Civil Law Case Digests

CIVIL LAW REVIEW 2 CASE DIGESTPRELIM2nd Semester SY 2013-2014

PRESCRIPTION

1. AZNAR BROTHERS VS. HEIRS OF ANICETO AUGUSTO

Facts: The subject matter of this controversyis Lot No. 4397 owned by Aniceto Augusto whowas married to Petrona Calipan. When Anicetodied on December 3, 1934, he left behind fivechildren: Geronimo, Zacarias, Teoderica,Arsenia and Irenea. Apparently, the propertyremained undivided as evidenced by TaxDeclaration No. 026794 issued to PetronaCalipan in 1945.

Tax Declaration No. 02679 in the name ofCalipan was cancelled pursuant to an"Extrajudicial Partition"5 executed beforeNotary Public Vicente Fanilag. In lieuthereof, tax declaration certificates coveringLot No. 4397 were issued to the following:Filomeno Augusto, Ciriaco Icoy, Felipe Aying,Zacarias Augusto, Abdon Augusto, TeodericaAugusto, Pedro Tampus and Anacleto Augusto.These persons sold the property to petitionerAznar Brothers Realty Company (Aznar Realty)through a Deed of Sale of Unregistered Land.

Respondent Heirs filed Civil Case No. 2666-Lagainst petitioner Aznar Realty, and Carlosand Filomeno Augusto in the RTC of Lapu-LapuCity, Branch 27, for (1) recovery of Lot No.4397; (2) the declaration of the Deed of Saledated February 13, 1962 as null and void; (3)the recognition of the Heirs; (4) thecancellation of the TCT issued to petitionerAznar Realty and (5) the issuance of arestraining order and/or writ of preliminaryinjunction.

Aznar Realty filed an answer interposing thedefense of lack of cause of action andprescription. It asked for a preliminaryhearing on the affirmative defenses as if a

motion to dismiss had been filed. This wasgranted by the trial court.

Issue: Whether or Not the action was barred byprescription?

Ruling: Pet.is without merit, claim isimprescriptible. Respondents anchored theiraction for reconveyance in the trial court onthe nullity of the Deed of Sale betweenpetitioner Aznar and the supposed owners ofthe property. Respondents impugned thevalidity of the document because the sellerswere not the true owners of the land.

Respondents sought the declaration of nullity(inexistence) of the Deed of Sale because ofthe absence of their consent as the true andlawful owners of the land. They argued thatthe sale to petitioner Aznar was void sincethe purported "owners" who signed the Deed ofSale as vendors were not even heirs of AnicetoAugusto and Petrona Calipan. They pointed outthat the 1945 Tax Declaration in the name ofPetrona Calipan indicated that the propertywas undivided as of the time Aniceto Augustodied in 1932.

The "owners" who sold the land to petitionerAznar Realty could not have been the trueowners of the land since there was no showinghow they acquired the land in the first place.Thus, the trial court should not havedismissed the complaint without looking intothe validity of the sale of land to petitionerAznar Realty.

In actions for reconveyance of propertypredicated on the fact that the conveyancecomplained of was null and void ab initio, aclaim of prescription of action would beunavailing. The action or defense for thedeclaration of the inexistence of a contractdoes not prescribe. Neither could laches beinvoked in the case at bar. Laches is adoctrine in equity and our courts arebasically courts of law and not courts ofequity. Equity, which has been aptly describedas "justice outside legality," should beapplied only in the absence of, and never

against, statutory law. Aequetas nunguamcontravenit legis.

The positive mandate of Art. 1410 of the NewCivil Code conferring imprescriptibility toactions for declaration of the inexistence ofa contract should pre-empt and prevail overall abstract arguments based only on equity.Respondents were evicted from their land inNovember 1991 and they filed their complaintwith the trial court on July 28, 1992. Onlyeight months had passed from the time theywere ejected to the time they asserted theirrights over their property. They certainlycould not be deemed to have slept on theirrights.

Thus, the Court of Appeals did not err insetting aside the decision of the trial courtand ordering that the case be remanded fortrial.

2. CAPITLE VS VDA DE GABAN

Facts: Julian’s brother Zacarias died in 1984.He was survived by the other petitionersherein, Aurora P. vda. de Correjado, LiliaCapitle, Artemio Correjado, Cecilia Correjado,Rogelia Correjado (Rogelia), SofronioCorrejado, Vicente Correjado and Gloria vda.de Beduna.

On November 26, 1986, petitioners filed acomplaint[1] for partition of the property anddamages before the Regional Trial Court (RTC)of La Carlota City against respondents,alleging that Fabian contracted two marriages,the first with Brigida Salenda who was themother of Julian, and the subsequent one withMaria Catahay (Maria) who was the mother ofZacarias, Manuel and Francisco; that theproperty remained undivided even after thedeath of Julian in 1950, his children-hereinrespondents having arrogated unto themselvesthe use and enjoyment of the property, to theexclusion of petitioners; and that respondentsrefused to deliver petitioners’ share in theproperty despite demands therefor and forpartition.

To the Complaint respondents countered intheir Answer[2] that in the proceedings in theintestate estate of their great grandfatherSantos Correjado, petitioners were notadjudicated any share in the property, forMaria, the mother of petitioners’ respectivefathers Francisco and Zacarias, was just amistress of Fabian, hence, Francisco andZacarias (as well as Manuel) were illegitimatewho were not entitled to inherit under the oldCivil

RTC dismissed the complaint upon the groundsof prescription and laches.

Issue: W/N the action has already prescribed

Ruling: ART. 1134. Ownership and other realrights over immovable property are acquired byordinary prescription through possession often years.

Art. 1137, New Civil Code

ART. 1137. Ownership and other real rightsover immovables also prescribe throughuninterrupted adverse possession thereof forthirty years, without need of title or of goodfaith.

Assuming arguendo that petitioners’ respectivefathers Francisco and Zacarias were legitimateand, therefore, were co-owners of theproperty: From the moment co-owner Julianoccupied in 1919 and claimed to be theabsolute and exclusive owner of the propertyand denied his brothers any share therein upto the time of his death in 1950, the questioninvolved is no longer one of partition but ofownership in which case imprescriptibility ofthe action for partition can no longer beinvoked. The adverse possession by Julian andhis successors-in-interest- herein respondentsas exclusive owner of the property havingentailed a period of about 67 years at thetime of the filing of the case at bar in 1986,ownership by prescription had vested in them.

As for estoppel by laches which is a creationof equity,[13] since laches cannot interfere

with the running of the period ofprescription, absent any conduct of theparties operating as estoppel,[14] in light ofthe prescription of petitioners’ action,discussion thereof is dispensed with. Sufficeit to state that while laches may not bestrictly applied between near relatives, underthe facts and circumstances of the case,especially the uncontroverted claim ofrespondents that their father Julian, and thedocumented claim of respondent Julieta, hadpaid realty taxes on the property as exclusiveowner, as well as the admission of petitionerRogelia that, as quoted above, she and her co-petitioners “never benefited” or were“deprived” of any benefits from the propertysince 1919 up to the time of the filing ofthe case in 1986 before the RTC or for aperiod of 67 years, despite demands therefor,even an extremely liberal application oflaches would bar the filing of the case.

3. OCCEÑA VS. ESPONILLA

Facts: After the death of the Tordesillasspouses, the lot was inherited by theirchildren Harod and Angela, and grandchildrenArnold and Lilia. In 1951, the heirs executeda Deed of Pacto de Retro Sale1 in favor ofAlberta Morales covering the southwesternportion of the lot

in 1954, Arnold and Lilia executed a Deed ofDefinite Sale of Shares, Rights, Interests andParticipations2 over the same 748 sq. m. lotin favor of Alberta Morales.

Alberta possessed the lot as owner,constructed a house on it and appointed acaretaker to oversee her property. Thereafter,in July 1956, vendor Arnold de la Florborrowed the OCT from Alberta covering thelot. He executed an Affidavit3 acknowledgingreceipt of the OCT in trust and undertook toreturn said title free from changes,modifications or cancellations.Arnold and Angela, nephew and daughterrespectively of the Tordesillas spouses,without the knowledge of Alberta, executed aDeed of Extrajudicial Settlement4 declaring

the two of them as the only co-owners of theundivided 1,198 sq. m. lot no. 265, withoutacknowledging their previous sale of 748 sq.m. thereof to Alberta.

In 1985, vendee Alberta Morales died. Hernieces-heirs, Lydia, Elsa and Dafrosa,succeeded in the ownership of the lot. Monthslater, as the heirs were about to leave forthe United States, they asked Arnold todeliver to them the title to the land so theycan register it in their name. Arnoldrepeatedly promised to do so but failed todeliver the title to them.

On December 4, 1986, after Alberta’s heirsleft for the States, Arnold used the OCT heborrowed from the deceased vendee AlbertaMorales, subdivided the entire lot no. 265into three sublots, and registered them allunder his name, viz: lot no. 265-A (with TCTNo. 16895), lot no. 265-B (with TCT No. 16896)and lot no. 265-C (with TCT No. 16897). Hethen paid the real estate taxes on theproperty.

After the death of Arnold, the three (3)nieces-heirs of Alberta Morales learned aboutthe second sale of their lot to the Occeñaspouses when they were notified by caretakerAbas that they were being ejected from theland. The heirs filed a case7 for annulment ofsale and cancellation of titles, with damages,against the second vendees Occeña spouses. Intheir complaint, they alleged that the Occeñaspurchased the land in bad faith as they wereaware that the lots sold to them had alreadybeen sold to Alberta Morales in 1954. Theyaverred that before the sale, when TomasOcceña conducted an ocular inspection of thelots, Morito Abas, the caretaker appointed byAlberta Morales to oversee her property,warned them not to push through with the saleas the land was no longer owned by vendorArnold as the latter had previously sold thelot to Alberta Morales who had a houseconstructed thereon.

For their part, the Occeña spouses claimedthat the OCT in the name of the originalowners of the lots, the Tordesillas spouses,

was cancelled after it was subdivided betweenAngela and Arnold in 1969; that new TCTs hadbeen issued in the latter’s names; that theywere unaware that the subject lots werealready previously sold to Morales as theydenied that Tomas had a talk with caretakerAbas on the matter; that as of December 4,1987, the TCTs covering the lots were in thename of Arnold and his wife, without anyadverse claim annotated thereon; that vendorArnold represented to them that the occupantsthey saw on the land were squatters and thathe merely tolerated their presence; that theydid not personally investigate the allegedsquatters on the land and merely relied on therepresentation of vendor Arnold; that sometimein 1966-1967, Arnold and his co-heir Angelacaused the survey of the original lot andsubdivided it into 3 lots, without oppositionfrom Morales or her heirs. Thus, three (3)TCTs were issued in 1969 to Arnold and Angelaand, two of the lots were then sold to theOcceña spouses, again without objection fromAlberta Morales.

The Occeña spouses alleged that they werebuyers in good faith as the titles to thesubject lots were free from liens orencumbrances when they purchased them. Theyclaimed that in 1989, Arnold offered to sellthe subject lots to them. On August 13, 1990,after they verified with the Antique Registryof Deeds that Arnold’s TCTs were clean andunencumbered, Arnold signed the instrument ofsale over the subject lots in favor of theOcceñas for P100,000.00 and new titles wereissued in their names.

The Occeñas likewise set up the defenses oflaches and prescription. They argue thatAlberta and plaintiffs-heirs were barred fromprosecuting their action as they failed toassert their right for forty (40) years.

Issue: Whether Or Not The Period Of More ThanForty (40) Years Without Positive Action TakenBy Respondents, As Well As By Alberta Morales,To Protect Their Interest Can Be ConsideredLaches And Thus Their Present Action HasPrescribed

Ruling: the action to annul title filed byrespondents-heirs is not barred by laches andprescription. Firstly, laches is a creation ofequity and its application is controlled byequitable considerations. Laches cannot beused to defeat justice or perpetuate fraud andinjustice. Neither should its application beused to prevent the rightful owners of aproperty from recovering what has beenfraudulently registered in the name ofanother.17 Secondly, prescription does notapply when the person seeking annulment oftitle or reconveyance is in possession of thelot because the action partakes of a suit toquiet title which is imprescriptible.18 Inthis case, Morales had actual possession ofthe land when she had a house built thereonand had appointed a caretaker to oversee herproperty. Her undisturbed possession of theland for a period of fifty (50) long yearsgave her and her heirs a continuing right toseek the aid of a court of equity to determinethe nature of the claim of ownership ofpetitioner-spouses.

In the case at bar, Morales’ caretaker becameaware of the second sale to petitioner-spousesonly in 1991 when he received from the lattera notice to vacate the land. Respondents-heirsdid not sleep on their rights for in 1994,they filed their action to annul petitioners’title over the land. It likewise bears tostress that when vendor Arnold reacquiredtitle to the subject property by means offraud and concealment after he has sold it toAlberta Morales, a constructive trust wascreated in favor of Morales and her heirs. Asthe defrauded parties who were in actualpossession of the property, an action of therespondents-heirs to enforce the trust andrecover the property cannot prescribe. Theymay vindicate their right over the propertyregardless of the lapse of time.21 Hence, therule that registration of the property has theeffect of constructive notice to the wholeworld cannot be availed of by petitioners andthe defense of prescription cannot besuccessfully raised against respondents.

4. SALUDARES VS. CA

Facts: Pomposa died on May 1, 1923, leavingherein petitioners, Enrica, Petra, Restituto,Amado, Delfina, Beata, Vicenta and Isabel, allsurnamed Dator, as her compulsory heirs

Heirs and their father Juan executed a deed ofextra-judicial partition of the share ofPomposa in the Tanza estate. The settlementconferred the eastern half of the Tanza estateto Juan and the western half to the Heirs.Juan was in possession of the entire Tanzaestate. After the partition, the Heirs tookpossession of their share and had the sametenanted by a certain Miguel Dahilig, husbandof Petra, one of the Heirs, who in turnmanaged the land in behalf of the othersiblings. Juan, the father, remained inpossession of his half of the land until hisdeath on April 6, 1940.On December 13, 1976, Isabel Dator applied fora free patent over the entire Tanza estate,including Lot 5793, in behalf of the Heirs. OnMay 26, 1977, after all the requirements werecomplied with, the Register of Deeds of Quezonawarded Free Patent No. 4A-2-8976 and issuedOriginal Certificate of Title (OCT) No. 0-23617 in the names of the Heirs.

Sometime in 1988, the Heirs were informed bytheir tenant that private respondents cut some50 coconut trees located within the subjectlot. Thus, the Heirs sent a letter,3 datedJuly 26, 1988, to private respondentsdemanding an explanation for their intrusioninto their property and unauthorized fellingof trees.

On August 25, 1988, private respondentsretaliated by filing an action forreconveyance against petitioners, docketed ascivil case no. 88-121, in the Regional TrialCourt of Lucena City. Private respondentsalleged in their complaint that: (a) they werethe owners in fee simple and possessors of LotNo. 5793; (b) they bought the land from thesuccessors-in-interest of Petra Dator, one ofthe heirs; (c) they were in possession of thesubject land from 1966 to the present and (d)petitioner Isabel Dator obtained free patentOCT P-23617 over Lot 5793 in favor of the

Heirs by means of fraud and misrepresentation.Thus, private respondents prayed for thecancellation of OCT P-23617 and the issuanceof a new title in their names.

In their answer, the Heirs denied having soldany portion of the Tanza estate to anyone.They alleged that: (a) they and theirpredecessors-in-interest had been and werestill in actual, continuous, adverse andpublic possession of the subject land in theconcept of an owner since time immemorial and(b) title to Lot 5793 was issued in theirfavor after faithful compliance with all therequirements necessary for the issuance of afree patent.

After trial, the lower court rendered adecision dismissing the action primarily onthe ground of prescription of action.

Issue: W/N CA erred when it did not considerthat the complaint filed by the privaterespondents for reconveyance and cancellationof title before the trial court eleven (11)years after a torrens title over the propertywas issued in the name of the petitioners(had) prescribed.Ruling: There is but one instance whenprescription cannot be invoked in an actionfor reconveyance, that is, when the plaintiffis in possession of the land to bereconveyed.9

In a series of cases, this Court permitted thefiling of an action for reconveyance despitethe lapse of ten years and declared that saidaction, when based on fraud, isimprescriptible as long as the land has notpassed to an innocent purchaser for value. Butin all those cases including Vital vs. Anore11on which the appellate court based itsassailed decision, the common factual backdropwas that the registered owners were never inpossession of the disputed property. Instead,it was the persons with the better right orthe legal owners of the land who had alwaysbeen in possession of the same. Thus, theCourt allowed the action for reconveyance toprosper in those cases despite the lapse ofmore than ten years from the issuance of title

to the land. The exception was based on thetheory that registration proceedings could notbe used as a shield for fraud or for enrichinga person at the expense of another.12

In the case at bar, however, it is the rulerather than the exception which should apply.

The trial court declared the Heirs as havingbeen in actual, open and continuous possessionof the disputed lot. On the other hand, theappellate court ruled that it was privaterespondents.

Private respondents presented documentspurportedly showing a series of transactionswhich led to the alleged transfer of ownershipof Lot 5793 from the Heirs to them. Other thanthe presentation of these documents, however,private respondents failed to prove that theywere in actual, open and continuous possessionof Lot 5793.

On the other hand, Isabel Dator, who testifiedfor the Heirs, vehemently denied having signedthe Kasulatan Ng Pagbibilihang Lampasan andpointed out the absence of the signatures ofher other siblings Vicenta, Barcelisa andAdoracion.

The Heirs likewise presented proof of paymentof realty taxes from 1956 to 1974 in the namesof their deceased parents, and from 1975 to1988 in their names.

More importantly, the Heirs convincinglyestablished their open and continuousoccupation of the entire Tanza estate,including Lot 5793, through their tenantMiguel Dahilig.

Saludares identified each and every landmarkand boundary of the subject lot. He alsoenumerated all the trees planted on thesubject lot and, when asked about the fruitsof the land, he told the court that he sharedthe harvest with the surviving Heirs.

In stark contrast, private respondents’witness, farm worker Perpetuo Daya could notidentify the boundaries of the disputed

property, its adjoining owners or recall thedates he worked and tilled the subject lot.

Furthermore, we note private respondent JoseDator’s declaration that he was the cadastralclaimant of and free patent applicant for Lot5794 which was adjacent to Lot 5793. Thisbeing the case, we find private respondents’inaction difficult to understand, consideringthat they were among those who receivednotices of petitioners’ free patentapplication dated January 2, 1979 from theBureau of Lands.14

If private respondents indeed owned Lot 5793,they should have filed an application for freepatent for it just as they did for Lot 5794,or at least opposed the Heirs’ application forfree patent over Lot 5793, to protect theirinterests. As a matter of fact, they wereaware that the Heirs’ tenant, MarceloSaludares, repeatedly harvested the fruits ofLot 5793.

But even assuming that private respondentsindeed validly acquired Lot 5793 in 1966 asthey claimed, they nevertheless slept on theirright to secure title thereto. Theirunexplained inaction for more than 11 yearsrendered their demand for reconveyance stale.Vigilantibus sed non dormientibus jurasubverniunt. The law aids the vigilant, notthose who sleep on their rights. This legalprecept finds perfect application in the caseat bar.

Accordingly, we find that the Court of Appealscommitted reversible error in disregarding theten-year prescriptive period for thereconveyance of registered real property andin giving due course to said action despitethe lapse of more than 11 years from theissuance of title thereto, which was clearlybarred by prescription.

WHEREFORE, the petition is hereby granted. Thedecision of the Court of Appeals, dated July31, 1996, is REVERSED and SET ASIDE and thedecision of the Regional Trial Court, datedAugust 27, 1992, is REINSTATED.

5. OÑO VS. LIM

Facts: Lim filed in the RTC in Cebu City apetition for the reconstitution of the owner’sduplicate copy of OCT No. RO-9969-(O-20449),alleging that said OCT had been lost duringWorld War II by his mother, Luisa, that LotNo. 943 of the Balamban Cadastre in Cebu Citycovered by said OCT had been sold in 1937 toLuisa by Spouses Diego Oño and Estefania Apas(Spouses Oño), the lot’s registered owners;and that although the deed evidencing the salehad been lost without being registered,Antonio Oño (Antonio), the only legitimateheir of Spouses Oño, had executed on April 23,1961 in favor of Luisa a notarized documentdenominated as confirmation of sale,5 whichwas duly filed in the Provincial Assessor’sOffice of Cebu.

Zosimo Oño and petitioner Teofisto Oño (Oños)opposed Lim’s petition, contending that theyhad the certificate of title in theirpossession as the successors-in-interest ofSpouses Oño.

On account of the Oños’ opposition, and uponorder of the RTC, Lim converted the petitionfor reconstitution into a complaint forquieting of title,6 averring additionally thathe and his predecessor-in-interest had been inactual possession of the property since 1937,cultivating and developing it, enjoying itsfruits, and paying the taxes corresponding toit. He prayed, inter alia, that the Oños beordered to surrender the reconstituted owner’sduplicate copy of OCT No. RO-9969-(O-20449),and that said OCT be cancelled and a newcertificate of title be issued in the name ofLuisa in lieu of said OCT.

In their answer,7 the Oños claimed that theirpredecessors-in-interest, Spouses Oño, neversold Lot No. 943 to Luisa; and that theconfirmation of sale purportedly executed byAntonio was fabricated, his signature thereonnot being authentic.

Issue: Whether or not the ownership overregistered land could be lost by prescription,laches, or adverse possession.

Ruling: Prescription was not relevant

The petitioners assert that the lot, beingtitled in the name of their predecessors-in-interest, could not be acquired byprescription or adverse possession.

The assertion is unwarranted.

Prescription, in general, is a mode ofacquiring or losing ownership and other realrights through the lapse of time in the mannerand under the conditions laid down by law.19However, prescription was not relevant to thedetermination of the dispute herein,considering that Lim did not base his right ofownership on an adverse possession over acertain period. He insisted herein, instead,that title to the land had been voluntarilytransferred by the registered ownersthemselves to Luisa, his predecessor-in-interest.

Lim showed that his mother had derived a justtitle to the property by virtue of sale; thatfrom the time Luisa had acquired the propertyin 1937, she had taken over its possession inthe concept of an owner, and had performed herobligation by paying real property taxes onthe property, as evidenced by tax declarationsissued in her name;20 and that in view of thedelivery of the property, coupled with Luisa’sactual occupation of it, all that remained tobe done was the issuance of a new transfercertificate of title in her name.

6. MARIANO VS.PETRON CORPORATION

Facts: Pacita V. Aure, Nicomedes Aure Bundac,and Zeny Abundo (Aure Group), owners of a2,064 square meter parcel of land in TagaytayCity4 (Property), leased the Property to ESSOStandard Eastern, Inc., (ESSO Eastern), aforeign corporation doing business in thecountry through its subsidiary ESSO StandardPhilippines, Inc. (ESSO Philippines). The

lease period is 90 years5 and the rent ispayable monthly for the first 10 years, andannually for the remaining period.6 The leasecontract (Contract) contained an assignmentveto clause barring the parties from assigningthe lease without prior consent of the other.7Excluded from the prohibition were certaincorporations to whom ESSO Eastern mayunilaterally assign its leasehold right.

On 23 December 1977, ESSO Eastern sold ESSOPhilippines to the Philippine National OilCorporation (PNOC).9 Apparently, the AureGroup was not informed of the sale. ESSOPhilippines, whose corporate name wassuccessively changed to Petrophil Corporationthen to Petron Corporation (Petron), tookpossession of the Property.

On 18 November 1993, petitioner Romeo D.Mariano (petitioner) bought the Property fromthe Aure Group and obtained title to theProperty issued in his name bearing anannotation of ESSO Eastern’s lease.10

On 17 December 1998, petitioner sent to Petrona notice to vacate the Property. Petitionerinformed Petron that Presidential Decree No.471 (PD 471),11 dated 24 May 1974, reduced theContract’s duration from 90 to 25 years,ending on 13 November 1993.12 Despitereceiving the notice to vacate on 21 December1998, Petron remained on the Property.

On 18 March 1999, petitioner sued Petron inthe Regional Trial Court of Tagaytay City,Branch 18, (trial court) to rescind theContract and recover possession of theProperty. Aside from invoking PD 471,petitioner alternatively theorized that theContract was terminated on 23 December 1977when ESSO Eastern sold ESSO Philippines toPNOC, thus assigning to PNOC its lease on theProperty, without seeking the Aure Group’sprior consent.

In its Answer, Petron countered that theContract was not breached because PNOC merelyacquired ESSO Eastern’s shares in ESSOPhilippines, a separate corporate entity.Alternatively, Petron argued that petitioner’s

suit, filed on 18 March 1999, was barred byprescription under Article 1389 and Article1146(1) of the Civil Code as petitioner shouldhave sought rescission within four years fromPNOC’s purchase of ESSO Philippines on 23December 197713 or before 23 December 1981.

Issue: W/N the action is barred byPrescription

Ruling: Petitioner’s Suit Barred byPrescription

Petitioner’s waiver of Petron’s contractualbreach was compounded by his long inaction toseek judicial redress. Petitioner filed hiscomplaint nearly 22 years after PNOC acquiredthe leasehold rights to the Property andalmost six years after petitioner bought theProperty from the Aure Group. The more thantwo decades lapse puts this case well withinthe territory of the 10 year prescriptive barto suits based upon a written contract underArticle 1144 (1) of the Civil Code.

7. CARMEN DEL PRADO,   vs. SPOUSES ANTONIO L. CABALLERO and LEONARDA CABALLERO,  

Facts: In a judgment rendered in CadastralCase, Regional Trial Court (RTC), adjudicatedin favor of Spouses Antonio L. Caballeroseveral parcels of land, one of which was thesubject of this controversy. On May 25, 1987, the same court, ordered theNational Land Titles and Deeds RegistrationAdministration to issue the decree ofregistration and the corresponding titles ofthe lots in favor of the Caballeros.4

On June 11, 1990, respondents sold topetitioner, Carmen del Prado, the said lot.Original Certificate of Title (OCT) coveringthe lot was issued only on November 15, 1990,and entered in the "Registration Book" of theCity of Cebu on December 19, 1990.5  Within 1 year from date of entry of decree ofregistration, (On March 20, 1991), petitioner

filed in the same cadastral proceedings a"Petition for Registration of Document UnderPresidential Decree (P.D.) 1529"7 in order thata certificate of title be issued in her name.Respondents opposed, on the main ground thatthe claimed area was substantially excessivethan that originally agreed upon. They movedfor the outright dismissal of the petition ongrounds of prescription and lack ofjurisdiction.RTC found in favor of petitionerCA reverse RTC, because the latter has nojurisdiction. “Petition for registration ofdocument” is not a remedy under PD 1529. Oneyear period has lapsed.

ISSUE: WON prescription has set in.

HELD: Yes. For filing wrong remedy, the 1 yearperiod had expired. Petitioner’s recourse, by filing the petitionfor registration in the same cadastral case,was improper. It is a fundamental principle inland registration that a certificate of titleserves as evidence of an indefeasible andincontrovertible title to the property infavor of the person whose name appearstherein. Such indefeasibility commences afterone year from the date of entry of the decreeof registration. Inasmuch as the petition forregistration of document did not interrupt therunning of the period to file the appropriatepetition for review and considering that theprescribed one-year period had long sinceexpired, the decree of registration, as wellas the certificate of title issued in favor ofrespondents, had become incontrovertible.

8. ANTHONY ORDUNA ET. AL., VS EDUARDOFUENTEBELLA ET AL.,

FACTS: During the lifetime of Gabriel Sr., hesold by installment a parcel of land toOrduna. The sale was not reduced in writing.  After his father’s death, Gabriel Jr.inherited subject lot and for which he wasissued TCT.  Since the Gabriel Sr. – Ordunasales transaction called for payment of thecontract price in installments, Gabriel Jr.received payments from the Orduñas and even

authorized them to enclose the subject lotwith a fence. Gabriel Jr. sold the land to respondents, whomsubsequently registered the land in theirfavor. Petitioners filed an annulment of title, whichthe respondent assailed.The RTC and CA found the purchaser-respondents’ thesis on prescription correctstating in this regard that Respondent’s TCTwas issued on May 16, 2000 while petitionersfiled their complaint for annulment only onJuly 3, 2001. To the courts below, the one-year prescriptive period to assail theissuance of a certificate of title had alreadyelapsed. ISSUE: WON the action to annul title hasprescribed.

HELD: NO.  Having possession of the subjectlot, petitioners’ right to the reconveyancethereof, and the annulment of the coveringtitle, has not prescribed or is not time-barred.  This is so for an action forannulment of title or reconveyance based onfraud is imprescriptible where the suitor isin possession of the property subject of theacts,[36] the action partaking as it does of asuit for quieting of title which isimprescriptible.[37]  Such is the case in thisinstance. Petitioners have possession ofsubject lots as owners having purchased thesame from Gabriel, Sr. subject only to thefull payment of the agreed price.  The prescriptive period for the reconveyanceof fraudulently registered real property is 10years, reckoned from the date of the issuanceof the certificate of title, if the plaintiffis not in possession, but imprescriptible ifhe is in possession of the property.[38] Thus,one who is in actual possession of a piece ofland claiming to be the owner thereof may waituntil his possession is disturbed or his titleis attacked before taking steps to vindicatehis right.[39]  As it is, petitioners’ actionfor reconveyance is imprescriptible.

(Note: As to enforceability of sale notreduced in writing, the statute of frauds

(1403) will not apply because the contract hasbeen partially executed.)

9. HEIRS OF JUANITA PADILLA VS DOMINADORMAGDUA

Facts: Juanita Padilla (Juanita), the motherof petitioners, owned a piece of land locatedin San Roque, Tanauan, Leyte.  After Juanita’sdeath on 1989, petitioners, as legal heirs ofJuanita, sought to have the landpartitioned.  Petitioners sent word to theireldest brother Ricardo Bahia (Ricardo)regarding their plans for the partition of theland.  In a letter dated 5 June 1998 writtenby Ricardo addressed to them, petitioners weresurprised to find out that Ricardo haddeclared the land for himself, prejudicingtheir rights as co-heirs.  It was thendiscovered that Juanita had allegedly executeda notarized Affidavit of Transfer of RealProperty[4] (Affidavit) in favor of Ricardo on4 June 1966 making him the sole owner of theland.  The records do not show that the landwas registered under the Torrens system.           On 26 October 2001, petitionersfiled an action with the RTC for recovery ofownership, possession, partition anddamages.  Petitioners sought to declare voidthe sale of the land by Ricardo’s daughters,Josephine Bahia and Virginia Bahia-Abas, torespondent Dominador Magdua (Dominador).  Thesale was made during the lifetime of Ricardo. The RTC dismissed the case on the ground ofprescription; that the case was filed only in2001 or more than 30 years since the Affidavitwas executed in 1966.  The RTC explained thatwhile the right of an heir to his inheritanceis imprescriptible, yet when one of the co-heirs appropriates the property as his own tothe exclusion of all other heirs, thenprescription can set in.ISSUE: WON the action for partition hasprescribed.HELD: NO. Reckoning date should start from1998, when Ricardo repudiated co-ownershipagainst co-heirs in accordance with Art. 494of the Civil Code.

Ricardo and petitioners are co-heirs or co-owners of the land.  Co-heirs or co-ownerscannot acquire by acquisitive prescription theshare of the other co-heirs or co-ownersabsent a clear repudiation of the co-ownershipSince possession of co-owners is like that ofa trustee, in order that a co-owner’spossession may be deemed adverse tothe cestui que trust or other co-owners, thefollowing requisites must concur: (1) that hehas performed unequivocal acts of repudiationamounting to an ouster of the cestui que trust orother co-owners, (2) that such positive actsof repudiation have been made known tothe cestui que trust or other co-owners,and       (3) that the evidence thereon mustbe clear and convincingIn the present case, the prescriptive periodbegan to run only from 1998, the datepetitioners received notice of Ricardo’srepudiation of their claims to theland.  Since petitioners filed an action forrecovery of ownership and possession,partition and damages with the RTC on 26October 2001, only a mere three years hadlapsed.  This three-year period falls short ofthe 10-year or 30-year acquisitiveprescription period required by law in orderto be entitled to claim legal ownership overthe land. Thus, Dominador cannot invokeacquisitive prescription.

OBLIGATIONS CASES

1. RCPI vs CA and Loreto Dionela

FACTS: The basis of the complaint against thedefendant corporation is a telegram sentthrough its Manila Office to the offendedparty, Loreto Dionela, reading as follows:SA IYO WALANG PAKINABANG DUMATING KA DIYAN-WALA-KANG PADALA DITO KAHIT BULBUL MOPlaintiff-respondent alleges that thedefamatory (libelous) words on the telegramsent to him not only wounded his feelings butalso caused him undue embarrassment andaffected adversely his business as well

because other people have come to know of saiddefamatory words. Defendant corporation as a defense, allegesthat the additional words in Tagalog was aprivate joke between the sending and receivingoperators and that they were not addressed toor intended for plaintiff 

ISSUE: WON the employer is directly andprimarily liable to the civil liabilityarising from the criminal act of itsemployee.

HELD: Yes.The action for damages was filed in the lowercourt directly against respondent corporationnot as an employer subsidiarily liable underthe provisions of Article 1161 of the NewCivil Code in relation to Art. 103 of theRevised Penal Code. The cause of action of theprivate respondent is based on Arts. 19 and 20of the New Civil Code (supra). As well as onrespondent's breach of contract thru thenegligence of its own employees. 1

Petitioner is a domestic corporation engagedin the business of receiving and transmittingmessages. Everytime a person transmits amessage through the facilities of thepetitioner, a contract is entered into. There is no question that in the case at bar,libelous matters were included in the messagetransmitted, without the consent or knowledgeof the sender. There is a clear case of breachof contract by the petitioner in addingextraneous and libelous matters in the messagesent to the private respondent. As acorporation, the petitioner can act onlythrough its employees. Hence the acts of itsemployees in receiving and transmittingmessages are the acts of the petitioner. Since negligence may be hard to substantiatein some cases, we may apply the doctrine ofRES IPSA LOQUITUR (the thing speaks foritself), by considering the presence of factsor circumstances surrounding the injury.

2. GERALDEZ VS CA and Kenstar Travel andTours

Facts: Petitioner opt a 22-day Europe tourtravel package offered by RespondentCorporation. The tour did not end up asexpected by herein petitioner, it did not asrepresented in the brochure: no European tourmanager, hotels were not 1st class and theFilipino tour guide who is supposed toaccompany them is a 1st timer. Petitionerthen filed a breach of contract againstRespondent Corporation for committing acts ofrepresentations constituting fraud incontracting the obligation.

RTC rendered judgment ordering RespondentCorporation to pay petitioner 500,000 as moraldamages, 200,000 as nominal damages, 300,000as exemplary damages and 50,000 as litigationand attorney’s fees (all in pesos).

On appeal, award for moral and exemplarydamages were deleted and a reduction ofnominal damages to 40,000 pesos, this onaccount that the Respondent has substantiallycomplied with the prestation and no malice orbad faith is imputable as aconsequence .

Issue: Whether or not private respondent actedin bad faith or with gross negligence indischarging it’s obligation under contract.

Held: Yes.On the foregoing considerations,respondent court erred in deleting the awardfor moral and exemplary damages which may beawarded in breaches of contract where fraud isevident. Private respondent faulted with fraudin the inducement,which is employed by a party to a contract insecuring the consent of the other.

This fraud or dolo which is present oremployed at the time of birth or perfection ofthe contract may either be dolo causante or doloincidente

Dolo Causante or Causal FraudReferred to in Art 1338, are those deceptionsor misrepresentations of a serious characteremployed by one party and without which theother party would not have entered into thecontract. Dolo causante determines or is the

essential cause of the consent. Effect:nullity of the contract and theindemnification of damages· Dolo Incidente or Incidental FraudReferred to in Art. 1344, are those which arenot serious in character and without which theother party still would have entered into thecontract. Dolo incidente refers only to someparticular or accident of the obligation.Effect: obliges person employing it to paydamages

In either case, whether Kenstar has committeddolo causante or dolo incidente, it isindubitably liable for damages both moral andexemplary. Nominal damages deleted.

3. SPS. CULABA VS CA and San Mig Corp.

FACTS: The spouses engaged in the sale anddistribution of San Miguel Corporation’s (SMC)beer products.  SMC sold beer products oncredit to the Culaba spouses. Thereafter, theCulaba spouses made a partial payment, leavingan unpaid balance.   As they failed to paydespite repeated demands, SMC filed an actionfor collection of a sum of money againstthem .The defendant-spouses denied any liability,claiming that they had already paid theplaintiff in full on four separate occasions.To substantiate this claim, the defendantspresented four (4) Temporary Charge Sales(TCS) Liquidation Receipts.According to the trial court, it was unusualthat defendant Francisco Culaba forgot thename of the collector to whom he made thepayments and that he did not require the saidcollector to print his name on the receipts. According to the petitioners, receivingreceipts from the private respondent’s agentsinstead of its salesmen was a usualoccurrence, as they had been operating thestore since 1979.

ISSUE: WoN petitioner is liable to pay again.

HELD: Yes, payment must be made to truecreditor not on impostor; they were negligent.Payment is a mode of extinguishing anobligation.Article 1240 of the Civil Codeprovides that payment shall be made to theperson in whose favor the obligation has beenconstituted, or his successor-in-interest, orany person authorized to receive it. In thiscase, the payments were purportedly made to a“supervisor” of the private respondent, whowas clad in an SMC uniform and drove an SMCvan. He appeared to be authorized to acceptpayments as he showed a list of customers’accountabilities and even issued SMCliquidation receipts which looked genuine.Unfortunately for petitioner Francisco Culaba,he did not ascertain the identity andauthority of the said supervisor, nor did heask to be shown any identification to provethat the latter was, indeed, an SMCsupervisor. The petitioners relied solely onthe man’s representation that he wascollecting payments for SMC. Thus, thepayments the petitioners claimed they madewere not the payments that discharged theirobligation to the private respondent.Negligence is the omission to do somethingwhich a reasonable man, guided by thoseconsiderations which ordinarily regulate theconduct of human affairs, would do, or thedoing of something, which a prudent andreasonable man would not do.] In the case atbar, the most prudent thing the petitionersshould have done was to ascertain the identityand authority of the person who collectedtheir payments. Failing this, the petitionerscannot claim that they acted in good faithwhen they made such payments. Their claimtherefor is negated by their negligence, andthey are bound by its consequences. Beingnegligent in this regard, the petitionerscannot seek relief on the basis of a supposedagency.

4. SANTOS VENTURA HOCORMA FOUNDATION, INC. VSERNESTO SANTOS & RIVERLAND, INC. G.R. No. 1530004November 5, 2004

FACTS: Subject of the present petition forreview on certiorari is the Decision, dated

January 30, 2002, as well as the April 12,2002, Resolution of the Court of Appeals, Theappellate court reversed the Decision, datedOctober 4, 1996, of the Regional Trial Courtof Makati City, and likewise deniedpetitioner's Motion for Reconsideration. OnOctober 26, 1990, the parties executed aCompromise Agreement which amicably ended alltheir pending litigations. The pertinentportions of the Agreement, include thefollowing: (1) Defendant Foundation shall payPlaintiff Santos P14.5 Million on (a) P1.5Million immediately upon the execution of thisagreement and (b) The balance of P13 Millionshall be paid, whether in one lump sum or ininstallments, at the discretion of theFoundation, within a period of not more thantwo years from the execution of thisagreement; (2) Immediately upon the executionof this agreement (and [the] receipt of theP1.5 Million), plaintiff Santos shall causethe dismissal with prejudice of Civil Cases;(3) Failure of compliance of any of theforegoing terms and conditions by either orboth parties to this agreement shall ipsofacto and ipso jure automatically entitle theaggrieved party to a writ of execution for theenforcement of this agreement.

In compliance with the Compromise Agreement,respondent Santos moved for the dismissal ofthe aforesaid civil cases. He also caused thelifting of the notices of lis pendens on thereal properties involved. For its part,petitioner SVHFI, paid P1.5 million torespondent Santos, leaving a balance of P13million.

On October 28, 1992, respondent Santos sentanother letter to petitioner inquiring when itwould pay the balance of P13 million. Therewas no response from petitioner. Consequently,respondent Santos applied with the RegionalTrial Court of Makati City, for the issuanceof a writ of execution of its compromisejudgment dated September 30, 1991. The RTCgranted the writ. Petitioner, however, filed numerous motions toblock the enforcement of the said writ. Thechallenge of the execution of the aforesaidcompromise judgment even reached the Supreme

Court. All these efforts, however, werefutile.

On November 22, 1994, petitioner's realproperties located in Mabalacat, Pampanga wereauctioned. In the said auction, Riverland,Inc. was the highest bidder for P12 millionand it was issued a Certificate of Salecovering the real properties subject of theauction sale. Subsequently, another auctionsale was held on February 8, 1995, for thesale of real properties of petitioner inBacolod City. Again, Riverland, Inc. was thehighest bidder. The Certificates of Saleissued for both properties provided for theright of redemption within one year from thedate of registration of the said properties.On June 2, 1995, Santos and Riverland Inc.filed a Complaint for Declaratory Relief andDamages alleging that there was delay on thepart of petitioner in paying the balance ofP13 million.

Issues: a)W/N the CA committed reversibleerror when it awarded legal interest in favorof the respondents notwithstanding the factthat neither in the compromise agreement norin the compromise of judgment by the judgeprovides for payment of interest to therespondent?b)W/N the CA erred in awarding legal interestto the respondents although the obligation ofthe petitioner to the respondent is to pay asum of money that had been converted into anobligation to pay in kind? c)W/N respondents are barred from demandingpayment of interest by reason of the waiverprovision in the compromise agreement, whichbecame the law among the parties.

Held:On October 4, 1996, the trial courtrendered a Decision dismissing therespondents' complaint and ordering them topay attorney's fees and exemplary damages topetitioner. Respondents then appealed to theCourt of Appeals.

The only issue to be resolved is whether therespondents are entitled to legal interest.The appellate court reversed the ruling of thetrial court: WHEREFORE, finding merit in the

appeal, the appealed Decision is herebyREVERSED and judgment is hereby renderedordering appellee SVHFI to pay appellantsSantos and Riverland, Inc.: (1) legal intereston the principal amount of P13 million at therate of 12% per annum from the date of demandon October 28, 1992 up to the date of actualpayment of the whole obligation; and (2)P20,000 as attorney's fees and costs of suit.SO ORDERED.Delay

Delay as used in this article is synonymous todefault or mora which means delay in thefulfillment of obligations. It is the non-fulfillment of the obligation with respect totime. In the case at bar, the obligation wasalready due and demandable after the lapse ofthe two-year period from the execution of thecontract. The two-year period ended on October26, 1992. When the respondents gave a demandletter on October 28, 1992, to the petitioner,the obligation was already due and demandable.Furthermore, the obligation is liquidatedbecause the debtor knows precisely how much heis to pay and when he is to pay it.The petition lacks meritIn the case at bar, the Compromise Agreementwas entered into by the parties on October 26,1990. It was judicially approved on September30, 1991. Applying existing jurisprudence, thecompromise agreement as a consensual contractbecame binding between the parties upon itsexecution and not upon its court approval.From the time a compromise is validly enteredinto, it becomes the source of the rights andobligations of the parties thereto. Thepurpose of the compromise is precisely toreplace and terminate controverted claims.

As to the remaining P13 million, the terms andconditions of the compromise agreement areclear and unambiguous. It provides that thebalance of P13 Million shall be paid, whetherin one lump sum or in installments, at thediscretion of the Foundation, within a periodof not more than two (2) years from theexecution of this agreement.

WHEREFORE, the petition is DENIED for lack ofmerit. The Decision dated January 30, 2002 of

the Court of Appeals and its April 12, 2002Resolution in CA-G.R. CV No. 55122 areAFFIRMED. Costs against petitioner. SO ORDERED

5. Santos vs. Pizarro; 465 SCRA 232

FACTS: In April 1994, Viron Transit driverSibayan was charged with reckless imprudenceresulting to multiple homicide and multiplephysical injuries for which Sibayan waseventually convicted in December 1998. Asthere was a reservation to file a separatecivil action, no pronouncement of civilliability was made by the MCTC. In October2000 Santos filed a complaint for damagesagainst Sibayan and Rondaris, the presidentand chairman of VironTransit. Viron Transitmoved for the dismissal of the complaintciting, among others, prescription allegingthat actions based on quasi delict prescribein 4 years from the accrual of the cause ofaction.

HELD: Petitioners expressly made a reservationof their right to file a separate civil actionas a result of the crime committed by Sibayan.On account of this reservation the MCTC didnot make any pronouncement as to the latter’scivil liability. Although there wereallegations of negligence on the part ofSibayan and Viron Transit, such does notnecessarily mean that petitioners werepursuing a cause of action based on quasidelict, considering that at the time of thefiling of the complaint, the cause of actionex quasi delicto had already prescribed.Besides, in cases of negligence, the offendedparty has the choice between an action toenforce liability arising from crime under theRevised Penal Code and an action for quasidelict under the Civil Code. An act oromission causing damage to another may giverise to 2 separate civil liabilities on thepart of the offender, i.e. (1) civil liabilityex delicto, under Article 100 of the RPC; and(2)independent civil liabilities (a) notarising from an act or omission complained ofas a felony, e.g., culpa contractual orobligations arising from law under Article 31of the Civil Code, intentional torts underArticles 32 and 34, and culpa aquiliana under

Article 2176 of the Civil Code; or (b) wherethe injured party is granted a right to filean action independent and distinct from thecriminal proceedings. While the cause ofaction ex quasi delicto had alreadyprescribed, petitioners can still pursue theremaining avenue opened for them by theirreservation, i.e., the surviving cause ofaction ex delicto. This is so because theprescription of the action ex quasi delictodoes not operate as a bar to an action toenforce the civil liability arising from crimeespecially as the latter action had beenexpressly reserved. We held that the dismissalof the action based on culpa aquiliana is nota bar to the enforcement of the subsidiaryliability of the employer. Once there is aconviction for a felony, final in character,the employer becomes subsidiarily liable ifthe commission of the crime was in dischargeof the duties of the employees. This is sobecause Article 103 of the RPC operates thecontrolling force to obviate the possibilityof the aggrieved party being deprived ofindemnity even after the rendition of a finaljudgment convicting the employee.

6. L AND L FOOTWEAR; 468 SCRA 393

FACTS: "PCI Leasing and L & L Lawrence enteredinto several ‘LOAN’ contracts embodied inseveral Memoranda of Agreement and DisclosureStatements from 1994 up to 1997 involvingvarious shoe making equipment. x x x.

"As a condition for the ‘loan’ extended by PCILeasing to L & L, the latter was also made toenter into several ‘LEASE CONTRACTS’ embodiedin numerous Lease Schedules whereby theimported shoe making equipment would beconsidered as the leased property. Pursuant tothe agreement between the parties, L & L gavePCI Leasing a THIRTY (30%) PERCENT GUARANTYDEPOSIT for ALL the ‘leased contracts’ betweenthem in the total sum of US$359,525.90.Furthermore, PCI Leasing received from L & L atotal of US$1,164,380.42 as rental paymentsunder the numerous Lease Schedules."Sae Chae Lee, the former President of L & L,was made to sign a x x x Continuing Guarantyof Lease Obligations dated 16 May 1994

securing the payment of the obligation of L &L under [a] Lease Agreement dated 13 May 1994.

"L & L, by reason of the economic crisis thathit the country coupled with the cancellationof the contracts with its buyers abroad andits labor problems, failed to meet itsobligations on time. For this reason, L & Ltried its best to negotiate with the PCILeasing for a possible amicable settlementbetween the parties.

"In the course of the negotiation between theparties, PCI Leasing sent to L & L a letterdated 05 May 1998, stating that: ‘Demand ishereby made on you to pay in full theoutstanding balance in the amount of$826,003.27 plus penalty charges amounting to$6,329.05 on or before May 12, 1998 or tosurrender to us the various equipments.

PCI Leasing filed a complaint for recovery ofsum of money and/or personal property withprayer for the issuance of a writ of replevinagainst L & L Lawrence Footwear, Inc., SaeChae Lee and a certain John Doe with theRegional Trial Court of Quezon City.

The RTC rendered a decision against thepetitioner. CA affirmed the trial courtdecision.

ISSUE:Whether a corporation can be held inESTOPPEL by reason of the representation ofits officer

HELD: No EstoppelPetitioners emphasize that the account officerof PCI Leasing testified that respondent hadadmittedly deducted the proceeds of the saleof the leased properties from the outstandingobligations. They argue that, by itsadmission, respondent recognized that theproperties were in fact owned by L & LLawrence Corporation. In turn, this factallegedly proves that the Contract between theparties was one of loan, not of lease.

This argument is patently without merit. Nosuch inference can be made from the statementsof the witness. On the contrary, her testimony

reinforced the fact that the true intent ofthe parties was to enter into a contract knownas a financial leasing agreement.

In such an agreement, "a finance companypurchases on behalf of or at the instance ofthe lessee the equipment which the latter isinterested to buy but has insufficient fundsfor the purpose. The finance company thereforeleases the equipment to the lessee inconsideration of the periodic payment by thelessee of a fixed amount of ‘rental.’"Recognized by this Court as being fairlycommon transactions in the commercial world,agreements such as these have been accepted asgenuine and legitimate. In Cebu ContractorsConsortium v. CA, the Court elucidated on thenature of a financial leasing agreement asfollows:

"A financing lease may be seen to be acontract sui generis, possessing some but notnecessarily all the elements of an ordinary orcivil law lease. Thus, legal title to theequipment leased is lodged in the financiallessor. The financial lessee is entitled tothe possession and use of the leasedequipment. At the same time, the financiallessee is obligated to make periodic paymentsdenominated as lease rentals, which enable thefinancial lessor to recover the purchase priceof the equipment which had been paid to thesupplier thereof."

7. LALICON VS. NHA; JULY 31, 2011

FACTS: On November 25, 1980 the NationalHousing Authority (NHA) executed a Deed ofSale with Mortgage over a Quezon City lot infavor of the spouses Isidro and FlavianaAlfaro. It was provided in the deed of salethat the Alfaros could sell the land withinfive years from the date of its release frommortgage without NHA’s prior written consent.Nine years later the Alfaros sold the land totheir son, Victor Alfaro, who had a common-lawwife, Cecilia, who had the means, had a housebuilt on the property and paid for theamortizations. On March 21, 1991, the NHAreleased the mortgage. After four and a half

years since the mortgaged was released Victorregistered the sale of land in his favor,resulting in the cancellation of his parent’stitle. On December 14, 1995

Victor mortgaged the land to Marcela Lao Chua,Rosa Sy, Amparo Ong, and Ida See. Afterward,on February14, 1997 Victor sold the propertyto Chua, one of the mortgagees, resulting inthe cancellation of his TCT140646 and theissuance of TCT N-172342 in Chua’s name.

Moreover, a year later the NHA instituted acase before the Quezon City Regional TrialCourt (RTC) for the annulment of the NHA’s1980 sale of the land to their son Victor andthe subsequent sale of Victor to Chua was aviolation of NHA rules and regulations. TheRTC ruled that although the Alfaros clearlyviolated the five-year prohibition, the NHAcould no longer rescind its sale to them sinceits right to do so had already prescribed,applying Article 1389 of the New Civil Code.While the CA declared TCT 277321 in the nameof the Alfaros and all subsequent titles anddeeds of sale null and void.

ISSUES:* Whether or not the CA erred inholding that the Alfaros violated theircontract with the NHA;*Whether or not the NHA’s right to rescind hasprescribed; and *Whether or not the subsequent buyers of theland acted in good faith and their rights,therefore, cannot be affected by therescission.

HELD: The CA correctly ruled that suchviolation comes under Article 1191 where theapplicable prescriptive period is thatprovided in Article 1144 which is 10 yearsfrom the time the right of action accrues. Itis clearly said that the Alfaros violated thefive-year restriction, thus entitling the NHAto rescind the contract. The NHA’s right ofaction accrued on February 18, 1992 when itlearned of the Alfaros’ forbidden sale of theproperty to Victor. Since the NHA filed itsaction for annulment of sale on April 10,1998, it did so well within the 10-yearprescriptive period. The Court also agrees

with the CA that the Lalicons and Chua werenot buyers in good faith. As regards Chua, sheand a few others with her took the property byway of mortgage from Victor in 1995, wellwithin the prohibited period. Since mutualrestitution is required in cases involvingrescission under Article 1191, the NHA mustreturn the full amount of the amortizations itreceived for the property, plus the value ofthe improvements introduced on the same, with6% interest per annum from the time of thefinality of this judgment. Hence, the Courtaffirms the Decision of the Court of Appeals.

8. GMC VS. SPS. RAMOS; JULY 20, 2011

FACTS: General Milling Corporation (GMC)entered into a Growers Contract with spousesLibrado and Remedios Ramos (Spouses Ramos).Under the contract, GMC was to supply broilerchickens for the spouses to raise on theirland. To guarantee full compliance, theGrowers Contract was accompanied by a Deed ofReal Estate Mortgage over a piece of realproperty upon which their conjugal home wasbuilt. The spouses further agreed to put up asurety bond at the rate of PhP 20,000 per1,000 chicks delivered by GMC. The Deed ofReal Estate Mortgage extended to Spouses Ramosa maximum credit line of PhP 215,000 payablewithin an indefinite period with an interestof twelve percent (12%) per annum.Spouses Ramos eventually were unable to settletheir account with GMC. They alleged that theysuffered business losses because of thenegligence of GMC and its violation of theGrowers Contract. On March 31, 1997, the counsel for GMCnotified Spouses Ramos that GMC wouldinstitute foreclosure proceedings on theirmortgaged property.

On May 7, 1997, GMC filed a Petition forExtrajudicial Foreclosure of Mortgage. On June10, 1997, the property subject of theforeclosure was subsequently sold by publicauction to GMC after the required posting andpublication.

Spouses Ramos filed a Complaint for Annulmentand/or Declaration of Nullity of theExtrajudicial Foreclosure Sale with Damages.They contended that the extrajudicialforeclosure sale on June 10, 1997 was null andvoid, since there was no compliance with therequirements of posting and publication ofnotices under Act No. 3135, as amended.Librado Ramos alleged that, when the propertywas foreclosed, GMC did not notify him at allof the foreclosure.

In its Answer, GMC argued that it repeatedlyreminded Spouses Ramos of their liabilitiesunder the Growers Contract. It argued that itwas compelled to foreclose the mortgagebecause of Spouses Ramos' failure to pay theirobligation. GMC insisted that it had observedall the requirements of posting andpublication of notices under Act No. 3135.

RTC rendered a decision in favor of theSpouses Ramos. The CA sustained the RTCdecision.

ISSUES: A. WHETHER [THE CA] MAY CONSIDERISSUES NOT ALLEGED AND DISCUSSED IN THE LOWERCOURT AND LIKEWISE NOT RAISED BY THE PARTIESON APPEAL, THEREFORE HAD DECIDED THE CASE NOTIN ACCORD WITH LAW AND APPLICABLE DECISIONS OFTHE SUPREME COURT.B. WHETHER [THE CA] ERRED IN RULING THATPETITIONER GMC MADE NO DEMAND TO RESPONDENTSPOUSES FOR THE FULL PAYMENT OF THEIROBLIGATION CONSIDERING THAT THE LETTER DATEDMARCH 31, 1997 OF PETITIONER GMC TO RESPONDENTSPOUSES IS TANTAMOUNT TO A FINAL DEMAND TOPAY, THEREFORE IT DEPARTED FROM THE ACCEPTEDAND USUAL COURSE OF JUDICIAL PROCEEDINGS.

HELD: In Diamonon v. Department of Labor andEmployment, [20] We explained that anappellate court has a broad discretionarypower in waiving the lack of assignment oferrors in the following instances:(a) Grounds not assigned as errors butaffecting the jurisdiction of the court overthe subject matter;

(b) Matters not assigned as errors on appealbut are evidently plain or clerical errorswithin contemplation of law;

(c) Matters not assigned as errors on appealbut consideration of which is necessary inarriving at a just decision and completeresolution of the case or to serve theinterests of a justice or to avoid dispensingpiecemeal justice;

(d) Matters not specifically assigned aserrors on appeal but raised in the trial courtand are matters of record having some bearingon the issue submitted which the partiesfailed to raise or which the lower courtignored;

(e) Matters not assigned as errors on appealbut closely related to an error assigned;

(f) Matters not assigned as errors on appealbut upon which the determination of a questionproperly assigned, is dependent.

Paragraph (c) above applies to the instantcase, for there would be a just and completeresolution of the appeal if there is a rulingon whether the Spouses Ramos were actually indefault of their obligation to GMC.

Was there sufficient demand?Wedisagree. There are three requisites necessary for afinding of default. First, the obligation isdemandable and liquidated; second, the debtordelays performance; and third, the creditorjudicially or extrajudicially requires thedebtor's performance.

According to the CA, GMC did not make a demandon Spouses Ramos but merely requested them togo to GMC's office to discuss the settlementof their account. In spite of the lack ofdemand made on the spouses, however, GMCproceeded with the foreclosure proceedings.Neither was there any provision in the Deed ofReal Estate Mortgage allowing GMC toextrajudicially foreclose the mortgage withoutneed of demand.

Indeed, Article 1169 of the Civil Code ondelay requires the following:Those obliged to deliver or to do somethingincur in delay from the time the obligeejudicially or extrajudicially demands fromthem the fulfilment of their obligation.

However, the demand by the creditor shall notbe necessary in order that delay may exist:

(1) When the obligation or the law expresslyso declares; x x x

As the contract in the instant case carries nosuch provision on demand not being necessaryfor delay to exist, We agree with theappellate court that GMC should have firstmade a demand on the spouses before proceedingto foreclose the real estate mortgage.

Development Bank of the Philippines v.Licuanan finds application to the instantcase:The issue of whether demand was made beforethe foreclosure was effected is essential. Ifdemand was made and duly received by therespondents and the latter still did not pay,then they were already in default andforeclosure was proper. However, if demandwas not made, then the loans had not yetbecome due and demandable. This meant thatrespondents had not defaulted in theirpayments and the foreclosure by petitioner waspremature. Foreclosure is valid only when thedebtor is in default in the payment of hisobligation.

9. LILY LIM VS. KOU CO PING; AUGUST 23, 2012

Principle: A single act or omission that causedamage to an offended party may gave rise totwo separate civil liabilities on the part ofthe offender –(1)civil liability ex delicto,that is, civil liability arising from thecriminal offense under Article 100 of theRevised Penal Code and (2) independent civilliability, that is civil liability that may bepursued independently of the criminal

proceedings. The independent civil liabilitymay be based on “an obligation not arisingfrom the act or omission complained of asfelony”. It may also be based on an act oromission that may constitute felony but,nevertheless, treated independently from thecriminal action by specific provision of theArticle 33 of the Civil Code.

FACTS: FR Cement Corporation issued severalwithdrawal authorities for the account ofcement dealers and traders, Fil-Cement andTiger bilt. Each withdrawal authoritycontained provision that it is valid for sixmonths from its date of issuance, unlessrevoked by FRCC MarketingDepartment .Filcement and Tigerbilt sold theirwithdrawal authorities to Co. On February Cothen sold these withdrawal authorities to Lim.Using the withdrawal authorities Lim withdrewcement bags from FRCC on a staggered basis.Sometime in April 1999, FRCC did not allow Limto withdraw the remaining bags covered by thewithdrawal authorities. Lim clarified thematter with Co and administrative manager ofFil-Cement, who explained that the plantimplemented a price increase and would onlyrelease the goods once Lim pays the pricedifference or agrees to receive lesserquantity of cement. Lim filed case of Estafathrough Misappropriation or Conversion againstCo. The Regional Trial Court acquitted Co.After the trial on the civil aspect of thecriminal case the court also found Co notcivilly liable. Lim sought a reconsiderationwhich the regional trial Court denied. OnMarch 14, 2005 Lim filed her notice of appealon the civil aspect of the criminal case. OnApril 19, 2005 Lim filed a complaint forspecific performance and damages before theRTC.

ISSUE: Whether or not there is no forumshopping for a private complainant to pursue acivil complaint for specific performance anddamages while appealing the judgment on thecivil aspect of a criminal case for estafa?

HELD: A single act or omission that causedamage to an offended party may gave rise totwo separate civil liabilities on the part of

the offender –(1)civil liability ex delicto,that is, civil liability arising from thecriminal offense under Article 100 of theRevised Penal Code and (2) independent civilliability, that is civil liability that may bepursued independently of the criminalproceedings. The independent civil liabilitymay be based on “an obligation not arisingfrom the act or omission complained of asfelony”. It may also be based on an act oromission that may constitute felony but,nevertheless, treated independently from thecriminal action by specific provision of theArticle 33 of the Civil Code. Because of thedistinct and independent nature of the twokinds of civil liabilities, jurisprudenceholds that the offended party may pursue twotypes of civil liabilities simultaneously orcumulatively, without offending the rules onforum shopping, litis pendentia or resjudicata. The criminal cases of estafa arebased on culpa criminal while the civil actionfor collection is anchored on culpacontractual. The first action is clearly acivil action ex delicto, it having beeninstituted together with criminal action. Onthe other hand, the second action, judging bythe allegations contained in the complaint, isa civil action arising from contractualobligation and fortuitous conduct. The CivilCase involves only the obligation arising fromcontract and from tort, whereas the appeal inthe estafa case involves only the civilobligations of Co arising from the offensecharged.

16. AGUILAR VS. CITY TRUST FINANCE CORP.

Facts: Sometime in May 1992, Josephine Aguilar(Josephine) canvassed, via telephone, pricesof cars from different car dealers listed inthe yellow pages of the Philippine LongDistance Telephone directory.

On May 23, 1992, World Cars, Inc.(World Cars) sent its representative JoselitoPerez (Perez) and Vangie Tayag (Vangie) to theAguilar residence in New Manila, Quezon Citybringing with them calling cards, brochuresand price list for different car models, amongother things. The two representatives

discussed with Josephine the advantages anddisadvantages of the different models, theirprices and terms of payment. Josephine having decided to purchasea white 1992 Nissan California at the agreedprice of P370,000.00, payable in 90 days,Perez and Vangie repaired to the Aguilarresidence on May 30, 1992, bringing with thema white 1992 Nissan California and thedocuments bearing on the sale.

As(the Aguilars) were being made tosign by the two representatives a promissorynote, chattel mortgage, disclosures and otherdocuments the dates of which were left blankand which showed that they would still beobliged to pay on installment in 12 months forthe car even if checks in full payment thereofin 90 days were to be issued, the two repliedthat it was only for formality, for in casethe checks were not cleared, the documentswould take effect, otherwise they would becancelled. The Aguilars did sign the promissorynote binding them to be jointly and severallyliable to World Cars. By Josephine’s claim, at the timeshe and her husband signed the promissorynote, its date, May 30, 1992, and the due dateof the monthly amortization which was agreedto be every 3rd day of each month startingJuly 1992 were not reflected therein. The Aguilars did execute too achattel mortgage in favor of World Cars whichembodied a deed of assignment in favor ofCitytrust Finance Corporation (Citytrust).the date May 30, 1992 appearing in the chattelmortgage cum deed of assignment was not yetfilled up at the time she and her husbandsigned it. After the Aguilars’ signing of thedocuments, Perez asked Josephine to make thecheck payments payable to him, prompting herto call up Perez’s boss, a certain LilyPaloma, to inquire whether Perez could collectpayment to which Lily replied in the

affirmative, the latter advising her to justsecure a receipt. Josephine thus issued four Far EastBank and Trust Company (FEBTC) checks. Threechecks were made payable to Perez. The otherone was made payable to World Cars representedpayment of the premium on the car insurance.

In mid-June of 1992, Perez and Vangie wentback to the Aguilar residence requesting thatthe two checks issued to Perez be cancelledand that two be issued in replacement thereof,to be made payable to Sunny Motors, whichappears to be a sales outlet of World Cars,for processing fee of the documents, and theother to be again made payable to Perez.Josephine obliged and accordingly issued thesaid checks. No official receipt for the checkshaving been issued to Josephine, she warnedPerez that if she did not get any by the endof July 1992, she would request for stoppayment of the last check she issued in hisname.

The clearing of one of the checkshaving been stopped on Josephine’s advice,Perez repaired to the Aguilar residence,asking the reason therefor. On being informedby Josephine of the reason, Perez explainedthat receipts were in Bulacan where the mainoffice of World Cars is, and he had no time togo there owing to its distance. Perez thenadvised Josephine that if she did not issueanother check to replace the check that wasstopped the 12-month installment term ofpayment under the documents she and herhusband signed would take effect. Not wanting to be bound by the 12-month installment term, Josephine issued thecheck payable to Perez who issued her SunnyMotor Sales Provisional Receipt In September 1992, Josephinereceived a letter dated August 20, 1992 fromAna Marie Caber (Ana Marie), AccountSpecialist of Citytrust, advising her that asof August 20, 1992, her overdue account with

it in connection with the purchase of the carhad amounted to “P1,045.39” inclusive of pastdue charges. Josephine at once informed Ana Mariethat she had fully paid the car to which AnaMarie replied that “maybe not all of thepapers have been processed yet,” hence, sheadvised Josephine not to worry about it.

In December 1992, Josephine receivedanother letter dated December 9, 1992 fromCitytrust advising her that her account hadbeen, as of December 9, 1992, overdueinclusive of unpaid installments plusaccumulated penalty charges; and that if shefailed to arrange for another payment scheme,her account would be referred to its legalcounsel for collection. Josephine again called Ana Marieinquiring what was going on and the latterreplied that no payment for the car had beenreceived. Josephine also called up World Carsand spoke to its Vice-President, a certainDomondon, who informed her that based oncompany records, the last payment had not beenreceived. The spouses Aguilar thus filed acomplaint for “annulment of chattel mortgageplus damages” against Citytrust and World Carsbefore the Regional Trial Court (RTC) ofQuezon City. In its Answer, Citytrust disclaimedknowledge of the alleged prior arrangement andthe alleged subsequent payments made by theAguilars to World Cars. And it claimed thatit accepted the endorsement and assignment ofthe promissory note and chattel mortgage ingood faith, relying on the terms andconditions thereof; and that assuming that theAguilars’ claim were true, World Cars appearedto have violated the terms and conditions ofthe Receivables Financing Agreement (RFA) itexecuted with it In its Answer with Counterclaim,World Cars claimed that, among other things,it received only the check in the amount of

P148,000.00 (Check No. 112703 payable toPerez) as downpayment for the car; and thatthe Aguilars defaulted in the payment of theirmonthly amortizations to Citytrust, and itshould not be held accountable for thepersonal and unilateral obligations of theAguilars to Citytrust.RTC found Perez to be an agent of World Cars,hence, an extension of its personality as faras the sale of the car to the Aguilars wasconcerned. The trial court further found that Perez wasauthorized to receive payment for the car,hence, all payments made to him for thepurchase of the car were payments made to hisprincipal, World Cars; and that the Aguilarshad no intention to be bound by the promissorynote which they signed in favor of World Carsor its assignee nor by the terms of theChattel Mortgage, the conforme in the undatedLetter (Notice of Assignment) of World Carsand the Disclosure Statement of Loan/CreditTransaction having been predicated on thevalidity of the promissory note. Moreover, the trial court held that the factthat on May 30, 1992, the same date of thepromissory note, Josephine issued three checksto fully cover the purchase price of the car(the fourth represented payment of insurancepremium), the last of which was still tomature on July 30, 1992, proves that theAguilars signed the promissory note withoutintending to be bound by its terms. In fine, the trial court held that theAguilars had paid World Cars the full purchaseprice of the car, and Citytrust as theassignee of World Cars had no right to collectfrom them the amount stated in the ChattelMortgage cum Deed of Assignment which issimulated and, therefore, void, following Art.1346 of the Civil Code. On appeal, the appellate court modified thatof the trial court.Hence, the present separatepetitions of the Aguilars and World Cars. Held: Clearly, Perez was the agent of WorldCars and was duly authorized to accept payment

for the car. Josephine’s testimony thatbefore issuing the checks in the name ofPerez, she verified from his supervisor andthe latter confirmed Perez’ authority toreceive payment remains unrefuted by WorldCars. In fact, World Cars admitted in itsAnswer with Counterclaim that “[w]hat wasactually paid [by the Aguilars] and receivedby [it] was [Josephine’s] check in the amountof P148,000.00 as downpayment for the saidcar.” Parenthetically, as earlier stated, whenJosephine spoke to World Cars’ Vice PresidentDomondon, the latter informed her that thelast payment had not been received. Thisinformation of Domondon does not jibe with theclaim of World Cars that it received onlyJosephine’s first check in the amount ofP148,000.00 as downpayment. Since the Aguilars’ payment to Perez is deemedpayment to World Cars, the promissory note,chattel mortgage and other accessory documentsthey executed which were to take effect onlyin the event the checks would be dishonoredwere deemed nullified, all the checks havingbeen cleared. Since the condition for theinstruments to become effective was fulfilled,the obligation on the part of the Aguilars tobe bound thereby did not arise and World Carsdid not thus acquire rights thereunderfollowing Art. 1181 of the Civil Code whichprovides: ARTICLE 1181. Inconditional obligations, the acquisition ofrights, as well as the extinguishment or lossof those already acquired, shall depend uponthe happening of the event which constitutesthe condition. (Emphasis supplied) As no right against the Aguilars wasacquired by World Cars under the promissorynote and chattel mortgage, it had nothing toassign to Citytrust. Consequently, Citytrustcannot enforce the instruments against theAguilars, for an assignee cannot acquiregreater rights than those pertaining to theassignor.

At all events, the Aguilars havingfully paid the car before they became aware ofthe assignment of the instruments to Citytrustwhen they received notice thereof byCitytrust, they were released of theirobligation thereunder. The Civil Code soprovides: ARTICLE 1626. The debtor who, before havingknowledge of the assignment, pays hiscreditor, shall be released from theobligation. While Citytrust cannot enforce theinstruments against the Aguilars, since underthe RFA, World Cars, its successors, andassigns, guaranteed that it has full right andlegal authority to make the assignment ordiscounting; that the installment papers sodiscounted by virtue of this agreement, aresubsisting, valid, enforceable and in allrespects what they purport to be; that thepapers contain the entire agreement betweenthe customers and [World Cars]; x x x that ithas absolute and good title to such contractsand the personalties covered thereby and theright to sell and transfer the same in favorof Citytrust.

17. FLORENTINO VS. SUPERVALUE

FACTS:Petitioner is doing business under thebusiness name “Empanada Royale,” a soleproprietorship engaged in the retail ofempanada with outlets in different malls andbusiness establishments within Metro Manila. Respondent, on the other hand, is a domesticcorporation engaged in the business of leasingstalls and commercial store spaces locatedinside SM Malls found all throughout thecountry. On 8 March 1999, petitioner andrespondent executed three Contracts of Leasecontaining similar terms and conditions overthe cart-type stalls at SM North Edsa andSMSouthmall and a store space at SM Megamall.The term of each contract is for a period offour months and may be renewed upon agreementof the parties.

Upon the expiration of the originalContracts of Lease, the parties agreed torenew the same by extending their terms until31 March 2000. Before the expiration of saidContracts of Lease, or on 4 February 2000,petitioner received two letters from therespondent, both dated 14 January 2000,transmitted through facsimile transmissions. In the first letter, petitioner wascharged with violating Section 8 of theContracts of Lease Respondent also charged petitioner withselling a new variety of empanada called“mini-embutido” and of increasing the price ofher merchandise without the prior approval ofthe respondent.Respondent observed that petitioner wasfrequently closing earlier than the usual mallhours, either because of non-delivery or delayin the delivery of stocks to her outlets,again in violation of the terms of thecontract. A stern warning was thus given topetitioner to refrain from committing similarinfractions in the future in order to avoidthe termination of the lease contract. Respondent informed the petitionerthat it will no longer renew the Contracts ofLease for the three outlets, upon theirexpiration Petitioner explained that the “mini-embutido” is not a new variety of empanada buthad similar fillings, taste and ingredients asthose of pork empanada; only, its size wasreduced in order to make it more affordable tothe buyers. Such explanation notwithstanding,respondent still refused to renew itsContracts of Lease with the petitioner. Tothe contrary, respondent took possession ofthe store space in SM Megamall and confiscatedthe equipment and personal belongings of thepetitioner found therein after the expirationof the lease contract. An action for Specific Performance, Sum ofMoney and Damages was filed by the petitioneragainst the respondent before the RTC ofMakati.In her Complaint petitioner alleged that therespondent made verbal representations thatthe Contracts of Lease will be renewed from

time to time and, through the saidrepresentations, the petitioner was induced tointroduce improvements upon the store space atSM Megamall in the sum of P200,000.00, only tofind out a year later that the respondent willno longer renew her lease contracts for allthree outlets. Petitioner alleged that therespondent, without justifiable cause andwithout previous demand, refused to return thesecurity deposits.Petitioner claimed that the respondent seizedher equipment and personal belongings foundinside the store space in SM Megamall afterthe lease contract for the said outlet expiredand despite repeated written demands from thepetitioner, respondent continuously refused toreturn the seized items.The RTC rendered a Judgment in favor of thepetitioner and found that the physicaltakeover by the respondent of the leasedpremises and the seizure of petitioner’sequipment and personal belongings withoutprior notice were illegal. Aggrieved, the respondent appealedthe adverse RTC Judgment to the Court ofAppeals.The Court of Appeals modified the RTC Judgmentand found that the respondent was justified inforfeiting the security deposits and was notliable to reimburse the petitioner for thevalue of the improvements introduced in theleased premises. Hence, this instant Petition forReview on Certiorari filed by the petitionerassailing the Court of Appeals Decision.

ISSUES: I. Whether or not the respondent isliable to return the security deposits to thepetitions. II. Whether or not the respondent isliable to reimburse the petitioner for the sumof the improvements she introduced in theleased premises.Held: I. The appellate court, in finding that therespondent is authorized to forfeit thesecurity deposits, relied on the provisions of

Sections 5 and 18 of the Contract of Lease, towit: Section 5. DEPOSIT. The LESSEEshall make a cash deposit in the sum of SIXTYTHOUSAND PESOS (P60,000.00) equivalent tothree (3) months rent as security for the fulland faithful performance to each and everyterm, provision, covenant and condition ofthis lease and not as a pre-payment of rent. Section 18. TERMINATION. Anybreach, non-performance or non-observance ofthe terms and conditions herein provided shallconstitute default which shall be sufficientground to terminate this lease, its extensionor renewal. … and LESSOR shall forfeit in itsfavor the deposit tendered without prejudiceto any such other appropriate action as may belegally authorized. Since it was already established bythe trial court that the petitioner was guiltyof committing several breaches of contract,the Court of Appeals decreed that she cannottherefore rightfully demand the return of thesecurity deposits for the same are deemedforfeited by reason of evident contractualviolations. It is undisputed that the above-quoted provision found in all Contracts ofLease is in the nature of a penal clause toensure petitioner’s faithful compliance withthe terms and conditions of the saidcontracts. A penal clause is an accessoryundertaking to assume greater liability incase of breach. It is attached to anobligation in order to insure performance andhas a double function: (1) to provide forliquidated damages, and (2) to strengthen thecoercive force of the obligation by the threatof greater responsibility in the event ofbreach. The obligor would then be bound to paythe stipulated indemnity without the necessityof proof of the existence and the measure ofdamages caused by the breach. Article 1226 ofthe Civil Code states:Art. 1226. In obligations with a penalclause, the penalty shall substitute theindemnity for damages and the payment ofinterests in case of noncompliance, if thereis no stipulation to the contrary.Nevertheless, damages shall be paid if the

obligor refuses to pay the penalty or isguilty of fraud in the fulfillment of theobligation. The penalty may be enforced only when it isdemandable in accordance with the provisionsof this Code. As a general rule, courts are not atliberty to ignore the freedoms of the partiesto agree on such terms and conditions as theysee fit as long as they are not contrary tolaw, morals, good customs, public order orpublic policy. Nevertheless, courts mayequitably reduce a stipulated penalty in thecontracts in two instances: (1) if theprincipal obligation has been partly orirregularly complied with; and (2) even ifthere has been no compliance if the penalty isiniquitous or unconscionable in accordancewith Article 1229 of the Civil Code whichclearly provides:Art. 1229. The judge shall equitably reducethe penalty when the principal obligation hasbeen partly or irregularly complied with bythe debtor. Even if there has been noperformance, the penalty may also be reducedby the courts if it is iniquitous orunconscionable. In ascertaining whether the penaltyis unconscionable or not, this court set outthe following standard in Ligutan v. Court ofAppeals, to wit: The question of whether a penalty isreasonable or iniquitous can be partlysubjective and partly objective. Itsresolution would depend on such factor as, butnot necessarily confined to, the type, extentand purpose of the penalty, the nature of theobligation, the mode of breach and itsconsequences, the supervening realities, thestanding and relationship of the parties, andthe like, the application of which, by andlarge, is addressed to the sound discretion ofthe court. xxx.In the instant case, the forfeiture of theentire amount of the security deposits wasexcessive and unconscionable considering thatthe gravity of the breaches committed by thepetitioner is not of such degree that therespondent was unduly prejudiced thereby. Itis but equitable therefore to reduce the

penalty of the petitioner to 50% of the totalamount of security deposits.The forfeiture of the entire sum ofP192,000.00 is clearly a usurious andiniquitous penalty for the transgressionscommitted by the petitioner. The respondentis therefore under the obligation to returnthe 50% of P192,000.00 to the petitioner.II. As to the liability of the respondent toreimburse the petitioner for one-half of theexpenses incurred for the improvements on theleased store space at SMMegamall. The provisions in the Contract ofLease mandates that before the petitioner canintroduce any improvement on the leasedpremises, she should first obtain respondent’sconsent. In the case at bar, it was notshown that petitioner previously secured theconsent of the respondent before she made theimprovements on the leased space in SMMegamall. It was not even alleged by thepetitioner that she obtained such consent orshe at least attempted to secure the same. Onthe other hand, the petitioner asserted thatrespondent allegedly misrepresented to herthat it would renew the terms of the contractsfrom time to time after their expirations, andthat the petitioner was so induced therebythat she expended the sum of P200,000.00 forthe improvement of the store space leased. Moreover, it is consonant with humanexperience that lessees, before occupying theleased premises, especially store spaceslocated inside malls and big commercialestablishments, would renovate the place andintroduce improvements thereon according tothe needs and nature of their business and inharmony with their trademark designs as partof their marketing ploy to attract customers.Certainly, no inducement or misrepresentationfrom the lessor is necessary for this purpose,for it is not only a matter of necessity thata lessee should re-design its place ofbusiness but a business strategy as well. In ruling that the respondent isliable to reimburse petitioner one half of theamount of improvements made on the leasedstore space should it choose to appropriatethe same, the RTC relied on the provision ofArticle 1678 of the Civil Code.

While it is true that under theabove-quoted provision of the Civil Code, thelessor is under the obligation to pay thelessee one-half of the value of theimprovements made should the lessor choose toappropriate the improvements, Article 1678however should be read together with Article448 and Article 546 of the same statute.Thus, to be entitled to reimbursement forimprovements introduced on the property, thepetitioner must be considered a builder ingood faith. Further, Articles 448 and 546 ofthe Civil Code, which allow full reimbursementof useful improvements and retention of thepremises until reimbursement is made, applyonly to a possessor in good faith, i.e.,onewho builds on land with the belief that he isthe owner thereof. A builder in good faith isone who is unaware of any flaw in his title tothe land at the time he builds on it. In thiscase, the petitioner cannot claim that she wasnot aware of any flaw in her title or wasunder the belief that she is the owner of thesubject premises for it is a settled fact thatshe is merely a lessee thereof. Since petitioner’s interest in thestore space is merely that of the lessee underthe lease contract, she cannot therefore beconsidered a builder in good faith.Consequently, respondent may appropriate theimprovements introduced on the leased premiseswithout any obligation to reimburse thepetitioner for the sum expended.18. Gonzales vs. Lim

19. JEANETTE D. MOLINO VS. SECURITY DINERINT’L. CORP.

FACTS: The Security Diners InternationalCorporation (“SDIC”) operates a credit cardsystem under the name of Diners Club throughwhich it extends credit accommodation to itscardholders for the purchase of goods andpayment of services from its memberestablishments to be reimbursed later on bythe cardholder upon proper billing. Thereare two types of credit cards issued: one, theRegular (Local) Card which entitles thecardholder to purchase goods and pay servicesfrom member establishments in an amount notexceeding P10,000.00; and two, the Diamond

(Edition) Card which entitles the cardholderto purchase goods and pay services from memberestablishments in unlimited amounts. One ofthe requirements for the issuance of either ofthese cards is that an applicant should have asurety.On July 24, 1987, Danilo A. Alto applied for aRegular (Local) Card with SDIC. He got as hissurety his own sister-in-law Jeanette MolinoAlto. On the basis of the completed and signedApplication Form and Surety Undertaking, theSDIC issued to Danilo Diners Card The latterused this card and initially paid hisobligations to SDIC. On February 8, 1988,Danilo wrote SDIC a letter requesting it toupgrade his Regular (Local) Diners Club Cardto a Diamond (Edition) one. As a requirementof SDIC, Danilo secured from Jeanette herapproval. The latter obliged and so on March2, 1988, she signed a Note which states:“This certifies that I, Jeanette D. Molino,approve of the request of Danilo and GloriaAlto with Card No. 3651-203216-0006 and 3651-203412-5007 to upgrade their card from regularto diamond edition.”Danilo’s request was granted and he was issueda Diamond (Edition) Diners Club Card. He usedthis card and made purchases from memberestablishments. On October 1, 1988 Danilo hadincurred credit charged plus appropriateinterest and service charges in the aggregateamount of P166,408.31. He defaulted in thepayment of this obligation.SDIC demanded of Danilo and Jeanette to paysaid obligation but they did not pay. So,SDIC filed an action to collect saidindebtedness against Danilo and Jeanette. The trial court rendered a decision dismissingthe complaint for failure of respondent toprove its case by a preponderance of theevidence. It found that while petitionerclearly bound herself as surety under theterms of Danilo Alto’s Regular Diners ClubCard, there was no evidence that after thecard had been upgraded to Diamond (Edition)petitioner consented or agreed to act assurety for Danilo. The trial court went on further to state thatpetitioner was not liable for any amount, noteven for P10,000.00 which is the maximum

credit limit for Regular Diners Club Cards,since at the time of the upgrading Danilo hadno outstanding credit card debts.[6] The Court of Appeals found contrary to thelower court, and declared that the SuretyUndertaking signed by petitioner when DaniloAlto first applied for a Regular Diners ClubCard clearly applied to the unpaid purchasesof Danilo Alto under the Diamond card. Petitioner’s motion for reconsideration of theabove decision was denied Hence, the petition.

ISSUES: 1. Whether petitioner is liable assurety under the Diamond card revolves aroundthe effect of the upgrading by Danilo Alto ofhis card.

2. Was the upgrading a novation of theoriginal agreement governing the use of DaniloAlto’s first credit card, as to extinguishthat obligation and the Surety Undertakingwhich was simply accessory to it?

HELD: Petitioner posits that she did notexpressly give her consent to be bound assurety under the upgraded card. She pointsout that the note she signed, registering herapproval of the request of Danilo Alto toupgrade his card, renders the SuretyUndertaking she signed under the terms of theprevious card “without probative value,immaterial and irrelevant as it covers onlythe liability of the surety in the use of theregular credit card by the principal debtorShe argues further that because the principaldebtor, Danilo Alto, was not held liable,having been dropped as a defendant, she couldnot be said to have incurred liability assurety.The petition is devoid of merit.Novation, as a mode of extinguishingobligations, may be done in two ways: byexplicit declaration, or by materialincompatibility (implied novation). As westated in Fortune Motors vs. Court of Appeals,supra:xxx The test of incompatibility is whether thetwo obligations can stand together, each onehaving its independent existence. If theycannot, they are incompatible and the latterobligation novates the first. Novation must

be established either by the express terms ofthe new agreement or by the acts of theparties clearly demonstrating the intent todissolve the old obligation as a considerationfor the emergence of the new one. The will tonovate, whether totally or partially, mustappear by express agreement of the parties, orby their acts which are too clear orunequivocal to be mistaken.There is no doubt that the upgrading was anovation of the original agreement coveringthe first credit card issued to Danilo Alto,basically since it was committed with theintent of cancelling and replacing the saidcard. However, the novation did not serve torelease petitioner from her surety obligationsbecause in the Surety Undertaking sheexpressly waived discharge in case of changeor novation in the agreement governing the useof the first credit card.The nature and extent of petitioner’sobligations are set out in clear andunmistakable terms in the Surety Undertaking.Thus:1. She bound herself jointly and severallywith Danilo Alto to pay SDIC all obligationsand charges in the use of the Diners ClubCard, including fees, interest, attorney’sfees, and costs;2. She declared that “any change or novationin the Agreement or any extension of timegranted by SECURITY DINERS to pay suchobligation, charges, and fees, shall notrelease (her) from this Surety Undertaking”;3. “(S)aid undertaking is a continuous oneand shall subsist and bind (her) until allsuch obligations, charges and fees have beenfully paid and satisfied”; and4. “The indication of a credit limit to thecardholder shall not relieve (her) ofliability for charges and all other amountsvoluntarily incurred by the cardholder inexcess of said credit limit.We cannot give any additional meaning to theplain language of the subject undertaking. Theextent of a surety’s liability is determinedby the language of the suretyship contract orbond itself. Article 1370 of the Civil Codeprovides: “If the terms of a contract areclear and leave no doubt upon the intention of

the contracting parties, the literal meaningof its stipulations shall control.” As a last-ditch measure, petitionerasseverates that, being merely a surety, apronouncement should first be made declaringthe principal debtor liable before she herselfcan be proceeded against. The argument, whichis hinged upon the dropping of Danilo asdefendant in the complaint, is bereft ofmerit.The Surety Undertaking expressly provides thatpetitioner’s liability is solidary. A suretyis considered in law as being the same partyas the debtor in relation to whatever isadjudged touching the obligation of thelatter, and their liabilities are interwovenas to be inseparable. Although the contract ofa surety is in essence secondary only to avalid principal obligation, his liability tothe creditor is direct, primary and absolute;he becomes liable for the debt and duty ofanother although he possesses no direct orpersonal interest over the obligations nordoes he receive any benefit therefrom. Therebeing no question that Danilo Alto incurreddebts of P166,408.31 in credit card advances,an obligation shared solidarily by petitioner,respondent was certainly within its rights toproceed singly against petitioner, as suretyand solidary debtor, without prejudice to anyaction it may later file against Danilo Alto,until the obligation is fully satisfied. Thisis so provided under Article 1216 of the CivilCode:The creditor may proceed against any one ofthe solidary debtors or some or all of themsimultaneously. The demand made against oneof them shall not be an obstacle to thosewhich may be subsequently directed against theothers, so long as the debt has not been fullycollected.Petitioner is a graduate of businessadministration, and possesses considerablework experience in several banks. She knewthe full import and consequence of the SuretyUndertaking that she executed. She had theoption to withdraw her suretyship when Daniloupgraded his card to one that permittedunlimited purchases, but instead she approvedthe upgrading. While we commiserate in thefinancial predicament she now faces, it is

also evident that the liability she incurredis only the legitimate consequence of anundertaking that she freely and intelligentlyobliged to. Prospective sureties to creditcard applicants would be well-advised to studycarefully the terms of the agreements preparedby the credit card companies before givingtheir consent, and pay heed to stipulationsthat could lead to onerous effects, like inthe present case where the credit applied forwas limitless. At the same time, it bearsarticulating that although courts inappropriate cases may equitably reduce theaward for penalty as provided under suchsuretyship agreements if the same isiniquitous or unconscionable, we are unable togive relief to petitioner by way of reducingthe amount of the principal liability assurety under the circumstances of this case.

20. FILINVEST LAND VS. CA

FACTS: Filinvest Land, Inc. (“FILINVEST”, forbrevity), a corporation engaged in thedevelopment and sale of residentialsubdivisions, awarded to defendant PacificEquipment Corporation (“PACIFIC”, for brevity)the development of its residentialsubdivisions consisting of two (2) parcels ofland located at Payatas, Quezon City, theterms and conditions of which are contained inan “Agreement”. To guarantee its faithfulcompliance and pursuant to the agreement,defendant Pacific posted two (2) Surety Bondsin favor of plaintiff which were issued bydefendant Philippine American GeneralInsurance (“PHILAMGEN”, for brevity). Notwithstanding three extensions granted byplaintiff to defendant Pacific, the latterfailed to finish the contracted works. On 16October 1979, plaintiff wrote defendantPacific advising the latter of its intentionto takeover the project and to hold saiddefendant liable for all damages which it hadincurred and will incur to finish the project. On 26 October 1979, plaintiff submitted itsclaim against defendant Philamgen under itsperformance and guarantee bond but Philamgen

refused to acknowledge its liability for thesimple reason that its principal, defendantPacific, refused to acknowledge liabilitytherefore. Hence, this action. In defense, defendant Pacific claims that itsfailure to finish the contracted work was dueto inclement weather and the fact that severalitems of finished work and change order whichplaintiff refused to accept and pay for causedthe disruption of work. Since the contractualrelation between plaintiff and defendantPacific created a reciprocal obligation, thefailure of the plaintiff to pay itsprogressing bills estops it from demandingfulfillment of what is incumbent upondefendant Pacific. The acquiescence byplaintiff in granting three extensions todefendant Pacific is likewise a waiver of theformer’s right to claim any damages for thedelay. Further, the unilateral and voluntaryaction of plaintiff in preventing defendantPacific from completing the work has relievedthe latter from the obligation of completingthe same. On the other hand, Philamgen contends that thevarious amendments made on the principalcontract and the deviations in theimplementation thereof which were resorted toby plaintiff and co-defendant Pacific withoutits (defendant Philamgen’s) written consentthereto, have automatically released thelatter from any or all liability within thepurview and contemplation of the coverage ofthe surety bonds it has issued. Upon agreementof the parties to appoint a commissioner toassist the court in resolving the issuesconfronting the parties, an order was issuednaming Architect Antonio Dimalanta as CourtCommissioner to conduct an ocular inspectionand to determine the amount of workaccomplished by the defendant Pacific and theamount of work done by plaintiff to completethe project. According to the Commissioner, no better basisin the work done or undone could be made otherthan the contract billings and payments madeby both parties as there was no properprocedure followed in terminating the

contract, lack of inventory of workaccomplished, absence of appropriate record ofwork progress (logbook) and inadequatedocumentation and system of constructionmanagement. Based on the billings of defendant Pacific andthe payments made by plaintiff, the workaccomplished by the former amounted toP11,788,282.40 with the exception of the lastbilling (which was not acted upon or processedby plaintiff) in the amount of P844,396.42.The total amount of work left to beaccomplished by plaintiff was based on theoriginal contract amount less value of workaccomplished by defendant Pacific in theamount of P681,717.58 (12,470,000-11,788,282.42). As regards the alleged repairs made byplaintiff on the construction deficiencies,the Court Commissioner found no sufficientbasis to justify the same. On the other hand,he found the additional work done by defendantPacific in the amount of P477,000.00 to bein order.

On the basis of the commissioner’s report, thetrial court dismissed Filinvest’s complaint Itheld:

The unpaid balance due defendant therefore isP1,939,191.67. To this amount should be addedadditional work performed by defendant atplaintiff’s instance in the sum ofP475,000.00.And from this total of P2,414,191.67 should bededucted the sum of P532,324.01 which is thecost to repair the deficiency or defect in thework done by defendant. The commissionerarrived at the figure of P532,324.01 bygetting the average between plaintiff’s claimof P758,080.37 and defendant’s allegation ofP306,567.67. The amount due to defendant perthe commissioner’s report is thereforeP1,881,867.66.

Although the said amount of P1,881,867.66would be owing to defendant Pacific, the factremains that said defendant was in delay sinceApril 25, 1979. The third extension agreement

of September 15, 1979 is very clear in thisregard. The pertinent paragraphs read:

a) You will complete all the unfinishedworks not later than Oct. 15, 1979. It isagreed and understood that this date shallDEFINITELY be the LAST and FINAL extension &there will be no further extension for anycause whatsoever. b) We are willing to waive all penaltiesfor delay which have accrued since April 25,1979 provided that you are able to finish allthe items of the contracted works as perrevised CPM; otherwise you shall continue tobe liable to pay the penalty up to the timethat all the contracted works shall have beenactually finished, in addition to otherdamages which we may suffer by reason of thedelays incurred.

Defendant Pacific therefore became liable fordelay when it did not finish the project onthe date agreed on October 15, 1979. Thecourt however, finds the claim ofP3,990,000.00 in the form of penalty by reasonof delay (P15,000.00/day from April 25, 1979to Jan. 15, 1980) to be excessive. Aforfeiture of the amount due defendant fromplaintiff appears to be a reasonable penaltyfor the delay in finishing the projectconsidering the amount of work alreadyperformed and the fact that plaintiffconsented to three prior extensions. The Court of Appeals, finding no reversibleerror in the appealed decision, affirmed thesame. Hence, the instant petition.

ISSUE:Whether or not the liquidated damagesagreed upon by the parties should be reducedconsidering that: (a) time is of the essenceof the contract; (b) the liquidated damageswas fixed by the parties to serve not only aspenalty in case Pecorp fails to fulfill itsobligation on time, but also as indemnity foractual and anticipated damages which Filinvestmay suffer by reason of such failure; and (c)the total liquidated damages sought is only32% of the total contract price, and the same

was freely and voluntarily agreed upon by theparties.

HELD: Filinvest argues that the penalty in itsentirety should be respected as it was aproduct of mutual agreement and it representsonly 32% of the P12,470,000.00 contract price,thus, not shocking and unconscionable underthe circumstances. Moreover, the penalty wasfixed to provide for actual or anticipatedliquidated damages and not simply to ensurecompliance with the terms of the contract;hence, courts should be slow in exercising theauthority conferred by Art. 1229 of the CivilCode.

We are not swayed.

There is no question that the penalty ofP15,000.00 per day of delay was mutuallyagreed upon by the parties and that the sameis sanctioned by law. A penal clause is anaccessory undertaking to assume greaterliability in case of breach. It is attached toan obligation in order to insure performanceand has a double function: (1) to provide forliquidated damages, and (2) to strengthen thecoercive force of the obligation by the threatof greater responsibility in the event ofbreach. Article 1226 of the Civil Codestates: Art. 1226. In obligations with a penalclause, the penalty shall substitute theindemnity for damages and the payment ofinterests in case of noncompliance, if thereis no stipulation to the contrary.Nevertheless, damages shall be paid if theobligor refuses to pay the penalty or isguilty of fraud in the fulfillment of theobligation. The penalty may be enforced only when it isdemandable in accordance with the provisionsof this Code.

As a general rule, courts are not at libertyto ignore the freedom of the parties to agreeon such terms and conditions as they see fitas long as they are not contrary to law,morals, good customs, public order or public

policy. Nevertheless, courts may equitablyreduce a stipulated penalty in the contract intwo instances: (1) if the principal obligationhas been partly or irregularly complied; and(2) even if there has been no compliance ifthe penalty is iniquitous or unconscionable inaccordance with Article 1229 of the Civil Codewhich provides:

Art. 1229. The judge shall equitablyreduce the penalty when the principalobligation has been partly or irregularlycomplied with by the debtor. Even if therehas been no performance, the penalty may alsobe reduced by the courts if it is iniquitousor unconscionable.

In herein case, the trial court ruled that thepenalty charge for delay – pegged atP15,000.00 per day of delay in the aggregateamount of P3,990,000.00 -- was excessive andaccordingly reduced it to P1,881,867.66“considering the amount of work alreadyperformed and the fact that [Filinvest]consented to three (3) prior extensions.” TheCourt of Appeals affirmed the ruling but addedas well that the penalty was unconscionable“as the construction was already not far fromcompletion.”

This Court finds no fault in the costestimates of the court-appointed commissioneras to the cost to repair deficiency or defectin the works which was based on the averagebetween plaintiff’s claim of P758,080.37 anddefendant’s P306,567.67 considering thefollowing factors: that “plaintiff did notfollow the standard practice of joint surveyupon take over to establish work alreadyaccomplished, balance of work per contractstill to be done, and estimate and inventoryof repair” (Exhibit “H”). As for the cost tofinish the remaining works, plaintiff’sestimates were brushed aside by thecommissioner on the reasoned observation that“plaintiff’s cost estimate for work (to be)done by the plaintiff to complete the projectis based on a contract awarded to anothercontractor (JPT), the nature and magnitude ofwhich appears to be inconsistent with the

basic contract between defendant PECORP andplaintiff FILINVEST.” We are hamstrung to reverse the Court ofAppeals as it is rudimentary that theapplication of Article 1229 is essentiallyaddressed to the sound discretion of thecourt. As it is settled that the project wasalready 94.53% complete and that Filinvest didagree to extend the period for completion ofthe project, which extensions Filinvestincluded in computing the amount of thepenalty, the reduction thereof is clearlywarranted.

Filinvest, however, hammers on the case ofLaureano v. Kilayco, decided in 1915, whichcautions courts to distinguish between twokinds of penalty clauses in order to betterapply their authority in reducing the amountrecoverable. We held therein that: . . . [I]n any case wherein there has been apartial or irregular compliance with theprovisions in a contract for specialindemnification in the event of failure tocomply with its terms, courts will rigidlyapply the doctrine of strict constructionagainst the enforcement in its entirety of theindemnification, where it is clear from theterms of the contract that the amount orcharacter of the indemnity is fixed withoutregard to the probable damages which might beanticipated as a result of a breach of theterms of the contract; or, in other words,where the indemnity provided for isessentially a mere penalty having for itsprincipal object the enforcement of compliancewith the contract. But the courts will be slowin exercising the jurisdiction conferred uponthem in article 1154 so as to modify the termsof an agreed upon indemnification where itappears that in fixing such indemnificationthe parties had in mind a fair and reasonablecompensation for actual damages anticipated asa result of a breach of the contract, or, inother words, where the principal purpose ofthe indemnification agreed upon appears tohave been to provide for the payment of actualanticipated and liquidated damages rather than

the penalization of a breach of the contract.(Emphases supplied) Filinvest contends that the subject penaltyclause falls under the second type, i.e., theprincipal purpose for its inclusion was toprovide for payment of actual anticipated andliquidated damages rather than thepenalization of a breach of the contract.Thus, Filinvest argues that had Pecorpcompleted the project on time, it (Filinvest)could have sold the lots sooner and earned itsprojected income that would have been used forits other projects.

Unfortunately for Filinvest, theabove-quoted doctrine is inapplicable toherein case. The Supreme Court in Laureanoinstructed that a distinction between apenalty clause imposed essentially as penaltyin case of breach and a penalty clause imposedas indemnity for damages should be made incases where there has been neither partial norirregular compliance with the terms of thecontract. In cases where there has beenpartial or irregular compliance, as in thiscase, there will be no substantial differencebetween a penalty and liquidated damagesinsofar as legal results are concerned. Thedistinction is thus more apparent than realespecially in the light of certain provisionsof the Civil Code of the Philippines whichprovides in Articles 2226 and Article 2227thereof: Art. 2226. Liquidated damages are thoseagreed upon by the parties to a contract to bepaid in case of breach thereof.

Art. 2227. Liquidated damages, whetherintended as an indemnity or a penalty, shallbe equitably reduced if they are iniquitous orunconscionable.

Thus, we lamented in one case that“(t)here is no justification for the CivilCode to make an apparent distinction between apenalty and liquidated damages because thesettled rule is that there is no differencebetween penalty and liquidated damages insofaras legal results are concerned and that either

may be recovered without the necessity ofproving actual damages and both may be reducedwhen proper.” Finally, Filinvest advances theargument that while it may be true that courtsmay mitigate the amount of liquidated damagesagreed upon by the parties on the basis of theextent of the work done, this contemplates asituation where the full amount of damages ispayable in case of total breach of contract.In the instant case, as the penalty clause wasagreed upon to answer for delay in thecompletion of the project considering thattime is of the essence, “the parties thusclearly contemplated the payment ofaccumulated liquidated damages despite, andprecisely because of, partial performance.”In effect, it is Filinvest’s position that thefirst part of Article 1229 on partialperformance should not apply preciselybecause, in all likelihood, the penalty clausewould kick in in situations where Pecorp hadalready begun work but could not finish it ontime, thus, it is being penalized for delay inits completion.

The above argument, albeit sound, isinsufficient to reverse the ruling of theCourt of Appeals. It must be remembered thatthe Court of Appeals not only held that thepenalty should be reduced because there waspartial compliance but categorically stated aswell that the penalty was unconscionable.Otherwise stated, the Court of Appealsaffirmed the reduction of the penalty notsimply because there was partial complianceper se on the part of Pecorp with what wasincumbent upon it but, more fundamentally,because it deemed the penalty unconscionablein the light of Pecorp’s 94.53% completionrate.

In Ligutan v. Court of Appeals, we pointed outthat the question of whether a penalty isreasonable or iniquitous can be partlysubjective and partly objective as its“resolution would depend on such factors as,but not necessarily confined to, the type,extent and purpose of the penalty, the natureof the obligation, the mode of breach and its

consequences, the supervening realities, thestanding and relationship of the parties, andthe like, the application of which, by andlarge, is addressed to the sound discretion ofthe court.” In herein case, there has beensubstantial compliance in good faith on thepart of Pecorp which renders unconscionablethe application of the full force of thepenalty especially if we consider that in 1979the amount of P15,000.00 as penalty for delayper day was quite steep indeed. Nothing inthe records suggests that Pecorp’s delay inthe performance of 5.47% of the contract wasdue to it having acted negligently or in badfaith. Finally, we factor in the fact thatFilinvest is not free of blame either as itlikewise failed to do that which was incumbentupon it, i.e., it failed to pay Pecorp forwork actually performed by the latter in thetotal amount of P1,881,867.66. Thus, allthings considered, we find no reversible errorin the Court of Appeals’ exercise ofdiscretion in the instant case.

21. SWAGMAN VS. CA [GR NO. 161135, APRIL 8,2005]

FACTS: Sometime in 1996 and 1997, Swagmanthrough Atty. Infante and Hegerty, itspresident and vice-president, respectively,obtained from Christian loans evidenced bythree promissory notes dated 7 August 1996, 14March 1997, and 14 July 1997. Each ofthepromissory notes is in the amount ofUS$50,000 payable after three years from itsdate with an interest of 15% per annum payableevery three months. In a letter dated 16December 1998, Christian informed thepetitioner corporation that he was terminatingthe loansand demanded from the latter paymentof said loans.

On 2 February 1999, Christian filed with theRTC a complaint for a sum of money and damagesagainst the petitioner corporation, Hegerty,and Atty. Infante.

The petitioner corporation, together with itspresident and vice-president, filed an Answer

raising as defenses lack of cause of action.According to them, Christian had no cause ofaction because the three promissory notes werenot yet due and demandable.

The trial court ruled that under Section 5 ofRule 10 of the 1997 Rules of Civil Procedure,a complaint which states no cause of actionmay be cured by evidence presented withoutobjection. Thus, even if the plaintiff had nocause of action at the time he filed theinstant complaint, as defendants’ obligationare not yet due and demandable then, he maynevertheless recover on the firsttwopromissory notes in view of theintroduction of evidence showing that theobligations covered by the two promissorynotes are now due and demandable. When theinstant case was filed on February 2, 1999,none of the promissory notes was due anddemandable, but , the first and the secondpromissory notes have already matured duringthe course of the proceeding. Hence, paymentis already due.

This finding was affirmed in toto by the CA.

ISSUE: Whether or not a complaint that lacks acause of action at the time it was filed becured by the accrual of a cause of actionduring the pendency of the case.

HELD: No. Cause of action, as defined inSection 2, Rule 2 of the 1997 Rules of CivilProcedure, is the act or omission by which aparty violates the right of another. Itsessential elements are as follows:

1. A right in favor of the plaintiff bywhatever means and under whatever law itarises or is created; 2. An obligation on the part of the nameddefendant to respect or not to violate suchright; and 3. Act or omission on the part of suchdefendant in violation of the right of theplaintiff or constituting a breach of theobligation of the defendant to the plaintifffor which the latter may maintain an actionfor recovery of damages or other appropriaterelief.

It is, thus, only upon the occurrence of thelast element that a cause of action arises,giving the plaintiff the right to maintain anaction in court for recovery of damages orother appropriate relief.

Such interpretation by the trial court and CAof Section 5, Rule 10 of the 1997 Rules ofCivil Procedure is erroneous. The curingeffect under Section 5 is applicable only if acause of action in fact exists at the time thecomplaint is filed, but the complaint isdefective for failure to allege the essentialfacts. Amendments of pleadings are allowedunder Rule 10 of the 1997 Rules of CivilProcedure in order that the actual merits of acase may be determined in the most expeditiousand inexpensive manner without regard totechnicalities and that all other mattersincluded in the case may be determined in asingle proceeding, thereby avoidingmultiplicity of suits.

22. CAROLYN M. GARCIA VS. RICA MARIE S. THIO,GR NO. 154878, 16 MARCH 2007

FACTS: Respondent Thio received frompetitioner Garcia two crossed checks whichamount to US$100,000 and US$500,000,respectively, payable to the order of MarilouSantiago. According to petitioner, respondentfailed to pay the principal amounts of theloans when they fell due and so she filed acomplaint for sum of money and damages withthe RTC. Respondent denied that she contractedthe two loans and countered that it wasMarilou Satiago to whom petitioner lent themoney. She claimed she was merely asked ypetitioner to give the checks to Santiago. Sheissued the checks for P76,000 and P20,000 notas payment of interest but to accommodatepetitioner’s request that respondent use herown checks instead of Santiago’s. RTC ruled in favor of petitioner.CA reversed RTC and ruled that there was nocontract of loan between the parties.

ISSUE: (1) Whether or not there was acontract of loan between petitioner andrespondent.

(2) Who borrowed money from petitioner, therespondent or Marilou Santiago?

HELD:(1) The Court held in theaffirmative. A loan is a real contract, notconsensual, and as such I perfected only uponthe delivery of the object of the contract.Upon delivery of the contract of loan (in thiscase the money received by the debtor when thechecks were encashed) the debtor acquiresownership of such money or loan proceeds andis bound to pay the creditor an equal amount.It is undisputed that the checks weredelivered to respondent.(2) However, the checks were crossedand payable not to the order of the respondentbut to the order of a certain MarilouSantiago. Delivery is the act by which the resor substance is thereof placed within theactual or constructive possession or controlof another. Although respondent did notphysically receive the proceeds of the checks,these instruments were placed in her controland possession under an arrangement wherebyshe actually re-lent the amount to Santiago.Petition granted; judgment and resolutionreversed and set aside.

23. FAR EAST BANK & TRUST V. DIAZ REALTY INC.,G.R. NO. 138588, AUGUST 23, 2001

FACTS: 1. Diaz and Co. obtained a loan fromPacific Banking Corp. in 1974 in the amount ofP720,000 at 12% interest p.a. which wasincreased thereafter. The said loan wassecured with a real estate mortgage over twoparcels of land owned by Diaz Realty, hereinrespondent. Subsequently, the loan account waspurchased by the petitioner Far East Bank(FEBTC). Two years after, the respondentthrough its President inquired about itsobligation and upon learning of theoutstanding obligation, it tendered payment inthe form of an Interbank check in the amountof P1,450,000 in order to avoid the furtherimposition of interests. The payment was witha notation for the full settlement of theobligation.

2. The petitioner accepted the check but italleged in its defense that it was merely adeposit. When the petitioner refused torelease the mortgage, the respondent filed asuit. The lower court ruled that there was avalid tender of payment and ordered thepetitioner to cancel the mortgage. Uponappeal, the appellate court affirmed thedecision.

ISSUE: Whether or not there was a valid tenderof payment to extinguish the obligation of therespondent

RULING: Yes. Although jurisprudence tells usthat a check is not a legal tender and acreditor may validly refuse it, this dictumdoes not prevent a creditor from accepting acheck as payment. Herein, the petitioneraccepted the check and the same was cleared.

A tender of payment is the definitive act ofof offering the creditor what is due him orher, together with the demand that he acceptsit. More important is that there must be aconcurrence of intent, ability and capabilityto make good such offer, and must be absoluteand must cover the amount due. The acts of therespondent manifest its intent, ability andcapability. Hence, there was a valid tender ofpayment.

Meanwhile, the transfer of credit from PacificBank to the petitioner did not involve aneffective novation but an assignment ofcredit. As such, the petitioner has the rightto collect the full value of the credit fromthe respondent subject to the conditions ofthe promissory note previously executed.

24. LICAROS v GATMAITAN

FACTS: Abelardo Licaros invested his moneyworth$150,000 with Anglo-Asean Bank, a moneymarket placement by way of deposit, based inthe Republic of Venatu. Unexpectedly, he had ahard time getting back his investments as wellas the interest earned. He then sought thecounsel of Antonio Gatmaitan, a reputable

banker and investor. They entered into anagreement,where a non-negotiable promissorynote was to be executed in favor of Licarosworth $150,000, and that Gatmaitan would takeover the value of the investment made byLicaros with the Anglo-Asean Bank at theformer's expense. When Gatmaitan contacted theforeign bank, it said they will look into it,but it didn't prosper. Because of theinability to collect,Gatmaitan did not botherto pay Licaros the value of the promissorynote. Licaros, however, believing that he hada right to collect from Gatmaitan regardlessof the outcome, demanded payment, but wasignore. Licaros filed a complaint againstGatmaitan for the collection of the note. Thetrial court ruled in favor of Licaros, but CAreversed.

ISSUE:Whether the memorandum of agreementbetween petitioner and respondent is one ofassignment of credit or one of conventionalsubrogation

RULING: It is a conventional subrogation. Anassignment of credit has been defined as theprocess of transferring the right of theassignor to the assignee who would then have aright to proceed against the debtor. Consentof the debtor is not required is not necessaryto product its legal effects, since notice ofthe assignment would be enough. On the otherhand, subrogation of credit has been definedas the transfer of all the rights of thecreditor to a third person, who substituteshim in all his rights. It requires that allthe related parties thereto, the originalcreditor, the new creditor and the debtor,enter into a new agreement, requiring theconsent of the debtor of such transfer ofrights. In the case at hand, it was clearlystipulated by the parties in the memorandum ofagreement that the express conformity of thethird party (debtor) is needed. The memorandumcontains a space for the signature of theAnglo-ASEAN Bank written therein "with ourconforme". Without such signature, there wasno transfer of rights. The usage of the word"Assignment" was used as a general term, sinceGatmaitan was not a lawyer, and therefore wasnot well-versed with the language of the law.

25. NEREO J. PACULDO, PETITIONER, VS.BONIFACIO C. REGALADO, RESPONDENT [2000]

FACTS: On Dec. 27, 1990: Contract of Leasebetween Paculdo (lessee) & Regalado (lessor)over a parcel of land w/a wet market bldglocated along Don Mariano Marcos Ave.,Fairview Park, QC. Contract was for 5 yrsfrom this date w/monthly rental of P450kpayable w/in first 5 days of each month atRegalado’s office + 2% penalty for every monthof late payment. Paculdo leased 11 other properties fromRegalado, 10 of w/c were located in Fairviewwhile the 11th was located along QuirinoHighway, QC. Paculdo also purchased 8 units ofheavy equipment & vehicles from Regaladoamounting to P1,020,000.00. Then, on July 15, 1991, Regalado informedPaculdo that his payment was to be applied tothe following: monthly rentals for the wetmarket, Quirino lot, and the heavy equipmentpurchased. This letter had no conformityportion. Paculdo did not act on the letter. On Nov. 19, 1991, Regalado proposed thatPaculdo’s security deposit for the Quirino lotbe applied as partial payment for his accountunder the subject lot as well as to the realestate taxes on the Quirino lot. Paculdo didnot object and he signed the conformityportion. Regalado claims that Paculdo failed to payP361, 895.55 in rental for the month of May,1992 and monthly rental of P450k for themonths of June & July, 1992. Thus he sent 2demand letters (both in July, 1992) asking forpayment and later on asked Paculdo to vacatethe property. Regalado mortgaged the land under the contractto Monte de Piedad Savings Bank. It includedthe improvements introduced by Paculdoamounting to P35M. Mortgage was used assecurity for a loan amounting to P20M. On Aug. 12, 1992 onwards, Regalado refused toaccept Paculdo’s daily rental payments. Ultimately, on Aug. 20, 1992, Paculdo filed anaction for injunction & damages to enjoinRegalado from disturbing his possession of

property under the contract. Regalado on theother hand, filed a complaint for ejectmentagainst Paculdo. Later on withdrawn and thenre-filed w/claim of P3,924,000.00. MTC: Ordered Paculdo to vacate the premises &pay P527,119.27 of unpaid monthly rentals asof June 30, 1992 w/2% interest + P450k/monthw/2% interest from July 1992 onwards untilplace has been vacated & turned over toRegalado + P5M for atty’s fees + costs. Feb. 19, 1994: Regalado w/50 armed securityguards forcibly entered the property & tookpossession of the wet market. RTC affirmed MTC decision. Issued a writ ofexecution thus Paculdo vacated the propertyvoluntarily & there was complete turn over byJuly 12, 1994. Paculdo appealed to the CA claiming that:He paid P11,478,121.85 as security deposit &rentals on the wet market building. Portions of the amount paid was applied byRegalado w/o his consent, to his otherobligations. Vouchers & receipts indicatedthat the payments were made for rentals, proofof Paculdo’s declaration as to w/c obligationthe payment must be applied. CA: Dismissed the petition for lack of merit.Paculdo impliedly consented to Regalado’sapplication of payment to his otherobligations.

ISSUE: WON Paculdo was truly in arrears in thepayment of rentals on the subject property atthe time of the filing of the complaint forejectment. – NO.

RATIO: 1. Based on MTC & RTC findings,Paculdo paid a total of P10,949,447.18 toRegalado as of July 2, 1992. And if this willbe applied solely to the rentals on theFairview wet market, there would even be anexcess payment of P1,049,447.18. (see p.139for computation)2. Paculdo goes back to the July 15, 1991letter. He emphasized that applying thepayment to the purchased equipment was crucialbecause it was equivalent to 2 mos rental &was the basis for the ejectment case. Hefurther claims that his silence/lack of

protest did not mean consent; rather, it was arejection.3. CC Art. 1252 & 1254: Debtor has the rtto specify w/c among his various obligationsto the same creditor is to be satisfied at thetime of making the payment. If the debtor didnot exercise this rt, law provides that nopayment is to be made to a debt that is notyet due (CC Art. 1252) and payment has to beapplied first to the debt most onerous to thedebtor (CC Art. 1254). a. Paculdo made it clear that payments wereto be applied to his rental obligations on thewet market property. b. Regalado claims that Paculdo assented tothe application as inferred from his silence. c. A big chunk of the amount paid went intothe satisfaction of an obligation w/c was notyet due & demandable (payment of heavyequipment). Application was contrary to law. d. Paculdo’s silence was not tantamount toconsent. Consent must be clear & definite.There was no meeting of the minds. Thoughthere was an offer by Regalado, there was noacceptance by Paculdo. Even if Paculdo did notexercise his rt to choose the obligation to besatisfied first & such rt was transferred toRegalado, latter’s choice is still subject toformer’s consent. e. Lease over the Fairview property is themost onerous among all the obligations ofpetitioner to respondent. It’s a going-concern(?) and investments on the improvements weremade amounting to P35M. Paculdo was bound tolose more if lease would be rescinded than ifthe contract of sale of heavy equipment wouldnot proceed.

Holding: Petition granted. CA decisionreversed & set aside.

26. PNB MADECOR VS. UY (363 SCRA 128)

FACTS: Guillermo Uy assigned to respondent hisreceivables due from Pantranco North ExpressInc. (PNEI). Respondent filed a collectionsuit with an application for issuance ofpreliminary attachment against PNEI which wasgranted by the RTC. The sheriff issued anotice of garnishment addressed to PNB and PNBMADECOR. The RTC rendered judgment against

PNEI with writ of execution causing thesheriff to garnish the amount therein from thecredits and collectibles of PNEI frompetitioner and levy upon the assets ofpetitioner should its personal assets beinsufficient to cover its debt with PNEI.Petitioner claimed that as debtor, it islikewise a creditor for PNEI consideringunpaid rentals of PNEI for its parcel of landand by operation of law on compensation, it isactually the PNEI that still has outstandingobligations to it.

ISSUE: Whether or not there was legalcompensation between the petitioner and PNEIas a defense of the former.

RULING: NO. There could not be anycompensation between PNEI’s receivables fromPNB MADECOR and the latter’s obligation to theformer because PNB MADECOR’s supposed debt toPNEI is the subject of attachment proceedingsinitiated by a third party, herein respondentGerardo Uy. This is a controversy that wouldprevent legal compensation from taking place,per the requirements set forth in Article 1279of the Civil Code. Moreover, it was not clearwhether, at the time compensation was supposedto have taken place, the rentals being claimedby petitioner were indeed still unpaid.Petitioner did not present evidence in thisregard, apart from a statement of account.

27. AZOLLA FARMS VS CA G.R.NO. 138085NOVEMBER 11, 2004

FACTS: The trial court rendered its decisionannulling the promissory notes and real estatemortgage, and awarding damages to petitioners.The dispositive portion of the decision reads:WHEREFORE, judgment is hereby rendered:(a) the promissory notes and real estate mortgageexecuted by plaintiff Yuseco novated, if not unenforceable;(b) any subsequent foreclosure or sale of the real estateproperty, without any binding effect;As alleged by petitioners, the testimony ofrespondent’s witness, Jesus Venturina,established the novation of the promissorynotes and the real estate mortgage, and theillegality of the foreclosure of petitionerYuseco’s property. The trial court agreed with

petitioners, ruling that there was a novationof the promissory notes and real estatemortgage.

ISSUE: W/N there was no novation, hence, thepromissory notes and the real estate mortgageare valid and binding.

RULING: YES, no novation took place.Novation is the extinguishment of anobligation by the substitution or change ofthe obligation by a subsequent one whichextinguishes or modifies the first, either bychanging the object or principal conditions,or, by substituting another in place of thedebtor, or by subrogating a third person inthe rights of the creditor. In order fornovation to take place, the concurrence of thefollowing requisites is indispensable:1. there must be a previous validobligation,2. there must be an agreement of theparties concerned to a new contract,3. there must be the extinguishment of theold contract, and4. there must be the validity of the newcontract.All these requisites are patently lacking inthis case. In the first place, there is no new obligationthat supposedly novated the promissory notesor the real estate mortgage, or a pre-existingobligation that was novated by the promissorynotes and the real estate mortgage. In fact,there is only one agreement between theparties in this case, i.e., petitioners’P2,000,000.00 loan with respondent, asevidenced by the 3 promissory notes datedSeptember 13 and 27, 1982, and January 4,1983, and the real estate mortgage. As theCourt of Appeals held:… There was only one single loan agreement in the amountof P2 million between the parties as evidenced by thepromissory notes and real estate mortgage - how can it bepossibly claimed by plaintiffs that these notes andmortgage were “novated” when no previous notes ormortgage or loan agreement had been executed? Whattranspired was an application for loan was filed byplaintiffs with Credit Manila in an amount greater thanthe P2 million eventually granted. This loan applicationwas endorsed to defendant Savings Bank of Manila,

processed by the latter and eventually approved by it inthe amount of P2 million.It cannot be said that the loan application ofplaintiffs or their initial representationswith Credit Manila’s Michael de Guzman wasalready in itself a binding original contractthat was later “novated” by defendant.Plaintiff Yuseco being himself a banker,cannot pretend to have been unaware of bankingprocedures that normally recognize a “loanapplication” as just that, a mere application.Only upon the bank’s approval of the loanapplication in the amount and under such termsit deems viable and acceptable, that a bindingand effective loan agreement comes intoexistence. Without any such first or original“loan agreement” as approved in the amount andunder specified terms by the bank, there canbe nothing whatsoever that can be subsequentlynovated.

28. HEIRS OF LUIS BACUS VS COURT OF APPEALS,SPOUSES FAUSTINO DURAY AND VICTORIANA DURAYG.R. NO. 127695 03DECEMBER2001

FACTS OF THE CASE: On 1984 Luis Bacus leasedto Faustino Duray a parcel of agriculturalland with total land area of 3,002 of squaremeters, in Cebu. The lease was for six yearsending in 1990, the contract contained anoption to buy clause. Under the said option,the lessee had the exclusive and irrevocableright to buy 2,000 square meters 5 years froma year after the effectivity of the contract,at P200 per square meter. That rate shall beproportionately adjusted depending on the pesorate against the US dollar, which at the timeof the execution of the contract was 14 pesos.Close to the expiration of the contract LuisBacus died on 1989, after Duray informed theheirs of Bacus that they are willing and readyto purchase the property under the option tobuy clause. The heirs refused to sell, thusDuray filed a complaint for specificperformance against the heirs of Bacus. Heshowed that he is ready and able to meet hisobligations under the contract with Bacus. TheRTC ruled in favor of the Durays and the CAlater affirmed the decision.

ISSUE: Can the heirs of Luis Bacus becompelled to sell the portion of the lot underthe option to buy clause?

HELD: - Yes, Obligations under an option tobuy are reciprocal obligations. Theperformance of one obligation is conditionedon the simultaneous fulfillment of the otherobligation. In other words, in an option tobuy, the payment of the purchase price by thecreditor is contingent upon the execution anddelivery of the deed of sale by the debtor.- When the Duray’s exercised their option tobuy the property their obligation was toadvise the Bacus’ of their decision andreadiness to pay the price, they were not yetobliged to make the payment. Only upon theBacus’ actual execution and delivery of thedeed of sale were they required to pay. - The Durays did not incur in delay when theydid not yet deliver the payment nor make aconsignation before the expiration of thecontract. In reciprocal obligations, neitherparty incurs in delay if the other party doesnot comply or is not ready to comply in aproper manner with what is incumbent upon him.Only from the moment one of the partiesfulfils his obligation, does delay by theother begin. Obligations and Contracts Terms:• Reciprocal Obligations- Those which arisefrom the same cause, and in which each partyis a debtor and a creditor of the other, suchthat the obligation of one is dependent uponthe obligation of the other. They are to beperformed simultaneously such that theperformance of one is conditioned upon thesimultaneous fulfilment of the other.

29. THE MANILA BANKING CORPORATION vs.UNIVERSITY OF BAGUIO,INC. and GROUPDEVELOPERS, INC.G.R. No. 159189 ; February 21, 2007

FACTS:On November 26, 1981, the hereinpetitioner granted a ₱14 million credit lineto the herein respondents for the constructionof additional buildings and purchase of newequipment. On behalf of the university, then

Vice-Chairman Fernando C. Bautista, Jr. signedPN Nos. 10660, 10672, 10687, and 10708 andexecuted a continuing surety agreement.However, Bautista, Jr. diverted the netproceeds of the loan. He endorsed anddelivered the four checks representing the netproceeds to respondent Group Developers, Inc.The loan was not paid. On February 12, 1990,the bank filed a complaint for a sum of moneywith application for preliminary attachmentagainst the university, Bautista, Jr. and hiswife Milagros, before the RTC of Makati City.Five years later, on March 31, 1995, the bankamended the complaint and impleaded GDI asadditional defendant. Consequently, even ifthe loan was overdue, the bank did not demandpayment until February 8, 1989. By way ofcross-claim, the university prayed that GDI beordered to pay the university the amount itwould have to pay the bank. On December 14,1995, the bank and GDI executed a deed ofdacion en pago. On March 19, 1998, theuniversity moved to dismiss the amendedcomplaint. On October 14, 1999 the universitymoved to set the case for pre-trial onDecember 2,1999. On August 3, 2000, the trialcourt resolved GDI’s motion to resolve themotion to dismiss and defer pre-trial. OnAugust 29, 2001, the university filed amanifestation with motion for reconsiderationof the August 17, 1999 Order denying theuniversity’s motion to dismiss the amendedcomplaint.

ISSUE: Whether or not the trial court erred indismissing the amended complaint, withouttrial, upon motion of respondent university.

\RULING: In this case, the university’s March19, 1998 motion to dismiss the amendedcomplaint was improper under Rule 16 becauseit was filed after respondent university filedits responsive pleading, its Answer. Also themotion’s merit could not be determined basedsolely on the allegations of the initiatorypleading, the amended complaint, since themotion was based on the deed of dacion enpago, which was not even alleged in thecomplaint. And since the deed of dacion enpago had been expunged from the record, the

trial court erred in its finding of paymentand lack of cause of action base on the deed.

In the case at bar, there had been nopresentation of evidence yet and petitionerhad not rested its case. Therefore the August17, 1999 Order properly denied the motion todismiss for being improper under either Rule16 or 33. The trial court had also made apremature statement in its Omnibus Order datedApril 21, 1997 that the dacion en pago settledthe loan and the case, even as it also statedthat respondent university was used as a“dummy” of GDI. If indeed there was fraud,considering the uncollateralized loan, itsdiversion, non-payment, absence of demandalthough overdue, and the dacion en pago wheretitle of the property accepted as paymentcannot be transferred, the fraud should beuncovered to determine who are liable to paythe loan. Thus, this petition was granted andset aside the trial court’s April 11, 2002 andJune 27, 2003 Orders.

The trial court is ordered to proceed with thepre-trial and hear this case with dispatch.

30. UNION REFINERY VS. TOLENTINO SR.

Doctrine: The basic civil law principle ofrelativity of contracts[9] demands thatcontracts only bind the parties (their heirsand assigns) who entered into it. It cannotfavor or prejudice third persons. Thus, theappellate court was correct in holding thatthe MOA between petitioner and respondentRoland binds only them, and that anyobligation arising therefrom may only beinvoked against each or both of them.

FACTS: Respondent Roland’s UCPB Check No.184124 bounced for insufficiency of funds.Petitioner filed a complaint for violation ofBatas Pambansa Blg. 22 or the Bouncing ChecksLaw, but respondent Roland was acquitted.

Respondent Roland’s unpaid debt allegedlyballooned to P2,555,362.34, hence, petitionerterminated the dealership contract on August24, 1987. When its formal demand for paymentwas unheeded, petitioner instituted an action

for collection of sum of money withpreliminary attachment against respondentRoland. His parents, respondents Reynaldo C.Tolentino, Sr. and Lucia B. Tolentino, andsiblings, respondents Reynaldo, Jr. and Rex,were impleaded as co-defendants. Therespondents-spouses Reynaldo, Sr. and Luciawere impleaded in the suit allegedly becausethey were the ones who actually secured thedealership contract with petitioner.Respondents Reynaldo, Jr. and Rex were suedfor the chattel mortgage of their vehiclesexecuted as security for their brother’sobligation with petitioner.Petitioner, however, contends that theappellate court erred in holding thatrespondent Roland only owes it P1,541,211.51and not P2,183,895.43 as claimed.

ISSUE: W/N the amount of P412,683.39, of which onlyP364,464.39 was credited by the Court of Appeals in favorof respondent Roland, does not represent payment dulymade by respondent Roland.

RULING: YESThe Court rejects the claim of respondentRoland that he made several payments but wereunrecorded by the petitioner. This claim runsagainst the grain of the rule that the one whopleads payment has the burden of proving it.In the world of business, it is unnatural tomake payments and allow them to be unrecorded.To be sure, even where the plaintiff allegesnonpayment, the general rule is that theburden rests on the defendant to provepayment, rather than on the plaintiff to provenonpayment.