THIRD DIVISION

[ G.R. No. 82082, March 25, 1988 ]

INSULAR BANK OF ASIA AND AMERICA, PLAINTIFF-APPELLANT, VS. SPOUSES EPIFANIA SALAZAR AND
RICARDOSALAZAR,DEFENDANTS-APPELLEES.

DECISION
GUTIERREZ, JR., J.:
This is an appeal by the Insular Bank of Asia and America (IBAA) from the judgment of the Regional Trial Court of Leyte
in Civil Case No. 6932 for collection of a sum of money with preliminary attachment. The appeal was originally brought
to the Court of Appeals but was certified to us by that tribunal because it raises only a question of law.

Thefactsarenotdisputed.

On November 22, 1978, defendants-appellees, Epifania Salazar and Ricardo Salazar obtained a loan from the plaintiff-
appellant in the amount of Forty Two Thousand and Fifty Pesos (P42,050.00) payable on or before December 12, 1980.
This loan transaction was evidenced by a promissory note where the defendants-appellees bound themselves jointly
and severally to pay the amount with interest at 19% per annum and with the express authority to increase without
notice the rate of interest up to the maximum allowed by law and subject further to penalty charges or liquidated damages
upon default equivalent to 2% per month on any amount due and unpaid. In the event the account was referred to an
attorney for collection, the defendants-appellees were also bound to pay 25% of any amount due as attorney's fees plus
expenses of litigation and costs.

In accordance with the agreement, the plaintiff-appellant increased the rate of interest to 21% pursuant to Central Bank
Circular No. 705 dated December 1, 1979.

The promissory note matured but the defendants-appellees failed to pay their account. It was only after several demands
that the defendants-appellees were able to make partial payment. As of November 25, 1983, they were able to pay a
total of P68,676.75 which payments were applied to partially satisfy the penalty and interest charges.

On September 12, 1984, the plaintiff-appellant filed a complaint with the Regional Trial Court alleging that the
defendants-appellees were indebted to IBAA in the amount of P87,647.19 as of September 15, 1984, including interest
at 21% per annum, penalty charges, and attorney's fees.

At the pre-trial on October 31, 1984, the parties and their counsels appeared. The defendant-spouses admitted the
execution of the promissory note in consideration of P48,050.00. The trial court then rendered a summary judgment the
dispositive portion of which reads:

"WHEREFORE, judgment is hereby ordered in favor of the plaintiff ordering the defendant spouses Ricardo Salazar
and Epifania Salazar to pay Insular Bank of Asia and America (IBAA) the sum of Eleven Thousand Two Hundred Fifty
Three Pesos and Twenty Five Centavos (P11,253.25), with interest thereon at the rate of 19% per annum from the filing
of the complaint on September 12, 1984 until fully paid. The defendants are further ordered to pay the plaintiff attorney's
fees in the amount of One Thousand Pesos (P1,000.00) and to pay the costs." (p. 4, Plaintiff?Appellant's Brief).
Plaintiff-appellant now raises the following assigned errors:

I. THE LOWER COURT ERRED IN NOT AWARDING TO PLAINTIFF-APPELLANT PENALTY CHARGES OR

LIQUIDATED DAMAGES IN THE AMOUNT OF 2% PER MONTH ON ALL AMOUNTS DUE AND UNPAID;
II. THE LOWER COURT ERRED IN NOT AWARDING INTEREST ON THE LOAN AT 21% PER ANNUM;
III. THE LOWER COURT ERRED IN THE COMPUTATION OF THE AMOUNT OF OBLIGATION DUE FROM
DEFENDANTS-APPELLEES IN FAVOR OF PLAINTIFF-APPELLANT;
IV. THE LOWER COURT ERRED IN NOT AWARDING PLAINTIFF-APPELLANT ATTORNEY'S FEES
EQUIVALENT TO 25% OF THE AMOUNT DUE AND EXPENSES OF LITIGATION; and
V. THE LOWER COURT ERRED IN NOT ORDERING DEFENDANTS-APPELLEES TO JOINTLY AND
SEVERALLY PAY THE OBLIGATION. (pp. 4-5, Plaintiff-Appellant's Brief)
The Escalation Clause provided in the promissory note reads:

"The interest herein charged shall be subject to increase, without notice, depending on whatever policy IBAA may in the
future adopt conformable to law, especially to compensate for any increase in Central Bank interests or rediscounting
rates."
Finding strength in the argument that the promissory note is the contract between the parties and, under the law,
obligations arising from contracts have the force of law between the parties, the plaintiff-appellant increased the interest
rate to 21% per annum effective December 1, 1979 pursuant to Central Bank Circular No. 705.

In line with the Court's ruling in the case of Banco Filipino v. Navarro (G.R. No. L-46591, July 28, 1987), the interest rate
may not be increased by the plaintiff-appellant in the instant case.
It is the rule that escalation clauses are valid stipulations in commercial contracts to maintain fiscal stability and to retain
the value of money in long term contracts. However, the enforceability of such stipulations are subject to certain
conditions.

In the Banco Filipino case, the borrower questioned the additional interest charges on the loan of P41,300.00 she
obtained when the interest rates were increased from 12% to 17% per Central Bank Circular No. 494, issued on January
2, 1976. In a letter written by the Central Bank to the borrower, some clarifications were made. Pertinent portions of the
letter read:

"In this connection, please be advised that the Monetary Board, in its Resolution No. 1155 dated June 11, 1976 adopted
the following guidelines to govern interest rate adjustments by banks and non-banks performing quasi-banking functions
on loans already existing as of January 3, 1976, in the light of Central Bank Circulars Nos. 492-498:

"1. Only banks and non-bank financial intermediaries performing quasi-banking functions may increase interest rates
on loans already existing as of January 2, 1976, provided that:
"a. The pertinent loan contracts/documents contain escalation clauses expressly authorizing lending bank or non-bank
performing quasi-banking functions to increase the rate of interest stipulated in the contract, in the event that any law or
Central Bank regulation is promulgated increasing the maximum interest rate for loans; and
"b. Said loans were directly granted by them and the remaining maturities thereof were more than 730 days as of January
2, 1976;and

"2. The increase in the rate of interest can be effective only as of January 2, 1976 or on a later date." (emphasis supplied)
Moreover, in its comment and supplemental comment submitted upon orders of this Court, the Central Bank took the
position that the issuance of its circulars is a valid exercise of its authority to prescribe maximum rates of interest and
based on the general principles of contract, the Escalation Clause is a valid provision in the loan agreement provided
that -- (1) the increased rate imposed or charged by petitioner does not exceed the ceiling fixed by law or the Monetary
Board; (2) the increase is made effective not earlier than the effectivity of the law or regulation authorizing such an
increase and (3) the remaining maturities of the loans are more than 730 days as of the effectivity of the law or regulation
authorizing such an increase. (Underlining supplied)

In the case at bar, the loan was obtained on November 21, 1978 and was payable on or before December 12, 1980.
Central Bank Circular No. 705, authorizing the increase from 19% to 21% was issued on December 1, 1979. Obviously,
as of this date, December 1, 1979, the remaining maturity of the loan was less than 730 days. Hence, the plaintiff-
appellant's second assignment of error is without merit.

With respect to the penalty clause, we have upheld the validity of such agreements in several cases. As the Court stated
in the case of Government Service Insurance System v. Court of Appeals (145 SCRA 311, 321):

"In the Bachrach case (supra) the Supreme Court ruled that the Civil Code permits the agreement upon a penalty apart
from the interest. Should there be such an agreement, the penalty does not include the interest, and as such the two
are different and distinct things which may be demanded separately. Reiterating the same principle in the later case of
Equitable Banking Corp. (supra), where this Court held that the stipulation about payment of such additional rate
partakes of the nature of a penalty clause, which is sanctioned by law."

In the case of Equitable Banking Corporation v. Liwanag (32 SCRA 293, 297), the Court explained:
"x x x We have not overlooked the 14% interest that appellant has been sentenced to pay. This may appear to be
usurious, but it is not so. The rate stipulated was 9%, subject, however, to an additional rate of 5%, in the event of
default. The stipulation about payment of such additional rate partakes of the nature of a penalty clause, which is
sanctioned by law, (Art, 1226, Civil Code of the Philippines), although 'the penalty may also be reduced by the courts if
it is iniquitous or unconscionable.' (Art. 1229, Civil Code of the Philippines) x x x."
Admittedly, the defendants-appellees in the instant case failed to pay the loan on the due date. However, with earnest
efforts, they tried to pay the loan little by little so that as of November 25, 1983, a total of P68,676.75 had been paid.
The plaintiff-appellant, on the other hand, merely applied this amount to satisfy the penalty and interest charges which
it additionally imposed. We do not find any evidence of bad faith on the part of the defendants-appellees in their failure
to pay the loan on time. Efforts were indeed made to make good their promise. We note the trial court's observation that
the plaintiff-appellant did not even state in the complaint that the defendants-appellees had made partial payments,
making it appear that the spouses Salazars refuted to pay the loan. In their answer with counterclaim, the defendants-
appellees alleged that the bank neglected to credit said payments in the defendants' account folio and subjected it as it
did to the additional charges. Furthermore, we agree with the trial court that the bank has already profited considerably
from the loan. In a span of about six (6) years, the bank was enriched by P26,626.75 (p. 17, Records). The penalty
charges of 2% a month are, therefore, out of proportion to the damage incurred by the bank. In accordance with Article
1229 of the Civil Code, the Court is constrained to reduce the penalty for being highly iniquitous.

With respect to the attorney's fees, the court is likewise empowered to reduce the same if they are unreasonable or
unconscionable notwithstanding the express contract for attorney's fees. The award of one thousand (P1,000.00) pesos
by the trial court appears to be enough.
The promissory note signed by the defendants-appellants states that the loan of P42,050.00 shall bear interest at the
rate of 19% per annum. This would yield an interest of P7,989.50 per annum or a total of P46,339.10 from November
22, 1978 to September 12, 1984, the date of filing the complaint. Penalty interest of 1% a month or 12% per annum is
reasonable so that from December 12, 1980 up to September 12, 1984, penalty charges should be P19,202.83.
Considering that the defendants-appellees have paid the amount of P68,676.75, they, therefore, owed the bank the
amount of P38,915.18 when the complaint was filed. There is no indication in the records as to the fluctuation of actual
interest rates from 1984 and, therefore, we order interest at the legal rate of 12% per annum on the unpaid amount.

WHEREFORE, the decision of the lower court is MODIFIED. The defendants-appellants Ricardo Salazar and Epifania
Salazar are ordered to pay Insular Bank of Asia and America (IBAA) the sum of THIRTY-EIGHT THOUSAND NINE
HUNDRED FIFTEEN PESOS and EIGHTEEN CENTAVOS (P38,915.18) with interest thereon at the rate of Twelve
Percent (12%) per annum from the filing of the complaint until fully paid.
SO ORDERED.

FIRST DIVISION
[ G.R. No. L-48349, December 29, 1986 ]
FRANCISCO HERRERA, PLAINTIFF-APPELLANT, VS. PETROPHIL CORPORATION, DEFENDANT-APPELLEE.
DECISION
CRUZ, J.:

This is an appeal by the plaintiff-appellant from a decision rendered by the then Court of First Instance of Rizal on a
pure question of law.[1]

The judgment appealed from was rendered on the pleadings, the parties having agreed during the pre-trial conference
on the factual antecedents.

The facts are as follows:

On December 5, 1969, the plaintiff-appellant and ESSO Standard Eastern, Inc., (later substituted by Petrophil
Corporation) entered into a "Lease Agreement" whereby the former leased to the latter a portion of his property for a
period of twenty (20) years from said date, subject inter alia to the following conditions:
"3. Rental: The LESSEE shall pay the LESSOR a rental of P1.40 sqm. per month on 400 sqm. and are to be expropriated
later on (sic) or P560 per month and P1.40 per sqm. per month on 1,693 sqm. or P2,370.21 per month or a total of
P2,930.20 per month 2,093 sqm. more or less, payable yearly in advance within the 1st twenty days of each year;
provided, a financial aid in the sum of P15,000 to clear the leased premises of existing improvements thereon is paid in
this manner; P10,000 upon execution of this lease and P5,000 upon delivery of leased premises free and clear of
improvements thereon within 30 days from the date of execution of this agreement. The portion on the side of the
leased premises with an area of 365 sqm. more or less, will be occupied by LESSEE without rental during the lifetime
of this lease. PROVIDED FINALLY, that the Lessor is paid 8 years advance rental based on P2,930.70 per month
discounted at 12% interest per annum or a total net amount of P130,288.47 before registration of lease. Leased
premises shall be delivered within 30 days after 1st partial payment of financial aid."[2]
On December 31, 1969, pursuant to the said contract, the defendant-appellee paid to the plaintiff-appellant advance
rentals for the first eight years, subtracting therefrom the amount of P101,010.73, the amount it computed as constituting
the interest or discount for the first eight years, in the total sum P180,288.47. On August 20, 1970, the defendant-
appellee, explaining that there had been a mistake in computation, paid to the plaintiff-appellant the additional sum of
P2,182.70, thereby reducing the deducted amount to only P98,828.03.[3]

On October 14, 1974, the plaintiff-appellant sued the defendant-appellee for the sum of P98,828.03, with interest,
claiming this had been illegally deducted from him in violation of the Usury Law.[4] He also prayed for moral damages
and attorney's fees. In its answer, the defendant-appellee admitted the factual allegations of the complaint but argued
that the amount deducted was not usurious interest but a discount given to it for paying the rentals in advance for eight
years.[5] Judgment on the pleadings was rendered for the defendant.[6]

Plaintiff-appellant now prays for a reversal of that judgment, insisting that the lower court erred in the computation of the
interest collected out of the rentals paid for the first eight years; that such interest was excessive and violative of the
Usury Law; and that he had neither agreed to nor accepted the defendant-appellant's computation of the total amount
to be deducted for the eight years advance rentals.[7]

The thrust of the plaintiff-appellant's position is set forth in paragraph 6 of his complaint, which read:
"6. The interest collected by defendant out of the rentals for the first eight years was excessive and beyond that
allowable by law, because the total interest on the said amount is only P33,755.90 at P4,219.4880 per yearly rental;
and considering that the interest should be computed excluding the first year rental because at the time the amount of
P281,199.20 was paid it was already due under the lease contract hence no interest should be collected from the rental
for the first year, the amount of P29,536.42 only as the total interest should have been deducted by defendant from the
sum of P281,299.20."
The defendant maintains that the correct amount of the discount is P98,828.03 and that the same is not excessive and
above that allowed by law.

As its title plainly indicates, the contract be-tween the parties is one of lease and not of loan. It is clearly denominated
a "LEASE AGREEMENT." Nowhere in the contract is there any showing that the parties intended a loan rather than a
lease. The provision for the payment of rentals in advance cannot be construed as a repayment of a loan because there
was no grant or forbearance of money as to constitute an indebtedness on the part of the lessor. On the contrary, the
defendant-appellee was discharging its obligation in advance by paying the eight years rentals, and it was for this
advance payment that it was getting a rebate or discount.

The provision for a discount is not unusual in lease contracts. As to its validity, it is settled that the parties may establish
such stipulations, clauses, terms and condition as they may want to include; and as long as such agreements are not
contrary to law, morals, good customs, public policy or public order, they shall have the force of law between them.[8]

There is no usury in this case because no money was given by the defendant-appellee to the plaintiff-appellant, nor did
it allow him to use its money already in his possession.[9] There was neither loan nor forbearance but a mere discount
which the plaintiff-appellant allowed the defendant-appellee to deduct from the total payments because they were being
made in advance for eight years. The discount was in effect a reduction of the rentals which the lessor had the right to
determine, and any reduction thereof, by any amount, would not contravene the Usury Law.

The difference between a discount and a loan or forbearance is that the former does not have to be repaid. The loan
or forbearance is subject to repayment and is therefore governed by the laws on usury.[10]

To constitute usury, "there must be loan or forbearance; the loan must be of money or something circulating as money;
it must be repayable absolutely and in all events; and something must be exacted for the use of the money in excess of
and in addition to interest allowed by law."[11]

It has been held that the elements of usury are (1) a loan, express or implied; (2) an understanding between the parties
that the money lent shall or may be returned; (3) that for such loan a greater rate or interest that is allowed by law shall
be paid, or agreed to be paid, as the case may be; and (4) a corrupt intent to take more than the legal rate for the use
of money loaned. Unless these four things concur in every transaction, it is safe to affirm that no case of usury can be
declared.[12]

Concerning the computation of the deductible dis-count, the trial court declared:
"As above-quoted, the 'Lease Agreement' expressly provides that the lessee (defendant) shall pay the lessor (plaintiff)
eight (8) years in advance rentals based on P2,930.20 per month discounted at 12% interest per annum. Thus, the total
rental for one-year period is P35,162.40 (P2,930.20 multiplied by 12 months) and that the interest therefrom is
P4,219.4880 (P35,162.40 multiplied by 12%). So, therefore, the total interest for the first eight (8) years should be only
P33,755.90 (P4,129.4880 multiplied by eight (8) years and not P98,828.03 as the defendant claimed it to be."

"The afore-quoted manner of computation made by plaintiff is patently erroneous. It is most seriously misleading. He
just computed the annual discount to be at P4,129.4880 and then simply multiplied it by eight (8) years. He did not take
into consideration the naked fact that the rentals due on the eight year were paid in advance by seven (7) years, the
rentals due on the seventh year were paid in advance by six (6) years, those due on the sixth year by five (5) years,
those due on the fifth year by four (4) years, those due on the fourth year by three (3) years, those due on the third year
by two (2) years, and those due on the second year by one (1) year, so much so that the total number of years by which
the annual rental of P4,129.4880 was paid in advance is twenty-eight (28), resulting in a total amount of P118,145.44
(P4,129.48 multiplied by 28 years) as the discount. However, defendant was most fair to plaintiff. It did not simply
multiply the annual rental discount by 28 years. It computed the total discount with the principal diminishing month to
month as shown by Annex 'A' of its memorandum. This is why the total discount amount to only P8,828.03.

"The allegation of plaintiff that defendant made the computation in a compunded manner is erroneous. Also after making
its own computations and after examining closely defendant's Annex 'A' of its memorandum, the court finds that
defendant did not charge 12% discount on the rentals due for the first year so much so that the compu-tation conforms
with the provision of the Lease Agreement to the effect that the rentals shall be 'payable yearly in advance within the
1st 20 days of each year.' "
We do not agree. The above computation appears to be too much technical mumbo-jumbo and could not have been
the intention of the parties to the transaction. Had it been so, then it should have been clearly stipulated in the contract.
Contracts should be interpreted according to their literal meaning and should not be interpreted beyond their obvious
intendment.[13]
The plaintiff-appellant simply understood that for every year of advance payment there would be a deduction of 12%
and this amount would be the same for each of the eight years. There is no showing that the intricate computation
applied by the trial court was explained to him by the defendant-appellee or that he knowingly accepted it.

The lower court, following the defendant-appellee's formula, declared that the plaintiff-appellant had actually agreed to
a 12% reduction for advance rentals for all of twenty eight years. That is absurd. It is not normal for a person to agree
to a reduction corresponding to twenty eight years advance rentals when all he is receiving in advance rentals is for only
eight years.

The deduction shall be for only eight years be-cause that was plainly what the parties intended at the time they signed
the lease agreement. "Simplistic" it may be, as the Solicitor General describes it, but that is how the lessor understood
the arrangement. In fact, the Court will reject his subsequent modification that the inte-rest should be limited to only
seven years because the first year rental was not being paid in advance. The agreement was for a uniform deduction
for the advance rentals for each of the eight years, and neither of the parties can deviate from it now.

On the annual rental of P35,168.40, the deducted 12% discount was P4,220.21; and for eight years, the total rental was
P281,347.20 from which was deducted the total discount of P33,761.68, leaving a difference of P247,585.52.
Subtracting from this amount, the sum of P182,471.17 already paid will leave a balance of P65,114.35 still due the
plaintiff-appellant.

The above computation is based on the more reasonable interpretation of the contract as a whole rather on the single
stipulation invoked by the respondent for the flat reduction of P130,288.47.

WHEREFORE, the decision of the trial court is hereby modified, and the defendant-appellee Petrophil Corporation is
ordered to pay plaintiff-appellant the amount of Sixty Five Thousand One Hundred Fourteen Pesos and Thirty-Five
Centavos (P65,114.35), with interest at the legal rate until fully paid, plus Ten Thousand Pesos (P10,000.00) as
attorney's fees. Costs against the defendant-appellee.

SO ORDERED.

DIVISION
[ GR No. 115324, Feb 19, 2003 ]
PRODUCERS BANK OF PHILIPPINES v. CA +
DECISION
CALLEJO, SR., J.:

This is a petition for review on certiorari of the Decision[1] of the Court of Appeals dated June 25, 1991 in CA-G.R. CV
No. 11791 and of its Resolution[2] dated May 5, 1994, denying the motion for reconsideration of said decision filed by
petitioner Producers Bank of the Philippines.

Sometime in 1979, private respondent Franklin Vives was asked by his neighbor and friend Angeles Sanchez to help
her friend and townmate, Col. Arturo Doronilla, in incorporating his business, the Sterela Marketing and Services
("Sterela" for brevity). Specifically, Sanchez asked private respondent to deposit in a bank a certain amount of money
in the bank account of Sterela for purposes of its incorporation. She assured private respondent that he could withdraw
his money from said account within a month's time. Private respondent asked Sanchez to bring Doronilla to their house
so that they could discuss Sanchez's request.[3]

On May 9, 1979, private respondent, Sanchez, Doronilla and a certain Estrella Dumagpi, Doronilla's private secretary,
met and discussed the matter. Thereafter, relying on the assurances and representations of Sanchez and Doronilla,
private respondent issued a check in the amount of Two Hundred Thousand Pesos (P200,000.00) in favor of Sterela.
Private respondent instructed his wife, Mrs. Inocencia Vives, to accompany Doronilla and Sanchez in opening a savings
account in the name of Sterela in the Buendia, Makati branch of Producers Bank of the Philippines. However, only
Sanchez, Mrs. Vives and Dumagpi went to the bank to deposit the check. They had with them an authorization letter
from Doronilla authorizing Sanchez and her companions, "in coordination with Mr. Rufo Atienza," to open an account
for Sterela Marketing Services in the amount of P200,000.00. In opening the account, the authorized signatories were
Inocencia Vives and/or Angeles Sanchez. A passbook for Savings Account No. 10-1567 was thereafter issued to Mrs.
Vives.[4]

Subsequently, private respondent learned that Sterela was no longer holding office in the address previously given to
him. Alarmed, he and his wife went to the Bank to verify if their money was still intact. The bank manager referred them
to Mr. Rufo Atienza, the assistant manager, who informed them that part of the money in Savings Account No. 10-1567
had been withdrawn by Doronilla, and that only P90,000.00 remained therein. He likewise told them that Mrs. Vives
could not withdraw said remaining amount because it had to answer for some postdated checks issued by Doronilla.
According to Atienza, after Mrs. Vives and Sanchez opened Savings Account No. 10-1567, Doronilla opened Current
Account No. 10-0320 for Sterela and authorized the Bank to debit Savings Account No. 10-1567 for the amounts
necessary to cover overdrawings in Current Account No. 10-0320. In opening said current account, Sterela, through
Doronilla, obtained a loan of P175,000.00 from the Bank. To cover payment thereof, Doronilla issued three postdated
checks, all of which were dishonored. Atienza also said that Doronilla could assign or withdraw the money in Savings
Account No. 10-1567 because he was the sole proprietor of Sterela.[5]
Private respondent tried to get in touch with Doronilla through Sanchez. On June 29, 1979, he received a letter from
Doronilla, assuring him that his money was intact and would be returned to him. On August 13, 1979, Doronilla issued
a postdated check for Two Hundred Twelve Thousand Pesos (P212,000.00) in favor of private respondent. However,
upon presentment thereof by private respondent to the drawee bank, the check was dishonored. Doronilla requested
private respondent to present the same check on September 15, 1979 but when the latter presented the check, it was
again dishonored.[6]

Private respondent referred the matter to a lawyer, who made a written demand upon Doronilla for the return of his
client's money. Doronilla issued another check for P212,000.00 in private respondent's favor but the check was again
dishonored for insufficiency of funds.[7]

Private respondent instituted an action for recovery of sum of money in the Regional Trial Court (RTC) in Pasig, Metro
Manila against Doronilla, Sanchez, Dumagpi and petitioner. The case was docketed as Civil Case No. 44485. He also
filed criminal actions against Doronilla, Sanchez and Dumagpi in the RTC. However, Sanchez passed away on March
16, 1985 while the case was pending before the trial court. On October 3, 1995, the RTC of Pasig, Branch 157,
promulgated its Decision in Civil Case No. 44485, the dispositive portion of which reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered sentencing defendants Arturo J. Doronila, Estrella
Dumagpi and Producers Bank of the Philippines to pay plaintiff Franklin Vives jointly and severally

(a) the amount of P200,000.00, representing the money deposited, with interest at the legal rate from the filing of the
complaint until the same is fully paid;
(b) the sum of P50,000.00 for moral damages and a similar amount for exemplary damages;
(c) the amount of P40,000.00 for attorney's fees; and
(d) the costs of the suit.

SO ORDERED.[8]
Petitioner appealed the trial court's decision to the Court of Appeals. In its Decision dated June 25, 1991, the appellate
court affirmed in toto the decision of the RTC.[9] It likewise denied with finality petitioner's motion for reconsideration in
its Resolution dated May 5, 1994.[10]

On June 30, 1994, petitioner filed the present petition, arguing that
I.THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT THE TRANSACTION BETWEEN THE
DEFENDANT DORONILLA AND RESPONDENT VIVES WAS ONE OF SIMPLE LOAN AND NOT ACCOMMODATION;

II.THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT PETITIONER'S BANK MANAGER, MR.
RUFO ATIENZA, CONNIVED WITH THE OTHER DEFENDANTS IN DEFRAUDING PETITIONER (Sic. Should be
PRIVATE RESPONDENT) AND AS A CONSEQUENCE, THE PETITIONER SHOULD BE HELD LIABLE UNDER THE
PRINCIPLE OF NATURAL JUSTICE;

III.THE HONORABLE COURT OF APPEALS ERRED IN ADOPTING THE ENTIRE RECORDS OF THE REGIONAL
TRIAL COURT AND AFFIRMING THE JUDGMENT APPEALED FROM, AS THE FINDINGS OF THE REGIONAL
TRIAL COURT WERE BASED ON A MISAPPREHENSION OF FACTS;

IV.THE HONORABLE COURT OF APPEALS ERRED IN DECLARING THAT THE CITED DECISION IN SALUDARES
VS. MARTINEZ, 29 SCRA 745, UPHOLDING THE LIABILITY OF AN EMPLOYER FOR ACTS COMMITTED BY AN
EMPLOYEE IS APPLICABLE;

V.THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THE DECISION OF THE LOWER COURT THAT
HEREIN PETITIONER BANK IS JOINTLY AND SEVERALLY LIABLE WITH THE OTHER DEFENDANTS FOR THE
AMOUNT OF P200,000.00 REPRESENTING THE SAVINGS ACCOUNT DEPOSIT, P50,000.00 FOR MORAL
DAMAGES, P50,000.00 FOR EXEMPLARY DAMAGES, P40,000.00 FOR ATTORNEY'S FEES AND THE COSTS OF
SUIT.[11]
Private respondent filed his Comment on September 23, 1994. Petitioner filed its Reply thereto on September 25, 1995.
The Court then required private respondent to submit a rejoinder to the reply. However, said rejoinder was filed only on
April 21, 1997, due to petitioner's delay in furnishing private respondent with copy of the reply[12] and several
substitutions of counsel on the part of private respondent.[13] On January 17, 2001, the Court resolved to give due
course to the petition and required the parties to submit their respective memoranda.[14] Petitioner filed its memorandum
on April 16, 2001 while private respondent submitted his memorandum on March 22, 2001.

Petitioner contends that the transaction between private respondent and Doronilla is a simple loan (mutuum) since all
the elements of a mutuum are present: first, what was delivered by private respondent to Doronilla was money, a
consumable thing; and second, the transaction was onerous as Doronilla was obliged to pay interest, as evidenced by
the check issued by Doronilla in the amount of P212,000.00, or P12,000 more than what private respondent deposited
in Sterela's bank account.[15] Moreover, the fact that private respondent sued his good friend Sanchez for his failure to
recover his money from Doronilla shows that the transaction was not merely gratuitous but "had a business angle" to it.
Hence, petitioner argues that it cannot be held liable for the return of private respondent's P200,000.00 because it is not
privy to the transaction between the latter and Doronilla.[16]

It argues further that petitioner's Assistant Manager, Mr. Rufo Atienza, could not be faulted for allowing Doronilla to
withdraw from the savings account of Sterela since the latter was the sole proprietor of said company. Petitioner asserts
that Doronilla's May 8, 1979 letter addressed to the bank, authorizing Mrs. Vives and Sanchez to open a savings account
for Sterela, did not contain any authorization for these two to withdraw from said account. Hence, the authority to
withdraw therefrom remained exclusively with Doronilla, who was the sole proprietor of Sterela, and who alone had legal
title to the savings account.[17] Petitioner points out that no evidence other than the testimonies of private respondent
and Mrs. Vives was presented during trial to prove that private respondent deposited his P200,000.00 in Sterela's
account for purposes of its incorporation.[18] Hence, petitioner should not be held liable for allowing Doronilla to
withdraw from Sterela's savings account.

Petitioner also asserts that the Court of Appeals erred in affirming the trial court's decision since the findings of fact
therein were not accord with the evidence presented by petitioner during trial to prove that the transaction between
private respondent and Doronilla was a mutuum, and that it committed no wrong in allowing Doronilla to withdraw from
Sterela's savings account.[19]

Finally, petitioner claims that since there is no wrongful act or omission on its part, it is not liable for the actual damages
suffered by private respondent, and neither may it be held liable for moral and exemplary damages as well as attorney's
fees.[20]

Private respondent, on the other hand, argues that the transaction between him and Doronilla is not a mutuum but an
accommodation,[21] since he did not actually part with the ownership of his P200,000.00 and in fact asked his wife to
deposit said amount in the account of Sterela so that a certification can be issued to the effect that Sterela had sufficient
funds for purposes of its incorporation but at the same time, he retained some degree of control over his money through
his wife who was made a signatory to the savings account and in whose possession the savings account passbook was
given.[22]

He likewise asserts that the trial court did not err in finding that petitioner, Atienza's employer, is liable for the return of
his money. He insists that Atienza, petitioner's assistant manager, connived with Doronilla in defrauding private
respondent since it was Atienza who facilitated the opening of Sterela's current account three days after Mrs. Vives and
Sanchez opened a savings account with petitioner for said company, as well as the approval of the authority to debit
Sterela's savings account to cover any overdrawings in its current account.[23]

There is no merit in the petition.

At the outset, it must be emphasized that only questions of law may be raised in a petition for review filed with this Court.
The Court has repeatedly held that it is not its function to analyze and weigh all over again the evidence presented by
the parties during trial.[24] The Court's jurisdiction is in principle limited to reviewing errors of law that might have been
committed by the Court of Appeals.[25] Moreover, factual findings of courts, when adopted and confirmed by the Court
of Appeals, are final and conclusive on this Court unless these findings are not supported by the evidence on record.[26]
There is no showing of any misapprehension of facts on the part of the Court of Appeals in the case at bar that would
require this Court to review and overturn the factual findings of that court, especially since the conclusions of fact of the
Court of Appeals and the trial court are not only consistent but are also amply supported by the evidence on record.

No error was committed by the Court of Appeals when it ruled that the transaction between private respondent and
Doronilla was a commodatum and not a mutuum. A circumspect examination of the records reveals that the transaction
between them was a commodatum. Article 1933 of the Civil Code distinguishes between the two kinds of loans in this
wise:
By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may
use the same for a certain time and return it, in which case the contract is called a commodatum; or money or other
consumable thing, upon the condition that the same amount of the same kind and quality shall be paid, in which case
the contract is simply called a loan or mutuum.

Commodatum is essentially gratuitous.

Simple loan may be gratuitous or with a stipulation to pay interest.

In commodatum, the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the
borrower.
The foregoing provision seems to imply that if the subject of the contract is a consumable thing, such as money, the
contract would be a mutuum. However, there are some instances where a commodatum may have for its object a
consumable thing. Article 1936 of the Civil Code provides:
Consumable goods may be the subject of commodatum if the purpose of the contract is not the consumption of the
object, as when it is merely for exhibition.
Thus, if consumable goods are loaned only for purposes of exhibition, or when the intention of the parties is to lend
consumable goods and to have the very same goods returned at the end of the period agreed upon, the loan is a
commodatum and not a mutuum.

The rule is that the intention of the parties thereto shall be accorded primordial consideration in determining the actual
character of a contract.[27] In case of doubt, the contemporaneous and subsequent acts of the parties shall be
considered in such determination.[28]

As correctly pointed out by both the Court of Appeals and the trial court, the evidence shows that private respondent
agreed to deposit his money in the savings account of Sterela specifically for the purpose of making it appear "that said
firm had sufficient capitalization for incorporation, with the promise that the amount shall be returned within thirty (30)
days."[29] Private respondent merely "accommodated" Doronilla by lending his money without consideration, as a favor
to his good friend Sanchez. It was however clear to the parties to the transaction that the money would not be removed
from Sterela's savings account and would be returned to private respondent after thirty (30) days.

Doronilla's attempts to return to private respondent the amount of P200,000.00 which the latter deposited in Sterela's
account together with an additional P12,000.00, allegedly representing interest on the mutuum, did not convert the
transaction from a commodatum into a mutuum because such was not the intent of the parties and because the
additional P12,000.00 corresponds to the fruits of the lending of the P200,000.00. Article 1935 of the Civil Code
expressly states that "[t]he bailee in commodatum acquires the use of the thing loaned but not its fruits." Hence, it was
only proper for Doronilla to remit to private respondent the interest accruing to the latter's money deposited with
petitioner.

Neither does the Court agree with petitioner's contention that it is not solidarily liable for the return of private respondent's
money because it was not privy to the transaction between Doronilla and private respondent. The nature of said
transaction, that is, whether it is a mutuum or a commodatum, has no bearing on the question of petitioner's liability for
the return of private respondent's money because the factual circumstances of the case clearly show that petitioner,
through its employee Mr. Atienza, was partly responsible for the loss of private respondent's money and is liable for its
restitution.

Petitioner's rules for savings deposits written on the passbook it issued Mrs. Vives on behalf of Sterela for Savings
Account No. 10-1567 expressly states that
"2. Deposits and withdrawals must be made by the depositor personally or upon his written authority duly authenticated,
and neither a deposit nor a withdrawal will be permitted except upon the production of the depositor savings bank book
in which will be entered by the Bank the amount deposited or withdrawn."[30]
Said rule notwithstanding, Doronilla was permitted by petitioner, through Atienza, the Assistant Branch Manager for the
Buendia Branch of petitioner, to withdraw therefrom even without presenting the passbook (which Atienza very well
knew was in the possession of Mrs. Vives), not just once, but several times. Both the Court of Appeals and the trial court
found that Atienza allowed said withdrawals because he was party to Doronilla's "scheme" of defrauding private
respondent:

But the scheme could not have been executed successfully without the knowledge, help and cooperation of Rufo
Atienza, assistant manager and cashier of the Makati (Buendia) branch of the defendant bank. Indeed, the evidence
indicates that Atienza had not only facilitated the commission of the fraud but he likewise helped in devising the means
by which it can be done in such manner as to make it appear that the transaction was in accordance with banking
procedure.

To begin with, the deposit was made in defendant's Buendia branch precisely because Atienza was a key officer therein.
The records show that plaintiff had suggested that the P200,000.00 be deposited in his bank, the Manila Banking
Corporation, but Doronilla and Dumagpi insisted that it must be in defendant's branch in Makati for "it will be easier for
them to get a certification". In fact before he was introduced to plaintiff, Doronilla had already prepared a letter addressed
to the Buendia branch manager authorizing Angeles B. Sanchez and company to open a savings account for Sterela in
the amount of P200,000.00, as "per coordination with Mr. Rufo Atienza, Assistant Manager of the Bank x x x" (Exh. 1).
This is a clear manifestation that the other defendants had been in consultation with Atienza from the inception of the
scheme. Significantly, there were testimonies and admission that Atienza is the brother-in-law of a certain Romeo
Mirasol, a friend and business associate of Doronilla.

Then there is the matter of the ownership of the fund. Because of the "coordination" between Doronilla and Atienza, the
latter knew before hand that the money deposited did not belong to Doronilla nor to Sterela. Aside from such
foreknowledge, he was explicitly told by Inocencia Vives that the money belonged to her and her husband and the
deposit was merely to accommodate Doronilla. Atienza even declared that the money came from Mrs. Vives.

Although the savings account was in the name of Sterela, the bank records disclose that the only ones empowered to
withdraw the same were Inocencia Vives and Angeles B. Sanchez. In the signature card pertaining to this account (Exh.
J), the authorized signatories were Inocencia Vives &/or Angeles B. Sanchez. Atienza stated that it is the usual banking
procedure that withdrawals of savings deposits could only be made by persons whose authorized signatures are in the
signature cards on file with the bank. He, however, said that this procedure was not followed here because Sterela was
owned by Doronilla. He explained that Doronilla had the full authority to withdraw by virtue of such ownership. The Court
is not inclined to agree with Atienza. In the first place, he was all the time aware that the money came from Vives and
did not belong to Sterela. He was also told by Mrs. Vives that they were only accommodating Doronilla so that a
certification can be issued to the effect that Sterela had a deposit of so much amount to be sued in the incorporation of
the firm. In the second place, the signature of Doronilla was not authorized in so far as that account is concerned
inasmuch as he had not signed the signature card provided by the bank whenever a deposit is opened. In the third
place, neither Mrs. Vives nor Sanchez had given Doronilla the authority to withdraw.

Moreover, the transfer of fund was done without the passbook having been presented. It is an accepted practice that
whenever a withdrawal is made in a savings deposit, the bank requires the presentation of the passbook. In this case,
such recognized practice was dispensed with. The transfer from the savings account to the current account was without
the submission of the passbook which Atienza had given to Mrs. Vives. Instead, it was made to appear in a certification
signed by Estrella Dumagpi that a duplicate passbook was issued to Sterela because the original passbook had been
surrendered to the Makati branch in view of a loan accommodation assigning the savings account (Exh. C). Atienza,
who undoubtedly had a hand in the execution of this certification, was aware that the contents of the same are not true.
He knew that the passbook was in the hands of Mrs. Vives for he was the one who gave it to her. Besides, as assistant
manager of the branch and the bank official servicing the savings and current accounts in question, he also was aware
that the original passbook was never surrendered. He was also cognizant that Estrella Dumagpi was not among those
authorized to withdraw so her certification had no effect whatsoever.

The circumstance surrounding the opening of the current account also demonstrate that Atienza's active participation
in the perpetration of the fraud and deception that caused the loss. The records indicate that this account was opened
three days later after the P200,000.00 was deposited. In spite of his disclaimer, the Court believes that Atienza was
mindful and posted regarding the opening of the current account considering that Doronilla was all the while in
"coordination" with him. That it was he who facilitated the approval of the authority to debit the savings account to cover
any overdrawings in the current account (Exh. 2) is not hard to comprehend.

Clearly Atienza had committed wrongful acts that had resulted to the loss subject of this case. x x x.[31]
Under Article 2180 of the Civil Code, employers shall be held primarily and solidarily liable for damages caused by their
employees acting within the scope of their assigned tasks. To hold the employer liable under this provision, it must be
shown that an employer-employee relationship exists, and that the employee was acting within the scope of his assigned
task when the act complained of was committed.[32] Case law in the United States of America has it that a corporation
that entrusts a general duty to its employee is responsible to the injured party for damages flowing from the employee's
wrongful act done in the course of his general authority, even though in doing such act, the employee may have failed
in its duty to the employer and disobeyed the latter's instructions.[33]

There is no dispute that Atienza was an employee of petitioner. Furthermore, petitioner did not deny that Atienza was
acting within the scope of his authority as Assistant Branch Manager when he assisted Doronilla in withdrawing funds
from Sterela's Savings Account No. 10-1567, in which account private respondent's money was deposited, and in
transferring the money withdrawn to Sterela's Current Account with petitioner. Atienza's acts of helping Doronilla, a
customer of the petitioner, were obviously done in furtherance of petitioner's interests[34] even though in the process,
Atienza violated some of petitioner's rules such as those stipulated in its savings account passbook.[35] It was
established that the transfer of funds from Sterela's savings account to its current account could not have been
accomplished by Doronilla without the invaluable assistance of Atienza, and that it was their connivance which was the
cause of private respondent's loss.

The foregoing shows that the Court of Appeals correctly held that under Article 2180 of the Civil Code, petitioner is liable
for private respondent's loss and is solidarily liable with Doronilla and Dumagpi for the return of the P200,000.00 since
it is clear that petitioner failed to prove that it exercised due diligence to prevent the unauthorized withdrawals from
Sterela's savings account, and that it was not negligent in the selection and supervision of Atienza. Accordingly, no error
was committed by the appellate court in the award of actual, moral and exemplary damages, attorney's fees and costs
of suit to private respondent.

WHEREFORE, the petition is hereby DENIED. The assailed Decision and Resolution of the Court of Appeals are
AFFIRMED.
SO ORDERED
[ GR No. L-20240, Dec 31, 1965 ]
REPUBLIC v. JOSE GRUALDO +
DECISION
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 crop loans was considered that the loans were
due one year after they were incurred. To secure the payment of the loan the appellant executed a chattel mortgage on
the standing crops on his land, Lot No. 1494 known as Hacienda Cambugsa in Hinigaran, 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 Act 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 extra-judicial 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 P1,457.39; so that the total account 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 of the amount due as attorney's fees and the costs.

The appellant appealed directly to this Court. During 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 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 Ms first point of contention, the appellant maintains that the appellee has no privity of contract with the
appellant. It is claimed that the transaction involved in this case was a private 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. Pursuant, further, to the Philippine Property Act of 1946 and Transfer Agreements dated
July 20, 1954 and June 1957, between 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 transfers
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 interests 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 juridical relation
and executed the private document and appears to be substituting him in his personal rights and obligation is a privy"
(Alpuerto 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 transferree 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 those 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
question 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 anything1 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 Order 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 Order 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,
99 Phil. 738, August 16, 1956. It follows, therefore, that the prescriptive period in the case now before Us was suspended
from November 18, 1944, when Executive Order No. 25 took effect, until May 18, 1953 when R.A. 342 along with
Executive Order 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 mouths 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 run 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 an 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
at the 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. It is this amount of 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 value 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 (83 Phil 471; 46 Off. Gaz., 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 Motes 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., Bautista Angelo, Concepcion, Reyes, J. B. L., Barrera, Dizon, Regala, Makalintal and Bengzon, J. P.,
JJ., concur.
Judgment affirmed.
191 Phil. 479

DIVISION
[ GR No. L-32116, Apr 21, 1981 ]
RURAL BANK OF CALOOCAN v. CA +
DECISION
DE CASTRO,* J.:

This is a petition for review by way of certiorari of the decision[1] of the Court of Appeals in CA-G.R. No. 39760-R entitled
"Maxima Castro, plaintiff-appellee, versus Severino Valencia, et al., defendants; Rural Bank of Caloocan, Inc., Jose
Desiderio, Jr. and Arsenio Reyes, defendants-appellants," which affirmed in toto the decision of the Court of First
Instance of Manila in favor of plaintiff-appellee, the herein private respondent Maxima Castro.

On December 7, 1959, respondent Maxima Castro, accompanied by Severino Valencia, went to the Rural Bank of
Caloocan to apply for an industrial loan. It was Severino Valencia who arranged everything about the loan with the bank
and who supplied to the latter the personal data required for Castro's loan application. On December 11, 1959, after
the bank approved the loan for the amount of P3,000.00, Castro, accompanied by the Valencia spouses, signed a
promissory note corresponding to her loan in favor of the bank.

On the same day, December 11, 1959, the Valencia spouses obtained from the bank an equal amount of loan for
P3,000.00. They signed a promissory note (Exhibit "2") corresponding to their loan in favor of the bank and had Castro
affixed thereon her signature as co-maker.

The two loans were secured by a real-estate mortgage (Exhibit "6") on Castro's house and lot of 150 square meters,
covered by Transfer Certificate of Title No. 7419 of the Office of the Register of Deeds of Manila.

On February 13, 1961, the sheriff of Manila, thru Acting Chief Deputy Sheriff Basilio Magsambol, sent a notice of sheriff's
sale addressed to Castro, announcing that her property covered by T.C.T. No. 7419 would be sold at public auction on
March 10, 1961 to satisfy the obligation covering the two promissory notes plus interest and attorney's fees.

Upon request by Castro and the Valencias and with conformity of the bank, the auction sale that was scheduled for
March 10, 1961 was postponed for April 10, 1961. But when April 10, 1961 was subsequently declared a special holiday,
the sheriff of Manila sold the property covered by T.C.T. No. 7419 at a public auction sale that was held on April 11,
1961, which was the next succeeding business day following the special holiday.
Castro alleged that it was only when she received the letter from the Acting Deputy Sheriff on February 13, 1961, when
she learned for the first time that the mortgage contract (Exhibit "6") which was an encumbrance on her property was
for P6,000.00 and not for P3,000.00 and that she was made to sign as co-maker of the promissory note (Exhibit "2")
without her being informed of this.

On April 4, 1961, Castro filed a suit denominated "Re: Sum of Money," against petitioners Bank and Desiderio, the
Spouses Valencia, Basilio Magsambol and Arsenio Reyes as defendants in Civil Case No. 46698 before the Court of
First Instance of Manila upon the charge, amongst others, that thru mistake on her part or fraud on the part of Valencias
she was induced to sign as co-maker of a promissory note (Exhibit "2") and to constitute a mortgage on her house and
lot to secure the questioned note. At the time of filing her complaint, respondent Castro deposited the amount of
P3,383.00 with the court a quo in full payment of her personal loan plus interest.

In her amended complaint, Castro prayed, amongst other, for the annulment as far as she is concerned of the promissory
note (Exhibit "2") and mortgage contract (Exhibit "6") insofar as it exceeds P3,000.00; for the discharge of her personal
obligation with the bank by reason of a deposit of P3,383.00 with the court a quo upon the filing of her complaint; for the
annulment of the foreclosure sale of her property covered by T.C.T. No. 7419 in favor of Arsenio Reyes; and for the
award in her favor of attorney's fees, damages and cost.

In their answers, petitioners interposed counterclaims and prayed for the dismissal of said complaint, with damages,
attorney's fees and costs.[2]

The pertinent facts arrived from the stipulation of facts entered into by the parties as stated by respondent Court of
Appeals are as follows:

"Spawning the present litigation are the facts contained in the following stipulation of facts submitted by the parties
themselves:
"1. That the capacity and addresses of all the parties in this case are admitted;
"2. That the plaintiff was the registered owner of a residential house and lot located at Nos. 1268-1270 Carola Street,
Sampaloc, Manila, containing an area of one hundred fifty (150) square meters, more or less, covered by T.C.T. No.
7419 of the Office of the Register of Deeds of Manila;
"3. That the signatures of the plaintiff appearing on the following documents are genuine:
'a) Application for Industrial Loan with the Rural Bank of Caloocan, dated December 7, 1959 in the amount of
P3,000.00 attached as Annex A of this partial stipulation of facts;
'b) Promissory Note dated December 11, 1959 signed by the plaintiff in favor of the Rural Bank of Caloocan for
the amount of P3,000.00 as per Annex B of this partial stipulation of facts;
'c) Application for Industrial Loan with the Rural Bank of Caloocan, dated December 11, 1959, signed only by the
defendants, Severino Valencia and Catalina Valencia, attached as Annex C, of this partial stipulation of facts;
'd) Promissory note in favor of the Rural Bank of Caloocan, dated December 11, 1959 for the amount of P3,000.00,
signed by the spouses Severino Valencia and Catalina Valencia as borrowers, and plaintiff Maxima Castro, as a co-
maker, attached as Annex D of this partial stipulation of facts;
'e) Real estate mortgage dated December 11, 1959 executed by plaintiff Maxima Castro, in favor of the Rural Bank
of Caloocan, to secure the obligation of P6,000.00 attached herein as Annex E of this partial stipulation of facts;

"All the parties herein expressly reserved their right to present any evidence they may desire on the circumstances
regarding the execution of the above-mentioned documents.
"4. That the sheriff of Manila, thru Acting Chief Deputy Sheriff, Basilio Magsambol, sent a notice of sheriff's sale,
addressed to the plaintiff, dated February 13, 1961, announcing that plaintiff's property covered by T.C.T. No. 7419 of
the Register of Deeds of the City of Manila, would be sold at public auction on March 10, 1961 to satisfy the total
obligation of P5,728.50, plus interest, attorney's fees, etc., as evidenced by the Notice of Sheriff's Sale and Notice of
Extrajudicial Auction Sale of the Mortgaged property, attached herewith as Annexes F and F-1, respectively, of this
stipulation of facts;
"5. That upon the request of the plaintiff and defendants-spouses Severino Valencia and Catalina Valencia, and with
the conformity of the Rural Bank of Caloocan, the Sheriff of Manila postponed the auction sale scheduled for March 10,
1961 for thirty (30) days and the sheriff re-set the auction sale for April 10, 1961;
"6. That April 10, 1961 was declared a special public holiday;
"(Note: No. 7 is omitted upon agreement of the parties.)
"8. That on April 11, 1961, the Sheriff of Manila, sold at public auction plaintiff's property covered by T.C.T. No. 7419
and defendant, Arsenio Reyes, was the highest bidder and the corresponding certificate of sale was issued to him as
per Annex G of this partial stipulation of facts;
"9. That on April 16, 1962, the defendant Arsenio Reyes, executed an Affidavit of Consolidation of Ownership, a copy
of which is hereto attached as Annex H of this partial stipulation of facts;
"10. That on May 9, 1962, the Rural Bank of Caloocan Incorporated executed the final deed of sale in favor of the
defendant, Arsenio Reyes, in the amount of P7,000.00, a copy of which is attached as Annex I of this partial stipulation
of facts;
"11. That the Register of Deeds of the City of Manila issued the Transfer Certificate of Title No. 67297 in favor of the
defendant, Arsenio Reyes, in lieu of Transfer Certificate of Title No. 7419 which was in the name of plaintiff, Maxima
Castro, which was cancelled;
"12. That after defendant, Arsenio Reyes, had consolidated his title to the property as per T.C.T. No. 67299, plaintiff
filed a notice of lis pendens with the Register of Deeds of Manila and the same was annotated in the back of T.C.T. No.
67299 as per Annex J of this partial stipulation of facts; and
"13. That the parties hereby reserved their rights to present additional evidence on matters not covered by this partial
stipulation of facts.
"WHEREFORE, it is respectfully prayed that the foregoing partial stipulation of facts be approved and admitted by this
Honorable Court."
As for the evidence presented during the trial, We quote from the decision of the Court of Appeals the statement thereof,
as follows:

"In addition to the foregoing stipulation of facts, plaintiff claims she is a 70-year old widow who cannot read and write
the English language; that she can speak the Pampango dialect only; that she has only finished second grade (t.s.n., p.
4, December 11, 1964); that in December 1959, she needed money in the amount of P3,000.00 to invest in the business
of the defendant spouses Valencia, who accompanied her to the defendant bank for the purpose of securing a loan of
P3,000.00; that while at the defendant bank, an employee handed to her several forms already prepared which she was
asked to sign on the places indicated, with no one explaining to her the nature and contents of the documents; that she
did not even receive a copy thereof; that she was given a check in the amount of P2,882.85 which she delivered to
defendant spouses; that sometime in February 1961, she received a letter from the Acting Deputy Sheriff of Manila,
regarding the extrajudicial foreclosure sale of her property; that it was then when she learned for the first time that the
mortgage indebtedness secured by the mortgage on her property was P6,000.00 and not P3,000.00; that upon
investigation of her lawyer, it was found that the papers she was made to sign were:
'(a) Application for a loan of P3,000.00 dated December 7, 1959 (Exh. B-1 and Exh. I);
'(b) Promissory note dated December 11, 1959 for the said loan of P3,000.00 (Exh. B-2);
'(c) Promissory note dated December 11, 1959 for P3,000.00 with the defendants Valencia spouses as borrowers
and appellee as co-maker (Exh. B-4 or Exh. 2).

"The auction sale set for March 10, 1961 was postponed to April 10, 1961 upon the request of defendant spouses
Valencia who needed more time within which to pay their loan of P3,000.00 to the defendant bank; plaintiff claims that
when she filed the complaint she deposited with the Clerk of Court the sum of P3,383.00 in full payment of her loan of
P3,000.00 with the defendant bank, plus interest at the rate of 12% per annum up to April 3, 1961 (Exh. D).
"As additional evidence for the defendant bank, its manager declared that sometime in December, 1959, plaintiff was
brought to the Office of the Bank by an employee (t.s.n., p. 4, January 27, 1966). She went there to inquire if she could
get a loan from the bank. He claims he asked the amount and the purpose of the loan and the security to be given and
plaintiff said she would need P3,000.00 to be invested in a drugstore in which she was a partner (t.s.n., p. 8). She
offered as security for the loan her lot and house at Carola St., Sampaloc, Manila, which was promptly investigated by
the defendant bank's inspector. Then a few days later, plaintiff came back to the bank with the wife of defendant
Valencia. A date was allegedly set for plaintiff and the defendant spouses for the processing of their application, but on
the day fixed, plaintiff came without the defendant spouses. She signed the application and the other papers pertinent
to the loan after she was interviewed by the manager of the defendant. After the application of plaintiff was made,
defendant spouses had their application for a loan also prepared and signed (see Exh. 13). In his interview of plaintiff
and defendant spouses, the manager of the bank was able to gather that plaintiff was in joint venture with the defendant
spouses wherein she agreed to invest P3,000.00 as additional capital in the laboratory owned by said spouses (t.s.n.,
pp. 16-17)."[3]
The Court of Appeals, upon evaluation of the evidence, affirmed in toto the decision of the Court of First Instance of
Manila, the dispositive portion of which reads:

"FOR ALL THE FOREGOING CONSIDERATIONS, the Court renders judgment and:
"(1) Declares that the promissory note, Exhibit '2', is invalid as against plaintiff herein;
"(2) Declares that the contract of mortgage, Exhibit '6', is null and void, in so far as the amount thereof exceeds the
sum of P3,000.00 representing the principal obligation of plaintiff, plus the interest thereon at 12% per annum;
"(3) Annuls the extrajudicial foreclosure sale at public auction of the mortgaged property held on April 11, 1961, as
well as all the process and actuations made in pursuance of or in implementation thereto;
"(4) Holds that the total unpaid obligation of plaintiff to defendant Rural Bank of Caloocan, Inc., is only the amount of
P3,000.00, plus the interest thereon at 12% per annum, as of April 3, 1961, and orders that plaintiff's deposit of
P3,383.00 in the Office of the Clerk of Court be applied to the payment thereof;
"(5) Orders defendant Rural Bank of Caloocan, Inc. to return to defendant Arsenio Reyes the purchase price the latter
paid for the mortgaged property at the public auction, as well as reimburse him of all the expenses he has incurred
relative to the sale thereof;
"(6) Orders defendants spouses Severino D. Valencia and Catalina Valencia to pay defendant Rural Bank of Caloocan,
Inc. the amount of P3,000.00 plus the corresponding 12% interest thereon per annum from December 11, 1960 until
fully paid; and
"Orders defendants Rural Bank of Caloocan, Inc., Jose Desiderio, Jr. and spouses Severino D. Valencia and Catalina
Valencia to pay plaintiff, jointly and severally, the sum of P600.00 by way of attorney's fees, as well as costs.
"In view of the conclusion that the court has thus reached, the counterclaims of defendant Rural Bank of Caloocan, Inc.,
Jose Desiderio, Jr. and Arsenio Reyes are hereby dismissed, as a corollary.
"The Court further denies the motion of defendant Arsenio Reyes for an Order requiring Maxima Castro to deposit
rentals filed on November 16, 1963, resolution of which was held in abeyance pending final determination of the case
on the merits, also as a consequence of the conclusion aforesaid."[4]
Petitioners Bank and Jose Desiderio moved for the reconsideration[5] of respondent court's decision. The motion having
been denied,[6] they now come before this Court in the instant petition, with the following Assignment of Errors, to wit:

I. "THE COURT OF APPEALS ERRED IN UPHOLDING THE PARTIAL ANNULMENT OF THE PROMISSORY NOTE,
EXHIBIT 2, AND THE MORTGAGE, EXHIBIT 6, INSOFAR AS THEY AFFECT RESPONDENT MAXIMA CASTRO VIS-
A-VIS PETITIONER BANK DESPITE THE TOTAL ABSENCE OF EITHER ALLEGATION IN THE COMPLAINT OR
COMPETENT PROOF IN THE EVIDENCE OF ANY FRAUD OR OTHER UNLAWFUL CONDUCT COMMITTED OR
PARTICIPATED IN BY PETITIONERS IN PROCURING THE EXECUTION OF SAID CONTRACTS FROM
RESPONDENT CASTRO.
II. "THE COURT OF APPEALS ERRED IN IMPUTING UPON AND CONSIDERING PREJUDICIALLY AGAINST
PETITIONERS, AS BASIS FOR THE PARTIAL ANNULMENT OF THE CONTRACTS AFORESAID ITS FINDING OF
FRAUD PERPETRATED BY THE VALENCIA SPOUSES UPON RESPONDENT CASTRO IN UTTER VIOLATION OF
THE RES INTER ALIOS ACTA RULE.
III."THE COURT OF APPEALS ERRED IN NOT HOLDING THAT, UNDER THE FACTS FOUND BY IT, RESPONDENT
CASTRO IS UNDER ESTOPPEL TO IMPUGN THE REGULARITY AND VALIDITY OF HER QUESTIONED
TRANSACTION WITH PETITIONER BANK.
IV. "THE COURT OF APPEALS ERRED IN NOT FINDING THAT, BETWEEN PETITIONERS AND RESPONDENT
CASTRO, THE LATTER SHOULD SUFFER THE CONSEQUENCES OF THE FRAUD PERPETRATED BY THE
VALENCIA SPOUSES, INASMUCH AS IT WAS THRU RESPONDENT CASTRO'S NEGLIGENCE OR
ACQUIESCENSE, IF NOT ACTUAL CONNIVANCE, THAT THE PERPETRATION OF SAID FRAUD WAS MADE
POSSIBLE.
V.THE COURT OF APPEALS ERRED IN UPHOLDING THE VALIDITY OF THE DEPOSIT BY RESPONDENT
CASTRO OF P3,383.00 WITH THE COURT BELOW AS A TENDER AND CONSIGNATION OF PAYMENT
SUFFICIENT TO DISCHARGE SAID RESPONDENT FROM HER OBLIGATION WITH PETITIONER BANK.
VI. "THE COURT OF APPEALS ERRED IN NOT DECLARING AS VALID AND BINDING UPON RESPONDENT
CASTRO THE HOLDING OF THE SALE ON FORECLOSURE ON THE BUSINESS DAY NEXT FOLLOWING THE
ORIGINALLY SCHEDULED DATE THEREFOR WHICH WAS DECLARED A HOLIDAY WITHOUT NECESSITY OF
FURTHER NOTICE THEREOF."
The issue raised in the first three (3) assignment of errors is whether or not respondent court correctly affirmed the lower
court in declaring the promissory note (Exhibit 2) invalid insofar as they affect respondent Castro vis-a-vis petitioner
bank, and the mortgage contract (Exhibit 6) valid up to the amount of P3,000.00 only.

Respondent court declared that the consent of Castro to the promissory note (Exhibit 2) where she signed as co-maker
with the Valencias as principal borrowers and her acquiescence to the mortgage contract (Exhibit 6) where she
encumbered her property to secure the amount of P6,000.00 was obtained by fraud perpetrated on her by the Valencias
who had abused her confidence, taking advantage of her old age and ignorance of her financial need. Respondent
court added that "the mandate of fair play decrees that she should be relieved of her obligation under the contract"
pursuant to Articles 24[7] and 1332[8] of the Civil Code.

The decision in effect relieved Castro of any liability to the promissory note (Exhibit 2) and the mortgage contract (Exhibit
6) was deemed valid up to the amount of P3,000.00 only which was equivalent to her personal loan to the bank.

Petitioners argued that since the Valencias were solely declared in the decision to be responsible for the fraud against
Castro, in the light of the res inter alios acta rule, a finding of fraud perpetrated by the spouses against Castro cannot
be taken to operate prejudicially against the bank. Petitioners concluded that respondent court erred in not giving effect
to the promissory note (Exhibit 2) insofar as they affect Castro and the bank and in declaring that the mortgage contract
(Exhibit 6) was valid only to the extent of Castro's personal loan of P3,000.00.

The records of the case reveal that respondent court's findings of fraud against the Valencias is well supported by
evidence. Moreover, the findings of fact by respondent court in the matter is deemed final.[9] The decision declared the
Valencias solely responsible for the defraudation of Castro. Petitioners' contention that the decision was silent regarding
the participation of the bank in the fraud is, therefore, correct.

We cannot agree with the contention of petitioners that the bank was defrauded by the Valencias. For one, no claim
was made on this in the lower court. For another, petitioners did not submit proof to support its contention.

At any rate, We observe that while the Valencias defrauded Castro by making her sign the promissory note (Exhibit 2)
and the mortgage contract (Exhibit 6), they also misrepresented to the bank Castro's personal qualifications in order to
secure its consent to the loan. This must be the reason which prompted the bank to contend that it was defrauded by
the Valencias. But to reiterate, We cannot agree with the contention for reasons above-mentioned. However, if the
contention deserves any consideration at all, it is in indicating the admission of petitioners that the bank committed
mistake in giving its consent to the contracts.

Thus, as a result of the fraud upon Castro and the misrepresentation to the bank inflicted by the Valencias, both Castro
and the bank committed mistake in giving their consents to the contracts. In other words, substantial mistake vitiated
their consents given. For if Castro had been aware of what she signed and the bank of the true qualifications of the
loan applicants, it is evident that they would not have given their consents to the contracts.

Pursuant to Article 1342 of the Civil Code which provides:

"Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has created
substantial mistake and the same is mutual."
We cannot declare the promissory note (Exhibit 2) valid between the bank and Castro and the mortgage contract (Exhibit
6) binding on Castro beyond the amount of P3,000.00, for while the contracts may not be invalidated insofar as they
affect the bank and Castro on the ground of fraud because the bank was not a participant thereto, such may however
be invalidated on the ground of substantial mistake mutually committed by them as a consequence of the fraud and
misrepresentation inflicted by the Valencias. Thus, in the case of Hill vs. Veloso,[10] this Court declared that a contract
may be annulled on the ground of vitiated consent if deceit by a third person, even without connivance or complicity with
one of the contracting parties, resulted in mutual error on the part of the parties to the contract.

Petitioners argued that the amended complaint fails to contain even a general averment of fraud or mistake, and its
mention in the prayer is definitely not a substantial compliance with the requirement of Section 5, Rule 8 of the Rules of
Court. The records of the case, however, will show that the amended complaint contained a particular averment of
fraud against the Valencias in full compliance with the provision of the Rules of Court. Although, the amended complaint
made no mention of mistake being incurred in by the bank and Castro, such mention is not essential in order that the
promissory note (Exhibit 2) may be declared of no binding effect between them and the mortgage (Exhibit 6) valid up to
the amount of P3,000.00 only. The reason is that the mistake they mutually suffered was a mere consequence of the
fraud perpetrated by the Valencias against them. Thus, the fraud particularly averred in the complaint, having been
proven, is deemed sufficient basis for the declaration of the promissory note (Exhibit 2) invalid insofar as it affects Castro
vis-a-vis the bank, and the mortgage contract (Exhibit 6) valid only up to the amount of P3,000.00.

The second issue raised in the fourth assignment of errors is who between Castro and the bank should suffer the
consequences of the fraud perpetrated by the Valencias.

In attributing to Castro all consequences of the loss, petitioners argue that it was her negligence or acquiescence if not
her actual connivance that made the fraud possible.

Petitioners' argument utterly disregards the findings of respondent Court of Appeals wherein petitioners' negligence in
the contracts has been aptly demonstrated, to wit:

"A witness for the defendant bank, Rodolfo Desiderio claims he had subjected the plaintiff-appellee to several interviews.
If this were true why is it that her age was placed at 61 instead of 70; why was she described in the application (Exh. B-
1-9) as drug manufacturer when in fact she was not; why was it placed in the application that she has an income of
P20,000.00 when according to plaintiff-appellee, she has not even given such kind of information - the true fact being
that she was being paid P1.20 per picul of the sugarcane production in her hacienda and 500 cavans on the palay
production."[11]
From the foregoing, it is evident that the bank was as much guilty, as Castro was, of negligence in giving its consent to
the contracts. It apparently relied on representations made by the Valencia spouses when it should have directly
obtained the needed data from Castro who was the acknowledged owner of the property offered as collateral. Moreover,
considering Castro's personal circumstances - her lack of education, ignorance and old age - she cannot be considered
utterly neglectful for having been defrauded. On the contrary, it is demanded of petitioners to exercise the highest order
of care and prudence in its business dealings with the Valencias considering that it is engaged in a banking business -
a business affected with public interest. It should have ascertained Castro's awareness of what she was signing or
made her understand what obligations she was assuming, considering that she was giving accommodation to, without
any consideration from, the Valencia spouses.

Petitioners further argue that Castro's act of holding the Valencias as her agent led the bank to believe that they were
authorized to speak and bind her. She cannot now be permitted to deny the authority of the Valencias to act as her
agent for one who clothes another with apparent authority as her agent is not permitted to deny such authority.

The authority of the Valencias was only to follow-up Castro's loan application with the bank. They were not authorized
to borrow for her. This is apparent from the fact that Castro went to the Bank to sign the promissory note for her loan
of P3,000.00. If her act had been understood by the Bank to be a grant of an authority to the Valencias to borrow in her
behalf, it should have required a special power of attorney executed by Castro in their favor. Since the bank did not,
We can rightly assume that it did not entertain the notion, that the Valencia spouses were in any manner acting as an
agent of Castro.
When the Valencias borrowed from the Bank a personal loan of P3,000.00 evidenced by a promissory note (Exhibit 2)
and mortgaged (Exhibit 6) Castro's property to secure said loan, the Valencias acted for their own behalf. Considering
however that for the loan in which the Valencias appeared as principal borrowers, it was the property of Castro that was
being mortgaged to secure said loan, the Bank should have exercised due care and prudence by making proper inquiry
if Castro's consent to the mortgage was without any taint or defect. The possibility of her not knowing that she signed
the promissory note (Exhibit 2) as co-maker with the Valencias, and that her property was mortgaged to secure the two
loans instead of her own personal loan only, in view of her personal circumstances - ignorance, lack of education and
old age - should have placed the Bank on prudent inquiry to protect its interest and that of the public it serves. With the
recent occurrence of events that have supposedly affected adversely our banking system, attributable to laxity in the
conduct of bank business by its officials, the need of extreme caution and prudence by said officials and employees in
the discharge of their functions cannot be over-emphasized.

Question is, likewise, raised as to the propriety of respondent court's decision which declared that Castro's consignation
in court of the amount of P3,383.00 was validly made. It is contended that the consignation was made without prior
offer or tender of payment to the Bank, and is therefore, not valid. In holding that there is a substantial compliance with
the provision of Article 1256 of the Civil Code, respondent court considered the fact that the Bank was holding Castro
liable for the sum of P6,000.00 plus 12% interest per annum, while the amount consigned was only P3,000.00 plus 12%
interest; that at the time of consignation, the Bank had long foreclosed the mortgage extrajudicially and the sale of the
mortgage property had already been scheduled for April 10, 1961 for non-payment of the obligation, and that despite
the fact that the Bank already knew of the deposit made by Castro because the receipt of the deposit was attached to
the record of the case, said Bank had not made any claim of such deposit, and that therefore, Castro was right in thinking
that it was futile and useless for her to make previous offer and tender of payment directly to the Bank only in the
aforesaid amount of P3,000.00 plus 12% interest. Under the foregoing circumstances, the consignation made by Castro
was valid, if not under the strict provision of the law, under the more liberal considerations of equity.

The final issue raised is the validity or invalidity of the extrajudicial foreclosure sale at public auction of the mortgaged
property that was held on April 11, 1961.

Petitioners contended that the public auction sale that was held on April 11, 1961 which was the next business day after
the scheduled date of the sale on April 10, 1961, a special public holiday, was permissible and valid pursuant to the
provisions of Section 31 of the Revised Administrative Code which ordains:

"Pretermission of holiday. - Where the day, or the last day, for doing any act required or permitted by law falls on a
holiday, the act may be done on the next succeeding business day."
Respondent court ruled that the aforesaid sale is null and void, it not having been carried out in accordance with Section
9 of Act No. 3135, which provides:

"Section 9. - Notice shall be given by posting notices of the sale for not less than twenty days in at least three public
places of the municipality or city where the property is situated, and if such property is worth more than four hundred
pesos, such notice shall also be published once a week for at least three consecutive weeks in a newspaper of general
circulation in the municipality or city."
We agree with respondent court. The pretermission of a holiday applies only "where the day, or the last day for doing
any act required or permitted by law falls on a holiday," or when the last day of a given period for doing an act falls on a
holiday. It does not apply to a day fixed by an office or officer of the government for an act to be done, as distinguished
from a period of time within which an act should be done, which may be on any day within that specified period. For
example, if a party is required by law to file his answer to a complaint within fifteen (15) days from receipt of the summons
and the last day falls on a holiday, the last day is deemed moved to the next succeeding business day. But, if the court
fixes the trial of a case on a certain day but the said date is subsequently declared a public holiday, the trial thereof is
not automatically transferred to the next succeeding business day. Since April 10, 1961 was not the day or the last day
set by law for the extrajudicial foreclosure sale, nor the last day of a given period, but a date fixed by the deputy sheriff,
the aforesaid sale cannot legally be made on the next succeeding business day without the notices of the sale on that
day being posted as prescribed in Section 9, Act No. 3135.

WHEREFORE, finding no reversible error in the judgment under review, We affirm the same in toto. No pronouncement
as to cost.

SO ORDERED.