31\epublic of tbe tlbilippines

~upreme <!Court
manila

THIRD DIVISION
PERSONAL

MONDRAGON
SALES, INC.,

Petitioner,

G.R. No. 174882

Present:

VELASCO, JR., J, Chairperson,

PERALTA,
ABAD,
MENDOZA, and
LEONEN,JJ.

-versus-

Promulgated:
VICTORIANO S. SOLA, JR.,
Respondent.

.
January 21, 2013

X-------------------------------------------------------------------------~~
DECISION
PERALTA, J.:

Before us is a petition for review on certiorari seeking to set aside the

1
Decision dated February 10, 2006 and the Resolution 2 dated September 6,
2006 issued by the Court of Appeals (CA) in CA-G.R. CV No. 71690.
Petitioner Mondragon Personal Sales Inc., a company engaged in the
business of selling various consumer products through a network of sales
representatives, entered into a Contract of Services 3 with respondent
Victoriano S. Sola, Jr. for a period of three years commencing on October
2, 1994 up to October 1, 1997. Under the said contract, respondent, as
service contractor, would provide service facilities, i.e., bodega cum office,
to petitioner's products, sales force and customers in General Santos City
and as such, he was entitled to<:.. ':'IJmmission or service fee as follows:
Penned by Associate Justice Myrna Dimaranan Vidal, with Associate Justices Romulo Y. Borja
and Ricardo R. Rosario concurring; rollo, pp. 23-35.
2
Penned by Associate Justice Ricardo R. Rosario, with Associate Justices Romulo Y. Borja and
Sixto C. Marella, Jr. concurring; rollo, pp. 43-44.
'
!d. at71-78.

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G.R. No. 174882

MONTHLY SALES
(net of vat)

SERVICE FEE

P50,000.00 to 2,500,000.00
P2,500,001.00 to 3,000.000.00
P3,000,001.00 to 3,500,000.00
P3,500,001.00 UP

Five percent (5%)

P125,000.00
150,000.00
200,000.004

The agreement then came into effect when petitioner's goods were
delivered to respondent's bodega and were sold by petitioner's employees.
Prior to the execution of the contract, however, respondents wife, Lina Sola,
had an existing obligation with petitioner arising from her Franchise
Distributorship Agreement with the latter. On January 26, 1995, respondent
wrote a letter5 addressed to Renato G. de Leon, petitioner's Vice-President
for Finance, wherein he acknowledged and confirmed his wifes
indebtedness to petitioner in the amount of P1,973,154.73 (the other
subject to
accountability in the sum of P1,490,091.15 was still
reconciliation) and, together with his wife, bound himself to pay on
installment basis the said debt. Consequently, petitioner withheld the
payment of respondent's service fees from February to April 1995 and
applied the same as partial payments to the debt which he obligated to pay.
On April 29, 1995, respondent closed and suspended operation of his office
cum bodega where petitioner's products were stored and customers were
being dealt with.
On May 24, 1995, respondent filed with the Regional Trial Court
(RTC) of Davao, a Complaint6 for accounting and rescission against
petitioner alleging that petitioner withheld portions of his service fees
covering the months from October 1994 to January 1995 and his whole
service fees for the succeeding months of February to April 1995, the total
amount of which was P222,202.84; that petitioner's act grossly hampered, if
not paralyzed, his business operation, thus left with no other recourse, he
suspended operations to minimize losses. He prayed for the rescission of the
contract of services and for petitioner to render an accounting of his service
fees.
In its Answer with Counterclaim7 filed on June 14, 1995, petitioner
contended that respondents letter dated January 26, 1995 addressed to
petitioner's Vice-President for Finance, confirmed and obligated himself to
pay on installment basis the accountability of his wife with petitioner, thus
respondent's service fees/commission earned for the period of February to
April 1995 amounting to P125,040.01 was applied by way of compensation
4
5
6
7

Id. at 74.
Id. at 79.
Id. at 48-53; Docketed as Civil Case No. 23,625-95.
Id. at 54-65.

Decision

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G.R. No. 174882

to the amounts owing to it; that all the service fees earned by respondent
prior to February 1995 were fully paid to him. By way of counterclaim,
petitioner asked for the payment of the amount of P1,547,892.55 which
respondent obligated to pay plus interest; the delivery of petitioner's
products padlocked in respondent's office cum bodega, the payment for the
loss of income in the amount of P833,600.00 as well as the remaining
balance of P45,728.30 from the P100,000.00 given by petitioner to
respondent as advance money for the purchase of office equipment and the
renovation of the bodega cum office.
In his Reply and Answer8 to petitioner's counterclaim, respondent
averred that he was made to believe that the sales commission contained in
petitioner's memorandum dated July 5, 1994 would be applicable to him;
that it was improper for petitioner to confuse respondent's transaction with
that of his wife as it was divergent in nature and terms.
Pending trial, petitioner moved for the issuance of a preliminary
attachment and replevin which the RTC granted in its Order dated June 19,
1995 upon the filing of bonds.9 Respondent filed a Motion to Quash the
Writ of Attachment, which the RTC denied in an Order dated July 24,
1995.10 As respondent's motion for reconsideration was also denied, he filed
with us a petition for certiorari, docketed as G.R. No. 126427, assailing the
RTC orders which we dismissed in a Resolution11 dated November 11, 1996
on procedural matters.
Trial thereafter ensued.
On July 6, 2000, the RTC rendered its Decision,12 the dispositive
portion of which reads:
FOR THE FOREGOING, judgment is hereby rendered in favor of
defendant and against plaintiff, ordering the latter to pay the former:
1) the sum of P1,543,643.96 representing the principal
balance of plaintiff's account with defendant, plus legal
interest from the time of filing of the complaint until fully
paid, at the rate of 6% per annum;
2) attorney's fees in the amount of P25,000.00
3) costs of the suit.13
8
9
10
11
12
13

Records, pp. 34-35.

Id. at 42.
Id. at 85-88.
Id. at 174-175.
Id. at 262-274; Per Judge Salvador M. Ibarreta, Jr.
Id. at 273-274.

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G.R. No. 174882

In so ruling, the RTC found that in computing the service

fees/commissions due respondent, the rate as provided in the contract of
service dated January 27, 1995 was controlling, since respondent was a party
thereto duly affixing his signature therein; that petitioner's computation of
respondent's service fees for the months of February to April 1995 in the
total amount of P125,040.01 which was based on the said contract deserved
credence. The RTC ruled that while Article 1381 of the Civil Code provides
for the grounds for which a contract may be rescinded, none of these
grounds existed in this case; that there was no showing of fraud which
petitioner employed when it entered into the contract with respondent nor
did respondent agree to such a contract without knowing its content, thus the
contract was not rescissible.
As regards to petitioner's counterclaim that respondent confirmed and
assumed the payment of his wife's account with petitioner, the RTC found
that respondent obligated himself to pay his wife's account as evidenced by
his letter dated January 26, 1995; that after deducting from the confirmed
amount of P1,668,683.97 the respondent's service commission for the
period from February 1995 to April 1995, which was in the total amount of
P125,040.01, the amount owing to petitioner would still be P1,543,643.96.
The RTC dismissed the other counterclaims, since they were not
substantiated but found petitioner entitled to attorney's fees due to the
amount of money involved and the time spent in pursuing the case.
Respondent filed his appeal to the CA to which petitioner filed its
appellee's brief. On February 10, 2006, the CA rendered its assailed
decision, the dispositive portion of which reads as follows:
WHEREFORE, in the light of the foregoing premises, herein
appeal is GRANTED. Accordingly, the Contract of Services is hereby
RESCINDED. Let the case be REMANDED to the court a quo for the
proper determination of the amount of service fees unlawfully withheld
from the appellant.
Furthermore, Appellee is hereby ordered to pay the Appellant
attorneys fees in the amount of twenty-five thousand pesos
(P25,000.00).14
The CA found that under Article 1191 of the Civil Code, respondent

was entitled to rescind the contract of services as it was petitioner who

breached the same by withholding the service fees lawfully due to the
former; that petitioner's act of unlawfully withholding the service fees due
respondent constituted a willful and deliberate infringement on contractual
obligations which would justify rescission under Article 1191. The CA
declared that the contract of services entered into by the parties did not fall
14

Rollo, p. 34. (Emphasis in the original).

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G.R. No. 174882

under any of the rescissible contracts enumerated under Article 1381 of the
Civil Code but under Article 1191 which pertains to rescission of reciprocal
obligations as in the instant case.
The CA ruled that respondent did not assume his wife's obligation as
he did not substitute himself in the shoes of his wife regarding the payment
of the latter's liability; that there can be no novation as novation was never
presumed. Petitioner's act of withholding respondent's service fee and
thereafter applying them to the obligation of his wife was unlawful,
considering that respondent never assumed his wife's obligation with
petitioner; that there could be no legal compensation, since it was
respondent's wife who was principally indebted to petitioner owing from the
franchise distributorship agreement she earlier entered into with petitioner;
that granting the debt redounded to the benefit of the family and incurred
with the consent of respondent, and the spouse, as joint administrators of the
community property are solidarily liable with their separate properties for
debts incurred, however, such liability is only subsidiary, when the
community property is not sufficient to pay for all liabilities, however, in
this case, there was no showing that the community property of the spouses
was insufficient to pay the debt.
The CA ordered the deletion of attorney's fees as it was respondent
who was entitled to such award, since he was compelled to litigate to protect
his interest for the unjustified act of petitioner.
Petitioner's motion for reconsideration was denied in a Resolution
dated September 6, 2006.
Hence, this petition where petitioner alleges that the CA erred:
1. In finding that petitioner breached its contract with respondent and that
there is no compensation in accordance to Article 1279 of the Civil
Code;
2. In finding that respondent did not assume the obligation of his wife;
3. In remanding the case to the court a quo for proper determination of
service fee withheld when the same has been determined;
4. In obliterating the award of petitioner's counterclaim when respondent
admitted his obligation to petitioner.15

The CA found that petitioner's act of withholding respondent's service

fees and thereafter applying them as partial payment to the obligation of
respondent's wife with petitioner was unlawful, considering that respondent
never assumed his wifes obligation, thus, there can be no legal
compensation under Article 1279 of the Civil Code.
15

Id. at 13.

Decision

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G.R. No. 174882

We do not agree.
In his letter dated January 26, 1995 addressed to Mr. Renato G. De
Leon, petitioner's Vice-President for Finance, respondent wrote, and which
we quote in full:
Gentlemen:
This refers to the account of my wife, Lina (Beng) Sola, with Mondragon
Personal Sales, Inc. in the amount of P3,463,173.88. Of this total amount,
we are initially confirming the total amount of P1,973,154.73 as due from
Lina (Beng) Sola, while the remaining balance of P1,490,091.15 will be
subject to a reconciliation on or before February 5, 1995.
In recognition of Lina (Beng) Sola's account, we undertake to pay
P100,000.00 on or before February 01, 1995 and the balance of
P1,873,154.73 plus interest of 18% per annum and 2% administrative
charge per month on the diminishing balance will be covered by postdated
checks of not less than P100,000.00 per month starting February 28, 1995
and every end of the month thereafter but not to exceed eighteen (18)
months or July 31, 1996.
With regards to the remaining balance of P1,490,019.15, we agree
that upon final verification of these accounts, we will issue additional
postdated checks subject to the same terms and conditions as stated above.
We further agree that all subsequent orders that will be released to
us will be covered by postdated checks.
I fully understand and voluntarily agree to the above undertaking
with full knowledge of the consequences which may arise therefrom.
Very truly yours,
(signed)
Victoriano S. Sola16

A reading of the letter shows that respondent becomes a co-debtor of

his wife's accountabilities with petitioner. Notably, the last paragraph of his
letter which states I fully understand and voluntarily agree to the above
undertaking with full knowledge of the consequences which may arise
therefrom and which was signed by respondent alone, shows that he
solidarily bound himself to pay such debt. Based on the letter, respondent's
wife had an account with petitioner in the amount of P3,463,173.88, out of
which only the amount of P1,973,154.73 was confirmed while the
remaining amount of P1,490,019.15 would still be subject to reconciliation.
As respondent bound himself to pay the amount of P1,973,154.73, he
becomes petitioner's principal debtor to such amount.
16

Id. at 79.

Decision

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G.R. No. 174882

On the other hand, respondent, as petitioner's service contractor, was

entitled to a payment of service fees as provided in their contract of services
dated January 26, 1995. We note that respondent never refuted the amount of
monthly sales recorded but only assailed in the RTC the rate of the service
fees which he was entitled to. However, we find that there could be no other
computation of the rate of the service fees other than what was provided in
the contract of services dated January 26, 1995 signed by respondent and
petitioner. Thus, we give credence to petitioner's computation of
respondent's service fees for the months of February to April 1995 in the
total amount of P125,040.01. Since respondent promised petitioner in his
letter dated January 26, 1995, to monthly pay a certain amount to cover the
indebtedness to petitioner which he failed to do, the latter withheld the
payment of respondent's service fees and applied the same as partial
payments of the debt by way of compensation.
We find that petitioner's act of withholding respondent's service
fees/commissions and applying them to the latter's outstanding obligation
with the former is merely an acknowledgment of the legal compensation that
occurred by operation of law between the parties.17 Compensation is a mode
of extinguishing to the concurrent amount the obligations of persons who in
their own right and as principals are reciprocally debtors and creditors of
each other. Legal compensation takes place by operation of law when all the
requisites are present, as opposed to conventional compensation which takes
place when the parties agree to compensate their mutual obligations even in
the absence of some requisites.18 Legal compensation requires the
concurrence of the following conditions:
(1)
That each one of the obligors be bound principally, and that he be
at the same time a principal creditor of the other;
(2)
That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the
latter has been stated;
(3)
That the two debts be due;
(4)
That they be liquidated and demandable;
(5)
That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the debtor.19

We find the presence of all the requisites for legal compensation.

Petitioner and respondent are both principal obligors and creditors of each
other. Their debts to each other consist in a sum of money. Respondent
acknowledged and bound himself to pay petitioner the amount of
P1,973,154.73 which was already due, while the service fees owing to
17

See Bank of the Philippine Islands v. Court of Appeals, G.R. No. 142731, June 8, 2006, 490 SCRA
168, 178; 523 Phil. 548, 560 (2006).
18
Id.
19
Civil Code, Art. 1279.

Decision

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G.R. No. 174882

respondent by petitioner become due every month. Respondent's debt is

liquidated and demandable, and petitioner's payments of service fees are
liquidated and demandable every month as they fall due. Finally, there is no
retention or controversy commenced by third persons over either of the
debts. Thus, compensation is proper up to the concurrent amount where
petitioner owes respondent P125,040.01 for service fees, while respondent
owes petitioner P1,973,154.73.
As legal compensation took place in this case, there is no basis for
respondent to ask for rescission since he was the first to breach their
contract when, on April 29, 1995, he suddenly closed and padlocked his
bodega cum office in General Santos City occupied by petitioner.
Petitioner claims that the CA erred in obliterating the RTCs award of
its counterclaim which it had alleged and proved during trial and which
respondent even admitted.
We agree.
In his letter dated January 6, 1995, respondent confirmed the amount
of P1,973,154.73 owing to petitioner. On September 29, 1997, petitioner
wrote another letter20 to petitioner's Credit and Collection Manager, Rudy
Machanco, wherein he again confirmed the indebtedness in the amount of
P1,973,154.73. In the same letter, he showed the payments he had already
made and after deducting the same from the confirmed indebtedness, the
total balance remained to be at P1,668,683.97. As we have said earlier,
respondent's service fees from February to April 1995 which was in the total
amount of P125,040.01 was not assailed at all by respondent in his appeal
with the CA, thus he is bound by such computation. Hence, the amount of
P125,040.01 which petitioner owes respondent shall be offset against the
P1,973,154.73 which respondent owes petitioner, and therefore leaving a
balance of P1,543,643.96 which respondent must pay.
WHEREFORE, the petition for review is GRANTED. The Decision
dated February 10, 2006 and the Resolution dated September 6, 2006 of the
Court of Appeals are hereby REVERSED and SET ASIDE. Respondent is
hereby ordered to pay petitioner the amount of P1,543,643.96 with 6%
percent per annum from June 14, 1995 until finality of this Decision and
12% percent per annum thereafter until full payment.

20

Rollo, p. 81.

- 9-

Decision

GR. No. 174882

SO ORDERED.

WE CONCUR:

PRESBITE 0 J. VELASCO, JR.

As ociate Justice
Chairperson

ROBERTO A. ABAD
Associate Justice

JOSE

CA~NDOZA

As;l7;eLJ::~ce

Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in
consultation before the case was assigned to the writer of the opinion of the
Court's Division.

PRESBITE 0 J. VELASCO, JR.

Chai erson, Third Division

G.R. No. 174882

Decision

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution and the

Division Chairperson's Attestation, I certify that the conclusions in the above
Decision had been reached in consultation before the case was assigned to
the writer of the opinion of the Court's Division.

MARIA LOURDES P. A. SERENO

Chief Justice