SECOND DIVISION

[ G.R. No. 133632, February 15, 2002 ]

BPI INVESTMENT CORPORATION, PETITIONER, VS. HON. COURT OF APPEALS AND
ALS MANAGEMENT & DEVELOPMENT CORPORATION, RESPONDENTS.
DECISION
QUISUMBING, J.:
This petition for certiorari assails the decision dated February 28, 1997, of the Court of
Appeals and its resolution dated April 21, 1998, in CA-G.R. CV No. 38887. The appellate
court affirmed the judgment of the Regional Trial Court of Pasig City, Branch 151, in (a) Civil
Case No. 11831, for foreclosure of mortgage by petitioner BPI Investment Corporation (BPIIC
for brevity) against private respondents ALS Management and Development Corporation and
Antonio K. Litonjua,[1] consolidated with (b) Civil Case No. 52093, for damages with prayer for
the issuance of a writ of preliminary injunction by the private respondents against said
petitioner.
The trial court had held that private respondents were not in default in the payment of their
monthly amortization, hence, the extrajudicial foreclosure conducted by BPIIC was
premature and made in bad faith. It awarded private respondents the amount of P300,000
for moral damages, P50,000 for exemplary damages, and P50,000 for attorneys fees and
expenses for litigation. It likewise dismissed the foreclosure suit for being premature.
The facts are as follows:
Frank Roa obtained a loan at an interest rate of 16 1/4% per annum from Ayala Investment
and Development Corporation (AIDC), the predecessor of petitioner BPIIC, for the
construction of a house on his lot in New Alabang Village, Muntinlupa. Said house and lot
were mortgaged to AIDC to secure the loan. Sometime in 1980, Roa sold the house and lot
to private respondents ALS and Antonio Litonjua for P850,000. They paid P350,000 in cash
and assumed the P500,000 balance of Roas indebtedness with AIDC. The latter, however,
was not willing to extend the old interest rate to private respondents and proposed to grant
them a new loan of P500,000 to be applied to Roas debt and secured by the same property,
at an interest rate of 20% per annum and service fee of 1% per annum on the outstanding
principal balance payable within ten years in equal monthly amortization of P9,996.58 and
penalty interest at the rate of 21% per annum per day from the date the amortization
became due and payable.
Consequently, in March 1981, private respondents executed a mortgage deed containing the
above stipulations with the provision that payment of the monthly amortization shall
commence on May 1, 1981.
On August 13, 1982, ALS and Litonjua updated Roas arrearages by paying BPIIC the sum of
P190,601.35. This reduced Roas principal balance to P457,204.90 which, in turn, was
liquidated when BPIIC applied thereto the proceeds of private respondents loan of
P500,000.
On September 13, 1982, BPIIC released to private respondents P7,146.87, purporting to be
what was left of their loan after full payment of Roas loan.
In June 1984, BPIIC instituted foreclosure proceedings against private respondents on the
ground that they failed to pay the mortgage indebtedness which from May 1, 1981 to June
30, 1984, amounted to Four Hundred Seventy Five Thousand Five Hundred Eighty Five and
31/100 Pesos (P475,585.31). A notice of sheriffs sale was published on August 13, 1984.
On February 28, 1985, ALS and Litonjua filed Civil Case No. 52093 against BPIIC. They
alleged, among others, that they were not in arrears in their payment, but in fact made an
overpayment as of June 30, 1984. They maintained that they should not be made to pay
amortization before the actual release of the P500,000 loan in August and September 1982.
Further, out of the P500,000 loan, only the total amount of P464,351.77 was released to
private respondents. Hence, applying the effects of legal compensation, the balance of
P35,648.23 should be applied to the initial monthly amortization for the loan.
On August 31, 1988, the trial court rendered its judgment in Civil Case Nos. 11831 and
52093, thus:
WHEREFORE, judgment is hereby rendered in favor of ALS Management and Development

Corporation and Antonio K. Litonjua and against BPI Investment Corporation, holding that
the amount of loan granted by BPI to ALS and Litonjua was only in the principal sum of
P464,351.77, with interest at 20% plus service charge of 1% per annum, payable on equal
monthly and successive amortizations at P9,283.83 for ten (10) years or one hundred twenty
(120) months. The amortization schedule attached as Annex A to the Deed of Mortgage
is correspondingly reformed as aforestated.
The Court further finds that ALS and Litonjua suffered compensable damages when BPI
caused their publication in a newspaper of general circulation as defaulting debtors, and
therefore orders BPI to pay ALS and Litonjua the following sums:
a) P300,000.00 for and as moral damages;
b) P50,000.00 as and for exemplary damages;
c) P50,000.00 as and for attorneys fees and expenses of litigation.
The foreclosure suit (Civil Case No. 11831) is hereby DISMISSED for being premature.
Costs against BPI.
SO ORDERED.[2]
Both parties appealed to the Court of Appeals. However, private respondents appeal was
dismissed for non-payment of docket fees.
On February 28, 1997, the Court of Appeals promulgated its decision, the dispositive portion
reads:
WHEREFORE, finding no error in the appealed decision the same is hereby AFFIRMED in
toto.
SO ORDERED.[3]
In its decision, the Court of Appeals reasoned that a simple loan is perfected only upon the
delivery of the object of the contract. The contract of loan between BPIIC and ALS & Litonjua
was perfected only on September 13, 1982, the date when BPIIC released the purported
balance of the P500,000 loan after deducting therefrom the value of Roas indebtedness.
Thus, payment of the monthly amortization should commence only a month after the said
date, as can be inferred from the stipulations in the contract. This, despite the express
agreement of the parties that payment shall commence on May 1, 1981. From October 1982
to June 1984, the total amortization due was only P194,960.43. Evidence showed that
private respondents had an overpayment, because as of June 1984, they already paid a total
amount of P201,791.96. Therefore, there was no basis for BPIIC to extrajudicially foreclose
the mortgage and cause the publication in newspapers concerning private respondents
delinquency in the payment of their loan. This fact constituted sufficient ground for moral
damages in favor of private respondents.

I
II
III

The motion for reconsideration filed by petitioner BPIIC was likewise denied, hence this
petition, where BPIIC submits for resolution the following issues:
WHETHER OR NOT A CONTRACT OF LOAN IS A CONSENSUAL CONTRACT IN THE LIGHT OF
THE RULE LAID DOWN IN BONNEVIE VS. COURT OF APPEALS, 125 SCRA 122.
II. WHETHER OR NOT BPI SHOULD BE HELD LIABLE FOR MORAL AND EXEMPLARY DAMAGES
AND ATTORNEYS FEES IN THE FACE OF IRREGULAR PAYMENTS MADE BY ALS AND OPPOSED
TO THE RULE LAID DOWN IN SOCIAL SECURITY SYSTEM VS. COURT OF APPEALS, 120 SCRA
707.
On the first issue, petitioner contends that the Court of Appeals erred in ruling that because
a simple loan is perfected upon the delivery of the object of the contract, the loan contract
in this case was perfected only on September 13, 1982. Petitioner claims that a contract of
loan is a consensual contract, and a loan contract is perfected at the time the contract of
mortgage is executed conformably with our ruling in Bonnevie v. Court of Appeals, 125 SCRA
122. In the present case, the loan contract was perfected on March 31, 1981, the date when
the mortgage deed was executed, hence, the amortization and interests on the loan should
be computed from said date.
Petitioner also argues that while the documents showed that the loan was released only on
August 1982, the loan was actually released on March 31, 1981, when BPIIC issued a
cancellation of mortgage of Frank Roas loan. This finds support in the registration on March
31, 1981 of the Deed of Absolute Sale executed by Roa in favor of ALS, transferring the title
of the property to ALS, and ALS executing the Mortgage Deed in favor of BPIIC. Moreover,
petitioner claims, the delay in the release of the loan should be attributed to private

respondents. As BPIIC only agreed to extend a P500,000 loan, private respondents were
required to reduce Frank Roas loan below said amount. According to petitioner, private
respondents were only able to do so in August 1982.
In their comment, private respondents assert that based on Article 1934 of the Civil Code, [4]
a simple loan is perfected upon the delivery of the object of the contract, hence a real
contract. In this case, even though the loan contract was signed on March 31, 1981, it was
perfected only on September 13, 1982, when the full loan was released to private
respondents. They submit that petitioner misread Bonnevie. To give meaning to Article
1934, according to private respondents, Bonnevie must be construed to mean that the
contract to extend the loan was perfected on March 31, 1981 but the contract of loan itself
was only perfected upon the delivery of the full loan to private respondents on September
13, 1982.
Private respondents further maintain that even granting, arguendo, that the loan contract
was perfected on March 31, 1981, and their payment did not start a month thereafter, still
no default took place. According to private respondents, a perfected loan agreement
imposes reciprocal obligations, where the obligation or promise of each party is the
consideration of the other party. In this case, the consideration for BPIIC in entering into the
loan contract is the promise of private respondents to pay the monthly amortization. For the
latter, it is the promise of BPIIC to deliver the money. In reciprocal obligations, neither party
incurs in delay if the other does not comply or is not ready to comply in a proper manner
with what is incumbent upon him. Therefore, private respondents conclude, they did not
incur in delay when they did not commence paying the monthly amortization on May 1,
1981, as it was only on September 13, 1982 when petitioner fully complied with its
obligation under the loan contract.
We agree with private respondents. A loan contract is not a consensual contract but a real
contract. It is perfected only upon the delivery of the object of the contract. [5] Petitioner
misapplied Bonnevie. The contract in Bonnevie declared by this Court as a perfected
consensual contract falls under the first clause of Article 1934, Civil Code. It is an accepted
promise to deliver something by way of simple loan.
In Saura Import and Export Co. Inc. vs. Development Bank of the Philippines, 44 SCRA 445,
petitioner applied for a loan of P500,000 with respondent bank. The latter approved the
application through a board resolution. Thereafter, the corresponding mortgage was
executed and registered. However, because of acts attributable to petitioner, the loan was
not released. Later, petitioner instituted an action for damages. We recognized in this case,
a perfected consensual contract which under normal circumstances could have made the
bank liable for not releasing the loan. However, since the fault was attributable to petitioner
therein, the court did not award it damages.
A perfected consensual contract, as shown above, can give rise to an action for damages.
However, said contract does not constitute the real contract of loan which requires the
delivery of the object of the contract for its perfection and which gives rise to obligations
only on the part of the borrower.[6]
In the present case, the loan contract between BPI, on the one hand, and ALS and Litonjua,
on the other, was perfected only on September 13, 1982, the date of the second release of
the loan. Following the intentions of the parties on the commencement of the monthly
amortization, as found by the Court of Appeals, private respondents obligation to pay
commenced only on October 13, 1982, a month after the perfection of the contract. [7]
We also agree with private respondents that a contract of loan involves a reciprocal
obligation, wherein the obligation or promise of each party is the consideration for that of
the other.[8] As averred by private respondents, the promise of BPIIC to extend and deliver
the loan is upon the consideration that ALS and Litonjua shall pay the monthly amortization
commencing on May 1, 1981, one month after the supposed release of the loan. It is a basic
principle in reciprocal obligations that neither party incurs in delay, if the other does not
comply or is not ready to comply in a proper manner with what is incumbent upon him. [9]
Only when a party has performed his part of the contract can he demand that the other
party also fulfills his own obligation and if the latter fails, default sets in. Consequently,
petitioner could only demand for the payment of the monthly amortization after September
13, 1982 for it was only then when it complied with its obligation under the loan contract.
Therefore, in computing the amount due as of the date when BPIIC extrajudicially caused the
foreclosure of the mortgage, the starting date is October 13, 1982 and not May 1, 1981.

Other points raised by petitioner in connection with the first issue, such as the date of actual
release of the loan and whether private respondents were the cause of the delay in the
release of the loan, are factual. Since petitioner has not shown that the instant case is one
of the exceptions to the basic rule that only questions of law can be raised in a petition for
review under Rule 45 of the Rules of Court, [10] factual matters need not tarry us now. On
these points we are bound by the findings of the appellate and trial courts.
On the second issue, petitioner claims that it should not be held liable for moral and
exemplary damages for it did not act maliciously when it initiated the foreclosure
proceedings. It merely exercised its right under the mortgage contract because private
respondents were irregular in their monthly amortization. It invoked our ruling in Social
Security System vs. Court of Appeals, 120 SCRA 707, where we said:
Nor can the SSS be held liable for moral and temperate damages. As concluded by the Court
of Appeals the negligence of the appellant is not so gross as to warrant moral and
temperate damages, except that, said Court reduced those damages by only P5,000.00
instead of eliminating them. Neither can we agree with the findings of both the Trial Court
and respondent Court that the SSS had acted maliciously or in bad faith. The SSS was of the
belief that it was acting in the legitimate exercise of its right under the mortgage contract in
the face of irregular payments made by private respondents and placed reliance on the
automatic acceleration clause in the contract. The filing alone of the foreclosure application
should not be a ground for an award of moral damages in the same way that a clearly
unfounded civil action is not among the grounds for moral damages.
Private respondents counter that BPIIC was guilty of bad faith and should be liable for said
damages because it insisted on the payment of amortization on the loan even before it was
released. Further, it did not make the corresponding deduction in the monthly amortization
to conform to the actual amount of loan released, and it immediately initiated foreclosure
proceedings when private respondents failed to make timely payment.
But as admitted by private respondents themselves, they were irregular in their payment of
monthly amortization. Conformably with our ruling in SSS, we can not properly declare BPIIC
in bad faith. Consequently, we should rule out the award of moral and exemplary damages.
[11]

However, in our view, BPIIC was negligent in relying merely on the entries found in the deed
of mortgage, without checking and correspondingly adjusting its records on the amount
actually released to private respondents and the date when it was released. Such
negligence resulted in damage to private respondents, for which an award of nominal
damages should be given in recognition of their rights which were violated by BPIIC. [12] For
this purpose, the amount of P25,000 is sufficient.
Lastly, as in SSS where we awarded attorneys fees because private respondents were
compelled to litigate, we sustain the award of P50,000 in favor of private respondents as
attorneys fees.
WHEREFORE, the decision dated February 28, 1997, of the Court of Appeals and its
resolution dated April 21, 1998, are AFFIRMED WITH MODIFICATION as to the award of
damages. The award of moral and exemplary damages in favor of private respondents is
DELETED, but the award to them of attorneys fees in the amount of P50,000 is UPHELD.
Additionally, petitioner is ORDERED to pay private respondents P25,000 as nominal
damages. Costs against petitioner.
SO ORDERED.

[ REPUBLIC ACT NO. 8183, June 11, 1996 ]

AN ACT REPEALING REPUBLIC ACT NUMBERED FIVE HUNDRED TWENTY-NINE, AS
AMENDED, ENTITLED "AN ACT TO ASSURE THE UNIFORM VALUE OF PHILIPPINE
COIN AND CURRENCY"
Be it enacted by the Senate and House of Representatives of the Philippines in Congress
assembled:
SECTION 1. All monetary obligations shall be settled in the Philippine currency which is
legal tender in the Philippines. However, the parties may agree that the obligation or
transaction shall be settled in any other currency at the time of payment.
SEC. 2. Republic Act Numbered Five Hundred Twenty- Nine (R. A. No. 529), as amended,
entitled "An Act to Assure the Uniform Value of Philippine Coin and Currency," is hereby
repealed.
SEC. 3. This Act shall take effect fifteen (15) days after its publication in the Official Gazette
or in two (2) national newspapers of general circulation. The Bangko Sentral ng Pilipinas and
the Department of Finance shall conduct an intensive information campaign on the effect of
this Act.
Approved, June 11, 1996.
R.A. No. 337, General Banking Act
REPUBLIC ACT NO. 337AN ACT REGULATING BANKS AND BANKING INSTITUTIONS
AND FOR OTHER PURPOSES
Section 80. Borrowers may at any time prior to the agreed maturity date prepay, in whole
or in part, the unpaid balance of any bank loan.
Republic Act No. 7394
April 13, 1992
THE CONSUMER ACT OF THE PHILIPPINES
Article 137. Right to Prepay. The person to whom credit is extended may prepay in full
or in part, at any time without penalty, the unpaid balance of any consumer credit
transaction.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-17474
October 25, 1962
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,
vs.
JOSE V. BAGTAS, defendant,
FELICIDAD M. BAGTAS, Administratrix of the Intestate Estate left by the late Jose
V. Bagtas, petitioner-appellant.
D. T. Reyes, Liaison and Associates for petitioner-appellant.Office of the Solicitor General for
plaintiff-appellee.
PADILLA, J.:
The Court of Appeals certified this case to this Court because only questions of law are
raised.
On 8 May 1948 Jose V. Bagtas borrowed from the Republic of the Philippines through the
Bureau of Animal Industry three bulls: a Red Sindhi with a book value of P1,176.46, a
Bhagnari, of P1,320.56 and a Sahiniwal, of P744.46, for a period of one year from 8 May
1948 to 7 May 1949 for breeding purposes subject to a government charge of breeding fee
of 10% of the book value of the bulls. Upon the expiration on 7 May 1949 of the contract, the
borrower asked for a renewal for another period of one year. However, the Secretary of
Agriculture and Natural Resources approved a renewal thereof of only one bull for another
year from 8 May 1949 to 7 May 1950 and requested the return of the other two. On 25
March 1950 Jose V. Bagtas wrote to the Director of Animal Industry that he would pay the
value of the three bulls. On 17 October 1950 he reiterated his desire to buy them at a value
with a deduction of yearly depreciation to be approved by the Auditor General. On 19
October 1950 the Director of Animal Industry advised him that the book value of the three
bulls could not be reduced and that they either be returned or their book value paid not later
than 31 October 1950. Jose V. Bagtas failed to pay the book value of the three bulls or to
return them. So, on 20 December 1950 in the Court of First Instance of Manila the Republic
of the Philippines commenced an action against him praying that he be ordered to return the
three bulls loaned to him or to pay their book value in the total sum of P3,241.45 and the
unpaid breeding fee in the sum of P199.62, both with interests, and costs; and that other
just and equitable relief be granted in (civil No. 12818).
On 5 July 1951 Jose V. Bagtas, through counsel Navarro, Rosete and Manalo, answered that
because of the bad peace and order situation in Cagayan Valley, particularly in the barrio of
Baggao, and of the pending appeal he had taken to the Secretary of Agriculture and Natural
Resources and the President of the Philippines from the refusal by the Director of Animal
Industry to deduct from the book value of the bulls corresponding yearly depreciation of 8%
from the date of acquisition, to which depreciation the Auditor General did not object, he
could not return the animals nor pay their value and prayed for the dismissal of the
complaint.
After hearing, on 30 July 1956 the trial court render judgment
. . . sentencing the latter (defendant) to pay the sum of P3,625.09 the total value of the
three bulls plus the breeding fees in the amount of P626.17 with interest on both sums of
(at) the legal rate from the filing of this complaint and costs.
On 9 October 1958 the plaintiff moved ex parte for a writ of execution which the court
granted on 18 October and issued on 11 November 1958. On 2 December 1958 granted an
ex-parte motion filed by the plaintiff on November 1958 for the appointment of a special
sheriff to serve the writ outside Manila. Of this order appointing a special sheriff, on 6
December 1958, Felicidad M. Bagtas, the surviving spouse of the defendant Jose Bagtas who

died on 23 October 1951 and as administratrix of his estate, was notified. On 7 January 1959
she file a motion alleging that on 26 June 1952 the two bull Sindhi and Bhagnari were
returned to the Bureau Animal of Industry and that sometime in November 1958 the third
bull, the Sahiniwal, died from gunshot wound inflicted during a Huk raid on Hacienda
Felicidad Intal, and praying that the writ of execution be quashed and that a writ of
preliminary injunction be issued. On 31 January 1959 the plaintiff objected to her motion. On
6 February 1959 she filed a reply thereto. On the same day, 6 February, the Court denied her
motion. Hence, this appeal certified by the Court of Appeals to this Court as stated at the
beginning of this opinion.
It is true that on 26 June 1952 Jose M. Bagtas, Jr., son of the appellant by the late defendant,
returned the Sindhi and Bhagnari bulls to Roman Remorin, Superintendent of the NVB
Station, Bureau of Animal Industry, Bayombong, Nueva Vizcaya, as evidenced by a
memorandum receipt signed by the latter (Exhibit 2). That is why in its objection of 31
January 1959 to the appellant's motion to quash the writ of execution the appellee prays
"that another writ of execution in the sum of P859.53 be issued against the estate of
defendant deceased Jose V. Bagtas." She cannot be held liable for the two bulls which
already had been returned to and received by the appellee.
The appellant contends that the Sahiniwal bull was accidentally killed during a raid by the
Huk in November 1953 upon the surrounding barrios of Hacienda Felicidad Intal, Baggao,
Cagayan, where the animal was kept, and that as such death was due to force majeure she
is relieved from the duty of returning the bull or paying its value to the appellee. The
contention is without merit. The loan by the appellee to the late defendant Jose V. Bagtas of
the three bulls for breeding purposes for a period of one year from 8 May 1948 to 7 May
1949, later on renewed for another year as regards one bull, was subject to the payment by
the borrower of breeding fee of 10% of the book value of the bulls. The appellant contends
that the contract was commodatum and that, for that reason, as the appellee retained
ownership or title to the bull it should suffer its loss due to force majeure. A contract of
commodatum is essentially gratuitous.1 If the breeding fee be considered a compensation,
then the contract would be a lease of the bull. Under article 1671 of the Civil Code the
lessee would be subject to the responsibilities of a possessor in bad faith, because she had
continued possession of the bull after the expiry of the contract. And even if the contract be
commodatum, still the appellant is liable, because article 1942 of the Civil Code provides
that a bailee in a contract of commodatum
. . . is liable for loss of the things, even if it should be through a fortuitous event:
(2) If he keeps it longer than the period stipulated . . .
(3) If the thing loaned has been delivered with appraisal of its value, unless there is a
stipulation exempting the bailee from responsibility in case of a fortuitous event;
The original period of the loan was from 8 May 1948 to 7 May 1949. The loan of one bull was
renewed for another period of one year to end on 8 May 1950. But the appellant kept and
used the bull until November 1953 when during a Huk raid it was killed by stray bullets.
Furthermore, when lent and delivered to the deceased husband of the appellant the bulls
had each an appraised book value, to with: the Sindhi, at P1,176.46, the Bhagnari at
P1,320.56 and the Sahiniwal at P744.46. It was not stipulated that in case of loss of the bull
due to fortuitous event the late husband of the appellant would be exempt from liability.
The appellant's contention that the demand or prayer by the appellee for the return of the
bull or the payment of its value being a money claim should be presented or filed in the
intestate proceedings of the defendant who died on 23 October 1951, is not altogether
without merit. However, the claim that his civil personality having ceased to exist the trial
court lost jurisdiction over the case against him, is untenable, because section 17 of Rule 3
of the Rules of Court provides that
After a party dies and the claim is not thereby extinguished, the court shall order, upon
proper notice, the legal representative of the deceased to appear and to be substituted for
the deceased, within a period of thirty (30) days, or within such time as may be granted. . . .
and after the defendant's death on 23 October 1951 his counsel failed to comply with
section 16 of Rule 3 which provides that
Whenever a party to a pending case dies . . . it shall be the duty of his attorney to inform the
court promptly of such death . . . and to give the name and residence of the executory
administrator, guardian, or other legal representative of the deceased . . . .
The notice by the probate court and its publication in the Voz de Manila that Felicidad M.
Bagtas had been issue letters of administration of the estate of the late Jose Bagtas and that
"all persons having claims for monopoly against the deceased Jose V. Bagtas, arising from
contract express or implied, whether the same be due, not due, or contingent, for funeral
expenses and expenses of the last sickness of the said decedent, and judgment for
monopoly against him, to file said claims with the Clerk of this Court at the City Hall Bldg.,
Highway 54, Quezon City, within six (6) months from the date of the first publication of this
order, serving a copy thereof upon the aforementioned Felicidad M. Bagtas, the appointed
administratrix of the estate of the said deceased," is not a notice to the court and the

appellee who were to be notified of the defendant's death in accordance with the abovequoted rule, and there was no reason for such failure to notify, because the attorney who
appeared for the defendant was the same who represented the administratrix in the special
proceedings instituted for the administration and settlement of his estate. The appellee or
its attorney or representative could not be expected to know of the death of the defendant
or of the administration proceedings of his estate instituted in another court that if the
attorney for the deceased defendant did not notify the plaintiff or its attorney of such death
as required by the rule.
As the appellant already had returned the two bulls to the appellee, the estate of the late
defendant is only liable for the sum of P859.63, the value of the bull which has not been
returned to the appellee, because it was killed while in the custody of the administratrix of
his estate. This is the amount prayed for by the appellee in its objection on 31 January 1959
to the motion filed on 7 January 1959 by the appellant for the quashing of the writ of
execution.
Special proceedings for the administration and settlement of the estate of the deceased Jose
V. Bagtas having been instituted in the Court of First Instance of Rizal (Q-200), the money
judgment rendered in favor of the appellee cannot be enforced by means of a writ of
execution but must be presented to the probate court for payment by the appellant, the
administratrix appointed by the court.
ACCORDINGLY, the writ of execution appealed from is set aside, without pronouncement as
to costs.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-46145 November 26, 1986
REPUBLIC OF THE PHILIPPINES (BUREAU OF LANDS), petitioner,
vs.
THE HON. COURT OF APPEALS, HEIRS OF DOMINGO P. BALOY, represented by
RICARDO BALOY, ET AL., respondents.
Pelaez, Jalondoni, Adriano and Associates for respondents.
PARAS, J.:p
This case originally emanated from a decision of the then Court of First Instance of Zambales
in LRC Case No. 11-0, LRC Record No. N-29355, denying respondents' application for
registration. From said order of denial the applicants, heirs of Domingo Baloy, represented
by Ricardo P. Baloy, (herein private respondents) interposed on appeal to the Court of
Appeals which was docketed as CA-G.R. No. 52039-R. The appellate court, thru its Fifth
Division with the Hon. Justice Magno Gatmaitan as ponente, rendered a decision dated
February 3, 1977 reversing the decision appealed from and thus approving the application
for registration. Oppositors (petitioners herein) filed their Motion for Reconsideration alleging
among other things that applicants' possessory information title can no longer be invoked
and that they were not able to prove a registerable title over the land. Said Motion for
Reconsideration was denied, hence this petition for review on certiorari.
Applicants' claim is anchored on their possessory information title (Exhibit F which had been
translated in Exhibit F-1) coupled with their continuous, adverse and public possession over
the land in question. An examination of the possessory information title shows that the
description and the area of the land stated therein substantially coincides with the land
applied for and that said possessory information title had been regularly issued having been
acquired by applicants' predecessor, Domingo Baloy, under the provisions of the Spanish
Mortgage Law. Applicants presented their tax declaration on said lands on April 8, 1965.
The Director of Lands opposed the registration alleging that this land had become public
land thru the operation of Act 627 of the Philippine Commission. On November 26, 1902
pursuant to the executive order of the President of the U.S., the area was declared within the
U.S. Naval Reservation. Under Act 627 as amended by Act 1138, a period was fixed within
which persons affected thereby could file their application, (that is within 6 months from July
8, 1905) otherwise "the said lands or interest therein will be conclusively adjudged to be
public lands and all claims on the part of private individuals for such lands or interests
therein not to presented will be forever barred." Petitioner argues that since Domingo Baloy
failed to file his claim within the prescribed period, the land had become irrevocably public
and could not be the subject of a valid registration for private ownership.
Considering the foregoing facts respondents Court of Appeals ruled as follows:
... perhaps, the consequence was that upon failure of Domingo Baloy to have filed his
application within that period the land had become irrevocably public; but perhaps also, for
the reason that warning was from the Clerk of the Court of Land Registration, named J.R.
Wilson and there has not been presented a formal order or decision of the said Court of Land

Registration so declaring the land public because of that failure, it can with plausibility be
said that after all, there was no judicial declaration to that effect, it is true that the U.S. Navy
did occupy it apparently for some time, as a recreation area, as this Court understands from
the communication of the Department of Foreign Affairs to the U.S. Embassy exhibited in the
record, but the very tenor of the communication apparently seeks to justify the title of herein
applicants, in other words, what this Court has taken from the occupation by the U.S. Navy is
that during the interim, the title of applicants was in a state of suspended animation so to
speak but it had not died either; and the fact being that this land was really originally private
from and after the issuance and inscription of the possessory information Exh. F during the
Spanish times, it would be most difficult to sustain position of Director of Lands that it was
land of no private owner; open to public disposition, and over which he has control; and
since immediately after U.S. Navy had abandoned the area, applicant came in and asserted
title once again, only to be troubled by first Crispiniano Blanco who however in due time,
quitclaimed in favor of applicants, and then by private oppositors now, apparently originally
tenants of Blanco, but that entry of private oppositors sought to be given color of ownership
when they sought to and did file tax declaration in 1965, should not prejudice the original
rights of applicants thru their possessory information secured regularly so long ago, the
conclusion must have to be that after all, applicants had succeeded in bringing themselves
within the provisions of Sec. 19 of Act 496, the land should be registered in their favor;
IN VIEW WHEREOF, this Court is constrained to reverse, as it now reverses, judgment
appealed from the application is approved, and once this decision shall have become final, if
ever it would be, let decree issue in favor of applicants with the personal circumstances
outlined in the application, costs against private oppositors.
Petitioner now comes to Us with the following:
ASSIGNMENT OF ERRORS:
1. Respondent court erred in holding that to bar private respondents from asserting any right
under their possessory information title there is need for a court order to that effect.
2. Respondent court erred in not holding that private respondents' rights by virtue of their
possessory information title was lost by prescription.
3. Respondent court erred in concluding that applicants have registerable title.
A cursory reading of Sec. 3, Act 627 reveals that several steps are to be followed before any
affected land can "be conclusively adjudged to be public land." Sec. 3, Act 627 reads as
follows:
SEC. 3. Immediately upon receipt of the notice from the civil Governor in the preceeding
section mentioned it shall be the duty of the judge of the Court of Land Registration to issue
a notice, stating that the lands within the limits aforesaid have been reserved for military
purposes, and announced and declared to be military reservations, and that claims for all
private lands, buildings, and interests therein, within the limits aforesaid, must be presented
for registration under the Land Registration Act within six calendar months from the date of
issuing the notice, and that all lands, buildings, and interests therein within the limits
aforesaid not so presented within the time therein limited will be conclusively adjudged to be
public lands and all claims on the part of private individuals for such lands, buildings, or an
interest therein not so presented will be forever barred. The clerk of the Court of Land
Registration shall immediately upon the issuing of such notice by the judge cause the same
to be published once a week for three successive weeks in two newspapers, one of which
newspapers shall be in the English Language, and one in the Spanish language in the city or
province where the land lies, if there be no such Spanish or English newspapers having a
general circulation in the city or province wherein the land lies, then it shall be a sufficient
compliance with this section if the notice be published as herein provided, in a daily
newspaper in the Spanish language and one in the English language, in the City of Manila,
having a general circulation. The clerk shall also cause a duly attested copy of the notice in
the Spanish language to be posted in conspicuous place at each angle formed by the lines of
the limits of the land reserved. The clerk shall also issue and cause to be personally served
the notice in the Spanish language upon every person living upon or in visible possession of
any part of the military reservation. If the person in possession is the head of the family
living upon the hand, it shall be sufficient to serve the notice upon him, and if he is absent it
shall be sufficient to leave a copy at his usual place of residence. The clerk shall certify the
manner in which the notices have been published, posted, and served, and his certificate
shall be conclusive proof of such publication, posting, and service, but the court shall have
the power to cause such further notice to be given as in its opinion may be necessary.
Clearly under said provisions, private land could be deemed to have become public land only
by virtue of a judicial declaration after due notice and hearing. It runs contrary therefore to
the contention of petitioners that failure to present claims set forth under Sec. 2 of Act 627
made the land ipso facto public without any deed of judicial pronouncement. Petitioner in
making such declaration relied on Sec. 4 of Act 627 alone. But in construing a statute the
entire provisions of the law must be considered in order to establish the correct
interpretation as intended by the law-making body. Act 627 by its terms is not self-executory

and requires implementation by the Court of Land Registration. Act 627, to the extent that it
creates a forfeiture, is a penal statute in derogation of private rights, so it must be strictly
construed so as to safeguard private respondents' rights. Significantly, petitioner does not
even allege the existence of any judgment of the Land Registration court with respect to the
land in question. Without a judgment or order declaring the land to be public, its private
character and the possessory information title over it must be respected. Since no such
order has been rendered by the Land Registration Court it necessarily follows that it never
became public land thru the operation of Act 627. To assume otherwise is to deprive private
respondents of their property without due process of law. In fact it can be presumed that the
notice required by law to be given by publication and by personal service did not include the
name of Domingo Baloy and the subject land, and hence he and his lane were never brought
within the operation of Act 627 as amended. The procedure laid down in Sec. 3 is a
requirement of due process. "Due process requires that the statutes which under it is
attempted to deprive a citizen of private property without or against his consent must, as in
expropriation cases, be strictly complied with, because such statutes are in derogation of
general rights." (Arriete vs. Director of Public Works, 58 Phil. 507, 508, 511).
We also find with favor private respondents' views that court judgments are not to be
presumed. It would be absurd to speak of a judgment by presumption. If it could be
contended that such a judgment may be presumed, it could equally be contended that
applicants' predecessor Domingo Baloy presumably seasonably filed a claim, in accordance
with the legal presumption that a person takes ordinary care of his concerns, and that a
judgment in his favor was rendered.
The finding of respondent court that during the interim of 57 years from November 26, 1902
to December 17, 1959 (when the U.S. Navy possessed the area) the possessory rights of
Baloy or heirs were merely suspended and not lost by prescription, is supported by Exhibit
"U," a communication or letter No. 1108-63, dated June 24, 1963, which contains an official
statement of the position of the Republic of the Philippines with regard to the status of the
land in question. Said letter recognizes the fact that Domingo Baloy and/or his heirs have
been in continuous possession of said land since 1894 as attested by an "Informacion
Possessoria" Title, which was granted by the Spanish Government. Hence, the disputed
property is private land and this possession was interrupted only by the occupation of the
land by the U.S. Navy in 1945 for recreational purposes. The U.S. Navy eventually
abandoned the premises. The heirs of the late Domingo P. Baloy, are now in actual
possession, and this has been so since the abandonment by the U.S. Navy. A new recreation
area is now being used by the U.S. Navy personnel and this place is remote from the land in
question.
Clearly, the occupancy of the U.S. Navy was not in the concept of owner. It partakes of the
character of a commodatum. It cannot therefore militate against the title of Domingo Baloy
and his successors-in-interest. One's ownership of a thing may be lost by prescription by
reason of another's possession if such possession be under claim of ownership, not where
the possession is only intended to be transient, as in the case of the U.S. Navy's occupation
of the land concerned, in which case the owner is not divested of his title, although it cannot
be exercised in the meantime.
WHEREFORE, premises considered, finding no merit in the petition the appealed decision is
hereby AFFIRMED.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 112485
August 9, 2001
EMILIA MANZANO, petitioner,
vs.
MIGUEL PEREZ SR., LEONCIO PEREZ, MACARIO PEREZ, FLORENCIO PEREZ, NESTOR
PEREZ, MIGUEL PEREZ JR. and GLORIA PEREZ, respondents.
PANGANIBAN, J.:
Courts decide cases on the basis of the evidence presented by the parties. In the
assessment of the facts, reason and logic are used. In civil cases, the party that presents a
preponderance of convincing evidence wins.
The Case
Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, assailing
the March 31, 1993 Decision1 of the Court of Appeals (CA) 2 in CA-GR CY No. 32594. The
dispositive part of the Decision reads:
"WHEREFORE, the judgment appealed from is hereby REVERSED and another one is entered
dismissing plaintiff's complaint."
On the other hand, the Judgment3 reversed by the CA ruled in this wise:

10

"WHEREFORE, premises considered, judgment is hereby rendered:

1) Declaring the two 'Kasulatan ng Bilihang Tuluyan' (Exh. 'J' & 'K') over the properties in
question void or simulated;
2) Declaring the two 'Kasulatan ng Bilihang Tuluyan' (Exh. 'J' & 'K') over the properties in
question rescinded;
3) Ordering the defendants Miguel Perez, Sr., Macario Perez, Leoncio Perez, Florencio Perez,
Miguel Perez, Jr., Nestor Perez and Gloria Perez to execute an Extra Judicial Partition with
transfer over the said residential lot and house, now covered and described in Tax
Declaration Nos. 1993 and 1994, respectively in the name of Nieves Manzano (Exh. 'Q' &
'P'), subject matter of this case, in favor of plaintiff Emilia Manzano;
4) Ordering the defendants to pay plaintiff:
a) P25,000.00 as moral damages;
b) P10,000.00 as exemplary damages;
c) P15,000.00 as and for [a]ttorney's fees; and
d) to pay the cost of the suit."4
The Motion for Reconsideration filed by petitioner before the CA was denied in a Resolution
dated October 28, 1993.5
The Facts
The facts of the case are summarized by the Court of Appeals as follows:
"[Petitioner] Emilia Manzano in her Complaint alleged that she is the owner of a residential
house and lot, more particularly described hereunder:
'A parcel of residential lot (Lots 1725 and 1726 of the Cadastral Survey of Siniloan), together
with all the improvements thereon, situated at General Luna Street, Siniloan, Laguna.
Bounded on the North by Callejon; on the East, by [a] town river; on the South by Constancia
Adofina; and on the West by Gen. Luna Street. Containing an area of 130 square meters
more or less, covered by Tax Dec. No. 9583 and assessed at P1,330.00.
'A residential house of strong mixed materials and G.I. iron roofing, with a floor area of 40
square meters, more or less. Also covered by Tax No. 9583.'
"In 1979, Nieves Manzano, sister of the [petitioner] and predecessor-in-interest of the herein
[private respondents], allegedly borrowed the aforementioned property as collateral for a
projected loan. The [petitioner] acceded to the request of her sister upon the latter's
promise that she [would] return the property immediately upon payment of her loan.
"Pursuant to their understanding, the [petitioner] executed two deeds of conveyance for the
sale of the residential lot on 22 January 1979 (Exhibit 'J') and the sale of the house erected
thereon on 2 February 1979 (Exhibit 'K'), both for a consideration of P1.00 plus other
valuables allegedly received by her from Nieves Manzano.
"On 2 April 1979, Nieves Manzano, together with her husband, [respondent] Miguel Perez,
Sr., and her son, [respondent] Macario Perez, obtained a loan from the Rural Bank of Infanta,
Inc. in the sum of P30,000.00. To secure payment of their indebtedness, they executed a
Real Estate Mortgage (Exhibit 'A') over the subject property in favor of the bank.
"Nieves Manzano died on 18 December 1979 leaving her husband and children as heirs.
These heirs, [respondents] herein, allegedly refused to return the subject property to the
[petitioner] even after the payment of their loan with the Rural Bank (Exhibit 'B').
"The [petitioner] alleged that sincere efforts to settle the dispute amicably failed and that
the unwarranted refusal of the [respondents] to return the property caused her sleepless
nights, mental shock and social humiliation. She was, likewise, allegedly constrained to
engage the services of a counsel to protect her proprietary rights.
"The [petitioner] sought the annulment of the deeds of sale and execution of a deed of
transfer or reconveyance of the subject property in her favor, the award of moral damages
of not less than P50,000.00, exemplary damages of P10,000.00, attorney's fees of
P10,000.00 plus P500.00 per court appearance, and costs of suit.
"In seeking the dismissal of the complaint, the [respondents] countered that they are the
owners of the property in question being the legal heirs of Nieves Manzano who purchased
the same from the [petitioner] for value and in good faith, as shown by the deeds of sale
which contain the true agreements between the parties therein; that except for the
[petitioner's] bare allegations, she failed to show any proof that the transaction she entered
into with her sister was a loan and not a sale.
"By way of special and affirmative defense, the [respondents] argued that what the parties
to the [sale] agreed upon was to resell the property to the [petitioner] after the payment of
the loan with the Rural Bank. But since the [respondents] felt that the property is the only
memory left by their predecessor-in-interest, they politely informed the [petitioner] of their
refusal to sell the same. The [respondents] also argued that the [petitioner] is now estopped
from questioning their ownership after seven (7) years from the consummation of the sale.
"As a proximate result of the filing of this alleged baseless and malicious suit, the
[respondents] prayed as counterclaim the award of moral damages in the amount of
P10,000.00 each, exemplary damages in an amount as may be warranted by the evidence
on record, attorney's fees of P10,000.00 plus P500.00 per appearance in court and costs of

11

suit.
"In ruling for the [petitioner], the court a guo considered the following:
'First, the properties in question after [they have] been transferred to Nieves Manzano, the
same were mortgaged in favor of the Rural Bank of Infante, Inc. (Exh. 'A') to secure payment
of the loan extended to Macario Perez.'
'Second, the documents covering said properties which were given to the bank as collateral
of said loan, upon payment and [release] to the [private respondents], were returned to
[petitioner] by Florencio Perez, one of the [private respondents].'
'[These] uncontroverted facts [are] a clear recognition [by private respondents] that
[petitioner] is the owner of the properties in question.'
xxx xxx xxx "'
'Third, [respondents'] pretense of ownership of the properties in question is belied by their
failure to present payment of real estate taxes [for] said properties, and it is on [record] that
[petitioner] has been paying the real estate taxes [on] the same (Exh. 'T', 'V', 'V-1', 'V-2' & 'V3')."
xxx xxx xxx
'Fourth, [respondents] confirmed the fact that [petitioner] went to the house in question and
hacked the stairs. According to [petitioner] she did it for failure of the [respondents] to
return and vacate the premises. [Respondents] did not file any action against her.'
'This is a clear indication also that they (respondents) recognized [petitioner] as owner of
said properties.'
xxx xxx xxx
'Fifth, the Cadastral Notice of said properties were in the name of [petitioner] and the same
was sent to her (Exh. 'F' & 'G').
xxx xxx xxx
'Sixth, upon request of the [petitioner] to return said properties to her, [respondents] did
promise and prepare an Extra Judicial Partition with Sale over said properties in question,
however the same did not materialize. The other heirs of Nieves Manzano did not sign."
xxx xxx xxx
'Seventh, uncontroverted is the fact that the consideration [for] the alleged sale of the
properties in question is P1.00 and other things of value. [Petitioner] denies she has received
any consideration for the transfer of said properties, and the [respondents] have not
presented evidence to belie her testimony."6
Ruling of the Court of Appeals
The Court of Appeals was not convinced by petitioner's claim that there was a supposed oral
agreement of commodatum over the disputed house and lot. Neither was it persuaded by
her allegation that respondents' predecessor-in-interest had given no consideration for the
sale of the property in the latter's favor. It explained as follows:
"To begin with, if the plaintiff-appellee remained as the rightful owner of the subject
property, she would not have agreed to reacquire one-half thereof for a consideration of
P10,000.00 (Exhibit 'U-1'). This is especially true if we are to accept her assertion that
Nieves Manzano did not purchase the property for value. More importantly, if the agreement
was to merely use plaintiff's property as collateral in a mortgage loan, it was not explained
why physical possession of the house and lot had to be with the supposed vendee and her
family who even built a pigpen on the lot (p. 6, TSN, June 11, 1990). A mere execution of the
document transferring title in the latter's name would suffice for the purpose.
"The alleged failure of the defendants-appellants to present evidence of payment of real
estate taxes cannot prejudice their cause. Realty tax payment of property is not conclusive
evidence of ownership (Director of Lands vs. Intermediate Appellate Court, 195 SCRA 38).
Tax receipts only become strong evidence of ownership when accompanied by proof of
actual possession of the property (Tabuena vs. Court of Appeals, 196 SCRA 650).
"In this case, plaintiff-appell[ee] was not in possession of the subject property. The
defendant-appellants were the ones in actual occupation of the house and lot which as
aforestated was unnecessary if the real agreement was merely to lend the property to be
used as collateral. Moreover, the plaintiff-appellee began paying her taxes only in 1986 after
the instant complaint ha[d] been instituted (Exhibits 'V', 'V-1', 'V-2', 'V-3' and 'T'), and are,
therefore, self-serving.
"Significantly, while plaintiff-appellee was still the owner of the subject property in 1979
(Exhibit 'I'), the Certificate of Tax Declaration issued by the Office of the Municipal Treasurer
on 8 August 1990 upon the request of the plaintiff-appellee herself (Exhibit 'W') named
Nieves Manzano as the owner and possessor of the property in question. Moreover, Tax
Declaration No. 9589 in the name of Nieves Manzano (Exhibits 'D' and 'D-1 ') indicates that
the transfer of the subject property was based on the Absolute Sale executed before Notary
Public Alfonso Sanvictores, duly recorded in his notarial book as Document No. 3157, Page
157, Book No. II. Tax Declaration No[s]. 9633 (Exhibit 'H'), 1994 (Exhibit 'P'), 1993 (Exhibit
'Q') are all in the name of Nieves Manzano.
"There is always the presumption that a written contract [is] for a valuable consideration

12

(Section 5 (r), Rule 131 of the Rules of Court; Gamaitan vs. Court of Appeals, 200 SCRA 37).
The execution of a deed purporting to convey ownership of a realty is in itself prima facie
evidence of the existence of a valuable consideration and xxx the party alleging lack of
consideration has the burden of proving such allegation (Caballero, et al. vs. Caballero, et
al., C.A. 45 O.G. 2536).
"The consideration [for] the questioned [sale] is not the One (P1.00) Peso alone but also the
other valuable considerations. Assuming that such consideration is suspiciously insufficient,
this circumstance alone, is not sufficient to invalidate the sale. The inadequacy of the
monetary consideration does not render a conveyance null and void, for the vendor's
liberality may be a sufficient cause for a valid contract (Ong vs. Ong, 139 SCRA 133)." 7
Hence, this Petition.8
Issues
Petitioner submits the following grounds in support of her cause: 9
"1. The Court of Appeals erred in failing to consider that:
A) The introduction of petitioner's evidence is proper under the parol evidence rule.
B) The rules on admission by silence apply in the case at bar.
C) Petitioner is entitled to the reliefs prayed for.
"2. The Court of Appeals erred in reversing the decision of the trial court whose factual
findings are entitled to great respect since it was able to observe and evaluate the
demeanor of the witnesses."10
In sum, the main issue is whether the agreement between the parties was a commodatum
or an absolute sale.
The Court's Ruling
The Petition has no merit.
Main Issue: Sale or Commodatum
Obviously, the issue in this case is enveloped by a conflict in factual perception, which is
ordinarily not reviewable in a petition under Rule 45. But the Court is constrained to resolve
it, because the factual findings of the Court of Appeals are contrary to those of the trial
court.11
Preliminarily, petitioner contends that the CA erred in rejecting the introduction of her parol
evidence. A reading of the assailed Decision shows, however, that an elaborate discussion of
the parol evidence rule and its exceptions was merely given as a preface by the appellate
court. Nowhere therein did it consider petitioner's evidence as improper under the said rule.
On the contrary, it considered and weighed each and every piece thereof. Nonetheless, it
was not persuaded, as explained in the multitude of reasons explicitly stated in its Decision.
This Court finds no cogent reason to disturb the findings and conclusions of the Court of
Appeals. Upon close examination of the records, we find that petitioner has failed to
discharge her burden of proving her case by a preponderance of evidence. This concept
refers to evidence that has greater weight or is more convincing than that which is offered in
opposition; at bottom, it means probability of truth. 12
In the case at bar, petitioner has presented no convincing proof of her continued ownership
of the subject property. In addition to her own oral testimony, she submitted proof of
payment of real property taxes. But that payment, which was made only after her Complaint
had already been lodged before the trial court, cannot be considered in her favor for being
self-serving, as aptly explained by the CA. Neither can we give weight to her allegation that
respondent's possession of the subject property was merely by virtue of her tolerance. Bare
allegations, unsubstantiated by evidence, are not equivalent to proof under our Rules. 13
On the other hand, respondents presented two Deeds of Sale, which petitioner executed in
favor of the former's predecessor-in-interest. Both Deeds - for the residential lot and for the
house erected thereon - were each in consideration of P1.00 "plus other valuables." Having
been notarized, they are presumed to have been duly executed. Also, issued in favor of
respondents' predecessor-in-interest the day after the sale was Tax Declaration No. 9589,
which covered the property.
The facts alleged by petitioner in her favor are the following: (1) she inherited the subject
house and lot from her parents, with her siblings waiving in her favor their claim over the
same; (2) the property was mortgaged to secure a loan of P30,000 taken in the names of
Nieves Manzano Perez and Respondent Miguel Perez; (3) upon full payment of the loan, the
documents pertaining to the house and lot were returned by Respondent Florencio Perez to
petitioner; (4) three of the respondents were signatories to a document transferring one half
of the property to Emilia Manzano in consideration of the sum of ten thousand pesos,
although the transfer did not materialize because of the refusal of the other respondents to
sign the document; and (5) petitioner hacked the stairs of the subject house, yet no case
was filed against her. 1wphi1.nt
These matters are not, however, convincing indicators of petitioner's ownership of the house
and lot. On the contrary, they even support the claim of respondents. Indeed, how could one
of them have obtained a mortgage over the property, without having dominion over it? Why
would they execute a reconveyance of one half of it in favor of petitioner? Why would the

13

latter have to pay P10,000 for that portion if, as she claims, she owns the whole?
Pitted against respondents' evidence, that of petitioner awfully pales. Oral testimony cannot,
as a rule, prevail over a written agreement of the parties. 14 In order to contradict the facts
contained in a notarial document, such as the two "Kasulatan ng Bilihang Tuluyan" in this
case, as well as the presumption of regularity in the execution thereof, there must be clear
and convincing evidence that is more than merely preponderant. 15 Here, petitioner has failed
to come up with even a preponderance of evidence to prove her claim.
Courts are not blessed with the ability to read what goes on in the minds of people. That is
why parties to a case are given all the opportunity to present evidence to help the courts
decide on who are telling the truth and who are lying, who are entitled to their claim and
who are not. The Supreme Court cannot depart from these guidelines and decide on the
basis of compassion alone because, aside from being contrary to the rule of law and our
judicial system, this course of action would ultimately lead to anarchy.
We reiterate, the evidence offered by petitioner to prove her claim is sadly lacking.
Jurisprudence on the subject matter, when applied thereto, points to the existence of a sale,
not a commodatum over the subject house and lot.
WHEREFORE, the Petition is hereby DENIED and the assailed Decision AFFIRMED. Costs
against petitioner.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 80294-95 September 21, 1988
CATHOLIC VICAR APOSTOLIC OF THE MOUNTAIN PROVINCE, petitioner,
vs.
COURT OF APPEALS, HEIRS OF EGMIDIO OCTAVIANO AND JUAN
respondents.
Valdez, Ereso, Polido & Associates for petitioner.
Claustro, Claustro, Claustro Law Office collaborating counsel for petitioner.
Jaime G. de Leon for the Heirs of Egmidio Octaviano.
Cotabato Law Office for the Heirs of Juan Valdez.

VALDEZ,

GANCAYCO, J.:
The principal issue in this case is whether or not a decision of the Court of Appeals
promulgated a long time ago can properly be considered res judicata by respondent Court of
Appeals in the present two cases between petitioner and two private respondents.
Petitioner questions as allegedly erroneous the Decision dated August 31, 1987 of the Ninth
Division of Respondent Court of Appeals 1 in CA-G.R. No. 05148 [Civil Case No. 3607 (419)]
and CA-G.R. No. 05149 [Civil Case No. 3655 (429)], both for Recovery of Possession, which
affirmed the Decision of the Honorable Nicodemo T. Ferrer, Judge of the Regional Trial Court
of Baguio and Benguet in Civil Case No. 3607 (419) and Civil Case No. 3655 (429), with the
dispositive portion as follows:
WHEREFORE, Judgment is hereby rendered ordering the defendant, Catholic Vicar Apostolic
of the Mountain Province to return and surrender Lot 2 of Plan Psu-194357 to the plaintiffs.
Heirs of Juan Valdez, and Lot 3 of the same Plan to the other set of plaintiffs, the Heirs of
Egmidio Octaviano (Leonardo Valdez, et al.). For lack or insufficiency of evidence, the
plaintiffs' claim or damages is hereby denied. Said defendant is ordered to pay costs. (p. 36,
Rollo)
Respondent Court of Appeals, in affirming the trial court's decision, sustained the trial court's
conclusions that the Decision of the Court of Appeals, dated May 4,1977 in CA-G.R. No.
38830-R, in the two cases affirmed by the Supreme Court, touched on the ownership of lots
2 and 3 in question; that the two lots were possessed by the predecessors-in-interest of
private respondents under claim of ownership in good faith from 1906 to 1951; that
petitioner had been in possession of the same lots as bailee in commodatum up to 1951,
when petitioner repudiated the trust and when it applied for registration in 1962; that
petitioner had just been in possession as owner for eleven years, hence there is no
possibility of acquisitive prescription which requires 10 years possession with just title and
30 years of possession without; that the principle of res judicata on these findings by the
Court of Appeals will bar a reopening of these questions of facts; and that those facts may
no longer be altered.
Petitioner's motion for reconsideation of the respondent appellate court's Decision in the two
aforementioned cases (CA G.R. No. CV-05418 and 05419) was denied.
The facts and background of these cases as narrated by the trail court are as follows
... The documents and records presented reveal that the whole controversy started when the
defendant Catholic Vicar Apostolic of the Mountain Province (VICAR for brevity) filed with the

14

Court of First Instance of Baguio Benguet on September 5, 1962 an application for

registration of title over Lots 1, 2, 3, and 4 in Psu-194357, situated at Poblacion Central, La
Trinidad, Benguet, docketed as LRC N-91, said Lots being the sites of the Catholic Church
building, convents, high school building, school gymnasium, school dormitories, social hall,
stonewalls, etc. On March 22, 1963 the Heirs of Juan Valdez and the Heirs of Egmidio
Octaviano filed their Answer/Opposition on Lots Nos. 2 and 3, respectively, asserting
ownership and title thereto. After trial on the merits, the land registration court promulgated
its Decision, dated November 17, 1965, confirming the registrable title of VICAR to Lots 1, 2,
3, and 4.
The Heirs of Juan Valdez (plaintiffs in the herein Civil Case No. 3655) and the Heirs of
Egmidio Octaviano (plaintiffs in the herein Civil Case No. 3607) appealed the decision of the
land registration court to the then Court of Appeals, docketed as CA-G.R. No. 38830-R. The
Court of Appeals rendered its decision, dated May 9, 1977, reversing the decision of the land
registration court and dismissing the VICAR's application as to Lots 2 and 3, the lots claimed
by the two sets of oppositors in the land registration case (and two sets of plaintiffs in the
two cases now at bar), the first lot being presently occupied by the convent and the second
by the women's dormitory and the sister's convent.
On May 9, 1977, the Heirs of Octaviano filed a motion for reconsideration praying the Court
of Appeals to order the registration of Lot 3 in the names of the Heirs of Egmidio Octaviano,
and on May 17, 1977, the Heirs of Juan Valdez and Pacita Valdez filed their motion for
reconsideration praying that both Lots 2 and 3 be ordered registered in the names of the
Heirs of Juan Valdez and Pacita Valdez. On August 12,1977, the Court of Appeals denied the
motion for reconsideration filed by the Heirs of Juan Valdez on the ground that there was "no
sufficient merit to justify reconsideration one way or the other ...," and likewise denied that
of the Heirs of Egmidio Octaviano.
Thereupon, the VICAR filed with the Supreme Court a petition for review on certiorari of the
decision of the Court of Appeals dismissing his (its) application for registration of Lots 2 and
3, docketed as G.R. No. L-46832, entitled 'Catholic Vicar Apostolic of the Mountain Province
vs. Court of Appeals and Heirs of Egmidio Octaviano.'
From the denial by the Court of Appeals of their motion for reconsideration the Heirs of Juan
Valdez and Pacita Valdez, on September 8, 1977, filed with the Supreme Court a petition for
review, docketed as G.R. No. L-46872, entitled, Heirs of Juan Valdez and Pacita Valdez vs.
Court of Appeals, Vicar, Heirs of Egmidio Octaviano and Annable O. Valdez.
On January 13, 1978, the Supreme Court denied in a minute resolution both petitions (of
VICAR on the one hand and the Heirs of Juan Valdez and Pacita Valdez on the other) for lack
of merit. Upon the finality of both Supreme Court resolutions in G.R. No. L-46832 and G.R.
No. L- 46872, the Heirs of Octaviano filed with the then Court of First Instance of Baguio,
Branch II, a Motion For Execution of Judgment praying that the Heirs of Octaviano be placed
in possession of Lot 3. The Court, presided over by Hon. Salvador J. Valdez, on December 7,
1978, denied the motion on the ground that the Court of Appeals decision in CA-G.R. No.
38870 did not grant the Heirs of Octaviano any affirmative relief.
On February 7, 1979, the Heirs of Octaviano filed with the Court of Appeals a petitioner for
certiorari and mandamus, docketed as CA-G.R. No. 08890-R, entitled Heirs of Egmidio
Octaviano vs. Hon. Salvador J. Valdez, Jr. and Vicar. In its decision dated May 16, 1979, the
Court of Appeals dismissed the petition.
It was at that stage that the instant cases were filed. The Heirs of Egmidio Octaviano filed
Civil Case No. 3607 (419) on July 24, 1979, for recovery of possession of Lot 3; and the Heirs
of Juan Valdez filed Civil Case No. 3655 (429) on September 24, 1979, likewise for recovery
of possession of Lot 2 (Decision, pp. 199-201, Orig. Rec.).
In Civil Case No. 3607 (419) trial was held. The plaintiffs Heirs of Egmidio Octaviano
presented one (1) witness, Fructuoso Valdez, who testified on the alleged ownership of the
land in question (Lot 3) by their predecessor-in-interest, Egmidio Octaviano (Exh. C ); his
written demand (Exh. BB-4 ) to defendant Vicar for the return of the land to them; and the
reasonable rentals for the use of the land at P10,000.00 per month. On the other hand,
defendant Vicar presented the Register of Deeds for the Province of Benguet, Atty. Nicanor
Sison, who testified that the land in question is not covered by any title in the name of
Egmidio Octaviano or any of the plaintiffs (Exh. 8). The defendant dispensed with the
testimony of Mons.William Brasseur when the plaintiffs admitted that the witness if called to
the witness stand, would testify that defendant Vicar has been in possession of Lot 3, for
seventy-five (75) years continuously and peacefully and has constructed permanent
structures thereon.
In Civil Case No. 3655, the parties admitting that the material facts are not in dispute,
submitted the case on the sole issue of whether or not the decisions of the Court of Appeals
and the Supreme Court touching on the ownership of Lot 2, which in effect declared the
plaintiffs the owners of the land constitute res judicata.
In these two cases , the plaintiffs arque that the defendant Vicar is barred from setting up
the defense of ownership and/or long and continuous possession of the two lots in question

15

since this is barred by prior judgment of the Court of Appeals in CA-G.R. No. 038830-R under
the principle of res judicata. Plaintiffs contend that the question of possession and ownership
have already been determined by the Court of Appeals (Exh. C, Decision, CA-G.R. No.
038830-R) and affirmed by the Supreme Court (Exh. 1, Minute Resolution of the Supreme
Court). On his part, defendant Vicar maintains that the principle of res judicata would not
prevent them from litigating the issues of long possession and ownership because the
dispositive portion of the prior judgment in CA-G.R. No. 038830-R merely dismissed their
application for registration and titling of lots 2 and 3. Defendant Vicar contends that only the
dispositive portion of the decision, and not its body, is the controlling pronouncement of the
Court of Appeals. 2
The alleged errors committed by respondent Court of Appeals according to petitioner are as
follows:
1. ERROR IN APPLYING LAW OF THE CASE AND RES JUDICATA;
2. ERROR IN FINDING THAT THE TRIAL COURT RULED THAT LOTS 2 AND 3 WERE ACQUIRED
BY PURCHASE BUT WITHOUT DOCUMENTARY EVIDENCE PRESENTED;
3. ERROR IN FINDING THAT PETITIONERS' CLAIM IT PURCHASED LOTS 2 AND 3 FROM VALDEZ
AND OCTAVIANO WAS AN IMPLIED ADMISSION THAT THE FORMER OWNERS WERE VALDEZ
AND OCTAVIANO;
4. ERROR IN FINDING THAT IT WAS PREDECESSORS OF PRIVATE RESPONDENTS WHO WERE
IN POSSESSION OF LOTS 2 AND 3 AT LEAST FROM 1906, AND NOT PETITIONER;
5. ERROR IN FINDING THAT VALDEZ AND OCTAVIANO HAD FREE PATENT APPLICATIONS AND
THE PREDECESSORS OF PRIVATE RESPONDENTS ALREADY HAD FREE PATENT APPLICATIONS
SINCE 1906;
6. ERROR IN FINDING THAT PETITIONER DECLARED LOTS 2 AND 3 ONLY IN 1951 AND JUST
TITLE IS A PRIME NECESSITY UNDER ARTICLE 1134 IN RELATION TO ART. 1129 OF THE CIVIL
CODE FOR ORDINARY ACQUISITIVE PRESCRIPTION OF 10 YEARS;
7. ERROR IN FINDING THAT THE DECISION OF THE COURT OF APPEALS IN CA G.R. NO.
038830 WAS AFFIRMED BY THE SUPREME COURT;
8. ERROR IN FINDING THAT THE DECISION IN CA G.R. NO. 038830 TOUCHED ON OWNERSHIP
OF LOTS 2 AND 3 AND THAT PRIVATE RESPONDENTS AND THEIR PREDECESSORS WERE IN
POSSESSION OF LOTS 2 AND 3 UNDER A CLAIM OF OWNERSHIP IN GOOD FAITH FROM 1906
TO 1951;
9. ERROR IN FINDING THAT PETITIONER HAD BEEN IN POSSESSION OF LOTS 2 AND 3 MERELY
AS BAILEE BOR ROWER) IN COMMODATUM, A GRATUITOUS LOAN FOR USE;
10. ERROR IN FINDING THAT PETITIONER IS A POSSESSOR AND BUILDER IN GOOD FAITH
WITHOUT RIGHTS OF RETENTION AND REIMBURSEMENT AND IS BARRED BY THE FINALITY
AND CONCLUSIVENESS OF THE DECISION IN CA G.R. NO. 038830. 3
The petition is bereft of merit.
Petitioner questions the ruling of respondent Court of Appeals in CA-G.R. Nos. 05148 and
05149, when it clearly held that it was in agreement with the findings of the trial court that
the Decision of the Court of Appeals dated May 4,1977 in CA-G.R. No. 38830-R, on the
question of ownership of Lots 2 and 3, declared that the said Court of Appeals Decision CAG.R. No. 38830-R) did not positively declare private respondents as owners of the land,
neither was it declared that they were not owners of the land, but it held that the
predecessors of private respondents were possessors of Lots 2 and 3, with claim of
ownership in good faith from 1906 to 1951. Petitioner was in possession as borrower in
commodatum up to 1951, when it repudiated the trust by declaring the properties in its
name for taxation purposes. When petitioner applied for registration of Lots 2 and 3 in 1962,
it had been in possession in concept of owner only for eleven years. Ordinary acquisitive
prescription requires possession for ten years, but always with just title. Extraordinary
acquisitive prescription requires 30 years. 4
On the above findings of facts supported by evidence and evaluated by the Court of Appeals
in CA-G.R. No. 38830-R, affirmed by this Court, We see no error in respondent appellate
court's ruling that said findings are res judicata between the parties. They can no longer be
altered by presentation of evidence because those issues were resolved with finality a long
time ago. To ignore the principle of res judicata would be to open the door to endless
litigations by continuous determination of issues without end.
An examination of the Court of Appeals Decision dated May 4, 1977, First Division 5 in CAG.R. No. 38830-R, shows that it reversed the trial court's Decision 6 finding petitioner to be
entitled to register the lands in question under its ownership, on its evaluation of evidence
and conclusion of facts.
The Court of Appeals found that petitioner did not meet the requirement of 30 years
possession for acquisitive prescription over Lots 2 and 3. Neither did it satisfy the
requirement of 10 years possession for ordinary acquisitive prescription because of the
absence of just title. The appellate court did not believe the findings of the trial court that
Lot 2 was acquired from Juan Valdez by purchase and Lot 3 was acquired also by purchase
from Egmidio Octaviano by petitioner Vicar because there was absolutely no documentary

16

evidence to support the same and the alleged purchases were never mentioned in the
application for registration.
By the very admission of petitioner Vicar, Lots 2 and 3 were owned by Valdez and Octaviano.
Both Valdez and Octaviano had Free Patent Application for those lots since 1906. The
predecessors of private respondents, not petitioner Vicar, were in possession of the
questioned lots since 1906.
There is evidence that petitioner Vicar occupied Lots 1 and 4, which are not in question, but
not Lots 2 and 3, because the buildings standing thereon were only constructed after
liberation in 1945. Petitioner Vicar only declared Lots 2 and 3 for taxation purposes in 1951.
The improvements oil Lots 1, 2, 3, 4 were paid for by the Bishop but said Bishop was
appointed only in 1947, the church was constructed only in 1951 and the new convent only
2 years before the trial in 1963.
When petitioner Vicar was notified of the oppositor's claims, the parish priest offered to buy
the lot from Fructuoso Valdez. Lots 2 and 3 were surveyed by request of petitioner Vicar only
in 1962.
Private respondents were able to prove that their predecessors' house was borrowed by
petitioner Vicar after the church and the convent were destroyed. They never asked for the
return of the house, but when they allowed its free use, they became bailors in
commodatum and the petitioner the bailee. The bailees' failure to return the subject matter
of commodatum to the bailor did not mean adverse possession on the part of the borrower.
The bailee held in trust the property subject matter of commodatum. The adverse claim of
petitioner came only in 1951 when it declared the lots for taxation purposes. The action of
petitioner Vicar by such adverse claim could not ripen into title by way of ordinary
acquisitive prescription because of the absence of just title.
The Court of Appeals found that the predecessors-in-interest and private respondents were
possessors under claim of ownership in good faith from 1906; that petitioner Vicar was only
a bailee in commodatum; and that the adverse claim and repudiation of trust came only in
1951.
We find no reason to disregard or reverse the ruling of the Court of Appeals in CA-G.R. No.
38830-R. Its findings of fact have become incontestible. This Court declined to review said
decision, thereby in effect, affirming it. It has become final and executory a long time ago.
Respondent appellate court did not commit any reversible error, much less grave abuse of
discretion, when it held that the Decision of the Court of Appeals in CA-G.R. No. 38830-R is
governing, under the principle of res judicata, hence the rule, in the present cases CA-G.R.
No. 05148 and CA-G.R. No. 05149. The facts as supported by evidence established in that
decision may no longer be altered.
WHEREFORE AND BY REASON OF THE FOREGOING, this petition is DENIED for lack of merit,
the Decision dated Aug. 31, 1987 in CA-G.R. Nos. 05148 and 05149, by respondent Court of
Appeals is AFFIRMED, with costs against petitioner.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 146364
June 3, 2004
COLITO T. PAJUYO, petitioner,
vs.
COURT OF APPEALS and EDDIE GUEVARRA, respondents.
DECISION
CARPIO, J.:
The Case
Before us is a petition for review1 of the 21 June 2000 Decision2 and 14 December 2000
Resolution of the Court of Appeals in CA-G.R. SP No. 43129. The Court of Appeals set aside
the 11 November 1996 decision3 of the Regional Trial Court of Quezon City, Branch 81, 4
affirming the 15 December 1995 decision5 of the Metropolitan Trial Court of Quezon City,
Branch 31.6
The Antecedents
In June 1979, petitioner Colito T. Pajuyo ("Pajuyo") paid P400 to a certain Pedro Perez for the
rights over a 250-square meter lot in Barrio Payatas, Quezon City. Pajuyo then constructed a
house made of light materials on the lot. Pajuyo and his family lived in the house from 1979
to 7 December 1985.
On 8 December 1985, Pajuyo and private respondent Eddie Guevarra ("Guevarra") executed
a Kasunduan or agreement. Pajuyo, as owner of the house, allowed Guevarra to live in the
house for free provided Guevarra would maintain the cleanliness and orderliness of the
house. Guevarra promised that he would voluntarily vacate the premises on Pajuyos
demand.

17

In September 1994, Pajuyo informed Guevarra of his need of the house and demanded that
Guevarra vacate the house. Guevarra refused.
Pajuyo filed an ejectment case against Guevarra with the Metropolitan Trial Court of Quezon
City, Branch 31 ("MTC").
In his Answer, Guevarra claimed that Pajuyo had no valid title or right of possession over the
lot where the house stands because the lot is within the 150 hectares set aside by
Proclamation No. 137 for socialized housing. Guevarra pointed out that from December 1985
to September 1994, Pajuyo did not show up or communicate with him. Guevarra insisted
that neither he nor Pajuyo has valid title to the lot.
On 15 December 1995, the MTC rendered its decision in favor of Pajuyo. The dispositive
portion of the MTC decision reads:
WHEREFORE, premises considered, judgment is hereby rendered for the plaintiff and against
defendant, ordering the latter to:
A) vacate the house and lot occupied by the defendant or any other person or persons
claiming any right under him;
B) pay unto plaintiff the sum of THREE HUNDRED PESOS (P300.00) monthly as reasonable
compensation for the use of the premises starting from the last demand;
C) pay plaintiff the sum of P3,000.00 as and by way of attorneys fees; and
D) pay the cost of suit.
SO ORDERED.7
Aggrieved, Guevarra appealed to the Regional Trial Court of Quezon City, Branch 81 ("RTC").
On 11 November 1996, the RTC affirmed the MTC decision. The dispositive portion of the RTC
decision reads:
WHEREFORE, premises considered, the Court finds no reversible error in the decision
appealed from, being in accord with the law and evidence presented, and the same is
hereby affirmed en toto.
SO ORDERED.8
Guevarra received the RTC decision on 29 November 1996. Guevarra had only until 14
December 1996 to file his appeal with the Court of Appeals. Instead of filing his appeal with
the Court of Appeals, Guevarra filed with the Supreme Court a "Motion for Extension of Time
to File Appeal by Certiorari Based on Rule 42" ("motion for extension"). Guevarra theorized
that his appeal raised pure questions of law. The Receiving Clerk of the Supreme Court
received the motion for extension on 13 December 1996 or one day before the right to
appeal expired.
On 3 January 1997, Guevarra filed his petition for review with the Supreme Court.
On 8 January 1997, the First Division of the Supreme Court issued a Resolution 9 referring the
motion for extension to the Court of Appeals which has concurrent jurisdiction over the case.
The case presented no special and important matter for the Supreme Court to take
cognizance of at the first instance.
On 28 January 1997, the Thirteenth Division of the Court of Appeals issued a Resolution 10
granting the motion for extension conditioned on the timeliness of the filing of the motion.
On 27 February 1997, the Court of Appeals ordered Pajuyo to comment on Guevaras
petition for review. On 11 April 1997, Pajuyo filed his Comment.
On 21 June 2000, the Court of Appeals issued its decision reversing the RTC decision. The
dispositive portion of the decision reads:
WHEREFORE, premises considered, the assailed Decision of the court a quo in Civil Case No.
Q-96-26943 is REVERSED and SET ASIDE; and it is hereby declared that the ejectment
case filed against defendant-appellant is without factual and legal basis.
SO ORDERED.11
Pajuyo filed a motion for reconsideration of the decision. Pajuyo pointed out that the Court of
Appeals should have dismissed outright Guevarras petition for review because it was filed
out of time. Moreover, it was Guevarras counsel and not Guevarra who signed the
certification against forum-shopping.
On 14 December 2000, the Court of Appeals issued a resolution denying Pajuyos motion for
reconsideration. The dispositive portion of the resolution reads:
WHEREFORE, for lack of merit, the motion for reconsideration is hereby DENIED. No costs.
SO ORDERED.12
The Ruling of the MTC
The MTC ruled that the subject of the agreement between Pajuyo and Guevarra is the house
and not the lot. Pajuyo is the owner of the house, and he allowed Guevarra to use the house
only by tolerance. Thus, Guevarras refusal to vacate the house on Pajuyos demand made
Guevarras continued possession of the house illegal.
The Ruling of the RTC
The RTC upheld the Kasunduan, which established the landlord and tenant relationship
between Pajuyo and Guevarra. The terms of the Kasunduan bound Guevarra to return
possession of the house on demand.
The RTC rejected Guevarras claim of a better right under Proclamation No. 137, the Revised

18

National Government Center Housing Project Code of Policies and other pertinent laws. In an
ejectment suit, the RTC has no power to decide Guevarras rights under these laws. The RTC
declared that in an ejectment case, the only issue for resolution is material or physical
possession, not ownership.
The Ruling of the Court of Appeals
The Court of Appeals declared that Pajuyo and Guevarra are squatters. Pajuyo and Guevarra
illegally occupied the contested lot which the government owned.
Perez, the person from whom Pajuyo acquired his rights, was also a squatter. Perez had no
right or title over the lot because it is public land. The assignment of rights between Perez
and Pajuyo, and the Kasunduan between Pajuyo and Guevarra, did not have any legal effect.
Pajuyo and Guevarra are in pari delicto or in equal fault. The court will leave them where
they are.
The Court of Appeals reversed the MTC and RTC rulings, which held that the Kasunduan
between Pajuyo and Guevarra created a legal tie akin to that of a landlord and tenant
relationship. The Court of Appeals ruled that the Kasunduan is not a lease contract but a
commodatum because the agreement is not for a price certain.
Since Pajuyo admitted that he resurfaced only in 1994 to claim the property, the appellate
court held that Guevarra has a better right over the property under Proclamation No. 137.
President Corazon C. Aquino ("President Aquino") issued Proclamation No. 137 on 7
September 1987. At that time, Guevarra was in physical possession of the property. Under
Article VI of the Code of Policies Beneficiary Selection and Disposition of Homelots and
Structures in the National Housing Project ("the Code"), the actual occupant or caretaker of
the lot shall have first priority as beneficiary of the project. The Court of Appeals concluded
that Guevarra is first in the hierarchy of priority.
In denying Pajuyos motion for reconsideration, the appellate court debunked Pajuyos claim
that Guevarra filed his motion for extension beyond the period to appeal.
The Court of Appeals pointed out that Guevarras motion for extension filed before the
Supreme Court was stamped "13 December 1996 at 4:09 PM" by the Supreme Courts
Receiving Clerk. The Court of Appeals concluded that the motion for extension bore a date,
contrary to Pajuyos claim that the motion for extension was undated. Guevarra filed the
motion for extension on time on 13 December 1996 since he filed the motion one day before
the expiration of the reglementary period on 14 December 1996. Thus, the motion for
extension properly complied with the condition imposed by the Court of Appeals in its 28
January 1997 Resolution. The Court of Appeals explained that the thirty-day extension to file
the petition for review was deemed granted because of such compliance.
The Court of Appeals rejected Pajuyos argument that the appellate court should have
dismissed the petition for review because it was Guevarras counsel and not Guevarra who
signed the certification against forum-shopping. The Court of Appeals pointed out that
Pajuyo did not raise this issue in his Comment. The Court of Appeals held that Pajuyo could
not now seek the dismissal of the case after he had extensively argued on the merits of the
case. This technicality, the appellate court opined, was clearly an afterthought.
The Issues
Pajuyo raises the following issues for resolution:
WHETHER THE COURT OF APPEALS ERRED OR ABUSED ITS AUTHORITY AND DISCRETION
TANTAMOUNT TO LACK OF JURISDICTION:
1) in GRANTING, instead of denying, Private Respondents Motion for an Extension of thirty
days to file petition for review at the time when there was no more period to extend as the
decision of the Regional Trial Court had already become final and executory.
2) in giving due course, instead of dismissing, private respondents Petition for Review even
though the certification against forum-shopping was signed only by counsel instead of by
petitioner himself.
3) in ruling that the Kasunduan voluntarily entered into by the parties was in fact a
commodatum, instead of a Contract of Lease as found by the Metropolitan Trial Court and in
holding that "the ejectment case filed against defendant-appellant is without legal and
factual basis".
4) in reversing and setting aside the Decision of the Regional Trial Court in Civil Case No. Q96-26943 and in holding that the parties are in pari delicto being both squatters, therefore,
illegal occupants of the contested parcel of land.
5) in deciding the unlawful detainer case based on the so-called Code of Policies of the
National Government Center Housing Project instead of deciding the same under the
Kasunduan voluntarily executed by the parties, the terms and conditions of which are the
laws between themselves.13
The Ruling of the Court
The procedural issues Pajuyo is raising are baseless. However, we find merit in the
substantive issues Pajuyo is submitting for resolution.
Procedural Issues
Pajuyo insists that the Court of Appeals should have dismissed outright Guevarras petition

19

for review because the RTC decision had already become final and executory when the
appellate court acted on Guevarras motion for extension to file the petition. Pajuyo points
out that Guevarra had only one day before the expiry of his period to appeal the RTC
decision. Instead of filing the petition for review with the Court of Appeals, Guevarra filed
with this Court an undated motion for extension of 30 days to file a petition for review. This
Court merely referred the motion to the Court of Appeals. Pajuyo believes that the filing of
the motion for extension with this Court did not toll the running of the period to perfect the
appeal. Hence, when the Court of Appeals received the motion, the period to appeal had
already expired.
We are not persuaded.
Decisions of the regional trial courts in the exercise of their appellate jurisdiction are
appealable to the Court of Appeals by petition for review in cases involving questions of fact
or mixed questions of fact and law.14 Decisions of the regional trial courts involving pure
questions of law are appealable directly to this Court by petition for review. 15 These modes of
appeal are now embodied in Section 2, Rule 41 of the 1997 Rules of Civil Procedure.
Guevarra believed that his appeal of the RTC decision involved only questions of law.
Guevarra thus filed his motion for extension to file petition for review before this Court on 14
December 1996. On 3 January 1997, Guevarra then filed his petition for review with this
Court. A perusal of Guevarras petition for review gives the impression that the issues he
raised were pure questions of law. There is a question of law when the doubt or difference is
on what the law is on a certain state of facts. 16 There is a question of fact when the doubt or
difference is on the truth or falsity of the facts alleged.17
In his petition for review before this Court, Guevarra no longer disputed the facts. Guevarras
petition for review raised these questions: (1) Do ejectment cases pertain only to possession
of a structure, and not the lot on which the structure stands? (2) Does a suit by a squatter
against a fellow squatter constitute a valid case for ejectment? (3) Should a Presidential
Proclamation governing the lot on which a squatters structure stands be considered in an
ejectment suit filed by the owner of the structure?
These questions call for the evaluation of the rights of the parties under the law on
ejectment and the Presidential Proclamation. At first glance, the questions Guevarra raised
appeared purely legal. However, some factual questions still have to be resolved because
they have a bearing on the legal questions raised in the petition for review. These factual
matters refer to the metes and bounds of the disputed property and the application of
Guevarra as beneficiary of Proclamation No. 137.
The Court of Appeals has the power to grant an extension of time to file a petition for review.
In Lacsamana v. Second Special Cases Division of the Intermediate Appellate
Court,18 we declared that the Court of Appeals could grant extension of time in appeals by
petition for review. In Liboro v. Court of Appeals,19 we clarified that the prohibition against
granting an extension of time applies only in a case where ordinary appeal is perfected by a
mere notice of appeal. The prohibition does not apply in a petition for review where the
pleading needs verification. A petition for review, unlike an ordinary appeal, requires
preparation and research to present a persuasive position. 20 The drafting of the petition for
review entails more time and effort than filing a notice of appeal. 21 Hence, the Court of
Appeals may allow an extension of time to file a petition for review.
In the more recent case of Commissioner of Internal Revenue v. Court of Appeals,22
we held that Liboros clarification of Lacsamana is consistent with the Revised Internal
Rules of the Court of Appeals and Supreme Court Circular No. 1-91. They all allow an
extension of time for filing petitions for review with the Court of Appeals. The extension,
however, should be limited to only fifteen days save in exceptionally meritorious cases
where the Court of Appeals may grant a longer period.
A judgment becomes "final and executory" by operation of law. Finality of judgment
becomes a fact on the lapse of the reglementary period to appeal if no appeal is perfected. 23
The RTC decision could not have gained finality because the Court of Appeals granted the
30-day extension to Guevarra.
The Court of Appeals did not commit grave abuse of discretion when it approved Guevarras
motion for extension. The Court of Appeals gave due course to the motion for extension
because it complied with the condition set by the appellate court in its resolution dated 28
January 1997. The resolution stated that the Court of Appeals would only give due course to
the motion for extension if filed on time. The motion for extension met this condition.
The material dates to consider in determining the timeliness of the filing of the motion for
extension are (1) the date of receipt of the judgment or final order or resolution subject of
the petition, and (2) the date of filing of the motion for extension. 24 It is the date of the filing
of the motion or pleading, and not the date of execution, that determines the timeliness of
the filing of that motion or pleading. Thus, even if the motion for extension bears no date,
the date of filing stamped on it is the reckoning point for determining the timeliness of its
filing.
Guevarra had until 14 December 1996 to file an appeal from the RTC decision. Guevarra filed

20

his motion for extension before this Court on 13 December 1996, the date stamped by this
Courts Receiving Clerk on the motion for extension. Clearly, Guevarra filed the motion for
extension exactly one day before the lapse of the reglementary period to appeal.
Assuming that the Court of Appeals should have dismissed Guevarras appeal on technical
grounds, Pajuyo did not ask the appellate court to deny the motion for extension and dismiss
the petition for review at the earliest opportunity. Instead, Pajuyo vigorously discussed the
merits of the case. It was only when the Court of Appeals ruled in Guevarras favor that
Pajuyo raised the procedural issues against Guevarras petition for review.
A party who, after voluntarily submitting a dispute for resolution, receives an adverse
decision on the merits, is estopped from attacking the jurisdiction of the court. 25 Estoppel
sets in not because the judgment of the court is a valid and conclusive adjudication, but
because the practice of attacking the courts jurisdiction after voluntarily submitting to it is
against public policy.26
In his Comment before the Court of Appeals, Pajuyo also failed to discuss Guevarras failure
to sign the certification against forum shopping. Instead, Pajuyo harped on Guevarras
counsel signing the verification, claiming that the counsels verification is insufficient since it
is based only on "mere information."
A partys failure to sign the certification against forum shopping is different from the partys
failure to sign personally the verification. The certificate of non-forum shopping must be
signed by the party, and not by counsel. 27 The certification of counsel renders the petition
defective.28
On the other hand, the requirement on verification of a pleading is a formal and not a
jurisdictional requisite.29 It is intended simply to secure an assurance that what are alleged
in the pleading are true and correct and not the product of the imagination or a matter of
speculation, and that the pleading is filed in good faith. 30 The party need not sign the
verification. A partys representative, lawyer or any person who personally knows the truth
of the facts alleged in the pleading may sign the verification. 31
We agree with the Court of Appeals that the issue on the certificate against forum shopping
was merely an afterthought. Pajuyo did not call the Court of Appeals attention to this defect
at the early stage of the proceedings. Pajuyo raised this procedural issue too late in the
proceedings.
Absence of Title over the Disputed Property will not Divest the Courts of
Jurisdiction to Resolve the Issue of Possession
Settled is the rule that the defendants claim of ownership of the disputed property will not
divest the inferior court of its jurisdiction over the ejectment case. 32 Even if the pleadings
raise the issue of ownership, the court may pass on such issue to determine only the
question of possession, especially if the ownership is inseparably linked with the
possession.33 The adjudication on the issue of ownership is only provisional and will not bar
an action between the same parties involving title to the land. 34 This doctrine is a necessary
consequence of the nature of the two summary actions of ejectment, forcible entry and
unlawful detainer, where the only issue for adjudication is the physical or material
possession over the real property.35
In this case, what Guevarra raised before the courts was that he and Pajuyo are not the
owners of the contested property and that they are mere squatters. Will the defense that the
parties to the ejectment case are not the owners of the disputed lot allow the courts to
renounce their jurisdiction over the case? The Court of Appeals believed so and held that it
would just leave the parties where they are since they are in pari delicto.
We do not agree with the Court of Appeals.
Ownership or the right to possess arising from ownership is not at issue in an action for
recovery of possession. The parties cannot present evidence to prove ownership or right to
legal possession except to prove the nature of the possession when necessary to resolve the
issue of physical possession.36 The same is true when the defendant asserts the absence of
title over the property. The absence of title over the contested lot is not a ground for the
courts to withhold relief from the parties in an ejectment case.
The only question that the courts must resolve in ejectment proceedings is - who is entitled
to the physical possession of the premises, that is, to the possession de facto and not to the
possession de jure.37 It does not even matter if a partys title to the property is
questionable,38 or when both parties intruded into public land and their applications to own
the land have yet to be approved by the proper government agency. 39 Regardless of the
actual condition of the title to the property, the party in peaceable quiet possession shall not
be thrown out by a strong hand, violence or terror. 40 Neither is the unlawful withholding of
property allowed. Courts will always uphold respect for prior possession.
Thus, a party who can prove prior possession can recover such possession even against the
owner himself.41 Whatever may be the character of his possession, if he has in his favor prior
possession in time, he has the security that entitles him to remain on the property until a
person with a better right lawfully ejects him. 42 To repeat, the only issue that the court has to
settle in an ejectment suit is the right to physical possession.

21

In Pitargue v. Sorilla,43 the government owned the land in dispute. The government did
not authorize either the plaintiff or the defendant in the case of forcible entry case to occupy
the land. The plaintiff had prior possession and had already introduced improvements on the
public land. The plaintiff had a pending application for the land with the Bureau of Lands
when the defendant ousted him from possession. The plaintiff filed the action of forcible
entry against the defendant. The government was not a party in the case of forcible entry.
The defendant questioned the jurisdiction of the courts to settle the issue of possession
because while the application of the plaintiff was still pending, title remained with the
government, and the Bureau of Public Lands had jurisdiction over the case. We disagreed
with the defendant. We ruled that courts have jurisdiction to entertain ejectment suits even
before the resolution of the application. The plaintiff, by priority of his application and of his
entry, acquired prior physical possession over the public land applied for as against other
private claimants. That prior physical possession enjoys legal protection against other
private claimants because only a court can take away such physical possession in an
ejectment case.
While the Court did not brand the plaintiff and the defendant in Pitargue44 as squatters,
strictly speaking, their entry into the disputed land was illegal. Both the plaintiff and
defendant entered the public land without the owners permission. Title to the land remained
with the government because it had not awarded to anyone ownership of the contested
public land. Both the plaintiff and the defendant were in effect squatting on government
property. Yet, we upheld the courts jurisdiction to resolve the issue of possession even if the
plaintiff and the defendant in the ejectment case did not have any title over the contested
land.
Courts must not abdicate their jurisdiction to resolve the issue of physical possession
because of the public need to preserve the basic policy behind the summary actions of
forcible entry and unlawful detainer. The underlying philosophy behind ejectment suits is to
prevent breach of the peace and criminal disorder and to compel the party out of possession
to respect and resort to the law alone to obtain what he claims is his. 45 The party deprived of
possession must not take the law into his own hands. 46 Ejectment proceedings are summary
in nature so the authorities can settle speedily actions to recover possession because of the
overriding need to quell social disturbances.47
We further explained in Pitargue the greater interest that is at stake in actions for recovery
of possession. We made the following pronouncements in Pitargue:
The question that is before this Court is: Are courts without jurisdiction to take cognizance of
possessory actions involving these public lands before final award is made by the Lands
Department, and before title is given any of the conflicting claimants? It is one of utmost
importance, as there are public lands everywhere and there are thousands of settlers,
especially in newly opened regions. It also involves a matter of policy, as it requires the
determination of the respective authorities and functions of two coordinate branches of the
Government in connection with public land conflicts.
Our problem is made simple by the fact that under the Civil Code, either in the old, which
was in force in this country before the American occupation, or in the new, we have a
possessory action, the aim and purpose of which is the recovery of the physical possession
of real property, irrespective of the question as to who has the title thereto. Under the
Spanish Civil Code we had the accion interdictal, a summary proceeding which could be
brought within one year from dispossession (Roman Catholic Bishop of Cebu vs. Mangaron, 6
Phil. 286, 291); and as early as October 1, 1901, upon the enactment of the Code of Civil
Procedure (Act No. 190 of the Philippine Commission) we implanted the common law action
of forcible entry (section 80 of Act No. 190), the object of which has been stated by this
Court to be "to prevent breaches of the peace and criminal disorder which would
ensue from the withdrawal of the remedy, and the reasonable hope such
withdrawal would create that some advantage must accrue to those persons who,
believing themselves entitled to the possession of property, resort to force to
gain possession rather than to some appropriate action in the court to assert
their claims." (Supia and Batioco vs. Quintero and Ayala, 59 Phil. 312, 314.) So before the
enactment of the first Public Land Act (Act No. 926) the action of forcible entry was already
available in the courts of the country. So the question to be resolved is, Did the Legislature
intend, when it vested the power and authority to alienate and dispose of the public lands in
the Lands Department, to exclude the courts from entertaining the possessory action of
forcible entry between rival claimants or occupants of any land before award thereof to any
of the parties? Did Congress intend that the lands applied for, or all public lands for that
matter, be removed from the jurisdiction of the judicial Branch of the Government, so that
any troubles arising therefrom, or any breaches of the peace or disorders caused by rival
claimants, could be inquired into only by the Lands Department to the exclusion of the
courts? The answer to this question seems to us evident. The Lands Department does not
have the means to police public lands; neither does it have the means to prevent disorders
arising therefrom, or contain breaches of the peace among settlers; or to pass promptly

22

upon conflicts of possession. Then its power is clearly limited to disposition and
alienation, and while it may decide conflicts of possession in order to make
proper award, the settlement of conflicts of possession which is recognized in the
court herein has another ultimate purpose, i.e., the protection of actual
possessors and occupants with a view to the prevention of breaches of the peace.
The power to dispose and alienate could not have been intended to include the
power to prevent or settle disorders or breaches of the peace among rival settlers
or claimants prior to the final award. As to this, therefore, the corresponding branches
of the Government must continue to exercise power and jurisdiction within the limits of their
respective functions. The vesting of the Lands Department with authority to
administer, dispose, and alienate public lands, therefore, must not be understood
as depriving the other branches of the Government of the exercise of the
respective functions or powers thereon, such as the authority to stop disorders
and quell breaches of the peace by the police, the authority on the part of the
courts to take jurisdiction over possessory actions arising therefrom not
involving, directly or indirectly, alienation and disposition.
Our attention has been called to a principle enunciated in American courts to the effect that
courts have no jurisdiction to determine the rights of claimants to public lands, and that until
the disposition of the land has passed from the control of the Federal Government, the
courts will not interfere with the administration of matters concerning the same. (50 C. J.
1093-1094.) We have no quarrel with this principle. The determination of the respective
rights of rival claimants to public lands is different from the determination of who has the
actual physical possession or occupation with a view to protecting the same and preventing
disorder and breaches of the peace. A judgment of the court ordering restitution of the
possession of a parcel of land to the actual occupant, who has been deprived thereof by
another through the use of force or in any other illegal manner, can never be "prejudicial
interference" with the disposition or alienation of public lands. On the other hand, if
courts were deprived of jurisdiction of cases involving conflicts of possession,
that threat of judicial action against breaches of the peace committed on public
lands would be eliminated, and a state of lawlessness would probably be
produced between applicants, occupants or squatters, where force or might, not
right or justice, would rule.
It must be borne in mind that the action that would be used to solve conflicts of possession
between rivals or conflicting applicants or claimants would be no other than that of forcible
entry. This action, both in England and the United States and in our jurisdiction, is a
summary and expeditious remedy whereby one in peaceful and quiet possession may
recover the possession of which he has been deprived by a stronger hand, by violence or
terror; its ultimate object being to prevent breach of the peace and criminal disorder. (Supia
and Batioco vs. Quintero and Ayala, 59 Phil. 312, 314.) The basis of the remedy is mere
possession as a fact, of physical possession, not a legal possession. (Mediran vs. Villanueva,
37 Phil. 752.) The title or right to possession is never in issue in an action of forcible entry;
as a matter of fact, evidence thereof is expressly banned, except to prove the nature of the
possession. (Second 4, Rule 72, Rules of Court.) With this nature of the action in mind, by no
stretch of the imagination can conclusion be arrived at that the use of the remedy in the
courts of justice would constitute an interference with the alienation, disposition, and control
of public lands. To limit ourselves to the case at bar can it be pretended at all that its result
would in any way interfere with the manner of the alienation or disposition of the land
contested? On the contrary, it would facilitate adjudication, for the question of priority of
possession having been decided in a final manner by the courts, said question need no
longer waste the time of the land officers making the adjudication or award. (Emphasis ours)
The Principle of Pari Delicto is not Applicable to Ejectment Cases
The Court of Appeals erroneously applied the principle of pari delicto to this case.
Articles 1411 and 1412 of the Civil Code 48 embody the principle of pari delicto. We explained
the principle of pari delicto in these words:
The rule of pari delicto is expressed in the maxims ex dolo malo non eritur actio and in
pari delicto potior est conditio defedentis. The law will not aid either party to an illegal
agreement. It leaves the parties where it finds them.49
The application of the pari delicto principle is not absolute, as there are exceptions to its
application. One of these exceptions is where the application of the pari delicto rule would
violate well-established public policy.50
In Drilon v. Gaurana,51 we reiterated the basic policy behind the summary actions of
forcible entry and unlawful detainer. We held that:
It must be stated that the purpose of an action of forcible entry and detainer is that,
regardless of the actual condition of the title to the property, the party in peaceable quiet
possession shall not be turned out by strong hand, violence or terror. In affording this
remedy of restitution the object of the statute is to prevent breaches of the peace and
criminal disorder which would ensue from the withdrawal of the remedy, and the reasonable

23

hope such withdrawal would create that some advantage must accrue to those persons who,
believing themselves entitled to the possession of property, resort to force to gain
possession rather than to some appropriate action in the courts to assert their claims. This is
the philosophy at the foundation of all these actions of forcible entry and detainer which are
designed to compel the party out of possession to respect and resort to the law alone to
obtain what he claims is his.52
Clearly, the application of the principle of pari delicto to a case of ejectment between
squatters is fraught with danger. To shut out relief to squatters on the ground of pari delicto
would openly invite mayhem and lawlessness. A squatter would oust another squatter from
possession of the lot that the latter had illegally occupied, emboldened by the knowledge
that the courts would leave them where they are. Nothing would then stand in the way of
the ousted squatter from re-claiming his prior possession at all cost.
Petty warfare over possession of properties is precisely what ejectment cases or actions for
recovery of possession seek to prevent. 53 Even the owner who has title over the disputed
property cannot take the law into his own hands to regain possession of his property. The
owner must go to court.
Courts must resolve the issue of possession even if the parties to the ejectment suit are
squatters. The determination of priority and superiority of possession is a serious and urgent
matter that cannot be left to the squatters to decide. To do so would make squatters receive
better treatment under the law. The law restrains property owners from taking the law into
their own hands. However, the principle of pari delicto as applied by the Court of Appeals
would give squatters free rein to dispossess fellow squatters or violently retake possession of
properties usurped from them. Courts should not leave squatters to their own devices in
cases involving recovery of possession.
Possession is the only Issue for Resolution in an Ejectment Case
The case for review before the Court of Appeals was a simple case of ejectment. The Court
of Appeals refused to rule on the issue of physical possession. Nevertheless, the appellate
court held that the pivotal issue in this case is who between Pajuyo and Guevarra has the
"priority right as beneficiary of the contested land under Proclamation No. 137." 54 According
to the Court of Appeals, Guevarra enjoys preferential right under Proclamation No. 137
because Article VI of the Code declares that the actual occupant or caretaker is the one
qualified to apply for socialized housing.
The ruling of the Court of Appeals has no factual and legal basis.
First. Guevarra did not present evidence to show that the contested lot is part of a
relocation site under Proclamation No. 137. Proclamation No. 137 laid down the metes and
bounds of the land that it declared open for disposition to bona fide residents.
The records do not show that the contested lot is within the land specified by Proclamation
No. 137. Guevarra had the burden to prove that the disputed lot is within the coverage of
Proclamation No. 137. He failed to do so.
Second. The Court of Appeals should not have given credence to Guevarras
unsubstantiated claim that he is the beneficiary of Proclamation No. 137. Guevarra merely
alleged that in the survey the project administrator conducted, he and not Pajuyo appeared
as the actual occupant of the lot.
There is no proof that Guevarra actually availed of the benefits of Proclamation No. 137.
Pajuyo allowed Guevarra to occupy the disputed property in 1985. President Aquino signed
Proclamation No. 137 into law on 11 March 1986. Pajuyo made his earliest demand for
Guevarra to vacate the property in September 1994.
During the time that Guevarra temporarily held the property up to the time that
Proclamation No. 137 allegedly segregated the disputed lot, Guevarra never applied as
beneficiary of Proclamation No. 137. Even when Guevarra already knew that Pajuyo was
reclaiming possession of the property, Guevarra did not take any step to comply with the
requirements of Proclamation No. 137.
Third. Even assuming that the disputed lot is within the coverage of Proclamation No. 137
and Guevarra has a pending application over the lot, courts should still assume jurisdiction
and resolve the issue of possession. However, the jurisdiction of the courts would be limited
to the issue of physical possession only.
In Pitargue,55 we ruled that courts have jurisdiction over possessory actions involving public
land to determine the issue of physical possession. The determination of the respective
rights of rival claimants to public land is, however, distinct from the determination of who
has the actual physical possession or who has a better right of physical possession. 56 The
administrative disposition and alienation of public lands should be threshed out in the proper
government agency.57
The Court of Appeals determination of Pajuyo and Guevarras rights under Proclamation No.
137 was premature. Pajuyo and Guevarra were at most merely potential beneficiaries of the
law. Courts should not preempt the decision of the administrative agency mandated by law
to determine the qualifications of applicants for the acquisition of public lands. Instead,
courts should expeditiously resolve the issue of physical possession in ejectment cases to

24

prevent disorder and breaches of peace.58

Pajuyo is Entitled to Physical Possession of the Disputed Property
Guevarra does not dispute Pajuyos prior possession of the lot and ownership of the house
built on it. Guevarra expressly admitted the existence and due execution of the Kasunduan.
The Kasunduan reads:
Ako, si COL[I]TO PAJUYO, may-ari ng bahay at lote sa Bo. Payatas, Quezon City, ay
nagbibigay pahintulot kay G. Eddie Guevarra, na pansamantalang manirahan sa nasabing
bahay at lote ng "walang bayad." Kaugnay nito, kailangang panatilihin nila ang kalinisan at
kaayusan ng bahay at lote.
Sa sandaling kailangan na namin ang bahay at lote, silay kusang aalis ng walang reklamo.
Based on the Kasunduan, Pajuyo permitted Guevarra to reside in the house and lot free of
rent, but Guevarra was under obligation to maintain the premises in good condition.
Guevarra promised to vacate the premises on Pajuyos demand but Guevarra broke his
promise and refused to heed Pajuyos demand to vacate.
These facts make out a case for unlawful detainer. Unlawful detainer involves the
withholding by a person from another of the possession of real property to which the latter is
entitled after the expiration or termination of the formers right to hold possession under a
contract, express or implied.59
Where the plaintiff allows the defendant to use his property by tolerance without any
contract, the defendant is necessarily bound by an implied promise that he will vacate on
demand, failing which, an action for unlawful detainer will lie. 60 The defendants refusal to
comply with the demand makes his continued possession of the property unlawful. 61 The
status of the defendant in such a case is similar to that of a lessee or tenant whose term of
lease has expired but whose occupancy continues by tolerance of the owner. 62
This principle should apply with greater force in cases where a contract embodies the
permission or tolerance to use the property. The Kasunduan expressly articulated Pajuyos
forbearance. Pajuyo did not require Guevarra to pay any rent but only to maintain the house
and lot in good condition. Guevarra expressly vowed in the Kasunduan that he would vacate
the property on demand. Guevarras refusal to comply with Pajuyos demand to vacate
made Guevarras continued possession of the property unlawful.
We do not subscribe to the Court of Appeals theory that the Kasunduan is one of
commodatum.
In a contract of commodatum, one of the parties delivers to another something not
consumable so that the latter may use the same for a certain time and return it. 63 An
essential feature of commodatum is that it is gratuitous. Another feature of commodatum is
that the use of the thing belonging to another is for a certain period. 64 Thus, the bailor
cannot demand the return of the thing loaned until after expiration of the period stipulated,
or after accomplishment of the use for which the commodatum is constituted.65 If the bailor
should have urgent need of the thing, he may demand its return for temporary use. 66 If the
use of the thing is merely tolerated by the bailor, he can demand the return of the thing at
will, in which case the contractual relation is called a precarium. 67 Under the Civil Code,
precarium is a kind of commodatum.68
The Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra was not
essentially gratuitous. While the Kasunduan did not require Guevarra to pay rent, it
obligated him to maintain the property in good condition. The imposition of this obligation
makes the Kasunduan a contract different from a commodatum. The effects of the
Kasunduan are also different from that of a commodatum. Case law on ejectment has
treated relationship based on tolerance as one that is akin to a landlord-tenant relationship
where the withdrawal of permission would result in the termination of the lease. 69 The
tenants withholding of the property would then be unlawful. This is settled jurisprudence.
Even assuming that the relationship between Pajuyo and Guevarra is one of commodatum,
Guevarra as bailee would still have the duty to turn over possession of the property to
Pajuyo, the bailor. The obligation to deliver or to return the thing received attaches to
contracts for safekeeping, or contracts of commission, administration and commodatum. 70
These contracts certainly involve the obligation to deliver or return the thing received. 71
Guevarra turned his back on the Kasunduan on the sole ground that like him, Pajuyo is also a
squatter. Squatters, Guevarra pointed out, cannot enter into a contract involving the land
they illegally occupy. Guevarra insists that the contract is void.
Guevarra should know that there must be honor even between squatters. Guevarra freely
entered into the Kasunduan. Guevarra cannot now impugn the Kasunduan after he had
benefited from it. The Kasunduan binds Guevarra.
The Kasunduan is not void for purposes of determining who between Pajuyo and Guevarra
has a right to physical possession of the contested property. The Kasunduan is the
undeniable evidence of Guevarras recognition of Pajuyos better right of physical
possession. Guevarra is clearly a possessor in bad faith. The absence of a contract would not
yield a different result, as there would still be an implied promise to vacate.
Guevarra contends that there is "a pernicious evil that is sought to be avoided, and that is

25

allowing an absentee squatter who (sic) makes (sic) a profit out of his illegal act." 72 Guevarra
bases his argument on the preferential right given to the actual occupant or caretaker under
Proclamation No. 137 on socialized housing.
We are not convinced.
Pajuyo did not profit from his arrangement with Guevarra because Guevarra stayed in the
property without paying any rent. There is also no proof that Pajuyo is a professional
squatter who rents out usurped properties to other squatters. Moreover, it is for the proper
government agency to decide who between Pajuyo and Guevarra qualifies for socialized
housing. The only issue that we are addressing is physical possession.
Prior possession is not always a condition sine qua non in ejectment.73 This is one of the
distinctions between forcible entry and unlawful detainer. 74 In forcible entry, the plaintiff is
deprived of physical possession of his land or building by means of force, intimidation,
threat, strategy or stealth. Thus, he must allege and prove prior possession. 75 But in unlawful
detainer, the defendant unlawfully withholds possession after the expiration or termination
of his right to possess under any contract, express or implied. In such a case, prior physical
possession is not required.76
Pajuyos withdrawal of his permission to Guevarra terminated the Kasunduan. Guevarras
transient right to possess the property ended as well. Moreover, it was Pajuyo who was in
actual possession of the property because Guevarra had to seek Pajuyos permission to
temporarily hold the property and Guevarra had to follow the conditions set by Pajuyo in the
Kasunduan. Control over the property still rested with Pajuyo and this is evidence of actual
possession.
Pajuyos absence did not affect his actual possession of the disputed property. Possession in
the eyes of the law does not mean that a man has to have his feet on every square meter of
the ground before he is deemed in possession. 77 One may acquire possession not only by
physical occupation, but also by the fact that a thing is subject to the action of ones will. 78
Actual or physical occupation is not always necessary.79
Ruling on Possession Does not Bind Title to the Land in Dispute
We are aware of our pronouncement in cases where we declared that "squatters and
intruders who clandestinely enter into titled government property cannot, by such act,
acquire any legal right to said property." 80 We made this declaration because the person who
had title or who had the right to legal possession over the disputed property was a party in
the ejectment suit and that party instituted the case against squatters or usurpers.
In this case, the owner of the land, which is the government, is not a party to the ejectment
case. This case is between squatters. Had the government participated in this case, the
courts could have evicted the contending squatters, Pajuyo and Guevarra.
Since the party that has title or a better right over the property is not impleaded in this case,
we cannot evict on our own the parties. Such a ruling would discourage squatters from
seeking the aid of the courts in settling the issue of physical possession. Stripping both the
plaintiff and the defendant of possession just because they are squatters would have the
same dangerous implications as the application of the principle of pari delicto. Squatters
would then rather settle the issue of physical possession among themselves than seek relief
from the courts if the plaintiff and defendant in the ejectment case would both stand to lose
possession of the disputed property. This would subvert the policy underlying actions for
recovery of possession.
Since Pajuyo has in his favor priority in time in holding the property, he is entitled to remain
on the property until a person who has title or a better right lawfully ejects him. Guevarra is
certainly not that person. The ruling in this case, however, does not preclude Pajuyo and
Guevarra from introducing evidence and presenting arguments before the proper
administrative agency to establish any right to which they may be entitled under the law. 81
In no way should our ruling in this case be interpreted to condone squatting. The ruling on
the issue of physical possession does not affect title to the property nor constitute a binding
and conclusive adjudication on the merits on the issue of ownership. 82 The owner can still go
to court to recover lawfully the property from the person who holds the property without
legal title. Our ruling here does not diminish the power of government agencies, including
local governments, to condemn, abate, remove or demolish illegal or unauthorized
structures in accordance with existing laws.
Attorneys Fees and Rentals
The MTC and RTC failed to justify the award of P3,000 attorneys fees to Pajuyo. Attorneys
fees as part of damages are awarded only in the instances enumerated in Article 2208 of the
Civil Code.83 Thus, the award of attorneys fees is the exception rather than the rule. 84
Attorneys fees are not awarded every time a party prevails in a suit because of the policy
that no premium should be placed on the right to litigate. 85 We therefore delete the
attorneys fees awarded to Pajuyo.
We sustain the P300 monthly rentals the MTC and RTC assessed against Guevarra. Guevarra
did not dispute this factual finding of the two courts. We find the amount reasonable
compensation to Pajuyo. The P300 monthly rental is counted from the last demand to

26

vacate, which was on 16 February 1995.

WHEREFORE, we GRANT the petition. The Decision dated 21 June 2000 and Resolution
dated 14 December 2000 of the Court of Appeals in CA-G.R. SP No. 43129 are SET ASIDE.
The Decision dated 11 November 1996 of the Regional Trial Court of Quezon City, Branch 81
in Civil Case No. Q-96-26943, affirming the Decision dated 15 December 1995 of the
Metropolitan Trial Court of Quezon City, Branch 31 in Civil Case No. 12432, is REINSTATED
with MODIFICATION. The award of attorneys fees is deleted. No costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-46240
November 3, 1939
MARGARITA QUINTOS and ANGEL A. ANSALDO, plaintiffs-appellants,
vs.
BECK, defendant-appellee.
Mauricio Carlos for appellants.Felipe Buencamino, Jr. for appellee.
IMPERIAL, J.:
The plaintiff brought this action to compel the defendant to return her certain furniture
which she lent him for his use. She appealed from the judgment of the Court of First Instance
of Manila which ordered that the defendant return to her the three has heaters and the four
electric lamps found in the possession of the Sheriff of said city, that she call for the other
furniture from the said sheriff of Manila at her own expense, and that the fees which the
Sheriff may charge for the deposit of the furniture be paid pro rata by both parties, without
pronouncement as to the costs.
The defendant was a tenant of the plaintiff and as such occupied the latter's house on M. H.
del Pilar street, No. 1175. On January 14, 1936, upon the novation of the contract of lease
between the plaintiff and the defendant, the former gratuitously granted to the latter the
use of the furniture described in the third paragraph of the stipulation of facts, subject to the
condition that the defendant would return them to the plaintiff upon the latter's demand.
The plaintiff sold the property to Maria Lopez and Rosario Lopez and on September 14, 1936,
these three notified the defendant of the conveyance, giving him sixty days to vacate the
premises under one of the clauses of the contract of lease. There after the plaintiff required
the defendant to return all the furniture transferred to him for them in the house where they
were found. On
November 5, 1936, the defendant, through another person, wrote to
the plaintiff reiterating that she may call for the furniture in the ground floor of the house.
On the 7th of the same month, the defendant wrote another letter to the plaintiff informing
her that he could not give up the three gas heaters and the four electric lamps because he
would use them until the 15th of the same month when the lease in due to expire. The
plaintiff refused to get the furniture in view of the fact that the defendant had declined to
make delivery of all of them. On
November 15th, before vacating the house, the
defendant deposited with the Sheriff all the furniture belonging to the plaintiff and they are
now on deposit in the warehouse situated at No. 1521, Rizal Avenue, in the custody of the
said sheriff.
In their seven assigned errors the plaintiffs contend that the trial court incorrectly applied
the law: in holding that they violated the contract by not calling for all the furniture on
November 5, 1936, when the defendant placed them at their disposal; in not ordering the
defendant to pay them the value of the furniture in case they are not delivered; in holding
that they should get all the furniture from the Sheriff at their expenses; in ordering them to
pay-half of the expenses claimed by the Sheriff for the deposit of the furniture; in ruling that
both parties should pay their respective legal expenses or the costs; and in denying pay
their respective legal expenses or the costs; and in denying the motions for reconsideration
and new trial. To dispose of the case, it is only necessary to decide whether the defendant
complied with his obligation to return the furniture upon the plaintiff's demand; whether the
latter is bound to bear the deposit fees thereof, and whether she is entitled to the costs of
litigation.lawphi1.net
The contract entered into between the parties is one of commadatum, because under it the
plaintiff gratuitously granted the use of the furniture to the defendant, reserving for herself
the ownership thereof; by this contract the defendant bound himself to return the furniture
to the plaintiff, upon the latters demand (clause 7 of the contract, Exhibit A; articles 1740,
paragraph 1, and 1741 of the Civil Code). The obligation voluntarily assumed by the

27

defendant to return the furniture upon the plaintiff's demand, means that he should return
all of them to the plaintiff at the latter's residence or house. The defendant did not comply
with this obligation when he merely placed them at the disposal of the plaintiff, retaining for
his benefit the three gas heaters and the four eletric lamps. The provisions of article 1169 of
the Civil Code cited by counsel for the parties are not squarely applicable. The trial court,
therefore, erred when it came to the legal conclusion that the plaintiff failed to comply with
her obligation to get the furniture when they were offered to her.
As the defendant had voluntarily undertaken to return all the furniture to the plaintiff, upon
the latter's demand, the Court could not legally compel her to bear the expenses occasioned
by the deposit of the furniture at the defendant's behest. The latter, as bailee, was not
entitled to place the furniture on deposit; nor was the plaintiff under a duty to accept the
offer to return the furniture, because the defendant wanted to retain the three gas heaters
and the four electric lamps.
As to the value of the furniture, we do not believe that the plaintiff is entitled to the payment
thereof by the defendant in case of his inability to return some of the furniture because
under paragraph 6 of the stipulation of facts, the defendant has neither agreed to nor
admitted the correctness of the said value. Should the defendant fail to deliver some of the
furniture, the value thereof should be latter determined by the trial Court through evidence
which the parties may desire to present.
The costs in both instances should be borne by the defendant because the plaintiff is the
prevailing party (section 487 of the Code of Civil Procedure). The defendant was the one who
breached the contract of commodatum, and without any reason he refused to return and
deliver all the furniture upon the plaintiff's demand. In these circumstances, it is just and
equitable that he pay the legal expenses and other judicial costs which the plaintiff would
not have otherwise defrayed.
The appealed judgment is modified and the defendant is ordered to return and deliver to the
plaintiff, in the residence to return and deliver to the plaintiff, in the residence or house of
the latter, all the furniture described in paragraph 3 of the stipulation of facts Exhibit A. The
expenses which may be occasioned by the delivery to and deposit of the furniture with the
Sheriff shall be for the account of the defendant. the defendant shall pay the costs in both
instances. So ordered.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-4150
February 10, 1910
FELIX DE LOS SANTOS, plaintiff-appelle,
vs.
AGUSTINA JARRA, administratrix of the estate of Magdaleno Jimenea, deceased,
defendant-appellant.
Matias Hilado, for appellant. Jose Felix Martinez, for appellee.
TORRES, J.:
On the 1st of September, 1906, Felix de los Santos brought suit against Agustina Jarra, the
administratrix of the estate of Magdaleno Jimenea, alleging that in the latter part of 1901
Jimenea borrowed and obtained from the plaintiff ten first-class carabaos, to be used at the
animal-power mill of his hacienda during the season of 1901-2, without recompense or
remuneration whatever for the use thereof, under the sole condition that they should be
returned to the owner as soon as the work at the mill was terminated; that Magdaleno
Jimenea, however, did not return the carabaos, notwithstanding the fact that the plaintiff
claimed their return after the work at the mill was finished; that Magdaleno Jimenea died on
the 28th of October, 1904, and the defendant herein was appointed by the Court of First
Instance of Occidental Negros administratrix of his estate and she took over the
administration of the same and is still performing her duties as such administratrix; that the
plaintiff presented his claim to the commissioners of the estate of Jimenea, within the legal
term, for the return of the said ten carabaos, but the said commissioners rejected his claim
as appears in their report; therefore, the plaintiff prayed that judgment be entered against
the defendant as administratrix of the estate of the deceased, ordering her to return the ten
first-class carabaos loaned to the late Jimenea, or their present value, and to pay the costs.
The defendant was duly summoned, and on the 25th of September, 1906, she demurred in
writing to the complaint on the ground that it was vague; but on the 2d of October of the
same year, in answer to the complaint, she said that it was true that the late Magdaleno

28

Jimenea asked the plaintiff to loan him ten carabaos, but that he only obtained three secondclass animals, which were afterwards transferred by sale by the plaintiff to the said Jimenea;
that she denied the allegations contained in paragraph 3 of the complaint; for all of which
she asked the court to absolve her of the complaint with the cost against the plaintiff.
By a writing dated the 11th of December, 1906, Attorney Jose Felix Martinez notified the
defendant and her counsel, Matias Hilado, that he had made an agreement with the plaintiff
to the effect that the latter would not compromise the controversy without his consent, and
that as fees for his professional services he was to receive one half of the amount allowed in
the judgment if the same were entered in favor of the plaintiff.
The case came up for trial, evidence was adduced by both parties, and either exhibits were
made of record. On the 10th of January, 1907, the court below entered judgment sentencing
Agustina Jarra, as administratrix of the estate of Magdaleno Jimenea, to return to the
plaintiff, Felix de los Santos, the remaining six second and third class carabaos, or the value
thereof at the rate of P120 each, or a total of P720 with the costs.
Counsel for the defendant excepted to the foregoing judgment, and, by a writing dated
January 19, moved for anew trial on the ground that the findings of fact were openly and
manifestly contrary to the weight of the evidence. The motion was overruled, the defendant
duly excepted, and in due course submitted the corresponding bill of exceptions, which was
approved and submitted to this court.
The defendant has admitted that Magdaleno Jimenea asked the plaintiff for the loan of ten
carabaos which are now claimed by the latter, as shown by two letters addressed by the said
Jimenea to Felix de los Santos; but in her answer the said defendant alleged that the late
Jimenea only obtained three second-class carabaos, which were subsequently sold to him by
the owner, Santos; therefore, in order to decide this litigation it is indispensable that proof
be forthcoming that Jimenea only received three carabaos from his son-in-law Santos, and
that they were sold by the latter to him.
The record discloses that it has been fully proven from the testimony of a sufficient number
of witnesses that the plaintiff, Santos, sent in charge of various persons the ten carabaos
requested by his father-in-law, Magdaleno Jimenea, in the two letters produced at the trial by
the plaintiff, and that Jimenea received them in the presence of some of said persons, one
being a brother of said Jimenea, who saw the animals arrive at the hacienda where it was
proposed to employ them. Four died of rinderpest, and it is for this reason that the judgment
appealed from only deals with six surviving carabaos.
The alleged purchase of three carabaos by Jimenea from his son-in-law Santos is not
evidenced by any trustworthy documents such as those of transfer, nor were the
declarations of the witnesses presented by the defendant affirming it satisfactory; for said
reason it can not be considered that Jimenea only received three carabaos on loan from his
son-in-law, and that he afterwards kept them definitely by virtue of the purchase.
By the laws in force the transfer of large cattle was and is still made by means of official
documents issued by the local authorities; these documents constitute the title of ownership
of the carabao or horse so acquired. Furthermore, not only should the purchaser be provided
with a new certificate or credential, a document which has not been produced in evidence by
the defendant, nor has the loss of the same been shown in the case, but the old documents
ought to be on file in the municipality, or they should have been delivered to the new
purchaser, and in the case at bar neither did the defendant present the old credential on
which should be stated the name of the previous owner of each of the three carabaos said to
have been sold by the plaintiff.
From the foregoing it may be logically inferred that the carabaos loaned or given on
commodatum to the now deceased Magdaleno Jimenea were ten in number; that they, or at
any rate the six surviving ones, have not been returned to the owner thereof, Felix de los
Santos, and that it is not true that the latter sold to the former three carabaos that the
purchaser was already using; therefore, as the said six carabaos were not the property of the
deceased nor of any of his descendants, it is the duty of the administratrix of the estate to
return them or indemnify the owner for their value.
The Civil Code, in dealing with loans in general, from which generic denomination the
specific one of commodatum is derived, establishes prescriptions in relation to the lastmentioned contract by the following articles:
ART. 1740. By the contract of loan, one of the parties delivers to the other, either anything
not perishable, in order that the latter may use it during a certain period and return it to the
former, in which case it is called commodatum, or money or any other perishable thing,
under the condition to return an equal amount of the same kind and quality, in which case it
is merely called a loan.
Commodatum is essentially gratuitous.
A simple loan may be gratuitous, or made under a stipulation to pay interest.
ART. 1741. The bailee acquires retains the ownership of the thing loaned. The bailee acquires
the use thereof, but not its fruits; if any compensation is involved, to be paid by the person
requiring the use, the agreement ceases to be a commodatum.

29

ART. 1742. The obligations and rights which arise from the commodatum pass to the heirs of
both contracting parties, unless the loan has been in consideration for the person of the
bailee, in which case his heirs shall not have the right to continue using the thing loaned.
The carabaos delivered to be used not being returned by the defendant upon demand, there
is no doubt that she is under obligation to indemnify the owner thereof by paying him their
value.
Article 1101 of said code reads:
Those who in fulfilling their obligations are guilty of fraud, negligence, or delay, and those
who in any manner whatsoever act in contravention of the stipulations of the same, shall be
subjected to indemnify for the losses and damages caused thereby.
The obligation of the bailee or of his successors to return either the thing loaned or its value,
is sustained by the supreme tribunal of Sapin. In its decision of March 21, 1895, it sets out
with precision the legal doctrine touching commodatum as follows:
Although it is true that in a contract of commodatum the bailor retains the ownership of the
thing loaned, and at the expiration of the period, or after the use for which it was loaned has
been accomplished, it is the imperative duty of the bailee to return the thing itself to its
owner, or to pay him damages if through the fault of the bailee the thing should have been
lost or injured, it is clear that where public securities are involved, the trial court, in deferring
to the claim of the bailor that the amount loaned be returned him by the bailee in bonds of
the same class as those which constituted the contract, thereby properly applies law 9 of
title 11 of partida 5.
With regard to the third assignment of error, based on the fact that the plaintiff Santos had
not appealed from the decision of the commissioners rejecting his claim for the recovery of
his carabaos, it is sufficient to estate that we are not dealing with a claim for the payment of
a certain sum, the collection of a debt from the estate, or payment for losses and damages
(sec. 119, Code of Civil Procedure), but with the exclusion from the inventory of the property
of the late Jimenea, or from his capital, of six carabaos which did not belong to him, and
which formed no part of the inheritance.
The demand for the exclusion of the said carabaos belonging to a third party and which did
not form part of the property of the deceased, must be the subject of a direct decision of the
court in an ordinary action, wherein the right of the third party to the property which he
seeks to have excluded from the inheritance and the right of the deceased has been
discussed, and rendered in view of the result of the evidence adduced by the administrator
of the estate and of the claimant, since it is so provided by the second part of section 699
and by section 703 of the Code of Civil Procedure; the refusal of the commissioners before
whom the plaintiff unnecessarily appeared can not affect nor reduce the unquestionable
right of ownership of the latter, inasmuch as there is no law nor principle of justice
authorizing the successors of the late Jimenea to enrich themselves at the cost and to the
prejudice of Felix de los Santos.
For the reasons above set forth, by which the errors assigned to the judgment appealed from
have been refuted, and considering that the same is in accordance with the law and the
merits of the case, it is our opinion that it should be affirmed and we do hereby affirm it with
the costs against the appellant. So ordered.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 141811
November 15, 2001
FIRST METRO INVESTMENT CORPORATION, petitioner,
vs.
ESTE DEL SOL MOUNTAIN RESERVE, INC., VALENTIN S. DAEZ, JR., MANUEL Q.
SALIENTES, MA. ROCIO A. DE VEGA, ALEXANDER G. ASUNCION, ALBERTO * M.
LADORES, VICENTE M. DE VERA, JR., and FELIPE B. SESE, respondents.
DE LEON, JR., J.:
Before us is a petition for review on certiorari of the Decision 1 of the Court of Appeals2 dated
November 8, 1999 in CA-G.R. CV No. 53328 reversing the Decision 3 of the Regional Trial
Court of Pasig City, Branch 159 dated June 2, 1994 in Civil Case No. 39224. Essentially, the
Court of Appeals found and declared that the fees provided for in the Underwriting and
Consultancy Agreements executed by and between petitioner First Metro Investment Corp.
(FMIC) and respondent Este del Sol Mountain Reserve, Inc. (Este del Sol) simultaneously with
the Loan Agreement dated January 31, 1978 were mere subterfuges to camouflage the
usurious interest charged by petitioner FMIC.
The facts of the case are as follows:
It appears that on January 31, 1978, petitioner FMIC granted respondent Este del Sol a loan
of Seven Million Three Hundred Eighty-Five Thousand Five Hundred Pesos (P7,385,500.00) to

30

finance the construction and development of the Este del Sol Mountain Reserve, a
sports/resort complex project located at Barrio Puray, Montalban, Rizal. 4
Under the terms of the Loan Agreement, the proceeds of the loan were to be released on
staggered basis. Interest on the loan was pegged at sixteen (16%) percent per annum based
on the diminishing balance. The loan was payable in thirty-six (36) equal and consecutive
monthly amortizations to commence at the beginning of the thirteenth month from the date
of the first release in accordance with the Schedule of Amortization. 5 In case of default, an
acceleration clause was, among others, provided and the amount due was made subject to a
twenty (20%) percent one-time penalty on the amount due and such amount shall bear
interest at the highest rate permitted by law from the date of default until full payment
thereof plus liquidated damages at the rate of two (2%) percent per month compounded
quarterly on the unpaid balance and accrued interests together with all the penalties, fees,
expenses or charges thereon until the unpaid balance is fully paid, plus attorney's fees
equivalent to twenty-five (25%) percent of the sum sought to be recovered, which in no case
shall be less than Twenty Thousand Pesos (P20,000.00) if the services of a lawyer were
hired.6
In accordance with the terms of the Loan Agreement, respondent Este del Sol executed
several documents7 as security for payment, among them, (a) a Real Estate Mortgage dated
January 31, 1978 over two (2) parcels of land being utilized as the site of its development
project with an area of approximately One Million Twenty-Eight Thousand and Twenty-Nine
(1,028,029) square meters and particularly described in TCT Nos. N-24332 and N-24356 of
the Register of Deeds of Rizal, inclusive of all improvements, as well as all the machineries,
equipment, furnishings and furnitures existing thereon; and (b) individual Continuing
Suretyship agreements by co-respondents Valentin S. Daez, Jr., Manuel Q. Salientes, Ma.
Rocio A. De Vega, Alexander G. Asuncion, Alberto M. Ladores, Vicente M. De Vera, Jr. and
Felipe B. Sese, all dated February 2, 1978, to guarantee the payment of all the obligations of
respondent Este del Sol up to the aggregate sum of Seven Million Five Hundred Thousand
Pesos (P7,500,000.00) each.8
Respondent Este del Sol also executed, as provided for by the Loan Agreement, an
Underwriting Agreement on January 31, 1978 whereby petitioner FMIC shall underwrite on a
best-efforts basis the public offering of One Hundred Twenty Thousand (120,000) common
shares of respondent Este del Sol's capital stock for a one-time underwriting fee of Two
Hundred Thousand Pesos (P200,000.00). In addition to the underwriting fee, the
Underwriting Agreement provided that for supervising the public offering of the shares,
respondent Este del Sol shall pay petitioner FMIC an annual supervision fee of Two Hundred
Thousand Pesos (P200,000.00) per annum for a period of four (4) consecutive years. The
Underwriting Agreement also stipulated for the payment by respondent Este del Sol to
petitioner FMIC a consultancy fee of Three Hundred Thirty-Two Thousand Five Hundred Pesos
(P332,500.00) per annum for a period of four (4) consecutive years. Simultaneous with the
execution of and in accordance with the terms of the Underwriting Agreement, a
Consultancy Agreement was also executed on January 31, 1978 whereby respondent Este
del Sol engaged the services of petitioner FMIC for a fee as consultant to render general
consultancy services.9
In three (3) letters all dated February 22, 1978 petitioner billed respondent Este del Sol for
the amounts of [a] Two Hundred Thousand Pesos (P200,000.00) as the underwriting fee of
petitioner FMIC in connection with the public offering of the common shares of stock of
respondent Este del Sol; [b] One Million Three Hundred Thirty Thousand Pesos
(P1,330,000.00) as consultancy fee for a period of four (4) years; and [c] Two Hundred
Thousand Pesos (P200,000.00) as supervision fee for the year beginning February, 1978, in
accordance to the Underwriting Agreement. 10 The said amounts of fees were deemed paid
by respondent Este del Sol to petitioner FMIC which deducted the same from the first release
of the loan.
Since respondent Este del Sol failed to meet the schedule of repayment in accordance with a
revised Schedule of Amortization, it appeared to have incurred a total obligation of Twelve
Million Six Hundred Seventy-Nine Thousand Six Hundred Thirty Pesos and Ninety-Eight
Centavos (P12,679,630.98) per the petitioner's Statement of Account dated June 23, 1980, 11
to wit:
STATEMENT OF ACCOUNT OF ESTE DEL SOL MOUNTAIN RESERVE, INC.
AS OF JUNE 23, 1980
PARTICULARS

AMOUNT

Total amount due as of 11-22-78 per revised amortization schedule dated

1-3-78
P7,999,631.42
Interest on P7,999,631.42 @ 16% p.a. from 11-22-78 to 2-22-79 (92 days)
Balance

31

327,096.04
8,326,727.46

One time penalty of 20% of the entire unpaid obligations under Section
6.02 (ii) of Loan Agreement
1,665,345.49
Past due interest under Section 6.02 (iii) of loan Agreement:
@ 19% p.a. from 2-22-79 to 11-30-79 (281 days)
@ 21% p.a. from 11-30-79 to 6-23-80 (206 days)
Other charges publication of extra judicial foreclosure of REM made on
5-23-80 & 6-6-80

1,481,879.93
1,200,714.10
4,964.00

Total Amount Due and Collectible as of June 23, 1980

P12,679,630.98
Accordingly, petitioner FMIC caused the extrajudicial foreclosure of the real estate mortgage
on June 23, 1980.12 At the public auction, petitioner FMIC was the highest bidder of the
mortgaged properties for Nine Million Pesos (P9,000,000.00). The total amount of Three
Million One Hundred Eighty-Eight Thousand Six Hundred Thirty Pesos and Seventy-Five
Centavos (P3,188,630.75) was deducted therefrom, that is, for the publication fee for the
publication of the Sheriff's Notice of Sale, Four Thousand Nine Hundred Sixty-Four Pesos
(P4,964.00); for Sheriff's fees for conducting the foreclosure proceedings, Fifteen Thousand
Pesos (P15,000.00); and for Attorney's fees, Three Million One Hundred Sixty-Eight Thousand
Six Hundred Sixty-Six Pesos and Seventy-Five Centavos (P3,168,666.75). The remaining
balance of Five Million Eight Hundred Eleven Thousand Three Hundred Sixty-Nine Pesos and
Twenty-Five Centavos (P5,811,369.25) was applied to interests and penalty charges and
partly against the principal, due as of June 23, 1980, thereby leaving a balance of Six Million
Eight Hundred Sixty-Three Thousand Two Hundred Ninety-Seven Pesos and Seventy-Three
Centavos (P6,863,297.73) on the principal amount of the loan as of June 23, 1980. 13
Failing to secure from the individual respondents, as sureties of the loan of respondent Este
del Sol by virtue of their continuing surety agreements, the payment of the alleged
deficiency balance, despite individual demands sent to each of them, 14 petitioner instituted
on November 11, 1980 the instant collection suit 15 against the respondents to collect the
alleged deficiency balance of Six Million Eight Hundred Sixty-Three Thousand Two Hundred
Ninety-Seven Pesos and Seventy-Three Centavos (P6,863,297.73) plus interest thereon at
twenty-one (21%) percent per annum from June 24, 1980 until fully paid, and twenty-five
(25%) percent thereof as and for attorney's fees and costs.
In their Answer, the respondents sought the dismissal of the case and set up several special
and affirmative defenses, foremost of which is that the Underwriting and Consultancy
Agreements executed simultaneously with and as integral parts of the Loan Agreement and
which provided for the payment of Underwriting, Consultancy and Supervision fees were in
reality subterfuges resorted to by petitioner FMIC and imposed upon respondent Este del Sol
to camouflage the usurious interest being charged by petitioner FMIC. 16
The petitioner FMIC presented as its witnesses during the trial: Cesar Valenzuela, its former
Senior Vice-President, Felipe Neri, its Vice-President for Marketing, and Dennis Aragon, an
Account Manager of its Account Management Group, as well as documentary evidence. On
the other hand, co-respondents Vicente M. De Vera, Jr. and Valentin S. Daez, Jr., and Perfecto
Doroja, former Senior Manager and Assistant Vice-President of FMIC, testified for the
respondents.
After the trial, the trial court rendered its decision in favor of petitioner FMIC, the dispositive
portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendants,
ordering defendants jointly and severally to pay to plaintiff the amount of P6,863,297.73
plus 21% interest per annum, from June 24, 1980, until the entire amount is fully paid, plus
the amount equivalent to 25% of the total amount due, as attorney's fees, plus costs of suit.
Defendants' counterclaims are dismissed, for lack of merit.
Finding the decision of the trial court unacceptable, respondents interposed an appeal to the
Court of Appeals. On November 8, 1999, the appellate court reversed the challenged
decision of the trial court. The appellate court found and declared that the fees provided for
in the Underwriting and Consultancy Agreements were mere subterfuges to camouflage the
excessively usurious interest charged by the petitioner FMIC on the loan of respondent Este
del Sol; and that the stipulated penalties, liquidated damages and attorney's fees were
"excessive, iniquitous, unconscionable and revolting to the conscience," and declared that in
lieu thereof, the stipulated one time twenty (20%) percent penalty on the amount due and
ten (10%) percent of the amount due as attorney's fees would be reasonable and suffice to
compensate petitioner FMIC for those items. Thus, the appellate court dismissed the
complaint as against the individual respondents sureties and ordered petitioner FMIC to pay
or reimburse respondent Este del Sol the amount of Nine Hundred Seventy-One Thousand
Pesos (P971,000.00) representing the difference between what is due to the petitioner and
what is due to respondent Este del Sol, based on the following computation: 17
A: DUE TO THE [PETITIONER]

32

Principal of Loan

P7,382,500.00

Add: 20% one-time

Penalty
Attorney's fees

1,476,500.00
900,000.00

Less: Proceeds of foreclosure Sale

P9,759,000.00
9,000,000.00

Deficiency

P759,000.00

B. DUE TO [RESPONDENT ESTE DEL SOL]

Return of usurious interest in the form of:
Underwriting fee
Supervision fee
Consultancy fee

P 200,000.00
200,000.00
1,330,000.00

Total amount due Este

P1,730,000.00
The appellee is, therefore, obliged to return to the appellant Este del Sol the difference of
P971,000.00 or (P1,730,000.00 less P759,000.00).
Petitioner moved for reconsideration of the appellate court's adverse decision. However, this
was denied in a Resolution18 dated February 9, 2000 of the appellate court.
Hence, the instant petition anchored on the following assigned errors: 19
THE APPELLATE COURT HAS DECIDED QUESTIONS OF SUBSTANCE IN A WAY NOT IN ACCORD
WITH LAW AND WITH APPLICABLE DECISIONS OF THIS HONORABLE COURT WHEN IT:
a] HELD THAT ALLEGEDLY THE UNDERWRITING AND CONSULTANCY AGREEMENTS SHOULD
NOT BE CONSIDERED SEPARATE AND DISTINCT FROM THE LOAN AGREEMENT, AND INSTEAD,
THEY SHOULD BE CONSIDERED AS A SINGLE CONTRACT.
b] HELD THAT THE UNDERWRITING AND CONSULTANCY AGREEMENTS ARE "MERE
SUBTERFUGES TO CAMOUFLAGE THE USURIOUS INTEREST CHARGED" BY THE PETITIONER.
c] REFUSED TO CONSIDER THE TESTIMONIES OF PETITIONER'S WITNESSES ON THE
SERVICES PERFORMED BY PETITIONER.
d] REFUSED TO CONSIDER THE FACT [i] THAT RESPONDENTS HAD WAIVED THEIR RIGHT TO
SEEK RECOVERY OF THE AMOUNTS THEY PAID TO PETITIONER, AND [ii] THAT RESPONDENTS
HAD ADMITTED THE VALIDITY OF THE UNDERWRITING AND CONSULTANCY AGREEMENTS.
e] MADE AN ERRONEOUS COMPUTATION ON SUPPOSEDLY "WHAT IS DUE TO EACH PARTY
AFTER THE FORECLOSURE SALE", AS SHOWN IN PP. 34-35 OF THE ASSAILED DECISION, EVEN
GRANTING JUST FOR THE SAKE OF ARGUMENT THAT THE APPELLATE COURT WAS CORRECT
IN STIGMATIZING [i] THE PROVISIONS OF THE LOAN AGREEMENT THAT REFER TO
STIPULATED PENALTIES, LIQUIDATED DAMAGES AND ATTORNEY'S FEES AS SUPPOSEDLY
"EXCESSIVE, INIQUITOUS AND UNCONSCIONABLE AND REVOLTING TO THE CONSCIENCE"
AND [ii] THE UNDERWRITING, SUPERVISION AND CONSULTANCY SERVICES AGREEMENT AS
SUPPOSEDLY "MERE SUBTERFUGES TO CAMOUFLAGE THE USURIOUS INTEREST CHARGED"
UPON THE RESPONDENT ESTE BY PETITIONER.
f] REFUSED TO CONSIDER THE FACT THAT RESPONDENT ESTE, AND THUS THE INDIVIDUAL
RESPONDENTS, ARE STILL OBLIGATED TO THE PETITIONER.
Petitioner essentially assails the factual findings and conclusion of the appellate court that
the Underwriting and Consultancy Agreements were executed to conceal a usurious loan.
Inquiry upon the veracity of the appellate court's factual findings and conclusion is not the
function of this Court for the Supreme Court is not a trier of facts. Only when the factual
findings of the trial court and the appellate court are opposed to each other does this Court
exercise its discretion to re-examine the factual findings of both courts and weigh which,
after considering the record of the case, is more in accord with law and justice.
After a careful and thorough review of the record including the evidence adduced, we find no
reason to depart from the findings of the appellate court.
First, there is no merit to petitioner FMIC's contention that Central Bank Circular No. 905
which took effect on January 1, 1983 and removed the ceiling on interest rates for secured
and unsecured loans, regardless of maturity, should be applied retroactively to a contract
executed on January 31, 1978, as in the case at bar, that is, while the Usury Law was in full
force and effect. It is an elementary rule of contracts that the laws, in force at the time the
contract was made and entered into, govern it. 20 More significantly, Central Bank Circular No.
905 did not repeal nor in any way amend the Usury Law but simply suspended the latter's
effectivity.21 The illegality of usury is wholly the creature of legislation. A Central Bank
Circular cannot repeal a law. Only a law can repeal another law. 22 Thus, retroactive
application of a Central Bank Circular cannot, and should not, be presumed. 23
Second, when a contract between two (2) parties is evidenced by a written instrument, such
document is ordinarily the best evidence of the terms of the contract. Courts only need to
rely on the face of written contracts to determine the intention of the parties. However, this
rule is not without exception. 24 The form of the contract is not conclusive for the law will not
permit a usurious loan to hide itself behind a legal form. Parol evidence is admissible to show

33

that a written document though legal in form was in fact a device to cover usury. If from a
construction of the whole transaction it becomes apparent that there exists a corrupt
intention to violate the Usury Law, the courts should and will permit no scheme, however
ingenious, to becloud the crime of usury. 25
In the instant case, several facts and circumstances taken altogether show that the
Underwriting and Consultancy Agreements were simply cloaks or devices to cover an illegal
scheme employed by petitioner FMIC to conceal and collect excessively usurious interest,
and these are:
a) The Underwriting and Consultancy Agreements are both dated January 31, 1978 which is
the same date of the Loan Agreement. 26 Furthermore, under the Underwriting Agreement
payment of the supervision and consultancy fees was set for a period of four (4) years 27 to
coincide ultimately with the term of the Loan Agreement. 28 This fact means that all the said
agreements which were executed simultaneously were set to mature or shall remain
effective during the same period of time.
b) The Loan Agreement dated January 31, 1978 stipulated for the execution and delivery of
an underwriting agreement29 and specifically mentioned that such underwriting agreement
is a condition precedent30 for petitioner FMIC to extend the loan to respondent Este del Sol,
indicating and as admitted by petitioner FMIC's employees, 31 that such Underwriting
Agreement is "part and parcel of the Loan Agreement."32
c) Respondent Este del Sol was billed by petitioner on February 28, 1978 One Million Three
Hundred Thirty Thousand Pesos (P1,330,000.00) 33 as consultancy fee despite the clear
provision in the Consultancy Agreement that the said agreement is for Three Hundred ThirtyTwo Thousand Five Hundred Pesos (P332,500.00) per annum for four (4) years and that only
the first year consultancy fee shall be due upon signing of the said consultancy agreement. 34
d) The Underwriting, Supervision and Consultancy fees in the amounts of Two Hundred
Thousand Pesos (P200,000.00), and one Million Three Hundred Thirty Thousand Pesos
(P1,330,000.00), respectively, were billed by petitioner to respondent Este del Sol on
February 22, 1978,35 that is, on the same occasion of the first partial release of the loan in
the amount of Two Million Three Hundred Eighty-Two Thousand Five Hundred Pesos
(P2,382,500.00).36 It is from this first partial release of the loan that the said corresponding
bills for Underwriting, Supervision and Constantly fees were conducted and apparently paid,
thus, reverting back to petitioner FMIC the total amount of One Million Seven Hundred Thirty
Thousand Pesos (P1,730,000.00) as part of the amount loaned to respondent Este del Sol. 37
e) Petitioner FMIC was in fact unable to organize an underwriting/selling syndicate to sell any
share of stock of respondent Este del Sol and much less to supervise such a syndicate, thus
failing to comply with its obligation under the Underwriting Agreement. 38 Besides, there was
really no need for an Underwriting Agreement since respondent Este del Sol had its own
licensed marketing arm to sell its shares and all its shares have been sold through its
marketing arm.39
f) Petitioner FMIC failed to comply with its obligation under the Consultancy Agreement, 40
aside from the fact that there was no need for a Consultancy Agreement, since respondent
Este del Sol's officers appeared to be more competent to be consultants in the development
of the projected sports/resort complex.41
All the foregoing established facts and circumstances clearly belie the contention of
petitioner FMIC that the Loan, Underwriting and Consultancy Agreements are separate and
independent transactions. The Underwriting and Consultancy Agreements which were
executed and delivered contemporaneously with the Loan Agreement on January 31, 1978
were exacted by petitioner FMIC as essential conditions for the grant of the loan. An
apparently lawful loan is usurious when it is intended that additional compensation for the
loan be disguised by an ostensibly unrelated contract providing for payment by the borrower
for the lender's services which are of little value or which are not in fact to be rendered, such
as in the instant case.42 In this connection, Article 1957 of the New Civil Code clearly
provides that:
Art. 1957. Contracts and stipulations, under any cloak or device whatever, intended to
circumvent the laws against usury shall be void. The borrower may recover in accordance
with the laws on usury.
In usurious loans, the entire obligation does not become void because of an agreement for
usurious interest; the unpaid principal debt still stands and remains valid but the stipulation
as to the usurious interest is void, consequently, the debt is to be considered without
stipulation as to the interest.43 The reason for this rule was adequately explained in the case
of Angel Jose Warehousing Co., Inc. v. Chelda Enterprises44 where this Court held:
In simple loan with stipulation of usurious interest, the prestation of the debtor to pay the
principal debt, which is the cause of the contract (Article 1350, Civil Code), is not illegal. The
illegality lies only as to the prestation to pay the stipulated interest; hence, being separable,
the latter only should be deemed void, since it is the only one that is illegal.
Thus, the nullity of the stipulation on the usurious interest does not affect the lender's right
to receive back the principal amount of the loan. With respect to the debtor, the amount

34

paid as interest under a usurious agreement is recoverable by him, since the payment is
deemed to have been made under restraint, rather than voluntarily.45
This Court agrees with the factual findings and conclusion of the appellate court, to wit:
We find the stipulated penalties, liquidated damages and attorney's fees, excessive,
iniquitous and unconscionable and revolting to the conscience as they hardly allow the
borrower any chance of survival in case of default. And true enough, ESTE folded up when
the appellee extrajudicially foreclosed on its (ESTE's) development project and literally
closed its offices as both the appellee and ESTE were at the time holding office in the same
building. Accordingly, we hold that 20% penalty on the amount due and 10% of the proceeds
of the foreclosure sale as attorney's fees would suffice to compensate the appellee,
especially so because there is no clear showing that the appellee hired the services of
counsel to effect the foreclosure, it engaged counsel only when it was seeking the recovery
of the alleged deficiency.
Attorney's fees as provided in penal clauses are in the nature of liquidated damages. So long
as such stipulation does not contravene any law, morals, or public order, it is binding upon
the parties. Nonetheless, courts are empowered to reduce the amount of attorney's fees if
the same is "iniquitous or unconscionable."46 Articles 1229 and 2227 of the New Civil Code
provide that:
Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has
been partly or irregularly complied with by the debtor. Even if there has been no
performance, the penalty may also be reduced by the courts if it is iniquitous or
unconscionable.
Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be
equitably reduced if they are iniquitous or unconscionable.
In the case at bar, the amount of Three Million One Hundred Eighty-Eight Thousand Six
Hundred Thirty Pesos and Seventy-Five Centavos (93,188,630.75) for the stipulated
attorney's fees equivalent to twenty-five (25%) percent of the alleged amount due, as of the
date of the auction sale on June 23, 1980, is manifestly exorbitant and unconscionable.
Accordingly, we agree with the appellate court that a reduction of the attorney's fees to ten
(10%) percent is appropriate and reasonable under the facts and circumstances of this case.
Lastly, there is no merit to petitioner FMIC's contention that the appellate court erred in
awarding an amount allegedly not asked nor prayed for by respondents. Whether the exact
amount of the relief was not expressly prayed for is of no moment for the reason that the
relief was plainly warranted by the allegations of the respondents as well as by the facts as
found by the appellate court. A party is entitled to as much relief as the facts may warrant 47
In view of all the foregoing, the Court is convinced that the appellate court committed no
reversible error in its challenged Decision.
WHEREFORE, the instant petition is hereby DENIED, and the assailed Decision of the Court of
Appeals is AFFIRMED. Costs against petitioner.
SO ORDERED.
SECOND DIVISION
[G.R. No. 133632. February 15, 2002]
BPI INVESTMENT CORPORATION, petitioner, vs. HON. COURT OF APPEALS and ALS
MANAGEMENT & DEVELOPMENT CORPORATION, respondents.
DECISION
QUISUMBING, J.:
This petition for certiorari assails the decision dated February 28, 1997, of the Court of
Appeals and its resolution dated April 21, 1998, in CA-G.R. CV No. 38887. The appellate
court affirmed the judgment of the Regional Trial Court of Pasig City, Branch 151, in (a) Civil
Case No. 11831, for foreclosure of mortgage by petitioner BPI Investment Corporation (BPIIC
for brevity) against private respondents ALS Management and Development Corporation and
Antonio K. Litonjua,[if !supportFootnotes][1][endif] consolidated with (b) Civil Case No. 52093, for
damages with prayer for the issuance of a writ of preliminary injunction by the private
respondents against said petitioner.
The trial court had held that private respondents were not in default in the payment of their
monthly amortization, hence, the extrajudicial foreclosure conducted by BPIIC was
premature and made in bad faith. It awarded private respondents the amount of P300,000
for moral damages, P50,000 for exemplary damages, and P50,000 for attorneys fees and
expenses for litigation. It likewise dismissed the foreclosure suit for being premature.
The facts are as follows:
Frank Roa obtained a loan at an interest rate of 16 1/4% per annum from Ayala Investment
and Development Corporation (AIDC), the predecessor of petitioner BPIIC, for the
construction of a house on his lot in New Alabang Village, Muntinlupa. Said house and lot
were mortgaged to AIDC to secure the loan. Sometime in 1980, Roa sold the house and lot
to private respondents ALS and Antonio Litonjua for P850,000. They paid P350,000 in cash
and assumed the P500,000 balance of Roas indebtedness with AIDC. The latter, however,

35

was not willing to extend the old interest rate to private respondents and proposed to grant
them a new loan of P500,000 to be applied to Roas debt and secured by the same property,
at an interest rate of 20% per annum and service fee of 1% per annum on the outstanding
principal balance payable within ten years in equal monthly amortization of P9,996.58 and
penalty interest at the rate of 21% per annum per day from the date the amortization
became due and payable.
Consequently, in March 1981, private respondents executed a mortgage deed containing the
above stipulations with the provision that payment of the monthly amortization shall
commence on May 1, 1981.
On August 13, 1982, ALS and Litonjua updated Roas arrearages by paying BPIIC the sum of
P190,601.35. This reduced Roas principal balance to P457,204.90 which, in turn, was
liquidated when BPIIC applied thereto the proceeds of private respondents loan of P500,000.
On September 13, 1982, BPIIC released to private respondents P7,146.87, purporting to be
what was left of their loan after full payment of Roas loan.
In June 1984, BPIIC instituted foreclosure proceedings against private respondents on the
ground that they failed to pay the mortgage indebtedness which from May 1, 1981 to June
30, 1984, amounted to Four Hundred Seventy Five Thousand Five Hundred Eighty Five and
31/100 Pesos (P475,585.31). A notice of sheriffs sale was published on August 13, 1984.
On February 28, 1985, ALS and Litonjua filed Civil Case No. 52093 against BPIIC. They
alleged, among others, that they were not in arrears in their payment, but in fact made an
overpayment as of June 30, 1984. They maintained that they should not be made to pay
amortization before the actual release of the P500,000 loan in August and September 1982.
Further, out of the P500,000 loan, only the total amount of P464,351.77 was released to
private respondents. Hence, applying the effects of legal compensation, the balance of
P35,648.23 should be applied to the initial monthly amortization for the loan.
On August 31, 1988, the trial court rendered its judgment in Civil Case Nos. 11831 and
52093, thus:
WHEREFORE, judgment is hereby rendered in favor of ALS Management and Development
Corporation and Antonio K. Litonjua and against BPI Investment Corporation, holding that
the amount of loan granted by BPI to ALS and Litonjua was only in the principal sum of
P464,351.77, with interest at 20% plus service charge of 1% per annum, payable on equal
monthly and successive amortizations at P9,283.83 for ten (10) years or one hundred twenty
(120) months. The amortization schedule attached as Annex A to the Deed of Mortgage is
correspondingly reformed as aforestated.
The Court further finds that ALS and Litonjua suffered compensable damages when BPI
caused their publication in a newspaper of general circulation as defaulting debtors, and
therefore orders BPI to pay ALS and Litonjua the following sums:
a) P300,000.00 for and as moral damages;
b) P50,000.00 as and for exemplary damages;
c) P50,000.00 as and for attorneys fees and expenses of litigation.
The foreclosure suit (Civil Case No. 11831) is hereby DISMISSED for being premature.
Costs against BPI.
SO ORDERED.[if !supportFootnotes][2][endif]
Both parties appealed to the Court of Appeals. However, private respondents appeal was
dismissed for non-payment of docket fees.
On February 28, 1997, the Court of Appeals promulgated its decision, the dispositive portion
reads:
WHEREFORE, finding no error in the appealed decision the same is hereby AFFIRMED in
toto.
SO ORDERED.[if !supportFootnotes][3][endif]
In its decision, the Court of Appeals reasoned that a simple loan is perfected only upon the
delivery of the object of the contract. The contract of loan between BPIIC and ALS & Litonjua
was perfected only on September 13, 1982, the date when BPIIC released the purported
balance of the P500,000 loan after deducting therefrom the value of Roas indebtedness.
Thus, payment of the monthly amortization should commence only a month after the said
date, as can be inferred from the stipulations in the contract. This, despite the express
agreement of the parties that payment shall commence on May 1, 1981. From October 1982
to June 1984, the total amortization due was only P194,960.43. Evidence showed that
private respondents had an overpayment, because as of June 1984, they already paid a total
amount of P201,791.96. Therefore, there was no basis for BPIIC to extrajudicially foreclose
the mortgage and cause the publication in newspapers concerning private respondents
delinquency in the payment of their loan. This fact constituted sufficient ground for moral
damages in favor of private respondents.
The motion for reconsideration filed by petitioner BPIIC was likewise denied, hence this
petition, where BPIIC submits for resolution the following issues:
I. WHETHER OR NOT A CONTRACT OF LOAN IS A CONSENSUAL CONTRACT IN THE LIGHT OF
THE RULE LAID DOWN IN BONNEVIE VS. COURT OF APPEALS, 125 SCRA 122.

36

II. WHETHER OR NOT BPI SHOULD BE HELD LIABLE FOR MORAL AND EXEMPLARY DAMAGES
AND ATTORNEYS FEES IN THE FACE OF IRREGULAR PAYMENTS MADE BY ALS AND OPPOSED
TO THE RULE LAID DOWN IN SOCIAL SECURITY SYSTEM VS. COURT OF APPEALS, 120 SCRA
707.
On the first issue, petitioner contends that the Court of Appeals erred in ruling that because
a simple loan is perfected upon the delivery of the object of the contract, the loan contract
in this case was perfected only on September 13, 1982. Petitioner claims that a contract of
loan is a consensual contract, and a loan contract is perfected at the time the contract of
mortgage is executed conformably with our ruling in Bonnevie v. Court of Appeals, 125 SCRA
122. In the present case, the loan contract was perfected on March 31, 1981, the date when
the mortgage deed was executed, hence, the amortization and interests on the loan should
be computed from said date.
Petitioner also argues that while the documents showed that the loan was released only on
August 1982, the loan was actually released on March 31, 1981, when BPIIC issued a
cancellation of mortgage of Frank Roas loan. This finds support in the registration on March
31, 1981 of the Deed of Absolute Sale executed by Roa in favor of ALS, transferring the title
of the property to ALS, and ALS executing the Mortgage Deed in favor of BPIIC. Moreover,
petitioner claims, the delay in the release of the loan should be attributed to private
respondents. As BPIIC only agreed to extend a P500,000 loan, private respondents were
required to reduce Frank Roas loan below said amount. According to petitioner, private
respondents were only able to do so in August 1982.
In their comment, private respondents assert that based on Article 1934 of the Civil Code, [if !
supportFootnotes][4][endif]
a simple loan is perfected upon the delivery of the object of the contract,
hence a real contract. In this case, even though the loan contract was signed on March 31,
1981, it was perfected only on September 13, 1982, when the full loan was released to
private respondents. They submit that petitioner misread Bonnevie. To give meaning to
Article 1934, according to private respondents, Bonnevie must be construed to mean that
the contract to extend the loan was perfected on March 31, 1981 but the contract of loan
itself was only perfected upon the delivery of the full loan to private respondents on
September 13, 1982.
Private respondents further maintain that even granting, arguendo, that the loan contract
was perfected on March 31, 1981, and their payment did not start a month thereafter, still
no default took place. According to private respondents, a perfected loan agreement
imposes reciprocal obligations, where the obligation or promise of each party is the
consideration of the other party. In this case, the consideration for BPIIC in entering into the
loan contract is the promise of private respondents to pay the monthly amortization. For the
latter, it is the promise of BPIIC to deliver the money. In reciprocal obligations, neither party
incurs in delay if the other does not comply or is not ready to comply in a proper manner
with what is incumbent upon him. Therefore, private respondents conclude, they did not
incur in delay when they did not commence paying the monthly amortization on May 1,
1981, as it was only on September 13, 1982 when petitioner fully complied with its
obligation under the loan contract.
We agree with private respondents. A loan contract is not a consensual contract but a real
contract. It is perfected only upon the delivery of the object of the contract. [if !supportFootnotes][5]
[endif]
Petitioner misapplied Bonnevie. The contract in Bonnevie declared by this Court as a
perfected consensual contract falls under the first clause of Article 1934, Civil Code. It is an
accepted promise to deliver something by way of simple loan.
In Saura Import and Export Co. Inc. vs. Development Bank of the Philippines, 44 SCRA 445,
petitioner applied for a loan of P500,000 with respondent bank. The latter approved the
application through a board resolution. Thereafter, the corresponding mortgage was
executed and registered. However, because of acts attributable to petitioner, the loan was
not released. Later, petitioner instituted an action for damages. We recognized in this case,
a perfected consensual contract which under normal circumstances could have made the
bank liable for not releasing the loan. However, since the fault was attributable to petitioner
therein, the court did not award it damages.
A perfected consensual contract, as shown above, can give rise to an action for damages.
However, said contract does not constitute the real contract of loan which requires the
delivery of the object of the contract for its perfection and which gives rise to obligations
only on the part of the borrower.[if !supportFootnotes][6][endif]
In the present case, the loan contract between BPI, on the one hand, and ALS and Litonjua,
on the other, was perfected only on September 13, 1982, the date of the second release of
the loan. Following the intentions of the parties on the commencement of the monthly
amortization, as found by the Court of Appeals, private respondents obligation to pay
commenced only on October 13, 1982, a month after the perfection of the contract. [if !
supportFootnotes][7][endif]

We also agree with private respondents that a contract of loan involves a reciprocal
obligation, wherein the obligation or promise of each party is the consideration for that of

37

the other.[if !supportFootnotes][8][endif] As averred by private respondents, the promise of BPIIC to

extend and deliver the loan is upon the consideration that ALS and Litonjua shall pay the
monthly amortization commencing on May 1, 1981, one month after the supposed release of
the loan. It is a basic principle in reciprocal obligations that neither party incurs in delay, if
the other does not comply or is not ready to comply in a proper manner with what is
incumbent upon him.[if !supportFootnotes][9][endif] Only when a party has performed his part of the
contract can he demand that the other party also fulfills his own obligation and if the latter
fails, default sets in. Consequently, petitioner could only demand for the payment of the
monthly amortization after September 13, 1982 for it was only then when it complied with
its obligation under the loan contract. Therefore, in computing the amount due as of the
date when BPIIC extrajudicially caused the foreclosure of the mortgage, the starting date is
October 13, 1982 and not May 1, 1981.
Other points raised by petitioner in connection with the first issue, such as the date of actual
release of the loan and whether private respondents were the cause of the delay in the
release of the loan, are factual. Since petitioner has not shown that the instant case is one of
the exceptions to the basic rule that only questions of law can be raised in a petition for
review under Rule 45 of the Rules of Court, [if !supportFootnotes][10][endif] factual matters need not tarry
us now. On these points we are bound by the findings of the appellate and trial courts.
On the second issue, petitioner claims that it should not be held liable for moral and
exemplary damages for it did not act maliciously when it initiated the foreclosure
proceedings. It merely exercised its right under the mortgage contract because private
respondents were irregular in their monthly amortization. It invoked our ruling in Social
Security System vs. Court of Appeals, 120 SCRA 707, where we said:
Nor can the SSS be held liable for moral and temperate damages. As concluded by the Court
of Appeals the negligence of the appellant is not so gross as to warrant moral and temperate
damages, except that, said Court reduced those damages by only P5,000.00 instead of
eliminating them. Neither can we agree with the findings of both the Trial Court and
respondent Court that the SSS had acted maliciously or in bad faith. The SSS was of the
belief that it was acting in the legitimate exercise of its right under the mortgage contract in
the face of irregular payments made by private respondents and placed reliance on the
automatic acceleration clause in the contract. The filing alone of the foreclosure application
should not be a ground for an award of moral damages in the same way that a clearly
unfounded civil action is not among the grounds for moral damages.
Private respondents counter that BPIIC was guilty of bad faith and should be liable for said
damages because it insisted on the payment of amortization on the loan even before it was
released. Further, it did not make the corresponding deduction in the monthly amortization
to conform to the actual amount of loan released, and it immediately initiated foreclosure
proceedings when private respondents failed to make timely payment.
But as admitted by private respondents themselves, they were irregular in their payment of
monthly amortization. Conformably with our ruling in SSS, we can not properly declare BPIIC
in bad faith. Consequently, we should rule out the award of moral and exemplary damages.
[if !supportFootnotes][11][endif]

However, in our view, BPIIC was negligent in relying merely on the entries found in the deed
of mortgage, without checking and correspondingly adjusting its records on the amount
actually released to private respondents and the date when it was released. Such negligence
resulted in damage to private respondents, for which an award of nominal damages should
be given in recognition of their rights which were violated by BPIIC. [if !supportFootnotes][12][endif] For
this purpose, the amount of P25,000 is sufficient.
Lastly, as in SSS where we awarded attorneys fees because private respondents were
compelled to litigate, we sustain the award of P50,000 in favor of private respondents as
attorneys fees.
WHEREFORE, the decision dated February 28, 1997, of the Court of Appeals and its
resolution dated April 21, 1998, are AFFIRMED WITH MODIFICATION as to the award of
damages. The award of moral and exemplary damages in favor of private respondents is
DELETED, but the award to them of attorneys fees in the amount of P50,000 is UPHELD.
Additionally, petitioner is ORDERED to pay private respondents P25,000 as nominal
damages. Costs against petitioner.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-24968 April 27, 1972
SAURA IMPORT and EXPORT CO., INC., plaintiff-appellee,
vs.

38

DEVELOPMENT BANK OF THE PHILIPPINES, defendant-appellant.

Mabanag, Eliger and Associates and Saura, Magno and Associates for plaintiff-appellee.
Jesus A. Avancea and Hilario G. Orsolino for defendant-appellant.
MAKALINTAL, J.:p
In Civil Case No. 55908 of the Court of First Instance of Manila, judgment was rendered on
June 28, 1965 sentencing defendant Development Bank of the Philippines (DBP) to pay
actual and consequential damages to plaintiff Saura Import and Export Co., Inc. in the
amount of P383,343.68, plus interest at the legal rate from the date the complaint was filed
and attorney's fees in the amount of P5,000.00. The present appeal is from that judgment.
In July 1953 the plaintiff (hereinafter referred to as Saura, Inc.) applied to the Rehabilitation
Finance Corporation (RFC), before its conversion into DBP, for an industrial loan of
P500,000.00, to be used as follows: P250,000.00 for the construction of a factory building
(for the manufacture of jute sacks); P240,900.00 to pay the balance of the purchase price of
the jute mill machinery and equipment; and P9,100.00 as additional working capital.
Parenthetically, it may be mentioned that the jute mill machinery had already been
purchased by Saura on the strength of a letter of credit extended by the Prudential Bank and
Trust Co., and arrived in Davao City in July 1953; and that to secure its release without first
paying the draft, Saura, Inc. executed a trust receipt in favor of the said bank.
On January 7, 1954 RFC passed Resolution No. 145 approving the loan application for
P500,000.00, to be secured by a first mortgage on the factory building to be constructed,
the land site thereof, and the machinery and equipment to be installed. Among the other
terms spelled out in the resolution were the following:
1. That the proceeds of the loan shall be utilized exclusively for the following purposes:
For construction of factory building P250,000.00
For payment of the balance of purchase
price of machinery and equipment 240,900.00
For working capital 9,100.00
T O T A L P500,000.00
4. That Mr. & Mrs. Ramon E. Saura, Inocencia Arellano, Aniceto Caolboy and Gregoria
Estabillo and China Engineers, Ltd. shall sign the promissory notes jointly with the borrowercorporation;
5. That release shall be made at the discretion of the Rehabilitation Finance Corporation,
subject to availability of funds, and as the construction of the factory buildings progresses,
to be certified to by an appraiser of this Corporation;"
Saura, Inc. was officially notified of the resolution on January 9, 1954. The day before,
however, evidently having otherwise been informed of its approval, Saura, Inc. wrote a letter
to RFC, requesting a modification of the terms laid down by it, namely: that in lieu of having
China Engineers, Ltd. (which was willing to assume liability only to the extent of its stock
subscription with Saura, Inc.) sign as co-maker on the corresponding promissory notes,
Saura, Inc. would put up a bond for P123,500.00, an amount equivalent to such subscription;
and that Maria S. Roca would be substituted for Inocencia Arellano as one of the other comakers, having acquired the latter's shares in Saura, Inc.
In view of such request RFC approved Resolution No. 736 on February 4, 1954, designating
of the members of its Board of Governors, for certain reasons stated in the resolution, "to
reexamine all the aspects of this approved loan ... with special reference as to the
advisability of financing this particular project based on present conditions obtaining in the
operations of jute mills, and to submit his findings thereon at the next meeting of the
Board."
On March 24, 1954 Saura, Inc. wrote RFC that China Engineers, Ltd. had again agreed to act
as co-signer for the loan, and asked that the necessary documents be prepared in
accordance with the terms and conditions specified in Resolution No. 145. In connection with
the reexamination of the project to be financed with the loan applied for, as stated in
Resolution No. 736, the parties named their respective committees of engineers and
technical men to meet with each other and undertake the necessary studies, although in
appointing its own committee Saura, Inc. made the observation that the same "should not
be taken as an acquiescence on (its) part to novate, or accept new conditions to, the
agreement already) entered into," referring to its acceptance of the terms and conditions
mentioned in Resolution No. 145.
On April 13, 1954 the loan documents were executed: the promissory note, with F.R. Halling,
representing China Engineers, Ltd., as one of the co-signers; and the corresponding deed of
mortgage, which was duly registered on the following April 17.
It appears, however, that despite the formal execution of the loan agreement the
reexamination contemplated in Resolution No. 736 proceeded. In a meeting of the RFC
Board of Governors on June 10, 1954, at which Ramon Saura, President of Saura, Inc., was
present, it was decided to reduce the loan from P500,000.00 to P300,000.00. Resolution No.
3989 was approved as follows:

39

RESOLUTION No. 3989. Reducing the Loan Granted Saura Import & Export Co., Inc. under
Resolution No. 145, C.S., from P500,000.00 to P300,000.00. Pursuant to Bd. Res. No. 736,
c.s., authorizing the re-examination of all the various aspects of the loan granted the Saura
Import & Export Co. under Resolution No. 145, c.s., for the purpose of financing the
manufacture of jute sacks in Davao, with special reference as to the advisability of financing
this particular project based on present conditions obtaining in the operation of jute mills,
and after having heard Ramon E. Saura and after extensive discussion on the subject the
Board, upon recommendation of the Chairman, RESOLVED that the loan granted the Saura
Import & Export Co. be REDUCED from P500,000 to P300,000 and that releases up to
P100,000 may be authorized as may be necessary from time to time to place the factory in
actual operation: PROVIDED that all terms and conditions of Resolution No. 145, c.s., not
inconsistent herewith, shall remain in full force and effect."
On June 19, 1954 another hitch developed. F.R. Halling, who had signed the promissory note
for China Engineers Ltd. jointly and severally with the other RFC that his company no longer
to of the loan and therefore considered the same as cancelled as far as it was concerned. A
follow-up letter dated July 2 requested RFC that the registration of the mortgage be
withdrawn.
In the meantime Saura, Inc. had written RFC requesting that the loan of P500,000.00 be
granted. The request was denied by RFC, which added in its letter-reply that it was
"constrained to consider as cancelled the loan of P300,000.00 ... in view of a notification ...
from the China Engineers Ltd., expressing their desire to consider the loan insofar as they
are concerned."
On July 24, 1954 Saura, Inc. took exception to the cancellation of the loan and informed RFC
that China Engineers, Ltd. "will at any time reinstate their signature as co-signer of the note
if RFC releases to us the P500,000.00 originally approved by you.".
On December 17, 1954 RFC passed Resolution No. 9083, restoring the loan to the original
amount of P500,000.00, "it appearing that China Engineers, Ltd. is now willing to sign the
promissory notes jointly with the borrower-corporation," but with the following proviso:
That in view of observations made of the shortage and high cost of imported raw materials,
the Department of Agriculture and Natural Resources shall certify to the following:
1. That the raw materials needed by the borrower-corporation to carry out its operation are
available in the immediate vicinity; and
2. That there is prospect of increased production thereof to provide adequately for the
requirements of the factory."
The action thus taken was communicated to Saura, Inc. in a letter of RFC dated December
22, 1954, wherein it was explained that the certification by the Department of Agriculture
and Natural Resources was required "as the intention of the original approval (of the loan) is
to develop the manufacture of sacks on the basis of locally available raw materials." This
point is important, and sheds light on the subsequent actuations of the parties. Saura, Inc.
does not deny that the factory he was building in Davao was for the manufacture of bags
from local raw materials. The cover page of its brochure (Exh. M) describes the project as a
"Joint venture by and between the Mindanao Industry Corporation and the Saura Import and
Export Co., Inc. to finance, manage and operate a Kenaf mill plant, to manufacture copra
and corn bags, runners, floor mattings, carpets, draperies; out of 100% local raw materials,
principal kenaf." The explanatory note on page 1 of the same brochure states that, the
venture "is the first serious attempt in this country to use 100% locally grown raw materials
notably kenaf which is presently grown commercially in theIsland of Mindanao where the
proposed jutemill is located ..."
This fact, according to defendant DBP, is what moved RFC to approve the loan application in
the first place, and to require, in its Resolution No. 9083, a certification from the Department
of Agriculture and Natural Resources as to the availability of local raw materials to provide
adequately for the requirements of the factory. Saura, Inc. itself confirmed the defendant's
stand impliedly in its letter of January 21, 1955: (1) stating that according to a special study
made by the Bureau of Forestry "kenaf will not be available in sufficient quantity this year or
probably even next year;" (2) requesting "assurances (from RFC) that my company and
associates will be able to bring in sufficient jute materials as may be necessary for the full
operation of the jute mill;" and (3) asking that releases of the loan be made as follows:
a) For the payment of the receipt for jute mill
machineries with the Prudential Bank &
Trust Company P250,000.00
(For immediate release)
b) For the purchase of materials and equipment per attached list to enable the jute
mill to operate 182,413.91
c) For raw materials and labor 67,586.09
1) P25,000.00 to be released on the opening of the letter of credit for raw jute

40

for $25,000.00.
2) P25,000.00 to be released upon arrival
of raw jute.
3) P17,586.09 to be released as soon as the
mill is ready to operate.
On January 25, 1955 RFC sent to Saura, Inc. the following reply:
Dear Sirs:
This is with reference to your letter of January 21, 1955, regarding the release of your loan
under consideration of P500,000. As stated in our letter of December 22, 1954, the releases
of the loan, if revived, are proposed to be made from time to time, subject to availability of
funds towards the end that the sack factory shall be placed in actual operating status. We
shall be able to act on your request for revised purpose and manner of releases upon reappraisal of the securities offered for the loan.
With respect to our requirement that the Department of Agriculture and Natural Resources
certify that the raw materials needed are available in the immediate vicinity and that there
is prospect of increased production thereof to provide adequately the requirements of the
factory, we wish to reiterate that the basis of the original approval is to develop the
manufacture of sacks on the basis of the locally available raw materials. Your statement that
you will have to rely on the importation of jute and your request that we give you assurance
that your company will be able to bring in sufficient jute materials as may be necessary for
the operation of your factory, would not be in line with our principle in approving the loan.
With the foregoing letter the negotiations came to a standstill. Saura, Inc. did not pursue the
matter further. Instead, it requested RFC to cancel the mortgage, and so, on June 17, 1955
RFC executed the corresponding deed of cancellation and delivered it to Ramon F. Saura
himself as president of Saura, Inc.
It appears that the cancellation was requested to make way for the registration of a
mortgage contract, executed on August 6, 1954, over the same property in favor of the
Prudential Bank and Trust Co., under which contract Saura, Inc. had up to December 31 of
the same year within which to pay its obligation on the trust receipt heretofore mentioned. It
appears further that for failure to pay the said obligation the Prudential Bank and Trust Co.
sued Saura, Inc. on May 15, 1955.
On January 9, 1964, ahnost 9 years after the mortgage in favor of RFC was cancelled at the
request of Saura, Inc., the latter commenced the present suit for damages, alleging failure of
RFC (as predecessor of the defendant DBP) to comply with its obligation to release the
proceeds of the loan applied for and approved, thereby preventing the plaintiff from
completing or paying contractual commitments it had entered into, in connection with its
jute mill project.
The trial court rendered judgment for the plaintiff, ruling that there was a perfected contract
between the parties and that the defendant was guilty of breach thereof. The defendant
pleaded below, and reiterates in this appeal: (1) that the plaintiff's cause of action had
prescribed, or that its claim had been waived or abandoned; (2) that there was no perfected
contract; and (3) that assuming there was, the plaintiff itself did not comply with the terms
thereof.
We hold that there was indeed a perfected consensual contract, as recognized in Article
1934 of the Civil Code, which provides:
ART. 1954. An accepted promise to deliver something, by way of commodatum or simple
loan is binding upon the parties, but the commodatum or simple loan itself shall not be
perferted until the delivery of the object of the contract.
There was undoubtedly offer and acceptance in this case: the application of Saura, Inc. for a
loan of P500,000.00 was approved by resolution of the defendant, and the corresponding
mortgage was executed and registered. But this fact alone falls short of resolving the basic
claim that the defendant failed to fulfill its obligation and the plaintiff is therefore entitled to
recover damages.
It should be noted that RFC entertained the loan application of Saura, Inc. on the assumption
that the factory to be constructed would utilize locally grown raw materials, principally
kenaf. There is no serious dispute about this. It was in line with such assumption that when
RFC, by Resolution No. 9083 approved on December 17, 1954, restored the loan to the
original amount of P500,000.00. it imposed two conditions, to wit: "(1) that the raw materials
needed by the borrower-corporation to carry out its operation are available in the immediate
vicinity; and (2) that there is prospect of increased production thereof to provide adequately
for the requirements of the factory." The imposition of those conditions was by no means a
deviation from the terms of the agreement, but rather a step in its implementation. There
was nothing in said conditions that contradicted the terms laid down in RFC Resolution No.
145, passed on January 7, 1954, namely "that the proceeds of the loan shall be utilized
exclusively for the following purposes: for construction of factory building P250,000.00;
for payment of the balance of purchase price of machinery and equipment P240,900.00;
for working capital P9,100.00." Evidently Saura, Inc. realized that it could not meet the

41

conditions required by RFC, and so wrote its letter of January 21, 1955, stating that local jute
"will not be able in sufficient quantity this year or probably next year," and asking that out of
the loan agreed upon the sum of P67,586.09 be released "for raw materials and labor." This
was a deviation from the terms laid down in Resolution No. 145 and embodied in the
mortgage contract, implying as it did a diversion of part of the proceeds of the loan to
purposes other than those agreed upon.
When RFC turned down the request in its letter of January 25, 1955 the negotiations which
had been going on for the implementation of the agreement reached an impasse. Saura, Inc.
obviously was in no position to comply with RFC's conditions. So instead of doing so and
insisting that the loan be released as agreed upon, Saura, Inc. asked that the mortgage be
cancelled, which was done on June 15, 1955. The action thus taken by both parties was in
the nature cf mutual desistance what Manresa terms "mutuo disenso" 1 which is a
mode of extinguishing obligations. It is a concept that derives from the principle that since
mutual agreement can create a contract, mutual disagreement by the parties can cause its
extinguishment. 2
The subsequent conduct of Saura, Inc. confirms this desistance. It did not protest against
any alleged breach of contract by RFC, or even point out that the latter's stand was legally
unjustified. Its request for cancellation of the mortgage carried no reservation of whatever
rights it believed it might have against RFC for the latter's non-compliance. In 1962 it even
applied with DBP for another loan to finance a rice and corn project, which application was
disapproved. It was only in 1964, nine years after the loan agreement had been cancelled at
its own request, that Saura, Inc. brought this action for damages.All these circumstances
demonstrate beyond doubt that the said agreement had been extinguished by mutual
desistance and that on the initiative of the plaintiff-appellee itself.
With this view we take of the case, we find it unnecessary to consider and resolve the other
issues raised in the respective briefs of the parties.
WHEREFORE, the judgment appealed from is reversed and the complaint dismissed, with
costs against the plaintiff-appellee.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 26085
August 12, 1927
SEVERINO TOLENTINO and POTENCIANA MANIO, plaintiffs-appellants,
vs.
BENITO GONZALEZ SY CHIAM, defendants-appellee.
Araneta and Zaragoza for appellants.Eusebio Orense for appelle.
JOHNSON, J.:
PRINCIPAL QUESTIONS PRESENTED BY THE APPEAL
The principal questions presented by this appeal are:
(a) Is the contract in question a pacto de retro or a mortgage?
(b) Under a pacto de retro, when the vendor becomes a tenant of the purchaser and agrees
to pay a certain amount per month as rent, may such rent render such a contract usurious
when the amount paid as rent, computed upon the purchase price, amounts to a higher rate
of interest upon said amount than that allowed by law?
(c)
May the contract in the present case may be modified by parol evidence?
ANTECEDENT FACTS
Sometime prior to the 28th day of November, 1922, the appellants purchased of the Luzon
Rice Mills, Inc., a piece or parcel of land with the camarin located thereon, situated in the
municipality of Tarlac of the Province of Tarlac for the price of P25,000, promising to pay
therefor in three installments. The first installment of P2,000 was due on or before the 2d
day of May, 1921; the second installment of P8,000 was due on or before 31st day of May,
1921; the balance of P15,000 at 12 per cent interest was due and payable on or about the
30th day of November, 1922. One of the conditions of that contract of purchase was that on
failure of the purchaser (plaintiffs and appellants) to pay the balance of said purchase price
or any of the installments on the date agreed upon, the property bought would revert to the
original owner.
The payments due on the 2d and 31st of May, 1921, amounting to P10,000 were paid so far
as the record shows upon the due dates. The balance of P15,000 due on said contract of
purchase was paid on or about the 1st day of December, 1922, in the manner which will be
explained below. On the date when the balance of P15,000 with interest was paid, the
vendor of said property had issued to the purchasers transfer certificate of title to said
property, No. 528. Said transfer certificate of title (No. 528) was transfer certificate of title
from No. 40, which shows that said land was originally registered in the name of the vendor
on the 7th day of November, 1913.
PRESENT FACTS

42

On the 7th day of November, 1922 the representative of the vendor of the property in
question wrote a letter to the appellant Potenciana Manio (Exhibit A, p. 50), notifying the
latter that if the balance of said indebtedness was not paid, an action would be brought for
the purpose of recovering the property, together with damages for non compliance with the
condition of the contract of purchase. The pertinent parts of said letter read as follows:
Sirvase notar que de no estar liquidada esta cuenta el dia 30 del corriente, procederemos
judicialmente contra Vd. para reclamar la devolucion del camarin y los daos y perjuicios
ocasionados a la compaia por su incumplimiento al contrato.
Somos de Vd. atentos y S. S.
SMITH, BELL & CO., LTD.
By (Sgd.) F. I. HIGHAM
Treasurer.
General Managers
LUZON RICE MILLS INC.
According to Exhibits B and D, which represent the account rendered by the vendor, there
was due and payable upon said contract of purchase on the 30th day of November, 1922,
the sum P16,965.09. Upon receiving the letter of the vendor of said property of November 7,
1922, the purchasers, the appellants herein, realizing that they would be unable to pay the
balance due, began to make an effort to borrow money with which to pay the balance due,
began to make an effort to borrow money with which to pay the balance of their
indebtedness on the purchase price of the property involved. Finally an application was
made to the defendant for a loan for the purpose of satisfying their indebtedness to the
vendor of said property. After some negotiations the defendants agreed to loan the plaintiffs
to loan the plaintiffs the sum of P17,500 upon condition that the plaintiffs execute and
deliver to him a pacto de retro of said property.
In accordance with that agreement the defendant paid to the plaintiffs by means of a check
the sum of P16,965.09. The defendant, in addition to said amount paid by check, delivered
to the plaintiffs the sum of P354.91 together with the sum of P180 which the plaintiffs paid
to the attorneys for drafting said contract of pacto de retro, making a total paid by the
defendant to the plaintiffs and for the plaintiffs of P17,500 upon the execution and delivery
of said contract. Said contracts was dated the 28th day of November, 1922, and is in the
words and figures following:
Sepan todos por la presente:
Que nosotros, los conyuges Severino Tolentino y Potenciana Manio, ambos mayores de edad,
residentes en el Municipio de Calumpit, Provincia de Bulacan, propietarios y transeuntes en
esta Ciudad de Manila, de una parte, y de otra, Benito Gonzalez Sy Chiam, mayor de edad,
casado con Maria Santiago, comerciante y vecinos de esta Ciudad de Manila.
MANIFESTAMOS Y HACEMOS CONSTAR:
Primero. Que nosotros, Severino Tolentino y Potenciano Manio, por y en consideracion a la
cantidad de diecisiete mil quinientos pesos (P17,500) moneda filipina, que en este acto
hemos recibido a nuestra entera satisfaccion de Don Benito Gonzalez Sy Chiam, cedemos,
vendemos y traspasamos a favor de dicho Don Benito Gonzalez Sy Chiam, sus herederos y
causahabientes, una finca que, segun el Certificado de Transferencia de Titulo No. 40
expedido por el Registrador de Titulos de la Provincia de Tarlac a favor de "Luzon Rice Mills
Company Limited" que al incorporarse se donomino y se denomina "Luzon Rice Mills Inc.," y
que esta corporacion nos ha transferido en venta absoluta, se describe como sigue:
Un terreno (lote No. 1) con las mejoras existentes en el mismo, situado en el Municipio de
Tarlac. Linda por el O. y N. con propiedad de Manuel Urquico; por el E. con propiedad de la
Manila Railroad Co.; y por el S. con un camino. Partiendo de un punto marcado 1 en el plano,
cuyo punto se halla al N. 41 gds. 17' E.859.42 m. del mojon de localizacion No. 2 de la
Oficina de Terrenos en Tarlac; y desde dicho punto 1 N. 81 gds. 31' O., 77 m. al punto 2;
desde este punto N. 4 gds. 22' E.; 54.70 m. al punto 3; desde este punto S. 86 gds. 17' E.;
69.25 m. al punto 4; desde este punto S. 2 gds. 42' E., 61.48 m. al punto de partida;
midiendo una extension superficcial de cuatro mil doscientos diez y seis metros cuadrados
(4,216) mas o menos. Todos los puntos nombrados se hallan marcados en el plano y sobre el
terreno los puntos 1 y 2 estan determinados por mojones de P. L. S. de 20 x 20 x 70
centimetros y los puntos 3 y 4 por mojones del P. L. S. B. L.: la orientacion seguida es la
verdadera, siendo la declinacion magnetica de 0 gds. 45' E. y la fecha de la medicion, 1. de
febrero de 1913.
Segundo. Que es condicion de esta venta la de que si en el plazo de cinco (5) aos contados
desde el dia 1. de diciembre de 1922, devolvemos al expresado Don Benito Gonzalez Sy
Chiam el referido precio de diecisiete mil quinientos pesos (P17,500) queda obligado dicho
Sr. Benito Gonzalez y Chiam a retrovendernos la finca arriba descrita; pero si transcurre
dicho plazo de cinco aos sin ejercitar el derecho de retracto que nos hemos reservado,
entonces quedara esta venta absoluta e irrevocable.
Tercero. Que durante el expresado termino del retracto tendremos en arrendamiento la finca
arriba descrita, sujeto a condiciones siguientes:

43

(a) El alquiler que nos obligamos a pagar por mensualidades vencidas a Don Benito
Gonzalez Sy Chiam y en su domicilio, era de trescientos setenta y cinco pesos (P375)
moneda filipina, cada mes.
(b) El amillaramiento de la finca arrendada sera por cuenta de dicho Don Benito Gonzalez Sy
Chiam, asi como tambien la prima del seguro contra incendios, si el conviniera al referido Sr.
Benito Gonzalez Sy Chiam asegurar dicha finca.
(c) La falta de pago del alquiler aqui estipulado por dos meses consecutivos dara lugar a la
terminacion de este arrendamieno y a la perdida del derecho de retracto que nos hemos
reservado, como si naturalmente hubiera expirado el termino para ello, pudiendo en su
virtud dicho Sr. Gonzalez Sy Chiam tomar posesion de la finca y desahuciarnos de la misma.
Cuarto. Que yo, Benito Gonzalez Sy Chiam, a mi vez otorgo que acepto esta escritura en los
precisos terminos en que la dejan otorgada los conyuges Severino Tolentino y Potenciana
Manio.
En testimonio de todo lo cual, firmamos la presente de nuestra mano en Manila, por
cuadruplicado en Manila, hoy a 28 de noviembre de 1922.
(Fdo.) SEVERINO TOLENTINO
(Fda.) POTENCIANA MANIO
(Fdo.) BENITO GONZALEZ SY CHIAM
Firmado en presencia de:
(Fdos.) MOISES M. BUHAIN
B. S. BANAAG
An examination of said contract of sale with reference to the first question above, shows
clearly that it is a pacto de retro and not a mortgage. There is no pretension on the part of
the appellant that said contract, standing alone, is a mortgage. The pertinent language of
the contract is:
Segundo. Que es condicion de esta venta la de que si en el plazo de cinco (5) aos contados
desde el dia 1. de diciembre de 1922, devolvemos al expresado Don Benito Gonzales Sy
Chiam el referido precio de diecisiete mil quinientos pesos (P17,500) queda obligado dicho
Sr. Benito Gonzales Sy Chiam a retrovendornos la finca arriba descrita; pero si transcurre
dicho plazo de cinco (5) aos sin ejercitar al derecho de retracto que nos hemos reservado,
entonces quedara esta venta absoluta e irrevocable.
Language cannot be clearer. The purpose of the contract is expressed clearly in said
quotation that there can certainly be not doubt as to the purpose of the plaintiff to sell the
property in question, reserving the right only to repurchase the same. The intention to sell
with the right to repurchase cannot be more clearly expressed.
It will be noted from a reading of said sale of pacto de retro, that the vendor, recognizing the
absolute sale of the property, entered into a contract with the purchaser by virtue of which
she became the "tenant" of the purchaser. That contract of rent appears in said quoted
document above as follows:
Tercero. Que durante el expresado termino del retracto tendremos en arrendamiento la finca
arriba descrita, sujeto a condiciones siguientes:
(a) El alquiler que nos obligamos a pagar por mensualidades vencidas a Don Benito
Gonzalez Sy Chiam y en su domicilio, sera de trescientos setenta y cinco pesos (P375)
moneda filipina, cada mes.
(b) El amillaramiento de la finca arrendada sera por cuenta de dicho Don Benito Gonzalez Sy
Chiam, asi como tambien la prima del seguro contra incendios, si le conviniera al referido Sr.
Benito Gonzalez Sy Chiam asegurar dicha finca.
From the foregoing, we are driven to the following conclusions: First, that the contract of
pacto de retro is an absolute sale of the property with the right to repurchase and not a
mortgage; and, second, that by virtue of the said contract the vendor became the tenant of
the purchaser, under the conditions mentioned in paragraph 3 of said contact quoted above.
It has been the uniform theory of this court, due to the severity of a contract of pacto de
retro, to declare the same to be a mortgage and not a sale whenever the interpretation of
such a contract justifies that conclusion. There must be something, however, in the
language of the contract or in the conduct of the parties which shows clearly and beyond
doubt that they intended the contract to be a "mortgage" and not a pacto de retro.
(International Banking Corporation vs. Martinez, 10 Phil., 252; Padilla vs. Linsangan, 19 Phil.,
65; Cumagun vs. Alingay, 19 Phil., 415; Olino vs. Medina, 13 Phil., 379; Manalo vs. Gueco, 42
Phil., 925; Velazquez vs. Teodoro, 46 Phil., 757; Villa vs. Santiago, 38 Phil., 157.)
We are not unmindful of the fact that sales with pacto de retro are not favored and that the
court will not construe an instrument to one of sale with pacto de retro, with the stringent
and onerous effect which follows, unless the terms of the document and the surrounding
circumstances require it.
While it is general rule that parol evidence is not admissible for the purpose of varying the
terms of a contract, but when an issue is squarely presented that a contract does not
express the intention of the parties, courts will, when a proper foundation is laid therefor,
hear evidence for the purpose of ascertaining the true intention of the parties.

44

In the present case the plaintiffs allege in their complaint that the contract in question is a
pacto de retro. They admit that they signed it. They admit they sold the property in question
with the right to repurchase it. The terms of the contract quoted by the plaintiffs to the
defendant was a "sale" with pacto de retro, and the plaintiffs have shown no circumstance
whatever which would justify us in construing said contract to be a mere "loan" with
guaranty. In every case in which this court has construed a contract to be a mortgage or a
loan instead of a sale with pacto de retro, it has done so, either because the terms of such
contract were incompatible or inconsistent with the theory that said contract was one of
purchase and sale. (Olino vs. Medina, supra; Padilla vs. Linsangan, supra; Manlagnit vs. Dy
Puico, 34 Phil., 325; Rodriguez vs. Pamintuan and De Jesus, 37 Phil., 876.)
In the case of Padilla vs. Linsangan the term employed in the contract to indicate the nature
of the conveyance of the land was "pledged" instead of "sold". In the case of Manlagnit vs.
Dy Puico, while the vendor used to the terms "sale and transfer with the right to
repurchase," yet in said contract he described himself as a "debtor" the purchaser as a
"creditor" and the contract as a "mortgage". In the case of Rodriguez vs. Pamintuan and De
Jesus the person who executed the instrument, purporting on its face to be a deed of sale of
certain parcels of land, had merely acted under a power of attorney from the owner of said
land, "authorizing him to borrow money in such amount and upon such terms and conditions
as he might deem proper, and to secure payment of the loan by a mortgage." In the case of
Villa vs. Santiago (38 Phil., 157), although a contract purporting to be a deed of sale was
executed, the supposed vendor remained in possession of the land and invested the money
he had obtained from the supposed vendee in making improvements thereon, which fact
justified the court in holding that the transaction was a mere loan and not a sale. In the case
of Cuyugan vs. Santos (39 Phil., 970), the purchaser accepted partial payments from the
vendor, and such acceptance of partial payments is absolutely incompatible with the idea of
irrevocability of the title of ownership of the purchaser at the expiration of the term
stipulated in the original contract for the exercise of the right of repurchase."
Referring again to the right of the parties to vary the terms of written contract, we quote
from the dissenting opinion of Chief Justice Cayetano S. Arellano in the case of Government
of the Philippine Islands vs. Philippine Sugar Estates Development Co., which case was
appealed to the Supreme Court of the United States and the contention of the Chief Justice
in his dissenting opinion was affirmed and the decision of the Supreme Court of the
Philippine Islands was reversed. (See decision of the Supreme Court of the United States,
June 3, 1918.)1 The Chief Justice said in discussing that question:
According to article 1282 of the Civil Code, in order to judge of the intention of the
contracting parties, consideration must chiefly be paid to those acts executed by said
parties which are contemporary with and subsequent to the contract. And according to
article 1283, however general the terms of a contract may be, they must not be held to
include things and cases different from those with regard to which the interested parties
agreed to contract. "The Supreme Court of the Philippine Islands held the parol evidence was
admissible in that case to vary the terms of the contract between the Government of the
Philippine Islands and the Philippine Sugar Estates Development Co. In the course of the
opinion of the Supreme Court of the United States Mr. Justice Brandeis, speaking for the
court, said:
It is well settled that courts of equity will reform a written contract where, owing to mutual
mistake, the language used therein did not fully or accurately express the agreement and
intention of the parties. The fact that interpretation or construction of a contract presents a
question of law and that, therefore, the mistake was one of law is not a bar to granting relief.
. . . This court is always disposed to accept the construction which the highest court of a
territory or possession has placed upon a local statute. But that disposition may not be
yielded to where the lower court has clearly erred. Here the construction adopted was rested
upon a clearly erroneous assumption as to an established rule of equity. . . . The burden of
proof resting upon the appellant cannot be satisfied by mere preponderance of the evidence.
It is settled that relief by way of reformation will not be granted unless the proof of mutual
mistake be of the clearest and most satisfactory character.
The evidence introduced by the appellant in the present case does not meet with that
stringent requirement. There is not a word, a phrase, a sentence or a paragraph in the entire
record, which justifies this court in holding that the said contract of pacto de retro is a
mortgage and not a sale with the right to repurchase. Article 1281 of the Civil Code
provides: "If the terms of a contract are clear and leave no doubt as to the intention of the
contracting parties, the literal sense of its stipulations shall be followed." Article 1282
provides: "in order to judge as to the intention of the contracting parties, attention must be
paid principally to their conduct at the time of making the contract and subsequently
thereto."
We cannot thereto conclude this branch of our discussion of the question involved, without
quoting from that very well reasoned decision of the late Chief Justice Arellano, one of the
greatest jurists of his time. He said, in discussing the question whether or not the contract,

45

in the case of Lichauco vs. Berenguer (20 Phil., 12), was a pacto de retro or a mortgage:
The public instrument, Exhibit C, in part reads as follows: "Don Macarion Berenguer declares
and states that he is the proprietor in fee simple of two parcels of fallow unappropriated
crown land situated within the district of his pueblo. The first has an area of 73 quiones, 8
balitas and 8 loanes, located in the sitio of Batasan, and its boundaries are, etc., etc. The
second is in the sitio of Panantaglay, barrio of Calumpang has as area of 73 hectares, 22
ares, and 6 centares, and is bounded on the north, etc., etc."
In the executory part of the said instrument, it is stated:
'That under condition of right to repurchase (pacto de retro) he sells the said properties to
the aforementioned Doa Cornelia Laochangco for P4,000 and upon the following conditions:
First, the sale stipulated shall be for the period of two years, counting from this date, within
which time the deponent shall be entitled to repurchase the land sold upon payment of its
price; second, the lands sold shall, during the term of the present contract, be held in lease
by the undersigned who shall pay, as rental therefor, the sum of 400 pesos per annum, or
the equivalent in sugar at the option of the vendor; third, all the fruits of the said lands shall
be deposited in the sugar depository of the vendee, situated in the district of Quiapo of this
city, and the value of which shall be applied on account of the price of this sale; fourth, the
deponent acknowledges that he has received from the vendor the purchase price of P4,000
already paid, and in legal tender currency of this country . . .; fifth, all the taxes which may
be assessed against the lands surveyed by competent authority, shall be payable by and
constitute a charge against the vendor; sixth, if, through any unusual event, such as flood,
tempest, etc., the properties hereinbefore enumerated should be destroyed, wholly or in
part, it shall be incumbent upon the vendor to repair the damage thereto at his own expense
and to put them into a good state of cultivation, and should he fail to do so he binds himself
to give to the vendee other lands of the same area, quality and value.'
xxx
xxx
xxx
The opponent maintained, and his theory was accepted by the trial court, that Berenguer's
contract with Laochangco was not one of sale with right of repurchase, but merely one of
loan secured by those properties, and, consequently, that the ownership of the lands in
questions could not have been conveyed to Laochangco, inasmuch as it continued to be
held by Berenguer, as well as their possession, which he had not ceased to enjoy.
Such a theory is, as argued by the appellant, erroneous. The instrument executed by
Macario Berenguer, the text of which has been transcribed in this decision, is very clear.
Berenguer's heirs may not go counter to the literal tenor of the obligation, the exact
expression of the consent of the contracting contained in the instrument, Exhibit C. Not
because the lands may have continued in possession of the vendor, not because the latter
may have assumed the payment of the taxes on such properties, nor yet because the same
party may have bound himself to substitute by another any one of the properties which
might be destroyed, does the contract cease to be what it is, as set forth in detail in the
public instrument. The vendor continued in the possession of the lands, not as the owner
thereof as before their sale, but as the lessee which he became after its consummation, by
virtue of a contract executed in his favor by the vendee in the deed itself, Exhibit C. Right of
ownership is not implied by the circumstance of the lessee's assuming the responsibility of
the payment is of the taxes on the property leased, for their payment is not peculiarly
incumbent upon the owner, nor is such right implied by the obligation to substitute the thing
sold for another while in his possession under lease, since that obligation came from him
and he continues under another character in its possessiona reason why he guarantees its
integrity and obligates himself to return the thing even in a case of force majeure. Such
liability, as a general rule, is foreign to contracts of lease and, if required, is exorbitant, but
possible and lawful, if voluntarily agreed to and such agreement does not on this account
involve any sign of ownership, nor other meaning than the will to impose upon oneself
scrupulous diligence in the care of a thing belonging to another.
The purchase and sale, once consummated, is a contract which by its nature transfers the
ownership and other rights in the thing sold. A pacto de retro, or sale with right to
repurchase, is nothing but a personal right stipulated between the vendee and the vendor,
to the end that the latter may again acquire the ownership of the thing alienated.
It is true, very true indeed, that the sale with right of repurchase is employed as a method of
loan; it is likewise true that in practice many cases occur where the consummation of a
pacto de retro sale means the financial ruin of a person; it is also, unquestionable that in
pacto de retro sales very important interests often intervene, in the form of the price of the
lease of the thing sold, which is stipulated as an additional covenant. (Manresa, Civil Code,
p. 274.)
But in the present case, unlike others heard by this court, there is no proof that the sale with
right of repurchase, made by Berenguer in favor of Laonchangco is rather a mortgage to
secure a loan.
We come now to a discussion of the second question presented above, and that is, stating
the same in another form: May a tenant charge his landlord with a violation of the Usury Law

46

upon the ground that the amount of rent he pays, based upon the real value of the property,
amounts to a usurious rate of interest? When the vendor of property under a pacto de retro
rents the property and agrees to pay a rental value for the property during the period of his
right to repurchase, he thereby becomes a "tenant" and in all respects stands in the same
relation with the purchaser as a tenant under any other contract of lease.
The appellant contends that the rental price paid during the period of the existence of the
right to repurchase, or the sum of P375 per month, based upon the value of the property,
amounted to usury. Usury, generally speaking, may be defined as contracting for or
receiving something in excess of the amount allowed by law for the loan or forbearance of
moneythe taking of more interest for the use of money than the law allows. It seems that
the taking of interest for the loan of money, at least the taking of excessive interest has
been regarded with abhorrence from the earliest times. (Dunham vs. Gould, 16 Johnson [N.
Y.], 367.) During the middle ages the people of England, and especially the English Church,
entertained the opinion, then, current in Europe, that the taking of any interest for the loan
of money was a detestable vice, hateful to man and contrary to the laws of God. (3 Coke's
Institute, 150; Tayler on Usury, 44.)
Chancellor Kent, in the case of Dunham vs. Gould, supra, said: "If we look back upon history,
we shall find that there is scarcely any people, ancient or modern, that have not had usury
laws. . . . The Romans, through the greater part of their history, had the deepest abhorrence
of usury. . . . It will be deemed a little singular, that the same voice against usury should
have been raised in the laws of China, in the Hindu institutes of Menu, in the Koran of
Mahomet, and perhaps, we may say, in the laws of all nations that we know of, whether
Greek or Barbarian."
The collection of a rate of interest higher than that allowed by law is condemned by the
Philippine Legislature (Acts Nos. 2655, 2662 and 2992). But is it unlawful for the owner of a
property to enter into a contract with the tenant for the payment of a specific amount of rent
for the use and occupation of said property, even though the amount paid as "rent," based
upon the value of the property, might exceed the rate of interest allowed by law? That
question has never been decided in this jurisdiction. It is one of first impression. No cases
have been found in this jurisdiction answering that question. Act No. 2655 is "An Act fixing
rates of interest upon 'loans' and declaring the effect of receiving or taking usurious rates."
It will be noted that said statute imposes a penalty upon a "loan" or forbearance of any
money, goods, chattels or credits, etc. The central idea of said statute is to prohibit a rate of
interest on "loans." A contract of "loan," is very different contract from that of "rent". A
"loan," as that term is used in the statute, signifies the giving of a sum of money, goods or
credits to another, with a promise to repay, but not a promise to return the same thing. To
"loan," in general parlance, is to deliver to another for temporary use, on condition that the
thing or its equivalent be returned; or to deliver for temporary use on condition that an
equivalent in kind shall be returned with a compensation for its use. The word "loan,"
however, as used in the statute, has a technical meaning. It never means the return of the
same thing. It means the return of an equivalent only, but never the same thing loaned. A
"loan" has been properly defined as an advance payment of money, goods or credits upon a
contract or stipulation to repay, not to return, the thing loaned at some future day in
accordance with the terms of the contract. Under the contract of "loan," as used in said
statute, the moment the contract is completed the money, goods or chattels given cease to
be the property of the former owner and becomes the property of the obligor to be used
according to his own will, unless the contract itself expressly provides for a special or
specific use of the same. At all events, the money, goods or chattels, the moment the
contract is executed, cease to be the property of the former owner and becomes the
absolute property of the obligor.
A contract of "loan" differs materially from a contract of "rent." In a contract of "rent" the
owner of the property does not lose his ownership. He simply loses his control over the
property rented during the period of the contract. In a contract of "loan" the thing loaned
becomes the property of the obligor. In a contract of "rent" the thing still remains the
property of the lessor. He simply loses control of the same in a limited way during the period
of the contract of "rent" or lease. In a contract of "rent" the relation between the contractors
is that of landlord and tenant. In a contract of "loan" of money, goods, chattels or credits,
the relation between the parties is that of obligor and obligee. "Rent" may be defined as the
compensation either in money, provisions, chattels, or labor, received by the owner of the
soil from the occupant thereof. It is defined as the return or compensation for the possession
of some corporeal inheritance, and is a profit issuing out of lands or tenements, in return for
their use. It is that, which is to paid for the use of land, whether in money, labor or other
thing agreed upon. A contract of "rent" is a contract by which one of the parties delivers to
the other some nonconsumable thing, in order that the latter may use it during a certain
period and return it to the former; whereas a contract of "loan", as that word is used in the
statute, signifies the delivery of money or other consumable things upon condition of
returning an equivalent amount of the same kind or quantity, in which cases it is called

47

merely a "loan." In the case of a contract of "rent," under the civil law, it is called a
"commodatum."
From the foregoing it will be seen that there is a while distinction between a contract of
"loan," as that word is used in the statute, and a contract of "rent" even though those words
are used in ordinary parlance as interchangeable terms.
The value of money, goods or credits is easily ascertained while the amount of rent to be
paid for the use and occupation of the property may depend upon a thousand different
conditions; as for example, farm lands of exactly equal productive capacity and of the same
physical value may have a different rental value, depending upon location, prices of
commodities, proximity to the market, etc. Houses may have a different rental value due to
location, conditions of business, general prosperity or depression, adaptability to particular
purposes, even though they have exactly the same original cost. A store on the Escolta, in
the center of business, constructed exactly like a store located outside of the business
center, will have a much higher rental value than the other. Two places of business located in
different sections of the city may be constructed exactly on the same architectural plan and
yet one, due to particular location or adaptability to a particular business which the lessor
desires to conduct, may have a very much higher rental value than one not so located and
not so well adapted to the particular business. A very cheap building on the carnival ground
may rent for more money, due to the particular circumstances and surroundings, than a
much more valuable property located elsewhere. It will thus be seen that the rent to be paid
for the use and occupation of property is not necessarily fixed upon the value of the
property. The amount of rent is fixed, based upon a thousand different conditions and may or
may not have any direct reference to the value of the property rented. To hold that "usury"
can be based upon the comparative actual rental value and the actual value of the property,
is to subject every landlord to an annoyance not contemplated by the law, and would create
a very great disturbance in every business or rural community. We cannot bring ourselves to
believe that the Legislature contemplated any such disturbance in the equilibrium of the
business of the country.
In the present case the property in question was sold. It was an absolute sale with the right
only to repurchase. During the period of redemption the purchaser was the absolute owner
of the property. During the period of redemption the vendor was not the owner of the
property. During the period of redemption the vendor was a tenant of the purchaser. During
the period of redemption the relation which existed between the vendor and the vendee was
that of landlord and tenant. That relation can only be terminated by a repurchase of the
property by the vendor in accordance with the terms of the said contract. The contract was
one of rent. The contract was not a loan, as that word is used in Act No. 2655.
As obnoxious as contracts of pacto de retro are, yet nevertheless, the courts have no right to
make contracts for parties. They made their own contract in the present case. There is not a
word, a phrase, a sentence or paragraph, which in the slightest way indicates that the
parties to the contract in question did not intend to sell the property in question absolutely,
simply with the right to repurchase. People who make their own beds must lie thereon.
What has been said above with reference to the right to modify contracts by parol evidence,
sufficiently answers the third questions presented above. The language of the contract is
explicit, clear, unambiguous and beyond question. It expresses the exact intention of the
parties at the time it was made. There is not a word, a phrase, a sentence or paragraph
found in said contract which needs explanation. The parties thereto entered into said
contract with the full understanding of its terms and should not now be permitted to change
or modify it by parol evidence.
With reference to the improvements made upon said property by the plaintiffs during the life
of the contract, Exhibit C, there is hereby reserved to the plaintiffs the right to exercise in a
separate action the right guaranteed to them under article 361 of the Civil Code.
For all of the foregoing reasons, we are fully persuaded from the facts of the record, in
relation with the law applicable thereto, that the judgment appealed from should be and is
hereby affirmed, with costs. So ordered.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 118375
October 3, 2003
CELESTINA T. NAGUIAT, petitioner,
vs.
COURT OF APPEALS and AURORA QUEAO, respondents.
DECISION
TINGA, J.:
Before us is a Petition for Review on Certiorari under Rule 45, assailing the decision of the
Sixteenth Division of the respondent Court of Appeals promulgated on 21 December 1994 1,

48

which affirmed in toto the decision handed down by the Regional Trial Court (RTC) of Pasay
City.2
The case arose when on 11 August 1981, private respondent Aurora Queao (Queao) filed
a complaint before the Pasay City RTC for cancellation of a Real Estate Mortgage she had
entered into with petitioner Celestina Naguiat (Naguiat). The RTC rendered a decision,
declaring the questioned Real Estate Mortgage void, which Naguiat appealed to the Court of
Appeals. After the Court of Appeals upheld the RTC decision, Naguiat instituted the present
petition.1vvphi1.nt
The operative facts follow:
Queao applied with Naguiat for a loan in the amount of Two Hundred Thousand Pesos
(P200,000.00), which Naguiat granted. On 11 August 1980, Naguiat indorsed to Queao
Associated Bank Check No. 090990 (dated 11 August 1980) for the amount of Ninety Five
Thousand Pesos (P95,000.00), which was earlier issued to Naguiat by the Corporate
Resources Financing Corporation. She also issued her own Filmanbank Check No. 065314, to
the order of Queao, also dated 11 August 1980 and for the amount of Ninety Five Thousand
Pesos (P95,000.00). The proceeds of these checks were to constitute the loan granted by
Naguiat to Queao.3
To secure the loan, Queao executed a Deed of Real Estate Mortgage dated 11 August 1980
in favor of Naguiat, and surrendered to the latter the owners duplicates of the titles
covering the mortgaged properties.4 On the same day, the mortgage deed was notarized,
and Queao issued to Naguiat a promissory note for the amount of TWO HUNDRED
THOUSAND PESOS (P200,000.00), with interest at 12% per annum, payable on 11
September 1980.5 Queao also issued a Security Bank and Trust Company check, postdated
11 September 1980, for the amount of TWO HUNDRED THOUSAND PESOS (P200,000.00)
and payable to the order of Naguiat.
Upon presentment on its maturity date, the Security Bank check was dishonored for
insufficiency of funds. On the following day, 12 September 1980, Queao requested Security
Bank to stop payment of her postdated check, but the bank rejected the request pursuant to
its policy not to honor such requests if the check is drawn against insufficient funds. 6
On 16 October 1980, Queao received a letter from Naguiats lawyer, demanding settlement
of the loan. Shortly thereafter, Queao and one Ruby Ruebenfeldt (Ruebenfeldt) met with
Naguiat. At the meeting, Queao told Naguiat that she did not receive the proceeds of the
loan, adding that the checks were retained by Ruebenfeldt, who purportedly was Naguiats
agent.7
Naguiat applied for the extrajudicial foreclosure of the mortgage with the Sheriff of Rizal
Province, who then scheduled the foreclosure sale on 14 August 1981. Three days before the
scheduled sale, Queao filed the case before the Pasay City RTC, 8 seeking the annulment of
the mortgage deed. The trial court eventually stopped the auction sale. 9
On 8 March 1991, the RTC rendered judgment, declaring the Deed of Real Estate Mortgage
null and void, and ordering Naguiat to return to Queao the owners duplicates of her titles
to the mortgaged lots.10 Naguiat appealed the decision before the Court of Appeals, making
no less than eleven assignments of error. The Court of Appeals promulgated the decision
now assailed before us that affirmed in toto the RTC decision. Hence, the present petition.
Naguiat questions the findings of facts made by the Court of Appeals, especially on the issue
of whether Queao had actually received the loan proceeds which were supposed to be
covered by the two checks Naguiat had issued or indorsed. Naguiat claims that being a
notarial instrument or public document, the mortgage deed enjoys the presumption that the
recitals therein are true. Naguiat also questions the admissibility of various representations
and pronouncements of Ruebenfeldt, invoking the rule on the non-binding effect of the
admissions of third persons.11
The resolution of the issues presented before this Court by Naguiat involves the
determination of facts, a function which this Court does not exercise in an appeal by
certiorari. Under Rule 45 which governs appeal by certiorari, only questions of law may be
raised12 as the Supreme Court is not a trier of facts. 13 The resolution of factual issues is the
function of lower courts, whose findings on these matters are received with respect and are
in fact generally binding on the Supreme Court. 14 A question of law which the Court may
pass upon must not involve an examination of the probative value of the evidence presented
by the litigants.15 There is a question of law in a given case when the doubt or difference
arises as to what the law is on a certain state of facts; there is a question of fact when the
doubt or difference arises as to the truth or the falsehood of alleged facts. 16
Surely, there are established exceptions to the rule on the conclusiveness of the findings of
facts of the lower courts.17 But Naguiats case does not fall under any of the exceptions. In
any event, both the decisions of the appellate and trial courts are supported by the evidence
on record and the applicable laws.
Against the common finding of the courts below, Naguiat vigorously insists that Queao
received the loan proceeds. Capitalizing on the status of the mortgage deed as a public
document, she cites the rule that a public document enjoys the presumption of validity and

49

truthfulness of its contents. The Court of Appeals, however, is correct in ruling that the
presumption of truthfulness of the recitals in a public document was defeated by the clear
and convincing evidence in this case that pointed to the absence of consideration. 18 This
Court has held that the presumption of truthfulness engendered by notarized documents is
rebuttable, yielding as it does to clear and convincing evidence to the contrary, as in this
case.19
On the other hand, absolutely no evidence was submitted by Naguiat that the checks she
issued or endorsed were actually encashed or deposited. The mere issuance of the checks
did not result in the perfection of the contract of loan. For the Civil Code provides that the
delivery of bills of exchange and mercantile documents such as checks shall produce the
effect of payment only when they have been cashed. 20 It is only after the checks have
produced the effect of payment that the contract of loan may be deemed perfected. Art.
1934 of the Civil Code provides:
"An accepted promise to deliver something by way of commodatum or simple loan is binding
upon the parties, but the commodatum or simple loan itself shall not be perfected until the
delivery of the object of the contract."
A loan contract is a real contract, not consensual, and, as such, is perfected only upon the
delivery of the object of the contract. 21 In this case, the objects of the contract are the loan
proceeds which Queao would enjoy only upon the encashment of the checks signed or
indorsed by Naguiat. If indeed the checks were encashed or deposited, Naguiat would have
certainly presented the corresponding documentary evidence, such as the returned checks
and the pertinent bank records. Since Naguiat presented no such proof, it follows that the
checks were not encashed or credited to Queaos account.1awphi1.nt
Naguiat questions the admissibility of the various written representations made by
Ruebenfeldt on the ground that they could not bind her following the res inter alia acta alteri
nocere non debet rule. The Court of Appeals rejected the argument, holding that since
Ruebenfeldt was an authorized representative or agent of Naguiat the situation falls under a
recognized exception to the rule.22 Still, Naguiat insists that Ruebenfeldt was not her agent.
Suffice to say, however, the existence of an agency relationship between Naguiat and
Ruebenfeldt is supported by ample evidence. As correctly pointed out by the Court of
Appeals, Ruebenfeldt was not a stranger or an unauthorized person. Naguiat instructed
Ruebenfeldt to withhold from Queao the checks she issued or indorsed to Queao, pending
delivery by the latter of additional collateral. Ruebenfeldt served as agent of Naguiat on the
loan application of Queaos friend, Marilou Farralese, and it was in connection with that
transaction that Queao came to know Naguiat. 23 It was also Ruebenfeldt who accompanied
Queao in her meeting with Naguiat and on that occasion, on her own and without Queao
asking for it, Reubenfeldt actually drew a check for the sum of P220,000.00 payable to
Naguiat, to cover for Queaos alleged liability to Naguiat under the loan agreement. 24
The Court of Appeals recognized the existence of an "agency by estoppel 25 citing Article
1873 of the Civil Code.26 Apparently, it considered that at the very least, as a consequence
of the interaction between Naguiat and Ruebenfeldt, Queao got the impression that
Ruebenfeldt was the agent of Naguiat, but Naguiat did nothing to correct Queaos
impression. In that situation, the rule is clear. One who clothes another with apparent
authority as his agent, and holds him out to the public as such, cannot be permitted to deny
the authority of such person to act as his agent, to the prejudice of innocent third parties
dealing with such person in good faith, and in the honest belief that he is what he appears to
be.27 The Court of Appeals is correct in invoking the said rule on agency by
estoppel.1awphi1.nt
More fundamentally, whatever was the true relationship between Naguiat and Ruebenfeldt is
irrelevant in the face of the fact that the checks issued or indorsed to Queao were never
encashed or deposited to her account of Naguiat.
All told, we find no compelling reason to disturb the finding of the courts a quo that the
lender did not remit and the borrower did not receive the proceeds of the loan. That being
the case, it follows that the mortgage which is supposed to secure the loan is null and void.
The consideration of the mortgage contract is the same as that of the principal contract from
which it receives life, and without which it cannot exist as an independent contract. 28 A
mortgage contract being a mere accessory contract, its validity would depend on the validity
of the loan secured by it.29
WHEREFORE, the petition is denied and the assailed decision is affirmed. Costs against
petitioner.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-20240
December 31, 1965

50

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
JOSE GRIJALDO, defendant-appellant.
Office of the Solicitor General for plaintiff-appellee.Isabelo P. Samson for defendantappellant.
ZALDIVAR, J.:
In the year 1943 appellant Jose Grijaldo obtained five loans from the branch office of the
Bank of Taiwan, Ltd. in Bacolod City, in the total sum of P1,281.97 with interest at the rate of
6% per annum, compounded quarterly. These loans are evidenced by five promissory notes
executed by the appellant in favor of the Bank of Taiwan, Ltd., as follows: On June 1, 1943,
P600.00; on June 3, 1943, P159.11; on June 18, 1943, P22.86; on August 9, 1943,P300.00; on
August 13, 1943, P200.00, all notes without due dates, but because the loans were due one
year after they were incurred. To secure the payment of the loans the appellant executed a
chattel mortgage on the standing crops on his land, Lot No. 1494 known as Hacienda
Campugas in Hinigiran, Negros Occidental.
By virtue of Vesting Order No. P-4, dated January 21, 1946, and under the authority provided
for in the Trading with the Enemy Act, as amended, the assets in the Philippines of the Bank
of Taiwan, Ltd. were vested in the Government of the United States. Pursuant to the
Philippine Property Act of 1946 of the United States, these assets, including the loans in
question, were subsequently transferred to the Republic of the Philippines by the
Government of the United States under Transfer Agreement dated July 20, 1954. These
assets were among the properties that were placed under the administration of the Board of
Liquidators created under Executive Order No. 372, dated November 24, 1950, and in
accordance with Republic Acts Nos. 8 and 477 and other pertinent laws.
On September 29, 1954 the appellee, Republic of the Philippines, represented by the
Chairman of the Board of Liquidators, made a written extrajudicial demand upon the
appellant for the payment of the account in question. The record shows that the appellant
had actually received the written demand for payment, but he failed to pay.
The aggregate amount due as principal of the five loans in question, computed under the
Ballantyne scale of values as of the time that the loans were incurred in 1943, was P889.64;
and the interest due thereon at the rate of 6% per annum compounded quarterly, computed
as of December 31, 1959 was P2,377.23.
On January 17, 1961 the appellee filed a complaint in the Justice of the Peace Court of
Hinigaran, Negros Occidental, to collect from the appellant the unpaid account in question.
The Justice of the Peace Of Hinigaran, after hearing, dismissed the case on the ground that
the action had prescribed. The appellee appealed to the Court of First Instance of Negros
Occidental and on March 26, 1962 the court a quo rendered a decision ordering the
appellant to pay the appellee the sum of P2,377.23 as of December 31, 1959, plus interest
at the rate of 6% per annum compounded quarterly from the date of the filing of the
complaint until full payment was made. The appellant was also ordered to pay the sum
equivalent to 10% of the amount due as attorney's fees and costs.
The appellant appealed directly to this Court. During the pendency of this appeal the
appellant Jose Grijaldo died. Upon motion by the Solicitor General this Court, in a resolution
of May 13, 1963, required Manuel Lagtapon, Jacinto Lagtapon, Ruben Lagtapon and Anita L.
Aguilar, who are the legal heirs of Jose Grijaldo to appear and be substituted as appellants in
accordance with Section 17 of Rule 3 of the Rules of Court.
In the present appeal the appellant contends: (1) that the appellee has no cause of action
against the appellant; (2) that if the appellee has a cause of action at all, that action had
prescribed; and (3) that the lower court erred in ordering the appellant to pay the amount of
P2,377.23.
In discussing the first point of contention, the appellant maintains that the appellee has no
privity of contract with the appellant. It is claimed that the transaction between the Taiwan
Bank, Ltd. and the appellant, so that the appellee, Republic of the Philippines, could not
legally bring action against the appellant for the enforcement of the obligation involved in
said transaction. This contention has no merit. It is true that the Bank of Taiwan, Ltd. was the
original creditor and the transaction between the appellant and the Bank of Taiwan was a
private contract of loan. However, pursuant to the Trading with the Enemy Act, as amended,
and Executive Order No. 9095 of the United States; and under Vesting Order No. P-4, dated
January 21, 1946, the properties of the Bank of Taiwan, Ltd., an entity which was declared to
be under the jurisdiction of the enemy country (Japan), were vested in the United States
Government and the Republic of the Philippines, the assets of the Bank of Taiwan, Ltd. were
transferred to and vested in the Republic of the Philippines. The successive transfer of the
rights over the loans in question from the Bank of Taiwan, Ltd. to the United States
Government, and from the United States Government to the government of the Republic of
the Philippines, made the Republic of the Philippines the successor of the rights, title and
interest in said loans, thereby creating a privity of contract between the appellee and the
appellant. In defining the word "privy" this Court, in a case, said:

51

The word "privy" denotes the idea of succession ... hence an assignee of a credit, and one
subrogated to it, etc. will be privies; in short, he who by succession is placed in the position
of one of those who contracted the judicial relation and executed the private document and
appears to be substituting him in the personal rights and obligation is a privy (Alpurto vs.
Perez, 38 Phil. 785, 790).
The United States of America acting as a belligerent sovereign power seized the assets of
the Bank of Taiwan, Ltd. which belonged to an enemy country. The confiscation of the assets
of the Bank of Taiwan, Ltd. being an involuntary act of war, and sanctioned by international
law, the United States succeeded to the rights and interests of said Bank of Taiwan, Ltd. over
the assets of said bank. As successor in interest in, and transferee of, the property rights of
the United States of America over the loans in question, the Republic of the Philippines had
thereby become a privy to the original contracts of loan between the Bank of Taiwan, Ltd.
and the appellant. It follows, therefore, that the Republic of the Philippines has a legal right
to bring the present action against the appellant Jose Grijaldo.
The appellant likewise maintains, in support of his contention that the appellee has no cause
of action, that because the loans were secured by a chattel mortgage on the standing crops
on a land owned by him and these crops were lost or destroyed through enemy action his
obligation to pay the loans was thereby extinguished. This argument is untenable. The terms
of the promissory notes and the chattel mortgage that the appellant executed in favor of the
Bank of Taiwan, Ltd. do not support the claim of appellant. The obligation of the appellant
under the five promissory notes was not to deliver a determinate thing namely, the crops to
be harvested from his land, or the value of the crops that would be harvested from his land.
Rather, his obligation was to pay a generic thing the amount of money representing the
total sum of the five loans, with interest. The transaction between the appellant and the
Bank of Taiwan, Ltd. was a series of five contracts of simple loan of sums of money. "By a
contract of (simple) loan, one of the parties delivers to another ... money or other
consumable thing upon the condition that the same amount of the same kind and quality
shall be paid." (Article 1933, Civil Code) The obligation of the appellant under the five
promissory notes evidencing the loans in questions is to pay the value thereof; that is, to
deliver a sum of money a clear case of an obligation to deliver, a generic thing. Article
1263 of the Civil Code provides:
In an obligation to deliver a generic thing, the loss or destruction of anything of the same
kind does not extinguish the obligation.
The chattel mortgage on the crops growing on appellant's land simply stood as a security for
the fulfillment of appellant's obligation covered by the five promissory notes, and the loss of
the crops did not extinguish his obligation to pay, because the account could still be paid
from other sources aside from the mortgaged crops.
In his second point of contention, the appellant maintains that the action of the appellee had
prescribed. The appellant points out that the loans became due on June 1, 1944; and when
the complaint was filed on January 17,1961 a period of more than 16 years had already
elapsed far beyond the period of ten years when an action based on a written contract
should be brought to court.
This contention of the appellant has no merit. Firstly, it should be considered that the
complaint in the present case was brought by the Republic of the Philippines not as a
nominal party but in the exercise of its sovereign functions, to protect the interests of the
State over a public property. Under paragraph 4 of Article 1108 of the Civil Code
prescription, both acquisitive and extinctive, does not run against the State. This Court has
held that the statute of limitations does not run against the right of action of the
Government of the Philippines (Government of the Philippine Islands vs. Monte de Piedad,
etc., 35 Phil. 738-751).Secondly, the running of the period of prescription of the action to
collect the loan from the appellant was interrupted by the moratorium laws (Executive
Orders No. 25, dated November 18, 1944; Executive Order No. 32. dated March 10, 1945;
and Republic Act No. 342, approved on July 26, 1948). The loan in question, as evidenced by
the five promissory notes, were incurred in the year 1943, or during the period of Japanese
occupation of the Philippines. This case is squarely covered by Executive Order No. 25, which
became effective on November 18, 1944, providing for the suspension of payments of debts
incurred after December 31, 1941. The period of prescription was, therefore, suspended
beginning November 18, 1944. This Court, in the case of Rutter vs. Esteban (L-3708, May 18,
1953, 93 Phil. 68), declared on May 18, 1953 that the Moratorium Laws, R.A. No. 342 and
Executive Orders Nos. 25 and 32, are unconstitutional; but in that case this Court ruled that
the moratorium laws had suspended the prescriptive period until May 18, 1953. This ruling
was categorically reiterated in the decision in the case of Manila Motors vs. Flores, L-9396,
August 16, 1956. It follows, therefore, that the prescriptive period in the case now before US
was suspended from November 18,1944, when Executive Orders Nos. 25 and 32 were
declared unconstitutional by this Court. Computed accordingly, the prescriptive period was
suspended for 8 years and 6 months. By the appellant's own admission, the cause of action
on the five promissory notes in question arose on June 1, 1944. The complaint in the present

52

case was filed on January 17, 1961, or after a period of 16 years, 6 months and 16 days
when the cause of action arose. If the prescriptive period was not interrupted by the
moratorium laws, the action would have prescribed already; but, as We have stated, the
prescriptive period was suspended by the moratorium laws for a period of 8 years and 6
months. If we deduct the period of suspension (8 years and 6 months) from the period that
elapsed from the time the cause of action arose to the time when the complaint was filed
(16 years, 6 months and 16 days) there remains a period of 8 years and 16 days. In other
words, the prescriptive period ran for only 8 years and 16 days. There still remained a period
of one year, 11 months and 14 days of the prescriptive period when the complaint was filed.
In his third point of contention the appellant maintains that the lower court erred in ordering
him to pay the amount of P2,377.23. It is claimed by the appellant that it was error on the
part of the lower court to apply the Ballantyne Scale of values in evaluating the Japanese
war notes as of June 1943 when the loans were incurred, because what should be done is to
evaluate the loans on the basis of the Ballantyne Scale as of the time the loans became due,
and that was in June 1944. This contention of the appellant is also without merit.
The decision of the court a quo ordered the appellant to pay the sum of P2,377.23 as of
December 31, 1959, plus interest rate of 6% per annum compounded quarterly from the
date of the filing of the complaint. The sum total of the five loans obtained by the appellant
from the Bank of Taiwan, Ltd. was P1,281.97 in Japanese war notes. Computed under the
Ballantyne Scale of values as of June 1943, this sum of P1,281.97 in Japanese war notes in
June 1943 is equivalent to P889.64 in genuine Philippine currency which was considered the
aggregate amount due as principal of the five loans, and the amount of P2,377.23 as of
December 31, 1959 was arrived at after computing the interest on the principal sum of
P889.64 compounded quarterly from the time the obligations were incurred in 1943.
It is the stand of the appellee that the Ballantyne scale of values should be applied as of the
time the obligation was incurred, and that was in June 1943. This stand of the appellee was
upheld by the lower court; and the decision of the lower court is supported by the ruling of
this Court in the case of Hilado vs. De la Costa (G.R. No. L-150, April 30, 1949; 46 O.G.
5472), which states:
... Contracts stipulating for payments presumably in Japanese war notes may be enforced in
our Courts after the liberation to the extent of the just obligation of the contracting parties
and, as said notes have become worthless, in order that justice may be done and the party
entitled to be paid can recover their actual value in Philippine Currency, what the debtor or
defendant bank should return or pay is the value of the Japanese military notes in relation to
the peso in Philippine Currency obtaining on the date when and at the place where the
obligation was incurred unless the parties had agreed otherwise. ... . (italics supplied)
IN VIEW OF THE FOREGOING, the decision appealed from is affirmed, with costs against the
appellant. Inasmuch as the appellant Jose Grijaldo died during the pendency of this appeal,
his estate must answer in the execution of the judgment in the present case.

SECOND DIVISION
[G.R. No. 123031. October 12, 1999]
CEBU INTERNATIONAL FINANCE CORPORATION, petitioner, vs. COURT OF APPEALS,
VICENTE ALEGRE, respondents.
DECISION
QUISUMBING, J.:
This petition for review on certiorari assails respondent appellate courts Decision, [if !
supportFootnotes][1][endif]
dated December 8, 1995, in CA G.R. CV No. 44085, which affirmed the
ruling of the Regional Trial Court of Makati, Branch 132. The dispositive portion of the trial
courts decision reads:
WHEREFORE, judgment is hereby rendered ordering defendant [herein petitioner] to pay
plaintiff [herein private respondent]:
(1) the principal sum of P514,390.94 with legal interest thereon computed from August 6,
1991 until fully paid; and
(2) the costs of suit.
SO ORDERED.[if !supportFootnotes][2][endif]
Based on the records, the following are the pertinent facts of the case:
Cebu International Finance Corporation (CIFC), a quasi-banking institution, is engaged
in money market operations.
On April 25, 1991, private respondent, Vicente Alegre, invested with CIFC, five hundred
thousand (P500,000.00) pesos, in cash. Petitioner issued a promissory note to mature on

53

May 27, 1991. The note for five hundred sixteen thousand, two hundred thirty-eight pesos
and sixty-seven centavos (P516,238.67) covered private respondents placement plus
interest at twenty and a half (20.5%) percent for thirty-two (32) days.
On May 27, 1991, CIFC issued BPI Check No. 513397 (hereinafter the CHECK) for five
hundred fourteen thousand, three hundred ninety pesos and ninety-four centavos
(P514,390.94) in favor of the private respondent as proceeds of his matured investment plus
interest. The CHECK was drawn from petitioners current account number 0011-0803-59,
maintained with the Bank of the Philippine Islands (BPI), main branch at Makati City.
On June 17, 1991, private respondents wife deposited the CHECK with Rizal
Commercial Banking Corp. (RCBC), in Puerto Princesa, Palawan. BPI dishonored the CHECK
with the annotation, that the Check (is) Subject of an Investigation. BPI took custody of the
CHECK pending an investigation of several counterfeit checks drawn against CIFCs
aforestated checking account. BPI used the check to trace the perpetrators of the forgery.
Immediately, private respondent notified CIFC of the dishonored CHECK and
demanded, on several occasions, that he be paid in cash. CIFC refused the request, and
instead instructed private respondent to wait for its ongoing bank reconciliation with BPI.
Thereafter, private respondent, through counsel, made a formal demand for the payment of
his money market placement. In turn, CIFC promised to replace the CHECK but required an
impossible condition that the original must first be surrendered.
On February 25, 1992, private respondent Alegre filed a complaint [if !supportFootnotes][3][endif]
for recovery of a sum of money against the petitioner with the Regional Trial Court of Makati
(RTC-Makati), Branch 132.
On July 13, 1992, CIFC sought to recover its lost funds and formally filed against BPI, a
separate civil action[if !supportFootnotes][4][endif] for collection of a sum of money with the RTC-Makati,
Branch 147. The collection suit alleged that BPI unlawfully deducted from CIFCs checking
account, counterfeit checks amounting to one million, seven hundred twenty-four thousand,
three hundred sixty-four pesos and fifty-eight centavos (P1,724,364.58). The action included
the prayer to collect the amount of the CHECK paid to Vicente Alegre but dishonored by BPI.
Meanwhile, in response to Alegres complaint with RTC-Makati, Branch 132, CIFC filed a
motion for leave of court to file a third-party complaint against BPI. BPI was impleaded by
CIFC to enforce a right, for contribution and indemnity, with respect to Alegres claim. CIFC
asserted that the CHECK it issued in favor of Alegre was genuine, valid and sufficiently
funded.
On July 23, 1992, the trial court granted CIFCs motion. However, BPI moved to dismiss
the third-party complaint on the ground of pendency of another action with RTC-Makati,
Branch 147. Acting on the motion, the trial court dismissed the third-party complaint on
November 4, 1992, after finding that the third party complaint filed by CIFC against BPI is
similar to its ancillary claim against the bank, filed with RTC-Makati Branch 147.
Thereafter, during the hearing by RTC-Makati, Branch 132, held on May 27, and June
22, 1993, Vito Arieta, Bank Manager of BPI, testified that the bank, indeed, dishonored the
CHECK, retained the original copy and forwarded only a certified true copy to RCBC. When
Arieta was recalled on July 20, 1993, he testified that on July 16, 1993, BPI encashed and
deducted the said amount from the account of CIFC, but the proceeds, as well as the CHECK
remained in BPIs custody. The banks move was in accordance with the Compromise
Agreement[if !supportFootnotes][5][endif] it entered with CIFC to end the litigation in RTC-Makati, Branch
147. The compromise agreement, which was submitted for the approval of the said court,
provided that:
1. Defendant [BPI] shall pay to the plaintiff [CIFC] the amount of P1,724,364.58 plus P
20,000 litigation expenses as full and final settlement of all of plaintiffs claims as contained
in the Amended Complaint dated September 10, 1992. The aforementioned amount shall be
credited to plaintiffs current account No. 0011-0803-59 maintained at defendants Main
Branch upon execution of this Compromise Agreement.
2. Thereupon, defendant shall debit the sum of P 514,390.94 from the aforesaid current
account representing payment/discharge of BPI Check No. 513397 payable to Vicente
Alegre.
3. In case plaintiff is adjudged liable to Vicente Alegre in Civil Case No. 92-515 arising from
the alleged dishonor of BPI Check No. 513397, plaintiff cannot go after the defendant:
otherwise stated, the defendant shall not be liable to the plaintiff. Plaintiff [CIFC] may
however set-up the defense of payment/discharge stipulated in par. 2 above. [if !supportFootnotes][6]
[endif]

On July 27, 1993, BPI filed a separate collection suit [if !supportFootnotes][7][endif] against Vicente
Alegre with the RTC-Makati, Branch 62. The complaint alleged that Vicente Alegre connived
with certain Lina A. Pena and Lita A. Anda and forged several checks of BPIs client, CIFC. The
total amount of counterfeit checks was P 1,724,364.58. BPI prevented the encashment of
some checks amounting to two hundred ninety five thousand, seven hundred seventy-five
pesos and seven centavos (P295,775.07). BPI admitted that the CHECK, payable to Vicente
Alegre for P514,390.94, was deducted from BPIs claim, hence, the balance of the loss

54

incurred by BPI was nine hundred fourteen thousand, one hundred ninety-eight pesos and
fifty-seven centavos (P914,198.57), plus costs of suit for twenty thousand (P20,000.00)
pesos. The records are silent on the outcome of this case.
On September 27, 1993, RTC-Makati, Branch 132, rendered judgment in favor of
Vicente Alegre.
CIFC appealed from the adverse decision of the trial court. The respondent court
affirmed the decision of the trial court.
Hence this appeal,[if !supportFootnotes][8][endif] in which petitioner interposes the following
assignments of errors:
1. The Honorable Court of Appeals erred in affirming the finding of the Honorable Trial Court
holding that petitioner was not discharged from the liability of paying the value of the
subject check to private respondent after BPI has debited the value thereof against
petitioners current account.
2. The Honorable Court of Appeals erred in applying the provisions of paragraph 2 of Article
1249 of the Civil Code in the instant case. The applicable law being the Negotiable
Instruments Law.
3. The Honorable Court of Appeals erred in affirming the Honorable Trial Courts findings that
the petitioner was guilty of negligence and delay in the performance of its obligation to the
private respondent.
4. The Honorable Court of Appeals erred in affirming the Honorable Trial Courts decision
ordering petitioner to pay legal interest and the cost of suit.
5. The Honorable Court of Appeals erred in affirming the Honorable Trial Courts dismissal of
petitioners third-party complaint against BPI.
These issues may be synthesized into three:
1. WHETHER OR NOT ARTICLE 1249 OF THE NEW CIVIL CODE APPLIES IN THE PRESENT CASE;
2. WHETHER OR NOT BPI CHECK NO. 513397 WAS VALIDLY DISCHARGED; and
3. WHETHER OR NOT THE DISMISSAL OF THE THIRD PARTY COMPLAINT OF PETITIONER
AGAINST BPI BY REASON OF LIS PENDENS WAS PROPER?
On the first issue, petitioner contends that the provisions of the Negotiable
Instruments Law (NIL) are the pertinent laws to govern its money market transaction with
private respondent, and not paragraph 2 of Article 1249 of the Civil Code. Petitioner stresses
that it had already been discharged from the liability of paying the value of the CHECK due
to the following circumstances:
1) There was ACCEPTANCE of the subject check by BPI, the drawee bank, as defined under
the Negotiable Instruments Law, and therefore, BPI, the drawee bank, became primarily
liable for the payment of the check, and consequently, the drawer, herein petitioner, was
discharged from its liability thereon;
2) Moreover, BPI, the drawee bank, has not validly DISHONORED the subject check; and,
3) The act of BPI, the drawee bank of debiting/deducting the value of the check from
petitioners account amounted to and/or constituted a discharge of the drawers (petitioners)
liability under the instrument/subject check.[if !supportFootnotes][9][endif]
Petitioner cites Section 137 of the Negotiable Instruments Law, which states:
Liability of drawee retaining or destroying bill - Where a drawee to whom a bill is delivered
for acceptance destroys the same, or refuses within twenty-four hours after such delivery or
such other period as the holder may allow, to return the bill accepted or non-accepted to the
Holder, he will be deemed to have accepted the same.
Petitioner asserts that since BPI accepted the instrument, the bank became primarily liable
for the payment of the CHECK. Consequently, when BPI offset the value of CHECK against
the losses from the forged checks allegedly committed by the private respondent, the check
was deemed paid.
Article 1249 of the New Civil Code deals with a mode of extinction of an obligation and
expressly provides for the medium in the payment of debts. It provides that:
The payment of debts in money shall be made in the currency stipulated, and if it is not
possible to deliver such currency, then in the currency, which is legal tender in the
Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other mercantile
documents shall produce the effect of payment only when they have been cashed, or when
through the fault of the creditor they have been impaired.
In the meantime, the action derived from the original obligation shall be held in abeyance.
Considering the nature of a money market transaction, the above-quoted provision
should be applied in the present controversy. As held in Perez vs. Court of Appeals,[if !
supportFootnotes][10][endif]
a money market is a market dealing in standardized short-term credit
instruments (involving large amounts) where lenders and borrowers do not deal directly with
each other but through a middle man or dealer in open market. In a money market
transaction, the investor is a lender who loans his money to a borrower through a
middleman or dealer.[if !supportFootnotes][11][endif]
In the case at bar, the money market transaction between the petitioner and the

55

private respondent is in the nature of a loan. The private respondent accepted the CHECK,
instead of requiring payment in money. Yet, when he presented it to RCBC for encashment,
as early as June 17, 1991, the same was dishonored by non-acceptance, with BPIs
annotation: Check (is) subject of an investigation. These facts were testified to by BPIs
manager. Under these circumstances, and after the notice of dishonor, [if !supportFootnotes][12][endif]
the holder has an immediate right of recourse against the drawer, [if !supportFootnotes][13][endif] and
consequently could immediately file an action for the recovery of the value of the check.
In a loan transaction, the obligation to pay a sum certain in money may be paid in
money, which is the legal tender or, by the use of a check. A check is not a legal tender, and
therefore cannot constitute valid tender of payment. In the case of Philippine Airlines, Inc.
vs. Court of Appeals,[if !supportFootnotes][14][endif] this Court held:
Since a negotiable instrument is only a substitute for money and not money, the delivery of
such an instrument does not, by itself, operate as payment (citation omitted). A check,
whether a managers check or ordinary check, is not legal tender, and an offer of a check in
payment of a debt is not a valid tender of payment and may be refused receipt by the
obligee or creditor. Mere delivery of checks does not discharge the obligation under a
judgment. The obligation is not extinguished and remains suspended until the payment by
commercial document is actually realized (Art. 1249, Civil Code, par. 3.) [if !supportFootnotes][15][endif]
Turning now to the second issue, when the bank deducted the amount of the CHECK
from CIFCs current account, this did not ipso facto operate as a discharge or payment of the
instrument. Although the value of the CHECK was deducted from the funds of CIFC, it was
not delivered to the payee, Vicente Alegre. Instead, BPI offset the amount against the losses
it incurred from forgeries of CIFC checks, allegedly committed by Alegre. The confiscation of
the value of the check was agreed upon by CIFC and BPI. The parties intended to amicably
settle the collection suit filed by CIFC with the RTC-Makati, Branch 147, by entering into a
compromise agreement, which reads:
xxx
2. Thereupon, defendant shall debit the sum of P 514,390.94 from the aforesaid current
account representing payment/discharge of BPI Check No. 513397 payable to Vicente
Alegre.
3. In case plaintiff is adjudged liable to Vicente Alegre in Civil Case No. 92-515 arising from
the alleged dishonor of BPI Check No. 513397, plaintiff cannot go after the defendant;
otherwise stated, the defendant shall not be liable to the plaintiff. Plaintiff however (sic) setup the defense of payment/discharge stipulated in par. 2 above.[if !supportFootnotes][16][endif]
A compromise is a contract whereby the parties, by making reciprocal concessions,
avoid a litigation or put an end to one already commenced. [if !supportFootnotes][17][endif] It is an
agreement between two or more persons who, for preventing or putting an end to a lawsuit,
adjust their difficulties by mutual consent in the manner which they agree on, and which
everyone of them prefers in the hope of gaining, balanced by the danger of losing. [if !
supportFootnotes][18][endif]
The compromise agreement could not bind a party who did not sign the
compromise agreement nor avail of its benefits. [if !supportFootnotes][19][endif] Thus, the stipulations in
the compromise agreement is unenforceable against Vicente Alegre, not a party thereto. His
money could not be the subject of an agreement between CIFC and BPI. Although Alegres
money was in custody of the bank, the banks possession of it was not in the concept of an
owner. BPI cannot validly appropriate the money as its own. The codal admonition on this
issue is clear:
Art. 1317 No one may contract in the name of another without being authorized by the latter, or
unless he has by law a right to represent him.
A Contract entered into in the name of another by one who has no authority or legal
representation, or who has acted beyond his powers, shall be unenforceable, unless it is
ratified, expressly or impliedly, by the person on whose behalf it has been executed, before
it is revoked by the other contracting party.[if !supportFootnotes][20][endif]
BPIs confiscation of Alegres money constitutes garnishment without the parties going
through a valid proceeding in court. Garnishment is an attachment by means of which the
plaintiff seeks to subject to his claim the property of the defendant in the hands of a third
person or money owed to such third person or a garnishee to the defendant. [if !supportFootnotes][21]
[endif]
The garnishment procedure must be upon proper order of RTC-Makati, Branch 62, the
court who had jurisdiction over the collection suit filed by BPI against Alegre. In effect, CIFC
has not yet tendered a valid payment of its obligation to the private respondent. Tender of
payment involves a positive and unconditional act by the obligor of offering legal tender
currency as payment to the obligee for the formers obligation and demanding that the latter
accept the same.[if !supportFootnotes][22][endif] Tender of payment cannot be presumed by a mere
inference from surrounding circumstances.
With regard to the third issue, for litis pendentia to be a ground for the dismissal of an
action, the following requisites must concur: (a) identity of parties or at least such as to
represent the same interest in both actions; (b) identity of rights asserted and relief prayed

56

for, the relief being founded on the same acts; and (c) the identity in the two cases should
be such that the judgment which may be rendered in one would, regardless of which party is
successful, amount to res judicata in the other.[if !supportFootnotes][23][endif]
The trial courts ruling as adopted by the respondent court states, thus:
A perusal of the complaint in Civil Case No. 92-1940, entitled Cebu International Finance
Corporation vs. Bank of the Philippine Islands now pending before Branch 147 of this Court
and the Third Party Complaint in the instant case would readily show that the parties are not
only identical but also the cause of action being asserted, which is the recovery of the value
of BPI Check No. 513397 is the same. In Civil Case No. 92-1940 and in the Third Party
Complaint the rights asserted and relief prayed for, the reliefs being founded on the facts,
are identical.
xxx
WHEREFORE, the motion to dismiss is granted and consequently, the Third Party Complaint
is hereby ordered dismissed on ground of lis pendens.[if !supportFootnotes][24][endif]
We agree with the observation of the respondent court that, as between the third party
claim filed by the petitioner against BPI in Civil Case No. 92-515 and petitioners ancillary
claim against the bank in Civil Case No. 92-1940, there is identity of parties as well as
identity of rights asserted, and that any judgment that may be rendered in one case will
amount to res judicata in another.
The compromise agreement between CIFC and BPI, categorically provided that In case
plaintiff is adjudged liable to Vicente Alegre in Civil Case No. 92-515 arising from the alleged
dishonor of BPI Check No. 513397, plaintiff (CIFC) cannot go after the defendant (BPI);
otherwise stated, the defendant shall not be liable to the plaintiff. [if !supportFootnotes][25][endif] Clearly,
this stipulation expressed that CIFC had already abandoned any further claim against BPI
with respect to the value of BPI Check No. 513397. To ask this Court to allow BPI to be a
party in the case at bar, would amount to res judicata and would violate terms of the
compromise agreement between CIFC and BPI. The general rule is that a compromise has
upon the parties the effect and authority of res judicata, with respect to the matter definitely
stated therein, or which by implication from its terms should be deemed to have been
included therein.[if !supportFootnotes][26][endif] This holds true even if the agreement has not been
judicially approved.[if !supportFootnotes][27][endif]
WHEREFORE, the instant petition is hereby DENIED. The Decision of the Court of Appeals in
CA-G.R. CV No. 44085 is AFFIRMED. Costs against petitioner.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-47878
July 24, 1942
GIL JARDENIL, plaintiff-appellant,
vs.
HEFTI SOLAS (alias HEPTI SOLAS, JEPTI SOLAS), defendant-appellee.
Eleuterio J. Gustilo for appellant.Jose C. Robles for appellee.
MORAN, J.:
This is an action for foreclosure of mortgage. The only question raised in this appeal is: Is
defendant-appellee bound to pay the stipulated interest only up to the date of maturity as
fixed in the promissory note, or up to the date payment is effected? This question is, in our
opinion controlled by the express stipulation of the parties.

57

Paragraph 4 of the mortgage deed recites:

Que en consideracion a dicha suma aun por pagar de DOS MIL CUATROCIENTOS PESOS
(P2,4000.00), moneda filipina, que el Sr. Hepti Solas se compromete a pagar al Sr. Jardenil
en o antes del dia treintaiuno (31) de marzo de mil novecientos treintaicuarto (1934), con
los intereses de dicha suma al tipo de doce por ciento (12%) anual a partir desde fecha
hasta el dia de su vencimiento o sea treintaiuno (31) de marzo de mil novecientos
treintaicuatro (1934), por la presente, el Sr. Hepti Solas cede y traspasa, por via de primera
hipoteca, a favor del Sr. Jardenil, sus herederos y causahabientes, la parcela de terreno
descrita en el parrafo primero (1.) de esta escritura.
Defendant-appellee has, therefore, clearly agreed to pay interest only up to the date of
maturity, or until March 31, 1934. As the contract is silent as to whether after that date, in
the event of non-payment, the debtor would continue to pay interest, we cannot in law,
indulge in any presumption as to such interest; otherwise, we would be imposing upon the
debtor an obligation that the parties have not chosen to agree upon. Article 1755 of the Civil
Code provides that "interest shall be due only when it has been expressly stipulated."
(Emphasis supplied.)
A writing must be interpreted according to the legal meaning of its language (section 286,
Act No. 190, now section 58, Rule 123), and only when the wording of the written instrument
appears to be contrary to the evident intention of the parties that such intention must
prevail. (Article 1281, Civil Code.) There is nothing in the mortgage deed to show that the
terms employed by the parties thereto are at war with their evident intent. On the contrary
the act of the mortgage of granting to the mortgagor on the same date of execution of the
deed of mortgage, an extension of one year from the date of maturity within which to make
payment, without making any mention of any interest which the mortgagor should pay
during the additional period (see Exhibit B attached to the complaint), indicates that the true
intention of the parties was that no interest should be paid during the period of grace. What
reason the parties may have therefor, we need not here seek to explore.
Neither has either of the parties shown that, by mutual mistake, the deed of mortgage fails
to express their agreement, for if such mistake existed, plaintiff would have undoubtedly
adduced evidence to establish it and asked that the deed be reformed accordingly, under
the parcel-evidence rule.
We hold therefore, that as the contract is clear and unmistakable and the terms employed
therein have not been shown to belie or otherwise fail to express the true intention of the
parties and that the deed has not been assailed on the ground of mutual mistake which
would require its reformation, same should be given its full force and effect. When a party
sues on a written contract and no attempt is made to show any vice therein, he cannot be
allowed to lay any claim more than what its clear stipulations accord. His omission, to which
the law attaches a definite warning as an in the instant case, cannot by the courts be
arbitrarily supplied by what their own notions of justice or equity may dictate.
Plaintiff is, therefore, entitled only to the stipulated interest of 12 per cent on the loan of P2,
400 from November 8, 1932 to March 31, 1934. And it being a fact that extra judicial
demands have been made which we may assume to have been so made on the expiration of
the year of grace, he shall be entitled to legal interest upon the principal and the accrued
interest from April 1, 1935, until full payment.
Thus modified judgment is affirmed, with costs against appellant.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-32644
October 4, 1930
CU UNJIENG E HIJOS, plaintiff-appelle,
vs.
THE MABALACAT SUGAR CO., ET AL., defendants.
THE MABALACAT SUGAR CO., appellant.
Romeo Mercado for appellant. Araneta and Zaragoza for plaintiff-appellee. Duran and Lim
for defendant-appellee Siuliong and Co.
STREET, J.:
This action was instituted in the Court of First Instance of Pampanga by Cu Unjieng e Hijos,
for the purpose of recovering from the Mabalacat Sugar Company an indebtedness
amounting to more than P163,00, with interest, and to foreclose a mortgage given by the
debtor to secure the same, as well as to recover stipulated attorney's fee and the sum of
P1,206, paid by the plaintiff for insurance upon the mortgaged property, with incidental
relief. In the complaint Siuliong & Co., Inc., was joined as defendant, as a surety of the
Mabalacat Sugar Company, and as having a third mortgage on the mortgaged property. The
Philippine National Bank was also joined by reason of its interest as second mortgagee of the

58

land covered by the mortgage to the plaintiff. After the cause had been brought to issue by
the answers of the several defendants, the cause was heard and judgment rendered, the
dispositive portion of the decision being as follows:
Por las consideraciones expuestas, el Juzgado condena a The Mabalacat Sugar Company a
pagar a la demandante la suma de P163,534.73, con sus intereses de 12 por ciento al ano,
compuestos mensualmente desde el 1. de mayo de 1929. Tambien se le condena a pagar a
dicha demandante la suma de P2,412 por las primas de seguros abonadas por esta, con sus
intereses de 12 por ciento al ano, compuestos tambien mensualmente desde el 15 de mayo
de 1928, mas la de P7,500 por honorarios de abogados y las costas del juicio. Y si esta
deuda no se pagare dentro del plazo de tres meses, se ejecutaran los bienes hipotecados de
acuerdo con la ley.
Si del producto de la venta hubiese algun remanente, este se destinara al pago del credito
del Banco Nacional, o sea de P32,704.69, con sus intereses de 9 por ciento al ano desde el 7
de junio de 1929, sin perjuicio de la orden de ejecucion que pudiera expedirse en el asundo
No. 26435 del Juzgado de Primera Instancia de Manila.
Se condena ademas a The Mabalacat Sugar Company al pago de la suma de P3,205.78
reclamada por Siuliong & Co., con sus intereses de 9 por ciento al ano desde el 29 de julio
de 1926 hasta su completo pago, ordenandola que rinda cuentas del azucar por ella
producido y pague la comision correspondiente bajo la base de 5 por ciento de su valor,
descontandose, desde luego, las cantidades ya pagadas.
Se absuelve de la demanda de Cu Unjieng e Hijos a Siuliong & Co., Inc.1awph!l.net
From this judgment the defendant, the Mabalacat Sugar Company, appealed.
The first point assigned as error has relation to the question whether the action was
prematurely stated. In this connection we note that the mortgage executed by the
Mabalacat Sugar Company contains, in paragraph 5, a provision to the effect that noncompliance on the part of the mortgage debtor with any of the obligations assumed in virtue
of this contract will cause the entire debt to become due and give occasion for the
foreclosure of the mortgage. The debtor party failed to comply with the obligation, imposed
upon it in the mortgage, to pay the mortgage debt in the stipulated installments at the time
specified in the contract. It results that the creditor was justified in treating the entire
mortgage debt as having been accelerated by such failure of the debtor in paying the
installments.
It appears, however, that on or about October 20, 1928, the mortgage creditor, Cu Unjieng e
Hijos, agreed to extend the time for payment of the mortgage indebtedness until June 30,
1929, with certain interim payments to be made upon specified dates prior to the
contemplated final liquidation of the whole indebtedness. But the debtor party failed to
make the interim payments due on February 25, 1929, March 25, 1929, and April 25, 1929,
and failed altogether to pay the balance due, according to the terms of this extension, on
June 30, 1929. Notwithstanding the failure of the debtor to comply with the terms of this
extension, it is insisted for the appellant that this agreement for the extension of the time of
payment had the effect of abrogating the stipulation of the original contract with respect to
the acceleration of the maturity of the debt by non-compliance with the terms of the
mortgage. As the trial court pointed out, this contention is untenable. The agreement to
extend the time of payment was voluntary and without consideration so far as the creditor is
concerned; and the failure of the debtor to comply with the terms of the extension justified
the creditor in treating it as of no effect. The first error is therefore without merit.
The second error is directed to the propriety of the interest charges made by the plaintiff in
estimating the amount of the indebtedness. In this connection we note that, under the
second clause of the mortgage, interest should be calculated upon the indebtedness at the
rate of 12 per cent per annum. In the same clause, but in a separate paragraph, there is
another provision with respect to the payment of interest expressed in Spanish in the
following words:
Los intereses seran pagados mensualmente a fin de cada mes, computados teniendo en
cuenta el capital del prestamo aun no pagado.
Translated into English this provision reads substantially as follows: "Interest, to be
computed upon the still unpaid capital of the loan, shall be paid monthly, at the end of each
month."
It is well settled that, under article 1109 of the Civil Code, as well as under section 5 of the
Usury Law (Act No. 2655), the parties may stipulate that interest shall be compounded; and
rests for the computation of compound interest can certainly be made monthly, as well as
quarterly, semiannually, or annually. But in the absence of express stipulation for the
accumulation of compound interest, no interest can be collected upon interest until the debt
is judicially claimed, and then the rate at which interest upon accrued interest must be
computed is fixed at 6 per cent per annum.
In the present case, however, the language which we have quoted above does not justify the
charging of interest upon interest, so far as interest on the capital is concerned. The
provision quoted merely requires the debtor to pay interest monthly at the end of each

59

month, such interest to be computed upon the capital of the loan not already paid. Clearly
this provision does not justify the charging of compound interest upon the interest accruing
upon the capital monthly. It is true that in subsections (a), (b) and (c) of article IV of the
mortgage, it is stipulated that the interest can be thus computed upon sums which the
creditor would have to pay out (a) to maintain insurance upon the mortgaged property, (b)
to pay the land tax upon the same property, and (c) upon disbursements that might be
made by the mortgagee to maintain the property in good condition. But the chief thing is
that interest cannot be thus accumulated on unpaid interest accruing upon the capital of the
debt.
The trial court was of the opinion that interest could be so charged, because of the Exhibit 1
of the Mabalacat Sugar Company, which the court considered as an interpretation by the
parties to the contract and a recognition by the debtor of the propriety of compounding the
interest earned by the capital. But the exhibit referred to is merely a receipt showing that
the sum of P256.28 was, on March 19, 1928, paid by the debtor to the plaintiff as interest
upon interest. But where interest is improperly charged, at an unlawful rate, the mere
voluntary payment of it to the creditor by the debtor is not binding. Such payment, in the
case before us, was usurious, being in excess of 12 per cent which is allowed to be charged,
under section 2 of the Usury Law, when a debt is secured by mortgage upon real property.
The Exhibit 1 therefore adds no support to the contention of the plaintiff that interest upon
interest can be accumulated in the manner adopter by the creditor in this case. The point
here ruled is in exact conformity with the decision of this court in Bachrach Garage and
Taxicab Co. vs. Golingco (39 Phil., 192), where this court held that interest cannot be allowed
in the absence of stipulation, or in default thereof, except when the debt is judicially
claimed; and when the debt is judicially claimed, the interest upon the interest can only be
computed at the rate of 6 per cent per annum.
It results that the appellant's second assignment of error is well taken, and the compound
interest must be eliminated from the judgment. With respect to the amount improperly
charged, we accept the estimate submitted by the president and manager of the Mabalacat
Sugar Company, who says that the amount improperly included in the computation made by
the plaintiff's bookkeeper is P879.84, in addition to the amount of P256.28 covered by
Exhibit 1 of the Mabalacat Sugar Company. But the plaintiff creditor had the right to charge
interest, in the manner adopted by it, upon insurance premiums which it had paid out; and if
any discrepancy of importance is discoverable by the plaintiff in the result here reached, it
will be at liberty to submit a revised computation in this court, upon motion for
reconsideration, wherein interest shall be computed in accordance with this opinion, that is
to say, that no accumulation of interest will be permitted at monthly intervals, as regards
the capital of the debt, but such unpaid interest shall draw interest at the rate of 6 per cent
from the date of the institution of the action.
In the third assignment of error the appellant complains, as excessive, of the attorney's fees
allowed by the court in accordance with stipulation in the mortgage. The allowance made on
the principal debt was around 4 per cent, and about the same upon the fee allowed to the
bank. Under the circumstances we think the debtor has no just cause for complaint upon this
score.
The fourth assignment of error complains of the failure of the trial court to permit an
amendment to be filed by the debtor to its answer, the application therefore having been
made on the day when the cause had been set for trial, with notice that the period was nonextendible. The point was a matter in the discretion of the court, and no abuse of discretion
is shown.
From what has been stated, it follows that the appealed judgment must be modified by
deducting the sum of P1,136.12 from the principal debt, so that the amount of said
indebtedness shall be P162,398.61, with interest at 12 per cent per annum, from May 1,
1929. In other respects the judgment will be affirmed, and it is so ordered, with cost against
the appellant.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 97412 July 12, 1994
EASTERN SHIPPING LINES, INC., petitioner,
vs.
HON. COURT OF APPEALS AND MERCANTILE INSURANCE
respondents.
Alojada & Garcia and Jimenea, Dala & Zaragoza for petitoner.
Zapa Law Office for private respondent.

60

COMPANY,

INC.,

VITUG, J.:
The issues, albeit not completely novel, are: (a) whether or not a claim for damage sustained
on a shipment of goods can be a solidary, or joint and several, liability of the common
carrier, the arrastre operator and the customs broker; (b) whether the payment of legal
interest on an award for loss or damage is to be computed from the time the complaint is
filed or from the date the decision appealed from is rendered; and (c) whether the applicable
rate of interest, referred to above, is twelve percent (12%) or six percent (6%).
The findings of the court a quo, adopted by the Court of Appeals, on the antecedent and
undisputed facts that have led to the controversy are hereunder reproduced:
This is an action against defendants shipping company, arrastre operator and brokerforwarder for damages sustained by a shipment while in defendants' custody, filed by the
insurer-subrogee who paid the consignee the value of such losses/damages.
On December 4, 1981, two fiber drums of riboflavin were shipped from Yokohama, Japan for
delivery vessel "SS EASTERN COMET" owned by defendant Eastern Shipping Lines under Bill
of Lading
No. YMA-8 (Exh. B). The shipment was insured under plaintiff's Marine Insurance Policy No.
81/01177 for P36,382,466.38.
Upon arrival of the shipment in Manila on December 12, 1981, it was discharged unto the
custody of defendant Metro Port Service, Inc. The latter excepted to one drum, said to be in
bad order, which damage was unknown to plaintiff.
On January 7, 1982 defendant Allied Brokerage Corporation received the shipment from
defendant Metro Port Service, Inc., one drum opened and without seal (per "Request for Bad
Order Survey." Exh. D).
On January 8 and 14, 1982, defendant Allied Brokerage Corporation made deliveries of the
shipment to the consignee's warehouse. The latter excepted to one drum which contained
spillages, while the rest of the contents was adulterated/fake (per "Bad Order Waybill" No.
10649, Exh. E).
Plaintiff contended that due to the losses/damage sustained by said drum, the consignee
suffered losses totaling P19,032.95, due to the fault and negligence of defendants. Claims
were presented against defendants who failed and refused to pay the same (Exhs. H, I, J, K,
L).
As a consequence of the losses sustained, plaintiff was compelled to pay the consignee
P19,032.95 under the aforestated marine insurance policy, so that it became subrogated to
all the rights of action of said consignee against defendants (per "Form of Subrogation",
"Release" and Philbanking check, Exhs. M, N, and O). (pp. 85-86, Rollo.)
There were, to be sure, other factual issues that confronted both courts. Here, the appellate
court said:
Defendants filed their respective answers, traversing the material allegations of the
complaint contending that: As for defendant Eastern Shipping it alleged that the shipment
was discharged in good order from the vessel unto the custody of Metro Port Service so that
any damage/losses incurred after the shipment was incurred after the shipment was turned
over to the latter, is no longer its liability (p. 17, Record); Metroport averred that although
subject shipment was discharged unto its custody, portion of the same was already in bad
order (p. 11, Record); Allied Brokerage alleged that plaintiff has no cause of action against it,
not having negligent or at fault for the shipment was already in damage and bad order
condition when received by it, but nonetheless, it still exercised extra ordinary care and
diligence in the handling/delivery of the cargo to consignee in the same condition shipment
was received by it.
From the evidence the court found the following:
The issues are:
1. Whether or not the shipment sustained losses/damages;
2. Whether or not these losses/damages were sustained while in the custody of defendants
(in whose respective custody, if determinable);
3. Whether or not defendant(s) should be held liable for the losses/damages (see plaintiff's
pre-Trial Brief, Records, p. 34; Allied's pre-Trial Brief, adopting plaintiff's Records, p. 38).
As to the first issue, there can be no doubt that the shipment sustained losses/damages. The
two drums were shipped in good order and condition, as clearly shown by the Bill of Lading
and Commercial Invoice which do not indicate any damages drum that was shipped (Exhs. B
and C). But when on December 12, 1981 the shipment was delivered to defendant Metro
Port Service, Inc., it excepted to one drum in bad order.
Correspondingly, as to the second issue, it follows that the losses/damages were sustained
while in the respective and/or successive custody and possession of defendants carrier
(Eastern), arrastre operator (Metro Port) and broker (Allied Brokerage). This becomes evident
when the Marine Cargo Survey Report (Exh. G), with its "Additional Survey Notes", are
considered. In the latter notes, it is stated that when the shipment was "landed on vessel" to
dock of Pier # 15, South Harbor, Manila on December 12, 1981, it was observed that "one
(1) fiber drum (was) in damaged condition, covered by the vessel's Agent's Bad Order Tally

61

Sheet No. 86427." The report further states that when defendant Allied Brokerage withdrew
the shipment from defendant arrastre operator's custody on January 7, 1982, one drum was
found opened without seal, cello bag partly torn but contents intact. Net unrecovered
spillages was
15 kgs. The report went on to state that when the drums reached the consignee, one drum
was found with adulterated/faked contents. It is obvious, therefore, that these
losses/damages occurred before the shipment reached the consignee while under the
successive custodies of defendants. Under Art. 1737 of the New Civil Code, the common
carrier's duty to observe extraordinary diligence in the vigilance of goods remains in full
force and effect even if the goods are temporarily unloaded and stored in transit in the
warehouse of the carrier at the place of destination, until the consignee has been advised
and has had reasonable opportunity to remove or dispose of the goods (Art. 1738, NCC).
Defendant Eastern Shipping's own exhibit, the "Turn-Over Survey of Bad Order Cargoes"
(Exhs. 3-Eastern) states that on December 12, 1981 one drum was found "open".
and thus held:
WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered:
A. Ordering defendants to pay plaintiff, jointly and severally:
1. The amount of P19,032.95, with the present legal interest of 12% per annum from
October 1, 1982, the date of filing of this complaints, until fully paid (the liability of
defendant Eastern Shipping, Inc. shall not exceed US$500 per case or the CIF value of the
loss, whichever is lesser, while the liability of defendant Metro Port Service, Inc. shall be to
the extent of the actual invoice value of each package, crate box or container in no case to
exceed P5,000.00 each, pursuant to Section 6.01 of the Management Contract);
2. P3,000.00 as attorney's fees, and
3. Costs.
B. Dismissing the counterclaims and crossclaim of defendant/cross-claimant Allied Brokerage
Corporation.
SO ORDERED. (p. 207, Record).
Dissatisfied, defendant's recourse to US.
The appeal is devoid of merit.
After a careful scrutiny of the evidence on record. We find that the conclusion drawn
therefrom is correct. As there is sufficient evidence that the shipment sustained damage
while in the successive possession of appellants, and therefore they are liable to the
appellee, as subrogee for the amount it paid to the consignee. (pp. 87-89, Rollo.)
The Court of Appeals thus affirmed in toto the judgment of the court
a quo.
In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes error and grave
abuse of discretion on the part of the appellate court when
I. IT HELD PETITIONER CARRIER JOINTLY AND SEVERALLY LIABLE WITH THE ARRASTRE
OPERATOR AND CUSTOMS BROKER FOR THE CLAIM OF PRIVATE RESPONDENT AS GRANTED
IN THE QUESTIONED DECISION;
II. IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF PRIVATE RESPONDENT SHOULD
COMMENCE FROM THE DATE OF THE FILING OF THE COMPLAINT AT THE RATE OF TWELVE
PERCENT PER ANNUM INSTEAD OF FROM THE DATE OF THE DECISION OF THE TRIAL COURT
AND ONLY AT THE RATE OF SIX PERCENT PER ANNUM, PRIVATE RESPONDENT'S CLAIM BEING
INDISPUTABLY UNLIQUIDATED.
The petition is, in part, granted.
In this decision, we have begun by saying that the questions raised by petitioner carrier are
not all that novel. Indeed, we do have a fairly good number of previous decisions this Court
can merely tack to.
The common carrier's duty to observe the requisite diligence in the shipment of goods lasts
from the time the articles are surrendered to or unconditionally placed in the possession of,
and received by, the carrier for transportation until delivered to, or until the lapse of a
reasonable time for their acceptance by, the person entitled to receive them (Arts. 17361738, Civil Code; Ganzon vs. Court of Appeals, 161 SCRA 646; Kui Bai vs. Dollar Steamship
Lines, 52 Phil. 863). When the goods shipped either are lost or arrive in damaged condition,
a presumption arises against the carrier of its failure to observe that diligence, and there
need not be an express finding of negligence to hold it liable (Art. 1735, Civil Code;
Philippine National Railways vs. Court of Appeals, 139 SCRA 87; Metro Port Service vs. Court
of Appeals, 131 SCRA 365). There are, of course, exceptional cases when such presumption
of fault is not observed but these cases, enumerated in Article 1734 1 of the Civil Code, are
exclusive, not one of which can be applied to this case.
The question of charging both the carrier and the arrastre operator with the obligation of
properly delivering the goods to the consignee has, too, been passed upon by the Court. In
Fireman's Fund Insurance vs. Metro Port Services (182 SCRA 455), we have explained, in
holding the carrier and the arrastre operator liable in solidum, thus:
The legal relationship between the consignee and the arrastre operator is akin to that of a

62

depositor and warehouseman (Lua Kian v. Manila Railroad Co., 19 SCRA 5 [1967]. The
relationship between the consignee and the common carrier is similar to that of the
consignee and the arrastre operator (Northern Motors, Inc. v. Prince Line, et al., 107 Phil. 253
[1960]). Since it is the duty of the ARRASTRE to take good care of the goods that are in its
custody and to deliver them in good condition to the consignee, such responsibility also
devolves upon the CARRIER. Both the ARRASTRE and the CARRIER are therefore charged
with the obligation to deliver the goods in good condition to the consignee.
We do not, of course, imply by the above pronouncement that the arrastre operator and the
customs broker are themselves always and necessarily liable solidarily with the carrier, or
vice-versa, nor that attendant facts in a given case may not vary the rule. The instant
petition has been brought solely by Eastern Shipping Lines, which, being the carrier and not
having been able to rebut the presumption of fault, is, in any event, to be held liable in this
particular case. A factual finding of both the court a quo and the appellate court, we take
note, is that "there is sufficient evidence that the shipment sustained damage while in the
successive possession of appellants" (the herein petitioner among them). Accordingly, the
liability imposed on Eastern Shipping Lines, Inc., the sole petitioner in this case, is inevitable
regardless of whether there are others solidarily liable with it.
It is over the issue of legal interest adjudged by the appellate court that deserves more than
just a passing remark.
Let us first see a chronological recitation of the major rulings of this Court:
The early case of Malayan Insurance Co., Inc., vs. Manila Port Service, 2 decided 3 on 15 May
1969, involved a suit for recovery of money arising out of short deliveries and pilferage of
goods. In this case, appellee Malayan Insurance (the plaintiff in the lower court) averred in
its complaint that the total amount of its claim for the value of the undelivered goods
amounted to P3,947.20. This demand, however, was neither established in its totality nor
definitely ascertained. In the stipulation of facts later entered into by the parties, in lieu of
proof, the amount of P1,447.51 was agreed upon. The trial court rendered judgment
ordering the appellants (defendants) Manila Port Service and Manila Railroad Company to
pay appellee Malayan Insurance the sum of P1,447.51 with legal interest thereon from the
date the complaint was filed on 28 December 1962 until full payment thereof. The
appellants then assailed, inter alia, the award of legal interest. In sustaining the appellants,
this Court ruled:
Interest upon an obligation which calls for the payment of money, absent a stipulation, is the
legal rate. Such interest normally is allowable from the date of demand, judicial or
extrajudicial. The trial court opted for judicial demand as the starting point.
But then upon the provisions of Article 2213 of the Civil Code, interest "cannot be recovered
upon unliquidated claims or damages, except when the demand can be established with
reasonable certainty." And as was held by this Court in Rivera vs. Perez, 4 L-6998, February
29, 1956, if the suit were for damages, "unliquidated and not known until definitely
ascertained, assessed and determined by the courts after proof (Montilla c. Corporacion de
P.P. Agustinos, 25 Phil. 447; Lichauco v. Guzman,
38 Phil. 302)," then, interest "should be from the date of the decision." (Emphasis supplied)
The case of Reformina vs. Tomol, 5 rendered on 11 October 1985, was for "Recovery of
Damages for Injury to Person and Loss of Property." After trial, the lower court decreed:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and third party
defendants and against the defendants and third party plaintiffs as follows:
Ordering defendants and third party plaintiffs Shell and Michael, Incorporated to pay jointly
and severally the following persons:
xxx xxx xxx
(g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of P131,084.00 which is
the value of the boat F B Pacita III together with its accessories, fishing gear and equipment
minus P80,000.00 which is the value of the insurance recovered and the amount of
P10,000.00 a month as the estimated monthly loss suffered by them as a result of the fire of
May 6, 1969 up to the time they are actually paid or already the total sum of P370,000.00 as
of June 4, 1972 with legal interest from the filing of the complaint until paid and to pay
attorney's fees of P5,000.00 with costs against defendants and third party plaintiffs.
(Emphasis supplied.)
On appeal to the Court of Appeals, the latter modified the amount of damages awarded but
sustained the trial court in adjudging legal interest from the filing of the complaint until fully
paid. When the appellate court's decision became final, the case was remanded to the lower
court for execution, and this was when the trial court issued its assailed resolution which
applied the 6% interest per annum prescribed in Article 2209 of the Civil Code. In their
petition for review on certiorari, the petitioners contended that Central Bank Circular
No. 416, providing thus
By virtue of the authority granted to it under Section 1 of Act 2655, as amended, Monetary
Board in its Resolution No. 1622 dated July 29, 1974, has prescribed that the rate of interest
for the loan, or forbearance of any money, goods, or credits and the rate allowed in

63

judgments, in the absence of express contract as to such rate of interest, shall be twelve
(12%) percent per annum. This Circular shall take effect immediately. (Emphasis found in the
text)
should have, instead, been applied. This Court 6 ruled:
The judgments spoken of and referred to are judgments in litigations involving loans or
forbearance of any money, goods or credits. Any other kind of monetary judgment which has
nothing to do with, nor involving loans or forbearance of any money, goods or credits does
not fall within the coverage of the said law for it is not within the ambit of the authority
granted to the Central Bank.
xxx xxx xxx
Coming to the case at bar, the decision herein sought to be executed is one rendered in an
Action for Damages for injury to persons and loss of property and does not involve any loan,
much less forbearances of any money, goods or credits. As correctly argued by the private
respondents, the law applicable to the said case is Article 2209 of the New Civil Code which
reads
Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor
incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall
be the payment of interest agreed upon, and in the absence of stipulation, the legal interest
which is six percent per annum.
The above rule was reiterated in Philippine Rabbit Bus Lines, Inc., v. Cruz, 7 promulgated on
28 July 1986. The case was for damages occasioned by an injury to person and loss of
property. The trial court awarded private respondent Pedro Manabat actual and
compensatory damages in the amount of P72,500.00 with legal interest thereon from the
filing of the complaint until fully paid. Relying on the Reformina v. Tomol case, this Court 8
modified the interest award from 12% to 6% interest per annum but sustained the time
computation thereof, i.e., from the filing of the complaint until fully paid.
In Nakpil and Sons vs. Court of Appeals, 9 the trial court, in an action for the recovery of
damages arising from the collapse of a building, ordered,
inter alia, the "defendant United Construction Co., Inc. (one of the petitioners)
. . . to pay the plaintiff, . . . , the sum of P989,335.68 with interest at the legal rate from
November 29, 1968, the date of the filing of the complaint until full payment . . . ." Save
from the modification of the amount granted by the lower court, the Court of Appeals
sustained the trial court's decision. When taken to this Court for review, the case, on 03
October 1986, was decided, thus:
WHEREFORE, the decision appealed from is hereby MODIFIED and considering the special
and environmental circumstances of this case, we deem it reasonable to render a decision
imposing, as We do hereby impose, upon the defendant and the third-party defendants (with
the exception of Roman Ozaeta) a solidary (Art. 1723, Civil Code, Supra.
p. 10) indemnity in favor of the Philippine Bar Association of FIVE MILLION (P5,000,000.00)
Pesos to cover all damages (with the exception to attorney's fees) occasioned by the loss of
the building (including interest charges and lost rentals) and an additional ONE HUNDRED
THOUSAND (P100,000.00) Pesos as and for attorney's fees, the total sum being payable
upon the finality of this decision. Upon failure to pay on such finality, twelve (12%) per cent
interest per annum shall be imposed upon aforementioned amounts from finality until paid.
Solidary costs against the defendant and third-party defendants (Except Roman Ozaeta).
(Emphasis supplied)
A motion for reconsideration was filed by United Construction, contending that "the interest
of twelve (12%) per cent per annum imposed on the total amount of the monetary award
was in contravention of law." The Court 10 ruled out the applicability of the Reformina and
Philippine Rabbit Bus Lines cases and, in its resolution of 15 April 1988, it explained:
There should be no dispute that the imposition of 12% interest pursuant to Central Bank
Circular No. 416 . . . is applicable only in the following: (1) loans; (2) forbearance of any
money, goods or credit; and
(3) rate allowed in judgments (judgments spoken of refer to judgments involving loans or
forbearance of any money, goods or credits. (Philippine Rabbit Bus Lines Inc. v. Cruz, 143
SCRA 160-161 [1986]; Reformina v. Tomol, Jr., 139 SCRA 260 [1985]). It is true that in the
instant case, there is neither a loan or a forbearance, but then no interest is actually
imposed provided the sums referred to in the judgment are paid upon the finality of the
judgment. It is delay in the payment of such final judgment, that will cause the imposition of
the interest.
It will be noted that in the cases already adverted to, the rate of interest is imposed on the
total sum, from the filing of the complaint until paid; in other words, as part of the judgment
for damages. Clearly, they are not applicable to the instant case. (Emphasis supplied.)
The subsequent case of American Express International, Inc., vs. Intermediate Appellate
Court 11 was a petition for review on certiorari from the decision, dated 27 February 1985, of
the then Intermediate Appellate Court reducing the amount of moral and exemplary
damages awarded by the trial court, to P240,000.00 and P100,000.00, respectively, and its

64

resolution, dated 29 April 1985, restoring the amount of damages awarded by the trial court,
i.e., P2,000,000.00 as moral damages and P400,000.00 as exemplary damages with interest
thereon at 12% per annum from notice of judgment, plus costs of suit. In a decision of 09
November 1988, this Court, while recognizing the right of the private respondent to recover
damages, held the award, however, for moral damages by the trial court, later sustained by
the IAC, to be inconceivably large. The Court 12 thus set aside the decision of the appellate
court and rendered a new one, "ordering the petitioner to pay private respondent the sum of
One Hundred Thousand (P100,000.00) Pesos as moral damages, with
six (6%) percent interest thereon computed from the finality of this decision until paid.
(Emphasis supplied)
Reformina came into fore again in the 21 February 1989 case of Florendo v. Ruiz 13 which
arose from a breach of employment contract. For having been illegally dismissed, the
petitioner was awarded by the trial court moral and exemplary damages without, however,
providing any legal interest thereon. When the decision was appealed to the Court of
Appeals, the latter held:
WHEREFORE, except as modified hereinabove the decision of the CFI of Negros Oriental
dated October 31, 1972 is affirmed in all respects, with the modification that defendantsappellants, except defendant-appellant Merton Munn, are ordered to pay, jointly and
severally, the amounts stated in the dispositive portion of the decision, including the sum of
P1,400.00 in concept of compensatory damages, with interest at the legal rate from the
date of the filing of the complaint until fully paid (Emphasis supplied.)
The petition for review to this Court was denied. The records were thereupon transmitted to
the trial court, and an entry of judgment was made. The writ of execution issued by the trial
court directed that only compensatory damages should earn interest at 6% per annum from
the date of the filing of the complaint. Ascribing grave abuse of discretion on the part of the
trial judge, a petition for certiorari assailed the said order. This Court said:
. . . , it is to be noted that the Court of Appeals ordered the payment of interest "at the legal
rate" from the time of the filing of the complaint. . . Said circular [Central Bank Circular No.
416] does not apply to actions based on a breach of employment contract like the case at
bar. (Emphasis supplied)
The Court reiterated that the 6% interest per annum on the damages should be computed
from the time the complaint was filed until the amount is fully paid.
Quite recently, the Court had another occasion to rule on the matter. National Power
Corporation vs. Angas, 14 decided on 08 May 1992, involved the expropriation of certain
parcels of land. After conducting a hearing on the complaints for eminent domain, the trial
court ordered the petitioner to pay the private respondents certain sums of money as just
compensation for their lands so expropriated "with legal interest thereon . . . until fully paid."
Again, in applying the 6% legal interest per annum under the Civil Code, the Court 15
declared:
. . . , (T)he transaction involved is clearly not a loan or forbearance of money, goods or
credits but expropriation of certain parcels of land for a public purpose, the payment of
which is without stipulation regarding interest, and the interest adjudged by the trial court is
in the nature of indemnity for damages. The legal interest required to be paid on the amount
of just compensation for the properties expropriated is manifestly in the form of indemnity
for damages for the delay in the payment thereof. Therefore, since the kind of interest
involved in the joint judgment of the lower court sought to be enforced in this case is
interest by way of damages, and not by way of earnings from loans, etc. Art. 2209 of the
Civil Code shall apply.
Concededly, there have been seeming variances in the above holdings. The cases can
perhaps be classified into two groups according to the similarity of the issues involved and
the corresponding rulings rendered by the court. The "first group" would consist of the cases
of Reformina v. Tomol (1985), Philippine Rabbit Bus Lines v. Cruz (1986), Florendo v. Ruiz
(1989)
and National Power Corporation v. Angas (1992). In the "second group" would be Malayan
Insurance Company v. Manila Port Service (1969), Nakpil and Sons v. Court of Appeals
(1988), and American Express International v. Intermediate Appellate Court (1988).
In the "first group", the basic issue focuses on the application of either the 6% (under the
Civil Code) or 12% (under the Central Bank Circular) interest per annum. It is easily
discernible in these cases that there has been a consistent holding that the Central Bank
Circular imposing the 12% interest per annum applies only to loans or forbearance 16 of
money, goods or credits, as well as to judgments involving such loan or forbearance of
money, goods or credits, and that the 6% interest under the Civil Code governs when the
transaction involves the payment of indemnities in the concept of damage arising from the
breach or a delay in the performance of obligations in general. Observe, too, that in these
cases, a common time frame in the computation of the 6% interest per annum has been
applied, i.e., from the time the complaint is filed until the adjudged amount is fully paid.
The "second group", did not alter the pronounced rule on the application of the 6% or 12%

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interest per annum, 17 depending on whether or not the amount involved is a loan or
forbearance, on the one hand, or one of indemnity for damage, on the other hand. Unlike,
however, the "first group" which remained consistent in holding that the running of the legal
interest should be from the time of the filing of the complaint until fully paid, the "second
group" varied on the commencement of the running of the legal interest.
Malayan held that the amount awarded should bear legal interest from the date of the
decision of the court a quo, explaining that "if the suit were for damages, 'unliquidated and
not known until definitely ascertained, assessed and determined by the courts after proof,'
then, interest 'should be from the date of the decision.'" American Express International v.
IAC, introduced a different time frame for reckoning the 6% interest by ordering it to be
"computed from the finality of (the) decision until paid." The Nakpil and Sons case ruled that
12% interest per annum should be imposed from the finality of the decision until the
judgment amount is paid.
The ostensible discord is not difficult to explain. The factual circumstances may have called
for different applications, guided by the rule that the courts are vested with discretion,
depending on the equities of each case, on the award of interest. Nonetheless, it may not be
unwise, by way of clarification and reconciliation, to suggest the following rules of thumb for
future guidance.
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or
quasi-delicts 18 is breached, the contravenor can be held liable for damages. 19 The
provisions under Title XVIII on "Damages" of the Civil Code govern in determining the
measure of recoverable damages. 20
II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been
stipulated in writing. 21 Furthermore, the interest due shall itself earn legal interest from the
time it is judicially demanded. 22 In the absence of stipulation, the rate of interest shall be
12% per annum to be computed from default, i.e., from judicial or extrajudicial demand
under and subject to the provisions of Article 1169 23 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an
interest on the amount of damages awarded may be imposed at the discretion of the court 24
at the rate of 6% per annum. 25 No interest, however, shall be adjudged on unliquidated
claims or damages except when or until the demand can be established with reasonable
certainty. 26 Accordingly, where the demand is established with reasonable certainty, the
interest shall begin to run from the time the claim is made judicially or extrajudicially (Art.
1169, Civil Code) but when such certainty cannot be so reasonably established at the time
the demand is made, the interest shall begin to run only from the date the judgment of the
court is made (at which time the quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of legal interest shall, in any
case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory,
the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above,
shall be 12% per annum from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit.
WHEREFORE, the petition is partly GRANTED. The appealed decision is AFFIRMED with the
MODIFICATION that the legal interest to be paid is SIX PERCENT (6%) on the amount due
computed from the decision, dated
03 February 1988, of the court a quo. A TWELVE PERCENT (12%) interest, in lieu of SIX
PERCENT (6%), shall be imposed on such amount upon finality of this decision until the
payment thereof.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-52478 October 30, 1986
THE GOVERNMENT SERVICE INSURANCE SYSTEM, petitioner-appellant,
vs.
HONORABLE COURT OF APPEALS, NEMENCIO R. MEDINA and JOSEFINA G. MEDINA,
respondents-appellants.
Coronel Law Office for private respondents.
Alberto C. Lerma collaborating counsel for private respondents
PARAS, J.:
This is a petition for review on certiorari of the decision of the Court of Appeals in CA-G.R.

66

No. 62541-R (Nemencio R. Medina and Josefina G. Medina, Plaintiffs-Appellants vs. The
Government Service Insurance System, Defendant-Appellant) affirming the January 21, 1977
Decision of the trial court, and at the same time ordering the GSIS to reimburse the amount
of P9,580.00 as over-payment and to pay the spouses Nemencio R. Medina and Josefina G.
Medina P3,000.00 and P1,000.00 as attorney's fees and litigation expenses.
In 1961, herein private respondents spouses Nemencio R. Medina and Josefina G. Medina
(Medinas for short) applied with the herein petitioner Government Service Insurance System
(GSIS for short) for a loan of P600,000.00. The GSIS Board of Trustees, in its Resolution of
December 20, 1961, approved under Resolution No. 5041 only the amount of P350,000.00,
subject to the following conditions: that the rate of interest shall be 9% per annum
compounded monthly; repayable in ten (10) years at a monthly amortization of P4,433.65
including principal and interest, and that any installment or amortization that remains due
and unpaid shall bear interest at the rate of 9%/12% per month. The Office of the Economic
Coordinator, in a 2nd Indorsement dated March 26, 1962, further reduced the approved
amount to P295,000.00. On April 4, 1962, the Medinas accepting the reduced amount,
executed a promissory note and a real estate mortgage in favor of GSIS. On May 29, 1962,
the GSIS, and on June 6, 1962, the Office of the Economic Coordinator, upon request of the
Medinas, both approved the restoration of the amount of P350,000.00 (P295,000.00 +
P55,000.00) originally approved by the GSIS. This P350,000.00 loan was denominated by the
GSIS as Account No. 31055.
On July 6, 1962, the Medinas executed in favor of the GSIS an Amendment of Real Estate
Mortgage, the pertinent portion of which reads:
WHEREAS, on the 4th day of April, 1962, the Mortgagor executed signed and delivered a real
estate mortgage to and in favor of the Mortgagee on real estate properties located in the
City of Manila, ... to secure payment to the mortgages of a loan of Two Hundred Ninety Five
Thousand Pesos (P295,000.00) Philippine Currency, granted by the mortgagee to the
Mortgagors, ...;
WHEREAS, the parties herein have agreed as they hereby agree to increase the
aforementioned loan from Two Hundred Ninety Five Thousand Pesos (P295,000.00) to Three
Hundred Fifty Thousand Pesos (P350,000.00), Philippine Currency;
NOW, THEREFORE, for and in consideration of the foregoing premises, the aforementioned
parties have amended and by these presents do hereby amend the said mortgage dated
April 4, 1962, mentioned in the second paragraph hereof by increasing the loan from Two
Hundred Ninety Five Thousand Pesos (P295,000.00) to Three Hundred Fifty Thousand Pesos
(P350,000.00) subject to this additional condition.
(1) That the mortgagor shall pay to the system P4,433.65 monthly including principal and
interest.
It is hereby expressly understood that with the foregoing amendment, all other terms and
conditions of the said real estate mortgage dated April 4, 1962 insofar as they are not
inconsistent herewith, are hereby confirmed, ratified and continued in full force and effect
and that the parties thereto agree that this amendment be an integral part of said real
estate mortgage. (Rollo, p. 153-154).
Upon application by the Medinas, the GSIS Board of Trustees adopted Resolution No. 121 on
January 18, 1963, as amended by Resolution No. 348 dated February 25, 1963, approving an
additional loan of P230,000.00 in favor of the Medinas on the security of the same
mortgaged properties and the additional properties covered by TCT Nos. 49234, 49235 and
49236, to bear interest at 9% per annum compounded monthly and repayable in ten years.
This additional loan of P230,000.00 was denominated by the GSIS as Account No. 31442.
On March 18, 1963, the Economic Coordinator thru the Auditor General interposed no
objection thereto, subject to the conditions of Resolution No. 121 as amended by Resolution
No. 348 of the GSIS.
Beginning 1965, the Medinas having defaulted in the payment of the monthly amortization
on their loan, the GSIS imposed 9%/12% interest on an installments due and unpaid. In
1967, the Medinas began defaulting in the payment of fire insurance premiums.
On May 3, 1974, the GSIS notified the Medinas that they had arrearages in the aggregate
amount of P575,652.42 as of April 18, 1974 (Exhibit 9, p. 149, Joint Record on Appeal, Rollo,
p. 79), and demanded payment within seven (7) days from notice thereof, otherwise, it
would foreclose the mortgage.
On April 21, 1975, the GSIS filed an Application for Foreclosure of Mortgage with the Sheriff
of the City of Manila (Exhibit "22," pp. 63 and 149; Rollo, p. 79). On June 30, 1975, the
Medinas filed with the Court of First Instance of Manila a complaint, praying, among other
things, that a restraining order or writ of preliminary injunction be issued to prevent the GSIS
and the Sheriff of the City of Manila from proceeding with the extra-judicial foreclosure of
their mortgaged properties (CFI Decision, p. 121; Rollo, p. 79). However, in view of Section 2
of Presidential Decree No. 385, no restraining order or writ of preliminary injunction was
issued by the trial court (CFI Decision, p. 212; Rollo, p. 79). On April 25, 1975, the Medinas
made a last partial payment in the amount of P209,662.80.

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Under a Notice of Sale on Extra-Judicial Foreclosure dated June 18, 1975, the real properties
of the Medinas covered by Transfer Certificates of Title Nos. 32231, 43527, 51394, 58626,
60534, 63304, 67550, 67551 and 67552 of the Registry of Property of the City of Manila
were sold at public auction to the GSIS as the highest bidder for the total amount of
P440,080.00 on January 12, 1976, and the corresponding Certificate of Sale was executed by
the Sheriff of Manila on January 27, 1976 (CFI Decision, pp. 212-213; Rollo, p. 79).
On January 30, 1976, the Medinas filed an Amended Complaint with the trial court, praying
for (a) the declaration of nullity of their two real estate mortgage contracts with the GSIS as
well as of the extra-judicial foreclosure proceedings; and (b) the refund of excess payments,
plus damages and attorney's fees (CFI Decision, p. 213; Rollo, p. 79).
On March 19, 1976, the GSIS filed its Amended Answer (Joint Record on Appeal, pp. 99-105;
Rollo, p. 79). After trial, the trial court rendered a Decision dated January 21, 1977 (Joint
Record on Appeal, pp. 210-232), the pertinent dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered declaring the extra-judicial foreclosure conducted
by the Sheriff of Manila of real estate mortgage contracts executed by plaintiffs on April 4,
1962, as amended on July 6, 1962, and February 17, 1963, null and void and the Sheriff's
Certificate of Sale dated January 27, 1976, in favor of the GSIS of no legal force and effect;
and directing plaintiffs to pay the GSIS the sum of P1,611.12 in full payment of their
obligation to the latter with interest of 9% per annum from December 11, 1975, until fully
paid.
Dissatisfied with the said judgment, both parties appealed with the Court of Appeals.
The Court of Appeals, in a Decision promulgated on January 18, 1980 (Record, pp. 72-77),
ruled in favor of the Medinas
WHEREFORE, the defendant GSIS is ordered to reimburse the amount of P9,580.00 as
overpayment and to pay plaintiffs P3,000.00 and Pl,000.00 as attorney's fees and litigation
expenses, respectively. With these modifications, the judgment appealed from is AFFIRMED
in all other respects, with costs against defendant GSIS."
Hence this petition.
The Second Division of this Court, in a Resolution dated April 25, 1980 (Rollo, p.. 88),
resolved to deny the petition for lack of merit.
Petitioner filed on June 26, 1980 a Motion for Reconsideration dated June 17, 1980 (Rollo, pp.
95-103), of the above-stated Resolution and respondents in a Resolution dated July 9, 1980
(Rollo, p. 105), were required to comment thereon which comment they filed on August 6,
1980. (Rollo, pp. 106-116).
The petition was given due course in the Resolution dated July 6, 1981 (Rollo, p. 128).
Petitioner filed its brief on November 26, 1981 (Rollo, pp. 147-177); while private
respondents filed their brief on January 27, 1982 (Rollo, pp. 181-224), and the case was
considered submitted for decision in the Resolution of July 19, 1982 (Rollo, p. 229).
The issues in this case are:
1. WHETHER OR NOT THE COURT OF APPEALS ERRED IN HOLDING THAT THE AMENDMENT
OF REAL ESTATE MORTGAGE DATED JULY 6, 1962 SUPERSEDED THE MORTGAGE CONTRACT
DATED APRIL 4, 1962, PARTICULARLY WITH RESPECT TO COMPOUNDING OF INTEREST;
2. WHETHER OR NOT THE COURT OF APPEALS ERRED IN SUSTAINING THE RESPONDENTAPPELLEE SPOUSES MEDINA'S CLAIM OR OVERPAYMENT, BY CREDITING THE FIRE INSURANCE
PROCEEDS IN THE SUM OF P11,152.02 TO THE TOTAL PAYMENT MADE BY SAID SPOUSES AS
OF DECEMBER 11, 1975;
3. WHETHER OR NOT THE COURT OF APPEALS ERRED IN HOLDING THAT THE INTEREST
RATES ON THE LOAN ACCOUNTS OF RESPONDENT-APPELLEE SPOUSES ARE USURIOUS;
4. WHETHER OR NOT THE COURT OF APPEALS ERRED IN AFFIRMING THE ANNULMENT OF
THE SUBJECT EXTRAJUDICIAL FORECLOSURE AND SHERIFF'S CERTIFICATE OF SALE; AND
5. WHETHER OR NOT THE COURT OF APPEALS ERRED IN HOLDING THE GSIS LIABLE FOR
ATTORNEY'S FEES, EXPENSES OF LITIGATION AND COSTS.
The petition is impressed with merit.
There is no dispute as to the facts of the case. By agreement of the parties the issues in this
case are limited to the loan of P350,000.00 denominated as Account No. 31055 (Rollo, p. 79;
Joint Record on Appeal, p. 129) subject of the Amendment of Real Mortgage dated July 6,
1962, the interpretation of which is the major issue in this case.
GSIS claims that the amendment of the real estate mortgage did not supersede the original
mortgage contract dated April 4, 1962 which was being amended only with respect to the
amount secured thereby, and the amount of monthly amortizations. All other provisions of
aforesaid mortgage contract including that on compounding of interest were deemed
rewritten and thus binding on and enforceable against the respondent spouses. (Rollo, pp.
162-166).
Accordingly, payments made by the Medinas in the total amount of P991,845.53 was applied
as follows: the amount of P600,495.51 to Account No. 31055, P466,965.31 of which to
interest and P133,530.20 to principal and P390,845.66 to Account No. 31442, P230,774.29
to interest and P159,971.37 to principal. (Joint Record on Appeal, p. 216; Rollo, p. 79).

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On the other hand the Medinas maintain that there is no express stipulation on compounded
interest in the amendment of mortgage contract of July 6, 1962 so that the compounded
interest stipulation in the original mortgage contract of April 4, 1962 which has been
superseded cannot be enforced in the later mortgage. (Rollo, p. 185).
Hence the Medinas claim an overpayment in Account No. 31055. The application of their
total payment in the amount of P991,845.53 as computed by the trial court and by the Court
of Appeals is as follows:
... It appearing and so the parties admit in their own exhibits that as of December 11, 1975,
plaintiffs had paid a total of P991,241.17 excluding fire insurance, P532,038.00 of said
amount should have been applied to the full payment of Acct. No. 31055 and the balance of
P459,203.17 applied to the payment of Acct. No. 31442.
According to the computation of the GSIS (Exhibit C, also Exhibit 38) the total amounts,
collected on Acct. No. 31442 as of December 11, 1975 total P390,745.66 thus leaving an
unpaid balance of P70,028.63. The total amount plaintiffs should pay on said account should
therefore be P460,774.29. Deduct this amount from P459,163.17 which has been shown to
be the difference between the total payments made by plaintiffs to the G.S.I.S. as of
December 11, 1975 and the amount said plaintiffs should pay under their Acct. No. 31055,
there remains an outstanding balance of P1,611.12. This amount represents the balance of
the obligation of the plaintiffs to the G.S.I.S. on Acct. No. 31442 as of December 11, 1975."
(Decision, Civil Case No. 98390; Joint Record on Appeal, pp. 227-228; Rollo, p. 79).
To recapitulate, the difference in the computation lies in the inclusion of the compounded
interest as demanded by the GSIS on the one hand and the exclusion thereof, as insisted by
the Medinas on the other.
It is a basic and fundamental rule in the interpretation of contract that if the terms thereof
are clear and leave no doubt as to the intention of the contracting parties, the literal
meaning of the stipulations shall control but when the words appear contrary to the evident
intention of the parties, the latter shall prevail over, the former. In order to judge the
intention of the parties, their contemporaneous and subsequent acts shall be principally
considered. (Sy v. Court of Appeals, 131 SCRA 116; July 31, 1984).
There appears no ambiguity whatsoever in the terms and conditions of the amendment of
the mortgage contract herein quoted earlier. On the contrary, an opposite conclusion cannot
be otherwise but absurd.
As correctly stated by the GSIS in its brief (Rollo, pp. 162166), a careful perusal of the title,
preamble and body of the Amendment of Real Estate Mortgage dated July 6, 1962, taking
into account the prior, contemporaneous, and subsequent acts of the parties, ineluctably
shows that said Amendment was never intended to completely supersede the mortgage
contract dated April 4, 1962.
First, the title "Amendment of Real Estate Mortgage" recognizes the existence and effectivity
of the previous mortgage contract. Second, nowhere in the aforesaid Amendment did the
parties manifest their intention to supersede the original contract. On the contrary in the
WHEREAS clauses, the existence of the previous mortgage contract was fully recognized and
the fact that the same was just being amended as to amount and amortization is fully
established as to obviate any doubt. Third, the Amendment of Real Estate Mortgage dated
July 6, 1962 does not embody the act of conveyancing the subject properties by way of
mortgage. In fact the intention of the parties to be bound by the unaffected provisions of the
mortgage contract of April 4, 1962 expressed in unmistakable language is clearly evident in
the last provision of the Amendment of Real Estate Mortgage dated July 6, 1962 which reads:
It is hereby expressly understood that with the foregoing amendment, all other terms and
conditions of the said real estate mortgage dated April 4, 1962, insofar as they are not
inconsistent herewith, are hereby confirmed, ratified and continued to be in full force and
effect, and that the parties hereto agree that the amendment be an integral part of said real
estate mortgage. (Emphasis supplied).
A review of prior, contemporaneous, and subsequent acts supports the conclusion that both
contracts are fully subsisting insofar as the latter is not inconsistent with the former. The fact
is the GSIS, as a matter of policy, imposes uniform terms and conditions for all its real estate
loans, particularly with respect to compounding of interest. As shown in the case at bar, the
original mortgage contract embodies the same terms and conditions as in the additional
loan denominated as Account No. 31442 while the amendment carries the provision that it
shall be subject to the same terms and conditions as the real estate mortgage of April 4,
1962 except as to amount and amortization.
Furthermore, it would be contrary to human experience and to ordinary practice for the
mortgagee to impose less onerous conditions on an increased loan by the deletion of
compound interest exacted on a lesser loan.
II
There is an obvious error in the ruling of the Court of Appeals in its Decision dated January
18, 1980, which reads:
... We agree that plaintiff should be credited with P11,152.02 of the fire insurance proceeds

69

as the same is admitted in paragraph (4) of its Answer and should be added to their
payments. (par. 13).
Contrary thereto, paragraph 4 of the Answer of the GSIS states:
That they (GSIS) specifically deny the allegations in Paragraph 11, the truth being that
plaintiffs are not entitled to a credit of P19,381.07 as fire insurance proceeds since they were
only entitled to, and were credited with, the amount of P11,152.02 as proceeds of their fire
insurance policy. (par. 4, Amended Answer).
As can be gleaned from the foregoing, petitioner-appellant GSIS had already credited the
amount of P11,152.02. Thus, when the Court of Appeals made the aforequoted ruling, it was
actually doubly crediting the amount of P11,152.02 which had been previously credited by
petitioner-appellant GSIS (Rollo, pp. 170-171).
III.
As to whether or not the interest rates on the loan accounts of the Medinas are usurious, it
has already been settled that the Usury Law applies only to interest by way of compensation
for the use or forbearance of money (Lopez v. Hernaez, 32 Phil. 631; Bachrach Motor Co. v.
Espiritu, 52 Phil. 346; Equitable Banking Corporation v. Liwanag, 32 SCRA 293, March 30,
1970). Interest by way of damages is governed by Article 2209 of the Civil Code of the
Philippines which provides:
Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs
in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the
payment of the interest agreed upon,...
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.
IV.
Based on the finding that the GSIS had the legal right to impose an interest 9% per annum,
compounded monthly, on the loans of the Medinas and an interest of 9%/12% per annum on
all due and unpaid amortizations or installments, there is no question that the Medinas failed
to settle their accounts with the GSIS which as computed by the latter reached an
outstanding balance of P630,130.55 as of April 12, 1975 and that the GSIS had a perfect
right to foreclose the mortgage.
In the same manner, there is obvious error in invalidating the extra-judicial foreclosure on
the basis of a typographical error in the Sheriff's Certificate of Sale which stated that the
mortgage was foreclosed on May 17, 1963 instead of February 17, 1963.
There is merit in GSIS' contention that the Sheriff's Certificate of Sale is merely provisional in
character and is not intended to operate as an absolute transfer of the subject property, but
merely to Identify the property, to show the price paid and the date when the right of
redemption expires (Section 27, Rule 39, Rules of Court, Francisco, The Revised Rules of
Court, 1972 Vol., IV-B, Part I, p. 681). Hence the date of the foreclosed mortgage is not even
a material content of the said Certificate. (Rollo, p. 174).
V.
PREMISES CONSIDERED, the decision of the Court of Appeals, in CA-G.R. No. 62541-R
Medina, et al. v. Government Service Insurance System et al., is hereby REVERSED and SET
ASIDE, and a new one is hereby RENDERED, affirming the validity of the extra-judicial
foreclosure of the real estate mortgages of the respondent-appellee spouses Medina dated
April 4, 1962, as amended on July 6, 1962, and February 17, 1963.
SO ORDERED.

70