SEBASTIAN SIGA- G.R. No.

173227
AN, The facts gathered from the records are as follows:
Petitioner, Present:

YNARES-SANTIAGO, On 30 March 1998, respondent Alicia Villanueva filed a

Chairperson,
AUSTRIA-MARTINEZ, complaint[5] for sum of money against petitioner Sebastian Siga-an
CHICO-NAZARIO,
before the Las Pinas City Regional Trial Court (RTC), Branch 255,
-versus NACHURA, and
LEONARDO-DE CASTRO,* JJ. docketed as Civil Case No. LP-98-0068. Respondent alleged that she
was a businesswoman engaged in supplying office materials and
Promulgated:
equipments to the Philippine Navy Office (PNO) located at Fort
ALICIA January 20, 2009 Bonifacio, Taguig City, while petitioner was a military officer and
VILLANUEVA,
Respondent. comptroller of the PNO from 1991 to 1996.
x-------------------------------------------------
-x
Respondent claimed that sometime in 1992, petitioner
approached her inside the PNO and offered to loan her the amount
DECISION of P540,000.00. Since she needed capital for her business
transactions with the PNO, she accepted petitioners proposal. The
CHICO-NAZARIO, J.: loan agreement was not reduced in writing. Also, there was no
stipulation as to the payment of interest for the loan.[6]
Before Us is a Petition[1] for Review on Certiorari under Rule
45 of the Rules of Court seeking to set aside the Decision,[2] dated 16 On 31 August 1993, respondent issued a check
December 2005, and Resolution,[3]dated 19 June 2006 of the Court of worth P500,000.00 to petitioner as partial payment of the loan. On 31
Appeals in CA-G.R. CV No. 71814, which affirmed in toto the October 1993, she issued another check in the amount
Decision,[4] dated 26 January 2001, of the Las Pinas City Regional of P200,000.00 to petitioner as payment of the remaining balance of
Trial Court, Branch 255, in Civil Case No. LP-98-0068. the loan. Petitioner told her that since she paid a total amount
of P700,000.00 for the P540,000.00 worth of loan, the excess amount
of P160,000.00 would be applied as interest for the loan. Not satisfied
with the amount applied as interest, petitioner pestered her to pay
additional interest. Petitioner threatened to block or disapprove her
transactions with the PNO if she would not comply with his
demand. As all her transactions with the PNO were subject to the
approval of petitioner as comptroller of the PNO, and fearing that
petitioner might block or unduly influence the payment of her vouchers
in the PNO, she conceded. Thus, she paid additional amounts in cash
and checks as interests for the loan. She asked petitioner for receipt
for the payments but petitioner told her that it was not necessary as
there was mutual trust and confidence between them. According to
her computation, the total amount she paid to petitioner for the loan
and interest accumulated to P1,200,000.00.[7]
Thereafter, respondent consulted a lawyer regarding the
propriety of paying interest on the loan despite absence of agreement
to that effect. Her lawyer told her that petitioner could not validly collect
interest on the loan because there was no agreement between her
and petitioner regarding payment of interest. Since she paid petitioner
a total amount of P1,200,000.00 for the P540,000.00 worth of loan,
and upon being advised by her lawyer that she made overpayment to
petitioner, she sent a demand letter to petitioner asking for the return
of the excess amount of P660,000.00. Petitioner, despite receipt of the
demand letter, ignored her claim for reimbursement.[8]
Respondent prayed that the RTC render judgment ordering
petitioner to pay respondent (1) P660,000.00 plus legal interest from
the time of demand; (2) P300,000.00 as moral damages;
(3) P50,000.00 as exemplary damages; and (4) an amount equivalent
to 25% of P660,000.00 as attorneys fees.[9]
In his answer[10] to the complaint, petitioner denied that he
offered a loan to respondent. He averred that in 1992, respondent
approached and asked him if he could grant her a loan, as she needed
money to finance her business venture with the PNO. At first, he was
reluctant to deal with respondent, because the latter had a spotty
record as a supplier of the PNO. However, since respondent was an
acquaintance of his officemate, he agreed to grant her a
loan. Respondent paid the loan in full.[11]
Subsequently, respondent again asked him to give her a
loan. As respondent had been able to pay the previous loan in full, he
agreed to grant her another loan. Later, respondent requested him to
restructure the payment of the loan because she could not give full
payment on the due date. He acceded to her request. Thereafter,
respondent pleaded for another restructuring of the payment of the
loan. This time he rejected her plea. Thus, respondent proposed to
execute a promissory note wherein she would acknowledge her
obligation to him, inclusive of interest, and that she would issue
several postdated checks to guarantee the payment of her obligation.
Upon his approval of respondents request for restructuring of the loan,
respondent executed a promissory note dated 12 September 1994
wherein she admitted having borrowed an amount ofP1,240,000.00,
inclusive of interest, from petitioner and that she would pay said
amount in March 1995. Respondent also issued to him six postdated
checks amounting toP1,240,000.00 as guarantee of compliance with
her obligation. Subsequently, he presented the six checks for
encashment but only one check was honored. He demanded that
respondent settle her obligation, but the latter failed to do so. Hence,
he filed criminal cases for Violation of the Bouncing Checks Law
(Batas Pambansa Blg. 22) against respondent. The cases were
assigned to the Metropolitan Trial Court of Makati City, Branch 65
(MeTC).[12]
Petitioner insisted that there was no overpayment because
respondent admitted in the latters promissory note that her monetary
obligation as of 12 September 1994 amounted to P1,240,000.00
inclusive of interests. He argued that respondent was already
estopped from complaining that she should not have paid any interest,
because she was given several times to settle her obligation but failed
to do so. He maintained that to rule in favor of respondent is
tantamount to concluding that the loan was given interest-free.Based
on the foregoing averments, he asked the RTC to dismiss respondents
complaint.
After trial, the RTC rendered a Decision on 26 January 2001
holding that respondent made an overpayment of her loan obligation
to petitioner and that the latter should refund the excess amount to the
former. It ratiocinated that respondents obligation was only to pay the
loaned amount of P540,000.00, and that the alleged interests due
should not be included in the computation of respondents total
monetary debt because there was no agreement between them
regarding payment of interest. It concluded that since respondent
made an excess payment to petitioner in the amount of P660,000.00
through mistake, petitioner should return the said amount to
respondent pursuant to the principle of solutio indebiti.[13]
The RTC also ruled that petitioner should pay moral damages
for the sleepless nights and wounded feelings experienced by
respondent. Further, petitioner should pay exemplary damages by
way of example or correction for the public good, plus attorneys fees
and costs of suit.
The dispositive portion of the RTC Decision reads:
 WHEREFORE, in view of the foregoing
evidence and in the light of the provisions of law and
jurisprudence on the matter, judgment is hereby
rendered in favor of the plaintiff and against the
defendant as follows:
(1) Ordering defendant to pay
plaintiff the amount of P660,000.00 plus legal interest
of 12% per annum computed from 3 March 1998 until
the amount is paid in full;
(2) Ordering defendant to pay plaintiff the
amount of P300,000.00 as moral damages;
(3) Ordering defendant to pay plaintiff the
amount of P50,000.00 as exemplary damages;
(4) Ordering defendant to pay plaintiff the
amount equivalent to 25% of P660,000.00 as
attorneys fees; and
(5) Ordering defendant to pay the costs of
suit.[14]
Petitioner appealed to the Court of Appeals. On 16 December
2005, the appellate court promulgated its Decision affirming in toto the
RTC Decision, thus:
WHEREFORE, the foregoing considered, the
instant appeal is hereby DENIED and the assailed
decision [is] AFFIRMED in toto.[15]
Petitioner filed a motion for reconsideration of the appellate
courts decision but this was denied.[16] Hence, petitioner lodged the
instant petition before us assigning the following errors:
I.
THE RTC AND THE COURT OF APPEALS ERRED
IN RULING THAT NO INTEREST WAS DUE TO
PETITIONER;
II.
THE RTC AND THE COURT OF APPEALS ERRED
IN APPLYING THE PRINCIPLE OF SOLUTIO
INDEBITI.[17]
Interest is a compensation fixed by the parties for the use or
forbearance of money. This is referred to as monetary interest.
Interest may also be imposed by law or by courts as penalty or
indemnity for damages. This is called compensatory interest. [18] The
right to interest arises only by virtue of a contract or by virtue of
damages for delay or failure to pay the principal loan on which interest
is demanded.[19]
Article 1956 of the Civil Code, which refers to monetary
interest,[20] specifically mandates that no interest shall be due unless
it has been expressly stipulated in writing .As can be gleaned from the
foregoing provision, payment of monetary interest is allowed only if:
(1) there was an express stipulation for the payment of interest; and
(2) the agreement for the payment of interest was reduced in
writing. The concurrence of the two conditions is required for the
payment of monetary interest. Thus, we have held that collection of
interest without any stipulation therefor in writing is prohibited by
law.[21]
It appears that petitioner and respondent did not agree on the
payment of interest for the loan. Neither was there convincing proof of
written agreement between the two regarding the payment of
interest. Respondent testified that although she accepted petitioners
offer of loan amounting to P540,000.00, there was, nonetheless, no
verbal or written agreement for her to pay interest on the loan.[22]
Petitioner presented a handwritten promissory note dated 12
September 1994[23] wherein respondent purportedly admitted owing
petitioner capital and interest. Respondent, however, explained that it
was petitioner who made a promissory note and she was told to copy
it in her own handwriting; that all her transactions with the PNO were
subject to the approval of petitioner as comptroller of the PNO; that
petitioner threatened to disapprove her transactions with the PNO if
she would not pay interest; that being unaware of the law on interest
and fearing that petitioner would make good of his threats if she would
not obey his instruction to copy the promissory note, she copied the
promissory note in her own handwriting; and that such was the same
promissory note presented by petitioner as alleged proof of their
written agreement on interest.[24] Petitioner did not rebut the foregoing
testimony. It is evident that respondent did not really consent to the
payment of interest for the loan and that she was merely tricked and
coerced by petitioner to pay interest. Hence, it cannot be gainfully said
that such promissory note pertains to an express stipulation of interest
or written agreement of interest on the loan between petitioner and
respondent.
Petitioner, nevertheless, claims that both the RTC and the
Court of Appeals found that he and respondent agreed on the payment
of 7% rate of interest on the loan; that the agreed 7% rate of interest
was duly admitted by respondent in her testimony in the Batas
Pambansa Blg. 22 cases he filed against respondent; that despite
such judicial admission by respondent, the RTC and the Court of
Appeals, citing Article 1956 of the Civil Code, still held that no interest
was due him since the agreement on interest was not reduced in
writing; that the application of Article 1956 of the Civil Code should not
be absolute, and an exception to the application of such provision
should be made when the borrower admits that a specific rate of
interest was agreed upon as in the present case; and that it would be
unfair to allow respondent to pay only the loan when the latter very
well knew and even admitted in the Batas Pambansa Blg. 22 cases
that there was an agreed 7% rate of interest on the loan.[25]
We have carefully examined the RTC Decision and found that
the RTC did not make a ruling therein that petitioner and respondent
agreed on the payment of interest at the rate of 7% for the loan. The
RTC clearly stated that although petitioner and respondent entered
into a valid oral contract of loan amounting to P540,000.00, they,
nonetheless, never intended the payment of interest thereon.[26] While
the Court of Appeals mentioned in its Decision that it concurred in the
RTCs ruling that petitioner and respondent agreed on a certain rate of
interest as regards the loan, we consider this as merely an
inadvertence because, as earlier elucidated, both the RTC and the
Court of Appeals ruled that petitioner is not entitled to the payment of
interest on the loan. The rule is that factual findings of the trial court
deserve great weight and respect especially when affirmed by the
appellate court.[27] We found no compelling reason to disturb the ruling
of both courts.
Petitioners reliance on respondents alleged admission in the
Batas Pambansa Blg. 22 cases that they had agreed on the payment
of interest at the rate of 7% deserves scant consideration. In the said
case, respondent merely testified that after paying the total amount of
loan, petitioner ordered her to pay interest.[28] Respondent did not
categorically declare in the same case that she and respondent made
an express stipulation in writing as regards payment of interest at the
rate of 7%. As earlier discussed, monetary interest is due only if there
was an express stipulation in writing for the payment of interest.
There are instances in which an interest may be imposed
even in the absence of express stipulation, verbal or written, regarding
payment of interest. Article 2209 of the Civil Code states that if the
obligation consists in the payment of a sum of money, and the debtor
incurs delay, a legal interest of 12% per annum may be imposed as
indemnity for damages if no stipulation on the payment of interest was
agreed upon. Likewise, Article 2212 of the Civil Code provides that
interest due shall earn legal interest from the time it is judicially
demanded, although the obligation may be silent on this point.
All the same, the interest under these two instances may be
imposed only as a penalty or damages for breach of contractual
obligations. It cannot be charged as a compensation for the use or
forbearance of money. In other words, the two instances apply only to
compensatory interest and not to monetary interest.[29] The case at bar
involves petitioners claim for monetary interest.
Further, said compensatory interest is not chargeable in the
instant case because it was not duly proven that respondent defaulted
in paying the loan. Also, as earlier found, no interest was due on the
loan because there was no written agreement as regards payment of
interest.
Apropos the second assigned error, petitioner argues that the
principle of solutio indebiti does not apply to the instant case. Thus, he
cannot be compelled to return the alleged excess amount paid by
respondent as interest.[30]
Under Article 1960 of the Civil Code, if the borrower of loan
pays interest when there has been no stipulation therefor, the
provisions of the Civil Code concerning solutioindebiti shall be
applied. Article 2154 of the Civil Code explains the principle of solutio
indebiti. Said provision provides that if something is received when
there is no right to demand it, and it was unduly delivered through
mistake, the obligation to return it arises. In such a case, a creditor-
debtor relationship is created under a quasi-contract whereby the
payor becomes the creditor who then has the right to demand the
return of payment made by mistake, and the person who has no right
to receive such payment becomes obligated to return the same. The
quasi-contract of solutio indebiti harks back to the ancient principle
that no one shall enrich himself unjustly at the expense of
another.[31] The principle of solutio indebiti applies where (1) a
payment is made when there exists no binding relation between the
payor, who has no duty to pay, and the person who received the
payment; and (2) the payment is made through mistake, and not
through liberality or some other cause.[32] We have held that the
principle of solutio indebiti applies in case of erroneous payment of
undue interest.[33]
It was duly established that respondent paid interest to
petitioner. Respondent was under no duty to make such payment
because there was no express stipulation in writing to that
effect. There was no binding relation between petitioner and
respondent as regards the payment of interest. The payment was
clearly a mistake. Since petitioner received something when there was
no right to demand it, he has an obligation to return it.
We shall now determine the propriety of the monetary award
and damages imposed by the RTC and the Court of Appeals.
Records show that respondent received a loan amounting
to P540,000.00 from petitioner.[34] Respondent issued two checks with
a total worth of P700,000.00 in favor of petitioner as payment of the
loan.[35] These checks were subsequently encashed by
petitioner.[36] Obviously, there was an excess of P160,000.00 in the
payment for the loan.Petitioner claims that the excess of P160,000.00
serves as interest on the loan to which he was entitled. Aside from
issuing the said two checks, respondent also paid cash in the total
amount of P175,000.00 to petitioner as interest.[37] Although no
receipts reflecting the same were presented because petitioner
refused to issue such to respondent, petitioner, nonetheless, admitted
in his Reply-Affidavit[38] in the Batas Pambansa Blg. 22 cases that
respondent paid him a total amount of P175,000.00 cash in addition
to the two checks. Section 26 Rule 130 of the Rules of Evidence
provides that the declaration of a party as to a relevant fact may be
given in evidence against him. Aside from the amounts
of P160,000.00 and P175,000.00 paid as interest, no other proof of
additional payment as interest was presented by respondent. Since
we have previously found that petitioner is not entitled to payment of
interest and that the principle of solutio indebiti applies to the instant
case, petitioner should return to respondent the excess amount
ofP160,000.00 and P175,000.00 or the total amount of P335,000.00.
Accordingly, the reimbursable amount to respondent fixed by the RTC
and the Court of Appeals should be reduced from P660,000.00
to P335,000.00.
As earlier stated, petitioner filed five (5) criminal cases for
violation of Batas Pambansa Blg. 22 against respondent. In the said
cases, the MeTC found respondent guilty of violating Batas Pambansa
Blg. 22 for issuing five dishonored checks to petitioner. Nonetheless,
respondents conviction therein does not affect our ruling in the instant
case. The two checks, subject matter of this case,
totaling P700,000.00 which respondent claimed as payment of
the P540,000.00 worth of loan, were not among the five checks found
to be dishonored or bounced in the five criminal cases. Further, the
MeTC found that respondent made an overpayment of the loan by
reason of the interest which the latter paid to petitioner. [39]
Article 2217 of the Civil Code provides that moral damages
may be recovered if the party underwent physical suffering, mental
anguish, fright, serious anxiety, besmirched reputation, wounded
feelings, moral shock, social humiliation and similar injury.
Respondent testified that she experienced sleepless nights and
wounded feelings when petitioner refused to return the amount paid
as interest despite her repeated demands. Hence, the award of moral
damages is justified. However, its corresponding amount
of P300,000.00, as fixed by the RTC and the Court of Appeals, is
exorbitant and should be equitably reduced. Article 2216 of the Civil
Code instructs that assessment of damages is left to the discretion of
the court according to the circumstances of each case. This discretion
is limited by the principle that the amount awarded should not be
palpably excessive as to indicate that it was the result of prejudice or
corruption on the part of the trial court.[40] To our mind, the amount
of P150,000.00 as moral damages is fair, reasonable, and
proportionate to the injury suffered by respondent.
 Article 2232 of the Civil Code states that in a quasi-contract,
such as solutio indebiti, exemplary damages may be imposed if the
defendant acted in an oppressive manner. Petitioner acted
oppressively when he pestered respondent to pay interest and
threatened to block her transactions with the PNO if she would not pay
interest. This forced respondent to pay interest despite lack of
agreement thereto. Thus, the award of exemplary damages is
appropriate. The amount of P50,000.00 imposed as exemplary
damages by the RTC and the Court is fitting so as to deter petitioner
and other lenders from committing similar and other serious
wrongdoings.[41]
Jurisprudence instructs that in awarding attorneys fees, the
trial court must state the factual, legal or equitable justification for
awarding the same.[42] In the case under consideration, the RTC
stated in its Decision that the award of attorneys fees equivalent to
25% of the amount paid as interest by respondent to petitioner is
reasonable and moderate considering the extent of work rendered by
respondents lawyer in the instant case and the fact that it dragged on
for several years.[43] Further, respondent testified that she agreed to
compensate her lawyer handling the instant case such amount.[44] The
award, therefore, of attorneys fees and its amount equivalent to 25%
of the amount paid as interest by respondent to petitioner is proper.
Finally, the RTC and the Court of Appeals imposed a 12% rate
of legal interest on the amount refundable to respondent computed
from 3 March 1998 until its full payment.This is erroneous.
We held in Eastern Shipping Lines, Inc. v. Court of
Appeals,[45] that when an obligation, not constituting a loan or
forbearance of money is breached, an interest on the amount of
damages awarded may be imposed at the rate of 6% per annum. We
further declared that when the judgment of the court awarding a sum
of money becomes final and executory, the rate of legal interest,
whether it is a loan/forbearance of money or not, shall be 12% per
annum from such finality until its satisfaction, this interim period being
deemed equivalent to a forbearance of credit.
In the present case, petitioners obligation arose from a quasi-
contract of solutio indebiti and not from a loan or forbearance of
money. Thus, an interest of 6% per annum should be imposed on the
amount to be refunded as well as on the damages awarded and on
the attorneys fees, to be computed from the time of the extra-judicial
demand on 3 March 1998,[46] up to the finality of this Decision. In
addition, the interest shall become 12% per annum from the finality of
this Decision up to its satisfaction.
 WHEREFORE, the Decision of the Court of Appeals in CA-
G.R. CV No. 71814, dated 16 December 2005, is
hereby AFFIRMED with the following MODIFICATIONS: (1) the
amount of P660,000.00 as refundable amount of interest is reduced
to THREE HUNDRED THIRTY FIVE THOUSAND PESOS
(P335,000.00); (2) the amount of P300,000.00 imposed as moral
damages is reduced to ONE HUNDRED FIFTY THOUSAND PESOS
(P150,000.00); (3) an interest of 6% per annum is imposed on
the P335,000.00, on the damages awarded and on the attorneys fees
to be computed from the time of the extra-judicial demand on 3 March
1998 up to the finality of this Decision; and (4) an interest of 12% per
annum is also imposed from the finality of this Decision up to its
satisfaction. Costs against petitioner.

SO ORDERED.
G.R. No. 155223 April 4, 2007
BOBIE ROSE V. FRIAS, represented by her Attorney-in-fact,
MARIE F. FUJITA, Petitioner,
vs.
FLORA SAN DIEGO-SISON, Respondent.
DECISION
AUSTRIA-MARTINEZ, J.:
Before us is a Petition for Review on Certiorari filed by Bobie Rose
V. Frias represented by her Attorney-in-fact, Marie Regine F. Fujita
(petitioner) seeking to annul the Decision1 dated June 18, 2002 and
the Resolution2 dated September 11, 2002 of the Court of Appeals
(CA) in CA-G.R. CV No. 52839.
Petitioner is the owner of a house and lot located at No. 589
Batangas East, Ayala Alabang, Muntinlupa, Metro Manila, which she
acquired from Island Masters Realty and Development Corporation
(IMRDC) by virtue of a Deed of Sale dated Nov. 16, 1990.3 The
property is covered by TCT No. 168173 of the Register of Deeds of
Makati in the name of IMRDC.4
On December 7, 1990, petitioner, as the FIRST PARTY, and Dra.
Flora San Diego-Sison (respondent), as the SECOND PARTY,
entered into a Memorandum of Agreement5 over the property with
the following terms:
NOW, THEREFORE, for and in consideration of the sum of THREE
MILLION PESOS (P3,000,000.00) receipt of which is hereby
acknowledged by the FIRST PARTY from the SECOND PARTY, the
parties have agreed as follows:
1. That the SECOND PARTY has a period of Six (6) months
from the date of the execution of this contract within which to
notify the FIRST PARTY of her intention to purchase the
aforementioned parcel of land together within (sic) the
improvements thereon at the price of SIX MILLION FOUR
HUNDRED THOUSAND PESOS (P6,400,000.00). Upon
notice to the FIRST PARTY of the SECOND PARTYs
intention to purchase the same, the latter has a period of
another six months within which to pay the remaining
balance of P3.4 million.
2. That prior to the six months period given to the SECOND
PARTY within which to decide whether or not to purchase
the above-mentioned property, the FIRST PARTY may still
offer the said property to other persons who may be
interested to buy the same provided that the amount
of P3,000,000.00 given to the FIRST PARTY BY THE
SECOND PARTY shall be paid to the latter including interest
based on prevailing compounded bank interest plus the
amount of the sale in excess of P7,000,000.00 should the
property be sold at a price more than P7 million.
3. That in case the FIRST PARTY has no other buyer within
the first six months from the execution of this contract, no
interest shall be charged by the SECOND PARTY on the P3
million however, in the event that on the sixth month the
SECOND PARTY would decide not to purchase the
aforementioned property, the FIRST PARTY has a period of
another six months within which to pay the sum of P3 million
pesos provided that the said amount shall earn compounded
bank interest for the last six months only. Under this
circumstance, the amount of P3 million given by the
SECOND PARTY shall be treated as [a] loan and the
property shall be considered as the security for the mortgage
which can be enforced in accordance with law.
x x x x.6
Petitioner received from respondent two million pesos in cash and
one million pesos in a post-dated check dated February 28, 1990,
instead of 1991, which rendered said check stale.7 Petitioner then
gave respondent TCT No. 168173 in the name of IMRDC and the
Deed of Absolute Sale over the property between petitioner and
IMRDC.
Respondent decided not to purchase the property and notified
petitioner through a letter8 dated March 20, 1991, which petitioner
received only on June 11, 1991,9 reminding petitioner of their
agreement that the amount of two million pesos which petitioner
received from respondent should be considered as a loan payable
within six months. Petitioner subsequently failed to pay respondent
the amount of two million pesos.
On April 1, 1993, respondent filed with the Regional Trial Court
(RTC) of Manila, a complaint10 for sum of money with preliminary
attachment against petitioner. The case was docketed as Civil Case
No. 93-65367 and raffled to Branch 30. Respondent alleged the
foregoing facts and in addition thereto averred that petitioner tried to
deprive her of the security for the loan by making a false report11 of
the loss of her owners copy of TCT No. 168173 to the Tagig Police
Station on June 3, 1991, executing an affidavit of loss and by filing a
petition12 for the issuance of a new owners duplicate copy of said
title with the RTC of Makati, Branch 142; that the petition was
granted in an Order13 dated August 31, 1991; that said Order was
subsequently set aside in an Order dated April 10, 199214where the
RTC Makati granted respondents petition for relief from judgment
due to the fact that respondent is in possession of the owners
duplicate copy of TCT No. 168173, and ordered the provincial public
prosecutor to conduct an investigation of petitioner for perjury and
false testimony. Respondent prayed for the ex-parte issuance of a
writ of preliminary attachment and payment of two million pesos with
interest at 36% per annum from December 7, 1991, P100,000.00
moral, corrective and exemplary damages and P200,000.00 for
attorneys fees.
In an Order dated April 6, 1993, the Executive Judge of the RTC of
Manila issued a writ of preliminary attachment upon the filing of a
bond in the amount of two million pesos.15
Petitioner filed an Amended Answer16 alleging that the Memorandum
of Agreement was conceived and arranged by her lawyer, Atty.
Carmelita Lozada, who is also respondents lawyer; that she was
asked to sign the agreement without being given the chance to read
the same; that the title to the property and the Deed of Sale between
her and the IMRDC were entrusted to Atty. Lozada for safekeeping
and were never turned over to respondent as there was no
consummated sale yet; that out of the two million pesos cash paid,
Atty. Lozada took the one million pesos which has not been returned,
thus petitioner had filed a civil case against her; that she was never
informed of respondents decision not to purchase the property within
the six month period fixed in the agreement; that when she
demanded the return of TCT No. 168173 and the Deed of Sale
between her and the IMRDC from Atty. Lozada, the latter gave her
these documents in a brown envelope on May 5, 1991 which her
secretary placed in her attache case; that the envelope together with
her other personal things were lost when her car was forcibly opened
the following day; that she sought the help of Atty. Lozada who
advised her to secure a police report, to execute an affidavit of loss
and to get the services of another lawyer to file a petition for the
issuance of an owners duplicate copy; that the petition for the
issuance of a new owners duplicate copy was filed on her behalf
without her knowledge and neither did she sign the petition nor
testify in court as falsely claimed for she was abroad; that she was a
victim of the manipulations of Atty. Lozada and respondent as shown
by the filing of criminal charges for perjury and false testimony
against her; that no interest could be due as there was no valid
mortgage over the property as the principal obligation is vitiated with
fraud and deception. She prayed for the dismissal of the complaint,
counter-claim for damages and attorneys fees.
Trial on the merits ensued. On January 31, 1996, the RTC issued a
decision,17 the dispositive portion of which reads:
WHEREFORE, judgment is hereby RENDERED:
1) Ordering defendant to pay plaintiff the sum of P2 Million
plus interest thereon at the rate of thirty two (32%) per cent
per annum beginning December 7, 1991 until fully paid.
 2) Ordering defendant to pay plaintiff the sum of P70,000.00
representing premiums paid by plaintiff on the attachment
bond with legal interest thereon counted from the date of this
decision until fully paid.
3) Ordering defendant to pay plaintiff the sum
of P100,000.00 by way of moral, corrective and exemplary
damages.
4) Ordering defendant to pay plaintiff attorneys fees
of P100,000.00 plus cost of litigation.18
The RTC found that petitioner was under obligation to pay
respondent the amount of two million pesos with compounded
interest pursuant to their Memorandum of Agreement; that the
fraudulent scheme employed by petitioner to deprive respondent of
her only security to her loaned money when petitioner executed an
affidavit of loss and instituted a petition for the issuance of an
owners duplicate title knowing the same was in respondents
possession, entitled respondent to moral damages; and that
petitioners bare denial cannot be accorded credence because her
testimony and that of her witness did not appear to be credible.
The RTC further found that petitioner admitted that she received
from respondent the two million pesos in cash but the fact that
petitioner gave the one million pesos to Atty. Lozada was without
respondents knowledge thus it is not binding on respondent; that
respondent had also proven that in 1993, she initially paid the sum
ofP30,000.00 as premium for the issuance of the attachment
bond, P20,000.00 for its renewal in 1994, andP20,000.00 for the
renewal in 1995, thus plaintiff should be reimbursed considering that
she was compelled to go to court and ask for a writ of preliminary
attachment to protect her rights under the agreement.
Petitioner filed her appeal with the CA. In a Decision dated June 18,
2002, the CA affirmed the RTC decision with modification, the
dispositive portion of which reads:
WHEREFORE, premises considered, the decision appealed from is
MODIFIED in the sense that the rate of interest is reduced from 32%
to 25% per annum, effective June 7, 1991 until fully paid.19
The CA found that: petitioner gave the one million pesos to Atty.
Lozada partly as her commission and partly as a loan; respondent
did not replace the mistakenly dated check of one million pesos
because she had decided not to buy the property and petitioner
knew of her decision as early as April 1991; the award of moral
damages was warranted since even granting petitioner had no hand
in the filing of the petition for the issuance of an owners copy, she
executed an affidavit of loss of TCT No. 168173 when she knew all
along that said title was in respondents possession; petitioners
claim that she thought the title was lost when the brown envelope
given to her by Atty. Lozada was stolen from her car was hollow; that
such deceitful conduct caused respondent serious anxiety and
emotional distress.
The CA concluded that there was no basis for petitioner to say that
the interest should be charged for six months only and no more; that
a loan always bears interest otherwise it is not a loan; that interest
should commence on June 7, 199120 with compounded bank interest
prevailing at the time the two million was considered as a loan which
was in June 1991; that the bank interest rate for loans secured by a
real estate mortgage in 1991 ranged from 25% to 32% per annum as
certified to by Prudential Bank,21 that in fairness to petitioner, the rate
to be charged should be 25% only.
Petitioners motion for reconsideration was denied by the CA in a
Resolution dated September 11, 2002.
Hence the instant Petition for Review on Certiorari filed by petitioner
raising the following issues:
(A) WHETHER OR NOT THE COMPOUNDED BANK
INTEREST SHOULD BE LIMITED TO SIX (6) MONTHS AS
CONTAINED IN THE MEMORANDUM OF AGREEMENT.
 (B) WHETHER OR NOT THE RESPONDENT IS ENTITLED
TO MORAL DAMAGES.
(C) WHETHER OR NOT THE GRANT OF CORRECTIVE
AND EXEMPLARY DAMAGES AND ATTORNEYS FEES IS
PROPER EVEN IF NOT MENTIONED IN THE TEXT OF
THE DECISION.22
Petitioner contends that the interest, whether at 32% per annum
awarded by the trial court or at 25% per annum as modified by the
CA which should run from June 7, 1991 until fully paid, is contrary to
the parties Memorandum of Agreement; that the agreement
provides that if respondent would decide not to purchase the
property, petitioner has the period of another six months to pay the
loan with compounded bank interest for the last six months only; that
the CAs ruling that a loan always bears interest otherwise it is not a
loan is contrary to Art. 1956 of the New Civil Code which provides
that no interest shall be due unless it has been expressly stipulated
in writing.
We are not persuaded.
While the CAs conclusion, that a loan always bears interest
otherwise it is not a loan, is flawed since a simple loan may be
gratuitous or with a stipulation to pay interest,23 we find no error
committed by the CA in awarding a 25% interest per annum on the
two-million peso loan even beyond the second six months stipulated
period.
The Memorandum of Agreement executed between the petitioner
and respondent on December 7, 1990 is the law between the parties.
In resolving an issue based upon a contract, we must first examine
the contract itself, especially the provisions thereof which are
relevant to the controversy.24 The general rule is that if the terms of
an agreement are clear and leave no doubt as to the intention of the
contracting parties, the literal meaning of its stipulations shall
prevail.25 It is further required that the various stipulations of a
contract shall be interpreted together, attributing to the doubtful ones
that sense which may result from all of them taken jointly.26
In this case, the phrase "for the last six months only" should be taken
in the context of the entire agreement. We agree with and adopt the
CAs interpretation of the phrase in this wise:
Their agreement speaks of two (2) periods of six months each. The
first six-month period was given to plaintiff-appellee (respondent) to
make up her mind whether or not to purchase defendant-appellants
(petitioner's) property. The second six-month period was given to
defendant-appellant to pay the P2 million loan in the event that
plaintiff-appellee decided not to buy the subject property in which
case interest will be charged "for the last six months only", referring
to the second six-month period. This means that no interest will be
charged for the first six-month period while appellee was making up
her mind whether to buy the property, but only for the second period
of six months after appellee had decided not to buy the property.
This is the meaning of the phrase "for the last six months only".
Certainly, there is nothing in their agreement that suggests that
interest will be charged for six months only even if it takes defendant-
appellant an eternity to pay the loan.27
The agreement that the amount given shall bear compounded bank
interest for the last six months only, i.e., referring to the second six-
month period, does not mean that interest will no longer be charged
after the second six-month period since such stipulation was made
on the logical and reasonable expectation that such amount would
be paid within the date stipulated. Considering that petitioner failed to
pay the amount given which under the Memorandum of Agreement
shall be considered as a loan, the monetary interest for the last six
months continued to accrue until actual payment of the loaned
amount.
The payment of regular interest constitutes the price or cost of the
use of money and thus, until the principal sum due is returned to the
creditor, regular interest continues to accrue since the debtor
continues to use such principal amount.28 It has been held that for a
debtor to continue in possession of the principal of the loan and to
continue to use the same after maturity of the loan without payment
of the monetary interest, would constitute unjust enrichment on the
part of the debtor at the expense of the creditor.29
Petitioner and respondent stipulated that the loaned amount shall
earn compounded bank interests, and per the certification issued by
Prudential Bank, the interest rate for loans in 1991 ranged from 25%
to 32% per annum. The CA reduced the interest rate to 25% instead
of the 32% awarded by the trial court which petitioner no longer
assailed.1awphi1.nt
In Bautista v. Pilar Development Corp.,30 we upheld the validity of a
21% per annum interest on a P142,326.43 loan. In Garcia v. Court of
Appeals,31 we sustained the agreement of the parties to a 24% per
annum interest on an P8,649,250.00 loan. Thus, the interest rate of
25% per annum awarded by the CA to a P2 million loan is fair and
reasonable.
Petitioner next claims that moral damages were awarded on the
erroneous finding that she used a fraudulent scheme to deprive
respondent of her security for the loan; that such finding is baseless
since petitioner was acquitted in the case for perjury and false
testimony filed by respondent against her.
We are not persuaded.
Article 31 of the Civil Code provides that when the civil action is
based on an obligation not arising from the act or omission
complained of as a felony, such civil action may proceed
independently of the criminal proceedings and regardless of the
result of the latter.32
While petitioner was acquitted in the false testimony and perjury
cases filed by respondent against her, those actions are entirely
distinct from the collection of sum of money with damages filed by
respondent against petitioner.
We agree with the findings of the trial court and the CA that
petitioners act of trying to deprive respondent of the security of her
loan by executing an affidavit of loss of the title and instituting a
petition for the issuance of a new owners duplicate copy of TCT No.
168173 entitles respondent to moral damages.1a\^/phi1.net Moral
damages may be awarded in culpa contractual or breach of contract
cases when the defendant acted fraudulently or in bad faith. Bad
faith does not simply connote bad judgment or negligence; it imports
a dishonest purpose or some moral obliquity and conscious doing of
wrong. It partakes of the nature of fraud.33
The Memorandum of Agreement provides that in the event that
respondent opts not to buy the property, the money given by
respondent to petitioner shall be treated as a loan and the property
shall be considered as the security for the mortgage. It was testified
to by respondent that after they executed the agreement on
December 7, 1990, petitioner gave her the owners copy of the title to
the property, the Deed of Sale between petitioner and IMRDC, the
certificate of occupancy, and the certificate of the Secretary of the
IMRDC who signed the Deed of Sale.34 However, notwithstanding
that all those documents were in respondents possession, petitioner
executed an affidavit of loss that the owners copy of the title and the
Deed of Sale were lost.
Although petitioner testified that her execution of the affidavit of loss
was due to the fact that she was of the belief that since she had
demanded from Atty. Lozada the return of the title, she thought that
the brown envelope with markings which Atty. Lozada gave her on
May 5, 1991 already contained the title and the Deed of Sale as
those documents were in the same brown envelope which she gave
to Atty. Lozada prior to the transaction with respondent.35 Such
statement remained a bare statement. It was not proven at all since
Atty. Lozada had not taken the stand to corroborate her claim. In
fact, even petitioners own witness, Benilda Ynfante (Ynfante), was
not able to establish petitioner's claim that the title was returned by
Atty. Lozada in view of Ynfante's testimony that after the brown
envelope was given to petitioner, the latter passed it on to her and
she placed it in petitioners attach case36 and did not bother to look
at the envelope.37
It is clear therefrom that petitioners execution of the affidavit of loss
became the basis of the filing of the petition with the RTC for the
issuance of new owners duplicate copy of TCT No. 168173.
Petitioners actuation would have deprived respondent of the security
for her loan were it not for respondents timely filing of a petition for
relief whereby the RTC set aside its previous order granting the WHEREFORE, in view of all the foregoing, the Decision dated June
issuance of new title. Thus, the award of moral damages is in order. 18, 2002 and the Resolution dated September 11, 2002 of the Court
of Appeals in CA-G.R. CV No. 52839 are AFFIRMED with
The entitlement to moral damages having been established, the MODIFICATION that the award of attorneys fees is DELETED.
award of exemplary damages is proper.38Exemplary damages may
be imposed upon petitioner by way of example or correction for the No pronouncement as to costs.
public good.39 The RTC awarded the amount of P100,000.00 as
moral and exemplary damages. While the award of moral and SO ORDERED.
exemplary damages in an aggregate amount may not be the usual
way of awarding said damages,40 no error has been committed by
CA. There is no question that respondent is entitled to moral and
exemplary damages.

Petitioner argues that the CA erred in awarding attorneys fees

because the trial courts decision did not explain the findings of facts
and law to justify the award of attorneys fees as the same was
mentioned only in the dispositive portion of the RTC decision.

We agree.

Article 220841 of the New Civil Code enumerates the instances

where such may be awarded and, in all cases, it must be
reasonable, just and equitable if the same were to be
granted.42 Attorney's fees as part of damages are not meant to
enrich the winning party at the expense of the losing litigant. They
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.43 The
award of attorney's fees is the exception rather than the general rule.
As such, it is necessary for the trial court to make findings of facts
and law that would bring the case within the exception and justify the
grant of such award. The matter of attorney's fees cannot be
mentioned only in the dispositive portion of the decision.44 They must
be clearly explained and justified by the trial court in the body of its
decision. On appeal, the CA is precluded from supplementing the
bases for awarding attorneys fees when the trial court failed to
discuss in its Decision the reasons for awarding the same.
Consequently, the award of attorney's fees should be deleted.
[G.R. No. 122079. June 27, 1997]
SPOUSES ANTONIO E.A. CONCEPCION and MANUELA S.
CONCEPCION, petitioners, vs. HON. COURT OF APPEALS,
HOME SAVINGS BANK AND TRUST COMPANY, and as nominal
party-defendants, THE SHERIFF ASSIGNED TO SAN JUAN,
METRO MANILA, and who conducted the auction sale and the
REGISTER OF DEEDS or his representative of San Juan, Metro
Manila, and ASAJE REALTY CORPORATION, respondents.
DECISION
VITUG, J.:
The spouses Antonio E.A. Concepcion and Manuela S. Concepcion
assail, via the instant petition for review on certiorari, the decision,[1] dated 15
September 1995, of the Court of Appeals, affirming with modification the
judgment of the Regional Trial Court ("RTC"),[2] Branch 157, of Pasig
City,[3] that dismissed the complaint of herein petitioners against private
respondents.
The facts, hereunder narrated, are culled from the findings of the
appellate court.
On 17 January 1979, the Home Savings Bank and Trust Company (now
Insular Life Savings and Trust Company) granted to the Concepcions a loan
amounting to P1,400,000.00. The Concepcions, in turn, executed in favor of
the bank a promissory note and a real estate mortgage over their property
located at 11 Albany St., Greenhills, San Juan, Metro Manila. The loan was
payable in equal quarterly amortizations for a period of fifteen (15) years and
carried an interest rate of sixteen percent (16%) per annum. The promissory
note provided that the Concepcions had authorized -
"x x x the Bank to correspondingly increase the interest rate presently stipulated in
this transaction without advance notice to me/us in the event the Central Bank of the
Philippines raises its rediscount rate to member banks, and/or the interest rate on
savings and time deposit, and/or the interest rate on such loans and/or advances."[4]
In accordance with the above provision, the bank unilaterally increased the
interest rate from 16% to 21% effective 17 February 1980; from 21% to 30%
effective 17 October 1984; and from 30% to 38% effective 17 November 1984,
increasing the quarterly amortizations from P67,830.00 to,
respectively, P77,619.72, P104,661.10, and P123,797.05 for the periods
aforestated. The Concepcions paid, under protest, the increased
amortizations of P77,619.72 and P104,661.10 until January 1985 but
thereafter failed to pay the quarterly amortization of P123,797.05 (starting due
date of 17 April 1985).
In a letter, dated 15 July 1985, the bank's President made a demand on
the Concepcions for the payment of the arrearages. The Concepcions failed
to pay, constraining the bank's counsel to send a final demand letter, dated
26 August 1985, for the payment of P393,878.81, covering the spouses' due
account for three quarterly payments plus interest, penalty, and service
charges. Still, no payment was received.
On 14 April 1986, the bank finally filed with the Office of the Provincial
Sheriff of Pasig City a petition for extrajudicial foreclosure of the real estate
mortgage executed by the Concepcions. A notice of sale was issued on 15
May 1986, setting the public auction sale on 11 June 1986. The notice was
published in the newspaper "Mabuhay." A copy of the notice was sent to the
Concepcions at 59 Whitefield St., White Plains Subdivision, Quezon City
and/or at 11 Albany St., Greenhills Subdivision, San Juan, Metro Manila. The
public auction sale went on as scheduled with the bank emerging as the
highest bidder. A Certificate of Sale was issued in favor of the bank.
The Concepcions were unable to exercise their right of redemption
within the one-year period provided under Act No. 3135. The bank thus
consolidated its title over the property and, after the cancellation of the title in
the name of the Concepcions, a new transfer certificate of title (No. 090-R)
was issued in the name of Home Savings Bank and Trust Company.
On 31 July 1987, the bank executed a Deed of Absolute Sale in favor of
Asaje Realty Corporation and a new certificate of title was issued in the latter's
name.
Meanwhile, on 29 July 1987, the Concepcions filed an action against
Home Savings Bank and Trust Company, the Sheriff of San Juan, Metro
Manila, and the Register of Deeds of San Juan, Metro Manila, for the
cancellation of the foreclosure sale, the declaration of nullity of the
consolidation of title in favor of the bank, and the declaration of nullity of the
unilateral increases of the interest rates on their loan. The spouses likewise
claimed damages against the defendants. The Concepcions, having learned
of the sale of the property to Asaje Realty Corporation, filed an amended
complaint impleading the realty corporation and so praying as well for the
cancellation of the sale executed between said corporation and the bank and
the cancellation of the certificate of title issued in the name of Asaje.
On 31 August 1992, the trial court found for the defendants and ruled:
"In view of all the foregoing premises, this Court finally concludes that the plaintiffs
have no cause of action either against defendant Home Savings Bank & Trust
Company or defendant Asaje Realty Corporation; and under the circumstances of
this case, it deems it just and equitable that attorney's fees and expenses of litigation
should be recovered by said defendants.
"WHEREFORE, judgment is hereby rendered dismissing the amended complaint of
plaintiffs Spouses Antonio E.A. Concepcion and Manuela S. Concepcion against the
defendants for lack of merit, and ordering the said plaintiffs to pay attorney's fees
and expenses of litigation in the sum of P30,000.00 to defendant Home Savings
Bank & Trust Company and in the amount of P25,000.00 to defendant Asaje Realty
Corporation, in addition to their respective costs of suit.
"SO ORDERED."[5]
The Concepcions went to the Court of Appeals.
On 15 September 1995, the appellate court affirmed the trial court's
decision, with modification, as follows:
"Under the facts and circumstances of the case at bench, the award of attorney's fees,
expenses of litigation and costs of suit in favor of defendant-appellee should be
deleted. It is not a sound policy to place a penalty on the right to litigate, nor should
counsel's fees be awarded everytime a party wins a suit (Arenas vs. Court of
Appeals, 169 SCRA 558).
"WHEREFORE, the appealed judgment is AFFIRMED with the modification that
the award of attorneys fees, litigation expenses and costs of suit in favor of
defendant-appellees are deleted from the dispositive portion.
"SO ORDERED."[6]
The Concepcions forthwith filed with this Court a petition for review
on certiorari, contending that they have been denied their contractually
stipulated right to be personally notified of the foreclosure proceedings on the
mortgaged property.
There is some merit in the petition.
The three common types of forced sales arising from a failure to pay a
mortgage debt include (a) an extrajudicial foreclosure sale, governed by Act
No. 3135; (b) a judicial foreclosure sale, regulated by Rule 68 of the Rules of
Court; and (c) an ordinary execution sale, covered by Rule 39 of the Rules of
Court.[7] Each mode, peculiarly, has its own requirements.
In an extrajudicial foreclosure, such as here, Section 3 of Act No.
3135[8] is the law applicable;[9] the provision reads:
"Sec. 3. Notice shall be given by posting notices of the sale for not less than twenty
days in at least three public places of the municipality or city where the property is
situated, and if such property is worth more than four hundred pesos, such notice
shall also be published once a week for at least three consecutive weeks in a
newspaper of general circulation in the municipality or city."
The Act only requires (1) the posting of notices of sale in three public places,
and (2) the publication of the same in a newspaper of general
circulation.[10] Personal notice to the mortgagor is not
necessary.[11] Nevertheless, the parties to the mortgage contract are not
precluded from exacting additional requirements.
In the case at bar, the mortgage contract stipulated that -
"All correspondence relative to this Mortgage, including demand letters, summons,
subpoenas, or notifications of any judicial or extrajudicial actions shall be sent to the
Mortgagor at the address given above or at the address that may hereafter be given
in writing by the Mortgagor to the Mortgagee, and the mere act of sending any
correspondence by mail or by personal delivery to the said address shall be valid and
effective notice to the Mortgagor for all legal purposes, and fact that any
communication is not actually received by the Mortgagor, or that it has been
returned unclaimed to the Mortgagee, or that no person was found at the address
given, or that the address is fictitious or cannot be located, shall not excuse or
relieve Mortgagor from the effects of such notice."[12]
The stipulation, not being contrary to law, morals, good customs, public order
or public policy, is the law between the contracting parties and should be
faithfully complied with.[13]
Private respondent bank maintains that the stipulation that "all
correspondence relative to (the) Mortgage x x x shall be sent to the Mortgagor
at the address given above or at the address that may hereafter be given in
writing by the Mortgagor to the Mortgagee"[14] gives the mortgagee an
alternative to send its correspondence either at the old or the new address
given.[15] This stand is illogical. It could not have been the intendment of the
parties to defeat the very purpose of the provision referred to which is
obviously to apprise the mortgagors of the bank's action that might affect the
property and to accord to them an opportunity to safeguard their rights. The
Court finds the bank's failure to comply with its agreement with petitioners an
inexcusable breach of the mortgagee's covenant. Neither petitioners'
subsequent opportunity to redeem the property nor their failed negotiations
with the bank for a new schedule of payments, [16] can be a valid justification
for the breach.
The foregoing notwithstanding, petitioners may no longer seek the
reconveyance of the property from private respondent Asaje Realty
Corporation, the latter having been, evidently, an innocent purchaser in good
faith.[17] The realty corporation purchased the property when the title was
already in the name of the bank. It was under no obligation to investigate the
title of the bank or to look beyond what clearly appeared to be on the face of
the certificate.[18]
Private respondent bank, however, can still be held to account for the
bid price of Asaje Realty Corporation over and above, if any, the amount due
the bank on the basis of the original interest rate, the unilateral increases
made by the bank having been correctly invalidated by the Court of Appeals.
The validity of "escalation" or "escalator" clauses in contracts, in general,
was upheld by the Supreme Court in Banco Filipino Savings and Mortgage
Bank vs. Hon. Navarro and Del Valle.[19] Hence:
"Some contracts contain what is known as an `escalator clause,' which is defined as
one in which the contract fixes a base price but contains a provision that in the event
of specified cost increases, the seller or contractor may raise the price up to a fixed
percentage of the base. Attacks on such a clause have usually been based on the
claim that, because of the open price-provision, the contract was too indefinite to be
enforceable and did not evidence an actual meeting of the minds of the parties, or
that the arrangement left the price to be determined arbitrarily by one party so that
the contract lacked mutuality. In most instances, however, these attacks have been
unsuccessful.
"The Court further finds as a matter of law that the cost of living index adjustment,
or escalator clause, is not substantively unconscionable.
"Cost of living index adjustment clauses are widely used in commercial contracts in
an effort to maintain fiscal stability and to retain `real dollar' value to the price terms
of long term contracts. The provision is a common one, and has been universally
upheld and enforced. Indeed, the Federal government has recognized the efficacy of
escalator clauses in tying Social Security benefits to the cost of living index, 42
U.S.C.s 415(i). Pension benefits and labor contracts negotiated by most of the major
labor unions are other examples. That inflation, expected or otherwise, will cause a
particular bargain to be more costly in terms of total dollars than originally
contemplated can be of little solace to the plaintiffs."[20]
In Philippine National Bank vs. Court of Appeals,[21] the Court further
elucidated, as follows:
"It is basic that there can be no contract in the true sense in the absence of the
element of agreement, or of mutual assent of the parties. If this assent is wanting on
the part of one who contracts, his act has no more efficacy than if it had been done
under duress or by a person of unsound mind.
"Similarly, contract changes must be made with the consent of the contracting
parties. The minds of all the parties must meet as to the proposed modification,
especially when it affects an important aspect of the agreement. In the case of loan
contracts, it cannot be gainsaid that the rate of interest is always a vital component,
for it can make or break a capital venture. Thus, any change must
be mutually agreed upon, otherwise, it is bereft of any binding effect.
"We cannot countenance petitioner bank's posturing that the escalation clause at
bench gives it unbridled right to unilaterally upwardly adjust the interest on private
respondents' loan. That would completelytake away from private respondents the
right to assent to an important modification in their agreement, and would negate the
element of mutuality in contracts. In Philippine National Bank v. Court of Appeals,
et al., 196 SCRA 536, 544-545 (1991) we held -
"`x x x (T)he unilateral action of the PNB in increasing the interest rate on the
private respondent's loan violated the mutuality of contracts ordained in Article 1308
of the Civil Code:
"`ART. 1308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.'
"In order that obligations arising from contracts may have the force or law between
the parties, there must be mutuality between the parties based on their essential
equality. A contract containing a condition which makes its fulfillment dependent
exclusively upon the uncontrolled will of one of the contracting parties, is void x x
x. Hence, even assuming that the x x x loan agreement between the PNB and the
private respondent gave the PNB a license (although in fact there was none) to
increase the interest rate at will during the term of the loan, that license would have
been null and void for being violative of the principle of mutuality essential in
contracts. It would have invested the loan agreement with the character of a contract
of adhesion, where the parties do not bargain on equal footing, the weaker party's
(the debtor) participation being reduced to the alternative `to take it or leave it' x x
x. Such a contract is a veritable trap for the weaker party whom the courts of justice
must protect against abuse and imposition.(Citations omitted.)"[22]
 Even if we were to consider that petitioners were bound by their rate. This case is REMANDED to the trial court for the above
agreement allowing an increase in the interest rate despite the lack of advance determination. No costs.
notice to them, the escalation should still be subject, as so contractually
stipulated, to a corresponding increase by the Central Bank of its rediscount SO ORDERED.
rate to member banks, or of the interest rate on savings and time deposit, or
of the interest rate on such loans and advances. The notices sent to
petitioners merely read:
Letter of 19 July 1984:

"Please be informed that the Bank has increased the interest rate of your existing
loan from 21 to 30% per annum beginning October 17, 1984. This increase of
interest rate is in accordance with the provision of Section 2 of Presidential Decree
No. 1684[23] amending Act No. 2655. This provision of the decree is reiterated under
paragraph 1 of your Promissory Note. Your quarterly amortization has been
increased to P104,661.10.

"We trust that you will be guided accordingly."[24]

Letter of 14 November 1984:

"On account of the prevailing business and economic condition, we are compelled
to increase the interest rate of your existing loan from 30% to 38% per annum
effective November 17, 1984. This increase is in accordance with your agreement
(escalation clause) in your promissory note/s.

"In view of this increase in the interest rate of your loan, your Quarterly
amortization correspondingly increased to P123,797.05 commencing on April 17,
1985.

"We trust that you will understand our position and please be guided
accordingly."[25]

Given the circumstances, the Court sees no cogent reasons to fault the
appellate court in its finding that there are no sufficient valid justifications aptly
shown for the unilateral increases by private respondent bank of the interest
rates on the loan.
WHEREFORE, the decision of the appellate court is AFFIRMED subject
to the MODIFICATION that private respondent Home Savings Bank and Trust
Company shall pay to petitioners the excess, if any, of the bid price it received
from Asaje Realty Corporation for the foreclosed property in question over and
above the unpaid balance of the loan computed at the original interest
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. 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.
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
RESPONDENT-APPELLEE 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).
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 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.
 [G.R. No. 138677. February 12, 2002]
TOLOMEO LIGUTAN and LEONIDAS DE LA LLANA, petitioners,
vs. HON. COURT OF APPEALS & SECURITY BANK &
TRUST COMPANY, respondents.
DECISION
VITUG, J.:
Before the Court is a petition for review on certiorari under Rule
45 of the Rules of Court, assailing the decision and resolutions of the
Court of Appeals in CA-G.R. CV No. 34594, entitled "Security Bank
and Trust Co. vs. Tolomeo Ligutan, et al."
Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained
on 11 May 1981 a loan in the amount of P120,000.00 from respondent
Security Bank and Trust Company. Petitioners executed a promissory
note binding themselves, jointly and severally, to pay the sum
borrowed with an interest of 15.189% per annum upon maturity and to
pay a penalty of 5% every month on the outstanding principal and
interest in case of default. In addition, petitioners agreed to pay 10%
of the total amount due by way of attorneys fees if the matter were
indorsed to a lawyer for collection or if a suit were instituted to enforce
payment. The obligation matured on 8 September 1981; the bank,
however, granted an extension but only up until 29 December 1981.
Despite several demands from the bank, petitioners failed to
settle the debt which, as of 20 May 1982, amounted to
P114,416.10. On 30 September 1982, the bank sent a final demand
letter to petitioners informing them that they had five days within which
to make full payment. Since petitioners still defaulted on their
obligation, the bank filed on 3 November 1982, with the Regional Trial
Court of Makati, Branch 143, a complaint for recovery of the due
amount.
After petitioners had filed a joint answer to the complaint, the
bank presented its evidence and, on 27 March 1985, rested its
case. Petitioners, instead of introducing their own evidence, had the
hearing of the case reset on two consecutive occasions. In view of the
absence of petitioners and their counsel on 28 August 1985, the third
hearing date, the bank moved, and the trial court resolved, to consider
the case submitted for decision.
Two years later, or on 23 October 1987, petitioners filed a motion
for reconsideration of the order of the trial court declaring them as
having waived their right to present evidence and prayed that they be
allowed to prove their case. The court a quo denied the motion in an
order, dated 5 September 1988, and on 20 October 1989, it rendered
its decision,[1] the dispositiveportion of which read:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and
against the defendants, ordering the latter to pay, jointly and severally, to
the plaintiff, as follows:
"1. The sum of P114,416.00 with interest thereon at the rate
of 15.189% per annum, 2% service charge and 5% per
month penalty charge, commencing on 20 May
1982 until fully paid;
"2. To pay the further sum equivalent to 10% of the total
amount of indebtedness for and as attorneys fees; and
"3. To pay the costs of the suit.[2]
Petitioners interposed an appeal with the Court of Appeals,
questioning the rejection by the trial court of their motion to present
evidence and assailing the imposition of the 2% service charge, the
5% per month penalty charge and 10% attorney's fees. In its
decision[3] of 7 March 1996, the appellate court affirmed the judgment
of the trial court except on the matter of the 2% service charge which
was deleted pursuant to Central Bank Circular No. 783. Not fully
satisfied with the decision of the appellate court, both parties filed their
respective motions for reconsideration.[4] Petitioners prayed for the
reduction of the 5% stipulated penalty for being unconscionable. The
bank, on the other hand, asked that the payment of interest and
penalty be commenced not from the date of filing of complaint but from
the time of default as so stipulated in the contract of the parties.
On 28 October 1998, the Court of Appeals resolved the two
motions thusly:
We find merit in plaintiff-appellees claim that the principal sum of
P114,416.00 with interest thereon must commence not on the date of filing
of the complaint as we have previously held in our decision but on the date
when the obligation became due.
Default generally begins from the moment the creditor demands the
performance of the obligation. However, demand is not necessary to render
the obligor in default when the obligation or the law so provides.
In the case at bar, defendants-appellants executed a promissory note where
they undertook to pay the obligation on its maturity date 'without necessity
of demand.' They also agreed to pay the interest in case of non-payment
from the date of default.
xxxxxxxxx
While we maintain that defendants-appellants must be bound by the
contract which they acknowledged and signed, we take cognizance of their
plea for the application of the provisions of Article 1229 x x x.
Considering that defendants-appellants partially complied with their
obligation under the promissory note by the reduction of the original
amount of P120,000.00 to P114,416.00 and in order that they will finally
settle their obligation, it is our view and we so hold that in the interest of
justice and public policy, a penalty of 3% per month or 36% per annum
would suffice.
xxxxxxxxx
WHEREFORE, the decision sought to be reconsidered is hereby
MODIFIED. The defendants-
appellants Tolomeo Ligutan and Leonidas dela Llana are hereby ordered to
pay the plaintiff-appellee Security Bank and Trust Company the following:
1. The sum of P114,416.00 with interest thereon at the
rate of 15.189% per annum and 3% per month
penalty charge commencing May 20, 1982 until fully
paid;
2. The sum equivalent to 10% of the total amount of the
indebtedness as and for attorneys fees.[5]
On 16 November 1998, petitioners filed an omnibus motion for
reconsideration and to admit newly discovered evidence,[6] alleging
that while the case was pending before the trial court,
petitioner Tolomeo Ligutan and his wife Bienvenida Ligutan executed
a real estate mortgage on 18 January 1984 to secure the existing
indebtedness of petitioners Ligutan and dela Llanawith the
bank. Petitioners contended that the execution of the real estate
mortgage had the effect of novating the contract between them and
the bank. Petitioners further averred that the mortgage
was extrajudicially foreclosed on 26 August 1986, that they were not
informed about it, and the bank did not credit them with the proceeds
of the sale. The appellate court denied the omnibus motion for
reconsideration and to admit newly discovered evidence, ratiocinating
that such a second motion for reconsideration cannot be entertained
under Section 2, Rule 52, of the 1997 Rules of Civil
Procedure. Furthermore, the appellate court said, the newly-
discovered evidence being invoked by petitioners had actually been
known to them when the case was brought on appeal and when the
first motion for reconsideration was filed.[7]
Aggrieved by the decision and resolutions of the Court of
Appeals, petitioners elevated their case to this Court on 9 July
1999 via a petition for review on certiorari under Rule 45 of the Rules
of Court, submitting thusly -
I. The respondent Court of Appeals seriously erred in not
holding that the 15.189% interest and the
penalty of three (3%) percent per month or thirty-
six (36%) percent per annum imposed by private
respondent bank on petitioners loan obligation
are still manifestly exorbitant, iniquitous and
unconscionable.
II. The respondent Court of Appeals gravely erred in not
reducing to a reasonable level the ten (10%)
percent award of attorneys fees which is highly
and grossly excessive, unreasonable and
unconscionable.
 III. The respondent Court of Appeals gravely erred in not
admitting petitioners newly discovered evidence
which could not have been timely produced
during the trial of this case.
IV. The respondent Court of Appeals seriously erred in not
holding that there was a novation of the cause of
action of private respondents complaint in the
instant case due to the subsequent execution of
the real estate mortgage during the pendency of
this case and the subsequent foreclosure of the
mortgage.[8]
Respondent bank, which did not take an appeal, would, however,
have it that the penalty sought to be deleted by petitioners was even
insufficient to fully cover and compensate for the cost of money
brought about by the radical devaluation and decrease in the
purchasing power of the peso, particularly vis-a-vis the U.S. dollar,
taking into account the time frame of its occurrence. The Bank would
stress that only the amount of P5,584.00 had been remitted out of the
entire loan of P120,000.00.[9]
A penalty clause, expressly recognized by law,[10] is an accessory
undertaking to assume greater liability on the part of an obligor in case
of breach of an obligation. It functions to strengthen the coercive force
of the obligation[11] and to provide, in effect, for what could be the
liquidated damages resulting from such a breach. The obligor would
then be bound to pay the stipulated indemnity without the necessity of
proof on the existence and on the measure of damages caused by the
breach.[12] Although a court may not at liberty ignore the freedom of
the parties to agree on such terms and conditions as they see fit that
contravene neither law nor morals, good customs, public order or
public policy, a stipulated penalty, nevertheless, may be equitably
reduced by the courts if it is iniquitous or unconscionable or if the
principal obligation has been partly or irregularly complied with.[13]
The question of whether a penalty is reasonable or iniquitous can
be partly subjective and partly objective. Its resolution would depend
on such factors as, but not necessarily confined to, the type, extent
and purpose of the penalty, the nature of the obligation, the mode of
breach and its consequences, the supervening realities, the standing
and relationship of the parties, and the like, the application of which,
by and large, is addressed to the sound discretion of the
court. In Rizal Commercial Banking Corp. vs. Court of Appeals,[14] just
an example, the Court has tempered the penalty charges after taking
into account the debtors pitiful situation and its offer to settle the entire
obligation with the creditor bank. The stipulated penalty might likewise
be reduced when a partial or irregular performance is made by the
debtor.[15] The stipulated penalty might even be deleted such as when
there has been substantial performance in good faith by the
obligor,[16] when the penalty clause itself suffers from fatal infirmity, or
when exceptional circumstances so exist as to warrant it.[17]
The Court of Appeals, exercising its good judgment in the instant
case, has reduced the penalty interest from 5% a month to 3% a
month which petitioner still disputes. Given the circumstances, not to
mention the repeated acts of breach by petitioners of their contractual
obligation, the Court sees no cogent ground to modify the ruling of the
appellate court..
Anent the stipulated interest of 15.189% per annum, petitioners,
for the first time, question its reasonableness and prays that the Court
reduce the amount. This contention is a fresh issue that has not been
raised and ventilated before the courts below. In any event, the
interest stipulation, on its face, does not appear as being that
excessive. The essence or rationale for the payment of interest, quite
often referred to as cost of money, is not exactly the same as that of
a surcharge or a penalty. A penalty stipulation is not necessarily
preclusive of interest, if there is an agreement to that effect, the two
being distinct concepts which may separately be demanded.[18] What
may justify a court in not allowing the creditor to impose full surcharges
and penalties, despite an express stipulation therefor in a valid
agreement, may not equally justify the non-payment or reduction of
interest. Indeed, the interest prescribed in loan financing
arrangements is a fundamental part of the banking business and the
core of a bank's existence.[19]
Petitioners next assail the award of 10% of the total amount of
indebtedness by way of attorney's fees for being grossly excessive,
exorbitant and unconscionable vis-a-vis the time spent and the extent
of services rendered by counsel for the bank and the nature of the
case. Bearing in mind that the rate of attorneys fees has been agreed
to by the parties and intended to answer not only for litigation
expenses but also for collection efforts as well, the Court, like the
appellate court, deems the award of 10% attorneys fees to be
reasonable.
Neither can the appellate court be held to have erred in rejecting
petitioners' call for a new trial or to admit newly discovered
evidence. As the appellate court so held in its resolution of14 May
1999 -
Under Section 2, Rule 52 of the 1997 Rules of Civil Procedure, no second
motion for reconsideration of a judgment or final resolution by the same
party shall be entertained. Considering that the instant motion is already a
second motion for reconsideration, the same must therefore be denied.
Furthermore, it would appear from the records available to this court that
the newly-discovered evidence being invoked by defendants-appellants
have actually been existent when the case was brought on appeal to this
court as well as when the first motion for reconsideration was filed. Hence,
it is quite surprising why defendants-appellants raised the alleged newly-
discovered evidence only at this stage when they could have done so in the
earlier pleadings filed before this court.
The propriety or acceptability of such a second motion for reconsideration
is not contingent upon the averment of 'new' grounds to assail the judgment,
i.e., grounds other than those theretofore presented and rejected. Otherwise,
attainment of finality of a judgment might be stayed off indefinitely,
depending on the partys ingenuousness or cleverness in conceiving and
formulating 'additional flaws' or 'newly discovered errors' therein, or
thinking up some injury or prejudice to the rights of the movant for
reconsideration.[20]
At any rate, the subsequent execution of the real estate mortgage as
security for the existing loan would not have resulted in the
extinguishment of the original contract of loan because of
novation. Petitioners acknowledge that the real estate mortgage
contract does not contain any express stipulation by the parties
intending it to supersede the existing loan agreement between the
petitioners and the bank.[21] Respondent bank has correctly postulated
that the mortgage is but an accessory contract to secure the loan in
the promissory note.
Extinctive novation requires, first, a previous valid
obligation; second, the agreement of all the parties to the new
contract; third, the extinguishment of the obligation; and fourth, the
validity of the new one.[22] In order that an obligation may be
extinguished by another which substitutes the same, it is imperative
that it be so declared in unequivocal terms, or that the old and the new
obligation be on every point incompatible with each other.[23] An
obligation to pay a sum of money is not extinctively novated by a new
instrument which merely changes the terms of payment or adding
compatible covenants or where the old contract is merely
supplemented by the new one.[24] When not expressed, incompatibility
is required so as to ensure that the parties have indeed intended
such novation despite their failure to express it in categorical
terms. The incompatibility, to be sure, should take place in any of the
essential elements of the obligation, i.e., (1) the juridical relation or tie,
such as from a mere commodatum to lease of things, or
from negotiorum gestio to agency, or from a mortgage
to antichresis,[25] or from a sale to one of loan;[26] (2) the object or
principal conditions, such as a change of the nature of the prestation;
or (3) the subjects, such as the substitution of a debtor[27] or the
subrogation of the creditor. Extinctive novation does not necessarily
imply that the new agreement should be complete by itself; certain
terms and conditions may be carried, expressly or by implication, over
to the new obligation.
WHEREFORE, the petition is DENIED.
SO ORDERED.