1

OBLIGATIONS & CONTRACTS (Case Digests)

AGNER v. BPI
SAVINGS
Facts: Spouses executed a Promissory Note with Chattel Mortgage in favor of Citimotors, Inc. The
contract provides, among others, that: for receiving the amount of Php834, 768.00, petitioners shall
pay Php 17,391.00 every 15111 day of each succeeding month until fully paid; the loan is secured by a
2001 Mitsubishi Adventure Super Sport; and an interest of 6% per month shall be imposed for failure to
pay each installment on or before the stated due date. On thasame day, Citimotors signed all its credit
to ABN AMRO. ABN AMRO then assigned also its credit to BPI Savings Bank.
For failure to pay four successive installments BPI, through counsel, sent to petitioners a demand letter
declaring the entire obligation as due and demandable and requiring to pay Php576,664.04, or
surrender the mortgaged vehicle immediately upon receiving the letter.
As the demand was left unheeded, BPI filed on an action for Replevin and Damages before the Manila
Regional Trial Court (RTC).
A writ of replevin was issued. Despite this, the subject vehicle was not seized.
RTC ordered petitioners to jointly and severally pay the amount of Php576,664.04 plus interest at the
rate of 72% per annum from August 20, 2002 until fully paid, and the costs of suit.
CA upheld the ruling of the RTC.
Issue: W/N petitioners cannot be considered to have defaulted in payment for lack of competent proof
that they received the demand letter.
Held: As to the second issue, records bear that both verbal and written demands were in fact made by
respondent prior to the institution of the case against petitioners. Even assuming, for arguments sake,
that no demand letter was sent by respondent, there is really no need for it because petitioners legally
waived the necessity of notice or demand in the Promissory Note with Chattel Mortgage, which they
voluntarily and knowingly signed in favor of respondents predecessor-in-interest. Said contract
expressly stipulates:
In case of my/our failure to pay when due and payable, any sum which I/We are obliged to pay under
this note and/or any other obligation which I/We or any of us may now or in the future owe to the
holder of this note or to any other party whether as principal or guarantor x x x then the entire sum
outstanding under this note shall, without prior notice or demand, immediately become due and
payable.
A provision on waiver of notice or demand has been recognized as legal and valid in Bank of the
Philippine Islands v. Court of Appeals, wherein We held:
The Civil Code in Article 1169 provides that one incurs in delay or is in default from the time the obligor
demands the fulfillment of the obligation from the obligee. However, the law expressly provides that
demand is not necessary under certain circumstances, and one of these circumstances is when the
parties expressly waive demand. Hence, since the co-signors expressly waived demand in the
promissory notes, demand was unnecessary for them to be in default.
Further, the Court even ruled in Navarro v. Escobido that priordemand is not a condition precedent to
an action for a writ of replevin, since there is nothing in Section 2, Rule 60 of the Rules of Court that
requires the applicant to make a demand on the possessor of the property before an action for a writ of
replevin could be filed.
Also, petitioners representation that they have not received a demand letter is completely
inconsequential as the mere act of sending it would suffice. Again, We look into the Promissory Note
with Chattel Mortgage, which provides:
All correspondence relative to this mortgage, including demand letters, summonses, subpoenas, or
notifications of any judicial or extrajudicial action shall be sent to the MORTGAGOR at the address
indicated on this promissory note with chattel mortgage or at the address that may hereafter be given
in writing by the MORTGAGOR to the MORTGAGEE or his/its assignee. The mere act of sending any
correspondence by mail or by personal delivery to the said address shall be valid and effective notice
to the mortgagor for all legal purposes and the fact that any communication is not actually received by
the MORTGAGOR or that it has been returned unclaimed to the MORTGAGEE or that no person was
found at the address given, or that the address is fictitious or cannot be located shall not excuse or
relieve the MORTGAGOR from the effects of such notice.
The Court cannot yield to petitioners denial in receiving respondents demand letter. To note, their
postal address evidently remained unchanged from the time they executed the Promissory Note with
Chattel Mortgage up to time the case was filed against them. Thus, the presumption that a letter duly
directed and mailed was received in the regular course of the mail stands in the absence of
satisfactory proof to the contrary.
Petitioners cannot find succour from Ting v. Court of Appeals simply because it pertained to violation of
Batas Pambansa Blg. 22 or the Bouncing Checks Law. As a higher quantum of proof that is, proof
beyond reasonable doubt is required in view of the criminal nature of the case, We found insufficient
the mere presentation of a copy of the demand letter allegedly sent through registered mail and its
corresponding registry receipt as proof of receiving the notice of dishonor.
Perusing over the records, what is clear is that petitioners did not take advantage of all the
opportunities to present their evidence in the proceedings before the courts below. They miserably

OBLIGATIONS & CONTRACTS (Case Digests)

failed to produce the original cash deposit slips proving payment of the monthly amortizations in
question. Not even a photocopy of the alleged proof of payment was appended to their Answer or
shown during the trial. Neither have they demonstrated any written requests to respondent to furnish
them with official receipts or a statement of account. Worse, petitioners were not able to make a
formal offer of evidence considering that they have not marked any documentary evidence during the
presentation of Deo Agners testimony.
Jurisprudence abounds that, in civil cases, one who pleads payment has the burden of proving it; the
burden rests on the defendant to prove payment, rather than on the plaintiff to prove non-payment.
When the creditor is in possession of the document of credit, proof of non-payment is not needed for it
is presumed. Respondent's possession of the Promissory Note with Chattel Mortgage strongly
buttresses its claim that the obligation has not been extinguished. As held in Bank of the Philippine
Islands v. Spouses Royeca:
x x x The creditor's possession of the evidence of debt is proof that the debt has not been discharged
by payment. A promissory note in the hands of the creditor is a proof of indebtedness rather than proof
of payment. In
an action for replevin by a mortgagee, it is prima facie evidence that the promissory note has not been
paid. Likewise, an uncanceled mortgage in the possession of the mortgagee gives rise to the
presumption that the mortgage debt is unpaid.
Indeed, when the existence of a debt is fully established by the evidence contained in the record, the
burden of proving that it has been extinguished by payment devolves upon the debtor who offers such
defense to the claim of the creditor. The debtor has the burden of showing with legal certainty that the
obligation has been discharged by payment.
All the foregoing notwithstanding, We are of the opinion that theinterest of 6% per month should be
equitably reduced to one percent (1%)per month or twelve percent (12%) per annum, to be reckoned
from May 16,2002 until full payment and with the remaining outstanding balance of theircar loan as of
May 15, 2002 as the base amount.
Settled is the principle which this Court has affirmed in a number of cases that stipulated interest rates
of three percent (3%) per month and higher are excessive, iniquitous, unconscionable, and
exorbitant.31 While Central Bank Circular No. 905-82, which took effect on January 1, 1983, effectively
removed the ceiling on interest rates for both secured and unsecured loans, regardless of maturity,
nothing in the said circular could possibly be read as granting carte blanche authority to lenders to
raise interest rates to levels which would either enslave their borrowers or lead to a hemorrhaging of
their assets.32 Since the stipulation on the interest rate is void for being contrary to morals, if not
against the law, it is as if there was no express contract on said interest rate; thus, the interest rate
may be reduced as reason and equity demand.
STRONGHOLD v.
REPUBLIC-ASAHI1
Facts: Republic-Asahi Glass Corporation (Republic-Asahi) entered into a contract with x x x Jose D.
Santos, Jr., the proprietor of JDS Construction (JDS), for the construction of roadways and a drainage
system in Republic-Asahis compound in Barrio Pinagbuhatan, Pasig City, where [respondent] was to
pay x x x JDS five million three hundred thousand pesos (P5,300,000.00) inclusive of value added tax
for said construction, which was supposed to be completed within a period of two hundred forty (240)
days beginning May 8, 1989. In order to guarantee the faithful and satisfactory performance of its
undertakings x x x JDS, shall post a performance bond of seven hundred ninety five thousand pesos
(P795,000.00). x x x JDS executed, jointly and severally with [petitioner] Stronghold Insurance Co., Inc.
(SICI) Performance Bond No. SICI-25849/g(13)9769.
"Several times prior to November of 1989, [respondents] engineers called the attention of x x x JDS to
the alleged alarmingly slow pace of the construction, which resulted in the fear that the construction
will not be finished within the stipulated 240-day period. However, said reminders went unheeded by x
x x JDS. Since Republic-Asahi was dissatisfied with the progress of the work undertaken by x x x JDS,
[respondent] Republic-Asahi extrajudicially rescinded the contract pursuant to Article XIII of said
contract, and wrote a letter to x x x JDS informing the latter of such rescission. Such rescission,
according to Article XV of the contract shall not be construed as a waiver of [respondents] right to
recover damages from x x x JDS and the latters sureties.
"[Respondent] alleged that, as a result of x x x JDSs failure to comply with the provisions of the
contract, which resulted in the said contracts rescission, it had to hire another contractor to finish the
project, for which it incurred an additional expense of three million two hundred fifty six thousand,
eight hundred seventy four pesos (P3,256,874.00).
Since Both letters of Republic-Asahi to both JDS and SICI allegedly went unheeded, it then filed [a]
complaint against x x x JDS and SICI. It sought from x x x JDS payment ofP3,256,874.00 representing
the additional expenses incurred by [respondent] for the completion of the project using another
contractor, and from x x x JDS and SICI, jointly and severally, payment of P750,000.00 as damages in
accordance with the performance bond; exemplary damages in the amount of P100,000.00 and
attorneys fees in the amount of at least P100,000.00.

1 Asurety companys liability under the performance bond it issues is solidary. The death of the principal obligor does not, as a rule, extinguish the
obligation and the solidary nature of that liability.

OBLIGATIONS & CONTRACTS (Case Digests)

"According to the Sheriffs Return, summons were duly served on defendant-appellee SICI. However, x
x x Jose D. Santos, Jr. died the previous year (1990), and x x x JDS Construction was no longer at its
address at 2nd Floor, Room 208-A, San Buena Bldg. Cor. Pioneer St., Pasig, Metro Manila, and its
whereabouts were unknown.
Petitioner contends that the death of Santos, the bond principal, extinguished his liability under the
surety bond. Consequently, it says, it is automatically released from any liability under the bond.
Issue: W/N petitioners liability under the performance bond was automatically extinguished by the
death of Santos, the principal.
Held: As a general rule, the death of either the creditor or the debtor does not extinguish the
obligation.8 Obligations are transmissible to the heirs, except when the transmission is prevented by
the law, the stipulations of the parties, or the nature of the obligation. 9 Only obligations that are
personal10 or are identified with the persons themselves are extinguished by death. 11
Section 5 of Rule 8612 of the Rules of Court expressly allows the prosecution of money claims arising
from a contract against the estate of a deceased debtor. Evidently, those claims are not actually
extinguished.13 What is extinguished is only the obligees action or suit filed before the court, which is
not then acting as a probate court.14
In the present case, whatever monetary liabilities or obligations Santos had under his contracts with
respondent were not intransmissible by their nature, by stipulation, or by provision of law. Hence, his
death did not result in the extinguishment of those obligations or liabilities, which merely passed on to
his estate.15 Death is not a defense that he or his estate can set up to wipe out the obligations under
the performance bond. Consequently, petitioner as surety cannot use his death to escape its monetary
obligation under its performance bond.
The liability of petitioner is contractual in nature, because it executed a performance bond worded as
follows:
"KNOW ALL MEN BY THESE PRESENTS:
"That we, JDS CONSTRUCTION of 208-A San Buena Building, contractor, of Shaw Blvd., Pasig, MM
Philippines, as principal and the STRONGHOLD INSURANCE COMPANY, INC. a corporation duly
organized and existing under and by virtue of the laws of the Philippines with head office at Makati, as
Surety, are held and firmly bound unto the REPUBLIC ASAHI GLASS CORPORATION and to any
individual, firm, partnership, corporation or association supplying the principal with labor or materials
in the penal sum of SEVEN HUNDRED NINETY FIVE THOUSAND (P795,000.00), Philippine Currency, for
the payment of which sum, well and truly to be made, we bind ourselves, our heirs, executors,
administrators, successors and assigns, jointly and severally, firmly by these presents.
"The CONDITIONS OF THIS OBLIGATION are as follows;
"WHEREAS the above bounden principal on the ___ day of __________, 19__ entered into a contract with
the REPUBLIC ASAHI GLASS CORPORATION represented by _________________, to fully and faithfully.
Comply with the site preparation works road and drainage system of Philippine Float Plant at
Pinagbuhatan, Pasig, Metro Manila.
"WHEREAS, the liability of the Surety Company under this bond shall in no case exceed the sum of
PESOS SEVEN HUNDRED NINETY FIVE THOUSAND (P795,000.00) Philippine Currency, inclusive of
interest, attorneys fee, and other damages, and shall not be liable for any advances of the obligee to
the principal.
"WHEREAS, said contract requires the said principal to give a good and sufficient bond in the abovestated sum to secure the full and faithfull performance on its part of said contract, and the satisfaction
of obligations for materials used and labor employed upon the work;
"NOW THEREFORE, if the principal shall perform well and truly and fulfill all the undertakings,
covenants, terms, conditions, and agreements of said contract during the original term of said contract
and any extension thereof that may be granted by the obligee, with notice to the surety and during the
life of any guaranty required under the contract, and shall also perform well and truly and fulfill all the
undertakings, covenants, terms, conditions, and agreements of any and all duly authorized
modifications of said contract that may hereinafter be made, without notice to the surety except when
such modifications increase the contract price; and such principal contractor or his or its subcontractors shall promptly make payment to any individual, firm, partnership, corporation or
association supplying the principal of its sub-contractors with labor and materials in the prosecution of
the work provided for in the said contract, then, this obligation shall be null and void; otherwise it shall
remain in full force and effect. Any extension of the period of time which may be granted by the

OBLIGATIONS & CONTRACTS (Case Digests)

obligee to the contractor shall be considered as given, and any modifications of said contract shall be
considered as authorized, with the express consent of the Surety.
"The right of any individual, firm, partnership, corporation or association supplying the contractor with
labor or materials for the prosecution of the work hereinbefore stated, to institute action on the penal
bond, pursuant to the provision of Act No. 3688, is hereby acknowledge and confirmed." 16
As a surety, petitioner is solidarily liable with Santos in accordance with the Civil Code, which provides
as follows:
"Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.
"If a person binds himself solidarily with the principal debtor, the provisions of Section 4, 17 Chapter 3,
Title I of this Book shall be observed. In such case the contract is called a suretyship."
xxxxxxxxx
"Art. 1216. The creditor may proceed against any one of the solidary debtors or some or all of them
simultaneously. The demand made against one of them shall not be an obstacle to those which may
subsequently be directed against the others, so long as the debt has not been fully collected."
Elucidating on these provisions, the Court in Garcia v. Court of Appeals 18 stated thus:
"x x x. The suretys obligation is not an original and direct one for the performance of his own act, but
merely accessory or collateral to the obligation contracted by the principal. Nevertheless, although
the contract of a surety is in essence secondary only to a valid principal obligation, his
liability to the creditor or promisee of the principal is said to be direct, primary and
absolute; in other words, he is directly and equally bound with the principal. x x x." 19
Under the law and jurisprudence, respondent may sue, separately or together, the principal
debtor and the petitioner herein, in view of the solidary nature of their liability. The death
of the principal debtor will not work to convert, decrease or nullify the substantive right of
the solidary creditor. Evidently, despite the death of the principal debtor, respondent may
still sue petitioner alone, in accordance with the solidary nature of the latters liability
under the performance bond.
PNB v. TAN2
Facts: The government of Bacolod City initiated expropriation proceedings against Tan among others.
After such expropriation, petitioner PNB (Bacolod Branch) was required by the trial court to release to
Tan the amount of P32,480.00 deposited with it by the government.
Thereafter, petitioner, through its Assistant Branch Manager Juan Tagamolila, issued a managers
check for P3 2,480.00 and delivered the same to one Sonia Gonzaga without Tans knowledge, consent

CIVIL LAW; OBLIGATIONS AND CONTRACTS; A DEBT IS PAID BY COMPLETE DELIVERY OF THE THING OR RENDITION OF SERVICE.
- There is no question that no payment had ever been made to private respondent as the check was never delivered to him. When the court
ordered petitioner to pay private respondent the amount of P32,480.00, it had the obligation to deliver the same to him. Under Art. 1233 of the
Civil Code, a debt shall not be understood to have been paid unless the thing or service in which the obligation consists has been completely
delivered or rendered, as the case may be.2. REMEDIAL LAW; EVIDENCE; BURDEN OF PROOF OF PAYMENT OF OBLIGATION LIES WITH
THE DEBTOR; PAYMENT NOT PROVED IN CASE AT BAR. - The burden of proof of such payment lies with the debtor. In the instant case,
neither the SPA nor the check issued by petitioner was ever presented in court. The testimonies of petitioners own witnesses regarding the check
were conflicting. Tagamolila testified that the check was issued to the order of Sonia Gonzaga as attorney-in-fact of Loreto Tan, while Elvira
Tibon, assistant cashier of PNB (Bacolod Branch), stated that the check was issued to the order of Loreto Tan. Furthermore, contrary to
petitioners contention that all that is needed to be proved is the existence of the SPA, it is also necessary for evidence to be presented regarding
the nature and extent of the alleged powers and authority granted to Sonia Gonzaga; more specifically, to determine whether the document
indeed authorized her to receive payment intended for private respondent. However, no such evidence was ever presented.

3.

ID.; ID.; BEST EVIDENCE RULE; WHEN SECONDARY EVIDENCE IS ALLOWED. - Section 4, Rule 130 of the Rules of Court allows the
presentation of secondary evidence when the original is lost or destroyed.

4.

ID.; ID.; ID.; PAYMENT OF OBLIGATION NEGATED BY FAILURE TO PRESENT SPECIAL POWER OF ATTORNEY IN CASE AT BAR.
- Considering that the contents of the SPA are also in issue here, the best evidence rule applies. Hence, only the original document (which has not
been presented at all) is the best evidence of the fact as to whether or not private respondent indeed authorized Sonia Gonzaga to receive the
check from petitioner. In the absence of such document, petitioners arguments regarding due payment must fail.

OBLIGATIONS & CONTRACTS (Case Digests)

or authority. Sonia Gonzaga deposited it in her account with Far East Bank and Trust Co. (FEBTC) and
later on withdrew the said amount.
Private respondent Tan subsequently demanded payment in the amount of P32,480.00 from petitioner,
but the same was refused on the ground that petitioner had already paid and delivered the amount to
Sonia Gonzaga on the strength of a Special Power of Attorney (SPA) allegedly executed in her favor by
Tan.
Tan executed an affidavit before petitioners lawyer, Alejandro S. Somo, stating that:
1) he had never executed any Special Power of Attorney in favor of Sonia S. Gonzaga;
2) he had never authorized Sonia Gonzaga to receive the sum of P32,480.00 from petitioner;
3) he signed a motion for the court to issue an Order to release the said sum of money to him and
gave the same to Mr. Nilo Gonzaga (husband of Sonia) to be filed in court. However, after the Order
was subsequently issued by the court, a certain Engineer Decena of the Highway Engineers Office
issued the authority to release the funds not to him but to Mr. Gonzaga.
When he failed to recover the amount from PNB, private respondent filed a motion with the court to
require PNB to pay the same to him.
Petitioner filed an opposition contending that Sonia Gonzaga presented to it a copy of the May 22,
1978 order and a special power of attorney by virtue of which petitioner delivered the check to her. It
further argued that private respondent had duly authorized Sonia Gonzaga to act as his agent.
Tagamolila, in his answer, stated that Sonia Gonzaga presented a Special Power of Attorney to him but
borrowed it later with the promise to return it, claiming that she needed it to encash the check.
TC ruled in favor of Tan and ordered the Bank and it manager to pay Tan.
CA affirmed TCs decision but modified the award of exemplary damages and deleted the award of
attorneys fees.
PNB argues that the existence of the SPA need not be proved by it under the best evidence rule
because it already proved the existence of the SPA from the testimonies of its witnesses and by the
certification issued by the Far East Bank and Trust Company that it allowed Sonia Gonzaga to encash
Tans check on the basis of the SPA.
Issue: W/N the SPA ever existed.
Held: There is no question that no payment had ever been made to private respondent as the check
was never delivered to him. When the court ordered petitioner to pay private respondent the amount
of P3 2,480.00, it had the obligation to deliver the same to him. Under Art. 1233 of the Civil Code, a
debt shall not be understood to have been paid unless the thing or service in which the obligation
consists has been completely delivered or rendered, as the case may be.
The burden of proof of such payment lies with the debtor. In the instant case, neither the
SPA nor the check issued by petitioner was ever presented in court.
The testimonies of petitioners own witnesses regarding the check were conflicting.
Tagamolila testified that the check was issued to the order of Sonia Gonzaga as attorneyin-fact of Loreto Tan, while Elvira Tibon, assistant cashier of PNB (Bacolod Branch), stated
that the check was issued to the order of Loreto Tan.
Furthermore, contrary to petitioners contention that all that is needed to be proved is the existence of
the SPA, it is also necessary for evidence to be presented regarding the nature and extent
of the alleged powers and authority granted to Sonia Gonzaga; more specifically, to
determine whether the document indeed authorized her to receive payment intended for
private respondent. However, no such evidence was ever presented.
Section 2, Rule 130 of the Rules of Court states that:
SEC. 2. Original writing must be produced; exceptions.
- There can be no evidence of a writing the contents of which is the subject of inquiry, other than the
original writing itself, except in the following cases:
(a) When the original has been lost, destroyed, or cannot be produced in court;
(b) When the original is in the possession of the party against whom the evidence is offered, and the
latter fails to produce it after reasonable notice;
(c) When the original is a record or other document in the custody of a public officer;
(d) When the original has been recorded in an existing record a certified copy of which is made
evidence by law;

OBLIGATIONS & CONTRACTS (Case Digests)

(e) When the original consists of numerous accounts or other documents which cannot be examined in
court without great loss of time and the fact sought to be established from them is only the general
result of the whole.
Section 4, Rule 130 of the Rules of Court allows the presentation of secondary evidence when the
original is lost or destroyed, thus:
SEC. 4. Secondary evidence when original is lost or destroyed. - When the original writing has been
lost or destroyed, or cannot be produced in court, upon proof of its execution and loss or destruction,
or unavailability, its contents may be proved by a copy, or by a recital of its contents in some authentic
document, or by the recollection of witnesses.
Considering that the contents of the SPA are also in issue here, the best evidence rule
applies. Hence, only the original document (which has not been presented at all) is the
best evidence of the fact as to whether or not private respondent indeed authorized Sonia
Gonzaga to receive the check from petitioner. In the absence of such document,
petitioners arguments regarding due payment must fail.
CULABA v. CA
Facts: The spouses Francisco and Demetria Culaba were the owners and proprietors of the Culaba
Store and were engaged in the sale and distribution of San Miguel Corporations (SMC) beer
products. SMC sold beer products on credit to the Culaba spouses in the amount of P28,650.00, as
evidenced by Temporary Credit Invoice No. 42943. [4] Thereafter, the Culaba spouses made a partial
payment of P3,740.00, leaving an unpaid balance of P24,910.00. As they failed to pay despite
repeated demands, SMC filed an action for collection of a sum of money against them before the RTC
of Makati, Branch 138.
The defendant-spouses denied any liability, claiming that they had already paid the plaintiff in full on
four separate occasions. To substantiate this claim, the defendants presented four (4) Temporary
Charge Sales (TCS) Liquidation Receipts
Defendant Francisco Culaba testified that he made the foregoing payments to an SMC supervisor who
came in an SMC van. He was then showed a list of customers accountabilities which included his
account. The defendant, in good faith, then paid to the said supervisor, and he was, in turn, issued
genuine SMC liquidation receipts.
For its part, SMC submitted a publishers affidavit [9] to prove that the entire booklet of TCSL Receipts
bearing Nos. 27301-27350 were reported lost by it, and that it caused the publication of the notice of
loss in the July 9, 1983 issue of the Daily Express, as follows:
NOTICE OF LOSS
OUR CUSTOMERS ARE HEREBY INFORMED THAT TEMPORARY CHARGE SALES LIQUIDATION RECEIPTS
WITH SERIAL NOS. 27301-27350 HAVE BEEN LOST.
ANY TRANSACTION, THEREFORE, ENTERED INTO WITH THE USE OF THE ABOVE RECEIPTS WILL NOT BE
HONORED.
SAN MIGUEL CORPORATION
BEER DIVISION
Makati Beer Region
TC ruled in favor of SMC.
CA upheld the ruling of the TC.
According to the petitioners, receiving receipts from the private respondents agents instead of its
salesmen was a usual occurrence, as they had been operating the store since 1979. Thus, on four
occasions in April 1983, when an agent of the respondent came to the store wearing an SMC uniform
and driving an SMC van, petitioner Francisco Culaba, without question, paid his accounts. He received
the receipts without fear, as they were similar to what he used to receive before. Furthermore, the
petitioners assert that, common experience will attest that unless the attention of the customers is
called for, they would not take note of the serial number of the receipts.
The petitioners contend that the private respondent advertised its warning to the public only after
the damage was done, or on July 9, 1993. Its belated notice showed its glaring lack of interest or
concern for its customers welfare, and, in sum, its negligence.
Anent the second issue, petitioner Francisco Culaba avers that the agent to whom the accounts
were paid had all the physical and material attributes or indications of a representative of the private
respondent, leaving no doubt that he was duly authorized by the latter. Petitioner Francisco Culabas
testimony that he does not necessarily check the contents of the receipts issued to him except for the
amount indicated if [the] same accurately reflects his actual payment is a common attitude of
customers. He could, thus, not be faulted for paying the private respondents agent on four

OBLIGATIONS & CONTRACTS (Case Digests)

occasions. Petitioner Francisco Culaba asserts that he made the payment in good faith, to an agent
who issued SMC receipts which appeared to be genuine. Thus, according to the petitioners, they had
duly paid their obligation in accordance with Articles 1240 and 1242 of the New Civil Code.
The private respondent, for its part, avers that the burden of proving payment is with the debtor,
in consonance with the express provision of Article 1233 of the New Civil Code. The petitioners
miserably failed to prove the self-serving allegation that they already paid their liability to the private
respondent. Furthermore, under normal circumstances, an obligor would not just pay a substantial
amount to someone whom he saw for the first time, without even asking for the latters name.
Issue: W/N the payment of the petitioners obligation to the private respondent was properly made,
thus, extinguishing the same.
Held: A careful study of the records of the case reveal that the appellate court affirmed the trial
courts factual findings as follows:
First. Receipts Nos. 27331, 27318, 27339 and 27346 were included in the private respondents
lost booklet, which loss was duly advertised in a newspaper of general circulation; thus, the private
respondent could not have officially issued them to the petitioners to cover the alleged payments on
the dates appearing thereon.
Second. There was something amiss in the way the receipts were issued to the petitioners, as
one receipt bearing a higher serial number was issued ahead of another receipt bearing a lower serial
number, supposedly covering a later payment. The petitioners failed to explain the apparent mix-up in
these receipts, and no attempt was made in this regard.
Third. The fact that the salesmans name was invariably left blank in the four receipts and that
the petitioners could not even remember the name of the supposed impostor who received the said
payments strongly argue against the veracity of the petitioners claim.
We find no cogent reason to reverse the said findings.
The dismissal of the petition is inevitable even upon close perusal of the merits of the case.
Payment is a mode of extinguishing an obligation. [20] Article 1240 of the Civil Code provides that
payment shall be made to the person in whose favor the obligation has been constituted, or his
successor-in-interest, or any person authorized to receive it. [21] In this case, the payments were
purportedly made to a supervisor of the private respondent, who was clad in an SMC uniform and
drove an SMC van. He appeared to be authorized to accept payments as he showed a list of
customers accountabilities and even issued SMC liquidation receipts which looked genuine.
Unfortunately for petitioner Francisco Culaba, he did not ascertain the identity and authority of the said
supervisor, nor did he ask to be shown any identification to prove that the latter was, indeed, an SMC
supervisor. The petitioners relied solely on the mans representation that he was collecting payments
for SMC. Thus, the payments the petitioners claimed they made were not the payments that
discharged their obligation to the private respondent.
The basis of agency is representation. [22] A person dealing with an agent is put upon inquiry and
must discover upon his peril the authority of the agent. [23] In the instant case, the petitioners loss
could have been avoided if they had simply exercised due diligence in ascertaining the identity of the
person to whom they allegedly made the payments. The fact that they were parting with valuable
consideration should have made them more circumspect in handling their business transactions.
Persons dealing with an assumed agent are bound at their peril to ascertain not only the fact of agency
but also the nature and extent of authority, and in case either is controverted, the burden of proof is
upon them to establish it.[24] The petitioners in this case failed to discharge this burden, considering
that the private respondent vehemently denied that the payments were accepted by it and were made
to its authorized representative.
Negligence is the omission to do something which a reasonable man, guided by those
considerations which ordinarily regulate the conduct of human affairs, would do, or the doing of
something, which a prudent and reasonable man would not do. [25] In the case at bar, the most prudent
thing the petitioners should have done was to ascertain the identity and authority of the person who
collected their payments. Failing this, the petitioners cannot claim that they acted in good faith when
they made such payments. Their claim therefor is negated by their negligence, and they are bound by
its consequences. Being negligent in this regard, the petitioners cannot seek relief on the basis of a
supposed agency.
ALLIED BANKING v.
LIM SIO WAN3
Facts: September 21, 1983: FCC had deposited a money market placement for P 2M with Producers
Bank

Santos was the money market trader assigned to handle FCCs account

Such deposit is evidenced by Official Receipt and a Letter

Lim Sio Wan (deposited 1st money market) > Allied Bank > (pre-terminated and withdrawn) Santos > (through forged indorsement of Lim Sio
Wan deposited in FCC account) Metrobank > (release in exchange of undertaking of reimbursement) FCC > (through Santos, as officer of Producers
bank, deposited money market) Producers Bank.

OBLIGATIONS & CONTRACTS (Case Digests)

When the placement matured, FCC demanded the payment of the proceeds of the placement

November 14, 1983: Lim Sio Wan deposited with Allied Banking Corporation (Allied) amoney
market placement of P 1,152,597.35 for a term of 31 days

December 5, 1983: a person claiming to be Lim Sio Wan called up Cristina So, an officer of Allied, and
instructed the latter to pre-terminate Lim Sio Wans money market placement, to issue a managers
check representing the proceeds of the placement, and to give the check to Deborah Dee Santos who
would pick up the check. Lim Sio Wan described the appearance of Santos

Santos arrived at the bank and signed the application form for a managers check to be issued

The bank issued Managers Check representing the proceeds of Lim Sio Wans money
market placement in the name of Lim Sio Wan, as payee, cross-checked "For Payees Account Only"
and given to Santos

Allied managers check was deposited in the account of Filipinas Cement Corporation (FCC) at
Metropolitan Bank and Trust Co. (Metrobank), with the forged signature of Lim Sio Wan as indorser

Metrobank stamped a guaranty on the check, which reads: "All prior endorsements and/or lack
of endorsement guaranteed."

Upon the presentment of the check, Allied funded the check even without checking the
authenticity of Lim Sio Wans purported indorsement.
amount on the face of the check was credited to the account of FCC

December 9, 1983: Lim Sio Wan deposited with Allied a second money market placement to mature on
January 9, 1984

December 14, 1983: upon the maturity date of the first money market placement, Lim Sio Wan went to
Allied to withdraw it. She was then informed that the placement had been pre-terminated upon her
instructions which she denied

Lim Sio Wan filed with the RTC against Allied to recover the proceeds of her first money
market placement

Allied filed a third party complaint against Metrobank and Santos

Metrobank filed a fourth party complainagainst FCC

FCC for its part filed a fifth party complaint against Producers Bank.

Summonses were duly served upon all the parties except for Santos, who was no longer
connected with Producers Bank

May 15, 1984: Allied informed Metrobank that the signature on the check was forged

Metrobank withheld the amount represented by the check from FCC.

Metrobank agreed to release the amount to FCC after the FCC executed an undertaking,
promising to indemnify Metrobank in case it was made to reimburse the amount

Lim Sio Wan thereafter filed an amended complaint to include Metrobank as a party-defendant,
along with Allied.

RTC : Allied Bank to pay Lim Sio Wan plus damages and atty. fees

Allied Banks cross-claim against Metrobank is DISMISSED.

Metrobanks third-party complaint as against Filipinas Cement Corporation is DISMISSED

Filipinas Cement Corporations fourth-party complaint against Producers Bank is DISMISSED

CA: Modified. Allied Banking Corporation to pay 60% and Metropolitan Bank and Trust Company 40%

Issue: W/N the payment of the bank extinguishes its liability.

Held: No.
The Liability of the Parties
As to the liability of the parties, we find that Allied is liable to Lim Sio Wan. Fundamental and familiar is
the doctrine that the relationship between a bank and a client is one of debtor-creditor.
Articles 1953 and 1980 of the Civil Code provide:

OBLIGATIONS & CONTRACTS (Case Digests)

Art. 1953. A person who receives a loan of money or any other fungible thing acquires the ownership
thereof, and is bound to pay to the creditor an equal amount of the same kind and quality.
Art. 1980. Fixed, savings, and current deposits of money in banks and similar institutions shall be
governed by the provisions concerning simple loan.
Thus, we have ruled in a line of cases that a bank deposit is in the nature of a simple loan or
mutuum.42 More succinctly, in Citibank, N.A. (Formerly First National City Bank) v. Sabeniano, this Court
ruled that a money market placement is a simple loan or mutuum. 43 Further, we defined a money
market in Cebu International Finance Corporation v. Court of Appeals, as follows:
[A] money market is a market dealing in standardized short-term credit instruments (involving large
amounts) where lenders and borrowers do not deal directly with each other but through a middle man
or dealer in open market. In a money market transaction, the investor is a lender who loans his money
to a borrower through a middleman or dealer.
In the case at bar, the money market transaction between the petitioner and the private respondent is
in the nature of a loan.44
Lim Sio Wan, as creditor of the bank for her money market placement, is entitled to payment upon her
request, or upon maturity of the placement, or until the bank is released from its obligation as debtor.
Until any such event, the obligation of Allied to Lim Sio Wan remains unextinguished.
Art. 1231 of the Civil Code enumerates the instances when obligations are considered extinguished,
thus:
Art. 1231. Obligations are extinguished:
(1) By payment or performance;
(2) By the loss of the thing due;
(3) By the condonation or remission of the debt;
(4) By the confusion or merger of the rights of creditor and debtor;
(5) By compensation;
(6) By novation.
Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a
resolutory condition, and prescription, are governed elsewhere in this Code. (Emphasis supplied.)
From the factual findings of the trial and appellate courts that Lim Sio Wan did not authorize the
release of her money market placement to Santos and the bank had been negligent in so doing, there
is no question that the obligation of Allied to pay Lim Sio Wan had not been extinguished. Art. 1240 of
the Code states that "payment shall be made to the person in whose favor the obligation has been
constituted, or his successor in interest, or any person authorized to receive it." As commented by
Arturo Tolentino:
Payment made by the debtor to a wrong party does not extinguish the obligation as to the creditor, if
there is no fault or negligence which can be imputed to the latter. Even when the debtor acted in
utmost good faith and by mistake as to the person of his creditor, or through error induced by the
fraud of a third person, the payment to one who is not in fact his creditor, or authorized to receive such
payment, is void, except as provided in Article 1241. Such payment does not prejudice the creditor,
and accrual of interest is not suspended by it.45 (Emphasis supplied.)
Since there was no effective payment of Lim Sio Wans money market placement, the bank still has an
obligation to pay her at six percent (6%) interest from March 16, 1984 until the payment thereof.
We cannot, however, say outright that Allied is solely liable to Lim Sio Wan.

DELA CRUZ v.
CONCEPCION4
Facts: Spouses Dela Cruz and Concepcion entered into a contract to sell involving a house and lot.
Various stipulations in the contract were made. Thereafter, Concepcion made the following payments,

10

OBLIGATIONS & CONTRACTS (Case Digests)

to wit: (1) P500,000.00 by way of downpayment; (2) P500,000.00 on May 30, 1996; (3) P500,000.00
paid on January 22, 1997; and (4) P500,000.00 bounced check dated June 30, 1997 which was
subsequently replaced by another check of the same amount, dated July 7, 1997. Respondent was,
therefore, able to pay a total of P2,000,000.00.
Before respondent issued the P500,000.00 replacement check, she told petitioners that based on the
computation of her accountant as of July 6, 1997, her unpaid obligation which includes interests and
penalties was only P200,000.00. Petitioners agreed with respondent and said if P200,000.00 is the
correct balance, it is okay with us.
Meanwhile, the title to the property was transferred to respondent. Petitioners later reminded
respondent to pay P209,000.00 within three months. They claimed that the said amount remained
unpaid, despite the transfer of the title to the property to respondent. Several months later, petitioners
made further demands stating the supposed correct computation of respondents liabilities. Despite
repeated demands, petitioners failed to collect the amounts they claimed from respondent. Hence, the
Complaint for Sum of Money With Damages10 filed with the Regional Trial Court (RTC) of Antipolo,
Rizal. The case was docketed as Civil Case No. 98-4716.
In her Answer with Compulsory Counterclaim, respondent claimed that her unpaid obligation to
petitioners is only P200,000.00 as earlier confirmed by petitioners and not P487,384. as later alleged in
the complaint. Respondent thus prayed for the dismissal of the complaint.
RTC rendered its decision in favor of Concepcion.
Issue: W/N respondents obligation had already been extinguished by payment.
Held: Respondents obligation consists of payment of a sum of money. In order to extinguish said
obligation, payment should be made to the proper person as set forth in Article 1240 of the Civil
Code, to wit:
Article 1240. Payment shall be made to the person in whose favor the obligation has been constituted,
or his successor in interest, or any person authorized to receive it.

4 It is undisputed that the parties entered into a contract to sell a house and lot for a total consideration of P2 million. Considering that the property was

payable in installment, they likewise agreed on the payment of interest as well as penalty in case of default. It is likewise settled that respondent was
able to pay the total purchase price of P2 million ahead of the agreed term. After which, they agreed on the remaining balance by way of interest and
penalties which is P200,000.00. Considering that the term of payment was not strictly followed and the purchase price had already been fully paid by
respondent, the latter presented to petitioners her computation of her liabilities for interests and penalties which was agreed to by petitioners.
Petitioners also manifested their conformity to the statement of account prepared by respondent.
In paragraph (9) of petitioners Complaint, they stated that:
But in paragraph (17) thereof, petitioners claimed that defendants outstanding liability as of November 6, 1997 was P487,384.15.28 Different
amounts, however, were claimed in their demand letter and in their testimony in court. With the foregoing factual antecedents, petitioners cannot be
permitted to assert a different computation of the correct amount of respondents liability.
It is noteworthy that in answer to petitioners claim of her purported unpaid obligation, respondent admitted in her Answer with Compulsory
Counterclaim that she paid a total amount of P2 million representing the purchase price of the subject house and lot. She then manifested to petitioners
and conformed to by respondent that her only balance was P200,000.00. Nowhere in her Answer did she allege the defense of payment. However,
during the presentation of her evidence, respondent submitted a receipt to prove that she had already paid the remaining balance. Both the RTC and the
CA concluded that respondent had already paid the remaining balance of P200,000.00. Petitioners now assail this, insisting that the court should have
maintained the judicial admissions of respondent in her Answer with Compulsory Counterclaim, especially as to their agreed stipulations on interests and
penalties as well as the existence of outstanding obligations.
It is, thus, necessary to discuss the effect of failure of respondent to
plead payment of its obligations.
Section 1, Rule 9 of the Rules of Court states that defenses and objections not pleaded either in a motion to dismiss or in the answer are deemed
waived. Hence, respondent should have been barred from raising the defense of payment of the unpaid P200,000.00. However, Section 5, Rule 10 of
the Rules of Court allows the amendment to conform to or authorize presentation of evidence, to wit:
Section 5. Amendment to conform to or authorize presentation of evidence. When issues not raised by the pleadings are tried with the express or
implied consent of the parties, they shall be treated in all respects as if they had been raised in the pleadings. Such amendment of the pleadings as may
be necessary to cause them to conform to the evidence and to raise these issues may be made upon motion of any party at any time, even after
judgment; but failure to amend does not affect the result of the trial of these issues. If evidence is objected to at the trial on the ground that it is not
within the issues made by the pleadings, the court may allow the pleadings to be amended and shall do so with liberality if the presentation of the merits
of the action and the ends of substantial justice will be subserved thereby. The court may grant a continuance to enable the amendment to be made.
The foregoing provision envisions two scenarios, namely, when evidence is introduced in an issue not alleged in the pleadings and no objection was
interjected; and when evidence is offered on an issue not alleged in the pleadings but this time an objection was raised.29 When the issue is tried
without the objection of the parties, it should be treated in all respects as if it had been raised in the pleadings.30 On the other hand, when there is an
objection, the evidence may be admitted where its admission will not prejudice him.
Thus, while respondent judicially admitted in her Answer that she only paid P2 million and that she still owed petitioners P200,000.00, respondent
claimed later and, in fact, submitted an evidence to show that she already paid the whole amount of her unpaid obligation. It is noteworthy that when
respondent presented the evidence of payment, petitioners did not object thereto. When the receipt was formally offered as evidence, petitioners did not
manifest their objection to the admissibility of said document on the ground that payment was not an issue. Apparently, petitioners only denied receipt
of said payment and assailed the authority of Losloso to receive payment. Since there was an implied consent on the part
of petitioners to try the issue of payment, even if no motion was filed and no amendment of the pleading has been ordered,32 the RTC cannot be faulted
for admitting respondents testimonial and documentary evidence to prove payment.
As stressed by the Court in Royal Cargo Corporation v. DFS Sports
Unlimited, Inc.,
The failure of a party to amend a pleading to conform to the evidence adduced during trial does not preclude adjudication by the court on the basis of
such evidence which may embody new issues not raised in the pleadings. x x x Although, the pleading may not have been amended to conform to the
evidence submitted during trial, judgment may nonetheless
be rendered, not simply on the basis of the issues alleged but also on the issues discussed and the assertions of fact proved in the course of the trial.
The court may treat the pleading as if it had been amended to conform to the evidence, although it had not been actually amended. X x x Clearly, a
court may rule and render judgment on the basis of the evidence before it even though the relevant pleading had not been previously amended, so long
as no surprise or prejudice is thereby caused to the adverse party. Put a little differently, so long as the basic requirements of fair play had been met, as
where the litigants were given full opportunity to support their respective contentions and to object to or refute each other's evidence, the court may
validly treat the pleadings as if they had been amended to conform to the evidence and proceed to adjudicate on the basis of all the evidence before it.
To be sure, petitioners were given ample opportunity to refute the fact of and present evidence to prove payment.

11

OBLIGATIONS & CONTRACTS (Case Digests)

The Court explained in Cambroon v. City of Butuan, cited in Republic v. De Guzman, to whom payment
should be made in order to extinguish an obligation:
Payment made by the debtor to the person of the creditor or to one authorized by him or by the law to
receive it extinguishes the obligation.
When payment is made to the wrong party, however, the obligation is not extinguished as to the
creditor who is without fault or negligence even if the debtor acted in utmost good faith and by
mistake as to the person of the creditor or through error induced by fraud of a third person.
In general, a payment in order to be effective to discharge an obligation, must be made to
the proper person. Thus, payment must be made to the obligee himself or to an agent
having authority, express or implied, to receive the particular payment. Payment made to
one having apparent authority to receive the money will, as a rule, be treated as though
actual authority had been given for its receipt. Likewise, if payment is made to one who by
law is authorized to act for the creditor, it will work a discharge. The receipt of money due
on a judgment by an officer authorized by law to accept it will, therefore, satisfy the debt.
Admittedly, payment of the remaining balance of P200,000.00 was not made to the creditors
themselves. Rather, it was allegedly made to a certain Losloso. Respondent claims that Losloso was
the authorized agent of petitioners, but the latter dispute it.
Loslosos authority to receive payment was embodied in petitioners letter addressed to respondent,
dated August 7, 1997, where they informed respondent of the amounts they advanced for the
payment of the 1997 real estate taxes. In said letter, petitioners reminded respondent of her remaining
balance, together with the amount of taxes paid. Taking into consideration the busy schedule of
respondent, petitioners advised the latter to leave the payment to a certain Dori who
admittedly is Losloso, or to her trusted helper. This is an express authority given to Losloso
to receive payment. Moreover, as correctly held by the CA:
Furthermore, that Adoracion Losloso was indeed an agent of the appellant spouses is borne out by the
following admissions of plaintiffappellant Atty. Miniano dela Cruz, to wit:
Q: You would agree with me that you have authorized this Doiry Losloso to receive payment of
whatever balance is due you coming from Ana Marie Concepcion, that is correct?
A: In one or two times but not total authority, sir.
Q: Yes, but you have authorized her to receive payment?
A: One or two times, yes x x x.
Thus, as shown in the receipt signed by petitioners agent and pursuant to the authority
granted by petitioners to Losloso, payment made to the latter is deemed payment to
petitioners. We find no reason to depart from the RTC and the CA conclusion that payment had
already been made and that it extinguished respondent's obligations.