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Compañia Maritima vs. Court of Appeals, No. L-50900, 135 SCRA 593 , April 09, 1985 MELENCIO-HERRERA, J.: The above-entitled three (3) cases stemmed from the Decision of this Court, dated October 31, 1964, entitled "Fernando A. Froilan vs. Pan-Oriental Shipping Co., et al. 1 and our four (4) subsequent Resolutions of August 27, 1965, November 23, 1966, December 16, 1966, and January 5, 1967, respectively. The antecedental background is narrated in the aforestated Decision, the pertinent portions of which read: On March 7, 1947, Fernando A. Froilan purchased from the Shipping Administration a boat described as MV/FS- 197 for the sum of P200,000.00, with a down payment of P50,000.00. To secure payment of the unpaid balance of the purchase price, a mortgage was constituted on the vessel in favor of the Shipping Administration .... xxx xxx xxx Th(e) contract was duly approved by the President of the Philippines. Froilan appeared to have defaulted in spite of demands, not only in the payment of the first installment on the unpaid balance of the purchase price and the interest thereon when they fell due, but also failed in his express undertaking to pay the premiums on the insurance coverage of the vessel obliging the Shipping Administration to advance such payment to the insurance company. ... Subsequently, FROILAN appeared to have still incurred a series of defaults notwithstanding reconsiderations granted, so much so that: On February 21, 1949, the General Manager (of the Shipping Administration) directed its officers ... to take immediate possession of the vessel and to suspend the unloading of all cargoes on the same until the owners thereof made the corresponding arrangement with the Shipping Administration. Pursuant to these instructions, the boat was, not only actually repossessed, but the title thereto was registered again in the name of the Shipping Administration, thereby re-transferring the ownership thereof to the government. On February 22, 1949, Pan Oriental Shipping Co., hereinafter referred to as Pan Oriental, offered to charter said vessel FS-197 for a monthly rent of P3,000.00. Because the government was then spending for the guarding of the boat and subsistence of the crew members since repossession, the Slopping Administration on April 1, 1949, accepted Pan Oriental's offer "in principle" subject to the condition that the latter shag cause the repair of the vessel advancing the cost of labor and drydocking thereof, and the Shipping Administration to furnish the necessary spare parts. In accordance with this charter contract, the vessel was delivered to the possession of Pan Oriental. In the meantime, or on February 22, 1949, Froilan tried to explain his failure to comply with the obligations he assumed and asked that he be given another extension up to March 15, 1949 to file the necessary bond. Then on March 8, Froilan offered to pay all his overdue accounts. However, as he failed to fulfill even these offers made by him in these two communications, the Shipping Administration denied his petition for reconsideration (of the rescission of the contract) on March 22, 1949. It should be noted that while his petition for reconsideration was denied on March 22, it does not appear when he formally formulated his appeal. In the meantime, as already stated, the boat has been repossessed by the Shipping Administration and the title thereto re-registered in the name of the government, and delivered to the Pan Oriental in virtue of the charter agreement. On June 2, 1949, Froilan protested to the President against the charter of the vessel. xxx xxx xxx On June 4, 1949, the Shipping Administration and the Pan Oriental formalized the charter agreement and signed a bareboat contract with option to purchase, containing the following pertinent provisions: III. CHARTER HIRE, TIME OF PAYMENT. — The CHARTERER shall pay to the owner a monthly charter hire of THREE THOUSAND (P3,000.00) PESOS from date of delivery of the vessel, payable in advance on or before the 5th of every current month until the return of the vessel to OWNER or purchase of the vessel by CHARTERER. IV. RIGHT OF OPTION TO PURCHASE.— The right of option to purchase the vessel at the price of P150,000.00 plus the amount expended for its present repairs is hereby granted to the CHARTERER within 120 days from the execution of this Contract, unless otherwise extended by the OWNER. This right shall be deemed exercised only if, before the expiration of the said period, or its extension by the OWNER, the CHARTERER completes the payment, including any amount paid as Charter hire, of a total sum of not less than twenty-five percentum (25%) of said price of the vessel. The period of option may be extended by the OWNER without in any way affecting the other provisions, stipulations, and terms of this contract. If, for any reason whatsoever, the CHARTERER fails to exercise its option to purchase within the period stipulated, or within the extension thereof by the OWNER, its right of option to purchase shall be deemed terminated, without prejudice to the continuance of the Charter Party provisions of this contract. The right to dispose of the vessel or terminate the Charter Party at its discretion is reserved to the OWNER. XIII. TRANSFER OF OWNERSHIP OF THE VESSEL. — After the CHARTERER has exercised his right of option as provided in the preceding paragraph (XII), the vessel shall be deemed conditionally sold to the purchaser, but the ownership thereof shag not be deemed transferred unless and until all the price of the vessel,

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original cases compilation

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Compañia Maritima vs. Court of Appeals, No. L-50900, 135 SCRA 593 , April 09, 1985 

MELENCIO-HERRERA, J.:

The above-entitled three (3) cases stemmed from the Decision of this Court, dated October 31, 1964, entitled "Fernando A. Froilan vs. Pan-Oriental Shipping Co., et al. 1 and our four (4) subsequent Resolutions of August 27, 1965, November 23, 1966, December 16, 1966, and January 5, 1967, respectively.

The antecedental background is narrated in the aforestated Decision, the pertinent portions of which read:

On March 7, 1947, Fernando A. Froilan purchased from the Shipping Administration a boat described as MV/FS-197 for the sum of P200,000.00, with a down payment of P50,000.00. To secure payment of the unpaid balance of the purchase price, a mortgage was constituted on the vessel in favor of the Shipping Administration ....

xxx xxx xxxTh(e) contract was duly approved by the President of the Philippines.

Froilan appeared to have defaulted in spite of demands, not only in the payment of the first installment on the unpaid balance of the purchase price and the interest thereon when they fell due, but also failed in his express undertaking to pay the premiums on the insurance coverage of the vessel obliging the Shipping Administration to advance such payment to the insurance company. ...

Subsequently, FROILAN appeared to have still incurred a series of defaults notwithstanding reconsiderations granted, so much so that:

On February 21, 1949, the General Manager (of the Shipping Administration) directed its officers ... to take immediate possession of the vessel and to suspend the unloading of all cargoes on the same until the owners thereof made the corresponding arrangement with the Shipping Administration. Pursuant to these instructions, the boat was, not only actually repossessed, but the title thereto was registered again in the name of the Shipping Administration, thereby re-transferring the ownership thereof to the government.

On February 22, 1949, Pan Oriental Shipping Co., hereinafter referred to as Pan Oriental, offered to charter said vessel FS-197 for a monthly rent of P3,000.00. Because the government was then spending for the guarding of the boat and subsistence of the crew members since repossession, the Slopping Administration on April 1, 1949, accepted Pan Oriental's offer "in principle" subject to the condition that the latter shag cause the repair of the vessel advancing the cost of labor and drydocking thereof, and the Shipping Administration to furnish the necessary spare parts. In accordance with this charter contract, the vessel was delivered to the possession of Pan Oriental.

In the meantime, or on February 22, 1949, Froilan tried to explain his failure to comply with the obligations he assumed and asked that he be given another extension up to March 15, 1949 to file the necessary bond. Then on March 8, Froilan offered to pay all his overdue accounts. However, as he failed to fulfill even these offers made by him in these two communications, the Shipping Administration denied his petition for reconsideration (of the rescission of the contract) on March 22, 1949. It should be noted that while his petition for reconsideration was denied on March 22, it does not appear when he formally formulated his appeal. In the meantime, as already stated, the boat has been repossessed by the Shipping Administration and the title thereto re-registered in the name of the government, and delivered to the Pan Oriental in virtue of the charter agreement. On June 2, 1949, Froilan protested to the President against the charter of the vessel.

xxx xxx xxxOn June 4, 1949, the Shipping Administration and the Pan Oriental formalized the charter agreement and signed a bareboat contract with option to purchase, containing the following pertinent provisions:

III. CHARTER HIRE, TIME OF PAYMENT. — The CHARTERER shall pay to the owner a monthly charter hire of THREE THOUSAND (P3,000.00) PESOS from date of delivery of the vessel, payable in advance on or before the 5th of every current month until the return of the vessel to OWNER or purchase of the vessel by CHARTERER.

IV. RIGHT OF OPTION TO PURCHASE.— The right of option to purchase the vessel at the price of P150,000.00 plus the amount expended for its present repairs is hereby granted to the CHARTERER within 120 days from the execution of this Contract, unless otherwise extended by the OWNER. This right shall be deemed exercised only if, before the expiration of the said period, or its extension by the OWNER, the CHARTERER completes the payment, including any amount paid as Charter hire, of a total sum of not less than twenty-five percentum (25%) of said price of the vessel.

The period of option may be extended by the OWNER without in any way affecting the other provisions, stipulations, and terms of this contract.

If, for any reason whatsoever, the CHARTERER fails to exercise its option to purchase within the period stipulated, or within the extension thereof by the OWNER, its right of option to purchase shall be deemed terminated, without prejudice to the continuance of the Charter Party provisions of this contract. The right to dispose of the vessel or terminate the Charter Party at its discretion is reserved to the OWNER.

XIII. TRANSFER OF OWNERSHIP OF THE VESSEL. — After the CHARTERER has exercised his right of option as provided in the preceding paragraph (XII), the vessel shall be deemed conditionally sold to the purchaser, but the ownership thereof shag not be deemed transferred unless and until all the price of the vessel, together with the interest thereon, and any other obligation due and payable to the OWNER under this contract, have been fully paid by the CHARTERER.

xxx xxx xxxXXI. APPROVAL OF THE PRESIDENT. — This contract shall take effect only upon approval of His Excellency, the President.

On September 6, 1949, the Cabinet revoked the cancellation of Froilan's contract of sale and restored to him all his rights thereunder, on condition that he would give not less than P1,000.00 to settle partially as overdue accounts and that reimbursement of the expenses incurred for the repair and drydocking of the vessel performed by Pan Oriental was to be made in accordance with future adjustment between him and the Shipping Administration (Exh. I). Later, pursuant to this reservation, Froilan's request to the Executive Secretary that the Administration advance the payment of the expenses incurred by Pan Oriental in the drydocking and repair of the vessel, was granted on condition that Froilan assume to pay the same and file a bond to cover said undertaking (EXH. III).

On September 7, 1949, the formal bareboat charter with option to purchase filed on June 4, 1949, in favor of the Pan Oriental was returned to the General Manager of the Shipping Administration without action (not disapproval), only because of the Cabinet resolution of September 6, 1949 restoring Froilan to his rights under the conditions set forth therein, namely, the payment of P10,000.00 to settle partially his overdue accounts and the filing of a bond to guarantee the reimbursement of the expenses incurred by the Pan Oriental in the drydocking and repair of the vessel But Froilan again failed to comply with these conditions. And so the Cabinet, considering Froilan's consistent failure to comply with his obligations, including those imposed in the resolution of September 6, 1949, resolved to reconsider said previous resolution restoring him to his previous rights. And, in a letter dated December 3, 1949, the Executive Secretary authorized the Administration to continue its charter contract with Pan Oriental in respect to FS-197 and enforce whatever rights it may still have under the original contract with Froilan (Exh. 188).

xxx xxx xxxOn August 25, 1950, the Cabinet resolved once more to restore Froilan to his rights under the original contract of sale, on condition that he shall pay the sum of P10,000.00 upon delivery of the vessel to him, said amount to be credited to his outstanding accounts; that he shall continue paying the remaining installments due, and that he shall assume the expenses incurred for the repair and drydocking of the vessel (Exh. 134). Pan Oriental

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protested to this restoration of Froilan's rights under the contract of sale, for the reason that when the vessel was delivered to it, the Shipping Administration had authority to dispose of the said property, Froilan having already relinquished whatever rights he may have thereon. Froilan paid the required cash of P10,000.00, and as Pan Oriental refused to surrender possession of the vessel, he filed an action for replevin in the Court of First Instance of Manila (Civil Case No. 13196) to recover possession thereof and to have him declared the rightful owner of said property.

Upon plaintiff's filing a bond of P400,000.00, the court ordered the seizure of the vessel from Pan Oriental and its delivery to the plaintiff. Pan Oriental tried to question the validity of this order in a petition for certiorari filed in this Court (G.R. No. L-4577), but the same was dismissed for lack of merit by resolution of February 22, 1951. Defendant accordingly filed an answer, denying the averments of the complaint.

The Republic of the Philippines, having been allowed to intervene in the proceeding, also prayed for the possession of the vessel in order that the chattel mortgage constituted thereon may be foreclosed. Defendant Pari Oriental resisted said intervention, claiming to have a better right to the possession of the vessel by reason of a valid and subsisting contract in its favor, and of its right of retention, in view of the expenses it had incurred for the repair of the said vessel. As counterclaim, defendant demanded of the intervenor to comply with the latter's obligation to deliver the vessel pursuant to the provisions of the charter contract.

xxx xxx xxxSubsequently, Compañia Maritima, as purchaser of the vessel from Froilan, was allowed to intervene in the proceedings (in the lower court), said intervenor taking common cause with the plaintiff Froilan. In its answer to the complaint in intervention, defendant set-up a counterclaim for damages in the sum of P50,000.00, alleging that plaintiff secured the Cabinet resolutions and the writ of replevin, resulting in its deprivation of possession of the vessel, at the instigation and inducement of Compania Maritima. This counterclaim was denied by both plaintiff and intervenor Maritima.

On September 28, 1956, the lower court rendered a decision upholding Froilan's (and Compañia Maritima's) right to the ownership and possession of the FS-197.

xxx xxx xxxIt is not disputed that appellant Pan Oriental took possession of the vessel in question after it had been repossessed by the Shipping Administration and title thereto reacquired by the government, and operated the same from June 2, 1949 after it had repaired the vessel until it was dispossessed of the property on February 3, 1951, in virtue of a bareboat charter contract entered into between said company and the Shipping Administration. In the same agreement, appellant as charterer, was given the option to purchase the vessel, which may be exercised upon payment of a certain amount within a specified period. The President and Treasurer of the appellant company, tendered the stipulated initial payment on January 16, l950. Appellant now contends that having exercised the option, the subsequent Cabinet resolutions restoring Froilan's rights on the vessel, violated its existing rights over the same property. To the contention of plaintiff Froffan that the charter contract never became effective because it never received presidential approval as required therein, Pan Oriental answers that the letter of the Executive Secretary dated December 3, 1949 (Exh. 118), authorizing the Shipping Administration to continue its charter contract with appellant, satisfies such requirement (of presidential approval). It is to be noted, however, that said letter was signed by the Executive Secretary only and not under authority of the President. The same, therefore, cannot be considered to have attached unto the charter contract the required consent of the Chief Executive for its validity.

xxx xxx xxx(Emphasis supplied)

This Court then held:

In the circumstances of this case, therefore, the resulting situation is that neither Froilan nor the Pan Oriental holds a valid contract over the vessel. However, since the intervenor Shipping Administration, representing the government practically ratified its proposed contract with Froilan by receiving the full consideration of the sale to the latter, for which reason the complaint in intervention was dismissed as to Froilan, and since Pan Oriental has no capacity to question this actuation of the Shipping Administration because it had no valid contract in its favor, the of the lower court adjudicating the vessel to Froilan and its successor Maritima, must be sus Nevertheless, under the already adverted to, Pan Oriental cannot be considered as in bad faith until after the institution of the case. However, since it is not disputed that said made useful and necessary expenses on the vessel, appellant is entitled to the refund of such expenses with the light to retain the vessel until he has been reimbursed therefor (Art. 546, Civil Code). As it is by the concerted acts of defendants and intervenor Republic of the Philippines that appellant was deprived of the possession of the vessel over which appellant had a lien for his expenses, appellees Froilan, Compañia Maritima, and the Republic of the Philippines are declared liable for the reimbursement to appellant of its legitimate expenses, as allowed by law, with legal interest from the time of disbursement.

Modified in this manner, the decision appealed from is affirmed, without costs. Case is remanded to the lower court for further proceedings in the matter of expenses. So ordered. (Emphasis supplied).

On August 27, 1965, this Court, in resolving a Motion for Reconsideration filed by FROILAN and MARITIMA, ruled:

In G.R. No. L-11897 (Fernando A. Froilan vs. Pan Oriental Shipping Co.); before us are (1) a motion, filed by appellant Pan Oriental to reconsider the ruling made in this case sustaining Froilan's right to ownership and possession of the vessel FS-197, and holding that there was never a perfected contract between said movant and the intervenor Republic of the Philippines; and (2) a motion by plaintiff-appellee Fernando A. Froilan, and intervenor-appellee Compañia Maritima, for reconsideration of the decision insofar as it declared said movants, together with intervenor Republic of the Philippines, liable for reimbursement to appellant Pan Oriental of the latter's legitimate necessary expenses made on the vessel in question.

1. .Appellant Pan Oriental's Motion must be denied.

It may be remembered that in the instant case, the alleged approval of the charter contract or permission to proceed with said contract was given by the Executive Secretary in his own name and not under the authority of the President.

xxx xxx xxx

2. Anent, appellant's motion, considering that the writ of replevin, by virtue of which appellant Pan Oriental was divested of possession of the vessel FS-197, was issued by the lower court on February 8, 1951 at the instance of plaintiff Froilan and with the cooperation of intervenor Republic of the Philippines, which accepted the payment tendered by him (Froilan) notwithstanding its previous dealings with Pan Oriental; and whereas, the intervenor Compañia Maritima acquired the same property only on December 1, 1951, it is clear that only plaintiff Froilan and the intervenor Republic of the Philippines may be held responsible for the deprivation of defendant of its right to the retention of the property until fully reimbursed of the necessary expenditure made on the vessel. For this reason, Froilan and the Republic of the Philippines are declared jointly and severally liable, not only for reimbursement to Pan Oriental of the legitimate necessary expenses incurred on the vessel but also for payment of legal interest thereon, computed from the date of the defendant's dispossession of the property. However, as defendant was in actual possession of the vessel from April 1, 1949 to February 7, 1951, it must be required to pay reasonable rental for the use thereof, at the rate of P3,000.00 a month — the same rate specified as rental in the imperfected charter contract — which shall be deductible from whatever may be due and owing the said party by way of reimbursable necessary expenses and interest. This rental shall commence from the time defendant Pan Oriental actually operated the vessel, which date shall be determined by the lower court.

Case is remanded to the court of origin for further proceedings on the matter of necessary expenses, interest and rental, as directed in our decision and this resolution. (Emphasis supplied).

On November 23, 1966, acting on a second Motion for Reconsideration filed by PAN ORIENTAL, this Court resolved:

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In case G.R. No. L-11817, Fernando A, Froilan, et al., appellees, vs. Pan Oriental Shipping Company, appellant, the latter filed a .second motion for reconsideration, alleging that the Resolution of this Court of August 27, 1965 denying its motion for reconsideration of December 16, 1964 is not in accordance with law; and that the modification of the judgment following the ex-parte motion for reconsideration of appellee Froilan is contrary to due process.

Considering that foregoing motion as well as the opposition thereto by plaintiff-appellee and intervenor-appellee Compañia Maritima, the Court RESOLVED to amend the ruling in this case by holding intervenor-appellee Compañia Maritima, because of its actual knowledge of the circumstances surrounding the purchase by Froilan of the vessel in question from the Shipping Administrator, jointly and severally liable with the other appellees, for reimbursement to appellant of the necessary expenses incurred and expended by the latter on the said vessel, minus the amount of rentals due from the appellant for the use thereof for the period it was actually operated by Pan Oriental. The period of actual operation shall not include the time when the vessel was drydocked.

On December 16,1966, acting on PAN ORIENTAL's Motion for Reconsideration or Application for Damages on account of the wrongful issuance of the Writ of Replevin, this Court issued a Resolution as follows:

Before us again in Case G.R. No. 11897 (Fernando A. Froilan vs. Pan Oriental Shipping Co. et al) is a motion for reconsideration or Application for damages filed by respondent Pan Oriental Shipping Co., allegedly on account of the wrongful issuance of the writ of replevin, pursuant to Rule 60, Section 10, in relation to Rule 57, Section 20 of the Revised Rules of Court. Considering that by virtue of our resolution dated August 27, 1965, this case has been ordered to be remanded to the Court of origin for further proceedings on the matter of necessary expenses, interest and rentals, and since evidence would have to be presented if the application for damages is allowed, the Court resolved, first, to deny the present motion for reconsideration and, second, to refer the application to the trial court, there to be heard and decided as prescribed by law and the Rules. (See last sentence, Section 20, Rule 57).

Pursuant thereto, the case was remanded to the Court of First Instance of Manila, Branch VI (Civil Case No. 13196). After the evidence of the parties was received and assessed by a Commissioner, said Court issued an Order, dated June 4, 1975, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing consideration, the Court orders the intervenor Compañia (plaintiff Fernando A. Froilan's successor-in-interest) and intervenor Republic of the Philippines (Board of Liquidators) jointly and severally to pay defendant Pan Oriental Shipping Company the sum of P6,937.72 a month from the time 'it was dispossessed on February 3, 1951' until it is paid its useful and necessary expenses; the sum of P40,797.54 actual amount expended for the repairs and improvements prior to the operation of the vessel on June 1, 1949 with legal interest from the time of disbursement of said legitimate expenses. The Court also orders the intervenor Republic of the Philippines to return the sum of P15,000.00 tendered by defendant Pan Oriental Shipping Company as provided in the option with legal interest from January 16, 1950, the date it was paid by the latter.

SO ORDERED. 2

The amount of P6,937.72 ordered to be paid monthly represented the lower Court's computation of damages of PAN ORIENTAL for deprivation of the right to retain the vessel. 3

On appeal by REPUBLIC and MARITIMA to the then Court of Appeals, judgment was promulgated decreeing.

WHEREFORE, in the light of the foregoing pronouncements, the judgment appealed from is hereby MODIFIED as follows:

Ordering intervenors-appellants Republic and Compañia Maritima, jointly and severally, to pay appellee Pan Oriental Shipping Company the sum of P40,797.54 with legal interest from February 3, 1951 until fully paid but there shah be deducted therefrom the amount of P59,500.00 representing the unpaid rentals due the Republic of the Philippines; and AFFIRMED in all other respects.

In other words, (a) the date from which interest is to be paid on the amount of P40,797.54 is from February 3, 1951, the date of dispossession, and not from the time of disbursement and (b) the unpaid rentals due the Republic are deductible from the amount of expenses payable to PAN-ORIENTAL. It should be recalled that the deduction of rentals from the amount payable to PAN-ORIENTAL by REPUBLIC was pursuant to this Court's Resolutions of August 27, 1965 and November 23, 1966, supra,

From the foregoing Decision, the parties filed their respective Petitions for Review now before us.

For clarity, the sums ordered to be paid by MARITIMA and the REPUBLIC, jointly and severally, to PAN-ORIENTAL are: (a) the sum of P6,937.72 a month from February 3, 1951, the date of PAN-ORIENTAL's dispossession, in the concept of damages for the deprivation of its right to retain the vessel, it until it is paid its useful and necessary expenses"; 4 (b) the sum of P15,000.00, representing PAN-ORIENTAL's deposit with REPUBLIC for the purchase of the vessel, "with legal interest from January 16, 1950," the date PAN-ORIENTAL had paid the same; 5 and (c) the sum of P40,797.54 representing the expenses for repairs incurred by PAN-ORIENTAL, "with legal interest from February 3, 1951 until fully paid," minus the amount of P59,500.00 representing the unpaid rentals due the REPUBLIC 6 The legal rate of interest is made payable only on the last two amounts (b) and (c).

REPUBLIC attributes the following errors to the Appellate Court: (1) in not holding that compensation by operation of law took place as between REPUBLIC and PAN-ORIENTAL as of the date of dispossession; (2) in not holding that the obligation of the REPUBLIC to pay legal interest on the amount of useful and necessary expenses from February 3, 1951 had become stale and ineffective; (3) in affirming the Order of the Trial Court that MARITIMA and REPUBLIC, jointly and severally, pay to PAN-ORIENTAL the sum of P6,937.72 a month from the time it was dispossessed of the vessel on February 3, 1951 until it is paid its useful and necessary expenses; and (4) in not holding that the Trial Court had no jurisdiction to order the return of P15,000.00 to PAN-ORIENTAL. MARITIMA, for its part, aside from assailing the sums it was ordered to pay PAN-ORIENTAL, jointly and severally, with REPUBLIC, echoed the theory of compensation and added that the question of damages on account of alleged wrongful replevin was not a proper subject of inquiry by the Trial Court when it determined the matter of necessary expenses, interest and rentals.

REPUBLIC's Submissions

1) REPUBLIC maintains that compensation or set-off took place between it and PAN-ORIENTAL as of February 3, 1951, the date the latter was dispossessed of the vessel For compensation to take place, one of the elements necessary is that the debts be liquidated. 7 In this case, all the elements for Compensation to take place were not present on the date of dispossession, or on February 3, 1951. The amount expended for repairs and improvements had yet to be determined by the Trial Court pursuant to the Decision of this Court promulgated on October 31, 1964. At the time of dispossession also, PAN-ORIENTAL was still insisting on its right to purchase the vessel. The obligation of REPUBLIC to reimburse PAN-ORIENTAL for expenses arose only after this Court had so ruled. Rentals for the use of the vessel by PAN- ORIENTAL were neither due and demandable at the time of dispossession but only after this Court had issued its Resolution of August 27, 1965.

More, the legal interest payable from February 3, 1951 on the sum of P40,797.54, representing useful expenses incurred by PAN-ORIENTAL, is also still unliquidated 8 since interest does not stop accruing "until the expenses are fully paid." 9 Thus, we find without basis REPUBLIC's allegation that PAN- ORIENTAL's claim in the amount of P40,797.54 was extinguished by compensation since the rentals payable by PAN-ORIENTAL amount to P59,500.00 while the expenses reach only P40,797.54. Deducting the latter amount from the former, REPUBLIC claims that P18,702.46 would still be owing by PAN-ORIENTAL to REPUBLIC. That argument loses sight of the fact that to the sum of P40,797.54 will still have to be added the legal rate of interest "from February 3, 1951 until fully paid."

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But although compensation by operation of law cannot take place as between REPUBLIC and PAN-ORIENTAL, by specific pronouncement of this Court in its Resolution of November 23, 1966, supra, the rentals payable by PAN-ORIENTAL in the amount of P59,500.00 should be deducted from the sum of useful expenses plus legal interest due, assuming that the latter amount would still be greater. Otherwise, the corresponding adjustments can be made depending on the totality of the respective amounts.2) Since we are holding that the obligation of REPUBLIC to pay P40,797.54 to PAN-ORIENTAL was not extinguished by compensation, the obligation of REPUBLIC to pay legal interest on said amount has neither become stale as REPUBLIC contends. Of special note is the fact that payment of that interest was the specific ruling of this Court in its Resolution of August 27, 1965, thus:

... For this reason, Froilan and the REPUBLIC of the Philippines are declared jointly and severally liable, not only for reimbursement to Pan Oriental, of the legitimate necessary expenses incurred on the vessel, but also for payment of legal interest thereon, computed from the date of the defendant's dispossession of the property ... .

3) The amount of P6,937.72 a month ordered to be paid by REPUBLIC and MARITIMA to PAN-ORIENTAL until the latter is paid its useful and necessary expenses is likewise in order. That amount represents the damages for the wrongful issuance of the Writ of Replevin and was computed as follows: P4,132.77 for loss of income by PAN-ORIENTAL plus P2,804.95 as monthly depreciation of the vessel in lieu of the charter hire.

It should further be recalled that this Court, in acting on PAN- ORIENTAL's application for damages in its Resolution of December 16, 1966, supra, did not deny the same but referred it instead to the Trial Court "there to be heard and decided" since evidence would have to be presented. Moreover, this Court found that PAN-ORIENTAL was "deprived of the possession of the vessel over which (it) had a lien for these expenses" 10 and that FROILAN and REPUBLIC "may be held responsible for the deprivation of defendant (PANORIENTAL) of its right to retention of the property until fully reimbursed on the necessary expenditures made on the vessel. " 11

4) There return of Pl5,000.00 ordered by the Trial Court and affirmed by the Appellate Court was but just and proper. As this Court found, that sum was tendered to REPUBLIC "which together with its (PAN-ORIENTAL's) alleged expenses already made on the vessel, cover 25% of the cost of the vessel, as provided in the option granted in the bareboat contract (Exhibit "C"). This amount was accepted by the Administration as deposit ...." Since the purchase did not eventually materialize for reasons attributable to REPUBLIC, it is but just that the deposit be returned. 12 It is futile to allege that PAN-ORIENTAL did not plead for the return of that amount since its prayer included other reliefs as may be just under the premises. Courts may issue such orders of restitution as justice and equity may warrant.

MARITIMA's Position

We find no merit in MARITIMA's contention that the alleged damages on account of wrongful replevin was barred by res judicata, and that the application for damages before the lower Court was but a mere adoption of a different method of presenting claims already litigated. For the records show that an application for damages for wrongful replevin was filed both before this Court and thereafter before the Trial Court after this Tribunal specifically remanded the issue of those damages to the Trial Court there to be heard and decided pursuant to Rule 60, Section 10 in relation to Rule 57, Section 20. 13

The matter of legal compensation which MARITIMA has also raised has been previously discussed.

Parenthetically, PAN-ORIENTAL can no longer raise the alleged error of the Trial Court in computing the necessary and useful expenses at only P40,797.54 when they should be P87,267.30, since it did not appeal from that Court's Decision.

In a nutshell, we find that the appealed Decision of the Trial Court and of the then Court of Appeals is in consonance with the Decision and Resolutions of this Court.

ACCORDINGLY, the judgment appealed from is hereby affirmed. No costs. SO ORDERED.G.R. No. L-69560 June 30, 1988

THE INTERNATIONAL CORPORATE BANK INC., petitioner, vs.THE IMMEDIATE APPELLATE COURT, HON. ZOILO AGUINALDO, as presiding Judge of the Regional Trial Court of Makati, Branch 143, NATIVIDAD M. FAJARDO, and SILVINO R. PASTRANA, as Deputy and Special Sheriff, respondents.

PARAS, J.:

This is a petition for review on certiorari of the Decision of the Court of Appeals dated October 31, 1984 in AC-G.R. SP No. 02912 entitled "THE INTERNATIONAL CORPORATE BANK, INC. v. Hon. ZOILO AGUINALDO, et al.," dismissing petitioner's petition for certiorari against the Regional Trial Court of Makati (Branch 143) for lack of merit, and of its Resolution dated January 7, 1985, denying petitioner's motion for reconsideration of the aforementioned Decision.

Petitioner also prays that upon filing of the petition, a restraining order be issued ex-parte, enjoining respondents or any person acting in their behalf, from enforcing or in any manner implementing the Order of the respondent trial court dated February 13 and March 9, 1984, and January 10 and January 11, 1985.

The facts of this case, as found by the trial court and subsequently adopted by the Court of Appeals, are as follows:

In the early part of 1980, private respondent secured from petitioner's predecessors-in-interest, the then Investment and Underwriting Corp. of the Philippines and Atrium Capital Corp., a loan in the amount of P50,000,000.00. To secure this loan, private respondent mortgaged her real properties in Quiapo, Manila and in San Rafael, Bulacan, which she claimed have a total market value of P110,000,000.00. Of this loan, only the amount of P20,000,000.00 was approved for release. The same amount was applied to pay her other obligations to petitioner, bank charges and fees. Thus, private respondent's claim that she did not receive anything from the approved loan.

On September 11, 1980, private respondent made a money market placement with ATRIUM in the amount of P1,046,253.77 at 17% interest per annum for a period of 32 days or until October 13, 1980, its maturity date. Meanwhile, private respondent allegedly failed to pay her mortgaged indebtedness to the bank so that the latter refused to pay the proceeds of the money market placement on maturity but applied the amount instead to the deficiency in the proceeds of the auction sale of the mortgaged properties. With Atrium being the only bidder, said properties were sold in its favor for only P20,000,000.00. Petitioner claims that after deducting this amount, private respondent is still indebted in the amount of P6.81 million.

On November 17, 1982, private respondent filed a complaint with the trial court against petitioner for annulment of the sheriff's sale of the mortgaged properties, for the release to her of the balance of her loan from petitioner in the amount of P30,000,000,00, and for recovery of P1,062,063.83 representing the proceeds of her money market investment and for damages. She alleges in her complaint, which was subsequently amended, that the mortgage is not yet due and demandable and accordingly the foreclosure was illegal; that per her loan agreement with petitioner she is entitled to the release to her of the balance of the loan in the amount of P30,000,000.00; that petitioner refused to pay her the proceeds of her money market placement notwithstanding the fact that it has long become due and payable; and that she suffered damages as a consequence of petitioner's illegal acts.

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In its answer, petitioner denies private respondent's allegations and asserts among others, that it has the right to apply or set off private respondent's money market claim of P1,062,063.83. Petitioner thus interposes counterclaims for the recovery of P5,763,741.23, representing the balance of its deficiency claim after deducting the proceeds of the money market placement, and for damages.

The trial court subsequently dismissed private respondent's cause of action concerning the annulment of the foreclosure sale, for lack of jurisdiction, but left the other causes of action to be resolved after trial. Private respondent then filed separate complaints in Manila and in Bulacan for annulment of the foreclosure sale of the properties in Manila and in Bulacan, respectively.

On December 15, 1983, private respondent filed a motion to order petitioner to release in her favor the sum of P1,062,063.83, representing the proceeds of the money market placement, at the time when she had already given her direct testimony on the merits of the case and was being cross-examined by counsel. On December 24, 1983, petitioner filed an opposition thereto, claiming that the proceeds of the money market investment had already been applied to partly satisfy its deficiency claim, and that to grant the motion would be to render judgment in her favor without trial and make the proceedings moot and academic. However, at the hearing on February 9, 1984, counsel for petitioner and private respondent jointly manifested that they were submitting for resolution said motion as well as the opposition thereto on the basis of the pleadings and of the evidence which private respondent had already presented.

On February 13, 1984, respondent judge issued an order granting the motion, as follows:

IN VIEW OF THE FOREGOING, the defendant International Corporate Bank is hereby ordered to deliver to the plaintiff Natividad M. Pajardo the amount of P1,062,063.83 covered by the repurchase agreement with Serial No. AOY-14822 (Exhibit "A'), this amount represented the principal of P1,046,253.77 which the plaintiff held including its interest as of October 13, 1980, conditioned upon the plaintiff filing a bond amount to P1,062,063.83 to answer for all damages which the said defendant bank may suffer in the event that the Court should finally decide that the plaintiff was not entitled to the said amount.

Petitioner filed a motion for reconsideration to the aforesaid order, asserting among other things that said motion is not verified, and therefore a mere scrap of paper. Private respondent however manifested that since she testified in open court and was cross-examined by counsel for petitioner on the motion for release of the proceeds of the money market placement, the defect had already been cured. On March 9, 1984, the respondent judge issued an order denying petitioner's motion for reconsideration. (CA Decision, Rollo, pp. 109-111).

On March 13, 1984, petitioner filed a special civil action for certiorari and prohibition with preliminary injunction with the Court of Appeals, (a) for the setting aside and annulment of the Orders dated February 13, 1984 and March 9,1984, issued by the respondent trial court, and (b) for an order commanding or directing the respondent trial judge to desist from enforcing and/or implementing and/or executing the aforesaid Orders. The temporary restraining order prayed for was issued by respondent Court of Appeals on March 22, 1984. (Please see CA Decision, Rollo, p. 114, last paragraph).

In a decision rendered on October 31, 1984 (Rollo, pp. 109-14), the Court of Appeals dismissed said petition finding—(a) that while the Motion for the release of the proceeds of the money market investment in favor of private respondent was not verified by her, that defect was cured when she testified under oath to substantiate her allegations therein: (b) that, petitioner cannot validly claim it was denied due process for the reason that it was given ample time to be heard, as it was in fact heard when it filed an Opposition to the motion and a motion for reconsideration; (c) that the circumstances of this case prevent legal compensation from taking place because the question of whether private respondent is indebted to petitioner in the amount of 6.81 million representing the deficiency balance after the foreclosure of the mortgage executed to secure the loan extended to her, is vigorously disputed; (d) that the release of the proceeds of the money market investment for private respondent will not make the causes of action of the case pending before the trial court moot and academic nor will it cause irreparable damage to petitioner, private respondent having filed her bond in the amount of P1,062,063.83 to answer for all damages which the former may suffer in the event that the court should finally decide that private respondent is not entitled to the return of said amount (CA Decision, Rello, pp. 112-114).

The dispositive portion of the aforementioned Decision reads:

... We hold that the respondent court cannot be successfully charged with grave abuse of discretion amounting to lack of jurisdiction when it issued its Orders of February 13, 1984 and March 9, 1984, based as they are on a correct appreciation of the import of the parties' evidence and the applicable law.

IN VIEW WHEREOF, the petition is dismissed for lack of merit and the temporary restraining order issued by this Court on March 22, 1984 is lifted. (Ibid., p. 114).

Petitioner moved for the reconsideration of the above decision (Annex "S", Rollo, pp. 116-124), but for the reason that the same failed to raise any issue that had not been considered and passed upon by the respondent Court of Appeals, it was denied in a Resolution dated January 7, 1985 (CA Resolution, Rollo, p. 126).

Having been affirmed by the Court of Appeals, the trial court issued a Writ of Execution to implement its Order of February 13, 1984 (Annex "BB", Rollo, p. 188) and by virtue thereof, a levy was made on petitioner's personal property consisting of 20 motor vehicles (Annex "U", Rollo, p. 127).

On January 9, 1985, herein private respondent (then plaintiff) filed in the trial court an ex-parte motion praying that the four branches of the petitioner such as: Baclaran Branch, Paranaque, Metro Manila; Ylaya Branch, Divisoria, Metro Manila; Cubao Branch, Quezon City and Binondo Branch, Sta. Cruz, Manila, be ordered to pay the amount of P250,000.00 each, and the main office of the petitioner bank at Paseo de Roxas, Makati, Metro Manila, be ordered to pay the amount of P62,063.83 in order to answer for the claim of private respondent amounting to P1,062,063.83.

Thereupon, on January 10, 1985, the trial court issued an Order (Annex "V", Rollo, p. 129) granting the above-mentioned prayers.

Acting on the ex-parte motion by the plaintiff (now private respondent), the trial court, on January 11, 1984, ordered the President of defendant International Corporate Bank (now petitioner) and all its employees and officials concemed to deliver to the sheriff the 20 motor vehicles levied by virtue of the Writ of Execution dated December 12, 1984 (Annex "W", Rollo, p. 131).

The petitioner having failed to comply with the above-cited Order, the respondent trial court issued two (2) more Orders: the January 16, 1985 (Annex "CC," Rollo, p. 190) and January 21, 1985 Orders (Annex "DD", Rollo, p. 191), directing several employees mentioned therein to show cause wily they should not be cited in contempt.

Hence, this petition for review on certiorari with prayer for a restraining order and for a writ of preliminary injunction.

Three days after this petition was filed, or specifically on January 18, 1985, petitioner filed an urgent motion reiterating its prayer for the issuance of an ex-parte restraining order (Rollo, p. 132).

Simultaneous with the filing of the present petition, petitioner, as defendant, filed with the trial court an ex-parte motion to suspend the implementation of any and all orders and writs issued pursuant to Civil Case No. 884 (Annex "A", Rollo, p. 135).

This Court's resolution dated January 21, 1985, without giving due course to the petition, resolved (a) to require the respondents to comment: (b) to issue, effective immediately and until further orders from this Court, a Temporary Restraining Order enjoining the respondents from enforcing or in any manner implementing the questioned Orders dated February 13, 1984, March 9, 1984, January 10, 1985 and January 11 and 16, 1985, issued in Civil Case No. 884.

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The corresponding writ was issued on the same day (Rollo, pp. 139-140).

As required, the Comment of private respondent was filed on January 28, 1985 (Rollo, pp. 141- 150).

Thereafter, petitioner moved for leave to file a supplemental petition on the ground that after it had filed this present petition, petitioner discovered that the bond filed with, and approved by, the respondent lower court showed numerous material erasures, alterations and/or additions (Rollo, p. 151), which the issuing insurance company certified as having been done without its authority or consent (Annex "Z", Rollo, p. 178).

The Supplemental Petition was actually filed on February 1, 1985 (Rollo, pp. 154-171). It pointed out the erasures, alterations and/or additions in the bond as follows:

a. below "Civil Case No. 884" after the words, "Plaintiff's Bond," the phrase "For Levying of Attachment" was erased or deleted;

b. in lines 2 and 3 after the word "order," the phrase "approving plaintiff's motion dated Dec. 15, 1983, was inserted or added;

c. in line 3, the phrases "Of attachment" and "ordered that a writ of attachment issue' were erased or deleted;

d also in line 3 after the words "the court has" the phrase "approved the Motion was likewise inserted or added;

e. in line 9, the phrase "and of the levying of said attachment" was also erased or deleted;

f. in line 13, the word "attachment" was likewise erased or deleted;

g. also in line 13 after the deletion of word "attachment" the phrase "release of the P1,062,063.83 to the plaintiff was similarly inserted or added."

Petitioner contended therein that in view of the foregoing facts, the genuineness, due execution and authenticity as well as the validity and enforceability of the bond (Rello, p. 174) is now placed in issue and consequently, the bond may successfully be repudiated as falsified and, therefore, without any force and effect and the bonding company may thereby insist that it has been released from any hability thereunder.

Also, petitioner pointed as error the respondent trial court's motu proprio transferring Civil Case No. 884 to the Manila Branch of the same Court arguing that improper venue, as a ground for, and unless raised in, a Motion to Dismiss, may be waived by the parties and the court may not pre-empt the right of the parties to agree between or among themselves as to the venue of their choice in litigating their justiciable controversy (Supplemental Petition, Rollo, p. 160).

On being required to comment thereon, (Rollo, p. 192) private respondent countered (Rollo, pp. 193-198) that bond forms are ready-prepared forms and the bonding company used the form for "Levying of Attachment" because the company has no ready-prepared form for the kind of bond called for or required in Civil Case 884. Whatever deletions or additions appear on the bond were made by the Afisco Insurance Corporation itself for the purpose of accomplishing what was required or intended.

Nonetheless, on May 7, 1985, private respondent filed "Plaintiffs Bond" in the respondent trial court in the amount of P1,062,063.83 a xerox copy of which was furnished this Court (Rollo, p. 219), and noted in the Court's Resolution dated May 29,1985 (Rollo, p. 225).

On March 11, 1985, petitioner was required to file a Consolidated Reply (Rollo, p. 199) which was filed on April 10, 1985 (Rollo, p. 201).

Thereafter, a Rejoinder (Rollo, p. 238) was filed by private respondent on September 18, 1985 after Atty. Advincula, counsel for private respondents was required by this Court to show cause why he should not be disciplinarily dealt with or held in contempt for his failure to comply on time (Rollo, p. 226) and on August 19, 1985 said lawyer was finally admonished (Rollo, p. 229) for his failure to promptly apprise the Court of his alleged non-receipt of copy of petitioner's reply, which alleged non-receipt was vehemently denied by petitioner in its Counter Manifestation (Rollo, p. 230) filed on August 5, 1985.

Finally, on October 7, 1985, this petition was given due course and both parties were required to submit simultaneous memoranda (Rollo, p. 249) but before the same were filed, petitioner moved for leave to file sur-rejoinder (Rollo, p. 250), the sur-rejoinder was filed on October 14,1985 (Rollo, pp. 252-254).

Petitioner's memorandum was filed on December 28, 1985 (Rollo, pp. 264-292) while that of private respondent was submitted on January 10, 1986 (Rollo, pp. 295-304).

Petitioner again moved for leave to file a Reply Memorandum (Rollo, p. 307) which, despite permission from this Court, was not filed and on August 22, 1986, private respondent prayed for early resolution of the petition (Rollo, p. 311).

In a resolution dated October 13, 1986 (Rollo, p. 314) this case was transferred to the Second Division of this Court, the same being assigned to a member of that Division.

The crucial issue to be resolved in this case is whether or not there can be legal compensation in the case at bar.

Petitioner contends that after foreclosing the mortgage, there is still due from private respondent as deficiency the amount of P6.81 million against which it has the right to apply or set off private respondent's money market claim of P1,062,063.83.

The argument is without merit.

As correctly pointed out by the respondent Court of Appeals —

Compensation shall take place when two persons, in their own right, are creditors and debtors of each other. (Art. 1278, Civil Code). "When all the requisites mentioned in Art. 1279 of the Civil Code are present, compensation takes effect by operation of law, even without the consent or knowledge of the debtors." (Art. 1290, Civil Code). Article 1279 of the Civil Code requires among others, that in order that legal compensation shall take place, "the two debts be due" and "they be liquidated and demandable." Compensation is not proper where the claim of the person asserting the set-off against the other is not clear nor liquidated; compensation cannot extend to unliquidated, disputed claim arising from breach of contract. (Compañia General de Tabacos vs. French and Unson, 39 Phil. 34; Lorenzo & Martinez vs. Herrero, 17 Phil. 29).

There can be no doubt that petitioner is indebted to private respondent in the amount of P1,062,063.83 representing the proceeds of her money market investment. This is admitted. But whether private respondent is indebted to petitioner in the amount of P6.81 million representing the deficiency balance after the foreclosure of the mortgage executed to secure the loan extended to her, is vigorously disputed. This circumstance prevents legal compensation from taking place. (CA Decision, Rollo, pp. 112-113).

It must be noted that Civil Case No. 83-19717 is still pending consideration at the RTC Manila, for annulment of Sheriffs sale on extra-judicial foreclosure of private respondent's property from which the alleged deficiency arose. (Annex "AA", Rollo, pp. 181-189). Therefore, the validity of the extrajudicial foreclosure sale and petitioner's claim for deficiency are still in question, so much so that it is evident, that the requirement of Article

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1279 that the debts must be liquidated and demandable has not yet been met. For this reason, legal compensation cannot take place under Article 1290 of the Civil Code.

Petitioner now assails the motion of the plaintiff (now private respondent) filed in the trial court for the release of the proceeds of the money market investment, arguing that it is deficient in form, the same being unverified (petitioner's Memorandum, Rollo, p. 266). On this score, it has been held that "as enjoined by the Rules of Court and the controlling jurisprudence, a liberal construction of the rules and the pleadings is the controlling principle to effect substantial justice." (Maturan v. Araula, 111 SCRA 615 [1982]).

Finally, the filing of insufficient or defective bond does not dissolve absolutely and unconditionally the injunction issued. Whatever defect the bond possessed was cured when private respondent filed another bond in the trial court.

PREMISES CONSIDERED, the questioned Decision and Resolution of the respondent Court of Appeals are hereby AFFIRMED.

SO ORDERED.

Yap, C.J., Melen

G.R. No. 170141 April 22, 2008

JAPAN AIRLINES, petitioner, vs. JESUS SIMANGAN, respondent.

REYES R.T., J.:

WHEN an airline issues a ticket to a passenger confirmed on a particular flight on a certain date, a contract of carriage arises, and the passenger has every right to expect that he would fly on that flight and on that date. If he does not, then the carrier opens itself to a suit for breach of contract of carriage.1

The power to admit or not an alien into the country is a sovereign act which cannot be interfered with even by Japan Airlines (JAL).2

In this petition for review on certiorari,3 petitioner JAL appeals the: (1) Decision4 dated May 31, 2005 of the Court of Appeals (CA) ordering it to pay respondent Jesus Simangan moral and exemplary damages; and (2) Resolution5 of the same court dated September 28, 2005 denying JAL's motion for reconsideration.

The Facts

In 1991, respondent Jesus Simangan decided to donate a kidney to his ailing cousin, Loreto Simangan, in UCLA School of Medicine in Los Angeles, California, U.S.A. Upon request of UCLA, respondent undertook a series of laboratory tests at the National Kidney Institute in Quezon City to verify whether his blood and tissue type are compatible with Loreto's.6 Fortunately, said tests proved that respondent's blood and tissue type were well-matched with Loreto's.7

Respondent needed to go to the United States to complete his preliminary work-up and donation surgery. Hence, to facilitate respondent's travel to the United States, UCLA wrote a letter to the American Consulate in Manila to arrange for his visa. In due time, respondent was issued an emergency U.S. visa by the American Embassy in Manila.8

Having obtained an emergency U.S. visa, respondent purchased a round trip plane ticket from petitioner JAL for US$1,485.00 and was issued the corresponding boarding pass.9 He was scheduled to a particular flight bound for Los Angeles, California, U.S.A. via Narita, Japan.10

On July 29, 1992, the date of his flight, respondent went to Ninoy Aquino International Airport in the company of several relatives and friends.11 He was allowed to check-in at JAL's counter.12 His plane ticket, boarding pass, travel authority and personal articles were subjected to rigid immigration and security routines.13 After passing through said immigration and security procedures, respondent was allowed by JAL to enter its airplane.14

While inside the airplane, JAL's airline crew suspected respondent of carrying a falsified travel document and imputed that he would only use the trip to the United States as a pretext to stay and work in Japan.15 The stewardess asked respondent to show his travel documents. Shortly after, the stewardess along with a Japanese and a Filipino haughtily ordered him to stand up and leave the plane.16 Respondent protested, explaining that he was issued a U.S. visa. Just to allow him to board the plane, he pleaded with JAL to closely monitor his movements when the aircraft stops over in Narita.17 His pleas were ignored. He was then constrained to go out of the plane.18 In a nutshell, respondent was bumped off the flight.

Respondent went to JAL's ground office and waited there for three hours. Meanwhile, the plane took off and he was left behind.19 Afterwards, he was informed that his travel documents were, indeed, in order.20 Respondent was refunded the cost of his plane ticket less the sum of US$500.00 which was deducted by JAL.21 Subsequently, respondent's U.S. visa was cancelled.22

Displeased by the turn of events, respondent filed an action for damages against JAL with the Regional Trial Court (RTC) in Valenzuela City, docketed as Civil Case No. 4195-V-93. He claimed he was not able to donate his kidney to Loreto; and that he suffered terrible embarrassment and mental anguish.23 He prayed that he be awarded P3 million as moral damages, P1.5 million as exemplary damages and P500,000.00 as attorney's fees.24

JAL denied the material allegations of the complaint. It argued, among others, that its failure to allow respondent to fly on his scheduled departure was due to "a need for his travel documents to be authenticated by the United States Embassy"25 because no one from JAL's airport staff had encountered a parole visa before.26 It posited that the authentication required additional time; that respondent was advised to take the flight the following day, July 30, 1992. JAL alleged that respondent agreed to be rebooked on July 30, 1992.27

JAL also lodged a counterclaim anchored on respondent's alleged wrongful institution of the complaint. It prayed for litigation expenses, exemplary damages and attorney's fees.28

On September 21, 2000, the RTC presided by Judge Floro P. Alejo rendered its decision in favor of respondent (plaintiff), disposing as follows:

WHEREFORE, judgment is hereby rendered ordering the defendant to pay the plaintiff the amount of P1,000,000.00 as moral damages, the amount of P500,000.00 as exemplary damages and the amount of P250,000.00 as attorney's fees, plus the cost of suit.29

The RTC explained:

In summarily and insolently ordering the plaintiff to disembark while the latter was already settled in his assigned seat, the defendant violated the contract of carriage; that when the plaintiff was ordered out of the plane under the pretext that the genuineness of his travel documents would be verified it had caused him embarrassment and besmirched reputation; and that when the plaintiff was finally not allowed to take the flight, he suffered more wounded feelings and social humiliation for which the plaintiff was asking to be awarded moral and exemplary damages as well as attorney's fees.

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The reason given by the defendant that what prompted them to investigate the genuineness of the travel documents of the plaintiff was that the plaintiff was not then carrying a regular visa but just a letter does not appear satisfactory. The defendant is engaged in transporting passengers by plane from country to country and is therefore conversant with the travel documents. The defendant should not be allowed to pretend, to the prejudice of the plaintiff not to know that the travel documents of the plaintiff are valid documents to allow him entry in the United States.

The foregoing act of the defendant in ordering the plaintiff to deplane while already settled in his assigned seat clearly demonstrated that the defendant breached its contract of carriage with the plaintiff as passenger in bad faith and as such the plaintiff is entitled to moral and exemplary damages as well as to an award of attorney's fees.30

Disagreeing with the RTC judgment, JAL appealed to the CA contending that it is not guilty of breach of contract of carriage, hence, not liable for damages.31 It posited that it is the one entitled to recover on its counterclaim.32

CA Ruling

In a Decision33 dated May 31, 2005, the CA affirmed the decision of the RTC with modification in that it lowered the amount of moral and exemplary damages and deleted the award of attorney's fees. The fallo of the CA decision reads:

WHEREFORE, the appealed Decision is AFFIRMED with MODIFICATION. Appellant JAPAN AIR LINES is ordered to pay appellee JESUS SIMANGAN the reduced sums, as follows: Five Hundred Thousand Pesos (P500,000.00) as moral damages, and Two Hundred Fifty Thousand Pesos (P250,000.00) as exemplary damages. The award of attorney's fees is hereby DELETED.34

The CA elucidated that since JAL issued to respondent a round trip plane ticket for a lawful consideration, "there arose a perfected contract between them."35 It found that respondent was "haughtily ejected"36 by JAL and that "he was certainly embarrassed and humiliated"37 when, in the presence of other passengers, JAL's airline staff "shouted at him to stand up and arrogantly asked him to produce his travel papers, without the least courtesy every human being is entitled to";38 and that "he was compelled to deplane on the grounds that his papers were fake."39

The CA ratiocinated:

While the protection of passengers must take precedence over convenience, the implementation of security measures must be attended by basic courtesies.

In fact, breach of the contract of carriage creates against the carrier a presumption of liability, by a simple proof of injury, relieving the injured passenger of the duty to establish the fault of the carrier or of his employees; and placing on the carrier the burden to prove that it was due to an unforeseen event or to force majeure.

That appellee possessed bogus travel documents and that he might stay illegally in Japan are allegations without substantiation. Also, appellant's attempt to rebook appellee the following day was too late and did not relieve it from liability. The damage had been done. Besides, its belated theory of novation, i.e., that appellant's original obligation to carry appellee to Narita and Los Angeles on July 29, 1992 was extinguished by novation when appellant and appellant agreed that appellee will instead take appellant's flight to Narita on the following day, July 30, 1992, deserves little attention. It is inappropriate at bar. Questions not taken up during the trial cannot be raised for the first time on appeal.40 (Underscoring ours and citations were omitted)

Citing Ortigas, Jr. v. Lufthansa German Airlines,41 the CA declared that "(i)n contracts of common carriage, inattention and lack of care on the part of the carrier resulting in the failure of the passenger to be accommodated in the class contracted for amounts to bad faith or fraud which entitles the passengers to the award of moral damages in accordance with Article 2220 of the Civil Code."42

Nevertheless, the CA modified the damages awarded by the RTC. It explained:

Fundamental in the law on damages is that one injured by a breach of a contract, or by a wrongful or negligent act or omission shall have a fair and just compensation commensurate to the loss sustained as consequence of the defendant's act. Being discretionary on the court, the amount, however, should not be palpably and scandalously excessive.

Here, the trial court's award of P1,000,000.00 as moral damages appears to be overblown. No other proof of appellee's social standing, profession, financial capabilities was presented except that he was single and a businessman. To Us, the sum of 500,000.00 is just and fair. For, moral damages are emphatically not intended to enrich a complainant at the expense of the defendant. They are awarded only to enable the injured party to obtain means, diversion or amusements that will serve to alleviate the moral suffering he has undergone, by reason of the defendant's culpable action.

Moreover, the grant of P500,000.00 as exemplary damages needs to be reduced to a reasonable level. The award of exemplary damages is designed to permit the courts to mould behavior that has socially deleterious consequences and its imposition is required by public policy to suppress the wanton acts of the offender. Hence, the sum of P250,000.00 is adequate under the circumstances.

The award of P250,000.00 as attorney's fees lacks factual basis. Appellee was definitely compelled to litigate in protecting his rights and in seeking relief from appellant's misdeeds. Yet, the record is devoid of evidence to show the cost of the services of his counsel and/or the actual expenses incurred in prosecuting his action.43 (Citations were omitted)

When JAL's motion for reconsideration was denied, it resorted to the petition at bar.

Issues

Basically, there are three (3) issues to resolve here: (1) whether or not JAL is guilty of contract of carriage; (2) whether or not respondent is entitled to moral and exemplary damages; and (3) whether or not JAL is entitled to its counterclaim for damages.

Our Ruling

This Court is not a trier of facts.

Chiefly, the issues are factual. The RTC findings of facts were affirmed by the CA. The CA also gave its nod to the reasoning of the RTC except as to the awards of damages, which were reduced, and that of attorney's fees, which was deleted.

We are not a trier of facts. We generally rely upon, and are bound by, the conclusions on this matter of the lower courts, which are better equipped and have better opportunity to assess the evidence first-hand, including the testimony of the witnesses.45

We have repeatedly held that the findings of fact of the CA are final and conclusive and cannot be reviewed on appeal to the Supreme Court provided they are based on substantial evidence.46 We have no jurisdiction, as a rule, to reverse their findings.47 Among the exceptions to this rule are: (a) when the conclusion is a finding grounded entirely on speculations, surmises or conjectures; (b) when the inference made is manifestly mistaken, absurd or impossible; (c) where there is grave abuse of discretion; (d) when the judgment is based on a misapprehension of facts; (e) when the findings of facts are conflicting; (f) when the CA, in making its findings, went beyond the issues of the case and the same is contrary to the admissions of both appellant and appellee.48

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The said exceptions, which are being invoked by JAL, are not found here. There is no indication that the findings of the CA are contrary to the evidence on record or that vital testimonies of JAL's witnesses were disregarded. Neither did the CA commit misapprehension of facts nor did it fail to consider relevant facts. Likewise, there was no grave abuse of discretion in the appreciation of facts or mistaken and absurd inferences.

We thus sustain the coherent facts as established by the courts below, there being no sufficient showing that the said courts committed reversible error in reaching their conclusions.

JAL is guilty of breach ofcontract of carriage.

That respondent purchased a round trip plane ticket from JAL and was issued the corresponding boarding pass is uncontroverted.49 His plane ticket, boarding pass, travel authority and personal articles were subjected to rigid immigration and security procedure.50 After passing through said immigration and security procedure, he was allowed by JAL to enter its airplane to fly to Los Angeles, California, U.S.A. via Narita, Japan.51 Concisely, there was a contract of carriage between JAL and respondent.

Nevertheless, JAL made respondent get off the plane on his scheduled departure on July 29, 1992. He was not allowed by JAL to fly. JAL thus failed to comply with its obligation under the contract of carriage.

JAL justifies its action by arguing that there was "a need to verify the authenticity of respondent's travel document."52 It alleged that no one from its airport staff had encountered a parole visa before.53 It further contended that respondent agreed to fly the next day so that it could first verify his travel document, hence, there was novation.54 It maintained that it was not guilty of breach of contract of carriage as respondent was not able to travel to the United States due to his own voluntary desistance.55

We cannot agree. JAL did not allow respondent to fly. It informed respondent that there was a need to first check the authenticity of his travel documents with the U.S. Embassy.56 As admitted by JAL, "the flight could not wait for Mr. Simangan because it was ready to depart."57

Since JAL definitely declared that the flight could not wait for respondent, it gave respondent no choice but to be left behind. The latter was unceremoniously bumped off despite his protestations and valid travel documents and notwithstanding his contract of carriage with JAL. Damage had already been done when respondent was offered to fly the next day on July 30, 1992. Said offer did not cure JAL's default.

Considering that respondent was forced to get out of the plane and left behind against his will, he could not have freely consented to be rebooked the next day. In short, he did not agree to the alleged novation. Since novation implies a waiver of the right the creditor had before the novation, such waiver must be express.58 It cannot be supposed, without clear proof, that respondent had willingly done away with his right to fly on July 29, 1992.

Moreover, the reason behind the bumping off incident, as found by the RTC and CA, was that JAL personnel imputed that respondent would only use the trip to the United States as a pretext to stay and work in Japan.59

Apart from the fact that respondent's plane ticket, boarding pass, travel authority and personal articles already passed the rigid immigration and security routines,60 JAL, as a common carrier, ought to know the kind of valid travel documents respondent carried. As provided in Article 1755 of the New Civil Code: "A common carrier is bound to carry the passengers safely as far as human care and foresight can provide, using the utmost diligence of very cautious persons, with a due regard for all the circumstances."61 Thus, We find untenable JAL's defense of "verification of respondent's documents" in its breach of contract of carriage.

It bears repeating that the power to admit or not an alien into the country is a sovereign act which cannot be interfered with even by JAL.62

In an action for breach of contract of carriage, all that is required of plaintiff is to prove the existence of such contract and its non-performance by the carrier through the latter's failure to carry the passenger safely to his destination.63 Respondent has complied with these twin requisites.

Respondent is entitled to moral and exemplary damages and attorney's fees plus legal interest.

With reference to moral damages, JAL alleged that they are not recoverable in actions ex contractu except only when the breach is attended by fraud or bad faith. It is contended that it did not act fraudulently or in bad faith towards respondent, hence, it may not be held liable for moral damages.

As a general rule, moral damages are not recoverable in actions for damages predicated on a breach of contract for it is not one of the items enumerated under Article 2219 of the Civil Code.64 As an exception, such damages are recoverable: (1) in cases in which the mishap results in the death of a passenger, as provided in Article 1764, in relation to Article 2206(3) of the Civil Code; and (2) in the cases in which the carrier is guilty of fraud or bad faith, as provided in Article 2220.65

The acts committed by JAL against respondent amounts to bad faith. As found by the RTC, JAL breached its contract of carriage with respondent in bad faith. JAL personnel summarily and insolently ordered respondent to disembark while the latter was already settled in his assigned seat. He was ordered out of the plane under the alleged reason that the genuineness of his travel documents should be verified.

These findings of facts were upheld by the CA, to wit:

x x x he was haughtily ejected by appellant. He was certainly embarrassed and humiliated when, in the presence of other passengers, the appellant's airline staff shouted at him to stand up and arrogantly asked him to produce his travel papers, without the least courtesy every human being is entitled to. Then, he was compelled to deplane on the grounds that his papers were fake. His protestation of having been issued a U.S. visa coupled with his plea to appellant to closely monitor his movements when the aircraft stops over in Narita, were ignored. Worse, he was made to wait for many hours at the office of appellant only to be told later that he has valid travel documents.66 (Underscoring ours)

Clearly, JAL is liable for moral damages. It is firmly settled that moral damages are recoverable in suits predicated on breach of a contract of carriage where it is proved that the carrier was guilty of fraud or bad faith, as in this case. Inattention to and lack of care for the interests of its passengers who are entitled to its utmost consideration, particularly as to their convenience, amount to bad faith which entitles the passenger to an award of moral damages. What the law considers as bad faith which may furnish the ground for an award of moral damages would be bad faith in securing the contract and in the execution thereof, as well as in the enforcement of its terms, or any other kind of deceit.67

JAL is also liable for exemplary damages as its above-mentioned acts constitute wanton, oppressive and malevolent acts against respondent. Exemplary damages, which are awarded by way of example or correction for the public good, may be recovered in contractual obligations, as in this case, if defendant acted in wanton, fraudulent, reckless, oppressive, or malevolent manner.68

Exemplary damages are designed by our civil law to permit the courts to reshape behaviour that is socially deleterious in its consequence by creating negative incentives or deterrents against such behaviour. In requiring compliance with the standard of extraordinary diligence, a standard which is, in fact, that of the highest possible degree of diligence, from common carriers and in creating a presumption of negligence against them, the law seeks to compel them to control their employees, to tame their reckless instincts and to force them to take adequate care of human beings and their property.69

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Neglect or malfeasance of the carrier's employees could give ground for an action for damages. Passengers have a right to be treated by the carrier's employees with kindness, respect, courtesy and due consideration and are entitled to be protected against personal misconduct, injurious language, indignities and abuses from such employees.70

The assessment of P500,000.00 as moral damages and P100,000.00 as exemplary damages in respondent's favor is, in Our view, reasonable and realistic. This award is reasonably sufficient to indemnify him for the humiliation and embarrassment he suffered. This also serves as an example to discourage the repetition of similar oppressive acts.

With respect to attorney's fees, they may be awarded when defendant's act or omission has compelled plaintiff to litigate with third persons or to incur expenses to protect his interest.71 The Court, in Construction Development Corporation of the Philippines v. Estrella,72 citing Traders Royal Bank Employees Union-Independent v. National Labor Relations Commission,73 elucidated thus:

There are two commonly accepted concepts of attorney's fees, the so-called ordinary and extraordinary. In its ordinary concept, an attorney's fee is the reasonable compensation paid to a lawyer by his client for the legal services he has rendered to the latter. The basis of this compensation is the fact of his employment by and his agreement with the client.

In its extraordinary concept, an attorney's fee is an indemnity for damages ordered by the court to be paid by the losing party in a litigation. The basis of this is any of the cases provided by law where such award can be made, such as those authorized in Article 2208, Civil Code, and is payable not to the lawyer but to the client, unless they have agreed that the award shall pertain to the lawyer as additional compensation or as part thereof.74

It was therefore erroneous for the CA to delete the award of attorney's fees on the ground that the record is devoid of evidence to show the cost of the services of respondent's counsel. The amount is actually discretionary upon the Court so long as it passes the test of reasonableness. They may be recovered as actual or compensatory damages when exemplary damages are awarded and whenever the court deems it just and equitable,75 as in this case.

Considering the factual backdrop of this case, attorney's fees in the amount of P200,000.00 is reasonably modest.

The above liabilities of JAL in the total amount of P800,000.00 earn legal interest pursuant to the Court's ruling in Construction Development Corporation of the Philippines v. Estrella,76 citing Eastern Shipping Lines, Inc. v. Court of Appeals,77 to wit:

Regarding the imposition of legal interest at the rate of 6% from the time of the filing of the complaint, we held in Eastern Shipping Lines, Inc. v. Court of Appeals, that when an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is breached, the contravenor can be held liable for payment of interest in the concept of actual and compensatory damages, subject to the following rules, to wit -

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

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

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.78 (Emphasis supplied and citations omitted)

Accordingly, in addition to the said total amount of P800,000.00, JAL is liable to pay respondent legal interest. Pursuant to the above ruling of the Court, the legal interest is 6% and it shall be reckoned from September 21, 2000 when the RTC rendered its judgment. From the time this Decision becomes final and executory, the interest rate shall be 12% until its satisfaction.

JAL is not entitled to its counterclaim for damages.

The counterclaim of JAL in its Answer79 is a compulsory counterclaim for damages and attorney's fees arising from the filing of the complaint. There is no mention of any other counter claims.

This compulsory counterclaim of JAL arising from the filing of the complaint may not be granted inasmuch as the complaint against it is obviously not malicious or unfounded. It was filed by respondent precisely to claim his right to damages against JAL. Well-settled is the rule that the commencement of an action does not per se make the action wrongful and subject the action to damages, for the law could not have meant to impose a penalty on the right to litigate.80

We reiterate case law that if damages result from a party's exercise of a right, it is damnum absque injuria.81 Lawful acts give rise to no injury. Walang perhuwisyong maaring idulot ang paggamit sa sariling karapatan.

During the trial, however, JAL presented a witness who testified that JAL suffered further damages. Allegedly, respondent caused the publications of his subject complaint against JAL in the newspaper for which JAL suffered damages.82

Although these additional damages allegedly suffered by JAL were not incorporated in its Answer as they arose subsequent to its filing, JAL's witness was able to testify on the same before the RTC.83 Hence, although these issues were not raised by the pleadings, they shall be treated in all respects as if they had been raised in the pleadings.

As provided in Section 5, Rule 10 of the Rules of Court, "(w)hen issues not raised by the pleadings are tried with the express or implied consent of the parties, they shall be treated in all respects as if they had been raised in the pleadings."

Nevertheless, JAL's counterclaim cannot be granted.

JAL is a common carrier. JAL's business is mainly with the traveling public. It invites people to avail themselves of the comforts and advantages it offers.84 Since JAL deals with the public, its bumping off of respondent without a valid reason naturally drew public attention and generated a public issue.

The publications involved matters about which the public has the right to be informed because they relate to a public issue. This public issue or concern is a legitimate topic of a public comment that may be validly published.

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

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

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

Hence, pursuant to the Borjal case, there must be an actual malice in order that a discreditable imputation to a public person in his public capacity or to a public official may be actionable. To be considered malicious, the libelous statements must be shown to have been written or published with the knowledge that they are false or in reckless disregard of whether they are false or not.88

Considering that the published articles involve matters of public interest and that its expressed opinion is not malicious but based on established facts, the imputations against JAL are not actionable. Therefore, JAL may not claim damages for them.

WHEREFORE, the petition is DENIED. The appealed Decision of the Court of Appeals is AFFIRMED WITH MODIFICATION. As modified, petitioner Japan Airlines is ordered to pay respondent Jesus Simangan the following: (1) P500,000.00 as moral damages; (2) P100,000.00 as exemplary damages; and (3) P200,000.00 as attorney's fees.

The total amount adjudged shall earn legal interest at the rate of 6% per annum from the date of judgment of the Regional Trial Court on September 21, 2000 until the finality of this Decision. From the time this Decision becomes final and executory, the unpaid amount, if any, shall earn legal interest at the rate of 12% per annum until its satisfaction.

SO ORDERED.

METROPOLITAN BANK AND TRUST COMPANY vs. RURAL BANK OF GERONA, INC. . G.R. No. 159097; July 5, 2010 BRION, J.:

Petitioner Metropolitan Bank and Trust Company (Metrobank) filed this Petition for Review on Certiorari[1] under Rule 45 of the Rules of Court to challenge the Court of Appeals (CA) decision dated December 17, 2002[2] and the resolution dated July 14, 2003[3] in CA-G.R. CV No. 46777. The CA decision set aside the July 7, 1994 decision[4] of the Regional Trial Court (RTC) of Tarlac, Branch 65, in Civil Case No. 6028 (a collection case filed by Metrobank against respondent Rural Bank of Gerona, Inc. [RBG]), and ordered the remand of the case to include the Central Bank of the Philippines[5] (Central Bank) as a necessary party. THE FACTUAL ANTECEDENTS RBG is a rural banking corporation organized under Philippine laws and located in Gerona, Tarlac. In the 1970s, the Central Bank and the RBG entered into an agreement providing that RBG shall facilitate the loan applications of farmers-borrowers under the Central Bank-International Bank for Reconstruction and Development’s (IBRD’s) 4th Rural Credit Project. The agreement required RBG to open a separate bank account where the IBRD loan proceeds shall be deposited. The RBG accordingly opened a special savings account with Metrobank’s Tarlac Branch. As the depository bank of RBG, Metrobank was designated to receive the credit advice released by the Central Bank representing the proceeds of the IBRD loan of the farmers-borrowers; Metrobank, in turn, credited the proceeds to RBG’s special savings account for the latter’s release to the farmers-borrowers. On September 27, 1978, the Central Bank released a credit advice in Metrobank’s favor and accordingly credited Metrobank’s demand deposit account in the amount of P178,652.00, for the account of RBG. The amount, which was credited to RBG’s special savings account represented the approved loan application of farmer-borrower Dominador de Jesus. RBG withdrew the P178,652.00 from its account. On the same date, the Central Bank approved the loan application of another farmer-borrower, Basilio Panopio, for P189,052.00, and credited the amount to Metrobank’s demand deposit account. Metrobank, in turn, credited RBG’s special savings account. Metrobank claims that the RBG also withdrew the entire credited amount from its account.

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On October 3, 1978, the Central Bank approved Ponciano Lagman’s loan application for P220,000.00. As with the two other IBRD loans, the amount was credited to Metrobank’s demand deposit account, which amount Metrobank later credited in favor of RBG’s special savings account. Of the P220,000.00, RBG only withdrew P75,375.00. On November 3, 1978, more than a month after RBG had made the above withdrawals from its account with Metrobank, the Central Bank issued debit advices, reversing all the approved IBRD loans.[6] The Central Bank implemented the reversal by debiting from Metrobank’s demand deposit account the amount corresponding to all three IBRD loans. Upon receipt of the November 3, 1978 debit advices, Metrobank, in turn, debited the following amounts from RBG’s special savings account: P189,052.00, P115,000.00, and P8,000.41. Metrobank, however, claimed that these amounts were insufficient to cover all the credit advices that were reversed by the Central Bank. It demanded payment from RBG which could make partial payments. As of October 17, 1979, Metrobank claimed that RBG had an outstanding balance of P334,220.00. To collect this amount, it filed a complaint for collection of sum of money against RBG before the RTC, docketed as Civil Case No. 6028.[7] In its July 7, 1994 decision,[8] the RTC ruled for Metrobank, finding that legal subrogation had ensued: [Metrobank] had allowed releases of the amounts in the credit advices it credited in favor of [RBG’s special savings account] which credit advices and deposits were under its supervision. Being faulted in these acts or omissions, the Central Bank [sic] debited these amounts against [Metrobank’s] demand [deposit] reserve; thus[, Metrobank’s] demand deposit reserves diminished correspondingly, [Metrobank as of this time,] suffers prejudice in which case legal subrogation has ensued.[9] It thus ordered RBG to pay Metrobank the sum of P334,200.00, plus interest at 14% per annum until the amount is fully paid. On appeal, the CA noted that this was not a case of legal subrogation under Article 1302 of the Civil Code. Nevertheless, the CA recognized that Metrobank had a right to be reimbursed of the amount it had paid and failed to recover, as it suffered loss in an agreement that involved only the Central Bank and the RBG. It clarified, however, that a determination still had to be made on who should reimburse Metrobank. Noting that no evidence exists why the Central Bank reversed the credit advices it had previously confirmed, the CA declared that the Central Bank should be impleaded as a necessary party so it could shed light on the IBRD loan reversals. Thus, the CA set aside the RTC decision, and remanded the case to the trial court for further proceedings after the Central Bank is impleaded as a necessary party.[10] After the CA denied its motion for reconsideration, Metrobank filed the present petition for review on certiorari. THE PETITION FOR REVIEW ON CERTIORARI Metrobank disagrees with the CA’s ruling to implead the Central Bank as a necessary party and to remand the case to the RTC for further proceedings. It argues that the inclusion of the Central Bank as party to the case is unnecessary since RBG has already admitted its liability for the amount Metrobank failed to recover. In two letters,[11] RBG’s President/Manager made proposals to Metrobank for the repayment of the amounts involved. Even assuming that no legal subrogation took place, Metrobank claims that RBG’s letters more than sufficiently proved its liability. Metrobank additionally contends that a remand of the case would unduly delay the proceedings. The transactions involved in this case took place in 1978, and the case was commenced before the RTC more than 20 years ago. The RTC resolved the complaint for collection in 1994, while the CA decided the appeal in 2002. To implead Central Bank, as a necessary party in the case, means a return to square one and the restart of the entire proceedings. THE COURT’S RULING The petition is impressed with merit. A basic first step in resolving this case is to determine who the liable parties are on the IBRD loans that the Central Bank extended. The Terms and Conditions of the IBRD 4th Rural Credit Project[12] (Project Terms and Conditions) executed by the Central Bank and the RBG shows that the farmers-borrowers to whom credits have been extended, are primarily liable for the payment of the borrowed amounts. The loans were extended through the RBG which also took care of the collection and of the remittance of the collection to the Central Bank. RBG, however, was not a mere conduit and collector. While the farmers-borrowers were the principal debtors, RBG assumed liability under the Project Terms and Conditions by solidarily binding itself with the principal debtors to fulfill the obligation. How RBG profited from the transaction is not clear from the records and is not part of the issues before us, but if it delays in remitting the amounts due, the Central Bank imposed a 14% per annum penalty rate on RBG until the amount is actually remitted. The Central Bank was further authorized to deduct the amount due from RBG’s demand deposit reserve should the latter become delinquent in payment. On these points, paragraphs 5 and 6 of the Project Terms and Conditions read: 5. Collection received representing repayments of borrowers shall be immediately remitted to the Central Bank, otherwise[,] the Rural Bank/SLA shall be charged a penalty of fourteen [percent] (14%) p.a. until date of remittance. 6. In case the rural bank becomes delinquent in the payment of amortizations due[,] the Central Bank is authorized to deduct the corresponding amount from the rural bank’s demand deposit reserve[13] at any time to cover any delinquency. [Emphasis supplied.] Based on these arrangements, the Central Bank’s immediate recourse, therefore should have been against the farmers-borrowers and the RBG; thus, it erred when it deducted the amounts covered by the debit advices from Metrobank’s demand deposit account. Under the Project Terms and Conditions, Metrobank had no responsibility over the proceeds of the IBRD loans other than serving as a conduit for their transfer from the Central Bank to the RBG once credit advice has been issued. Thus, we agree with the CA’s conclusion that the agreement governed only the parties involved – the Central Bank and the RBG. Metrobank was simply an outsider to the agreement. Our disagreement with the appellate court is in its conclusion that no legal subrogation took place; the present case, in fact, exemplifies the circumstance contemplated under paragraph 2, of Article 1302 of the Civil Code which provides: Art. 1302. It is presumed that there is legal subrogation:(1) When a creditor pays another creditor who is preferred, even without the debtor’s knowledge;(2) When a third person, not interested in the obligation, pays with the express or tacit approval of the debtor;(3) When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation pays, without prejudice to the effects of confusion as to the latter’s share. [Emphasis supplied.] As discussed, Metrobank was a third party to the Central Bank-RBG agreement, had no interest except as a conduit, and was not legally answerable for the IBRD loans. Despite this, it was Metrobank’s demand deposit account, instead of RBG’s, which the Central Bank proceeded against, on the assumption perhaps that this was the most convenient means of recovering the cancelled loans. That Metrobank’s payment was involuntarily made does not change the reality that it was Metrobank which effectively answered for RBG’s obligations. Was there express or tacit approval by RBG of the payment enforced against Metrobank? After Metrobank received the Central Bank’s debit advices in November 1978, it (Metrobank) accordingly debited the amounts it could from RBG’s special savings account without any objection from RBG.[14] RBG’s President and Manager, Dr. Aquiles Abellar, even wrote Metrobank, on August 14, 1979, with proposals regarding possible means of settling the amounts debited by Central Bank from Metrobank’s demand deposit account.[15] These instances are all indicative of RBG’s approval of Metrobank’s payment of the IBRD loans. That RBG’s tacit approval came after payment had been made does not completely negate the legal subrogation that had taken place.

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Article 1303 of the Civil Code states that subrogation transfers to the person subrogated the credit with all the rights thereto appertaining, either against the debtor or against third persons. As the entity against which the collection was enforced, Metrobank was subrogated to the rights of Central Bank and has a cause of action to recover from RBG the amounts it paid to the Central Bank, plus 14% per annum interest. Under this situation, impleading the Central Bank as a party is completely unnecessary. We note that the CA erroneously believed that the Central Bank’s presence is necessary “in order x x x to shed light on the matter of reversals made by it concerning the loan applications of the end users and to have a complete determination or settlement of the claim.”[16] In so far as Metrobank is concerned, however, the Central Bank’s presence and the reasons for its reversals of the IBRD loans are immaterial after subrogation has taken place; Metrobank’s interest is simply to collect the amounts it paid the Central Bank. Whatever cause of action RBG may have against the Central Bank for the unexplained reversals and any undue deductions is for RBG to ventilate as a third-party claim; if it has not done so at this point, then the matter should be dealt with in a separate case that should not in any way further delay the disposition of the present case that had been pending before the courts since 1980. While we would like to fully and finally resolve this case, certain factual matters prevent us from doing so. Metrobank contends in its petition that it credited RBG’s special savings account with three amounts corresponding to the three credit advices issued by the Central Bank: the P178,652.00 for Dominador de Jesus; the P189,052.00 for Basilio Panopio; and the P220,000.00 for Ponciano Lagman. Metrobank claims that all of the three credit advices were subsequently reversed by the Central Bank, evidenced by three debit advices. The records, however, contained only the credit and debit advices for the amounts set aside for de Jesus and Lagman;[17] nothing in the findings of fact by the RTC and the CA referred to the amount set aside for Panopio. Thus, what were sufficiently proven as credited and later on debited from Metrobank’s demand deposit account were only the amounts of P178,652.00 and P189,052.00. With these amounts combined, RBG’s liability would amount to P398,652.00 – the same amount RBG acknowledged as due to Metrobank in its August 14, 1979 letter.[18] Significantly, Metrobank likewise quoted this amount in its July 11, 1979[19] and July 26, 1979[20] demand letters to RBG and its Statement of Account dated December 23, 1982.[21] RBG asserts that it made partial payments amounting to P145,197.40,[22] but neither the RTC nor the CA made a conclusive finding as to the accuracy of this claim. Although Metrobank admitted that RBG indeed made partial payments, it never mentioned the actual amount paid; neither did it state that the P145,197.40 was part of the P312,052.41 that, it admitted, it debited from RBG’s special savings account. Deducting P312,052.41 (representing the amounts debited from RBG’s special savings account, as admitted by Metrobank) from P398,652.00 amount due to Metrobank from RBG, the difference would only be P86,599.59. We are, therefore, at a loss on how Metrobank computed the amount of P334,220.00 it claims as the balance of RBG’s loan. As this Court is not a trier of facts, we deem it proper to remand this factual issue to the RTC for determination and computation of the actual amount RBG owes to Metrobank, plus the corresponding interest and penalties. WHEREFORE, we GRANT the petition for review on certiorari, and REVERSE the decision and the resolution of the Court of Appeals, in CA-G.R. CV No. 46777, promulgated on December 17, 2002 and July 14, 2003, respectively. We AFFIRM the decision of the Regional Trial Court, Branch 65, Tarlac, promulgated on July 7, 1994, insofar as it found respondent liable to the petitioner Metropolitan Bank and Trust Company, but order the REMAND of the case to the trial court to determine the actual amounts due to the petitioner. Costs against respondent Rural Bank of Gerona, Inc. SO ORDERED.

G.R. No. L-47369 June 30, 1987

JOSEPH COCHINGYAN, JR. and JOSE K. VILLANUEVA, petitioners, vs. R & B SURETY AND INSURANCE COMPANY, INC., respondent.

FELICIANO, J.:

This case was certified to us by the Court of Appeals in its resolution dated 11 November 1977 as one involving only questions of law and, therefore, falling within the exclusive appellate jurisdiction of this Court under Section 17, Republic Act 296, as amended.

In November 1963, Pacific Agricultural Suppliers, Inc. (PAGRICO) applied for and was granted an increase in its line of credit from P400,000.00 to P800,000.00 (the "Principal Obligation"), with the Philippine National Bank (PNB). To secure PNB's approval, PAGRICO had to give a good and sufficient bond in the amount of P400,000.00, representing the increment in its line of credit, to secure its faithful compliance with the terms and conditions under which its line of credit was increased. In compliance with this requirement, PAGRICO submitted Surety Bond No. 4765, issued by the respondent R & B Surety and Insurance Co., Inc. (R & B Surety") in the specified amount in favor of the PNB. Under the terms of the Surety Bond, PAGRICO and R & B Surety bound themselves jointly and severally to comply with the "terms and conditions of the advance line [of credit] established by the [PNB]." PNB had the right under the Surety Bond to proceed directly against R & B Surety "without the necessity of first exhausting the assets" of the principal obligor, PAGRICO. The Surety Bond also provided that R & B Surety's liability was not to be limited to the principal sum of P400,000.00, but would also include "accrued interest" on the said amount "plus all expenses, charges or other legal costs incident to collection of the obligation [of R & B Surety]" under the Surety Bond.

In consideration of R & B Surety's issuance of the Surety Bond, two Identical indemnity agreements were entered into with R & B Surety: (a) one agreement dated 23 December 1963 was executed by the Catholic Church Mart (CCM) and by petitioner Joseph Cochingyan, Jr, the latter signed not only as President of CCM but also in his personal and individual capacity; and (b) another agreement dated 24 December 1963 was executed by PAGRICO, Pacific Copra Export Inc. (PACOCO), Jose K. Villanueva and Liu Tua Ben Mr. Villanueva signed both as Manager of PAGRICO and in his personal and individual capacity; Mr. Liu signed both as President of PACOCO and in his individual and personal capacity.

Under both indemnity agreements, the indemnitors bound themselves jointly and severally to R & B Surety to pay an annual premium of P5,103.05 and "for the faithful compliance of the terms and conditions set forth in said SURETY BOND for a period beginning ... until the same is CANCELLED and/or DISCHARGED." The Indemnity Agreements further provided:

(b) INDEMNITY: — TO indemnify the SURETY COMPANY for any damage, prejudice, loss, costs, payments, advances and expenses of whatever kind and nature, including [of] attorney's fees, which the CORPORATION may, at any time, become liable for, sustain or incur as consequence of having executed the above mentioned Bond, its renewals, extensions or substitutions and said attorney's fees [shall] not be less than twenty [20%] per cent of the total amount claimed by the CORPORATION in each action, the same to be due, demandable and payable, irrespective of whether the case is settled judicially or extrajudicially and whether the amount has been actually paid or not;

(c) MATURITY OF OUR OBLIGATIONS AS CONTRACTED HEREWITH: — The said indemnities will be paid to the CORPORATION as soon as demand is received from the Creditor or upon receipt of Court order or as soon as it becomes liable to make payment of any sum under the terms of the above-mentioned Bond, its renewals, extensions, modifications or substitutions, whether the said sum or sums or part thereof, have been actually paid or not.

We authorize the SURETY COMPANY, to accept in any case and at its entire discretion, from any of us, payments on account of the pending obligations, and to grant extension to any of us, to liquidate said obligations, without necessity of previous knowledge of [or] consent from the other obligors.

xxx xxx xxx

(e) INCONTESTABILITY OF PAYMENTS MADE BY THE COMPANY. — Any payment or disbursement made by the SURETY COMPANY on account of the above-mentioned Bonds, its renewals, extensions or substitutions, either in the belief that the SURETY COMPANY was obligate[d] to make such payment or in the belief that said payment was necessary in order to avoid greater losses or obligations for which the SURETY COMPANY might be liable by virtue of the terms of the above-mentioned Bond, its renewals, extensions or substitutions, shall be final and

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will not be disputed by the undersigned, who jointly and severally bind themselves to indemnify the SURETY COMPANY of any and all such payments as stated in the preceding clauses.

xxx xxx xxx

When PAGRICO failed to comply with its Principal Obligation to the PNB, the PNB demanded payment from R & B Surety of the sum of P400,000.00, the full amount of the Principal Obligation. R & B Surety made a series of payments to PNB by virtue of that demand totalling P70,000.00 evidenced by detailed vouchers and receipts.

R & B Surety in turn sent formal demand letters to petitioners Joseph Cochingyan, Jr. and Jose K. Villanueva for reimbursement of the payments made by it to the PNB and for a discharge of its liability to the PNB under the Surety Bond. When petitioners failed to heed its demands, R & B Surety brought suit against Joseph Cochingyan, Jr., Jose K. Villanueva and Liu Tua Ben in the Court of First Instance of Manila, praying principally that judgment be rendered:

b. Ordering defendants to pay jointly and severally, unto the plaintiff, the sum of P20,412.20 representing the unpaid premiums for Surety Bond No. 4765 from 1965 up to 1968, and the additional amount of P5,103.05 yearly until the Surety Bond No. 4765 is discharged, with interest thereon at the rate of 12% per annum; [and]

c. Ordering the defendants to pay jointly and severally, unto the plaintiff the sum of P400,000.00 representing the total amount of the Surety Bond No. 4765 with interest thereon at the rate of 12% per annum on the amount of P70,000.00 which had been paid to the Phil. National Bank already, the interest to begin from the month of September, 1966;

xxx xxx xxx

Petitioner Joseph Cochingyan, Jr. in his answer maintained that the Indemnity Agreement he executed in favor of R & B Surety: (i) did not express the true intent of the parties thereto in that he had been asked by R & B Surety to execute the Indemnity Agreement merely in order to make it appear that R & B Surety had complied with the requirements of the PNB that credit lines be secured; (ii) was executed so that R & B Surety could show that it was complying with the regulations of the Insurance Commission concerning bonding companies; (iii) that R & B Surety had assured him that the execution of the agreement was a mere formality and that he was to be considered a stranger to the transaction between the PNB and R & B Surety; and (iv) that R & B Surety was estopped from enforcing the Indemnity Agreement as against him.

Petitioner Jose K. Villanueva claimed in his answer that. (i) he had executed the Indemnity Agreement in favor of R & B Surety only "for accommodation purposes" and that it did not express their true intention; (ii) that the Principal Obligation of PAGRICO to the PNB secured by the Surety Bond had already been assumed by CCM by virtue of a Trust Agreement entered into with the PNB, where CCM represented by Joseph Cochingyan, Jr. undertook to pay the Principal Obligation of PAGRICO to the PNB; (iii) that his obligation under the Indemnity Agreement was thereby extinguished by novation arising from the change of debtor under the Principal Obligation; and (iv) that the filing of the complaint was premature, considering that R & B Surety filed the case against him as indemnitor although the PNB had not yet proceeded against R & B Surety to enforce the latter's liability under the Surety Bond.

Petitioner Cochingyan, however, did not present any evidence at all to support his asserted defenses. Petitioner Villanueva did not submit any evidence either on his "accommodation" defense. The trial court was therefore constrained to decide the case on the basis alone of the terms of the Trust Agreement and other documents submitted in evidence.

In due time, the Court of First Instance of Manila, Branch 24 1 rendered a decision in favor of R & B Surety, the dispositive portion of which reads as follows;

Premises considered, judgment is hereby rendered: (a) ordering the defendants Joseph Cochingyan, Jr. and Jose K. Villanueva to pay, jointly and severally, unto the plaintiff the sum of 400,000,00, representing the total amount of their liability on Surety Bond No. 4765, and interest at the rate of 6% per annum on the following amounts:

until full payment; (b) ordering said defendants to pay, jointly and severally, unto the plaintiff the sum of P20,412.00 as the unpaid premiums for Surety Bond No. 4765, with legal interest thereon from the filing of plaintiff's complaint on August 1, 1968 until fully paid, and the further sum of P4,000.00 as and for attorney's fees and expenses of litigation which this Court deems just and equitable.

There being no showing the summons was duly served upon the defendant Liu Tua Ben who has filed no answer in this case, plaintiff's complaint is hereby dismissed as against defendant Liu Tua Ben without prejudice.

Costs against the defendants Joseph Cochingyan, Jr. and Jose K. Villanueva.

Not satisfied with the decision of the trial court, the petitioners took this appeal to the Court of Appeals which, as already noted, certified the case to us as one raising only questions of law.

The issues we must confront in this appeal are:

1. whether or not the Trust Agreement had extinguished, by novation, the obligation of R & B Surety to the PNB under the Surety Bond which, in turn, extinguished the obligations of the petitioners under the Indemnity Agreements;

2. whether the Trust Agreement extended the term of the Surety Bond so as to release petitioners from their obligation as indemnitors thereof as they did not give their consent to the execution of the Trust Agreement; and

3. whether or not the filing of this complaint was premature since the PNB had not yet filed a suit against R & B Surety for the forfeiture of its Surety Bond.

We address these issues seriatim.

1. The Trust Agreement referred to by both petitioners in their separate briefs, was executed on 28 December 1965 (two years after the Surety Bond and the Indemnity Agreements were executed) between: (1) Jose and Susana Cochingyan, Sr., doing business under the name and style of the Catholic Church Mart, represented by Joseph Cochingyan, Jr., as Trustor[s]; (2) Tomas Besa, a PNB official, as Trustee; and (3) the PNB as beneficiary. The Trust Agreement provided, in pertinent part, as follows:

WHEREAS, the TRUSTOR has guaranteed a bond in the amount of P400,000.00 issued by the R & B Surety and Insurance Co. (R & B) at the instance of Pacific Agricultural Suppliers, Inc. (PAGRICO) on December 21, 1963, in favor of the BENEFICIARY in connection with the application of PAGRICO for an advance line of P400,000.00 to P800,000.00;

WHEREAS, the TRUSTOR has also guaranteed a bond issued by the Consolacion Insurance & Surety Co., Inc. (CONSOLACION) in the amount of P900,000.00 in favor of the BENEFICIARY to secure certain credit facilities extended by the BENEFICIARY to the Pacific Copra Export Co., Inc. (PACOCO);

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WHEREAS, the PAGRICO and the PACOCO have defaulted in the payment of their respective obligations in favor of the BENEFICIARY guaranteed by the bonds issued by the R & B and the CONSOLACION, respectively, and by reason of said default, the BENEFICIARY has demanded compliance by the R & B and the CONSOLACION of their respective obligations under the aforesaid bonds;

WHEREAS, the TRUSTOR is, therefore, bound to comply with his obligation under the indemnity agreements aforementioned executed by him in favor of R & B and the CONSOLACION, respectively and in order to forestall impending suits by the BENEFICIARY against said companies, he is willing as he hereby agrees to pay the obligations of said companies in favor of the BENEFICIARY in the total amount of P1,300,000 without interest from the net profits arising from the procurement of reparations consumer goods made thru the allocation of WARVETS; . . .

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

xxx xxx xxx

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

xxx xxx xxx

9. This agreement shall not in any manner release the R & B and CONSOLACION from their respective liabilities under the bonds mentioned above. (emphasis supplied)

There is no question that the Surety Bond has not been cancelled or fully discharged 2 by payment of the Principal Obligation. Unless, therefore, the Surety Bond has been extinguished by another means, it must still subsist. And so must the supporting Indemnity Agreements. 3

We are unable to sustain petitioners' claim that the Surety Bond and their respective obligations under the Indemnity Agreements were extinguished by novation brought about by the subsequent execution of the Trust Agreement.

Novation is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which terminates it, either by changing its object or principal conditions, or by substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the creditor. 4 Novation through a change of the object or principal conditions of an existing obligation is referred to as objective (or real) novation. Novation by the change of either the person of the debtor or of the creditor is described as subjective (or personal) novation. Novation may also be both objective and subjective (mixed) at the same time. In both objective and subjective novation, a dual purpose is achieved-an obligation is extinguished and a new one is created in lieu thereof. 5

If objective novation is to take place, it is imperative that the new obligation expressly declare that the old obligation is thereby extinguished, or that the new obligation be on every point incompatible with the old one. 6 Novation is never presumed: it must be established either by the discharge of the old debt by the express terms of the new agreement, or by the acts of the parties whose intention to dissolve the old obligation as a consideration of the emergence of the new one must be clearly discernible. 7

Again, if subjective novation by a change in the person of the debtor is to occur, it is not enough that the juridical relation between the parties to the original contract is extended to a third person. It is essential that the old debtor be released from the obligation, and the third person or new debtor take his place in the new relation. If the old debtor is not released, no novation occurs and the third person who has assumed the obligation of the debtor becomes merely a co-debtor or surety or a co-surety. 8

Applying the above principles to the instant case, it is at once evident that the Trust Agreement does not expressly terminate the obligation of R & B Surety under the Surety Bond. On the contrary, the Trust Agreement expressly provides for the continuing subsistence of that obligation by stipulating that "[the Trust Agreement] shall not in any manner release" R & B Surety from its obligation under the Surety Bond.

Neither can the petitioners anchor their defense on implied novation. Absent an unequivocal declaration of extinguishment of a pre-existing obligation, a showing of complete incompatibility between the old and the new obligation (and nothing else) would sustain a finding of novation by implication. 9 But where, as in this case, the parties to the new obligation expressly recognize the continuing existence and validity of the old one, where, in other words, the parties expressly negated the lapsing of the old obligation, there can be no novation. The issue of implied novation is not reached at all.

What the trust agreement did was, at most, merely to bring in another person or persons-the Trustor[s]-to assume the same obligation that R & B Surety was bound to perform under the Surety Bond. It is not unusual in business for a stranger to a contract to assume obligations thereunder; a contract of suretyship or guarantee is the classical example. The precise legal effect is the increase of the number of persons liable to the obligee, and not the extinguishment of the liability of the first debtor. 10 Thus, in Magdalena Estates vs. Rodriguez, 11 we held that:

[t]he mere fact that the creditor receives a guaranty or accepts payments from a third person who has agreed to assume the obligation, when there is no agreement that the first debtor shall be released from responsibility, does not constitute a novation, and the creditor can still enforce the obligation against the original debtor.

In the present case, we note that the Trustor under the Trust Agreement, the CCM, was already previously bound to R & B Surety under its Indemnity Agreement. Under the Trust Agreement, the Trustor also became directly liable to the PNB. So far as the PNB was concerned, the effect of the Trust Agreement was that where there had been only two, there would now be three obligors directly and solidarily bound in favor of the PNB: PAGRICO, R & B Surety and the Trustor. And the PNB could proceed against any of the three, in any order or sequence. Clearly, PNB never intended to release, and never did release, R & B Surety. Thus, R & B Surety, which was not a party to the Trust Agreement, could not have intended to release any of its own indemnitors simply because one of those indemnitors, the Trustor under the Trust Agreement, became also directly liable to the PNB.

2. We turn to the contention of petitioner Jose K. Villanueva that his obligation as indemnitor under the 24 December 1963 Indemnity Agreement with R & B Surety was extinguished when the PNB agreed in the Trust Agreement "to hold in abeyance any action to enforce its claims against R & B Surety .

The Indemnity Agreement speaks of the several indemnitors "apply[ing] jointly and severally (in solidum) to the R & B Surety] — to become SURETY upon a SURETY BOND demanded by and in favor of [PNB] in the sum of [P400,000.00] for the faithful compliance of the terms and conditions set forth in said SURETY BOND — ." This part of the Agreement suggests that the indemnitors (including the petitioners) would become co-sureties on the Security Bond in favor of PNB. The record, however, is bereft of any indication that the petitioners-indemnitors ever in fact became co-sureties of R & B Surety vis-a-vis the PNB. The petitioners, so far as the record goes, remained simply indemnitors bound to R & B Surety but not to PNB, such that PNB could not have directly demanded payment of the Principal Obligation from the petitioners. Thus, we do not see how Article 2079 of the Civil Code-which provides in part that "[a]n extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty" could apply in the instant case.

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The petitioner-indemnitors are, as, it were, second-tier parties so far as the PNB was concerned and any extension of time granted by PNB to any of the first-tier obligators (PAGRICO, R &B Surety and the trustors[s]) could not prejudice the second-tier parties.

There is no other reason why petitioner Villanueva's contention must fail. PNB's undertaking under the Trust Agreement "to hold in abeyance any action to enforce its claims" against R & B Surety did not extend the maturity of R & B Surety's obligation under the Surety Bond. The Principal Obligation had in fact already matured, along with that of R &B Surety, by the time the Trust Agreement was entered into. Petitioner's Obligation had in fact already matured, for those obligations were to amture "as soon as [R & B Surety] became liable to make payment of any sum under the terms of the [Surety Bond] — whether the said sum or sums or part thereof have been actually paid or not." Thus, the situation was that precisely envisaged in Article 2079:

[t]he mere failure on the part of the creditor to demand payment after the debt has become due does not of itself constitute any extension of the referred to herein.(emphasis supplied)

The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor without the surety of his right to pay the creditor and to be immediately subrogated to the creditor's remedies against the principal debtor upon the original maturity date. The surety is said to be entitled to protect himself against the principal debtor upon the orginal maturity date. The surety is said to be entitled to protect himself against the contingency of the principal debtor or the indemnitors becoming insolvent during the extended period. The underlying rationale is not present in the instant case. As this Court has held,

merely delay or negligence in proceeding against the principal will not discharge a surety unless there is between the creditor and the principal debtor a valid and binding agreement therefor, one which tends to prejudice [the surety] or to deprive it of the power of obtaining indemnity by presenting a legal objection for the time, to the prosecution of an action on the original security. 12

In the instant case, there was nothing to prevent the petitioners from tendering payment, if they were so minded, to PNB of the matured obligation on behalf of R & B Surety and thereupon becoming subrogated to such remedies as R & B Surety may have against PAGRICO.

3. The last issue can be disposed of quicjly, Clauses (b) and (c) of the Indemnity Agreements (quoted above) allow R & B Surety to recover from petitioners even before R & B Surety shall have paid the PNB. We have previously held similar indemnity clauses to be enforceable and not violative of any public policy. 13

The petitioners lose sight of the fact that the Indemnity Agreements are contracts of indemnification not only against actual loss but against liability as well. 14 While in a contract of indemnity against loss as indemnitor will not be liable until the person to be indemnified makes payment or sustains loss, in a contract of indemnity against liability, as in this case, the indemnitor's liability arises as soon as the liability of the person to be indemnified has arisen without regard to whether or not he has suffered actual loss. 15 Accordingly, R & B Surety was entitled to proceed against petitioners not only for the partial payments already made but for the full amount owed by PAGRICO to the PNB.

Summarizing, we hold that :

(1) The Surety Bond was not novated by the Trust Agreement. Both agreements can co-exist. The Trust Agreement merely furnished to PNB another party obligor to the Principal Obligation in addition to PAGRICO and R & B Surety.

(2) The undertaking of the PNB to 'hold in abeyance any action to enforce its claim" against R & B Surety did not amount to an "extension granted to the debtor" without petitioner's consent so as to release petitioner's from their undertaking as indemnitors of R & B Surety under the INdemnity Agreements; and

(3) Petitioner's are indemnitors of R & B Surety against both payments to and liability for payments to the PNB. The present suit is therefore not premature despite the fact that the PNB has not instituted any action against R & B Surety for the collection of its matured obligation under the Surety Bond.

WHEREFORE, the petitioner's appeal is DENIED for the lack of merit and the decision of the trial court is AFFIRMED in toto. Costs against the petitioners.

SO ORDERED.

G.R. No. L-68477 October 29, 1987

SPOUSES ANICETO BALILA and EDITHA S. DE GUZ MAN, SPOUSES ASTERIO DE GUZMAN and ERLINDA CONCEPCION and ENCARNACION OCAMPO VDA. DE CONCEPCION, petitioners, vs.HONORABLE INTERMEDIATE APPELLATE COURT, HONORABLE FLORANTE S. ABASOLO, in his capacity as Judge, Regional Trial Court, First Judicial Region, Branch L, Villasis, Pangasinan, GUADALUPE C. VDA. DE DEL CASTILLO and WALDO DEL CASTILLO, respondents.

PARAS, J.:

This is a Petition for Review on certiorari of (1) the decision 1 of the Intermediate Appellate Court (IAC) affirming in toto the order 2 dated April 26, 1983 in Civil Case No. U-3501 of the trial court which ordered the consolidation of ownership in favor of private respondent Guadalupe C. Vda. del Castillo over two (2) parcels of land including the improvements thereon, situated in Villasis, Pangasinan namely, Lot No. 965, with an area of 648 square meters covered by TCT No. 93407 and Lot No. 16 with an area of 910 square meters covered by TCT No. 101794 and (2) the Order of the Intermediate Appellate Court (IAC) dated July 25, 1984 denying petitioners' Motion for Reconsideration.

The petition at bar began as an amicable settlement between petitioners and private respondents as defendants and plaintiffs in Civil Case No. U-3501, which was approved by the trial court and made as the basis of its Decision 3 dated December 11, 1980 ordering the parties to comply strictly with the terms and conditions embodied in said amicable settlement. The salient points therein show that defendants admitted "having sold under a pacto de retro sale the parcels of land 4 described in the complaint in the amount of P84,000.00" and that they "hereby promise to pay the said amount within the period of four (4) months but not later than May 15,1981." 5

On December 30, 1981 or more than seven months after the last day for making payments, defendants redeemed from plaintiff Guadalupe (one of the private respondents herein) Lot No. 52 with an area of 294 sq.m. covered by TCT 101352 which was one of the three parcels of land described in the complaint by paying the amount of P20,000.00.

On August 4, 1982, plaintiff filed a motion for a hearing on the consolidation of title over the remaining two (2) parcels of land namely Lot 965 and Lot 16 alleging that the court's decision dated December 11, 1980 remained unenforced for no payment of the total obligation due from defendants. Defendants opposed said motion alleging that they had made partial payments of their obligation through plaintiff's attorney in fact and son, Waldo del Castillo, as well as to the Sheriff. On April 26, 1983, the lower court issued the questioned order affirming consolidation.

On June 8, 1983, while the Order of the lower court had not yet been enforced, defendants paid plaintiff Guadalupe Vda. del Castillo by tendering the amount of P28,800.00 to her son Waldo del Castillo (one of the private respondents herein) thus leaving an unpaid balance of P35,200.00. A Certification dated June 8, 1983, (Annex D, Rollo, page 31) and signed by Waldo shows that defendants were given a period of 45 days from date or up to July 23, 1983 within which to pay the balance. Said Certification supported defendants' motion for reconsideration and supplemental motion

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for reconsideration of the Order reconsolidation of title, which motions were both denied by the lower court, prompting defendants to file a petition for certiorari, prohibition and mandamus with pre injunction petition with the Intermediate Appellate Court to seeking to annul and set aside the assailed Order dated April 26, 1983 and the Order denying their motion for reconsideration. After due consideration of the records of the case, the appellate tribunal sustained the lower court, hence the present petition for certiorari, defendants relying on the following arguments:,

(1) The appellate court erred in not declaring that the contract between the petitioners and private respondent Guadalupe is one of equitable mortgage and not a pacto de retro sale,

(2) The appellate court erred in not declaring that the decision dated 11, 1980, based upon the agreement of the parties was novated upon subsequent mutual agreements of the said parties.

Petitioners contend that despite the rendition of the said decision by the appellate court, private respondent Guadalupe Vda. de del Castillo, represented by her son Waldo del Castillo as for attorney-in-fact, accepted payments from petitioners and gave petitioners several extensions of time to pay their remaining obligations thus:

5.A. On July 8, 1984, private respondents accepted the amounts of P6,130.00 from petitioners- and gave petitioners up to August 30, 1984 to pay the latter's balance of P23,870.00; (Certification Annex "J" Petition);

5.B. On September 9, 1984, private respondents accepted the amount of P1,100.00 from petitioners and gave petitioners up to October 30, 1984 to pay the latter's balance of P21,624.00 (Certification Annex "L" Petition);

5.C. On October 30, 1984, private respondents accepted the amount of P2,500.00 from petitioners and gave petitioners up to November 15, 1984 to pay the latter's balance of P19,124.00 (Receipt, Annex "N" Reply);

5.D. On November 13, 1984, private respondents accepted the amount of P3,124.00 from petitioners and gave petitioners up to December 30, 1984 to pay the latter's balance of P16,000.00 and private respondent promised to deliver TCT Nos. 146360 and 146361 already in-the name of private respondent Guadalupe Vda. de del Castillo, covering lots 965 and 16, respectively, in favor of petitioners (Receipt, Annex "O," Reply);

5.E. On November 23, 1984, private respondents accepted the amount of P6,000.00 from petitioners and gave petitioners up to December 30, 1984 to pay the latter's balance of P10,000.00 and private respondents proposed to deliver TCT Nos. 146360 and 146361, covering Lots 965 and 16, respectively, and promised to reconvey said lots in favor of petitioners (Receipt, Annex "P," Reply).

(Memo for Petitioners, pp. 175-176, Rollo)

Petitioners likewise allege that private respondents Guadalupe Vda. de del Castillo and son Waldo, were nowhere to be found on December 30, 1984, the last day for petitioners to pay their balance of P10,000.00 and for private respondents to reconvey the lands in question (Lots 965 and 16) in favor of petitioners and to deliver TCT Nos. 146360 and 146361 already in the name of private respondent Guadalupe Vda. de del Castillo, covering said lots respectively. This incident compelled petitioners to deposit said amount with the Regional Trial Court as per receipt OR No. 9764172 (Annex "Q") accompanied by a motion to deposit (Annex "R") which motion was granted as per Order dated January 9, 1985 (Annex "S"). The aforementioned titles over the two parcels of lands are subject to Notice of Lis Pendens dated August 15, 1983 (Annex "T").

On the other hand, some of the private respondents do not deny they received the amounts stated in Annexes "D," "F," "J," "L," N," and "P". They aver however that the amicable settlement entered into by and between the parties duly assisted by their counsel was, with respect to Guadalupe, signed by her personally and that at no time thereafter did she ever appoint Waldo del Castillo who is one of her children to receive for her any sum of money to be paid by the petitioners for the settlement of their obligations arising out of their amicable settlement. Guadalupe also questions the inclusion as private respondent of Waldo del Castillo in this Court and the inclusion of the alleged receipts of payments as these receipts were never offered in evidence before the 'trial court or the appellate court nor were the same admitted in evidence by said courts.

Petitioners' contentions deserve Our consideration.

The root of all the issues raised before Us is that judgment by compromise rendered by the lower court based on the terms of the amicable settlement of the contending parties. Such agreement not being contrary to law, good morals or public policy was approved by the lower court and therefore binds the parties who are enjoined to comply therewith.

However, the records show that petitioners made partial payments to private respondent Waldo del Castillo after May 15, 1981 or the last day for making payments, redeeming Lot No. 52 as earlier stated. (Annex "A," Petition).

There is no question that petitioners tendered several payments to Waldo del Castillo even after redeeming lot No. 52. A total of these payments reveals that petitioners share. fulIy paid the amount stated in the judgment by com promise. The only issue is whether Waldo del Castillo was a person duly authorized by his mother Guadalupe Vda. de del Castillo, as her attorney-in-fact to represent her in transactions involving the properties in question. We believe that he was so authorized in the same way that the appellate court took cognizance of such fact as embodied in its assailed decision. reading as follows:

It may be mentioned that on May 25,1981, Guadalupe Vda. de Del Castillo, represented by her attorney in fact Waldo Castillo, filed a complaint for consolidation of ownership against the same petitioners herein before the Court of First Instance of Pangasinan, docketed as Civil Case No. U-3650, the allegations of which are Identical to the complaint filed in Civil Case No. U-3501 of the same court. This case U-3650 was, however, dismissed in an Order dated May 27, 1983, in view of the order of consolidation issued in Civil Case No. U-350 1. (p. 37, Rollo) (Underscoring supplied)

The fact therefore remains that the amount of P84,000.00 payable on or before May 15, 1981 decreed by the trial court in its judgment by compromise was novated and amended by the subsequent mutual agreements and actions of petitioners and private respondents. Petitioners paid the aforestated amount on an insatalment basis and they were given by private respondents no less than eight extensions of time pay their obligation. These transactions took place during the pendency of the motion for reconsideration of the Order of the trial court dated April 26, 1983 in Civil Case No. U-3501, during the pendency of the petition for certiorari in AC-G.R. SP-01307 before the Intermediate Appellate Court and after the filing of the petition before us. This answers the claim of the respondents on the failure of the petitioners to present evidences or proofs of payment in the lower court and the appellate court. We have touched on this issue, similarly, in the case of de los Santos vs. Rodriguez 6 wherein We ruled that:

As early as Molina vs. De la Riva 7 the principle has been laid down that, when, after judgment has become final, facts and circumstances transpire which render its execution impossible or unjust, the interested party may ask the court to modify or alter the judgment to harmonize the same with justice and the facts.

For this reason, in Amor vs. Judge Jose, 8 we used the following language:

The Court cannot refuse to issue a writ of execution upon a final and executory judgment, or quash it, or order its stay, for, as a general rule, parties will not be allowed, after final judgment, to object to the execution by raising new issues of fact or of law, except when there had been a change in the situation of the parties which makes such execution in- equitable; or when it appears that the controversy has never been submitted to the judgment of the court, or when it appears that the writ of execution has been improvidently issued, or that it is defective in substance, or issued against the wrong party or that judgment debt has been paid or otherwise satisfied or when the writ has been issued without authority. (emphasis supplied)

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Likewise in the case of Dormitorio vs. Fernandez, 9 We held:

What was done by respondent Judge in setting aside the writ of execution in Civil Case No. 5111 finds support in the applicable authorities. There is this relevant excerpt in Barretto v. Lopez 10 this Court speaking through the then Chief Justice Paras: "Allegating that the respondent judge of the municipal court had acted in excess of her jurisdiction and with grave abuse of discretion in issuing the writ of execution of December 15, 1947, the petitioner has filed the present petition for certiorari and prohibition for the purpose of having said writ of execution annulled. Said petition is meritorious. The agreement filed by the parties in the ejectment case created as between them new rights and obligations which naturally superseded the judgment of the municipal court." In Santos v. Acuna, 11 it was contended that a lower court decision was novated by the subsequent agreement of the parties. Implicit in this Court's ruling is that such a plea would merit approval if indeed that was what the parties intended. ...

WHEREFORE, finding merit in the petition, the same is hereby given DUE COURSE and the assailed decision, SET ASIDE. Private respondents are hereby ordered to reconvey and deliver lot No. 965 and Lot No. 16 as covered by TCT Nos. 146360 and 146361 respectively in favor of petitioners. Should private respondents fail to do so, the Clerk of Court of the Regional Trial Court concerned is ordered to execute the necessary deed of reconveyance, conformably with the provisions of the Rules of Court. The local Register of Property is ordered to register said deed of reconveyance. Private respondents are hereby authorized to withdraw the balance in the amount of P10,000 consigned by petitioners on January 9, 1985 with the trial court as per OR No. 9764172 (Annex "O") a full payment of petitioners' obligation.

This decision is immediately executory and no motion for extension of the period within which to file a motion for reconsideration will be granted.

SO ORDERED.

PEOPLE'S BANK AND TRUST COMPANY vs. SYVEL'S INCORPORATED, ANTONIO Y. SYYAP and ANGEL Y SYYAPG.R. No. L-29280 August 11, 1988

PARAS, J.:

This is an appeal from the decision dated May 16, 1968 rendered by the Court of First Instance of Manila, Branch XII in Civil Case No. 68095, the decretal portion of which states:

IN VIEW OF THE FOREGOING, judgment is rendered sentencing all the defendants to pay the plaintiff jointly and severally the sum of P601,633.01 with interest thereon at the rate of 11% per annum from June 17, 1967, until the whole amount is paid, plus 10% of the total amount due for attorney's fees and the costs of suit. Should the defendants fail to pay the same to the plaintiff, then it is ordered that all the effects, materials and stocks covered by the chattel mortgages be sold at public auction in conformity with the Provisions of Sec. 14 of the Chattel Mortgage Law, and the proceeds thereof applied to satisfy the judgment herein rendered. The counterclaim of the defendants, upon the evidence presented and in the light of the authorities above cited, is dismissed for lack of merit.

SO ORDERED

(pp. 89-90, Record on Appeal; p. 15, Rollo)

The facts of the case based on the statement of facts, made by the trial court in its decision as cited in the briefs of both parties are as follows:

This is an action for foreclosure of chattel mortgage executed in favor of the plaintiff by the defendant Syvel's Incorporated on its stocks of goods, personal properties and other materials owned by it and located at its stores or warehouses at No. 406, Escolta, Manila; Nos. 764-766 Rizal Avenue, Manila; Nos. 10-11 Cartimar Avenue, Pasay City; No. 886 Nicanor Reyes, Sr. (formerly Morayta), Manila; as evidenced by Annex"A."The chattel mortgage was duly registered in the corresponding registry of deeds of Manila and Pasay City. The chattel mortgage was in connection with a credit commercial line in the amount of P900,000.00 granted the said defendant corporation, the expiry date of which was May 20, 1966. On May 20, 1965, defendants Antonio V. Syyap and Angel Y. Syyap executed an undertaking in favor of the plaintiff whereby they both agreed to guarantee absolutely and unconditionally and without the benefit of excussion the full and prompt payment of any indebtedness to be incurred on account of the said credit line. Against the credit line granted the defendant Syvel's Incorporated the latter drew advances in the form of promissory notes which are attached to the complaint as Annexes "C" to "l." In view of the failure of the defendant corporation to make payment in accordance with the terms and conditions agreed upon in the Commercial Credit Agreement the plaintiff started to foreclose extrajudicially the chattel mortgage. However, because of an attempt to have the matter settled, the extra-judicial foreclosure was not pushed thru. As no payment had been paid, this case was even tually filed in this Court.

On petition of the plaintiff based on the affidavits executed by Mr. Leopoldo R. Rivera, Assistant Vice President of the plaintiff bank and Atty. Eduardo J. Berenguer on January 12, 1967, to the effect, among others, that the defendants are disposing of their properties with intent to defraud their creditors, particularly the plaintiff herein, a preliminary writ of attachment was issued. As a consequence of the issuance of the writ of attachment, the defendants, in their answer to the complaint set up a compulsory counterclaim for damages.

After the filing of this case in this court and during its pendency defendant Antonio v. Syyap proposed to have the case settled amicably and to that end a conference was held in which Mr. Antonio de las Alas, Jr., Vice President of the Bank, plaintiff, defendant Antonio V. Syyap and Atty. Mendoza were present. Mr. Syyap requested that the plaintiff dismiss this case because he did not want to have the goodwill of Syvel's Incorporated impaired, and offered to execute a real estate mortgage on his real property located in Bacoor, Cavite. Mr. De las Alas consented, and so the Real Estate Mortgage, marked as Exhibit A, was executed by the defendant Antonio V. Syyap and his wife Margarita Bengco Syyap on June 22, 1967. In that deed of mortgage, defendant Syyap admitted that as of June 16, 1967, the indebtedness of Syvel's Incorporated was P601,633.01, the breakdown of which is as follows: P568,577.76 as principal and P33,055.25 as interest. Complying with the promise of the plaintiff thru its Vice President to ask for the dismissal of this case, a motion to dismiss this case without prejudice was prepared, Exhibit C, but the defendants did not want to agree if the dismissal would mean also the dismissal of their counterclaim Against the plaintiff. Hence, trial proceeded.

As regards the liabilities of the defendants, there is no dispute that a credit line to the maximum amount of P900,000.00 was granted to the defendant corporation on the guaranty of the merchandise or stocks in goods of the said corporation which were covered by chattel mortgage duly registered as required by law. There is likewise no dispute that the defendants Syyap guaranteed absolutely and unconditionally and without the benefit of excussion the full and prompt payment of any indebtedness incurred by the defendant corporation under the credit line granted it by the plaintiff. As of June 16, 1967, its indebtedness was in the total amount of P601,633.01. This was admitted by defendant Antonio V. Syyap in the deed of real estate mortgage executed by him. No part of the amount has been paid by either of the defendants. Hence their liabilities cannot be questioned. (pp. 3-6, Brief for Appellee; p. 26, Rollo)

In their brief, appellants assign the following errors:

I

The lower court erred in not holding that the obligation secured by the Chattel Mortgage sought to be foreclosed in the above-entitled case was novated by the subsequent execution between appellee and appellant Antonio V, Syyap of a real estate mortgage as additional collateral to the obligation secured by said chattel mortgage.

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II

The lower court erred in not dismissing the above-entitled case and in finding appellants liable under the complaint.

III

The lower court erred in not holding that the writ of preliminary attachment is devoid of any legal and factual basis whatsoever.

IV

The lower court erred in dismissing appellants'counterclaim and in not holding appellee liable to appellants for the consequent damages arising out of a wrongful attachment. (pp. 1-2, Brief for the Appellants, p. 25, Rollo)

Appellants admit that they are indebted to the appellee bank in the amount of P601,633.01, breakdown of which is as follows: P568,577.76 as principal and P33,055.25 as interest. After the filing of the case and during its pendency, defendant Antonio V. Syyap proposed to have the case amicably settled and for that purpose a conference was held in which Mr. Antonio de las Alas, Jr., Vice President of plaintiff People's Bank and Trust Company, defendant Antonio V. Syyap and Atty. Mendoza were present. Mr. Syyap requested that the plaintiff dismiss this case as he did not want to have the goodwill of Syvel's Incorporated impaired, and offered to execute a real estate mortgage on his real property located in Bacoor, Cavite. Mr. de las Alas consented, and so the Real Estate Mortgage (Exhibit "A") was executed by defendant Antonio Syyap and his wife Margarita Bengco Syyap on June 22, 1967. Defendants did not agree with plaintiffs motion to dismiss which included the dismissal of their counterclaim and filed instead their own motion to dismiss (Record on Appeal, pp. 68-72) on the ground that by the execution of said real estate mortgage, the obligation secured by the chattel mortgage subject of this case was novated, and therefore, appellee's cause of action thereon was extinguished.

In an Order dated September 23, 1967, the motion was denied for not being well founded (record on Appeal, p. 78).

Appellants contention is without merit.

Novation takes place when the object or principal condition of an obligation is changed or altered. It is elementary that novation is never presumed; it must be explicitly stated or there must be manifest incompatibility between the old and the new obligations in every aspect (Goni v. CA, 144 SCRA 223 [1986]; National Power Corp. v. Dayrit, 125 SCRA 849 [1983]).

In the case at bar, there is nothing in the Real Estate Mortgage which supports appellants'submission. The contract on its face does not show the existence of an explicit novation nor incompatibility on every point between the "old and the "new" agreements as the second contract evidently indicates that the same was executed as new additional security to the chattel mortgage previously entered into by the parties.

Moreover, records show that in the real estate mortgage, appellants agreed that the chattel mortgage "shall remain in full force and shall not be impaired by this (real estate) mortgage."

The pertinent provision of the contract is quoted as follows:

That the chattel mortgage executed by Syvel's Inc. (Doc. No. 439, Book No. I, Series of 1965, Notary Public Jose C. Merris, Manila); real estate mortgage executed by Angel V. Syyap and Rita V. Syyap (Doc. No. 441, Page No. 90, Book No. I, Series of 1965, Notary Public Jose C. Merris, Manila) shall remain in full force and shall not be impaired by this mortgage (par. 5, Exhibit"A," Emphasis ours).

It is clear, therefore, that a novation was not intended. The real estate mortgage was evidently taken as additional security for the performance of the contract (Bank of P.I. v. Herrige, 47 Phil. 57).

In the determination of the legality of the writ of attachment by the Court of First Instance of Manila, it is a well established rule that the grant or denial of a writ of attachment rests upon the sound discretion of the court. Records are bereft of any evidence that grave abuse of discretion was committed by respondent judge in the issuance of the writ of attachment.

Appellants contend that the affidavits of Messrs. Rivera and Berenguer on which the lower court based the issuance of the writ of preliminary attachment relied on the reports of credit investigators sent to the field and not on the personal knowledge of the affiants. Such contention deserves scant consideration. Evidence adduced during the trial strongly shows that the witnesses have personal knowledge of the facts stated in their affidavits in support of the application for the writ. They testified that Syvel's Inc. had disposed of all the articles covered by the chattel mortgage but had not remitted the proceeds to appellee bank; that the Syvel's Stores at the Escolta, Rizal Avenue and Morayta Street were no longer operated by appellants and that the latter were disposing of their properties to defraud appellee bank. Such testimonies and circumstances were given full credit by the trial court in its decision (Brief for Appellee, p. 14). Hence, the attachment sought on the ground of actual removal of property is justified where there is physical removal thereof by the debtor, as shown by the records (McTaggert v. Putnam Corset Co., 8 N.Y. S 800 cited in Moran, Comments on the Rules of Court, 1970 Ed., Vol. 3, p. 7).

Besides, the actuations of appellants were clearly seen by the witnesses who "saw a Fiat Bantam Car-Fiat Car, a small car and about three or four persons hurrying; they were carrying goods coming from the back portion of this store of Syvels at the Escolta, between 5:30 and 6:00 o'clock in the evening." (Record on Appeal, pp. 45-46). Therefore, "the act of debtor (appellant) in taking his stock of goods from the rear of his store at night, is sufficient to support an attachment upon the ground of the fraudulent concealment of property for the purpose of delaying and defrauding creditors." (4 Am. Jur., 841 cited in Francisco, Revised Rules of Court, Second Edition, 1985, p. 24).

In any case, intent to defraud may be and usually is inferred from the facts and circumstances of the case; it can rarely be proved by direct evidence. It may be gleaned also from the statements and conduct of the debtor, and in this connection, the principle may be applied that every person is presumed to intend the natural consequences of his acts (Francisco, Revised Rules of Court, supra, pp. 24-25), In fact the trial court is impressed "that not only has the plaintiff acted in perfect good faith but also on facts sufficient in themselves to convince an ordinary man that the defendants were obviously trying to spirit away a port;.on of the stocks of Syvel's Incorporated in order to render ineffectual at least partially anyjudgment that may be rendered in favor of the plaintiff." (Decision; Civil Case No. 68095; Record on Appeal, pp. 88-89).

Appellants having failed to adduce evidence of bad faith or malice on the part of appellee in the procurement of the writ of preliminary attachment, the claim of the former for damages is evidently negated. In fact, the allegations in the appellee's complaint more than justify the issuance of the writ of attachment.

PREMISES CONSIDERED, this appeal is DISMISSED for lack of merit and the judgment appealed from is AFFIRMED.

SO ORDERED.

December 28, 1970

G.R. No. L-26396ANTONIO RODRIGUEZ, petitioner-appellant,vs.

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THE HON. ANDRES REYES, Presiding Judge, Branch VI, CFI, Rizal, et al., respondent-appellees.

G.R. Nos. L-27016-27 December 28, 1970ABELARDO SUBIDO, as Commissioner of Civil Service, petitioner,

, J.:

Salonga, Ordoñez, Yap, Sicat and Associates for petitioner-appellant.

Office of the Solicitor General for respondents-appellees.

Nos. L-27026-27:

Office of the Solicitor Bernardo P. Pardo, and Alfredo Daza, Ricardo Diaz and Ernesto Ross for petitioner.

Salonga, Ordoñez, Yap, Sicat and Associates for respondents.

MAKALINTAL, J.:

These three cases are interrelated. L-26396 is an appeal by Dr. Antonio Rodriguez from the judgment of the Court of First Instance of Rizal dismissing the petition for certiorari he had filed against Abelardo Subido, Commissioner of Civil Service, in connection with the latter’s decision in two administrative cases against said petitioner.

L-27026 and L-27027 are original petitions for certiorari and prohibition filed in this Court by Commissioner Subido, questioning the actuation of the Civil Service Board of Appeals in taking cognizance of the appeal from the same decision rendered by him against Dr. Rodriguez.

Dr. Rodriguez was Medical Adviser (Chief of Section) in the Bureau of Medical Services. On July 1, 1959, he was detailed as head of the National Mental Hospital by the then Secretary of Health, Dr. Elpidio Valencia. On July 8, 1960 he was administratively charged on nine counts (Adm. Case No. R-23237), to investigate which the Secretary formed a committee composed of several members. Pending investigation, or on May 29, 1961, Dr. Rodriguez was appointed “Chief of Hospital IV (R-54) in the Hospital Services (National Mental Hospital), Field Operations,” which appointment was approved by the Acting Chief, Personnel Transaction Division, in behalf of then Commissioner of Civil Service Amado del Rosario. After the investigation, where evidence was adduced by both parties, the committee rendered its report on November 20, 1961, finding the respondent innocent. Upon its recommendation the Secretary of Health exonerated him completely and indorsed the findings to Commissioner del Rosario, who, however, in his decision dated May 17, 1962, found Dr. Rodriguez “guilty of indiscretion” in connection with specification “b” of the charges, for having caused slaughtered pigs (belonging to the National Mental Hospital) to be given to his superior and to the Auditor General.” The penalty administered to him was an “admonition to be more careful in his activities.”

On June 29, 1962 Dr. Rodriguez moved for reconsideration. In his motion he did not question the factual findings in the decision; he simply pointed out that the offense of “indiscretion” did not exist in the statutes or in the civil service rules and regulations. His prayer was that the verdict on that particular count “be entirely deleted from the records of the case.” Eight months thereafter, or on February 22, 1963, Rodriguez wrote a letter to the Commissioner of Civil Service withdrawing his motion for reconsideration and manifesting his conformity to the decision of May 17, 1962. The reason he gave for the withdrawal was that the administrative case had been pending for a long time and affected not only his peace of mind but also the “interest of (the) public institution committed to his responsibility.” On March 18, 1963 the request for withdrawal was granted by the Department Legal Counsel of the Civil Service Commission, who signed the corresponding indorsement “For the Commissioner.” On May 6, 1963 Abelardo Subido, then Acting Commissioner of Civil Service, revoked the grant of withdrawal as having been issued without authority.

Meanwhile, under date of January 23, 1962, another administrative complaint, No. 24354, had been lodged with the Secretary of Health against Dr. Rodriguez. One of the seven charges was electioneering. Again the Secretary created an investigating committee, to which he issued the following directive: .

To study the nature of such charges and determine the merit of each case. In case this committee finds sufficient grounds for investigation, it is hereby directed that a formal investigation be conducted in accordance with existing rules and regulations. After the investigation of the case, the Committee shall submit to the undersigned its findings, comments and recommendations.

The investigating committee required Dr. Rodriguez to submit his explanation, which he did on March 6, 1962. On August 29, 1962 the committee, on the basis of the said explanation alone and without conducting a formal investigation, rendered a memorandum report recommending exoneration. On October 29, 1962 the Secretary of Health indorsed the recommendation, with his full concurrence, to the Civil Service Commissioner.

On September 12, 1963 Commissioner Abelardo Subido rendered a joint decision in the two cases. In Case No. 23237 he found Dr. Rodriguez guilty of misconduct in office for having loaned government construction materials to a private contractor in connection with a project the latter was doing for the National Mental Hospital. It was a charge not touched upon in the motion for reconsideration of Dr. Rodriguez, and of which he had already been found innocent by the investigating Committee created by the Secretary of Health, by the Secretary himself, and by Civil Service Commissioner del Rosario. In Case No. 24354 the Commissioner found the respondent guilty of the charge of electioneering. The penalty imposed was dismissal from office, which the Commissioner ordered, in the same decision, immediately executed “in the public interest.”

Dr. Rodriguez personally received a copy of the decision on September 14, 1963. On the same day he filed a petition for certiorari with preliminary injunction in the Court of First Instance of Rizal, alleging that the decision had been rendered without due process of law, and without jurisdiction or with grave abuse of discretion. The injunction was issued by the Court, restraining immediate execution of the verdict of dismissal.

On February 23, 1966 Dr. Rodriguez appealed the decision of Commissioner Subido to the Civil Service Board of Appeals. On May 4, 1966 the Court of First Instance dismissed the petition for certiorari on the ground of non-exhaustion of administrative remedies. Dr. Rodriguez moved to reconsider, and after his motion was denied, filed a petition for review with preliminary injunction in the Court of Appeals, which thereafter certified the case to this Court, where it was docketed as Case No. 26396.

Commissioner Subido, on his part, tried to have the Civil Service Board of Appeals dismiss the respondent’s appeal before it on the ground that the same had been filed out of time and that his decision was already final. The Board turned down the plea, and Commissioner Subido came to this Court on certiorari and prohibition, his petition being docketed under Nos. L-27026 and 27027.

On January 5, 1967, this Court issued an order temporarily restraining the Civil Service Board of Appeals from taking cognizance of and assuming jurisdiction over the appeal taken by Dr. Rodriguez, but the order failed to take effect because two days before, or on January 3, the Board had decided the appeal, declaring the decision of Commissioner Subido null and void for having been rendered “without jurisdiction and without due process of law,” and ordering the reinstatement of Dr. Rodriguez to his position.

There are two issues presented for resolution: (a) whether or not the decision of Commissioner Subido was rendered with jurisdiction and/or due process; and (b) whether or not the appeal taken by Dr. Rodriguez to the Civil Service Board of Appeals was timely.

1. With respect to Administrative Case No. 23237 our position is that the decision of Commissioner Amado del Rosario dated May 17, 1962, finding Dr. Rodriguez guilty of indiscretion and imposing upon him the penalty of admonition, had already become final and therefore beyond the jurisdiction of Commissioner Subido to set it aside when he did so and rendered his own decision on September 12, 1963. True, Dr. Rodriguez moved for

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reconsideration of the del Rosario decision. But he withdrew that motion on February 22, 1963; and since no action thereon had yet been taken at the time, the withdrawal was a matter of right on his part, subject neither to approval nor to disapproval by the Commissioner.

It has been said, however, that the complainant in the said administrative case sent a letter to the Commissioner on December 20, 1962, asking for a “revaluation of the entire evidence in this case ….” We do not believe, however, that the step thus taken by the complainant kept the case open independently of the motion of Dr. Rodriguez and its subsequent withdrawal. It bears emphasis that this motion of Dr. Rodriguez did not question the findings of fact in the del Rosario decision. The only point it raised was a legal one – that in connection with the specific charge of which he had been found guilty, there was no such offense in the civil service law or regulations as “indiscretion”; and on this ground he asked that the decision be modified accordingly.

The letter of the complainant was evidently not intended to be a motion for reconsideration, since the complainant was later on to request the Commissioner that it be considered as such a motion – this on April 3, 1963, after Dr. Rodriguez had withdrawn his own motion. If the letter was but an answer or opposition to the said motion of Dr. Rodriguez, then it became functus oficio after the latter was withdrawn. On the other hand, if it was an independent motion for reconsideration in itself then it was filed out of time – more than seven (7) months after the Del Rosario decision was rendered. In either case that decision had already become final when Commissioner Subido reconsidered it and rendered his own decision on September 12, 1963.

2. Going now to Administrative Case No. 24354, our view is that the decision of the Commissioner suffers from a basic infirmity – that it violated the principle of due process, having been rendered without investigation and without first affording the respondent an opportunity to defend himself. It must be remembered that the authority given by the Secretary of Health to the investigating committee he had created was, “to study the nature of (the) charges and determine the merit of each case (and) in case this committee finds sufficient grounds for investigation, it is hereby directed that a formal investigation be conducted in accordance with existing rules and regulations.”

The validity of the Subido decision is sought to be justified by the argument that under Section 32 of the Civil Service Act of 1959 Dr. Rodriguez had the right to elect a formal investigation, and since he made no such election he cannot later on be heard that an investigation was denied him. There is here a confusion as to the order of priority among the rungs of the procedural ladder. Dr. Rodriguez could hardly have asked for a formal investigation at the stage in which the administrative case was at the time. He had merely been required to submit his explanation in writing, which he did. The committee was still to determine whether there were sufficient grounds for investigation, and if there were, to conduct a formal investigation. This is explicit in the instruction given by the Secretary of Health. The committee found, on the basis of the charges and the explanation, that no formal investigation was necessary, and hence it recommended that the charges be dropped for lack of merit. The recommendation was thereupon favorably indorsed by the Secretary of Health to the Commissioner of Civil Service. There was manifestly neither need nor occasion for Dr. Rodriguez to elect a formal investigation pursuant to the Civil Service Law. It would have been not only premature but inconsistent for him to ask that he be formally investigated on charges of which he had already been exonerated.

If, despite the findings of the investigating committee and the concurring recommendation of the Secretary of Health, the Civil Service Commissioner still considered the charges grave enough to warrant further action, the basic principle of due process required that Dr. Rodriguez be first heard in his own defense, or at least allowed to express a choice to undergo a formal investigation or not in accordance with Section 32 of the Civil Service Act. This right was not accorded him. Ironically enough Dr. Rodriguez was found guilty of electioneering on the strength of a letter he had annexed to his explanation submitted to the investigating committee – a letter which, if anything, was exculpatory in the light of the charge against him and the explanation that he had submitted. He was accused of electioneering for the benefit of the Nacionalista Party; the letter was sent to him by some Liberal Party men in Bulacan thanking him for having employed fourteen (14) skilled workers who turned out to be “Liberals.”

A revealing sidelight on this aspect of the case, which shows how precipitate and groundless was the pronouncement of the guilt of Dr. Rodriguez, is the following excerpt from the decision of the Civil Service Board of Appeals:

In the instant case, the Commissioner, without giving the respondent a chance to be heard, found him guilty of partisan political activity on the basis of a letter from Liberal Party officials thanking him for having employed skilled laborers, 14 of whom were election inspectors of the party in Malolos, Bulacan. If a hearing had been conducted by the Commissioner before he convicted the respondent of electioneering, the latter could have had the opportunity to explain how he came to employ the 14 skilled laborers referred to. Upon questioning by the Board at the hearing of this appeal, the respondent informed the Board that he did not know the 14 men before he employed them; that they were screened by a screening committee in the hospital, before they were employed, together with hundreds of other recommendees; that these 14 were only part of the 300 casual laborers employed in the hospital because it was greatly undermanned; that the screening committee recommended the employment of the 14 because they were found to be skilled and with tools; that these applicants for employment who were not skilled or did not have tools were not employed in the hospital regardless of recommendation; that the 14 workers were not employed at the same time, but they represent the total workers from Malolos who had been employed at various times; and that he came to know that the 14 were election inspectors of the Liberal Party in Malolos after he had already the letter of thanks regarding their employment. Respondent, however, was barred from making this explanation by his immediate conviction and dismissal without a hearing. Consequently, respondent was denied due process.

3. Assuming that Commissioner Subido could validly render his joint decision of September 12, 1963, the next question was the appeal taken by Dr. Rodriguez to the Civil Service Board of Appeal timely? As already observed hereinabove, over the Commissioner’s objection the Board took cognizance of the appeal, held itself with jurisdiction to entertain the same, and on January 3, 1967 promulgated its resolution declaring the decision appealed from null and void and ordering the reinstatement of Dr. Rodriguez to his position.

The recourse taken by Dr. Rodriguez to the Court of First Instance of Rizal on certiorari with preliminary injunction was eventually dismissed by that Court on the ground that the petitions had not exhausted the administrative remedy available to him, namely, by appeal to the Civil Service Board of Appeals. It is, to our mind, open to serious doubt whether such an appeal was an adequate remedy for the purposes sought by the petitioner in that case. He was, first of all, challenging the jurisdiction of the Commissioner to render the decision with, respect to the first administrative case, and pleading lack of due process and grave abuse of discretion with respect to the other. And the immediate relief prayed for was preliminary injunction to restrain the execution of the decision already ordered by the Commissioner. These remedies, while clearly spelled out in the Rules of Court as within the dispensation of the courts, are nebulous and unsettled when sought in administrative bodies. An appeal to the Civil Service Board of Appeals connotes a review of the case on its merits, a reappraisal of the evidence and of the penalty meted below. When the need of the moment, however, is to stop immediate execution of that penalty and, after hearing, to set aside the decision altogether on grounds of jurisdiction and due process, we are not prepared to say the doors of the courts must remain shut. It is preferable to overlook slight deviations from procedural paths which even to the discerning may appears quite hazy than disregard the greater imperatives of justice and fair play. After all the course pursued in the court below was one in equity, and the function of equity is to avert or prevent civil injury which may otherwise be irreparable.

Considering all these circumstances, we are of the view that the issuance of the writ of preliminary injunction by the Court of First Instance interrupted the running of the period within which an appeal could be taken from the Civil Service Commissioner to the Civil Service Board of Appeals; and that therefore the appeal, actually taken on the day Dr. Rodriguez received copy of the court’s decision, wherein the injunction was dissolved, was a timely one. In the case of Geukeko vs. Araneta, etc., 102 Phil. 706, decided December 24, 1957, the party adversely affected by a decision of the Director of Lands relative to disputed lot in the Tambobong estate went directly to the Court of First Instance and sought to annul the said decision instead of appealing to the Secretary of Agriculture and Natural Resources, which he was supposed to do within 60 days under the rules promulgated by that official. No injunction was issued by the court, which dismissed the case after more than two years on the ground that the plaintiff had not exhausted his available administrative remedies. An appeal was then taken from the decision of the Director of the Bureau of Lands to the Secretary of Agriculture and Natural Resources. This Court held, when the matter came up before it on mandamus and prohibition, that the institution of the court action suspended the running of the period for such appeal, making reference to the administrative policy of the Department to that effect.

In connection with the administrative cases against Dr. Rodriguez, the Civil Service Board of Appeals similarly took cognizance of his appeal and held that it was timely. Indeed in its decision it cites a number of cases where appeals (forwarded to it by the Commissioner) were entertained even

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after the expiration of the time limit. It did no more than what the Secretary of Agriculture and Natural Resources did in the Geukeko case, and with even greater justification, for there was a judicial injunction issued against the execution of the decision of the Civil Service Commmissioner.

When the vote on these cases was taken, four members of this Court, including the undersigned, concurred in this opinion; two members dissented four abstained from voting; and the last one, Justice Felix V. Makasiar, had not yet been appointed. Since the votes on either side are short of the required majority, the petition of Commissioner Abelardo Subido in G. R. Nos. L-27026 and L-27027 should be, as it is hereby, dismissed, and the jurisdiction of the Civil Service Board of Appeals in the appeal taken by Dr. Antonio Rodriguez is deemed upheld. Considering that the said Board has already rendered its decision, the petition in No. L-26396 is, likewise, dismissed as moot and academic.

G.R. No. 163512 February 28, 2007

DAISY B. TIU, Petitioner vs.PLATINUM PLANS PHIL., INC., Respondent.

D E C I S I O N

QUISUMBING, J.:

For review on certiorari are the Decision1 dated January 20, 2004 of the Court of Appeals in CA-G.R. CV No. 74972, and its Resolution2 dated May 4, 2004 denying reconsideration. The Court of Appeals had affirmed the decision3 dated February 28, 2002 of the Regional Trial Court (RTC) of Pasig City, Branch 261, in an action for damages, ordering petitioner to pay respondent P100,000 as liquidated damages.

The relevant facts are as follows:

Respondent Platinum Plans Philippines, Inc. is a domestic corporation engaged in the pre-need industry. From 1987 to 1989, petitioner Daisy B. Tiu was its Division Marketing Director.

On January 1, 1993, respondent re-hired petitioner as Senior Assistant Vice-President and Territorial Operations Head in charge of its Hongkong and Asean operations. The parties executed a contract of employment valid for five years.4

On September 16, 1995, petitioner stopped reporting for work. In November 1995, she became the Vice-President for Sales of Professional Pension Plans, Inc., a corporation engaged also in the pre-need industry.

Consequently, respondent sued petitioner for damages before the RTC of Pasig City, Branch 261. Respondent alleged, among others, that petitioner’s employment with Professional Pension Plans, Inc. violated the non-involvement clause in her contract of employment, to wit:

8. NON INVOLVEMENT PROVISION – The EMPLOYEE further undertakes that during his/her engagement with EMPLOYER and in case of separation from the Company, whether voluntary or for cause, he/she shall not, for the next TWO (2) years thereafter, engage in or be involved with any corporation, association or entity, whether directly or indirectly, engaged in the same business or belonging to the same pre-need industry as the EMPLOYER. Any breach of the foregoing provision shall render the EMPLOYEE liable to the EMPLOYER in the amount of One Hundred Thousand Pesos (P100,000.00) for and as liquidated damages.5

Respondent thus prayed for P100,000 as compensatory damages; P200,000 as moral damages; P100,000 as exemplary damages; and 25% of the total amount due plus P1,000 per counsel’s court appearance, as attorney’s fees.

Petitioner countered that the non-involvement clause was unenforceable for being against public order or public policy: First, the restraint imposed was much greater than what was necessary to afford respondent a fair and reasonable protection. Petitioner contended that the transfer to a rival company was an accepted practice in the pre-need industry. Since the products sold by the companies were more or less the same, there was nothing peculiar or unique to protect. Second, respondent did not invest in petitioner’s training or improvement. At the time petitioner was recruited, she already possessed the knowledge and expertise required in the pre-need industry and respondent benefited tremendously from it. Third, a strict application of the non-involvement clause would amount to a deprivation of petitioner’s right to engage in the only work she knew.

In upholding the validity of the non-involvement clause, the trial court ruled that a contract in restraint of trade is valid provided that there is a limitation upon either time or place. In the case of the pre-need industry, the trial court found the two-year restriction to be valid and reasonable. The dispositive portion of the decision reads:

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

1. the amount of One Hundred Thousand Pesos (P100,000.00) for and as damages, for the breach of the non-involvement provision (Item No. 8) of the contract of employment;

2. costs of suit.

There being no sufficient evidence presented to sustain the grant of attorney’s fees, the Court deems it proper not to award any.

SO ORDERED.6

On appeal, the Court of Appeals affirmed the trial court’s ruling. It reasoned that petitioner entered into the contract on her own will and volition. Thus, she bound herself to fulfill not only what was expressly stipulated in the contract, but also all its consequences that were not against good faith, usage, and law. The appellate court also ruled that the stipulation prohibiting non-employment for two years was valid and enforceable considering the nature of respondent’s business.

Petitioner moved for reconsideration but was denied. Hence, this appeal by certiorari where petitioner alleges that the Court of Appeals erred when:

A.

… [IT SUSTAINED] THE VALIDITY OF THE NON-INVOLVEMENT CLAUSE IN PETITIONER’S CONTRACT CONSIDERING THAT THE PERIOD FIXED THEREIN IS VOID FOR BEING OFFENSIVE TO PUBLIC POLICY

B.

… [IT SUSTAINED] THE AWARD OF LIQUIDATED DAMAGES CONSIDERING THAT IT BEING IN THE NATURE OF A PENALTY THE SAME IS EXCESSIVE, INIQUITOUS OR UNCONSCIONABLE7

Plainly stated, the core issue is whether the non-involvement clause is valid.

Petitioner avers that the non-involvement clause is offensive to public policy since the restraint imposed is much greater than what is necessary to afford respondent a fair and reasonable protection. She adds that since the products sold in the pre-need industry are more or less the same, the

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transfer to a rival company is acceptable. Petitioner also points out that respondent did not invest in her training or improvement. At the time she joined respondent, she already had the knowledge and expertise required in the pre-need industry. Finally, petitioner argues that a strict application of the non-involvement clause would deprive her of the right to engage in the only work she knows.

Respondent counters that the validity of a non-involvement clause has been sustained by the Supreme Court in a long line of cases. It contends that the inclusion of the two-year non-involvement clause in petitioner’s contract of employment was reasonable and needed since her job gave her access to the company’s confidential marketing strategies. Respondent adds that the non-involvement clause merely enjoined her from engaging in pre-need business akin to respondent’s within two years from petitioner’s separation from respondent. She had not been prohibited from marketing other service plans.

As early as 1916, we already had the occasion to discuss the validity of a non-involvement clause. In Ferrazzini v. Gsell,8 we said that such clause was unreasonable restraint of trade and therefore against public policy. In Ferrazzini, the employee was prohibited from engaging in any business or occupation in the Philippines for a period of five years after the termination of his employment contract and must first get the written permission of his employer if he were to do so. The Court ruled that while the stipulation was indeed limited as to time and space, it was not limited as to trade. Such prohibition, in effect, forces an employee to leave the Philippines to work should his employer refuse to give a written permission.

In G. Martini, Ltd. v. Glaiserman,9 we also declared a similar stipulation as void for being an unreasonable restraint of trade. There, the employee was prohibited from engaging in any business similar to that of his employer for a period of one year. Since the employee was employed only in connection with the purchase and export of abaca, among the many businesses of the employer, the Court considered the restraint too broad since it effectively prevented the employee from working in any other business similar to his employer even if his employment was limited only to one of its multifarious business activities.

However, in Del Castillo v. Richmond,10 we upheld a similar stipulation as legal, reasonable, and not contrary to public policy. In the said case, the employee was restricted from opening, owning or having any connection with any other drugstore within a radius of four miles from the employer’s place of business during the time the employer was operating his drugstore. We said that a contract in restraint of trade is valid provided there is a limitation upon either time or place and the restraint upon one party is not greater than the protection the other party requires.

Finally, in Consulta v. Court of Appeals,11 we considered a non-involvement clause in accordance with Article 130612 of the Civil Code. While the complainant in that case was an independent agent and not an employee, she was prohibited for one year from engaging directly or indirectly in activities of other companies that compete with the business of her principal. We noted therein that the restriction did not prohibit the agent from engaging in any other business, or from being connected with any other company, for as long as the business or company did not compete with the principal’s business. Further, the prohibition applied only for one year after the termination of the agent’s contract and was therefore a reasonable restriction designed to prevent acts prejudicial to the employer.

Conformably then with the aforementioned pronouncements, a non-involvement clause is not necessarily void for being in restraint of trade as long as there are reasonable limitations as to time, trade, and place.

In this case, the non-involvement clause has a time limit: two years from the time petitioner’s employment with respondent ends. It is also limited as to trade, since it only prohibits petitioner from engaging in any pre-need business akin to respondent’s.1awphi1.net

More significantly, since petitioner was the Senior Assistant Vice-President and Territorial Operations Head in charge of respondent’s Hongkong and Asean operations, she had been privy to confidential and highly sensitive marketing strategies of respondent’s business. To allow her to engage in a rival business soon after she leaves would make respondent’s trade secrets vulnerable especially in a highly competitive marketing environment. In sum, we find the non-involvement clause not contrary to public welfare and not greater than is necessary to afford a fair and reasonable protection to respondent.13

In any event, Article 1306 of the Civil Code provides that parties to a contract may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.

Article 115914 of the same Code also provides that obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. Courts cannot stipulate for the parties nor amend their agreement where the same does not contravene law, morals, good customs, public order or public policy, for to do so would be to alter the real intent of the parties, and would run contrary to the function of the courts to give force and effect thereto.15 Not being contrary to public policy, the non-involvement clause, which petitioner and respondent freely agreed upon, has the force of law between them, and thus, should be complied with in good faith.16

Thus, as held by the trial court and the Court of Appeals, petitioner is bound to pay respondent P100,000 as liquidated damages. While we have equitably reduced liquidated damages in certain cases,17 we cannot do so in this case, since it appears that even from the start, petitioner had not shown the least intention to fulfill the non-involvement clause in good faith.

WHEREFORE, the petition is DENIED for lack of merit. The Decision dated January 20, 2004, and the Resolution dated May 4, 2004, of the Court of Appeals in CA-G.R. CV No. 74972, are AFFIRMED. Costs against petitioner.

SO ORDERED.

G.R. No. L-65425 November 5, 1987

IRENEO LEAL, JOSE LEAL, CATALINA LEAL, BERNABELA LEAL, VICENTE LEAL EUIOGIA LEAL PATERNO RAMOS, MACARIO DEL ROSARIO, MARGARITA ALBERTO, VICTORIA TORRES, JUSTINA MANUEL, JULIAN MANUEL, MELANIA SANTOS, CLEMENTE SAMARIO, MARIKINA VALLEY, INC., MIGUELA MENDOZA, and REGISTER OF DEEDS OF RIZAL, petitioners, vs.THE HONORABLE INTERMEDIATE APPELLATE COURT (4th Civil Cases Division), and VICENTE SANTIAGO (Substituted by SALUD M. SANTIAGO), respondents.

SARMIENTO, J.:

In its resolution dated September 27, 1983, the respondent Intermediate Appellate Court, 1 speaking through Justice Porfirio V, Sison, ordered, in part, the petitioners to accept the sum of P5,600.00 from the private respondent as repurchase price of the lots described in the "Compraventa" and, thereafter, to execute a Deed of Repurchase to effect transfer over ownership over the same properties to the private respondent.

This ruling was a complete reversal of the earlier decision, 2 dated June 28, 1.978, penned by Justice Paras, of the Court of Appeals, in the same case, affirming the trial court's dismissal of the private respondent's complaint.

The petitioners, feeling aggrieved and astonished by the complete turnaround of the respondent court, come to Us with this petition for review by certiorari.

The antecedent facts are undisputed.

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This case brings us back almost half a century ago, on March 21, 1941, when a document entitled "Compraventa," written entirely in the Spanish language, involving three parcels of land, was executed by the private respondent's predecessors-in-interest, Vicente Santiago and his brother, Luis Santiago, in favor of Cirilio Leal the deceased father of some of the petitioners, Pursuant to this "Compraventa," the title over the three parcels of land in the name of the vendors was cancelled and a new one was issued in the name of Cirilo Leal who immediately took possession and exercised ownership over the said lands. When Cirilo died on December 10, 1959, the subject lands were inherited by his six children, who are among the petitioners, and who caused the consolidation and subdivision of the properties among themselves.

Between the years 1960 and 1965, the properties were either mortgaged or leased by the petitioners-children of Cirilo Leal — to their co-petitioners.

Sometime before the agricultural year 1966-1967, Vicente Santiago approached the petitioners and offered re- repurchase the subject properties. Petitioners, however, refused the offer. Consequently, Vicente Santiago instituted a complaint for specific performance before the then Court of First Instance of Quezon City on August 2, 1967.

All the trial, the court a quo rendered its decision,-dismissing the complaint on the ground that the same was still premature considering that there was, as yet, no sale nor any alienation equivalent to a sale. Not satisfied with this decision, the private respondent appealed to the Court of Appeals and the latter, acting through the Fourth Division and with Justice Edgardo Paras as ponente affirmed the decision of the court a quo.

The petitioners seasonably filed a motion to amend the dispositive portion of the decision so as to include an order for the cancellation of the annotations at the back of the Transfer certificates of Title issued in their favor. The private respondent,-on the other hand, filed a-timely motion for reconsideration of the above decision and an opposition to petitioners' motion to amend. These incidents were not resolved until then Court of Appeals was abolished and in lieu of which the Intermideate Appellate Court was established In view of the said reorganization, case was reassigned to the Fourth Civil in this cases Division.

Resolving the abovestated motion for reconsideration, the respondent court, in a resolution penned by Justice Sison and promulgated on September 27, 1983, ruled, as follows:

WHEREFORE, Our decision of June 28, 1978 is hereby reversed and set aside and another one is rendered ordering: (1) defendants-appellees surnamed Leal to accept the sum of P5,600.00 from plaintiff-appellant (substituted by Salud M. Santiago) as repurchase price of the lots described in the "Compraventa" of March 21, 1941, and thereafter to execute a deed of repurchase sufficient in law to transfer ownership of the properties to appellant Salud M. Santiago, the same to be done within five (5) days from payment; (2) ordering the same defendants Leals and defendant Clemente Samario to indemnify appellant in the sum of P3,087.50 as rental for the year 1967-1968 and the same amount every year thereafter; (3) ordering an the defendants jointly and severally to pay the sum of Pl,500.00 as attorney's fees and other expenses of litigation; and (4) ordering defendant Register of Deeds of Rizal to cancel Transfer Certificate of Title No. 42535 in the names of Vicente Santiago and Luis Santiago upon presentation of the deed of sale herein ordered to be executed by the appellees in favor of Salud M. Santiago and to issue thereof another Transfer Certificate of Title in the name alone of Salud M. Santiago. No costs here and in the courts (sic) below.

SO ORDERED.

Verily, the well-spring whence the present controversy arose is the abovementioned "Compraventa," more particularly paragraph (b) thereof, to wit:

xxx xxx xxx

(b) En caso de venta, no podran vender a otros dichos tres lotes de terreno sino al aqui vendedor Vicente Santiago, o los herederos o sucesores de este por el niismo precio de CINCO MIL SEISCIENTOS PESOS (P5,600.00) siempre y cuando estos ultimos pueden hacer la compra. 3

xxx xxx xxx

which is now the subject of varying and conflicting interpretations.

xxx xxx xxx

It is admitted by both parties that the phrase "they shall not sell to others these three lots but only to the seller Vicente Santiago or to his heirs or successors" is an express prohibition against the sale of the lots described in the "Compraventa" to third persons or strangers to the contract. However, while private respondent naturally lauds the resolution of Justice Sison, which sustains the validity of this prohibition, the petitioners, on the other hand, endorse the decision penned by Justice Paras, which states, in part:

xxx xxx xxx

Finally, there is grave doubt re the validity of the ostensible resolutory condition here, namely, the prohibition to sell the lots to persons other than the vendor (appellant); uncertainly, a prohibition to alienate should not exceed at most a period of twenty years, otherwise there would be subversion of public policy, which naturally frowns on unwarranted restrictions on the right of ownership. 4

xxx xxx xxx

We agree with the Paras ponencia.

Contracts are generally binding between the parties, their assigns and heirs; however, under Art. 1255 of the Civil Code of Spain, which is applicable in this instance, pacts, clauses, and conditions which are contrary to public order are null and void, thus, without any binding effect.

Parenthetically, the equivalent provision in the Civil Code of the Philippines is that of Art. 1306, which states: "That contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. Public order signifies the public weal — public policy. 5 Essentially, therefore, public order and public policy mean one and the same thing. Public policy is simply the English equivalent of "order publico" in Art. 1255 of the Civil Code of Spain. 6

One such condition which is contrary to public policy is the present prohibition to self to third parties, because the same virtually amounts to a perpetual restriction to the right of ownership, specifically the owner's right to freely dispose of his properties. This, we hold that any such prohibition, indefinite and stated as to time, so much so that it shall continue to be applicable even beyond the lifetime of the original parties to the contract, is, without doubt, a nullity. In the light of this pronouncement, we grant the petitioners' prayer for the cancellation of the annotations of this prohibition at the back of their Transfer Certificates 'Title.

It will be noted, moreover, that the petitioners have never sold, or even attempted to sell, the properties subject of the "Compraventa. "

We now come to what we believe is the very issue in this case which is, whether or not under the aforequoted paragraph (b) of the "Compraventa" a right of repurchase in favor of the private respondent exist.

The ruling of the Fourth Division (Justice Paras) is that the said stipulation does not grant a right to repurchase. Contrarily, the resolution of the Fourth Civil Cases Division (Justice P. V. Sison) interpreted the same provision as granting the right to repurchase subject to a condition precedent.

Thus, the assailed Resolution, reversing the earlier decision of the same respondent court, ruled

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xxx xxx xxx

The all-importartant phrase "en caso de venta," must of necessity refer to the sale of the properties either by Cirilo or his heirs to the Santiago brothers themselves or to their heirs, including appellants Vicente Santiago including appellants Vicente Santiago and Salud M Santiago, for the same sum of P5,600.00, "siempre y cuando estos ultimos pueden hacer la compra" (when the latter shall be able to buy it).

xxx xxx xxx

... We repeat, The words envision the situation contemplated by the contracting parties themselves, the resale of the lots to their owners, and NOT to a sale of the lots to third parties or strangers to the contracts. ... 7

xxx xxx xxx

The law provides that for conventional redemption to take place, the vendor should reserve, in no uncertain terms, the right to repurchase the thing sold. 8 Thus, the right to redeem must be expressly stipulated in the contract of sale in order that it may have legal existence.

In the case before us, we cannot and any express or implied grant of a right to repurchase, nor can we infer, from any word or words in the questioned paragraph, the existence of any such right. The interpretation in the resolution (Justice Sison) is rather strained. The phrase "in case case" of should be construed to mean "should the buyers wish to sell which is the plain and simple import of the words, and not "the buyers should sell," which is clearly a contorted construction of the same phrase. The resort to Article 1373 of the Civil Code of the Philippines is erroneous. The subject phrase is patent and unambiguous, hence, it must not be given another interpretation

But even assuming that such a right of repurchase is granted under the "Compraventa," the petitioner correctly asserts that the same has already prescribed. Under Art. 1508 of the Civil Code of Spain (Art,. 1606 of the Civil Code of the Philippines), the right to redeem or repurchase, in the absence of an express agreement as to time, shall last four years from the date of the contract. In this case then, the right to repurchase, if it was at four guaranteed under in the "Compraventa," should have been exercise within four years from March 21, 1941 (indubitably the date of execution of the contract), or at the latest in 1945.

In the respondent court's resolution, it is further ruled that the right to repurchase was given birth by the condition precedent provided for in the phrase "siempre y cuando estos ultimos pueden hacer la compra" (when the buyer has money to buy). In other words, it is the respondent court's contention that the right may be exercised only when the buyer has money to buy. If this were so, the second paragraph of Article 1508 would apply — there is agreement as to the time, although it is indefinite, therefore, the right should be exercised within ten years, because the law does not favor suspended ownership. Since the alleged right to repurchase was attempted to be exercised by Vicente Santiago only in 1966, or 25 years from the date of the contract, the said right has undoubtedly expired.

WHEREFORE, in view of the foregoing, the Resolution dated September 27, 1983, of the respondent court is SET ASIDE and the Decision promulgated on June 28, 1978 is hereby REINSTATED. The annotations of the prohibition to sell at the back of TCT Nos. 138837, 138838, 138839, 138840, 138841, and 138842 are hereby ordered CANCELLED. Costs against the private respondent.

SO ORDERED.

G.R. No. L-46591 July 28, 1987

BANCO FILIPINO SAVINGS and MORTGAGE BANK, petitioner, vs.HON. MIGUEL NAVARRO, Presiding Judge, Court of First Instance of Manila, Branch XXXI and FLORANTE DEL VALLE, respondents.

MELENCIO-HERRERA, J.:

This is a Petition to review on certiorari the Decision of respondent Court, the dispositive portion of which decrees:

WHEREFORE, the Court finds that the enforcement of the escalation clause retroactively before the lapse of the 15-year period stated in the promissory note is contrary to Sec. 3 of Presidential Decree No. 116 and Sec. 109 of Republic Act No. 265, and hereby declares null and void the said escalation clause. The respondent Banco Filipino Savings and Mortgage Bank is hereby ordered to desist from enforcing the increased rate of interest on petitioner's loan.

SO ORDERED.

The facts are not in dispute:

On May 20, 1975, respondent Florante del Valle (the BORROWER) obtained a loan secured by a real estate mortgage (the LOAN, for short) from petitioner BANCO FILIPINO1 in the sum of Forty-one Thousand Three Hundred (P41,300.00) Pesos, payable and to be amortized within fifteen (15) years at twelve (12%) per cent interest annually. Hence, the LOAN still had more than 730 days to run by January 2, 1976, the date when CIRCULAR No. 494 was issued by the Central Bank.

Stamped on the promissory note evidencing the loan is an Escalation Clause, reading as follows:

I/We hereby authorize Banco Filipino to correspondingly increase the interest rate stipulated in this contract without advance notice to me/us in the event law should be enacted increasing the lawful rates of interest that may be charged on this particular kind of loan.

The Escalation Clause is based upon Central Bank CIRCULAR No. 494 issued on January 2, 1976, the pertinent portion of which reads:

3. The maximum rate of interest, including commissions, premiums, fees and other charges on loans with maturity of more than seven hundred thirty (730) days, by banking institutions, including thrift banks and rural banks, or by financial intermediaries authorized to engage in quasi-banking functions shall be nineteen percent (19%) per annum.

x x x x x x x x x

7. Except as provided in this Circular and Circular No. 493, loans or renewals thereof shall continue to be governed by the Usury Law, as amended."

CIRCULAR No. 494 was issued pursuant to the authority granted to the Monetary Board by Presidential Decree No. 116 (Amending Further Certain Sections of the Usury Law) promulgated on January 29, 1973, the applicable section of which provides:

Sec. 2. The same Act is hereby amended by adding the following section immediately after section one thereof, which reads as follows:

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Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or rates of interest for the loan or renewal thereof or the forbearance of any money, goods or credits, and to change such rate or rates whenever warranted by prevailing economic and social conditions: Provided, that such changes shall not be made oftener than once every twelve months.

The same grant of authority appears in P.D. No. 858, promulgated on December 31, 1975, except that the limitation on the frequency of changes was eliminated.

On the strength of CIRCULAR No. 494 BANCO FILIPINO gave notice to the BORROWER on June 30, 1976 of the increase of interest rate on the LOAN from 12% to 17% per annum effective on March 1, 1976.

On September 24, 1976, Ms. Mercedes C. Paderes of the Central Bank wrote a letter to the BORROWER as follows:

September 24, 1976

Mr. Florante del Valle14 Palanca StreetB.F. Homes, ParanaqueRizal

Dear Mr. del Valle:

This refers to your letter dated August 28, 1976 addressed to the Governor, Central Bank of the Philippines, seeking clarification and our official stand on Banco Filipino's recent decision to raise interest rates on lots bought on installment from 12% to 17% per annum.

A verification made by our Examiner of the copy of your Promissory Note on file with Banco Filipino showed that the following escalation clause with your signature is stamped on the Promissory Note:

I /We hereby authorize Banco Filipino to correspondingly increase the interest rate stipulated in this contract without advance notice to me/us in the event a law should be enacted increasing the lawful rates of interest that may be charged on this particular kind of loan.

In this connection, please be advised that the Monetary Board, in its Resolution No. 1155 dated June 11, 1976, adopted the following guidelines to govern interest rate adjustments by banks and non-banks performing quasi-banking functions on loans already existing as of January 3, 1976, in the light of Central Bank Circulars Nos. 492-498:

l. Only banks and non-bank financial intermediaries performing quasi-banking functions may increase interest rates on loans already existings of January 2, 1976, provided that:

a. The pertinent loan contracts/documents contain escalation clauses expressly authorizing lending bank or non-bank performing quasi-banking functions to increase the rate of interest stipulated in the contract, in the event that any law or Central Bank regulation is promulgated increasing the maximum interest rate for loans; and

b. Said loans were directly granted by them and the remaining maturities thereof were more than 730 days as of January 2, 1976; and

2. The increase in the rate of interest can be effective only as of January 2, 1976 or on a later date.

The foregoing guidelines, however, shall not be understood as precluding affected parties from questioning before a competent court of justice the legality or validity of such escalation clauses.

We trust the above guidelines would help you resolve your problems regarding additional interest charges of Banco Filipino.

Very truly yours,

(Sgd.) MERCEDES C. PAREDESDirector

Contending that CIRCULAR No. 494 is not the law contemplated in the Escalation Clause of the promissory note, the BORROWER filed suit against BANCO FILIPINO for "Declaratory Relief" with respondent Court, praying that the Escalation Clause be declared null and void and that BANCO FILIPINO be ordered to desist from enforcing the increased rate of interest on the BORROWER's real estate loan.

For its part, BANCO FILIPINO maintained that the Escalation Clause signed by the BORROWER authorized it to increase the interest rate once a law was passed increasing the rate of interest and that its authority to increase was provided for by CIRCULAR No. 494.

In its judgment, respondent Court nullified the Escalation Clause and ordered BANCO FILIPINO to desist from enforcing the increased rate of interest on the BORROWER's loan. It reasoned out that P.D. No. 116 does not expressly grant the Central Bank authority to maximize interest rates with retroactive effect and that BANCO FILIPINO cannot legally impose a higher rate of interest before the expiration of the 15-year period in which the loan is to be paid other than the 12% per annum in force at the time of the execution of the loan.

It is from that Decision in favor of the BORROWER that BANCO FILIPINO has come to this instance on review by Certiorari. We gave due course to the Petition, the question being one of law.

On February 24, 1983, the parties represented by their respective counsel, not only moved to withdraw the appeal on the ground that it had become moot and academic "because of recent developments in the rules and regulations of the Central Bank," but also prayed that "the decision rendered in the Court of First Instance be therefore vacated and declared of no force and effect as if the case was never filed," since the parties would like to end this matter once and for all."

However, "considering the subject matter of the controversy in which many persons similarly situated are interested and because of the need for a definite ruling on the question," the Court, in its Resolution of February 24, 1983, impleaded the Central Bank and required it to submit its Comment, and encouraged homeowners similarly situated as the BORROWER to intervene in the proceedings.

At the hearing on February 24, 1983, one Leopoldo Z. So, a mortgage homeowner at B.F. Resort Subdivision, was present and manifested that he was in a similar situation as the BORROWER. Since then, he has written several letters to the Court, pleading for early resolution of the case. The Court allowed the intervention of Lolita Perono2 and issued a temporary restraining order enjoining the Regional Trial Court (Pasay City Branch) in the case entitled "Banco Filipino Savings and Mortgage Bank vs. Lolita Perono" from issuing a writ of possession over her mortgaged property. Also snowed to intervene were Enrique Tabalon, Jose Llopis, et als., who had obtained loans with Identical escalation clauses from Apex Mortgage and Loans Corporation, apparently an affiliate of BANCO FILIPINO, Upon motion of Jose Llopis, a Temporary Restraining Order was likewise issued enjoining the foreclosure of his real estate mortgage by BANCO FILIPINO.

The Court made it explicit, however, that intervention was allowed only for the purpose of "joining in the discussion of the legal issue involved in this proceedings, to wit, the validity of the so-called "escalation clause," or its applicability to existing contracts of loan."

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The Central Bank has submitted its Comment and Supplemental Comment and like BANCO FILIPINO, has taken the position that the issuance of its Circulars is a valid exercise of its authority to scribe maximum rates of interest and that, based on general principles of contract, the Escalation Clause is a valid provision in the loan agreement provided that "(1) the increased rate imposed or charged by petitioner does not exceed the ceiling fixed by law or the Monetary Board; (2) the increase is made effective not earlier than the effectivity of the law or regulation authorizing such an increase; and (3) the remaining maturities of the loans are more than 730 days as of the effectivity of the law or regulation authorizing such an increase. However, with respect to loan agreements entered into,on or after March 17, 1980, such agreement, in order to be valid, must also include a de-escalation clause as required by Presidential Decree No. 1684."3

The substantial question in this case is not really whether the Escalation Clause is a valid or void stipulation. There should be no question that the clause is valid.

Some contracts contain what is known as an "escalator clause," which is defined as one in which the contract fixes a base price but contains a provision that in the event of specified cost increases, the seller or contractor may raise the price up to a fixed percentage of the base. Attacks on such a clause have usually been based on the claim that, because of the open price-provision, the contract was too indefinite to be enforceable and did not evidence an actual meeting of the minds of the parties, or that the arrangement left the price to be determined arbitrarily by one party so that the contract lacked mutuality. In most instances, however, these attacks have been unsuccessful.4

The Court further finds as a matter of law that the cost of living index adjustment, or escalator clause, is not substantively unconscionable.

Cost of living index adjustment clauses are widely used in commercial contracts in an effort to maintain fiscal stability and to retain "real dollar" value to the price terms of long term contracts. The provision is a common one, and has been universally upheld and enforced. Indeed, the Federal government has recognized the efficacy of escalator clauses in tying Social Security benefits to the cost of living index, 42 U.S.C.s 415(i). Pension benefits and labor contracts negotiated by most of the major labor unions are other examples. That inflation, expected or otherwise, will cause a particular bargain to be more costly in terms of total dollars than originally contemplated can be of little solace to the plaintiffs.5

What should be resolved is whether BANCO FILIPINO can increase the interest rate on the LOAN from 12% to 17% per annum under the Escalation Clause. It is our considered opinion that it may not.

The Escalation Clause reads as follows:

I/We hereby authorize Banco Filipino to correspondingly increase

the interest rate stipulated in this contract without advance notice to me/us in the event

a law

increasing

the lawful rates of interest that may be charged

on this particular

kind of loan. (Paragraphing and emphasis supplied)

It is clear from the stipulation between the parties that the interest rate may be increased "in the event a law should be enacted increasing the lawful rate of interest that may be charged on this particular kind of loan." " The Escalation Clause was dependent on an increase of rate made by "law" alone.

CIRCULAR No. 494, although it has the effect of law, is not a law. "Although a circular duly issued is not strictly a statute or a law, it has, however, the force and effect of law."6 (Italics supplied). "An administrative regulation adopted pursuant to law has the force and effect of law."7 "That administrative rules and regulations have the force of law can no longer be questioned. "8

The distinction between a law and an administrative regulation is recognized in the Monetary Board guidelines quoted in the letter to the BORROWER of Ms. Paderes of September 24, 1976 (supra). According to the guidelines, for a loan's interest to be subject to the increases provided in CIRCULAR No. 494, there must be an Escalation Clause allowing the increase "in the event that any law or Central Bank regulation is promulgated increasing the maximum interest rate for loans." The guidelines thus presuppose that a Central Bank regulation is not within the term "any law."

The distinction is again recognized by P.D. No. 1684, promulgated on March 17, 1980, adding section 7-a to the Usury Law, providing that parties to an agreement pertaining to a loan could stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest is increased "by law or by the Monetary Board." To quote:

Sec. 7-a Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest

is increased by law or by the Monetary Board:

Provided, That such stipulation shall be valid only if there is also a stipulation in the agreement that the rate of interest agreed upon shall be reduced in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board;

Provided, further, That the adjustment in the rate of interest agreed upon shall take effect on or after the effectivity of the increase or decrease in the maximum rate of interest. (Paragraphing and emphasis supplied).

It is now clear that from March 17, 1980, escalation clauses to be valid should specifically provide: (1) that there can be an increase in interest if increased by law or by the Monetary Board; and (2) in order for such stipulation to be valid, it must include a provision for reduction of the stipulated interest "in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board."

While P.D. No. 1684 is not to be given retroactive effect, the absence of a de-escalation clause in the Escalation Clause in question provides another reason why it should not be given effect because of its one-sidedness in favor of the lender.

2. The Escalation Clause specifically stipulated that the increase in interest rate was to be "on this particular kind of loan, " meaning one secured by registered real estate mortgage.

Paragraph 7 of CIRCULAR No. 494 specifically directs that "loans or renewals continue to be governed by the Usury Law, as amended." So do Circular No. 586 of the Central Bank, which superseded Circular No. 494, and Circular No. 705, which superseded Circular No. 586. The Usury Law, as amended by Acts Nos. 3291, 3998 and 4070, became effective on May 1, 1916. It provided for the maximum yearly interest of 12% for loans secured by a mortgage upon registered real estate (Section 2), and a maximum annual interest of 14% for loans covered by security other than mortgage upon registered real estate (Section 3). Significant is the separate treatment of registered real estate loans and other loans not secured by mortgage upon registered real estate. It appears clear in the Usury Law that the policy is to make interest rates for loans guaranteed by registered real estate lower than those for loans guaranteed by properties other than registered realty.

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On June 15, 1948, Congress approved Republic Act No. 265, creating the Central Bank, and establishing the Monetary Board. That law provides that "the Monetary Board may, within the limits prescribed in the Usury law,9 fix the maximum rates of interest which banks may charge for different types of loans and for any other credit operations, ... " and that "any modification in the maximum interest rates permitted for the borrowing or lending operations of the banks shall apply only to future operations and not to those made prior to the date on which the modification becomes effective" (Section 109).1avvphi1

On January 29, 1973, P.D. No. 116 was promulgated amending the Usury Law. The Decree gave authority to the Monetary Board "to prescribe maximum rates of interest for the loan or renewal thereof or the forbearance of any money goods or credits, and to change such rate or rates whenever warranted by prevailing economic and social conditions. In one section,10 the Monetary Board could prescribe the maximum rate of interest for loans secured by mortgage upon registered real estate or by any document conveying such real estate or an interest therein and, in another separate section,11 the Monetary Board was also granted authority to fix the maximum interest rate for loans secured by types of security other than registered real property. The two sections read:

SEC. 3. Section two of the same Act is hereby amended to read as follows:

SEC. 2. No person or corporation shall directly or indirectly take or receive in money or other property, real or personal, or choses in action, a higher rate of interest or greater sum or value, including commissions, premiums, fines and penalties, for the loan or renewal thereof or forbearance of money, goods, or credits, where such loan or renewal or forbearance is secured in whole or in part by a mortgage upon real estate the title to which is duly registered or by any document conveying such real estate or an interest therein, than twelve per centum per annum or the maximum rate prescribed by the Monetary Board and in force at the time the loan or renewal thereof or forbearance is granted: Provided, That the rate of interest under this section or the maximum rate of interest that may be prescribed by the Monetary Board under this section may likewise apply to loans secured by other types of security as may be specified by the Monetary Board.

SEC. 4. Section three of the same Act is hereby amended to read as follows:

SEC. 3. No person or corporation shall directly or indirectly demand, take, receive, or agree to charge in money or other property, real or personal, a higher rate or greater sum or value for the loan or forbearance of money, goods, or credits, where such loan or forbearance is not secured as provided in Section two hereof, than fourteen per centum per annum or the maximum rate or rates prescribed by the Monetary Board and in force at the time the loan or forbearance is granted.

Apparent then is that the separate treatment for the two classes of loans was maintained. Yet, CIRCULAR No. 494 makes no distinction as to the types of loans that it is applicable to unlike Circular No. 586 dated January 1, 1978 and Circular No. 705 dated December 1, 1979, which fix the effective rate of interest on loan transactions with maturities of more than 730 days to not exceeding 19% per annum (Circular No. 586) and not exceeding 21% per annum (Circular No. 705) "on both secured and unsecured loans as defined by the Usury Law, as amended."

In the absence of any indication in CIRCULAR No. 494 as to which particular type of loan was meant by the Monetary Board, the more equitable construction is to limit CIRCULAR No. 494 to loans guaranteed by securities other than mortgage upon registered realty.

WHEREFORE, the Court rules that while an escalation clause like the one in question can ordinarily be held valid, nevertheless, petitioner Banco Filipino cannot rely thereon to raise the interest on the borrower's loan from 12% to 17% per annum because Circular No. 494 of the Monetary Board was not the "law" contemplated by the parties, nor should said Circular be held as applicable to loans secured by registered real estate in the absence of any such specific indication and in contravention of the policy behind the Usury Law. The judgment appealed from is, therefore, hereby affirmed in so far as it orders petitioner Banco Filipino to desist from enforcing the increased rate of interest on petitioner's loan.

The Temporary Restraining Orders heretofore issued are hereby made permanent if the escalation clauses are Identical to the one herein and the loans involved have applied the increased rate of interest authorized by Central Bank Circular No. 494.

SO ORDERED.

G.R. No. 101771 December 17, 1996

SPOUSES MARIANO and GILDA FLORENDO, petitioners, vs.COURT OF APPEALS and LAND BANK OF THE PHILIPPINES, respondents.

PANGANIBAN, J.:p

May a bank unilaterally raise the interest rate on a housing loan granted an employee, by reason of the voluntary resignation of the borrower?

Such is the query raised in the petition for review on certiorari now before us, which assails the Decision promulgated on June 19, 1991 by respondent Court of Appeals 1 in CA-G.R. CV No. 24956, upholding the validity and enforceability of the escalation by private respondent Land Bank of the Philippines of the applicable interest rate on the housing loan taken out by petitioner-spouses.

The Antecedent Facts

Petitioners filed an action for Injunction with Damages docketed as Civil Case No. 86-38146 before the Regional Trial Court of Manila, Branch XXII against respondent bank. Both parties, after entering into a joint stipulation of facts, submitted the case for decision on the basis of said stipulation and memoranda. The stipulation reads in part: 2

1. That (Petitioner) Gilda Florendo (was) an employee of (Respondent Bank) from May 17, 1976 until August 16, 1984 when she voluntarily resigned. However, before her resignation, she applied for a housing loan of P148,000.00, payable within 25 years from (respondent bank's) Provident Fund on July 20, 1983;

2. That (petitioners) and (respondent bank), through the latter's duly authorized representative, executed the Housing Loan Agreement, . . .;

3. That, together with the Housing Loan Agreement, (petitioners) and (respondent bank), through the latter's authorized representative, also executed a Real Estate Mortgage and PromissoryNote, . . .;

4. That the loan . . . was actually given to (petitioner) Gilda Florendo, . . ., in her capacity as employee of (respondent bank);

5. That on March 19, 1985, (respondent bank) increased the interest rate on (petitioner's) loan from 9% per annum to 17%, the said increase to take effect on March 19, 1985;

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6. That the details of the increase are embodied in (Landbank's) ManCom Resolution No. 85-08 dated March 19, 1985, . . . , and in a PF (Provident Fund) Memorandum Circular (No. 85-08, Series of 1985), . . .;

7. That (respondent bank) first informed (petitioners) of the said increase in a letter dated June 7, 1985, . . . . Enclosed with the letter are a copy of the PF Memo Circular . . . and a Statement of Account as of May 31, 1985, . . .;

8. That (petitioners) protested the increase in a letter dated June 11, 1985 to which (respondent bank) replied through a letter dated July 1, 1985, . . . Enclosed with the letter is a Memorandum dated June 26, 1985 of (respondent bank's) legal counsel, A.B. F. Gaviola, Jr., . . .;

9. That thereafter, (respondent bank) kept on demanding that (petitioner) pay the increased interest or the new monthly installments based on the increased interest rate, but Plaintiff just as vehemently maintained that the said increase is unlawful and unjustifiable. Because of (respondent bank's) repeated demands, (petitioners) were forced to file the instant suit for Injunction and Damages;

10. That, just the same, despite (respondent bank's) demands that (petitioners) pay the increased interest or increased monthly installments, they (petitioners) have faithfully paid and discharged their loan obligations, more particularly the monthly payment of the original stipulated installment of P1,248.72. Disregarding (respondent bank's) repeated demand for increased interest and monthly installment, (petitioners) are presently up-to-date in the payments of their obligations under the original contracts (Housing Loan Agreement, Promissory Note and Real Estate Mortgage) with (respondent bank);

xxx xxx xxx

The clauses or provisions in the Housing Loan Agreement and the Real Estate Mortgage referred to above as the basis for the escalation are:

a. Section I-F of Article VI of the Housing Loan Agreement, 3 which provides that, for as long as the loan or any portion thereof or any sum that may be due and payable under the said loan agreement remains outstanding, the borrower shall —

f) Comply with all the rules and regulations of the program imposed by the LENDER and to comply with all the rules and regulations that the Central Bank of the Philippines has imposed or will impose in connection with the financing programs for bank officers and employees in the form of fringe benefits.

b. Paragraph (f) of the Real Estate Mortgage 4 which states:

The rate of interest charged on the obligation secured by this mortgage. . ., shall be subject, during the life of this contract, to such an increase/decrease in accordance with prevailing rules, regulations and circulars of the Central Bank of the Philippines as the Provident Fund Board of Trustees of the Mortgagee may prescribe for its debtors and subject to the condition that the increase/decrease shall only take effect on the date of effectivity of said increase/decrease and shall only apply to the remaining balance of the loan.

c. and ManCom (Management Committee) Resolution No. 85-08, together with PF (Provident Fund) Memorandum Circular No. 85-08, which escalated the interest rates on outstanding housing loans of bank employees who voluntarily "secede" (resign) from the Bank; the range of rates varied depending upon the number of years service rendered by the employees concerned. The rates were made applicable to those who had previously resigned from the bank as well as those who would be resigning in the future.

The trial court ruled in favor of respondent bank, and held that the bank was vested with authority to increase the interest rate (and the corresponding monthly amortizations) pursuant to said escalation provisions in the housing loan agreement and the mortgage contract. The dispositive portion of the said decision reads: 5

WHEREFORE, judgment is hereby rendered denying the instant suit for injunction and declaring that the rate of interest on the loan agreement in question shall be 17% per annum and the monthly amortization on said loan properly raised to P2,064.75 a month, upon the finality of this judgment.

xxx xxx xxx

Petitioners promptly appealed, arguing that, inter alia, the increased rate of interest is onerous and was imposed unilaterally, without the consent of the borrower-spouses. Respondent bank likewise appealed and contested the propriety of having the increased interest rate apply only upon the finality of the judgment and not from March 19, 1985.

The respondent Court subsequently affirmed with modification the decision of the trial court, holding that: 6

. . . Among the salient provisions of the mortgage is paragraph (f) which provides that the interest rate shall be subject, during the term of the loan, to such increases/decreases as may be allowed under the prevailing rules and/or circulars of the Central Bank and as the Provident Fund of the Bank may prescribe for its borrowers. In other words, the spouses agreed to the escalation of the interest rate on their original loan. Such an agreement is a contractual one and the spouses are bound by it. Escalation clauses have been ruled to be valid stipulations in contracts in order to maintain fiscal stability and to retain the value of money in long term contracts (Insular Bank of Asia and America vs. Spouses Epifania Salazar and Ricardo Salazar, 159 SCRA 133). One of the conditions for the validity of an escalation clause such as the one which refers to an increase rate is that the contract should also contain a proviso for a decrease when circumstances so warrant it. Paragraph (f) referred to above contains such provision.

A contract is binding on the parties no matter that a provision thereof later proves onerous and which on hindsight, a party feels he should not have agreed to in the first place.

and disposed as follows: 7

WHEREFORE, the dispositive part of the decision is MODIFIED in the sense that the interest of 17% on the balance of the loan of the spouses shall be computed starting July 1, 1985.

Dissatisfied, the petitioners had recourse to this Court.

The Issues

Petitioners ascribe to respondent Court "a grave and patent error" in not nullifying the respondent bank's unilateral increase of the interest rate and monthly amortizations of the loan —

1. . . . (simply because of) a bare and unqualified stipulation that the interest rate may be increased;

2. . . . on the ground that the increase has no basis in the contracts between the parties;

3. . . . on the ground that the increase violates Section 7-A of the Usury Law;

4. . . . on the ground that the increase and the contractual provision that (respondent bank) relies upon for the increase are contrary to morals, good customs, public order and public policy. 8

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The key issue may be simply presented as follows: Did the respondent bank have a valid and legal basis to impose an increased interest rate on the petitioners' housing loan?

The Court's Ruling

Basis for Increased Interest Rate

Petitioners argue that the HLA provision covers only administrative and other matters, and does not include interest rates per se, since Article VI of the agreement deals with insurance on and upkeep of the mortgaged property. As for the stipulation in the mortgage deed, they claim that it is vague because it does not state if the "prevailing" CB rules and regulations referred to therein are those prevailing at the time of the execution of these contracts or at the time of the increase or decrease of the interest rate. They insist that the bank's authority to escalate interest rates has not been shown to be "crystal-clear as a matter of fact" and established beyond doubt. The contracts being "contracts of adhesion," any vagueness in their provisions should be interpreted in favor of petitioners.

We note that Section 1-F of Article VI of the HLA cannot be read as an escalation clause as it does not make any reference to increases or decreases in the interest rate on loans. However, paragraph (f) of the mortgage contract is clearly and indubitably an escalation provision, and therefore, the parties were and are bound by the said stipulation that "(t)he rate of interest charged on the obligation secured by this mortgage . . ., shall be subject, during the life of this contract, to such an increase/decrease in accordance with prevailing rules, regulations and circulars of the Central Bank of the Philippines as the Provident Fund Board of Trustees of the Mortgagee (respondent bank) may prescribe for its debtors . . . ." 9 Contrary to petitioners' allegation, there is no vagueness in the aforequoted proviso; even their own arguments (below) indicate that this provision is quite clear to them.

In Banco Filipino Savings & Mortgage Bank vs. Navarro, 10 this Court in essence ruled that in general there is nothing inherently wrong with escalation clauses. In IBAA vs. Spouses Salazar, 11 the Court reiterated the rule that escalation clauses are valid stipulations in commercial contracts to maintain fiscal stability and to retain the value of money in long term contracts.

Application of the Escalation to Petitioners

Petitioners however insist that while ManCom Resolution No. 85-08 authorized a rate increase for resigned employees, it could not apply as to petitioner-employee because nowhere in the loan agreement or mortgage contract is it provided that petitioner-wife's resignation will be a ground for the adjustment of interest rates, which is the very bedrock of and the raison d'etre specified in said ManCom Resolution.

They additionally contend that the escalation is violative of Section 7-A of the Usury Law (Act No. 2655, as amended) which requires a law or MB act fixing an increased maximum rate of interest, and that escalation upon the will of the respondent bank is contrary to the principle of mutuality of contracts, per Philippine National Bank vs. Court of Appeals. 12

What is actually central to the disposition of this case is not really the validity of the escalation clause but the retroactive enforcement of the ManCom Resolution as against petitioner-employee. In the case at bar, petitioners have put forth a telling argument that there is in fact no Central Bank rule, regulation or other issuance which would have triggered an application of the escalation clause as to her factual situation.

In Banco Filipino, 13 this Court, speaking through Mme. Justice Ameurfina M. Herrera, disallowed the bank from increasing the interest rate on the subject loan from 12% to 17% despite an escalation clause in the loan agreement authorizing the bank to "correspondingly increase the interest rate stipulated in this contract without advance notice to me/us in the event a law should be enacted increasing the lawful rates of interest that may be charged on this particular kind of loan". In said case, the bank had relied upon a Central Bank circular as authority to up its rates. The Court ruled that CB Circular No. 494, although it has the effect of law, is not a law, but an administrative regulation.

In PNB vs. Court of Appeals, 14 this Court disallowed the increases in interest rate imposed by the petitioner-bank therein, on the ground, among others, that said bank relied merely on its own Board Resolution (No. 681), PNB Circular No. 40-79-84, and PNB Circular No. 40-129-84, which were neither laws nor resolutions of the Monetary Board.

In the case at bar, the loan was perfected on July 20, 1983. PD No. 116 became effective on January 29, 1973. CB Circular No. 416 was issued on July 29, 1974. CB Circ. 504 was issued February 6, 1976. CB Circ. 706 was issued December 1, 1979. CB Circ. 905, lifting any interest rate ceiling prescribed under or pursuant to the Usury Law, as amended, was promulgated in 1982. These and other relevant CB issuances had already come into existence prior to the perfection of the housing loan agreement and mortgage contract, and thus it may be said that these regulations had been taken into consideration by the contracting parties when they first entered into their loan contract. In light of the CB issuances in force at that time, respondent bank was fully aware that it could have imposed an interest rate higher than 9% per annum rate for the housing loans of its employees, but it did not. In the subject loan, the respondent bank knowingly agreed that the interest rate on petitioners' loan shall remain at 9% p.a. unless a CB issuance is passed authorizing an increase (or decrease) in the rate on such employee loans and the Provident Fund Board of Trustees acts accordingly. Thus, as far as the parties were concerned, all other onerous factors, such as employee resignations, which could have been used to trigger an application of the escalation clause were considered barred or waived. If the intention were otherwise, they — especially respondent bank — should have included such factors in their loan agreement.

ManCom Resolution No. 85-08, which is neither a rule nor a resolution of the Monetary Board, cannot be used as basis for the escalation in lieu of CB issuances, since paragraph (f) of the mortgage contract very categorically specifies that any interest rate increase be in accordance with "prevailing rules, regulations and circulars of the Central Bank . . . as the Provident Fund Board . . . may prescribe." The Banco Filipino and PNB doctrines are applicable four-square in this case. As a matter of fact, the said escalation clause further provides that the increased interest rate "shall only take effect on the date of effectivity of (the) increase/decrease" authorized by the CB rule, regulation or circular. Without such CB issuance, any proposed increased rate will never become effective.

We have already mentioned (and now reiterate our holding in severalcases 15) that by virtue of CB Circular 905, the Usury Law has been rendered ineffective. Thus, petitioners' contention that the escalation clause is violative of the said law is bereft of any merit.

On the other hand, it will not be amiss to point out that the unilateral determination and imposition of increased interest rates by the herein respondent bank is obviously violative of the principle of mutuality of contracts ordained in Article 1308 of the Civil Code. As this Court held in PNB: 16

In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between the parties based on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the . . . loan agreement between the PNB and the private respondent gave the PNB a license (although in fact there was none) to increase the interest rate at will during the term of the loan, that license would have been null and void for being violative of the principle of mutuality essential in contracts. It would have invested the loan agreement with the character of a contract of adhesion, where the parties do not bargain on equal footing, the weaker party's (the debtor) participation being reduced to the alternative "to take it or leave it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil 85). Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and imposition.

The respondent bank tried to sidestep this difficulty by averring that petitioner Gilda Florendo as a former bank employee was very knowledgeable concerning respondent bank's lending rates and procedures, and therefore, petitioners were "on an equal footing" with respondent bank as far as the subject loan contract was concerned. That may have been true insofar as entering into the original loan agreement and mortgage contract was

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concerned. However, that does not hold true when it comes to the determination and imposition of escalated rates of interest as unilaterally provided in the ManCom Resolution, where she had no voice at all in its preparation and application.

To allay fears that respondent bank will inordinately be prejudiced by being stuck with this "sweetheart loan" at patently concessionary interest rates, which according to respondent bank is the "sweetest deal" anyone could obtain and is an act of generosity considering that in 1985 lending rates in the banking industry were peaking well over 30% p.a., 17 we need only point out that the bank had the option to impose in its loan contracts the condition that resignation of an employee-borrower would be a ground for escalation. The fact is it did not. Hence, it must live with such omission. And it would be totally unfair to now impose said condition, not to mention that it would violate the principle of mutuality of consent in contracts. It goes without saying that such escalation ground can be included in future contracts — not to agreements already validly entered into.

Let it be clear that this Court understands respondent bank's position that the concessional interest rate was really intended as a means to remunerate its employees and thus an escalation due to resignation would have been a valid stipulation. But no such stipulation was in fact made, and thus the escalation provision could not be legally applied and enforced as against herein petitioners.

WHEREFORE, the petition is hereby GRANTED. The Court hereby REVERSES and SETS ASIDE the challenged Decision of the Court of Appeals. The interest rate on the subject housing loan remains at nine (9) percent per annum and the monthly amortization at P1,248.72.

SO ORDERED.

PRUDENTIAL BANK AND TRUST COMPANY (now BANK OF THE PHILIPPINE ISLANDS vs. ABASOLO,G.R. No. 186738; September 27, 2010CARPIO MORALES, J. Leonor Valenzuela-Rosales inherited two parcels of land situated in Palanan, Sta. Cruz, Laguna (the properties), registered as Original Certificates of Title Nos. RO-527 and RO-528. After she passed away, her heirs executed on June 14, 1993 a Special Power of Attorney (SPA) in favor of Liwayway Abasolo (respondent) empowering her to sell the properties.[2] Sometime in 1995, Corazon Marasigan (Corazon) wanted to buy the properties which were being sold for P2,448,960, but as she had no available cash, she broached the idea of first mortgaging the properties to petitioner Prudential Bank and Trust Company (PBTC), the proceeds of which would be paid directly to respondent. Respondent agreed to the proposal. On Corazon and respondent’s consultation with PBTC’s Head Office, its employee, Norberto Mendiola (Mendiola), allegedly advised respondent to issue an authorization for Corazon to mortgage the properties, and for her (respondent) to act as one of the co-makers so that the proceeds could be released to both of them. To guarantee the payment of the property, Corazon executed on August 25, 1995 a Promissory Note for P2,448,960 in favor of respondent. By respondent’s claim, in October 1995, Mendiola advised her to transfer the properties first to Corazon for the immediate processing of Corazon’s loan application with assurance that the proceeds thereof would be paid directly to her (respondent), and the obligation would be reflected in a bank guarantee. Heeding Mendiola’s advice, respondent executed a Deed of Absolute Sale over the properties in favor of Corazon following which or on December 4, 1995, Transfer Certificates of Title Nos. 164159 and 164160 were issued in the name of Corazon. Corazon’s application for a loan with PBTC’s Tondo Branch was approved on December 1995. She thereupon executed a real estate mortgage covering the properties to secure the payment of the loan. In the absence of a written request for a bank guarantee, the PBTC released the proceeds of the loan to Corazon. Respondent later got wind of the approval of Corazon’s loan application and the release of its proceeds to Corazon who, despite repeated demands, failed to pay the purchase price of the properties. Respondent eventually accepted from Corazon partial payment in kind consisting of one owner type jeepney and four passenger jeepneys,[3] plus installment payments, which, by the trial court’s computation, totaled P665,000. In view of Corazon’s failure to fully pay the purchase price, respondent filed a complaint for collection of sum of money and annulment of sale and mortgage with damages, against Corazon and PBTC (hereafter petitioner), before the Regional Trial Court (RTC) of Sta. Cruz, Laguna.[4] In her Answer,[5] Corazon denied that there was an agreement that the proceeds of the loan would be paid directly to respondent. And she claimed that the vehicles represented full payment of the properties, and had in fact overpaid P76,040. Petitioner also denied that there was any arrangement between it and respondent that the proceeds of the loan would be released to her.[6] It claimed that it “may process a loan application of the registered owner of the real property who requests that proceeds of the loan or part thereof be payable directly to a third party [but] the applicant must submit a letter request to the Bank.”[7] On pre-trial, the parties stipulated that petitioner was not a party to the contract of sale between respondent and Corazon; that there was no written request that the proceeds of the loan should be paid to respondent; and that respondent received five vehicles as partial payment of the properties.[8] Despite notice, Corazon failed to appear during the trial to substantiate her claims. By Decision of March 12, 2004,[9] Branch 91 of the Sta. Cruz, Laguna RTC rendered judgment in favor of respondent and against Corazon who was made directly liable to respondent, and against petitioner who was made subsidiarily liable in the event that Corazon fails to pay. Thus the trial court disposed: WHEREFORE, premises considered, finding the plaintiff has established her claim against the defendants, Corazon Marasigan and Prudential Bank and Trust Company, judgment is hereby rendered in favor of the plaintiff ordering: Defendant Corazon Marasigan to pay the plaintiff the amount of P1,783,960.00 plus three percent (3%) monthly interest per month from August 25, 1995 until fully paid. Further, to pay the plaintiff the sum equivalent to twenty percent five [sic] (25%) of P1,783,960.00 as attorney’s fees. Defendant Prudential Bank and Trust Company to pay the plaintiff the amount of P1,783,960.00 or a portion thereof plus the legal rate of interest per annum until fully paid in the event that Defendant Corazon Marasigan fails to pay the said amount or a portion thereof. Other damages claimed not duly proved are hereby dismissed. So Ordered.[10] (emphasis in the original; underscoring partly in the original, partly supplied) In finding petitioner subsidiarily liable, the trial court held that petitioner breached its understanding to release the proceeds of the loan to respondent:

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Liwayway claims that the bank should also be held responsible for breach of its obligation to directly release to her the proceeds of the loan or part thereof as payment for the subject lots. The evidence shows that her claim is valid. The Bank had such an obligation as proven by evidence. It failed to rebut the credible testimony of Liwayway which was given in a frank, spontaneous, and straightforward manner and withstood the test of rigorous cross-examination conducted by the counsel of the Bank. Her credibility is further strengthened by the corroborative testimony of Miguela delos Reyes who testified that she went with Liwayway to the bank for several times. In her presence, Norberto Mendiola, the head of the loan department, instructed Liwayway to transfer the title over the subject lots to Corazon to facilitate the release of the loan with the guarantee that Liwayway will be paid upon the release of the proceeds. Further, Liwayway would not have executed the deed of sale in favor of Corazon had Norberto Mendiola did not promise and guarantee that the proceeds of the loan would be directly paid to her. Based on ordinary human experience, she would not have readily transferred the title over the subject lots had there been no strong and reliable guarantee. In this case, what caused her to transfer title is the promise and guarantee made by Norberto Mendiola that the proceeds of the loan would be directly paid to her. [11] (emphasis underscoring supplied) On appeal, the Court of Appeals¸ by Decision of January 14, 2008[12], affirmed the trial court’s decision with modification on the amount of the balance of the purchase price which was reduced from P1,783,960 to P1,753,960. It disposed: WHEREFORE, premises considered, the assailed Decision dated March 12, 2004 of the Regional Trial Court of Sta. Cruz, Laguna, Branch 91, is AFFIRMED WITH MODIFICATION as to the amount to be paid which is P1,753,960.00. SO ORDERED.[13] (emphasis in the original; underscoring supplied) Petitioner’s motion for reconsideration having been denied by the appellate court by Resolution of February 23, 2009, the present petition for review was filed. The only issue petitioner raises is whether it is subsidiarily liable. The petition is meritorious. In the absence of a lender-borrower relationship between petitioner and Liwayway, there is no inherent obligation of petitioner to release the proceeds of the loan to her. To a banking institution, well-defined lending policies and sound lending practices are essential to perform its lending function effectively and minimize the risk inherent in any extension of credit. Thus, Section X302 of the Manual of Regulations for Banks provides: X-302. To ensure that timely and adequate management action is taken to maintain the quality of the loan portfolio and other risk assets and that adequate loss reserves are set up and maintained at a level sufficient to absorb the loss inherent in the loan portfolio and other risk assets, each bank shall establish a system of identifying and monitoring existing or potential problem loans and other risk assets and of evaluating credit policies vis-à-vis prevailing circumstances and emerging portfolio trends. Management must also recognize that loss reserve is a stabilizing factor and that failure to account appropriately for losses or make adequate provisions for estimated future losses may result in misrepresentation of the bank’s financial condition. In order to identify and monitor loans that a bank has extended, a system of documentation is necessary. Under this fold falls the issuance by a bank of a guarantee which is essentially a promise to repay the liabilities of a debtor, in this case Corazon. It would be contrary to established banking practice if Mendiola issued a bank guarantee, even if no request to that effect was made.The principle of relativity of contracts in Article 1311 of the Civil Code supports petitioner’s cause: 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. If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment provided he communicated his acceptance to the obligor before its revocation. A mere incidental benefit or interest of a person is not sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person. (underscoring supplied) For Liwayway to prove her claim against petitioner, a clear and deliberate act of conferring a favor upon her must be present. A written request would have sufficed to prove this, given the nature of a banking business, not to mention the amount involved. Since it has not been established that petitioner had an obligation to Liwayway, there is no breach to speak of. Liwayway’s claim should only be directed against Corazon. Petitioner cannot thus be held subisidiarily liable. To the Court, Liwayway did not rely on Mendiola’s representations, even if he indeed made them. The contract for Liwayway to sell to Corazon was perfected from the moment there was a meeting of minds upon the properties-object of the contract and upon the price. Only the source of the funds to pay the purchase price was yet to be resolved at the time the two inquired from Mendiola. Consider Liwayway’s testimony: Q: We are referring to the promissory note which you aforementioned a while ago, why did this promissory note come about? A: Because the negotiation was already completed, sir, and the deed of sale will have to be executed, I asked the defendant (Corazon) to execute the promissory note first before I could execute a deed of absolute sale, for assurance that she really pay me, sir.[14] (emphasis and underscoring supplied) That it was on Corazon’s execution of a promissory note that prompted Liwayway to finally execute the Deed of Sale is thus clear. The trial Court’s reliance on the doctrine of apparent authority – that the principal, in this case petitioner, is liable for the obligations contracted by its agent, in this case Mendiola, – does not lie. Prudential Bank v. Court of Appeals[15] instructs: [A] banking corporation is liable to innocent third persons where the representation is made in the course of its business by an agent acting within the general scope of his authority even though, in the particular case, the agent is secretly abusing his authority and attempting to perpetuate fraud upon his principal or some person, for his own ultimate benefit.[16] (underscoring supplied) The onus probandi that attempt to commit fraud attended petitioner’s employee Mendiola’s acts and that he abused his authority lies on Liwayway. She, however, failed to discharge the onus. It bears noting that Mendiola was not privy to the approval or disallowance of Corazon’s application for a loan nor that he would benefit by the approval thereof.

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Aside from Liwayway’s bare allegations, evidence is wanting to show that there was collusion between Corazon and Mendiola to defraud her. Even in Liwayway’s Complaint, the allegation of fraud is specifically directed against Corazon.[17] IN FINE, Liwayway’s cause of action lies against only Corazon. WHEREFORE, the Decision of January 14, 2008 of the Court of Appeals, in so far as it holds petitioner, Prudential Bank and Trust Company (now Bank of the Philippine Islands), subsidiary liable in case its co-defendant Corazon Marasigan, who did not appeal the trial court’s decision, fails to pay the judgment debt, is REVERSED and SET ASIDE. The complaint against petitioner is accordingly DISMISSED. SO ORDERED.

METROPOLITAN BANK and TRUST COMPANY vs. Reynaldo and AdrandeaG.R. No. 164538; August 9, 2010DEL CASTILLO, J.:

“It is a hornbook doctrine in our criminal law that the criminal liability for estafa is not affected by a compromise, for it is a public offense which must be prosecuted and punished by the government on its own motion, even though complete reparation [has] been made of the damage suffered by the private offended party. Since a criminal offense like estafa is committed against the State, the private offended party may not waive or extinguish the criminal liability that the law imposes for the commission of the crime.”[1]

This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks the reversal of the Court of Appeals’ (CA’s) Decision[2] dated October 21, 2002 in CA-G.R. SP No. 58548 and its further Resolution[3][4] dated July 12, 2004 denying petitioner’s Motion for Reconsideration.

Factual Antecedents

On January 31, 1997, petitioner Metropolitan Bank and Trust Company charged respondents before the Office of the City Prosecutor of Manila with the crime of estafa under Article 315, paragraph 1(b) of the Revised Penal Code. In the affidavit[5] of petitioner’s audit officer, Antonio Ivan S. Aguirre, it was alleged that the special audit conducted on the cash and lending operations of its Port Area branch uncovered anomalous/fraudulent transactions perpetrated by respondents in connivance with client Universal Converter Philippines, Inc. (Universal); that respondents were the only voting members of the branch’s credit committee authorized to extend credit accommodation to clients up to P200,000.00; that through the so-called Bills Purchase Transaction, Universal, which has a paid-up capital of only P125,000.00 and actual maintaining balance of P5,000.00, was able to make withdrawals totaling P81,652,000.00[6] against uncleared regional checks deposited in its account at petitioner’s Port Area branch; that, consequently, Universal was able to utilize petitioner’s funds even before the seven-day clearing period for regional checks expired; that Universal’s withdrawals against uncleared regional check deposits were without prior approval of petitioner’s head office; that the uncleared checks were later dishonored by the drawee bank for the reason “Account Closed”; and, that respondents acted with fraud, deceit, and abuse of confidence.

In their defense, respondents denied responsibility in the anomalous transactions with Universal and claimed that they only intended to help the Port Area branch solicit and increase its deposit accounts and daily transactions.

Meanwhile, on February 26, 1997, petitioner and Universal entered into a Debt Settlement Agreement[7]P50,990,976.27[8] as of February 4, 1997 and undertook to pay the same in bi-monthly amortizations in the sum of P300,000.00 starting January 15, 1997, covered by postdated checks, “plus balloon payment of the remaining principal balance and interest and other charges, if any, on December 31, 2001.”[9] whereby the latter acknowledged its indebtedness to the former in the total amount of

Findings of the Prosecutor

Following the requisite preliminary investigation, Assistant City Prosecutor Winnie M. Edad (Prosecutor Edad) in her Resolution[10] dated July 10, 1997 found petitioner’s evidence insufficient to hold respondents liable for estafa. According to Prosecutor Edad:

The execution of the Debt Settlement Agreement puts complainant bank in estoppel to argue that the liability is criminal. Since the agreement was made even before the filing of this case, the relations between the parties [have] change[d], novation has set in and prevented the incipience of any criminal liability on the part of respondents.[11]

Thus, Prosecutor Edad recommended the dismissal of the case:

WHEREFORE, for insufficiency of evidence, it is respectfully recommended that the case be dismissed.[12]

On December 9, 1997, petitioner appealed the Resolution of Prosecutor Edad to the Department of Justice (DOJ) by means of a Petition for Review.[13]

Ruling of the Department of JusticeOn June 22, 1998, the DOJ dismissed the petition ratiocinating that:

It is evident that your client based on the same transaction chose to file estafa only against its employees and treat with kid gloves its big time client Universal who was the one who benefited from this transaction and instead, agreed that it should be paid on installment basis.

To allow your client to make the choice is to make an unwarranted classification under the law which will result in grave injustice against herein respondents. Thus, if your client agreed that no estafa was committed in this transaction with Universal who was the principal player and beneficiary of this transaction[,] more so with herein respondents whose liabilities are based only on conspiracy with Universal.

Equivocally, there is no estafa in the instant case as it was not clearly shown how respondents misappropriated the P53,873,500.00 which Universal owed your client after its checks deposited with Metrobank were dishonored. Moreover, fraud is not present considering that the Executive Committee and the Credit Committee of Metrobank were duly notified of these transactions which they approved. Further, no damage was caused to your client as it agreed [to] the settlement [with] Universal.[14]

A Motion for Reconsideration[15] was filed by petitioner, but the same was denied on March 1, 2000 by then Acting Secretary of Justice Artemio G. Tuquero.[16]

Aggrieved, petitioner went to the CA by filing a Petition for Certiorari & Mandamus.[17]

Ruling of the Court of Appeals

By Decision[18] of October 21, 2002, the CA affirmed the twin resolutions of the Secretary of Justice. Citing jurisprudence[19] wherein we ruled that while novation does not extinguish criminal liability, it may prevent the rise of such liability as long as it occurs prior to the filing of the criminal information in court.[20] Hence, according to the CA, “[j]ust as Universal cannot be held responsible under the bills purchase transactions on

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account of novation, private respondents, who acted in complicity with the former, cannot be made liable [for] the same transactions.”[21] The CA added that “[s]ince the dismissal of the complaint is founded on legal ground, public respondents may not be compelled by mandamus to file an information in court.”[22]

Incidentally, the CA totally ignored the Comment[23] of the Office of the Solicitor General (OSG) where the latter, despite being the statutory counsel of public respondent DOJ, agreed with petitioner that the DOJ erred in dismissing the complaint. It alleged that where novation does not extinguish criminal liability for estafa neither does restitution negate the offense already committed.[24]

Additionally, the OSG, in sharing the views of petitioner contended that failure to implead other responsible individuals in the complaint does not warrant its dismissal, suggesting that the proper remedy is to cause their inclusion in the information.[25] This notwithstanding, however, the CA disposed of the petition as follows:

WHEREFORE, the petition is DENIED due course and, accordingly, DISMISSED. Consequently, the resolutions dated June 22, 1998 and March 1, 2000 of the Secretary of Justice are AFFIRMED.

SO ORDERED.[26]

Hence, this instant petition before the Court.

On November 8, 2004, we required[27] respondents to file Comment, not a motion to dismiss, on the petition within 10 days from notice. The OSG filed a Manifestation and Motion in Lieu of Comment[28] while respondent Jose C. Adraneda (Adraneda) submitted his Comment[29] on the petition. The Secretary of Justice failed to file the required comment on the OSG’s Manifestation and Motion in Lieu of Comment and respondent Rogelio Reynado (Reynado) did not submit any. For which reason, we issued a show cause order[30] on July 19, 2006. Their persistent non-compliance with our directives constrained us to resolve that they had waived the filing of comment and to impose a fine of P1,000.00 on Reynado. Upon submission of the required memorandum by petitioner and Adraneda, the instant petition was submitted for resolution.

Issues

Petitioner presented the following main arguments for our consideration:

1. Novation and undertaking to pay the amount embezzled do not extinguish criminal liability.

2. It is the duty of the public prosecutor to implead all persons who appear criminally liable for the offense charged.

Petitioner persistently insists that the execution of the Debt Settlement Agreement with Universal did not absolve private respondents from criminal liability for estafa. Petitioner submits that the settlement affects only the civil obligation of Universal but did not extinguish the criminal liability of the respondents. Petitioner thus faults the CA in sustaining the DOJ which in turn affirmed the finding of Prosecutor Edad for committing apparent error in the appreciation and the application of the law on novation. By petitioner’s claim, citing Metropolitan Bank and Trust Co. v. Tonda,[31] the “negotiations pertain [to] and affect only the civil aspect of the case but [do] not preclude prosecution for the offense already committed.”[32]

In his Comment, Adraneda denies being a privy to the anomalous transactions and passes on the sole responsibility to his co-respondent Reynado as the latter was able to conceal the pertinent documents being the head of petitioner’s Port Area branch. Nonetheless, he contends that because of the Debt Settlement Agreement, they cannot be held liable for estafa.

The OSG, for its part, instead of contesting the arguments of petitioner, even prayed before the CA to give due course to the petition contending that DOJ indeed erred in dismissing the complaint for estafa.

Given the facts of the case, the basic issue presented before this Court is whether the execution of the Debt Settlement Agreement precluded petitioner from holding respondents liable to stand trial for estafa under Art. 315 (1)(b) of the Revised Penal Code.[33]

Our Ruling

We find the petition highly meritorious.

Novation not a mode of extinguishing

criminal liability for estafa; Criminal liability for estafa not affected by compromise or novation of contract.

Initially, it is best to emphasize that “novation is not one of the grounds prescribed by the Revised Penal Code for the extinguishment of criminal liability.”[34]

In a catena of cases, it was ruled that criminal liability for estafa is not affected by a compromise or novation of contract. In Firaza v. People[35] and Recuerdo v. People,[36] this Court ruled that in a crime of estafa, reimbursement or belated payment to the offended party of the money swindled by the accused does not extinguish the criminal liability of the latter. We also held in People v. Moreno[37] and in People v. Ladera[38]Metropolitan Bank and Trust Company v. Tonda[39] cited by petitioner, we held that in a crime of estafa, reimbursement of or compromise as to the amount misappropriated, after the commission of the crime, affects only the civil liability of the offender, and not his criminal liability. that “criminal liability for estafa is not affected by compromise or novation of contract, for it is a public offense which must be prosecuted and punished by the Government on its own motion even though complete reparation should have been made of the damage suffered by the offended party.” Similarly in the case of

Thus, the doctrine that evolved from the aforecited cases is that a compromise or settlement entered into after the commission of the crime does not extinguish accused’s liability for estafa. Neither will the same bar the prosecution of said crime. Accordingly, in such a situation, as in this case, the

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complaint for estafa against respondents should not be dismissed just because petitioner entered into a Debt Settlement Agreement with Universal. Even the OSG arrived at the same conclusion:

Contrary to the conclusion of public respondent, the Debt Settlement Agreement entered into between petitioner and Universal Converter Philippines extinguishes merely the civil aspect of the latter’s liability as a corporate entity but not the criminal liability of the persons who actually committed the crime of estafa against petitioner Metrobank. x x x[40]

Unfortunately for petitioner, the above observation of the OSG was wittingly glossed over in the body of the assailed Decision of the CA.

Execution of the Debt Settlement Agreement did not prevent the incipience of criminal liability.

Even if the instant case is viewed from the standpoint of the law on contracts, the disposition absolving the respondents from criminal liability because of novation is still erroneous.

Under Article 1311 of the Civil Code, “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 civil law principle of relativity of contracts provides that “contracts can only bind the parties who entered into it, and it cannot favor or prejudice a third person, even if he is aware of such contract and has acted with knowledge thereof.”[41]

In the case at bar, it is beyond cavil that respondents are not parties to the agreement. The intention of the parties thereto not to include them is evident either in the onerous or in the beneficent provisions of said agreement. They are not assigns or heirs of either of the parties. Not being parties to the agreement, respondents cannot take refuge therefrom to bar their anticipated trial for the crime they committed. It may do well for respondents to remember that the criminal action commenced by petitioner had its genesis from the alleged fraud, unfaithfulness, and abuse of confidence perpetrated by them in relation to their positions as responsible bank officers. It did not arise from a contractual dispute or matters strictly between petitioner and Universal. This being so, respondents cannot rely on subject settlement agreement to preclude prosecution of the offense already committed to the end of extinguishing their criminal liability or prevent the incipience of any liability that may arise from the criminal offense. This only demonstrates that the execution of the agreement between petitioner and Universal has no bearing on the innocence or guilt of the respondents.

Determination of the probable cause, a function belonging to the public prosecutor; judicial review allowed where it has been clearly established that the prosecutor committed grave abuse of discretion.

In a preliminary investigation, a public prosecutor determines whether a crime has been committed and whether there is probable cause that the accused is guilty thereof.[42] The Secretary of Justice, however, may review or modify the resolution of the prosecutor.

“Probable cause is defined as such facts and circumstances that will engender a well-founded belief that a crime has been committed and that the respondent is probably guilty thereof and should be held for trial.”[43][44] Tested against these guidelines, we find that this case falls under the exception rather than the general rule. Generally, a public prosecutor is afforded a wide latitude of discretion in the conduct of a preliminary investigation. By way of exception, however, judicial review is allowed where respondent has clearly established that the prosecutor committed grave abuse of discretion that is, when he has exercised his discretion “in an arbitrary, capricious, whimsical or despotic manner by reason of passion or personal hostility, patent and gross enough as to amount to an evasion of a positive duty or virtual refusal to perform a duty enjoined by law.”

A close scrutiny of the substance of Prosecutor Edad’s Resolution dated July 10, 1997 readily reveals that were it not for the Debt Settlement Agreement, there was indeed probable cause to indict respondents for the crime charged. From her own assessment of the Complaint-Affidavit of petitioner’s auditor, her preliminary finding is that “Ordinarily, the offense of estafa has been sufficiently established.”[45] Interestingly, she suddenly changed tack and declared that the agreement altered the relation of the parties and that novation had set in preventing the incipience of any criminal liability on respondents. In light of the jurisprudence herein earlier discussed, the prosecutor should not have gone that far and executed an apparent somersault. Compounding further the error, the DOJ in dismissing petitioner’s petition, ruled out estafa contrary to the findings of the prosecutor. Pertinent portion of the ruling reads:

Equivocally, there is no estafa in the instant case as it was not clearly shown how respondents misappropriated the P53,873,500.00 which Universal owed your client after its checks deposited with Metrobank were dishonored. Moreover, fraud is not present considering that the Executive Committee and the Credit Committee of Metrobank were duly notified of these transactions which they approved. Further, no damage was caused to your client as it agreed [to] the settlement [with] Universal.[46]

The findings of the Secretary of Justice in sustaining the dismissal of the Complaint are matters of defense best left to the trial court’s deliberation and contemplation after conducting the trial of the criminal case. To emphasize, a preliminary investigation for the purpose of determining the existence of probable cause is “not a part of the trial. A full and exhaustive presentation of the parties’ evidence is not required, but only such as may engender a well-grounded belief that an offense has been committed and that the accused is probably guilty thereof.”[47] A “finding of probable cause does not require an inquiry into whether there is sufficient evidence to procure a conviction. It is enough that it is believed that the act or omission complained of constitutes the offense charged.”[48] So we held in Balangauan v. Court of Appeals:[49]

Applying the foregoing disquisition to the present petition, the reasons of DOJ for affirming the dismissal of the criminal complaints for estafa and/or qualified estafa are determinative of whether or not it committed grave abuse of discretion amounting to lack or excess of jurisdiction. In requiring “hard facts and solid evidence” as the basis for a finding of probable cause to hold petitioners Bernyl and Katherene liable to stand trial for the crime complained of, the DOJ disregards the definition of probable cause – that it is a reasonable ground of presumption that a matter is, or may be, well-founded, such a state of facts in the mind of the prosecutor as would lead a person of ordinary caution and prudence to believe, or entertain an honest or strong suspicion, that a thing is so. The term does not mean “actual and positive cause” nor does it import absolute certainty. It is merely based on opinion and reasonable belief; that is, the belief that the act or omission complained of constitutes the offense charged. While probable cause demands more than “bare suspicion,” it requires “less than evidence which would justify conviction.” Herein, the DOJ reasoned as if no evidence was actually presented by respondent HSBC when in fact the records of the case were teeming; or it discounted the value of such substantiation when in fact the evidence presented was adequate to excite in a reasonable mind the probability that petitioners Bernyl and

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Katherene committed the crime/s complained of. In so doing, the DOJ whimsically and capriciously exercised its discretion, amounting to grave abuse of discretion, which rendered its resolutions amenable to correction and annulment by the extraordinary remedy of certiorari.

In the case at bar, as analyzed by the prosecutor, a prima facie case of estafa exists against respondents. As perused by her, the facts as presented in the Complaint-Affidavit of the auditor are reasonable enough to excite her belief that respondents are guilty of the crime complained of. In Andres v. Justice Secretary Cuevas[50] we had occasion to rule that the “presence or absence of the elements of the crime is evidentiary in nature and is a matter of defense that may be passed upon after a full-blown trial on the merits.”[51]

Thus confronted with the issue on whether the public prosecutor and the Secretary of Justice committed grave abuse of discretion in disposing of the case of petitioner, given the sufficiency of evidence on hand, we do not hesitate to rule in the affirmative. We have previously ruled that grave abuse of discretion may arise when a lower court or tribunal violates and contravenes the Constitution, the law or existing jurisprudence.

Non-inclusion of officers of Universal not a ground for the dismissal of the complaint.

The DOJ in resolving to deny petitioner’s appeal from the resolution of the prosecutor gave another ground – failure to implead the officers of Universal. It explained:

To allow your client to make the choice is to make an unwarranted classification under the law which will result in grave injustice against herein respondents. Thus, if your client agreed that no estafa was committed in this transaction with Universal who was the principal player and beneficiary of this transaction[,] more so with herein respondents whose liabilities are based only on conspiracy with Universal.[52]

The ratiocination of the Secretary of Justice conveys the idea that if the charge against respondents rests upon the same evidence used to charge co-accused (officers of Universal) based on the latter’s conspiratorial participation, the non-inclusion of said co-accused in the charge should benefit the respondents.

The reasoning of the DOJ is flawed.

Suffice it to say that it is indubitably within the discretion of the prosecutor to determine who must be charged with what crime or for what offense. Public prosecutors, not the private complainant, are the ones obliged to bring forth before the law those who have transgressed it.

Section 2, Rule 110 of the Rules of Court[53] mandates that all criminal actions must be commenced either by complaint or information in the name of the People of the Philippines against all persons who appear to be responsible therefor. Thus the law makes it a legal duty for prosecuting officers to file the charges against whomsoever the evidence may show to be responsible for the offense. The proper remedy under the circumstances where persons who ought to be charged were not included in the complaint of the private complainant is definitely not to dismiss the complaint but to include them in the information. As the OSG correctly suggested, the proper remedy should have been the inclusion of certain employees of Universal who were found to have been in cahoots with respondents in defrauding petitioner. The DOJ, therefore, cannot seriously argue that because the officers of Universal were not indicted, respondents themselves should not likewise be charged. Their non-inclusion cannot be perversely used to justify desistance by the public prosecutor from prosecution of the criminal case just because not all of those who are probably guilty thereof were charged.

Mandamus a proper remedy when resolution of public respondent is tainted with grave abuse of discretion.

Mandamus is a remedial measure for parties aggrieved. It shall issue when “any tribunal, corporation, board, officer or person unlawfully neglects the performance of an act which the law specifically enjoins as a duty resulting from an office, trust or station.”[54] The writ of mandamus is not available to control discretion neither may it be issued to compel the exercise of discretion. Truly, it is a matter of discretion on the part of the prosecutor to determine which persons appear responsible for the commission of a crime. However, the moment he finds one to be so liable it becomes his inescapable duty to charge him therewith and to prosecute him for the same. In such a situation, the rule loses its discretionary character and becomes mandatory. Thus, where, as in this case, despite the sufficiency of the evidence before the prosecutor, he refuses to file the corresponding information against the person responsible, he abuses his discretion. His act is tantamount to a deliberate refusal to perform a duty enjoined by law. The Secretary of Justice, on the other hand, gravely abused his discretion when, despite the existence of sufficient evidence for the crime of estafa as acknowledged by the investigating prosecutor, he completely ignored the latter’s finding and proceeded with the questioned resolution anchored on purely evidentiary matters in utter disregard of the concept of probable cause as pointed out in Balangauan. To be sure, findings of the Secretary of Justice are not subject to review unless shown to have been made with grave abuse.[55] The present case calls for the application of the exception. Given the facts of this case, petitioner has clearly established that the public prosecutor and the Secretary of Justice committed grave abuse of discretion.

WHEREFORE, the petition is GRANTED. The assailed Decision of the Court of Appeals in CA-G.R. SP No. 58548 promulgated on October 21, 2002 affirming the Resolutions dated June 22, 1998 and March 1, 2000 of the Secretary of Justice, and its Resolution dated July 12, 2004 denying reconsideration thereon are hereby REVERSED and SET ASIDE. The public prosecutor is ordered to file the necessary information for estafa against the respondents.

SO ORDERED.