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G.R. No. 191555 January 20, 2014UNION BANK OF THE PHILIPPINES, Petitioner, vs.DEVELOPMENT BANK OF THE PHILIPPINES, Respondent.D E C I S I O NPERLAS-BERNABE, J.:Assailed in this petition for review on Certiorari1 are the Decision2 dated November 3, 2009 and Resolution3 dated February 26, 2010 of the Court of Appeals (CA) in CA-G.R. SP No. 93833 which affirmed the Orders4 dated November 9, 2005 and January 30, 2006 of the Regional Trial Court of Makati, Branch 585 (RTC) in Civil Case No. 7648 denying the motion to affirm legal compensation6 filed by petitioner Union Bank of the Philippines (Union Bank) against respondent Development Bank of the Philippines (DBP).The FactsFoodmasters, Inc. (FI) had outstanding loan obligations to both Union Banks predecessor-in-interest, Bancom Development Corporation (Bancom), and to DBP.On May 21, 1979, FI and DBP, among others, entered into a Deed of Cession of Property In Payment of Debt7 (dacion en pago) whereby the former ceded in favor of the latter certain properties (including a processing plant in Marilao, Bulacan [processing plant]) in consideration of the following: (a) the full and complete satisfaction of FIs loan obligations to DBP; and (b) the direct assumption by DBP of FIs obligations to Bancom in the amount of P17,000,000.00 (assumed obligations).8On the same day, DBP, as the new owner of the processing plant, leased back9 for 20 years the said property to FI (Lease Agreement) which was, in turn, obliged to pay monthly rentals to be shared by DBP and Bancom.DBP also entered into a separate agreement10 with Bancom (Assumption Agreement) whereby the former: (a) confirmed its assumption of FIs obligations to Bancom; and (b) undertook to remit up to 30% of any and all rentals due from FI to Bancom (subject rentals) which would serve as payment of the assumed obligations, to be paid in monthly installments. The pertinent portions of the Assumption Agreement reads as follows:WHEREAS, DBP has agreed and firmly committed in favor of Bancom that the above obligations to Bancom which DBP has assumed shall be settled, paid and/or liquidated by DBP out of a portion of the lease rentals or part of the proceeds of sale of those properties of the Assignors conveyed to DBP pursuant to the [Deed of Cession of Property in Payment of Debt dated May 21, 1979] and which are the subject of [the Lease Agreement] made and executed by and between DBP and [FI], the last hereafter referred to as the "Lessee" to be effective as of July 31, 1978.x x x x4. DBP hereby covenants and undertakes that the amount up to 30% of any and all rentals due from the Lessee pursuant to the Lease Agreement shall be remitted by DBP to Bancom at the latters offices at Pasay Road, Makati, Metro Manila within five (5) days from due dates thereof, and applied in payment of the Assumed Obligations. Likewise, the amount up to 30% of the proceeds from any sale of the Leased Properties shall within the same period above, be remitted by DBP to Bancom and applied in payment or prepayment of the Assumed Obligations. x x x.Any balance of the Assumed Obligations after application of the entire rentals and or the entire sales proceeds actually received by Bancom on the Leased Properties shall be paid by DBP to Bancom not later than December 29, 1998. (Emphases supplied)Meanwhile, on May 23, 1979, FI assigned its leasehold rights under the Lease Agreement to Foodmasters Worldwide, Inc. (FW);11 while on May 9, 1984, Bancom conveyed all its receivables, including, among others, DBPs assumed obligations, to Union Bank.12Claiming that the subject rentals have not been duly remitted despite its repeated demands, Union Bank filed, on June 20, 1984, a collection case against DBP before the RTC, docketed as Civil Case No. 7648.13 In opposition, DBP countered, among others, that the obligations it assumed were payable only out of the rental payments made by FI. Thus, since FI had yet to pay the same, DBPs obligation to Union Bank had not arisen.14 In addition, DBP sought to implead FW as third party-defendant in its capacity as FIs assignee and, thus, should be held liable to Union Bank.15In the interim, or on May 6, 1988, DBP filed a motion to dismiss on the ground that it had ceased to be a real-party-in-interest due to the supervening transfer of its rights, title and interests over the subject matter to the Asset Privatization Trust (APT). Said motion was, however, denied by the RTC in an Order dated May 27, 1988.16The RTC Ruling in Civil Case No. 7648Finding the complaint to be meritorious, the RTC, in a Decision17 dated May 8, 1990, ordered: (a) DBP to pay Union Bank the sum of P4,019,033.59, representing the amount of the subject rentals (which, again, constitutes 30% of FIs [now FWs] total rental debt), including interest until fully paid; and (b) FW, as third-party defendant, to indemnify DBP, as third- party plaintiff, for its payments of the subject rentals to Union Bank. It ruled that there lies no evidence which would show that DBPs receipt of the rental payments from FW is a condition precedent to the formers obligation to remit the subject rentals under the Lease Agreement. Thus, when DBP failed to remit the subject rentals to Union Bank, it defaulted on its assumed obligations.18 DBP then elevated the case on appeal before the CA, docketed as CA-G.R. CV No. 35866.The CA Ruling in CA-G.R. CV No. 35866In a Decision19 dated May 27, 1994 (May 27, 1994 Decision), the CA set aside the RTCs ruling, and consequently ordered: (a) FW to pay DBP the amount of P32,441,401.85 representing the total rental debt incurred under the Lease Agreement, including P10,000.00 as attorneys fees; and (b) DBP, after having been paid by FW its unpaid rentals, to remit 30% thereof (i.e., the subject rentals) to Union Bank.20It rejected Union Banks claim that DBP has the direct obligation to remit the subject rentals not only from FWs rental payments but also out of its own resources since said claim contravened the "plain meaning" of the Assumption Agreement which specifies that the payment of the assumed obligations shall be made "out of the portion of the lease rentals or part of the proceeds of the sale of those properties of [FI] conveyed to DBP."21 It also construed the phrase under the Assumption Agreement that DBP is obligated to "pay any balance of the Assumed Obligations after application of the entire rentals and/or the entire sales proceeds actually received by [Union Bank] on the Leased Properties . . . not later than December 29, 1998" to mean that the lease rentals must first be applied to the payment of the assumed obligations in the amount of P17,000,000.00, and that DBP would have to pay out of its own money only in case the lease rentals were insufficient, having only until December 29, 1998 to do so. Nevertheless, the monthly installments in satisfaction of the assumed obligations would still have to be first sourced from said lease rentals as stipulated in the assumption agreement.22 In view of the foregoing, the CA ruled that DBP did not default in its obligations to remit the subject rentals to Union Bank precisely because it had yet to receive the rental payments of FW.23Separately, the CA upheld the RTCs denial of DBPs motion to dismiss for the reason that the transfer of its rights, title and interests over the subject matter to the APT occurred pendente lite, and, as such, the substitution of parties is largely discretionary on the part of the court.At odds with the CAs ruling, Union Bank and DBP filed separate petitions for review on certiorari before the Court, respectively docketed as G.R. Nos. 115963 and 119112, which were thereafter consolidated.The Courts Ruling in G.R. Nos. 115963 & 119112The Court denied both petitions in a Resolution24 dated December 13, 1995. First, it upheld the CAs finding that while DBP directly assumed FIs obligations to Union Bank, DBP was only obliged to remit to the latter 30% of the lease rentals collected from FW, from which any deficiency was to be settled by DBP not later than December 29, 1998.25 Similarly, the Court agreed with the CA that the denial of DBPs motion to dismiss was proper since substitution of parties, in case of transfers pendente lite, is merely discretionary on the part of the court, adding further that the proposed substitution of APT will amount to a novation of debtor which cannot be done without the consent of the creditor.26On August 2, 2000, the Courts resolution became final and executory.27The RTC Execution ProceedingsOn May 16, 2001, Union Bank filed a motion for execution28 before the RTC, praying that DBP be directed to pay the amount of P9,732,420.555 which represents the amount of the subject rentals (i.e., 30% of the FWs total rental debt in the amount of P32,441,401.85). DBP opposed29 Union Banks motion, contending that it sought to effectively vary the dispositive portion of the CAs May 27, 1994 Decision in CA-G.R. CV No. 35866. Also, on September 12, 2001, DBP filed its own motion for execution against FW, citing the same CA decision as its basis.In a Consolidated Order30 dated October 15, 2001 (Order of Execution), the RTC granted both motions for execution. Anent Union Banks motion, the RTC opined that the CAs ruling that DBPs payment to Union Bank shall be demandable only upon payment of FW must be viewed in light of the date when the same was rendered. It noted that the CA decision was promulgated only on May 27, 1994, which was before the December 29, 1998 due date within which DBP had to fully pay its obligation to Union Bank under the Assumption Agreement. Since the latter period had already lapsed, "[i]t would, thus, be too strained to argue that payment by DBP of its assumed obligation[s] shall be dependent on [FWs] ability, if not availability, to pay."31 In similar regard, the RTC granted DBPs motion for execution against FW since its liability to Union Bank and DBP remained undisputed.As a result, a writ of execution32 dated October 15, 2001 (October 15, 2001 Writ of Execution) and, thereafter, a notice of garnishment33 against DBP were issued. Records, however, do not show that the same writ was implemented against FW.DBP filed a motion for reconsideration34 from the Execution Order, averring that the latter issuance varied the import of the CAs May 27, 1994 Decision in CA-G.R. CV No. 35866 in that it prematurely ordered DBP to pay the assumed obligations to Union Bank before FWs payment. The motion was, however, denied on December 5, 2001.35 Thus, DBPs deposits were eventually garnished.36 Aggrieved, DBP filed a petition for certiorari37 before the CA, docketed as CA-G.R. SP No. 68300.The CA Ruling in CA-G.R. SP No. 68300In a Decision38 dated July 26, 2002, the CA dismissed DBPs petition, finding that the RTC did not abuse its discretion when it issued the October 15, 2001 Writ of Execution. It upheld the RTCs observation that there was "nothing wrong in the manner how [said writ] was implemented," as well as "in the zealousness and promptitude exhibited by Union Bank" in moving for the same. DBP appealed the CAs ruling before the Court, which was docketed as G.R. No. 155838.The Courts Ruling in G.R. No. 155838In a Decision39 dated January 13, 2004 (January 13, 2004 Decision), the Court granted DBPs appeal, and thereby reversed and set aside the CAs ruling in CA-G.R. SP No. 68300. It found significant points of variance between the CAs May 27, 1994 Decision in CA-G.R. CV No. 35866, and the RTCs Order of Execution/October 15, 2001 Writ of Execution. It ruled that both the body and the dispositive portion of the same decision acknowledged that DBPs obligation to Union Bank for remittance of the lease payments is contingent on FWs prior payment to DBP, and that any deficiency DBP had to pay by December 29, 1998 as per the Assumption Agreement cannot be determined until after the satisfaction of FWs own rental obligations to DBP. Accordingly, the Court: (a) nullified the October 15, 2001 Writ of Execution and all related issuances thereto; and (b) ordered Union Bank to return to DBP the amounts it received pursuant to the said writ.40 Dissatisfied, Union Bank moved for reconsideration which was, however, denied by the Court in a Resolution dated March 24, 2004 with finality. Thus, the January 13, 2004 Decision attained finality on April 30, 2004.41 Thereafter, DBP moved for the execution of the said decision before the RTC. After numerous efforts on the part of Union Bank proved futile, the RTC issued a writ of execution (September 6, 2005 Writ of Execution), ordering Union Bank to return to DBP all funds it received pursuant to the October 15, 2001 Writ of Execution.42Union Banks Motion to Affirm Legal CompensationOn September 13, 2005, Union Bank filed a Manifestation and Motion to Affirm Legal Compensation,43 praying that the RTC apply legal compensation between itself and DBP in order to offset the return of the funds it previously received from DBP. Union Bank anchored its motion on two grounds which were allegedly not in existence prior to or during trial, namely: (a) on December 29, 1998, DBPs assumed obligations became due and demandable;44 and (b) considering that FWI became non-operational and non-existent, DBP became primarily liable to the balance of its assumed obligation, which as of Union Banks computation after its claimed set-off, amounted to P1,849,391.87.45On November 9, 2005, the RTC issued an Order46 denying the above-mentioned motion for lack of merit, holding that Union Banks stated grounds were already addressed by the Court in the January 13, 2004 Decision in G.R. No. 155838. With Union Banks motion for reconsideration therefrom having been denied, it filed a petition for certiorari47 with the CA, docketed as CA-G.R. SP No. 93833.Pending resolution, Union Bank issued Managers Check48 No. 099-0003192363 dated April 21, 2006 amounting to P52,427,250.00 in favor of DBP, in satisfaction of the Writ of Execution dated September 6, 2005 Writ of Execution. DBP, however, averred that Union Bank still has a balance of P756,372.39 representing a portion of the garnished funds of DBP,49 which means that said obligation had not been completely extinguished.The CA Ruling in CA-G.R. SP No. 93833In a Decision50 dated November 3, 2009, the CA dismissed Union Banks petition, finding no grave abuse of discretion on the RTCs part. It affirmed the denial of its motion to affirm legal compensation considering that: (a) the RTC only implemented the Courts January 13, 2004 Decision in G.R. No. 155838 which by then had already attained finality; (b) DBP is not a debtor of Union Bank; and (c) there is neither a demandable nor liquidated debt from DBP to Union Bank.51Undaunted, Union Bank moved for reconsideration which was, however, denied in a Resolution52 dated February 26, 2010; hence, the instant petition.The Issue Before the CourtThe sole issue for the Courts resolution is whether or not the CA correctly upheld the denial of Union Banks motion to affirm legal compensation.The Courts RulingThe petition is bereft of merit. Compensation is defined as a mode of extinguishing obligations whereby two persons in their capacity as principals are mutual debtors and creditors of each other with respect to equally liquidated and demandable obligations to which no retention or controversy has been timely commenced and communicated by third parties.53 The requisites therefor are provided under Article 1279 of the Civil Code which reads as follows:Art. 1279. In order that compensation may be proper, it is necessary:(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated;(3) That the two debts be due;(4) That they be liquidated and demandable;(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor.1awp++i1 (Emphases and underscoring supplied)The rule on legal54 compensation is stated in Article 1290 of the Civil Code which provides that "[w]hen all the requisites mentioned in Article 1279 are present, compensation takes effect by operation of law, and extinguishes both debts to the concurrent amount, even though the creditors and debtors are not aware of the compensation."In this case, Union Bank filed a motion to seek affirmation that legal compensation had taken place in order to effectively offset (a) its own obligation to return the funds it previously received from DBP as directed under the September 6, 2005 Writ of Execution with (b) DBPs assumed obligations under the Assumption Agreement. However, legal compensation could not have taken place between these debts for the apparent reason that requisites 3 and 4 under Article 1279 of the Civil Code are not present. Since DBPs assumed obligations to Union Bank for remittance of the lease payments are in the Courts words in its Decision dated January 13, 2004 in G.R. No. 155838 " contingent on the prior payment thereof by [FW] to DBP," it cannot be said that both debts are due (requisite 3 of Article 1279 of the Civil Code). Also, in the same ruling, the Court observed that any deficiency that DBP had to make up (by December 29, 1998 as per the Assumption Agreement) for the full satisfaction of the assumed obligations " cannot be determined until after the satisfaction of Foodmasters obligation to DBP." In this regard, it cannot be concluded that the same debt had already been liquidated, and thereby became demandable (requisite 4 of Article 1279 of the Civil Code).The aforementioned Court decision had already attained finality on April 30, 200455 and, hence, pursuant to the doctrine of conclusiveness of judgment, the facts and issues actually and directly resolved therein may not be raised in any future case between the same parties, even if the latter suit may involve a different cause of action.56 Its pertinent portions are hereunder quoted for ready reference:57Both the body and the dispositive portion of the [CAs May 27, 1994 Decision in CA-G.R. CV No. 35866] correctly construed the nature of DBPs liability for the lease payments under the various contracts, to wit:x x x Construing these three contracts, especially the "Agreement" x x x between DBP and Bancom as providing for the payment of DBPs assumed obligation out of the rentals to be paid to it does not mean negating DBPs assumption "for its own account" of the P17.0 million debt x x x. It only means that they provide a mechanism for discharging [DBPs] liability. This liability subsists, since under the "Agreement" x x x, DBP is obligated to pay "any balance of the Assumed Obligations after application of the entire rentals and or the entire sales proceeds actually received by [Union Bank] on the Leased Properties not later than December 29, 1998." x x x It only means that the lease rentals must first be applied to the payment of the P17 million debt and that [DBP] would have to pay out of its money only in case of insufficiency of the lease rentals having until December 29, 1998 to do so. In this sense, it is correct to say that the means of repayment of the assumed obligation is not limited to the lease rentals. The monthly installments, however, would still have to come from the lease rentals since this was stipulated in the "Agreement."x x x xSince, as already stated, the monthly installments for the payment of the P17 million debt are to be funded from the lease rentals, it follows that if the lease rentals are not paid, there is nothing for DBP to remit to [Union Bank], and thus [DBP] should not be considered in default. It is noteworthy that, as stated in the appealed decision, "as regards plaintiffs claim for damages against defendant for its alleged negligence in failing and refusing to enforce a lessors remedies against Foodmasters Worldwide, Inc., the Court finds no competent and reliable evidence of such claim."x x x xWHEREFORE, the decision appealed from is SET ASIDE and another one is RENDERED,(i) Ordering third-party defendant-appellee Foodmasters Worldwide, Inc. to pay defendant and third-party plaintiff-appellant Development Bank of the Philippines the sum of P32,441,401.85, representing the unpaid rentals from August 1981 to June 30, 1987, as well as P10,000.00 for attorneys fees; and(ii) Ordering defendant and third-party plaintiff-appellant Development Bank of the Philippines after having been paid by third-party defendant-appellee the sum of P32,441,401.85, to remit 30% thereof to plaintiff-appellee Union Bank of the Philippines.SO ORDERED.In other words, both the body and the dispositive portion of the aforequoted decision acknowledged that DBPs obligation to Union Bank for remittance of the lease payments is contingent on the prior payment thereof by Foodmasters to DBP.A careful reading of the decision shows that the Court of Appeals, which was affirmed by the Supreme Court, found that only the balance or the deficiency of the P17 million principal obligation, if any, would be due and demandable as of December 29, 1998. Naturally, this deficiency cannot be determined until after the satisfaction of Foodmasters obligation to DBP, for remittance to Union Bank in the proportion set out in the 1994 Decision. (Emphases and underscoring supplied; citations omitted)x x x xIn fine, since requisites 3 and 4 of Article 1279 of the Civil Code have not concurred in this case, no legal compensation could have taken place between the above-stated debts pursuant to Article 1290 of the Civil Code. Perforce, the petition must be denied, and the denial of Union Bank s motion to affirm legal compensation sustained.WHEREFORE, the petition is DENIED. The Decision dated November 3, 2009 and Resolution dated February 26, 2010 of the Court of Appeals in CA-G.R. SP No. 93833 are hereby AFFIRMED.SO ORDERED.

G.R. No. 172592 July 9, 2008SPOUSES WILFREDO N. ONG and EDNA SHEILA PAGUIO-ONG, Petitioners, vs.ROBAN LENDING CORPORATION, Respondent.AUSTRIA-MARTINEZ,*D E C I S I O NCARPIO MORALES, J.:On different dates from July 14, 1999 to March 20, 2000, petitioner-spouses Wilfredo N. Ong and Edna Sheila Paguio-Ong obtained several loans from Roban Lending Corporation (respondent) in the total amount of P4,000,000.00. These loans were secured by a real estate mortgage on petitioners parcels of land located in Binauganan, Tarlac City and covered by TCT No. 297840.1On February 12, 2001, petitioners and respondent executed an Amendment to Amended Real Estate Mortgage2 consolidating their loans inclusive of charges thereon which totaled P5,916,117.50. On even date, the parties executed a Dacion in Payment Agreement3 wherein petitioners assigned the properties covered by TCT No. 297840 to respondent in settlement of their total obligation, and a Memorandum of Agreement4 reading:That the FIRST PARTY [Roban Lending Corporation] and the SECOND PARTY [the petitioners] agreed to consolidate and restructure all aforementioned loans, which have been all past due and delinquent since April 19, 2000, and outstanding obligations totaling P5,916,117.50. The SECOND PARTY hereby sign [sic] another promissory note in the amount of P5,916,117.50 (a copy of which is hereto attached and forms xxx an integral part of this document), with a promise to pay the FIRST PARTY in full within one year from the date of the consolidation and restructuring, otherwise the SECOND PARTY agree to have their "DACION IN PAYMENT" agreement, which they have executed and signed today in favor of the FIRST PARTY be enforced[.]5In April 2002 (the day is illegible), petitioners filed a Complaint,6 docketed as Civil Case No. 9322, before the Regional Trial Court (RTC) of Tarlac City, for declaration of mortgage contract as abandoned, annulment of deeds, illegal exaction, unjust enrichment, accounting, and damages, alleging that the Memorandum of Agreement and the Dacion in Payment executed are void for being pactum commissorium.7Petitioners alleged that the loans extended to them from July 14, 1999 to March 20, 2000 were founded on several uniform promissory notes, which provided for 3.5% monthly interest rates, 5% penalty per month on the total amount due and demandable, and a further sum of 25% attorneys fees thereon,8 and in addition, respondent exacted certain sums denominated as "EVAT/AR."9 Petitioners decried these additional charges as "illegal, iniquitous, unconscionable, and revolting to the conscience as they hardly allow any borrower any chance of survival in case of default."10Petitioners further alleged that they had previously made payments on their loan accounts, but because of the illegal exactions thereon, the total balance appears not to have moved at all, hence, accounting was in order.11Petitioners thus prayed for judgment:a) Declaring the Real Estate Mortgage Contract and its amendments x x x as null and void and without legal force and effect for having been renounced, abandoned, and given up;b) Declaring the "Memorandum of Agreement" xxx and "Dacion in Payment" x x x as null and void for being pactum commissorium;c) Declaring the interests, penalties, Evat [sic] and attorneys fees assessed and loaded into the loan accounts of the plaintiffs with defendant as unjust, iniquitous, unconscionable and illegal and therefore, stricken out or set aside;d) Ordering an accounting on plaintiffs loan accounts to determine the true and correct balances on their obligation against legal charges only; ande) Ordering defendant to [pay] to the plaintiffs: --e.1 Moral damages in an amount not less than P100,000.00 and exemplary damages of P50,000.00;e.2 Attorneys fees in the amount of P50,000.00 plus P1,000.00 appearance fee per hearing; ande.3 The cost of suit.12as well as other just and equitable reliefs.In its Answer with Counterclaim,13 respondent maintained the legality of its transactions with petitioners, alleging that:x x x xIf the voluntary execution of the Memorandum of Agreement and Dacion in Payment Agreement novated the Real Estate Mortgage then the allegation of Pactum Commissorium has no more legal leg to stand on;The Dacion in Payment Agreement is lawful and valid as it is recognized x x x under Art. 1245 of the Civil Code as a special form of payment whereby the debtor-Plaintiffs alienates their property to the creditor-Defendant in satisfaction of their monetary obligation;The accumulated interest and other charges which were computed for more than two (2) years would stand reasonable and valid taking into consideration [that] the principal loan is P4,000,000 and if indeed it became beyond the Plaintiffs capacity to pay then the fault is attributed to them and not the Defendant[.]14After pre-trial, the initial hearing of the case, originally set on December 11, 2002, was reset several times due to, among other things, the parties efforts to settle the case amicably.151avvphi1During the scheduled initial hearing of May 7, 2003, the RTC issued the following order:Considering that the plaintiff Wilfredo Ong is not around on the ground that he is in Manila and he is attending to a very sick relative, without objection on the part of the defendants counsel, the initial hearing of this case is reset to June 18, 2003 at 10:00 oclock in the morning.Just in case [plaintiffs counsel] Atty. Concepcion cannot present his witness in the person of Mr. Wilfredo Ong in the next scheduled hearing, the counsel manifested that he will submit the case for summary judgment.16 (Underscoring supplied)It appears that the June 18, 2003 setting was eventually rescheduled to February 11, 2004 at which both counsels were present17 and the RTC issued the following order:The counsel[s] agreed to reset this case on April 14, 2004, at 10:00 oclock in the morning. However, the counsels are directed to be ready with their memorand[a] together with all the exhibits or evidence needed to support their respective positions which should be the basis for the judgment on the pleadings if the parties fail to settle the case in the next scheduled setting.x x x x18 (Underscoring supplied)At the scheduled April 14, 2004 hearing, both counsels appeared but only the counsel of respondent filed a memorandum.1By Decision of April 21, 2004, Branch 64 of the Tarlac City RTC, finding on the basis of the pleadings that there was no pactum commissorium, dismissed the complaint.20On appeal,21 the Court of Appeals22 noted thatx x x [W]hile the trial court in its decision stated that it was rendering judgment on the pleadings, x x x what it actually rendered was a summary judgment. A judgment on the pleadings is proper when the answer fails to tender an issue, or otherwise admits the material allegations of the adverse partys pleading. However, a judgment on the pleadings would not have been proper in this case as the answer tendered an issue, i.e. the validity of the MOA and DPA. On the other hand, a summary judgment may be rendered by the court if the pleadings, supporting affidavits, and other documents show that, except as to the amount of damages, there is no genuine issue as to any material fact.23Nevertheless, finding the error in nomenclature "to be mere semantics with no bearing on the merits of the case",24 the Court of Appeals upheld the RTC decision that there was no pactum commissorium.25Their Motion for Reconsideration26 having been denied,27 petitioners filed the instant Petition for Review on Certiorari,28 faulting the Court of Appeals for having committed a clear and reversible errorI. . . . WHEN IT FAILED AND REFUSED TO APPLY PROCEDURAL REQUISITES WHICH WOULD WARRANT THE SETTING ASIDE OF THE SUMMARY JUDGMENT IN VIOLATION OF APPELLANTS RIGHT TO DUE PROCESS;II. . . . WHEN IT FAILED TO CONSIDER THAT TRIAL IN THIS CASE IS NECESSARY BECAUSE THE FACTS ARE VERY MUCH IN DISPUTE;III. . . . WHEN IT FAILED AND REFUSED TO HOLD THAT THE MEMORANDUM OF AGREEMENT (MOA) AND THE DACION EN PAGO AGREEMENT (DPA) WERE DESIGNED TO CIRCUMVENT THE LAW AGAINST PACTUM COMMISSORIUM; andIV. . . . WHEN IT FAILED TO CONSIDER THAT THE MEMORANDUM OF AGREEMENT (MOA) AND THE DACION EN PAGO (DPA) ARE NULL AND VOID FOR BEING CONTRARY TO LAW AND PUBLIC POLICY.29The petition is meritorious.Both parties admit the execution and contents of the Memorandum of Agreement and Dacion in Payment. They differ, however, on whether both contracts constitute pactum commissorium or dacion en pago.This Court finds that the Memorandum of Agreement and Dacion in Payment constitute pactum commissorium, which is prohibited under Article 2088 of the Civil Code which provides:The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void."The elements of pactum commissorium, which enables the mortgagee to acquire ownership of the mortgaged property without the need of any foreclosure proceedings,30 are: (1) there should be a property mortgaged by way of security for the payment of the principal obligation, and (2) there should be a stipulation for automatic appropriation by the creditor of the thing mortgaged in case of non-payment of the principal obligation within the stipulated period.31In the case at bar, the Memorandum of Agreement and the Dacion in Payment contain no provisions for foreclosure proceedings nor redemption. Under the Memorandum of Agreement, the failure by the petitioners to pay their debt within the one-year period gives respondent the right to enforce the Dacion in Payment transferring to it ownership of the properties covered by TCT No. 297840. Respondent, in effect, automatically acquires ownership of the properties upon petitioners failure to pay their debt within the stipulated period.Respondent argues that the law recognizes dacion en pago as a special form of payment whereby the debtor alienates property to the creditor in satisfaction of a monetary obligation.32 This does not persuade. In a true dacion en pago, the assignment of the property extinguishes the monetary debt.33 In the case at bar, the alienation of the properties was by way of security, and not by way of satisfying the debt.34 The Dacion in Payment did not extinguish petitioners obligation to respondent. On the contrary, under the Memorandum of Agreement executed on the same day as the Dacion in Payment, petitioners had to execute a promissory note for P5,916,117.50 which they were to pay within one year.35Respondent cites Solid Homes, Inc. v. Court of Appeals36 where this Court upheld a Memorandum of Agreement/Dacion en Pago.37 That case did not involve the issue of pactum commissorium.38That the questioned contracts were freely and voluntarily executed by petitioners and respondent is of no moment, pactum commissorium being void for being prohibited by law.39Respecting the charges on the loans, courts may reduce interest rates, penalty charges, and attorneys fees if they are iniquitous or unconscionable.40This Court, based on existing jurisprudence,41 finds the monthly interest rate of 3.5%, or 42% per annum unconscionable and thus reduces it to 12% per annum. This Court finds too the penalty fee at the monthly rate of 5% (60% per annum) of the total amount due and demandable principal plus interest, with interest not paid when due added to and becoming part of the principal and likewise bearing interest at the same rate, compounded monthly42 unconscionable and reduces it to a yearly rate of 12% of the amount due, to be computed from the time of demand.43 This Court finds the attorneys fees of 25% of the principal, interests and interests thereon, and the penalty fees unconscionable, and thus reduces the attorneys fees to 25% of the principal amount only.44The prayer for accounting in petitioners complaint requires presentation of evidence, they claiming to have made partial payments on their loans, vis a vis respondents denial thereof.45 A remand of the case is thus in order.Prescinding from the above disquisition, the trial court and the Court of Appeals erred in holding that a summary judgment is proper. A summary judgment is permitted only if there is no genuine issue as to any material fact and a moving party is entitled to a judgment as a matter of law.46 A summary judgment is proper if, while the pleadings on their face appear to raise issues, the affidavits, depositions, and admissions presented by the moving party show that such issues are not genuine.47 A genuine issue, as opposed to a fictitious or contrived one, is an issue of fact that requires the presentation of evidence.48 As mentioned above, petitioners prayer for accounting requires the presentation of evidence on the issue of partial payment.But neither is a judgment on the pleadings proper. A judgment on the pleadings may be rendered only when an answer fails to tender an issue or otherwise admits the material allegations of the adverse partys pleadings.49 In the case at bar, respondents Answer with Counterclaim disputed petitioners claims that the Memorandum of Agreement and Dation in Payment are illegal and that the extra charges on the loans are unconscionable.50 Respondent disputed too petitioners allegation of bad faith.51WHEREFORE, the challenged Court of Appeals Decision is REVERSED and SET ASIDE. The Memorandum of Agreement and the Dacion in Payment executed by petitioner- spouses Wilfredo N. Ong and Edna Sheila Paguio-Ong and respondent Roban Lending Corporation on February 12, 2001 are declared NULL AND VOID for being pactum commissorium.In line with the foregoing findings, the following terms of the loan contracts between the parties are MODIFIED as follows:1. The monthly interest rate of 3.5%, or 42% per annum, is reduced to 12% per annum;2. The monthly penalty fee of 5% of the total amount due and demandable is reduced to 12% per annum, to be computed from the time of demand; and3. The attorneys fees are reduced to 25% of the principal amount only.Civil Case No. 9322 is REMANDED to the court of origin only for the purpose of receiving evidence on petitioners prayer for accounting.SO ORDERED.

G.R. No. 172346 July 24, 2013SPOUSES NAMEAL and LOURDES BONROSTRO, Petitioners, vs.SPOUSES JUAN and CONSTANCIA LUNA, Respondents.D E C I S I O NDEL CASTILLO, J.:Questioned in this case is the Court of Appeals' (CA) disquisition on the matter of interest.Petitioners spouses Nameal and Lourdes Bonrostro (spouses Bonrostro) assail through this Petition for Review on Certiorari1 the April 15, 2005 Decision2 of the CA in CA-G.R. CV No. 56414 which affirmed with modifications the April 4, 1997 Decision3 of the Regional Trial Court (RTC) of Quezon City, Branch 104 in Civil Case No. Q-94-18895. They likewise question the CA April17, 2006 Resolution4 denying their motion for partial reconsideration.Factual AntecedentsIn 1992, respondent Constancia Luna (Constancia), as buyer, entered into a Contract to Sell5 with Bliss Development Corporation (Bliss) involving a house and lot identified as Lot 19, Block 26 of New Capitol Estates in Diliman, Quezon City. Barely a year after, Constancia, this time as the seller, entered into another Contract to Sell6 with petitioner Lourdes Bonrostro (Lourdes) concerning the same property under the following terms and conditions:1. The stipulated price of P1,250,000.00 shall be paid by the VENDEE to the VENDOR in the following manner:(a) P200,000.00 upon signing x x x the Contract To Sell, (b) P300,000.00 payable on or before April 30, 1993,(c) P330,000.00 payable on or before July 31, 1993,(d) P417,000.00 payable to the New Capitol Estate, for 15 years at P6,867.12 a month,2. x x x In the event the VENDEE fails to pay the second installment on time, the VENDEE will pay starting May 1, 1993 a 2% interest on the P300,000.00 monthly. Likewise, in the event the VENDEE fails to pay the amount of P630,000.00 on the stipulated time, this CONTRACT TO SELL shall likewise be deemed cancelled and rescinded and x x x 5% of the total contract price of P1,250,000.00 shall be deemed forfeited in favor of the VENDOR. Unpaid monthly amortization shall likewise be deducted from the initial down payment in favor of the VENDOR.7Immediately after the execution of the said second contract, the spouses Bonrostro took possession of the property. However, except for the P200,000.00 down payment, Lourdes failed to pay any of the stipulated subsequent amortization payments.Ruling of the Regional Trial CourtOn January 11, 1994, Constancia and her husband, respondent Juan Luna (spouses Luna), filed before the RTC a Complaint8 for Rescission of Contract and Damages against the spouses Bonrostro praying for the rescission of the contract, delivery of possession of the subject property, payment by the latter of their unpaid obligation, and awards of actual, moral and exemplary damages, litigation expenses and attorneys fees.In their Answer with Compulsory Counterclaim,9 the spouses Bonrostro averred that they were willing to pay their total balance of P630,000.00 to the spouses Luna after they sought from them a 60-day extension to pay the same.10 However, during the time that they were ready to pay the said amount in the last week of October 1993, Constancia and her lawyer, Atty. Arlene Carbon (Atty. Carbon), did not show up at their rendezvous. On November 24, 1993, Lourdes sent Atty. Carbon a letter11 expressing her desire to pay the balance, but received no response from the latter. Claiming that they are still willing to settle their obligation, the spouses Bonrostro prayed that the court fix the period within which they can pay the spouses Luna.The spouses Bonrostro likewise belied that they were not paying the monthly amortization to New Capitol Estates and asserted that on November 18, 1993, they paid Bliss, the developer of New Capitol Estates, the amount of P46,303.44. Later during trial, Lourdes testified that Constancia instructed Bliss not to accept amortization payments from anyone as evidenced by her March 4, 1993 letter12 to Bliss.On April 4, 1997, the RTC rendered its Decision13 focusing on the sole issue of whether the spouses Bonrostros delay in their payment of the installments constitutes a substantial breach of their obligation under the contract warranting rescission. The RTC ruled that the delay could not be considered a substantial breach considering that Lourdes (1) requested for an extension within which to pay; (2) was willing and ready to pay as early as the last week of October 1993 and even wrote Atty. Carbon about this on November 24, 1993; (3) gave Constancia a down payment of P200,000.00; and, (4) made payment to Bliss.The dispositive portion of the said Decision reads:WHEREFORE, in view of the foregoing, judgment is hereby rendered as follows:1.) Declaring the Contract to Sell executed by the plaintiff Constancia and defendant Lourdes with respect to the house and lot located at Blk. 26, Lot 19, New Capitol Estates, Diliman, Quezon City to be in force and effect. And that Lourdes Bonrostro must remain in the possession of the premises.2.) Ordering the defendants to pay plaintiffs within 60 days from receipt of this decision the sum of P300,000.00 plus an interest of 2% per month from April 1993 to November 1993.3.) Ordering the defendants to pay plaintiffs within sixty (60) days from receipt of this decision the sum of P330,000.00 plus an interest of 2% per month from July 1993 to November 1993.4.) Ordering the defendants to reimburse plaintiffs the sum of P214,492.62 which plaintiffs paid to Bliss Development Corporation.No pronouncement as to Cost.SO ORDERED.14As their Motion for Reconsideration15 was likewise denied in an Order16 dated July 15, 1997, the spouses Luna appealed to the CA.17Ruling of the Court of AppealsIn its Decision18 of April 15, 2005, the CA concluded that since the contract entered into by and between the parties is a Contract to Sell, rescission is not the proper remedy. Moreover, the subject contract being specifically a contract to sell a real property on installment basis, it is governed by Republic Act No. 655219 or the Maceda Law, Section 4 of which states:Sec. 4. In case where less than two years of installment were paid, the seller shall give the buyer a grace period of not less than sixty days from the date the installment became due.If the buyer fails to pay the installments due at the expiration of the grace period, the seller may cancel the contract after thirty days from receipt by the buyer of the notice of cancellation or the demand for rescission of the contract by a notarial act. (Emphases supplied)The CA held that while the spouses Luna sent the spouses Bonrostro letters20 rescinding the contract for non-payment of the sum of P630,000.00, the same could not be considered as valid and effective cancellation under the Maceda Law since they were made within the 60-day grace period and were not notarized. The CA concluded that there being no cancellation effected in accordance with the procedure prescribed by law, the contract therefore remains valid and subsisting.The CA also affirmed the RTCs finding that Lourdes was ready to pay her obligation on November 24, 1993.However, the CA modified the RTC Decision with respect to interest, viz:Nevertheless, there is a need to modify the appealed decision insofar as (i) the interest imposed on the sum of P300,000.00 is only for the period April 1993 to November 1993; (ii) the interest imposed on the sum of P330,000.00 is 2% per month and is only for the period July 1993 to November 1993; (iii) it does not impose interest on the amount of P214,492.62 which was paid by Constancia to BLISS in behalf of Lourdes x x xThe rule is that no interest shall be due unless it has been expressly stipulated in writing (Art. 1956, Civil Code). However, the contract does not provide for interest in case of default in payment of the sum of P330,000.00 to Constancia and the monthly amortizations to BLISS.Considering that Lourdes had incurred x x x delay in the performance of her obligations, she should pay (i) interest at the rate of 2% per month on the sum of P300,000.00 from May 1, 1993 until fully paid and (ii) interest at the legal rate on the amounts of P330,000.00 and P214,492.62 from the date of default (August 1, 1993 and April 4, 1997 date of the appealed decision, respectively) until the same are fully paid x x x21Hence, the dispositive portion of the said Decision:WHEREFORE, the appealed decision is AFFIRMED with the MODIFICATIONS that paragraphs 2, 3, and 4 of its dispositive portion shall now read:2.) Ordering the defendants to pay plaintiffs the sum of P300,000.00 plus interest thereon at the rate of 2% per month from May 1, 1993 until fully paid;3.) Ordering the defendants to pay plaintiffs the sum of P330,000.00 plus interest thereon at the legal rate from August 1, 1993 until fully paid; and4.) Ordering the defendants to reimburse plaintiffs the sum of P214,492.62, which plaintiffs paid to Bliss Development Corporation, plus interest thereon at the legal rate from filing of the complaint until fully reimbursed.SO ORDERED.22The spouses Luna no longer assailed the ruling. On the other hand, the spouses Bonrostro filed a Partial Motion for Reconsideration23 questioning the above-mentioned modifications. The CA, however, denied for lack of merit the said motion in a Resolution24 dated April 17, 2006.Hence, this Petition for Review on Certiorari.IssueThe basic issue in this case is whether the CA correctly modified the RTC Decision with respect to interests.The Parties ArgumentsAs may be recalled, the RTC under paragraphs 2 and 3 of the dispositive portion of its Decision ordered the spouses Bonrostro to pay the spouses Luna the sums of P300,000.00 plus interest of 2% per month from April 1993 to November 1993 and P330,000.00 plus interest of 2% per month from July 1993 to November 1993, respectively. The CA modified these by reckoning the payment of the 2% interest on the P300,000.00 from May 1, 1993 until fully paid and by imposing interest at the legal rate on the P330,000.00 reckoned from August 1, 1993 until fully paid.The spouses Bonrostro harp on the factual finding of the RTC, as affirmed by the CA, that Lourdes was willing and ready to pay her obligation as evidenced by her November 24, 1993 letter to Atty. Carbon. They also assert that the sending of the said letter constitutes a valid tender of payment on their part. Hence, they argue that they should not be assessed any interest subsequent to the date of the said letter. Neither should they be ordered to pay interest on the amount of P214,492.62 which covers the amortizations paid by the spouses Luna to Bliss. They point out that it was Constancia who prevented them from fulfilling their obligation to pay the amortizations when she instructed Bliss not to accept payment from them.25The spouses Luna, on the other hand, aver that the November 24, 1993 letter of Lourdes is not equivalent to tender of payment since the mere sending of a letter expressing the intention to pay, without the accompanying payment, cannot be considered a valid tender of payment. Also, if the spouses Bonrostro were really willing and ready to pay at that time and assuming that the spouses Luna indeed refused to accept payment, the former should have resorted to consignation. Anent the payment of amortization, the spouses Luna explain that under the parties Contract to Sell, Lourdes was to assume Constancias balance to Bliss by paying the monthly amortization in order to avoid the cancellation of the earlier Contract to Sell entered into by Constancia with Bliss.26 However, since Lourdes was remiss in paying the same, the spouses Luna were constrained to pay the amortization. They thus assert that reimbursement to them of the said amount with interest is proper considering that by reason of such payment, the spouses Bonrostro were spared from the interests and penalties which would have been imposed by Bliss if the amortizations remained unpaid.Our RulingThe Petition lacks merit.The spouses Bonrostros reliance on the RTCs factual finding that Lourdes was willing and ready to pay on November 24, 1993 is misplaced.As mentioned, the RTC in resolving the Complaint focused on the sole issue of whether the failure of spouses Bonrostro to pay the installments of P300,000.00 on April 30, 1993 and P330,000.00 on July 31, 1993 is a substantial breach of their obligation under the contract as to warrant the rescission of the same.27 The said court ratiocinated, viz:After careful evaluation of the evidence testimonial and documentary, the Court believes that the defendants delay in the payment of the two installments is not so substantial as to warrant rescission of contract. Although, the defendant failed to pay the two installments in due time, she was able to communicate with the plaintiffs through letters requesting for an extension of two months within which to pay the installments. In fact, on November 24, 1993 defendant informed Atty. Arlene Carbon that she was ready to pay the installments and the money is ready for pick-up. However, plaintiff did not bother to get or pick-up the money without any valid reason. It would be very prejudicial on the part of the defendant if the contract to sell be rescinded considering that she made a downpayment of P200,000.00 and made partial amortization to the Bliss Development Corporation. In fact, the defendant testified that she is willing and ready to pay the balance including the interest on November 24, 1993.The Court is of the opinion that the delay in the payment of the balance of the purchase price of the house and lot is not so substantial as to warrant the rescission of the contract to sell. The question of whether a breach of contract is substantial depends upon the attendant circumstance. x x x28Clearly, the RTC arrived at the above-quoted conclusion based on its mistaken premise that rescission is applicable to the case. Hence, its determination of whether there was substantial breach. As may be recalled, however, the CA, in its assailed Decision, found the contract between the parties as a contract to sell, specifically of a real property on installment basis, and as such categorically declared rescission to be not the proper remedy. This is considering that in a contract to sell, payment of the price is a positive suspensive condition, failure of which is not a breach of contract warranting rescission under Article 119129 of the Civil Code but rather just an event that prevents the supposed seller from being bound to convey title to the supposed buyer.30 Also, and as correctly ruled by the CA, Article 1191 cannot be applied to sales of real property on installment since they are governed by the Maceda Law.31There being no breach to speak of in case of non-payment of the purchase price in a contract to sell, as in this case, the RTCs factual finding that Lourdes was willing and able to pay her obligation a conclusion arrived at in connection with the said courts determination of whether the non-payment of the purchase price in accordance with the terms of the contract was a substantial breach warranting rescission therefore loses significance. The spouses Bonrostros reliance on the said factual finding is thus misplaced. They cannot invoke their readiness and willingness to pay their obligation on November 24, 1993 as an excuse from being made liable for interest beyond the said date.The spouses Bonrostro are liable for interest on the installments due from the date of default until fully paid.The spouses Bonrostro assert that Lourdes letter of November 24, 1993 amounts to tender of payment of the remaining balance amounting to P630,000.00. Accordingly, thenceforth, accrual of interest should be suspended.Tender of payment "is the manifestation by the debtor of a desire to comply with or pay an obligation. If refused without just cause, the tender of payment will discharge the debtor of the obligation to pay but only after a valid consignation of the sum due shall have been made with the proper court."32 "Consignation is the deposit of the proper amount with a judicial authority in accordance with rules prescribed by law, after the tender of payment has been refused or because of circumstances which render direct payment to the creditor impossible or inadvisable."33"Tender of payment, without more, produces no effect."34 "To have the effect of payment and the consequent extinguishment of the obligation to pay, the law requires the companion acts of tender of payment and consignation."35As to the effect of tender of payment on interest, noted civilist Arturo M. Tolentino explained as follows:When a tender of payment is made in such a form that the creditor could have immediately realized payment if he had accepted the tender, followed by a prompt attempt of the debtor to deposit the means of payment in court by way of consignation, the accrual of interest on the obligation will be suspended from the date of such tender. But when the tender of payment is not accompanied by the means of payment, and the debtor did not take any immediate step to make a consignation, then interest is not suspended from the time of such tender. x x x x36 (Emphasis supplied)Here, the subject letter merely states Lourdes willingness and readiness to pay but it was not accompanied by payment. She claimed that she made numerous telephone calls to Atty. Carbon reminding the latter to collect her payment, but, neither said lawyer nor Constancia came to collect the payment. After that, the spouses Bonrostro took no further steps to effect payment. They did not resort to consignation of the payment with the proper court despite knowledge that under the contract, non-payment of the installments on the agreed date would make them liable for interest thereon. The spouses Bonrostro erroneously assumed that their notice to pay would excuse them from paying interest. Their claimed tender of payment did not produce any effect whatsoever because it was not accompanied by actual payment or followed by consignation. Hence, it did not suspend the running of interest. The spouses Bonrostro are therefore liable for interest on the subject installments from the date of default until full payment of the sums of P300,000.00 and P330,000.00.The spouses Bonrostro are likewise liable for interest on the amount paid by the spouses Luna to Bliss as amortization.The spouses Bonrostro want to be relieved from paying interest on the amount of P214,492.62 which the spouses Luna paid to Bliss as amortizations by asserting that they were prevented by the latter from fulfilling such obligation. They invoke Art. 1186 of the Civil Code which provides that "the condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment."However, the Court finds Art. 1186 inapplicable to this case. The said provision explicitly speaks of a situation where it is the obligor who voluntarily prevents fulfillment of the condition. Here, Constancia is not the obligor but the obligee. Moreover, even if this significant detail is to be ignored, the mere intention to prevent the happening of the condition or the mere placing of ineffective obstacles to its compliance, without actually preventing fulfillment is not sufficient for the application of Art. 1186.37 Two requisites must concur for its application, to wit: (1) intent to prevent fulfillment of the condition; and, (2) actual prevention of compliance.38In this case, while it is undisputed that Constancia indeed instructed Bliss on March 4, 1994 not to accept payment from anyone but her, there is nothing on record to show that Bliss heeded the instruction of Constancia as to actually prevent the spouses Bonrostro from making payments to Bliss. There is no showing that subsequent to the said letter, the spouses Bonrostro attempted to make payment to and was refused by Bliss. Neither was there a witness presented to prove that Bliss indeed gave effect to the instruction contained in Constancias letter. While Bliss Project Development Officer, Mr. Ariel Cordero, testified during trial, nothing could be gathered from his testimony regarding this except for the fact that Bliss received the said letter.39 In view of these, the spouses Luna could not be said to have placed an effective obstacle as to actually prevent the spouses Bonrostro from making amortization payments to Bliss.On the other hand, there are telling circumstances which militate against the spouses Bonrostros claimed keenness to comply with their obligation to pay the monthly amortization. After the execution of the contract in January 1993, they immediately took possession of the property but failed to make amortization payments. It was only after seven months or on November 18, 1993 that they made payments to Bliss in the amount of P46,303.44.40 Whether the same covers previous unpaid amortizations is also not clear as the receipt does not indicate the same41 and per Statement of Account42 as of March 8, 1994 issued by Bliss, the unpaid monthly amortizations for February to November 1993 in the total amount of P78,271.69 remained outstanding. There was also no payment made of the amortizations due on December 4, 1993 and January 4, 199443 before the filing of the Complaint on January 11, 1994.On the part of the spouses Luna, it is understandable that they paid the amortizations due.1wphi1 The assumption of payment of the monthly amortization to Bliss was made part of the obligations of the spouses Bonrostro under their contract with the spouses Luna precisely to avoid the cancellation of the earlier contract entered into by Constancia with Bliss. But as the spouses Bonrostro failed in this obligation, the spouses Luna were constrained to pay Bliss to avoid the adverse effect of such failure. This act of the spouses Luna proved to be even more beneficial to the spouses Bonrostro as the cancellation of the Contract to Sell between Constancia and Bliss would result in the cancellation of the subsequent Contract to Sell between Constancia and Lourdes. Also, the spouses Bonrostro were relieved from paying the penalties that would have been imposed by Bliss if the monthly amortizations covered by the said payment remained unpaid. The Statements of Account44 issued by Bliss clearly state that each monthly amortization is due on or before the fourth day of every month and a penalty equivalent to 1/10th of 1% per day of delay shall be imposed for all payments made after due date. That translates to 3% monthly or 36% per annum rate of interest, three times higher than the 12% per annum rate of interest correctly imposed by the CA.Hence, the resulting situation is that the spouses Luna are constrained to part with their money while the spouses Bonrostro, despite being remiss in their obligation to pay the monthly amortization, are relieved from paying higher penalties at the expense of the former. This is aside from the fact that the spouses Bonrostro are in continued possession of the subject property and are enjoying the beneficial use thereof. Under the circumstances and considering that the spouses Bonrostro are obviously in delay in complying with their obligation to pay the amortizations due from February 1993 to January 1995 for which the spouses Luna paid P214,492.62,45 the CA correctly ordered the reimbursement to the latter of the said amount with interest. "Delay in the performance of an obligation is looked upon with disfavor because, when a party to a contract incurs delay, the other party who performs his part of the contract suffers damages thereby."46 As discussed, the spouses Luna obviously suffered damages brought about by the failure of the spouses Bonrostro to comply with their obligation on time. "And, sans elaboration of the matter at hand, damages take the form of interest x x x."47Under Article 2209 of the Civil Code, "if the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest x x x." There being no stipulation on interest in case of delay in the payment of amortization, the CA thus correctly imposed interest at the legal rate which is now 12% per annum.WHEREFORE, the Petition for Review on Certiorari is DENIED and the assailed Decision dated April 15, 2005 and the Resolution dated April 17, 2006 of the Court of Appeals in CA-G.R. CV No. 56414 are AFFIRMED.SO ORDERED.

G.R. No. 174882 January 21, 2013MONDRAGON PERSONAL SALES, INC., Petitioner, vs.VICTORIANO S. SOLA, JR., Respondent.D E C I S I O NPERALTA, J.:Before us is a petition for review on certiorari seeking to set aside the Decision1 dated February 10, 2006 and the Resolution2 dated September 6, 2006 issued by the Court of Appeals (CA) in CA-G.R. CV No. 71690.Petitioner Mondragon Personal Sales Inc., a company engaged in the business of selling various consumer products through a network of sales representatives, entered into a Contract of Services3 with respondent Victoriano S. Sola, Jr. for a period of three years commencing on October 2, 1994 up to October 1, 1997. Under the said contract, respondent, as service contractor, would provide service facilities, i.e., bodega cum office, to petitioner's products, sales force and customers in General Santos City and as such, he was entitled to commission or service fee as follows:MONTHLY SALES(net of vat)SERVICE FEEP50,000.00 to 2,500,000.00Five percent (5%)P2,500,001.00 to 3,000.000.00P125,000.00P3,000,001.00 to 3,500,000.00150,000.00P3,500,001.00 UP200,000.004The agreement then came into effect when petitioner's goods were delivered to respondent's bodega and were sold by petitioner's employees. Prior to the execution of the contract, however, respondents wife, Lina Sola, had an existing obligation with petitioner arising from her Franchise Distributorship Agreement with the latter. On January 26, 1995, respondent wrote a letter5 addressed to Renato G. de Leon, petitioner's Vice-President for Finance, wherein he acknowledged and confirmed his wifes indebtedness to petitioner in the amount of P1,973,154.73 (the other accountability in the sum of P1,490,091.15 was still subject to reconciliation) and, together with his wife, bound himself to pay on installment basis the said debt. Consequently, petitioner withheld the payment of respondent's service fees from February to April 1995 and applied the same as partial payments to the debt which he obligated to pay. On April 29, 1995, respondent closed and suspended operation of his office cum bodega where petitioner's products were stored and customers were being dealt with.On May 24, 1995, respondent filed with the Regional Trial Court (RTC) of Davao, a Complaint6 for accounting and rescission against petitioner alleging that petitioner withheld portions of his service fees covering the months from October 1994 to January 1995 and his whole service fees for the succeeding months of February to April 1995, the total amount of which was P222,202.84; that petitioner's act grossly hampered, if not paralyzed, his business operation, thus left with no other recourse, he suspended operations to minimize losses. He prayed for the rescission of the contract of services and for petitioner to render an accounting of his service fees.In its Answer with Counterclaim7 filed on June 14, 1995, petitioner contended that respondents letter dated January 26, 1995 addressed to petitioner's Vice-President for Finance, confirmed and obligated himself to pay on installment basis the accountability of his wife with petitioner, thus respondent's service fees/commission earned for the period of February to April 1995 amounting to P125,040.01 was applied by way of compensation to the amounts owing to it; that all the service fees earned by respondent prior to February 1995 were fully paid to him. By way of counterclaim, petitioner asked for the payment of the amount of P1,547,892.55 which respondent obligated to pay plus interest; the delivery of petitioner's products padlocked in respondent's office cum bodega, the payment for the loss of income in the amount of P833,600.00 as well as the remaining balance of P45,728.30 from the P100,000.00 given by petitioner to respondent as advance money for the purchase of office equipment and the renovation of the bodega cum office.In his Reply and Answer8 to petitioner's counterclaim, respondent averred that he was made to believe that the sales commission contained in petitioner's memorandum dated July 5, 1994 would be applicable to him; that it was improper for petitioner to confuse respondent's transaction with that of his wife as it was divergent in nature and terms.Pending trial, petitioner moved for the issuance of a preliminary attachment and replevin which the RTC granted in its Order dated June 19, 1995 upon the filing of bonds.9 Respondent filed a Motion to Quash the Writ of Attachment, which the RTC denied in an Order dated July 24, 1995.10 As respondent's motion for reconsideration was also denied, he filed with us a petition for certiorari, docketed as G.R. No. 126427, assailing the RTC orders which we dismissed in a Resolution11 dated November 11, 1996 on procedural matters.Trial thereafter ensued.On July 6, 2000, the RTC rendered its Decision,12 the dispositive portion of which reads:FOR THE FOREGOING, judgment is hereby rendered in favor of defendant and against plaintiff, ordering the latter to pay the former:1) the sum of P1,543,643.96 representing the principal balance of plaintiff's account with defendant, plus legal interest from the time of filing of the complaint until fully paid, at the rate of 6% per annum;2) attorney's fees in the amount of P25,000.003) costs of the suit.13In so ruling, the RTC found that in computing the service fees/commissions due respondent, the rate as provided in the contract of service dated January 27, 1995 was controlling, since respondent was a party thereto duly affixing his signature therein; that petitioner's computation of respondent's service fees for the months of February to April 1995 in the total amount of P125,040.01 which was based on the said contract deserved credence. The RTC ruled that while Article 1381 of the Civil Code provides for the grounds for which a contract may be rescinded, none of these grounds existed in this case; that there was no showing of fraud which petitioner employed when it entered into the contract with respondent nor did respondent agree to such a contract without knowing its content, thus the contract was not rescissible.As regards to petitioner's counterclaim that respondent confirmed and assumed the payment of his wife's account with petitioner, the RTC found that respondent obligated himself to pay his wife's account as evidenced by his letter dated January 26, 1995; that after deducting from the confirmed amount of P1,668,683.97 the respondent's service commission for the period from February 1995 to April 1995, which was in the total amount of P125,040.01, the amount owing to petitioner would still be P1,543,643.96. The RTC dismissed the other counterclaims, since they were not substantiated but found petitioner entitled to attorney's fees due to the amount of money involved and the time spent in pursuing the case.Respondent filed his appeal to the CA to which petitioner filed its appellee's brief. On February 10, 2006, the CA rendered its assailed decision, the dispositive portion of which reads as follows:WHEREFORE, in the light of the foregoing premises, herein appeal is GRANTED. Accordingly, the Contract of Services is hereby RESCINDED. Let the case be REMANDED to the court a quo for the proper determination of the amount of service fees unlawfully withheld from the appellant.Furthermore, Appellee is hereby ordered to pay the Appellant attorneys fees in the amount of twenty-five thousand pesos (P25,000.00).14The CA found that under Article 1191 of the Civil Code, respondent was entitled to rescind the contract of services as it was petitioner who breached the same by withholding the service fees lawfully due to the former; that petitioner's act of unlawfully withholding the service fees due respondent constituted a willful and deliberate infringement on contractual obligations which would justify rescission under Article 1191. The CA declared that the contract of services entered into by the parties did not fall under any of the rescissible contracts enumerated under Article 1381 of the Civil Code but under Article 1191 which pertains to rescission of reciprocal obligations as in the instant case.The CA ruled that respondent did not assume his wife's obligation as he did not substitute himself in the shoes of his wife regarding the payment of the latter's liability; that there can be no novation as novation was never presumed. Petitioner's act of withholding respondent's service fee and thereafter applying them to the obligation of his wife was unlawful, considering that respondent never assumed his wife's obligation with petitioner; that there could be no legal compensation, since it was respondent's wife who was principally indebted to petitioner owing from the franchise distributorship agreement she earlier entered into with petitioner; that granting the debt redounded to the benefit of the family and incurred with the consent of respondent, and the spouse, as joint administrators of the community property are solidarily liable with their separate properties for debts incurred, however, such liability is only subsidiary, when the community property is not sufficient to pay for all liabilities, however, in this case, there was no showing that the community property of the spouses was insufficient to pay the debt.The CA ordered the deletion of attorney's fees as it was respondent who was entitled to such award, since he was compelled to litigate to protect his interest for the unjustified act of petitioner.Petitioner's motion for reconsideration was denied in a Resolution dated September 6, 2006.Hence, this petition where petitioner alleges that the CA erred:1. In finding that petitioner breached its contract with respondent and that there is no compensation in accordance to Article 1279 of the Civil Code;2. In finding that respondent did not assume the obligation of his wife;3. In remanding the case to the court a quo for proper determination of service fee withheld when the same has been determined;4. In obliterating the award of petitioner's counterclaim when respondent admitted his obligation to petitioner.15The CA found that petitioner's act of withholding respondent's service fees and thereafter applying them as partial payment to the obligation of respondent's wife with petitioner was unlawful, considering that respondent never assumed his wifes obligation, thus, there can be no legal compensation under Article 1279 of the Civil Code.We do not agree.In his letter dated January 26, 1995 addressed to Mr. Renato G. De Leon, petitioner's Vice-President for Finance, respondent wrote, and which we quote in full:Gentlemen:This refers to the account of my wife, Lina (Beng) Sola, with Mondragon Personal Sales, Inc. in the amount of P3,463,173.88. Of this total amount, we are initially confirming the total amount of P1,973,154.73 as due from Lina (Beng) Sola, while the remaining balance of P1,490,091.15 will be subject to a reconciliation on or before February 5, 1995.In recognition of Lina (Beng) Sola's account, we undertake to pay P100,000.00 on or before February 01, 1995 and the balance of P1,873,154.73 plus interest of 18% per annum and 2% administrative charge per month on the diminishing balance will be covered by postdated checks of not less than P100,000.00 per month starting February 28, 1995 and every end of the month thereafter but not to exceed eighteen (18) months or July 31, 1996.With regards to the remaining balance of P1,490,019.15, we agree that upon final verification of these accounts, we will issue additional postdated checks subject to the same terms and conditions as stated above.We further agree that all subsequent orders that will be released to us will be covered by postdated checks.I fully understand and voluntarily agree to the above undertaking with full knowledge of the consequences which may arise therefrom.Very truly yours,(signed)Victoriano S. Sola16A reading of the letter shows that respondent becomes a co-debtor of his wife's accountabilities with petitioner. Notably, the last paragraph of his letter which states "I fully understand and voluntarily agree to the above undertaking with full knowledge of the consequences which may arise therefrom" and which was signed by respondent alone, shows that he solidarily bound himself to pay such debt. Based on the letter, respondent's wife had an account with petitioner in the amount of P3,463,173.88, out of which only the amount of P1,973,154.73 was confirmed while the remaining amount of P1,490,019.15 would still be subject to reconciliation. As respondent bound himself to pay the amount of P1,973,154.73, he becomes petitioner's principal debtor to such amount.On the other hand, respondent, as petitioner's service contractor, was entitled to a payment of service fees as provided in their contract of services dated January 26, 1995. We note that respondent never refuted the amount of monthly sales recorded but only assailed in the RTC the rate of the service fees which he was entitled to. However, we find that there could be no other computation of the rate of the service fees other than what was provided in the contract of services dated January 26, 1995 signed by respondent and petitioner. Thus, we give credence to petitioner's computation of respondent's service fees for the months of February to April 1995 in the total amount of P125,040.01. Since respondent promised petitioner in his letter dated January 26, 1995, to monthly pay a certain amount to cover the indebtedness to petitioner which he failed to do, the latter withheld the payment of respondent's service fees and applied the same as partial payments of the debt by way of compensation.We find that petitioner's act of withholding respondent's service fees/commissions and applying them to the latter's outstanding obligation with the former is merely an acknowledgment of the legal compensation that occurred by operation of law between the parties.17 Compensation is a mode of extinguishing to the concurrent amount the obligations of persons who in their own right and as principals are reciprocally debtors and creditors of each other. Legal compensation takes place by operation of law when all the requisites are present, as opposed to conventional compensation which takes place when the parties agree to compensate their mutual obligations even in the absence of some requisites.18 Legal compensation requires the concurrence of the following conditions:(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated;(3) That the two debts be due;(4) That they be liquidated and demandable;(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor.19We find the presence of all the requisites for legal compensation. Petitioner and respondent are both principal obligors and creditors of each other. Their debts to each other consist in a sum of money. Respondent acknowledged and bound himself to pay petitioner the amount of P1,973,154.73 which was already due, while the service fees owing to respondent by petitioner become due every month. Respondent's debt is liquidated and demandable, and petitioner's payments of service fees are liquidated and demandable every month as they fall due. Finally, there is no retention or controversy commenced by third persons over either of the debts. Thus, compensation is proper up to the concurrent amount where petitioner owes respondent P125,040.01 for service fees, while respondent owes petitioner P1,973,154.73.As legal compensation took place in this case, there is no basis for respondent to ask for rescission since he was the first to breach their contract when, on April 29, 1995, he suddenly closed and padlocked his bodega cum office in General Santos City occupied by petitioner.1wphi1Petitioner claims that the CA erred in obliterating the RTCs award of its counterclaim which it had alleged and proved during trial and which respondent even admitted.We agree.In his letter dated January 6, 1995, respondent confirmed the amount of P1,973,154.73 owing to petitioner. On September 29, 1997, petitioner wrote another letter20 to petitioner's Credit and Collection Manager, Rudy Machanco, wherein he again confirmed the indebtedness in the amount of P1,973,154.73. In the same letter, he showed the payments he had already made and after deducting the same from the confirmed indebtedness, the total balance remained to be at P1,668,683.97. As we have said earlier, respondent's service fees from February to April 1995 which was in the total amount of P125,040.01 was not assailed at all by respondent in his appeal with the CA, thus he is bound by such computation. Hence, the amount of P125,040.01 which petitioner owes respondent shall be offset against the P1,973,154.73 which respondent owes petitioner, and therefore leaving a balance of P1,543,643.96 which respondent must pay.WHEREFORE, the petition for review is GRANTED. The Decision dated February 10, 2006 and the Resolution dated September 6, 2006 of the Court of Appeals are hereby REVERSED and SET ASIDE. Respondent is hereby ordered to pay petitioner the amount of P1,543,643.96 with 6% percent per annum from June 14, 1995 until finality of this Decision and 12% percent per annum thereafter until full payment.SO ORDERED.