G.R. No.

207348 August 19, 2014

ROWENA R. SALONTE, Petitioner,

vs.
COMMISSION ON AUDIT, CHAIRPERSON MA. GRACIA PULIDO-TAN,
COMMISSIONER JUANITO G. ESPINO, JR., COMMISSIONER HEIDI L. MENDOZA,
and FORTUNATA M. RUBICO, DIRECTOR IV, COA COMMISSION SECRETARIAT,
in their official capacities, Respondents.

DECISION

VELASCO, JR., J.:

The Case

This is a petition for review filed under Rule 64 assailing the February 15, 2008 Decision1 and
November 5, 2012 Resolution,2 denominated as Decision Nos. 2008-018 and 2012-190,
respectively, of the Commission on Audit (COA). The assailed issuances affirmed the Notice of
Disallowance No. (ND) 2000-002-101(97) dated November 14, 2001 issued by Rexy M. Ramos,
COA State Auditor IV, pursuant to COA Assignment Order No. 2000-63.3

The Facts

On April 26, 1989, the City of Mandaue and F.F. Cruz and Co., Inc. (F.F. Cruz) entered into a
Contract of Reclamation4 in which F.F. Cruz, in consideration of a defined land sharing formula
thus stipulated, agreed to undertake, at its own expense, the reclamation of 180 hectares, more or
less, of foreshore and submerged lands fromthe Cabahug Causeway in that city. The timetables,
i.e., commencement of the contract and project completion, are provided in paragraphs 2 and 15
of the Contract which state:

2. COMMENCEMENT. Work on the reclamation shall commence not later than [July 1989],
after thiscontract shall be ratified by the Sanggunian Panlungsod;

xxxx

15. CONTRACT DURATION. The project is estimated to be completed in six (6) years: (3 years
for the dredge-filling and seawall construction and 3 years for the infrastructures completion).
However, if all the infrastructures within the OWNERS share of the project are already
completed within the six (6) year period agreed upon, any extension of time for works to bedone
within the share of the DEVELOPERS, shall be at the discretion of the DEVELOPERS, as a
growing city, changes in requirements of the lot buyers are inevitable.

On a best effort basis, the construction of roadways, drainage system and open spaces in the area
designated as share of the City of Mandaue, shall be completed not later than December 31,
1991. (emphasis supplied)

Subsequently, the parties inked inrelation to the above project a Memorandum of Agreement
(MOA) dated October 24, 19895 whereby the City of Mandaue allowed F.F. Cruz to put up
structures on a portion of a parcel of land owned by the city for the use of and to house F.F. Cruz
personnel assigned at the project site, subject to terms particularly provided in paragraphs 3, 4
and 5 of the MOA:

3) That [F.F. Cruz] desires to use a portion of a parcel of land of the [City of Mandaue]
described under paragraph 1 hereof to the extent of 495 square meters x x x to be used by
them in the construction of their offices to house its personnel to supervise the Mandaue
City Reclamation Project x x x.
 xxxx

4) That the [City of Mandaue] agrees to the desire of [F.F. Cruz] to use a portion of the
parcel of land described under paragraph 1 by [F.F. Cruz] for the latter to use for the
construction of their offices to house its personnel to supervise the said Mandaue City
Reclamation Project with no rental to be paid by [F.F. Cruz] to the [City of Mandaue].

5) That the [City of Mandaue] and [F.F. Cruz] have agreed that upon the completion of
the Mandaue City Reclamation Project, all improvements introduced by [F.F. Cruz] to the
portion of the parcel of land owned by the [City of Mandaue]as described under
paragraph 3 hereof existing upon the completion of the said Mandaue City Reclamation
Project shall ipso facto belong to the [City of Mandaue] in ownershipas compensation for
the use of said parcel of land by [F.F. Cruz] without any rental whatsoever. (emphasis
supplied)

Pursuant to the MOA, F.F. Cruz proceeded to construct the contemplated housing units and other
facilities which included a canteen and a septic tank.

Later developments saw the City of Mandaue undertaking the Metro Cebu Development Project
II (MCDP II), part of which required the widening of the Plaridel Extension Mandaue Causeway.
However, the structures and facilities built by F.F. Cruz subject of the MOA stood in the direct
path of the road widening project. Thus, the Department of Public Works and Highways
(DPWH) and Samuel B. Darza, MCDP II project director, entered into an Agreement to
Demolish, Remove and Reconstruct Improvement dated July 23, 19976 with F.F. Cruz whereby
the latter would demolish the improvements outside of the boundary of the road widening project
and, in return, receive the total amount of PhP 1,084,836.42 in compensation.

Accordingly, petitioner Rowena B.Rances (now Rowena RancesSolante), Human Resource

Management Officer III, prepared and, with the approval of Samuel B. Darza (Darza), then
issued Disbursement Voucher (DV) No. 102-07-88-97 dated July 24, 19977 for PhP
1,084,836.42 in favor of F.F. Cruz. In the voucher, Solante certified that the expense covered by
it was "necessary, lawful and incurred under my direct supervision."

Thereafter, Darza addressed a letter-complaint to the Office of the Ombudsman, Visayas, inviting
attention to several irregularities regarding the implementation of MCDP II. The letter was
referred to the COA which then issued Assignment Order No. 2000-063 for a team to audit the
accounts of MCDP II. Following an audit, the audit team issued Special Audit Office (SAO)
Report No. 2000-28, par. 5 of which states:

F.F. Cruz and Company, Inc. was paid P1,084,836.42 for the cost of the property affected by the
widening of Plaridel Extension, Mandaue Causeway. However, under Section 5 of its MOA with
Mandaue City, the former was no longer the lawful owner of the properties at the time the
payment was made.8

Based on the above findings, the SAO audit team, through Rexy Ramos, issued the adverted ND
2000-002-101-(97)9 disallowing the payment of PhP 1,084,836.42 to F.F. Cruz and naming that
company, Darza and Solante liable for the transaction. Therefrom, Solante sought
reconsideration, while F.F. Cruz appealed, but the motion for reconsideration and the appeal were
jointly denied in Legal and Adjudication Office (LAO) Local Decision No. 2004-040 dated
March 5, 2004, which F.F. Cruz in time appealed to COA Central.

In the meantime, the adverted letter-complaint of Darza was upgraded as an Ombudsman case,
docketed as OMB-V-C-03-0173-C, against Solante, et al., albeit the Ombudsman, by Resolution
of June 29, 2006,10 would subsequently dismiss the same for lack of merit.

The Ruling of the Commission on Audit

In its February 15, 2008 Decision,11 the COA, as indicated at the outset, affirmed ND 2000-002-
101-97 on the strength of the following premises:

From the above provision of the MOA, it is clear that the improvements introduced by F.F. Cruz
x x x would be owned by the City upon completion of the project which under the Contract of
reclamation should have been in 1995. However, the project was not completed in 1995 and even
in 1997 when MDCP paid for these improvements. The fact that the reclamation project had not
yet been completed or turned over to the City of Mandaue by F.F. Cruz in 1997 or two years after
it should have been completed, does not negate the right over such improvements by the City x x
x. Clearly, the intention of the stipulation is for F.F. Cruz x x x to compensate the government for
the use of the land on which the office, pavement, canteen, extension shed, house and septic tank
were erected. Thus, to make the government pay for the cost of the demolished improvements
will defeat the intention of parties as regards compensation due from the contractor for its use of
[the] subject land. Under Article 1315 of the Civil Code, from the moment a contract is
perfected, the parties are bound to the fulfillment to what has been expressly stipulated and all
the consequences which according to their nature, may be in keeping with good faith, usage and
law. Thus, even if the contractual stipulations may turn out to be financially disadvantageous to
any party, such will not relieve any or both parties fromtheir contractual obligations.12
(emphasis supplied)

From such decision, Solante filed a Motion for Reconsideration dated June 28, 2010 purportedly
with Audit Team Leader, Leila Socorro P. Domantay. This motion was denied by the COA in a
Resolution dated November 5, 201213 wherein the commission held:

x x x The arguments of Ms. Solante that as long as the Project has not yet been turned over, the
ownership of the said improvements would not be acquired yet by the City would put the entire
contract at the mercy of F.F. Cruz & Co., Inc., thus, negating the mutuality of contracts principle
expressed in Article 1308 ofthe New Civil Code, which states:

Art. 1308. The contracts must bindboth contracting parties; its validity or compliance cannot be
leftto the will of one of them.

On February 15, 2013, Solante received a Notice of Finality of Decision (NFD)14 stating that the
COA Decision dated February 15, 2008 and Resolution dated November 5, 2012 have become
final and executory, a copy of the Resolution having been served on the parties on November 9,
2012 by registered mail. Notably, Solante never received a copy of the COA Resolution. She
came to get one only on May 8, 2013 after inquiring from the Cebu Central Post Office, which,
in a Certification of Deliverydated May 8, 2013,15 stated that the registered mail containing said
copy was in fact not delivered.

Hence, the instant petition.

The Issue

The resolution of the present controversy rests on the determination of a sole issue: who between
the City ofMandaue and F.F. Cruz owned during the period material the properties that were
demolished.

The Courts Ruling

The petition is meritorious. The COA and its audit team obviously misread the relevant
stipulations of the MOA in relation to the provisions on project completion and termination of
contract of the Mandaue-F.F. Cruz reclamation contract.

Essentially, the COA is alleging that the Contract of Reclamation establishes an obligation on the
part of F.F. Cruz to finish the project within the allotted period of six (6) years from contract
execution in August 1989. Prescinding from this premise, the COA would conclude that after the
six (6)-year period, F.F. Cruz is automatically deemed to be in delay, the contract considered as
completed, and the ownership of the structures built in accordance with the MOA transferred to
the City of Mandaue.

COAs basic position and the arguments holding it together is untenable.

On this point, the Civil Code provision on obligations with a period is relevant. Article 1193
thereof provides:

Article 1193. Obligations for whose fulfillment a day certain has been fixed, shall be demandable
only when that day comes.

Obligations with a resolutory period take effect at once, but terminate upon arrival of the day
certain.

A day certain is understood to bethat which must necessarily come, although it may not be
known when.

If the uncertainty consists in whether the day will come or not, the obligation is conditional, and
it shall be regulated by the rules of the preceding Section. (emphasis supplied)

A plain reading of the Contract ofReclamation reveals that the six (6)-year period provided for
projectcompletion, or, with like effect, termination of the contract was a mere estimateand cannot
be considered a period or a "day certain" inthe context of the aforequoted Art. 1193. To be clear,
par. 15 of the Contract of Reclamation states: "[T]he project is estimated to be completed in six
(6) years." As such, the lapse of six (6) years from the perfection of the contract did not, by itself,
make the obligation to finish the reclamation project demandable, such as to put the obligor in a
state of actionable delay for its inability to finish. Thus, F.F. Cruz cannot be deemed to be in
delay. Parenthetically, the Ombudsman, in a Resolution of June 29, 2006 in OMB-V-C-03-0173-
C, espoused a similar view in dismissing the complaint against Solante, thus:

A careful reading of the pertinent section of the Contract of Reclamation between F.F. Cruz and
Mandaue City, however, would confirm respondents Rances-Solante[s]and Sungahids view that
herein respondent Cruz was still the owner of the subject properties at the time these were
demolished. Indeed, the Contract specifies that the six (6)-year period was no more than an
estimate of the project completion. It was not a fixed period agreed upon. Being so, the mere
lapse of six (6) years from the execution of the Contract, did not by itself deem the reclamation
project completed, muchless bring about the fulfillment of the condition stipulated in the MOA
(on the shift of ownership over the demolished properties). Herein respondent Cruz, and/or his
company, at least on this particular regard, can be said to be still the owner of the structures
along Plaridel Extension x x x, when these were demolished to give way to road widening. It was
nothing but equitable that they get compensated for the damages caused by the demolition.16
(emphasis supplied)

Put a bit differently, the lapse of six (6) years from the perfection of the subject reclamation
contract, withoutmore, could not have automatically vested Mandaue City, under the MOA, with
ownership of the structures.

Moreover, even if we consider the allotted six (6) years within which F.F. Cruz was supposed to
completethe reclamation project, the lapse thereof does not automatically mean thatF.F. Cruz was
in delay. As may be noted, the City of Mandaue never madea demand for the fulfillment of its
obligation under the Contract of Reclamation. Article 1169 of the Civil Code on the interaction
of demand and delay and the exceptions to the requirement of demand relevantly states:

Article 1169. Those obliged to deliver orto do something incur in delay from the time the
obligeejudicially or extrajudicially demands from them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order that delay may exist:

(1) When the obligation or the law expressly so declares; or

(2) When from the nature and the circumstances of the obligation it appears that the
designation of the time when the thing is to be delivered or the service is to be rendered
was a controlling motive for the establishment of the contract; or

(3) When demand would be useless, as when the obligor has rendered it beyond his
power to perform.

In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready
to comply in a proper manner with what is incumbent upon him. From the momentone of the
parties fulfills his obligation, delay by the other begins.

Thus, in J Plus Asia Development Corporation v. Utility Assurance Corporation,17 the Court has
held:

In this jurisdiction, the following requisites must be present in order that the debtor may be in
default: (1) that the obligation be demandable and already liquidated;(2) that the debtor delays
performance; and (3) that the creditor requires the performance judicially or extrajudicially.
(emphasis supplied)

In the instant case, the records are bereft of any document whence to deduce that the City of
Mandaue exactedfrom F.F. Cruz the fulfillment of its obligation under the reclamation contract.
And to be sure, not one of the exceptions to the requisite demand under Art. 1169 is established,
let alone asserted. On the contrary, the then city mayor of Mandaue, no less, absolved F.F. Cruz
from incurring under the premises in delay. In his affidavit dated July 9, 2004,18 then Mayor
Ouano stated:

That although x x x the reclamation wasestimatedto be completed in six years ending in 1995,
the said project however, was not fully completed when the demolition of the mentioned
improvements of [F.F. Cruz] was made x x x [and in fact] up to now the said Mandaue
Reclamation Project has not yet been fully completed and turned over to the City of Mandaue.

x x x [S]ince at the time of the demolition the said improvements actually belonged to [F.F. Cruz]
and the City of Mandaue has no claim whatsoever on the said payment x x x for the demolished
improvements. (emphasis supplied)

As it were, the Mandaue-F.F.Cruz MOA states that the structures built by F .F. Cruz on the
property of the city will belong to the latter only upon the completion of the project. Clearly, the
completion of the project is a suspensive condition that has yet to be fulfilled.1wphi1 Until the
condition arises, ownership of the structures properly pertains to F .F. Cruz.

To be clear, the MOA does not state that the structures shall inure in ownership to the City of
Mandaue after the lapse of six ( 6) years from the execution of the Contract of Reclamation.
What the MOA does provide is that ownership of the structures shall vest upon, or ipso facto
belong to, the City of Mandaue when the Contract of Reclamation shall have been completed.
Logically, before such time, or until the agreed reclamation project is actually finished, F.F. Cruz
owns the structures. The payment of compensation for the demolition thereof is justified. The
disallowance of the payment is without factual and legal basis. COA then gravely abused its
discretion when it decreed the disallowance.

WHEREFORE, the instant petition is GRANTED. Accordingly, the assailed February 15, 2008
Decision, November 5, 2012 Resolution, and Notice of Disallowance No. 2000-002-101 (97)
dated November 14, 2001 issued by the Commission on Audit are hereby REVERSED and SET
ASIDE.
G.R. No. L-47350 April 21, 1981

F. S. DIVINAGRACIA AGRO-COMMERCIAL INC. petitioner,

vs.
HONORABLE COURT OF APPEALS and RUFINO FERNANDEZ, respondents.

GUERRERO, J.:

This is a petition for certiorari to review the decision of the Court of Appeals in CA-G.R. No.
S.P. 06585 entitled "Rufino Q. Fernandez vs. Hon. Ricardo M. Ilarde, et al.," promulgated on
September 22, 1977.

The facts of this case are clear, undisputed and may be summarized briefly as follows:

Private respondent's father was the original lessee of the building and lot owned by the late Doa
Concepcion Gay de Loring and the spouses Mercedes Van Kauffman and Jaime Ibaez de
Aldecoa. This lease dates back to 1899. After his father's demise, private respondent continued
the lease. The building and lot subject of the lease was bought by petitioner herein from the
interest state estate of the original owners for the sum of P250,000.00 on July 9, 1974. Before its
purchase, private respondent was a lessee of the said owners and was paying them a rental of
P1,250.00 a month. After the purchase, the rental corresponding to first half of the month of July,
1974 in the sum of P625.00 was paid by private respondent to the original owners and that of the
second half in the sum of P625.00 to the new owner, petitioner herein. In the continuance of the
lease, it was verbally agreed by and between the petitioner and private respondent that the rental
for the succeeding months would be increased to P2,000.00 starting August, 1974. This went on
until September, 1975. About the second week of October, 1975, private respondent was
informed by a representative of petitioner, Atty. Santiago Divinagracia, that his contract of lease
would terminate on October 31, 1975. When private respondent refused to vacate the premises
on October 31, 1975, petitioner reiterated the advice earlier made in a letter dated November 4,
1975 formally advising him of the termination of the lease on October 31, 1975 and giving him,
the private respondent, a final extension to occupy the premises up to the end of November,
1975, for which reason petitioner refused to accept further payment of rentals for December,
1975. Private respondent in turn informed petitioner that he was depositing his rentals for the
succeeding months with the Clerk of Court.

A complaint for unlawful detainer was filed by herein petitioner against private respondent
before the City Court of Iloilo, Branch I, which rendered a decision in favor of private
respondent, the dispositive portion of which reads:

WHEREFORE, this court hereby renders its decision

a. Dismissing the complaint;

b. Ordering defendant to pay plaintiff the sum of P3,000.00 a month as the

reasonable rent for the use of the premises, beginning January, 1976;

c. Fixing the duration of the lease of defendant which, since 1899 to the present, is
76 years, at one year for every 10 years, i.e., that defendant may continue to lease
the premises for seven and a half (7-1/2) years to commence from finality of the
decision;

without pronouncement as to the costs.

From the decision, petitioner appealed to the Court of First Instance which modified the City
Court's decision by:
 (a) Dismissing the complaint;

(b) Ordering defendant to pay plaintiff the sum of P3,000.00 a month, as the
reasonable rent for the use of the premises, beginning January, 1976; and

(c) Extending the duration of the lease by defendant of plaintiff's property to one
(1) year to commence from finality of the decision;

without pronouncement as to costs.

From the latter decision, private respondent filed a petition for review before the Court of
Appeals which modified the previous decision. The dispositive portion of the Appellate Court's
decision states:

WHEREFORE, and as thus modified, in the sense that the lease should be as it is
hereby extended for another five (5) years, the judgment of the court a quo is
affirmed in all other respects. Without pronouncement as to costs.

From the judgment of the Court of Appeals, petitioner herein appealed by certiorari to this Coat,
assigning a single error involving a legal issue, to wit:

The respondent Court of Appeals committed a grave error in the correct application of Article
1687 of the New Civil Code by extending the lease for another five (5) years which is a grave
abuse of discretion amounting to lack or in excess of its jurisdiction.

Petitioner, in support of the foregoing assigned error argues upon the following considerations:

I. The Court of Appeals practically made a contract between the parties which is
contrary to the spirit and intent of Article 1687 of the New Civil Code;

II. The Court of Appeals did not show that the Court of First instance of Iloilo
Branch V, presided by the Hon. Judge Ricardo M. Ilarde to which this case was
originally appealed, gravely abused its discretion by reducing the term of the lease
to only one (1) year;

III. The conclusion arrived at by the Court of Appeals are contrary to law, the
admitted facts and admission of the parties;

IV. The Court of Appeals did not observe the criteria set out by this honorable
Court in the application of Article 1687 of the New Civil Code in the exercise of
its discretion.

The first and fourth arguments of the petitioner relate solely to the proper application of Article
1687 of the New Civil Code, hence We are constrained to consider and resolve them together.
Petitioner alleges that there was grave abuse of discretion by the Court of Appeals in reckoning
the occupancy of the lessee from 1899 when his predecessor-in-interest was the occupant of the
premises. It should have been reckoned only from his personal occupancy of the premises.
Petitioner further alleges that the Court of Appeals was oblivious of the following facts: (1)
There was a change of ownership - the lessor became owner only on July 9, 1974; (2) The leased
premises is a commercial lot; (3) the Private respondent was made to understand that in the
future, the petitioner may need the premises for its own use; (4) The private respondent has
admitted that he has two stores, one at the premises subject of this case and the other located at
his own commercial building; and (5) The petitioner herein was the one who filed the unlawful
detainer case. It could have been another matter had the private respondent filed an independent
action asking for the fixing of the period of the lease.
Withal, petitioner concluded that the decision of the respondent Court is most unfair, arbitrary
and inequitable. It is unjust and authoritarian. The Court practically made a contract between the
parties. It curtailed the basic human right of the parties of their freedom to contract. Petitioner's
contention is devoid of merit. In the first place, it is beyond dispute that Article 1687 of the New
Civil Code is applicable, which article states:

Art. 1687. If the period for the lease has not been fixed, it is understood to be
from year to year, if the rent agreed upon is annual; from month to month, if it is
monthly, from week to week, if the rent is weekly; and from day to day, if the rent
is to be paid daily. However, even though a monthly rent is paid and no period for
the lease has been set, the court may fix a longer term for the lease after the
lessee has occupied the premises for over one year. ...

Article 1687 of the New Civil Code must be correlated with Article 1197 of the New Civil Code
which provides:

Art. 1197. If the obligation does not fix a period, but from its nature and
circumstances it can be inferred that a period was intended, the court may fix the
duration thereof. ...

Considering both Articles together, it is at once clear and evident that the court is accorded the
power to fix a longer term for the lease, which power is potestative or discretionary in nature.
This prerogative is addressed to the court's sound judgment and is controlled by equitable
considerations. "The court may fix a longer term where equities come into play demanding an
extension." (Divino v. Fable de Marcos, 4 SCRA 186).

It may not, therefore, be contended that the Court of Appeals in the exercise of its discretionary
power under Article 1687 in relation with Article 1197 made a contract between the parties, since
the very purpose of the law is not the fixing of a longer term for the lease, but to make the
indefinite period of lease definite by fixing once and for all the remaining duration of the lease.

Neither can We sustain the factors assigned by the petitioner herein, which the Court of Appeals
refused to appreciate. Squarely resolving these factors that there was a change of ownership, the
lessor became the owner only on July 9, 1974, and that the lease is not recorded in the Registry
of Property, is of no moment. In the first place, that purchaser is bound to continue the lease is
explicit under Article 1676 of the Civil Code, more specifically the same article provides: "The
purchaser of a piece of land which is under a lease that is not recorded in the Registry of
Property may terminate the lease, save when there is a stipulation to the contrary in the contract
of sale, or when the purchaser knows of the existence of the lease." Such knowledge of the lease
was established in the findings of the Court of Appeals, thus:

... that private respondent knew of the existence of such lease is eloquently shown
by the fact that when the private respondent bought the property on July 9, 1974,
the private respondent received only the rental corresponding to the second half of
the month of July, or the sum of P625.00. The rental for the first half of the same
month was in fact paid to the former owner. This circumstance not only shows
that private respondent knew of the existence of such prior lease, but also that
they knew the monthly rental fixed for the lease of the premises. ... we therefore
entertain no doubt that private respondent knew of the existence of such lease and
that from its actuation from August 1974 to September 1975, it allowed the herein
petitioner to continue with the lease indefinitely ... .

Secondly, that the leased premises is a commercial lot finds no legal significance. Article 1687
does not make any qualification nor distinction as to its application. Under the principle of
expressio unius est exclusion alterius, the law applies to both residential and commercial lands as
well. Thirdly, that private respondent was made to understand that in the future the petitioner
may need the premises for its own use is without importance in the case at bar. Whether or not
there was such an understanding would not affect the lease contract existing between the parties.
Such knowledge is not sufficient to terminate an existing contract in compliance with the
provisions of Article 1687. To hold otherwise would be making a fetish of a technicality which
the law abominates Besides, every owner is precisely interested in his own property and the fact
that he may need the property at some future time is beyond human scruples. But then the
question of when such future time win arise is potestative in nature and will depend on the
prevailing circumstances and conditions as well as the acquiescence of the parties, so that by
reason of equity, justice and fairness, Article 1687 supplies the remedy in the event the parties
decide to terminate their contract. Fourthly, that private respondents admitted that he has two
stores, one at the subject premises and the other at his own commercial establishment, does not
alter the applicability of Article 1687, considering the fact that the private respondent's other
store is also tenanted and as the Court of Appeals correctly pointed out, "... It would be most
difficult for him to eject the tenants of his property for him to move in. ... Moreover, petitioner
established his hardware business in the premises since 1946. Any sudden transfer would
certainly affect his business ..." . Finally, the fact that petitioner herein was the one who filed the
unlawful detainer case instead of the private respondent is immaterial considering that private
respondent had in his counterclaim prayed that "the Court fix the term of the lease to ten (10)
years from the final termination of the case." The provision of Article 1687 may be interposed as
a defense in the answer (Imperial Insurance, Inc. v. Simon, 14 SCRA 855), or as a counterclaim
therein. The exercise of the power given to the Court in Article 1687 to extend the period of the
lease when the defendant has been in occupancy of the premises for more than a year, does not
contemplate a separate action for that purpose. That power may be exercised as an incident in the
action for ejectment itself and by the court having jurisdiction over it (Ramirez vs. Sy Chit, 21
SCRA 1364). Moreover, We cannot lose sight of the fact that it would be an idle and costly
procedure to require the lessee to file another action to have the term of the lease fixed, with all
the possible delays and inconveniences attendant upon a lawsuit.

Apropos the second argument that the Court of Appeals did not show that the Court of First
Instance of Iloilo to which this case was originally appealed, gravely abused its discretion, the
petitioner maintains that since it is the lower court which is familiar with the reigning conditions
of each locality. its judgment on the additional term to be granted to the lessee in each case
should not be interfered with on appeal, absent a clear abuse of discretion.

It is well to stress that in a petition for review, the appellate court has the discretion to alter,
modify or affirm the decision brought to it on appeal. In the exercise of such discretion, it may
either increase or decrease the extension of the lease period granted by the lower court.

The onus probandi that the respondent Court committed grave abuse of discretion is upon the
petitioner himself, and not the court reviewing the decision. The petitioner must show on
certiorari that the appellate Court exercised its discretion arbitrarily or despotically. We have
examined the records and We find nothing of importance to warrant a disturbance of the
conclusions reached by the respondent Court of Appeals. In view of Our settled and established
jurisprudence, that when the lower court has jurisdiction over the subject matter of the case, its
actuation in the exercise of such jurisdiction is not correctible by certiorari (Matanog v.
Alejandro, G.R. Nos. L-22502-03, June 30, 1964).

The final argument of the petitioner faults the Court of Appeals' findings as contrary to law,
admitted facts and admission of the parties. The advocation is without merit. It is a legal rule that
not every error in the proceeding or every erroneous conclusion of law or of fact is abuse of
discretion. In the absence of any indication and cogent reason, We will not encroach upon the
respondent Court's prerogative. After a careful perusal of the judgment of the Court of Appeals,
We find no reversible error committed that would warrant the reversal of the present case. We are
in full accord with the findings and conclusions of the respondent Court as the same are final and
binding upon Us. Hence, We again reiterate the voluminous jurisprudence to the effect that
"findings of facts of the Court of Appeals are binding on the Supreme Court and cannot be
reviewed. (Torres v. People, 39 SCRA 28; Heirs of Francisco Pasco v. Han Pia, 45 SCRA 164;
Tolentino v. De Jesus, 56 SCRA 167; Tiongco v. De la Merced, 58 SCRA 89).
We are not unmindful that the foregoing established rule admits of exceptions, such that the
findings of fact of the Court of Appeals may be reviewed by Us:

(1) When the same are grounded entirely on speculation, surmises or conjectures;

(2) When the inference made is manifestly mistaken, absurd or impossible;

(3) When there is grave abuse of discretion:

(4) When the judgment is based on misapprehension of facts; and

(5) When the Court of Appeals, in making its findings, went beyond the issues of
the case and the same are contrary to the admissions of both appellant and
appellee. (Ramos v. CA, 63 SCRA 331; Napolis v. CA, 43 SCRA 301).

We find that not one of the exceptional circumstances aforementioned is present in the case at
bar. The findings of facts of the appealed decision are sufficiently supported by substantial
evidence, and the conclusions drawn therefrom are not against the law or jurisprudence. The
decision of the Court, of Appeals rests on cited doctrinal jurisprudence, justice and equity as it
stated that:

Considering the doctrine laid down in the said decisions (Gregorio Araneta, Inc.
vs. Dolores de Mesa, 35 SCRA 137, and Divino vs. Marcos, et al., 4 SCRA 186),
and the fact that the petitioner had been in the occupancy of the premises since
1899, petitioner's occupancy has gone for no less than 70 years, We, therefore,
find in the broader interest of justice and equity the extension of the lease should
be for a period of five (5) years.

After having gone at length over the records of the present case, and in the light of the above
pronouncement, We are positively convinced that the petitioner is not entitled to the writ of
certiorari. There is absolutely no showing that the respondent Court acted so "arbitrarily",
"despoticall" or "capriciously" as to amount to lack of jurisdiction in reviewing the appealed
decision. It is settled to the point of being elementary that the only question involved in certiorari
is jurisdiction, either want of jurisdiction or excess thereof, and abuse of discretion shall warrant
the issuance of the extraordinary remedy of certiorari when the same is so grave as when the
power is exercised in an arbitrary or despotic manner by reason of passion, prejudice or personal
hostility, and it must be so patent and gross as to amount to an evasion of positive duty, or to a
virtual refusal to perform a duty enjoined, or to act at all, in contemplation of law (Abig v.
Constantino, 2 SCRA 299; Abad Santos v. Province of Tarlac, 67 Phil. 480; Alafriz v. Wable 72
Phil. 278). Even mere abuse of discretion is not sufficient by itself to justify the issuance of a
writ of certiorari. For that purpose, the abuse of discretion must be grave and patent and it must
be shown that it was exercised arbitrarily or despotically. (Travera Luna, Inc. v. Nable, 72 Phil.
278; Villa Rey Transit, Inc. v. Bello, 75 SCRA 735) which is not the case made out by the present
petition.

WHEREFORE, IN VIEW OF THE FOREGOING, the decision of the Court of Appeals is

hereby AFFIRMED, with costs against the petitioner.

SO ORDERED.
G.R. No. L-22558 May 31, 1967

GREGORIO ARANETA, INC., petitioner,

vs.
THE PHILIPPINE SUGAR ESTATES DEVELOPMENT CO., LTD., respondent.

Araneta and Araneta for petitioner.

Rosauro Alvarez and Ernani Cruz Pao for respondent.

REYES, J.B.L., J.:

Petition for certiorari to review a judgment of the Court of Appeals, in its CA-G.R. No. 28249-
R, affirming with modification, an amendatory decision of the Court of First Instance of Manila,
in its Civil Case No. 36303, entitled "Philippine Sugar Estates Development Co., Ltd., plaintiff,
versus J. M. Tuason & Co., Inc. and Gregorio Araneta, Inc., defendants."

As found by the Court of Appeals, the facts of this case are:

J. M. Tuason & Co., Inc. is the owner of a big tract land situated in Quezon City, otherwise
known as the Sta. Mesa Heights Subdivision, and covered by a Torrens title in its name. On July
28, 1950, through Gregorio Araneta, Inc., it (Tuason & Co.) sold a portion thereof with an area of
43,034.4 square meters, more or less, for the sum of P430,514.00, to Philippine Sugar Estates
Development Co., Ltd. The parties stipulated, among in the contract of purchase and sale with
mortgage, that the buyer will

Build on the said parcel land the Sto. Domingo Church and Convent

while the seller for its part will

Construct streets on the NE and NW and SW sides of the land herein sold so that the
latter will be a block surrounded by streets on all four sides; and the street on the NE side
shall be named "Sto. Domingo Avenue;"

The buyer, Philippine Sugar Estates Development Co., Ltd., finished the construction of Sto.
Domingo Church and Convent, but the seller, Gregorio Araneta, Inc., which began constructing
the streets, is unable to finish the construction of the street in the Northeast side named (Sto.
Domingo Avenue) because a certain third-party, by the name of Manuel Abundo, who has been
physically occupying a middle part thereof, refused to vacate the same; hence, on May 7, 1958,
Philippine Sugar Estates Development Co., Lt. filed its complaint against J. M. Tuason & Co.,
Inc., and instance, seeking to compel the latter to comply with their obligation, as stipulated in
the above-mentioned deed of sale, and/or to pay damages in the event they failed or refused to
perform said obligation.

Both defendants J. M. Tuason and Co. and Gregorio Araneta, Inc. answered the complaint, the
latter particularly setting up the principal defense that the action was premature since its
obligation to construct the streets in question was without a definite period which needs to he
fixed first by the court in a proper suit for that purpose before a complaint for specific
performance will prosper.

The issues having been joined, the lower court proceeded with the trial, and upon its termination,
it dismissed plaintiff's complaint (in a decision dated May 31, 1960), upholding the defenses
interposed by defendant Gregorio Araneta, Inc.1wph1.t

Plaintiff moved to reconsider and modify the above decision, praying that the court fix a period
within which defendants will comply with their obligation to construct the streets in question.
Defendant Gregorio Araneta, Inc. opposed said motion, maintaining that plaintiff's complaint did
not expressly or impliedly allege and pray for the fixing of a period to comply with its obligation
and that the evidence presented at the trial was insufficient to warrant the fixing of such a period.

On July 16, 1960, the lower court, after finding that "the proven facts precisely warrants the
fixing of such a period," issued an order granting plaintiff's motion for reconsideration and
amending the dispositive portion of the decision of May 31, 1960, to read as follows:

WHEREFORE, judgment is hereby rendered giving defendant Gregorio Araneta, Inc., a

period of two (2) years from notice hereof, within which to comply with its obligation
under the contract, Annex "A".

Defendant Gregorio Araneta, Inc. presented a motion to reconsider the above quoted order,
which motion, plaintiff opposed.

On August 16, 1960, the lower court denied defendant Gregorio Araneta, Inc's. motion; and the
latter perfected its appeal Court of Appeals.

In said appellate court, defendant-appellant Gregorio Araneta, Inc. contended mainly that the
relief granted, i.e., fixing of a period, under the amendatory decision of July 16, 1960, was not
justified by the pleadings and not supported by the facts submitted at the trial of the case in the
court below and that the relief granted in effect allowed a change of theory after the submission
of the case for decision.

Ruling on the above contention, the appellate court declared that the fixing of a period was
within the pleadings and that there was no true change of theory after the submission of the case
for decision since defendant-appellant Gregorio Araneta, Inc. itself squarely placed said issue by
alleging in paragraph 7 of the affirmative defenses contained in its answer which reads

7. Under the Deed of Sale with Mortgage of July 28, 1950, herein defendant has a
reasonable time within which to comply with its obligations to construct and complete
the streets on the NE, NW and SW sides of the lot in question; that under the
circumstances, said reasonable time has not elapsed;

Disposing of the other issues raised by appellant which were ruled as not meritorious and which
are not decisive in the resolution of the legal issues posed in the instant appeal before us, said
appellate court rendered its decision dated December 27, 1963, the dispositive part of which
reads

IN VIEW WHEREOF, judgment affirmed and modified; as a consequence, defendant is

given two (2) years from the date of finality of this decision to comply with the obligation
to construct streets on the NE, NW and SW sides of the land sold to plaintiff so that the
same would be a block surrounded by streets on all four sides.

Unsuccessful in having the above decision reconsidered, defendant-appellant Gregorio Araneta,

Inc. resorted to a petition for review by certiorari to this Court. We gave it due course.

We agree with the petitioner that the decision of the Court of Appeals, affirming that of the Court
of First Instance is legally untenable. The fixing of a period by the courts under Article 1197 of
the Civil Code of the Philippines is sought to be justified on the basis that petitioner (defendant
below) placed the absence of a period in issue by pleading in its answer that the contract with
respondent Philippine Sugar Estates Development Co., Ltd. gave petitioner Gregorio Araneta,
Inc. "reasonable time within which to comply with its obligation to construct and complete the
streets." Neither of the courts below seems to have noticed that, on the hypothesis stated, what
the answer put in issue was not whether the court should fix the time of performance, but
whether or not the parties agreed that the petitioner should have reasonable time to perform its
part of the bargain. If the contract so provided, then there was a period fixed, a "reasonable
time;" and all that the court should have done was to determine if that reasonable time had
already elapsed when suit was filed if it had passed, then the court should declare that petitioner
had breached the contract, as averred in the complaint, and fix the resulting damages. On the
other hand, if the reasonable time had not yet elapsed, the court perforce was bound to dismiss
the action for being premature. But in no case can it be logically held that under the plea above
quoted, the intervention of the court to fix the period for performance was warranted, for Article
1197 is precisely predicated on the absence of any period fixed by the parties.

Even on the assumption that the court should have found that no reasonable time or no period at
all had been fixed (and the trial court's amended decision nowhere declared any such fact) still,
the complaint not having sought that the Court should set a period, the court could not proceed to
do so unless the complaint in as first amended; for the original decision is clear that the
complaint proceeded on the theory that the period for performance had already elapsed, that the
contract had been breached and defendant was already answerable in damages.

Granting, however, that it lay within the Court's power to fix the period of performance, still the
amended decision is defective in that no basis is stated to support the conclusion that the period
should be set at two years after finality of the judgment. The list paragraph of Article 1197 is
clear that the period can not be set arbitrarily. The law expressly prescribes that

the Court shall determine such period as may under the circumstances been probably
contemplated by the parties.

All that the trial court's amended decision (Rec. on Appeal, p. 124) says in this respect is that
"the proven facts precisely warrant the fixing of such a period," a statement manifestly
insufficient to explain how the two period given to petitioner herein was arrived at.

It must be recalled that Article 1197 of the Civil Code involves a two-step process. The Court
must first determine that "the obligation does not fix a period" (or that the period is made to
depend upon the will of the debtor)," but from the nature and the circumstances it can be inferred
that a period was intended" (Art. 1197, pars. 1 and 2). This preliminary point settled, the Court
must then proceed to the second step, and decide what period was "probably contemplated by the
parties" (Do., par. 3). So that, ultimately, the Court can not fix a period merely because in its
opinion it is or should be reasonable, but must set the time that the parties are shown to have
intended. As the record stands, the trial Court appears to have pulled the two-year period set in
its decision out of thin air, since no circumstances are mentioned to support it. Plainly, this is not
warranted by the Civil Code.

In this connection, it is to be borne in mind that the contract shows that the parties were fully
aware that the land described therein was occupied by squatters, because the fact is expressly
mentioned therein (Rec. on Appeal, Petitioner's Appendix B, pp. 12-13). As the parties must have
known that they could not take the law into their own hands, but must resort to legal processes in
evicting the squatters, they must have realized that the duration of the suits to be brought would
not be under their control nor could the same be determined in advance. The conclusion is thus
forced that the parties must have intended to defer the performance of the obligations under the
contract until the squatters were duly evicted, as contended by the petitioner Gregorio Araneta,
Inc.

The Court of Appeals objected to this conclusion that it would render the date of performance
indefinite. Yet, the circumstances admit no other reasonable view; and this very indefiniteness is
what explains why the agreement did not specify any exact periods or dates of performance.

It follows that there is no justification in law for the setting the date of performance at any other
time than that of the eviction of the squatters occupying the land in question; and in not so
holding, both the trial Court and the Court of Appeals committed reversible error. It is not denied
that the case against one of the squatters, Abundo, was still pending in the Court of Appeals
when its decision in this case was rendered.
In view of the foregoing, the decision appealed from is reversed, and the time for the
performance of the obligations of petitioner Gregorio Araneta, Inc. is hereby fixed at the date
that all the squatters on affected areas are finally evicted therefrom.

Costs against respondent Philippine Sugar Estates Development, Co., Ltd. So ordered.

G.R. No. L-22558 May 31, 1967

GREGORIO ARANETA, INC., petitioner,

vs.
THE PHILIPPINE SUGAR ESTATES DEVELOPMENT CO., LTD., respondent.

Araneta and Araneta for petitioner.

Rosauro Alvarez and Ernani Cruz Pao for respondent.

REYES, J.B.L., J.:

Petition for certiorari to review a judgment of the Court of Appeals, in its CA-G.R. No. 28249-
R, affirming with modification, an amendatory decision of the Court of First Instance of Manila,
in its Civil Case No. 36303, entitled "Philippine Sugar Estates Development Co., Ltd., plaintiff,
versus J. M. Tuason & Co., Inc. and Gregorio Araneta, Inc., defendants."

As found by the Court of Appeals, the facts of this case are:

J. M. Tuason & Co., Inc. is the owner of a big tract land situated in Quezon City, otherwise
known as the Sta. Mesa Heights Subdivision, and covered by a Torrens title in its name. On July
28, 1950, through Gregorio Araneta, Inc., it (Tuason & Co.) sold a portion thereof with an area of
43,034.4 square meters, more or less, for the sum of P430,514.00, to Philippine Sugar Estates
Development Co., Ltd. The parties stipulated, among in the contract of purchase and sale with
mortgage, that the buyer will

Build on the said parcel land the Sto. Domingo Church and Convent

while the seller for its part will

Construct streets on the NE and NW and SW sides of the land herein sold so that the
latter will be a block surrounded by streets on all four sides; and the street on the NE side
shall be named "Sto. Domingo Avenue;"

The buyer, Philippine Sugar Estates Development Co., Ltd., finished the construction of Sto.
Domingo Church and Convent, but the seller, Gregorio Araneta, Inc., which began constructing
the streets, is unable to finish the construction of the street in the Northeast side named (Sto.
Domingo Avenue) because a certain third-party, by the name of Manuel Abundo, who has been
physically occupying a middle part thereof, refused to vacate the same; hence, on May 7, 1958,
Philippine Sugar Estates Development Co., Lt. filed its complaint against J. M. Tuason & Co.,
Inc., and instance, seeking to compel the latter to comply with their obligation, as stipulated in
the above-mentioned deed of sale, and/or to pay damages in the event they failed or refused to
perform said obligation.

Both defendants J. M. Tuason and Co. and Gregorio Araneta, Inc. answered the complaint, the
latter particularly setting up the principal defense that the action was premature since its
obligation to construct the streets in question was without a definite period which needs to he
fixed first by the court in a proper suit for that purpose before a complaint for specific
performance will prosper.
The issues having been joined, the lower court proceeded with the trial, and upon its termination,
it dismissed plaintiff's complaint (in a decision dated May 31, 1960), upholding the defenses
interposed by defendant Gregorio Araneta, Inc.1wph1.t

Plaintiff moved to reconsider and modify the above decision, praying that the court fix a period
within which defendants will comply with their obligation to construct the streets in question.

Defendant Gregorio Araneta, Inc. opposed said motion, maintaining that plaintiff's complaint did
not expressly or impliedly allege and pray for the fixing of a period to comply with its obligation
and that the evidence presented at the trial was insufficient to warrant the fixing of such a period.

On July 16, 1960, the lower court, after finding that "the proven facts precisely warrants the
fixing of such a period," issued an order granting plaintiff's motion for reconsideration and
amending the dispositive portion of the decision of May 31, 1960, to read as follows:

WHEREFORE, judgment is hereby rendered giving defendant Gregorio Araneta, Inc., a

period of two (2) years from notice hereof, within which to comply with its obligation
under the contract, Annex "A".

Defendant Gregorio Araneta, Inc. presented a motion to reconsider the above quoted order,
which motion, plaintiff opposed.

On August 16, 1960, the lower court denied defendant Gregorio Araneta, Inc's. motion; and the
latter perfected its appeal Court of Appeals.

In said appellate court, defendant-appellant Gregorio Araneta, Inc. contended mainly that the
relief granted, i.e., fixing of a period, under the amendatory decision of July 16, 1960, was not
justified by the pleadings and not supported by the facts submitted at the trial of the case in the
court below and that the relief granted in effect allowed a change of theory after the submission
of the case for decision.

Ruling on the above contention, the appellate court declared that the fixing of a period was
within the pleadings and that there was no true change of theory after the submission of the case
for decision since defendant-appellant Gregorio Araneta, Inc. itself squarely placed said issue by
alleging in paragraph 7 of the affirmative defenses contained in its answer which reads

7. Under the Deed of Sale with Mortgage of July 28, 1950, herein defendant has a
reasonable time within which to comply with its obligations to construct and complete
the streets on the NE, NW and SW sides of the lot in question; that under the
circumstances, said reasonable time has not elapsed;

Disposing of the other issues raised by appellant which were ruled as not meritorious and which
are not decisive in the resolution of the legal issues posed in the instant appeal before us, said
appellate court rendered its decision dated December 27, 1963, the dispositive part of which
reads

IN VIEW WHEREOF, judgment affirmed and modified; as a consequence, defendant is

given two (2) years from the date of finality of this decision to comply with the obligation
to construct streets on the NE, NW and SW sides of the land sold to plaintiff so that the
same would be a block surrounded by streets on all four sides.

Unsuccessful in having the above decision reconsidered, defendant-appellant Gregorio Araneta,

Inc. resorted to a petition for review by certiorari to this Court. We gave it due course.

We agree with the petitioner that the decision of the Court of Appeals, affirming that of the Court
of First Instance is legally untenable. The fixing of a period by the courts under Article 1197 of
the Civil Code of the Philippines is sought to be justified on the basis that petitioner (defendant
below) placed the absence of a period in issue by pleading in its answer that the contract with
respondent Philippine Sugar Estates Development Co., Ltd. gave petitioner Gregorio Araneta,
Inc. "reasonable time within which to comply with its obligation to construct and complete the
streets." Neither of the courts below seems to have noticed that, on the hypothesis stated, what
the answer put in issue was not whether the court should fix the time of performance, but
whether or not the parties agreed that the petitioner should have reasonable time to perform its
part of the bargain. If the contract so provided, then there was a period fixed, a "reasonable
time;" and all that the court should have done was to determine if that reasonable time had
already elapsed when suit was filed if it had passed, then the court should declare that petitioner
had breached the contract, as averred in the complaint, and fix the resulting damages. On the
other hand, if the reasonable time had not yet elapsed, the court perforce was bound to dismiss
the action for being premature. But in no case can it be logically held that under the plea above
quoted, the intervention of the court to fix the period for performance was warranted, for Article
1197 is precisely predicated on the absence of any period fixed by the parties.

Even on the assumption that the court should have found that no reasonable time or no period at
all had been fixed (and the trial court's amended decision nowhere declared any such fact) still,
the complaint not having sought that the Court should set a period, the court could not proceed to
do so unless the complaint in as first amended; for the original decision is clear that the
complaint proceeded on the theory that the period for performance had already elapsed, that the
contract had been breached and defendant was already answerable in damages.

Granting, however, that it lay within the Court's power to fix the period of performance, still the
amended decision is defective in that no basis is stated to support the conclusion that the period
should be set at two years after finality of the judgment. The list paragraph of Article 1197 is
clear that the period can not be set arbitrarily. The law expressly prescribes that

the Court shall determine such period as may under the circumstances been probably
contemplated by the parties.

All that the trial court's amended decision (Rec. on Appeal, p. 124) says in this respect is that
"the proven facts precisely warrant the fixing of such a period," a statement manifestly
insufficient to explain how the two period given to petitioner herein was arrived at.

It must be recalled that Article 1197 of the Civil Code involves a two-step process. The Court
must first determine that "the obligation does not fix a period" (or that the period is made to
depend upon the will of the debtor)," but from the nature and the circumstances it can be inferred
that a period was intended" (Art. 1197, pars. 1 and 2). This preliminary point settled, the Court
must then proceed to the second step, and decide what period was "probably contemplated by the
parties" (Do., par. 3). So that, ultimately, the Court can not fix a period merely because in its
opinion it is or should be reasonable, but must set the time that the parties are shown to have
intended. As the record stands, the trial Court appears to have pulled the two-year period set in
its decision out of thin air, since no circumstances are mentioned to support it. Plainly, this is not
warranted by the Civil Code.

In this connection, it is to be borne in mind that the contract shows that the parties were fully
aware that the land described therein was occupied by squatters, because the fact is expressly
mentioned therein (Rec. on Appeal, Petitioner's Appendix B, pp. 12-13). As the parties must have
known that they could not take the law into their own hands, but must resort to legal processes in
evicting the squatters, they must have realized that the duration of the suits to be brought would
not be under their control nor could the same be determined in advance. The conclusion is thus
forced that the parties must have intended to defer the performance of the obligations under the
contract until the squatters were duly evicted, as contended by the petitioner Gregorio Araneta,
Inc.
The Court of Appeals objected to this conclusion that it would render the date of performance
indefinite. Yet, the circumstances admit no other reasonable view; and this very indefiniteness is
what explains why the agreement did not specify any exact periods or dates of performance.

It follows that there is no justification in law for the setting the date of performance at any other
time than that of the eviction of the squatters occupying the land in question; and in not so
holding, both the trial Court and the Court of Appeals committed reversible error. It is not denied
that the case against one of the squatters, Abundo, was still pending in the Court of Appeals
when its decision in this case was rendered.

In view of the foregoing, the decision appealed from is reversed, and the time for the
performance of the obligations of petitioner Gregorio Araneta, Inc. is hereby fixed at the date
that all the squatters on affected areas are finally evicted therefrom.

Costs against respondent Philippine Sugar Estates Development, Co., Ltd. So ordered.

G. R. No. 133250. May 6, 2003]

FRANCISCO I. CHAVEZ, petitioner, vs. PUBLIC ESTATES AUTHORITY and AMARI

COASTAL BAY DEVELOPMENT CORPORATION, respondents.

R ES OLUTIO N

CARPIO, J.:

For resolution of the Court are the following motions: (1) Motion to Inhibit and for Re-
Deliberation filed by respondent Amari Coastal Bay Development Corporation (Amari for
brevity) on September 13, 2002; (2) Motion to Set Case for Hearing on Oral Argument filed by
Amari on August 20, 2002; (3) Motion for Reconsideration and Supplement to Motion for
Reconsideration filed by Amari on July 26, 2002 and August 20, 2002, respectively; (4) Motion
for Reconsideration and Supplement to Motion for Reconsideration filed by respondent Public
Estates Authority (PEA for brevity) on July 26, 2002 and August 8, 2002, respectively; and (5)
Motion for Reconsideration and/or Clarification filed by the Office of the Solicitor General on
July 25, 2002. Petitioner Francisco I. Chavez filed on November 13, 2002 his Consolidated
Opposition to the main and supplemental motions for reconsideration.

To recall, the Courts decision of July 9, 2002 (Decision for brevity) on the instant case states in
its summary:

We can now summarize our conclusions as follows:

1. The 157.84 hectares of reclaimed lands comprising the Freedom Islands, now covered by
certificates of title in the name of PEA, are alienable lands of the public domain. PEA may lease
these lands to private corporations but may not sell or transfer ownership of these lands to private
corporations. PEA may only sell these lands to Philippine citizens, subject to the ownership
limitations in the 1987 Constitution and existing laws.

2. The 592.15 hectares of submerged areas of Manila Bay remain inalienable natural resources of
the public domain until classified as alienable or disposable lands open to disposition and
declared no longer needed for public service. The government can make such classification and
declaration only after PEA has reclaimed these submerged areas. Only then can these lands
qualify as agricultural lands of the public domain, which are the only natural resources the
government can alienate. In their present state, the 592.15 hectares of submerged areas are
inalienable and outside the commerce of man.
3. Since the Amended JVA seeks to transfer to AMARI, a private corporation, ownership of
77.34 hectares of the Freedom Islands, such transfer is void for being contrary to Section 3,
Article XII of the 1987 Constitution which prohibits private corporations from acquiring any
kind of alienable land of the public domain.

4. Since the Amended JVA also seeks to transfer to AMARI ownership of 290.156 hectares of
still submerged areas of Manila Bay, such transfer is void for being contrary to Section 2, Article
XII of the 1987 Constitution which prohibits the alienation of natural resources other than
agricultural lands of the public domain. PEA may reclaim these submerged areas. Thereafter, the
government can classify the reclaimed lands as alienable or disposable, and further declare them
no longer needed for public service. Still, the transfer of such reclaimed alienable lands of the
public domain to AMARI will be void in view of Section 3, Article XII of the 1987 Constitution
which prohibits private corporations from acquiring any kind of alienable land of the public
domain.

Clearly, the Amended JVA violates glaringly Sections 2 and 3, Article XII of the 1987
Constitution. Under Article 1409 of the Civil Code, contracts whose object or purpose is contrary
to law, or whose object is outside the commerce of men, are inexistent and void from the
beginning. The Court must perform its duty to defend and uphold the Constitution, and therefore
declares the Amended JVA null and void ab initio.

Amari seeks the inhibition of Justice Antonio T. Carpio, ponente of the Decision, on the ground
that Justice Carpio, before his appointment to the Court, wrote in his Manila Times column of
July 1, 1997, I have always maintained that the law requires the public bidding of reclamation
projects. Justice Carpio, then a private law practitioner, also stated in the same column, The
Amari-PEA reclamation contract is legally flawed because it was not bid out by the PEA. Amari
claims that because of these statements Justice Carpio should inhibit himself on the grounds of
bias and prejudgment and that the instant case should be re-deliberated after being assigned to a
new ponente.

The motion to inhibit Justice Carpio must be denied for three reasons. First, the motion to inhibit
came after Justice Carpio had already rendered his opinion on the merits of the case. The rule is
that a motion to inhibit must be denied if filed after a member of the Court had already given an
opinion on the merits of the case,[1] the rationale being that a litigant cannot be permitted to
speculate upon the action of the Court xxx (only to) raise an objection of this sort after a decision
has been rendered. Second, as can be readily gleaned from the summary of the Decision quoted
above, the absence of public bidding is not one of the ratio decidendi of the Decision which is
anchored on violation of specific provisions of the Constitution. The absence of public bidding
was not raised as an issue by the parties. The absence of public bidding was mentioned in the
Decision only to complete the discussion on the law affecting reclamation contracts for the
guidance of public officials. At any rate, the Office of the Solicitor General in its Motion for
Reconsideration concedes that the absence of public bidding in the disposition of the Freedom
Islands rendered the Amended JVA null and void.[2] Third, judges and justices are not
disqualified from participating in a case just because they have written legal articles on the law
involved in the case. As stated by the Court in Republic v. Cocofed,[3] -

The mere fact that, as a former columnist, Justice Carpio has written on the coconut levy will not
disqualify him, in the same manner that jurists will not be disqualified just because they may
have given their opinions as textbook writers on the question involved in a case.

Besides, the subject and title of the column in question was The CCP reclamation project and the
column referred to the Amari-PEA contract only in passing in one sentence.

Amaris motion to set the case for oral argument must also be denied since the pleadings of the
parties have discussed exhaustively the issues involved in the case.
The motions for reconsideration reiterate mainly the arguments already discussed in the
Decision. We shall consider in this Resolution only the new arguments raised by respondents.

In its Supplement to Motion for Reconsideration, Amari argues that the Decision should be made
to apply prospectively, not retroactively to cover the Amended JVA. Amari argues that the
existence of a statute or executive order prior to its being adjudged void is an operative fact to
which legal consequences are attached, citing De Agbayani v. PNB,[4] thus:

x x x. It does not admit of doubt that prior to the declaration of nullity such challenged legislative
or executive act must have been in force and had to be complied with. This is so as until after the
judiciary, in an appropriate case, declares its invalidity, it is entitled to obedience and respect.
Parties may have acted under it and may have changed their positions. What could be more
fitting than that in a subsequent litigation regard be had to what has been done while such
legislative or executive act was in operation and presumed to be valid in all respects. It is now
accepted as a doctrine that prior to its being nullified, its existence as a fact must be reckoned
with. This is merely to reflect awareness that precisely because the judiciary is the governmental
organ which has the final say on whether or not a legislative or executive measure is valid, a
period of time may have elapsed before it can exercise the power of judicial review that may lead
to a declaration of nullity. It would be to deprive the law of its quality of fairness and justice
then, if there be no recognition of what had transpired prior to such adjudication.

In the language of an American Supreme Court decision: "The actual existence of a statute, prior
to such a determination [of unconstitutionality], is an operative fact and may have consequences
which cannot justly be ignored. The past cannot always be erased by a new judicial declaration.
The effect of the subsequent ruling as to invalidity may have to be considered in various aspects,
- with respect to particular relations, individual and corporate, and particular conduct, private and
official." This language has been quoted with approval in a resolution in Araneta v. Hill and the
decision in Manila Motor Co., Inc. v. Flores. x x x.

xxx

x x x That before the decision they were not constitutionally infirm was admitted expressly.
There is all the more reason then to yield assent to the now prevailing principle that the existence
of a statute or executive order prior to its being adjudged void is an operative fact to which legal
consequences are attached.

Amari now claims that assuming arguendo that Presidential Decree Nos. 1084 and 1085, and
Executive Order Nos. 525 and 654 are inconsistent with the 1987 Constitution, the limitation
imposed by the Decision on these decrees and executive orders should only be applied
prospectively from the finality of the Decision.

Amari likewise asserts that a new doctrine of the Court cannot operate retroactively if it impairs
vested rights. Amari maintains that the new doctrine embodied in the Decision cannot apply
retroactively on those who relied on the old doctrine in good faith, citing Spouses Benzonan v.
Court of Appeals,[5] thus:

At that time, the prevailing jurisprudence interpreting section 119 of R.A. 141 as amended was
that enunciated in Monge and Tupas cited above. The petitioners Benzonan and respondent Pe
and the DBP are bound by these decisions for pursuant to Article 8 of the Civil Code "judicial
decisions applying or interpreting the laws or the Constitution shall form a part of the legal
system of the Philippines." But while our decisions form part of the law of the land, they are also
subject to Article 4 of the Civil Code which provides that "laws shall have no retroactive effect
unless the contrary is provided." This is expressed in the familiar legal maxim lex prospicit, non
respicit, the law looks forward not backward. The rationale against retroactivity is easy to
perceive. The retroactive application of a law usually divests rights that have already become
vested or impairs the obligations of contract and hence, is unconstitutional (Francisco v. Certeza,
3 SCRA 565 [1961]).
The same consideration underlies our rulings giving only prospective effect to decisions
enunciating new doctrines. Thus, we emphasized in People v. Jabinal, 55 SCRA 607 [1974] "x x
x when a doctrine of this Court is overruled and a different view is adopted, the new doctrine
should be applied prospectively and should not apply to parties who had relied on the old
doctrine and acted on the faith thereof.

There may be special cases where weighty considerations of equity and social justice will
warrant a retroactive application of doctrine to temper the harshness of statutory law as it applies
to poor farmers or their widows and orphans. In the present petitions, however, we find no such
equitable considerations. Not only did the private respondent apply for free agricultural land
when he did not need it and he had no intentions of applying it to the noble purposes behind the
law, he would now repurchase for only P327,995.00, the property purchased by the petitioners in
good faith for P1,650,000.00 in 1979 and which, because of improvements and the appreciating
value of land must be worth more than that amount now.

The buyers in good faith from DBP had a right to rely on our rulings in Monge and Tupas when
they purchased the property from DBP in 1979 or thirteen (13) years ago. Under the rulings in
these two cases, the period to repurchase the disputed lot given to respondent Pe expired on June
18, 1982. He failed to exercise his right. His lost right cannot be revived by relying on the 1988
case of Belisario. The right of petitioners over the subject lot had already become vested as of
that time and cannot be impaired by the retroactive application of the Belisario ruling.

Amaris reliance on De Agbayani and Spouses Benzonan is misplaced. These cases would apply
if the prevailing law or doctrine at the time of the signing of the Amended JVA was that a private
corporation could acquire alienable lands of the public domain, and the Decision annulled the
law or reversed this doctrine. Obviously, this is not the case here.

Under the 1935 Constitution, private corporations were allowed to acquire alienable lands of the
public domain. But since the effectivity of the 1973 Constitution, private corporations were
banned from holding, except by lease, alienable lands of the public domain. The 1987
Constitution continued this constitutional prohibition. The prevailing law before, during and after
the signing of the Amended JVA is that private corporations cannot hold, except by lease,
alienable lands of the public domain. The Decision has not annulled or in any way changed the
law on this matter. The Decision, whether made retroactive or not, does not change the law since
the Decision merely reiterates the law that prevailed since the effectivity of the 1973
Constitution. Thus, De Agbayani, which refers to a law that is invalidated by a decision of the
Court, has no application to the instant case.

Likewise, Spouses Benzonan is inapplicable because it refers to a doctrine of the Court that is
overruled by a subsequent decision which adopts a new doctrine. In the instant case, there is no
previous doctrine that is overruled by the Decision. Since the case of Manila Electric Company
v. Judge Castro-Bartolome,[6] decided on June 29, 1982, the Court has applied consistently the
constitutional provision that private corporations cannot hold, except by lease, alienable lands of
the public domain. The Court reiterated this in numerous cases, and the only dispute in the
application of this constitutional provision is whether the land in question had already become
private property before the effectivity of the 1973 Constitution.[7] If the land was already private
land before the 1973 Constitution because the corporation had possessed it openly, continuously,
exclusively and adversely for at least thirty years since June 12, 1945 or earlier, then the
corporation could apply for judicial confirmation of its imperfect title. But if the land remained
public land upon the effectivity of the 1973 Constitution, then the corporation could never hold,
except by lease, such public land. Indisputably, the Decision does not overrule any previous
doctrine of the Court.

The prevailing doctrine before, during and after the signing of the Amended JVA is that private
corporations cannot hold, except by lease, alienable lands of the public domain. This is one of the
two main reasons why the Decision annulled the Amended JVA. The other main reason is that
submerged areas of Manila Bay, being part of the sea, are inalienable and beyond the commerce
of man, a doctrine that has remained immutable since the Spanish Law on Waters of 1886.
Clearly, the Decision merely reiterates, and does not overrule, any existing judicial doctrine.

Even on the characterization of foreshore lands reclaimed by the government, the Decision does
not overrule existing law or doctrine. Since the adoption of the Regalian doctrine in this
jurisdiction, the sea and its foreshore areas have always been part of the public domain. And
since the enactment of Act No. 1654 on May 18, 1907 until the effectivity of the 1973
Constitution, statutory law never allowed foreshore lands reclaimed by the government to be sold
to private corporations. The 1973 and 1987 Constitution enshrined and expanded the ban to
include any alienable land of the public domain.

There are, of course, decisions of the Court which, while recognizing a violation of the law or
Constitution, hold that the sale or transfer of the land may no longer be invalidated because of
weighty considerations of equity and social justice.[8] The invalidation of the sale or transfer
may also be superfluous if the purpose of the statutory or constitutional ban has been achieved.
But none of these cases apply to Amari.

Thus, the Court has ruled consistently that where a Filipino citizen sells land to an alien who
later sells the land to a Filipino, the invalidity of the first transfer is corrected by the subsequent
sale to a citizen.[9] Similarly, where the alien who buys the land subsequently acquires
Philippine citizenship, the sale is validated since the purpose of the constitutional ban to limit
land ownership to Filipinos has been achieved.[10] In short, the law disregards the constitutional
disqualification of the buyer to hold land if the land is subsequently transferred to a qualified
party, or the buyer himself becomes a qualified party. In the instant case, however, Amari has not
transferred the Freedom Islands, or any portion of it, to any qualified party. In fact, Amari admits
that title to the Freedom Islands still remains with PEA.[11]

The Court has also ruled consistently that a sale or transfer of the land may no longer be
questioned under the principle of res judicata, provided the requisites for res judicata are
present.[12] Under this principle, the courts and the parties are bound by a prior final decision,
otherwise there will be no end to litigation. As the Court declared in Toledo-Banaga v. Court of
Appeals,[13] once a judgement has become final and executory, it can no longer be disturbed no
matter how erroneous it may be. In the instant case, there is no prior final decision adjudicating
the Freedom Islands to Amari.

There are, moreover, special circumstances that disqualify Amari from invoking equity
principles. Amari cannot claim good faith because even before Amari signed the Amended JVA
on March 30, 1999, petitioner had already filed the instant case on April 27, 1998 questioning
precisely the qualification of Amari to acquire the Freedom Islands. Even before the filing of this
petition, two Senate Committees[14] had already approved on September 16, 1997 Senate
Committee Report No. 560. This Report concluded, after a well-publicized investigation into
PEAs sale of the Freedom Islands to Amari, that the Freedom Islands are inalienable lands of the
public domain. Thus, Amari signed the Amended JVA knowing and assuming all the attendant
risks, including the annulment of the Amended JVA.

Amari has also not paid to PEA the full reimbursement cost incurred by PEA in reclaiming the
Freedom Islands. Amari states that it has paid PEA only P300,000,000.00[15] out of the
P1,894,129,200.00 total reimbursement cost agreed upon in the Amended JVA. Moreover, Amari
does not claim to have even initiated the reclamation of the 592.15 hectares of submerged areas
covered in the Amended JVA, or to have started to construct any permanent infrastructure on the
Freedom Islands. In short, Amari does not claim to have introduced any physical improvement or
development on the reclamation project that is the subject of the Amended JVA. And yet Amari
claims that it had already spent a whopping P9,876,108,638.00 as its total development cost as of
June 30, 2002.[16] Amari does not explain how it spent the rest of the P9,876,108,638.00 total
project cost after paying PEA P300,000,000.00. Certainly, Amari cannot claim to be an innocent
purchaser in good faith and for value.
In its Supplement to Motion for Reconsideration, PEA claims that it is similarly situated as the
Bases Conversion Development Authority (BCDA) which under R.A. No. 7227 is tasked to sell
portions of the Metro Manila military camps and other military reservations. PEAs comparison is
incorrect. The Decision states as follows:

As the central implementing agency tasked to undertake reclamation projects nationwide, with
authority to sell reclaimed lands, PEA took the place of DENR as the government agency
charged with leasing or selling reclaimed lands of the public domain. The reclaimed lands being
leased or sold by PEA are not private lands, in the same manner that DENR, when it disposes of
other alienable lands, does not dispose of private lands but alienable lands of the public domain.
Only when qualified private parties acquire these lands will the lands become private lands. In
the hands of the government agency tasked and authorized to dispose of alienable or
disposable lands of the public domain, these lands are still public, not private lands.

PEA is the central implementing agency tasked to undertake reclamation projects nationwide.
PEA took the place of Department of Environment and Natural Resources (DENR for brevity) as
the government agency charged with leasing or selling all reclaimed lands of the public domain.
In the hands of PEA, which took over the leasing and selling functions of DENR, reclaimed
foreshore lands are public lands in the same manner that these same lands would have been
public lands in the hands of DENR. BCDA is an entirely different government entity. BCDA is
authorized by law to sell specific government lands that have long been declared by presidential
proclamations as military reservations for use by the different services of the armed forces under
the Department of National Defense. BCDAs mandate is specific and limited in area, while
PEAs mandate is general and national. BCDA holds government lands that have been granted to
end-user government entities the military services of the armed forces. In contrast, under
Executive Order No. 525, PEA holds the reclaimed public lands, not as an end-user entity, but as
the government agency primarily responsible for integrating, directing, and coordinating all
reclamation projects for and on behalf of the National Government.

In Laurel v. Garcia,[17] cited in the Decision, the Court ruled that land devoted to public use by
the Department of Foreign Affairs, when no longer needed for public use, may be declared
patrimonial property for sale to private parties provided there is a law authorizing such act. Well-
settled is the doctrine that public land granted to an end-user government agency for a specific
public use may subsequently be withdrawn by Congress from public use and declared
patrimonial property to be sold to private parties. R.A. No. 7227 creating the BCDA is a law that
declares specific military reservations no longer needed for defense or military purposes and
reclassifies such lands as patrimonial property for sale to private parties.

Government owned lands, as long they are patrimonial property, can be sold to private parties,
whether Filipino citizens or qualified private corporations. Thus, the so-called Friar Lands
acquired by the government under Act No. 1120 are patrimonial property[18] which even private
corporations can acquire by purchase. Likewise, reclaimed alienable lands of the public domain
if sold or transferred to a public or municipal corporation for a monetary consideration become
patrimonial property in the hands of the public or municipal corporation. Once converted to
patrimonial property, the land may be sold by the public or municipal corporation to private
parties, whether Filipino citizens or qualified private corporations.

We reiterate what we stated in the Decision is the rationale for treating PEA in the same manner
as DENR with respect to reclaimed foreshore lands, thus:

To allow vast areas of reclaimed lands of the public domain to be transferred to PEA as private
lands will sanction a gross violation of the constitutional ban on private corporations from
acquiring any kind of alienable land of the public domain. PEA will simply turn around, as PEA
has now done under the Amended JVA, and transfer several hundreds of hectares of these
reclaimed and still to be reclaimed lands to a single private corporation in only one transaction.
This scheme will effectively nullify the constitutional ban in Section 3, Article XII of the 1987
Constitution which was intended to diffuse equitably the ownership of alienable lands of the
public domain among Filipinos, now numbering over 80 million strong.

This scheme, if allowed, can even be applied to alienable agricultural lands of the public domain
since PEA can acquire x x x any and all kinds of lands. This will open the floodgates to
corporations and even individuals acquiring hundreds, if not thousands, of hectares of alienable
lands of the public domain under the guise that in the hands of PEA these lands are private lands.
This will result in corporations amassing huge landholdings never before seen in this country -
creating the very evil that the constitutional ban was designed to prevent. This will completely
reverse the clear direction of constitutional development in this country. The 1935 Constitution
allowed private corporations to acquire not more than 1,024 hectares of public lands. The 1973
Constitution prohibited private corporations from acquiring any kind of public land, and the 1987
Constitution has unequivocally reiterated this prohibition.

Finally, the Office of the Solicitor General and PEA argue that the cost of reclaiming deeply
submerged areas is enormous and it would be difficult for PEA to accomplish such project
without the participation of private corporations.[19] The Decision does not bar private
corporations from participating in reclamation projects and being paid for their services in
reclaiming lands. What the Decision prohibits, following the explicit constitutional mandate, is
for private corporations to acquire reclaimed lands of the public domain. There is no prohibition
on the directors, officers and stockholders of private corporations, if they are Filipino citizens,
from acquiring at public auction reclaimed alienable lands of the public domain. They can
acquire not more than 12 hectares per individual, and the land thus acquired becomes private
land.

Despite the nullity of the Amended JVA, Amari is not precluded from recovering from PEA in
the proper proceedings, on a quantum meruit basis, whatever Amari may have incurred in
implementing the Amended JVA prior to its declaration of nullity.

WHEREFORE, finding the Motions for Reconsideration to be without merit, the same are
hereby DENIED with FINALITY. The Motion to Inhibit and for Re-Deliberation and the Motion
to Set Case for Hearing on Oral Argument are likewise DENIED.

G.R. No. 206806 June 25, 2014

ARCO PULP AND PAPER CO., INC. and CANDIDA A. SANTOS, Petitioners,
vs.
DAN T. LIM, doing business under the name and style of QUALITY PAPERS & PLASTIC
PRODUCTS ENTERPRISES, Respondent.

DECISION

LEONEN, J.:

Novation must be stated in clear and unequivocal terms to extinguish an obligation. It cannot be
presumed and may be implied only if the old and new contracts are incompatible on every point.

Before us is a petition for review on certiorari1 assailing the Court of Appeals decision2 in CA-
G.R. CV No. 95709, which stemmed from a complaint3 filed in the Regional Trial Court of
Valenzuela City, Branch 171, for collection of sum of money.

The facts are as follows:

Dan T. Lim works in the business of supplying scrap papers, cartons, and other raw materials,
under the name Quality Paper and Plastic Products, Enterprises, to factories engaged in the paper
mill business.4 From February 2007 to March 2007, he delivered scrap papers worth
7,220,968.31 to Arco Pulp and Paper Company, Inc. (Arco Pulp and Paper) through its Chief
Executive Officer and President, Candida A. Santos.5 The parties allegedly agreed that Arco
Pulp and Paper would either pay Dan T. Lim the value of the raw materials or deliver to him
their finished products of equivalent value.6

Dan T. Lim alleged that when he delivered the raw materials, Arco Pulp and Paper issued a post-
dated check dated April 18, 20077 in the amount of 1,487,766.68 as partial payment, with the
assurance that the check would not bounce.8 When he deposited the check on April 18, 2007, it
was dishonored for being drawn against a closed account.9

On the same day, Arco Pulp and Paper and a certain Eric Sy executed a memorandum of
agreement10 where Arco Pulp and Paper bound themselves to deliver their finished products to
Megapack Container Corporation, owned by Eric Sy, for his account. According to the
memorandum, the raw materials would be supplied by Dan T. Lim, through his company, Quality
Paper and Plastic Products. The memorandum of agreement reads as follows:

Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs. Candida A.
Santos and Mr. Eric Sy that ARCO will deliver 600 tons Test Liner 150/175 GSM, full width 76
inches at the price of P18.50 per kg. to Megapack Container for Mr. Eric Sys account. Schedule
of deliveries are as follows:

....

It has been agreed further that the Local OCC materials to be used for the production of the
above Test Liners will be supplied by Quality Paper & Plastic Products Ent., total of 600 Metric
Tons at P6.50 per kg. (price subject to change per advance notice). Quantity of Local OCC
delivery will be based on the quantity of Test Liner delivered to Megapack Container Corp.
based on the above production schedule.11

On May 5, 2007, Dan T.Lim sent a letter12 to Arco Pulp and Paper demanding payment of the
amount of 7,220,968.31, but no payment was made to him.13

Dan T. Lim filed a complaint14 for collection of sum of money with prayer for attachment with
the Regional Trial Court, Branch 171, Valenzuela City, on May 28, 2007. Arco Pulp and Paper
filed its answer15 but failed to have its representatives attend the pre-trial hearing. Hence, the
trial court allowed Dan T. Lim to present his evidence ex parte.16

On September 19, 2008, the trial court rendered a judgment in favor of Arco Pulp and Paper and
dismissed the complaint, holding that when Arco Pulp and Paper and Eric Sy entered into the
memorandum of agreement, novation took place, which extinguished Arco Pulp and Papers
obligation to Dan T. Lim.17

Dan T. Lim appealed18 the judgment with the Court of Appeals. According to him, novation did
not take place since the memorandum of agreement between Arco Pulp and Paper and Eric Sy
was an exclusive and private agreement between them. He argued that if his name was
mentioned in the contract, it was only for supplying the parties their required scrap papers, where
his conformity through a separate contract was indispensable.19

On January 11, 2013, the Court of Appeals20 rendered a decision21 reversing and setting aside
the judgment dated September 19, 2008 and ordering Arco Pulp and Paper to jointly and
severally pay Dan T. Lim the amount of P7,220,968.31 with interest at 12% per annum from the
time of demand; P50,000.00 moral damages; P50,000.00 exemplary damages; and P50,000.00
attorneys fees.22

The appellate court ruled that the facts and circumstances in this case clearly showed the
existence of an alternative obligation.23 It also ruled that Dan T. Lim was entitled to damages
and attorneys fees due to the bad faith exhibited by Arco Pulp and Paper in not honoring its
undertaking.24

Its motion for reconsideration25 having been denied,26 Arco Pulp and Paper and its President
and Chief Executive Officer, Candida A. Santos, bring this petition for review on certiorari.

On one hand, petitioners argue that the execution of the memorandum of agreement constituted a
novation of the original obligation since Eric Sy became the new debtor of respondent. They also
argue that there is no legal basis to hold petitioner Candida A. Santos personally liable for the
transaction that petitioner corporation entered into with respondent. The Court of Appeals, they
allege, also erred in awarding moral and exemplary damages and attorneys fees to respondent
who did not show proof that he was entitled to damages.27

Respondent, on the other hand, argues that the Court of Appeals was correct in ruling that there
was no proper novation in this case. He argues that the Court of Appeals was correct in ordering
the payment of 7,220,968.31 with damages since the debt of petitioners remains unpaid.28 He
also argues that the Court of Appeals was correct in holding petitioners solidarily liable since
petitioner Candida A. Santos was "the prime mover for such outstanding corporate liability."29
In their reply, petitioners reiterate that novation took place since there was nothing in the
memorandum of agreement showing that the obligation was alternative. They also argue that
when respondent allowed them to deliver the finished products to Eric Sy, the original obligation
was novated.30

A rejoinder was submitted by respondent, but it was noted without action in view of A.M. No.
99-2-04-SC dated November 21, 2000.31

The issues to be resolved by this court are as follows:

1. Whether the obligation between the parties was extinguished by novation

2. Whether Candida A. Santos was solidarily liable with Arco Pulp and Paper Co., Inc.

3. Whether moral damages, exemplary damages, and attorneys fees can be awarded

The petition is denied.

The obligation between the

parties was an alternative
obligation

The rule on alternative obligations is governed by Article 1199 of the Civil Code, which states:

Article 1199. A person alternatively bound by different prestations shall completely perform one
of them.

The creditor cannot be compelled to receive part of one and part of the other undertaking.

"In an alternative obligation, there is more than one object, and the fulfillment of one is
sufficient, determined by the choice of the debtor who generally has the right of election."32 The
right of election is extinguished when the party who may exercise that option categorically and
unequivocally makes his or her choice known.33

The choice of the debtor must also be communicated to the creditor who must receive notice of it
since: The object of this notice is to give the creditor . . . opportunity to express his consent, or to
impugn the election made by the debtor, and only after said notice shall the election take legal
effect when consented by the creditor, or if impugned by the latter, when declared proper by a
competent court.34
According to the factual findings of the trial court and the appellate court, the original contract
between the parties was for respondent to deliver scrap papers worth P7,220,968.31 to petitioner
Arco Pulp and Paper. The payment for this delivery became petitioner Arco Pulp and Papers
obligation. By agreement, petitioner Arco Pulp and Paper, as the debtor, had the option to either
(1) pay the price or(2) deliver the finished products of equivalent value to respondent.35

The appellate court, therefore, correctly identified the obligation between the parties as an
alternative obligation, whereby petitioner Arco Pulp and Paper, after receiving the raw materials
from respondent, would either pay him the price of the raw materials or, in the alternative,
deliver to him the finished products of equivalent value.

When petitioner Arco Pulp and Paper tendered a check to respondent in partial payment for the
scrap papers, they exercised their option to pay the price. Respondents receipt of the check and
his subsequent act of depositing it constituted his notice of petitioner Arco Pulp and Papers
option to pay.

This choice was also shown by the terms of the memorandum of agreement, which was executed
on the same day. The memorandum declared in clear terms that the delivery of petitioner Arco
Pulp and Papers finished products would be to a third person, thereby extinguishing the option
to deliver the finished products of equivalent value to respondent.

The memorandum of
agreement did not constitute
a novation of the original
contract

The trial court erroneously ruled that the execution of the memorandum of agreement constituted
a novation of the contract between the parties. When petitioner Arco Pulp and Paper opted
instead to deliver the finished products to a third person, it did not novate the original obligation
between the parties.

The rules on novation are outlined in the Civil Code, thus:

Article 1291. Obligations may be modified by:

(1) Changing their object or principal conditions;

(2) Substituting the person of the debtor;

(3) Subrogating a third person in the rights of the creditor. (1203)

Article 1292. 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. (1204)

Article 1293. 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. (1205a)

Novation extinguishes an obligation between two parties when there is a substitution of objects
or debtors or when there is subrogation of the creditor. It occurs only when the new contract
declares so "in unequivocal terms" or that "the old and the new obligations be on every point
incompatible with each other."36

Novation was extensively discussed by this court in Garcia v. Llamas:37

Novation is a mode of extinguishing an obligation by changing its objects or principal
obligations, by substituting a new debtor in place of the old one, or by subrogating a third person
to the rights of the creditor. Article 1293 of the Civil Code defines novation as follows:

"Art. 1293. 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 rights mentioned in articles 1236
and 1237."

In general, there are two modes of substituting the person of the debtor: (1) expromision and (2)
delegacion. In expromision, the initiative for the change does not come from and may even be
made without the knowledge of the debtor, since it consists of a third persons assumption of
the obligation. As such, it logically requires the consent of the third person and the creditor. In
delegacion, the debtor offers, and the creditor accepts, a third person who consents to the
substitution and assumes the obligation; thus, the consent of these three persons are necessary.
Both modes of substitution by the debtor require the consent of the creditor.

Novation may also be extinctive or modificatory. It is extinctive when an old obligation is

terminated by the creation of a new one that takes the place of the former. It is merely
modificatory when the old obligation subsists to the extent that it remains compatible with the
amendatory agreement. Whether extinctive or modificatory, novation is made either by changing
the object or the principal conditions, referred to as objective or real novation; or by substituting
the person of the debtor or subrogating a third person to the rights of the creditor, an act known
as subjective or personal novation. For novation to take place, the following requisites must
concur:

1) There must be a previous valid obligation.

2) The parties concerned must agree to a new contract.

3) The old contract must be extinguished.

4) There must be a valid new contract.

Novation may also be express or implied. It is express when the new obligation declares in
unequivocal terms that the old obligation is extinguished. It is implied when the new obligation
is incompatible with the old one on every point. The test of incompatibility is whether the two
obligations can stand together, each one with its own independent existence.38 (Emphasis
supplied)

Because novation requires that it be clear and unequivocal, it is never presumed, thus:

In the civil law setting, novatio is literally construed as to make new. So it is deeply rooted in the
Roman Law jurisprudence, the principle novatio non praesumitur that novation is never
presumed.At bottom, for novation tobe a jural reality, its animus must be ever present, debitum
pro debito basically extinguishing the old obligation for the new one.39 (Emphasis supplied)
There is nothing in the memorandum of agreement that states that with its execution, the
obligation of petitioner Arco Pulp and Paper to respondent would be extinguished. It also does
not state that Eric Sy somehow substituted petitioner Arco Pulp and Paper as respondents debtor.
It merely shows that petitioner Arco Pulp and Paper opted to deliver the finished products to a
third person instead.

The consent of the creditor must also be secured for the novation to be valid:

Novation must be expressly consented to. Moreover, the conflicting intention and acts of the
parties underscore the absence of any express disclosure or circumstances with which to deduce
a clear and unequivocal intent by the parties to novate the old agreement.40 (Emphasis supplied)
In this case, respondent was not privy to the memorandum of agreement, thus, his conformity to
the contract need not be secured. This is clear from the first line of the memorandum, which
states:

Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs. Candida A.
Santos and Mr. Eric Sy. . . .41

If the memorandum of agreement was intended to novate the original agreement between the
parties, respondent must have first agreed to the substitution of Eric Sy as his new debtor. The
memorandum of agreement must also state in clear and unequivocal terms that it has replaced the
original obligation of petitioner Arco Pulp and Paper to respondent. Neither of these
circumstances is present in this case.

Petitioner Arco Pulp and Papers act of tendering partial payment to respondent also conflicts
with their alleged intent to pass on their obligation to Eric Sy. When respondent sent his letter of
demand to petitioner Arco Pulp and Paper, and not to Eric Sy, it showed that the former neither
acknowledged nor consented to the latter as his new debtor. These acts, when taken together,
clearly show that novation did not take place. Since there was no novation, petitioner Arco Pulp
and Papers obligation to respondent remains valid and existing. Petitioner Arco Pulp and Paper,
therefore, must still pay respondent the full amount of P7,220,968.31.

Petitioners are liable for

damages

Under Article 2220 of the Civil Code, moral damages may be awarded in case of breach of
contract where the breach is due to fraud or bad faith:

Art. 2220. Willfull injury to property may be a legal ground for awarding moral damages if the
court should find that, under the circumstances, such damages are justly due. The same rule
applies to breaches of contract where the defendant acted fraudulently or in bad faith. (Emphasis
supplied)

Moral damages are not awarded as a matter of right but only after the party claiming it proved
that the breach was due to fraud or bad faith. As this court stated:

Moral damages are not recoverable simply because a contract has been breached. They are
recoverable only if the party from whom it is claimed acted fraudulently or in bad faith or in
wanton disregard of his contractual obligations. The breach must be wanton, reckless, malicious
or in bad faith, and oppressive or abusive.42

Further, the following requisites must be proven for the recovery of moral damages:

An award of moral damages would require certain conditions to be met, to wit: (1)first, there
must be an injury, whether physical, mental or psychological, clearly sustained by the claimant;
(2) second, there must be culpable act or omission factually established; (3) third, the wrongful
act or omission of the defendant is the proximate cause of the injury sustained by the claimant;
and (4) fourth, the award of damages is predicated on any of the cases stated in Article 2219 of
the Civil Code.43

Here, the injury suffered by respondent is the loss of P7,220,968.31 from his business. This has
remained unpaid since 2007. This injury undoubtedly was caused by petitioner Arco Pulp and
Papers act of refusing to pay its obligations.

When the obligation became due and demandable, petitioner Arco Pulp and Paper not only
issued an unfunded check but also entered into a contract with a third person in an effort to evade
its liability. This proves the third requirement.
As to the fourth requisite, Article 2219 of the Civil Code provides that moral damages may be
awarded in the following instances:

Article 2219. Moral damages may be recovered in the following and analogous cases:

(1) A criminal offense resulting in physical injuries;

(2) Quasi-delicts causing physical injuries;

(3) Seduction, abduction, rape, or other lascivious acts;

(4) Adultery or concubinage;

(5) Illegal or arbitrary detention or arrest;

(6) Illegal search;

(7) Libel, slander or any other form of defamation;

(8) Malicious prosecution;

(9) Acts mentioned in Article 309;

(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.

Breaches of contract done in bad faith, however, are not specified within this enumeration. When
a party breaches a contract, he or she goes against Article 19 of the Civil Code, which states:
Article 19. Every person must, in the exercise of his rights and in the performance of his duties,
act with justice, give everyone his due, and observe honesty and good faith.

Persons who have the right to enter into contractual relations must exercise that right with
honesty and good faith. Failure to do so results in an abuse of that right, which may become the
basis of an action for damages. Article 19, however, cannot be its sole basis:

Article 19 is the general rule which governs the conduct of human relations. By itself, it is not
the basis of an actionable tort. Article 19 describes the degree of care required so that an
actionable tort may arise when it is alleged together with Article 20 or Article 21.44

Article 20 and 21 of the Civil Code are as follows:

Article 20. Every person who, contrary to law, wilfully or negligently causes damage to another,
shall indemnify the latter for the same.

Article 21.Any person who wilfully causes loss or injury to another in a manner that is contrary
to morals, good customs or public policy shall compensate the latter for the damage.

To be actionable, Article 20 requires a violation of law, while Article 21 only concerns with
lawful acts that are contrary to morals, good customs, and public policy:

Article 20 concerns violations of existing law as basis for an injury. It allows recovery should the
act have been willful or negligent. Willful may refer to the intention to do the act and the desire
to achieve the outcome which is considered by the plaintiff in tort action as injurious. Negligence
may refer to a situation where the act was consciously done but without intending the result
which the plaintiff considers as injurious.

Article 21, on the other hand, concerns injuries that may be caused by acts which are not
necessarily proscribed by law. This article requires that the act be willful, that is, that there was
an intention to do the act and a desire to achieve the outcome. In cases under Article 21, the legal
issues revolve around whether such outcome should be considered a legal injury on the part of
the plaintiff or whether the commission of the act was done in violation of the standards of care
required in Article 19.45

When parties act in bad faith and do not faithfully comply with their obligations under contract,
they run the risk of violating Article 1159 of the Civil Code:

Article 1159. Obligations arising from contracts have the force of law between the contracting
parties and should be complied with in good faith.

Article 2219, therefore, is not an exhaustive list of the instances where moral damages may be
recovered since it only specifies, among others, Article 21. When a party reneges on his or her
obligations arising from contracts in bad faith, the act is not only contrary to morals, good
customs, and public policy; it is also a violation of Article 1159. Breaches of contract become the
basis of moral damages, not only under Article 2220, but also under Articles 19 and 20 in
relation to Article 1159.

Moral damages, however, are not recoverable on the mere breach of the contract. Article 2220
requires that the breach be done fraudulently or in bad faith. In Adriano v. Lasala:46

To recover moral damages in an action for breach of contract, the breach must be palpably
wanton, reckless and malicious, in bad faith, oppressive, or abusive. Hence, the person claiming
bad faith must prove its existence by clear and convincing evidence for the law always presumes
good faith.

Bad faith does not simply connote bad judgment or negligence. It imports a dishonest purpose or
some moral obliquity and conscious doing of a wrong, a breach of known duty through some
motive or interest or ill will that partakes of the nature of fraud. It is, therefore, a question of
intention, which can be inferred from ones conduct and/or contemporaneous statements.47
(Emphasis supplied)

Since a finding of bad faith is generally premised on the intent of the doer, it requires an
examination of the circumstances in each case.

When petitioner Arco Pulp and Paper issued a check in partial payment of its obligation to
respondent, it was presumably with the knowledge that it was being drawn against a closed
account. Worse, it attempted to shift their obligations to a third person without the consent of
respondent.

Petitioner Arco Pulp and Papers actions clearly show "a dishonest purpose or some moral
obliquity and conscious doing of a wrong, a breach of known duty through some motive or
interest or ill will that partakes of the nature of fraud."48 Moral damages may, therefore, be
awarded.

Exemplary damages may also be awarded. Under the Civil Code, exemplary damages are due in
the following circumstances:

Article 2232. In contracts and quasi-contracts, the court may award exemplary damages if the
defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.

Article 2233. Exemplary damages cannot be recovered as a matter of right; the court will decide
whether or not they should be adjudicated.

Article 2234. While the amount of the exemplary damages need not be proven, the plaintiff must
show that he is entitled to moral, temperate or compensatory damages before the court may
consider the question of whether or not exemplary damages should be awarded.
In Tankeh v. Development Bank of the Philippines,49 we stated that:

The purpose of exemplary damages is to serve as a deterrent to future and subsequent parties
from the commission of a similar offense. The case of People v. Ranteciting People v. Dalisay
held that:

Also known as punitive or vindictive damages, exemplary or corrective damages are intended
to serve as a deterrent to serious wrong doings, and as a vindication of undue sufferings and
wanton invasion of the rights of an injured or a punishment for those guilty of outrageous
conduct. These terms are generally, but not always, used interchangeably. In common law, there
is preference in the use of exemplary damages when the award is to account for injury to feelings
and for the sense of indignity and humiliation suffered by a person as a result of an injury that
has been maliciously and wantonly inflicted, the theory being that there should be compensation
for the hurt caused by the highly reprehensible conduct of the defendantassociated with such
circumstances as willfulness, wantonness, malice, gross negligence or recklessness, oppression,
insult or fraud or gross fraudthat intensifies the injury. The terms punitive or vindictive
damages are often used to refer to those species of damages that may be awarded against a
person to punish him for his outrageous conduct. In either case, these damages are intended in
good measure to deter the wrongdoer and others like him from similar conduct in the future.50
(Emphasis supplied; citations omitted)

The requisites for the award of exemplary damages are as follows:

(1) they may be imposed by way of example in addition to compensatory damages, and
only after the claimant's right to them has been established;

(2) that they cannot be recovered as a matter of right, their determination depending upon
the amount of compensatory damages that may be awarded to the claimant; and

(3) the act must be accompanied by bad faith or done in a wanton, fraudulent, oppressive
or malevolent manner.51

Business owners must always be forthright in their dealings. They cannot be allowed to renege
on their obligations, considering that these obligations were freely entered into by them.
Exemplary damages may also be awarded in this case to serve as a deterrent to those who use
fraudulent means to evade their liabilities.

Since the award of exemplary damages is proper, attorneys fees and cost of the suit may also be
recovered.

Article 2208 of the Civil Code states:

Article 2208. In the absence of stipulation, attorney's fees and expenses of litigation, other than
judicial costs, cannot be recovered, except:

(1) When exemplary damages are awarded[.]

Petitioner Candida A. Santos
is solidarily liable with
petitioner corporation

Petitioners argue that the finding of solidary liability was erroneous since no evidence was
adduced to prove that the transaction was also a personal undertaking of petitioner Santos. We
disagree.

In Heirs of Fe Tan Uy v. International Exchange Bank,52 we stated that:

Basic is the rule in corporation law that a corporation is a juridical entity which is vested with a
legal personality separate and distinct from those acting for and in its behalf and, in general, from
the people comprising it. Following this principle, obligations incurred by the corporation, acting
through its directors, officers and employees, are its sole liabilities. A director, officer or
employee of a corporation is generally not held personally liable for obligations incurred by the
corporation. Nevertheless, this legal fiction may be disregarded if it is used as a means to
perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing obligation, the
circumvention of statutes, or to confuse legitimate issues.

....

Before a director or officer of a corporation can be held personally liable for corporate
obligations, however, the following requisites must concur: (1) the complainant must allege in
the complaint that the director or officer assented to patently unlawful acts of the corporation, or
that the officer was guilty of gross negligence or bad faith; and (2) the complainant must clearly
and convincingly prove such unlawful acts, negligence or bad faith.

While it is true that the determination of the existence of any of the circumstances that would
warrant the piercing of the veil of corporate fiction is a question of fact which cannot be the
subject of a petition for review on certiorari under Rule 45, this Court can take cognizance of
factual issues if the findings of the lower court are not supported by the evidence on record or are
based on a misapprehension of facts.53 (Emphasis supplied)

As a general rule, directors, officers, or employees of a corporation cannot be held personally

liable for obligations incurred by the corporation. However, this veil of corporate fiction may be
pierced if complainant is able to prove, as in this case, that (1) the officer is guilty of negligence
or bad faith, and (2) such negligence or bad faith was clearly and convincingly proven.

Here, petitioner Santos entered into a contract with respondent in her capacity as the President
and Chief Executive Officer of Arco Pulp and Paper. She also issued the check in partial payment
of petitioner corporations obligations to respondent on behalf of petitioner Arco Pulp and Paper.
This is clear on the face of the check bearing the account name, "Arco Pulp & Paper, Co.,
Inc."54 Any obligation arising from these acts would not, ordinarily, be petitioner Santos
personal undertaking for which she would be solidarily liable with petitioner Arco Pulp and
Paper.

We find, however, that the corporate veil must be pierced. In Livesey v. Binswanger
Philippines:55

Piercing the veil of corporate fiction is an equitable doctrine developed to address situations
where the separate corporate personality of a corporation is abused or used for wrongful
purposes. Under the doctrine, the corporate existence may be disregarded where the entity is
formed or used for non-legitimate purposes, such as to evade a just and due obligation, or to
justify a wrong, to shield or perpetrate fraud or to carry out similar or inequitable considerations,
other unjustifiable aims or intentions, in which case, the fiction will be disregarded and the
individuals composing it and the two corporations will be treated as identical.56 (Emphasis
supplied)

According to the Court of Appeals, petitioner Santos was solidarily liable with petitioner Arco
Pulp and Paper, stating that:

In the present case, We find bad faith on the part of the [petitioners] when they unjustifiably
refused to honor their undertaking in favor of the [respondent]. After the check in the amount of
1,487,766.68 issued by [petitioner] Santos was dishonored for being drawn against a closed
account, [petitioner] corporation denied any privity with [respondent]. These acts prompted the
[respondent] to avail of the remedies provided by law in order to protect his rights.57
We agree with the Court of Appeals. Petitioner Santos cannot be allowed to hide behind the
corporate veil.1wphi1 When petitioner Arco Pulp and Papers obligation to respondent became
due and demandable, she not only issued an unfunded check but also contracted with a third
party in an effort to shift petitioner Arco Pulp and Papers liability. She unjustifiably refused to
honor petitioner corporations obligations to respondent. These acts clearly amount to bad faith.
In this instance, the corporate veil may be pierced, and petitioner Santos may be held solidarily
liable with petitioner Arco Pulp and Paper.

The rate of interest due on

the obligation must be
reduced in view of Nacar v.
Gallery Frames58

In view, however, of the promulgation by this court of the decision dated August 13, 2013 in
Nacar v. Gallery Frames,59 the rate of interest due on the obligation must be modified from 12%
per annum to 6% per annum from the time of demand.

Nacar effectively amended the guidelines stated in Eastern Shipping v. Court of Appeals,60 and
we have laid down the following guidelines with regard to the rate of legal interest:

To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping
Linesare accordingly modified to embody BSP-MB Circular No. 799, as follows:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or
quasi-delicts is breached, the contravenor can be held liable for damages. The provisions under
Title XVIII on "Damages" of the Civil Code govern in determining the measure of recoverable
damages.

II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e.,
a loan or forbearance of money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the
time it is judicially demanded. In the absence of stipulation, the rate of interest shall be
6% per annum to be computed from default, i.e., from judicial or extrajudicial demand
under and subject to the provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an

interest on the amount of damages awarded may be imposed at the discretion of the court
at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated
claims or damages, except when or until the demand can be established with reasonable
certainty. Accordingly, where the demand is established with reasonable certainty, the
interest shall begin to run from the time the claim is made judicially or extrajudicially
(Art. 1169, Civil Code), but when such certainty cannot be so reasonably established at
the time the demand is made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of damages may be
deemed to have been reasonably ascertained). The actual base for the computation of
legal interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph
2, above, shall be 6% per annum from such finality until its satisfaction, this interim
period being deemed to be by then an equivalent to a forbearance of credit.
And, in addition to the above, judgments that have become final and executory prior to July 1,
2013, shall not be disturbed and shall continue to be implemented applying the rate of interest
fixed therein.61 (Emphasis supplied; citations omitted.)

According to these guidelines, the interest due on the obligation of P7,220,968.31 should now be
at 6% per annum, computed from May 5, 2007, when respondent sent his letter of demand to
petitioners. This interest shall continue to be due from the finality of this decision until its full
satisfaction.

WHEREFORE, the petition is DENIED in part. The decision in CA-G.R. CV No. 95709 is
AFFIRMED.

Petitioners Arco Pulp & Paper Co., Inc. and Candida A. Santos are hereby ordered solidarily to
pay respondent Dan T. Lim the amount of P7,220,968.31 with interest of 6% per annum at the
time of demand until finality of judgment and its full satisfaction, with moral damages in the
amount of P50,000.00, exemplary damages in the amount of P50,000.00, and attorney's fees in
the amount of P50,000.00.

SO ORDERED.