S.C. Megaworld Construction and Development Corporation vs. Engr. Luis U. Parada

A sole proprietorship has no separate juridical personality and need not be impleaded as a party-plaintiff; novation by substitution of debtor requires the creditor’s clear and unequivocal consent to release the original debtor; and objections to verification and certification against forum shopping are formal, not jurisdictional, and must be raised at the earliest opportunity.

S.C. Megaworld Construction and Development Corporation purchased electrical lighting materials from Genlite Industries, a sole proprietorship owned by Engr. Luis U. Parada, for its Read-Rite project in Canlubang, Laguna. Petitioner had a subcontract with Enviro Kleen Technologies, Inc., which was connected to the payment arrangement for the purchase.

S.C. Megaworld Construction and Development Corporation bought electrical lighting materials from Genlite Industries, a sole proprietorship owned by Engineer Luis U. Parada, for its Read-Rite project in Canlubang, Laguna. The petitioner failed to pay for the purchase on the due date and attributed this to its failure to collect under its subcontract with Enviro Kleen Technologies, Inc. The petitioner persuaded Enviro Kleen to settle the purchase, and on June 2, 1999, Enviro Kleen paid the respondent ₱250,000.00. Enviro Kleen thereafter stopped making further payments, leaving an outstanding balance of ₱816,627.00, and ignored the respondent’s various demands. The respondent then filed a suit in the RTC of Quezon City, docketed as Civil Case No. Q-01-45212, to collect the balance, plus damages, costs, and expenses.

In its answer, the petitioner denied liability and claimed that it was released from its indebtedness by novation. It reasoned that when the respondent accepted Enviro Kleen’s partial payment in the petitioner’s behalf, the respondent acquiesced to the substitution of Enviro Kleen as the new debtor in the petitioner’s place. The complaint was verified and accompanied by a certification of non-forum shopping signed by Engineer Leonardo A. Parada as attorney-in-fact of the respondent. The special power of attorney authorized Leonardo to file a complaint against the petitioner for sum of money with damages, to testify in the trial, and to sign all papers and documents related thereto, with full powers to enter into stipulation and compromise.

After trial, the RTC found that the respondent’s letters to Enviro Kleen dated April 14, 1999 and June 16, 1999 did not show any consent to the exchange of the person of the debtor from the petitioner to Enviro Kleen. In the first letter, the respondent informed Enviro Kleen that he had served notice to the petitioner that unless the overdue account was paid, the matter would be referred to its lawyers and there might be a pull-out of the delivered lighting fixtures; incidental damages to the structure during the pull-out would be to the petitioner’s account. The RTC concluded that there was no novation, that the respondent’s acquiescence to Enviro Kleen’s assumption of the obligation merely added a debtor, and that the respondent did not assent to the substitution, as shown by his action against the petitioner.

The CA upheld the RTC. It noted that the petitioner raised only the defense of novation in its answer and did not raise the real-party-in-interest question at any stage below. From the sales invoices and receipts, the CA found that the respondent was the sole proprietor of Genlite Industries and therefore the real party-plaintiff. On novation, the CA found nothing in the respondent’s two letters that would imply consent to the alleged novation or an intent to release the petitioner from its primary obligation; the respondent retained his option to seek satisfaction from the petitioner, so any acquiescence was limited to accepting Enviro Kleen as an additional debtor. The petitioner moved for reconsideration, raising for the first time the validity of the verification and certification of non-forum shopping; the CA denied the motion for lack of merit.

During the pendency of the case, the respondent, a widower, died of cardio-pulmonary arrest on January 21, 2009. He was survived by his legitimate children, Leonardo, Luis, Jr., and Lalaine, all surnamed Parada, who substituted him in the petition per the Supreme Court Resolution dated September 2, 2009. On July 23, 2009, Luis, Jr. and Lalaine executed a special power of attorney authorizing their brother Leonardo to represent them in the instant petition.

• Novation: Petitioner maintained that the trial court erred in ruling that no novation of the contract took place through the substitution of Enviro Kleen as the new debtor. It argued that when the respondent accepted Enviro Kleen’s partial payment of ₱250,000.00 in its behalf, the respondent acquiesced to the substitution of Enviro Kleen as the new debtor in petitioner’s place and thereby released petitioner from its obligation.
• Real Party in Interest: Petitioner argued for the first time on appeal that the trial court should have dismissed the complaint for failure of the respondent to implead Genlite Industries as a proper party in interest under Section 2, Rule 3 of the 1997 Rules of Civil Procedure.
• Verification and Non-Forum Shopping: Petitioner raised for the first time on motion for reconsideration, and reiterated in the Supreme Court, that the verification and certification of non-forum shopping attached to the complaint were invalid because the special power of attorney executed by the respondent did not specifically authorize Leonardo to sign the verification and certification, thus violating Sections 4 and 5 of Rule 7 and rendering the complaint defective.

• Verification and Non-Forum Shopping: Whether the complaint should have been dismissed outright for invalid verification and certification of non-forum shopping.
• Real Party in Interest: Whether Genlite Industries should have been impleaded as a party-plaintiff, or whether respondent was the real party in interest.
• Novation: Whether the contract was novated by substitution of Enviro Kleen as new debtor, thereby releasing petitioner from its obligation.
• Interest: Whether the award of 20% per month interest was proper.
• Attorney’s Fees: Whether the award of attorney’s fees was proper.

• Verification and Non-Forum Shopping: No. Verification and certification are formal, not jurisdictional; objections must be raised in the proceedings below, not for the first time on appeal, and substantial compliance was shown because verification may be based on authentic records.
• Real Party in Interest: No. A sole proprietorship has no separate juridical personality; respondent, as sole proprietor, was the real party in interest, and Genlite Industries need not be impleaded.
• Novation: No. Novation is never presumed and requires clear and unequivocal consent of the creditor to release the original debtor; mere acceptance of payment from a third person who assumed the obligation results only in addition of debtors.
• Interest: The 20% per month award was a clerical error and excessive; proper interest is 12% per annum from judicial demand until June 30, 2013, and 6% per annum from July 1, 2013 until finality, then 6% until fully paid.
• Attorney’s Fees: Not proper. The trial court failed to state factual, legal, or equitable justification in the body of its decision; the award is deleted.

• Verification and Non-Forum Shopping: The Court applied the settled rule that no question will be entertained on appeal unless it has been raised in the proceedings below; points of law, theories, issues, and arguments not brought to the attention of the lower court need not be considered by the reviewing court, as they cannot be raised for the first time at that late stage. Fairness and due process impel the rule, and any issue raised for the first time on appeal is barred by estoppel. Petitioner first raised the real-party-in-interest objection on appeal and the verification/non-forum shopping objection only on motion for reconsideration. Verification is a formal, not a jurisdictional, requisite; it is mainly intended to secure an assurance that the allegations are made in good faith and are true and correct, and the court may order correction or act on an unverified pleading if strict compliance may be dispensed with to serve the ends of justice. The question of forum shopping cannot be raised in the CA and in the Supreme Court, since it must be raised at the earliest opportunity in a motion to dismiss or similar pleading. Even assuming Leonardo lacked personal knowledge, Section 4 of Rule 7 allows verification based on authentic records; sales invoices, statements of accounts, receipts, and collection letters for the balance due are such records. There was substantial compliance, and strict compliance with the rules may be dispensed with to serve substantial justice.
• Real Party in Interest: Section 1 of Rule 3 provides that only natural or juridical persons or entities authorized by law may be parties in a civil case. Article 44 of the New Civil Code enumerates juridical persons, and a sole proprietorship is not among them. Genlite Industries is merely the DTI-registered trade name or style of the respondent by which he conducted his business; it does not exist as a separate entity apart from its owner and has no separate juridical personality to sue or be sued. As the sole proprietor of Genlite Industries, the respondent was the real party in interest who stood to be directly benefited or injured by the judgment. There was therefore no necessity to implead Genlite Industries as a party-plaintiff, since the complaint was already filed in the name of its proprietor.
• Novation: Article 1293 of the Civil Code provides that novation consisting in substituting a new debtor in place of the original one may be made even without the knowledge or against the will of the latter, but not without the consent of the creditor. In order to change the person of the debtor, the former debtor must be expressly released from the obligation, and the third person or new debtor must assume the former’s place in the contractual relation. The substitution may be by expromision or delegacion; in both modes, the old debtor must be released, and both require the consent of the creditor. The respondent’s letters to Enviro Kleen dated April 14, 1999 and June 16, 1999 showed no clear and unequivocal consent to release petitioner. The respondent retained his option to go after petitioner if Enviro Kleen failed to settle the debt; he informed Enviro Kleen that he had served notice to petitioner that unless the overdue account was paid, the matter would be referred to its lawyers and there might be a pull-out of the delivered lighting fixtures, with incidental damages to petitioner’s account. The acceptance of payments from Enviro Kleen did not ipso facto result in novation; absent an agreement to release petitioner, it merely added debtors, and the creditor could still enforce the obligation against the original debtor. Novation is never presumed but must be clearly and unequivocally shown; mere substitution of debtors will not result in novation; if there is no agreement as to solidarity, the first and new debtors are considered obligated jointly. The trial court and the CA found that no novation occurred, and the Court found no overlooked fact or misinterpretation that would warrant a different conclusion.
• Interest: The trial court’s fallo ordered interest equivalent to 20% per month of the principal obligation, but the recital of facts showed that the respondent demanded interest of 2% per month. The 20% per month award was an obvious clerical error, excessive and iniquitous, and beyond what the plaintiff had prayed for. A clerical error is one visible to the eyes or obvious to the understanding and may be corrected. More importantly, it was nowhere stated that the parties stipulated an interest on the amount due. Under Article 2209 of the Civil Code, if the obligation consists in the payment of a sum of money and the debtor incurs in delay, the indemnity for damages, absent stipulation, is the legal interest, which is 6% per annum. Under Central Bank Circular No. 416 and Circular No. 905, the rate for loans or forbearance of money, goods, or credits, and judgments involving such forbearance, was 12% per annum, while for damages arising from breach or delay in general, the rate is 6% per annum under Article 2209. Eastern Shipping Lines laid down the guidelines: 12% per annum for loans or forbearance of money; 6% per annum for non-loan or non-forbearance obligations; and from finality of judgment until satisfaction, the award is considered a forbearance of credit. However, Bangko Sentral ng Pilipinas Circular No. 799, effective July 1, 2013, restored the rate to 6% per annum for loans or forbearance of money, goods, or credits and judgments absent an express contract. Accordingly, the interest was fixed at 12% per annum from judicial demand until June 30, 2013, and 6% per annum from July 1, 2013 until finality, with the principal as adjusted by interest earning 6% per annum until fully paid.
• Attorney’s Fees: Article 2208 of the New Civil Code enumerates the instances when attorney’s fees may be awarded, and the award must be reasonable, just, and equitable. Attorney’s fees are the exception rather than the general rule and are not awarded every time a party prevails, because no premium should be placed on the right to litigate. The trial court must state the factual, legal, or equitable justification in the body of its decision; the matter cannot be stated only in the dispositive portion, and the CA is precluded from supplementing the basis when the trial court failed to discuss the reasons. The trial court merely said that petitioner “unjustifiably failed and refused to pay the respondent” and did not state the factual or legal basis for the award. The award of attorney’s fees was therefore deleted.

• Verification and Certification Against Forum Shopping as Formal Requirements — Verification and certification against forum shopping are formal, not jurisdictional, requisites. Objections to non-compliance must be raised at the earliest opportunity in the proceedings below; raising them for the first time on appeal or in a motion for reconsideration is barred by estoppel and violates fair play and due process. Courts may order correction or act on an unverified pleading, and strict compliance may be dispensed with to serve substantial justice. In this case, the Court found substantial compliance because the verification could be based on authentic records and the objections were belated.
• Real Party in Interest in a Sole Proprietorship — A sole proprietorship has no juridical personality separate and distinct from that of its owner and need not be impleaded as a party-plaintiff. The owner is the real party in interest who stands to be benefited or injured by the judgment. The Court applied this to hold that Genlite Industries, merely a DTI-registered trade name of respondent, had no separate personality to sue or be sued, and respondent was properly the plaintiff.
• Novation by Substitution of Debtor (Expromision and Delegacion) — Novation by changing the person of the debtor requires the creditor’s consent and the express release of the old debtor from the obligation. There are two modes: expromision, where a third person assumes the obligation with the consent of the third person and the creditor; and delegacion, where the debtor offers and the creditor accepts a third person who consents to the substitution, requiring the consent of all three. Both modes require the creditor’s consent. In this case, no novation occurred because respondent never clearly and unequivocally consented to release petitioner.
• Novation Never Presumed; Addition of Debtors — Novation is never presumed but must be clearly and unequivocally shown. The mere substitution of debtors will not result in novation, and the creditor’s acceptance of payments from a third person who has assumed the obligation results merely in the addition of debtors, not novation. The creditor may enforce the obligation against both debtors; absent an agreement as to solidarity, the first and new debtors are considered obligated jointly. The Court applied this to hold that Enviro Kleen’s partial payment did not release petitioner.
• Legal Interest on Money Judgments — Under Article 2209 of the Civil Code, absent stipulation, the legal interest is 6% per annum. However, under Central Bank Circular No. 416 and Circular No. 905, the rate for loans or forbearance of money, goods, or credits, and judgments involving such forbearance, was 12% per annum. For damages arising from breach or delay in general, the rate is 6% per annum under Article 2209. From finality of judgment until satisfaction, the award is considered a forbearance of credit. Under Bangko Sentral ng Pilipinas Circular No. 799, effective July 1, 2013, the rate for loans or forbearance and judgments absent express contract is 6% per annum. The Court applied these rules to reduce the interest award.
• Attorney’s Fees Must Be Justified in the Body of the Decision — Attorney’s fees are the exception rather than the general rule and are not awarded every time a party prevails. The trial court must state the factual, legal, or equitable justification in the body of its decision, not merely in the dispositive portion; the appellate court cannot supply the missing basis. The Court applied this to delete the award of attorney’s fees.

• "It is well-settled that no question will be entertained on appeal unless it has been raised in the proceedings below. Points of law, theories, issues and arguments not brought to the attention of the lower court, administrative agency or quasi-judicial body, need not be considered by are viewing court, as they cannot be raised for the first time at that late stage. Basic considerations of fairness and due process impel this rule. Any issue raised for the first time on appeal is barred by estoppel." — This states the procedural bar applied to petitioner’s belated objections to the verification, certification against forum shopping, and real party in interest.
• "A sole proprietorship has no juridical personality separate and distinct from that of its owner, and need not be impleaded as a party-plaintiff in a civil case." — This is the Court’s holding on why Genlite Industries was not a necessary party-plaintiff and why respondent, as sole proprietor, was the real party in interest.
• "Novation is never presumed but must be clearly and unequivocally shown." — This is the controlling rule on novation, applied to reject petitioner’s claim that Enviro Kleen’s partial payment and respondent’s acceptance released petitioner from the obligation.
• "The award of attorney’s fees is not proper." — This states the Court’s conclusion deleting the trial court’s award of attorney’s fees because the trial court failed to justify it in the body of its decision.

• KILUSAN-OLALIA vs. CA, 555 Phil. 42 (2007) — Held that verification is a formal, not jurisdictional, requisite and that strict compliance may be dispensed with to serve the ends of justice; relied on to reject petitioner’s belated challenge to the verification.
• Young vs. John Keng Seng, 446 Phil. 823 (2003) — Held that the question of forum shopping cannot be raised in the CA and the Supreme Court because it must be raised at the earliest opportunity in a motion to dismiss or similar pleading; cited to support the procedural bar.
• Berman Memorial Park, Inc. vs. Cheng, 497 Phil. 441 (2005) — Held that a sole proprietorship has no separate juridical personality to sue or be sued; cited to hold that Genlite Industries need not be impleaded and respondent was the real party in interest.
• Garcia vs. Llamas, 462 Phil. 779 (2003) — Explained expromision and delegacion and the requirement of creditor consent in substitution of debtor; relied on to reject novation.
• Reyes vs. CA, 332 Phil. 40 (1996) — Held that the creditor’s consent to a novation by change of debtor is indispensable and that mere acceptance of payments from a third person who assumed the obligation creates co-debtorship or suretyship, not novation; applied to the facts.
• Ajax Marketing & Development Corporation vs. CA, 318 Phil. 268 (1995) — Held that to effect a subjective novation by change of debtor, the old debtor must be expressly released and the new debtor must assume his place; no novation without such release.
• Medel vs. CA, 359 Phil. 820 (1998) — Held that an award of 20% per month interest is excessive and iniquitous; cited in correcting the trial court’s interest award.
• Eastern Shipping Lines vs. Court of Appeals, G.R. No. 97412, July 12, 1994, 234 SCRA 78 — Laid down the guidelines on the imposition of legal interest, including the distinction between loans or forbearance of money and damages arising from breach or delay; applied in recomputing interest.
• Sunga-Chan vs. CA, G.R. No. 164401, June 25, 2008, 555 SCRA 275 — Clarified the meaning of a loan or forbearance of money and reiterated the 12% versus 6% interest rules; cited in the interest discussion.
• Frias vs. San Diego-Sison, 549 Phil. 49 (2007) — Held that attorney’s fees must be justified by findings in the body of the trial court’s decision and that the CA cannot supply the missing basis; relied on to delete the award.
• Philippine Airlines, Incorporated vs. CA, G.R. No. 123238, September 22, 2008, 566 SCRA 124 — Held that the trial court must state the factual, legal, or equitable justification for attorney’s fees; cited in deleting the award.
• Buñing vs. Santos, 533 Phil. 610 (2006) — Held that attorney’s fees cannot be stated only in the dispositive portion but must be explained in the body of the decision; cited in deleting the award.

• Section 2, Rule 3, 1997 Rules of Civil Procedure — Defines a real party in interest as the party who stands to be benefited or injured by the judgment or is entitled to the avails of the suit; applied to hold respondent was the real party in interest as sole proprietor of Genlite Industries.
• Section 1(g), Rule 16, 1997 Rules of Civil Procedure — Allows dismissal on the ground that the suit was not brought in the name of or against the real party in interest; petitioner’s belated invocation of this ground was rejected.
• Sections 4 and 5, Rule 7, 1997 Rules of Civil Procedure — Govern verification and certification against forum shopping; the Court held these are formal, not jurisdictional, and that objections must be raised at the earliest opportunity, with substantial compliance sufficient.
• Section 1, Rule 3, Rules of Court — Provides that only natural or juridical persons or entities authorized by law may be parties in a civil case; applied to hold that a sole proprietorship cannot be a party.
• Article 44, New Civil Code — Enumerates juridical persons; a sole proprietorship is not included, so Genlite Industries had no separate juridical personality.
• Article 1293, New Civil Code — Provides that substitution of a new debtor may be made even without the knowledge or against the will of the old debtor, but not without the consent of the creditor; applied to reject novation.
• Article 1292, New Civil Code — Cited for the rule that parties must expressly agree to abrogate their old contract in favor of a new one; applied to require clear and unequivocal novation.
• Article 2209, New Civil Code — Provides that absent stipulation, the legal interest for a money obligation is 6% per annum; applied together with the circulars in fixing interest.
• Article 2208, New Civil Code — Enumerates the instances when attorney’s fees may be awarded; the trial court failed to justify the award in the body of its decision, so it was deleted.
• Article 1169, New Civil Code — Concerns default or delay; referenced in the Eastern Shipping Lines guidelines for reckoning interest from judicial or extrajudicial demand.
• Central Bank Circular No. 416 — Prescribed 12% per annum interest for loans or forbearance of money, goods, or credits and judgments absent express contract; applied until June 30, 2013.
• Central Bank Circular No. 905 — Continued the 12% per annum rate and suspended the Usury Law; cited in the interest discussion.
• Bangko Sentral ng Pilipinas Circular No. 799 — Effective July 1, 2013, restored the rate to 6% per annum for loans or forbearance of money, goods, or credits and judgments absent express contract; applied from July 1, 2013.

Chief Justice Maria Lourdes P. A. Sereno (Chairperson), Associate Justice Teresita J. Leonardo-De Castro, Associate Justice Lucas P. Bersamin, and Associate Justice Martin S. Villarama, Jr. No separate concurring opinions are summarized in the text.