Article 1179 and 1181

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G.R. No. 170405 February 2, 2010

RAYMUNDO S. DE LEON, Petitioner,

vs.BENITA T. ONG.1 Respondent.

D E C I S I O N

CORONA, J.:

On March 10, 1993, petitioner Raymundo S. de Leon sold three parcels of land2 with improvements

situated in Antipolo, Rizal to respondent Benita T. Ong. As these properties were mortgaged to RealSavings and Loan Association, Incorporated (RSLAI), petitioner and respondent executed a notarized

deed of absolute sale with assumption of mortgage3 stating:

x x x x x x x x x

That for and in consideration of the sum of ONE MILLION ONE HUNDRED THOUSAND PESOS (P1.1

million), Philippine currency, the receipt whereof is hereby acknowledged from [RESPONDENT] to the

entire satisfaction of [PETITIONER], said [PETITIONER] does hereby sell, transfer and convey in a

manner absolute and irrevocable, unto said [RESPONDENT], his heirs and assigns that certain realestate together with the buildings and other improvements existing thereon, situated in [Barrio]

Mayamot, Antipolo, Rizal under the following terms and conditions:

1. That upon full payment of [respondent] of the amount of FOUR HUNDRED FIFTEENTHOUSAND FIVE HUNDRED (P415,000), [petitioner] shall execute and sign a deed of

assumption of mortgage in favor of [respondent] without any further cost whatsoever;

2. That [respondent] shall assume payment of the outstanding loan of SIX HUNDRED

EIGHTY FOUR THOUSAND FIVE HUNDRED PESOS (P684,500) with REAL SAVINGS AND

LOAN,4 Cainta, Rizal… (emphasis supplied)

x x x x x x x x x

Pursuant to this deed, respondent gave petitioner P415,500 as partial payment. Petitioner, on the otherhand, handed the keys to the properties and wrote a letter informing RSLAI of the sale and authorizing it

to accept payment from respondent and release the certificates of title.

Thereafter, respondent undertook repairs and made improvements on the properties.5 Respondent

likewise informed RSLAI of her agreement with petitioner for her to assume petitioner’s outstanding

loan. RSLAI required her to undergo credit investigation.

Subsequently, respondent learned that petitioner again sold the same properties to one Leona Viloria

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after March 10, 1993 and changed the locks, rendering the keys he gave her useless. Respondent thusproceeded to RSLAI to inquire about the credit investigation. However, she was informed that petitioner

had already paid the amount due and had taken back the certificates of title.

Respondent persistently contacted petitioner but her efforts proved futile.

On June 18, 1993, respondent filed a complaint for specific performance, declaration of nullity of the

second sale and damages6 against petitioner and Viloria in the Regional Trial Court (RTC) of Antipolo,Rizal, Branch 74. She claimed that since petitioner had previously sold the properties to her on March 10,

1993, he no longer had the right to sell the same to Viloria. Thus, petitioner fraudulently deprived her of the properties.

Petitioner, on the other hand, insisted that respondent did not have a cause of action against him and

consequently prayed for the dismissal of the complaint. He claimed that since the transaction was subject

to a condition (i.e., that RSLAI approve the assumption of mortgage), they only entered into a contract to

sell. Inasmuch as respondent did apply for a loan from RSLAI, the condition did not arise. Consequently,

the sale was not perfected and he could freely dispose of the properties. Furthermore, he made a

counter-claim for damages as respondent filed the complaint allegedly with gross and evident bad faith.

Because respondent was a licensed real estate broker, the RTC concluded that she knew that the validityof the sale was subject to a condition. The perfection of a contract of sale depended on RSLAI’s approval

of the assumption of mortgage. Since RSLAI did not allow respondent to assume petitioner’s obligation,

the RTC held that the sale was never perfected.

In a decision dated August 27, 1999,7 the RTC dismissed the complaint for lack of cause of action and

ordered respondent to pay petitioner P100,000 moral damages, P20,000 attorney’s fees and the cost of

suit.

Aggrieved, respondent appealed to the Court of Appeals (CA),8 asserting that the court a quo erred in

dismissing the complaint.

The CA found that the March 10, 2003 contract executed by the parties did not impose any condition on

the sale and held that the parties entered into a contract of sale. Consequently, because petitioner no

longer owned the properties when he sold them to Viloria, it declared the second sale void. Moreover, it

found petitioner liable for moral and exemplary damages for fraudulently depriving respondent of the

properties.

In a decision dated July 22, 2005,9 the CA upheld the sale to respondent and nullified the sale to Viloria. It likewise ordered respondent to reimburse petitioner P715,250 (or the amount he paid to RSLAI).

Petitioner, on the other hand, was ordered to deliver the certificates of titles to respondent and pay her

P50,000 moral damages and P15,000 exemplary damages.

Petitioner moved for reconsideration but it was denied in a resolution dated November 11, 2005.10

Hence, this petition,11 with the sole issue being whether the parties entered into a contract of sale or a

contract to sell.

Petitioner insists that he entered into a contract to sell since the validity of the transaction was subject to

a suspensive condition, that is , the approval by RSLAI of respondent’s assumption of mortgage. Because

RSLAI did not allow respondent to assume his (petitioner’s) obligation, the condition never materialized.

























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Consequently, there was no sale.

Respondent, on the other hand, asserts that they entered into a contract of sale as petitioner already

conveyed full ownership of the subject properties upon the execution of the deed.

We modify the decision of the CA.

Contract of Sale or Contract to Sell?

The RTC and the CA had conflicting interpretations of the March 10, 1993 deed. The RTC ruled that it wasa contract to sell while the CA held that it was a contract of sale.

In a contract of sale, the seller conveys ownership of the property to the buyer upon the perfection of the

contract. Should the buyer default in the payment of the purchase price, the seller may either sue for the

collection thereof or have the contract judicially resolved and set aside. The non-payment of the price istherefore a negative resolutory condition.12

On the other hand, a contract to sell is subject to a positive suspensive condition. The buyer does not acquire ownership of the property until he fully pays the purchase price. For this reason, if the buyerdefaults in the payment thereof, the seller can only sue for damages.13

The deed executed by the parties (as previously quoted) stated that petitioner sold the properties to

respondent "in a manner absolute and irrevocable" for a sum of P1.1 million.14 With regard to the manner

of payment, it required respondent to pay P415,500 in cash to petitioner upon the execution of the deed,

with the balance15 payable directly to RSLAI (on behalf of petitioner) within a reasonable time.16 Nothing

in said instrument implied that petitioner reserved ownership of the properties until the full payment of

the purchase price.17 On the contrary, the terms and conditions of the deed only affected the manner of

payment, not the immediate transfer of ownership (upon the execution of the notarized contract) from

petitioner as seller to respondent as buyer. Otherwise stated, the said terms and conditions pertained to

the performance of the contract, not the perfection thereof nor the transfer of ownership.

Settled is the rule that the seller is obliged to transfer title over the properties and deliver the same to the

buyer.18 In this regard, Article 1498 of the Civil Code19 provides that, as a rule, the execution of anotarized deed of sale is equivalent to the delivery of a thing sold.

In this instance, petitioner executed a notarized deed of absolute sale in favor of respondent. Moreover,

not only did petitioner turn over the keys to the properties to respondent, he also authorized RSLAI toreceive payment from respondent and release his certificates of title to her. The totality of petitioner’s

acts clearly indicates that he had unqualifiedly delivered and transferred ownership of the properties to

respondent. Clearly, it was a contract of sale the parties entered into.

Furthermore, even assuming arguendo that the agreement of the parties was subject to the condition that

RSLAI had to approve the assumption of mortgage, the said condition was considered fulfilled aspetitioner prevented its fulfillment by paying his outstanding obligation and taking back the certificates

of title without even notifying respondent. In this connection, Article 1186 of the Civil Code provides:

Article 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment.

































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Void Sale Or Double Sale?

Petitioner sold the same properties to two buyers, first to respondent and then to Viloria on two separate

occasions.20 However, the second sale was not void for the sole reason that petitioner had previously sold

the same properties to respondent. On this account, the CA erred.

This case involves a double sale as the disputed properties were sold validly on two separate occasions

by the same seller to the two different buyers in good faith.

Article 1544 of the Civil Code provides:

Article 1544. If the same thing should have been sold to different vendees, the ownership shall betransferred to the person who may have first taken possession thereof in good faith, if it should be

movable property.

Should it be immovable property, the ownership shall belong to the person acquiring it who in

good faith first recorded it in the Registry of Property.

Should there be no inscription, the ownership shall pertain to the person who in good faith was

first in the possession; and, in the absence thereof, to the person who presents the oldest title,

provided there is good faith. (emphasis supplied)

This provision clearly states that the rules on double or multiple sales apply only to purchasers in good

faith. Needless to say, it disqualifies any purchaser in bad faith.

A purchaser in good faith is one who buys the property of another without notice that some other person

has a right to, or an interest in, such property and pays a full and fair price for the same at the time of

such purchase, or before he has notice of some other person’s claim or interest in the property.21 The law

requires, on the part of the buyer, lack of notice of a defect in the title of the seller and payment in full of

the fair price at the time of the sale or prior to having notice of any defect in the seller’s title.

Was respondent a purchaser in good faith? Yes.

Respondent purchased the properties, knowing they were encumbered only by the mortgage to RSLAI.

According to her agreement with petitioner, respondent had the obligation to assume the balance of petitioner’s outstanding obligation to RSLAI. Consequently, respondent informed RSLAI of the sale and of

her assumption of petitioner’s obligation. However, because petitioner surreptitiously paid his

outstanding obligation and took back her certificates of title, petitioner himself rendered respondent’s

obligation to assume petitioner’s indebtedness to RSLAI impossible to perform.

Article 1266 of the Civil Code provides:

Article 1266. The debtor in obligations to do shall be released when the prestation become legally or

physically impossible without the fault of the obligor.

Since respondent’s obligation to assume petitioner’s outstanding balance with RSLAI became impossible

without her fault, she was released from the said obligation. Moreover, because petitioner himself

willfully prevented the condition vis-à-vis the payment of the remainder of the purchase price, the said

condition is considered fulfilled pursuant to Article 1186 of the Civil Code. For purposes, therefore, of









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determining whether respondent was a purchaser in good faith, she is deemed to have fully compliedwith the condition of the payment of the remainder of the purchase price.

Respondent was not aware of any interest in or a claim on the properties other than the mortgage to

RSLAI which she undertook to assume. Moreover, Viloria bought the properties from petitioner after the

latter sold them to respondent. Respondent was therefore a purchaser in good faith. Hence, the rules ondouble sale are applicable.

Article 1544 of the Civil Code provides that when neither buyer registered the sale of the properties with

the registrar of deeds, the one who took prior possession of the properties shall be the lawful ownerthereof.

In this instance, petitioner delivered the properties to respondent when he executed the notarized deed 22

and handed over to respondent the keys to the properties. For this reason, respondent took actual

possession and exercised control thereof by making repairs and improvements thereon. Clearly, the sale

was perfected and consummated on March 10, 1993. Thus, respondent became the lawful owner of the

properties.

Nonetheless, while the condition as to the payment of the balance of the purchase price was deemed

fulfilled, respondent’s obligation to pay it subsisted. Otherwise, she would be unjustly enriched at the

expense of petitioner.

Therefore, respondent must pay petitioner P684,500, the amount stated in the deed. This is because the

provisions, terms and conditions of the contract constitute the law between the parties. Moreover, thedeed itself provided that the assumption of mortgage "was without any further cost whatsoever."

Petitioner, on the other hand, must deliver the certificates of title to respondent. We likewise affirm the

award of damages.

WHEREFORE, the July 22, 2005 decision and November 11, 2005 resolution of the Court of Appeals in

CA-G.R. CV No. 59748 are hereby AFFIRMED with MODIFICATION insofar as respondent Benita T. Ongis ordered to pay petitioner Raymundo de Leon P684,500 representing the balance of the purchase price

as provided in their March 10, 1993 agreement.

Costs against petitioner.

SO ORDERED.

RENATO C. CORONA

Associate Justice

Chairperson

WE CONCUR:

ANTONIO T. CARPIO Associate Justice

PRESBITERO J. VELASCO, JR. Associate Justice

ANTONIO EDUARDO B. NACHURA

Associate Justice

DIOSDADO M. PERALTA

Associate Justice




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A T T E S T A T I O N

I attest that the conclusions in the above Decision had been reached in consultation before the case was

assigned to the writer of the opinion of the Court’s Division.

RENATO C. CORONA

Associate JusticeChairperson

C E R T I F I C A T I O N

Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson’s Attestation, I

certify that the conclusions in the above Decision had been reached in consultation before the case was

assigned to the writer of the opinion of the Court’s Division.

REYNATO S. PUNO

Chief Justice

Footnotes

* Per Special Order No. 818 dated January 18, 2010.

1 The Court of Appeals was impleaded as respondent but was excluded pursuant toSection 4, Rule 45 of the Rules of Court.

2 Covered by TCT Nos. 226469, 226470 and 226471 registered in the name of petitioner.

3 Rollo, pp. 55-56. There is a marked discrepancy between the total amount and the sum

of the payments to be made by respondent (or P1,099,500).

4 The records of this case revealed that petitioner’s outstanding obligation to RSLAI

amounted to P715,000 as of April 1, 1993.

5 Respondent had the properties cleaned and landscaped. She likewise had the house(built thereon) painted and repaired.

6 Docketed as Civil Case No. 93-2739.

7 Penned by Judge Francisco A. Querubin. Id., pp. 129-151.

8 Docketed as CA-G.R. CV No. 59748.

9 Penned by Associate Justice Eugenio S. Labitoria and concurred in by Associate JusticesEliezer R. delos Santos and Arturo D. Brion (now a member of this Court) of the Third

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Division of the Court of Appeals. Rollo, pp. 30-34.

10 Id., pp. 46-47.

11 Under Rule 45 of the Rules of Court.

12 Dijamco v. Court of Appeals. G.R. No. 113665, 7 October 2004, 440 SCRA 190, 197.See

also J.B.L. Reyes, 5 Outline of Philippine Civil Law, 2-3 (1957).

13 Id.

14 Supra note 3.

15 Supra note 4.

16 Paragraph 2 of the deed did not prescribe a period within which respondent should

settle petitioner’s obligation to RSLAI.

17 See Civil Code, Art. 1370 which provides:

Article 1370. If the terms of a contract are clear and leave no doubt upon the

intention of the contracting parties, the literal meaning of the stipulations shall

control.

If the words appear to be contrary to the evident intention of the parties, the

latter shall prevail over the former.

18 Civil Code, Art. 1495 provides:

Article 1495. The vendor is bound to transfer the ownership of and deliver, aswell as warrant the thing which is the object of the sale.

19 Civil Code, Art. 1498 provides:

Article 1498. When a sale is made through a public instrument , the execution

thereof shall be equivalent to the delivery of the thing which is the object of

the contract , if from the deed. the contrary does not appear or cannot be

clearly inferred.

With regard to movable property, its delivery may also be made by the delivery of

the keys of the place or depository where it is stored or kept. (emphasis supplied)

20 See Delfin v. Lagon, G.R. No. 132262, 15 September 2006, 502 SCRA 24, 31.

21 Centeno v. Spouses Viray, 440 Phil. 881, 885 (2002).

22 See Civil Code, Art. 1498.








































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The Lawphil Project - Arellano Law Foundation

G.R. No. 188064 June 1, 2011

MILA A. REYES, Petitioner,

vs.VICTORIA T. TUPARAN, Respondent.

D E C I S I O N

MENDOZA, J.:

Subject of this petition for review is the February 13, 2009 Decision1 of the Court of Appeals

(CA) which affirmed with modification the February 22, 2006 Decision2 of the Regional Trial

Court, Branch 172, Valenzuela City (RTC), in Civil Case No. 3945-V-92, an action forRescission of Contract with Damages.

On September 10, 1992, Mila A. Reyes (petitioner) filed a complaint for Rescission of

Contract with Damages against Victoria T. Tuparan (respondent) before the RTC. In herComplaint, petitioner alleged, among others, that she was the registered owner of a 1,274

square meter residential and commercial lot located in Karuhatan, Valenzuela City, andcovered by TCT No. V-4130; that on that property, she put up a three-storey commercial

building known as RBJ Building and a residential apartment building; that since 1990, she

had been operating a drugstore and cosmetics store on the ground floor of RBJ Buildingwhere she also had been residing while the other areas of the buildings including the

sidewalks were being leased and occupied by tenants and street vendors.

In December 1989, respondent leased from petitioner a space on the ground floor of the RBJ

Building for her pawnshop business for a monthly rental of ₱4,000.00. A close friendship

developed between the two which led to the respondent investing thousands of pesos inpetitioner’s financing/lending business from February 7, 1990 to May 27, 1990, with

interest at the rate of 6% a month.

On June 20, 1988, petitioner mortgaged the subject real properties to the Farmers Savings

Bank and Loan Bank, Inc. (FSL Bank) to secure a loan of ₱2,000,000.00 payable ininstallments. On November 15, 1990, petitioner’s outstanding account on the mortgage

reached ₱2,278,078.13. Petitioner then decided to sell her real properties for at least

₱6,500,000.00 so she could liquidate her bank loan and finance her businesses. As a gestureof friendship, respondent verbally offered to conditionally buy petitioner’s real properties

for ₱4,200,000.00 payable on installment basis without interest and to assume the bank

loan. To induce the petitioner to accept her offer, respondent offered the following

conditions/concessions:

1. That the conditional sale will be cancelled if the plaintiff ( petitioner ) canfind a buyer of said properties for the amount of ₱6,500,000.00 within the

next three (3) months provided all amounts received by the plaintiff from

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the defendant (respondent ) including payments actually made by defendant to Farmers Savings and Loan Bank would be refunded to the defendant with

additional interest of six (6%) monthly;

2. That the plaintiff would continue using the space occupied by her and

drugstore and cosmetics store without any rentals for the duration of theinstallment payments;

3. That there will be a lease for fifteen (15) years in favor of the plaintiff over

the space for drugstore and cosmetics store at a monthly rental of only₱8,000.00 after full payment of the stipulated installment payments are

made by the defendant;

4. That the defendant will undertake the renewal and payment of the fire

insurance policies on the two (2) subject buildings following the expiration

of the then existing fire insurance policy of the plaintiff up to the time that

plaintiff is fully paid of the total purchase price of ₱4,200,000.00.3

After petitioner’s verbal acceptance of all the conditions/concessions, both parties worked

together to obtain FSL Bank’s approval for respondent to assume her (petitioner’s)

outstanding bank account. The assumption would be part of respondent’s purchase price

for petitioner’s mortgaged real properties. FSL Bank approved their proposal on the

condition that petitioner would sign or remain as co-maker for the mortgage obligation

assumed by respondent.

On November 26, 1990, the parties and FSL Bank executed the corresponding Deed of

Conditional Sale of Real Properties with Assumption of Mortgage. Due to their close

personal friendship and business relationship, both parties chose not to reduce into writing

the other terms of their agreement mentioned in paragraph 11 of the complaint. Besides,

FSL Bank did not want to incorporate in the Deed of Conditional Sale of Real Properties withAssumption of Mortgage any other side agreement between petitioner and respondent.

Under the Deed of Conditional Sale of Real Properties with Assumption of Mortgage,

respondent was bound to pay the petitioner a lump sum of ₱1.2 million pesos without

interest as part of the purchase price in three (3) fixed installments as follows:

a) ₱200,000.00 – due January 31, 1991

b) ₱200,000.00 – due June 30, 1991

c) ₱800,000.00 – due December 31, 1991

Respondent, however, defaulted in the payment of her obligations on their due dates.Instead of paying the amounts due in lump sum on their respective maturity dates,

respondent paid petitioner in small amounts from time to time. To compensate for herdelayed payments, respondent agreed to pay petitioner an interest of 6% a month. As of

August 31, 1992, respondent had only paid ₱395,000.00, leaving a balance of ₱805,000.00

as principal on t he unpaid installments and ₱466,893.25 as unpaid accumulated interest.





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Petitioner further averred that despite her success in finding a prospective buyer for thesubject real properties within the 3-month period agreed upon, respondent reneged on her

promise to allow the cancellation of their deed of conditional sale. Instead, respondent

became interested in owning the subject real properties and even wanted to convert the

entire property into a modern commercial complex. Nonetheless, she consented because

respondent repeatedly professed friendship and assured her that all their verbal side

agreement would be honored as shown by the fact that since December 1990, she(respondent) had not collected any rentals from the petitioner for the space occupied by her

drugstore and cosmetics store.

On March 19, 1992, the residential building was gutted by fire which caused the petitioner

to lose rental income in the amount of ₱8,000.00 a month since April 1992. Respondent

neglected to renew the fire insurance policy on the subject buildings.

Since December 1990, respondent had taken possession of the subject real properties andhad been continuously collecting and receiving monthly rental income from the tenants of

the buildings and vendors of the sidewalk fronting the RBJ building without sharing it with

petitioner.

On September 2, 1992, respondent offered the amount of ₱751,000.00 only payable on

September 7, 1992, as full payment of the purchase price of the subject real properties and

demanded the simultaneous execution of the corresponding deed of absolute sale.

Respondent’s Answer

Respondent countered, among others, that the tripartite agreement erroneously designated

by the petitioner as a Deed of Conditional Sale of Real Property with Assumption of

Mortgage was actually a pure and absolute contract of sale with a term period. It could not

be considered a conditional sale because the acquisition of contractual rights and the

performance of the obligation therein did not depend upon a future and uncertain event.Moreover, the capital gains and documentary stamps and other miscellaneous expenses and

real estate taxes up to 1990 were supposed to be paid by petitioner but she failed to do so.

Respondent further averred that she successfully rescued the properties from a definite

foreclosure by paying the assumed mortgage in the amount of ₱2,278,078.13 plus interest

and other finance charges. Because of her payment, she was able to obtain a deed of cancellation of mortgage and secure a release of mortgage on the subject real propertiesincluding petitioner’s ancestral residential property in Sta. Maria, Bulacan.

Petitioner’s claim for the balance of the purchase price of the subject real properties was

baseless and unwarranted because the full amount of the purchase price had already been

paid, as she did pay more than ₱4,200,000.00, the agreed purchase price of the subject real

properties, and she had even introduced improvements thereon worth more than₱4,800,000.00. As the parties could no longer be restored to their original positions,

rescission could not be resorted to.

Respondent added that as a result of their business relationship, petitioner was able to

obtain from her a loan in the amount of ₱400,000.00 with interest and took several pieces of

jewelry worth ₱120,000.00. Petitioner also failed and refused to pay the monthly rental of

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₱20,000.00 since November 16, 1990 up to the present for the use and occupancy of the

ground floor of the building on the subject real property, thus, accumulating arrearages in

the amount of ₱470,000.00 as of October 1992.

Ruling of the RTC

On February 22, 2006, the RTC handed down its decision finding that respondent failed to

pay in full the ₱4.2 million total purchase price of the subject real properties leaving a

balance of ₱805,000.00. It stated that the checks and receipts presented by respondent refer

to her payments of the mortgage obligation with FSL Bank and not the payment of thebalance of ₱1,200,000.00. The RTC also considered the Deed of Conditional Sale of Real

Property with Assumption of Mortgage executed by and among the two parties and FSL

Bank a contract to sell, and not a contract of sale. It was of the opinion that although thepetitioner was entitled to a rescission of the contract, it could not be permitted because her

non-payment in full of the purchase price "may not be considered as substantial andfundamental breach of the contract as to defeat the object of the parties in entering into the

contract."4 The RTC believed that the respondent’s offer stated in her counsel’s letter dated

September 2, 1992 to settle what she thought was her unpaid balance of ₱751,000.00showed her sincerity and willingness to settle her obligation. Hence, it would be more

equitable to give respondent a chance to pay the balance plus interest within a given period

of time.

Finally, the RTC stated that there was no factual or legal basis to award damages and

attorney’s fees because there was no proof that either party acted fraudulently or in bad

faith.

Thus, the dispositive portion of the RTC Decision reads:

WHEREFORE, judgment is hereby rendered as follows:

1. Allowing the defendant to pay the plaintiff within thirty (30) days from

the finality hereof the amount of ₱805,000.00, representing the unpaid

purchase price of the subject property, with interest thereon at 2% a month

from January 1, 1992 until fully paid. Failure of the defendant to pay said

amount within the said period shall cause the automatic rescission of the

contract (Deed of Conditional Sale of Real Property with Assumption of Mortgage) and the plaintiff and the defendant shall be restored to their

former positions relative to the subject property with each returning to the

other whatever benefits each derived from the transaction;

2. Directing the defendant to allow the plaintiff to continue using the space

occupied by her for drugstore and cosmetic store without any rental

pending payment of the aforesaid balance of the purchase price.

3. Ordering the defendant, upon her full payment of the purchase price

together with interest, to execute a contract of lease for fifteen (15) years in

favor of the plaintiff over the space for the drugstore and cosmetic store at a

fixed monthly rental of ₱8,000.00; and





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4. Directing the plaintiff, upon full payment to her by the defendant of thepurchase price together with interest, to execute the necessary deed of sale,

as well as to pay the Capital Gains Tax, documentary stamps and other

miscellaneous expenses necessary for securing the BIR Clearance, and to pay

the real estate taxes due on the subject property up to 1990, all necessary to

transfer ownership of the subject property to the defendant.

No pronouncement as to damages, attorney’s fees and costs.

SO ORDERED.5

Ruling of the CA

On February 13, 2009, the CA rendered its decision affirming with modification the RTC

Decision. The CA agreed with the RTC that the contract entered into by the parties is a

contract to sell but ruled that the remedy of rescission could not apply because the

respondent’s failure to pay the petitioner the balance of the purchase price in the total

amount of ₱805,000.00 was not a breach of contract, but merely an event that preventedthe seller (petitioner) from conveying title to the purchaser (respondent). It reasoned that

out of the total purchase price of the subject property in the amount of ₱4,200,000.00,

respondent’s remaining unpaid balance was only ₱805,000.00. Since respondent had

already paid a substantial amount of the purchase price, it was but right and just to allowher to pay the unpaid balance of the purchase price plus interest. Thus, the decretal portion

of the CA Decision reads:

WHEREFORE, premises considered, the Decision dated 22 February 2006 and Order dated

22 December 2006 of the Regional Trial Court of Valenzuela City, Branch 172 in Civil Case

No. 3945-V-92 are AFFIRMED with MODIFICATION in that defendant-appellant Victoria T.

Tuparan is hereby ORDERED to pay plaintiff-appellee/appellant Mila A. Reyes, within 30

days from finality of this Decision, the amount of ₱805,000.00 representing the unpaidbalance of the purchase price of the subject property, plus interest thereon at the rate of 6%

per annum from 11 September 1992 up to finality of this Decision and, thereafter, at the

rate of 12% per annum until full payment. The ruling of the trial court on the automatic

rescission of the Deed of Conditional Sale with Assumption of Mortgage is hereby DELETED.

Subject to the foregoing, the dispositive portion of the trial court’s decision is AFFIRMED in

all other respects.

SO ORDERED.6

After the denial of petitioner’s motion for reconsideration and respondent’s motion for

partial reconsideration, petitioner filed the subject petition for review praying for the

reversal and setting aside of the CA Decision anchored on the following

ASSIGNMENT OF ERRORS

A. THE COURT OF APPEALS SERIOUSLY ERRED AND ABUSED ITS DISCRETION IN

DISALLOWING THE OUTRIGHT RESCISSION OF THE SUBJECT DEED OF CONDITIONAL

SALE OF REAL PROPERTIES WITH ASSUMPTION OF MORTGAGE ON THE GROUND THAT

RESPONDENT TUPARAN’S FAILURE TO PAY PETITIONER REYES THE BALANCE OF THE









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PURCHASE PRICE OF ₱805,000.00 IS NOT A BREACH OF CONTRACT DESPITE ITS OWN

FINDINGS THAT PETITIONER STILL RETAINS OWNERSHIP AND TITLE OVER THE SUBJECT

REAL PROPERTIES DUE TO RESPONDENT’S REFUSAL TO PAY THE BALANCE OF THE

TOTAL PURCHASE PRICE OF ₱805,000.00 WHICH IS EQUAL TO 20% OF THE TOTAL

PURCHASE PRICE OF ₱4,200,000.00 OR 66% OF THE STIPULATED LAST INSTALLMENT OF₱1,200,000.00 PLUS THE INTEREST THEREON. IN EFFECT, THE COURT OF APPEALS

AFFIRMED AND ADOPTED THE TRIAL COURT’S CONCLUSION THAT THE RESPONDENT’SNON-PAYMENT OF THE ₱805,000.00 IS ONLY A SLIGHT OR CASUAL BREACH OF

CONTRACT.

B. THE COURT OF APPEALS SERIOUSLY ERRED AND ABUSED ITS DISCRETION IN

DISREGARDING AS GROUND FOR THE RESCISSION OF THE SUBJECT CONTRACT THE

OTHER FRAUDULENT AND MALICIOUS ACTS COMMITTED BY THE RESPONDENT

AGAINST THE PETITIONER WHICH BY THEMSELVES SUFFICIENTLY JUSTIFY A DENIAL

OF A GRACE PERIOD OF THIRTY (30) DAYS TO THE RESPONDENT WITHIN WHICH TO

PAY TO THE PETITIONER THE ₱805,000.00 PLUS INTEREST THEREON.

C. EVEN ASSUMING ARGUENDO THAT PETITIONER IS NOT ENTITLED TO THE RESCISSIONOF THE SUBJECT CONTRACT, THE COURT OF APPEALS STILL SERIOUSLY ERRED ANDABUSED ITS DISCRETION IN REDUCING THE INTEREST ON THE ₱805,000.00 TO ONLY "6%

PER ANNUM STARTING FROM THE DATE OF FILING OF THE COMPLAINT ON SEPTEMBER

11, 1992" DESPITE THE PERSONAL COMMITMENT OF THE RESPONDENT AND

AGREEMENT BETWEEN THE PARTIES THAT RESPONDENT WILL PAY INTEREST ON THE

₱805,000.00 AT THE RATE OF 6% MONTHLY STARTING THE DATE OF DELINQUENCY ON

DECEMBER 31, 1991.

D. THE COURT OF APPEALS SERIOUSLY ERRED AND ABUSED ITS DISCRETION IN THEAPPRECIATION AND/OR MISAPPRECIATION OF FACTS RESULTING INTO THE DENIAL OF

THE CLAIM OF PETITIONER REYES FOR ACTUAL DAMAGES WHICH CORRESPOND TO THE

MILLIONS OF PESOS OF RENTALS/FRUITS OF THE SUBJECT REAL PROPERTIES WHICHRESPONDENT TUPARAN COLLECTED CONTINUOUSLY SINCE DECEMBER 1990, EVENWITH THE UNPAID BALANCE OF ₱805,000.00 AND DESPITE THE FACT THAT

RESPONDENT DID NOT CONTROVERT SUCH CLAIM OF THE PETITIONER AS CONTAINED

IN HER AMENDED COMPLAINT DATED APRIL 22, 2006.

E. THE COURT OF APPEALS SERIOUSLY ERRED AND ABUSED ITS DISCRETION IN THE

APPRECIATION OF FACTS RESULTING INTO THE DENIAL OF THE CLAIM OF PETITIONER

REYES FOR THE ₱29,609.00 BACK RENTALS THAT WERE COLLECTED BY RESPONDENT

TUPARAN FROM THE OLD TENANTS OF THE PETITIONER.

F. THE COURT OF APPEALS SERIOUSLY ERRED AND ABUSED ITS DISCRETION IN DENYING

THE PETITIONER’S EARLIER "URGENT MOTION FOR ISSUANCE OF A PRELIMINARYMANDATORY AND PROHIBITORY INJUNCTION" DATED JULY 7, 2008 AND THE

"SUPPLEMENT" THERETO DATED AUGUST 4, 2008 THEREBY CONDONING THE

UNJUSTIFIABLE FAILURE/REFUSAL OF JUDGE FLORO ALEJO TO RESOLVE WITHINELEVEN (11) YEARS THE PETITIONER’S THREE (3) SEPARATE "MOTIONS FOR

PRELIMINARY INJUNCTION/ TEMPORARY RESTRAINING ORDER, ACCOUNTING AND

DEPOSIT OF RENTAL INCOME" DATED MARCH 17, 1995, AUGUST 19, 1996 AND JANUARY7, 2006 THEREBY PERMITTING THE RESPONDENT TO UNJUSTLY ENRICH HERSELF BY

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CONTINUOUSLY COLLECTING ALL THE RENTALS/FRUITS OF THE SUBJECT REALPROPERTIES WITHOUT ANY ACCOUNTING AND COURT DEPOSIT OF THE COLLECTED

RENTALS/FRUITS AND THE PETITIONERS "URGENT MOTION TO DIRECT DEFENDANT

VICTORIA TUPARAN TO PAY THE ACCUMULATED UNPAID REAL ESTATE TAXES AND SEF

TAXES ON THE SUBJECT REAL PROPERTIES" DATED JANUARY 13, 2007 THEREBY

EXPOSING THE SUBJECT REAL PROPERTIES TO IMMINENT AUCTION SALE BY THE CITY

TREASURER OF VALENZUELA CITY.

G. THE COURT OF APPEALS SERIOUSLY ERRED AND ABUSED ITS DISCRETION IN DENYING

THE PETITIONER’S CLAIM FOR MORAL AND EXEMPLARY DAMAGES AND ATTORNEY’S

FEES AGAINST THE RESPONDENT.

In sum, the crucial issue that needs to be resolved is whether or not the CA was correct inruling that there was no legal basis for the rescission of the Deed of Conditional Sale with

Assumption of Mortgage.

Position of the Petitioner

The petitioner basically argues that the CA should have granted the rescission of the subject

Deed of Conditional Sale of Real Properties with Assumption of Mortgage for the followingreasons:

1. The subject deed of conditional sale is a reciprocal obligation whose

outstanding characteristic is reciprocity arising from identity of cause byvirtue of which one obligation is correlative of the other.

2. The petitioner was rescinding – not enforcing – the subject Deed of

Conditional Sale pursuant to Article 1191 of the Civil Code because of therespondent’s failure/refusal to pay the ₱805,000.00 balance of the total

purchase price of the petitioner’s properties within the stipulated periodending December 31, 1991.

3. There was no slight or casual breach on the part of the respondent

because she (respondent) deliberately failed to comply with her contractual

obligations with the petitioner by violating the terms or manner of payment

of the ₱1,200,000.00 balance and unjustly enriched herself at the expense of the petitioner by collecting all rental payments for her personal benefit and

enjoyment.

Furthermore, the petitioner claims that the respondent is liable to pay interest at the rate of 6% per month on her unpaid installment of ₱805,000.00 from the date of the delinquency,

December 31, 1991, because she obligated herself to do so.

Finally, the petitioner asserts that her claim for damages or lost income as well as for theback rentals in the amount of ₱29,609.00 has been fully substantiated and, therefore, should

have been granted by the CA. Her claim for moral and exemplary damages and attorney’s

fees has been likewise substantiated.

Position of the Respondent

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The respondent counters that the subject Deed of Conditional Sale with Assumption of Mortgage entered into between the parties is a contract to sell and not a contract of sale

because the title of the subject properties still remains with the petitioner as she failed to

pay the installment payments in accordance with their agreement.

Respondent echoes the RTC position that her inability to pay the full balance on thepurchase price may not be considered as a substantial and fundamental breach of the

subject contract and it would be more equitable if she would be allowed to pay the balance

including interest within a certain period of time. She claims that as early as 1992, she has

shown her sincerity by offering to pay a certain amount which was, however, rejected by

the petitioner.

Finally, respondent states that the subject deed of conditional sale explicitly provides that the installment payments shall not bear any interest. Moreover, petitioner failed to prove

that she was entitled to back rentals.

The Court’s Ruling

The petition lacks merit.

The Court agrees with the ruling of the courts below that the subject Deed of Conditional

Sale with Assumption of Mortgage entered into by and among the two parties and FSL Bank on November 26, 1990 is a contract to sell and not a contract of sale. The subject contract

was correctly classified as a contract to sell based on the following pertinent stipulations:

8. That the title and ownership of the subject real properties shall remain with the First

Party until the full payment of the Second Party of the balance of the purchase price and

liquidation of the mortgage obligation of ₱2,000,000.00. Pending payment of the balance of

the purchase price and liquidation of the mortgage obligation that was assumed by the

Second Party, the Second Party shall not sell, transfer and convey and otherwise encumberthe subject real properties without the written consent of the First and Third Party.

9. That upon full payment by the Second Party of the full balance of the purchase price and

the assumed mortgage obligation herein mentioned the Third Party shall issue the

corresponding Deed of Cancellation of Mortgage and the First Party shall execute the

corresponding Deed of Absolute Sale in favor of the Second Party.7

Based on the above provisions, the title and ownership of the subject properties remainswith the petitioner until the respondent fully pays the balance of the purchase price and the

assumed mortgage obligation. Thereafter, FSL Bank shall then issue the corresponding deed

of cancellation of mortgage and the petitioner shall execute the corresponding deed of

absolute sale in favor of the respondent.

Accordingly, the petitioner’s obligation to sell the subject properties becomes demandable

only upon the happening of the positive suspensive condition, which is the respondent’s full

payment of the purchase price. Without respondent’s full payment, there can be no breach

of contract to speak of because petitioner has no obligation yet to turn over the title.

Respondent’s failure to pay in full the purchase price is not the breach of contract

contemplated under Article 1191 of the New Civil Code but rather just an event that





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prevents the petitioner from being bound to convey title to the respondent. The 2009 caseof Nabus v. Joaquin & Julia Pacson8 is enlightening:

The Court holds that the contract entered into by the Spouses Nabus and respondents was a

contract to sell, not a contract of sale.

A contract of sale is defined in Article 1458 of the Civil Code, thus:

Art. 1458. By the contract of sale, one of the contracting parties obligates himself to transfer

the ownership of and to deliver a determinate thing, and the other to pay therefor a pricecertain in money or its equivalent.

x x x

Sale, by its very nature, is a consensual contract because it is perfected by mere consent.The essential elements of a contract of sale are the following:

a) Consent or meeting of the minds, that is, consent to transfer ownership inexchange for the price;

b) Determinate subject matter; and

c) Price certain in money or its equivalent.

Under this definition, a Contract to Sell may not be considered as a Contract of Sale because

the first essential element is lacking. In a contract to sell, the prospective seller explicitly

reserves the transfer of title to the prospective buyer, meaning, the prospective seller does

not as yet agree or consent to transfer ownership of the property subject of the contract to

sell until the happening of an event, which for present purposes we shall take as the full

payment of the purchase price. What the seller agrees or obliges himself to do is to fulfill his

promise to sell the subject property when the entire amount of the purchase price isdelivered to him. In other words, the full payment of the purchase price partakes of a

suspensive condition, the non-fulfillment of which prevents the obligation to sell fromarising and, thus, ownership is retained by the prospective seller without further remedies

by the prospective buyer.

x x x x x x x x x

Stated positively, upon the fulfillment of the suspensive condition which is the full payment

of the purchase price, the prospective seller’s obligation to sell the subject property by

entering into a contract of sale with the prospective buyer becomes demandable asprovided in Article 1479 of the Civil Code which states:

Art. 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally

demandable.

An accepted unilateral promise to buy or to sell a determinate thing for a price certain is

binding upon the promissor if the promise is supported by a consideration distinct from the

price.




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A contract to sell may thus be defined as a bilateral contract whereby the prospective seller,while expressly reserving the ownership of the subject property despite delivery thereof to

the prospective buyer, binds himself to sell the said property exclusively to the prospective

buyer upon fulfillment of the condition agreed upon, that is, full payment of the purchase

price.

A contract to sell as defined hereinabove, may not even be considered as a conditional

contract of sale where the seller may likewise reserve title to the property subject of the

sale until the fulfillment of a suspensive condition, because in a conditional contract of sale,

the first element of consent is present, although it is conditioned upon the happening of a

contingent event which may or may not occur. If the suspensive condition is not fulfilled, the

perfection of the contract of sale is completely abated. However, if the suspensive condition

is fulfilled, the contract of sale is thereby perfected, such that if there had already beenprevious delivery of the property subject of the sale to the buyer, ownership thereto

automatically transfers to the buyer by operation of law without any further act having to

be performed by the seller.

In a contract to sell, upon the fulfillment of the suspensive condition which is the fullpayment of the purchase price, ownership will not automatically transfer to the buyer

although the property may have been previously delivered to him. The prospective seller

still has to convey title to the prospective buyer by entering into a contract of absolute sale.

Further, Chua v. Court of Appeals, cited this distinction between a contract of sale and a

contract to sell:

In a contract of sale, the title to the property passes to the vendee upon the delivery of the

thing sold; in a contract to sell, ownership is, by agreement, reserved in the vendor and isnot to pass to the vendee until full payment of the purchase price. Otherwise stated, in a

contract of sale, the vendor loses ownership over the property and cannot recover it until

and unless the contract is resolved or rescinded; whereas, in a contract to sell, title isretained by the vendor until full payment of the price. In the latter contract, payment of the

price is a positive suspensive condition, failure of which is not a breach but an event that

prevents the obligation of the vendor to convey title from becoming effective.

It is not the title of the contract, but its express terms or stipulations that determine the

kind of contract entered into by the parties. In this case, the contract entitled "Deed of

Conditional Sale" is actually a contract to sell. The contract stipulated that "as soon as the

full consideration of the sale has been paid by the vendee, the corresponding transfer

documents shall be executed by the vendor to the vendee for the portion sold." Where the

vendor promises to execute a deed of absolute sale upon the completion by the vendee of

the payment of the price, the contract is only a contract to sell." The aforecited stipulation

shows that the vendors reserved title to the subject property until full payment of thepurchase price.

x x x

Unfortunately for the Spouses Pacson, since the Deed of Conditional Sale executed in their

favor was merely a contract to sell, the obligation of the seller to sell becomes demandable

only upon the happening of the suspensive condition. The full payment of the purchase

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price is the positive suspensive condition, the failure of which is not a breach of contract,but simply an event that prevented the obligation of the vendor to convey title from

acquiring binding force. Thus, for its non-fulfilment, there is no contract to speak of, the

obligor having failed to perform the suspensive condition which enforces a juridical relation.

With this circumstance, there can be no rescission or fulfillment of an obligation that is still

non-existent, the suspensive condition not having occurred as yet. Emphasis should be

made that the breach contemplated in Article 1191 of the New Civil Code is the obligor’sfailure to comply with an obligation already extant, not a failure of a condition to render

binding that obligation. [Emphases and underscoring supplied]

Consistently, the Court handed down a similar ruling in the 2010 case of Heirs of Atienza v.

Espidol, 9 where it was written:

Regarding the right to cancel the contract for non-payment of an installment, there is need

to initially determine if what the parties had was a contract of sale or a contract to sell. In acontract of sale, the title to the property passes to the buyer upon the delivery of the thing

sold. In a contract to sell, on the other hand, the ownership is, by agreement, retained by the

seller and is not to pass to the vendee until full payment of the purchase price. In thecontract of sale, the buyer’s non-payment of the price is a negative resolutory condition; inthe contract to sell, the buyer’s full payment of the price is a positive suspensive condition

to the coming into effect of the agreement. In the first case, the seller has lost and cannot

recover the ownership of the property unless he takes action to set aside the contract of sale.

In the second case, the title simply remains in the seller if the buyer does not comply with

the condition precedent of making payment at the time specified in the contract. Here, it is

quite evident that the contract involved was one of a contract to sell since the Atienzas, as

sellers, were to retain title of ownership to the land until respondent Espidol, the buyer, has

paid the agreed price. Indeed, there seems no question that the parties understood this tobe the case.

Admittedly, Espidol was unable to pay the second installment of P1,750,000.00 that fell duein December 2002. That payment, said both the RTC and the CA, was a positive suspensive

condition failure of which was not regarded a breach in the sense that there can be no

rescission of an obligation (to turn over title) that did not yet exist since the

suspensive condition had not taken place. x x x. [Emphases and underscoring supplied]

Thus, the Court fully agrees with the CA when it resolved: "Considering, however, that the

Deed of Conditional Sale was not cancelled by Vendor Reyes (petitioner) and that out of the

total purchase price of the subject property in the amount of ₱4,200,000.00, the remaining

unpaid balance of Tuparan (respondent) is only ₱805,000.00, a substantial amount of the

purchase price has already been paid. It is only right and just to allow Tuparan to pay the

said unpaid balance of the purchase price to Reyes."10

Granting that a rescission can be permitted under Article 1191, the Court still cannot allow

it for the reason that, considering the circumstances, there was only a slight or casual

breach in the fulfillment of the obligation.

Unless the parties stipulated it, rescission is allowed only when the breach of the contract is

substantial and fundamental to the fulfillment of the obligation. Whether the breach is slight









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or substantial is largely determined by the attendant circumstances.11 In the case at bench,the subject contract stipulated the following important provisions:

2. That the purchase price of ₱4,200,000.00 shall be paid as follows:

a) ₱278,078.13 received in cash by the First Party but directly paid to the

Third Party as partial payment of the mortgage obligation of the First Party

in order to reduce the amount to ₱2,000,000.00 only as of November 15,

1990;

b) ₱721,921.87 received in cash by the First Party as additional payment of

the Second Party;

c) ₱1,200,000.00 to be paid in installments as follows:

1. ₱200,000.00 payable on or before January 31, 1991;

2. ₱200,000.00 payable on or before June 30, 1991;

3. ₱800,000.00 payable on or before December 31, 1991;

Note: All the installments shall not bear any interest.

d) ₱2,000,000.00 outstanding balance of the mortgage obligation as of

November 15, 1990 which is hereby assumed by the Second Party.

x x x

3. That the Third Party hereby acknowledges receipts from the Second Party P278,078.13

as partial payment of the loan obligation of First Party in order to reduce the account to

only ₱2,000,000.00 as of November 15, 1990 to be assumed by the Second Party effective

November 15, 1990.12

From the records, it cannot be denied that respondent pa id to FSL Bank petitioner’smortgage obligation in the amount of ₱2,278,078.13, which formed part of the purchase

price of the subject property. Likewise, it is not disputed that respondent paid directly to

petitioner the amount of ₱721,921.87 representing the additional payment for the purchase

of the subject property. Clearly, out of the total price of ₱4,200,000.00, respondent was able

to pay the total amount of ₱3,000,000.00, leaving a balance of ₱1,200,000.00 payable in

three (3) installments.

Out of t he ₱1,200,000.00 remaining balance, respondent paid on several dates the first and

second installments of ₱200,000.00 each. She, however, failed to pay the third and last

installment of ₱800,000.00 due on December 31, 1991. Nevertheless, on August 31, 1992,respondent, through counsel, offered to pay the amount of ₱751,000.00, which was rejected

by petitioner for the reason that the actual balance was ₱805,000.00 excluding the interest

charges.









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Considering that out of the total purchase price of ₱4,200,000.00, respondent has alreadypaid the substantial amount of ₱3,400,000.00, more or less, leaving an unpaid balance of

only ₱805,000.00, it is right and just to allow her to settle, within a reasonable period of

time, the balance of the unpaid purchase price. The Court agrees with the courts below that

the respondent showed her sincerity and willingness to comply with her obligation whenshe offered to pay the petitioner the amount of ₱751,000.00.

On the issue of interest, petitioner failed to substantiate her claim that respondent made a

personal commitment to pay a 6% monthly interest on the ₱805,000.00 from the date of

delinquency, December 31, 1991. As can be gleaned from the contract, there was a

stipulation stating that: "All the installments shall not bear interest." The CA was, however,

correct in imposing interest at the rate of 6% per annum starting from the filing of the

complaint on September 11, 1992.1avvphi1

Finally, the Court upholds the ruling of the courts below regarding the non-imposition of damages and attorney’s fees. Aside from petitioner’s self -serving statements, there is not

enough evidence on record to prove that respondent acted fraudulently and maliciously

against the petitioner. In the case of Heirs of Atienza v. Espidol,13

it was stated:

Respondents are not entitled to moral damages because contracts are not referred to in

Article 2219 of the Civil Code, which enumerates the cases when moral damages may be

recovered. Article 2220 of the Civil Code allows the recovery of moral damages in breaches

of contract where the defendant acted fraudulently or in bad faith. However, this case

involves a contract to sell, wherein full payment of the purchase price is a positive

suspensive condition, the non-fulfillment of which is not a breach of contract, but merely an

event that prevents the seller from conveying title to the purchaser. Since there is no breach

of contract in this case, respondents are not entitled to moral damages.

In the absence of moral, temperate, liquidated or compensatory damages, exemplary

damages cannot be granted for they are allowed only in addition to any of the four kinds of damages mentioned.

WHEREFORE, the petition is DENIED.

SO ORDERED.

JOSE CATRAL MENDOZA

Associate Justice

WE CONCUR:

ANTONIO T. CARPIO

Associate Justice

Chairperson

ANTONIO EDUARDO B. NACHURA

Associate Justice

DIOSDADO M. PERALTA

Associate Justice





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ROBERTO A. ABAD Associate Justice

A T T E S T A T I O N

I attest that the conclusions in the above Decision had been reached in consultation beforethe case was assigned to the writer of the opinion of the Court’s Division.

ANTONIO T. CARPIO

Associate JusticeChairperson, Second Division

C E R T I F I C A T I O N

Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson’s

Attestation, I certify that the conclusions in the above Decision had been reached in

consultation before the case was assigned to the writer of the opinion of the Court’s Division.

G.R. No. 105774 April 25, 2002

GREAT ASIAN SALES CENTER CORPORATION and TAN CHONG LIN, petitioners,

vs.THE COURT OF APPEALS and BANCASIA FINANCE AND INVESTMENT CORPORATION,

respondents.

CARPIO, J .:

The Case

Before us is a Petition for Review on Certiorari under Rule 45 of the Revised Rules on Civil

Procedure assailing the June 9, 1992 Decision1 of the Court of Appeals2 in CA-G.R. CV No.20167. The Court of Appeals affirmed the January 26, 1988 Decision3 of the Regional Trial

Court of Manila, Branch 52,4 ordering petitioners Great Asian Sales Center Corporation("Great Asian" for brevity) and Tan Chong Lin to pay, solidarily, respondent Bancasia

Finance and Investment Corporation ("Bancasia" for brevity) the amount of P1,042,005.00.The Court of Appeals affirmed the trial court’s award of interest and costs of suit but deleted

the award of attorney’s fees.

The Facts

Great Asian is engaged in the business of buying and selling general merchandise, inparticular household appliances. On March 17, 1981, the board of directors of Great Asianapproved a resolution authorizing its Treasurer and General Manager, Arsenio Lim Piat, Jr.

("Arsenio" for brevity) to secure a loan from Bancasia in an amount not to exceed P1.0

million. The board resolution also authorized Arsenio to sign all papers, documents orpromissory notes necessary to secure the loan. On February 10, 1982, the board of directors

of Great Asian approved a second resolution authorizing Great Asian to secure a discountingline with Bancasia in an amount not exceeding P2.0 million. The second board resolution

http://www.lawphil.net/judjuris/juri2002/apr2002/gr_105774_2002.html#fnt1














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also designated Arsenio as the authorized signatory to sign all instruments, documents andchecks necessary to secure the discounting line.

On March 4, 1981, Tan Chong Lin signed a Surety Agreement in favor of Bancasia to

guarantee, solidarily, the debts of Great Asian to Bancasia. On January 29, 1982, Tan Chong

Lin signed a Comprehensive and Continuing Surety Agreement in favor of Bancasia toguarantee, solidarily, the debts of Great Asian to Bancasia. Thus, Tan Chong Lin signed two

surety agreements ("Surety Agreements" for brevity) in favor of Bancasia.

Great Asian, through its Treasurer and General Manager Arsenio, signed four (4) Deeds of Assignment of Receivables ("Deeds of Assignment" for brevity), assigning to Bancasia

fifteen (15) postdated checks. Nine of the checks were payable to Great Asian, three were

payable to "New Asian Emp.", and the last three were payable to cash. Various customers of Great Asian issued these postdated checks in payment for appliances and other

merchandise.

Great Asian and Bancasia signed the first Deed of Assignment on January 12, 1982 covering

four postdated checks with a total face value of P244,225.82, with maturity dates not laterthan March 17, 1982. Of these four postdated checks, two were dishonored. Great Asian and

Bancasia signed the second Deed of Assignment also on January 12, 1982 covering four

postdated checks with a total face value of P312,819.00, with maturity dates not later than

April 1, 1982. All these four checks were dishonored. Great Asian and Bancasia signed the

third Deed of Assignment on February 11, 1982 covering eight postdated checks with a total

face value of P344,475.00, with maturity dates not later than April 30, 1982. All these eight

checks were dishonored. Great Asian and Bancasia signed the fourth Deed of Assignment on

March 5, 1982 covering one postdated check with a face value of P200,000.00, with

maturity date on March 18, 1982. This last check was also dishonored. Great Asian assignedthe postdated checks to Bancasia at a discount rate of less than 24% of the face value of the

checks.

Arsenio endorsed all the fifteen dishonored checks by signing his name at the back of the

checks. Eight of the dishonored checks bore the endorsement of Arsenio below the stamped

name of "Great Asian Sales Center", while the rest of the dishonored checks just bore the

signature of Arsenio. The drawee banks dishonored the fifteen checks on maturity when

deposited for collection by Bancasia, with any of the following as reason for the dishonor:

"account closed", "payment stopped", "account under garnishment", and "insufficiency of

funds". The total amount of the fifteen dishonored checks is P1,042,005.00. Below is a table

of the fifteen dishonored checks:

Drawee Bank Check No. Amount Maturity

Date

1st Deed

Solid Bank C-A097480 P137,500.00 March 16,

1982

Pacific BankingCorp.

23950 P47,211.00 March 17,1982

2nd Deed

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Metrobank 030925 P68,722.00 March 19,

1982

030926 P45,230.00 March 19,

1982

Solidbank C-A097478 P140,000.00 March 23,1982

Pacific Banking

Corp.

CC 769910 P58,867.00 April 1,

1982

3rd Deed

Phil. Trust Company 060835 P21,228.00 April 21,

1982

060836 P22,187.00 April 28,

1982

Allied Banking Corp. 11251624 P41,773.00 April 22,

198211251625 P38,592.00 April 29,

1982

Pacific Banking

Corp.

237984 P37,886.00 April 23,

1982

237988 P47,385.00 April 28,

1982

237985 P46,748.00 April 30,

1982

Security Bank &

Trust Co.

22061 P88,676.00 April 30,

1982

4th Deed

Pacific Banking

Corp.

860178 P200,000.00 March 18,

1982

After the drawee bank dishonored Check No. 097480 dated March 16, 1982, Bancasia

referred the matter to its lawyer, Atty. Eladia Reyes, who sent by registered mail to Tan

Chong Lin a letter dated March 18, 1982, notifying him of the dishonor and demanding

payment from him. Subsequently, Bancasia sent by personal delivery a letter dated June 16,

1982 to Tan Chong Lin, notifying him of the dishonor of the fifteen checks and demanding

payment from him. Neither Great Asian nor Tan Chong Lin paid Bancasia the dishonoredchecks.

On May 21, 1982, Great Asian filed with the then Court of First Instance of Manila a petition

for insolvency, verified under oath by its Corporate Secretary, Mario Tan. Attached to theverified petition was a "Schedule and Inventory of Liabilities and Creditors of Great Asian

Sales Center Corporation," listing Bancasia as one of the creditors of Great Asian in theamount of P1,243,632.00.

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On June 23, 1982, Bancasia filed a complaint for collection of a sum of money against Great Asian and Tan Chong Lin. Bancasia impleaded Tan Chong Lin because of the Surety

Agreements he signed in favor of Bancasia. In its answer, Great Asian denied the material

allegations of the complaint claiming it was unfounded, malicious, baseless, and unlawfully

instituted since there was already a pending insolvency proceedings, although Great Asian

subsequently withdrew its petition for voluntary insolvency. Great Asian further raised the

alleged lack of authority of Arsenio to sign the Deeds of Assignment as well as the absenceof consideration and consent of all the parties to the Surety Agreements signed by Tan

Chong Lin.

Ruling of the Trial Court

The trial court rendered its decision on January 26, 1988 with the following findings andconclusions:

"From the foregoing facts and circumstances, the Court finds that the

plaintiff has established its causes of action against the defendants. The

Board Resolution (Exh. "T"), dated March 17, 1981, authorizing Arsenio LimPiat, Jr., general manager and treasurer of the defendant Great Asian to

apply and negotiate for a loan accommodation or credit line with the

plaintiff Bancasia in an amount not exceeding One Million Pesos

(P1,000,000.00), and the other Board Resolution approved on February 10,

1982, authorizing Arsenio Lim Piat, Jr., to obtain for defendant Asian Center

a discounting line with Bancasia at prevailing discounting rates in an

amount not to exceed Two Million Pesos (P2,000,000.00), both of which

were intended to secure money from the plaintiff financing firm to finance

the business operations of defendant Great Asian, and pursuant to whichArsenio Lim Piat, Jr. was able to have the aforementioned fifteen (15) checks

totaling P1,042,005.00 discounted with the plaintiff, which transactions

were obviously known by the beneficiary thereof, defendant Great Asian, asin fact, in its aforementioned Schedule and Inventory of Liabilities and

Creditors (Exh. DD, DD-1) attached to its Verified Petition for Insolvency,

dated May 12, 1982 (pp. 50-56), the defendant Great Asian admitted an

existing liability to the plaintiff, in the amount of P1,243,632.00, secured byit, by way of ‘financing accommodation,’ from the said financing institution

Bancasia Finance and Investment Corporation, plaintiff herein, sufficientlyestablish the liability of the defendant Great Asian to the plaintiff for the

amount of P1,042,005.00 sought to be recovered by the latter in this case.5

xxx

WHEREFORE, judgment is hereby rendered in favor of the plaintiff andagainst the two (2) defendants ordering the latter, jointly and severally, to

pay the former:

(a) The amount of P1,042,005.00, plus interest thereon at the legal rate from

the filing of the complaint until the same is fully paid;





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(b) Attorney’s fees equivalent to twenty per cent (20%) of the total amount

due; and

(c) The costs of suit.

SO ORDERED."6

Ruling of the Court of Appeals

On appeal, the Court of Appeals sustained the decision of the lower court, deleting only theaward of attorney’s fees, as follows:

"As against appellants’ bare denial of it, the Court is more inclined to accept

the appellee’s version, to the effect that the subject deeds of assignment are

but individual transactions which -- being collectively evidentiary of the loanaccommodation and/or credit line it granted the appellant corporation --

should not be taken singly and distinct therefrom. In addition to its

plausibility, the proposition is, more importantly, adequately backed by thedocumentary evidence on record. Aside from the aforesaid Deeds of

Assignment (Exhs. "A", "D", "I", and "R") and the Board Resolutions of the

appellant corporation’s Board of Directors (Exhs. "T", "U" and "V"), the

appellee -- consistent with its theory -- interposed the Surety Agreementsthe appellant Tan Chong Lin executed (Exhs. "W" and "X"), as well as the

demand letters it served upon the latter as surety (Exhs. "Y" and "Z"). It bears emphasis that the second Resolution of the appellant corporation’s

Board of Directors (Exh. "V") even closely coincides with the execution of the

February 11, 1982 and March 5, 1982 Deeds of Assignment (Exhs. "I" and

"R"). Were the appellants’ posturings true, it seems rather strange that the

appellant Tan Chong Lin did not even protest or, at least, make known to the

appellee what he -- together with the appellant corporation -- represented tobe a corporate larceny to which all of them supposedly fell prey. In the

petition for voluntary insolvency it filed, the appellant corporation, instead,

indirectly acknowledged its indebtedness in terms of financing

accommodations to the appellee, in an amount which, while not exactly

matching the sum herein sought to be collected, approximates the same

(Exhs. "CC", "DD" and "DD-1").7

xxx

The appellants contend that the foregoing warranties enlarged or increasedthe surety’s risk, such that appellant Tan Chong Lin should be released from

his liabilities (pp. 37-44, Appellant’s Brief). Without saying more, theappellants’ position is, however, soundly debunked by the undertaking

expressed in the Comprehensive and Continuing Surety Agreements (Exhs.

"W" and "X"), to the effect that the "xxx surety/ies, jointly and severally

among themselves and likewise with the principal, hereby agree/s and

bind/s himself to pay at maturity all the notes, drafts, bills of exchange,

overdrafts and other obligations which the principal may now or may

hereafter owe the creditor xxx." With the possible exception of the fixed









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ceiling for the amount of loan obtainable, the surety undertaking in the caseat bar is so comprehensive as to contemplate each and every condition, term

or warranty which the principal parties may have or may be minded to

agree on. Having affixed his signature thereto, the appellant Tan Chong Lin is

expected to have, at least, read and understood the same.

xxx

With the foregoing disquisition, the Court sees little or no reason to go into

the appellants’ remaining assignments of error, save the matter of attorney’s

fees. For want of a statement of the rationale therefore in the body of the

challenged decision, the trial court’s award of attorney’s fees should be

deleted and disallowed ( Abrogar vs. Intermediate Appellate Court , 157 SCRA57).

WHEREFORE, the decision appealed from is MODIFIED, to delete the trial

court’s award of attorney’s f ees. The rest is AFFIRMED in toto.

SO ORDERED."8

The Issues

The petition is anchored on the following assigned errors:

"1. The respondent Court erred in not holding that the proper parties against

whom this action for collection should be brought are the drawers and

indorser of the checks in question, being the real parties in interest, and not

the herein petitioners.

2. The respondent Court erred in not holding that the petitioner-corporationis discharged from liability for failure of the private respondent to complywith the provisions of the Negotiable Instruments Law on the dishonor of

the checks.

3. The respondent Court erred in its appreciation and interpretation of theeffect and legal consequences of the signing of the deeds of assignment and

the subsequent indorsement of the checks by Arsenio Lim Piat, Jr. in his

individual and personal capacity and without stating or indicating the name

of his supposed principal.

4. The respondent Court erred in holding that the assignment of the checksis a loan accommodation or credit line accorded by the private respondent

to petitioner-corporation, and not a purchase and sale thereof.

5. The respondent Court erred in not holding that there was a materialalteration of the risk assumed by the petitioner-surety under his surety

agreement by the terms, conditions, warranties and obligations assumed bythe assignor Arsenio Lim Piat, Jr. under the deeds of assignment or

receivables.





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6. The respondent Court erred in holding that the petitioner-corporationimpliedly admitted its liability to private respondent when the former

included the latter as one of its creditors in its petition for voluntary

insolvency, although no claim was filed and proved by the private

respondent in the insolvency court.

7. The respondent Court erred in holding the petitioners liable to private

respondent on the transactions in question."9

The issues to be resolved in this petition can be summarized into three:

1. WHETHER ARSENIO HAD AUTHORITY TO EXECUTE THE DEEDS OFASSIGNMENT AND THUS BIND GREAT ASIAN;

2. WHETHER GREAT ASIAN IS LIABLE TO BANCASIA UNDER THE DEEDS OF

ASSIGNMENT FOR BREACH OF CONTRACT PURSUANT TO THE CIVIL CODE,

INDEPENDENT OF THE NEGOTIABLE INSTRUMENTS LAW;

3. WHETHER TAN CHONG LIN IS LIABLE TO GREAT ASIAN UNDER THE

SURETY AGREEMENTS.

The Court’s Ruling

The petition is bereft of merit.

First Issue: Authority of Arsenio to Sign the Deeds of Assignment

Great Asian asserts that Arsenio signed the Deeds of Assignment and indorsed the checks in

his personal capacity. The primordial question that must be resolved is whether Great Asian

authorized Arsenio to sign the Deeds of Assignment. If Great Asian so authorized Arsenio,

then Great Asian is bound by the Deeds of Assignment and must honor its terms.

The Corporation Code of the Philippines vests in the board of directors the exercise of thecorporate powers of the corporation, save in those instances where the Code requires

stockholders’ approval for certain specific acts. Section 23 of the Code provides:

"SEC. 23. The Board of Directors or Trustees. Unless otherwise provided in

this Code, the corporate powers of all corporations formed under this Code

shall be exercised, all business conducted and all property of such

corporations controlled and held by the board of directors or trustees x x x."

In the ordinary course of business, a corporation can borrow funds or dispose of assets of the corporation only on authority of the board of directors. The board of directors normally

designates one or more corporate officers to sign loan documents or deeds of assignment

for the corporation.

To secure a credit accommodation from Bancasia, the board of directors of Great Asian

adopted two board resolutions on different dates, the first on March 17, 1981, and the





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second on February 10, 1982. These two board resolutions, as certified under oath by Great Asian’s Corporate Secretary Mario K. Tan, state:

First Board Resolution

"RESOLVED, that the Treasurer of the corporation, Mr. Arsenio Lim Piat, Jr.,be authorized as he is authorized to apply for and negotiate for a loan

accommodation or credit line in the amount not to exceed ONE MILLIONPESOS (P1,000,000.00), with Bancasia Finance and Investment Corporation,

and likewise to sign any and all papers, documents, and/or promissorynotes in connection with said loan accommodation or credit line, including

the power to mortgage such properties of the corporation as may be needed

to effectuate the same."10 (Emphasis supplied)

Second Board Resolution

"RESOLVED that Great Asian Sales Center Corp. obtain a discounting line

with BANCASIA FINANCE & INVESTMENT CORPORATION, at prevailingdiscounting rates, in an amount not to exceed** TWO MILLION PESOS ONLY

(P2,000,000),** Philippine Currency.

RESOLVED FURTHER, that the corporation secure such other forms of credit lines with BANCASIA FINANCE & INVESTMENT CORPORATION in an

amount not to exceed** TWO MILLION PESOS ONLY (P2,000,000.00),**PESOS, under such terms and conditions as the signatories may deem fit and

proper.

RESOLVED FURTHER, that the following persons be authorized individually,

jointly or collectively to sign, execute and deliver any and all instruments,

documents, checks, sureties, etc. necessary or incidental to secure any of theforegoing obligation:

(signed)

Specimen Signature

1. ARSENIO LIM PIAT, JR.

2. _______________________

3. _______________________

4. _______________________

PROVIDED FINALLY that this authority shall be valid, binding and effective

until revoked by the Board of Directors in the manner prescribed by law,

and that BANCASIA FINANCE & INVESTMENT CORPORATION shall not be

bound by any such revocation until such time as it is noticed in writing of

such revocation."11 (Emphasis supplied)









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The first board resolution expressly authorizes Arsenio, as Treasurer of Great Asian, toapply for a "loan accommodation or credit line" with Bancasia for not more than P1.0 million.

Also, the first resolution explicitly authorizes Arsenio to sign any document, paper or

promissory note, including mortgage deeds over properties of Great Asian, to secure the

loan or credit line from Bancasia.

The second board resolution expressly authorizes Great Asian to secure a "discounting line"

from Bancasia for not more than P2.0 million. The second board resolution also expressly

empowers Arsenio, as the authorized signatory of Great Asian, "to sign, execute and deliver

any and all documents, checks x x x necessary or incidental to secure" the discounting line.

The second board resolution specifically authorizes Arsenio to secure the discounting line

"under such terms and conditions as (he) x x x may deem fit and proper ."

As plain as daylight, the two board resolutions clearly authorize Great Asian to secure a loan

or discounting line from Bancasia. The two board resolutions also categorically designateArsenio as the authorized signatory to sign and deliver all the implementing documents,

including checks, for Great Asian. There is no iota of doubt whatsoever about the purpose of

the two board resolutions, and about the authority of Arsenio to act and sign for Great Asian.The second board resolution even gave Arsenio full authority to agree with Bancasia on the

terms and conditions of the discounting line. Great Asian adopted the correct and proper

board resolutions to secure a loan or discounting line from Bancasia, and Bancasia had a

right to rely on the two board resolutions of Great Asian. Significantly, the two board

resolutions specifically refer to Bancasia as the financing institution from whom Great Asian

will secure the loan accommodation or discounting line.

Armed with the two board resolutions, Arsenio signed the Deeds of Assignment selling, and

endorsing, the fifteen checks of Great Asian to Bancasia. On the face of the Deeds of Assignment, the contracting parties are indisputably Great Asian and Bancasia as the names

of these entities are expressly mentioned therein as the assignor and assignee, respectively.

Great Asian claims that Arsenio signed the Deeds of Assignment in his personal capacitybecause Arsenio signed above his printed name, below which was the word "Assignor",

thereby making Arsenio the assignor. Great Asian conveniently omits to state that the first

paragraph of the Deeds expressly contains the following words: "the ASSIGNOR, Great Asian

Sales Center, a domestic corporation x x x herein represented by its Treasurer Arsenio Lim Piat,

Jr ." The assignor is undoubtedly Great Asian, represented by its Treasurer, Arsenio. The

only issue to determine is whether the Deeds of Assignment are indeed the transactions theboard of directors of Great Asian authorized Arsenio to sign under the two board

resolutions.

Under the Deeds of Assignment, Great Asian sold fifteen postdated checks at a discount,

over three months, to Bancasia. The Deeds of Assignment uniformly state that Great Asian, –

"x x x for valuable consideration received, does hereby SELL, TRANSFER,

CONVEY, and ASSIGN, unto the ASSIGNEE, BANCASIA FINANCE &

INVESTMENT CORP., a domestic corporation x x x, the following ACCOUNTS

RECEIVABLES due and payable to it, having an aggregate face value of x x x."

The Deeds of Assignment enabled Great Asian to generate instant cash from its fifteen

checks, which were still not due and demandable then. In short, instead of waiting for the

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maturity dates of the fifteen postdated checks, Great Asian sold the checks to Bancasia at less than the total face value of the checks. In exchange for receiving an amount less than

the face value of the checks, Great Asian obtained immediately much needed cash. Over

three months, Great Asian entered into four transactions of this nature with Bancasia,

showing that Great Asian availed of a discounting line with Bancasia.

In the financing industry, the term "discounting line" means a credit facility with a financing

company or bank, which allows a business entity to sell, on a continuing basis, its accounts

receivable at a discount .12 The term "discount" means the sale of a receivable at less than its

face value. The purpose of a discounting line is to enable a business entity to generate

instant cash out of its receivables which are still to mature at future dates. The financing

company or bank which buys the receivables makes its profit out of the difference between

the face value of the receivable and the discounted price. Thus, Section 3 (a) of theFinancing Company Act of 1998 provides:

"Financing companies" are corporations x x x primarily organized for the

purpose of extending credit facilities to consumers and to industrial,

commercial or agricultural enterprises by discounting or factoringcommercial papers or accounts receivable, or by buying and selling contracts,

leases, chattel mortgages, or other evidences of indebtedness, or by financial

leasing of movable as well as immovable property." (Emphasis supplied)

This definition of "financing companies" is substantially the same definition as in the old

Financing Company Act (R.A. No. 5980).13

Moreover, Section 1 (h) of the New Rules and Regulations adopted by the Securities and

Exchange Commission to implement the Financing Company Act of 1998 states:

"Discounting" is a type of receivables financing whereby evidences of indebtedness of a third

party, such as installment contracts, promissory notes and similar instruments, arepurchased by, or assigned to, a financing company in an amount or for a consideration less

than their face value." (Emphasis supplied)

Likewise, this definition of "discounting" is an exact reproduction of the definition of

"discounting" in the implementing rules of the old Finance Company Act.

Clearly, the discounting arrangements entered into by Arsenio under the Deeds of

Assignment were the very transactions envisioned in the two board resolutions of Great Asian to raise funds for its business. Arsenio acted completely within the limits of his

authority under the two board resolutions. Arsenio did exactly what the board of directors

of Great Asian directed and authorized him to do.

Arsenio had all the proper and necessary authority from the board of directors of Great

Asian to sign the Deeds of Assignment and to endorse the fifteen postdated checks. Arsenio

signed the Deeds of Assignment as agent and authorized signatory of Great Asian under an

authority expressly granted by its board of directors. The signature of Arsenio on the Deeds

of Assignment is effectively also the signature of the board of directors of Great Asian,

binding on the board of directors and on Great Asian itself. Evidently, Great Asian shows its









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bad faith in disowning the Deeds of Assignment signed by its own Treasurer, after receivingvaluable consideration for the checks assigned under the Deeds.

Second Issue: Breach of Contract by Great Asian

Bancasia’s complaint against Great Asian is founded on the latter’s breach of contract under the Deeds of Assignment. The Deeds of Assignment uniformly stipulate14 as follows:

"If for any reason the receivables or any part thereof cannot be paid by the

obligor/s, the ASSIGNOR unconditionally and irrevocably agrees to pay the

same, assuming the liability to pay, by way of penalty three per cent (3%) of

the total amount unpaid, for the period of delay until the same is fully paid.

In case of any litigation which the ASSIGNEE may institute to enforce the

terms of this agreement, the ASSIGNOR shall be liable for all the costs, plus

attorney’s fees equivalent to twenty-five (25%) per cent of the total amount

due. Further thereto, the ASSIGNOR agrees that any and all actions which

may be instituted relative hereto shall be filed before the proper courts of the City of Manila, all other appropriate venues being hereby waived.

The last Deed of Assignment 15 contains the following added stipulation:

"xxx Likewise, it is hereby understood that the warranties which the

ASSIGNOR hereby made are deemed part of the consideration for thistransaction, such that any violation of any one, some, or all of said

warranties shall be deemed as deliberate misrepresentation on the part of

the ASSIGNOR. In such event, the monetary obligation herein conveyed unto

the ASSIGNEE shall be conclusively deemed defaulted, giving rise to the

immediate responsibility on the part of the ASSIGNOR to make good said

obligation, and making the ASSIGNOR liable to pay the penalty stipulatedhereinabove as if the original obligor/s of the receivables actually defaulted.

xxx"

Obviously, there is one vital suspensive condition in the Deeds of Assignment. That is, in

case the drawers fail to pay the checks on maturity, Great Asian obligated itself to pay

Bancasia the full face value of the dishonored checks, including penalty and attorney’s fees.

The failure of the drawers to pay the checks is a suspensive condition,16 the happening of

which gives rise to Bancasia’s right to demand payment from Great Asian. This conditionalobligation of Great Asian arises from its written contracts with Bancasia as embodied in the

Deeds of Assignment. Article 1157 of the Civil Code provides that -

"Obligations arise from:

(1) Law;

(2) Contracts;

(3) Quasi-contracts;












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(4) Acts or omissions punished by law; and

(5) Quasi-delicts."

By express provision in the Deeds of Assignment, Great Asian unconditionally obligated

itself to pay Bancasia the full value of the dishonored checks. In short, Great Asian sold thepostdated checks on with recourse basis against itself. This is an obligation that Great Asian

is bound to faithfully comply because it has the force of law as between Great Asian andBancasia. Article 1159 of the Civil Code further provides that -

"Obligations arising from contracts have the force of law between the

contracting parties and should be complied with in good faith."

Great Asian and Bancasia agreed on this specific with recourse stipulation, despite the fact

that the receivables were negotiable instruments with the endorsement of Arsenio. The

contracting parties had the right to adopt the with recourse stipulation which is separate

and distinct from the warranties of an endorser under the Negotiable Instruments Law.

Article 1306 of the Civil Code provides that –

"The contracting parties may establish such stipulations, clauses, terms and

conditions as they may deem convenient, provided they are not contrary to

law, morals, good customs, public order, or public policy."

The explicit with recourse stipulation against Great Asian effectively enlarges, by agreement of the parties, the liability of Great Asian beyond that of a mere endorser of a negotiable

instrument. Thus, whether or not Bancasia gives notice of dishonor to Great Asian, the latter

remains liable to Bancasia because of the with recourse stipulation which is independent of

the warranties of an endorser under the Negotiable Instruments Law.

There is nothing in the Negotiable Instruments Law or in the Financing Company Act (old ornew), that prohibits Great Asian and Bancasia parties from adopting the with recourse

stipulation uniformly found in the Deeds of Assignment. Instead of being negotiated, a

negotiable instrument may be assigned.17 Assignment of a negotiable instrument is actually

the principal mode of conveying accounts receivable under the Financing Company Act.

Since in discounting of receivables the assignee is subrogated as creditor of the receivable,

the endorsement of the negotiable instrument becomes necessary to enable the assignee tocollect from the drawer. This is particularly true with checks because collecting banks will

not accept checks unless endorsed by the payee. The purpose of the endorsement is merelyto facilitate collection of the proceeds of the checks.

The purpose of the endorsement is not to make the assignee finance company a holder in

due course because policy considerations militate against according finance companies the

rights of a holder in due course.18 Otherwise, consumers who purchase appliances on

installment, giving their promissory notes or checks to the seller, will have no defense

against the finance company should the appliances later turn out to be defective. Thus, the

endorsement does not operate to make the finance company a holder in due course. For its

own protection, therefore, the finance company usually requires the assignor, in a separate

and distinct contract, to pay the finance company in the event of dishonor of the notes or

checks.









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As endorsee of Great Asian, Bancasia had the option to proceed against Great Asian underthe Negotiable Instruments Law. Had it so proceeded, the Negotiable Instruments Law

would have governed Bancasia’s cause of action. Bancasia, however, did not choose this

route. Instead, Bancasia decided to sue Great Asian for breach of contract under the Civil

Code, a right that Bancasia had under the express with recourse stipulation in the Deeds of

Assignment.

The exercise by Bancasia of its option to sue for breach of contract under the Civil Code will

not leave Great Asian holding an empty bag. Great Asian, after paying Bancasia, is

subrogated back as creditor of the receivables. Great Asian can then proceed against the

drawers who issued the checks. Even if Bancasia failed to give timely notice of dishonor, still

there would be no prejudice whatever to Great Asian. Under the Negotiable Instruments

Law, notice of dishonor is not required if the drawer has no right to expect or require thebank to honor the check, or if the drawer has countermanded payment .19 In the instant case,

all the checks were dishonored for any of the following reasons: "account closed", "account

under garnishment", insufficiency of funds", or "payment stopped". In the first three

instances, the drawers had no right to expect or require the bank to honor the checks, and

in the last instance, the drawers had countermanded payment.

Moreover, under common law, delay in notice of dishonor, where such notice is required,

discharges the drawer only to the extent of the loss caused by the delay.20 This rule finds

application in this jurisdiction pursuant to Section 196 of the Negotiable Instruments Law

which states, "Any case not provided for in this Act shall be governed by the provisions of

existing legislation, or in default thereof, by the rules of the Law Merchant." Under Section

186 of the Negotiable Instruments Law, delay in the presentment of checks discharges the

drawer. However, Section 186 refers only to delay in presentment of checks but is silent on

delay in giving notice of dishonor. Consequently, the common law or Law Merchant cansupply this gap in accordance with Section 196 of the Negotiable Instruments Law.

One other issue raised by Great Asian, that of lack of consideration for the Deeds of Assignment, is completely unsubstantiated. The Deeds of Assignment uniformly provide

that the fifteen postdated checks were assigned to Bancasia "for valuable consideration."

Moreover, Article 1354 of the Civil Code states that, "Although the cause is not stated in the

contract, it is presumed that it exists and is lawful, unless the debtor proves the contrary."The record is devoid of any showing on the part of Great Asian rebutting this presumption.

On the other hand, Bancasia’s Loan Section Manager, Cynthia Maclan, testified that Bancasia

paid Great Asian a consideration at the discount rate of less than 24% of the face value of

the postdated checks.21 Moreover, in its verified petition for voluntary insolvency, Great

Asian admitted its debt to Bancasia when it listed Bancasia as one of its creditors, an extra-

judicial admission that Bancasia proved when it formally offered in evidence the verified

petition for insolvency.22 The Insolvency Law requires the petitioner to submit a schedule of

debts that must "contain a full and true statement of all his debts and liabilities."23 TheInsolvency Law even requires the petitioner to state in his verification that the schedule of

debts contains "a full, correct and true discovery of all my debts and liabilities x x x."24 Great Asian cannot now claim that the listing of Bancasia as a creditor was not an admission of its

debt to Bancasia but merely an acknowledgment that Bancasia had sent a demand letter toGreat Asian.

























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Great Asian, moreover, claims that the assignment of the checks is not a loanaccommodation but a sale of the checks. With the sale, ownership of the checks passed to

Bancasia, which must now, according to Great Asian, sue the drawers and indorser of the

check who are the parties primarily liable on the checks. Great Asian forgets that under the

Deeds of Assignment, Great Asian expressly undertook to pay the full value of the checks in

case of dishonor. Again, we reiterate that this obligation of Great Asian is separate and

distinct from its warranties as indorser under the Negotiable Instruments Law.

Great Asian is, however, correct in saying that the assignment of the checks is a sale, or

more properly a discounting, of the checks and not a loan accommodation. However, it is

precisely because the transaction is a sale or a discounting of receivables, embodied in

separate Deeds of Assignment, that the relevant provisions of the Civil Code are applicable

and not the Negotiable Instruments Law.

At any rate, there is indeed a fine distinction between a discounting line and a loanaccommodation. If the accounts receivable, like postdated checks, are sold for a

consideration less than their face value, the transaction is one of discounting, and is subject

to the provisions of the Financing Company Act. The assignee is immediately subrogated ascreditor of the accounts receivable. However, if the accounts receivable are merely used as

collateral for the loan, the transaction is only a simple loan, and the lender is not subrogated

as creditor until there is a default and the collateral is foreclosed.

In summary, Great Asian’s four contracts assigning its fifteen postdated checks to Bancasia

expressly stipulate the suspensive condition that in the event the drawers of the checks fail

to pay, Great Asian itself will pay Bancasia. Since the common condition in the contracts had

transpired, an obligation on the part of Great Asian arose from the four contracts, and that

obligation is to pay Bancasia the full value of the checks, including the stipulated penaltyand attorney’s fees.

Third Issue: The liability of surety Tan Chong Lin

Tan Chong Lin, the President of Great Asian, is being sued in his personal capacity based on

the Surety Agreements he signed wherein he solidarily held himself liable with Great Asian

for the payment of its debts to Bancasia. The Surety Agreements contain the following

common condition:

"Upon failure of the Principal to pay at maturity, with or without demand,any of the obligations above mentioned, or in case of the Principal’s failure

promptly to respond to any other lawful demand made by the Creditor, its

successors, administrators or assigns, both the Principal and the Surety/ies

shall be considered in default and the Surety/ies agree/s to pay jointly and

severally to the Creditor all outstanding obligations of the Principal, whetherdue or not due, and whether held by the Creditor as Principal or agent, and it is agreed that a certified statement by the Creditor as to the amount due

from the Principal shall be accepted by the Surety/ies as correct and final for

all legal intents and purposes."

Indisputably, Tan Chong Lin explicitly and unconditionally bound himself to pay Bancasia,

solidarily with Great Asian, if the drawers of the checks fail to pay on due date. The

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condition on which Tan Chong Lin’s obligation hinged had happened. As surety, Tan ChongLin automatically became liable for the entire obligation to the same extent as Great Asian.

Tan Chong Lin, however, contends that the following warranties in the Deeds of Assignment

enlarge or increase his risks under the Surety Agreements:

"The ASSIGNOR warrants:

1. the soundness of the receivables herein assigned;

2. that said receivables are duly noted in its books and are supported by

appropriate documents;

3. that said receivables are genuine, valid and subsisting;

4. that said receivables represent bona fide sale of goods, merchandise,

and/or services rendered in the ordinary course of its business transactions;

5. that the obligors of the receivables herein assigned are solvent;

6. that it has valid and genuine title to and indefeasible right to dispose of

said accounts;

7. that said receivables are free from all liens and encumbrances;

8. that the said receivables are freely and legally transferable, and that theobligor/s therein will not interpose any objection to this assignment, and

has in fact given his/their consent hereto."

Tan Chong Lin maintains that these warranties in the Deeds of Assignment materially

altered his obligations under the Surety Agreements, and therefore he is released from any

liability to Bancasia. Under Article 1215 of the Civil Code, what releases a solidary debtor is

a "novation, compensation, confusion or remission of the debt" made by the creditor with

any of the solidary debtors. These warranties, however, are the usual warranties made by

one who discounts receivables with a financing company or bank. The Surety Agreements,

written on the letter head of "Bancasia Finance & Investment Corporation," uniformly state

that "Great Asian Sales Center x x x has obtained and/or desires to obtain loans, overdrafts,discounts and/or other forms of credits from" Bancasia. Tan Chong Lin was clearly on notice

that he was holding himself as surety of Great Asian which was discounting postdated

checks issued by its buyers of goods and merchandise. Moreover, Tan Chong Lin, as

President of Great Asian, cannot feign ignorance of Great Asian’s business activities ordiscounting transactions with Bancasia. Thus, the warranties do not increase or enlarge the

risks of Tan Chong Lin under the Surety Agreements. There is, moreover, no novation of thedebt of Great Asian that would warrant release of the surety.

In any event, the provisions of the Surety Agreements are broad enough to include the

obligations of Great Asian to Bancasia under the warranties. The first Surety Agreement states that:

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"x x x herein Surety/ies, jointly and severally among themselves and likewisewith principal, hereby agree/s and bind/s himself/themselves to pay at

maturity all the notes, drafts, bills of exchange, overdraft and other obligations

of every kind which the Principal may now or may hereafter owe the Creditor ,

including extensions or renewals thereof in the sum *** ONE MILLION

ONLY*** PESOS (P1,000,000.00), Philippine Currency, plus stipulated

interest thereon at the rate of sixteen percent (16%) per annum, or at suchincreased rate of interest which the Creditor may charge on the Principal’s

obligations or renewals or the reduced amount thereof, plus all the costs and

expenses which the Creditor may incur in connection therewith.

x x x

Upon failure of the Principal to pay at maturity, with or without demand, any

of the obligations above mentioned, or in case of the Principal’s failure

promptly to respond to any other lawful demand made by the Creditor , its

successors, administrators or assigns, both the Principal and the Surety/ies

shall be considered in default and the Surety/ies agree/s to pay jointly and severally to the Creditor all outstanding obligations of the Principal , whether

due or not due, and whether held by the Creditor as Principal or agent, and it

is agreed that a certified statement by the Creditor as to the amount due

from the Principal shall be accepted by the Surety/ies as correct and final for

all legal intents and purposes. (Emphasis supplied)

The second Surety Agreement contains the following provisions:

"x x x herein Surety/ies, jointly and severally among themselves and likewisewith PRINCIPAL, hereby agree and bind themselves to pay at maturity all the

notes, drafts, bills of exchange, overdraft and other obligations of every kind

which the PRINCIPAL may now or may hereafter owe the Creditor , includingextensions and/or renewals thereof in the principal sum not to exceed TWO

MILLION (P2,000,000.00) PESOS, Philippine Currency, plus stipulated

interest thereon, or such increased or decreased rate of interest which the

Creditor may charge on the principal sum outstanding pursuant to the rules

and regulations which the Monetary Board may from time to time

promulgate, together with all the cost and expenses which the CREDITOR

may incur in connection therewith.

If for any reason whatsoever, the PRINCIPAL should fail to pay at maturity

any of the obligations or amounts due to the CREDITOR, or if for any reason

whatsoever the PRINCIPAL fails to promptly respond to and comply with

any other lawful demand made by the CREDITOR, or if for any reasonwhatsoever any obligation of the PRINCIPAL in favor of any person or entity

should be considered as defaulted, then both the PRINCIPAL and the

SURETY/IES shall be considered in default under the terms of this

Agreement. Pursuant thereto, the SURETY/IES agree/s to pay jointly and

severally with the PRINCIPAL, all outstanding obligations of the CREDITOR,

whether due or not due, and whether owing to the PRINCIPAL in its

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personal capacity or as agent of any person, endorsee, assignee or transferee.x x x. (Emphasis supplied)

Article 1207 of the Civil Code provides, "xxx There is a solidary liability only when the

obligation expressly so states, or when the law or nature of the obligation requires

solidarity." The stipulations in the Surety Agreements undeniably mandate the solidaryliability of Tan Chong Lin with Great Asian. Moreover, the stipulations in the Surety

Agreements are sufficiently broad, expressly encompassing "all the notes, drafts, bills of

exchange, overdraft and other obligations of every kind which the PRINCIPAL may now or may

hereafter owe the Creditor ". Consequently, Tan Chong Lin must be held solidarily liable with

Great Asian for the nonpayment of the fifteen dishonored checks, including penalty and

attorney’s fees in accordance with the Deeds of Assignment.

The Deeds of Assignment stipulate that in case of suit Great Asian shall pay attorney’s fees

equivalent to 25% of the outstanding debt. The award of attorney’s fees in the instant caseis justified,25 not only because of such stipulation, but also because Great Asian and Tan

Chong Lin acted in gross and evident bad faith in refusing to pay Bancasia’s plainly valid,

just and demandable claim. We deem it just and equitable that the stipulated attorney’s feeshould be awarded to Bancasia.

The Deeds of Assignment also provide for a 3% penalty on the total amount due in case of

failure to pay, but the Deeds are silent on whether this penalty is a running monthly or

annual penalty. Thus, the 3% penalty can only be considered as a one-time penalty.

Moreover, the Deeds of Assignment do not provide for interest if Great Asian fails to pay.

We can only award Bancasia legal interest at 12% interest per annum, and only from the

time it filed the complaint because the records do not show that Bancasia made a written

demand on Great Asian prior to filing the complaint .26 Bancasia made an extrajudicialdemand on Tan Chong Lin, the surety, but not on the principal debtor, Great Asian.

WHEREFORE, the assailed Decision of the Court of Appeals in CA-G.R. CV No. 20167 isAFFIRMED with MODIFICATION. Petitioners are ordered to pay, solidarily, private

respondent the following amounts: (a) P1,042,005.00 plus 3% penalty thereon, (b) interest

on the total outstanding amount in item (a) at the legal rate of 12% per annum from thefiling of the complaint until the same is fully paid, (c) attorney’s fees equivalent to 25% of

the total amount in item (a), including interest at 12% per annum on the outstandingamount of the attorney’s fees from the finality of this judgment until the same is fully paid,

and (c) costs of suit.

SO ORDERED.

Vitug, (Acting Chairman), and Panganiban, JJ., concur.

Melo, (Chairman), J., on leave.Sandoval-Gutierrez, J., no part.

Footnotes

1 Rollo, pp. 38-58.







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2 Eleventh Division composed of Justices Nathanael P. De Pano, Jr. ( ponente),Jesus M. Elbinias and Angelina S. Gutierrez (now a member of this Court).

3 Rollo, pp. 144-157.

4 Penned by Judge Maximo A. Savellano, Jr.

5 Rollo, pp. 154-155.

6 Ibid ., pp. 156-157.

7 Ibid ., pp. 76-77.

8 Ibid ., pp. 79-81.

9 Rollo, pp. 13-15.

10 Plaintiff’s Evidence, p. 15.

11 Plaintiff’s Evidence, p. 16.

12 The following entry on "discount" in Simon & Schuster New Millennium

Encyclopedia (2000 CD Version) explains the meaning of a discounting line:

"In finance, discounts are premiums or considerations given on the purchase

of promissory notes, bills of exchange, or other forms of negotiable

commercial paper in advance of their maturity dates. Such discounts makeup deductions from the face value of the discounted paper and are made at

the time of purchase. The principal agencies engaged in discountingcommercial paper are commercial banks and, in a few countries, financial

institutions that specialize in that practice. When discounted paper is again

put into circulation by a bank or discount house and is discounted again, it issaid to be rediscounted.

When discounted paper matures, the holders of such bills and notes receive

the full face value of the commercial paper they present for payment;

therefore, the practice of discounting bills and notes is, in effect, a means of

extending credit in the form of loans; the discounts are regarded as advance

collections of interest on the loans. Rates for discounting and rediscounting

commercial paper are established by commercial banks and discount houses

in accordance with the relative supply of money available for commercial

loans. In countries in which the banking system is organized on a centralizedbasis, discount and rediscount rates are determined in large part by the

central banks; in the U.S., these rates are established in part by the FederalReserve System to control the volume of credit and thus stimulate or slow

the economy."

13 Section 3 (a) of R.A. No. 5980 stated as follows: "Financing companies,"hereinafter called companies, are corporations x x x which are primarily

organized for the purpose of extending credit facilities to consumers and to





































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industrial, commercial, or agricultural enterprises, either by discounting orfactoring commercial papers or accounts receivable, or by buying and selling

contracts, leases, chattel mortgages, or other evidences of indebtedness, x x

x."

14 Plaintiff’s Evidence, Exhs. "A", "D", "I", "R", pp. 1, 3, 6 and 11-12.

15 Plaintiff’s Evidence, Exh. "R", pp. 11-12.

16 Article 1181 of the Civil Code provides as follows: "In conditionalobligations, the acquisition of rights, as well as the extinguishment or loss of

those already acquired, shall depend upon the happening of the event whichconstitutes the condition."

17 Sesbreño vs. Court of Appeals, 222 SCRA 466 (1993).

18 See Campos & Campos, p. 128, Notes and Selected Cases on Negotiable

Instruments Law (1971).

19 Section 114 (d) and (e) of the Negotiable Instruments Law provides as

follows: "When notice need not be given to drawer. - Notice of dishonor is

not required to be given to the drawer in either of the following cases: (a) x xx; (d) Where the drawer has no right to expect or require that the drawee or

acceptor will honor the instrument; (e) Where the drawer hascountermanded payment."

20 Campos & Campos, p. 516, supra., Note 18.

21 TSN, May 7, 1984, p. 9.

22 Original Records, Exhibits "DD", "DD-1", pp. 238-244.

23 Act No. 1956, Section 15.

24 Ibid ., Section 17.

25 Article 2208 of the Civil Code.

26 Eastern Shipping Lines, Inc. vs. Court of Appeals, 234 SCRA 78 (1994).

G.R. No. L-58286 May 16, 1983

AGAPITO B. DUCUSIN and AGAPITO T. DUCUSIN, JR., petitioners,

vs.

HON. COURT OF APPEALS, VIRGILIO S. BALIOLA and LILIA S. BALIOLA, respondents.

Agapito Ducusin in his own behalf.








































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Roberto Brodette for respondents.

GUERRERO, J.:

Petition for certiorari praying that the judgment in CA-G.R. No. SP-11473- PR entitled

"Virgilio S. Baliola and Lilia S. Baliola vs. Hon. Alfredo L. Benipayo, Judge, CFI of Manila,Branch XVI, Agapito Ducusin and Agapito Ducusin, Jr." be set aside and reversed, the

dispositive portion of which reads:

WHEREFORE, premises considered, the judgment appealed from is herebyMODIFIED. The complaint for ejectment is hereby DISMISSED. Petitioners

are hereby ordered to pay private respondent Agapito Ducusin Sr. the sum

of P263.29 as their proportionate share for the use of the booster pump.

Petitioners are likewise ordered to share in the expenses incurred for the

use of the booster pump in the future until the termination of the contract of

lease. No costs.

It appears from the records that on February 20, 1975, petitioner Agapito Ducusin leased to

private respondent, Virgilio S. Baliola married to Lilia Baliola a one-door apartment unit

located in 3319-A, Magistrado Araulio St., Bacood, Sta. Mesa, Manila under the contract of lease, Exhibit "A", pertinent stipulations of which state:

xxx xxx xxx

Now, therefore, for and in consideration of the foregoing premises and

covenants and stipulations herein contained in a monthly rental of Two

Hundred and Twenty (P220.00) Pesos, the Lessor hereby lease the one-door

residential apartment located at No. 3319-A Maj. Araulio St., Bacood, Manilaunder the following terms, stipulations and conditions:

l. The lessees agrees to pay to the Lessor on or before the 30th day of eachand every month the sum of Two Hundred and Twenty (P220.00) Pesos as

rental fee for the subject premises, without need of demand;

2. The term of this contract shall be in a month to month basis commencing on

February 19,1975 until terminated by the lessor on the ground that his

children need the premises for their own use or residence or upon any ground

provided for in accordance with law;

3. The Lessees, hereby warrants that the leased premises will be used by

him exclusively as residence only and that Lessees shag not directly orindirectly sublease, assign, transfer, convey or in any manner encumber the

right of lease or in any part of the leased premises under any circumstanceswhatsoever;

4. The Lessees hereby agrees to keep and maintain the premises clean or

same in such good and tenantable conditions, and shall comply with all

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government sanitary regulations and safety, as well as electrical regulationswhich may be imposed by the government or the lessor himself;

5. All utilities such as light, water, telephone, gas service, etc. in the leased

premises shall be paid for by the Lessees,

6. The Lessor hereby undertake to maintain the Lessees in a peaceful

enjoyment and possession of the lease premises and warrants that thepremises lease by him to the lessees, are in good habitable condition;

7. That all repairs necessary for the preservation of the wire screens, electric

switches and other parts, plumbing fixtures, articles or toilet parts and tubes,paints and payment for labor for repairs shall be for the account of the

Lessees, except big major repairs;

8. That the Lessees agrees to deposit the amount of four hundred and forty

( P440.00) pesos rental deposit to the Lessor. The said rental deposit which

is equivalent to payment of two months rental fee could be used or be paidfor the Lessees last two months stay in the leased premises. ... (Exhibit "A").

(Emphasis supplied)

The Baliola spouses occupied the apartment for almost two (2) years, paying its rentalswhen on January 18, 1977, petitioner Ducusin sent a "Notice to Terminate Lease Contract"

to private respondents Baliolas terminating the lease and giving them until March 15, 1977within which to vacate the premises for the reason that his two children were getting

married and will need the apartment for their own use and residence (Exhibit "B"). A

second letter dated February 14, 1977 was thereafter sent by Ducusin to respondents

Baliolas making an inquiry on any action the latter had taken on the previous notice to

terminate the lease contract.

Respondents made no reply to the "Notice to Terminate Lease Contract". Indeed, they wrote

a letter to the Secretary of National Defense dated February 12, 1977, reporting that

Ducusin was intent on evicting them from the leased premises (Exhibit "6").

So on April 14, 1977, petitioners filed an action for ejectment against the Baliola spouses in

the City Court of Manila, Branch XVI, alleging that having constructed the apartment complex for the use and residence of his children (each to a unit) if and when they decide to

marry and live independently and that the apartment unit located at 3319-A MagistradoAraullo St., Bacood, Manila having been allotted to his son, Agapito Ducusin, Jr., the said unit

is now needed by Agapito, Jr. who is getting married in the month of May, 1977 and that

said Agapito, Jr. has decided to live independently.

The complaint for eviction further alleged that the lessees have violated the terms of the

contract by subleasing the premises; that the lessees have not used the premises solely for

residential purposes but have used the same as factory and/or manufacturing premises for

their commercial goods; and that they have neglected to undertake repairs of the apartment

and the premises according to their agreement.

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The lessees denied the allegations of the lessor and claimed in their Answer that theejectment suit "is a well-planned scheme to rid the defendants and family out of their

apartment, and to circumvent the law prohibiting raising the rental of apartments and

houses. "

The City Court of Manila, Branch XVI, decided in favor of the lessor Ducusin on the groundthat the "defendants' contract with the plaintiff has already terminated with the notice of

termination sent by the plaintiff to the defendants on the ground that he needs the premises

for his own children." The trial court's decision states the following dispositive portion:

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and

against the defendants, ordering the defendants and all persons claiming

possession under them to vacate the premises known as 3319-A MagistradoAraulio St., Bacood, Sta. Mesa, Manila, and surrender possession thereof to

the plaintiffs herein; ordering the defendants to pay the plaintiffs theamount of P220.00 monthly as reasonable compensation for the use of the

premises starting December 1978 until the premises is finally vacated and

possession thereof surrendered to the plaintiffs; ordering the defendants topay to the plaintiffs the amount of P263.29 as reimbursement for the

expenses incurred for the use of the booster pump; ordering the defendants

to pay the plaintiff the amount of P700.00 as reasonable attorney's fees, plus

the costs of suit.

The lessees appealed to the Court of First Instance of Manila, Branch XVI, assigning the

following errors: (a) That the lower court erred in not finding that the written contract of

lease falls within the range of P.D. No. 20; (b) That the lower court erred in finding that the

need of the leased premises by the plaintiffs-appellees to be lawful and valid andsatisfactorily proved by them; (c) That the lower court erred in awarding damages in the

form of reimbursement of the expenses for the use of the booster pump and attorney's fees;

and (d) That the lower court erred in not allowing defendants-appellants' counter-claim.

The Court of First Instance of Manila, Branch XVI, affirmed the decision of the City Court of

Manila, Branch XVI, based on its findings that: (1) mere allegation of the landlord in his need

of the premises for the use of the immediate members of his family "constitutes a cause to

eject the tenants ..."; (2) the marriage of private respondent Agapito Ducusin, Jr. was proved

by the testimony of private respondent Agapito Ducusin, Sr., the latter's son Arturo,

photographs depicting married couple and a marriage certificate (Exhibits "F", "G", "H" and

"I"); and (3) that petitioners admitted the existence of the verbal agreement to share the

expenses incurred for the use of the booster pump.

The lessees, still not satisfied with the CFI decision, went to the Court of Appeals on a

petition for review submitting that: "(1) that the respondent CFI of Manila erred in holdingthat the need of the premises in question by the private respondents is lawful and valid; (2)

that the respondent CFI of Manila erred in finding that the need of the premises a quo by the

private respondents has been sufficiently proven by them and legally entitle them to

judicially eject the petitioners from the premises; (3) that the respondent CFI of Manilaerred in ruling that the award by the trial court to private respondents of damages in the

form of reimbursement of expenses for the use of the booster pump is proper and legal."

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In resolving the appeal, the respondent appellate court proceeded to "examine (the)determination of the questions (1) whether or not an owner of a leased premises can

unilaterally terminate the contract of lease under the terms and conditions stated therein;

and (2) whether or not the happening of the resolutory condition re: the need of the

immediate members of the family of the lessor of the leased premises - has been established

by a preponderance of evidence

Sustaining the validity of the clause in the contract of lease in question, the Court of Appeals

held:

The clause in the contract of lease dated February 20, 1975 at issue in the

instant case reads:

xxx xxx xxx

2. The term of this contract shall be in a month-to-month

basis commencing on February 19, 1975 until terminated by

mutual agreement or terminated by the lessor on the ground that his children need the premises for their own use or

residence or upon any ground provided for in accordancewith law-,

xxx xxx xxx

(Emphasis supplied.)

The Parties to the contract of lease agreed that the obligations arising from

the said contract shall be extinguished due to the following causes; (1)

termination of the contract by mutual consent of the Parties; (2) when the

lessor elects to terminate the contract on the ground that his children need

the premises for their own use or residence and (3) for any cause asprovided in accordance with law.

In the complaint for ejectment, private respondents rely on three causes of

action to support their claim that the contract of lease entered into with the

petitioners was terminated: (1) violation of the clause in the contract against

sublease: (21 use of the leased premises for commercial purposes and (3)happening of the resolutory condition - need of the leased premises by the

lessor's children. The trial court rejected the first two grounds as not beingsupported by evidence presented but sustained the private respondents'

third cause of action.

The validity of the terms and conditions in a contract is governed by the

following Civil Code provisions:

Art. 1308. The contract must bind both contracting parties;

its validity or compliance cannot be left to the will of one of

them.

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Art. 1182. When the fulfillment of the condition dependsupon the sole will of the debtor, the conditional obligation

shall be void. If it depends upon chance or upon the will of a

third person, the obligation shall take effect in conformity

with the provisions of this Code. ...

The resolutory condition in the contract of lease re: the need of the lessor's

children of the leased premises is not a condition the happening of which is

dependent solely upon the will of the lessor. The happening of the condition

depends upon the will of a third person the lessor's children. Whenever the

latter require the use of the leased premises for their own needs, then the

contract of lease shall be deemed terminated. The validity of the said

condition as agreed upon by the parties stands.

We agree with the above ruling of the respondent Court and, therefore, affirm the same.

As to the second issue: whether the need of the immediate members of the family of the

lessor of the leased premises has been established by a preponderance of evidence, therespondent court ruled against the lessor Ducusin and We quote:

Upon a careful review of the records of the instant case, We are of the

opinion that the private respondents have not proved by a preponderance of evidence the alleged need of the immediate members of his family of the use

of the leased premises in dispute,

Private respondent Agapito Ducusin Sr. alleged in his complaint that he

needed the leased premises because his son Agapito Ducusin, Jr. was getting

married. In the proceedings at the trial Court, he testified that Agapito

Ducusin Jr. was getting married on May 1977, hence the latter needed the

leased premises (T.S.N., March 7, 1978, pp. 11-12).

No proof of the marriage of private respondent Agapito Ducusin, Jr. was

presented from the time of the institution of the case against the petitioners

on April 13, 1977 until June 5, 1979 when Arturo Ducusin testified for his

father, Agapito Ducusin, Sr. In fact, evidence on the alleged marriage of

private respondent Agapito Ducusin, Jr. was only presented after privaterespondents filed a "Motion To Reopen The Case For Reception of Rebuttal

Evidence For Plaintiffs." The evidence consists of photographs of a wedding

(Exhibits "J" and "J-1") and a marriage certificate (Exhibit "H"). An alleged

letter of the private respondent Agapito Ducusin, Jr. where it stated that the

latter intended to settle in the Philippines instead of Canada where he was

presently residing with his wife (Exhibits "F" & "G") was also presented.

To give weight and credence to the evidence presented by the private

respondents on the need of the landlord's children to occupy and use the

leased premises runs counter to the time-honored rule against hearsay

evidence.

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Private respondent Agapito Ducusin, Jr. though named a plaintiff in the caseat bar never appeared during the proceedings in the trial Court. Even his

presence in the Philippines in 1977 when the case was instituted remains

subject to conjecture. His father, private respondent Agapito Ducusin Sr.,

merely intimated during the trial Court proceedings that the younger

Ducusin applied as an immigrant to Canada (T.S.N. March 7, 1978, pp. 11- 12)

The letters of private respondent Agapito Ducusin, Jr. to his brother Arturo

Ducusin, photographs of the alleged wedding of the former and the

certificate of marriage of Agapito Ducusin, Jr. are all self-serving. . Petitioners

are entitled to cross-examine the person who y made the statements in the

letter following the rulings in Pastor v. Gaspar, 2 Phil. 529; U.S. v. Caligagan, 2

Phil. 433; U.S. v. Manalo, 6 Phil. 364. The evidence presented to prove thealleged marriage of Agapito Ducusin, Jr. should be excluded in accordance

with the provisions of Rule 130, Sec. 30 of the Rules of Court which states:

Sec. 30. Testimony generally confined to personal knowledge;

hearsay excluded : A witness can testify only to those factswhich he knows of his own knowledge; that is, which is

derived from his own perception, except as otherwise

provided in these rules.'

Moreover, even if We are satisfactorily convinced of the marriage of private

respondent Agapito Ducusin, Jr., it does not establish the alleged need of the

latter to use the leased premises presently occupied by the petitioners.

Private respondent Agapito Ducusin, Sr. did not show that the one-door

apartment leased to the petitioners was the only place available for the useof his son, Agapito Ducusin, Jr. On the contrary, petitioner Virgilio Baliola

testified that private respondent Agapito Ducusin, Sr. informed him before

the action was instituted against him that another apartment unit, No. 3319-D similarly owned by the latter would soon be vacated (T.S.N., July 27, 1978,

pp. 17-18).

According to the petitioners, the above ruling of the Court of Appeals is erroneous and

should be reversed because "I. The contract expired by the termination of the period of the

lease and upon notice to vacate, irrespective of the truth or not of petitioner' need of the

subject premises; II. The evidence of petitioners on the third cause of action was sufficient

to show their need of the premises for their personal use and occupation; and III. There

being a provision in the contract on the third cause of action, the house rental laws have not

been violated." (Petition, p. 11, Records).

We find for the petitioners. We do not agree with the holding of the respondent court that the petitioners have not proved by a preponderance of evidence the alleged need of the

immediate members of his family for the use of the leased premises, which holding is

grounded on the assumption that "to give weight and credence to the evidence presented by

the private respondents on the need of the landlord's children to occupy and use the leasedpremises runs counter to the time-honored rule against hearsay evidence. " (CA Decision, p.

108, Records). The Court of Appeals rejected the letters of petitioner Agapito Ducusin, Jr. tohis brother, Arturo Ducusin the photographs of the wedding of Ducusin, Jr. and the

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certificate of marriage of Ducusin, Jr. and Adela Villacorta as self. serving, citing Sec. 30, Rule130 of the Rules of Court which provides that the witness can testify only to those facts

which he knows of his own knowledge. And since the marriage was not proved, the

appellate court reasoned out that the need for the use of the leased premises by Ducusin, Jr.

was not established.

We reject this holding of the respondent court. In the first place, as pointed out by the

petitioners, the testimony of petitioner Agapito Ducusin, Sr. should have been given weight

by the appellate court because he testified that his son Agapito Jr. got married to Adela

Villacorta on November 25, 1978 in Edmonton Alberta, Canada at the St. Anthony Church

and that he knows this fact of marriage since he was present during the wedding ceremony

and pictures marked Exhibits "H", "I", "J" and "J-1" were taken of the wedding party after the

ceremony and wherein he Identified himself in the picture (Exh. "J") as "the gentleman indark jacket on the right side" (t.s.n., June 5,1979, pp. 19-21; pp. 177-179, Records). And with

the testimony of Arturo Ducusin, a brother of Agapito Jr., which may be considered under

Rule 130, Sec. 33 as an act or declaration about pedigree, the word "pedigree" including

relationship, family genealogy, birth, marriage, death, the dates when and the places where

these facts occurred, and the names of the relatives, as well as the presentation of the

marriage certificate of Agapito Ducusin, Jr. and Adela Villacorta (all of which evidence were

noted, admitted and considered in the decision of the case before the CFI of Manila, Branch

XVI (p. 87, Records) and in the decision of the City Court of Manila, Branch XVI (p. 62,

Records) both holding that the marriage has been sufficiently proved, We rule that the

Court of Appeals gravely erred in excluding the evidence described above and presented to

prove the marriage of Agapito Ducusin, Jr.

We likewise conclude that the intention to use the leased premises as the residence of

Ducusin Jr. has been satisfactorily and sufficiently proved by clear, strong, and substantialevidence found in the records of the case. The testimony of the petitioner, Ducusin Sr., that

his son needs the leased premises as he was getting married and did in fact got married, for

which reason petitioner sent the "Notice to Terminate His Contract" (Exh. "B"); thetestimony of Arturo Ducusin -that he had an overseas telephone talk with his brother

Agapito Jr. informing that the latter was coming home and that he and his wife werepreparing their documents and arriving within the month (t.s.n., pp. 13, 17, June 5, 1979; p.

15, Records) and the documentary evidence (Exh. "F" and "G") which is the letter of theprivate respondent Agapito Ducusin, Jr. where it stated that he intended to settle in the

Philippines instead of Canada where he was presently residing with his wife (CA decision, p.

108, Records) - an these evidence clearly and competently prove the intention of petitioner

Agapito Ducusin, Jr. to re side in the Philippines and use the leased premises for his

residence and his wife.

The contention of the petitioner that the contract of lease in question is for a definite period,

being on a month-to-month basis beginning February 19, 1975 and is, therefore, not covered by P.D. No. 20, is correct. The rule We laid down in Rantael vs. Court of Appeals and

Teresa Llave, L-47519, April 30, 97 SCRA 453, is squarely on an fours with the case at barand is controlling. The Supreme Court said, and We quote:

1. The source of disagreement between petitioner Rantael and respondent

Llave relates to the following quoted provisions of the Agreement onOccupancy of Apartment dated August 1, 1974:

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The undersigned TENANT hereby agrees with Mrs. Teresa F.Llave as owner, to use, occupy and live in the latter's

apartment at Standford, Quezon City, known as Door 51-A on

a month to month basis, beginning today, under the following

terms and condition until the premises, (are) completely

vacated. ...

The aforequoted provisions of the Agreement on Occupancy of Apartment

cannot but be read as providing for a definite period for the lease. Period

relates to "length of existence; duration" or even a "series of years, months

or days in which something is completed" Definite means "having distinct or

certain limits; determinate in extent or character; limited fixed." A definite

period, therefore, refers to a portion of time certain or ascertainable as to itsbeginning, duration and termination. As already stated above, the parties

further expressly agreed that — 'upon thirty (30) days notice, either party

may terminate this agreement, each fulfilling their respective obligations

herein agreed.

In the case at bar, the lease entered into between petitioner Rantael and

respondent Llave commenced, in accordance with the provisions of the

Agreement on Occupancy of Apartment, on August 1, 1974, the date of

execution of the said Agreement, considering that the parties employed the

phrase "beginning today" with reference to the starting point of the period

during which petitioner Rantael would have use and occupancy of the

premises of unit 51-A. As to the duration and termination of the

aforementioned contractual relations, the parties used the phrase "on a

month to month basis" in the Agreement with reference to the length of timeduring which petitioner Rantael would have use and occupancy of the leased

premises. And month here should be construed, in like manner as in the

interpretation of laws pursuant to the provisions of Article 12 of the CivilCode of the Philippines, there being no reason to deviate therefrom, as a

period composed of thirty days. The contractual relations betweenpetitioner Rantael and respondent Llave ceased after the expiration of the

first thirty days reckoned from August 1, 1974 but continued for the next thirty-day period and expired after the last day thereof, repeating the same

cycle for the succeeding thirty-day periods, until the Id respondent Llave

exercised her express prerogative under the agreement to terminate the

same.

xxx xxx xxx

However, by express exception of P.D. No. 20, judicialejectment lies "when the lease is for a definite period"or

when the fixed or definite period agreed upon has expired.The lease in the case at bar having a definite period, it

indubitably follows that the exception, rather than thegeneral rule, applies and, therefore, respondent Llave's right

to judicially eject petitioner Rantael from the premises maybe duly enforced. This has been the consistent administrative

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interpretation of the Office of the President, supra. Therefore,no error was committed by respondent appellate court. ...

As to the holding of the respondent court that petitioner Ducusin, Sr. "did not show that the

one-door apartment leased to the petitioners was the only place available for the use of his

son, Agapito Ducusin, Jr.," on the contrary, We find in the records evidence that out of theeight doors apartment building belonging to the petitioner Ducusin Sr., three doors, now 31

years old, became untenantable due to wear and tear and the remaining five doors were all

occupied by tenants; first door, 3319, is occupied by Mr. Coluso, 3319-A by the Baliola

spouses, 3319-B by Mr. & Mrs. Magsano, 3319-C by Mr. & Mrs. de los Santos, and 3319-D by

Videz. (pp. 13-14, t.s.n., July 27, 1978; see p. 14, Records). From this evidence may be

deduced that there is no other place available for the use and residence of petitioner's son,

Agapito Ducusin, Jr. Assuming that Agapito Ducusin, Sr. informed his tenant Virgilio Baliolathat another apartment unit No. 3319, would soon be vacated, the alleged vacancy is nearly

speculative and there is no showing that it actually became vacant and available.

There is, therefore, no factual and legal basis for the respondent court's decision dismissing

the complaint for ejectment and reversing the findings of facts of both the City Court of Manila, Branch XVI, and the Court of First Instance of Manila, Branch XVI.

And that brings Us to the last point in the review of the case at bar. Generally, the findings of

fact by the Court of Appeals are deemed accepted as the basis for review of the appellate

court's decision. But this rule is not without exception such as shown in the case before Us

where the Court of Appeals reversed the findings of fact made by the trial court (the City

Court of Manila) and also the Court of First Instance, by excluding evidence supposedly

hearsay when they are not pursuant to the rules of evidence, by ignoring evidence on record

that are competent, clear and substantial and by misapprehending the facts, thereby makingmanifest the commission of grave abuse of discretion on the part of the respondent

appellate court and so warrants and justifies a review not only of the law but also the facts.

We reiterate Our doctrine in Tolentino vs. De Jesus, 56 SCRA 167, where it was ruled that the

findings of facts of the Court of Appeals are not conclusive where there is grave abuse of

discretion; the judgment is based on misapprehens ion of facts; the findings of facts of the

Court of Appeals are contrary to those of the trial court or premised on the absence of

evidence and is contradicted by evidence on record; the conclusion is a finding grounded

entirely on speculation, surmise and conjectures; and the inference made is manifestly

mistaken. These are the exceptions to the general rule. The instant petition is such an

exception.

WHEREFORE, IN VIEW OF THE FOREGOING, the decision of the respondent Court of

Appeals subject of this review is hereby REVERSED and SET ASIDE. The decision of the City

Court of Manila, Branch XVI and affirmed on appeal to the Court of First Instance of Manila,Branch XVI is hereby reinstated and restored, with costs in favor of petitioners.

SO ORDERED.

Makasiar, Aquino, Concepcion, Jr., De Castro and Escolin JJ., concur.

Abad Santos, J., took no part.

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Article 1179 and 1181