INTENTION OF THE PARTIES

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

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

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 On April 16, 1973, petitioner signed a Deed of Pacto de Retro Sale[2] in favor of Parangan which was superseded by the Deed of Definite Sale[3] dated May 4, 1979 which petitioner signed upon Parangan's representation that the same merely evidences the loans extended by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;

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.

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 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?

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 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.

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 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.

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.

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 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 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 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.

G.R. No. L-25931October 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.

MUOZ 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.

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 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 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.

G.R. No. L-53955January 13, 1989

THE MANILA BANKING CORPORATION, plaintiff-appellee, vs.ANASTACIO TEODORO, JR. and GRACE ANNA TEODORO, defendants-appellants.

Formoso & Quimbo Law Office for plaintiff-appellee.

Serafin P. Rivera for defendants-appellants.

BIDIN, J.:

This is an appeal from the decision* of the Court of First Instance of Manila, Branch XVII in Civil Case No. 78178 for collection of sum of money based on promissory notes executed by the defendants-appellants in favor of plaintiff-appellee bank. The dispositive portion of the appealed decision (Record on Appeal, p. 33) reads as follows:

WHEREFORE judgment is hereby rendered (a) sentencing defendants, Anastacio Teodoro, Jr. and Grace Anna Teodoro jointly and severally, to pay plaintiff the sum of P15,037.11 plus 12% interest per annum from September 30, 1969 until fully paid, in payment of Promissory Notes No. 11487, plus the sum of P1,000.00 as attorney's fees; and (b) sentencing defendant Anastacio Teodoro, Jr. to pay plaintiff the sum of P8,934.74, plus interest at 12% per annum from September 30, 1969 until fully paid, in payment of Promissory Notes Nos. 11515 and 11699, plus the sum of P500.00 an attorney's fees.

With Costs against defendants.

The facts of the case as found by the trial court are as follows:

On April 25, 1966, defendants, together with Anastacio Teodoro, Sr., jointly and severally, executed in favor of plaintiff a Promissory Note (No. 11487) for the sum of P10,420.00 payable in 120 days, or on August 25, 1966, at 12% interest per annum. Defendants failed to pay the said amount inspire of repeated demands and the obligation as of September 30, 1969 stood at P 15,137.11 including accrued interest and service charge.

On May 3, 1966 and June 20, 1966, defendants Anastacio Teodoro, Sr. (Father) and Anastacio Teodoro, Jr. (Son) executed in favor of plaintiff two Promissory Notes (Nos. 11515 and 11699) for P8,000.00 and P1,000.00 respectively, payable in 120 days at 12% interest per annum. Father and Son made a partial payment on the May 3, 1966 promissory Note but none on the June 20, 1966 Promissory Note, leaving still an unpaid balance of P8,934.74 as of September 30, 1969 including accrued interest and service charge.

The three Promissory Notes stipulated that any interest due if not paid at the end of every month shall be added to the total amount then due, the whole amount to bear interest at the rate of 12% per annum until fully paid; and in case of collection through an attorney-at-law, the makers shall, jointly and severally, pay 10% of the amount over-due as attorney's fees, which in no case shall be leas than P200.00.

It appears that on January 24, 1964, the Son executed in favor of plaintiff a Deed of Assignment of Receivables from the Emergency Employment Administration in the sum of P44,635.00. The Deed of Assignment provided that it was for and in consideration of certain credits, loans, overdrafts and other credit accommodations extended to defendants as security for the payment of said sum and the interest thereon, and that defendants do hereby remise, release and quitclaim all its rights, title, and interest in and to the accounts receivables. Further.

(1)The title and right of possession to said accounts receivable is to remain in the assignee, and it shall have the right to collect the same from the debtor, and whatsoever the Assignor does in connection with the collection of said accounts, it agrees to do as agent and representative of the Assignee and in trust for said Assignee ;

xxxxxxxxx

(6)The Assignor guarantees the existence and legality of said accounts receivable, and the due and punctual payment thereof unto the assignee, ... on demand, ... and further, that Assignor warrants the solvency and credit worthiness of each and every account.

(7)The Assignor does hereby guarantee the payment when due on all sums payable under the contracts giving rise to the accounts receivable ... including reasonable attorney's fees in enforcing any rights against the debtors of the assigned accounts receivable and will pay upon demand, the entire unpaid balance of said contract in the event of non-payment by the said debtors of any monthly sum at its due date or of any other default by said debtors;

xxxxxxxxx

(9) ... This Assignment shall also stand as a continuing guarantee for any and all whatsoever there is or in the future there will be justly owing from the Assignor to the Assignee ...

In their stipulations of Fact, it is admitted by the parties that plaintiff extended loans to defendants on the basis and by reason of certain contracts entered into by the defunct Emergency Employment Administration (EEA) with defendants for the fabrication of fishing boats, and that the Philippine Fisheries Commission succeeded the EEA after its abolition; that non-payment of the notes was due to the failure of the Commission to pay defendants after the latter had complied with their contractual obligations; and that the President of plaintiff Bank took steps to collect from the Commission, but no collection was effected.

For failure of defendants to pay the sums due on the Promissory Note, this action was instituted on November 13, 1969, originally against the Father, Son, and the latter's wife. Because the Father died, however, during the pendency of the suit, the case as against him was dismiss under the provisions of Section 21, Rule 3 of the Rules of Court. The action, then is against defendants Son and his wife for the collection of the sum of P 15,037.11 on Promissory Note No. 14487; and against defendant Son for the recovery of P 8,394.7.4 on Promissory Notes Nos. 11515 and 11699, plus interest on both amounts at 12% per annum from September 30, 1969 until fully paid, and 10% of the amounts due as attorney's fees.

Neither of the parties presented any testimonial evidence and submitted the case for decision based on their Stipulations of Fact and on then, documentary evidence.

The issues, as defined by the parties are: (1) whether or not plaintiff claim is already considered paid by the Deed of Assign. judgment of Receivables by the Son; and (2) whether or not it is plaintiff who should directly sue the Philippine Fisheries Commission for collection.' (Record on Appeal, p. 29- 32).

On April 17, 1972, the trial court rendered its judgment adverse to defendants. On June 8, 1972, defendants filed a motion for reconsideration (Record on Appeal, p. 33) which was denied by the trial court in its order of June 14, 1972 (Record on Appeal, p. 37). On June 23, 1972, defendants filed with the lower court their notice of appeal together with the appeal bond (Record on Appeal, p. 38). The record of appeal was forwarded to the Court of Appeals on August 22, 1972 (Record on Appeal, p. 42).

In their appeal (Brief for the Appellants, Rollo, p. 12), appellants raised a single assignment of error, that is

THAT THE DECISION IN QUESTION AMOUNTS TO A JUDICIAL REMAKING OF THE CONTRACT BETWEEN THE PARTIES, IN VIOLATION OF LAW; HENCE, TANTAMOUNT TO LACK OR EXCESS OF JURISDICTION.

As the appeal involves a pure question of law, the Court of Appeals, in its resolution promulgated on March 6, 1980, certified the case to this Court (Rollo, p. 24). The record on Appeal was forwarded to this Court on March 31, 1980 (Rollo, p. 1).

In the resolution of May 30, 1980, the First Division of this Court ordered that the case be docketed and declared submitted for decision (Rollo, p. 33).

On March 7, 1988, considering the length of time that the case has been pending with the Court and to determine whether supervening events may have rendered the case moot and academic, the Court resolved (1) to require the parties to MOVE IN THE PREMISES within thirty days from notice, and in case they fail to make the proper manifestation within the required period, (2) to consider the case terminated and closed with the entry of judgment accordingly made thereon (Rollo, p. 40).

On April 27, 1988, appellee moved for a resolution of the appeal review interposed by defendants-appellants (Rollo, p. 41).

The major issues raised in this case are as follows: (1) whether or not the assignment of receivables has the effect of payment of all the loans contracted by appellants from appellee bank; and (2) whether or not appellee bank must first exhaust all legal remedies against the Philippine Fisheries Commission before it can proceed against appellants for collections of loan under the promissory notes which are plaintiffs bases in the action for collection in Civil Case No. 78178.

Assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor, by a legal cause, such as 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, known as the assignee, who acquires the power to enforce it to the same extent as the assignor could have enforced it against the debtor. ... It may be in the form of a sale, but at times it may constitute a dation in payment, such as when a debtor, in order to obtain a release from his debt, assigns to his creditor a credit he has against a third person, or it may constitute a donation as when it is by gratuitous title; or it may even be merely by way of guaranty, as when the creditor gives as a collateral, to secure his own debt in favor of the assignee, without transmitting ownership. The character that it may assume determines its requisites and effects. its regulation, and the capacity of the parties to execute it; and in every case, the obligations between assignor and assignee will depend upon the judicial relation which is the basis of the assignment: (Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, Vol. 5, pp. 165-166).

There is no question as to the validity of the assignment of receivables executed by appellants in favor of appellee bank.

The issue is with regard to its legal effects.

I

It is evident that the assignment of receivables executed by appellants on January 24, 1964 did not transfer the ownership of the receivables to appellee bank and release appellants from their loans with the bank incurred under promissory notes Nos. 11487,11515 and 11699.

The Deed of Assignment provided that it was for and in consideration of certain credits, loans, overdrafts, and their credit accommodations in the sum of P10,000.00 extended to appellants by appellee bank, and as security for the payment of said sum and the interest thereon; that appellants as assignors, remise, release, and quitclaim to assignee bank all their rights, title and interest in and to the accounts receivable assigned (lst paragraph). It was further stipulated that the assignment will also stand as a continuing guaranty for future loans of appellants to appellee bank and correspondingly the assignment shall also extend to all the accounts receivable; appellants shall also obtain in the future, until the consideration on the loans secured by appellants from appellee bank shall have been fully paid by them (No. 9).

The position of appellants, however, is that the deed of assignment is a quitclaim in consideration of their indebtedness to appellee bank, not mere guaranty, in view of the following provisions of the deed of assignment:

... the Assignor do hereby remise, release and quit-claim unto said assignee all its rights, title and interest in the accounts receivable described hereunder. (Emphasis supplied by appellants, first par., Deed of Assignment).

... that the title and right of possession to said account receivable is to remain in said assignee and it shall have the right to collect directly from the debtor, and whatever the Assignor does in connection with the collection of said accounts, it agrees to do so as agent and representative of the Assignee and it trust for said Assignee ...(Ibid. par. 2 of Deed of Assignment).' (Record on Appeal, p. 27)

The character of the transactions between the parties is not, however, determined by the language used in the document but by their intention. Thus, the Court, quoting from the American Jurisprudence (68 2d, Secured Transaction, Section 50) said:

The characters 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 construed as a pledge. However, even though a transfer, if regarded by itself, appellate 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 Id that 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, and that accordingly, the use of the terms ordinarily exporting 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 ambiguous language or other circumstances excluding an intent to pledge. (Lopez v. Court of Appeals, 114 SCRA 671 [1982]).

Definitely, the assignment of the receivables did not result from a sale transaction. It cannot be said to have been constituted by virtue of a dation in payment for appellants' loans with the bank evidenced by promissory note Nos. 11487, 11515 and 11699 which are the subject of the suit for collection in Civil Case No. 78178. At the time the deed of assignment was executed, said loans were non-existent yet. The deed of assignment was executed on January 24, 1964 (Exh. "G"), while promissory note No. 11487 is dated April 25, 1966 (Exh. 'A), promissory note 11515, dated May 3, 1966 (Exh. 'B'), promissory note 11699, on June 20, 1966 (Exh. "C"). At most, it was a dation in payment for P10,000.00, the amount of credit from appellee bank indicated in the deed of assignment. At the time the assignment was executed, there was no obligation to be extinguished except the amount of P10,000.00. Moreover, 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 (Article 1292, New Civil Code).

Obviously, the deed of assignment was intended as collateral security for the bank loans of appellants, as a continuing guaranty for whatever sums would be owing by defendants to plaintiff, as stated in stipulation No. 9 of the deed.

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. Court of Appeals, supra).

In one case, the assignments of rights, title and interest of the defendant in the contracts of lease of two buildings as well as her rights, title and interest in the land on which the buildings were constructed to secure an overdraft from a bank amounting to P110,000.00 which was increased to P150,000.00, then to P165,000.00 was considered by the Court to be documents of mortgage contracts inasmuch as they were executed to guarantee the principal obligations of the defendant consisting of the overdrafts or the indebtedness resulting therefrom. The Court ruled that an assignment to guarantee an obligation is in effect a mortgage and not an absolute conveyance of title which confers ownership on the assignee (People's Bank & Trust Co. v. Odom, 64 Phil. 126 [1937]).

II

As to whether or not appellee bank must have to exhaust all legal remedies against the Philippine Fisheries Commission before it can proceed against appellants for collection of loans under their promissory notes, must also be answered in the negative.

The obligation of appellants under the promissory notes not having been released by the assignment of receivables, appellants remain as the principal debtors of appellee bank rather than mere guarantors. The deed of assignment merely guarantees said obligations. That the guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor, and has resorted to all the legal remedies against the debtor, under Article 2058 of the New Civil Code does not therefore apply to them. It is of course of the essence of a contract of pledge or mortgage 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 (Article 2087, New Civil Code). In the instant case, appellants are both the principal debtors and the pledgors or mortgagors. Resort to one is, therefore, resort to the other.

Appellee bank did try to collect on the pledged receivables. As the Emergency Employment Agency (EEA) which issued the receivables had been abolished, the collection had to be coursed through the Office of the President which disapproved the same (Record on Appeal, p. 16). The receivable became virtually worthless leaving appellants' loans from appellee bank unsecured. It is but proper that after their repeated demands made on appellants for the settlement of their obligations, appellee bank should proceed against appellants. It would be an exercise in futility to proceed against a defunct office for the collection of the receivables pledged.

WHEREFORE, the appeal is Dismissed for lack of merit and the appealed decision of the trial court is affirmed in toto.

SO ORDERED.

Fernan, C.J., Gutierrez, Jr. and Cortes, JJ., concur.

Separate Opinions

FELICIANO, J., concurring:

I quite agree with the general reasoning of and the results reached by my distinguished brother Bidin in respect of both of the principal issues he addressed in his opinion.

I would merely wish to add a few lines in respect of the point made by Bidin, J., that "the character of the transactions between the parties is not, however, determined by the language used in the document but by their intention.' This statement is basically not exceptionable, so far as it goes. It might, however, be borne in mind that the intent of the parties to the transaction is to be determined in the first instance, by the very language which they use. The deed of assignment contains language which suggest that the parties intended to effect a complete alienation of title to and rights over the receivables which are the subject of the assignment. This language is comprised of works like "remise," "release and quitclaim" and clauses like "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." The same intent is also suggested by the use of the words "agent and representative of the assignee" in reffering to the assignor.

The point that appears to me to be worth making is that although in its form, the deed of assignment of receivables partakes of the nature of a complete alienation of the receivables assigned, such form should be taken in conjunction with, and indeed must be qualified and controlled by, other language showing an 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 asignee but that title is defeasible being designed to collateralize the principal obligation. Operationally, what this means is that the assignee is burdened with an obligation of 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 formally unlimited conveyance of title, the assignee would have to treat the deed of assignment as no more than a deed of pledge or of chattel mortgage. In other words, in such hypothetical case, should the assignee seek to realize upon the security given to him through the deed of assignment (which would then have to comply with the documentation and registration requirements of a pledge or chattel mortgage), the assignee would have to foreclose upon the securities or credits assigned and place them on public sale and there acquire the same. It should be recalled that under the principle which forbids a pactum commisorium Article 2088, Civil Code), a mortgagee or pledgee is prohibited from simply taking and appropriating the personal property turned over to him as security for the payment of a principal obligation. 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. (Emphasis supplied)

The foregoing is applicable where, as in the present instance, the deed of assignment of receivables combines elements of both a complete or absolute alienation of the credits being assigned and a security arrangement to assure payment of a principal obligation. Where the second element is absent, that is, where there is nothing to indicate that the parties intended the deed of assignment to function as a security device, it would of course follow that the simple absolute conveyance embodied in the deed of assignment would be operative; the assignment would constitute essentially a mode of payment or dacion en pago. Put a little differently, 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. Finally, it might be noted that that deed simply follows a form in standard use in commercial banking.

G.R. No. L-33157June 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 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 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

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