This is a petition for review on certiorari^[1] of the Decision^[2] dated 12 November 1999 and the Resolution dated 31 July 2000 of the Court of Appeals in CA-G.R. CV No. 37399. The Court of Appeals modified the Decision^[3] of the Regional Trial Court of Makati, Branch 58 ("trial court").


Respondent Engineering and Construction Corporation of Asia ("ECCO-ASIA") is a corporation engaged in the construction business. Petitioner Casimiro R. Nadela ("Nadela") was the Regional Logistics Manager of ECCO-ASIA from 11 October 1982 until 11 April 1983. Effective 12 April 1983, Nadela became the Assistant Vice-President of the Visayas Office of ECCO-ASIA^[4] and on 1 September 1984, ECCO-ASIA appointed him Assistant Vice-President of the Southern Philippines Division ("Southern Division").^[5] As Assistant Vice-President, Nadela was in charge of procuring and monitoring materials, manpower and equipment requirements in the Southern Division.^[6] Nadela's contractual employment with ECCO-ASIA ended on 31 July 1985 upon the expiration of his contract.^[7]

According to Nadela, ECCO-ASIA suffered financial setbacks in 1983 until 1985. As Assistant Vice-President of the Southern Division of ECCO-ASIA, Nadela decided to offset the obligations of ECCO-ASIA to its creditors through payment in kind. Since the major creditors of ECCO-ASIA were located in Cebu, Nadela arranged for all the materials, tools and equipment owned by ECCO-ASIA in his division to be stored in the Cebu Oversea Hardware warehouse ("warehouse") to facilitate the offsetting arrangement.^[8]

Percival G. Llaban ("Llaban"), owner of JAPER Marketing, was one of the creditors of ECCO-ASIA. Llaban supplied the liquefied petroleum gas to ECCO-ASIA for its metal cutting operation. In a letter dated 28 April 1985,^[9] Llaban wrote ECCO-ASIA demanding payment of its payables to JAPER Marketing. Considering the financial condition of ECCO-ASIA, Llaban agreed to be paid in tools and equipment. To facilitate the offsetting of ECCO-ASIA's payables to Llaban, Nadela withdrew the remaining tools and equipment of ECCO-ASIA worth approximately P600,000^[10] from the warehouse and brought these to Llaban's residence. Llaban selected some tools and equipment worth P119,165.18^[11] as payment of ECCO-ASIA's account to JAPER Marketing. In September 1985, Llaban executed a receipt and quitclaim in favor of ECCO-ASIA.^[12] After the offsetting, the excess tools and equipment of ECCO-ASIA remained in Llaban's residence. Llaban later brought some of the tools and equipment to his store Casper Enterprises for storage.^[13]

Juan F. Ibañez ("Ibañez") was the internal auditor of ECCO-ASIA and administrator of its Buli Logistic Facility in Muntinlupa. Sometime in 1985, ECCO-ASIA's Vice President Melina E. Medina ("Medina") directed Ibañez to go to Cebu and investigate Nadela's withdrawal from the warehouse of ECCO-ASIA's property valued at approximately P600,000. Ibañez proceeded to wind up the operation of the Southern Division of ECCO-ASIA.^[14] He arranged a conference with Llaban and Nadela to discuss the return of the remaining properties of ECCO-ASIA. Llaban agreed to return the remaining tools and equipment of ECCO-ASIA provided he would be paid the remaining balance of P19,000. However, Nadela objected because ECCO-ASIA had not fully paid his salary.^[15] Ibañez continued the offsetting of ECCO-ASIA's payables to Llaban and signed the remaining delivery receipts^[16] dated 26 September 1985 in favor of Llaban for the full settlement of its account. Thereafter, Llaban executed a receipt and quitclaim in favor of ECCO-ASIA.

Ibañez likewise facilitated the offsetting of accounts of ECCO-ASIA in favor of Nadela and signed delivery receipts dated 11 September 1985,^[17] 12 September 1985,^[18] and 2 October 1985^[19] representing tools and equipment worth more than P53,600 delivered to Nadela.

On 18 September 1985, ECCO-ASIA sent a letter^[20] to Nadela, requesting the immediate return of the tools and construction materials of ECCO-ASIA. The letter was signed by Ibañez and enclosed was a list^[21] of the tools and construction materials amounting to P476,365.69 which were still in Nadela's custody. On 7 October 1985, Medina sent a telegram^[22] to Nadela reiterating the request of ECCO-ASIA for Nadela to turn over to Ibañez the equipment, construction materials and vehicle of ECCO-ASIA which were still in Nadela's custody.

On 29 October 1985, ECCO-ASIA filed with the trial court an action against Nadela and Llaban for Recovery of Personal Property and/or Collection of Sum of Money with Prayer for Preliminary Attachment. The case was docketed as Civil Case No. 12117.

On 11 November 1985, Nadela's counsel sent to the president of ECCO-ASIA, Mr. Cesar Pio Roda, a letter stating that Nadela had a right to retain and dispose the company assets in his possession until all his claims against ECCO-ASIA were satisfied.

Meanwhile, in February 1986, Nadela filed with the Regional Arbitration Branch No. VII, Cebu City, a complaint for unpaid wages and other money claims against ECCO-ASIA. On 14 December 1990, the Labor Arbiter rendered a decision in favor of Nadela which was subsequently affirmed by the National Labor Relations Commission. The dispositive portion of the Labor Arbiter's decision reads:

WHEREFORE, premises considered, judgment is rendered in favor of complainant ordering respondent to pay P52,188.81 representing unpaid balance of complainant's salaries.

Respondent is also ordered to pay separation pay for the period from October 11, 1982 to July 31, 1985 the sum of P28,500.00 representing three months plus the imputed period from July 31, 1985 up to the time of actual payment but such imputed period not to exceed 3 years, equivalent to one month salary for every year.

Finally, respondent is assessed the amount of P400.00 pursuant to NLRC Memorandum dated July 3, 1990.

SO ORDERED.^[23]

On 21 February 1992, the trial court rendered a decision in Civil Case No. 12117. The trial court held Nadela liable for unlawfully withholding ECCO-ASIA's property but dismissed the case against Llaban for lack of evidence. The dispositive portion of the decision reads:

WHEREFORE, premises considered, judgment is hereby rendered:

1) Ordering defendant Casimiro R. Nadela to return the various pieces of equipments, tools and construction materials valued at P476,365.69 or if he cannot return them, to pay plaintiff the value of such equipments, tools and materials in the amount of P476,365.69 with legal interest at 12% per annum from October 29, 1985;

2) Ordering the case against Percival G. Llaban dismissed; and

3) Ordering defendant Casimiro R. Nadela to pay 25% of the amount awarded to plaintiff as attorney's fees and P500.00 per appearance and to pay the costs of the suit.

SO ORDERED.^[24]

Nadela appealed to the Court of Appeals. On 12 November 1999, the Court of Appeals modified the decision of the trial court as follows:

WHEREFORE, foregoing premises considered, the decision appealed from is hereby modified, in so far as the interest on the obligation is concerned and as to award of attorney's fees, by:

1) Ordering defendant Casimiro R. Nadale (sic) to return the various pieces of equipment, tools and construction materials valued at P476,365.69 or if he cannot return them, to pay plaintiff-appellee the value of such equipments, tools and materials in the amount of P476,365.69 with interest at 6% computed from October 29, 1985, and at 12% interest computed from the time the judgment becomes final and executory until fully paid or satisfied;

2) No award as to attorney's fees;

3) Ordering the case against Percival Llaban dismissed.

No cost.

SO ORDERED.^[25]

Nadela filed a motion for reconsideration which the Court of Appeals denied in a Resolution dated 31 July 2000. Hence, this petition for review.


The Court of Appeals found no justifiable reason to disturb the factual findings and conclusion of the trial court. The appellate court held that

Articles 1707^[26] and 1731^[27] of the Civil Code are not applicable to the case since the provisions apply only when goods are manufactured or work is done on personal properties.

However, the Court of Appeals disagreed with the trial court on the imposition of the interest rate and on the award of attorney's fees. The Court of Appeals held that when an obligation, other than a loan or forbearance of money, is breached, the interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum, computed from the filing of the complaint. The rate is 12% from the time the judgment becomes final and executory until full payment.

The Court of Appeals deleted the award for attorney's fees. The Court of Appeals held that attorney's fees could not be recovered as part of damages because of the policy that no premium should be placed on the right to litigate. Besides, the appellate court noted that no bad faith was shown by Nadela which would justify the award of attorney's fees.


Nadela contends that:

1. THE COURT OF APPEALS GRAVELY ABUSED ITS DISCRETION IN FAILING TO CONSIDER THAT THE TRIAL COURT IN RENDERING ITS ASSAILED DECISION OVERLOOKED AND SET ASIDE SUBSTANTIAL FACTS AND CIRCUMSTANCES WHICH IF PROPERLY CONSIDERED, WOULD JUSTIFY A DIFFERENT CONCLUSION OR ALTER THE RESULT OF THIS CASE.
   
   
2. THE COURT OF APPEALS GRAVELY ABUSED ITS DISCRETION IN BASING ITS ASSAILED DECISION ON PURE HEARSAY.
   
   
3. THE COURT OF APPEALS GRAVELY ABUSED ITS DISCRETION WHEN IT FAILED TO RULE THAT GRANTING THERE ARE ITEMS AND EQUIPMENT REMAINING IN THE CUSTODY OF PETITIONER, LEGAL COMPENSATION AUTOMATICALLY APPLIES WITH RESPECT TO PETITIONER'S CLAIM FOR UNPAID SALARIES AND BENEFITS AWARDED TO HIM BY THE NATIONAL LABOR RELATIONS COMMISSION.^[28]

The petition is partly meritorious.


Nadela alleges that the finding of the trial and appellate courts that he has custody of the remaining tools and equipment of ECCO-ASIA is contrary to the evidence on record.

The Court is not convinced.

Nadela, as the Assistant Vice-President of the Southern Division of ECCO-ASIA, arranged for all the tools and equipment of ECCO-ASIA to be stored in the warehouse. Nadela later withdrew the remaining tools and equipment of ECCO-ASIA worth P600,000 and brought them to Llaban's residence for the offsetting of ECCO-ASIA's account with Llaban. The list of withdrawn items marked as Exhibits "A" to "A-23" contained Nadela's signature.^[29] After the account with Llaban was settled, the tools and equipment of ECCO-ASIA remained in Llaban's residence for storage. Nadela insisted on retaining the tools and equipment in Llaban's residence until the full payment of his claims against ECCO-ASIA.

Both Ibañez and Llaban testified that Nadela objected to the return of the remaining tools and equipment of ECCO-ASIA after the offsetting of Llaban's payables unless ECCO-ASIA also settled Nadela's claims. During cross-examination, Ibañez testified:

	Q:	After the items were being selected by Mr. Llaban, there were some items left in the residence of Mr. Llaban, is that correct?
	A:	Yes, sir.
	Q:	And during that period, you even went to the premises of Mr. Llaban and saw the items remaining?
	A:	Yes, sir.
	Q:	Did you not ask Mr. Llaban to return these items to you?
	A:	I have about two or three times. I even held conferences in the residence of Mr. Llaban.
	Q:	And what was the response of Mr. Llaban?
	A:	Mr. Llaban agreed to return the items in excess of the ones selected as long as he only be paid of the remaining P19,000.00 but Mr. Nadela objected because he claimed that he should also be cleared.
	Q:	You requested Mr. Llaban three times, that is, for him to return the items still remaining in his residence but Mr. Nadela refused or objected for Mr. Llaban to return these items [t]o you, that is what you mean?
	A:	That is what Mr. Llaban wants.
	Q:	So, in other words, you did not have actual, shall we say communication with Mr. Nadela regarding his objection to Mr. Llaban's returning the items of Ecco-Asia, is that correct?
	A:	The formal communication, what do you mean by formal communication?
	Q:	Communication.
	A:	Because these are in conferences, we have these conferences, in a joint conference between Mr. Llaban, Nadela and me, we have this taken first in a conference.
	Q:	So, in other words, there was really an actual communication between the three of you, Mr. Llaban, Nadela and Ecco-Asia, represented by you, is that correct?
	A:	Yes, sir, in a conference.
	Q:	The reason used by Mr. Nadela as ground for Mr. Llaban to refuse to return these items is because Mr. Nadela has not yet been paid of accrued salaries?
	A:	That is his allegation.[30] (Emphasis supplied)@@@

Llaban corroborated Ibañez's testimony. Llaban testified during cross-examination:

	Q:	You mentioned also that you knew that Mr. Nadela had claims with Ecco-Asia, is that right?
	A:	Yes, sir.
	Q:	In which case, you said that Mr. Nadela withheld some tools and equipment, is that right?
	A:	Yes, after Ecco-Asia had completed sorting out all the tools and equipment which were intended to be paid to me in kind. So, Nadela took over with the negotiation of Col. [I]bañez.
	Q:	These tools and equipment which were withheld by Nadela were in the meantime in your residence, is that right?
	A:	Yes, sir.
	Q:	And these tools and equipment were subsequently brought to your store at Junquera St., the ones withheld by Nadela?
	A:	No, not all because what I have in the store are only those of the equipment that I got from Ecco-Asia as payment and some of the few items that Ecco-Asia had left there, which they had not removed, I brought them to the store because they were clogging in my residence. I don't have a bodega and it's just a house. In fact, the sheriff and Col. [I]bañez have been there; they could see the place. From the house, it's full outside. It's expose of (sic) the elements. So, what I did, the better looking ones, I put them in the store just for display.
	Q:	So, these were the ones which were withheld by Mr. Nadela?
	A:	No, because there were still some which were left in the house because after I signed the quitclaim with Ecco-Asia, the negotiation continued between Nadela and Ecco-Asia. So, there was a request made by Nadela to hold those equipment there and I told Mr. Nadela and [I]bañez that, that will be between the two of you, because my case was already settled.
	Q:	The request by Mr. Nadela was to hold the equipment in your residence, is that right?
	A:	Yes, because he is still negotiating with Ecco-Asia for the payment of his back salary because Ecco-Asia could not pay him in cash.
	Q:	But he did not request you to withhold that Ecco-Asia tools in your store, is that right?
	A:	No, it is on my own that I brought them there and to place them there for safekeeping also.[31] (Emphasis supplied)

Nadela himself admitted that he has custody of the remaining tools and equipment of ECCO-ASIA. In a letter dated 11 November 1985, Nadela's counsel informed ECCO-ASIA that Nadela has a right to retain and dispose of ECCO-ASIA's assets in his possession to offset ECCO-ASIA's payables to Nadela. The letter^[32] reads:

11 November 1985

Mr. Cesar Pio Roda
President
ECCO-ASIA

Subject: Settlement of accountabilities with Casimiro

R. Nadela

Sir :

Our client Casimiro R. Nadela has endorsed to our office for appropriate action all pertinent papers and supporting documents on hand to sustain all his claims against ECCO-ASIA.

Perusing and inspecting thoroughly the documents and after lengthy discourses during several conferences en consulta, we stand in firm agreement with our client and it is too well-settled for any serious argument that under the law and equity it is only fair that your firm should act upon the claims of Mr. Nadela with all promptitude to attain advantageous results to both ends. Understandably, under the same principle of equity, Mr. Nadela is just and right to retain a lien on all company assets in his possession and dispose the same until after he has been given all his dues.

Hereunder, a claims statement is pointed out most graphically:

1. Statement of balance due to Casimiro R. Nadela including interests less the value of off-settled items. See photocopies of the prepared statement. (Enclosed and bracketed as Annexes "A-1", "A-2", "A-3", "A-4").
   
2. 
   
3. Unenjoyed company privileges.
   
4. 
   
5. P10,000.00 representing Attorney's fees. Anent, because of the urgency of the matter, it is most respectfully requested that you communicate with Mr. Nadela, thru counsels, the course of action the company is taking within seven (7) days upon receipt thereof or we will be compelled, much to our regrets, to take the necessary legal steps and to continue disposing of company assets, proceeds of which will be applied in satisfaction of what is due to Mr. Nadela from ECCO-Asia.
   

Thank you.

Very truly yours,

LEDESMA, SALUDO & ASSOCIATES

By:

(signed)
RONALD C. CATIPAY

and

(signed)
JOSE MENELEO S. PASCUAL

On my Insistence:

(signed)
CASIMIRO R. NADELA

Thus, the conclusion of the trial and appellate courts that Nadela has custody of the remaining tools and equipment of ECCO-ASIA is based on the records of the case. Factual findings of the trial court, especially when affirmed by the appellate court and supported by sufficient evidence, are binding on this Court and will not be disturbed on appeal.^[33]


Compensation is a mode of extinguishing to the concurrent amount the debts of persons who in their own right are creditors and debtors of each other.^[34] The object of compensation is the prevention of unnecessary suits and payments thru the mutual extinction by operation of law of concurring debts.^[35] The requisites for legal compensation are provided in Article 1279 of the Civil Code:

Art. 1279. In order that compensation may be proper, it is necessary:

(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.

We find that legal compensation is proper in this case. The requisites for legal compensation are present. Nadela and ECCO-ASIA are creditors and debtors of each other. Nadela owes ECCO-ASIA P476,365.69, representing the value of the tools, equipment and construction materials of ECCO-ASIA for which Nadela is accountable. On the other hand, in a final and executory judgment in a labor case,^[36] ECCO-ASIA was ordered to pay Nadela P52,188.81 representing unpaid salaries and P28,500 representing separation pay. The debts, consisting of a sum of money, are due, liquidated, and demandable. Thus, compensation is proper up to the concurrent amount in this case where ECCO-ASIA owes Nadela P80,688.81^[37] for unpaid salaries and separation pay while Nadela owes ECCO-ASIA P476,365.69.

WHEREFORE, the Decision of the Court of Appeals dated 12 November 1999 and the Resolution dated 31 July 2000 are MODIFIED. The P80,688.81 which Engineering and Construction Corporation of Asia (ECCO-ASIA) owes Casimiro R. Nadela by virtue of a final judgment in a labor case shall be offset against the P476,365.69 which Casimiro R. Nadela owes ECCO-ASIA, leaving a balance of P395,676.88. Casimiro R. Nadela shall return to ECCO-ASIA its tools, equipment and construction materials worth P395,676.88, or pay ECCO-ASIA P395,676.88 with interest at 6% per annum from 29 October 1985 until finality of this Decision and 12% per annum thereafter until full payment.

SO ORDERED.

Davide, Jr., C.J., (Chairman), Quisumbing, Ynares-Santiago, and Azcuna, JJ., concur.

---

^[1] Under Rule 45 of the 1997 Rules of Civil Procedure.

^[2] Penned by Associate Justice Jose L. Sabio, Jr., with Associate Justices Hector L. Hofileña and Omar U. Amin concurring.

^[3] Penned by Judge Zosimo Z. Angeles.

^[4] See Exh. "1-Nadela depo.," Nadela's Folder of Exhibits, pp. 1-2.

^[5] See Exh. "3-Nadela depo.," Nadela's Folder of Exhibits, pp. 5-6.

^[6] Ibid.

^[7] See Exh. "7-Nadela depo.," Nadela's Folder of Exhibits, pp. 13-14; TSN, 12 July 1988, pp. 16-17.

^[8] According to Nadela, the warehouse was chosen as the storage for the tools and equipment of ECCO-ASIA for the offsetting of debts because Cebu Oversea Hardware was the biggest creditor of ECCO-ASIA. TSN, 12 July 1988, pp. 52-53.

^[9] Exhs. "14" to "14-A," Llaban's Folder of Exhibits (Volume 5), pp. 6-7.

^[10] Exhs. "A" to "A-24," Records, pp. 193-217.

^[11] Exhs. "1-A" to "1-XXX," Llaban's Folder of Exhibits (Volume 4), pp. 26-101.

^[12] Exh. "1," Llaban's Folder of Exhibits (Volume 4), p. 25; TSN, 24 June 1987, p. 40.

^[13] TSN, 24 June 1987, pp. 65-70; TSN, 27 August 1987, pp. 19-22.

^[14] TSN, 8 May 1987, p. 25.

^[15] TSN, 8 May 1987, pp. 13-16; TSN, 27 August 1987, pp. 20-22; TSN, 22 September 1987, pp. 6-8.

^[16] Exhs. "1-NNN" to "1-XXX," Llaban's Folder of Exhibits (Volume 4), pp. 91-101.

^[17] Exhs. "2" to "2-B," Llaban's Folder of Exhibits (Volume 4), pp. 102-104.

^[18] Exhs. "2-C" to "2-Y," Llaban's Folder of Exhibits (Volume 4), pp. 105-127.

^[19] Exhs. "2-Z" to "2-FF," Llaban's Folder of Exhibits (Volume 4), pp. 128-134.

^[20] Exh. "D," Records, p. 222. The letter reads:


18 September 1985

CASIMIRO R. NADELA
Offr's Qtrs, Camp Lapu-Lapu
Lahug, Cebu City

Dear Casi,

Attached is a list of remaining tools and materials you have taken and signed on different dates from the Cebu Oversea Hardware Bodega, Banilad, Cebu City and which are under your custody per signed Custody Receipts of the warehouseman.

In order to clear yourself of your accountabilities and thereby collect whatever amount is due you, request that you return said tools and construction materials immediately. Should you wish to buy or off-set said tools and materials to the amount due you please make your offer or bid price.

Hoping for your cooperation on this matter.

Very truly yours,

ENGINEERING & CONSTRUCTION
CORPORATION OF ASIA
(signed)
JUAN F. IBAÑEZ

^[21] Exhs. "C" to "C-3," Records, pp. 218-221.

^[22] Exh. "E," Records, p. 223.

^[23] Rollo, p. 89. The Labor Arbiter's decision was affirmed by the NLRC in a decision dated 24 August 1992. The decision became final and executory on 11 June 1993.

^[24] Ibid., p. 67.

^[25] Ibid., pp. 78-79.

^[26] Article 1707 of the Civil Code provides that: "The laborer's wages shall be a lien on the goods manufactured or the work done."

^[27] Article 1731 of the Civil Code provides that: "He who has executed work upon a movable has a right to retain it by way of pledge until he is paid."

^[28] Rollo, p. 32.

^[29] Nadela's signature in Exhibits "A" to "A-24" was marked as Exhibits "A-25" to "A-50." Records, pp. 193-217.

^[30] TSN, 8 May 1987, pp. 13-16.

^[31] TSN, 27 August 1987, pp. 19-22.

^[32] Exhs. "H" to "H-2," Records, pp. 284-285. Emphasis supplied.

^[33] National Power Corporation v. Court of Appeals, G.R. No. 106804, 12 August 2004, 436 SCRA 195; Naguiat v. Court of Appeals, G.R. No. 118375, 3 October 2003, 412 SCRA 591; Pacific Airways Corporation v. Tonda, 441 Phil. 156 (2002); MOF Company, Inc. v. Enriquez, 431 Phil. 862 (2002).

^[34] PNB MADECOR v. Uy, 415 Phil. 348 (2001). See Article 1278 of the Civil Code.

^[35] Compañia General de Tabacos v. French and Unson, 39 Phil. 34 (1918).

^[36] Annex "F," Rollo, p. 95. The decision became final and executory on 11 June 1993.

^[37] P52,188.81 + P28,500 = P80,688.81.