Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-19190 November 29, 1922

THE PEOPLE OF THE PHILIPPINE ISLANDS, plaintiff-appellee,

vs.
VENANCIO CONCEPCION, defendant-appellant.

Recaredo Ma. Calvo for appellant.

Attorney-General Villa-Real for appellee.

MALCOLM, J.:

By telegrams and a letter of confirmation to the manager of the Aparri

branch of the Philippine National Bank, Venancio Concepcion, President of
the Philippine National Bank, between April 10, 1919, and May 7, 1919,
authorized an extension of credit in favor of "Puno y Concepcion, S. en C." in
the amount of P300,000. This special authorization was essential in view of
the memorandum order of President Concepcion dated May 17, 1918,
limiting the discretional power of the local manager at Aparri, Cagayan, to
grant loans and discount negotiable documents to P5,000, which, in certain
cases, could be increased to P10,000. Pursuant to this authorization, credit
aggregating P300,000, was granted the firm of "Puno y Concepcion, S. en
C.," the only security required consisting of six demand notes. The notes,
together with the interest, were taken up and paid by July 17, 1919.

"Puno y Concepcion, S. en C." was a copartnership capitalized at P100,000.

Anacleto Concepcion contributed P5,000; Clara Vda. de Concepcion, P5,000;
Miguel S. Concepcion, P20,000; Clemente Puno, P20,000; and Rosario San
Agustin, "casada con Gral. Venancio Concepcion," P50,000. Member Miguel
S. Concepcion was the administrator of the company.

On the facts recounted, Venancio Concepcion, as President of the Philippine

National Bank and as member of the board of directors of this bank, was
charged in the Court of First Instance of Cagayan with a violation of section

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35 of Act No. 2747. He was found guilty by the Honorable Enrique V. Filamor,
Judge of First Instance, and was sentenced to imprisonment for one year and
six months, to pay a fine of P3,000, with subsidiary imprisonment in case of
insolvency, and the costs.

Section 35 of Act No. 2747, effective on February 20, 1918, just mentioned,
to which reference must hereafter repeatedly be made, reads as follows:
"The National Bank shall not, directly or indirectly, grant loans to any of the
members of the board of directors of the bank nor to agents of the branch
banks." Section 49 of the same Act provides: "Any person who shall violate
any of the provisions of this Act shall be punished by a fine not to exceed ten
thousand pesos, or by imprisonment not to exceed five years, or by both
such fine and imprisonment." These two sections were in effect in 1919 when
the alleged unlawful acts took place, but were repealed by Act No. 2938,
approved on January 30, 1921.

Counsel for the defense assign ten errors as having been committed by the
trial court. These errors they have argued adroitly and exhaustively in their
printed brief, and again in oral argument. Attorney-General Villa-Real, in an
exceptionally accurate and comprehensive brief, answers the proposition of
appellant one by one.

The question presented are reduced to their simplest elements in the opinion
which follows:

I. Was the granting of a credit of P300,000 to the copartnership "Puno y

Concepcion, S. en C." by Venancio Concepcion, President of the Philippine
National Bank, a "loan" within the meaning of section 35 of Act No. 2747?

Counsel argue that the documents of record do not prove that authority to
make a loan was given, but only show the concession of a credit. In this
statement of fact, counsel is correct, for the exhibits in question speak of a
"credito" (credit) and not of a " prestamo" (loan).

The "credit" of an individual means his ability to borrow money by virtue of

the confidence or trust reposed by a lender that he will pay what he may
promise. (Donnell vs. Jones [1848], 13 Ala., 490; Bouvier's Law Dictionary.) A
"loan" means the delivery by one party and the receipt by the other party of
a given sum of money, upon an agreement, express or implied, to repay the
sum loaned, with or without interest. (Payne vs. Gardiner [1864], 29 N. Y.,

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146, 167.) The concession of a "credit" necessarily involves the granting of
"loans" up to the limit of the amount fixed in the "credit,"

II. Was the granting of a credit of P300,000 to the copartnership "Puno y

Concepcion, S. en C.," by Venancio Concepcion, President of the Philippine
National Bank, a "loan" or a "discount"?

Counsel argue that while section 35 of Act No. 2747 prohibits the granting of
a "loan," it does not prohibit what is commonly known as a "discount."

In a letter dated August 7, 1916, H. Parker Willis, then President of the

National Bank, inquired of the Insular Auditor whether section 37 of Act No.
2612 was intended to apply to discounts as well as to loans. The ruling of the
Acting Insular Auditor, dated August 11, 1916, was to the effect that said
section referred to loans alone, and placed no restriction upon discount
transactions. It becomes material, therefore, to discover the distinction
between a "loan" and a "discount," and to ascertain if the instant transaction
comes under the first or the latter denomination.

Discounts are favored by bankers because of their liquid nature, growing, as

they do, out of an actual, live, transaction. But in its last analysis, to discount
a paper is only a mode of loaning money, with, however, these distinctions:
(1) In a discount, interest is deducted in advance, while in a loan, interest is
taken at the expiration of a credit; (2) a discount is always on double-name
paper; a loan is generally on single-name paper.

Conceding, without deciding, that, as ruled by the Insular Auditor, the law
covers loans and not discounts, yet the conclusion is inevitable that the
demand notes signed by the firm "Puno y Concepcion, S. en C." were not
discount paper but were mere evidences of indebtedness, because (1)
interest was not deducted from the face of the notes, but was paid when the
notes fell due; and (2) they were single-name and not double-name paper.

The facts of the instant case having relation to this phase of the argument
are not essentially different from the facts in the Binalbagan Estate case. Just
as there it was declared that the operations constituted a loan and not a
discount, so should we here lay down the same ruling.

III. Was the granting of a credit of P300,000 to the copartnership, "Puno y

Concepcion, S. en C." by Venancio Concepcion, President of the Philippine

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National Bank, an "indirect loan" within the meaning of section 35 of Act No.
2747?

Counsel argue that a loan to the partnership "Puno y Concepcion, S. en C."

was not an "indirect loan." In this connection, it should be recalled that the
wife of the defendant held one-half of the capital of this partnership.

In the interpretation and construction of statutes, the primary rule is to

ascertain and give effect to the intention of the Legislature. In this instance,
the purpose of the Legislature is plainly to erect a wall of safety against
temptation for a director of the bank. The prohibition against indirect loans is
a recognition of the familiar maxim that no man may serve two masters
that where personal interest clashes with fidelity to duty the latter almost
always suffers. If, therefore, it is shown that the husband is financially
interested in the success or failure of his wife's business venture, a loan to
partnership of which the wife of a director is a member, falls within the
prohibition.

Various provisions of the Civil serve to establish the familiar relationship

called a conjugal partnership. (Articles 1315, 1393, 1401, 1407, 1408, and
1412 can be specially noted.) A loan, therefore, to a partnership of which the
wife of a director of a bank is a member, is an indirect loan to such director.

That it was the intention of the Legislature to prohibit exactly such an

occurrence is shown by the acknowledged fact that in this instance the
defendant was tempted to mingle his personal and family affairs with his
official duties, and to permit the loan P300,000 to a partnership of no
established reputation and without asking for collateral security.

In the case of Lester and Wife vs. Howard Bank ([1870], 33 Md., 558; 3 Am.
Rep., 211), the Supreme Court of Maryland said:

What then was the purpose of the law when it declared that no director
or officer should borrow of the bank, and "if any director," etc., "shall
be convicted," etc., "of directly or indirectly violating this section he
shall be punished by fine and imprisonment?" We say to protect the
stockholders, depositors and creditors of the bank, against the
temptation to which the directors and officers might be exposed, and
the power which as such they must necessarily possess in the control
and management of the bank, and the legislature unwilling to rely
upon the implied understanding that in assuming this relation they

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 would not acquire any interest hostile or adverse to the most exact and
faithful discharge of duty, declared in express terms that they should
not borrow, etc., of the bank.

In the case of People vs. Knapp ([1912], 206 N. Y., 373), relied upon in the
Binalbagan Estate decision, it was said:

We are of opinion the statute forbade the loan to his copartnership firm
as well as to himself directly. The loan was made indirectly to him
through his firm.

IV. Could Venancio Concepcion, President of the Philippine National Bank, be

convicted of a violation of section 35 of Act No. 2747 in relation with section
49 of the same Act, when these portions of Act No. 2747 were repealed by
Act No. 2938, prior to the finding of the information and the rendition of the
judgment?

As noted along toward the beginning of this opinion, section 49 of Act No.
2747, in relation to section 35 of the same Act, provides a punishment for
any person who shall violate any of the provisions of the Act. It is contended,
however, by the appellant, that the repeal of these sections of Act No. 2747
by Act No. 2938 has served to take away the basis for criminal prosecution.

This same question has been previously submitted and has received an
answer adverse to such contention in the cases of United Stated vs.
Cuna ([1908], 12 Phil., 241); People vs. Concepcion ([1922], 43 Phil., 653);
and Ong Chang Wing and Kwong Fok vs. United States ([1910], 218 U. S.,
272; 40 Phil., 1046). In other words, it has been the holding, and it must
again be the holding, that where an Act of the Legislature which penalizes an
offense, such repeals a former Act which penalized the same offense, such
repeal does not have the effect of thereafter depriving the courts of
jurisdiction to try, convict, and sentenced offenders charged with violations
of the old law.

V. Was the granting of a credit of P300,000 to the copartnership "Puno y

Concepcion, S. en C." by Venancio Concepcion, President of the Philippine
National Bank, in violation of section 35 of Act No. 2747, penalized by this
law?

Counsel argue that since the prohibition contained in section 35 of Act No.
2747 is on the bank, and since section 49 of said Act provides a punishment

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not on the bank when it violates any provisions of the law, but on a person
violating any provisions of the same, and imposing imprisonment as a part of
the penalty, the prohibition contained in said section 35 is without penal
sanction.

The answer is that when the corporation itself is forbidden to do an act, the
prohibition extends to the board of directors, and to each director separately
and individually. (People vs. Concepcion, supra.)

VI. Does the alleged good faith of Venancio Concepcion, President of the
Philippine National Bank, in extending the credit of P300,000 to the
copartnership "Puno y Concepcion, S. en C." constitute a legal defense?

Counsel argue that if defendant committed the acts of which he was

convicted, it was because he was misled by rulings coming from the Insular
Auditor. It is furthermore stated that since the loans made to the
copartnership "Puno y Concepcion, S. en C." have been paid, no loss has
been suffered by the Philippine National Bank.

Neither argument, even if conceded to be true, is conclusive. Under the

statute which the defendant has violated, criminal intent is not necessarily
material. The doing of the inhibited act, inhibited on account of public policy
and public interest, constitutes the crime. And, in this instance, as previously
demonstrated, the acts of the President of the Philippine National Bank do
not fall within the purview of the rulings of the Insular Auditor, even
conceding that such rulings have controlling effect.

Morse, in his work, Banks and Banking, section 125, says:

It is fraud for directors to secure by means of their trust, and

advantage not common to the other stockholders. The law will not
allow private profit from a trust, and will not listen to any proof of
honest intent.

JUDGMENT

On a review of the evidence of record, with reference to the decision of the

trial court, and the errors assigned by the appellant, and with reference to
previous decisions of this court on the same subject, we are irresistibly led to
the conclusion that no reversible error was committed in the trial of this
case, and that the defendant has been proved guilty beyond a reasonable

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doubt of the crime charged in the information. The penalty imposed by the
trial judge falls within the limits of the punitive provisions of the law.

Judgment is affirmed, with the costs of this instance against the appellant. So
ordered.

DIGEST

FACTS:
Defendant authorized an extension of credit in favor of Concepcion, a
co-partnership. Defendants wife was a director of this co-
partnership. Defendant was found guilty of violating Sec. 35 of Act No. 2747
which says that The National Bank shall not, directly or indirectly, grant
loans to any of the members of the Board of Directors of the bank nor to
agents of the branch banks. This Section was in effect in 1919 but was
repealed in Act No. 2938 approved on January 30, 1921.

ISSUE:
W/N Defendant can be convicted of violating Sections of Act No.
2747, which were repealed by Act No. 2938.

HELD:
In the interpretation and construction, the primary rule is to ascertain and
give effect to the intention of the Legislature. Section 49 in relation to Sec.
25 of Act No. 2747 provides a punishment for any person who shall violate
any provisions of the Act. Defendant contends that the repeal of these
Sections by Act No. 2938 has served to take away basis for
criminal prosecution. The Court holds that where an act of
the Legislature which penalizes an offense repeals a former act which
penalized the same offense, such repeal does not have the
effect of thereafter depriving the Courts of jurisdiction to try, convict and
sentence offenders charged with violations of the old law.

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 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-16106 December 30, 1961

REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,

vs.
PHILIPPINE NATIONAL BANK, ET AL., defendants,
THE FIRST NATIONAL CITY BANK OF NEW YORK, defendant-appellee.

Office of the Solicitor General for plaintiff-appellant.

Picazo, Lichauco and Agcaoili for defendant-appellee.

BAUTISTA ANGELO, J.:

The Republic of the Philippines filed on September 25, 1957 before the Court
of First Instance of Manila a complaint for escheat of certain unclaimed bank
deposits balances under the provisions of Act No. 3936 against several
banks, among them the First National City Bank of New York. It is alleged that
pursuant to Section 2 of said Act, defendant banks forwarded to the
Treasurer of the Philippines a statement under oath of their respective
managing officials of all the credits and deposits held by them in favor of
persons known to be dead or who have not made further deposits or
withdrawals during the period of 10 years or more. Wherefore, it is prayed
that said credits and deposits be escheated to the Republic of the Philippines
by ordering defendant banks to deposit them to its credit with the Treasurer
of the Philippines.

In its answer the First National City Bank of New York claims that, while it
admits that various savings deposits, pre-war inactive accounts, and sundry
accounts contained in its report submitted to the Treasurer of the Philippines
pursuant to Act No. 3936, totalling more than P100,000.00, which remained
dormant for 10 years or more, are subject to escheat however, it has
inadvertently included in said report certain items amounting to P18,589.89
which, properly speaking, are not credits or deposits within the
contemplation of Act No. 3936. Hence, it prayed that said items be not
included in the claim of plaintiff.

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After hearing the court a quo rendered judgment holding that cashier's is or
manager's checks and demand drafts as those which defendant wants
excluded from the complaint come within the purview of Act No. 3936, but
not the telegraphic transfer payment which orders are of different category.
Consequently, the complaint was dismissed with regard to the latter. But,
after a motion to reconsider was filed by defendant, the court a quo changed
its view and held that even said demand drafts do not come within the
purview of said Act and so amended its decision accordingly. Plaintiff has
appealed.

Section 1, Act No. 3936, provides:

Section 1. "Unclaimed balances" within the meaning of this Act shall

include credits or deposits of money, bullion, security or other
evidence of indebtedness of any kind, and interest thereon with banks,
as hereinafter defined, in favor of any person unheard from for a period
of ten years or more. Such unclaimed balances, together with the
increase and proceeds thereof, shall be deposited with the Insular
Treasure to the credit of the Government of the Philippine Islands to be
as the Philippine Legislature may direct.

It would appear that the term "unclaimed balances" that are subject to
escheat include credits or deposits money, or other evidence of
indebtedness of any kind with banks, in favor of any person unheard from for
a period of 10 years or more. And as correctly stated by the trial court, the
term "credit" in its usual meaning is a sum credited on the books of a
company to a person who appears to be entitled to it. It presupposes a
creditor-debtor relationship, and may be said to imply ability, by reason of
property or estates, to make a promised payment ( In re Ford, 14 F. 2d 848,
849). It is the correlative to debt or indebtedness, and that which is due to
any person, a distinguished from that which he owes (Mountain Motor Co. vs.
Solof, 124 S.E., 824, 825; Eric vs. Walsh, 61 Atl. 2d 1, 4; See also Libby vs.
Hopkins, 104 U.S. 303, 309; Prudential Insurance Co. of America vs. Nelson,
101 F. 2d, 441, 443; Barnes vs. Treat, 7 Mass. 271, 274). The same is true
with the term "deposits" in banks where the relationship created between
the depositor and the bank is that of creditor and debtor (Article 1980, Civil
Code; Gullas vs. National Bank, 62 Phil. 915; Gopoco Grocery, et al. vs.
Pacific Coast Biscuit Co., et al., 65 Phil. 443).

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The questions that now arise are: Do demand draft and telegraphic orders
come within the meaning of the term "credits" or "deposits" employed in the
law? Can their import be considered as a sum credited on the books of the
bank to a person who appears to be entitled to it? Do they create a creditor-
debtor relationship between drawee and the payee?

The answers to these questions require a digression the legal meaning of

said banking terminologies.

To begin with, we may say that a demand draft is a bill of exchange payable
on demand (Arnd vs. Aylesworth, 145 Iowa 185; Ward vs. City Trust
Company, 102 N.Y.S. 50; Bank of Republic vs. Republic State Bank, 42 S.W.
2d, 27). Considered as a bill of exchange, a draft is said to be, like the
former, an open letter of request from, and an order by, one person on
another to pay a sum of money therein mentioned to a third person, on
demand or at a future time therein specified (13 Words and Phrases, 371). As
a matter of fact, the term "draft" is often used, and is the common term, for
all bills of exchange. And the words "draft" and "bill of exchange" are used
indiscriminately (Ennis vs. Coshoctan Nat. Bank, 108 S.E., 811; Hinnemann
vs. Rosenback, 39 N.Y. 98, 100, 101; Wilson vs. Bechenau, 48 Supp. 272,
275).

On the other hand, a bill of exchange within the meaning of our Negotiable
Instruments Law (Act No. 2031) does not operate as an assignment of funds
in the hands of the drawee who is not liable on the instrument until he
accepts it. This is the clear import of Section 127. It says: "A bill of exchange
of itself does not operate as an assignment of the funds in the hands of the
drawee available for the payment thereon and the drawee is not liable on the
bill unless and until he accepts the same." In other words, in order that a
drawee may be liable on the draft and then become obligated to the payee it
is necessary that he first accepts the same. In fact, our law requires that with
regard to drafts or bills of exchange there is need that they be presented
either for acceptance or for payment within a reasonable time after their
issuance or after their last negotiation thereof as the case may be (Section
71, Act 2031). Failure to make such presentment will discharge the drawer
from liability or to the extent of the loss caused by the delay (Section
186, Ibid.)

Since it is admitted that the demand drafts herein involved have not been
presented either for acceptance or for payment, the inevitable consequence

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is that the appellee bank never had any chance of accepting or rejecting
them. Verily, appellee bank never became a debtor of the payee concerned
and as such the aforesaid drafts cannot be considered as credits subject to
escheat within the meaning of the law.

But a demand draft is very different from a cashier's or manager's cheek,

contrary to appellant's pretense, for it has been held that the latter is a
primary obligation of the bank which issues it and constitutes its written
promise to pay upon demand. Thus, a cashier's check has been clearly
characterized in In Re Bank of the United States, 277 N.Y.S. 96. 100, as
follows:

A cashier's check issued by a bank, however, is not an ordinary draft.

The latter is a bill of exchange payable demand. It is an order upon a
third party purporting to drawn upon a deposit of funds. Drinkall v.
Movious State Bank, 11 N.D. 10, 88 N.W. 724, 57 L.R.A. 341, 95 Am. St.
Rep. 693; State v. Tyler County State Bank (Tex. Com. App.) 277 S.W.
625, 42 A.L.R. 1347. A cashier's check is of a very different character. It
is the primary obligation of the bank which issues it (Nissenbaum v.
State, 38 Ga. App. 253, S.E. 776) and constitutes its written promise to
pay upon demand (Steinmetz v. Schultz, 59 S.D. 603, 241 N.W.
734)....lawphil.net

The following definitions cited by appellant also confirm this view:

A cashier's check is a check of the bank's cashier on his or another

bank. It is in effect a bill of exchange drawn by a bank on itself and
accepted in advance by the act of issuance (10 C.J.S. 409).

A cashier's check issued on request of a depositor is the substantial

equivalent of a certified check and the deposit represented by the
check passes to the credit of the checkholder, who is thereafter a
depositor to that amount (Lummus Cotton Gin Co. v. Walker, 70 So.
754, 756, 195 Ala. 552).

A cashier's check, being merely a bill of exchange drawn by a bank on

itself, and accepted in advance by the act of issuance, is not subject to
countermand by the payee after indorsement, and has the same legal
effects as a certificate deposit or a certified check (Walker v. Sellers, 77
So. 715, 201 Ala. 189).

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A demand draft is not therefore of the same category as a cashier's check
which should come within the purview of the law.

The case, however, is different with regard to telegraphic payment order. It is

said that as the transaction is for the establishment of a telegraphic or cable
transfer the agreement to remit creates a contractual obligation a has been
termed a purchase and sale transaction (9 C.J.S. 368). The purchaser of a
telegraphic transfer upon making payment completes the transaction insofar
as he is concerned, though insofar as the remitting bank is concerned the
contract is executory until the credit is established (Ibid.) We agree with the
following comment the Solicitor General: "This is so because the drawer bank
was already paid the value of the telegraphic transfer payment order. In the
particular cases under consideration it appears in the books of the defendant
bank that the amounts represented by the telegraphic payment orders
appear in the names of the respective payees. If the latter choose to demand
payment of their telegraphic transfers at the time the same was (were)
received by the defendant bank, there could be no question that this bank
would have to pay them. Now, the question is, if the payees decide to have
their money remain for sometime in the defendant bank, can the latter
maintain that the ownership of said telegraphic payment orders is now with
the drawer bank? The latter was already paid the value of the telegraphic
payment orders otherwise it would not have transmitted the same to the
defendant bank. Hence, it is absurd to say that the drawer banks are still the
owners of said telegraphic payment orders."

WHEREFORE, the decision of the trial court is hereby modified in the sense
that the items specifically referred to and listed under paragraph 3 of
appellee bank's answer representing telegraphic transfer payment orders
should be escheated in favor of the Republic of the Philippines. No costs.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

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G.R. No. L-24968 April 27, 1972

SAURA IMPORT and EXPORT CO., INC., plaintiff-appellee,

vs.
DEVELOPMENT BANK OF THE PHILIPPINES, defendant-appellant.

Mabanag, Eliger and Associates and Saura, Magno and Associates for
plaintiff-appellee.

Jesus A. Avancea and Hilario G. Orsolino for defendant-appellant.

MAKALINTAL, J.:p

In Civil Case No. 55908 of the Court of First Instance of Manila, judgment was
rendered on June 28, 1965 sentencing defendant Development Bank of the
Philippines (DBP) to pay actual and consequential damages to plaintiff Saura
Import and Export Co., Inc. in the amount of P383,343.68, plus interest at the
legal rate from the date the complaint was filed and attorney's fees in the
amount of P5,000.00. The present appeal is from that judgment.

In July 1953 the plaintiff (hereinafter referred to as Saura, Inc.) applied to the
Rehabilitation Finance Corporation (RFC), before its conversion into DBP, for
an industrial loan of P500,000.00, to be used as follows: P250,000.00 for the
construction of a factory building (for the manufacture of jute sacks);
P240,900.00 to pay the balance of the purchase price of the jute mill
machinery and equipment; and P9,100.00 as additional working capital.

Parenthetically, it may be mentioned that the jute mill machinery had

already been purchased by Saura on the strength of a letter of credit
extended by the Prudential Bank and Trust Co., and arrived in Davao City in
July 1953; and that to secure its release without first paying the draft, Saura,
Inc. executed a trust receipt in favor of the said bank.

On January 7, 1954 RFC passed Resolution No. 145 approving the loan
application for P500,000.00, to be secured by a first mortgage on the factory
building to be constructed, the land site thereof, and the machinery and
equipment to be installed. Among the other terms spelled out in the
resolution were the following:

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 1. That the proceeds of the loan shall be utilized exclusively for
the following purposes:

For construction of factory building P250,000.00

For payment of the balance of purchase

price of machinery and equipment 240,900.00

For working capital 9,100.00

T O T A L P500,000.00

4. That Mr. & Mrs. Ramon E. Saura, Inocencia Arellano, Aniceto Caolboy and
Gregoria Estabillo and China Engineers, Ltd. shall sign the promissory notes
jointly with the borrower-corporation;

5. That release shall be made at the discretion of the Rehabilitation Finance

Corporation, subject to availability of funds, and as the construction of the
factory buildings progresses, to be certified to by an appraiser of this
Corporation;"

Saura, Inc. was officially notified of the resolution on January 9, 1954. The
day before, however, evidently having otherwise been informed of its
approval, Saura, Inc. wrote a letter to RFC, requesting a modification of the
terms laid down by it, namely: that in lieu of having China Engineers, Ltd.
(which was willing to assume liability only to the extent of its stock
subscription with Saura, Inc.) sign as co-maker on the corresponding
promissory notes, Saura, Inc. would put up a bond for P123,500.00, an
amount equivalent to such subscription; and that Maria S. Roca would be
substituted for Inocencia Arellano as one of the other co-makers, having
acquired the latter's shares in Saura, Inc.

In view of such request RFC approved Resolution No. 736 on February 4,

1954, designating of the members of its Board of Governors, for certain
reasons stated in the resolution, "to reexamine all the aspects of this
approved loan ... with special reference as to the advisability of financing this
particular project based on present conditions obtaining in the operations of
jute mills, and to submit his findings thereon at the next meeting of the
Board."

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On March 24, 1954 Saura, Inc. wrote RFC that China Engineers, Ltd. had
again agreed to act as co-signer for the loan, and asked that the necessary
documents be prepared in accordance with the terms and conditions
specified in Resolution No. 145. In connection with the reexamination of the
project to be financed with the loan applied for, as stated in Resolution No.
736, the parties named their respective committees of engineers and
technical men to meet with each other and undertake the necessary studies,
although in appointing its own committee Saura, Inc. made the observation
that the same "should not be taken as an acquiescence on (its) part to
novate, or accept new conditions to, the agreement already) entered into,"
referring to its acceptance of the terms and conditions mentioned in
Resolution No. 145.

On April 13, 1954 the loan documents were executed: the promissory note,
with F.R. Halling, representing China Engineers, Ltd., as one of the co-signers;
and the corresponding deed of mortgage, which was duly registered on the
following April 17.

It appears, however, that despite the formal execution of the loan agreement
the reexamination contemplated in Resolution No. 736 proceeded. In a
meeting of the RFC Board of Governors on June 10, 1954, at which Ramon
Saura, President of Saura, Inc., was present, it was decided to reduce the
loan from P500,000.00 to P300,000.00. Resolution No. 3989 was approved as
follows:

RESOLUTION No. 3989. Reducing the Loan Granted Saura Import & Export
Co., Inc. under Resolution No. 145, C.S., from P500,000.00 to P300,000.00.
Pursuant to Bd. Res. No. 736, c.s., authorizing the re-examination of all the
various aspects of the loan granted the Saura Import & Export Co. under
Resolution No. 145, c.s., for the purpose of financing the manufacture of jute
sacks in Davao, with special reference as to the advisability of financing this
particular project based on present conditions obtaining in the operation of
jute mills, and after having heard Ramon E. Saura and after extensive
discussion on the subject the Board, upon recommendation of the Chairman,
RESOLVED that the loan granted the Saura Import & Export Co. be REDUCED
from P500,000 to P300,000 and that releases up to P100,000 may be
authorized as may be necessary from time to time to place the factory in
actual operation: PROVIDED that all terms and conditions of Resolution No.
145, c.s., not inconsistent herewith, shall remain in full force and effect."

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On June 19, 1954 another hitch developed. F.R. Halling, who had signed the
promissory note for China Engineers Ltd. jointly and severally with the other
RFC that his company no longer to of the loan and therefore considered the
same as cancelled as far as it was concerned. A follow-up letter dated July 2
requested RFC that the registration of the mortgage be withdrawn.

In the meantime Saura, Inc. had written RFC requesting that the loan of
P500,000.00 be granted. The request was denied by RFC, which added in its
letter-reply that it was "constrained to consider as cancelled the loan of
P300,000.00 ... in view of a notification ... from the China Engineers Ltd.,
expressing their desire to consider the loan insofar as they are concerned."

On July 24, 1954 Saura, Inc. took exception to the cancellation of the loan
and informed RFC that China Engineers, Ltd. "will at any time reinstate their
signature as co-signer of the note if RFC releases to us the P500,000.00
originally approved by you.".

On December 17, 1954 RFC passed Resolution No. 9083, restoring the loan
to the original amount of P500,000.00, "it appearing that China Engineers,
Ltd. is now willing to sign the promissory notes jointly with the borrower-
corporation," but with the following proviso:

That in view of observations made of the shortage and high cost

of imported raw materials, the Department of Agriculture and
Natural Resources shall certify to the following:

1. That the raw materials needed by the borrower-corporation to

carry out its operation are available in the immediate vicinity;
and

2. That there is prospect of increased production thereof to

provide adequately for the requirements of the factory."

The action thus taken was communicated to Saura, Inc. in a letter of RFC
dated December 22, 1954, wherein it was explained that the certification by
the Department of Agriculture and Natural Resources was required "as the
intention of the original approval (of the loan) is to develop the manufacture
of sacks on the basis of locally available raw materials." This point is
important, and sheds light on the subsequent actuations of the parties.
Saura, Inc. does not deny that the factory he was building in Davao was for
the manufacture of bags from local raw materials. The cover page of its

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brochure (Exh. M) describes the project as a "Joint venture by and between
the Mindanao Industry Corporation and the Saura Import and Export Co., Inc.
to finance, manage and operate a Kenafmill plant, to manufacture copra and
corn bags, runners, floor mattings, carpets, draperies; out of 100% local raw
materials, principal kenaf." The explanatory note on page 1 of the same
brochure states that, the venture "is the first serious attempt in this country
to use 100% locally grown raw materials notably kenaf which is presently
grown commercially in theIsland of Mindanao where the proposed jutemill is
located ..."

This fact, according to defendant DBP, is what moved RFC to approve the
loan application in the first place, and to require, in its Resolution No. 9083, a
certification from the Department of Agriculture and Natural Resources as to
the availability of local raw materials to provide adequately for the
requirements of the factory. Saura, Inc. itself confirmed the defendant's
stand impliedly in its letter of January 21, 1955: (1) stating that according to
a special study made by the Bureau of Forestry "kenaf will not be available in
sufficient quantity this year or probably even next year;" (2) requesting
"assurances (from RFC) that my company and associates will be able to bring
in sufficient jute materials as may be necessary for the full operation of the
jute mill;" and (3) asking that releases of the loan be made as follows:

a) For the payment of the receipt for jute mill

machineries with the Prudential Bank &

Trust Company P250,000.00

(For immediate release)

b) For the purchase of materials and equip-

ment per attached list to enable the jute
mill to operate 182,413.91

c) For raw materials and labor 67,586.09

1) P25,000.00 to be released on the open-

ing of the letter of credit for raw jute
for $25,000.00.

2) P25,000.00 to be released upon arrival

of raw jute.

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 3) P17,586.09 to be released as soon as the
mill is ready to operate.

On January 25, 1955 RFC sent to Saura, Inc. the following reply:

Dear Sirs:

This is with reference to your letter of January 21,

1955, regarding the release of your loan under
consideration of P500,000. As stated in our letter of
December 22, 1954, the releases of the loan, if
revived, are proposed to be made from time to time,
subject to availability of funds towards the end that
the sack factory shall be placed in actual operating
status. We shall be able to act on your request for
revised purpose and manner of releases upon re-
appraisal of the securities offered for the loan.

With respect to our requirement that the Department

of Agriculture and Natural Resources certify that the
raw materials needed are available in the immediate
vicinity and that there is prospect of increased
production thereof to provide adequately the
requirements of the factory, we wish to reiterate that
the basis of the original approval is to develop the
manufacture of sacks on the basis of the locally
available raw materials. Your statement that you will
have to rely on the importation of jute and your
request that we give you assurance that your
company will be able to bring in sufficient jute
materials as may be necessary for the operation of
your factory, would not be in line with our principle in
approving the loan.

With the foregoing letter the negotiations came to a standstill. Saura, Inc. did
not pursue the matter further. Instead, it requested RFC to cancel the
mortgage, and so, on June 17, 1955 RFC executed the corresponding deed of
cancellation and delivered it to Ramon F. Saura himself as president of Saura,
Inc.

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It appears that the cancellation was requested to make way for the
registration of a mortgage contract, executed on August 6, 1954, over the
same property in favor of the Prudential Bank and Trust Co., under which
contract Saura, Inc. had up to December 31 of the same year within which to
pay its obligation on the trust receipt heretofore mentioned. It appears
further that for failure to pay the said obligation the Prudential Bank and
Trust Co. sued Saura, Inc. on May 15, 1955.

On January 9, 1964, ahnost 9 years after the mortgage in favor of RFC was
cancelled at the request of Saura, Inc., the latter commenced the present
suit for damages, alleging failure of RFC (as predecessor of the defendant
DBP) to comply with its obligation to release the proceeds of the loan applied
for and approved, thereby preventing the plaintiff from completing or paying
contractual commitments it had entered into, in connection with its jute mill
project.

The trial court rendered judgment for the plaintiff, ruling that there was a
perfected contract between the parties and that the defendant was guilty of
breach thereof. The defendant pleaded below, and reiterates in this appeal:
(1) that the plaintiff's cause of action had prescribed, or that its claim had
been waived or abandoned; (2) that there was no perfected contract; and (3)
that assuming there was, the plaintiff itself did not comply with the terms
thereof.

We hold that there was indeed a perfected consensual contract, as

recognized in Article 1934 of the Civil Code, which provides:

ART. 1954. An accepted promise to deliver something, by way of

commodatum or simple loan is binding upon the parties, but the
commodatum or simple loan itself shall not be perferted until the
delivery of the object of the contract.

There was undoubtedly offer and acceptance in this case: the application of
Saura, Inc. for a loan of P500,000.00 was approved by resolution of the
defendant, and the corresponding mortgage was executed and registered.
But this fact alone falls short of resolving the basic claim that the defendant
failed to fulfill its obligation and the plaintiff is therefore entitled to recover
damages.

It should be noted that RFC entertained the loan application of Saura, Inc. on
the assumption that the factory to be constructed would utilize locally grown

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raw materials, principally kenaf. There is no serious dispute about this. It was
in line with such assumption that when RFC, by Resolution No. 9083
approved on December 17, 1954, restored the loan to the original amount of
P500,000.00. it imposed two conditions, to wit: "(1) that the raw materials
needed by the borrower-corporation to carry out its operation are available in
the immediate vicinity; and (2) that there is prospect of increased production
thereof to provide adequately for the requirements of the factory." The
imposition of those conditions was by no means a deviation from the terms
of the agreement, but rather a step in its implementation. There was nothing
in said conditions that contradicted the terms laid down in RFC Resolution
No. 145, passed on January 7, 1954, namely "that the proceeds of the loan
shall be utilizedexclusively for the following purposes: for construction of
factory building P250,000.00; for payment of the balance of purchase
price of machinery and equipment P240,900.00; for working capital
P9,100.00." Evidently Saura, Inc. realized that it could not meet the
conditions required by RFC, and so wrote its letter of January 21, 1955,
stating that local jute "will not be able in sufficient quantity this year or
probably next year," and asking that out of the loan agreed upon the sum of
P67,586.09 be released "for raw materials and labor." This was a deviation
from the terms laid down in Resolution No. 145 and embodied in the
mortgage contract, implying as it did a diversion of part of the proceeds of
the loan to purposes other than those agreed upon.

When RFC turned down the request in its letter of January 25, 1955 the
negotiations which had been going on for the implementation of the
agreement reached an impasse. Saura, Inc. obviously was in no position to
comply with RFC's conditions. So instead of doing so and insisting that the
loan be released as agreed upon, Saura, Inc. asked that the mortgage be
cancelled, which was done on June 15, 1955. The action thus taken by both
parties was in the nature cf mutual desistance what Manresa terms
"mutuo disenso" 1 which is a mode of extinguishing obligations. It is a
concept that derives from the principle that since mutual agreement can
create a contract, mutual disagreement by the parties can cause its
extinguishment. 2

The subsequent conduct of Saura, Inc. confirms this desistance. It did not
protest against any alleged breach of contract by RFC, or even point out that
the latter's stand was legally unjustified. Its request for cancellation of the
mortgage carried no reservation of whatever rights it believed it might have
against RFC for the latter's non-compliance. In 1962 it even applied with DBP

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for another loan to finance a rice and corn project, which application was
disapproved. It was only in 1964, nine years after the loan agreement had
been cancelled at its own request, that Saura, Inc. brought this action for
damages.All these circumstances demonstrate beyond doubt that the said
agreement had been extinguished by mutual desistance and that on the
initiative of the plaintiff-appellee itself.

With this view we take of the case, we find it unnecessary to consider and
resolve the other issues raised in the respective briefs of the parties.

WHEREFORE, the judgment appealed from is reversed and the complaint

dismissed, with costs against the plaintiff-appellee.

DIGEST

FACTS:

In July 1952, Saura, Inc., applied to Rehabilitation Finance Corp., now

DBP, for an industrial loan of P500,000 to be used for the
construction of a factory building, to pay the balance of the jute mill
machinery and equipment and as additional working capital. In
Resolution No.145, the loan application was approved to be secured
first by mortgage on the factory buildings, the land site, and
machinery and equipment to be installed.

The mortgage was registered and documents for the promissory

note were executed. But then, later on, was cancelled to make way
for the registration of a mortgage contract over the same property in
favor of Prudential Bank and Trust Co., the latter having issued Saura
letter of credit for the release of the jute machinery. As security,
Saura execute a trust receipt in favor of the Prudential. For failure of
Saura to pay said obligation, Prudential sued Saura.

After almost 9 years, Saura Inc, commenced an action against RFC,

alleging failure on the latter to comply with its obligations to release
the loan applied for and approved, thereby preventing the plaintiff
from completing or paying contractual commitments it had entered
into, in connection with its jute mill project.

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 The trial court ruled in favor of Saura, ruling that there was a
perfected contract between the parties and that the RFC was guilty
of breach thereof.

ISSUE: Whether or not there was a perfected contract between the

parties. YES. There was indeed a perfected consensual contract.

HELD:
Article 1934 provides: An accepted promise to deliver something by way of
commodatum or simple loan is binding upon the parties, but the
commodatum or simple loan itself shall not be perfected until delivery of the
object of the contract.
There was undoubtedly offer and acceptance in the case. The application of
Saura, Inc. for a loan of P500,000.00 was approved by resolution of the
defendant, and the corresponding mortgage was executed and registered.
The defendant failed to fulfill its obligation and the plaintiff is therefore
entitled to recover damages.
When an application for a loan of money was approved by resolution of the
respondent corporation and the responding mortgage was executed and
registered, there arises a perfected consensual contract.
However, it should be noted that RFC imposed two conditions (availability
of raw materials and increased production) when it restored the loan to the
original amount of P500,000.00.
Saura, Inc. obviously was in no position to comply with RFCs conditions. So
instead of doing so and insisting that the loan be released as agreed upon,
Saura, Inc. asked that the mortgage be cancelled.The action thus taken
by both parties was in the nature of mutual desistance which is a
mode of extinguishing obligations. It is a concept that derives from
the principle that since mutual agreement can create a contract,
mutual disagreement by the parties can cause its extinguishment.
WHEREFORE, the judgment appealed from is reversed and the complaint
dismissed.
2ND DIGEST

Facts: Saura Inc. applied to the Rehabilitation Finance Corp (before its
conversion to DBP) for a loan of 500k secured by a first mortgage of the
factory building to finance for the construction of a jute mill factory and
purchase of factory implements. RFC accepted and approved the loan
application subject to some conditions which Saura admitted it could not
comply with. Without having received the amount being loaned, and sensing
that it could not at anyway obtain the full amount of loan, Saura Inc. then
asked for cancellation of the mortgage which RFC also approved. Nine years

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after the cancellation of the mortgage, Saura sued RFC for damages for its
non-fulfillment of obligations arguing that there was indeed a perfected
consensual contract between them.

Issue: Was there a perfected consensual contract? Was there a real contract
of loan which would warrant recovery of damages arising out of breach of
such contract?

Held: On the first issue, yes, there was indeed a perfected consensual
contract, as recognized in Article 1934 of the Civil Code. There was
undoubtedly offer and acceptance in this case: the application of Saura, Inc.
for a loan of P500,000.00 was approved by resolution of the defendant, and
the corresponding mortgage was executed and registered. But this fact alone
falls short of resolving the second issue and the basic claim that the
defendant failed to fulfill its obligation and the plaintiff is therefore entitled to
recover damages. The action thus taken by both partiesSaura's request for
cancellation and RFC's subsequent approval of such cancellationwas in the
nature of mutual desistance what Manresa terms "mutuo disenso" which
is a mode of extinguishing obligations. It is a concept derived from the
principle that since mutual agreement can create a contract, mutual
disagreement by the parties can cause its extinguishment. In view of such
extinguishment, said perfected consensual contract to deliver did not
constitute a real contract of loan.

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 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-49101 October 24, 1983

RAOUL S.V. BONNEVIE and HONESTO V. BONNEVIE, petitioners,

vs.
THE HONORABLE COURT OF APPEALS and THE PHILIPPINE BANK OF
COMMERCE, respondents.

Edgardo I. De Leon for petitioners.

Siguion Reyna, Montecillo & Associates for private respondent.

GUERRERO, J:

Petition for review on certiorari seeking the reversal of the decision of the
defunct Court of Appeals, now Intermediate Appellate Court, in CA-G.R. No.
61193-R, entitled "Honesto Bonnevie vs. Philippine Bank of Commerce, et
al.," promulgated August 11, 1978 1 as well as the Resolution denying the
motion for reconsideration.

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The complaint filed on January 26, 1971 by petitioner Honesto Bonnevie with
the Court of First Instance of Rizal against respondent Philippine Bank of
Commerce sought the annulment of the Deed of Mortgage dated December
6, 1966 executed in favor of the Philippine Bank of Commerce by the
spouses Jose M. Lozano and Josefa P. Lozano as well as the extrajudicial
foreclosure made on September 4, 1968. It alleged among others that (a) the
Deed of Mortgage lacks consideration and (b) the mortgage was executed by
one who was not the owner of the mortgaged property. It further alleged that
the property in question was foreclosed pursuant to Act No. 3135 as
amended, without, however, complying with the condition imposed for a
valid foreclosure. Granting the validity of the mortgage and the extrajudicial
foreclosure, it finally alleged that respondent Bank should have accepted
petitioner's offer to redeem the property under the principle of equity said
justice.

On the other hand, the answer of defendant Bank, now private respondent
herein, specifically denied most of the allegations in the complaint and raised
the following affirmative defenses: (a) that the defendant has not given its
consent, much less the requisite written consent, to the sale of the
mortgaged property to plaintiff and the assumption by the latter of the loan
secured thereby; (b) that the demand letters and notice of foreclosure were
sent to Jose Lozano at his address; (c) that it was notified for the first time
about the alleged sale after it had foreclosed the Lozano mortgage; (d) that
the law on contracts requires defendant's consent before Jose Lozano can be
released from his bilateral agreement with the former and doubly so, before
plaintiff may be substituted for Jose Lozano and Alfonso Lim; (e) that the loan
of P75,000.00 which was secured by mortgage, after two renewals remain
unpaid despite countless reminders and demands; of that the property in
question remained registered in the name of Jose M. Lozano in the land
records of Rizal and there was no entry, notation or indication of the alleged
sale to plaintiff; (g) that it is an established banking practice that payments
against accounts need not be personally made by the debtor himself; and (h)
that it is not true that the mortgage, at the time of its execution and
registration, was without consideration as alleged because the execution and
registration of the securing mortgage, the signing and delivery of the
promissory note and the disbursement of the proceeds of the loan are mere
implementation of the basic consensual contract of loan.

After petitioner Honesto V. Bonnevie had rested his case, petitioner Raoul SV
Bonnevie filed a motion for intervention. The intervention was premised on
the Deed of Assignment executed by petitioner Honesto Bonnevie in favor of
petitioner Raoul SV Bonnevie covering the rights and interests of petitioner
Honesto Bonnevie over the subject property. The intervention was ultimately
granted in order that all issues be resolved in one proceeding to avoid
multiplicity of suits.

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On March 29, 1976, the lower court rendered its decision, the dispositive
portion of which reads as follows:

WHEREFORE, all the foregoing premises considered, judgment is

hereby rendered dismissing the complaint with costs against the
plaintiff and the intervenor.

After the motion for reconsideration of the lower court's decision was denied,
petitioners appealed to respondent Court of Appeals assigning the following
errors:

1. The lower court erred in not finding that the real estate
mortgage executed by Jose Lozano was null and void;

2. The lower court erred in not finding that the auction sale
decide on August 19, 1968 was null and void;

3. The lower court erred in not allowing the plaintiff and the
intervenor to redeem the property;

4. The lower court erred in not finding that the defendant acted
in bad faith; and

5. The lower court erred in dismissing the complaint.

On August 11, 1978, the respondent court promulgated its decision affirming
the decision of the lower court, and on October 3. 1978 denied the motion
for reconsideration. Hence, the present petition for review.

The factual findings of respondent Court of Appeals being conclusive upon

this Court, We hereby adopt the facts found the trial court and found by the
Court of Appeals to be consistent with the evidence adduced during trial, to
wit:

It is not disputed that spouses Jose M. Lozano and Josefa P.

Lozano were the owners of the property which they mortgaged
on December 6, 1966, to secure the payment of the loan in the
principal amount of P75,000.00 they were about to obtain from
defendant-appellee Philippine Bank of Commerce; that on
December 8, 1966, executed in favor of plaintiff-appellant the
Deed of Sale with Mortgage ,, for and in consideration of the sum
of P100,000.00, P25,000.00 of which amount being payable to
the Lozano spouses upon the execution of the document, and the
balance of P75,000.00 being payable to defendant- appellee;
that on December 6, 1966, when the mortgage was executed by
the Lozano spouses in favor of defendant-appellee, the loan of

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 P75,000.00 was not yet received them, as it was on December
12, 1966 when they and their co-maker Alfonso Lim signed the
promissory note for that amount; that from April 28, 1967 to July
12, 1968, plaintiff-appellant made payments to defendant-
appellee on the mortgage in the total amount of P18,944.22; that
on May 4, 1968, plaintiff-appellant assigned all his rights under
the Deed of Sale with Assumption of Mortgage to his brother,
intervenor Raoul Bonnevie; that on June 10, 1968, defendant-
appellee applied for the foreclosure of the mortgage, and notice
of sale was published in the Luzon Weekly Courier on June 30,
July 7, and July 14, 1968; that auction sale was conducted on
August 19, 1968, and the property was sold to defendant-
appellee for P84,387.00; and that offers from plaintiff-appellant
to repurchase the property failed, and on October 9, 1969, he
caused an adverse claim to be annotated on the title of the
property. (Decision of the Court of Appeals, p. 5).

Presented for resolution in this review are the following issues:

Whether the real estate mortgage executed by the spouses

Lozano in favor of respondent bank was validly and legally
executed.

II

Whether the extrajudicial foreclosure of the said mortgage was

validly and legally effected.

III

Whether petitioners had a right to redeem the foreclosed

property.

IV

Granting that petitioners had such a right, whether respondent

was justified in refusing their offers to repurchase the property.

As clearly seen from the foregoing issues raised, petitioners' course of action
is three-fold. They primarily attack the validity of the mortgage executed by
the Lozano spouses in favor of respondent Bank. Next, they attack the
validity of the extrajudicial foreclosure and finally, appeal to justice and
equity. In attacking the validity of the deed of mortgage, they contended that
when it was executed on December 6, 1966, there was yet no principal

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obligation to secure as the loan of P75,000.00 was not received by the
Lozano spouses "So much so that in the absence of a principal obligation,
there is want of consideration in the accessory contract, which consequently
impairs its validity and fatally affects its very existence." (Petitioners' Brief,
par. 1, p. 7).

This contention is patently devoid of merit. From the recitals of the mortgage
deed itself, it is clearly seen that the mortgage deed was executed for and
on condition of the loan granted to the Lozano spouses. The fact that the
latter did not collect from the respondent Bank the consideration of the
mortgage on the date it was executed is immaterial. A contract of loan being
a consensual contract, the herein contract of loan was perfected at the same
time the contract of mortgage was executed. The promissory note executed
on December 12, 1966 is only an evidence of indebtedness and does not
indicate lack of consideration of the mortgage at the time of its execution.

Petitioners also argued that granting the validity of the mortgage, the
subsequent renewals of the original loan, using as security the same
property which the Lozano spouses had already sold to petitioners, rendered
the mortgage null and void,

This argument failed to consider the provision 2 of the contract of mortgage

which prohibits the sale, disposition of, mortgage and encumbrance of the
mortgaged properties, without the written consent of the mortgagee, as well
as the additional proviso that if in spite of said stipulation, the mortgaged
property is sold, the vendee shall assume the mortgage in the terms and
conditions under which it is constituted. These provisions are expressly made
part and parcel of the Deed of Sale with Assumption of Mortgage.

Petitioners admit that they did not secure the consent of respondent Bank to
the sale with assumption of mortgage. Coupled with the fact that the
sale/assignment was not registered so that the title remained in the name of
the Lozano spouses, insofar as respondent Bank was concerned, the Lozano
spouses could rightfully and validly mortgage the property. Respondent Bank
had every right to rely on the certificate of title. It was not bound to go
behind the same to look for flaws in the mortgagor's title, the doctrine of
innocent purchaser for value being applicable to an innocent mortgagee for
value. (Roxas vs. Dinglasan, 28 SCRA 430; Mallorca vs. De Ocampo, 32 SCRA
48). Another argument for the respondent Bank is that a mortgage follows
the property whoever the possessor may be and subjects the fulfillment of
the obligation for whose security it was constituted. Finally, it can also be
said that petitioners voluntarily assumed the mortgage when they entered
into the Deed of Sale with Assumption of Mortgage. They are, therefore,
estopped from impugning its validity whether on the original loan or
renewals thereof.

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Petitioners next assail the validity and legality of the extrajudicial foreclosure
on the following grounds:

a) petitioners were never notified of the foreclosure sale.

b) The notice of auction sale was not posted for the period
required by law.

c) publication of the notice of auction sale in the Luzon Weekly

Courier was not in accordance with law.

The lack of notice of the foreclosure sale on petitioners is a flimsy ground.

Respondent Bank not being a party to the Deed of Sale with Assumption of
Mortgage, it can validly claim that it was not aware of the same and hence, it
may not be obliged to notify petitioners. Secondly, petitioner Honesto
Bonnevie was not entitled to any notice because as of May 14, 1968, he had
transferred and assigned all his rights and interests over the property in
favor of intervenor Raoul Bonnevie and respondent Bank not likewise
informed of the same. For the same reason, Raoul Bonnevie is not entitled to
notice. Most importantly, Act No. 3135 does not require personal notice on
the mortgagor. The requirement on notice is that:

Section 3. Notice shall be given by posting notices of the sale for

not less than twenty days in at least three public places of the
municipality or city where the property is situated, and if such
property is worth more than four hundred pesos, such notice
shall also be published once a week for at least three
consecutive weeks in a newspaper of general circulation in the
municipality or city

In the case at bar, the notice of sale was published in the Luzon Courier on
June 30, July 7 and July 14, 1968 and notices of the sale were posted for not
less than twenty days in at least three (3) public places in the Municipality
where the property is located. Petitioners were thus placed on constructive
notice.

The case of Santiago vs. Dionisio, 92 Phil. 495, cited by petitioners is

inapplicable because said case involved a judicial foreclosure and the sale to
the vendee of the mortgaged property was duly registered making the
mortgaged privy to the sale.

As regards the claim that the period of publication of the notice of auction
sale was not in accordance with law, namely: once a week for at least three
consecutive weeks, the Court of Appeals ruled that the publication of notice
on June 30, July 7 and July 14, 1968 satisfies the publication requirement
under Act No. 3135 notwithstanding the fact that June 30 to July 14 is only 14

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days. We agree. Act No. 3135 merely requires that such notice shall be
published once a week for at least three consecutive weeks." Such phrase,
as interpreted by this Court in Basa vs. Mercado, 61 Phil. 632, does not mean
that notice should be published for three full weeks.

The argument that the publication of the notice in the "Luzon Weekly
Courier" was not in accordance with law as said newspaper is not of general
circulation must likewise be disregarded. The affidavit of publication,
executed by the Publisher, business/advertising manager of the Luzon
Weekly Courier, stares that it is "a newspaper of general circulation in ...
Rizal, and that the Notice of Sheriff's sale was published in said paper on
June 30, July 7 and July 14, 1968. This constitutes prima facie evidence of
compliance with the requisite publication. Sadang vs. GSIS, 18 SCRA 491).

To be a newspaper of general circulation, it is enough that "it is published for

the dissemination of local news and general information; that it has a bona
fide subscription list of paying subscribers; that it is published at regular
intervals." (Basa vs. Mercado, 61 Phil. 632). The newspaper need not have
the largest circulation so long as it is of general circulation. Banta vs.
Pacheco, 74 Phil. 67). The testimony of three witnesses that they do read the
Luzon Weekly Courier is no proof that said newspaper is not a newspaper of
general circulation in the province of Rizal.

Whether or not the notice of auction sale was posted for the period required
by law is a question of fact. It can no longer be entertained by this Court.
(see Reyes, et al. vs. CA, et al., 107 SCRA 126). Nevertheless, the records
show that copies of said notice were posted in three conspicuous places in
the municipality of Pasig, Rizal namely: the Hall of Justice, the Pasig Municipal
Market and Pasig Municipal Hall. In the same manner, copies of said notice
were also posted in the place where the property was located, namely: the
Municipal Building of San Juan, Rizal; the Municipal Market and on Benitez
Street. The following statement of Atty. Santiago Pastor, head of the legal
department of respondent bank, namely:

Q How many days were the notices posted in these

two places, if you know?

A We posted them only once in one day. (TSN, p. 45,

July 25, 1973)

is not a sufficient countervailing evidence to prove that there was no

compliance with the posting requirement in the absence of proof or even of
allegation that the notices were removed before the expiration of the twenty-
day period. A single act of posting (which may even extend beyond the
period required by law) satisfies the requirement of law. The burden of

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proving that the posting requirement was not complied with is now shifted to
the one who alleges non-compliance.

On the question of whether or not the petitioners had a right to redeem the
property, We hold that the Court of Appeals did not err in ruling that they had
no right to redeem. No consent having been secured from respondent Bank
to the sale with assumption of mortgage by petitioners, the latter were not
validly substituted as debtors. In fact, their rights were never recorded and
hence, respondent Bank is charged with the obligation to recognize the right
of redemption only of the Lozano spouses. But even granting that as
purchaser or assignee of the property, as the case may be, the petitioners
had acquired a right to redeem the property, petitioners failed to exercise
said right within the period granted by law. Thru certificate of sale in favor of
appellee was registered on September 2, 1968 and the one year redemption
period expired on September 3, 1969. It was not until September 29, 1969
that petitioner Honesto Bonnevie first wrote respondent and offered to
redeem the property. Moreover, on September 29, 1969, Honesto had at that
time already transferred his rights to intervenor Raoul Bonnevie.

On the question of whether or not respondent Court of Appeals erred in

holding that respondent Bank did not act in bad faith, petitioners rely on
Exhibit "B" which is the letter of lose Lozano to respondent Bank dated
December 8, 1966 advising the latter that Honesto Bonnevie was authorized
to make payments for the amount secured by the mortgage on the subject
property, to receive acknowledgment of payments, obtain the Release of the
Mortgage after full payment of the obligation and to take delivery of the title
of said property. On the assumption that the letter was received by
respondent Bank, a careful reading of the same shows that the plaintiff was
merely authorized to do acts mentioned therein and does not mention that
petitioner is the new owner of the property nor request that all
correspondence and notice should be sent to him.

The claim of appellants that the collection of interests on the loan up to July
12, 1968 extends the maturity of said loan up to said date and accordingly
on June 10, 1968 when defendant applied for the foreclosure of the
mortgage, the loan was not yet due and demandable, is totally incorrect and
misleading. The undeniable fact is that the loan matured on December 26,
1967. On June 10, 1968, when respondent Bank applied for foreclosure, the
loan was already six months overdue. Petitioners' payment of interest on July
12, 1968 does not thereby make the earlier act of respondent Bank
inequitous nor does it ipso facto result in the renewal of the loan. In order
that a renewal of a loan may be effected, not only the payment of the
accrued interest is necessary but also the payment of interest for the
proposed period of renewal as well. Besides, whether or not a loan may be
renewed does not solely depend on the debtor but more so on the discretion
of the bank. Respondent Bank may not be, therefore, charged of bad faith.

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WHEREFORE, the appeal being devoid of merit, the decision of the Court of
Appeals is hereby AFFIRMED. Costs against petitioners.

SO ORDERED.

DIGEST

Facts: Spouses Lozano mortgaged their property to secure the payment of a

loan amounting to 75K with private respondent Philippine Bank of
Communication (PBCom). The deed of mortgage was executed on 12-6-66,
but the loan proceeeds were received only on 12-12-66. Two days after the
execution of the deed of mortgage, the spouses sold the property to the
petitioner Bonnevie for and in consideration of 100k25K of which payable
to the spouses and 75K as payment to PBCom. Afterwhich, Bonnevie
defaulted payments to PBCom prompting the latter to auction the property
after Bonnivie failed to settle despite subsequent demands, in order to
recover the amount loaned. The latter now assails the validity of the
mortgage between Lozano and Pbcom arguing that on the day the deed was
executed there was yet no principal obligation to secure as the loan of
P75,000.00 was not received by the Lozano spouses, so that in the absence
of a principal obligation, there is want of consideration in the accessory
contract, which consequently impairs its validity and fatally affects its very
existence.

Issue: Was there a perfected contract of loan?

Held: Yes. From the recitals of the mortgage deed itself, it is clearly seen that
the mortgage deed was executed for and on condition of the loan granted to
the Lozano spouses. The fact that the latter did not collect from the
respondent Bank the consideration of the mortgage on the date it was
executed is immaterial. A contract of loan being a consensual contract, the
herein contract of loan was perfected at the same time the contract of
mortgage was executed. The promissory note executed on December 12,
1966 is only an evidence of indebtedness and does not indicate lack of
consideration of the mortgage at the time of its execution.

2ND DIGEST

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Facts:

December 6, 1966: Spouses Jose M. Lozano and Josefa P. Lozano

secured their loan of P75K from Philippine Bank of Commerce (PBC) by
mortgaging their property
December 8, 1966: Executed Deed of Sale with Mortgage to Honesto
Bonnevie where P75K is payable to PBC and P25K is payable to Spouses
Lanzano.
April 28, 1967 to July 12, 1968: Honesto Bonnevie paid a total
of P18,944.22 to PBC
May 4, 1968: Honesto Bonnevie assigned all his rights under the Deed
of Sale with Assumption ofMortgage to his brother, intervenor Raoul
Bonnevie
June 10, 1968: PBC applied for the foreclosure of the mortgage, and
notice of sale was published
January 26, 1971: Honesto Bonnevie filed in the CFI of Rizal
against Philippine Bank of Commerce for the annulment of the Deed
of Mortgage dated December 6, 1966 as well as
the extrajudicial foreclosure made on September 4, 1968.
CFI: Dismissed the complaint with costs against the Bonnevies
CA: Affirmed
ISSUE: W/N the forclosure on the mortgage is validly executed.

HELD: YES. CA affirmed

A contract of loan being a consensual contract is perfected at the same
time the contract of mortgagewas executed. The promissory
note executed on December 12, 1966 is only an evidence of indebtedness
and does not indicate lack of consideration of the mortgage at the time of
its execution.
Respondent Bank had every right to rely on the certificate of title. It
was not bound to go behind the same to look for flaws in the mortgagor's
title, the doctrine of innocent purchaser for value being applicable to an
innocent mortgagee for value.
Thru certificate of sale in favor of appellee was registered on
September 2, 1968 and the one year redemption period expired on
September 3, 1969. It was not until September 29, 1969 that Honesto
Bonnevie first wrote respondent and offered to redeem the property.

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 loan matured on December 26, 1967 so when respondent Bank applied
for foreclosure, the loan was already six months overdue. Payment of
interest on July 12, 1968 does not make the earlier act of PBC inequitous
nor does it ipso facto result in the renewal of the loan. In order that
a renewal of a loan may be effected, not only the payment of the accrued
interest is necessary but also the payment of interest for the proposed
period of renewal as well. Besides, whether or not a loan may be renewed
does not solely depend on the debtor but more so on the discretion of the
bank.

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 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-45710 October 3, 1985

CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR

ANTONIO T. CASTRO, JR. OF THE DEPARTMENT OF COMMERCIAL AND
SAVINGS BANK, in his capacity as statutory receiver of Island
Savings Bank, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and SULPICIO M.
TOLENTINO, respondents.

I.B. Regalado, Jr., Fabian S. Lombos and Marino E. Eslao for petitioners.

Antonio R. Tupaz for private respondent.

MAKASIAR, CJ.:

This is a petition for review on certiorari to set aside as null and void the
decision of the Court of Appeals, in C.A.-G.R. No. 52253-R dated February 11,
1977, modifying the decision dated February 15, 1972 of the Court of First
Instance of Agusan, which dismissed the petition of respondent Sulpicio M.
Tolentino for injunction, specific performance or rescission, and damages
with preliminary injunction.

On April 28, 1965, Island Savings Bank, upon favorable recommendation of

its legal department, approved the loan application for P80,000.00 of Sulpicio
M. Tolentino, who, as a security for the loan, executed on the same day a real
estate mortgage over his 100-hectare land located in Cubo, Las Nieves,
Agusan, and covered by TCT No. T-305, and which mortgage was annotated
on the said title the next day. The approved loan application called for a lump
sum P80,000.00 loan, repayable in semi-annual installments for a period of 3
years, with 12% annual interest. It was required that Sulpicio M. Tolentino
shall use the loan proceeds solely as an additional capital to develop his
other property into a subdivision.

On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00 loan
was made by the Bank; and Sulpicio M. Tolentino and his wife Edita Tolentino

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signed a promissory note for P17,000.00 at 12% annual interest, payable
within 3 years from the date of execution of the contract at semi-annual
installments of P3,459.00 (p. 64, rec.). An advance interest for the
P80,000.00 loan covering a 6-month period amounting to P4,800.00 was
deducted from the partial release of P17,000.00. But this pre-deducted
interest was refunded to Sulpicio M. Tolentino on July 23, 1965, after being
informed by the Bank that there was no fund yet available for the release of
the P63,000.00 balance (p. 47, rec.). The Bank, thru its vice-president and
treasurer, promised repeatedly the release of the P63,000.00 balance (p.
113, rec.).

On August 13, 1965, the Monetary Board of the Central Bank, after finding
Island Savings Bank was suffering liquidity problems, issued Resolution No.
1049, which provides:

In view of the chronic reserve deficiencies of the Island Savings

Bank against its deposit liabilities, the Board, by unanimous vote,
decided as follows:

1) To prohibit the bank from making new loans and investments

[except investments in government securities] excluding
extensions or renewals of already approved loans, provided that
such extensions or renewals shall be subject to review by the
Superintendent of Banks, who may impose such limitations as
may be necessary to insure correction of the bank's deficiency as
soon as possible;

xxx xxx xxx

(p. 46, rec.).

On June 14, 1968, the Monetary Board, after finding thatIsland Savings Bank
failed to put up the required capital to restore its solvency, issued Resolution
No. 967 which prohibited Island Savings Bank from doing business in the
Philippines and instructed the Acting Superintendent of Banks to take charge
of the assets of Island Savings Bank (pp. 48-49, rec).

On August 1, 1968, Island Savings Bank, in view of non-payment of the

P17,000.00 covered by the promissory note, filed an application for the
extra-judicial foreclosure of the real estate mortgage covering the 100-
hectare land of Sulpicio M. Tolentino; and the sheriff scheduled the auction
for January 22, 1969.

On January 20, 1969, Sulpicio M. Tolentino filed a petition with the Court of
First Instance of Agusan for injunction, specific performance or rescission and
damages with preliminary injunction, alleging that since Island Savings Bank

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failed to deliver the P63,000.00 balance of the P80,000.00 loan, he is entitled
to specific performance by ordering Island Savings Bank to deliver the
P63,000.00 with interest of 12% per annum from April 28, 1965, and if said
balance cannot be delivered, to rescind the real estate mortgage (pp. 32-43,
rec.).

On January 21, 1969, the trial court, upon the filing of a P5,000.00 surety
bond, issued a temporary restraining order enjoining the Island Savings Bank
from continuing with the foreclosure of the mortgage (pp. 86-87, rec.).

On January 29, 1969, the trial court admitted the answer in intervention
praying for the dismissal of the petition of Sulpicio M. Tolentino and the
setting aside of the restraining order, filed by the Central Bank and by the
Acting Superintendent of Banks (pp. 65-76, rec.).

On February 15, 1972, the trial court, after trial on the merits rendered its
decision, finding unmeritorious the petition of Sulpicio M. Tolentino, ordering
him to pay Island Savings Bank the amount of PI 7 000.00 plus legal interest
and legal charges due thereon, and lifting the restraining order so that the
sheriff may proceed with the foreclosure (pp. 135-136. rec.

On February 11, 1977, the Court of Appeals, on appeal by Sulpicio M.

Tolentino, modified the Court of First Instance decision by affirming the
dismissal of Sulpicio M. Tolentino's petition for specific performance, but it
ruled that Island Savings Bank can neither foreclose the real estate mortgage
nor collect the P17,000.00 loan pp. 30-:31. rec.).

Hence, this instant petition by the central Bank.

The issues are:

1. Can the action of Sulpicio M. Tolentino for specific performance

prosper?

2. Is Sulpicio M. Tolentino liable to pay the P17,000.00 debt

covered by the promissory note?

3. If Sulpicio M. Tolentino's liability to pay the P17,000.00

subsists, can his real estate mortgage be foreclosed to satisfy
said amount?

When Island Savings Bank and Sulpicio M. Tolentino entered into an

P80,000.00 loan agreement on April 28, 1965, they undertook reciprocal
obligations. In reciprocal obligations, the obligation or promise of each party
is the consideration for that of the other (Penaco vs. Ruaya, 110 SCRA 46
[1981]; Vda. de Quirino vs, Pelarca 29 SCRA 1 [1969]); and when one party

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has performed or is ready and willing to perform his part of the contract, the
other party who has not performed or is not ready and willing to perform
incurs in delay (Art. 1169 of the Civil Code). The promise of Sulpicio M.
Tolentino to pay was the consideration for the obligation of Island Savings
Bank to furnish the P80,000.00 loan. When Sulpicio M. Tolentino executed a
real estate mortgage on April 28, 1965, he signified his willingness to pay the
P80,000.00 loan. From such date, the obligation of Island Savings Bank to
furnish the P80,000.00 loan accrued. Thus, the Bank's delay in furnishing the
entire loan started on April 28, 1965, and lasted for a period of 3 years or
when the Monetary Board of the Central Bank issued Resolution No. 967 on
June 14, 1968, which prohibited Island Savings Bank from doing further
business. Such prohibition made it legally impossible for Island Savings Bank
to furnish the P63,000.00 balance of the P80,000.00 loan. The power of the
Monetary Board to take over insolvent banks for the protection of the public
is recognized by Section 29 of R.A. No. 265, which took effect on June 15,
1948, the validity of which is not in question.

The Board Resolution No. 1049 issued on August 13,1965 cannot interrupt
the default of Island Savings Bank in complying with its obligation of
releasing the P63,000.00 balance because said resolution merely prohibited
the Bank from making new loans and investments, and nowhere did it
prohibit island Savings Bank from releasing the balance of loan agreements
previously contracted. Besides, the mere pecuniary inability to fulfill an
engagement does not discharge the obligation of the contract, nor does it
constitute any defense to a decree of specific performance (Gutierrez Repide
vs. Afzelius and Afzelius, 39 Phil. 190 [1918]). And, the mere fact of
insolvency of a debtor is never an excuse for the non-fulfillment of an
obligation but 'instead it is taken as a breach of the contract by him (vol.
17A, 1974 ed., CJS p. 650)

The fact that Sulpicio M. Tolentino demanded and accepted the refund of the
pre-deducted interest amounting to P4,800.00 for the supposed P80,000.00
loan covering a 6-month period cannot be taken as a waiver of his right to
collect the P63,000.00 balance. The act of Island Savings Bank, in asking the
advance interest for 6 months on the supposed P80,000.00 loan, was
improper considering that only P17,000.00 out of the P80,000.00 loan was
released. A person cannot be legally charged interest for a non-existing debt.
Thus, the receipt by Sulpicio M. 'Tolentino of the pre-deducted interest was
an exercise of his right to it, which right exist independently of his right to
demand the completion of the P80,000.00 loan. The exercise of one right
does not affect, much less neutralize, the exercise of the other.

The alleged discovery by Island Savings Bank of the over-valuation of the

loan collateral cannot exempt it from complying with its reciprocal obligation
to furnish the entire P80,000.00 loan. 'This Court previously ruled that bank
officials and employees are expected to exercise caution and prudence in the

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discharge of their functions (Rural Bank of Caloocan, Inc. vs. C.A., 104 SCRA
151 [1981]). It is the obligation of the bank's officials and employees that
before they approve the loan application of their customers, they must
investigate the existence and evaluation of the properties being offered as a
loan security. The recent rush of events where collaterals for bank loans turn
out to be non-existent or grossly over-valued underscore the importance of
this responsibility. The mere reliance by bank officials and employees on their
customer's representation regarding the loan collateral being offered as loan
security is a patent non-performance of this responsibility. If ever bank
officials and employees totally reIy on the representation of their customers
as to the valuation of the loan collateral, the bank shall bear the risk in case
the collateral turn out to be over-valued. The representation made by the
customer is immaterial to the bank's responsibility to conduct its own
investigation. Furthermore, the lower court, on objections of' Sulpicio M.
Tolentino, had enjoined petitioners from presenting proof on the alleged over-
valuation because of their failure to raise the same in their pleadings (pp.
198-199, t.s.n. Sept. 15. 1971). The lower court's action is sanctioned by the
Rules of Court, Section 2, Rule 9, which states that "defenses and objections
not pleaded either in a motion to dismiss or in the answer are deemed
waived." Petitioners, thus, cannot raise the same issue before the Supreme
Court.

Since Island Savings Bank was in default in fulfilling its reciprocal obligation
under their loan agreement, Sulpicio M. Tolentino, under Article 1191 of the
Civil Code, may choose between specific performance or rescission with
damages in either case. But since Island Savings Bank is now prohibited from
doing further business by Monetary Board Resolution No. 967, WE cannot
grant specific performance in favor of Sulpicio M, Tolentino.

Rescission is the only alternative remedy left. WE rule, however, that

rescission is only for the P63,000.00 balance of the P80,000.00 loan, because
the bank is in default only insofar as such amount is concerned, as there is
no doubt that the bank failed to give the P63,000.00. As far as the partial
release of P17,000.00, which Sulpicio M. Tolentino accepted and executed a
promissory note to cover it, the bank was deemed to have complied with its
reciprocal obligation to furnish a P17,000.00 loan. The promissory note gave
rise to Sulpicio M. Tolentino's reciprocal obligation to pay the P17,000.00 loan
when it falls due. His failure to pay the overdue amortizations under the
promissory note made him a party in default, hence not entitled to rescission
(Article 1191 of the Civil Code). If there is a right to rescind the promissory
note, it shall belong to the aggrieved party, that is, Island Savings Bank. If
Tolentino had not signed a promissory note setting the date for payment of
P17,000.00 within 3 years, he would be entitled to ask for rescission of the
entire loan because he cannot possibly be in default as there was no date for
him to perform his reciprocal obligation to pay.

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Since both parties were in default in the performance of their respective
reciprocal obligations, that is, Island Savings Bank failed to comply with its
obligation to furnish the entire loan and Sulpicio M. Tolentino failed to comply
with his obligation to pay his P17,000.00 debt within 3 years as stipulated,
they are both liable for damages.

Article 1192 of the Civil Code provides that in case both parties have
committed a breach of their reciprocal obligations, the liability of the first
infractor shall be equitably tempered by the courts. WE rule that the liability
of Island Savings Bank for damages in not furnishing the entire loan is offset
by the liability of Sulpicio M. Tolentino for damages, in the form of penalties
and surcharges, for not paying his overdue P17,000.00 debt. The liability of
Sulpicio M. Tolentino for interest on his PI 7,000.00 debt shall not be included
in offsetting the liabilities of both parties. Since Sulpicio M. Tolentino derived
some benefit for his use of the P17,000.00, it is just that he should account
for the interest thereon.

WE hold, however, that the real estate mortgage of Sulpicio M. Tolentino

cannot be entirely foreclosed to satisfy his P 17,000.00 debt.

The consideration of the accessory contract of real estate mortgage is the

same as that of the principal contract (Banco de Oro vs. Bayuga, 93 SCRA
443 [1979]). For the debtor, the consideration of his obligation to pay is the
existence of a debt. Thus, in the accessory contract of real estate mortgage,
the consideration of the debtor in furnishing the mortgage is the existence of
a valid, voidable, or unenforceable debt (Art. 2086, in relation to Art, 2052, of
the Civil Code).

The fact that when Sulpicio M. 'Tolentino executed his real estate mortgage,
no consideration was then in existence, as there was no debt yet because
Island Savings Bank had not made any release on the loan, does not make
the real estate mortgage void for lack of consideration. It is not necessary
that any consideration should pass at the time of the execution of the
contract of real mortgage (Bonnevie vs. C.A., 125 SCRA 122 [1983]). lt may
either be a prior or subsequent matter. But when the consideration is
subsequent to the mortgage, the mortgage can take effect only when the
debt secured by it is created as a binding contract to pay (Parks vs, Sherman,
Vol. 176 N.W. p. 583, cited in the 8th ed., Jones on Mortgage, Vol. 2, pp. 5-6).
And, when there is partial failure of consideration, the mortgage becomes
unenforceable to the extent of such failure (Dow. et al. vs. Poore, Vol. 172
N.E. p. 82, cited in Vol. 59, 1974 ed. CJS, p. 138). Where the indebtedness
actually owing to the holder of the mortgage is less than the sum named in
the mortgage, the mortgage cannot be enforced for more than the actual
sum due (Metropolitan Life Ins. Co. vs. Peterson, Vol. 19, F(2d) p. 88, cited in
5th ed., Wiltsie on Mortgage, Vol. 1, P. 180).

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Since Island Savings Bank failed to furnish the P63,000.00 balance of the
P8O,000.00 loan, the real estate mortgage of Sulpicio M. Tolentino became
unenforceable to such extent. P63,000.00 is 78.75% of P80,000.00, hence
the real estate mortgage covering 100 hectares is unenforceable to the
extent of 78.75 hectares. The mortgage covering the remainder of 21.25
hectares subsists as a security for the P17,000.00 debt. 21.25 hectares is
more than sufficient to secure a P17,000.00 debt.

The rule of indivisibility of a real estate mortgage provided for by Article

2089 of the Civil Code is inapplicable to the facts of this case.

Article 2089 provides:

A pledge or mortgage is indivisible even though the debt may be

divided among the successors in interest of the debtor or
creditor.

Therefore, the debtor's heirs who has paid a part of the debt can
not ask for the proportionate extinguishment of the pledge or
mortgage as long as the debt is not completely satisfied.

Neither can the creditor's heir who have received his share of the
debt return the pledge or cancel the mortgage, to the prejudice
of other heirs who have not been paid.

The rule of indivisibility of the mortgage as outlined by Article 2089 above-

quoted presupposes several heirs of the debtor or creditor which does not
obtain in this case. Hence, the rule of indivisibility of a mortgage cannot
apply

WHEREFORE, THE DECISION OF THE COURT OF APPEALS DATED FEBRUARY

11, 1977 IS HEREBY MODIFIED, AND

1. SULPICIO M. TOLENTINO IS HEREBY ORDERED TO PAY IN FAVOR OF HEREIN

PETITIONERS THE SUM OF P17.000.00, PLUS P41,210.00 REPRESENTING 12%
INTEREST PER ANNUM COVERING THE PERIOD FROM MAY 22, 1965 TO
AUGUST 22, 1985, AND 12% INTEREST ON THE TOTAL AMOUNT COUNTED
FROM AUGUST 22, 1985 UNTIL PAID;

2. IN CASE SULPICIO M. TOLENTINO FAILS TO PAY, HIS REAL ESTATE

MORTGAGE COVERING 21.25 HECTARES SHALL BE FORECLOSED TO SATISFY
HIS TOTAL INDEBTEDNESS; AND

3. THE REAL ESTATE MORTGAGE COVERING 78.75 HECTARES IS HEREBY

DECLARED UNEN FORCEABLE AND IS HEREBY ORDERED RELEASED IN FAVOR
OF SULPICIO M. TOLENTINO.

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 NO COSTS. SO ORDERED.

DIGETS

The banks asking for advance interest for the loan is improper
considering that the total loan hasnt been released. A person cant
be charged interest for nonexisting debt. The alleged discovery by
the bank of overvaluation of the loan collateral is not an
issue. Since Island Savings Bank failed to furnish the P63,000.00
balance of the P80,000.00 loan, the real estate mortgage of Sulpicio
M. Tolentino became unenforceable to such extent.
Facts: Island Savings Bank, upon favorable recommendation of its legal
department, approved the loan application for P80,000.00 of Sulpicio M.
Tolentino, who, as a security for the loan, executed on the same day a real
estate mortgage over his 100-hectare land located in Cubo, Las Nieves,
Agusan. The loan called for a lump sum of P80,000, repayable in semi-annual
installments for 3 yrs, with 12% annual interest. After the agreement, a mere
P17K partial release of the loan was made by the bank and Tolentino and his
wife signed a promissory note for the P17,000 at 12% annual interest
payable w/in 3 yrs. An advance interest was deducted fr the partial release
but this prededucted interest was refunded to Tolentino after being informed
that there was no fund yet for the release of the P63K balance.

Monetary Board of Central Bank, after finding that bank was suffering
liquidity problems, prohibited the bank fr making new loans and investments.
And after the bank failed to restore its solvency, the Central Bank prohibited
Island Savings Bank from doing business in the Philippines. Island Savings
Bank in view of the non-payment of the P17K filed an application for
foreclosure of the real estate mortgage. Tolentino filed petition for specific
performance or rescission and damages with preliminary injunction, alleging
that since the bank failed to deliver P63K, he is entitled to specific
performance and if not, to rescind the real estate mortgage.

Issues: 1) Whether or not Tolentinos can collect from the bank for damages

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 2) Whether or not the mortgagor is liable to pay the amount covered
by the promissory note

3) Whether or not the real estate mortgage can be foreclosed

Held:

1) Whether or not Tolentinos can collect from the bank for damages

The loan agreement implied reciprocal obligations. When one party is willing
and ready to perform, the other party not ready nor willing incurs in delay.
When Tolentino executed real estate mortgage, he signified willingness to
pay. That time, the banks obligation to furnish the P80K loan accrued. Now,
the Central Bank resolution made it impossible for the bank to furnish the
P63K balance. The prohibition on the bank to make new loans is irrelevant
bec it did not prohibit the bank fr releasing the balance of loans previously
contracted. Insolvency of debtor is not an excuse for non-fulfillment of
obligation but is a breach of contract.

The banks asking for advance interest for the loan is improper considering
that the total loan hasnt been released. A person cant be charged interest
for nonexisting debt. The alleged discovery by the bank of overvaluation of
the loan collateral is not an issue. The bank officials should have been more
responsible and the bank bears risk in case the collateral turned out to be
overvalued. Furthermore, this was not raised in the pleadings so this issue
cant be raised. The bank was in default and Tolentino may choose bet
specific performance or rescission w/ damages in either case. But
considering that the bank is now prohibited fr doing business, specific
performance cannot be granted. Rescission is the only remedy left, but the
rescission shld only be for the P63K balance.

2) Whether or not the mortgagor is liable to pay the amount covered by the
promissory note

The promissory note gave rise to Sulpicio M. Tolentinos reciprocal obligation

to pay the P17,000.00 loan when it falls due. His failure to pay the overdue
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amortizations under the promissory note made him a party in default, hence
not entitled to rescission (Article 1191 of the Civil Code). If there is a right to
rescind the promissory note, it shall belong to the aggrieved party, that is,
Island Savings Bank. If Tolentino had not signed a promissory note setting
the date for payment of P17,000.00 within 3 years, he would be entitled to
ask for rescission of the entire loan because he cannot possibly be in default
as there was no date for him to perform his reciprocal obligation to pay. Since
both parties were in default in the performance of their respective reciprocal
obligations, that is, Island Savings Bank failed to comply with its obligation to
furnish the entire loan and Sulpicio M. Tolentino failed to comply with his
obligation to pay his P17,000.00 debt within 3 years as stipulated, they are
both liable for damages.

3) Whether or not the real estate mortgage can be foreclosed

Since Island Savings Bank failed to furnish the P63,000.00 balance of the
P80,000.00 loan, the real estate mortgage of Sulpicio M. Tolentino became
unenforceable to such extent. P63,000.00 is 78.75% of P80,000.00, hence
the real estate mortgage covering 100 hectares is unenforceable to the
extent of 78.75 hectares. The mortgage covering the remainder of 21.25
hectares subsists as a security for the P17,000.00 debt. 21.25 hectares is
more than sufficient to secure a P17,000.00 debt.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-17474 October 25, 1962

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
JOSE V. BAGTAS, defendant,
FELICIDAD M. BAGTAS, Administratrix of the Intestate Estate left by
the late Jose V. Bagtas, petitioner-appellant.

D. T. Reyes, Liaison and Associates for petitioner-appellant.

Office of the Solicitor General for plaintiff-appellee.

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PADILLA, J.:

The Court of Appeals certified this case to this Court because only questions
of law are raised.

On 8 May 1948 Jose V. Bagtas borrowed from the Republic of the Philippines
through the Bureau of Animal Industry three bulls: a Red Sindhi with a book
value of P1,176.46, a Bhagnari, of P1,320.56 and a Sahiniwal, of P744.46, for
a period of one year from 8 May 1948 to 7 May 1949 for breeding purposes
subject to a government charge of breeding fee of 10% of the book value of
the bulls. Upon the expiration on 7 May 1949 of the contract, the borrower
asked for a renewal for another period of one year. However, the Secretary of
Agriculture and Natural Resources approved a renewal thereof of only one
bull for another year from 8 May 1949 to 7 May 1950 and requested the
return of the other two. On 25 March 1950 Jose V. Bagtas wrote to the
Director of Animal Industry that he would pay the value of the three bulls. On
17 October 1950 he reiterated his desire to buy them at a value with a
deduction of yearly depreciation to be approved by the Auditor General. On
19 October 1950 the Director of Animal Industry advised him that the book
value of the three bulls could not be reduced and that they either be
returned or their book value paid not later than 31 October 1950. Jose V.
Bagtas failed to pay the book value of the three bulls or to return them. So,
on 20 December 1950 in the Court of First Instance of Manila the Republic of
the Philippines commenced an action against him praying that he be ordered
to return the three bulls loaned to him or to pay their book value in the total
sum of P3,241.45 and the unpaid breeding fee in the sum of P199.62, both
with interests, and costs; and that other just and equitable relief be granted
in (civil No. 12818).

On 5 July 1951 Jose V. Bagtas, through counsel Navarro, Rosete and Manalo,
answered that because of the bad peace and order situation in Cagayan
Valley, particularly in the barrio of Baggao, and of the pending appeal he had
taken to the Secretary of Agriculture and Natural Resources and the
President of the Philippines from the refusal by the Director of Animal
Industry to deduct from the book value of the bulls corresponding yearly
depreciation of 8% from the date of acquisition, to which depreciation the
Auditor General did not object, he could not return the animals nor pay their
value and prayed for the dismissal of the complaint.

After hearing, on 30 July 1956 the trial court render judgment

. . . sentencing the latter (defendant) to pay the sum of P3,625.09 the

total value of the three bulls plus the breeding fees in the amount of
P626.17 with interest on both sums of (at) the legal rate from the filing
of this complaint and costs.

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On 9 October 1958 the plaintiff moved ex parte for a writ of execution which
the court granted on 18 October and issued on 11 November 1958. On 2
December 1958 granted an ex-parte motion filed by the plaintiff on
November 1958 for the appointment of a special sheriff to serve the writ
outside Manila. Of this order appointing a special sheriff, on 6 December
1958, Felicidad M. Bagtas, the surviving spouse of the defendant Jose Bagtas
who died on 23 October 1951 and as administratrix of his estate, was
notified. On 7 January 1959 she file a motion alleging that on 26 June 1952
the two bull Sindhi and Bhagnari were returned to the Bureau Animal of
Industry and that sometime in November 1958 the third bull, the Sahiniwal,
died from gunshot wound inflicted during a Huk raid on Hacienda Felicidad
Intal, and praying that the writ of execution be quashed and that a writ of
preliminary injunction be issued. On 31 January 1959 the plaintiff objected to
her motion. On 6 February 1959 she filed a reply thereto. On the same day, 6
February, the Court denied her motion. Hence, this appeal certified by the
Court of Appeals to this Court as stated at the beginning of this opinion.

It is true that on 26 June 1952 Jose M. Bagtas, Jr., son of the appellant by the
late defendant, returned the Sindhi and Bhagnari bulls to Roman Remorin,
Superintendent of the NVB Station, Bureau of Animal Industry, Bayombong,
Nueva Vizcaya, as evidenced by a memorandum receipt signed by the latter
(Exhibit 2). That is why in its objection of 31 January 1959 to the appellant's
motion to quash the writ of execution the appellee prays "that another writ
of execution in the sum of P859.53 be issued against the estate of defendant
deceased Jose V. Bagtas." She cannot be held liable for the two bulls which
already had been returned to and received by the appellee.

The appellant contends that the Sahiniwal bull was accidentally killed during
a raid by the Huk in November 1953 upon the surrounding barrios of
Hacienda Felicidad Intal, Baggao, Cagayan, where the animal was kept, and
that as such death was due to force majeure she is relieved from the duty of
returning the bull or paying its value to the appellee. The contention is
without merit. The loan by the appellee to the late defendant Jose V. Bagtas
of the three bulls for breeding purposes for a period of one year from 8 May
1948 to 7 May 1949, later on renewed for another year as regards one bull,
was subject to the payment by the borrower of breeding fee of 10% of the
book value of the bulls. The appellant contends that the contract
was commodatum and that, for that reason, as the appellee retained
ownership or title to the bull it should suffer its loss due to force majeure. A
contract ofcommodatum is essentially gratuitous.1 If the breeding fee be
considered a compensation, then the contract would be a lease of the bull.
Under article 1671 of the Civil Code the lessee would be subject to the
responsibilities of a possessor in bad faith, because she had continued
possession of the bull after the expiry of the contract. And even if the
contract be commodatum, still the appellant is liable, because article 1942 of
the Civil Code provides that a bailee in a contract of commodatum

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 . . . is liable for loss of the things, even if it should be through a
fortuitous event:

(2) If he keeps it longer than the period stipulated . . .

(3) If the thing loaned has been delivered with appraisal of its value,
unless there is a stipulation exempting the bailee from responsibility in
case of a fortuitous event;

The original period of the loan was from 8 May 1948 to 7 May 1949. The loan
of one bull was renewed for another period of one year to end on 8 May
1950. But the appellant kept and used the bull until November 1953 when
during a Huk raid it was killed by stray bullets. Furthermore, when lent and
delivered to the deceased husband of the appellant the bulls had each an
appraised book value, to with: the Sindhi, at P1,176.46, the Bhagnari at
P1,320.56 and the Sahiniwal at P744.46. It was not stipulated that in case of
loss of the bull due to fortuitous event the late husband of the appellant
would be exempt from liability.

The appellant's contention that the demand or prayer by the appellee for the
return of the bull or the payment of its value being a money claim should be
presented or filed in the intestate proceedings of the defendant who died on
23 October 1951, is not altogether without merit. However, the claim that his
civil personality having ceased to exist the trial court lost jurisdiction over
the case against him, is untenable, because section 17 of Rule 3 of the Rules
of Court provides that

After a party dies and the claim is not thereby extinguished, the court
shall order, upon proper notice, the legal representative of the
deceased to appear and to be substituted for the deceased, within a
period of thirty (30) days, or within such time as may be granted. . . .

and after the defendant's death on 23 October 1951 his counsel failed to
comply with section 16 of Rule 3 which provides that

Whenever a party to a pending case dies . . . it shall be the duty of his

attorney to inform the court promptly of such death . . . and to give the
name and residence of the executory administrator, guardian, or other
legal representative of the deceased . . . .

The notice by the probate court and its publication in the Voz de Manila that
Felicidad M. Bagtas had been issue letters of administration of the estate of
the late Jose Bagtas and that "all persons having claims for monopoly against
the deceased Jose V. Bagtas, arising from contract express or implied,
whether the same be due, not due, or contingent, for funeral expenses and
expenses of the last sickness of the said decedent, and judgment for

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monopoly against him, to file said claims with the Clerk of this Court at the
City Hall Bldg., Highway 54, Quezon City, within six (6) months from the date
of the first publication of this order, serving a copy thereof upon the
aforementioned Felicidad M. Bagtas, the appointed administratrix of the
estate of the said deceased," is not a notice to the court and the appellee
who were to be notified of the defendant's death in accordance with the
above-quoted rule, and there was no reason for such failure to notify,
because the attorney who appeared for the defendant was the same who
represented the administratrix in the special proceedings instituted for the
administration and settlement of his estate. The appellee or its attorney or
representative could not be expected to know of the death of the defendant
or of the administration proceedings of his estate instituted in another court
that if the attorney for the deceased defendant did not notify the plaintiff or
its attorney of such death as required by the rule.

As the appellant already had returned the two bulls to the appellee, the
estate of the late defendant is only liable for the sum of P859.63, the value
of the bull which has not been returned to the appellee, because it was killed
while in the custody of the administratrix of his estate. This is the amount
prayed for by the appellee in its objection on 31 January 1959 to the motion
filed on 7 January 1959 by the appellant for the quashing of the writ of
execution.

Special proceedings for the administration and settlement of the estate of

the deceased Jose V. Bagtas having been instituted in the Court of First
Instance of Rizal (Q-200), the money judgment rendered in favor of the
appellee cannot be enforced by means of a writ of execution but must be
presented to the probate court for payment by the appellant, the
administratrix appointed by the court.

ACCORDINGLY, the writ of execution appealed from is set aside, without

pronouncement as to costs.

DIGEST

Facts: Bagtas borrowed three bulls from the Bureau of Animal Industry for
one year for breeding purposes subject to payment of breeding fee of 10% of
book value of the bull. Upon expiration, Bagtas asked for renewal. The
renewal was granted only to one bull. Bagtas offered to buy the bulls at its
book value less depreciation but the Bureau refused. The Bureau said that
Bagtas should either return or buy it at book value. Bagtas proved that he
already returned two of the bulls, and the other bull died during a Huk raid,
hence, obligation already extinguished. He claims that the contract is a
commodatum hence, loss through fortuitous event should be borne by the

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owner.

Issue: WON Bagtas is liable for the death of the bull.

Held: Yes. Commodatum is essentially gratuitous. However, in this case,

there is a 10% charge. If this is considered compensation, then the case at
bar is a lease. Lessee is liable as possessor in bad faith because the period
already lapsed.

Even if this is a commodatum, Bagtas is still liable because the fortuitous

event happened when he held the bull and the period stipulated already
expired and he is liable because the thing loaned was delivered with
appraisal of value and there was no contrary stipulation regarding his liability
in case there is a fortuitous event.

2ND DIGEST

FACTS:

May 8, 1948: Jose V. Bagtas borrowed from the Republic of the

Philippines through the Bureau of Animal Industry three bulls: a Red
Sindhi with a book value of P1,176.46, a Bhagnari, of P1,320.56 and a
Sahiniwal, of P744.46, for a period of 1 year for breeding purposes subject
to a breeding fee of 10% of the book value of the bulls
May 7, 1949: Jose requested for a renewal for another year for the
three bulls but only one bull was approved while the others are to be
returned
March 25, 1950: He wrote to the Director of Animal Industry that he
would pay the value of the 3 bulls
October 17, 1950: he reiterated his desire to buy them at a value with
a deduction of yearly depreciation to be approved by the Auditor General.
October 19, 1950: Director of Animal Industry advised him that either
the 3 bulls are to be returned or their book value without deductions
should be paid not later than October 31, 1950 which he was not able to
do

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 December 20, 1950: An action at the CFI was commenced against Jose
praying that he be ordered to return the 3 bulls or to pay their book
value of P3,241.45 and the unpaid breeding fee of P199.62, both with
interests, and costs
July 5, 1951: Jose V. Bagtas, through counsel Navarro, Rosete and
Manalo, answered that because of the bad peace and order situation in
Cagayan Valley, particularly in the barrio of Baggao, and of the
pending appeal he had taken to the Secretary of Agriculture and Natural
Resources and the President of the Philippines, he could not return the
animals nor pay their value and prayed for the dismissal of the complaint.
RTC: granted the action
December 1958: granted an ex-parte motion for the appointment of a
special sheriff to serve the writ outside Manila
December 6, 1958: Felicidad M. Bagtas, the surviving spouse of Jose
who died on October 23, 1951 and administratrix of his estate, was
notified
January 7, 1959: she file a motion that the 2 bulls where returned by
his son on June 26, 1952 evidenced by recipt and the 3rd bull died from
gunshot wound inflicted during a Huk raid and prayed that the writ
of execution be quashed and that a writ of preliminary injunction be
issued.
ISSUE: W/N the contract is commodatum and NOT a lease and the estate
should be liable for the loss due to force majeure due to delay.

HELD: YES. writ of execution appealed from is set aside, without

pronouncement as to costs
If contract was commodatum then Bureau of Animal Industry retained
ownership or title to the bull it should suffer its loss due to force majeure.
A contract of commodatum is essentially gratuitous. If the breeding fee
be considered a compensation, then the contract would be a lease of the
bull. Underarticle 1671 of the Civil Code the lessee would be subject to
the responsibilities of a possessor in bad faith, because she had continued
possession of the bull after the expiry of the contract. And even if the
contract be commodatum, still the appellant is liable if he keeps it longer
than the period stipulated
the estate of the late defendant is only liable for the sum of P859.63,
the value of the bull which has not been returned because it was killed
while in the custody of the administratrix of his estate

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 Special proceedings for the administration and settlement of the estate
of the deceased Jose V. Bagtas having been instituted in the CFI, the
money judgment rendered in favor of the appellee cannot be enforced by
means of a writ of execution but must be presented to the probate
court for payment by the appellant, the administratrix appointed by the
court.

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 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 80294-95 September 21, 1988

CATHOLIC VICAR APOSTOLIC OF THE MOUNTAIN

PROVINCE, petitioner,
vs.
COURT OF APPEALS, HEIRS OF EGMIDIO OCTAVIANO AND JUAN
VALDEZ, respondents.

Valdez, Ereso, Polido & Associates for petitioner.

Claustro, Claustro, Claustro Law Office collaborating counsel for petitioner.

Jaime G. de Leon for the Heirs of Egmidio Octaviano.

Cotabato Law Office for the Heirs of Juan Valdez.

GANCAYCO, J.:

The principal issue in this case is whether or not a decision of the Court of
Appeals promulgated a long time ago can properly be considered res
judicata by respondent Court of Appeals in the present two cases between
petitioner and two private respondents.

Petitioner questions as allegedly erroneous the Decision dated August 31,

1987 of the Ninth Division of Respondent Court of Appeals 1 in CA-G.R. No.
05148 [Civil Case No. 3607 (419)] and CA-G.R. No. 05149 [Civil Case No.
3655 (429)], both for Recovery of Possession, which affirmed the Decision of
the Honorable Nicodemo T. Ferrer, Judge of the Regional Trial Court of Baguio
and Benguet in Civil Case No. 3607 (419) and Civil Case No. 3655 (429), with
the dispositive portion as follows:

WHEREFORE, Judgment is hereby rendered ordering the

defendant, Catholic Vicar Apostolic of the Mountain Province to
return and surrender Lot 2 of Plan Psu-194357 to the plaintiffs.
Heirs of Juan Valdez, and Lot 3 of the same Plan to the other set
of plaintiffs, the Heirs of Egmidio Octaviano (Leonardo Valdez, et

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 al.). For lack or insufficiency of evidence, the plaintiffs' claim or
damages is hereby denied. Said defendant is ordered to pay
costs. (p. 36, Rollo)

Respondent Court of Appeals, in affirming the trial court's decision, sustained

the trial court's conclusions that the Decision of the Court of Appeals, dated
May 4,1977 in CA-G.R. No. 38830-R, in the two cases affirmed by the
Supreme Court, touched on the ownership of lots 2 and 3 in question; that
the two lots were possessed by the predecessors-in-interest of private
respondents under claim of ownership in good faith from 1906 to 1951; that
petitioner had been in possession of the same lots as bailee in commodatum
up to 1951, when petitioner repudiated the trust and when it applied for
registration in 1962; that petitioner had just been in possession as owner for
eleven years, hence there is no possibility of acquisitive prescription which
requires 10 years possession with just title and 30 years of possession
without; that the principle of res judicata on these findings by the Court of
Appeals will bar a reopening of these questions of facts; and that those facts
may no longer be altered.

Petitioner's motion for reconsideation of the respondent appellate court's

Decision in the two aforementioned cases (CA G.R. No. CV-05418 and 05419)
was denied.

The facts and background of these cases as narrated by the trail court are as
follows

... The documents and records presented reveal that

the whole controversy started when the defendant
Catholic Vicar Apostolic of the Mountain Province
(VICAR for brevity) filed with the Court of First
Instance of Baguio Benguet on September 5, 1962 an
application for registration of title over Lots 1, 2, 3,
and 4 in Psu-194357, situated at Poblacion Central,
La Trinidad, Benguet, docketed as LRC N-91, said Lots
being the sites of the Catholic Church building,
convents, high school building, school gymnasium,
school dormitories, social hall, stonewalls, etc. On
March 22, 1963 the Heirs of Juan Valdez and the
Heirs of Egmidio Octaviano filed their
Answer/Opposition on Lots Nos. 2 and 3, respectively,
asserting ownership and title thereto. After trial on
the merits, the land registration court promulgated
its Decision, dated November 17, 1965, confirming
the registrable title of VICAR to Lots 1, 2, 3, and 4.

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The Heirs of Juan Valdez (plaintiffs in the herein Civil
Case No. 3655) and the Heirs of Egmidio Octaviano
(plaintiffs in the herein Civil Case No. 3607) appealed
the decision of the land registration court to the then
Court of Appeals, docketed as CA-G.R. No. 38830-R.
The Court of Appeals rendered its decision, dated
May 9, 1977, reversing the decision of the land
registration court and dismissing the VICAR's
application as to Lots 2 and 3, the lots claimed by the
two sets of oppositors in the land registration case
(and two sets of plaintiffs in the two cases now at
bar), the first lot being presently occupied by the
convent and the second by the women's dormitory
and the sister's convent.

On May 9, 1977, the Heirs of Octaviano filed a

motion for reconsideration praying the Court of
Appeals to order the registration of Lot 3 in the
names of the Heirs of Egmidio Octaviano, and on May
17, 1977, the Heirs of Juan Valdez and Pacita Valdez
filed their motion for reconsideration praying that
both Lots 2 and 3 be ordered registered in the names
of the Heirs of Juan Valdez and Pacita Valdez. On
August 12,1977, the Court of Appeals denied the
motion for reconsideration filed by the Heirs of Juan
Valdez on the ground that there was "no sufficient
merit to justify reconsideration one way or the
other ...," and likewise denied that of the Heirs of
Egmidio Octaviano.

Thereupon, the VICAR filed with the Supreme Court a

petition for review on certiorari of the decision of the
Court of Appeals dismissing his (its) application for
registration of Lots 2 and 3, docketed as G.R. No. L-
46832, entitled 'Catholic Vicar Apostolic of the
Mountain Province vs. Court of Appeals and Heirs of
Egmidio Octaviano.'

From the denial by the Court of Appeals of their

motion for reconsideration the Heirs of Juan Valdez
and Pacita Valdez, on September 8, 1977, filed with
the Supreme Court a petition for review, docketed as
G.R. No. L-46872, entitled, Heirs of Juan Valdez and
Pacita Valdez vs. Court of Appeals, Vicar, Heirs of
Egmidio Octaviano and Annable O. Valdez.

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 On January 13, 1978, the Supreme Court denied in a
minute resolution both petitions (of VICAR on the one
hand and the Heirs of Juan Valdez and Pacita Valdez
on the other) for lack of merit. Upon the finality of
both Supreme Court resolutions in G.R. No. L-46832
and G.R. No. L- 46872, the Heirs of Octaviano filed
with the then Court of First Instance of Baguio,
Branch II, a Motion For Execution of Judgment
praying that the Heirs of Octaviano be placed in
possession of Lot 3. The Court, presided over by Hon.
Salvador J. Valdez, on December 7, 1978, denied the
motion on the ground that the Court of Appeals
decision in CA-G.R. No. 38870 did not grant the Heirs
of Octaviano any affirmative relief.

On February 7, 1979, the Heirs of Octaviano filed

with the Court of Appeals a petitioner for certiorari
and mandamus, docketed as CA-G.R. No. 08890-R,
entitled Heirs of Egmidio Octaviano vs. Hon. Salvador
J. Valdez, Jr. and Vicar. In its decision dated May 16,
1979, the Court of Appeals dismissed the petition.

It was at that stage that the instant cases were filed.

The Heirs of Egmidio Octaviano filed Civil Case No.
3607 (419) on July 24, 1979, for recovery of
possession of Lot 3; and the Heirs of Juan Valdez filed
Civil Case No. 3655 (429) on September 24, 1979,
likewise for recovery of possession of Lot 2 (Decision,
pp. 199-201, Orig. Rec.).

In Civil Case No. 3607 (419) trial was held. The plaintiffs Heirs of
Egmidio Octaviano presented one (1) witness, Fructuoso Valdez,
who testified on the alleged ownership of the land in question
(Lot 3) by their predecessor-in-interest, Egmidio Octaviano (Exh.
C ); his written demand (Exh. BB-4 ) to defendant Vicar for the
return of the land to them; and the reasonable rentals for the use
of the land at P10,000.00 per month. On the other hand,
defendant Vicar presented the Register of Deeds for the Province
of Benguet, Atty. Nicanor Sison, who testified that the land in
question is not covered by any title in the name of Egmidio
Octaviano or any of the plaintiffs (Exh. 8). The defendant
dispensed with the testimony of Mons.William Brasseur when the
plaintiffs admitted that the witness if called to the witness stand,
would testify that defendant Vicar has been in possession of Lot
3, for seventy-five (75) years continuously and peacefully and
has constructed permanent structures thereon.

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 In Civil Case No. 3655, the parties admitting that the material
facts are not in dispute, submitted the case on the sole issue of
whether or not the decisions of the Court of Appeals and the
Supreme Court touching on the ownership of Lot 2, which in
effect declared the plaintiffs the owners of the land
constitute res judicata.

In these two cases , the plaintiffs arque that the defendant Vicar
is barred from setting up the defense of ownership and/or long
and continuous possession of the two lots in question since this
is barred by prior judgment of the Court of Appeals in CA-G.R. No.
038830-R under the principle of res judicata. Plaintiffs contend
that the question of possession and ownership have already
been determined by the Court of Appeals (Exh. C, Decision, CA-
G.R. No. 038830-R) and affirmed by the Supreme Court (Exh. 1,
Minute Resolution of the Supreme Court). On his part, defendant
Vicar maintains that the principle of res judicata would not
prevent them from litigating the issues of long possession and
ownership because the dispositive portion of the prior judgment
in CA-G.R. No. 038830-R merely dismissed their application for
registration and titling of lots 2 and 3. Defendant Vicar contends
that only the dispositive portion of the decision, and not its body,
is the controlling pronouncement of the Court of Appeals. 2

The alleged errors committed by respondent Court of Appeals according to

petitioner are as follows:

1. ERROR IN APPLYING LAW OF THE CASE AND RES JUDICATA;

2. ERROR IN FINDING THAT THE TRIAL COURT RULED THAT LOTS 2 AND 3
WERE ACQUIRED BY PURCHASE BUT WITHOUT DOCUMENTARY EVIDENCE
PRESENTED;

3. ERROR IN FINDING THAT PETITIONERS' CLAIM IT PURCHASED LOTS 2 AND

3 FROM VALDEZ AND OCTAVIANO WAS AN IMPLIED ADMISSION THAT THE
FORMER OWNERS WERE VALDEZ AND OCTAVIANO;

4. ERROR IN FINDING THAT IT WAS PREDECESSORS OF PRIVATE

RESPONDENTS WHO WERE IN POSSESSION OF LOTS 2 AND 3 AT LEAST FROM
1906, AND NOT PETITIONER;

5. ERROR IN FINDING THAT VALDEZ AND OCTAVIANO HAD FREE PATENT

APPLICATIONS AND THE PREDECESSORS OF PRIVATE RESPONDENTS
ALREADY HAD FREE PATENT APPLICATIONS SINCE 1906;

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6. ERROR IN FINDING THAT PETITIONER DECLARED LOTS 2 AND 3 ONLY IN
1951 AND JUST TITLE IS A PRIME NECESSITY UNDER ARTICLE 1134 IN
RELATION TO ART. 1129 OF THE CIVIL CODE FOR ORDINARY ACQUISITIVE
PRESCRIPTION OF 10 YEARS;

7. ERROR IN FINDING THAT THE DECISION OF THE COURT OF APPEALS IN CA

G.R. NO. 038830 WAS AFFIRMED BY THE SUPREME COURT;

8. ERROR IN FINDING THAT THE DECISION IN CA G.R. NO. 038830 TOUCHED

ON OWNERSHIP OF LOTS 2 AND 3 AND THAT PRIVATE RESPONDENTS AND
THEIR PREDECESSORS WERE IN POSSESSION OF LOTS 2 AND 3 UNDER A
CLAIM OF OWNERSHIP IN GOOD FAITH FROM 1906 TO 1951;

9. ERROR IN FINDING THAT PETITIONER HAD BEEN IN POSSESSION OF LOTS 2

AND 3 MERELY AS BAILEE BOR ROWER) IN COMMODATUM, A GRATUITOUS
LOAN FOR USE;

10. ERROR IN FINDING THAT PETITIONER IS A POSSESSOR AND BUILDER IN

GOOD FAITH WITHOUT RIGHTS OF RETENTION AND REIMBURSEMENT AND IS
BARRED BY THE FINALITY AND CONCLUSIVENESS OF THE DECISION IN CA
G.R. NO. 038830. 3

The petition is bereft of merit.

Petitioner questions the ruling of respondent Court of Appeals in CA-G.R. Nos.

05148 and 05149, when it clearly held that it was in agreement with the
findings of the trial court that the Decision of the Court of Appeals dated May
4,1977 in CA-G.R. No. 38830-R, on the question of ownership of Lots 2 and 3,
declared that the said Court of Appeals Decision CA-G.R. No. 38830-R) did
not positively declare private respondents as owners of the land, neither was
it declared that they were not owners of the land, but it held that the
predecessors of private respondents were possessors of Lots 2 and 3, with
claim of ownership in good faith from 1906 to 1951. Petitioner was in
possession as borrower in commodatum up to 1951, when it repudiated the
trust by declaring the properties in its name for taxation purposes. When
petitioner applied for registration of Lots 2 and 3 in 1962, it had been in
possession in concept of owner only for eleven years. Ordinary acquisitive
prescription requires possession for ten years, but always with just title.
Extraordinary acquisitive prescription requires 30 years. 4

On the above findings of facts supported by evidence and evaluated by the

Court of Appeals in CA-G.R. No. 38830-R, affirmed by this Court, We see no
error in respondent appellate court's ruling that said findings are res
judicata between the parties. They can no longer be altered by presentation
of evidence because those issues were resolved with finality a long time ago.

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To ignore the principle of res judicata would be to open the door to endless
litigations by continuous determination of issues without end.

An examination of the Court of Appeals Decision dated May 4, 1977, First

Division 5 in CA-G.R. No. 38830-R, shows that it reversed the trial court's
Decision 6 finding petitioner to be entitled to register the lands in question
under its ownership, on its evaluation of evidence and conclusion of facts.

The Court of Appeals found that petitioner did not meet the requirement of
30 years possession for acquisitive prescription over Lots 2 and 3. Neither
did it satisfy the requirement of 10 years possession for ordinary acquisitive
prescription because of the absence of just title. The appellate court did not
believe the findings of the trial court that Lot 2 was acquired from Juan
Valdez by purchase and Lot 3 was acquired also by purchase from Egmidio
Octaviano by petitioner Vicar because there was absolutely no documentary
evidence to support the same and the alleged purchases were never
mentioned in the application for registration.

By the very admission of petitioner Vicar, Lots 2 and 3 were owned by Valdez
and Octaviano. Both Valdez and Octaviano had Free Patent Application for
those lots since 1906. The predecessors of private respondents, not
petitioner Vicar, were in possession of the questioned lots since 1906.

There is evidence that petitioner Vicar occupied Lots 1 and 4, which are not
in question, but not Lots 2 and 3, because the buildings standing thereon
were only constructed after liberation in 1945. Petitioner Vicar only declared
Lots 2 and 3 for taxation purposes in 1951. The improvements oil Lots 1, 2,
3, 4 were paid for by the Bishop but said Bishop was appointed only in 1947,
the church was constructed only in 1951 and the new convent only 2 years
before the trial in 1963.

When petitioner Vicar was notified of the oppositor's claims, the parish priest
offered to buy the lot from Fructuoso Valdez. Lots 2 and 3 were surveyed by
request of petitioner Vicar only in 1962.

Private respondents were able to prove that their predecessors' house was
borrowed by petitioner Vicar after the church and the convent were
destroyed. They never asked for the return of the house, but when they
allowed its free use, they became bailors in commodatum and the petitioner
the bailee. The bailees' failure to return the subject matter
of commodatum to the bailor did not mean adverse possession on the part of
the borrower. The bailee held in trust the property subject matter of
commodatum. The adverse claim of petitioner came only in 1951 when it
declared the lots for taxation purposes. The action of petitioner Vicar by such
adverse claim could not ripen into title by way of ordinary acquisitive
prescription because of the absence of just title.

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The Court of Appeals found that the predecessors-in-interest and private
respondents were possessors under claim of ownership in good faith from
1906; that petitioner Vicar was only a bailee in commodatum; and that the
adverse claim and repudiation of trust came only in 1951.

We find no reason to disregard or reverse the ruling of the Court of Appeals

in CA-G.R. No. 38830-R. Its findings of fact have become incontestible. This
Court declined to review said decision, thereby in effect, affirming it. It has
become final and executory a long time ago.

Respondent appellate court did not commit any reversible error, much less
grave abuse of discretion, when it held that the Decision of the Court of
Appeals in CA-G.R. No. 38830-R is governing, under the principle of res
judicata, hence the rule, in the present cases CA-G.R. No. 05148 and CA-G.R.
No. 05149. The facts as supported by evidence established in that decision
may no longer be altered.

WHEREFORE AND BY REASON OF THE FOREGOING, this petition is DENIED for

lack of merit, the Decision dated Aug. 31, 1987 in CA-G.R. Nos. 05148 and
05149, by respondent Court of Appeals is AFFIRMED, with costs against
petitioner.

SO ORDERED.

DIGEST

Facts:

The whole controversy started when the herein petitioner filed an application
for registration of lands 1, 2, 3 and 4 in La Trinidad, Benguet on September 5,
1962. The heirs of Juan Valdez and the heirs of Egmidio Octaviano filed an
opposition on lots 2 and 3, respectively. On November 17, 1965, the land
registration court confirmed the registrable title of the petitioner. On May 9,
1977, the Court of Appeals reversed the decision and dismissed the Vicars
application. The heirs filed a motion for reconsideration, praying that the lots
be ordered registered under their names. The Court of Appeals denied the
motion for lack of sufficient merit. Both parties then came before the
Supreme Court. The Supreme Court, in a minute resolution, denied both
petitions. The heirs filed the instant cases for the recovery and possession of
the lots.

Respondents argue that the petitioner is barred from setting up the defense
of ownership or long and continuous possession by the prior judgment of the

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Court of Appeals under the principle of res judicata. Petitioner contends that
the principle is not applicable because the dispositive portion of the
judgment merely dismissed the application for registration.

Issues:

(1) Whether the decision of the Court of Appeals constitute res judicata and
therefore bars the petitioner from alleging ownership over the lots

(2) Whether the petitioner has acquired the lots through acquisitive
prescription

Held:

(1) The Court of Appeals did not positively declare private respondents as
owners of the land, neither was it declared that they were not owners of the
land, but it held that the predecessors of private respondents were
possessors of Lots 2 and 3, with claim of ownership in good faith from 1906
to 1951. Petitioner was in possession as borrower in commodatum up to
1951, when it repudiated the trust by declaring the properties in its name for
taxation purposes. When petitioner applied for registration of Lots 2 and 3 in
1962, it had been in possession in concept of owner only for eleven years.
Ordinary acquisitive prescription requires possession for ten years, but
always with just title. Extraordinary acquisitive prescription requires 30
years. On the above findings of facts supported by evidence and evaluated
by the Court of Appeals, affirmed by this Court, We see no error in
respondent appellate court's ruling that said findings are res judicata
between the parties. They can no longer be altered by presentation of
evidence because those issues were resolved with finality a long time ago. To
ignore the principle of res judicata would be to open the door to endless
litigations by continuous determination of issues without end.

(2) Private respondents were able to prove that their predecessors' house
was borrowed by petitioner Vicar after the church and the convent were
destroyed. They never asked for the return of the house, but when they
allowed its free use, they became bailors in commodatum and the petitioner
the bailee. The bailees' failure to return the subject matter of commodatum
to the bailor did not mean adverse possession on the part of the borrower.
The bailee held in trust the property subject matter of commodatum. The
adverse claim of petitioner came only in 1951 when it declared the lots for

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taxation purposes. The action of petitioner Vicar by such adverse claim could
not ripen into title by way of ordinary acquisitive prescription because of the
absence of just title.

Motion for Reconsideration

Issue:

Who is entitled to the possession and ownership of the land?

Held:

Pursuant to the said decision in CA-G.R. No. 38830-R, the two lots in question
remained part of the public lands. This is the only logical conclusion when
the appellate court found that neither the petitioner nor private respondents
are entitled to confirmation of imperfect title over said lots. Hence, the Court
finds the contention of petitioner to be well taken in that the trial court and
the appellate court have no lawful basis in ordering petitioner to return and
surrender possession of said lots to private respondents. Said property being
a public land its disposition is subject to the provision of the Public Land Act,
as amended.

Article 555 of the Civil Code provides as follows:

Art. 555. A possessor may lose his possession:

(4) By the possession of another, subject to the provisions of Article

537, if the new possession has lasted longer than one year.But the real right
of possession is not lost till after the lapse of ten years.

It is clear that the real right of possession of private respondents over the
property was lost or no longer exists after the lapse of 10 years that
petitioner had been in adverse possession thereof. Thus, the action for
recover of possession of said property filed by private respondents against
petitioner must fail. The Court, therefore, finds that the trial court and the
Court of Appeals erred in declaring the private respondents to be entitled to
the possession thereof. Much less can they pretend to be owners thereof.
Said lots are part of the public domain.

2ND DIGEST

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Facts:
- 1962: Catholic Vicar Apostolic of the Mountain Province (Vicar), petitioner,
filed with the court an application for the registration of title over lots 1, 2, 3
and 4 situated in Poblacion Central, Benguet, said lots being used as sites of
the Catholic Church, building, convents, high school building, school
gymnasium, dormitories, social hall and stonewalls.
- 1963: Heirs of Juan Valdez and Heirs of Egmidio Octaviano claimed that
they have ownership over lots 1, 2 and 3. (2 separate civil cases)
- 1965: The land registration court confirmed the registrable title of Vicar to
lots 1 , 2, 3 and 4. Upon appeal by the private respondents (heirs), the
decision of the lower court was reversed. Title for lots 2 and 3 were
cancelled.
- VICAR filed with the Supreme Court a petition for review on certiorari of the
decision of the Court of Appeals dismissing his application for registration of
Lots 2 and 3.
- During trial, the Heirs of Octaviano presented one (1) witness, who testified
on the alleged ownership of the land in question (Lot 3) by their predecessor-
in-interest, Egmidio Octaviano; his written demand to Vicar for the return of
the land to them; and the reasonable rentals for the use of the land at
P10,000 per month. On the other hand, Vicar presented the Register of
Deeds for the Province of Benguet, Atty. Sison, who testified that the land in
question is not covered by any title in the name of Egmidio Octaviano or any
of the heirs. Vicar dispensed with the testimony of Mons. Brasseur when the
heirs admitted that the witness if called to the witness stand, would testify
that Vicar has been in possession of Lot 3, for 75 years continuously and
peacefully and has constructed permanent structures thereon.

Issue: WON Vicar had been in possession of lots 2 and 3 merely as bailee
borrower in commodatum, a gratuitous loan for use.

Held: YES.

Private respondents were able to prove that their predecessors' house was
borrowed by petitioner Vicar after the church and the convent were
destroyed. They never asked for the return of the house, but when they
allowed its free use, they became bailors in commodatum and the petitioner
the bailee.

The bailees' failure to return the subject matter of commodatum to the bailor
did not mean adverse possession on the part of the borrower. The bailee held

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in trust the property subject matter of commodatum. The adverse claim of
petitioner came only in 1951 when it declared the lots for taxation purposes.
The action of petitioner Vicar by such adverse claim could not ripen into title
by way of ordinary acquisitive prescription because of the absence of just
title.

The Court of Appeals found that petitioner Vicar did not meet the
requirement of 30 years possession for acquisitive prescription over Lots 2
and 3. Neither did it satisfy the requirement of 10 years possession for
ordinary acquisitive prescription because of the absence of just title. The
appellate court did not believe the findings of the trial court that Lot 2 was
acquired from Juan Valdez by purchase and Lot 3 was acquired also by
purchase from Egmidio Octaviano by petitioner Vicar because there was
absolutely no documentary evidence to support the same and the alleged
purchases were never mentioned in the application for registration.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-46240 November 3, 1939

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MARGARITA QUINTOS and ANGEL A. ANSALDO, plaintiffs-appellants,
vs.
BECK, defendant-appellee.

Mauricio Carlos for appellants.

Felipe Buencamino, Jr. for appellee.

IMPERIAL, J.:

The plaintiff brought this action to compel the defendant to return her certain
furniture which she lent him for his use. She appealed from the judgment of
the Court of First Instance of Manila which ordered that the defendant return
to her the three has heaters and the four electric lamps found in the
possession of the Sheriff of said city, that she call for the other furniture from
the said sheriff of Manila at her own expense, and that the fees which the
Sheriff may charge for the deposit of the furniture be paid pro rata by both
parties, without pronouncement as to the costs.

The defendant was a tenant of the plaintiff and as such occupied the latter's
house on M. H. del Pilar street, No. 1175. On January 14, 1936, upon the
novation of the contract of lease between the plaintiff and the defendant, the
former gratuitously granted to the latter the use of the furniture described in
the third paragraph of the stipulation of facts, subject to the condition that
the defendant would return them to the plaintiff upon the latter's demand.
The plaintiff sold the property to Maria Lopez and Rosario Lopez and on
September 14, 1936, these three notified the defendant of the conveyance,
giving him sixty days to vacate the premises under one of the clauses of the
contract of lease. There after the plaintiff required the defendant to return all
the furniture transferred to him for them in the house where they were
found. On November 5, 1936, the defendant, through another person,
wrote to the plaintiff reiterating that she may call for the furniture in the
ground floor of the house. On the 7th of the same month, the defendant
wrote another letter to the plaintiff informing her that he could not give up
the three gas heaters and the four electric lamps because he would use
them until the 15th of the same month when the lease in due to expire. The
plaintiff refused to get the furniture in view of the fact that the defendant
had declined to make delivery of all of them. On November 15th,
before vacating the house, the defendant deposited with the Sheriff all the
furniture belonging to the plaintiff and they are now on deposit in the
warehouse situated at No. 1521, Rizal Avenue, in the custody of the said
sheriff.

In their seven assigned errors the plaintiffs contend that the trial court
incorrectly applied the law: in holding that they violated the contract by not

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calling for all the furniture on November 5, 1936, when the defendant placed
them at their disposal; in not ordering the defendant to pay them the value
of the furniture in case they are not delivered; in holding that they should get
all the furniture from the Sheriff at their expenses; in ordering them to pay-
half of the expenses claimed by the Sheriff for the deposit of the furniture; in
ruling that both parties should pay their respective legal expenses or the
costs; and in denying pay their respective legal expenses or the costs; and in
denying the motions for reconsideration and new trial. To dispose of the case,
it is only necessary to decide whether the defendant complied with his
obligation to return the furniture upon the plaintiff's demand; whether the
latter is bound to bear the deposit fees thereof, and whether she is entitled
to the costs of litigation.lawphi1.net

The contract entered into between the parties is one of commadatum,

because under it the plaintiff gratuitously granted the use of the furniture to
the defendant, reserving for herself the ownership thereof; by this contract
the defendant bound himself to return the furniture to the plaintiff, upon the
latters demand (clause 7 of the contract, Exhibit A; articles 1740, paragraph
1, and 1741 of the Civil Code). The obligation voluntarily assumed by the
defendant to return the furniture upon the plaintiff's demand, means that he
should return all of them to the plaintiff at the latter's residence or house.
The defendant did not comply with this obligation when he merely placed
them at the disposal of the plaintiff, retaining for his benefit the three gas
heaters and the four eletric lamps. The provisions of article 1169 of the Civil
Code cited by counsel for the parties are not squarely applicable. The trial
court, therefore, erred when it came to the legal conclusion that the plaintiff
failed to comply with her obligation to get the furniture when they were
offered to her.

As the defendant had voluntarily undertaken to return all the furniture to the
plaintiff, upon the latter's demand, the Court could not legally compel her to
bear the expenses occasioned by the deposit of the furniture at the
defendant's behest. The latter, as bailee, was not entitled to place the
furniture on deposit; nor was the plaintiff under a duty to accept the offer to
return the furniture, because the defendant wanted to retain the three gas
heaters and the four electric lamps.

As to the value of the furniture, we do not believe that the plaintiff is entitled
to the payment thereof by the defendant in case of his inability to return
some of the furniture because under paragraph 6 of the stipulation of facts,
the defendant has neither agreed to nor admitted the correctness of the said
value. Should the defendant fail to deliver some of the furniture, the value
thereof should be latter determined by the trial Court through evidence
which the parties may desire to present.

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The costs in both instances should be borne by the defendant because the
plaintiff is the prevailing party (section 487 of the Code of Civil Procedure).
The defendant was the one who breached the contract of commodatum, and
without any reason he refused to return and deliver all the furniture upon the
plaintiff's demand. In these circumstances, it is just and equitable that he
pay the legal expenses and other judicial costs which the plaintiff would not
have otherwise defrayed.

The appealed judgment is modified and the defendant is ordered to return

and deliver to the plaintiff, in the residence to return and deliver to the
plaintiff, in the residence or house of the latter, all the furniture described in
paragraph 3 of the stipulation of facts Exhibit A. The expenses which may be
occasioned by the delivery to and deposit of the furniture with the Sheriff
shall be for the account of the defendant. the defendant shall pay the costs
in both instances. So ordered.

DIGEST

Facts: Quintos and Beck entered into a contract of lease, whereby the latter
occupied the formers house. On Jan 14, 1936, the contract of lease was
novated, wherein the QUintos gratuitously granted to Beck the use of the
furniture, subject to the condition that Beck should return the furnitures to
Quintos upon demand. Thereafter, Quintos sold the property to Maria and
Rosario Lopez. Beck was notified of the conveyance and given him 60 days
to vacate the premises. IN addition, Quintos required Beck to return all the
furniture. Beck refused to return 3 gas heaters and 4 electric lamps since he
would use them until the lease was due to expire. Quintos refused to get the
furniture since Beck had declined to return all of them. Beck deposited all the
furniture belonging to QUintos to the sheriff.

ISSUE: WON Beck complied with his obligation of returning the furnitures to
Quintos when it deposited the furnitures to the sheriff.

RULING: The contract entered into between the parties is one

of commadatum, because under it the plaintiff gratuitously granted the use
of the furniture to the defendant, reserving for herself the ownership thereof;
by this contract the defendant bound himself to return the furniture to the
plaintiff, upon the latters demand (clause 7 of the contract, Exhibit A; articles
1740, paragraph 1, and 1741 of the Civil Code). The obligation voluntarily
assumed by the defendant to return the furniture upon the plaintiff's
demand, means that he should return all of them to the plaintiff at the
latter's residence or house. The defendant did not comply with this obligation

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when he merely placed them at the disposal of the plaintiff, retaining for his
benefit the three gas heaters and the four eletric lamps.

As the defendant had voluntarily undertaken to return all the furniture to the
plaintiff, upon the latter's demand, the Court could not legally compel her to
bear the expenses occasioned by the deposit of the furniture at the
defendant's behest. The latter, as bailee, was nt entitled to place the
furniture on deposit; nor was the plaintiff under a duty to accept the offer to
return the furniture, because the defendant wanted to retain the three gas
heaters and the four electric lamps.

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 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-20240 December 31, 1965

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
JOSE GRIJALDO, defendant-appellant.

Office of the Solicitor General for plaintiff-appellee.

Isabelo P. Samson for defendant-appellant.

ZALDIVAR, J.:

In the year 1943 appellant Jose Grijaldo obtained five loans from the branch
office of the Bank of Taiwan, Ltd. in Bacolod City, in the total sum of
P1,281.97 with interest at the rate of 6% per annum, compounded quarterly.
These loans are evidenced by five promissory notes executed by the
appellant in favor of the Bank of Taiwan, Ltd., as follows: On June 1, 1943,
P600.00; on June 3, 1943, P159.11; on June 18, 1943, P22.86; on August 9,
1943,P300.00; on August 13, 1943, P200.00, all notes without due dates, but
because the loans were due one year after they were incurred. To secure the
payment of the loans the appellant executed a chattel mortgage on the
standing crops on his land, Lot No. 1494 known as Hacienda Campugas in
Hinigiran, Negros Occidental.

By virtue of Vesting Order No. P-4, dated January 21, 1946, and under the
authority provided for in the Trading with the Enemy Act, as amended, the
assets in the Philippines of the Bank of Taiwan, Ltd. were vested in the
Government of the United States. Pursuant to the Philippine Property Act of
1946 of the United States, these assets, including the loans in question, were
subsequently transferred to the Republic of the Philippines by the
Government of the United States under Transfer Agreement dated July 20,
1954. These assets were among the properties that were placed under the
administration of the Board of Liquidators created under Executive Order No.

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372, dated November 24, 1950, and in accordance with Republic Acts Nos. 8
and 477 and other pertinent laws.

On September 29, 1954 the appellee, Republic of the Philippines,

represented by the Chairman of the Board of Liquidators, made a written
extrajudicial demand upon the appellant for the payment of the account in
question. The record shows that the appellant had actually received the
written demand for payment, but he failed to pay.

The aggregate amount due as principal of the five loans in question,

computed under the Ballantyne scale of values as of the time that the loans
were incurred in 1943, was P889.64; and the interest due thereon at the rate
of 6% per annum compounded quarterly, computed as of December 31,
1959 was P2,377.23.

On January 17, 1961 the appellee filed a complaint in the Justice of the Peace
Court of Hinigaran, Negros Occidental, to collect from the appellant the
unpaid account in question. The Justice of the Peace Of Hinigaran, after
hearing, dismissed the case on the ground that the action had prescribed.
The appellee appealed to the Court of First Instance of Negros Occidental
and on March 26, 1962 the court a quo rendered a decision ordering the
appellant to pay the appellee the sum of P2,377.23 as of December 31,
1959, plus interest at the rate of 6% per annum compounded quarterly from
the date of the filing of the complaint until full payment was made. The
appellant was also ordered to pay the sum equivalent to 10% of the amount
due as attorney's fees and costs.

The appellant appealed directly to this Court. During the pendency of this
appeal the appellant Jose Grijaldo died. Upon motion by the Solicitor General
this Court, in a resolution of May 13, 1963, required Manuel Lagtapon, Jacinto
Lagtapon, Ruben Lagtapon and Anita L. Aguilar, who are the legal heirs of
Jose Grijaldo to appear and be substituted as appellants in accordance with
Section 17 of Rule 3 of the Rules of Court.

In the present appeal the appellant contends: (1) that the appellee has no
cause of action against the appellant; (2) that if the appellee has a cause of
action at all, that action had prescribed; and (3) that the lower court erred in
ordering the appellant to pay the amount of P2,377.23.

In discussing the first point of contention, the appellant maintains that the
appellee has no privity of contract with the appellant. It is claimed that the
transaction between the Taiwan Bank, Ltd. and the appellant, so that the
appellee, Republic of the Philippines, could not legally bring action against
the appellant for the enforcement of the obligation involved in said
transaction. This contention has no merit. It is true that the Bank of Taiwan,
Ltd. was the original creditor and the transaction between the appellant and

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the Bank of Taiwan was a private contract of loan. However, pursuant to the
Trading with the Enemy Act, as amended, and Executive Order No. 9095 of
the United States; and under Vesting Order No. P-4, dated January 21, 1946,
the properties of the Bank of Taiwan, Ltd., an entity which was declared to be
under the jurisdiction of the enemy country (Japan), were vested in the
United States Government and the Republic of the Philippines, the assets of
the Bank of Taiwan, Ltd. were transferred to and vested in the Republic of the
Philippines. The successive transfer of the rights over the loans in question
from the Bank of Taiwan, Ltd. to the United States Government, and from the
United States Government to the government of the Republic of the
Philippines, made the Republic of the Philippines the successor of the rights,
title and interest in said loans, thereby creating a privity of contract between
the appellee and the appellant. In defining the word "privy" this Court, in a
case, said:

The word "privy" denotes the idea of succession ... hence an assignee
of a credit, and one subrogated to it, etc. will be privies; in short, he
who by succession is placed in the position of one of those who
contracted the judicial relation and executed the private document and
appears to be substituting him in the personal rights and obligation is a
privy (Alpurto vs. Perez, 38 Phil. 785, 790).

The United States of America acting as a belligerent sovereign power seized

the assets of the Bank of Taiwan, Ltd. which belonged to an enemy country.
The confiscation of the assets of the Bank of Taiwan, Ltd. being an
involuntary act of war, and sanctioned by international law, the United States
succeeded to the rights and interests of said Bank of Taiwan, Ltd. over the
assets of said bank. As successor in interest in, and transferee of, the
property rights of the United States of America over the loans in question,
the Republic of the Philippines had thereby become a privy to the original
contracts of loan between the Bank of Taiwan, Ltd. and the appellant. It
follows, therefore, that the Republic of the Philippines has a legal right to
bring the present action against the appellant Jose Grijaldo.

The appellant likewise maintains, in support of his contention that the

appellee has no cause of action, that because the loans were secured by a
chattel mortgage on the standing crops on a land owned by him and these
crops were lost or destroyed through enemy action his obligation to pay the
loans was thereby extinguished. This argument is untenable. The terms of
the promissory notes and the chattel mortgage that the appellant executed
in favor of the Bank of Taiwan, Ltd. do not support the claim of appellant. The
obligation of the appellant under the five promissory notes was not to deliver
a determinate thing namely, the crops to be harvested from his land, or the
value of the crops that would be harvested from his land. Rather, his
obligation was to pay a generic thing the amount of money representing
the total sum of the five loans, with interest. The transaction between the

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appellant and the Bank of Taiwan, Ltd. was a series of five contracts of
simple loan of sums of money. "By a contract of (simple) loan, one of the
parties delivers to another ... money or other consumable thing upon the
condition that the same amount of the same kind and quality shall be paid."
(Article 1933, Civil Code) The obligation of the appellant under the five
promissory notes evidencing the loans in questions is to pay the value
thereof; that is, to deliver a sum of money a clear case of an obligation to
deliver, a generic thing. Article 1263 of the Civil Code provides:

In an obligation to deliver a generic thing, the loss or destruction of

anything of the same kind does not extinguish the obligation.

The chattel mortgage on the crops growing on appellant's land simply stood
as a security for the fulfillment of appellant's obligation covered by the five
promissory notes, and the loss of the crops did not extinguish his obligation
to pay, because the account could still be paid from other sources aside from
the mortgaged crops.

In his second point of contention, the appellant maintains that the action of
the appellee had prescribed. The appellant points out that the loans became
due on June 1, 1944; and when the complaint was filed on January 17,1961 a
period of more than 16 years had already elapsed far beyond the period of
ten years when an action based on a written contract should be brought to
court.

This contention of the appellant has no merit. Firstly, it should be considered

that the complaint in the present case was brought by the Republic of the
Philippines not as a nominal party but in the exercise of its sovereign
functions, to protect the interests of the State over a public property. Under
paragraph 4 of Article 1108 of the Civil Code prescription, both acquisitive
and extinctive, does not run against the State. This Court has held that the
statute of limitations does not run against the right of action of the
Government of the Philippines (Government of the Philippine Islands vs.
Monte de Piedad, etc., 35 Phil. 738-751).Secondly, the running of the period
of prescription of the action to collect the loan from the appellant was
interrupted by the moratorium laws (Executive Orders No. 25, dated
November 18, 1944; Executive Order No. 32. dated March 10, 1945; and
Republic Act No. 342, approved on July 26, 1948). The loan in question, as
evidenced by the five promissory notes, were incurred in the year 1943, or
during the period of Japanese occupation of the Philippines. This case is
squarely covered by Executive Order No. 25, which became effective on
November 18, 1944, providing for the suspension of payments of debts
incurred after December 31, 1941. The period of prescription was, therefore,
suspended beginning November 18, 1944. This Court, in the case of Rutter
vs. Esteban (L-3708, May 18, 1953, 93 Phil. 68), declared on May 18, 1953
that the Moratorium Laws, R.A. No. 342 and Executive Orders Nos. 25 and

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32, are unconstitutional; but in that case this Court ruled that the
moratorium laws had suspended the prescriptive period until May 18, 1953.
This ruling was categorically reiterated in the decision in the case of Manila
Motors vs. Flores, L-9396, August 16, 1956. It follows, therefore, that the
prescriptive period in the case now before US was suspended from
November 18,1944, when Executive Orders Nos. 25 and 32 were declared
unconstitutional by this Court. Computed accordingly, the prescriptive period
was suspended for 8 years and 6 months. By the appellant's own admission,
the cause of action on the five promissory notes in question arose on June 1,
1944. The complaint in the present case was filed on January 17, 1961, or
after a period of 16 years, 6 months and 16 days when the cause of action
arose. If the prescriptive period was not interrupted by the moratorium laws,
the action would have prescribed already; but, as We have stated, the
prescriptive period was suspended by the moratorium laws for a period of 8
years and 6 months. If we deduct the period of suspension (8 years and 6
months) from the period that elapsed from the time the cause of action arose
to the time when the complaint was filed (16 years, 6 months and 16 days)
there remains a period of 8 years and 16 days. In other words, the
prescriptive period ran for only 8 years and 16 days. There still remained a
period of one year, 11 months and 14 days of the prescriptive period when
the complaint was filed.

In his third point of contention the appellant maintains that the lower court
erred in ordering him to pay the amount of P2,377.23. It is claimed by the
appellant that it was error on the part of the lower court to apply the
Ballantyne Scale of values in evaluating the Japanese war notes as of June
1943 when the loans were incurred, because what should be done is to
evaluate the loans on the basis of the Ballantyne Scale as of the time the
loans became due, and that was in June 1944. This contention of the
appellant is also without merit.

The decision of the court a quo ordered the appellant to pay the sum of
P2,377.23 as of December 31, 1959, plus interest rate of 6% per annum
compounded quarterly from the date of the filing of the complaint. The sum
total of the five loans obtained by the appellant from the Bank of Taiwan, Ltd.
was P1,281.97 in Japanese war notes. Computed under the Ballantyne Scale
of values as of June 1943, this sum of P1,281.97 in Japanese war notes in
June 1943 is equivalent to P889.64 in genuine Philippine currency which was
considered the aggregate amount due as principal of the five loans, and the
amount of P2,377.23 as of December 31, 1959 was arrived at after
computing the interest on the principal sum of P889.64 compounded
quarterly from the time the obligations were incurred in 1943.

It is the stand of the appellee that the Ballantyne scale of values should be
applied as of the time the obligation was incurred, and that was in June 1943.
This stand of the appellee was upheld by the lower court; and the decision of

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the lower court is supported by the ruling of this Court in the case of Hilado
vs. De la Costa (G.R. No. L-150, April 30, 1949; 46 O.G. 5472), which states:

... Contracts stipulating for payments presumably in Japanese war

notes may be enforced in our Courts after the liberation to the extent
of the just obligation of the contracting parties and, as said notes have
become worthless, in order that justice may be done and the party
entitled to be paid can recover their actual value in Philippine
Currency, what the debtor or defendant bank should return or pay is
the value of the Japanese military notes in relation to the peso in
Philippine Currency obtaining on the date when and at the place where
the obligation was incurred unless the parties had agreed otherwise. ...
. (italics supplied)

IN VIEW OF THE FOREGOING, the decision appealed from is affirmed, with

costs against the appellant. Inasmuch as the appellant Jose Grijaldo died
during the pendency of this appeal, his estate must answer in the execution
of the judgment in the present case.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-38745 August 6, 1975

LUCIA TAN, plaintiff-appellee,

vs.
ARADOR VALDEHUEZA and REDICULO VALDEHUEZA, defendants-
appellants.

Alaric P. Acosta for plaintiff-appellee.

Lorenzo P. de Guzman for defendants-appellants.

CASTRO, J.:

This appeal was certified to this Court by the Court of Appeals as involving
questions purely of law.

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The decision a quo was rendered by the Court of First Instance of Misamis
Occidental (Branch I) in an action instituted by the plaintiff-appellee Lucia
Tan against the defendants-appellants Arador Valdehueza and Rediculo
Valdehueza (docketed as civil case 2574) for (a) declaration of ownership and
recovery of possession of the parcel of land described in the first cause of
action of the complaint, and (b) consolidation of ownership of two portions of
another parcel of (unregistered) land described in the second cause of action
of the complaint, purportedly sold to the plaintiff in two separate deeds
of pacto de retro.

After the issues were joined, the parties submitted the following stipulation of
facts:

1. That parties admit the legal capacity of plaintiff to sue; that

defendants herein, Arador, Rediculo, Pacita, Concepcion and
Rosario, all surnamed Valdehueza, are brothers and sisters; that
the answer filed by Arador and Rediculo stand as the answer of
Pacita, Concepcion and Rosario.

2. That the parties admit the identity of the land in the first cause
of action.

3. That the parcel of land described in the first cause of action

was the subject matter of the public auction sale held on May 6,
1955 at the Capitol Building in Oroquieta, Misamis Occidental,
wherein the plaintiff was the highest bidder and as such a
Certificate of Sale was executed by MR. VICENTE D. ROA who was
then the Ex-Officio Provincial Sheriff in favor of LUCIA TAN the
herein plaintiff. Due to the failure of defendant Arador
Valdehueza to redeem the said land within the period of one year
as being provided by law, MR. VICENTE D. ROA who was then the
Ex-Officio Provincial Sheriff executed an ABSOLUTE DEED OF
SALE in favor of the plaintiff LUCIA TAN.

A copy of the NOTICE OF SHERIFFS SALE is hereby marked as

'Annex A', the CERTIFICATE OF SALE is marked as 'Annex B' and
the ABSOLUTE DEED OF SALE is hereby marked as Annex C and
all of which are made as integral parts of this stipulation of facts.

4. That the party-plaintiff is the same plaintiff in Civil Case No.

2002; that the parties defendants Arador, Rediculo and Pacita, all
Valdehueza were the same parties-defendants in the same said
Civil Case No. 2002; the complaint in Civil Case No. 2002 to be
marked as Exhibit 1; the answer as Exhibit 2 and the order dated
May 22, 1963 as Exhibit 3, and said exhibits are made integral
part of this stipulation.

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 5. That defendants ARADOR VALDEHUEZA and REDICULO
VALDEHUEZA have executed two documents of DEED OF PACTO
DE RETRO SALE in favor of the plaintiff herein, LUCIA TAN of two
portions of a parcel of land which is described in the second
cause of action with the total amount of ONE THOUSAND FIVE
HUNDRED PESOS (P1,500.00), Philippine Currency, copies of said
documents are marked as 'Annex D' and Annex E', respectively
and made as integral parts of this stipulation of facts.

6. That from the execution of the Deed of Sale with right to

repurchase mentioned in the second cause of action, defendants
Arador Valdehueza and Rediculo Valdehueza remained in the
possession of the land; that land taxes to the said land were paid
by the same said defendants.

Civil case 2002 referred to in stipulation of fact no. 4 was a

complaint for injunction filed by Tan on July 24, 1957 against the
Valdehuezas, to enjoin them "from entering the above-described
parcel of land and gathering the nuts therein ...." This complaint
and the counterclaim were subsequently dismissed for failure of
the parties "to seek for the immediate trial thereof, thus evincing
lack of interest on their part to proceed with the case. 1

The Deed of Pacto de Retro referred to in stipulation of fact no. 5 as "Annex

D" (dated August 5, 1955) was not registered in the Registry of Deeds, while
the Deed of Pacto de Retro referred to as "Annex E" (dated March 15, 1955)
was registered.

On the basis of the stipulation of facts and the annexes, the trial court
rendered judgment, as follows:

WHEREFORE, judgment is hereby rendered in favor of the

plaintiff:

1. Declaring Lucia Tan the absolute owner of the property

described in the first cause of action of the amended complaint;
and ordering the herein defendants not to encroach and molest
her in the exercise of her proprietary rights; and, from which
property they must be dispossessed;

2. Ordering the defendants, Arador Valdehueza and Rediculo

Valdehueza jointly and severally to pay to the plaintiff, Lucia Tan,
on Annex 'E' the amount of P1,200, with legal interest of 6% as of
August 15, 1966, within 90 days to be deposited with the Office
of the Court within 90 days from the date of service of this
decision, and that in default of such payment the property shall

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 be sold in accordance with the Rules of Court for the release of
the mortgage debt, plus costs;

3. And as regards the land covered by deed of pacto de retro

annex 'D', the herein defendants Arador Valdehueza and Rediculo
Valdehueza are hereby ordered to pay the plaintiff the amount of
P300 with legal interest of 6% from August 15, 1966, the said
land serving as guaranty of the said amount of payment;

4. Sentencing the defendants Arador Valdehueza and Rediculo

Valdehueza to pay jointly and severally to the herein plaintiff
Lucia Tan the amount of 1,000.00 as attorney's fees; and .

5. To pay the costs of the proceedings.

The Valdehuezas appealed, assigning the following errors:

That the lower court erred in failing to adjudge on the first cause
of action that there exists res judicata; and

That the lower court erred in making a finding on the second

cause of action that the transactions between the parties were
simple loan, instead, it should be declared as equitable
mortgage.

We affirm in part and modify in part.

1. Relying on Section 3 of Rule 17 of the Rules of Court which pertinently

provides that a dismissal for failure to prosecute "shall have the effect of an
adjudication upon the merits," the Valdehuezas submit that the dismissal of
civil case 2002 operated, upon the principle of res judicata, as a bar to the
first cause of action in civil case 2574. We rule that this contention is
untenable as the causes of action in the two cases are not identical. Case
2002 was for injunction against the entry into and the gathering of nuts from
the land, while case 2574 seeks to "remove any doubt or cloud of the
plaintiff's ownership ..." (Amended complaint, Rec. on App., p. 27), with a
prayer for declaration of ownership and recovery of possession.

Applying the test of absence of inconsistency between prior and subsequent

judgments, 2 we hold that the failure of Tan, in case 2002, to secure an
injunction against the Valdehuezas to prevent them from entering the land
and gathering nuts is not inconsistent with her being adjudged, in case 2574,
as owner of the land with right to recover possession thereof. Case 2002
involved only the possession of the land and the fruits thereof, while case
2574 involves ownership of the land, with possession as a mere attribute of
ownership. The judgment in the first case could not and did not encompass

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the judgment in the second, although the second judgment would
encompass the first. Moreover, the new Civil Code provides that suitors in
actions to quiet title "need not be in possession of said property. 3

2. The trial court treated the registered deed of pacto de retro as an

equitable mortgage but considered the unregistered deed of pacto de
retro "as a mere case of simple loan, secured by the property thus sold
underpacto de retro," on the ground that no suit lies to foreclose an
unregistered mortgage. It would appear that the trial judge had not updated
himself on law and jurisprudence; he cited, in support of his ruling, article
1875 of the old Civil Code and decisions of this Court circa 1910 and 1912.

Under article 1875 of the Civil Code of 1889, registration was a necessary
requisite for the validity of a mortgage even as between the parties, but
under article 2125 of the new Civil Code (in effect since August 30,1950),
this is no longer so. 4

If the instrument is not recorded, the mortgage is nonetheless

binding between the parties. (Article 2125, 2nd sentence).

The Valdehuezas having remained in possession of the land and the realty
taxes having been paid by them, the contracts which purported to be pacto
de retro transactions are presumed to be equitable mortgages, 5 whether
registered or not, there being no third parties involved.

3. The Valdehuezas claim that their answer to the complaint of the plaintiff
affirmed that they remained in possession of the land and gave the proceeds
of the harvest to the plaintiff; it is thus argued that they would suffer double
prejudice if they are to pay legal interest on the amounts stated in the pacto
de retro contracts, as the lower court has directed, and that therefore the
court should have ordered evidence to be adduced on the harvest.

The record does not support this claim. Nowhere in the original and the
amended complaints is an allegation of delivery to the plaintiff of the harvest
from the land involved in the second cause of action. Hence, the defendants'
answer had none to affirm.

In submitting their stipulation of facts, the parties prayed "for its approval
and maybe made the basis of the decision of this Honorable Court. "
(emphasis supplied) This, the court did. It cannot therefore be faulted for not
receiving evidence on who profited from the harvest.

4. The imposition of legal interest on the amounts subject of the equitable

mortgages, P1,200 and P300, respectively, is without legal basis, for, "No
interest shall be due unless it has been expressly stipulated in writing."
(Article 1956, new Civil Code) Furthermore, the plaintiff did not pray for such

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interest; her thesis was a consolidation of ownership, which was properly
rejected, the contracts being equitable mortgages.

With the definitive resolution of the rights of the parties as discussed above,
we find it needless to pass upon the plaintiffs petition for receivership.
Should the circumstances so warrant, she may address the said petition to
the court a quo.

ACCORDINGLY, the judgment a quo is hereby modified, as follows: (a) the

amounts of P1,200 and P300 mentioned in Annexes E and D shall bear
interest at six percent per annum from the finality of this decision; and (b)
the parcel of land covered by Annex D shall be treated in the same manner
as that covered by Annex E, should the defendants fail to pay to the plaintiff
the sum of P300 within 90 days from the finality of this decision. In all other
respects the judgment is affirmed. No costs.

DIGEST

Facts:
Defendants herein, Arador, Rediculo, Pacita, Concepcion and Rosario, all
surnamed Valdehueza, are brothers and sisters; the parcel of land described
in the first cause of action was the subject matter of the public auction sale
wherein the plaintiff was the highest bidder and as such a Certificate of Sale
was executed in favor of LUCIA TAN the herein plaintiff. Due to the failure
of defendant Arador Valdehueza to redeem the said land within the period
of one year as being provided by law, an ABSOLUTE DEED OF SALE in
favor of the plaintiff LUCIA; that defendants ARADOR VALDEHUEZA and
REDICULO VALDEHUEZA have executed two documents of DEED OFPACTO
DE RETRO SALE in favor of the plaintiff herein, LUCIA TAN of two portions of a
parcel of land which is described in the second cause of action with the total
amount of P1,500; that from the execution of the Deed of Sale with right
to repurchase mentioned in the second cause of action, defendants Arador
Valdehueza and Rediculo Valdehueza remained in the possession of the land.
A complaint for injunction filed by Tan to enjoin the Valdehuezas
"fromentering the parcel of land and gathering the nuts therein ...." This
complaint and the counterclaim were subsequently dismissed for failure
of the parties"to seek for the immediate trial thereof, thus evincing lack of
interest on their part to proceed with the case. The Deed of Pacto de Retro
referred to was not registered in the Registry of Deeds, while the 2nd Deed of
Pacto de Retro was registered.
Issue:
Whether the transactions between the parties were simple loan?
Held:
NO. Under article 1875 of the Civil Code of 1889, registration was a
necessary requisite for the validity of a mortgage even as between the
parties, but under article 2125 of the new Civil Code (in effect since August

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30,1950),this is no longer so. The Valdehuezas having remained in
possession of the land and the realty taxes having been paid by them, the
contracts which purported to be pacto deretro transactions are presumed to
be equitable mortgages, 5 whether registered or not, there being no third
parties involved.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 138739 July 6, 2000

RADIOWEALTH FINANCE COMPANY, petitioner,

vs.
Spouses VICENTE and MA. SUMILANG DEL ROSARIO, respondents.

DECISION

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PANGANIBAN, J.:

When a demurrer to evidence granted by a trial court is reversed on appeal,

the reviewing court cannot remand the case for further proceedings. Rather,
it should render judgment on the basis of the evidence proffered by the
plaintiff. Inasmuch as defendants in the present case admitted the due
execution of the Promissory Note both in their Answer and during the
pretrial, the appellate court should have rendered judgment on the bases of
that Note and on the other pieces of evidence adduced during the trial.

The Case

Before us is a Petition for Review on Certiorari of the December 9, 1997

Decision1 and the May 3, 1999 Resolution2 of the Court of Appeals in CA-GR
CV No. 47737. The assailed Decision disposed as follows:

"WHEREFORE, premises considered, the appealed order (dated November 4,

1994) of the Regional Trial Court (Branch XIV) in the City of Manila in Civil
Case No. 93-66507 is hereby REVERSED and SET ASIDE. Let the records of
this case be remanded to the court a quo for further proceedings. No
pronouncement as to costs."3

The assailed Resolution denied the petitioners Partial Motion for

Reconsideration.4

The Facts

The facts of this case are undisputed. On March 2, 1991, Spouses Vicente
and Maria Sumilang del Rosario (herein respondents), jointly and severally
executed, signed and delivered in favor of Radiowealth Finance Company
(herein petitioner), a Promissory Note5 for P138,948. Pertinent provisions of
the Promissory Note read:

"FOR VALUE RECEIVED, on or before the date listed below, I/We promise to
pay jointly and severally Radiowealth Finance Co. or order the sum of ONE
HUNDRED THIRTY EIGHT THOUSAND NINE HUNDRED FORTY EIGHTPesos
(P138,948.00) without need of notice or demand, in installments as follows:

P11,579.00 payable for 12 consecutive months starting on ________ 19__ until

the amount of P11,579.00 is fully paid. Each installment shall be due every
____ day of each month. A late payment penalty charge of two and a half
(2.5%) percent per month shall be added to each unpaid installment from
due date thereof until fully paid.

xxx xxx xxx

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It is hereby agreed that if default be made in the payment of any of the
installments or late payment charges thereon as and when the same
becomes due and payable as specified above, the total principal sum then
remaining unpaid, together with the agreed late payment charges thereon,
shall at once become due and payable without need of notice or demand.

xxx xxx xxx

If any amount due on this Note is not paid at its maturity and this Note is
placed in the hands of an attorney or collection agency for collection, I/We
jointly and severally agree to pay, in addition to the aggregate of the
principal amount and interest due, a sum equivalent to ten (10%) per cent
thereof as attorneys and/or collection fees, in case no legal action is filed,
otherwise, the sum will be equivalent to twenty-five (25%) percent of the
amount due which shall not in any case be less than FIVE HUNDRED PESOS
(P500.00) plus the cost of suit and other litigation expenses and, in addition,
a further sum of ten per cent (10%) of said amount which in no case shall be
less than FIVE HUNDRED PESOS (P500.00), as and for liquidated damages." 6

Thereafter, respondents defaulted on the monthly installments. Despite

repeated demands, they failed to pay their obligations under their
Promissory Note.

On June 7, 1993, petitioner filed a Complaint7 for the collection of a sum of

money before the Regional Trial Court of Manila, Branch 14.8 During the trial,
Jasmer Famatico, the credit and collection officer of petitioner, presented in
evidence the respondents check payments, the demand letter dated July 12,
1991, the customers ledger card for the respondents, another demand letter
and Metropolitan Bank dishonor slips. Famatico admitted that he did not
have personal knowledge of the transaction or the execution of any of these
pieces of documentary evidence, which had merely been endorsed to him.

On July 4, 1994, the trial court issued an Order terminating the presentation
of evidence for the petitioner.9 Thus, the latter formally offered its evidence
and exhibits and rested its case on July 5, 1994.

Respondents filed on July 29, 1994 a Demurrer to Evidence10 for alleged lack
of cause of action. On November 4, 1994, the trial court dismissed11 the
complaint for failure of petitioner to substantiate its claims, the evidence it
had presented being merely hearsay.

On appeal, the Court of Appeals (CA) reversed the trial court and remanded
the case for further proceedings.

Hence, this recourse.12

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 Ruling of the Court of Appeals

According to the appellate court, the judicial admissions of respondents

established their indebtedness to the petitioner, on the grounds that they
admitted the due execution of the Promissory Note, and that their only
defense was the absence of an agreement on when the installment
payments were to begin. Indeed, during the pretrial, they admitted the
genuineness not only of the Promissory Note, but also of the demand letter
dated July 12, 1991. Even if the petitioners witness had no personal
knowledge of these documents, they would still be admissible "if the purpose
for which [they are] produced is merely to establish the fact that the
statement or document was in fact made or to show its tenor[,] and such fact
or tenor is of independent relevance."

Besides, Articles 19 and 22 of the Civil Code require that every person must
-- in the exercise of rights and in the performance of duties -- act with justice,
give all else their due, and observe honesty and good faith. Further, the rules
on evidence are to be liberally construed in order to promote their objective
and to assist the parties in obtaining just, speedy and inexpensive
determination of an action.

Issue

The petitioner raises this lone issue:

"The Honorable Court of Appeals patently erred in ordering the remand of

this case to the trial court instead of rendering judgment on the basis of
petitioners evidence."13

For an orderly discussion, we shall divide the issue into two parts: (a) legal
effect of the Demurrer to Evidence, and (b) the date when the obligation
became due and demandable.

The Courts Ruling

The Petition has merit. While the CA correctly reversed the trial court, it erred
in remanding the case "for further proceedings."

Consequences of a Reversal, on Appeal, of a Demurrer to Evidence

Petitioner contends that if a demurrer to evidence is reversed on appeal, the

defendant should be deemed to have waived the right to present evidence,
and the appellate court should render judgment on the basis of the evidence
submitted by the plaintiff. A remand to the trial court "for further
proceedings" would be an outright defiance of Rule 33, Section 1 of the 1997
Rules of Court.

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On the other hand, respondents argue that the petitioner was not necessarily
entitled to its claim, simply on the ground that they lost their right to present
evidence in support of their defense when the Demurrer to Evidence was
reversed on appeal. They stress that the CA merely found them indebted to
petitioner, but was silent on when their obligation became due and
demandable.

The old Rule 35 of the Rules of Court was reworded under Rule 33 of the
1997 Rules, but the consequence on appeal of a demurrer to evidence was
not changed. As amended, the pertinent provision of Rule 33 reads as
follows:

"SECTION 1. Demurrer to evidence.After the plaintiff has completed the

presentation of his evidence, the defendant may move for dismissal on the
ground that upon the facts and the law the plaintiff has shown no right to
relief. If his motion is denied, he shall have the right to present evidence. If
the motion is granted but on appeal the order of dismissal is reversed he
shall be deemed to have waived the right to present evidence."14

Explaining the consequence of a demurrer to evidence, the Court in

Villanueva Transit v. Javellana15 pronounced:

"The rationale behind the rule and doctrine is simple and logical. The
defendant is permitted, without waiving his right to offer evidence in the
event that his motion is not granted, to move for a dismissal (i.e., demur to
the plaintiffs evidence) on the ground that upon the facts as thus
established and the applicable law, the plaintiff has shown no right to relief. If
the trial court denies the dismissal motion, i.e., finds that plaintiffs evidence
is sufficient for an award of judgment in the absence of contrary evidence,
the case still remains before the trial court which should then proceed to
hear and receive the defendants evidence so that all the facts and evidence
of the contending parties may be properly placed before it for adjudication as
well as before the appellate courts, in case of appeal. Nothing is lost. The
doctrine is but in line with the established procedural precepts in the conduct
of trials that the trial court liberally receive all proffered evidence at the trial
to enable it to render its decision with all possibly relevant proofs in the
record, thus assuring that the appellate courts upon appeal have all the
material before them necessary to make a correct judgment, and avoiding
the need of remanding the case for retrial or reception of improperly
excluded evidence, with the possibility thereafter of still another appeal, with
all the concomitant delays. The rule, however, imposes the condition by the
same token that if his demurrer is granted by the trial court, and the order of
dismissal is reversed on appeal, the movant losses his right to present
evidence in his behalf and he shall have been deemed to have elected to
stand on the insufficiency of plaintiffs case and evidence. In such event, the
appellate court which reverses the order of dismissal shall proceed to render

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judgment on the merits on the basis of plaintiffs evidence." (Underscoring
supplied)

In other words, defendants who present a demurrer to the plaintiffs evidence

retain the right to present their own evidence, if the trial court disagrees with
them; if the trial court agrees with them, but on appeal, the appellate court
disagrees with both of them and reverses the dismissal order, the defendants
lose the right to present their own evidence.16 The appellate court shall, in
addition, resolve the case and render judgment on the merits, inasmuch as a
demurrer aims to discourage prolonged litigations.17

In the case at bar, the trial court, acting on respondents demurrer to

evidence, dismissed the Complaint on the ground that the plaintiff had
adduced mere hearsay evidence. However, on appeal, the appellate court
reversed the trial court because the genuineness and the due execution of
the disputed pieces of evidence had in fact been admitted by defendants.

Applying Rule 33, Section 1 of the 1997 Rules of Court, the CA should have
rendered judgment on the basis of the evidence submitted by the petitioner.
While the appellate court correctly ruled that "the documentary evidence
submitted by the [petitioner] should have been allowed and appreciated
xxx," and that "the petitioner presented quite a number of documentary
exhibits xxx enumerated in the appealed order,"18 we agree with petitioner
that the CA had sufficient evidence on record to decide the collection suit. A
remand is not only frowned upon by the Rules, it is also logically unnecessary
on the basis of the facts on record.

Due and Demandable Obligation

Petitioner claims that respondents are liable for the whole amount of their
debt and the interest thereon, after they defaulted on the monthly
installments.

Respondents, on the other hand, counter that the installments were not yet
due and demandable. Petitioner had allegedly allowed them to apply their
promotion services for its financing business as payment of the Promissory
Note. This was supposedly evidenced by the blank space left for the date on
which the installments should have commenced.19 In other words,
respondents theorize that the action for immediate enforcement of their
obligation is premature because its fulfillment is dependent on the sole will
of the debtor. Hence, they consider that the proper court should first fix a
period for payment, pursuant to Articles 1180 and 1197 of the Civil Code.

This contention is untenable. The act of leaving blank the due date of the
first installment did not necessarily mean that the debtors were allowed to
pay as and when they could. If this was the intention of the parties, they

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should have so indicated in the Promissory Note. However, it did not reflect
any such intention.

On the contrary, the Note expressly stipulated that the debt should be
amortized monthly in installments ofP11,579 for twelve consecutive months.
While the specific date on which each installment would be due was left
blank, the Note clearly provided that each installment should be payable
each month.

Furthermore, it also provided for an acceleration clause and a late payment

penalty, both of which showed the intention of the parties that the
installments should be paid at a definite date. Had they intended that the
debtors could pay as and when they could, there would have been no need
for these two clauses.

Verily, the contemporaneous and subsequent acts of the parties manifest

their intention and knowledge that the monthly installments would be due
and demandable each month.20 In this case, the conclusion that the
installments had already became due and demandable is bolstered by the
fact that respondents started paying installments on the Promissory Note,
even if the checks were dishonored by their drawee bank. We are convinced
neither by their avowals that the obligation had not yet matured nor by their
claim that a period for payment should be fixed by a court.

Convincingly, petitioner has established not only a cause of action against

the respondents, but also a due and demandable obligation. The obligation
of the respondents had matured and they clearly defaulted when their
checks bounced. Per the acceleration clause, the whole debt became due
one month (April 2, 1991) after the date of the Note because the check
representing their first installment bounced.

As for the disputed documents submitted by the petitioner, the CA ruling in

favor of their admissibility, which was not challenged by the respondents,
stands. A party who did not appeal cannot obtain affirmative relief other than
that granted in the appealed decision.21

It should be stressed that respondents do not contest the amount of the

principal obligation.1wphi1 Their liability as expressly stated in the
Promissory Note and found by the CA is "P13[8],948.0022 which is payable in
twelve (12) installments at P11,579.00 a month for twelve (12) consecutive
months." As correctly found by the CA, the "ambiguity" in the Promissory
Note is clearly attributable to human error.23

Petitioner, in its Complaint, prayed for "14% interest per annum from May 6,
1993 until fully paid." We disagree.1wphi1The Note already stipulated a late
payment penalty of 2.5 percent monthly to be added to each unpaid

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installment until fully paid. Payment of interest was not expressly stipulated
in the Note. Thus, it should be deemed included in such penalty.

In addition, the Note also provided that the debtors would be liable for
attorneys fees equivalent to 25 percent of the amount due in case a legal
action was instituted and 10 percent of the same amount as liquidated
damages. Liquidated damages, however, should no longer be imposed for
being unconscionable.24 Such damages should also be deemed included in
the 2.5 percent monthly penalty. Furthermore, we hold that petitioner is
entitled to attorneys fees, but only in a sum equal to 10 percent of the
amount due which we deem reasonable under the proven facts.25

The Court deems it improper to discuss respondents' claim for moral and
other damages. Not having appealed the CA Decision, they are not entitled
to affirmative relief, as already explained earlier.26

WHEREFORE, the Petition is GRANTED. The appealed Decision is MODIFIED in

that the remand is SET ASIDE and respondents are ordered TO PAY P138,948,
plus 2.5 percent penalty charge per month beginning April 2, 1991 until fully
paid, and 10 percent of the amount due as attorneys fees. No costs.

SO ORDERED.

Digest

FACTS:

Spouses Vicente & Maria Del Rosario jointly & severally executed, signed and
delivered in favor of Radiowealth Finance Company a promissory note for
P138,948.

Thereafter, respondents defaulted on the monthly installments. Despite

repeated demands, they failed to pay their obligation.

Petitioner filed a complaint for the collection of sum of money before the
RTC.

Trial court dismissed the complaint for the evidence presented were merely
hearsay.

CA reversed & remanded the case for further proceedings.

Petitioner claims that respondents are liable for the whole amount of their

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debt and the interest thereon, after they defaulted on the monthly
installments. Respondents counter that the installments were not yet due
and demandable. They theorize that the action for immediate enforcement
of their obligation is premature because its fulfillment is dependent on the
sole will of the debtor. Hence, they consider that the proper court should first
fix a period for payment, pursuant to Articles 1180 and 1197 of the Civil
Code.

ISSUE:

WON the installments had already became due and demandable? YES

HELD:

The act of leaving blank space the due date of the first installment did not
necessary mean that the debtors were allowed to pay as & when they could.
If this was the intention of the parties, they should have so indicated in the
promissory note. However, it did not reflect any such intention.

While the specific date on which each installment would be due was left
blank, the note clearly provided that each installment should be payable
each month.

Furthermore, it also provided for an acceleration clause and a late payment

penalty, both of which showed the intention of the parties that the
installment should be paid at a definite date. Had they intended that the
debtors could pay as & when they could, there would have been no need for
these 2 clauses.

The installments had already became due & demandable is bolstered by the
fact that respondents started paying installments on the promissory note.
The obligation of the respondents had matured & they clearly defaulted
when their checks bounced. Per the acceleration clause, the whole debt
became due one month after the date of the note because the check
representing their first installment bounced.

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 FIRST DIVISION

[G.R. No. 88880. April 30, 1991.]

PHILIPPINE NATIONAL BANK, Petitioner, v. THE HON. COURT OF

APPEALS and AMBROSIO PADILLA, Respondents.

The Chief Legal Counsel for Petitioner.

Ambrosio Padilla, Mempin & Reyes Law Offices for Private

Respondent.

SYLLABUS

1. COMMERCIAL LAW; BANKING LAWS; RATE OF INTEREST; INCREASE OF

INTEREST RATE; NOT TO BE MADE OFTENER THAN ONCE A YEAR. PNB,
over the objection of the private respondent, and without authority from the
Monetary Board, within a period of only four (4) months, increased the 18%
interest rate on the private respondents loan obligation three (3) times: (a)
to 32% in July 1984; (b) to 41% in October 1984; and (c) to 48% in November
1984. Those increases were null and void. Although Section 2, P.D. No. 116 of
January 29, 1973, authorizes the Monetary Board to prescribe the maximum
rate or rates of interest for loans or renewal thereof and to change such rate
or rates whenever warranted by prevailing economic and social conditions, it
expressly provides that "such changes shall not be made oftener than once
every twelve months. "If the Monetary Board itself was not authorized to
make such changes oftener than once a year, even less so may a bank which
is subordinate to the Board.

2. ID.; ID.; ID.; ID.; MAY BE INCREASED WITHIN LIMITS OF LAW; PNB
CIRCULARS AND RESOLUTION ARE NEITHER LAWS NOR RESOLUTIONS OF
MONETARY BOARD. While the private respondent-debtor did agree in the
Deed of Real Estate Mortgage (Exh. 5) that the interest rate may be
increased during the life of the contract "to such increase within the rate
allowed by law, as the Board of Directors of the MORTGAGEE may prescribe"

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(Exh. 5-e-1) or "within the limits allowed by law" (Promissory Notes, Exhs. 2,
3, and 4), no laws was ever passed in July to November 1984 increasing the
interest rates on loans or renewals thereof to 32%, 41% and 48% (per
annum), and no documents were executed and delivered by the debtor to
effectuate the increases. The PNB relied on its own Board Resolution No. 681
(Exh. 10), PNB Circular No. 40-79-84 (Exh. 13), and PNB Circular No. 40-129-
84 (Exh. 15), but those resolution and circulars are neither laws nor
resolutions of the Monetary Board.

3. ID.; ID.; ID.; REMOVAL OF USURY LAW CEILING ON INTEREST RATES DOES
NOT AUTHORIZE BANKS TO UNILATERALLY AND SUCCESSIVELY INCREASE
INTEREST RATES. CB Circular No. 905, Series of 1982 (Exh. 11) removed
the Usury law ceiling on interest rates but it did not authorize the PNB, or
any bank for that matter, to unilaterally and successively increase the
agreed interest rates from 18% to 48% within a span of four (4) months, in
violation of P.D. 116 which limits such changes to "once every twelve
months."cralaw virtua1aw library

4. ID.; ID.; ID.; UNILATERAL ACTION TO INCREASE INTEREST RATES, A

VIOLATION OF ARTICLE 1308 OF CIVIL CODE. Besides violating P.D. 116,
the unilateral action of the PNB in increasing the interest rate on the private
respondents loan, violated the mutuality of contracts ordained in Article
1308 of the civil Code: "ART. 1308. The contract must bind both contracting
parties; its validity or compliance cannot be left to the will of one of
them."cralaw virtua1aw library

5. ID.; ID.; ID.; SUCCESSIVE INCREASE OF INTEREST RATES, A VIOLATION OF

ARTICLE 1956 OF CIVIL CODE. PNBs successive increases of the interest
rate on the private respondents loan, over the latters protest, were
arbitrary as they violated an express provision of the Credit Agreement (Exh.
1) Section 9.01 that its terms "may be amended only by an instrument in
writing signed by the party to be bound as burdened by such amendment."
The increases imposed by PNB also contravene Art. 1956 of the Civil Code
which provides that "no interest shall be due unless it has been expressly
stipulated in writing."

DECISION

GRIO-AQUINO, J.:

The Philippine National Bank (PNB) has appealed by certiorari from the
decision promulgated on June 27, 1989 by the Court of Appeals in CA-G.R. CV
No. 09791 entitled, "AMBROSIO PADILLA, plaintiff-appellant versus

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PHILIPPINE NATIONAL BANK, defendant-appellee," reversing the decision of
the trial court which had dismissed the private respondents complaint "to
annul interest increases." (p. 32, Rollo.) The Court of Appeals rendered
judgment:

". . . declaring the questioned increases of interest as unreasonable,

excessive and arbitrary and ordering the defendant-appellee [PNB] to refund
to the plaintiff-appellant the amount of interest collected from July, 1984 in
excess of twenty-four percent (24%) per annum. Costs against the
defendant-appellee." (pp 14-15, Rollo.)

In July 1982, the private respondent applied for, and was granted by
petitioner PNB, a credit line of 321.8 million, secured by a real estate
mortgage, for a term of two (2) years, with 18% interest per annum. Private
respondent executed in favor of the PNB a Credit Agreement, two (2)
promissory notes in the amount of P900,000.00 each, and a Real Estate
Mortgage Contract.

The Credit Agreement provided that

"9.06 Other Conditions. The Borrowers hereby agree to be bound by the rules
and regulations of the Central Bank and the current and general policies of
the Bank and those which the Bank may adopt in the future, which may have
relation to or in any way affect the Line, which rules, regulations and policies
are incorporated herein by reference as if set forth herein in full. Promptly
upon receipt of a written request from the Bank, the Borrowers shall execute
and deliver such documents and instruments, in form and substance
satisfactory to the Bank, in order to effectuate or otherwise comply with such
rules, regulations and policies." (p. 85, Rollo.)

The Promissory Notes, in turn, uniformly authorized the PNB to increase the
stipulated 18% interest per annum "within the limits allowed by law at any
time depending on whatever policy it [PNB] may adopt in the future;
Provided, that, the interest rate on this note shall be correspondingly
decreased in the event that the applicable maximum interest rate is reduced
by law or by the Monetary Board." (pp. 85-86, Rollo; Emphasis ours.)

The Real Estate Mortgage Contract likewise provided that:

"(k) INCREASE OF INTEREST RATE

"The rate of interest charged on the obligation secured by this mortgage as

well as the interest on the amount which may have been advanced by the
MORTGAGEE, in accordance with the provisions hereof, shall be subject
during the life of this contract to such an increase within the rate allowed by
law, as the Board of Directors of the MORTGAGEE may prescribe for its

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debtors." (p. 86, Rollo; Emphasis supplied.)

Four (4) months advance interest and incidental expenses/charges were

deducted from the loan, the net proceeds of which were released to the
private respondent by crediting or transferring the amount to his current
account with the bank.

On June 20, 1984, PNB informed the private respondent that (1) his credit
line of P1.8 million "will expire on July 4, 1984," (2)" [i]f renewal of the line for
another year is intended, please submit soonest possible your request," and
(3) the "present policy of the Bank requires at least 30% reduction of
principal before your line can be renewed." (pp. 86-87, Rollo.) Complying,
private respondent on June 25, 1984, paid PNB P540,000 00 (30% of P1.8
million) and requested that "the balance of P1,260,000.00 be renewed for
another period of two (2) years under the same arrangement" and that "the
increase of the interest rate of my mortgage loan be from 18% to 21%" (p.
87, Rollo.).

On July 4, 1984, private respondent paid PNB P360,000.00.

On July 18, 1984, private respondent reiterated in writing his request that
"the increase in the rate of interest from 18% be fixed at 21% of 24%. (p. 87,
Rollo.)

On July 26, 1984, private respondent made an additional payment of

P100,000.

On August 10, 1984, PNB informed private respondent that "we can not give
due course to your request for preferential interest rate in view of the
following reasons: Existing Loan Policies of the bank requires 32% for loan of
more than one year; our present cost of funds has substantially increased."
(pp. 8788, Rollo.)

On August 17, 1984, private respondent further paid PNB P150,000.00.

In a letter dated August 24, 1984 to PNB, private respondent announced that
he would "continue making further payments, and instead of a loan of more
than one year, I shall pay the said loan before the lapse of one year or
before July 4, 1985. . . . I reiterate my request that the increase of my rate of
interest from 18% be fixed at 21% or 24%." (p. 88, Rollo.)

On September 12, 1984, private respondent paid PNB P160,000.00.

In letters dated September 12, 1984 and September 13, 1984, PNB informed
private respondent that "the interest rate on your outstanding line/loan is
hereby adjusted from 32% p.a. to 41% p.a. (35% prime rate + 6%) effective

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September 6, 1984;" and further explained "why we can not grant your
request for a lower rate of 21% or 24%." (pp. 88-89, Rollo.)

In a letter dated September 24, 1984 to PNB, private respondent registered

his protest against the increase of interest rate from 18% to 32% on July 4,
1984 and from 32% to 41% on September 6, 1984.

On October 15, 1984, private respondent reiterated his request that the
interest rate should not be increased from 18% to 32% and from 32% to
41%. He also attached (as payment) a check for P140,000.00.

Like rubbing salt on the private respondents wound, the petitioner informed
private respondent on October 29, 1984, that "the interest rate on your
outstanding line/loan is hereby adjusted from 41% p.a. to 48% p.a. (42%
prime rate plus 6% spread) effective 25 October 1984." (p. 89, Rollo.)

In November 1984, private respondent paid PNB P50,000.00 thus reducing

his principal loan obligation to P300,000.00.

On December 18, 1984, private respondent filed in the Regional Trial Court of
Manila a complaint against PNB entitled, "AMBROSIO PADILLA v. PHILIPPINE
NATIONAL BANK" (Civil Case No. 84-28391), praying that judgment be
rendered:

"a. Declaring that the unilateral increase of interest rates from 18% to 32%,
then to 41% and again to 48% are illegal, not valid nor binding on plaintiff,
and that an adjustment of his interest rate from 18% to 24% is reasonable,
fair and just;

"b. The interest rate on the P900,000.00 released on September 27, 1982 be
counted from said date and not from July 4, 1984;

"c. The excess of interest payment collected by defendant bank by debiting

plaintiffs current account be refunded to plaintiff or credited to his current
account;

"d. Pending the determination of the merits of this case, a restraining order
and or a writ of preliminary injunction be issued (1) to restrain and or enjoin
defendant bank for [sic] collecting from plaintiff and/or debiting his current
account with illegal and excessive increases of interest rates; and (2) to
prevent defendant bank from declaring plaintiff in default for non-payment
and from instituting any foreclosure proceeding, extrajudicial or judicial, of
the valuable commercial property of plaintiff." (pp. 89-90, Rollo.)

In its answer to the complaint, PNB denied that the increases in interest rates
were illegal, unilateral excessive and arbitrary and recited the reasons

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justifying said increases.

On March 31, 1985, the private respondent paid the P300,000 balance of his
obligation to PNBN (Exh. 5).

The trial court rendered judgment on April 14, 1986, dismissing the
complaint because the increases of interest were properly made.

The private respondent appealed to the Court of Appeals. On June 27, 1989,
the Court of Appeals reversed the trial court, hence, NBs recourse to this
Court by a petition for review under Rule 45 of the Rules of Court.

The assignments of error raised in PNBs petition for review can be resolved
into a single legal issue of whether the bank, within the term of the loan
which it granted to the private respondent, may unilaterally change or
increase the interest rate stipulated therein at will and as often as it pleased.

The answer to that question is no.

In the first place, although Section 2, PD. No. 116 of January 29, 1973,
authorizes the Monetary Board to prescribe the maximum rate or rates of
interest for loans or renewal thereof and to change such rate or rates
whenever warranted by prevailing economic and social conditions, it
expressly provides that "such changes shall not be made oftener than once
every twelve months."cralaw virtua1aw library

In this case, PNB, over the objection of the private respondent, and without
authority from the Monetary Board, within a period of only four (4) months,
increased the 18% interest rate on the private respondents loan obligation
three (3) times: (a) to 32% in July 1984; (b) to 41% in October 1984; and (c)
to 48% in November 1984. Those increases were null and void, for if the
Monetary Board itself was not authorized to make such changes oftener than
once a year, even less so may a bank which is subordinate to the Board.

Secondly, as pointed out by the Court of Appeals, while the private

respondent-debtor did agree in the Deed of Real Estate Mortgage (Exh. 5)
that the interest rate may be increased during the life of the contract "to
such increase within the rate allowed by law, as the Board of Directors of the
MORTGAGEE may prescribe" (Exh. 5-e-1) or "within the limits allowed by law"
(Promissory Notes, Exs. 2, 3, and 4), no law was ever passed in July to
November 1984 increasing the interest rates on loans or renewals thereof to
32%, 41% and 48% (per annum), and no documents were executed and
delivered by the debtor to effectuate the increases. The Court of Appeals
observed.

". . . We focus Our attention first of all on the agreement between the parties

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as embodied in the following instruments, to wit: (1) Exhibit 1 Credit
Agreement dated July 1, 1982; (2) Exhibit 2 Promissory Note dated July 5,
1982; (3) Exhibit (3) Promissory Note dated January 3, 1983; (4) Exhibit
4 Promissory Note, dated December 13, 1983; and (5) Exhibit 5 Real
Estate Mortgage contract dated July 1, 1982.

"Exhibit 1 states in its portion marked Exhibit 1-g-1:

9 .06 Other Conditions. The Borrowers hereby agree to be bound by the

rules and regulations of the Central Bank and the current and general
policies of the Bank and those which the Bank may adopt in the future, which
may have relation to or in any way affect the Line, which rules, regulations
and policies are incorporated herein by reference as if set forth herein in full.
Promptly upon receipt of a written request from the Bank, the Borrowers
shall execute and deliver such documents and instruments, in form and
substance satisfactory to the Bank, in order to effectuate or otherwise
comply with such rules, regulations and policies.

"Exhibits 2, 3, and 4 in their portions respectively marked Exhibits 2-B,

3-B, and 4-B uniformly authorize the defendant bank to increase the
stipulated interest rate of 18% per annum within the limits allowed by law at
any time depending on whatever policy it may adopt in the future: Provided,
that, the interest rate on this note shall be correspondingly decreased in the
event that the applicable maximum interest rate is reduced by law or by the
Monetary Board.

"Exhibit 5 in its portion marked Exhibit 5-e-1 stipulates:

(k) INCREASE OF INTEREST RATE

The rate of interest charged on the obligation secured by this mortgage as

well as the interest on the amount which may have been advanced by the
MORTGAGEE, in accordance with the provisions hereof, shall be subject
during the life of this contract to such an increase within the rate allowed by
law, as the Board of Directors of the MORTGAGEE may prescribe for its
debtors.

"Clearly, then, the agreement between the parties authorized the defendant
bank to increase the interest rate beyond the original rate of 18% per annum
but within the limits allowed by law or within the rate allowed by law, it
being declared the obligation of the plaintiff as borrower to execute and
deliver the corresponding documents and instruments to effectuate the
increase." (pp. 11-12, Rollo.)

In Banco Filipino Savings and Mortgage Bank v. Navarro, 15 SCRA 346

(1987), this Court disauthorized the bank from raising the interest rate on

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the borrowers loan from 12% to 17% despite an escalation clause in the loan
agreement signed by the debtors authorizing Banco Filipino "to
correspondingly increase the interest rate stipulated in this contract without
advance notice to me/us in the event a law should be enacted increasing the
lawful rates of interest that may be charged on this particular kind of loan."
(Emphasis supplied.)

In the Banco Filipino case, the bank relied on Section 3 of CB Circular No. 494
dated July 1, 1976 (72 O.G. No. 3, p. 676-J) which provided that "the
maximum rate of interest, including commissions premiums, fees and other
charges on loans with a maturity of more than 730 days by banking
institution . . . shall be 19%."cralaw virtua1aw library

This Court disallowed the increase for the simple reason that said "Circular
No. 494, although it has the effect of law is not a law." Speaking through
Mme. Justice Ameurfina M. Herrera, this Court held:

"It is now clear that from March 17, 1980, escalation clauses to be valid
should specifically provide: (1) that there can be an increase in interest if
increased by law or by the Monetary Board; and (2) in order for such
stipulation to be valid, it must include a provision for reduction of the
stipulated interest in the event that the applicable maximum rate of interest
is reduced by law or by the Monetary Board." p. 111, Rollo.).

In the present case, the PNB relied on its own Board Resolution No. 681 (Exh.
10), PNB Circular No. 40-79-84 (Exh. 13), and PNB Circular No. 40-129-84
(Exh. 15), but those resolution and circulars are neither laws nor resolutions
of the Monetary Board.

CB Circular No. 905, Series of 1982 (Exh. 11) removed the Usury Law ceiling
on interest rates

". . . increases in interest rates are not subject to any ceiling prescribed by
the Usury Law."cralaw virtua1aw library

but it did not authorize the PNB, or any bank for that matter, to unilaterally
and successively increase the agreed interest rates from 18% to 48% within
a span of four (4) months, in violation of PD. 116 which limits such changes
to "once every twelve months."cralaw virtua1aw library

Besides violating PD. 116, the unilateral action of the PNB in increasing the
interest rate on the private respondents loan, violated the mutuality of
contracts ordained in Article 1308 of the Civil Code:

"ART. 1308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them."cralaw virtua1aw library

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In order that obligations arising from contracts may have the force of law
between the parties, there must be mutuality between the parties based on
their essential equality. A contract containing a condition which makes its
fulfillment dependent exclusively upon the uncontrolled will of one of the
contracting parties, is void (Garcia v. Rita Legarda, Inc., 21 SCRA 555).
Hence, even assuming that the P1.8 million loan agreement between the
PNB and the private respondent gave the PNB a license (although in fact
there was none) to increase the interest rate at will during the term of the
loan, that license would have been null and void for being violative of the
principle of mutuality essential in contracts. It would have invested the loan
agreement with the character of a contract of adhesion, where the parties do
not bargain on equal footing, the weaker partys (the debtor) participation
being reduced to the alternative "to take it or leave it" (Qua v. Law Union &
Rock Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for the
weaker party whom the courts of justice must protect against abuse and
imposition.

PNBS successive increases of the interest rate on the private respondents

loan, over the latters protest, were arbitrary as they violated an express
provision of the Credit Agreement (Exh. 1) Section 9.01 that its terms "may
be amended only by an instrument in writing signed by the party to be
bound as burdened by such amendment." The increases imposed by PNB
also contravene Art. 1956 of the Civil Code which provides that "no interest
shall be due unless it has been expressly stipulated in writing."cralaw
virtua1aw library

The debtor herein never agreed in writing to pay the interest increases fixed
by the PNB beyond 24% per annum, hence, he is not bound to pay a higher
rate than that.

That an increase in the interest rate from 18% to 48% within a period of four
(4) months is excessive, as found by the Court of Appeals, is indisputable.

WHEREFORE, finding no reversible error in the decision of the Court of

Appeals in CA-G.R. CV No. 09791, the Court resolved to deny the petition for
review for lack of merit, with costs against the petitioner.

SO ORDERED.

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 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. 97412 July 12, 1994

EASTERN SHIPPING LINES, INC., petitioner,

vs.
HON. COURT OF APPEALS AND MERCANTILE INSURANCE COMPANY,
INC., respondents.

Alojada & Garcia and Jimenea, Dala & Zaragoza for petitoner.

Zapa Law Office for private respondent.

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VITUG, J.:

The issues, albeit not completely novel, are: (a) whether or not a claim for
damage sustained on a shipment of goods can be a solidary, or joint and
several, liability of the common carrier, the arrastre operator and the
customs broker; (b) whether the payment of legal interest on an award for
loss or damage is to be computed from the time the complaint is filed or
from the date the decision appealed from is rendered; and (c) whether the
applicable rate of interest, referred to above, is twelve percent (12%) or six
percent (6%).

The findings of the court a quo, adopted by the Court of Appeals, on the
antecedent and undisputed facts that have led to the controversy are
hereunder reproduced:

This is an action against defendants shipping company, arrastre

operator and broker-forwarder for damages sustained by a
shipment while in defendants' custody, filed by the insurer-
subrogee who paid the consignee the value of such
losses/damages.

On December 4, 1981, two fiber drums of riboflavin were shipped

from Yokohama, Japan for delivery vessel "SS EASTERN COMET"
owned by defendant Eastern Shipping Lines under Bill of Lading
No. YMA-8 (Exh. B). The shipment was insured under plaintiff's
Marine Insurance Policy No. 81/01177 for P36,382,466.38.

Upon arrival of the shipment in Manila on December 12, 1981, it

was discharged unto the custody of defendant Metro Port
Service, Inc. The latter excepted to one drum, said to be in bad
order, which damage was unknown to plaintiff.

On January 7, 1982 defendant Allied Brokerage Corporation

received the shipment from defendant Metro Port Service, Inc.,
one drum opened and without seal (per "Request for Bad Order
Survey." Exh. D).

On January 8 and 14, 1982, defendant Allied Brokerage

Corporation made deliveries of the shipment to the consignee's
warehouse. The latter excepted to one drum which contained
spillages, while the rest of the contents was adulterated/fake (per
"Bad Order Waybill" No. 10649, Exh. E).

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 Plaintiff contended that due to the losses/damage sustained by
said drum, the consignee suffered losses totaling P19,032.95,
due to the fault and negligence of defendants. Claims were
presented against defendants who failed and refused to pay the
same (Exhs. H, I, J, K, L).

As a consequence of the losses sustained, plaintiff was

compelled to pay the consignee P19,032.95 under the
aforestated marine insurance policy, so that it became
subrogated to all the rights of action of said consignee against
defendants (per "Form of Subrogation", "Release" and
Philbanking check, Exhs. M, N, and O). (pp. 85-86, Rollo.)

There were, to be sure, other factual issues that confronted both courts.
Here, the appellate court said:

Defendants filed their respective answers, traversing the

material allegations of the complaint contending that: As for
defendant Eastern Shipping it alleged that the shipment was
discharged in good order from the vessel unto the custody of
Metro Port Service so that any damage/losses incurred after the
shipment was incurred after the shipment was turned over to the
latter, is no longer its liability (p. 17, Record); Metroport averred
that although subject shipment was discharged unto its custody,
portion of the same was already in bad order (p. 11, Record);
Allied Brokerage alleged that plaintiff has no cause of action
against it, not having negligent or at fault for the shipment was
already in damage and bad order condition when received by it,
but nonetheless, it still exercised extra ordinary care and
diligence in the handling/delivery of the cargo to consignee in
the same condition shipment was received by it.

From the evidence the court found the following:

The issues are:

1. Whether or not the shipment sustained

losses/damages;

2. Whether or not these losses/damages were

sustained while in the custody of defendants (in
whose respective custody, if determinable);

3. Whether or not defendant(s) should be held liable

for the losses/damages (see plaintiff's pre-Trial Brief,

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Records, p. 34; Allied's pre-Trial Brief, adopting
plaintiff's Records, p. 38).

As to the first issue, there can be no doubt that the

shipment sustained losses/damages. The two drums
were shipped in good order and condition, as clearly
shown by the Bill of Lading and Commercial Invoice
which do not indicate any damages drum that was
shipped (Exhs. B and C). But when on December 12,
1981 the shipment was delivered to defendant Metro
Port Service, Inc., it excepted to one drum in bad
order.

Correspondingly, as to the second issue, it follows

that the losses/damages were sustained while in the
respective and/or successive custody and possession
of defendants carrier (Eastern), arrastre operator
(Metro Port) and broker (Allied Brokerage). This
becomes evident when the Marine Cargo Survey
Report (Exh. G), with its "Additional Survey Notes",
are considered. In the latter notes, it is stated that
when the shipment was "landed on vessel" to dock of
Pier # 15, South Harbor, Manila on December 12,
1981, it was observed that "one (1) fiber drum (was)
in damaged condition, covered by the vessel's
Agent's Bad Order Tally Sheet No. 86427." The report
further states that when defendant Allied Brokerage
withdrew the shipment from defendant arrastre
operator's custody on January 7, 1982, one drum was
found opened without seal, cello bag partly torn but
contents intact. Net unrecovered spillages was
15 kgs. The report went on to state that when the
drums reached the consignee, one drum was found
with adulterated/faked contents. It is obvious,
therefore, that these losses/damages occurred before
the shipment reached the consignee while under the
successive custodies of defendants. Under Art. 1737
of the New Civil Code, the common carrier's duty to
observe extraordinary diligence in the vigilance of
goods remains in full force and effect even if the
goods are temporarily unloaded and stored in transit
in the warehouse of the carrier at the place of
destination, until the consignee has been advised
and has had reasonable opportunity to remove or
dispose of the goods (Art. 1738, NCC). Defendant
Eastern Shipping's own exhibit, the "Turn-Over

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 Survey of Bad Order Cargoes" (Exhs. 3-Eastern)
states that on December 12, 1981 one drum was
found "open".

and thus held:

WHEREFORE, PREMISES CONSIDERED, judgment is

hereby rendered:

A. Ordering defendants to pay plaintiff, jointly and severally:

1. The amount of P19,032.95, with the present legal

interest of 12% per annum from October 1, 1982, the
date of filing of this complaints, until fully paid (the
liability of defendant Eastern Shipping, Inc. shall not
exceed US$500 per case or the CIF value of the loss,
whichever is lesser, while the liability of defendant
Metro Port Service, Inc. shall be to the extent of the
actual invoice value of each package, crate box or
container in no case to exceed P5,000.00 each,
pursuant to Section 6.01 of the Management
Contract);

2. P3,000.00 as attorney's fees, and

3. Costs.

B. Dismissing the counterclaims and

crossclaim of defendant/cross-claimant
Allied Brokerage Corporation.

SO ORDERED. (p. 207, Record).

Dissatisfied, defendant's recourse to US.

The appeal is devoid of merit.

After a careful scrutiny of the evidence on record. We find that

the conclusion drawn therefrom is correct. As there is sufficient
evidence that the shipment sustained damage while in the
successive possession of appellants, and therefore they are liable
to the appellee, as subrogee for the amount it paid to the
consignee. (pp. 87-89, Rollo.)

The Court of Appeals thus affirmed in toto the judgment of the court
a quo.

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In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes
error and grave abuse of discretion on the part of the appellate court when

I. IT HELD PETITIONER CARRIER JOINTLY AND SEVERALLY LIABLE

WITH THE ARRASTRE OPERATOR AND CUSTOMS BROKER FOR
THE CLAIM OF PRIVATE RESPONDENT AS GRANTED IN THE
QUESTIONED DECISION;

II. IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF

PRIVATE RESPONDENT SHOULD COMMENCE FROM THE DATE OF
THE FILING OF THE COMPLAINT AT THE RATE OF TWELVE
PERCENT PER ANNUM INSTEAD OF FROM THE DATE OF THE
DECISION OF THE TRIAL COURT AND ONLY AT THE RATE OF SIX
PERCENT PER ANNUM, PRIVATE RESPONDENT'S CLAIM BEING
INDISPUTABLY UNLIQUIDATED.

The petition is, in part, granted.

In this decision, we have begun by saying that the questions raised by

petitioner carrier are not all that novel. Indeed, we do have a fairly good
number of previous decisions this Court can merely tack to.

The common carrier's duty to observe the requisite diligence in the shipment
of goods lasts from the time the articles are surrendered to or
unconditionally placed in the possession of, and received by, the carrier for
transportation until delivered to, or until the lapse of a reasonable time for
their acceptance by, the person entitled to receive them (Arts. 1736-1738,
Civil Code; Ganzon vs. Court of Appeals, 161 SCRA 646; Kui Bai vs. Dollar
Steamship Lines, 52 Phil. 863). When the goods shipped either are lost or
arrive in damaged condition, a presumption arises against the carrier of its
failure to observe that diligence, and there need not be an express finding of
negligence to hold it liable (Art. 1735, Civil Code; Philippine National
Railways vs. Court of Appeals, 139 SCRA 87; Metro Port Service vs. Court of
Appeals, 131 SCRA 365). There are, of course, exceptional cases when such
presumption of fault is not observed but these cases, enumerated in Article
1734 1 of the Civil Code, are exclusive, not one of which can be applied to
this case.

The question of charging both the carrier and the arrastre operator with the
obligation of properly delivering the goods to the consignee has, too, been
passed upon by the Court. In Fireman's Fund Insurance vs. Metro Port
Services (182 SCRA 455), we have explained, in holding the carrier and the
arrastre operator liable in solidum,thus:

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 The legal relationship between the consignee and the arrastre
operator is akin to that of a depositor and warehouseman (Lua
Kian v. Manila Railroad Co., 19 SCRA 5 [1967]. The relationship
between the consignee and the common carrier is similar to that
of the consignee and the arrastre operator (Northern Motors, Inc.
v. Prince Line, et al., 107 Phil. 253 [1960]). Since it is the duty of
the ARRASTRE to take good care of the goods that are in its
custody and to deliver them in good condition to the consignee,
such responsibility also devolves upon the CARRIER. Both the
ARRASTRE and the CARRIER are therefore charged with the
obligation to deliver the goods in good condition to the
consignee.

We do not, of course, imply by the above pronouncement that the arrastre

operator and the customs broker are themselves always and necessarily
liable solidarily with the carrier, or vice-versa, nor that attendant facts in a
given case may not vary the rule. The instant petition has been brought
solely by Eastern Shipping Lines, which, being the carrier and not having
been able to rebut the presumption of fault, is, in any event, to be held liable
in this particular case. A factual finding of both the court a quo and the
appellate court, we take note, is that "there is sufficient evidence that the
shipment sustained damage while in the successive possession of
appellants" (the herein petitioner among them). Accordingly, the liability
imposed on Eastern Shipping Lines, Inc., the sole petitioner in this case, is
inevitable regardless of whether there are others solidarily liable with it.

It is over the issue of legal interest adjudged by the appellate court that
deserves more than just a passing remark.

Let us first see a chronological recitation of the major rulings of this Court:

The early case of Malayan Insurance Co., Inc., vs. Manila Port
Service, 2 decided 3 on 15 May 1969, involved a suit for recovery of money
arising out of short deliveries and pilferage of goods. In this case, appellee
Malayan Insurance (the plaintiff in the lower court) averred in its complaint
that the total amount of its claim for the value of the undelivered goods
amounted to P3,947.20. This demand, however, was neither established in
its totality nor definitely ascertained. In the stipulation of facts later entered
into by the parties, in lieu of proof, the amount of P1,447.51 was agreed
upon. The trial court rendered judgment ordering the appellants (defendants)
Manila Port Service and Manila Railroad Company to pay appellee Malayan
Insurance the sum of P1,447.51 with legal interest thereon from the date the
complaint was filed on 28 December 1962 until full payment thereof. The
appellants then assailed, inter alia, the award of legal interest. In sustaining
the appellants, this Court ruled:

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 Interest upon an obligation which calls for the payment of
money, absent a stipulation, is the legal rate. Such interest
normally is allowable from the date of demand, judicial or
extrajudicial. The trial court opted for judicial demand as the
starting point.

But then upon the provisions of Article 2213 of the Civil Code,
interest "cannot be recovered upon unliquidated claims or
damages, except when the demand can be established with
reasonable certainty." And as was held by this Court in Rivera
vs. Perez, 4 L-6998, February 29, 1956, if the suit were for
damages, "unliquidated and not known until definitely
ascertained, assessed and determined by the courts after proof
(Montilla c. Corporacion de P.P. Agustinos, 25 Phil. 447; Lichauco
v. Guzman,
38 Phil. 302)," then, interest "should be from the date of the
decision." (Emphasis supplied)

The case of Reformina vs. Tomol, 5 rendered on 11 October 1985, was for
"Recovery of Damages for Injury to Person and Loss of Property." After trial,
the lower court decreed:

WHEREFORE, judgment is hereby rendered in favor of the

plaintiffs and third party defendants and against the defendants
and third party plaintiffs as follows:

Ordering defendants and third party plaintiffs Shell and Michael,

Incorporated to pay jointly and severally the following persons:

xxx xxx xxx

(g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum

of P131,084.00 which is the value of the boat F B Pacita III
together with its accessories, fishing gear and equipment minus
P80,000.00 which is the value of the insurance recovered and the
amount of P10,000.00 a month as the estimated monthly loss
suffered by them as a result of the fire of May 6, 1969 up to the
time they are actually paid or already the total sum of
P370,000.00 as of June 4, 1972 with legal interest from the filing
of the complaint until paid and to pay attorney's fees of
P5,000.00 with costs against defendants and third party
plaintiffs. (Emphasis supplied.)

On appeal to the Court of Appeals, the latter modified the amount of

damages awarded but sustained the trial court in adjudging legal
interest from the filing of the complaint until fully paid. When the

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 appellate court's decision became final, the case was remanded to the
lower court for execution, and this was when the trial court issued its
assailed resolution which applied the 6% interest per annum prescribed
in Article 2209 of the Civil Code. In their petition for review
on certiorari, the petitioners contended that Central Bank Circular
No. 416, providing thus

By virtue of the authority granted to it under Section 1 of Act

2655, as amended, Monetary Board in its Resolution No. 1622
dated July 29, 1974, has prescribed that the rate of interest for
the loan, or forbearance of any money, goods, or credits and the
rate allowed in judgments, in the absence of express contract as
to such rate of interest, shall be twelve (12%) percent per
annum. This Circular shall take effect immediately. (Emphasis
found in the text)

should have, instead, been applied. This Court 6 ruled:

The judgments spoken of and referred to are judgments in

litigations involving loans or forbearance of any money, goods or
credits. Any other kind of monetary judgment which has nothing
to do with, nor involving loans or forbearance of any money,
goods or credits does not fall within the coverage of the said law
for it is not within the ambit of the authority granted to the
Central Bank.

xxx xxx xxx

Coming to the case at bar, the decision herein sought to be

executed is one rendered in an Action for Damages for injury to
persons and loss of property and does not involve any loan,
much less forbearances of any money, goods or credits. As
correctly argued by the private respondents, the law applicable
to the said case is Article 2209 of the New Civil Code which reads

Art. 2209. If the obligation consists in the payment

of a sum of money, and the debtor incurs in delay,
the indemnity for damages, there being no
stipulation to the contrary, shall be the payment of
interest agreed upon, and in the absence of
stipulation, the legal interest which is six percent per
annum.

The above rule was reiterated in Philippine Rabbit Bus Lines, Inc.,
v. Cruz, 7 promulgated on 28 July 1986. The case was for damages

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occasioned by an injury to person and loss of property. The trial court
awarded private respondent Pedro Manabat actual and compensatory
damages in the amount of P72,500.00 with legal interest thereon from the
filing of the complaint until fully paid. Relying on the Reformina
v. Tomol case, this Court 8 modified the interest award from 12% to 6%
interest per annum but sustained the time computation thereof, i.e., from
the filing of the complaint until fully paid.

In Nakpil and Sons vs. Court of Appeals, 9 the trial court, in an action for the
recovery of damages arising from the collapse of a building, ordered,
inter alia, the "defendant United Construction Co., Inc. (one of the
petitioners)
. . . to pay the plaintiff, . . . , the sum of P989,335.68 with interest at the
legal rate from November 29, 1968, the date of the filing of the complaint
until full payment . . . ." Save from the modification of the amount granted by
the lower court, the Court of Appeals sustained the trial court's decision.
When taken to this Court for review, the case, on 03 October 1986, was
decided, thus:

WHEREFORE, the decision appealed from is hereby MODIFIED

and considering the special and environmental circumstances of
this case, we deem it reasonable to render a decision imposing,
as We do hereby impose, upon the defendant and the third-party
defendants (with the exception of Roman Ozaeta) a solidary (Art.
1723, Civil Code, Supra.
p. 10) indemnity in favor of the Philippine Bar Association of FIVE
MILLION (P5,000,000.00) Pesos to cover all damages (with the
exception to attorney's fees) occasioned by the loss of the
building (including interest charges and lost rentals) and an
additional ONE HUNDRED THOUSAND (P100,000.00) Pesos as
and for attorney's fees, the total sum being payable upon the
finality of this decision. Upon failure to pay on such finality,
twelve (12%) per cent interest per annum shall be imposed upon
aforementioned amounts from finality until paid. Solidary costs
against the defendant and third-party defendants (Except Roman
Ozaeta). (Emphasis supplied)

A motion for reconsideration was filed by United Construction,

contending that "the interest of twelve (12%) per cent per
annum imposed on the total amount of the monetary award was in
contravention of law." The Court 10 ruled out the applicability of the
Reformina and Philippine Rabbit Bus Lines cases and, in its resolution
of 15 April 1988, it explained:

There should be no dispute that the imposition of 12% interest

pursuant to Central Bank Circular No. 416 . . . is applicable only

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 in the following: (1) loans; (2) forbearance of any money, goods
or credit; and
(3) rate allowed in judgments (judgments spoken of refer to
judgments involving loans or forbearance of any money, goods
or credits. (Philippine Rabbit Bus Lines Inc. v. Cruz, 143 SCRA
160-161 [1986]; Reformina v. Tomol, Jr., 139 SCRA 260 [1985]). It
is true that in the instant case, there is neither a loan or a
forbearance, but then no interest is actually imposed provided
the sums referred to in the judgment are paid upon the finality of
the judgment. It is delay in the payment of such final judgment,
that will cause the imposition of the interest.

It will be noted that in the cases already adverted to, the rate of
interest is imposed on the total sum, from the filing of the
complaint until paid; in other words, as part of the judgment for
damages. Clearly, they are not applicable to the instant case.
(Emphasis supplied.)

The subsequent case of American Express International, Inc.,

vs. Intermediate Appellate Court 11 was a petition for review
on certiorari from the decision, dated 27 February 1985, of the then
Intermediate Appellate Court reducing the amount of moral and exemplary
damages awarded by the trial court, to P240,000.00 and P100,000.00,
respectively, and its resolution, dated 29 April 1985, restoring the amount of
damages awarded by the trial court, i.e., P2,000,000.00 as moral damages
and P400,000.00 as exemplary damages with interest thereon at 12% per
annum from notice of judgment, plus costs of suit. In a decision of 09
November 1988, this Court, while recognizing the right of the private
respondent to recover damages, held the award, however, for moral
damages by the trial court, later sustained by the IAC, to be inconceivably
large. The Court 12 thus set aside the decision of the appellate court and
rendered a new one, "ordering the petitioner to pay private respondent the
sum of One Hundred Thousand (P100,000.00) Pesos as moral damages, with
six (6%) percent interest thereon computed from the finality of this decision
until paid. (Emphasis supplied)

Reformina came into fore again in the 21 February 1989 case of Florendo
v. Ruiz 13 which arose from a breach of employment contract. For having
been illegally dismissed, the petitioner was awarded by the trial court moral
and exemplary damages without, however, providing any legal interest
thereon. When the decision was appealed to the Court of Appeals, the latter
held:

WHEREFORE, except as modified hereinabove the decision of the

CFI of Negros Oriental dated October 31, 1972 is affirmed in all
respects, with the modification that defendants-appellants,

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 except defendant-appellant Merton Munn, are ordered to pay,
jointly and severally, the amounts stated in the dispositive
portion of the decision, including the sum of P1,400.00 in
concept of compensatory damages, with interest at the legal
rate from the date of the filing of the complaint until fully
paid(Emphasis supplied.)

The petition for review to this Court was denied. The records were
thereupon transmitted to the trial court, and an entry of judgment was
made. The writ of execution issued by the trial court directed that only
compensatory damages should earn interest at 6% per annum from
the date of the filing of the complaint. Ascribing grave abuse of
discretion on the part of the trial judge, a petition for certiorari assailed
the said order. This Court said:

. . . , it is to be noted that the Court of Appeals ordered the

payment of interest "at the legal rate" from the time of the filing
of the complaint. . . Said circular [Central Bank Circular No. 416]
does not apply to actions based on a breach of employment
contract like the case at bar. (Emphasis supplied)

The Court reiterated that the 6% interest per annum on the damages
should be computed from the time the complaint was filed until the
amount is fully paid.

Quite recently, the Court had another occasion to rule on the

matter. National Power Corporation vs. Angas, 14decided on 08 May 1992,
involved the expropriation of certain parcels of land. After conducting a
hearing on the complaints for eminent domain, the trial court ordered the
petitioner to pay the private respondents certain sums of money as just
compensation for their lands so expropriated "with legal interest
thereon . . . until fully paid." Again, in applying the 6% legal interest per
annum under the Civil Code, the Court 15 declared:

. . . , (T)he transaction involved is clearly not a loan or

forbearance of money, goods or credits but expropriation of
certain parcels of land for a public purpose, the payment of
which is without stipulation regarding interest, and the interest
adjudged by the trial court is in the nature of indemnity for
damages. The legal interest required to be paid on the amount of
just compensation for the properties expropriated is manifestly in
the form of indemnity for damages for the delay in the payment
thereof. Therefore, since the kind of interest involved in the joint
judgment of the lower court sought to be enforced in this case is
interest by way of damages, and not by way of earnings from
loans, etc. Art. 2209 of the Civil Code shall apply.

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Concededly, there have been seeming variances in the above holdings. The
cases can perhaps be classified into two groups according to the similarity of
the issues involved and the corresponding rulings rendered by the court. The
"first group" would consist of the cases of Reformina v. Tomol (1985),
Philippine Rabbit Bus Lines v. Cruz(1986), Florendo v. Ruiz (1989)
and National Power Corporation v. Angas (1992). In the "second group"
would be Malayan Insurance Company v.Manila Port Service (1969), Nakpil
and Sons v. Court of Appeals (1988), and American Express International
v.Intermediate Appellate Court (1988).

In the "first group", the basic issue focuses on the application of either the
6% (under the Civil Code) or 12% (under the Central Bank Circular)
interest per annum. It is easily discernible in these cases that there has been
a consistent holding that the Central Bank Circular imposing the 12%
interest per annum applies only to loans or forbearance 16 of money, goods
or credits, as well as to judgments involving such loan or forbearance of
money, goods or credits, and that the 6% interest under the Civil Code
governs when the transaction involves the payment of indemnities in the
concept of damage arising from the breach or a delay in the performance of
obligations in general. Observe, too, that in these cases, a common time
frame in the computation of the 6% interest per annum has been
applied, i.e., from the time the complaint is filed until the adjudged amount is
fully paid.

The "second group", did not alter the pronounced rule on the application of
the 6% or 12% interest per annum, 17depending on whether or not the
amount involved is a loan or forbearance, on the one hand, or one of
indemnity for damage, on the other hand. Unlike, however, the "first group"
which remained consistent in holding that the running of the legal interest
should be from the time of the filing of the complaint until fully paid, the
"second group" varied on the commencement of the running of the legal
interest.

Malayan held that the amount awarded should bear legal interest from the
date of the decision of the court a quo,explaining that "if the suit were for
damages, 'unliquidated and not known until definitely ascertained, assessed
and determined by the courts after proof,' then, interest 'should be from the
date of the decision.'" American Express International v. IAC, introduced a
different time frame for reckoning the 6% interest by ordering it to be
"computed from the finality of (the) decision until paid." The Nakpil and Sons
case ruled that 12% interest per annum should be imposed from the finality
of the decision until the judgment amount is paid.

The ostensible discord is not difficult to explain. The factual circumstances

may have called for different applications, guided by the rule that the courts
are vested with discretion, depending on the equities of each case, on the

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award of interest. Nonetheless, it may not be unwise, by way of clarification
and reconciliation, to suggest the following rules of thumb for future
guidance.

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-

contracts, delicts or quasi-delicts 18 is breached, the contravenor can be held
liable for damages. 19 The provisions under Title XVIII on "Damages" of the
Civil Code govern in determining the measure of recoverable damages. 20

II. With regard particularly to an award of interest in the concept of actual

and compensatory damages, the rate of interest, as well as the accrual
thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum

of money, i.e., a loan or forbearance of money, the interest due should be
that which may have been stipulated in writing. 21 Furthermore, the interest
due shall itself earn legal interest from the time it is judicially
demanded. 22 In the absence of stipulation, the rate of interest shall be
12% per annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of Article 1169 23 of
the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is

breached, an interest on the amount of damages awarded may be imposed
at the discretion of the court 24 at the rate of 6% per annum. 25 No interest,
however, shall be adjudged on unliquidated claims or damages except when
or until the demand can be established with reasonable
certainty. 26 Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty
cannot be so reasonably established at the time the demand is made, the
interest shall begin to run only from the date the judgment of the court is
made (at which time the quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final
and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance of credit.

WHEREFORE, the petition is partly GRANTED. The appealed decision is

AFFIRMED with the MODIFICATION that the legal interest to be paid is SIX
PERCENT (6%) on the amount due computed from the decision, dated
03 February 1988, of the court a quo. A TWELVE PERCENT (12%) interest, in

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 lieu of SIX PERCENT (6%), shall be imposed on such amount upon finality of
this decision until the payment thereof.

SO ORDERED.

Digest

FACTS
Two fiber drums were shipped owned by Eastern Shipping from Japan.
The shipment as insured with a marine policy. Upon arrival in Manila unto the
custody of metro Port Service, which excepted to one drum, said to be in bad
order and which damage was unknown the Mercantile Insurance Company.
Allied Brokerage Corporation received the shipment from Metro, one drum
opened and without seal. Allied delivered the shipment to the consignees
warehouse. The latter excepted to one drum which contained spillages while
the rest of the contents was adulterated/fake. As consequence of the loss,
the insurance company paid the consignee, so that it became subrogated to
all the rights of action of consignee against the defendants Eastern Shipping,
Metro Port and Allied Brokerage. The insurance company filed before the trial
court. The trial court ruled in favor of plaintiff an ordered defendants to pay
the former with present legal interest of 12% per annum from the date of the
filing of the complaint. On appeal by defendants, the appellate court denied
the same and affirmed in toto the decision of the trial court.

ISSUE
(1) Whether the applicable rate of legal interest is 12% or 6%.

(2) Whether the payment of legal interest on the award for loss or damage is
to be computed from the time the complaint is filed from the date the
decision appealed from is rendered.

HELD
(1) The Court held that the legal interest is 6% computed from
the decision of the court a quo. When an obligation, not constituting a loan or
forbearance of money, is breached, an interest on the amount of damaes
awarded may be imposed at the discretion of the court at the rate of 6% per
annum. No interest shall be adjudged on unliquidated claims or damages
except when or until the demand can be established with reasonable
certainty.

When the judgment of the court awarding a sum of money becomes

final and executor, the rate of legal interest shall be 12% per annum from
such finality until satisfaction, this interim period being deemed to be by
then an equivalent to a forbearance of money.

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 The interest due shall be 12% PA to be computed fro default, J or
EJD.

(2) From the date the judgment is made. Where the demand is
established with reasonable certainty, the interest shall begin to run from the
time the claim is made judicially or EJ but when such certainty cannot be so
reasonably established at the time the demand is made, the interest shll
begin to run only from the date of judgment of the court is made.

(3) The Court held that it should be computed from the decision rendered by
the court a quo.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 128721 March 9, 1999

CRISMINA GARMENTS, INC., petitioner,

vs.
COURT OF APPEALS and NORMA SIAPNO, respondent.

PANGANIBAN, J.:

Interest shall be computed in accordance with the stipulation of the parties.

In the absence of such agreement, the rate shall be twelve percent (12%)

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per annum when the obligation arises out of a loan or a forbearance of
money, goods or credits. In other cases, it shall be six percent (6%).

The Case

On May 5, 1997, Crismina Garments, Inc. filed a Petition for Review

on Certiorari 1 assailing the December 28, 1995 Decision 2 and March 17,
1997 Resolution 3 of the Court of Appeals in CA-GR CV No. 28973. On
September 24, 1997, this Court issued a minute Resolution 4 denying the
petition "for its failure to show any reversible error on the part of the Court of
Appeals."

Petitioner then filed a Motion for Reconsideration, 5 arguing that the interest
rate should be computed at 6 percent per annum as provided under Article
2209 of the Civil Code, not 12 percent per annum as prescribed under
Circular No. 416 of the Central Bank of the Philippines. Acting on the Motion,
the Court reinstated 6 the Petition, but only with respect to the issue of which
interest rate should be applied. 7

The Facts

As the facts of the case are no longer disputed, we are reproducing

hereunder the findings of the appellate court:

During the period from February 1979 to April 1979, the [herein
petitioner], which was engaged in the export of girls' denim
pants, contracted the services of the [respondent], the sole
proprietress of the D'Wilmar Garments, for the sewing of 20,762
pieces of assorted girls['] denims supplied by the [petitioner]
under Purchase Orders Nos. 1404, dated February 15, 1979,
0430 dated February 1, 1979, 1453 dated April 30, 1979. The
[petitioner] was obliged to pay the [respondent], for her services,
in the total amount of P76,410.00. The [respondent] sew[ed] the
materials and delivered the same to the [petitioner] which
acknowledged the same per Delivery Receipt Nos. 0030 dated
February 9, 1979; 0032, dated February 15, 1979; 0033 dated
February 21, 1979; 0034, dated February 24, 1979; 0036, dated
February 20, 1979; 0038, dated March 11, 1979[;] 0039, dated
March 24, 1979; 0040 dated March 27, 1979; 0041, dated March
29, 1979; 0044, dated Marc[h] 25, 1979; 0101 dated May 18,
1979[;] 0037, dated March 10, 1979 and 0042 dated March 10,
1979, in good order condition. At first, the [respondent] was told
that the sewing of some of the pants w[as] defective. She offered
to take delivery of the defective pants. However, she was later
told by [petitioner]'s representative that the goods were already
good. She was told to just return for her check of P76,410.00.

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 However, the [petitioner] failed to pay her the aforesaid amount.
This prompted her to hire the services of counsel who, on
November 12, 1979, wrote a letter to the [petitioner] demanding
payment of the aforesaid amount within ten (10) days from
receipt thereof. On February 7, 1990, the [petitioner]'s [v]ice-
[p]resident-[c]omptroller, wrote a letter to [respondent]'s
counsel, averring, inter alia, that the pairs of jeans sewn by her,
numbering 6,164 pairs, were defective and that she was liable to
the [petitioner] for the amount of P49,925.51 which was the
value of the damaged pairs of denim pants and demanded
refund of the aforesaid amount.

On January 8, 1981, the [respondent] filed her complaint against

the [petitioner] with the [trial court] for the collection of the
principal amount of P76,410.00. . . .

xxx xxx xxx

After due proceedings, the [trial court] rendered judgment, on

February 28, 1989, in favor of the [respondent] against the
[petitioner], the dispositive portion of which reads as follows:

WHEREFORE, judgment is hereby rendered in favor of the

plaintiff and against the defendant ordering the latter to pay the
former:

(1) The sum of P76,140.00 with interest thereon at 12% per

annum, to be counted from the filing of this complaint on January
8, 1981, until fully paid;

(2) The sum of P5,000 as attorney[']s fees; and

(3) The costs of this suit;

(4) Defendant's counterclaim is hereby dismissed. 8

The Court of Appeals (CA) affirmed the trial court's ruling, except for the
award of attorney's fees which was deleted. 9 Subsequently, the CA denied
the Motion for Reconsideration. 10

Hence, this recourse to this Court 11

Sole Issue

In light of the Court's Resolution dated April 27, 1998, petitioner submits for
our consideration this sole issue:

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 Whether or not it is proper to impose interest at the rate of
twelve percent (12%) per annum for an obligation that does not
involve a loan or forbearance of money in the absence of
stipulation of the parties. 12

This Court's Ruling

We sustain petitioner's contention that the interest rate should be computed

at six percent (6%) per annum.

Sole Issue: Interest Rate

The controversy revolves around petitioner's payment of the price beyond

the period prescribed in a contract for a piece of work. Article 1589 on the
Civil Code provides that "[t]he vendee [herein petitioner] shall owe interest
for the period between the delivery of the thing and the payment of the price
. . . should he be in default from the time of judicial or extrajudicial demand
for the payment of the price." The only issue now is the applicable rate of
interest for the late payment.

Because the case before us is "an action for the enforcement of an obligation
for payment of money arising from a contract for a piece of
work," 13 petitioner submits that the interest rate should be six percent (6%),
pursuant to Article 2209 of the Civil Code, which states:

If the obligation consists in the payment of money and the

debtor incurs in delay, the indemnity for damages, there being
no stipulation to the contrary, shall be the payment of the
interest agreed upon, and in the absence of stipulation, the legal
interest, which is six per cent per annum." (Emphasis supplied.)

On the other hand, private respondent maintains that the interest rate
should be twelve percent (12 %) per annum, in accordance with Central Bank
(CB) Circular No. 416, which reads:

By virtue of the authority granted to it under Section 1 of Act No.

2655, as amended, otherwise known as the "Usury Law", the
Monetary Board, in its Resolution No. 1622 dated July 29, 1974,
has prescribed that the rate of interest for the loan or
forbearance of any money, goods or credits and the rate allowed
in judgments, in the absence of express contract as to such rate
of interest, shall be twelve per cent (12%) per annum."
(Emphasis supplied.)

She argues that the circular applies, since "the money sought to be
recovered by her is in the form of forbearance." 14

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We agree with the petitioner. In Reformina v. Tomol Jr., 15 this Court stressed
that the interest rate under CB Circular No. 416 applies to (1) loans; (2)
forbearance of money, goods or credits; or (3) a judgment involving a loan or
forbearance of money, goods or credits. Cases beyond the scope of the said
circular are governed by Article 2209 of the Civil Code, 16which considers
interest a form of indemnity for the delay in the performance of an
obligation. 17

In Eastern Shipping Lines, Inc. v. Court of Appeals, 18 the Court gave the
following guidelines for the application of the proper interest rates:

I. When an obligation, regardless of its source, i.e., law,

contracts, quasi-contracts, delicts or quasi-delicts is breached,
the contravenor can be held liable for damages. The provisions
under Title XVIII on "Damages" of the Civil Code govern in
determining the measure of recoverable damages.

II. With regard particularly to an award of interest in the concept

of actual and compensatory damages, the rate of interest, as
well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the

payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself
earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 12% per
annum to be computed from default,i.e., from judicial or
extrajudicial demand under and subject to the provisions of
Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of

money, is breached, an interest on the amount of damages
awarded may be imposed at the discretion of the court at the
rate of 6% per annum. No interest, however, shall be adjudged
on unliquidated claims or damages except when or until the
demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim
is made judicially or extrajudicially (Art. 1169, Civil Code) but
when such certainty cannot be so reasonably established at the
time the demand is made, the interest shall begin to run only
from the date the judgment of the court is made (at which time
the quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of

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 legal interest shall, in any case, be . . . the amount finally
adjudged.

3. When the judgment of the court awarding a sum of money

becomes final and executory, the rate of legal interest, whether
the case falls under paragraph 1 or paragraph 2, above, shall be
12% per annum from such finality until its satisfaction, this
interim period being deemed to be by then an equivalent to
forbearance of credit. 19

In Keng Hua Paper Products Co., Inc. v. CA, 20 we also ruled that the
monetary award shall earn interest at twelve percent (12%) per annum from
the date of finality of the judgment until its satisfaction, regardless of
whether or not the case involves a loan of forbearance of money. The interim
period is deemed to be equivalent to a forbearance of a credit. 21

Because the amount due in this case arose from a contract for a piece of
work, not from a loan or forbearance of money, the legal interest of six
percent (6%) per annum should be applied. Furthermore, since the amount of
the demand could be established with certainty when the Complaint was
filed, the six percent (6%) interest should be computed from the filing of the
said Complaint. But after the judgment becomes final and exuecutory until
the obligation is satisfied, the interest should be reckoned at twelve percent
(%12) per year.

Private respondent maintains that the twelve percent (12%) interest should
be imposed, because the obligation arose from a forbearance of
money. 22 This is erroneous. In Eastern Shipping, 23 the Court observed that a
"forbearance" in the context of the usury law is a "contractual obligation of
lender or creditor to refrain, during a given period of time, from requiring the
borrower or debtor to repay a loan or debt then due and payable." Using this
standard, the obligation in this case was obviously not a forbearance of
money, goods or credit.

WHEREFORE, the appealed Decision is MODIFIED. The rate of interest shall

be six percent (6%) per annum, computed from the time of the filing of the
Complaint in the trial court until the finality of the judgment. If the adjudged
principal and the interest (or any part thereof) remain unpaid thereafter, the
interest rate shall be twelve percent (12%) per annum computed from the
time the judgment becomes final and executory until it is fully satisfied. No
pronouncement as to costs.

SO ORDERED.

Digest

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FACTS:

Petitioner contracted the services of the respondent, to sew for the petitioner
of 20,762 pieces of assorted girls denims to the amount of P76,410.00.

At first, the respondent was told that the sewing of some of the pants was
defective. She offered to take delivery of the defective pants. However, she
was later told by [petitioner]'s representative that the goods were already
good. She was told to just return for her check of P76,410.00. However, the
petitioner failed to pay her the aforesaid amount. This prompted her to hire
the services of counsel who, on November 12, 1979, wrote a letter to the
petitioner demanding payment of the aforesaid amount within ten days from
receipt thereof. On February 7, 1990, the petitioner's vice-president-
comptroller, wrote a letter to respondent's counsel, averring, inter alia, that
the pairs of jeans sewn by her, numbering 6,164 pairs, were defective and
that she was liable to the petitioner for the amount of P49,925.51 which was
the value of the damaged pairs of denim pants and demanded refund of the
aforesaid amount.

ISSUE:

Whether or not it is proper to impose interest at the rate of twelve percent

(12%) per annum for an obligation that does not involve a loan or
forbearance of money in the absence of stipulation of the parties.

HELD:

Because the amount due in this case arose from a contract for
a piece of work, not from a loan or forbearance of money, the legal interest
of six percent (6%) per annum should be applied. Furthermore, since the
amount of the demand could be established with certainty when the
Complaint was filed, the six percent (6%) interest should be computed from
the filing of the said Complaint. But after the judgment becomes final and
executory until the obligation is satisfied, the interest should be reckoned at
twelve percent (12%) per year.

Republic of the Philippines

SUPREME COURT
Manila

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 SECOND DIVISION

G.R. No. L-47180 May 19, 1980

THE PHILIPPINE AMERICAN ACCIDENT INSURANCE COMPANY,

INC., petitioner-appellant,
vs.
THE HON. JOSE P. FLORES, and CONCORDIA G. NAVALTA, respondents-
appellees.

ABAD SANTOS, J.:+.wph!1

Petition to review the Order of the respondent judge dated August 24, 1977.
The facts are simple.

Private respondent was the plaintiff and the petitioner was the defendant in
Civil Case No. 2414 of the Court of First Instance of La Union. On January 22,
1973, the respondent judge rendered judgment in said case, the dispositive
portion of which reads: t.hqw

IN VIEW OF THE FOREGOING, the Court hereby renders judgment

and sentences the defendant to pay Concordia Garcia Navalta
the amount of P75,000.00 with legal interest from October, 1968,
Pl,000.00, as attorney's fees am the cost of suit.

The decision was appealed by the petitioner to the Court of Appeals in CA-
G.R. No. 52675-R but was affirmed on February 7, 1977. On February 24,
1977, the petitioner paid the following amounts to the private
respondent: t.hqw

On the principal P75,000.00

Interest at 6% per annum

from Oct. 1968* to April 30,

1977 P 38,250.00

Attorney's fee P 1,000.00

Total P114,250.00

(*Art. 2209 of the Civil Code provides: "If the obligation consists
in the payment of a sum of money, and the debtor incurs in

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 delay, the indemnity for damages, there being no stipulation to
the contrary, shall be the payment of the interest agreed upon,
and in the absence of stipulation, the legal interest, which is six
per cent per annum." This appears to be the basis for awarding
interest at the legal rate from October, 1968, although the debt
was judicially demanded only on July 6, 1970.)

The petitioner was advised by the respondent and her counsel that the
payment was not in fun satisfaction of the judgment because the former had
to pay compound interest or an additional sum of P10,375.77.

Upon refusal of the petitioner to pay the sum additionally claimed, the
private respondent secure a writ of execution for the same which the former
sought to quash over the opposition of the latter. In resolving the question
the respondent judge issued an Order on August 24, 1977 as follows: t.
hqw

After hearing and consideration of the motion of the plaintiff for

the issuance of an alias writ of execution, and the written
manifestation and opposition filed by the defendant and finding
as it appears that the written schedule of interest computation,
which was submitted, is correct and in order, because compound
interest has been computed from July 6, 1970 when the claim
was judicially demanded, let an alias writ of execution issue to
satisfy accordingly the unpaid balance as demanded.

It is this Order which is the object of this petition and which raises the
question as to whether or not the petitioner is obligated to pay compound
interest under the judgment.

The questioned Order cannot be sustained. The judgment which was sought
to be executed ordered the payment of simple "legal interest" only. It said
nothing about the payment of compound interest. Accordingly, when the
respondent judge ordered the payment of compound interest he went
beyond the confines of his own judgment which had been affirmed by the
Court of Appeals and which had become final. Fundamental is the rule that
execution must conform to that ordained or decreed in the dispositive part of
the decision. Likewise, a court can not, except for clerical errors or omissions,
amend a judgment that has become final. (Jabon, et al. vs. Alo, et al., 91 Phil.
750 [1952]; Robles vs. Timario, et al., 107 Phil. 809 [1960]; Collector of
Internal Revenue vs. Gutierrez, et al., 108 Phil. 215 [1960]; Ablaza vs. Sycip,
et al., 110 Phil., 4 [1960].)

Private respondent invokes Sec. 5 of the Usury Law which reads in part as
follows: "In computing the interest on any obligation, promissory note or
other instrument or contract, compound interest shall not be reckoned,

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except by agreement, or, in default thereof, whenever the debt is judicially
claimed in which last case it shall draw six per centum per annum
interest ..." as well as Art. 2212 of the Civil Code which stipulates: "Interest
due shall earn legal interest from the time it is judicially demanded, although
the obligation may be silent upon this point." Both legal provisions are in
applicable for they contemplate the presence of stipulated or conventional
interest which had accrued when demand was judicially made. (Sunico vs.
Ramirez, 14 Phil. 500 [1909]; Salvador vs. Palencia, 25 Phil. 661 [1913];
Bachrach vs. Golingco, 39 Phil. 912 [1919]; Robinson vs. Sackermann 46 Phil.
539 [1924]; Philippine Engineering Co. vs. Green, 48 Phil. 466 [1925]; and Cu
Unjieng vs. Mabalacat Sugar Co., 54 Phil. 916 [1930].) In this case no interest
had been stipulated by the parties. In other words, there was no accrued
conventional interest which could further earn interest upon judicial demand.

WHEREFORE, the Order dated August 24, 1977, of the respondent judge is
hereby set aside. No special pronouncement as to costs.

SO ORDERED.

Digest

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 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-23559 October 4, 1971

AURELIO G. BRIONES, plaintiff-appellee,

vs.
PRIMITIVO P. CAMMAYO, ET AL., defendants-appellants.

Carlos J. Antiporda for plaintiff-appellee.

Manuel A. Cammayo for defendants-appellants.

DIZON, J.:

On February 22, 1962, Aurelio G. Briones filed an action in the Municipal

Court of Manila against Primitivo, Nicasio, Pedro, Hilario and Artemio, all
surnamed Cammayo, to recover from them, jointly and severally, the amount
of P1,500.00, plus damages, attorney's fees and costs of suit. The
defendants answered the complaint with specific denials and the following
special defenses and compulsory counterclaim:

...;

By way of

SPECIAL DEFENSES

Defendants allege:

4. Defendants executed the real estate mortgage, Annex "A" of

the complaint, as security for the loan of P1,200.00 given to
defendant Primitivo P. Cammayo upon the usurious agreement
that defendant pays to the plaintiff and that the plaintiff reserve
and secure, as in fact plaintiff reserved and secured himself, out
of the alleged loan of P1,500.00 as interest the sum of P300.00
for one year;

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 5. That although the mortgage contract, Annex "A" was executed
for securing the payment of P1,500.00 for a period of one year,
without interest, the truth and the real fact is that plaintiff
delivered to the defendant Primitivo P. Cammayo only the sum of
P1,200.00 and withheld the sum of P300.00 which was intended
as advance interest for one year;

6. That on account of said loan of P1,200.00, defendant Primitivo

P. Cammayo paid to the plaintiff during the period from October
1955 to July 1956 the total sum of P330.00 which plaintiff,
illegally and unlawfully refuse to acknowledge as part payment
of the account but as in interest of the said loan for an extension
of another term of one year;

7. That said contract of loan entered into between plaintiff and

defendant Primitivo P. Cammayo is a usurious contract and is
contrary to law, morals, good customs, public order or public
policy and is, therefore, in existent and void from the beginning
(Art. 1407 Civil Code);

And as

COMPULSORY COUNTERCLAIM

Defendants replead all their allegations in the preceding

paragraphs;

8. That plaintiff, by taking and receiving interest in excess of that

allowed by law, with full intention to violate the law, at the
expense of the defendants, committed a flagrant violation of Act
2655, otherwise known as the Usury Law, causing the
defendants damages and attorney's fees, the amount of which
will be proven at the trial;

9. That this is the second time this same case is filed before this
court, the first having been previously filed and docketed in this
court as Civil Case No. 75845 (Branch VII) and the same was
dismissed by the Court of First Instance of Manila on July 13,
1961 in Civil Case No. 43121 (Branch XVII) and for repeatedly
bringing this case to the court, harassing and persecuting
defendants in that manner, defendants have suffered mental
anguish and anxiety for which they should be compensated for
moral damages.

On September 7, 1962, Briones filed an unverified reply in which he merely

denied the allegations of the counterclaim. Thereupon the defendants moved

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for the rendition of a summary judgment on the ground that, upon the
record, there was no genuine issue of fact between the parties. The
Municipal Court granted the motion and rendered judgment sentencing the
defendants to pay the plaintiff the sum of P1,500.00, with interests thereon
at the legal rate from February 22, 1962, plus the sum of P150.00 as
attorney's fees. From this judgment, the defendants appealed to the Court of
First Instance of Manila where, according to the appealed decision,
"defendant has asked for summary judgment and plaintiff has agreed to the
same." (Record on Appeal p. 21). Having found the motion for summary
judgment to be in order, the court then, proceeded to render judgment as
follows:

Judgment is, therefore, rendered, ordering Defendant to pay

plaintiff the sum of P1,180.00 with interest thereon at the legal
rate from October 16, 1962 until fully paid. This judgment
represents Defendant's debt of P1,500.00 less usurious interest
of P120.00 and the additional sum of P200.00 as attorney's fees
or a total deduction of P320.00. Plaintiff shall pay the costs.

In the present appeal defendants claim that the trial court erred in
sentencing them to pay the principal of the loan notwithstanding its finding
that the same was tainted with usury, and erred likewise in not dismissing
the case.

It is not now disputed that the contract of loan in question was tainted with
usury. The only questions to be resolved, therefore, are firstly, whether the
creditor is entitled to collect from the debtor the amount representing the
principal obligation; secondly, in the affirmative, if he is entitled to collect
interests thereon, and if so, at what rate.

The Usury Law penalizes any person or corporation who, for any loan or
renewal thereof or forbearance, shall collect or receive a higher rate or
greater sum or value than is allowed by law, and provides further that, in
such case, the debtor may recover the whole interest, commissions,
premiums, penalties and surcharges paid or delivered, with costs and
attorney's fees, in an appropriate action against his creditor, within two (2)
years after such payment or delivery (Section 6, Act 2655, as amended by
Acts 3291 and 3998).

Construing the above provision, We held in Go Chioco vs. Martinez, 45 Phil.

256 that even if the contract of loan is declared usurious the creditor is
entitled to collect the money actually loaned and the legal interest due
thereon.

In Gui Jong & Co. vs. Rivera, et al., 45 Phil. 778, this Court likewise declared
that, in any event, the debtor in a usurious contract of loan should pay the

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creditor the amount which he justly owes him citing in support of this ruling
its previous decisions in Go Chioco Supra, Aguilar vs. Rubiato, et al., 40 Phil.
570, and Delgado vs. Duque Valgona, 44 Phil. 739.

In all the above cited cases it was recognized and held that under Act 2655 a
usurious contract is void; that the creditor had no right of action to recover
the interest in excess of the lawful rate; but that this did not mean that the
debtor may keep the principal received by him as loan thus unjustly
enriching himself to the damage of the creditor.

Then in Lopez and Javelona vs. El Hogar Filipino, 47 249, We also held that
the standing jurisprudence of this Court on the question under consideration
was clearly to the effect that the Usury Law, by its letter and spirit, did not
deprive the lender of his right to recover from the borrower the money
actually loaned to and enjoyed by the latter. This Court went further to say
that the Usury Law did not provide for the forfeiture of the capital in favor of
the debtor in usurious contracts, and that while the forfeiture might appear
to be convenient as a drastic measure to eradicate the evil of usury, the
legal question involved should not be resolved on the basis of convenience.

Other cases upholding the same principle are Palileo vs. Cosio, 97 Phil. 919
and Pascua vs. Perez, L-19554, January 31, 1964, 10 SCRA 199, 200-202. In
the latter We expressly held that when a contract is found to be tainted with
usury "the only right of the respondent (creditor) ... was merely to collect the
amount of the loan, plus interest due thereon."

The view has been expressed, however, that the ruling thus consistently
adhered to should now be abandoned because Article 1957 of the new Civil
Code a subsequent law provides that contracts and stipulations, under
any cloak or device whatever, intended to circumvent the laws against usury,
shall be void, and that in such cases "the power may recover in accordance
with the laws on usury." From this the conclusion is drawn that the whole
contract is void and that, therefore, the creditor has no right to recover not
even his capital.

The meaning and scope of our ruling in the cases mentioned heretofore is
clearly stated, and the view referred to in the preceding paragraph is
adequately answered, in Angel Jose, etc. vs. Chelda Enterprises, et al. (L-
25704, April 24, 1968). On the question of whether a creditor in a usurious
contract may or may not recover the principal of the loan, and, in the
affirmative, whether or not he may also recover interest thereon at the legal
rate, We said the following:

... .

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The court found that there remained due from defendants an
unpaid principal amount of P20,287.50; that plaintiff charged
usurious interests, of which P1,048.15 had actually been
deducted in advance by plaintiff from the loan; that said amount
of P1,048.15 should therefore be deducted from the unpaid
principal of P20,287.50, leaving a balance of P19,247.35 still
payable to the plaintiff. Said court held that notwithstanding the
usurious interests charged, plaintiff is not barred from collecting
the principal of the loan or its balance of P19,247.35.
Accordingly, it stated in the dispositive portion of the decision,
thus:

WHEREFORE, judgment is hereby rendered, ordering the

defendant partnership to pay to the plaintiff the amount of
P19,247.35, with legal interest thereon from May 29, 1964 until
paid, plus an additional sum of P2,000.00 as damages for
attorney's fee; and, in case the assets of defendant partnership
be insufficient to satisfy this judgment in full, ordering the
defendant David Syjueco to pay to the plaintiff one-half () of
the unsatisfied portion of this judgment.

With costs against the defendants.

Appealing directly to Us, defendants raise two questions of law:

(1) In a loan with usurious interest, may the creditor recover the
principal of the loan? (2) Should attorney's fees be awarded in
plaintiff's favor?

Great reliance is made by appellants on Art. 1411 of the New

Civil Code which states:

ART. 1411. When the nullity proceeds from the illegality of the
cause or object of the contract, and the act constitutes a criminal
offense, both parties being in pari delicto, they shall have no
action against each other, and both shall be prosecuted.
Moreover, the provisions of the Penal Code relative to the
disposal of effects or instruments of a crime shall be applicable
to the things or the price of the contract.

This rule shall be applicable when only one of the parties is

guilty; but the innocent one may claim what he has given, and
shall not be bound to comply with his promise.

Since, according to the appellants, a usurious loan is void due to

illegality of cause or object, the rule of pari delicto expressed in
Article 1411, supra, applies, so that neither party can bring

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action against each other. Said rule, however, appellants add, is
modified as to the borrower, by express provision of the law (Art.
1413, New Civil Code), allowing the borrower to recover interest
paid in excess of the interest allowed by the Usury Law. As to the
lender, no exception is made to the rule; hence, he cannot
recover on the contract. So they continue the New Civil
Code provisions must be upheld as against the Usury Law, under
which a loan with usurious interest is not totally void, because of
Article 1961 of the New Civil Code, that: "Usurious contracts shall
be governed by the Usury Law and other special laws, so far as
they are not inconsistent with this Code. (Emphasis ours.) .

We do not agree with such reasoning, Article 1411 of the New

Civil Code is not new; it is the same as Article 1305 of the Old
Civil Code. Therefore, said provision is no warrant for departing
from previous interpretation that, as provided in the Usury Law
(Act No. 2655, as amended), a loan with usurious interest is not
totally void only as to the interest.

True, as stated in Article 1411 of the New Civil Code, the rule of
pari delicto applies where a contract's nullity proceeds from
illegality of the cause or object of said contract.

However, appellants fail to consider that a contract of loan with

usurious interest consists of principal and accessory stipulations;
the principal one is to pay the debt; the accessory stipulation is
to pay interest thereon.

And said two stipulations are divisible in the sense that the
former can still stand without the latter. Article 1273, Civil Code,
attests to this: "The renunciation of the principal debt shall
extinguish the accessory obligations; but the waiver of the latter
shall leave the former in force."

The question therefore to resolve is whether the illegal terms as

to payment of interest likewise renders a nullity the legal terms
as to payments of the principal debt. Article 1420 of the New
Civil Code provides in this regard: "In case of a divisible contract,
if the illegal terms can be separated from the legal ones, the
latter may be enforced."

In simple loan with stipulation of usurious interest, the prestation

of the debtor to pay the principal debt, which is the cause of the
contract (Article 1350, Civil Code), is not illegal. The illegality lies
only as to the prestation to pay the stipulated interest; hence,

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being separable, the latter only should be deemed void, since it
is the only one that is illegal.

Neither is there a conflict between the New Civil Code and the
Usury Law. Under the latter, in Sec. 6, any person who for a loan
shall have paid a higher rate or greater sum or value than is
allowed in said law, may recover the whole interest paid. The
New Civil Code, in Article 1413 states: "Interest paid in excess of
the interest allowed by the usury laws may be recovered by the
debtor, with interest thereon from the date of payment." Article
1413, in speaking of "interest paid in excess of the interest
allowed by the usury laws" means the whole usurious interest;
that is, in a loan of P1,000, with interest of 20% per annum or
P200 for one year, if the borrower pays said P200, the whole
P200 is the usurious interest, not just that part thereof in excess
of the interest allowed by law. It is in this case that the law does
not allow division. The whole stipulation as to interest is void,
since payment of said interest is illegal. The only change
effected, therefore, by Article 1413, New Civil Code, is not to
provide for the recovery of the interest paid in excess of that
allowed by law, which the Usury Law already provided for, but to
add that the same can be recovered "with interest thereon from
the date of payment."

The foregoing interpretation is reached with the philosophy of

usury legislation in mind; to discourage stipulations on usurious
interest, said stipulations are treated as wholly void, so that the
loan becomes one without stipulation as to payment of interest.
It should not, however, be interpreted to mean forfeiture even of
the principal, for this would unjustly enrich the borrower at the
expense of the lender. Furthermore, penal sanctions are available
against a usurious lender, as a further deterrence to usury.

The principal debt remaining without stipulation for payment of

interest can thus be recovered by judicial action. And in case of
such demand, and the debtor incurs in delay, the debt earns
interest from the date of the demand (in this case from the filing
of the complaint). Such interest is not due to stipulation, for there
was none, the same being void. Rather, it is due to the general
provision of law that in obligations to pay money, where the
debtor incurs in delay, he has to pay interest by way of damages
(Art. 2209, Civil Code). The court a quo therefore, did not err in
ordering defendants to pay the principal debt with interest
thereon at the legal rate, from the date of filing of the complaint.

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In answer to the contention that the forfeiture of the principal of the usurious
loan is necessary to punish the usurer, We say this: Under the Usury Law
there is already provision for adequate punishment for the usurer namely,
criminal prosecution where, if convicted, he may be sentence to pay a fine of
not less than P50 nor more than P500, or imprisonment of not less than 30
days nor more than one year, or both, in the discretion of the court. He may
further be sentenced to return the entire sum received as interest, with
subsidiary imprisonment in case of non-payment thereof. lt is, of course, to
be assumed that this last penalty may be imposed only if the return of the
entire sum received as interest had not yet been the subject of judgment in a
civil action involving the usurious contract of load.

In arriving at the above conclusion We also considered our decision in Mulet

vs. The People of the Philippines (73 Phil. p. 60), but found that the same
does not apply to the present case. The facts therein involved were as
follows:

On July 25, 1929, Alejandra Rubillos and Espectacion Rubillos

secured from petitioner Miguel Mulet a loan of P550, payable
within 5 years at 30 per cent interest per annum. In the deed of
mortgage executed by the Rubillos as a security; the sum of
P1,375 was made to appear as the capital of the loan. This
amount obviously represented the actual loan of P550 and the
total interest of P825 computed at 30 per cent per annum for 5
years. Within four years of following the execution of the
mortgage, the debtors made partial payments aggregating
P278.27, on account of interest. Thereafter, the debtors paid the
whole capital of P550, due to petitioner's promise to condone the
unpaid interest upon payment of such capital. But to their
surprise, petitioner informed them that they were still indebted in
the sum of P546.73 which represented the balance of the
usurious interest. And in consideration of this amount, petitioner
pressed upon the debtors to execute in October, 1933, in his
favor, a deed of sale with pacto de retro of a parcel of land, in
substitution of the original mortgage which was cancelled. From
the date of the execution of the new deed up to 1936, petitioner
received, as his share of the products of the land, the total sum
of P480. Prosecuted on November 18, 1936, for the violation of
the Usury Law, petitioner was convicted by the trial court, and on
appeal, the judgment was affirmed by the Court of Appeals. The
instant petition for certiorari is directed at that portion of the
decision of the appellate court ordering petitioner to return to the
offended parties the sum of P373.27, representing interests
received by him in excess of that allowed by law.

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It was Mulet's claim that, as the amount of P373.27 had been paid more than
two years prior to the filing of the complaint for usury against him, its return
could no longer be ordered in accordance with the prescriptive period
provided therefor in Section 6 of the Usury Law. Said amount was made up of
the usurious interest amounting to P278.27 paid to Mulet, in cash, and the
sum of P480.00 paid to him in kind, from the total of which two amounts 14%
interest allowed by law amounting to P385.85 was deducted. Our
decision was that Mulet should return the amount of P480.00 which
represented the value of the produce of the land sold to him under pacto de
retrowhich, with the unpaid balance of the usurious interest, was the
consideration of the transaction meaning thepacto de retro sale. This
Court then said:

... . This last amount is not usurious interest on the capital of the
loan but the value of the produce of the land sold to petitioner
under pacto de retro with the unpaid balance of the usurious
interest (P546.73) as the consideration of the transaction. This
consideration, because contrary to law, is illicit, and the contract
which results therefrom, null and void. (Art. 1275, Civil Code).
And, under the provisions of article 1305, in connection with
article 1303, of the Civil Code, when the nullity of a contract
arises from the illegality of the consideration which in itself
constitutes a felony, the guilty party shall be subject to criminal
proceeding while the innocent party may recover whatever he
has given, including the fruits thereof. (emphasis supplied).

It is clear, therefore, that in the Mulet case, the principal of the obligation
had been fully paid by the debtor to the creditor; that the latter was not
sentenced to pay it back to the former, and that what this Court declared
recoverable by the debtor were only the usurious interest paid as well as the
fruits of the property sold underpacto de retro.

IN VIEW OF THE FOREGOING, the decision, appealed from is modified in the

sense that appellee may recover from appellant the principal of the loan
(P1,180.00) only, with interest thereon at the legal rate of 6% per annum
from the date of the filing of the complaint. With costs.

Digest

FACTS:

Aurelio G. Briones filed an action in the Municipal

Court of Manila against Primitivo, Nicasio, Pedro, Hilario
and Artemio, all surnamed Cammayo, to recover from
them, jointly and severally, the amount of P1,500.00, plus

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damages, attorney's fees and costs of suit.
Defendants executed the real estate mortgage as
security for the loan of P1,200.00 given to Primitivo P.
Cammayo upon the usurious agreement that defendant
pays to the plaintiff, out of the alleged loan of P1,500.00
(which includes as interest the sum of P300.00) for one
year.
Although the mortgage contract was executed for
securing the payment of P1,500.00 for a period of one
year, without interest, the truth and the real fact is that
plaintiff delivered to the defendant Primitivo P. Cammayo
only the sum of P1,200.00 and withheld the sum of
P300.00 which was intended as advance interest for one
year.

On account of said loan of P1,200.00, defendant

Primitivo P. Cammayo paid to the plaintiff during the
period from October 1955 to July 1956 the total sum of
P330.00 which plaintiff, illegally and unlawfully refused to
acknowledge as part payment of the account but as in
interest of the said loan for an extension of another term of
one year.

ISSUE:
Can Briones recover the amount of P1,500.00?

RULING:
Loan is valid but usurious interest is void. Creditor
has the right to recover his capital by judicial action. To
discourage stipulations on usurious interest, said
stipulations are treated as wholly void, so that the loan
becomes one without stipulation as to payment of interest.
It should not, however, be interpreted to mean forfeiture
even of the principal, for this would unjustly enrich the
borrower at the expense of the lender. Furthermore, penal
sanctions are available against a usurious lender, as a
further deterrence to usury.
In simple loan with stipulation of usurious
interest, the prestation of the debtor to pay the principal
debt, which is the cause of the contract (Article 1350, Civil

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Code), is not illegal. The illegality lies only as to the
prestation to pay the stipulated interest; hence, being
separable, the latter only should be deemed void, since it is
the only one that is illegal.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-32644 October 4, 1930

CU UNJIENG E HIJOS, plaintiff-appelle,

vs.
THE MABALACAT SUGAR CO., ET AL., defendants.
THE MABALACAT SUGAR CO., appellant.

Romeo Mercado for appellant.

Araneta and Zaragoza for plaintiff-appellee.
Duran and Lim for defendant-appellee Siuliong and Co.

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STREET, J.:

This action was instituted in the Court of First Instance of Pampanga by Cu

Unjieng e Hijos, for the purpose of recovering from the Mabalacat Sugar
Company an indebtedness amounting to more than P163,00, with interest,
and to foreclose a mortgage given by the debtor to secure the same, as well
as to recover stipulated attorney's fee and the sum of P1,206, paid by the
plaintiff for insurance upon the mortgaged property, with incidental relief. In
the complaint Siuliong & Co., Inc., was joined as defendant, as a surety of the
Mabalacat Sugar Company, and as having a third mortgage on the
mortgaged property. The Philippine National Bank was also joined by reason
of its interest as second mortgagee of the land covered by the mortgage to
the plaintiff. After the cause had been brought to issue by the answers of the
several defendants, the cause was heard and judgment rendered, the
dispositive portion of the decision being as follows:

Por las consideraciones expuestas, el Juzgado condena a The

Mabalacat Sugar Company a pagar a la demandante la suma de
P163,534.73, con sus intereses de 12 por ciento al ano, compuestos
mensualmente desde el 1. de mayo de 1929. Tambien se le condena a
pagar a dicha demandante la suma de P2,412 por las primas de
seguros abonadas por esta, con sus intereses de 12 por ciento al ano,
compuestos tambien mensualmente desde el 15 de mayo de 1928,
mas la de P7,500 por honorarios de abogados y las costas del juicio. Y
si esta deuda no se pagare dentro del plazo de tres meses, se
ejecutaran los bienes hipotecados de acuerdo con la ley.

Si del producto de la venta hubiese algun remanente, este se destinara

al pago del credito del Banco Nacional, o sea de P32,704.69, con sus
intereses de 9 por ciento al ano desde el 7 de junio de 1929, sin
perjuicio de la orden de ejecucion que pudiera expedirse en el asundo
No. 26435 del Juzgado de Primera Instancia de Manila.

Se condena ademas a The Mabalacat Sugar Company al pago de la

suma de P3,205.78 reclamada por Siuliong & Co., con sus intereses de
9 por ciento al ano desde el 29 de julio de 1926 hasta su completo
pago, ordenandola que rinda cuentas del azucar por ella producido y
pague la comision correspondiente bajo la base de 5 por ciento de su
valor, descontandose, desde luego, las cantidades ya pagadas.

Se absuelve de la demanda de Cu Unjieng e Hijos a Siuliong & Co.,

Inc.1awph!l.net

From this judgment the defendant, the Mabalacat Sugar Company, appealed.

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The first point assigned as error has relation to the question whether the
action was prematurely stated. In this connection we note that the mortgage
executed by the Mabalacat Sugar Company contains, in paragraph 5, a
provision to the effect that non-compliance on the part of the mortgage
debtor with any of the obligations assumed in virtue of this contract will
cause the entire debt to become due and give occasion for the foreclosure of
the mortgage. The debtor party failed to comply with the obligation, imposed
upon it in the mortgage, to pay the mortgage debt in the stipulated
installments at the time specified in the contract. It results that the creditor
was justified in treating the entire mortgage debt as having been accelerated
by such failure of the debtor in paying the installments.

It appears, however, that on or about October 20, 1928, the mortgage

creditor, Cu Unjieng e Hijos, agreed to extend the time for payment of the
mortgage indebtedness until June 30, 1929, with certain interim payments to
be made upon specified dates prior to the contemplated final liquidation of
the whole indebtedness. But the debtor party failed to make the interim
payments due on February 25, 1929, March 25, 1929, and April 25, 1929,
and failed altogether to pay the balance due, according to the terms of this
extension, on June 30, 1929. Notwithstanding the failure of the debtor to
comply with the terms of this extension, it is insisted for the appellant that
this agreement for the extension of the time of payment had the effect of
abrogating the stipulation of the original contract with respect to the
acceleration of the maturity of the debt by non-compliance with the terms of
the mortgage. As the trial court pointed out, this contention is untenable.
The agreement to extend the time of payment was voluntary and without
consideration so far as the creditor is concerned; and the failure of the
debtor to comply with the terms of the extension justified the creditor in
treating it as of no effect. The first error is therefore without merit.

The second error is directed to the propriety of the interest charges made by
the plaintiff in estimating the amount of the indebtedness. In this connection
we note that, under the second clause of the mortgage, interest should be
calculated upon the indebtedness at the rate of 12 per cent per annum. In
the same clause, but in a separate paragraph, there is another provision with
respect to the payment of interest expressed in Spanish in the following
words:

Los intereses seran pagados mensualmente a fin de cada mes,

computados teniendo en cuenta el capital del prestamo aun no
pagado.

Translated into English this provision reads substantially as follows: "Interest,

to be computed upon the still unpaid capital of the loan, shall be paid
monthly, at the end of each month."

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It is well settled that, under article 1109 of the Civil Code, as well as under
section 5 of the Usury Law (Act No. 2655), the parties may stipulate that
interest shall be compounded; and rests for the computation of compound
interest can certainly be made monthly, as well as quarterly, semiannually,
or annually. But in the absence of express stipulation for the accumulation of
compound interest, no interest can be collected upon interest until the debt
is judicially claimed, and then the rate at which interest upon accrued
interest must be computed is fixed at 6 per cent per annum.

In the present case, however, the language which we have quoted above
does not justify the charging of interest upon interest, so far as interest on
the capital is concerned. The provision quoted merely requires the debtor to
pay interest monthly at the end of each month, such interest to be computed
upon the capital of the loan not already paid. Clearly this provision does not
justify the charging of compound interest upon the interest accruing upon
the capital monthly. It is true that in subsections (a), (b) and (c) of article IV
of the mortgage, it is stipulated that the interest can be thus computed upon
sums which the creditor would have to pay out (a) to maintain insurance
upon the mortgaged property, (b) to pay the land tax upon the same
property, and (c) upon disbursements that might be made by the mortgagee
to maintain the property in good condition. But the chief thing is that interest
cannot be thus accumulated on unpaid interest accruing upon the capital of
the debt.

The trial court was of the opinion that interest could be so charged, because
of the Exhibit 1 of the Mabalacat Sugar Company, which the court considered
as an interpretation by the parties to the contract and a recognition by the
debtor of the propriety of compounding the interest earned by the capital.
But the exhibit referred to is merely a receipt showing that the sum of
P256.28 was, on March 19, 1928, paid by the debtor to the plaintiff as
interest upon interest. But where interest is improperly charged, at an
unlawful rate, the mere voluntary payment of it to the creditor by the debtor
is not binding. Such payment, in the case before us, was usurious, being in
excess of 12 per cent which is allowed to be charged, under section 2 of the
Usury Law, when a debt is secured by mortgage upon real property. The
Exhibit 1 therefore adds no support to the contention of the plaintiff that
interest upon interest can be accumulated in the manner adopter by the
creditor in this case. The point here ruled is in exact conformity with the
decision of this court in Bachrach Garage and Taxicab Co. vs. Golingco (39
Phil., 192), where this court held that interest cannot be allowed in the
absence of stipulation, or in default thereof, except when the debt is
judicially claimed; and when the debt is judicially claimed, the interest upon
the interest can only be computed at the rate of 6 per cent per annum.

It results that the appellant's second assignment of error is well taken, and
the compound interest must be eliminated from the judgment. With respect

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to the amount improperly charged, we accept the estimate submitted by the
president and manager of the Mabalacat Sugar Company, who says that the
amount improperly included in the computation made by the plaintiff's
bookkeeper is P879.84, in addition to the amount of P256.28 covered by
Exhibit 1 of the Mabalacat Sugar Company. But the plaintiff creditor had the
right to charge interest, in the manner adopted by it, upon insurance
premiums which it had paid out; and if any discrepancy of importance is
discoverable by the plaintiff in the result here reached, it will be at liberty to
submit a revised computation in this court, upon motion for reconsideration,
wherein interest shall be computed in accordance with this opinion, that is to
say, that no accumulation of interest will be permitted at monthly intervals,
as regards the capital of the debt, but such unpaid interest shall draw
interest at the rate of 6 per cent from the date of the institution of the action.

In the third assignment of error the appellant complains, as excessive, of the

attorney's fees allowed by the court in accordance with stipulation in the
mortgage. The allowance made on the principal debt was around 4 per cent,
and about the same upon the fee allowed to the bank. Under the
circumstances we think the debtor has no just cause for complaint upon this
score.

The fourth assignment of error complains of the failure of the trial court to
permit an amendment to be filed by the debtor to its answer, the application
therefore having been made on the day when the cause had been set for
trial, with notice that the period was non-extendible. The point was a matter
in the discretion of the court, and no abuse of discretion is shown.

From what has been stated, it follows that the appealed judgment must be
modified by deducting the sum of P1,136.12 from the principal debt, so that
the amount of said indebtedness shall be P162,398.61, with interest at 12
per cent per annum, from May 1, 1929. In other respects the judgment will
be affirmed, and it is so ordered, with cost against the appellant.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 135046 August 17, 1999

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SPOUSES FLORANTE and LAARNI BAUTISTA, petitioners,
vs.
PILAR DEVELOPMENT CORPORATION, respondent.

PUNO, J.:

This petition for review seeks to reverse and set aside the Decision and
Resolution of the Court of Appeals in CA-G.R. CV No. 513631 which reversed
the Decision of the Regional Trial Court, Makati, Branch 138 in Civil Case No.
17702.2

The following facts are uncontroverted.

In 1978, petitioner spouses Florante and Laarni Bautista purchased a house

and lot in Pilar Village, Las Pinas, Metro Manila. To partially finance the
purchase, they obtained from the Apex Mortgage & Loan Corporation (Apex)
a loan in the amount of P100,180.00. They executed a promissory note on
December 22, 1978 obligating themselves, jointly and severally, to pay the
"principal sum of P100,180.00 with interest rate of 12% and service charge
of 3%" for a period of 240 months, or twenty years, from date, in monthly
installments of P1,378.83.3 Late payments were to be charged a penalty of
one and one-half per cent (1 1/2%) of the amount due. In the same
promissory note, petitioners authorized Apex to "increase the rate of interest
and/or service charges" without notice to them in the event that a law,
Presidential Decree or any Central Bank regulation should be enacted
increasing the lawful rate of interest and service charges on the
loan.4 Payment of the promissory note was secured by a second mortgage on
the house and lot purchased by petitioners.5

Petitioner spouses failed to pay several installments. On September 20,

1982, they executed another promissory note in favor of Apex. This note was
in the amount of P142,326.43 at the increased interest rate of twenty-one
per cent (21%) per annum with no provision for service charge but with
penalty charge of 1 1/2% for late payments. Payment was to be made for a
period of 196 months or 16.33 years in monthly installments of P2,526.68,
inclusive of principal and interest. Petitioner spouses also authorized Apex to
"increase/decrease the rate of interest and/or service charges" on the note in
the event any law or Central Bank regulation shall be passed increasing or
decreasing the same.6

In November 1983, petitioner spouses again failed to pay the installments.

On June 6, 1984, Apex assigned the second promissory note to respondent
Pilar Development Corporation without notice to petitioners.1wphi1.nt

On August 31, 1987, respondent corporation, as successor-in-interest of

Apex, instituted against petitioner spouses Civil Case No. 17702 before the

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Regional Trial Court, Makati, Branch 138. Respondent corporation sought to
collect from petitioners the amount of P140,515.11 representing the unpaid
balance of the principal debt from November 23, 1983, including interest at
the rate of twenty-one per cent (21%) under the second promissory note,
and 25% and 36% per annum in accordance with Central Bank Circular No.
905, series of 1982. Respondent also sought payment of ten per cent (10%)
of the amount due as attorney's fees.7

In their answer, petitioner spouses mainly contended that the terms of the
second promissory note increasing the interest rate to 21% and the
escalation clauses authorizing Apex to increase interest rates pursuant to
any law or Central Bank regulation are null and void in the absence of a de-
escalation clause in the same note.8

After pre-trial, both parties submitted the case for decision on the sole issue
of the interest rate.

The trial court rendered judgment on September 22, 1995. It ordered

petitioner spouses to pay respondent corporation the sum of P140,515.11,
with interest at the rate of 12% per annum, plus service charge, viz:

WHEREFORE, judgment is hereby rendered as follows:

(a) Plaintiff is entitled to collect from the defendants the amount of

P140,515.11 with interest at the rate of 12% per annum from
November 23, 1983 until the amount is fully paid plus the stipulated
service charge;

(b) Ordering defendants as joint and several obligors to pay plaintiff

the amount stated in paragraph (a) hereof;

(c) Counterclaim is hereby dismissed.

No pronouncement as to costs.

SO ORDERED.9

Both parties appealed to the Court of Appeals. In a Decision dated May 14,
1998, the appellate court reversed the trial court by applying the interest
rate of 21% per annum, and adding attorney's fees of 10%. Thus:

IN VIEW OF ALL THE FOREGOING, the appealed judgment is hereby

REVERSED and SET ASIDE and a new one entered ordering the
defendants to pay the plaintiffs the amount of P142,326.43, as
principal with interest at the rate of 21% from November 23, 1983 until

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 the amount is fully paid; the sum equivalent to 10% of the amount due
as attorney's fees and the costs of this suit.

SO ORDERED.10

Petitioner spouses moved for reconsideration. In a Resolution dated August

18, 1998, the Court of Appeals denied the motion but reduced the principal
amount of the obligation from P142,326.42 to P140,515.11.11

Hence this recourse.

Petitioner spouses claim that the Court of Appeals erred:

IN RULING THAT THE TWO (2) PROMISSORY NOTES EXECUTED BY THE

PARTIES ARE INDEPENDENT OF EACH OTHER.

CONVERSELY, IN NOT RULING THAT THE SAID PROMISSORY NOTES

CONSTITUTE A SINGLE-LOAN TRANSACTION.

II

IN RULING THAT THE APPLICABLE RATE OF INTEREST IS 21% PER ANNUM AS

STIPULATED IN THE SECOND PROMISSORY NOTE.

CONVERSELY, IN NOT RULING THAT THE ESCALATION OF INTEREST RATE

FROM 12% PER ANNUM (1ST PROMISSORY NOTE) TO 21% PER ANNUM (2ND
PROMISSORY NOTE) IS UNLAWFUL.

III

IN RULING THAT 10% OF THE AMOUNT DUE IS AWARDABLE AS ATTORNEY'S

FEES.

CONVERSELY, IN NOT RULING THAT THE AWARD OF 10% ATTORNEY'S FEES IS

NOT PROPER UNDER THE CIRCUMSTANCES.

IV

IN RULING THAT NOTICE OF ASSIGNMENT OF CREDIT IS "POINTLESS AND

UNSUSTAINABLE ."

CONVERSELY, IN NOT RULING THAT NOTICE TO THE DEBTOR IS REQUIRED

WHEN CREDIT IS ASSIGNED.

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 V

IN NOT RULING THAT UNDER THE CIRCUMSTANCES PETITIONERS ARE

ENTITLED TO MORAL AND EXEMPLARY DAMAGES.12

The controversy in this petition involves the rate of interest respondent

creditor is entitled to collect on petitioners' loan: whether it be 12% under
the promissory note of December 22, 1978, or 21% under the promissory
note of September 20, 1982.

Petitioners claim that the interest rate of 12% per annum should be adjudged
inasmuch as the two promissory notes constitute one transaction. Allegedly,
the first note defined the terms and conditions of the loan while the second
note is merely an extension of and derives its existence from the former.
Hence, the second note is governed by the stipulations in the first note.13

The two promissory notes are identically entitled "Promissory Note with
Authority to Assign Credit." The notes were prepared by Apex in standard
form and consist of two (2) pages each. Except for one or two stipulations,
they contain the same provisions and the same blanks for the amount of the
loan and other pertinent data subject of each note. However, on the upper
right portion of the second note, there appears a typewritten entry which
reads:

This cancels PN # A-387-78 dated December 22, 1978.14

Correspondingly, on the face of each page of the first promissory note, i.e.,
PN No. A-387-78 dated December 22, 1978, the word "Cancelled" is boldly
stamped twice with the date "September 16, 1982" and a signature written
in a space inside the letters of the word.15

The first promissory note was cancelled by the express terms of the second
promissory note. To cancel is to strike out, to revoke, rescind or abandon, to
terminate.16 In fine, the first note was revoked and terminated. Simply put, it
was novated. The extinguishment of an obligation by the substitution or
change of the obligation by a subsequent one which extinguishes or modifies
the first is a novation.17 Novation is made either by changing the object or
principal conditions, referred to as an objective or real novation; or by
substituting the person of the debtor or subrogating a third person to the
rights of the creditor, which is known as subjective or personal novation.18 In
both objective and subjective novation, a dual purpose is achieved an
obligation is extinguished and a new one is created in lieu thereof.19 Novation
may either be express, when the new obligation declares in unequivocal
terms that the old obligation is extinguished; or implied, when the new
obligation is on every point incompatible with the old one.20 Express novation
takes place when the contracting parties expressly disclose that their object

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in making the new contract is to extinguish the old contract, otherwise the
old contract remains in force and the new contract is merely added to it, and
each gives rise to an obligation still in force.21

Novation has four (4) essential requisites: (1) the existence of a previous
valid obligation; (2) the agreement of all parties to the new contract; (3) the
extinguishment of the old contract; and (4) the validity of the new one.22 In
the instant case, all four requisites have been complied with. The first
promissory note was a valid and subsisting contract when petitioner spouses
and Apex executed the second promissory note. The second promissory note
absorbed the unpaid principal and interest of P142,326.43 in the first note
which amount became the principal debt therein, payable at a higher
interest rate of 21% per annum. Thus, the terms of the second promissory
note provided for a higher principal, a higher interest rate, and a higher
monthly amortization, all to be paid within a shorter period of 16.33 years.
These changes are substantial and constitute the principal conditions of the
obligation.23 Both parties voluntarily accepted the terms of the second note;
and also in the same note, they unequivocally stipulated to extinguish the
first note. Clearly, there was animus novandi, an express intention to
novate.24 The first promissory note was cancelled and replaced by the second
note. This second note became the new contract governing the parties'
obligations.

In their second assigned error, petitioners contend that in the second

promissory note, the escalation of the interest rate from 12% to 21% per
annum is unlawful and cannot be imposed for failure of the escalation
provisions to include valid de-escalation clauses. In the absence of de-
escalation clauses, the Court of Appeals allegedly erred in applying Central
Bank Circulars Nos. 705, 712 and 905 issued by the Monetary Board of the
Central Bank of the Philippines.25

At the time the parties executed the first promissory note in 1978, the
interest of 12% was the maximum rate fixed by the Usury Law for loans
secured by a mortgage upon registered real estate.26 On December 1, 1979,
the Monetary Board of the Central Bank of the Philippines27 issued Circular
No. 705 which fixed the effective rate of interest on loan transactions with
maturities of more than 730 days to twenty-one per cent (21%) per
annum for both secured and unsecured loans.28 On January 28, 1980, The
Monetary Board issued Circular No. 712 reiterating the effective interest rate
of 21% on said loan transactions.29 On January 1, 1983, CB Circular No. 905,
series of 1982, took effect. This Circular declared that the rate of interest on
any loan or forbearance of any money, goods or credits, regardless of
maturity and whether secured or unsecured, "shall not be subject to any
ceiling prescribed under or pursuant to the Usury Law, as amended. 30 In
short, Circular No. 905 removed the ceiling on interest rates for secured and
unsecured loans, regardless of maturity.31

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When the second promissory note was executed on September 20, 1982,
Central Bank Circulars Nos. 705 and 712 were already in effect. These
Circulars fixed the effective interest rate for secured loan transactions with
maturities of more than 730 days, i.e., two (2) years, at 21% per annum. The
interest rate of 21% provided in the second promissory note was therefore
authorized under these Circulars.

The question of whether the escalation clauses in the second promissory

note are valid is irrelevant. Respondent corporation has signified that it is
collecting petitioners' debt only at the fixed interest rate of 21% per annum,
as expressly agreed upon in the second promissory note, not at the
escalated rates authorized under the escalation clauses.32 The Court of
Appeals therefore did not err in applying the interest rate of 21% to
petitioner's loan under the second promissory note.

Neither did the Court of Appeals err in imposing attorney's fees of ten per
cent (10%) on the amount, due. The award of attorney's fees is expressly
stipulated in the fourth paragraph of the promissory note itself, viz:

In case of non-payment of the amount of this note or any portion of it

on demand when given due, or any other amount/s due on account of
this note, the entire obligation shall become due and demandable, and
if for the enforcement of the payment thereof, APEX MORTGAGE AND
LOANS CORP. is constrained to entrust the case to its attorneys, I/We,
jointly and severally, bind myself/ourselves to pay TEN (10%) per cent
on the amount due on the note as attorney's fees, such amount in no
case to be less than FIVE HUNDRED (P500.00) PESOS in addition to the
legal fees and other incidental expenses.33

Petitioners' lack of bad faith in resisting imposition of the increased interest

rate cannot serve to mitigate their liability for liquidated damages. Petitioner
Florante Bautista is a lawyer and he should have been aware of the effects of
the stipulations in the second promissory note and the pertinent CB Circulars
on his obligation. At the same time, there is no showing that the amount of
liquidated damages is iniquitous and unconscionable for this court to
equitably reduce the same.34

Finally, the fact that petitioners were not notified of the assignment of their
credit by Apex to herein respondent corporation is not material. In the eighth
paragraph of the second promissory note, petitioners expressly waived
notice to any assignment of credit, viz:

It is understood that APEX MORTGAGE AND LOANS CORPORATION has

the right to assign this promissory note, or make use of it as collateral
in favor of any third person whomsoever and this will constitute as an
authority therefore waiver of notice of such action taken [sic].35

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The purpose of the notice is only to inform the debtor that from the date of
the assignment, payment should be made to the assignee and not to the
original creditor.36

IN VIEW WHEREOF, the petition is denied and the Decision and Resolution of
the Court of Appeals in CA-G.R. CV No. 51363 are affirmed.1wphi1.nt

SO ORDERED.

Digest

Fact:
In 1978, Petitioner spouses Bautista purchased a house and lot in Pilar
Village, Las Pinas, Metro Manila. To partially finance the purchase, they
obtained from the Apex Mortgage and Loan Corp a loan in the amout of
100,180.00php. They executed a promissory note obligating themselves,
jointly and severally to pay the principal sum with interest rate of 12% for
240 months or 2years. In the same promissory note, petitioners authorized
Apex to "increase the rate of interest and/or service charge" without notice
to them in the event a law, Presidential Decree or any Central Bank
regulation should be enacted increasing the lawful rate of interest.

Petitioner spouses failed to pay several installments. On September 20,

1982, they executed another promissory note in favor of Apex. This time
there was an increased interest rate of 21% per annum with penalty of 11/2
for late payment payable for 196 months. Petitioners retained the
authorization to increase/decrease the rate of interest.

In November 1983, petitioners again failed to pay installments. On June 06,

1984, Apex assigned the second promissory note to respondent Pilar
Development Corporation, a successor-in-interest. The latter then instituted
against petitioner spouses before the RTC collection for the unpaid balance
as of November 23, 1983 including the internal rate of 21%. RTC rendered
judgment ordering petitioners to pay balance with interest of 12%. CA
reversed the trial court by applying 21% per annum amounting to
142,346.42php. However, it was reversed to 140,515.11, initial decision of
RTC, after the denial for motion to reconsider.

Issue:
Whether it be 12% under the promissory note of December 22, 1978 or 21%
under the promissory note of September 20, 1982.

Ruling:
The court ruled that at the time the parties executed the first promissory
note in 1978, the interest of 12% was the maximum rate fixed by the Usury
Law for loans secured by a mortgage upon registered estate.

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On December 1, 1979, the Monetary Board of the Central Bank of the
Philippines issued Circular No 705 which fixed the effective rate of interest on
loan transactions with maturities of more than 730 days to 21% per annum
for both secured and unsecured loans. On January 28, 1980, the Monetary
Board issued Circular No 712 reiterating the effective rate of 21% on
said transactions. On January 1, 1983, CB Circular No 905 series of 1982,
took effect. The circular declared that the rate of interest on any loan or
forbearance of any money, goods or credit, regardless of maturity and
whether secured or unsecured, "shall not be subject to any ceiling prescribed
under or pursuant to the Usury Law, as amended." In short, Circular No 905
removed the ceiling on interest rate for secured and unsecured loans,
regardless of majority.

When the second promissory note was executed on September 20, 1982,
Central Bank Circulars Nos 705 and 712 were already in effect. These
circulars fixed the effective interest rate for secured loans transactions with
maturities of more than 730 days, i.e., 2years at 21% per annum. The
interest rate of 21% provided in the second promissory note was therefore
authorized under these Circulars.
2nd digest

In 1978, Bautista, a lawyer, acquired a loan (abt. P100k) from Apex Corp. The
terms ofthe loan are: that interest rate is at 12% per yr; that interest rate
may be increased/decreased by Apex if authorized by law; that there is a
10% penalty of the amount due in case of litigation; that no notice is needed
in case Apex will assign the credit to another. These were all put into a
promissory note.
In 1982, Bautista is already behind in payment so he executed another
promissory note in favor of Apex. The balance then was at P140k. Apex
increased the interest rate to 21% pursuant to CB Circular 705 which allowed
the maximum 21%. There is de-escalation clause this time around. The
2nd PN expressly cancelled the 1st PN. In 1983, CB Circular 905 was issued. In
same year, Bautista failed to make payments.
In 1984, Apex assigned the credit to Pilar Devt w/o notice to Bautista. Pilar
sued Bautista. Bautista now claims that the 2nd PN is one and the same as
the 1st; that interest rate should be at 12%; that CB Circ. 905 does not allow
escalation of rate in the absence of a de-escalation clause.
ISSUE: Whether or not to follow the 1st promissory note.
HELD: No. The 2nd promissory note novated the 1st PN. This was expressly
agreed upon by both parties. Hence, the 2 nd PN is distinct and separate from

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the 1st. Therefore, the imposition of the 21% rate is valid as it was agreed
upon. This regardless of the absence of a de-escalation clause. The operative
law was CB Circ. 705 which was in effect when 2 nd PN was signed in 82. Also,
the assignment of credit is valid even if it was w/o notice to Bautista because
the same was agreed upon.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-30771 May 28, 1984

LIAM LAW, plaintiff-appellee,

vs.
OLYMPIC SAWMILL CO. and ELINO LEE CHI, defendants-appellants.

Felizardo S.M. de Guzman for plaintiff-appellee.

Mariano M. de Joya for defendants-appellants.

MELENCIO-HERRERA, J.:

This is an appeal by defendants from a Decision rendered by the then Court

of First Instance of Bulacan. The appeal was originally taken to the then
Court of Appeals, which endorsed it to this instance stating that the issue
involved was one of law.

It appears that on or about September 7, 1957, plaintiff loaned P10,000.00,

without interest, to defendant partnership and defendant Elino Lee Chi, as
the managing partner. The loan became ultimately due on January 31, 1960,
but was not paid on that date, with the debtors asking for an extension of
three months, or up to April 30, 1960.

On March 17, 1960, the parties executed another loan document. Payment of
the P10,000.00 was extended to April 30, 1960, but the obligation was
increased by P6,000.00 as follows:

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 That the sum of SIX THOUSAND PESOS (P6,000.00), Philippine
currency shall form part of the principal obligation to answer for
attorney's fees, legal interest, and other cost incident thereto to
be paid unto the creditor and his successors in interest upon the
termination of this agreement.

Defendants again failed to pay their obligation by April 30, 1960 and, on
September 23, 1960, plaintiff instituted this collection case. Defendants
admitted the P10,000.00 principal obligation, but claimed that the additional
P6,000.00 constituted usurious interest.

Upon application of plaintiff, the Trial Court issued, on the same date of
September 23, 1960, a writ of Attachment on real and personal properties of
defendants located at Karanglan, Nueva Ecija. After the Writ of Attachment
was implemented, proceedings before the Trial Court versed principally in
regards to the attachment.

On January 18, 1961, an Order was issued by the Trial Court stating that
"after considering the manifestation of both counsel in Chambers, the Court
hereby allows both parties to simultaneously submit a Motion for Summary
Judgment. 1 The plaintiff filed his Motion for Summary Judgment on January
31, 1961, while defendants filed theirs on February 2, 196l. 2

On June 26, 1961, the Trial Court rendered decision ordering defendants to
pay plaintiff "the amount of P10,000.00 plus the further sum of P6,000.00 by
way of liquidated damages . . . with legal rate of interest on both amounts
from April 30, 1960." It is from this judgment that defendants have appealed.

We have decided to affirm.

Under Article 1354 of the Civil Code, in regards to the agreement of the
parties relative to the P6,000.00 obligation, "it is presumed that it exists and
is lawful, unless the debtor proves the contrary". No evidentiary hearing
having been held, it has to be concluded that defendants had not proven
that the P6,000.00 obligation was illegal. Confirming the Trial Court's finding,
we view the P6,000.00 obligation as liquidated damages suffered by plaintiff,
as of March 17, 1960, representing loss of interest income, attorney's fees
and incidentals.

The main thrust of defendants' appeal is the allegation in their Answer that
the P6,000.00 constituted usurious interest. They insist the claim of usury
should have been deemed admitted by plaintiff as it was "not denied
specifically and under oath". 3

Section 9 of the Usury Law (Act 2655) provided:

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 SEC. 9. The person or corporation sued shall file its answer in
writing under oath to any complaint brought or filed against said
person or corporation before a competent court to recover the
money or other personal or real property, seeds or agricultural
products, charged or received in violation of the provisions of this
Act. The lack of taking an oath to an answer to a complaint will
mean the admission of the facts contained in the latter.

The foregoing provision envisages a complaint filed against an entity which

has committed usury, for the recovery of the usurious interest paid. In that
case, if the entity sued shall not file its answer under oath denying the
allegation of usury, the defendant shall be deemed to have admitted the
usury. The provision does not apply to a case, as in the present, where it is
the defendant, not the plaintiff, who is alleging usury.

Moreover, for sometime now, usury has been legally non-existent. Interest
can now be charged as lender and borrower may agree upon. 4 The Rules of
Court in regards to allegations of usury, procedural in nature, should be
considered repealed with retroactive effect.

Statutes regulating the procedure of the courts will be construed

as applicable to actions pending and undetermined at the time of
their passage. Procedural laws are retrospective in that sense
and to that extent. 5

... Section 24(d), Republic Act No. 876, known as the Arbitration
Law, which took effect on 19 December 1953, and may be
retroactively applied to the case at bar because it is procedural
in nature. ... 6

WHEREFORE, the appealed judgment is hereby affirmed, without

pronouncement as to costs.

SO ORDERED.

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 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 116285 October 19, 2001

ANTONIO TAN, petitioner,

vs.
COURT OF APPEALS and the CULTURAL CENTER OF THE
PHILIPPINES, respondents.

DE LEON, JR., J.:

Before us is a petition for review of the Decision1 dated August 31, 1993 and
Resolution2 dated July 13, 1994 of the Court of Appeals affirming the
Decision3 dated May 8, 1991 of the Regional Trial Court (RTC) of Manila,
Branch 27.

The facts are as follows:

On May 14, 1978 and July 6, 1978, petitioner Antonio Tan obtained two (2)
loans each in the principal amount of Two Million Pesos (P2,000,000.00), or in
the total principal amount of Four Million Pesos (P4,000,000.00) from
respondent Cultural Center of the Philippines (CCP, for brevity) evidenced by
two (2) promissory notes with maturity dates on May 14, 1979 and July 6,
1979, respectively. Petitioner defaulted but after a few partial payments he
had the loans restructured by respondent CCP, and petitioner accordingly
executed a promissory note (Exhibit "A") on August 31, 1979 in the amount
of Three Million Four Hundred Eleven Thousand Four Hundred Twenty-One

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Pesos and Thirty-Two Centavos (P3,411,421.32) payable in five (5)
installments. Petitioner Tan failed to pay any installment on the said
restructured loan of Three Million Four Hundred Eleven Thousand Four
Hundred Twenty-One Pesos and Thirty-Two Centavos (P3,411,421.32), the
last installment falling due on December 31, 1980. In a letter dated January
26, 1982, petitioner requested and proposed to respondent CCP a mode of
paying the restructured loan, i.e., (a) twenty percent (20%) of the principal
amount of the loan upon the respondent giving its conformity to his proposal;
and (b) the balance on the principal obligation payable in thirty-six (36)
equal monthly installments until fully paid. On October 20, 1983, petitioner
again sent a letter to respondent CCP requesting for a moratorium on his
loan obligation until the following year allegedly due to a substantial
deduction in the volume of his business and on account of the peso
devaluation. No favorable response was made to said letters. Instead,
respondent CCP, through counsel, wrote a letter dated May 30, 1984 to the
petitioner demanding full payment, within ten (10) days from receipt of said
letter, of the petitioners restructured loan which as of April 30, 1984
amounted to Six Million Eighty-Eight Thousand Seven Hundred Thirty-Five
Pesos and Three Centavos (P6,088,735.03).

On August 29, 1984, respondent CCP filed in the RTC of Manila a complaint
for collection of a sum of money, docketed as Civil Case No. 84-26363,
against the petitioner after the latter failed to settle his said restructured
loan obligation. The petitioner interposed the defense that he merely
accommodated a friend, Wilson Lucmen, who allegedly asked for his help to
obtain a loan from respondent CCP. Petitioner claimed that he has not been
able to locate Wilson Lucmen. While the case was pending in the trial court,
the petitioner filed a Manifestation wherein he proposed to settle his
indebtedness to respondent CCP by proposing to make a down payment of
One Hundred Forty Thousand Pesos (P140,000.00) and to issue twelve (12)
checks every beginning of the year to cover installment payments for one
year, and every year thereafter until the balance is fully paid. However,
respondent CCP did not agree to the petitioners proposals and so the trial of
the case ensued.

On May 8, 1991, the trial court rendered a decision, the dispositive portion of
which reads:

WHEREFORE, judgment is hereby rendered in favor of plaintiff and

against defendant, ordering defendant to pay plaintiff, the amount of
P7,996,314.67, representing defendants outstanding account as of
August 28, 1986, with the corresponding stipulated interest and
charges thereof, until fully paid, plus attorneys fees in an amount
equivalent to 25% of said outstanding account, plus P50,000.00, as
exemplary damages, plus costs.

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 Defendants counterclaims are ordered dismissed, for lack of merit.

SO ORDERED.4

The trial court gave five (5) reasons in ruling in favor of respondent CCP. First,
it gave little weight to the petitioners contention that the loan was merely
for the accommodation of Wilson Lucmen for the reason that the defense
propounded was not credible in itself. Second, assuming, arguendo, that the
petitioner did not personally benefit from the said loan, he should have filed
a third party complaint against Wilson Lucmen, the alleged accommodated
party but he did not. Third, for three (3) times the petitioner offered to settle
his loan obligation with respondent CCP. Fourth, petitioner may not avoid his
liability to pay his obligation under the promissory note (Exh. "A") which he
must comply with in good faith pursuant to Article 1159 of the New Civil
Code. Fifth, petitioner is estopped from denying his liability or loan obligation
to the private respondent.

The petitioner appealed the decision of the trial court to the Court of Appeals
insofar as it charged interest, surcharges, attorneys fees and exemplary
damages against the petitioner. In his appeal, the petitioner asked for the
reduction of the penalties and charges on his loan obligation. He abandoned
his alleged defense in the trial court that he merely accommodated his
friend, Wilson Lucmen, in obtaining the loan, and instead admitted the
validity of the same. On August 31, 1993, the appellate court rendered a
decision, the dispositive portion of which reads:

WHEREFORE, with the foregoing modification, the judgment appealed

from is hereby AFFIRMED.

SO ORDERED.5

In affirming the decision of the trial court imposing surcharges and interest,
the appellate court held that:

We are unable to accept appellants (petitioners) claim for

modification on the basis of alleged partial or irregular performance,
there being none. Appellants offer or tender of payment cannot be
deemed as a partial or irregular performance of the contract, not a
single centavo appears to have been paid by the defendant.

However, the appellate court modified the decision of the trial court by
deleting the award for exemplary damages and reducing the amount of
awarded attorneys fees to five percent (5%), by ratiocinating as follows:

Given the circumstances of the case, plus the fact that plaintiff was
represented by a government lawyer, We believe the award of 25% as

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 attorneys fees and P500,000.00 as exemplary damages is out of
proportion to the actual damage caused by the non-performance of the
contract and is excessive, unconscionable and iniquitous.

In a Resolution dated July 13, 1994, the appellate court denied the
petitioners motion for reconsideration of the said decision.

Hence, this petition anchored on the following assigned errors:

THE HONORABLE COURT OF APPEALS COMMITTED A MISTAKE IN GIVING ITS

IMPRIMATUR TO THE DECISION OF THE TRIAL COURT WHICH COMPOUNDED
INTEREST ON SURCHARGES.

II

THE HONORABLE COURT OF APPEALS ERRED IN NOT SUSPENDING

IMPOSITION OF INTEREST FOR THE PERIOD OF TIME THAT PRIVATE
RESPONDENT HAS FAILED TO ASSIST PETITIONER IN APPLYING FOR RELIEF OF
LIABILITY THROUGH THE COMMISSION ON AUDIT AND THE OFFICE OF THE
PRESIDENT.

III

THE HONORABLE COURT OF APPEALS ERRED IN NOT DELETING AWARD OF

ATTORNEYS FEES AND IN REDUCING PENALTIES.

Significantly, the petitioner does not question his liability for his restructured
loan under the promissory note marked Exhibit "A". The first question to be
resolved in the case at bar is whether there are contractual and legal bases
for the imposition of the penalty, interest on the penalty and attorneys fees.

The petitioner imputes error on the part of the appellate court in not totally
eliminating the award of attorneys fees and in not reducing the penalties
considering that the petitioner, contrary to the appellate courts findings, has
allegedly made partial payments on the loan. And if penalty is to be
awarded, the petitioner is asking for the non-imposition of interest on the
surcharges inasmuch as the compounding of interest on surcharges is not
provided in the promissory note marked Exhibit "A". The petitioner takes
exception to the computation of the private respondent whereby the interest,
surcharge and the principal were added together and that on the total sum
interest was imposed. Petitioner also claims that there is no basis in law for
the charging of interest on the surcharges for the reason that the New Civil
Code is devoid of any provision allowing the imposition of interest on
surcharges.

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We find no merit in the petitioners contention. Article 1226 of the New Civil
Code provides that:

In obligations with a penal clause, the penalty shall substitute the

indemnity for damages and the payment of interests in case of non-
compliance, if there is no stipulation to the contrary. Nevertheless,
damages shall be paid if the obligor refuses to pay the penalty or is
guilty of fraud in the fulfillment of the obligation.

The penalty may be enforced only when it is demandable in

accordance with the provisions of this Code.

In the case at bar, the promissory note (Exhibit "A") expressly provides for
the imposition of both interest and penalties in case of default on the part of
the petitioner in the payment of the subject restructured loan. The
pertinent6 portion of the promissory note (Exhibit "A") imposing interest and
penalties provides that:

For value received, I/We jointly and severally promise to pay to the CULTURAL
CENTER OF THE PHILIPPINES at its office in Manila, the sum of THREE
MILLION FOUR HUNDRED ELEVEN THOUSAND FOUR HUNDRED + PESOS
(P3,411,421.32) Philippine Currency, xxx.

xxx xxx xxx

With interest at the rate of FOURTEEN per cent (14%) per annum from
the date hereof until paid. PLUS THREE PERCENT (3%) SERVICE
CHARGE.

In case of non-payment of this note at maturity/on demand or upon

default of payment of any portion of it when due, I/We jointly and
severally agree to pay additional penalty charges at the rate of TWO
per cent (2%) per month on the total amount due until paid, payable
and computed monthly. Default of payment of this note or any portion
thereof when due shall render all other installments and all existing
promissory notes made by us in favor of the CULTURAL CENTER OF THE
PHILIPPINES immediately due and demandable. (Underscoring
supplied)

xxx xxx xxx

The stipulated fourteen percent (14%) per annum interest charge until full
payment of the loan constitutes the monetary interest on the note and is
allowed under Article 1956 of the New Civil Code.7 On the other hand, the
stipulated two percent (2%) per month penalty is in the form of penalty

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charge which is separate and distinct from the monetary interest on the
principal of the loan.

Penalty on delinquent loans may take different forms. In Government Service

Insurance System v. Court of Appeals,8 this Court has ruled that the New Civil
Code permits an agreement upon a penalty apart from the monetary
interest. If the parties stipulate this kind of agreement, the penalty does not
include the monetary interest, and as such the two are different and distinct
from each other and may be demanded separately. QuotingEquitable
Banking Corp. v. Liwanag,9 the GSIS case went on to state that such a
stipulation about payment of an additional interest rate partakes of the
nature of a penalty clause which is sanctioned by law, more particularly
under Article 2209 of the New Civil Code which provides that:

If the obligation consists in the payment of a sum of money, and the

debtor incurs in delay, the indemnity for damages, there being no
stipulation to the contrary, shall be the payment of the interest agreed
upon, and in the absence of stipulation, the legal interest, which is six
per cent per annum.

The penalty charge of two percent (2%) per month in the case at bar began
to accrue from the time of default by the petitioner. There is no doubt that
the petitioner is liable for both the stipulated monetary interest and the
stipulated penalty charge. The penalty charge is also called penalty or
compensatory interest. Having clarified the same, the next issue to be
resolved is whether interest may accrue on the penalty or compensatory
interest without violating the provisions of Article 1959 of the New Civil Code,
which provides that:

Without prejudice to the provisions of Article 2212, interest due and

unpaid shall not earn interest. However, the contracting parties may by
stipulation capitalize the interest due and unpaid, which as added
principal, shall earn new interest.

According to the petitioner, there is no legal basis for the imposition of

interest on the penalty charge for the reason that the law only allows
imposition of interest on monetary interest but not the charging of interest
on penalty. He claims that since there is no law that allows imposition of
interest on penalties, the penalties should not earn interest. But as we have
already explained, penalty clauses can be in the form of penalty or
compensatory interest. Thus, the compounding of the penalty or
compensatory interest is sanctioned by and allowed pursuant to the above-
quoted provision of Article 1959 of the New Civil Code considering that:

First, there is an express stipulation in the promissory note (Exhibit "A")

permitting the compounding of interest. The fifth paragraph of the said

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promissory note provides that: "Any interest which may be due if not paid
shall be added to the total amount when due and shall become part thereof,
the whole amount to bear interest at the maximum rate allowed by
law."10 Therefore, any penalty interest not paid, when due, shall earn the
legal interest of twelve percent (12%) per annum,11 in the absence of express
stipulation on the specific rate of interest, as in the case at bar.

Second, Article 2212 of the New Civil Code provides that "Interest due shall
earn legal interest from the time it is judicially demanded, although the
obligation may be silent upon this point." In the instant case, interest
likewise began to run on the penalty interest upon the filing of the complaint
in court by respondent CCP on August 29, 1984. Hence, the courts a quo did
not err in ruling that the petitioner is bound to pay the interest on the total
amount of the principal, the monetary interest and the penalty interest.

The petitioner seeks the elimination of the compounded interest imposed on

the total amount based allegedly on the case of National Power Corporation
v. National Merchandising Corporation,12 wherein we ruled that the imposition
of interest on the damages from the filing of the complaint is unjust where
the litigation was prolonged for twenty-five (25) years through no fault of the
defendant. However, the ruling in the said National Power Corporation (NPC)
case is not applicable to the case at bar inasmuch as our ruling on the issue
of interest in that NPC case was based on equitable considerations and on
the fact that the said case lasted for twenty-five (25) years "through no fault
of the defendant." In the case at bar, however, equity cannot be considered
inasmuch as there is a contractual stipulation in the promissory note
whereby the petitioner expressly agreed to the compounding of interest in
case of failure on his part to pay the loan at maturity. Inasmuch as the said
stipulation on the compounding of interest has the force of law between the
parties and does not appear to be inequitable or unjust, the said written
stipulation should be respected.

The private respondents Statement of Account (marked Exhibits "C" to "C-

2")13 shows the following breakdown of the petitioners indebtedness as of
August 28, 1986:

Principa P2,838,454
l .68

Interest P
576,167.89

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 Surchar P4,581,692
ge .10

P7,996,314
.67

The said statement of account also shows that the above amounts stated
therein are net of the partial payments amounting to a total of Four Hundred
Fifty-Two Thousand Five Hundred Sixty-One Pesos and Forty-Three Centavos
(P452,561.43) which were made during the period from May 13, 1983 to
September 30, 1983.14 The petitioner now seeks the reduction of the penalty
due to the said partial payments. The principal amount of the promissory
note (Exhibit "A") was Three Million Four Hundred Eleven Thousand Four
Hundred Twenty-One Pesos and Thirty-Two Centavos (P3,411,421.32) when
the loan was restructured on August 31, 1979. As of August 28, 1986, the
principal amount of the said restructured loan has been reduced to Two
Million Eight Hundred Thirty-Eight Thousand Four Hundred Fifty-Four Pesos
and Sixty-Eight Centavos (P2,838,454.68). Thus, petitioner contends that
reduction of the penalty is justifiable pursuant to Article 1229 of the New
Civil Code which provides that: "The judge shall equitably reduce the penalty
when the principal obligation has been partly or irregularly complied with by
the debtor. Even if there has been no performance, the penalty may also be
reduced by the courts if it is iniquitous or unconscionable." Petitioner insists
that the penalty should be reduced to ten percent (10%) of the unpaid debt
in accordance with Bachrach Motor Company v. Espiritu.15

There appears to be a justification for a reduction of the penalty charge but

not necessarily to ten percent (10%) of the unpaid balance of the loan as
suggested by petitioner. Inasmuch as petitioner has made partial payments
which showed his good faith, a reduction of the penalty charge from two
percent (2%) per month on the total amount due, compounded monthly,
until paid can indeed be justified under the said provision of Article 1229 of
the New Civil Code.

In other words, we find the continued monthly accrual of the two percent
(2%) penalty charge on the total amount due to be unconscionable inasmuch
as the same appeared to have been compounded monthly.

Considering petitioners several partial payments and the fact he is liable

under the note for the two percent (2%) penalty charge per month on the
total amount due, compounded monthly, for twenty-one (21) years since his
default in 1980, we find it fair and equitable to reduce the penalty charge to

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a straight twelve percent (12%) per annum on the total amount due starting
August 28, 1986, the date of the last Statement of Account (Exhibits "C" to
"C-2"). We also took into consideration the offers of the petitioner to enter
into a compromise for the settlement of his debt by presenting proposed
payment schemes to respondent CCP. The said offers at compromise also
showed his good faith despite difficulty in complying with his loan obligation
due to his financial problems. However, we are not unmindful of the
respondents long overdue deprivation of the use of its money collectible
from the petitioner.

The petitioner also imputes error on the part of the appellate court for not
declaring the suspension of the running of the interest during that period
when the respondent allegedly failed to assist the petitioner in applying for
relief from liability. In this connection, the petitioner referred to the private
respondents letter16 dated September 28, 1988 addressed to petitioner
which partially reads:

Dear Mr. Tan:

xxx xxx xxx

With reference to your appeal for condonation of interest and

surcharge, we wish to inform you that the center will assist you in
applying for relief of liability through the Commission on Audit and
Office of the President xxx.

While your application is being processed and awaiting approval, the

center will be accepting your proposed payment scheme with the
downpayment of P160,000.00 and monthly remittances of P60,000.00
xxx.

xxx xxx xxx

The petitioner alleges that his obligation to pay the interest and surcharge
should have been suspended because the obligation to pay such interest and
surcharge has become conditional, that is dependent on a future and
uncertain event which consists of whether the petitioners request for
condonation of interest and surcharge would be recommended by the
Commission on Audit and the Office of the President to the House of
Representatives for approval as required under Section 36 of Presidential
Decree No. 1445. Since the condition has not happened allegedly due to the
private respondents reneging on its promise, his liability to pay the interest
and surcharge on the loan has not arisen. This is the petitioners contention.

It is our view, however, that the running of the interest and surcharge was
not suspended by the private respondents promise to assist the petitioners

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 in applying for relief therefrom through the Commission on Audit and the
Office of the President.

First, the letter dated September 28, 1988 alleged to have been sent by the
respondent CCP to the petitioner is not part of the formally offered
documentary evidence of either party in the trial court. That letter cannot be
considered evidence pursuant to Rule 132, Section 34 of the Rules of Court
which provides that: "The court shall consider no evidence which has not
been formally offered xxx." Besides, the said letter does not contain any
categorical agreement on the part of respondent CCP that the payment of
the interest and surcharge on the loan is deemed suspended while his appeal
for condonation of the interest and surcharge was being processed.

Second, the private respondent correctly asserted that it was the primary
responsibility of petitioner to inform the Commission on Audit and the Office
of the President of his application for condonation of interest and surcharge.
It was incumbent upon the petitioner to bring his administrative appeal for
condonation of interest and penalty charges to the attention of the said
government offices.

On the issue of attorneys fees, the appellate court ruled correctly and justly
in reducing the trial courts award of twenty-five percent (25%) attorneys
fees to five percent (5%) of the total amount due.

WHEREFORE, the assailed Decision of the Court of Appeals is hereby

AFFIRMED with MODIFICATION in that the penalty charge of two percent (2%)
per month on the total amount due, compounded monthly, is hereby reduced
to a straight twelve percent (12%) per annum starting from August 28, 1986.
With costs against the petitioner.

SO ORDERED.

Digest

FACTS:
1. Petition for review.
2. TAN OBTAINED 2 LOANS, EACH FOR P2,000,000 FROM CCP.
1. Executed a promissory note in amount of P3,411,421.32; payable
in 5 installments.
2. TAN failed to pay any installment on the said restructured loa.
3. In a letter, TAN requested and proposed to respondent CCP a
mode of paying the restructured loan
i. 20% of the principal amount of the loan upon the respondent
giving its conformity to his proposal

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 ii. Balance on the principal obligation payable 36 monthly
installments until fully paid.
4. TAN requested for a moratorium on his loan obligation until the
following year allegedly due to a substantial deduction in the volume of his
business and on account of the peso devaluation.
i. No favorable response was made to said letters.
ii. CCP demanded full payment, within ten (10) days from
receipt of said letter P6,088,735.03.
3. CCP FILED COMPLAINT collection of a sum of money
1. TAN interposed the defense that he accommodated a friend who
asked for help to obtain a loan from CCP.
i. Claimed that cannot find the friend.
2. TAN filed a Manifestation wherein he proposed to settle his
indebtedness to CCP by down payment of P140,000.00 and to issue1 2
checks every beginning of the year to cover installment payments for one
year, and every year thereafter until the balance is fully paid.
i. CCP did not agree to the petitioners proposals and so the
trial of the case ensued.
4. TRIAL COURT ORDERED TAN TO PAY CCP P7,996,314.67, representing
defendants outstanding account as of August 28, 1986, with the
corresponding stipulated interest and charges thereof, until fully paid, plus
attorneys fees in an amount equivalent to 25% of said outstanding account,
plus P50,000.00, as exemplary damages, plus costs.
1. REASONS:
i. Reason of loan for accommodation of friend was not credible.
ii. Assuming, arguendo, that the TAN did not personally benefit
from loan, he should have filed a 3rd-party complaint against Wilson Lucmen
iii. 3 times the petitioner offered to settle his loan obligation with
CCP.
iv. TAN may not avoid his liability to pay his obligation under the
promissory note which he must comply with in good faith.
v. TAN is estopped from denying his liability or loan obligation to
the private respondent.
5. TAN APPEALED TO CA, asked for the reduction of the penalties and
charges on his loan obligation.
1. Judgment appealed from is hereby AFFIRMED.
1. No alleged partial or irregular performance.
2. However, the appellate court modified the decision of the trial court by
deleting exemplary damages because not proportionate to actual damage
caused by the non-performance of the contract

ISSUES:

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 WON there are contractual and legal bases for the imposition of the penalty,
interest on the penalty and attorneys fees.
TAN imputes error on CA in not fully eliminating attorney fees and in not
reducing the penalties considering that he made partial payments on the
loan.
And if penalty is to be awarded, TAN asking for non-imposition of interest on
the surcharges because compounding of these are not included in
promissory note.
No basis in law for the charging of interest on the surcharges for the reason
that the New Civil Code is devoid of any provision allowing the imposition of
interest on surcharges.

WON interest may accrue on the penalty or compensatory interest without

violating ART 1959: Without prejudice to the provisions of Article 2212,
interest due and unpaid shall not earn interest. However, the contracting
parties may by stipulation capitalize the interest due and unpaid, which as
added principal, shall earn new interest.
TAN- No legal basis for the imposition of interest on the penalty charge for
the reason that the law only allows imposition of interest on monetary
interest but not the charging of interest on penalty. Penalties should not earn
interest.

WON TAN can file reduction of penalty due to made partial payments.
Petitioner contends that reduction of the penalty is justifiable under ART
1229: The judge shall equitably reduce the penalty when the principal
obligation has been partly or irregularly complied with by the debtor. Even if
there has been no performance, the penalty may also be reduced by the
courts if it is iniquitous or unconscionable.

HELD
CA DECISION AFFIRMED with MODIFICATION in that the penalty charge of two
percent (2%) per month on the total amount due, compounded monthly, is
hereby reduced to a straight twelve percent (12%) per annum starting from
August 28, 1986. With costs against the petitioner.

1. WON there are contractual and legal bases for the imposition of the
penalty, interest on the penalty and attorneys fees. YES. WITH LEGAL
BASES.
1. ART 1226: In obligations with a penal clause, the penalty shall
substitute the indemnity for damages and the payment of interests in case of
non-compliance, if there is no stipulation to the contrary. Nevertheless,
damages shall be paid if the obligor refuses to pay the penalty or is guilty of
fraud in the fulfillment of the obligation.

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 i. The penalty may be enforced only when it is demandable in
accordance with the provisions of this Code.
2. CASE AT BAR: promissory note expressed the imposition of both
interest and penalties in case of default on the part of the petitioner in the
payment of the subject restructured loan.
3. PENALTY IN MANY FORMS:
i. If the parties stipulate penalty apart monetary interest, two
are different and distinct from each other and may be demanded separately.
ii. If stipulation about payment of an additional interest rate
partakes of the nature of a penalty clause which is sanctioned by law:
1. ART 2209: If the obligation consists in the payment of a sum of money, and
the debtor incurs in delay, the indemnity for damages, there being no
stipulation to the contrary, shall be the payment of the interest agreed upon,
and in the absence of stipulation, the legal interest, which is six per cent per
annum.
4. CASE AT BAR: Penalty charge of 2% per month began to accrue
from the time of default by the petitioner.
i. No doubt petitioner is liable for both the stipulated monetary
interest and the stipulated penalty charge.
1. PENALTY CHARGE = penalty or compensatory interest.

2. WON interest may accrue on the penalty or compensatory interest

without violating ART 1959.
1. Penalty clauses can be in the form of penalty or compensatory
interest.
i. Thus, the compounding of the penalty or compensatory
interest is sanctioned by and allowed pursuant to the above-quoted provision
of Article 1959 of the New Civil Code considering that:
1. There is an express stipulation in the promissory note (Exhibit A)
permitting the compounding of interest.
a. 5th paragraph of the said promissory note provides that: Any interest
which may be due if not paid shall be added to the total amount when due
and shall become part thereof, the whole amount to bear interest at the
maximum rate allowed by law..
2. Therefore, any penalty interest not paid, when due, shall earn the legal
interest of twelve percent (12%) per annum, in the absence of express
stipulation on the specific rate of interest, as in the case at bar.
2. ART 2212: Interest due shall earn legal interest from the time it
is judicially demanded, although the obligation may be silent upon this
point.
3. CASE AT BAR: interest began to run on the penalty interest upon
the filing of the complaint in court by CCP.

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 i. Hence, the courts did not err in ruling that the petitioner is
bound to pay the interest on the total amount of the principal, the monetary
interest and the penalty interest.

3. WON TAN can file reduction of penalty due to made partial payments.
YES. BUT NOT 10% REDUCTION AS SUGGESTED BY PETITIONER.
1. REDUCED TO 2% REDUCTION:
i. PARTIAL PAYMENTS showed his good faith despite difficulty in
complying with his loan obligation due to his financial problems.
1. However, we are not unmindful of the respondents long overdue
deprivation of the use of its money collectible.
4. The petitioner also imputes error on the part of the appellate court for
not declaring the suspension of the running of the interest during period
when the CCP allegedly failed to assist the petitioner in applying for relief
from liability
1. Alleges that his obligation to pay the interest and surcharge
should have been suspended because the obligation to pay such interest and
surcharge has become conditional
i. Dependent on a future and uncertain event which consists of
whether the petitioners request for condonation of interest and surcharge
would be recommended by the Commission on Audit.
1. Since the condition has not happened due to the private respondents
reneging on its promise, his liability to pay the interest and surcharge on the
loan has not arisen.
2. COURT ANSWER:
i. Running of the interest and surcharge was not suspended.
ii. CCP correctly asserted that it was the primary responsibility
of petitioner to inform the Commission on Audit of his application for
condonation of interest and surcharge.

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 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 113926 October 23, 1996

SECURITY BANK AND TRUST COMPANY, petitioner,

vs.
REGIONAL TRIAL COURT OF MAKATI, BRANCH 61, MAGTANGGOL
EUSEBIO and LEILA VENTURA,respondents.

HERMOSISIMA, JR. J.:p

Questions of law which are of first impression are sought to be resolved in

this case: Should the rate of interest on a loan or forbearance of money,

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goods or credits, as stipulated in a contract, far in excess of the ceiling
prescribed under or pursuant to the Usury Law, prevail over Section 2 of
Central Bank Circular No. 905 which prescribes that the rate of interest
thereof shall continue to be 12% per annum? Do the Courts have the
discretion to arbitrarily override stipulated interest rates of promissory notes
and stipulated interest rates of promissory notes and thereby impose a 12%
interest on the loans, in the absence of evidence justifying the imposition of
a higher rate?

This is a petition for review on certiorari for the purpose of assailing the
decision of Honorable Judge Fernando V. Gorospe of the Regional Trial Court
of Makati, Branch 61, dated March 30, 1993, which found private respondent
Eusebio liable to petitioner for a sum of money. Interest was lowered by the
court a quo from 23% per annum as agreed upon the parties to 12% per
annum.

The undisputed facts are as follows:

On April 27, 1983, private respondent Magtanggol Eusebio executed

Promissory Note No. TL/74/178/83 in favor of petitioner Security Bank and
Trust Co. (SBTC) in the total amount of One Hundred Thousand Pesos
(P100,000.00) payable in six monthly installments with a stipulated interest
of 23% per annum up to the fifth installment. 1

On July 28, 1983, respondent Eusebio again executed Promissory Note No.
TL/74/1296/83 in favor of petitioner SBTC. Respondent bound himself to pay
the sum of One Hundred Thousand Pesos (P100,000.00) in six (6) monthly
installments plus 23% interest per annum. 2

Finally, another Promissory Note No. TL74/1491/83 was executed on August

31, 1983 in the amount of Sixty Five Thousand Pesos (P65,000.00).
Respondent agreed to pay this note in six (6) monthly installments plus
interest at the rate of 23% per annum. 3

On all the abovementioned promissory notes, private respondent Leila

Ventura had signed as co-maker. 4

Upon maturity which fell on the different dates below, the principal balance
remaining on the notes stood at:

1) PN No. TL/74/748/83 P16,665.00 as of September

1983.
2) PN No. TL/74/1296/83 P83,333.00 as of August 1983.
3) PN No. TL/74/1991/83 P65,000.00 as of August 1983.

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Upon the failure and refusal of respondent Eusebio to pay the aforestated
balance payable, a collection case was filed in court by petitioner SBTC. 5 On
March 30, 1993, the court a quo rendered a judgment in favor of petitioner
SBTC, the dispositive portion which reads:

WHEREFORE, premises above-considered, and plaintiff's claim

having been duly proven, judgment is hereby rendered in favor
of plaintiff and as against defendant Eusebio who is hereby
ordered to:

1. Pay the sum of P16,655.00, plus interest of 12% per

annum starting 27 September 1983, until fully paid;

2. Pay the sum of P83,333.00, plus interest of 12% per

annum starting 28 August 1983, until fully paid;

3. Pay the sum of P65,000.00, plus interest of 12% per

annum starting 31 August 1983, until fully paid;

4. Pay the sum equivalent to 20% of the total amount due and
payable to plaintiff as and by way of attorney's fees; and to

5. Pay the costs of this suit.

6
SO ORDERED.

On August 6, 1993, a motion for partial reconsideration was filed by

petitioner SBTC contending that:

(1) the interest rate agreed upon by the parties during the
signing of the promissory notes was 23%per annum;

(2) the interests awarded should be compounded quarterly from

due date as provided in the three (3) promissory notes;

(3) defendants Leila Ventura should likewise be held liable to pay

the balance on the promissory notes since she has signed as co-
maker and as such, is liable jointly and severally with defendant
Eusebio without a need for demand upon her. 7

Consequently, an Order was issued by the court a quo denying the motion to
grant the rates of interest beyond 12% per annum; and holding defendant
Leila Ventura jointly and severally liable with co-defendants Eusebio.

Hence, this petition.

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The sole issue to be settled in this petition is whether or not the 23% rate of
interest per annum agreed upon by petitioner bank and respondents is
allowable and not against the Usury Law.

We find merit in this petition.

From the examination of the records, it appears that indeed the agreed rate
of interest as stipulated on the three (3) promissory notes is 23% per
annum. 8 The applicable provision of law is the Central Bank Circular No. 905
which took effect on December 22, 1982, particularly Sections 1 and 2 which
state: 9

Sec. 1. The rate of interest, including commissions, premiums,

fees and other charges, on a loan or forbearance of any money,
goods or credits, regardless of maturity and whether secured or
unsecured, that may be charged or collected by any person,
whether natural or judicial, shall not be subject to any ceiling
prescribed under or pursuant to the Usury Law, as amended.

Sec. 2. The rate of interest for the loan or forbearance of any

money, goods or credits and the rate allowed in judgments, in
the absence of express contract as to such rate of interest, shall
continue to be twelve per cent (12%) per annum.

CB Circular 905 was issued by the Central Bank's Monetary Board pursuant
to P.D. 1684 empowering them to prescribe the maximum rates of interest
for loans and certain forbearances, to wit:

Sec. 1. Section 1-a of Act No. 2655, as amended, is hereby

amended to read as follows:

Sec. 1-a. The Monetary Board is hereby authorized to prescribe

the maximum rate of interest for the loan or renewal thereof or
the forbearance of any money, goods or credits, and to change
such rate or rates whenever warranted by prevailing economic
and social conditions: Provided, That changes in such rate or
rates may be effected gradually on scheduled dates announced
in advance.

In the exercise of the authority herein granted, the Monetary

Board may prescribe higher maximum rates for loans of low
priority, such as consumer loans or renewals thereof as well as
such loans made by pawnshops, finance companies and other
similar credit institutions although the rates prescribed for these
institutions need not necessarily be uniform. The Monetary Board
is also authorized to prescribed different maximum rate or rates

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 for different types of borrowings, including deposits and deposit
substitutes, or loans of financial intermediaries. 10

The court has ruled in the case of Philippine National Bank v. Court of
Appeals 11 that:

P.D. No. 1684 and C.B. Circular No. 905 no more than allow
contracting parties to stipulate freely regarding any subsequent
adjustment in the interest rate that shall accrue on a loan or
forbearance of money, goods or credits. In fine, they can agree
to adjust, upward or downward, the interest previously
stipulated.

All the promissory notes were signed in 1983 and, therefore, were already
covered by CB Circular No. 905. Contrary to the claim of respondent court,
this circular did not repeal nor in anyway amend the Usury Law but simply
suspended the latter's effectivity.

Basic is the rule of statutory construction that when the law is clear and
unambiguous, the court is left with no alternative but to apply the same
according to its clear language. As we have held in the case of Quijano
v.Development Bank of the Philippines: 12

. . . We cannot see any room for interpretation or construction in

the clear and unambiguous language of the above-quoted
provision of law. This Court had steadfastly adhered to the
doctrine that its first and fundamental duty is the application of
the law according to its express terms, interpretation being
called for only when such literal application is impossible. No
process of interpretation or construction need be resorted to
where a provision of law peremptorily calls for application. Where
a requirement or condition is made in explicit and unambiguous
terms, no discretion is left to the judiciary. It must see to it that is
mandate is obeyed.

The rate of interest was agreed upon by the parties freely. Significantly,
respondent did not question that rate. It is not for respondent court a quo to
change the stipulations in the contract where it is not illegal. Furthermore,
Article 1306 of the New Civil Code provides that contracting parties may
establish such stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good customs,
public order, or public policy. We find no valid reason for the respondent
court a quo to impose a 12% rate of interest on the principal balance owing
to petitioner by respondent in the presence of a valid stipulation. In a loan or
forbearance of money, the interest due should be that stipulated in writing,

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and in the absence thereof, the rate shall be 12% per annum. 13 Hence, only
in the absence of a stipulation can the court impose the 12% rate of interest.

The promissory notes were signed by both parties voluntarily. Therefore,

stipulations therein are binding between them. Respondent Eusebio, likewise,
did not question any of the stipulations therein. In fact, in the Comment filed
by respondent Eusebio to this court, he chose not to question the decision
and instead expressed his desire to negotiate with the petitioner bank for
"terms within which to settle his obligation." 14

IN VIEW OF THE FOREGOING, the decision of the respondent court a quo, is

hereby AFFIRMED with the MODIFICATION that the rate of interest that
should be imposed be 23% per annum.

SO ORDERED.

Digets

In 1983, Eusebio acquired 3 separate loans from Security Bank amounting to

P265k. The agreed interest rate was 23% per annum. The promissory note
was freely and voluntarily signed by both parties. Leia Ventura was the co-
maker. Eusebio defaulted from paying. Security Bank sued for collection.
Judge Gorospe of the Makati RTC ordered Eusebio to pay but he lowered the
interest rate to 12% per annum.
ISSUE: Whether or not the courts have liberality to reduce stipulated
interest rates to the legal rate of 12% per annum.
HELD: No. From the examination of the records, it appears that indeed the
agreed rate of interest as stipulated on the three (3) promissory notes is
23% per annum. The applicable provision of law is the Central Bank Circular
No. 905 which took effect on December 22, 1982:
Sec. 1. The rate of interest, including commissions, premiums, fees and other
charges, on a loan or forbearance of any money, goods or credits, regardless
of maturity and whether secured or unsecured, that may be charged or
collected by any person, whether natural or judicial, shall not be subject to
any ceiling prescribed under or pursuant to the Usury Law, as amended.
Only in the absence of stipulations will the 12% rate be applied or if the
stipulated rate is grossly excessive.
Further, Eusebio never questioned the rate. He merely expressed to
negotiate theterms and conditions. The promissory notes were signed by

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both parties voluntarily. Therefore, stipulations therein are binding between
them.
2nd digest

FACTS:

In 1983, Eusebio acquired 3 separate loans from Security Bank amounting to

P265k. The agreed interest rate was 23% per annum. The promissory note
was freely and voluntarily signed by both parties. Leia Ventura was the co-
maker. Eusebio defaulted from paying. Security Bank sued for collection.

DECISION OF LOWER COURTS:

* RTC: Judge Gorospe of the Makati RTC ordered Eusebio to pay but he
lowered the interest rate to 12% per annum.
* directly to SC in petition for certiorari.

ISSUES & RULING:

1. Should the rate of interest on a loan or forbearance of money, goods or
credits, as stipulated in a contract, far in excess of the ceiling prescribed
under or pursuant to the Usury Law, prevail over Section 2 of Central Bank
Circular No. 905 which prescribes that the rate of interest thereof shall
continue to be 12% per annum? or whether or not the 23% rate of interest
per annum agreed upon by petitioner bank and respondents is allowable and
not against the Usury Law?

Yes, the rate per contract prevails.

From the examination of the records, it appears that indeed the agreed rate
of interest as stipulated on the three (3) promissory notes is 23% per annum.
The applicable provision of law is the Central Bank Circular No. 905 which
took effect on December 22, 1982:

Sec. 1. The rate of interest, including commissions, premiums, fees and other
charges, on a loan or forbearance of any money, goods or credits, regardless
of maturity and whether secured or unsecured, that may be charged or
collected by any person, whether natural or judicial, shall not be subject to
any ceiling prescribed under or pursuant to the Usury Law, as amended.

Only in the absence of stipulations will the 12% rate be applied or if the
stipulated rate is grossly excessive.

Further, Eusebio never questioned the rate. He merely expressed to

negotiate the terms and conditions. The promissory notes were signed by

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both parties voluntarily. Therefore, stipulations therein are binding between
them.

2. Do the Courts have the discretion to arbitrarily override stipulated interest

rates of promissory notes and stipulated interest rates of promissory notes
and thereby impose a 12% interest on the loans, in the absence of evidence
justifying the imposition of a higher rate?

NO. The rate of interest was agreed upon by the parties freely. Significantly,
respondent did not question that rate. It is not for respondent court a quo to
change the stipulations in the contract where it is not illegal. Furthermore,
Article 1306 of the New Civil Code provides that contracting parties may
establish such stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good customs,
public order, or public policy. We find no valid reason for the respondent
court a quo to impose a 12% rate of interest on the principal balance owing
to petitioner by respondent in the presence of a valid stipulation. In a loan or
forbearance of money, the interest due should be that stipulated in writing,
and in the absence thereof, the rate shall be 12% per annum. Hence, only in
the absence of a stipulation can the court impose the 12% rate of interest.

APPLICABLE PROVISION OF LAW:

Central Bank Circular No. 905 which took effect on December 22, 1982,
particularly Sections 1 and 2 which state:

Sec. 1. The rate of interest, including commissions, premiums, fees and other
charges, on a loan or forbearance of any money, goods or credits, regardless
of maturity and whether secured or unsecured, that may be charged or
collected by any person, whether natural or judicial, shall not be subject to
any ceiling prescribed under or pursuant to the Usury Law, as amended.

Sec. 2. The rate of interest for the loan or forbearance of any money, goods
or credits and the rate allowed in judgments, in the absence of express
contract as to such rate of interest, shall continue to be twelve per cent
(12%) per annum.

All the promissory notes were signed in 1983 and, therefore, were already
covered by CB Circular No. 905. Contrary to the claim of respondent court,
this circular did not repeal nor in anyway amend the Usury Law but simply
suspended the latter's effectivity.

Republic of the Philippines

SUPREME COURT
Manila

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 THIRD DIVISION

G.R. No. 131622 November 27, 1998

LETICIA Y. MEDEL, DR. RAFAEL MEDEL and SERVANDO

FRANCO, petitioners,
vs.
COURT OF APPEALS, SPOUSES VERONICA R. GONZALES and DANILO
G. GONZALES, JR. doing lending business under the trade name and
style "GONZALES CREDIT ENTERPRISES", respondents.

PARDO, J.:

The case before the Court is a petition for review on certiorari, under Rule 45
of the Revised Rules of Court, seeking to set aside the decision of the Court
of Appeals, 1 and its resolution denying reconsideration, 2 the dispositive
portion of which decision reads as follows:

WHEREFORE, the appealed judgment is hereby MODIFIED such

that defendants are hereby-ordered to pay the plaintiff: the sum
of P500,000.00, plus 5.5% per month interest and 2% service
charge per annum effective July 23, 1986, plus 1% per month of
the total amount due and demandable as penalty charges
effective August 23, 1986, until the entire amount is fully paid.

The award to the plaintiff of P50,000.00 as attorney's fees is

affirmed. And so is the imposition of costs against the
defendants.
3
SO ORDERED.

The Court required the respondents to comment on the petition, 4 which was
filed on April 3, 1998, 5 and the petitioners to reply thereto, which was filed
on May 29, 1998. 6 We now resolve to give due course to the petition and
decide the case.

The facts of the case, as found by the Court of Appeals in its decision, which
are considered binding and conclusive on the parties herein, as the appeal is
limited to questions of law, are as follows:

On November 7, 1985, Servando Franco and Leticia Medel (hereafter

Servando and Leticia) obtained a loan from Veronica R. Gonzales (hereafter

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Veronica), who was engaged in the money lending business under the name
"Gonzales Credit Enterprises", in the amount of P50,000.00, payable in two
months. Veronica gave only the amount of P47,000.00, to the borrowers, as
she retained P3,000.00, as advance interest for one month at 6% per month.
Servando and Leticia executed a promissory note for P50,000.00, to
evidence the loan, payable on January 7, 1986.

On November 19, 1985, Servando and Liticia obtained from Veronica another
loan in the amount of P90,000.00, payable in two months, at 6% interest per
month. They executed a promissory note to evidence the loan, maturing on
Janaury 19, 1986. They received only P84,000.00, out of the proceeds of the
loan.

On maturity of the two promissory notes, the borrowers failed to pay the
indebtedness.

On June 11, 1986, Servando and Leticia secured from Veronica still another
loan in the amout of P300,000.00, maturing in one month, secured by a real
estate mortgage over a property belonging to Leticia Makalintal Yaptinchay,
who issued a special power of attorney in favor of Leticia Medel, authorizing
her to execute the mortgage. Servando and Leticia executed a promissory
note in favor of Veronica to pay the sum of P300,000.00, after a month, or on
July 11, 1986. However, only the sum of P275.000.00, was given to them out
of the proceeds of the loan.

Like the previous loans, Servando and Medel failed to pay the third loan on
maturity.

On July 23, 1986, Servando and Leticia with the latter's husband, Dr. Rafael
Medel, consolidated all their previous unpaid loans totaling P440,000.00, and
sought from Veronica another loan in the amount of P60,000.00, bringing
their indebtedness to a total of P500,000.00, payable on August 23, 1986.
They executed a promissory note, reading as follows:

Baliwag, Bulacan July 23, 1986

Maturity Date Augsut 23, 1986

P500,000.00

FOR VALUE RECEIVED, I/WE jointly and severally promise to pay

to the order of VERONICA R. GONZALES doing business in the
business style of GONZALES CREDIT ENTERPRISES, Filipino, of
legal age, married to Danilo G. Gonzales, Jr., of Baliwag, Bulacan,
the sum of PESOS . . . FIVE HUNDRED THOUSAND . . .
(P500,000.00) Philippine Currency with interest thereon at the

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 rate of 5.5 PER CENT per month plus 2% service charge per
annum from date hereof until fully paid according to the
amortization schedule contained herein. (Emphasis supplied)

Payment will be made in full at the maturity date.

Should I/WE fail to pay any amortization or portion hereof when

due, all the other installments together with all interest accrued
shall immediately be due and payable and I/WE hereby agree to
pay an additional amount equivalent to one per cent (1%) per
month of the amount due and demandable as penalty charges in
the form of liquidated damages until fully paid; and the
further sum of TWENTY FIVE PER CENT (25%) thereof in
full, without deductions as Attorney's Fee whether actually
incurred or not, of the total amount due and demandable,
exclusive of costs and judicial or extra judicial expenses.
(Emphasis supplied).

I, WE further agree that in the event the present rate of interest

on loan is increased by law or the Central Bank of the Philippines,
the holder shall have the option to apply and collect the
increased interest charges without notice although the original
interest have already been collected wholly or partially unless
the contrary is required by law.

It is also a special condition of this contract that the parties

herein agree that the amount of peso-obligation under this
agreement is based on the present value of the peso, and if there
be any change in the value thereof, due to extraordinary inflation
or deflation, or any other cause or reason, then the peso-
obligation herein contracted shall be adjusted in accordance with
the value of the peso then prevailing at the time of the complete
fulfillment of the obligation.

Demand and notice of dishonor waived. Holder may accept

partial payments and grant renewals of this note or extension of
payments, reserving rights against each and all indorsers and all
parties to this note.

IN CASE OF JUDICIAL Execution of this obligation, or any part of

it, the debtors waive all his/their rights under the provisions of
Section 12, Rule 39, of the Revised Rules of Court.

On maturity of the loan, the borrowers failed to pay the indebtedness of

P500,000.00, plus interests and penalties, evidenced by the above-quoted
promissory note.

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On February 20, 1990, Veronica R. Gonzales, joined by her husband Danilo G.
Gonzales, filed with the Regional Trial Court of Bulacan, Branch 16, at
Malolos, Bulacan, a complaint for collection of the full amount of the loan
including interests and other charges.

In his answer to the complaint filed with the trial court on April 5, 1990,
defendant Servando alleged that he did not obtain any loan from the
plaintiffs; that it was defendants Leticia and Dr. Rafael Medel who borrowed
from the plaintiffs the sum of P500,000.00, and actually received the amount
and benefited therefrom; that the loan was secured by a real estate
mortgage executed in favor of the plaintiffs, and that he (Servando Franco)
signed the promissory note only as a witness.

In their separate answer filed on April 10, 1990, defendants Leticia and
Rafael Medel alleged that the loan was the transaction of Leticia Yaptinchay,
who executed a mortgage in favor of the plaintiffs over a parcel of real estate
situated in San Juan, Batangas; that the interest rate is excessive at 5.5% per
month with additional service charge of 2% per annum, and penalty charge
of 1% per month; that the stipulation for attorney's fees of 25% of the
amount due is unconscionable, illegal and excessive, and that substantial
payments made were applied to interest, penalties and other charges.

After due trial, the lower court declared that the due execution and
genuineness of the four promissory notes had been duly proved, and ruled
that although the Usury Law had been repealed, the interest charged by the
plaintiffs on the loans was unconscionable and "revolting to the conscience".
Hence, the trial court applied "the provision of the New [Civil] Code" that the
"legal rate of interest for loan or forbearance of money, goods or credit is
12% per annum." 7

Accordingly, on December 9, 1991, the trial court rendered judgment, the

dispositive portion of which reads as follows:

WHEREFORE, premises considered, judgment is hereby rendered,

as follows:

1. Ordering the defendants Servando Franco and Leticia Medel,

jointly and severally, to pay plaintiffs the amount of P47,000.00
plus 12% interest per annum from November 7, 1985 and 1% per
month as penalty, until the entire amount is paid in full.

2. Ordering the defendants Servando Franco and Leticia Y. Medel

to plaintiffs, jointly and severally the amount of P84,000.00 with
12% interest per annum and 1% per cent per month as penalty
from November 19, 1985 until the whole amount is fully paid;

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 3. Ordering the defendants to pay the plaintiffs, jointly and
severally, the amount of P285,000.00 plus 12% interest per
annum and 1% per month as penalty from July 11, 1986, until
the whole amount is fully paid;

4. Ordering the defendants to pay plaintiffs, jointly and severally,

the amount of P50,000.00 as attorney's fees;

5. All counterclaims are hereby dismissed.

With costs against the defendants. 8

In due time, both plaintiffs and defendants appealed to the Court of Appeals.

In their appeal, plaintiffs-appellants argued that the promissory note, which

consolidated all the unpaid loans of the defendants, is the law that governs
the parties. They further argued that Circular No. 416 of the Central Bank
prescribing the rate of interest for loans or forbearance of money, goods or
credit at 12% per annum, applies only in the absence of a stipulation on
interest rate, but not when the parties agreed thereon.

The Court of Appeals sustained the plaintiffs-appellants' contention. It ruled

that "the Usury Law having become 'legally inexistent' with the promulgation
by the Central Bank in 1982 of Circular No. 905, the lender and borrower
could agree on any interest that may be charged on the loan". 9 The Court of
Appeals further held that "the imposition of 'an additional amount equivalent
to 1% per month of the amount due and demandable as penalty charges in
the form of liquidated damages until fully paid' was allowed by
law". 10

Accordingly, on March 21, 1997, the Court of Appeals promulgated its

decision reversing that of the Regional Trial Court, disposing as follows:

WHEREFORE, the appealed judgment is hereby MODIFIED such

that defendants are hereby ordered to pay the plaintiffs the sum
of P500,000.00, plus 5.5% per month interest and 2% service
charge per annum effective July 23, 1986, plus 1% per month of
the total amount due and demandable as penalty charges
effective August 24, 1986, until the entire amount is fully paid.

The award to the plaintiffs of P50,000.00 as attorney's fees is

affirmed. And so is the imposition of costs against the
defendants.
11
SO ORDERED.

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On April 15, 1997, defendants-appellants filed a motion for reconsideration of
the said decision. By resolution dated November 25, 1997, the Court of
Appeals denied the motion. 12

Hence, defendants interposed the present recourse via petition for review
on certiorari. 13

We find the petition meritorious.

Basically, the issue revolves on the validity of the interest rate stipulated
upon. Thus, the question presented is whether or not the stipulated rate of
interest at 5.5% per month on the loan in the sum of P500,000.00, that
plaintiffs extended to the defendants is usurious. In other words, is the Usury
Law still effective, or has it been repealed by Central Bank Circular No. 905,
adopted on December 22, 1982, pursuant to its powers under P.D. No. 116,
as amended by P.D. No. 1684?

We agree with petitioners that the stipulated rate of interest at 5.5% per
month on the P500,000.00 loan is excessive, iniquitous, unconscionable and
exorbitant. 13 However, we can not consider the rate "usurious" because this
Court has consistently held that Circular No. 905 of the Central Bank,
adopted on December 22, 1982, has expressly removed the interest ceilings
prescribed by the Usury Law 14 and that the Usury Law is now "legally
inexistent". 15

In Security Bank and Trust Company vs. Regional Trial Court of Makati,
Branch 61 16 the Court held that CB Circular No. 905 "did not repeal nor in
anyway amend the Usury Law but simply suspended the latter's effectivity."
Indeed, we have held that "a Central Bank Circular can not repeal a law. Only
a law can repeal another law." 17 In the recent case of Florendo vs. Court of
Appeals 18, the Court reiterated the ruling that "by virtue of CB Circular 905,
the Usury Law has been rendered ineffective". "Usury has been legally non-
existent in our jurisdiction. Interest can now be charged as lender and
borrower may agree upon." 19

Nevertheless, we find the interest at 5.5% per month, or 66% per annum,
stipulated upon by the parties in the promissory note iniquitous or
unconscionable, and, hence, contrary to morals ("contra bonos mores"), if
not against the law. 20 The stipulation is void. 21 The courts shall reduce
equitably liquidated damages, whether intended as an indemnity or a
penalty if they are iniquitous or unconscionable. 22

Consequently, the Court of Appeals erred in upholding the stipulation of the

parties. Rather, we agree with the trial court that, under the circumstances,
interest at 12% per annum, and an additional 1% a month penalty charge as
liquidated damages may be more reasonable.

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WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of
the Court of Appeals promulgated on March 21, 1997, and its resolution
dated November 25, 1997. Instead, we render judgment REVIVING and
AFFIRMING the decision dated December 9, 1991, of the Regional Trial Court
of Bulacan, Branch 16, Malolos, Bulacan, in Civil Case No. 134-M-90,
involving the same parties.

No pronouncement as to costs in this instance.

SO ORDERED.

Digest

FACTS:

Four loans were involved in this case. The first loan was secured by the
spouses Medel from Gonzales in the amount of P50,000 wherein P3,000 was
withheld by the latter as advance interest. This was secured by a promissory
note. The second loan obtained was for P90,000. The spouses only received
P84,000. The third loan was for P300,000 and this was secured by a real
estate mortgage. The spouses failed to pay for the aforementioned three
loans. This was consolidated into one loan in the amount of
P500,000. An additional P60,000 was loaned to make the payable P500,000.
This was covered with
a promissory note containing an acceleration clause. Again the spouses
failed to pay. The appellate court modified the interest to be paid by saying
that that the interest should be 5.5% per month.

HELD:
The interest was exorbitant, iniquitous, and unconscionable and hence, it
contrary to morals, if not the law.
2nd digest

Facts: Defendants obtained a loan from Plaintiff in the amount P50, 000.00,
payable in 2 months and executed a promissory note. Plaintiff gave only the
amount of P47, 000.00 to the borrowers and retained P3, 000.00 as advance
interest for 1 month at 6% per month.
Defendants obtained another loan from Defendant in the amount of P90,
000.00, payable in 2 months, at 6% interest per month. They executed a

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promissory note to evidence the loan and received only P84, 000.00 out of
the proceeds of the loan.

For the third time, Defendants secured from Plaintiff another loan in the
amount of P300, 000.00, maturing in 1 month, and secured by a real estate
mortgage. They executed a promissory note in favor of the Plaintiff.
However, only the sum of P275, 000.00, was given to them out of the
proceeds of the loan.

Upon maturity of the three promissory notes, Defendants failed to pay the
indebtedness.

Defendants consolidated all their previous unpaid loans totalling P440,

000.00, and sought from Plaintiff another loan in the amount of P60, 000.00,
bringing their indebtedness to a total of P50,000.00. They executed another
promissory note in favor of Plaintiff to pay the sum of P500, 000.00 with a
5.5% interest per month plus 2% service charge per annum, with an
additional amount of 1% per month as penalty charges.

On maturity of the loan, the Defendants failed to pay the indebtedness which
prompt the Plaintiffs to file with the RTC a complaint for collection of the full
amount of the loan including interests and other charges.

Declaring that the due execution and genuineness of the four promissory
notes has been duly proved, the RTC ruled that although the Usury Law had
been repealed, the interest charged on the loans was unconscionable and
revolting to the conscience and ordered the payment of the amount of the
first 3 loans with a 12% interest per annum and 1% per month as penalty.
On appeal, Plaintiff-appellants argued that the promissory note, which
consolidated all the unpaid loans of the defendants, is the law that governs
the parties.

The Court of Appeals ruled in favor of the Plaintiff-appellants on the ground

that the Usury Law has become legally inexistent with the promulgation by
the Central Bank in 1982 of Circular No. 905, the lender and the borrower
could agree on any interest that may be charged on the loan, and ordered
the Defendants to pay the Plaintiffs the sum of P500,000, plus 5.5% per
month interest and 2& service charge per annum , and 1% per month as
penalty charges.

Defendants filed the present case via petition for review on certiorari.

Issue: WON the stipulated 5.5% interest rate per month on the loan in the
sum of P500, 000.00 is usurious.
Held: No.

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A stipulated rate of interest at 5.5% per month on the P500, 000.00 loan is
excessive, iniquitous, unconscionable and exorbitant, but it cannot be
considered usurious because Central Bank Circular No. 905 has expressly
removed the interest ceilings prescribed by the Usury Law and that the Usury
Law is now legally inexistent.

Doctrine: A CB Circular cannot repeal a law. Only a law can repeal

another law.
Jurisprudence provides that CB Circular did not repeal nor in a way amend
the Usury Law but simply suspended the latters effectivity (Security Bank
and Trust Co vs RTC). Usury has been legally non-existent in our jurisdiction.
Interest can now be charged as lender and borrower may agree upon.

Law: Article 2227, Civil Code

The courts shall reduce equitably liquidated damages, whether intended as
an indemnity or a penalty if they are iniquitous or unconscionable.

Note: While the Usury Law ceiling on interest rates was lifted by the CB
Circular 905, nothing in the said circular could possibly be read as granting
carte blanche authority to lenders to raise interest rates to levels which
would either enslave their borrowers or lead to a haemorrhaging of their
assets (Almeda vs. CA, 256 SCRA 292 [1996]).

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-48349 December 29, 1986

FRANCISCO HERRERA, plaintiff-appellant,

vs.
PETROPHIL CORPORATION, defendant-appellee.

Paterno R. Canlas Law Offices for plaintiff-appellant.

CRUZ, J.:

This is an appeal by the plaintiff-appellant from a decision rendered by the

then Court of First Instance of Rizal on a pure question of law. 1

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The judgment appealed from was rendered on the pleadings, the parties
having agreed during the pretrial conference on the factual antecedents.

The facts are as follows: On December 5, 1969, the plaintiff-appellant and

ESSO Standard Eastern. Inc., (later substituted by Petrophil Corporation)
entered into a "Lease Agreement" whereby the former leased to the latter a
portion of his property for a period of twenty (20) years from said date,
subject inter alia to the following conditions:

3. Rental: The LESSEE shall pay the LESSOR a rental of Pl.40 sqm. per
month on 400 sqm. and are to be expropriated later on (sic) or P560
per month and Fl.40 per sqm. per month on 1,693 sqm. or P2,370.21
per month or a total of P2,930.20 per month 2,093 sqm. more or less,
payable yearly in advance within the 1st twenty days of each year;
provided, a financial aid in the sum of P15,000 to clear the leased
premises of existing improvements thereon is paid in this manner;
P10,000 upon execution of this lease and P5,000 upon delivery of
leased premises free and clear of improvements thereon within 30
days from the date of execution of this agreement. The portion on the
side of the leased premises with an area of 365 sqrm. more or less, will
be occupied by LESSEE without rental during the lifetime of this lease.
PROVIDED FINALLY, that the Lessor is paid 8 years advance rental
based on P2,930.70 per month discounted at 12% interest per annum
or a total net amount of P130,288.47 before registration of lease.
Leased premises shall be delivered within 30 days after 1st partial
payment of financial aid. 2

On December 31, 1969, pursuant to the said contract, the defendant-

appellee paid to the plaintfff-appellant advance rentals for the first eight
years, subtracting therefrom the amount of P101,010.73, the amount it
computed as constituting the interest or discount for the first eight years, in
the total sum P180,288.47. On August 20, 1970, the defendant-appellee,
explaining that there had been a mistake in computation, paid to the
appellant the additional sum of P2,182.70, thereby reducing the deducted
amount to only P98,828.03. 3

On October 14, 1974, the plaintiff-appellant sued the defendant-appellee for

the sum of P98,828.03, with interest, claiming this had been illegally
deducted from him in violation of the Usury Law. 4 He also prayed for moral
damages and attorney's fees. In its answer, the defendant-appellee admitted
the factual allegations of the complaint but argued that the amount
deducted was not usurious interest but a given to it for paying the rentals in
advance for eight years. 5 Judgment on the pleadings was rendered for the
defendant. 6

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Plaintiff-appellant now prays for a reversal of that judgment, insisting that
the lower court erred in the computation of the interest collected out of the
rentals paid for the first eight years; that such interest was excessive and
violative of the Usury Law; and that he had neither agreed to nor accepted
the defendant-appellant's computation of the total amount to be deducted
for the eight years advance rentals. 7

The thrust of the plaintiff-appellant's position is set forth in paragraph 6 of

his complaint, which read:

6. The interest collected by defendant out of the rentals for the first
eight years was excessive and beyond that allowable by law, because
the total interest on the said amount is only P33,755.90 at P4,219.4880
per yearly rental; and considering that the interest should be
computed excluding the first year rental because at the time the
amount of P281, 199.20 was paid it was already due under the lease
contract hence no interest should be collected from the rental for the
first year, the amount of P29,536.42 only as the total interest should
have been deducted by defendant from the sum of P281,299.20.

The defendant maintains that the correct amount of the discount is

P98,828.03 and that the same is not excessive and above that allowed by
law.

As its title plainly indicates, the contract between the parties is one of lease
and not of loan. It is clearly denominated a "LEASE AGREEMENT." Nowhere in
the contract is there any showing that the parties intended a loan rather
than a lease. The provision for the payment of rentals in advance cannot be
construed as a repayment of a loan because there was no grant or
forbearance of money as to constitute an indebtedness on the part of the
lessor. On the contrary, the defendant-appellee was discharging its obligation
in advance by paying the eight years rentals, and it was for this advance
payment that it was getting a rebate or discount.

The provision for a discount is not unusual in lease contracts. As to its

validity, it is settled that the parties may establish such stipulations, clauses,
terms and condition as they may want to include; and as long as such
agreements are not contrary to law, morals, good customs, public policy or
public order, they shall have the force of law between them. 8

There is no usury in this case because no money was given by the

defendant-appellee to the plaintiff-appellant, nor did it allow him to use its
money already in his possession. 9 There was neither loan nor forbearance
but a mere discount which the plaintiff-appellant allowed the defendant-
appellee to deduct from the total payments because they were being made
in advance for eight years. The discount was in effect a reduction of the

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rentals which the lessor had the right to determine, and any reduction
thereof, by any amount, would not contravene the Usury Law.

The difference between a discount and a loan or forbearance is that the

former does not have to be repaid. The loan or forbearance is subject to
repayment and is therefore governed by the laws on usury. 10

To constitute usury, "there must be loan or forbearance; the loan must be of

money or something circulating as money; it must be repayable absolutely
and in all events; and something must be exacted for the use of the money
in excess of and in addition to interest allowed by law." 11

It has been held that the elements of usury are (1) a loan, express or implied;
(2) an understanding between the parties that the money lent shall or may
be returned; that for such loan a greater rate or interest that is allowed by
law shall be paid, or agreed to be paid, as the case may be; and (4) a corrupt
intent to take more than the legal rate for the use of money loaned. Unless
these four things concur in every transaction, it is safe to affirm that no case
of usury can be declared. 12

Concerning the computation of the deductible discount, the trial court

declared:

As above-quoted, the 'Lease Agreement' expressly provides that the

lessee (defendant) shag pay the lessor (plaintiff) eight (8) years in
advance rentals based on P2,930.20 per month discounted at 12%
interest per annum. Thus, the total rental for one-year period is
P35,162.40 (P2,930.20 multiplied by 12 months) and that the interest
therefrom is P4,219.4880 (P35,162.40 multiplied by 12%). So,
therefore, the total interest for the first eight (8) years should be only
P33,755.90 (P4,129.4880 multiplied by eight (8) years and not
P98,828.03 as the defendant claimed it to be.

The afore-quoted manner of computation made by plaintiff is patently

erroneous. It is most seriously misleading. He just computed the
annual discount to be at P4,129.4880 and then simply multiplied it by
eight (8) years. He did not take into consideration the naked fact that
the rentals due on the eight year were paid in advance by seven (7)
years, the rentals due on the seventh year were paid in advance by six
(6) years, those due on the sixth year by five (5) years, those due on
the fifth year by four (4) years, those due on the fourth year by three
(3) years, those due on the third year by two (2) years, and those due
on the second year by one (1) year, so much so that the total number
of years by which the annual rental of P4,129.4880 was paid in
advance is twenty-eight (28), resulting in a total amount of
P118,145.44 (P4,129.48 multiplied by 28 years) as the discount.

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 However, defendant was most fair to plaintiff. It did not simply multiply
the annual rental discount by 28 years. It computed the total discount
with the principal diminishing month to month as shown by Annex 'A'
of its memorandum. This is why the total discount amount to only P
8,828.03.

The allegation of plaintiff that defendant made the computation in a

compounded manner is erroneous. Also after making its own
computations and after examining closely defendant's Annex 'A' of its
memorandum, the court finds that defendant did not charge 12%
discount on the rentals due for the first year so much so that the
computation conforms with the provision of the Lease Agreement to
the effect that the rentals shall be 'payable yearly in advance within
the 1st 20 days of each year. '

We do not agree. The above computation appears to be too much technical

mumbo-jumbo and could not have been the intention of the parties to the
transaction. Had it been so, then it should have been clearly stipulated in the
contract. Contracts should be interpreted according to their literal meaning
and should not be interpreted beyond their obvious intendment. 13

The plaintfff-appellant simply understood that for every year of advance

payment there would be a deduction of 12% and this amount would be the
same for each of the eight years. There is no showing that the intricate
computation applied by the trial court was explained to him by the
defendant-appellee or that he knowingly accepted it.

The lower court, following the defendant-appellee's formula, declared that

the plaintiff-appellant had actually agreed to a 12% reduction for advance
rentals for all of twenty eight years. That is absurd. It is not normal for a
person to agree to a reduction corresponding to twenty eight years advance
rentals when all he is receiving in advance rentals is for only eight years.

The deduction shall be for only eight years because that was plainly what the
parties intended at the time they signed the lease agreement. "Simplistic" it
may be, as the Solicitor General describes it, but that is how the lessor
understood the arrangement. In fact, the Court will reject his subsequent
modification that the interest should be limited to only seven years because
the first year rental was not being paid in advance. The agreement was for
auniform deduction for the advance rentals for each of the eight years, and
neither of the parties can deviate from it now.

On the annual rental of P35,168.40, the deducted 12% discount was

P4,220.21; and for eight years, the total rental was P281,347.20 from which
was deducted the total discount of P33,761.68, leaving a difference of

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P247,585.52. Subtracting from this amount, the sum of P182,471.17 already
paid will leave a balance of P65,114.35 still due the plaintiff-appellant.

The above computation is based on the more reasonable interpretation of

the contract as a whole rather on the single stipulation invoked by the
respondent for the flat reduction of P130,288.47.

WHEREFORE, the decision of the trial court is hereby modified, and the
defendant-appellee Petrophil Corporation is ordered to pay plaintiff-appellant
the amount of Sixty Five Thousand One Hundred Fourteen pesos and Thirty-
Five Centavos (P65,114.35), with interest at the legal rate until fully paid,
plus Ten Thousand Pesos (P10,000.00) as attorney's fees. Costs against the
defendant-appellee.

SO ORDERED.

Digest

Facts:

On December 5, 1969, Herrera and ESSO Standard, (later substituted by

Petrophil Corp.,) entered into a lease agreement, whereby the former leased
to the latter a portion of his property for a period of 20yrs.subject to the
condition that monthly rentals should be paid and there should be an
advance payment of rentals for the first eight years of the contract, to which
ESSO paid on December 31, 1969. However, ESSO deducted the amount of
101, 010.73 as interest or discount for the eight years advance rental. On
August 20, 1970, ESSO informed Herrera that there had been a mistake in
the computation of the interest and paid an additional sum of 2,182.70; thus,
it was reduced to 98, 828.03. As such, Herrera sued ESSO for the sum of 98,
828.03, with interest, claiming that this had been illegally deducted to him in
violation of the Usury Law. ESSO argued that amount deducted was not
usurious interest but rather a discount given to it for paying the rentals in
advance. Judgment on the pleadings was rendered in favor of ESSO. Thus,
the matter was elevated to the SC for only question of law was involved.

ISSUE:

W/N the contract between the parties is one of loan or lease.

RULING:

Contract between the parties is one of lease and not of loan. It is clearly
denominated a "LEASEAGREEMENT." Nowhere in the contract is there any

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showing that the parties intended a loan rather than a lease. The provision
for the payment of rentals in advance cannot be construed as are payment
of a loan because there was no grant or forbearance of money as to
constitute an indebtedness on the part of the lessor. On the contrary, the
defendant-appellee was discharging its obligation in advance by paying the
eight years rentals, and it was for this advance payment that it was getting a
rebate or discount.

---

There is no usury in this case because no money was given by

the defendant-appellee to the plaintiff-appellant, nor did it allow him to use
its money already in his possession. There was neither loan nor forbearance
but a mere discount which the plaintiff-appellant allowed the defendant-
appellee to deduct from the total payments because they were being made
in advance for eight years. The discount was in effect a reduction of the
rentals which the lessor had the right to determine, and any reduction
thereof, by any amount, would not contravene the Usury Law

The difference between a discount and a loan or forbearance is that

the former does not have to be repaid. The loan or forbearance is subject to
repayment and is therefore governed by the laws on usury.

To constitute usury, "there must be loan or forbearance; the loan must be of

money or something circulating as money; it must be repayable absolutely
and in all events; and something must be exacted for the use of the money
in excess of and in addition to interest allowed by law."

It has been held that the elements of usury are

(1) a loan, express or implied; (2) an understanding between the parties that
the money lent shall or may be returned; that for such loan a greater rate or
interest that is allowed by law shall be paid, or agreed to be paid, as the case
may be; and (4) a corrupt intent to take more than the legal rate for the use
of money loaned.

Unless these four things concur in every transaction, it is safe to affirm that
no case of usury can be declared.

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Republic of the Philippines
SUPREME COURT
Manila

EN BANC

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G.R. No. L-18208 February 14, 1922
THE UNITED STATES, plaintiff-appellee,
vs.
VICENTE DIAZ CONDE and APOLINARIA R. DE CONDE, defendants-
appellants.

JOHNSON, J.:

It appears from the record that on the 6th day of May, 1921, a complaint was
presented in the Court of First Instance of the city of Manila, charging the
defendants with a violation of the Usury Law (Act No. 2655). Upon said
complaint they were each arrested, arraigned, and pleaded not guilty. The
cause was finally brought on for trial on the 1st day of September, 1921. At
the close of the trial, and after a consideration of the evidence adduced, the
Honorable M. V. del Rosario, judge, found that the defendants were guilty of
the crime charged in the complaint and sentenced each of them to pay a fine
of P120 and, in case of insolvency, to suffer subsidiary imprisonment in
accordance with the provisions of the law. From that sentence each of the
defendants appealed to this court.

The appellants now contend: (a) That the contract upon which the alleged
usurious interest was collected was executed before Act No. 2655 was
adopted; (b) that at the time said contract was made (December 30, 1915),
there was no usury law in force in the Philippine Islands; (c) that said Act No.
2655 did not become effective until the 1st day of May, 1916, or four months
and a half after the contract in question was executed; (d) that said law
could have no retroactive effect or operation, and (e) that said law impairs
the obligation of a contract, and that for all of said reasons the judgment
imposed by the lower court should be revoked; that the complaint should be
dismissed, and that they should each be discharged from the custody of the
law.

The essential facts constituting the basis of the criminal action are not in
dispute, and may be stated as follows: (1) That on the 30th day of
December, 1915, the alleged offended persons Bartolome Oliveros and
Engracia Lianco executed and delivered to the defendants a contract (Exhibit
B) evidencing the fact that the former had borrowed from the latter the sum
of P300, and (2) that, by virtue of the terms of said contract, the said
Bartolome Oliveros and Engracia Lianco obligated themselves to pay to the
defendants interest at the rate of five per cent (5%) per month, payable
within the first ten days of each and every month, the first payment to be
made on the 10th day of January, 1916. There were other terms in the
contract which, however, are not important for the decision in the present
case.

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The lower court, in the course of its opinion, stated that at the time of the
execution and delivery of said contract (Exhibit B), there was no law in force
in the Philippine Islands punishing usury; but, inasmuch as the defendants
had collected a usurious rate of interest after the adoption of the Usury Law
in the Philippine Islands (Act No. 2655), they were guilty of a violation of that
law and should be punished in accordance with its provisions.

The law, we think, is well established that when a contract contains an

obligation to pay interest upon the principal, the interest thereby becomes
part of the principal and is included within the promise to pay. In other words,
the obligation to pay interest on money due under a contract, be it express
or implied, is a part of the obligation of the contract. Laws adopted after the
execution of a contract, changing or altering the rate of interest, cannot be
made to apply to such contract without violating the provisions of the
constitution which prohibit the adoption of a law "impairing the obligation of
contract." (8 Cyc., 996; 12 Corpus Juris, 1058-1059.)

The obligation of the contract is the law which binds the parties to perform
their agreement if it is not contrary to the law of the land, morals or public
order. That law must govern and control the contract in every aspect in
which it is intended to bear upon it, whether it affect its validity,
construction, or discharge. Any law which enlarges, abridges, or in any
manner changes the intention of the parties, necessarily impairs the contract
itself. If a law impairs the obligation of a contract, it is prohibited by the Jones
Law, and is null and void. The laws in force in the Philippine Islands prior to
any legislation by the American sovereignty, prohibited the Legislature from
giving to any penal law a retroactive effect unless such law was favorable to
the person accused. (Articles 21 and 22, Penal Code.)

A law imposing a new penalty, or a new liability or disability, or giving a new

right of action, must not be construed as having a retroactive effect. It is an
elementary rule of contract that the laws in force at the time the contract
was made must govern its interpretation and application. Laws must be
construed prospectively and not retrospectively. If a contract is legal at its
inception, it cannot be rendered illegal by any subsequent legislation. If that
were permitted then the obligations of a contract might be impaired, which is
prohibited by the organic law of the Philippine Islands. (U.S. vs. Constantino
Tan Quingco Chua, 39 Phil., 552; Aguilar vs. Rubiato and Gonzales Vila, 40
Phil., 570.)

Ex post facto laws, unless they are favorable to the defendant, are prohibited
in this jurisdiction. Every law that makes an action, done before the passage
of the law, and which was innocent when done, criminal, and punishes such
action, is an ex post facto law. In the present case Act No. 2655 made an act
which had been done before the law was adopted, a criminal act, and to
make said Act applicable to the act complained of would be to give it an ex

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post facto operation. The Legislature is prohibited from adopting a law which
will make an act done before its adoption a crime. A law may be given a
retroactive effect in civil action, providing it is curative in character, but ex
post facto laws are absolutely prohibited unless its retroactive effect is
favorable to the defendant.

For the reason, therefore, that the acts complained of in the present case
were legal at the time of their occurrence, they cannot be made criminal by
any subsequent or ex post facto legislation. What the courts may say,
considering the provisions of article 1255 of the Civil Code, when a civil
action is brought upon said contract, cannot now be determined. A contract
may be annulled by the courts when it is shown that it is against morals or
public order.

For all of the foregoing reasons, we are of the opinion, and so decide, that
the acts complained of by the defendants did not constitute a crime at the
time they were committed, and therefore the sentence of the lower court
should be, and is hereby, revoked; and it is hereby ordered and decreed that
the complaint be dismissed, and that the defendants be discharged from the
custody of the law, with costs de oficio. So ordered.

Digest

Facts:
On December 30, 1915, complainants Bartolome Oliveros and Engracia
Lianco entered into a contract with the defendants concerning a debt of
P300. Oliveros and co. were obligated to pay five percent interest per month
within the first ten days of every month. On May 6, 1921, Vicente Diaz Conde
and Apolinaria R. De Conde were charged with violating the Usury Law in the
Court of First Instance of the city of Manila. They were found guilty,
sentenced to pay a fine of P120 and in case of insolvency, to suffer
subsidiary imprisonment in accordance with the provisions of law. They took
it to SC to plead.
Issues:
WoN the Usury Law has a retroactive effect in this case
WoN the law impaired the contract

Held and Ratio:

No. The Usury Law, a penal law, cannot become retroactive unless it is
favorable to the person accused. (Art. 21 and 22 Penal Code)
Yes. If a contract is legal at its inception, it cannot be rendered illegal by any
subsequent legislation.

Decision: Judgment reversed, defendants acquitted.

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 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-1927 May 31, 1949

CRISTOBAL ROO, petitioner,

vs.
JOSE L. GOMEZ, ET AL., respondents.

Alfonso Farcon for petitioner.

Capistrano & Azores for respondents.

BENGZON, J.:

This petition to review a decision of the Court of Appeals was admitted

mainly because it involves one phase of the vital contemporary question: the
repayment of loans given in Japanese fiat currency during the last war of the
Pacific.

On October 5, 1944, Cristobal Roo received as a loan four thousand pesos in

Japanese fiat money from Jose L. Gomez. He informed the later that he would
use the money to purchase a jitney; and he agreed to pay that debt one year
after date in the currency then prevailing. He signed a promissory note of the
following tenor:

For value received, I promise to pay one year after date the sum of four
thousand pesos (4,000) to Jose L. Gomez. It is agreed that this will not
earn any interest and the payment It is agreed that this will not earn
any interest and the payment prevailing by the end of the stipulated
period of one year.

In consideration of this generous loan, I renounce any right that may

come to me by reason of any postwar arrangement, of privilege that
may come to me by legislation wherein this sum may be devalued. I
renounce flatly and absolutely any condition, term right or privilege
which in any way will prejudice the right engendered by this
agreement wherein Atty. Jose L. Gomez will receive by right his money
in the amount of P4,000. I affirm the legal tender, currency or any

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 medium of exchange, or money in this sum of P4,000 will be paid by
me to Jose L. Gomez one year after this date, October 5, 1944.

On October 15, 1945, i.e., after the liberation, Roo was sued for payment in
the Laguna Court of First Instance. His main defense was his liability should
not exceed the equivalent of 4,000 pesos "mickey mouse" money and
could not be 4,000 pesos Philippine currency, because the contract would be
void as contrary to law, public order and good morals.

After the corresponding hearing, the Honorable Felix Bautista Angelo, Judge,
ordered the defendant Roo to pay four thousand pesos in Philippine
currency with legal interest from the presentation of the complaint plus
costs.

On appeal the Court of Appeals in a decision written by Mr. Justice Jugo,

affirmed the judgment with costs. It declared being a mechanic who knew
English was not deceived into signing the promissory note, and that the
contents of the same had not been misrepresented to him. It pronounced the
contract valid and enforceable according to its terms and conditions.

One basic principle of the law on contracts of the Civil Code is that "the
contracting parties may establish any pacts, clauses and conditions they
may deem advisable, provided they are not contrary to law, morals or public
order." (Article 1255.) Another principle is that "obligations arising from
contracts shall have the force of law between the contracting parties and
must be performed in accordance with their stipulations" (Article 1091).

Invoking the above proviso, Roo asserts this contract is contrary to the
Usury law, because on the basis of calculations by Government experts he
only received the equivalent of one hundred Philippine pesos and now he is
required to disgorge four thousand pesos or interest greatly in excess of the
lawful rates.

But he is not paying interest. Precisely the contract says that the money
received "will not earn any interest." Furthermore, he received four
thousand pesos; and he is required to pay four thousand pesos exactly. The
increased intrinsic value and purchasing power of the current money is
consequence of an event (change of currency) which at the time of the
contract neither party knew would certainly happen within the period of one
year. They both elected to subject their rights and obligations to that
contingency. If within one year another kind of currency became legal tender,
Gomez would probably get more for his money. If the same Japanese
currency continued, he would get less, the value of Japanese money being
then on the downgrade.

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Our legislation has a word for these contracts: aleatory. The Civil Code
recognizes their validity (see art. 1790 and Manresa's comment thereon) on
a par with insurance policies and life annuities.

The eventual gain of Gomez in this transaction is not interest within the
meaning of Usury Laws. Interest is some additional money to be paid in any
event, which is not the case herein, because Gomez might have gotten less if
the Japanese occupation had extended to the end of 1945 or if the liberation
forces had chosen to permit the circulation of the Japanese notes.

Moreover, Roo argues, the deal was immoral because taking advantage of
his superior knowledge of war developments Gomez imposed on him this
onerous obligation. In the first place, the Court of Appeals found that he
voluntary agreed to sign and signed the document without having been
misled as to its contents and "in so far as knowledge of war events was
concerned" both parties were on "equal footing". In the second place
although on October 5, 1944 it was possible to surmise the impending
American invasion, the date of victory or liberation was anybody's guess. In
the third place there was the possibility that upon-re-occupation the
Philippine Government would not invalidate the Japanese currency, which
after all had been forced upon the people in exchange for valuable goods
and property. The odds were about even when Roo and Gomez played their
bargaining game. There was no overreaching, nor unfair advantage.

Again Roo alleges it is immoral and against public order for a man to obtain
four thousand pesos in return for an investment of forty pesos (his estimate
of the value of the Japanese money he borrowed). According to his line of
reasoning it would be immoral for the homeowner to recover ten thousand
pesos (P10,000, when his house is burned, because he invested only about
one hundred pesos for the insurance policy. And when the holder of a
sweepstakes ticket who paid only four pesos luckily obtains the first prize of
one hundred thousand pesos or over, the whole business is immoral or
against public order.

In this connection we should explain that this decision does not cover
situations where borrowers of Japanese fiat currency promised to repay "the
same amount" or promised to return the same number of pesos "in
Philippines currency" or "in the currency prevailing after the war." There may
be room for argument when those litigations come up for adjudication. All we
say here and now is that the contract in question is legal and obligatory.

A minor point concerns the personality of the plaintiff, the wife of Jose L.
Gomez. We opine with the Court of Appeals that the matter involve a defect
in procedure which does not amount to prejudicial error.

Wherefore, the appealed judgment will be affirmed with costs. So ordered.

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Digest

STATEMENT OF FACTS:

On October 5, 1944, Cristobal Roo received as a loan fromJose L. Gomez

P4,000.00 in Japanese fiat money (mickey mouse money). The contract of
loan is under the condition that said loan will not earn interest and that it will
be paid in the currency then prevailing one year after the execution of the
contract. After a year, a collection suit was filed by respondent Gomez
against petitioner Rono to collect the latters debt. Subsequently, the trial
court ruled in favor of Gomez. The court ordered Rono to pay the respondent
an amount of P4,000.00 in Philippine currency which was then the prevailing
currency at the time of payment. Contending such decision, Rono insists that
the contract taken in favor of respondent is contrary to law, public order and
good morals since his loan then of P4,000.00 mickey mouse money is
equivalent only to P100.00 of the Philippine currency which is the prevailing
currency at the time of payment.

CONTENTION OF THE PETITIONER:

Roo asserts that the decision of the trial court ruling in favor of respondent
is contrary to the Usury law, because on the basis of calculations by
Government experts he only received the equivalent of P100 Philippine
pesos and now he is required to give four thousand pesos or interest greatly
in excess of the lawful rates.

CONTENTION OF THE RESPONDENT:

That both parties agreed that the loaned amount of

P4,000.00 mickey mouse money be paid in the currency prevailing by the

end of one year. The civil cod

e supports such agreement when it says "obligations arising from contracts

shall have the force of law between the contracting parties and must be
performed in accordance with their stipulations" (Article 1091).

RESOLUTION OF SC:

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The SC ruled that that the contract between the parties is an aleatory
contract. The eventual gain of Gomez is not interest within the meaning of
the Usury law. In the first place, Rono is not paying an interest. Such is
evidenced by the fact that in his promissory note, he indicated that the
money loaned will not earn any interest.

Furthermore, both parties clearly agreed at the time of the execution of

thecontract that the loaned money ( P4,000.00 mickey mouse ) will be paid
in the currency prevailing by the end of the stipulated period of one year.
The devaluation of the Mickey mouse money is due to an event
unforeseeable by any man; that the increased intrinsic value and purchasing
power of the current money is consequence of an event (change of currency)
which at the time of the contract neither party knew would certainly happen
within the period of one year. However, both parties subjected their rights
and obligations to that contingency. Thus, the contract in question is legal
and obligatory and is not subject to the operation of the Usury law.

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 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-35697-99 April 15, 1988

ELADlA DE LIMA, POTENCIANO REQUIJO, NEMESIO FLORES,

REYNALDO REQUIJO, DOMINADOR REQUIJO and MARIO
REQUIJO, petitioners,
vs.
LAGUNA TAYABAS CO., CLARO SAMONTE, SANTIAGO SYJUCO, INC.,
(SEVEN-UP BOTTLING CO., OF THE PHILIPPINES) and PORVENIR
ABAJAR BARRETO, respondents.

Leon O. Ty, Gesmundo and Gesmundo and Renato B. Vasquez for petitioners.

Domingo E. de Lara and Associates for respondents.

GANCAYCO, J.:

Before Us is a petition for review on certiorari of the decision De Lima vs.

Laguna Tayabas Co. of the Court of Appeals 1 affirming the decision of the
court a quo with modification to include an award of legal interest on the
amounts adjudged in favor of the petitioners from the date of the decision of
the Court of Appeals to the time of actual payment.

This present action arose from a collision between a passenger bus of the
Laguna Tayabas Bus Co. (LTB) and a delivery truck of the Seven-up Bottling

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Co. of the Philippines which took place on June 3, 1958 resulting in the death
of Petra de la Cruz and serious physical injuries of Eladia de Lima and
Nemesio Flores, all passengers of the LTB bus. Three civil suits were filed
against herein respondents which were consolidated for trial before the Court
of First Instance of Laguna (San Pablo City).

On December 27, 1963, the court a quo rendered its decision, the dispositive
part of which reads as follows:

WHEREFORE, in view of all the foregoing considerations,

judgment is hereby rendered against the defendants LTB Co. Inc.
and Claro Samonte, who are hereby ordered to pay jointly and
severally, the resolve plaintiffs.

In Civil Case No. SP-239; Plaintiff Eladia de Lima:

1
For P960
. loss .00
of
mone
y and
medi
cal
expe
nses.

2 For
. loss
of
earni
ngs
from
June
3,
1958
to

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 Nove .
mber 924.
3, 00
1958

3 For
. expe
nses
of
litigat
ion
and
attor
ney's

fees ..
1,00
0.00

TOTA P
L 2,88
4.00

In Civil Case No. SP-240; Plaintiffs Requijos:

1
For P
the 3,8
de 83.
ath 82
of
Pet
ra
de
la
Cr

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 uz

inc
lud
ing
fun
era
l
ex
pe
ns
es

2 For 800
the .00
mo
ne
y
los
t
dur
ing
the
trip

3 Mo
ral
da
ma
ge
s
for
me
nta
l
an
gui
sh

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 (of 3,0
Me 00.
rca 00
do
vs.
Lir
a,
et
al.)

4 For
the
los
s
of
ear
nin
g
ca
pa
cit
y
for

5 8,0
ye 00.
ars 00

5 For
ex
pe
ns
es
of
liti
gat
ion
an

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 d

att 2,5
orn 00.
ey' 00
s
fee
s

TO P18,
TA 183
L .82

In Civil Case No. SP-268: To Plaintiff Nemesio Flores:

1
For
. loss of
earnin
g
capaci
ty for

5 year
from
June 3,
1958
at the

rate of P
P228.0 3,680.0
0a 0
month

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 2 For
. expen
ses of
litigati
on and

attorn 1,000.0
ey's 0
fees.

TOTAL P14,680
.00

Plaintiffs in Civil Cases Nos. SP-239 and SP-240 filed a motion for
reconsideration of the decision seeking an award of legal interest on the
amounts adjudged in their favor from the date of the said decision but their
motion was not acted upon by the court a quo.

All of the plaintiffs voluntarily desisted from appealing the decision by reason
of financial necessity and in the hope that the defendants LTB Co. and its
driver Claro Samonte will be persuaded to make immediate payment to them
as adjudged by the court a quo. Only the said defendants appealed the
decision to the Court of Appeals.

In the motion of petitioners dated December 29, 1971 filed with the Court of
Appeals, 2 they sought for an immediate decision of the case with a prayer
for the granting of legal interest from the date of the decision of the court a
quo and for the increase to P12,000.00 of the civil indemnity of P3,000.00
awarded for the death of Petra de la Cruz.

On January 31, 1972, the now disputed decision of the Court of Appeals was
promulgated. 3

Petitioners moved for a reconsideration of this decision 4 seeking its

modification so that the legal interest awarded by the Appellate, Court will
start to run from the date of the decision of the trial court on December 27,
1963 instead of January 31, 1972, the date of the decision of the Court of
Appeals. Petitioner potenciano Requijo as heir of the deceased Petra de la
Cruz further sought an increase in the civil indemnity of P3,000.00 to P
12,000.00.
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The Appellate Court denied the motion for reconsideration holding that since
the plaintiffs did not appeal from the failure of the court a quo to award
interest on the damages and that the court on its own discretion awarded
such interest in view of Art. 2210 of the Civil Code, the effectivity of the
interest should not be rolled back to the time the decision of the court a
quo was rendered. 5

Hence this petition.

The assignment of errors raised the following issues, to wit:

1) Whether or not the Court of Appeal; erred in granting legal interest on

damages to start only from the date of its decision instead of from the date
of the trial court's decision;

2) Whether or not the Court of Appeals erred in not increasing the indemnity
for the death of Petra de La Cruz (in Civil Case No. SP-240) from P3,000 to
P12,000.00.

We find merit in the petition.

Under the first issue, petitioners contend that the ruling of she Appellate
Court departs from the consistent rulings of this court that the award of the
legal rate of interest should be computed from the promulgation of the
decision of the tonal court.

Respondents counter that petitioners having failed to appeal from the lower
court's decision they. are now precluded from questioning the ruling of the
Court of Appeals.

It is true that the rule is well-settled that a party cannot impugn the
correctness of a judgment not appealed from by him, and while he may
make counter assignment of errors, he can do so only to sustain the
judgment on other grounds but not to seek modification or reversal
thereof, 6 for in such case he must appeal. 7 A party who does not appeal
from the decision may not obtain any affirmative relief from the appellate
court other than what he has obtained from the lower court, if any, whose
decision is brought up on appeal. 8

However, respondents failed to note that the legal interest was awarded by
the Appellate Court in its discretion based on equitable grounds which is duly
sanctioned by Art. 2210 of the Civil Code which provides

Interest may, in the discretion of the court, be allowed upon

damages awarded for breach of contract.

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Thus, the Appellate Court pointed out

A further examination of the record will also show that the

plaintiffs in Civil Cases Nos. SP-239 and SP-240 moved for the
reconsideration of the decision appealed from to include the
award of legal interest on the amounts adjudicated from the date
of the decision, but said motion was not acted upon by the
court a quo. Although said plaintiffs failed to appeal on this issue,
and did not file their brief to reiterate their claim for interest
thereon, the plaintiff in Civil Case No. SP-268, Nemesio Flores,
filed his brief and prayed for the imposition of interest from the
date of the decision. We are not left without discretion to resolve
this issue, considering the provision of Article 2210, New Civil
Code, stating that "Interest may, in the petition of the court, be
allowed upon damages awarded for breach of contract." There is
no doubt that the damages awarded in these civil cases arise
from the breach of a contractual obligation on the part of the
defendants- appellants. But to grant the imposition of interest on
the amounts awarded to and as prayed for by one of the
plaintiffs and deny the same to the others considering that the
cases arose from one single incident would be, to Our mind,
unfair and inequitous. In the light, therefore, not only of the
provision of the Civil Code above referred to, but also the facts
and circumstances obtaining in these cases. We believe that on
equitable grounds legal interest, should be allowed on the
amounts adjudged in favor of the plaintiffs from the date of this
decision up to the time of actual payment thereof.

Also noteworthy is the case of Fores v. Miranda 9 where this Court upheld the
granting by the Court of Appeals of attorney's fees even if the respondent, a
jeepney passenger injured in a vehicular accident, did not appeal from the
decision of the trial court. The Appellate Court found the award to be justified
because the respondent asked for damages in his answer and the said court
considered the attorney's fees as included in the concept of damages which
can be awarded whenever the court deems it just and equitable (Art. 2208,
Civil Code of the Philippines).

At any rate, this Court is inclined to adopt a liberal stance in this case as We
have done in previous decisions where We have held that litigations should,
as much as possible be decided on their merits and not on technicality.10

We take note of the fact that petitioners are litigating as paupers. Although
they may not have appealed, they had filed their motion for reconsideration
with the court a quo which unfortunately did not act on it. By reason of their
indigence, they failed to appeal but petitioners De Lima and Requijo had filed

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their manifestation making reference to the law and jurisprudence upon
which they base their prayer for relief while petitioner Flores filed his brief.

Pleadings as well as remedial laws should be construed liberally in order that

the litigants may have ample opportunity to pursue their respective claims
and that a possible denial of substantial justice due to legal technicalities
may be avoided. 11

Moreover, under the circumstances of this case where the heirs of the victim
in the traffic accident chose not to appeal in the hope that the transportation
company will pay the damages awarded by the lower court but unfortunately
said company still appealed to the Court of Appeals, which step was
obviously dilatory and oppressive of the rights of the said claimants: that the
case had been pending in court for about 30 years from the date of the
accident in 1958 so that as an exception to the general rule aforestated, the
said heirs who did not appeal the judgment, should be afforded equitable
relief by the courts as it must be vigilant for their protection. 12The claim for
legal interest and increase in the indemnity should be entertained in spite of
the failure of the claimants to appeal the judgment.

We take exception to the ruling of the Appellate Court as to the date when
the legal interest should commence to ran. In view of the consistent rulings
of this Court, We hold that the legal interest of six percent (6) 13 on the
amounts adjudged in favor of petitioners should start from the time of the
rendition of the trial court's decision on December 27, 1963 instead of
January 31, 1972, the promulgation of the decision of the Court of Appeals. 14

As to the second issue, civil indemnity for the death of Petra de la Cruz was
properly awarded by virtue of Art. 1764 in relation to Art. 2206 of the Civil
Code of the Philippines which allows a minimum indemnity of P3,000.00 for
the death of a passenger caused by the breach of contract by a common
carrier. In accordance with prevailing jurisprudence the indemnity of
P3,000.00 should be increased to P30,000.00 and not P12,000.00 as prayed
for by petitioner.

If the transportation company had only accepted the judgment of the trial
court and paid its just awards instead of appealing the same to the Court of
Appeals, no further delay would have been occasioned on the simple issue of
interest and indemnity. To mitigate the impact of such a great delay in this
case the Court finds ample justification in the aforesaid award for interest
and indemnity. We hope this relief is not too late.

WHEREFORE, the petition is hereby GRANTED, the subject decision is

modified in that the legal interest on the damages awarded to petitioners
commences from the date of the decision of the court a quo until actual
payment while the civil indemnity for the death of Petra de la Cruz is

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increased to P 30,000.00. This judgment is immediately executory and no
motion for extension of time to file motion for reconsideration shall be
entertained.

SO ORDERED.

FACTS:

On June 3, 1958, an accident between a Laguna Tayabas Co. (LTB)bus and

Seven-up Bottlers Co. delivery truck resulted to the death of an LTB
passenger named Petra dela Cruz. Two other LTB passengers namely Eladia
de Lima and Nemesio Flores also incurred physical injuries. De Lima, Flores
and the heir of dela Cruz filed suits to the
buscompany.In December 29, 1971, the petitioners requested to expedite th
edecision of the case with the hope that the legal interest is to be given
immediately from the date of the decision. By January 31, 1972, the decision
was given. Again, the petitioners reiterated their request forthe modification
of the decision in such a way that the effectivity is tobe rolled back to
December 27, 1963. Furthermore, the heir of dela Cruz filed a
reconsideration for the increase of indemnity from P3,000to P12,000. With
this pending motion for reconsideration, LTB filed an appeal for the case. The
appellate court turned down the motion for reconsideration of the plaintiffs
indicating that an appeal should have been filed for the awarding of the legal
interest. The petition was reviewed in 1988, thirty years after the actual
incident.

ISSUES:

a. Whether the effectivity of the decision is to be rolled back as requested by

the plaintiffs.

b. Whether the lower court was erroneous in the delay of the decision for the
increase in the claim of the heir of Petra dela Cruz.

HELD:

The court granted the petition noting that the plaintiffs were unable to
make an appeal in the lower court due to the fact that the petitionersare
seeking judicial remedy as impoverished individuals. They were hopeful that
the adjudged amount will be provided to them by the transportation
company. With the case pending for thirty years, the court aptly found this as
a sufficient justification to grant the legal interest as well as the increase in
indemnity. It was found that the rolling back of the effectivity date was

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necessary to compensate for the monetary loss the plaintiffs incurred from
the accident, death and court proceedings. Moreover, the claim for Petradela
Cruz was increased from P3,000.00 to P30,000.00. The decision was
immediately executory in response to the identified urgent need of the
plaintiffs.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 120262 July 17, 1997

PHILIPPINE AIRLINES, INC., petitioner,

vs.
COURT OF APPEALS and LEOVIGILDO A. PANTEJO, respondents.

REGALADO, J.:

In this appeal by certiorari, petitioner Philippine Airlines, Inc. (PAL) seeks to

set aside the decision of respondent Court of Appeals, 1 promulgated on
December 29, 1994, which affirmed the award for damages made by the trial
court in favor of herein private respondent Leovegildo A. Pantejo.

On October 23, 1988, private respondent Pantejo, then City Fiscal of Surigao
City, boarded a PAL plane in Manila and disembarked in Cebu City where he

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was supposed to take his connecting flight to Surigao City However, due to
typhoon Osang, the connecting flight to Surigao City was cancelled.

To accommodate the needs of its stranded passengers, PAL initially gave out
cash assistance of P100.00 and, the next day, P200.00, for their expected
stay of two days in Cebu. Respondent Pantejo requested instead that he be
billeted in a hotel at PAL's expense because he did not have cash with him at
that time, but PAL refused. Thus, respondent Pantejo was forced to seek and
accept the generosity of a co-passenger, an engineer named Andoni Dumlao,
and he shared a room with the latter at Sky View Hotel with the promise to
pay his share of the expenses upon reaching Surigao.

On October 25, 1988 when the flight for Surigao was resumed, respondent
Pantejo came to know that the hotel expenses of his co-passengers, one
Superintendent Ernesto Gonzales and a certain Mrs. Gloria Rocha, an auditor
of the Philippine National Bank, were reimbursed by PAL. At this point,
respondent Pantejo informed Oscar Jereza, PAL's Manager for Departure
Services at Mactan Airport and who was in charge of cancelled flights, that
he was going to sue the airline for discriminating against him. It was only
then that Jereza offered to pay respondent Pantejo P300.00 which, due to the
ordeal and anguish he had undergone, the latter decline.

On March 18, 1991, the Regional Trial Court of Surigao City, Branch 30,
rendered judgment in the action for damages filed by respondent Pantejo
against herein petitioner, Philippine Airlines, Inc., ordering the latter to pay
Pantejo P300.00 for actual damages, P150,000.00 as moral damages,
P100,000.00 as exemplary damages, P15,000.00 as attorney's fees, and 6%
interest from the time of the filing of the complaint until said amounts shall
have been fully paid, plus costs of suit. 2 On appeal, respondent court
affirmed the decision of the court a quo, but with the exclusion of the award
of attorney's fees and litigation expenses.

The main issue posed for resolution is whether petitioner airlines acted in
bad faith when it failed and refused to provide hotel accommodations for
respondent Pantejo or to reimburse him for hotel expenses incurred by
reason of the cancellation of its connecting flight to Surigao City due to force
majeure.

To begin with, it must be emphasized that a contract to transport passengers

is quite different in kind and degree from any other contractual relation, and
this is because of the relation which an air carrier sustain with the public. Its
business is mainly with the travelling public. It invites people to avail of the
comforts and advantages it offers. The contract of air carriage, therefore,
generates a relation attended with a public duty. Neglect or malfeasance of
the carrier's employees naturally could give ground for an action for
damages. 3

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In ruling for respondent Pantejo, both the trial court and the Court of Appeals
found that herein petitioner acted in bad faith in refusing to provide hotel
accommodations for respondent Pantejo or to reimburse him for hotel
expenses incurred despite and in contrast to the fact that other passengers
were so favored.

In declaring that bad faith existed, respondent court took into consideration
the following factual circumstances:

1. Contrary to petitioner's claim that cash assistance was given instead

because of non-availability of rooms in hotels where petitioner had existing
tie-ups, the evidence shows that Sky View Hotel, where respondent Pantejo
was billeted, had plenty of rooms available.

2. It is not true that the P300.00 Paid to Ernesto Gonzales, a co-passenger of

respondent, was a refund for his plane ticket, the truth being that it was a
reimbursement for hotel and meal expenses.

3. It is likewise not denied that said Gonzales and herein respondent came to
know about the reimbursements only because another passenger, Mrs.
Rocha, informed them that she was able to obtain the refund for her own
hotel expenses.

4. Petitioner offered to pay P300.00 to private respondent only after he had

confronted the airline's manager about the discrimination committed against
him, which the latter realized was an actionable wrong.

5. Service Voucher No. 199351, presented by petitioner to prove that it gave

cash assistance to its passengers, was based merely on the list of
passengers already given cash assistance and was purportedly prepared at
around 10:00 A.M. of October 23, 1988. This was two
hours before respondent came to know of the cancellation of his flight to
Surigao, hence private respondent could not have possibly refused the
same. 4

It must be stressed that these factual findings, which are supported by

substantial evidence, are binding, final and conclusive upon this Court absent
any reason, and we find none, why this settled evidential rule should not
apply.

Petitioner theorizes that the hotel accommodations or cash assistance given

in case a flight is cancelled is in the nature of an amenity and is merely a
privilege that may be extended at its own discretion, but never a right that
may be demanded by its passengers. Thus, when respondent Pantejo was
offered cash assistance and he refused it, petitioner cannot be held liable for
whatever befell respondent Pantejo on that fateful day, because it was

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merely exercising its discretion when it opted to just give cash assistance to
its passengers.

Assuming arguendo that the airline passengers have no vested right to these
amenities in case a flight is cancelled due to force majeure, what makes
petitioner liable for damages in this particular case and under the facts
obtaining herein is its blatant refusal to accord the so-called amenities
equally to all its stranded passengers who were bound for Surigao City. No
compelling or justifying reason was advanced for such discriminatory and
prejudicial conduct.

More importantly, it has been sufficiently established that it is petitioner's

standard company policy, whenever a flight has been cancelled, to extend to
its hapless passengers cash assistance or to provide them accommodations
in hotels with which it has existing tie-ups. In fact, petitioner's Mactan Airport
Manager for departure services, Oscar Jereza, admitted that PAL has an
existing arrangement with hotels to accommodate stranded
passengers, 5 and that the hotel bills of Ernesto Gonzales were
reimbursed 6 obviously pursuant to that policy.

Also, two witnesses presented by respondent, Teresita Azarcon and Nerie Bol,
testified that sometime in November, 1988, when their flight from Cebu to
Surigao was cancelled, they were billeted at Rajah Hotel for two nights and
three days at the expense of PAL. 7 This was never denied by PAL.

Further, Ernesto Gonzales, the aforementioned co-passenger of respondent

on that fateful flight, testified that based on his previous experience hotel
accommodations were extended by PAL to its stranded passengers either in
Magellan or Rajah Hotels, or even in Cebu Plaza. Thus, we view as impressed
with dubiety PAL's present attempt to represent such emergency assistance
as being merely ex gratia and not ex debito.

While petitioner now insists that the passengers were duly informed that
they would be reimbursed for their hotel expenses, it miserably and
significantly failed to explain why the other passengers were given
reimbursement while private respondent was not. Although Gonzales was
subsequently given a refund, this was only so because he came to know
about it by accident through Mrs. Rocha, as earlier explained.

Petitioner could only offer the strained and flimsy pretext that possibly the
passengers were not listening when the announcement was made. This is
absurd because when respondent Pantejo came to know that his flight had
been cancelled, he immediately proceeded to petitioner's office and
requested for hotel accommodations. He was not only refused
accommodations, but he was not even informed that he may later on be
reimbursed for his hotel expenses. This explains why his co-passenger,

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Andoni Dumlao, offered to answer for respondent's hotel bill and the latter
promised to pay him when they arrive in Surigao. Had both know that they
would be reimbursed by the airline, such arrangement would not have been
necessary.

Respondent Court of Appeals thus correctly concluded that the refund of

hotel expenses was surreptitiously and discriminatorily made by herein
petitioner since the same was not made known to everyone, except through
word of mouth to a handful of passengers. This is a sad commentary on the
quality of service and professionalism of an airline company, which is the
country's flag carrier at that.

On the bases of all the foregoing, the inescapable conclusion is that

petitioner acted in bad faith in disregarding its duties as a common carrier to
its passengers and in discriminating against herein respondent Pantejo. It
was even oblivious to the fact that this respondent was exposed to
humiliation and embarrassment especially because of his government
position and social prominence, which altogether necessarily subjected him
to ridicule, shame and anguish. It remains uncontroverted that at the time of
the incident, herein respondent was then the City Prosecutor of Surigao City,
and that he is a member of the Philippine Jaycee Senate, past Lt. Governor of
the Kiwanis Club of Surigao, a past Master of the Mount Diwata Lodge of Free
Masons of the Philippines, member of the Philippine National Red Cross,
Surigao Chapter,
and past Chairman of the Boy Scouts of the Philippines, Surigao del Norte
Chapter. 8

It is likewise claimed that the moral and exemplary damages awarded to

respondent Pantejo are excessive and unwarranted on the ground that
respondent is not totally blameless because of his refusal to accept the
P100.00 cash assistance which was inceptively offered to him. It bears
emphasis that respondent Pantejo had every right to make such refusal since
it evidently could not meet his needs and that was all that PAL claimed it
could offer.

His refusal to accept the P300.00 proffered as an afterthought when he

threatened suit was justified by his resentment when he belatedly found out
that his co-passengers were reimbursed for hotel expenses and he was not.
Worse, he would not even have known about it were it not for a co-passenger
who verbally told him that she was reimbursed by the airline for hotel and
meal expenses. It may even be said that the amounts, the time and the
circumstances under which those amounts were offered could not salve the
moral wounds inflicted by PAL on private respondent but even approximated
insult added to injury.

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The discriminatory act of petitioner against respondent ineludibly makes the
former liable for moral damages under Article 21 in relation to Article 2219
(10) of the Civil Code. 9 As held in Alitalia Airways vs. CA, et al., 10 such
inattention to and lack of care by petitioner airline for the interest of its
passengers who are entitled to its utmost consideration, particularly as to
their convenience, amount to bad faith which entitles the passenger to the
award of moral damages.

Moral damages are emphatically not intended to enrich a plaintiff at the

expense of the defendant. They are awarded only to allow the former to
obtain means, diversion, or amusements that will serve to alleviate the moral
suffering he has undergone due to the defendant's culpable action and must,
perforce, be proportional to the suffering inflicted. 11 However, substantial
damages do not translate into excessive damages. 12 Except for attorney's
fees and costs of suit, it will be noted that the Court of Appeals affirmed
point by point the factual findings of the lower court upon which the award of
damages had been based. 13 We, therefore, see no reason to modify the
award of damages made by the trial court.

Under the peculiar circumstances of this case, we are convinced that the
awards for actual, moral and exemplary damages granted in the judgment of
respondent court, for the reasons meticulously analyzed and thoroughly
explained in its decision, are just and equitable. It is high time that the
travelling public is afforded protection and that the duties of common
carriers, long detailed in our previous laws and jurisprudence and thereafter
collated and specifically catalogued in our Civil Code in 1950, be enforced
through appropriate sanctions.

We agree, however, with the contention that the interest of 6% imposed by

respondent court should be computed from the date of rendition of judgment
and not from the filing of the complaint. The rule has been laid down
inEastern Shipping Lines, Inc. vs. Court of Appeals, et al. 14 that:

When an obligation, not constituting a loan or forbearance of money, is

breached, an interest on the amount of damages awarded may be
imposed at the discretion of the court at the rate of 6% per annum. No
interest, however, shall be adjudged on unliquidated claims or
damages except when or until the demand can be established with
reasonable certainty. Accordingly, where the demand is established
with reasonable certainty, the interest shall begin to run from the time
the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but
when such certainty cannot be so reasonably established at the time
the demand is made, the interest shall begin to run only from the date
the judgment of the court is made (at which time the quantification of
damages may be deemed to have been reasonably ascertained). The

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 actual base for the computation of legal interest shall, in any case, be
on the amount finally adjudged.

This is because at the time of the filing of the complaint, the amount of
damages to which plaintiff may be entitled remains unliquidated and not
known, until it is definitely ascertained, assessed and determined by the
court, and only after the presentation of proof thereon. 15

WHEREFORE, the challenged judgment of respondent Court of Appeals is

hereby AFFIRMED, subject to the MODIFICATION regarding the computation
of the 6% legal rate of interest on the monetary awards granted therein to
private respondent

SO ORDERED.

Digest

FACTS:

On October 23, 1988, Leovegildo Pantejo, then City Fiscal of Surigao

City, boarded a PAL plane in Manila and disembarked in Cebu City where he
was supposed to take his connecting flight to Surigao City. However, due to
typhoon Osang, the connecting flight to Surigao City was cancelled. PAL
initially gave out cash assistance of P100 and, the next day, P200 for their
expected stay of two days in Cebu. Pantejo requested instead that he be
accommodated in a hotel at the expense of PAL as he did not have cash with
him at that time but PAL refused. Fortunately, Pantejo was accommodated by
Andoni Dumlao and he shared a room with the latter at Sky View Hotel with
the promise to pay his share of the expenses upon reaching Surigao. When
the flight for Surigao was resumed, Pantejo was informed that the hotel
expenses of his co-passengers were reimbursed by PAL. At this point, Pantejo
informed the Manager for Departure Services of PAL at Mactan Airport that
he was going to sue the airline for discriminating against him. The manager
offered to pay Pantejo P300 which the latter declined. Pantejo filed a suit for
damages against PAL in the Regional Trial Court of Surigao City. Said court
rendered judgment in favor of Pantejo, ordering PAL to pay Pantejo P300 for
actual damages, P150,000 as moral damages, P100,000 as exemplary
damages, P15,000 as attorney's fees, and 6% interest from the time of the
filing of the complaint until said amounts shall have been fully paid, plus
costs of suit. On appeal, CA affirmed the decision, but with the exclusion of
the award of attorney's fees and litigation expenses. Hence, this petition.

ISSUE:

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 Whether or not PAL was liable for damages.

HELD:

Yes. A contract to transport passengers is quite different in kind and

degree from any other contractual relation because of the relation which an
air carrier sustains with the public. Its business is mainly with the travelling
public. It invites people to avail of the comforts and advantages it offers. The
contract of air carriage, therefore, generates a relation attended with a
public duty. Neglect or malfeasance of the carrier's employees naturally
could give ground for an action for damages.

In this case, there was bad faith on the part of PAL. Contrary to the
claim of PAL that cash assistance was given instead because of non-
availability of rooms in hotels, the evidence showed that Sky View Hotel,
where respondent Pantejo was billeted, had plenty of rooms available.
Pantejo only came to know about the reimbursements when other
passengers informed him that they were able to obtain the refund for their
own hotel expenses. PAL offered to pay P300.00 to Pantejo only after the
latter had confronted the manager of PAL about the discrimination
committed against Pantejo, which the manager realized was an actionable
wrong. The hotel accommodation was not a mere amenity or privilege. It was
a company policy whenever a flight is cancelled as testified by several
witnesses. And even if it was a mere privilege, PAL was still liable for
damages for its blatant refusal to accord the so-called amenities equally to
all its stranded passengers. No compelling or justifying reason was advanced
for such discriminatory and prejudicial conduct. It was not also true that
Pantejo was not listening to the announcements. In fact, Pantejo immediately
proceeded to the office of PAL and requested for hotel accommodations. He
was not only refused accommodations, but he was not even informed that he
may later on be reimbursed for his hotel expenses. The refund of hotel
expenses was surreptitiously and discriminatorily made by PAL as only
handful of passengers knew about it. Pantejo was exposed to humiliation and
embarrassment especially because of his government position and social
prominence. The discriminatory act of PAL against Pantejo made PAL liable
for moral damages under Article 21 in relation to Article 2219 (10) of the Civil
Code. As held in Alitalia Airways vs. CA, such inattention to and lack of care
by petitioner airline for the interest of its passengers who were entitled to its
utmost consideration, particularly as to their convenience, amounted to bad
faith which entitled the passenger to the award of moral damages. Under the
peculiar circumstances of this case, the awards for actual, moral and

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exemplary damages granted in the judgment of CA were just and equitable.
But the interest of 6% imposed should be computed from the date of
rendition of judgment and not from the filing of the complaint. The judgment
of Court of Appeals was AFFIRMED, subject to the MODIFICATION regarding
the computation of the 6% legal rate of interest on the monetary awards
granted therein to private respondent.

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 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 120097 September 23, 1996

FOOD TERMINAL, INC., petitioner,

vs.
COURT OF APPEALS and TAO DEVELOPMENT, INC., respondents.

RESOLUTION

FRANCISCO, J.:

Petitioner Food Terminal, Inc. (FTI) is a government owned and controlled

corporation engaged in the business of providing storage services and
bonded warehousing to the public for a fee. Sometime in the first quarter of
1984, petitioner FTI and herein private respondent entered into a contract of
storage whereby private respondent deposited in petitioner's cold storage
22,716 bags (approximately 567,900 kilos) of yellow granex onions and
2,853 bags (approximately 71,300 kilos) of red creole onions. These onions
were intended for export to Japan. During the first week of May, an ammonia
leak penetrated through petitioner's storage facilities and caused damage on
private respondent's goods, as a consequence of which, the onions were
rendered unfit for export.

Private respondent filed a complaint for damages demanding payment of the

actual value of the goods, unrealized profits, exemplary damages and
attorney's fees. Finding petitioner negligent in the performance of its duties,
the lower court rendered judgment in favor of private respondent as follows:

ACCORDINGLY, judgment is hereby rendered:

1. Ordering defendant Food Terminal, Inc. to pay plaintiff TAO

Development, Inc. the amount of P2,429,055.00 as actual
damages representing the loss sustained by plaintiff;

2. Ordering said defendant to pay said plaintiff the amount of

P800,000.00 as damages it sustained in paying interest on the
cash advance of US$100,000.00 from plaintiff's Japanese buyer;

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 3. Ordering said defendant to pay said plaintiff the amount of
P1,534,005.00 as unearned profits; and

4. Ordering said defendant to pay said plaintiff the amount of

P100,000.00 as attorney's fees.

The above amounts shall earn interest at the rate of 12

percent per annum from May 15, 1984 until fully satisfied.

In addition, defendant is, likewise, ordered to pay the costs of the

suit.
1
SO ORDERED.

On appeal, public respondent Court of Appeals (CA) affirmed the decision of

the lower court with modification, to wit:

WHEREFORE, in view of the foregoing, the decision appealed

from is hereby AFFIRMED with MODIFICATIONS. Accordingly,
judgment is hereby rendered as follows:

a) Ordering the defendant Food Terminal, Inc. to pay appellee

TAO Development, Inc. the amount of P2,400,168.00 as actual
damages representing the loss sustained by the appellee;

b) Ordering said appellant to pay said appellee the amount of

P1,534,005.00 as unearned profits; and

c) Ordering said appellant to pay said appellee the amount of

P100,000.00 as attorney's fees.

The above amounts shall earn interest at the rate of 12% per
annum from May 15, 1984 until fully satisfied.

No costs.
2
IT IS SO ORDERED.

Hence, this petition on both questions of fact and law.

It is contended that the lower court and public respondent CA erred in finding
petitioner negligent. Petitioner alleges that the damage to the onions was
due to their poor quality, their propensity to deteriorate rapidly, and private
respondent's delay in their disposal.

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The contention, we note, is premised on a review of the factual findings of
the CA and the lower court, matters not ordinarily reviewable in a petition for
review on certiorari. Well-established is the rule that factual findings of the
trial court and the CA are entitled to great weight and respect 3 and will not
be disturbed on appeal save in exceptional circumstances, 4 none of which
obtains in the case at bench. On the contrary, the finding of the trial court
and the CA that the damage caused to private respondent's goods is due to
petitioner's negligence is sufficiently supported by the evidence on record.
Hence, on this ground, the petitioner's contention must fail.

Petitioner likewise argues that the CA erred in affirming the rate of interest
imposed by the lower court in its decision. This contention is well-taken. The
CA incorrectly applied the provisions of Central Bank Circular No. 416 which
provides:

By virtue of the authority granted to it under Section 1 of Act

2655, as amended known as the "Usury Law", the Monetary
Board in its Resolution No. 1622 dated July 29, 1974, has
prescribed that the rate of interest for the loan, or forbearance of
any money, goods, or credits and the rate allowed in judgments,
in the absence of express contract as to such rate of interest,
shall be twelve (12%) per cent per annum. This circular shall take
effect immediately.

The above circular refers to legal interest in a loan or forbearance of money,

or to cases where money is transferred from one person to another and the
obligation to return the same or a portion thereof is adjudged. 5Any other
monetary judgment which does not involve or which has nothing to do with
loans or forbearance of any money, goods or credit does not fall within its
coverage for such imposition is not within the ambit of the authority granted
to the Central Bank. 6 When an obligation not constituting a loan or
forbearance of money is breached then an interest on the amount of
damages awarded may be imposed at the discretion of the court at the rate
of 6% per annum 7 in accordance with Art. 2209 8 of the Civil Code. Indeed,
the monetary judgment in favor of private respondent does not involve a
loan or forbearance of money, hence the proper imposable rate of interest is
six (6%) per cent. However, as declared in the case ofEastern Shipping Lines,
Inc. vs. CA 9 , the interim period from the finality of the judgment awarding a
monetary claim and until payment thereof, is deemed to be equivalent to a
forbearance of credit. Thus, from the time the judgment becomes final until
its full satisfaction, the applicable rate of legal interest shall be twelve
percent (12%).

ACCORDINGLY, the appealed decision is hereby AFFIRMED with the following

modification:

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 a) Ordering petitioner Food Terminal, Inc. to pay private
respondent TAO Development, Inc. the amount of P2,400,168.00
as actual damages representing the loss sustained by the private
respondent;

b) Ordering petitioner to pay private respondent the amount of

P1,534,005.00 as unearned profits; and

c) Ordering petitioner to pay private respondent the amount of

P100,000.00 as attorney's fees.

These amounts shall earn interest at the rate of SIX PER CENT (6%) per
annum from May 15, 1984 until fully satisfied, but before judgment becomes
final. From the date of finality of the judgment until the obligation is totally
paid, A TWELVE PER CENT (12%) interest, in lieu of the SIX PER CENT (6%)
interest, shall be imposed.

SO ORDERED.

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 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 119974 June 30, 1999

RUPERTO L. VILORIA, petitioner,

vs.
COURT OF APPEALS, LIDA C. AQUINO, assisted by her husband
Gregorio Aquino, MANUEL V. CACANANDO, as heirs of the late
Felicitacion V. Cacanando, RODOLFO V. ANCHETA, ESTRELLA V.
ANCHETA and CARMEN A. NICOLASURA, assisted by her husband
Ramon Nicolasura, as heirs of the late Josefina V. Ancheta and
ANASTACIO L. VILORIA, respondents.

BELLOSILLO, J.:

ASSAILED in this petition for review on certiorari is the decision of the Court
of Appeals 1 which affirmed with modification that of the Regional Trial Court,
Branch 34, Balaoan, La Union, 2 declaring petitioner and private respondents
as co-owners of the 2/3 portion of the commercial lot located in Cabua-an
Oeste, Balaoan, La Union, under TCT No. T-29060 in the name of Ruperto L.
Viloria as trustee, and 1/3 portion of the orchard located in Nalasin, Balaoan,
La Union, under OCT No. 0-1952 in the name of Ruperto, Nicolasa and
Rosaida, all surnamed Viloria.

Sometime in December 1980 Nicolasa Viloria passed away, followed by her

sister Rosaida in June 1989. Both died single and without issue, survived by
their brothers Ruperto L. Viloria, Anastacio L. Viloria, the heirs of their sister
Felicitacion V. Cacanando, who predeceased them, namely, Lida C. Aquino
and Manuel V. Cacanando, and the heirs of their other sister Josefina V.
Ancheta, who likewise predeceased them, namely, Rodolfo V. Ancheta,
Estrella V. Ancheta and Carmen A. Nicolasura.

On 18 February 1991 the heirs of Rosaida and Nicolasa Viloria filed an action
for partition with the Regional Trial Court of Balaoan, La Union, against their

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co-heir Ruperto L. Viloria. The heirs alleged that during the lifetime of
Nicolasa and Rosaida they were co-owners in equal shares and pro-
indiviso with Ruperto L. Viloria of a commercial lot and an orchard. After
Nicolasa and Rosaida died, their heirs demanded from Ruperto L. Viloria, who
was in possession of the properties, to partition the same among them but
he refused claiming that during their lifetime Nicolasa and Rosaida sold and
conveyed to him all their shares, interests and participation over the
properties in question. Ruperto alleged that Nicolasa and Rosaida sold the
commercial lot to him by virtue of a deed of sale executed on 10 August
1965 and duly registered in the Office of the Register of Deeds of La Union,
while the heirs of Josefina V. Ancheta sold and relinguished to him all their
claims and ownership over the commercial lot. As regards the orchard,
Ruperto further alleged that it came to his possession when Nicolasa sold to
him her share of the land and the ancestral house standing thereon by virtue
of a private agreement written in Ilocano, referred to as "Catulagan," dated
10 June 1978, while Rosaida sold to him her share of the property by virtue of
a deed of sale dated 10 September 1987.

Refuting Ruperto's allegations, the heirs of Nicolasa and Rosaida maintained

that the transfer of title of the commercial lot in the name of Ruperto Viloria
was only for loan purposes and not to convey and relinquish ownership over
the property, and that Ruperto assured Nicolasa and Rosaida that they would
remain as co-owners and the deed of sale returned to them. As proof of this
arrangement, the heirs asserted that Nicolasa and Rosaida exercised acts of
administration and dominion over the property and collected rentals from the
buildings standing thereon for 25 years or until they died.

Through their co-heirs Lida C. Aquino and Atty. Gerardo Viloria, private
respondents also asserted that while Rosaida Viloria executed a deed of sale
conveying her share of the orchard to Ruperto Viloria, it was without any
consideration. However, upon realization of the iniquitous nature of the
document, Rosaida Viloria immediately executed a deed of revocation of the
sale.

On 6 April 1992 the trial court ruled that title over the commercial lot was
not in reality transferred in the name of Ruperto L. Viloria for the reason that
the parties to the deed of sale merely intended to create an express
trust. 3By admitting the trust and assuring his sisters Nicolasa and Rosaida as
well as private respondents that they would remain as co-owners, an express
trust had been created. 4 Petitioner Ruperto Viloria thus became only a
trustee to an express trust which incapacitated him from acquiring for his
own benefit the property committed to his custody although titled in his
name. 5 Nicolasa and Rosaida remained as co-owners of the commercial lot,
which upon their demise passed on to their heirs.

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The trial court likewise declared that there was no effective conveyance of
the 1/3 share of Rosaida over the orchard in Nalasin since the document of
conveyance was in effect nullified when Rosaida executed the deed of
revocation. 6 Neither did the "Catulagan" allegedly executed by Nicolasa
convey her share of the orchard to Ruperto since she had already disposed of
the property in favor of Rodolfo Ancheta by virtue of a deed of
donation. 7 Consequently, the trial court declared Ruperto L. Viloria and the
other heirs as co-owners of the entire portion of the commercial lot (except
the northern portion titled in the name of Rodolfo, Aurora and Estrella
Ancheta) and the entire orchard, and ordered a partition of the properties
such that the commercial lot and the orchard would be divided into four (4)
equal parts each, 1/4 for Ruperto Viloria and 3/4 for the other heirs. 8

Apparently dissatisfied with the adjudication by the lower court, Ruperto L.

Viloria elevated the matter to the Court of Appeals which affirmed the
findings of the court a quo with the modification that petitioner and private
respondents should be declared co-owners of the commercial lot only to the
extent of 2/3 of the property and co-owners of 1/3 of the orchard. 9 Indeed,
the trial court erred in ordering that the entire commercial lot be divided into
four (4) equal parts since petitioner Ruperto Viloria already owned 1/3 as co-
owner thereof. Therefore, with regard to the commercial lot, what should be
divided into four (4) equal parts should only be the 2/3 share of Nicolasa and
Rosaida Viloria. The appellate court further held that the deed of revocation
executed by Rosaida did not rescind the 1987 deed of sale over the orchard
since it was duly notarized and hence enjoyed the presumption of validity
which could only be annulled through proper judicial action. In the absence
thereof, the 1987 deed of sale remained valid. Hence, only the 1/3 share of
Rosaida Viloria in the orchard should be divided among petitioner and private
respondents.

Petitioner now impugns the decision of the Court of Appeals as he contends

that the appellate court committed serious errors when it affirmed the
findings of the lower court that (a) the 1965 deed of sale of the commercial
lot was an express trust and not a true conveyance of real property, and (b)
that prescription did not run against private respondents.

Petitioner argues that the existence of an express trust cannot be deduced

from the collection of rentals by Nicolasa and Rosaida since what they
collected were merely rentals for the use of the buildings and improvements
on the property as differentiated from rentals for the use of the land
itself. 10 Neither can the existence of an express trust be inferred from the
consent and conformity to the waiver of rights issued by Nicolasa and
Rosaida since they were not signatories to the actual document, petitioner
being the sole signatory thereto. 11

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These issues would call for the examination of the probative value of the
evidence presented by the parties before the trial court. As we have ruled in
a litany of cases, resort to judicial review of the decisions of the Court of
Appeals under Rule 45 is confined only to errors of law. The findings of fact
by the lower court are conclusive absent any palpable error or arbitrariness.
After carefully examining the records, we find no reason to depart from this
principle. The lower courts are in a much better position to properly evaluate
the evidence and hence we find no other recourse but to leave it untouched
and proceed with the determination of the other issues raised.

Petitioner further contends that the appellate court committed a grave error
in law when it assumed jurisdiction over the validity of the 1965 deed of sale
since it was never raised as an issue in Civil Case No. 417 where plaintiffs,
private respondents herein, merely asked for partition without praying for the
annulment of the document, 12 hence, according to petitioner, public
respondent overstepped the boundaries of its jurisdiction when it classified
the 1965 sale as merely one of express trust and not a true conveyance.

The contention is without merit. In the action for partition private

respondents claimed that they were co-owners of the property subject
thereof hence entitled to their share, while petitioner denied their claim by
asserting that their rights were supplanted by his by virtue of the deed of
absolute sale. As a result, the issue of co-ownership and the legality of the
1965 sale have to be resolved in the partition case. As enunciated
in Catapusan v. CA, 13 until and unless the issue of ownership is definitely
resolved, it would be premature to effect a partition of the properties. Thus,
the appellate court did not exceed the limits of its jurisdiction when it ruled
on the validity of the 1965 sale.

Petitioner still further asserts that the 1965 deed of sale should not have
been declared as an express trust in the absence of a court declaration
annulling and declaring it as such, pursuant to Art. 1390 of New Civil
Code. 14Likewise, petitioner points out that the 1965 deed of sale should
have enjoyed the presumption of validity since it was duly notarized. 15

Art. 1390 of the New Civil Code has no bearing in the instant case. The
provision alludes to contracts which could be voided by reason of absence or
infirmity of consent and not to simulated contracts. The parties in the instant
case freely gave their consent to the 1965 deed of sale but intended it to be
merely a trust agreement and not a relinquishment of rights. It is therefore
the nature of the contract that is in issue and not the character of the
consent given. Moreover, a separate declaration of nullity is no longer
necessary since the trial court already assumed jurisdiction over the validity
of the 1965 deed of sale in determining whether co-ownership in fact existed
and whether partition was proper.

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The fact that a deed of sale is notarized does not necessarily justify the
conclusion that the sale is a true conveyance to which the parties thereto are
irrevocably and undeniably bound. 16 Although the notarization of the deed of
sale vests in its favor the presumption of regularity, it does not validate nor
make binding an instrument never intended, in the first place, to have any
binding legal effect upon the parties thereto. 17

Petitioner argues that the determination of the preceding issue is contrary to

the principle laid down in Dino v. CA18 where it was held that under the
Torrens system registration is the operative act that gives validity to the
transfer or creates a lien upon the land. The deed of sale being duly
registered in the Office of the Register of Deeds of La Union in 1965 and a
certificate of title issued in his name, thereby conferring upon him valid and
legal title to the property, cannot thereafter be declared as merely an
express trust. 19

Petitioner cannot rely on the registration of the land subject of the 1965 sale
and the corresponding issuance of a certificate of title in his name as vesting
ownership on him because the trial court found the deed of sale to be in fact
an express trust. It has been held that a trustee who obtains a Torrens title
over property held in trust by him for another cannot repudiate the trust by
relying on the registration. 20

Finally, petitioner claims that the ruling that the heirs are entitled to the
property in question is contrary to the law on succession. 21 Citing Locsin v.
CA, 22 petitioner postulates that property transferred or conveyed by one
person to another during the lifetime of the former no longer forms part of
his estate at the time of his death to which his heirs may lay claim. Since the
shares of Nicolasa and Rosaida in the commercial lot were already sold to
Ruperto Viloria by virtue of the 1965 deed of sale the heirs had nothing more
to inherit.

The contention is without merit. The claim that the ruling of the appellate
court is contrary to the law on succession and jurisprudence proceeds from
the assumption that the deed of sale was a true conveyance. However, the
Court finds that the 1965 deed of sale was in fact an express trust and hence
no actual conveyance took place. The owners Nicolasa and Rosaida did not
relinquish their claim of ownership over the commercial lot but continued to
exercise acts of administration and dominion over it, hence, it continued to
form part of their estate and devolved upon their demise on their heirs.

As regards prescription invoked by petitioner, it is contended that

prescription has already run against co-owners Nicolasa and Rosaida Viloria
since Ruperto Viloria openly, publicly and continuously owned and possessed
the properties for a period of more than 25 years, or from 1965 up to the

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filing of the case in 1991, with good and just title 23 pursuant to Arts.
1117, 24 1127 25 and 1134 26 of the New Civil Code.

We disagree. Prescriptive period for an action of reconveyance of real

property based on implied or constructive trust which is counted from the
date of registration of property applies when the plaintiff is not in possession
of the contested property. 27 Moreover, an action to compel the trustee to
convey property registered in his name for the benefit of the cestui que
trust does not prescribe unless the trustee repudiates the trust. 28 Nicolasa
and Rosaida were in possession of the land and were exercising acts of
ownership and administration over the property consistent with their
responsibility as co-owners. At no time did Ruperto openly repudiate the
claims of his co-owners but continued to assure them of their rights
regarding the property. Hence, prescriptive period did not commence to run
against private respondents.

WHEREFORE, the decision of the Court of Appeals declaring petitioner and

private respondents as co-owners of the 2/3 portion of the commercial lot
located in Cabua-an Oeste (Poblacion), Balaoan, La Union, under TCT No. T-
29060 in the name of Ruperto Viloria as trustee, and 1/3 portion of the
orchard located in Nalasin, Balaoan, La Union, under OCT No. 0-1952 in the
name of Ruperto, Nicolasa and Rosaida, all surnamed Viloria, is AFFIRMED.
The properties in Cabua-an Oeste and Nalasin, Balaoan, La Union, shall be
divided into 4 equal parts: 1/4 for petitioner, and 3/4 for private respondents
Anastacio L. Viloria; Lida C. Aquino, assisted by her husband Gregorio
Aquino, and Manuel V. Cacanando, as heirs of the late Felicitacion V.
Cacanando; and Rodolfo V. Ancheta, Estrella V. Ancheta and Carmen A.
Nicolasura, assisted by her husband Ramon Nicolasura, as heirs of the late
Josefina V. Ancheta.1wphi1.nt

SO ORDERED.

Digest

FACTS:
In December 1980 Nicolasa Viloria passed away, followed by her sister
Rosaida in June 1989. Both died single, survived by their brothers Ruperto
Viloria, Anastacio Viloria, the heirs of their sister Felicitacion Cacanando, who
predeceased them, Lida Aquino and Manuel Cacanando, and the heirs of
their other sister Josefina Ancheta, who likewise predeceased them, Rodolfo
Ancheta, Estrella Ancheta and Carmen Nicolasura.
In February 1991 the heirs of Rosaida and Nicolasa Viloria filed an action for
partition with the Regional Trial Court of La Union, against their co-heir
Rupero. The heirs claims that during the lifetime of Nicolasa and Rosaida
they were co-owners in equal shares and pro-indiviso with Ruperto of a

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commercial lot and an orchard. After Nicolasa and Rosaida died, their heirs
demanded from Ruperto, who was in possession of the properties, to
partition the same among them but he refused claiming that during their
lifetime Nicolasa and Rosaida sold and conveyed to him all their shares,
interests and participation over the properties in question. Ruperto alleged
that Nicolasa and Rosaida sold the commercial lot to him by virtue of a deed
of sale executed in August 1965 and duly registered in the Office of the
Register of Deeds, while the heirs of Josefina sold and relinquished to him all
their claims and ownership over the commercial lot. Ruperto further alleged
that the orchard came to his possession when Nicolasa sold to him her share
of the land and the ancestral house standing thereon by virtue of a private
agreement written in Ilocano, referred to as Catulagan, in June 1978.
The heirs of Nicolasa and Rosaida maintained that the transfer of title of the
commercial lot in the name of Ruperto was only for loan purposes and not to
convey and relinquish ownership over the property, and that Ruperto assured
Nicolasa and Rosaida that they would remain as co-owners and the deed of
sale returned to them.
Through their co-heirs Lida and Atty. Gerardo Viloria, private respondents
also asserted that while Rosaida executed a deed of sale conveying her
share of the orchard to Ruperto, it was without any consideration. Thereafter
upon realization of the iniquitous nature of the document, Rosaida Viloria
immediately executed a deed of revocation of the sale.
Trial Court held that title over the commercial lot was not transferred in the
name of Ruperto for the parties to the deed of sale merely intended to create
an express trust. By admitting the trust and assuring his sisters Nicolasa
and Rosaida as well as private respondents that they would remain as co-
owners, an express trust had been created. Petitioner Ruperto Viloria thus
became only a trustee to an express trust which incapacitated him from
acquiring for his own benefit the property committed to his custody although
titled in his name. Nicolasa and Rosaida remained as co-owners of the
commercial lot, which upon their demise passed on to their heirs.
The trial court likewise declared that there was no effective conveyance of
the one thitd share of Rosaida over the orchard in Nalasin since the
document of conveyance was in effect nullified when Rosaida executed the
deed of revocation. Neither did the Catulagan allegedly executed by
Nicolasa convey her share of the orchard to Ruperto since she had already
disposed of the property in favor of Rodolfo Ancheta by virtue of a deed of
donation. Consequently, the trial court declared Ruperto portion titled in the
name of Rodolfo, Aurora and Estrella Ancheta) and the entire orchard, and
ordered a partition of the properties such that the commercial lot and the
orchard would be divided into four (4) equal parts each, one fourth for
Ruperto Viloria and three-fourths for the other heirs.

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Ruperto filed a case to the Court of Appeals. The court affirmed the
findings of the trial court with the modification that petitioner and private
respondents should be declared co-owners of the commercial lot only to the
extent of two-thirds of the property and co-owners of one third of the
orchard. Therefore, with regard to the commercial lot, what should be
divided into four (4) equal parts should only be the two-thirds share of
Nicolasa and Rosaida Viloria. The court further held that the deed of
revocation executed by Rosaida did not rescind the 1987 deed of sale over
the orchard since it was duly notarized and hence enjoyed the presumption
of validity which could only be annulled through proper judicial action. In the
absence thereof, the 1987 deed of sale remained valid. Therefore only the
one third share of Rosaida in the orchard should be divided among petitioner
and private respondents.

ISSUE: Whether or not the 1965 deed of sale of the commercial lot was an
express trust and not a true conveyance of the real property.
Whether or not the prescription did not run against the private respondents.

HELD: The Court held that the 1965 deed of sale was in fact an express trust
and hence no actual conveyance took place. The parties in the case freely
gave their consent to the deed of sale but intended the same to be merely a
trust agreement between them and not alienation of the property in
litigation. In the present case, by admitting the trust and assuring his sisters
Nicolasa and Rosaida as well as private respondents that they would remain
as co-owners, an express trust had been created. Deceased owners, Nicolasa
and Rosaida, did not relinquish their claim of ownership over the commercial
lot but continued to exercise acts of administration and dominion over it. The
property continued to form part of their estate and devolved upon their
demise on their heirs.
The allegation that the sale was notarized does not affect the nature of the
contract which both parties are bound. Notarization creates a presumption
that there is a consummated sale, however if the intention of the parties
states otherwise, the instrument is binding according to the intent of the
parties.
On the allegation that Ruperto owns the property and there is no trust since
the property was already registered in the name of Ruperto, the court held
that under the Torrens system registration is the operative act that gives
validity to the transfer or creates a lien upon the land. However petitioner
cannot rely on the registration of the land subject of the 1965 sale and the
corresponding issuance of a certificate of title in his name as vesting
ownership on him because the trial court found the deed of sale is in fact an
express trust. It has been held that a trustee who obtains a Torrens title over

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property held in trust by him for another cannot repudiate the trust by
relying on the registration.

With respect to the second issue, the court held that the prescriptive period
for an action of reconveyance of real property based on implied or
constructive trust which is counted from the date of registration of property
which applies when the plaintiff is not in possession of the contested
property. Likewise, an action to compel the trustee to convey property
registered in his name for the benefit of the cestui que trust does not
prescribe unless the trustee repudiates the trust. In the present case,
Nicolasa and Rosaida were in possession of the land and were exercising acts
of ownership and administration over the property consistent with their
responsibility as co-owners. Ruperto did not openly repudiate the claims of
his co-owners but continued to assure them of their rights regarding the
property. Hence, prescriptive period did not commence to run against
private respondents.

Therefore, the decision of the Court of Appeals declaring petitioner and

private respondents as co-owners of the two-thirds portion of the commercial
lot in the name of Ruperto, Nicolasa and Rosaida, is AFFIRMED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 127135 January 18, 1999

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EASTERN ASSURANCE AND SURETY CORPORATION
(EASCO), petitioner,
vs.
HON. COURT OF APPEALS, HON. TEOFISTO L. CALUMPANG, in his
capacity as Presiding Judge of the Regional Trial Court of
Dumaguete City, Branch 40, and VICENTE TAN, respondents.

MENDOZA, J.:

This is a petition for review of the decision of the Court of Appeals,1 the
dispositive portion of which reads:2

WHEREFORE, the petition is hereby GIVEN DUE COURSE and is

GRANTED. The legal interest rate to be paid by petitioner EASCO to the
private respondent is 6% per annum on the amount due corresponding
to the period from June 26, 1981 to August 24, 1993; and 12% per
annum beginning August 25, 1993 until the money judgment shall
have been fully paid. No pronouncement as to costs.1wphi1.nt

SO ORDERED.

The facts of the case are as follows:

On April 9, 1981, private respondent Vicente Tan insured his building in

Dumaguete City against fire with petitioner Eastern Assurance and
Surety Corporation (EASCO) for P250,000.00. On June 26, 1981, the
building was destroyed by fire. As his claim for indemnity was refused,
private respondent filed a complaint for breach of contract with
damages against petitioner. The Regional Trial Court, Branch 40,
Dumaguete City, to which the case was assigned rendered judgment
as follows:3

WHEREFORE, judgment is rendered in favor of plaintiff [private

respondent Vicente Tan] and ordering defendant [petitioner EASCO].

1. To pay plaintiff the sum of Two Hundred Fifty Thousand

(P250,000.00) Pesos representing the fire insurance claim of
plaintiff plus legal rate of interest from June 26, 1981 until fully
paid;

2. To pay plaintiff the sum of Twenty Thousand (P20,000.00)

Pesos as attorney's fees;

3. To pay plaintiff all expenses incurred when he went to Manila

with his lawyer regarding his insurance claim;

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 4. To pay plaintiff Twenty Thousand Pesos (P20,000.00) Pesos as
moral damages and Twenty Thousand (P20,000.00) Pesos as
exemplary damages.

SO ORDERED.

Petitioner appealed to the Court of Appeals, which, on July 30, 1993, affirmed
the decision of the trial court with modification by disallowing the award of
moral and exemplary damages, attorney's fees and litigation expenses. As
no further appeal was taken from the decision of the Court of Appeals, the
same became final and executory on August 25, 1993. Thereupon, petitioner
tendered payment of the money judgment in the amount of P250,000.00
plus interest of 6% per annum from June 26, 1981 to July 30, 1993. However,
private respondent refused to accept payment on the ground that the
applicable legal rate of interest was 12% per annum. Subsequently, private
respondent brought the matter to the Insurance Commission. On February
27, 1995, the parties agreed before the hearing officer of the commission
that the interest should be computed from June 26, 1981 to September 30,
1994. Petitioner would file with the trial court a motion to fix the legal rate of
interest attaching thereto a check in the amount of P250,000.00 with 6%
interest per annum.

Accordingly, on March 17, 1995, petitioner filed the necessary motion in

court, attaching thereto a manager's check for P448,750.00 representing the
principal sum plus 6% interest per annum for the period June 26, 1981 to
September 30, 1994. On May 10, 1995, the trial court issued the assailed
resolution fixing the rate of interest at 12% per annum, the dispositive
portion of which reads:4

WHEREFORE, premises considered, this Court hereby resolve[s] that:

1. The legal rate of interest imposable on the principal sum of

P250,000.00 should be twelve (12%)per annum from June 26,
1981 to September 30, 1994, which is the cut-off date agreed
upon by the parties;

2. That the manager's check issued by the defendant in the

amount of P448,750.00 in favor of the plaintiff is considered as
partial satisfaction of the writ of execution; and

3. Defendant to pay immediately to plaintiff the unpaid balance

of interest of the principal amount of P250,000.00 equivalent to
6% per annum from June 26, 1981 to September 30,1994.

Petitioner filed a motion for reconsideration which was, however,

denied by the trial court. Thus, on August 30, 1995, petitioner went to

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 the Court of Appeals on certiorari, and on November 14, 1996, the
appellate court rendered a decision. Noting that the case was for
breach of contract for the payment of damages for the loss or
destruction of property and not for collection of a loan or forbearance
of money, the Court of Appeals ruled, on the authority of Eastern
Shipping Lines, Inc. v. Court of Appeals,5 that the interest rate on the
amount due should be 6% per annum from June 26, 1981 to August 24,
1993, and 12% per annumbeginning August 25, 1993 (the date the
decision of the trial court became final and executory) until the money
judgment is paid.

Hence, this petition. Petitioner contends that6

I. The Appellate Court glaringly committed an error of law in its

assailed decision when it wrongfully applied the aforecited
paragraph 3 of the suggested rules of thumb for future guidance
[as formulated in Eastern Shipping Lines, Inc. v. Court of Appeals,
234 SCRA 78 (1994)] and unlawfully ignored or disregarded the
agreed cut-off date for the payment of the legal rate of
manifestations/admissions of the parties as well as the stand of
the respondent Judge in resolving the issue of applicable legal
rare of interest thereon.

II. The application of the abovequoted paragraph 3 of the

suggested rules of thumb in the computation of the applicable
legal rate of interest embodied in the dispositive part of the
assailed decision is tantamount to a "modification of a judgment
that is at its execution stage." It is also an "addition" amounting
to a material alteration of the same judgment which had been
satisfied only at 6% percent interest per annum from June 26,
1981 up to September 30, 1994 (the agreed cut-off date). Hence,
it cannot be allowed and is null and void.

Petitioner's contentions are without merit.

First. In Eastern Shipping Lines, Inc. v. Court of Appeals,7 it was held:

I. When an obligation, regardless of its source, i.e., law, contracts,

quasi-contracts, delicts or quasi-delicts, is breached, the contravener
can be held liable for damages. The provisions under Title XVIII on
"Damages" of the Civil Code govern in determining the measure of
recoverable damages.

II. With regard particularly to an award of interest in the concept of

actual and compensatory damages, the rate of interest, as well as the
accrual thereof, is imposed, as follows:

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 1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself
earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 12% per
annum to be computed from default,i.e., from judicial or
extrajudicial demand under and subject to the provisions of
Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of

money, is breached, an interest on the amount of damages
awarded may be imposed at the discretion of the court at the
rate of 6% per annum. No interest, however, shall be adjudged
on unliquidated claims or damages except when or until the
demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim
is made judicially or extrajudicially (Art. 1169, Civil Code) but
when such certainty cannot be so reasonably established at the
time the demand is made, the interest shall begin to run only
from the date the judgment of the court is made (at which time
the quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of
legal interest shall, in any case, be on the amount finally
adjudged.

3. When the judgment of the court awarding a sum of money

becomes final and executory, the rare of legal interest, whether
the case falls under paragraph 1 or paragraph 2, above, shall be
12% per annum from such finality until its satisfaction, this
interim period being deemed to be by then an equivalent to a
forbearance of credit.

Unquestionably, this case falls under the rule stated in paragraph 3. The
question is whether this rule can be applied to this case. Petitioner contends
that paragraph 3 cannot be applied to this case considering that the decision
of July 30, 1993 of the Court of Appeals, affirming the decision of the trial
court, became final and executory on August 25, 1993, whereas the decision
in Eastern Shipping Lines, Inc. was rendered only on July 22, 1994. Petitioner
argues that the rules stated in that case were in fact made for "future
guidance" of courts and, thus, to apply paragraph 3 to the case at bar is to
sanction the modification of a judgment which is already final and executory.

Contrary to petitioner's contention, Eastern Shipping Lines, Inc. did not lay
down any new rules; all that was made was to state a comprehensive

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summary of existing rules on the computation of legal interest. In fact,
earlier in the case of Nakpil and Sons v. Court of Appeals,8 the Court allowed
the imposition of 12% legal interest per annum on money judgment from the
date of its finality until fully paid. Strictly speaking, therefore, there was no
retroactive application of the rules in this case.

Nor was there modification of judgment in fixing the legal rate of interest at
12% precisely because the subject case arose when the trial court failed to
specify in its decision the rate of the legal interest to be imposed on the
money judgment.1wphi1.nt

Second. Petitioner argues that the parties agreed on the "cut-off date" for the
payment of legal interest, and that is from June 26, 1981 to September 30,
1984, which the Court of Appeals should have respected. Private respondent
disputes the existence of the alleged agreement of the parties. He claims
that he merely agreed to refer the issue of the applicable rate of legal
interest to the trial court for resolution.9

We are inclined to believe the claim of petitioner. The resolution of May 10,
1995 of the trial court referred to such an agreement, and private
respondent never questioned this resolution. The trial court's finding on this
point is binding. Hence, the payment of 12% legal interest per annum should
commence from August 25, 1993, the date the decision of the trial court
became final, up to September 30, 1994, the agreed "cut-off-date" for the
payment of legal interest.

WHEREFORE, the questioned decision is AFFIRMED with the only

MODIFICATION that petitioner is ordered to pay interest on the amount due
at the rate of 12% legal interest per annum from August 25, 1993 to
September 30, 1994.

SO ORDERED.

Digest

Eastern Assurance v. CA
Recit ready digest

Tan insured his building in Dumaguete against fire with Eastern

Assurance in the amount of Php250,000. The building was later
destroyed in a fire, for which Tan sought payment from the insurance
company. His claim was refused, prompting him to file in the RTC a
complaint against Eastern Assurance. The RTC ordered the insurance
company to pay Php250,000 + interest. This was affirmed by the CA.
Petitioner tendered the Php 250,000, but it was refused, with Tan
insisting on the payment of 12% pa interest. The matter was brought

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 before the insurance commission, which provided a cut-off date for the
payment in Sept. 1994. The insurance company filed with the trial
court a petition to fix the interest rate to be applied, for which the rate
of 12% pa was provided. This was affirmed by the CA
The Eastern Shipping case did not lay down new rules, as it only stated
a comprehensive summary of existing rules on the computation of
legal interest. The cut-off date previously provided must still be
respected, such that the rate of 12% will be imposed from the finality
of the judgment until Sept. 30, 1994.

Petition:

review the decision of CA which ordered the petitioner to pay interest rate
on the amount due should be 6% per annum from June 26, 1981 to August
24, 1993, and 12% per annum beginning August 25, 1993 until the money
judgment is paid.

Factual Antecedents:

On April 9, 1981, private respondent Vicente Tan insured his building in

Dumaguete City against fire with petitioner Eastern Assurance and
Surety Corporation (EASCO) for P250,000.00.
On June 26, 1981, the building was destroyed by fire. As his claim for
indemnity was refused, private respondent filed a complaint for breach
of contract with damages against petitioner. The RTC Court, decided in
favour of Vicente Tan. In its ruling, the RTC court imposed the rate of
interest at 12% per annum, and decided that EASCO to pay
immediately to Vicente Tan the unpaid balance of interest of the
principal amount of P250,000.00 equivalent to 6% per annum from
June 26, 1981 to September 30,1994.
Petitioner EASCO appealed to the Court of Appeals, which, on July 30,
1993, affirmed the decision of the trial court. The CA, on the authority
of prior case, Eastern Shipping Lines, Inc. v. Court of Appeals, that the
interest rate on the amount due should be 6% per annum from June
26, 1981 to August 24, 1993, and 12% per annum beginning August
25, 1993 until the money judgment is paid.
Thereafter, petitioner EASCO tendered payment of the money
judgment in the amount of P250,000.00 plus interest of 6% per annum
from June 26, 1981 to July 30, 1993.
However, private respondent refused to accept payment on the ground
that the applicable legal rate of interest was 12% per annum.
Subsequently, private respondent brought the matter to the Insurance
Commission.

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 Then in, 1995, the parties agreed before the hearing officer of the
commission that the interest should be computed from June 26, 1981
to September 30, 1994. Petitioner would file with the trial court a
motion to fix the legal rate of interest attaching thereto a check in the
amount of P250,000.00 with 6% interest per annum.

Ruling of the lower court/s:

The trial court fixed the rate of interest at 12% per annum from June
26, 1981 to September 30, 1994.
The CA ruled that the interest rate on the amount due should be 6%
per annum from June 26, 1981 to August 24, 1993, and 12% per
annum beginning August 25, 1993 until the money judgment is paid.
Position of Petitioner:

It contended that the CA wrongfully applied the paragraph 3 of the

suggested rules of thumb for future guidance as formulated in Eastern
Shipping Lines, Inc. v. Court of Appeals, and unlawfully ignored or
disregarded the agreed cut-off date for the payment of the legal rate.
ISSUE:

When the judgment of the court awarding a sum of money becomes

final and executory what is the rate to be imposed?
HELD/RATIO:

In Eastern Shipping Lines, Inc. v. Court of Appeals, was held:

I. When an obligation, regardless of its source, i.e., law, contracts,

quasi-contracts, delicts or quasi-delicts, is breached, the contravener
can be held liable for damages. The provisions under "Damages" of the
Civil Code govern in determining the measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of

actual and compensatory damages, the rate of interest, as well as the
accrual thereof, is imposed, as follows:

III. When the judgment of the court awarding a sum of money becomes
final and executory, the rate of legal interest, whether the case falls
under paragraph 1 or paragraph 2, above, shall be 12% per annum

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 from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit.

Unquestionably, this case falls under the rule stated in paragraph 3.

The question is whether this rule can be applied to this case.

The prior Eastern Shipping Lines, case. did not lay down any new rules
because it was just a a comprehensive summary of existing rules on
the computation of legal interest.

As to the "cut-off date" for the payment of legal interest:

o The payment of 12% legal interest per annum should commence

from August 25, 1993, the date the decision of the trial court
became final, up to September 30, 1994, the agreed "cut-off-
date" for the payment of legal interest.

2nd digest

Facts: On June 26, 1981 , a building owned by private respondent Vicente

Tan and insured with the petitioner East Assurance and Surety Corporation
(EASCO) was destroyed by fire. Due to EASCOs refusal to indemnify private
respondent, the latter filed a complaint against the former for breach of
contract with damages with RTC by which a judgment was rendered in favor
of private respondent and ordered EASCO to pay as sum of money
representing the fire insurance claim plus legal rate of interest from June 26,
1981 until fully paid , attorneys fees, moral and exemplary damages and all
expenses incurred from Manila.

On Appeal by the petitioner , to The CA , the decision was affirmed with

some modification , and thereafter , became final and executory on August
25, 1993. Upon Payment by the petitioner , private respondent refused to
accept it on ground that the applicable legal rate was 12% per annum.

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Subsequently, private respondent brought the matter to the Insurance
Commission . On February 27, 1995, the parties agreed before the hearing
office of the commission that the interest should be computed from June 26,
1981 to September 30, 1994. Petitioner would file with the trial court a
motion to fix a legal rate of interest attaching thereto a check with 6%
interest per annum. Upon Doing so , the trial court issued the assailed
resolution fixing the rate of interest to 12% per annum.

Petitioner filed a motion for reconsideration, but was denied and on

certiorari to the Court of Appeals , the latter rendered a decision. Noting that
the case was for breach of contract for payment of damages for the loss or
destruction of property and not for collection of a loan or forbearance , it
ruled that the interest rate should be 6% per annum from June 26, 1981 to
August 24, 1993 and 12% per annum beginning August 25, 1993( the date
the decision of the trial court become final and executory until the money
judgment is paid), Hence this petition

Issue: Whether or not the legal interest rate should be 12 % per annum from
such finality until its satisfaction , this interim period being deemed to be by
then an equivalent to a forbearance of credit.

Held: Contrary to the petitioner contention , Eastern Shipping Lines, Inc., did
not lay down any new rules ; all that was made was to state a
comprehensive summary of existing rules on the computation of interest . In
fact , earlier in the case of Nakpil An Sons vs. Court of Appeals , the court
allowed the imposition of 12 % legal interest per annum on money judgment
from the date of it finality until fully paid. Strictly speaking, therefore, there
was no retroactive application of the rules in this case. Nor there
modification of judgment in fixing the legal rate of interest at 12 % precisely
because the subject case arose when the trial court failed to specify in its
decision the rate of the legal interest to be imposed on the money judgment.

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 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-28497 November 6, 1928

THE BACHRACH MOTOR CO., INC., plaintiff-appellee,

vs.
FAUSTINO ESPIRITU, defendant-appellant.

------------------------------

G.R. No. L-28498 November 6, 1928

THE BACHRACH MOTOR CO., INC., plaintiff-appellee,

vs.
FAUSTINO ESPIRITU, defendant-appellant, and
ROSARIO ESPIRITU, intervenor-appellant.

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Ernesto Zaragoza and Simeon Ramos for defendant-appellant.
Benito Soliven and Jose Varela Calderon for intervenor-appellant.
B. Francisco for appellee.

AVANCEA, C. J.:

These two cases, Nos. 28497 and 28948, were tried together.

It appears, in connection with case 28497; that on July 28, 1925 the
defendant Faustino Espiritu purchased of the plaintiff corporation a two-
ton White truck for P11,983.50, paying P1,000 down to apply on account of
this price, and obligating himself to pay the remaining P10,983.50 within the
periods agreed upon. To secure the payment of this sum, the defendants
mortgaged the said truck purchased and, besides, three others, two of which
are numbered 77197 and 92744 respectively, and all of the White make
(Exhibit A). These two trucks had been purchased from the same plaintiff and
were fully paid for by the defendant and his brother Rosario Espiritu. The
defendant failed to pay P10,477.82 of the price secured by this mortgage.

In connection with case 28498, it appears that on February 18, 1925 the
defendant bought a one-ton White truck of the plaintiff corporation for the
sum of P7,136.50, and after having deducted the P500 cash payment and
the 12 per cent annual interest on the unpaid principal, obligated himself to
make payment of this sum within the periods agreed upon. To secure this
payment the defendant mortgaged to the plaintiff corporation the said truck
purchased and two others, numbered 77197 and 92744, respectively, the
same that were mortgaged in the purchase of the other truck referred to in
the other case. The defendant failed to pay P4,208.28 of this sum.

In both sales it was agreed that 12 per cent interest would be paid upon the
unpaid portion of the price at the executon of the contracts, and in case of
non-payment of the total debt upon its maturity, 25 per cent thereon, as
penalty.

In addition to the mortagage deeds referred to, which the defendant

executed in favor of the plaintiff, the defendant at the same time also signed
a promissory note solidarily with his brother Rosario Espiritu for the several
sums secured by the two mortgages (Exhibits B and D).

Rosario Espiritu appeared in these two cases as intervenor, alleging to be the

exclusive owner of the two White trucks Nos. 77197 and 92744, which
appear to have been mortgaged by the defendants to the
plaintiff. lawphi1.net

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While these two cases were pending in the lower court the mortgaged trucks
were sold by virtue of the mortgage, all of them together bringing in, after
deducting the sheriff's fees and transportation charges to Manila, the net
sum of P3,269.58.

The judgment appealed from ordered the defendants and the intervenor to
pay plaintiff in case 28497 the sum of P7,732.09 with interest at the rate of
12 per cent per annum from May 1, 1926 until fully paid, and 25 per cent
thereof in addition as penalty. In case 28498, the trial court ordered the
defendant and the intervenor to pay plaintiff the sum of P4,208.28 with
interest at 12 per cent per annum from December 1, 1925 until fully paid,
and 25 per cent thereon as penalty.

The appellants contend that trucks 77197 and 92744 were not mortgaged,
because, when the defendant signed the mortgage deeds these trucks were
not included in those documents, and were only put in later, without
defendant's knowledge. But there is positive proof that they were included at
the time the defendant signed these documents. Besides, there were
presented two of defendant's letters to Hidalgo, an employee of the plaintiff's
written a few days before the transaction, acquiescing in the inclusion of all
his White trucks already paid for, in the mortgage (Exhibit H-I).

Appellants also alleged that on February 4, 1925, the defendant sold his
rights in said trucks Nos. 77197 and 92744 to the intervenor, and that as the
latter did not sign the mortgage deeds, such trucks cannot be considered as
mortgaged. But the evidence shows that while the intervenor Rosario Espiritu
did not sign the two mortgage deeds (Exhibits A and C), yet, together with
the defendants Faustino Espiritu, he signed the two promissory notes
(Exhibits B and D) secured by these two mortgages. All these instruments
were executed at the same time, and when the trucks 77197 and 92744
were included in the mortgages, the intervenor Rosario Espiritu was aware of
it and consented to such inclusion. These facts are supported by the
testimony of Bachrach, manager of the plaintiff corporation, of Agustin
Ramirez, who witnessed the execution of all these documents, and of Angel
Hidalgo, who witnessed the execution of Exhibits B and D.

We do not find the statement of the intervenor Rosario Espiritu that he did
not sign promissory notes Exhibits B and C to be sufficient to overthrow this
evidence. A comparison of his genuine signature on Exhibit AA with those
appearing on promissory notes B and C, convinces us that the latter are his
signatures. And such is our conclusion, notwithstanding the evidence
presented to establish that on the date when Exhibits B appears to have
been signed, that is July 25, 1925, the intervenor was in Batac, Ilocos Norte,
many miles away from Manila. And the fact that on the 24th of said month of
July, the plaintiff sent some truck accessory parts by rail to Ilocos for the

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intervenor does not necessarily prove that the latter could not have been in
Manila on the 25th of that month.

In view of his conclusion that the intervenor signed the promissory notes
secured by trucks 77197 and 92744 and consented to the mortgage of the
same, it is immaterial whether he was or was not the exclusive owner
thereof.

It is finally contended that the 25 per cent penalty upon the debt, in addition
to the interest of 12 per cent per annum, makes the contract usurious. Such
a contention is not well founded. Article 1152 of the Civil Code permits the
agreement upon a penalty apart from the interest. Should there be such an
agreemnet, the penalty, as was held in the case of Lopez vs. Hernaez (32
Phil., 631), does not include the interest, and which may be demamded
separetely. According to this, the penalty is not to be added to the interest
for the determination of whether the interest exceeds the rate fixed by the
law, since said rate was fixed only for the interest. But considering that the
obligation was partly performed, and making use of the power given to the
court by article 1154 of the Civil Code, this penalty is reduced to 10 per cent
of the unpaid debt.

With the sole modification that instead of 25 per cent upon the sum owed,
the defendants need pay only 10 per cent thereon as penalty, the judgment
appealed from is affired in all other respects without special pronouncement
as to costs. So ordered.

Digest

Facts:
1. This is a consolidated case(Cases no. 28497 and 28948) involving two
separate sale transactions. One made in Feb. 18, 1925 (case 28498), when
the defendant earlier bought a truck on instalment from the petitioner and
said truck was mortgaged together with the two others (no. 77197 & 92744
in the the subsequent sale transaction dated July 28, 1925. The said two of
the other trucks were also purchased (but already paid previously) from the
plaintiff. The defendant failed to pay the balance. In July 1925, defendant
again purchased another truck from Bachrach. The said truck, together with
the 3 other vehicles were mortgaged to the plaintiff to secure the remaining
balance. The defendant failed to pay the balance for the latest truck
obtained.

2. It was agreed in both sales that 12% interest will be paid on the unpaid
price, and in case of the non-payment of the total debt at maturity, 25% shall
be the penalty. The defendant also signed a promissory note solidarily with
his brother Rosario (acting as intervenor), the sums secured by the

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mortgages. Rosario is alleged to be the owner of the two white trucks no.
77197 & 92744 mortgaged.

3. While these two cases were pending in the lower court the mortgaged
trucks were sold by virtue of the mortgage, all of them together bringing in,
after deducting the sheriff's fees and transportation charges to Manila, the
net sum of P3,269.58.

4. The lower court ordered the defendants and the intervenor to pay
plaintiff in case 28497 the sum of P7,732.09 with interest at the rate of 12
per cent per annum from May 1, 1926 until fully paid, and 25 per cent
thereof in addition as penalty. In case 28498, the trial court ordered the
defendant and the intervenor to pay plaintiff the sum of P4,208.28 with
interest at 12 per cent per annum from December 1, 1925 until fully paid,
and 25 per cent thereon as penalty.

5. The appellants contend that trucks 77197 and 92744 were not
mortgaged, because, when the defendant signed the mortgage deeds these
trucks were not included in those documents, and were only put in later,
without defendant's knowledge. Appellants also alleged that on February 4,
1925, the defendant sold his rights in said trucks Nos. 77197 and 92744 to
the intervenor, and that as the latter did not sign the mortgage deeds, such
trucks cannot be considered as mortgaged.

6. But there is positive proof that they were included at the time the
defendant signed these documents. Besides, there were presented two of
defendant's letters to Hidalgo, an employee of the plaintiff's written a few
days before the transaction, acquiescing in the inclusion of all
his White trucks already paid for, in the mortgage (Exhibit H-I).

Issue: W/N the 25% penalty upon the debt in addition to the 25%
p.a. is usurious

Ruling: No, Article 1152 of the Civil Code permits the agreement upon a
penalty apart from the interest. Should there be such an agreement, the
penalty, as was held in the case of Lopez vs. Hernaez (32 Phil., 631), does
not include the interest, and which may be demanded separately. The
penalty is not to be added to the interest for the determination of whether
the interest exceeds the rate fixed by the law, since said rate was fixed only
for the interest. But considering that the obligation was partly performed,
and making use of the power given to the court by article 1154 of the Civil
Code, this penalty is reduced to 10 per cent of the unpaid debt. The penalty
is however reduced from 25 % upon the sum owed, the defendants need pay
only 10 % thereon as penalty. (Judgment appealed from is affirmed in all
other respects).

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- See more at: http://lawsandfound.blogspot.com/2013/07/the-bachrach-
motor-co-v-espiritu-digest.html#sthash.5jALV3GV.dpuf

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

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G.R. No. 82082 March 25, 1988

INSULAR BANK OF ASIA AND AMERICA,plaintiff-appellant,

vs.
SPOUSES EPIFANIA SALAZAR and RICARDO SALAZAR, defendants-
appellees.

GUTIERREZ, JR., J.:

This is an appeal by the Insular Bank of Asia and America (IBAA) from the
judgment of the Regional Trial Court of Leyte in Civil Case No. 6932 for
collection of a sum of money with preliminary attachment. The appeal was
originally brought to the Court of Appeals but was certified to us by that
tribunal because it raises only a question of law.

The facts are not disputed.

On November 22, 1978, defendants-appellees Epifania Salazar and Ricardo

Salazar obtained a loan from the plaintiff-appellant in the amount of Forty
Two Thousand and Fifty Pesos ( P42,050.00 ) payable on or before December
12, 1980. This loan transaction was evidenced by a promissory note where
the defendants-appellees bound themselves jointly and severally to pay the
amount with interest at 19% per annum and with the express authority to
increase without notice the rate of interest up to the maximum allowed by
law and subject further to penalty charges or liquidated damages upon
default equivalent to 2% per month on any amount due and unpaid. In the
event the account was referred to an attorney for collection, the defendants-
appellees were also bound to pay 25% of any amount due as attorney's fees
plus expenses of litigation and costs.

In accordance with the agreement, the plaintiff-appellant increased the rate

of interest to 21% pursuant to Central Bank Circular No. 705 dated December
1, 1979.

The promissory note matured but the defendants-appellees failed to pay

their account. It was only after several demands that the defendants-
appellees were able to make partial payment. As of November 25, 1983, they
were able to pay a total of P68,676.75 which payments were applied to
partially satisfy the penalty and interest charges.

On September 12, 1984, the plaintiff-appellant filed a complaint with the

Regional Trial Court alleging that the defendants-appellees were indebted to
IBAA in the amount of P87,647.19 as of September 15, 1984. including
interest at 21% per annum penalty charges, and attorney's fees.

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At the pre-trial on October 31, 1984, the parties and their counsels appeared.
The defendant-spouses admitted the execution of the promissory note in
consideration of P48,050.00. The trial court then rendered a summary
judgment the dispositive portion of which reads:

WHEREFORE, judgment is hereby ordered in favor of the plaintiff

ordering the defendant spouses Ricardo Salazar and Epifania
Salazar to pay Insular Bank of Asia and America (IBAA) the sum
of Eleven Thousand Two Hundred Fifty Three Pesos and Twenty
Five Centavos ( P11,253.25 ), with interest thereon at the rate of
19% per annum from the filing of the complaint on September
12, 1984 until fully paid. The defendants are further ordered to
pay the plaintiff-attorney's fees in the amount of one Thousand
Pesos ( P1,000.00 ) and to pay the costs. (p. 4, Plaintiff-
Appellant's Brief).

Plaintiff-appellant now raises the following assigned errors:

I THE LOWER COURT ERRED IN NOT AWARDING TO PLAINTIFF-APPELLANT

PENALTY CHARGES OR LIQUIDATED DAMAGES IN THE AMOUNT OF 2% PER
MONTH ON ALL AMOUNTS DUE AND UNPAID;

II THE LOWER COURT ERRED IN NOT AWARDING INTEREST ON THE LOAN AT

21 % PER ANNUM.

III THE LOWER COURT ERRED IN THE COMPUTATION OF THE AMOUNT OF

OBLIGATION DUE FROM DEFENDANTS-APPELLEES APPELLEES IN FAVOR OF
PLAINTIFF-APPELLANT

III THE LOWER COURT ERRED IN NOT AWARDING PLAINTIFF- APPELLANT

ATTORNEY'S FEES EQUIVALENT TO 25% OF THE AMOUNT DUE AND
EXPENSES OF LITIGATION; and

IV THE LOWER COURT ERRED IN NOT ORDERING DEFENDANTS-APELLEES TO

JOINTLY AND SEVERALLY PAY THE OBLIGATION. (pp. 4-5, Plaintiff-Appellant's
Brief)

The Escalation Clause provided in the promissory note reads:

The interest herein charged shall be subject to in , without

notice, depending on whatever policy IBAA may in the future
adopt conformable to law, especially to compensate for any in
Central Bank interests or rediscounting rates.

Finding strength in the argument that the promissory note is the contract
between the parties and, under the law, obligations arising from contracts

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have the force of law between the parties, the plaintiff-appellant increased
the interest rate to 21% per annum effective December 1, 1979 pursuant to
Central Bank Circular No. 705.

In line with the Court's ruling in the case of Banco Filipino v. Navarro (G.R.
No. L-46591, July 28,1987), the interest rate may not be increased by the
plaintiff-appellant in the instant case. It is the nile that escalation clauses are
valid stipulations in commercial contracts to maintain fiscal stability and to
retain the value of money in long term contracts. However, the enforceability
of such stipulations are subject to certain conditions.

In the Banco Filipino case, the borrower questioned the additional interest
charges on the loan of P41,300.00 she obtained when the interest rates were
increased from 12% to 17% per Central Bank Circular No. 494, issued on
January 2, 1976. In a letter written by the Central Bank to the borrower,
some clarifications were made. Pertinent portions of the letter read:

In this connection, please be advised that the Monetary Board, in

its Resolution No. 1155 dated June 11, 1976 adopted the
following guidelines to govern interest rate adjustments by banks
and non-banks performing quasi- banking functions on loans
already existing as of January 3, 1976, in the light of Central
Rank Circulars Nos. 492-498:

1 Only banks and non-bank financial intermediaries performing

quasi-banking functions may interest rates on I already existing
as of January 2,1976, provided that:

a. The pertinent loan contracts/documents contain

escalation clauses expressly authorizing lending bank
or non-bank performing quasi-banking functions to
increase the rate of interest stipulated in the
contract, in the event that any law or Central Bank
regulation is promulgated increasing the maximum
interest rate for loans; and

b. Said loans were directly granted by them and

the remaining maturities thereof were more than
730 days as of January 2, 1976, and

2. The increase in the rate of interest can be effective only as of

January 2, 1976 or on a later date. (Emphasis supplied)

Moreover, in its comment and supplemental comment submit, ted upon

orders of this Court, the Central Bank took the position that the issuance of
its circulars is a valid exercise of its authority to prescribe maximum rates of

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interest and based on the general principles of contract, the Escalation
Clause is a valid provision in the loan agreement provided that- 41) the
increased rate imposed or charged by petitioner does not exceed the ceiling
fixed by law or the Monetary Board; (2) the increase is made effective not
earlier than the effectivity of the law or regulation authorizing such an
increase and (3) the remaining maturities of the loans are more than 730
days as of the effectivity of the law or regulation authorizing such an
increase. (Emphasis supplied)

In the case at bar, the loan was obtained on November 21, 1978 and was
payable on or before November 12, 1980. Central Bank Circular No. 705,
authorizing the increase from 19% to 21% was issued on December 1, 1979.
Obviously, as of this date, December 1, 1979, the remaining maturity of the
loan was less than 730 days. Hence, the plaintiff-appellant's second
assignment of error is without merit.

With respect to the penalty clause, we have upheld the validity of such
agreements in several cases. As the Court stated in the case of Government
Service Insurance System v. Court of appeals (145 SCRA 311, 321):

In the Bachrach case (supra) the Supreme Court ruled that the
Civil Code permits the agreement upon a penalty apart from the
interest. Should there be such an agreement, the penalty does
not include the interest, and as such the two are different and
distinct things which may be demanded separately. Reiterating
the same principle in the later case of Equitable Banking Corp.
(supra), where this Court held that the stipulation about payment
of such additional rate partakes of the nature of a penalty clause,
winch is sanctioned by law.

In the case of Equitable Banking Corporation v. Liwanag (32 SCRA 293, 297),
the Court explained:

xxx xxx xxx

... We have not overlooked the 14% interest that appellant has
been sentenced to pay. This may appear to be usurious, but it is
not so. The rate stipulated was 9%, subject, however, to an
additional rate of 5%, in the event of default. The stipulation
about payment of such additional rate partakes of the nature of a
penalty clause, which is sanctioned by law, (Art. 1226, Civil Code
of the Philippines), although, the penalty may also be reduced by
the courts if it is iniquitous or unconscionable. (Art 1229, Civil
Code of the Philippines). ...

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Admittedly, the defendants-appellees in the instant case failed to pay the
loan on the due date. However, with earnest efforts, they tried to pay the
loan little by little so that as of November 25, 1983, a total of P68,676.75 had
been paid. The plaintiff-appellant, on the other hand, merely applied this
amount to satisfy the penalty and interest charges which it additionally
imposed. We do not find any evidence of bad faith on the part of the
defendants-appellees in their failure to pay the loan on time. Efforts were
indeed made to make good their promise. We note the trial court's
observation that the plaintiff-appellant did not even state in the complaint
that the defendants-appellees had made partial payments, making it appear
that the spouses Salazars refused to pay the loan. In their answer with
counterclaim, the defendants-appellees alleged that the bank neglected to
credit said payments in the defendant's account folio and subjected it as it
did to the additional charges. Furthermore, we agree with the trial court that
the bank has already profited considerably from the loan. In a span of about
six (6) years, the bank was enriched by P 26,626.75 (p. 17, Records). The
penalty charges of 2% a month are, therefore, out of proportion to the
damage incurred by the bank. In accordance with Article 1229 of the Civil
Code, the Court is constrained to reduce the penalty for being highly
iniquitous

With respect to the attorney's fees, the court is likewise empowered to

reduce the same if they are unreasonable or unconscionable notwithstanding
the express contract for attorney's fees. The award of one thousand
( P1,000.00 ) pesos by the trial court appears to be enough.

The promissory note signed by the defendants-appellants states that the

loan of P42,050.00 shall bear interest at the rate of 19% per annum. This
would yield interest of P7,989.50 per annum or a total of P 46,339.10 from
November 22, 1978 to September 12, 1984, the date of filing the complaint.
Penalty interest of 1% a month or 12% per annum is reasonable so that from
December 12, 1980 up to September 12, 1984, penalty charges should be
P19,202.83. Considering that the defendants-appellees have paid the
amount of P68,676.75, they, therefore, owed the bank the amount of
P38,915.18 when the complaint was filed. There is no indication in the
records as to the fluctuation of actual interest rates from 1984 and,
therefore, we order interest at the legal rate of 12% per annum on the
unpaid amount.

WHEREFORE, the decision of the lower court is MODIFIED. The defendants-

appellants Ricardo Salazar and Epifania Salazar are ordered to pay Insular
Bank of Asia and America (IBAA) the sum of THIRTY-EIGHT THOUSAND NINE
HUNDRED PESOS and EIGHTEEN CENTAVOS (P38,915.18 ) with interest
thereon at the rate of Twelve Percent (12%) per annum from the filing of the
complaint until fully paid.

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SO ORDERED.

No digest available

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-9262 July 10, 1959

MARINO S. UMALI, petitioner,

vs.
EFRAIN Y. MICLAT, respondent.

Zavalla, Bautista and Nuevas for petitioner.

Domingo F. de Guzman for respondent.

BAUTISTA ANGELO, J.:

This is an action to recover certain sums of money, plus damages and

attorney's fees, for some work done by plaintiff for defendant Marino S.
Umali. Defendant Antonio M. Tiongco was included in his capacity as
guarantor of Umali but he was never served with summons. With leave of
Court, defendant Umali filed a third party complaint against Maharlika
Pictures, Inc., a corporation duly organized under the laws of the Philippines,
but because the latter failed to file its answer, it was declared in default.

Defendant Umali set up the defense that the work done by the plaintiff was
not complete or satisfactorily; that the contract upon which the action is
based was executed by the Maharlika Pictures, Inc., of which he is the
President and General Manager, and so plaintiff's action should be directed
against said corporation.

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After trial, the lower court rendered judgment ordering defendant Umali to
pay plaintiff the sum of P675.00, plus 10% surcharge thereon as stipulated,
and the sum of P200.00 as attorney's fees; and with respect to the second
claim, to pay the sum of P344.50. The Court ordered that the sums of
P675.00 and P344.50 shall bear 6% interest per annum for the date of the
filing of the complaint until paid. The complaint with respect to defendant
Tiongco and the third party complaint against the corporation were
dismissed. Costs were taxed against defendant Umali.

Umali took the case on appeal to the Court of Appeals, and the decision of
the lower court was affirmed in toto, with costs against appellant. Hence the
present petition for review.

It appears that in accordance with the contract Exhibit "A" and the Job Order
Exhibit "D", appellee prepared posters, a theater show board display, a
theater display standee, a float, and other forms of advertisement for the
showing of the film "LAGRIMAS"; that for the work specified in Exhibit "A",
Umali agreed to pay the sum of P900, of which appellee was paid P225 in
advance; that for work called for in Exhibit "D", Umali agreed to pay the sum
of P344.50; that the work covered by the contract and job order above
mentioned were completely done and the articles called for therein delivered
to Umali; and that notwithstanding several demands made upon Umali, he
refused to pay without justification.

The first defense set up by appellant is that the contracts which appellee's
action is based were executed by and between the appellee and the
Maharlika Pictures, Inc., of which appellant is the President and General
Manager, and so the action should have been directed against the
corporation and not against him in his personal capacity. Appellant does not
dispute the correctness of the amounts claimed in the complaint.

The Court of Appeals, in meeting this contention, made the following

observation:

We have gone carefully over the evidence of record, and we have

arrived at the conclusion that the decision appealed from should be
affirmed. As the contract (Exhibit A) would show, Umali signed the
same in his personal capacity. While it is mentioned therein that he is
the President and General Manager of Maharlika Pictures, Inc., it is not
stated that, as such, he was duly authorized to enter into the contract
for and on behalf of the corporation. If it were true that it was the
intention of the contracting parties to hold Maharlika Pictures, Inc.,
solely and exclusively liable, it was not explained why Umali allowed
Maharlika Pictures, Inc., of which he was still an Officer at the time of
trial of this case, to be declared in default by not filing its answer to the
third-party complaint filed by him. Neither did Umali present in

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 evidence any resolution or minutes of meeting of Maharlika Pictures,
Inc., which Umali admits is a corporation duly organized and existing
under and by virtue of the laws of the Philippines, or of its Board of
Directors, ratifying the action of Umali and confirming the contract
(Exhibit A) as an act of the corporation. As President and General
Manager of the corporation and the party appearing to be solely and
personally liable under the contract (Exhibit A), Umali should have
taken steps to enable the Board of Directors of the corporation to
adopt a resolution confirming the execution by him of Exhibit A as an
act of the corporation because this was for his own protection.

We find the above observation supported by evidence. Indeed it appears in

the contract Exhibit "A" that the one who contracted for the work to be done
is appellant in his personal capacity, although he described himself therein
as President and General Manager of the Maharlika Pictures, Inc. Umali
signed the contract as "party of the second part" without stating that he was
acting in behalf of the corporation. And from what may be gathered from the
decision both of the lower court and the Court of Appeals, Umali never
explained that when he entered into such a contract he acted in behalf of the
corporation or was authorized to do so by its Board of Directors. It is strange
that, after bringing the corporation into this case as party-defendant, Umali
allowed it to be declared in default being its president and general manager
as he claims to be, which gives rise to the suspicion that his claim is merely
an attempt to shift to the corporation the responsibility for the transaction.
The same consideration may be made with regard to the job order Exhibit
"D". It is true that on its face it appears that the articles mentioned therein
were delivered to the corporation, but apparently the requisition of said
articles was made by appellant himself for which reason he was made
personally responsible by the trial court and the Court of Appeals. This is a
question of fact which we cannot now look into.

The next question refers to the surcharge of 10% which was agreed upon in
the contract Exhibit "A". It appears therein that if appellant should fail to pay
the balance of P675 after the lapse of 30 days from the date exhibition of the
film "LAGRIMAS" has started, he should pay a surcharge of 10% every 30
days thereafter until the amount has been fully paid. It is claimed that this
surcharged is unconscionable and unreasonable, because it is tantamount to
imposing an interest of 10% a month, or 120% a year on the balance of the
obligation until the same is paid in full.

There is merit in this contention. While this surcharge partakes of the nature
of a penal clause which the parties may stipulate under the law,1 however,
one cannot deny that the same is unreasonable, for if that is to be
maintained, we would have that on the basis of P675 which is the balance
that remains outstanding, appellant would pay P67.50 a month, or P810 a
year, which considering the time that has already elapsed since appellant

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defaulted, would amount to P3,420. This is indeed a case where equity
demands that the penalty be reduced in fairness to the debtor. And so,
making use of the discretion that the law grants us on the matter, we are of
the opinion that a surcharge of 20% per annum would be reasonable. We
therefore hold that the penalty should be reduced accordingly.2

The last claim of appellant refers to the portion of the decision which orders
the payment of 6% interest per annum from the date of the filing of the
complaint until full payment of the obligation due, which is also considered
unreasonable considering that appellant was already ordered to pay the
penalty agreed upon.

This claim is untenable in the light of the law and the contract of the parties.
Thus, Article 1226 of the new Civil Code provides that "in obligations with a
penal clause, the penalty shall substitute the indemnity for damages and the
payment of interests in case of non-compliance, if there is no stipulation to
the contrary. Nevertheless, damages shall be paid if the obligor refuses to
pay the penalty. . . .". In other words, the penalty takes the place of the
interests only if there is no stipulation to the contrary, and even then,
damages may still be collected if the obligor refuses to pay the penalty. In
this case not only is there an express stipulation to pay damages in addition
to the penalty, but appellant has failed to pay his obligation as well as the
penalty. This appears in paragraph (f) of the contract Exhibit "A". The
imposition of 6% interest per annum is, therefore, justified.

Modified with regard to the amount of the surcharge to be imposed on

appellant as above indicated, we hereby affirm the decision appealed from in
all other respects, without pronouncement as to costs.

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 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-29292 March 13, 1929

TOMASA C. VIUDA DE PAMINTUAN, plaintiff-appellant,

vs.
JUAN TIGLAO, defendant-appellant

Jose Ma. Cavanna for plaintiff-appellant.

Alfonso Ponce Enrile for defendant-appellant.

OSTRAND, J.:

This action was instituted in the court of the justice of the peace of
Mabalacat, Pampanga, by Tomasa C. Vda. de Pamintuan, as guardian of her
five minor children, bearing ther surname of Pamintuan y Centeno, for the
purpose of recovering from Juan Tiglao the possession of 2 parcels of land
described in the complaint, as well as quantity of palay and sugar, as rent,
together with damages and an attorney's fee, and costs. In the said court the
cause was decided favorably to the plaintiff, whereupon the defendant
appealed to the Court of First Instance. In the latter court the defendant

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challenged the jurisdiction of the court and set up various counterclaims not
necessary to be here specified.

Upon the trial of the cause in the Court of First instance justice was again
rendered in favor of the plaintiff for the possession of the land in question
and requiring the defendant to pay for the plaintiff, as rent for the
agricultural year 1925-1926, three hundred cavans of palay (Pinilingbeltu), or
in the default thereof, its equivalent in the money at the rate of P3.75 per
caravan, as well as four hundred piculs of sugar; and as rent for agricultural
year 1926-1927, another three hundred cavans of palay, or in default
thereof, its equivalent value in money at the same rate per cavan, with
interest on all of said sums from April 10, 1926. From this judgment both the
plaintiff and appellant appealed: the plaintiff appealing with respect to so
much of the judgement as failed to award the stipulated attorney's fee of
P1000 and stipulated interest at the rate of 15 percent per annum upon the
unpaid rents; the defendant appealing from the court's refusal to dismiss the
cause of lack of jurisdiction, as well as from the failure of the court to allow
the defendant his own attorney's fee.

It appears that on March 18, 1925, one Jose v. Ramirez, as attorney-in-fact of

Florentino Pamintuan, entered into a written contract with the defendant
herein, Juan Tiglao, whereby the former leased to the latter 2 parcels of land
described in the plaintiff's complaint, located in the barrio of Dolores,
municipality of Mabalacat, Province of Pampanga. The term of the lease was
fixed at two agricultural years, beginning with the month of April, 1925, and
continuing to March, 1927.

In the fourth paragraph of this contract the annual rent due upon the lease
was fixed at three hundred cavans of palay and four hundred piculs of sugar,
of defined quality, and deliverable on or before the last day of March,
marking the end of two respective years covered by the lease. The rent for
the first year not having been paid on or before March 31, 1926, nor
thereafter, this action was instituted on September 10, 1926, after proper
demand made, for the purposes indicated in the first paragraph of this
opinion.

Logically speaking, the first question that presents itself upon this record is
whether the court of justice of the peace has jurisdiction to entertain an
action of the detainer, at the instance of the landlord, upon failure of the
tenant to pay rent at the time and manner stipulated; and consequently
whether this action, which was instituted prior to the termination of the full
period fixed by the lease, can be considered premature. Upon this point, it
may be recalled as rudimentary in the law governing leases of rural and
urban property, that it is the duty of the lessee to pay the price of the lease
in the manner agreed upon (art. 1555, Civ. Code). Furthermore, the failure on
the part of the lessee to comply with this obligation supplies a ground for

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rescission of the contract and recovery of damages by the lessor (art. 1556,
Civ. Code). Again, in section 80 of the Code of Civil Procedure, it is in effect,
among other things, declared that any landlord against whom the possession
of any land is unlawfully withheld after the determination of the right to hold
possession shall, at any time with one year after the commencement of such
unlawful withholding of possession, be entitled, as against the person so
depriving him of possession, to restitution of the land, together with the
damages and costs. From these provisions it is clear that upon non-payment
of rent by the lessee, the lessor may elect to treat the contract as rescinded
and thereby determine the right of the lessee to continue in possession; and
this right to recover possession may be enforced in an action of unlawful
detainer. It is not necessary, in such situation, that an independent action for
the recission of the lease should first be instituted, in the Court of First
Instance, for the purpose of putting an end to the right of the tenant to
remain in possession under the lease. Indeed, the proviso to the section of
the Code of Civil Procedure last above cited, gives express recognition to the
right of the landlord to recover possession in an ordinary action of detainer,
for non-payment of rent by the lessee, the condition being that non-payment
of the rent must have continued for the period of at least three days after
demand duly made.

It appears from the record that after this action was begun, and before the
case was decided, the defendant voluntarily surrendered possession of the
land to the plaintiff. Upon this it is contended by the attorney for the
defendant that the court of the justice of the peace and consequently the
Court of First Instance lost jurisdiction to entertain the action. This
contention is of course untenable. The jurisdiction of the court having once
attached, that jurisdiction continues until the complete remedy is granted.
The defendant-appellant further contends that inasmuch as he set up a
counterclaim for damages in the amount of P6,000, the jurisdiction of the
court of justice of the peace over the main action was destroyed. But this
proposition also is untenable.

What has been said disposes of the main points raised in the appeal of the
defendant. With respect to the plaintiff's appeal, we note, first, a provision in
the contract of lease to the effect that if the stipulated rent should not be
paid at the times stated, the lessee must indemnify the lessor in an
additional amount equivalent to 15 per centum annually, or 1.25 per cent of
each month of delay, to be calculated upon the highest quotation registered
in the market, for the commodity which should have been paid, within the
sixty days following the due date of such rent. The trial court refused to give
effect to this stipulation on the ground that, in effect, it was a stipulation for
the payment of usurious interest. In this connection it will be recalled that at
that time the contract in question was made, the highest rate that could be
legally collected upon any unsecured loan or forebearance of money, goods,
or credits, was 14 per centum per annum. In view of this provision, we are of

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the opinion that the trial court committed no error in refusing to allow the
interest thus stipulated for. In dealing with situations of this kind it is the duty
of the court to look through the form and into the substance of the
transaction, and we are of the opinion that this stipulation really
contemplated interest, as interest, and that the stipulation did not
contemplate what may be called liquidated damages, as contended by the
plaintiff-appellant.

The second fault involved in the plaintiff's appeal has reference to the refusal
of the trial court to allow an attorney's fee. In paragraph 11 of the contract, it
is stipulated that in case of litigation for non-compliance with the lease, the
lessee shall pay to the lessor the sum of P1000 for his attorney's fee and
other expenses. The justice of the peace, before whom the case was
brought, refused to take cognizance of this item on the ground that the sum
exceeded the amount over which he could take jurisdiction. Upon appeal, the
Court of First Instance held that as it was only exercising its appellate
jurisdiction, it could not take cognizance of matters beyond the jurisdiction of
the justice of the peace court.

In our opinion, the views of the two lower courts are correct. A justice of the
peace court is of limited jurisdiction, and the limits are fully and clearly
defined in the statutes. This is an action for forcible entry and detainer and,
as such, can only involve " the restitution of the land, building, and premises
possession of which is unlawfully withheld, together
with damages and costs" (see sec 80, Code of Civil Procedure). Damages do
not include attorney's fees; whatever doubt there may be on that point
should be dispelled by section 84 of the same code, which reads as follows:

If, upon trial, the court shall find that the complainant is not true, it
shall enter judgement against the plaintiff for costs. If it finds the
complaint to be true, it shall render judgement against the defendant
in favor of the plaintiff for restitution of the premises, and cost of suit,
and for all arrears of rent, or a reasonable compensation for the use
and occupation of the premises. (Emphasis supplied.)

The costs referred to are fixed by section 491 of the code and do not include
attorney's fees.

In conclusion we note that the defendant supposes that he is entitled to

recover his own attorney's fee under section 7 of the Usury law (Act no.
2655), in view of the usurious character of the stipulation for the payment of
15 per cent interest to the lessor for the payment of overdue rents. This
suggestion is untenable, since the right to the attorney's fee under the
section referred to attaches only when usurious interest has in fact been
paid. The circumstance that usurious interest is stipulated for does not

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entitle the borrower to an attorney's fee in an action declaring the stipulation
usurious.

The judgement appealed from is in accordance with the law and the facts
and is affirmed without costs. So ordered.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-21280 February 9, 1924

VICENTE E. REYES, in his capacity as administrator of the estate of

Felipa Alonso y de Mesa viuda de Mendiola, plaintiff-appellant,
vs.

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HENRY W. ELSER, defendant-appellant.
MARIANO ALONSO Y DE MESA, intervenor and appellee.

Santiago and Guerrero for plaintiff-appellant.

F. Boomer for defendant-appellant.
Modesto Reyes and E. Ymzon for intervenor-appellee.

STATEMENT

At the time of her death, Felipa Alonso y de Mesa, widow of Mendiola, was
the sole owner of a parcel of land, known as lot 44-B subdivision of lot No. 44
of block No. 2130 of the cadastral survey of the City of Manila, together with
the buildings and improvements thereon, consisting of 1,844.60 square
meters, which is more fully described in transfer certificate of title No. 17652,
issued by the register of deeds of Manila on June 22, 1922.

In August, 1921, after her death, the plaintiff, Vicente E. Reyes, was
appointed as administrator of her estate, and duly qualified as such, and at
all times since he has been and is now such administrator.

After some negotiations, and by and with the knowledge, consent and
approval of the heirs of the deceased, and founded upon an order of the
probate court, the administrator sold the land in question to the defendant
Henry W. Elser at the agreed price of P74,242.69, of which P10,000 was paid
at the time of the purchase, and on March 29, 1922, Elser made his note to
the plaintiff, as administrator, for the balance of P64,242.69 made due and
payable May 29, 1922. To secure the payment of the note and on the same
day, Elser executed to the administrator a first and voluntary mortgage on
the premises, which was duly registered. By the terms of the note and the
mortgage, the P64,242.69 was to bear interest at the rate of 12 per cent per
annum from maturity until final payment. It was further provided that in case
of a suit or action to collect the note and enforce the mortgage, Elser would
pay the further sum of P5,000, as attorney's fees.

For failure to pay the note at maturity, and on July 5, 1922, this suit was
commenced to foreclose the mortgage and have the property sold.

Among other things, the mortgage also provides:

(c) It is distinctly understood and agreed that all rents on the property
above described from the date of the execution of this document until
the full payment of the amount of the said note, shall be, as at present,
collected by the party of the first part for the benefit of the estate
under his administration.

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In the original complaint, the plaintiff prayed for P64,242.69, with interest
thereon from May 29, 1922, at 12 per cent per annum, and for P5,000, as
attorney's fees, and the sale of the property, and the application of the
proceeds of the sale to satisfy the debt. Later, the plaintiff filed a plea in
which he admits having collected rent upon the mortgaged property from
May 29, 1922 to November 8, 1922, and that he kept the amount collected
to apply upon the payment of the necessary expenses upon the mortgaged
premises, and the balance, if any, to be applied to the payment of interest,
and "that the plaintiff is, and always has been, ready to make an accounting
of the rent collected upon the mortgaged premises and the expenses
incurred in its preservation, but the defendant has never asked the plaintiff
for a formal accounting."

For answer, defendant Elser made a general denial, and further alleged that
the plaintiff had collected all the rents upon the mortgaged premises from
March 29, 1922, and never paid any part thereof to the defendant or given
him credit therefor; that he has also collected from the defendant P104.80 as
taxes which accrued prior to March 29, 1922, and further alleged that the
"mortgage is invalid in that it provides for the payment of interest at the rate
of 12 per cent per annum and for collection by the mortgagee for his benefit
of the rents of the property alleged to have been mortgaged which amount
to and have amounted to a sum in excess of P200 each month, constituting
usury in violation of Act No. 2655, laws of the Philippine Islands."

Over the protest and objection of the plaintiff, Mariano Alonso y de Mesa was
permitted to file a bill of intervention, in which he alleges that for the last six
years he has been and is now the usufructuary and in the possession of a
two-story house on a certain lot on the premises, and that he obtained it as a
compensation "for the long and valuable services rendered by him in favor of
Felipa Alonso who died on June 25, 1921;" that the right existed a long time
prior to her death, and was recognized and confirmed by the deceased in her
will; that the real property described in the mortgage was sold by Vicente
Reyes, as administrator of the estate of Felipa Alonso to Henry W. Elser for
P74,242.69; that the intervenor gave his consent to the sale with the
understanding that he would intervene in the execution of the deed of sale,
and that he was to receive "the proportional amount corresponding to his
right of usufruct and possession," and that he has never received any part
thereof; that the intervenor is entitled to, should have and receive, his
proportional part "which corresponds to his usufructuary right and
possession, inasmuch as on account of said sale he would be deprived of his
aforesaid right of usufruct and possession, and for the reason that he had
and was enjoying said usufructuary right and possession even prior to the
death of the late Felipa Alonso."

Wherefore, he prays a corresponding judgment for the value of the usufruct,

or at least P4,640.

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To the bill of intervention, the plaintiff made a general denial.

Pending the suit Mr. Elser died, and C.W. Rosenstock was appointed as
administrator of his este, and, as such, was substituted as defendant.

The case was tried upon such issues, and the lower court rendered judgment
in favor of the plaintiff and against the defendant Elser for the sum of
P64,242.69, with interest thereon from May 29, 1922, at the rate of 12 per
cent per annum, from which was deducted the sum of P1,812.29, the total
amount of the rents received by the plaintiff, as shown by Exhibit J. The trial
court also rendered judgment for the further sum of P5,000, as attorney's
fees and the costs of the action, and dismissed the cross-complaint of the
defendant Elser, and directed the sale of the property to satisfy the
judgment. It also rendered judgment against the plaintiff, as administrator, in
favor of Mariano Alonso y de Mesa, as intervenor, for the sum of P2,000 as
the value of his right of occupation and usufruct, with interest from the date
of the judgment, without costs. From the judgment against him and in favor
of the plaintiff, as administrator, the defendant Rosenstock, as executor of
the Elser estate, appeals and assigns the following errors:

I. The trial court erred in not finding that the sum or value reserved and
secured by Exhibit A, paragraph 6, sub-paragraphs (a) and (c) was for
the forbearance of P64,242.69 imported by the said exhibit and was
greater than is allowed by section 2 of Act No. 2655.

II. The trial court erred in not finding that Exhibit A was tainted with
usury and therefore void.

III. The trial court erred in condemning the defendant-appellant to pay

to the plaintiff-appellant within the space of three months from April
30, 1923, the sum of P64,242.69 with interest at 12 per cent per
annum less the sum of P1,812.29 and to pay the further sum of P5,000
as attorneys' fees and the costs of the action.

From the judgment against him and in favor of the intervenor, the plaintiff
appeals and assigns the following errors:

I. The trial court erred in finding that the intervenor signed the petition
asking for a license to sell the property, Exhibit D, with the
understanding that he (intervenor) would intervene in the execution of
the deed of sale and receive a remuneration as payment of his right of
occupation in house No. 30 on Calle Almanza, which was included in
the property sold to the defendant Henry W. Elser.

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 II. The trial court erred in holding that the intervenor had a right to
receive P2,000, as reasonable compensation for his usufruct and right
of occupation.

III. The trial court erred in accepting the intervenor's motion, asking
permission to intervene, filed right at the trial of this case without
serving previous notice to the plaintiff, as required by section 121 of
the Code of Civil Procedure and section 10 of the rules of Courts of First
Instance, and in not ordering the striking out of the record of the
complaint in intervention, as prayed for by the plaintiff in his motion
under date of November 15, 1922.

IV. The trial court erred in condemning the plaintiff to pay the
intervenor the sum of P2,000 with legal interest.

JOHNS, J.:

The note and mortgage in question were executed by Mr. Elser, now
deceased, to and in favor of the plaintiff, as administrator, and the whole
transaction was authorized and approved by the court. It was the result of a
series of negotiations between the plaintiff and Elser, and the sale itself was
authorized and approved by the heirs of the deceased, including Mariano
Alonso y de Mesa, the intervenor. It is true that clause C of the mortgage in
question above quoted specifically provides "that all rents on the property
above described from the date of the execution of this document until the
full payment of the amount of the said note, shall be, as at present, collected
by the party of the first part for the benefit of the state under his
administration." Standing alone and within itself, it might be construed as
tending to show that the plaintiff was to receive more than 12 per cent
interest on the amount of the note.

March 22, 1922, Elser wrote the plaintiff as follows:

I have the honor to advise you that the said property is now sold to the
undersigned under the following conditions:

The sum of ten thousand (P10,000) pesos to be paid upon the

execution of the deed of sale, and

The balance to a term of sixty (60) days after the sale, same to be
recorded on regular mortgage, upon the same property. It is
understood that the said mortgage will carry no interest, during that
period of sixty (60) days, but whatever rent to be derived from said
property during said period to redound to the benefit of the estate.

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Based upon that letter, the probate court made an order authorizing and
approving the sale of the property.

March 25, 1922, Elser wrote the plaintiff another letter in which he said:

The balance to a term of sixty (60) days after the sale, same to be
recorded on regular mortgage, upon the same property. It is
understood that the said mortgage will carry no interest during that
period of sixty (60) days, but whatever rent to be derived from said
property during said period to redound to the benefit of the estate.

Upon its receipt, another order of the probate court was obtained authorizing
the sale upon the terms stated in that letter.

It is important to note that all of the transactions between the plaintiff and
Elser were authorized and approved by the probate court, and that the
transaction was a sale of property as distinguished from a loan of money by
one person to another. It is also important to note that the promissory note in
question became due and payable sixty days after its execution, and that it
specifically provides that it shall not draw interest until after maturity. It is
very apparent that at the time the mortgage was executed, it was
contemplated by both parties that the note would be paid at its maturity,
and that the clause, giving the plaintiff the right to the rents for the first sixty
days, was inserted in consideration of plaintiff's waiver of interest on the
note for the first sixty days. In other words, it was contemplated that the
note would be paid at maturity. Pending that time it did not draw interest,
and for such reason the plaintiff was to have the rents pending the maturity
of the note. That was the real purpose and intent of the parties. It is true that
in the original complaint the plaintiff claimed both the interest and the rents
from May 29, 1922. But in a subsequent pleading, the exclusive right to the
rents after May 29th was waived, and the plaintiff offered to account for
them, and in its finding the lower court allowed the defendant credit for rents
to the amount of P1,812.29, and as a payment pro tanto on the note.

Clause C in the mortgage is a literal copy of Elser's letter to the plaintiff of

March 25th, in which he modified his proposition of March 22d. In other
words, clause C of the mortgage in question was founded on Elser's own
proposition. It is very apparent that neither the plaintiff nor Elser ever
contemplated the making of an usurious contract, and that, at the time it
was made, neither of them ever thought or understood that it was. There is
no merit in the claim that it was an usurious transaction. It was a sale as
distinguished from a loan, and was authorized and approved by the probate
court, and upon that question the judgment of the lower court is in accord
with the actual facts and the intention of the parties, and for such reason is
affirmed, with costs in favor of the plaintiff and against the appellant
Rosenstock, as administrator.

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Upon the bill of intervention, the trial court rendered judgment in favor of the
intervenor and against the plaintiff for the sum of P2,000, without costs.

Here, again, it will be noted that both the note and the mortgage were
executed by Elser to, and in favor of, the plaintiff, as administrator, and that
there are other heirs of the deceased Felipa Alonso y de Mesa, of which the
intervenor is only one, and that the deceased was the sole owner of the real
property in question at the time of her death; that there are other
improvements upon it outside of those claimed by the intervenor; that the
sale in question was authorized and consummated with both the knowledge,
written consent and approval of the intervenor, and that he shared in the
proceeds of the sale.

This is a suit to foreclose the mortgage, and the validity of the mortgage is
the only question involved between the plaintiff and the defendant Elser. The
note and mortgage, having been executed to, and in favor of, the plaintiff, as
administrator, by and with the knowledge, consent and approval of the heirs
of the deceased, as administrator, plaintiff is entitled to have and receive the
proceeds from the sale of the property. The question as to how it should be
divided, and to whom it should be paid, and the amount which each should
receive, and which the intervenor now seeks to litigate in this case, is a
matter solely between the heirs of the deceased, and between them only,
and the intervenor is the only one of them, who is a party to this action, and
the other heirs would not be bound by any judgment of preference rendered
in favor of the intervenor. In other words, the questions sought to be litigated
by the intervenor in this action are questions between the heirs of the
deceased, and between them only, and to which all of them should be made
a party.

Assuming, without deciding, that the intervenor has a just and equitable
claim, as contended for in his bill of intervention, it is a matter which should
be settled in the administration of the estate between the intervenor and his
coheirs.

The judgment in his favor and against the plaintiff, as administrator, is

reversed, without costs to either party, and without prejudice to any rights
which the intervenor may have arising from, or growing out of, any of the
matters alleged in his bill of intervention. So ordered.

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 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-21440 April 30, 1966

SUN BROS. APPLIANCES, INC., plaintiff-appellant,

vs.
ANGEL AL. CALUNTAD, defendant-appellee.

Dominador A. Alafriz and Associates for plaintiff-appellant.

Eusebio V. Navarro for defendant-appellee.

BAUTISTA ANGELO, J.:

Plaintiff filed before the Municipal Court of Manila a complaint based on a

conditional sale of one G.E. Television Set, Model 21, Console 1960, Serial No.
652548, under the condition that the price would be P3,440.00, the down
payment P894.00, and it would be paid in monthly installments of P142.00
each for eighteen (18) months. Defendant only paid the amount of
P1,442.00, leaving a balance of P1,988.00, which he failed to pay since
March, 1961, for which reason plaintiff prayed that if said balance is not paid,
the property be returned to plaintiff.

Defendant denied owing said balance of P1,988.00 for he contends that what
he bought from plaintiff was a Philco Television Set, Model 21, with a value of
P1,700.00, payable within ninety (90) days, but that it was destroyed by
plaintiff's technicians and so it was replaced with a G.E. set on a cash basis,
payable within ninety (90) days, the advance payment on the original set to
be credited on the second set. It was agreed that the true market value of
the G.E. set would be P1,500.00 but defendant made plaintiff sign a deed of
sale for P3,440.00 thereby adding more than 150% to the original price. It is
alleged that plaintiff in effect entered into a usurious transaction under the
guise of a contract of sale.

Apparently, the case was elevated to the court of first instance because of
the question of law involved.

The allegation of usury made by defendant in his answer was not denied
under oath by plaintiff and so the court a quo considered said allegation as
admitted under Section 1, Rule 9 of the Rules of Court. Hence, the court a
quo considered the transaction null and void and on that basis dismissed the

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complaint. Plaintiff brought this case on appeal directly before this Court
when its motion for reconsideration was denied on the plea that the same
merely involves questions of law.

Plaintiff in its complaint alleges that the transaction between the parties was
a conditional sale the terms thereof having been specified therein. Defendant
in his answer admits that what he originally bought from plaintiff was one
Philco Television Set, Model 21, Console 1960, the terms of payment having
been specified in the contract of sale. Defendant admits that he failed to pay
the purchase price within the term of ninety (90) days agreed
upon.1wph1.t

It appears, therefore, that the transaction that took place between the
parties was a conditional sale based on an installment plan, and not a loan,
so that the alleged increase in the price of the article sold cannot be
considered as a mere pretext to cover a usurious loan. It has been held that
"The increase of the price is not interest within the purview of the Usury Law,
if the sale is made in good faith and not a mere pretext to cover a usurious
loan" (Manila Trading & Supply Co. vs. Tamaraw Plantation Co., 47 Phil. 513).
And elaborating on said case, this Court said:

x x x The increase of the price, when the sale is on credit, serves not
only to cover the expenses generally entailed by such transactions on
credit, but also to encourage cash sales, so useful to commerce. It is
up to the purchaser to decide which price he prefers in making the
purchase. If he prefers to purchase for cash, he obtains a 5 per cent
reduction of the price; if, on the contrary, he prefers to buy on credit,
he cannot complain of the increase of the price demanded by the
vendor.

In 27 R.C.L., p. 214, it is said: "On principle and authority, the owner of

property, whether real or personal, has a perfect right to name the
price on which he is willing to sell, and to refuse to accede to any
other. He may offer to sell at a designated price for cash or at a much
higher price on credit, and a credit sale will not constitute usury
however great the difference between the two prices, unless the
buying and selling was a mere pretense." And in 39 Cyc., p. 927, it is
also established that: "A vendor may well fix upon his property one
price for cash and another for credit, and the mere fact that the credit
price exceeds the cost price by a greater percentage than is permitted
by the usury laws is a matter of concern to the parties but not to the
courts, barring evidence of bad faith. If the parties have acted in good
faith such a transaction is not a loan, and not usurious.

Defendant's contention that the failure of plaintiff to specifically deny under

oath the allegation of usury in his answer constitutes an implied admission of

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usury is untenable. If it is alleged that defendant entered into a contract of
loan with plaintiff in which the latter collected a usurious interest there is
need to deny the transaction under oath, and if no oath is taken the only
thing admitted is the allegation that the interest is usurious and not that the
contract entered into is a loan. The nature of the transaction is not admitted.
The fact that what is alleged is that the transaction was a loan under the
guise of a conditional contract of sale and that by increasing its price by
150% the consideration became usurious, such is not deemed admitted by
the mere failure to deny the answer under oath. This transaction must still be
proven before usury can be invoked in the light of the following ruling of this
Court:

It may, of course, be held in general that only that for which the law
requires an oath is deemed admitted, should no oath be taken. If it is
alleged in the complaint that the defendant, whether an individual or a
corporation, has entered into a contract of loan with the plaintiff, there
is no need for a sworn answer. But if it be added that on this loan the
defendant has collected usurious interest, that is, interest in excess of
the rate fixed by the law, then there is need of an oath. In that case, if
no oath is taken to the answer, the only thing admitted is the
allegation that the interest charged is usurious, not that the contract
entered into is a loan, which is something that must be proved
independently of the admission, especially when, as in the one in
question, this allegation is disputed.

The intervenor Hilarion Soriano not only alleges that the plaintiff
charged, and that he paid him, usurious interest, but also that the
contract they made, under the guise of a sale subject to repurchase,
according to its terms, was in reality a contract of loan herein usurious
interest was stipulated and collected. He should therefore have shown
by competent evidence that contract was really a loan. But, not only is
there not a scintilla of evidence to this effect, but, on the contrary, the
evidence of record, which is the contract itself, shows conclusively that
it was a sale subject to repurchase. Wherefore, as the plaintiff and the
intervenor did not enter into a contract of loan by virtue of which
usurious interest could be collected, and as the contract entered into
between them was a sale upon which usurious interest could not be
collected, the admission established by the law that such interest was
in fact collected, does not exist. The law cannot presume an absurdity.
In order that this admission of the collection of usurious interest may
be invoked, it is necessary first to establish the contract by virtue of
which interest could be collected. (Lo Bun Chay vs. Paulino, 54 Phil.
144, 147-148.)

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The contract entered into between the parties being a conditional sale, the
increase in price over the cash price cannot be considered interest, and so
the dismissal of the case by the court a quo is not justified.

Wherefore, the decision appealed from is reversed. The case is remanded to

the lower court for further proceedings, without pronouncement as to costs.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-44106 January 19, 1937

THE GOVERNMENT OF THE PHILIPPINE ISLANDS, plaintiff-appellee,

vs.
JOSE VACA Y GARRIDO and ANA CALDERON, defendants-appellants.

Cardenas and Casal for appellants.

Office of the Solicitor-General Hilado for appellee.

VILLA-REAL, J.:

The defendants, Jose Vaca y Garrido and Ana Calderon, appeal to this court
from the judgment of the Court of First Instance of Cavite, the dispositive
part of which reads as follows:

In view of all the foregoing, judgment is rendered:

On the first cause of action:

(a) The defendants are ordered to pay to the plaintiff the total amount
of P46,693.39 plus the interest on the capital of P38,000 at 9 per cent
per annum computed semi-annually from April 30, 1935, until fully
paid, together with compound interest at 9 per cent per annum on all
semi-annual interest due and unpaid from said date until fully paid;

(b) The said defendants are likewise ordered to pay interest at 9 per
cent per annum on the total amount of P2,065.45, the insurance

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 premiums and land taxes advanced by the Philippine Postal Savings
Bank on the mortgaged properties, from April 30, 1935, until fully paid,
and

(c) Likewise to pay the sum of P1,000 as costs, expenses and

attorney's fees.

On the second cause of action:

(a) The defendants are ordered to pay to the plaintiffs the total
amounts of P3,042.63 plus the interest on the capital of P2,500 at 9
per cent per annum computed semi-annually from April 30, 1935, until
fully paid, together with compound interest at 9 per cent per annum on
all semi-annual interest due and paid from said date until fully paid;

(b) Likewise to pay the sum of P125 as costs, expenses and attorney's
fees, and.

(c) Finally, said defendants are likewise ordered to pay to the plaintiff
any amount it might pay after April 29, 1935, as land taxes and
insurance premiums or expenses for the repair of the mortgaged
properties, plus interest at 9 percent per annum on said sums, until
fully paid.

The defendants shall pay to the plaintiffs all the sums adjudicated to
the latter by virtue of this decision, within the period of 120 days from
the date this decision becomes final, otherwise the mortgaged
properties shall be sold in order to satisfy to the plaintiff, with the
proceeds thereof, all the sums to which it is entitled by virtue of this
decision. So ordered.

In support of their appeal, the appellants assign two alleged errors as

committed by the court a quo in its decision in question, to wit:

1. The lower court has fallen into error in rendering judgment against
defendants for the amount represented by 9 per cent per annum on
semi-annual interest due and unpaid of the capital loans of P38,000
and P2,500; and in sentencing defendants to pay further the sum of
P1,125 as attorney's fees.

2. The lower court also has committed an error in not granting the
defendant's motion for new trial based on statutory grounds.

The first question to be decided in the present appeal, which is raised in the
first assignment of alleged error, is whether or not court a quo erred in
ordering the defendants to pay interest at 9 per cent per annum on the semi-

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annual interest due and unpaid on the loans of P38,000 and P2,500,
respectively.

The appellant's claim that the interest of 9 per cent per annum on the semi-
annual interest due and unpaid on the loans of P38,000 and P2,500 is
usurious.

The legal question herein raised has already been decided by this Court in
the case of the Government of the Philippine Islands vs. Conde (61 Phil.,
714), which states:

It is well settled in this jurisdiction that when there is an express

agreement to charge interest on interest, such fact should not be taken
into consideration in determining whether or not the stipulated interest
exceeds the limit prescribed by the Usury Law. (Government of the
Philippine Islands vs. Schenkel and Gonzales, 43 Phil., 616;
Villaruel vs. Alvayda and Vicencio, 46 Phil., 277; Valdezco vs. Francisco,
52 Phil., 350).

The appellants likewise that the sums of P1,000 and P125, stipulated as
penalties for costs, collection expenses and attorney's fees, are excessive
and should be taken into consideration in determining whether or not the
Usury Law has been violated. This question has likewise been decided by this
court in the case of the Government of the Philippines Islands vs.
Macanaya (G.R. No. L-40333[60 Phil., 409], wherein this court stated:

The errors assigned will have to be sustained. In the second paragraph

of the note and in the mortgage contract, the defendant agreed in case
of nonpayment on demand to pay to the Postal Savings Bank the sum
of P1,000 in full, without any deduction, as and for costs, expenses,
and attorney's fees for collection whether actually incurred or not. In
other words, the defendant bound himself to pay said amount
regardless of the fact of whether it was actually spent for attorney's
fees or not. So whether the plaintiff was represented by the provincial
fiscal was not important, for this official was in the service of the
Government of the Philippine Islands and was paid by it.

In the case of the Government of the Philippine Islands vs. Lim (61 Phil.,
737), this court likewise stated:

In the promissory notes executed by the defendants and incorporated

in the mortgage deeds, they voluntarily undertook to pay the sum of
P1,300 as court costs, expenses of collection, and attorney's fees,
whether incurred or not. This stipulation is a valid and permissible
penal clause, not to contrary to any law, morals, or public order, and is,
therefore, strictly binding upon the defendants. (Arts. 1091,1152, and

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 1258, Civil Code; Lambert vs. Fox, 26 Phil., 588; Bachrach vs. Golingco,
39 Phil., 138; Compaia General de Tobaccos vs. Jalandoni, 50 Phil.,
501; Bachrach Motor Co. vs. Espiritu, 52 Phil., 346; Manila Building and
Loan Association vs. Green, 54 Phil., 507.) It is neither excessive nor
exorbitant, and the defendants have not made any payment upon their
principal obligations, wherefore, the discretion conferred by article
1154 of the Civil Code may not be exercised to reduce the penalty.

In the light of the rulings above-cited, this court finds no merit in the
foregoing assignments of error.

With respect to the costs, inasmuch as they are included in the penalties of
P1,000 and P125, respectively, stipulated by the parties in the two mortgage
contracts, the plaintiff's petition relative thereto should not be granted
(Garcia vs. Lim Chu Sing, 59 Phil., 562; Bank of the Philippine Islands vs. Yulo,
31 Phil., 476).

In view of the foregoing, and finding the appealed judgment in accordance

with the law, it is affirmed in toto, without special pronouncement as to
costs. So ordered.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-47180 May 19, 1980

THE PHILIPPINE AMERICAN ACCIDENT INSURANCE COMPANY,

INC., petitioner-appellant,
vs.
THE HON. JOSE P. FLORES, and CONCORDIA G. NAVALTA, respondents-
appellees.

ABAD SANTOS, J.:+.wph!1

Petition to review the Order of the respondent judge dated August 24, 1977.
The facts are simple.

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Private respondent was the plaintiff and the petitioner was the defendant in
Civil Case No. 2414 of the Court of First Instance of La Union. On January 22,
1973, the respondent judge rendered judgment in said case, the dispositive
portion of which reads: t.hqw

IN VIEW OF THE FOREGOING, the Court hereby renders judgment

and sentences the defendant to pay Concordia Garcia Navalta
the amount of P75,000.00 with legal interest from October, 1968,
Pl,000.00, as attorney's fees am the cost of suit.

The decision was appealed by the petitioner to the Court of Appeals in CA-
G.R. No. 52675-R but was affirmed on February 7, 1977. On February 24,
1977, the petitioner paid the following amounts to the private
respondent: t.hqw

On the principal P75,000.00

Interest at 6% per annum

from Oct. 1968* to April 30,

1977 P 38,250.00

Attorney's fee P 1,000.00

Total P114,250.00

(*Art. 2209 of the Civil Code provides: "If the obligation consists
in the payment of a sum of money, and the debtor incurs in
delay, the indemnity for damages, there being no stipulation to
the contrary, shall be the payment of the interest agreed upon,
and in the absence of stipulation, the legal interest, which is six
per cent per annum." This appears to be the basis for awarding
interest at the legal rate from October, 1968, although the debt
was judicially demanded only on July 6, 1970.)

The petitioner was advised by the respondent and her counsel that the
payment was not in fun satisfaction of the judgment because the former had
to pay compound interest or an additional sum of P10,375.77.

Upon refusal of the petitioner to pay the sum additionally claimed, the
private respondent secure a writ of execution for the same which the former
sought to quash over the opposition of the latter. In resolving the question
the respondent judge issued an Order on August 24, 1977 as follows: t.
hqw

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 After hearing and consideration of the motion of the plaintiff for
the issuance of an alias writ of execution, and the written
manifestation and opposition filed by the defendant and finding
as it appears that the written schedule of interest computation,
which was submitted, is correct and in order, because compound
interest has been computed from July 6, 1970 when the claim
was judicially demanded, let an alias writ of execution issue to
satisfy accordingly the unpaid balance as demanded.

It is this Order which is the object of this petition and which raises the
question as to whether or not the petitioner is obligated to pay compound
interest under the judgment.

The questioned Order cannot be sustained. The judgment which was sought
to be executed ordered the payment of simple "legal interest" only. It said
nothing about the payment of compound interest. Accordingly, when the
respondent judge ordered the payment of compound interest he went
beyond the confines of his own judgment which had been affirmed by the
Court of Appeals and which had become final. Fundamental is the rule that
execution must conform to that ordained or decreed in the dispositive part of
the decision. Likewise, a court can not, except for clerical errors or omissions,
amend a judgment that has become final. (Jabon, et al. vs. Alo, et al., 91 Phil.
750 [1952]; Robles vs. Timario, et al., 107 Phil. 809 [1960]; Collector of
Internal Revenue vs. Gutierrez, et al., 108 Phil. 215 [1960]; Ablaza vs. Sycip,
et al., 110 Phil., 4 [1960].)

Private respondent invokes Sec. 5 of the Usury Law which reads in part as
follows: "In computing the interest on any obligation, promissory note or
other instrument or contract, compound interest shall not be reckoned,
except by agreement, or, in default thereof, whenever the debt is judicially
claimed in which last case it shall draw six per centum per annum
interest ..." as well as Art. 2212 of the Civil Code which stipulates: "Interest
due shall earn legal interest from the time it is judicially demanded, although
the obligation may be silent upon this point." Both legal provisions are in
applicable for they contemplate the presence of stipulated or conventional
interest which had accrued when demand was judicially made. (Sunico vs.
Ramirez, 14 Phil. 500 [1909]; Salvador vs. Palencia, 25 Phil. 661 [1913];
Bachrach vs. Golingco, 39 Phil. 912 [1919]; Robinson vs. Sackermann 46 Phil.
539 [1924]; Philippine Engineering Co. vs. Green, 48 Phil. 466 [1925]; and Cu
Unjieng vs. Mabalacat Sugar Co., 54 Phil. 916 [1930].) In this case no interest
had been stipulated by the parties. In other words, there was no accrued
conventional interest which could further earn interest upon judicial demand.

WHEREFORE, the Order dated August 24, 1977, of the respondent judge is
hereby set aside. No special pronouncement as to costs.

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SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-57314 November 29, 1983

TEODORO SANCHEZ, petitioner,

vs.
HON. CARLOS R. BUENVIAJE, Presiding Judge, Branch VII, Court of
First Instance of Camarines Sur, Iriga City, and ALEJO
SANCHEZ, respondents.

Andres C. Regalado for petitioner.

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The Solicitor General for respondents.

ABAD SANTOS, J.:+.wph!1

This is a petition to review a decision rendered by the defunct Court of First

Instance of Camarines Sur, Branch VII, with following factual background.

On August 25, 1976, Alejo Sanchez sued Teodoro Sanchez and Leonor
Santilles in the Municipal Court of Bato, Camarines Sur, for the recovery of
P2,000.00 which the latter had promised to pay in two notes. Said notes also
contained stipulations for interest at the rate of 10% per month The
Municipal Court rendered judgment ordering Teodoro Sanchez only to pay to
Alejo Sanchez P2,000.00 plus interest thereon at the legal rate from the filing
of the complaint.

Teodoro appealed to the Court of First Instance of Camarines Sur which

rendered the following judgment: t.hqw

WHEREFORE, the judgment rendered by the lower court is

hereby AFFIRMED with modification as to costs. Judgment is
hereby rendered, ordering the defendant to pay his indebtedness
to plaintiff in the total sum of P2,000.00, plus interest thereon at
the legal rate from the firing of the complaint in this case to
actual payment. Defendant to pay double the costs of this suit.
(Rollo p. 30.)

In his petition for review, Teodoro claims that in a loan with usurious interest
both the loan and the usurious interest are void.

Alejo was required to comment on the petition but it appears that he died
sometime in the latter part of 1980 and the early part of 1981. (Rollo, p. 42.)
Accordingly, his children were impleaded as respondents and required to file
comment which they failed to do despite notice to them.

The absence of comment on the part of the private respondents

notwithstanding, We resolve the petition without any difficulty.

It is now well-settled that: "the Usury Law (Act No. 2655), by its letter and
spirit, does not deprive the lender of his right to recover of the borrower the
money actually loaned this only in the case that the interest collected is
usurious. The law, as it is now, does not provide for the forfeiture of the
capital in favor of the debtor in usurious contract ... (Lopez and Javelona vs.
El Hogar Filipino, 47 Phil. 249, 275 [1925].)

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True it is that in Briones vs. Cammayo, L-23559, Oct. 4, 1971; 41 SCRA 404,
Chief Justice Concepcion and now Chief Justice Fernando concurred with
Justice Castro who opined that both loan and usurious interest are void.
However, it must be emphasized that eight other justices maintained that
only the usurious interest is void but not the principal obligation.

WHEREFORE, finding the judgment sought to be reviewed to be in

accordance with law, the petition is hereby dismissed for lack of merit with
costs against the petitioner.

SO ORDERED.1wph1.t

Republic of the Philippines

SUPREME COURT

SECOND DIVISION

G.R. No. 128990 September 21, 2000

INVESTORS FINANCE CORPORATION, petitioner,

vs.
AUTOWORLD SALES CORPORATION, and PIO BARRETTO REALTY
DEVELOPMENT CORPORATION,respondents.

BELLOSILLO, J.:

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INVESTORS FINANCE CORPORATION seeks a review of the Decision of the
Court of Appeals which ruled that the financing firm had entered into a
usurious loan transaction with Autoworld Sales Corporation, thus entitling the
latter to reimbursement of excess interest payments amounting to
P2,586,035.44.1

Petitioner Investors Finance Corporation, then known also as FNCB Finance

(now doing business under the name of Citytrust Finance Corporation), is a
financing company doing business with private respondent Autoworld Sales
Corporation (AUTOWORLD) since 1975. Anthony Que, president of
AUTOWORLD, also held the same position at its affiliate corporation, private
respondent Pio Barretto Realty Corporation (BARRETTO).

Sometime in August 1980 Anthony Que, in behalf of AUTOWORLD, applied

for a direct loan with FNCB. However, since the Usury Law imposed an
interest rate ceiling at that time, FNCB informed Anthony Que that it was not
engaged in direct lending; consequently, AUTOWORLD's request for loan was
denied.

But sometime thereafter, FNCB's Assistant Vice President, Mr. Leoncio

Araullo, informed Anthony Que that although it could not grant direct loans it
could extend funds to AUTOWORLD by purchasing any of its outstanding
receivables at a discount. After a series of negotiations the parties agreed to
execute an Installment Paper Purchase ("IPP") transaction to enable
AUTOWORLD to acquire the additional capital it needed. The mechanics of
the proposed "IPP" transaction was

(1) First, Pio Barretto (BARRETTO) would execute a Contract to Sell a

parcel of land in favor of AUTOWORLD for P12,999,999.60 payable in
sixty (60) equal monthly installments of P216,666.66. Consequently,
BARRETTO would acquire P12,999,999.60 worth of receivables from
AUTOWORLD;

(2) FNCB would then purchase the receivables worth P12,999,999.60

from BARRETTO at a discounted value of P6,980,000.00 subject to the
condition that such amount would be "flowed back" to AUTOWORLD;

(3) BARRETTO, would in turn, execute a Deed of Assignment (in favor

of FNCB) obliging AUTOWORLD to pay the installments of the
P12,999,999.60 purchase price directly to FNCB;2 and

(4) Lastly, to secure the payment of the receivables under the Deed of
Assignment, BARRETTO would mortgage the property subject of the
sale to FNCB.

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On 17 November 1980 FNCB informed AUTOWORLD that its Executive
Committee approved the proposed "IPP" transaction.3 The lawyers of FNCB
then drafted the contracts needed and furnished Anthony Que with copies
thereof.4

On 9 February 1981 the parties signed three (3) contracts to implement the
"IPP" transaction:

(1) Contract to Sell whereby BARRETTO sold a parcel of land to

AUTOWORLD, situated in San Miguel, Manila, together with the
improvements thereon, covered by TCT No. 129763 for the price of
P12,999,999.60 payable in sixty (60) consecutive and equal monthly
installments of P216,666.66.

(2) Deed of Assignment whereby BARRETTO assigned and sold in favor

of FNCB all its rights, title and interest to all the money and other
receivables due from AUTOWORLD under the Contract to Sell, subject
to the condition that the assignee (FNCB) has the right of recourse
against the assignor (BARRETTO) in the event that the payor
(AUTOWORLD) defaulted in the payment of its obligations.

(3) Real Estate Mortgage whereby BARRETTO, as assignor, mortgaged

the property subject of the Contract to Sell to FNCB as security for
payment of its obligation under the Deed of Assignment.5

After the three (3) contracts were concluded AUTOWORLD started paying the
monthly installments to FNCB.

On 18 June 1982 AUTOWORLD transacted with FNCB for the second time
obtaining a loan of P3,000,000.00 with an effective interest rate of 28% per
annum.6 AUTOWORLD and BARRETTO, as co-makers, then signed a
promissory note in favor of FNCB worth P5,604,480.00 payable in sixty (60)
consecutive monthly installments of P93,408.00.7 To secure the promissory
note, AUTOWORLD mortgaged a parcel of land located in Sampaloc, Manila,
to FNCB.8 Thereafter, AUTOWORLD began paying the installments.

In December 1982, after paying nineteen (19) monthly installments of

P216,666.66 on the first transaction ("IPP" worth P6,980,000.00) and three
(3) monthly installments of P93,408.00 on the second transaction (loan worth
P3,000,000.00), AUTOWORLD advised FNCB that it intended to preterminate
the two (2) transactions by paying their outstanding balances in full. It then
requested FNCB to provide a computation of the remaining balances. FNCB
sent AUTOWORLD its computation requiring it to pay a total amount of
P10,026,736.78, where P6,784,551.24 was the amount to settle the first
transaction while P3,242,165.54 was the amount to settle the second
transaction.9

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On 20 December 1982 AUTOWORLD wrote FNCB that it disagreed with the
latter's computation of its outstanding balances.10 On 27 December 1982
FNCB replied that it would only be willing to reconcile its accounting records
with AUTOWORLD upon payment of the amounts demanded.11 Thus, despite
its objections, AUTOWORLD reluctantly paid FNCB P10,026,736.78 through
its UCPB account.12

On 5 January 1983 AUTOWORLD asked FNCB for a refund of its

overpayments in the total amount of P3,082,021.84.13 According to
AUTOWORLD, it overpaid P2,586,035.44 to settle the first transaction and
P418,262.00 to settle the second transaction.14

The parties attempted to reconcile their accounting figures but the

subsequent negotiations broke down prompting AUTOWORLD to file an
action before the Regional Trial Court of Makati to annul the Contract to Sell,
the Deed of Assignment and the Real Estate Mortgage all dated 9 February
1981. It likewise prayed for the nullification of thePromissory Note dated 18
June 1982 and the Real Estate Mortgage dated 24 June 1982.

In its complaint, AUTOWORLD alleged that the aforementioned contracts

were only perfected to facilitate a usurious loan and therefore should be
annulled. FNCB should refund the amounts of P2,586,035.44 as excess
payment for the first transaction and P418,262.00 as excess payment for the
second transaction. AUTOWORLD also asked for P500,000.00 as exemplary
damages and P100,000.00 as attorney's fees.

FNCB argued that the contracts dated 9 February 1981 were not executed to
hide a usurious loan. Instead, the parties entered into a legitimate
Installment Paper Purchase ("IPP") transaction, or purchase of receivables at
a discount, which FNCB could legally engage in as a financing company. With
regard to the second transaction, the existence of a usurious interest rate
had no bearing on the P3,000,000.00 loan since at the time it was perfected
on 18 January 1982 Central Bank Circular No. 871 dated 21 July 1981 had
effectively lifted the ceiling rates for loans having a period of more than
three hundred sixty-five (365) days. FNCB also prayed for P2,000,000.00 as
moral damages and P500,000.00 as attorney's fees.

On 18 January 1985 FNCB filed a Third-Party Complaint against BARRETTO

based on the Deed of Assignment, which expressly provided that FNCB as
assignee had a right of recourse against BARRETTO as assignor in case
AUTOWORLD defaulted in its payments.15

BARRETTO countered that it could not be held liable for AUTOWORLD's

alleged default in its payments since theDeed of Assignment, together with
the Contract to Sell and the Real Estate Mortgage, was simulated and

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perfected only to facilitate a usurious loan. It prayed for P1,600,000.00 as
damages and P100,000.00 as attorney's fees.16

On 11 July 1988 the Regional Trial Court of Makati ruled in favor of FNCB
declaring that the parties voluntarily and knowingly executed a legitimate
"IPP" transaction or the discounting of receivables. AUTOWORLD was not
entitled to any reimbursement since it was unable to prove the existence of a
usurious loan. On the other hand, it was ordered to pay FNCB P50,000.00 for
attorney's fees.17

The Court of Appeals modified the decision of the trial court and concluded
that the "IPP" transaction, comprising of the three (3) contracts perfected on
9 February 1981, was merely a scheme employed by the parties to disguise
a usurious loan. It ordered the annulment of the contracts and required FNCB
to reimburse AUTOWORLD P2,586,035.44 as excess interest payments over
the 12% ceiling rate. However, with regard to the second transaction, the
appellate court ruled that at the time it was executed the ceiling rates
imposed by the Usury Law had already been lifted thus allowing the parties
to stipulate any rate of interest.18 The appellate court deleted the award of
P50,000.00 as attorney's fees in favor of FNCB explaining that the filing of
the complaint against FNCB was exercised in good faith. Hence, this petition
of FNCB.

We stress at the outset that this petition concerns itself only with the first
transaction involving the alleged' "IPP" worth P6,980,000.00, which was
implemented through the three (3) contracts of 9 February 1981. As to the
second transaction, which involves the P3,000,000.00 loan, we agree with
the appellate court that it was executed when the ceiling rates of interest
had already been removed, hence the parties were free to fix any interest
rate.

The pivotal issue therefore is whether the three (3) contracts all dated 9
February 1981 were executed to implement a legitimate Installment Paper
Purchase ("IPP") transaction or merely to conceal a usurious loan. Generally,
the courts only need to rely on the face of written contracts to determine the
intention of the parties. "However, the law will not permit a usurious loan to
hide itself behind a legal form. Parol evidence is admissible to show that a
written document though legal in form was in fact a device to cover usury. If
from a construction of the whole transaction it becomes apparent that there
exists a corrupt intention to violate the Usury Law, the courts should and will
permit no scheme, however ingenious, to becloud the crime of usury." 19 The
following circumstances show that such scheme was indeed employed:

First, petitioner claims that it was never a party to the Contract to

Sell between AUTOWORLD and BARRETTO.20As far as it was concerned, it
merely purchased receivables at a discount from BARRETTO as evidenced by

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the Deed of Assignment dated 9 February 1981. Whether the Contract to
Sell was fictitious or not would have no effect on its right to claim the
receivables of BARRETTO from AUTOWORLD since the two contracts were
entirely separate and distinct from each other.

Curiously however, petitioner admitted that its lawyers were the ones who
drafted all the three (3) contracts involved21 which were executed on the
same day.22 Also, petitioner was the one who procured the services of the
Asian Appraisal Company to determine the fair market value of the land to
be sold way back in September of 1980 or six (6) months prior to the
sale.23 If it were true that petitioner was never privy to the Contract to Sell,
then why was it interested in appraising the lot six (6) months prior to the
sale? And why did petitioner's own lawyers prepare the Contract to Sell?
Obviously, petitioner actively participated in the sale to ensure that the
appraised lot would serve as adequate collateral for the usurious loan it gave
to AUTOWORLD.

Second, petitioner insists that the 9 February 1981 transaction was a

legitimate "IPP" transaction where it only bought the receivables of
BARRETTO from AUTOWORLD amounting to P12,999,999.60 at a discounted
price of P6,980,000.00. However, per instruction of petitioner in its letter to
BARRETTO dated 17 November 1980 the whole purchase price of the
receivables was to be "flowed back" to AUTOWORLD.24 And in its subsequent
letter of 24 February 1981 petitioner also gave instructions on how
BARRETTO should apply the proceeds worth P6,980,000.00, thus

Gentlemen:

This serves to inform you of-the various application of the proceeds

(P6,980,000.00) of your real estate transaction per your
authorization/letter dated 2.10.81:

1. P1,937,884.20 Paid to Paramount Finance Corp. on Feb. 16, 1981,

inclusive of P2.00 SC for Manager's Check.

2. P111,818.87 Paid to Agcaoili and Associates of Feb. 16, 1981

inclusive of P2.00 SC for Manager's Check for the preparation of
documents, legal review, registration and transfer of ownership.

3. P3,179,700.00 Paid to FNCB Finance on Feb. 20, 1981 for full

payment of DB transaction (Account No. 06156)

4. P3,108.40 Payment for the appraisal fee conducted by the Asian

Appraisal Company. Inc.

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 5. P100.00 Payment for the title search fee conducted by Agcaoili
and Associates.

6. P2,500.00 Payment for legal and professional fee (Agcaoili and

Associates)

7. P638,601.60 Payment to FNCB Finance for the partial payment of

DB transaction (Account No. 40150 sold units)

8. P122,640.00 Payment to FNCB Finance for the partial payment of

DB transaction (Account No. 406149 sold units)

9. P983,646.93 Balance after application, Payable to Pio Barreto Dev.

Inc.

P6,980,000.00 Total

Should you need any clarification on the matter, please do not hesitate
to call on the undersigned.

Very truly yours,

L.V. Araullo, Asst. Vice-President25

It can be seen that out of the nine (9) items of appropriation stated above,
Item Nos. 2-8 had to be returned to petitioner. Thus, in compliance with the
aforesaid letter, BARRETTO had to yield P4,058,468.47 of the P6,980,000.00
to petitioner to settle some of AUTOWORLD's previous debts to it.26 Any
remaining amount after the application of the proceeds would then be
surrendered to AUTOWORLD in compliance with the letter of 17 November
1980; none went to BARRETTO.

The foregoing circumstances confirm that the P6,980,000.00 was really an

indirect loan extended to AUTOWORLD so that it could settle its previous
debts to petitioner. Had petitioner entered into a legitimate purchase of
receivables, then BARRETTO, as seller, would have received the whole
purchase price, and free to dispose of such proceeds in any manner it
wanted. It would not have been obliged to follow the "Application of
Proceeds" stated in petitioner's letter.

Third, in its 17 November 1980 letter to BARRETTO, petitioner itself

designated the proceeds of the "IPP" transaction as a "loan."27 In that letter,
petitioner stated that the "loan proceeds" amounting to P6,980,000.00 would
be released to BARRETTO only upon submission of the documents it
required. And as previously mentioned, one of the required documents was a
letter agreement between BARRETTO and AUTOWORLD stipulating that the

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P6,980,000.00 should be "flowed back" to AUTOWORLD. If it were a genuine
"IPP" transaction then petitioner would not have designated the money to be
released as "loan proceeds" and BARRETTO would have been the end
recipient of such proceeds with no obligation to turn them over to
AUTOWORLD.

Fourth, after the interest rate ceilings were lifted on 21 July 1981 petitioner
extended on 18 June 1982 a direct loan of P3,000,000.00 to AUTOWORLD.
This time however, with no more ceiling rates to hinder it, petitioner imposed
a 28% effective interest rate on the loan.28 And no longer having a need to
cloak the exorbitant interest rate, the promissory note evidencing the second
transaction glaringly bore the 28% interest rate on its face.29 We are
therefore of the impression that had there been no interest rate ceilings in
1981, petitioner would not have resorted to the fictitious "IPP" transaction;
instead, it would have directly loaned the money to AUTOWORLD with an
interest rate higher than 12%. Gregorio Anonas, Senior Vice President of
petitioner, effectively admitted that it only employed discounting of
receivables due to the ceiling rates imposed by the Usury Law. Thus he
testified

Q: And is it not a fact further that FNCB Finance at the time

could not or would not want to extend direct loan because of a ceiling
fixed by the Usury Law on interest?

A: We haven't at that time giving direct loan, it is a discounting

business.

Q: You mean never have you extended direct loan?

A: We did at a certain period of time and then we stopped, we

go to discounting business because we transferred to direct loan.

Q: After the ceiling was removed, ceiling on interest was

removed, you again, FNCB, extended direct loan, correct?

A: Yes, sir.

Q: Shall we say that the reason why you did not extend direct
loan was because you did not want to be confined on the ceiling on
interest under Usury Law?

A: Probably yes, because as you know the cost, in the operating

cost of finance company is extremely different from a bank and we
cannot survive, and this normally has been the case.

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 Q: And so, therefore, the only way you could generate more
income for your company would be to encourage discounting of
receivables?

A: That was our business. It is not to generate more income,

that is our business. . .30

Thus, although the three (3) contracts seemingly show at face value that
petitioner only entered into a legitimate discounting of receivables, the
circumstances cited prove that the P6,980,000.00 was really a usurious loan
extended to AUTOWORLD.

Petitioner anchors its defense on Sec. 7 of the Usury Law which states

Provided, finally, That nothing herein contained shall be construed to

prevent the purchase by an innocent purchaser of a negotiable
mercantile paper, usurious or otherwise, for valuable consideration
before maturity, when there has been no intention on the part of said
purchaser to evade the provisions of the Act and said purchase was not
a part of the original usurious transaction. In any case however, the
maker of said note shall have the right to recover from said original
holder the whole interest paid by him thereon and, in any case of
litigation, also the costs and such attorney's fees as may be allowed by
the court.

Indeed, the Usury Law recognizes the legitimate purchase of negotiable

mercantile paper by innocent purchasers. But even the law has anticipated
the potential abuse of such transactions to conceal usurious loans. Thus, the
law itself made a qualification. It would recognize legitimate purchase of
negotiable mercantile paper, whether usurious or otherwise, only if the
purchaser had no intention of evading the provisions of the Usury Law and
that the purchase was not a part of the original usurious transaction.
Otherwise, the law would not hesitate to annul such contracts. Thus, Art.
1957 of the Civil Code provides

Contracts and stipulations, under any cloak or device whatever,

intended to circumvent the laws on usury shall be void. The borrower
may recover in accordance with the laws on usury.

In the case at bar, the attending factors surrounding the execution of the
three (3) contracts on 9 February 1981 clearly establish that the parties
intended to transact a usurious loan. These contracts should therefore be
declared void. Having declared the transaction between the parties as void,
we are now tasked to determine how much reimbursement AUTOWORLD is
entitled to. The Court of Appeals, adopting the computation of AUTOWORLD
in its plaintiff-appellant's brief, ruled

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 According to plaintiff-appellant, defendant-appellee was able to collect
P3,921,217.7831 in interests from appellant. This is not denied by the
appellee. Computed at 12% the effective interest should have been
P1,545,400.00.32 Hence, appellant may recover
P2,586,035.44,33 representing overpayment arising from usurious
interest rate charged by appellee.34

While we do not dispute the appellate court's finding that the first
transaction was a usurious loan, we do not agree with the amount of
reimbursement awarded to AUTOWORLD. Indeed, it erred in awarding only
the interest paid in excess of the 12% ceiling. In usurious loans, the creditor
can always recover the principal debt.35 However, the stipulation on the
interest is considered void thus allowing the debtor to claim the whole
interest paid. In a loan of P1,000.00 with interest at 20% per annum or
P200.00 per year, if the borrower pays P200.00, the whole P200.00 would be
considered usurious interest, not just the portion thereof in excess of the
interest allowed by law.36

In the instant case, AUTOWORLD obtained a loan of P6,980,000.00.

Thereafter, it paid nineteen (19) consecutive installments of P216,666.66
amounting to a total of P4,116,666.54, and further paid a balance of
P6,784,551.24 to settle it. All in all, it paid the aggregate amount of
P10,901,217.78 for a debt of P6,980,000.00. For the 23-month period of the
existence of the loan covering the period February 1981 to January 1982,
AUTOWORLD paid a total of P3,921,217.78 in interests.37 Applying the 12%
interest ceiling rate mandated by the Usury Law, AUTOWORLD should have
only paid a total of P1,605,400.00 in interests.38 Hence, AUTOWORLD is
entitled to recover the whole usurious interest amounting to P3,921,217.78.

We are not unaware of Sanchez v. Buenviaje39 where the Court allowed the
usurer to recover legal interest on the principal amount loaned. But such
interest arose from the debtor's delay in paying the principal from the time of
the creditor's demand. That is the reason why legal interest was counted
only from the time the creditor filed his complaint for the recovery of a debt.
In this case however, the debtor was never in delay. As a matter of fact,
AUTOWORLD paid the principal of P6,980,000.00 and the whole usurious
interest of P3,921,217.88 upon petitioner's insistent demand. Thus, the case
of Sanchez v. Buenviaje herein cited will not apply to petitioner and it will not
be entitled to legal interest on the amount of the principal loan.

Under Sec. 6 of the Usury Law, AUTOWORLD is also entitled to reasonable

attorney's fees and costs

SECTION 6. Any person or corporation who, for any such loan or

renewal thereof or forbearance, shall have paid or delivered a higher
rate or greater sum or value than is hereinbefore allowed, to be taken

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 or received, may recover the whole interest, commission, premiums,
penalties and surcharges paid or delivered with costs and attorney's
fees in such sum as may be allowed by the court in an action against a
person or corporation who took or received them if such action is
brought within two years after such payment or delivery (emphasis
ours).

Although the Court has discretion to fix the amount of attorney's fees, it has
no discretion to deny it altogether. Thus, in Delgado v. Valgona,40 we held

When the right of action to recover interest paid upon a usurious

contract is established, a reasonable attorney's fee should be allowed
as a matter of course, the same as costs are awarded. The purpose of
the law is to encourage persons who have suffered from contracts of
this character to come into court and vindicate their rights, and the
imposition upon the usurer of the obligation to pay attorney's fee will
serve at once as an encouragement to the oppressed and as a
wholesome deterrent to the taking of usurious interests.

Quite obviously, Anthony Que, the President of AUTOWORLD, actively and

knowingly participated in the execution of the usurious loan transaction. As a
seasoned businessman he must have been aware of the consequences of his
business dealings. But, although we find his actions extremely reprehensible,
we must abide by the principle laid down in Go Chioco v. Martinez41 where we
held that the pari delicto rule does not apply to usury cases which entitle the
borrower to recover the whole interest paid; otherwise, the avowed policy of
discouraging usurious transactions would not be served, for the mere
invocation of the pari delicto rule would allow the usurer to reap the benefits
of his unlawful act.

WHEREFORE, the assailed Decision of the Court of Appeals dated 24 May

1996 declaring the 9 February 1981 transaction as a usurious loan is
AFFIRMED, subject to the MODIFICATION that petitioner Investors Finance
Corporation is ordered to pay private respondent Autoworld Sales
Corporation the amount of P3,921,217.78 representing the entire usurious
interest it paid on the 9 February 1981 loan, as well as P50,000 00 as
attorney's fees and the costs.

SO ORDERED.

Digest

Facts: Anthony Que, in behalf of AUTOWORLD, applied for a direct loan with
FNCB. However, since the Usury Law imposed an interest rate ceiling at that
time, FNCB informed Anthony Que that it was not engaged in direct lending;

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consequently, AUTOWORLD's request for loan was denied. But however
remedied to extend funds by purchasing any of its outstanding receivables at
a discount, the parties agreed to execute an Installment Paper Purchase
("IPP") transaction to enable AUTOWORLD to acquire the additional capital it
needed. The parties signed three contracts to implement the "IPP"
transaction. After which it was concluded AUTOWORLD started paying the
monthly installments to FNCB.

After paying nineteen (19) monthly installments on the first transaction

("IPP" worth P6,980,000.00) and three (3) monthly installments on the
second transaction (loan worth P3,000,000.00), AUTOWORLD advised FNCB
that it intended to pre-terminate the two (2) transactions by paying their
outstanding balances in full. It then requested FNCB to provide a
computation of the remaining balances. FNCB sent AUTOWORLD its
computation requiring it to pay a total amount of P10,026,736.78.

AUTOWORLD disagreed with the latter's computation of its outstanding

balances. However, FNCB replied that it would only be willing to reconcile its
accounting records with AUTOWORLD upon payment of the amounts
demanded. Thus, despite its objections, AUTOWORLD reluctantly paid.

AUTOWORLD asked FNCB for a refund of its overpayments in the total

amount of P3,082,021.84. According to AUTOWORLD, it overpaid
P2,586,035.44 to settle the first transaction and P418,262.00 to settle the
second transaction.

The parties attempted to reconcile their accounting figures but the

subsequent negotiations broke down prompting AUTOWORLD to file an
action before the Regional Trial Court of Makati to annul the Contract to Sell,
the Deed of Assignment and the Real Estate Mortgage all dated 9 February
1981. It likewise prayed for the nullification of the Promissory Note dated 18
June 1982 and the Real Estate Mortgage dated 24 June 1982.

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 In its complaint, AUTOWORLD alleged that the aforementioned
contracts were only perfected to facilitate a usurious loan and therefore
should be annulled. FNCB should refund the amounts of P2,586,035.44 as
excess payment for the first transaction and P418,262.00 as excess payment
for the second transaction.

FNCB argued that the contracts were not executed to hide a usurious
loan. Instead, the parties entered into a legitimate Installment Paper
Purchase ("IPP") transaction, or purchase of receivables at a discount, which
FNCB could legally engage in as a financing company. With regard to the
second transaction, the existence of a usurious interest rate had no bearing
on the P3,000,000.00 loan since at the time it was perfected on 18 January
1982 Central Bank Circular No. 871 dated 21 July 1981 had effectively lifted
the ceiling rates for loans having a period of more than three hundred sixty-
five (365) days.

The Regional Trial Court of Makati ruled in favor of FNCB. The Court of
Appeals modified the decision of the trial court and concluded that the "IPP"
transaction, comprising of the three (3) contracts perfected on 9 February
1981, was merely a scheme employed by the parties to disguise a usurious
loan. It ordered the annulment of the contracts and required FNCB to
reimburse AUTOWORLD P2,586,035.44 as excess interest payments over the
12% ceiling rate. However, with regard to the second transaction, the
appellate court ruled that at the time it was executed the ceiling rates
imposed by the Usury Law had already been lifted thus allowing the parties
to stipulate any rate of interest. The appellate court deleted the award of
P50,000.00 as attorney's fees in favor of FNCB explaining that the filing of
the complaint against FNCB was exercised in good faith. Hence, this petition
of FNCB.

Issue: Whether the three (3) contracts that were executed to implement a
legitimate Installment Paper Purchase ("IPP") transaction are concealment to
a usurious loan.

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Held: We stress at the outset that this petition concerns itself only with the
first transaction involving the alleged' "IPP" worth P6,980,000.00, which was
implemented through the three 3 contracts of 9 February 1981. As to the
second transaction, which involves the P3,000,000.00 loan, we agree with
the appellate court that it was executed when the ceiling rates of interest
had already been removed, hence the parties were free to fix any interest
rate.

Generally, the courts only need to rely on the face of written contracts
to determine the intention of the parties. "However, the law will not permit a
usurious loan to hide itself behind a legal form. Parol evidence is admissible
to show that a written document though legal in form was in fact a device to
cover usury. If from a construction of the whole transaction it becomes
apparent that there exists a corrupt intention to violate the Usury Law, the
courts should and will permit no scheme, however ingenious, to becloud the
crime of usury. The following circumstances show that such scheme was
indeed.

Thus, although the three (3) contracts seemingly show at face value
that petitioner only entered into a legitimate discounting of receivables, the
circumstances cited prove that the P6,980,000.00 was really a usurious loan
extended to AUTOWORLD.

Indeed, the Usury Law recognizes the legitimate purchase of

negotiable mercantile paper by innocent purchasers. But even the law has
anticipated the potential abuse of such transactions to conceal usurious
loans. Thus, the law itself made a qualification. It would recognize legitimate
purchase of negotiable mercantile paper, whether usurious or otherwise,
only if the purchaser had no intention of evading the provisions of the Usury
Law and that the purchase was not a part of the original usurious
transaction. Otherwise, the law would not hesitate to annul such contracts.
Thus, Art. 1957 of the Civil Code provides Contracts and stipulations,
under any cloak or device whatever, intended to circumvent the laws on

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usury shall be void. The borrower may recover in accordance with the laws
on usury.

In the case at bar, the attending factors surrounding the execution of

the three (3) contracts on 9 February 1981 clearly establish that the parties
intended to transact a usurious loan. These contracts should therefore be
declared void.

Republic of the Philippines

SUPREME COURT
Baguio City

FIRST DIVISION

G.R. No. 113412 April 17, 1996

Spouses PONCIANO ALMEDA and EUFEMIA P. ALMEDA, petitioner,

vs.
THE COURT OF APPEALS and PHILIPPINE NATIONAL
BANK, respondents.

KAPUNAN, J.:p

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On various dates in 1981, the Philippine National Bank granted to herein
petitioners, the spouses Ponciano L. Almeda and Eufemia P. Almeda several
loan/credit accommodations totaling P18.0 Million pesos payable in a period
of six years at an interest rate of 21% per annum. To secure the loan, the
spouses Almeda executed a Real Estate Mortgage Contract covering a 3,500
square meter parcel of land, together with the building erected thereon (the
Marvin Plaza) located at Pasong Tamo, Makati, Metro Manila. A credit
agreement embodying the terms and conditions of the loan was executed
between the parties. Pertinent portions of the said agreement are quoted
below:

SPECIAL CONDITIONS

xxx xxx xxx

The loan shall be subject to interest at the rate of twenty one per
cent (21%) per annum, payable semi-annually in arrears, the first
interest payment to become due and payable six (6) months
from date of initial release of the loan. The loan shall likewise be
subject to the appropriate service charge and a penalty charge of
three per cent (30%) per annum to be imposed on any amount
remaining unpaid or not rendered when due.

xxx xxx xxx

III. OTHER CONDITIONS

(c) Interest and Charges

(1) The Bank reserves the right to increase the

interest rate within the limits allowed by law at any
time depending on whatever policy it may adopt in
the future; provided, that the interest rate on
this/these accommodations shall be correspondingly
decreased in the event that the applicable maximum
interest rate is reduced by law or by the Monetary
Board. In either case, the adjustment in
the interest rate agreed upon shall take effect on the
effectivity date of the increase or decrease of the
maximum interest rate. 1

Between 1981 and 1984, petitioners made several partial payments on the
loan totaling. P7,735,004.66, 2 a substantial portion of which was applied to
accrued interest. 3 On March 31, 1984, respondent bank, over petitioners'
protestations, raised the interest rate to 28%, allegedly pursuant to Section

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III-c (1) of its credit agreement. Said interest rate thereupon increased from
an initial 21% to a high of 68% between March of 1984 to September, 1986. 4

Petitioner protested the increase in interest rates, to no avail. Before the loan
was to mature in March, 1988, the spouses filed on February 6, 1988 a
petition for declaratory relief with prayer for a writ of preliminary injunction
and temporary restraining order with the Regional Trial Court of Makati,
docketed as Civil Case No. 18872. In said petition, which was raffled to
Branch 134 presided by Judge Ignacio Capulong, the spouses sought
clarification as to whether or not the PNB could unilaterally raise interest
rates on the loan, pursuant to the credit agreement's escalation clause, and
in relation to Central Bank Circular No. 905. As a preliminary measure, the
lower court, on March 3, 1988, issued a writ of preliminary injunction
enjoining the Philippine National Bank from enforcing an interest rate above
the 21% stipulated in the credit agreement. By this time the spouses were
already in default of their loan obligations.

Invoking the Law on Mandatory Foreclosure (Act 3135, as amended and P.D.
385), the PNB countered by ordering the extrajudicial foreclosure of
petitioner's mortgaged properties and scheduled an auction sale for March
14, 1989. Upon motion by petitioners, however, the lower court, on April 5,
1989, granted a supplemental writ of preliminary injunction, staying the
public auction of the mortgaged property.

On January 15, 1990, upon the posting of a counterbond by the PNB, the trial
court dissolved the supplemental writ of preliminary injunction. Petitioners
filed a motion for reconsideration. In the interim, respondent bank once more
set a new date for the foreclosure sale of Marvin Plaza which was March 12,
1990. Prior to the scheduled date, however, petitioners tendered to
respondent bank the amount of P40,142,518.00, consisting of the principal
(P18,000,000.00) and accrued interest calculated at the originally stipulated
rate of 21%. The PNB refused to accept the payment. 5

As a result of PNB's refusal of the tender of payment, petitioners, on March 8,

1990, formally consigned the amount of P40,142,518.00 with the Regional
Trial Court in Civil Case No. 90-663. They prayed therein for a writ of
preliminary injunction with a temporary restraining order. The case was
raffled to Branch 147, presided by Judge Teofilo Guadiz. On March 15, 1990,
respondent bank sought the dismissal of the case.

On March 30, 1990 Judge Guadiz in Civil Case No. 90-663 issued an order
granting the writ of preliminary injunction enjoining the foreclosure sale of
"Marvin Plaza" scheduled on March 12, 1990. On April 17, 1990 respondent
bank filed a motion for reconsideration of the said order.

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On August 16, 1991, Civil Case No. 90-663 we transferred to Branch 66
presided by Judge Eriberto Rosario who issued an order consolidating said
case with Civil Case 18871 presided by Judge Ignacio Capulong.

For Judge Ignacio's refusal to lift the writ of preliminary injunction issued
March 30, 1990, respondent bank filed a petition for Certiorari, Prohibition
and Mandamus with respondent Court of Appeals, assailing the following
orders of the Regional Trial Court:

1. Order dated March 30, 1990 of Judge Guadiz granting the writ
of preliminary injunction restraining the foreclosure sale of Mavin
Plaza set on March 12, 1990;

2. Order of Judge Ignacio Capulong dated January 10, 1992

denying respondent bank's motion to lift the writ of injunction
issued by Judge Guadiz as well as its motion to dismiss Civil Case
No. 90-663;

3. Order of Judge Capulong dated July 3, 1992 denying

respondent bank's subsequent motion to lift the writ of
preliminary injunction; and

4. Order of Judge Capulong dated October 20, 1992 denying

respondent bank's motion for reconsideration.

On August 27, 1993, respondent court rendered its decision setting aside the
assailed orders and upholding respondent bank's right to foreclose the
mortgaged property pursuant to Act 3135, as amended and P.D. 385.
Petitioners' Motion for Reconsideration and Supplemental Motion for
Reconsideration, dated September 15, 1993 and October 28, 1993,
respectively, were denied by respondent court in its resolution dated January
10, 1994.

Hence the instant petition.

This appeal by certiorari from the respondent court's decision dated August
27, 1993 raises two principal issues namely: 1) Whether or not respondent
bank was authorized to raise its interest rates from 21% to as high as 68%
under the credit agreement; and 2) Whether or not respondent bank is
granted the authority to foreclose the Marvin Plaza under the mandatory
foreclosure provisions of P.D. 385.

In its comment dated April 19, 1994, respondent bank vigorously denied that
the increases in the interest rates were illegal, unilateral, excessive and
arbitrary, it argues that the escalated rates of interest it imposed was based
on the agreement of the parties. Respondent bank further contends that it

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had a right to foreclose the mortgaged property pursuant to P.D. 385, after
petitioners were unable to pay their loan obligations to the bank based on
the increased rates upon maturity in 1984.

The instant petition is impressed with merit.

The binding effect of any agreement between parties to a contract is

premised on two settled principles: (1) that any obligation arising from
contract has the force of law between the parties; and (2) that there must be
mutuality between the parties based on their essential equality. 6 Any
contract which appears to be heavily weighed in favor of one of the parties
so as to lead to an unconscionable result is void. Any stipulation regarding
the validity or compliance of the contract which is left solely to the will of one
of the parties, is likewise, invalid.

It is plainly obvious, therefore, from the undisputed facts of the case that
respondent bank unilaterally altered the terms of its contract with petitioners
by increasing the interest rates on the loan without the prior assent of the
latter. In fact, the manner of agreement is itself explicitly stipulated by the
Civil Code when it provides, in Article 1956 that "No interest shall be due
unless it has been expressly stipulated in writing." What has been "stipulated
in writing" from a perusal of interest rate provision of the credit agreement
signed between the parties is that petitioners were bound merely to pay 21%
interest, subject to a possible escalation or de-escalation, when 1) the
circumstances warrant such escalation or de-escalation; 2) within the limits
allowed by law; and 3) upon agreement.

Indeed, the interest rate which appears to have been agreed upon by the
parties to the contract in this case was the 21% rate stipulated in the interest
provision. Any doubt about this is in fact readily resolved by a careful reading
of the credit agreement because the same plainly uses the phrase "interest
rate agreed upon," in reference to the original 21% interest rate. The interest
provision states:

(c) interest and Charges

(1) The Bank reserves the right to increase the interest

rate within the limits allowed by law at any time depending on
whatever policy it may adopt in the future; provided, that the
interest rate on this/these accommodations shall be
correspondingly decreased in the event that the applicable
maximum interest rate is reduced by law or by the Monetary
Board. In either case, the adjustment in the interest rate agreed
upon shall take effect on the effectivity date of the increase or
decrease of the maximum interest rate.

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In Philippine National Bank v. Court of Appeals, 7 this Court disauthorized
respondent bank from unilaterally raising the interest rate in the borrower's
loan from 18% to 32%, 41% and 48% partly because the aforestated
increases violated the principle of mutuality of contracts expressed in Article
1308 of the Civil Code. The Court held:

CB Circular No. 905, Series of 1982 (Exh. 11)

removed the Usury Law ceiling on interest rates

. . . increases in interest rates are not subject to any

ceiling prescribed by the Usury Law.

but it did not authorize the PNB, or any bank for that matter, to
unilaterally and successively increase the agreed interest rates
from 18% to 48% within a span of four (4) months, in violation of
P.D. 116 which limits such changes to once every twelve months.

Besides violating P.D. 116, the unilateral action of the PNB in

increasing the interest rate on the private respondent's loan,
violated the mutuality of contracts ordained in Article 1308 of the
Civil Code:

Art. 308. The contract must bind both contracting parties; its
validity or compliance cannot be left to the will of one of them.

In order that obligations arising from contracts may have the

force of law between the parties, there must
be mutuality between the parties based on their essential
equality. A contract containing a condition which makes its
fulfillment dependent exclusively upon the uncontrolled will of
one of the contracting parties, is void (Garcia vs. Rita Legarda,
Inc., 21 SCRA 555). Hence, even assuming that the P1.8 million
loan agreement between the PNB and the private respondent
gave the PNB a license (although in fact there was none) to
increase the interest rate at will during the term of the loan, that
license would have been null and void for being violative of the
principle of mutuality essential in contracts. It would have
invested the loan agreement with the character of a contract of
adhesion, where the parties do not bargain on equal footing, the
weaker party's (the debtor) participation being reduced to the
alternative "to take it or lease it" (Qua vs. Law Union & Rock
Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for
the weaker party whom the courts of justice must protect against
abuse and imposition.

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 PNB's successive increases of the interest rate on the private
respondent's loan, over the latter's protest, were arbitrary as
they violated an express provision of the Credit Agreement (Exh.
1) Section 9.01 that its terms "may be amended only by an
instrument in writing signed by the party to be bound as
burdened by such amendment." The increases imposed by PNB
also contravene Art. 1956 of the Civil Code which provides that
"no interest shall be due unless it has been expressly stipulated
in writing."

The debtor herein never agreed in writing to pay the interest

increases fixed by the PNB beyond 24%per annum, hence, he is
not bound to pay a higher rate than that.

That an increase in the interest rate from 18% to 48% within a

period of four (4) months is excessive, as found by the Court of
Appeals, is indisputable.

Clearly, the galloping increases in interest rate imposed by respondent bank

on petitioners' loan, over the latter's vehement protests, were arbitrary.

Moreover, respondent bank's reliance on C.B. Circular No. 905, Series of

1982 did not authorize the bank, or any lending institution for that matter, to
progressively increase interest rates on borrowings to an extent which would
have made it virtually impossible for debtors to comply with their own
obligations. True, escalation clauses in credit agreements are perfectly valid
and do not contravene public policy. Such clauses, however, (as are
stipulations in other contracts) are nonetheless still subject to laws and
provisions governing agreements between parties, which agreements
while they may be the law between the contracting parties implicitly
incorporate provisions of existing law. Consequently, while the Usury Law
ceiling on interest rates was lifted by C.B. Circular 905, nothing in the said
circular could possibly be read as granting respondent bank carte
blanche authority to raise interest rates to levels which would either enslave
its borrowers or lead to a hemorrhaging of their assets. Borrowing represents
a transfusion of capital from lending institutions to industries and businesses
in order to stimulate growth. This would not, obviously, be the effect of PNB's
unilateral and lopsided policy regarding the interest rates of petitioners'
borrowings in the instant case.

Apart from violating the principle of mutuality of contracts, there is authority

for disallowing the interest rates imposed by respondent bank, for the credit
agreement specifically requires that the increase be "within the limits
allowed by law". In the case of PNB v. Court of Appeals, cited above, this
Court clearly emphasized that C.B. Circular No. 905 could not be properly

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invoked to justify the escalation clauses of such contracts, not being a grant
of specific authority.

Furthermore, the escalation clause of the credit agreement requires that the
same be made "within the limits allowed by law," obviously referring
specifically to legislative enactments not administrative circulars. Note that
the phrase "limits imposed by law," refers only to the escalation clause.
However, the same agreement allows reduction on the basis of law or the
Monetary Board. Had the parties intended the word "law" to refer to both
legislative enactments and administrative circulars and issuances, the
agreement would not have gone as far as making a distinction between "law
or the Monetary Board Circulars" in referring to mutually agreed upon
reductions in interest rates. This distinction was the subject of the Court's
disquisition in the case of Banco Filipino Savings and Mortgage Bank
v. Navarro 8 where the Court held that:

What should be resolved is whether BANCO FILIPINO can increase

the interest rate on the LOAN from 12% to 17% per annum under
the Escalation Clause. It is our considered opinion that it may
not.

The Escalation Clause reads as follows:

I/We hereby authorize Banco Filipino to correspondingly increase.

the interest rate stipulated in this contract without advance

notice to me/us in the event.

a law

increasing

the lawful rates of interest that may be charged

on this particular

kind of loan. (Paragraphing and emphasis supplied)

It is clear from the stipulation between the parties that the

interest rate may be increased "in the event a law should be
enacted increasing the lawful rate of interest that may be
charged on this particular kind of loan." The Escalation Clause
was dependent on an increase of rate made by "law" alone.

CIRCULAR No. 494, although it has the effect of law, is not a law.
"Although a circular duly issued is not strictly a statute or a law,

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it has, however, the force and effect of law." (Emphasis supplied).
"An administrative regulation adopted pursuant to law has the
force and effect of law." "That administrative rules and
regulations have the force of law can no longer be questioned."

The distinction between a law and an administrative regulation is

recognized in the Monetary Board guidelines quoted in the latter
to the BORROWER of Ms. Paderes of September 24, 1976 (supra).
According to the guidelines, for a loan's interest to be subject to
the increases provided in CIRCULAR No. 494, there must be an
Escalation Clause allowing the increase "in the event that any
law or Central Bank regulation is promulgated increasing the
maximum rate for loans." The guidelines thus presuppose that a
Central Bank regulation is not within the term "any law."

The distinction is again recognized by P.D. No. 1684, promulgated

on March 17, 1980, adding section 7-a to the Usury Law,
providing that parties to an agreement pertaining to a loan could
stipulate that the rate of interest agreed upon may be increased
in the event that the applicable maximum rate of interest is
increased "by law or by the Monetary Board." To quote:

Sec. 7-a. Parties to an agreement pertaining to a loan

or forbearance of money, goods or credits may
stipulate that the rate of interest agreed upon may
be increased in the event that the applicable
maximum rate of interest

is increased by law or by the Monetary Board:

Provided, That such stipulation shall be valid only if

there is also a stipulation in the agreement that the
rate of interest agreed upon shall be reduced in the
event that the applicable maximum rate of interest is
reduced by law or by the Monetary Board;

Provided, further, That the adjustment in the rate of

interest agreed upon shall take effect on or after the
effectivity of the increase or decrease in the
maximum rate of interest.' (Paragraphing and
emphasis supplied).

It is now clear that from March 17, 1980, escalation clauses to be

valid should specifically provide: (1) that there can be an
increase in interest if increased by law or by the Monetary Board;
and (2) in order for such stipulation to be valid, it must include a

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 provision for reduction of the stipulated interest "in the event
that the applicable maximum rate of interest is reduced by law or
by the Monetary Board."

Petitioners never agreed in writing to pay the increased interest rates

demanded by respondent bank in contravention to the tenor of their credit
agreement. That an increase in interest rates from 18% to as much as 68% is
excessive and unconscionable is indisputable. Between 1981 and 1984,
petitioners had paid an amount equivalent to virtually half of the entire
principal (P7,735,004.66) which was applied to interest alone. By the time
the spouses tendered the amount of P40,142,518.00 in settlement of their
obligations; respondent bank was demanding P58,377,487.00 over and
above those amounts already previously paid by the spouses.

Escalation clauses are not basically wrong or legally objectionable so long as

they are not solely potestative but based on reasonable and valid
grounds. 9 Here, as clearly demonstrated above, not only the increases of the
interest rates on the basis of the escalation clause patently unreasonable
and unconscionable, but also there are no valid and reasonable standards
upon which the increases are anchored.

We go now to respondent bank's claim that the principal issue in the case at
bench involves its right to foreclose petitioners' properties under P.D. 385.
We find respondent's pretense untenable.

Presidential Decree No. 385 was issued principally to guarantee that

government financial institutions would not be denied substantial cash
inflows necessary to finance the government's development projects all over
the country by large borrowers who resort to litigation to prevent or delay
the government's collection of their debts or loans.10 In facilitating collection
of debts through its automatic foreclosure provisions, the government is
however, not exempted from observing basic principles of law, and ordinary
fairness and decency under the due process clause of the Constitution. 11

In the first place, because of the dispute regarding the interest rate
increases, an issue which was never settled on merit in the courts below, the
exact amount of petitioner's obligations could not be determined. Thus, the
foreclosure provisions of P.D. 385 could be validly invoked by respondent
only after settlement of the question involving the interest rate on the loan,
and only after the spouses refused to meet their obligations following such
determination. In Filipinas Marble Corporation v. Intermediate Appellate
Court, 12 involving P.D. 385's provisions on mandatory foreclosure, we held
that:

We cannot, at this point, conclude that respondent DBP together

with the Bancom people actually misappropriated and misspent

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 the $5 million loan in whole or in part although the trial court
found that there is "persuasive" evidence that such acts were
committed by the respondent. This matter should rightfully be
litigated below in the main action. Pending the outcome of such
litigation, P.D. 385 cannot automatically be applied for if it is
really proven that respondent DBP is responsible for the
misappropriation of the loan, even if only in part, then the
foreclosure of the petitioner's properties under the provisions of
P.D. 385 to satisfy the whole amount of the loan would be a gross
mistake. It would unduly prejudice the petitioner, its employees
and their families.

Only after trial on the merits of the main case can the true
amount of the loan which was applied wisely or not, for the
benefit of the petitioner be determined. Consequently, the extent
of the loan where there was no failure of consideration and which
may be properly satisfied by foreclosure proceedings under P.D.
385 will have to await the presentation of evidence in a trial on
the merits.

In Republic Planters Bank v. Court of Appeals 13 the Court reiterating

the dictum in Filipinas Marble Corporation, held:

The enforcement of P.D. 385 will sweep under the rug' this
iceberg of a scandal in the sugar industry during the Marcos
Martial Law years. This we can not allow to happen. For the
benefit of future generations, all the dirty linen in the
PHILSUCUCOM/NASUTRA/RPB closets have to be exposed in
public so that the same may NEVER be repeated.

It is of paramount national interest, that we allow the trial court

to proceed with dispatch to allow the parties below to present
their evidence.

Furthermore, petitioners made a valid consignation of what they, in good

faith and in compliance with the letter of the Credit Agreement, honestly
believed to be the real amount of their remaining obligations with the
respondent bank. The latter could not therefore claim that there was no
honest-to-goodness attempt on the part of the spouse to settle their
obligations. Respondent's rush to inequitably invoke the foreclosure
provisions of P.D. 385 through its legal machinations in the courts below, in
spite of the unsettled differences in interpretation of the credit agreement
was obviously made in bad faith, to gain the upper hand over petitioners.

In the face of the unequivocal interest rate provisions in the credit

agreement and in the law requiring the parties to agree to changes in the

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interest rate in writing, we hold that the unilateral and progressive increases
imposed by respondent PNB were null and void. Their effect was to increase
the total obligation on an eighteen million peso loan to an amount way over
three times that which was originally granted to the borrowers. That these
increases, occasioned by crafty manipulations in the interest rates is
unconscionable and neutralizes the salutary policies of extending loans to
spur business cannot be disputed.

WHEREFORE, PREMISES CONSIDERED, the decision of the Court of Appeals

dated August 27, 1993, as well as the resolution dated February 10, 1994 is
hereby REVERSED AND SET ASIDE. The case is remanded to the Regional
Trial Court of Makati for further proceedings.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 122079 June 27, 1997

SPOUSES ANTONIO E.A. CONCEPCION and MANUELA S.

CONCEPCION, petitioners,
vs.
HON. COURT OF APPEALS, HOME SAVINGS BANK AND TRUST
COMPANY, and as nominal party-defendants, THE SHERIFF ASSIGNED
TO SAN JUAN, METRO MANILA, and who conducted the auction sale
and the REGISTER OF DEEDS or his representative of San Juan,
Metro Manila, and ASAJE REALTY CORPORATION, respondents.

VITUG, J.:

The spouses Antonio E.A. Concepcion and Manuela S. Concepcion

assail, via the instant petition for review oncertiorari, the decision, 1 dated 15
September 1995, of the Court of Appeals, affirming with modification the
judgment of the Regional Trial Court ("RTC"), 2 Branch 157, of Pasig
City, 3 that dismissed the complaint of herein petitioners against private
respondents.

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The facts, hereunder narrated, are culled from the findings of the appellate
court.

On 17 January 1979, the Home Savings Bank and Trust Company (now
Insular Life Savings and Trust Company) granted to the Concepcions a loan
amounting to P1,400,000.00. The Concepcions, in turn, executed in favor of
the bank a promissory note and a real estate mortgage over their property
located at 11 Albany St., Greenhills, San Juan, Metro Manila. The loan was
payable in equal quarterly amortizations for a period of fifteen (15) years and
carried an interest rate of sixteen percent (16%) per annum. The promissory
note provided that the Concepcions had authorized

. . . the Bank to correspondingly increase the interest rate

presently stipulated in this transaction without advance notice to
me/us in the event the Central Bank of the Philippines raises its
rediscount rate to member banks, and/or the interest rate on
savings and time deposit, and/or the interest rate on such loans
and/or advances. 4

In accordance with the above provision, the bank unilaterally increased

the interest rate from 16% to 21% effective 17 February 1980; from
21% to 30% effective 17 October 1984; and from 30% to 38% effective
17 November 1984, increasing the quarterly amortizations from
P67,830.00 to, respectively, P77,619.72, P104,661.10, and
P123,797.05 for the periods aforestated. The Concepcions paid, under
protest, the increased amortizations of P77,619.72 and P104,661.10
until January 1985 but thereafter failed to pay the quarterly
amortization of P123,797.05 (starting due date of 17 April 1985).

In a letter, dated 15 July 1985, the bank's President made a demand on the
Concepcions for the payment of the arrearages. The Concepcions failed to
pay, constraining the bank's counsel to send a final demand letter, dated 26
August 1985, for the payment of P393,878.81, covering the spouses' due
account for three quarterly payments plus interest, penalty, and service
charges. Still, no payment was received.

On 14 April 1986, the bank finally filed with the Office of the Provincial Sheriff
of Pasig City a petition for extrajudicial foreclosure of the real estate
mortgage executed by the Concepcions. A notice of sale was issued on 15
May 1986, setting the public auction sale on 11 June 1986. The notice was
published in the newspaper "Mabuhay." A copy of the notice was sent to the
Concepcions at 59 Whitefield St., White Plains Subdivision, Quezon City
and/or at 11 Albany St., Greenhills Subdivision, San Juan, Metro Manila. The
public auction sale went on as scheduled with the bank emerging as the
highest bidder. A Certificate of Sale was issued in favor of the bank.

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The Concepcions were unable to exercise their right of redemption within the
one-year period provided under Act No. 3135. The bank thus consolidated its
title over the property and, after the cancellation of the title in the name of
the Concepcions, a new transfer certificate of title (No. 090-R) was issued in
the name of Home Savings Bank and Trust Company.

On 31 July 1987, the bank executed a Deed of Absolute Sale in favor of Asaje
Realty Corporation and a new certificate of title was issued in the latter's
name.

Meanwhile, on 29 July 1987, the Concepcions filed an action against Home

Savings Bank and Trust Company, the Sheriff of San Juan, Metro Manila, and
the Register of Deeds of San Juan, Metro Manila, for the cancellation of the
foreclosure sale, the declaration of nullity of the consolidation of title in favor
of the bank, and the declaration of nullity of the unilateral increases of the
interest rates on their loan. The spouses likewise claimed damages against
the defendants. The Concepcions, having learned of the sale of the property
to Asaje Realty Corporation, filed an amended complaint impleading the
realty corporation and so praying as well for the cancellation of the sale
executed between said corporation and the bank and the cancellation of the
certificate of title issued in the name of Asaje.

On 31 August 1992, the trial court found for the defendants and ruled:

In view of all the foregoing premises, this Court finally concludes

that the plaintiffs have no cause of action either against
defendant Home Savings Bank & Trust Company or defendant
Asaje Realty Corporation; and under the circumstances of this
case, it deems it just and equitable that attorney's fees and
expenses of litigation should be recovered by said defendants.

WHEREFORE, judgment is hereby rendered dismissing the

amended complaint of plaintiffs Spouses Antonio E.A. Concepcion
and Manuela S. Concepcion against the defendants for lack of
merit, and ordering the said plaintiffs to pay attorney's fees and
expenses of litigation in the sum of P30,000.00 to defendant
Home Savings Bank & Trust Company and in the amount of
P25,000.00 to defendant Asaje Realty Corporation, in addition to
their respective costs of suit.

SO ORDERED. 5

The Concepcions went to the Court of Appeals.

On 15 September 1995, the appellate court affirmed the trial court's

decision, with modification, as follows:

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 Under the facts and circumstances of the case at bench, the
award of attorney's fees, expenses of litigation and costs of suit
in favor of defendant-appellee should be deleted. It is not a
sound policy to place a penalty on the right to litigate, nor should
counsel's fees be awarded everytime a party wins a suit (Arenas
vs. Court of Appeals, 169 SCRA 558).

WHEREFORE, the appealed judgment is AFFIRMED with the

modification that the award of attorneys fees, litigation expenses
and costs of suit in favor of defendant-appellees are deleted from
the dispositive portion.

SO ORDERED. 6

The Concepcions forthwith filed with this Court a petition for review
on certiorari, contending that they have been denied their contractually
stipulated right to be personally notified of the foreclosure proceedings on
the mortgaged property.

There is some merit in the petition.

The three common types of forced sales arising from a failure to pay a
mortgage debt include (a) an extrajudicial foreclosure sale, governed by Act
No. 3135; (b) a judicial foreclosure sale, regulated by Rule 68 of the Rules of
Court; and (c) an ordinary execution sale, covered by Rule 39 of the Rules of
Court. 7 Each mode, peculiarly, has its own requirements.

In an extrajudicial foreclosure, such as here, Section 3 of Act No. 3135 8 is the

law applicable; 9 the provision reads:

Sec. 3. Notice shall be given by posting notices of the sale for not
less than twenty days in at least three public places of the
municipality or city where the property is situated, and if such
property is worth more than four hundred pesos, such notice
shall also be published once a week for at least three
consecutive weeks in a newspaper of general circulation in the
municipality or city.

The Act only requires (1) the posting of notices of sale in three
public places, and (2) the publication of the same in a newspaper of
general circulation. 10 Personal notice to the mortgagor is not
necessary. 11, Nevertheless, the parties to the mortgage contract are
not precluded from exacting additional requirements.

In the case at bar, the mortgage contract stipulated that

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 All correspondence relative to this Mortgage, including demand
letters, summons, subpoenas, or notifications of any judicial or
extrajudicial actions shall be sent to the Mortgagor at the
address given above or at the address that may hereafter be
given in writing by the Mortgagor to the Mortgagee, and the
mere act of sending any correspondence by mail or by personal
delivery to the said address shall be valid and effective notice to
the Mortgagor for all legal purposes, and fact that any
communication is not actually received by the Mortgagor, or that
it has been returned unclaimed to the Mortgagee, or that no
person was found at the address given, or that the address is
fictitious or cannot be located, shall not excuse or relieve
Mortgagor from the effects of such notice. 12

The stipulation, not being contrary to law, morals, good customs,

public order or public policy, is the law between the contracting parties
and should be faithfully complied with. 13

Private respondent bank maintains that the stipulation that "all

correspondence relative to (the) Mortgage . . . shall be sent to the Mortgagor
at the address given above or at the address that may hereafter be given in
writing by the Mortgagor to the Mortgagee" 14 gives the mortgagee an
alternative to send its correspondence either at the old or the new address
given. 15 This stand is illogical. It could not have been the intendment of the
parties to defeat the very purpose of the provision referred to which is
obviously to apprise the mortgagors of the bank's action that might affect
the property and to accord to them an opportunity to safeguard their rights.
The Court finds the bank's failure to comply with its agreement with
petitioners an inexcusable breach of the mortgagee's covenant. Neither
petitioners' subsequent opportunity to redeem the property nor their failed
negotiations with the bank for a new schedule of payments, 16 can be a valid
justification for the breach.

The foregoing notwithstanding, petitioners may no longer seek the

reconveyance of the property from private respondent Asaje Realty
Corporation, the latter having been, evidently, an innocent purchaser in good
faith. 17The realty corporation purchased the property when the title was
already in the name of the bank. It was under no obligation to investigate the
title of the bank or to look beyond what clearly appeared to be on the face of
the certificate. 18

Private respondent bank, however, can still be held to account for the bid
price of Asaje Realty Corporation over and above, if any, the amount due the
bank on the basis of the original interest rate, the unilateral increases made
by the bank having been correctly invalidated by the Court of Appeals.

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The validity of "escalation" or "escalator" clauses in contracts, in general,
was upheld by the Supreme Court in Banco Filipino Savings and Mortgage
Bank vs. Hen. Navarro and Del Valle. 19 Hence:

Some contracts contain what is known as an "escalator clause,"

which is defined as one in which the contract fixes a base price
but contains a provision that in the event of specified cost
increases, the seller or contractor may raise the price up to a
fixed percentage of the base. Attacks on such a clause have
usually been based on the claim that, because of the open price-
provision, the contract was too indefinite to be enforceable and
did not evidence actual meeting of the minds of the parties or
that the arrangement left the price to be determined arbitrarily
by one party so that the contract lacked mutuality. In most
instances, however, these attacks have been unsuccessful.

The Court further finds as a matter of law that the cost of living
index adjustment, or substantively unconscionable.

Cost of living index adjustment clauses are widely used in

commercial contracts in an effort to maintain fiscal stability and
to retain "real dollar" value to the price terms of long term
contracts. The provision is a common one, and has been
universally upheld and enforced. Indeed, the Federal government
has recognized the efficacy of escalator clauses in tying Social
Security benefits to the cost of living index, 42 U.S.C.s 415(i).
Pension benefits and labor contracts negotiated by most of the
major labor unions are other examples. That inflation, expected
or otherwise, will cause a particular bargain to be more costly in
terms of total dollars than originally contemplated can be of little
solace to the plaintiffs. 20
21
In Philippine National Bank vs. Court of Appeals, the Court further
elucidated, as follows:

It is basic that there can be no contract in the true sense in the

absence of the element of agreement, or of mutual assent of the
parties. If this assent is wanting on the part of one who contracts
his act has no more efficacy than if it had been done under
duress or by a person of unsound mind.

Similarly, contract changes must be made with the consent of

the contracting parties. The minds of all the parties must meet
as to the proposed modification especially when it affects an
important aspect of the agreement. In the case of loan contracts,
it cannot be gainsaid that the rate of interest is component, for it

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 can make or break a capital venture. Thus, any change must
be mutually agreed upon, otherwise, it is bereft of any binding
effect.

We cannot countenance petitioner bank's posturing that the

escalation clause at bench gives it unbridled right
to unilaterally upwardly adjust the interest on private
respondents' loan. That would completely take away from private
respondents the right to assent to an important modification in
their agreement, and would negate the element of mutuality in
contracts. In Philippine National Bank v.Court of Appeals, et al.,
196 SCRA 536, 544-545 (1991) we held

. . . (T)he unilateral action of the PNB in increasing the interest

rate on the private respondent's loan violated the mutuality of
contracts ordained in Article 1308 of the Civil Code:

Art. 1308. The contract must bind both contracting

parties; its validity or compliance cannot be left to
the will of one of them.

In order that obligations arising from contracts may have the

force or law between the parties, there must be mutuality
between the parties based on their essential equality. A contract
containing a condition which makes its fulfillment dependent
exclusively upon the uncontrolled will of one of the contracting
parties, is void . . . Hence, even assuming that the
. . . loan agreement between the PNB and the private respondent
gave the PNB a license (although in fact there was none) to
increase the interest rate at will during the term of the loan, that
license would have been null and void for being violative of the
principle of mutuality essential in contracts. It would have
invested the loan agreement with the character of a contract of
adhesion, where the parties do not equal footing the weaker
party's (the debtor) participation being reduced to the alternative
to take it or leave it'
. . . Such a contract is a veritable trap for the weaker party whom
the courts of justice must protect against abuse and imposition.
(Citations
omitted.) 22

Even if we were to consider that petitioners were bound by their agreement

allowing an increase in the interest rate despite the lack of advance notice to
them, the escalation should still be subject, as so contractually stipulated, to
a corresponding increase by the Central Bank of its rediscount rate to
member banks, or of the interest rate on savings and time deposit, or of the

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interest rate on such loans and advances. The notices sent to petitioners
merely read:

Letter of 19 July 1984:

Please be informed that the Bank has increased the interest rate
of your existing loan from 21 to 30%per annum beginning
October 17, 1984. This increase of interest rate is in accordance
with the provision of Section 2 of Presidential Decree No.
1684 23 amending Act No. 2655. This provision of the decree is
reiterated under paragraph 1 of your Promissory Note. Your
quarterly amortization has been increased to P104,661.10.
24
We trust that you will be guided accordingly.

Letter of 14 November 1984:

On account of the prevailing business and economic condition,

we are compelled to increase the interest rate of your existing
loan from 30% to 38 % per annum effective November 17, 1984.
This increase is in accordance with your agreement (escalation
clause) in your promissory note/s.

In view of this increase in the interest rate of your loan, your

Quarterly amortization correspondingly increased to P123,797.05
commencing on April 17, 1985.

We trust that you will understand our position and please be

guided accordingly. 25

Given the circumstances, the Court sees no cogent reasons to fault the
appellate court in its finding that there are no sufficient valid justifications
aptly shown for the unilateral increases by private respondent bank of the
interest rates on the loan.

WHEREFORE, the, decision of the appellate court is AFFIRMED subject to the

MODIFICATION that private respondent Home Savings Bank and Trust
Company shall pay to petitioners the excess, if any, of the bid price it
received from Asaje Realty Corporation for the foreclosed property in
question over and above the unpaid balance of the loan computed at the
original interest rate. This case is REMANDED to the trial court for the above
determination. No costs.

SO ORDERED.

Digest

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FACTS: Home Savings Bank and Trust Company granted to the Concepcions a
loan. The Concepcions, in turn, executed in favor of the bank a promissory
note and a REM over their property. The loan was payable in equal quarterly
amortizations for a period of fifteen (15) years and carried an interest rate of
sixteen percent (16%) per annum.
Escalation Clause: The promissory note provided that the Concepcions
had authorized -"x x x the Bank to correspondingly increase the interest rate
presently stipulated in this transaction without advance notice to me/us in
the event the Central Bank of the Philippines raises its rediscount rate to
member banks, and/or the interest rate on savings and time deposit, and/or
the interest rate on such loans and/or advances."
In accordance with the above provision, the bank unilaterally increased
the interest rate from 16% to 38%.
General Rule (GR): The validity of escalation clauses in contracts is
upheld by the SC.
Reason for validity: (a) to maintain fiscal stability and (b) to retain the
value of money in long term contracts.
Principle of mutuality of contracts: ART. 1308. The contract must bind
both contracting parties; its validity or compliance cannot be left to the will
of one of them.
A contract containing a condition which makes its fulfillment dependent
exclusively upon the uncontrolled will of one of the contracting parties, is
void.
An escalation clause that gives a creditor an unbridled right
to unilaterallyand upwardly adjust the interest on private respondentthe
debtors loan would completely take away from the debtor the right to assent
to an important modification in their agreement, and would negate the
element of mutuality in contracts.
Basis of the increase of interest rates in this case: on account of the
revailing business and economic condition.

PD 1684 Usury Law: SEC. 7-a. Parties to an agreement pertaining to a

loan or forbearance of money, goods or credits may stipulate that the rate of
interest agreed upon may be increased in the event that the applicable
maximum rate of interest is increased by law or by the Monetary Board:
Provided, That such stipulation shall be valid only if there is also a stipulation
in the agreement that the rate of interest agreed upon shall be reduced in

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the event that the applicable maximum rate of interest is reduced by law or
by the Monetary Board: xxx.'

RULING: Even if we were to consider that petitioners were bound by their

agreement allowing an increase in the interest rate despite the lack of
advance notice to them, the escalation should still be subject, as so
contractually stipulated, to a corresponding increase by the Central Bank of
its rediscount rate to member banks, or of the interest rate on savings and
time deposit, or of the interest rate on such loans and advances. There are
no sufficient valid justifications aptly shown for the unilateral increases by
private respondent bank of the interest rates on the loan.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 119379 September 25, 1998

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RODELO G. POLOTAN, SR., petitioner,
vs.
HON. COURT OF APPEALS (Eleventh Division), REGIONAL TRIAL
COURT IN MAKATI CITY (Branch 132), and SECURITY DINERS
INTERNATIONAL CORPORATION, respondents.

ROMERO, J.:

Assailed before this Court in a Petition for Review on Certiorari is the

decision 1 of the Court of Appeals in CA-G.R. CV No. 33270 affirming the
decision of Branch 132 of the Regional Trial Court of Makati City.

Private respondent Security Diners International Corporation (Diners Club), a

credit card company, extends credit accommodations to its cardholders for
the purchase of goods and other services from member establishments. Said
goods and services are reimbursed later on by cardholders upon proper
billing.

Petitioner Rodelo G. Polotan, Sr. applied for membership and credit

accommodations with Diners Club in October 1985. The application form
contained terms and conditions governing the use and availment of the
Diners Club card, among which is for the cardholder to pay all charges made
through the use of said card within the period indicated in the statement of
account and any remaining unpaid balance to earn 3% interest per annum
plus prime rate of Security Bank & Trust Company. Notably, in the application
form submitted by petitioner, Ofricano Canlas obligated himself to pay jointly
and severally with petitioner the latter's obligation to private respondent.

Upon acceptance of his application, petitioner was issued Diners Club card
No. 3651-212766-3005. As of May 8, 1987, petitioner incurred credit charges
plus appropriate interest and service charges in the aggregate amount of
P33,819.84 which had become due and demandable.

Demands for payment made against petitioner proved futile. Hence, private
respondent filed a Complaint for Collection of Sum of Money against
petitioner before the lower court.

The lower court rued, thus:

WHEREFORE, judgment is hereby rendered ordering defendants

to pay jointly and severally plaintiff:

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 a) The amount of P33,819.84 and interest of 3% per annum plus
prime rate of SBTC and service charges of 2% per month starting
May 9, 1987 until the entire obligation is fully paid;

b) An amount equivalent to 25% of any and all amounts due and

payable as attorney's fees, plus costs of suit.

With respect to the cross-claim of defendant Ofricano Canlas,

defendant Rodelo G. Polotan, Sr. is ordered to indemnify and/or
reimburse the former for whatever he may be ordered to pay
plaintiff.

The Court of Appeals affirmed the ruling of the lower court. Hence, this
petition. Petitioner assigns the following errors:

RESPONDENT COURT OF APPEALS COMMITTED AN ERROR OF

LAW IN RULING AS VALID AND LEGAL THE FOLLOWING
PROVISION ON INTEREST IN THE DINERS CARD CONTRACT, TO
WIT:

PAYMENT OF CHARGES . . . The Cardholder agrees to pay

interest per annum at 3% plus the prime rate of Security Bank
and Trust Company. . . . Provided that if there occurs any change
in the prevailing market rates the new interest rate shall be the
guiding rate of computing the interest due on the outstanding
obligation without need of serving notice to the Cardholder other
than the required posting on the monthly statement served to
the Cardholder.

The Cardholder hereby authorizes Security Diners to

correspondingly increase the rate of such interest in the event of
changes in prevailing market rates and to charge additional
service fees as may be deemed necessary in order to maintain
its service to the Cardholder.

II

RESPONDENT COURT OF APPEALS COMMITTED AN ERROR OF

LAW IN RULING IN EFFECT THAT PRIVATE RESPONDENT'S
STATEMENT OF ACCOUNT (Exh. "2"). AS A JUDICIAL ADMISSION
THAT MRS. POLOTAN HAD ALREADY PAID COULD BE
CONTRADICTED WITHOUT THE PRIVATE RESPONDENT LAYING
THE PROPER BASIS FOR THE INTRODUCTION OF CONTRARY
EVIDENCE;

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 III

RESPONDENT COURT OF APPEALS COMMITTED A GRIEVOUS

ERROR OF FACT IN FINDING AS CREDIBLE THE ILLOGICAL AND
ABSURD EXPLANATION OF PRIVATE RESPONDENT'S MR. VICENTE;

IV

RESPONDENT COURT OF APPEALS ERRED IN NOT AWARDING

DAMAGES TO PETITIONER.

In the first assignment of error, petitioner argues that the provision on

interest rate is "obscure and ambiguous and not susceptible of reasonable
interpretation" particularly the terms "prime rate", "prevailing market rate"
and "guiding rate". In effect, there was no meeting of minds. As such, this
being a contract of adhesion, any ambiguity should be resolved against the
one who caused it.

Petitioner added that the said provision was also illegal as it violated the laws
and Central Bank Circulars. While said proviso allowed for the escalation of
interest, it did not allow for a downward adjustment of the same.

In his second and third assignment of error, petitioner claimed that Diners
Club admitted, through its statement of account, that petitioner's wife, Mrs.
Polotan, had no more account with it. But then, he claimed that the lower
court and the Court of Appeals allowed the testimony of one Mr. Vicente
explaining that the reason why Mrs. Polotan had no more account with it was
that being a supplementary cardholder, her account was consolidated with
that of petitioner in accordance with its new policy. He argued that since
Diners Club admitted that Mrs. Polotan had no more account with it, the only
way it could contradict such admission was by declaring that the same was a
result of a palpable mistake in accordance with Section 4 of Rule 129 of the
Revised Rules on Evidence. In admitting said explanation, the lower court
and the Court of Appeals violated the rule on the weight to be accorded
conflicting evidence. In effect, petitioner insists that both courts favored the
uncorroborated testimonial evidence of Mr. Vicente over the documentary
evidence presented by petitioner and admitted by Diners Club.

In its fourth assignment of error, petitioner claimed that he should have been
awarded damages because of Diners Club's bad faith.

This Court finds Petitioner's contentions without merit.

The issues presented by petitioner are clearly questions of law.

Notwithstanding petitioner's submission of the above errors, however, the
core issue is basically one of fact. This case stemmed from a simple

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complaint for collection of sum of money. The lower court and the Court of
Appeals found that petitioner indeed owed Diners Club the amount being
demanded.

In the case of Reyes v. CA, 2 this Court held that factual findings of the trial
court, adopted and confirmed by the Court of Appeals, are final and
conclusive and may not be reviewed on appeal. The exceptions to this rule
are as follows: (1) when the inference made is manifestly mistaken, absurd
or impossible; (2) when there is a grave abuse of discretion; (3) when the
finding is grounded entirely on speculations, surmises or conjectures; (4)
when the judgment of the Court of Appeals is based on misapprehension of
facts; (5) when the findings of fact are conflicting; (6) when the Court of
Appeals, in making its findings, went beyond the issues of the case and the
same is contrary to the admissions of both appellant and appellee; (7) when
the findings of the Court of Appeals are contrary to those of the trial court;
(8) when the findings of fact are conclusions without citation of specific
evidence on which they are based; (9) when the Court of Appeals manifestly
overlooked certain relevant facts not disputed by the parties and which, if
properly considered, would justify a different conclusion and (10) when the
findings of fact of the Court of Appeals are premised on the absence of
evidence and are contradicted by the evidence on record.

Only a clear showing that any of the above-cited exceptions exists would
justify a review of the findings of fact made by the lower court and upheld by
the Court of Appeals. In the instant case, a review of the decisions of the
lower court, as well as the Court of Appeals, shows that the conclusions have
been logically arrived at and substantially supported by the evidence
presented by the parties.

Be that as it may, this Court sees it fit and proper to discuss the merits of
this petition based on petitioner's claim that since the contract he signed
with Diners Club was a contract of adhesion, the obscure provision on
interest should be resolved in his favor.

A contract of adhesion is one in which one of the contracting parties imposes

a ready-made form of contract which the other party may accept or reject,
but cannot modify. One party prepares the stipulation in the contract, while
the other party merely affixes his signature or his "adhesion" thereto, giving
no room for negotiation and depriving the latter of the opportunity to bargain
on equal footing. 3

Admittedly, the contract containing standard stipulations imposed upon

those who seek to avail of its credit services was prepared by Diners Club.
There is no way a prospective credit card holder can object to any onerous
provision as it is offered on a take-it-or-leave-it basis. Being a contract of

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adhesion, any ambiguity in its provisions trust be construed against private
respondent.

Indeed, the terms "prime rate", "prevailing market rate", "2% penalty
charge", "service fee", and "guiding rate" are technical terms which are
beyond the ken of an ordinary layman. To be sure, petitioner hardly falls into
the category of an "ordinary layman." As aptly observed by the Court of
Appeals:

. . . [A]ppellant by his own admission is a "lawyer by profession, a

reputable businessman and a note leader of a number of socio-
civic organizations." With such impressive credentials, this Court
is hard-put to fathom someone of his calibre entering into a
contract with eyes "blindfolded". 4

Nevertheless, these types of contracts have been declared as binding

ordinary contracts, the reason being that the party who adheres to the
contract is free to reject it entirely. 5

The binding effect of any agreement between parties to a contract is

premised on two settled principles: (1) that any obligation arising from a
contract has the force of law between the parties; and (2) that there must be
mutuality between the parties based on their essential equality. Any contract
which appears to be heavily weighed in favor of one of the parties so as to
lead to an unconscionable result is void. Any stipulation regarding the
validity or compliance of the contract which is left solely to the will of one of
the parties, is likewise, invalid. 6 It is important to stress that the Court is not
precluded from ruling out blind adherence to their terms if the attendant
facts and circumstances show that they should be ignored for being
obviously too one-sided. 7

In this case, petitioner, in effect, claims that the subject contract is one-sided
in that the contract allows for the escalation of interests, but does not
provide for a downward adjustment of the same in violation of Central Bank
Circular 905.

The claim is without basis. First, by signing the contract, petitioner and
private respondent agreed upon the rate as stipulated in the subject
contract. Such is now allowed by C.B. Circular 905. 8 Second, petitioner failed
to cite any particular provision of said Circular which was allegedly violated
by the subject contract.

Be that as it may, there is nothing inherently wrong with escalation clauses.

Escalation clauses are valid stipulations in commercial contracts to maintain
fiscal stability and to retain the value of money in long term contracts. 9

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Petitioner further argues that the interest rate was unilaterally imposed and
based on the standards and rate formulated solely by Diners Club.
10
In Florendo v. CA, this Court has held that:

. . . the unilateral determination and imposition of increased

interest rates by the herein respondent bank is obviously
violative of the principle of mutuality of contracts ordained in
Article 1308 of the Civil Code. As this Court held in PNB v. CA
(196 SCRA 536 [1991]):

In order that obligations arising from contracts may

have the force of law between the parties, there
must be mutuality between the parties based on
their essential equality. A contract containing a
condition which makes its fulfillment dependent
exclusively upon the uncontrolled will of one of the
contracting parties, is void. . . .

The contractual provision in question states that "if there occurs any change
in the prevailing market rates, the new interest rate shall be the guiding rate
in computing the interest due on the outstanding obligation without need of
serving notice to the Cardholder other than the required posting on the
monthly statement served to the Cardholder." This could not be considered
an escalation clause for the reason that it neither states all increase nor a
decrease in interest rate. Said clause simply states that the interest rate
should be based on the prevailing market rate.

Interpreting it differently, while said clause does not expressly stipulate a

reduction in interest rate, it nevertheless provides a leeway for the interest
rate to be reduced in case the prevailing market rates dictate its reduction.

Admittedly, the second paragraph of the questioned proviso which provides

that "the Cardholder hereby authorizes Security Diners to correspondingly
increase the rate of such interest in the event of changes in prevailing
market rates . . ." is an escalation clause. However, it cannot be said to be
dependent solely on the will of private respondent as it is also dependent on
the prevailing market rates.

Escalation clauses are not basically wrong or legally objectionable as long as

they are not solely potestative but based on reasonable and valid
grounds. 11 Obviously, the fluctuation in the markets rates is beyond the
control of private respondent.

As to the second and third assignments of error, it is misleading for petitioner

to say that private respondent had judicially admitted that its statement of

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account is proof that Mrs. Polotan has already paid her account with private
respondent. Proceeding from said premise, it is further misleading for
petitioner to conclude that private respondent's testimonial evidence about a
new policy contradicted its judicially admitted documentary evidence without
laying the proper basis for the introduction of contrary evidence and in
violation of Section 2, Rule 129 of the Revised Rules on Evidence, which
provides that:

Admissions made by the parties in the pleadings, or in the course

of the trial or other proceedings do not require proof and can be
contradicted unless previously shown to have been made
through palpable mistake.

Certainly, Diners Club could not deny the existence of Exhibit "2" which is
the Statement of Account issued to Mrs. Polotan since, precisely, it was the
one which issued said statement. But to conclude that said Statement of
Account was likewise an admission that Mrs. Polotan has no more account
with Diners Club would be equivocatory, or non-sequitur.

While private respondent admitted the existence of Exhibit "2", it could not
have agreed to the purpose for which the exhibit was presented. As
satisfactorily found by the Court of Appeals and to which this Court agrees:

Appellant's allegation is misleading. On the contrary, appellee's

rebuttal witness, Alfredo Vicente, categorically stated that the
reason the Statement of Account in the name of Alicia Polotan
showed a zero balance (Exh. "2") was due to the fact that
effective February 1989, under a new system, separate monthly
statements were produced on supplementary card members.
Prior to February 1989, the availment of Mr. and Mrs. Polotan
were incorporated under one statement.

Moreover, it is to be observed that while the Complaint was filed

on 15 May 1987, the Diners Club Monthly Statement in the name
of Alicia B. Polotan is dated almost two (2) years later or
"02/08/89" (Exh. "2"). This bolsters the testimony of Alfredo
Vicente regarding the entry of zero balance in Mrs. Polotan's
name.

Although said exhibit would, by itself, show that Mrs. Polotan had no more
account with Diners Club, it would not have been conclusive to prove that
said account was already paid. The proper evidence would have been a
receipt of payment.

Significantly, petitioner did not contest the purchases as indicated in the

statements of account but merely alleged that some of the purchases being

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claimed to have been made by petitioner were not supported by invoices.
The lower court found otherwise. 12

In light of the above, this Court sees no reason to award damages to

petitioner.

WHEREFORE, in view of the foregoing, the petition for certiorari is hereby

DENIED and the Decision of the Court of Appeals AFFIRMED with the
MODIFICATION that the attorney's fees are reduced to 15%.

SO ORDERED.

Digest

Private respondent Security Diners International Corporation (Diners Club), a

credit card company, extends credit accommodations to its cardholders for
the purchase of goods and other services from member establishments.

Petitioner argues that the provision on interest rate is obscure and

ambiguous and not susceptible of reasonable interpretation particularly the
terms prime rate, prevailing market rate and guiding rate. In effect, there
was no meeting of minds. As such, this being a contract of adhesion, any
ambiguity should be resolved against the one who caused it.

Petitioners contract with private respondent in this case, expressly provides

for an escalation clause but not a de-escalation clause. The Supreme Court
ruled that notwithstanding this, the contract provides a leeway for the
interest rate to be reduced in case the prevailing market rates dictate its
reduction and that said provision on the increase of interest rates is not
dependent solely on the will of private respondent as it is also dependent on
the prevailing market rates. A contract of adhesion is one in which one of the
contracting parties imposes a ready-made form of contract which the other
party may accept or reject, but cannot modify. One party prepares the
stipulation in the contract, while the other party merely affixes his signature
or his adhesion thereto, giving no room for negotiation and depriving the
latter of the opportunity to bargain on equal footing. Admittedly, the contract
containing standard stipulations imposed upon those who seek to avail of its
credit services was prepared by the Company. There is no way a prospective
credit card holder can object to any onerous provision as it is offered on a
take-it-or-leave-it basis. Being a contract of adhesion, any ambiguity in its
provisions trust be construed against the Company. Nevertheless, these

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types of contracts have been declared as binding ordinary contracts, the
reason being that the party who adheres to the contract is free to reject it
entirely. The binding effect of any agreement between parties to a contract is
premised on two settled principles: (1) that any obligation arising from a
contract has the force of law between the parties; and (2) that there must be
mutuality between the parties based on their essential equality. Any contract
which appears to be heavily weighed in favor of one of the parties so as
to lead to an unconscionable result is void. Any stipulation regarding the
validity or compliance of the contract which is left solely to the will of one of
the parties, is likewise, invalid. It is important to stress that the Court is not
precluded from ruling out blind adherence to their terms if the attendant
facts and circumstances show that they should be ignored for being
obviously too one-sided

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-46591 July 28, 1987

BANCO FILIPINO SAVINGS and MORTGAGE BANK, petitioner,

vs.
HON. MIGUEL NAVARRO, Presiding Judge, Court of First Instance of
Manila, Branch XXXI and FLORANTE DEL VALLE, respondents.

MELENCIO-HERRERA, J.:

This is a Petition to review on certiorari the Decision of respondent Court, the

dispositive portion of which decrees:

WHEREFORE, the Court finds that the enforcement of the escalation

clause retroactively before the lapse of the 15-year period stated in the
promissory note is contrary to Sec. 3 of Presidential Decree No. 116
and Sec. 109 of Republic Act No. 265, and hereby declares null and
void the said escalation clause. The respondent Banco Filipino Savings
and Mortgage Bank is hereby ordered to desist from enforcing the
increased rate of interest on petitioner's loan.

SO ORDERED.

The facts are not in dispute:

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On May 20, 1975, respondent Florante del Valle (the BORROWER) obtained a
loan secured by a real estate mortgage (the LOAN, for short) from petitioner
BANCO FILIPINO1 in the sum of Forty-one Thousand Three Hundred
(P41,300.00) Pesos, payable and to be amortized within fifteen (15) years at
twelve (12%) per cent interest annually. Hence, the LOAN still had more than
730 days to run by January 2, 1976, the date when CIRCULAR No. 494 was
issued by the Central Bank.

Stamped on the promissory note evidencing the loan is an Escalation Clause,

reading as follows:

I/We hereby authorize Banco Filipino to correspondingly increase the

interest rate stipulated in this contract without advance notice to
me/us in the event law should be enacted increasing the lawful rates of
interest that may be charged on this particular kind of loan.

The Escalation Clause is based upon Central Bank CIRCULAR No. 494 issued
on January 2, 1976, the pertinent portion of which reads:

3. The maximum rate of interest, including commissions, premiums,

fees and other charges on loans with maturity of more than seven
hundred thirty (730) days, by banking institutions, including thrift
banks and rural banks, or by financial intermediaries authorized to
engage in quasi-banking functions shall be nineteen percent (19%) per
annum.

xxx xxx xxx

7. Except as provided in this Circular and Circular No. 493, loans or

renewals thereof shall continue to be governed by the Usury Law, as
amended."

CIRCULAR No. 494 was issued pursuant to the authority granted to the
Monetary Board by Presidential Decree No. 116 (Amending Further Certain
Sections of the Usury Law) promulgated on January 29, 1973, the applicable
section of which provides:

Sec. 2. The same Act is hereby amended by adding the following

section immediately after section one thereof, which reads as follows:

Sec. 1-a. The Monetary Board is hereby authorized to prescribe the

maximum rate or rates of interest for the loan or renewal thereof or the
forbearance of any money, goods or credits, and to change such rate
or rates whenever warranted by prevailing economic and social
conditions: Provided, that such changes shall not be made oftener than
once every twelve months.

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The same grant of authority appears in P.D. No. 858, promulgated on
December 31, 1975, except that the limitation on the frequency of changes
was eliminated.

On the strength of CIRCULAR No. 494 BANCO FILIPINO gave notice to the
BORROWER on June 30, 1976 of the increase of interest rate on the LOAN
from 12% to 17% per annum effective on March 1, 1976.

On September 24, 1976, Ms. Mercedes C. Paderes of the Central Bank wrote
a letter to the BORROWER as follows:

September 24, 1976

Mr. Florante del Valle

14 Palanca Street
B.F. Homes, Paranaque
Rizal

Dear Mr. del Valle:

This refers to your letter dated August 28, 1976 addressed to the Governor,
Central Bank of the Philippines, seeking clarification and our official stand on
Banco Filipino's recent decision to raise interest rates on lots bought on
installment from 12% to 17% per annum.

A verification made by our Examiner of the copy of your Promissory Note on

file with Banco Filipino showed that the following escalation clause with your
signature is stamped on the Promissory Note:

I /We hereby authorize Banco Filipino to correspondingly increase

the interest rate stipulated in this contract without advance
notice to me/us in the event a law should be enacted increasing
the lawful rates of interest that may be charged on this particular
kind of loan.

In this connection, please be advised that the Monetary Board, in its

Resolution No. 1155 dated June 11, 1976, adopted the following guidelines to
govern interest rate adjustments by banks and non-banks performing quasi-
banking functions on loans already existing as of January 3, 1976, in the light
of Central Bank Circulars Nos. 492-498:

l. Only banks and non-bank financial intermediaries performing

quasi-banking functions may increase interest rates on loans
already existings of January 2, 1976, provided that:

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 a. The pertinent loan contracts/documents contain
escalation clauses expressly authorizing lending bank or
non-bank performing quasi-banking functions to increase
the rate of interest stipulated in the contract, in the event
that any law or Central Bank regulation is promulgated
increasing the maximum interest rate for loans; and

b. Said loans were directly granted by them and the

remaining maturities thereof were more than 730 days as
of January 2, 1976; and

2. The increase in the rate of interest can be effective only as of

January 2, 1976 or on a later date.

The foregoing guidelines, however, shall not be understood as precluding

affected parties from questioning before a competent court of justice the
legality or validity of such escalation clauses.

We trust the above guidelines would help you resolve your problems
regarding additional interest charges of Banco Filipino.

Very truly yours,

(Sgd.) MERCEDES C. PAREDES

Director

Contending that CIRCULAR No. 494 is not the law contemplated in the
Escalation Clause of the promissory note, the BORROWER filed suit against
BANCO FILIPINO for "Declaratory Relief" with respondent Court, praying that
the Escalation Clause be declared null and void and that BANCO FILIPINO be
ordered to desist from enforcing the increased rate of interest on the
BORROWER's real estate loan.

For its part, BANCO FILIPINO maintained that the Escalation Clause signed by
the BORROWER authorized it to increase the interest rate once a law was
passed increasing the rate of interest and that its authority to increase was
provided for by CIRCULAR No. 494.

In its judgment, respondent Court nullified the Escalation Clause and ordered
BANCO FILIPINO to desist from enforcing the increased rate of interest on the
BORROWER's loan. It reasoned out that P.D. No. 116 does not expressly grant
the Central Bank authority to maximize interest rates with retroactive effect
and that BANCO FILIPINO cannot legally impose a higher rate of interest
before the expiration of the 15-year period in which the loan is to be paid
other than the 12% per annum in force at the time of the execution of the
loan.

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It is from that Decision in favor of the BORROWER that BANCO FILIPINO has
come to this instance on review by Certiorari. We gave due course to the
Petition, the question being one of law.

On February 24, 1983, the parties represented by their respective counsel,

not only moved to withdraw the appeal on the ground that it had become
moot and academic "because of recent developments in the rules and
regulations of the Central Bank," but also prayed that "the decision rendered
in the Court of First Instance be therefore vacated and declared of no force
and effect as if the case was never filed," since the parties would like to end
this matter once and for all."

However, "considering the subject matter of the controversy in which many

persons similarly situated are interested and because of the need for a
definite ruling on the question," the Court, in its Resolution of February 24,
1983, impleaded the Central Bank and required it to submit its Comment,
and encouraged homeowners similarly situated as the BORROWER to
intervene in the proceedings.

At the hearing on February 24, 1983, one Leopoldo Z. So, a mortgage

homeowner at B.F. Resort Subdivision, was present and manifested that he
was in a similar situation as the BORROWER. Since then, he has written
several letters to the Court, pleading for early resolution of the case. The
Court allowed the intervention of Lolita Perono2and issued a temporary
restraining order enjoining the Regional Trial Court (Pasay City Branch) in the
case entitled "Banco Filipino Savings and Mortgage Bank vs. Lolita Perono"
from issuing a writ of possession over her mortgaged property. Also snowed
to intervene were Enrique Tabalon, Jose Llopis, et als., who had obtained
loans with Identical escalation clauses from Apex Mortgage and Loans
Corporation, apparently an affiliate of BANCO FILIPINO, Upon motion of Jose
Llopis, a Temporary Restraining Order was likewise issued enjoining the
foreclosure of his real estate mortgage by BANCO FILIPINO.

The Court made it explicit, however, that intervention was allowed only for
the purpose of "joining in the discussion of the legal issue involved in this
proceedings, to wit, the validity of the so-called "escalation clause," or its
applicability to existing contracts of loan."

The Central Bank has submitted its Comment and Supplemental Comment
and like BANCO FILIPINO, has taken the position that the issuance of its
Circulars is a valid exercise of its authority to scribe maximum rates of
interest and that, based on general principles of contract, the Escalation
Clause is a valid provision in the loan agreement provided that "(1) the
increased rate imposed or charged by petitioner does not exceed the ceiling
fixed by law or the Monetary Board; (2) the increase is made effective not
earlier than the effectivity of the law or regulation authorizing such an

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increase; and (3) the remaining maturities of the loans are more than 730
days as of the effectivity of the law or regulation authorizing such an
increase. However, with respect to loan agreements entered into,on or after
March 17, 1980, such agreement, in order to be valid, must also include a
de-escalation clause as required by Presidential Decree No. 1684." 3

The substantial question in this case is not really whether the Escalation
Clause is a valid or void stipulation. There should be no question that the
clause is valid.

Some contracts contain what is known as an "escalator clause," which

is defined as one in which the contract fixes a base price but contains a
provision that in the event of specified cost increases, the seller or
contractor may raise the price up to a fixed percentage of the base.
Attacks on such a clause have usually been based on the claim that,
because of the open price-provision, the contract was too indefinite to
be enforceable and did not evidence an actual meeting of the minds of
the parties, or that the arrangement left the price to be determined
arbitrarily by one party so that the contract lacked mutuality. In most
instances, however, these attacks have been unsuccessful.4

The Court further finds as a matter of law that the cost of living index
adjustment, or escalator clause, is not substantively unconscionable.

Cost of living index adjustment clauses are widely used in commercial

contracts in an effort to maintain fiscal stability and to retain "real
dollar" value to the price terms of long term contracts. The provision is
a common one, and has been universally upheld and enforced. Indeed,
the Federal government has recognized the efficacy of escalator
clauses in tying Social Security benefits to the cost of living index, 42
U.S.C.s 415(i). Pension benefits and labor contracts negotiated by most
of the major labor unions are other examples. That inflation, expected
or otherwise, will cause a particular bargain to be more costly in terms
of total dollars than originally contemplated can be of little solace to
the plaintiffs.5

What should be resolved is whether BANCO FILIPINO can increase the

interest rate on the LOAN from 12% to 17% per annum under the Escalation
Clause. It is our considered opinion that it may not.

The Escalation Clause reads as follows:

I/We hereby authorize Banco Filipino to correspondingly increase

the interest rate stipulated in this contract without advance notice to

me/us in the event

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 a law

increasing

the lawful rates of interest that may be charged

on this particular

kind of loan. (Paragraphing and emphasis supplied)

It is clear from the stipulation between the parties that the interest rate may
be increased "in the event a lawshould be enacted increasing the lawful rate
of interest that may be charged on this particular kind of loan." " The
Escalation Clause was dependent on an increase of rate made by "law"
alone.

CIRCULAR No. 494, although it has the effect of law, is not a law. "Although a
circular duly issued is not strictly a statute or a law, it has, however, the
force and effect of law."6 (Italics supplied). "An administrative regulation
adopted pursuant to law has the force and effect of law."7 "That
administrative rules and regulations have the force of law can no longer be
questioned. "8

The distinction between a law and an administrative regulation is recognized

in the Monetary Board guidelines quoted in the letter to the BORROWER of
Ms. Paderes of September 24, 1976 (supra). According to the guidelines, for
a loan's interest to be subject to the increases provided in CIRCULAR No. 494,
there must be an Escalation Clause allowing the increase "in the event that
any law or Central Bank regulation is promulgated increasing the maximum
interest rate for loans." The guidelines thus presuppose that a Central Bank
regulation is not within the term "any law."

The distinction is again recognized by P.D. No. 1684, promulgated on March

17, 1980, adding section 7-a to the Usury Law, providing that parties to an
agreement pertaining to a loan could stipulate that the rate of interest
agreed upon may be increased in the event that the applicable maximum
rate of interest is increased "by law or by the Monetary Board." To quote:

Sec. 7-a Parties to an agreement pertaining to a loan or forbearance of

money, goods or credits may stipulate that the rate of interest agreed
upon may be increased in the event that the applicable maximum rate
of interest

is increased by law or by the Monetary Board:

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 Provided, That such stipulation shall be valid only if there is also a
stipulation in the agreement that the rate of interest agreed upon shall
be reduced in the event that the applicable maximum rate of interest
is reduced by law or by the Monetary Board;

Provided, further, That the adjustment in the rate of interest agreed

upon shall take effect on or after the effectivity of the increase or
decrease in the maximum rate of interest. (Paragraphing and emphasis
supplied).

It is now clear that from March 17, 1980, escalation clauses to be valid
should specifically provide: (1) that there can be an increase in interest if
increased by law or by the Monetary Board; and (2) in order for such
stipulation to be valid, it must include a provision for reduction of the
stipulated interest "in the event that the applicable maximum rate of interest
is reduced by law or by the Monetary Board."

While P.D. No. 1684 is not to be given retroactive effect, the absence of a de-
escalation clause in the Escalation Clause in question provides another
reason why it should not be given effect because of its one-sidedness in
favor of the lender.

2. The Escalation Clause specifically stipulated that the increase in interest

rate was to be "on this particular kind of loan, " meaning one secured by
registered real estate mortgage.

Paragraph 7 of CIRCULAR No. 494 specifically directs that "loans or renewals

continue to be governed by the Usury Law, as amended." So do Circular No.
586 of the Central Bank, which superseded Circular No. 494, and Circular No.
705, which superseded Circular No. 586. The Usury Law, as amended by Acts
Nos. 3291, 3998 and 4070, became effective on May 1, 1916. It provided for
the maximum yearly interest of 12% for loans secured by a mortgage upon
registered real estate (Section 2), and a maximum annual interest of 14% for
loans covered by security other than mortgage upon registered real estate
(Section 3). Significant is the separate treatment of registered real estate
loans and other loans not secured by mortgage upon registered real estate.
It appears clear in the Usury Law that the policy is to make interest rates for
loans guaranteed by registered real estate lower than those for loans
guaranteed by properties other than registered realty.

On June 15, 1948, Congress approved Republic Act No. 265, creating the
Central Bank, and establishing the Monetary Board. That law provides that
"the Monetary Board may, within the limits prescribed in the Usury law,9 fix
the maximum rates of interest which banks may charge for different types of
loans and for any other credit operations, ... " and that "any modification in
the maximum interest rates permitted for the borrowing or lending

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operations of the banks shall apply only to future operations and not to those
made prior to the date on which the modification becomes effective"
(Section 109).1avvphi1

On January 29, 1973, P.D. No. 116 was promulgated amending the Usury
Law. The Decree gave authority to the Monetary Board "to prescribe
maximum rates of interest for the loan or renewal thereof or the forbearance
of any money goods or credits, and to change such rate or rates whenever
warranted by prevailing economic and social conditions. In one section, 10 the
Monetary Board could prescribe the maximum rate of interest for loans
secured by mortgage upon registered real estate or by any document
conveying such real estate or an interest therein and, in another separate
section,11 the Monetary Board was also granted authority to fix the maximum
interest rate for loans secured by types of security other than registered real
property. The two sections read:

SEC. 3. Section two of the same Act is hereby amended to read as

follows:

SEC. 2. No person or corporation shall directly or indirectly take

or receive in money or other property, real or personal, or choses
in action, a higher rate of interest or greater sum or value,
including commissions, premiums, fines and penalties, for the
loan or renewal thereof or forbearance of money, goods, or
credits, where such loan or renewal or forbearance is secured in
whole or in part by a mortgage upon real estate the title to which
is duly registered or by any document conveying such real estate
or an interest therein, than twelve per centum per annum or the
maximum rate prescribed by the Monetary Board and in force at
the time the loan or renewal thereof or forbearance is granted:
Provided, That the rate of interest under this section or the
maximum rate of interest that may be prescribed by the
Monetary Board under this section may likewise apply to loans
secured by other types of security as may be specified by the
Monetary Board.

SEC. 4. Section three of the same Act is hereby amended to read as

follows:

SEC. 3. No person or corporation shall directly or indirectly

demand, take, receive, or agree to charge in money or other
property, real or personal, a higher rate or greater sum or value
for the loan or forbearance of money, goods, or credits, where
such loan or forbearance is not secured as provided in Section
two hereof, than fourteen per centum per annum or the

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 maximum rate or rates prescribed by the Monetary Board and in
force at the time the loan or forbearance is granted.

Apparent then is that the separate treatment for the two classes of loans was
maintained. Yet, CIRCULAR No. 494 makes no distinction as to the types of
loans that it is applicable to unlike Circular No. 586 dated January 1, 1978
and Circular No. 705 dated December 1, 1979, which fix the effective rate of
interest on loan transactions with maturities of more than 730 days to not
exceeding 19% per annum (Circular No. 586) and not exceeding 21% per
annum (Circular No. 705) "on both secured and unsecured loans as defined
by the Usury Law, as amended."

In the absence of any indication in CIRCULAR No. 494 as to which particular

type of loan was meant by the Monetary Board, the more equitable
construction is to limit CIRCULAR No. 494 to loans guaranteed by securities
other than mortgage upon registered realty.

WHEREFORE, the Court rules that while an escalation clause like the one in
question can ordinarily be held valid, nevertheless, petitioner Banco Filipino
cannot rely thereon to raise the interest on the borrower's loan from 12% to
17% per annum because Circular No. 494 of the Monetary Board was not the
"law" contemplated by the parties, nor should said Circular be held as
applicable to loans secured by registered real estate in the absence of any
such specific indication and in contravention of the policy behind the Usury
Law. The judgment appealed from is, therefore, hereby affirmed in so far as it
orders petitioner Banco Filipino to desist from enforcing the increased rate of
interest on petitioner's loan.

The Temporary Restraining Orders heretofore issued are hereby made

permanent if the escalation clauses are Identical to the one herein and the
loans involved have applied the increased rate of interest authorized by
Central Bank Circular No. 494.

SO ORDERED.

Digest

Republic of the Philippines

SUPREME COURT
Manila

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 EN BANC

G.R. No. L-31125 January 21, 1930

TIBURCIO LUTERO, plaintiff-appellant,

vs.
SIULIONG and CO., defendant-appellant.

Guevara, Francisco and Recto and Tiburcio Lutero for plaintiff-appellant.

Power and Hill for defendant-appellant.

VILLA-REAL, J.:

These are two appeals taken by plaintiff Tiburcio Lutero and by defendant
Siuliong & Co. from the judgment of the Court of First Instance of Iloilo
absolving the defendant from the complaint, and the plaintiff from the cross-
complaint, without costs.

In support of his appeal, the plaintiff assigns the following alleged errors as
committed by the court below in its judgment, to wit:

The lower court erred:

1. In refusing to permit witness Rufino Abordo to testify with regard to

a conversation between the plaintiff and the deceased manager of the
defendant.

2. In holding: (a) That Exhibits A and C are contracts of sale of sugar;

(b) that the P3,000 and P5,600 mentioned in said contracts are
advances on the selling price of 500 and 800 piculs of sugar,
respectively.

3. In not holding: (a) That Exhibits A and C are contracts of loans of

money payable in sugar; (b) that said contracts are usurious; (c)
therefore, the current market price at the time of delivery, or P30 per
picul, should be fixed as the price of the sugar delivered by the plaintiff
to the defendant; (d) consequently, the plaintiff is entitled to a balance
of P8,187.75 against the defendant.

4. In not ordering the defendant to pay plaintiff said amount of

P8,187.75.

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 5. In denying the plaintiff's motion for a new trial.

On the other hand, the defendant, in support of its appeal, assigns the
following alleged errors as committed by the court below in its judgment, to
wit:

The court erred in all of the following particulars:

1. In finding that the defendant by its silence had renounced its rights
under its contracts with the plaintiff.

2. In refusing to allow defendant interest at eight per cent per annum

as provided for in Exhibit C.

3. In refusing to allow defendant attorney's fees as provided for in

contracts Exhibits A and C.

4. In not rendering judgment in favor of the defendant and against

plaintiff for all of the amounts prayed for in defendant's counter-
complaint, including interest, attorney's fees, penalties and payment
for sugar at prices agreed upon in the contracts between plaintiff and
defendant.

The following facts were proved at the trial without dispute:

On June 30, 1919, the plaintiff Tiburcio Lutero and the defendant Siuliong &
Co. entered into a contract (Exhibit A), the pertinent parts of which are as
follows:

Know all men by these presents:

That I, Tiburcio Lutero, of age, married, and a resident of the

municipality of January, Province of Iloilo, Philippine Islands,

DO HEREBY STATE:

That I own a sugar plantation located in the municipality of January,

Iloilo, called San Ramon, from which I expect a crop of at least 1,200 to
1,500 piculs of sugar, more or less.

That I have agreed with the firm of Siuliong & Co., of this City of Iloilo,
represented by Mr. Yap-Inchong, to fix the selling price of 500 piculs of

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my sugar crop from said plantation during the season of 1919-1920 at
the rate of P12 per picul for high class No. 1 sugar; P11.50 for No. 2,
and P11 for No. 3, to be delivered to said firm in the month of March of
next year, 1920.

That by virtue of this agreement to sell, the firm of Siuliong & Co.,
through its manager, binds, itself to advance to Mr. Tiburcio Lutero the
amount of P3,000, Philippine currency, or, at the rate of P6 a picul for
No. 1; and P0.50 less for each succeeding picul, as an advance upon
the sale of said 500 piculs, and the remainder shall be paid to said Mr.
Lutero from time to time, as he sends his sugar to the Iloilo market,
until the full price of said 500 piculs of sugar is covered.

I further state that should I be unable to deliver said 500 piculs, I bind
myself to pay in specie to said form of Siuliong & Co., the price of the
undelivered portion according to the current market price during said
month of March.

I state likewise that for the security of Siuliong & Co., I, Tiburcio Lutero,
constitute a second mortgage in favor of said firm on a sugar
plantation located in the barrio of Ramirez, municipality of Janiuay,
Province of Iloilo, with all the improvements thereon, consisting of a
six-horse power steam engine with an eight-horse power boiler; a
battery with two ovens and eight cauas and a warehouse of mixed
materials, which plantation is encumbered by a first mortgage in favor
of the National Bank, and is described as follows: . . . .

That for the security of Siuliong & Co., I, Maximino Jalandoni, farmer,
landowner, and resident of the municipality of Jaro, Province of Iloilo, P.
I., do hereby bind myself as joint and several surety for Mr. Tiburcio
Lutero in favor of Messrs. Siuliong & Co., for the sum of three thousand
pesos (P3,000) in case said Mr. Lutero should be unable to fulfill his
obligations stipulated in this contract. "Any of the parties failing to
fulfill the terms of this contract hereby binds himself to pay an
indemnity of P200 as costs and attorney's fees.

In witness whereof, we sign these presents in Iloilo, this thirtieth day of

June, 1919.

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 (Sgd.) TIBURCIO LUTERO
SIULIONG & CO.
(Sgd.) YAP-INCHONG

On August 21, 1919, the same parties entered into another contract (Exhibit
C), the pertinent parts of which are as follows:

Know all men by these presents:

That I, Tiburcio Lutero, of age, married, and resident of the municipality

of Janiuay, Province of Iloilo, P. I.

DO HEREBY STATE:

That I, Tiburcio Lutero, own a sugar plantation located in the

municipality of Janiuay, Province of Iloilo, P. I., from which I expect a
crop of one thousand two hundred to one thousand five hundred piculs
of sugar more or less.

That I have agreed with the firm Siuliong & Co., through its branch in
this City of Iloilo, Province of Iloilo, to fix the selling price of Eight
hundred (800) piculs of sugar from my crop from said plantation during
the season of 1919-1920 at the rate of fourteen pesos (P14) a picul for
No. 1 sugar; thirteen pesos and fifty centavos (P13.50) a picul for No. 2
sugar; thirteen pesos (P13) for No. 3; twelve pesos and fifty centavos
(P12.50) for No. 4; and twelve pesos (P12) for No. 5; to be delivered to
said firm in the months of December, January, February, March, and
April of said year of 1920.

That by virtue of this agreement to sell, the firm Siuliong & Co.,
through its manager, binds itself to advance to me the amount of five
thousand six hundred pesos (P5,600), Philippine currency, that is, at
the rate of P7 per picul as an advance payment upon the selling price
of said eight hundred piculs of sugar, and the balance shall be paid to
me from time to time as I forward my sugar to the Iloilo market, until
the full price of said eight hundred piculs (800) is covered.

I likewise state that should I be unable to deliver said eight hundred

piculs of sugar of any part thereof, I bind myself to pay in specie the
price of the undelivered portion to said firm of Siuliong & Co.,

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according to the current market price in said months and on the day of
the settlement of my account.

I state further that to secure to said firm of Siuliong & Co., the sum of
five thousand six hundred pesos (P5,600) which I have received from
the same as an advance upon this sale, I hereby mortgaged to said
firm all the sugar cane now planted on my said San Ramon plantation,
situated in the municipality of Janiuay, Province of Iloilo, P. I., with the
exception of the five hundred (500) piculs, which was the subject of my
contract with the same firm of Siuliong & Co., dated June 30th of this
year.

That for a further security of said firm of Siuliong & Co., and by virtue
of the power of attorney conferred upon me by Mr. Ramon Masa,
attorney, farmer, and resident of the municipality of Sibalum, Province
of Antique, P.I., which power remains to this day unrevoked, duly
acknowledged before the justice of the peace of Sibalum, Province of
Antique, Mr. Nicolas Tordecillas, on August 15, of this year, I do hereby
mortgage in favor of said firm of Siuliong & Co., the forty head of
cattle, consisting of cows and carabaos, all of which are at present on
said Mr. Masa's farm in the municipality of San Remigio, Province of
Antique, which are free from all liens and incubrances, and of which
the documents of ownership are described as follows:

xxx xxx xxx

Should any or all of said animals thus mortgaged die, I bind myself to
replace the loss with my own carabaos.

I hereby state that the amount of five thousand six hundred pesos
(P5,600) Philippine currency, advanced to me by the firm of Siuliong &
Co., shall earn 8 per cent annual interest until full settlement of my
account.

I hereby state that the date of maturity of this contract was fixed as
April 30, 1920.

I, Florentino Magalona, of age, married, resident of the district of Molo,

municipality of Iloilo, Province of Iloilo, P.I., farmer, landowner, do
hereby state that I hereby bind myself as joint and several surety for

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 Mr. Tiburcio Lutero in favor of the firm of Siuliong & Co., should he be
unable to meet his obligation stipulated in this contract.

Any of the parties who fails to comply with the terms of this contract
shall be bound to pay an indemnity of five hundred pesos (P500) as
costs and attorney's fees.

In witness whereof, we have hereunto set our hands in Iloilo, this 21st
day of August, 1919.

(Sgd.) TIBURCIO LUTERO

(Sgd.) FLORENTINO MAGALONA
SIULIONG & CO.
By (Sgd.) YAP-INCHONG

By virtue of the contract Exhibit A, the plaintiff delivered to the defendant a

total of 337 piculs and 57 cates of muscovado sugar of different classes, and
on different dates, the total price of which amounts of P3,405.58 (Exhibit 1),
leaving an undelivered balance of 162 piculs and 44 cates. The plaintiff
received from the defendant in kind and specie the amount of P4,606.15.

In conformity with the contract Exhibit C, the plaintiff delivered to the

defendant 309 piculs and 77 cates of muscovado sugar, the total price of
which amounts to P3,822.40 (Exhibit 2), leaving an undelivered balance of
490 piculs and 24 cates. The plaintiff received by virtue of said contract
Exhibit C, in kind and specie, the sum of P6,862 (Exhibit 2).

The first question to be decided in the present appeal is whether the

contracts Exhibits A and C, entered into by and between the plaintiff Tiburcio
Lutero and the defendant Siuliong & Co. are for usurious loans of money
payable in sugar.

By contract Exhibit A, the plaintiff bound himself to sell to the defendant

during the month of March, 1920, 500 piculs of sugar from the crop of the
agricultural year 1919-1920, at the rate of P12 a picul for No. 1 superior
sugar; P11.50 for No. 2; and P11 for No. 3.

By virtue of the second contract Exhibit C, the plaintiff bound himself to sell
to the defendant 800 piculs of sugar from his crop of the agricultural year
1919-1920 at the rate of P14 a picul for No. 1 sugar; P13.50 for No. 2; P13 for

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No. 3; P12.50 for No. 4; and P12 for No. 5, to be delivered in the months of
December, January, February, March, and April, of the year 1920.

It is contended by the plaintiff-appellant that the defendant having advanced

money to the plaintiff upon both contracts, said money was given as a loan
payable in sugar, which, according to the law, must be computed on the
basis of the market price at the time of delivery; and that as the maximum
price of sugar on the respective dates of delivery was P30, and the price
stipulated in said contracts was not even one-half of the market price, said
contracts are usurious.

According to both contracts, the defendant was bound to buy the 500 piculs
of sugar mentioned in the contract Exhibit A, and the 800 piculs of sugar
mentioned in the contract Exhibit C, at the price stipulated in said contracts.
It is no contended by the plaintiff-appellant that contracts for the sale of
agricultural products to be delivered in future cannot be entered into. If so,
the contracts made by the plaintiff and the defendant are perfectly valid, and
the fact that on the date of delivery of the sugar, its market price is higher
than that stipulated, does not make them usurious or illegal, because the
defendant assumed the same risk of a loss taken by the plaintiff, due to
difference in price, and if the price, instead of rising, had slumped, the
defendant would have had to pay the price stipulated, and not the market
price, as has happened to many farmers and merchants due to the sudden
slump of prices at the end of the world war.

For the foregoing considerations, we are of the opinion and so hold that the
contracts of sale of agricultural products to be delivered in future, fixing a
selling price, are not usurious or illegal, even when the market price of the
products sold should turn out to be higher at the time of delivery.

The second question to be decided in the present appeal is whether or not

the plaintiff must pay to be defendant for the sugar which the former failed
to deliver in accordance with the aforesaid contracts, Exhibits A and C.

The court below, considering the price of each picul of sugar to be P30, held
that the defendant had been more than paid with the sugar delivered by the
plaintiff, and considering also that from the month of July, 1921, when the
defendant demanded of the plaintiff the delivery of the remaining portion of
the sugar, until December 8, 1927, when the cross-complaint was filed,
almost six years had elapsed, said court held that the defendant had
renounced its rights and had been satisfied with the sugar theretofore
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received from plaintiff. This opinion of the court below is based neither on
law nor on equity. That the defendant had not waived its rights to the
balance of the amount of sugar specified in said contracts, is shown by the
fact that it several times required the plaintiff, by means of letters, to deliver
said balance and that the latter kept on asking for extension of time by
reason of his critical financial situation. The defendant, taking this
circumstance into account, did not press its demands on the plaintiff, and
allowed some six years to elapse, until the plaintiff brought this action
against the defendant, praying that said contracts be declared usurious, and
that the defendant be sentenced to return the amount of P16,410, as the
sum collected in excess of plaintiff's debt.

For laches and neglect on the part of those, who, under the law are entitled
to require of others the fulfillment of their obligations, the statute of
limitations has been enacted, which provides that such rights prescribe after
a certain period of time, in order that it may serve alike as a punishment for
those who do not know how to look after their own interest, and as a source
of reassurance to those who may have rested in the belief that their creditors
had waived their rights, and also to insure economic stability and the
certainty of rights. In the case before us, there are written contracts by virtue
of which the parties incurred mutual obligations, and, according to section
43, No. 1 of the Code of Civil Procedure, the action which one of the parties
may bring against the other to require the fulfillment of his obligation, does
not prescribed until after ten years. Inasmuch as only six years, more or less,
have elapsed from the time the defendant last demanded of the plaintiff the
fulfillment of the obligation incurred by him by virtue of the contracts
Exhibits A and C until it filed its counterclaim herein, said action has not
prescribed, and the defendant is entitled to have a judicial pronouncement
thereon.

Now then, if the defendant is entitled to demand of the plaintiff the

fulfillment of his obligations under the terms of the contracts Exhibits A and
C, and if of the 500 piculs of sugar which the plaintiff bound himself to
deliver in pursuance of the contract Exhibit A, he only delivered 337 piculs
and 57 cates of sugar, thus incurring a shortage of 162 piculs and 44 cates;
and if out of the 800 piculs of sugar which he bound himself to deliver in
accordance with the contract Exhibit C, he only delivered 309 piculs and
77 cates, thereby defaulting with respect to 490 piculs and 23 cates, and as
he cannot now deliver said shortages since the period for delivery has
elapsed, what damages is the defendant entitled to?

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Under contract Exhibit A, the plaintiff had received from the defendant in
cash, goods, and other expenses the amount of P4,606.15. Having delivered
337 piculs and 57 cates of muscovado, the total value of which is P3,405.58,
he had still a balance of P1,199.87 to pay, and 162 piculs and 44 cates of
sugar to deliver.

Under contract Exhibit C, the plaintiff received from the defendant in cash,
goods, and other expenses the total sum of P6,862. Having delivered 319
piculs and 77 cates of muscovado, the full value whereof is P3,822.44, he
had still a balance of P3,031.54 to pay, and 490 piculs and 24 cates of sugar
to deliver.

In accordance with contracts Exhibits A and C, mentioned above, the plaintiff

bound himself to pay in cash, according to the current market price, for the
undelivered difference.

The minimum market price of muscovado in the month of May, 1920, was
P19 per picul. Fixing the average price of the sugar, which the plaintiff failed
to deliver to the defendant, according to the respective contracts, at P10
under the contract Exhibit A, and at P12 under the contract Exhibit C, the
difference between said respective contracts and the minimum market price
would be the loss sustained by the defendant through plaintiff's failure to
deliver the sugar at the proper time according to said contracts.

The undelivered quantity of 162 piculs and 44 cates of sugar under contract
Exhibit A, at P19 a picul, yields a total sum of P3,086.36, and at P10 a picul, a
total of P1,624.40, leaving a difference of P1,461.96. Inasmuch as under said
contract the plaintiff owned the defendant P1,199.87, this amount and the
difference just mentioned, give a total of P2,661.83, which is the aggregate
amount which the plaintiff should pay to the defendant under said contract
Exhibit A.

The undelivered quantity of 490 piculs and 24 cates of sugar under the
contract Exhibit C, at the minimum price of P19 yields a total of P9,314.56,
and at P12, a total of P5,882.88, leaving a difference of P3,431.68. Inasmuch
as the plaintiff owed a balance of P3,031.54, this amount and the difference
just mentioned, give a total of P6,463.22, which is the aggregate amount
which the plaintiff should pay to the defendant under the aforesaid contract
Exhibit C.

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With respect to interest upon the sums advanced by the defendant to the
plaintiff, and the attorney's fees, we do not believe it equitable to award
them, considering the circumstances of this case.

For the foregoing considerations, we are of opinion and so hold: (1) That the
sale of sugar to be delivered at a future definite time and for a fixed price, a
part of which is advanced by the purchaser to the vendor, is neither usurious
nor illegal even though said price should prove to be much less than the
market price on the date of delivery; (2) that the fact that the purchaser
does not bring suit against the vendor immediately upon the latter's default
in the delivery of the sugar sold, and that he allows six years to elapse, does
not deprive him of his right to bring such action on account of laches,
inasmuch as such action, arising from a written contract, does not prescribed
until after ten years from the time the cause of action arises. (section 43,
Code of Civil Procedure); and (3) that the purchaser is entitled to damages
sustained on account of the vendor's default, said damages consisting in the
difference between the price stipulated and the market price of the goods at
the time delivery thereof should have been made.

By virtue whereof, the judgment appealed from is reversed, and the

defendant is absolved from the complaint; and the plaintiff is ordered, by
virtue of the defendant's counterclaim to pay to the latter, under contract
Exhibit A, the sum of P2,661.83 with legal interest from the date of the filing
of the counterclaim until fully paid; and, under contract Exhibit C, the sum of
P6,463.22 with legal interest from the date of the filing of the counterclaim
until fully paid, with costs against the appellee. So ordered.

Digest

Doctrine:
Contracts of sale of agricultural products to be delivered in future, fixing a
selling price, are not usurious or illegal, even when the market price of the
products sold should turn out to be higher at the time of delivery.

Facts:
Plaintiff entered into a contract with defendant to sell the formers future
sugar crop harvest to the latter at a price depending on the class of the
sugar. The defendant bound itself to pay an advance amount of Php. 3,000
and the remainder shall be paid from time to time. The contract also stated

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that should the plaintiff fail to deliver, he shall pay the amount of the
undelivered portion to the defendant. The plaintiff also entered into a
mortgage agreement to secure his performance in the contract.

Issue:
Whether or not future products are invalid subjects in a contract of sale

Held:
No. The contracts of sale of agricultural products to be delivered in future,
fixing a selling price, are not usurious or illegal, even when the market price
of the products sold should turn out to be higher at the time of delivery.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-17165 September 26, 1962

EMMA R. GENIZA, AURELIO GENIZA, LORENZO RIVERA, CATALINA

CARREON RIVERA and ZACARIAS RIVERA, plaintiffs-appellants,
vs.
HENRY SY and ASIA MERCANTILE CORPORATION, defendants-
appellants.

Vicente J. Francisco for plaintiffs-appellants.

Dakila F. Castro for defendants-appellees.

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LABRADOR, J.:

The original decision rendered by Us in the above entitled case refers to a

first decision rendered by the Court of First Instance of Quezon City, Hon.
Nicasio Yatco, presiding, dated March 30, 1960. It so happened, however,
that the above decision was amended by said court on May 18, 1960, but
upon our study of the record of the case the amended decision was
overlooked. The original decision of the court of first instance refers to the
mortgage contract, Exhibit "A", while the amended decision refers to both
contracts of mortgage, Exhibits "A" and "E", executed on the same date. The
appeal was made against the amended decision and involves identical
questions on the foreclosure of the two mortgages above mentioned. In view
of the fact that We overlooked the amended decision, especially as regards
the second contract of mortgage, it has become necessary to render this
amended decision on both of the contracts of mortgage, already referred to.

On July 8, 1959, Catalina Carreon, with the consent of her husband Zacarias
Rivera, mortgaged to the defendant Asia Mercantile Corporation Lot No. 551
of the Piedad estate subdivision for P50,000.00, payable within a period of
thirty days with interest at the rate of 12% per annum. Paragraph 4 of the
contract provides that upon failure of the mortgagor to pay the indebtedness
and the interest when due, the mortgage shall become due and demandable
and without necessity of demand the mortgagee may immediately foreclose
the mortgage, judicially or extrajudicially, and for this purpose the mortgagor
appoints the mortgagee as his attorney-in-fact to sell the property and to
sign all documents and perform any act requisite and necessary to
accomplish said purpose. It was further expressly agreed that in case of
foreclosure the mortgagor binds himself to pay the mortgagee 30% of the
sum owing and unpaid as attorney's fees and liquidated damages, exclusive
of costs and expenses of the sale.

On the same date another mortgage was executed by plaintiffs Emma R.

Geniza, Aurelio Geniza and Lorenzo Rivera over two parcels of registered
land for the sum of P50,000.00, and with the same conditions as the
mortgage executed by the spouses Catalina Carreon and Zacarias Rivera.
Copies of the contracts of mortgage are annexed to the complaint in this
case as Annex "A" an Annex "B". The mortgagors in both mortgage contract
defaulted in the payment of their respective obligations. The mortgage
executed by Catalina Carreon Rivera an Zacarias Rivera was foreclosed
extra-judicially and the proceeds of the sale of the land amounting to
P68,567.57 was disposed of by the mortgagee as follows:

1. P50,000.00 as mortgage loan

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 2. P12,500.00 as the 12% interest on the loan as December 7, 1957
plus daily interest thereafter until the obligation is legally terminated.

3. P15,000.00 as Attorney's fees and liquidated

damages.1awphl.nt

4. The fees and expense of foreclosure and sale.

Plaintiffs brought this action to obtain a judicial declaration that the

stipulation in the deeds of mortgage fixing the amount of 30% as attorney's
fees and liquidated damages is excessive, unconscionable and iniquitous and
that the same should be reduced to P200.00. The complainants also asked
for P5,000.00 as attorney's fees for bringing this action. The defendants set
up the defense that the complaint states no cause of action; that the
mortgage executed by Emma R. Geniza and Aurelio Geniza has not yet been
foreclosed; that the mortgagors are estopped from alleging that the
stipulation regarding liquidated damages and attorney's fees is excessive
and unreasonable.

The case having been tried in the Court of First Instance of Quezon City, Hon.
Nicasio Yatco, presiding, rendered judgment dismissing the action of plaintiffs
Emma Geniza and Aurelio Geniza as premature, and ordering the defendant
Asia Mercantile Corporation to return to plaintiff Catalina C. Rivera the sum of
P13,567.57 which represents the excess of the total obligations of the
mortgagor based on the following computation:

Proceeds of Sale (TCT No. P68,567.5

7464) 7
Less:
P50,000.0
Amount of Loan
0
12% Interest 2,000.00
5% Attorney's 2,500.00
fees and
liquidated
damages
P55,000.0
Total Obligation
0

Excess Recoverable 13,567.57

A motion for reconsideration having been presented to the effect that the
parcels of land subject of the mortgage in Exhibit "A" were foreclosed on
March 22, 1960 and sold to the defendant Henry Sy for P51,965.80, the court

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on May 18, 1960 rendered an amended decision the dispositive parts of
which read as follows:

WHEREFORE, judgment is hereby rendered one in favor of the plaintiffs

and against the defendant by ordering the reduction of the stipulated
30% attorney's fees and liquidated damages to 5% in the mortgage
contracts entered into by them (Exhs. A and B); ordering the defendant
Henry Sy to return to plaintiffs Aurelio Geniza, Emma Geniza and
Lorenzo Rivera the sum of P5,277.30 representing the excess of the
public sales of said plaintiffs' mortgaged properties (TCT No. 39230,
TCT No. T-22028 and TCT No. 20384) in the total amount of P60,277.30
over the obligations of same plaintiffs in the amount of P55,000.00
based on the following computation:

Proceeds of Sales (TCT No.

39230, TCT No. 22028 and P60,277.3
TCT No. 20384) 0
Less:
P50,000.0
Amount of Loan
0
12% Interest 2,500.00
5% Attorney's 2,500.00
fees and
liquidated
damages
P55,000.0
Total Obligations
0
Excess Recoverable
5,277.30

ordering the defendant Asia Mercantile Corporation to return to plaintiff

Catalina C. Rivera the sum of P13,567.57 representing the excess of the
public sale of said plaintiff's mortgaged land (TCT No. 7464) in the amount of
P68,567.57 over the total obligations of same plaintiff in the amount of
P55,000.00 based also on the following computation:

Proceeds of Sale (TCT No. P68,167.5

7464 7
Less:
P50,000.0
Amount of Loan
0
12% Interest 2,500.00
5% Attorney's 2,500.00
fees and
liquidated

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 damages
P55,000.0
Total Obligations
0
Excess Recoverable
13,567.57

without pronouncement as to costs.

SO ORDERED.

It is against the above judgment that the plaintiff have prosecuted the
appeal to this Court, claiming that the lower court erred in not reducing the
liquidated damages and the attorney's fees to not more than P500.00 and in
not declaring the stipulation exacting attorney's fees and liquidated damages
as a usurious stipulation, by reason of which plaintiffs (appellants herein)
should be entitled to attorney's fees amounting to P5,000.00.

In reducing the 30% attorney's fees and liquidated damages to 5%, the judge
below appears to be fully justified. As the loans were for a period of thirty
days only, damages amounting to 30% of the loans of P50,000.00 each
would appear to be iniquitous and subject to reduction in accordance with
the provisions of Articles 1227 and 1229 of the Civil Code of the Philippines.
We do not agree with counsel for plaintiffs-appellants that the contract was a
usurious contract there being no allegation of fact that the mortgagee's
intention was to exact a usurious interest, nor evidence to that effect.
Neither is there any allegation or claim that the mortgage is contra bonos
mores, so that we may assume that he demanded the insertion of the
iniquitous clause or 30% damages to cover a usurious deal. Under these
circumstances we cannot sustain the claim of the plaintiffs-appellants that
the agreement was a usurious one; so that we hold that the trial court was
fully justified in considering the provision only as an iniquitous clause subject
to reduction.

We also find the reduced liquidated damages and attorney's fees to be fair
and we find no reason for disturbing the discretion of the court below in this
respect.

WHEREFORE, the judgment appealed from is hereby affirmed, with costs

against the plaintiffs-appellants.

Digest

4. GENIZA VS HENRY SY

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Facts:

On July 8, 1959, Catalina Carreon, with the consent of her husband Zacarias
Rivera, mortgaged to the defendant Asia Mercantile Corporation Lot No. 551
of the Piedad estate subdivision for P50,000.00, payable within a period of
thirty days with interest at the rate of 12% per annum.

Paragraph 4 of the contract provides that upon failure of the mortgagor to

pay the indebtedness and the interest when due, the mortgage shall become
due and demandable and without necessity of demand the mortgagee may
immediately foreclose the mortgage, judicially or extra judicially. It was
further expressly agreed that

in case of foreclosure the mortgagor binds himself to pay the mortgagee

30% of the sum owing and unpaid as attorney's fees and liquidated
damages, exclusive of costs and expenses of the sale.

On the same date another mortgage was executed by plaintiffs Emma R.

Geniza, Aurelio Geniza and Lorenzo Rivera overtwo parcels of registered land
for the sum of P50,000.00, and with the same conditions as the mortgage
executed by thespouses Catalina Carreon and Zacarias Rivera.

The mortgagors in both mortgage contract defaulted in the payment of

their respective obligations Plaintiffs brought this action to obtain a judicial
declaration that the stipulation in the deeds of mortgage fixing the amountof
30% as attorney's fees and liquidated damages is excessive, unconscionable
and iniquitous and that the same should be reduced to P200.00.

Trial court ruled did reduced the 30% attorneys fees and liquidation fees to
5% of the mortgage contract Plaintiffs further appealed that stating that the
court erred in not declaring the 30% attorneys fees and liquidateddamages
unconscionable and reducing it to P200.

Issue:

Whether or not the trial court erred in reducing the 30% to 5% rather than
declaring it as P200.00.

Ruling:

In reducing the 30% attorney's fees and liquidated damages to 5%, the judge
below appears to be fully justified.

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 As the loans were for a period of thirty days only, damages amounting to
30% of the loans of P50,000.00 each wouldappear to be Iniquitous and
subject to reduction in accordance with the provisions of Articles 1227 and
1229 of the CivilCode of the Philippines.

We do not agree with counsel for plaintiffs-appellants that the contract was
a usurious contract there being no allegation of fact that the mortgagee's
intention was to exact a usurious interest, nor evidence to that effect.

Neither is there any allegation or claim that the mortgage is contra

bonos mores, so that we may assume that he demanded the insertion of the
iniquitous clause or 30% damages to cover a usurious deal.

Under these circumstances we cannot sustain the claim of the plaintiffs-

appellants that the agreement was a usurious one; so that we hold that the
trial court was fully justified in considering the provision only as an iniquitous
clause subject to reduction.

We also find the reduced liquidated damages and attorney's fees to be fair
and we find no reason for disturbing the discretion of the court below in this
respect

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

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G.R. No. 141811 November 15, 2001

FIRST METRO INVESTMENT CORPORATION, petitioner,

vs.
ESTE DEL SOL MOUNTAIN RESERVE, INC., VALENTIN S. DAEZ, JR.,
MANUEL Q. SALIENTES, MA. ROCIO A. DE VEGA, ALEXANDER G.
ASUNCION, ALBERTO * M. LADORES, VICENTE M. DE VERA, JR., and
FELIPE B. SESE, respondents.

DE LEON, JR., J.:

Before us is a petition for review on certiorari of the Decision1 of the Court of

Appeals2 dated November 8, 1999 in CA-G.R. CV No. 53328 reversing the
Decision3 of the Regional Trial Court of Pasig City, Branch 159 dated June 2,
1994 in Civil Case No. 39224. Essentially, the Court of Appeals found and
declared that the fees provided for in the Underwriting and Consultancy
Agreements executed by and between petitioner First Metro Investment
Corp. (FMIC) and respondent Este del Sol Mountain Reserve, Inc. (Este del
Sol) simultaneously with the Loan Agreement dated January 31, 1978 were
mere subterfuges to camouflage the usurious interest charged by petitioner
FMIC.

The facts of the case are as follows:

It appears that on January 31, 1978, petitioner FMIC granted respondent Este
del Sol a loan of Seven Million Three Hundred Eighty-Five Thousand Five
Hundred Pesos (P7,385,500.00) to finance the construction and development
of the Este del Sol Mountain Reserve, a sports/resort complex project located
at Barrio Puray, Montalban, Rizal.4

Under the terms of the Loan Agreement, the proceeds of the loan were to be
released on staggered basis. Interest on the loan was pegged at sixteen
(16%) percent per annum based on the diminishing balance. The loan was
payable in thirty-six (36) equal and consecutive monthly amortizations to
commence at the beginning of the thirteenth month from the date of the first
release in accordance with the Schedule of Amortization. 5 In case of default,
an acceleration clause was, among others, provided and the amount due was
made subject to a twenty (20%) percent one-time penalty on the amount
due and such amount shall bear interest at the highest rate permitted by law
from the date of default until full payment thereof plus liquidated damages
at the rate of two (2%) percent per month compounded quarterly on the
unpaid balance and accrued interests together with all the penalties, fees,
expenses or charges thereon until the unpaid balance is fully paid, plus
attorney's fees equivalent to twenty-five (25%) percent of the sum sought to
be recovered, which in no case shall be less than Twenty Thousand Pesos
(P20,000.00) if the services of a lawyer were hired.6

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In accordance with the terms of the Loan Agreement, respondent Este del Sol
executed several documents7 as security for payment, among them, (a) a
Real Estate Mortgage dated January 31, 1978 over two (2) parcels of land
being utilized as the site of its development project with an area of
approximately One Million Twenty-Eight Thousand and Twenty-Nine
(1,028,029) square meters and particularly described in TCT Nos. N-24332
and N-24356 of the Register of Deeds of Rizal, inclusive of all improvements,
as well as all the machineries, equipment, furnishings and furnitures existing
thereon; and (b) individual Continuing Suretyship agreements by co-
respondents Valentin S. Daez, Jr., Manuel Q. Salientes, Ma. Rocio A. De Vega,
Alexander G. Asuncion, Alberto M. Ladores, Vicente M. De Vera, Jr. and Felipe
B. Sese, all dated February 2, 1978, to guarantee the payment of all the
obligations of respondent Este del Sol up to the aggregate sum of Seven
Million Five Hundred Thousand Pesos (P7,500,000.00) each.8

Respondent Este del Sol also executed, as provided for by the Loan
Agreement, an Underwriting Agreement on January 31, 1978 whereby
petitioner FMIC shall underwrite on a best-efforts basis the public offering of
One Hundred Twenty Thousand (120,000) common shares of respondent Este
del Sol's capital stock for a one-time underwriting fee of Two Hundred
Thousand Pesos (P200,000.00). In addition to the underwriting fee, the
Underwriting Agreement provided that for supervising the public offering of
the shares, respondent Este del Sol shall pay petitioner FMIC an annual
supervision fee of Two Hundred Thousand Pesos (P200,000.00) per annum for
a period of four (4) consecutive years. The Underwriting Agreement also
stipulated for the payment by respondent Este del Sol to petitioner FMIC a
consultancy fee of Three Hundred Thirty-Two Thousand Five Hundred Pesos
(P332,500.00) per annum for a period of four (4) consecutive years.
Simultaneous with the execution of and in accordance with the terms of the
Underwriting Agreement, a Consultancy Agreement was also executed on
January 31, 1978 whereby respondent Este del Sol engaged the services of
petitioner FMIC for a fee as consultant to render general consultancy
services.9

In three (3) letters all dated February 22, 1978 petitioner billed respondent
Este del Sol for the amounts of [a] Two Hundred Thousand Pesos
(P200,000.00) as the underwriting fee of petitioner FMIC in connection with
the public offering of the common shares of stock of respondent Este del Sol;
[b] One Million Three Hundred Thirty Thousand Pesos (P1,330,000.00) as
consultancy fee for a period of four (4) years; and [c] Two Hundred Thousand
Pesos (P200,000.00) as supervision fee for the year beginning February,
1978, in accordance to the Underwriting Agreement.10 The said amounts of
fees were deemed paid by respondent Este del Sol to petitioner FMIC which
deducted the same from the first release of the loan.

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Since respondent Este del Sol failed to meet the schedule of repayment in
accordance with a revised Schedule of Amortization, it appeared to have
incurred a total obligation of Twelve Million Six Hundred Seventy-Nine
Thousand Six Hundred Thirty Pesos and Ninety-Eight Centavos
(P12,679,630.98) per the petitioner's Statement of Account dated June 23,
1980,11 to wit:

STATEMENT OF ACCOUNT OF ESTE DEL SOL MOUNTAIN

RESERVE, INC.
AS OF JUNE 23, 1980

PARTICULARS AMOUNT

Total amount due as of 11-22-78 per revised P7,999,631.4

amortization schedule dated 1-3-78 2

Interest on P7,999,631.42 @ 16% p.a. from

11-22-78 to 2-22-79 (92 days) 327,096.04

Balance 8,326,727.46

One time penalty of 20% of the entire unpaid

obligations under Section 6.02 (ii) of Loan
Agreement 1,665,345.49

Past due interest under Section 6.02 (iii) of

loan Agreement:
@ 19% p.a. from 2-22-79 to 11-30-79 (281
days)
@ 21% p.a. from 11-30-79 to 6-23-80 (206 1,481,879.93
days) 1,200,714.10

Other charges publication of extra judicial

foreclosure of REM made on 5-23-80 & 6-6-80 4,964.00

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 Total Amount Due and Collectible as of June P12,679,630.
23, 1980 98

Accordingly, petitioner FMIC caused the extrajudicial foreclosure of the real

estate mortgage on June 23, 1980.12At the public auction, petitioner FMIC
was the highest bidder of the mortgaged properties for Nine Million Pesos
(P9,000,000.00). The total amount of Three Million One Hundred Eighty-Eight
Thousand Six Hundred Thirty Pesos and Seventy-Five Centavos
(P3,188,630.75) was deducted therefrom, that is, for the publication fee for
the publication of the Sheriff's Notice of Sale, Four Thousand Nine Hundred
Sixty-Four Pesos (P4,964.00); for Sheriff's fees for conducting the foreclosure
proceedings, Fifteen Thousand Pesos (P15,000.00); and for Attorney's fees,
Three Million One Hundred Sixty-Eight Thousand Six Hundred Sixty-Six Pesos
and Seventy-Five Centavos (P3,168,666.75). The remaining balance of Five
Million Eight Hundred Eleven Thousand Three Hundred Sixty-Nine Pesos and
Twenty-Five Centavos (P5,811,369.25) was applied to interests and penalty
charges and partly against the principal, due as of June 23, 1980, thereby
leaving a balance of Six Million Eight Hundred Sixty-Three Thousand Two
Hundred Ninety-Seven Pesos and Seventy-Three Centavos (P6,863,297.73)
on the principal amount of the loan as of June 23, 1980.13

Failing to secure from the individual respondents, as sureties of the loan of

respondent Este del Sol by virtue of their continuing surety agreements, the
payment of the alleged deficiency balance, despite individual demands sent
to each of them,14 petitioner instituted on November 11, 1980 the instant
collection suit15 against the respondents to collect the alleged deficiency
balance of Six Million Eight Hundred Sixty-Three Thousand Two Hundred
Ninety-Seven Pesos and Seventy-Three Centavos (P6,863,297.73) plus
interest thereon at twenty-one (21%) percent per annum from June 24, 1980
until fully paid, and twenty-five (25%) percent thereof as and for attorney's
fees and costs.

In their Answer, the respondents sought the dismissal of the case and set up
several special and affirmative defenses, foremost of which is that the
Underwriting and Consultancy Agreements executed simultaneously with and
as integral parts of the Loan Agreement and which provided for the payment
of Underwriting, Consultancy and Supervision fees were in reality
subterfuges resorted to by petitioner FMIC and imposed upon respondent
Este del Sol to camouflage the usurious interest being charged by petitioner
FMIC.16

The petitioner FMIC presented as its witnesses during the trial: Cesar
Valenzuela, its former Senior Vice-President, Felipe Neri, its Vice-President for

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Marketing, and Dennis Aragon, an Account Manager of its Account
Management Group, as well as documentary evidence. On the other hand,
co-respondents Vicente M. De Vera, Jr. and Valentin S. Daez, Jr., and Perfecto
Doroja, former Senior Manager and Assistant Vice-President of FMIC, testified
for the respondents.

After the trial, the trial court rendered its decision in favor of petitioner FMIC,
the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of plaintiff and

against defendants, ordering defendants jointly and severally to pay to
plaintiff the amount of P6,863,297.73 plus 21% interest per annum,
from June 24, 1980, until the entire amount is fully paid, plus the
amount equivalent to 25% of the total amount due, as attorney's fees,
plus costs of suit.

Defendants' counterclaims are dismissed, for lack of merit.

Finding the decision of the trial court unacceptable, respondents interposed

an appeal to the Court of Appeals. On November 8, 1999, the appellate court
reversed the challenged decision of the trial court. The appellate court found
and declared that the fees provided for in the Underwriting and Consultancy
Agreements were mere subterfuges to camouflage the excessively usurious
interest charged by the petitioner FMIC on the loan of respondent Este del
Sol; and that the stipulated penalties, liquidated damages and attorney's
fees were "excessive, iniquitous, unconscionable and revolting to the
conscience," and declared that in lieu thereof, the stipulated one time twenty
(20%) percent penalty on the amount due and ten (10%) percent of the
amount due as attorney's fees would be reasonable and suffice to
compensate petitioner FMIC for those items. Thus, the appellate court
dismissed the complaint as against the individual respondents sureties and
ordered petitioner FMIC to pay or reimburse respondent Este del Sol the
amount of Nine Hundred Seventy-One Thousand Pesos (P971,000.00)
representing the difference between what is due to the petitioner and what is
due to respondent Este del Sol, based on the following computation:17

A: DUE TO THE [PETITIONER]

P7,382,500.0
Principal of Loan 0

Add: 20% one-time 1,476,500.00 P9,759,000.0

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 Penalty
Attorney's fees 900,000.00 0

Less: Proceeds of
foreclosure Sale 9,000,000.00

Deficiency P759,000.00

B. DUE TO [RESPONDENT ESTE DEL SOL]

Return of usurious interest

in the form of: P 200,000.00
Underwriting fee 200,000.00
Supervision fee
Consultancy fee 1,330,000.00

P1,730,000.0
Total amount due Este 0

The appellee is, therefore, obliged to return to the appellant Este del
Sol the difference of P971,000.00 or (P1,730,000.00 less P759,000.00).

Petitioner moved for reconsideration of the appellate court's adverse

decision. However, this was denied in a Resolution18 dated February 9, 2000
of the appellate court.

Hence, the instant petition anchored on the following assigned errors:19

THE APPELLATE COURT HAS DECIDED QUESTIONS OF SUBSTANCE IN A WAY

NOT IN ACCORD WITH LAW AND WITH APPLICABLE DECISIONS OF THIS
HONORABLE COURT WHEN IT:

a] HELD THAT ALLEGEDLY THE UNDERWRITING AND CONSULTANCY

AGREEMENTS SHOULD NOT BE CONSIDERED SEPARATE AND DISTINCT
FROM THE LOAN AGREEMENT, AND INSTEAD, THEY SHOULD BE
CONSIDERED AS A SINGLE CONTRACT.

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 b] HELD THAT THE UNDERWRITING AND CONSULTANCY AGREEMENTS
ARE "MERE SUBTERFUGES TO CAMOUFLAGE THE USURIOUS INTEREST
CHARGED" BY THE PETITIONER.

c] REFUSED TO CONSIDER THE TESTIMONIES OF PETITIONER'S

WITNESSES ON THE SERVICES PERFORMED BY PETITIONER.

d] REFUSED TO CONSIDER THE FACT [i] THAT RESPONDENTS HAD

WAIVED THEIR RIGHT TO SEEK RECOVERY OF THE AMOUNTS THEY PAID
TO PETITIONER, AND [ii] THAT RESPONDENTS HAD ADMITTED THE
VALIDITY OF THE UNDERWRITING AND CONSULTANCY AGREEMENTS.

e] MADE AN ERRONEOUS COMPUTATION ON SUPPOSEDLY "WHAT IS

DUE TO EACH PARTY AFTER THE FORECLOSURE SALE", AS SHOWN IN
PP. 34-35 OF THE ASSAILED DECISION, EVEN GRANTING JUST FOR THE
SAKE OF ARGUMENT THAT THE APPELLATE COURT WAS CORRECT IN
STIGMATIZING [i] THE PROVISIONS OF THE LOAN AGREEMENT THAT
REFER TO STIPULATED PENALTIES, LIQUIDATED DAMAGES AND
ATTORNEY'S FEES AS SUPPOSEDLY "EXCESSIVE, INIQUITOUS AND
UNCONSCIONABLE AND REVOLTING TO THE CONSCIENCE" AND [ii] THE
UNDERWRITING, SUPERVISION AND CONSULTANCY SERVICES
AGREEMENT AS SUPPOSEDLY "MERE SUBTERFUGES TO CAMOUFLAGE
THE USURIOUS INTEREST CHARGED" UPON THE RESPONDENT ESTE BY
PETITIONER.

f] REFUSED TO CONSIDER THE FACT THAT RESPONDENT ESTE, AND

THUS THE INDIVIDUAL RESPONDENTS, ARE STILL OBLIGATED TO THE
PETITIONER.

Petitioner essentially assails the factual findings and conclusion of the

appellate court that the Underwriting and Consultancy Agreements were
executed to conceal a usurious loan. Inquiry upon the veracity of the
appellate court's factual findings and conclusion is not the function of this
Court for the Supreme Court is not a trier of facts. Only when the factual
findings of the trial court and the appellate court are opposed to each other
does this Court exercise its discretion to re-examine the factual findings of
both courts and weigh which, after considering the record of the case, is
more in accord with law and justice.

After a careful and thorough review of the record including the evidence
adduced, we find no reason to depart from the findings of the appellate
court.

First, there is no merit to petitioner FMIC's contention that Central Bank

Circular No. 905 which took effect on January 1, 1983 and removed the
ceiling on interest rates for secured and unsecured loans, regardless of

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maturity, should be applied retroactively to a contract executed on January
31, 1978, as in the case at bar, that is, while the Usury Law was in full force
and effect. It is an elementary rule of contracts that the laws, in force at the
time the contract was made and entered into, govern it.20 More significantly,
Central Bank Circular No. 905 did not repeal nor in any way amend the Usury
Law but simply suspended the latter's effectivity.21 The illegality of usury is
wholly the creature of legislation. A Central Bank Circular cannot repeal a
law. Only a law can repeal another law.22 Thus, retroactive application of a
Central Bank Circular cannot, and should not, be presumed.23

Second, when a contract between two (2) parties is evidenced by a written

instrument, such document is ordinarily the best evidence of the terms of the
contract. Courts only need to rely on the face of written contracts to
determine the intention of the parties. However, this rule is not without
exception.24 The form of the contract is not conclusive for the law will not
permit a usurious loan to hide itself behind a legal form. Parol evidence is
admissible to show that a written document though legal in form was in fact
a device to cover usury. If from a construction of the whole transaction it
becomes apparent that there exists a corrupt intention to violate the Usury
Law, the courts should and will permit no scheme, however ingenious, to
becloud the crime of usury.25

In the instant case, several facts and circumstances taken altogether show
that the Underwriting and Consultancy Agreements were simply cloaks or
devices to cover an illegal scheme employed by petitioner FMIC to conceal
and collect excessively usurious interest, and these are:

a) The Underwriting and Consultancy Agreements are both dated January 31,
1978 which is the same date of the Loan Agreement.26 Furthermore, under
the Underwriting Agreement payment of the supervision and consultancy
fees was set for a period of four (4) years27 to coincide ultimately with the
term of the Loan Agreement.28 This fact means that all the said agreements
which were executed simultaneously were set to mature or shall remain
effective during the same period of time.

b) The Loan Agreement dated January 31, 1978 stipulated for the execution
and delivery of an underwriting agreement29 and specifically mentioned that
such underwriting agreement is a condition precedent30 for petitioner FMIC to
extend the loan to respondent Este del Sol, indicating and as admitted by
petitioner FMIC's employees,31that such Underwriting Agreement is "part and
parcel of the Loan Agreement."32

c) Respondent Este del Sol was billed by petitioner on February 28, 1978 One
Million Three Hundred Thirty Thousand Pesos (P1,330,000.00) 33 as
consultancy fee despite the clear provision in the Consultancy Agreement
that the said agreement is for Three Hundred Thirty-Two Thousand Five

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Hundred Pesos (P332,500.00) per annum for four (4) years and that only the
first year consultancy fee shall be due upon signing of the said consultancy
agreement.34

d) The Underwriting, Supervision and Consultancy fees in the amounts of Two

Hundred Thousand Pesos (P200,000.00), and one Million Three Hundred
Thirty Thousand Pesos (P1,330,000.00), respectively, were billed by
petitioner to respondent Este del Sol on February 22, 1978,35 that is, on the
same occasion of the first partial release of the loan in the amount of Two
Million Three Hundred Eighty-Two Thousand Five Hundred Pesos
(P2,382,500.00).36 It is from this first partial release of the loan that the said
corresponding bills for Underwriting, Supervision and Constantly fees were
conducted and apparently paid, thus, reverting back to petitioner FMIC the
total amount of One Million Seven Hundred Thirty Thousand Pesos
(P1,730,000.00) as part of the amount loaned to respondent Este del Sol.37

e) Petitioner FMIC was in fact unable to organize an underwriting/selling

syndicate to sell any share of stock of respondent Este del Sol and much less
to supervise such a syndicate, thus failing to comply with its obligation under
the Underwriting Agreement.38 Besides, there was really no need for an
Underwriting Agreement since respondent Este del Sol had its own licensed
marketing arm to sell its shares and all its shares have been sold through its
marketing arm.39

f) Petitioner FMIC failed to comply with its obligation under the Consultancy
Agreement,40 aside from the fact that there was no need for a Consultancy
Agreement, since respondent Este del Sol's officers appeared to be more
competent to be consultants in the development of the projected
sports/resort complex.41

All the foregoing established facts and circumstances clearly belie the
contention of petitioner FMIC that the Loan, Underwriting and Consultancy
Agreements are separate and independent transactions. The Underwriting
and Consultancy Agreements which were executed and delivered
contemporaneously with the Loan Agreement on January 31, 1978 were
exacted by petitioner FMIC as essential conditions for the grant of the loan.
An apparently lawful loan is usurious when it is intended that additional
compensation for the loan be disguised by an ostensibly unrelated contract
providing for payment by the borrower for the lender's services which are of
little value or which are not in fact to be rendered, such as in the instant
case.42 In this connection, Article 1957 of the New Civil Code clearly provides
that:

Art. 1957. Contracts and stipulations, under any cloak or device

whatever, intended to circumvent the laws against usury shall be void.
The borrower may recover in accordance with the laws on usury.

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In usurious loans, the entire obligation does not become void because of an
agreement for usurious interest; the unpaid principal debt still stands and
remains valid but the stipulation as to the usurious interest is void,
consequently, the debt is to be considered without stipulation as to the
interest.43 The reason for this rule was adequately explained in the case
of Angel Jose Warehousing Co., Inc. v. Chelda Enterprises44 where this Court
held:

In simple loan with stipulation of usurious interest, the prestation of the

debtor to pay the principal debt, which is the cause of the contract
(Article 1350, Civil Code), is not illegal. The illegality lies only as to the
prestation to pay the stipulated interest; hence, being separable, the
latter only should be deemed void, since it is the only one that is
illegal.

Thus, the nullity of the stipulation on the usurious interest does not affect the
lender's right to receive back the principal amount of the loan. With respect
to the debtor, the amount paid as interest under a usurious agreement is
recoverable by him, since the payment is deemed to have been made under
restraint, rather than voluntarily.45

This Court agrees with the factual findings and conclusion of the appellate
court, to wit:

We find the stipulated penalties, liquidated damages and attorney's

fees, excessive, iniquitous and unconscionable and revolting to the
conscience as they hardly allow the borrower any chance of survival in
case of default. And true enough, ESTE folded up when the appellee
extrajudicially foreclosed on its (ESTE's) development project and
literally closed its offices as both the appellee and ESTE were at the
time holding office in the same building. Accordingly, we hold that 20%
penalty on the amount due and 10% of the proceeds of the foreclosure
sale as attorney's fees would suffice to compensate the appellee,
especially so because there is no clear showing that the appellee hired
the services of counsel to effect the foreclosure, it engaged counsel
only when it was seeking the recovery of the alleged deficiency.

Attorney's fees as provided in penal clauses are in the nature of liquidated

damages. So long as such stipulation does not contravene any law, morals,
or public order, it is binding upon the parties. Nonetheless, courts are
empowered to reduce the amount of attorney's fees if the same is "iniquitous
or unconscionable."46 Articles 1229 and 2227 of the New Civil Code provide
that:

Art. 1229. The judge shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied with by the

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 debtor. Even if there has been no performance, the penalty may also
be reduced by the courts if it is iniquitous or unconscionable.

Art. 2227. Liquidated damages, whether intended as an indemnity or a

penalty, shall be equitably reduced if they are iniquitous or
unconscionable.

In the case at bar, the amount of Three Million One Hundred Eighty-Eight
Thousand Six Hundred Thirty Pesos and Seventy-Five Centavos
(93,188,630.75) for the stipulated attorney's fees equivalent to twenty-five
(25%) percent of the alleged amount due, as of the date of the auction sale
on June 23, 1980, is manifestly exorbitant and unconscionable. Accordingly,
we agree with the appellate court that a reduction of the attorney's fees to
ten (10%) percent is appropriate and reasonable under the facts and
circumstances of this case.

Lastly, there is no merit to petitioner FMIC's contention that the appellate

court erred in awarding an amount allegedly not asked nor prayed for by
respondents. Whether the exact amount of the relief was not expressly
prayed for is of no moment for the reason that the relief was plainly
warranted by the allegations of the respondents as well as by the facts as
found by the appellate court. A party is entitled to as much relief as the facts
may warrant 47

In view of all the foregoing, the Court is convinced that the appellate court
committed no reversible error in its challenged Decision.

WHEREFORE, the instant petition is hereby DENIED, and the assailed

Decision of the Court of Appeals is AFFIRMED. Costs against petitioner.

SO ORDERED.

Digest

FACTS
FMIC granted Este del Sol a loan to finance a sports/resort complex in
Montalban, Rizal. Under the agreement, the interest was 16% pa based on
the diminishing balance. In case of default, an acceleration clause was
provided and the amount due is subject to 20% one-time penalty on the
amount due and such amount shall bear interest at the highest rate
permitted by law. respondent executed a REM, individual continuing
suretyship and an underwriting agreement whereby FMIC shall underwrite
the public offering of one P120,000 common shares of respondents capital
stock for one-time underwriting fee of P200,000. For failure to pay its
obligation, FMIC caused the foreclosure of the REM. At the public auction, FIC
was the highest bidder. Petitioner filed to collect for alleged deficiency

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balance against respondents since it failed to collect from the sureties, plus
interest at 21% pa. the trial court ruled in favor of FMIC. Respondents
appealed before the CA which held that the fees provided for in the
Underwriting and Consultacy Agreements were mere subterfuges to
camouflage the excessively usurious interest charged. The CA ordered FMIC
to reimburse petitioner representing what is ue to petitioner and what is due
to respondent.

ISSUE
Whether or not the interests are lawful

HELD
No. an apparently lawful loan is usurious when it is intended that
additional compensation for the loan be disguised by an ostensibly unrelated
contract for the payment by the borrower for the lenders services which re
of little value or which are not in fact to be rendered. Article 1957 clearly
provides: contracts and stipulations, under any cloak or device whatever,
intended to circumvent the law agaistn usury shall be void. The borrower
may recover in accordance with the laws on usury.

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 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 125944 June 29, 2001

SPOUSES DANILO SOLANGON and URSULA SOLANGON, petitioners,

vs.
JOSE AVELINO SALAZAR, respondents.

SANDOVAL-GUTIERREZ, J.:

Petition for review on certiorari under Rule 45 of the 1997 Rules of Civil
Procedure, as amended, of the decision of the Court of Appeals in CA-G.R. CV
No. 37899, affirming the decision of the Regional Trial Court, Branch 16,
Malolos, Bulacan, in Civil Case No. 375-M-91, "Spouses Danilo and Ursula
Solangon vs. Jose Avelino Salazar" for annulment of mortgage. The
dispositive portion of the RTC decision reads:

"WHEREFORE, judgment is hereby rendered against the plaintiffs in

favor of the defendant Salazar, as follows:

1. Ordering the dismissal of the complaint;

2. Ordering the dissolution of the preliminary injunction issued on July

8, 1991;

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 3. Ordering the plaintiffs to pay the defendant the amount of
P10,000.00 by way of attorneys fees; and

4. To pay the costs.

SO ORDERED."1

The facts as summarized by the Court of Appeals in its decision being

challenged are:

"On August 22, 1986, the plaintiffs-appellants executed a deed or real

estate mortgage in which they mortgaged a parcel of land situated in
Sta. Maria, Bulacan, in favor of the defendant-appellee, to secure
payment of a loan of P60,000.00 payable within a period of four (4)
months, with interest thereon at the rate of 6% per month (Exh. "B").

On May 27, 1987, the plaintiffs-appellants executed a deed of real

estate mortgage in which they mortgaged the same parcel of land to
the defendant-appellee, to secure payment of a loan of P136,512.00,
payable within a period of one (1) year, with interest thereon at the
legal rate (Exh. "1").

On December 29, 1990, the plaintiffs-appellants executed a deed of

real estate mortgage in which they mortgaged the same parcel of land
in favor of defendant-appellee, to secure payment of a loan in the
amount of P230,000.00 payable within a period of four (4) months,
with interest thereon at the legal rate (Exh. "2", Exh. "C").

This action was initiated by the plaintiffs-appellants to prevent the

foreclosure of the mortgaged property. They alleged that they obtained
only one loan form the defendant-appellee, and that was for the
amount of P60,000.00, the payment of which was secured by the first
of the above-mentioned mortgages. The subsequent mortgages were
merely continuations of the first one, which is null and void because it
provided for unconscionable rate of interest. Moreover, the defendant-
appellee assured them that he will not foreclose the mortgage as long
as they pay the stipulated interest upon maturity or within a
reasonable time thereafter. They have already paid the defendant-
appellee P78,000.00 and tendered P47,000.00 more, but the latter has
initiated foreclosure proceedings for their alleged failure to pay the
loan P230,000.00 plus interest.1wphi1.nt

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 On the other hand, the defendant-appellee Jose Avelino Salazar
claimed that the above-described mortgages were executed to secure
three separate loans of P60,000.00 P136,512.00 and P230,000.00, and
that the first two loans were paid, but the last one was not. He denied
having represented that he will not foreclose the mortgage as long as
the plaintiffs-appellants pay interest."

In their petition, spouses Danilo and Ursula Solangon ascribe to the Court of
Appeals the following errors:

1. The Court of Appeals erred in holding that three (3) mortgage

contracts were executed by the parties instead of one (1);

2. The Court of Appeals erred in ruling that a loan obligation secured by

a real estate mortgage with an interest of 72% per cent per annum or
6% per month is not unconscionable;

4. The Court of Appeals erred in holding that the loan of P136,512.00

HAS NOT BEEN PAID when the mortgagee himself states in his ANSWER
that the same was already paid; and

5. The Court of Appeals erred in not resolving the SPECIFIC ISSUES

raised by the appellants.

In his comment, respondent Jose Avelino Salazar avers that the petition
should not be given due course as it raises questions of facts which are not
allowed in a petition for review on certiorari.

We find no merit in the instant petition.

The core of the present controversy is the validity of the third contract of
mortgage which was foreclosed.

Petitioners contend that they obtained from respondent Avelino Salazar only
one (1) loan in the amount of P60,000.00 secured by the first mortgage of
August 1986. According to them, they signed the third mortgage contract in
view of respondents assurance that the same will not be foreclosed. The trial
court, which is in the best position to evaluate the evidence presented before
it, did not give credence to petitioners corroborated testimony and ruled:

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 "The testimony is improbable. The real estate mortgage was signed not
only by Ursula Solangon but also by her husband including the
Promissory Note appended to it. Signing a document without knowing
its contents is contrary to common experience. The uncorroborated
testimony of Ursula Solangon cannot be given weight."2

Petitioners likewise insist that, contrary to the finding of the Court of appeals,
they had paid the amount of P136,512.00, or the second loan. In fact, such
payment was confirmed by respondent Salazar in his answer to their
complaint.

It is readily apparent that petitioners are raising issues of fact in this petition.
In a petition for review under Rule 45 of the 1997 Rules of Civil Procedure, as
amended, only questions of law may be raised and they must be distinctly
set forth. The settled rule is that findings of fact of the lower courts
(including the Court of Appeals) are final and conclusive and will not be
reviewed on appeal except: (1) when the conclusion is a finding grounded
entirely on speculation, surmises or conjectures; (2) when the inference
made is manifestly mistaken, absurd or impossible; (3) when there is grave
abuse of discretion; (4) when the judgment is based on a misapprehension of
facts; (5) when the findings of facts are conflicting; (6) when the Court of
Appeals, in making its findings, went beyond the issues of the case and such
findings are contrary to the admission of both appellant and appellee; (6)
when the findings of the Court of Appeals are contrary to those of the trial
court; and (7) when the findings of fact are conclusions without citation of
specific evidence on which they are based.3

None of these instances are extant in the present case.

Parenthetically, petitioners are questioning the rate of interest involved here.

They maintain that the Court of Appeals erred in decreeing that the
stipulated interest rate of 72% per annum or 6% per month is not
unconscionable.

The Court of Appeals, in sustaining the stipulated interest rate, ratiocinated

that since the Usury Law had been repealed by Central Bank Circular No. 905
there is no more maximum rate of interest and the rate will just depend on
the mutual agreement of the parties. Obviously, this was in consonance with
our ruling in Liam Law v. Olympic Sawmill Co.4

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The factual circumstances of the present case require the application of a
different jurisprudential instruction. While the Usury Law ceiling on interest
rates was lifted by C.B. Circular No. 905, nothing in the said circular grants
lenders carte blanche authority to raise interest rates to levels which will
either enslave their borrowers or lead to a hemorrhaging of their
assets.5 In Medel v. Court of Appeals,6 this court had the occasion to rule on
this question - whether or not the stipulated rate of interest at 5.5% per
month on a loan amounting to P500,000.00 is usurious. While decreeing that
the aforementioned interest was not usurious, this Court held that the same
must be equitably reduced for
being iniquitous, unconscionable and exorbitant, thus:

"We agree with petitioners that the stipulated rate of interest

at 5.5% per month on the P500,000.00 loan is excessive,
iniquitous, unconscionable and exorbitant. However, we can not
consider the rate usurious because this Court has consistently held
that Circular No. 905 of the Central Bank, adopted on December 22,
1982, has expressly removed the interest ceilings prescribed by the
Usury Law and that the Usury Law is now legally inexistent.

In Security Bank and Trust Company vs. Regional Trial Court of Makati,
Branch 61 the Court held that CB Circular No. 905 did not repeal nor in
any way amend the Usury Law but simply suspended the latters
effectivity. Indeed, we have held that a Central Bank Circular can not
repeal a law. Only a law can repeal another law. In the recent case of
Florendo v. Court of Appeals, the Court reiterated the ruling that by
virtue of CB Circular 905, the Usury Law has been rendered
ineffective. Usury Law has been legally non-existent in our
jurisdiction. Interest can now be charged as lender and borrower may
agree upon.

Nevertheless, we find the interest at 5.5 % per month, or 66%

per annum, stipulated upon by the parties in the promissory
note iniquitous or unconscionable, and hence, contrary to
morals (contra bonos mores), if not against the law. The
stipulation is void. The courts shall reduce equitably liquidated
damages, whether intended as an indemnity or a penalty if
they are iniquitous or unconscionable." (Emphasis supplied)

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In the case at bench, petitioners stand on a worse situation. They are
required to pay the stipulated interest rate of 6% per month or 72% per
annum which is definitely outrageous and inordinate. Surely, it is more
consonant with justice that the said interest rate be reduced equitably. An
interest of 12% per annum is deemed fair and reasonable.

WHEREFORE, the appealed decision of the Court of Appeals

is AFFIRMED subject to the MODIFICATION that the interest rate of 72%
per annum is ordered reduced to 12 % per annum.

SO ORDERED.

Digest

Facts:

Petitioner-spouses executed 3 real estate mortgages on a parcel of land

situated in Bulacan, in favor of the same Respondent Salazar to secure
payment of loans of P60 K, P136 K and P230 K payable within 4 months, 1
year, and 4 months in that order, with 6% monthly interest on the first
loan, and legal interests on the others.

This action was initiated by the Petitioner-spouses to prevent the

foreclosure of the mortgaged property.

They alleged that they obtained only one loan from the Respondent which
was the P60 K secured by the first mortgage. Also, Petitioner-spouses
opined that the 6% monthly interest was unconscionable.

The subsequent mortgages were merely continuations of the first one,

which is null and void.

Moreover, the Respondent assured them that he will not foreclose the
mortgage as long as they pay the stipulated interest upon maturity or
within a reasonable time thereafter. Petitioner-spouses substantially paid
the loans with interest but were unable to pay it in full.

On the other hand, the Respondent claimed that the mortgages were
executed to secure 3 separate loans of and that the first two loans were
paid, but the last one was not.

He denied having represented that he will not foreclose the mortgage as

long as the Petitioner-spouses pay interest.

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 Lower courts ruled in favour of Respondent. Thus, this petition.

Issue:

Whether or not the 6% monthly interest is unconscionable?

Ruling:

Yes. The SC ruled that this is unconscionable.

While the Usury Law ceiling on interest rates was lifted by C.B. Circular
No. 905, nothing in the said circular grants lenders carte blanche
authority to raise interest rates to levels which will either enslave their
borrowers or lead to a hemorrhaging of their assets.

In Medel v. Court of Appeals, the Court decreed that the 5.5% interest or
66% per annum was not usurious but held that the same must be
equitably reduced for being iniquitous, unconscionable and exorbitant ,
and hence, contrary to morals (contra bonos mores), if not against the
law.

In the case at bench, Petitioner-spouses stand on a worse situation. They

are required to pay the stipulated interest rate of 6% per month or 72%
per annum which is definitely outrageous and inordinate.

Hence, the interest rate must be reduced equitably. An interest of 12%

per annum is deemed fair and reasonable.

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 TABLE OF CONTENTS

G.R. No. L-19190 November 29, 1922

THE PEOPLE OF THE PHILIPPINE ISLANDS, ,

vs.
VENANCIO CONCEPCION, .
------------------------------------------------------------------1

G.R. No. L-16106 December 30, 1961

REPUBLIC OF THE PHILIPPINES, ,

vs.
PHILIPPINE NATIONAL BANK, ET AL., ,

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THE FIRST NATIONAL CITY BANK OF NEW YORK, .
---------------------------------7

G.R. No. L-24968 April 27, 1972

SAURA IMPORT and EXPORT CO., INC., ,

vs.
DEVELOPMENT BANK OF THE PHILIPPINES, .
---------------------------------------11

G.R. No. L-49101 October 24, 1983

RAOUL S.V. BONNEVIE and HONESTO V. BONNEVIE, ,
vs.
THE HONORABLE COURT OF APPEALS and THE PHILIPPINE BANK OF
COMMERCE, .
-----------------------------------------------------------------------------------21

G.R. No. L-45710 October 3, 1985

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CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR
ANTONIO T. CASTRO, JR. OF THE DEPARTMENT OF COMMERCIAL AND
SAVINGS BANK, in his capacity as statutory receiver of Island
Savings Bank, ,
vs.
THE HONORABLE COURT OF APPEALS and SULPICIO M.
TOLENTINO,---------31

G.R. No. L-17474 October 25, 1962

REPUBLIC OF THE PHILIPPINES, ,
vs.
JOSE V. BAGTAS, ,
FELICIDAD M. BAGTAS, Administratrix of the Intestate Estate left by
the late Jose V. Bagtas, - .
----------------------------------------------------------------------------40

G.R. No. 80294-95 September 21, 1988

CATHOLIC VICAR APOSTOLIC OF THE MOUNTAIN PROVINCE, ,
vs.
COURT OF APPEALS, HEIRS OF EGMIDIO OCTAVIANO AND JUAN
VALDEZ, .
---------------------------------------------------------------------------------------------------------4
7

G.R. No. L-46240 November 3, 1939

MARGARITA QUINTOS and ANGEL A. ANSALDO, ,
vs.
BECK, .
-------------------------------------------------------------------------------------------58

G.R. No. L-20240 December 31, 1965

REPUBLIC OF THE PHILIPPINES, ,
vs.

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JOSE GRIJALDO, .
-----------------------------------------------------------------------------62

G.R. No. L-38745 August 6, 1975

LUCIA TAN, ,
vs.
ARADOR VALDEHUEZA and REDICULO
VALDEHUEZA, ------------------------------67

G.R. No. 138739 July 6, 2000

RADIOWEALTH FINANCE COMPANY, ,
vs.
Spouses VICENTE and MA. SUMILANG DEL ROSARIO, .
--------------------------73

[G.R. No. 88880. April 30, 1991.]

PHILIPPINE NATIONAL BANK, , v. THE HON. COURT OF APPEALS and

AMBROSIO PADILLA, .
----------------------------------------------------------------------81

G.R. No. 97412 July 12, 1994

EASTERN SHIPPING LINES, INC., ,
vs.
HON. COURT OF APPEALS AND MERCANTILE INSURANCE COMPANY,
INC., .
--------------------------------------------------------------------------------------------------------90

G.R. No. 128721 March 9, 1999

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CRISMINA GARMENTS, INC., ,
vs.
COURT OF APPEALS and NORMA SIAPNO, .
-----------------------------------------104

G.R. No. L-47180 May 19, 1980

THE PHILIPPINE AMERICAN ACCIDENT INSURANCE COMPANY, INC., -
,
vs.
THE HON. JOSE P. FLORES, and CONCORDIA G. NAVALTA,
--------------------110

G.R. No. L-23559 October 4, 1971

AURELIO G. BRIONES, ,
vs.
PRIMITIVO P. CAMMAYO, ET AL., .
----------------------------------------------------113

G.R. No. L-32644 October 4, 1930

CU UNJIENG E HIJOS, ,
vs.
THE MABALACAT SUGAR CO., ET AL., .
THE MABALACAT SUGAR CO., .
----------------------------------------------------------123

G.R. No. 135046 August 17, 1999

SPOUSES FLORANTE and LAARNI BAUTISTA, ,
vs.
PILAR DEVELOPMENT CORPORATION, .
---------------------------------------------127

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G.R. No. L-30771 May 28, 1984
LIAM LAW, ,
vs.
OLYMPIC SAWMILL CO. and ELINO LEE CHI, .
-------------------------------------135

G.R. No. 116285 October 19, 2001

ANTONIO TAN, ,
vs.
COURT OF APPEALS and the CULTURAL CENTER OF THE
PHILIPPINES------138

G.R. No. 113926 October 23, 1996

SECURITY BANK AND TRUST COMPANY, ,
vs.
REGIONAL TRIAL COURT OF MAKATI, BRANCH 61, MAGTANGGOL
EUSEBIO and LEILA VENTURA, .
----------------------------------------------------------------------151

G.R. No. 131622 November 27, 1998

LETICIA Y. MEDEL, DR. RAFAEL MEDEL and SERVANDO FRANCO, ,
vs.
COURT OF APPEALS, SPOUSES VERONICA R. GONZALES and DANILO
G. GONZALES, JR. doing lending business under the trade name and
style "GONZALES CREDIT ENTERPRISES", .
------------------------------------------------158

G.R. No. L-48349 December 29, 1986

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FRANCISCO HERRERA, ,
vs.
PETROPHIL CORPORATION, .
-----------------------------------------------------------166

G.R. No. L-18208 February 14, 1922

THE UNITED STATES, ,
vs.
VICENTE DIAZ CONDE and APOLINARIA R. DE CONDE, .
-----------------------173

G.R. No. L-1927 May 31, 1949

CRISTOBAL ROO, ,
vs.
JOSE L. GOMEZ, ET AL., .
------------------------------------------------------------------176

G.R. No. L-35697-99 April 15, 1988

ELADlA DE LIMA, POTENCIANO REQUIJO, NEMESIO FLORES,
REYNALDO REQUIJO, DOMINADOR REQUIJO and MARIO REQUIJO, ,
vs.
LAGUNA TAYABAS CO., CLARO SAMONTE, SANTIAGO SYJUCO, INC.,
(SEVEN-UP BOTTLING CO., OF THE PHILIPPINES) and PORVENIR
ABAJAR BARRETO, .
------------------------------------------------------------------------------------181

G.R. No. 120262 July 17, 1997

PHILIPPINE AIRLINES, INC., ,
vs.
COURT OF APPEALS and LEOVIGILDO A. PANTEJO, .
----------------------------189

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G.R. No. 120097 September 23, 1996
FOOD TERMINAL, INC., ,
vs.
COURT OF APPEALS and TAO DEVELOPMENT, INC., .
----------------------------197

G.R. No. 119974 June 30, 1999

RUPERTO L. VILORIA, ,
vs.
COURT OF APPEALS, LIDA C. AQUINO, assisted by her husband
Gregorio Aquino, MANUEL V. CACANANDO, as heirs of the late
Felicitacion V. Cacanando, RODOLFO V. ANCHETA, ESTRELLA V.
ANCHETA and CARMEN A. NICOLASURA, assisted by her husband
Ramon Nicolasura, as heirs of the late Josefina V. Ancheta and
ANASTACIO L. VILORIA, . -------------------------------201

G.R. No. 127135 January 18, 1999

EASTERN ASSURANCE AND SURETY CORPORATION (EASCO), ,
vs.
HON. COURT OF APPEALS, HON. TEOFISTO L. CALUMPANG, in his
capacity as Presiding Judge of the Regional Trial Court of
Dumaguete City, Branch 40, and VICENTE TAN, .
-------------------------------------------------------------------------209

G.R. No. L-28497 November 6, 1928

THE BACHRACH MOTOR CO., INC., ,
vs.
FAUSTINO ESPIRITU, .
------------------------------
G.R. No. L-28498 November 6, 1928
THE BACHRACH MOTOR CO., INC., ,
vs.
FAUSTINO ESPIRITU, , and
ROSARIO ESPIRITU, intervenor- .
--------------------------------------------------------218

G.R. No. 82082 March 25, 1988

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INSULAR BANK OF ASIA AND AMERICA, ,
vs.
SPOUSES EPIFANIA SALAZAR and RICARDO SALAZAR, .---------------------
---223

G.R. No. L-9262 July 10, 1959

MARINO S. UMALI, ,
vs.
EFRAIN Y. MICLAT, .
-----------------------------------------------------------------------228

G.R. No. L-29292 March 13, 1929

TOMASA C. VIUDA DE PAMINTUAN, ,
vs.
JUAN TIGLAO,
-------------------------------------------------------------------------------232

G.R. No. L-21280 February 9, 1924

VICENTE E. REYES, in his capacity as administrator of the estate of
Felipa Alonso y de Mesa viuda de Mendiola, ,
vs.
HENRY W. ELSER, .
MARIANO ALONSO Y DE MESA, -----------------------------------------------------------
236

G.R. No. L-21440 April 30, 1966

SUN BROS. APPLIANCES, INC., ,
vs.
ANGEL AL. CALUNTAD, .
-------------------------------------------------------------------242

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G.R. No. L-44106 January 19, 1937
THE GOVERNMENT OF THE PHILIPPINE ISLANDS, ,
vs.
JOSE VACA Y GARRIDO and ANA CALDERON, .
------------------------------------245

G.R. No. L-47180 May 19, 1980

THE PHILIPPINE AMERICAN ACCIDENT INSURANCE COMPANY, INC., -
,
vs.
THE HON. JOSE P. FLORES, and CONCORDIA G.
NAVALTA----------------------. 248

G.R. No. L-57314 November 29, 1983

TEODORO SANCHEZ, ,
vs.
HON. CARLOS R. BUENVIAJE, Presiding Judge, Branch VII, Court of
First Instance of Camarines Sur, Iriga City, and ALEJO SANCHEZ, .----
------------ 251

G.R. No. 128990 September 21, 2000

INVESTORS FINANCE CORPORATION, ,
vs.
AUTOWORLD SALES CORPORATION, and PIO BARRETTO REALTY
DEVELOPMENT CORPORATION, .-------------------------------------------------------
253

G.R. No. 113412 April 17, 1996

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Spouses PONCIANO ALMEDA and EUFEMIA P. ALMEDA, ,
vs.
THE COURT OF APPEALS and PHILIPPINE NATIONAL BANK, .
----------------265

G.R. No. 122079 June 27, 1997

SPOUSES ANTONIO E.A. CONCEPCION and MANUELA S.
CONCEPCION, ,
vs.
HON. COURT OF APPEALS, HOME SAVINGS BANK AND TRUST
COMPANY, and as nominal party- , THE SHERIFF ASSIGNED TO SAN
JUAN, METRO MANILA, and who conducted the auction sale and the
REGISTER OF DEEDS or his representative of San Juan, Metro Manila,
and ASAJE REALTY CORPORATION, .
----------------------------------------------------------------------------275

G.R. No. 119379 September 25, 1998

RODELO G. POLOTAN, SR., ,
vs.
HON. COURT OF APPEALS (Eleventh Division), REGIONAL TRIAL
COURT IN MAKATI CITY (Branch 132), and SECURITY DINERS
INTERNATIONAL CORPORATION, .
----------------------------------------------------------------------------284

G.R. No. L-46591 July 28, 1987

BANCO FILIPINO SAVINGS and MORTGAGE BANK, ,
vs.
HON. MIGUEL NAVARRO, Presiding Judge, Court of First Instance of
Manila, Branch XXXI and FLORANTE DEL VALLE, .
-------------------------------------------292

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G.R. No. L-31125 January 21, 1930

TIBURCIO LUTERO, ,
vs.
SIULIONG and CO., .
-----------------------------------------------------------------------301

G.R. No. L-17165 September 26, 1962

EMMA R. GENIZA, AURELIO GENIZA, LORENZO RIVERA, CATALINA
CARREON RIVERA and ZACARIAS RIVERA, ,
vs.
HENRY SY and ASIA MERCANTILE CORPORATION, .
-----------------------------310

G.R. No. 141811 November 15, 2001

FIRST METRO INVESTMENT CORPORATION, ,
vs.
ESTE DEL SOL MOUNTAIN RESERVE, INC., VALENTIN S. DAEZ, JR.,
MANUEL Q. SALIENTES, MA. ROCIO A. DE VEGA, ALEXANDER G.
ASUNCION, ALBERTO * M. LADORES, VICENTE M. DE VERA, JR., and
FELIPE B. SESE, .

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----------------------------------------------------------------------------------------------------------3
16

G.R. No. 125944 June 29, 2001

SPOUSES DANILO SOLANGON and URSULA SOLANGON, ,

vs.
JOSE AVELINO SALAZAR, .
---------------------------------------------------------------327

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