G.R. No.

L-19227 February 17, 1968

DIOSDADO YULIONGSIU, plaintiff-appellant,

vs.
PHILIPPINE NATIONAL BANK (Cebu Branch), defendant-appellee.

Vicente Jaime, Regino Hermosisima & E. Lumontad, Sr. for plaintiff-appellant.

Tomas Besa, R. B. de los Reyes and C. E. Medina for defendant-appellee.

BENGZON, J.P., J.:

Plaintiff-appellant Diosdado Yuliongsiu 1 was the owner of two (2) vessels, namely: The M/S
Surigao, valued at P109,925.78 and the M/S Don Dino, valued at P63,000.00, and operated the FS-
203, valued at P210,672.24, which was purchased by him from the Philippine Shipping Commission,
by installment or on account. As of January or February, 1943, plaintiff had paid to the Philippine
Shipping Commission only the sum of P76,500 and the balance of the purchase price was payable
at P50,000 a year, due on or before the end of the current year. 2

On June 30, 1947, plaintiff obtained a loan of P50,000 from the defendant Philippine National
Bank, Cebu Branch. To guarantee its payment, plaintiff pledged the M/S Surigao, M/S Don Dino and
its equity in the FS-203 to the defendant bank, as evidenced by the pledge contract, Exhibit "A" & "1-
Bank", executed on the same day and duly registered with the office of the Collector of Customs for
the Port of Cebu. 3

Subsequently, plaintiff effected partial payment of the loan in the sum of P20,000. The
remaining balance was renewed by the execution of two (2) promissory notes in the bank's favor.
The first note, dated December 18, 1947, for P20,000, was due on April 16, 1948 while the second,
dated February 26, 1948, for P10,000, was due on June 25, 1948. These two notes were never paid
at all by plaintiff on their respective due dates. 4

On April 6, 1948, the bank filed criminal charges against plaintiff and two other accused for
estafa thru falsification of commercial documents, because plaintiff had, as last indorsee, deposited
with defendant bank, from March 11 to March 31, 1948, seven Bank of the Philippine Islands checks
totalling P184,000. The drawer thereof one of the co-accused had no funds in the drawee
bank. However, in connivance with one employee of defendant bank, plaintiff was able to withdraw
the amount credited to him before the discovery of the defraudation on April 2, 1948. Plaintiff and his
co-accused were convicted by the trial court and sentenced to indemnify the defendant bank in the
sum of P184,000. On appeal, the conviction was affirmed by the Court of Appeals on October 31,
1950. The corresponding writ of execution issued to implement the order for indemnification was
returned unsatisfied as plaintiff was totally insolvent. 5

Meanwhile, together with the institution of the criminal action, defendant bank took physical
possession of three pledged vessels while they were at the Port of Cebu, and on April 29, 1948,
after the first note fell due and was not paid, the Cebu Branch Manager of defendant bank, acting as
attorney-in-fact of plaintiff pursuant to the terms of the pledge contract, executed a document of sale,
Exhibit "4", transferring the two pledged vessels and plaintiff's equity in FS-203, to defendant bank
for P30,042.72. 6

The FS-203 was subsequently surrendered by the defendant bank to the Philippine Shipping
Commission which rescinded the sale to plaintiff on September 8, 1948, for failure to pay the
remaining installments on the purchase price thereof. 7 The other two boats, the M/S Surigao and the
M/S Don Dino were sold by defendant bank to third parties on March 15, 1951.
 On July 19, 1948, plaintiff commenced action in the Court of First Instance of Cebu to recover
the three vessels or their value and damages from defendant bank. The latter filed its answer, with a
counterclaim for P202,000 plus P5,000 damages. After issues were joined, a pretrial was held
resulting in a partial stipulation of facts dated October 2, 1958, reciting most of the facts above-
narrated. During the course of the trial, defendant amended its answer reducing its claim from
P202,000 to P8,846.01, 8 but increasing its alleged damages to P35,000.

The lower court rendered its decision on February 13, 1960 ruling: (a) that the bank's taking of
physical possession of the vessels on April 6, 1948 was justified by the pledge contract, Exhibit "A" &
"1-Bank" and the law; (b) that the private sale of the pledged vessels by defendant bank to itself
without notice to the plaintiff-pledgor as stipulated in the pledge contract was likewise valid; and (c)
that the defendant bank should pay to plaintiff the sums of P1,153.99 and P8,000, as his remaining
account balance, or set-off these sums against the indemnity which plaintiff was ordered to pay to it
in the criminal cases.

When his motion for reconsideration and new trial was denied, plaintiff brought the appeal to
Us, the amount involved being more than P200,000.00.

In support of the first assignment of error, plaintiff-appellant would have this Court hold that
Exhibit "A" & "1-Bank" is a chattel mortgage contract so that the creditor defendant could not take
possession of the chattels object thereof until after there has been default. The submission is without
merit. The parties stipulated as a fact that Exhibit "A" & "1-Bank" is a pledge contract

3. That a credit line of P50,000.00 was extended to the plaintiff by the defendant Bank,
and the plaintiff obtained and received from the said Bank the sum of P50,000.00, and in
order to guarantee the payment of this loan, the pledge contract, Exhibit "A" & Exhibit "1-
Bank", was executed and duly registered with the Office of the Collector of Customs for the
Port of Cebu on the date appearing therein; (Emphasis supplied) 1wph1.t

Necessarily, this judicial admission binds the plaintiff. Without any showing that this was made
thru palpable mistake, no amount of rationalization can offset it. 9

The defendant bank as pledgee was therefore entitled to the actual possession of the vessels.
While it is true that plaintiff continued operating the vessels after the pledge contract was entered
into, his possession was expressly made "subject to the order of the pledgee." 10 The provision of Art.
2110 of the present Civil Code 11 being new cannot apply to the pledge contract here which was
entered into on June 30, 1947. On the other hand, there is an authority supporting the proposition
that the pledgee can temporarily entrust the physical possession of the chattels pledged to the
pledgor without invalidating the pledge. In such a case, the pledgor is regarded as holding the
pledged property merely as trustee for the pledgee. 12

Plaintiff-appellant would also urge Us to rule that constructive delivery is insufficient to make
pledge effective. He points to Betita v. Ganzon, 49 Phil. 87 which ruled that there has to be actual
delivery of the chattels pledged. But then there is also Banco Espaol-Filipino v. Peterson, 7 Phil.
409 ruling that symbolic delivery would suffice. An examination of the peculiar nature of the things
pledged in the two cases will readily dispel the apparent contradiction between the two rulings.
In Betita v. Ganzon, the objects pledged carabaos were easily capable of actual, manual
delivery unto the pledgee. In Banco Espaol-Filipino v. Peterson, the objects pledged goods
contained in a warehouse were hardly capable of actual, manual delivery in the sense that it was
impractical as a whole for the particular transaction and would have been an unreasonable
requirement. Thus, for purposes of showing the transfer of control to the pledgee, delivery to him of
the keys to the warehouse sufficed. In other words, the type of delivery will depend upon the nature
and the peculiar circumstances of each case. The parties here agreed that the vessels be delivered
by the "pledgor to the pledgor who shall hold said property subject to the order of the pledgee."
Considering the circumstances of this case and the nature of the objects pledged, i.e., vessels used
in maritime business, such delivery is sufficient.

Since the defendant bank was, pursuant to the terms of pledge contract, in full control of the
vessels thru the plaintiff, the former could take actual possession at any time during the life of the
pledge to make more effective its security. Its taking of the vessels therefore on April 6, 1948, was
not unlawful. Nor was it unjustified considering that plaintiff had just defrauded the defendant bank in
the huge sum of P184,000.

The stand We have taken is not without precedent. The Supreme Court of Spain, in a similar
case involving Art. 1863 of the old Civil Code, 13 has ruled: 14

Que si bien la naturaleza del contrato de prenda consiste en pasar las cosas a poder
del acreedor o de un tercero y no quedar en la del deudor, como ha sucedido en el caso de
autos, es lo cierto que todas las partes interesadas, o sean acreedor, deudor y Sociedad,
convinieron que continuaran los coches en poder del deudor para no suspender el trafico, y
el derecho de no uso de la prenda pertenence al deudor, y el de dejar la cosa bajo su
responsabilidad al acreedor, y ambos convinieron por creerlo util para las partes
contratantes, y estas no reclaman perjuicios no se infringio, entre otros este articulo.

In the second assignment of error imputed to the lower court plaintiff-appellant attacks the
validity of the private sale of the pledged vessels in favor of the defendant bank itself. It is
contended first, that the cases holding that the statutory requirements as to public sales with prior
notice in connection with foreclosure proceedings are waivable, are no longer authoritative in view of
the passage of Act 3135, as amended; second, that the charter of defendant bank does not allow it
to buy the property object of foreclosure in case of private sales; and third, that the price obtained at
the sale is unconscionable.

There is no merit in the claims. The rulings in Philippine National Bank v. De Poli, 44 Phil. 763
and El Hogar Filipino v. Paredes, 45 Phil. 178 are still authoritative despite the passage of Act 3135.
This law refers only, and is limited, to foreclosure of real estate mortgages. 15 So, whatever
formalities there are in Act 3135 do not apply to pledge. Regarding the bank's authority to be the
purchaser in the foreclosure sale, Sec. 33 of Act 2612, as amended by Acts 2747 and 2938 only
states that if the sale is public, the bank could purchase the whole or part of the property sold " free
from any right of redemption on the part of the mortgagor or pledgor." This even argues against
plaintiff's case since the import thereof is this if the sale were private and the bank became the
purchaser, the mortgagor or pledgor could redeem the property. Hence, plaintiff could have
recovered the vessels by exercising this right of redemption. He is the only one to blame for not
doing so.

Regarding the third contention, on the assumption that the purchase price was
unconscionable, plaintiff's remedy was to have set aside the sale. He did not avail of this. Moreover,
as pointed out by the lower court, plaintiff had at the time an obligation to return the P184,000
fraudulently taken by him from defendant bank.

The last assignment of error has to do with the damages allegedly suffered by plaintiff-
appellant by virtue of the taking of the vessels. But in view of the results reached above, there is no
more need to discuss the same.
 On the whole, We cannot say the lower court erred in disposing of the case as it did. Plaintiff-
appellant was not all-too-innocent as he would have Us believe. He did defraud the defendant bank
first. If the latter countered with the seizure and sale of the pledged vessels pursuant to the pledge
contract, it was only to protect its interests after plaintiff had defaulted in the payment of the first
promissory note. Plaintiff-appellant did not come to court with clean hands.

WHEREFORE, the appealed judgment is, as it is hereby, affirmed. Costs against plaintiff-
appellant. So ordered.
G.R. No. 97753 August 10, 1992

CALTEX (PHILIPPINES), INC., petitioner,

vs.
COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents.

Bito, Lozada, Ortega & Castillo for petitioners.

Nepomuceno, Hofilea & Guingona for private.

REGALADO, J.:

This petition for review on certiorari impugns and seeks the reversal of the decision promulgated by
respondent court on March 8, 1991 in CA-G.R. CV No. 23615 1 affirming with modifications, the
earlier decision of the Regional Trial Court of Manila, Branch XLII, 2 which dismissed the complaint
filed therein by herein petitioner against respondent bank.

The undisputed background of this case, as found by the court a quo and adopted by respondent
court, appears of record:

1. On various dates, defendant, a commercial banking institution, through its Sucat

Branch issued 280 certificates of time deposit (CTDs) in favor of one Angel dela Cruz
who deposited with herein defendant the aggregate amount of P1,120,000.00, as
follows: (Joint Partial Stipulation of Facts and Statement of Issues, Original Records,
p. 207; Defendant's Exhibits 1 to 280);

CTD CTD
Dates Serial Nos. Quantity Amount

22 Feb. 82 90101 to 90120 20 P80,000

26 Feb. 82 74602 to 74691 90 360,000
2 Mar. 82 74701 to 74740 40 160,000
4 Mar. 82 90127 to 90146 20 80,000
5 Mar. 82 74797 to 94800 4 16,000
5 Mar. 82 89965 to 89986 22 88,000
5 Mar. 82 70147 to 90150 4 16,000
8 Mar. 82 90001 to 90020 20 80,000
9 Mar. 82 90023 to 90050 28 112,000
9 Mar. 82 89991 to 90000 10 40,000
9 Mar. 82 90251 to 90272 22 88,000

Total 280 P1,120,000
===== ========

2. Angel dela Cruz delivered the said certificates of time (CTDs) to herein plaintiff in
connection with his purchased of fuel products from the latter (Original Record, p.
208).
3. Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo Tiangco, the
Sucat Branch Manger, that he lost all the certificates of time deposit in dispute. Mr.
Tiangco advised said depositor to execute and submit a notarized Affidavit of Loss,
as required by defendant bank's procedure, if he desired replacement of said lost
CTDs (TSN, February 9, 1987, pp. 48-50).

4. On March 18, 1982, Angel dela Cruz executed and delivered to defendant bank
the required Affidavit of Loss (Defendant's Exhibit 281). On the basis of said affidavit
of loss, 280 replacement CTDs were issued in favor of said depositor (Defendant's
Exhibits 282-561).

5. On March 25, 1982, Angel dela Cruz negotiated and obtained a loan from
defendant bank in the amount of Eight Hundred Seventy Five Thousand Pesos
(P875,000.00). On the same date, said depositor executed a notarized Deed of
Assignment of Time Deposit (Exhibit 562) which stated, among others, that he (de la
Cruz) surrenders to defendant bank "full control of the indicated time deposits from
and after date" of the assignment and further authorizes said bank to pre-terminate,
set-off and "apply the said time deposits to the payment of whatever amount or
amounts may be due" on the loan upon its maturity (TSN, February 9, 1987, pp. 60-
62).

6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff Caltex

(Phils.) Inc., went to the defendant bank's Sucat branch and presented for verification
the CTDs declared lost by Angel dela Cruz alleging that the same were delivered to
herein plaintiff "as security for purchases made with Caltex Philippines, Inc." by said
depositor (TSN, February 9, 1987, pp. 54-68).

7. On November 26, 1982, defendant received a letter (Defendant's Exhibit 563) from
herein plaintiff formally informing it of its possession of the CTDs in question and of
its decision to pre-terminate the same.

8. On December 8, 1982, plaintiff was requested by herein defendant to furnish the

former "a copy of the document evidencing the guarantee agreement with Mr. Angel
dela Cruz" as well as "the details of Mr. Angel dela Cruz" obligation against which
plaintiff proposed to apply the time deposits (Defendant's Exhibit 564).

9. No copy of the requested documents was furnished herein defendant.

10. Accordingly, defendant bank rejected the plaintiff's demand and claim for
payment of the value of the CTDs in a letter dated February 7, 1983 (Defendant's
Exhibit 566).

11. In April 1983, the loan of Angel dela Cruz with the defendant bank matured and
fell due and on August 5, 1983, the latter set-off and applied the time deposits in
question to the payment of the matured loan (TSN, February 9, 1987, pp. 130-131).

12. In view of the foregoing, plaintiff filed the instant complaint, praying that
defendant bank be ordered to pay it the aggregate value of the certificates of time
deposit of P1,120,000.00 plus accrued interest and compounded interest therein at
16% per annum, moral and exemplary damages as well as attorney's fees.

After trial, the court a quo rendered its decision dismissing the instant complaint. 3
On appeal, as earlier stated, respondent court affirmed the lower court's dismissal of the complaint,
hence this petition wherein petitioner faults respondent court in ruling (1) that the subject certificates
of deposit are non-negotiable despite being clearly negotiable instruments; (2) that petitioner did not
become a holder in due course of the said certificates of deposit; and (3) in disregarding the
pertinent provisions of the Code of Commerce relating to lost instruments payable to bearer. 4

The instant petition is bereft of merit.

A sample text of the certificates of time deposit is reproduced below to provide a better
understanding of the issues involved in this recourse.

SECURITY BANK
AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%

Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____

This is to Certify that B E A R E R has deposited in this Bank the sum

of PESOS: FOUR THOUSAND ONLY, SECURITY BANK SUCAT
OFFICE P4,000 & 00 CTS Pesos, Philippine Currency, repayable to
said depositor 731 days. after date, upon presentation and surrender
of this certificate, with interest at the rate of 16% per cent per annum.

(Sgd. Illegible) (Sgd. Illegible)

AUTHORIZED SIGNATURES 5

Respondent court ruled that the CTDs in question are non-negotiable instruments, nationalizing as
follows:

. . . While it may be true that the word "bearer" appears rather boldly in the CTDs
issued, it is important to note that after the word "BEARER" stamped on the space
provided supposedly for the name of the depositor, the words "has deposited" a
certain amount follows. The document further provides that the amount deposited
shall be "repayable to said depositor" on the period indicated. Therefore, the text of
the instrument(s) themselves manifest with clarity that they are payable, not to
whoever purports to be the "bearer" but only to the specified person indicated
therein, the depositor. In effect, the appellee bank acknowledges its depositor Angel
dela Cruz as the person who made the deposit and further engages itself to pay said
depositor the amount indicated thereon at the stipulated date. 6

We disagree with these findings and conclusions, and hereby hold that the CTDs in question are
negotiable instruments. Section 1 Act No. 2031, otherwise known as the Negotiable Instruments
Law, enumerates the requisites for an instrument to become negotiable, viz:
 (a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in money;

(c) Must be payable on demand, or at a fixed or determinable future time;

(d) Must be payable to order or to bearer; and

(e) Where the instrument is addressed to a drawee, he must be named or otherwise

indicated therein with reasonable certainty.

The CTDs in question undoubtedly meet the requirements of the law for negotiability. The parties'
bone of contention is with regard to requisite (d) set forth above. It is noted that Mr. Timoteo P.
Tiangco, Security Bank's Branch Manager way back in 1982, testified in open court that the
depositor reffered to in the CTDs is no other than Mr. Angel de la Cruz.

xxx xxx xxx

Atty. Calida:

q In other words Mr. Witness, you are saying that per books of the
bank, the depositor referred (sic) in these certificates states that it
was Angel dela Cruz?

witness:

a Yes, your Honor, and we have the record to show that Angel dela
Cruz was the one who cause (sic) the amount.

Atty. Calida:

q And no other person or entity or company, Mr. Witness?

witness:

a None, your Honor. 7

xxx xxx xxx

Atty. Calida:

q Mr. Witness, who is the depositor identified in all of these

certificates of time deposit insofar as the bank is concerned?

witness:

a Angel dela Cruz is the depositor. 8

xxx xxx xxx

On this score, the accepted rule is that the negotiability or non-negotiability of an instrument is
determined from the writing, that is, from the face of the instrument itself.9 In the construction of a bill
or note, the intention of the parties is to control, if it can be legally ascertained. 10 While the writing
may be read in the light of surrounding circumstances in order to more perfectly understand the
intent and meaning of the parties, yet as they have constituted the writing to be the only outward and
visible expression of their meaning, no other words are to be added to it or substituted in its stead.
The duty of the court in such case is to ascertain, not what the parties may have secretly intended as
contradistinguished from what their words express, but what is the meaning of the words they have
used. What the parties meant must be determined by what they said. 11

Contrary to what respondent court held, the CTDs are negotiable instruments. The documents
provide that the amounts deposited shall be repayable to the depositor. And who, according to the
document, is the depositor? It is the "bearer." The documents do not say that the depositor is Angel
de la Cruz and that the amounts deposited are repayable specifically to him. Rather, the amounts
are to be repayable to the bearer of the documents or, for that matter, whosoever may be the bearer
at the time of presentment.

If it was really the intention of respondent bank to pay the amount to Angel de la Cruz only, it could
have with facility so expressed that fact in clear and categorical terms in the documents, instead of
having the word "BEARER" stamped on the space provided for the name of the depositor in each
CTD. On the wordings of the documents, therefore, the amounts deposited are repayable to
whoever may be the bearer thereof. Thus, petitioner's aforesaid witness merely declared that Angel
de la Cruz is the depositor "insofar as the bank is concerned," but obviously other parties not privy to
the transaction between them would not be in a position to know that the depositor is not the bearer
stated in the CTDs. Hence, the situation would require any party dealing with the CTDs to go behind
the plain import of what is written thereon to unravel the agreement of the parties thereto through
facts aliunde. This need for resort to extrinsic evidence is what is sought to be avoided by the
Negotiable Instruments Law and calls for the application of the elementary rule that the interpretation
of obscure words or stipulations in a contract shall not favor the party who caused the obscurity. 12

The next query is whether petitioner can rightfully recover on the CTDs. This time, the answer is in
the negative. The records reveal that Angel de la Cruz, whom petitioner chose not to implead in this
suit for reasons of its own, delivered the CTDs amounting to P1,120,000.00 to petitioner without
informing respondent bank thereof at any time. Unfortunately for petitioner, although the CTDs are
bearer instruments, a valid negotiation thereof for the true purpose and agreement between it and
De la Cruz, as ultimately ascertained, requires both delivery and indorsement. For, although
petitioner seeks to deflect this fact, the CTDs were in reality delivered to it as a security for De la
Cruz' purchases of its fuel products. Any doubt as to whether the CTDs were delivered as payment
for the fuel products or as a security has been dissipated and resolved in favor of the latter by
petitioner's own authorized and responsible representative himself.

In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q. Aranas, Jr.,
Caltex Credit Manager, wrote: ". . . These certificates of deposit were negotiated to us by Mr. Angel
dela Cruz to guarantee his purchases of fuel products" (Emphasis ours.) 13 This admission is
conclusive upon petitioner, its protestations notwithstanding. Under the doctrine of estoppel, an
admission or representation is rendered conclusive upon the person making it, and cannot be denied
or disproved as against the person relying thereon. 14 A party may not go back on his own acts and
representations to the prejudice of the other party who relied upon them. 15 In the law of evidence,
whenever a party has, by his own declaration, act, or omission, intentionally and deliberately led
another to believe a particular thing true, and to act upon such belief, he cannot, in any litigation
arising out of such declaration, act, or omission, be permitted to falsify it. 16
If it were true that the CTDs were delivered as payment and not as security, petitioner's credit
manager could have easily said so, instead of using the words "to guarantee" in the letter
aforequoted. Besides, when respondent bank, as defendant in the court below, moved for a bill of
particularity therein 17 praying, among others, that petitioner, as plaintiff, be required to aver with
sufficient definiteness or particularity (a) the due date or dates of payment of the alleged
indebtedness of Angel de la Cruz to plaintiff and (b) whether or not it issued a receipt showing that
the CTDs were delivered to it by De la Cruz as payment of the latter's alleged indebtedness to it,
plaintiff corporation opposed the motion. 18 Had it produced the receipt prayed for, it could have
proved, if such truly was the fact, that the CTDs were delivered as payment and not as security.
Having opposed the motion, petitioner now labors under the presumption that evidence willfully
suppressed would be adverse if produced. 19

Under the foregoing circumstances, this disquisition in Intergrated Realty Corporation, et al. vs.
Philippine National Bank, et al. 20 is apropos:

. . . Adverting again to the Court's pronouncements in Lopez, supra, we quote

therefrom:

The character of the transaction between the parties is to be

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

Petitioner's insistence that the CTDs were negotiated to it begs the question. Under the Negotiable
Instruments Law, an instrument is negotiated when it is transferred from one person to another in
such a manner as to constitute the transferee the holder thereof, 21 and a holder may be the payee or
indorsee of a bill or note, who is in possession of it, or the bearer thereof. 22 In the present case,
however, there was no negotiation in the sense of a transfer of the legal title to the CTDs in favor of
petitioner in which situation, for obvious reasons, mere delivery of the bearer CTDs would have
sufficed. Here, the delivery thereof only as security for the purchases of Angel de la Cruz (and we
even disregard the fact that the amount involved was not disclosed) could at the most constitute
petitioner only as a holder for value by reason of his lien. Accordingly, a negotiation for such purpose
cannot be effected by mere delivery of the instrument since, necessarily, the terms thereof and the
subsequent disposition of such security, in the event of non-payment of the principal obligation, must
be contractually provided for.

The pertinent law on this point is that where the holder has a lien on the instrument arising from
contract, he is deemed a holder for value to the extent of his lien. 23 As such holder of collateral
security, he would be a pledgee but the requirements therefor and the effects thereof, not being
provided for by the Negotiable Instruments Law, shall be governed by the Civil Code provisions on
pledge of incorporeal rights, 24 which inceptively provide:

Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be

pledged. The instrument proving the right pledged shall be delivered to the creditor,
and if negotiable, must be indorsed.

Art. 2096. A pledge shall not take effect against third persons if a description of the
thing pledged and the date of the pledge do not appear in a public instrument.

Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of
respondent court quoted at the start of this opinion show that petitioner failed to produce any
document evidencing any contract of pledge or guarantee agreement between it and Angel de la
Cruz. 25 Consequently, the mere delivery of the CTDs did not legally vest in petitioner any right
effective against and binding upon respondent bank. The requirement under Article 2096
aforementioned is not a mere rule of adjective law prescribing the mode whereby proof may be
made of the date of a pledge contract, but a rule of substantive law prescribing a condition without
which the execution of a pledge contract cannot affect third persons adversely. 26

On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of respondent
bank was embodied in a public instrument. 27 With regard to this other mode of transfer, the Civil
Code specifically declares:

Art. 1625. An assignment of credit, right or action shall produce no effect as against
third persons, unless it appears in a public instrument, or the instrument is recorded
in the Registry of Property in case the assignment involves real property.

Respondent bank duly complied with this statutory requirement. Contrarily, petitioner, whether as
purchaser, assignee or lien holder of the CTDs, neither proved the amount of its credit or the extent
of its lien nor the execution of any public instrument which could affect or bind private respondent.
Necessarily, therefore, as between petitioner and respondent bank, the latter has definitely the better
right over the CTDs in question.

Finally, petitioner faults respondent court for refusing to delve into the question of whether or not
private respondent observed the requirements of the law in the case of lost negotiable instruments
and the issuance of replacement certificates therefor, on the ground that petitioner failed to raised
that issue in the lower court. 28

On this matter, we uphold respondent court's finding that the aspect of alleged negligence of private
respondent was not included in the stipulation of the parties and in the statement of issues submitted
by them to the trial court. 29 The issues agreed upon by them for resolution in this case are:

1. Whether or not the CTDs as worded are negotiable instruments.

2. Whether or not defendant could legally apply the amount covered by the CTDs
against the depositor's loan by virtue of the assignment (Annex "C").

3. Whether or not there was legal compensation or set off involving the amount
covered by the CTDs and the depositor's outstanding account with defendant, if any.
 4. Whether or not plaintiff could compel defendant to preterminate the CTDs before
the maturity date provided therein.

5. Whether or not plaintiff is entitled to the proceeds of the CTDs.

6. Whether or not the parties can recover damages, attorney's fees and litigation
expenses from each other.

As respondent court correctly observed, with appropriate citation of some doctrinal authorities, the
foregoing enumeration does not include the issue of negligence on the part of respondent bank. An
issue raised for the first time on appeal and not raised timely in the proceedings in the lower court is
barred by estoppel. 30 Questions raised on appeal must be within the issues framed by the parties
and, consequently, issues not raised in the trial court cannot be raised for the first time on appeal. 31

Pre-trial is primarily intended to make certain that all issues necessary to the disposition of a case
are properly raised. Thus, to obviate the element of surprise, parties are expected to disclose at a
pre-trial conference all issues of law and fact which they intend to raise at the trial, except such as
may involve privileged or impeaching matters. The determination of issues at a pre-trial conference
bars the consideration of other questions on appeal. 32

To accept petitioner's suggestion that respondent bank's supposed negligence may be considered
encompassed by the issues on its right to preterminate and receive the proceeds of the CTDs would
be tantamount to saying that petitioner could raise on appeal any issue. We agree with private
respondent that the broad ultimate issue of petitioner's entitlement to the proceeds of the questioned
certificates can be premised on a multitude of other legal reasons and causes of action, of which
respondent bank's supposed negligence is only one. Hence, petitioner's submission, if accepted,
would render a pre-trial delimitation of issues a useless exercise. 33

Still, even assuming arguendo that said issue of negligence was raised in the court below, petitioner
still cannot have the odds in its favor. A close scrutiny of the provisions of the Code of Commerce
laying down the rules to be followed in case of lost instruments payable to bearer, which it invokes,
will reveal that said provisions, even assuming their applicability to the CTDs in the case at bar, are
merely permissive and not mandatory. The very first article cited by petitioner speaks for itself.

Art 548. The dispossessed owner, no matter for what cause it may be, may apply to
the judge or court of competent jurisdiction, asking that the principal, interest or
dividends due or about to become due, be not paid a third person, as well as in order
to prevent the ownership of the instrument that a duplicate be issued him. (Emphasis
ours.)

xxx xxx xxx

The use of the word "may" in said provision shows that it is not mandatory but discretionary on the
part of the "dispossessed owner" to apply to the judge or court of competent jurisdiction for the
issuance of a duplicate of the lost instrument. Where the provision reads "may," this word shows that
it is not mandatory but discretional. 34 The word "may" is usually permissive, not mandatory. 35 It is an
auxiliary verb indicating liberty, opportunity, permission and possibility. 36

Moreover, as correctly analyzed by private respondent, 37 Articles 548 to 558 of the Code of
Commerce, on which petitioner seeks to anchor respondent bank's supposed negligence, merely
established, on the one hand, a right of recourse in favor of a dispossessed owner or holder of a
bearer instrument so that he may obtain a duplicate of the same, and, on the other, an option in
favor of the party liable thereon who, for some valid ground, may elect to refuse to issue a
replacement of the instrument. Significantly, none of the provisions cited by petitioner categorically
restricts or prohibits the issuance a duplicate or replacement instrument sans compliance with the
procedure outlined therein, and none establishes a mandatory precedent requirement therefor.

WHEREFORE, on the modified premises above set forth, the petition is DENIED and the appealed
decision is hereby AFFIRMED.

SO ORDERED.
G.R. No. L-78519 September 26, 1989

VICTORIA YAU CHU, assisted by her husband MICHAEL CHU, petitioners,

vs.
HON. COURT OF APPEALS, FAMILY SAVINGS BANK and/or CAMS TRADING ENTERPRISES,
INC., respondents.

Francisco A. Lara, Jr. for petitioner.

D. T. Ramos and Associates for respondent Family Savings Bank.

Romulo T. Santos for respondent CAMS Trading.

GRINO-AQUINO, J.:

This is a petition for review on certiorari to annul and set aside the Court of Appeals' decision dated
October 28, 1986 in CA-G.R. CV No. 03269 which affirmed the decision of the trial court in favor of
the private respondents in an action to recover the petitioners' time deposits in the respondent
Family Savings Bank.

Since 1980, the petitioner, Victoria Yau Chu, had been purchasing cement on credit from CAMS
Trading Enterprises, Inc. (hereafter "CAMS Trading" for brevity). To guaranty payment for her
cement withdrawals, she executed in favor of Cams Trading deeds of assignment of her time
deposits in the total sum of P320,000 in the Family Savings Bank (hereafter the Bank). Except for
the serial numbers and the dates of the time deposit certificates, the deeds of assignment, which
were prepared by her own lawyer, uniformly provided

... That the assignment serves as a collateral or guarantee for the payment of my
obligation with the said CAMS TRADING ENTERPRISES, INC. on account of my
cement withdrawal from said company, per separate contract executed between us.

On July 24,1980, Cams Trading notified the Bank that Mrs. Chu had an unpaid account with it in the
sum of P314,639.75. It asked that it be allowed to encash the time deposit certificates which had
been assigned to it by Mrs. Chu. It submitted to the Bank a letter dated July 18, 1980 of Mrs. Chu
admitting that her outstanding account with Cams Trading was P404,500. After verbally advising
Mrs. Chu of the assignee's request to encash her time deposit certificates and obtaining her verbal
conformity thereto, the Bank agreed to encash the certificates.It delivered to Cams Trading the sum
of P283,737.75 only, as one time deposit certificate (No. 0048120954) lacked the proper signatures.
Upon being informed of the encashment, Mrs. Chu demanded from the Bank and Cams Trading that
her time deposit be restored. When neither complied, she filed a complaint to recover the sum of
P283,737.75 from them. The case was docketed in the Regional Trial Court of Makati, Metro Manila
(then CFI of Rizal, Pasig Branch XIX), as Civil Case No. 38861.

In a decision dated December 12, 1983, the trial court dismissed the complaint for lack of merit.

Chu appealed to the Court of Appeals (CA-G.R. CV No. 03269) which affirmed the dismissal of her
complaint.

In this petition for review, she alleges that the Court of Appeals erred:
 1. In not annulling the encashment of her time deposit certificates as
a pactum commissorium; and

2. In not finding that the obligations secured by her time deposits had already been
paid.

We find no merit in the petition for review.

The Court of Appeals found that the deeds of assignment were contracts of pledge, but, as the
collateral was also money or an exchange of "peso for peso," the provision in Article 2112 of the Civil
Code for the sale of the thing pledged at public auction to convert it into money to satisfy the
pledgor's obligation, did not have to be followed. All that had to be done to convert the pledgor's time
deposit certificates into cash was to present them to the bank for encashment after due notice to the
debtor.

The encashment of the deposit certificates was not a pacto commissorio which is prohibited under
Art. 2088 of the Civil Code. A pacto commissorio is a provision for the automatic appropriation of the
pledged or mortgaged property by the creditor in payment of the loan upon its maturity. The
prohibition against a pacto commissorio is intended to protect the obligor, pledgor, or mortgagor
against being overreached by his creditor who holds a pledge or mortgage over property whose
value is much more than the debt. Where, as in this case, the security for the debt is also money
deposited in a bank, the amount of which is even less than the debt, it was not illegal for the creditor
to encash the time deposit certificates to pay the debtors' overdue obligation, with the latter's
consent.

Whether the debt had already been paid as now alleged by the debtor, is a factual question which
the Court of Appeals found not to have been proven for the evidence which the debtor sought to
present on appeal, were receipts for payments made prior to July 18, 1980. Since the petitioner
signed on July 18, 1980 a letter admitting her indebtedness to be in the sum of P404,500, and there
is no proof of payment made by her thereafter to reduce or extinguish her debt, the application of her
time deposits, which she had assigned to the creditor to secure the payment of her debt, was proper.
The Court of Appeals did not commit a reversible error in holding that it was so.

WHEREFORE, the petition for review is denied. Costs against the appellant.

SO ORDERED.

Narvasa, Cruz and Medialdea, JJ., concur.

Gancayco, J., took no part.

SPOUSES BONIFACIO and G.R. No. 132287
FAUSTINA PARAY, and
VIDAL ESPELETA, Present:
Petitioners,
QUISUMBING, J.,
Chairman,
CARPIO,
- versus - CARPIO-MORALES, and
TINGA, JJ.

DRA. ABDULIA C. RODRIGUEZ, Promulgated:

MIGUELA R. JARIOL assisted by her
husband ANTOLIN JARIOL, SR., January 24, 2006
LEONORA NOLASCO assisted by her
husband FELICIANO NOLASCO,
DOLORES SOBERANO assisted by her
husband JOSE SOBERANO, JR., JULIA
R. GENEROSO, TERESITA R. NATIVIDAD
and GENOVEVA R. SORONIO assisted by
her husband ALFONSO SORONIO,
Respondents.

x---------------------------------------------------------------------------------x

DECISION

TINGA, J.:

The assailed decision of the Court of Appeals took off on the premise that pledged
shares of stock auctioned off in a notarial sale could still be redeemed by their
owners. This notion is wrong, and we thus reverse.

The facts, as culled from the record, follow.

Respondents were the owners, in their respective personal capacities, of shares of

stock in a corporation known as the Quirino-Leonor-Rodriguez Realty
Inc.[1] Sometime during the years 1979 to 1980, respondents secured by way of
pledge of some of their shares of stock to petitioners Bonifacio and Faustina Paray
(Parays) the payment of certain loan obligations. The shares pledged are listed
below:

Miguel Rodriguez Jariol .1,000 shares covered by Stock Certifi-

cates No. 011, 060, 061 & 062;
Abdulia C. Rodriguez . 300 shares covered by Stock Certificates
No. 023 & 093;
Leonora R. Nolasco .. 407 shares covered by Stock Certificates
No. 091 & 092;
Genoveva Soronio. 699 shares covered by Stock Certificates
No. 025, 059 & 099;
Dolores R. Soberano. 699 shares covered by Stock Certificates
No. 021, 053, 022 & 097;
Julia Generoso .. 1,100 shares covered by Stock Certificates
No. 085, 051, 086 & 084;
Teresita Natividad.. 440 shares covered by Stock Certificates
Nos. 054 & 055[2]

When the Parays attempted to foreclose the pledges on account of respondents

failure to pay their loans, respondents filed complaints with the Regional Trial
Court (RTC) of Cebu City. The actions, which were consolidated and tried before
RTC Branch 14, Cebu City, sought the declaration of nullity of the pledge
agreements, among others. However the RTC, in its decision[3] dated 14 October
1988, dismissed the complaint and gave due course to the foreclosure and sale at
public auction of the various pledges subject of these two cases.[4] This decision
attained finality after it was affirmed by the Court of Appeals and the Supreme
Court. The Entry of Judgment was issued on 14 August 1991.

Respondents then received Notices of Sale which indicated that the pledged shares
were to be sold at public auction on 4 November 1991. However, before the
scheduled date of auction, all of respondents caused the consignation with the RTC
Clerk of Court of various amounts. It was claimed that respondents had attempted
to tender these payments to the Parays, but had been rebuffed. The deposited
amounts were as follows:

Abdulia C. Rodriguez.. P 120,066.66 .. 14 Oct. 1991

Leonora R. Nolasco . 277,381.82 .. 14 Oct. 1991
Genoveva R. Soronio 425,353.50 .. 14 Oct. 1991
38,385.44 .. 14 Oct. 1991
Julia R. Generoso .. 638,385.00 .. 25 Oct. 1991
Teresita R. Natividad . 264,375.00 .. 11 Nov. 1991
Dolores R. Soberano .. 12,031.61.. 25 Oct. 1991
520,216.39 ..11 Nov. 1991
Miguela Jariol . 490,000.00.. 18 Oct. 1991
88,000.00 ..18 Oct. 1991[5]
Notwithstanding the consignations, the public auction took place as scheduled,
with petitioner Vidal Espeleta successfully bidding the amount of P6,200,000.00
for all of the pledged shares. None of respondents participated or appeared at the
auction of 4 November 1991.

Respondents instead filed on 13 November 1991 a complaint seeking the

declaration of nullity of the concluded public auction. The complaint, docketed as
Civil Case No. CEB-10926, was assigned to Branch 16 of the Cebu City RTC.
Respondents argued that their tender of payment and subsequent consignations
served to extinguish their loan obligations and discharged the pledge contracts.
Petitioners countered that the auction sale was conducted pursuant to the final and
executory judgment in Civil Cases Nos. R-20120 and 20131, and that the tender of
payment and consignations were made long after their obligations had fallen due.

The Cebu City RTC dismissed the complaint, expressing agreement with the
position of the Parays.[6] It held, among others that respondents had failed to tender
or consign payments within a reasonable period after default and that the proper
remedy of respondents was to have participated in the auction sale.[7] The Court of
Appeals Eighth Division however reversed the RTC on appeal, ruling that the
consignations extinguished the loan obligations and the subject pledge contracts;
and the auction sale of 4 November 1991 as null and void.[8] Most crucially, the
appellate court chose to uphold the sufficiency of the consignations owing to an
imputed policy of the law that favored redemption and mandated a liberal
construction to redemption laws. The attempts at payment by respondents were
characterized as made in the exercise of the right of redemption.

The Court of Appeals likewise found fault with the auction sale, holding that
there was a need to individually sell the various shares of stock as they had
belonged to different pledgors. Thus, it was observed that the minutes of the
auction sale should have specified in detail the bids submitted for each of the
shares of the pledgors for the purpose of knowing the price to be paid by the
different pledgors upon redemption of the auctioned sales of stock.

Petitioners now argue before this Court that they were authorized to refuse
as they did the tender of payment since they were undertaking the auction sale
pursuant to the final and executory decision in Civil Cases Nos. R-20120 and
20131, which did not authorize the payment of the principal obligation by
respondents. They point out that the amounts consigned could not extinguish the
principal loan obligations of respondents since they were not sufficient to cover the
interests due on the debt. They likewise argue that the essential procedural
requisites for the auction sale had been satisfied.

We rule in favor of petitioners.

The fundamental premise from which the appellate court proceeded was that
the consignations made by respondents should be construed in light of the rules of
redemption, as if respondents were exercising such right. In that perspective, the
Court of Appeals made three crucial conclusions favorable to respondents: that
their act of consigning the payments with the RTC should be deemed done in the
exercise of their right of redemption; that the buyer at public auction does not ipso
facto become the owner of the pledged shares pending the lapse of the one-year
redemptive period; and that the collective sale of the shares of stock belonging to
several individual owners without specification of the apportionment in the
applications of payment deprives the individual owners of the opportunity to know
of the price they would have to pay for the purpose of exercising the right of
redemption.

The appellate courts dwelling on the right of redemption is utterly off-

tangent. The right of redemption involves payments made by debtors after the
foreclosure of their properties, and not those made or attempted to be made, as in
this case, before the foreclosure sale. The proper focus of the Court of Appeals
should have been whether the consignations made by respondents sufficiently
acquitted them of their principal obligations. A pledge contract is an accessory
contract, and is necessarily discharged if the principal obligation is extinguished.

Nonetheless, the Court is now confronted with this rather new fangled
theory, as propounded by the Court of Appeals, involving the right of redemption
over pledged properties. We have no hesitation in pronouncing such theory as
discreditable.

Preliminarily, it must be clarified that the subject sale of pledged shares was
an extrajudicial sale, specifically a notarial sale, as distinguished from a judicial
sale as typified by an execution sale. Under the Civil Code, the foreclosure of a
pledge occurs extrajudicially, without intervention by the courts. All the creditor
needs to do, if the credit has not been satisfied in due time, is to proceed before a
Notary Public to the sale of the thing pledged.[9]

In this case, petitioners attempted as early as 1980 to proceed extrajudicially

with the sale of the pledged shares by public auction. However, extrajudicial sale
was stayed with the filing of Civil Cases No. R-20120 and 20131, which sought to
annul the pledge contracts. The final and executory judgment in those cases
affirmed the pledge contracts and disposed them in the following fashion:

WHEREFORE, premises considered, judgment is hereby rendered

dismissing the complaints at bar, and

(1) Declaring the various pledges covered in Civil Cases Nos. R-20120 and
R-20131 valid and effective; and

(2) Giving due course to the foreclosure and sale at public auction of the
various pledges subject of these two cases.

Costs against the plaintiffs.

SO ORDERED.[10]

The phrase giving due course to the foreclosure and sale at public auction of
the various pledges subject of these two cases may give rise to the impression that
such sale is judicial in character. While the decision did authorize the sale by
public auction, such declaration could not detract from the fact that the sale so
authorized is actually extrajudicial in character. Note that the final judgment in said
cases expressly did not direct the sale by public auction of the pledged shares, but
instead upheld the right of the Parays to conduct such sale at their own volition.

Indeed, as affirmed by the Civil Code,[11] the decision to proceed with the
sale by public auction remains in the sole discretion of the Parays, who could very
well choose not to hold the sale without violating the final judgments in the
aforementioned civil cases. If the sale were truly in compliance with a final
judgment or order, the Parays would have no choice but to stage the sale for then
the order directing the sale arises from judicial compulsion. But nothing in the
dispositive portion directed the sale at public auction as a mandatory recourse, and
properly so since the sale of pledged property in public auction is, by virtue of the
Civil Code, extrajudicial in character.
 The right of redemption as affirmed under Rule 39 of the Rules of Court
applies only to execution sales, more precisely execution sales of real property.

The Court of Appeals expressly asserted the notion that pledged property,
necessarily personal in character, may be redeemed by the creditor after being sold
at public auction. Yet, as a fundamental matter, does the right of redemption exist
over personal property? No law or jurisprudence establishes or affirms such right.
Indeed, no such right exists.

The right to redeem property sold as security for the satisfaction of an

unpaid obligation does not exist preternaturally. Neither is it predicated on
proprietary right, which, after the sale of property on execution, leaves the
judgment debtor and vests in the purchaser. Instead, it is a bare statutory privilege
to be exercised only by the persons named in the statute.[12]

The right of redemption over mortgaged real property sold extrajudicially is

established by Act No. 3135, as amended. The said law does not extend the same
benefit to personal property. In fact, there is no law in our statute books which
vests the right of redemption over personal property. Act No. 1508, or the Chattel
Mortgage Law, ostensibly could have served as the vehicle for any legislative
intent to bestow a right of redemption over personal property, since that law
governs the extrajudicial sale of mortgaged personal property, but the statute is
definitely silent on the point. And Section 39 of the 1997 Rules of Civil Procedure,
extensively relied upon by the Court of Appeals, starkly utters that the right of
redemption applies to real properties, not personal properties, sold on execution.

Tellingly, this Court, as early as 1927, rejected the proposition that personal
property may be covered by the right of redemption. In Sibal 1. v. Valdez,[13] the
Court ruled that sugar cane crops are personal property, and thus, not subject to the
right of redemption.[14] No countervailing statute has been enacted since then that
would accord the right of redemption over personal property, hence the Court can
affirm this decades-old ruling as effective to date.

Since the pledged shares in this case are not subject to redemption, the Court
of Appeals had no business invoking and applying the inexistent right of
redemption. We cannot thus agree that the consigned payments should be treated
with liberality, or somehow construed as having been made in the exercise of the
right of redemption. We also must reject the appellate courts declaration that the
buyer of at the public auction is not ipso facto rendered the owner of the auctioned
shares, since the debtor enjoys the one-year redemptive period to redeem the
property. Obviously, since there is no right to redeem personal property, the rights
of ownership vested unto the purchaser at the foreclosure sale are not entangled in
any suspensive condition that is implicit in a redemptive period.

The Court of Appeals also found fault with the apparent sale in bulk of the
pledged shares, notwithstanding the fact that these shares were owned by several
people, on the premise the pledgors would be denied the opportunity to know
exactly how much they would need to shoulder to exercise the right to redemption.
This concern is obviously rendered a non-issue by the fact that there can be no
right to redemption in the first place. Rule 39 of the Rules of Court does provide
for instances when properties foreclosed at the same time must be sold separately,
such as in the case of lot sales for real property under Section 19. However, these
instances again pertain to execution sales and not extrajudicial sales. No provision
in the Rules of Court or in any law requires that pledged properties sold at auction
be sold separately.

On the other hand, under the Civil Code, it is the pledgee, and not the
pledgor, who is given the right to choose which of the items should be sold if two
or more things are pledged.[15] No similar option is given to pledgors under the
Civil Code. Moreover, there is nothing in the Civil Code provisions governing the
extrajudicial sale of pledged properties that prohibits the pledgee of several
different pledge contracts from auctioning all of the pledged properties on a single
occasion, or from the buyer at the auction sale in purchasing all the pledged
properties with a single purchase price. The relative insignificance of ascertaining
the definite apportionments of the sale price to the individual shares lies in the fact
that once a pledged item is sold at auction, neither the pledgee nor the pledgor can
recover whatever deficiency or excess there may be between the purchase price
and the amount of the principal obligation.[16]

A different ruling though would obtain if at the auction, a bidder expressed

the desire to bid on a determinate number or portion of the pledged shares. In such
a case, there may lie the need to ascertain with particularity which of the shares are
covered by the bid price, since not all of the shares may be sold at the auction and
correspondingly not all of the pledge contracts extinguished. The same situation
also would lie if one or some of the owners of the pledged shares participated in
the auction, bidding only on their respective pledged shares. However, in this case,
none of the pledgors participated in the auction, and the sole bidder cast his bid for
all of the shares. There obviously is no longer any practical reason to apportion the
bid price to the respective shares, since no matter how slight or significant the
value of the purchase price for the individual share is, the sale is completed, with
the pledgor and the pledgee not entitled to recover the excess or the deficiency, as
the case may be. To invalidate the subject auction solely on this point serves no
cause other than to celebrate formality for formalitys sake.

Clearly, the theory adopted by the Court of Appeals is in shambles, and

cannot be resurrected. The question though yet remains whether the consignations
made by respondents extinguished their respective pledge contracts in favor of the
Parays so as to enjoin the latter from auctioning the pledged shares.
 There is no doubt that if the principal obligation is satisfied, the pledges
should be terminated as well. Article 2098 of the Civil Code provides that the right
of the creditor to retain possession of the pledged item exists only until the debt is
paid. Article 2105 of the Civil Code further clarifies that the debtor cannot ask for
the return of the thing pledged against the will of the creditor, unless and until he
has paid the debt and its interest. At the same time, the right of the pledgee to
foreclose the pledge is also established under the Civil Code. When the credit has
not been satisfied in due time, the creditor may proceed with the sale by public
auction under the procedure provided under Article 2112 of the Code.

Respondents argue that their various consignations made prior to the auction
sale discharged them from the loan and the pledge agreements. They are mistaken.

Petitioners point out that while the amounts consigned by respondents could
answer for their respective principal loan obligations, they were not sufficient to
cover the interests due on these loans, which were pegged at the rate of 5% per
month or 60% per annum. Before this Court, respondents, save for Dolores
Soberano, do not contest this interest rate as alleged by petitioners. Soberano, on
the other hand, challenges this interest rate as usurious.[17]

The particular pledge contracts did not form part of the records elevated to
this Court. However, the 5% monthly interest rate was noted in the statement of
facts in the 14 October 1988 RTC Decision which had since become final.
Moreover, the said decision pronounced that even assuming that the interest rates
of the various loans were 5% per month, it is doubtful whether the interests so
charged were exorbitantly or excessively usurious. This is because for sometime
now, usury has become legally inexistent.[18] The finality of this 1988 Decision is a
settled fact, and thus the time to challenge the validity of the 5% monthly interest
rate had long passed. With that in mind, there is no reason for the Court to disagree
with petitioners that in order that the consignation could have the effect of
extinguishing the pledge contracts, such amounts should cover not just the
principal loans, but also the 5% monthly interests thereon.

It bears noting that the Court of Appeals also ruled that respondents had
satisfied the requirements under Section 18, Rule 39, which provides that the
judgment obligor may prevent the sale by paying the amount required by the
execution and the costs that have been incurred therein.[19] However, the provision
applies only to execution sales, and not extra-judicial sales, as evidenced by the use
of the phrases sale of property on execution and judgment obligor. The reference
is inapropos, and even if it were applicable, the failure of the payment to cover the
interests due renders it insufficient to stay the sale.

The effect of the finality of the judgments in Civil Cases Nos. R-20120 and
R-20131 should also not be discounted. Petitioners right to proceed with the
auction sale was affirmed not only by law, but also by a final court judgment. Any
subsequent court ruling that would enjoin the petitioners from exercising such right
would have the effect of superseding a final and executory judgment.

Finally, we cannot help but observe that respondents may have saved
themselves much trouble if they simply participated in the auction sale, as they are
permitted to bid themselves on their pledged properties.[20] Moreover, they would
have had a better right had they

matched the terms of the highest bidder.[21] Under the circumstances, with the high
interest payments that accrued after several years, respondents were even placed in
a favorable position by the pledge agreements, since the creditor would be unable
to recover any deficiency from the debtors should the sale price be insufficient to
cover the principal amounts with interests. Certainly, had respondents participated
in the auction, there would have been a chance for them to recover the shares at a
price lower than the amount that was actually due from them to the Parays. That
respondents failed to avail of this beneficial resort wholly accorded them by law is
their loss. Now, all respondents can recover is the amounts they had consigned.

WHEREFORE, the petition is GRANTED. The assailed decision of the

Court of Appeals is SET ASIDE and the decision of the Cebu City RTC, Branch
16, dated 18 November 1992 is REINSTATED. Costs against respondents.

SO ORDERED.
G.R. No. 199420 August 27, 2014

PHILNICO INDUSTRIAL CORPORATION, Petitioner,

vs.
PRIVATIZATION AND MANAGEMENT OFFICE, Respondent.

x-----------------------x

G.R. No. 199432

PRIVATIZATION AND MANAGEMENT OFFICE, Petitioner,

vs.
PHILNICO INDUSTRIAL CORPORATION, Respondent.

DECISION

LEONARDO-DE CASTRO, J.:

Before the Court are the consolidated Petitions for Review on Certiorari under Rule 45 of the Rules
of Court involving the Decision1 dated January 31, 2011 and Resolution2 dated November 18, 2011
of the Court of Appeals in CA-G.R. SP. No. 111108, which affirmed the Order3 dated August 25,
2009 of the Regional Trial Court (R TC), Branch 64 of Makati City in Civil Case No. 03-114.

THE PARTIES

The Petition in G.R. No. 199420 was filed by Philnico Industrial Corporation (PIC). It is a corporation
duly organized under the laws of the Philippines and which, together withPhilnico Processing
Corporation (PPC) and Pacific Nickel Philippines, Inc. (PNPI), form the Philnico Group. The Philnico
Group is engaged in nickel mining and refining business. PIC and PNPI hold a Mineral Production
Sharing Agreement over nickel mining areas in Nonoc and Dinagat Islands inSurigao, while PPC
owns a nickel refinery complex also in Nonoc Island.4

The Petition in G.R. No. 199432 was filed by the Privatization and Management Office (PMO), an
attached agency of the Department of Finance. PMO succeeded the Asset Privatization Trust (APT),
when the latters life ended on December 31, 2000.5 The PMO serves as the marketing arm of the
Government with respect to Transferred Assets, Government Corporations and other properties
assigned to it by the Privatization Council (PrC) for disposition. Together, the mission of the PMO
and PrC is to take title to and possession of, conserve, provisionally manage, and dispose of assets
previouslyidentified for privatization; and, in the process, reduce the Governments maintenance
expense on nonperforming assets, generating maximum cash recovery for the National
Government.6

ANTECEDENT FACTS

The Development Bank of the Philippines and Philippine National Bank, by virtue of foreclosure
proceedings, became the holders of all the shares of stock in PPC (then still the Nonoc Mining and
Industrial Corporation). The banks eventually transferred their PPC shares of stock to PMO (then still
the APT) in 1987.

On May 10, 1996, PMO, PIC (then still the Philnico Mining and Industrial Corporation), and PPC
executed a contract, denominated as the Amended and Restated Definitive Agreement (ARDA),
which laid down the terms and conditions of the purchase and acquisition by PIC from PMO of
22,500,000 shares of stock of PPC (representing 90% of ownership of PPC), as well as receivables
of PMO from PPC. Under the ARDA, PIC agreed to pay PMO the peso equivalent of
US$333,762,000.00 as purchase price, payable in installments and in accordance with the schedule
also set out in the ARDA.7

Among the provisions of the ARDA relevant to the instant cases are Sections 2.04 and 2.07, which
govern the rights and obligations of the parties as regards the PPC shares of stock, viz: 2.04
Security

(a) As security for the payment of the Purchase Price in accordance with the terms of this
Agreement, the Buyer shall pledge the Shares to the Seller and execute a pledge agreement
(the "Pledge Agreement") in favor of the Seller in substantially the form of Annex A. The
Buyer shall also pledge to the Seller the Converted Shares and the New Shares as security
for the payment of the Purchase Price upon the issuance of such shares in the name of the
Buyer.

xxxx

2.07 Closing

(a) The closing of the sale and purchase of the Shares and the Tranche B Receivables under
this Agreement shall take place on the Closing Date and at such place as may be agreed
between the Buyer and the Seller upon the fulfillment of all of the conditions precedent
specified in Sections 4.01 and 4.02 (unless any such condition precedent shall have been
waived by the Buyer or the Seller, as the case may be). At the closing, the following
transactions shall take place:

(1) the Seller shall execute and deliver to the Buyer the necessary deed of sale
transferring to the Buyer all of the Sellers right, title and interest in and to the Shares
and deliver to the Buyer the stock certificates representing such shares, each duly
endorsed, or with separatestock transfer powers attached, in favor of the Buyer
together with the duly executed resignations of the directors of the Company named
in Schedule 6;

(2) the Company shall issue in the name of, and deliver to, the Buyer new stock
certificates representing the Shares;

(3) the Buyer shall execute and deliver the Pledge Agreement covering the Shares
and deliver to the Seller the stock certificates representing such shares;

xxxx

(b) From and after the Closing Date, the Buyer shall exercise all the rights (including the right
to vote) of a shareholder in respect of the Shares (subject to the negative covenants
contained in the Pledge Agreement).8

Also worthy of note herein is Section 8 of the ARDA on default, which states:

SECTION 8. DEFAULT AND DEFAULT REMEDIES

8.01 Events of Default

Subject to any applicable curing period, each of the following events shall constitute an Event of
Default hereunder:

(a) The Buyer shall, subject tothe provisions of Section 2.03(b), fail to pay any two
consecutive installments on the Purchase Price in accordance with the terms of Section
2.03.

(b) The Buyer shall fail to complywith or observe any other material term, obligation or
covenant contained in this Agreement or in the Pledge Agreement.

(c) The Buyer shall commit any act of bankruptcy or insolvency, or shall file any petition or
action for relief under any bankruptcy, reorganization, insolvency or moratorium law or other
law or laws for the relief of debtors.

8.02 Consequence of Default

At any time after the happening of an Event of Default, and provided that the same shall not have
been remedied within ninety (90) days from receipt by the Buyer of written notice from the Seller, the
Seller may declare the buyer in default and, asa consequence thereof, exercise such rights and
remedies as it may have under this Agreement and applicable laws (including the cancellation of
these Agreement); provided that in case of default under Section 8.01(a), the title to the Existing
Shares and the Converted Shares shall ipso facto revertto the Seller without need of demand in
case such payment default is not remedied by the Buyer within ninety (90) days from the due date of
the second installment. (Emphasis supplied.)9

In accordance with the ARDA, PMO executed and delivered to PIC the necessary documents to
transfer the formers rights, title, and interests to and in the PPC shares of stock to the latter; and
PPC issued new certificates for the same shares of stock in the name of PIC and/or its nominees.

On May 2, 1997, PIC and PNPI as pledgors and PMO as pledgee executed a Pledge
Agreement10 which began with "Whereas Clauses" that read:

WHEREAS, [PIC] and the [PMO] have entered into an Amended and Restated Definitive
Agreement, dated May 10, 1996, involving the purchase by the [PIC] from the [PMO] of 22,500,000
shares of common stock of [PPC] and certain receivables of the [PMO] from said corporation; and

WHEREAS, to secure the obligation of [PIC] to pay the purchase price and all other amounts due
the [PMO] under the aforesaid Definitive Agreement and the performance by [PIC] of its other
obligations thereunder and under this Pledge Agreement, the [PIC and PNPI] have agreed to
execute and deliver thisPledge Agreement, giving unto the [PMO] a good and valid pledge over the
pledge[d] shares[.]11

Sections 3.01 and 3.02 of the Pledge Agreement expressly acknowledged that PIC delivered its
certificates of shares of stock in PPC and that PMO received said certificates.12 Section 5 of the
same Agreement covered default and the available remedies in case thereof, thus: SECTION [5].
DEFAULT REMEDIES, ETC.

5.01 Events of Default

The following shall be considered Events of Default under this Pledge Agreement:

(a) [PIC] shall fail to pay when duethe obligations after giving effect to any applicable period
of grace; or

(b) [PIC] or PNPI shall fail to comply with or observe any other material term, obligation or
covenant contained in this Pledge Agreement or the Definitive Agreement; or

(c) [PIC] or PNPI shall commit any act of bankruptcy or insolvency, or shall file any petition or
action for relief under any bankruptcy, reorganization, insolvency or moratorium law or other
x x x laws for the relief of debtors; or

(d) The priority of the lien of or the security interest granted by this Pledge Agreement shall
be impaired, or this Pledge Agreement shall cease to be a first and preferred lien upon the
Pledged Shares.

5.02 Consequences of Default

If an Event of Default shall have occurred, then at any time thereafter, if any such event shall then be
continuing after the applicable grace period, if any, the [PMO] is hereby authorized:

(a) To sell in one or more sales, either public or private, at any time the whole or any part of
the Pledged Shares in such order and number as the [PMO] may elect at its place of
business or elsewhere and the [PMO] may, in all allowable cases, be the purchaser of any or
all Pledged Shares so sold and hold the same thereafter in its own right free from any claim
of [PIC] or any right of redemption;

(b) To issue receipts and to execute and deliver any instrument or document or do any act
necessary for the transferand assignment of all rights, title and interest of [PIC] in the
Pledged Shares to the purchaser or purchasers thereof; and

(c) To apply, at the [PMOs] option, the proceeds of any said sale, as well as all sums
received orcollected by the [PMO] from or on account of such Pledged Shares to (i) the
payment of expenses incurred or paid by the [PMO] in connection with any sale, transfer or
delivery of the Pledged Shares and (ii) the payment of the Obligations or any part thereof.13

In the meantime, the nickel refinery complex of PPC, which last operated in the 1980s, had become
obsolete and much of the facilities therein were already scrap. The estimated cost in 2003 for
building an entirely new refinery plant based on new technology was about US$1 Billion. The
Philnico Group, which had already invested at least US$60 Million, was inviting and negotiating
withprospective foreign investors who could assist in its business.

On account of the huge financial cost of building a new nickel refinery plant, coupled with the
economic problems then affecting the AsiaPacific Region, PMO, PIC, and PPC executed an
Amendment Agreement14 on September 27, 1999 which provided for the restructuring of the payment
terms of the entire obligation under the ARDA, the repayment of advances, the conditions for
borrowings or financing, a new cash break-even formula, and the adoption of an investment plan.

Three years later, in a letter dated November 6, 2002, PMO notified PIC that the latter had defaulted
in the payment of its obligations and demanded that PIC settle its unpaid amortizations in the total
amount of US$275,000.00 within 90 days, or on or about February 5, 2003, or else the PMO would
enforce the automatic reversion of the PPC shares of stock under Section 8.02 of the ARDA. PIC
replied in a letter dated January 7, 2003 requesting PMO to set aside its notice of default; to not
rescind the sale of the PPC shares of stock; and to give PIC an opportunity to conclude its fund-
raising efforts for its business, particularly with a group of investors from China. In another letter
dated January 22, 2003 to PIC, PMO clearly indicated its intention to enforce Section 8.02 of the
ARDA should PIC fail to settle its outstanding obligations after February 5, 2003.

On February 4, 2003, a day before the deadline for payment set by PMO in its letters, PIC filed
beforethe RTC a Complaint for Prohibition against Reversion of Shares with Prayer for Writ of
Preliminary Injunction and/or Temporary Restraining Order, Suspension of Payment and Fixing of
Period of Payment, against PMO, PPC, and the PPC Corporate Secretary.

On February 7, 2003, PIC filed an Amended Complaint raising, among other arguments, the need
for mutual restitution in case the ARDAis rescinded by the RTC. Ultimately, PIC prayed of the RTC
that:

(a) Upon the filing of this complaint, a temporary restraining order be issued under Sec. 5 of
Rule 58 of [the] 1997 Rules of Civil Procedure prohibiting [PMO, PPC, and the PPC
Corporate Secretary] from reverting the 22,500,000 shares covered by Stock Certificate Nos.
018, 022, 024, 025, 026, 027, 028, 030 and 031 x x x in the name of [PIC] to defendant
PMO.

(b) After hearing

(i) A writ of preliminary injunction be issued prohibiting [PMO, PPC, and the PPC Corporate
Secretary] from effecting the reversion of the aforementioned shares in favor of defendant
PMO until further orders from the Court; and thereafter,

(c) Judgment issue

(i) Making the injunction permanent and ordering the suspension of the payment of the
amortizations as provided for in the ARDA and fixing a reasonable period within which said
payment should be due; and

(d) Or in the alternative, in the remote possibility that the ARDA x x x be considered
rescinded, mutual restitution be ordered by the Honorable Court as provided by the Civil
Code relative to reciprocal obligations.

[PIC] prays for such further and equitable relief as may be just and equitable in the premises.15

After the summary hearing held on February 7, 2003, the RTC issued a temporary restraining order
(TRO), effective for 20 days, restraining PMO, PPC, and the PPC Corporate Secretary from effecting
the reversion of the 22,500,000 shares of stock of PPC.

The RTC then conducted hearings on the prayer of PIC for the issuance of a writ of preliminary
injunction. The RTC subsequently issued an Order16 on February 27, 2003 finding PIC entitled to the
issuance of such a writ for the following reasons:

While the failure of [PIC] to meet its amortization with respect to the smaller portion of the purchase
price cannot be denied, said default cannot automatically result in the reversion of the shares of
stocks to PMO. The provision in the ARDA providing for ipso facto reversion of the shares of stock is
null and void for being a pactum commissorium. x x x.

xxxx

The automatic reversion of the shares of stock is by itself automatic appropriation of the thing
pledged, which is contrary to good morals and public policy. It would alsoresult in unjust enrichment
on the part of defendant PMO. Even in case of rescission, mutual restitution is allowed so as not to
enrich one party to the prejudice of the other. It would be tantamount to confiscation ofproperty
without due process. The seller had the option of foreclosing the property pledged. The seller cannot
automatically appropriate the same to himself when the ownership is already transferred to [PIC].
Thus, even for the time being when foreclosure of the shares pledge[d] isbeing considered, and the
question of rescission is being deliberated, [PIC] has a right to be protected and therefore entitled to
the relief of preliminary injunction.

Regarding the provision on referral to arbitration, granting that the case is proper for arbitration, [PIC]
isnonetheless entitled to the writ of preliminary injunction pending the arbitration proceeding.

xxxx

One of the requirements for the issuance of the writ of preliminary injunction is when there is an
urgent and paramount necessity for the writ to prevent an irreparable damage. Irreparable means
one that can not be rectified. [PIC] is in danger of losingits investment in the project without any
recourse if PMO will be allowed the automatic reversion of the ownership of the 22,500,000 shares.
The right of [PIC] will be prejudiced if the writ of preliminary injunction will not be issued in the
meantime.17

The RTC thus decreed:

WHEREFORE, premises considered, the Writ of Preliminary Injunction is GRANTED.

Until further Order from this Court,and subject to [PICs] filing of a bond in the amount of
100,000,000.00 to pay for all the damages which [PMO, PPC, and the PPC Corporate Secretary]
may sustain by reason of the injunction if the Court will finally decide that [PIC] is not entitled thereto,
defendants Privatization and Management Office (PMO), Philnico Processing Corporation (PPC),
and the Corporation Secretary of PPC are enjoined from effecting the reversion to PMO of the
22,500,000 shares purchased by plaintiff Philnico Industrial Corporation and from selling the same to
any third party.18

PMO filed a Motion for Reconsideration of the RTC Order dated February 27, 2003, insisting that the
provision on ipso factoreversion in the ARDA did not constitute pactum commissoriumand would not
result in unjust enrichment on the part of PMO. PMO likewise filed a Motion to Dismiss on the
ground that the complaint of PIC did not state a cause of action. In its Order19 dated June 19, 2003,
the RTC found no merit in both Motions and held that:

1. The Motion for Reconsideration is DENIED. This Court maintains that [PIC] is entitled to the
issuance of the Writ of Preliminary Injunction.

[PIC] has already acquired ownership of the 22,500,000 shares when the ARDA was executed
between the parties. The ARDA merely provides for the transfer of the subject shares to [PIC]. As a
matter of fact, [PIC] has executed a Pledge Agreement as a security for the payment of [PICs]
obligation with defendant PMO.

xxxx

Under the ARDA, the relationship of [PIC] and defendant PMO is that of a pledgor and pledgee and
no longer as a buyer and seller. As such, the ipso facto reversion of the shares in the ARDA
constitutes pactum commissorium. The execution of the Pledge Agreement is precisely made to
secure the payment of [PICs] obligation with defendant PMO. The automatic reversion of the shares
if allowed will in fact constitute automatic appropriation of the thing pledged which is proscribed
being pactum commissorium. The automatic appropriation itself will prejudice the investment made
by [PIC] in the said project and all improvements will inure to defendant PMO which the law abhors.
Even in case of rescission, mutual restitution is allowed so as not to enrich one party at the expense
of the other. This forfeitureclause in the ARDA is contrary to law, good morals and public policy.

2. With respect to the Motion To Dismiss, the same is DENIED.

Cause of action is the act or omission by which a party violates a right of another (Sec. 2, Rule 2 of
the 1997 Rules on Civil Procedure). As already stated in the resolution of the motion for
reconsideration, the ipso facto reversion of the shares pursuant to Section 8.02 of the ARDA
constitute[s] pactum commissorium, and therefore null and void being contrary to morals, law and
public policy. As such, the ipso facto reversion of the shares will result inunjust enrichment on the
part of defendant PMO for the reason that all investment of [PIC] with the said project will inure to
the benefit ofdefendant PMO with [PIC] getting nothing.

The present case does not violate the principles of autonomy of contract[s]. [PIC] seeks to prohibit
the implementation of the ipso facto reversion clause in the ARDA, which is contrary to law being a
pactum commissorium. This is a limitation imposed by law, which is considered to be part of a
contract. Contracts must respect the law, for the law forms part of the contract. While the contract is
the law between the parties, the Court may stop its enforcement if it is contrary to law, morals, good
customs or public policy (San Andres vs. Rodriguez, 332 SCRA 69).

While the ARDA provides for arbitration as mode of settlement of the dispute (Section 9.05), the
present complaint involves interpretation of the provisions of the ARDA. Interpretation of contracts is
within the domain of the Court. The ipso facto reversion of the shares in the ARDA can never be
subject of arbitration but it is within the domain of the court to declare whether or not the same is
valid or null and void.20

In the same Order, the RTC directed PMO, PPC, and the PPC Secretary to file their answer to the
complaint of PIC. PMO no longer challenged the RTC Orders dated February 27, 2003 and June 19,
2003 before the appellate courts. Instead, PMO complied with the RTC directive and already filed
with the said trial court its Answer and Amended Answer to the complaint of PIC. The RTC
proceeded to pre-trial when the parties failed to arrive at an amicable settlement. On February
6,2009, the RTC issued its Pre-trial Order21 in which it enumerated the respective issues for
resolution submitted by PIC and PMO, to wit:

ISSUES ([PIC])

1. Whether or not the ipso facto reversion clause in the ARDA is valid, and, whether or not it
is a specie[s] of pactum commissoriumwhich is outlawed.
 2. Whether or not [PIC] is in default under the terms of the ARDA which clearly contemplates
the actual operation of the plant before the subsequent installments after the third year will
be due, as it even recognizes deferment of payment of installment if the Nonoc mining plant
and refinery is not yet in full operation and has not produced sufficient cash equivalent for
payment to seller.

3. Even assuming that the schedule of payment is not modified by the other terms of the
ARDA (as actual operation of the plant and refinery), whether or not [PIC] may be considered
as in default considering the fortuitous events which are unforeseen and beyond the control
of [PIC] which had prevented [PIC] from complying with its obligation under the scheduled
amortization. 4. Whether or not [PIC] is entitled to be reimbursed what it had already paid
and spent to implement the contract, in the remote event that APT/PMO may be allowed to
exercise right [of] rescission.

5. Whether or not plaintiff [PIC] is required to resort to arbitration to enforce its cause of
action in the complaint.

ISSUES ([PMO])

1. Whether or not defendant PMO may be prohibited from ipso facto reverting the shares
pursuant to the ARDA considering that [PIC] defaulted in its payment and there is an express
provision in the ARDA providing for the said provision.

2. Whether or not the terms and modes of payments as provided in the ARDA may be
suspended or fixed anew by reason of unforeseen events cited by [PIC].

3. Whether or not defendant PMO may be enjoined by this Honorable Court in the
performance of its functions and duties in connection with the sale or disposition of assets
transferred to it pursuant to Proclamation No. 50-A.22 (Emphases supplied.)

PIC filed a Manifestation and Motion praying for the modification of the foregoing Pre-trial Order
dated February 6, 2009 of the RTC by deleting Issue Nos. 1 and 5 in the Statement of Issues of PIC.
PIC posited that these two issues were already resolved by the RTC in the Order dated June 19,
2003 and should no longer be among the issuesto be tried in the course of subsequent proceedings.

PMO countered in its Comment/Opposition that the RTC Orders dated February 27, 2003 and June
19, 2003 concerned only the issuance of the Writ of Preliminary Injunction; and the findings and
conclusions of the trial court on the propriety of the issuance of the injunctive writ are premised on
initial and incomplete evidence, which should be considered merely as provisional. Said RTC Orders
should not bind the trial court in its determination of the merits of the caseand to hold otherwise
would result in the prejudgment of the case or disposition of the main case without a fullblown trial.
Consequently, PMO prayed that the RTC deny the Manifestation and Motion of PIC.

PMO also successively filed an Omnibus Motion and a Supplement to Omnibus Motion, asserting
that: (1) the Writ of Preliminary Injunction was issued in 2003 by the RTC without jurisdiction and
was therefore void, because there was no compliance with the arbitration clause in the ARDA; (2)
the continuance of the Writ of Preliminary Injunction is causing irreparable damage to the National
Government; (3) since the issuance of the Writ of Preliminary Injunction six years before, PIC had
effectively achieved and obtained the reliefs it had prayed for in its complaint as it was able to
suspend the payment of monthly amortization and prevent the reversion, or even the selling, of the
PPC shares of stock in the event of default; (4) the amount of injunction bond is insufficient and
grossly disproportionate to the enormity of the damages that PMO stands to suffer; (5) the injunctive
writ is supposed to be a "strong arm of equity" and should not be used as an instrument of
perpetrating injustice against the National Government; (6) in accordance with Rule 58, Section 6 of
the Rules of Court, PMO is signifying its intention to post a counterbond that would answer for the
damages PIC might suffer by the dissolution of the Writ of Preliminary Injunction; and (7) PMO
thought it prudent to no longer assail the RTC Orders dated February 27, 2003 and June 19, 2003
before the appellate courts believing that such a move would only cause further delay in the
resolution of the case and cause more irreparable damage to the

National Government. PMO sought several reliefs from the RTC in its Omnibus Motion, quoted as
follows:

(1) That the Writ of Preliminary Injunction be dissolved;

(2) That a representative of defendant PMO be appointed to the PPCs and PNPIs board of
directors or management; and

(3) That [PIC] be required to submit an accounting of its books and financial reports from the
year 2003 to 2008.

Other just and equitable reliefs are also prayed for.23

Following hearings and exchange ofpleadings by the parties, the RTC collectively resolved the
pending motions of PIC and PMO in its Order dated August 25, 2009.

The RTC determined that there was sufficient basis to grant the Manifestation and Motion of PIC to
delete two issues from the Pre-Trial Order dated February 6, 2009:

The Court will not disturb the earlier findings of the previous judge that the ipso factoreversion clause
in the ARDA is invalid and that it constitute[s] pactum commissorium. The Court finds no legal and
factual reasons to change the previous findings of the Honorable Delia H. Panganiban that [PIC] has
already acquired ownership of the 22,500,000 shares sold to it and that the ARDA is merely a
scheme for the transfer of the said share to the latter. As such, the relation between [PIC] and
defendant PMO has become that ofa mortgagor and mortgagee. Accordingly, the proviso in the
ARDA for the ipso factoreversion constitutes pactum commissorium.

The Court disagrees with [PMO] that the said finding is merely initiatory as it was a finding on a legal
issue. No other evidence is needed to change the same. In fact, said issue was extensively and
exhaustively argued by the parties in their respective pleadings in relation thereto. It is presumed
that the previous Presiding Judge of this Court has considered all the arguments raised by the
parties.Section 3(o) of Rule 131 of the Revised Rules of Court provides: that all matters within an
issue raised in a case were laid before the court and passed upon by it. In addition, based on the
personal analysis of its new Presiding Judge, the Court is judiciously convinced of the soundness of
its earlier findings. More importantly, it appears from the records that defendant PMO never
challenged such finding in a higher judicial arena. Thus, this Court deems its resolution to be
incontestable at this stage. Consequently, since the said finding has attained finality, any error that
thisCourt may have committed in resolving the said issue may only be raised in an appeal to be
made by the adverse party.

This Court also finds merit [i]n plaintiffs prayer for the deletion of the fifth issue raised during the pre-
trial of this case. The denial of the motion to dismiss previously filed by defendant PMO also
[constitutes] as an adjudication on the issue as to whether or not the subject matter of this case is a
proper subject of arbitration proceedings as provided for in ARDA. The Court reached the said
conclusion based on jurisprudential law which up to this date is unchanged. Said conclusionhas also
become immutable when [PMO, PPC, and the PPCCorporate Secretary] similarly failed to challenge
the same.24

As for the Omnibus Motion and Supplement to Omnibus Motion of PMO, the RTC only conceded to
requiring PIC to submit accounting and financial reports to PMO:

On defendant PMOs omnibus motion and its supplemental thereto, the Court resolves the first
motion in the negative. As stated above[,] this instant case does not involve matters which can be
adjudicated through arbitration. It involves the interpretation of contract which falls within the
jurisdiction of this Court. This Court agrees with [PIC] that there can be no damage whenwhat is
being restrained is an illegal act. It need not be said that no right can emanate from an illegal act. In
this instant case, what is being restrained by the Writ is the enforcement by defendant PMO of the
reversion clause in the ARDA. Having unequivocally declared such reversion clause illegal, the
Court has no reason to terminate the efficacy of the Writ it issued. The Court notes that defendant
PMO did not lift a finger during the time that it should have done so. Thus, the delay, if there be any,
is not solely attributable to [PIC]. Having impliedly consented thereto, defendant PMO must suffer
the consequences of its inaction. The same is true on the allegation of insufficiency of the injunction
bond filed by [PIC]. The defendant PMOs failure to question the same withinreasonable time the
amount of the injunction bond posted by [PIC] is fatal to its cause as it galvanized the resolution of
the Court on the matter.

The Court will not act on defendant PMOs prayer for the appointment of a representative in [PICs]
Board of Director[s]. As stated by [PIC] in its opposition to the pending incident, that it is not
preventing defendant PMO to appoint a representative [in the] former, the Court will no longer
discuss the said motion. The parties, however, are directed to notify this Court of the appointmentby
[PMO] of a representative in [PICs] Board of Director[s]. Ondefendant PMOs motion to submit
accounting report, while it may be true that [PIC] is submitting its financial statements to the Bureau
ofInternal Revenue and the Securities and Exchange Commission, the Court finds no legal obstacle
not to direct [PIC] to submit a copy of the said documents to [PMO]. Lastly, on the motion of [PMO]
to post counter bond, the Court finds the same to [be] without merit.The Court cannot allow, even if a
bond is posted, [PMO] to commit an act which it has declared to be illegal. There is no premium for
an illegal act.25

The dispositive portion of the RTC Order dated August 25, 2009 reads:

WHEREFORE, premises considered, the Court GRANTS the following motion:

1. Manifestation [and] Motion filed by [PIC] and hereby DELETES issues numbers 1 and 5 in
pages 5 and 6 of its Pre-Trial Order of February 6, 2009.

2. The Omnibus Motion on requiring [PIC] to submit an accounting and financial reportto the
defendant [PMO], and submit to this Court a manifestation of its compliance thereto; and
DENIESthe following:

1. The dissolution of the Writ of Preliminary Injunction for lack of merit.

2. The appointment of a representative of [PMO to the] Board of Directors for lack of

merit.

3. The posting of counter bond for lack of merit.26

PMO assailed the RTC Order dated August 25,2009 before the Court of Appeals viaa Petition for
Certiorari, averring that:

I.

PUBLIC RESPONDENT COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO

LACK OR EXCESS OF JURISDICTION IN HOLDING THAT THE IPSO
FACTOREVERSION CLAUSE IN THE ARDA IS A SPECIE[S] OF PACTUM
COMMISSORIUMAND SUCH DISPOSITION IS A FINAL DETERMINATION OF THE
COURT WHICH CAN ONLY BE QUESTIONED ON APPEAL; AND

II.

PUBLIC RESPONDENT COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO

LACK OR EXCESS OF JURISDICTION IN DENYING [PMOS] MOTION TO DISSOLVE
THE WRIT OF PRELIMINARY INJUNCTION AND MOTION TO FILE A COUNTERBOND
FOR THE DISSOLUTION THEREOF.27

The Court of Appeals, in itsDecision dated January 31, 2011, disagreed with the finding of the RTC
that the instant case involves a pactum commissorium, but still affirmed the denial by the RTC of the
motion of PMO to dissolve the Writ of Preliminary Injunction issued in 2003.

According to the Court of Appeals, Section 8.02 of the ARDA does not constitute pactum
commissorium:

The elements of pactum commissoriumare: (1) that there should be a pledge or mortgage wherein a
property is pledged or mortgaged by way of security for the payment of the principal obligation; and
(2) that there should be a stipulation for an automatic appropriation by the creditor of the thing
pledged or mortgaged in the event of nonpayment of the principal obligation within the stipulated
period.

In the instant case, the subject ARDA basically pertains to the contract of sale of shares of stock.
There was nothing given by way of pledge or mortgage in said contract, through which [PMO] could
have appropriated the shares to itself should default in the payment thereof arise.

At this point, We have to agree with [PMO] that the ARDA is separate and distinct from the Pledge
Agreement. The two agreements have separate terms and conditions, especially concerning the
consequences of default. Under the ARDA, [PMO] may effect the ipso factoreversion of the title over
the sharesof stock of [PIC], without need of demand. On the other hand, under the Pledge
Agreement, [PMO] may conduct a public or private sale of the shares of stock of [PIC], wherein it
may opt to buy the same.

Furthermore, the first element of pactum commissoriumonly holds true under the Pledge Agreement
whilethe second element with respect to the stipulation for automatic appropriation can be found
under the ARDA. Thus, it is plainly irreconcilable how pactum commissoriumcan be made to apply in
the present case, absentthe two elements concurring in one contract.28

Notwithstanding its aforequotedpronouncements, the Court of Appeals still declared the ipso
factoreversion clause in the ARDA invalid:
Nevertheless, the questioned provision on automatic reversion of shares still cannot be held valid.
While the contracting parties may establish such stipulations, clauses, terms and conditions as they
may deem convenient, they should, however, be not contrary to law, morals, good customs, public
order, or public policy.

In a contract of sale involving shares of stock, ownership is deemed transferred upon the issuance
ofcertificate of stock. Section 63 of the Corporation Code provides that "shares of stock so issued
are personal property and may be transferred by delivery of the certificate or certificates indorsed by
the owner or his attorney-in-fact or other person legally authorized to make the transfer."

The word "transfer," as contemplatedin that particular section of the Corporation Code, means any
act by which the share of stock of one person is vested in another, that is, he is divested and another
acquires ownership of such stock.

Applying these principles, ownership over the stock of shares was already transferred to [PIC] when
it was issued new certificates of stock. [PMO] cannot oblige [PIC] to automatically part with its
ownership over the shares in favor of the former on the occasion of default or nonpayment, even if
they have previously agreed upon the same. Such stipulation contained in the ARDA is contraryto
law, hence, null and void.

It bears stressing that what is being declared null and void here is the "automatic reversion of
shares" clause and not the provision for the rescission/cancellation of ARDA, as what has been
impressed by [PMO] in its arguments.

Accordingly, [PIC] is entitled to be protected of his rights through the issuance of the Writ of
Preliminary Injunction. And it is but proper to deny the dissolution of said writ. Itshould be of no
moment that it has been in effect for several years now. Until the matter has been settled on whether
[PIC] has substantially breached its obligation as to constitute default, then, the shares of stock
cannotas yet be foreclosed and sold, in accordance with the terms and conditionsof the Pledge
Agreement, to satisfy [PMOs] alleged claims.29 (Citations omitted.)

The Court of Appeals accordingly ruled in the end:

In view of all the foregoing, We simply cannot ascribe grave abuse of discretion to public
respondent. While We may have a different take on the matter at hand, it is axiomatic thatnot every
erroneous conclusion of law or fact is abuse of discretion.

WHEREFORE, premises considered, the instant petition is DENIED. The assailed Order dated 25
August 2009 issued by public respondent, Hon. Judge Gina M. Bibat-Palamos of RTC Makati,
Branch 64, in Civil Case No. 03-114 is hereby AFFIRMED.30 (Citation omitted.)

PIC filed a Motion for Partial Reconsideration, while PMO filed a Motion for Reconsideration of the
Decision dated January 31, 2011 of the Court of Appeals, which the appellatecourt both denied in its
Resolution dated November 18, 2011.

Hence, the instant Petitions.

In its Petition in G.R. No. 199420, PICassigned the following errors on the part of the Court of
Appeals:

I
THE HONORABLE COURT OF APPEALS COMMITTED GROSS ERROR, ACTED WITH GRAVE
ABUSE OF DISCRETION WHEN IT DECIDED A QUESTION OF SUBSTANCE NOT IN ACCORD
WITH LAW AND ESTABLISHED JURISPRUDENCE BY HOLDING THAT THE ESSENTIAL
ELEMENTS OFPACTUM COMMISSORIUM, NAMELY, 1) THAT THERE SHOULD BE A [PLEDGE]
OR [MORTGAGE] WHEREIN A PROPERTY PLEDGED OR MORTGAGED BY WAY OF
SECURITY FOR THE PAYMENT OF THE PRINCIPAL OBLIGATION; AND 2) THAT THERE
SHOULD BE A STIPULATION FOR AN AUTOMATIC APPROPRIATION BY THE CREDITOR OF
THE THING PLEDGED OR MORTGAGED IN THE EVENT OF NONPAYMENT OF THE
PRINCIPAL OBLIGATION WITHIN THE STIPULATED PERIOD, MUST CONCUR OR BE
PRESENT IN ONE CONTRACT UNLIKE IN THE CASE AT BENCH WHERE ONE ELEMENT
PURPORTEDLY APPEARS IN THE ARDA WHILE THE OTHER APPEARS INTHE PLEDGE
AGREEMENT.

II

THE HONORABLE COURT OF APPEALS COMMITTED GROSS ERROR, ACTED WITH GRAVE
ABUSE OF DISCRETION AND NOT IN ACCORD WITH LAW AND ESTABLISHED
JURISPRUDENCE WHEN IT GAVE DUE COURSE AND RULED ON [PMOS] PETITION FOR
CERTIORARI ASSAILING THE ORDER ISSUED BY THE TRIAL COURT ON FEBRUARY 27, 2003
HOLDING THAT THE IPSO FACTOOR AUTOMATIC REVERSION TO PMO OF THE PLEDGED
SHARES OF STOCK UNDER SECTION 8.02 OF THE ARDA IS PACTUM COMMISSORIUMWHEN
SAID ORDER HAD LONG BECOME FINAL AND THEREFORE THE PETITION ASSAILING IT IS
TIME-BARRED AND SHOULD HAVE BEEN DISMISSED OUTRIGHT.31

On the other hand, PMO raised the following arguments in its Petition in G.R. No. 199432:

THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE IPSO

FACTOREVERSION CLAUSE OF THE ARDA IS CONTRARY TO LAW IN THE ABSENCE OF ANY
LAW ALLEGEDLY VIOLATED BYTHE SAID CLAUSE.

II

THE HONORABLE COURT OF APPEALS ERRED IN DENYING [PMOS] PRAYER FOR THE
DISSOLUTION OF THE WRIT OF PRELIMINARY INJUNCTION EVEN IF THE PURPOSE FOR
WHICH IT WAS ISSUED HAD ALREADY BEEN MET AND ITS CONTINUED IMPLEMENTATION
DEPRIVED [PMO] OF REMEDIES UNDER THE LAW AND THE ARDA.

III

THE DISSOLUTION OF THE WRIT AFTER THE LAPSE OF ALMOST NINE (9) YEARS IS IN
ORDER AND IN THE INTEREST OF EQUITABLE JUSTICE.32

RULING OF THE COURT

The allegations and arguments of PIC and PMO in their respective Petitions essentially boil down to
two fundamental issues: (1) Whether Section 8.02 of the ARDA on ipso factoor automatic reversion
of the PPC shares of stock to PMO in case of default by PIC constitutes pactum commissorium; and
(2) Whether the Writ of Preliminary Injunction should be dissolved. The Court resolves the first issue
in the positive and the second issue in the negative.
Section 8.02 of the ARDA constitutes pactum commissorium and, thus, null and void for being
contrary to Article 2088 of the Civil Code.

Article 1305 of the Civil Code allowscontracting parties to establish such stipulation, clauses,
terms,and conditions asthey may deem convenient, provided, however, that theyare not contrary to
law, morals, good customs, public order, or public policy.

Pactum commissoriumis among the contractual stipulations that are deemed contrary to law. It is
defined as "a stipulation empowering the creditor to appropriate the thing given as guaranty for the
fulfillment of the obligation in the event the obligor fails to live up to his undertakings, without further
formality, such as foreclosure proceedings, and a public sale."33 It is explicitly prohibited under Article
2088 of the Civil Code which provides:

ART. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or
dispose of them. Any stipulation to the contrary is null and void.

There are two elements for pactum commissoriumto exist: (1) that there should be a pledge or
mortgage wherein a property is pledged or mortgaged by way of security for the payment of the
principal obligation; and (2) that there should be a stipulation for an automatic appropriation by the
creditor of the thing pledged or mortgaged in the event of nonpayment of the principal obligation
within the stipulated period.34

Both elements of pactum commissoriumare present in the instant case: (1) By virtue of the Pledge
Agreement dated May 2,1997, PIC pledged its PPC shares of stock in favor of PMO as security for
the fulfillment of the formers obligations under the ARDA dated May 10, 1996 and the Pledge
Agreement itself; and (2) There is automatic appropriation as under Section 8.02 of the ARDA, in the
event of default by PIC, title to the PPC shares of stock shall ipso factorevert from PIC to PMO
without need of demand.

The Court of Appeals, in ruling that there is no pactum commissorium, adopted the position of PMO
that the ARDA and the Pledge Agreement are entirely separate and distinct contracts. Neither
contract contains both elements of pactum commissorium: the ARDA solely has the second element,
while the Pledge Agreement only has the first element.

The Court disagrees.

In Blas v. Angeles-Hutalla,35 the Court recognized that the agreement of the parties may be
embodied in only one contract or in two or more separate writings. In case of the latter, the writings
of the parties should be read and interpreted together in sucha way as to render their intention
effective.

The agreement between PMO and PIC isthe sale of the PPC shares of stock by the former to the
latter, to besecured by a pledge on the very same shares of stock. The ARDA and the Pledge
Agreement herein, although executed in separate written instruments, are integral to one another.
On one hand, Section 2.04 of the ARDA explicitly requires the execution of a pledge agreement as
security for the payment by PIC of the purchase price for the PPC shares of stock and receivables,
and even provides the form for said pledge agreement in Annex A thereof. Section 2.07 of the ARDA
also states that the closing of the sale and purchase of the PPCshares of stock and receivables shall
take place on the same date that PIC shall execute and deliver the pledge agreement, together with
the certificates of shares of stock, to PMO. On the other hand, the "Whereas Clauses" of the Pledge
Agreement expressly mentions the ARDA and explains that the Pledge Agreement is being
executed to securepayment by PIC of the purchase price and all other amounts due to PMO under
the ARDA, aswell as the performance by PIC of its other obligations under the ARDA and the Pledge
Agreement itself. Clearly, itwas the intention of the parties to enter into and execute both contracts
for a complete effectuation of their agreement.

To reiterate, the Pledge Agreement secures, for the benefit of PMO, the performance by PIC of its
obligations under both the ARDA and the Pledge Agreement itself. It is withthe execution of the
Pledge Agreement that PIC turned over possession of its certificates of shares of stock in PPC to
PMO. As the RTC pertinently observed in its Order dated June 19, 2003, there had already been a
shift in the relations of PMO and PIC, from mere seller and buyer, to creditor-pledgee and debtor-
pledgor. Having enjoyed the security and benefits of the Pledge Agreement, PMO cannot now insist
on applying Section 8.02 of the ARDAand conveniently and arbitrarily exclude and/or ignore the
Pledge Agreement so as to evade the prohibition against pactum commissorium.

More importantly, the Court, in determining the existence of pactum commissorium, had focused
more on the evident intention of the parties, rather than the formal or written form. In A. Francisco
Realty and Development Corporation v. Court of Appeals,36 therein petitioner similarly denied the
existence of pactum commissoriumbecause the proscribed stipulation was found in the promissory
note and not in the mortgage deed. The Court held that:

The contention is patently without merit. To sustain the theory of petitioner would be to allow a
subversion of the prohibition in Art. 2088.

In Nakpil v. Intermediate Appellate Court, which involved the violation of a constructive trust, nodeed
of mortgage was expressly executed between the parties in that case. Nevertheless, this Court ruled
that an agreement whereby property held in trust was ceded to the trustee upon failure of the
beneficiary to pay his debt to the former as secured by the said property was void for being a pactum
commissorium. It was there held:

The arrangement entered into between the parties, whereby Pulong Maulapwas to be "considered
sold to him (respondent) x x x" incase petitioner fails to reimburse Valdes, must then be construed
as tantamount to a pactum commissoriumwhich is expressly prohibited by Art. 2088 of the Civil
Code. For, there was to be automatic appropriation of the property by Valdez in the event of failure
of petitioner to pay the value of the advances. Thus, contrary to respondents manifestations, all the
elements of a pactum commissoriumwere present: there was a creditordebtor relationship between
the parties; the property was used as security for the loan; and, there was automatic appropriation
by respondent of Pulong Maulap in case of default of petitioner.

Similarly, the Court has struck down such stipulations as contained in deeds of sale purporting to be
pacto de retrosales but found actually to be equitable mortgages.

It has been consistently held that the presence of even one of the circumstancesenumerated in Art.
1602 of the New Civil Code is sufficient to declare a contract of sale with right to repurchase an
equitable mortgage. This is so because pacto de retrosales with the stringent and onerous effects
that accompany them are not favored. In case of doubt, a contract purporting to be a sale with right
to repurchase shall be construed as an equitable mortgage.

Petitioner, to prove her claim, cannot rely on the stipulation in the contract providing that complete
and absolute title shall be vested on the vendee should the vendors fail to redeem the property on
the specified date. Such stipulation that the ownership of the property would automatically pass to
the vendee in case no redemption was effected within the stipulated period is void for being a
pactum commissoriumwhich enables the mortgagee to acquire ownership of the mortgaged property
without need of foreclosure. Its insertion in the contract is an avowal of the intention to mortgage
rather that to sell the property.

Indeed, in Reyes v. Sierra, this Court categorically ruled that a mortgagees mere act of registering
the mortgaged property in his own name upon the mortgagors failure to redeem the property
amounted to the exercise of the privilege of a mortgagee in a pactum commissorium. Obviously,
from the nature of the transaction, applicants predecessor-in-interest is a mere mortgagee, and
ownership of the thing mortgaged is retained by Basilia Beltran, the mortgagor. The mortgagee,
however, may recover the loan, although the mortgage document evidencing the loan was
nonregistrable being a purely private instrument. Failure ofmortgagor to redeem the property does
not automatically vest ownership of the property to the mortgagee, which would grant the latter the
right to appropriate the thing mortgaged or dispose of it. This violates the provision of Article 2088 of
the New Civil Code, which reads:

The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose by them.
Any stipulation to the contrary is null and void.

The act of applicant inregistering the property in his own name upon mortgagorsfailure to redeem
the property would amount to a pactum commissoriumwhich is against good moralsand public
policy.

Thus, in the case at bar, the stipulations in the promissory notes providing that, upon failure of
respondent spouses to pay interest, ownership of the property would be automatically transferred to
petitioner A. Francisco Realty and the deed of sale in its favor would be registered, are in substance
a pactum commissorium. They embody the two elements of pactum commissoriumas laid down in
Uy Tong v. Court of Appeals, x x x. (Citations omitted.)

Appreciating the ARDA together with the Pledge Agreement, the Court can only conclude that
Section 8.02 of the ARDA constitutes pactum commissoriumand, therefore, null and void.

PMO though insists that there is no valid Pledge Agreement, arguing that PIC could not have validly
pledged the PPC shares of stock because it is not yet the absolute owner of said shares. According
to PMO, the sale of the PPC shares of stock to PIC is subject to the resolutory condition of
nonpayment by PIC of the installmentsdue on the purchase price.

Again, the Court is unconvinced.

Among the requirements of a contract ofpledge is that the pledgor is the absolute owner of the thing
pledged.37Based on the provisions of the ARDA, ownership of the PPC shares ofstock had passed
on to PIC, hence, enabling PIC to pledge the very same shares to PMO. In accordance with Section
2.07(a)(1) and 2.07(a)(2) of the ARDA, PMO had transferred to PIC all rights, title, and interests in
and to the PPC sharesof stock, and delivered to PIC the certificates for said shares for cancellation
and replacement of new certificates already in the name ofPIC. In addition, Section 2.07(b) of the
ARDA explicitly declares that PIC asbuyer shall exercise all the rights, including the right to vote, of a
shareholder in respect of the PPC shares of stock.

PMO cannot maintain that the ownership of the PPC shares of stock did not pass on to PIC, but in
the same breath claim that non-payment by PIC of the installments due on the purchase price is a
resolutory condition for the contract of sale these two arguments are actually contradictory. As the
Court clearly explained in Heirs of Paulino Atienza v. Espidol38:
Regarding the right to cancel the contract for nonpayment of an installment, there is need to initially
determine if what the parties had was a contract of sale or a contract to sell. In a contract of sale, the
title to the property passes to the buyer upon the delivery of the thing sold. In a contract to sell, on
the other hand, the ownership is, by agreement, retained by the seller and is not to pass to the
vendee until full payment of the purchase price. In the contract of sale, the buyers nonpayment of
the price is a negative resolutory condition;in the contract to sell, the buyers full payment of the price
is a positive suspensive condition to the coming into effect of the agreement. In the first case, the
seller has lost and cannot recover the ownership of the property unless he takes action to set aside
the contract of sale.In the second case, the title simply remains in the seller if the buyer does not
comply with the condition precedent of making payment at the time specified in the contract. x x x.
(Emphases supplied, citation omitted.)

So that it could invoke the resolutory condition of nonpayment of an installment, PMO must
necessarily concede that its contract with PIC was a one of sale and that ownership of the PPC
shares of stock had indeed passed on to PIC. And even then, having lostownership of the shares,
PMO cannot automatically recover the same without taking steps to set aside the contract of sale.

Moreover, the general rule is that in the absence of a stipulation, a party cannot unilaterally and
extrajudicially rescind a contract. A party must invoke the right to rescind a contract judicially.39 It is
also settled that the rescission of a contract based on Article 1191 of the Civil Code requires mutual
restitution to bring back the parties to their original situation prior to the inception of the contract.
Rescissioncreates the obligation to return the object of the contract. It can be carried out only when
the one who demands rescission can return whatever he may be obliged to restore.40

Even though PMO had previouslyacknowledged the need for restitution or restoration following
rescission, it also qualified that such restitution or restoration shall still be "subject x x x to the fair
determination of the amount to be restored asmay be deemed reasonable and substantiated."41

Section 8.02 of the ARDA provides for the ipso factoreversion of the pledged shares of PIC to PMO
in case ofdefault on the part of the former, which as explained above, is prohibited by Article 2088 of
the Civil Code. The said Section does not mention the broader concept of rescission of the entire
ARDA.

In its Petition in G.R. No. 199432, PMO is asking the Court, among other things, to already declare
the ARDA rescinded. The Court cannot grant or deny such prayer at this point for there are
1wphi1

questions of fact and law which are still under litigation before the RTC.

There is no basis for dissolving the Writ of Preliminary Injunction.

The Court emphasizes that the Writ of Preliminary Injunction was granted in the RTC Order dated
February 27, 2003; and the Motion for Reconsideration of the issuance of saidWrit filed by the PMO
was denied in the RTC Order dated June 19, 2003 both of which are interlocutory orders. Under
Rule 65 of the Rules of Court,the PMO only had 60 days from notice to file with the Court of Appeals
a petition for certiorariassailing said orders. However, PMO did not file such a petition and lost the
right to avail itself of the remedy.

PMO, in challenging the RTC Order dated August 25, 2009, cannot be allowed to revive the issues
of pactum commissoriumand the arbitration clause, together with its opposition to the Writ of
Preliminary Injunction, which were already settled and ruled upon six years before in the RTC
Orders dated February 27, 2003 and June 19, 2003. The removal of said issues from those
submitted for trial before the R TC is thus justified. That the R TC issued the aforementioned Orders
of 2003 based only on initial and incomplete evidence is incorrect. The issues of pactum
commisorium and arbitration clause are questions of law that do not require the review or evaluation
of evidence. The RTC, before issuing said Orders of 2003, conducted hearings and required the
submission of pleadings, so the parties were given the opportunity to present their arguments on
said questions of law. In particular, the ruling of the RTC that Section 8.02 of the ARDA constitutes
pactum commissorium, cannot be set aside and the Writ of Injunction issued based on such ruling
cannot be dissolved, even if there be changes in the factual circumstances of the parties, for as long
as the applicable law remains the same.

There are still several remaining issues in the Pre-Trial Order dated February 6, 2009 that the RTC
needs to resolve, among others, the alleged default under the ARDA. They involve both questions of
fact and law, so their resolution requires further hearings for presentation of evidence by the parties.
Hence, PMO cannot claim pre-judgment of its case with the issuance by the RTC of the Orders
dated February 27, 2003 and June 19, 2003. Despite the declaration that Section 8.02 of the ARDA
is null and void as it constitutes pactum commissorium, PMO and PIC shall have the opportunity to
thresh-out other issues between them which are not resolved in these cases, such as the issue of
default, during the trial on the merits before the RTC. WHEREFORE, premises considered, the
Court:

(1) GRANTS the Petition for Review of PIC in G.R. No. 199420 by declaring that Section
8.02 of the ARDA constitutes pactum commissorium and, thus, null and void;

(2) DENIES the Petition for Review of PMO in G.R. No. 199432 for lack of merit; and

(3) DIRECTS the RTC to resolve Civil Case No. 03-114 with utmost dispatch.

SO ORDERED.