
in commercial operation also belonged to GVEI as it expressly undertook "to explore, develop, and
equip the Claims to mine and beneficiate the ore thereof by any method or process" and "to enter
into contract, agreement, assignments, conveyances and understandings of any kind whatsoever
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with reference to the exploration, development, equipping and operation of the Claims, and the
mining and beneficiation of the ore derived therefrom, and marketing the resulting marketable
products."
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Records reveal that when the OA was signed on October 30, 1987, 15 mining claims were already
covered by a perfected mining lease contract, i.e., MLC No. MRD-56, granting to the holder thereof
"the right to extract all mineral deposits found on or underneath the surface of his mining claims x x
x; to remove, process and otherwise utilize the mineral deposits for his own benefit." This meant
that GVEI could have immediately extracted mineral deposits from the covered mineral land and
carried out commercial mining operations from the very start. However, despite earlier demands
made by PMC, no meaningful steps were taken by GVEI towards the commercial production of the
15 perfected mining claims and the beneficial exploration of those remaining. Consequently, seven
years into the life of the OA, no royalties were paid to PMC. Compounding its breach, GVEI not only
failed to pay royalties to PMC but also did not carry out its obligation to conduct operations on and/or
commercialize the mining claims already covered by MLC No. MRD-56. Truth be told, GVEIs nonperformance of the latter obligation under the OA actually made the payment of royalties to PMC
virtually impossible. Hence, GVEI cannot blame anyone but itself for its breach of the OA, which, in
turn, gave PMC the right to unilaterally rescind the same.
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Second, neither can GVEI successfully oppose PMCs rescission of the OA on the argument that the
ground to rescind the OA was only limited to its non-payment of royalties precisely because said
ground was actually among the reasons for PMCs rescission thereof. Considering the stipulations
above-cited, the ground for non-payment of royalties was in itself sufficient for PMC to extra-judicially
rescind the OA.
In any event, even discounting the ground of non-payment of royalties, PMC still had the right to
rescind the OA based on the other grounds it had invoked therefor, namely, (a) violation of Section
2.03, Article II of the OA, or the failure of GVEI to advance the actual cost for the perfection of the
mining claims or for the acquisition of mining rights, cost of lease applications, lease surveys and
legal expenses incidental thereto, (b) GVEIs non-reimbursement of the expenses incurred by PMC
General Manager Benjamin Saguid in connection with the visit of a financier to the mineral property
in 1996, (c) its non-remittance of the US$300,000.00 received from Excelsior Resources, Ltd., (d) its
non-disclosure of contracts entered into with other mining companies with respect to the mining
claims, (e) its being a mere "promoter/broker" of PMCs mining claims instead of being the operator
thereof, and (f) its non-performance of the necessary works on the mining claims, albeit the said
grounds should have been invoked judicially since the court would still need to determine if the same
would constitute substantial breach and not merely a slight or casual breach of the contract. While
Section 8.01, Article VIII of the OA as above-cited appears to expressly restrict the availability of an
extra-judicial rescission only to the grounds stated thereunder, the Court finds that the said
stipulation does not negate PMCs implied statutory right to judicially rescind the contract for other
unspecified acts that may actually amount to a substantial breach of the contract. This is based on
Article 1191 of the Civil Code (also above-cited) which pertinently provides that 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" and that "[t]he court shall decree the rescission claimed, unless there be just
cause authorizing the fixing of a period."
While it remains apparent that PMC had not judicially invoked the other grounds to rescind in this
case, the only recognizable effect, however, is with respect to the reckoning point as to when the
contract would be formally regarded as rescinded. Where parties agree to a stipulation allowing
extra-judicial rescission, no judicial decree is necessary for rescission to take place; the extra-judicial
rescission immediately releases the party from its obligation under the contract, subject only to court
reversal if found improper. On the other hand, without a stipulation allowing extra-judicial rescission,
it is the judicial decree that rescinds, and not the will of the rescinding party. This may be gathered
from previous Court rulings on the matter.
1wphi1
For instance, in Ocejo, Perez & Co. v. International Banking Corporation, where the seller, without
having reserved title to the thing sold, sought to re-possess the subject matter of the sale through an
action for replevin after the buyer failed to pay its purchase price, the Court ruled that the action of
replevin (which operates on the assumption that the plaintiff is the owner of the thing subject of the
suit) "will not lie upon the theory that the rescission has already taken place and that the seller has
recovered title to the thing sold." It held that the title which had already passed by delivery to the
buyer is not ipso facto re-vested in the seller upon the latters own determination to rescind the sale
because it is the judgment of the court that produces the rescission.
38
On the other hand, in De Luna v. Abrigo (De Luna), the Court upheld the validity of a stipulation
providing for the automatic reversion of donated property to the donor upon non-compliance of
certain conditions therefor as the same was akin to an agreement granting a party the right to extrajudicially rescind the contract in case of breach. The Court ruled, in effect, that a subsequent court
judgment does not rescind the contract but merely declares the fact that the same has been
rescinded, viz.:
39
[J]udicial intervention is necessary not for purposes of obtaining a judicial declaration rescinding a
contract already deemed rescinded by virtue of an agreement providing for rescission even without
judicial intervention, but in order to determine whether or not the rescission was proper. (Emphases
and underscoring supplied)
40
A similar agreement in Roman Catholic Archbishop of Manila v. CA allowing the ipso facto reversion
of the donated property upon noncompliance with the conditions was likewise upheld, with the Court
reiterating De Luna and declaring in unmistakable terms that:
41
42
Where [the propriety of the automatic rescission] is sustained, the decision of the court will be merely
declaratory of the revocation, but it is not in itself the revocatory act. (Emphasis and underscoring
supplied)
This notwithstanding, jurisprudence still indicates that an extra-judicial rescission based on grounds
not specified in the contract would not preclude a party to treat the same as rescinded. The
rescinding party, however, by such course of action, subjects himself to the risk of being held liable
for damages when the extra-judicial rescission is questioned by the opposing party in court. This was
made clear in the case of U.P. v. De Los Angeles, wherein the Court held as follows:
43
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.
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. x x x. (Emphases and underscoring supplied)
44
The pronouncement, which was also reiterated in the case of Angeles v. Calasanz, sought to
explain various rulings that continued to require judicial confirmation even in cases when the
rescinding party has a proven contractual right to extra-judicially rescind the contract. The
observation then was mainly on the practical effect of a stipulation allowing extra-judicial rescission
being merely "to transfer to the defaulter the initiative on instituting suit, instead of the rescinder."
45
46
Proceeding from the foregoing, the Court has determined that the other grounds raised by PMC in its
Letter dated June 8, 1999 to GVEI (the existence of which had not been convincingly disputed
herein) amounts to the latter's substantial breach of the OA. To the Court's mind, said infractions,
when taken together, ultimately resulted in GVEI's failure to faithfully perform its primordial obligation
under the OA to explore and develop PMC's mining claims as well as to put the same into
commercial operation. Accordingly, PMC's rescission of the OA on the foregoing grounds, in addition
to the ground of non-payment of royalties, is equally valid.
Finally, the Court cannot lend credence to GVEI's contention that when PMC entered into an
agreement with CVI covering the mining claims, it was committing a violation of the terms and
conditions of the OA. As above-explained, the invocation of a stipulation allowing extra-judicial
rescission effectively puts an end to the contract and, thus, releases the parties from the obligations
thereunder, notwithstanding the lack of a judicial decree for the purpose. In the case at bar, PMC,
through its Letter dated June 8, 1999 to GVEI, invoked Section 8.01, Article VIII in relation to Section
5.01, Article V of the OA which allows it to extra-judicially rescind the contract for GVEI's nonpayment of royalties. Thus, at that point in time, PMC had effectively rescinded the OA and was then
considered to have been released from its legal effects. Accordingly, there stood no legal
impediment so as to hinder PMC from entering into a contract with CVI covering the same mining
claims subject of this case.
In fine, the Court denies the instant petition and affirms the assailed CA Decision and Resolution.
WHEREFORE, the petition is DENIED. The Decision dated July 23, 2009 and the Resolution dated
October 23, 2009 of the Court of Appeals in CA-G.R. CV. No. 90682 are hereby AFFIRMED.
SO ORDERED.
ESTELA M. PERLAS-BERNABE
Associate Justice
WE CONCUR:
SWIRE REALTY DEVELOPMENT CORPORATION vs. JAYNE YU, G.R. No.

207133, March 09, 2015, J. Peralta
G.R. No. 207133, March 09, 2015
SWIRE REALTY DEVELOPMENT CORPORATION, Petitioner, v. JAYNE YU, Respondent.

DECISION
PERALTA, J.:
This is a Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil Procedure which seeks to
reverse and set aside the Decision 1 dated January 24, 2013 and Resolution 2 dated April 30, 2013 of the
Court of Appeals (CA) in CA-G.R. SP No. 121175.
The facts follow.
Respondent Jayne Yu and petitioner Swire Realty Development Corporation entered into a Contract to Sell on
July 25, 1995 covering one residential condominium unit, specifically Unit 3007 of the Palace of Makati,
located at P. Burgos corner Caceres Sts., Makati City, with an area of 137.30 square meters for the total
contract price of P7,519,371.80, payable in equal monthly installments until September 24, 1997.
Respondent likewise purchased a parking slot in the same condominium building for P600,000.00.
On September 24, 1997, respondent paid the full purchase price of P7,519,371.80 for the unit while making
a down payment of P20,000.00 for the parking lot. However, notwithstanding full payment of the contract
price, petitioner failed to complete and deliver the subject unit on time. This prompted respondent to file a
Complaint for Rescission of Contract with Damages before the Housing and Land Use Regulatory Board
(HLURB) Expanded National Capital Region Field Office (ENCRFO).
On October 19, 2004, the HLURB ENCRFO rendered a Decision 3 dismissing respondents complaint. It ruled
that rescission is not permitted for slight or casual breach of the contract but only for such breaches as are
substantial and fundamental as to defeat the object of the parties in making the agreement. It disposed of
the case as follows:
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WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered ordering [petitioner] the following:
1.
To finish the subject unit as pointed out in the inspection Report
2.
To pay [respondent] the following:

a.
the amount of P100,000 as compensatory damages for the minor irreversible

defects in her unit [respondent], or, in the alternative, conduct the necessary
repairs on the subject unit to conform to the intended specifications;
b.
moral damages of P20,000.00
c.
Attorneys fees of P20,000.00
On the other hand, [respondent] is hereby directed to immediately update her account insofar as the
parking slot is concerned, without interest, surcharges or penalties charged therein.
All other claims and counterclaims are hereby dismissed for lack of merit.
IT IS SO ORDERED.
4
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Respondent then elevated the matter to the HLURB Board of Commissioners.

In a Decision 5 dated March 30, 2006, the HLURB Board of Commissioners reversed and set aside the ruling
of the HLURB ENCRFO and ordered the rescission of the Contract to Sell, ratiocinating:
We find merit in the appeal. The report on the ocular inspection conducted on the subject condominium
project and subject unit shows that the amenities under the approved plan have not yet been provided as of
May 3, 2002, and that the subject unit has not been delivered to [respondent] as of August 28, 2002, which
is beyond the period of development of December 1999 under the license to sell. The delay in the
completion of the project as well as of the delay in the delivery of the unit are breaches of statutory and
contractual obligations which entitles [respondent] to rescind the contract, demand a refund and payment of
damages.
The delay in the completion of the project in accordance with the license to sell also renders [petitioner]
liable for the payment of administrative fine.
Wherefore, the decision of the Office below is set aside and a new decision is rendered as follows:
1.
Declaring the contract to sell as rescinded and directing [petitioner] to refund to

[respondent] the amount of P7,519,371.80 at 6% per annum from the time of extrajudicial
demand on January 05, 2001: subject to computation and payment of the correct filing
fee;
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2.
Directing [petitioner] to pay respondent attorneys fees in the amount of P20,000.00;
3.
Directing [petitioner] to pay an administrative fine of P10,000.00 for violation of Section 20,
in relation to Section 38 of P.D. 957:
SO ORDERED.
6
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Petitioner moved for reconsideration, but the same was denied by the HLURB Board of Commissioners in a
Resolution 7 dated June 14, 2007.
Unfazed, petitioner appealed to the Office of the President (OP) on August 7, 2007.
In a Decision 8 dated November 21, 2007, the OP, through then Deputy Executive Secretary Manuel Gaite,
dismissed petitioners appeal on the ground that it failed to promptly file its appeal before the OP. It held:
Records show that [petitioner] received its copy of the 30 March 2006 HLURB Decision on 17 April 2006 and
instead of filing an appeal, it opted first to file a Motion for Reconsideration on 28 April 2006 or eleven (11)
days thereafter. The said motion interrupted the 15-day period to appeal.
On 23 July 2007, [petitioner] received the HLURB Resolution dated 14 June 2007 denying the Motion for
Reconsideration.
Based on the ruling in United Overseas Bank Philippines, Inc. v. Ching (486 SCRA 655), the period to
appeal decisions of the HLURB Board of Commissioners to the Office of the President is 15 days from receipt
thereof pursuant to Section 15 of P.D. No. 957 and Section 2 of P.D. No. 1344 which are special laws that
provide an exception to Section 1 of Administrative Order No. 18.
Corollary thereto, par. 2, Section 1 of Administrative Order No. 18, Series of 1987provides that:
The time during which a motion for reconsideration has been pending with the Ministry/Agency concerned
shall be deducted from the period of appeal. But where such a motion for reconsideration has been filed
during office hours of the last day of the period herein provided, the appeal must be made within the day
following receipt of the denial of said motion by the appealing party. (Underscoring supplied)
xxxx
Accordingly, the [petitioner] had only four (4) days from receipt on 23 July 2007 of HLURB Resolution dated
14 June 2007, or until 27 July 2007 to file the Notice of Appeal before this Office. However, [petitioner] filed
its appeal only on 7 August 2007 or eleven (11) days late.
Thus, this Office need not delve on the merits of the appeal filed as the records clearly show that the said
appeal was filed out of time.
WHEREFORE, premises considered, [petitioner]s appeal is hereby DISMISSED, and the HLURB Decision
dated 30 March 2006 and HLURB Resolution dated 14 June 2007 are hereby AFFIRMED.
SO ORDERED.
9
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Immediately thereafter, petitioner filed a motion for reconsideration against said decision.
In a Resolution 10 dated February 17, 2009, the OP, through then Executive Secretary Eduardo Ermita,
granted petitioners motion and set aside Deputy Executive Secretary Gaites decision. It held that after a
careful and thorough evaluation and study of the records of the case, the OP was more inclined to agree
with the earlier decision of the HLURB ENCRFO as it was more in accord with facts, law and jurisprudence
relevant to the case. Thus:
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WHEREFORE, premises considered, the instant Motion for Reconsideration is herebyGRANTED. The
Decision and Resolution of the HLURB Third Division Board of Commissioners, dated March 30, 2006 and
June 14, 2007, respectively, are hereby SET ASIDE, and the HLURB ENCRFO Decision dated October 19,
2004 is hereby REINSTATED.
SO ORDERED.
11
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Respondent sought reconsideration of said resolution, however, the same was denied by the OP in a
Resolution 12 dated August 18, 2011.
Consequently, respondent filed an appeal to the CA.
In a Decision dated January 24, 2013, the CA granted respondents appeal and reversed and set aside the
Order of the OP. The fallo of its decision reads:
WHEREFORE, the Petition is hereby GRANTED. The assailed Resolution dated 17 February 2009
and Order dated 18 August 2011 of the Office of the President, in O.P. Case No. 07-H-283, are
hereby REVERSED and SET ASIDE. Accordingly, the Decision dated 30 March 2006 and Resolution dated
14 June 2007 of the HLURB Board of Commissioners in HLURB Case No. REM-A-050127-0014,
are REINSTATED.
SO ORDERED.
13
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Petitioner moved for reconsideration, however, the CA denied the same in a Resolution dated April 30, 2013.
Hence, the present petition wherein petitioner raises the following grounds to support its petition:
THE COURT OF APPEALS GRAVELY ERRED IN IGNORING THE LEGAL PRECEPTS THAT:
1.
TECHNICAL RULES ARE NOT BINDING UPON ADMINISTRATIVE AGENCIES; and
2.
RESCISSION WILL BE ORDERED ONLY WHERE THE BREACH COMPLAINED OF IS

SUBSTANTIAL AS TO DEFEAT THE OBJECT OF THE PARTIES IN ENTERING INTO THE
AGREEMENT. 14
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In essence, the issues are: (1) whether petitioners appeal was timely filed before the OP; and (2) whether
rescission of the contract is proper in the instant case.
We shall resolve the issues in seriatim.
First, the period to appeal the decision of the HLURB Board of Commissioners to the Office of the President
has long been settled in the case of SGMC Realty Corporation v. Office of the President, 15as reiterated in the
cases of Maxima Realty Management and Development Corporation v. Parkway Real Estate Development
Corporation 16 and United Overseas Bank Philippines, Inc. v. Ching. 17
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In the aforementioned cases, we ruled that the period to appeal decisions of the HLURB Board of
Commissioners is fifteen (15) days from receipt thereof pursuant to Section 15 18 of PD No. 957 19and
Section 2 20 of PD No. 1344 21 which are special laws that provide an exception to Section 1 of Administrative
Order No. 18. Thus, in the SGMC Realty Corporation v. Office of the President case, the Court explained:
As pointed out by public respondent, the aforecited administrative order allows aggrieved party to file its
appeal with the Office of the President within thirty (30) days from receipt of the decision complained of.
Nonetheless, such thirty-day period is subject to the qualification that there are no other statutory periods of
appeal applicable. If there are special laws governing particular cases which provide for a shorter or longer
reglementary period, the same shall prevail over the thirty-day period provided for in the administrative
order. This is in line with the rule in statutory construction that an administrative rule or regulation, in order
to be valid, must not contradict but conform to the provisions of the enabling law.
We note that indeed there are special laws that mandate a shorter period of fifteen (15) days within which to
appeal a case to public respondent. First, Section 15 of Presidential Decree No. 957 provides that the
decisions of the National Housing Authority (NHA) shall become final and executory after the lapse of fifteen
(15) days from the date of receipt of the decision. Second, Section 2 of Presidential Decree No. 1344 states
that decisions of the National Housing Authority shall become final and executory after the lapse of fifteen
(15) days from the date of its receipt. The latter decree provides that the decisions of the NHA is appealable
only to the Office of the President. Further, we note that the regulatory functions of NHA relating to housing
and land development has been transferred to Human Settlements Regulatory Commission, now known as
HLURB. x x x 22
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Records show that petitioner received a copy of the HLURB Board of Commissioners decision on April 17,
2006. Correspondingly, it had fifteen days from April 17, 2006 within which to file its appeal or until May 2,
2006. However, on April 28, 2006, or eleven days after receipt of the HLURB Board of Commissioners
decision, it filed a Motion for Reconsideration, instead of an appeal.
Concomitantly, Section 1 of Administrative Order No. 18 23 provides that the time during which a motion for
reconsideration has been pending with the ministry or agency concerned shall be deducted from the period
for appeal. Petitioner received the HLURB Board Resolution denying its Motion for Reconsideration on July
23, 2007 and filed its appeal only on August 7, 2007. Consequently therefore, petitioner had only four days
from July 23, 2007, or until July 27, 2007, within which to file its appeal to the OP as the filing of the motion
for reconsideration merely suspended the running of the 15-day period. However, records reveal that
petitioner only appealed to the OP on August 7, 2007, or eleven days late. Ergo, the HLURB Board of
Commissioners decision had become final and executory on account of the fact that petitioner did not
promptly appeal with the OP.
In like manner, we find no cogent reason to exempt petitioner from the effects of its failure to comply with
the rules.
In an avuncular case, we have held that while the dismissal of an appeal on purely technical grounds is
concededly frowned upon, it bears emphasizing that the procedural requirements of the rules on appeal are
not harmless and trivial technicalities that litigants can just discard and disregard at will. Neither being a
natural right nor a part of due process, the rule is settled that the right to appeal is merely a statutory
privilege which may be exercised only in the manner and in accordance with the provisions of the law. 24
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Time and again, we have held that rules of procedure exist for a noble purpose, and to disregard such rules,
in the guise of liberal construction, would be to defeat such purpose. Procedural rules are not to be disdained
as mere technicalities. They may not be ignored to suit the convenience of a party. 25 The reason for the
liberal application of the rules before quasi-judicial agencies cannot be used to perpetuate injustice and
hamper the just resolution of the case. Neither is the rule on liberal construction a license to disregard the
rules of procedure. 26
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Thus, while there may be exceptions for the relaxation of technical rules principally geared to attain the ends
of justice, petitioners fatuous belief that it had a fresh 15-day period to elevate an appeal with the OP is not
the kind of exceptional circumstance that merits relaxation.
Second, Article 1191 of the Civil Code sanctions the right to rescind the obligation in the event that specific
performance becomes impossible, to wit:
Article 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with the payment
of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter
should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have acquired the thing, in
accordance with Articles 1385 and 1388 and the Mortgage Law.
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Basic is the rule that the right of rescission of a party to an obligation under Article 1191 of the Civil Code is
predicated on a breach of faith by the other party who violates the reciprocity between them. The breach
contemplated in the said provision is the obligors failure to comply with an existing obligation. When the
obligor cannot comply with what is incumbent upon it, the obligee may seek rescission and, in the absence
of any just cause for the court to determine the period of compliance, the court shall decree the
rescission. 27
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In the instant case, the CA aptly found that the completion date of the condominium unit was November
1998 pursuant to License No. 97-12-3202 dated November 2, 1997 but was extended to December 1999 as
per License to Sell No. 99-05-3401 dated May 8, 1999. However, at the time of the ocular inspection
conducted by the HLURB ENCRFO, the unit was not yet completely finished as the kitchen cabinets and
fixtures were not yet installed and the agreed amenities were not yet available. Said inspection report
states:
1.
The unit of the [respondent] is Unit 3007, which was labeled as P2-07, at the Palace of
Makati, located at the corner of P. Burgos Street and Caceres Street, Poblacion, Makati City.
Based on the approved plans, the said unit is at the 26 thFloor.
2.
During the time of inspection, the said unit appears to be completed except for the
installation of kitchen cabinets and fixtures.
3.
Complainant pinpointed to the undersigned the deficiencies as follows:

a.
The delivered unit has high density fiber (HDF) floorings instead of narra wood
parquet.
b.
The [petitioners] have also installed baseboards as borders instead of pink porrino
granite boarders.
c.
Walls are newly painted by the respondent and the alleged obvious signs of
cladding could not be determined.
d.
Window opening at the master bedroom conforms to the approved plans. As a

result it leaves a 3 inches (sic) gap between the glass window and partitioning of
the masters bedroom.
e.
It was verified and confirmed that a square column replaced the round column,
based on the approved plans.
f.
At the time of inspection, amenities such as swimming pool and change room are
seen at the 31st floor only. These amenities are reflected on the 27th floor plan of
the approved condominium plans. Health spa for men and women, Shiatsu
Massage Room, Two-Level Sky Palace Restaurant and Hall for games and
entertainments, replete with billiard tables, a bar, indoor golf with spectacular deck
and karaoke rooms were not yet provided by the [petitioner].
g.
The [masters] bedroom door bore sign of poor quality of workmanship as seen
below.
h.
The stairs have been installed in such manner acceptable to the undersigned.
i.
Bathrooms and powder room have been installed in such manner acceptable to the
undersigned. 28
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From the foregoing, it is evident that the report on the ocular inspection conducted on the subject
condominium project and subject unit shows that the amenities under the approved plan have not yet been
provided as of May 3, 2002, and that the subject unit has not been delivered to respondent as of August 28,
2002, which is beyond the period of development of December 1999 under the license to sell.
Incontrovertibly, petitioner had incurred delay in the performance of its obligation amounting to breach of
contract as it failed to finish and deliver the unit to respondent within the stipulated period. The delay in the
completion of the project as well as of the delay in the delivery of the unit are breaches of statutory and
contractual obligations which entitle respondent to rescind the contract, demand a refund and payment of
damages.
WHEREFORE, premises considered, the instant petition is DENIED. The Decision dated January 24, 2013
and Resolution dated April 30, 2013 of the Court of Appeals in CA-G.R. SP No. 121175 are
hereby AFFIRMED, with MODIFICATION that moral damages be awarded in the amount of
P20,000.00
SO ORDERED.
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OBLIGATIONS WITH PERIOD

ROWENA R. SALONTE vs. COMMISSION ON AUDIT, CHAIRPERSON MA.
GRACIA PULIDO-TAN, COMMISSIONER JUANITO G. ESPINO, JR.,
COMMISSIONER HEIDI L. MENDOZA, and FORTUNATA M. RUBICO, DIRECTOR
IV, COA COMMISSION SECRETARIAT, G.R. No. 207348, August 19, 2014, J.
Velasco, Jr.,
G.R. No. 207348
August 19, 2014
ROWENA R. SALONTE, Petitioner,

vs.
COMMISSION ON AUDIT, CHAIRPERSON MA. GRACIA PULIDO-TAN, COMMISSIONER
JUANITO G. ESPINO, JR., COMMISSIONER HEIDI L. MENDOZA, and FORTUNATA M. RUBICO,
DIRECTOR IV, COA COMMISSION SECRETARIAT, in their official capacities, Respondents.
DECISION
VELASCO, JR., J.:
The Case
This is a petition for review filed under Rule 64 assailing the February 15, 2008 Decision and
November 5, 2012 Resolution, denominated as Decision Nos. 2008-018 and 2012-190, respectively,
of the Commission on Audit (COA). The assailed issuances affirmed the Notice of Disallowance No.
1
(ND) 2000-002-101(97) dated November 14, 2001 issued by Rexy M. Ramos, COA State Auditor IV,
pursuant to COA Assignment Order No. 2000-63.
3
The Facts
On April 26, 1989, the City of Mandaue and F.F. Cruz and Co., Inc. (F.F. Cruz) entered into a
Contract of Reclamation in which F.F. Cruz, in consideration of a defined land sharing formula thus
stipulated, agreed to undertake, at its own expense, the reclamation of 180 hectares, more or less,
of foreshore and submerged lands fromthe Cabahug Causeway in that city. The timetables, i.e.,
commencement of the contract and project completion, are provided in paragraphs 2 and 15 of the
Contract which state:
4
2. COMMENCEMENT. Work on the reclamation shall commence not later than [July 1989], after
thiscontract shall be ratified by the Sanggunian Panlungsod;
xxxx
15. CONTRACT DURATION. The project is estimated to be completed in six (6) years: (3 years for
the dredge-filling and seawall construction and 3 years for the infrastructures completion). However,
if all the infrastructures within the OWNERS share of the project are already completed within the six
(6) year period agreed upon, any extension of time for works to bedone within the share of the
DEVELOPERS, shall be at the discretion of the DEVELOPERS, as a growing city, changes in
requirements of the lot buyers are inevitable.
On a best effort basis, the construction of roadways, drainage system and open spaces in the area
designated as share of the City of Mandaue, shall be completed not later than December 31, 1991.
(emphasis supplied)
Subsequently, the parties inked inrelation to the above project a Memorandum of Agreement (MOA)
dated October 24, 1989 whereby the City of Mandaue allowed F.F. Cruz to put up structures on a
portion of a parcel of land owned by the city for the use of and to house F.F. Cruz personnel
assigned at the project site, subject to terms particularly provided in paragraphs 3, 4 and 5 of the
MOA:
5
3) That [F.F. Cruz] desires to use a portion of a parcel of land of the [City of Mandaue]
described under paragraph 1 hereof to the extent of 495 square meters x x x to be used by
them in the construction of their offices to house its personnel to supervise the Mandaue City
Reclamation Project x x x.
xxxx
4) That the [City of Mandaue] agrees to the desire of [F.F. Cruz] to use a portion of the parcel
of land described under paragraph 1 by [F.F. Cruz] for the latter to use for the construction of
their offices to house its personnel to supervise the said Mandaue City Reclamation Project
with no rental to be paid by [F.F. Cruz] to the [City of Mandaue].
5) That the [City of Mandaue] and [F.F. Cruz] have agreed that upon the completion of the
Mandaue City Reclamation Project, all improvements introduced by [F.F. Cruz] to the portion
of the parcel of land owned by the [City of Mandaue]as described under paragraph 3 hereof
existing upon the completion of the said Mandaue City Reclamation Project shall ipso facto
belong to the [City of Mandaue] in ownershipas compensation for the use of said parcel of
land by [F.F. Cruz] without any rental whatsoever. (emphasis supplied)
Pursuant to the MOA, F.F. Cruz proceeded to construct the contemplated housing units and other
facilities which included a canteen and a septic tank.
Later developments saw the City of Mandaue undertaking the Metro Cebu Development Project II
(MCDP II), part of which required the widening of the Plaridel Extension Mandaue Causeway.
However, the structures and facilities built by F.F. Cruz subject of the MOA stood in the direct path of
the road widening project. Thus, the Department of Public Works and Highways (DPWH) and
Samuel B. Darza, MCDP II project director, entered into an Agreement to Demolish, Remove and
Reconstruct Improvement dated July 23, 1997 with F.F. Cruz whereby the latter would demolish the
improvements outside of the boundary of the road widening project and, in return, receive the total
amount of PhP 1,084,836.42 in compensation.
6
Accordingly, petitioner Rowena B.Rances (now Rowena RancesSolante), Human Resource

Management Officer III, prepared and, with the approval of Samuel B. Darza (Darza), then issued
Disbursement Voucher (DV) No. 102-07-88-97 dated July 24, 1997 for PhP 1,084,836.42 in favor of
F.F. Cruz. In the voucher, Solante certified that the expense covered by it was "necessary, lawful and
incurred under my direct supervision."
7
Thereafter, Darza addressed a letter-complaint to the Office of the Ombudsman, Visayas, inviting
attention to several irregularities regarding the implementation of MCDP II. The letter was referred to
the COA which then issued Assignment Order No. 2000-063 for a team to audit the accounts of
MCDP II. Following an audit, the audit team issued Special Audit Office (SAO) Report No. 2000-28,
par. 5 of which states:
F.F. Cruz and Company, Inc. was paid P1,084,836.42 for the cost of the property affected by the
widening of Plaridel Extension, Mandaue Causeway. However, under Section 5 of its MOA with
Mandaue City, the former was no longer the lawful owner of the properties at the time the payment
was made.
8
Based on the above findings, the SAO audit team, through Rexy Ramos, issued the adverted ND
2000-002-101-(97) disallowing the payment of PhP 1,084,836.42 to F.F. Cruz and naming that
company, Darza and Solante liable for the transaction. Therefrom, Solante sought reconsideration,
while F.F. Cruz appealed, but the motion for reconsideration and the appeal were jointly denied in
Legal and Adjudication Office (LAO) Local Decision No. 2004-040 dated March 5, 2004, which F.F.
Cruz in time appealed to COA Central.
9
In the meantime, the adverted letter-complaint of Darza was upgraded as an Ombudsman case,
docketed as OMB-V-C-03-0173-C, against Solante, et al., albeit the Ombudsman, by Resolution of
June 29, 2006, would subsequently dismiss the same for lack of merit.
10
The Ruling of the Commission on Audit

In its February 15, 2008 Decision, the COA, as indicated at the outset, affirmed ND 2000-002-10197 on the strength of the following premises:
11
From the above provision of the MOA, it is clear that the improvements introduced by F.F. Cruz x x x
would be owned by the City upon completion of the project which under the Contract of reclamation
should have been in 1995. However, the project was not completed in 1995 and even in 1997 when
MDCP paid for these improvements. The fact that the reclamation project had not yet been
completed or turned over to the City of Mandaue by F.F. Cruz in 1997 or two years after it should
have been completed, does not negate the right over such improvements by the City x x x. Clearly,
the intention of the stipulation is for F.F. Cruz x x x to compensate the government for the use of the
land on which the office, pavement, canteen, extension shed, house and septic tank were erected.
Thus, to make the government pay for the cost of the demolished improvements will defeat the
intention of parties as regards compensation due from the contractor for its use of [the] subject land.
Under Article 1315 of the Civil Code, from the moment a contract is perfected, the parties are bound
to the fulfillment to what has been expressly stipulated and all the consequences which according to
their nature, may be in keeping with good faith, usage and law. Thus, even if the contractual
stipulations may turn out to be financially disadvantageous to any party, such will not relieve any or
both parties fromtheir contractual obligations. (emphasis supplied)
12
From such decision, Solante filed a Motion for Reconsideration dated June 28, 2010 purportedly with
Audit Team Leader, Leila Socorro P. Domantay. This motion was denied by the COA in a Resolution
dated November 5, 2012 wherein the commission held:
13
x x x The arguments of Ms. Solante that as long as the Project has not yet been turned over, the
ownership of the said improvements would not be acquired yet by the City would put the entire
contract at the mercy of F.F. Cruz & Co., Inc., thus, negating the mutuality of contracts principle
expressed in Article 1308 ofthe New Civil Code, which states:
Art. 1308. The contracts must bindboth contracting parties; its validity or compliance cannot be leftto
the will of one of them.
On February 15, 2013, Solante received a Notice of Finality of Decision (NFD) stating that the COA
Decision dated February 15, 2008 and Resolution dated November 5, 2012 have become final and
executory, a copy of the Resolution having been served on the parties on November 9, 2012 by
registered mail. Notably, Solante never received a copy of the COA Resolution. She came to get one
only on May 8, 2013 after inquiring from the Cebu Central Post Office, which, in a Certification of
Deliverydated May 8, 2013, stated that the registered mail containing said copy was in fact not
delivered.
14
15
Hence, the instant petition.

The Issue
The resolution of the present controversy rests on the determination of a sole issue: who between
the City ofMandaue and F.F. Cruz owned during the period material the properties that were
demolished.
The Courts Ruling
The petition is meritorious. The COA and its audit team obviously misread the relevant stipulations of
the MOA in relation to the provisions on project completion and termination of contract of the
Mandaue-F.F. Cruz reclamation contract.
Essentially, the COA is alleging that the Contract of Reclamation establishes an obligation on the
part of F.F. Cruz to finish the project within the allotted period of six (6) years from contract execution
in August 1989. Prescinding from this premise, the COA would conclude that after the six (6)-year
period, F.F. Cruz is automatically deemed to be in delay, the contract considered as completed, and
the ownership of the structures built in accordance with the MOA transferred to the City of Mandaue.
COAs basic position and the arguments holding it together is untenable.
On this point, the Civil Code provision on obligations with a period is relevant. Article 1193 thereof
provides:
Article 1193. Obligations for whose fulfillment a day certain has been fixed, shall be demandable
only when that day comes.
Obligations with a resolutory period take effect at once, but terminate upon arrival of the day certain.
A day certain is understood to bethat which must necessarily come, although it may not be known
when.
If the uncertainty consists in whether the day will come or not, the obligation is conditional, and it
shall be regulated by the rules of the preceding Section. (emphasis supplied)
A plain reading of the Contract ofReclamation reveals that the six (6)-year period provided for
projectcompletion, or, with like effect, termination of the contract was a mere estimateand cannot be
considered a period or a "day certain" inthe context of the aforequoted Art. 1193. To be clear, par. 15
of the Contract of Reclamation states: "[T]he project is estimated to be completed in six (6) years."
As such, the lapse of six (6) years from the perfection of the contract did not, by itself, make the
obligation to finish the reclamation project demandable, such as to put the obligor in a state of
actionable delay for its inability to finish. Thus, F.F. Cruz cannot be deemed to be in delay.
Parenthetically, the Ombudsman, in a Resolution of June 29, 2006 in OMB-V-C-03-0173-C,
espoused a similar view in dismissing the complaint against Solante, thus:
A careful reading of the pertinent section of the Contract of Reclamation between F.F. Cruz and
Mandaue City, however, would confirm respondents Rances-Solante[s]and Sungahids view that
herein respondent Cruz was still the owner of the subject properties at the time these were
demolished. Indeed, the Contract specifies that the six (6)-year period was no more than an estimate
of the project completion. It was not a fixed period agreed upon. Being so, the mere lapse of six (6)
years from the execution of the Contract, did not by itself deem the reclamation project completed,
muchless bring about the fulfillment of the condition stipulated in the MOA (on the shift of ownership
over the demolished properties). Herein respondent Cruz, and/or his company, at least on this
particular regard, can be said to be still the owner of the structures along Plaridel Extension x x x,
when these were demolished to give way to road widening. It was nothing but equitable that they get
compensated for the damages caused by the demolition. (emphasis supplied)
16
Put a bit differently, the lapse of six (6) years from the perfection of the subject reclamation contract,
withoutmore, could not have automatically vested Mandaue City, under the MOA, with ownership of
the structures.
Moreover, even if we consider the allotted six (6) years within which F.F. Cruz was supposed to
completethe reclamation project, the lapse thereof does not automatically mean thatF.F. Cruz was in
delay. As may be noted, the City of Mandaue never madea demand for the fulfillment of its obligation
under the Contract of Reclamation. Article 1169 of the Civil Code on the interaction of demand and
delay and the exceptions to the requirement of demand relevantly states:
Article 1169. Those obliged to deliver orto do something incur in delay from the time the
obligeejudicially or extrajudicially demands from them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order that delay may exist:
(1) When the obligation or the law expressly so declares; or
(2) When from the nature and the circumstances of the obligation it appears that the
designation of the time when the thing is to be delivered or the service is to be rendered was
a controlling motive for the establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it beyond his power
to perform.
In 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. From the momentone of the parties
fulfills his obligation, delay by the other begins.
Thus, in J Plus Asia Development Corporation v. Utility Assurance Corporation, the Court has held:
17
In this jurisdiction, the following requisites must be present in order that the debtor may be in default:
(1) that the obligation be demandable and already liquidated;(2) that the debtor delays performance;
and (3) that the creditor requires the performance judicially or extrajudicially. (emphasis supplied)
In the instant case, the records are bereft of any document whence to deduce that the City of
Mandaue exactedfrom F.F. Cruz the fulfillment of its obligation under the reclamation contract. And to
be sure, not one of the exceptions to the requisite demand under Art. 1169 is established, let alone
asserted. On the contrary, the then city mayor of Mandaue, no less, absolved F.F. Cruz from
incurring under the premises in delay. In his affidavit dated July 9, 2004, then Mayor Ouano stated:
18
That although x x x the reclamation wasestimatedto be completed in six years ending in 1995, the
said project however, was not fully completed when the demolition of the mentioned improvements
of [F.F. Cruz] was made x x x [and in fact] up to now the said Mandaue Reclamation Project has not
yet been fully completed and turned over to the City of Mandaue.
x x x [S]ince at the time of the demolition the said improvements actually belonged to [F.F. Cruz] and
the City of Mandaue has no claim whatsoever on the said payment x x x for the demolished
improvements. (emphasis supplied)
As it were, the Mandaue-F.F.Cruz MOA states that the structures built by F .F. Cruz on the property
of the city will belong to the latter only upon the completion of the project. Clearly, the completion of
the project is a suspensive condition that has yet to be fulfilled. Until the condition arises, ownership
of the structures properly pertains to F .F. Cruz.
1wphi1
To be clear, the MOA does not state that the structures shall inure in ownership to the City of
Mandaue after the lapse of six ( 6) years from the execution of the Contract of Reclamation. What
the MOA does provide is that ownership of the structures shall vest upon, or ipso facto belong to, the
City of Mandaue when the Contract of Reclamation shall have been completed. Logically, before
such time, or until the agreed reclamation project is actually finished, F.F. Cruz owns the structures.
The payment of compensation for the demolition thereof is justified. The disallowance of the
payment is without factual and legal basis. COA then gravely abused its discretion when it decreed
the disallowance.
WHEREFORE, the instant petition is GRANTED. Accordingly, the assailed February 15, 2008
Decision, November 5, 2012 Resolution, and Notice of Disallowance No. 2000-002-101 (97) dated
November 14, 2001 issued by the Commission on Audit are hereby REVERSED and SET ASIDE.
No costs.
SO ORDERED.
NATURE AND EFFECT OF

OBLIGATIONS
FEDERAL BUILDERS, INC. vs. FOUNDATION SPECIALISTS, INC., G.R. No.
194507, September 8, 2014, J. Peralta
G.R. No. 194507
September 8, 2014
FEDERAL BUILDERS, INC., Petitioner,

vs.
FOUNDATION SPECIALISTS, INC., Respondent,
x-----------------------x
G.R. No. 194621
FOUNDATION SPECIALISTS, INC., Petitioner,
vs.
FEDERAL BUILDERS, INC., Respondent.
DECISION
PERALTA, J.:
Before the Court are two consolidated cases, namely: (1) Petition for review on certiorari under Rule
45 of the Rules of Court, docketed as G.R. No. 194507, filed by Federal Builders, Inc., assailing the
Decision and Resolution, dated July 15, 2010 and November 23, 2010, respectively, of the Court of
Appeals (CA) in CA-G.R. CV No. 70849, which affirmed with modification the Decision dated May 3,
2001 of the Regional Trial Court (RTC) in Civil Case No. 92-075; and (2) Petition for review on
certiorari under Rule 45 of the Rules of Court,docketed as G.R. No. 194621, filed by Foundation
Specialists, Inc., assailing the same Decision and Resolution, dated July 15, 2010 and November
23, 2010,respectively, of the CA in CA- G.R. CV No. 70849, which affirmed with modification the
Decision dated May 3, 2001 of the RTC in Civil Case No. 92-075.
1
The antecedent facts are as follows:
On August 20, 1990, Federal Builders, Inc. (FBI) entered into an agreement with Foundation
Specialists, Inc. (FSI) whereby the latter, as subcontractor, undertook the construction of the
diaphragm wall, capping beam, and guide walls of the Trafalgar Plaza located at Salcedo Village,
Makati City (the Project), for a total contract price of Seven Million Four Hundred Thousand Pesos
(P7,400,000.00). Under the agreement, FBI was to pay a downpayment equivalent to twenty
percent (20%) of the contract price and the balance, through a progress billing every fifteen (15)
days, payable not later than one (1) week from presentation of the billing.
7
On January 9, 1992, FSI filed a complaint for Sum of Money against FBI before the RTC of Makati
City seeking to collect the amount of One Million Six Hundred Thirty-Five Thousand Two Hundred
Seventy-Eight Pesos and Ninety-One Centavos (P1,635,278.91), representing Billings No. 3 and 4,
with accrued interest from August 1, 1991 plus moral and exemplary damages with attorneys
fees. In its complaint,FSI alleged that FBI refused to pay said amount despite demand and
itscompletion of ninety-seven percent (97%) of the contracted works.
9
In its Answer with Counterclaim, FBI claimed that FSI completed only eighty-five percent (85%) of
the contracted works, failing to finish the diaphragm wall and component works in accordance with
the plans and specifications and abandoning the jobsite. FBI maintains that because of FSIs
inadequacy, its schedule in finishing the Project has been delayed resulting in the Project owners
deferment of its own progress billings. It further interposed counterclaims for amounts it spent for
the remedial works on the alleged defects in FSIs work.
10
On May 3, 2001, after evaluating the evidence of both parties, the RTC ruled in favor of FSI, the
dispositive portion of its Decision reads:
WHEREFORE, on the basis of the foregoing, judgment is rendered ordering defendant to pay
plaintiff the following:
1. The sum of P1,024,600.00 representing billings 3 and 4, less the amount of P33,354.40
plus 12% legal interest from August 30, 1991;
2. The sum of P279,585.00 representing the cost of undelivered cement;
3. The sum of P200,000.00 as attorneys fees; and
4. The cost of suit.
Defendants counterclaim is deniedfor lack of factual and legal basis.
SO ORDERED.
11
On appeal, the CA affirmed the Decision of the lower court, but deleted the sum of P279,585.00
representing the cost of undelivered cement and reduced the award of attorneys fees
to P50,000.00. In its Decision dated July 15, 2010, the CA explained that FSI failed to substantiate
how and in what manner it incurred the cost of cement by stressing that its claim was not supported
by actual receipts. Also, it found that while the trial court did not err in awarding attorneys fees, the
same should be reduced for being unconscionable and excessive. On FBIs rejection of the 12%
annual interest rate on the amount of Billings 3 and 4, the CA ruled that the lower court did not err in
imposing the same in the following wise:
12
x x x The rule is well-settled that when an obligation is breached, and it consists in the payment of a
sum of money, the interest due shall itself earn legal interest from the time it is judicially demanded
(BPI Family Savings Bank, Inc. vs. First Metro Investment Corporation, 429 SCRA 30). When there
is no rate of interest stipulated, such as in the present case, the legal rate of interest shall be
imposed, pursuant to Article 2209 of the New Civil Code. In the absence of a stipulated interest rate
on a loan due, the legal rate of interest shall be 12% per annum.
13
Both parties filed separate Motions for Reconsideration assailing different portions of the
CADecision, but to no avail. Undaunted, they subsequently elevated their claims withthis Court via
petitions for review on certiorari.
14
On the one hand, FSI asserted that the CA should not have deleted the sum of P279,585.00
representing the cost of undelivered cement and reduced the award of attorneys fees
to P50,000.00, since it was an undisputed fact that FBI failed to deliver the agreed quantity of
cement. On the other hand, FBI faulted the CA for affirming the decision of the lower court insofar as
the award of the sum representing Billings 3 and 4, the interest imposed thereon, and the rejection of
his counterclaim were concerned. In a Resolution dated February 21, 2011, however, this Court
denied, with finality, the petition filed by FSI in G.R. No. 194621 for having been filed late.
15
Hence, the present petition filed byFBI in G.R. No. 194507 invoking the following arguments:
I.
THE COURT OF APPEALS COMMITTED A CLEAR, REVERSABLE ERROR WHEN IT
AFFIRMED THE TRIAL COURTS JUDGMENT THAT FEDERAL BUILDERS, INC. WAS
LIABLE TO PAY THE BALANCE OFP1,024,600.00 LESS THE AMOUNT OF P33,354.40
NOTWITHSTANDING THAT THE DIAPHRAGM WALL CONSTRUCTED BY FOUNDATION
SPECIALIST, INC. WAS CONCEDEDLY DEFECTIVE AND OUT-OF-SPECIFICATIONS AND
THAT PETITIONER HAD TO REDO IT AT ITS OWN EXPENSE.
II.
THE COURT OF APPEALS COMMITTED SERIOUS, REVERSABLE ERROR WHEN IT
IMPOSED THE 12% LEGAL INTEREST FROM AUGUST 30, 1991 ON THE DISPUTED
CLAIM OF P1,024,600.00 LESS THE AMOUNT OF P33,354.40 DESPITE THE FACT THAT
THERE WAS NO STIPULATION IN THE AGREEMENT OF THE PARTIES WITH REGARD
TO INTEREST AND DESPITE THE FACT THAT THEIR AGREEMENT WAS NOT A "LOAN
OR FORBEARANCE OF MONEY."
III.
THE COURT OF APPEALS COMMITTED GRAVE AND SERIOUS REVERSABLE ERROR
WHEN IT DISMISSED THE COUNTERCLAIM OF PETITIONER NOTWITHSTANDING
OVERWHELMING EVIDENCE SUPPORTING ITS CLAIM OF P8,582,756.29 AS ACTUAL
DAMAGES.
The petition is partly meritorious.
We agree with the courts below and reject FBIs first and third arguments. Well-entrenched in
jurisprudence is the rule that factual findings of the trial court, especially when affirmed by the
appellate court, are accorded the highest degree of respectand considered conclusive between the
parties, save for the following exceptional and meritorious circumstances: (1) when the factual
findings of the appellate court and the trial court are contradictory; (2) whenthe findings of the trial
court are grounded entirely on speculation, surmises or conjectures; (3) when the lower courts
inference from its factual findings is manifestly mistaken, absurd or impossible; (4) when there is
grave abuse of discretion in the appreciation of facts; (5) when the findings of the appellate court go
beyond the issues of the case, or fail to notice certain relevant facts which, if properly considered,
will justify a different conclusion; (6) when there is a misappreciation of facts; (7) when the findings of
fact are themselves conflicting; and (8) when the findings of fact are conclusions without mention of
the specific evidence on which they are based, are premised on the absence of evidence, or are
contradicted by evidence on record.
16
None of the aforementioned exceptions are present herein. In the assailed Decision, the RTC
meticulouslydiscussed the obligations of each party, the degree of their compliance therewith, as
well as their respective shortcomings, all of which were properly substantiated with the
corresponding documentary and testimonial evidence.
Under the construction agreement, FSIs scope of workconsisted in (1) the construction of the guide
walls, diaphragm walls, and capping beam; and (2) the installation of steel props. As the lower
courts aptly observed from the records at hand, FSI had, indeed, completed ninety-seven percent
(97%) of its contracted works and the non-completion of the remaining three percent (3%), as well
as the alleged defects in the said works, are actually attributable to FBIs own fault such as, but not
limited to, the failure to deliver the needed cement as agreed upon in the contract, to wit:
17
On March 8, 1991, plaintiff had finished the construction of the guide wall and diaphragm wall (Exh.
"R") but had not yet constructed the capping beam as of April 22, 1991 for defendants failure to
deliver the needed cement in accordance with their agreement(Exhibit "I"). The diaphragm wall had
likewise been concrete tested and was found to have conformed with the required design strength
(Exh. "R").
Subsequently, plaintiff was paid the aggregate amount of P5,814,000.00. But as of May 30, 1991,
plaintiffs billings numbers 3 and 4 had remained unpaid (Exhs. "L", "M", and "M-1").
xxxx
On the misaligned diaphragm wall from top to bottom and inbetween panels, plaintiff explained thatin
the excavation of the soil where the rebar cages are lowered and later poured with concrete cement,
the characteristics of the soil is not the same or homogenous all throughout. Because of this
property of the soil,in the process of excavation, it may erode in some places that may cause spaces
that the cement may fill or occupy which would naturally cause bulges, protrusions and misalignment
in the concrete cast into the excavated ground(tsn., June 1, 2000, pp 14-18). This, in fact was
anticipated when the agreement was executed and included as provision 6.4 thereof.
The construction of the diaphragm wall panel by panel caused misalignment and the chipping off of
the portions misaligned is considered a matter of course. Defendant, as the main contractor of the
project, has the responsibility of chopping or chipping off of bulges(tsn., ibid, pp 20-21). Wrong
location of rebar dowels was anticipated by both contractor and subcontractor as the latter submitted
a plan called "Detail of Sheer Connectors" (Exh "T") which was approved.The plan provided two
alternatives by which the wrong location of rebar dowels may be remedied. Hence, defendant, aware
of the possibility of inaccurate location of these bars, cannot therefore ascribe the same to the
plaintiff as defective work.
Construction of the capping beam required the use of cement. Records, however, show that from
September 14, 1990 up to May 30, 1991 (Exhs. "B" to "L"), plaintiff had repeatedly requested
defendant to deliver cement. Finally, on April 22, 1991, plaintiff notified defendant of its inability to
construct the capping beam for the latters failure to deliver the cement as provided in their
agreement(Exh. "I"). Although records show that there was mention of revision of design, there was
no evidence presented to show such revision required less amount of cement than what was agreed
on by plaintiff and defendant.
The seventh phase of the construction of the diaphragm wall is the construction of the steel props
which could be installed only after the soil has been excavated by the main contractor. When
defendant directed plaintiff to install the props, the latter requested for a site inspection to determine
if the excavation of the soil was finished up to the 4th level basement. Plaintiff, however, did not
receive any response.It later learned that defendant had contracted out that portion of work to
another sub-contractor (Exhs. "O" and "P"). Nevertheless, plaintiff informed defendant of its
willingness to execute that portion of its work.
18
It is clear from the foregoing that contrary to the allegations of FBI, FSI had indeed completed its
assigned obligations, with the exception of certain assigned tasks, which was due to the failure of
FBI to fulfil its end of the bargain.
It can similarly be deduced that the defects FBI complained of, such as the misaligned diaphragm
wall and the erroneous location of the rebar dowels, were not only anticipated by the parties, having
stipulated alternative plans to remedy the same, but more importantly, are also attributable to the
very actions of FBI. Accordingly, considering that the alleged defects in FSIs contracted works were
not so much due to the fault or negligence of the FSI, but were satisfactorily proven to be caused by
FBIs own acts, FBIs claim of P8,582,756.29 representing the cost of the measures it undertook to
rectify the alleged defects must necessarily fail. In fact, as the lower court noted, at the time when
FBI had evaluated FSIs works, it did not categorically pose any objection thereto, viz:
Defendant admitted that it had paid P6 million based on its evaluation of plaintiffs accomplishments
(tsn., Sept. 28, 2000, p. 17) and its payment was made without objection on plaintiffs works, the
majority of which were for the accomplishments in the construction of the diaphragm wall (tsn., ibid,
p. 70).
xxxx
While there is no evidence to show the scope of work for these billings, it is safe to assume that
these were also works in the construction of the diaphragm wall considering that as of May 16, 1991,
plaintiff had only the installation of the steel props and welding works to complete (Exh. "H"). If
defendant was able to evaluate the work finished by plaintiff the majority of which was the
construction of the diaphragm wall and paid it about P6 million as accomplishment, there was no
reason why it could not evaluate plaintiffs works covered by billings 3 and 4.In other words,
defendants did nothave to excavate in order to determine and evaluate plaintiffs works. Hence,
defendants refusal to pay was not justified and the alleged defects of the diaphragm wall (tsn, Sept.
28, 2000, p. 17) which it claims to have discovered only after January 1992 were mere
afterthoughts.
19
Thus, in the absence of any record to otherwise prove FSIs neglect in the fulfilment of its obligations
under the contract, this Court shall refrain from reversing the findings of the courts below, which are
fully supported by and deducible from, the evidence on record. Indeed, FBI failed to present any
evidence to justify its refusal to pay FSI for the works it was contracted to perform. As such, We do
not see any reason to deviate from the assailed rulings.
Anent FBIs second assignment of error, however, We find merit in the argument that the 12%
interest rateis inapplicable, since this case does not involve a loan or forbearance ofmoney. In the
landmark case of Eastern Shipping Lines, Inc. v. Court of Appeals, We laid down the following
guidelines in computing legal interest:
20
II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time
it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per
annum to be computed from default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an
interest on the amount of damages awarded may be imposed at the discretion of the court at
the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or
damages except when or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty, the interest shall
begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code)
but when such certainty cannot be so reasonably established at the time the demand is
made, the interest shall begin to run only from the date the judgment of the court is made (at
which time the quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest shall, in any case, be on
the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory,
the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above,
shall be 12% per annum from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit.
21
In line, however, with the recent circular of the Monetary Board of the Bangko Sentral ng Pilipinas
(BSP-MB) No. 799, we have modified the guidelines in Nacar v. Gallery Frames, as follows:
22
I. When an obligation, regardless of itssource, i.e., law, contracts, quasicontracts, delicts or

quasi-delicts is breached, the contravenor can be held liable for damages. The provisions
under Title XVIII on "Damages" of the Civil Code govern in determining the measure of
recoverable damages.
1. When the obligation is breached, and it consists in the payment of a sum of
money, i.e., a loan or forbearance of money, the interest due should be that which
may have been stipulated in writing. Furthermore, the interest due shall itself earn
legal interest from the time it is judicially demanded. In the absence of stipulation, the
rate of interest shall be 6% per annumto be computed from default, i.e., from judicial
or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil
Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached,

an interest on the amount of damages awarded may be imposed at the discretion of
the court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages, except when or until the demand can be established
with reasonable certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially(Art. 1169, Civil Code), but when such certainty cannot be
so reasonably established at the time the demand is made, the interest shall begin to
run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained).
The actual base for the computation of legal interest shall, in any case, be on the
amount finally adjudged. 3. When the judgment of the court awarding a sum of
money becomes final and executory, the rate of legal interest, whether the case falls
under paragraph 1 or paragraph 2, above, shall be 6% per annumfrom such finality
until its satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of credit.
And, in addition to the above, judgments that have become final and executory prior to July 1, 2013,
shall not be disturbed and shall continue to be implemented applying the rate of interest fixed
therein.
23
It should be noted, however, that the new rate could only be applied prospectively and not
retroactively. Consequently, the twelve percent (12%) per annum legal interest shall apply only until
June 30, 2013. Come July 1, 2013, the new rate of six percent (6%) per annum shall be the
prevailing rate of interest when applicable. Thus, the need to determine whether the obligation
involved herein is a loanand forbearance of money nonetheless exists.
In S.C. Megaworld Construction and Development Corporation v. Engr. Parada, We clarified the
meaning of obligations constituting loans or forbearance of money in the following wise:
24
As further clarified in the case of Sunga-Chan v. CA, a loan or forbearance of money, goods or credit
describes a contractual obligation whereby a lender or creditor has refrained during a given period
from requiring the borrower or debtor to repay the loan or debt then due and payable. Thus:
In Reformina v. Tomol, Jr., the Court held that the legal interest at 12% per annum under Central
Bank (CB) Circular No. 416 shall be adjudged only in cases involving the loan or forbearance of
money. And for transactions involving payment of indemnities in the concept of damages arising
from default in the performance of obligations in general and/or for money judgment not involving a
loan or forbearance of money, goods, or credit, the governing provision is Art. 2209 of the Civil Code
prescribing a yearly 6% interest. Art. 2209 pertinently provides:
Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay,
the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the
interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per
annum.
The term "forbearance," within the context of usury law, has been described as a contractual
obligation ofa lender or creditor to refrain, during a given period of time, from requiring the borrower
or debtor to repay the loan or debt then due and payable.
25
Forbearance of money, goods or credits, therefore, refers to arrangements other than loan
agreements, where a person acquiesces to the temporary use of his money, goods orcredits
pending the happening of certain events or fulfilment of certain conditions. Consequently, if those
conditions are breached, said person is entitled not only to the return of the principal amount paid,
but also to compensation for the use of his money which would be the same rateof legal interest
applicable to a loan since the use or deprivation of funds therein is similar to a loan.
26
27
This case, however, does not involve an acquiescence to the temporary use of a partys money but a
performance of a particular service, specifically the construction of the diaphragm wall, capping
beam, and guide walls of the Trafalgar Plaza.
A review of similar jurisprudence would tell us that this Court had repeatedly recognized this
distinction and awarded interest at a rate of 6% on actual or compensatory damages arising from a
breach not only of construction contracts, such as the one subject ofthis case, but also of contracts
wherein one of the parties reneged on its obligation to perform messengerial services, deliver
certain quantities of molasses, undertake the reforestation of a denuded forest land, as well as
breaches of contracts of carriage, and trucking agreements. We have explained therein that the
reason behind such is that said contracts do not partake of loans or forbearance of money but are
more in the nature of contracts of service.
28
29
30
31
32
33
Thus, in the absence of any stipulation as to interest in the agreement between the parties herein,
the matter of interest award arising from the dispute in this case would actually fall under the second
paragraph of the above-quoted guidelines inthe landmark case of Eastern Shipping Lines, which
necessitates the imposition of interestat the rate of 6%, instead of the 12% imposed by the courts
below.
The 6% interest rate shall further be imposed from the finality of the judgment herein until
satisfaction thereof, in light of our recent ruling in Nacar v. Gallery Frames.
34
Note, however, that contrary to FBIsassertion, We find no error in the RTCs ruling that the interest
shall begin to run from August 30, 1991 as this is the date when FSI extrajudicially made its claim
against FBI through a letter demanding payment for its services.
35
In view of the foregoing, therefore, We find no compelling reason to disturb the factual findings of the
RTC and the CA, which are fully supported by and deducible from, the evidence on record, insofar
as the sum representing Billings 3 and 4 is concerned. As to the rate of interest due thereon,
however, We note that the same should be reduced to 6% per annum considering the fact that the
obligation involved herein does not partake of a loan or forbearance of money.
WHEREFORE, premises considered, the instant petition is DENIED. The Decision and Resolution,
dated July 15, 2010 and November 23, 2010, respectively, of the Court of Appeals in CA-G.R. CV
No. 70849 are hereby AFFIRMED with MODIFICATION. Federal Builders, Inc. is ORDERED to pay
Foundation Specialists, Inc. the sum of Pl ,024,600.00 representing billings 3 and 4, less the amount
of P33,354.40, plus interest at six percent (6%) per annum reckoned from August 30, 1991 until full
payment thereof.
SO ORDERED.
DIOSDADO M. PERALTA
Associate Justice
Acting Chairperson
WE CONCUR:
RODRIGO RIVERA vs. SPOUSES SALVADOR CHUA AND VIOLETA S. CHUA,

G.R. No. 184458 (consolidated), January 14, 2015, J. Perez
G.R. No. 184458, January 14, 2015
RODRIGO RIVERA, Petitioner, v. SPOUSES SALVADOR CHUA AND S. VIOLETA CHUA,Respondents.
[G.R. NO. 184472]
SPS. SALVADOR CHUA AND VIOLETA S. CHUA, Petitioners, v. RODRIGO RIVERA, Respondent.
DECISION
PEREZ, J.:
Before us are consolidated Petitions for Review on Certiorari under Rule 45 of the Rules of Court assailing
the Decision1 of the Court of Appeals in CA-G.R. SP No. 90609 which affirmed with modification the separate
rulings of the Manila City trial courts, the Regional Trial Court, Branch 17 in Civil Case No. 02-105256 2 and
the Metropolitan Trial Court (MeTC), Branch 30, in Civil Case No. 163661, 3 a case for collection of a sum of
money due a promissory note. While all three (3) lower courts upheld the validity and authenticity of the
promissory note as duly signed by the obligor, Rodrigo Rivera (Rivera), petitioner in G.R. No. 184458, the
appellate court modified the trial courts consistent awards: (1) the stipulated interest rate of sixty percent
(60%) reduced to twelve percent (12%) per annum computed from the date of judicial or extrajudicial
demand, and (2) reinstatement of the award of attorneys fees also in a reduced amount of P50,000.00.
In G.R. No. 184458, Rivera persists in his contention that there was no valid promissory note and questions
the entire ruling of the lower courts. On the other hand, petitioners in G.R. No. 184472, Spouses Salvador
and Violeta Chua (Spouses Chua), take exception to the appellate courts reduction of the stipulated interest
rate of sixty percent (60%) to twelve percent (12%) per annum.
We proceed to the facts.
The parties were friends of long standing having known each other since 1973: Rivera and Salvador
are kumpadres, the former is the godfather of the Spouses Chuas son.
On 24 February 1995, Rivera obtained a loan from the Spouses Chua:
chanroblesvirtuallawlibrary
PROMISSORY NOTE
120,000.00
FOR VALUE RECEIVED, I, RODRIGO RIVERA promise to pay spouses SALVADOR C. CHUA and VIOLETA SY
CHUA, the sum of One Hundred Twenty Thousand Philippine Currency (P120,000.00) on December 31,
1995.
It is agreed and understood that failure on my part to pay the amount of (P120,000.00) One Hundred
Twenty Thousand Pesos on December 31, 1995. (sic) I agree to pay the sum equivalent to FIVE PERCENT
(5%) interest monthly from the date of default until the entire obligation is fully paid for.
Should this note be referred to a lawyer for collection, I agree to pay the further sum equivalent to twenty
percent (20%) of the total amount due and payable as and for attorneys fees which in no case shall be less
than P5,000.00 and to pay in addition the cost of suit and other incidental litigation expense.
Any action which may arise in connection with this note shall be brought in the proper Court of the City of
Manila.
Manila, February 24, 1995[.]

(SGD.) RODRIGO RIVERA4
In October 1998, almost three years from the date of payment stipulated in the promissory note, Rivera, as
partial payment for the loan, issued and delivered to the Spouses Chua, as payee, a check numbered
012467, dated 30 December 1998, drawn against Riveras current account with the Philippine Commercial
International Bank (PCIB) in the amount of P25,000.00.
On 21 December 1998, the Spouses Chua received another check presumably issued by Rivera, likewise
drawn against Riveras PCIB current account, numbered 013224, duly signed and dated, but blank as to
payee and amount. Ostensibly, as per understanding by the parties, PCIB Check No. 013224 was issued in
the amount of P133,454.00 with cash as payee. Purportedly, both checks were simply partial payment for
Riveras loan in the principal amount of P120,000.00.
Upon presentment for payment, the two checks were dishonored for the reason account closed.
As of 31 May 1999, the amount due the Spouses Chua was pegged at P366,000.00 covering the principal of
P120,000.00 plus five percent (5%) interest per month from 1 January 1996 to 31 May 1999.
The Spouses Chua alleged that they have repeatedly demanded payment from Rivera to no avail. Because of
Riveras unjustified refusal to pay, the Spouses Chua were constrained to file a suit on 11 June 1999. The
case was raffled before the MeTC, Branch 30, Manila and docketed as Civil Case No. 163661.
In his Answer with Compulsory Counterclaim, Rivera countered that: (1) he never executed the subject
Promissory Note; (2) in all instances when he obtained a loan from the Spouses Chua, the loans were
always covered by a security; (3) at the time of the filing of the complaint, he still had an existing
indebtedness to the Spouses Chua, secured by a real estate mortgage, but not yet in default; (4) PCIB
Check No. 132224 signed by him which he delivered to the Spouses Chua on 21 December 1998, should
have been issued in the amount of only P1,300.00, representing the amount he received from the Spouses
Chuas saleslady; (5) contrary to the supposed agreement, the Spouses Chua presented the check for
payment in the amount of P133,454.00; and (6) there was no demand for payment of the amount of
P120,000.00 prior to the encashment of PCIB Check No. 0132224. 5
In the main, Rivera claimed forgery of the subject Promissory Note and denied his indebtedness thereunder.
The MeTC summarized the testimonies of both parties respective witnesses:
[The spouses Chuas] evidence include[s] documentary evidence and oral evidence (consisting of the
testimonies of [the spouses] Chua and NBI Senior Documents Examiner Antonio Magbojos). x x x
xxxx
Witness Magbojos enumerated his credentials as follows: joined the NBI (1987); NBI document examiner
(1989); NBI Senior Document Examiner (1994 to the date he testified); registered criminologist; graduate
of 18th Basic Training Course [i]n Questioned Document Examination conducted by the NBI; twice attended
a seminar on US Dollar Counterfeit Detection conducted by the US Embassy in Manila; attended a seminar
on Effective Methodology in Teaching and Instructional design conducted by the NBI Academy; seminar
lecturer on Questioned Documents, Signature Verification and/or Detection; had examined more than a
hundred thousand questioned documents at the time he testified.
Upon [order of the MeTC], Mr. Magbojos examined the purported signature of [Rivera] appearing in the
Promissory Note and compared the signature thereon with the specimen signatures of [Rivera] appearing on
several documents. After a thorough study, examination, and comparison of the signature on the questioned
document (Promissory Note) and the specimen signatures on the documents submitted to him, he concluded
that the questioned signature appearing in the Promissory Note and the specimen signatures of [Rivera]
appearing on the other documents submitted were written by one and the same person. In connection with
his findings, Magbojos prepared Questioned Documents Report No. 712-1000 dated 8 January 2001, with
the following conclusion: The questioned and the standard specimen signatures RODGRIGO RIVERA were
written by one and the same person.
[Rivera] testified as follows: he and [respondent] Salvador are kumpadres; in May 1998, he obtained a
loan from [respondent] Salvador and executed a real estate mortgage over a parcel of land in favor of
[respondent Salvador] as collateral; aside from this loan, in October, 1998 he borrowed P25,000.00 from
Salvador and issued PCIB Check No. 126407 dated 30 December 1998; he expressly denied execution of the
Promissory Note dated 24 February 1995 and alleged that the signature appearing thereon was not his
signature; [respondent Salvadors] claim that PCIB Check No. 0132224 was partial payment for the
Promissory Note was not true, the truth being that he delivered the check to [respondent Salvador] with the
space for amount left blank as he and [respondent] Salvador had agreed that the latter was to fill it in with
the amount of ?1,300.00 which amount he owed [the spouses Chua]; however, on 29 December 1998
[respondent] Salvador called him and told him that he had written P133,454.00 instead of P1,300.00; x x x.
To rebut the testimony of NBI Senior Document Examiner Magbojos, [Rivera] reiterated his averment that
the signature appearing on the Promissory Note was not his signature and that he did not execute the
Promissory Note.6
After trial, the MeTC ruled in favor of the Spouses Chua:
WHEREFORE, [Rivera] is required to pay [the spouses Chua]: P120,000.00 plus stipulated interest at the
rate of 5% per month from 1 January 1996, and legal interest at the rate of 12% percent per annum from
11 June 1999, as actual and compensatory damages; 20% of the whole amount due as attorneys fees. 7
On appeal, the Regional Trial Court, Branch 17, Manila affirmed the Decision of the MeTC, but deleted the
award of attorneys fees to the Spouses Chua:
WHEREFORE, except as to the amount of attorneys fees which is hereby deleted, the rest of the Decision
dated October 21, 2002 is hereby AFFIRMED.8
Both trial courts found the Promissory Note as authentic and validly bore the signature of Rivera.
Undaunted, Rivera appealed to the Court of Appeals which affirmed Riveras liability under the Promissory
Note, reduced the imposition of interest on the loan from 60% to 12% per annum, and reinstated the award
of attorneys fees in favor of the Spouses Chua:
WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to theMODIFICATION that the
interest rate of 60% per annum is hereby reduced to 12% per annum and the award of attorneys fees is
reinstated at the reduced amount of P50,000.00 Costs against [Rivera]. 9
Hence, these consolidated petitions for review on certiorari of Rivera in G.R. No. 184458 and the Spouses
Chua in G.R. No. 184472, respectively raising the following issues:
chanroble svirtuallawlibrary
A. In G.R. No. 184458

1. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THE RULING OF THE RTC
AND M[e]TC THAT THERE WAS A VALID PROMISSORY NOTE EXECUTED BY [RIVERA].
2. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT DEMAND IS NO
LONGER NECESSARY AND IN APPLYING THE PROVISIONS OF THE NEGOTIABLE INSTRUMENTS LAW.
3. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN AWARDING ATTORNEYS FEES
DESPITE THE FACT THAT THE SAME HAS NO BASIS IN FACT AND IN LAW AND DESPITE THE FACT THAT
[THE SPOUSES CHUA] DID NOT APPEAL FROM THE DECISION OF THE RTC DELETING THE AWARD OF
ATTORNEYS FEES.10
B. In G.R. No. 184472

[WHETHER OR NOT] THE HONORABLE COURT OF APPEALS COMMITTED GROSS LEGAL ERROR WHEN IT
MODIFIED THE APPEALED JUDGMENT BY REDUCING THE INTEREST RATE FROM 60% PER ANNUM TO 12%
PER ANNUM IN SPITE OF THE FACT THAT RIVERA NEVER RAISED IN HIS ANSWER THE DEFENSE THAT THE
SAID STIPULATED RATE OF INTEREST IS EXORBITANT, UNCONSCIONABLE, UNREASONABLE, INEQUITABLE,
ILLEGAL, IMMORAL OR VOID.11
As early as 15 December 2008, we already disposed of G.R. No. 184472 and denied the petition, via a
Minute Resolution, for failure to sufficiently show any reversible error in the ruling of the appellate court
specifically concerning the correct rate of interest on Riveras indebtedness under the Promissory Note. 12
On 26 February 2009, Entry of Judgment was made in G.R. No. 184472.

Thus, what remains for our disposition is G.R. No. 184458, the appeal of Rivera questioning the entire ruling
of the Court of Appeals in CA-G.R. SP No. 90609.
Rivera continues to deny that he executed the Promissory Note; he claims that given his friendship with the
Spouses Chua who were money lenders, he has been able to maintain a loan account with them. However,
each of these loan transactions was respectively secured by checks or sufficient collateral.
Rivera points out that the Spouses Chua never demanded payment for the loan nor interest thereof (sic)
from [Rivera] for almost four (4) years from the time of the alleged default in payment [i.e., after December
31, 1995].13
On the issue of the supposed forgery of the promissory note, we are not inclined to depart from the lower
courts uniform rulings that Rivera indeed signed it.
Rivera offers no evidence for his asseveration that his signature on the promissory note was forged, only
that the signature is not his and varies from his usual signature. He likewise makes a confusing defense of
having previously obtained loans from the Spouses Chua who were money lenders and who had allowed him
a period of almost four (4) years before demanding payment of the loan under the Promissory Note.
First, we cannot give credence to such a naked claim of forgery over the testimony of the National Bureau of
Investigation (NBI) handwriting expert on the integrity of the promissory note.
On that score, the appellate court aptly disabled Riveras contention:
[Rivera] failed to adduce clear and convincing evidence that the signature on the promissory note is a
forgery. The fact of forgery cannot be presumed but must be proved by clear, positive and convincing
evidence. Mere variance of signatures cannot be considered as conclusive proof that the same was forged.
Save for the denial of Rivera that the signature on the note was not his, there is nothing in the records to
support his claim of forgery. And while it is true that resort to experts is not mandatory or indispensable to
the examination of alleged forged documents, the opinions of handwriting experts are nevertheless helpful
in the courts determination of a documents authenticity.
To be sure, a bare denial will not suffice to overcome the positive value of the promissory note and the
testimony of the NBI witness. In fact, even a perfunctory comparison of the signatures offered in evidence
would lead to the conclusion that the signatures were made by one and the same person.
It is a basic rule in civil cases that the party having the burden of proof must establish his case by
preponderance of evidence, which simply means evidence which is of greater weight, or more convincing
than that which is offered in opposition to it.
Evaluating the evidence on record, we are convinced that [the Spouses Chua] have established a prima
facie case in their favor, hence, the burden of evidence has shifted to [Rivera] to prove his allegation of
forgery. Unfortunately for [Rivera], he failed to substantiate his defense. 14
Well-entrenched in jurisprudence is the rule that factual findings of the trial court, especially when affirmed
by the appellate court, are accorded the highest degree of respect and are considered conclusive between
the parties.15 A review of such findings by this Court is not warranted except upon a showing of highly
meritorious circumstances, such as: (1) when the findings of a trial court are grounded entirely on
speculation, surmises or conjectures; (2) when a lower court's inference from its factual findings is
manifestly mistaken, absurd or impossible; (3) when there is grave abuse of discretion in the appreciation of
facts; (4) when the findings of the appellate court go beyond the issues of the case, or fail to notice certain
relevant facts which, if properly considered, will justify a different conclusion; (5) when there is a
misappreciation of facts; (6) when the findings of fact are conclusions without mention of the specific
evidence on which they are based, are premised on the absence of evidence, or are contradicted by
evidence on record.16 None of these exceptions obtains in this instance. There is no reason to depart from
the separate factual findings of the three (3) lower courts on the validity of Riveras signature reflected in
the Promissory Note.
Indeed, Rivera had the burden of proving the material allegations which he sets up in his Answer to the
plaintiffs claim or cause of action, upon which issue is joined, whether they relate to the whole case or only
to certain issues in the case.17
In this case, Riveras bare assertion is unsubstantiated and directly disputed by the testimony of a
handwriting expert from the NBI. While it is true that resort to experts is not mandatory or indispensable to
the examination or the comparison of handwriting, the trial courts in this case, on its own, using the
handwriting expert testimony only as an aid, found the disputed document valid. 18
Hence, the MeTC ruled that:
[Rivera] executed the Promissory Note after consideration of the following: categorical statement of
[respondent] Salvador that [Rivera] signed the Promissory Note before him, in his ([Riveras]) house; the
conclusion of NBI Senior Documents Examiner that the questioned signature (appearing on the Promissory
Note) and standard specimen signatures Rodrigo Rivera were written by one and the same person;
actual view at the hearing of the enlarged photographs of the questioned signature and the standard
specimen signatures.19
Specifically, Rivera insists that: [i]f that promissory note indeed exists, it is beyond logic for a money lender
to extend another loan on May 4, 1998 secured by a real estate mortgage, when he was already in default
and has not been paying any interest for a loan incurred in February 1995.20
We disagree.
It is likewise likely that precisely because of the long standing friendship of the parties as kumpadres,
Rivera was allowed another loan, albeit this time secured by a real estate mortgage, which will cover
Riveras loan should Rivera fail to pay. There is nothing inconsistent with the Spouses Chuas two (2) and
successive loan accommodations to Rivera: one, secured by a real estate mortgage and the other, secured
by only a Promissory Note.
Also completely plausible is that given the relationship between the parties, Rivera was allowed a substantial
amount of time before the Spouses Chua demanded payment of the obligation due under the Promissory
Note.
In all, Riveras evidence or lack thereof consisted only of a barefaced claim of forgery and a discordant
defense to assail the authenticity and validity of the Promissory Note. Although the burden of proof rested
on the Spouses Chua having instituted the civil case and after they established a prima facie case against
Rivera, the burden of evidence shifted to the latter to establish his defense. 21Consequently, Rivera failed to
discharge the burden of evidence, refute the existence of the Promissory Note duly signed by him and
subsequently, that he did not fail to pay his obligation thereunder. On the whole, there was no question left
on where the respective evidence of the parties preponderatedin favor of plaintiffs, the Spouses Chua.
Rivera next argues that even assuming the validity of the Promissory Note, demand was still necessary in
order to charge him liable thereunder. Rivera argues that it was grave error on the part of the appellate
court to apply Section 70 of the Negotiable Instruments Law (NIL). 22
We agree that the subject promissory note is not a negotiable instrument and the provisions of the NIL do
not apply to this case. Section 1 of the NIL requires the concurrence of the following elements to be a
negotiable instrument:
(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with
reasonable certainty.
On the other hand, Section 184 of the NIL defines what negotiable promissory note is:
SECTION 184. Promissory Note, Defined. A negotiable promissory note within the meaning of this Act is an
unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on
demand, or at a fixed or determinable future time, a sum certain in money to order or to bearer. Where a
note is drawn to the makers own order, it is not complete until indorsed by him.
The Promissory Note in this case is made out to specific persons, herein respondents, the Spouses Chua,
and not to order or to bearer, or to the order of the Spouses Chua as payees.
However, even if Riveras Promissory Note is not a negotiable instrument and therefore outside the coverage
of Section 70 of the NIL which provides that presentment for payment is not necessary to charge the person
liable on the instrument, Rivera is still liable under the terms of the Promissory Note that he issued.
The Promissory Note is unequivocal about the date when the obligation falls due and becomes demandable
31 December 1995. As of 1 January 1996, Rivera had already incurred in delay when he failed to pay the
amount of P120,000.00 due to the Spouses Chua on 31 December 1995 under the Promissory Note.
Article 1169 of the Civil Code explicitly provides:
Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or
extrajudicially demands from them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order that delay may exist:
(1) When the obligation or the law expressly so declare; or
(2) When from the nature and the circumstances of the obligation it appears that the designation of the time
when the thing is to be delivered or the service is to be rendered was a controlling motive for the
establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it beyond his power to perform.
In 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. From the moment one of the parties fulfills his
obligation, delay by the other begins. (Emphasis supplied)
There are four instances when demand is not necessary to constitute the debtor in default: (1) when there is
an express stipulation to that effect; (2) where the law so provides; (3) when the period is the controlling
motive or the principal inducement for the creation of the obligation; and (4) where demand would be
useless. In the first two paragraphs, it is not sufficient that the law or obligation fixes a date for
performance; it must further state expressly that after the period lapses, default will commence.
We refer to the clause in the Promissory Note containing the stipulation of interest:
It is agreed and understood that failure on my part to pay the amount of (P120,000.00) One Hundred
Twenty Thousand Pesos on December 31, 1995. (sic) I agree to pay the sum equivalent to FIVE PERCENT
(5%) interest monthly from the date of default until the entire obligation is fully paid for.23
which expressly requires the debtor (Rivera) to pay a 5% monthly interest from the date of default until
the entire obligation is fully paid for. The parties evidently agreed that the maturity of the obligation at a
date certain, 31 December 1995, will give rise to the obligation to pay interest. The Promissory Note
expressly provided that after 31 December 1995, default commences and the stipulation on payment of
interest starts.
The date of default under the Promissory Note is 1 January 1996, the day following 31 December 1995, the
due date of the obligation. On that date, Rivera became liable for the stipulated interest which the
Promissory Note says is equivalent to 5% a month. In sum, until 31 December 1995, demand was not
necessary before Rivera could be held liable for the principal amount of P120,000.00. Thereafter, on 1
January 1996, upon default, Rivera became liable to pay the Spouses Chua damages, in the form of
stipulated interest.
The liability for damages of those who default, including those who are guilty of delay, in the performance of
their obligations is laid down on Article 117024 of the Civil Code.

Corollary thereto, Article 2209 solidifies the consequence of payment of interest as an indemnity for
damages when the obligor incurs in delay:
Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in
delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the
interest agreed upon, and in the absence of stipulation, the legal interest, which is six percent per annum.
(Emphasis supplied)
Article 2209 is specifically applicable in this instance where: (1) the obligation is for a sum of money; (2) the
debtor, Rivera, incurred in delay when he failed to pay on or before 31 December 1995; and (3) the
Promissory Note provides for an indemnity for damages upon default of Rivera which is the payment of a 5%
monthly interest from the date of default.
We do not consider the stipulation on payment of interest in this case as a penal clause although Rivera, as
obligor, assumed to pay additional 5% monthly interest on the principal amount of P120,000.00 upon
default.
Article 1226 of the Civil Code provides:
Art. 1226. 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. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud
in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance with the provisions of this Code.
The penal clause is generally undertaken to insure performance and works as either, or both, punishment
and reparation. It is an exception to the general rules on recovery of losses and damages. As an exception
to the general rule, a penal clause must be specifically set forth in the obligation. 25
In high relief, the stipulation in the Promissory Note is designated as payment of interest, not as a penal
clause, and is simply an indemnity for damages incurred by the Spouses Chua because Rivera defaulted in
the payment of the amount of P120,000.00. The measure of damages for the Riveras delay is limited to the
interest stipulated in the Promissory Note. In apt instances, in default of stipulation, the interest is that
provided by law.26
In this instance, the parties stipulated that in case of default, Rivera will pay interest at the rate of 5% a
month or 60% per annum. On this score, the appellate court ruled:
It bears emphasizing that the undertaking based on the note clearly states the date of payment to be 31
December 1995. Given this circumstance, demand by the creditor is no longer necessary in order that delay
may exist since the contract itself already expressly so declares. The mere failure of [Spouses Chua] to
immediately demand or collect payment of the value of the note does not exonerate [Rivera] from his
liability therefrom. Verily, the trial court committed no reversible error when it imposed interest from 1
January 1996 on the ratiocination that [Spouses Chua] were relieved from making demand under Article
1169 of the Civil Code.
xxxx
As observed by [Rivera], the stipulated interest of 5% per month or 60% per annum in addition to legal
interests and attorneys fees is, indeed, highly iniquitous and unreasonable. Stipulated interest rates are
illegal if they are unconscionable and the Court is allowed to temper interest rates when necessary. Since
the interest rate agreed upon is void, the parties are considered to have no stipulation regarding the interest
rate, thus, the rate of interest should be 12% per annum computed from the date of judicial or extrajudicial
demand.[27
The appellate court found the 5% a month or 60% per annum interest rate, on top of the legal interest and
attorneys fees, steep, tantamount to it being illegal, iniquitous and unconscionable.
Significantly, the issue on payment of interest has been squarely disposed of in G.R. No. 184472 denying the
petition of the Spouses Chua for failure to sufficiently show any reversible error in the ruling of the appellate
court, specifically the reduction of the interest rate imposed on Riveras indebtedness under the Promissory
Note. Ultimately, the denial of the petition in G.R. No. 184472 isres judicata in its concept of bar by prior
judgment on whether the Court of Appeals correctly reduced the interest rate stipulated in the Promissory
Note.
Res judicata applies in the concept of bar by prior judgment if the following requisites concur: (1) the
former judgment or order must be final; (2) the judgment or order must be on the merits; (3) the decision
must have been rendered by a court having jurisdiction over the subject matter and the parties; and (4)
there must be, between the first and the second action, identity of parties, of subject matter and of causes
of action.28
In this case, the petitions in G.R. Nos. 184458 and 184472 involve an identity of parties and subject matter
raising specifically errors in the Decision of the Court of Appeals. Where the Court of Appeals disposition on
the propriety of the reduction of the interest rate was raised by the Spouses Chua in G.R. No. 184472, our
ruling thereon affirming the Court of Appeals is a bar by prior judgment.
At the time interest accrued from 1 January 1996, the date of default under the Promissory Note, the then
prevailing rate of legal interest was 12% per annum under Central Bank (CB) Circular No. 416 in cases
involving the loan or forbearance of money.29 Thus, the legal interest accruing from the Promissory Note is
12% per annum from the date of default on 1 January 1996.
However, the 12% per annum rate of legal interest is only applicable until 30 June 2013, before the advent
and effectivity of Bangko Sentral ng Pilipinas (BSP) Circular No. 799, Series of 2013 reducing the rate of
legal interest to 6% per annum. Pursuant to our ruling in Nacar v. Gallery Frames,30 BSP Circular No. 799 is
prospectively applied from 1 July 2013. In short, the applicable rate of legal interest from 1 January 1996,
the date when Rivera defaulted, to date when this Decision becomes final and executor is divided into two
periods reflecting two rates of legal interest: (1) 12% per annumfrom 1 January 1996 to 30 June 2013; and
(2) 6% per annum FROM 1 July 2013 to date when this Decision becomes final and executory.
As for the legal interest accruing from 11 June 1999, when judicial demand was made, to the date when this
Decision becomes final and executory, such is likewise divided into two periods: (1) 12%per annum from 11
June 1999, the date of judicial demand to 30 June 2013; and (2) 6% per annumfrom 1 July 2013 to date
when this Decision becomes final and executor.31 We base this imposition of interest on interest due
earning legal interest on Article 2212 of the Civil Code which provides that interest due shall earn legal
interest from the time it is judicially demanded, although the obligation may be silent on this point.
From the time of judicial demand, 11 June 1999, the actual amount owed by Rivera to the Spouses Chua
could already be determined with reasonable certainty given the wording of the Promissory Note. 32
We cite our recent ruling in Nacar v. Gallery Frames:33
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for damages. The provisions under Title XVIII on Damages of
the Civil Code govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the
rate of interest, as well as the accrual thereof, is imposed, as follows:
1.
When the obligation is breached, and it consists in the payment of a sum

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

an interest on the amount of damages awarded may be imposed at the discretion
of the court at the rate of 6% per annum. No interest, however, shall be adjudged
on unliquidated claims or damages, except when or until the demand can be

established with reasonable certainty. Accordingly, where the demand is established
with reasonable certainty, the interest shall begin to run from the time the claim is
made judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty
cannot be so reasonably established at the time the demand is made, the interest
shall begin to run only from the date the judgment of the court is made (at which
time the quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest shall, in any
case, be on the amount finally adjudged.
3.
When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 6% per annum from such finality until its satisfaction,
this interim period being deemed to be by then an equivalent to a forbearance of
credit.
And, in addition to the above, judgments that have become final and executory
prior to July 1, 2013, shall not be disturbed and shall continue to be implemented
applying the rate of interest fixed therein. (Emphasis supplied)
On the reinstatement of the award of attorneys fees based on the stipulation in the Promissory Note, we
agree with the reduction thereof but not the ratiocination of the appellate court that the attorneys fees are
in the nature of liquidated damages or penalty. The interest imposed in the Promissory Note already answers
as liquidated damages for Riveras default in paying his obligation. We award attorneys fees, albeit in a
reduced amount, in recognition that the Spouses Chua were compelled to litigate and incurred expenses to
protect their interests.34 Thus, the award of P50,000.00 as attorneys fees is proper.
For clarity and to obviate confusion, we chart the breakdown of the total amount owed by Rivera to the
Spouses Chua:
Face value
of the
Promissory
Note
Stipulated Interest
A&B
February
A. January 1, 1996
24, 1995 to to June 30, 2013
December
31, 1995
B. July 1 2013 to
date when this
Decision becomes
final and executory
Interest due
earning legal
interest A & B
Attorneys
fees
Total
Amount
A. June 11, 1999

Wholesale
(date of judicial
amount
demand) to June
30, 2013
B. July 1, 2013 to
date when this
Decision becomes
final and executory
P120,000.00 A. 12 % per
A. 12% per
P50,000.00 Total
annum on the
annum on the total
amount
principal amount of amount of column
of
P120,000.00
2
Columns
B. 6% per
B. 6% per
1-4
annum on the
annum on the total
principal amount of amount of column
P120,000.00
235
The total amount owing to the Spouses Chua set forth in this Decision shall further earn legal interest at the
rate of 6% per annum computed from its finality until full payment thereof, the interim period being deemed
to be a forbearance of credit.
chanroble slaw
WHEREFORE, the petition in G.R. No. 184458 is DENIED. The Decision of the Court of Appeals in CA-G.R.
SP No. 90609 is MODIFIED. Petitioner Rodrigo Rivera is ordered to pay respondents Spouse Salvador and
Violeta Chua the following:
(1) the principal amount of P120,000.00;

(2) legal interest of 12% per annum of the principal amount of P120,000.00
reckoned from 1 January 1996 until 30 June 2013;
(3) legal interest of 6% per annum of the principal amount of P120,000.00
form 1 July 2013 to date when this Decision becomes final and
executory;
(4) 12% per annum applied to the total of paragraphs 2 and 3 from 11 June
1999, date of judicial demand, to 30 June 2013, as interest due earning
legal interest;
(5) 6% per annum applied to the total amount of paragraphs 2 and 3 from
1 July 2013 to date when this Decision becomes final and executor, as
interest due earning legal interest;
(6) Attorneys fees in the amount of P50,000.00; and
(7) 6% per annum interest on the total of the monetary awards from the
finality of this Decision until full payment thereof.
Costs against petitioner Rodrigo Rivera.
JOINT AND SOLIDARY OBLIGATION

SPOUSES RODOLFO BEROT AND LILIA BEROT vs. FELIPE C. SIAPNO, G.R.
No. 188944, July 9, 2014, CJ. Sereno
G.R. No. 188944
July 9, 2014
SPOUSES RODOLFO BEROT AND LILIA BEROT, Petitioners,

vs.
FELIPE C. SIAPNO, Respondent.
DECISION
SERENO, CJ:
Before us is a Petition for Review on Certiorari under Rule 45 of the 1997 Revised Rules on Civil
Procedure assailing the Court of Appeals (CA) Decision dated 29 January 2009 in CA-G.R. CV No.
87995. The assailed CA Decision affirmed with modification the Decision in Civil Case No. 20040246-D issued by the Regional Trial Court (RTC), First Judicial Region of Dagupan City, Branch 42.
The RTC Decision allowed the foreclosure of a mortgaged property despite the objections of
petitioners claiming, among others, that its registered owner was impleaded in the suit despite being
deceased.
1
THE FACTS
Considering that there are no factual issues in this case, we adopt the findings of fact of the CA, as
follows:
On May 23, 2002, Macaria Berot (or "Macaria") and spouses Rodolfo A. Berot (or "appellant") and
Lilia P. Berot (or "Lilia") obtained a loan from Felipe C. Siapno (or "appellee") in the sum
of P250,000.00, payable within one year together with interest thereon at the rate of 2% per annum
from that date until fully paid.
As security for the loan, Macaria, appellant and Lilia (or "mortgagors", when collectively)mortgaged
to appellee a portion, consisting of 147 square meters (or "contested property"), of that parcel of land
with an area of 718 square meters, situated in Banaoang, Calasiao, Pangasinan and covered by Tax
Declaration No. 1123 in the names of Macaria and her husband Pedro Berot (or "Pedro"), deceased.
On June 23, 2003, Macaria died.
Because of the mortgagors default,appellee filed an action against them for foreclosure of
mortgageand damages on July 15, 2004 in the Regional Trial Court of Dagupan City (Branch 42).
The action was anchored on the averment that the mortgagors failed and refused to pay the
abovementioned sum of P250,000.00 plus the stipulated interest of 2% per month despite lapse of
one year from May 23, 2002.
In answer, appellant and Lilia (or "Berot spouses", when collectively [referred to]) alleged that the
contested property was the inheritance of the former from his deceased father, Pedro; that on said
property is their family home; that the mortgage is void as it was constituted over the family home
without the consent of their children, who are the beneficiaries thereof; thattheir obligation is only
joint; and that the lower court has no jurisdiction over Macaria for the reason that no summons was
served on her as she was already dead.
With leave of court, the complaint was amended by substituting the estate of Macaria in her stead.
Thus, the defendants named in the amended complaint are now the "ESTATE OF MACARIA
BEROT, represented by Rodolfo A. Berot, RODOLFO A. BEROT and LILIA P. BEROT".
After trial, the lower court rendered a decision dated June 30, 2006, the decretal portion of which
reads:
WHEREFORE, the Court hereby renders judgment allowing the foreclosure of the subject mortgage.
Accordingly, the defendants are hereby ordered to pay to the plaintiff within ninety (90) days from
notice of thisDecision the amount of P250,000.00 representing the principal loan, with interest at two
(2%) percent monthly from February, 2004 the month when they stopped paying the agreed interest
up to satisfaction of the claim and 30% of the amount to be collected as and for attorneys fees.
Defendants are also assessed to pay the sum of P20,000.00 as litigation expenses and another sum
of P10,000.00 as exemplary damages for their refusal to pay their aforestated loan obligation. If
within the aforestated 90-day period the defendants fail to pay plaintiff the above-mentioned
amounts, the sale of the property subject of the mortgage shall be made and the proceeds of the
sale to be delivered to the plaintiff to cover the debt and charges mentioned above, and after such
payments the excess, if any shall be delivered to the defendants.
SO ORDERED.
Appellant filed a motion for reconsideration of the decision but it was denied per order dated
September 8, 2006. Hence, this appeal interposed by appellant imputing errors to the lower court in
1. SUBSTITUTING AS DEFENDANT THE ESTATE OF MACARIA BEROT WHICH HAS NO

PERSONALITY TO SUE AND TO BE SUED;
2. APPOINTING RODOLFO BEROT AS A REPRESENTATIVE OF THE ESTATE OF THE
DECEASED MACARIA BEROT TO THE PREJUDICE OF THE OTHER HEIRS, GRANTING FOR
THE SAKE OF ARGUMENT THAT THE ESTATE OF MACARIA BEROT HAS A PERSONALITY TO
SUE AND BE SUED;
3. NOT FINDING THE MORTGAGE NULL AND VOID, WHICH WAS ENTERED INTOWITHOUT
THE WRITTEN CONSENT OF THE BENEFICIARIES OF THE FAMILY HOME WHO WERE OF
LEGAL AGE;
4. MAKING DEFENDANTS LIABLE FOR THE ENTIRE OBLIGATION OF PH250,000.00, WHEN
THE OBLIGATION IS ONLY JOINT;
5. IMPOSING ATTORNEYS FEE(S) IN THE DISPOSITIVE PORTION WITHOUT MAKING A
FINDING OF THE BASIS THEREOF IN THE BODY; and
6. IMPOSING EXEMPLARY DAMAGES AND LITIGATION EXPENSES.
Appellant contends that the substitution of the estate of Macaria for her is improper as the estate has
no legal personality to be sued.
3
On 29 January 2009, the CA, through its Seventh Division, promulgated a Decision that affirmed the
RTC Decision but with modification where it deleted the award of exemplary damages, attorneys
fees and expenses of litigation. The appellate court explained in its ruling that petitioners correctly
argued that a decedents estate is not a legal entity and thus, cannot sue or be sued. However,it
noted that petitioners failed to object to the trial courts exercise of jurisdiction over the estate of
Macaria when the latter was impleaded by respondents by amending the original
complaint. Adopting the rationale of the trial court on this matter, the CA held:
4
As aptly observed by the trial court:

It may be recalled that when the plaintiff filed his Amended Complaint substituting the estate of
Macaria Berot in place of Macaria Berot as party defendant, defendants made no objection thereto.
Not even an amended answer was filed by the defendants questioning the substitution of the estate
of Macaria Berot. For these reasons, the defendants are deemed to have waivedany objection on
the personality of the estate of Macaria Berot. Section 1, Rule 9 of the Rules of Court provides that,
Defenses and objections not pleaded either in a motion to dismiss or in the answer are deemed
waived. (Order dated September 8, 2006) [Underscoring supplied]
5
The CA also found the action of respondent to be procedurally correct under Section 7, Rule 86 of
the Rules ofCourt, when it decided to foreclose on the mortgage of petitioner and prove his
deficiency as an ordinary claim. The CA did not make a categorical finding that the nature of the
6
obligation was joint or solidary on the part of petitioners. It neither sustained their argument that the
mortgage was invalidfor having beenconstituted over a family home without the written consent of
the beneficiaries who were of legal age. However, it upheld their argument that the award of
exemplary damages and attorneys fees in favor ofrespondent was improper for lack of basis, when
it ruled thus:
7
WHEREFORE, the appealed decision is AFFIRMED with MODIFICATION in that the award of
exemplary damages, attorneys fees and expenses of litigation is DELETED.
SO ORDERED.
10
Petitioners moved for the reconsideration of the CA Decision, but their motion was denied through a
Resolution dated 9 July 2009. Aggrieved by the denial of their Motion for Reconsideration, they now
come to us through a Petition for Review on Certiorari under Rule 45, proffering purely questions of
law.
11
THE ISSUES
The following are the issues presented by petitioners for resolution by this Court:
The Court of Appeals erred in:
1. Holding that the intestate estate of Macaria Berot could be a proper party by waiver expressly or
impliedly by voluntary appearance;
2. In not holding that the obligation is joint
12
THE COURTS RULING

We DENYthe Petition for lack of merit.
Petitioners were correct when they argued that upon Macaria Berots death on 23 June 2003, her
legal personality ceased, and she could no longer be impleaded as respondent in the foreclosure
suit. It is also true that her death opened to her heirs the succession of her estate, which in this case
was an intestate succession. The CA, in fact, sustained petitioners position that a deceased
persons estate has no legal personality to be sued. Citing the Courts ruling in Ventura v.
Militante, it correctly ruled that a decedent does not have the capacity to be sued and may not be
madea defendant in a case:
13
A deceased person does not have suchlegal entity asis necessary to bring action so much so that a
motion to substitute cannot lie and should be denied by the court. An action begun by a decedents
estate cannot be said to have been begun by a legal person, since an estate is not a legal entity;
such an action is a nullity and a motion to amend the party plaintiff will not, likewise, lie, there being
nothing before the court to amend. Considering that capacity to be sued isa correlative of the
capacity to sue, to the same extent, a decedent does not have the capacity to be sued and may not
be named a party defendant in a court action.
When respondent filed the foreclosure case on 15 June 2004 and impleaded Macaria Berot as
respondent, the latter had already passed away the previous year, on 23 June 2003. In their
Answer to the Complaint, petitioners countered among others, that the trial court did not have
jurisdiction over Macaria, because no summons was served on her, precisely for the reason that she
had already died. Respondent then amended his Complaint with leave of court and substituted the
deceased Macaria by impleading her intestate estate and identified Rodolfo Berot as the estates
representative. Thereafter, the case proceeded on the merits at the trial, where this case originated
and where the Decision was promulgated.
14
It can be gleaned from the records ofthe case that petitioners did not object when the estate of
Macaria was impleaded as respondent in the foreclosure case. Petitioner Rodolfo Berot did not
object either when the original Complaint was amended and respondent impleaded him as the
administrator of Macarias estate, in addition to his being impleaded as an individual respondent in
the case. Thus, the trial and appellate courts were correct in ruling that, indeed, petitionersimpliedly
waived any objection to the trial courts exercise of jurisdiction over their persons at the inception of
the case. In resolving the Motion for Reconsideration of petitioners as defendants in Civil Case No.
2004-0246-D, the RTC was in point when it ruled:
It may be recalled that when the plaintiff filed his Amended Complaint substituting the estate of
Macaria Berot in place of Macaria Berot as party defendant, defendants made no objections thereto.
Not even an amended answer was filed by the defendants questioning the substitution of the estate
of Macaria Berot. For these reasons, the defendants are deemed to have waivedany objection on
the personality of the estate of Macaria Berot. Section 1, Rule 9 of the Rules of Court provides that,
"Defenses and objections not pleaded either in a motion to dismiss or in the answer are deemed
waived. x x x. (Underscoring ours)
15
Indeed, the defense of lack of jurisdiction over the person of the defendant is one that may bewaived
by a party to a case. In order to avail of that defense, one must timely raise an objection before the
court.
16
The records of the case show that on 9 November 2004, a hearing was held on the Motion for Leave
to Filefiled by respondent to have her amended Complaint admitted. During the said hearing, the
counsel for petitioners did not interpose an objection to the said Motion for Leave. On 18 March
2005, a hearing was held on respondents Motion to Admit Amended Complaint, wherein counselfor
petitioners again failed to interpose any objection. Thus, the trial court admitted respondents
Amended Complaint and ordered thata copy and a summons be served anew on petitioners.
17
18
19
In an Order dated 14 April 2005, the RTC noted that petitioners received the summons and the
copy of the amended Complaint on 3 February 2005 and yet they did not file an Answer. During the
trial on the merits that followed, petitioners failed to interpose any objection to the trial courts
exercise of jurisdiction over the estate of Macaria Berot. Clearly, their full participation in the
proceedings of the case can only be construed as a waiver of any objection to or defense of the trial
courts supposed lack of jurisdiction over the estate.
20
In Gonzales v. Balikatan Kilusang Bayan sa Panlalapi, Inc., we held that a partys appearance in a
case is equivalent to a service of summons and that objections must be timely raised:
21
In this regard, petitioners should be reminded of the provision in the Rules of Court that a
defendantsvoluntary appearance in an action shall be equivalent to service of summons. Further,
the lack of jurisdiction over the person of the defendant may be waived either expressly or impliedly.
When a defendant voluntarily appears, he is deemed to have submitted himself to the jurisdiction of
the court. If he does not wish to waive this defense, he must do so seasonably by motion, and object
thereto.
It should be noted that Rodolfo Berot is the son of the deceased Macaria and as such, he is a
compulsory heir of his mother. His substitution is mandated by Section 16, Rule 3 of the Revised
Rules of Court. Notably, there is no indication inthe records of the case that he had other siblings
who would have been his co-heirs. The lower and appellate courts veered from the real issue
whether the proper parties have been impleaded. They instead focused on the issue whether there
was need for a formal substitution when the deceasedMacaria, and later its estate, was impleaded.
As the compulsory heir of the estate of Macaria, Rodolfo is the real party in interest in accordance
with Section 2, Rule 3 of the Revised Rules of Court. At the time of the filing of the complaint for
foreclosure, as well as the time it was amended to implead the estate of Macaria, it is Rodolfo as
heir who is the real party in interest. He stands to be benefitted or injured by the judgment in the
suit.
22
Rodolfo is also Macarias co-defendant in the foreclosure proceedings in his own capacity as coborrower ofthe loan. He participated in the proceedings of the case, from the initial hearing of the
case, and most particularly when respondent filed his amended complaint impleading the estate of
Macaria. When respondent amended his complaint, Rodolfo did not file an amended Answer nor
raise any objection, even if he was also identified therein as the representative ofthe estate of the
deceased Macaria. The lower court noted this omission by Rodolfo in its Order dated 8 September
2006 ruling on his Motionfor Reconsideration to the said courts Decision dated 30 June 2006. Thus,
his continued participation in the proceedings clearly shows that the lower court acquired jurisdiction
over the heir of Macaria.
In Regional Agrarian Reform Adjudication Board v. Court of Appeals, we ruled that:
23
[W]e have to point out that the confusion in this case was brought about by respondents themselves
when they included in their complaint two defendants who were already dead. Instead of impleading
the decedents heirs and current occupants of the landholding, respondents filed their complaint
against the decedents, contrary to the following provision of the 1994 DARAB Rules of Procedure:
RULE V
PARTIES, CAPTION AND SERVICE OF PLEADINGS
SECTION 1. Parties in Interest. Every agrarian case must be initiated and defended inthe name of
the real party in interest. x x x.
A real party in interest is defined as "the party who stands to be benefited or injured by the judgment
in the suit, or the party entitled to the avails of a suit." The real parties in interest, at the time the
complaint was filed, were no longer the decedents Avelino and Pedro, but rather their respective
heirs who are entitled to succeed to their rights (whether as agricultural lessees or as farmersbeneficiaries) under our agrarian laws. They are the ones who, as heirs of the decedents and
actualtillers, stand to be removed from the landholding and made to pay back rentals to respondents
if the complaint is sustained.
Since respondents failed to correcttheir error (they did not amend the erroneous caption of their
complaint to include the real parties-ininterest), they cannot be insulated from the confusion which it
engendered in the proceedings below. But at any rate, notwithstanding the erroneous caption and
the absence of a formal substitution of parties, jurisdiction was acquired over the heirs of Avelino and
Pedro who voluntarily participated in the proceedings below. This Court has ruled that formal
substitution of parties is not necessary when the heirs themselves voluntarily appeared, participated,
and presented evidence during the proceedings.
As such, formal substitution of the parties in this case is not necessary.
In Vda. De Salazar v. Court of Appeals we ruled that a formal substitution of the heirs in place of the
deceased is no longer necessary if the heirs continued to appear and participated in the proceedings
of the case. In the cited case, we explained the rationale of our ruling and related it to the due
process issue, to wit:
24
We are not unaware of several cases where we have ruled that a party having died in an action that
survives, the trial held by the court without appearance of the deceased's legal representative or
substitution of heirs and the judgment rendered after such trial, are null and void because the court
acquired no jurisdiction over the persons of the legal representatives or of the heirs upon whom the
trial and the judgment would be binding. This general rule notwithstanding, in denying petitioner's
motion for reconsideration, the Court of Appeals correctly ruled that formal substitution of heirs is not
necessary when the heirs themselves voluntarily appeared, participated in the case and presented
evidence in defense of deceased defendant. Attending the case at bench, after all, are these
particular circumstances which negate petitioner's belated and seemingly ostensible claim of
violation of her rights to due process. We should not lose sight of the principle underlying the general
rule that formal substitution of heirs must be effectuated for them to be bound by a subsequent
judgment. Such had been the general rule established not because the rule on substitution of heirs
and that on appointment of a legal representative are jurisdictional requirements per se but because
non-compliance therewith results in the undeniable violation of the right to due process of those who,
though not duly notified of the proceedings, are substantially affected by the decision rendered
therein. Viewing the rule on substitution of heirs in this light, the Court of Appeals,in the resolution
denying petitioner's motion for reconsideration, thus expounded:
Although the jurisprudential rule is that failure to make the substitution is a jurisdictional defect, it
should be noted that the purpose of this procedural rule is to comply with due process requirements.
The original party having died, he could not continue, to defend himself in court despite the fact that
the action survived him. For the case to continue, the real party in interest must be substituted for
the deceased. The real party in interest is the one who would beaffected by the judgment. It could be
the administrator or executor or the heirs. In the instant case, the heirs are the proper substitutes.
Substitution gives them the opportunity to continue the defense for the deceased. Substitution is
important because such opportunity to defend is a requirement to comply with due process. Such
substitution consists of making the proper changes in the caption of the case which may be called
the formal aspect of it. Such substitution also includes the process of letting the substitutes know
that they shall be bound by any judgment in the case and that they should therefore actively
participate in the defense of the deceased. This part may be called the substantive aspect. This is
the heart of the procedural rule because this substantive aspect is the one that truly embodies and
gives effect to the purpose of the rule. It is this court's view that compliance with the substantive
aspect of the rule despite failure to comply with the formal aspect may he considered substantial
compliance.Such is the situation in the case at bench because the only inference that could be
deduced from the following facts was that there was active participation of the heirs in the defense
ofthe deceased after his death:
1. The original lawyer did not stop representing the deceased. It would be absurd to think that the
lawyer would continue to represent somebody if nobody is paying him his fees. The lawyer
continued to represent him in the litigation before the trial court which lasted for about two more
years. A dead party cannot pay him any fee. With or without payment of fees, the fact remains that
the said counsel was allowed by the petitioner who was well aware of the instant litigation to
continue appearing as counsel until August 23, 1993 when the challenged decision was rendered;
2. After the death of the defendant, his wife, who is the petitioner in the instant case, even testified in
the court and declared that her husband is already deceased. She knew therefore that there was a
litigation against her husband and that somehow her interest and those of her children were
involved;
3. This petition for annulmentof judgment was filed only after the appeal was decided against the
defendant on April 3, 1995, more than one and a half year (sic) after the decision was rendered
(even if we were to give credence to petitioner's manifestation that she was notaware that an appeal
had been made);
4. The Supreme Court has already established that there is such a thing as jurisdiction byestoppel.
This principle was established even in cases where jurisdiction over the subject matter was being
questioned. In the instant case, only jurisdiction over the person of the heirs is in issue. Jurisdiction
over the person may be acquired by the court more easily than jurisdiction over the subject matter.
Jurisdiction over the person may be acquired by the simple appearance of the person in court as did
herein petitioner appear;
5. The case cited by the herein petitioner (Ferreria et al. vs. Manuela Ibarra vda. de Gonzales, etal.)
cannot be availed of to support the said petitioner's contention relative to nonacquisition of
jurisdiction by the court. In that case, Manolita Gonzales was not served notice and, more
importantly, she never appeared in court, unlike herein petitioner who appeared and even testified
regarding the death of her husband.
In this case, Rodolfos continued appearance and participation in the proceedings of the case
dispensed with the formal substitution of the heirs in place of the deceased Macaria. The failure of
petitioners to timely object to the trial courts exercise of jurisdiction over the estate of Macaria Berot
amounted to a waiver on their part. Consequently, it would be too late for them at this point to raise
that defense to merit the reversal of the assailed decision of the trial court. We are left with no option
other than to sustain the CAs affirmation of the trial courts Decision on this matter.
On the second issue of whether the nature of the loan obligation contracted by petitioners is joint or
solidary, we rule that it is joint.
Under Article 1207 of the Civil Code of the Philippines, the general rule is that when there is a
concurrence of two or more debtors under a single obligation, the obligation is presumed to be joint:
Art. 1207. The concurrence of two or more creditors or of two or more debtors in one and the same
obligation does not imply that each one of the former has a right to demand, orthat each one of the
latter is bound to render, entire compliance with the prestations. There is a solidary liability only
when the obligation expressly so states, or when the law or the nature of the obligation requires
solidarity.
The law further provides that to consider the obligation as solidary in nature, it must expressly be
stated as such, or the law or the nature of the obligation itself must require solidarity. In PH Credit
Corporation v. Court of Appeals, we held that:
25
A solidaryobligation is one in which each of the debtors is liable for the entire obligation, and each of
the creditors is entitled to demand the satisfaction of the whole obligation from any or all of the
debtors. On the other hand, a jointobligation is one in which each debtors is liable only for a
proportionate part of the debt, and the creditor is entitled to demand only a proportionate part of the
credit from each debtor. The wellentrenched rule is that solidary obligations cannot be inferred lightly.
They must be positively and clearly expressed. A liability is solidary "only when the obligation
expressly so states, when the law so provides or when the nature of the obligation so requires."
In the instant case, the trial court expressly ruled that the nature of petitioners obligation to
respondent was solidary. It scrutinized the real estate mortgage and arrived at the conclusion that
petitioners had bound themselves to secure their loan obligation by way of a realestate mortgage in
the event that they failed to settle it. But such pronouncement was not expressly stated in its 30
June 2006 Decision. This was probably the reason why, when the trial court Decision was appealed
to it, the CA did not squarely address the issue when the latter ruled that:
26
27
It is noteworthy that the appealed decision makes no pronouncement that the obligation of the
mortgagors is solidary; and that said decision has not been modifiedby the trial court. Hence, it is
unnecessary for US to make a declaration on the nature of the obligation of the
mortgagors. However, a closer scrutiny of the records would reveal that the RTC expressly
pronounced that the obligation of petitioners to the respondent was solidary. In resolving petitioners
Motion for Reconsideration to its 30 June 2006 Decision, the trial court categorically ruled that:
28
Defendants [sic] obligation with plaintiff is solidary. A careful scrutiny of the Real Estate
Mortgage(Exh. "A") will show that all the defendants, for a single loan, bind themselves to cede,
transfer, and convey by way of real estate mortgage all their rights, interest and participation in the
subject parcelof land including the improvements thereon in favor of the plaintiff, and warrant the
same to be free from liens and encumbrances, and that should theyfail to perform their obligation the
mortgage will be foreclosed. From this it can be gleaned that each of the defendants obligated
himself/herself to perform the said solidary obligation with the plaintiff. We do not agree with this
finding by the trial court.
29
We have scoured the records of the case, but found no record of the principal loan instrument,
except an evidence that the realestate mortgage was executed by Macaria and petitioners. When
petitioner Rodolfo Berot testified in court, he admitted that heand his mother, Macaria had contracted
the loan for their benefit:
Q: On the Real Estate Mortgage, you and your mother obtained a loan from Mr. Siapno in the
amountofP250,000.00, now as between you and your mother whose loan is that?
A: It is the loan of my mother and myself, sir.
30
The testimony of petitioner Rodolfo only established that there was that existing loan to respondent,
and that the subject property was mortgaged as security for the said obligation. His admission of the
existence of the loan made him and his late mother liable to respondent. We have examined the
contents of the real estate mortgagebut found no indication in the plain wordings of the instrument
that the debtors the late Macaria and herein petitioners had expressly intended to make their
obligation to respondent solidary in nature. Absent from the mortgage are the express and
indubitable terms characterizing the obligation as solidary. Respondent was not able to prove by a
preponderance of evidence that petitioners' obligation to him was solidary. Hence, applicable to this
case is the presumption under the law that the nature of the obligation herein can only be considered
as joint. It is incumbent upon the party alleging otherwise to prove with a preponderance of evidence
that petitioners' obligation under the loan contract is indeed solidary in character.
31
The CA properly upheld respondent's course of action as an availment of the second remedy
provided under Section 7, Rule 86 of the 1997 Revised Rules of Court. Under the said provision for
claims against an estate, a mortgagee has the legal option to institute a foreclosure suit and to
recover upon the security, which is the mortgaged property.
32
During her lifetime, Macaria was the registered owner of the mortgaged property, subject of the
assailed foreclosure. Considering that she had validly mortgaged the property to secure a loan
obligation, and given our ruling in this case that the obligation is joint, her intestate estate is liable to
a third of the loan contracted during her lifetime. Thus, the foreclosure of the property may proceed,
but would be answerable only to the extent of the liability of Macaria to respondent. WHEREFORE,
the CA Decision in CA-G.R. CV No. 87995 sustaining the RTC Decision in Civil Case No. 20040246-D is hereby AFFIRMED with the MODIFICATION that the obligation of petitioners and the
estate of Macaria Berot is declared as joint in nature.
SO ORDERED.
MARIA LOURDES P.A. SERENO
Chief Justice, Chairperson
WE CONCU
OLONGAPO CITY vs. SUBIC WATER AND SEWERAGE CO., INC., G.R. No.
171626, August 6, 2014, J. Brion
G.R. No. 171626
August 6, 2014
OLONGAPO CITY, Petitioner,

vs.
SUBIC WATER AND SEWERAGE CO., INC., Respondent.
DECISION
BRION, J.:
We resolve in this petition for certiorari under Rule 65 the challenge to the July 6, 2005 decision and
the January 3, 2006 resolution (assailed CA rulings) of the Court of Appeals (CA) in CAG.R. SP No.
80947.
1
These assailed CA rulings annulled and set aside: a) the July 29, 2003 order of the Regional Trial
Court of Olongapo, Br. 75 (RTC Olongapo ), which directed the issuance of a writ of execution in
Civil Case No. 582-0-90, against respondent Subic Water and Sewerage Co., Inc. (Subic Water); b)
the July 31, 2003 writ of execution subsequently issued by the same court; and c) the October 7,
2003 order of R TC Olongapo, denying Subic Water's special appearance with motion to reconsider
order dated July 29, 2003 and to quash writ of execution dated July 31, 2003.
4
Factual Antecedents
On May 25, 1973, Presidential Decree No. 198 (PD 198) took effect. This law authorized the
creation of local water districts which may acquire, install, maintain and operate water supply and
distribution systems for domestic, industrial, municipal and agricultural uses.
8
Pursuant to PD 198, petitioner Olongapo City (petitioner) passed Resolution No. 161, which
transferred all itsexisting water facilities and assets under the Olongapo City Public Utilities
Department Waterworks Division, to the jurisdiction and ownership of the Olongapo City Water
District (OCWD).
10
PD 198, as amended, allows local water districts (LWDs)which have acquired an existing water
system of a localgovernment unit (LGU) to enter into a contract to pay the concerned LGU. In lieu of
the LGUs share in the acquired water utility plant, it shall be paid by the LWD an amount not
exceeding three percent (3%) of the LWDs gross receipts from water sales in any year.
11
12
On October 24, 1990, petitioner filed a complaint for sum of money and damages against OCWD.
Among others, petitioner alleged that OCWD failed to pay its electricity bills to petitioner and remit its
payment under the contract to pay, pursuant to OCWDs acquisition of petitioners water system. In
its complaint, petitioner prayed for the following reliefs:
"WHEREOF, it is respectfully prayed of this Honorable Court that after due hearing and notice,
judgment be rendered in favor of plaintiff ordering the defendant to:
(a) pay the amount of P26,798,223.70 plus legal interests from the filing of the Complaint to
actual full payment;
(b) pay the amount of its in lieu share representing three percent of the defendants gross
receipts from water sales starting 1981 up to present;
(c) pay the amount of P1,000,000 as moral damages; and
(d) pay the cost of suit and other litigation expenses."
13
In its answer, OCWD posed a counterclaim against petitioner for unpaid water bills amounting
toP3,080,357.00.
14
15
In the interim, OCWD entered into a Joint Venture Agreement (JVA) with Subic Bay Metropolitan
Authority (SBMA), Biwater International Limited (Biwater), and D.M. Consunji, Inc. (DMCI) on
November 24, 1996. Pursuant to this agreement, Subic Water a new corporate entity was
incorporated, withthe following equity participation from its shareholders:
16
SBMA 19.99% or 20%

OCWD 9.99% or 10%
Biwater 29.99% or 30%
DMCI 39.99% or 40%
17
On November 24, 1996, Subic Water was granted the franchise to operate and to carry on the
businessof providing water and sewerage services in the Subic BayFree Port Zone, as well as in
Olongapo City. Hence, Subic Water took over OCWDs water operations in Olongapo City.
18
19
To finally settle their money claims against each other, petitioner and OCWD entered into a
compromise agreement on June 4, 1997. In this agreement, petitioner and OCWD offset their
respective claims and counterclaims. OCWD also undertook to pay to petitioner its net obligation
amounting to P135,909,467.09, to be amortized for a period of not exceeding twenty-five (25) years
at twenty-fourpercent (24%) per annum.
20
21
The compromise agreement also contained a provision regarding the parties requestthat Subic
Water, Philippines,which took over the operations of the defendant Olongapo City Water District be
made the co-makerfor OCWDs obligations. Mr. Noli Aldip, then chairman of Subic Water, acted as
its representative and signed the agreement on behalf of Subic Water.
Subsequently, the parties submitted the compromise agreement to RTC Olongapo for approval. In its
decision dated June 13, 1997, the trial court approved the compromiseagreement and adopted it as
its judgment in Civil Case No. 580-0-90.
22
Pursuant to the compromise agreement and in payment of OCWDs obligations to

petitioner,petitioner and OCWD executed a Deed of Assignment onNovember 24, 1997. OCWD
assigned all of its rights in the JVA in favor of the petitioner, including but not limited to the
assignment of its shares, lease payments, regulatory assistance fees and other receivables arising
out of or related to the Joint Venture Agreement and the Lease Agreement. On December 15,1998,
OCWD was judicially dissolved.
23
24
25
On May 7, 1999, to enforce the compromise agreement, the petitioner filed a motion for the issuance
of a writ of execution with the trial court. In its July 23, 1999 order, the trial court granted the
motion, but did not issue the corresponding writ of execution.
26
27
Almost four years later, on May 30, 2003, the petitioner, through its new counsel, filed a notice of
appearance with urgent motion/manifestation and prayed again for the issuance of a writ of
execution against OCWD. A certain Atty. Segundo Mangohig, claiming to be OCWDs former
counsel, filed a manifestation alleging that OCWD had already been dissolved and that Subic Water
is now the former OCWD.
28
29
Because of this assertion, Subic Water also filed a manifestation informing the trial court that as
borne out by the articles of incorporation and general information sheet of Subic Water x x x
defendant OCWD is not Subic Water. The manifestation also indicated that OCWD was only a ten
percent (10%) shareholder of Subic Water; and that its 10% share was already inthe process of
being transferred to petitioner pursuant to the Deed of Assignment dated November 24, 1997.
30
31
The trial court granted the motion for execution and directed its issuance against OCWD and/or
Subic Water. Because of this unfavorable order, Subic Water filed a special appearance with motion
to: (1) reconsider order dated July29, 2003; and (2) quash writ of execution dated July 31, 2003.
32
The trial court denied Subic Waters special appearance, motion for reconsideration, and its motion
to quash. Subic Water then filed a petition for certiorari with the CA, imputing grave abuse of
discretion amounting to lack or excess of jurisdiction to RTC Olongapo for issuing its July 29, 2003
and October 7, 2003 orders aswell as the writ of execution dated July 31, 2003. The CAs Ruling
33
In its decision dated July 6, 2005, the CA granted Subic Waters petition for certiorariand reversed
the trial courts rulings.
34
The CA found that the writ ofexecution dated July 31, 2003 did not comply with Section 6, Rule 39
of the Rules of Court, to wit:
35
Section 6. Execution by motion orby independent action. A final and executory judgment or order
may be executed on motion within five (5) years from the date of its entry. After the lapse of such
time, and before it is barred by the statute of limitations, a judgment may be enforced by action. The
revived judgment may also be enforced by motion within five (5) years from the date of its entry and
thereafter by action before it is barred by the statute of limitations. (6a)[emphasis ours]
A judgment on a compromiseagreement is immediately executory and is considered to have been
entered on the date it was approved by the trial court. Since the compromise agreement was
approved and adoptedby the trial court on June 13, 1997, this should be the reckoning date for the
counting of the period for the filing of a valid motion for issuance of a writ of execution. Petitioner
thus had until June 13, 2002, to file its motion.
36
The CA further remarked that whileit was true that a motion for execution was filed by petitioner on
May 7, 1999, and the same was granted by the trial court in its July 23, 1999 order, no writ of
execution was actually issued.
37
As the CA looked at the case, petitioner, instead of following up with the trial court the issuance ofthe
writ of execution, did not do anything to secure its prompt issuance. It waitedanother four years to
file a second motion for execution on May 30, 2003. By this time, the allowed period for the filing of
a motion for the issuance of the writ had already lapsed. Hence, the trial courts July 29, 2003 order
granting the issuance of the writ was null and void for having been issued by a court without
jurisdiction.
38
The CA denied petitioners subsequentmotion for reconsideration. Petitioner is now before us on a

petition for certiorari under Rule 65.
The Petition
The petitioner acknowledged the rule that the execution of a judgment could no longer be made by
mere motion after the prescribed five-year period had already lapsed. However, it argued that the
delay for the issuance of the writ of execution was caused by OCWD and Subic Water. The
petitioner submitted that this Court had allowed execution by mere motion even after the lapse ofthe
five-year period, when the delay was caused or occasioned by the actions of the judgment debtor.
39
Also, the petitioner asserted that although Subic Water was not a party in the case, it could still be
subjected to a writ of execution, since it was identified as OCWDs co-maker and successor-ininterest in the compromise agreement.
40
Lastly, the petitioner contended that the compromise agreement was signed by Mr. Noli R. Aldip,then
Subic Waters chairman, signifying Subic Waters consent to the agreement.
The Courts Ruling
We DISMISSthe petition for being the wrong remedy and, in any case, for lack of merit; what we
have before us is a final judgment that we can no longer touch unless there is grave abuse of
discretion.
A. Procedural Law Aspect
Certiorari is not a substitute for a lost appeal.
At the outset, we emphasize thatthe present petition, brought under Rule 65, merits outright
dismissal for having availed an improper remedy.
The instant petition should havebeen brought under Rule 45 in a petition for review on certiorari.
Section 1 of this Rule mandates:
Section 1. Filing of petition with Supreme Court. A party desiring to appeal by certiorari from a
judgment or final order or resolution of the Court of Appeals, the Sandiganbayan, the Regional Trial
Court or other courts whenever authorized by law, may file with the Supreme Court a verified petition
for review on certiorari. The petition shall raise only questions of law which must be distinctly set
forth. (1a, 2a) [emphasis supplied]
Supplementing Rule 45 are Sections 3 and 4 of Rule 56 which govern the applicable procedure in
the Supreme Court.
41
42
Appeals from judgmentsor final orders or resolutions of the CA should be made through a verified
petition for review on certiorari under Rule 45. In this case, petitioner questioned the July 6, 2005
decision and the January 3, 2006 resolution of the CA which declared as null and void the writ of
execution issued by the trial court. Since the CAs pronouncement completely disposed of the case
and the issues raised by the parties, it was the proper subject of a Rule 45 petition. It was already a
final order that resolved the subject matter in its entirety, leaving nothing else to be done.
43
44
45
A petition for certiorari under Rule 65 is appropriate only if there is no appeal, or any plain, speedy,
and adequate remedy in the ordinary course of law available tothe aggrieved party. As we have
distinctly explained in the case of Pasiona v. Court of Appeals:
46
The aggrieved party is proscribed from assailing a decision or final order of the CA viaRule 65
because such recourse is proper only if the party has no plain,speedy and adequate remedy in the
course of law. In this case, petitioner had an adequate remedy, namely, a petition for review on
certiorari under Rule 45 ofthe Rules of Court.A petition for review on certiorari, not a special civil
action for certiorari was, therefore, the correct remedy.
xxxx
Settled is the rule that where appeal is available to the aggrieved party, the special civil actionfor
certiorari will not be entertained remedies of appealand certiorari are mutually exclusive, not
alternative or successive. Hence, certiorari is not and cannot be a substitute for a lost
appeal,especially if one's own negligence or error in one's choice of remedy occasioned such loss or
lapse. [emphasis ours]
47
The petitioner received the CAs assailed resolution denying its motion for reconsideration on
January 9, 2006. Following Rule 45, Section 2 of the Rules of Court, the petitioner had until January
24, 2006 to file its petition for review. It could have even filed a motion for a 30-day extension of time,
a motion that this Court grants for justifiable reasons. But all of these, it failed to do. Thus, the
assailed CA rulings became final and executory and could no longer be the subject of an appeal.
48
49
Apparently, to revive its lost appeal, petitioner filed the present petition for certiorari that under
Rule 65 may be filed within sixty days from the promulgation of the assailed CA resolution (on
January 3, 2006). A Rule 65 petition for certiorari, however, cannot be a substitute for a lost appeal.
With the lapse of the prescribed period for appeal without an action from the petitioner, the present
petition for certiorari a mere replacement must be dismissed.
But even without the procedural infirmity, the present recourse to us has no basis on the merits and
must be denied.
Execution by motion is only available within the five-year period from entry of judgment.
Under Rule 39, Section 6, a judgment creditor has two modes in enforcing the courts judgment.
Execution may be either through motion or an independent action.
50
These two modes of execution are available depending on the timing when the judgmentcreditor
invoked its right to enforce the courts judgment. Execution by motion is only available if the
enforcement of the judgment was sought within five (5) years from the date of its entry. On the other
hand, execution by independent action is mandatory if the five-year prescriptive period for execution
by motion had already elapsed. However, for execution by independent action to prosper the
Rules impose another limitation the action must be filed before it is barred by the statute of
limitations which, under the Civil Code, is ten (10) years from the finality of the judgment.
51
52
On May 7, 1999, within the five-year period from the trial courts judgment, petitioner filed its motion
for the issuance of a writ of execution. However, despite the grant of the motion, the court did not
issue an actual writ. It was only onMay 30, 2003 that petitioner filed a second motion to ask again for
the writs issuance. By this time, the allowed five-year period for execution by motion had already
lapsed.
As will be discussed below, since the second motion was filed beyond the five-year prescriptive
period set by the Rules, then the writ of execution issued by the trial court on July 31, 2003 was null
and void for having been issued by a court already ousted ofits jurisdiction.
In Arambulo v. Court of First Instance of Laguna, we explained the rule that the jurisdiction of a
court to issue a writ of execution by motion is only effective within the five-year period from the entry
of judgment. Outside this five-year period, any writ of execution issued pursuant to a motion filed by
the judgment creditor, is null and void. If no writ of execution was issued by the court within the fiveyear period, even a motion filed within such prescriptive period would not suffice. A writ issued by the
court after the lapse of the five-year period is already null and void. The judgment creditors only
recourse then is to file an independent action, which must also be within the prescriptive period set
by law for the enforcement of judgments.
53
54
This Court subsequently reiterated its Arambuloruling in Ramos v. Garciano, where we said:
55
There seems to be no serious dispute that the 4th alias writ of execution was issued eight (8)
daysafter the lapse of the five (5) year period from the dateof the entry of judgment in Civil Case No.
367. As a general rule, after the lapse of such period a judgment may be enforced only by ordinary
action, not by mere motion (Section 6, Rule 39, Rules of Court).
xxxx
The limitation that a judgment beenforced by execution within five years, otherwise itloses efficacy,
goes tothe very jurisdiction of the Court.A writ issued after such period is void, and the failure to
object thereto does notvalidate it, for the reason that jurisdiction of courts is solely conferred by law
and not by express or implied will of the parties. [emphasis supplied]
56
To clearly restate these rulings, for execution by motion to be valid, the judgment creditor
mustensure the accomplishment of two acts within the five-year prescriptive period. These are:a) the
filing of the motion for the issuance of the writ of execution; and b) the courts actual issuance of the
writ.In the instanceswhen the Court allowed execution by motion even after the lapse of five years,
we only recognized one exception, i.e., when the delay is caused or occasioned by actions of the
judgment debtor and/or is incurred for his benefit or advantage. However, petitioner failed toshow or
cite circumstances showing how OCWD or Subic Water caused it to belatedly file its second motion
for execution.
57
Strictly speaking, the issuance of the writ should have been a ministerial duty on the partof the trial
court after it gave its July 23, 1999 order, approving the first motion and directing the issuance of
such writ. The petitioner could have easily compelled the court to actually issue the writ by filing a
manifestation onthe existence of the July 23, 1999 order. However, petitioner idly sat and waited for
the five-year period to lapse before it filed its second motion. Having slept on its rights, petitioner had
no one to blame but itself.
A writ of execution cannot affect a non- party to a case.
Strangers to a case are not bound by the judgment rendered in it. Thus, a writ of execution can only
beissued against a party and not against one who did not have his day in court.
58
Subic Water never participated in the proceedings in Civil Case No. 580-0-90, where OCWD and
petitioner were the contending parties. Subic Water only came into the picture when one Atty.
Segundo Mangohig, claiming to beOCWDs former counsel, manifested before the trial court that
OCWD had already been judicially dissolved and thatSubic Water assumed OCWDs personality.
In the present case, the compromise agreement, although signed by Mr. Noli Aldip, did not carry the
express conformity of Subic Water. Mr. Aldip was never given any authorization to conform to or bind
Subic Water in the compromiseagreement. Also, the agreement merely labeled Subic Water as a comaker. It did not contain any provision where Subic Water acknowledged its solidary liability with
OCWD.
Lastly, Subic Water did not voluntarily submit tothe courts jurisdiction. In fact, the motion it filed was
only made as a special appearance, precisely toavoid the courts acquisition of jurisdiction over its
person. Without any participation inthe proceedings below, it cannot be made liable on the writ
ofexecution issuedby the court a quo.
B. Substantive Law Aspect
Solidary liability mustbe expressly stated.
The petitioner also argued that Subic Water could be held solidarily liable under the writ of execution
since it was identified as OCWDs co-maker in the compromise agreement.The petitioners basis for
this is the following provision of the agreement:
4. Both parties also requestthat Subic Water,Philippines which took over the operations of the
defendant Olongapo City Water District be made as co-makerfor the obligation herein
abovecited. [emphasis supplied]
59
As the rule stands, solidary liability is not presumed. This stems from Art. 1207 of the Civil Code,
which provides:
Art. 1207. x x x There is a solidary liability only when the obligation expressly so states, or when the
law orthe nature of the obligation requiressolidarity. [emphasis supplied]
In Palmares v. Court of Appeals, the Court did not hesitate to rule that although a party to a
promissory note was onlylabeled as a comaker, his liability was that ofa surety, since the instrument
expressly provided for his joint and several liabilitywith the principal.
60
In the present case, the joint and several liability of Subic Water and OCWD was nowhere clear in
the agreement. The agreement simply and plainly stated that petitioner and OCWD were only
requestingSubic Water to be a co-maker, in view of its assumption of OCWDs water operations. No
evidence was presented to show that such request was ever approved by Subic Waters board of
directors.
Under these circumstances, petitioner cannot proceed after Subic Water for OCWDs unpaid
obligations. The law explicitly states that solidary liability is not presumed and must be expressly
provided for. Not being a surety, Subic Water is not an insurer of OCWDs obligations under the
compromise agreement. At best, Subic Water was merely a guarantor against whom petitioner can
claim, provided it was first shown that: a) petitioner had already proceeded after the properties of
OCWD, the principal debtor; b) and despite this, the obligation under the compromise agreement,
remains to be not fully satisfied. But as will be discussed next, Subic Water could not also be
recognized as a guarantorof OCWDs obligations.
61
An officers actions can only bind the corporation ifhe had been authorized to do so.
An examination of the compromise agreement reveals that it was not accompanied by any document
showing a grant of authority to Mr. Noli Aldip to sign on behalf of Subic Water.
Subic Water is a corporation. A corporation, as a juridical entity, primarily acts through its board
ofdirectors, which exercises its corporate powers. In this capacity, the general rule is that, in the
absence of authority from the board ofdirectors, no person, not even its officers, can validly bind a
corporation. Section 23 of the Corporation Code provides:
62
Section 23. The board of directors or trustees. Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by the board of directors or
trusteesto be elected from among the holders of stocks, or where there is no stock, from among the
members of the corporation, who shall hold office for one (1) year until their successors are elected
and qualified. (28a) [emphasis supplied]
In Peoples Aircargo and Warehousing Co., Inc. v. Court of Appeals, we held that under Section 23
of the Corporation Code, the power and responsibility to decide whether a corporation can enter into
a binding contract is lodged with the board of directors, subject to the articles of incorporation, bylaws, or relevant provisions of law. As we have clearly explained in another case:
63
A corporate officer or agent may represent and bind the corporation in transactions with third
persons to the extent that [the] authority to do so has been conferred upon him, and this includes
powers which have been intentionally conferred, and also such powers as, in the usual courseof the
particular business, are incidental to, or may be implied from, the powers intentionally conferred,
powers added bycustom and usage, as usually pertaining to the particular officer or agent,and such
apparent powers as the corporation has caused persons dealing with the officer oragent to believe
that ithas conferred. [emphasis ours]
64
Mr. Noli Aldip signedthe compromise agreement purely in his own capacity. Moreover, the
compromise agreement did not expressly provide that Subic Water consented to become OCWDs
co-maker. As worded, the compromise agreement merely provided that both parties
[also]requestSubic Water, Philippines, which took over the operations of Olongapo City Water District
be made asco-maker [for the obligations above-cited].This request was never forwarded to Subic
Waters board of directors. Even if due notification had been made (which does not appearin the
records), Subic Waters board does not appear to have given any approval tosuch request.
Nodocument such as the minutes of Subic Waters board of directors meeting or a secretarys
certificate, purporting to be an authorization to Mr. Aldip to conform to the compromise agreement,
was everpresented. In effect, Mr. Aldips act of signing the compromise agreement was outside of his
authority to undertake.
Since Mr. Aldip was never authorized and there was no showing that Subic Waters articles of
incorporation or by-laws granted him such authority, then the compromise agreement he signed
cannot bind Subic Water. Subic Water cannot likewise be made a surety or even a guarantor for
OCWDs obligations. OCWDs debts under the compromise agreement are its own corporate
obligations to petitioner.
OCWD and Subic Water are two separate and different entities.
Petitioner practically suggests that since Subic Water took over OCWDs water operations in
OlongapoCity, it also acquired OCWDs juridical personality, making the two entities one and the
same.
This is an interpretation that we cannot make or adopt under the facts and the evidence of this case.
Subic Water clearly demonstrated that it was a separate corporate entity from OCWD. OCWD is just
a ten percent (10%) shareholder of Subic Water. As a mere shareholder, OCWDs juridical
personality cannot be equated nor confused with that ofSubic Water. It is basic in corporation law
that a corporation is a juridical entity vested with a legal personality separate and distinct from those
acting for and in its behalf and, in general, from the people comprising it. Under this corporate
reality, Subic Water cannot be held liable for OCWDs corporate obligations in the same manner that
OCWD cannot be held liable for the obligations incurred by Subic Water as a separate entity. The
corporate veilshould not and cannot be pierced unless it is clearly established that the separate and
distinct personality of the corporation was used to justify a wrong, protect fraud, or perpetrate a
deception.
65
66
In Concept Builders, Inc. v. NLRC, the Court enumerated the possible probative factors of identity
which could justify the application of the doctrine of piercing the corporate veil. These are:
67
(1) Stock ownership by one or common ownership of both corporations;

(2) Identity of directors and officers;
(3) The manner of keeping corporate books and records; and
(4) Methods of conducting the business.
68
The burden of proving the presence of any of these probative factors lies with the one alleging it.
Unfortunately, petitioner simply claimed that Subic Water took over OCWD's water operations in
Olongapo City. Apart from this allegation, petitioner failed to demonstrate any link to justify the
construction that Subic Water and OCWD are one and the same.
Under this evidentiary situation, our duty is to respect the separate and distinct personalities of these
two juridical entities.
1wphi1
We thus deny the present petition. The writ of execution issued by RTC Olongapo, Br. 75, in favor of
Olongapo City, is hereby confirmed to be null and void. Accordingly, respondent Subic Water cannot
be made liable under this writ.
WHEREFORE, premises considered, we hereby DISMISS the petition. The Court of Appeals'
decision dated July 6, 2005 and resolution dated January 3, 2006, annulling and setting aside the
orders of the Regional Trial Court of Olongapo, Branch 75 dated July 29, 2003 and October 7, 2003,
and the writ of execution dated July 31, 2003, are hereby AFFIRMED. Costs against the City of
Olongapo.
SO ORDERED.
ARTURO D. BRION
Associate Justice
WE CONCUR:
EXTINGUISHMENT OF OBLIGATIONS
PAYMENT OR PERFORMANCE
NATIONAL POWER CORPORATION vs. LUCMAN M. IBRAHIM et al., G.R. No.
175863, February 18, 2015, J. Perez
G.R. No. 175863, February 18, 2015
NATIONAL POWER CORPORATION, Petitioner, v. LUCMAN M. IBRAHIM, ATTY. OMAR G. MARUHOM,
ELIAS G. MARUHOM, BUCAY G. MARUHOM, MAMOD G. MARUHOM, FAROUK G. MARUHOM,
HIDJARA G. MARUHOM, ROCANIA G. MARUHOM, POTRISAM G. MARUHOM, LUMBA G. MARUHOM,
SINAB G. MARUHOM, ACMAD G. MARUHOM, SOLAYMAN G. MARUHOM, MOHAMAD M. IBRAHIM,
CAIRONESA M. IBRAHIM AND MACAPANTON K. MANGONDATO,Respondents.
DECISION
PEREZ, J.:
At bench is a petition for review on certiorari1 assailing the Decision2 dated 24 June 2005 and
Resolution3 dated 5 December 2006 of the Court of Appeals in CA-G.R. CV No. 68061.
The facts:
The Subject Land
In 1978, petitioner took possession of a 21,995 square meter parcel of land in Marawi City (subject land) for
the purpose of building thereon a hydroelectric power plant pursuant to its Agus 1 project. The subject land,
while in truth a portion of a private estate registered under Transfer Certificate of Title (TCT) No. 378-A 4 in
the name of herein respondent Macapanton K. Mangondato (Mangondato), 5was occupied by petitioner under
the mistaken belief that such land is part of the vast tract of public land reserved for its use by the
government under Proclamation No. 1354, s. 1974.6
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Mangondato first discovered petitioners occupation of the subject land in 1979the year that petitioner
started its construction of the Agus 1 plant. Shortly after such discovery, Mangondato began demanding
compensation for the subject land from petitioner.
In support of his demand for compensation, Mangondato sent to petitioner a letter7 dated 28 September
1981 wherein the former detailed the origins of his ownership over the lands covered by TCT No. 378-A,
including the subject land. The relevant portions of the letter read:
Now let me trace the basis of the title to the land adverted to for particularity. The land titled in my name
was originally consisting of seven (7) hectares. This piece of land was particularly set aside by the Patriarch
Maruhom, a fact recognized by all royal datus of Guimba, to belong to his eldest son, Datu Magayo-ong
Maruhom. This is the very foundation of the right and ownership over the land in question which was titled
in my name because as the son-in-law of Hadji Ali Maruhom the eldest son of, and only lawyer among the
descendants of Datu Magayo-ong Maruhom, the authority and right to apply for the title to the land was
given to me by said heirs after mutual agreement among themselves besides the fact that I have already
bought a substantial portion of the original seven (7) hectares.
The original title of this seven (7) hectares has been subdivided into several TCTs for the other children of
Datu Magayo-ong Maruhom with whom I have executed a quit claim. Presently, only three (3) hectares is
left to me out of the original seven (7) hectares representing those portion [sic] belonging to my wife and
those I have bought previously from other heirs. This is now the subject of this case. 8
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Petitioner, at first, rejected Mangondatos claim of ownership over the subject land; the former then
adamant in its belief that the said land is public land covered by Proclamation No. 1354, s. 1974. But, after
more than a decade, petitioner finally acquiesced to the fact that the subject land is private land covered by
TCT No. 378-A and consequently acknowledged Mangondatos right, as registered owner, to receive
compensation therefor.
Thus, during the early 1990s, petitioner and Mangondato partook in a series of communications aimed at
settling the amount of compensation that the former ought to pay the latter in exchange for the subject
land. Ultimately, however, the communications failed to yield a genuine consensus between petitioner and
Mangondato as to the fair market value of the subject land.
Civil Case No. 605-92 and Civil Case No. 610-92

With an agreement basically out of reach, Mangondato filed a complaint for reconveyance against petitioner
before the Regional Trial Court (RTC) of Marawi City in July 1992. In his complaint, Mangondato asked for,
among others, the recovery of the subject land and the payment by petitioner of a monthly rental from 1978
until the return of such land. Mangondatos complaint was docketed asCivil Case No. 605-92.
For its part, petitioner filed an expropriation complaint 9 before the RTC on 27 July 1992. Petitioners
complaint was docketed as Civil Case No. 610-92.
Later, Civil Case No. 605-92 and Civil Case No. 610-92 were consolidated before Branch 8 of the Marawi City
RTC.
On 21 August 1992, Branch 8 of the Marawi City RTC rendered a Decision 10 in Civil Case No. 605-92 and Civil
Case No. 610-92. The decision upheld petitioners right to expropriate the subject land: it denied
Mangondatos claim for reconveyance and decreed the subject land condemned in favor of the petitioner,
effective July of 1992, subject to payment by the latter of just compensation in the amount of
P21,995,000.00. Anent petitioners occupation of the subject land from 1978 to July of 1992, on the other
hand, the decision required the former to pay rentals therefor at the rate of P15,000.00 per month with 12%
interest per annum. The decisions fallo reads:
WHEREFORE, the prayer in the recovery case for [petitioners] surrender of the property is denied but
[petitioner] is ordered to pay monthly rentals in the amount of P15,000.00 from 1978 up to July 1992 with
12% interest per annum xxx and the property is condemned in favor of [petitioner] effective July 1992 upon
payment of the fair market value of the property at One Thousand (P1,000.00) Pesos per square meter or a
total of Twenty-One Million Nine Hundred Ninety-Five Thousand (P21,995,000.00) [P]esos. 11
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Disagreeing with the amount of just compensation that it was adjudged to pay under the said decision,
petitioner filed an appeal with the Court of Appeals. This appeal was docketed in the Court of Appeals as CAG.R. CV No. 39353.
Respondents Ibrahims and Maruhoms and Civil Case No. 967-93
During the pendency of CA-G.R. CV No. 39353, or on 29 March 1993, herein respondents the Ibrahims and
Maruhoms12 filed before the RTC of Marawi City a complaint13 against Mangondato and petitioner. This
complaint was docketed as Civil Case No. 967-93 and was raffled to Branch 10 of the Marawi City RTC.
In their complaint, the Ibrahims and Maruhoms disputed Mangondatos ownership of the lands covered by
TCT No. 378-A, including the subject land. The Ibrahims and Maruhoms asseverate that they are the real
owners of the lands covered by TCT No. 378-A; they being the lawful heirs of the late Datu Magayo-ong
Maruhom, who was the original proprietor of the said lands.14 They also claimed that Mangondato actually
holds no claim or right over the lands covered by TCT No. 378-A except that of a trustee who merely holds
the said lands in trust for them.15
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The Ibrahims and Maruhoms submit that since they are the real owners of the lands covered by TCT No.
378-A, they should be the ones entitled to any rental fees or expropriation indemnity that may be found due
for the subject land.
Hence, the Ibrahims and Maruhoms prayed for the following reliefs in their complaint: 16
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1.
That Mangondato be ordered to execute a Deed of Conveyance transferring to them the ownership
of the lands covered by TCT No. 378-A;
2.
That petitioner be ordered to pay to them whatever indemnity for the subject land it is later on
adjudged to pay in Civil Case No. 605-92 and Civil Case No. 610-92;
3.
That Mangondato be ordered to pay to them any amount that the former may have received from
the petitioner by way of indemnity for the subject land;
4.
That petitioner and Mangondato be ordered jointly and severally liable to pay attorneys fees in the
sum of P200,000.00.
In the same complaint, the Ibrahims and Maruhoms also prayed for the issuance of a temporary restraining
order (TRO) and a writ of preliminary injunction to enjoin petitioner, during the pendency of the suit, from
making any payments to Mangondato concerning expropriation indemnity for the subject land. 17
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On 30 March 1993, Branch 10 of the Marawi City RTC granted the prayer of the Ibrahims and Maruhoms for
the issuance of a TRO.18 On 29 May 1993, after conducting an appropriate hearing for the purpose, the same
court likewise granted the prayer for the issuance of a writ of preliminary injunction. 19
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In due course, trial then ensued in Civil Case No. 967-93.
The Decision of the Court of Appeals in CA-G.R. CV No. 39353

and the Decision of this Court in G.R. No. 113194
On 21 December 1993, the Court of Appeals rendered a Decision in CA-G.R. CV No. 39353 denying the
appeal of petitioner and affirming in toto the 21 August 1992 Decision in Civil Case No. 605-92 and Civil
Case No. 610-92. Undeterred, petitioner next filed a petition for review on certiorari with this Court that was
docketed herein as G.R. No. 113194.20
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On 11 March 1996, we rendered our Decision in G.R. No. 113194 wherein we upheld the Court of Appeals
denial of petitioners appeal.21 In the same decision, we likewise sustained the appellate courts affirmance
of the decision in Civil Case No. 605-92 and Civil Case No. 610-92 subject only to a reduction of the rate of
interest on the monthly rental fees from 12% to 6% per annum. 22
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Our decision in G.R. No. 113194 eventually became final and executory on 13 May 1996. 23
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Execution of the 21 August 1992 Decision in Civil Case No. 605-92 and
Civil Case No. 610-92, as Modified
In view of the finality of this Courts decision in G.R. No. 113194, Mangondato filed a motion for execution of
the decision in Civil Case No. 605-92 and Civil Case No. 610-92. 24 Against this motion, however, petitioner
filed an opposition.25
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In its opposition, petitioner adverted to the existence of the writ of preliminary injunction earlier issued in
Civil Case No. 967-93 that enjoins it from making any payment of expropriation indemnity over the subject
land in favor of Mangondato.26 Petitioner, in sum, posits that such writ of preliminary injunction constitutes a
legal impediment that effectively bars any meaningful execution of the decision in Civil Case No. 605-92 and
Civil Case No. 610-92.
Finding no merit in petitioners opposition, however, Branch 8 of the Marawi City RTC rendered a
Resolution27 dated 4 June 1996 ordering the issuance of a writ of execution in favor of Mangondato in Civil
Case No. 605-92 and Civil Case No. 610-92. Likewise, in the same resolution, the trial court ordered the
issuance of a notice of garnishment against several of petitioners bank accounts 28 for the amount
of P21,801,951.00the figure representing the total amount of judgment debt due from petitioner in Civil
Case No. 605-92 and Civil Case No. 610-92 less the amount then already settled by the latter. The
dispositive portion of the resolution reads:
WHEREFORE, let a Writ of Execution and the corresponding order or notice of garnishment be immediately
issued against [petitioner] and in favor of [Mangondato] for the amount of Twenty One Million Eight Hundred
One Thousand and Nine Hundred Fifty One (P21,801,951.00) Pesos.
chanrobleslaw
x x x.29
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Pursuant to the above resolution, a notice of garnishment 30 dated 5 June 1996 for the amount of
P21,801,951.00 was promptly served upon the Philippine National Bank (PNB)the authorized depositary of
petitioner. Consequently, the amount thereby garnished was paid to Mangondato in full satisfaction of
petitioners judgment debt in Civil Case No. 605-92 and Civil Case No. 610-92.
Decision in Civil Case No. 967-93

Upon the other hand, on 16 April 1998, Branch 10 of the Marawi City RTC decided Civil Case No. 96793.31 In its decision, Branch 10 of the Marawi City RTC made the following relevant findings: 32
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1.
The Ibrahims and Maruhomsnot Mangondatoare the true owners of the lands covered by TCT
No. 378-A, which includes the subject land.
2.
The subject land, however, could no longer be reconveyed to the Ibrahims and Maruhoms since the
same was already expropriated and paid for by the petitioner under Civil Case No. 605-92 and Civil
Case No. 610-92.
3.
Be that as it may, the Ibrahims and Maruhoms, as true owners of the subject land, are the rightful
recipients of whatever rental fees and indemnity that may be due for the subject land as a result of
its expropriation.
Consistent with the foregoing findings, Branch 10 of the Marawi City RTC thus required payment of all the
rental fees and expropriation indemnity due for the subject land, as previously adjudged in Civil Case No.
605-92 and Civil Case No. 610-92, to the Ibrahims and Maruhoms.
Notable in the trial courts decision, however, was that it held both Mangondato and the
petitioner solidarily liable to the Ibrahims and Maruhoms for the rental fees and expropriation
indemnity adjudged in Civil Case No. 605-92 and Civil Case No. 610-92.33
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In addition, Mangondato and petitioner were also decreed solidarily liable to the Ibrahims and Maruhoms for
attorneys fees in the amount of P200,000.00.34
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The pertinent dispositions in the decision read:
WHEREFORE, premises considered, judgment is hereby rendered in favor of [the Ibrahims and Maruhoms]
and against [Mangondato and petitioner] as follows:
1.
xxx
2.
Ordering [Mangondato and petitioner] to pay jointly and severally [the Ibrahims and
Maruhoms] all forms of expropriation indemnity as adjudged for [the subject land]
consisting of 21,995 square meters in the amount of P21,801,051.00 plus other forms of
indemnity such as rentals and interests;
3.
Ordering [Mangondato and petitioner] to pay [the Ibrahims and Maruhoms] jointly and
severally the sum of P200,000.00 as attorneys fees;
4.
xxx
5.
xxx
6.
xxx
SO ORDERED.35
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Petitioners Appeal to the Court of Appeals and the Execution

Pending Appeal of the Decision in Civil Case No. 967-93
Petitioner appealed the decision in Civil Case No. 967-93 with the Court of Appeals: contesting mainly the
holding in the said decision that it ought to be solidarily liable with Mangondato to pay to the Ibrahims and
Maruhoms the rental fees and expropriation indemnity adjudged due for the subject land. This appeal was
docketed as CA-G.R. CV No. 68061.
While the foregoing appeal was still pending decision by the Court of Appeals, however, the Ibrahims and
Maruhoms were able to secure with the court a quo a writ of execution pending appeal36 of the decision in
Civil Case No. 967-93. The enforcement of such writ led to the garnishment of Mangondatos moneys in the
possession of the Social Security System (SSS) in the amount of P2,700,000.00 on 18 September
1998.37 Eventually, the amount thereby garnished was paid to the Ibrahims and Mangondato in partial
satisfaction of the decision in Civil Case No. 967-93.
On 24 June 2005, the Court of Appeals rendered its Decision 38 in CA-G.R. CV No. 68061 denying petitioners
appeal. The appellate court denied petitioners appeal and affirmed the decision in Civil Case No. 967-93,
subject to the right of petitioner to deduct the amount of P2,700,000.00 from its liability as a consequence
of the partial execution of the decision in Civil Case No. 967-93. 39
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Hence, the present appeal by petitioner.
The Present Appeal

The present appeal poses the question of whether it is correct, in view of the facts and circumstances in this
case, to hold petitioner liable in favor of the Ibrahims and Maruhoms for the rental fees and expropriation
indemnity adjudged due for the subject land.
In their respective decisions, both Branch 10 of the Marawi City RTC and the Court of Appeals had answered
the foregoing question in the affirmative. The two tribunals postulated that, notwithstanding petitioners
previous payment to Mangondato of the rental fees and expropriation indemnity as a consequence of the
execution of the decision in Civil Case No. 605-92 and 610-92, petitioner may still be held liable to the
Ibrahims and Maruhoms for such fees and indemnity because its previous payment to Mangondato was
tainted with bad faith.40 As proof of such bad faith, both courts cite the following considerations: 41
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1.
Petitioner allowed payment to Mangondato despite its prior knowledge, which dates back as early
as 28 September 1981, by virtue of Mangondatos letter of even date, that the subject land was
owned by a certain Datu Magayo-ong Maruhom and not by Mangondato; and
2.
Petitioner allowed such payment despite the issuance of a TRO and a writ of preliminary injunction
in Civil Case No. 967-93 that precisely enjoins it from doing so.
For the two tribunals, the bad faith on the part of petitioner rendered its previous payment to Mangondato
invalid insofar as the Ibrahims and Maruhoms are concerned. Hence, both courts concluded that petitioner
may still be held liable to the Ibrahims and Maruhoms for the rental fees and expropriation indemnity
previously paid to Mangondato.42
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Petitioner, however, argues otherwise. It submits that a finding of bad faith against it would have no basis in
fact and law, given that it merely complied with the final and executory decision in Civil Case No. 605-92
and Civil Case No. 610-92 when it paid the rental fees and expropriation indemnity due the subject to
Mangondato.43 Petitioner thus insists that it should be absolved from any liability to pay the rental fees and
expropriation indemnity to the Ibrahims and Maruhoms and prays for the dismissal of Civil Case No. 967-93
against it.
OUR RULING
We grant the appeal.
No Bad Faith On The Part
of Petitioner
Petitioner is correct. No bad faith may be taken against it in paying Mangondato the rental fees and
expropriation indemnity due the subject land.
Our case law is not new to the concept of bad faith. Decisions of this Court, both old and new, had been
teeming with various pronouncements that illuminate the concept amidst differing legal contexts. In any
attempt to understand the basics of bad faith, it is mandatory to take a look at some of these
pronouncements:
In Lopez, et al. v. Pan American World Airways,44 a 1966 landmark tort case, we defined the concept of bad
faith as:
a breach of a known duty through some motive of interest or ill will.45
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Just months after the promulgation of Lopez, however, came the case of Air France v. Carrascoso, et
al.,46 In Air France, we expounded on Lopezs definition by describing bad faith as:
xxx a state of mind affirmatively operating with furtive design or with some motive of self-interest or will or
for ulterior purpose.47
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Air Frances articulation of the meaning of bad faith was, in turn, echoed in a number subsequent
cases,48 one of which, is the 2009 case of Balbuena, et al. v. Sabay, et al.49
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In the 1967 case of Board of Liquidators v. Heirs of M. Kalaw,50 on the other hand, we enunciated one of the
more oft-repeated formulations of bad faith in our case law:
xxx bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or some
moral obliquity and conscious doing of wrong. It means breach of a known duty thru some motive or interest
of ill will; it partakes of the nature of fraud.51
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As a testament to its enduring quality, the foregoing pronouncement in Board of Liquidators had been
reiterated in a slew of later cases,52 more recently, in the 2009 case of Nazareno, et al. v. City of
Dumaguete53 and the 2012 case of Aliling v. Feliciano.54
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Still, in 1995, the case of Far East Bank and Trust Company v. Court of Appeals55 contributed the following
description of bad faith in our jurisprudence:
Malice or bad faith implies a conscious and intentional design to do a wrongful act for a dishonest purpose
or moral obliquity;xxx.56
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The description of bad faith in Far East Bank and Trust Company then went on to be repeated in subsequent
cases such as 1995s Ortega v. Court of Appeals,57 1997s Laureano Investment and Development
Corporation v. Court of Appeals,58 2010s Lambert Pawnbrokers v. Binamira59 and 2013s California Clothing,
Inc., v. Quiones,60 to name a few.
Verily, the clear denominator in all of the foregoing judicial pronouncements is that the essence of bad faith
consists in the deliberate commission of a wrong. Indeed, the concept has often been equated with
malicious or fraudulent motives, yet distinguished from the mere unintentional wrongs resulting from mere
simple negligence or oversight.61
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A finding of bad faith, thus, usually assumes the presence of two (2) elements: first, that the actor knew or
should have known that a particular course of action is wrong or illegal, and second, that despite such actual
or imputable knowledge, the actor, voluntarily, consciously and out of his own free will, proceeds with such
course of action. Only with the concurrence of these two elements can we begin to consider that the wrong
committed had been done deliberately and, thus, in bad faith.
In this case, both Branch 10 of the Marawi City RTC and the Court of Appeals held that petitioner was in bad
faith when it paid to Mangondato the rental fees and expropriation indemnity due the subject land. The two
tribunals, in substance, fault petitioner when it allowed such payment to take place despite the latters
alleged knowledge of the existing claim of the Ibrahims and Maruhoms upon the subject land and the
issuance of a TRO in Civil Case No. 967-93. Hence, the two tribunals claim that petitioners payment to
Mangondato is ineffective as to the Ibrahims and Maruhoms, whom they found to be the real owners of the
subject land.
We do not agree.
Branch 10 of the Marawi City RTC and the Court of Appeals erred in their finding of bad faith because they
have overlooked the utter significance of one important fact: that petitioners payment to Mangondato
of the rental fees and expropriation indemnity adjudged due for the subject land in Civil Case No. 60592 and Civil Case No. 610-92, was required by the final and executory decision in the said two cases
and was compelled thru a writ of garnishment issued by the court that rendered such decision. In
other words, the payment to Mangondato was not a product of a deliberate choice on the part of the
petitioner but was made only in compliance to the lawful orders of a court with jurisdiction.
Contrary then to the view of Branch 10 of the Marawi City RTC and of the Court of Appeals, it was not the
petitioner that allowed the payment of the rental fees and expropriation indemnity to Mangondato. Indeed,
given the circumstances, the more accurate rumination would be that it was the trial court in Civil Case No.
605-92 and Civil Case No. 610-92 that ordered or allowed the payment to Mangondato and that petitioner
merely complied with the order or allowance by the trial court. Since petitioner was only acting under the
lawful orders of a court in paying Mangondato, we find that no bad faith can be taken against it,
even assuming that petitioner may have had prior knowledge about the claims of the Ibrahims and
Maruhoms upon the subject land and the TRO issued in Civil Case No. 967-93.
Sans Bad Faith, Petitioner
Cannot Be Held Liable to the
Ibrahims and Maruhoms
Without the existence of bad faith, the ruling of the RTC and of the Court of Appeals apropos petitioners
remaining liability to the Ibrahims and Maruhoms becomes devoid of legal basis. In fact, petitioners
previous payment to Mangondato of the rental fees and expropriation indemnity due the subject land
pursuant to the final judgment in Civil Case No. 605-92 and Civil Case No. 610-92 may be considered to
have extinguished the formers obligation regardless of who between Mangondato, on one hand, and
the Ibrahims and Maruhoms, on the other, turns out to be the real owner of the subject
land.62 Either way, petitioner cannot be made liable to the Ibrahims and Maruhoms:
First. If Mangondato is the real owner of the subject land, then the obligation by petitioner to pay for the
rental fees and expropriation indemnity due the subject land is already deemed extinguished by the latters
previous payment under the final judgment in Civil Case No. 605-92 and Civil Case No. 610-92. This would
be a simple case of an obligation being extinguished through payment by the debtor to its creditor.63 Under
this scenario, the Ibrahims and Maruhoms would not even be entitled to receive anything from anyone for
the subject land. Hence, petitioner cannot be held liable to the Ibrahims and Maruhoms.
Second. We, however, can reach the same conclusion even if the Ibrahims and Maruhoms turn out to be the
real owners of the subject land.
Should the Ibrahims and Maruhoms turn out to be the real owners of the subject land, petitioners previous
payment to Mangondato pursuant to Civil Case No. 605-92 and Civil Case No. 610-92given the absence of
bad faith on petitioners part as previously discussedmay nonetheless be considered as akin to a payment
made in good faith to a person in possession of credit per Article 1242 of the Civil Code that,
just the same, extinguishes its obligation to pay for the rental fees and expropriation indemnity due for the
subject land. Article 1242 of the Civil Code reads:
Payment made in good faith to any person in possession of the credit shall release the debtor.
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Article 1242 of the Civil Code is an exception to the rule that a valid payment of an obligation can only be
made to the person to whom such obligation is rightfully owed. 64 It contemplates a situation where a debtor
pays a possessor of credit i.e., someone who is not the real creditor but appears, under the circumstances,
to be the real creditor.65 In such scenario, the law considers the payment to the possessor of credit as valid
even as against the real creditor taking into account the good faith of the debtor.
Borrowing the principles behind Article 1242 of the Civil Code, we find that Mangondatobeing the
judgment creditor in Civil Case No. 605-92 and Civil Case No. 610-92 as well as the registered owner of the
subject land at the time66may be considered as a possessor of credit with respect to the rental fees and
expropriation indemnity adjudged due for the subject land in the two cases, if the Ibrahims and Maruhoms
turn out to be the real owners of the subject land. Hence, petitioners payment to Mangondato of the fees
and indemnity due for the subject land as a consequence of the execution of Civil Case No. 605-92 and Civil
Case No. 610-92 could still validly extinguish its obligation to pay for the same even as against the Ibrahims
and Maruhoms.
Effect of Extinguishment of
Petitioners Obligation
The extinguishment of petitioners obligation to pay for the rental fees and expropriation indemnity due the
subject land carries with it certain legal effects:
First. If Mangondato turns out to be the real owner of the subject land, the Ibrahims and Maruhoms would
not be entitled to recover anything from anyone for the subject land. Consequently, the partial execution of
the decision in Civil Case No. 967-93 that had led to the garnishment of Mangondatos moneys in the
possession of the Social Security System (SSS) in the amount of P2,700,000.00 in favor of the Ibrahims and
Maruhoms, becomes improper and unjustified. In this event, therefore, the Ibrahims and Maruhoms may be
ordered to return the amount so garnished to Mangondato.
Otherwise, i.e. if the Ibrahims and Maruhoms really are the true owners of the subject land, they may only
recover the rental fees and expropriation indemnity due the subject land against Mangondato but only up to
whatever payments the latter had previously received from petitioner pursuant to Civil Case No. 605-92 and
Civil Case No. 610-92.
Second. At any rate, the extinguishment of petitioners obligation to pay for the rental fees and
expropriation indemnity due the subject land negates whatever cause of action the Ibrahims and Maruhoms
might have had against the former in Civil Case No. 967-93. Hence, regardless of who between
Mangondato, on one hand, and the Ibrahims and Maruhoms, on the other, turns out to be the real
owner of the subject land, the dismissal of Civil Case No. 967-93 insofar as petitioner is
concerned is called for.
Re: Attorneys Fees
The dismissal of Civil Case No. 967-93 as against petitioner necessarily absolves the latter from paying
attorneys fees to the Ibrahims and Maruhoms arising from that case.
WHEREFORE, premises considered, the instant petition is GRANTED. The Decision dated 24 June 2005 and
Resolution dated 5 December 2006 of the Court of Appeals in CA-G.R. CV No. 68061 is hereby SET
ASIDE. The Decision dated 16 April 1998 of the Regional Trial Court in Civil Case No. 967-93
is MODIFIED in that petitioner is absolved from any liability in that case in favor of the respondents Lucman
M. Ibrahim, Atty. Omar G. Maruhom, Elias G. Maruhom, Bucay G. Maruhom, Mamod G. Maruhom, Farouk G.
Maruhom, Hidjara G. Maruhom, Rocania G. Maruhom, Potrisam G. Maruhom, Lumba G. Maruhom, Sinab G.
Maruhom, Acmad G. Maruhom, Solayman G. Maruhom, Mohamad M. Ibrahim and Caironesa M. Ibrahim.
Civil Case No. 967-93 is DISMISSED as against petitioner.
No costs.
SO ORDERED.
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Sereno, C.J., (Chairperson), Leonardo-De Castro, Bersamin, Perez, and Perlas-Bernabe, JJ., concur.
LEONARDO BOGNOT vs. RRI LENDING CORPORATION, REPRESENTED BY ITS

GENERAL MANAGER, DARIO J. BERNARDEZ, G.R. No. 180144, September
24, 2014, J. Brion
G.R. No. 180144
September 24, 2014
LEONARDO BOGNOT, Petitioner,

vs.
RRI LENDING CORPORATION, represented by its General Manager, DARIO J.
BERNARDEZ, Respondent.
DECISION
BRION, J.:
Before the Court is the petition for review on certiorari filed by Leonardo Bognot (petitioner) assailing
the March 28, 2007 decision and the October 15, 2007 resolution of the Court of Appeals (CA) in
CA-G.R. CV No. 66915.
1
Background Facts
RRI Lending Corporation (respondent) is an entity engaged in the business of lending money to its
borrowers within Metro Manila. It is duly represented by its General Manager, Mr. Dario J. Bernardez
(Bernardez).
Sometime in September 1996, the petitioner and his younger brother, Rolando A. Bognot
(collectively referred to as the "Bognot siblings"), applied for and obtained a loan of Five Hundred
Thousand Pesos (P500,000.00) from the respondent, payable on November 30, 1996. The loan
was evidenced by a promissory note and was secured by a post dated check dated November 30,
1996.
4
Evidence on record shows that the petitioner renewed the loan several times on a monthly basis. He
paid a renewal fee of P54,600.00 for each renewal, issued a new post-dated checkas security, and
executed and/or renewed the promissory note previouslyissued. The respondent on the other hand,
cancelled and returned to the petitioner the post-dated checks issued prior to their renewal.
Sometime in March 1997, the petitioner applied for another loan renewal. He again executed as
principal and signed Promissory Note No. 97-035 payable on April 1, 1997; his co-maker was again
6
Rolando. As security for the loan, the petitioner also issued BPI Check No. 0595236, post dated to
April 1, 1997.
7
Subsequently, the loan was again renewed on a monthly basis (until June 30, 1997), as shown by
the Official Receipt No. 797 dated May 5, 1997, and the Disclosure Statement dated May 30, 1997
duly signed by Bernardez. The petitioner purportedly paid the renewal fees and issued a post-dated
check dated June 30, 1997 as security. As had been done in the past, the respondent superimposed
the date "June 30, 1997" on the upper right portion of Promissory Note No. 97-035 to make it appear
that it would mature on the said date.
9
Several days before the loans maturity, Rolandos wife, Julieta Bognot (Mrs. Bognot), went to the
respondents office and applied for another renewal of the loan. She issued in favor of the
respondent Promissory Note No. 97-051, and International Bank Exchange (IBE) Check No.
00012522, dated July 30, 1997, in the amount ofP54,600.00 as renewal fee.
On the excuse that she needs to bring home the loan documents for the Bognot siblings signatures
and replacement, Mrs. Bognot asked the respondents clerk to release to her the promissory note,
the disclosure statement, and the check dated July 30, 1997. Mrs. Bognot, however, never returned
these documents nor issued a new post-dated check. Consequently, the respondent sent the
petitioner follow-up letters demanding payment of the loan, plus interest and penalty charges. These
demands went unheeded.
On November 27, 1997, the respondent, through Bernardez, filed a complaint for sum of money
before the Regional Trial Court (RTC) against the Bognot siblings. The respondent mainly alleged
that the loan renewal payable on June 30, 1997 which the Bognot siblings applied for remained
unpaid; that before June30, 1997, Mrs. Bognot applied for another loan extension and issued IBE
Check No. 00012522 as payment for the renewal fee; that Mrs. Bognot convinced the respondents
clerk to release to her the promissory note and the other loan documents; that since Mrs. Bognot
never issued any replacement check, no loanextension took place and the loan, originally payable
on June 30, 1997, became due on this date; and despite repeated demands, the Bognot siblings
failed to pay their joint and solidary obligation.
Summons were served on the Bognotsiblings. However, only the petitioner filed his answer.
In his Answer, the petitioner claimed that the complaint states no cause of action because the
respondents claim had been paid, waived, abandoned or otherwise extinguished. He denied being a
party to any loan application and/or renewal in May 1997. He also denied having issued the BPI
check post-dated to June 30, 1997, as well as the promissory note dated June 30, 1997, claiming
that this note had been tampered. He claimed that the one (1) month loan contracted by Rolando
and his wife in November 1996 which was lastly renewed in March 1997 had already been fully paid
and extinguished in April 1997.
10
11
Trial on the merits thereafter ensued.

The Regional Trial Court Ruling
In a decision dated January 17, 2000,the RTC ruled in the respondents favor and ordered the
Bognot siblings to pay the amount of the loan, plus interest and penalty charges. It considered the
wordings of the promissory note and found that the loan they contracted was joint and solidary. It
12
also noted that the petitioner signed the promissory note as a principal (and not merely as a
guarantor), while Rolando was the co-maker. It brushed the petitioners defense of full payment
aside, ruling that the respondent had successfully proven, by preponderance of evidence, the
nonpayment of the loan. The trial court said:
Records likewise reveal that while he claims that the obligation had been fully paid in his Answer, he
did not, in order to protect his right filed (sic) a cross-claim against his co-defendant Rolando Bognot
despite the fact that the latter did not file any responsive pleading.
In fine, defendants are liable solidarily to plaintiff and must pay the loan of P500,000.00 plus 5%
interest monthly as well as 10% monthly penalty charges from the filing of the complaint on
December 3, 1997 until fully paid. As plaintiff was constrained to engage the services of counsel in
order to protect his right,defendants are directed to pay the former jointly and severally the amount
of P50,000.00 as and by way of attorneys fee.
The petitioner appealed the decision to the Court of Appeals.
The Court of Appeals Ruling
In its decision dated March 28, 2007, the CA affirmed the RTCs findings. It found the petitioners
defense of payment untenable and unsupported by clear and convincing evidence. It observed that
the petitioner did not present any evidence showing that the check dated June 30, 1997 had, in fact,
been encashed by the respondent and the proceeds applied to the loan, or any official receipt
evidencing the payment of the loan. It further stated that the only document relied uponby the
petitioner to substantiate his defense was the April 1, 1997 checkhe issued which was cancelled and
returned to him by the respondent.
The CA, however, noted the respondents established policy of cancelling and returning the postdated checks previously issued, as well as the subsequent loan renewals applied for by the
petitioner, as manifested by the official receipts under his name. The CA thus ruled that the petitioner
failed to discharge the burden of proving payment.
The petitioner moved for the reconsideration of the decision, but the CA denied his motion in its
resolution of October 15, 2007, hence, the present recourse to us pursuant toRule 45 of the Rules of
Court.
The Petition
The petitioner submits that the CA erred in holding him solidarily liable with Rolando and his wife.
Heclaimed that based on the legal presumption provided by Article 1271 of the Civil Code, his
obligation had been discharged by virtue of his possession of the post-dated check (stamped
"CANCELLED") that evidenced his indebtedness. He argued that it was Mrs. Bognot who
subsequently assumed the obligation by renewing the loan, paying the fees and charges, and
issuing a check. Thus, there is an entirely new obligation whose payment is her sole responsibility.
13
The petitioner also argued that as a result of the alteration of the promissory note without his
consent (e.g., the superimposition of the date "June 30, 1997" on the upper right portion of
Promissory Note No. 97-035 to make it appear that it would mature on this date), the respondent can
no longer collect on the tampered note, let alone, hold him solidarily liable with Rolando for the
payment of the loan. He maintained that even without the proof of payment, the material alteration of
the promissory note is sufficient to extinguish his liability.
Lastly, he claimed that he had been released from his indebtedness by novation when Mrs. Bognot
renewed the loan and assumed the indebtedness.
The Case for the Respondents
The respondent submits that the issues the petitioner raised hinge on the appreciation of the
adduced evidence and of the factual lower courts findings that, as a rule, are notreviewable by this
Court.
The Issues
The case presents to us the following issues:
1. Whether the CA committed a reversible error in holding the petitioner solidarily liable with
Rolando;
2. Whether the petitioner is relieved from liability by reason of the material alteration in the
promissory note; and
3. Whether the parties obligation was extinguished by: (i) payment; and (ii) novation by
substitution of debtors.
Our Ruling
We find the petition partly meritorious.
As a rule, the Courts jurisdiction in a Rule 45 petition is limited to the review of pure questions of
law. Appreciation of evidence and inquiry on the correctness of the appellate court's factual findings
are not the functions of this Court; we are not a trier of facts.
14
15
A question of law exists when the doubt or dispute relates to the application of the law on given
facts. On the other hand, a question of fact exists when the doubt or dispute relates to the truth or
falsity of the parties factual allegations.
16
As the respondent correctly pointedout, the petitioners allegations are factual issuesthat are not
proper for the petition he filed. In the absence of compelling reasons, the Court cannot re-examine,
review or re-evaluate the evidence and the lower courts factual conclusions. This is especially true
when the CA affirmed the lower courts findings, as in this case. Since the CAs findings of facts
affirmed those of the trial court, they are binding on this Court, rendering any further factual review
unnecessary.
If only to lay the issues raised - both factual and legal to rest, we shall proceed to discuss their
merits and demerits.
No Evidence Was Presented to Establish the Fact of Payment
Jurisprudence tells us that one who pleads payment has the burden of proving it; the burden rests
on the defendant to prove payment, rather than on the plaintiff to prove non-payment. Indeed, once
the existence of an indebtedness is duly established by evidence, the burden of showing with legal
certainty that the obligation has been discharged by payment rests on the debtor.
17
18
19
In the present case, the petitioner failed to satisfactorily prove that his obligation had already been
extinguished by payment. As the CA correctly noted, the petitioner failed to present any evidence
that the respondent had in fact encashed his check and applied the proceeds to the payment of the
loan. Neither did he present official receipts evidencing payment, nor any proof that the check had
been dishonored.
We note that the petitioner merely relied on the respondents cancellation and return to him of the
check dated April 1, 1997. The evidence shows that this check was issued to secure the
indebtedness. The acts imputed on the respondent, standing alone, do not constitute sufficient
evidence of payment.
Article 1249, paragraph 2 of the Civil Code provides:
xxxx
The delivery of promissory notes payable to order, or bills of exchange or other mercantile
documents shall produce the effect of payment only when they have been cashed, or when through
the fault of the creditor they have been impaired. (Emphasis supplied)
Also, we held in Bank of the Philippine Islands v. Spouses Royeca:
20
Settled is the rule that payment must be made in legal tender. A check is not legal tender and,
therefore, cannot constitute a valid tender of payment. Since a negotiable instrument is only a
substitute for money and not money, the delivery of such an instrument does not, by itself, operate
as payment. Mere delivery of checks does not discharge the obligation under a judgment. The
obligation is not extinguished and remains suspended until the payment by commercial document is
actually realized.(Emphasis supplied)
Although Article 1271 of the Civil Code provides for a legal presumption of renunciation of action (in
cases where a private document evidencing a credit was voluntarily returned by the creditor to the
debtor), this presumption is merely prima facieand is not conclusive; the presumption loses efficacy
when faced with evidence to the contrary.
Moreover, the cited provision merely raises a presumption, not of payment, but of the renunciation of
the credit where more convincing evidence would be required than what normally would be called for
to prove payment. Thus, reliance by the petitioner on the legal presumption to prove payment is
misplaced.
21
To reiterate, no cash payment was proven by the petitioner. The cancellation and return of the check
dated April 1, 1997, simply established his renewal of the loan not the fact of payment.
Furthermore, it has been established during trial, through repeated acts, that the respondent
cancelled and surrendered the post-dated check previously issued whenever the loan is renewed.
We trace whatwould amount to a practice under the facts of this case, to the following testimonial
exchanges:
Civil Case No. 97-0572

TSN December 14, 1998, Page 13.
Atty. Almeda:
Q: In the case of the renewal of the loan you admitted that a renewal fee is charged to the debtor
which he or she must pay before a renewal is allowed. I show you Exhibit "3" official receipt of
plaintiff dated July 3, 1997, would this be your official receipt which you issued to your client which
they make renewal of the loan?
A: Yes, sir.
xxx
xxx
xxx
Q: And naturally when a loan has been renewed, the old one which is replaced by the renewal has
already been cancelled, is that correct?
A: Yes, sir.
Q: It is also true to say that all promissory notes and all postdated checks covered by the old loan
which have been the subject of the renewal are deemed cancelled and replaced is that correct?
A: Yes, sir. xxx
22
Civil Case No. 97-0572

TSN November 27, 1998, Page 27.
Q: What happened to the check that Mr. Bognot issued?
Court: There are two Bognots. Who in particular?
Q: Leonardo Bognot, Your Honor.
A: Every month, they were renewed, he issued a new check, sir.
Q: Do you have a copy of the checks?
A: We returned the check upon renewing the loan.
23
In light of these exchanges, wefind that the petitioner failed to discharge his burden ofproving
payment.
The Alteration of the Promissory Note
Did Not Relieve the Petitioner From Liability
We now come to the issue of material alteration. The petitioner raised as defense the alleged
material alteration of Promissory Note No. 97-035 as basis to claim release from his loan. He alleged
that the respondents superimposition of the due date "June 30, 1997" on the promissory note
without his consent effectively relieved him of liability.
We find this defense untenable.
Although the respondent did not dispute the fact of alteration, he nevertheless denied that the
alteration was done without the petitioners consent. The parties Pre-Trial Order dated November 3,
1998 states that:
24
xxx There being no possibility of a possible compromise agreement, stipulations, admissions, and
denials were made, to wit:
FOR DEFENDANT LEONARDO BOGNOT
13. That the promissory note subject of this case marked as Annex "A" of the complaint was
originally dated April 1, 1997 with a superimposed rubber stamp mark "June 30, 1997" to which the
plaintiff admitted the superimposition.
14. The superimposition was done without the knowledge, consent or prior consultation with
Leonardo Bognot which was denied by plaintiff." (Emphasis supplied)
25
Significantly, the respondent also admitted in the Pre-Trial Order that part of its company practice is
to rubber stamp, or make a superimposition through a rubber stamp, the old promissory note which
has been renewed to make it appear that there is a new loan obligation. The petitioner did not rebut
this statement. To our mind, the failure to rebut is tantamount to an admission of the respondents
allegations:
"22. That it is the practice of plaintiff to just rubber stamp or make superimposition through a rubber
stamp on old promissory note which has been renewed to make it appear that there is a new loan
obligation to which the plaintiff admitted." (Emphasis Supplied).
26
Even assuming that the note had indeed been tampered without the petitioners consent, the latter
cannot totally avoid payment of his obligation to the respondent based on the contract of loan.
Based on the records, the Bognot Siblings had applied for and were granted a loan of P500,000.00
by the respondent. The loan was evidenced by a promissory note and secured by a post-dated
check dated November 30, 1996. In fact, the petitioner himself admitted his loan application was
evidenced by the Promissory Note dated April 1, 1997. This loan was renewed several times by the
petitioner, after paying the renewal fees, as shown by the Official Receipt Nos. 797 and 587 dated
May 5 and July 3, 1997, respectively. These official receipts were issued in the name of the
petitioner. Although the petitioner had insisted that the loan had been extinguished, no other
evidence was presented to prove payment other than the cancelled and returnedpost-dated check.
27
28
29
30
Under this evidentiary situation, the petitioner cannot validly deny his obligation and liability to the
respondent solely on the ground that the Promissory Note in question was tampered. Notably, the
existence of the obligation, as well as its subsequent renewals, have been duly established by: first,
the petitioners application for the loan; second, his admission that the loan had been obtained from
the respondent; third, the post-dated checks issued by the petitioner to secure the loan; fourth, the
testimony of Mr. Bernardez on the grant, renewal and non-payment of the loan; fifth, proof of nonpayment of the loan; sixth, the loan renewals; and seventh, the approval and receipt of the loan
renewals.
In Guinsatao v. Court of Appeals, this Court pointed out that while a promissory note is evidence of
an indebtedness, it is not the only evidence, for the existence of the obligation can be proven by
other documentary evidence such as a written memorandum signed by the parties. In Pacheco v.
Court of Appeals, this Court likewise expressly recognized that a check constitutes anevidence of
indebtedness and is a veritable proof of an obligation. It canbe used in lieu of and for the same
purpose as a promissory note and can therefore be presented to establish the existence of
indebtedness.
31
32
33
In the present petition, we find that the totality of the evidence on record sufficiently established the
existence of the petitioners indebtedness (and liability) based on the contract ofloan. Even with the
tampered promissory note, we hold that the petitioner can still be held liable for the unpaid loan.
The Petitioners BelatedClaim of Novation by Substitution May no Longer be Entertained
It has not escaped the Courts attention that the petitioner raised the argument that the obligation
had been extinguished by novation. The petitioner never raised this issue before the lower courts.
It is a settled principle of law thatno issue may be raised on appeal unless it has been brought before
the lower tribunal for its consideration. Matters neither alleged in the pleadingsnor raised during the
proceedings below cannot be ventilated for the first time on appeal before the Supreme Court.
34
35
In any event, we find no merit in the defense of novation as we discuss at length below. Novation
cannot be presumed and must be clearly and unequivocably proven.
Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by
substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the
creditor.
36
Article 1293 of the Civil Code defines novation as follows:

"Art. 1293. Novation which consists insubstituting a new debtor in the place of the originalone, may
be made even without the knowledge or against the will of the latter, but not without the consent of
the creditor. Payment by the new debtor gives him rights mentioned in Articles 1236 and 1237."
To give novation legal effect, the original debtor must be expressly released from the obligation, and
the new debtor must assume the original debtors place in the contractual relationship. Depending
on who took the initiative, novation by substitution of debtor has two forms substitution by
expromision and substitution by delegacion. The difference between these two was explained in
Garcia v. Llamas:
37
"In expromision, the initiative for the change does not come from -- and may even be made without
the knowledge of -- the debtor, since it consists of a third persons assumption of the obligation. As
such, it logically requires the consent of the third person and the creditor. In delegacion, the debtor
offers, and the creditor accepts, a third person who consents to the substitution and assumes the
obligation; thus, the consent of these three persons are necessary."
In both cases, the original debtor must be released from the obligation; otherwise, there can be no
valid novation. Furthermore, novation by substitution of debtor must alwaysbe made with the
consent of the creditor.
38
39
The petitioner contends thatnovation took place through a substitution of debtors when Mrs. Bognot
renewed the loan and assumed the debt. He alleged that Mrs. Bognot assumed the obligation by
paying the renewal fees and charges, and by executing a new promissory note. He further claimed
that she issued her own check to cover the renewal fees, which fact, according to the petitioner,
was done with the respondents consent.
40
Contrary to the petitioners contention, Mrs. Bognot did not substitute the petitioner as debtor. She
merely attempted to renew the original loan by executing a new promissory note and check. The
purported one month renewal of the loan, however, did not push through, as Mrs. Bognot did not
return the documents or issue a new post dated check. Since the loan was not renewed for another
month, the originaldue date, June 30,1997, continued to stand.
41
More importantly, the respondent never agreed to release the petitioner from his obligation. That the
respondent initially allowed Mrs. Bognot to bring home the promissory note, disclosure statement
and the petitioners previous check dated June 30, 1997, does not ipso factoresult in novation.
Neither will this acquiescence constitute an implied acceptance of the substitution of the debtor.
In order to give novation legal effect, the creditor should consent to the substitution of a new debtor.
Novation must be clearly and unequivocally shown, and cannot be presumed.
Since the petitioner failed to show thatthe respondent assented to the substitution, no valid novation
took place with the effect of releasing the petitioner from his obligation to the respondent.
Moreover, in the absence of showing that Mrs. Bognot and the respondent had agreed to release the
petitioner, the respondent can still enforce the payment of the obligation against the original debtor.
Mere acquiescence to the renewal of the loan, when there is clearly no agreement to release the
petitioner from his responsibility, does not constitute novation.
The Nature of the Petitioners Liability
On the nature of the petitioners liability, we rule however, that the CA erred in holding the petitioner
solidarily liable with Rolando.
A solidary obligation is one in which each of the debtors is liable for the entire obligation, and each of
the creditors is entitled to demand the satisfaction of the whole obligation from any or all of the
debtors. There is solidary liability when the obligation expressly so states, when the law so
provides, or when the nature of the obligation so requires. Thus, when the obligor undertakes to be
"jointly and severally" liable, the obligation is solidary,
42
43
In this case, both the RTC and the CA found the petitioner solidarily liable with Rolando based on
Promissory Note No. 97-035 dated June 30, 1997. Under the promissory note, the Bognot Siblings
defined the parameters of their obligation as follows:
"FOR VALUE RECEIVED, I/WE, jointly and severally, promise to pay to READY RESOURCES
INVESTORS RRI LENDING CORPO. or Order, its office at Paranaque, M.M. the principal sum of
Five Hundred Thousand PESOS (P500,000.00), PhilippineCurrency, with interest thereon at the rate
of Five percent (5%) per month/annum, payable in One Installment (01) equal daily/weekly/semimonthly/monthly of PESOS Five Hundred Thousand Pesos (P500,000.00), first installment to
become due on June 30, 1997. xxx" (Emphasis Ours).
44
Although the phrase "jointly and severally" in the promissory note clearly and unmistakably provided
for the solidary liability of the parties, we note and stress that the promissory note is merely a
photocopyof the original, which was never produced.
Under the best evidence rule, whenthe subject of inquiry is the contents of a document, no evidence
isadmissible other than the original document itself except in the instances mentioned in Section 3,
Rule 130 of the Revised Rules of Court.
45
The records show that the respondenthad the custody of the original promissory note dated April 1,
1997, with a superimposed rubber stamp mark "June 30, 1997", and that it had been given every
opportunity to present it. The respondent even admitted during pre-trial that it could not present the
original promissory note because it is in the custody of its cashier who is stranded in Bicol. Since
the respondent never produced the original of the promissory note, much less offered to produce it,
the photocopy of the promissory note cannot be admitted as evidence. Other than the promissory
note in question, the respondent has not presented any other evidence to support a finding of
solidary liability. As we earlier noted, both lower courts completely relied on the note when they
found the Bognot siblingssolidarily liable.
46
The well-entrenched rule is that solidary obligation cannot be inferred lightly. It must be positively
and clearly expressed and cannot be presumed.
47
In view of the inadmissibility of the promissory note, and in the absence of evidence showing that the
petitioner had bound himself solidarily with Rolando for the payment of the loan, we cannot but
conclude that the obligation to pay is only joint.
48
The 5% Monthly Interest Stipulated in the Promissory Note is Unconscionable and Should be
Equitably Reduced
Finally, on the issue of interest, while we agree with the CA that the petitioner is liable to the
respondentfor the unpaid loan, we find the imposition of the 5% monthly interest to be excessive,
iniquitous, unconscionable and exorbitant, and hence, contrary to morals and jurisprudence.
Although parties to a loan agreement have wide latitude to stipulate on the applicable interest rate
under Central Bank Circular No. 905 s. 1982 (which suspended the Usury Law ceiling on interest
effective January 1, 1983), we stress that unconscionable interest rates may still be declared illegal.
In several cases, we haveruled that stipulations authorizing iniquitous or unconscionable interests
are contrary to morals and are illegal. In Medel v. Court of Appeals, we annulled a stipulated 5.5%
per month or 66% per annum interest on a P500,000.00 loan, and a 6% per month or 72% per
50
49
annum interest on a P60,000.00 loan, respectively, for being excessive, iniquitous,

unconscionableand exorbitant.
1wphi1
We reiterated this ruling in Chua v. Timan, where we held that the stipulated interest rates of 3% per
month and higher are excessive, iniquitous, unconscionable and exorbitant, and must therefore be
reduced to 12% per annum.
51
Applying these cited rulings, we now accordingly hold that the stipulated interest rate of 5% per
month, (or 60% per annum) in the promissory note is excessive, unconscionable, contrary to morals
and is thus illegal. It is void ab initiofor violating Article 1306 of the Civil Code. We accordingly find
it equitable to reduce the interest rate from 5% per month to 1% per month or 12% per annum in line
with the prevailing jurisprudence.
52
1wphi1
WHEREFORE, premises considered, the Decision dated March 28, 2007 of the Court of Appeals in
CA-G.R. CV No. 66915 is hereby AFFIRMED with MODIFICATION, as follows:
1. The petitioner Leonardo A. Bognotand his brother, Rolando A. Bognot are JOINTLY
LIABLE to pay the sum of P500,000.00 plus 12% interest per annum from December 3, 1997
until fully paid.
2. The rest of the Court of Appeals' dispositions are hereby AFFIRMED.
Costs against petitioner Leonardo A. Bognot.
SO ORDERED.
ARTURO D. BRION
Associate Justice
WE CONCUR:
ELIZABETH DEL CARMEN vs. SPOUSES RESTITUTO SABORDO and MIMA

MAHILUM-SABORDO, G.R. No. 181723, August 11, 2014, J. Peralta
G.R. No. 181723
August 11, 2014
ELIZABETH DEL CARMEN, Petitioner,

vs.
SPOUSES RESTITUTO SABORDO and MIMA MAHILUM-SABORDO, Respondents.
DECISION
PERALTA, J.:
This treats of the petition for review on certiorari assailing the Decision and Resolution of the Court
of Appeals (CA), dated May 25, 2007 and January 24, 2008, respectively, in CA-G.R. CV No. 75013.
1
The factual and procedural antecedents of the case are as follows:

Sometime in 1961, the spouses Toribio and Eufrocina Suico (Suico spouses), along with several
business partners, entered into a business venture by establishing a rice and com mill at Mandaue
City, Cebu. As part of their capital, they obtained a loan from the Development Bank of the
Philippines (DBP), and to secure the said loan, four parcels of land owned by the Suico spouses,
denominated as Lots 506, 512, 513 and 514, and another lot owned by their business partner,
Juliana Del Rosario, were mortgaged. Subsequently, the Suico spouses and their business partners
failed to pay their loan obligations forcing DBP to foreclose the mortgage. After the Suico spouses
and their partners failed to redeem the foreclosed properties, DBP consolidated its ownership over
the same. Nonetheless, DBP later allowed the Suico spouses and Reginald and Beatriz Flores
(Flores spouses), as substitutes for Juliana Del Rosario, to repurchase the subject lots by way of a
conditional sale for the sum ofP240,571.00. The Suico and Flores spouses were able to pay the
downpayment and the first monthly amortization, but no monthly installments were made thereafter.
Threatened with the cancellation of the conditional sale, the Suico and Flores spouses sold their
rights over the said properties to herein respondents Restituto and Mima Sabordo, subject to the
condition that the latter shall pay the balance of the sale price. On September 3, 1974, respondents
and the Suico and Flores spouses executed a supplemental agreement whereby they affirmed that
what was actually sold to respondents were Lots 512 and 513, while Lots 506 and 514 were given to
them as usufructuaries. DBP approved the sale of rights of the Suico and Flores spouses in favor of
herein respondents. Subsequently, respondents were able to repurchase the foreclosed properties
of the Suico and Flores spouses.
On September 13, 1976, respondent Restituto Sabordo (Restituto) filed with the then Court of First
Instance of Negros Occidental an original action for declaratory relief with damages and prayer for a
writ of preliminary injunction raising the issue of whether or not the Suico spouses have the right to
recover from respondents Lots 506 and 514.
In its Decision dated December 17, 1986, the Regional Trial Court (RTC) of San Carlos City, Negros
Occidental, ruled in favor of the Suico spouses directing that the latter have until August 31, 1987
within which to redeem or buy back from respondents Lots 506 and 514.
On appeal, the CA, in its Decision in CA-G.R. CV No. 13785, dated April 24, 1990, modified the
RTC decision by giving the Suico spouses until October 31, 1990 within which to exercise their
option to purchase or redeem the subject lots from respondents by paying the sum of P127,500.00.
The dispositive portion of the CADecision reads as follows:
3
xxxx
For reasons given, judgment is hereby rendered modifying the dispositive portion of [the] decision of
the lower court to read:
1) The defendants-appellees are granted up to October 31, 1990 within which toexercise
their option to purchase from the plaintiff-appellant Restituto Sabordo and Mima Mahilum Lot
No. 506, covered by Transfer Certificate of Title No. T-102598 and Lot No. 514, covered by
Transfer Certificate of Title No. T-102599, both of Escalante Cadastre, Negros Occidental by
reimbursing or paying to the plaintiff the sum of ONE HUNDRED TWENTY-SEVEN
THOUSAND FIVE HUNDRED PESOS (P127,500.00);
2) Within said period, the defendants-appellees shall continue to have usufructuary rights on
the coconut trees on Lots Nos. 506 and 514, Escalante Cadastre, Negros Occidental;
3) The Writ of Preliminary Injunction dated August 12, 1977 shall be effective
untildefendants-appellees shall have exercised their option to purchase within said period by
paying or reimbursing to the plaintiff-appellant the aforesaid amount.
No pronouncement as to costs.
SO ORDERED.
In a Resolution dated February 13, 1991, the CA granted the Suico spouses an additional period of
90 days from notice within which to exercise their option to purchase or redeem the disputed lots.
5
In the meantime, Toribio Suico (Toribio) died leaving his widow, Eufrocina, and several others,
includingherein petitioner, as legal heirs. Later, they discovered that respondents mortgaged Lots
506 and 514 with Republic Planters Bank (RPB) as security for a loan which, subsequently, became
delinquent.
Thereafter, claiming that theyare ready with the payment of P127,500.00, but alleging that they
cannot determine as to whom such payment shall be made, petitioner and her co-heirs filed a
Complaint with the RTC of San Carlos City, Negros Occidental seeking to compel herein
respondents and RPB to interplead and litigate between themselves their respective interests on the
abovementioned sum of money. The Complaint also prayed that respondents be directed to
substitute Lots 506 and 514 with other real estate properties as collateral for their outstanding
obligation with RPB and that the latter be ordered toaccept the substitute collateral and release the
mortgage on Lots 506 and 514. Upon filing of their complaint, the heirs of Toribio deposited the
amount ofP127,500.00 with the RTC of San Carlos City, Branch 59.
6
1wphi1
Respondents filed their Answer with Counterclaim praying for the dismissal of the above Complaint
on the grounds that (1) the action for interpleader was improper since RPB isnot laying any claim on
the sum ofP127,500.00; (2) that the period withinwhich the complainants are allowed to purchase
Lots 506 and 514 had already expired; (3) that there was no valid consignation, and (4) that the case
is barred by litis pendenciaor res judicata.
7
On the other hand, RPB filed a Motion to Dismiss the subject Complaint on the ground that petitioner
and her co-heirs had no valid cause of action and that they have no primary legal right which is
enforceable and binding against RPB.
On December 5, 2001, the RTC rendered judgment, dismissing the Complaint of petitioner and her
co-heirs for lack of merit. Respondents' Counterclaim was likewise dismissed.
8
Petitioner and her co-heirs filed an appeal with the CA contending that the judicial deposit or
consignation of the amount of P127,500.00 was valid and binding and produced the effect of
payment of the purchase price of the subject lots.
In its assailed Decision, the CA denied the above appeal for lack of merit and affirmed the disputed
RTC Decision.
Petitioner and her co-heirs filed a Motion for Reconsideration, but it was likewise denied by the CA.
9
Hence, the present petition for review on certiorariwith a lone Assignment of Error, to wit:
THE COURT OF APPEALS ERRED IN AFFIRMING THE DECISION OF THE LOWER COURT
WHICH HELD THAT THE JUDICIAL DEPOSIT OF P127,500.00 MADE BY THE SUICOS WITH THE
CLERK OF COURT OF THE RTC, SAN CARLOS CITY, IN COMPLIANCE WITH THE FINAL AND
EXECUTORY DECISION OF THE COURT OF APPEALS IN CA-G.R. CV-13785 WAS NOT VALID.
10
Petitioner's main contention is that the consignation which she and her co-heirs made was a judicial
deposit based on a final judgment and, as such, does not require compliance with the requirements
of Articles 1256 and 1257 of the Civil Code.
11
12
The petition lacks merit. At the outset, the Court quotes withapproval the discussion of the CA
regarding the definition and nature of consignation, to wit: 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. It should be distinguished from
tender of payment which is the manifestation by the debtor to the creditor of his desire to comply
with his obligation, with the offer of immediate performance.Tender is the antecedent of
consignation, thatis, 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.
Tender and consignation, where validly made, produces the effect of payment and extinguishes the
obligation.
13
In the case of Arzaga v. Rumbaoa, which was cited by petitioner in support of his contention, this
Court ruled that the deposit made with the court by the plaintiff-appellee in the saidcase is
considered a valid payment of the amount adjudged, even without a prior tender of payment thereof
to the defendants-appellants,because the plaintiff-appellee, upon making such deposit, expressly
petitioned the court that the defendants-appellees be notified to receive the tender of payment.This
Court held that while "[t]he deposit, by itself alone, may not have been sufficient, but with the
express terms of the petition, there was full and complete offer of payment made directly to
defendants-appellants." In the instant case, however, petitioner and her co-heirs, upon making the
deposit with the RTC, did not ask the trial court that respondents be notified to receive the amount
that they have deposited. In fact, there was no tender of payment. Instead, what petitioner and her
co-heirs prayed for is thatrespondents and RPB be directed to interplead with one another to
determine their alleged respective rights over the consigned amount; that respondents be likewise
directed to substitute the subject lots with other real properties as collateral for their loan with RPB
and that RPB be also directed to accept the substitute real properties as collateral for the said loan.
Nonetheless,the trial court correctly ruled that interpleader is not the proper remedy because RPB
did notmake any claim whatsoever over the amount consigned by petitioner and her co-heirs with
the court.
14
15
In the cases of Del Rosario v. Sandico and Salvante v. Cruz, likewise cited as authority by
petitioner, this Court held that, for a consignation or deposit with the court of an amount due on a
judgment to be considered as payment, there must beprior tender to the judgment creditor who
refuses to accept it. The same principle was reiterated in the later case of Pabugais v. Sahijwani. As
stated above, tender of payment involves a positive and unconditional act by the obligor of offering
16
17
18
legal tender currency as payment to the obligee for the formers obligation and demanding that the
latter accept the same. In the instant case, the Court finds no cogent reason to depart from the
findings of the CA and the RTC that petitioner and her co-heirs failed to make a prior valid tender of
payment to respondents.
19
It is settled that compliance with the requisites of a valid consignation is mandatory. Failure to
comply strictly with any of the requisites will render the consignation void. One of these requisites is
a valid prior tender of payment.
20
21
Under Article 1256, the only instances where prior tender of payment is excused are: (1) when the
creditor is absent or unknown, or does not appear at the place of payment; (2) when the creditor is
incapacitated to receive the payment at the time it is due; (3) when, without just cause, the creditor
refuses to give a receipt; (4) when two or more persons claim the same right to collect; and (5) when
the title of the obligation has been lost. None of these instances are present in the instant case.
Hence, the fact that the subject lots are in danger of being foreclosed does not excuse petitioner and
her co-heirs from tendering payment to respondents, as directed by the court.
WHEREFORE, the instant petition is DENIED. The Decision of the Court of Appeals, dated May 25,
2007, and its Resolution dated January 24, 2008, both in CA-G.R. CV No. 75013, are AFFIRMED.
SO ORDERED.
DIOSDADO M. PERALTA
Associate Justice
WE CONCUR:
NETLINK COMPUTER INCORPORATED vs. ERIC DELMO, G.R No. 160827, June
18, 2014, J. Bersamin
G.R. No. 160827
June 18, 2014
NETLINK COMPUTER INCORPORATED, Petitioner,

vs.
ERIC DELMO, Respondent.
DECISION
BERSAMIN, J.:
In the absence of a written agreement between the employer and the employee that sales
commissions shall be paid in a foreign currency, the latter has the right to be paid in such foreign
currency once the same has become an established practice of the former. The rate of exchange at
the time of payment, not the rate of exchange at the time of the sales, controls.
Antecedents
On November 3, 1991, Netlink Computer, Inc. Products and Services (Netlink) hired Eric S. Delmo
(Delmo) as account manager tasked to canvass and source clients and convince them to purchase
the products and services of Netlink. Delmo worked in the field most of the time. He and his fellow
account managers were not required to accomplish time cards to record their personal presence in
the office of Netlink. He was able to generate sales worth P35,000,000.00, more or less, from which
he earned commissions amounting to P993,558.89 and US$7,588.30. He then requested payment
of his commissions, but Netlink refused and only gave him partial cash advances chargeable to his
commissions. Later on, Netlink began to nitpick and fault find, like stressing his supposed absences
and tardiness. In order to force him to resign, Netlink issued several memoranda detailing his
supposed infractions of the companys attendance policy. Despite the memoranda, Delmo continued
to generate huge sales for Netlink.
1
On November 28, 1996, Delmo was shocked when he was refused entry into the company premises
by the security guard pursuant to a memorandum to that effect. His personal belongings were still
inside the company premises and he sought their return to him. This incident prompted Delmo to file
a complaint for illegal dismissal.
3
In its answer to Delmos complaint,Netlink countered that there were guidelines regarding company
working time and its utilization and how the employees time would be recorded. Allegedly, all
personnel were required to use the bundy clock to punch in and out in the morning, and in and out in
the afternoon. Excepted from the rules were the company officers, and the authorized personnel in
the field project assignments. Netlink claimed that it would be losing on the business transactions
closed by Delmo due to the high costs of equipment, and in fact his biggest client had not yet paid.
Netlink pointed out that Delmo had becomevery lax in his obligations, with the other account
managers eventually having outperformed him. Netlink asserted that warning, reprimand, and
suspension memoranda were given to employees who violated company rules and regulations, but
such actions were considered as a necessary management tool to instill discipline.
4
Ruling of the Labor Arbiter

On September 23, 1998, the Labor Arbiter ruled against Netlink and in favor of Delmo, to wit:
WHEREFORE, judgment is hereby rendered declaring complainant as illegally and unjustly
dismissed and respondents are ordered to reinstate complainant to his former position without loss
of seniority rights with full backwages and other benefits and respondents are hereby ordered to pay
complainant as follows:
P161,000.00 - Backwages, basic pay and allowances from Nov. 1996 to Sept. 1998
15,000.00 - 13th month pay for 1996 to 1998
993,558.89 - unpaid commissions
P1,169,558.89 - Total
plus US$7,588.30 - unpaid commissions
plus 10% attorneys fees
The reinstatement aspect is immediately executory even pending appeal. In case reinstatement is
no longer feasible, complainant shall be paid separation pay of one-month pay for every year of
service. All other claims are hereby dismissed.
SO ORDERED.
Decision of the NLRC

On appeal, the National Labor Relations Commission (NLRC) modified the decision of the Labor
Arbiter by setting aside the backwages and reinstatement decreed by the Labor Arbiter due to the
existence of valid and just causes for the termination of Delmos employment, to wit: WHEREFORE,
premises considered, the decision of the Labor Arbiter a quo is hereby SET ASIDEand a new one
ENTERED, ordering the respondents-appellantsto pay the following:
1. TWO THOUSAND PESOS (P2,000.00) as indemnity for failure to observe procedural due
process;
2. Unpaid commission in the amount of P993,558.89;
3. US$7,588.30 as unpaid commission;
4. P15,000.00 representing the 13th month pay for 1996, 1997, and 1998;
5. 10% attorneys fees of the total amount awarded.
SO ORDERED.
The NLRC denied the motion for reconsideration, after which Netlink filed a petition for certiorariin
the CA.
Judgment of the CA
On May 9, 2003, the CA promulgated its assailed decision upholding the NLRCs ruling subject to
modifications, viz:
7
In the present case, since the payment of the commission is made to depend on the future and
uncertain event which is the payment of the accounts by the persons who have transacted
business with the petitioner, without payment by the former to the latter, the obligation to pay the
commission has not yet arisen.
The evidence on record shows that the ALCATEL, private respondents biggest client has not paid
fully the amount it owes to the petitioner as of March 10, 1998. (Rollo, pp. 101, 397, 398) The
obligation therefore, on the part of the petitioner to pay the private respondent for his commission for
the said unpaid account has not yet arisen. Thus it is a grave abuse of discretion on the part of the
public respondent to make petitioner liable to the private respondent for the payment of the said
commission, when it is clear on the record, as We have discussed above, that the obligation therefor
has not yet arisen.
Perusal of the records, likewise, show that petitioner failed to refute by evidence that the private
respondent is not entitled to the P993, 558.89 commission. Petitioner however claimed that since the
amounts out of which the commission will be taken has not yet been paid fully, petitioner must,
likewise, not be made liable for the said commission. However, public respondent committed grave
abuse of discretion when it disregard the evidence on record which is not disputed by the private
respondent that out of the total commissions of the private respondent, petitioner has paid the
petitioner in the amount of P216,799.45 in the form of advance payment. (Rollo, p. 12)
In view of the foregoing discussions, therefore, the advance payment made by the petitioner in
favorof the private respondent in the amount of P216, 799.45 must be deducted to the P993, 558.89
unpaid commission of the private respondent. The difference amounting to P776, 779.44 must
likewise be deducted to the amount of P4, 066.19 which represents the amount which the petitioner
had admitted as the net commission payable to private respondent. The difference thereof
amounting to P772, 713.25 shall represent the unpaid commission which shall be payable to the
private respondent by the petitioner upon payment of the accounts out of which such commission
shall be taken.
We, likewise, agree with the petitioner that the private respondent is not entitled to 13th month pay in
the years 1997 and 1998. The order of the public respondent making the petitioner liable to the
private respondent for the 13th month pay of the latter in the years 1997 and 1998 is contrary to its
findings that there are valid and just cause for the termination of the private respondent from
employment, although private respondent was not given his right to due process. (Rollo, pp. 32-33)
The rule applicable in the present case is the decision of the Supreme Court in the case of
Sebuguero vs National Labor Relations Commission [248 SCRA 532, 547 (1995)] where it was ruled
that "where the dismissal of an employee is in fact for a just and valid cause and is so proven to be
but he is not accorded his right to due process,i.e., he was not furnished the twin requirements of
notice and the opportunityto be heard, the dismissal shall be upheld but the employer must be
sanctioned for non-compliance with the requirements of or for failureto observe due process."
Hence, petitioner should not be made to pay the 13th month pay to private respondent whose
employment was terminated for cause but without due process in 1996.
xxxx
Thus, private respondent is entitled only to a 13th month pay computed pro-rata from January 1996
to November 1996 which as properly computed by the petitioner amounts to P4, 584.00. (Rollo, p.
11)
With respect to the other arguments of the petitioner, this Court is not persuaded. Petitioner failed to
refute by evidence that private respondent is not entitled to the commissions payable in US dollars.
Neither is there any reason for us to agree with the petitioner that the computation of these
commissions must be based on the value of [the] Peso in relation to a Dollar at the time of sale. As
properly observed by the Labor Arbiter a quo, viz: "Likewise the devaluation of the peso cannot be
used as a shield against the complainant because that should have been the lookout of the
respondent company in providing for such a clause that in case of devaluation, the price agreed
upon should be at the exchange rate when the contract of sale had been consummated. For the lack
of foresight and inefficiency of the respondent company and as regards its contracts or agreements
with its clientele, the complainant should not be made to suffer." (Labor Arbiter Ricardo Olairez
Decision, September 23, 1998, pp. 11-12, Rollo,pp. 328-329) In this regardtherefore, We uphold the
well settled rule that "the findings of facts of the NLRC, particularly where the NLRC and the Labor
Arbiter are in agreement, are deemed binding and conclusive upon the Court." (Permex, Inc. vs
National Labor Relations Commission, 323 SCRA 121, 126).
xxxx
WHEREFORE, premises considered, the assailed Resolutions are hereby AFFIRMED with
MODIFICATION, ordering the petitioner to pay the private respondent the following:
1. TWO-THOUSAND PESOS (P2,000.00) as indemnity for failure to observe procedural due
process;
2. P4,066.19 representing the unpaid commissions that have accrued in favor of the private
respondent;
3. P776,779.44 payable to the private respondent upon payment of the accounts out of
which the said amount will be taken;
4. P4,584.00 representing the unpaid 13th month pay of the private respondent;
5. US$7,588.30 as unpaid commission;
6. 10% attorneys fees of the total amount awarded excluding the amount contained in the
No.3 of this Order.
SO ORDERED.
Issues
Hence, this appeal.
Netlink submits that the CA committed a palpable and reversible error of law in not holding that the
applicable exchange rate for computing the US dollar commissions of Delmo should be the rates
prevailing at the time when the sales were actually generated, not the rates prevailing at the time of
the payment; and in awarding attorneys fees.
In his comment, Delmo counters that because he had earned in US dollars it was only fair that his
commissions be paid in US dollars; that Netlink should not be allowed to flip-flop after it had paid
commissions in US dollar on the sales generated by its sales agents on US-dollar denominated
transactions; and that attorneys fees were warranted because of the unanimous finding that there
was violation of procedural due process.
8
In its reply, Netlink maintains that the commissions of Delmo should be based on sales generated,
actually paid by and collected from the customers; that commissions must be paid on the basis of
the conversion of the US dollar to the Philippine peso at the time of sale; and that no cogent and
justifiable reason existed for the award of attorneys fees.
9
To be considered for resolution are,therefore, the following, namely: (1) whether or not the payment
of the commissions should be in US dollars; and (2) whether or not the award ofattorneys fees was
warranted.
Ruling of the Court
The appeal lacks merit.
As a general rule, all obligations shall be paid in Philippine currency. However, the contracting
parties may stipulate that foreign currencies may be used for settling obligations. This is pursuant to
Republic Act No. 8183, which provides as follows:
10
Section 1. All monetary obligations shall be settled in the Philippine currency which is legal tender in
the Philippines. However, the parties may agree that the obligation ortransaction shall be settled in
any other currency at the time of payment.
We remarked in C.F. Sharp & Co. v. Northwest Airlines, Inc. that the repeal of Republic Act No. 529
had the effect of removing the prohibition on the stipulation of currency other than Philippine
currency, such that obligations or transactions could already be paid in the currency agreed upon by
the parties. However, both Republic Act No. 529 and Republic Act No. 8183 did not stipulate the
applicable rate of exchange for the conversion of foreign currency-incurred obligations to their peso
equivalent. It follows, therefore, that the jurisprudence established under Republic Act No. 529 with
regard to the rate of conversion remains applicable. In C.F. Sharp, the Court cited Asia World
Recruitment,Inc. v. NLRC, to the effect that the real value of the foreign exchange-incurred
obligation up to the date of itspayment should be preserved.
11
12
There was no written contract between Netlink and Delmo stipulating that the latters commissions
would be paid in US dollars. The absence of the contractual stipulation notwithstanding, Netlink was
still liable to pay Delmo in US dollars because the practice of paying its sales agents in US dollars
for their US dollar-denominatedsales had become a company policy. This was impliedly admitted by
Netlink when it did not refute the allegation that the commissions earned by Delmo and its other
sales agents had been paid in US dollars. Instead of denying the allegation, Netlink only sought a
declaration that the US dollar commissions be paid using the exchange rate at the time of sale. The
principle of non-diminution of benefits, which has been incorporated in Article 100 of the Labor
Code, forbade Netlink from unilaterally reducing, diminishing, discontinuing or eliminating the
practice. Verily, the phrase "supplements, or other employee benefits" in Article 100 is construed to
mean the compensation and privileges received by an employee aside from regular salaries or
wages.
1wphi1
13
With regard to the length of timethe company practice should have been observed to constitute a
voluntary employer practice that cannot be unilaterally reduced, diminished, discontinued or
eliminated by the employer, we find that jurisprudence has not laid down any rule requiring a specific
mmimum number of years. In Davao Fruits Corporation v. Associated Labor Unions, the company
practice lasted for six years. In Davao Integrated Port Stevedoring Services v. Abarquez, the
employer, for three years and nine months, approved the commutation to cash of the unenjoyed
portion of the sick leave with pay benefits of its intermittent workers. In Tiangco v. Leogardo, Jr., the
employer carried on the practice of giving a fixed monthly emergency allowance from November
1976 to February 1980, or three years and four months. In Sevilla Trading Company v.
Semana, the employer kept the practice of including non-basic benefits such as paid leaves for
unused sick leave and vacation in the computation of their 13th-month pay for at least two years.
14
15
16
17
With the payment of US dollar commissions having ripened into a company practice, there is no way
that the commissions due to Delmo were to be paid in US dollars or their equivalent in Philippine
currency determined at the time of the sales. To rule otherwise would be to cause an unjust
diminution of the commissions due and owing to Delmo.
Finally, we affirm the following justification of the CA in granting attorney's fees to Delmo, viz: The
award of attorney's fees must, likewise, be upheld in line of (sic) the decision of the Supreme Court
in the case of Consolidated Rural Bank (Cagayan Valley), Inc. vs. National Labor Relations
Commission, 301 SCRA 223, 235, where it was held that "in actions for recovery of wages or where
an employee was forced to litigate and thus incur expenses to protect her rights and interests, even
if not so claimed, an award of attorney's fees equivalent to ten percent (10%) of the total award is
legally and morally justifiable. There is no doubt that in the present case, the private respondent has
incurred expenses for the protection and enforcement of his right to his commissions.
18
WHEREFORE, the Court DENIES the petition for review on certiorari; AFFIRMS the decision
promulgated on May 9, 2003; and ORDERS the petitioner to pay the costs of suit.
SO ORDERED
LUCAS P. BERSAMIN
Associate Justice
WE CONCUR:
LOSS OF THE THING DUE

COMGLASCO CORPORATION/AGUILA GLASS vs. SANTOS CAR CHECK CENTER
CORPORATION, G.R. No. 202989, March 25, 2015, J. Reyes
G.R. No. 202989, March 25, 2015
COMGLASCO CORPORATION/AGUILA GLASS, Petitioner, v. SANTOS CAR CHECK CENTER
CORPORATION, Respondent.
DECISION
REYES, J.:
On August 16, 2000, respondent Santos Car Check Center Corporation (Santos), owner of a showroom
located at 75 Delgado Street, in Iloilo City, leased out the said space to petitioner Comglasco Corporation
(Comglasco), an entity engaged in the sale, replacement and repair of automobile windshields, for a period
of five years at a monthly rental of P60,000.00 for the first year, P66,000.00 on the second year, and
P72,600.00 on the third through fifth years.1
On October 4, 2001, Comglasco advised Santos through a letter2 that it was pre-terminating their lease
contract effective December 1, 2001. Santos refused to accede to the pre-termination, reminding
Comglasco that their contract was for five years. On January 15, 2002, Comglasco vacated the leased
premises and stopped paying any further rentals. Santos sent several demand letters, which Comglasco
completely ignored. On September 15, 2003, Santos sent its final demand letter,3 which Comglasco again
ignored. On October 20, 2003, Santos filed suit for breach of contract. 4
Summons and a copy of the complaint, along with the annexes, were served on Comglasco on January 21,
2004, but it moved to dismiss the complaint for improper service. The Regional Trial Court (RTC) of Iloilo
City, Branch 37, dismissed the motion and ordered the summons served anew. On June 28, 2004,
Comglasco filed its Answer.5 Santos moved for a judgment on the pleadings, which the RTC granted. On
August 18, 2004, the trial court rendered its judgment, 6 the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of [Santos] and against [Comglasco]:
1. Ordering [Comglasco] to faithfully comply with [its] obligation under the Contract of Lease and pay its
unpaid rentals starting January 16, 2002 to August 15, 2003 in the total amount of Php1,333,200.00, plus
12% interest per annum until fully paid;
2. To pay [Santos]:
a) Php200,000.00 as attorneys fees;
b) [Php]50,000.00 as litigation expenses;
c) [Php]400,000.00 as exemplary damages.
3. Costs of the suit.
SO ORDERED.7
On February 14, 2005, Santos moved for execution pending Comglascos appeal, which the trial court
granted on May 12, 2005. In its appeal, Comglasco interposed the following issues for resolution:
1.
Whether or not judgment on the pleadings was properly invoked by the trial court as basis
for rendering its decision;
2.
Whether or not material issues were raised in [Comglascos] Answer;
3.
Whether or not damages may be granted by the trial court without proof and legal basis. 8
In its Decision9 dated August 10, 2011, the Court of Appeals (CA) affirmed the judgment of the RTC but
reduced the award of attorneys fees to P100,000.00 and deleted the award of litigation expenses and
exemplary damages.
Petition for Review to the Supreme Court
In this petition, Comglasco raises the following issues:
1.
Whether or not judgment on the pleadings was properly invoked by the trial court as basis
for rendering its decision?
2.
Whether or not material issues were raised in [Comglascos] answer?
3.
Whether or not summary judgment or judgment on the pleadings is the proper remedy for
[Santos] under the circumstances of the present case?
4.
Whether or not the amount deposited for advance rental and deposit should be credited to
[Comglascos] account?
5.
Whether or not attorneys fees may be granted by the trial court without proof and legal
basis?10
Paragraph 15 of the parties lease contract11 permits pre-termination with cause in the first three years and
without cause after the third year. Citing business reverses which it ascribed to the 1997 Asian financial
crisis, Comglasco insists that under Article 1267 of the Civil Code it is exempted from its obligation under
the contract, because its business setback is the cause contemplated in their lease which authorized it to
pre-terminate the same. Article 1267 provides:
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.
Comglasco argues that it cannot be said to have admitted in its Answer the material allegations of the
complaint precisely because it invoked therein a valid cause for its decision to pre-terminate the lease before
the lapse of three years; that therefore, in view of its pleaded cause for reneging on its rentals (the 1997
Asian financial crisis), the RTC should have ordered the reception of evidence for this purpose, after which a
summary judgment would then have been proper, not a judgment on the pleadings. After all, Santos has
claimed in its Motion for Summary Judgment that Comglascos cited cause for pre-termination was
fictitious or a sham, whereas in truth the prevailing business climate which ensued after the 1997 currency
crisis resulted in great difficulty on its part to comply with the terms of the lease as to be manifestly beyond
the contemplation of the parties; thus, Comglasco should be deemed released from the lease.
Next, Comglasco insists that its advance rentals and deposit totaling P309,000.00 should be deducted from
any sum awarded to Santos while it also insists that there is no factual and legal basis for the award of
damages.
Ruling of the Court

The petition is denied.
The first three issues being related will be discussed together.
Comglasco maintains that the RTC was wrong to rule that its answer to Santos complaint tendered no issue,
or admitted the material allegations therein; that the court should have heard it out on the reason it invoked
to justify its action to pre-terminate the parties lease; that therefore a summary judgment would have been
the proper recourse, after a hearing.
In Philippine National Construction Corporation v. CA12 (PNCC), which also involves the termination of a
lease of property by the lessee due to financial, as well as technical, difficulties,13 the Court ruled:
The obligation to pay rentals or deliver the thing in a contract of lease falls within the prestation to give;
hence, it is not covered within the scope of Article 1266. At any rate, the unforeseen event and causes
mentioned by petitioner are not the legal or physical impossibilities contemplated in said article. Besides,
petitioner failed to state specifically the circumstances brought about by the abrupt change in the political
climate in the country except the alleged prevailing uncertainties in government policies on infrastructure
projects.
The principle of rebus sic stantibus neither fits in with the facts of the case. Under this theory, the parties
stipulate in the light of certain prevailing conditions, and once these conditions cease to exist, the contract
also ceases to exist. This theory is said to be the basis of Article 1267 of the Civil Code, which provides:
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.
This article, which enunciates the doctrine of unforeseen events, is not, however, an absolute application of
the principle of rebus sic stantibus, which would endanger the security of contractual relations. The parties
to the contract must be presumed to have assumed the risks of unfavorable developments. It is therefore
only in absolutely exceptional changes of circumstances that equity demands assistance for the debtor.
In this case, petitioner wants this Court to believe that the abrupt change in the political climate of the
country after the EDSA Revolution and its poor financial condition rendered the performance of the lease
contract impractical and inimical to the corporate survival of the petitioner.
This Court cannot subscribe to this argument. As pointed out by private respondents:
xxxx
Anent petitioners alleged poor financial condition, the same will neither release petitioner from the binding
effect of the contract of lease. As held in Central Bank v. Court of Appeals, cited by private respondents,
mere pecuniary inability to fulfill an engagement does not discharge a contractual obligation, nor does it
constitute a defense to an action for specific performance. 14
Relying on Article 1267 of the Civil Code to justify its decision to pre-terminate its lease with Santos,
Comglasco invokes the 1997 Asian currency crisis as causing it much difficulty in meeting its obligations.
But in PNCC,15 the Court held that the payment of lease rentals does not involve a prestation to do
envisaged in Articles 1266 and 1267 which has been rendered legally or physically impossible without
the fault of the obligor-lessor. Article 1267 speaks of a prestation involving service which has been
rendered so difficult by unforeseen subsequent events as to be manifestly beyond the contemplation of the
parties. To be sure, the Asian currency crisis befell the region from July 1997 and for sometime thereafter,
but Comglasco cannot be permitted to blame its difficulties on the said regional economic phenomenon
because it entered into the subject lease only on August 16, 2000, more than three years after it began, and
by then Comglasco had known what business risks it assumed when it opened a new shop in Iloilo City.
This situation is no different from the Courts finding in PNCC wherein PNCC cited the assassination of
Senator Benigno Aquino Jr. (Senator Aquino) on August 21, 1983 and the ensuing national political and
economic crises as putting it in such a difficult business climate that it should be deemed released from its
lease contract. The Court held that the political upheavals, turmoils, almost daily mass demonstrations,
unprecedented inflation, and peace and order deterioration which followed Senator Aquinos death were a
matter of judicial notice, yet despite this business climate, PNCC knowingly entered into a lease with therein
respondents on November 18, 1985, doing so with open eyes of the deteriorating conditions of the country.
The Court rules now, as in PNCC, that there are no absolutely exceptional changes of circumstances that
equity demands assistance for the debtor.16
As found by the CA, Comglascos Answer admitted the material allegations in the complaint, to wit: a) that
Santos holds absolute title to a showroom space; b) that Comglasco leased the said showroom from Santos;
c) that after a little over a year, Comglasco pre-terminated the lease; d) that, disregarding Santos rejection
of the pre-termination of their lease, Comglasco vacated the leased premises on January 15, 2002; e) that
Comglasco never denied the existence and validity of the parties lease contract. Specifically, the CA noted
that Paragraph 2 of the Answer admitted the allegations in Paragraphs 2, 3 and 4 of the complaint that the
lease was for five years, starting on August 16, 2000 and to expire on August 15, 2005, at a monthly rental
of P60,000.00 on the first year, P66,000.00 on the second year, and P72,600.00 on the third up to the fifth
year.
The RTC acted correctly in resorting to Section 1 of Rule 34, on Judgment on the Pleadings, to cut short a
needless trial. This Court agrees with the CA that Comglasco cannot cite Article 1267 of the Civil Code, and
that it must be deemed to have admitted the material allegations in the complaint. Section 1, Rule 34 reads:
Sec. 1. Judgment on the pleadings. - Where an answer fails to tender an issue, or otherwise admits the
material allegations of the adverse partys pleading, the court may, on motion of that party, direct judgment
on such pleading. However, in actions for declaration of nullity or annulment of marriage or for legal
separation, the material facts alleged in the complaint shall always be proved.
A judgment on the pleadings is a judgment on the facts as pleaded, 17 and is based exclusively upon the
allegations appearing in the pleadings of the parties and the accompanying annexes. 18 It is settled that the
trial court has the discretion to grant a motion for judgment on the pleadings filed by a party if there is no
controverted matter in the case after the answer is filed. 19 A genuine issue of fact is that which requires the
presentation of evidence, as distinguished from a sham, fictitious, contrived or false issue. 20 Come to think
of it, under Rule 35, on Summary Judgments, Comglasco had recourse to move for summary judgment,
wherein it could have adduced supporting evidence to justify its action on the parties lease, but it did not do
so. Section 2 of Rule 35 provides:
Sec. 2. Summary judgment for defending party. - A party against whom a claim, counterclaim, or crossclaim is asserted or a declaratory relief is sought may, at any time, move with supporting affidavits,
depositions or admissions for a summary judgment in his favor as to all or any part thereof.
Concerning, now, whether Comglascos alleged rental deposit and advance rentals of P309,000.00 should be
credited to Comglascos account, let it suffice to state that it never raised this matter in its answer to the
complaint, nor in its appeal to the CA. Certainly, it cannot do so now.
Finally, as to whether attorneys fees may be recovered by Santos, Article 2208(2) of the Civil Code justifies
the award thereof, in the absence of stipulation, where the defendants act or omission has compelled the
plaintiff to incur expenses to protect his interest. The pre-termination of the lease by Comglasco was not
due to any fault of Santos, and Comglasco completely ignored all four demands of Santos to pay the rentals
due from January 16, 2002 to August 15, 2003, thereby compelling Santos to sue to obtain relief. It is true
that the policy of the Court is that no premium should be placed on the right to litigate, 21 but it is also true
that attorneys fees are in the nature of actual damages, the reason being that litigation costs money.22 But
the Court agrees with the CA that the lesser amount of P100,000.00 it awarded to Santos instead of
P200,000.00 adjudged by the RTC, is more reasonable.
WHEREFORE, premises considered, the petition is DENIED for lack of merit.
SO ORDERED.
NOVATION
ARCO PULP AND PAPER CO., INC. and CANDIDA A. SANTOS vs. DAN T. LIM,
doing business under the name and style of QUALITY PAPERS & PLASTIC
PRODUCTS ENTERPRISES, G.R. No. 206806, June 25, 2014, J. Leonen
G.R. No. 206806
June 25, 2014
ARCO PULP AND PAPER CO., INC. and CANDIDA A. SANTOS, Petitioners,
vs.
DAN T. LIM, doing business under the name and style of QUALITY PAPERS & PLASTIC
PRODUCTS ENTERPRISES, Respondent.
DECISION
LEONEN, J.:
Novation must be stated in clear and unequivocal terms to extinguish an obligation. It cannot be
presumed and may be implied only if the old and new contracts are incompatible on every point.
Before us is a petition for review on certiorari assailing the Court of Appeals decision in CA-G.R.
CV No. 95709, which stemmed from a complaint filed in the Regional Trial Court of Valenzuela City,
Branch 171, for collection of sum of money.
1
The facts are as follows:

Dan T. Lim works in the business of supplying scrap papers, cartons, and other raw materials, under
the name Quality Paper and Plastic Products, Enterprises, to factories engaged in the paper mill
business. From February 2007 to March 2007, he delivered scrap papers worth 7,220,968.31 to
Arco Pulp and Paper Company, Inc. (Arco Pulp and Paper) through its Chief Executive Officer and
President, Candida A. Santos. The parties allegedly agreed that Arco Pulp and Paper would either
pay Dan T. Lim the value of the raw materials or deliver to him their finished products of equivalent
value.
4
Dan T. Lim alleged that when he delivered the raw materials, Arco Pulp and Paper issued a postdated check dated April 18, 2007 in the amount of 1,487,766.68 as partial payment, with the
assurance that the check would not bounce. When he deposited the check on April 18, 2007, it was
dishonored for being drawn against a closed account.
7
On the same day, Arco Pulp and Paper and a certain Eric Sy executed a memorandum of
agreement where Arco Pulp and Paper bound themselves to deliver their finished products to
Megapack Container Corporation, owned by Eric Sy, for his account. According to the memorandum,
the raw materials would be supplied by Dan T. Lim, through his company, Quality Paper and Plastic
Products. The memorandum of agreement reads as follows:
10
Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs. Candida A.
Santos and Mr. Eric Sy that ARCO will deliver 600 tons Test Liner 150/175 GSM, full width 76 inches
at the price of P18.50 per kg. to Megapack Container for Mr. Eric Sys account. Schedule of
deliveries are as follows:
....
It has been agreed further that the Local OCC materials to be used for the production of the above
Test Liners will be supplied by Quality Paper & Plastic Products Ent., total of 600 Metric Tons
at P6.50 per kg. (price subject to change per advance notice). Quantity of Local OCC delivery will be
based on the quantity of Test Liner delivered to Megapack Container Corp. based on the above
production schedule.
11
On May 5, 2007, Dan T.Lim sent a letter to Arco Pulp and Paper demanding payment of the amount
of 7,220,968.31, but no payment was made to him.
12
13
Dan T. Lim filed a complaint for collection of sum of money with prayer for attachment with the
Regional Trial Court, Branch 171, Valenzuela City, on May 28, 2007. Arco Pulp and Paper filed its
answer but failed to have its representatives attend the pre-trial hearing. Hence, the trial court
allowed Dan T. Lim to present his evidence ex parte.
14
15
16
On September 19, 2008, the trial court rendered a judgment in favor of Arco Pulp and Paper and
dismissed the complaint, holding that when Arco Pulp and Paper and Eric Sy entered into the
memorandum of agreement, novation took place, which extinguished Arco Pulp and Papers
obligation to Dan T. Lim.
17
Dan T. Lim appealed the judgment with the Court of Appeals. According to him, novation did not
take place since the memorandum of agreement between Arco Pulp and Paper and Eric Sy was an
exclusive and private agreement between them. He argued that if his name was mentioned in the
contract, it was only for supplying the parties their required scrap papers, where his conformity
through a separate contract was indispensable.
18
19
On January 11, 2013, the Court of Appeals rendered a decision reversing and setting aside the
judgment dated September 19, 2008 and ordering Arco Pulp and Paper to jointly and severally pay
Dan T. Lim the amount of P7,220,968.31 with interest at 12% per annum from the time of
demand; P50,000.00 moral damages;P50,000.00 exemplary damages; and P50,000.00 attorneys
fees.
20
21
22
The appellate court ruled that the facts and circumstances in this case clearly showed the existence
of an alternative obligation. It also ruled that Dan T. Lim was entitled to damages and attorneys
fees due to the bad faith exhibited by Arco Pulp and Paper in not honoring its undertaking.
23
24
Its motion for reconsideration having been denied, Arco Pulp and Paper and its President and
Chief Executive Officer, Candida A. Santos, bring this petition for review on certiorari.
25
26
On one hand, petitioners argue that the execution of the memorandum of agreement constituted a
novation of the original obligation since Eric Sy became the new debtor of respondent. They also
argue that there is no legal basis to hold petitioner Candida A. Santos personally liable for the
transaction that petitioner corporation entered into with respondent. The Court of Appeals, they
allege, also erred in awarding moral and exemplary damages and attorneys fees to respondent who
did not show proof that he was entitled to damages.
27
Respondent, on the other hand, argues that the Court of Appeals was correct in ruling that there was
no proper novation in this case. He argues that the Court of Appeals was correct in ordering the
payment of 7,220,968.31 with damages since the debt of petitioners remains unpaid. He also
argues that the Court of Appeals was correct in holding petitioners solidarily liable since petitioner
28
Candida A. Santos was "the prime mover for such outstanding corporate liability." In their reply,
petitioners reiterate that novation took place since there was nothing in the memorandum of
agreement showing that the obligation was alternative. They also argue that when respondent
allowed them to deliver the finished products to Eric Sy, the original obligation was novated.
29
30
A rejoinder was submitted by respondent, but it was noted without action in view of A.M. No. 99-204-SC dated November 21, 2000.
31
The issues to be resolved by this court are as follows:

1. Whether the obligation between the parties was extinguished by novation
2. Whether Candida A. Santos was solidarily liable with Arco Pulp and Paper Co., Inc.
3. Whether moral damages, exemplary damages, and attorneys fees can be awarded
The petition is denied.
The obligation between the
parties was an alternative
obligation
The rule on alternative obligations is governed by Article 1199 of the Civil Code, which states:
Article 1199. A person alternatively bound by different prestations shall completely perform one of
them.
The creditor cannot be compelled to receive part of one and part of the other undertaking.
"In an alternative obligation, there is more than one object, and the fulfillment of one is sufficient,
determined by the choice of the debtor who generally has the right of election." The right of election
is extinguished when the party who may exercise that option categorically and unequivocally makes
his or her choice known.
32
33
The choice of the debtor must also be communicated to the creditor who must receive notice of it
since: The object of this notice is to give the creditor . . . opportunity to express his consent, or to
impugn the election made by the debtor, and only after said notice shall the election take legal effect
when consented by the creditor, or if impugned by the latter, when declared proper by a competent
court.
34
According to the factual findings of the trial court and the appellate court, the original contract
between the parties was for respondent to deliver scrap papers worth P7,220,968.31 to petitioner
Arco Pulp and Paper. The payment for this delivery became petitioner Arco Pulp and Papers
obligation. By agreement, petitioner Arco Pulp and Paper, as the debtor, had the option to either (1)
pay the price or(2) deliver the finished products of equivalent value to respondent.
35
The appellate court, therefore, correctly identified the obligation between the parties as an
alternative obligation, whereby petitioner Arco Pulp and Paper, after receiving the raw materials from
respondent, would either pay him the price of the raw materials or, in the alternative, deliver to him
the finished products of equivalent value.
When petitioner Arco Pulp and Paper tendered a check to respondent in partial payment for the
scrap papers, they exercised their option to pay the price. Respondents receipt of the check and his
subsequent act of depositing it constituted his notice of petitioner Arco Pulp and Papers option to
pay.
This choice was also shown by the terms of the memorandum of agreement, which was executed on
the same day. The memorandum declared in clear terms that the delivery of petitioner Arco Pulp and
Papers finished products would be to a third person, thereby extinguishing the option to deliver the
finished products of equivalent value to respondent.
The memorandum of
agreement did not constitute
a novation of the original
contract
The trial court erroneously ruled that the execution of the memorandum of agreement constituted a
novation of the contract between the parties. When petitioner Arco Pulp and Paper opted instead to
deliver the finished products to a third person, it did not novate the original obligation between the
parties.
The rules on novation are outlined in the Civil Code, thus:
Article 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor. (1203)
Article 1292. In order that an obligation may be extinguished by another which substitute the same, it
is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be
on every point incompatible with each other. (1204)
Article 1293. Novation which consists in substituting a new debtor in the place of the original one,
may be made even without the knowledge or against the will of the latter, but not without the consent
of the creditor. Payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237.
(1205a)
Novation extinguishes an obligation between two parties when there is a substitution of objects or
debtors or when there is subrogation of the creditor. It occurs only when the new contract declares
so "in unequivocal terms" or that "the old and the new obligations be on every point incompatible
with each other."
36
Novation was extensively discussed by this court in Garcia v. Llamas:
37
Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by

substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the
creditor. Article 1293 of the Civil Code defines novation as follows:
"Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may
be made even without the knowledge or against the will of the latter, but not without the consent of
the creditor. Payment by the new debtor gives him rights mentioned in articles 1236 and 1237."
In general, there are two modes of substituting the person of the debtor: (1) expromision and (2)
delegacion. In expromision, the initiative for the change does not come from and may even be
made without the knowledge of the debtor, since it consists of a third persons assumption of the
obligation. As such, it logically requires the consent of the third person and the creditor. In
delegacion, the debtor offers, and the creditor accepts, a third person who consents to the
substitution and assumes the obligation; thus, the consent of these three persons are necessary.
Both modes of substitution by the debtor require the consent of the creditor.
Novation may also be extinctive or modificatory. It is extinctive when an old obligation is terminated
by the creation of a new one that takes the place of the former. It is merely modificatory when the old
obligation subsists to the extent that it remains compatible with the amendatory agreement. Whether
extinctive or modificatory, novation is made either by changing the object or the principal conditions,
referred to as objective or real novation; or by substituting the person of the debtor or subrogating a
third person to the rights of the creditor, an act known as subjective or personal novation. For
novation to take place, the following requisites must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.
Novation may also be express or implied. It is express when the new obligation declares in
unequivocal terms that the old obligation is extinguished. It is implied when the new obligation is
incompatible with the old one on every point. The test of incompatibility is whether the two
obligations can stand together, each one with its own independent existence. (Emphasis supplied)
38
Because novation requires that it be clear and unequivocal, it is never presumed, thus:
In the civil law setting, novatio is literally construed as to make new. So it is deeply rooted in the
Roman Law jurisprudence, the principle novatio non praesumitur that novation is never
presumed.At bottom, for novation tobe a jural reality, its animus must be ever present, debitum pro
debito basically extinguishing the old obligation for the new one. (Emphasis supplied) There is
nothing in the memorandum of agreement that states that with its execution, the obligation of
petitioner Arco Pulp and Paper to respondent would be extinguished. It also does not state that Eric
Sy somehow substituted petitioner Arco Pulp and Paper as respondents debtor. It merely shows that
petitioner Arco Pulp and Paper opted to deliver the finished products to a third person instead.
39
The consent of the creditor must also be secured for the novation to be valid:
Novation must be expressly consented to. Moreover, the conflicting intention and acts of the parties
underscore the absence of any express disclosure or circumstances with which to deduce a clear
and unequivocal intent by the parties to novate the old agreement. (Emphasis supplied)
40
In this case, respondent was not privy to the memorandum of agreement, thus, his conformity to the
contract need not be secured. This is clear from the first line of the memorandum, which states:
Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs. Candida A.
Santos and Mr. Eric Sy. . . .
41
If the memorandum of agreement was intended to novate the original agreement between the
parties, respondent must have first agreed to the substitution of Eric Sy as his new debtor. The
memorandum of agreement must also state in clear and unequivocal terms that it has replaced the
original obligation of petitioner Arco Pulp and Paper to respondent. Neither of these circumstances is
present in this case.
Petitioner Arco Pulp and Papers act of tendering partial payment to respondent also conflicts with
their alleged intent to pass on their obligation to Eric Sy. When respondent sent his letter of demand
to petitioner Arco Pulp and Paper, and not to Eric Sy, it showed that the former neither
acknowledged nor consented to the latter as his new debtor. These acts, when taken together,
clearly show that novation did not take place. Since there was no novation, petitioner Arco Pulp and
Papers obligation to respondent remains valid and existing. Petitioner Arco Pulp and Paper,
therefore, must still pay respondent the full amount of P7,220,968.31.
Petitioners are liable for
damages
Under Article 2220 of the Civil Code, moral damages may be awarded in case of breach of contract
where the breach is due to fraud or bad faith:
Art. 2220. Willfull injury to property may be a legal ground for awarding moral damages if the court
should find that, under the circumstances, such damages are justly due. The same rule applies to
breaches of contract where the defendant acted fraudulently or in bad faith. (Emphasis supplied)
Moral damages are not awarded as a matter of right but only after the party claiming it proved that
the breach was due to fraud or bad faith. As this court stated:
Moral damages are not recoverable simply because a contract has been breached. They are
recoverable only if the party from whom it is claimed acted fraudulently or in bad faith or in wanton
disregard of his contractual obligations. The breach must be wanton, reckless, malicious or in bad
faith, and oppressive or abusive.
42
Further, the following requisites must be proven for the recovery of moral damages:
An award of moral damages would require certain conditions to be met, to wit: (1)first, there must be
an injury, whether physical, mental or psychological, clearly sustained by the claimant; (2) second,
there must be culpable act or omission factually established; (3) third, the wrongful act or omission of
the defendant is the proximate cause of the injury sustained by the claimant; and (4) fourth, the
award of damages is predicated on any of the cases stated in Article 2219 of the Civil Code.
43
Here, the injury suffered by respondent is the loss of P7,220,968.31 from his business. This has
remained unpaid since 2007. This injury undoubtedly was caused by petitioner Arco Pulp and
Papers act of refusing to pay its obligations.
When the obligation became due and demandable, petitioner Arco Pulp and Paper not only issued
an unfunded check but also entered into a contract with a third person in an effort to evade its
liability. This proves the third requirement.
As to the fourth requisite, Article 2219 of the Civil Code provides that moral damages may be
awarded in the following instances:
Article 2219. Moral damages may be recovered in the following and analogous cases:
(1) A criminal offense resulting in physical injuries;
(2) Quasi-delicts causing physical injuries;
(3) Seduction, abduction, rape, or other lascivious acts;
(4) Adultery or concubinage;
(5) Illegal or arbitrary detention or arrest;
(6) Illegal search;
(7) Libel, slander or any other form of defamation;
(8) Malicious prosecution;
(9) Acts mentioned in Article 309;
(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.
Breaches of contract done in bad faith, however, are not specified within this enumeration. When a
party breaches a contract, he or she goes against Article 19 of the Civil Code, which states: Article
19. Every person must, in the exercise of his rights and in the performance of his duties, act with
justice, give everyone his due, and observe honesty and good faith.
Persons who have the right to enter into contractual relations must exercise that right with honesty
and good faith. Failure to do so results in an abuse of that right, which may become the basis of an
action for damages. Article 19, however, cannot be its sole basis:
Article 19 is the general rule which governs the conduct of human relations. By itself, it is not the
basis of an actionable tort. Article 19 describes the degree of care required so that an actionable tort
may arise when it is alleged together with Article 20 or Article 21.
44
Article 20 and 21 of the Civil Code are as follows:

Article 20. Every person who, contrary to law, wilfully or negligently causes damage to another, shall
indemnify the latter for the same.
Article 21.Any person who wilfully causes loss or injury to another in a manner that is contrary to
morals, good customs or public policy shall compensate the latter for the damage.
To be actionable, Article 20 requires a violation of law, while Article 21 only concerns with lawful acts
that are contrary to morals, good customs, and public policy:
Article 20 concerns violations of existing law as basis for an injury. It allows recovery should the act
have been willful or negligent. Willful may refer to the intention to do the act and the desire to
achieve the outcome which is considered by the plaintiff in tort action as injurious. Negligence may
refer to a situation where the act was consciously done but without intending the result which the
plaintiff considers as injurious.
Article 21, on the other hand, concerns injuries that may be caused by acts which are not
necessarily proscribed by law. This article requires that the act be willful, that is, that there was an
intention to do the act and a desire to achieve the outcome. In cases under Article 21, the legal
issues revolve around whether such outcome should be considered a legal injury on the part of the
plaintiff or whether the commission of the act was done in violation of the standards of care required
in Article 19.
45
When parties act in bad faith and do not faithfully comply with their obligations under contract, they
run the risk of violating Article 1159 of the Civil Code:
Article 1159. Obligations arising from contracts have the force of law between the contracting parties
and should be complied with in good faith.
Article 2219, therefore, is not an exhaustive list of the instances where moral damages may be
recovered since it only specifies, among others, Article 21. When a party reneges on his or her
obligations arising from contracts in bad faith, the act is not only contrary to morals, good customs,
and public policy; it is also a violation of Article 1159. Breaches of contract become the basis of
moral damages, not only under Article 2220, but also under Articles 19 and 20 in relation to Article
1159.
Moral damages, however, are not recoverable on the mere breach of the contract. Article 2220
requires that the breach be done fraudulently or in bad faith. In Adriano v. Lasala:
46
To recover moral damages in an action for breach of contract, the breach must be palpably wanton,
reckless and malicious, in bad faith, oppressive, or abusive. Hence, the person claiming bad faith
must prove its existence by clear and convincing evidence for the law always presumes good faith.
Bad faith does not simply connote bad judgment or negligence. It imports a dishonest purpose or
some moral obliquity and conscious doing of a wrong, a breach of known duty through some motive
or interest or ill will that partakes of the nature of fraud. It is, therefore, a question of intention, which
can be inferred from ones conduct and/or contemporaneous statements. (Emphasis supplied)
47
Since a finding of bad faith is generally premised on the intent of the doer, it requires an examination
of the circumstances in each case.
When petitioner Arco Pulp and Paper issued a check in partial payment of its obligation to
respondent, it was presumably with the knowledge that it was being drawn against a closed account.
Worse, it attempted to shift their obligations to a third person without the consent of respondent.
Petitioner Arco Pulp and Papers actions clearly show "a dishonest purpose or some moral obliquity
and conscious doing of a wrong, a breach of known duty through some motive or interest or ill will
that partakes of the nature of fraud." Moral damages may, therefore, be awarded.
48
Exemplary damages may also be awarded. Under the Civil Code, exemplary damages are due in
the following circumstances:
Article 2232. In contracts and quasi-contracts, the court may award exemplary damages if the
defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.
Article 2233. Exemplary damages cannot be recovered as a matter of right; the court will decide
whether or not they should be adjudicated.
Article 2234. While the amount of the exemplary damages need not be proven, the plaintiff must
show that he is entitled to moral, temperate or compensatory damages before the court may
consider the question of whether or not exemplary damages should be awarded.
In Tankeh v. Development Bank of the Philippines, we stated that:
49
The purpose of exemplary damages is to serve as a deterrent to future and subsequent parties from
the commission of a similar offense. The case of People v. Ranteciting People v. Dalisay held that:
Also known as punitive or vindictive damages, exemplary or corrective damages are intended to
serve as a deterrent to serious wrong doings, and as a vindication of undue sufferings and wanton
invasion of the rights of an injured or a punishment for those guilty of outrageous conduct. These
terms are generally, but not always, used interchangeably. In common law, there is preference in the
use of exemplary damages when the award is to account for injury to feelings and for the sense of
indignity and humiliation suffered by a person as a result of an injury that has been maliciously and
wantonly inflicted, the theory being that there should be compensation for the hurt caused by the
highly reprehensible conduct of the defendantassociated with such circumstances as willfulness,
wantonness, malice, gross negligence or recklessness, oppression, insult or fraud or gross fraud
that intensifies the injury. The terms punitive or vindictive damages are often used to refer to those
species of damages that may be awarded against a person to punish him for his outrageous
conduct. In either case, these damages are intended in good measure to deter the wrongdoer and
others like him from similar conduct in the future. (Emphasis supplied; citations omitted)
50
The requisites for the award of exemplary damages are as follows:

(1) they may be imposed by way of example in addition to compensatory damages, and only
after the claimant's right to them has been established;
(2) that they cannot be recovered as a matter of right, their determination depending upon
the amount of compensatory damages that may be awarded to the claimant; and
(3) the act must be accompanied by bad faith or done in a wanton, fraudulent, oppressive or
malevolent manner.
51
Business owners must always be forthright in their dealings. They cannot be allowed to renege on
their obligations, considering that these obligations were freely entered into by them. Exemplary
damages may also be awarded in this case to serve as a deterrent to those who use fraudulent
means to evade their liabilities.
Since the award of exemplary damages is proper, attorneys fees and cost of the suit may also be
recovered.
Article 2208 of the Civil Code states:
Article 2208. In the absence of stipulation, attorney's fees and expenses of litigation, other than
judicial costs, cannot be recovered, except:
(1) When exemplary damages are awarded[.]
Petitioner Candida A. Santos
is solidarily liable with
petitioner corporation
Petitioners argue that the finding of solidary liability was erroneous since no evidence was adduced
to prove that the transaction was also a personal undertaking of petitioner Santos. We disagree.
In Heirs of Fe Tan Uy v. International Exchange Bank, we stated that:
52
Basic is the rule in corporation law that a corporation is a juridical entity which is vested with a legal
personality separate and distinct from those acting for and in its behalf and, in general, from the
people comprising it. Following this principle, obligations incurred by the corporation, acting through
its directors, officers and employees, are its sole liabilities. A director, officer or employee of a
corporation is generally not held personally liable for obligations incurred by the corporation.
Nevertheless, this legal fiction may be disregarded if it is used as a means to perpetrate fraud or an
illegal act, or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, or
to confuse legitimate issues.
....
Before a director or officer of a corporation can be held personally liable for corporate obligations,
however, the following requisites must concur: (1) the complainant must allege in the complaint that
the director or officer assented to patently unlawful acts of the corporation, or that the officer was
guilty of gross negligence or bad faith; and (2) the complainant must clearly and convincingly prove
such unlawful acts, negligence or bad faith.
While it is true that the determination of the existence of any of the circumstances that would warrant
the piercing of the veil of corporate fiction is a question of fact which cannot be the subject of a
petition for review on certiorari under Rule 45, this Court can take cognizance of factual issues if the
findings of the lower court are not supported by the evidence on record or are based on a
misapprehension of facts. (Emphasis supplied)
53
As a general rule, directors, officers, or employees of a corporation cannot be held personally liable
for obligations incurred by the corporation. However, this veil of corporate fiction may be pierced if
complainant is able to prove, as in this case, that (1) the officer is guilty of negligence or bad faith,
and (2) such negligence or bad faith was clearly and convincingly proven.
Here, petitioner Santos entered into a contract with respondent in her capacity as the President and
Chief Executive Officer of Arco Pulp and Paper. She also issued the check in partial payment of
petitioner corporations obligations to respondent on behalf of petitioner Arco Pulp and Paper. This is
clear on the face of the check bearing the account name, "Arco Pulp & Paper, Co., Inc." Any
obligation arising from these acts would not, ordinarily, be petitioner Santos personal undertaking for
which she would be solidarily liable with petitioner Arco Pulp and Paper.
54
We find, however, that the corporate veil must be pierced. In Livesey v. Binswanger Philippines:
55
Piercing the veil of corporate fiction is an equitable doctrine developed to address situations where
the separate corporate personality of a corporation is abused or used for wrongful purposes. Under
the doctrine, the corporate existence may be disregarded where the entity is formed or used for nonlegitimate purposes, such as to evade a just and due obligation, or to justify a wrong, to shield or
perpetrate fraud or to carry out similar or inequitable considerations, other unjustifiable aims or
intentions, in which case, the fiction will be disregarded and the individuals composing it and the two
corporations will be treated as identical. (Emphasis supplied)
56
According to the Court of Appeals, petitioner Santos was solidarily liable with petitioner Arco Pulp
and Paper, stating that:
In the present case, We find bad faith on the part of the [petitioners] when they unjustifiably refused
to honor their undertaking in favor of the [respondent]. After the check in the amount of 1,487,766.68
issued by [petitioner] Santos was dishonored for being drawn against a closed account, [petitioner]
corporation denied any privity with [respondent]. These acts prompted the [respondent] to avail of
the remedies provided by law in order to protect his rights.
57
We agree with the Court of Appeals. Petitioner Santos cannot be allowed to hide behind the
corporate veil. When petitioner Arco Pulp and Papers obligation to respondent became due and
demandable, she not only issued an unfunded check but also contracted with a third party in an
effort to shift petitioner Arco Pulp and Papers liability. She unjustifiably refused to honor petitioner
corporations obligations to respondent. These acts clearly amount to bad faith. In this instance, the
corporate veil may be pierced, and petitioner Santos may be held solidarily liable with petitioner Arco
Pulp and Paper.
1wphi1
The rate of interest due on

the obligation must be
reduced in view of Nacar v.
Gallery Frames
58
In view, however, of the promulgation by this court of the decision dated August 13, 2013 in Nacar v.
Gallery Frames, the rate of interest due on the obligation must be modified from 12% per annum to
6% per annum from the time of demand.
59
Nacar effectively amended the guidelines stated in Eastern Shipping v. Court of Appeals, and we
have laid down the following guidelines with regard to the rate of legal interest:
60
To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping
Linesare accordingly modified to embody BSP-MB Circular No. 799, as follows:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasidelicts is breached, the contravenor can be held liable for damages. The provisions under Title XVIII
on "Damages" of the Civil Code govern in determining the measure of recoverable damages.
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time
it is judicially demanded. In the absence of stipulation, the rate of interest shall be 6% per
annum to be computed from default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an
interest on the amount of damages awarded may be imposed at the discretion of the court at
the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or
damages, except when or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty, the interest shall
begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil
Code), but when such certainty cannot be so reasonably established at the time the demand
is made, the interest shall begin to run only from the date the judgment of the court is made
(at which time the quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest shall, in any case, be on
the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory,
the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above,
shall be 6% per annum from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit.
And, in addition to the above, judgments that have become final and executory prior to July 1, 2013,
shall not be disturbed and shall continue to be implemented applying the rate of interest fixed
therein. (Emphasis supplied; citations omitted.)
61
According to these guidelines, the interest due on the obligation of P7,220,968.31 should now be at
6% per annum, computed from May 5, 2007, when respondent sent his letter of demand to
petitioners. This interest shall continue to be due from the finality of this decision until its full
satisfaction.
WHEREFORE, the petition is DENIED in part. The decision in CA-G.R. CV No. 95709 is AFFIRMED.
Petitioners Arco Pulp & Paper Co., Inc. and Candida A. Santos are hereby ordered solidarily to pay
respondent Dan T. Lim the amount of P7,220,968.31 with interest of 6% per annum at the time of
demand until finality of judgment and its full satisfaction, with moral damages in the amount
of P50,000.00, exemplary damages in the amount of P50,000.00, and attorney's fees in the amount
of P50,000.00.
SO ORDERED.
MARVIC MARIO VICTOR F. LEONEN
Associate Justice
WE CONCUR
NOVATION BY SUBROGATION
FORT BONIFACIO DEVELOPMENT CORPORATION vs. VALENTIN L. FONG.,
G.R. No. 209370, March 25, 2015, J. Perlas-Bernabe
G.R. No. 209370, March 25, 2015
FORT BONIFACIO DEVELOPMENT CORPORATION, Petitioner, v. VALENTIN L. FONG, Respondent.
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari1 are the Decision2 dated May 17, 2013 and the
Resolution3 dated September 2, 2013 rendered by the Court of Appeals (CA) in CA-G.R. CV. No. 93407,
which affirmed the Decision4 dated January 28, 2009 of the Regional Trial Court of Mandaluyong City, Branch
214 (RTC) in Civil Case No. MC06-2928, finding petitioner Fort Bonifacio Development Corporation (FBDC)
liable to respondent Valentin L. Fong (Fong), as proprietor of VF Industrial Sales, for the amount of
P1,577,115.90 with legal interest computed from February 13, 2006.
The Facts
On June 5, 2000, FBDC, a domestic corporation engaged in the real estate development business, 5entered
into a Trade Contract6 with MS Maxco Company, Inc. (MS Maxco), then operating under the name L&M
Maxco, Specialist Engineering Construction, for the execution of the structural and partial architectural
works of one of its condominium projects in Taguig City, the Bonifacio Ridge Condominium
(Project).7 Records show that FBDC had the right to withhold five percent (5%) of the contract price as
retention money.8
Under the Trade Contract, FBDC had the option to hire other contractors to rectify any errors committed by
MS Maxco by reason of its negligence, act, omission, or default, as well as to deduct or set-off any amount
from the contract price in such cases.9Hence, when MS Maxco incurred delays and failed to comply with the
terms of the Trade Contract, FBDC took over and hired other contractors to complete the unfinished
construction.10 Unfortunately, corrective work had to likewise be done on the numerous defects and
irregularities caused by MS Maxco, which cost P11,567,779.12. 11 Pursuant to the Trade Contract, FBDC
deducted the said amount from MS Maxcos retention money.12
The Trade Contract likewise provided that MS Maxco is prohibited from assigning or transferring any of its
rights, obligations, or liabilities under the said Contract without the written consent of FBDC. 13
Sometime in April 2005, FBDC received a letter14 dated April 18, 2005 (April 18, 2005 letter) from the
counsel of Fong informing it that MS Maxco had already assigned its receivables from FBDC to him (Fong) by
virtue of a notarized Deed of Assignment15 dated February 28, 2005.16 Under the Deed of Assignment, MS
Maxco assigned the amount of P1,577,115.90 to Fong as payment of the formers obligation to the latter,
which amount was to be taken from the retention money with FBDC. 17 In its letter-reply18 dated October 11,
2005, FBDC acknowledged the five percent (5%) retention money of MS Maxco, but asserted that the same
was not yet due and demandable and that it was already the subject of garnishment 19 by MS Maxcos other
creditors.
Despite Fongs repeated requests,20 FBDC refused to deliver to Fong the amount assigned by MS Maxco.
Finally, in a letter21 dated January 31, 2006, FBDC informed Fong that after the rectification of the defects in
the Project, as well as the garnishment made by MS Maxcos creditors, nothing was left of its retention
money with FBDC from which Fongs claims may be satisfied. This prompted Fong, doing business under the
name VF Industrial Sales to file the instant civil case, 22 before the RTC, against MS Maxco or FBDC for the
payment of the sum of P1,577,115.90, with legal interest due, costs of suit, and litigation expenses. 23
In its defense,24 FBDC reiterated its position that,since MS Maxco incurred delays and rendered defective
works on the Project, FBDC was constrained to hire other contractors to repair the defects and complete the
work therein, the cost of which it deducted from MS Maxcos retention money, pursuant to the express
stipulations in the Trade Contract.25 Likewise, the said retention money was due only in January 2006, and
was already garnished in favor of MS Maxcos other creditors. 26 As a result of the deductions and the
garnishment, no amount due to MS Maxco was left from the retention money; and, FBDC was, therefore,
under no obligation to satisfy Fongs claim.27 FBDC likewise asserted, inter alia, that it was not bound by the
Deed of Assignment between Fong and MS Maxco, not being a party thereto. 28 However, Fong, being a mere
substitute or assignee of MS Maxco, was bound to observe the terms and conditions of the Trade
Contract.29 FBDC also stressed that it paid the creditors of MS Maxco in compliance with valid court orders. 30
The RTC Ruling
In a Decision31 dated January 28, 2009, the RTC found FBDC liable to pay Fong the amount of
P1,577,115.90, with legal interest computed from the time of the filing of the complaint on February 13,
2006.32
In so ruling, the RTC held that the instant case was one of assignment of credit under Article 1624 33of the
Civil Code, hence, did not require FBDCs consent as debtor for its validity and enforceability.34What the law
requires is not the consent of the debtor, but merely notice to him, as the assignment takes effect only from
the time of his knowledge thereof.35 With respect to third persons without notice of the assignment, the
same becomes effective only if the assignment appears in a public instrument. 36
Also, the RTC observed that FBDC did not dispute the genuineness and due execution of the Deed of
Assignment between MS Maxco and Fong. As such, FBDC became bound thereby upon its receipt of Fongs
April 18, 2005 letter informing it of the assignment. Effectively, Fong became subrogated to the right of MS
Maxco to collect from FBDC the credit assigned to him. 37 Likewise, FBDC was bound to recognize the
assignment, which appears in a public instrument.38
With respect to the garnishment of the retention money, the RTC held that it could not adversely affect
Fongs rights as assignee of MS Maxco, considering that the amount indicated in the Deed of Assignment
was no longer MS Maxcos property, but Fongs. Effectively, when MS Maxco assigned the sum of
P1,577,115.90 to Fong, the said amount can no longer be considered MS Maxcos property that could be
garnished or attached by its creditors. As records show that the garnishment of the retention money was
made on July 30, 2005 and January 26, 2006, or after FBDC was notified of MS Maxcos assignment in favor
of Fong on April 18, 2005, for all intents and purposes, FBDC must be considered to have paid MS Maxcos
other creditors out of its own funds.39
Finally, with regard to the provision in the Trade Contract requiring the written consent of FBDC before MS
Maxco may validly assign or transfer any of its rights, obligations, or liabilities thereunder, the RTC held that
Fong was not bound thereby. It ruled that Fong did not automatically become party to the provisions of the
Trade Contract by virtue of its being the assignee of MS Maxco, as the said provisions are matters which
exclusively pertain to the parties thereto.40
In any event, however, the RTC recognized FBDCs right of recourse against its co-defendant MS Maxco for
the latters breach of undertaking under the Trade Contract. 41
Aggrieved, FBDC appealed42 to the CA, assailing the RTCs conclusion that the Deed of Assignment was
binding upon it and that it was liable to satisfy Fongs claims.
The CA Ruling
In a Decision43 dated May 17, 2013, the CA denied FBDCs appeal and affirmed the RTC ruling, 44concurring
with the latters finding that when FBDC was notified of the assignment through the April 18, 2005 letter, the
assignment produced legal effects and operated as a transfer of a portion of the receivables of MS Maxco to
Fong.45Considering that FBDCs consent as debtor is not required under the law, as mere notice to it is
sufficient, and taking into account the fact that the Deed of Assignment was a public instrument, the
assignment therefore bound FBDC and third persons as well. 46
Likewise, upon a review of the evidence offered by FBDC, the CA found that as of December 6, 2005, there
was still sufficient amount left in the retention money with which to pay Fong even after the deduction of the
rectification costs for the Project. As correctly held by the RTC, the payments made by FBDC to MS Maxcos
judgment creditors cannot prejudice Fong since the Deed of Assignment was valid and enforceable against
FBDC and the said creditors.47
FBDCs motion for reconsideration48 was denied in a Resolution49 dated September 2, 2013, hence, this
petition.
The Issues Before the Court
The issues for the Courts resolution are whether or not the CA erred in ruling that FBDC was bound by the
Deed of Assignment between MS Maxco and Fong, and even assuming that it was, whether or not FBDC was
liable to pay Fong the amount of ?1,577,115.90, representing a portion of MS Maxcos retention money.
The Courts Ruling
The petition is meritorious.
Obligations arising from contracts have the force of law between the contracting parties and should be
complied with in good faith.50 As such, the stipulations in contracts are binding on them unless the contract
is contrary to law, morals, good customs, public order or public policy.51
The same principle on obligatory force applies by extension to the contracting partys assignees, in turn, by
virtue of the principle of relativity of contracts which is fleshed out in Article 1311 of the Civil Code, viz.:
Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except in case where the
rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by
provision of law. The heir is not liable beyond the value of the property he received from the decedent.
x x x x (Emphasis supplied)
The reason that a contracting partys assignees, although seemingly a third party to the transaction, remain
bound by the original partys transaction under the relativity principle further lies in the concept of
subrogation, which inheres in assignment.
Case law states that when a person assigns his credit to another person, the latter is deemed subrogated to
the rights as well as to the obligations of the former.52 By virtue of the Deed of Assignment, the assignee is
deemed subrogated to the rights and obligations of the assignor and is bound by exactly the same
conditions as those which bound the assignor.53 Accordingly, an assignee cannot acquire greater rights than
those pertaining to the assignor.54 The general rule is that an assignee of a non-negotiable chose in action
acquires no greater right than what was possessed by his assignor and simply stands into the shoes of the
latter.55
Applying the foregoing, the Court finds that MS Maxco, as the Trade Contractor, cannot assign or transfer
any of its rights, obligations, or liabilities under the Trade Contract without the written consent of FBDC, the
Client, in view of Clause 19.0 on Assignment and Sub-letting of the Trade Contract between FBDC and MS
Maxco which explicitly provides that:
19.0 ASSIGNMENT AND SUB-LETTING
19.1 The Trade Contractor [Ms Maxco] shall not, without written consent of the Client [FBDC], assign
or transfer any of his rights, obligations or liabilities under this Contract. The Trade Contractor shall
not, without the written consent of the Client, sub-let any portion of the Works and such consent, if given,
shall not relieve the Trade Contractor from any liability or obligation under this Contract. 56 (Emphases
supplied)
Fong, as mere assignee of MS Maxcos rights under the Trade Contract it had previously entered with
FBDC, i.e., the right to recover any credit owing to any unutilized retention money, is equally bound by the
foregoing provision and hence, cannot validly enforce the same without FBDCs consent.
Without any proof showing that FBDC had consented to the assignment, Fong cannot validly demand from
FBDC the delivery of the sum of P1,577,115.90 that was supposedly assigned to him by MS Maxco as a
portion of its retention money with FBDC. The practical efficacy of the assignment, although valid between
Fong and MS Maxco, remains contingent on FBDCs consent. Without the happening of said condition, only
MS Maxco, and not Fong, can collect on the credit. Note, however, that this finding does not preclude any
recourse that Fong may take against MS Maxco. After all, an assignment of credit for a consideration and
covering a demandable sum of money is considered as a sale of personal property.57 To this, Article 1628 of
the Civil Code provides:
Art. 1628. The vendor in good faith shall be responsible for the existence and legality of the credit at the
time of the sale, unless it should have been sold as doubtful; but not for the solvency of the debtor, unless it
has been so expressly stipulated or unless the insolvency was prior to the sale and of common knowledge.
Even in these cases he shall only be liable for the price received and for the expenses specified in No. 1 of
Article 1616.58
The vendor in bad faith shall always be answerable for the payment of all expenses, and for damages.
WHEREFORE, the petition is GRANTED. The assailed Decision dated May 17, 2013 and the Resolution
dated September 2, 2013 rendered by the Court of Appeals in CA-G.R. CV. No. 93407 are
hereby REVERSED and SET ASIDE, and a new one is entered DISMISSING the instant complaint against
petitioner Fort Bonifacio Development Corporation.
SO ORDERED.
Sereno, C.J., (Chairperson,) Leonardo-De Castro, Bersamin, and Perez, JJ., concur.
CONTRACTS
GENERAL PROVISIONS
SM LAND, INC. vs. BASES CONVERSION AND DEVELOPMENT AUTHORITY
AND ARNEL PACIANO D. CASANOVA, ESQ., IN HIS OFFICIAL CAPACITY AS
PRESIDENT AND CEO OF BCDA, G.R. No. 203655, August 13, 2014, J.
Velasco Jr.
G.R. No. 203655
August 13, 2014
SM LAND, INC., Petitioner,

vs.
BASES CONVERSION AND DEVELOPMENT AUTHORITY and ARNEL PACIANO D.
CASANOVA, ESQ., in his official capacity as President and CEO of BCDA, Respondents.
DECISION
VELASCO, JR., J.:
The Case
Before Us is a Petition for Certiorari, Prohibition and Mandamus under Rule 65 of the Rules of Court,
with prayer for injunctive relief, seeking to nullify and set aside the Bases Conversion and
Development Authority (BCDA) Supplemental Notice No. 5 as well as all other acts pursued in
furtherance thereof, and to order respondents to immelliately conduct and complete the Competitive
Selection Process on petitioner's duly accepted unsolicited proposal.
1
The Facts
As culled from the records, the facts are simple and undisputed.
Pursuant to Republic Act No. (RA) 7227 or the "Bases Conversion and Development Act of 1992,"
the BCDA opened for disposition and development its Bonifacio South Property, a 33.1-hectare
expanse located at Taguig City that was once used as the command center for the country's military
forces. Jumping on the opportunity, petitioner SM Land, Inc. (SMLI), on December 14, 2009,
submitted to the BCDA an unsolicited proposal for the development of the lot through a publicprivate joint venture agreement. The proposal guaranteed the BCDA secured payments amounting
to PhP 15,985/sqm or a total of PhP 8.1 billion.
Barely three months later, the initial proposal was followed by a second one with guaranteed
secured payments of PhP 31,139/sqm, totaling PhP 20 billion. On May 4, 2010, however, SMLI
submitted its third unsolicited proposal with guaranteed secured payments amounting to PhP
32,501/sqm for a total of PhP 22.6 billion.
Thereafter, the BCDA created a Joint Venture Selection Committee (JV-SC) following the procedures
prescribed under Annex "C" of the Detailed Guidelines for Competitive Challenge Procedure for
PublicPrivate Joint Ventures (NEDA JV Guidelines) promulgated by the National Economic
Development Authority(NEDA). The said committee recommended the acceptance of the unsolicited
proposal, which recommendation was favorablyacted upon by the BCDA. Through a letter dated
May 12, 2010, the BCDA communicated to petitioner its acceptance of the unsolicited proposal.
Despite its acceptance, however, the BCDA clarified that its act should not be construed to bind the
agency to enter into a joint venture agreement with the petitioner but only constitutes an
authorization granted to the JV-SC to conduct detailed negotiations with petitioner SMLI and iron out
the terms and conditions of the agreement.
Pursuant to this authorization, the JV-SC and SMLI embarked on a series of detailed negotiations,
and on July 23, 2010, SMLI submitted its final revised proposal with guaranteed secured payments
amounting to a total of PhP 25.9 billion. Afterwards, upon arriving at mutually acceptable terms and
conditions, a Certification of Successful Negotiations (Certification) was issued by the BCDA and
signed by both parties on August 6, 2010. Through the said Certification, the BCDA undertook to
"subject SMLIs Original Proposal to Competitive Challenge pursuant to Annex C" and committed
itself to "commence the activities for the solicitation for comparative proposals."
1
In an attempt to comply with its obligations, the BCDA prepared for the conduct of a Competitive
Challenge to determine whether or not there are other Private Sector Entities (PSEs)that can match
the proposal of SMLI, and concurrently ensure that the joint venture contract will be awarded to the
party that can offer the most advantageous terms in favor of the government. In furtherance thereof,
the agency issued Terms of Reference (TOR), which mapped out the procedure to be followed in
connection with the Competitive Challenge. Consequently, SMLI was required, as it did, to post a
proposalsecurity in the amount of PhP 187 million, following the prescribed procedure outlined in the
TOR and the NEDA JV Guidelines.
2
Afterwards, the BCDA set the Pre-eligibility Conference on September 3, 2010. Invitations to apply
for eligibility and to submit comparative proposals were then duly published on August 12, 16 and
20, 2010. Hence, the pre-eligibility conference was conducted as scheduled. The companies that
participated in the conference included SMLI, as the Original Proponent, and three (3) PSEs, namely
Ayala Land, Inc., Rockwell Land Corp., and Filinvest Land, Inc.
On Ayala Land, Inc.s request, the deadline for submission of Eligibility Documents was scheduled
on October 20, 2010 through Supplemental Notice No. 1. However, the deadline was again moved
to November 19, 2010 to allow the BCDA, in conjunction with other national agencies, to resolve
issues concerning the relocation and replication of facilities located in the subject property.For this
purpose, the BCDA issued Supplemental Notice No. 2.
Following a conference, the BCDA, on November 18, 2010, issued Supplemental Notice No. 3,
again rescheduling the submission deadline this time to an unspecified future date "pending final
results of the policy review by the Office of the President on the lease versus joint venture/sale mode
and other issues." Henceforth, the BCDA repeatedly postponed the deadline of eligibility
requirements untiltwo (2) years have already elapsed from the signing of the Certification without the
Competitive Challenge being completed.
3
Then, instead of proceeding withthe Competitive Challenge, the BCDA addressed a letter to Jose T.
Gabionza, Vice President of SMLI, stating that it will welcome any "voluntary and unconditional
proposal" to improve the original offer, with the assurance that the BCDA will nonetheless respect
any right which may have accrued in favor of SMLI. SMLI, through a letter dated December 22,
2011, replied by increasing the total secured payments to PhP 22.436 billion in over fifteen (15)
years with an upfront payment of PhP 3 billion. SMLI likewise proposed to increase the net present
value of the property to PhP 38,500.00/sqm. With this accelerated terms of payment, the total inflow
to be received by the BCDA from the project after five (5) years would amount to PhP 9.289 billion.
In the same letter, SMLI clarified that itsimproved offer is tendered on reliance of the BCDAs
previous commitment torespect SMLIs status as the Original Proponent.
4
Without responding to SMLIs new proposal, the BCDA sent a memorandum to the Office of the
President (OP) dated February 13, 2012, categorically recommending the termination of the
Competitive Challenge. The memorandum, in part, reads:
In view of the foregoing, may we respectfully recommend the Presidents approval for BCDA to
terminate the proceedings for the privatization and development of the BNS/PMC/ASCOM/SSU
Properties in Bonifacio South through Competitive Challenge and proceed with the bidding of the
property.
5
Alarmed by this development, SMLI, in a letter dated August 10, 2012, urged the BCDA to proceed
with the Competitive Challenge as agreed upon. However, the BCDA, via the assailed Supplemental
Notice No. 5, terminated the Competitive Challenge altogether. Said Supplemental Notice pertinently
reads:
This Supplemental Notice No. 05 is issued to inform the [PSEs] that the Competitive Challenge for
the Selection of BCDAs Private Sector Partner for the Privatization and Development of the
approximately 33.1-hectare BNS/PMC/ASCOM/SSU Properties in Bonifacio South is hereby
terminated. BCDA shall not dispose the property through Competitive Challenge.
6
To support its position, the BCDA invoked Article VIII of the TOR on the subject "Qualifications and
Waivers," to wit:
The BCDA reserves the right to call off [the] disposition prior to acceptance of the proposal(s) and
call for a new disposition process under amended rules and without any liability whatsoever to any or
all the PSEs, except the obligation to return the Proposal Security.
Thereafter, the BCDA informed SMLI of the OPs decision to subject the development of the subject
propertyto public bidding. When asked by SMLI, the JV-SC manifested its conformity with the actions
thus taken by the BCDA and OP.
The JV-SCs declaration proved to be the last straw that fractured SMLIs patience as it lost no time
in interposing the instant recourse.
In the meantime, the BCDA issuedin favor of SMLI Philippine National Bank Check No. 11-634610001-0 in the amount of PhP 188,508,466.67 dated September 28, 2012. The check was sent
through registered mail with no explanation whatsoever accompanying the same, although the
BCDA admitted that its value corresponds to the proposal security posted by SMLI, plus interest in
an unspecified rate. SMLI attempted to return the check but to no avail.
The BCDA likewise caused the publication of an "Invitation to Bid" for the development of the subject
property in the December 21, 2012 issue of the Philippine Star. This impelled SMLI to file an Urgent
Manifestation with Reiterative Motion to Resolve SMLIs Application for Temporary Restraining Order
(TRO) and Preliminary Injunctionon the same day. By Resolution of January 9, 2013, the Court
issued the TRO prayed for by petitioner and enjoined respondent BCDA from proceeding with the
new selection process for the development of the property.
7
The Issue
Without a doubt, the issue in this case boils down to whether or not the BCDA gravely abused its
discretion in issuing Supplemental Notice No. 5, in unilaterally aborting the Competitive Challenge,
and in subjecting the development of the project to public bidding.
For its part, SMLI alleged in its petition that the Certification issued by the BCDA and signed by the
parties constituted a contract and that under the said contract, BCDA cannot renege on its obligation
to conduct and complete the Competitive Challenge. The BCDA, on the other hand, relies chiefly on
the reservation clause in the TOR, which allegedly authorized the agency to unilaterally cancel the
Competitive Challenge. Respondents add that the terms and conditions agreedupon are
disadvantageous to the government, and that it cannot legally be barred by estoppel in correcting a
mistake committed by its agents.
The Courts Ruling
The petition is impressed with merit. SMLI has the right to a completed competitive challenge
pursuant to the NEDA JV Guidelines and the Certification issued by the BCDA. The reservation
clause adverted to by the respondent cannot, in any way, prejudice said right.
The Procurement Process under the NEDA JV Guidelines
In resolving the case, discussing the procedure outlined under the NEDA JV Guidelines and a brief
backgrounder thereof is apropos.
To streamline the procurement process and expedite the acquisition of goods and services,
Executive Order No. (EO) 423 was issued on April 30, 2005, which prescribed the rules and
procedures on the review and approval of government contracts. The EO, in part, provides: Section
8. Joint Venture Agreements. The NEDA, in consultation with the GPPB, shall issue guidelines
regarding joint venture agreements with private entities with the objective of promoting transparency,
competitiveness, and accountability in government transactions, and, where applicable, complying
with the requirements of an open and competitive public bidding.
Taking its cue from the above-quoted provision, the NEDA promulgated the NEDA JV Guidelines,
which detailed two (2) modes of selecting a private sector JV partner: by competitive selectionor
through negotiated agreements.
Competitive selection involves a selection process based on transparent criteria, which should not
constrain or limit competition, and is open to participation byany interested and qualified private
entity. Selection by negotiated agreements or negotiated projects, on the other hand, comes about
as an end result of an unsolicited proposal from a private sector proponent, or if the government
has failed to identify an eligible private sector partner for a desired activity after subjecting the same
to a competitive selection.
9
10
11
12
Relevant to the case at bar is the selection modality by negotiated agreement arising from the
submission and acceptance of an unsolicited proposal, known as the Swiss Challenge method, in
essea hybrid mechanism between the direct negotiation approach and the competitive bidding
route. With the availability of the Swiss Challenge method for utilization by those in the private
sector, PSEs have studied, formulated, and submitted numerous suo motoor unsolicited proposals
with the ultimate goal of assisting the public sector in elevating the countrys place in the global
economy, as in the case herein.
13
14
The development and adoption by several countries of the Swiss Challenge scheme is attributed to
the recognition that the private sector can be an important source of technical and managerial
expertise, as well as financing, as evidenced by private companies practice of directly approaching
governments with new and innovative project ideas through unsolicited proposals. Some states,
however, frown on the practice since transparency is allegedly compromised when the government
directly negotiates with a proponent. In this method, the Original Proponent, who first submitted and
secured acceptance ofthe unsolicited proposal, is given the right to match the successful bid
received in the competitive bid process for the said project.
15
16
17
Item III, Annex "C" of the NEDA JV Guidelines, where the Swiss Challenge format is tucked in, maps
out a three-stage framework, to which Negotiated JV Agreements are to be mandatorily subjected,
as summarized below:
Stage One
Submission and the Acceptance
or Rejection of the Unsolicited Proposal
Stage One of the process involves the submission, evaluation, and the acceptance of unsolicited
proposals from private entities. The steps involved are:
18
1. A PSE submits an unsolicited proposalto the government entity (GE) or the GE seeks out
a JV partner after a failed competition (open bidding) for a JV activity or project.
2. The GE, through its JV-SC, undertakes the initial evaluation of the proposal.
3. The head of the GE shall then either issue an acceptance or nonacceptance notice of the
proposal.
a. An acceptance shall not bind the GE to enter into the JV activity, but shall mean
that authorization is given to proceed with detailed negotiations on the terms and
conditions of the JV activity.
b. In case of non-acceptance, the private sector entity shall be informed of the
reasons/grounds for such action.
Stage Two
Detailed Negotiations
Stage Two entails negotiation on the terms and conditions of the JV activity. Below is a summary of
the parameters adhered to in detailed negotiations, and the preparation of the proposal documents
in case of successful negotiations:
19
1. The parties shall negotiate on, among other things, the scope as well as all legal,
technical, and financial aspects of the JV activity.
2. The JV-SC shall determine the eligibility of the PSE to enter into the JV activity in
accordance with pre-set rules.
3. Negotiations shall comply with the process, requirements and conditions as stipulated
under Sections 6 (General Guidelines) and 7 (Process for Entering into JV Agreements) of
the JV Guidelines.
a. If successful, the GE head and the representative of the PSE shall issue a signed
certification of successful negotiation to the effect that:
a) an agreement has been reached;
b) the PSE is eligible to enter into the proposed JV activity; and
c) the GE shall commence the activities for the solicitation for comparative proposals.
b. If an acceptable agreement isnot reached, the GE may:
a) reject the proposal and thereafter accept a new one from private sector participants; or
b) pursue the proposed activity through alternative routes other than a joint venture.
4. After an agreement is reached, the contract documents, including the selection documents
for the competitive challenge, are prepared.
Stage Three
Competitive Challenge
In Stage Three, upon the successful completion of the detailed negotiation phase, the JV activity
shall be subjected to a competitive challenge, which includes the observance of the following
procedure:
20
21
1. Preparation and approval of all tender documents including the draft contract before the
invitation for comparative proposals is published.
2. Publication of the invitation for comparative proposals followed by the posting by the PSE
of the proposal security.
3. Determination of the eligibility of comparative proponents/PSEs, issuance of supplemental
competitive selection bulletins and pre-selection conferences, submission, opening and
evaluation of comparative proposals.
4. In the evaluation of the comparative proposals as a prelude to determine the best offer,
the original proposal of the original proponent shall be considered.
a. If the GE determines that an offer made by a comparative private sector
participant is more advantageous to the government than the original proposal, the
original proponent shall be given the right to match such superior or more
advantageous offer.
b. Should no matching offer be received, the JV activity shall be awarded to the
comparative private sector participant submitting the most advantageous proposal.
c. If a matching offer is received, or if there is no comparative proposal, the JV
activity shall be awarded to the original proponent.
5. After the completion of the competitive challenge, the JV-SC shall submit the
recommendation of award to the head of the GE.
22
6. Embarking on activities leading to the execution of the Final Agreement.
23
Deviation from the procedure outlined cannot be countenanced. Wellestablished is the rule that
administrative issuancessuch as the NEDA JV Guidelines, duly promulgated pursuant to the rulemaking power granted by statutehave the force and effect of law. Being an issuance in
compliance with an executive edict, the NEDA JV Guidelines, therefore, has the same binding effect
as if it were issued by the President himself. As such, no agency or instrumentality covered by the
JV Guidelines can validly stray from the mandatory procedures set forth therein, even if the other
party acquiesced therewith or not.
24
25
26
27
SMLIs rights as an Original Proponent and BCDAs correlative duty under the NEDA JV
Guidelinesand the parties agreement
It is well to point out that after BCDA accepted the unsolicited proposal of SMLI and after both
parties herein successfully concluded the detailed negotiations on the terms and conditions of the
project, SMLI acquired the status of an Original Proponent. An Original Proponent, per the TOR,
pertains to the party whose unsolicited proposal for the development and privatization of the subject
property though JV with BCDA has been accepted by the latter, subject to certain conditions, and is
now being subjected to a competitive challenge.
28
In this regard, SMLI insists that asan Original Proponent, it obtained the right to a completed
competitive challenge. On the other hand, the BCDA argues that it can, at any time, withdraw from
the disposition process as it is not bound to enter into the proposed JV activity with SMLI.
Petitioners argument holds water.
A scrutiny of the NEDA JV Guidelinesreveals that certain rights are conferred to an Original
Proponent. Ascorrectly pointed out by SMLI, these rights include:
1. The right to the conduct and completion of a competitive challenge;
2. The right to match the superior or more advantageous offer, if any;
3. The right to be awarded the JV activity in the event that a matching offer is submitted
within the prescribed period; and
4. The right to be immediately awarded the JV activity should there be no comparative

proposals. (emphasis added)
29
Material to the present case is the right to the conduct and completion of a Competitive Challenge.
Based onthe NEDA JV Guidelines, it is necessary that Stages One and Two of the Swiss Challenge
shall have been fruitful for this right to arise.
To recall, Stages One and Two ofthe framework deal with the submission and evaluation of the
unsolicited proposal and the conduct of the detailed negotiations. Should the parties productively
conclude the in-depth negotiations, the guidelines require the preparation of the contract and
selection documents for the competitive challenge. Following this, Stage Three of the same rules
provides that the GE shall subject the terms agreed upon to a Competitive Challenge. Thus:
30
Stage Three Once the negotiations have been successfully completed, the JV activity shallbe
subjected to a competitive challenge, as follows:
1. The [GE] shallprepare the tender documents pursuant to Section II (Selection/Tender
Documents) of Annex A hereof. The eligibility criteria used in determining the eligibility of the
[PSE] shall be the same as those stated in the tender documents. x x x The Head of the [GE]
shall approve all tender documents including the draft contract before the publication of the
invitation for comparative proposals.
2. Within seven (7) calendar days from the issuance of the Certification of a successful
negotiation referred toin Stage Two above, the JV-SC shall publish the invitation for
comparative proposals in accordance with Section III.2. (Publication of Invitation to Apply for
Eligibility and to Submit Proposal) under Annex A hereof.
3. The [PSE] shallpost the proposal security at the date of the first day of the publication of
the invitation for comparative proposals in the amount and form stated in the tender
documents.
4. The procedure for the determination of eligibility of comparative proponents/private sector
participants, issuance of supplemental competitive selection bulletins and pre-selection
conferences, submission and receipt of proposals, opening and evaluation of proposals shall
follow the procedure stipulated under Annex A hereof. In the evaluation of proposals, the
best offer shall be determined to include the original proposal of the [PSE]. If the [GE]
determines that an offer made by a comparative private sector participant other than the
original proponent is superior or more advantageous to the government than the original
proposal, the [PSE] who submitted the original proposal shall be given the right to match
such superior or more advantageous offerx x x. Should no matching offer be received within
the stated period, the JV activity shallbe awarded to the comparative private sector
participant submitting the most advantageous proposal. If a matching offer is received within
the prescribed period, the JV activity shallbe awarded to the original proponent. If no
comparative proposal isreceived by the [GE], the JV activity shallbe immediately awarded to
the original private sector proponent.
5. Within seven (7) calendar days from the date of completion of the Competitive Challenge,
the JV-SC shallsubmit the recommendation of award to the Head of the [GE]. Succeeding
activities shall be in accordance with Sections VIII. (Awardand Approval of Contract) and X
(Final Approval) of Annex A hereof. (emphasis added)
31
Anent the above-quoted directives, emphasis must be given to the repeated use of the word "shall."
It is elementary that the word "shall" underscores the mandatory character of the rule. Itis a word of
command, one which always has or must be given a compulsory meaning, and is generally
imperative or mandatory. Considering the compulsory tenor of the order, the rule could not be any
clearerthat once the negotiations at Stage Two shall have been successfully completed, it
becomes mandatory for the GE to subject theJV activity to a competitive challenge. By the
Guidelines explicit order, proceeding to Stage Three of the process is compulsory, conditioned only
on the successful conclusion of Stage Two. The GE is not given any discretion to decide whether it
will proceed with the competitive challenge or not. Furthermore, there is no question in the case at
hand that the unsolicited proposal for the development of the subject property passed through
scrutiny under the first two stages, resulting inthe issuance and signing of the Certification. As a
matter of fact, this is clearly evinced in the whereas clauses of the Certification, to wit:
32
WHEREAS, on 04 May 2010, BCDA received from [SMLI] an unsolicited proposalfor the
development of [the subject property]. x x x
WHEREAS, after evaluation of the unsolicited proposalsubmitted by SMLI in accordance with the
provisions of Annex "C" of the JV Guidelines, the [JV-SC] created byBCDA x x x recommended to
the BCDA Board, and the BCDA Board approved, per Board Resolution No. 2010-05-100, the
acceptance ofthe unsolicited proposal, subject to the condition that such acceptance shall not bind
BCDA to enter into a JV activity, but shall mean that authorization is given to proceed with detailed
negotiationson the terms and conditions of the JV activity;
WHEREAS, pursuant to the authorization granted by the Board and issued pursuant to Annex "C",
Part III, Stage One of the JV Guidelines, BCDA went into detailed negotiations with SMLI. The JV-SC
simultaneously ascertained the eligibility of SMLI inaccordance with Annex "C", Part III, Stage 2 (2)
of the JV Guidelines;
WHEREAS, this Certificationisissuedpursuant to Annex "C" Part III, Stage 2 (2) of the JV Guidelines;
NOW, THEREFORE, for and in consideration of the foregoing, BCDA and SMLI, after successful
negotiationspursuant to Stage II of Annex C x x x reached an agreement on the purpose, terms and
conditions of the JV development of the subjectproperty, which shall become the terms for the
Competitive Challenge pursuant to Annex C of the JV Guidelinesx x x. (emphasis added)
33
Moreover, the Certification further discloses that the BCDA has the obligation to subject SMLIs
unsolicited proposal to a Competitive Challenge, to which SMLI assented. As provided:
BCDA and SMLI have agreed to subject SMLIs Original Proposal to Competitive Challenge pursuant
to Annex C Detailed Guidelines for Competitive Challenge Procedure for Public-Private Joint
Ventures of the NEDA JV Guidelines, which competitive challenge process shall be immediately
implemented following the Terms of Reference (TOR) Volumes 1 and 2. BCDA shall, thus,
commence the activities for the solicitation for comparative proposals with the publication of the
Invitation to Apply for Eligibility and to Submit Comparative Proposals (IAESCP) thrice for two (2)
consecutive weeks in three (3) major newspapers starting on 10 August 2010, on which date SMLI
shall post the required Proposal Security as statedabove. Pursuant to Annex C of the NEDA JV
Guidelines, if, after solicitation of comparative proposals, BCDA determines that an offer by a
comparative PSE is found to be superior to SMLIs Original Proposal,SMLI shall be given the right to
match such superior offer within the period prescribed in the attached TOR Volumes 1 and 2. If SMLI
is ableto match such superior offer, SMLI shall be issued the Notice of Award, subject to Item No. 19
above. In the event, however, that SMLI is unable to match the superior offer, the comparative PSE
which submitted such superior offer shall be awarded the contract, subject to Item No. 19
above. (emphasis added)
34
By their mutual consent and in signing the Certification, both parties, in effect, entered into a binding
agreement to subject the unsolicited proposal to the Competitive Challenge. Evidently, the
certification partakes of a contractwherein BCDA committed itself to proceed with the Third Stage of
the process and simultaneously grants SMLI the right to expect that the BCDA will fulfill its
obligations under the same. The preconditions to the conduct of the Competitive Challenge having
been met, what is left, therefore, is tosubject the terms agreed upon to a Competitive Challenge
pursuant to Stage Three, Annex "C" of the NEDA JV Guidelines.
The Reservation Clause only covers the Third Stage and cannot prejudice SMLIs rights stemming
from the first two stages
In an attempt to advance its claim, BCDA invokes the reservation clause in Article VIII of the TOR on
"Qualifications and Waivers." To reiterate, said provision reads:
3. BCDA further reserves the right to call off this disposition prior to acceptance of the proposal(s)
and call for a new disposition process under amended rules, and without any liability whatsoever to
any or all of the PSEs, except the obligation to return the Proposal Security. (emphasis ours)
35
The BCDA insists that the "disposition process" to which the reservation clause refers is the entire
Swiss Challenge, and not merely Stage Three thereof regarding the Competitive Challenge. This
interpretation does not come as a surprise considering the terms technical meaning, that is,
alienation of property; the transfer of the property and possession of lands, tenements, or other
things from one person to another; or the voluntary resignation of title to real estate by one person to
another and accepted by the latter, in the forms prescribed by law. On the basis of said definition,
indeed, the reservation clause seemingly refers to the Swiss Challenge itself since in the case at bar,
it is the Swiss Challenge, not the competitive challenge, that is the avenue for the disposition.
36
37
To anchor the real import of the clause on the basis only of a single word may, however, result in a
deviation from its true meaning by rendering all the other terms unnecessaryor insignificant. Suchan
interpretation would run afoul Article 1373 of the Civil Code, which states that "[i]f some stipulation of
any contract should admit of several meanings, it shall be understood as bearing that import which is
most adequate to render it effectual." It is a cardinal rule in statutory construction that no word,
clause, sentence, provision or part of a statute shall be considered surplusage or superfluous,
meaningless, void and insignificant. For this purpose, an interpretation which renders every word
operative is preferred over that which makes some words idle and nugatory.
38
We find that the reservation clausecannot justify the cancellation of the entire procurement process.
Respondent cannot merely harp on the lone provision adverted to without first explaining the context
surrounding the reservation clause. The said provision cannot be interpreted in a vacuum and
should instead be read in congruence with the other provisions in the TOR for Us to fully appreciate
its import.
At this juncture, it is worthy to point out that the TOR containing the reservation clause details the
requirements for eligibility to qualify as a PSE that may submit its proposal for the JV, as well as the
procedure to be followed in the assessment of the eligibility requirements submitted and in the
conduct of the Competitive Challenge. It basically governs only part and parcel of Stage Three of the
Swiss Challenge Process, that is, the requirements for and the determination of an interested PSEs
eligibility to participate inthe Competitive Challenge. This conclusion is deduced from the very
provisions of the TOR, viz:
39
These [TOR] describe the procedures that shall be followed in connection with the disposition of the
approximately Three Hundred Thirty-one Thousand Three Hundred Twenty-seven square meters
(331,327 sq.m.) or 33.1-hectare Bonifacio Naval Station (BNS)/Philippine Marine Corps (PMC)/Army
Support Command (ASCOM)/Service Support Unit (SSU) Properties in Bonifacio South (the
"Property"), located along Lawton Avenue, Fort Bonifacio, Taguig City, Metro Manila, Philippines.
These TOR are issued in two (2) volumes: Volume 1 Eligibility Documents; and Volume 2 Tender
Documents. This first volume details the requirements for eligibility to qualify as a Private Sector
Entity (PSE) that may submit Technical and Financial Proposals for the Joint Venture (JV)
Privatization and Development of [the] subject Property, and the procedures involved in the entire
Competitive Challenge procedure. [PSEs] which shall be declared eligible shall be issued the
second volume of the TOR which details the requirements and procedures for the submission of
Technical and Financial Proposals, with the end-view of determining a Winning PSE for subject JV
development.
xxxx
I. GENERAL INFORMATION
xxxx
2. Publication of Invitation for Comparative Proposals. BCDA shall publish x x x the "Invitation to
Apply for Eligibility and to Submit a Comparative Proposal" (IAESCP). This shall serve to inform and
to invite the prospective PSEs to the Competitive Challenge procedure at hand. x x x
3. Joint Venture Agreement.x x x the ultimate objective of BCDA in qualifying prospective PSEsto be
eligible to submit Technical and Financial Proposals is to select a partner in the
unincorporated/contractual [JV]for the privatization and development of the subject Property. x x x
xxxx
4. Amendment of these TOR. x x x Should any of the information and/or procedurescontained in
these TOR be amended or replaced, the JV-SC shall inform and send Supplemental Notices to all
PSEs. To ensure all PSEs are informed of any amendments, all PSEs are requested to inform BCDA
of their contact [details].In addition, receipt of all Supplemental Notices shall beduly acknowledged
by each PSEprior to the submission of eligibility documents and/or proposals and shall be
soindicated therein.
5. Pre-Eligibility Conference. Interested parties are invited to attend a Pre-Eligibility Conference for
prospective PSEs x x x.
6. One-on-One Meetings. Prospective PSEs may request for one-on-one meetings with the JV-SC or
its duly authorized representatives. x x x
xxxx
9. Due Diligence. x x x
The PSE shall investigate x x x [and] carefully examine [the] conditions of and at the Property and its
surrounding vicinities affecting the actual execution and such other information as to allow the PSE
to make a competitive estimate. The PSE, by the act of submitting its proposal, acknowledges that it
has inspected the Property and accepted all the terms and conditions for this competitive challenge
as set in TOR Volumes 1 and 2.
xxxx
V. APPLICATION FOR ELIGIBILITY
1. Eligibility Requirements. Only eligible PSEs shall be allowed to submit comparative Technical and
Financial Proposals, or collectively, the Tender Documents x x x. Hence, interested PSEs are invited
to apply for eligibility and to participate in the Competitive Challenge procedure. Aside from being
required to purchase the [TOR] Volume1, for a non-refundable fee x x x, a PSE shall be
considered eligible if it satisfies all of the following requirements:
1.1. Legal Requirements. The PSE must be a duly registered and existing corporation authorized by
Philippine Laws to own, hold or develop lands in the Philippines. x x
x
1.2. Technical Requirements.
1.2.1. Firm Experience. The PSEx x x shall have completed within a period of ten (10) years from the
date of submission and receipt of Proposals, a similar or related development project x x x.
1.2.2. Key Personnel. x x x
1.3. Financial Capability. The PSEx x x must have adequate capability to sustain the financing
requirements for the proposed development ofthe Property. This shall be measured in terms of:
1.3.1. Net Worth. x x x
1.3.2. Good financial standing. x x x
1.3.3. No Arrears. x x x
1.3.4. Timely and complete Payment of Taxes. x x x
1.3.5. Financial Capacity to Undertake the
Project.
xxxx
2. Required Eligibility Documents. The PSEs x x x that wish to be considered for eligibility are
required to submit x x x the following documents:
xxxx
VI. EVALUATION OF ELIGIBILITY
1. Opening of Eligibility Documents. x x x
2. Evaluation Process. Eligibility Documents submitted by the PSEshall be evaluated on a
pass or fail basis to determine if the PSEx x x complies with or satisfies all of the
requirements specified in Article V hereof. x x x
3. Motion for Reconsideration/Appeal on Eligibility. A prospective PSE determined as
"Ineligible" has seven (7) calendar days upon written notice within which to file a motion for
reconsideration tothe JV-SC. x x x
4. No Eligible [PSEs]. In the event that no PSE be found eligible or no PSE submitted itself to
eligibility check for the Competitive Challenge procedure, BCDA shall proceed to the
issuance of Notice of Award to SMLI, as the original proponent for the subject JV project.
xxxx
VII. CHANGE IN MEMBERSHIP OF AN ELIGIBLE PSE.
xxxx
VIII. QUALIFICATIONS AND WAIVERS
1. BCDA reserves the right to reject any or all Eligibility Documents, to waive any defect or
informality thereon or minor deviations, which do notaffect the substance and validity of the
proposal.
2. BCDA reserves the right to review other relevant information affecting the PSE or its
Eligibility Documents before its declaration as eligible to participate further in the selection
process, and be allowed to submit a Final Proposal. Should such review uncover any
misrepresentations made in the eligibility documents, or any change in the situation of the
PSE, which affects its eligibility, BCDA may disqualify the PSE from obtaining any
award/contract.
3. BCDA further reserves the right tocall of this disposition prior to acceptance of the
proposal(s) and call for a new disposition process under amended rules,and without any
liability whatsoever to any or all the PSEs, except the obligation to return the Proposal
Security x x x. (emphasis ours; citation omitted)
40
A cursory reading of the TOR, ascouched, readily shows that it focuses only on the eligibility
requirements for PSEs who wish to challenge SMLIs proposal as well as the procedure to be
followed by the BCDA JVSC in the evaluation of the PSEs submittals. We thus find merit in SMLIs
thrust that since the TOR governs the eligibility requirements for PSEs, the "disposition process"
referred to inthe reservation clause could only refer to the eligibility process in Stage Three of the
Swiss Challenge and not the entire Swiss Challenge process itself. We are convinced that the said
provision does not authorize BCDA to abort the entire procurement process and cannot impair any of
SMLIs statutorily and contractuallyconferred rights stemming from the first two stages conclusion.
To rule otherwise would grant the GE unbridled authority to thrust aside the agreement between the
parties after successful detailed negotiations. It would disregard the fact that through the said
covenant,the GE bound itself to conduct and complete the Competitive Challenge pertaining to
SMLIs proposal.
Provisions of the TOR cannot prevail over the NEDA JV Guidelines
In the same vein, We cannot also agree with respondents contention that the term "disposition" in
the assailed reservation clause refers to the entire Swiss Challenge itself and authorizes the BCDA
to abandon the negotiations even at Stage Three of the process for this would result in an
interpretation that is antagonisticwith the NEDA JV Guidelines.
A review of the outlined three-stage framework reveals that there are only two occasions where pretermination of the Swiss Challenge process is allowed: at Stage One, prior to acceptance of the
unsolicited proposal; and at Stage Two, should the detailed negotiationsprove unsuccessful. In the
Third Stage, the BCDA can no longer withdraw with impunity from conducting the Competitive
Challenge as it became ministerial for the agency to commence and complete the same. Thus,
acceding to the interpretation of the TOR offered byBCDA will, in effect, result not only in the
alteration of the agreement between the parties but also of the NEDA JV Guidelines itself, both of
which has the force and effect of law.
The interpretation offered by BCDA is, therefore, unacceptable. Between procedural guidelines
promulgated by an agency pursuant to its rule-making power and a condition unilaterally designed
and imposed for the implementation of the same, the former must prevail. BCDA does not wield any
rule-making power such that it can validly alter or abandon a clear and definite provision in the
NEDA JV Guidelines under the guise of a condition under the TOR. AsWe have time and again
harped, the ones dutybound to ensure observance with laws and rules should not be the ones to
depart therefrom. A contrary rule would open the floodgates to abuses and anomalies more
detrimental to public interest. For how can others be expected to respect the rule of law if the very
persons or entities tasked to administer laws and their implementing rules and regulations are the
first to violate them, blatantly or surreptitiously?
41
42
BCDA gravely abused its discretion when it issued Supplemental

Notice No. 5 in breach of its contractual obligation to SMLI
"Grave abuse of discretion" implies such capricious and whimsical exercise of judgment as is
equivalent tolack of jurisdiction. It must be so patent and gross as to amount to an evasion of
positive duty or to a virtual refusal to perform the duty enjoined or to act at all in contemplation of
law. While it is the general policy of the Court to sustain the decisions of administrative authorities,
not only on the basis of the doctrine of separation of powers but also for their presumed expertise in
43
the laws they are entrusted to enforce, when said decisions and orders are tainted with unfairness or
arbitrariness that would amount to grave abuse of discretion, the Courts are duty-bound to entertain
petitions questioning the formers rulings or actions.
44
In the present case, the Court finds that BCDA gravely abused its discretion for having acted
arbitrarily and contrary to its contractual commitment to SMLI, to the damage and prejudice of the
latter. It veritably desecrated the rules the Government itself set in the award of public contracts.
To review, We have demonstratedthat the BCDA is duty-bound to proceed with and complete the
competitive challenge if the detailed negotiations proved successful. Afterwards, it becomes
mandatory for the competitive challenge to proceed. Whatever rights and obligations that may have
accrued to the parties by that time can no longer be altered by a new disposition process. At most,
the reservation clause in the TOR can only serve to alter the rules of the eligibility process under the
Competitive Challenge.
In the case at bar, however, BCDA, in its mistaken reliance on the reservation clause, aborted not
just the eligibility process of the Competitive Challenge but the entire Swiss Challenge. Even though
the language of Supplemental Notice No. 5 at first blush appears to limit its application to the Third
Stage of the framework, BCDAs actuations say otherwise. Worthy of reiteration at this point is the
fact that after BCDA issued the assailed notice, the agency also returned through registeredmail the
security posted by SMLI. Coupled with the factthat BCDA subjected the property instead to straight
bidding, it becomes obvious that BCDA no longer intends to comply with its obligations to SMLI and
that it abandoned the Swiss Challenge process altogether, in contravention of its statutory and
contractual obligations.
Moreover, the asseveration of the BCDA in its last ditch effort to salvage its positionthat the
withdrawal is justified since it allegedly found that the revised SMLI proposal shall not yield the best
value for the government deserves scant consideration. On the contrary, the BCDAs statements
have been inconsistentwhen it comes to identifying the procurement process that would best serve
the interest of the state.
45
Noticeably, in its November 8, 2010 Memorandum, the BCDA posited that competitive challenge is
more advantageous to the government than straight bidding, to wit:
The price of the Bonifacio South properties has already been set by the winning price in the bidding
for the joint venture development of the JUSMAG property (P31,111/sq.m.). Thus, BCDA has
established the benchmark for the price of the remaining Bonifacio South properties, of which the
JUSMAG property is the most prime. Logically the minimum bid price under straight bidding for the
BNS/PMC/ASCOM/SSU property, which is a far less inferior property, would be P31,111/sq.m.
However, with SMs submission of a revised unsolicited proposal atP31,732/sq.m. and later further
revised to P32,500/sq.m., BCDA saw the opportunity to negotiate for better terms and eventually
arrived at a higher price of P36,900/sq.m. In this case, BCDA deemed that going into Competitive
Challenge was more advantageous to the government than Competitive Selection (straight bidding)
because of the opportunity to increase the price.
Furthermore, subjecting the price tosubsequent price challenge will possibly drive up the price even
higher thanP38,900/sq.m. These opportunities cannot be taken advantage of under a straight
bidding where failure of bidding would likely ensue if in case BCDA immediately sets the price of the
property too high. The competition in the real estate industry and as experienced by BCDA issuch
that the other developers will usually challenge the original proposal to "up the ante" as they cannot
allow the original proponent to get the property easily.
46
Despite this testament, the BCDA, over a year later, made a complete turnaround stating that
straight bidding will be best for the Government. As can be gleaned from the BCDAs Memorandum
to the Presidentdated February 13, 2012, respondents themselves recommended to the President
that the selection proceedings be terminated. To reiterate:
47
In view of the foregoing, may we respectfully recommend the Presidents approval for BCDA to
terminate the proceedings for the privatization and development of the BNS/PMC/ASCOM/SSU
Properties in Bonifacio South through Competitive Challenge and proceed with the bidding of the
property.
48
The BCDA offered no explanation to reconcile its opposing positions. It also neglected to inform
SMLI of the provisions in its proposal that it deemed disadvantageous to the government. The
sweeping statement of the BCDA that the terms are disadvantageous cannot be accepted at face
value, bearing in mind that a fruitful in-depthnegotiation necessarily implies that BCDA found the
terms offered by SMLI acceptable. Consider also that should the Competitive Challenge prove to be
unsuccessful, it has no other recourse but to award the project toSMLI, the Original Proponent. This
caveat forces BCDA to ensure that the terms agreed upon during the detailed negotiations are
advantageousto it, lest it run the risk of being bound to a project that is not beneficial to the
government in the first place.
Overall, the foregoing goes to showthat the BCDA failed to establish a justifiable reason for its
refusal to proceed with the Competitive Challenge and for canceling the entire Swiss Challenge.
Because of BCDAs mistaken reliance on the TOR provision, and by changing its stand on the
conduct of the Competitive Challenge without pointing out with specificity the socalled unfavorable
terms, Weare left to believe that the cancellation of the Swiss Challenge was only due to BCDAs
whims and caprices.
Acceptance of Unsolicited Proposal vis--vis Estoppel
Lastly, respondents argue that the government cannot be estopped by the mistakes or errors of its
agents, implying that when it issued the Certification, it committed a lapse of judgment as it later
discovered that the terms of the proposal allegedly turnedout to be disadvantageous to the
Government. Thus, according to them, it cannot be compelled to proceed with the Competitive
Challenge.
We are very much aware of the time-honored rule that "the government cannot be estopped by the
mistakes or errors of its agents." Suffice it to state, however, that this precept is not absolute. As
jurisprudence teaches, this rule on estoppel cannot be used to perpetrate an injustice.
49
50
In the case at bar, it is evident that to allow BCDA to renege on its statutory and contractual
obligationswould cause grave prejudice to petitioner, who already invested time, effort, and
resources in the study and formulation of the proposal, in the adjustment thereof, as well as in the
negotiations. To permit BCDA to suddenly cancel the procurement process and strip SMLI of its
earlier-enumerated rights as an Original Proponent at this pointafter the former has already
benefited from SMLIs proposal through the acquisition of information and ideas for the development
of the subject propertywould unjustly enrich the agency through the efforts of petitioner. What is
worse, to do so would be contrary to BCDAs representations and assurances that it will respect
SMLIs earlier acquired rights, which statements SMLI reasonably and innocently believed.
All told, the BCDAs acceptance ofthe unsolicited proposal and the successful in-depth negotiation
cannot be written off as mere mistake or error that respondents claim to be reversible and not
susceptible to the legal bar of estoppel. The subsequent cancellation of the Competitive Challenge
on grounds that infringe the contractual rights of SMLI and violate the NEDA JV Guidelines cannot
be shrouded with legitimacy by invoking the above-cited rule.
Conclusion
To increase government prospects, participation in joint ventures has been incentivized by granting
rightsand advantages to the Original Proponent in the Competitive Challenge phase of a Swiss
Challenge. Faithful observance of these provisions oflaw that grant the aforesaid rights, may it be
sourced from a bilateral contract or executive edict, aids in improving government reliability. This, in
turn, heavily correlates with greater availability of options when entering into future joint venture
agreements with private sector entities via public-private enterprises as it will attract investors to
contribute in formulating a roadmap towards a nationwide infrastructure development.
Needless to say, allowing government agencies to retract their commitments to the project
proponents will essentially render inutile the incentives offered to and have accrued in favor of the
private sector entity. Without securing these rights, the business community will be wary when it
comes to forging contracts with the government. Simply put, the failure of the government to abide
by the rules ititself set would have detrimental effects on the private sectors confidence that the
government will comply with its statutory and contractual obligations to the letter.
In the case at bench, considering the undisputed facts presented before Us, We cannot sustain the
BCDAs arguments that its withdrawal from the negotiations is permissible and was not done with
grave abuse of discretion. Being an instrumentality of the government, it is incumbent upon the
BCDA to abide by the laws, rules and regulations, and perform its obligations with utmost good faith.
It cannot, under the guise of protecting the public interest, disregard the clear mandate of the NEDA
JV Guidelines and unceremoniously disregard the very commitments it made to the prejudice of the
SMLI that innocently relied on such promises. It is in instances such as thiswhere an agency,
instrumentality or officer of the government evades the performance of a positive duty enjoined by
law wherein the exercise of judicial power is warranted. Consistent with Our solemn obligation to
afford protection by ensuring that grave abuses of discretion on the part of a branch or
instrumentality of the government do not go unchecked, the Petition for Certiorari must be granted
and the corresponding injunctive relief be made permanent.
51
52
As a final note, it is worth mentioning that the foreseeable repercussion of a contrary

ponenciaencompasses the reduction of the number of interested private sector entities that would
bewilling to submit suo motoproposals and invest in government projects. After all, what would be
the point of developing ideas and allocating resources in the formulation of PPP projects when ones
rights asan Original Proponent, under the NEDA JV Guidelines and the agreement between the
parties, can easily be wiped out should the agency decide tolevel the playing field and conduct
straight bidding instead? Evidently, this would not attract but would, in contrast, repel investors from
tendering offers. In addition, even if potential investors do submit unsolicited or comparative
proposals, the terms therein might be driven to become less competitive due to the adjustment in the
balance of risks and returns on investment. Taking into account the increased possibility of the
development project not pushing through, investors might not be too keen in guaranteeing a high
amount of secured payments for the same. These considerations further validate the need to
secure the private sectors trust and confidence in the government.
1wphi1
WHEREFORE, premises considered, the petition is hereby GRANTED. The assailed Supplemental
Notice No. 5 dated August 6, 2012 issued by the BCDA is hereby ANULLED and SET ASIDE. The
Temporary Restraining Order issued bythis Court on January 9, 2013 is hereby madePERMANENT.
Respondent Bases Conversion and Development Authority and Arnel Paciano D. Casanova, or
whoever assumes the position of president of BCDA, are hereby ORDEREDto conduct and
complete the Competitive Challenge pursuant to the Certification, TOR, and NEDA JV Guidelines.
Specifically, the BCDA and/or the JV-SC are DIRECTEDto carry out the following:
1. Publish, within seven (7) calendar days from finality of this Decision, the "Invitation to
Apply for Eligibility and to Submit a Comparative Proposal" (IAESCP) in three (3)
newspapers of general nationwide circulation for two (2) consecutive weeks, and in the
BCDA website (www.bcda.gov.ph), in accordance with Section III.2. (Publication of Invitation
to Apply for Eligibility and to Submit Proposal), Section III (Project Rationale), Item 5 of the
TOR, and Section III (General Information), Item 2 (Publication of Invitation for Comparative
Proposals) of the TOR;
2. Immediately make the necessary adjustments to the timetable of activities set forth in
Supplemental Notice No. 1, considering that the periods specified therein have already
lapsed, without awaiting the lapse of the period for publication;
3. Strictly adhere to the TOR, Supplemental Notice No. 1, as adjusted, the Certification of
Successful Negotiations, and the NEDA JV Guidelines, in the conduct and completion of the
Swiss Challenge procedure on SM Land Inc.s unsolicited proposal accepted by the BCDA;
and
4. Perform any and all acts necessary to carry out and complete Stage Three of the Swiss
Challenge pursuant to the provisions of the TOR and NEDA JV Guidelines, including, but not
limited to, subjecting petitioner's unsolicited proposal to a competitive challenge.
In the event that SM Land, Inc. already obtained from BCDA the amount representing its Proposal
Security, SM Land, Inc. is hereby DIRECTED to re-post the Proposal Security, in the same amount
as the previous one, on the first day of the publication of the invitation for comparative proposals, per
the NEDA JV Guidelines.
SO ORDERED.
PRESBITERO J. VELASCO, JR.
Associate Justice
ESSENTIAL REQUISITES
CONSENT
SPOUSES VICTOR AND EDNA BINUA vs. LUCIA P. ONG, G.R. No. 207176,
June 18, 2014, J. Reyes
G.R. No. 207176
June 18, 2014
SPOUSES VICTOR and EUNA BINUA, Petitioners,

vs.
LUCIA P. ONG, Respondent.
DECISION
REYES, J.:
Spouses Victor and Edna Binua (petitioners) seek the declaration of the nullity of the real estate
mortgages executed by petitioner Victor in favor of Lucia P. Ong (respondent), on the ground that
these were executed under fear, duress and threat.
Facts of the Case
In a Joint Decision dated January 10, 2006 by the Regional Trial Court of Tuguegarao City, Branch 2
(RTC-Branch 2), in Criminal Cases Nos. 8230, 8465-70, petitioner Edna was found guilty of Estafa
and was sentenced to imprisonment from six ( 6) years and one ( 1) day of prision mayor, as
minimum, to thirty (30) years of reclusion perpetua, as maximum, for each conviction. Petitioner
Edna was also ordered to pay the respondent the amount of P2,285,000.00, with ten percent (10%)
interest, and damages.
1
Petitioner Edna sought to avoid criminal liability by settling her indebtedness through the execution
of separate real estate mortgages over petitioner Victors properties on February 2, 2006, and
covering the total amount ofP7,000,000.00. Mortgaged were portions of Lot No. 1319 covered by
Transfer Certificate of Title (TCT) No. T-15232 and Lot No. 2399 covered by TCT No. T-15227, both
located in Tuguegarao City.
3
Thereafter, petitioner Edna filed a motion for new trial, which was granted by the RTC-Branch 2.
Consequently, the RTC-Branch 2 rendered a Decision on February 24, 2006, ordering petitioner
Edna to pay the respondent the amount of P2,285,000.00 as actual damages, with ten percent
(10%) interest, and other damages. The RTC-Branch 2 ruled that the presentation of a promissory
note dated March 4, 1997 novated the original agreement between them into a civil obligation. The
decision further reads:
4
During the hearing of the motion [for new trial], [petitioner Ednas] counsel presented [petitioner
Edna]. In the course of her testimony, she narrated that a promissory note (Exhibit "1") dated March
4, 1997 was executed by her in favor of Lucia P. Ong, the herein private complainant.
xxxx
With the surfacing and finally the introduction of Exhibit "1", the nature of the liability of [petitioner
Edna] changed from both criminal and civil in nature to purely civil in character.
The Promissory Note novated the complexity of the nature of the course of action the [respondent]
had from the beginning against [petitioner Edna].
xxxx
However, after the Promissory Note (Exh. "1") was executed by the parties, the whole scenario was
novated into purely civil in nature. It was the intention of both [the respondent] and [petitioner Edna]
to turn the debt into a mere loan, hence, this agreement of theirs being the law that binds them must
be respected.
[Petitioner Edna] nonetheless, admits in Exhibit "1," that, she is indebted to [the respondent]. Thus,
she must pay her just debt. (Emphasis ours)
6
Petitioner Edna, however, failed to settle her obligation, forcing the respondent to foreclose the
mortgage on the properties, with the latter as the highest bidder during the public sale.
The petitioners then filed the case for the Declaration of Nullity of Mortgage Contracts, alleging that
the mortgage documents were "executed under duress, as the [petitioners] at the time of the
execution of said deeds were still suffering from the effect of the conviction of [petitioner] Edna, and
could not have been freely entered into said contracts."
7
On December 12, 2008, the RTC of Tuguegarao City, Branch 5 (RTC-Branch 5), rendered a
Decision dismissing the complaint for lack of factual and legal merit. The RTC-Branch 5 ruled:
8
When the [petitioners] executed the Deeds of Mortgage, did they act under fear, or duress, or threat?
Quite clearly, they did because a judgment of conviction was hanging over Ednas head sentencing
her to a prison term x x x. However, Article 1335 of the Civil Code is equally unmistakable. The last
paragraph of the article reads: "A threat to enforce ones claim through competent authority, if the
claim is just or legal, does not vitiate consent."
The Court cannot see its way to an agreement with the [petitioners]. They asked for a "compromise"
consisting in the execution of a promissory note by deeds of mortgage. Edna profited from it she
did not go to jail. She was in fact acquitted. The judgment of Branch 2 of this Court attained finality
for failure of the accused to perfect a seasonable appeal. And now they come to Court asking it to
set aside the very deeds of mortgage they had signed to keep Edna away from prison?
10
The petitioners brought their case to the Court of Appeals (CA) and in the assailed Decision dated
November 13, 2012 and Resolution dated May 14, 2013, the RTC-Branch 5 decision was affirmed.
The CA ruled that:
11
12
[T]he claim of [petitioner] Victor that he executed the real estate mortgages for fear that his wife
would go to jail is obviously not the intimidation referred to by law. In asserting that the abovementioned circumstance constituted fear, duress and threat, [the petitioners] missed altogether the
essential ingredient that would qualify the act complained of as intimidation, that the threat must be
of an unjust act.
13
In the present petition for review under Rule 45 of the Rules of Court, the petitioners claim that:
I.
THE LOWER COURT ERRED IN GIVING FULL FAITH AND CREDENCE TO THE DECISION
OFTHE COURT A QUO BASED ON FINDINGS OF FACTS NOT SUPPORTED BY THE EVIDENCE
ON RECORD
II.
THE LOWER COURT ERRED IN REFUSING TO DECLARE NULL AND VOID THE MORTGAGE
CONTRACTS DESPITE ITS FINDING THAT SAID CONTRACTS WERE EXECUTED UNDER
FEAR, DURESS AND THREAT
III.
THE LOWER COURT ERRED IN REFUSING TO DECLARE NULL AND VOID THE MORTGAGE
CONTRACTS DESPITE THE FACT THAT THEY WERE EXECUTED TO SECURE A MONETARY
OBLIGATION THAT IMPOSES A MONTHLY INTEREST OF TEN PERCENT
14
The petitioners contend that the CA erred when it sustained the findings of the RTC that the
execution of the promissory note changed petitioner Ednas obligation to a civil one. According to the
petitioners, the RTCs findings are not in accord with the RTC-Branch 2 Decision dated February 24,
2006, which ruled that petitioner Ednas liability is purely civil and not based on the compromise
agreement with the respondent. The petitioners insist that the RTC-Branch 2 decision allegedly show
"the lack of criminal liability of x x x Edna Binua due to novation." The petitioners also contend that
there was no evidence during trial regarding the existence of the promissory note or that the basis of
petitioner Ednas exoneration from criminal liability was the execution of the mortgage.
15
The petitioners also claim that the threat and coercion levelled by the respondent against petitioner
Victor, i.e., the wrongful criminal conviction of petitioner Edna, and which resulted into the signing of
the mortgages, do not fall within the coverage of Article 1335 of the Civil Code. Finally, the
petitioners argue that the CA committed an error when it refused to rule on the legality of the ten
percent (10%) monthly interest rate imposed on petitioner Ednas loan obligation.
16
17
Ruling of the Court

First, the Court must emphasize that in a Rule 45 petition for review, only questions of law may be
raised because the Court is not a trier of facts and is not to review or calibrate the evidence on
record; and when supported by substantial evidence, the findings off act by the CA are conclusive
and binding on the parties and are not reviewable by this Court, unless the case falls under any of
the exceptions.
18
19
In this case, the Court notes that the petitioners arguments are exact repetitions of the issues raised
in the CA, and the petitioners failed to advance any convincing reason that would alter the resolution
in this case. Not only that, the petitioners arguments are also downright inaccurate, if not maliciously
misleading.
The decisive factor in this case is the RTC-Branch 2 Decision dated February 24, 2006 in Criminal
Case Nos. 8230, 8465, 8466, 8467, 8468, 8469 & 8470. This was the decision that overturned
petitioner Ednas previous conviction for estafa and adjudged her only to be civilly liable to the
respondent. Said RTC decision is already final and executory, and this was not refuted by the
petitioners. The Court has consistently ruled that "once a decision attains finality, it becomes the law
of the case regardless of any claim that it is erroneous. Having been rendered by a court of
competent jurisdiction acting within its authority, the judgment may no longer be altered even at the
risk of occasional legal infirmities or errors it may contain." Thus, said RTC decision bars a rehash,
not only of the issues raised therein but also of other issues that might have been raised, and this
includes the existence of the promissory note upon which petitioner Ednas exoneration rested. As a
matter of fact, the RTC decision embodied petitioner Ednas own admission that she is indebted to
the respondent. The issue of whether petitioner Ednas liability under the note was, from the very
beginning, civil and not criminal in nature has no relevance in this case as the only issue to be
resolved is whether the mortgage contracts were executed under duress. Any other discussion
pertinent to the RTC decision will transgress the principle of immutability of a final judgment.
20
21
22
The petitioners claim that they were compelled by duress or intimidation when they executed the
mortgage contracts. According to them, they "were still suffering from the effect of the conviction of
[petitioner] Edna, and could not have been freely entered into said contracts." The petitioners also
allege that the respondent subsequently "rammed the two (2) mortgage contracts involving two (2)
prime properties on [petitioner Victors] throat, so to speak[,] just so to make him sign the said
documents," and that the respondent took advantage of the misfortune of the petitioners and was
able to secure in her favor the real estate mortgages.
1wphi1
23
24
25
Article 1390(2) of the Civil Code provides that contracts where the consent is vitiated by mistake,
violence, intimidation, undue influence or fraud are voidable or annullable. Article 1335 of the Civil
Code, meanwhile, states that "[t]here is intimidation when one of the contracting parties is compelled
by a reasonable and well-grounded fear of an imminent and grave evil upon his person or property,
or upon the person or property of his spouse, descendants or ascendants, to give his consent." The
same article, however, further states that "[a] threat to enforce ones claim through competent
authority, if the claim is just or legal, does not vitiate consent."
In De Leon v. Court of Appeals, the Court held that in order that intimidation may vitiate consent and
render the contract invalid, the following requisites must concur: (1) that the intimidation must be the
determining cause of the contract, or must have caused the consent to be given; (2) that the
threatened act be unjust or unlawful; (3) that the threat be real and serious, there being an evident
disproportion between the evil and the resistance which all men can offer, leading to the choice of
the contract as the lesser evil; and (4) that it produces a reasonable and well-grounded fear from the
fact that the person from whom it comes has the necessary means or ability to inflict the threatened
injury.
26
27
In cases involving mortgages, a preponderance of the evidence is essential to establish its invalidity,
and in order to show fraud, duress, or undue influence of a mortgage, clear and convincing proof is
necessary.
28
Based on the petitioners own allegations, what the respondent did was merely inform them of
petitioner Ednas conviction in the criminal cases for estafa. It might have evoked a sense of fear or
dread on the petitioners part, but certainly there is nothing unjust, unlawful or evil in the
respondent's act. The petitioners also failed to show how such information was used by the
respondent in coercing them into signing the mortgages. The petitioners must remember that
petitioner Edna's conviction was a result of a valid judicial process and even without the respondent
allegedly "ramming it into petitioner Victor's throat," petitioner Edna's imprisonment would be a legal
consequence of such conviction. In Callanta v. National Labor Relations Commission, the Court
stated that the threat to prosecute for estafa not being an unjust act, but rather a valid and legal act
to enforce a claim, cannot at all be considered as intimidation. As correctly ruled by the CA, "[i]f the
judgment of conviction is the only basis of the [petitioners] in saying that their consents were vitiated,
such will not suffice to nullify the real estate mortgages and the subsequent foreclosure of the
mortgaged properties. No proof was adduced to show that [the respondent] used [force], duress, or
threat to make [petitioner] Victor execute the real estate mortgages."
29
30
31
Finally, the petitioners assail the ten percent (10%) imposed by the RTC-Branch 2 in the criminal
cases for estafa. As previously stated, however, the decision in said case is already final and
executory. The Court will not even consider the petitioners' arguments on such issue for to do so
would sanction the petitioners' act of subverting the immutability of a final judgment.
32
WHEREFORE, the petition is DENIED for lack of merit.

SO ORDERED.
BIENVENIDO L. REYES
Associate Justice
WE CONCUR:
SPOUSES FRANCISCO SIERRA (substituted by DONATO, TERESITA,

TEODORA, LORENZA, LUCINA, IMELDA, VILMA, and MILAGROS SIERRA) and
ANTONINA SANTOS, SPOUSES ROSARIO SIERRA and EUSEBIO CALUMA
LEYVA, and SPOUSES SALOME SIERRA and FELIX GATLABAYAN (substituted
by BUENA VENTURA, ELPIDIO, PAULINO, CATALINA, GREGORIO, and
EDGARDO GATLABAYAN, LORETO REILLO, FERMINA PEREGRINA, and NIDA
HASHIMOTO) vs.PAIC SAVINGS AND MORTGAGE BANK, INC., G.R. No.
197857, September 10, 2014, J. Perlas-Bernabe
G.R. No. 197857
September 10, 2014
SPOUSES FRANCISCO SIERRA (substituted by DONATO, TERESITA, TEODORA, LORENZA,

LUCINA, IMELDA, VILMA, and MILAGROS SIERRA) and ANTONINA SANTOS, SPOUSES
ROSARIO SIERRA and EUSEBIO CALUMA LEYVA, and SPOUSES SALOME SIERRA and
FELIX GATLABAYAN (substituted by BUENA VENTURA, ELPIDIO, PAULINO, CATALINA,
GREGORIO, and EDGARDO GATLABAYAN, LORETO REILLO, FERMINA PEREGRINA, and
NIDA HASHIMOTO), Petitioners,
vs.
PAIC SAVINGS AND MORTGAGE BANK, INC., Respondent.
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari is the Decision dated June 27, 2011 of the Court of
Appeals (CA) in CA-G.R. CV No. 91999 which reversed and set aside the Decision dated April 24,
2006 of the Regional Trial Court of Antipolo City, Branch 74 (RTC) in Civil Case No. 91-2153,
dismissing petitioners complaint for declaration of nullity of real estate mortgage and extrajudicial
foreclosure proceedings.
1
The Facts
On May 31, 1983, Goldstar Conglomerates, Inc. (GCI), represented by Guillermo Zaldaga (Zaldaga),
obtained from First Summa Savings and Mortgage Bank (Summa Bank), now respondent Paic
Savings and Mortgage Bank, Inc. (PSMB), a loan in the amount of P1,500,000.00 as evidenced by
a Loan Agreement dated May 31, 1983. As security therefor, GCI executed in favor of PSMB six (6)
promissory notes in the aggregate amount ofP1,500,000.00 as well as a Deed of Real Estate
Mortgage over a parcel of land covered by Transfer Certificate of Title (TCT) No. 308475. As
additional security, petitioners Francisco Sierra, Rosario Sierra, and Spouses Felix Gatlabayan and
Salome Sierra mortgaged four(4) parcels of land in Antipolo City, covered by TCT Nos. 308476,
308477, 308478, and 308479, and respectively registered in their names (subject properties).
Records show that after the signing of the mortgage deed, Zaldaga gave petitioner Francisco
Sierra four (4) managers checks with an aggregate amount of P200,000.00, which werelater
successfully encashed, as well as several post-dated checks.
4
10
11
Eventually, GCI defaulted in the payment of its loan to PSMB, thereby prompting the latter to
extrajudicially foreclose the mortgage on the subject properties in accordance with Act No. 3135, as
amended, with due notice to petitioners. In the process, PSMB emerged as the highest bidder in
the public auction sale held on June 27, 1984 for a total bid price of P2,467,272.66. Since
petitioners failed to redeem the subject properties within the redemption period, their certificates of
title were cancelled and new ones were issued in PSMBs name.
12
13
14
15
On September 16, 1991, petitioners filed a complaint for the declaration of nullity ofthe real estate
mortgage and its extrajudicial foreclosure, and damages against PSMB and Summa Bank before the
RTC, docketed as Civil Case No. 91-2153.
16
In the said complaint, petitioners averred that under pressing need of money, with very limited
education and lacking proper instructions, they fell prey to a group who misrepresented to have
connectionswith Summa Bank and, thus, could help them secure a loan. They were made to
believe that they applied for a loan, the proceeds of which would be released through checks drawn
against Summa Bank. Relying in good faith on the checks issued to them, petitioners
unsuspectingly signed a document denominated as Deed of Real Estate Mortgage (subject deed),
couched in highly technical legal terms, which was notinterpreted in a language/dialect known to
them, and which was not accompanied by the loan documents. However, when they presented for
payment the earliest-dated checks to the drawee bank, the same were dishonored for the reason
"Account Closed." Upon confrontation, some members of the group assured petitioners that there
was only a misunderstanding and that their certificates of titles would be returned. Subsequently,
petitioners learned that: (a) the loan account secured by the real estate mortgage was in the nameof
another person and not in their names as they were made to understand; (b) despite lack of special
authority from them, foreclosure proceedings over the subject properties were initiated by PSMB and
not Summa Bank in whose favor the mortgage was executed; (c) the period of redemption had
17
18
19
20
already lapsed; and (d) the ownership over the subject properties had already been consolidated in
the name of PSMB. Petitioners likewise lamented that they were not furnished copies of the loan
and mortgage documents, or notified/apprised of the assignment to PSMB, rendering them unable to
comply with their obligations under the subject deed. They further claimed that theywere not
furnished a copy of the statement of account, which was bloated with unconscionable and unlawful
charges, assessments, and fees, nor a copy of the petition for foreclosure prior to the precipitate
extrajudicial foreclosure and auction sale which failed to comply with the posting and notice
requirements. In light of the foregoing, petitioners prayed that the real estate mortgage and the
subsequent foreclosure proceedings, and all derivative titles and rights arising therefrom be declared
null and void ab initio, and that the subject properties be reconveyed back to them, with further
prayer for compensatory and exemplary damages, and attorneys fees.
21
22
23
PSMB filed its answer, averring that PSMB and Summa Bank are one and the same entity. It
prayed for the dismissal of the complaint, claiming that petitioners have no cause of action against it
because it never extended any loan to them. PSMB maintained that: (a) it acted in good faith with
respect to the subject transactions and that petitioners action should be directed against the group
who deceived them; (b) the subject properties were mortgaged to securean obligation covered by
the loan agreement with GCI; (c) the mortgage was valid, having been duly signed by petitioners
before a notary public; (d) the foreclosure proceedings were regular, having complied with the
formalities required by law; and (e) petitioners allowed time topass without pursuing their purported
right against Summa Bank and/or PSMB. PSMB thereby interposed a counterclaim for
compensatory, moral and exemplary damages, and attorneys fees for the baseless suit.
24
25
26
27
28
29
30
31
32
The RTC Ruling

In a Decision dated April 24, 2006, the RTC: (a) declared the subject deed and the extrajudicial
foreclosure proceedings null and void; (b) cancelled the certificates of title of PSMB; and (c) directed
the reinstatement of petitioners certificates of title.
33
34
While the RTC ruled that the loan transaction was a valid and binding agreement between Summa
Bank and GCI, it held that the subject deed did not reflect the true intent and agreement between
Summa Bank and petitioners who were made tobelieve that they were the principal obligors in the
loan, thereby invalidating their consent to the mortgage. It likewise held that petitioners cannot be
faulted for failing to heed the notice of extrajudicial foreclosure sale by PSMB considering their lackof
notice that Summa Bank had changed its name to PSMB. Nonetheless, considering that petitioners
had received partial loan proceeds of P200,000.00, the RTC heldthem liable for such amount and
accordingly directed PSMB to (a) allow petitioners to pay for their loan in the amount ofP200,000.00
plus 12% interest, and (b) pay moral and exemplary damages, attorneysfees, and the costs of suit.
35
36
37
Aggrieved, PSMB filed a motion for reconsideration, while petitioners filed a motion for discretionary
execution which were, however, denied in an Order dated February 11, 2008. Dissatisfied, PSMB
interposed an appeal to the CA.
38
39
40
The CA Ruling
In a Decision dated June 27, 2011, the CAreversed and set aside the RTC Decision and dismissed
petitioners complaint for lack of merit.
41
42
It held that petitioners were not able to sufficiently prove their claim that they were uneducated
and/or unschooled, rejecting the self-serving and uncorroborated testimony of petitioner Francisco
Sierra on such claim. In this relation, it pointed out that petitioners had knowingly and voluntarily
executed the subject deed, observing that: (a) prior to its execution, petitioners Francisco and
Rosario Sierra had previously mortgaged their properties twice to the Rural Bank of Antipolo,
showing that they were familiar with the intricacies of obtaining a loan and of the terms and
conditions of a mortgage, and (b) the page on which the parties affixed their signatures clearly
indicated petitioners as the mortgagors and GCI as the borrowers. Moreover, petitioners did not
demand for the release of the remaining amount of their alleged loan, raising issue thereon only in
their complaint filed in 1991.
43
44
The CA likewise ruled that the action to annul the subject deed had already prescribed, since the
same was brought more than four (4) years from the discovery of the mistake orfraud, reckoned from
the time the earliest checks issued to petitioners were dishonored, or on January 9, 1984, this being
the time the consideration orprice for the execution of the subject deed turned out to be false.
45
The CA further held that petitioners were barred by lachesfrom asserting any claim on the subject
properties considering that despite receipt of the letter dated June 11, 1984 informing them of the
scheduled auction sale, they failed to attend the sale or file an adverse claim, or to thereafter
redeem the subject properties.
46
Unperturbed, petitioners filed the instant petition.

The Issues Before The Court
The essential issues in this case are whether or not the CA erred in: (a) ruling that petitioners were
aware that they were mere accommodation mortgagors, and (b) dismissing the complaint on the
grounds of prescription and laches.
The Courts Ruling
The petition lacks merit.
A. Vitiation of Consent.
Time and again, the Court has stressed that allegations must be proven by sufficient evidence
because mere allegation is not evidence. Thus,one who alleges any defect or the lack ofa valid
consent toa contract must establish the same by full, clear, and convincing evidence, not merely by
preponderance of evidence. The rule is that he who alleges mistake affecting a transaction must
substantiatehis allegation, since it is presumed that a person takes ordinary care of his concerns and
that private transactions have been fair and regular. Where mistake or error is alleged by parties
who claim to have not had the benefit of a good education, as in this case, they must establish that
their personal circumstances prevented them from giving their free, voluntary, and spontaneous
consent to a contract.
47
48
49
50
After a judicious perusal of the records, the Court finds petitioners claim of mistake or error (that
they acted merely as accommodation mortgagors) grounded on their "very limited education" and
"lack of proper instruction" not to be firmly supported by the evidence on record.
As correctly observed by the CA, the testimony of petitioner Francisco Sierra as to petitioners
respective educational backgrounds remained uncorroborated. The other petitioners-signatories to
the deed never testified that their educational background prevented them from knowingly executing
the subject deed as mere accommodation mortgagors. Petitioners claim of lack of "proper
instruction on the intricacies in securing [the] loan from the bank" is further belied by the fact that
petitioners Francisco and Rosario Sierra had previously mortgaged two (2) of the subject properties
twiceto the Rural Bank of Antipolo.Moreover, petitioners did not: (a) demand for any loan document
containingthe details of the transaction, i.e., monthly amortization, interest rate, added charges, etc.,
and the release of the remaining amount of their alleged loan; and (b) offer to pay the purported
partial loan proceeds they received at any time, complaining thereof only in 1991 when they filed
their complaint. Indeed, the foregoing circumstances clearly show that petitioners are aware that
they were mere accommodation mortgagors, debunking their claim that mistake vitiated their
consent to the mortgage.
51
52
Thus, there being valid consent on the part of petitioners to act as accommodation mortgagors, no
reversible error was committed by the CA in setting aside the RTCs Decision declaring the real
estate mortgage as void for vices of consent and awardingdamages to petitioners. As mere
accommodation mortgagors, petitioners are not entitled to the proceeds of the loan, nor were
required to be furnished with the loan documents or notice of the borrowers default in payingthe
principal, interests, penalties, and other charges on due date, or of the extrajudicial foreclosure
proceedings, unless stipulated in the subject deed. As jurisprudence states, an accommodation
mortgagor is a third person who is not a debtor to a principal obligation but merely secures it by
mortgaging his or her own property. Like an accommodation party to a negotiable instrument, the
accommodation mortgagor in effect becomes a surety to enable the accommodated debtor to obtain
credit, as petitioners in this case.
53
54
55
56
57
B. Prescription.
On a second matter, petitioners insist that the CA erred in ruling that their action for nullification of
the subject deed had already prescribed, contending that the applicable provision is the ten-year
prescriptive period of mortgage actions under Article 1142 of the Civil Code.
58
The contention is bereft of merit.

Based on case law, a "mortgage action" refers to an action to enforcea right necessarily arising from
a mortgage. In the present case, petitioners are not "enforcing"their rights under the mortgage but
are, in fact, seeking to be relieved therefrom.The complaint filed by petitioners is, therefore, not a
mortgage actionas contemplated under Article 1142.
59
Considering, however, petitioners failure to establish that their consent to the mortgage was vitiated,
rendering them without a cause of action, much less a right of action to annul the mortgage, the
question of whether or not the complaint has prescribed becomes merely academic.
60
In any event, even assuming that petitioners have a valid cause of action, the four-year prescriptive
period on voidable contracts shall apply. Since the complaint for annulment was anchored on a
claim of mistake, i.e., that petitioners are the borrowers under the loan secured by the mortgage, the
action should have been brought withinfour (4) years from its discovery.
61
1wphi1
A perusal of the complaint, however, failed to disclose when petitioners learned that they were not
the borrowers under the loan secured by the subject mortgage. Nonetheless, considering that
petitioners admitted receipt on June 19, 1984 of PSMBs letter dated June 11, 1984 informing them
of the scheduled foreclosure sale on June 27, 1984 due to GCIs breach of its loan obligation
secured by the subject properties, the discovery of the averred mistake should appear to be
reckoned from June 19, 1984, and not from the dishonor of the checks on January 9, 1984 as ruled
by the CA.
62
1wphi1
C. Laches.
As to this final issue, the Court holds that !aches applies.
As the records disclose, despite notice on June 19, 1984 of the scheduled foreclosure sale,
petitioners, for unexplained reasons, failed to impugn the real estate mortgage and oppose the
public auction sale for a period of more than seven (7) years from said notice. As such, petitioners'
action is already barred by !aches, which, as case law holds, operates not really to penalize neglect
or sleeping on one's rights, but rather to avoid recognizing a right when to do so would result in a
clearly inequitable situation. As mortgagors desiring to attack a mortgage as invalid, petitioners
should act with reasonable promptness, else its unreasonable delay may amount to
ratification. Verily, to allow petitioners to assert their right to the subject properties now after their
unjustified failure to act within a reasonable time would be grossly unfair to PSMB, and perforce
should not be sanctioned.
63
64
65
WHEREFORE, the petition is DENIED. The Decision dated June 27, 2011 of the Court of Appeals
(CA) in CA-G.R. CV No. 91999 is hereby AFFIRMED.
SO ORDERED.
ESTELA M. PERLAS-BERNABE
Associate Justice
WE CONCUR:
ECE REALTY AND DEVELOPMENT INC. vs. RACHEL G. MANDAP, G.R. No.
196182, September 1, 2014, J. Peralta
G.R. No. 196182, September 01, 2014
ECE REALTY AND DEVELOPMENT INC., Petitioner, v. RACHEL G. MANDAP, Respondent.
DECISION
PERALTA, J.:
Before the Court is a petition for review on certiorari assailing the Decision1 and Resolution2 of the Court of
Appeals (CA), dated July 21, 2010 and March 15, 2011, respectively, in CA-G.R. SP No. 100741.
The factual and procedural antecedents of the case are as follows:
Herein petitioner is a corporation engaged in the building and development of condominium units. Sometime
in 1995, it started the construction of a condominium project called Central Park Condominium Building
located along Jorge St., Pasay City. However, printed advertisements were made indicating therein that the
said project was to be built in Makati City.3 In December 1995, respondent, agreed to buy a unit from the
above project by paying a reservation fee and, thereafter, downpayment and monthly installments. On June
18, 1996, respondent and the representatives of petitioner executed a Contract to Sell. 4 In the said
Contract, it was indicated that the condominium project is located in Pasay City.
More than two years after the execution of the Contract to Sell, respondent, through her counsel, wrote
petitioner a letter dated October 30, 1998 demanding the return of P422,500.00, representing the payments
she made, on the ground that she subsequently discovered that the condominium project was being built in
Pasay City and not in Makati City as indicated in its printed advertisements. 5
cralawred
However, instead of answering respondent's letter, petitioner sent her a written communication dated
November 30, 1998 informing her that her unit is ready for inspection and occupancy should she decide to
move in.6
cralawre d
Treating the letter as a form of denial of her demand for the return of the sum she had paid to petitioner,
respondent filed a complaint with the Expanded National Capital Region Field Office (ENCRFO) of the
Housing and Land Use Regulatory Board (HLURB) seeking the annulment of her contract with petitioner, the
return of her payments, and damages.7
cralawred
On September 30, 2005, the ENCRFO dismissed respondent's complaint for lack of merit and directed the
parties to resume the fulfillment of the terms and conditions of their sales contract. The ENCRFO held that
respondent failed to show or substantiate the legal grounds that consist of a fraudulent or malicious dealing
with her by the [petitioner], such as, the latter's employment of insidious words or machinations which
induced or entrapped her into the contract and which, without them, would not have encouraged her to buy
the unit.8
cralawred
Respondent filed a petition for review with the HLURB Board of Commissioners questioning the decision of
the ENCRFO. On April 25, 2006, the HLURB Board of Commissioners rendered judgment dismissing
respondent's complaint and affirming the decision of the ENCRFO.9 Giving credence to the Contract to Sell
executed by petitioner and respondent, the Board of Commissioners held that when the parties reduced
their contract in writing, their rights and duties must be found in their contract and neither party can place a
greater obligation than what the contract provides.
Aggrieved, respondent filed an appeal with the Office of the President. On June 21, 2007, the Office of the
President dismissed respondent's appeal and affirmed in toto the decision of the HLURB Board of
Commissioners.10 Respondent filed a Motion for Reconsideration,11 but the Office of the President denied it in
a Resolution12 dated August 29, 2007.
Respondent then filed a petition for review with the CA. 13
cralawre d
On July 21, 2010, the CA promulgated its assailed Decision, the dispositive portion of which reads, thus:
WHEREFORE, premises considered, We hereby REVERSE and SET ASIDE the Decision and the Resolution
dated June 21, 2007 and August 29, 2007, respectively, issued by the Office of the President in OP Case
No. 06-F-224. Accordingly, the contract between Rachel G. Mandap and ECE Realty is hereby ANNULLED.
Consequently, ECE Realty is ordered to return the total amount of P422,500.00 representing payments made
by Rachel G. Mandap on reservation fee, [downpayment] and monthly installments on the condominium
unit, with legal interest thereon at twelve percent (12%) per annum from the date of filing of action until
fully paid.
No costs.
SO ORDERED.14
cralawred
The CA held that petitioner employed fraud and machinations to induce respondent to enter into a contract
with it. The CA also expressed doubt on the due execution of the Contract to Sell between the parties.
Petitioner filed a Motion for Reconsideration, but the CA denied it in its March 15, 2011 Resolution.
Hence, the present petition for review on certiorari with the following Assignment of Errors:
I
The Court of Appeals gravely erred in ruling that there was fraud in the execution of the subject contract to
sell and declaring the same as annulled and ordering petitioner ECE to refund all payments made by
respondent.
II
The Court of Appeals erred in ordering the award of legal interest at the rate of 12% per annum starting
from the filing of the complaint until fully paid when legal interest should have been pegged at 6%. 15
The Court finds the petition meritorious.
The basic issue in the present case is whether petitioner was guilty of fraud and if so, whether such fraud is
sufficient ground to nullify its contract with respondent.
Article 1338 of the Civil Code provides that [t]here is fraud when through insidious words or machinations
of one of the contracting parties, the other is induced to enter into a contract which, without them, he would
not have agreed to.
In addition, under Article 1390 of the same Code, a contract is voidable or annullable where the consent is
vitiated by mistake, violence, intimidation, undue influence or fraud.
Also, Article 1344 of the same Code provides that [i]n order that fraud may make a contract voidable, it
should be serious and should not have been employed by both contracting parties.
Jurisprudence has shown that in order to constitute fraud that provides basis to annul contracts, it must
fulfill two conditions.
First, the fraud must be dolo causante or it must be fraud in obtaining the consent of the party.16 This is
referred to as causal fraud. The deceit must be serious. The fraud is serious when it is sufficient to impress,
or to lead an ordinarily prudent person into error; that which cannot deceive a prudent person cannot be a
ground for nullity.17 The circumstances of each case should be considered, taking into account the personal
conditions of the victim.18
cralawre d
Second, the fraud must be proven by clear and convincing evidence and not merely by a preponderance
thereof.19
cralawred
In the present case, this Court finds that petitioner is guilty of false representation of a fact. This is
evidenced by its printed advertisements indicating that its subject condominium project is located in Makati
City when, in fact, it is in Pasay City. The Court agrees with the Housing and Land Use Arbiter, the HLURB
Board of Commissioners, and the Office of the President, in condemning petitioner's deplorable act of
making misrepresentations in its advertisements and in issuing a stern warning that a repetition of this act
shall be dealt with more severely.
However, insofar as the present case is concerned, the Court agrees with the Housing and Land Use Arbiter,
the HLURB Board of Commissioners, and the Office of the President, that the misrepresentation made by
petitioner in its advertisements does not constitute causal fraud which would have been a valid basis in
annulling the Contract to Sell between petitioner and respondent.
In his decision, the Housing and Land Use Arbiter found that respondent failed to show that the essential
and/or moving factor that led the [respondent] to give her consent and agree to buy the unit was precisely
the project's advantageous or unique location in Makati [City] to the exclusion of other places or city x x
x. Both the HLURB Board of Commissioners and the Office of the President affirmed the finding of the
Arbiter and unanimously held that respondent failed to prove that the location of the said project was the
causal consideration or the principal inducement which led her into buying her unit in the said condominium
project. The Court finds no cogent reason to depart from the foregoing findings and conclusion of the above
agencies.
Indeed, evidence shows that respondent proceeded to sign the Contract to Sell despite information
contained therein that the condominium is located in Pasay City. This only means that she still agreed to buy
the subject property regardless of the fact that it is located in a place different from what she was originally
informed. If she had a problem with the property's location, she should not have signed the Contract to Sell
and, instead, immediately raised this issue with petitioner. But she did not. As correctly observed by the
Office of the President, it took respondent more than two years from the execution of the Contract to Sell to
demand the return of the amount she paid on the ground that she was misled into believing that the subject
property is located in Makati City. In the meantime, she continued to make payments.
The Court is not persuaded by the ruling of the CA which expresses doubt on the due execution of the
Contract to Sell. The fact remains that the said Contract to Sell was notarized. It is settled that absent any
clear and convincing proof to the contrary, a notarized document enjoys the presumption of regularity and is
conclusive as to the truthfulness of its contents.20 Neither does the Court agree that the presumption of
regularity accorded to the notarized Contract to Sell was overcome by evidence to the contrary.
Respondent's allegation that she signed the said Contract to Sell with several blank spaces, and which
allegedly did not indicate the location of the condominium, was not supported by proof. The basic rule is that
mere allegation is not evidence and is not equivalent to proof.21 In addition, the fact that respondent made
several payments prior to the execution of the subject Contract to Sell is not the kind of evidence needed to
overcome such presumption of regularity.
With respect to the foregoing discussions, the Court quotes with approval the disquisition of the Office of the
President on the credibility of the claims of petitioner and respondent, to wit:
xxxx
We give credence to the version of [petitioner] ECE Realty considering that there is no cogent reason why
this Office could not rely on the truth and veracity of the notarized Contract to Sell. Being a notarized
document, it had in its favor the presumption of regularity, and to overcome the same, there must be
evidence that is clear, convincing and more than merely preponderant; otherwise, the document should be
upheld. [Respondent] Mandap failed to overcome this presumption.
The contention that Mandap signed the Contract to Sell in-blank, and [that] it was ECE Realty that supplied
the details on it is remarkably threadbare for no evidence was submitted to support such claim in all the
proceedings before the ENCRFO and the Board of Commissioners. It is only now that Mandap has belatedly
submitted the Affidavit of Lorenzo G. Tipon. This cannot be done without running afoul with the well-settled
principle barring a party from introducing fresh defenses and facts at the appellate stage. Moreover, the
infirmity of affidavits as evidence is a matter of judicial experience. It is settled that no undue importance
shall be given to a sworn statement or affidavit as a piece of evidence because being taken ex parte, an
affidavit is almost always incomplete and inaccurate. Thus, absent, as here, of (sic) any controverting
evidence, it is reasonable to presume that Mandap knew the contents of the Contract to Sell which was
executed with legal formalities. The ruling in Bernardo vs. Court of Appeals is enlightening in this wise:
x x x. The rule that one who signs a contract is presumed to know its contents has been applied even to
contract of illiterate persons on the ground that if such persons are unable to read, they are negligent if they
fail to have the contract read to them. If a person cannot read the instrument, it is as much his duty to
procure some reliable persons to read and explain it to him, before he signs it, as it would be to read it
before he signed it if he were able to do so and his failure to obtain a reading and explanation of it is such
gross negligence as will estop him from avoiding it on the ground that he was ignorant of its contents. 22
In any case, even assuming that petitioners misrepresentation consists of fraud which could be a ground for
annulling their Contract to Sell, respondent's act of affixing her signature to the said Contract, after having
acquired knowledge of the property's actual location, can be construed as an implied ratification thereof.
Ratification of a voidable contract is defined under Article 1393 of the Civil Code as follows:
Art. 1393. Ratification may be effected expressly or tacitly. It is understood that there is a tacit ratification if,
with knowledge of the reason which renders the contract voidable and such reason having ceased, the
person who has a right to invoke it should execute an act which necessarily implies an intention to waive his
right.
Implied ratification may take diverse forms, such as by silence or acquiescence; by acts showing
approval or adoption of the contract; or by acceptance and retention of benefits flowing therefrom. 23
cralawred
Under Article 1392 of the Civil Code, ratification extinguishes the action to annul a voidable contract. In
addition, Article 1396 of the same Code provides that [r]atification cleanses the contract from all its defects
from the moment it was constituted.
Hence, based on the foregoing, the findings and conclusions of the Housing and Land Use Arbiter, the HLURB
Board of Commissioners and the Office of the President, should be sustained.
WHEREFORE, the instant petition is GRANTED. The Decision and Resolution of the Court of Appeals, dated
July 21, 2010 and March 15, 2011, respectively, are REVERSED and SET ASIDE. The September 30, 2005
Decision of the Expanded National Capital Region Field Office of the Housing and Land Use Regulatory Board,
which dismisses respondent's complaint and directs petitioner and respondent to resume the fulfillment of
their sales contract, is REINSTATED.
SO ORDERED.
cralawla w library
Velasco, Jr., (Chairperson), Bersamin,* Villarama, Jr., and Reyes, JJ., concur.
AVELINA ABARIENTOS REBUSQUILLO [substituted by her heirs, except

Emelinda R. Gualvez] and SALVADOR A. OROSCO, vs. SPS. DOMINGO and
EMELINDA REBUSQUILLO GUALVEZ and the CITY ASSESSOR OF LEGAZPI
CITY, G.R. No. 204029, June 4, 2014, J. Velasco, Jr.
G.R. No. 204029
June 4, 2014
AVELINA ABARIENTOS REBUSQUILLO [substituted by her heirs, except Emelinda R.

Gualvez] and SALVADOR A. OROSCO, Petitioners,
vs.
SPS. DOMINGO and EMELINDA REBUSQUILLO GUALVEZ and the CITY ASSESSOR OF
LEGAZPI CITY,Respondents.
DECISION
VELASCO, JR., J.:
Before Us is a Petition for Review on Certiorari under Rule 45 assailing the Decision and
Resolution dated March 30, 2012 and September 25, 2012, respectively, of the Court of Appeals
(CA) in CA-G.R. CV No. 93035, which reversed and set aside the Decision dated January 20, 2009
of the Regional Trial Court (RTC), Branch 4 in Legazpi City, in Civil Case No. 10407.
1
The antecedent facts may be summarized as follows:

On October 26, 2004, petitioners Avelina Abarientos Rebusquillo (Avelina) and Salvador Orosco
(Salvador) filed a Complaint for annulment and revocation of an Affidavit of Self-Adjudication dated
December 4, 2001 and a Deed of Absolute Sale dated February 6, 2002 before the court a quo. In it,
petitioners alleged that Avelina was one of the children of Eulalio Abarientos (Eulalio) and Victoria
Villareal (Victoria). Eulalio died intestate on July 3, 1964, survived by his wife Victoria, six legitimate
children, and one illegitimate child, namely: (1) Avelina Abarientos-Rebusquillo, petitioner in this
case; (2) Fortunata Abarientos-Orosco, the mother of petitioner Salvador; (3) Rosalino Abarientos;
(4) Juan Abarientos; (5) Feliciano Abarientos; (6) Abraham Abarientos; and (7) Carlos Abarientos.
His wife Victoria eventually died intestate on June 30, 1983.
On his death, Eulalio left behind an untitled parcel of land in Legazpi City consisting of two thousand
eight hundred sixty-nine(2,869) square meters, more or less, which was covered by Tax Declaration
ARP No. (TD) 0141.
In 2001, Avelina was supposedly made to sign two (2) documents by her daughter Emelinda
Rebusquillo-Gualvez (Emelinda) and her son-in-law Domingo Gualvez (Domingo), respondents in
this case, on the pretext that the documents were needed to facilitate the titling of the lot. It was only
in 2003, so petitioners claim, that Avelina realized that what she signed was an Affidavit of SelfAdjudication and a Deed of Absolute Sale in favor of respondents.
As respondents purportedly ignored her when she tried to talk to them, Avelina sought the
intervention of the RTC to declare null and void the two (2) documents in order to reinstate TD0141
and so correct the injustice done to the other heirs of Eulalio.
In their answer, respondents admitted that the execution of the Affidavit of Self-Adjudication and the
Deed of Sale was intended to facilitate the titling of the subject property. Paragraph 9 of their Answer
reads:
Sometime in the year 2001, [petitioner] Avelina together with the other heirs of Eulalio Abarientos
brought out the idea to [respondent] Emelinda Rebusquillo-Gualvez to have the property described
in paragraph 8 of the complaint registered under the Torrens System of Registration. To facilitate the
titling of the property, so that the same could be attractive to prospective buyers, it was agreed that
the propertys tax declaration could be transferred to [respondents] Spouses [Emelinda] R. Gualvez
and Domingo Gualvez who will spend all the cost of titling subject to reimbursement by all other
heirs in case the property is sold; That it was agreed that all the heirs will be given their
corresponding shares on the property; That pursuant to said purpose Avelina Abarientos-Rebusquillo
with the knowledge and consent of the other heirs signed and executed an Affidavit of SelfAdjudication and a Deed of Absolute Sale in favor of [respondents] Gualvez. In fact, [petitioner]
Avelina Rebusquillo was given an advance sum of FIFTY THOUSAND PESOS (P50,000.00) by
[respondent] spouses and all the delinquent taxes paid by [respondents].
3
After trial, the RTC rendered its Decision dated January 20, 2009 annulling the Affidavit of SelfAdjudication and the Deed of Absolute Sale executed by Avelina on the grounds that (1) with regard
to the Affidavit of Self-Adjudication, she was not the sole heir of her parents and was not therefore
solely entitled to their estate; and (2) in the case of the Deed of Absolute Sale, Avelina did not really
intend to sell her share in the property as it was only executed to facilitate the titling of such property.
The dispositive portion of the RTC Decision reads:
WHEREFORE, premises considered, judgment is hereby rendered, as follows:
1. The subject Affidavit of Self-Adjudication of the Estate of the Deceased Spouses Eulalio
Abarientos and Victoria Villareal, dated December 4, 2001 as well as the subject Deed of
Absolute Sale, notarized on February 6, 2002, covering the property described in par. 8 of
the Amended Complaint are hereby ordered ANNULLED;
2. That defendant City Assessors Officer of Legazpi City is hereby ordered to CANCEL the
Tax Declaration in the name of private [respondents] spouses Gualvez under ARP No. 4143
and to REINSTATE the Tax Declaration under ARP No. 0141 in the name of Eulalio
Abarientos;
3. By way of restitution, [petitioner] Avelina Abarientos Rebusquillo is hereby ordered to
return or refund to [respondents] spouses Domingo Gualvez and Emelinda Gualvez,
the P50,000.00 given by the latter spouses to the former.
4
Assailing the trial courts decision, respondents interposed an appeal with the CA arguing that the
Deed of Sale cannot be annulled being a public document that has for its object the creation and
transmission of real rights over the immovable subject property. The fact that Avelinas testimony
was not offered in evidence, so respondents argued, the signature on the adverted deed remains as
concrete proof of her agreement to its terms. Lastly, respondents contended that the Complaint filed
by petitioners Avelina and Salvador before the RTC is not the proper remedy provided by law for
those compulsory heirs unlawfully deprived of their inheritance.
Pending the resolution of respondents appeal, Avelina died intestate on September 1, 2009 leaving
behind several living heirs including respondent Emelinda.
5
In its Decision dated March 30, 2012, the appellate court granted the appeal and reversed and set
aside the Decision of the RTC. The CA held that the RTC erred in annulling the Affidavit of SelfAdjudication simply on petitioners allegation of the existence of the heirs of Eulalio, considering that
issues on heirship must be made in administration or intestate proceedings, not in an ordinary civil
action. Further, the appellate court observed that the Deed of Absolute Sale cannot be nullified as it
is a notarized document that has in its favor the presumption of regularity and is entitled to full faith
and credit upon its face.
Aggrieved by the CAs Decision, petitioner Avelina, as substituted by her heirs except respondent
Emelinda, and petitioner Salvador are now before this Court ascribing reversible error on the part of
the appellate court.
We find merit in the instant petition.
It has indeed been ruled that the declaration of heirship must be made in a special proceeding, not in
an independent civil action. However, this Court had likewise held that recourse to administration
proceedings to determine who heirs are is sanctioned only if there is a good and compelling reason
for such recourse. Hence, the Court had allowed exceptions to the rule requiring administration
proceedings as when the parties in the civil case already presented their evidence regarding the
issue of heirship, and the RTC had consequently rendered judgment upon the issues it defined
during the pre-trial. In Portugal v. Portugal-Beltran, this Court held:
6
In the case at bar, respondent, believing rightly or wrongly that she was the sole heir to Portugals
estate, executed on February 15, 1988 the questioned Affidavit of Adjudication under the second
sentence of Rule 74, Section 1 of the Revised Rules of Court. Said rule is an exception to the
general rule that when a person dies leaving a property, it should be judicially administered and the
competent court should appoint a qualified administrator, in the order established in Sec. 6, Rule 78
in case the deceased left no will, or in case he did, he failed to name an executor therein.
Petitioners claim, however, to be the exclusive heirs of Portugal. A probate or intestate court, no
doubt, has jurisdiction to declare who are the heirs of a deceased.
It appearing, however, that in the present case the only property of the intestate estate of Portugal is
the Caloocan parcel of land to still subject it, under the circumstances of the case, to a special
proceeding which could be long, hence, not expeditious, just to establish the status of petitioners as
heirs is not only impractical; it is burdensome to the estate with the costs and expenses of an
administration proceeding. And it is superfluous in light of the fact that the parties to the civil case subject of the present case, could and had already in fact presented evidence before the trial court
which assumed jurisdiction over the case upon the issues it defined during pre-trial.
In fine, under the circumstances of the present case, there being no compelling reason to still
subject Portugals estate to administration proceedings since a determination of petitioners status as
heirs could be achieved in the civil case filed by petitioners, the trial court should proceed to evaluate
the evidence presented by the parties during the trial and render a decision thereon upon the issues
it defined during pre-trial x x x. (emphasis supplied)
Similar to Portugal, in the present case, there appears to be only one parcel of land being claimed by
the contending parties as the inheritance from Eulalio. It would be more practical, as Portugal
teaches, to dispense with a separate special proceeding for the determination of the status of
petitioner Avelina as sole heir of Eulalio, especially in light of the fact that respondents spouses
Gualvez admitted in court that they knew for a fact that petitioner Avelina was not the sole heir of
Eulalio and that petitioner Salvador was one of the other living heirs with rights over the subject land.
As confirmed by the RTC in its Decision, respondents have stipulated and have thereby admitted the
veracity of the following facts during the pre-trial:
IV UNCONTROVERTED FACTS: (Based on the stipulation of facts in the Pre-Trial Order)
A. x x x
B. [Petitioners] and private [respondents] spouses Gualvez admitted the following facts:
1. Identity of the parties;
2. Capacity of the [petitioners] and private [respondents] to sue and be sued;
3. [Petitioner] Avelina Abarientos-Rebusquilllo is not the only surviving heir of deceased
spouses Eulalio and Victoria Abarientos;
4. Petitioner Salvador Orosco is a co-owner/possessor of a portion of the subject property;
5. Fortunata Abarientos-Orosco is the sister of Avelina Abarientos;
6. [Respondent] Emelinda Rebusquillo-Gualves is a daughter of [petitioner] Avelina A.
Rebusquillo;
7. [Petitioner] Avelina Rebusquillo was born on Nov. 10, 1923;
8. The existence of Affidavit of Self-Adjudication of Estate of the Deceased and Deed of

Absolute Sale executed by [petitioner] Avelina A. Rebusquillo on the subject
property. (emphasis supplied)
9
In light of the admission of respondents spouses Gualvez, it is with more reason that a resort to
special proceeding will be but an unnecessary superfluity. Accordingly, the court a quo had properly
rendered judgment on the validity of the Affidavit of Self-Adjudication executed by Avelina. As
pointed out by the trial court, an Affidavit of Self-Adjudication is only proper when the affiant is the
sole heir of the decedent. The second sentence of Section 1, Rule 74 of the Rules of Court is
patently clear that self-adjudication is only warranted when there is only one heir:
Section 1. Extrajudicial settlement by agreement between heirs. x x x If there is only one heir, he
may adjudicate to himself the entire estate by means of an affidavit filed in the office of the register of
deeds. x x x (emphasis supplied)
As admitted by respondents, Avelina was not the sole heir of Eulalio. In fact, as admitted by
respondents, petitioner Salvador is one of the co-heirs by right of representation of his mother.
Without a doubt, Avelina had perjured herself when she declared in the affidavit that she is "the only
daughter and sole heir of spouses EULALIO ABARIENTOS AND VICTORIA VILLAREAL." The
falsity of this claim renders her act of adjudicating to herself the inheritance left by her father invalid.
The RTC did not, therefore, err in granting Avelinas prayer to declare the affidavit null and void and
so correct the wrong she has committed.
10
In like manner, the Deed of Absolute Sale executed by Avelina in favor of respondents was correctly
nullified and voided by the RTC. Avelina was not in the right position to sell and transfer the absolute
ownership of the subject property to respondents. As she was not the sole heir of Eulalio and her
Affidavit of Self-Adjudication is void, the subject property is still subject to partition. Avelina, in fine,
did not have the absolute ownership of the subject property but only an aliquot portion. What she
could have transferred to respondents was only the ownership of such aliquot portion. It is apparent
from the admissions of respondents and the records of this case that Avelina had no intention to
transfer the ownership, of whatever extent, over the property to respondents. Hence, the Deed of
Absolute Sale is nothing more than a simulated contract.
The Civil Code provides:
Art. 1345. Simulation of a contract may be absolute or relative. The former takes place when the
parties do not intend to be bound at all; the latter, when the parties conceal their true agreement.
(emphasis supplied)
Art. 1346. An absolutely simulated or fictitious contract is void. A relative simulation, when it does not
prejudice a third person and is not intended for any purpose contrary to law, morals, good customs,
public order or public policy binds the parties to their real agreement.
In Heirs of Policronio Ureta Sr. v. Heirs of Liberato Ureta, this Court explained the concept of the
simulation of contracts:
11
In absolute simulation, there is a colorable contract but it has no substance as the parties have no
intention to be bound by it. The main characteristic of an absolute simulation is that the apparent
contract is not really desired or intended to produce legal effect or in any way alter the juridical
situation of the parties. As a result, an absolutely simulated or fictitious contract is void, and the
parties may recover from each other what they may have given under the contract. However, if the
parties state a false cause in the contract to conceal their real agreement, the contract is relatively
simulated and the parties are still bound by their real agreement. Hence, where the essential
requisites of a contract are present and the simulation refers only to the content or terms of the
contract, the agreement is absolutely binding and enforceable between the parties and their
successors in interest. (emphasis supplied)
In the present case, the true intention of the parties in the execution of the Deed of Absolute Sale is
immediately apparent from respondents very own Answer to petitioners Complaint. As respondents
themselves acknowledge, the purpose of the Deed of Absolute Sale was simply to "facilitate the
titling of the [subject] property," not to transfer the ownership of the lot to them. Furthermore,
respondents concede that petitioner Salvador remains in possession of the property and that there is
no indication that respondents ever took possession of the subject property after its supposed
purchase. Such failure to take exclusive possession of the subject property or, in the alternative, to
collect rentals from its possessor, is contrary to the principle of ownership and is a clear badge of
simulation that renders the whole transaction void.
12
Contrary to the appellate courts opinion, the fact that the questioned Deed of Absolute Sale was
reduced to writing and notarized does not accord it the quality of incontrovertibility otherwise
provided by the parole evidence rule. The form of a contract does not make an otherwise simulated
and invalid act valid. The rule on parole evidence is not, as it were, ironclad. Sec. 9, Rule 130 of the
Rules of Court provides the exceptions:
Section 9. Evidence of written agreements. x x x
However, a party may present evidence to modify, explain or add to the terms of written agreement if
he puts in issue in his pleading:
(a) An intrinsic ambiguity, mistake or imperfection in the written agreement;
(b) The failure of the written agreement to express the true intent and agreement of the
parties thereto;
(c) The validity of the written agreement; or
(d) The existence of other terms agreed to by the parties or their successors in interest after
the execution of the written agreement.
The term "agreement" includes wills. (emphasis supplied)
The failure of the Deed of Absolute Sale to express the true intent and agreement of the contracting
parties was clearly put in issue in the present case. Again, respondents themselves admit in their
Answer that the Affidavit of Self-Adjudication and the Deed of Absolute Sale were only executed to
facilitate the titling of the property. The RTC is, therefore, justified to apply the exceptions provided in
the second paragraph of Sec. 9, Rule 130 to ascertain the true intent of the parties, which shall
prevail over the letter of the document. That said, considering that the Deed of Absolute Sale has
been shown to be void for being absolutely simulated, petitioners are not precluded from presenting
evidence to modify, explain or add to the terms of the written agreement.
13
WHEREFORE, the instant petition is GRANTED. The Decision dated March 30, 2012 and the
Resolution dated September 25, 2012 of the Court of Appeals in CA-G.R. CV No. 93035 are hereby
REVERSED and SET ASIDE. The Decision dated January 20, 2009 in Civil Case No. 10407 of the
Regional Trial Court (RTC),Branch 4 in Legazpi City is REINSTATED.
SO ORDERED.
PRESBITERO J. VELASCO, JR.
Associate Justice
WE CONCUR:
KINDS OF CONTRACTS
UNENFORCEABLE CONTRACTS
IGLESIA FILIPINA INDEPENDIENTE vs. HEIRS of BERNARDINO TAEZA, G.R.
No. 179597, February 3, 2014, J. Peralta
G.R. No. 179597
February 3, 2014
IGLESIA FILIPINA INDEPENDIENTE, Petitioner,

vs.
HEIRS of BERNARDINO TAEZA, Respondents.
DECISION
PERALTA, J.:
This deals with the Petition for Review on Certiorari under Rule 45 of the Rules of Court praying that
the Decision of the Court of Appeals (CA), promulgated on June 30, 2006, and the Resolution dated
August 23, 2007, denying petitioner's motion for reconsideration thereof, be reversed and set aside.
1
The CA's narration of facts is accurate, to wit:

The plaintiff-appellee Iglesia Filipina Independiente (IFI, for brevity), a duly registered religious
corporation, was the owner of a parcel of land described as Lot 3653, containing an area of 31,038
square meters, situated at Ruyu (now Leonarda), Tuguegarao, Cagayan, and covered by Original
Certificate of Title No. P-8698. The said lot is subdivided as follows: Lot Nos. 3653-A, 3653-B, 3653C, and 3653-D.
Between 1973 and 1974, the plaintiff-appellee, through its then Supreme Bishop Rev. Macario Ga,
sold Lot 3653-D, with an area of 15,000 square meters, to one Bienvenido de Guzman.
On February 5, 1976, Lot Nos. 3653-A and 3653-B, with a total area of 10,000 square meters, were
likewise sold by Rev. Macario Ga, in his capacity as the Supreme Bishop of the plaintiff-appellee, to
the defendant Bernardino Taeza, for the amount of P100,000.00, through installment, with mortgage
to secure the payment of the balance. Subsequently, the defendant allegedly completed the
payments.
In 1977, a complaint for the annulment of the February 5, 1976 Deed of Sale with Mortgage was filed
by the Parish Council of Tuguegarao, Cagayan, represented by Froilan Calagui and Dante Santos,
the President and the Secretary, respectively, of the Laymen's Committee, with the then Court of
First Instance of Tuguegarao, Cagayan, against their Supreme Bishop Macario Ga and the
defendant Bernardino Taeza.
The said complaint was, however, subsequently dismissed on the ground that the plaintiffs therein
lacked the personality to file the case.
After the expiration of Rev. Macario Ga's term of office as Supreme Bishop of the IFI on May 8,
1981, Bishop Abdias dela Cruz was elected as the Supreme Bishop. Thereafter, an action for the
declaration of nullity of the elections was filed by Rev. Ga, with the Securities and Exchange
Commission (SEC).
In 1987, while the case with the SEC is (sic) still pending, the plaintiff-appellee IFI, represented by
Supreme Bishop Rev. Soliman F. Ganno, filed a complaint for annulment of the sale of the subject
parcels of land against Rev. Ga and the defendant Bernardino Taeza, which was docketed as Civil
Case No. 3747. The case was filed with the Regional Trial Court of Tuguegarao, Cagayan, Branch
III, which in its order dated December 10, 1987, dismissed the said case without prejudice, for the
reason that the issue as to whom of the Supreme Bishops could sue for the church had not yet been
resolved by the SEC.
On February 11, 1988, the Securities and Exchange Commission issued an order resolving the
leadership issue of the IFI against Rev. Macario Ga.
Meanwhile, the defendant Bernardino Taeza registered the subject parcels of land. Consequently,
Transfer Certificate of Title Nos. T-77995 and T-77994 were issued in his name.
The defendant then occupied a portion of the land. The plaintiff-appellee allegedly demanded the
defendant to vacate the said land which he failed to do.
In January 1990, a complaint for annulment of sale was again filed by the plaintiff-appellee IFI, this
time through Supreme Bishop Most Rev. Tito Pasco, against the defendant-appellant, with the
Regional Trial Court of Tuguegarao City, Branch 3.
On November 6, 2001, the court a quo rendered judgment in favor of the plaintiff-appellee. It held
that the deed of sale executed by and between Rev. Ga and the defendant-appellant is null and
void.
1wphi1
The dispositive portion of the Decision of Regional Trial Court of Tuguegarao City (RTC) reads as
follows:
WHEREFORE, judgment is hereby rendered:
1) declaring plaintiff to be entitled to the claim in the Complaint;

2) declaring the Deed of Sale with Mortgage dated February 5, 1976 null and void;
3) declaring Transfer Certificates of Title Numbers T-77995 and T-77994 to be null and void
ab initio;
4) declaring the possession of defendant on that portion of land under question and
ownership thereof as unlawful;
5) ordering the defendant and his heirs and successors-in-interest to vacate the premises in
question and surrender the same to plaintiff; [and]
6) condemning defendant and his heirs pay (sic) plaintiff the amount of P100,000.00 as
actual/consequential damages and P20,000.00 as lawful attorney's fees and costs of the
amount (sic).
4
Petitioner appealed the foregoing Decision to the CA. On June 30, 2006, the CA rendered its
Decision reversing and setting aside the RTC Decision, thereby dismissing the complaint. The CA
ruled that petitioner, being a corporation sole, validly transferred ownership over the land in question
through its Supreme Bishop, who was at the time the administrator of all properties and the official
representative of the church. It further held that "[t]he authority of the then Supreme Bishop Rev. Ga
to enter into a contract and represent the plaintiff-appellee cannot be assailed, as there are no
provisions in its constitution and canons giving the said authority to any other person or entity."
5
Petitioner then elevated the matter to this Court via a petition for review on certiorari, wherein the
following issues are presented for resolution:
A.) WHETHER OR NOT THE COURT OF APPEALS ERRED IN NOT FINDING THE
FEBRUARY 5, 1976 DEED OF SALE WITH MORTGAGE AS NULL AND VOID;
B.) ASSUMING FOR THE SAKE OF ARGUMENT THAT IT IS NOT VOID, WHETHER OR
NOT THE COURT OF APPEALS ERRED IN NOT FINDING THE FEBRUARY 5, 1976 DEED
OF SALE WITH MORTGAGE AS UNENFORCEABLE, [and]
C.) WHETHER OR NOT THE COURT OF APPEALS ERRED IN NOT FINDING
RESPONDENT TAEZA HEREIN AS BUYER IN BAD FAITH.
7
The first two issues boil down to the question of whether then Supreme Bishop Rev. Ga is authorized
to enter into a contract of sale in behalf of petitioner.
Petitioner maintains that there was no consent to the contract of sale as Supreme Bishop Rev. Ga
had no authority to give such consent. It emphasized that Article IV (a) of their Canons provides that
"All real properties of the Church located or situated in such parish can be disposed of only with the
approval and conformity of the laymen's committee, the parish priest, the Diocesan Bishop, with
sanction of the Supreme Council, and finally with the approval of the Supreme Bishop, as
administrator of all the temporalities of the Church." It is alleged that the sale of the property in
question was done without the required approval and conformity of the entities mentioned in the
Canons; hence, petitioner argues that the sale was null and void.
In the alternative, petitioner contends that if the contract is not declared null and void, it should
nevertheless be found unenforceable, as the approval and conformity of the other entities in their
church was not obtained, as required by their Canons.
Section 113 of the Corporation Code of the Philippines provides that:
Sec. 113. Acquisition and alienation of property. - Any corporation sole may purchase and hold real
estate and personal property for its church, charitable, benevolent or educational purposes, and may
receive bequests or gifts for such purposes. Such corporation may mortgage or sell real property
held by it upon obtaining an order for that purpose from the Court of First Instance of the province
where the property is situated; x x x Provided, That in cases where the rules, regulations and
discipline of the religious denomination, sect or church, religious society or order concerned
represented by such corporation sole regulate the method of acquiring, holding, selling and
mortgaging real estate and personal property, such rules, regulations and discipline shall control,
and the intervention of the courts shall not be necessary.
8
Pursuant to the foregoing, petitioner provided in Article IV (a) of its Constitution and Canons of the
Philippine Independent Church, that "[a]ll real properties of the Church located or situated in such
parish can be disposed of only with the approval and conformity of the laymen's
9
committee, the parish priest, the Diocesan Bishop, with sanction of the Supreme Council, and finally
with the approval of the Supreme Bishop, as administrator of all the temporalities of the Church."
Evidently, under petitioner's Canons, any sale of real property requires not just the consent of the
Supreme Bishop but also the concurrence of the laymen's committee, the parish priest, and the
Diocesan Bishop, as sanctioned by the Supreme Council. However, petitioner's Canons do not
specify in what form the conformity of the other church entities should be made known. Thus, as
petitioner's witness stated, in practice, such consent or approval may be assumed as a matter of
fact, unless some opposition is expressed.
10
Here, the trial court found that the laymen's committee indeed made its objection to the sale known
to the Supreme Bishop. The CA, on the other hand, glossed over the fact of such opposition from
the laymen's committee, opining that the consent of the Supreme Bishop to the sale was sufficient,
especially since the parish priest and the Diocesan Bishop voiced no objection to the sale.
11
12
The Court finds it erroneous for the CA to ignore the fact that the laymen's committee objected to the
sale of the lot in question. The Canons require that ALL the church entities listed in Article IV (a)
thereof should give its approval to the transaction. Thus, when the Supreme Bishop executed the
contract of sale of petitioner's lot despite the opposition made by the laymen's committee, he acted
beyond his powers.
This case clearly falls under the category of unenforceable contracts mentioned in Article 1403,
paragraph (1) of the Civil Code, which provides, thus:
Art. 1403. The following contracts are unenforceable, unless they are ratified:
(1) Those entered into in the name of another person by one who has been given no authority or
legal representation, or who has acted beyond his powers;
In Mercado v. Allied Banking Corporation, the Court explained that:
13
x x x Unenforceable contracts are those which cannot be enforced by a proper action in court,
unless they are ratified, because either they are entered into without or in excess of authority or they
do not comply with the statute of frauds or both of the contracting parties do not possess the
required legal capacity. x x x.
14
Closely analogous cases of unenforceable contracts are those where a person signs a deed of
extrajudicial partition in behalf of co-heirs without the latter's authority; where a mother as judicial
guardian of her minor children, executes a deed of extrajudicial partition wherein she favors one
child by giving him more than his share of the estate to the prejudice of her other children; and
where a person, holding a special power of attorney, sells a property of his principal that is not
included in said special power of attorney.
15
16
17
In the present case, however, respondents' predecessor-in-interest, Bernardino Taeza, had already
obtained a transfer certificate of title in his name over the property in question. Since the person
supposedly transferring ownership was not authorized to do so, the property had evidently been
acquired by mistake. In Vda. de Esconde v. Court of Appeals, the Court affirmed the trial court's
ruling that the applicable provision of law in such cases is Article 1456 of the Civil Code which states
that "[i]f property is acquired through mistake or fraud, the person obtaining it is, by force of law,
considered a trustee of an implied trust for the benefit of the person from whom the property comes."
Thus, in Aznar Brothers Realty Company v. Aying, citing Vda. de Esconde, the Court clarified the
concept of trust involved in said provision, to wit:
18
19
20
Construing this provision of the Civil Code, in Philippine National Bank v. Court of Appeals, the Court
stated:
A deeper analysis of Article 1456 reveals that it is not a trust in the technical sense for in a typical
trust, confidence is reposed in one person who is named a trustee for the benefit of another who is
called the cestui que trust, respecting property which is held by the trustee for the benefit of the
cestui que trust. A constructive trust, unlike an express trust, does not emanate from, or generate a
fiduciary relation. While in an express trust, a beneficiary and a trustee are linked by confidential or
fiduciary relations, in a constructive trust, there is neither a promise nor any fiduciary relation to
speak of and the so-called trustee neither accepts any trust nor intends holding the property for the
beneficiary.
The concept of constructive trusts was further elucidated in the same case, as follows:
. . . implied trusts are those which, without being expressed, are deducible from the nature of the
transaction as matters of intent or which are superinduced on the transaction by operation of law as
matters of equity, independently of the particular intention of the parties. In turn, implied trusts are
either resulting or constructive trusts. These two are differentiated from each other as follows:
Resulting trusts are based on the equitable doctrine that valuable consideration and not legal title
determines the equitable title or interest and are presumed always to have been contemplated by
the parties. They arise from the nature of circumstances of the consideration involved in a
transaction whereby one person thereby becomes invested with legal title but is obligated in equity
to hold his legal title for the benefit of another. On the other hand, constructive trusts are created by
the construction of equity in order to satisfy the demands of justice and prevent unjust enrichment.
They arise contrary to intention against one who, by fraud, duress or abuse of confidence, obtains or
holds the legal right to property which he ought not, in equity and good conscience, to hold. (Italics
supplied)
A constructive trust having been constituted by law between respondents as trustees and petitioner
as beneficiary of the subject property, may respondents acquire ownership over the said property?
The Court held in the same case of Aznar, that unlike in express trusts and resulting implied trusts
where a trustee cannot acquire by prescription any property entrusted to him unless he repudiates
the trust, in constructive implied trusts, the trustee may acquire the property through prescription
even if he does not repudiate the relationship. It is then incumbent upon the beneficiary to bring an
action for reconveyance before prescription bars the same.
21
In Aznar, the Court explained the basis for the prescriptive period, to wit:
22
x x x under the present Civil Code, we find that just as an implied or constructive trust is an offspring
of the law (Art. 1456, Civil Code), so is the corresponding obligation to reconvey the property and the
title thereto in favor of the true owner. In this context, and vis--vis prescription, Article 1144 of the
Civil Code is applicable.
Article 1144. The following actions must be brought within ten years from the time the right of action
accrues:
(1) Upon a written contract;
(2) Upon an obligation created by law;
(3) Upon a judgment.
xxx
xxx
xxx
An action for reconveyance based on an implied or constructive trust must perforce prescribe in ten
years and not otherwise. A long line of decisions of this Court, and of very recent vintage at that,
illustrates this rule. Undoubtedly, it is now well-settled that an action for reconveyance based on an
implied or constructive trust prescribes in ten years from the issuance of the Torrens title over the
property.
It has also been ruled that the ten-year prescriptive period begins to run from the date of registration
of the deed or the date of the issuance of the certificate of title over the property, x x x.
23
Here, the present action was filed on January 19, 1990, while the transfer certificates of title over
the subject lots were issued to respondents' predecessor-in-interest, Bernardino Taeza, only on
February 7, 1990.
24
25
Clearly, therefore, petitioner's complaint was filed well within the prescriptive period stated above,
and it is only just that the subject property be returned to its rightful owner.
WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals, dated June 30,
2006, and its Resolution dated August 23, 2007, are REVERSED and SET ASIDE. A new judgment
is hereby entered:
(1) DECLARING petitioner Iglesia Filipina Independiente as the RIGHTFUL OWNER of the
lots covered by Transfer Certificates of Title Nos. T-77994 and T-77995;
(2) ORDERING respondents to execute a deed reconveying the aforementioned lots to
petitioner;
(3) ORDERING respondents and successors-in-interest to vacate the subject premises and
surrender the same to petitioner; and
(4) Respondents to PAY costs of suit.
SO ORDERED.
DIOSDADO M. PERALTA
Associate Justice
WE CONCUR:
RESCISSION
THE WELLEX GROUP, INC. vs. U-LAND AIRLINES, CO., LTD., G.R. No. 167519.
January 14, 2015, J. Leonen
G.R. No. 167519, January 14, 2015
THE WELLEX GROUP, INC., Petitioner, v. U-LAND AIRLINES, CO., LTD., Respondent.
DECISION
LEONEN, J.:
This is a Petition1 for Review on Certiorari under Rule 45 of the Rules of Court. The Wellex Group, Inc.
(Wellex) prays that the Decision2 dated July 30, 2004 of the Court of Appeals in CA-G.R. CV No. 74850 be
reversed and set aside.3
The Court of Appeals affirmed the Decision4 of the Regional Trial Court, Branch 62 of Makati City in Civil Case
No. 99-1407. The Regional Trial Court rendered judgment in favor of U-Land Airlines, Co., Ltd. (U-Land) and
ordered the rescission of the Memorandum of Agreement 5 between Wellex and U-Land.6
Wellex is a corporation established under Philippine law and it maintains airline operations in the
Philippines.7 It owns shares of stock in several corporations including Air Philippines International
Corporation (APIC), Philippine Estates Corporation (PEC), and Express Savings Bank (ESB). 8 Wellex alleges
that it owns all shares of stock of Air Philippines Corporation (APC). 9
U-Land Airlines Co. Ltd. (U-Land) is a corporation duly organized and existing under the laws of Taiwan,
registered to do business . . . in the Philippines.10 It is engaged in the business of air transportation in
Taiwan and in other Asian countries.11

On May 16, 1998, Wellex and U-Land entered into a Memorandum of Agreement 12 (First Memorandum of
Agreement) to expand their respective airline operations in Asia. 13
Terms of the First Memorandum of Agreement
The preambular clauses of the First Memorandum of Agreement state:
WHEREAS, U-LAND is engaged in the business of airline transportation in Taiwan, Philippines and/or in other
countries in the Asian region, and desires to expand its operation and increase its market share by, among
others, pursuing a long-term involvement in the growing Philippine airline industry;
WHEREAS, WELLEX, on the other hand, has current airline operation in the Philippines through its majorityowned subsidiary Air Philippines International Corporation and the latters subsidiary, Air Philippines
Corporation, and in like manner also desires to expand its operation in the Asian regional markets, a
Memorandum of Agreement on ______, a certified copy of which is attached hereto as Annex A and is
hereby made an integral part hereof, which sets forth, among others, the basis for WELLEXs present
ownership of shares in Air Philippines International Corporation.
WHEREAS, the parties recognize the opportunity to develop a long-term profitable relationship by combining
such of their respective resources in an expanded airline operation as well as in property development and in
other allied business activities in the Philippines, and desire to set forth herein the basic premises and their
understanding with respect to their joint cooperation and undertakings. 14
In the First Memorandum of Agreement, Wellex and U-Land agreed to develop a long-term business
relationship through the creation of joint interest in airline operations and property development projects in
the Philippines.15 This long-term business relationship would be implemented through the following
transactions, stated in Section 1 of the First Memorandum of Agreement:
(a) U-LAND shall acquire from WELLEX, shares of stock of AIR PHILIPPINES INTERNATIONAL CORPORATION
(APIC) equivalent to at least 35% of the outstanding capital stock of APIC, but in any case, not less than
1,050,000,000 shares . . . [;]
(b) U-LAND shall acquire from WELLEX, shares of stock of PHILIPPINE ESTATES CORPORATION (PEC)
equivalent to at least 35% of the outstanding capital stock of PEC, but in any case, not less than
490,000,000 shares . . . [;]
(c) U-LAND shall enter into a joint development agreement with PEC . . . [; and]
(d) U-LAND shall be given the option to acquire from WELLEX shares of stock of EXPRESS SAVINGS BANK
(ESB) up to 40% of the outstanding capital stock of ESB . . . under terms to be mutually agreed. 16
I. Acquisition of APIC and PEC shares
The First Memorandum of Agreement stated that within 40 days from its execution date, Wellex and U-Land
would execute a share purchase agreement covering U-Lands acquisition of the shares of stock of both APIC
(APIC shares) and PEC (PEC shares).17 In this share purchase agreement, U-Land would purchase from
Wellex its APIC shares and PEC shares.18
Wellex and U-Land agreed to an initial purchase price of P0.30 per share of APIC and P0.65 per share of
PEC. However, they likewise agreed that the final price of the shares of stock would be reflected in the actual
share purchase agreement.19
Both parties agreed that the purchase price of APIC shares and PEC shares would be paid upon the
execution of the share purchase agreement and Wellexs delivery of the stock certificates covering the
shares of stock. The transfer of APIC shares and PEC shares to U-Land was conditioned on the full
remittance of the final purchase price as reflected in the share purchase agreement. Further, the transfer
was conditioned on the approval of the Securities and Exchange Commission of the issuance of the shares of
stock and the approval by the Taiwanese government of U-Lands acquisition of these shares of stock. 20
Thus, Section 2 of the First Memorandum of Agreement reads:

2. Acquisition of APIC and PEC Shares. - Within forty (40) days from date hereof (unless extended by mutual
agreement), U-LAND and WELLEX shall execute a Share Purchase Agreement (SHPA) covering the
acquisition by U-LAND of the APIC Shares and PEC Shares (collectively, the Subject Shares). Without
prejudice to any subsequent agreement between the parties, the purchase price for the APIC Shares to be
reflected in the SHPA shall be THIRTY CENTAVOS (P0.30) per share and that for the PEC Shares at SIXTY
FIVE CENTAVOS (P0.65) per share.
The purchase price for the Subject Shares as reflected in the SHPA shall be paid in full upon execution of the
SHPA against delivery of the Subject Shares. The parties may agree on such other terms and conditions
governing the acquisition of the Subject Shares to be provided in a separate instrument.
The transfer of the Subject Shares shall be effected to U-LAND provided that: (i) the purchase price
reflected in the SHPA has been fully paid; (ii) the Philippine Securities & Exchange Commission (SEC) shall
have approved the issuance of the Subject Shares; and (iii) any required approval by the Taiwanese
government of the acquisition by U-LAND of the Subject Shares shall likewise have been obtained. 21
II. Operation and management of APIC/PEC/APC
U-Land was entitled to a proportionate representation in the Board of Directors of APIC and PEC in
accordance with Philippine law.22 Operational control of APIC and APC would be exercised jointly by Wellex
and U-Land on the basis of mutual agreement and consultations.23 The parties intended that U-Land would
gain primary control and responsibility for the international operations of APC. 24 Wellex manifested that APC
is a subsidiary of APIC in the second preambular clause of the First Memorandum of Agreement. 25
Section 3 of the First Memorandum of Agreement reads:
3. Operation/Management of APIC/APC. - U-LAND shall be entitled to a proportionate representation in the
Board of Directors of APIC and PEC in accordance with Philippine law. For this purpose, WELLEX shall cause
the resignation of its nominated Directors in APIC and PEC to accommodate U-LANDs pro rata number of
Directors. Subject to applicable Philippine law and regulations, operational control of APIC and Air Philippines
Corporation (APC) shall be lodged jointly to WELLEX and U-LAND on the basis of mutual agreement and
consultations. Further, U-LAND may second technical and other consultants into APIC and/or APC with the
view to increasing service, productivity and efficiency, identifying and implementing profit-service
opportunities, developing technical capability and resources, and installing adequate safety systems and
procedures. In addition, U-LAND shall arrange for the lease by APC of at least three (3) aircrafts owned by
U-LAND under such terms as the parties shall mutually agree upon. It is the intent of the parties that ULAND shall have primary control and responsibility for APCs international operations. 26
III. Entering into and funding a joint development agreement
Wellex and U-Land also agreed to enter into a joint development agreement simultaneous with the execution
of the share purchase agreement. The joint development agreement shall cover housing and other real
estate development projects.27
U-Land agreed to remit the sum of US$3 million not later than May 22, 1998. This sum was to serve as
initial funding for the development projects that Wellex and U-Land were to undertake pursuant to the joint
development agreement. In exchange for the US$3 million, Wellex would deliver stock certificates covering
57,000,000 PEC shares to U-Land.28
The execution of a joint development agreement was also conditioned on the execution of a share purchase
agreement.29
4. Joint Development Agreement with PEC. Simultaneous with the execution of the SHPA, U-LAND and PEC
shall execute a joint development agreement (JDA) to pursue property development projects in the
Philippines. The JDA shall cover specific housing and other real estate development projects as the parties
shall agree. All profits derived from the projects covered by the JDA shall be shared equally between U-LAND
and PEC. U-LAND shall, not later than May 22, 1998, remit the sum of US$3.0 million as initial funding for
the aforesaid development projects against delivery by WELLEX of 57,000,000 shares of PEC as security for
said amount in accordance with Section 9 below.30
In case of conflict between the provisions of the First Memorandum of Agreement and the provisions of the
share purchase agreement or its implementing agreements, the terms of the First Memorandum of
Agreement would prevail, unless the parties specifically stated otherwise or the context of any agreement
between the parties would reveal a different intent. 31 Thus, in Section 6 of the First Memorandum of
Agreement:
6. Primacy of Agreement. It is agreed that in case of conflict between the provisions of this Agreement and
those of the SHPA and the implementing agreements of the SHPA, the provisions of this Agreement shall
prevail, unless the parties specifically state otherwise, or the context clearly reveal a contrary intent. 32
Finally, Wellex and U-Land agreed that if they were unable to agree on the terms of the share purchase
agreement and the joint development agreement within 40 days from signing, then the First Memorandum
of Agreement would cease to be effective.33
In case no agreements were executed, the parties would be released from their respective undertakings,
except that Wellex would be required to refund within three (3) days the US$3 million given as initial funding
by U-Land for the development projects. If Wellex was unable to refund the US$3 million to U-Land, U-Land
would have the right to recover on the 57,000,000 PEC shares that would be delivered to it. 34 Section 9 of
the First Memorandum of Agreement reads:
9. Validity. - In the event the parties are unable to agree on the terms of the SHPA and/or the JDA within
forty (40) days from date hereof (or such period as the parties shall mutually agree), this Memorandum of
Agreement shall cease to be effective and the parties released from their respective undertakings herein,
except that WELLEX shall refund the US$3.0 million provided under Section 4 within three (3) days
therefrom, otherwise U-LAND shall have the right to recover on the 57,000,000 PEC shares delivered to ULAND under Section 4.35
The First Memorandum of Agreement was signed by Wellex Chairman and President William T. Gatchalian
(Mr. Gatchalian) and U-Land Chairman Ker Gee Wang (Mr. Wang) on May 16, 1998. 36
Annex A or the Second Memorandum of Agreement
Attached and made an integral part of the First Memorandum of Agreement was Annex A, as stated in the
second preambular clause. It is a document denoted as a Memorandum of Agreement entered into by
Wellex, APIC, and APC.37
The Second Memorandum of Agreement states:
This Memorandum of Agreement, made and executed this ___th day of ______ at Makati City, by and
between:
THE WELLEX GROUP, INC., a corporation duly organized and existing under the laws of the Philippines,
with offices at 22F Citibank Tower, 8741 Paseo de Roxas, Makati City (hereinafter referred to as TWGI),
AIR PHILIPPINES INTERNATIONAL CORPORATION (formerly FORUM PACIFIC, INC.), likewise a
corporation duly organized and existing under the laws of the Philippines, with offices at 8F Rufino Towers,
Ayala Avenue, Makati City (hereinafter referred to as APIC),
- and AIR PHILIPPINES CORPORATION, corporation duly organized and existing under the laws of the
Philippines, with offices at Multinational Building, Ayala Avenue, Makati City (hereinafter referred to as
APC).
W I T N E S S E T H: That -
WHEREAS, TWGI is the registered and beneficial owner, or has otherwise acquired_____ (illegible
in rollo) rights to the entire issued and outstanding capital stock (the APC SHARES) of AIR PHILIPPINES
CORPORATION (APC) and has made stockholder advances to APC for the _____ (illegible in rollo) of
aircraft, equipment and for working capital used in the latters operations (the _____ (illegible
in rollo) ADVANCES).
WHEREAS, APIC desires to obtain full ownership and control of APC, including all of_____ (illegible
in rollo) assets, franchise, goodwill and operations, and for this purpose has offered to acquire the _____
(illegible in rollo) SHARES of TWGI in APC, including the APC ADVANCES due to TWGI from APC, with _____
(illegible in rollo) of acquiring all the assets, franchise, goodwill and operations of APC; and TWGI has _____
(illegible inrollo) to the same in consideration of the conveyance by APIC to TWGI of certain
investments, _____ (illegible in rollo) issuance of TWGI of shares of stock of APIC in exchange for said APC
SHARES and the _____ (illegible in rollo) ADVANCES, as more particularly described hereunder.
NOW, THEREFORE, the parties agree as follows:
1. TWGI agrees to transfer the APC ADVANCES in APIC in exchange for the _____ (illegible in rollo) by APIC
to TWGI of investment shares of APIC in Express Bank, PetroChemical _____ (illegible in rollo) of Asia
Pacific, Republic Resources & Development Corporation and Philippine _____ (illegible in rollo) Corporation
(the APIC INVESTMENTS).
2. TWGI likewise agrees to transfer the APC SHARES to APIC in exchange solely _____ (illegible in rollo) the
issuance by APIC of One Billion Seven Hundred Ninety Seven Million Eight Hundred Fifty Seven Thousand
Three Hundred Sixty Four (1,797,857,364) shares of its capital stock of a _____ (illegible in rollo) value of
P1.00 per share (the APIC SHARES), taken from the currently authorized but _____ (illegible in rollo)
shares of the capital stock of APIC, as well as from the increase in the authorized capital _____ (illegible
in rollo) of APIC from P2.0 billion to P3.5 billion.
3. It is the basic understanding of the parties hereto that the transfer of the APC _____ (illegible in rollo) as
well as the APC ADVANCES to APIC shall be intended to enable APIC to obtain _____ (illegible in rollo) and
control of APC, including all of APCs assets, franchise, goodwill and _____ (illegible in rollo).
4. Unless the parties agree otherwise, the effectivity of this Agreement and transfers _____ (illegible
in rollo) APC ADVANCES in exchange for the APIC INVESTMENTS, and the transfer of the _____ (illegible
in rollo) SHARES in exchange for the issuance of new APIC SHARES, shall be subject to _____ (illegible
in rollo) due diligence as the parties shall see fit, and the condition subsequent that the _____ (illegible in
rollo) for increase in the authorized capital stock of the APIC from P2.0 billion to P3.5 _____ (illegible inrollo)
shall have been approved by the Securities and Exchange Commission.
IN WITNESS WHEREOF, the parties have caused these presents to be signed on the date _____ (illegible
in rollo) first above written.38 (Emphasis supplied)
This Second Memorandum of Agreement was allegedly incorporated into the First Memorandum of
Agreement as a disclosure to [U-Land] [that] . . . [Wellex] was still in the process of acquiring and
consolidating its title to shares of stock of APIC.39 It included the terms of a share swap whereby [Wellex]
agreed to transfer to APIC its shareholdings and advances to APC in exchange for the issuance by APIC of
shares of stock to [Wellex].40
The Second Memorandum of Agreement was signed by Mr. Gatchalian, APIC President Salud, 41 and APC
President Augustus C. Paiso.42 It was not dated, and no place was indicated as the place of signing. 43 It was
not notarized either, and no other witnesses signed the document. 44
The 40-day period lapsed on June 25, 1998.45 Wellex and U-Land were not able to enter into any share
purchase agreement although drafts were exchanged between the two.
Despite the absence of a share purchase agreement, U-Land remitted to Wellex a total of
US$7,499,945.00.46 These were made in varying amounts and through the issuance of post-dated
checks.47 The dates of remittances were the following:
Date
June 30, 1998
July 2, 1998
July 30, 1998
August 1, 1998
August 3, 1998
September 25, 1998
Total
Amount (in US$)

990,000.00
990,000.00
20,000.00
990,000.00
490,000.00
490,000.00
990,000.00
490,000.00
490,000.00
990,000.00
70,000.00
399,972.50
99, 972.50
US$7,499,945.0048
Wellex acknowledged the receipt of these remittances in a confirmation letter addressed to U-Land dated
September 30, 1998.49
According to Wellex, the parties agreed to enter into a security arrangement. If the sale of the shares of
stock failed to push through, the partial payments or remittances U-Land made were to be secured by these
shares of stock and parcels of land.50 This meant that U-Land could recover the amount it paid to Wellex by
selling these shares of stock and land titles or using them to generate income.
Thus, after the receipt of US$7,499,945.00, Wellex delivered to U-Land stock certificates representing
60,770,000 PEC shares and 72,601,000 APIC shares.51 These were delivered to U-Land on July 1, 1998,
September 1, 1998, and October 1, 1998.52
In addition, Wellex delivered to U-Land Transfer Certificates of Title (TCT) Nos. T-216769, T-216771, T228231, T-228227, T-211250, and T-216775 covering properties owned by Westland Pacific Properties
Corporation in Bulacan; and TCT Nos. T-107306, T-115667, T-105910, T-120250, T-1114398, and T-120772
covering properties owned by Rexlon Realty Group, Inc.53 On October 1, 1998,54 U-Land received a letter
from Wellex, indicating a list of stock certificates that the latter was giving to the former by way of
security.55
Despite these transactions, Wellex and U-Land still failed to enter into the share purchase agreement and
the joint development agreement.
In the letter56 dated July 22, 1999, 10 months57 after the last formal communication between the two
parties, U-Land, through counsel, demanded the return of the US$7,499,945.00. 58 This letter was sent 14
months after the signing of the First Memorandum of Agreement.
Counsel for U-Land claimed that [Wellex] ha[d] unjustifiably refused to enter into the. . . Share Purchase
Agreement.59 As far as U-Land was concerned, the First Memorandum of Agreement was no longer in effect,
pursuant to Section 9.60 As such, U-Land offered to return all the stock certificates covering APIC shares and
PEC shares as well as the titles to real property given by Wellex as security for the amount remitted by ULand.61
Wellex sent U-Land a letter62 dated August 2, 1999, which refuted U-Lands claims. Counsel for Wellex stated
that the two parties carried out several negotiations that included finalizing the terms of the share purchase
agreement and the terms of the joint development agreement. Wellex asserted that under the joint
development agreement, U-Land agreed to remit the sum of US$3 million by May 22, 1998 as initial funding
for the development projects.63
Wellex further asserted that it conducted extended discussions with U-Land in the hope of arriving at the
final terms of the agreement despite the failure of the remittance of the US$3 million on May 22,
1998.64 That remittance pursuant to the joint development agreement would have demonstrated [U-Lands]
good faith in finalizing the agreements.65
Wellex averred that, [s]ave for a few items, [Wellex and U-Land] virtually agreed on the terms of both [the
share purchase agreement and the joint development agreement.] 66 Wellex believed that the parties had
already gone beyond the intent stage of the [First Memorandum of Agreement] and [had already] effected
partial implementation of an over-all agreement.67 U-Land even delivered a total of 12 post-dated checks to
Wellex as payment for the APIC shares and PEC shares.68 [Wellex] on the other hand, had [already]
delivered to [U-Land] certificates of stock of APEC [sic] and PEC as well as various land titles to cover actual
remittances.69 Wellex alleged that the agreements were not finalized because U-Land was forced to
suspend operations because of financial problems spawned by the regional economic turmoil.70
Thus, Wellex maintained that the inability of the parties to execute the [share purchase agreement] and the
[joint development agreement] principally arose from problems at [U-Lands] side, and not due to [Wellexs]
unjustified refusal to enter into [the] [share purchase agreement][.] 71
On July 30, 1999, U-Land filed a Complaint 72 praying for rescission of the First Memorandum of Agreement
and damages against Wellex and for the issuance of a Writ of Preliminary Attachment. 73From U-Lands point
of view, its primary reason for purchasing APIC shares from Wellex was APICs majority ownership of shares
of stock in APC (APC shares).74 After verification with the Securities and Exchange Commission, U-Land
discovered that APIC did not own a single share of stock in APC.75 U-Land alleged that it repeatedly
requested that the parties enter into the share purchase agreement. 76U-Land attached the demand letter
dated July 22, 1999 to the Complaint.77 However, the 40-day period lapsed, and no share purchase
agreement was finalized.78
U-Land alleged that, as of the date of filing of the Complaint, Wellex still refused to return the amount of
US$7,499,945.00 while refusing to enter into the share purchase agreement. 79 U-Land stated that it was
induced by Wellex to enter into and execute the First Memorandum of Agreement, as well as release the
amount of US$7,499,945.00.80
In its Answer with Compulsory Counterclaim,81 Wellex countered that U-Land had no cause of
action.82 Wellex maintained that under the First Memorandum of Agreement, the parties agreed to enter into
a share purchase agreement and a joint development agreement. 83 Wellex alleged that to bring the share
purchase agreement to fruition, it would have to acquire the corresponding shares in APIC. 84 It claimed that
U-Land was fully aware that the former still ha[d] to consolidate its title over these shares.85 This was the
reason for Wellexs attachment of the Second Memorandum of Agreement to the First Memorandum of
Agreement. Wellex attached the Second Memorandum of Agreement as evidence to refute U-Lands claim of
misrepresentation.86
Wellex further alleged that U-Land breached the First Memorandum of Agreement since the payment for the
shares was to begin during the 40-day period, which began on May 16, 1998. 87 In addition, U-Land failed to
remit the US$3 million by May 22, 1998 that would serve as initial funding for the development
projects.88 Wellex claimed that the remittance of the US$3 million on May 22, 1998 was a mandatory
obligation on the part of U-Land.89
Wellex averred that it presented draft versions of the share purchase agreement, which were never
finalized.90 Thus, it believed that there was an implied extension of the 40-day period within which to enter
into the share purchase agreement and the joint development agreement since U-Land began remitting
sums of money in partial payment for the purchase of the shares of stock. 91
In its counterclaim against U-Land, Wellex alleged that it had already set in motion building and
development of real estate projects on four (4) major sites in Cavite, Iloilo, and Davao. It started initial
construction on the basis of its agreement with U-Land to pursue real estate development projects. 92
Wellex claims that, had the development projects pushed through, the parties would have shared equally in
the profits of these projects.93 These projects would have yielded an income of P2,404,948,000.00, as per
the study Wellex conducted, which was duly recognized by U-Land. 94 Half of that amount,
P1,202,474,000.00, would have redounded to Wellex.95 Wellex, thus, prayed for the rescission of the First
Memorandum of Agreement and the payment of P1,202,474,000 in damages for loss of profit. 96 It prayed for
the payment of moral damages, exemplary damages, attorneys fees, and costs of suit. 97
In its Reply,98 U-Land denied that there was an extension of the 40-day period within which to enter into the
share purchase agreement and the joint development agreement. It also denied requesting for an extension
of the 40-day period. It further raised that there was no provision in the First Memorandum of Agreement
that required it to remit payments for Wellexs shares of stock in APIC and PEC within the 40-day period.
Rather, the remittances were supposed to begin upon the execution of the share purchase agreement. 99
As for the remittance of the US$3 million, U-Land stated that the issuance of this amount on May 22, 1998
was supposed to be simultaneously made with Wellexs delivery of the stock certificates for 57,000,000 PEC
shares. These stock certificates were not delivered on that date. 100
With regard to the drafting of the share purchase agreement, U-Land denied that it was Wellex that
presented versions of the agreement. U-Land averred that it was its own counsel who drafted versions of the
share purchase agreement and the joint development agreement, which Wellex refused to sign. 101
U-Land specifically denied that it had any knowledge prior to or during the execution of the First
Memorandum of Agreement that Wellex still had to consolidate its title over its shares in APIC. U-Land
averred that it relied on Wellexs representation that it was a majority owner of APIC shares and that APIC
owned a majority of APC shares.102
Moreover, U-Land denied any knowledge of the initial steps that Wellex undertook to pursue the
development projects and denied any awareness of a study conducted by Wellex regarding the potential
profit of these projects.103
The case proceeded to trial.
U-Land presented Mr. David Tseng (Mr. Tseng), its President and Chief Executive Officer, as its sole
witness.104 Mr. Tseng testified that [s]ometime in 1997, Mr. William Gatchalian who was in Taiwan invited
[U-Land] to join in the operation of his airline company[.] 105 U-Land did not accept the offer at that
time.106 During the first quarter of 1998, Mr. Gatchalian went to Taiwan and invited [U-Land] to invest in Air
Philippines[.]107 This time, U-Land alleged that subsequent meetings were held where Mr. Gatchalian,
representing Wellex, claimed ownership of a majority of the shares of APIC and ownership by APIC of a
majority of the shares of [APC,] a domestic carrier in the Philippines.108Wellex, through Mr. Gatchalian,
offered to sell to U-Land PEC shares as well.109
According to Mr. Tseng, the parties agreed to enter into the First Memorandum of Agreement after their
second meeting.110 Mr. Tseng testified that under this memorandum of agreement, the parties would enter
into a share purchase agreement within forty (40) days from its execution which [would] put into effect the
sale of the shares [of stock] of APIC and PEC[.]111 However, the [s]hare [p]urchase [a]greement was not
executed within the forty-day period despite the draft . . . given [by U-Land to Wellex].112
Mr. Tseng further testified that it was only after the lapse of the 40-day period that U-Land discovered that
Wellex needed money for the transfer of APC shares to APIC. This allegedly shocked U-Land since under the
First Memorandum of Agreement, APIC was supposed to own a majority of APC shares. Thus, U-Land
remitted to Wellex a total of US$7,499,945.00 because of its intent to become involved in the aviation
business in the Philippines. These remittances were confirmed by Wellex through a confirmation letter.
Despite the remittance of this amount, no share purchase agreement was entered into by the parties. 113
Wellex presented its sole witness, Ms. Elvira Ting (Ms. Ting), Vice President of Wellex. She admitted her
knowledge of the First Memorandum of Agreement as she was involved in its drafting. She testified that the
First Memorandum of Agreement made reference, under its second preambular clause, to the Second
Memorandum of Agreement entered into by Wellex, APIC, and APC. She testified that under the First
Memorandum of Agreement, U-Lands purchase of APIC shares and PEC shares from Wellex would take place
within 40 days, with the execution of a share purchase agreement. 114
According to Ms. Ting, after the 40-day period lapsed, U-Land Chairman Mr. Wang requested sometime in
June of 1998 for an extension for the execution of the share purchase agreement and the remittance of the
US$3 million. As proof that Mr. Wang made this request, Ms. Ting testified that Mr. Wang sent several postdated checks to cover the payment of the APIC shares and PEC shares and the initial funding of US$3 million
for the joint development agreement. She testified that Mr. Wang presented a draft of the share purchase
agreement, which Wellex rejected. Wellex drafted a new version of the share purchase
agreement.115 However, the share purchase agreement was not executed because during the period of
negotiation, Wellex learned from other sources that U-Land encountered difficulties starting October of
1998.116 Ms. Ting admitted that U-Land made the remittances to Wellex in the amount of
US$7,499,945.00.117
Ms. Ting testified that U-Land was supposed to make an initial payment of US$19 million under the First
Memorandum of Agreement. However, U-Land only paid US$7,499,945.00. The total payments should have
amounted to US$41 million.118
Finally, Ms. Ting testified that Wellex tried to contact U-Land to have a meeting to thresh out the problems
of the First Memorandum of Agreement, but U-Land did not reply. Instead, Wellex only received
communication from U-Land regarding their subsequent negotiations through the latters demand letter
dated July 22, 1999. In response, Wellex wrote to U-Land requesting another meeting to discuss the
demands. However, U-Land already filed the Complaint for rescission and caused the attachment against the
properties of Wellex, causing embarrassment to Wellex.119
In the Decision dated April 10, 2001, the Regional Trial Court of Makati City held that rescission of the First
Memorandum of Agreement was proper:
The first issue must be resolved in the negative. Preponderance of evidence leans in favor of plaintiff that it
is entitled to the issuance of the writ of preliminary attachment. Plaintiffs evidence establishes the facts that
it is engaged in the airline business in Taiwan, was approached by defendant, through its Chairman William
Gatchalian, and was invited by the latter to invest in an airline business in the Philippines, Air Philippines
Corporation (APC); that plaintiff became interested in the invitation of defendant; that during the
negotiations between plaintiff and defendant, defendant induced plaintiff to buy shares in Air Philippines
International Corporation (APIC) since it owns majority of the shares of APC; that defendant also induced
plaintiff to buy shares of APIC in Philippine Estates Corporation (PEC); that the negotiations between plaintiff
and defendant culminated into the parties executing a MOA (Exhs. C to C-3, also Exh. 1); that in the
second Whereas clause of the MOA, defendant represented that it has a current airline operation through
its majority-owned subsidiary APIC, that under the MOA, the parties were supposed to enter into a Share
Purchase Agreement (SPA) within forty (40) days from May 16, 1998, the date the MOA in order to effect
the transfer of APIC and PEC shares of defendant to plaintiff; that plaintiff learned from defendant that APIC
does not actually own a single share in APC; that plaintiff verified with the Securities and Exchange
Commission (SEC), by obtaining a General Information Sheet therefrom (Exh. C-Attachment); that APIC
does not in fact own APC; that defendant induced plaintiff to still remit its investment to defendant, which
plaintiff did as admitted by defendant per its Confirmation Letter (Exh. D) in order that APC shares could
be transferred to APIC; that plaintiff remitted a total of US$7,499,945.00 to defendant; and that during the
forty-day period stipulated in the MOA and even after the lapse of the said period, defendant has not
entered into the SPA, nor has defendant caused the transfer of APC shares to APIC.
In the second Whereas clause of the MOA (Exh. C), defendants misrepresentation that APIC owns APC is
made clear, as follows:
WHEREAS, WELLEX, on the other hand, has current airline operation in the Philippines through its majorityowned subsidiary Air Philippines International Corporation (Exh. C) and the latters subsidiary, Air
Philippines Corporation, and in like manner also desires to expand its operation in the Asian regional
markets; x x x (Second Whereas of Exh. C)
On the other hand, defendants evidence failed to disprove plaintiffs evidence. The testimony of defendants
sole witness Elvira Ting, that plaintiff knew at the time of the signing of the MOA that APIC does not own a
majority of the shares of APC because another Memorandum of Agreement was attached to the MOA (Exh
1) pertaining to the purchase of APC shares by APIC is unavailing. The second Whereas clause of the
MOA leaves no room for interpretation. . . . The second MOA purportedly attached as Annex A of this MOA
merely enlightens the parties on the manner by which APIC acquired the shares of APC. Besides, . . . the
second MOA was not a certified copy and did not contain a marking that it is an Annex A when it was
supposed to be an Annex A and a certified copy per the MOA between plaintiff and defendant. As can be
also gathered from her testimony, Ms. Ting does not have personal knowledge that plaintiff was not
informed that APIC did not own shares of APC during the negotiations as she was not present during the
negotiations between plaintiff and defendants William Gatchalian. Her participation in the agreement
between the parties [was] merely limited to the preparation of the documents to be signed. Ms. Ting
testified, as follows:
Q During the negotiation, you did not know anything about that?
A I was not involved in the negotiation, sir.
Q And you are just making your statement that U-Land knew about the intended transfer of shares from
APC to APIC because of this WHEREAS CLAUSE and the Annex to this Memorandum of Agreement?
A Yes, it was part of the contract.
(TSN, Elvira Ting, June 6, 2000, pp. 8-10)
Defendants fraud in the performance of its obligation under the MOA is further revealed when Ms. Ting
testified on cross-examination that notwithstanding the remittances made by plaintiff in the total amountn
[sic] of US$7,499, 945.00 to partially defray the cost of transferring APC shares to APIC even as of the year
2000, as follows:
Q Ms. Ting, can you please tell the Court if you know who owns shares of Air Philippines Corporation at this
time?
A Air Philippines Corporation right now is own [sic] by Wellex Group and certain individual.
Q How much shares of Air Philippines Corporation is owned by Wellex Group?
A Around twenty...at this moment around twenty five percent (25%).
Q Can you tell us if you know who are the other owners of the shares of Air Philippines?
A There are several individual owners, I cannot recall the names.
Q Could [sic] you know if Air Philippines Intl. Corporation is one of the owners?
A As of this moment, no sir.
(lbid, p. 16)
That defendant represented to plaintiff that it needed the remittances of plaintiff, even if no SPA was
executed yet between the parties, to effect the transfer of APC shares to APIC is admitted by its same
witness also in this wise:
Q You said that remittances were made to the Wellex Group, Incorporated by plaintiff for the period from
June 1998 to September 1998[,] is that correct?
A Yes, Sir.
Q During all these times, that remittances were made in the total amount of more than seven million
dollars, did you ever know if plaintiff asked for evidence from your company that AIR PHILIPPINES
INTERNATIONAL CORPORATION has already acquired shares of AIR PHILIPPINES CORPORATION?
A There were queries on the matter.
Q And what was your answer to those queries, Madam Witness?
A We informed them that the decision was still in the process.
Q Even up to the time that plaintiff U-Land stopped the remittances sometime in September 1998 you have
not effected the transfer of shares of AIR PHILIPPINES CORPORATION to AIR PHILIPPINES INTERNATIONCAL
[sic] CORPORATION[,] am I correct?
A APC to APIC, well at that time its still in the process.
Q In fact, Madam Witness, is it not correct for me to say that one of the reasons why U-Land Incorporated
was convinced to remit the amounts of money totalling seven million dollars plus, was that your company
said that it needed funds to effect these transfers, is that correct?
A Yes, sir.
(lbid, pp. 25-29)
As the evidence adduced by the parties stand, plaintiff has established the fact that it had made remittances
in the total amount of US$7,499,945.00 to defendant in order that defendant will make good its
representation that APC is a subsidiary of APIC. The said remittances are admitted by defendant.
Notwithstanding the said remittances, APIC does not own a single share of APC. On the other hand,
defendant could not even satisfactorily substantiate its claim that at least it had the intention to cause the
transfer of APC shares to APIC. [D]efendant obviously did not enter into the stipulated SPA because it did
not have the shares of APC transferred to APIC despite its representations. Under the circumstances, it is
clear that defendant fraudulently violated the provisions of the MOA. 120 (Emphasis supplied)
On appeal, the Court of Appeals affirmed the ruling of the Regional Trial Court. 121 In its July 30, 2004
Decision, the Court of Appeals held that the Regional Trial Court did not err in granting the rescission:
Records show that in the answer filed by defendant-appellant, the latter itself asked for the rescission of the
MOA. Thus, in effect, it prays for the return of what has been given or paid under the MOA, as the law
creates said obligation to return the things which were the object of the contract, and the same could be
carried out only when he who demands rescission can return whatever he may be obliged to restore. The
law says:
Rescission creates the obligation to return the things which were the object of the contract, together with
their fruits, and the price with its interest; consequently, it can be carried out only when he who demands
rescission can return whatever he may be obliged to restore.
Appellant, therefore, cannot ask for rescission of the MOA and yet refuse to return what has been paid to it.
Further, appellants claim that the lower court erred in ruling for the rescission of the MOA is absurd and
ridiculous because rescission thereof is prayed for by the former. . . .
This Court agrees with the lower court that appellee is the injured party in this case, and therefore is entitled
to rescission, because the rescission referred to here is predicated on the breach of faith by the appellant
which breach is violative of the reciprocity between the parties. It is noted that appellee has partly complied
with its own obligation, while the appellant has not. It is, therefore, the right of the injured party to ask for
rescission because the guilty party cannot ask for rescission.
The lower court . . . correctly ruled that:
. . . This Court agrees with plaintiff that defendants misrepresentations regarding APICs not owning shares
in APC vitiates its consent to the MOA. Defendants continued misrepresentation that it will cause the
transfer of APC shares in APIC inducing plaintiff to remit money despite the lapse of the stipulated forty day
period, further establishes plaintiffs right to have the MOA rescinded.
Section 9 of the MOA itself provides that in the event of the non-execution of an SPA within the 40 day
period, or within the extensions thereof, the payments made by plaintiff shall be returned to it, to wit:
9 Validity.- In the event that the parties are unable to agree on the terms of the SHPA and/or JDA within
forty (40) days from the date hereof (or such period as the parties shall mutually agree), this Memorandum
of Agreement shall cease to be effective and the parties released from their respective undertakings herein,
except that WELLEX shall refund the US$3.0 million under Section 4 within three (3) days therefrom,
otherwise U-LAND shall have the right to recover the 57,000,000 PEC shares delivered to U-LAND under
Section 4.
Clearly, the parties were not able to agree on the terms of the SPA within and even after the lapse of the
stipulated 40 day period. There being no SPA entered into by and between the plaintiff and defendant,
defendants return of the remittances [of] plaintiff in the total amount of US$7,499,945 is only proper, in the
same vein, plaintiff should return to defendant the titles and certificates of stock given to it by
defendant.122(Citations omitted)
Hence, this Petition was filed.
Petitioners Arguments
Petitioner Wellex argues that contrary to the finding of the Court of Appeals, respondent U-Land was not
entitled to rescission because the latter itself violated the First Memorandum of Agreement. Petitioner Wellex
states that respondent U-Land was actually bound to pay US$17.5 million for all of APIC shares and PEC
shares under the First Memorandum of Agreement and the US$3 million to pursue the development projects
under the joint development agreement. In sum, respondent U-Land was liable to petitioner Wellex for the
total amount of US$20.5 million. Neither the Court of Appeals nor the Regional Trial Court made any
mention of the legal effect of respondent U-Lands failure to pay the full purchase price. 123
On the share purchase agreement, petitioner Wellex asserts that its obligation to deliver the totality of the
shares of stock would become demandable only upon remittance of the full purchase price of US$17.5
million.124 The full remittance of the purchase price of the shares of stock was a suspensive condition for the
execution of the share purchase agreement and delivery of the shares of stock. Petitioner Wellex argues that
the use of the term upon in Section 2 of the First Memorandum of Agreement clearly provides that the full
payment of the purchase price must be given simultaneously or concurrent with the execution of the
share purchase agreement.125
Petitioner Wellex raises that the Court of Appeals erred in saying that the rescission of the First
Memorandum of Agreement was proper because petitioner Wellex itself asked for this in its Answer before
the trial court.126 It asserts that there can be no rescission of a non-existent obligation, such as [one]
whose suspensive condition has not yet happened[,]127 as held in Padilla v. Spouses
Paredes.128 Citing Villaflor v. Court of Appeals129 and Spouses Agustin v. Court of Appeals,130 it argues that
the vendor. . . has no obligation to deliver the thing sold. . . if the buyer. . . fails to fully pay the price as
required by the contract.131 In this case, petitioner Wellex maintains that respondent U-Lands remittance of
US$7,499,945.00 constituted mere partial performance of a reciprocal obligation. 132 Thus, respondent ULand was not entitled to rescission. The nature of this reciprocal obligation requires both parties
simultaneous fulfillment of the totality of their reciprocal obligations and not only partial performance on the
part of the allegedly injured party.
As to the finding of misrepresentations, petitioner Wellex raises that a seller may sell a thing not yet
belonging to him at the time of the transaction, provided that he will become the owner at the time of
delivery so that he can transfer ownership to the buyer. Contrary to the finding of the lower courts,
petitioner Wellex was obliged to be the owner of the shares only when the time came to deliver these to
respondent U-Land and not during the perfection of the contract itself.133
Finally, petitioner Wellex argues that respondent U-Land could have recovered through the securities given
to the latter.134 Petitioner Wellex invokes Suria v. Intermediate Appellate Court,135 which held that an action
for rescission is not a principal action that is retaliatory in character [under Article 1191 of the Civil Code,
but] a subsidiary one which. . . is available only in the absence of any other legal remedy [under Article
1384 of the Civil Code].136
Respondents Arguments
Respondent U-Land argues that it was the execution of the share purchase agreement that would result in
its purchase of the APIC shares and PEC shares.137 It was not the full remittance of the purchase price of the
shares of stock as indicated in the First Memorandum of Agreement, as alleged by petitioner
Wellex.138 Respondent U-Land asserts that the First Memorandum of Agreement provides that the exact
number of APIC shares and PEC shares to be purchased under the share purchase agreement and the final
price of these shares were not yet determined by the parties. 139
Respondent U-Land reiterates that it was petitioner Wellex that requested for the remittances amounting to
US$7,499,945.00 to facilitate APICs purchase of APC shares.140 Thus, it was petitioner Wellexs refusal to
enter into the share purchase agreement that led to respondent U-Land demanding rescission of the First
Memorandum of Agreement and the return of the US$7,499,945.00. 141Respondent U-Land further argues
before this court that petitioner Wellex failed to present evidence as to how the money was spent, stating
that Ms. Ting admitted that the Second Memorandum of Agreement was not consummated at any time.142
Respondent U-Land raises that petitioner Wellex was guilty of fraud by making it appear that APC was a
subsidiary of APIC.143 It reiterates that, as an airline company, its primary reason for entering into the First
Memorandum of Agreement was to acquire management of APC, another airline company.144Under Article
1191 of the Civil Code, respondent U-Land, as the injured party, was entitled to rescission due to the fatal
misrepresentations committed by petitioner Wellex.145

Respondent U-Land further asserts that the shareholdings in APIC and APC were never in
question.146 Rather, it was petitioner Wellexs misrepresentation that APIC was a majority shareholder of
APC that compelled it to enter into the agreement.147
As for Suria, respondent U-land avers that this case was inapplicable because the pertinent provision
in Suria was not Article 1191 but rescission under Article 1383 of the Civil Code. 148 The rescission referred
to in Article 1191 referred to resolution of a contract due to a breach of a mutual obligation, while Article
1384 spoke of rescission because of lesion and damage.149 Thus, the rescission that is relevant to the
present case is that of Article 1191, which involves breach in a reciprocal obligation. It is, in fact, resolution,
and not rescission as a result of fraud or lesion, as found in Articles 1381, 1383, and 1384 of the Civil
Code.150
The Issue
The question presented in this case is whether the Court of Appeals erred in affirming the Decision of the
Regional Trial Court that granted the rescission of the First Memorandum of Agreement prayed for by ULand.
The Petition must be denied.
I
The requirement of a share purchase agreement
The Civil Code provisions on the interpretation of contracts are
controlling to this case, particularly Article 1370, which reads:
ART. 1370. If the terms of a contract are clear and leave no doubt upon the intention of the contracting
parties, the literal meaning of its stipulations shall control.
If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the
former.
In Norton Resources and Development Corporation v. All Asia Bank Corporation:151
The cardinal rule in the interpretation of contracts is embodied in the first paragraph of Article 1370 of the
Civil Code: [i]f the terms of a contract are clear and leave no doubt upon the intention of the contracting
parties, the literal meaning of its stipulations shall control. This provision is akin to the plain meaning rule
applied by Pennsylvania courts, which assumes that the intent of the parties to an instrument is embodied
in the writing itself, and when the words are clear and unambiguous the intent is to be discovered only from
the express language of the agreement. It also resembles the four corners rule, a principle which allows
courts in some cases to search beneath the semantic surface for clues to meaning. A court's purpose in
examining a contract is to interpret the intent of the contracting parties, as objectively manifested by them.
The process of interpreting a contract requires the court to make a preliminary inquiry as to whether the
contract before it is ambiguous. A contract provision is ambiguous if it is susceptible of two reasonable
alternative interpretations. Where the written terms of the contract are not ambiguous and can only be read
one way, the court will interpret the contract as a matter of law. If the contract is determined to be
ambiguous, then the interpretation of the contract is left to the court, to resolve the ambiguity in the light of
the intrinsic evidence.152 (Emphasis supplied)
As held in Norton, this court must first determine whether a provision or stipulation contained in a contract
is ambiguous. Absent any ambiguity, the provision on its face will be read as it is written and treated as the
binding law of the parties to the contract.
The parties have differing interpretations of the terms of the First Memorandum of Agreement. Petitioner
Wellex even admits that the facts of the case are fairly undisputed [and that] [i]t is only the parties
respective [understanding] of these facts that are not in harmony.153
The second preambular clause of the First Memorandum of Agreement reads:

WHEREAS, WELLEX, on the other hand, has current airline operation in the Philippines through its majorityowned subsidiary Air Philippines International Corporation and the latters subsidiary, Air Philippines
Corporation, and in like manner also desires to expand its operation in the Asian regional markets; a
Memorandum of Agreement on ______, a certified copy of which is attached hereto as Annex A and is
hereby made an integral part hereof, which sets forth, among others, the basis for WELLEXs present
ownership of shares in Air Philippines International Corporation.154 (Emphasis supplied)
I. Basic Agreement. - The parties agree to develop a long-term business relationship initially through the
creation of joint interest in airline operations as well as in property development projects in the Philippines
to be implemented as follows:
(a) U-LAND shall acquire from WELLEX, shares of stock of AIR PHILIPPINES INTERNATIONAL CORPORATION
(APIC) equivalent to at least 35% of the outstanding capital stock of APIC, but in any case, not less than
1,050,000,000 shares (the APIC Shares).
(b) U-LAND shall acquire from WELLEX, shares of stock of PHILIPPINE ESTATES CORPORATION (PEC)
equivalent to at least 35% of the outstanding capital stock of PEC, but in any case, not less than
490,000,000 shares (the PEC Shares).
(c) U-LAND shall enter into a joint development agreement with PEC to jointly pursue property development
projects in the Philippines.
(d) U-LAND shall be given the option to acquire from WELLEX shares of stock of EXPRESS SAVINGS BANK
(ESB) up to 40% of the outstanding capital stock of ESB (the ESB Shares) under terms to be mutually
agreed.155
The First Memorandum of Agreement contained the following stipulations regarding the share purchase
agreement:
2. Acquisition of APIC and PEC Shares. - Within forty (40) days from date hereof (unless extended by
mutual agreement), U-LAND and WELLEX shall execute a Share Purchase Agreement (SHPA) covering the
acquisition by U-LAND of the APIC Shares and PEC Shares (collectively, the Subject Shares). Without
prejudice to any subsequent agreement between the parties, the purchase price for the APIC Shares to be
reflected in the SHPA shall be THIRTY CENTAVOS (P0.30) per share and that for the PEC Shares at SIXTY
FIVE CENTAVOS (P0.65) per share.
The purchase price for the Subject Shares as reflected in the SHPA shall be paid in full upon execution of the
SHPA against delivery of the Subject Shares. The parties may agree on such other terms and conditions
governing the acquisition of the Subject Shares to be provided in a separate instrument.
The transfer of the Subject Shares shall be effected to U-LAND provided that: (i) the purchase price
reflected in the SHPA has been fully paid; (ii) the Philippine Securities & Exchange Commission (SEC) shall
have approved the issuance of the Subject Shares; and (iii) any required approval by the Taiwanese
government of the acquisition by U-LAND of the Subject Shares shall likewise have been
obtained.156 (Emphasis supplied)
As for the joint development agreement, the First Memorandum of Agreement contained the following
stipulation:
4. Joint Development Agreement with PEC. Simultaneous with the execution of the SHPA, U-LAND and
PEC shall execute a joint development agreement (JDA) to pursue property development projects in the
Philippines. The JDA shall cover specific housing and other real estate development projects as the parties
shall agree. All profits derived from the projects covered by the JDA shall be shared equally between U-LAND
and PEC.U-LAND shall, not later than May 22, 1998, remit the sum of US$3.0 million as initial funding for
the aforesaid development projects against delivery by WELLEX of 57,000,000 shares of PEC as security for
said amount in accordance with Section 9 below.157 (Emphasis provided)
Finally, the parties included the following stipulation in case of a failure to agree on the terms of the share
purchase agreement or the joint development agreement:
9. Validity. - In the event the parties are unable to agree on the terms of the SHPA and/or the JDA within
forty (40) days from date hereof (or such period as the parties shall mutually agree), this Memorandum of
Agreement shall cease to be effective and the parties released from their respective undertakings herein,
except that WELLEX shall refund the US$3.0 million provided under Section 4 within three (3) days
therefrom, otherwise U-LAND shall have the right to recover on the 57,000,000 PEC shares delivered to ULAND under Section 4.158
Section 2 of the First Memorandum of Agreement clearly provides that the execution of a share purchase
agreement containing mutually agreeable terms and conditions must first be accomplished by the
parties before respondent U-Land purchases any of the shares owned by petitioner Wellex. A perusal of the
stipulation on its face allows for no other interpretation.
The need for a share purchase agreement to be entered into before payment of the full purchase price can
further be discerned from the other stipulations of the First Memorandum of Agreement.
In Section 1, the parties agreed to enter into a joint business venture, through entering into two (2)
agreements: a share purchase agreement and a joint development agreement. However, Section 1 provides
that in the share purchase agreement, U-LAND shall acquire from WELLEX, shares of stock of AIR
PHILIPPINES INTERNATIONAL CORPORATION (APIC) equivalent to at least 35% of the outstanding capital
stock of APIC, but in any case, not less than 1,050,000,000 shares (the APIC Shares). 159
As for the PEC shares, Section 1 provides that respondent U-Land shall purchase from petitioner Wellex
shares of stock of PHILIPPINE ESTATES CORPORATION (PEC) equivalent to at least 35% of the
outstanding capital stock of PEC, but in any case, not less than 490,000,000 shares (the PEC Shares).160
The use of the terms at least 35% of the outstanding capital stock of APIC, but in any case, not less than
1,050,000,000 shares and at least 35% of the outstanding capital stock of PEC, but in any case, not less
than 490,000,000 shares means that the parties had yet to agree on the number of shares of stock to be
purchased.
The need to execute a share purchase agreement before payment of the purchase price of the shares is
further shown by the clause, [w]ithout prejudice to any subsequent agreement between the parties, the
purchase price for the APIC Shares to be reflected in the [share purchase agreement]shall be... P0.30 per
share and that for the PEC Shares at... P0.65 per share.161 This phrase clearly shows that the final price of
the shares of stock was to be reflected in the share purchase agreement. There being no share purchase
agreement executed, respondent U-Land was under no obligation to begin payment or remittance of the
purchase price of the shares of stock.
Petitioner Wellex argues that the use of upon in Section 2 162 of the First Memorandum of Agreement means
that respondent U-Land must pay the purchase price of the shares of stock in its entirety when they are
transferred. This argument has no merit.
ART. 1373. If some stipulation of any contract should admit of several meanings, it shall be understood as
bearing that import which is most adequate to render it effectual.
It is necessary for the parties to first agree on the final purchase price and the number of shares of stock to
be purchased before respondent U-Land is obligated to pay or remit the entirety of the purchase price. Thus,
petitioner Wellexs argument cannot be sustained since the parties to the First Memorandum of Agreement
were clearly unable to agree on all the terms concerning the share purchase agreement. It would be absurd
for petitioner Wellex to expect payment when respondent U-Land did not yet agree to the final amount to be
paid for the totality of an indeterminate number of shares of stock.
The third paragraph of Section 2163 provides that the transfer of the Subject Shares shall take place upon
the fulfillment of certain conditions, such as full payment of the purchase price as reflected in the [share
purchase agreement]. The transfer of the shares of stock is different from the execution of the share
purchase agreement. The transfer of the shares of stock requires full payment of the final purchase price.
However, that final purchase price must be reflected in the share purchase agreement. The execution of the
share purchase agreement will require the existence of a finalagreement.
In its Answer with counterclaim before the trial court, petitioner Wellex argued that the payment of the
shares of stock was to begin within the 40-day period. Petitioner Wellexs claim is not in any of the
stipulations of the contract. Its subsequent claim that respondent U-Land was actually required to remit a
total of US$20.5 million is likewise bereft of basis since there was no final purchase price of the shares of
stock that was agreed upon, due to the failure of the parties to execute a share purchase agreement. In
addition, the parties had yet to agree on the final number of APIC shares and PEC shares that respondent ULand would acquire from petitioner Wellex.
Therefore, the understanding of the parties captured in the First Memorandum of Agreement was to
continue their negotiation to determine the price and number of the shares to be purchased. Had it been
otherwise, the specific number or percentage of shares and its price should already have been provided
clearly and unambiguously. Thus, they agreed to a 40-day period of negotiation.
Section 9 of the First Memorandum of Agreement explicitly provides that:
In the event the parties are unable to agree on the terms of the SHPA and/or the JDA within forty (40) days
from date hereof (or such period as the parties shall mutually agree), this Memorandum of Agreement shall
cease to be effective and the parties released from their respective undertakings herein . . . 164
The First Memorandum of Agreement was, thus, an agreement to enter into a share purchase agreement.
The share purchase agreement should have been executed by the parties within 40 days from May 16,
1998, the date of the signing of the First Memorandum of Agreement.
When the 40-day period provided for in Section 9 lapsed, the efficacy of the First Memorandum of
Agreement ceased. The parties were released from their respective undertakings. Thus, from June 25,
1998, the date when the 40-day period lapsed, the parties were no longer obliged to negotiate with each
other in order to enter into a share purchase agreement.
However, Section 9 provides for another period within which the parties could still be required to negotiate.
The clause or such period as the parties shall mutually agree means that the parties should agree on a
period within which to continue negotiations for the execution of an agreement. This means that after the
40-day period, the parties were still allowed to negotiate, provided that they could mutually agree on a new
period of negotiation.
Based on the records and the findings of the lower courts, the parties were never able to arrive at a specific
period within which they would bind themselves to enter into an agreement. There being no other period
specified, the parties were no longer under any obligation to negotiate and enter into a share purchase
agreement. Section 9 clearly freed them from this undertaking.
II
There was no express or implied
novation of the First Memorandum
of Agreement
The subsequent acts of the parties after the 40-day period were, therefore, independent of the First
Memorandum of Agreement.
In its Appellants Brief before the Court of Appeals, petitioner Wellex mentioned that there was an implied
partial objective or real novation165 of the First Memorandum of Agreement. Petititoner did not raise this
argument of novation before this court. In Gayos v. Gayos,166 this court held that it is a cherished rule of
procedure that a court should always strive to settle the entire controversy in a single proceeding leaving no
root or branch to bear the seeds of future litigation[.]167
Articles 1291 and 1292 of the Civil Code provides how obligations may be modified:
Article 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor.
Article 1292. In order that an obligation may be extinguished by another which substitute the same, it is
imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every
point incompatible with each other.
In Arco Pulp and Paper Co. v. Lim,168 this court discussed the concept of novation:
Novation extinguishes an obligation between two parties when there is a substitution of objects or debtors or
when there is subrogation of the creditor. It occurs only when the new contract declares so in unequivocal
terms or that the old and the new obligations be on every point incompatible with each other.
....
For novation to take place, the following requisites must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.
Novation may also be express or implied. It is express when the new obligation declares in unequivocal
terms that the old obligation is extinguished. It is implied when the new obligation is incompatible with the
old one on every point. The test of incompatibility is whether the two obligations can stand together, each
one with its own independent existence. (Emphasis from the original omitted)
Because novation requires that it be clear and unequivocal, it is never presumed, thus:
I
n the civil law setting, novatio is literally construed as to make new. So it is deeply rooted in the Roman Law
jurisprudence, the principle novatio non praesumitur that novation is never presumed. At bottom, for
novation to be a jural reality, its animus must be ever present, debitum pro debito basically extinguishing
the old obligation for the new one.169(Emphasis from the original omitted, citations omitted)
Applying Arco, it is clear that there was no novation of the original obligation.
After the 40-day period, the parties did not enter into any subsequent written agreement that was couched
in unequivocal terms. The transaction of the First Memorandum of Agreement involved large amounts of
money from both parties. The parties sought to participate in the air travel industry, which has always been
highly regulated and subject to the strictest commercial scrutiny. Both parties admitted that their counsels
participated in the crafting and execution of the First Memorandum of Agreement as well as in the efforts to
enter into the share purchase agreement. Any subsequent agreement would be expected to be clearly
agreed upon with their counsels assistance and in writing, as well.
Given these circumstances, there was no express novation.
There was also no implied novation of the original obligation. In Quinto v. People:170
[N]o specific form is required for an implied novation, and all that is prescribed by law would be an
incompatibility between the two contracts. While there is really no hard and fast rule to determine what
might constitute to be a sufficient change that can bring about novation, the touchstone for contrariety,
however, would be an irreconcilable incompatibility between the old and the new obligations.
....
. . . The test of incompatibility is whether or not the two obligations can stand together, each one having its
independent existence. If they cannot, they are incompatible and the latter obligation novates the first.
Corollarily, changes that breed incompatibility must be essential in nature and not merely accidental. The
incompatibility must take place in any of the essential elements of the obligation, such as its object, cause
or principal conditions thereof; otherwise, the change would be merely modificatory in nature and
insufficient to extinguish the original obligation. 171 (Citations omitted)
There was no incompatibility between the original terms of the First Memorandum of Agreement and the
remittances made by respondent U-Land for the shares of stock. These remittances were actually made with
the view that both parties would subsequently enter into a share purchase agreement. It is clear that there
was no subsequent agreement inconsistent with the provisions of the First Memorandum of Agreement.
Thus, no implied novation took place. In previous cases, 172 this court has consistently ruled that presumed
novation or implied novation is not deemed favorable. In United Pulp and Paper Co., Inc. v. Acropolis Central
Guaranty Corporation:173
Neither can novation be presumed in this case. As explained in Dugo v. Lopena:
Novation by presumption has never been favored. To be sustained, it need be established that the old and
new contracts are incompatible in all points, or that the will to novate appears by express agreement of the
parties or in acts of similar import.174 (Emphasis supplied)
There being no novation of the First Memorandum of Agreement, respondent U-Land is entitled to the return
of the amount it remitted to petitioner Wellex. Petitioner Wellex is likewise entitled to the return of the
certificates of shares of stock and titles of land it delivered to respondent U-Land. This is simply an
enforcement of Section 9 of the First Memorandum of Agreement. Pursuant to Section 9, only the execution
of a final share purchase agreement within either of the periods contemplated by this stipulation will justify
the parties retention of what they received or would receive from each other.
III
Applying Article 1185 of the Civil
Code, the parties are obligated to
return to each other all they have
received
Article 1185 of the Civil Code provides that:
ART. 1185. The condition that some event will not happen at a determinate time shall render the obligation
effective from the moment the time indicated has elapsed, or if it has become evident that the event cannot
occur.
If no time has been fixed, the condition shall be deemed fulfilled at such time as may have probably been
contemplated, bearing in mind the nature of the obligation.
Article 1185 provides that if an obligation is conditioned on the non-occurrence of a particular event at a
determinate time, that obligation arises (a) at the lapse of the indicated time, or (b) if it has become evident
that the event cannot occur.
Petitioner Wellex and respondent U-Land bound themselves to negotiate with each other within a 40-day
period to enter into a share purchase agreement. If no share purchase agreement was entered into, both
parties would be freed from their respective undertakings.
It is the non-occurrence or non-execution of the share purchase agreement that would give rise to the
obligation to both parties to free each other from their respective undertakings. This includes returning to
each other all that they received in pursuit of entering into the share purchase agreement.
At the lapse of the 40-day period, the parties failed to enter into a share purchase agreement. This lapse is
the first circumstance provided for in Article 1185 that gives rise to the obligation. Applying Article 1185, the
parties were then obligated to return to each other all that they had received in order to be freed from their
respective undertakings.
However, the parties continued their negotiations after the lapse of the 40-day period. They made
subsequent transactions with the intention to enter into the share purchase agreement. Despite that, they
still failed to enter into a share purchase agreement. Communication between the parties ceased, and no
further transactions took place.
It became evident that, once again, the parties would not enter into the share purchase agreement. This is
the second circumstance provided for in Article 1185. Thus, the obligation to free each other from their
respective undertakings remained.
As such, petitioner Wellex is obligated to return the remittances made by respondent U-Land, in the same
way that respondent U-Land is obligated to return the certificates of shares of stock and the land titles to
petitioner Wellex.
IV
Respondent U-Land is praying for
rescission or resolution under Article
1191, and not rescission under Article
1381
The arguments of the parties generally rest on the propriety of the rescission of the First Memorandum of
Agreement. This requires a clarification of rescission under Article 1191, and rescission under Article 1381 of
the Civil Code.
ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should
not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with the payment
of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter
should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have acquired the thing, in
accordance with articles 1385 and 1388 and the Mortgage Law.
Articles 1380 and 1381, on the other hand, provide an enumeration of rescissible contracts:
ART. 1380. Contracts validly agreed upon may be rescinded in the cases established by law.
ART. 1381. The following contracts are rescissible:
(1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion by
more than one-fourth of the value of the things which are the object thereof;
(2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding
number;
(3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due
them;
(4) Those which refer to things under litigation if they have been entered into by the defendant without the
knowledge and approval of the litigants or of competent judicial authority;
(5) All other contracts specially declared by law to be subject to rescission.
Article 1383 expressly provides for the subsidiary nature of rescission:
ART. 1383. The action for rescission is subsidiary; it cannot be instituted except when the party suffering
damage has no other legal means to obtain reparation for the same.
Rescission itself, however, is defined by Article 1385:
ART. 1385. Rescission creates the obligation to return the things which were the object of the contract,
together with their fruits, and the price with its interest; consequently, it can be carried out only when he
who demands rescission can return whatever he may be obliged to restore.
Neither shall rescission take place when the things which are the object of the contract are legally in the
possession of third persons who did not act in bad faith.
In this case, indemnity for damages may be demanded from the person causing the loss.
Gotesco Properties v. Fajardo175 categorically stated that Article 1385 is applicable to Article 1191:
At this juncture, it is noteworthy to point out that rescission does not merely terminate the contract and
release the parties from further obligations to each other, but abrogates the contract from its inception and
restores the parties to their original positions as if no contract has been made. Consequently, mutual
restitution, which entails the return of the benefits that each party may have received as a result of the
contract, is thus required. To be sure, it has been settled that the effects of rescission as provided for in
Article 1385 of the Code are equally applicable to cases under Article 1191, to wit:
xxxx
Mutual restitution is required in cases involving rescission under Article 1191.This means bringing
the parties back to their original status prior to the inception of the contract. Article 1385 of the Civil Code
provides, thus:
ART. 1385. Rescission creates the obligation to return the things which were the object of the
contract, together with their fruits, and the price with its interest; consequently, it can be carried
out only when he who demands rescission can return whatever he may be obligated to restore.
Neither shall rescission take place when the things which are the object of the contract are legally in the
possession of third persons who did not act in bad faith.
In this case, indemnity for damages may be demanded from the person causing the loss.
This Court has consistently ruled that this provision applies to rescission under Article 1191:
[S]ince Article 1385 of the Civil Code expressly and clearly states that rescission creates the obligation to
return the things which were the object of the contract, together with their fruits, and the price with its
interest, the Court finds no justification to sustain petitioners position that said Article 1385 does not apply
to rescission under Article 1191. x x x176(Emphasis from the original, citations omitted)
Rescission, as defined by Article 1385, mandates that the parties must return to each other everything that
they may have received as a result of the contract. This pertains to rescission or resolution under Article
1191, as well as the provisions governing all forms of rescissible contracts.
For Article 1191 to be applicable, however, there must be reciprocal prestations as distinguished
frommutual obligations between or among the parties. A prestation is the object of an obligation, and it is
the conduct required by the parties to do or not to do, or to give. 177 Parties may be mutually obligated to
each other, but the prestations of these obligations are not necessarily reciprocal. The reciprocal prestations
must necessarily emanate from the same cause that gave rise to the existence of the contract. This
distinction is best illustrated by an established authority in civil law, the late Arturo Tolentino:
This article applies only to reciprocal obligations. It has no application to every case where two persons are
mutually debtor and creditor of each other. There must be reciprocity between them. Both relations must
arise from the same cause, such that one obligation is correlative to the other. Thus, a person may be the
debtor of another by reason of an agency, and his creditor by reason of a loan. They are mutually obligated,
but the obligations are not reciprocal. Reciprocity arises from identity of cause, and necessarily the two
obligations are created at the same time.178 (Citation omitted)
Ang Yu Asuncion v. Court of Appeals179 provides a clear necessity of the cause in perfecting the existence of
an obligation:
An obligation is a juridical necessity to give, to do or not to do (Art. 1156, Civil Code). The obligation is
constituted upon the concurrence of the essential elements thereof, viz: (a) The vinculum juris orjuridical
tie which is the efficient cause established by the various sources of obligations (law, contracts, quasicontracts, delicts and quasi-delicts); (b) the object which is the prestation or conduct, required to be
observed (to give, to do or not to do); and (c) the subject-persons who, viewed from the demandability of
the obligation, are the active (obligee) and the passive (obligor) subjects. 180
The cause is the vinculum juris or juridical tie that essentially binds the parties to the obligation. This linkage
between the parties is a binding relation that is the result of their bilateral actions, which gave rise to the
existence of the contract.
The failure of one of the parties to comply with its reciprocal prestation allows the wronged party to seek the
remedy of Article 1191. The wronged party is entitled to rescission or resolution under Article 1191, and
even the payment of damages. It is a principal action precisely because it is a violation of the original
reciprocal prestation.
Article 1381 and Article 1383, on the other hand, pertain to rescission where creditors or even third persons
not privy to the contract can file an action due to lesion or damage as a result of the contract. In Ong v.
Court of Appeals,181 this court defined rescission:
Rescission, as contemplated in Articles 1380, et seq., of the New Civil Code, is a remedy granted by law to
the contracting parties and even to third persons, to secure the reparation of damages caused to them by a
contract, even if this should be valid, by restoration of things to their condition at the moment prior to the
celebration of the contract. It implies a contract, which even if initially valid, produces a lesion or a pecuniary
damage to someone.182 (Citations omitted)
Ong elaborated on the confusion between rescission or resolution under Article 1191 and rescission under
Article 1381:
On the other hand, Article 1191 of the New Civil Code refers to rescission applicable to reciprocal
obligations. Reciprocal obligations are those which arise from the same cause, and in which each party is a
debtor and a creditor of the other, such that the obligation of one is dependent upon the obligation of the
other. They are to be performed simultaneously such that the performance of one is conditioned upon the
simultaneous fulfillment of the other. Rescission of reciprocal obligations under Article 1191 of the New Civil
Code should be distinguished from rescission of contracts under Article 1383. Although both presuppose
contracts validly entered into and subsisting and both require mutual restitution when proper, they are not
entirely identical.
While Article 1191 uses the term rescission, the original term which was used in the old Civil Code, from
which the article was based, was resolution. Resolution is a principal action which is based on breach of a
party, while rescission under Article 1383 is a subsidiary action limited to cases of rescission for lesion under
Article 1381 of the New Civil Code, which expressly enumerates the following rescissible contracts:
1.
Those which are entered into by guardians whenever the wards whom they
represent suffer lesion by more than one fourth of the value of the things which are
the object thereof;
2.
Those agreed upon in representation of absentees, if the latter suffer the lesion
stated in the preceding number;
3.
Those undertaken in fraud of creditors when the latter cannot in any manner collect
the claims due them;
4.
Those which refer to things under litigation if they have been entered into by the
defendant without the knowledge and approval of the litigants or of competent
judicial authority; [and]
5.
All other contracts specially declared by law to be subject to rescission. 183 (Citations
omitted)
When a party seeks the relief of rescission as provided in Article 1381, there is no need for reciprocal
prestations to exist between or among the parties. All that is required is that the contract should be among
those enumerated in Article 1381 for the contract to be considered rescissible. Unlike Article 1191, rescission
under Article 1381 must be a subsidiary action because of Article 1383.
Contrary to petitioner Wellexs argument, this is not rescission under Article 1381 of the Civil Code. This case
does not involve prejudicial transactions affecting guardians, absentees, or fraud of creditors. Article
1381(3) pertains in particular to a series of fraudulent actions on the part of the debtor who is in the process
of transferring or alienating property that can be used to satisfy the obligation of the debtor to the creditor.
There is no allegation of fraud for purposes of evading obligations to other creditors. The actions of the
parties involving the terms of the First Memorandum of Agreement do not fall under any of the enumerated
contracts that may be subject of rescission.
Further, respondent U-Land is pursuing rescission or resolution under Article 1191, which is a principal
action. Justice J.B.L. Reyes concurring opinion in the landmark case of Universal Food Corporation v. Court
of Appeals184 gave a definitive explanation on the principal character of resolution under Article 1191 and the
subsidiary nature of actions under Article 1381:
The rescission on account of breach of stipulations is not predicated on injury to economic interests of the
party plaintiff but on the breach of faith by the defendant, that violates the reciprocity between the parties.
It is not a subsidiary action, and Article 1191 may be scanned without disclosing anywhere that the action
for rescission thereunder is subordinated to anything other than the culpable breach of his obligations by the
defendant. This rescission is a principal action retaliatory in character, it being unjust that a party be held
bound to fulfill his promises when the other violates his. As expressed in the old Latin aphorism: Non
servanti fidem, non est fides servanda. Hence, the reparation of damages for the breach is purely
secondary.
On the contrary, in the rescission by reason of lesion or economic prejudice, the cause of action is
subordinated to the existence of that prejudice, because it is the raison detreas well as the measure of the
right to rescind. Hence, where the defendant makes good the damages caused, the action cannot be
maintained or continued, as expressly provided in Articles 1383 and 1384. But the operation of these two
articles is limited to the cases of rescission for lesin enumerated in Article 1381 of the Civil Code of the
Philippines, and does not apply to cases under Article 1191. 185
Rescission or resolution under Article 1191, therefore, is a principal action that is immediately available to
the party at the time that the reciprocal prestation was breached. Article 1383 mandating that rescission be
deemed a subsidiary action cannot be applicable to rescission or resolution under Article 1191.
Thus, respondent U-Land correctly sought the principal relief of rescission or resolution under Article 1191.
The obligations of the parties gave rise to reciprocal prestations, which arose from the same cause: the
desire of both parties to enter into a share purchase agreement that would allow both parties to expand
their respective airline operations in the Philippines and other neighboring countries.
V
The jurisprudence relied upon by
petitioner Wellex is not applicable

The cases that petitioner Wellex cited to advance its arguments against respondent U-Lands right to
rescission are not in point.
Suria v. Intermediate Appellate Court is not applicable. In that case, this court specifically stated that the
parties entered into a contract of sale, and their reciprocal obligations had already been fulfilled: 186
There is no dispute that the parties entered into a contract of sale as distinguished from a contract to sell.
By the contract of sale, the vendor obligates himself to transfer the ownership of and to deliver a
determinate thing to the buyer, who in turn, is obligated to pay a price certain in money or its equivalent
(Art. 1458, Civil Code). From the respondents own arguments, we note that they have fully
complied with their part of the reciprocal obligation. As a matter of fact, they have already parted
with the title as evidenced by the transfer certificate of title in the petitioners name as of June
27, 1975.
The buyer, in turn, fulfilled his end of the bargain when he executed the deed of mortgage. The payments on
an installment basis secured by the execution of a mortgage took the place of a cash payment. In other
words, the relationship between the parties is no longer one of buyer and seller because the contract of sale
has been perfected and consummated. It is already one of a mortgagor and a mortgagee. In consideration
of the petitioners promise to pay on installment basis the sum they owe the respondents, the latter have
accepted the mortgage as security for the obligation.
The situation in this case is, therefore, different from that envisioned in the cited opinion of Justice J.B.L.
Reyes. The petitioners breach of obligations is not with respect to the perfected contract of sale but in the
obligations created by the mortgage contract. The remedy of rescission is not a principal action retaliatory in
character but becomes a subsidiary one which by law is available only in the absence of any other legal
remedy. (Art. 1384, Civil Code).
Foreclosure here is not only a remedy accorded by law but, as earlier stated, is a specific provision found in
the contract between the parties.187 (Emphasis supplied)
In Suria, this court clearly applied rescission under Article 1384 and not rescission or resolution under Article
1191. In addition, the First Memorandum of Agreement is not a contract to sell shares of stock. It is an
agreement to negotiate with the view of entering into a share purchase agreement.
Villaflor v. Court of Appeals is not applicable either. In Villaflor, this court held that non-payment of
consideration of contracts only gave rise to the right to sue for collection, but this non-payment cannot serve
as proof of a simulated contract.188 The case did not rule that the vendor has no obligation to deliver the
thing sold if the buyer fails to fully pay the price required by the contract. In Villaflor:
Petitioner insists that nonpayment of the consideration in the contracts proves their simulation. We disagree.
Nonpayment, at most, gives him only the right to sue for collection. Generally, in a contract of sale, payment
of the price is a resolutory condition and the remedy of the seller is to exact fulfillment or, in case of a
substantial breach, to rescind the contract under Article 1191 of the Civil Code. However, failure to pay is not
even a breach, but merely an event which prevents the vendors obligation to convey title from acquiring
binding force.189 (Citations omitted)
This courts statement in Villaflor regarding rescission under Article 1191 was a mere obiter dictum. InLand
Bank of the Philippines v. Suntay,190 this court discussed the nature of an obiter dictum:
An obiter dictum has been defined as an opinion expressed by a court upon some question of law that is not
necessary in the determination of the case before the court. It is a remark made, or opinion expressed, by a
judge, in his decision upon a cause by the way, that is, incidentally or collaterally, and not directly upon the
question before him, or upon a point not necessarily involved in the determination of the cause, or
introduced by way of illustration, or analogy or argument. It does not embody the resolution or
determination of the court, and is made without argument, or full consideration of the point. It lacks the
force of an adjudication, being a mere expression of an opinion with no binding force for purposes of res
judicata.191 (Citations omitted)
Petitioner Wellexs reliance on Padilla v. Spouses Paredes and Spouses Agustin v. Court of Appeals is also
misplaced. In these cases, this court held that there can be no rescission for an obligation that is nonexistent, considering that the suspensive condition that will give rise to the obligation has not yet happened.
This is based on an allegation that the contract involved is a contract to sell. In a contract to sell, the failure
of the buyer to pay renders the contract without effect. A suspensive condition is one whose non-fulfillment
prevents the existence of the obligation.192 Payment of the purchase price, therefore, constitutes a
suspensive condition in a contract to sell. Thus, this court held that non-remittance of the full price allowed
the seller to withhold the transfer of the thing to be sold.
In this case, the First Memorandum of Agreement is not a contract to sell. Entering into the share purchase
agreement or the joint development agreement remained a stipulation that the parties themselves agreed to
pursue in the First Memorandum of Agreement.
Based on the First Memorandum of Agreement, the execution of the share purchase agreement was
necessary to put into effect respondent U-Lands purchase of the shares of stock. This is the stipulation
indicated in this memorandum of agreement. There was no suspensive condition of full payment of the
purchase price needed to execute either the share purchase agreement or the joint development agreement.
Upon the execution of the share purchase, the obligation of petitioner Wellex to transfer the shares of stock
and of respondent U-Land to pay the price of these shares would have arisen.
Enforcement of Section 9 of the First Memorandum of Agreement has the same effect as rescission or
resolution under Article 1191 of the Civil Code. The parties are obligated to return to each other all that they
may have received as a result of the breach by petitioner Wellex of the reciprocal obligation. Therefore, the
Court of Appeals did not err in affirming the rescission granted by the trial court.
VI
Petitioner Wellex was not guilty of
fraud but of violating Article 1159
of the Civil Code
In the issuance of the Writ of Preliminary Attachment, the lower court found that petitioner Wellex
committed fraud by inducing respondent U-Land to purchase APIC shares and PEC shares and by leading the
latter to believe that APC was a subsidiary of APIC.
Determining the existence of fraud is not necessary in an action for rescission or resolution under Article
1191. The existence of fraud must be established if the rescission prayed for is the rescission under Article
1381.
However, the existence of fraud is a question that the parties have raised before this court. To settle this
question with finality, this court will examine the established facts and determine whether petitioner Wellex
indeed defrauded respondent U-Land.
In Tankeh v. Development Bank of the Philippines,193 this court enumerated the relevant provisions of the
Civil Code on fraud:
Fraud is defined in Article 1338 of the Civil Code as:
x x x fraud when, through insidious words or machinations of one of the contracting parties, the other is
induced to enter into a contract which, without them, he would not have agreed to.
This is followed by the articles which provide legal examples and illustrations of fraud.
....
Art. 1340. The usual exaggerations in trade, when the other party had an opportunity to know the facts, are
not in themselves fraudulent. (n)
Art. 1341. A mere expression of an opinion does not signify fraud, unless made by an expert and the other
party has relied on the formers special knowledge. (n)
Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has
created substantial mistake and the same is mutual. (n)
Art. 1343. Misrepresentation made in good faith is not fraudulent but may constitute error. (n)
The distinction between fraud as a ground for rendering a contract voidable or as basis for an award of
damages is provided in Article 1344:
In order that fraud may make a contract voidable, it should be serious and should not have been employed
by both contracting parties.
Incidental fraud only obliges the person employing it to pay damages. (1270) 194
Tankeh further discussed the degree of evidence needed to prove the existence of fraud:
[T]he standard of proof required is clear and convincing evidence. This standard of proof is derived from
American common law. It is less than proof beyond reasonable doubt (for criminal cases) but greater than
preponderance of evidence (for civil cases). The degree of believability is higher than that of an ordinary civil
case. Civil cases only require a preponderance of evidence to meet the required burden of proof. However,
when fraud is alleged in an ordinary civil case involving contractual relations, an entirely different standard
of proof needs to be satisfied. The imputation of fraud in a civil case requires the presentation of clear and
convincing evidence. Mere allegations will not suffice to sustain the existence of fraud. The burden of
evidence rests on the part of the plaintiff or the party alleging fraud. The quantum of evidence is such that
fraud must be clearly and convincingly shown.195
To support its allegation of fraud, Mr. Tseng, respondent U-Lands witness before the trial court, testified that
Mr. Gatchalian approached respondent U-Land on two (2) separate meetings to propose entering into an
agreement for joint airline operations in the Philippines. Thus, the parties entered into the First
Memorandum of Agreement. Respondent U-Land primarily anchors its allegation of fraud against petitioner
Wellex on the existence of the second preambular clause of the First Memorandum of Agreement.
In its Appellants Brief before the Court of Appeals, petitioner Wellex admitted that [t]he amount of
US$7,499,945.00 was remitted for the purchase of APIC and PEC shares.196 In that brief, it argued that the
parties were already in the process of partially executing the First Memorandum of Agreement.
As held in Tankeh, there must be clear and convincing evidence of fraud. Based on the established facts,
respondent U-Land was unable to clearly convince this court of the existence of fraud.
Respondent U-Land had every reasonable opportunity to ascertain whether APC was indeed a subsidiary of
APIC. This is a multimillion dollar transaction, and both parties admitted that the share purchase agreement
underwent several draft creations. Both parties admitted the participation of their respective counsels in the
drafting of the First Memorandum of Agreement. Respondent U-Land had every opportunity to ascertain the
ownership of the shares of stock.
Respondent U-Land itself admitted that it was not contesting petitioner Wellexs ownership of the APIC
shares or APC shares; hence, it was not contesting the existence of the Second Memorandum of Agreement.
Upon becoming aware of petitioner Wellexs representations concerning APICs ownership or control of APC
as a subsidiary, respondent U-Land continued to make remittances totalling the amount sought to be
rescinded. It had the option to opt out of negotiations after the lapse of the 40-day period. However, it
proceeded to make the remittances to petitioner Wellex and proceed with negotiations.
Respondent U-Land was not defrauded by petitioner Wellex to agree to the First Memorandum of
Agreement. To constitute fraud under Article 1338, the words and machinations must have been so insidious
or deceptive that the party induced to enter into the contract would not have agreed to be bound by its
terms if that party had an opportunity to be aware of the truth. 197
Respondent U-Land was already aware that APC was not a subsidiary of APIC after the 40-day period. Still,
it agreed to be bound by the First Memorandum of Agreement by making the remittances from June 30 to
September 25, 1998.198 Thus, petitioner Wellexs failure to inform respondent U-Land that APC was not a
subsidiary of APIC when the First Memorandum of Agreement was being executed did not constitute fraud.
However, the absence of fraud does not mean that petitioner Wellex is free of culpability. By failing to inform
respondent U-Land that APC was not yet a subsidiary of APIC at the time of the execution of the First
Memorandum of Agreement, petitioner Wellex violated Article 1159 of the Civil Code. Article 1159 reads:
ART. 1159. Obligations arising from contracts have the force of law between the contracting parties and
should be complied with in good faith.
In Ochoa v. Apeta,199 this court defined good faith:
Good faith is an intangible and abstract quality with no technical meaning or statutory definition, and it
encompasses, among other things, an honest belief, the absence of malice and the absence of design to
defraud or to seek an unconscionable advantage. It implies honesty of intention, and freedom from
knowledge of circumstances which ought to put the holder upon inquiry. The essence of good faith lies in an
honest belief in the validity of ones right, ignorance of a superior claim and absence of intention to
overreach another.200 (Citations omitted)
It was incumbent upon petitioner Wellex to negotiate the terms of the pending share purchase agreement in
good faith. This duty included providing a full disclosure of the nature of the ownership of APIC in APC.
Unilaterally compelling respondent U-Land to remit money to finalize the transactions indicated in the
Second Memorandum of Agreement cannot constitute good faith.
The absence of fraud in a transaction does not mean that rescission under Article 1191 is not proper. This
case is not an action to declare the First Memorandum of Agreement null and void due to fraud at the
inception of the contract or dolo causante. This case is not an action for fraud based on Article 1381 of the
Civil Code. Rescission or resolution under Article 1191 is predicated on the failure of one of the parties in a
reciprocal obligation to fulfill the prestation as required by that obligation. It is not based on vitiation of
consent through fraudulent misrepresentations.
VII
Respondent U-Land was not bound
to pay the US$3 million under the
joint development agreement
The alleged failure of respondent U-Land to pay the amount of US$3 million to petitioner Wellex does not
justify the actions of the latter in refusing to return the US$7,499,945.00.
Article 1374 of the Civil Code provides that:
ART. 1374. The various stipulations of a contract shall be interpreted together, attributing to the doubtful
ones that sense which may result from all of them taken jointly.
The execution of the joint development agreement was contingent on the execution of the share purchase
agreement. This is provided for in Section 4 of the First Memorandum of Agreement, which stated that the
execution of the two agreements is [s]imultaneous.201 Thus, the failure of the share purchase agreements
execution would necessarily mean the failure of the joint development agreements execution.
Section 9 of the First Memorandum of Agreement provides that should the parties fail to execute the
agreement, they would be released from their mutual obligations. Had respondent U-Land paid the US$3
million and petitioner Wellex delivered the 57,000,000 PEC shares for the purpose of the joint development
agreement, they would have been obligated to return these to each other.
Section 4 and Section 9 of the First Memorandum of Agreement must be interpreted together. Since the
parties were unable to agree on a final share purchase agreement and there was no exchange of money or
shares of stock due to the continuing negotiations, respondent U-Land was no longer obliged to provide the
money for the real estate development projects. The payment of the US$3 million was for pursuing the real
estate development projects under the joint development agreement. There being no joint development
agreement, the obligation to deliver the US$3 million and the delivery of the PEC shares for that purpose
were no longer incumbent upon the parties.
VIII
Respondent U-Land was not

obligated to exhaust the securities
given by petitioner Wellex
Contrary to petitioner Wellexs assertion, there is no obligation on the part of respondent U-Land to exhaust
the securities given by petitioner Wellex. No such meeting of the minds to create a guarantee or surety or
any other form of security exists. The principal obligation is not a loan or an obligation subject to the
conditions of sureties or guarantors under the Civil Code. Thus, there is no need to exhaust the securities
given to respondent U-Land, and there is no need for a legal condition where respondent U-Land should
pursue other remedies.
Neither petitioner Wellex nor respondent U-Land stated that there was already a transfer of ownership of the
shares of stock or the land titles. Respondent U-Land itself maintained that the delivery of the shares of
stock and the land titles were not in the nature of a pledge or mortgage. 202 It received the certificates of
shares of stock and the land titles with an understanding that the parties would subsequently enter a share
purchase agreement. There being no share purchase agreement, respondent U-Land is obligated to return
the certificates of shares of stock and the land titles to petitioner Wellex.
The parties are bound by the 40-day period provided for in the First Memorandum of Agreement. Adherence
by the parties to Section 9 of the First Memorandum of Agreement has the same effect as the rescission or
resolution prayed for and granted by the trial court.
Informal acts are prone to ambiguous legal interpretation. This will be based on the say-so of each party and
is a fragile setting for good business transactions. It will contribute to the unpredictability of the market as it
would provide courts with extraordinary expectations to determine the business actors intentions. The
parties appear to be responsible businessmen who know that their expectations and obligations should be
clearly articulated between them. They have the resources to engage legal representation. Indeed, they
have reduced their agreement in writing.
Petitioner Wellex now wants this court to define obligations that do not appear in these instruments. We
cannot do so. This court cannot interfere in the bargains, good or bad, entered into by the parties. Our duty
is to affirm legal expectations, not to guarantee good business judgments.
WHEREFORE, the petition is DENIED. The Decision of the Regional Trial Court in Civil Case No. 99-1407
and the Decision of the Court of Appeals in CA-G.R. CV No. 74850 are AFFIRMED. Costs against petitioner
The Wellex Group, Inc.
SO ORDERED.
Carpio, (Chairperson), Velasco, Jr.,* Del Castillo, and Mendoza, JJ., concur.

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PRESCRIPTION

SPOUSES FRANCISCO SIERRA (substituted by DONATO, TERESITA,

September 10, 2014

SPOUSES FRANCISCO SIERRA (substituted by DONATO, TERESITA, TEODORA, LORENZA,

The RTC Ruling

Unperturbed, petitioners filed the instant petition.

The contention is bereft of merit.

PURE AND CONDITIONAL

June 11, 2014

GOLDEN VALLEY EXPLORATION, INC., Petitioner,

The RTC Ruling

The Issue Before the Court

SWIRE REALTY DEVELOPMENT CORPORATION vs. JAYNE YU, G.R. No.

SWIRE REALTY DEVELOPMENT CORPORATION, Petitioner, v. JAYNE YU, Respondent.

To finish the subject unit as pointed out in the inspection Report

To pay [respondent] the following:

the amount of P100,000 as compensatory damages for the minor irreversible

moral damages of P20,000.00

Attorneys fees of P20,000.00

Respondent then elevated the matter to the HLURB Board of Commissioners.

Declaring the contract to sell as rescinded and directing [petitioner] to refund to

Directing [petitioner] to pay respondent attorneys fees in the amount of P20,000.00;

TECHNICAL RULES ARE NOT BINDING UPON ADMINISTRATIVE AGENCIES; and

RESCISSION WILL BE ORDERED ONLY WHERE THE BREACH COMPLAINED OF IS

Complainant pinpointed to the undersigned the deficiencies as follows:

Window opening at the master bedroom conforms to the approved plans. As a

OBLIGATIONS WITH PERIOD

August 19, 2014

ROWENA R. SALONTE, Petitioner,

Accordingly, petitioner Rowena B.Rances (now Rowena RancesSolante), Human Resource

The Ruling of the Commission on Audit

Hence, the instant petition.

NATURE AND EFFECT OF

FEDERAL BUILDERS, INC., Petitioner,

The antecedent facts are as follows:

I. When an obligation, regardless of itssource, i.e., law, contracts, quasicontracts, delicts or

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

RODRIGO RIVERA vs. SPOUSES SALVADOR CHUA AND VIOLETA S. CHUA,

Manila, February 24, 1995[.]

A. In G.R. No. 184458

B. In G.R. No. 184472

On 26 February 2009, Entry of Judgment was made in G.R. No. 184472.

Hence, the MeTC ruled that:

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

their obligations is laid down on Article 117024 of the Civil Code.

We cite our recent ruling in Nacar v. Gallery Frames:33

When the obligation is breached, and it consists in the payment of a sum

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

on unliquidated claims or damages, except when or until the demand can be

A. June 11, 1999

(1) the principal amount of P120,000.00;

JOINT AND SOLIDARY OBLIGATION

SPOUSES RODOLFO BEROT AND LILIA BEROT, Petitioners,

1. SUBSTITUTING AS DEFENDANT THE ESTATE OF MACARIA BEROT WHICH HAS NO

As aptly observed by the trial court:

THE COURTS RULING

OLONGAPO CITY, Petitioner,

SBMA 19.99% or 20%

Pursuant to the compromise agreement and in payment of OCWDs obligations to

The CA denied petitioners subsequentmotion for reconsideration. Petitioner is now before us on a

(1) Stock ownership by one or common ownership of both corporations;

Civil Case No. 605-92 and Civil Case No. 610-92

In due course, trial then ensued in Civil Case No. 967-93.

The Decision of the Court of Appeals in CA-G.R. CV No. 39353