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 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., 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 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 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 not on the
bank when it violates any provisions of the law, but on
a personviolating 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.lawph!l.net

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 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.

Araullo, C. J., Johnson, Street, Avancea, Villamor,

Ostrand, Johns, and Romualdez, JJ., concur.

FIRST DIVISION

[G.R. No. 146364. June 3, 2004]

COLITO T. PAJUYO, petitioner, vs. COURT OF

APPEALS and EDDIE GUEVARRA, respondents.

DECISION
CARPIO, J.:

The Case

Before us is a petition for review[1] of the 21 June 2000

Decision[2] and 14 December 2000 Resolution of the Court
of Appeals in CA-G.R. SP No. 43129. The Court of
Appeals set aside the 11 November 1996 decision[3] of the
Regional Trial Court of Quezon City, Branch 81,[4]affirming
the 15 December 1995 decision[5] of the Metropolitan Trial
Court of Quezon City, Branch 31.[6]

The Antecedents

In June 1979, petitioner Colito T. Pajuyo (Pajuyo)

paid P400 to a certain Pedro Perez for the rights over a
250-square meter lot in Barrio Payatas, Quezon
City. Pajuyo then constructed a house made of light
materials on the lot. Pajuyo and his family lived in the
house from 1979 to 7 December 1985.
On 8 December 1985, Pajuyo and private respondent
Eddie Guevarra (Guevarra) executed a Kasunduan or
agreement. Pajuyo, as owner of the house, allowed
Guevarra to live in the house for free provided Guevarra
would maintain the cleanliness and orderliness of the
house. Guevarra promised that he would voluntarily vacate
the premises on Pajuyos demand.
In September 1994, Pajuyo informed Guevarra of his
need of the house and demanded that Guevarra vacate
the house. Guevarra refused.
Pajuyo filed an ejectment case against Guevarra with
the Metropolitan Trial Court of Quezon City, Branch 31
(MTC).
In his Answer, Guevarra claimed that Pajuyo had no
valid title or right of possession over the lot where the
house stands because the lot is within the 150 hectares set
aside by Proclamation No. 137 for socialized housing.
Guevarra pointed out that from December 1985 to
September 1994, Pajuyo did not show up or communicate
with him. Guevarra insisted that neither he nor Pajuyo has
valid title to the lot.
On 15 December 1995, the MTC rendered its decision
in favor of Pajuyo. The dispositive portion of the MTC
decision reads:

WHEREFORE, premises considered, judgment is hereby

rendered for the plaintiff and against defendant, ordering the
latter to:

A) vacate the house and lot occupied by the

defendant or any other person or persons claiming
any right under him;
 B) pay unto plaintiff the sum of THREE HUNDRED
PESOS (P300.00) monthly as reasonable
compensation for the use of the premises starting
from the last demand;
C) pay plaintiff the sum of P3,000.00 as and by way
of attorneys fees; and
D) pay the cost of suit.

SO ORDERED.[7]

Aggrieved, Guevarra appealed to the Regional Trial

Court of Quezon City, Branch 81 (RTC).
On 11 November 1996, the RTC affirmed the MTC
decision. The dispositive portion of the RTC decision
reads:

WHEREFORE, premises considered, the Court finds no

reversible error in the decision appealed from, being in accord
with the law and evidence presented, and the same is hereby
affirmed en toto.

SO ORDERED.[8]

Guevarra received the RTC decision on 29 November

1996. Guevarra had only until 14 December 1996 to file his
appeal with the Court of Appeals. Instead of filing his
appeal with the Court of Appeals, Guevarra filed with the
Supreme Court a Motion for Extension of Time to File
Appeal by Certiorari Based on Rule 42 (motion for
extension). Guevarra theorized that his appeal raised pure
questions of law. The Receiving Clerk of the Supreme
Court received the motion for extension on 13 December
1996 or one day before the right to appeal expired.
On 3 January 1997, Guevarra filed his petition for
review with the Supreme Court.
On 8 January 1997, the First Division of the Supreme
Court issued a Resolution[9] referring the motion for
extension to the Court of Appeals which has concurrent
jurisdiction over the case. The case presented no special
and important matter for the Supreme Court to take
cognizance of at the first instance.
On 28 January 1997, the Thirteenth Division of the
Court of Appeals issued a Resolution[10] granting the
motion for extension conditioned on the timeliness of the
filing of the motion.
On 27 February 1997, the Court of Appeals ordered
Pajuyo to comment on Guevaras petition for review. On 11
April 1997, Pajuyo filed his Comment.
On 21 June 2000, the Court of Appeals issued its
decision reversing the RTC decision. The dispositive
portion of the decision reads:

WHEREFORE, premises considered, the assailed Decision of

the court a quo in Civil Case No. Q-96-26943
is REVERSED and SET ASIDE; and it is hereby declared that
the ejectment case filed against defendant-appellant is without
factual and legal basis.

SO ORDERED.[11]

Pajuyo filed a motion for reconsideration of the

decision. Pajuyo pointed out that the Court of Appeals
should have dismissed outright Guevarras petition for
review because it was filed out of time. Moreover, it was
Guevarras counsel and not Guevarra who signed the
certification against forum-shopping.
On 14 December 2000, the Court of Appeals issued a
resolution denying Pajuyos motion for reconsideration. The
dispositive portion of the resolution reads:

WHEREFORE, for lack of merit, the motion for reconsideration

is hereby DENIED. No costs.

SO ORDERED.[12]
 The Ruling of the MTC

The MTC ruled that the subject of the agreement

between Pajuyo and Guevarra is the house and not the
lot. Pajuyo is the owner of the house, and he allowed
Guevarra to use the house only by tolerance. Thus,
Guevarras refusal to vacate the house on Pajuyos demand
made Guevarras continued possession of the house
illegal.

The Ruling of the RTC

The RTC upheld the Kasunduan, which established the

landlord and tenant relationship between Pajuyo and
Guevarra. The terms of the Kasunduan bound Guevarra to
return possession of the house on demand.
The RTC rejected Guevarras claim of a better right
under Proclamation No. 137, the Revised National
Government Center Housing Project Code of Policies and
other pertinent laws. In an ejectment suit, the RTC has no
power to decide Guevarras rights under these laws. The
RTC declared that in an ejectment case, the only issue for
resolution is material or physical possession, not
ownership.

The Ruling of the Court of Appeals

The Court of Appeals declared that Pajuyo and

Guevarra are squatters. Pajuyo and Guevarra illegally
occupied the contested lot which the government owned.
Perez, the person from whom Pajuyo acquired his
rights, was also a squatter. Perez had no right or title over
the lot because it is public land. The assignment of rights
between Perez and Pajuyo, and the Kasunduan between
Pajuyo and Guevarra, did not have any legal effect.Pajuyo
and Guevarra are in pari delicto or in equal fault. The court
will leave them where they are.
The Court of Appeals reversed the MTC and RTC
rulings, which held that the Kasunduan between Pajuyo
and Guevarra created a legal tie akin to that of a landlord
and tenant relationship. The Court of Appeals ruled that
the Kasunduan is not a lease contract but
acommodatum because the agreement is not for a price
certain.
Since Pajuyo admitted that he resurfaced only in 1994
to claim the property, the appellate court held that
Guevarra has a better right over the property under
Proclamation No. 137. President Corazon C. Aquino
(President Aquino) issued Proclamation No. 137 on 7
September 1987. At that time, Guevarra was in physical
possession of the property. Under Article VI of the Code of
Policies Beneficiary Selection and Disposition of Homelots
and Structures in the National Housing Project (the Code),
the actual occupant or caretaker of the lot shall have first
priority as beneficiary of the project. The Court of Appeals
concluded that Guevarra is first in the hierarchy of priority.
In denying Pajuyos motion for reconsideration, the
appellate court debunked Pajuyos claim that Guevarra
filed his motion for extension beyond the period to appeal.
The Court of Appeals pointed out that Guevarras
motion for extension filed before the Supreme Court was
stamped 13 December 1996 at 4:09 PM by the Supreme
Courts Receiving Clerk. The Court of Appeals concluded
that the motion for extension bore a date, contrary to
Pajuyos claim that the motion for extension was
undated. Guevarra filed the motion for extension on time
on 13 December 1996 since he filed the motion one day
before the expiration of the reglementary period on 14
December 1996. Thus, the motion for extension properly
complied with the condition imposed by the Court of
Appeals in its 28 January 1997 Resolution. The Court of
Appeals explained that the thirty-day extension to file the
petition for review was deemed granted because of such
compliance.
The Court of Appeals rejected Pajuyos argument that
the appellate court should have dismissed the petition for
review because it was Guevarras counsel and not
Guevarra who signed the certification against
forum-shopping. The Court of Appeals pointed out that
Pajuyo did not raise this issue in his Comment. The Court
of Appeals held that Pajuyo could not now seek the
dismissal of the case after he had extensively argued on
the merits of the case. This technicality, the appellate court
opined, was clearly an afterthought.

The Issues

Pajuyo raises the following issues for resolution:

WHETHER THE COURT OF APPEALS ERRED OR

ABUSED ITS AUTHORITY AND DISCRETION
TANTAMOUNT TO LACK OF JURISDICTION:

1) in GRANTING, instead of denying, Private

Respondents Motion for an Extension of
thirty days to file petition for review at the
time when there was no more period to
extend as the decision of the Regional Trial
Court had already become final and
executory.
2) in giving due course, instead of dismissing,
private respondents Petition for Review
even though the certification against
forum-shopping was signed only by counsel
instead of by petitioner himself.
3) in ruling that the Kasunduan voluntarily
entered into by the parties was in fact a
 commodatum, instead of a Contract of
Lease as found by the Metropolitan Trial
Court and in holding that the ejectment case
filed against defendant-appellant is without
legal and factual basis.
4) in reversing and setting aside the Decision
of the Regional Trial Court in Civil Case No.
Q-96-26943 and in holding that the parties
are in pari delicto being both squatters,
therefore, illegal occupants of the contested
parcel of land.
5) in deciding the unlawful detainer case
based on the so-called Code of Policies of
the National Government Center Housing
Project instead of deciding the same under
the Kasunduan voluntarily executed by the
parties, the terms and conditions of which
are the laws between themselves.[13]

The Ruling of the Court

The procedural issues Pajuyo is raising are

baseless. However, we find merit in the substantive issues
Pajuyo is submitting for resolution.

Procedural Issues

Pajuyo insists that the Court of Appeals should have

dismissed outright Guevarras petition for review because
the RTC decision had already become final and executory
when the appellate court acted on Guevarras motion for
extension to file the petition. Pajuyo points out that
Guevarra had only one day before the expiry of his period
to appeal the RTC decision. Instead of filing the petition for
review with the Court of Appeals, Guevarra filed with this
Court an undated motion for extension of 30 days to file a
petition for review. This Court merely referred the motion to
the Court of Appeals. Pajuyo believes that the filing of the
motion for extension with this Court did not toll the running
of the period to perfect the appeal. Hence, when the Court
of Appeals received the motion, the period to appeal had
already expired.
We are not persuaded.
Decisions of the regional trial courts in the exercise of
their appellate jurisdiction are appealable to the Court of
Appeals by petition for review in cases involving questions
of fact or mixed questions of fact and law.[14] Decisions of
the regional trial courts involving pure questions of law are
appealable directly to this Court by petition for
review.[15] These modes of appeal are now embodied in
Section 2, Rule 41 of the 1997 Rules of Civil Procedure.
Guevarra believed that his appeal of the RTC decision
involved only questions of law. Guevarra thus filed his
motion for extension to file petition for review before this
Court on 14 December 1996. On 3 January 1997,
Guevarra then filed his petition for review with this Court. A
perusal of Guevarras petition for review gives the
impression that the issues he raised were pure questions
of law. There is a question of law when the doubt or
difference is on what the law is on a certain state of
facts.[16] There is a question of fact when the doubt or
difference is on the truth or falsity of the facts alleged.[17]
In his petition for review before this Court, Guevarra no
longer disputed the facts. Guevarras petition for review
raised these questions: (1) Do ejectment cases pertain
only to possession of a structure, and not the lot on which
the structure stands? (2) Does a suit by a squatter against
a fellow squatter constitute a valid case for ejectment? (3)
Should a Presidential Proclamation governing the lot on
which a squatters structure stands be considered in an
ejectment suit filed by the owner of the structure?
 These questions call for the evaluation of the rights of
the parties under the law on ejectment and the Presidential
Proclamation. At first glance, the questions Guevarra
raised appeared purely legal. However, some factual
questions still have to be resolved because they have a
bearing on the legal questions raised in the petition for
review. These factual matters refer to the metes and
bounds of the disputed property and the application of
Guevarra as beneficiary of Proclamation No. 137.
The Court of Appeals has the power to grant an
extension of time to file a petition for
review. In Lacsamana v. Second Special Cases
Division of the Intermediate Appellate Court,[18] we
declared that the Court of Appeals could grant extension of
time in appeals by petition for review. In Liboro v. Court of
Appeals,[19] we clarified that the prohibition against
granting an extension of time applies only in a case where
ordinary appeal is perfected by a mere notice of
appeal. The prohibition does not apply in a petition for
review where the pleading needs verification. A petition for
review, unlike an ordinary appeal, requires preparation and
research to present a persuasive position.[20] The drafting
of the petition for review entails more time and effort than
filing a notice of appeal.[21] Hence, the Court of Appeals
may allow an extension of time to file a petition for review.
In the more recent case of Commissioner of Internal
Revenue v. Court of Appeals,[22] we held that Liboros
clarification of Lacsamana is consistent with the Revised
Internal Rules of the Court of Appeals and Supreme Court
Circular No. 1-91. They all allow an extension of time for
filing petitions for review with the Court of Appeals. The
extension, however, should be limited to only fifteen days
save in exceptionally meritorious cases where the Court of
Appeals may grant a longer period.
A judgment becomes final and executory by operation
of law. Finality of judgment becomes a fact on the lapse of
the reglementary period to appeal if no appeal is
perfected.[23] The RTC decision could not have gained
finality because the Court of Appeals granted the 30-day
extension to Guevarra.
The Court of Appeals did not commit grave abuse of
discretion when it approved Guevarras motion for
extension. The Court of Appeals gave due course to the
motion for extension because it complied with the condition
set by the appellate court in its resolution dated 28 January
1997. The resolution stated that the Court of Appeals
would only give due course to the motion for extension if
filed on time. The motion for extension met this condition.
The material dates to consider in determining the
timeliness of the filing of the motion for extension are (1)
the date of receipt of the judgment or final order or
resolution subject of the petition, and (2) the date of filing of
the motion for extension.[24] It is the date of the filing of the
motion or pleading, and not the date of execution, that
determines the timeliness of the filing of that motion or
pleading. Thus, even if the motion for extension bears no
date, the date of filing stamped on it is the reckoning point
for determining the timeliness of its filing.
Guevarra had until 14 December 1996 to file an appeal
from the RTC decision. Guevarra filed his motion for
extension before this Court on 13 December 1996, the
date stamped by this Courts Receiving Clerk on the motion
for extension. Clearly, Guevarra filed the motion for
extension exactly one day before the lapse of the
reglementary period to appeal.
Assuming that the Court of Appeals should have
dismissed Guevarras appeal on technical grounds, Pajuyo
did not ask the appellate court to deny the motion for
extension and dismiss the petition for review at the earliest
opportunity. Instead, Pajuyo vigorously discussed the
merits of the case. It was only when the Court of Appeals
ruled in Guevarras favor that Pajuyo raised the procedural
issues against Guevarras petition for review.
A party who, after voluntarily submitting a dispute for
resolution, receives an adverse decision on the merits, is
estopped from attacking the jurisdiction of the
court.[25] Estoppel sets in not because the judgment of the
court is a valid and conclusive adjudication, but because
the practice of attacking the courts jurisdiction after
voluntarily submitting to it is against public policy.[26]
In his Comment before the Court of Appeals, Pajuyo
also failed to discuss Guevarras failure to sign the
certification against forum shopping. Instead, Pajuyo
harped on Guevarras counsel signing the verification,
claiming that the counsels verification is insufficient since it
is based only on mere information.
A partys failure to sign the certification against forum
shopping is different from the partys failure to sign
personally the verification. The certificate of non-forum
shopping must be signed by the party, and not by
counsel.[27] The certification of counsel renders the petition
defective.[28]
On the other hand, the requirement on verification of a
pleading is a formal and not a jurisdictional requisite.[29] It is
intended simply to secure an assurance that what are
alleged in the pleading are true and correct and not the
product of the imagination or a matter of speculation, and
that the pleading is filed in good faith.[30] The party need
not sign the verification. A partys representative, lawyer or
any person who personally knows the truth of the facts
alleged in the pleading may sign the verification.[31]
We agree with the Court of Appeals that the issue on
the certificate against forum shopping was merely an
afterthought. Pajuyo did not call the Court of Appeals
attention to this defect at the early stage of the
proceedings. Pajuyo raised this procedural issue too late in
the proceedings.

Absence of Title over the Disputed Property will not

Divest the Courts of Jurisdiction to Resolve the Issue
of Possession

Settled is the rule that the defendants claim of

ownership of the disputed property will not divest the
inferior court of its jurisdiction over the ejectment
case.[32] Even if the pleadings raise the issue of ownership,
the court may pass on such issue to determine only the
question of possession, especially if the ownership is
inseparably linked with the possession.[33] The adjudication
on the issue of ownership is only provisional and will not
bar an action between the same parties involving title to
the land.[34] This doctrine is a necessary consequence of
the nature of the two summary actions of ejectment,
forcible entry and unlawful detainer, where the only issue
for adjudication is the physical or material possession over
the real property.[35]
In this case, what Guevarra raised before the courts
was that he and Pajuyo are not the owners of the
contested property and that they are mere squatters. Will
the defense that the parties to the ejectment case are not
the owners of the disputed lot allow the courts to renounce
their jurisdiction over the case? The Court of Appeals
believed so and held that it would just leave the parties
where they are since they are in pari delicto.
We do not agree with the Court of Appeals.
Ownership or the right to possess arising from
ownership is not at issue in an action for recovery of
possession. The parties cannot present evidence to prove
ownership or right to legal possession except to prove the
nature of the possession when necessary to resolve the
issue of physical possession.[36] The same is true when the
defendant asserts the absence of title over the property.
The absence of title over the contested lot is not a ground
for the courts to withhold relief from the parties in an
ejectment case.
The only question that the courts must resolve in
ejectment proceedings is - who is entitled to the physical
possession of the premises, that is, to the possession de
facto and not to the possession de jure.[37] It does not even
matter if a partys title to the property is questionable,[38]or
when both parties intruded into public land and their
applications to own the land have yet to be approved by
the proper government agency.[39] Regardless of the actual
condition of the title to the property, the party in peaceable
quiet possession shall not be thrown out by a strong hand,
violence or terror.[40] Neither is the unlawful withholding of
property allowed. Courts will always uphold respect for
prior possession.
Thus, a party who can prove prior possession can
recover such possession even against the owner
himself.[41] Whatever may be the character of his
possession, if he has in his favor prior possession in time,
he has the security that entitles him to remain on the
property until a person with a better right lawfully ejects
him.[42] To repeat, the only issue that the court has to settle
in an ejectment suit is the right to physical possession.
In Pitargue v. Sorilla,[43] the government owned the
land in dispute. The government did not authorize either
the plaintiff or the defendant in the case of forcible entry
case to occupy the land. The plaintiff had prior possession
and had already introduced improvements on the public
land. The plaintiff had a pending application for the land
with the Bureau of Lands when the defendant ousted him
from possession. The plaintiff filed the action of forcible
entry against the defendant. The government was not a
party in the case of forcible entry.
 The defendant questioned the jurisdiction of the courts
to settle the issue of possession because while the
application of the plaintiff was still pending, title remained
with the government, and the Bureau of Public Lands had
jurisdiction over the case. We disagreed with the
defendant. We ruled that courts have jurisdiction to
entertain ejectment suits even before the resolution of the
application. The plaintiff, by priority of his application and
of his entry, acquired prior physical possession over the
public land applied for as against other private claimants.
That prior physical possession enjoys legal protection
against other private claimants because only a court can
take away such physical possession in an ejectment case.
While the Court did not brand the plaintiff and the
defendant in Pitargue[44] as squatters, strictly speaking,
their entry into the disputed land was illegal. Both the
plaintiff and defendant entered the public land without the
owners permission. Title to the land remained with the
government because it had not awarded to anyone
ownership of the contested public land. Both the plaintiff
and the defendant were in effect squatting on government
property. Yet, we upheld the courts jurisdiction to resolve
the issue of possession even if the plaintiff and the
defendant in the ejectment case did not have any title over
the contested land.
Courts must not abdicate their jurisdiction to resolve the
issue of physical possession because of the public need to
preserve the basic policy behind the summary actions of
forcible entry and unlawful detainer. The underlying
philosophy behind ejectment suits is to prevent breach of
the peace and criminal disorder and to compel the party
out of possession to respect and resort to the law alone to
obtain what he claims is his.[45] The party deprived of
possession must not take the law into his own
hands.[46] Ejectment proceedings are summary in nature
so the authorities can settle speedily actions to recover
possession because of the overriding need to quell social
disturbances.[47]
We further explained in Pitargue the greater interest
that is at stake in actions for recovery of possession. We
made the following pronouncements in Pitargue:

The question that is before this Court is: Are courts without
jurisdiction to take cognizance of possessory actions involving
these public lands before final award is made by the Lands
Department, and before title is given any of the conflicting
claimants? It is one of utmost importance, as there are public
lands everywhere and there are thousands of settlers, especially
in newly opened regions. It also involves a matter of policy, as it
requires the determination of the respective authorities and
functions of two coordinate branches of the Government in
connection with public land conflicts.

Our problem is made simple by the fact that under the Civil
Code, either in the old, which was in force in this country before
the American occupation, or in the new, we have a possessory
action, the aim and purpose of which is the recovery of the
physical possession of real property, irrespective of the question
as to who has the title thereto. Under the Spanish Civil Code we
had the accion interdictal, a summary proceeding which could
be brought within one year from dispossession (Roman Catholic
Bishop of Cebu vs. Mangaron, 6 Phil. 286, 291); and as early as
October 1, 1901, upon the enactment of the Code of Civil
Procedure (Act No. 190 of the Philippine Commission) we
implanted the common law action of forcible entry (section 80
of Act No. 190), the object of which has been stated by this
Court to be to prevent breaches of the peace and criminal
disorder which would ensue from the withdrawal of the
remedy, and the reasonable hope such withdrawal would
create that some advantage must accrue to those persons who,
believing themselves entitled to the possession of property,
resort to force to gain possession rather than to some
appropriate action in the court to assert their claims. (Supia
and Batioco vs. Quintero and Ayala, 59 Phil. 312, 314.) So
before the enactment of the first Public Land Act (Act No. 926)
the action of forcible entry was already available in the courts of
the country. So the question to be resolved is, Did the
Legislature intend, when it vested the power and authority to
alienate and dispose of the public lands in the Lands Department,
to exclude the courts from entertaining the possessory action of
forcible entry between rival claimants or occupants of any land
before award thereof to any of the parties? Did Congress intend
that the lands applied for, or all public lands for that matter, be
removed from the jurisdiction of the judicial Branch of the
Government, so that any troubles arising therefrom, or any
breaches of the peace or disorders caused by rival claimants,
could be inquired into only by the Lands Department to the
exclusion of the courts? The answer to this question seems to us
evident. The Lands Department does not have the means to
police public lands; neither does it have the means to prevent
disorders arising therefrom, or contain breaches of the peace
among settlers; or to pass promptly upon conflicts of
possession. Then its power is clearly limited to disposition and
alienation, and while it may decide conflicts of possession in
order to make proper award, the settlement of conflicts of
possession which is recognized in the court herein has another
ultimate purpose, i.e., the protection of actual possessors and
occupants with a view to the prevention of breaches of the
peace. The power to dispose and alienate could not have been
intended to include the power to prevent or settle disorders or
breaches of the peace among rival settlers or claimants prior to
the final award. As to this, therefore, the corresponding
branches of the Government must continue to exercise power
and jurisdiction within the limits of their respective
functions. The vesting of the Lands Department with authority
to administer, dispose, and alienate public lands, therefore,
must not be understood as depriving the other branches of the
Government of the exercise of the respective functions or
powers thereon, such as the authority to stop disorders and
quell breaches of the peace by the police, the authority on the
part of the courts to take jurisdiction over possessory actions
arising therefrom not involving, directly or indirectly,
alienation and disposition.

Our attention has been called to a principle enunciated in

American courts to the effect that courts have no jurisdiction to
determine the rights of claimants to public lands, and that until
the disposition of the land has passed from the control of the
Federal Government, the courts will not interfere with the
administration of matters concerning the same. (50 C. J.
1093-1094.) We have no quarrel with this principle. The
determination of the respective rights of rival claimants to
public lands is different from the determination of who has the
actual physical possession or occupation with a view to
protecting the same and preventing disorder and breaches of the
peace. A judgment of the court ordering restitution of the
possession of a parcel of land to the actual occupant, who has
been deprived thereof by another through the use of force or in
any other illegal manner, can never be prejudicial interference
with the disposition or alienation of public lands. On the other
hand, if courts were deprived of jurisdiction of cases involving
conflicts of possession, that threat of judicial action against
breaches of the peace committed on public lands would be
eliminated, and a state of lawlessness would probably be
produced between applicants, occupants or squatters, where
force or might, not right or justice, would rule.

It must be borne in mind that the action that would be used to

solve conflicts of possession between rivals or conflicting
applicants or claimants would be no other than that of forcible
entry. This action, both in England and the United States and in
our jurisdiction, is a summary and expeditious remedy whereby
one in peaceful and quiet possession may recover the possession
of which he has been deprived by a stronger hand, by violence
or terror; its ultimate object being to prevent breach of the peace
and criminal disorder. (Supia and Batioco vs. Quintero and
Ayala, 59 Phil. 312, 314.) The basis of the remedy is mere
possession as a fact, of physical possession, not a legal
possession. (Mediran vs. Villanueva, 37 Phil. 752.) The title or
right to possession is never in issue in an action of forcible entry;
as a matter of fact, evidence thereof is expressly banned, except
to prove the nature of the possession. (Second 4, Rule 72, Rules
of Court.) With this nature of the action in mind, by no stretch
of the imagination can conclusion be arrived at that the use of
the remedy in the courts of justice would constitute an
interference with the alienation, disposition, and control of
public lands. To limit ourselves to the case at bar can it be
pretended at all that its result would in any way interfere with
the manner of the alienation or disposition of the land contested?
On the contrary, it would facilitate adjudication, for the question
of priority of possession having been decided in a final manner
by the courts, said question need no longer waste the time of the
land officers making the adjudication or award. (Emphasis ours)

The Principle of Pari Delicto is not Applicable to

Ejectment Cases

The Court of Appeals erroneously applied the principle

of pari delicto to this case.
Articles 1411 and 1412 of the Civil Code[48] embody the
principle of pari delicto. We explained the principle of pari
delicto in these words:

The rule of pari delicto is expressed in the maxims ex dolo malo

non eritur actio and in pari delicto potior est conditio defedentis.
The law will not aid either party to an illegal agreement. It
leaves the parties where it finds them.[49]

The application of the pari delicto principle is not

absolute, as there are exceptions to its application. One of
these exceptions is where the application of the pari
delicto rule would violate well-established public policy.[50]
In Drilon v. Gaurana,[51] we reiterated the basic policy
behind the summary actions of forcible entry and unlawful
detainer. We held that:
It must be stated that the purpose of an action of forcible entry
and detainer is that, regardless of the actual condition of the title
to the property, the party in peaceable quiet possession shall not
be turned out by strong hand, violence or terror. In affording this
remedy of restitution the object of the statute is to prevent
breaches of the peace and criminal disorder which would ensue
from the withdrawal of the remedy, and the reasonable hope
such withdrawal would create that some advantage must accrue
to those persons who, believing themselves entitled to the
possession of property, resort to force to gain possession rather
than to some appropriate action in the courts to assert their
claims. This is the philosophy at the foundation of all these
actions of forcible entry and detainer which are designed to
compel the party out of possession to respect and resort to the
law alone to obtain what he claims is his.[52]

Clearly, the application of the principle of pari delicto to

a case of ejectment between squatters is fraught with
danger. To shut out relief to squatters on the ground of pari
delicto would openly invite mayhem and lawlessness. A
squatter would oust another squatter from possession of
the lot that the latter had illegally occupied, emboldened by
the knowledge that the courts would leave them where
they are. Nothing would then stand in the way of the
ousted squatter from re-claiming his prior possession at all
cost.
Petty warfare over possession of properties is precisely
what ejectment cases or actions for recovery of possession
seek to prevent.[53] Even the owner who has title over the
disputed property cannot take the law into his own hands
to regain possession of his property. The owner must go to
court.
Courts must resolve the issue of possession even if the
parties to the ejectment suit are squatters. The
determination of priority and superiority of possession is a
serious and urgent matter that cannot be left to the
squatters to decide. To do so would make squatters
receive better treatment under the law. The law restrains
property owners from taking the law into their own
hands. However, the principle of pari delicto as applied by
the Court of Appeals would give squatters free rein to
dispossess fellow squatters or violently retake possession
of properties usurped from them. Courts should not leave
squatters to their own devices in cases involving recovery
of possession.

Possession is the only Issue for Resolution in an

Ejectment Case

The case for review before the Court of Appeals was a

simple case of ejectment. The Court of Appeals refused to
rule on the issue of physical possession. Nevertheless, the
appellate court held that the pivotal issue in this case is
who between Pajuyo and Guevarra has the priority right as
beneficiary of the contested land under Proclamation No.
137.[54] According to the Court of Appeals, Guevarra enjoys
preferential right under Proclamation No. 137 because
Article VI of the Code declares that the actual occupant or
caretaker is the one qualified to apply for socialized
housing.
The ruling of the Court of Appeals has no factual and
legal basis.
First. Guevarra did not present evidence to show that
the contested lot is part of a relocation site under
Proclamation No. 137. Proclamation No. 137 laid down the
metes and bounds of the land that it declared open for
disposition to bona fide residents.
The records do not show that the contested lot is within
the land specified by Proclamation No. 137. Guevarra had
the burden to prove that the disputed lot is within the
coverage of Proclamation No. 137. He failed to do so.
 Second. The Court of Appeals should not have given
credence to Guevarras unsubstantiated claim that he is the
beneficiary of Proclamation No. 137. Guevarra merely
alleged that in the survey the project administrator
conducted, he and not Pajuyo appeared as the actual
occupant of the lot.
There is no proof that Guevarra actually availed of the
benefits of Proclamation No. 137. Pajuyo allowed
Guevarra to occupy the disputed property in
1985. President Aquino signed Proclamation No. 137 into
law on 11 March 1986. Pajuyo made his earliest demand
for Guevarra to vacate the property in September 1994.
During the time that Guevarra temporarily held the
property up to the time that Proclamation No. 137 allegedly
segregated the disputed lot, Guevarra never applied as
beneficiary of Proclamation No. 137. Even when Guevarra
already knew that Pajuyo was reclaiming possession of the
property, Guevarra did not take any step to comply with the
requirements of Proclamation No. 137.
Third. Even assuming that the disputed lot is within the
coverage of Proclamation No. 137 and Guevarra has a
pending application over the lot, courts should still assume
jurisdiction and resolve the issue of possession. However,
the jurisdiction of the courts would be limited to the issue of
physical possession only.
In Pitargue,[55] we ruled that courts have jurisdiction
over possessory actions involving public land to determine
the issue of physical possession. The determination of the
respective rights of rival claimants to public land is,
however, distinct from the determination of who has the
actual physical possession or who has a better right of
physical possession.[56] The administrative disposition and
alienation of public lands should be threshed out in the
proper government agency.[57]
 The Court of Appeals determination of Pajuyo and
Guevarras rights under Proclamation No. 137 was
premature. Pajuyo and Guevarra were at most merely
potential beneficiaries of the law. Courts should not
preempt the decision of the administrative agency
mandated by law to determine the qualifications of
applicants for the acquisition of public lands. Instead,
courts should expeditiously resolve the issue of physical
possession in ejectment cases to prevent disorder and
breaches of peace.[58]

Pajuyo is Entitled to Physical Possession of the

Disputed Property

Guevarra does not dispute Pajuyos prior possession of

the lot and ownership of the house built on it. Guevarra
expressly admitted the existence and due execution of
the Kasunduan. The Kasunduan reads:

Ako, si COL[I]TO PAJUYO, may-ari ng bahay at lote sa Bo.

Payatas, Quezon City, ay nagbibigay pahintulot kay G. Eddie
Guevarra, na pansamantalang manirahan sa nasabing bahay at
lote ng walang bayad. Kaugnay nito, kailangang panatilihin nila
ang kalinisan at kaayusan ng bahay at lote.

Sa sandaling kailangan na namin ang bahay at lote, silay kusang

aalis ng walang reklamo.

Based on the Kasunduan, Pajuyo permitted Guevarra

to reside in the house and lot free of rent, but Guevarra
was under obligation to maintain the premises in good
condition. Guevarra promised to vacate the premises on
Pajuyos demand but Guevarra broke his promise and
refused to heed Pajuyos demand to vacate.
These facts make out a case for unlawful detainer.
Unlawful detainer involves the withholding by a person
from another of the possession of real property to which
the latter is entitled after the expiration or termination of the
formers right to hold possession under a contract,
express or implied.[59]
Where the plaintiff allows the defendant to use his
property by tolerance without any contract, the defendant
is necessarily bound by an implied promise that he will
vacate on demand, failing which, an action for unlawful
detainer will lie.[60] The defendants refusal to comply with
the demand makes his continued possession of the
property unlawful.[61] The status of the defendant in such a
case is similar to that of a lessee or tenant whose term of
lease has expired but whose occupancy continues by
tolerance of the owner.[62]
This principle should apply with greater force in cases
where a contract embodies the permission or tolerance to
use the property. The Kasunduan expressly articulated
Pajuyos forbearance. Pajuyo did not require Guevarra to
pay any rent but only to maintain the house and lot in good
condition. Guevarra expressly vowed in
the Kasunduan that he would vacate the property on
demand. Guevarras refusal to comply with Pajuyos
demand to vacate made Guevarras continued possession
of the property unlawful.
We do not subscribe to the Court of Appeals theory that
the Kasunduan is one of commodatum.
In a contract of commodatum, one of the parties
delivers to another something not consumable so that the
latter may use the same for a certain time and return
it.[63] An essential feature of commodatum is that it is
gratuitous. Another feature of commodatum is that the use
of the thing belonging to another is for a certain
period.[64] Thus, the bailor cannot demand the return of the
thing loaned until after expiration of the period stipulated,
or after accomplishment of the use for which
the commodatum is constituted.[65] If the bailor should
have urgent need of the thing, he may demand its return
for temporary use.[66] If the use of the thing is merely
tolerated by the bailor, he can demand the return of the
thing at will, in which case the contractual relation is called
a precarium.[67] Under the Civil Code, precarium is a kind
of commodatum.[68]
The Kasunduan reveals that the accommodation
accorded by Pajuyo to Guevarra was not essentially
gratuitous. While the Kasunduan did not require Guevarra
to pay rent, it obligated him to maintain the property in
good condition. The imposition of this obligation makes
theKasunduan a contract different from
a commodatum. The effects of the Kasunduan are also
different from that of a commodatum. Case law on
ejectment has treated relationship based on tolerance as
one that is akin to a landlord-tenant relationship where the
withdrawal of permission would result in the termination of
the lease.[69] The tenants withholding of the property would
then be unlawful. This is settled jurisprudence.
Even assuming that the relationship between Pajuyo
and Guevarra is one of commodatum, Guevarra as bailee
would still have the duty to turn over possession of the
property to Pajuyo, the bailor. The obligation to deliver or
to return the thing received attaches to contracts for
safekeeping, or contracts of commission, administration
and commodatum.[70] These contracts certainly involve the
obligation to deliver or return the thing received.[71]
Guevarra turned his back on the Kasunduan on the sole
ground that like him, Pajuyo is also a squatter. Squatters,
Guevarra pointed out, cannot enter into a contract
involving the land they illegally occupy. Guevarra insists
that the contract is void.
Guevarra should know that there must be honor even
between squatters. Guevarra freely entered into
the Kasunduan. Guevarra cannot now impugn
the Kasunduan after he had benefited from
it. The Kasunduan binds Guevarra.
 The Kasunduan is not void for purposes of determining
who between Pajuyo and Guevarra has a right to physical
possession of the contested property. The Kasunduan is
the undeniable evidence of Guevarras recognition of
Pajuyos better right of physical possession. Guevarra is
clearly a possessor in bad faith. The absence of a contract
would not yield a different result, as there would still be an
implied promise to vacate.
Guevarra contends that there is a pernicious evil that is
sought to be avoided, and that is allowing an absentee
squatter who (sic) makes (sic) a profit out of his illegal
act.[72] Guevarra bases his argument on the preferential
right given to the actual occupant or caretaker under
Proclamation No. 137 on socialized housing.
We are not convinced.
Pajuyo did not profit from his arrangement with
Guevarra because Guevarra stayed in the property without
paying any rent. There is also no proof that Pajuyo is a
professional squatter who rents out usurped properties to
other squatters. Moreover, it is for the proper government
agency to decide who between Pajuyo and Guevarra
qualifies for socialized housing. The only issue that we are
addressing is physical possession.
Prior possession is not always a condition sine qua
non in ejectment.[73] This is one of the distinctions between
forcible entry and unlawful detainer.[74] In forcible entry, the
plaintiff is deprived of physical possession of his land or
building by means of force, intimidation, threat, strategy or
stealth. Thus, he must allege and prove prior
possession.[75] But in unlawful detainer, the defendant
unlawfully withholds possession after the expiration or
termination of his right to possess under any contract,
express or implied. In such a case, prior physical
possession is not required.[76]
 Pajuyos withdrawal of his permission to Guevarra
terminated the Kasunduan. Guevarras transient right to
possess the property ended as well. Moreover, it was
Pajuyo who was in actual possession of the property
because Guevarra had to seek Pajuyos permission to
temporarily hold the property and Guevarra had to follow
the conditions set by Pajuyo in the Kasunduan. Control
over the property still rested with Pajuyo and this is
evidence of actual possession.
Pajuyos absence did not affect his actual possession of
the disputed property. Possession in the eyes of the law
does not mean that a man has to have his feet on every
square meter of the ground before he is deemed in
possession.[77] One may acquire possession not only by
physical occupation, but also by the fact that a thing is
subject to the action of ones will.[78] Actual or physical
occupation is not always necessary.[79]

Ruling on Possession Does not Bind Title to the Land

in Dispute

We are aware of our pronouncement in cases where we

declared that squatters and intruders who clandestinely
enter into titled government property cannot, by such act,
acquire any legal right to said property.[80] We made this
declaration because the person who had title or who had
the right to legal possession over the disputed property
was a party in the ejectment suit and that party instituted
the case against squatters or usurpers.
In this case, the owner of the land, which is the
government, is not a party to the ejectment case. This case
is between squatters. Had the government participated in
this case, the courts could have evicted the contending
squatters, Pajuyo and Guevarra.
Since the party that has title or a better right over the
property is not impleaded in this case, we cannot evict on
our own the parties. Such a ruling would discourage
squatters from seeking the aid of the courts in settling the
issue of physical possession. Stripping both the plaintiff
and the defendant of possession just because they are
squatters would have the same dangerous implications as
the application of the principle of pari delicto. Squatters
would then rather settle the issue of physical possession
among themselves than seek relief from the courts if the
plaintiff and defendant in the ejectment case would both
stand to lose possession of the disputed property. This
would subvert the policy underlying actions for recovery of
possession.
Since Pajuyo has in his favor priority in time in holding
the property, he is entitled to remain on the property until a
person who has title or a better right lawfully ejects
him. Guevarra is certainly not that person. The ruling in this
case, however, does not preclude Pajuyo and Guevarra
from introducing evidence and presenting arguments
before the proper administrative agency to establish any
right to which they may be entitled under the law.[81]
In no way should our ruling in this case be interpreted to
condone squatting. The ruling on the issue of physical
possession does not affect title to the property nor
constitute a binding and conclusive adjudication on the
merits on the issue of ownership.[82] The owner can still go
to court to recover lawfully the property from the person
who holds the property without legal title. Our ruling here
does not diminish the power of government agencies,
including local governments, to condemn, abate, remove
or demolish illegal or unauthorized structures in
accordance with existing laws.

Attorneys Fees and Rentals

The MTC and RTC failed to justify the award of P3,000

attorneys fees to Pajuyo. Attorneys fees as part of
damages are awarded only in the instances enumerated in
Article 2208 of the Civil Code.[83] Thus, the award of
attorneys fees is the exception rather than the
rule.[84]Attorneys fees are not awarded every time a party
prevails in a suit because of the policy that no premium
should be placed on the right to litigate.[85] We therefore
delete the attorneys fees awarded to Pajuyo.
We sustain the P300 monthly rentals the MTC and RTC
assessed against Guevarra. Guevarra did not dispute this
factual finding of the two courts. We find the amount
reasonable compensation to Pajuyo. The P300 monthly
rental is counted from the last demand to vacate, which
was on 16 February 1995.
WHEREFORE, we GRANT the petition. The Decision
dated 21 June 2000 and Resolution dated 14 December
2000 of the Court of Appeals in CA-G.R. SP No. 43129 are
SET ASIDE. The Decision dated 11 November 1996 of the
Regional Trial Court of Quezon City, Branch 81 in Civil
Case No. Q-96-26943, affirming the Decision dated 15
December 1995 of the Metropolitan Trial Court of Quezon
City, Branch 31 in Civil Case No. 12432, is REINSTATED
with MODIFICATION. The award of attorneys fees is
deleted. No costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-8321 October 14, 1913

ALEJANDRA MINA, ET AL., plaintiffs-appellants,
vs.
RUPERTA PASCUAL, ET AL., defendants-appellees.

N. Segundo for appellants.

Iigo Bitanga for appellees.

ARELLANO, C.J.:

Francisco Fontanilla and Andres Fontanilla were brothers.

Francisco Fontanilla acquired during his lifetime, on March
12, 1874, a lot in the center of the town of Laoag, the
capital of the Province of Ilocos Norte, the property having
been awarded to him through its purchase at a public
auction held by the alcalde mayor of that province. The lot
has a frontage of 120 meters and a depth of 15.

Andres Fontanilla, with the consent of his brother

Francisco, erected a warehouse on a part of the said lot,
embracing 14 meters of its frontage by 11 meters of its
depth.

Francisco Fontanilla, the former owner of the lot, being

dead, the herein plaintiffs, Alejandro Mina, et al., were
recognized without discussion as his heirs.

Andres Fontanilla, the former owner of the warehouse,

also having died, the children of Ruperta Pascual were
recognized likes without discussion, though it is not said
how, and consequently are entitled to the said building, or
rather, as Ruperta Pascual herself stated, to only
six-sevenths of one-half of it, the other half belonging, as it
appears, to the plaintiffs themselves, and the remaining
one-seventh of the first one-half to the children of one of
the plaintiffs, Elena de Villanueva. The fact is that the
plaintiffs and the defendants are virtually, to all appearance,
the owners of the warehouse; while the plaintiffs are
undoubtedly, the owners of the part of the lot occupied by
that building, as well as of the remainder thereof.

This was the state of affairs, when, on May 6, 1909,

Ruperta Pascual, as the guardian of her minor children, the
herein defendants, petitioned the Curt of First Instance of
Ilocos Norte for authorization to sell "the six-sevenths of
the one-half of the warehouse, of 14 by 11 meters,
together with its lot." The plaintiffs that is Alejandra Mina,
et al. opposed the petition of Ruperta Pascual for the
reason that the latter had included therein the lot occupied
by the warehouse, which they claimed was their exclusive
property. All this action was taken in a special
proceeding in re guardianship.

The plaintiffs did more than oppose Pascual's petition; they

requested the court, through motion, to decide the
question of the ownership of the lot before it pass upon the
petition for the sale of the warehouse. But the court before
determining the matter of the ownership of the lot occupied
by the warehouse, ordered the sale of this building, saying:

While the trial continues with respect to the ownership of

the lot, the court orders the sale at public auction of the
said warehouse and of the lot on which it is built, with the
present boundaries of the land and condition of the
building, at a price of not less than P2,890 Philippine
currency . . . .

So, the warehouse, together with the lot on which it stands,

was sold to Cu Joco, the other defendant in this case, for
the price mentioned.

The plaintiffs insisted upon a decision of the question of

the ownership of the lot, and the court decided it by holding
that this land belonged to the owner of the warehouse
which had been built thereon thirty years before.
The plaintiffs appealed and this court reversed the
judgment of the lower court and held that the appellants
were the owners of the lot in question. 1

When the judgment became final and executory, a writ of

execution issued and the plaintiffs were given possession
of the lot; but soon thereafter the trial court annulled this
possession for the reason that it affected Cu Joco, who
had not been a party to the suit in which that writ was
served.

It was then that the plaintiffs commenced the present

action for the purpose of having the sale of the said lot
declared null and void and of no force and effect.

An agreement was had ad to the facts, the ninth paragraph

of which is as follows:

9. That the herein plaintiffs excepted to the judgment and

appealed therefrom to the Supreme Court which found for
them by holding that they are the owners of the lot in
question, although there existed and still exists a
commodatum by virtue of which the guardianship
(meaning the defendants) had and has the use, and the
plaintiffs the ownership, of the property, with no finding
concerning the decree of the lower court that ordered the
sale.

The obvious purport of the cause "although there existed

and still exists a commodatum," etc., appears to be that it
is a part of the decision of the Supreme Court and that,
while finding the plaintiffs to be the owners of the lot, we
recognized in principle the existence of a commodatum
under which the defendants held the lot. Nothing could be
more inexact. Possibly, also, the meaning of that clause is
that, notwithstanding the finding made by the Supreme
Court that the plaintiffs were the owners, these former and
the defendants agree that there existed, and still exists, a
commodatum, etc. But such an agreement would not affect
the truth of the contents of the decision of this court, and
the opinions held by the litigants in regard to this point
could have no bearing whatever on the present decision.

Nor did the decree of the lower court that ordered the sale
have the least influence in our previous decision to require
our making any finding in regard thereto, for, with or
without that decree, the Supreme Court had to decide the
ownership of the lot consistently with its titles and not in
accordance with the judicial acts or proceedings had prior
to the setting up of the issue in respect to the ownership of
the property that was the subject of the judicial decree.

What is essentially pertinent to the case is the fact that the

defendant agree that the plaintiffs have the ownership, and
they themselves only the use, of the said lot.

On this premise, the nullity of the sale of the lot is in all

respects quite evident, whatsoever be the manner in which
the sale was effected, whether judicially or extrajudicially.

He who has only the use of a thing cannot validly sell the
thing itself. The effect of the sale being a transfer of the
ownership of the thing, it is evident that he who has only
the mere use of the thing cannot transfer its ownership.
The sale of a thing effected by one who is not its owner is
null and void. The defendants never were the owners of
the lot sold. The sale of it by them is necessarily null and
void. On cannot convey to another what he has never had
himself.

The returns of the auction contain the following

statements:

I, Ruperta Pascual, the guardian of the minors, etc., by

virtue of the authorization conferred upon me on the 31st
of July, 1909, by the Court of First Instance of Ilocos Norte,
proceeded with the sale at public auction of the
six-sevenths part of the one-half of the warehouse
constructed of rubble stone, etc.

Whereas I, Ruperta Pascual, the guardian of the minors,

etc., sold at public auction all the land and all the rights title,
interest, and ownership in the said property to Cu Joco,
who was the highest bidder, etc.

Therefore, . . . I cede and deliver forever to the said

purchaser, Cu Joco, his heirs and assigns, all the interest,
ownership and inheritance rights and others that, as the
guardian of the said minors, I have and may have in the
said property, etc.

The purchaser could not acquire anything more than the

interest that might be held by a person to whom realty in
possession of the vendor might be sold, for at a judicial
auction nothing else is disposed of. What the minor
children of Ruperta Pascual had in their possession was
the ownership of the six-sevenths part of one-half of the
warehouse and the use of the lot occupied by his building.
This, and nothing more, could the Chinaman Cu Joco
acquire at that sale: not the ownership of the lot; neither
the other half, nor the remaining one-seventh of the said
first half, of the warehouse. Consequently, the sale made
to him of this one-seventh of one-half and the entire other
half of the building was null and void, and likewise with still
more reason the sale of the lot the building occupies.

The purchaser could and should have known what it was

that was offered for sale and what it was that he purchased.
There is nothing that can justify the acquisition by the
purchaser of the warehouse of the ownership of the lot that
this building occupies, since the minors represented by
Ruperta Pascual never were the owners of the said lot, nor
were they ever considered to be such.

The trial court, in the judgment rendered, held that there

were no grounds for the requested annulment of the sale,
and that the plaintiffs were entitled to the P600 deposited
with the clerk of the court as the value of the lot in question.
The defendants, Ruperta Pascual and the Chinaman Cu
Joco, were absolved from the complaint, without express
finding as to costs.

The plaintiffs cannot be obliged to acquiesce in or allow the

sale made and be compelled to accept the price set on the
lot by expert appraisers, not even though the plaintiffs be
considered as coowner of the warehouse. It would be
much indeed that, on the ground of coownership, they
should have to abide by and tolerate the sale of the said
building, which point this court does not decide as it is not
a question submitted to us for decision, but, as regards the
sale of the lot, it is in all respects impossible to hold that the
plaintiffs must abide by it and tolerate, it, and this
conclusion is based on the fact that they did not give their
consent (art. 1261, Civil Code), and only the contracting
parties who have given it are obliged to comply (art.
1091, idem).

The sole purpose of the action in the beginning was to

obtain an annulment of the sale of the lot; but subsequently
the plaintiffs, through motion, asked for an amendment by
their complaint in the sense that the action should be
deemed to be one for the recovery of possession of a lot
and for the annulment of its sale. The plaintiff's petition was
opposed by the defendant's attorney, but was allowed by
the court; therefore the complaint seeks, after the judicial
annulment of the sale of the lot, to have the defendants
sentenced immediately to deliver the same to the plaintiffs.

Such a finding appears to be in harmony with the decision

rendered by the Supreme Court in previous suit, wherein it
was held that the ownership of the lot lay in the plaintiffs,
and for this reason steps were taken to give possession
thereof to the defendants; but, as the purchaser Cu Joco
was not a party to that suit, the present action is strictly one
for recover against Cu Joco to compel him, once the sale
has been annulled, to deliver the lot to its lawful owners,
the plaintiffs.

As respects this action for recovery, this Supreme Court

finds:

1. That it is a fact admitted by the litigating parties, both in

this and in the previous suit, that Andres Fontanilla, the
defendants' predecessor in interest, erected the
warehouse on the lot, some thirty years ago, with the
explicit consent of his brother Francisco Fontanilla, the
plaintiff's predecessor in interest.

2. That it also appears to be an admitted fact that the

plaintiffs and the defendants are the coowners of the
warehouse.

3. That it is a fact explicitly admitted in the agreement, that

neither Andres Fontanilla nor his successors paid any
consideration or price whatever for the use of the lot
occupied by the said building; whence it is, perhaps, that
both parties have denominated that use a commodatum.

Upon the premise of these facts, or even merely upon that

of the first of them, the sentencing of the defendants to
deliver the lot to the plaintiffs does not follow as a
necessary corollary of the judicial declaration of ownership
made in the previous suit, nor of that of the nullity of the
sale of the lot, made in the present case.

The defendants do not hold lawful possession of the lot in

question.1awphil.net

But, although both litigating parties may have agreed in

their idea of the commodatum, on account of its not being,
as indeed it is not, a question of fact but of law, yet that
denomination given by them to the use of the lot granted
by Francisco Fontanilla to his brother, Andres Fontanilla, is
not acceptable. Contracts are not to be interpreted in
conformity with the name that the parties thereto agree to
give them, but must be construed, duly considering their
constitutive elements, as they are defined and
denominated by law.

By the contract of loan, one of the parties delivers to the

other, either anything not perishable, in order that the latter
may use it during the certain period and return it to the
former, in which case it is calledcommodatum . . . (art.
1740, Civil Code).

It is, therefore, an essential feature of the commodatum

that the use of the thing belonging to another shall for a
certain period. Francisco Fontanilla did not fix any definite
period or time during which Andres Fontanilla could have
the use of the lot whereon the latter was to erect a stone
warehouse of considerable value, and so it is that for the
past thirty years of the lot has been used by both Andres
and his successors in interest. The present contention of
the plaintiffs that Cu Joco, now in possession of the lot,
should pay rent for it at the rate of P5 a month, would
destroy the theory of the commodatum sustained by them,
since, according to the second paragraph of the aforecited
article 1740, "commodatum is essentially gratuitous," and,
if what the plaintiffs themselves aver on page 7 of their
brief is to be believed, it never entered Francisco's mind to
limit the period during which his brother Andres was to
have the use of the lot, because he expected that the
warehouse would eventually fall into the hands of his son,
Fructuoso Fontanilla, called the adopted son of Andres,
which did not come to pass for the reason that Fructuoso
died before his uncle Andres. With that expectation in view,
it appears more likely that Francisco intended to allow his
brother Andres a surface right; but this right supposes the
payment of an annual rent, and Andres had the gratuitous
use of the lot.
Hence, as the facts aforestated only show that a building
was erected on another's ground, the question should be
decided in accordance with the statutes that, thirty years
ago, governed accessions to real estate, and which were
Laws 41 and 42, title 28, of the third Partida, nearly
identical with the provisions of articles 361 and 362 of the
Civil Code. So, then, pursuant to article 361, the owner of
the land on which a building is erected in good faith has a
right to appropriate such edifice to himself, after payment
of the indemnity prescribed in articles 453 and 454, or to
oblige the builder to pay him the value of the land. Such,
and no other, is the right to which the plaintiff are entitled.

For the foregoing reasons, it is only necessary to annul the

sale of the said lot which was made by Ruperta Pascual, in
representation of her minor children, to Cu Joco, and to
maintain the latter in the use of the lot until the plaintiffs
shall choose one or the other of the two rights granted
them by article 361 of the Civil Code.1awphil.net

The judgment appealed from is reversed and the sale of

the lot in question is held to be null and void and of no
force or effect. No special finding is made as to the costs of
both instances.

Torres, Johnson, Carson, Moreland and Trent, JJ., concur.

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 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.

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.

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.

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;
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. 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.

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.

Narvasa, Cruz, Grio-Aquino and Medialdea, JJ., concur.

Footnotes

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

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

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 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.

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.

Avancea, C.J., Villa-Real, Laurel, Concepcion and Moran,

JJ., concur.
 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. 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 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 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 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 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.

Bengzon, C.J., Concepcion, Barrera, Regala, Bautista

Angelo, Reyes, J.B.L., Makalintal and Bengzon, J.P.,
JJ.,concur.
 FIRST DIVISION

[G.R. No. 138569. September 11, 2003]

THE CONSOLIDATED BANK and TRUST

CORPORATION, petitioner, vs. COURT OF
APPEALS and L.C. DIAZ and COMPANY,
CPAs, respondents.

DECISION
CARPIO, J.:

The Case

Before us is a petition for review of the Decision[1] of the

Court of Appeals dated 27 October 1998 and its Resolution
dated 11 May 1999. The assailed decision reversed the
Decision[2] of the Regional Trial Court of Manila, Branch 8,
absolving petitioner Consolidated Bank and Trust
Corporation, now known as Solidbank Corporation
(Solidbank), of any liability. The questioned resolution of
the appellate court denied the motion for reconsideration of
Solidbank but modified the decision by deleting the award
of exemplary damages, attorneys fees, expenses of
litigation and cost of suit.

The Facts

Solidbank is a domestic banking corporation organized

and existing under Philippine laws. Private respondent L.C.
Diaz and Company, CPAs (L.C. Diaz), is a professional
partnership engaged in the practice of accounting.
Sometime in March 1976, L.C. Diaz opened a savings
account with Solidbank, designated as Savings Account
No. S/A 200-16872-6.
On 14 August 1991, L.C. Diaz through its cashier,
Mercedes Macaraya (Macaraya), filled up a savings (cash)
deposit slip for P990 and a savings (checks) deposit slip
for P50. Macaraya instructed the messenger of L.C. Diaz,
Ismael Calapre (Calapre), to deposit the money with
Solidbank. Macaraya also gave Calapre the Solidbank
passbook.
Calapre went to Solidbank and presented to Teller No.
6 the two deposit slips and the passbook. The teller
acknowledged receipt of the deposit by returning to
Calapre the duplicate copies of the two deposit slips. Teller
No. 6 stamped the deposit slips with the words
DUPLICATE and SAVING TELLER 6 SOLIDBANK HEAD
OFFICE. Since the transaction took time and Calapre had
to make another deposit for L.C. Diaz with Allied Bank, he
left the passbook with Solidbank. Calapre then went to
Allied Bank. When Calapre returned to Solidbank to
retrieve the passbook, Teller No. 6 informed him that
somebody got the passbook.[3] Calapre went back to L.C.
Diaz and reported the incident to Macaraya.
Macaraya immediately prepared a deposit slip in
duplicate copies with a check of P200,000. Macaraya,
together with Calapre, went to Solidbank and presented to
Teller No. 6 the deposit slip and check. The teller stamped
the words DUPLICATE and SAVING TELLER 6
SOLIDBANK HEAD OFFICE on the duplicate copy of the
deposit slip. When Macaraya asked for the passbook,
Teller No. 6 told Macaraya that someone got the passbook
but she could not remember to whom she gave the
passbook. When Macaraya asked Teller No. 6 if Calapre
got the passbook, Teller No. 6 answered that someone
shorter than Calapre got the passbook. Calapre was then
standing beside Macaraya.
Teller No. 6 handed to Macaraya a deposit slip dated 14
August 1991 for the deposit of a check for P90,000 drawn
on Philippine Banking Corporation (PBC). This PBC check
of L.C. Diaz was a check that it had long closed.[4] PBC
subsequently dishonored the check because of insufficient
funds and because the signature in the check differed from
PBCs specimen signature. Failing to get back the
passbook, Macaraya went back to her office and reported
the matter to the Personnel Manager of L.C. Diaz,
Emmanuel Alvarez.
The following day, 15 August 1991, L.C. Diaz through
its Chief Executive Officer, Luis C. Diaz (Diaz), called up
Solidbank to stop any transaction using the same
passbook until L.C. Diaz could open a new account.[5] On
the same day, Diaz formally wrote Solidbank to make the
same request. It was also on the same day that L.C. Diaz
learned of the unauthorized withdrawal the day before, 14
August 1991, of P300,000 from its savings account. The
withdrawal slip for the P300,000 bore the signatures of the
authorized signatories of L.C. Diaz, namely Diaz and
Rustico L. Murillo. The signatories, however, denied
signing the withdrawal slip. A certain Noel Tamayo
received the P300,000.
In an Information[6] dated 5 September 1991, L.C. Diaz
charged its messenger, Emerano Ilagan (Ilagan) and one
Roscon Verdazola with Estafa through Falsification of
Commercial Document. The Regional Trial Court of Manila
dismissed the criminal case after the City Prosecutor filed
a Motion to Dismiss on 4 August 1992.
On 24 August 1992, L.C. Diaz through its counsel
demanded from Solidbank the return of its
money. Solidbank refused.
 On 25 August 1992, L.C. Diaz filed a Complaint[7] for
Recovery of a Sum of Money against Solidbank with the
Regional Trial Court of Manila, Branch 8. After trial, the trial
court rendered on 28 December 1994 a decision absolving
Solidbank and dismissing the complaint.
L.C. Diaz then appealed[8] to the Court of Appeals. On
27 October 1998, the Court of Appeals issued its Decision
reversing the decision of the trial court.
On 11 May 1999, the Court of Appeals issued its
Resolution denying the motion for reconsideration of
Solidbank. The appellate court, however, modified its
decision by deleting the award of exemplary damages and
attorneys fees.

The Ruling of the Trial Court

In absolving Solidbank, the trial court applied the rules

on savings account written on the passbook. The rules
state that possession of this book shall raise the
presumption of ownership and any payment or payments
made by the bank upon the production of the said book
and entry therein of the withdrawal shall have the same
effect as if made to the depositor personally.[9]
At the time of the withdrawal, a certain Noel Tamayo
was not only in possession of the passbook, he also
presented a withdrawal slip with the signatures of the
authorized signatories of L.C. Diaz. The specimen
signatures of these persons were in the signature
cards. The teller stamped the withdrawal slip with the
words Saving Teller No. 5. The teller then passed on the
withdrawal slip to Genere Manuel (Manuel) for
authentication. Manuel verified the signatures on the
withdrawal slip. The withdrawal slip was then given to
another officer who compared the signatures on the
withdrawal slip with the specimen on the signature cards.
The trial court concluded that Solidbank acted with care
and observed the rules on savings account when it allowed
the withdrawal of P300,000 from the savings account of
L.C. Diaz.
The trial court pointed out that the burden of proof now
shifted to L.C. Diaz to prove that the signatures on the
withdrawal slip were forged. The trial court admonished
L.C. Diaz for not offering in evidence the National Bureau
of Investigation (NBI) report on the authenticity of the
signatures on the withdrawal slip for P300,000. The trial
court believed that L.C. Diaz did not offer this evidence
because it is derogatory to its action.
Another provision of the rules on savings account states
that the depositor must keep the passbook under lock and
key.[10] When another person presents the passbook for
withdrawal prior to Solidbanks receipt of the notice of loss
of the passbook, that person is considered as the owner of
the passbook. The trial court ruled that the passbook
presented during the questioned transaction was now out
of the lock and key and presumptively ready for a business
transaction.[11]
Solidbank did not have any participation in the custody
and care of the passbook. The trial court believed that
Solidbanks act of allowing the withdrawal of P300,000 was
not the direct and proximate cause of the loss. The trial
court held that L.C. Diazs negligence caused the
unauthorized withdrawal. Three facts establish L.C. Diazs
negligence: (1) the possession of the passbook by a
person other than the depositor L.C. Diaz; (2) the
presentation of a signed withdrawal receipt by an
unauthorized person; and (3) the possession by an
unauthorized person of a PBC check long closed by L.C.
Diaz, which check was deposited on the day of the
fraudulent withdrawal.
The trial court debunked L.C. Diazs contention that
Solidbank did not follow the precautionary procedures
observed by the two parties whenever L.C. Diaz withdrew
significant amounts from its account. L.C. Diaz claimed
that a letter must accompany withdrawals of more
than P20,000. The letter must request Solidbank to allow
the withdrawal and convert the amount to a managers
check. The bearer must also have a letter authorizing him
to withdraw the same amount. Another person driving a
car must accompany the bearer so that he would not walk
from Solidbank to the office in making the withdrawal. The
trial court pointed out that L.C. Diaz disregarded these
precautions in its past withdrawal. On 16 July 1991, L.C.
Diaz withdrew P82,554 without any separate letter of
authorization or any communication with Solidbank that the
money be converted into a managers check.
The trial court further justified the dismissal of the
complaint by holding that the case was a last ditch effort of
L.C. Diaz to recover P300,000 after the dismissal of the
criminal case against Ilagan.
The dispositive portion of the decision of the trial court
reads:

IN VIEW OF THE FOREGOING, judgment is hereby rendered

DISMISSING the complaint.

The Court further renders judgment in favor of defendant bank

pursuant to its counterclaim the amount of Thirty Thousand
Pesos (P30,000.00) as attorneys fees.

With costs against plaintiff.

SO ORDERED.[12]

The Ruling of the Court of Appeals

The Court of Appeals ruled that Solidbanks negligence

was the proximate cause of the unauthorized withdrawal
of P300,000 from the savings account of L.C. Diaz. The
appellate court reached this conclusion after applying the
provision of the Civil Code on quasi-delict, to wit:

Article 2176. Whoever by act or omission causes damage to

another, there being fault or negligence, is obliged to pay for the
damage done. Such fault or negligence, if there is no
pre-existing contractual relation between the parties, is called a
quasi-delict and is governed by the provisions of this chapter.

The appellate court held that the three elements of a

quasi-delict are present in this case, namely: (a) damages
suffered by the plaintiff; (b) fault or negligence of the
defendant, or some other person for whose acts he must
respond; and (c) the connection of cause and effect
between the fault or negligence of the defendant and the
damage incurred by the plaintiff.
The Court of Appeals pointed out that the teller of
Solidbank who received the withdrawal slip for P300,000
allowed the withdrawal without making the necessary
inquiry. The appellate court stated that the teller, who was
not presented by Solidbank during trial, should have called
up the depositor because the money to be withdrawn was
a significant amount. Had the teller called up L.C. Diaz,
Solidbank would have known that the withdrawal was
unauthorized. The teller did not even verify the identity of
the impostor who made the withdrawal. Thus, the appellate
court found Solidbank liable for its negligence in the
selection and supervision of its employees.
The appellate court ruled that while L.C. Diaz was also
negligent in entrusting its deposits to its messenger and its
messenger in leaving the passbook with the
teller, Solidbank could not escape liability because of the
doctrine of last clear chance. Solidbank could have averted
the injury suffered by L.C. Diaz had it called up L.C. Diaz to
verify the withdrawal.
The appellate court ruled that the degree of diligence
required from Solidbank is more than that of a good father
of a family. The business and functions of banks are
affected with public interest. Banks are obligated to treat
the accounts of their depositors with meticulous care,
always having in mind the fiduciary nature of their
relationship with their clients. The Court of Appeals found
Solidbank remiss in its duty, violating its fiduciary
relationship with L.C. Diaz.
The dispositive portion of the decision of the Court of
Appeals reads:

WHEREFORE, premises considered, the decision appealed

from is hereby REVERSED and a new one entered.

1. Ordering defendant-appellee Consolidated Bank and

Trust Corporation to pay plaintiff-appellant the sum
of Three Hundred Thousand Pesos (P300,000.00),
with interest thereon at the rate of 12% per annum
from the date of filing of the complaint until paid, the
sum of P20,000.00 as exemplary damages,
and P20,000.00 as attorneys fees and expenses of
litigation as well as the cost of suit; and

2. Ordering the dismissal of defendant-appellees

counterclaim in the amount of P30,000.00 as
attorneys fees.

SO ORDERED.[13]

Acting on the motion for reconsideration of Solidbank, the

appellate court affirmed its decision but modified the award
of damages. The appellate court deleted the award of
exemplary damages and attorneys fees. Invoking Article
2231[14] of the Civil Code, the appellate court ruled that
exemplary damages could be granted if the defendant
acted with gross negligence. Since Solidbank was guilty of
simple negligence only, the award of exemplary damages
was not justified. Consequently, the award of attorneys
fees was also disallowed pursuant to Article 2208 of the
Civil Code. The expenses of litigation and cost of suit were
also not imposed on Solidbank.
The dispositive portion of the Resolution reads as
follows:

WHEREFORE, foregoing considered, our decision dated

October 27, 1998 is affirmed with modification by deleting the
award of exemplary damages and attorneys fees, expenses of
litigation and cost of suit.

SO ORDERED.[15]

Hence, this petition.

The Issues

Solidbank seeks the review of the decision and

resolution of the Court of Appeals on these grounds:

I. THE COURT OF APPEALS ERRED IN HOLDING

THAT PETITIONER BANK SHOULD SUFFER
THE LOSS BECAUSE ITS TELLER SHOULD
HAVE FIRST CALLED PRIVATE RESPONDENT
BY TELEPHONE BEFORE IT ALLOWED THE
WITHDRAWAL OF P300,000.00 TO
RESPONDENTS MESSENGER EMERANO
ILAGAN, SINCE THERE IS NO AGREEMENT
BETWEEN THE PARTIES IN THE OPERATION
OF THE SAVINGS ACCOUNT, NOR IS THERE
ANY BANKING LAW, WHICH MANDATES
THAT A BANK TELLER SHOULD FIRST CALL
UP THE DEPOSITOR BEFORE ALLOWING A
WITHDRAWAL OF A BIG AMOUNT IN A
SAVINGS ACCOUNT.

II. THE COURT OF APPEALS ERRED IN APPLYING

THE DOCTRINE OF LAST CLEAR CHANCE
 AND IN HOLDING THAT PETITIONER BANKS
TELLER HAD THE LAST OPPORTUNITY TO
WITHHOLD THE WITHDRAWAL WHEN IT IS
UNDISPUTED THAT THE TWO SIGNATURES
OF RESPONDENT ON THE WITHDRAWAL
SLIP ARE GENUINE AND PRIVATE
RESPONDENTS PASSBOOK WAS DULY
PRESENTED, AND CONTRARIWISE
RESPONDENT WAS NEGLIGENT IN THE
SELECTION AND SUPERVISION OF ITS
MESSENGER EMERANO ILAGAN, AND IN THE
SAFEKEEPING OF ITS CHECKS AND OTHER
FINANCIAL DOCUMENTS.

III. THE COURT OF APPEALS ERRED IN NOT

FINDING THAT THE INSTANT CASE IS A LAST
DITCH EFFORT OF PRIVATE RESPONDENT TO
RECOVER ITS P300,000.00 AFTER FAILING IN
ITS EFFORTS TO RECOVER THE SAME FROM
ITS EMPLOYEE EMERANO ILAGAN.

IV. THE COURT OF APPEALS ERRED IN NOT

MITIGATING THE DAMAGES AWARDED
AGAINST PETITIONER UNDER ARTICLE 2197
OF THE CIVIL CODE, NOTWITHSTANDING ITS
FINDING THAT PETITIONER BANKS
NEGLIGENCE WAS ONLY CONTRIBUTORY.[16]

The Ruling of the Court

The petition is partly meritorious.

Solidbanks Fiduciary Duty under the Law

The rulings of the trial court and the Court of Appeals

conflict on the application of the law. The trial court pinned
the liability on L.C. Diaz based on the provisions of the
rules on savings account, a recognition of the contractual
relationship between Solidbank and L.C. Diaz, the latter
being a depositor of the former. On the other hand, the
Court of Appeals applied the law on quasi-delict to
determine who between the two parties was ultimately
negligent. The law on quasi-delict or culpa aquiliana is
generally applicable when there is no pre-existing
contractual relationship between the parties.
We hold that Solidbank is liable for breach of contract
due to negligence, or culpa contractual.
The contract between the bank and its depositor is
governed by the provisions of the Civil Code on simple
loan.[17] Article 1980 of the Civil Code expressly provides
that x x x savings x x x deposits of money in banks and
similar institutions shall be governed by the provisions
concerning simple loan. There is a debtor-creditor
relationship between the bank and its depositor. The bank
is the debtor and the depositor is the creditor. The
depositor lends the bank money and the bank agrees to
pay the depositor on demand. The savings deposit
agreement between the bank and the depositor is the
contract that determines the rights and obligations of the
parties.
The law imposes on banks high standards in view of the
fiduciary nature of banking. Section 2 of Republic Act No.
8791 (RA 8791),[18] which took effect on 13 June 2000,
declares that the State recognizes the fiduciary nature of
banking that requires high standards of integrity and
performance.[19] This new provision in the general banking
law, introduced in 2000, is a statutory affirmation of
Supreme Court decisions, starting with the 1990 case
of Simex International v. Court of Appeals,[20] holding
that the bank is under obligation to treat the accounts of its
depositors with meticulous care, always having in mind the
fiduciary nature of their relationship.[21]
 This fiduciary relationship means that the banks
obligation to observe high standards of integrity and
performance is deemed written into every deposit
agreement between a bank and its depositor. The fiduciary
nature of banking requires banks to assume a degree of
diligence higher than that of a good father of a
family. Article 1172 of the Civil Code states that the degree
of diligence required of an obligor is that prescribed by law
or contract, and absent such stipulation then the diligence
of a good father of a family.[22] Section 2 of RA 8791
prescribes the statutory diligence required from banks that
banks must observe high standards of integrity and
performance in servicing their depositors. Although RA
8791 took effect almost nine years after the unauthorized
withdrawal of the P300,000 from L.C. Diazs savings
account, jurisprudence[23] at the time of the withdrawal
already imposed on banks the same high standard of
diligence required under RA No. 8791.
However, the fiduciary nature of a bank-depositor
relationship does not convert the contract between the
bank and its depositors from a simple loan to a trust
agreement, whether express or implied. Failure by the
bank to pay the depositor is failure to pay a simple loan,
and not a breach of trust.[24] The law simply imposes on the
bank a higher standard of integrity and performance in
complying with its obligations under the contract of simple
loan, beyond those required of non-bank debtors under a
similar contract of simple loan.
The fiduciary nature of banking does not convert a
simple loan into a trust agreement because banks do not
accept deposits to enrich depositors but to earn money for
themselves. The law allows banks to offer the lowest
possible interest rate to depositors while charging the
highest possible interest rate on their own borrowers. The
interest spread or differential belongs to the bank and not
to the depositors who are not cestui que trust of banks. If
depositors are cestui que trust of banks, then the interest
spread or income belongs to the depositors, a situation
that Congress certainly did not intend in enacting Section 2
of RA 8791.

Solidbanks Breach of its Contractual Obligation

Article 1172 of the Civil Code provides that

responsibility arising from negligence in the performance of
every kind of obligation is demandable. For breach of the
savings deposit agreement due to negligence, or culpa
contractual, the bank is liable to its depositor.
Calapre left the passbook with Solidbank because the
transaction took time and he had to go to Allied Bank for
another transaction. The passbook was still in the hands of
the employees of Solidbank for the processing of the
deposit when Calapre left Solidbank. Solidbanks rules on
savings account require that the deposit book should be
carefully guarded by the depositor and kept under lock and
key, if possible. When the passbook is in the possession of
Solidbanks tellers during withdrawals, the law imposes on
Solidbank and its tellers an even higher degree of diligence
in safeguarding the passbook.
Likewise, Solidbanks tellers must exercise a high
degree of diligence in insuring that they return the
passbook only to the depositor or his authorized
representative. The tellers know, or should know, that the
rules on savings account provide that any person in
possession of the passbook is presumptively its owner. If
the tellers give the passbook to the wrong person, they
would be clothing that person presumptive ownership of
the passbook, facilitating unauthorized withdrawals by that
person. For failing to return the passbook to Calapre, the
authorized representative of L.C. Diaz, Solidbank and
Teller No. 6 presumptively failed to observe such high
degree of diligence in safeguarding the passbook, and in
insuring its return to the party authorized to receive the
same.
In culpa contractual, once the plaintiff proves a breach
of contract, there is a presumption that the defendant was
at fault or negligent. The burden is on the defendant to
prove that he was not at fault or negligent. In contrast,
in culpa aquiliana the plaintiff has the burden of proving
that the defendant was negligent. In the present case, L.C.
Diaz has established that Solidbank breached its
contractual obligation to return the passbook only to the
authorized representative of L.C. Diaz. There is thus a
presumption that Solidbank was at fault and its teller was
negligent in not returning the passbook to Calapre. The
burden was on Solidbank to prove that there was no
negligence on its part or its employees.
Solidbank failed to discharge its burden. Solidbank did
not present to the trial court Teller No. 6, the teller with
whom Calapre left the passbook and who was supposed to
return the passbook to him. The record does not indicate
that Teller No. 6 verified the identity of the person who
retrieved the passbook. Solidbank also failed to adduce in
evidence its standard procedure in verifying the identity of
the person retrieving the passbook, if there is such a
procedure, and that Teller No. 6 implemented this
procedure in the present case.
Solidbank is bound by the negligence of its employees
under the principle of respondeat superior or command
responsibility. The defense of exercising the required
diligence in the selection and supervision of employees is
not a complete defense in culpa contractual, unlike
in culpa aquiliana.[25]
The bank must not only exercise high standards of
integrity and performance, it must also insure that its
employees do likewise because this is the only way to
insure that the bank will comply with its fiduciary
duty. Solidbank failed to present the teller who had the
duty to return to Calapre the passbook, and thus failed to
prove that this teller exercised the high standards of
integrity and performance required of Solidbanks
employees.

Proximate Cause of the Unauthorized Withdrawal

Another point of disagreement between the trial and

appellate courts is the proximate cause of the
unauthorized withdrawal. The trial court believed that L.C.
Diazs negligence in not securing its passbook under lock
and key was the proximate cause that allowed the
impostor to withdraw the P300,000. For the appellate court,
the proximate cause was the tellers negligence in
processing the withdrawal without first verifying with L.C.
Diaz. We do not agree with either court.
Proximate cause is that cause which, in natural and
continuous sequence, unbroken by any efficient
intervening cause, produces the injury and without which
the result would not have occurred.[26] Proximate cause is
determined by the facts of each case upon mixed
considerations of logic, common sense, policy and
precedent.[27]
L.C. Diaz was not at fault that the passbook landed in
the hands of the impostor. Solidbank was in possession of
the passbook while it was processing the deposit. After
completion of the transaction, Solidbank had the
contractual obligation to return the passbook only to
Calapre, the authorized representative of L.C.
Diaz. Solidbank failed to fulfill its contractual obligation
because it gave the passbook to another person.
Solidbanks failure to return the passbook to Calapre
made possible the withdrawal of the P300,000 by the
impostor who took possession of the passbook. Under
Solidbanks rules on savings account, mere possession of
the passbook raises the presumption of ownership. It was
the negligent act of Solidbanks Teller No. 6 that gave the
impostor presumptive ownership of the passbook. Had the
passbook not fallen into the hands of the impostor, the loss
of P300,000 would not have happened. Thus, the
proximate cause of the unauthorized withdrawal was
Solidbanks negligence in not returning the passbook to
Calapre.
We do not subscribe to the appellate courts theory that
the proximate cause of the unauthorized withdrawal was
the tellers failure to call up L.C. Diaz to verify the
withdrawal. Solidbank did not have the duty to call up L.C.
Diaz to confirm the withdrawal. There is no arrangement
between Solidbank and L.C. Diaz to this effect. Even the
agreement between Solidbank and L.C. Diaz pertaining to
measures that the parties must observe whenever
withdrawals of large amounts are made does not direct
Solidbank to call up L.C. Diaz.
There is no law mandating banks to call up their clients
whenever their representatives withdraw significant
amounts from their accounts. L.C. Diaz therefore had the
burden to prove that it is the usual practice of Solidbank to
call up its clients to verify a withdrawal of a large amount of
money. L.C. Diaz failed to do so.
Teller No. 5 who processed the withdrawal could not
have been put on guard to verify the withdrawal. Prior to
the withdrawal of P300,000, the impostor deposited with
Teller No. 6 the P90,000 PBC check, which later
bounced. The impostor apparently deposited a large
amount of money to deflect suspicion from the withdrawal
of a much bigger amount of money. The appellate court
thus erred when it imposed on Solidbank the duty to call up
L.C. Diaz to confirm the withdrawal when no law requires
this from banks and when the teller had no reason to be
suspicious of the transaction.
Solidbank continues to foist the defense that Ilagan
made the withdrawal. Solidbank claims that since Ilagan
was also a messenger of L.C. Diaz, he was familiar with its
teller so that there was no more need for the teller to verify
the withdrawal. Solidbank relies on the following
statements in the Booking and Information Sheet of
Emerano Ilagan:

xxx Ilagan also had with him (before the withdrawal) a forged
check of PBC and indicated the amount of P90,000 which he
deposited in favor of L.C. Diaz and Company. After
successfully withdrawing this large sum of money, accused
Ilagan gave alias Rey (Noel Tamayo) his share of the
loot. Ilagan then hired a taxicab in the amount of P1,000 to
transport him (Ilagan) to his home province at Bauan,
Batangas. Ilagan extravagantly and lavishly spent his money but
a big part of his loot was wasted in cockfight and horse
racing. Ilagan was apprehended and meekly admitted his
guilt.[28] (Emphasis supplied.)

L.C. Diaz refutes Solidbanks contention by pointing out

that the person who withdrew the P300,000 was a certain
Noel Tamayo. Both the trial and appellate courts stated
that this Noel Tamayo presented the passbook with the
withdrawal slip.
We uphold the finding of the trial and appellate courts
that a certain Noel Tamayo withdrew the P300,000. The
Court is not a trier of facts. We find no justifiable reason to
reverse the factual finding of the trial court and the Court of
Appeals. The tellers who processed the deposit of
the P90,000 check and the withdrawal of the P300,000
were not presented during trial to substantiate Solidbanks
claim that Ilagan deposited the check and made the
questioned withdrawal. Moreover, the entry quoted by
Solidbank does not categorically state that Ilagan
presented the withdrawal slip and the passbook.

Doctrine of Last Clear Chance

 The doctrine of last clear chance states that where both
parties are negligent but the negligent act of one is
appreciably later than that of the other, or where it is
impossible to determine whose fault or negligence caused
the loss, the one who had the last clear opportunity to
avoid the loss but failed to do so, is chargeable with the
loss.[29] Stated differently, the antecedent negligence of the
plaintiff does not preclude him from recovering damages
caused by the supervening negligence of the defendant,
who had the last fair chance to prevent the impending
harm by the exercise of due diligence.[30]
We do not apply the doctrine of last clear chance to the
present case. Solidbank is liable for breach of contract due
to negligence in the performance of its contractual
obligation to L.C. Diaz. This is a case of culpa contractual,
where neither the contributory negligence of the plaintiff
nor his last clear chance to avoid the loss, would exonerate
the defendant from liability.[31] Such contributory
negligence or last clear chance by the plaintiff merely
serves to reduce the recovery of damages by the plaintiff
but does not exculpate the defendant from his breach of
contract.[32]

Mitigated Damages

Under Article 1172, liability (for culpa contractual) may

be regulated by the courts, according to the circumstances.
This means that if the defendant exercised the proper
diligence in the selection and supervision of its employee,
or if the plaintiff was guilty of contributory negligence, then
the courts may reduce the award of damages. In this case,
L.C. Diaz was guilty of contributory negligence in allowing
a withdrawal slip signed by its authorized signatories to fall
into the hands of an impostor. Thus, the liability of
Solidbank should be reduced.
 In Philippine Bank of Commerce v. Court of
Appeals,[33] where the Court held the depositor guilty of
contributory negligence, we allocated the damages
between the depositor and the bank on a 40-60
ratio. Applying the same ruling to this case, we hold that
L.C. Diaz must shoulder 40% of the actual damages
awarded by the appellate court. Solidbank must pay the
other 60% of the actual damages.
WHEREFORE, the decision of the Court of Appeals
is AFFIRMED with MODIFICATION. Petitioner Solidbank
Corporation shall pay private respondent L.C. Diaz and
Company, CPAs only 60% of the actual damages awarded
by the Court of Appeals. The remaining 40% of the actual
damages shall be borne by private respondent L.C. Diaz
and Company, CPAs. Proportionate costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. Nos. 173654-765 August 28, 2008

PEOPLE OF THE PHILIPPINES, petitioner,

vs.
TERESITA PUIG and ROMEO PORRAS, respondents.

DECISION

CHICO-NAZARIO, J.:

This is a Petition for Review under Rule 45 of the Revised

Rules of Court with petitioner People of the Philippines,
represented by the Office of the Solicitor General, praying
for the reversal of the Orders dated 30 January 2006 and 9
June 2006 of the Regional Trial Court (RTC) of the
6th Judicial Region, Branch 68, Dumangas, Iloilo,
dismissing the 112 cases of Qualified Theft filed against
respondents Teresita Puig and Romeo Porras, and
denying petitioners Motion for Reconsideration, in
Criminal Cases No. 05-3054 to 05-3165.

The following are the factual antecedents:

On 7 November 2005, the Iloilo Provincial Prosecutors

Office filed before Branch 68 of the RTC in Dumangas,
Iloilo, 112 cases of Qualified Theft against respondents
Teresita Puig (Puig) and Romeo Porras (Porras) who were
the Cashier and Bookkeeper, respectively, of private
complainant Rural Bank of Pototan, Inc. The cases were
docketed as Criminal Cases No. 05-3054 to 05-3165.

The allegations in the Informations1 filed before the RTC

were uniform and pro-forma, except for the amounts, date
and time of commission, to wit:

INFORMATION

That on or about the 1st day of August, 2002, in the

Municipality of Pototan, Province of Iloilo, Philippines, and
within the jurisdiction of this Honorable Court,
above-named [respondents], conspiring, confederating,
and helping one another, with grave abuse of
confidence, being the Cashier and Bookkeeper of the
Rural Bank of Pototan, Inc., Pototan, Iloilo, without the
knowledge and/or consent of the management of the Bank
and with intent of gain, did then and there willfully,
unlawfully and feloniously take, steal and carry away the
sum of FIFTEEN THOUSAND PESOS (P15,000.00),
Philippine Currency, to the damage and prejudice of the
said bank in the aforesaid amount.
After perusing the Informations in these cases, the trial
court did not find the existence of probable cause that
would have necessitated the issuance of a warrant of
arrest based on the following grounds:

(1) the element of taking without the consent of the

owners was missing on the ground that it is the
depositors-clients, and not the Bank, which filed the
complaint in these cases, who are the owners of the
money allegedly taken by respondents and hence, are the
real parties-in-interest; and

(2) the Informations are bereft of the phrase alleging

"dependence, guardianship or vigilance between the
respondents and the offended party that would have
created a high degree of confidence between them
which the respondents could have abused."

It added that allowing the 112 cases for Qualified Theft

filed against the respondents to push through would be
violative of the right of the respondents under Section
14(2), Article III of the 1987 Constitution which states that
in all criminal prosecutions, the accused shall enjoy the
right to be informed of the nature and cause of the
accusation against him. Following Section 6, Rule 112 of
the Revised Rules of Criminal Procedure, the RTC
dismissed the cases on 30 January 2006 and refused to
issue a warrant of arrest against Puig and Porras.

A Motion for Reconsideration2 was filed on 17 April 2006,

by the petitioner.

On 9 June 2006, an Order3 denying petitioners Motion for

Reconsideration was issued by the RTC, finding as
follows:

Accordingly, the prosecutions Motion for Reconsideration

should be, as it hereby, DENIED. The Order dated January
30, 2006 STANDS in all respects.
Petitioner went directly to this Court via Petition for Review
on Certiorari under Rule 45, raising the sole legal issue of:

WHETHER OR NOT THE 112 INFORMATIONS FOR

QUALIFIED THEFT SUFFICIENTLY ALLEGE THE
ELEMENT OF TAKING WITHOUT THE CONSENT OF
THE OWNER, AND THE QUALIFYING CIRCUMSTANCE
OF GRAVE ABUSE OF CONFIDENCE.

Petitioner prays that judgment be rendered annulling and

setting aside the Orders dated 30 January 2006 and 9
June 2006 issued by the trial court, and that it be directed
to proceed with Criminal Cases No. 05-3054 to 05-3165.

Petitioner explains that under Article 1980 of the New Civil

Code, "fixed, savings, and current deposits of money in
banks and similar institutions shall be governed by the
provisions concerning simple loans." Corollary thereto,
Article 1953 of the same Code provides that "a person who
receives a loan of money or any other fungible thing
acquires the ownership thereof, and is bound to pay to the
creditor an equal amount of the same kind and quality."
Thus, it posits that the depositors who place their money
with the bank are considered creditors of the bank. The
bank acquires ownership of the money deposited by its
clients, making the money taken by respondents as
belonging to the bank.

Petitioner also insists that the Informations sufficiently

allege all the elements of the crime of qualified theft, citing
that a perusal of the Informations will show that they
specifically allege that the respondents were the Cashier
and Bookkeeper of the Rural Bank of Pototan, Inc.,
respectively, and that they took various amounts of money
with grave abuse of confidence, and without the
knowledge and consent of the bank, to the damage and
prejudice of the bank.
Parenthetically, respondents raise procedural issues. They
challenge the petition on the ground that a Petition for
Review on Certiorari via Rule 45 is the wrong mode of
appeal because a finding of probable cause for the
issuance of a warrant of arrest presupposes evaluation of
facts and circumstances, which is not proper under said
Rule.

Respondents further claim that the Department of Justice

(DOJ), through the Secretary of Justice, is the principal
party to file a Petition for Review on Certiorari, considering
that the incident was indorsed by the DOJ.

We find merit in the petition.

The dismissal by the RTC of the criminal cases was

allegedly due to insufficiency of the Informations and,
therefore, because of this defect, there is no basis for the
existence of probable cause which will justify the issuance
of the warrant of arrest. Petitioner assails the dismissal
contending that the Informations for Qualified Theft
sufficiently state facts which constitute (a) the qualifying
circumstance of grave abuse of confidence; and (b) the
element of taking, with intent to gain and without the
consent of the owner, which is the Bank.

In determining the existence of probable cause to issue a

warrant of arrest, the RTC judge found the allegations in
the Information inadequate. He ruled that the Information
failed to state facts constituting the qualifying circumstance
of grave abuse of confidence and the element of taking
without the consent of the owner, since the owner of the
money is not the Bank, but the depositors therein. He also
cites People v. Koc Song,4 in which this Court held:

There must be allegation in the information and proof of a

relation, by reason of dependence, guardianship or
vigilance, between the respondents and the offended party
that has created a high degree of confidence between
them, which the respondents abused.

At this point, it needs stressing that the RTC Judge based

his conclusion that there was no probable cause simply on
the insufficiency of the allegations in the Informations
concerning the facts constitutive of the elements of the
offense charged. This, therefore, makes the issue of
sufficiency of the allegations in the Informations the focal
point of discussion.

Qualified Theft, as defined and punished under Article 310

of the Revised Penal Code, is committed as follows, viz:

ART. 310. Qualified Theft. The crime of theft shall be

punished by the penalties next higher by two degrees than
those respectively specified in the next preceding article, if
committed by a domestic servant, or with grave abuse of
confidence, or if the property stolen is motor vehicle, mail
matter or large cattle or consists of coconuts taken from
the premises of a plantation, fish taken from a fishpond or
fishery or if property is taken on the occasion of fire,
earthquake, typhoon, volcanic eruption, or any other
calamity, vehicular accident or civil disturbance. (Emphasis
supplied.)

Theft, as defined in Article 308 of the Revised Penal Code,

requires the physical taking of anothers property without
violence or intimidation against persons or force upon
things. The elements of the crime under this Article are:

1. Intent to gain;

2. Unlawful taking;

3. Personal property belonging to another;

4. Absence of violence or intimidation against persons or

force upon things.
To fall under the crime of Qualified Theft, the following
elements must concur:

1. Taking of personal property;

2. That the said property belongs to another;

3. That the said taking be done with intent to gain;

4. That it be done without the owners consent;

5. That it be accomplished without the use of violence or

intimidation against persons, nor of force upon things;

6. That it be done with grave abuse of confidence.

On the sufficiency of the Information, Section 6, Rule 110

of the Rules of Court requires, inter alia, that the
information must state the acts or omissions complained of
as constitutive of the offense.

On the manner of how the Information should be worded,

Section 9, Rule 110 of the Rules of Court, is enlightening:

Section 9. Cause of the accusation. The acts or omissions

complained of as constituting the offense and the
qualifying and aggravating circumstances must be stated
in ordinary and concise language and not necessarily in
the language used in the statute but in terms sufficient to
enable a person of common understanding to know what
offense is being charged as well as its qualifying and
aggravating circumstances and for the court to pronounce
judgment.

It is evident that the Information need not use the exact

language of the statute in alleging the acts or omissions
complained of as constituting the offense. The test is
whether it enables a person of common understanding to
know the charge against him, and the court to render
judgment properly.5
The portion of the Information relevant to this discussion
reads:
A]bove-named [respondents], conspiring, confederating, and helping one another, with
grave abuse of confidence, being the Cashier and Bookkeeper of the Rural Bank of
Pototan, Inc., Pototan, Iloilo, without the knowledge and/or consent of the management of
the Bank x x x.

It is beyond doubt that tellers, Cashiers, Bookkeepers and

other employees of a Bank who come into possession of
the monies deposited therein enjoy the confidence
reposed in them by their employer. Banks, on the other
hand, where monies are deposited, are considered the
owners thereof. This is very clear not only from the express
provisions of the law, but from established jurisprudence.
The relationship between banks and depositors has been
held to be that of creditor and debtor. Articles 1953 and
1980 of the New Civil Code, as appropriately pointed out
by petitioner, provide as follows:

Article 1953. A person who receives a loan of money or

any other fungible thing acquires the ownership thereof,
and is bound to pay to the creditor an equal amount of the
same kind and quality.

Article 1980. Fixed, savings, and current deposits of

money in banks and similar institutions shall be governed
by the provisions concerning loan.

In a long line of cases involving Qualified Theft, this Court

has firmly established the nature of possession by the
Bank of the money deposits therein, and the duties being
performed by its employees who have custody of the
money or have come into possession of it. The Court has
consistently considered the allegations in the Information
that such employees acted with grave abuse of confidence,
to the damage and prejudice of the Bank, without
particularly referring to it as owner of the money deposits,
as sufficient to make out a case of Qualified Theft. For a
graphic illustration, we cite Roque v. People,6 where the
accused teller was convicted for Qualified Theft based on
this Information:

That on or about the 16th day of November, 1989, in the

municipality of Floridablanca, province of Pampanga,
Philippines and within the jurisdiction of his Honorable
Court, the above-named accused ASUNCION GALANG
ROQUE, being then employed as teller of the Basa Air
Base Savings and Loan Association Inc. (BABSLA) with
office address at Basa Air Base, Floridablanca, Pampanga,
and as such was authorized and reposed with the
responsibility to receive and collect capital contributions
from its member/contributors of said corporation, and
having collected and received in her capacity as teller of
the BABSLA the sum of TEN THOUSAND PESOS
(P10,000.00), said accused, with intent of gain, with grave
abuse of confidence and without the knowledge and
consent of said corporation, did then and there willfully,
unlawfully and feloniously take, steal and carry away the
amount of P10,000.00, Philippine currency, by making it
appear that a certain depositor by the name of Antonio
Salazar withdrew from his Savings Account No. 1359,
when in truth and in fact said Antonio Salazar did not
withdr[a]w the said amount of P10,000.00 to the damage
and prejudice of BABSLA in the total amount
of P10,000.00, Philippine currency.

In convicting the therein appellant, the Court held that:

[S]ince the teller occupies a position of confidence, and the

bank places money in the tellers possession due to the
confidence reposed on the teller, the felony of qualified
theft would be committed.7

Also in People v. Sison,8 the Branch Operations Officer

was convicted of the crime of Qualified Theft based on the
Information as herein cited:
That in or about and during the period compressed
between January 24, 1992 and February 13, 1992, both
dates inclusive, in the City of Manila, Philippines, the said
accused did then and there wilfully, unlawfully and
feloniously, with intent of gain and without the knowledge
and consent of the owner thereof, take, steal and carry
away the following, to wit:

Cash money amounting to P6,000,000.00 in different

denominations belonging to the PHILIPPINE
COMMERCIAL INTERNATIONAL BANK (PCIBank for
brevity), Luneta Branch, Manila represented by its Branch
Manager, HELEN U. FARGAS, to the damage and
prejudice of the said owner in the aforesaid amount
of P6,000,000.00, Philippine Currency.

That in the commission of the said offense, herein accused

acted with grave abuse of confidence and unfaithfulness,
he being the Branch Operation Officer of the said
complainant and as such he had free access to the place
where the said amount of money was kept.

The judgment of conviction elaborated thus:

The crime perpetuated by appellant against his employer,

the Philippine Commercial and Industrial Bank (PCIB), is
Qualified Theft. Appellant could not have committed the
crime had he not been holding the position of Luneta
Branch Operation Officer which gave him not only sole
access to the bank vault xxx. The management of the
PCIB reposed its trust and confidence in the appellant as
its Luneta Branch Operation Officer, and it was this trust
and confidence which he exploited to enrich himself to the
damage and prejudice of PCIB x x x.9

From another end, People v. Locson,10 in addition

to People v. Sison, described the nature of possession by
the Bank. The money in this case was in the possession of
the defendant as receiving teller of the bank, and the
possession of the defendant was the possession of the
Bank. The Court held therein that when the defendant, with
grave abuse of confidence, removed the money and
appropriated it to his own use without the consent of the
Bank, there was taking as contemplated in the crime of
Qualified Theft.11

Conspicuously, in all of the foregoing cases, where the

Informations merely alleged the positions of the
respondents; that the crime was committed with grave
abuse of confidence, with intent to gain and without the
knowledge and consent of the Bank, without necessarily
stating the phrase being assiduously insisted upon by
respondents, "of a relation by reason of dependence,
guardianship or vigilance, between the respondents
and the offended party that has created a high degree
of confidence between them, which respondents
abused,"12 and without employing the word "owner" in lieu
of the "Bank" were considered to have satisfied the test of
sufficiency of allegations.

As regards the respondents who were employed as

Cashier and Bookkeeper of the Bank in this case, there is
even no reason to quibble on the allegation in the
Informations that they acted with grave abuse of
confidence. In fact, the Information which alleged grave
abuse of confidence by accused herein is even more
precise, as this is exactly the requirement of the law in
qualifying the crime of Theft.

In summary, the Bank acquires ownership of the money

deposited by its clients; and the employees of the Bank,
who are entrusted with the possession of money of the
Bank due to the confidence reposed in them, occupy
positions of confidence. The Informations, therefore,
sufficiently allege all the essential elements constituting the
crime of Qualified Theft.
On the theory of the defense that the DOJ is the principal
party who may file the instant petition, the ruling in Mobilia
Products, Inc. v. Hajime Umezawa13 is instructive. The
Court thus enunciated:

In a criminal case in which the offended party is the State,

the interest of the private complainant or the offended party
is limited to the civil liability arising therefrom. Hence, if a
criminal case is dismissed by the trial court or if there is an
acquittal, a reconsideration of the order of dismissal or
acquittal may be undertaken, whenever legally feasible,
insofar as the criminal aspect thereof is concerned and
may be made only by the public prosecutor; or in the case
of an appeal, by the State only, through the OSG. x x x.

On the alleged wrong mode of appeal by petitioner, suffice

it to state that the rule is well-settled that in appeals by
certiorari under Rule 45 of the Rules of Court, only errors
of law may be raised,14 and herein petitioner certainly
raised a question of law.

As an aside, even if we go beyond the allegations of the

Informations in these cases, a closer look at the records of
the preliminary investigation conducted will show that,
indeed, probable cause exists for the indictment of herein
respondents. Pursuant to Section 6, Rule 112 of the Rules
of Court, the judge shall issue a warrant of arrest only upon
a finding of probable cause after personally evaluating the
resolution of the prosecutor and its supporting
evidence. Soliven v. Makasiar,15 as reiterated inAllado v.
Driokno,16 explained that probable cause for the issuance
of a warrant of arrest is the existence of such facts and
circumstances that would lead a reasonably discreet and
prudent person to believe that an offense has been
committed by the person sought to be arrested.17 The
records reasonably indicate that the respondents may
have, indeed, committed the offense charged.
Before closing, let it be stated that while it is truly
imperative upon the fiscal or the judge, as the case may be,
to relieve the respondents from the pain of going through a
trial once it is ascertained that no probable cause exists to
form a sufficient belief as to the guilt of the respondents,
conversely, it is also equally imperative upon the judge to
proceed with the case upon a showing that there is a prima
faciecase against the respondents.

WHEREFORE, premises considered, the Petition for

Review on Certiorari is hereby GRANTED. The Orders
dated 30 January 2006 and 9 June 2006 of the RTC
dismissing Criminal Cases No. 05-3054 to
05-3165 are REVERSED and SET ASIDE. Let the
corresponding Warrants of Arrest issue against herein
respondents TERESITA PUIG and ROMEO PORRAS.
The RTC Judge of Branch 68, in Dumangas, Iloilo, is
directed to proceed with the trial of Criminal Cases No.
05-3054 to 05-3165, inclusive, with reasonable dispatch.
No pronouncement as to costs.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 183360 September 8, 2014

ROLANDO C. DE LA PAZ,* Petitioner,

vs.
L & J DEVELOPMENT COMPANY, Respondent.
 DECISION

DEL CASTILLO, J.:

"No interest shall be due unless it has been expressly

stipulated in writing."1

This is a Petition for Review on Certiorari2 assailing the

February 27, 2008 Decision3 of the Court of Appeals (CA)
in CA-G.R. SP No. 100094, which reversed and set aside
the Decision4 dated April 19, 2007 of the Regional Trial
Court (RTC), Branch 192, Marikina City in Civil Case No.
06-1145-MK. The said RTC Decision affirmed in all
respects the Decision5 dated June 30, 2006 of the
Metropolitan Trial Court (MeTC), Branch 75, Marikina City
in Civil Case No. 05-7755, which ordered respondent L & J
Development Company (L&J) to pay petitioner Architect
Rolando C. De La Paz (Rolando) its principal obligation of
350,000.00, plus 12% interest per annumreckoned from
the filing of the Complaint until full payment of the
obligation.

Likewise assailed is the CAs June 6, 2008

Resolution6 which denied Rolandos Motion for
Reconsideration.

Factual Antecedents

On December 27, 2000, Rolando lent 350,000.00 without

any security to L&J, a property developer with Atty.
Esteban Salonga (Atty. Salonga) as its President and
General Manager. The loan, with no specified maturity
date, carried a 6% monthly interest, i.e., 21,000.00. From
December 2000 to August 2003, L&J paid Rolando a total
of 576,000.007 representing interest charges.

As L&J failed to pay despite repeated demands, Rolando

filed a Complaint8 for Collection of Sum of Money with
Damages against L&J and Atty. Salonga in his personal
capacity before the MeTC, docketed as Civil Case No.
05-7755. Rolando alleged, amongothers, that L&Js debtas
of January 2005, inclusive of the monthly interest, stood at
772,000.00; that the 6% monthly interest was upon Atty.
Salongas suggestion; and, that the latter tricked him into
parting with his money without the loan transaction being
reduced into writing.

In their Answer,9 L&J and Atty. Salonga denied Rolandos

allegations. While they acknowledged the loan as a
corporate debt, they claimed that the failure to pay the
same was due to a fortuitous event, that is, the financial
difficulties brought about by the economic crisis. They
further argued that Rolando cannot enforce the 6%
monthly interest for being unconscionable and shocking to
the morals. Hence, the payments already made should be
applied to the 350,000.00 principal loan.

During trial, Rolando testified that he had no

communication with Atty. Salonga prior to the loan
transaction but knew him as a lawyer, a son of a former
Senator, and the owner of L&J which developed
Brentwood Subdivision in Antipolo where his associate
Nilo Velasco (Nilo) lives. When Nilo told him that Atty.
Salonga and L&J needed money to finish their projects,
heagreed to lend them money. He personally met withAtty.
Salonga and their meeting was cordial.

He narrated that when L&J was in the process of

borrowing the 350,000.00 from him, it was Arlene San
Juan (Arlene), the secretary/treasurer of L&J, who
negotiated the terms and conditions thereof.She said that
the money was to finance L&Js housing project. Rolando
claimed that it was not he who demanded for the 6%
monthly interest. It was L&J and Atty. Salonga, through
Arlene, who insisted on paying the said interest as they
asserted that the loan was only a short-term one.
 Ruling of the Metropolitan Trial Court

The MeTC, in its Decision10 of June 30, 2006, upheld the

6% monthly interest. In so ruling, it ratiocinated that since
L&J agreed thereto and voluntarily paid the interest at
suchrate from 2000 to 2003, it isalready estopped from
impugning the same. Nonetheless, for reasons of equity,
the saidcourt reduced the interest rate to 12% per
annumon the remaining principal obligation of
350,000.00. With regard to Rolandos prayer for moral
damages, the MeTC denied the same as it found no malice
or bad faith on the part ofL&J in not paying the obligation. It
likewise relieved Atty. Salonga of any liability as it found
that he merely acted in his official capacity in obtaining the
loan. The MeTC disposed of the case as follows:

WHEREFORE, premises considered, judgment is hereby

rendered in favor of the plaintiff, Arch. Rolando C. Dela
Paz, and against the defendant, L & J Development Co.,
Inc., as follows:

a) ordering the defendant L & J Development Co., Inc. to

pay plaintiff the amount of Three Hundred Fifty Thousand
Pesos (350,000.00) representing the principal obligation,
plus interest at the legal rate of 12% per annum to be
computed from January 20, 2005, the date of the filing of
the complaint, until the whole obligation is fully paid;

b) ordering the defendant L & J Development Co., Inc. to

pay plaintiff the amount of Five Thousand Pesos
(5,000.00) as and for attorneys fees; and

c) to pay the costs of this suit.

SO ORDERED.11

Ruling of the Regional Trial Court

L&J appealed to the RTC. It asserted in its appeal
memorandum12 that from December 2000 to March 2003,
it paid monthly interest of 21,000.00 based on the
agreed-upon interest rate of 6%monthly and from April
2003 to August 2003, interest paymentsin various
amounts.13 The total of interest payments made amounts
to 576,000.00 an amount which is even more than the
principal obligation of 350,000.00

L&J insisted that the 6% monthly interest rate is

unconscionable and immoral. Hence, the 12% per
annumlegal interest should have been applied from the
time of the constitution of the obligation. At 12% per annum
interest rate, it asserted that the amount of interestit ought
to pay from December 2000 to March 2003 and from April
2003 to August 2003, only amounts to 105,000.00. If this
amount is deducted from the total interest
paymentsalready made, which is 576,000.00, the amount
of 471,000.00 appears to have beenpaid over and above
what is due. Applying the rule on compensation, the
principal loan of 350,000.00 should be set-off against the
471,000.00, resulting in the complete payment of the
principal loan.

Unconvinced, the RTC, inits April 19, 2007

Decision,14 affirmed the MeTC Decision, viz:
WHEREFORE, premises considered, the Decision
appealed from is hereby AFFIRMED in all respects, with
costs against the appellant.

SO ORDERED.15

Ruling of the Court of Appeals

Undaunted, L&J went to the CA and echoed its arguments

and proposed computation as proffered before the RTC.

In a Decision16 dated February 27, 2008, the CAreversed

and set aside the RTC Decision. The CA stressed that the
parties failedto stipulate in writing the imposition of interest
on the loan. Hence, no interest shall be due thereon
pursuant to Article 1956 of the Civil Code.17 And even if
payment of interest has been stipulated in writing, the 6%
monthly interest is still outrightly illegal and unconscionable
because it is contrary to morals, if not against the law.
Being void, this cannot be ratified and may be set up by the
debtor as defense. For these reasons, Rolando cannot
collect any interest even if L&J offered to pay interest.
Consequently, he has to return all the interest payments of
576,000.00 to L&J.

Considering further that Rolando and L&J thereby became

creditor and debtor of each other, the CA applied the
principle of legal compensation under Article 1279 of the
Civil Code.18 Accordingly, it set off the principal loan of
350,000.00 against the 576,000.00 total interest
payments made, leaving an excess of 226,000.00, which
the CA ordered Rolando to pay L&J plus interest. Thus:

WHEREFORE, the DECISION DATED APRIL 19, 2007 is

REVERSED and SET ASIDE.

CONSEQUENT TO THE FOREGOING, respondent

Rolando C. Dela Paz is ordered to pay to the petitioner the
amount of 226,000.00,plus interest of 12% per
annumfrom the finality of this decision.

Costs of suit to be paid by respondent Dela Paz.

SO ORDERED.19

In his Motion for Reconsideration,20 Rolando argued

thatthe circumstances exempt both the application of
Article 1956 and of jurisprudence holding that a 6%
monthly interest is unconscionable, unreasonable, and
exorbitant. He alleged that Atty. Salonga, a lawyer, should
have taken it upon himself to have the loan and the
stipulated rate of interest documented but, by way of legal
maneuver, Atty. Salonga, whom he fully trusted and relied
upon, tricked him into believing that the undocumented
and uncollateralized loan was withinlegal bounds. Had Atty.
Salonga told him that the stipulated interest should be in
writing, he would have readily assented. Furthermore,
Rolando insisted that the 6% monthly interest ratecould not
be unconscionable as in the first place, the interest was not
imposed by the creditor but was in fact offered by the
borrower, who also dictated all the terms of the loan. He
stressed that in cases where interest rates were declared
unconscionable, those meant to be protected by such
declaration are helpless borrowers which is not the case
here.

Still, the CA denied Rolandos motion in its Resolution21 of

June 6, 2008.

Hence, this Petition.

The Parties Arguments

Rolando argues that the 6%monthly interest rateshould not

have been invalidated because Atty. Salonga took
advantage of his legal knowledge to hoodwink him into
believing that no document was necessaryto reflect the
interest rate. Moreover, the cases anent unconscionable
interest rates that the CA relied upon involve lenders who
imposed the excessive rates,which are totally different
from the case at bench where it is the borrower who
decided on the high interest rate. This case does not fall
under a scenariothat enslaves the borrower or that leads
to the hemorrhaging of his assets that the courts seek to
prevent.

L&J, in controverting Rolandos arguments, contends that

the interest rate is subject of negotiation and is
agreedupon by both parties, not by the borrower alone.
Furthermore, jurisprudence has nullified interestrates on
loans of 3% per month and higher as these rates are
contrary to moralsand public interest. And while Rolando
raises bad faithon Atty. Salongas part, L&J avers thatsuch
issue is a question of fact, a matter that cannot be raised
under Rule 45.

Issue

The Courts determination of whether to uphold the

judgment of the CA that the principal loan is deemed paid
isdependent on the validity of the monthly interest rate
imposed. And in determining such validity, the Court must
necessarily delve into matters regarding a) the form of the
agreement of interest under the law and b) the alleged
unconscionability of the interest rate. Our Ruling

The Petition is devoid of merit.

The lack of a written stipulation to pay interest on the

loaned amount disallows a creditor from charging
monetary interest.

Under Article 1956 of the Civil Code, no interest shall

bedue unless it has been expressly stipulated in writing.
Jurisprudence on the matter also holds that for interest to
be due and payable, two conditions must concur: a)
express stipulation for the payment of interest; and b) the
agreement to pay interest is reduced in writing.

Here, it is undisputed that the parties did not put down in

writing their agreement. Thus, no interest is due. The
collection of interest without any stipulation in writing is
prohibited by law.22

But Rolando asserts that his situation deserves an

exception to the application of Article 1956. He blames Atty.
Salonga for the lack of a written document, claiming that
said lawyer used his legal knowledge to dupe him.
Rolando thus imputes bad faith on the part of L&J and Atty.
Salonga. The Court, however, finds no deception on the
partof L&J and Atty. Salonga. For one, despite the lack of a
document stipulating the payment of interest, L&J
nevertheless devotedly paid interests on the loan. It only
stopped when it suffered from financial difficulties that
prevented it from continuously paying the 6% monthly rate.
For another,regardless of Atty. Salongas profession,
Rolando who is an architect and an educated man himself
could have been a more reasonably prudent person under
the circumstances. To top it all, he admitted that he had no
prior communication with Atty. Salonga. Despite Atty.
Salonga being a complete stranger, he immediately trusted
him and lent his company 350,000.00, a significant
amount. Moreover, as the creditor,he could have
requested or required that all the terms and conditions of
the loan agreement, which include the payment of interest,
be put down in writing to ensure that he and L&J are on the
same page. Rolando had a choice of not acceding and to
insist that their contract be put in written form as this will
favor and safeguard him as a lender. Unfortunately, he did
not. It must be stressed that "[c]ourts cannot follow one
every step of his life and extricate him from bad bargains,
protect him from unwise investments, relieve him from
one-sided contracts,or annul the effects of foolish acts.
Courts cannotconstitute themselves guardians of persons
who are not legally incompetent."23

It may be raised that L&J is estopped from questioning the

interest rate considering that it has been paying Rolando
interest at such ratefor more than two and a half years. In
fact, in its pleadings before the MeTCand the RTC, L&J
merely prayed for the reduction of interest from 6%
monthly to 1% monthly or 12% per annum. However, in
Ching v. Nicdao,24 the daily payments of the debtor to the
lender were considered as payment of the principal
amount of the loan because Article 1956 was not complied
with. This was notwithstanding the debtors admission that
the payments made were for the interests due. The Court
categorically stated therein that "[e]stoppel cannot give
validity to an act that is prohibited by law or one thatis
against public policy."

Even if the payment of interest has been reduced in writing,

a 6% monthly interest rate on a loan is unconscionable,
regardless of who between the parties proposed the rate.

Indeed at present, usury has been legally non-existent in

view of the suspension of the Usury Law25 by Central Bank
Circular No. 905 s. 1982.26 Even so, not all interest rates
levied upon loans are permitted by the courts as they have
the power to equitably reduce unreasonable interest rates.
In Trade & Investment Development Corporation of the
Philippines v. Roblett Industrial Construction
Corporation, we said:
27

While the Court recognizes the right of the parties to enter

into contracts and who are expectedto comply with their
terms and obligations, this rule is not absolute. Stipulated
interest rates are illegal if they are unconscionable and the
Court is allowed to temper interest rates when necessary.
In exercising this vested power to determine what is
iniquitous and unconscionable, the Court must consider
the circumstances of each case. What may be iniquitous
and unconscionable in onecase, may be just in another. x
x x28

Time and again, it has been ruled in a plethora of cases

that stipulated interest rates of 3% per month and higher,
are excessive, iniquitous, unconscionable and exorbitant.
Such stipulations are void for being contrary to morals, if
not against the law.29 The Court, however, stresses that
these rates shall be invalidated and shall be reduced only
in cases where the terms of the loans are open-ended, and
where the interest rates are applied for an indefinite period.
Hence, the imposition of a specific sum of 40,000.00 a
month for six months on a 1,000,000.00 loan is not
considered unconscionable.30
In the case at bench, there is no specified period as to the
payment of the loan. Hence, levying 6% monthly or 72%
interest per annumis "definitely outrageous and
inordinate."31 The situation that it was the debtor who
insisted on the interest rate will not exempt Rolando from a
ruling that the rate is void. As this Court cited in Asian
Cathay Finance and Leasing Corporation v.
Gravador, "[t]he imposition of an unconscionable rate of
32

interest on a money debt, even if knowingly and voluntarily

assumed, is immoral and unjust. It is tantamount to a
repugnant spoliation and an iniquitous deprivation of
property, repulsive to the common sense of man."33 Indeed,
"voluntariness does notmake the stipulation on [an
unconscionable] interest valid."34

As exhaustibly discussed,no monetary interest isdue

Rolando pursuant to Article 1956.1wphi1 The CA thus
correctly adjudged that the excess interest payments made
by L&J should be applied to its principal loan. As computed
by the CA, Rolando is bound to return the excess payment
of 226,000.00 to L&J following the principle of solutio
indebiti.35

However, pursuant to Central Bank Circular No. 799 s.

2013 which took effect on July 1, 2013,36 the interest
imposed by the CA must be accordingly modified. The
226,000.00 which Rolando is ordered to pay L&J shall
earn an interest of 6% per annumfrom the finality of this
Decision.

WHEREFORE, the Decision dated February 27, 2008 of

the Court of Appeals in CA-G.R. SP No. 100094 is hereby
AFFIRMED with modification that petitioner Rolando C. De
La Paz is ordered to pay respondent L&J Development
Company the amount of ,226,000.00, plus interest of
6o/o per annum from the finality of this Decision until fully
paid.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. 189871 August 13, 2013

DARIO NACAR, PETITIONER,

vs.
GALLERY FRAMES AND/OR FELIPE BORDEY,
JR., RESPONDENTS.

DECISION

PERALTA, J.:

This is a petition for review on certiorari assailing the

Decision1 dated September 23, 2008 of the Court of
Appeals (CA) in CA-G.R. SP No. 98591, and the
Resolution2 dated October 9, 2009 denying petitioners
motion for reconsideration.

The factual antecedents are undisputed.

Petitioner Dario Nacar filed a complaint for constructive

dismissal before the Arbitration Branch of the National
Labor Relations Commission (NLRC) against respondents
Gallery Frames (GF) and/or Felipe Bordey, Jr., docketed
as NLRC NCR Case No. 01-00519-97.

On October 15, 1998, the Labor Arbiter rendered a

Decision3 in favor of petitioner and found that he was
dismissed from employment without a valid or just cause.
Thus, petitioner was awarded backwages and separation
pay in lieu of reinstatement in the amount of 158,919.92.
The dispositive portion of the decision, reads:

With the foregoing, we find and so rule that respondents

failed to discharge the burden of showing that complainant
was dismissed from employment for a just or valid cause.
All the more, it is clear from the records that complainant
was never afforded due process before he was terminated.
As such, we are perforce constrained to grant
complainants prayer for the payments of separation pay in
lieu of reinstatement to his former position, considering the
strained relationship between the parties, and his apparent
reluctance to be reinstated, computed only up to
promulgation of this decision as follows:

SEPARATION PAY
Date Hired = August 1990
Rate = 198/day
Date of Decision = Aug. 18, 1998
Length of Service = 8 yrs. & 1 month
198.00 x 26 days x 8 months = 41,184.00
BACKWAGES
Date Dismissed = January 24, 1997
Rate per day = 196.00
Date of Decisions = Aug. 18, 1998
a) 1/24/97 to 2/5/98 = 12.36 mos.
196.00/day x 12.36
= 62,986.56
mos.
b) 2/6/98 to 8/18/98 = 6.4 months
 Prevailing Rate per day = 62,986.00
198.00 x 26 days x
= 32,947.20
6.4 mos.
TOTAL = 95.933.76

xxxx

WHEREFORE, premises considered, judgment is hereby

rendered finding respondents guilty of constructive
dismissal and are therefore, ordered:

To pay jointly and severally the complainant the amount of

sixty-two thousand nine hundred eighty-six pesos and
56/100 (62,986.56) Pesos representing his separation
pay;

To pay jointly and severally the complainant the amount of

nine (sic) five thousand nine hundred thirty-three and
36/100 (95,933.36) representing his backwages; and

All other claims are hereby dismissed for lack of merit.

SO ORDERED.4

Respondents appealed to the NLRC, but it was dismissed

for lack of merit in the Resolution5 dated February 29, 2000.
Accordingly, the NLRC sustained the decision of the Labor
Arbiter. Respondents filed a motion for reconsideration, but
it was denied.6

Dissatisfied, respondents filed a Petition for Review on

Certiorari before the CA. On August 24, 2000, the CA
issued a Resolution dismissing the petition. Respondents
filed a Motion for Reconsideration, but it was likewise
denied in a Resolution dated May 8, 2001.7

Respondents then sought relief before the Supreme Court,

docketed as G.R. No. 151332. Finding no reversible error
on the part of the CA, this Court denied the petition in the
Resolution dated April 17, 2002.8

An Entry of Judgment was later issued certifying that the

resolution became final and executory on May 27,
2002.9The case was, thereafter, referred back to the Labor
Arbiter. A pre-execution conference was consequently
scheduled, but respondents failed to appear.10

On November 5, 2002, petitioner filed a Motion for Correct

Computation, praying that his backwages be computed
from the date of his dismissal on January 24, 1997 up to
the finality of the Resolution of the Supreme Court on May
27, 2002.11 Upon recomputation, the Computation and
Examination Unit of the NLRC arrived at an updated
amount in the sum of 471,320.31.12

On December 2, 2002, a Writ of Execution13 was issued by

the Labor Arbiter ordering the Sheriff to collect from
respondents the total amount of 471,320.31.
Respondents filed a Motion to Quash Writ of Execution,
arguing, among other things, that since the Labor Arbiter
awarded separation pay of 62,986.56 and limited
backwages of 95,933.36, no more recomputation is
required to be made of the said awards. They claimed that
after the decision becomes final and executory, the same
cannot be altered or amended anymore.14 On January 13,
2003, the Labor Arbiter issued an Order15 denying the
motion. Thus, an Alias Writ of Execution16 was issued on
January 14, 2003.

Respondents again appealed before the NLRC, which on

June 30, 2003 issued a Resolution17 granting the appeal in
favor of the respondents and ordered the recomputation of
the judgment award.

On August 20, 2003, an Entry of Judgment was issued

declaring the Resolution of the NLRC to be final and
executory. Consequently, another pre-execution
conference was held, but respondents failed to appear on
time. Meanwhile, petitioner moved that an Alias Writ of
Execution be issued to enforce the earlier recomputed
judgment award in the sum of 471,320.31.18

The records of the case were again forwarded to the

Computation and Examination Unit for recomputation,
where the judgment award of petitioner was reassessed to
be in the total amount of only 147,560.19.

Petitioner then moved that a writ of execution be issued

ordering respondents to pay him the original amount as
determined by the Labor Arbiter in his Decision dated
October 15, 1998, pending the final computation of his
backwages and separation pay.

On January 14, 2003, the Labor Arbiter issued an Alias

Writ of Execution to satisfy the judgment award that was
due to petitioner in the amount of 147,560.19, which
petitioner eventually received.

Petitioner then filed a Manifestation and Motion praying for

the re-computation of the monetary award to include the
appropriate interests.19

On May 10, 2005, the Labor Arbiter issued an

Order20 granting the motion, but only up to the amount of
11,459.73. The Labor Arbiter reasoned that it is the
October 15, 1998 Decision that should be enforced
considering that it was the one that became final and
executory. However, the Labor Arbiter reasoned that since
the decision states that the separation pay and backwages
are computed only up to the promulgation of the said
decision, it is the amount of 158,919.92 that should be
executed. Thus, since petitioner already received
147,560.19, he is only entitled to the balance of
11,459.73.
Petitioner then appealed before the NLRC,21 which appeal
was denied by the NLRC in its Resolution22 dated
September 27, 2006. Petitioner filed a Motion for
Reconsideration, but it was likewise denied in the
Resolution23dated January 31, 2007.

Aggrieved, petitioner then sought recourse before the CA,

docketed as CA-G.R. SP No. 98591.

On September 23, 2008, the CA rendered a

Decision24 denying the petition. The CA opined that since
petitioner no longer appealed the October 15, 1998
Decision of the Labor Arbiter, which already became final
and executory, a belated correction thereof is no longer
allowed. The CA stated that there is nothing left to be done
except to enforce the said judgment. Consequently, it can
no longer be modified in any respect, except to correct
clerical errors or mistakes.

Petitioner filed a Motion for Reconsideration, but it was

denied in the Resolution25 dated October 9, 2009.

Hence, the petition assigning the lone error:

WITH DUE RESPECT, THE HONORABLE

COURT OF APPEALS SERIOUSLY ERRED,
COMMITTED GRAVE ABUSE OF
DISCRETION AND DECIDED CONTRARY TO
LAW IN UPHOLDING THE QUESTIONED
RESOLUTIONS OF THE NLRC WHICH, IN
TURN, SUSTAINED THE MAY 10, 2005
ORDER OF LABOR ARBITER MAGAT
MAKING THE DISPOSITIVE PORTION OF THE
OCTOBER 15, 1998 DECISION OF LABOR
ARBITER LUSTRIA SUBSERVIENT TO AN
OPINION EXPRESSED IN THE BODY OF THE
SAME DECISION.26
Petitioner argues that notwithstanding the fact that there
was a computation of backwages in the Labor Arbiters
decision, the same is not final until reinstatement is made
or until finality of the decision, in case of an award of
separation pay. Petitioner maintains that considering that
the October 15, 1998 decision of the Labor Arbiter did not
become final and executory until the April 17, 2002
Resolution of the Supreme Court in G.R. No. 151332 was
entered in the Book of Entries on May 27, 2002, the
reckoning point for the computation of the backwages and
separation pay should be on May 27, 2002 and not when
the decision of the Labor Arbiter was rendered on October
15, 1998. Further, petitioner posits that he is also entitled
to the payment of interest from the finality of the decision
until full payment by the respondents.

On their part, respondents assert that since only

separation pay and limited backwages were awarded to
petitioner by the October 15, 1998 decision of the Labor
Arbiter, no more recomputation is required to be made of
said awards. Respondents insist that since the decision
clearly stated that the separation pay and backwages are
"computed only up to [the] promulgation of this decision,"
and considering that petitioner no longer appealed the
decision, petitioner is only entitled to the award as
computed by the Labor Arbiter in the total amount of
158,919.92. Respondents added that it was only during
the execution proceedings that the petitioner questioned
the award, long after the decision had become final and
executory. Respondents contend that to allow the further
recomputation of the backwages to be awarded to
petitioner at this point of the proceedings would
substantially vary the decision of the Labor Arbiter as it
violates the rule on immutability of judgments.

The petition is meritorious.

The instant case is similar to the case of Session Delights
Ice Cream and Fast Foods v. Court of Appeals (Sixth
Division),27 wherein the issue submitted to the Court for
resolution was the propriety of the computation of the
awards made, and whether this violated the principle of
immutability of judgment. Like in the present case, it was a
distinct feature of the judgment of the Labor Arbiter in the
above-cited case that the decision already provided for the
computation of the payable separation pay and backwages
due and did not further order the computation of the
monetary awards up to the time of the finality of the
judgment. Also in Session Delights, the dismissed
employee failed to appeal the decision of the labor arbiter.
The Court clarified, thus:

In concrete terms, the question is whether a

re-computation in the course of execution of the labor
arbiter's original computation of the awards made, pegged
as of the time the decision was rendered and confirmed
with modification by a final CA decision, is legally proper.
The question is posed, given that the petitioner did not
immediately pay the awards stated in the original labor
arbiter's decision; it delayed payment because it continued
with the litigation until final judgment at the CA level.

A source of misunderstanding in implementing the final

decision in this case proceeds from the way the original
labor arbiter framed his decision. The decision consists
essentially of two parts.

The first is that part of the decision that cannot now be

disputed because it has been confirmed with finality. This
is the finding of the illegality of the dismissal and the
awards of separation pay in lieu of reinstatement,
backwages, attorney's fees, and legal interests.

The second part is the computation of the awards made.

On its face, the computation the labor arbiter made shows
that it was time-bound as can be seen from the figures
used in the computation. This part, being merely a
computation of what the first part of the decision
established and declared, can, by its nature, be
re-computed. This is the part, too, that the petitioner now
posits should no longer be re-computed because the
computation is already in the labor arbiter's decision that
the CA had affirmed. The public and private respondents,
on the other hand, posit that a re-computation is necessary
because the relief in an illegal dismissal decision goes all
the way up to reinstatement if reinstatement is to be made,
or up to the finality of the decision, if separation pay is to be
given in lieu reinstatement.

That the labor arbiter's decision, at the same time that it

found that an illegal dismissal had taken place, also made
a computation of the award, is understandable in light of
Section 3, Rule VIII of the then NLRC Rules of Procedure
which requires that a computation be made. This Section
in part states:

[T]he Labor Arbiter of origin, in cases involving monetary

awards and at all events, as far as practicable, shall
embody in any such decision or order the detailed and full
amount awarded.

Clearly implied from this original computation is its

currency up to the finality of the labor arbiter's decision. As
we noted above, this implication is apparent from the terms
of the computation itself, and no question would have
arisen had the parties terminated the case and
implemented the decision at that point.

However, the petitioner disagreed with the labor arbiter's

findings on all counts - i.e., on the finding of illegality as
well as on all the consequent awards made. Hence, the
petitioner appealed the case to the NLRC which, in turn,
affirmed the labor arbiter's decision. By law, the NLRC
decision is final, reviewable only by the CA on jurisdictional
grounds.

The petitioner appropriately sought to nullify the NLRC

decision on jurisdictional grounds through a timely filed
Rule 65 petition for certiorari. The CA decision, finding that
NLRC exceeded its authority in affirming the payment of
13th month pay and indemnity, lapsed to finality and was
subsequently returned to the labor arbiter of origin for
execution.

It was at this point that the present case arose. Focusing

on the core illegal dismissal portion of the original labor
arbiter's decision, the implementing labor arbiter ordered
the award re-computed; he apparently read the figures
originally ordered to be paid to be the computation due had
the case been terminated and implemented at the labor
arbiter's level. Thus, the labor arbiter re-computed the
award to include the separation pay and the backwages
due up to the finality of the CA decision that fully
terminated the case on the merits. Unfortunately, the labor
arbiter's approved computation went beyond the finality of
the CA decision (July 29, 2003) and included as well the
payment for awards the final CA decision had deleted -
specifically, the proportionate 13th month pay and the
indemnity awards. Hence, the CA issued the decision now
questioned in the present petition.

We see no error in the CA decision confirming that a

re-computation is necessary as it essentially considered
the labor arbiter's original decision in accordance with its
basic component parts as we discussed above. To
reiterate, the first part contains the finding of illegality and
its monetary consequences; the second part is the
computation of the awards or monetary consequences of
the illegal dismissal, computed as of the time of the labor
arbiter's original decision.28
Consequently, from the above disquisitions, under the
terms of the decision which is sought to be executed by the
petitioner, no essential change is made by a recomputation
as this step is a necessary consequence that flows from
the nature of the illegality of dismissal declared by the
Labor Arbiter in that decision.29 A recomputation (or an
original computation, if no previous computation has been
made) is a part of the law specifically, Article 279 of the
Labor Code and the established jurisprudence on this
provision that is read into the decision. By the nature of
an illegal dismissal case, the reliefs continue to add up
until full satisfaction, as expressed under Article 279 of the
Labor Code. The recomputation of the consequences of
illegal dismissal upon execution of the decision does not
constitute an alteration or amendment of the final decision
being implemented. The illegal dismissal ruling stands;
only the computation of monetary consequences of this
dismissal is affected, and this is not a violation of the
principle of immutability of final judgments.30

That the amount respondents shall now pay has greatly

increased is a consequence that it cannot avoid as it is the
risk that it ran when it continued to seek recourses against
the Labor Arbiter's decision. Article 279 provides for the
consequences of illegal dismissal in no uncertain terms,
qualified only by jurisprudence in its interpretation of when
separation pay in lieu of reinstatement is allowed. When
that happens, the finality of the illegal dismissal decision
becomes the reckoning point instead of the reinstatement
that the law decrees. In allowing separation pay, the final
decision effectively declares that the employment
relationship ended so that separation pay and backwages
are to be computed up to that point.31

Finally, anent the payment of legal interest. In the

landmark case of Eastern Shipping Lines, Inc. v. Court of
Appeals,32 the Court laid down the guidelines regarding the
manner of computing legal interest, to wit:
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 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.33

Recently, however, the Bangko Sentral ng Pilipinas

Monetary Board (BSP-MB), in its Resolution No. 796 dated
May 16, 2013, approved the amendment of Section 234 of
Circular No. 905, Series of 1982 and, accordingly, issued
Circular No. 799,35 Series of 2013, effective July 1, 2013,
the pertinent portion of which reads:

The Monetary Board, in its Resolution No. 796 dated 16

May 2013, approved the following revisions governing the
rate of interest in the absence of stipulation in loan
contracts, thereby amending Section 2 of Circular No. 905,
Series of 1982:

Section 1. 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
an express contract as to such rate of interest,
shall be six percent (6%) per annum.

Section 2. In view of the above, Subsection

X305.136 of the Manual of Regulations for Banks
and Sections 4305Q.1,37 4305S.338 and
4303P.139 of the Manual of Regulations for
Non-Bank Financial Institutions are hereby
amended accordingly.

This Circular shall take effect on 1 July 2013.

Thus, from the foregoing, in the absence of an express

stipulation as to the rate of interest that would govern the
parties, the rate of legal interest for loans or forbearance of
any money, goods or credits and the rate allowed in
judgments shall no longer be twelve percent (12%) per
annum - as reflected in the case of Eastern Shipping
Lines40 and Subsection X305.1 of the Manual of
Regulations for Banks and Sections 4305Q.1, 4305S.3
and 4303P.1 of the Manual of Regulations for Non-Bank
Financial Institutions, before its amendment by BSP-MB
Circular No. 799 - but will now be six percent (6%) per
annum effective July 1, 2013. It should be noted,
nonetheless, that the new rate could only be applied
prospectively and not retroactively. Consequently, the
twelve percent (12%) per annum legal interest shall apply
only until June 30, 2013. Come July 1, 2013 the new rate
of six percent (6%) per annum shall be the prevailing rate
of interest when applicable.

Corollarily, in the recent case of Advocates for Truth in

Lending, Inc. and Eduardo B. Olaguer v. Bangko Sentral
Monetary Board,41 this Court affirmed the authority of the
BSP-MB to set interest rates and to issue and enforce
Circulars when it ruled that "the BSP-MB may prescribe the
maximum rate or rates of interest for all loans or renewals
thereof or the forbearance of any money, goods or credits,
including those for loans of low priority such as consumer
loans, as well as such loans made by pawnshops, finance
companies and similar credit institutions. It even authorizes
the BSP-MB to prescribe different maximum rate or rates
for different types of borrowings, including deposits and
deposit substitutes, or loans of financial intermediaries."

Nonetheless, with regard to those judgments that have

become final and executory prior to July 1, 2013, said
judgments shall not be disturbed and shall continue to be
implemented applying the rate of interest fixed
therein.1awp++i1

To recapitulate and for future guidance, the guidelines laid

down in the case of Eastern Shipping Lines42 are
accordingly modified to embody BSP-MB Circular No. 799,
as follows:
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.1wphi1

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:

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 6% 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.

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.

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 6% per annum from such finality until its
satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance of credit.

And, in addition to the above, judgments that have become

final and executory prior to July 1, 2013, shall not be
disturbed and shall continue to be implemented applying
the rate of interest fixed therein.

WHEREFORE, premises considered, the Decision dated

September 23, 2008 of the Court of Appeals in CA-G.R.
SP No. 98591, and the Resolution dated October 9, 2009
are REVERSED and SET ASIDE. Respondents are
Ordered to Pay petitioner:

(1) backwages computed from the time petitioner was

illegally dismissed on January 24, 1997 up to May 27,
2002, when the Resolution of this Court in G.R. No.
151332 became final and executory;

(2) separation pay computed from August 1990 up to May

27, 2002 at the rate of one month pay per year of service;
and

(3) interest of twelve percent (12%) per annum of the total

monetary awards, computed from May 27, 2002 to June 30,
2013 and six percent (6%) per annum from July 1, 2013
until their full satisfaction.

The Labor Arbiter is hereby ORDERED to make another

recomputation of the total monetary benefits awarded and
due to petitioner in accordance with this Decision.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-26058 October 28, 1977

AMPARO JOVEN DE CORTES & NOEL J. CORTES

(Jesus Noel plaintiff-appellees,
vs.
MARY E. VENTURANZA, ETC., JOSE OLEDAN &
ERLINDA M. OLEDAN, defendants-appellants.

Delia L. Hermoso for appellants the Venturanzas.

Ang. Atienza, Tabora & Del Rosario for appellants the

Oledans, Bernardo Guerrero & Associates for appellees.

MAKASIAR, J.:t.hqw

Direct appeal by the defendants-appellants from the

decision of the Court of First Instance of Bulacan against
them in its Civil Case No. 2693, entitled "Felix Cortes y
Ochoa, and Noel J. Cortes (Jesus Noel plaintiffs, versus
Gregorio Venturanza, Mary E. Venturanza, Jose Oledan
and Erlinda M. Oledan, defendants."

The original plaintiffs in this case were Felix Cortes y

Ochoa and Noel J. Cortes, and the original defendants
were Gregorio Venturanza, Mary E. Venturanza, Jose
Oledan and Erlinda M. Oledan. On December 11, 1967,
defendant Gregorio Venturanza died. Accordingly, as
prayed for by appellees, Mary E. Venturanza, Edna Lucille,
Greymar, Sylvia, Edward and Mary Grace, all surnamed
Venturanza, surviving spouse and children of the
deceased Gregorio Venturanza, were substituted as
appellants, in place of the deceased, by resolution of this
Court dated February 28, 1968. On September 12, 1968,
Felix Cortes y Ochoa died. Appellees, through counsel,
thereupon filed a petition praying that the title of this case
be changed to read: "Amparo Joven de Cortes and Noel J.
Cortes (Jesus Noel plaintiffs-appellant, versus Mary E.
Venturanza, etc., Jose Oledan and Erlinda M. Oledan,
defendants-appellants," which petition was granted by this
Court in its resolution dated April 11, 1969.

The background facts may be gleaned from the pertinent

portions of the decision of the court a quo, as
follows:+.wph!1

Plaintiff Felix Cortes y Ochoa and Noel J. Cortes filed the

instant action for foreclosure of real estate against the
defendants Gregorio Venturanza, Mary E. Venturanza,
Jose Oledan and Erlinda M. Oledan. The complaint alleges
that plaintiff Felix Cortez y Ochoa was the original owner of
nine (9) parcels of land covered by Transfer Certificates of
Title Nos. 21334 to 21342, inclusive, while plaintiff Noel J.
Cortes was likewise the original owner of twenty-four (24)
parcels of land covered by Transfer Certificates off Title
Nos. 21343, 21345, 21347 to 21367, inclusive, all of the
land records of Bulacan; that on October 24, 1958 said
plaintiffs sold and delivered to the defendants all the
above-mentioned thirty-three (33) parcels of land with all
the improvements thereon for the total sum of P716,573.90
of which defendants agreed to pay jointly and severally the
plaintiffs the sum of P100,000.00 upon the signing and
execution of a deed of sale and P40,000.00 on January 1,
1959 thereby leaving a balance of P576,573.90 which the
defendants agreed and bound themselves to pay plaintiffs
jointly and severally within three (3) years from January 1,
1959 with interest thereon at the rate of 6% per annum;
that defendants further agreed and bound themselves to
secure the payment of the said balance of P576,573.90
with a first mortgage upon the said 33 parcels of land with
improvements; that the defendants have already paid the
plaintiffs the total sum of P140,000.00; that of the unpaid
balance owing to plaintiffs, P169,484.24 pertaining to
plaintiff Felix Cortes and P407,089.66 pertains to plaintiff
Noel J. Cortes; that upon the registration of the deed of
sale and mortgage with the office of the register of deeds
of Bulacan new certificates of title for the 33 parcels of land
were issued in the names of the defendants and the
mortgage obligation was noted thereon; that the mortgage
obligation fell due on January 1, 1962, but despite
repeated demands for payment, defendants failed and
refused to pay the said balance of P576,573.90 to plaintiffs;
that from the time the mortgage obligation fell due and
demandable up to December 1, 1962 the total interest due
from the defendants on the balance of their obligation is
P103,783.32 computer led at the stipulated interest of
6% per annum; that it is stipulated in the deed of sale with
purchase money mortgage that in the event or default by
defendants to pay the obligation secured by the mortgage
and a suit is brought for the foreclosure of the mortgage or
any other legal proceedings is instituted for the
enforcement of plaintiffs' right, defendants would be
obligated and hound to pay the plaintiffs reasonable
compensation for attorney's fees which plaintiffs fixed at
P50,000.00.

Defendants Spouses Venturanza admit the allegations of

the complaint regarding plaintiffs's former ownership of the
lands in question as well as their execution of the
mortgage in favor of plaintiffs but allege that they are at
present the registered owners of the same parcels of land
by virtue of the sale thereof made to them; they likewise
admit the allotment of payment to plaintiffs of the balance
of their obligation but allege that the said balance has not
yet become due and demandable so that they have not
incurred in default. As special affirmative defense
defendants Venturanza allege that the document
designated as deed of sale with purchase money
mortgage does not express the true intent and agreement
of the parties with respect to the manner of payment of the
balance of the purchase price, the truth being that
defendants will pay the balance of the purchase price
in,the amount of P576,573.90 to the plaintiffs, and the
latter agreed, as soon as defendants will have received
from the Land Tenure Administration the purchase price of
their (defendants') hacienda in Bugo, Cagayan de Oro in
the amount of P360,000.00 which hacienda is the object of
exporpiration proceedings before the Court of First
Instance of said City; that it was agreed moreover that
defendants will complete payment of the balance of the
purchase price upon the consummation of the sale of their
other hacienda at Buhi, Camarines Sur to one Mr. De
Castro for P837, 00.00 more or less; that this negotiation
was known to plaintiffs who agreed to wait for the sale of
the same properties by defendants; that the property in
question was bought by defendant for speculative
purposes. As second special and affirmative defenses
defendants allege that the deed of sale with purchase
money mortgage had been novated by a subsequent
agreement regarding the manner and period of payment to
be made by defendants and that, therefore, the cause of
action has not yet accrued.

Defendants Jose Oledan and Erlinda M. Oledan deny the

material allegations of the complaint with respect to the
mortgage obligation alleging that plaintiffs cause of action
against them has been extinguished and, therefore did not
become due against them on January 1, 1962; that even
as regards their co-defendants Venturanzas the mortgage
obligation did not become due on January 1, 1962 there
hating been a novation of the original agreement which
affected material changes in the manner and condition of
time of payment of the balance of the mortgage obligation.
By way of affirmative defenses defendants Oledans
alleged that the deed of sale with purchase money
mortgage fails to express the true intent and agreement of
the parties thereto insofar as the nature of the liability of
the defendants is concerned, the true intention being to
hold them (defendants Oledan) obligated unto plaintiffs
only to the extent of the proportion of their share,
ownership and interests in the property conveyed; that
their obligation to plaintiffs has been extinguished by
novation; that their obligation to plaintiffs has been
extinguished by the assumption of the obligation by
defendants Venturanza as provided for in the agreement
among defendants dated December 28, 1959, such
assumption of the obligation being inside' with full
knowledge (of) and consent of plaintiffs which partakes of
the character of a novation of the original agreement and
that by their failure to seasonably interrupt any opposition
to the assumption of any obligation by defendants
Venturanza and to take appropriate action thereon,
plaintiffs have waived their right to proceed against them.

By way of cross-claim against their co-defendants

Venturanza, defendants Oledan allege that on December
28, 1958 they and their co-defendants executed and
entered into an agreement whereby they sold, transferred
unto their co-defendants all their shares, ownership and
interest in the property subject of a deed of sale with
purchase money mortgage for and in consideration of the
sum of P44,571.66 payable at the time and in the manner
specified in the written agreement; that of the
aforementioned consideration cross-defendants have paid
to them the sum of P22,285.83 thereby leaving a balance
still due and unpaid in the amount of P22,285.83 which
cross-defendants have failed to pay within the period
stipulated in their agreement; that it is further stipulated in
their agreement with cross-defendants that in the event of
failure by the latter to pay the said balance within the
period agreed upon they (cross-defendants) shall pay to
them the sum of P6,367.30 for the period August 8, 1960
to August 28, 1961; another amount of P6,367.30 for the
period August 28,1961 to August 28, 1962 and still another
amount of P6,367.30 for the period August 28, 1963 by
way of penalty, which despite repeated demands
cross-defendants have failed to pay; that it is further
stipulated in their agreement that in the event of default on
the part of cross-defendants, interest in the legal rate of
6% per annum shall be borne by the unpaid balance in the
amount of P22,285.83 plus the penalties aforementioned.

By way of counter-claim, defendants-cross-plaintiffs allege

that at the time defendants executed the agreement dated
December 28, 1958 plaintiffs had full knowledge of and
gave their consent to the transfer of their shares,
ownership and interest in favor of their co-defendants, as
well as the assumption by the latter of the mortgage
obligation; that despite such knowledge and consent,
plaintiffs induced cross-defendants not to register the
agreement and effect the issuance of new transfer
certificate of title in the name solely of defendants
Venturanza, evidently for the purpose of preversing cause
of action against them under the deed of sale with
purchase money mortgage; that as a consequence of
plaintiffs' injurious and malicious suit against them they
suffered mental anguish, serious anxiety, besmirched
reputation and moral shock on the basis of which plaintiffs
should he held answerable to them in moral damages in
the amount of P100,000.00 aside from exemplary
damages; and that a, a consequence of plaintiffs' having
filed the instant action against them they were compelled
to engage the services of counsel and incurred expenses
of litigation in the total amount of P20,000.00 for which
plaintiffs should be held liable to them (pp. 93-100,
Corrected Rec. on Appeal, pp. 320-323, rec ).
After due trial, the court a quo rendered its judgment with
the following rationale and dispositive portion:+.wph!1

There is no question that defendants are indebted to

plaintiffs on the mortgage executed by them contained in
the document denominated as 'Deed of Sale with
Purchase Money Mortgage' (Exhibit 'A') to the tune of
P576,573.90 with interest thereon at the stipulate rate of
6% per annum. The pertinent portion of the document in
question is quoted, as follows:+.wph!1

'(c) The remaining balance of the purchase price, after

deducting the sums of P100,000.00 and P40,000.00,
mentioned in Paragraphs (a) and (b) of this Article II,
aggregating the sum of Five Hundred Seventy Six
Thousand Five Hundred Seventy Three Pesos and Ninety
Centavos (P576,573.90) shall be paid jointly and severally,
by the vendees to the vendors within three (3) Nears from
January 1, 1959, with interest thereon at the rate of six per
annum, until fully paid, of which the sum of P169,484.24,
plus the corresponding interest thereon, shall be paid by
the vendees to the vendor, Felix Cortes y Ochoa, and the
balance of P407,089.66, plus the corresponding interest
thereon, shall be paid by the Vendees to the Vendor, Noel
J. Cortes.'

Defendants do not deny their failure to make good their

obligation to pay plaintiffs the balance of the purchase
price within the three-year period agreed upon in their
document. However, defendants Venturanzas explained
their failure as being due to their inability to collect the
payment of the sale of their own property located in Buhi,
Camarines Sur, and Bugo, Cagayan de Oro. in this
connection, we are again quoting a specific provision of the
agreement between the parties as regards the payment of
the obligation, thus:+.wph!1
C. In the event that the vendees shall fail to pay to the
vendors, in the form and manner provided in Paragraphs
(b) and (c) of Article II hereof, the said sums of P40,000.00
and P576,573.90, and the interest thereon, or should the
vendees make default in the performance of any one or
more of the conditions stipulated herein, the Vendors shall
have the right, at their election, to foreclos(ur)e this
mortgage, and to that end the vendors are hereby
appointed the attorneys-in-fact for the Vendees with full
power of substitution, to enter upon and take possession of
the mortgaged properties, without the order of any court or
any other authority other than herein granted, and to sell
and dispose of the same to the highest bidder at public
auction, ... .'

Defendants claim that there had been a novation of the

contract between them and plaintiffs on account of the
transfer made by defendants Oledans of their interest in
the property in favor of their defendants Venturanzas, with
the knowledge and consent of the plaintiffs As regards this
claim of defendants, we have another pertinenent
provision of their contract which reads as
follows:+.wph!1

'B. The vendees may, during the existence of this

mortgage, sell the property hereby mortgaged, or any part
thereof, or encumber the same with a second mortgage,
with the previous written consent of the vendors. ... .'

In view of the foregoing stipulations in the contract

between the parties, while plaintiffs may have knowledge
of the transfer made by defendants Oledans of their
interest in the property in question in favor of their
co-defendants, yet insofar as the original contract between
plaintiffs and defendants are concerned, 'the provisions
thereof shall govern. For plaintiffs' written consent to any
transfer is required by the provisions of their contract.
Since defendants were of the said provision, they should
have taken steps to obtain plaintiffs' written consent if only
to effect a novation. To the mind of the court, it must have
been due to a premonition on the part of plaintiffs that there
might be a substitution of debtor that gave rise to the
incIusion of the aforequoted provision in their original
contract.

It having been satisfactorily established that defendants

are indeed indebted to plaintiffs on the mortgage
constituted by them over the parcels of land in question,
the period of payment of the obligations having become
due, plaintiffs are, therefore, entitled to a foreclosure of the
said mortgage.

The next question that crops up for determination is

whether or not defendants Oledans have a right against
their co-defendants Venturanzas in this case. Exhibit
1-Oledan which is an Agreement and Deed of Sale of
Undivided Share in Real Estate entered into by and
between the Venturanzas and the Oledans clearly shows
that by virtue of said document, the Venturanzas assumed
the whole obligation to plaintiffs for and in consideration of
the sum of P44,571.66, one-half of which amount was paid
to the Oledans upon the execution and signing thereof and
the balance payable within 8 months therefrom. The
Venturanzas do not assail the veracity of the document
However, they seem to deny having agreed to the divisions
of the penalty clause claiming that the Oledans assured
them that the same was just incorporated therein as a
matter of form but that it would not be enforced. The
Venturanzas having agreed to time, as in fact, they have
assumed the whole obligation to the plaintiffs, they should,
therefore, be held liable to the Oledans for ,Alexander the
latter shall be bound to pay to plaintiffs under the original
contract known as Deed of Sale with Purchase Money
Mortgage.
WHEREFORE, judgment is hereby rendered in favor of
pIaintiffs and against the defendants, ordering the latter
jointly and severally to pay to the former or to deposit with
the clerk of court the sum of P576,573.90 with interest
thereon at the stipulated rate of 6% per annum until fully
paid, within 90 days from notice hereof. In default of such
payment the mortgaged property will be sold at public
auction to realize the mortgage indebtedness and costs. in
accordance with law.

On the cross-claim filed by defendants-cross-claimants

Oledans, cross-defendants Venturanzas are ordered to
reimburse to the former the amount which cross-claimants
are to pay to plaintiffs under the above judgment.

The parties will bear their own costs and expensive of

litigation" (pp. 107-113, Corrected Record on Appeal, pp.
327-330, rec.).

Not satisfied with the foregoing decision of the court a quo,

particularly with respect to its dispositive portion, plaintiffs
filed a motion for reconsideration and/or new trial, dated
October 19, 1965, and an urgent supplemental ration for
reconsideration, dated November 2, 1965. The defendants
Oledans likewise filed their motion for reconsideration
dated November 2, 1965, and the defendants Venturanzas
also filed a motion for reconsideration dated November 10,
1965.

Resolving the aforesaid motions of the parties litigants, the

trial court amended the dispositive portion of its in question
in its order dated November 22, 1965, which reads as
follows:+.wph!1

This case is again before the Court upon a motion for

reconsideration and/or new trial filed by plaintiffs dated
October 19, 1965, an urgent supplemental motion for
reconsideration dated November 2, 1965 filed by the same
plaintiffs, a motion for reconsideration dated November 2,
1965 filed by defendants Oledans, and a motion for
reconsideration dated November 10, 1965 filed by
defendants Venturanzas.

After a careful deliberation of the different motions for filed

by the parties, the Court believes a further modification of
the decision of September 30, 1965, as amended by the
order of October l, 1965, is in order. This, in accordance
with the agreement entered into by the parties embodied in
the document designated as Deed of Sale with Purchase
Money Mortgage.

WHEREFORE, the dispositive part of the decision of

September 30, 1965 is hereby re-amended so as to read
as follows:+.wph!1

'WHEREFORE, judgment is hereby rendered in favor of

plaintiff.s, and against the defendants ordering the latter,
jointly and severally, to pay the former or to deposit with
the clerk of court the sum of P576,573.90 with interest
thereon at the stipulated rate of 6%per annum from
January 1, 1959 until fully paid, within 90 days from notice
hereof. In default of such payment the mortgaged property
will be sold at public auction to realize the mortgage
indebtedness and costs, in accordance with law.'

'On the cross-claim by the defendants-cross-claimants

Venturanzas are ordered to reimburse to the former the
amount which cross-claimants are to pay to plaintiff under
the judgment.

'The parties will bear their own costs and expenses of

litigation.'

With the foregoing resolution the motion for

reconsideration filed by defendants Venturanzas and
Oledans are, therefore, DENIED (pp. 151-152, Corrected
Record on Appeal, pp. 349-350, rec.).
From the foregoing judgment, as amended, the defendants
Venturanzas and Oledans now appeal directly before this
Court. The Venturanzas assigned four (4) errors while the
Oledans assinged five (5) errors allegedly committed by
the trial court. WE believe these errors taken together all
boil down to the following issues:

a. Whether, upon the filing by plaintiffs of their complaint

against the defendants on December 12, 1962, the
obligation of the defendants had not yet become due and
demandable and, hence, the complaint was filed
prematurely.

b. Whether the payment of P576,573.90 with interest

thereon at the stipulated rate of 6% per annum was to be
made dependent upon the consummation of the sale of the
two haciendas of defendants Venturanzas and, hence,
there was a novation of the contract of sale with purchase
money mortgage, Exhibit B, as a result of a change in the
manner of payment.

c. Whether the sale on December 28, 1959 by the

defendants Oledans to their co-defendants Venturanzas,
of all their rights and interests in the property,
subject-matter of the deed of sale with purchase money
mortgage, Exhibit B, likewise constituted a novation
thereof and, therefore, had the effect of discharging the
defendants Oledans from their original obligation to the
plaintiffs.

1. The first and second issues involve an interpretation of

paragraph II (c) of the Deed of Sale with Purchase Money
Mortgage, Exhibit B, which provides as
follows: +.wph!1

(c) The remaining balance of the purchase price, after

deducting the sums of P100,000.00 and P40,000.00,
mentioned in Paragraphs (a) and (b) of this Article II,
aggregating the sum of FIVE HUNDRED SEVENTY-SIX
THOUSAND FIVE HUNDRED SEVENTY-THREE PESOS
AND NINETY CENTAVOS (P576,573.90) shall be paid,
jointly and severally, by the VENDEES to the VENDORS
WITHIN THREE (3) years from January 1, 1959, with
interest at the rate of Six Per Centrum (6%) per annum,
until fully paid of which the sum of P169,484.24, plus the
corresponding interest thereon, shall be paid by the
VENDEES to the VENDOR, FELIX CORTES y OCHOA,
and the balance of P407,089.66, plus the corresponding
interest thereon, shall be paid by the VENDEES to the
VENDOR, NOEL J. CORTES. ...

With respect to the first issue whether the complaint was

filed prematurely there is no dispute that plaintiffs filed
their complaint on December 12, 1962; that under the term
of the contract, the pertinent portion of which is quoted
above, the defendants were given until January 1, 1962
within which to pay their obligation; and that January 1,
1962 had passed without the defendants having paid to the
plaintiffs the sum of P576,573.90 and the corresponding
interest thereon notwithstanding repeated demands for
payment made upon and duly received by them (Exhs. D,
D-3 E, E-3, pp. 72, 73, 73-A, 74- 75, Folder of Exhibits).
Therefore, when plaintiffs filed the complaint on December
12, 1962, the effects of default as against the defendants
had already arisen. Besides, no less than the defendants
Venturanzas themselves admitted in their brief that they
were delayed in the payment of the balance of their
obligation to the plaintiffs. Let us turn to page 25 of their
brief.+.wph!1

The delay in the payment of the balance of the purchase

price due to the plaintiffs-appellees was caused by the
delay in the receipt of the payment of the purchase price of
the two haciendas of the herein defendants-appellants
Venturanza spouses. The non-compliance of herein
defendants-appellants with their obligations to
pIaintiffs-appellees was due to circumstances not within
their control ... .

One cannot admit being delayed in the payment of his

obligation unless he believes that his obligation is already
due and demandable. Stated otherwise, there is no delay if
the obligation is not yet due.

The alleged cause of their default in paying the balance of

the price, is not force majeure nor an act of God. Hence,
their failure to pay is not justified.

2. With respect to the second issue, defendants

Venturanzas contend that the three-year period provided
for in the Deed of Sale with Purchase Money Mortgage,
Exhibit B, was dependent on the date when they would be
able to collect the purchase price of the two properties they
were trying to sell. For this purpose, they claim that Dr.
Cortes, one of the plaintiffs, granted them an extension of
time within which to pay and this act of Dr. Cortes
constituted a novation of the contract.

This claim of defendants Venturanzas is equally devoid of

merit. A careful reading of the Deed of Sale with Purchase
Money Mortgage, Exhibit B, reveals the conspicuous
absence of any provision making the consummation of the
said contract dependent on the ability of defendants
Venturanzas to collect the purchase price of their two
haciendas. If this were the intention of the parties, they
should have clearly stated it in the contract. It is true the
defendants wrote two letters to Dr. Cortes and/or his
lawyer (Exhibits H and I-Venturanza, p. 90, Folder of
Exhibits), wherein the defendants Venturanzas requested
an extension of time within which to pay and Dr. Cortes
admitted having been informed of the alleged projected
sale of defendants Venturanzas' properties. Dr. Cortes,
however, vehemently denied having given said defendants
any extension of time.
The deed of sale with purchase money mortgage clearly
indicates that the balance of P576,573.90 shall be paid by
the defendants, jointly and severally, within three (3) years
from January 1, 1959, with interest at the rate of 6% per
annum, until fully paid. On January 1, 1962, the defendants
failed and refused to pay their obligation. This is a clear
case of an obligation with a definite period ex die, which
period was incidentally established for the benefit of the
defendants. The evidence presented by the plaintiffs to
substantiate these facts approaches moral certainty, not
merely preponderance of evidence. Hence, defendants'
defense of novation as to the period for payment, fails.

Furthermore, according to Article 1159 of the New Civil

Code, obligations arising from contracts have the force of
law between the contracting parties and should be
complied with in good faith. The deed, Exhibit B, does not
show on its face that any of the limitation of the freedom of
contract under Article 1306 of the same Code, such as law,
morals, good customs, public order, or public policy, exists,
On the contrary, the terms of said exhibit are so clear and
leave no doubt with respect to the intention of the
contracting parties. Hence, the literal meaning of its
stipulations shall control (Art. 1370, New Civil Code). This
is so because the intention of the parties is clearly
manifested and they are presumed to intend the
consequences of their voluntary acts ft. 5, par. [c], Rule
131, Revised Rules of Court). There being nothing in the
deed, Exhibit B, which would argue against its
enforcement, it follows that there is no ground or reason
why it should not be given effect.

WE therefore, see no reason to overturn the finding of the

court a quo that the defendants are indebted to the
plaintiffs on the mortgage constituted by them over the 33
parcels of land in question since the period for payment of
the obligation had become due and, therefore, plaintiffs are
entitled to a foreclosure of the said mortgage
3. The third and last issue pertains to the principal defense
of the defendants Oledans. These defendants claim that
because they transferred their interest and participation in
the property subject of the Deed of Sale with Purchase
Money Mortgage, Exhibit B, to the defendants
Venturanzas allegedly with the knowledge of the plaintiffs,
novation by substitution of the person of the debtor took
place and, therefore, their obligation to the plaintiffs had
been extinguished.

In resolving this issue, it is important to state some

principles and jurisprudence underlying the concept and
nature of novation as a mode of extinguishing obligations.

According to Manresa, novation is the extinguishment of

an obligation by the substitution or change of the obligation
by a subsequent one which extinguishes or modifies the
first, either by changing the object or Principal conditions,
or by substituting the person of the debtor, or by
subrogating a third person to the rights of the creditor (8
Manresa 428, cited in IV Civil Code of the Philippines by
Tolentino 1962 ed., p. 352). Unlike other modes of
extinction of obligations, novation is a juridical act with a
dual function it extinguishes an obligation and creates a
new one in lieu of the old.

Article 1293 of the New Civil Code provides:+.wph!1

Novation which consists in substituting a new debtor ,in the

place of the original one, may be made even without the
knowledge or -i , it the will of the latter, but not without the
without of the creditor (Emphasis supplied).

Under this provision, there are two forms of novation by

substituting the person of the debtor, and they are:
(1)expromision and (2) delegacion. In the former,the
initiative for the change does not come from the debtor and
may even be made without his knowledge, since it consists
in a third person assuming the obligation. As such, it
logically requires the consent of the third person and the
creditor. In the latter, the debtor offers and the creditor
accepts a third person who consents to the substitution
and assumes the obligation, so that the intervention and
the consent of these three persons are necessary (8
Manresa 436-437, cited in IV Civil Code of the Philippines
by Tolentino, 1962 ed., p. 360). In these two modes of
substitution, the consent of the creditor is an indispensable
requirement (Garcia vs. Khu Yek Chiong, 65 Phil. 466,
468)

Defendants Oledans' theory is that the Agreement and

Deed of Sale of Undivided Share in Real Estate (Exhibit
1-Oledan, p. 91, Folder of Exhibits), executed and entered
into by and between them and their co-defendants
Venturanzas, and which in effect transferred all their
interest and participation in the property subject of the
deed of mortgage (Exhibit B) to their co-defendants
Venturanzas, extinguished their obligation to the plaintiffs.
In support of their theory, they cited Article 1293 of the
New Civil Code, quoted above, and then concluded that
the creditor's consent to the novation which consists one
"is entirely unnecessary and senseless." They also cited
the cases of Rio Grande Oil Co. vs. Coleman (39 O.G. No.
38, 986) and Santisimo Rosario de Molo vs. Gemperle (39
O.G. No. 59, 1410), both decided by the Court of Appeals,
through the learned Mr. Justice Sabino Padilla, who later
became an active and respected member of this Court.

A perusal of the aforecited cases shows the

following:+.wph!1

From the Coleman case:

... A personal novation by substitution of another in place

of the debtor may be effected with or without the
knowledge of the debtor but not without the consent of the
creditor (Art. 1205, Civil Code [now Art 1293, New Civil
code]). this is the legal provision applicable to the case at
bar. the reason for the requirement that the creditor give
his consent to the substitution is obvious. the substitution
of another in place of the debtor may prevent or delay the
fulfillment or performance of the obligation by reason of the
inability or insolvency of the new debtor; hence, the
consent of the creditor is necessary. This kind of
substitution may take place without the knowledge of the
debtor when a third party assumes the obligation of the
debtor with the consent of the creditor. The novation
effected in this way is called delegacion. (Art. 1206, Civil
Code [now Art. 1295, New Civil Code]). In these two
modes of substitution, the consent of the creditor is always
required.... (emphasis supplied).

From the Gemperle case:+.wph!1

A personal novation by substitution of another in place of

the debtor may take place with or without the knowledge of
the debtor but not without the consent of the creditor
(Article 1205, Civil code the creditor's consent to such
substitution is obvious. Substitution of one debtor, for
another may delay or prevent the fulfillment or
performance of the obligation by reason of the temporary
inability or insolvency of the new debtor. In a novation that
takes place when the debtor offers and the creditor
accepts a third party in place of the former debtor, the
consent of the creditor is also necessary (art. 1206, Civil
Code [now Art. 1295, New civil Code]). ...

After going over carefully the aforecited portions of the

decisions of the Court of Appeal cited by the defendants
Oledans, WE find that they do not help any the cause of
said defendants; on the contrary, they both militate against
their theory. Be that as it may, suffice it to state that while
the Agreement and Deed of Sale of Undivided Share in
Real Estate, Exhibit 1-Oledan, might have created a
juridical relation as between defendants Venturanzas and
Oledans, it cannot however affect the relation between
them on one hand, and the plaintiffs, on the other, since
the latter are not privies to the said agreement, and this
kind of novation cannot be made without the consent of the
plaintiffs (Garcia vs. Khu Yek Chiong, et al., supra). One
reason for the requirement of the creditor's consent to such
substitution is obvious. Substitution of one debtor for
another may delay or prevent the fulfillment of the
obligation by reason of the financial inability or insolvency
of the new debtor; hence, the creditor should agree to
accept the substitution in order that it may be binding on
him.

Incidentally, this case is, in practically all respects, similar

to, if not Identical with, the case of McCullough & Co. vs.
Veloso and Serna (46 Phil. 1). In that case, plaintiff sold to
defendant Veloso its property known as "McCullough
Building" consisting of a land with the building thereon, for
the price of P700,000.00. Veloso paid a down payment of
P50,000.00 cash on account at the execution of the
contract, and the balance of P650,000.00 to be paid on
installment basis. To secure the payment of the balance,
Veloso mortgaged the property purchased in favor of
McCullough. It was stipulated that in case of failure on the
part of Veloso to comply with any of the stipulations
contained in the mortgage deed, all the installments with
the interest thereon at the rate of 7% per annum shall
become due, and the creditor shall then have the right to
bring the proper action in court.

Subsequently, Veloso sold the property with the

improvements thereon for P100,000.00 to Serna, who
agreed to respect the mortgage on the property in favor of
McCullough and to assume Veloso's obligation to pay the
plaintiff the balance. Veloso paid P50,000.00 on account of
the P650,000.00 and Serna made several payments up to
the total sum of P250.000.00 Subsequently, however,
neither Veloso nor Serna made any payment upon the last
installments, by virtue of which delay, the whole obligation
became due McCullough went to court.

After due trial, the court sentenced defendant Veloso to

pay the plaintiff the sum of P510,047.34, with interest
thereon at 7% per annum, within three months; otherwise,
the property mortgaged shall be sold at public auction to
the highest bidder and in the manner provided by law, the
proceeds of the sale to be applied to the payment of the
judgment, after deducting the fees of the court's officer.

On appeal, defendant Veloso contended that having sold

the property to Serna and the otter having assumed the
obligation to pay the plaintiff"the unpaid balance of the
price secured by the he was relieved from the obligation to
pay the plaintiff. This means contract between the
appellant and Serna, contract between him and the plaintiff
was novated by the substitution of Serna as a new debtor.

The Supreme Court ruled +.wph!1

In order that this novation may take place, the law requires
the consent of the creditor (Art. 1205 of the Old Civil code;
now Art. 1293 of the New Civil Code). The plaintiff did not
intervene in the contract between Veloso and Serna and
did not expressly give his consent to this substitution.
Novation must be express, and cannot be presumed.

In the case at bar, the agreement, Exhibit 1-Oledan relied

upon by the defendants Oledans, does not show on its
face that the plaintiffs intervened in, much less gave their
consent to, the substitution; as a matter of fact, plaintiff
Cortes vehemently denied having consented to the
transfer of rights from the Oledans to the Venturanzas
alone. Res inter alios acta alteri nocere non debet , no less
than defendant lose Oledan himself testified that he did not
personally see Dr. Cortes about the transfer of rights in
Exhibit 1-Oledan, despite his commitment with his
co-defendants in said agreement 'to inform Messrs. Felix
Cortes and Noel J. Cortes (Jesus Noel) of the execution of
the said agreement" (p. 15, t.s.n. hearing of January 19,
1965). There is thus a complete absence of animus
novandi, whether express or implied, on the part of the
creditors the Corteses.

With respect to the claim of plaintiffs for reasonable

attorney's fees, paragraph III (G) of the Deed of Sale with
Purchase Money Mortgage, Exhibit B,
provides:+.wph!1

G In the event of default on the part of the VENDEES and

by reason thereof a suit is brought for the foreclosure of
this mortgage or any other legal proceedings is instituted
for the enforcement of any of the rights of the VENDORS
hereunder, a reasonable compensation shall be paid,
jointly and severally, by the VENDEES to the VENDORS
for attorney's fees, in addition to the fees and costs allowed
by the Rules of Court.

The validity of the above agreement for reasonable

attorney's fees was questioned in the pleadings of the
defendants before the trial court. Before this Court, the
plaintiffs in their brief (pp. 121-123, 126), called OUR
attention to the oversight in respect thereto committed by
the court a quo.

With respect, however, to the interest due to the plaintiffs

on the indebtedness of the defendants, WE are reminded
of the mandate of Article 2212 of the New Civil Code,
which provides: +.wph!1

Interest due shall earn legal interest from the time it is

judicially demanded, although the obligation may be silent
upon this point.

Per stipulation, plaintiffs are entitled to collect from

defendants interest at the rate of six per centum (6%) per
annum on the remaining balance of P576,573.90 from
January 1, 1959. Hence, for the period from January 1,
1959 to December 12, 1962, the date of the riling of the
complaint, plaintiffs are entitled to collect from the
defendants, by way of interest at six percent per annum,
the sum of P136,482.13. Applying the aforequoted legal
provision, this amount of P136,482.13 should be added to
the principal of P576,573.90, making a total of
P713,056.03, which shall earn legal interest stipulated at
six percent per annum from December 13, 1962 until fully
paid. Such interest is not due to stipulation; rather it is due
to the mandate of the law hereinbefore quoted.

Now, considering that the total amount recoverable in this

case approximates 1.4 million pesos as of October 31,
1977 (consisting of principal of P576,573.90, plus
P136,482.13 interest from January 1, 1959 to December
12, 1962, plus P636,827.37 interest from December 13,
1962 to October 31, 1977), and that every step in the
foreclosure proceedings had been tenaciously contested,
not to mention the work it will still require counsel for the
plaintiffs to collect the same by judicial proceedings, WE
find that P50,000.00 is a reasonable amount to which the
plaintiffs are entitled as and for attorney's fees.

Anent the cross-claim of defendants Oledans against their

co-defendants Venturanzas to the effect "that the
defendants Venturanzas are liable to them for the balance
of P22,285.83 in addition to the penalties stipulated in the
agreement and deed of sale, Exhibit 1-Oledan, and the
interests provided therein, WE find the claim for the
balance of P22,285.83 meritorious.

On their claim for penalties and interests as provided for in

the same agreement, cross-claimants and defendants
Oledans rely on the pertinent portions of the agreement,
which read:+.wph!1

xxx xxx xxx

2. That upon the execution and signing of this Agreement,
the PARTIES/OF THE FIRST PART (the Venturanzas will
pay to the PARTIES OF THE SECOND PART (the
Oledans and the latter hereby, acknowledge receipt
thereof, of the sum of TWENTY TWO THOUSAND (TWO
HUNDRED) AND EIGHTY FIVE PESOS AND EIGHTY
THREE CENTAVOS (P22,285-83), Philippine Currency
(Prudential Bank Check No. 965159) and the balance of
Twenty Two Thousand Two Hundred and Eighty Five
Pesos and Eighty Three centavos (P22,285.83), Philippine
Currency, shall be paid by the PARTIES OF THE FIRST
PART to the PARTIES OF THE SECOND PART within
eight (8) months from the date and execution of this
Agreement and Deed of Sale;

xxx xxx xxx

4. That in the event of failure on the part of the PARTIES

OF THE FIRST PART to pay the said balance of Twenty
Two Thousand Two Hundred and Eighty Five Pesos and
Eighty Centavos (P22,285.80) within the said period of
eight (8) months stipulated above, the said PARTIES OF
THE FIRST PART will pay to the PARTIES OF THE
SECOND PART a penalty of Six Thousand Three Hundred
Sixty Seven Pesos and Thirty Centavos (P6,367.30) for
the period from August 28, 1960 to August 28, 1961;
another penalty of P6,367.30 for the period from August 28,
1961 to August 28, 1962; and another penalty of
P6,367.30 for the period from August 28, 1962 to August
28, 1963. It is agreed that any part payment on the said
balance of P22,285.80 has no effect on the payment of the
penalty provided for herein, and in case of non-payment of
the full amount of the balance of P22,285.80 within the
said period of three years aforementioned or up to August
28, 1963, then the said balance left unpaid plus the
penalties due, as provided for herein, shall bear an interest
at the legal rate. It is of course understood, that the
penalties and interest provided for herein shall not apply if
the PARTIES OF THE FIRST PART shall pay the said
balance of Twenty Two Thousand Two Hundred and
Eighty Five Pesos and Eighty Centavos (P22,285.80)
within the eight (8) months stipulated in paragraph 2 above,
or on or before August 28, 1960;

xxx xxx xxx

(Brief for defendants Oledans, pp. 32-34, Folder of Exhibits,

pp. 92- 93).

A meticulous analysis of the aforequoted portions of

Exhibit 1-Oledan shows:

1. That the Venturanzas were given a period of eight (8)

months from and after December 28, 1959 - the date of the
execution of the agreement - within which to pay the
balance of P22,285.80;

2. That in the event of failure on the part of the

Venturanzas to pay the said balance of P22,285.80 within
the said period of eight (8) months, the Venturanzas would
pay to the Oledans a penalty of P6,367.30 annually,
beginning August 28, 1960, for a period of three (3) years
lip to August 28, 1963, regardless of any partial payment
which the Venturanzas might make on the balance of
P22,285.80; and

3. That in case of non-payment of the whole obligation of

P22,285.80 within the stipulated period of three (3) years
from August 28, 1960 to August 28, 1963, such obligation
or any balance thereof remaining unpaid, plus the
penalties due at the rate of P6,367.30 annually for three (3)
years, shall earn interest at the legal rate.

Going over the entire agreement, Exhibit 1-Oledan, WE

have noted the following:
1. That in connection with the deed of sale with mortgage,
Exhibit B, the Venturanzas were the ones who paid out of
their own personal funds the One Hundred Thousand
Pesos (P100,000.00) to the plaintiffs, representing the
down payment on the purchase price of the property, with
the understanding that the Oledans would reimburse the
Venturanzas their one-half (1/2) share of P50,000.00;

2. That subsequently, the Oledans decided not to continue

with the payment or reimbursement to the Venturanzas of
their one-half (1/2) share of P50,000.00 as above indicated,
but they agreed to share in the amount of their investment
of only P20,000.00;

3. That the Venturanzas were again the ones who paid out
of their own personal funds the succeeding P40,000.00,
which fell due on January 1, 1959, to the plaintiffs;

4. That it was only on January 16, 1959 that the Oledans

were able to reimburse to the Venturanzas their one-half
(1/2) share of the P40,000.00; and

5. That the sum of P20,000.00 was the only amount paid

by the Oledans to and/or invested with the Venturanzas in
their joint venture envisioned in the deed of sale with
mortgage, Exhibit B.

In support of their claim for penalties and interests, the

cross-claimants and defendants Oledans contend that "this
is a normal stipulation in contracts of this character." WE
do not agree and hereby reject such claim for penalties as
well as for interests.

Settled is the rule that the 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
(Art. 1306, New Civil Code). The onwards show that
cross-claimants and defendants Oledans more than broke
even on their investment of P20,000.00 when they
received from their co-defendants Venturanzas the sum of
P22,285.F3 on December 28, 1959. From all indications, it
would seem that defendants Venturanzas threw caution to
the four winds, so to say, and bound themselves to pay to
their co-defendants Oledans the stipulated penalty of
P6,367.30 annually for three (3) years, beginning August
28, 1960, in their belief that within the said period of time
they would have more than enough money with which to
pay their obligation to the plaintiffs. Unfortunately, however,
to their great disappointment, the unexpected happened as
they ended up with no money with which to pay not only
the balance of their obligation to the plaintiffs in the sum of
P576,573.90, but also the balance of their obligation to
their co-defendants Oledans in the sum of P22,285.30. Be
that as it may justice and morality cannot consent to and
sanction a clearly iniquitous deprivation of property,
repulsive to the common sense of man. This is what this
Court said some sixty (60) years ago in the case of Ibarra
vs. Aveyro and Pre (37 Phil 273, 282), which WE cannot
help but quote hereunder:+.wph!1

Notwithstanding the imprudence and temerity shown by

the defendants by their execution of a ruinous engagement,
assumed, as it appears, knowingly and voluntarily, morality
and justice cannot consent to and sanction a repugnant
spoliation and iniquitous deprivation of property, repulsive
to the common sense of man; and therefore, as all acts
performed against the provisions of law are null and void,
and as the penal clause referred to, notwithstanding its
being an ostensible violation of morals, was inserted in
said promissory note, and as there is no law that expressly
authorizes it, we must conclude that the contracting party
favored by said penal clause totally lacks all right of action
to enforce its fulfillment (emphasis supplied).
WHEREFORE, THE APPEALED JUDGMENT IS
MODIFIED AND ANOTHER ONE IS RENDERED,
DIRECTING:

I. ALL THE DEFENDANTS APPELLANTS

VENTURANZAS AND OLEDANS TO PAY JOINTLY AND
SEVERALLY THE
PLAINTIFFS-APPELLEES: +.wph!1

A. THE SUM OF FIVE HUNDRED SEVENTY SIX

THOUSAND FIVE HUNDRED SEVENTY THREE PESOS
AND NINETY CENTAVOS (P576,573.90), PLUS ONE
HUNDRED THIRTY SIX THOUSAND FOUR HUNDRED
EIGHTY TWO PESOS AND THIRTEEN CENTAVOS
(P136,482.13) INTEREST AT THE RATE OF SIX PER
CENTUM (6%) PER ANNUM FROM JANUARY 1, 1959
TO DECEMBER 12, 1962, PLUS INTEREST AT THE
SAME RATE ON THE PRINCIPAL AMOUNT OF P576,
573.90 ADDED TO THE ACCRUED INTEREST FOR THE
PERIOD FROM DECEMBER 13,1962 UNTIL THE
WHOLE OBLIGATION IS FULLY PAID, WITHIN NINETY
(90) DAYS FROM NOTICE HEREOF. IN DEFAULT OF
SUCH PAYMENT, THE MORTGAGED PROPERTIES
SHALL BE SOLD AT PUBLIC AUCTION TO REALIZE
THE MORTGAGE INDEBTEDNESS AND COSTS IN
ACCORDANCE WITH LAW; AND

B. THE SUM OF FIFTY THOUSAND PESOS (P50,000.00)

AS ATTORNEY'S FEES:

II. THE CROSS-DEFENDANT'S VENTURANZAS TO PAY

AND/OR REIMBURSE THE CROSS-CLAIMANTS
OLEDANS: +.wph!1

A. THE SUM OF TWENTY TWO THOUSAND TWO

HUNDRED AND EIGHTY FIVE PESOS AND EIGHTY
THREE CENTAVOS (P22,285.83), PLUS INTEREST AT
THE RATE OF SIX PERCENT (6%) PER ANNUM
COUNTED FROM THE FINALITY OF THIS DECISION,
UNTIL THE SAW IS FULLY PAID;

B. THE AMOUNT WHICH SAID CROSS-CLAIMANT'S

MAY PAY TO PLAINTIFFS-APPELLEES UNDER THIS
JUDGMENT;AND

III. THE DEFENDANTS-APPELLANTS VENTURANZAS

TO PAY TREBLE COSTS.

Teehankee (Chairman), Mu;oz Palma, Martin, Fernandez

and Guerrero, JJ., concur

THIRD DIVISION

[G.R. No. 138677. February 12, 2002]

TOLOMEO LIGUTAN and LEONIDAS DE LA

LLANA, petitioners, vs. HON. COURT OF
APPEALS & SECURITY BANK & TRUST
COMPANY, respondents.

DECISION
VITUG, J.:

Before the Court is a petition for review

on certiorari under Rule 45 of the Rules of Court, assailing
the decision and resolutions of the Court of Appeals in
CA-G.R. CV No. 34594, entitled "Security Bank and Trust
Co. vs. Tolomeo Ligutan, et al."
 Petitioners Tolomeo Ligutan and Leonidas dela Llana o
btained on 11 May 1981 a loan in the amount of
P120,000.00 from respondent Security Bank and Trust
Company. Petitioners executed a promissory note binding
themselves, jointly and severally, to pay the sum borrowed
with an interest of 15.189% per annum upon maturity and
to pay a penalty of 5% every month on the outstanding
principal and interest in case of default. In addition,
petitioners agreed to pay 10% of the total amount due by
way of attorneys fees if the matter were indorsed to a
lawyer for collection or if a suit were instituted to enforce
payment. The obligation matured on 8 September 1981;
the bank, however, granted an extension but only up
until 29 December 1981.
Despite several demands from the bank, petitioners
failed to settle the debt which, as of 20 May 1982,
amounted to P114,416.10. On 30 September 1982, the
bank sent a final demand letter to petitioners informing
them that they had five days within which to make full
payment. Since petitioners still defaulted on their obligation,
the bank filed on 3 November 1982, with the Regional Trial
Court of Makati, Branch 143, a complaint for recovery of
the due amount.
After petitioners had filed a joint answer to the complaint,
the bank presented its evidence and, on 27 March 1985,
rested its case. Petitioners, instead of introducing their own
evidence, had the hearing of the case reset on two
consecutive occasions. In view of the absence of
petitioners and their counsel on 28 August 1985, the third
hearing date, the bank moved, and the trial court resolved,
to consider the case submitted for decision.
Two years later, or on 23 October 1987, petitioners filed
a motion for reconsideration of the order of the trial court
declaring them as having waived their right to present
evidence and prayed that they be allowed to prove their
case. The court a quo denied the motion in an order,
dated 5 September 1988, and on 20 October 1989, it
rendered its decision,[1] the dispositive portion of which
read:

WHEREFORE, judgment is hereby rendered in favor of the

plaintiff and against the defendants, ordering the latter to pay,
jointly and severally, to the plaintiff, as follows:

"1. The sum of P114,416.00 with interest thereon at

the rate of 15.189% per annum, 2% service charge
and 5% per month penalty charge, commencing
on 20 May 1982 until fully paid;
"2. To pay the further sum equivalent to 10% of the
total amount of indebtedness for and as attorneys
fees; and
"3. To pay the costs of the suit.[2]
Petitioners interposed an appeal with the Court of
Appeals, questioning the rejection by the trial court of their
motion to present evidence and assailing the imposition of
the 2% service charge, the 5% per month penalty charge
and 10% attorney's fees. In its decision[3] of 7 March 1996,
the appellate court affirmed the judgment of the trial court
except on the matter of the 2% service charge which was
deleted pursuant to Central Bank Circular No. 783. Not
fully satisfied with the decision of the appellate court, both
parties filed their respective motions for
reconsideration.[4] Petitioners prayed for the reduction of
the 5% stipulated penalty for being unconscionable. The
bank, on the other hand, asked that the payment of interest
and penalty be commenced not from the date of filing of
complaint but from the time of default as so stipulated in
the contract of the parties.
On 28 October 1998, the Court of Appeals resolved the
two motions thusly:

We find merit in plaintiff-appellees claim that the principal sum

of P114,416.00 with interest thereon must commence not on the
date of filing of the complaint as we have previously held in our
decision but on the date when the obligation became due.

Default generally begins from the moment the creditor demands

the performance of the obligation. However, demand is not
necessary to render the obligor in default when the obligation or
the law so provides.

In the case at bar, defendants-appellants executed a promissory

note where they undertook to pay the obligation on its maturity
date 'without necessity of demand.' They also agreed to pay the
interest in case of non-payment from the date of default.

xxxxxxxxx

While we maintain that defendants-appellants must be bound by

the contract which they acknowledged and signed, we take
cognizance of their plea for the application of the provisions of
Article 1229 x x x.

Considering that defendants-appellants partially complied with

their obligation under the promissory note by the reduction of
the original amount of P120,000.00 to P114,416.00 and in order
that they will finally settle their obligation, it is our view and we
so hold that in the interest of justice and public policy, a penalty
of 3% per month or 36% per annum would suffice.

xxxxxxxxx

WHEREFORE, the decision sought to be reconsidered is hereby

MODIFIED. The
defendants-appellants Tolomeo Ligutan and Leonidas dela Llan
a are hereby ordered to pay the plaintiff-appellee Security Bank
and Trust Company the following:

1. The sum of P114,416.00 with interest thereon

at the rate of 15.189% per annum and 3% per
month penalty charge commencing May 20,
1982 until fully paid;
 2. The sum equivalent to 10% of the total amount
of the indebtedness as and for attorneys fees.[5]
On 16 November 1998, petitioners filed an omnibus
motion for reconsideration and to admit newly discovered
evidence,[6] alleging that while the case was pending
before the trial court, petitioner Tolomeo Ligutan and his
wife Bienvenida Ligutan executed a real estate mortgage
on 18 January 1984 to secure the existing indebtedness of
petitioners Ligutan and dela Llana with the
bank. Petitioners contended that the execution of the real
estate mortgage had the effect of novating the contract
between them and the bank.Petitioners further averred that
the mortgage was extrajudicially foreclosed on 26 August
1986, that they were not informed about it, and the bank
did not credit them with the proceeds of the sale. The
appellate court denied the omnibus motion for
reconsideration and to admit newly discovered evidence,
ratiocinating that such a second motion for reconsideration
cannot be entertained under Section 2, Rule 52, of the
1997 Rules of Civil Procedure. Furthermore, the appellate
court said, the newly-discovered evidence being invoked
by petitioners had actually been known to them when the
case was brought on appeal and when the first motion for
reconsideration was filed.[7]
Aggrieved by the decision and resolutions of the Court
of Appeals, petitioners elevated their case to this Court on
9 July 1999 via a petition for review on certiorari under
Rule 45 of the Rules of Court, submitting thusly -
I. The respondent Court of Appeals seriously erred
in not holding that the 15.189% interest and
the penalty of three (3%) percent per month
or thirty-six (36%) percent per annum
imposed by private respondent bank on
petitioners loan obligation are still manifestly
exorbitant, iniquitous and unconscionable.
 II. The respondent Court of Appeals gravely erred in
not reducing to a reasonable level the ten
(10%) percent award of attorneys fees which
is highly and grossly excessive,
unreasonable and unconscionable.
III. The respondent Court of Appeals gravely erred in
not admitting petitioners newly discovered
evidence which could not have been timely
produced during the trial of this case.
IV. The respondent Court of Appeals seriously erred
in not holding that there was a novation of the
cause of action of private respondents
complaint in the instant case due to the
subsequent execution of the real estate
mortgage during the pendency of this case
and the subsequent foreclosure of the
mortgage.[8]
Respondent bank, which did not take an appeal, would,
however, have it that the penalty sought to be deleted by
petitioners was even insufficient to fully cover and
compensate for the cost of money brought about by the
radical devaluation and decrease in the purchasing power
of the peso, particularly vis-a-vis the U.S. dollar, taking into
account the time frame of its occurrence. The Bank would
stress that only the amount of P5,584.00 had been
remitted out of the entire loan of P120,000.00.[9]
A penalty clause, expressly recognized by law,[10] is an
accessory undertaking to assume greater liability on the
part of an obligor in case of breach of an obligation. It
functions to strengthen the coercive force of the
obligation[11] and to provide, in effect, for what could be the
liquidated damages resulting from such a breach. The
obligor would then be bound to pay the stipulated
indemnity without the necessity of proof on the existence
and on the measure of damages caused by the
breach.[12] Although a court may not at liberty ignore the
freedom of the parties to agree on such terms and
conditions as they see fit that contravene neither law nor
morals, good customs, public order or public policy, a
stipulated penalty, nevertheless, may be equitably reduced
by the courts if it is iniquitous or unconscionable or if the
principal obligation has been partly or irregularly complied
with.[13]
The question of whether a penalty is reasonable or
iniquitous can be partly subjective and partly objective. Its
resolution would depend on such factors as, but not
necessarily confined to, the type, extent and purpose of the
penalty, the nature of the obligation, the mode of breach
and its consequences, the supervening realities, the
standing and relationship of the parties, and the like, the
application of which, by and large, is addressed to the
sound discretion of the court. In Rizal Commercial
Banking Corp. vs. Court of Appeals,[14] just an example,
the Court has tempered the penalty charges after taking
into account the debtors pitiful situation and its offer to
settle the entire obligation with the creditor bank. The
stipulated penalty might likewise be reduced when a partial
or irregular performance is made by the debtor.[15] The
stipulated penalty might even be deleted such as when
there has been substantial performance in good faith by
the obligor,[16] when the penalty clause itself suffers from
fatal infirmity, or when exceptional circumstances so exist
as to warrant it.[17]
The Court of Appeals, exercising its good judgment in
the instant case, has reduced the penalty interest from 5%
a month to 3% a month which petitioner still
disputes. Given the circumstances, not to mention the
repeated acts of breach by petitioners of their contractual
obligation, the Court sees no cogent ground to modify the
ruling of the appellate court..
Anent the stipulated interest of 15.189% per annum,
petitioners, for the first time, question its reasonableness
and prays that the Court reduce the amount. This
contention is a fresh issue that has not been raised and
ventilated before the courts below. In any event, the
interest stipulation, on its face, does not appear as being
that excessive. The essence or rationale for the payment
of interest, quite often referred to as cost of money, is not
exactly the same as that of a surcharge or a penalty. A
penalty stipulation is not necessarily preclusive of interest,
if there is an agreement to that effect, the two being distinct
concepts which may separately be demanded.[18] What
may justify a court in not allowing the creditor to impose full
surcharges and penalties, despite an express
stipulation therefor in a valid agreement, may not equally
justify the non-payment or reduction of interest. Indeed, the
interest prescribed in loan financing arrangements is a
fundamental part of the banking business and the core of a
bank's existence.[19]
Petitioners next assail the award of 10% of the total
amount of indebtedness by way of attorney's fees for being
grossly excessive, exorbitant and
unconscionable vis-a-vis the time spent and the extent of
services rendered by counsel for the bank and the nature
of the case. Bearing in mind that the rate of attorneys fees
has been agreed to by the parties and intended to answer
not only for litigation expenses but also for collection efforts
as well, the Court, like the appellate court, deems the
award of 10% attorneys fees to be reasonable.
Neither can the appellate court be held to have erred in
rejecting petitioners' call for a new trial or to admit newly
discovered evidence. As the appellate court so held in its
resolution of 14 May 1999 -

Under Section 2, Rule 52 of the 1997 Rules of Civil Procedure,

no second motion for reconsideration of a judgment or final
resolution by the same party shall be entertained. Considering
that the instant motion is already a second motion for
reconsideration, the same must therefore be denied.
Furthermore, it would appear from the records available to this
court that the newly-discovered evidence being invoked by
defendants-appellants have actually been existent when the case
was brought on appeal to this court as well as when the first
motion for reconsideration was filed. Hence, it is quite
surprising why defendants-appellants raised the alleged
newly-discovered evidence only at this stage when they could
have done so in the earlier pleadings filed before this court.

The propriety or acceptability of such a second motion for

reconsideration is not contingent upon the averment of 'new'
grounds to assail the judgment, i.e., grounds other than those
theretofore presented and rejected. Otherwise, attainment of
finality of a judgment might be stayed off indefinitely,
depending on the partys ingenuousness or cleverness in
conceiving and formulating 'additional flaws' or 'newly
discovered errors' therein, or thinking up some injury or
prejudice to the rights of the movant for reconsideration.[20]

At any rate, the subsequent execution of the real estate

mortgage as security for the existing loan would not have
resulted in the extinguishment of the original contract of
loan because of novation. Petitioners acknowledge that
the real estate mortgage contract does not contain any
express stipulation by the parties intending it to supersede
the existing loan agreement between the petitioners and
the bank.[21] Respondent bank has correctly postulated that
the mortgage is but an accessory contract to secure the
loan in the promissory note.
Extinctive novation requires, first, a previous valid
obligation; second, the agreement of all the parties to the
new contract; third, the extinguishment of the obligation;
and fourth, the validity of the new one.[22] In order that an
obligation may be extinguished by another which
substitutes the same, it is imperative that it be so declared
in unequivocal terms, or that the old and the new obligation
be on every point incompatible with each other.[23] An
obligation to pay a sum of money is
not extinctively novated by a new instrument which merely
changes the terms of payment or adding compatible
covenants or where the old contract is merely
supplemented by the new one.[24] When not expressed,
incompatibility is required so as to ensure that the parties
have indeed intended such novation despite their failure to
express it in categorical terms. The incompatibility, to be
sure, should take place in any of the essential elements of
the obligation, i.e., (1) the juridical relation or tie, such as
from a mere commodatum to lease of things, or
from negotiorum gestio to agency, or from a mortgage
to antichresis,[25] or from a sale to one of loan;[26] (2) the
object or principal conditions, such as a change of the
nature of the prestation; or (3) the subjects, such as the
substitution of a debtor[27] or the subrogation of the
creditor. Extinctive novation does not necessarily imply
that the new agreement should be complete by itself;
certain terms and conditions may be carried, expressly or
by implication, over to the new obligation.
WHEREFORE, the petition is DENIED.
SO ORDERED.
Melo, (Chairman), Panganiban,
Sandoval-Gutierrez, and Carpio, JJ., concur.