[G.R. No. 16454. September 29, 1921.]

GEORGE A. KAUFFMAN, plaintiff-appellee, vs. THE PHILIPPINE NATIONAL BANK, defendant-appellant.

FACTS:

Plaintiff George Kauffman was the president and owner of almost all shares of stocks of the Philippine Fiber and Produce Company in the Philippine Islands. On February 5, 1918, the board of directors of said company, declared a dividend of P100,000 from its surplus earnings for the year 1917, of which the plaintiff was entitled to the sum of P98,000. This amount was accordingly placed to his credit on the books of the company, and so remained until in October of the same year when an unsuccessful effort was made to transmit the whole, or a greater part thereof, to the plaintiff in New York City.

On October 9, 1918, George B. Wicks, treasurer of the Philippine Fiber and Produce Company, presented himself in the exchange department of the Philippine National Bank in Manila and requested that a telegraphic transfer of $45,000 should be made to the plaintiff in New York City, upon account of the Philippine Fiber and Produce Company.

On the same day the Philippine National Bank dispatched to its New York agency a cablegram to the following effect: "Pay George A. Kauffman, New York, account Philip- pine Fiber Produce Co., $45,000. (Sgd.) PHILIPPINE NATIONAL BANK, Manila."

However the Philippine National Bank in Manila, upon advise by the bank’s representative in New York of the plaintiff’s reluctance to accept bills from his company and that payment be withheld, sent another telegram message on October 11 to its representative to withhold the payment to plaintiff as suggested.

Meanwhile, Wicks cabled the plaintiff in New York advising him that the $45,000 had been placed to his credit in the New York agency of PNB. Thereafter, plaintiff presented himself at the office of PNB in New York City demanding payment. By this time, the message from PNB Manila of October 11 directing the withholding of payment and that payment was therefore refused.

In view of these facts, the plaintiff Kauffman instituted the present action in the Court of First Instance of the city of Manila to recover said sum, with interest and costs; and judgment having been there entered favorably to the plaintiff, the defendant appealed.

ISSUE: WON THE PLAINTIFF CAN MAINTAIN THE ACTION CONSIDERING HIS LACK OF PRIVITY TO THE CONTRACT BETWEEN PNB AND GEORGE WICKS?

HELD – YES

The only express provision of law as bearing directly on this question is the second paragraph of article 1257 of the Civil Code; This provision states an exception to the general rule expressed in the first paragraph of the same article to the effect that contracts are productive of effects only between the parties who execute them; XXXX

The paragraph introducing the exception which we are now to consider is in these words:

"Should the contract contain any stipulation in favor of a third person, he may demand its fulfillment, provided he has given notice of his acceptance to the person bound before the stipulation has been revoked." (Art. 1257, par. 2, Civ. Code.)

In the case of Uy Tam and Uy Yet vs. Leonard (30 Phil., 471), XXXXX Justice Trent, speaking for the court in that case, sums up the conditions governing the right of the person for whose benefit a contract is made to maintain an action for the breach thereof in the following words:

1

"So, we believe the fairest test, in this jurisdiction at least, whereby to determine whether the interest of a third person in a contract is a stipulation pour autrui, or merely an incidental interest, is to rely upon the intention of the parties as disclosed by their contract.

"If a third person claims an enforceable interest in the contract, that question must be settled by determining whether the contracting parties desired to tender him such an interest. Did they deliberately insert terms in their agreement with the avowed purpose of conferring a favor upon such third person? In resolving this question, of course, the ordinary rules of construction and interpretation of writings must be observed." (Uy Tam and Uy Yet vs. Leonard, supra.)

In the light of the conclusions thus stated, the right of the plaintiff to maintain the present action is clear enough; for it is undeniable that the bank's promise to cause a definite sum of money to be paid to the plaintiff in New York City is a stipulation in his favor within the meaning of the paragraph above quoted; and the circumstances under which that promise was given disclose an evident intention on the part of the contracting parties that the plaintiff should have that money upon demand in New York City. The recognition of this unqualified right in the plaintiff to receive the money implies in our opinion the right in him to maintain an action to recover it; XXXXX

It will be noted that under the paragraph cited a third person seeking to enforce compliance with a stipulation in his favor must signify his acceptance before it has been revoked. In this case the plaintiff clearly signified his acceptance to the bank by demanding payment; and although the Philippine National Bank had already directed its New York agency to withhold payment when this demand was made, the rights of the plaintiff cannot be considered to have been prejudiced by that fact. The word "revoked," as there used, must be understood to imply revocation by the mutual consent of the contracting parties, or at least by direction of the party purchasing the exchange.

In Legniti vs. Mechanics, etc. Bank (130 N. E. Rep., 597), decided by the Court of Appeals of the State of New York on March 1, 1921, wherein it is

held that, by selling a cable transfer of funds on a foreign country in ordinary course, a bank incurs a simple contractual obligation, and cannot be considered as holding the money which was paid for the transfer in the character of a specific trust. Thus, it was said, "Cable transfers, therefore, mean a method of transmitting money by cable wherein the seller engages that he has the balance at the point on which the payment is ordered and that on receipt of the cable directing the transfer his correspondent at such point will make payment to the beneficiary described in the cable. All these transactions are matters of purchase and sale create no trust relationship."

As we view it there is nothing in the decision referred to decisive of the question now before us, which is merely that of the right of the beneficiary to maintain an action against the bank selling the transfer.

Upon the considerations already stated, we are of the opinion that the right of action exists, and the judgment must be affirmed. It is so ordered, with costs against the appellant. Interest will be computed as prescribed in section 510 of the Code of Civil Procedure.

Johnson, Araullo, Avanceña and Villamor, JJ., concur

2

THIRD DIVISION

[G.R. No. 111924. January 27, 1997]

ADORACION LUSTAN, petitioner, vs. COURT OF APPEALS, NICOLAS PARANGAN and SOLEDAD PARANGAN, PHILIPPINE NATIONAL BANK, respondents.

D E C I S I O N

FRANCISCO, J.:

Petitioner Adoracion Lustan is the registered owner of a parcel of land otherwise known as Lot 8069 of the Cadastral Survey of Calinog, lloilo containing an area of 10.0057 hectares and covered by TCT No. T-561. On February 25, 1969, petitioner leased the above described property to private respondent Nicolas Parangan for a term of ten (10) years and an annual rent of One Thousand (P1,000.00) Pesos. During the period of lease, Parangan was regularly extending loans in small amounts to petitioner to defray her daily expenses and to finance her daughter's education. On July 29, 1970, petitioner executed a Special Power of Attorney in favor of Parangan to secure an agricultural loan from private respondent Philippine National Bank (PNB) with the aforesaid lot as collateral. On February 18, 1972, a second Special Power of Attorney was executed by petitioner, by virtue of which, Parangan was able to secure four (4) additional loans, to wit: the sums of P24,000.00, P38,000.00, P38,600.00 and P25,000.00 on December 15, 1975,

September 6, 1976, July 2, 1979 and June 2, 1980, respectively. The last three loans were without the knowledge of herein petitioner and all the proceeds therefrom were used by Parangan for his own benefit.[1] These encumbrances were duly annotated on the certificate of title. On April 16, 1973, petitioner signed a Deed of Pacto de Retro Sale[2] in favor of Parangan which was superseded by the Deed of Definite Sale[3] dated May 4, 1979 which petitioner signed upon Parangan's representation that the same merely evidences the loans extended by him unto the former.

For fear that her property might be prejudiced by the continued borrowing of Parangan, petitioner demanded the return of her certificate of title. Instead of complying with the request, Parangan asserted his rights over the property which allegedly had become his by virtue of the aforementioned Deed of Definite Sale. Under said document, petitioner conveyed the subject property and all the improvements thereon unto Parangan absolutely for and in consideration of the sum of Seventy Five Thousand (P75,000.00) Pesos.

Aggrieved, petitioner filed an action for cancellation of liens, quieting of title, recovery of possession and damages against Parangan and PNB in the Regional Trial Court of Iloilo City. After trial, the lower court rendered judgment, disposing as follows:

"WHEREFORE and in view of the foregoing, a decision is rendered as follows:

1. Ordering cancellation by the Register of Deeds of the Province of lloilo, of the unauthorized loans, the liens and encumbrances appearing in the Transfer Certificate of Title No. T-561, especially entries nos. 286231; 338638; and 352794;

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2. Declaring the Deed of Pacto de Retro Sale dated April 25, 1978 and the Deed of Definite Sale dated May 6, 1979, both documents executed by Adoracion Lustan in favor of Nicolas Parangan over Lot 8069 in TCT No. T-561 of the Register of Deeds of lloilo, as null and void, declaring the same to be Deeds of Equitable Mortgage;

3. Ordering defendant Nicolas Parangan to pay all the loans he secured from defendant PNB using thereto as security TCT No. T-561 of plaintiff and defendant PNB to return TCT No. T-561 to plaintiff;

4. Ordering defendant Nicolas Parangan to return possession of the land in question, Lot 8069 of the Calinog Cadastre described in TCT No. T-561 of the Register of Deeds of lloilo, to plaintiff upon payment of the sum of P75,000.00 by plaintiff to defendant Parangan which payment by plaintiff must be made within ninety (90) days from receipt of this decision; otherwise, sale of the land will be ordered by the court to satisfy payment of the amount;

5. Ordering defendant Nicolas Parangan to pay plaintiff attorney's fees in the sum of P15,000.00 and to pay the costs of the suit.

SO ORDERED."[4]

Upon appeal to the Court of Appeals (CA), respondent court reversed the trial court's decision. Hence this petition contending that the CA committed the following errors:

"IN ARRIVING AT THE CONCLUSION THAT NONE OF THE CONDITIONS STATED IN ART. 1602 OF THE NEW CIVIL CODE HAS BEEN PROVEN TO EXIST BY PREPONDERANCE OF EVIDENCE:

IN CONCLUDING THAT PETITIONER SIGNED THE DEED OF SALE WITH KNOWLEDGE AS TO THE CONTENTS THEREOF;

IN ARRIVING AT THE CONCLUSION THAT THE TESTIMONY OF WITNESS DELIA CABIAL DESERVES FULL FAITH AND CREDIT;

IN FINDING THAT THE SPECIAL POWER OF ATTORNEY AUTHORIZING MORTGAGE FOR "UNLIMITED" LOANS AS RELEVANT."

Two main issues confront us in this case, to wit: whether or not the Deed of Definite Sale is in reality an equitable mortgage and whether or not petitioner's property is liable to PNB for the loans contracted by Parangan by virtue of the special power of attorney. The lower court and the CA arrived at different factual findings thus necessitating a review of the evidence on record.[5] After a thorough examination, we note some errors, both in fact and in law, committed by public respondent CA.

The court a quo ruled that the Deed of Definite Sale is in reality an equitable mortgage as it was shown beyond doubt that the intention of the parties was one of a loan secured by petitioner's land.[6] We agree.

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A contract is perfected by mere consent.[7] More particularly, a contract of sale is perfected at the moment there is a meeting of minds upon the thing which is the object of the contract and upon the price.[8] This meeting of the minds speaks of the intent of the parties in entering into the contract respecting the subject matter and the consideration thereof. If the words of the contract appear to be contrary to the evident intention of the parties, the latter shall prevail over the former.[9] In the case at bench, the evidence is sufficient to warrant a finding that petitioner and Parangan merely intended to consolidate the former's indebtedness to the latter in a single instrument and to secure the same with the subject property. Even when a document appears on its face to be a sale, the owner of the property may prove that the contract is really a loan with mortgage by raising as an issue the fact that the document does not express the true intent of the parties. In this case, parol evidence then becomes competent and admissible to prove that the instrument was in truth and in fact given merely as a security for the repayment of a loan. And upon proof of the truth of such allegations, the court will enforce the agreement or understanding in consonance with the true intent of the parties at the time of the execution of the contract.[10]

Articles 1602 and 1604 of the Civil Code respectively provide:

"The contract shall be presumed to be an equitable mortgage in any of the following cases:

1) When the price of a sale with right to repurchase is unusually inadequate;

2) When the vendor remains in possession as lessor or otherwise;

3) When upon or after the expiration of the right to repurchase, another instrument extending the period of redemption or granting a new period is executed;

4) When the vendor binds himself to pay the taxes on the thing sold;

5) When the purchaser retains for himself a part of the purchase price;

6) In any other case where it may be fairly inferred that the real intention of the parties is that the transaction shall secure the payment of a debt or the performance of any other obligation."

"Art. 1604. The provisions of Article 1602 shall also apply to a contract purporting to be an absolute sale."

From a reading of the above-quoted provisions, for a presumption of an equitable mortgage to arise, we must first satisfy two requisites namely: that the parties entered into a contract denominated as a contract of sale and that their intention was to secure an existing debt by way of mortgage. Under Art. 1604 of the Civil Code, a contract purporting to be an absolute sale shall be presumed to be an equitable mortgage should any of the conditions in Art. 1602 be present. The existence of any of the circumstances therein, not a concurrence nor an overwhelming number of such circumstances, suffices to give rise to the presumption that the contract is an equitable mortgage.[11]

Art. 1602, (6), in relation to Art 1604 provides that a contract of sale is presumed to be an equitable mortgage in any other case where it may be

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fairly inferred that the real intention of the parties is that the transaction shall secure the payment of a debt or the performance of any other obligation. That the case clearly falls under this category can be inferred from the circumstances surrounding the transaction as herein set forth:

Petitioner had no knowledge that the contract[12] she signed is a deed of sale. The contents of the same were not read nor explained to her so that she may intelligibly formulate in her mind the consequences of her conduct and the nature of the rights she was ceding in favor of Parangan. Petitioner is illiterate and her condition constrained her to merely rely on Parangan's assurance that the contract only evidences her indebtedness to the latter. When one of the contracting parties is unable to read, or if the contract is in a language not understood by him, and mistake or fraud is alleged, the person enforcing the contract must show that the terms thereof have been fully explained to the former.[13] Settled is the rule that where a party to a contract is illiterate or cannot read or cannot understand the language in which the contract is written, the burden is on the party interested in enforcing the contract to prove that the terms thereof are fully explained to the former in a language understood by him.[14] To our mind, this burden has not been satisfactorily discharged.

We do not find the testimony of Parangan and Delia Cabial that the contract was duly read and explained to petitioner worthy of credit. The assessment by the trial court of the credibility of witnesses is entitled to great respect and weight for having had the opportunity of observing the conduct and demeanor of the witnesses while testifying.[15] The lower court may not have categorically declared Cabial's testimony as doubtful but this fact is readily apparent when it ruled on the basis of petitioner's evidence in total disregard of the positive testimony on Parangan's side. We have subjected the records to a thorough examination, and a reading of the transcript of stenographic notes would bear out that the court a quo is correct in its assessment. The CA committed a reversible error when it relied on the

testimony of Cabial in upholding the validity of the Deed of Definite Sale. For one, there are noted major contradictions between the testimonies of Cabial and Judge Lebaquin, who notarized the purported Deed of Definite Sale. While the former testified that receipts were presented before Judge Lebaquin, who in turn made an accounting to determine the price of the land[16], the latter categorically denied the allegation.[17] This contradiction casts doubt on the credibility of Cabial as it is ostensible that her version of the story is concocted.

On the other hand, petitioner's witness Celso Pamplona, testified that the contract was not read nor explained to petitioner. We believe that this witness gave a more accurate account of the circumstances surrounding the transaction. He has no motive to prevaricate or concoct a story as he witnessed the execution of the document at the behest of Parangan himself who, at the outset, informed him that he will witness a document consolidating petitioner's debts. He thus testified:

"Q: In (sic) May 4, 1979, you remember having went (sic) to the Municipality of Calinog?

A: Yes, sir.

Q: Who invited you to go there?

A: Parangan.

Q: You mean Nicolas Parangan?

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A: Yes, sir.

Q: What did Nicolas tell you why he invited you to go there?

A: He told me that I will witness on the indebtedness of Adoracion to Parangan.

xxx xxx xxx

Q: Before Adoracion Lustan signed her name in this Exh. "4", was this document read to her?

A: No, sir.

Q: Did Nicolas Parangan right in that very room tell Adoracion what she was signing?

A: No, sir.

xxx xxx xxx

Q: What did you have in mind when you were signing this document, Exh. "4"?

A: To show that Adoracion Lustan has debts with Nicolas Parangan."[18]

Furthermore, we note the absence of any question propounded to Judge Lebaquin to establish that the deed of sale was read and explained by him to petitioner. When asked if witness has any knowledge whether petitioner knows how to read or write, he answered in the negative.[19] This latter admission impresses upon us that the contract was not at all read or explained to petitioner for had he known that petitioner is illiterate, his assistance would not have been necessary.

The foregoing squares with the sixth instance when a presumption of equitable mortgage prevails. The contract of definite sale, where petitioner purportedly ceded all her rights to the subject lot in favor of Parangan, did not embody the true intention of the parties. The evidence speaks clearly of the nature of the agreement — it was one executed to secure some loans.

Anent the issue of whether the outstanding mortgages on the subject property can be enforced against petitioner, we rule in the affirmative.

Third persons who are not parties to a loan may secure the latter by pledging or mortgaging their own property.[20] So long as valid consent was given, the fact that the loans were solely for the benefit of Parangan would not invalidate the mortgage with respect to petitioner's property. In consenting thereto, even granting that petitioner may not be assuming personal liability for the debt, her property shall nevertheless secure and respond for the

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performance of the principal obligation.[21] It is admitted that petitioner is the owner of the parcel of land mortgaged to PNB on five (5) occasions by virtue of the Special Powers of Attorney executed by petitioner in favor of Parangan. Petitioner argues that the last three mortgages were void for lack of authority. She totally failed to consider that said Special Powers of Attorney are a continuing one and absent a valid revocation duly furnished to the mortgagee, the same continues to have force and effect as against third persons who had no knowledge of such lack of authority. Article 1921 of the Civil Code provides:

"Art. 1921. If the agency has been entrusted for the purpose of contracting with specified persons, its revocation shall not prejudice the latter if they were not given notice thereof."

The Special Power of Attorney executed by petitioner in favor of Parangan duly authorized the latter to represent and act on behalf of the former. Having done so, petitioner clothed Parangan with authority to deal with PNB on her behalf and in the absence of any proof that the bank had knowledge that the last three loans were without the express authority of petitioner, it cannot be prejudiced thereby. As far as third persons are concerned, an act is deemed to have been performed within the scope of the agent's authority if such is within the terms of the power of attorney as written even if the agent has in fact exceeded the limits of his authority according to the understanding between the principal and the agent.[22] The Special Power of Attorney particularly provides that the same is good not only for the principal loan but also for subsequent commercial, industrial, agricultural loan or credit accommodation that the attorney-in-fact may obtain and until the power of attorney is revoked in a public instrument and a copy of which is furnished to PNB.[23] Even when the agent has exceeded his authority, the principal is solidarily liable with the agent if the former allowed the latter to act as though he had full powers (Article 1911, Civil Code).[24] The mortgage directly and immediately subjects the property upon which it is imposed.[25]

The property of third persons which has been expressly mortgaged to guarantee an obligation to which the said persons are foreign, is directly and jointly liable for the fulfillment thereof; it is therefore subject to execution and sale for the purpose of paying the amount of the debt for which it is liable.[26] However, petitioner has an unquestionable right to demand proportional indemnification from Parangan with respect to the sum paid to PNB from the proceeds of the sale of her property[27] in case the same is sold to satisfy the unpaid debts.

WHEREFORE, premises considered, the judgment of the lower court is hereby REINSTATED with the following MODIFICATIONS:

1. DECLARING THE DEED OF DEFINITE SALE AS AN EQUITABLE MORTGAGE;

2. ORDERING PRIVATE RESPONDENT NICOLAS PARANGAN TO RETURN THE POSSESSION OF THE SUBJECT LAND UNTO PETITIONER UPON THE LATTER'S PAYMENT OF THE SUM OF P75,000.00 WITHIN NINETY (90) DAYS FROM RECEIPT OF THIS DECISION;

3. DECLARING THE MORTGAGES IN FAVOR OF PNB AS VALID AND SUBSISTING AND MAY THEREFORE BE SUBJECTED TO EXECUTION SALE.

4. ORDERING PRIVATE RESPONDENT PARANGAN TO PAY PETITIONER THE AMOUNT OF P15,000.00 BY WAY OF ATTORNEY'S FEES AND TO PAY THE COSTS OF THE SUIT.

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SO ORDERED.

Narvasa, C.J., (Chairman), Davide, Jr., Melo, and Panganiban, JJ., concur.

9

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-7991            January 29, 1914

LEON J. LAMBERT, plaintiff-appellant, vs.T. J. FOX, defendant-appellee.

O'Brien and DeWitt and C. W. Ney, for appellant. J. C. Hixon, for appellee.

MORELAND, J.:

This is an action brought to recover a penalty prescribed on a contract as punishment for the breach thereof.

Early in 1911 the firm known as John R. Edgar & Co., engaged in the retail book and stationery business, found itself in such condition financially that its creditors, including the plaintiff and the defendant, together with many others, agreed to take over the business, incorporate it and accept stock therein in payment of their respective credits. This was done, the plaintiff and the defendant becoming the two largest stockholders in the new corporation called John R. Edgar & Co., Incorporated. A few days after the incorporation was completed plaintiff and defendant entered into the following agreement:

Whereas the undersigned are, respectively, owners of large amounts of stock in John R. Edgar and Co, Inc; and,

Whereas it is recognized that the success of said corporation depends, now and for at least one year next following, in the larger stockholders retaining their respective interests in the business of said corporation:

Therefore, the undersigned mutually and reciprocally agree not to sell, transfer, or otherwise dispose of any part of their present holdings of stock in said John R. Edgar & Co. Inc., till after one year from the date hereof.

Either party violating this agreement shall pay to the other the sum of one thousand (P1,000) pesos as liquidated damages, unless previous consent in writing to such sale, transfer, or other disposition be obtained.

Notwithstanding this contract the defendant Fox on October 19, 1911, sold his stock in the said corporation to E. C. McCullough of the firm of E. C. McCullough & Co. of Manila, a strong competitor of the said John R. Edgar & Co., Inc.

This sale was made by the defendant against the protest of the plaintiff and with the warning that he would be held liable under the contract hereinabove set forth and in accordance with its terms. In fact, the defendant Foz offered to sell his shares of stock to the plaintiff for the same sum that McCullough was paying them less P1,000, the penalty specified in the contract.

The learned trial court decided the case in favor of the defendant upon the ground that the intention of the parties as it appeared from the contract in question was to the effect that the agreement should be good and continue only until the corporation reached a sound financial basis, and that that event having occurred some time before the expiration of the year mentioned in the contract, the purpose for which the contract was made and had been fulfilled and the defendant accordingly discharged of his obligation thereunder. The complaint was dismissed upon the merits.

It is argued here that the court erred in its construction of the contract. We are of the opinion that the contention is sound. The intention of parties to a contract must be determined, in the first instance, from the words of the contract itself. It is to be presumed that persons mean what they say when they speak plain English. Interpretation and construction should by the instruments last resorted to by a court in determining what the parties agreed to. Where the language used by the parties is plain, then construction and

10

interpretation are unnecessary and, if used, result in making a contract for the parties. (Lizarraga Hermanos vs. Yap Tico, 24 Phil. Rep., 504.)

In the case cited the court said with reference to the construction and interpretation of statutes: "As for us, we do not construe or interpret this law. It does not need it. We apply it. By applying the law, we conserve both provisions for the benefit of litigants. The first and fundamental duty of courts, in our judgment, is to apply the law. Construction and interpretation come only after it has been demonstrated that application is impossible or inadequate without them. They are the very last functions which a court should exercise. The majority of the law need no interpretation or construction. They require only application, and if there were more application and less construction, there would be more stability in the law, and more people would know what the law is."

What we said in that case is equally applicable to contracts between persons. In the case at bar the parties expressly stipulated that the contract should last one year. No reason is shown for saying that it shall last only nine months. Whatever the object was in specifying the year, it was their agreement that the contract should last a year and it was their judgment and conviction that their purposes would not be subversed in any less time. What reason can give for refusing to follow the plain words of the men who made the contract? We see none.

The appellee urges that the plaintiff cannot recover for the reason that he did not prove damages, and cites numerous American authorities to the effect that because stipulations for liquidated damages are generally in excess of actual damages and so work a hardship upon the party in default, courts are strongly inclined to treat all such agreements as imposing a penalty and to allow a recovery for actual damages only. He also cites authorities holding that a penalty, as such, will not be enforced and that the party suing, in spite of the penalty assigned, will be put to his proof to demonstrate the damages actually suffered by reason of defendants wrongful act or omission.

In this jurisdiction penalties provided in contracts of this character are enforced . It is the rule that parties who are competent to contract may make such agreements within the limitations of the law and public policy as they desire, and that the courts will enforce them according to their terms. (Civil Code, articles 1152, 1153, 1154, and 1155; Fornow vs. Hoffmeister, 6 Phil. Rep., 33; Palacios vs. Municipality of Cavite, 12 Phil. Rep., 140; Gsell vs.

Koch, 16 Phil. Rep., 1.) The only case recognized by the Civil Code in which the court is authorized to intervene for the purpose of reducing a penalty stipulated in the contract is when the principal obligation has been partly or irregularly fulfilled and the court can see that the person demanding the penalty has received the benefit of such or irregular performance. In such case the court is authorized to reduce the penalty to the extent of the benefits received by the party enforcing the penalty.

In this jurisdiction, there is no difference between a penalty and liquidated damages, so far as legal results are concerned. Whatever differences exists between them as a matter of language, they are treated the same legally. In either case the party to whom payment is to be made is entitled to recover the sum stipulated without the necessity of proving damages. Indeed one of the primary purposes in fixing a penalty or in liquidating damages, is to avoid such necessity.

It is also urged by the appelle in this case that the stipulation in the contract suspending the power to sell the stock referred to therein is an illegal stipulation, is in restraint of trade and, therefore, offends public policy. We do not so regard it. The suspension of the power to sell has a beneficial purpose, results in the protection of the corporation as well as of the individual parties to the contract, and is reasonable as to the length of time of the suspension. We do not here undertake to discuss the limitations to the power to suspend the right of alienation of stock, limiting ourselves to the statement that the suspension in this particular case is legal and valid.

The judgment is reversed, the case remanded with instructions to enter a judgment in favor of the plaintiff and against the defendant for P1,000, with interest; without costs in this instance.

Arellano, C.J., Trent and Araullo, JJ., concur.

Separate Opinions

CARSON, J., dissenting:

I concur.

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I think it proper to observe, however that the doctrine touching the construction and interpretation of penalties prescribed in ordinary civil contracts as set forth in the opinion is carried to is extreme limits and that its statement in this form is not necessary to sustain the decision upon the facts in this case.

Without entering upon an extended discussion of the authorities, it is sufficient for my purposes to cite the opinion of the supreme court of Spain, dated June 13, 1906, construing the provisions of article 6 of Book 4, Title 1 of the Civil Code which treats of "contracts with a penal clause." In that case the court held:

The rules and prescriptions governing penal matters are fundamentally applicable to the penal sanctions of civil character.

This as well as other cases which might be cited from American as well as Spanish authorities indicate that special rules of interpretations are and should be made use of by the courts in construing penal clauses in civil contracts, and that case may well arise wherein the broad doctrine laid down in the opinion of the court may not be applicable.

12

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-1598            November 30, 1908

JOSE PALACIOS, manager of the Sociedad de Electricidad en Comandita, plaintiff-appellee, vs.THE MUNICIPALITY OF CAVITE, defendant-appellant.

Gabriel and Borbon, for appellant.R. Sotelo, for appellant.

 

TORRES, J.:

In the municipality of Cavite, and on the 11th day of November, 1901, Zacarias Fortich, as municipal president of the said municipality, and Jose Palacios, electrician and managing director of the company known as the Sociedad de Electricidad en Comandita, executed a contract before a notary of the public lighting and the said town and the isthmus by means of electricity, upon the basis, terms, and conditions approved by the said municipality, which are of the following tenor:

1. The Sociedad de Electricidad shall install two hundred incandescent lamps of sixteen candle power in the interior of this walled city of isthmus, at such points and distances as a special representative of the Ayuntamiento may designate in conjunction with the director of said company, and the said lamps shall be suspended from a cable which will be supported along the fronts of the houses at an approximate height of five meters from the ground.

2. The Ayuntamiento shall pay to the Sociedad for the installation of the sum of ten pesos for each incandescent lamp placed on the public

street, and six pesos more for each street lamp ( farol) as the purchase price of the same; payment to be made in three installments, one upon the signing of this contract, another at the commencement of the electric lighting, and the last thirty days thereafter.

3. Upon completion of the payment for the installation, the incandescent lamps, street lamps, and wires placed in the principal street for the public street lamps, shall become the property of the Ayuntamiento but all other cables, wires, posts, and insulators, shall, as previously, be the property of the Sociedad de Electricidad.

4. The Ayuntamiento shall obtain from the residents and owners the necessary authority for the purpose of supporting, on such houses as may be required, the lamps and wires of public lighting, inasmuch as this service is considered by the law as public utility, and will likewise permit the putting up of the posts in all such public streets where they may be necessary; not tax of any kind shall be imposed thereon, and in the case of damage to the buildings caused by the placing of the electric wires, the Sociedad de Electricidad shall be liable therefor.

5. Every alteration, removal or repair to be made in connection with the public lighting shall be done solely and exclusively by the personnel of the Sociedad de Electricidad and for account of the Ayuntamiento, with the exception of such repairs as may be necessary by reason of the wear and tear which shall be borne by the company.

6. The city lights shall burn from sunset to sunrise, and the Ayuntamiento, shall pay monthly in advance to this company the sum of P3 (three pesos) for each lamp of sixteen candle power, less ten per cent discount when there shall be two hundred lamps of sixteen candle power burning all night, and fifteen per cent discount where there shall be five hundred lamps of equal power.

7. The replacing lamps that may become useless, as well as the cleaning of the same, shall be for account of the Sociedad de

13

Electricidad, and the company in return therefore may be then cease to allow to the Ayuntamiento, the ten per cent bonus stated in the foregoing paragraph.

8. In the event of an involuntary interruption in the lighting, the company shall discount the value of the days during which such interruption may continue, and the Ayuntamiento, shall not claim any further indemnity.

9. In case the Ayuntamiento, fails to settle the bills within thirty days after the presentation thereof, the company shall be entitled to suspend the lighting and to rescind this contract.

10. The duration of this contract shall be two years, which period may be extended for two or more if agreeable to both parties without right to annul the same for any cause except for the lack of payment as provided in the foregoing paragraph, or for legal reasons of force majeure, but in the case of Ayuntamiento, should be without sufficient funds to pay for the lighting, there may be a temporary reduction of from ten to twenty per cent in the number of lights; such reduction not to exceed three months, as otherwise a new contract may be required.

11. And in case of noncompliance with this contract by the Ayuntamiento, before the expiration of the term of two years agreed upon, the Ayuntamiento, shall indemnify the company by assigning to it all the materials used in the installation to the amount of three thousands two hundred pesos paid by the said Ayuntamiento as stated in the foregoing paragraph.

12. If before the expiration of this contract for two years the Sociedad de Electricidad should to fail to comply therewith, the Ayuntamiento shall enjoy the right of preference in the recovery of the indemnity stipulated, in relation to other creditors of the company, and the company binds itself to respect the said lien in the event of transferring its rights to another person or company.

13. In the event of a disagreement between the two parties to this contract by reason thereof, it shall be decided by arbitrators to be

appointed by each of the parties, and if the arbitrators fail to reach an agreement they shall appoint a third person to decide.

By a written complaint presented by Jose Palacios on the 8th of October, 1902, as representative of the firm of Jose Palacios, Sociedad de Electricidad en Comandita, it was prayed that judgment be entered against the municipality of Cavite ordering the specific performance of the contract by the company; that the company be sentenced to pay monthly 400 pesos, from the 11th of November, 1901, and during the whole period in which the plaintiff shall continue to furnish electric current to the defendant, and to pay also the additional sum of 2,080 pesos, and all such further reimbursement as the court may consider just and equitable with the costs; it was also alleged among other things that, under the agreement and prior to the 1st of February, 1902, the plaintiffs company had acquired 200 lamps, cables, wires, machinery, and the necessary fittings for the installation of the said lamps, as well as the necessary engine to furnish the current for the lighting of the said 200 lamps; that prior to the aforesaid 1st day of February, and after the contract was signed, the plaintiff company installed and furnished lamps to the municipality according to the conditions stipulated in the contract, and was further prepared to supply 130 more lamps of the same description, but that the municipality refused to appoint a representative to designate the location for the said lamps and the supply of the current for the same beyond the 70 lamps already mounted, notwithstanding the fact that the company is and was prepared to install the 200 lamps contracted for sine December, 1901, in such localities within the town as the municipality would designate; that, by virtue of the contract, the plaintiff company constructed a plant with sufficient power, as had been stipulated, for the said number of lamps, and consequently with power in excess of what was required for the 70 lamps put up; that it has been obliged to keep at work the machinery with its excessive power in order to furnish current for the said 70 lamps, thus being subjected to an enormous and useless expense to the extent of 400 pesos a month, to the prejudice of its interests, since the 11th of November, 1901, incurring an additional loss of 2,080 pesos, the value of the remaining 130 lamps at the rate of 16 pesos each, according to agreement, all of which amount constituted an indebtedness which had not been paid, and which the defendant municipality refuses to pay.

After the demurrer of the defendant had been overruled, the plaintiff company asked in writing, on the 24th of July, 1903, to be allowed to amend its complaint by the addition of the following: That, in accordance with

14

clause 14 of the contract, the plaintiff had attempted to settle the differences that existed between them by the arbitration, and for such purpose, on its part appointed Leonardo Osorio, inviting the defendant municipality by letter to appoint another person on its behalf, but that the recommendation was not even answered by the defendant.

On the 11th of August, following, the representative of the municipality of Cavite answered the complaint, denying in general all the issues of the same and particularly those under paragraphs 6, 7, 8, and 9, and in defense alleged: That, under clause 10 of the contract, the municipality of Cavite reserved the right to reduce the lighting by reason of lack of sufficient funds, giving rise to a fresh contract if more than three months should elapse, with a reduction of the number as agreed to; that, by clause 12, it was stipulated that, as a penalty in case of noncompliance on the part of the municipality, the plaintiff could demand the cession to the company of all the materials used in the installation paid for by the municipality of Cavite, and that the reason for the refusal of said municipality to proceed with the installation of the number of lights agreed upon was the lack of funds to sustain the burden; therefore, it asked that the complaint be dismissed with costs.

In view of the result of the proceedings, the court below rendered judgment on the 5th of September, 1903, sentencing the defendant to pay to the plaintiff the sum of 2,132 pesos, the amount of the two installments unpaid by the defendant municipality, and that the latter deliver to the plaintiff the materials for the installations, and declared the contract rescinded, with the costs against the defendant. The representative of the municipality, upon being informed of the above judgment, moved for a new trial; the motion was overruled, to which the petitioner excepted, and, in opposition to this decision and to the judgment, the corresponding bill of exceptions was presented.

As may be seen from the complaint, the claim of the plaintiff is based on the failure to comply with the contract hereinbefore inserted, and the municipality's answer rests principally on the lack of funds to meet the total cost of the lights, and for this reason refused to permit the installation of the greater part of the lamps for the lighting of the city of Cavite.lawphil.net

It is an unquestionable fact that the municipality of Cavite, by objecting to the installation of 130 lamps for the lighting of the city, the balance of the 200 lamps agreed upon, violated the contract above referred to; the lack of

funds was no excuse for the failure to comply with the agreement; therefore, it has incurred the penalty prescribed by clause 12 of said contract, in accordance with the provisions of article 1152 of the Civil Code which provides that —

In obligations with a penal clause the penalty shall substitute indemnity for damages and the payment of interest in case of non-fulfillment, should there be no agreement to the contrary.

x x x           x x x          x x x

In view of the fact that the representative of the municipality of Cavite has admitted that, with the exception of the 70 lamps, he did not permit the installation of the 130 lamps, the remainder of the 200 agreed upon, the non-fulfillment of the contract is apparent and undeniable, and the contractor for the service, the plaintiff herein, is clearly relieved from having to prove that the said municipality violated the contract in order to be entitled to demand the enforcement of the penal clause therein agreed upon, which, in the present case, rather than a guaranty and a penalty for a violation of the agreement, is the means of reparation allowed by law for loss and damages.

Moreover, neither is the plaintiff obliged to prove that he was subjected to losses and damages and the extent thereof, inasmuch as the contracting parties, in order to avoid controversy, the necessity of adducing evidence, and other difficulties involved in litigations, agreed to appeal clause as a proviso to the main contract, and established an exception to the ordinary and general clause of indemnity for losses and damages in performance of the right granted by article 1255 of the Civil Code.

There can be no doubt that, in lieu of the said general clause covering indemnity for losses and damages, the contending parties agreed to substitute the penalty agreed upon in place of the indemnity for losses and damages prescribed by article 1152 inserted above, without having stipulated by other obligation. By this statement of facts, it is shown that the first error assigned to the judgment appealed from inadmissible.lawphil.net

With regard to the second error assigned to the judgment, the terms of the clauses 11 and 12 of the contract entered into between the plaintiff company and the municipality of Cavite, sustain the opinion of the trial judge in

15

considering that the stoppage of the installation of the remaining 130 lamps is one of the cases of violation of the contract as defined in clause 12, because the general terms employed therein, and in clause 11, prove beyond all doubt that the non-fulfillment stipulated refers to everything that has been set forth and to all the matters agreed upon. If the appellant's affirmation that the said clause 12 refers solely to the default in the monthly payment for the lighting of the city were true, it would have been clearly so stated. The words "in cases of non-fulfillment of the contract by either the company or by the Ayuntamiento " were inserted because it was the intent and purpose of the contracting parties to refer to the whole contract or to any of its clauses or conditions.

Article 1281 of the Civil Code prescribes that —

If the terms of a contract are clear and leave no doubt as to the intentions of the contracting parties, the literal sense of its stipulations shall be observed.

If the words should appear contrary to the evident intention of the contracting parties, the intention shall prevail.

According to the terms of the foregoing article, as the provisions of the said contract are clear and leave no doubt as to the intention of the contracting parties, the literal sense of its clause must prevail, especially when the words contained in two clauses above referred to are not opposed to the evident intention of the contracting parties.

As the plaintiff has made no appeal with respect to his other claims, which were omitted in the judgment of the court below, the same can not now be considered.

For the reasons hereinbefore set forth, it is our opinion that the judgment appealed from should be affirmed with costs, provided that the municipality of Cavite shall deliver to the plaintiff all the materials for the lighting of the city installed by the contractor. So ordered.

Johnson, Carson, and Willard, JJ., concur.Mapa and Tracey, JJ., dissent.

16

Republic of the PhilippinesSUPREME COURT

Manila

FIRST DIVISION

G.R. No. L-25931 October 30, 1978

ROBERTO LABASAN, AVELINO LABASAN, JOSEFINA LABASAN, and MARCELA COLOMA, petitioners, vs.ADELA LACUESTA, DOMINGA LACUESTA and NORBERTO LACUESTA, respondents.

Tipon & Fernandez for petitioners.

Andres B. Plan for respondents.

 

MUÑOZ PALMA, J.:

Is the contract entered into between spouses Clemente and Hermenigilda Lacuesta on one hand and spouses Gelacio and Marcela Labasan on the other a pacto de retro sale or an equitable mortgage? This is the lone question involved in this litigation.

Sometime in 1927, spouses Lacuesta were the owners of an unregistered, irrigated riceland located in the municipality of Badoc, province of Ilocos Norte, and declared for taxation purposes under Tax Declaration No. 026181 in the name of Hermenigilda Lacuesta. 1 On April 20, 1927, the spouses executed in favor of spouses Labasan a document written in the Ilocano dialect the English translation of which marked as Exhibit "1-A" follows:

We, the spouses, Clemente Lacuesta and Hermenigilda Lacuesta, both of legal age, are residents of barrio Salapasap No. 16, Badoc, Ilocos Norte. We declare the truth that in view of our urgent necessity for money, we thought of

selling one parcel of land owned by us situated in Sitio Mabusay No. 18 within the jurisdiction of said municipality, to the spouses Gelacio Labasan and Marcela Coloma, residents of barrio Puzo of the municipality of Pinili, Ilocos Norte, for the amount of TWO HUNDRED TWENTY-FIVE (P225.00) pesos, Philippine Currency, which we have already received in lump sum.

The sale of this parcel of land owned by us to the said spouses can be reconveyed provided ten years shall not have elapsed and we have the same amount of the money which we had taken from them, as agreed upon by us .

This parcel of land has a circumference of 240 square meters, yielding two 'uyones' and three baares of palay. Bounded on the north by Fernando Lacuesta and Vicente Coloma; on the east by Matias Coloma, on the south by Valeriana Lacuesta and on the west by Fernando Lacuesta.

We further agreed that during the period of their ownership of this parcel of land, I will be responsible for all tenancy matters over this land.

For this reason this receipt is made as security to the spouses for all matters pertaining thereto. But in case there shall arise adverse claims with respect to the ownership of the vendees over this parcel of land I and my wife shall answer the same as well as defray all expenses of litigation an if we shall be adjudged otherwise, and, if the vendees of this parcel of land shall be deprived of their ownership, we shall give another parcel of land with the same yield and area so that our sacred agreement shall not be beclouded with bad faith.

In witness to the truth of what we have done, we sign our names for those who know how to write and affix the cross for those who do not know how to write, together with the signatures of the witnesses.

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Done this 20th of April, 1927. (pp. 8-10, Petitioner's brief)

On April 23, 1948 spouses Lacuesta filed with the Court of First Instance of Ilocos Norte a complaint against spouses Labasan, seeking the reconveyance of the parcel of land subject of the above-quoted document. During the pendency of the case, the Lacuesta died and were substituted by their children, all surnamed Lacuesta. In the meantime, defendant Gleacio Labasan also died and was substituted by his children.

In the complaint, it was alleged that spouses Lacuesta secured a loan P225.00 from Gelacio Labasan and as security for the payment of that loan, they offered their riceland; sometime in 1943, they tendered payment of the loan but Labasan refused to accept it; after "liberation" they offered again to pay their loan and demanded the return of their land but they were once more refused because defendants claimed that they were the owners of the property. 1-A

In the answer to the complaint only one special defense was raised — that the Lacuesta conveyed by means of a written document the land with right to repurchase the same within the period of ten years, but because of plaintiff's failure to exercise that right within the stipulated period, the vendees a retro have became the absolute owners of the land and the latter in fact donated the property to their son Roberto Labasan who is now the owner of the property. 2

On the basis of the evidence adduced by the parties the trial court presided then by Judge Wenceslao M. Ortega rendered on May 11, 1959 a decision declaring that the document executed by the Lecuestas was a pacto de retro sale and that the latter lost their right to redeem the land for not having taken any step within the agreed of ten years. 3

The plaintiffs elevated the case to the Court of Appeals on the sole issue of the nature of the document marked Exhibit "1-A".

The Court of Appeals, in its decision of February 18, 1966, set aside the judgment of the trial court and declared the contract an equitable mortgage and ordered the defendants Labasan to reconvey the land to the Lacuestas without the latter paying the loan of P225.00 inasmuch as the same was

deemed paid from the fruits of the property which the Labasans had been receiving for the past thirty-two years. 4

We affirm the decision of the appellate court under well-settled principles embodied in the law and existing jurisprudence.

1. It is a basic fundamental rule in the interpretation of a contract that if the terms thereof are clear and leave no doubt upon the intention of the contracting parties the literal meaning of the stipulation shall control, 5 but when the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the former. 6

Examining Exhibit "1-A" in this case, it is evident that the terms of the document are not clear and explicit on the real intent of the parties when they executed the aforesaid document. For instance, the words or clauses, vis: "urgent necessity for money," "selling the land," ownership," I will be responsible for all tenancy matters," "This receipt is made as security," are sufficient to create a doubt as to what the document truly purports to be. Under those terms is the contract one of loan with security or a pacto de retro sale?

2. In view of the ambiguity caused by conflicting terminologies in the document, it becomes necessary to inquire into the reason behind the transaction and other circumstances accompanying it so as to determine the true intent of the parties. Once the intent becomes clear then it shall be made to prevail over what on its face the document appears to be. Each case is to be resolved on the basis of the circumstances attending the transaction.

Article 1371, New Civil Code: In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered. (same as Art. 1282, Old Civil Code)

In the case at bar, the collective weight of the following considerations lead Us to agree with the findings and conclusion of the appellate court that Exhibit "1-A" is a mere loan with security and not a pacto de retro sale.

First, the reason behind the execution of Exhibit "1-A" was that the Lacuestas were in "urgent necessity for money" and had to secure a loan of

18

P225.00 from Gelacio Labasan for which the riceland was given as "security". In Jayme, et al. v. Salvador, et al., 1930, this Court upheld a judgment of the Court of First Instance of Iloilo which found the transaction between the parties to be a loan instead of a sale of real property notwithstanding the terminology used in the document, after taking into account the surrounding circumstances of the transaction. The Court through Justice Norberto Romualdez stated that while it was true that plaintiffs were aware of the contents of the contracts, the preponderance of the evidence showed however that they signed knowing that said contracts did not express their real intention, and if they did so notwithstanding this, it was due to the urgent necessity of obtaining funds. 7 "Necessitous men are not, truly speaking, free men; but to answer a present emergency, will submit to any terms that the crafty may impose upon them." 8

Second, the amount of P225.00, even in 1927, was too inadequate for a purchase price of an irrigated riceland with an alleged "perimeter" of 240 meters and an "area of 1,269 square meters" yielding annually one "uyon" and five "baares" of palay, 9 the land being valued at the time for no less than P1,000.00. 9-A In Quinga v. Court of Appeals, et al., 1961, although the contract between the parties upon its face was one of sale, nevertheless, this Court upheld the findings of the Court of Appeals that the transaction was not a sale but a loan secured by an equitable mortgage under the prevailing circumstances of the case, such as, that the price of the land was grossly inadequate and the vendor remained in possession of the land and enjoyed the fruits. 10

In fact, Article 1602 paragraph 1 of the New Civil Code expressly provides that in case of doubt a contract purporting to be a sale with a right to repurchase shall be construed as an equitable mortgage when the price or consideration of the sale is unusually inadequate.

Third, although symbolically the possession of the property was transferred to Gelacio Labasan, it was Lacuesta, the supposed vendor, who continued to be in physical possession of the property, took charge of its cultivation, and all tenancy matters. The second paragraph of Article 1602 of the New Civil Code provides that when the vendor remains in possession as lessee or otherwise, the contract shall be construed as an equitable mortgage.

Fourth, Gelacio Labasan, the supposed vendee a retro never declared the property in his name for taxation purposes nor did he pay the taxes thereon

since the execution of the document in 1927. Roberto Labasan, now one of the petitioners and who claims to have acquired the property from his father Gelacio by way of donation, declared the property in his name under Tax Declaration No. 55683-C-1 only sometime in 1944. (p. 13, Respondents' brief; see also CFI decision, p. 18, Record on Appeal) In Santos v. Duata, this Court, in affirming a decision of the Court of Appeals, considered the facts that the vendor remained in possession of the land and continued paying the taxes thereon significant circumstances which justified a judgment holding the transaction between the parties as an equitable mortgage and not a pacto de retro sale, thereby applying Article 1602 of the New Civil Code which the Court held to be a remedial measure which may be applied retroactively to cases arising prior to the effectivity of the New Civil Code. 11

Fifth, as noted in the decision of the appellate court, the supposed vendees a retro, now the herein petitioners, failed to take any step since 1927 to consolidate their alleged ownership over the land. Under Article 1509 of the Old or Spanish Civil Code, if the vendor failed to redeem within the period agreed upon, the vendee's title became irrevocable by the mere registration of an affidavit of consolidation. Thus, under the old law, a judicial order was not necessary as is required now under Article 1607 of the New Civil Code. The failure of Gelacio Labasan or his heirs to carry out that act of consolidation strongly corroborates the claim of Lacuesta that there was no intent at all on the part of the parties to transfer ownership of the riceland in question.

3. Finally, We have the rule that in case of any doubt concerning the surrounding circumstances in the execution of a contract, the least transmission of rights and interests shall prevail if the contract is gratuitous, and, if onerous the doubt is to be settled in favor of the greatest reciprocity of interest. 12

Thus, in the early case of Olino v. Medina 1909, Olino filed a complaint against Medina to recover a parcel of riceland which he alleged to have mortgaged for P175.00 and which Medina refused to return on the ground that the latter allegedly bought the property. In deciding the conflict of allegations between the parties, this Court, through Justice Florentino Torres, considered the transaction over the property as a loan, reasoning that "such a contract involves a smaller transmission of rights and interests, and the debtor does not surrender all rights to his property but simply confers upon the creditor the right to collect what is owing from the value of the thing

19

given as security, there existing between the parties a greater reciprocity of rights and obligations. 13

With the foregoing considerations, there is no further necessity for Us to dwell on the other reasons given by the Court of Appeals in rendering judgment in favor of private respondents, which reasons We believe are not decisive of the issue posed in this case.

PREMISES CONSIDERED, We find no reversible error in the petition under review and We affirm the same. With costs against petitioners.

So ordered.

Teehankee (Chairman), Makasiar, Fernandez and Guerrero, JJ., concur.

20

Manila Banking Corp. v Anastacio Teodoro, Jr. and Grace Teodoro

Bidin, J. | 1989

1. April 1966, Spouses Teodoro together with Teodoro Sr executed a PN in favour of Manila Banking Corp (MBC);- Payable within 120 days (until Aug), with 12% interest per annum;- They failed to pay and left balance of 15k as of September 1969;

2. May and June 1966, executed two PNs;- 8k and 1k respectively payable within 120 days and 12% per annum;- They made partial payment but still left 8.9k balance as of

September 1969;3. It appears than in 1964, Teodoro Jr executed a Deed of Assignment of

Receivables in favour of MBC from Emergency Employment Administration;- Amounted to 44k;- The deed provided it was for consideration of certain credits, loans,

overdrafts and other credit accommodations extended to the spouses and Teodoro Sr as security for the payment of said sum and interest thereon; and that they release and quitclaim all its rights, title and interest in the receivables;

4. In the stipulations of fact, it was admitted by the parties:- That MBC extended loans to the spouses and Teodoro Jr because of

certain contracts entered into by latter with EEA for fabrication of fishing boats and that the Philippine Fisheries Commission succeeded EEA after its abolition;

- That non-payment of the PNs was due to failure of the Commission to pay spouses;

- That the Bank took steps to collect from the Commission but no collection was effected;

5. For failure of the spouses and Teodor Sr to pay, MBC instituted against them;- Teodoro Sr subsequently died so suit only against the spouses;

6. TC favoured MBC; MFR denied;

- Spouses appealed to CA but since issue pure question of law, CA forwarded to SC;

Issues:

W/N the assignment of receivables has the effect of payment of all the loans contracted by the spouses; No.

W/N MBC must exhaust all legal remedies against PFC before it can proceed against the spouses. No

Ratio:

Assignment of credit:

- An agreement by virtue of which the owner of a credit(assignor) by a legal cause (e.g. sale, dation in payment, exchange or donation) and without the need of the consent of the debtor, transfers his credit and its accessory rights to another(assignee) who acquires the power to enforce it to the same extent as the assignor could have enforced it against the debtor;

- May be in form of:o Sale

o Dation in payment - when a debtor, in order to obtain a release

from his debt, assigns to his creditor a credit he has against a third person;

o Donation – when it is by gratuitous title;

o Guaranty – creditor gives as a collateral, to secure his own debt

in favour of the assignee, without transmitting ownership;- Obligations between the parties will depend upon the juridical

relation which is the basis of the assignment;

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What is the legal effect of the Assignment (since its validity is not in question):

1. Assignment of receivables in 1964 did not transfer the ownership of the receivables to MBC and release the spouses from their loans;- Consideration was for certain credits, loans, overdrafts and credit

accommodations worth 10k extended by MBC to spouses and as security for the payment of said sum and interest thereon; also quitclaim of rights to MBC of their interest in the receivables;

- Stipulated also that it was a continuing guaranty for future loans and correspondingly, the assignment shall extend to all accounts receivable;

Contention of spouses: not mere guaranty since it was stipulated:

- That the assignor release and quitclaim to assignee all its rights, title and interest in the accounts receivable;

- That title and right of possession to account receivable is to remain in assignee and it shall have right to collect directly from the debtor; that whatever the assignor does in connection with collection of such, it does so as agent and representative and in trust of assignee;

- SC: character of transaction is not determined by the language in document but by intention of the parties;;

- If it was intended to secure the payment of money, it must be construed as a pledge.

- A transfer of property by the debtor to a creditor, even if sufficient on its farm to make an absolute conveyance, should be treated as a pledge if the debt continues in existence and is not discharged by the transfer;

Assignment of receivables did not result from sale or by virtue of a dation in payment;

- At time the deed was executed, the loans were non-existent yet;- At most, it was a dation for 10k, the amount of credit with MBC

indicated in the deed; at the time of execution, there was no obligation to be extinguished except for the 10k;

- 1292: in order that an obligation may be extinguished by another which substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other;

Deed of assignment intended as collateral security for the loans, as a continuing guaranty for whatever sums that would be owing by spouses;

- In case of doubt as to whether a transaction is a pledge or a dation in payment, the presumption is in favor of pledge, the latter being the lesser transmission of rights and interests (Lopez v CA);

2. MBC need not exhaust all legal remedies against PFC:- Spouses, not being released by the assignment, remain as the

principal debtors of MBC, rather than mere guarantors;- The deed merely guarantees said obligations;- 2058 (creditor must have exhausted property of debtor and

resorted to all legal remedies before it can proceed to guarantor) does not apply to them;

- Appellants are both the principal debtors and the pledgors or mortgagors;

- MBC did try to collect but at OP, it was disapproved; so the loan was basically unsecured;

DISMISSED.

Feliciano, J. concurring.

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Justice Bidin’s, "the character of the transactions between the parties is not, however, determined by the language used in the document but by their intention” – not without exception;

- Deed here contains language which suggest that the parties intended complete alienation of title to and rights over the receivables;

- Words ‘remise’, ‘release’ and ‘quitclaim’ and clauses ‘ title the title and right of possession to said accounts receivable is to remain in said assignee" who "shall have the right to collect directly from the debtor’;

- Words ‘agent’ also convey the ideas;- But such must be taken in conjunction with and qualified by other

language showing intent of the parties that title to the receivables shall pass to the assignee for the limited purpose of securing another, principal obligation owed by the assignor to the assignee;

Title moves from assignor to assignee but that title is defeasible being designed to collateralize the principal obligation:

- Operationally: means assignee is burdened to collateralize the principal obligation; taking the proceeds of the receivables assigned and applying such proceeds to the satisfaction of the principal obligation and returning any balance remaining thereafter to the assignor;

The parties gave the deed of assignment the form of an absolute conveyance of title over the receivables assigned, essentially for the convenience of the assignee:

- Without such nature of absolute conveyance, the assignee would have to foreclose the properties; he would have to comply with documentation and registration requirements of a pledge or chattel mortgage);

- A deed of assignment by way of security avoids the necessity of a public sale impose by the rule on pactum commisorium, by in effect placing the sale of the collateral up front;

- The foregoing is applicable where the deed of assignment of receivables combines elements of both a complete alienation of the credits and a security arrangement to assure payment of a principal obligation;

- Where the 2nd element is absent, the assignment would constitute essentially a mode of payment or dacion en pago;

- in order that a deed of assignment of receivables which is in form an absolute conveyance of title to the credits being assigned, may be qualified and treated as a security arrangement, language to such effect must be found in the document itself and that language, precisely, is embodied in the deed of assignment in the instant case;

23

Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

G.R. No. L-33157 June 29, 1982

BENITO H. LOPEZ, petitioner, vs.THE COURT OF APPEALS and THE PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC., respondents.

 

GUERRERO, J.:

On June 2, 1959, petitioner Benito H. Lopez obtained a loan in the amount of P20,000.00 from the Prudential Bank and Trust Company. On the same date, he executed a promissory note for the same amount, in favor of the said Bank, binding himself to repay the said sum one (1) year after the said date, with interest at the rate of 10% per annum. In addition to said promissory note, he executed Surety Bond No. 14164 in which he, as principal, and Philippine American General Insurance Co., Inc. (PHILAMGEN) as surety, bound themselves jointly and severally in favor of Prudential Bank for the payment of the sum of P20,000.00.

On the same occasion, Lopez also executed in favor of Philamgen an indemnity agreement whereby he agreed "to indemnify the Company and keep it indemnified and hold the same harmless from and against any and all damages, losses, costs, stamps, taxes, penalties, charges and expenses of whatever kind and nature which the Company shall or may at any time sustain or incur in consequence of having become surety upon the bond." 1 At the same time, Lopez executed a deed of assignment of 4,000 shares of the Baguio Military Institution entitled "Stock Assignment Separate from Certificate", which reads:

This deed of assignment executed by BENITO H. LOPEZ, Filipino, of legal age, married and with residence and postal address at Baguio City, Philippines, now and hereinafter called the "ASSIGNOR", in favor of the PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC., a corporation duly organized and existing under and by virtue of the laws of the Philippines, with principal offices at Wilson Building, Juan Luna, Manila, Philippines, now and hereinafter called the "ASSIGNEE-SURETY COMPANY"

— WITNESSETH —

That for and in consideration of the obligations undertaken by the ASSIGNEE-SURETY COMPANY under the terms and conditions of SURETY BOND NO. 14164, issued on behalf of said BENITO H. LOPEZ and in favor of the PRUDENTIAL BANK & TRUST COMPANY, Manila, Philippines, in the amount of TWENTY THOUSAND PESOS ONLY (P20,000.00), Philippine Currency, and for value received, the ASSIGNOR hereby sells, assigns, and transfers unto THE PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC., Four Thousand (4,000) shares of the Baguio military Institute, Inc. standing in the name of said Assignor on the books of said Baguio Military Institute, Inc. represented by Certificate No. 44 herewith and do hereby irrevocably constitutes and appoints THE PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC. as attorney to transfer the said stock on the books of the within named military institute with full power of substitution in the premises. 2

With the execution of this deed of assignment, Lopez endorsed the stock certificate and delivered it to Philamgen.

It appears from the evidence on record that the loan of P20,000.00 was approved conditioned upon the posting of a surety bond of a bonding company acceptable to the bank. Thus, Lopez persuaded Emilio Abello, Assistant Executive Vice-President of Philamgen and member of the Bond Under writing Committee to request Atty. Timoteo J. Sumawang, Assistant

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Vice- President and Manager of the Bonding Department, to accommodate him in putting up the bond against the security of his shares of stock with the Baguio Military Institute, Inc. It was their understanding that if he could not pay the loan, Vice-President Abello and Pio Pedrosa of the Prudential Bank would buy the shares of stocks and out of the proceeds thereof, the loan would be paid to the Prudential Bank.

On June 2, 1960, Lopez' obligation matured without it being settled. Thus, the Prudential Bank made demands for payment both upon Lopez and Philamgen. In turn, Philamgen sent Lopez several written demands for the latter to pay his note (Exhibit H, H-1 & H-2), but Lopez did not comply with said demands. Hence, the Prudential Bank sometime in August, 1961 filed a case against them to enforce payment on the promissory note plus interest.

Upon receipt of the copies of complaint, Atty. Sumawang confronted Emilio Abello and Pio Pedrosa regarding their commitment to buy the shares of stock of Lopez in the event that the latter failed to pay his obligations to the Prudential Bank. Vice-President Abello then instructed Atty. Sumawang to transfer the shares of stock to Philamgen and made a commitment that thereafter he (Abello) and Pio Pedrosa will buy the shares of stock from it so that the proceeds could be paid to the bank, and in the meantime Philamgen will not pay the bank because it did not want payment under the terms of the bank. 3

Due to said commitment and instruction of Vice-President Abello, Assistant Treasurer Marcial C. Cruz requested the transfer of Stock Certificate No. 44 for 4,000 shares to Philamgen in a letter dated October 31, 1961. Stock Certificate No. 44 in the name of Lopez was accordingly cancelled and in lieu thereof Stock Certificate No. 171 was issued by the Baguio Military Institute in the name of Philamgen on November 17, 1961.

The complaint was thereafter dismissed. But when no payment was still made by the principal debtor or by the surety, the Prudential Bank filed on November 8, 1963 another complaint for the recovery of the P20,000.00. On November 18, 1963, after being informed of said complaint, Lopez addressed the following letter to Philamgen:

Dear Mr. Sumawang:

This is with reference to yours of the 13th instant advising me of a complaint filed against us by Prudential Bank & Trust Co. regarding my loan of P20,000.00. In this connection, I would like to know what happened to my shares of stocks of Baguio Military Academy which were pledged to your goodselves to secure said obligation. These shares of stock I think are more than enough to answer for said obligation. 4

On December 9, 1963, Philamgen was forced to pay the Prudential Bank the sum of P27,785.89 which included the principal loan and accumulated interest and the Prudential Bank executed a subrogation receipt on the same date.

On March 18, 1965, Philamgen brought an action in the Court of First Instance of Manila (Civil Case No. 60272, "The Philippine American General Insurance Co., Inc. vs. Benito H. Lopez") for reimbursement of the said amount. After hearing, the said court rendered judgment dismissing the complaint holding:

The contention of the plaintiff that the stock of the defendant were merely pledged to it by the defendant is not borne out by the evidence. On the contrary, it appears to be contradicted by the facts of the case. The shares of stock of the defendant were actually transferred to the plaintiff when it became clear after the plaintiff and the defendant had been sued by the Prudential Bank that plaintiff would be compelled to make the payment to the Prudential Bank, in view of the inability of the defendant Benito H. Lopez to pay his said obligation. The certificate bearing No. 44 was cancelled and upon request of the plaintiff to the Baguio Military Institute a new certificate of stock was issued in the name of the plaintiff bearing No. 171, by means of which plaintiff became the registered owner of the 4,000 shares originally belonging to the defendant.

It is noteworthy that the transfer of the stocks of the defendant in the name of the plaintiff company was made at the instance of Messrs. Abello and Pedrosa, who promised to buy the same from the plaintiff. Now that these shares of

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stock of the defendant had already been transferred in the name of the plaintiff, the defendant has already divested himself of the said stocks, and it would seem that the remedy of the plaintiff is to go after Messrs. Abello and Pedrosa on their promise to pay for the said stocks. To go after the defendant after the plaintiff had already become the owner of his shares of stock and compel him to pay his obligation to the Prudential Bank would be most unfair, unjust and illogical for it would amount to double payment on his part. After the plaintiff had already appropriated the said shares of stock, it has already lost its right to recover anything from the defendant, for the reason that the transfer of the said stocks was made without qualification. This transfer takes the form of a reimbursement of what plaintiff had paid to the Prudential Bank, thereby depriving the plaintiff of its right to go after the defendant herein. 5

Philamgen appealed to the Court of Appeals raising these assignments of errors:

I

The lower court erred in finding that the evidence does not bear out the contention of plaintiff that the shares of stock belonging to defendant were transferred by him to plaintiff by way of pledge.

II

The lower court erred in finding that plaintiff company appropriated unto itself the shares of stock pledged to it by defendant Benito Lopez and in finding that, with the transfer of the stock in the name of plaintiff company, the latter has already been paid or reimbursed what it paid to Prudential Bank.

III

The lower court erred in not finding that the instant case is one where the pledge has abandoned the security and elected instead to enforce his claim against the pledgor by ordinary action. 6

On December 17, 1970, the Court of Appeals promulgated a decision in favor of the Philamgen, thereby upholding the foregoing assignments of errors. It declared that the stock assignment was a mere pledge that the transfer of the stocks in the name of Philamgen was not intended to make it the owner thereof; that assuming that Philamgen had appropriated the stocks, this appropriation is null and void as a stipulation authorizing it is a pactum commissorium; and that pending payment, Philamgen is merely holding the stock as a security for the payment of Lopez' obligation. The dispositive portion of the said decision states:

WHEREFORE, the decision of the lower court is hereby reversed, and another one is hereby entered ordering the defendant to pay the plaintiff the sum of P27,785.89 with interest at the rate of 12% per annum from December 9, 1963, 10% of the P27,785.89 as attorney's fees and the costs of the suit. 7

The motion for reconsideration with prayer to set the same for oral argument having been denied, Lopez brought this petition for review on certiorari presenting for resolution these questions:

a) Where, as in this case, a party "sells, assigns and transfers" and delivers shares of stock to another, duly endorsed in blank, in consideration of a contingent obligation of the former to the latter, and, the obligations having arisen, the latter causes the shares of stock to be transferred in its name, what is the juridical nature of the transaction-a dation in payment or a pledge?

b) Where, as in this case, the debtor assigns the shares of stock to the creditor under an agreement between the latter and determinate third persons that the latter would buy the shares of stock so that the obligations could be paid out of the proceeds, was there a novation of the obligation by substitution of debtor? 8

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Philamgen failed to file its comment on the petition for review on certiorari within the extended period which expired on March 19, 1971. This Court thereby resolved to require Lopez to file his brief. 9

Under the first assignment of error, Lopez argues in his brief:

That the Court of Appeals erred in holding that when petitioner "sold, assigned, transferred" and delivered shares of stock, duly endorsed in blank, to private respondent in consideration of a contingent obligation of the former to the latter and the obligation having thereafter arisen, the latter caused the shares of stock to be transferred to it, taking a new certificate of stock in its name, the transaction was a pledge, and in not holding instead that it was a dation in payment. 10

Considering the explicit terms of the deed denominated "Stock Assignment Separate from Certificate", hereinbefore copied verbatim, Lopez sold, assigned and transferred unto Philamgen the stocks involved "for and in consideration of the obligations undertaken" by Philamgen "under the terms and conditions of the surety bond executed by it in favor of the Prudential Bank" and "for value received". On its face, it is neither pledge nor dation in payment. The document speaks of an outright sale as there is a complete and unconditional divestiture of the incorporeal property consisting of stocks from Lopez to Philamgen. The transfer appears to have been an absolute conveyance of the stocks to Philamgen whether or not Lopez defaults in the payment of P20,000.00 to Prudential Bank. While it is a conveyance in consideration of a contingent obligation, it is not itself a conditional conveyance.

It is true that if Lopez should "well and truly perform and fulfill all the undertakings, covenants, terms, conditions, and agreements stipulated" in his promissory note to Prudential Bank, the obligation of Philamgen under the surety bond would become null and void. Corollarily, the stock assignment, which is predicated on the obligation of Philamgen under the surety bond, would necessarily become null and void likewise, for want of cause or consideration under Article 1352 of the New Civil Code. But this is not the case here because aside from the obligations undertaken by Philamgen under the surety bond, the stock assignment had other considerations referred to

therein as "value received". Hence, based on the manifest terms thereof, it is an absolute transfer.

Notwithstanding the express terms of the "Stock Assignment Separate from Certificate", however, We hold and rule that the transaction should not be regarded as an absolute conveyance in view of the circumstances obtaining at the time of the execution thereof.

It should be remembered that on June 2, 1959, the day Lopez obtained a loan of P20,000.00 from Prudential Bank, Lopez executed a promissory note for ?20,000.00, plus interest at the rate of ten (10%) per cent per annum, in favor of said Bank. He likewise posted a surety bond to secure his full and faithful performance of his obligation under the promissory note with Philamgen as his surety. In return for the undertaking of Philamgen under the surety bond, Lopez executed on the same day not only an indemnity agreement but also a stock assignment.

The indemnity agreement and the stock assignment must be considered together as related transactions because in order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered. (Article 1371, New Civil Code). Thus, considering that the indemnity agreement connotes a continuing obligation of Lopez towards Philamgen while the stock assignment indicates a complete discharge of the same obligation, the existence of the indemnity agreement whereby Lopez had to pay a premium of P1,000.00 for a period of one year and agreed at all times to indemnify Philamgen of any and all kinds of losses which the latter might sustain by reason of it becoming a surety, is inconsistent with the theory of an absolute sale for and in consideration of the same undertaking of Philamgen. There would have been no necessity for the execution of the indemnity agreement if the stock assignment was really intended as an absolute conveyance. Hence, there are strong and cogent reasons to conclude that the parties intended said stock assignment to complement the indemnity agreement and thereby sufficiently guarantee the indemnification of Philamgen should it be required to pay Lopez' loan to Prudential Bank.

The character of the transaction between the parties is to be determined by their intention, regardless of what language was used or what the form of the transfer was. If it was intended to secure the payment of money, it must be

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construed as a pledge; but if there was some other intention, it is not a pledge. However, even though a transfer, if regarded by itself, appears to have been absolute, its object and character might still be qualified and explained by a contemporaneous writing declaring it to have been a deposit of the property as collateral security. It has been said that a transfer of property by the debtor to a creditor, even if sufficient on its face to make an absolute conveyance, should be treated as a pledge if the debt continues in existence and is not discharged by the transfer, and that accordingly, the use of the terms ordinarily importing conveyance, of absolute ownership will not be given that effect in such a transaction if they are also commonly used in pledges and mortgages and therefore do not unqualifiedly indicate a transfer of absolute ownership, in the absence of clear and unambiguous language or other circumstances excluding an intent to pledge. 11

We agree with the holding of the respondent Court of Appeals that the stock assignment, Exhibit C, is in truth and in fact, a pledge. Indeed, the facts and circumstances leading to the execution of the stock assignment, Exhibit C, and the admission of Lopez prove that it is in fact a pledge. The appellate court is correct in ruling that the following requirements of a contract of pledge have been satisfied: (1) that it be constituted to secure the fulfillment of a principal obligation; (2) that the pledgor be the absolute owner of the thing pledged; and (3) that the person constituting the pledge has the free disposal of the property, and in the absence thereof, that he be legally authorized for the purpose. (Article 2085, New Civil Code).

Article 2087 of the New Civil Code providing that it is also the essence of these contracts (pledge, mortgage, and antichresis) that when the principal obligation becomes due, the things in which the pledge or mortgage consists may be alienated for the payment to the creditor, further supports the appellate court's ruling, which We also affirm. On this point further, the Court of Appeals correctly ruled:

In addition to the requisites prescribed in article 2085, it is necessary, in order to constitute the contract of pledge, that the thing pledged be placed in the possession of the creditor, or of a third person by common agreement. (Art. 2093,

N.C.C.) Incorporeal rights, including shares of stock may also be pledged (Art. 2095, N.C.C.) All these requisites are found in the transaction between the parties leading to the execution of the Stock Assignment, Exhibit C. And that it is a pledge was admitted by the defendant in his letter of November 18, 1963, Exhibit G, already quoted above, where he asked what had happened to his shares of stock "which were pledged to your goodselves to secure the said obligation". The testimony of the defendant-appellee that it was their agreement or understanding that if he would be unable to pay the loan to the Prudential Bank, plaintiff could sell the shares of stock or appropriate the same in full payment of its debt is a mere after-thought, conceived after he learned of the transfer of his stock to the plaintiff in the books of the Baguio Military Institute.

We also do not agree with the contention of petitioner that "petitioner's 'sale assignment and transfer' unto private respondent of the shares of stock, coupled with their endorsement in blank and delivery, comes exactly under the Civil Code's definition of dation in payment, a long recognized and deeply rooted concept in Civil Law denominated by Spanish commentators as 'adjudicacion en pago'".

According to Article 1245 of the New Civil Code, dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in money, shall be governed by the law of sales.

Speaking of the concept of dation in payment, it is well to cite that:

Dation in payment is the delivery and transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation. (2 Castan 525; 8 Manresa, 324) The property given may consist, not only of a thing, but also of a real right (such as a usufruct) or of a credit against a third person. (Perez Gonzales & Alguer :2-I Enneccerus, Kipp & Wolff 317). Thus, it has been held that the assignment to the creditor of the interest of the debtor in an inheritance in payment of his debt, is valid and extinguishes the debt. (Ignacio vs. Martinez, 33 Phil. 576)

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The modern concept of dation in payment considers it as a novation by change of the object, and this is to our mind the more juridically correct view. Our Civil Code, however, provides in this article that, where the debt is in money, the law on sales shall govern; in this case, the act is deemed to be a sale, with the amount of the obligation to the extent that it is extinguished being considered as the price. Does this mean that there can be no dation in payment if the debt is not in money? We do not think so. It is precisely in obligations which are not money debts, in which the true juridical nature of dation in payment becomes manifest. There is a real novation with immediate performance of the new obligation. The fact that there must be a prior agreement of the parties on the delivery of the thing in lieu of the original prestation shows that there is a novation which, extinguishes the original obligation, and the delivery is a mere performance of the new obligation.

The dation in payment extinguishes the obligation to the extent of the value of the thing delivered, either as agreed upon by the parties or as may be proved, unless the parties by agreement, express or implied, or by their silence, consider the thing as equivalent to the obligation, in which case the obligation is totally extinguished. (8 Manresa 324; 3 Valverde 174 fn

Assignment of property by the debtor to his creditors, provided for in article 1255, is similar to dation in payment in that both are substitute forms of performance of an obligation. Unlike the assignment for the benefit of creditors, however, dation in payment does not involve plurality of creditors, nor the whole of the property of the debtor. It does not suppose a situation of financial difficulties, for it may be made even by a person who is completely solvent. It merely involves a change of the object of the obligation by agreement of the parties and at the same time fulfilling the same voluntarily. (8 Manresa 324). 12

Considering the above jurisprudence, We find that the debt or obligation at bar has not matured on June 2, 1959 when Lopez "alienated" his 4,000 shares

of stock to Philamgen. Lopez' obligation would arise only when he would default in the payment of the principal obligation (the loan) to the bank and Philamgen had to pay for it. Such fact being adverse to the nature and concept of dation in payment, the same could not have been constituted when the stock assignment was executed. Moreover, there is no express provision in the terms of the stock assignment between Philamgen and Lopez that the principal obligation (which is the loan) is immediately extinguished by reason of such assignment.

In case of doubt as to whether a transaction is a pledge or a dation in payment, the presumption is in favor of pledge, the latter being the lesser transmission of rights and interests. Under American jurisprudence,

A distinction might also be made between delivery of property in payment of debt and delivery of such property as collateral security for the debt. Generally, such a transfer was presumed to be made for collateral security, in the absence of evidence tending to show an intention on the part of the parties that the transfer was in satisfaction of the debt. This presumption of a transfer for collateral security arose particularly where the property given was commercial paper, or some other 'specialty' chose of action, that conferred rights upon transfer by delivery of a different nature from the debt, whose value was neither intrinsic nor apparent and was not agreed upon by the parties. 13

Petitioner's argument that even assuming, arguendo that the transaction was at its inception a pledge, it gave way to a dation in payment when the obligation secured came into existence and private respondent had the stocks transferred to it in the corporate books and took a stock certificate in its name, is without merit. The fact that the execution of the stock assignment is accompanied by the delivery of the shares of stock, duly endorsed in blank to Philamgen is no proof that the transaction is a dation in payment. Likewise, the fact that Philamgen had the shares of stock transferred to it in the books of the corporation and took a certificate in its name in lieu of Lopez which was cancelled does not amount to conversion of the stock to one's own use. The transfer of title to incorporeal property is generally an essential part of the delivery of the same in pledge. It merely constitutes evidence of the pledgee's right of property in the thing pledged.

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By the contract of pledge, the pledgor does not part with his general right of property in the collateral. The general property therein remains in him, and only a special property vests in the pledgee. The pledgee does not acquire an interest in the property, except as a security for his debt. Thus, the pledgee holds possession of the security subject to the rights of the pledgor; he cannot acquire any interest therein that is adverse to the pledgor's title. Moreover, even where the legal title to incorporeal property which may be pledged is transferred to a pledgee as collateral security, he takes only a special property therein Such transfer merely performs the office that the delivery of possession does in case of a pledge of corporeal property.

xxx xxx xxx

The pledgee has been considered as having a lien on the pledged property. The extent of such lien is measured by the amount of the debt or the obligation that is secured by the collateral, and the lien continues to exist as long as the pledgee retains actual or symbolic possession of the property, and the debt or obligation remains unpaid. Payment of the debt extinguishes the lien.

Though a pledgee of corporation stock does not become personally liable as a stockholder of the company, he may have the shares transferred to him on the books of the corporation if he has been authorized to do so.

The general property in the pledge remains in the pledgor after default as well as prior thereto. The failure of the pledgor to pay his debt at maturity in no way affects the nature of the pledgee's rights concerning the property pledged, except that he then becomes entitled to proceed to make the security available in the manner prescribed by law or by the terms of the contract, ... . 14

In his second assignment of error, petitioner contends that the Court of Appeals erred in not holding that since private respondent entered into an agreement with determinate third persons whereby the latter would buy the

said shares so sold, assigned and transferred to the former by the petitioner for the purpose of paying petitioner's obligation out of the proceeds, there was a novation of the obligation by substitution of debtor.

We do not agree.

Under Article 1291 of the New Civil Code, obligations may be modified by: (1) changing their object or principal condition; (2) substituting the person of the debtor; (3) subrogating a third person in the rights of the creditor. And in order that an obligation may be extinguished by another which substitute the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other. (Article 1292, N.C.C.) Novation which consists in substituting a new debtor in the place of the original one, may be made even without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237. (Article 1293, N.C.C.)

Commenting on the second concept of novation, that is, substituting the person of the debtor, Manresa opines, thus:

In this kind of novation it is pot enough to extend the juridical relation to a third person; it is necessary that the old debtor be released from the obligation, and the third person or new debtor take his place in the relation. Without such release, there is no novation; the third person who has assumed the obligation of the debtor merely becomes a co-debtor or a surety. If there is no agreement as to solidarity, the first and the new debtor are considered obligated jointly. (8 Manresa 435, cited in Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, Vol. IV, p. 360)

In the case at bar, the undertaking of Messrs. Emilio Abello and Pio Pedrosa that they would buy the shares of stock so that Philamgen could be reimbursed from the proceeds that it paid to Prudential Bank does not necessarily imply the extinguishment of the liability of petitioner Lopez. Since it was not established nor shown that Lopez would be released from responsibility, the same does not constitute novation and hence, Philamgen may still enforce the obligation. As the Court of Appeals correctly held that

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"(t)he representation of Mr. Abello to Atty. Sumawang that he and Mr. Pedrosa would buy the stocks was a purely private arrangement between them, not an agreement between (Philamgen) and (Lopez)" and which We hereby affirm, petitioner's second assignment of error must be rejected.

In fine, We hold and rule that the transaction entered into by and between petitioner and respondent under the Stock Assignment Separate From Certificate in relation to the Surety Bond No. 14164 and the Indemnity Agreement, all executed and dated June 2, 1959, constitutes a pledge of the 40,000 shares of stock by the petitioner-pledgor in favor of the private respondent-pledgee, and not a dacion en pago. It is also Our ruling that upon the facts established, there was no novation of the obligation by substitution of debtor.

The promise of Abello and Pedrosa to buy the shares from private respondent not having materialized (which promise was given to said respondent only and not to petitioner) and no action was taken against the two by said respondent who chose instead to sue the petitioner on the Indemnity Agreement, it is quite clear that this respondent has abandoned its right and interest over the pledged properties and must, therefore, release or return the same to the petitioner-pledgor upon the latter's satisfaction of his obligation under the Indemnity Agreement.

It must also be made clear that there is no double payment nor unjust enrichment in this case because We have ruled that the shares of stock were merely pledged. As the Court of Appeals said:

The appellant (Philam) is not enriching himself at the expense of the appellee. True, the stock certificate of the appellee had been in the name of the appellant but the transfer was merely nominal, and was not intended to make the plaintiff the owner thereof. No offer had been made for the return of the stocks to the defendant. As the appellant had stated, the appellee could have the stocks transferred to him anytime as long as he reimburses the plaintiff the amount it had paid to the Prudential Bank. Pending payment, plaintiff is merely holding the certificates as a pledge or security for the payment of defendant's obligation.

The above holding of the appellate court is correct and We affirm the same.

As to the third assignment of error which is merely the consequence of the first two assignments of errors, the same is also devoid of merit.

WHEREFORE, IN VIEW OF ALL THE FOREGOING, the decision of the Court of Appeals is hereby AFFIRMED in toto, with costs against the petitioner.

SO ORDERED.

Barredo (Chairman), Aquino, Concepcion, Jr., Abad Santos, De Castro and Escolin, JJ., concur.

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EUTIQUIANO CUYUGAN vs. ISIDORO SANTOS

Posted on September 21, 2013 by winnieclaireStandard

[G.R. No. 10265. March 3, 1916.]

FACTS:• The plaintiff is the sole heir of his mother, Guillerma Cuyugan y Canda, deceased;• that in the year 1895 she borrowed the sum of P3,500 from the defendant and executed, at the same time, the document, Exhibit C, attached to the complaint, which purports on its face to be a deed of sale of the land described therein, with a reservation in favor of the vendor of the right to repurchase for the sum of P3,500;• that although the instrument purports on its face to be a deed of sale, it was intended by the parties merely to evidence the loan of the nominal purchase price and to serve as a security for the repayment of the amount of the loan;

ISSUE: WON the parol evidence should be admitted in support of allegations versus that of an instrument in writing

HELD: YES.

PAROL EVIDENCE AFFECTING WRITINGS; ALLEGED “PACTO DE RETRO”. — Parol evidence is competent and admissible in support of allegations that an instrument in writing, purporting on its face to transfer the absolute title to property, or to transfer the title with a mere right to repurchase under specified conditions reserved to the vendor, was in truth and in fact given merely as a security for the repayment of a loan; and upon proof of the truth of such allegations, the courts in this jurisdiction have power to enforce the agreement or understanding in this regard, in accord with the true intent of the parties at the time when it was executed.

UNITED STATES DOCTRINE. — The doctrine which must be applied in such cases in this jurisdiction “does not differ materially” from the equitable doctrine frequently announced and applied by the Supreme Court of the

United States in the numerous cases in which similar questions have come to it from the various States and Territories within its jurisdiction

MORTGAGE CLAIMED TO BE A SALE. — That court has held that: “To insist on what was really a mortgage, as a sale, is in equity a fraud, which cannot be successfully practiced, under the shelter of any written papers, however precise and complete they may appear to be.”

CONTRACT OF LOAN ON SECURITY; LOAN ALLEGED TO BE PURCHASE MONEY. — Also that: “When it is alleged and proved that a loan on security was really intended, and the defendant sets up the loan as a payment of purchase money, and the conveyance as a sale, both fraud and a vice in the consideration are sufficiently averred to require a court of equity to hold the transaction to be a mortgage.”

“PACTO DE RETRO;” AGREEMENT TO CONSIDER IT AS SECURITY FOR LOAN. — If the parties actually enter into such an agreement, the lender of the money is legally and morally bound to fulfill it. Of course, such an oral contract does not give the borrower a real right in the lands unless it is executed in compliance with the formalities prescribed by law. If entered into orally, it creates a mere personal obligation which in no wise affects the lands, and if the lender conveys the lands to innocent third persons, the borrower must content himself with a mere right of action for damages against the lender, for failure to comply with his agreement. But so long as the land remains in the hands of the lender, the borrower may demand the fulfillment of the agreement, and a mere lack of any of the formalities prescribed under the Spanish Code for the execution of contracts affecting real estate will not defeat his right to have the contract fulfilled, as the lender may be compelled in appropriate proceedings to execute the contract with the necessary prescribed formalities.

ORAL CONTRACTS AFFECTING LANDS; REQUISITES UNDER SPANISH CODES. — Under the Spanish Codes an oral contract affecting lands, even an oral contract for the sale of lands, was valid and enforceable, provided none of the essential requisites of all valid contracts are lacking, that is to say, (1) consent, (2) definite object, and (3) cause or consideration. The lack of the formal requisites prescribed by the Code in order that such contracts may become effective to bind or convey the property, such as their execution in public instruments and the like, does not invalidate them as

32

personal obligations, as “either party may compel the other to comply with such formalities” from the moment the valid personal obligation has been entered into.

“PACTO DE RETRO;” ACCEPTANCE OF PARTIAL PAYMENTS; EFFECT. — Where a sale of lands has been made reserving to the vendor a right to repurchase under stipulated conditions, and one or more partial payments have been made by the vendor and accepted by the purchaser, the acceptance of such partial payments is absolutely incompatible “with the idea of irrevocability of the title of ownership of the purchaser” at the expiration of the term stipulated in the original contract for the exercise of the right of repurchase.In the light of these elementary and basic principles of the Code there can be no question, in the absence of express statutory prohibition, as to the validity of an agreement or understanding whereby the lender of money, who as security for the repayment of the loan has taken a deed to land, absolute on its face or in the form of a deed reserving a mere right of repurchase to the vendor, obligates himself to hold such deed, not as evidence of a contract of sale but by way of security for the repayment of the debt; and that unless the rights of innocent third persons have intervened the lender of the money may be compelled to comply specifically with the terms of such an agreement, whether it be oral or written; and further, that he will not be permitted, in violation of its terms, to set up title in himself or to assert a claim of absolute ownership

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FIRST DIVISION

[G.R. No. L-50320 : July 31, 1981.]

PHILIPPINE APPAREL WORKERS UNION, Petitioners, vs. THE NATIONAL LABOR RELATIONS COMMISSION and PHILIPPINE APPAREL, INC., Respondents.

 

D E C I S I O N

 

MAKASIAR, J.:

 

Petition for Certiorari to review the decision dated September 1, 1978 of respondent Commission which sustained the position of respondent employer and dismissed the case for lack of merit.

It appears from the records that the petitioner, in anticipation of the expiration of their 1973-1976 collective bargaining agreement on July 31,1976, and as an initial step for its renewal, submitted to the respondent company a set of bargaining proposals dated June 2, 1976. Negotiations were held thereafter between the parties; but because of an impasse, the complainant cranad(petitioner herein) filed on September 15, 1976 a complaint with the Department of Labor praying that the parties therein be assisted in concluding a collective agreement. Notwithstanding the complaint, the parties nevertheless continued their negotiations.

On September 3, 1977, the private respondent and petitioner concluded and signed a collective bargaining agreement which, among other things, provided for a 3-stage wage increase for all rank and file employees. The terms of the agreement on wage increase, which were retroactive to April 1, 1977, follow:

“(a) Effective April 1, 1977, EIGHTY CENTAVOS [P0.80] will be added to the basic daily wages of all said employees.

“(b) Effective April 1, 1978, FIFTY CENTAVOS [P0.50] will be added to the basic daily wages of all said employees.

“(c) Effective April 1, 1979, FIFTY CENTAVOS [P0.50] will be added to the basic daily wages of all said employees.”

Meanwhile, on April 21, 1977, P.D. 1123 was enacted to take effect on May 1, 1977 providing for an increase by P60.00 in the living allowance ordained by P.D. 525. This increase was implemented effective May 1, 1977 by the respondent company, as shown by Memorandum No. 6-77 of the respondent company’s General Manager to all employees dated April 23, 1977 cranad(p. 12, rec.).

The controversy arose when the petitioner union sought the implementation of the negotiated wage increase of P0.80 as provided for in the collective bargaining agreement. The respondent company alleges that it has opted to consider the P0.80 daily wage increase cranad(roughly P22 per month) as partial compliance with the requirements of said decree, so that it is obliged to pay only the balance of P38 per month. In effect, the payment of the additional P60 covers both the requirements of the decree and the negotiated wage increase of P0.80 daily. Respondent company asserts that since there was already a meeting of the minds between the parties as early as April 2, 1977 about the wage increases which were made retroactive to April 1, 1977, it fell well within the exemption provided for in the Rules Implementing P.D. 1123, as follows:

“Section 1. Coverage. — These rules shall apply to all employers except the following:

x x x

“(k) Those that have granted in addition to the allowance under P.D. 525, at least P60.00 monthly wage increase on or after January 1, 1977, provided that those who paid less than this amount shall pay the difference.”

34

On the other hand, petitioner maintains that the living allowance under P.D. 1123 cranad(originally P.D. 525) is distinct and separate from the negotiated wage increase of P0.80 daily [pp. 6 & 96, rec.]. In fact, it adds, when the CBA was signed by the parties on September 3, 1977, the respondent company was fully aware of the effectivity of P.D. 1123 and had already been paying the increased allowance provided therein [p. 94, rec.]. Hence, the respondent company acted in bad faith when it refused to pay the negotiated wage increase in violation of the collective bargaining agreement and the respondent company is guilty of unfair labor practice, pursuant to the following provisions of the Labor Code:

“Article 248. Unfair Labor Practices of Employers. — It shall be unfair labor practice for an employer:

x x x

“(J) To violate a collective bargaining agreement.”

On February 13, 1978, the petitioner filed a complaint dated February 10, 1978 for unfair labor practice and violation of the CBA against the respondent company [pp. 13-16, rec.]. On May 30, 1978, an Order [p. 18, rec.] was issued by Labor Arbiter Conrado B. Maglaya, the dispositive portion of which reads as follows:

“WHEREFORE, premises considered, and by authority of Article 263 of the Labor Code as amended, let this case be, as it is hereby, DISMISSED and the same is referred to the parties or disputants for them to resolve their disputes, grievances or matters arising from the implementation, application or interpretation of their Collective Bargaining Agreement in accordance with the Machinery established in the CBA.”

From this order, both parties appealed to the respondent Commission.

Petitioner filed its appeal on June 28, 1978 [pp. 31-34, rec.] assailing the order of Labor Arbiter Maglaya as contrary to law and the evidence adduced during the hearing, which constitutes grave abuse of discretion amounting to lack of jurisdiction. It avers that the matter had already been taken up on grievance but the respondent company refused to implement the P0.80 wage increase under the CBA, and that it further refuses to submit to voluntary

arbitration. Hence, it prays for the setting aside of the Labor Arbiter’s Order and for the parties to submit to voluntary arbitration as provided for in their CBA and the provisions of the Labor Code.

On the other hand, respondent company filed on July 5, 1978 a partial appeal [pp. 19-27, rec.], accepting the dismissal of the complaint but assailing that portion of the Labor Arbiter’s Order declaring the subject matter as grievable and therefore threshable under the parties’ CBA. Its prayer was for affirmance of the dismissal, reversal of the referral to the parties for threshing out under their CBA, and for a declaration that it has not committed an unfair labor practice nor violated the CBA.

On September 1, 1978, the respondent Commission cranad(Second Division) promulgated its decision, setting aside the order appealed from and entering a new one dismissing the case for obvious lack of merit. The dismissal is predicated on the opinion [p. 45, rec.] of the Undersecretary of Labor when he said:

x x x

“If as you said, management and labor had agreed on April 2, 1977 to grant an amount of P27.00 cranad(roughly) per month to its employees retroactive to April 1, 1977, then the exemption is squarely in point, notwithstanding that the CBA was signed in May or June. This must be so for reason that on April 7, 1977, there was already the meeting of the minds of the parties and for legal purposes, the contract was already perfected as of said date.”

Said the respondent Commission:

“We fully subscribe to this view. It needs no further elaboration to demonstrate that by the facts and the terms of the law, the respondent has to pay each of the employees concerned a total of P60.00 monthly for it to satisfy payment of both the wage increase and the allowance.

“In resume, we find the refusal of the respondent to submit to voluntary arbitration to be validly grounded and, therefore, not constitutive of unfair labor practice. We further find to be untenable the complainant’s claim for full payment of both the P0.80 daily wage increase under the CBA and the P60 allowance under P.D. 1123” [pp. 45-46, rec.].

35

Petitioner than filed its motion for reconsideration but the NLRC en banc dismissed the same in its resolution of February 8, 1979 [pp. 48-54, rec.], pursuant to Section 7, Rule II of the Rules and Regulations Implementing P.D. No. 1391, which became effective on September 15, 1978 and provides thus —

“Sec. 7. Decisions of the Commissions. There shall henceforth be no appeal from such decisions to the Minister of Labor except as provided in P.D. 1367 and its implementing rules concerning appeals to the Prime Minister, and the decisions of the Commission en banc or any of its Decisions shall be final and executory.”

Hence, the instant petition.

Petitioner maintains that private respondent violated the CBA and committed an ULP when it refused to pay the negotiated wage increase of P0.80 daily effective April 1, 1977, to the employees within the bargaining unit. Private respondents, however, contend that there was no violation of the CBA and that its application of the negotiated wage increase as partial compliance with P.D. 1123 is well within the provisions of the latter.

A perusal of the CBA shows that it was made and entered into on the 3rd day of September, 1977 by and between the parties herein cranad(pl. see p. 1 of Annex “B” at p. 7 of NLRC rec.) although the first year of its increase was retroactive to April 1, 1977. At the time it was perfected and signed by the parties, P.D. 1123 was already in force and effect. A sample pay advice [p. 11 — insert, rec.] and the Memorandum No. 6-77 dated April 23, 1977 [p. 12, rec.] signed by the General Manager of respondent company show that the said P.D. was implemented by respondent company on May 1, 1977.

On the other hand, there is nothing in the records to indicate that the negotiated wage increases were granted or paid before May, 1977. Hence, it cannot be said that the respondent Company falls within the exceptions provided for in paragraph cranad(k) of the rules implementing P.D. 1123. At the time the said P.D. took effect, there was neither a perfected contract nor an actual payment of the said increase. There was therefore no grant of said increases as yet, despite the contrary opinion expressed in the letter of Undersecretary of Labor Amado G. Inciong.

The said letter dated May 13, 1977 [p. 33, NLRC rec.] of Undersecretary Inciong is based on a wrong premise and misrepresentation on the part of respondent company. It was alleged in the letter of respondent company that the wage increases were “agreed upon by the company and the bargaining union on April 2, 1977 in recognition of the imperative need for employees to cope up with inflation brought about by, among others, another increase in oil price” [p. 31, NLRC rec.]. It was not, however stated that at the time the said letter was written, negotiations were still being held “on other unresolved economic and non-economic bargaining items and it was only on September 3, 1977 when they reached agreement thereon” [pl. see p. 7 of private respondent’s Memorandum, p. 107, rec.].

There was therefore no binding contract between the parties before September 3, 1977. For “if any essential item is left open for future consideration, there is no binding contract, and an agreement to reach an agreement imposes no obligation on the parties thereto” [17 Am. Jur., 2d 362].

Such being the case, and without actual payment of the agreed P0.80 wage increase, there could have been no “grant” of wage increases within the contemplation of paragraph K, Section 1 of the Rules Implementing P.D. 1123 to place the respondent company within the purview of the exemption provided for in the said rules.

Consequently, its refusal to implement the P0.80 wage increase for the first year of the CBA constitutes a violation thereof and makes the respondent company guilty of unfair labor practice.

The respondent company is also guilty of bad faith when it signed the CBA on September 3, 1977 without in any way letting the petitioner union know that it was going to apply part of the allowances being paid under P.D. 1123 to the wage increases provided for in the CBA. Between the time of the implementation of P.D. 1123 on May 1, 1977 and the signing of the CBA on September 3, 1977, nothing was said between the parties about the wage increase despite the fact that negotiations were still going on between the parties. The exchange of letters between the respondent company and Labor Undersecretary Inciong appears to have been concealed from the union. According to the respondent Commission, “the wage increase cranad(however) was not immediately implemented because Mr. Alfred Flug who was to bring home funds was still in the United States” [p. 40, rec.]. It

36

was only upon arrival from the U.S.A. on January 19, 1978 of Robert Flug, son of said Alfred Flug, that the union had an inkling that the company will not pay the negotiated wage increase. At this point the CBA was already perfected and signed by the parties, so that its terms and stipulations have the force of law between them.

A collective bargaining agreement is the law between the parties cranad(Kapisanan ng mga Manggagawa sa La Suerte-FOITAF vs. Noriel, 77 SCRA 414). In the construction or interpretation of such a contract, the primary purpose and guideline and indeed the very foundation of all the rules for such construction or interpretation is the intention of the parties cranad(17 Am. Jur. 2d., 631).

What was the intention of the parties relative to the wage increases? A cursory reading of the CBA indicates that the benefits provided therein are not exclusive of other benefits, as may be gleaned from the provisions of its Section 4, Article XIV [p. 42 of the CBA at p. 6, NLRC rec.], which speaks of “any other benefits or privileges which are not expressly provided in this Agreement, even if now accorded or hereafter accorded to the employees and workers, shall be deemed purely acts of grace . cra .”

Likewise, in the accompanying Memorandum of Understanding [pp. 82-83, NLRC rec.] dated September 3, 1977, the parties have agreed as follows:

“1. As long as it does not contravene the law and its implementing rules and regulations the COMPANY agrees to effect a uniform and indiscriminate wage increase in the salaries of its employees within the bargaining unit represented by the UNION regardless of their position and pay rates, in the event that the government shall direct another increase(s) in the statutory minimum wage fixed under P.D 928 within the period of three years from the signing of this instrument. The uniform increase contemplated in this instrument will be equivalent to the amount of the statutory wage increase or adjustment.”

The bases of the dissent of Madame Justice Herrera are that:

I. The P0.80 per day increase was already granted as early as April 2, 1977 when the company agreed to give wage increases to its employees effective

April 1, 1977. Hence, such grant should be credited against the emergency cost of living allowance cranad(ECOLA) provided for by P.D. 1123.

II. The Department’s cranad(Labor) view on the matter of exemptions from P.D. 1123 should be given weight since it was not interpreting or construing a statute but explaining the extent of its own rule.

III. It is inequitable that an employer who has granted increases in pay to his employees on a given day is further ordered to give additional increases one, two or three days thereafter.

IV. Social justice requires that the broader requirements of a stable economy should be taken into account in resolving conflicts between labor and management.

I

There is no controversy that the first year’s wage increase under the CBA was supposed to retroact to April 1, 1977. There is likewise no question that had the company paid the eighty centavos daily increase in April 1977, the conclusion would have been unquestionable that such negotiated wage increase cranad(NWI) should be credited against the emergency cost of living allowance cranad(ECOLA) under P.D. 1123.

The question arose because, first, there was no such payment either before or after the effectivity of P.D. 1123 on May 1, 1977; and second, because there was no binding contract to speak of on May 1, 1977.

It is conceded that the word “grant” in its broader sense may include “to agree or assent to; to allow to be fulfilled; to accord; to bestow or confer; and is synonymous with ‘concede’ which means to agree on the idea of bestowal or acknowledgment especially of a right or privilege” chanroblesvirtualawlibrary(Woods vs. Reilly, 211 S.W. 2d 591, 597). Such being the case, the “grant” could be said to have been made at the time of the agreement, although there may not have been payment as yet.

But the question is, when was the inception or actual birth of the agreement? The company contends that it was on April 2, 1977, whereas the Union alleges that it was only on September 3, 1977, the date of the CBA.

37

Paragraph 1 of the CBA reads:

“This agreement, made and entered into this 3rd day of September 1977 . cra .”  chanroblesvirtualawlibrary(p. 7, NLRC rec.).

On the other hand, there is nothing in the record to indicate that the P0.80 wage increase was indeed agreed upon on April 2, 1977. Aside from the self-serving statements of the company in its various communications cranad(pp. 121, 125 and 128, rec.) and pleadings cranad(pp. 73 and 102, rec.), the only other reference to said date is found on the second paragraph of page 1 of the Memorandum of Understanding dated September 3, 1977 cranad(p. 82, NLRC rec.) which, however, does not mention anything about the 80-centavo increase effective April 1, 1977. In fact, the said paragraph speaks of the company’s commitment to effect uniform and indiscriminate wage increases among its employees within the bargaining unit represented by the union in the event that the government shall, within a period of three cranad(3) years from execution hereof, direct additional increases in the statutory minimum wage fixed under P.D. 928. In other words, what was agreed upon on April 2, 1977, was a conditional increase contingent upon the government’s increasing of the statutory minimum wage then prevailing. Is it not possible that the company’s decision to give the P0.80 daily increase effective April 1, 1977 was influenced by the knowledge that it could be absorbed by the additional ECOLA provided for by P.D. 1123, and that such decision was definitely made after receipt of the letter dated July 15, 1977 of then Undersecretary Inciong cranad(p. 130, rec.)?

In any case, the company admits that after April 1977 there were “negotiations on other unresolved economic and non-economic bargaining items and it was only on September 3, 1977 when they reached agreement thereon.”  chanroblesvirtualawlibrary(p. 107, rec.).

This brings us to no other conclusion that the agreement was born only on September 3, 1977:

“Mere preliminary negotiations as to the terms of an agreement do not constitute a contract. A complete contract is effected generally only by an agreement as to all the terms which the parties intend to introduce into the contract, and where such is the intention of the parties, by the execution of a formal written instrument embodying those terms” chanroblesvirtualawlibrary(17 C.J.S. 390).

“Where preliminary negotiations are consummated by a written contract, or an oral agreement is evidenced by a subsequent agreed memorandum in writing, the writing supersedes all previous understandings and the intent of the parties must be ascertained therefrom . cra .” chanroblesvirtualawlibrary(17 C.J.S. 750).

In the light of the foregoing, there was therefore no “grant” of the wage increase as of May 1, 1977 to enable the company to avail of the exemption under P.D. 1123.

II

It is also conceded that the Department of Labor had the right to construe the word “grant” as used in its rules implementing P.D. 1123, and its explanation regarding the exemptions to P.D. 1123 should be given weight. However, when it is based on misrepresentations as to the existence of an agreement between the parties, the same cannot be applied. At any rate, the opinion of then Undersecretary Inciong about the matter is based on the wrong premise that there was already an agreement cranad(“If as you said management and labor agreed on April 2, 1977 . cra .”, p. 33, NLRC rec.). There is no such agreement perfected on April 2, 1977.

There is no distinction between interpretation and explaining the extent and scope of the law; because where one explains the intent and scope of a statute, he is interpreting it.

The construction or explanation of then Undersecretary Inciong is not only wrong as it was purely based on a misapprehension of facts, but also unlawful because it goes beyond the scope of the law as hereinafter demonstrated.

III

The CBA entered into between the parties on September 3, 1977 created certain obligations between the parties which they are bound to keep without being “ordered” to do so. The principle of equity need not even come in, for “unless fraud, mistake or the like is set up, a court will not disturb contract rights as evidenced by a writing which purports to express the intention or will of the parties . cra .”  chanroblesvirtualawlibrary(27 Am. Jur. 594).

38

A cursory reading of the CBA dated September 3, 1977 reveals the following intentions of the parties:

a. That the wage increases thereunder should be staggered for a 3-year period retroactive to April 1, 1977 cranad(see page 2 of Private Respondent’s Memorandum, p 102, rec.); and

b. That such wage increases are exclusive of any statutory increase in the minimum wage, obliging the company to effect a uniform and indiscriminate wage increase equivalent to the increase or adjustment in the minimum wage that may be decreed within a period of three years from the signing of the instrument on September 3, 1977 cranad(see par. 1 of the Memorandum of Understanding, p. 83, NLRC rec.).

The staggered wage increase will not be achieved if the same were to be absorbed by the P60-increase in the ECOLA. For a computation of NWI under the CBA will approximately amount to the following:

First year — P0.80 daily or approximately P22/mo.

Second year — .50 daily or approximately 13.75/mo.

Third year — .50 daily or approximately 13.75/mo.

Monthly total for 3 years P49.50

Thus, it will be seen that because the resultant total in the monthly-wage increase over the 3-year period under the CBA is less than P60.00, the same will always be covered by the ECOLA, and there will be no occasion for a staggered increase during the period other than what the law may provide — which is not the intention of the parties.

It is submitted that had the parties intended that to be the end, they should have incorporated the same in their CBA or in their Memorandum of Understanding.

It is also apparent that the crediting of the NWI in the ECOLA was an afterthought on the part of the company. If not, then the company was in bad faith when it did not mention its plan to credit the NWI to the ECOLA during

the negotiations prior to the signing of the CBA on September 3, 1977, as soon as it received the opinion of then Undersecretary Inciong in his letter of July 13, 1977 cranad(p. 130, rec.).

IV

It is submitted that the principle of social justice will be better served by upholding the protection-to-labor policy guaranteed by the Constitution.

The Honorable Chief Justice Enrique M. Fernando, in explaining the concept of social justice, wrote:

“What is thus stressed is that a fundamental principle as social justice, identified as it is with the broad scope of the police power, has an even more basic role to play in aiding those whose lives are spent in toil, with destitution an ever-present threat, to attain a certain degree of economic well-being. Precisely, through the social justice coupled with the protection to labor provisions, the government is enabled to pursue an active and militant policy to give reality and substance to the proclaimed aspiration of a better life and more decent living conditions for all. It is in that spirit that in 1969, in Del Rosario vs. Delos Santos cranad(L-20586, March 21, 1969, 22 SCRA 1196), reference was made to what the social justice concept signifies in the realistic language of the late President Magsaysay: ‘He who has less in life should have more in law.’ After tracing the course of decisions which spoke uniformly to the effect that the tenancy legislation, now on the statute books, is not vitiated by constitutional infirmity, the Del Rosario opinion made clear why it is easily understandable ‘from the enactment of the Constitution with its avowed concern for those who have less in life, [that] the constitutionality of such legislation has been repeatedly upheld.’ What is sought to be accomplished by the above fundamental principle is to assure ‘the effectiveness of the community’s effort to assist the economically underprivileged. For under existing conditions, without succor and support, they might not, unaided, be able to secure justice for themselves” chanroblesvirtualawlibrary(Fernando, Enrique M., Constitution of the Philippines, pp. 80-81 [1974]).

More than elusive justice, survival is the daily problem of the worker and his family. The employer is not faced with such a problem. More often than not, the employer dissipates part of his income or profit in pleasures of the flesh

39

and gambling aside from luxuries, fabulous parties and conspicuous consumption.

The stability of the economy does not depend on the employer alone, but on government economic policies concerning productivity in all areas and not only in the clothing or textile industries. There is not even an intimation that the company is losing. It is the living wage of the workers which is the basis of a stable economy. If the company cannot pay a living wage, it has no business operating at the expense of the lives of its workers from the very start.

The preservation of the lives of the citizens is a basic duty of the State, more vital than the preservation of the profits of the corporation. When the State is engaged in a life-and-death struggle, like war or rebellion, it is the citizen worker who fights in defense of the State and for the preservation of the existence of corporations and businesses within its territorial confines. When the life of the State is threatened from within and without, it is the citizen, not the corporation or business enterprise, that mans the weapons of war and march into battle.

To invoke the nebulous term “stable economy” to justify rejection of the claims of the workers as against the assets of the employer, is to regard human life as more expendable than corporate capital. There is nothing in the Constitution that expressly guarantees the viability of business enterprises much less assuring them of profits.

V

Moreover, it must be pointed out that the Secretary of Labor has exceeded his authority when he included paragraph cranad(k) in Section 1 of the Rules Implementing P.D. 1123.

Section 1 of said decree spells out the scope of its benefits, as follows:

“Section 1. In the Private Sector. — In the private sector, an across-the-board increase of sixty pesos cranad(P60.00) in emergency allowance as provided in P.D. 525 shall be paid by all employers to their employees effective 1 May 1977. Accordingly, the monthly emergency allowance under P.D. 525 is hereby amended as follows:

“a) For workers being paid P50.00 P110

“b) For workers being paid P30.00 90

“c) For workers being paid P15.00 75.”

To implement P.D. 1123, the then Secretary of Labor was authorized in Section 4 of the same decree to issue appropriate rules and regulations. Such authority is quoted hereunder:

“Sec. 4. The Secretary of Labor and the Commissioner of the Budget shall issue appropriate rules and regulations to implement this Decree for their respective sectors. Under such rules and regulations, distressed employers whether public or private may be exempted while in such condition in the interest of development and employment.”

By virtue of such rule-making authority, the Secretary of Labor issued on May 1, 1977 a set of rules which exempts not only distressed employers cranad(see paragraph 1, Section 1 as well as Sections 6, 7, 8 and 9 of said rules) but also “those who have granted in addition to the allowance under P.D. 525, at least P60.00 monthly wage increase on or after January 1, 1977, provided that those who paid less than this amount shall pay the difference cranad(see paragraph k of said rules).

Clearly, the inclusion of paragraph k contravenes the statutory authority granted to the Secretary of Labor, and the same is therefore void, as ruled by this Court in a long line of cases among which are:

1. Teozon vs. Members of the Board of Administrators, PVA cranad(33 SCRA 585, 588-589):

“The recognition of the power of administrative officials to promulgate rules in the administration of the statute, necessarily limited to what is provided for in the legislative enactment, may be found in the early case of United States vs. Barrios decided in 1908. Then came in a 1914 decision, United States vs. Tupasi Molina cranad(29 Phil. 119) delineation of the scope of such competence. Thus: ‘Of course the regulations adopted under legislative authority by a particular department must be in harmony with the provisions of the law, and for the sole purpose of carrying into effect its general

40

provisions. By such regulations, of course, the law itself cannot be extended. So long, however, as the regulations relate solely to carrying into effect the provisions of the law, they are valid.’ In 1936, in People vs. Santos, this Court expressed its disapproval of an administrative order that would amount to an excess of the regulatory power vested in an administrative official. We reaffirmed such a doctrine in a 1951 decision, where we again made clear that where an administrative order betrays inconsistency or repugnancy to the provisions of the Act, ‘the mandate of the Act must prevail and must be followed.’ Justice Barrera, speaking for the Court in Victorias Milling Inc. vs. Social Security Commission, citing Parker as well as Davis did tersely sum up the matter thus: ‘A rule is binding on the Courts so long as the procedure fixed for its promulgation is followed and its scope is within the statutory authority granted by the legislature, even if the courts are not in agreement with the policy stated therein or its innate wisdom . cra . On the other hand, administrative interpretation of the law is at best merely advisory, for it is the courts that finally determine what the law means.’

“It cannot be otherwise as the Constitution limits the authority of the President, in whom all executive power resides, to take care that the laws be faithfully executed. No lesser administrative executive office or agency then can, contrary to the express language of the Constitution, assert for itself a more extensive prerogative. Necessarily, it is bound to observe the constitutional mandate. There must be strict compliance with the legislative enactment. Its terms must be followed. The statute requires adherence to, not departure from its provisions. No deviation is allowable. In the terse language of the present Chief Justice, an administrative agency ‘cannot amend an act of Congress.’ Respondents can be sustained, therefore, only if it could be shown that the rules and regulations promulgated by them were in accordance with what the Veterans Bill of Rights provides” chanroblesvirtualawlibrary(Emphasis supplied).

2. Santos vs. Hon. Estenzo, et al. cranad(109 Phil. 419):

“It is of elementary knowledge that an act of Congress cannot be amended by a rule promulgated by the Worker’s Compensation Commission.”

3. Hilado vs. Collector of Internal Revenue cranad(100 Phil. 295):

“It seems too clear for serious argument that an administrative officer cannot change a law enacted by Congress. A regulation that is merely an

interpretation of the statute when once determined to have been erroneous becomes a nullity.”

4. Sy Man vs. Jacinto & Fabros cranad(93 Phil. 1093):

“. cra . We also find and hold that the memorandum order of the Insular Collector of Customs of August 18, 1947, is void and of no effect, not only because it has not been duly approved by the Department Head and fully published as required by Section 551 of the Revised Administrative Code but also because it is inconsistent with law . cra . “ chanroblesvirtualawlibrary(Emphasis supplied).

5. Olsen & Co., Inc. vs. Aldenese and Trinidad cranad(43 Phil. 259):

“The important question here involved is the construction of Sections 6, 7 and 11 of Act No. 2613 of the Philippine Legislature, and Section 9 of the ‘Tobacco Inspection Regulations,’ promulgated by Administrative Order No. 35. It must be conceded that the authority of the Collector of Internal Revenue to make any rules and regulations must be founded upon some legislature act, and that they must follow and be within the scope and purview of the act.”

In the light of the foregoing, paragraph cranad(k) of the Rules Implementing P.D. 1123 must be declared void. Consequently, the argument about crediting the NWI against the ECOLA has no more leg to stand on and must perforce fall.

It is also obvious that the negotiated wage increases provided for in the CBA are intended to be distinct and separate from any other benefit or privilege that may be forthcoming to the workers.

The respondent company must perforce pay both the benefits under P.D. 1123 and the CBA. Its refusal to pay the wage increase provided for in the latter constitutes a question that should have been settled before a voluntary arbitrator.

Moreover, in case of doubt, all labor legislation and all labor contracts shall be construed in favor of the safety and decent living for the laborer

41

cranad(Insular Lumber Co. vs. CA, 80 SCRA 28, citing Art. 1702, Civil Code of the Philippines).

Consequently, We find that the respondent Commission acted with grave abuse of discretion when it dismissed petitioner’s case and upheld the private respondent’s posture in the absence of substantial evidence in support thereof.

WHEREFORE, THE WRIT OF CERTIORARI IS HEREBY GRANTED, THE DECISION OF THE RESPONDENT COMMISSION IS HEREBY SET ASIDE, AND PRIVATE RESPONDENT IS HEREBY DIRECTED TO PAY, IN ADDITION TO THE INCREASED ALLOWANCE PROVIDED FOR IN P.D. 1123, THE NEGOTIATED WAGE INCREASE OF P0.80 DAILY EFFECTIVE APRIL 1, 1977 AS WELL AS ALL OTHER WAGE INCREASES EMBODIED IN THE COLLECTIVE BARGAINING AGREEMENT, TO ALL COVERED EMPLOYEES. COSTS AGAINST PRIVATE RESPONDENT.

THIS DECISION IS IMMEDIATELY EXECUTORY.

SO ORDERED.

Fernandez, Guerrero and De Castro, JJ., concur.

 

Separate Opinions

TEEHANKEE, J., concurring:

I concur with the Court’s judgment holding that contrary to respondents’ stand, the P60. — ECOLA cranad(emergency cost of living allowance) increase provided in P.D. 1123 issued on April 21, 1977 to take effect May 1, 1977 is not creditable to nor deductible from the negotiated wage increases cranad(NWI) negotiated and agreed by the parties in their collective bargaining agreement cranad(CBA) executed on September 3, 1977 cranad(providing for staggered wage increases for the workers for the three

year period of the CBA in the “munificent” total of P49.50 per month, much less than the P60. — ECOLA increase effective immediately, as follows: 80 centavos daily or approximately P22.00 increase per month for the 1st year, 50 centavos daily or around P13.75/month increase for the 2nd year and 50 centavos daily or around P13.75/month increase for the 3rd year.)

Even conceding that the parties had arrived at a partial agreement on April 2, 1977 that the employees would be given the 80-centavo daily wage increase retroactive to April 1st, 1977, still the memorandum of understanding dated September 3, 1977 as signed by the parties cranad(pp. 82-83, NLRC record) clearly shows the intent of the parties that such negotiated staggered wage increases were exclusive of any statutory increase in the minimum wage and that the respondent employer obliged itself to effect a uniform and indiscriminate wage increase equivalent to the increase or adjustment in the minimum wage that may be decreed within a period of three years from the signing of the CBA on September 3, 1977. 1 The ECOLA is after all, in effect, another means of effecting an increase in the minimum wage.

The conduct of the parties before and after the signing on September 3, 1977 of the CBA bear out the parties’ clear understanding and agreement that the P60. — ECOLA increase effective May 1, 1977 was not to be taken into account or to be deducted from the negotiated wage increases amounting to a total of P49.50 for the third year of the CBA. Reason and experience rebel against the contrary assertion. If after all, the negotiated wage increases in such a “munificent” total of P49.50 for the third year of the CBA cranad(and for a total of only P35.75/month for the 2nd year of the CBA) were to be charged against the P60. — ECOLA increase, the long negotiations for the staggered wage increases for the three-year duration of the CBA would be of no use or meaning, for the workers were already receiving the total P60. — increase from May 1, 1977, without need of the CBA.

The CBA then would work against instead of enhancing the very interests of the workers, as witness the posture taken by respondent-employer some months after its execution that implementation of the CBA wage increases meant that the agreed P22./month wage increase won by the workers in the CBA was to be set off against the ECOLA so that it had to pay only a balance of P38./month for the ECOLA on the basis of the opinion it had unilaterally secured from the Undersecretary of Labor on July 15, 1977 that such wage increase had been “granted” by it on April 1, 1977 and could be deducted from the ECOLA as against the undisputed fact that it has not up to

42

now paid a centavo of the agreed wage increase, even of P22./month for the 1st year of the CBA from September 3, 1977 it had supposedly granted since April 1, 1977 nor a centavo of the stipulated staggered increases for the last 2 years of the CBA. Thus, the 3-year period of the CBA expired last September 3, 1980 without the workers having received the negotiated wage increases stipulated in the CBA due to respondent employer’s success so far in tying up the payment thereof by reason of the erroneous opinion of July 15, 1977 it had unilaterally secured from the Undersecretary of Labor.

It should be noted that beginning May 1, 1977, respondent-employer commenced paying the workers the P60. — ECOLA increase without any qualification or condition that would tie it up or make deductible therefrom the wage increases that it was then negotiating with the workers. Even after it had unilaterally obtained on July 15, 1977 Undersecretary Inciong’s favorable cranad(to it) opinion, it never divulged nor apprised the workers thereof during the negotiations that they were still conducting. So, even if we were to be kind and not impute bad faith to the company and say that its non-disclosure of Undersecretary Inciong’s opinion resulted in some ambiguity concerning the negotiated wage increases, this was attributable to itself alone and therefore must be resolved against it.

There is basis for the majority judgment’s holding that the implementing rule of the then Secretary of Labor in crediting the NWI against the ECOLA is void for being in excess and contravention of the statutory authority which exempted only distressed employers from the ECOLA, but I do not deem it necessary to concur in such ruling due to my conclusions above stated that the parties clearly understood and intended that the P60.-ECOLA increase which respondent-employer had been paying to the workers since May 1, 1977 would not be charged against the staggered NWI in the September 3, 1977 CBA which amounted to a “munificent” total of P49.50 for the three years of the CBA which expired last September 3, 1980 and which the workers have yet to be paid, due to the one-sided and oppressive stand adopted by respondent-employer.

 

MELENCIO-HERRERA, J., dissenting:

I vote to dismiss the Petition for Certiorari.

The facts of this case are as follows: Private respondent cranad(the COMPANY, for short) is a corporation engaged in the garment industry with about 2,000 employees, whose bargaining representative is petitioner cranad(the UNION for short). COMPANY and UNION had a 1973-1976 CBA, which expired on July 31, 1976. On June 2, 1976, the UNION submitted to the COMPANY proposals for the renewal of the CBA. Negotiations were thereafter held cranad(p. 62, NLRC Record).

On April 2, 1977, COMPANY and UNION agreed, partially, that the employees would be given an across-the board increase in regular wages of P0.80 per day retroactive to April 1st. This fact is confirmed by a Memorandum of Understanding of the parties cranad(p. 82, NLRC Record). Because there were other unresolved issues, the new CBA was not signed until September 3, 1977.

In the meantime, PD 1123 was issued by the President on April 21, 1977 to take effect on May 1, 1977. The decree provided that employees then receiving P50 a month as Emergency Cost of Living Allowance cranad(ECOLA) should be given an increase in the sum of P60.00 a month. The Decree further provided:

“SEC. 4. The Secretary of Labor and the Commissioner of the Budget shall issue appropriate rules and regulations to implement this Decree for their respective sectors. Under such rules and regulations, distressed employers whether public or private may be exempted while in such condition in the interest of development and employment.”

The Secretary of Labor subsequently promulgated Rules and Regulations for the implementation of PD 1123. Section 1 cranad(k) thereof provided that:

“Section 1. — Coverage — These rules shall apply to all employers except the following:

x x x

(k) Those that have granted, in addition to the allowance under PD 525, at least P60.00 monthly wage increase on or after January 1, 1977, provided that those who paid less than this amount shall pay the difference.”

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The meaning of the rule is that when an employer had “ granted” increases to his employees after January 1, 1977, such increases shall be credited against the P60.00 ECOLA provided in PD 1123. Considering that the Secretary of Labor could exempt distressed employers from complying with PD 1123, it is believed that the regulation to debit the P60.00 ECOLA with wage increases granted to employees after January 1, 1977 was within the authority of the Secretary to make.

Giving credit to employers for increases granted to employees within a short period before an ECOLA becomes effective is a sound rule. It is inequitable that an employer, who has granted increases in pay to his employees on a given day, is further ordered to give additional increases one, two or three days thereafter. The arrangement or policy, was followed by the Secretary in regards to PD 1614 which became effective on April 1, 1979. Increases granted to employees after December 1, 1978 could be credited against the ECOLA provided in that Decree. The policy was expressly followed in PD 1634 which itself provided that the P60.00 ECOLA, effective September 1, 1979, could be lessened by the increases granted to employees on or after August 1, 1979. In PD 1678, the ECOLA which became effective February 20, 1980 was credited with increases in wages granted on or after February 8, 1980. In PD 1713, the ECOLA increase was effective on August 18, 1980, and it was credited with increases granted after July 1, 1980. In Wage Order No. 1, the ECOLA increase payable beginning March 22, 1981 was to be debited with voluntary increases given between January 1 to March 22, 1981.

On May 1, 1977, the COMPANY gave its employees the P60.00 ECOLA provided in PD 1123. On May 13, 1977, the COMPANY wrote to the Department of Labor asking if the wage increase of P0.80 a day agreed upon on April 2, 1977 between the COMPANY and the UNION, retroactively to April 1, 1977, could be credited against the ECOLA provided in PD 1123 cranad(p. 31, NLRC Record). The reply of July 15, 1977 was in the affirmative, the Department stating:

“If as you said, management and labor had agreed on April 2, 1977 to grant an amount of P22.00 cranad(roughly) per month to its employees retroactive to April 1, 1977, then the exemption is squarely in point, notwithstanding that the CBA was signed in May or June. This must be so for reason that on April 2, 1977, there was already the meeting of the minds of the parties and for legal purposes, the contract was already perfected as of said date.” chanroblesvirtualawlibrary(italics supplied) cranad(p. 33, NLRC Record)

After the new CBA was signed on September 3, 1977, the UNION raised the question of creditability of the April 1 increase of P0.80 a day to the May 1 ECOLA. The matter was taken up in grievance procedure, but on January 21, 1978, the COMPANY took the definite stand in favor of the creditability cranad(p. 2, NLRC Record). Whereupon, the UNION filed a complaint with the Department of Labor against the COMPANY for unfair labor practice in regards to the creditability question, and asked that a voluntary arbitrator be agreed upon. On May 30, 1978, the Labor Arbiter dismissed the UNION’s complaint, and said that the issue should be resolved through further proceedings under the grievance machinery established in the CBA.

The decision of the Labor Arbiter was appealed to the National Labor Relations Commissions cranad(NLRC) which, on September 1, 1978, set aside the decision of the Labor Arbiter and dismissed the complaint of the UNION finding “to be untenable the complainant’s claim for full payment of both the P0.80 daily wage increase under the CBA and the P60.00 allowance under PD 1123”  chanroblesvirtualawlibrary(p. 46, Rollo). It is this Order of the NLRC which has been brought to this instance for review on Certiorari.

It should be relevant to cite the following statement in Victorias Milling Company, Inc. vs. Social Security Commission in 4 SCRA 627, 630:

“A rule is binding on the courts so long as the procedure fixed for its promulgation is followed and its scope is within the statutory authority granted by the legislature, even if the courts are not in agreement with the policy stated therein or its innate wisdom cranad(Davis, op. cit., 195-197). On the other hand, administrative interpretation of the law is at best merely advisory, for it is the courts that finally determine what the law means.”

Section 1 cranad(k) of the Rules and Regulations for the implementation of PD 1123 is part of the “law” binding on Courts. If the P0.80 per day increase had actually been paid to the employees on April 1st, the conclusion should be unquestionable that such increase was deductible from the May 1st ECOLA. The problem in this case has arisen because that P0.80 increase, definitely promised on April 2nd to be given as of April 1st, was not given until it was absorbed by the ECOLA which began to be payable on May 1st. After the Department’s reply to the COMPANY of July 15, 1977, the matter of the P0.80 per day increase became dormant until it was resuscitated with the execution of the CBA on September 3, 1977.

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It will be seen that in the Department’s letter to the COMPANY of July 15, 1977, it had construed the word “granted” in section 1 cranad(k) as not necessarily requiring an accomplished fact. “The word grant is used therein in its broader meaning so as to be all embracing, and includes both the creation of the obligation and the actual extension, enjoyment of the wage increase.” A definite agreement to increase within the time frame should already be deemed as a “granted” increase. The Oxford English Dictionary cranad(Vol. IV) defines “grant” and “granted” as follows:

“Grant” — cranad(grant), sb. 1 Forms: see the vb. cranad(f. the vb.) The action of granting; the thing granted. + 1. a. Consent, permission. b Promise. c. Admission, acknowledgment. Also, what is agreed to, promised, admitted, etc. Obs.”  chanroblesvirtualawlibrary(p. 355).

“Granted” — cranad(granted), ppl. a. cranad(f. GRANT v. + -Ed1.) In senses of the vb. 1. Bestowed, allotted.”  chanroblesvirtualawlibrary(p. 356). cranad(Emphasis supplied).

In Woods v. Reilly, Tex. Civ. App., 211 S.W. 2d 591, 597, it was said, in reference to “grant” and “granted”, that:

“Grant” means to agree or assent to; to allow to be fulfilled; to accord; to bestow or confer; and is synonymous with ‘concede’ which means to agree in the idea of bestowal or acknowledgment, especially of a right or privilege.”

“Granted” within provision of Teacher’s Retirement Act defining ‘retirement’ as withdrawal from active service with a retirement allowance ‘granted’ under provisions of the Act, was not intended to mean ‘immediately payable’.”

One thing is for sure. The Department had the right to construe the word “granted”, as used in Section 1 cranad(k). The construction it had adopted cannot be viewed as so wrong as to allow us to reverse it. The rule followed in this jurisdiction since Madrigal vs. Rafferty cranad(38 Phil. 414 [1918]) is that great weight shall be given to the interpretation or construction given to a statute by the Government agency called upon to implement the statute. In this case, the weight in favor of the Department of Labor should be greater,

because the Department is not interpreting or construing a statute, but it had explained the extent of its own rule.

On the other hand, it is rather evident that the Department’s construction of the word “granted” as used in Section 1 cranad(k), as well as the NLRC Order dismissing the UNION’s complaint, is reasonable. As previously explained, the objective of Section 1 cranad(k) is to give equitable treatment to employers who have granted “voluntary” increases to their employees on a given date. They should not be subjected to further “compulsory” increases one, two or three days thereafter. “Voluntary” increases which the employers had granted within a reasonable period previous to the effectivity of the “compulsory” increases should be credited against such “compulsory” increases. There can be no substantial difference between “voluntary” increases actually paid, and “voluntary” increases definitely agreed to be paid and which would have been actually paid were it not for its absorption by the “compulsory” increases. The rationale of Section 1 cranad(k) is applicable to both situations.

Lastly, it is well to remember that economic matters, such as wages, are imbued with public interest. The broader requirements for the maintenance of a stable economy should also be taken into account in resolving conflicts between labor and management.

It may be pertinent to recall herein Justice Laurel’s classic definition of social justice, a fundamental principle enshrined in both the 1935 and the 1973 Constitutions:

“. cra . Social justice means the promotion of the welfare of all the people, the adoption by the Government of measures calculated to insure economic stability of all the competent elements of society, through the maintenance of a proper economic and social equilibrium in the interrelations of the members of the community, constitutionally, through the adoption of measures legally justifiable, or extra-constitutionally, through the exercise of powers underlying the existence of all governments on the time-honored principle of salus populi est suprema lex.

Social justice, therefore, must be founded on the recognition of the necessity of interdependence among divers and diverse units of a society and of the protection that should be equally and evenly extended to all groups as a combined force in our social and economic life, consistent with the

45

fundamental and paramount objective of the state of promoting the health, comfort, and quiet of all persons, and of bringing about ‘the greatest good to the greatest number’.”  chanroblesvirtualawlibrary(Calalang vs. Williams, 70 Phil. pp. 726, 734-735 [1940]) cranad(Emphasis supplied)

It is in view of the foregoing considerations that I vote for the dismissal of the Petition for Certiorari.

46

THIRD DIVISION

[G.R. No. 121158. December 5, 1996]

CHINA BANKING CORPORATION, ATTYS. REYNALDO M. CABUSORA and RENATO C. TAGUIAM, petitioners, vs. COURT OF APPEALS, HON. PEDRO T. SANTIAGO, SPS. SO CHING and CRISTINA SO, and NATIVE WEST INTERNATIONAL TRADING CORP., respondents.

D E C I S I O N

FRANCISCO, J.:

China Banking Corporation (China Bank) extended several loans to Native West International Trading Corporation (Native West) and to So Ching, Native West’s president. Native West in turn executed promissory notes[1] in favor of China Bank. So Ching, with the marital consent of his wife, Cristina So, additionally executed two mortgages over their properties, viz., a real estate mortgage executed on July 27, 1989 covering a parcel of land situated in Cubao, Quezon City, under TCT No. 277797,[2] and another executed on August 10, 1989 covering a parcel of land located in Mandaluyong, under TCT No. 5363.[3] The promissory notes matured and despite due demands by China Bank neither private respondents Native West nor So Ching paid. Pursuant to a provision embodied in the two mortgage contracts, China Bank filed petitions for the extra-judicial foreclosure of the mortgaged properties before Notary Public Atty. Renato E. Taguiam for TCT No. 277797,[4] and Notary Public Atty. Reynaldo M. Cabusora for TCT No. 5363,[5] copies of

which were given to the spouses So Ching and Cristina So. After due notice and publication, the notaries public scheduled the foreclosure sale of the spouses’ real estate properties on April 13, 1993. Eight days before the foreclosure sale, however, private respondents filed a complaint [6]with the Regional Trial Court[7]for accounting with damages and with temporary restraining order against petitioners alleging the following causes of action:

“A. Defendants failed to comply with the mandates of Administrative Order No. 3 of the Supreme Court dated October 19, 1984.

“B. Defendants failed to comply with the mandates of Section 2 Presidential Decree No. 1079 dated January 28, 1977.

“C. MORTGAGORS liability limited to P6,500,000.00 and P3,500,000.00 respectively in the Mortgages Annexes A and B respectively, but the same are not included in the notice of foreclosure.

“D. Violation of Truth in Lending Act (RP Act No. 3765).

“E. In all the loans granted by DEFENDANT-BANK to plaintiffs and Borrowers, the Bank charged interests in excess of the rate allowed by the Central Bank.

“F. Violation of Article 1308 of the Civil Code.”[8]

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On April 7, 1993, the trial court issued a temporary restraining order to enjoin the foreclosure sale. Thereafter counsels for the respective parties agreed to file their pleadings and to submit the case, without further hearing, for resolution. On April 28, 1993, the trial court, without passing upon the material averments of the complaint, issued an Order granting the private respondents’ prayer for the issuance of preliminary injunction with the following proffered justification:

“From the foregoing, it is quite apparent that a question of accounting poses a thorny issue as between the litigants. Variance in the amounts involved relating to the loan agreements must be judiciously passed upon by the Court and this is only possible if a trial on the merits could be had as the matters appurtenant thereto are evidentiary in nature.

“Under the premises, the accounting issue being evidentiary in character calls for an issuance of a writ of preliminary injunction pending the adjudication of the case. The issuance thereof at this particular stage of the case is merely a preventive remedy designed to protect from irreparable injury to property or other rights plaintiff may suffer, which a court of equity may take cognizance of by commanding acts to be done or prohibiting their commission, as in the instant suit, to restrain notaries public Cabusora and Taguiam as well as defendant China Banking Corporation from continuing with the auction sale of the subject properties, until further orders from this Court.

“Wherefore, premises considered, finding that the circumstances warrant the issuance of a preliminary injunction, plaintiff’s prayer is hereby GRANTED. Consequent thereto, plaintiffs are hereby ordered to post a bond amounting to P1 (ONE) Million to answer for whatever damages defendant may suffer as a consequence of the writ.” [9]

Petitioners moved for reconsideration, but it was denied in an Order dated September 23, 1993. To annul the trial court’s Orders of April 28, 1993 and September 23, 1993, petitioners elevated the case through certiorari and prohibition[10] before public respondent Court of Appeals.[11] In a decision dated January 17, 1995, respondent Court of Appeals held that Administrative Circular No. 3 is the governing rule in extra-judicial foreclosure of mortgage, which circular petitioners however failed to follow, and with respect to the publication of the notice of the auction sale, the provisions of P.D. No. 1079 is the applicable statute,[12] which decree petitioners similarly failed to obey. Respondent Court of Appeals did not pass upon the other issues and confined its additional lengthy discussion on the validity of the trial court’s issuance of the preliminary injunction, finding the same neither capricious nor whimsical exercise of judgment that could amount to grave abuse of discretion.[13] The Court of Appeals accordingly dismissed the petition, as well as petitioners’ subsequent motion for reconsideration.[14] Hence, the instant petition under Rule 45 of the Rules of Court reiterating the grounds raised before respondent court, to wit:

“I. PETITIONER CBC’S PETITIONS TO EXTRA-JUDICIALLY FORECLOSE THE REAL ESTATE MORTGAGES OF JULY 27, 1989 AND AUGUST 10, 1989 THRU PETITIONERS-NOTARIES PUBLIC, AND THE SCHEDULED FORECLOSURE SALE ARE VALID AND LAWFUL;

“II. PRIVATE RESPONDENTS AND PETITIONER CBC HAD EXPRESSLY AGREED TO CONSIDER THE SAME MORTGAGES AS VALID SECURITIES FOR PROMPT AND FULL PAYMENT OF ALL AND ANY OBLIGATIONS OF THE FORMER FROM THE LATTER;

“III. THE SUPPOSED VARIANCE IN THE TOTAL AMOUNT OF UNPAID LOANS IS NOT A VALID BASIS TO ENJOIN THE FORECLOSURE OF THE QUESTIONED MORTGAGES. THE MERE

48

FAILURE TO PAY THE LOAN SECURED BY SAID MORTGAGES IS THE ONLY, SINGLE REASON FOR THEIR LAWFUL FORECLOSURE;

“IV. PETITIONER BANK HAD FURNISHED PRIVATE RESPONDENTS WITH COPIES OF DISCLOSURE STATEMENTS IN COMPLIANCE WITH THE TRUTH IN LENDING ACT, AND CHARGED THEM INTERESTS IN ACCORDANCE WITH LAW AND PURSUANT TO ITS EXPRESS AGREEMENT WITH THE LATTER;

“V. THE P1.0 MILLION INJUNCTION BOND REQUIRED BY THE HONORABLE COURT A QUO ON PRIVATE RESPONDENTS IS GROSSLY AND PATENTLY INADEQUATE.”[15]

At the outset, the Court’s attention is drawn to the fact that since the filing of this suit before the trial court, none of the substantial issues have been resolved. To avoid and gloss over the issues raised by the parties, as what the trial court and respondent Court of Appeals did, would unduly prolong this litigation involving a rather simple case of foreclosure of mortgage. Undoubtedly, this will run counter to the avowed purpose of the rules, i.e., to assist the parties in obtaining just, speedy and inexpensive determination of every action or proceeding.[16] The Court, therefore, feels that the central issues of the case, albeit unresolved by the courts below, should now be settled specially as they involved pure questions of law. Furthermore, the pleadings of the respective parties on file have amply ventilated their various positions and arguments on the matter necessitating prompt adjudication.

Now to the core issues.

As the Court sees it, the crucial issues are: (1) whether or not the loans in excess of the amounts expressly stated in the mortgage contracts can be included as part of the loans secured by the real estate mortgages, (2) whether or not petitioners can extrajudicially foreclose the properties subject of the mortgages, (3) whether or not Administrative Order No. 3 should govern the extrajudicial foreclosure of the properties, and (4) whether or not the writ of preliminary injunction issued by the trial court is valid.

Petitioners aver that the additional loans extended in favor of private respondents in excess of P6,500,000.00 and P3,500,000.00 — amounts respectively stipulated in the July 27, 1989 and August 10, 1989 mortgage contracts — are also secured by the same collaterals or real estate properties, citing as bases the introductory paragraph (“whereas clause”) of the mortgage contracts, as well as the stipulations stated therein under the first and second paragraphs. Private respondents for their part argue that the additional loans are clean loans, relying on some isolated parts of the same introductory paragraph and first paragraph of the contracts, and also of the third paragraph.

As both parties offered a conflicting interpretation of the contract, then judicial determination of the parties’ intention is thus, inevitable.[17] Hereunder are the pertinent identical introductory paragraphs and paragraphs 1 to 3 of the July 27, 1989 and August 10, 1989 mortgage contracts:

“WHEREAS, the MORTGAGEE has granted, and may from time to time hereafter grant to the MORTGAGOR(S)/either of them/and/or NATIVE WEST INTERNATIONAL TRADING CORP. hereinafter called the DEBTOR(S) credit facilities not exceeding SIX MILLION FIVE HUNDRED THOUSAND PESOS ONLY (P6,500,000.00)* Philippine currency, and the MORTGAGEE had required the MORTGAGOR(S) to give collateral security for the payment of any and all obligations heretofore contracted/incurred and which may thereafter be contracted/incurred by the

49

MORTGAGOR(S) and/or DEBTOR(S), or any one of them, in favor of the MORTGAGEE;

“NOW, THEREFORE, as collateral security for the payment of the principal and interest of the indebtedness/obligations herein referred to and the faithful performance by the MORTGAGOR(S) of his (her, its) obligations hereunder, the MORTGAGOR(S) hereby execute(s) a FIRST MORTGAGE, in favor of the MORTGAGEE, free from all liens and encumbrances of any kind, that (those) certain parcel(s) of land, together with all the buildings/machineries/equipment/ improvements now existing thereon, and which may hereafter be placed thereon, described in the Schedule of mortgaged properties described hereunder and/or which is hereto attached, marked Exhibit “A” and made a part thereof.

“1. It is agreed that this mortgage shall respond for all the obligations contracted/incurred by the MORTGAGOR(S) and/or DEBTOR(S) or any one of them, in favor of the MORTGAGEE up to the said sum of SIX MILLION FIVE HUNDRED THOUSAND PESOS ONLY (P6,500,000.00)* regardless of the manner in which the said obligations may have been contracted/incurred by the MORTGAGOR(S) and/or DEBTOR(S) — whether by advances or loans made to him (her, it) by the MORTGAGEE, by the negotiation of mercantile documents, including trust receipts, by the execution by the MORTGAGOR(S) and/or DEBTOR(S) of money market instruments/commercial papers, undertakings of guaranty of suretyship, or by endorsement of negotiable instruments, or otherwise, the idea being to make this deed a comprehensive and all embracing security that it is.

“2. Payments on account of the principal and interest of the credit granted by the MORTGAGEE to the MORTGAGOR(S) and/or DEBTOR(S) may be made from time to time, and as often as the MORTGAGOR(S) may elect; provided, however, that in the event of such payments being so made that the indebtedness to the MORTGAGEE may from time to time be reduced the MORTGAGEE may make further advances and all sums whatsoever

advanced by the MORTGAGEE shall be secured by this mortgage, and partial payments of said indebtedness from time to time shall not thereby be taken to reduce by the amount of such payments the credit hereby secured. The said credit shall extend to and account which shall, within the said limit of P6,500,000.00* exclusive of interest, be fluctuating and subject to increase or decrease from time to time as the MORTGAGEE may approve, and this mortgage shall stand as security for all indebtedness of the MORTGAGOR(S) and/or DEBTOR(S), or any one of them, at any and all times outstanding, regardless of partial or full payments at any time or times made by the MORTGAGOR(S) and/or DEBTOR(S).

“3. It is hereby agreed that the MORTGAGEE may from time to time grant the MORTGAGOR(S)/DEBTOR(S) credit facilities exceeding the amount secured by this mortgage, without affecting the liability of the MORTGAGOR(S) under this mortgage up to the amount stipulated.”[18]

An important task in contract interpretation is the ascertainment of the intention of the contracting parties which is accomplished by looking at the words they used to project that intention in their contract, i.e., all the words, not just a particular word or two, and words in context, not words standing alone.[19] Indeed, Article 1374 of the Civil Code, states that “the various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may result from all of them taken jointly.” Applying the rule, we find that the parties intent is to constitute the real estate properties as continuing securities liable for future obligations beyond the amounts of P6.5 million and P3.5 million respectively stipulated in the July 27, 1989 and August 10, 1989 mortgage contracts. Thus, while the “whereas” clause initially provides that “the mortgagee has granted, and may from time to time hereafter grant to the mortgagors x x x credit facilities not exceeding six million five hundred thousand pesos only (P6,500,000.00)**” yet in the same clause it provides that “the mortgagee had required the mortgagor(s) to give collateral security for the payment of any and all obligations heretofore contracted/incurred and which may thereafter be contracted/incurred by the mortgagor(s) and/or debtor(s), or any one of them, in favor of the mortgagee” which qualifies the initial part and shows that the collaterals or real estate properties serve as securities for future obligations. The first which ends

50

with the clause, “the idea being to make this deed a comprehensive and all embracing security that it is” supports this qualification.

Similarly, the second provides that “the mortgagee may take further advances and all sums whatsoever advanced by the mortgagee shall be secured by this mortgagee x x x.” And although it was stated that “[t]he said credit shall extend to any account which shall, within the said limit of P6,500,000.00 exclusive of interest,” this part of the second sentence is again qualified by its succeeding portion which provides that “this mortgage shall stand as security for all indebtedness of the mortgagor(s) and/or debtor(s), or any one of them, at any and all times outstanding ...” Again, under the third paragraph, it is provided that “the mortgagee may from time to time grant the mortgagor(s)/debtor(s) credit facilities exceeding the amount secured by this mortgage x x x.” The fourth paragraph,[20] in addition, states that “x x x all such withdrawals, and payments, whether evidenced by promissory notes or otherwise, shall be secured by this mortgage” which manifestly shows that the parties principally intended to constitute the real estate properties as continuing securities for additional advancements which the mortgagee may, upon application, extend. It is well settled that mortgages given to secure future advancements or loans are valid and legal contracts, and that the amounts named as consideration in said contracts do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered.[21]

Anent the second issue, we find that petitioners are entitled to foreclose the mortgages. In their complaint for accounting with damages pending with the trial court, private respondents averred that:

“8. Up to and until February, 1993, PLAINTIFF-CORPORATION had paid to the DEFENDANT-BANK, the amount of THREE HUNDRED FIFTY THOUSAND (P350,000.00) Pesos, Philippine Currency, and was willing to pay the balance in installments of FOUR HUNDRED

THOUSAND (P400,000.00) Pesos, Philippine Currency, every month, in the meantime, but the DEFENDANT-BANK refused to accept, demanding instead SEVEN HUNDRED MILLION (P700,000,000.00) Pesos, Philippine Currency, a month.

“9. Inspite of the expressed willingness and commitment of plaintiffs to pay their obligation in a manner which they could afford, on March 11, 1993, MORTGAGORS and DEFENDANT-CORPORATION, each received a Letter of Demand from DEFENDANT-BANK, for the payment of P28,775,615.14 exclusive of interest and penalty evidenced by 11 promissory notes enclosed therein x x x.

“10. Upon receipt of the letter, PLAINTIFF-CORPORATION through its President pleaded with the Chairman of the Board of the DEFENDANT-BANK, through whom Defendant-Corporation was transacting business with, to accept its offer of payment of FOUR HUNDRED THOUSAND (P400,000.00) Pesos, Philippine Currency, a month, in the meantime, which was again refused by the said Chairman.” [22]

which allegations are a clear admission that they were unable to settle to the fullest their obligation. Foreclosure is valid where the debtors, as in this case, are in default in the payment of their obligation.[23] The essence of a contract of mortgage indebtedness is that a property has been identified or set apart from the mass of the property of the debtor-mortgagor as security for the payment of money or the fulfillment of an obligation to answer the amount of indebtedness, in case of default of payment.[24] It is a settled rule that in a real estate mortgage when the obligation is not paid when due, the mortgagee has the right to foreclose the mortgage and to have the property seized and sold in view of applying the proceeds to the payment of the obligation.[25] In fact, aside from the mortgage contracts, the promissory notes executed to evidence the loans also authorize the mortgagee to foreclose on the mortgages. Thus:

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“x x x CHINA BANKING CORPORATION is hereby authorized to sell at public or private sales such securities or things of value for the purpose of applying their proceeds to such payments.”[26]

And while private respondents aver that they have already paid ten million pesos, an allegation which has still to be settled before the trial court, the same cannot be utilized as a shield to enjoin the foreclosure sale. A mortgage given to secure advancements, we repeat, is a continuing security and is not discharged by repayment of the amount named in the mortgage, until the full amount of the advancements are paid.[27]

With respect to the third issue, we find private respondents’ contention that Administrative Order No. 3 is the governing rule in foreclosure of mortgages misplaced. The parties, we note, have stipulated that the provisions of Act No. 3135 is the controlling law in case of foreclosure. Thus:

“17. The MORTGAGOR(S) hereby grant(s) unto the MORTGAGEE full and irrevocable power of attorney coupled with interest, in the event of breach of any of the conditions of this mortgage, to sell, in its discretion, the mortgaged properties at public auction, for cash and to the highest bidder, in the Province or City where the mortgaged properties are located, before the Sheriff, or a Notary Public, without court proceedings, after posting notices of sale for a period of twenty days in three public places in said place; and after publication of such notice in a newspaper of general circulation in the said place once a week, for three consecutive weeks, and the MORTGAGEE is hereby authorized to execute the deed of sale and all such other documents as may be necessary in the premises all in accordance with the provisions of Act No. 3135 of the Philippine Legislature,as amended, and Section 78 of Republic Act No. 337; x x x.”[28] (Underscoring supplied. )

By invoking the said Act, there is no doubt that it must “govern the manner in which the sale and redemption shall be effected.”[29] Clearly, the fundamental principle that contracts are respected as the law between the contracting parties finds application in the present case,[30] specially where they are not contrary to law, morals, good customs and public policy.

Moreover, Administrative Order No. 3 is a directive for executive judges and clerks of courts which, under its preliminary paragraph is “[i]n line with the responsibility of an Executive Judge, under Administrative Order No. 6, dated June 30, 1975, for the management of courts within his administrative area, included in which is the task of supervising directly the work of the Clerk of Court, who is also the Ex-Oficio Sheriff, and his staff, x x x” Surely, a petition for foreclosure with the notary public is not within the contemplation of the aforesaid directive as the same is not filed with the court. At any rate, Administrative Order No. 3 cannot prevail over Act No. 3135, as amended. It is an elementary principle in statutory construction that a statute is superior to an administrative directive and the former cannot be repealed or amended by the latter.

On the last issue, we find that the issuance of the writ of injunction by the trial court unjustified. A writ of preliminary injunction, as an ancillary or preventive remedy, may only be resorted to by a litigant to protect or preserve his rights or interests and for no other purpose during the pendency of the principal action.[31] But before a writ of preliminary injunction may be issued, there must be a clear showing by the complaint that there exists a right to be protected and that the acts against which the writ is to be directed are violative of the said right.[32] In the case at bench, we fail to see any reason why the foreclosure of the mortgages should be enjoined. On the face of the clear admission by private respondents that they were unable to settle their obligations which were secured by the mortgages, petitioners have a clear right to foreclose the mortgages which is a remedy provided by law. Thus, in Caltex Philippines, Inc. v. Intermediate Appellate Court,[33] we reiterated the rule that:

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“x x x where a debt is secured by a mortgage and there is a default in payment on the part of the mortgagor, the mortgagee has a choice of one (1) or two (2) remedies, but he cannot have both. The mortgagee may:

1) foreclosure the mortgage; or

2) file an ordinary action to collect the debt.

“When the mortgagee chooses the foreclosure of the mortgage as a remedy, he enforces his lien by the sale on foreclosure of the mortgaged property. The proceeds of the sale will be applied to the satisfaction of the debt. With this remedy, he has a prior lien on the property. In case of a deficiency, the mortgagee has the right to claim for the deficiency resulting from the price obtained in the sale of the real property at public auction and the outstanding obligation at the time of the foreclosure proceedings (Soriano v. Enriquez, 24 Phil. 584; Banco de Islas Filipinas v. Concepcion Hijos, 53 Phil. 86; Banco Nacional v. Barreto, 53 Phil. 101).

“On the other hand, if the mortgagee resorts to an action to collect the debt, he thereby waives his mortgage lien. He will have no more priority over the mortgaged property. If the judgment in the action to collect is favorable to him, and it becomes final and executory, he can enforce said judgment by execution. He can even levy execution on the same mortgaged property, but he will not have priority over the latter and there may be other creditors who have better lien on the properties of the mortgagor.”[34]

WHEREFORE, the instant petition is hereby GRANTED. The assailed Decision, as well as the Resolution, of the Court of Appeals dated January 17, 1995 and July 7, 1995, respectively, are hereby REVERSED and SET ASIDE. The preliminary writ of injunction issued by the trial court is hereby NULLIFIED. This case is REMANDED to the court of origin for further proceedings in conformity with this decision.

SO ORDERED.

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ADELFA PROPERTIES INC., VS CA

ART 1324

ADELFA PROPERTIES, INC., petitioner, vs.COURT OF APPEALS, ROSARIO JIMENEZ-CASTAÑEDA and SALUD JIMENEZ, respondents.(G.R. No. 111238 January 25, 1995)

THE CASE

FACTS

● Herein private respondents and their brothers, Jose and Dominador Jimenez, were the registered co-owners of a parcel of land situated in Barrio Culasi, Las Piñas, Metro Manila.

● Jose and Dominador Jimenez sold their share consisting of one-half of said parcel of land to herein petitioner pursuant to a "Kasulatan sa Bilihan ng Lupa”.

● Petitioner expressed interest in buying the western portion of the property from private respondents. Accordingly, on November 25, 1989, an "Exclusive Option to Purchase" 5 was executed between petitioner and private respondents.

● Before petitioner could make payment, it received summons. The nephews and nieces of private respondents against the latter, Jose and Dominador Jimenez, and herein petitioner filed for annulment of the deed of sale in favor of Household Corporation and recovery of ownership of the property.

● As a consequence, petitioner informed private respondents that it would hold payment of the full purchase price and suggested that private respondents settle the case with their nephews and nieces. Respondent Salud

Jimenez refused to heed the suggestion of petitioner and attributed the suspension of payment of the purchase price to "lack of word of honor."

● Private-respondents informed Atty. Bernardo, petitioner's counsel, that they were cancelling the transaction. Despite Atty. Bernardo's offers to pay the purchase price, private-respondents rejected his offers.

● Private respondents executed a Deed of Conditional Sale 10 in favor of Emylene Chua over the same parcel of land.

● private respondents' counsel sent a letter to petitioner enclosing therein a check for P25,000.00 representing the refund of fifty percent of the option money paid under the exclusive option to purchase. Private respondents then requested petitioner to return the owner's duplicate copy of the certificate of title of respondent Salud Jimenez.

● Petitioner failed to surrender the certificate of title, hence private respondents filed a case for annulment of contract with damages, praying, among others, that the exclusive option to purchase be declared null and void; that defendant, herein petitioner, be ordered to return the owner's duplicate certificate of title.

RTC RULING The agreement entered into by the parties was merely an option contract, and declaring that the suspension of payment by herein petitioner constituted a counter-offer which, therefore, was tantamount to a rejection of the option. Also, petitioner could not validly suspend payment in favor of private respondents because that the action filed by the latter's kin did not involve the western portion of the land covered by the contract between petitioner and private respondents, but the eastern portion which was the subject of the sale between petitioner and the brothers Jose and Dominador Jimenez.

CA RULING The failure of petitioner to pay the purchase price within the period agreed upon was tantamount to an election by petitioner not to buy the property; that the suspension of payment constituted an imposition of a

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condition which was actually a counter-offer amounting to a rejection of the option.

ISSUES 1) WON the "Exclusive Option to Purchase" executed between petitioner Adelfa Properties, Inc. and private respondents Rosario Jimenez-Castañeda and Salud Jimenez is an option contract (YES);

(2) WON there was a valid suspension of payment of the purchase price by said petitioner, and the legal effects thereof on the contractual relations of the parties. YES.

SC RULING

the alleged option contract as a contract to sell, rather than a contract of sale. The distinction between the two is important for in contract of sale, the title passes to the vendee upon the delivery of the thing sold; whereas in a contract to sell, by agreement the ownership is reserved in the vendor and is not to pass until the full payment of the price. In a contract of sale, the vendor has lost and cannot recover ownership until and unless the contract is resolved or rescinded; whereas in a contract to sell, title is retained by the vendor until the full payment of the price, such payment being a positive suspensive condition and failure of which is not a breach but an event that prevents the obligation of the vendor to convey title from becoming effective. Thus, a deed of sale is considered absolute in nature where there is neither a stipulation in the deed that title to the property sold is reserved in the seller until the full payment of the price, nor one giving the vendor the right to unilaterally resolve the contract the moment the buyer fails to pay within a fixed period.

The parties never intended to transfer ownership to Adelfa Properties to completion of payment of the purchase price, this is inferred by the fact that the exclusive option to purchase, although it provided for automatic rescission of the contract and partial forfeiture of the amount already paid in case of default, does not mention that Adelfa Properties is obliged to return possession or ownership of the property as a consequence of non-payment.

There is no stipulation anent reversion or reconveyance of the property in the event that petitioner does not comply with its obligation. With the absence of such a stipulation, it may legally be inferred that there was an implied agreement that ownership shall not pass to the purchaser until he had fully paid the price.

The validity of the suspension of payment notwithstanding, we find and hold that private respondents may no longer be compelled to sell and deliver the subject property to petitioner for two reasons, that is, petitioner's failure to duly effect the consignation of the purchase price after the disturbance had ceased; and, secondarily, the fact that the contract to sell had been validly rescinded by private respondents.

Adelfa Properties justified in suspending payment of balance by reason of vindicatory action filed against it.

The mere sending of a letter by the vendee expressing the intention to pay, without the accompanying payment, is not considered a valid tender of payment. Besides, a mere tender of payment is not sufficient to compel private respondents to deliver the property and execute the deed of absolute sale. It is consignation which is essential in order to extinguish petitioner's obligation to pay the balance of the purchase price.

By reason of petitioner's failure to comply with its obligation, private respondents elected to resort to and did announce the rescission of the contract through its letter to petitioner dated July 27, 1990. That written notice of rescission is deemed sufficient under the circumstances.

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In the case at bar, it has been shown that although petitioner was duly furnished and did receive a written notice of rescission which specified the grounds therefore, it failed to reply thereto or protest against it. Its silence thereon suggests an admission of the veracity and validity of private respondents' claim.

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HIRD DIVISION

[G.R. No. 115307. July 8, 1997]

MANUEL LAO, petitioner, vs. COURT OF APPEALS and BETTER HOMES REALTY & HOUSING CORPORATION, respondents.

D E C I S I O N

PANGANIBAN, J.:

As a general rule, the main issue in an ejectment suit is possession de facto, not possession de jure. In the event the issue of ownership is raised in the pleadings, such issue shall be taken up only for the limited purpose of determining who between the contending parties has the better right to possession. However, where neither of the parties objects to the allegation of the question of ownership -- which may be initially improvident or improper -- in an ejectment suit and, instead, both present evidence thereon, argue the question in their various submissions and participate in all aspects of the trial without objecting to the Metropolitan (or Municipal) Trial Court’s jurisdiction to decide the question of ownership, the Regional Trial Court -- in the exercise of its original jurisdiction as authorized by Section 11, Rule 40 of the Rules of Court -- may rule on the issue and the corollary question of whether the subject deed is one of sale or of equitable mortgage.

These postulates are discussed by the Court as it resolves this petition under Rule 45 seeking a reversal of the December 21, 1993 Decision[1] and April

28, 1994 Resolution[2] of the Court of Appeals in CA-G.R. SP No. 92-14293.

The Antecedent Facts

The facts of this case are narrated by Respondent Court of Appeals as follows:[3]

“On June 24, 1992, (herein Private Respondent Better Homes Realty and Housing Corporation) filed with the Metropolitan Trial Court of Quezon City, a complaint for unlawful detainer, on the ground that (said private respondent) is the owner of the premises situated at Unit I, No. 21 N. Domingo Street, Quezon City, evidenced by Transfer Certificate of Title No. 22184 of the Registry of Deeds of Quezon City; that (herein Petitioner Manuel Lao) occupied the property without rent, but on (private respondent’s) pure liberality with the understanding that he would vacate the property upon demand, but despite demand to vacate made by letter received by (herein petitioner) on February 5, 1992, the (herein petitioner) refused to vacate the premises.

In his answer to the complaint, (herein petitioner) claimed that he is the true owner of the house and lot located at Unit I, No. 21 N. Domingo Street, Quezon City; that the (herein private respondent) purchased the same from N. Domingo Realty and Development Corporation but the agreement was actually a loan secured by mortgage; and that plaintiff’s cause of action is for accion publiciana, outside the jurisdiction of an inferior court.

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On October 9, 1992, the Metropolitan Trial Court of Quezon City rendered judgment ordering the (petitioner) to vacate the premises located at Unit I, No. 21 N. Domingo Street, Quezon City; to pay (private respondent) the sum of P300.00 a day starting on January 31, 1992, as reasonable rent for the use and occupation of the premises; to pay plaintiff P5,000.00, as attorney’s fees, and costs.

On appeal to the Regional Trial Court of Quezon City,[4] on March 30, 1993, the latter court rendered a decision reversing that of the Metropolitan Trial Court, and ordering the dismissal of the (private respondent’s) complaint for lack of merit, with costs taxed against (private respondent).

In its decision, the Regional Trial Court held that the subject property was acquired by (private respondent) from N. Domingo Realty and Development Corporation, by a deed of sale, and (private respondent) is now the registered owner under Transfer Certificate of Title No. 316634 of the Registry of Deeds of Quezon City, but in truth the (petitioner) is the beneficial owner of the property because the real transaction over the subject property was not a sale but a loan secured by a mortgage thereon.”

The dispositive portion of the Regional Trial Court’s decision is quoted below:[5]

“WHEREFORE, judgment is hereby rendered reversing the appealed decision and ordering the dismissal of plaintiff’s complaint for lack of merit, with the costs taxed against it.

IT IS SO ORDERED.”

On April 28, 1993, private respondent filed an appeal with the Court of Appeals which reversed the decision of the Regional Trial Court. The Respondent Court ruled:

“The Metropolitan Trial Court has no jurisdiction to resolve the issue of ownership in an action for unlawful detainer (B.P. 129, Sec. 33 [2]; Cf. Alvir vs. Vera, 130 SCRA 357). The jurisdiction of a court is determined by the nature of the action alleged in the complaint (Ching vs. Malaya, 153 SCRA 412). In its complaint in the inferior court, the plaintiff alleged that it is the owner of the premises located at Unit I, No. 21 N. Domingo Street, Quezon City, and that defendant’s occupation is rent free and based on plaintiff’s pure liberality coupled with defendant’s undertaking to vacate the premises upon demand, but despite demands, defendant has refused to vacate. The foregoing allegations suffice to constitute a cause of action for ejectment (Banco de Oro vs. Court of Appeals, 182 SCRA 464).

The Metropolitan Trial Court is not ousted of jurisdiction simply because the defendant raised the question of ownership (Bolus vs. Court of Appeals, 218 SCRA 798). The inferior court shall resolve the issue of ownership only to determine who is entitled to the possession of the premises (B.P. 129, Sec. 33[2]; Bolus vs. Court of Appeals, supra).

Here, the Metropolitan Trial Court ruled that as owner, plaintiff (herein private respondent Better Homes Realty and Housing Corporation) is entitled to the possession of the premises because the defendant’s stay is by mere tolerance of the plaintiff (herein private respondent).

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On the other hand, the Regional Trial Court ruled that the subject property is owned by the defendant, (herein petitioner Manuel Lao) and, consequently, dismissed the complaint for unlawful detainer. Thus, the Regional Trial Court resolved the issue of ownership, as if the case were originally before it as an action for recovery of possession, or accion publiciana, within its original jurisdiction. In an appeal from a decision of the Municipal Trial Court, or Metropolitan Trial Court, in an unlawful detainer case, the Regional Trial Court is simply to determine whether the inferior court correctly resolved the issue of possession; it shall not delve into the issue of ownership (Manuel vs. Court of Appeals, 199 SCRA 603). What the Regional Trial Court did was to rule that the real agreement between the plaintiff and the previous owner of the property was not a sale, but an equitable mortgage. Defendant was only a director of the seller corporation, and his claim of ownership could not be true. This question could not be determined summarily. It was not properly in issue before the inferior court because, as aforesaid, the only issue was possession de facto (Manlapaz vs. Court of Appeals, 191 SCRA 795), or who has a better right to physical possession (Dalida vs. Court of Appeals, 117 SCRA 480). Consequently, the Regional Trial Court erred in reversing the decision of the Metropolitan Trial Court.

WHEREFORE, the Court hereby REVERSES the decision of the Regional Trial Court. In lieu thereof, We affirm the decision of the Metropolitan Trial Court of Quezon City sentencing the defendant and all persons claiming right under him to vacate the premises situated at Unit I, No. 21 N. Domingo Street, Quezon City, and to surrender possession to the plaintiff; to pay plaintiff the sum of P300.00, a day starting on January 31, 1992, until defendant shall have vacated the premises; to pay plaintiff P5,000.00 as attorneys fees, and costs.

SO ORDERED.”[6]

Manuel Lao’s motion for reconsideration dated January 24, 1994 was denied by the Court of Appeals in its Resolution promulgated on April 28, 1994. Hence, this petition for review before this Court.[7]

The Issues

Petitioner Manuel Lao raises three issues:

“3.1 Whether or not the lower court can decide on the issue of ownership in the present ejectment case

3.2 Whether or not private respondent had acquired ownership over the property in question

3.3 Whether or not petitioner should be ejected from the premises in question”[8]

The Court’s Ruling

The petition for review is meritorious.

First Issue: Jurisdiction to Decide the Issue of Ownership

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The Court of Appeals held that as a general rule, the issue in an ejectment suit is possession de facto, not possession de jure, and that in the event the issue of ownership is raised as a defense, the issue is taken up for the limited purpose of determining who between the contending parties has the better right to possession. Beyond this, the MTC acts in excess of its jurisdiction. However, we hold that this is not a hard and fast rule that can be applied automatically to all unlawful detainer cases.

Section 11, Rule 40 of the Rules of Court provides that “[a] case tried by an inferior court without jurisdiction over the subject matter shall be dismissed on appeal by the Court of First Instance. But instead of dismissing the case, the Court of First Instance, in the exercise of its original jurisdiction, may try the case on the merits if the parties therein file their pleadings and go to the trial without any objection to such jurisdiction.” After a thorough review of the records of this case, the Court finds that the respondent appellate court failed to apply this Rule and erroneously reversed the RTC Decision.

Respondent Court cites Alvir vs. Vera to support its Decision. On the contrary, we believe such case buttresses instead the Regional Trial Court’s decision. The cited case involves an unlawful detainer suit where the issue of possession was inseparable from the issue of transfer of ownership, and the latter was determinable only after an examination of a contract of sale involving the property in question. The Court ruled that where a “case was tried and heard by the lower court in the exercise of its original jurisdiction by common assent of the parties by virtue of the issues raised x x x and the proofs presented by them,” any dismissal on the ground of lack of jurisdiction “would only lead to needless delays and multiplicity of suits.” The Court held:

“In actions of forcible entry and detainer, the main issue is possession de facto, independently of any claim of ownership or possession de jure that

either party may set forth in his pleading. x x x Defendant’s claim of ownership of the property from which plaintiff seeks to eject him is not sufficient to divest the inferior court of its jurisdiction over the action of forcible entry and detainer. However, if it appears during the trial that the principal issue relates to the ownership of the property in dispute and any question of possession which may be involved necessarily depends upon the result of the inquiry into the title, previous rulings of this Court are that the jurisdiction of the municipal or city court is lost and the action should be dismissed.

We have at bar a case where, in effect, the question of physical possession could not properly be determined without settling that of lawful or de jure possession and of ownership and hence, following early doctrine, the jurisdiction of the municipal court over the ejectment case was lost and the action should have been dismissed. As a consequence, respondent court would have no jurisdiction over the case on appeal and it should have dismissed the case on appeal from the municipal trial court. However, in line with Section 11, Rule 40 of the Revised Rules of Court, which reads --

‘SEC. 11. Lack of Jurisdiction. -- A case tried by an inferior court without jurisdiction over the subject matter shall be dismissed on appeal by the Court of First Instance. But instead of dismissing the case, the Court of First Instance in the exercise of its original jurisdiction, may try the case on the merits if the parties therein file their pleadings and go to trial without objection to such jurisdiction.’

this Court held in Saliwan vs. Amores, 51 SCRA 329, 337, that dismissal ‘on the said ground of lack of appellate jurisdiction on the part of the lower court flowing from the municipal court’s loss of jurisdiction would lead only to needless delay and multiplicity of suits in the attainment of the same result and ignores, as above stated, that the case was tried and heard by the lower

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court in the exercise of its original jurisdiction by common assent of the parties by virtue of the issues raised by the parties and the proof presented by them thereon.’ ”[9]

This pronouncement was reiterated by this Court through Mr. Justice Teodoro R. Padilla in Consignado vs. Court of Appeals[10] as follows:

“As the MTC of Laguna had no jurisdiction over the unlawful detainer case in view of the raised question of title or ownership over the property in dispute, the RTC of Laguna also had no appellate jurisdiction to decide the case on the merits. It should have dismissed the appeal. However, it had original jurisdiction to pass upon the controversy. It is to be noted, in this connection, that in their respective memoranda filed with the RTC of Laguna, the petitioners and private respondents did not object to the said court exercising its original jurisdiction pursuant to the aforequoted provisions of Section 11, Rule 40 of the Rules of Court.

x x x x x x x x x

Petitioners now contend, among others, that the Court of Appeals erred in resolving the question of ownership as if actual title, not mere possession of subject premises, is involved in the instant case.

The petitioner’s contention is untenable. Since the MTC and RTC of Laguna decided the question of ownership over the property in dispute, on appeal the Court of Appeals had to review and resolve also the issue of ownership. x x x”

It is clear, therefore, that although an action for unlawful detainer “is inadequate for the ventilation of issues involving title or ownership of controverted real property, [i]t is more in keeping with procedural due process that where issues of title or ownership are raised in the summary proceedings for unlawful detainer, said proceeding should be dismissed for lack of jurisdiction, unless, in the case of an appeal from the inferior court to the Court of First Instance, the parties agree to the latter Court hearing the case in its original jurisdiction in accordance with Section 11, Rule 40 x x x.”[11]

In the case at bar, a determination of the issue of ownership is indispensable to resolving the rights of both parties over the property in controversy, and is inseparable from a determination of who between them has the right to possess the same. Indeed, the very complaint for unlawful detainer filed in the Metropolitan Trial Court of Quezon City is anchored on the alleged ownership of private respondent over the subject premises.[12] The parties did not object to the incongruity of a question of ownership being brought in an ejectment suit. Instead they both submitted evidence on such question, and the Metropolitan Trial Court decided on the issue. These facts are evident in the Metropolitan Trial Court’s decision:

“From the records of the case, the evidence presented and the various arguments advanced by the parties, the Court finds that the property subject matter of this case is in the name of (herein private respondent) Better Homes and Realty Housing Corporation; that the Deed of Absolute Sale which was the basis for the issuance of said TCT No. 22184 is between N. Domingo Realty and Development Corporation and Better Homes Realty and Housing Corporation which was signed by Artemio S. Lao representing the seller N. Domingo and Realty Development Corporation; that a Board Resolution of N. Domingo and Realty and Development Corporation (Exhibit ‘D’ position paper) shows that the Directors of the Board of the N. Domingo Realty and

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Development Corporation passed a resolution selling apartment units I and F located at No. 21 N. Domingo St., Quezon City and designating the (herein petitioner) with his brother Artemio S. Lao as signatories to the Deed of Sale. The claim therefore of the (herein petitioner) that he owns the property is not true. x x x”[13]

When the MTC decision was appealed to the Regional Trial Court, not one of the parties questioned the Metropolitan Trial Court’s jurisdiction to decide the issue of ownership. In fact, the records show that both petitioner and private respondent discussed the issue in their respective pleadings before the Regional Trial Court.[14] They participated in all aspects of the trial without objection to its jurisdiction to decide the issue of ownership. Consequently, the Regional Trial Court aptly decided the issue based on the exercise of its original jurisdiction as authorized by Section 11, Rule 40 of the Rules of Court.

This Court further notes that in both of the contending parties’ pleadings filed on appeal before the Court of Appeals, the issue of ownership was likewise amply discussed.[15] The totality of evidence presented was sufficient to decide categorically the issue of ownership.

These considerations, taken together with the fact that both the Metropolitan Trial Court and the Regional Trial Court decided the issue of ownership, justify the review of the lower courts’ findings of fact and decision on the issue of ownership. This we now do, as we dispose of the second issue and decide the case with finality to spare the parties the time, trouble and expense of undergoing the rigors of another suit where they will have to present the same evidence all over again and where, in all probability, the same ultimate issue of ownership will be brought up on appeal.

Second Issue: Absolute Sale or Equitable Mortgage?

Private Respondent Better Homes Realty and Housing Corporation anchored its right in the ejectment suit on a contract of sale in which petitioner (through their family corporation) transferred the title of the property in question. Petitioner contends, however, that their transaction was not an absolute sale, but an equitable mortgage.

In determining the nature of a contract, the Court looks at the intent of the parties and not at the nomenclature used to describe it. Pivotal to deciding this issue is the true aim and purpose of the contracting parties as shown by the terminology used in the covenant, as well as “by their conduct, words, actions and deeds prior to, during and immediately after executing the agreement.”[16] In this regard, parol evidence becomes admissible to prove the true intent and agreement of the parties which the Court will enforce even if the title of the property in question has already been registered and a new transfer certificate of title issued in the name of the transferee. In Macapinlac vs. Gutierrez Repide, which involved an identical question, the Court succintly stated:

“ x x x This conclusion is fully supported by the decision in Cuyugan vs. Santos (34 Phil., 100), where this court held that a conveyance in the form of a contract of sale with pacto de retro will be treated as a mere mortgage, if really executed as security for a debt, and that this fact can be shown by oral evidence apart from the instrument of conveyance, a doctrine which has been followed in the later cases of Villa vs. Santiago (38 Phil., 157), and Cuyugan vs. Santos (39 Phil., 970).

x x x x x x x x x

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In the first place, it must be borne in mind that the equitable doctrine which has been so fully stated above, to the effect that any conveyance intended as security for a debt will be held in effect to be a mortgage, whether so actually expressed in the instrument or not, operates regardless of the form of the agreement chosen by the contracting parties as the repository of their will. Equity looks through the form and considers the substance; and no kind of engagement can be adopted which will enable the parties to escape from the equitable doctrine to which reference is made. In other words, a conveyance of land, accompanied by registration in the name of the transferee and the issuance of a new certificate, is no more secured from the operation of this equitable doctrine than the most informal conveyance that could be devised.”[17]

The law enumerates when a contract may be presumed to be an equitable mortgage:

“(1) When the price of a sale with right to repurchase is unusually inadequate;

(2) When the vendor remains in possession as lessee or otherwise;

(3) When upon or after the expiration of the right to repurchase another instrument extending the period of redemption or granting a new period is executed;

(4) When the purchaser retains for himself a part of the purchase price;

(5) When the vendor binds himself to pay the taxes on the thing sold;

(6) In any other case where it may be fairly inferred that the real intention of the parties is that the transaction shall secure the payment of a debt or the performance of any other obligation.

x x x x x x x x x”[18]

The foregoing presumption applies also to a “contract purporting to be an absolute sale.”[19]

Applying the preceding principles to the factual milieu of this case, we find the agreement between the private respondent and N. Domingo Realty & Housing Corporation, as represented by petitioner, manifestly one of equitable mortgage. First, possession of the property in the controversy remained with Petitioner Manuel Lao who was the beneficial owner of the property, before, during and after the alleged sale.[20] It is settled that a “pacto de retro sale should be treated as a mortgage where the (property) sold never left the possession of the vendors.”[21] Second, the option given to Manuel Lao to purchase the property in controversy had been extended twice[22] through documents executed by Mr. Tan Bun Uy, President and Chairman of the Board of Better Homes Realty & Housing Corporation. The wording of the first extension is a refreshing revelation that indeed the parties really intended to be bound by a loan with mortgage, not by a pacto de retro. It reads, “On June 10, 88, this option is extended for another sixty days to expired (sic) on Aug. 11, 1988. The purchase price is increased to P137,000.00. Since Mr. Lao borrow (sic) P20,000.00 from me.”[23] These extensions clearly represent the extension of time to pay the loan given to

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Manuel Lao upon his failure to pay said loan on its maturity. Mr. Lao was even granted an additional loan of P20,000.00 as evidenced by the above-quoted document. Third, unquestionably, Manuel Lao and his brother were in such “dire need of money” that they mortgaged their townhouse units registered under the name of N. Domingo Realty Corporation, the family corporation put up by their parents, to Private Respondent Better Homes Realty & Housing Corporation. In retrospect, it is easy to blame Petitioner Manuel Lao for not demanding a reformation of the contract to reflect the true intent of the parties. But this seeming inaction is sufficiently explained by the Lao brothers’ desperate need for money, compelling them to sign the document purporting to be a sale after they were told that the same was just for “formality.”[24] In fact, this Court, in various cases involving the same situation, had occasion to state:

“ x x x In Jayme, et al. v. Salvador, et al., this Court upheld a judgment of the Court of First Instance of Iloilo which found the transaction between the parties to be a loan instead of a sale of real property notwithstanding the terminology used in the document, after taking into account the surrounding circumstances of the transaction. The Court through Justice Norberto Romualdez stated that while it was true that plaintiffs were aware of the contents of the contracts, the preponderance of the evidence showed however that they signed knowing that said contracts did not express their real intention, and if they did so notwithstanding this, it was due to the urgent necessity of obtaining funds. ‘Necessitous men are not, truly speaking, free men; but to answer a present emergency, will submit to any terms that the crafty may impose upon them.’”[25]

Moreover, since the borrower’s urgent need for money places the latter at a disadvantage vis-a-vis the lender who can thus dictate the terms of their contract, the Court, in case of an ambiguity, deems the contract to be one which involves the lesser transmission of rights and interest over the property in controversy.[26]

As aptly found and concluded by the regional trial court:

“The evidence of record indicates that while as of April 4, 1988 (the date of execution of the Deed of Absolute Sale whereby the N. Domingo and Realty & Development Corporation purportedly sold the townhouse and lot subject of this suit to [herein private respondent Better Homes Realty & Housing Corporation] for P100,000.00) said N. Domingo Realty & Development Corporation (NDRDC, for short) was the registered owner of the subject property under Transfer Certificate of Title (TCT) No. 316634 of the Registry of Deeds for Quezon City, (herein petitioner Manuel Lao) in fact was and has been since 1975 the beneficial owner of the subject property and, thus, the same was assigned to him by the NDRDC, the family corporation set up by his parents and of which (herein petitioner) and his siblings are directors. That the parties’ real transaction or contract over the subject property was not one of sale but, rather, one of loan secured by a mortgage thereon is unavoidably inferrable from the following facts of record, to (herein petitioner’s) possession of the subject property, which started in 1975 yet, continued and remained even after the alleged sale of April 4, 1988; (herein private respondent) executed an option to purchase in favor (herein petitioner) as early as April 2, 1988 or two days before (herein private respondent) supposedly acquired ownership of the property; the said option was renewed several times and the price was increased with each renewal (thus, the original period for the exercise of the option was up to June 11, 1988 and the price was P109,000.00; then, on June 10, 1988, the option was extended for 60 days or until August 11, 1988 and the price was increased to P137,000.00; and then on August 11, 1988, the option was again extended until November 11, 1988 and the price was increased to P158, 840.00); and, the Deed of Absolute Sale of April 4, 1988 was registered and the property transferred in the name of (private respondent) only on May 10, 1989, per TCT No. 22184 of the Registry of Deeds for Quezon City (Arts. 1602, nos. 2, 3, & 6, & 1604, Civil Code). Indeed, if it were true, as it would have the Court believe, that (private respondent) was so appreciative of

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(petitioner’s) alleged facilitation of the subject property’s sale to it, it is quite strange why (private respondent) some two days before such supposed sale would have been minded and inclined to execute an option to purchase allowing (petitioner) to acquire the property -- the very same property it was still hoping to acquire at the time. Certainly, what is more likely and thus credible is that, if (private respondent) was indeed thankful that it was able to purchase the property, it would not given (petitioner) any option to purchase at all x x x.”[27]

Based on the conduct of the petitioner and private respondent and even the terminology of the second option to purchase, we rule that the intent and agreement between them was undoubtedly one of equitable mortgage and not of sale.

Third Issue: Should Petitioner Be Ejected?

We answer in the negative. An action for unlawful detainer is grounded on Section 1, Rule 70 of the Rules of Court which provides that:

“ x x x a landlord, vendor, vendee, or other person against whom the possession of any land or building is unlawfully withheld after the expiration or termination of the right to hold possession, by virtue of any contract, express or implied, or the legal representatives or assigns of any such landlord, vendor, vendee, or other person, may, at any time within one (1) year after such unlawful deprivation or withholding of possession, bring an action in the proper inferior court against the person or persons unlawfully withholding or depriving of possession, or any person or persons claiming under them, for the restitution of such possession, together with damages and costs. x x x.”

Based on the previous discussion, there was no sale of the disputed property. Hence, it still belongs to petitioner’s family corporation, N. Domingo Realty & Development Corporation. Private respondent, being a mere mortgagee, has no right to eject petitioner. Private respondent, as a creditor and mortgagee, “ x x x cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void.”[28]

Other Matters

Private respondent in his memorandum also contends that (1) petitioner is not the real party in interest and (2) the petition should be dismissed for “raising/stating facts not so found by the Court of Appeals.” These deserve scant consideration. Petitioner was impleaded as party defendant in the ejectment suit by private respondent itself. Thus, private respondent cannot question his standing as a party. As such party, petitioner should be allowed to raise defenses which negate private respondent’s right to the property in question. The second point is really academic. This ponencia relies on the factual narration of the Court of Appeals and not on the “facts” supplied by petitioner.

WHEREFORE, the petition is hereby GRANTED. The challenged Decision of the Court of Appeals is REVERSED and SET ASIDE. The decision of the Regional Trial Court of Quezon City ordering the dismissal of the complaint for ejectment is REINSTATED and AFFIRMED. No pronouncement as to costs.

SO ORDERED

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Narvasa, C.J., (Chairman), Davide, Jr., and Francisco, JJ., concur.

Melo, J., on leave.

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G.R. No. 117190 January 2, 1997

JACINTO TANGUILIG doing business under the name and style J.M.T. ENGINEERING AND GENERAL MERCHANDISING, petitioner,

vs.

COURT OF APPEALS and VICENTE HERCE JR., respondents.

BELLOSILLO, J.:

Jacinto Tanguilig [owner of JMT Engineering and General merchandise] was contracted by Vicente Herce to construct a “windmill” for P 60,000

Herce paid P30,000 downpayment, an instalment of P15,000, and left a balance of P15,000

Petitioner [Tanguilig] filed a complaint for non-payment of the remaining balance.

Respondent answered saying that he already paid remaining balance to San Pedro General Merchandising Inc., who constructed the deep well connected to the windmill.

Also, respondent claimed that P15,000 balance should be offset since the windmill collapsed after a strong wind hit it.

Respondent contends that since petitioner did not have the capacity to install the pump the latter agreed to have a third party do the work the cost of which was to be deducted from the contract price. He presented Guillermo Pili of SPGMI who declared that petitioner Tanguilig approached him with a letter from respondent Herce Jr. asking him to build a deep well pump as "part of the price/contract which Engineer (Herce) had with Mr. Tanguilig."

TRIAL COURT: Deep well was NOT PART of the contract. NO clear showing that there is defect in the construction.

CA: REVERSED TC decision. Deep well was part of the contract. Petitioner [Tanguilig] should reconstruct the windmill.

ISSUE:

W/N deep well was part of the contract.

W/N petitioner should reconstruct the windmill.

W/N respondent can claim that Pili accepted his payment on behalf of petitioner?

HELD:

Deep well was NOT PART of the contractPetitioner SHOULD reconstruct the windmill.No.

RATIO:

Part of the contract

There is absolutely no mention in the two (2) documents that a deep well pump is a component of the proposed windmill system. The contract prices fixed in both proposals cover only the features specifically described therein and no other.The words "deep well" and "deep well pump” merely describe the type of deep well pump for which the proposed windmill would be suitable.For if the real intent of petitioner was to include a deep well in the agreement to construct a windmill, he would have used instead the conjunctions "and" or "with."It is a cardinal rule in the interpretation of contracts that the intention of the parties shall be accorded primordial consideration and, in case of doubt, their contemporaneous and subsequent acts shall be principally considered.The claim of Pili that Herce Jr. wrote him a letter is unsubstantiated. The alleged letter was never presented in court by private respondent for reasons known only to him.

Claim that Pili accepted on behalf of petitioner

While the law is clear that "payment shall be made to the person in whose favor the obligation has been constituted, or his successor in

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interest, or any person authorized to receive it," it does not appear from the record that Pili and/or SPGMI was so authorized.Respondent cannot claim the benefit of the law concerning "payments made by a third person."

The Civil Code provisions do not apply in the instant case because no creditor-debtor relationship between petitioner and Guillermo Pili and/or SPGMI has been established regarding the construction of the deep well.

Circumstances only show that the construction of the well by SPGMI was for the sole account of respondent and that petitioner merely supervised the installation of the well because the windmill was to be connected to it. There is no legal nor factual basis by which this Court can impose upon petitioner an obligation he did not expressly assume nor ratify.

Claim for exemption from liability

In order for a party to claim exemption from liability by reason of fortuitous event under Art. 1174 of the Civil Code the event should be the sole and proximate cause of the loss or destruction of the object of the contract.

Requisites for exemption (a) the cause of the breach of the obligation must be independent of

the will of the debtor; (b) the event must be either unforeseeable or unavoidable; (c) the event must be such as to render it impossible for the debtor to

fulfill his obligation in a normal manner; (d) the debtor must be free from any participation in or aggravation

of the injury to the creditor. Petitioner merely stated that there was a "strong wind." But a strong

wind in this case cannot be fortuitous — unforeseeable nor unavoidable. On the contrary, a strong wind should be present in places where windmills are constructed, otherwise the windmills will not turn.

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RIDJO TAPE & CHEMICAL CORP. and RIDJO PAPER CORP vs. CA et al

RIDJO TAPE & CHEMICAL CORP. and RIDJO PAPER CORP vs. CA et alGR No 126074. 24 Feb 1998.

Ponente: Romero, J.:

FACTS: This is a petition to review the decision of the CA which reversed that of the RTC of Quezon City, ordering petitioners to pay private respondent Manila Electric Co. (MERALCO) the amount of P415,317.66 and P89,710.58 plus the costs of suit.On September 4, 1991 and on July 30, 1992, petitioners received a letter from MERALCO demanding payment of P415,317.66 and P89,710.58 , respectively, allegedly representing unregistered electric consumption for the period November 7, 1990, to February 13, 1991 and for the period July 15, 1991 to April 13, 1992. MERALCO justified its demand on the ground that the unregistered electric consumption was due to the defects of the electric meter located in the premises of petitioners. Since petitioners refused to pay the amount, MERALCO notified them that their electricity be disconnected.

ISSUE: WON petitioners should pay the amounts demanded by Meralco despite the defective meter installed by the latter.

RULING: Decision MODIFIED. Petitioners are ordered to pay MERALCO the amount P168,342.75, representing its average electric consumption three months prior to the period in controversy.It must be underscored that MERALCO has the imperative duty to make a reasonable and proper inspection of its apparatus and equipment to ensure that they do not malfunction, and the due diligence to discover and repair defects therein. Failure to perform such duties constitutes negligence.The SC concludes that this is a case of negligence on the part of MERALCO for which it must bear the consequences. Its failure to make the necessary repairs and replacement of the defective electric meter was obviously the proximate cause of the instant dispute between the parties.MERALCO, being a public utility vested with vital public interest, is impressed with certain obligations towards its customers and any omission

on its part would be prejudicial to its interest. For in the final analysis, the bottom line is that those who do not exercise such prudence in the discharge of their duties shall be made to bear the consequences of such oversight.

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TSPI, INCORPORATION VS. TSPIC EMPLOYEES UNIONG.R No. 163419. February 13, 2008FACTS

: TSPI Corporation entered into a Collective Bargaining Agreementwith the corporation Union for the increase of salary for the latter’smembers for the year 2000 to 2002 starting from January 2000. thus, theincreased in salary was materialized on January 1, 2000. However, onOctober 6, 2000, the Regional Tripartite Wage and production Boardraised daily minimum wage from P 223.50 to P 250.00 starting November1, 2000. Conformably, the wages of the 17 probationary employees wereincreased to P250.00 and became regular employees therefore receivinganother 10% increase in salary. In January 2001, TSPIC implemented thenew wage rates as mandated by the CBA. As a result, the nine employeeswho were senior to the 17 recently regularized employees, received lesswages. On January 19, 2001, TSPIC’s HRD notified the 24 employees whoare private respondents, that due to an error in the automated payrollsystem, they were overpaid and the overpayment would be deductedfrom their salaries starting February 2001. The Union on the other hand,

asserted that there was no error and the deduction of the allegedoverpayment constituted diminution of pay.

ISSUE

:Whether the alleged overpayment constitutes diminution of pay asalleged by the Union.

RULING

: Yes, because it is considered that Collective Bargaining Agreemententered into by unions and their employers are binding upon the partiesand be acted in strict compliance therewith. Thus, the CBA in this case isthe law between the employers and their employees. Therefore, there was no overpayment when there was an increaseof salary for the members of the union simultaneous with the increasingof minimum wage for workers in the National Capital Region. The CBAshould be followed thus, the senior

employees who were first promoted asregular employees shall be entitled for the increase in their salaries andthe same with lower rank workers.

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benguet corporation vs cabildo 2008

Facts: Petitioner Benguet Corporation is a mining company with three (3) mining sites: Balatoc, Antamok and Acupan. Cesar Cabildo was a former employee of Benguet Corporation. Thereafter, Cabildo became a service contractor of painting jobs.

Sometime in February 1983, Cabildo submitted his quotation and bid for the painting of Benguet Corporation's Mill Buildings and Bunkhouses located at Balatoc mining site. He then negotiated with petitioners Reyes and Fider, the recommending approval and approving authority, respectively, of Benguet Corporation, on the scope of work for the Balatoc site painting job. The parties eventually agreed that Benguet Corporation would provide the needed materials for the project.

On March 9, 1983, Cabildo wrote Reyes requesting the assignment of a representative by Benguet Corporation to closely monitor the daily work accomplishments of Cabildo and his workers.

Subsequently, on March 23, 1983, Cabildo and Benguet Corporation, formally signed the Contract of Work for the painting of the Mill Buildings and Bunkhouses at the Balatoc mining site. All the stipulations were incorporated therein by Benguet Corporation which solely drafted the contract.

To undertake the project, Cabildo recruited and hired laborers including petitioner Velasco as his general foreman. On May 30, 1983, Velasco left Cabildo as the latter's general foreman and went on his own as contractor, offering his services for painting jobs.

On June 9, 1983, Reyes recommended approval of the Quotation of Velasco for the painting of the inner mill compound of Balatoc and approved by Fider on June 13, 1983 at a lower price than that of Cabildo.

Because of these developments, Cabildo enlisted the services of Atty. Galo Reyes, who wrote both Fider and Jaime Ongpin, President of Benguet Corporation, regarding the ostensibly overlapping contracts of Cabildo and Velasco.

On July 2, 1983, Benguet Corporation's Group Manager for Legal and Personnel, Atty. Juanito Mercado, who prepared and notarized the Contract of Work, responded to Cabildo's counsel, declaring that Benguet Corporation's Contract of Work with Cabildo only covered exterior painting of the Mill Buildings and Bunkhouses, whereas the contract with Velasco covered interior painting of the Mill Buildings, although the same was not expressly stated in the Contract.

Thus, Cabildo filed a complaint for damages against the petitioners and Velasco before the RTC, claiming breach by Benguet Corporation of their Contract of Work.

The RTC rendered a decision in favor of Cabildo and found the petitioners, as well as Velasco, jointly and severally liable to Cabildo. On appeal, the CA affirmed with modification the RTC's ruling. The appellate court excluded Velasco from liability.

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Issue: Whether or not there is breach of contract as basis for award of damages

Held: We cannot agree with the petitioners. The Contract of Work with Cabildo did not distinguish between the exterior and interior painting of the Mill Buildings. It simply stated that Cabildo "shall paint the Mill Buildings at Balatoc Mill and all the Bunkhouses at Balatoc." Article 1370 of the Civil Code sets forth the first rule in the interpretation of contracts. The article reads:

Art. 1370. If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control.

There is nothing in the contract which will serve as a basis for the petitioners' insistence that Cabildo's scope of work was merely confined to the painting of the exterior part of the Mill Buildings.

We also note that Benguet Corporation's counsel drafted and prepared the contract. Undoubtedly, the petitioners' claimed ambiguity in the wordings of the contract, if such an ambiguity truly exists, cannot give rise to an interpretation favorable to Benguet Corporation. Article 1377 of the Civil Code provides:

Art. 1377. The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity.

Finally, Article 1371 of the same code states:

Art. 1371. In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered.

First, the procedure for work accomplishments followed by the parties required representatives and/or employees of Benguet Corporation to closely monitor Cabildo's performance of the job. If, as the petitioners claim, the intention was only to paint the exterior of the Mill Buildings, then Reyes and Fider, or any of Benguet Corporation's representatives assigned to monitor the work of Cabildo, should have stopped Cabildo from continuing the painting of the interiors.

Moreover, the materials for the painting work were provided by Benguet Corporation. The petitioners had the opportunity to disapprove Cabildo's requests for materials needed to paint the interiors of the Mill Buildings, but they failed to do so.

From the foregoing, it is crystal clear that the petitioners breached the Contract of Work with Cabildo by awarding Velasco a contract covering the same subject matter, quite understandably, because Velasco offered a price schedule lower than Cabildo's.

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