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Republic of the Philippines

SUPREME COURT
Manila

EN BANC

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

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


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

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

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

MAKALINTAL, J.:p

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

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

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

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

For construction of factory building P250,000.00

For payment of the balance of purchase

price of machinery and equipment 240,900.00

For working capital 9,100.00

T O T A L P500,000.00

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

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


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

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

In view of such request RFC approved Resolution No. 736 on February 4, 1954,
designating of the members of its Board of Governors, for certain reasons stated in the
resolution, "to reexamine all the aspects of this approved loan ... with special reference
as to the advisability of financing this particular project based on present conditions
obtaining in the operations of jute mills, and to submit his findings thereon at the next
meeting of the Board."

On March 24, 1954 Saura, Inc. wrote RFC that China Engineers, Ltd. had again agreed
to act as co-signer for the loan, and asked that the necessary documents be prepared in
accordance with the terms and conditions specified in Resolution No. 145. In connection
with the reexamination of the project to be financed with the loan applied for, as stated
in Resolution No. 736, the parties named their respective committees of engineers and
technical men to meet with each other and undertake the necessary studies, although in
appointing its own committee Saura, Inc. made the observation that the same "should
not be taken as an acquiescence on (its) part to novate, or accept new conditions to, the
agreement already) entered into," referring to its acceptance of the terms and conditions
mentioned in Resolution No. 145.
On April 13, 1954 the loan documents were executed: the promissory note, with F.R.
Halling, representing China Engineers, Ltd., as one of the co-signers; and the
corresponding deed of mortgage, which was duly registered on the following April 17.

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

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

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

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

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

On December 17, 1954 RFC passed Resolution No. 9083, restoring the loan to the
original amount of P500,000.00, "it appearing that China Engineers, Ltd. is now willing
to sign the promissory notes jointly with the borrower-corporation," but with the following
proviso:
That in view of observations made of the shortage and high cost of imported raw
materials, the Department of Agriculture and Natural Resources shall certify to the
following:

1. That the raw materials needed by the borrower-corporation to carry out its operation
are available in the immediate vicinity; and

2. That there is prospect of increased production thereof to provide adequately for the
requirements of the factory."

The action thus taken was communicated to Saura, Inc. in a letter of RFC dated
December 22, 1954, wherein it was explained that the certification by the Department of
Agriculture and Natural Resources was required "as the intention of the original
approval (of the loan) is to develop the manufacture of sacks on the basis of locally
available raw materials." This point is important, and sheds light on the subsequent
actuations of the parties. Saura, Inc. does not deny that the factory he was building in
Davao was for the manufacture of bags from local raw materials. The cover page of its
brochure (Exh. M) describes the project as a "Joint venture by and between the
Mindanao Industry Corporation and the Saura Import and Export Co., Inc. to finance,
manage and operate a Kenaf mill plant, to manufacture copra and corn bags, runners,
floor mattings, carpets, draperies; out of 100% local raw materials, principal kenaf." The
explanatory note on page 1 of the same brochure states that, the venture "is the first
serious attempt in this country to use 100% locally grown raw materials notably kenaf
which is presently grown commercially in theIsland of Mindanao where the proposed
jutemill is located ..."

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

a) For the payment of the receipt for jute mill


machineries with the Prudential Bank &

Trust Company P250,000.00

(For immediate release)

b) For the purchase of materials and equip-


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

c) For raw materials and labor 67,586.09


1) P25,000.00 to be released on the open-
ing of the letter of credit for raw jute
for $25,000.00.

2) P25,000.00 to be released upon arrival


of raw jute.

3) P17,586.09 to be released as soon as the


mill is ready to operate.

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

Dear Sirs:

This is with reference to your letter of January 21, 1955, regarding the
release of your loan under consideration of P500,000. As stated in our
letter of December 22, 1954, the releases of the loan, if revived, are
proposed to be made from time to time, subject to availability of funds
towards the end that the sack factory shall be placed in actual operating
status. We shall be able to act on your request for revised purpose and
manner of releases upon re-appraisal of the securities offered for the
loan.

With respect to our requirement that the Department of Agriculture and


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

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

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

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

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

We hold that there was indeed a perfected consensual contract, as recognized in Article
1934 of the Civil Code, which provides:

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


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

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

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

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

The subsequent conduct of Saura, Inc. confirms this desistance. It did not protest
against any alleged breach of contract by RFC, or even point out that the latter's stand
was legally unjustified. Its request for cancellation of the mortgage carried no
reservation of whatever rights it believed it might have against RFC for the latter's non-
compliance. In 1962 it even applied with DBP for another loan to finance a rice and corn
project, which application was disapproved. It was only in 1964, nine years after the
loan agreement had been cancelled at its own request, that Saura, Inc. brought this
action for damages.All these circumstances demonstrate beyond doubt that the said
agreement had been extinguished by mutual desistance and that on the initiative of
the plaintiff-appellee itself.

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

WHEREFORE, the judgment appealed from is reversed and the complaint dismissed,
with costs against the plaintiff-appellee.

Reyes, J.B.L., Actg. C.J., Zaldivar, Castro, Fernando, Teehankee, Barredo and Antonio,
JJ., concur.

Makasiar, J., took no part.

Republic of the Philippines


SUPREME COURT
Manila

EN BANC

G.R. No. L-1927 May 31, 1949

CRISTOBAL ROO, petitioner,


vs.
JOSE L. GOMEZ, ET AL., respondents.
Alfonso Farcon for petitioner.
Capistrano & Azores for respondents.

BENGZON, J.:

This petition to review a decision of the Court of Appeals was admitted mainly because it
involves one phase of the vital contemporary question: the repayment of loans given in Japanese
fiat currency during the last war of the Pacific.

On October 5, 1944, Cristobal Roo received as a loan four thousand pesos in Japanese fiat
money from Jose L. Gomez. He informed the later that he would use the money to purchase a
jitney; and he agreed to pay that debt one year after date in the currency then prevailing. He
signed a promissory note of the following tenor:

For value received, I promise to pay one year after date the sum of four thousand pesos
(4,000) to Jose L. Gomez. It is agreed that this will not earn any interest and the payment
It is agreed that this will not earn any interest and the payment prevailing by the end of
the stipulated period of one year.

In consideration of this generous loan, I renounce any right that may come to me by
reason of any postwar arrangement, of privilege that may come to me by legislation
wherein this sum may be devalued. I renounce flatly and absolutely any condition, term
right or privilege which in any way will prejudice the right engendered by this agreement
wherein Atty. Jose L. Gomez will receive by right his money in the amount of P4,000. I
affirm the legal tender, currency or any medium of exchange, or money in this sum of
P4,000 will be paid by me to Jose L. Gomez one year after this date, October 5, 1944.

On October 15, 1945, i.e., after the liberation, Roo was sued for payment in the Laguna Court
of First Instance. His main defense was his liability should not exceed the equivalent of 4,000
pesos "mickey mouse" money and could not be 4,000 pesos Philippine currency, because the
contract would be void as contrary to law, public order and good morals.

After the corresponding hearing, the Honorable Felix Bautista Angelo, Judge, ordered the
defendant Roo to pay four thousand pesos in Philippine currency with legal interest from the
presentation of the complaint plus costs.

On appeal the Court of Appeals in a decision written by Mr. Justice Jugo, affirmed the judgment
with costs. It declared being a mechanic who knew English was not deceived into signing the
promissory note, and that the contents of the same had not been misrepresented to him. It
pronounced the contract valid and enforceable according to its terms and conditions.

One basic principle of the law on contracts of the Civil Code is that "the contracting parties may
establish any pacts, clauses and conditions they may deem advisable, provided they are not
contrary to law, morals or public order." (Article 1255.) Another principle is that "obligations
arising from contracts shall have the force of law between the contracting parties and must be
performed in accordance with their stipulations" (Article 1091).
Invoking the above proviso, Roo asserts this contract is contrary to the Usury law, because on
the basis of calculations by Government experts he only received the equivalent of one hundred
Philippine pesos and now he is required to disgorge four thousand pesos or interest greatly in
excess of the lawful rates.

But he is not paying interest. Precisely the contract says that the money received "will not earn
any interest." Furthermore, he received four thousand pesos; and he is required to pay four
thousand pesos exactly. The increased intrinsic value and purchasing power of the current money
is consequence of an event (change of currency) which at the time of the contract neither party
knew would certainly happen within the period of one year. They both elected to subject their
rights and obligations to that contingency. If within one year another kind of currency became
legal tender, Gomez would probably get more for his money. If the same Japanese currency
continued, he would get less, the value of Japanese money being then on the downgrade.

Our legislation has a word for these contracts: aleatory. The Civil Code recognizes their validity
(see art. 1790 and Manresa's comment thereon) on a par with insurance policies and life
annuities.

The eventual gain of Gomez in this transaction is not interest within the meaning of Usury Laws.
Interest is some additional money to be paid in any event, which is not the case herein, because
Gomez might have gotten less if the Japanese occupation had extended to the end of 1945 or if
the liberation forces had chosen to permit the circulation of the Japanese notes.

Moreover, Roo argues, the deal was immoral because taking advantage of his superior
knowledge of war developments Gomez imposed on him this onerous obligation. In the first
place, the Court of Appeals found that he voluntary agreed to sign and signed the document
without having been misled as to its contents and "in so far as knowledge of war events was
concerned" both parties were on "equal footing". In the second place although on October 5,
1944 it was possible to surmise the impending American invasion, the date of victory or
liberation was anybody's guess. In the third place there was the possibility that upon-re-
occupation the Philippine Government would not invalidate the Japanese currency, which after
all had been forced upon the people in exchange for valuable goods and property. The odds were
about even when Roo and Gomez played their bargaining game. There was no overreaching,
nor unfair advantage.

Again Roo alleges it is immoral and against public order for a man to obtain four thousand
pesos in return for an investment of forty pesos (his estimate of the value of the Japanese money
he borrowed). According to his line of reasoning it would be immoral for the homeowner to
recover ten thousand pesos (P10,000, when his house is burned, because he invested only about
one hundred pesos for the insurance policy. And when the holder of a sweepstakes ticket who
paid only four pesos luckily obtains the first prize of one hundred thousand pesos or over, the
whole business is immoral or against public order.

In this connection we should explain that this decision does not cover situations where borrowers
of Japanese fiat currency promised to repay "the same amount" or promised to return the same
number of pesos "in Philippines currency" or "in the currency prevailing after the war." There
may be room for argument when those litigations come up for adjudication. All we say here and
now is that the contract in question is legal and obligatory.

A minor point concerns the personality of the plaintiff, the wife of Jose L. Gomez. We opine with
the Court of Appeals that the matter involve a defect in procedure which does not amount to
prejudicial error.

Wherefore, the appealed judgment will be affirmed with costs. So ordered.

Moran, C.J., Ozaeta, Tuason, Montemayor and Reyes, JJ., concur.

Republic of the Philippines


SUPREME COURT
Manila

EN BANC

G.R. No. L-1328 September 9, 1949

MARIANO NEPOMUCENO and AGUEDA G. DE NEPOMUCENO, plaintiffs-appellants,


vs.
EDILBERTO A. NARCISO and MAURA SUAREZ, defendants-appellees.

Higinio Gopez for appellants.


Fausto, Solima and Gotiangco for appellees.

OZAETA, J.:

On November 14, 1938, appellant Mariano Nepomuceno executed a mortgage in favor of the
appellees on a parcel of land situated in the municipality of Angeles, Province of Pampanga, to
secure the payment within the period of seven years from the date of the mortgage of the sum of
P24,000 together with interest thereon at the rate of 8 per cent per annum.

On September 30, 1943, that is to say, more than two years before the maturity of said mortgage,
the parties executed a notarial document entitled "Partial Novation of Contract" whereby they
modified the terms of said mortgage as follows:

(1) From December 8, 1941, to January 1, 1944, the interest on the mortgage shall be at 6
per cent per annum, unpaid interest also paying interest also paying interest at the same
rate.
(2) From January 1, 1944, up to the end of the war, the mortgage debt shall likewise bear
interest at 6 per cent. Unpaid interest during this period shall however not bear any
interest.

(3) At the end of the war the interest shall again become 8 per cent in accordance with the
original contract of mortgage.

(4) While the war goes on, the mortgagor, his administrators or assigns, cannot redeem
the property mortgaged.

(5) When the mortgage lapses on November 14, 1945, the mortgage may continue for
another ten years if the mortgagor so chooses, but during this period he may pay only one
half of the capital.

On July 21, 1944, the mortgagor Mariano Nepomuceno and his wife Agueda G. de Nepomuceno
filed their complaint in this case against the mortgagees, which compplaint, as amended on
September 7, 1944, alleged the execution of the contract of mortgage and its principal novation
as above indicated, and

7. That as per Annex B, No. 4, it is provided that the mortgagor cannot redeem the
property mortgaged while the war goes on; and that notwithstanding the said provision
the herein plaintiffs-mortgagors are now willing to pay the amount of the indebtedness
together with the corresponding interest due thereon;

8. That on July 19, 1944, the mortgagors-plaintiffs went to the house of the mortgagees-
defendants to tender payment of the balance of the mortgage debt with their
corresponding interest, but said spouses defendants refuse and still refuse to accept
payment;

9. That because of this refusal of the defendants to accept tender of payment on the
mortgage consideration, the plaintiffs suffered and still suffer damages in the amount of
P5,000;

10. That the plaintiffs are now and have deposited with the Clerk of Court of First
Instance of Pampanga the amount of P22,356 for the payment of the mortgage debt and
the interest due thereon;

Wherefore, it is more respectfully prayed that this Honorable Court will issue an order in
the following tenor:

(a) Ordering the defendants to accept tender of payment from the plaintiffs;

(b) Ordering defendants to execute the corresponding deed of release of mortgage;

(c) Ordering defendants to pay damages in the amount of P5,000; and


(d) Ordering defendants to pay the amount of P3,000 as attorney's fee and the costs of
suit and any other remedy just and equitable in the premises.

After the trial the court sustained the defense that the complaint had been prematurely presented
and dismissed it with costs.

Appellants contend that the stipulation in the contract of September 30, 1943, that "while the war
goes on the mortgagor, his administrators or assigns cannot redeem the property mortgaged," is
against public policy and therefore null and void. They cite and rely on article 1255 of the Civil
Code, which provides:

ART. 1255. The contracting parties may establish any pacts, clauses, and conditions
they may deem advisable, provided they are not contrary to law, morals, or public order.

They argue that "it would certainly be against public policy and a restraint on the freedom of
commerce to compel a debtor not to release his property from a lien even if he wanted to by
the payment of the indebtedness while the war goes on, which was undoubtedly of a very
uncertain duration."

The first two paragraphs of article 1125 of the Civil Code provide:

ART. 1125. Obligation for the performance of which a day certain has been fixed shall
be demandable only when the day arrives.

A day certain is understood to be one which must necessarily arrive, even though its date
be unknown.

Article 1127 says:

ART. 1127. Whenever a term for the performance of an obligation is fixed, it is presumed
to have been established for the benefit of the creditor and that of the debtor, unless from
its tenor or from other circumstances it should appear that the term was established for
the benefit of one or the other.

It will be noted that the original contract of mortgage provided for interest at 8 per cent per
annum and that the principal together with the interest was payable within the period of seven
years from November 14, 1938. But by mutual agreement of the parties that term was modified
on September 30, 1943, by reducing the interest to 6 per cent per annum from December 8, 1941,
until the end of the war and by stipulating that the mortgagor shall not pay off the mortgage
while the war went on.

We find nothing immoral or violative of public order in that stipulation. The mortgagees
apparently did not want to have their prewar credit paid with Japanese military notes, and the
mortgagor voluntarily agreed not to do so in consideration of the reduction of the rate of interest.
It was a perfectly equitable and valid transaction, in conformity with the provision of the Civil
Code hereinabove quoted.

Appellants were bound by said contract and appellees were not obligated to receive the payment
before it was due. Hence the latter had reason not to accept the tender of payment made to them
by the former.

The judgment is affirmed, with costs against the appellants.

Moran, C.J., Paras, Feria, Bengzon, Padilla, Tuason, Montemayor, Reyes and Torres, JJ.,
concur.

SECOND DIVISION

PAN PACIFIC SERVICE G.R. No. 169975

CONTRACTORS, INC. and

RICARDO F. DEL ROSARIO, Present:

Petitioners,

CARPIO, J., Chairperson,

BRION,

DEL CASTILLO,

- versus - ABAD, and

PEREZ, JJ.

EQUITABLE PCI BANK (formerly


THE PHILIPPINE COMMERCIAL
INTERNATIONAL BANK),
Respondent.
Promulgated:

March 18, 2010

X - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -X

DECISION

CARPIO, J.:

The Case

PAN PACIFIC SERVICE CONTRACTORS, INC. AND RICARDO F. DEL


ROSARIO (PETITIONERS) FILED THIS PETITION FOR REVIEW 1[1]
ASSAILING THE COURT OF APPEALS (CA) DECISION2[2] DATED 30 JUNE

1
2005 IN CA-G.R. CV NO. 63966 AS WELL AS THE RESOLUTION 3[3] DATED 5
OCTOBER 2005 DENYING THE MOTION FOR RECONSIDERATION. IN
THE ASSAILED DECISION, THE CA MODIFIED THE 12 APRIL 1999
DECISION4[4] OF THE REGIONAL TRIAL COURT OF MAKATI CITY,
BRANCH 59 (RTC) BY ORDERING EQUITABLE PCI BANK 5[5]
(RESPONDENT) TO PAY PETITIONERS P1,516,015.07 WITH INTEREST AT
THE LEGAL RATE OF 12% PER ANNUM STARTING 6 MAY 1994 UNTIL
THE AMOUNT IS FULLY PAID.

The Facts

Pan Pacific Service Contractors, Inc. (Pan Pacific) is engaged in contracting


mechanical works on airconditioning system. On 24 November 1989, Pan Pacific,
through its President, Ricardo F. Del Rosario (Del Rosario), entered into a contract
of mechanical works (Contract) with respondent for P20,688,800. Pan Pacific and
respondent also agreed on nine change orders for P2,622,610.30. Thus, the total
consideration for the whole project was P23,311,410.30.6[6] The Contract stipulated,
among others, that Pan Pacific shall be entitled to a price adjustment in case of

6
increase in labor costs and prices of materials under paragraphs 70.17[7] and 70.28[8]
of the General Conditions for the Construction of PCIB Tower II Extension (the
escalation clause).9[9]

Pursuant to the contract, Pan Pacific commenced the mechanical works in


the project site, the PCIB Tower II extension building in Makati City. The project
was completed in June 1992. Respondent accepted the project on 9 July 1992.10[10]

In 1990, labor costs and prices of materials escalated. On 5 April 1991, in


accordance with the escalation clause, Pan Pacific claimed a price adjustment of
P5,165,945.52. Respondents appointed project engineer, TCGI Engineers, asked
for a reduction in the price adjustment. To show goodwill, Pan Pacific reduced the
price adjustment to P4,858,548.67.11[11]

On 28 April 1992, TCGI Engineers recommended to respondent that the


price adjustment should be pegged at P3,730,957.07. TCGI Engineers based their
evaluation of the price adjustment on the following factors:

1. Labor Indices of the Department of Labor and Employment.

2. PRICE INDEX OF THE NATIONAL STATISTICS OFFICE.

PD 1594 AND ITS IMPLEMENTING RULES AND REGULATIONS AS AMENDED, 15


MARCH 1991.

10

11
SHIPPING DOCUMENTS SUBMITTED BY PPSCI.

SUB-CLAUSE 70.1 OF THE GENERAL CONDITIONS OF THE CONTRACT


DOCUMENTS.12[12]

Pan Pacific contended that with this recommendation, respondent was already estopped
from disclaiming liability of at least P3,730,957.07 in accordance with the escalation

clause.13[13]

Due to the extraordinary increases in the costs of labor and materials, Pan Pacifics
operational capital was becoming inadequate for the project. However, respondent
withheld the payment of the price adjustment under the escalation clause despite
Pan Pacifics repeated demands.14[14] Instead, respondent offered Pan Pacific a loan
of P1.8 million. Against its will and on the strength of respondents promise that
the price adjustment would be released soon, Pan Pacific, through Del Rosario,
was constrained to execute a promissory note in the amount of P1.8 million as a
requirement for the loan. Pan Pacific also posted a surety bond. The P1.8 million
was released directly to laborers and suppliers and not a single centavo was given
to Pan Pacific.15[15]

Pan Pacific made several demands for payment on the price adjustment but
respondent merely kept on promising to release the same. Meanwhile, the P1.8
million loan matured and respondent demanded payment plus interest and penalty.
Pan Pacific refused to pay the loan. Pan Pacific insisted that it would not have
incurred the loan if respondent released the price adjustment on time. Pan Pacific
alleged that the promissory note did not express the true agreement of the parties.
Pan Pacific maintained that the P1.8 million was to be considered as an advance
payment on the price adjustment. Therefore, there was really no consideration for
the promissory note; hence, it is null and void from the beginning.16[16]

12

13

14

15

16
Respondent stood firm that it would not release any amount of the price adjustment
to Pan Pacific but it would offset the price adjustment with Pan Pacifics
outstanding balance of P3,226,186.01, representing the loan, interests, penalties
and collection charges.17[17]

Pan Pacific refused the offsetting but agreed to receive the reduced amount of
P3,730,957.07 as recommended by the TCGI Engineers for the purpose of
extrajudicial settlement, less P1.8 million and P414,942 as advance payments.18[18]

On 6 May 1994, petitioners filed a complaint for declaration of nullity/annulment


of the promissory note, sum of money, and damages against the respondent with
the RTC of Makati City, Branch 59. On 12 April 1999, the RTC rendered its
decision, the dispositive portion of which reads:

WHEREFORE, PREMISES CONSIDERED, JUDGMENT IS


HEREBY RENDERED IN FAVOR OF THE PLAINTIFFS AND AGAINST
THE DEFENDANT AS FOLLOWS:

1. DECLARING THE PROMISSORY NOTE


(EXHIBIT B) NULL AND VOID;

ORDERING THE DEFENDANT TO PAY THE PLAINTIFFS THE FOLLOWING AMOUNTS:

A. P1,389,111.10 REPRESENTING
UNPAID BALANCE OF THE
ADJUSTMENT PRICE, WITH
INTEREST THEREON AT THE
LEGAL RATE OF TWELVE (12%)
PERCENT PER ANNUM
STARTING MAY 6, 1994, THE
DATE WHEN THE COMPLAINT
WAS FILED, UNTIL THE
AMOUNT IS FULLY PAID;

P100,000.00 REPRESENTING MORAL DAMAGES;

P50,000.00 REPRESENTING EXEMPLARY DAMAGES; AND

P50,000.00 AS AND FOR ATTORNEYS FEES.


17

18
2. DISMISSING DEFENDANTS
COUNTERCLAIM, FOR LACK OF MERIT; AND

WITH COSTS AGAINST THE DEFENDANT.

SO ORDERED.19[19]

On 23 May 1999, petitioners partially appealed the RTC Decision to the CA.
On 26 May 1999, respondent appealed the entire RTC Decision for being contrary
to law and evidence. In sum, the appeals of the parties with the CA are as follows:

1. WITH RESPECT TO THE PETITIONERS, WHETHER THE RTC

ERRED IN DEDUCTING THE AMOUNT OF P126,903.97


FROM THE BALANCE OF THE ADJUSTED PRICE AND IN
AWARDING ONLY 12% ANNUAL INTEREST ON THE
AMOUNT DUE, INSTEAD OF THE BANK LOAN RATE OF
18% COMPOUNDED ANNUALLY BEGINNING
SEPTEMBER 1992.

2. With respect to respondent, whether the RTC erred in declaring the


promissory note void and in awarding moral and exemplary
damages and attorneys fees in favor of petitioners and in
dismissing its counterclaim.

In its decision dated 30 June 2005, the CA modified the RTC decision, with
respect to the principal amount due to petitioners. The CA removed the deduction
of P126,903.97 because it represented the final payment on the basic contract

19
price. Hence, the CA ordered respondent to pay P1,516,015.07 to petitioners, with
interest at the legal rate of 12% per annum starting 6 May 1994.20[20]

On 26 July 2005, petitioners filed a Motion for Partial Reconsideration


seeking a reconsideration of the CAs Decision imposing the legal rate of 12%.
Petitioners claimed that the interest rate applicable should be the 18% bank lending
rate. Respondent likewise filed a Motion for Reconsideration of the CAs decision.
In a Resolution dated 5 October 2005, the CA denied both motions.

AGGRIEVED BY THE CAS DECISION, PETITIONERS ELEVATED


THE CASE BEFORE THIS COURT.

The Issue

Petitioners submit this sole issue for our consideration: Whether the CA, in
awarding the unpaid balance of the price adjustment, erred in fixing the interest
rate at 12% instead of the 18% bank lending rate.

Ruling of the Court

20
We grant the petition.

This Court notes that respondent did not appeal the decision of the CA.
Hence, there is no longer any issue as to the principal amount of the unpaid
balance on the price adjustment, which the CA correctly computed at
P1,516,015.07. The only remaining issue is the interest rate applicable for
respondents delay in the payment of the balance of the price adjustment.

The CA denied petitioners claim for the application of the bank lending rate
of 18% compounded annually reasoning, to wit:

Anent the 18% interest rate compounded annually, while it is true that the
contract provides for an interest at the current bank lending rate in case of delay in
payment by the Owner, and the promissory note charged an interest of 18%, the
said proviso does not authorize plaintiffs to unilaterally raise the interest rate
without the other partys consent. Unlike their request for price adjustment on the
basic contract price, plaintiffs never informed nor sought the approval of
defendant for the imposition of 18% interest on the adjusted price. To unilaterally
increase the interest rate of the adjusted price would be violative of the principle
of mutuality of contracts. Thus, the Court maintains the legal rate of twelve
percent per annum starting from the date of judicial demand. Although the
contract provides for the period when the recommendation of the TCGI Engineers
as to the price adjustment would be binding on the parties, it was established,
however, that part of the adjusted price demanded by plaintiffs was already
disbursed as early as 28 February 1992 by defendant bank to their suppliers and
laborers for their account.21[21]

21
In this appeal, petitioners allege that the contract between the parties consists
of two parts, the Agreement22[22] and the General Conditions,23[23] both of which
provide for interest at the bank lending rate on any unpaid amount due under the
contract. Petitioners further claim that there is nothing in the contract which
requires the consent of the respondent to be given in order that petitioners can
charge the bank lending rate.24[24] Specifically, petitioners invoke Section 2.5 of the
Agreement and Section 60.10 of the General Conditions as follows:

Agreement

2.5 IF ANY PAYMENT IS DELAYED, THE CONTRACTOR MAY


CHARGE INTEREST THEREON AT THE CURRENT BANK
LENDING RATES, WITHOUT PREJUDICE TO OWNERS
RECOURSE TO ANY OTHER REMEDY AVAILABLE UNDER
EXISTING LAW.25[25]

GENERAL CONDITIONS

60.10 TIME FOR PAYMENT

THE AMOUNT DUE TO THE CONTRACTOR UNDER ANY INTERIM CERTIFICATE


ISSUED BY THE ENGINEER PURSUANT TO THIS CLAUSE, OR TO ANY TERM OF THE
CONTRACT, SHALL, SUBJECT TO CLAUSE 47, BE PAID BY THE OWNER TO THE
CONTRACTOR WITHIN 28 DAYS AFTER SUCH INTERIM CERTIFICATE HAS BEEN
DELIVERED TO THE OWNER, OR, IN THE CASE OF THE FINAL CERTIFICATE
REFERRED TO IN SUB-CLAUSE 60.8, WITHIN 56 DAYS, AFTER SUCH FINAL
CERTIFICATE HAS BEEN DELIVERED TO THE OWNER. IN THE EVENT OF THE
FAILURE OF THE OWNER TO MAKE PAYMENT WITHIN THE TIMES STATED, THE
OWNER SHALL PAY TO THE CONTRACTOR INTEREST AT THE RATE BASED ON
BANKING LOAN RATES PREVAILING AT THE TIME OF THE SIGNING OF THE
CONTRACT UPON ALL SUMS UNPAID FROM THE DATE BY WHICH THE SAME
SHOULD HAVE BEEN PAID. THE PROVISIONS OF THIS SUB-CLAUSE ARE WITHOUT

22

23

24

25
PREJUDICE TO THE CONTRACTORS ENTITLEMENT UNDER CLAUSE 69.26[26] (EMPHASIS
SUPPLIED)

Petitioners thus submit that it is automatically entitled to the bank lending


rate of interest from the time an amount is determined to be due thereto, which
respondent should have paid. Therefore, as petitioners have already proven their
entitlement to the price adjustment, it necessarily follows that the bank lending
interest rate of 18% shall be applied.27[27]

On the other hand, respondent insists that under the provisions of 70.1 and 70.2 of
the General Conditions, it is stipulated that any additional cost shall be determined
by the Engineer and shall be added to the contract price after due consultation with
the Owner, herein respondent. Hence, there being no prior consultation with the
respondent regarding the additional cost to the basic contract price, it naturally
follows that respondent was never consulted or informed of the imposition of 18%
interest rate compounded annually on the adjusted price.28[28]

A perusal of the assailed decision shows that the CA made a distinction between
the consent given by the owner of the project for the liability for the price
adjustments, and the consent for the imposition of the bank lending rate. Thus,
while the CA held that petitioners consulted respondent for price adjustment on the
basic contract price, petitioners, nonetheless, are not entitled to the imposition of
18% interest on the adjusted price, as petitioners never informed or sought the
approval of respondent for such imposition.29[29]

We disagree.

It is settled that the agreement or the contract between the parties is the
formal expression of the parties rights, duties, and obligations. It is the best

26

27

28

29
evidence of the intention of the parties. Thus, when the terms of an agreement have
been reduced to writing, it is considered as containing all the terms agreed upon
and there can be, between the parties and their successors in interest, no evidence
of such terms other than the contents of the written agreement.30[30]

The escalation clause of the contract provides:

CHANGES IN COST AND LEGISLATION

70.1 Increase or Decrease of Cost

There shall be added to or deducted from the Contract Price such sums in respect of rise or fall in
the cost of labor and/or materials or any other matters affecting the cost of the execution of the
Works as may be determined.

70.2 Subsequent Legislation

If, after the date 28 days prior to the latest date of submission of tenders for the Contract there
occur in the country in which the Works are being or are to be executed changes to any National
or State Statute, Ordinance, Decree or other Law or any regulation or bye-law (sic) of any local
or other duly constituted authority, or the introduction of any such State Statute, Ordinance,
Decree, Law, regulation or bye-law (sic) which causes additional or reduced cost to the
contractor, other than under Sub-Clause 70.1, in the execution of the Contract, such additional or
reduced cost shall, after due consultation with the Owner and Contractor, be determined by the
Engineer and shall be added to or deducted from the Contract Price and the Engineer shall notify
the Contractor accordingly, with a copy to the Owner.31[31]

In this case, the CA already settled that petitioners consulted respondent on


the imposition of the price adjustment, and held respondent liable for the balance
of P1,516,015.07. Respondent did not appeal from the decision of the CA; hence,
respondent is estopped from contesting such fact.

30

31
However, the CA went beyond the intent of the parties by requiring
respondent to give its consent to the imposition of interest before petitioners can
hold respondent liable for interest at the current bank lending rate. This is
erroneous. A review of Section 2.6 of the Agreement and Section 60.10 of the
General Conditions shows that the consent of the respondent is not needed for the
imposition of interest at the current bank lending rate, which occurs upon any
delay in payment.

When the terms of a contract are clear and leave no doubt as to the intention
of the contracting parties, the literal meaning of its stipulations governs. In these
cases, courts have no authority to alter a contract by construction or to make a new
contract for the parties. The Courts duty is confined to the interpretation of the
contract which the parties have made for themselves without regard to its wisdom
or folly as the court cannot supply material stipulations or read into the contract
words which it does not contain. It is only when the contract is vague and
ambiguous that courts are permitted to resort to construction of its terms and
determine the intention of the parties.32[32]

The escalation clause must be read in conjunction with Section 2.5 of the
Agreement and Section 60.10 of the General Conditions which pertain to the time
of payment. Once the parties agree on the price adjustment after due consultation
in compliance with the provisions of the escalation clause, the agreement is in
effect an amendment to the original contract, and gives rise to the liability of

32
respondent to pay the adjusted costs. Under Section 60.10 of the General
Conditions, the respondent shall pay such liability to the petitioner within 28 days
from issuance of the interim certificate. Upon respondents failure to pay within the
time provided (28 days), then it shall be liable to pay the stipulated interest.

This is the logical interpretation of the agreement of the parties on the imposition
of interest. To provide a contrary interpretation, as one requiring a separate consent
for the imposition of the stipulated interest, would render the intentions of the
parties nugatory.

Article 1956 of the Civil Code, which refers to monetary interest,


specifically mandates that no interest shall be due unless it has been expressly
stipulated in writing. Therefore, 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.33[33]

We agree with petitioners interpretation that in case of default, the consent


of the respondent is not needed in order to impose interest at the current bank
lending rate.

Applicable Interest Rate

33
Under Article 2209 of the Civil Code, the appropriate measure for damages
in case of delay in discharging an obligation consisting of the payment of a sum of
money is the payment of penalty interest at the rate agreed upon in the contract of
the parties. In the absence of a stipulation of a particular rate of penalty interest,
payment of additional interest at a rate equal to the regular monetary interest
becomes due and payable. Finally, if no regular interest had been agreed upon by
the contracting parties, then the damages payable will consist of payment of legal
interest which is 6%, or in the case of loans or forbearances of money, 12% per
annum.34[34] It is only when the parties to a contract have failed to fix the rate of
interest or when such amount is unwarranted that the Court will apply the 12%
interest per annum on a loan or forbearance of money.35[35]

The written agreement entered into between petitioners and respondent provides
for an interest at the current bank lending rate in case of delay in payment and the
promissory note charged an interest of 18%.

To prove petitioners entitlement to the 18% bank lending rate of interest,


petitioners presented the promissory note 36[36] prepared by respondent bank itself.
This promissory note, although declared void by the lower courts because it did not
express the real intention of the parties, is substantial proof that the bank lending
rate at the time of default was 18% per annum. Absent any evidence of fraud,

34

35

36
undue influence or any vice of consent exercised by petitioners against the
respondent, the interest rate agreed upon is binding on them.37[37]

WHEREFORE, we GRANT the petition. We SET ASIDE the Decision


and Resolution of the Court of Appeals in CA-G.R. CV No. 63966. We ORDER
respondent to pay petitioners P1,516,015.07 with interest at the bank lending rate
of 18% per annum starting 6 May 1994 until the amount is fully paid.

SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 169617 April 4, 2007

HEIRS OF ZOILO ESPIRITU AND PRIMITIVA ESPIRITU, Petitioners,


vs.
SPOUSES MAXIMO LANDRITO AND PAZ LANDRITO, Represented by ZOILO
LANDRITO, as their Attorney-in-Fact, Respondents.

DECISION

CHICO-NAZARIO, J.:

This is a petition for Review on Certiorari under Rule 45 of the Rules of Court assailing the
Decision of the Court of Appeals,1 dated 31 August 2005, reversing the Decision rendered by the
trial court on 13 December 1995. The Court of Appeals, in its assailed Decision, fixed the
interest rate of the loan between the parties at 12% per annum, and ordered the Spouses Zoilo
37
and Primitiva Espiritu (Spouses Espiritu) to reconvey the subject property to the Spouses
Landrito conditioned upon the payment of the loan.

Petitioners DULCE, BENLINDA, EDWIN, CYNTHIA, AND MIRIAM ANDREA, all surnamed
ESPIRITU, are the only children and legal heirs of the Spouses Zoilo and Primitiva Espiritu,
who both died during the pendency of the case before the Honorable Court of Appeals.2

Respondents Spouses Maximo and Paz Landrito (Spouses Landrito) are herein represented by
their son and attorney-in-fact, Zoilo Landrito.3

On 5 September 1986, Spouses Landrito loaned from the Spouses Espiritu the amount of
P350,000.00 payable in three months. To secure the loan, the Spouses Landrito executed a real
estate mortgage over a five hundred forty (540) square meter lot located in Alabang, Muntinlupa,
covered by Transfer Certificate of Title No. S-48948, in favor of the Spouses Espiritu. From the
P350,000.00 that the Landritos were supposed to receive, P17,500.00 was deducted as interest
for the first month which was equivalent to five percent of the principal debt, and P7,500.00 was
further deducted as service fee. Thus, they actually received a net amount of P325,000.00. The
agreement, however, provided that the principal indebtedness earns "interest at the legal rate."4

After three months, when the debt became due and demandable, the Spouses Landrito were
unable to pay the principal, and had not been able to make any interest payments other than the
amount initially deducted from the proceeds of the loan. On 29 December 1986, the loan
agreement was extended to 4 January 1987 through an Amendment of Real Estate Mortgage. The
loan was restructured in such a way that the unpaid interest became part of the principal, thus
increasing the principal to P385,000. The new loan agreement adopted all other terms and
conditions contained in first agreement.5

Due to the continued inability of the Spouses Landritos to settle their obligations with the
Spouses Espiritu, the loan agreement was renewed three more times. In all these subsequent
renewals, the same terms and conditions found in the first agreement were retained. On 29 July
1987, the principal was increased to P507,000.00 inclusive of running interest. On 11 March
1988, it was increased to P647,000.00. And on 21 October 1988, the principal was increased to
P874,125.00.6 At the hearing before the trial court, Zoilo Espiritu testified that the increase in the
principal in each amendment of the loan agreement did not correspond to the amount delivered
to the Spouses Landrito. Rather, the increase in the principal had been due to unpaid interest and
other charges.7

The debt remained unpaid. As a consequence, the Spouses Espiritu foreclosed the mortgaged
property on 31 October 1990. During the auction sale, the property was sold to the Spouses
Espiritu as the lone bidder. On 9 January 1991, the Sheriffs Certificate of Sale was annotated on
the title of the mortgaged property, giving the Spouses Landrito until 8 January 1992 to redeem
the property. 8

The Spouses Landrito failed to redeem the subject property although they alleged that they
negotiated for the redemption of the property as early as 30 October 1991. While the negotiated
price for the land started at P1,595,392.79, it was allegedly increased by the Spouses Espiritu
from time to time. Spouses Landrito allegedly tendered two managers checks and some cash,
totaling P1,800,000.00 to the Spouses Espiritu on 13 January 1992, but the latter refused to
accept the same. They also alleged that the Spouses Espiritu increased the amount demanded to
P2.5 Million and gave them until July 1992 to pay the said amount. However, upon inquiry, they
found out that on 24 June 1992, the Spouses Espiritu had already executed an Affidavit of
Consolidation of Ownership and registered the mortgaged property in their name, and that the
Register of Deeds of Makati had already issued Transfer Certificate of Title No. 179802 in the
name of the Spouses Espiritu. On 9 October 1992, the Spouses Landrito, represented by their son
Zoilo Landrito, filed an action for annulment or reconveyance of title, with damages against the
Spouses Espiritu before Branch 146 of the Regional Trial Court of Makati.9 Among the
allegations in their Complaint, they stated that the Spouses Espiritu, as creditors and mortgagees,
"imposed interest rates that are shocking to ones moral senses."10

The trial court dismissed the complaint and upheld the validity of the foreclosure sale. The trial
court ordered in its Decision, dated 13 December 1995:11

WHEREFORE, all the foregoing premises considered, the herein complaint is hereby dismissed
forthwith.

Without pronouncements to costs.

The Spouses Landrito appealed to the Court of Appeals pursuant to Rule 41 of the 1997 Rules of
Court. In its Decision dated 31 August 2005, the Court of Appeals reversed the trial courts
decision, decreeing that the five percent (5%) interest imposed by the Spouses Espiritu on the
first month and the varying interest rates imposed for the succeeding months contravened the
provisions of the Real Estate Mortgage contract which provided that interest at the legal rate, i.e.,
12% per annum, would be imposed. It also ruled that although the Usury Law had been rendered
ineffective by Central Bank Circular No. 905, which, in effect, removed the ceiling rates
prescribed for interests, thus, allowing parties to freely stipulate thereon, the courts may render
void any stipulation of interest rates which are found iniquitous or unconscionable. As a result,
the Court of Appeals set the interest rate of the loan at the legal rate, or 12% per annum.12

Furthermore, the Court of Appeals held that the action for reconveyance, filed by the Spouses
Landrito, is still a proper remedy. Even if the Spouses Landrito failed to redeem the property
within the one-year redemption period provided by law, the action for reconveyance remained as
a remedy available to a landowner whose property was wrongfully registered in anothers name
since the subject property has not yet passed to an innocent purchaser for value.13

In the decretal portion of its Decision, the Court of Appeals ruled14:

WHEREFORE, the instant appeal is hereby GRANTED. The assailed Decision dated December
13, 1995 of the Regional Trial Court of Makati, Branch 146 in Civil Case No. 92-2920 is hereby
REVERSED and SET ASIDE, and a new one is hereby entered as follows: (1) The legal rate of
12% per annum is hereby FIXED to be applied as the interest of the loan; and (2) Conditioned
upon the payment of the loan, defendants-appellees spouses Zoilo and Primitiva Espiritu are
hereby ordered to reconvey Transfer Certificate of Title No. S-48948 to appellant spouses
Maximo and Paz Landrito.

The case is REMANDED to the Trial Court for the above determination.

Hence, the present petition. The following issues were raised:15

THE HONORABLE COURT OF APPEALS ERRED IN REVERSING AND SETTING ASIDE


THE DECISION OF THE TRIAL COURT AND ORDERING HEREIN PETITIONERS TO
RECONVEY TRANSFER CERTIFICATE OF TITLE NO. 18918 TO HEREIN
RESPONDENTS, WITHOUT ANY FACTUAL OR LEGAL BASIS THEREFOR.

II

THE HONORABLE COURT OF APPEALS ERRED IN FINDING THAT HEREIN


PETITIONERS UNILATERALLY IMPOSED ON HEREIN RESPONDENTS THE
ALLEGEDLY UNREASONABLE INTERESTS ON THE MORTGAGE LOANS.

III

THE HONORABLE COURT OF APPEALS ERRED IN NOT CONSIDERING THAT HEREIN


RESPONDENTS ATTORNEY-IN-FACT IS NOT ARMED WITH AUTHORITY TO FILE
AND PROSECUTE THIS CASE.

The petition is without merit.

The Real Estate Mortgage executed between the parties specified that "the principal indebtedness
shall earn interest at the legal rate." The agreement contained no other provision on interest or
any fees or charges incident to the debt. In at least three contracts, all designated as Amendment
of Real Estate Mortgage, the interest rate imposed was, likewise, unspecified. During his
testimony, Zoilo Espiritu admitted that the increase in the principal in each of the Amendments
of the Real Estate Mortgage consists of interest and charges. The Spouses Espiritu alleged that
the parties had agreed on the interest and charges imposed in connection with the loan, hereunder
enumerated:

1. P17,500.00 was the interest charged for the first month and P7,500.00 was imposed as service
fee.

2. P35,000.00 interest and charges, or the difference between the P350,000.00 principal in the
Real Estate Mortgage dated 5 September 1986 and the P385,000.00 principal in the Amendment
of the Real Estate Mortgage dated 29 December 1986.
3. P132,000.00 interest and charges, or the difference between the P385,000.00 principal in the
Amendment of the Real Estate Mortgage dated 29 December 1986 and the P507,000.00 principal
in the Amendment of the Real Estate Mortgage dated 29 July 1987.

4. P140,000.00 interest and charges, or the difference between the P507,000.00 principal in the
Amendment of the Real Estate Mortgage dated 29 July 1987 and the P647,000.00 principal in
the Amendment of the Real Estate Mortgage dated 11 March 1988.

5. P227,125.00 interest and charges, or the difference between the P647,000.00 principal in the
Amendment of the Real Estate Mortgage dated 11 March 1988 and the P874,125 principal in the
Amendment of the Real Estate Mortgage dated 21 October 1988.

The total interest and charges amounting to P559,125.00 on the original principal of P350,000
was accumulated over only two years and one month. These charges are not found in any written
agreement between the parties. The records fail to show any computation on how much interest
was charged and what other fees were imposed. Not only did lack of transparency characterize
the aforementioned agreements, the interest rates and the service charge imposed, at an average
of 6.39% per month, are excessive.

In enacting Republic Act No. 3765, known as the "Truth in Lending Act," the State seeks to
protect its citizens from a lack of awareness of the true cost of credit by assuring the full
disclosure of such costs. Section 4, in connection with Section 3(3)16 of the said law, gives a
detailed enumeration of the specific information required to be disclosed, among which are the
interest and other charges incident to the extension of credit. Section 617 of the same law imposes
on anyone who willfully violates these provisions, sanctions which include civil liability, and a
fine and/or imprisonment.

Although any action seeking to impose either civil or criminal liability had already prescribed,
this Court frowns upon the underhanded manner in which the Spouses Espiritu imposed interest
and charges, in connection with the loan. This is aggravated by the fact that one of the creditors,
Zoilo Espiritu, a lawyer, is hardly in a position to plead ignorance of the requirements of the law
in connection with the transparency of credit transactions. In addition, the Civil Code clearly
provides that:

Article 1956. No interest shall be due unless it has been stipulated in writing.

The omission of the Spouses Espiritu in specifying in the contract the interest rate which was
actually imposed, in contravention of the law, manifested bad faith.

In several cases, this Court has been known to declare null and void stipulations on interest and
charges that were found excessive, iniquitous, and unconscionable. In the case of Medel v. Court
of Appeals,18 the Court declared an interest rate of 5.5% per month on a P500,000.00 loan to be
excessive, iniquitous, unconscionable and exorbitant. Even if the parties themselves agreed on
the interest rate and stipulated the same in a written agreement, it nevertheless declared such
stipulation as void and ordered the imposition of a 12% yearly interest rate. In Spouses Solangon
v. Salazar,19 6% monthly interest on a P60,000.00 loan was likewise equitably reduced to a 1%
monthly interest or 12% per annum. In Ruiz v. Court of Appeals,20 the Court found a 3% monthly
interest imposed on four separate loans with a total of P1,050,000.00 to be excessive and reduced
the interest to a 1% monthly interest or 12% per annum.

In declaring void the stipulations authorizing excessive interest and charges, the Court declared
that although the Usury Law was suspended by Central Bank Circular No. 905, s. 1982, effective
on 1 January 1983, and consequently parties are given a wide latitude to agree on any interest
rate, nothing in the said Circular grants lenders carte blanche authority to raise interest rates to
levels which will either enslave their borrowers or lead to a hemorrhaging of their assets.21

Stipulation authorizing iniquitous or unconscionable interests are contrary to morals, if not


against the law. Under Article 1409 of the Civil Code, these contracts are inexistent and void
from the beginning. They cannot be ratified nor the right to set up their illegality as a defense be
waived.22 The nullity of the stipulation on the usurious interest does not, however, affect the
lenders right to recover the principal of the loan.23 Nor would it affect the terms of the real estate
mortgage. The right to foreclose the mortgage remains with the creditors, and said right can be
exercised upon the failure of the debtors to pay the debt due. The debt due is to be considered
without the stipulation of the excessive interest. A legal interest of 12% per annum will be added
in place of the excessive interest formerly imposed.

While the terms of the Real Estate Mortgage remain effective, the foreclosure proceedings held
on 31 Ocotber 1990 cannot be given effect. In the Notice of Sheriffs Sale24 dated 5 October
1990, and in the Certificate of Sale25 dated 31 October 1990, the amount designated as mortgage
indebtedness amounted to P874,125.00. Likewise, in the demand letter26 dated 12 December
1989, Zoilo Espiritu demanded from the Spouses Landrito the amount of P874,125.00 for the
unpaid loan. Since the debt due is limited to the principal of P350,000.00 with 12% per annum as
legal interest, the previous demand for payment of the amount of P874,125.00 cannot be
considered as a valid demand for payment. For an obligation to become due, there must be a
valid demand.27 Nor can the foreclosure proceedings be considered valid since the total amount
of the indebtedness during the foreclosure proceedings was pegged at P874,125.00 which
included interest and which this Court now nullifies for being excessive, iniquitous and
exorbitant. If the foreclosure proceedings were considered valid, this would result in an
inequitable situation wherein the Spouses Landrito will have their land foreclosed for failure to
pay an over-inflated loan only a small part of which they were obligated to pay.

Moreover, it is evident from the facts of the case that despite considerable effort on their part, the
Spouses Landrito failed to redeem the mortgaged property because they were unable to raise the
total amount, which was grossly inflated by the excessive interest imposed. Their attempt to
redeem the mortgaged property at the inflated amount of P1,595,392.79, as early as 30 October
1991, is reflected in a letter, which creditor-mortgagee Zoilo Landrito acknowledged to have
received by affixing his signature herein.28 They also attached in their Complaint copies of two
checks in the amounts of P770,000.00 and P995,087.00, both dated 13 January 1992, which were
allegedly refused by the Spouses Espiritu.29 Lastly, the Spouses Espiritu even attached in their
exhibits a copy of a handwritten letter, dated 27 January 1994, written by Paz Landrito,
addressed to the Spouses Espiritu, wherein the former offered to pay the latter the sum of
P2,000,000.00.30 In all these instances, the Spouses Landrito had tried, but failed, to pay an
amount way over the indebtedness they were supposed to pay i.e., P350,000.00 and 12%
interest per annum. Thus, it is only proper that the Spouses Landrito be given the opportunity to
repay the real amount of their indebtedness.

Since the Spouses Landrito, the debtors in this case, were not given an opportunity to settle their
debt, at the correct amount and without the iniquitous interest imposed, no foreclosure
proceedings may be instituted. A judgment ordering a foreclosure sale is conditioned upon a
finding on the correct amount of the unpaid obligation and the failure of the debtor to pay the
said amount.31 In this case, it has not yet been shown that the Spouses Landrito had already failed
to pay the correct amount of the debt and, therefore, a foreclosure sale cannot be conducted in
order to answer for the unpaid debt. The foreclosure sale conducted upon their failure to pay
P874,125 in 1990 should be nullified since the amount demanded as the outstanding loan was
overstated; consequently it has not been shown that the mortgagors the Spouses Landrito, have
failed to pay their outstanding obligation. Moreover, if the proceeds of the sale together with its
reasonable rates of interest were applied to the obligation, only a small part of its original loans
would actually remain outstanding, but because of the unconscionable interest rates, the larger
part corresponded to said excessive and iniquitous interest.

As a result, the subsequent registration of the foreclosure sale cannot transfer any rights over the
mortgaged property to the Spouses Espiritu. The registration of the foreclosure sale, herein
declared invalid, cannot vest title over the mortgaged property. The Torrens system does not
create or vest title where one does not have a rightful claim over a real property. It only confirms
and records title already existing and vested. It does not permit one to enrich oneself at the
expense of another.32 Thus, the decree of registration, even after the lapse of one (1) year, cannot
attain the status of indefeasibility.

Significantly, the records show that the property mortgaged was purchased by the Spouses
Espiritu and had not been transferred to an innocent purchaser for value. This means that an
action for reconveyance may still be availed of in this case.33

Registration of property by one person in his or her name, whether by mistake or fraud, the real
owner being another person, impresses upon the title so acquired the character of a constructive
trust for the real owner, which would justify an action for reconveyance.34 This is based on
Article 1465 of the Civil Code which states that:

Art. 1465. If property acquired through mistakes or fraud, the person obtaining it is, by force of
law, considered a trustee of an implied trust for benefit of the person from whom the property
comes.

The action for reconveyance does not prescribe until after a period of ten years from the date of
the registration of the certificate of sale since the action would be based on implied trust.35 Thus,
the action for reconveyance filed on 31 October 1992, more than one year after the Sheriffs
Certificate of Sale was registered on 9 January 1991, was filed within the prescription period.

It should, however, be reiterated that the provisions of the Real Estate Mortgage are not annulled
and the principal obligation stands. In addition, the interest is not completely removed; rather, it
is set by this Court at 12% per annum. Should the Spouses Landrito fail to pay the principal, with
its recomputed interest which runs from the time the loan agreement was entered into on 5
September 1986 until the present, there is nothing in this Decision which prevents the Spouses
Espiritu from foreclosing the mortgaged property.

The last issue raised by the petitioners is whether or not Zoilo Landrito was authorized to file the
action for reconveyance filed before the trial court or even to file the appeal from the judgment
of the trial court, by virtue of the Special Power of Attorney dated 30 September 1992. They
further noted that the trial court and the Court of Appeals failed to rule on this issue.36

The Special Power of Attorney37 dated 30 September 1992 was executed by Maximo Landrito,
Jr., with the conformity of Paz Landrito, in connection with the mortgaged property. It authorized
Zoilo Landrito:

2. To make, sign, execute and deliver corresponding pertinent contracts, documents, agreements
and other writings of whatever nature or kind and to sue or file legal action in any court of the
Philippines, to collect, ask demands, encash checks, and recover any and all sum of monies,
proceeds, interest and other due accruing, owning, payable or belonging to me as such owner of
the afore-mentioned property. (Emphasis provided.)

Zoilo Landritos authority to file the case is clearly set forth in the Special Power of Attorney.
Furthermore, the records of the case unequivocally show that Zoilo Landrito filed the
reconveyance case with the full authority of his mother, Paz Landrito, who attended the hearings
of the case, filed in her behalf, without making any protest.38 She even testified in the same case
on 30 August 1995. From the acts of Paz Landrito, there is no doubt that she had authorized her
son to file the action for reconveyance, in her behalf, before the trial court.

IN VIEW OF THE FOREGOING, the instant Petition is DENIED. This Court AFFIRMS the
assailed Decision of the Court of Appeals, promulgated on 31 August 2005, fixing the interest
rate of the loan between the parties at 12% per annum, and ordering the Spouses Espiritu to
reconvey the subject property to the Spouses Landrito conditioned upon the payment of the loan
together with herein fixed rate of interest. Costs against the petitioners.

SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila

EN BANC

G.R. No. L-47878 July 24, 1942

GIL JARDENIL, plaintiff-appellant,


vs.
HEFTI SOLAS (alias HEPTI SOLAS, JEPTI SOLAS), defendant-appellee.
Eleuterio J. Gustilo for appellant.
Jose C. Robles for appellee.

MORAN, J.:

This is an action for foreclosure of mortgage. The only question raised in this appeal is: Is
defendant-appellee bound to pay the stipulated interest only up to the date of maturity as fixed in
the promissory note, or up to the date payment is effected? This question is, in our opinion
controlled by the express stipulation of the parties.

Paragraph 4 of the mortgage deed recites:

Que en consideracion a dicha suma aun por pagar de DOS MIL CUATROCIENTOS
PESOS (P2,4000.00), moneda filipina, que el Sr. Hepti Solas se compromete a pagar al
Sr. Jardenil en o antes del dia treintaiuno (31) de marzo de mil novecientos treintaicuarto
(1934), con los intereses de dicha suma al tipo de doce por ciento (12%) anual a partir
desde fecha hasta el dia de su vencimiento o sea treintaiuno (31) de marzo de mil
novecientos treintaicuatro (1934), por la presente, el Sr. Hepti Solas cede y traspasa, por
via de primera hipoteca, a favor del Sr. Jardenil, sus herederos y causahabientes, la
parcela de terreno descrita en el parrafo primero (1.) de esta escritura.

Defendant-appellee has, therefore, clearly agreed to pay interest only up to the date of maturity,
or until March 31, 1934. As the contract is silent as to whether after that date, in the event of
non-payment, the debtor would continue to pay interest, we cannot in law, indulge in any
presumption as to such interest; otherwise, we would be imposing upon the debtor an obligation
that the parties have not chosen to agree upon. Article 1755 of the Civil Code provides that
"interest shall be due only when it has been expressly stipulated." (Emphasis supplied.)

A writing must be interpreted according to the legal meaning of its language (section 286, Act
No. 190, now section 58, Rule 123), and only when the wording of the written instrument
appears to be contrary to the evident intention of the parties that such intention must prevail.
(Article 1281, Civil Code.) There is nothing in the mortgage deed to show that the terms
employed by the parties thereto are at war with their evident intent. On the contrary the act of the
mortgage of granting to the mortgagor on the same date of execution of the deed of mortgage, an
extension of one year from the date of maturity within which to make payment, without making
any mention of any interest which the mortgagor should pay during the additional period (see
Exhibit B attached to the complaint), indicates that the true intention of the parties was that no
interest should be paid during the period of grace. What reason the parties may have therefor, we
need not here seek to explore.

Neither has either of the parties shown that, by mutual mistake, the deed of mortgage fails to
express their agreement, for if such mistake existed, plaintiff would have undoubtedly adduced
evidence to establish it and asked that the deed be reformed accordingly, under the parcel-
evidence rule.
We hold therefore, that as the contract is clear and unmistakable and the terms employed therein
have not been shown to belie or otherwise fail to express the true intention of the parties and that
the deed has not been assailed on the ground of mutual mistake which would require its
reformation, same should be given its full force and effect. When a party sues on a written
contract and no attempt is made to show any vice therein, he cannot be allowed to lay any claim
more than what its clear stipulations accord. His omission, to which the law attaches a definite
warning as an in the instant case, cannot by the courts be arbitrarily supplied by what their own
notions of justice or equity may dictate.

Plaintiff is, therefore, entitled only to the stipulated interest of 12 per cent on the loan of P2, 400
from November 8, 1932 to March 31, 1934. And it being a fact that extra judicial demands have
been made which we may assume to have been so made on the expiration of the year of grace, he
shall be entitled to legal interest upon the principal and the accrued interest from April 1, 1935,
until full payment.

Thus modified judgment is affirmed, with costs against appellant.

Yulo, C.J., Ozaeta and Bocobo, JJ., concur.

SECOND DIVISION

PRISMA CONSTRUCTION & G.R. No. 160545


DEVELOPMENT
CORPORATION and
ROGELIO S. PANTALEON,

Petitioners,
Present:

*
NACHURA, J.,

*
BRION, Acting Chairperson,
- versus -
DEL CASTILLO,

ABAD, and

PEREZ, JJ.

ARTHUR F. MENCHAVEZ ,

Respondent.
Promulgated:

March 9, 2010

x------------------------------------------------------------------------------------------x

DECISION

BRION, J.:

We resolve in this Decision the petition for review on certiorari38[1] filed by


petitioners Prisma Construction & Development Corporation (PRISMA) and
Rogelio S. Pantaleon (Pantaleon) (collectively, petitioners) who seek to reverse and

38
set aside the Decision39[2] dated May 5, 2003 and the Resolution 40[3] dated
October 22, 2003 of the Former Ninth Division of the Court of Appeals (CA) in CA-
G.R. CV No. 69627. The assailed CA Decision affirmed the Decision of the Regional
Trial Court (RTC), Branch 73, Antipolo City in Civil Case No. 97-4552 that held the
petitioners liable for payment of P3,526,117.00 to respondent Arthur F.
Menchavez (respondent), but modified the interest rate from 4% per month to
12% per annum, computed from the filing of the complaint to full payment. The
assailed CA Resolution denied the petitioners Motion for Reconsideration.

FACTUAL BACKGROUND

The facts of the case, gathered from the records, are briefly summarized below.

On December 8, 1993, Pantaleon, the President and Chairman of the Board of PRISMA, obtained

a P1,000,000.0041[4] loan from the respondent, with a monthly interest of P40,000.00 payable for six

months, or a total obligation of P1,240,000.00 to be paid within six (6) months, 42[5] under the following
schedule of payments:

January 8, 1994 . P40,000.00

February 8, 1994 ... P40,000.00

March 8, 1994 ... P40,000.00

39

40

41

42
April 8, 1994 . P40,000.00

May 8, 1994 .. P40,000.00

June 8, 1994 P1,040,000.0043[6]

Total P1,240,000.00

To secure the payment of the loan, Pantaleon issued a promissory note 44[7] that states:

I, Rogelio S. Pantaleon, hereby acknowledge the receipt of ONE MILLION TWO

HUNDRED FORTY THOUSAND PESOS (P1,240,000), Philippine Currency, from Mr. Arthur

F. Menchavez, representing a six-month loan payable according to the following

schedule:

January 8, 1994 . P40,000.00

February 8, 1994 ... P40,000.00

March 8, 1994 ... P40,000.00

April 8, 1994 . P40,000.00

May 8, 1994 .. P40,000.00

June 8, 1994 P1,040,000.00

The checks corresponding to the above amounts are hereby acknowledged. 45[8]

43

44

45
and six (6) postdated checks corresponding to the schedule of payments. Pantaleon signed the

promissory note in his personal capacity,46[9] and as duly authorized by the Board of Directors of

PRISMA.47[10] The petitioners failed to completely pay the loan within the stipulated six (6)-month
period.

From September 8, 1994 to January 4, 1997, the petitioners paid the following amounts to the
respondent:

September 8, 1994 P320,000.00

October 8, 1995.P600,000.00

November 8, 1995.....P158,772.00

January 4, 1997 P30,000.0048[11]

As of January 4, 1997, the petitioners had already paid a total of P1,108,772.00. However, the
respondent found that the petitioners still had an outstanding balance of P1,364,151.00 as of January 4,

1997, to which it applied a 4% monthly interest.49[12] Thus, on August 28, 1997, the respondent filed a
complaint for sum of money with the RTC to enforce the unpaid balance, plus 4% monthly interest,

P30,000.00 in attorneys fees, P1,000.00 per court appearance and costs of suit. 50[13]

46

47

48

49
50
In their Answer dated October 6, 1998, the petitioners admitted the loan of P1,240,000.00, but
denied the stipulation on the 4% monthly interest, arguing that the interest was not provided in the
promissory note. Pantaleon also denied that he made himself personally liable and that he made

representations that the loan would be repaid within six (6) months. 51[14]

THE RTC RULING

The RTC rendered a Decision on October 27, 2000 finding that the respondent issued a check for
P1,000,000.00 in favor of the petitioners for a loan that would earn an interest of 4% or P40,000.00 per
month, or a total of P240,000.00 for a 6-month period. It noted that the petitioners made several
payments amounting to P1,228,772.00, but they were still indebted to the respondent for P3,526,117.00

as of February 11,52[15] 1999 after considering the 4% monthly interest. The RTC observed that PRISMA
was a one-man corporation of Pantaleon and used this circumstance to justify the piercing of the veil of
corporate fiction. Thus, the RTC ordered the petitioners to jointly and severally pay the respondent the

amount of P3,526,117.00 plus 4% per month interest from February 11, 1999 until fully paid. 53[16]

The petitioners elevated the case to the CA via an ordinary appeal under Rule 41 of the Rules of
Court, insisting that there was no express stipulation on the 4% monthly interest.

THE CA RULING

The CA decided the appeal on May 5, 2003. The CA found that the parties agreed to a 4%
monthly interest principally based on the board resolution that authorized Pantaleon to transact a loan
with an approved interest of not more than 4% per month. The appellate court, however, noted that the
interest of 4% per month, or 48% per annum, was unreasonable and should be reduced to 12% per
51

52

53
annum. The CA affirmed the RTCs finding that PRISMA was a mere instrumentality of Pantaleon that
justified the piercing of the veil of corporate fiction. Thus, the CA modified the RTC Decision by imposing
a 12% per annum interest, computed from the filing of the complaint until finality of judgment, and

thereafter, 12% from finality until fully paid. 54[17]

After the CA's denial55[18] of their motion for reconsideration, 56[19] the petitioners filed the
present petition for review on certiorari under Rule 45 of the Rules of Court.

THE PETITION

The petitioners submit that the CA mistakenly relied on their board resolution to conclude that
the parties agreed to a 4% monthly interest because the board resolution was not an evidence of a loan
or forbearance of money, but merely an authorization for Pantaleon to perform certain acts, including
the power to enter into a contract of loan. The expressed mandate of Article 1956 of the Civil Code is
that interest due should be stipulated in writing, and no such stipulation exists. Even assuming that the
loan is subject to 4% monthly interest, the interest covers the six (6)-month period only and cannot be
interpreted to apply beyond it. The petitioners also point out the glaring inconsistency in the CA
Decision, which reduced the interest from 4% per month or 48% per annum to 12% per annum, but
failed to consider that the amount of P3,526,117.00 that the RTC ordered them to pay includes the
compounded 4% monthly interest.

THE CASE FOR THE RESPONDENT

The respondent counters that the CA correctly ruled that the loan is subject to a 4% monthly
interest because the board resolution is attached to, and an integral part of, the promissory note based
on which the petitioners obtained the loan. The respondent further contends that the petitioners are
54

55

56
estopped from assailing the 4% monthly interest, since they agreed to pay the 4% monthly interest on
the principal amount under the promissory note and the board resolution.

THE ISSUE

The core issue boils down to whether the parties agreed to the 4% monthly interest on the loan.
If so, does the rate of interest apply to the 6-month payment period only or until full payment of the
loan?

OUR RULING

We find the petition meritorious.

Interest due should be stipulated in writing;

otherwise, 12% per annum

Obligations arising from contracts have the force of law between the contracting parties and

should be complied with in good faith.57[20] When the terms of a contract are clear and leave no doubt

as to the intention of the contracting parties, the literal meaning of its stipulations governs. 58[21] In such
cases, courts have no authority to alter the contract by construction or to make a new contract for the
parties; a court's duty is confined to the interpretation of the contract the parties made for themselves
without regard to its wisdom or folly, as the court cannot supply material stipulations or read into the

contract words the contract does not contain. 59[22] It is only when the contract is vague and ambiguous
that courts are permitted to resort to the interpretation of its terms to determine the parties intent.

57

58
59
In the present case, the respondent issued a check for P1,000,000.00.60[23] In turn, Pantaleon,
in his personal capacity and as authorized by the Board, executed the promissory note quoted above.
Thus, the P1,000,000.00 loan shall be payable within six (6) months, or from January 8, 1994 up
to June 8, 1994. During this period, the loan shall earn an interest of P40,000.00 per month, for a total
obligation of P1,240,000.00 for the six-month period. We note that this agreed sum can be computed at
4% interest per month, but no such rate of interest was stipulated in the promissory note; rather a
fixed sum equivalent to this rate was agreed upon.

Article 1956 of the Civil Code specifically mandates that no interest shall be due unless it has
been expressly stipulated in writing. Under this provision, the payment of interest in loans or
forbearance of money 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 interest at a stipulated rate. Thus, we held in Tan v.

Valdehueza61[24] and Ching v. Nicdao62[25] that collection of interest without any stipulation in writing
is prohibited by law.

Applying this provision, we find that the interest of P40,000.00 per month corresponds only to
the six (6)-month period of the loan, or from January 8, 1994 to June 8, 1994, as agreed upon by the
parties in the promissory note. Thereafter, the interest on the loan should be at the legal interest rate of

12% per annum, consistent with our ruling in Eastern Shipping Lines, Inc. v. Court of Appeals:63[26]

When the obligation is breached, and it consists in the payment of a sum of money, i.e.,

a loan or forbearance of money, the interest due should be that which may have been

60

61

62
63
stipulated in writing. Furthermore, the interest due shall itself earn legal interest from

the time it is judicially demanded. In the absence of stipulation, the rate of interest

shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial

demand under and subject to the provisions of Article 1169 of the Civil Code. (Emphasis

supplied)

We reiterated this ruling in Security Bank and Trust Co. v. RTC-Makati, Br. 61,64[27] Sulit v. Court

of Appeals,65[28] Crismina Garments, Inc. v. Court of Appeals,66[29] Eastern Assurance and Surety

Corporation v. Court of Appeals,67[30] Sps. Catungal v. Hao,68[31] Yong v. Tiu,69[32] and Sps. Barrera v.

Sps. Lorenzo.70[33] Thus, the RTC and the CA misappreciated the facts of the case; they erred in finding
that the parties agreed to a 4% interest, compounded by the application of this interest beyond the
promissory notes six (6)-month period. The facts show that the parties agreed to the payment of a
specific sum of money of P40,000.00 per month for six months, not to a 4% rate of interest payable
within a six (6)-month period.

Medel v. Court of Appeals not applicable

[34]
The CA misapplied Medel v. Court of Appeals71 in finding that a 4% interest per month was
unconscionable.

64

65
66
67
68
69
70
71
In Medel, the debtors in a P500,000.00 loan were required to pay an interest of 5.5% per
month, a service charge of 2% per annum, and a penalty charge of 1% per month, plus attorneys fee
equivalent to 25% of the amount due, until the loan is fully paid. Taken in conjunction with the stipulated
service charge and penalty, we found the interest rate of 5.5% to be excessive, iniquitous,
unconscionable, exorbitant and hence, contrary to morals, thereby rendering the stipulation null and
void.

Applying Medel, we invalidated and reduced the stipulated interest in Spouses Solangon v.
[35]
Salazar72 of 6% per month or 72% per annum interest on a P60,000.00 loan; in Ruiz v. Court of
[36]
Appeals,73 of 3% per month or 36% per annum interest on a P3,000,000.00 loan; in Imperial v.
[37]
Jaucian,74 of 16% per month or 192% per annum interest on a P320,000.00 loan; in Arrofo v. Quio,75
[38] [39]
of 7% interest per month or 84% per annum interest on a P15,000.00 loan; in Bulos, Jr. v. Yasuma,76
[40]
of 4% per month or 48% per annum interest on a P2,500,000.00 loan; and in Chua v. Timan,77 of 7%
and 5% per month for loans totalling P964,000.00. We note that in all these cases, the terms of the loans
were open-ended; the stipulated interest rates were applied for an indefinite period.

Medel finds no application in the present case where no other stipulation exists for the payment
of any extra amount except a specific sum of P40,000.00 per month on the principal of a loan payable
within six months. Additionally, no issue on the excessiveness of the stipulated amount of P40,000.00 per

month was ever put in issue by the petitioners; 78[41] they only assailed the application of a 4% interest
rate, since it was not agreed upon.

It is a familiar doctrine in obligations and contracts that the parties are bound by the stipulations,
clauses, terms and conditions they have agreed to, which is the law between them, the only limitation
72

73
74
75
76
77
78
being that these stipulations, clauses, terms and conditions are not contrary to law, morals, public order

or public policy.79[42] The payment of the specific sum of money of P40,000.00 per month was
voluntarily agreed upon by the petitioners and the respondent. There is nothing from the records and, in
fact, there is no allegation showing that petitioners were victims of fraud when they entered into the
agreement with the respondent.

Therefore, as agreed by the parties, the loan of P1,000,000.00 shall earn P40,000.00 per month
for a period of six (6) months, or from December 8, 1993 to June 8, 1994, for a total principal and interest
amount of P1,240,000.00. Thereafter, interest at the rate of 12% per annum shall apply. The amounts
already paid by the petitioners during the pendency of the suit, amounting to P1,228,772.00 as of

February 12, 1999,80[43] should be deducted from the total amount due, computed as indicated above.
We remand the case to the trial court for the actual computation of the total amount due.

Doctrine of Estoppel not applicable

The respondent submits that the petitioners are estopped from disputing the 4% monthly
interest beyond the six-month stipulated period, since they agreed to pay this interest on the principal
amount under the promissory note and the board resolution.

We disagree with the respondents contention.

We cannot apply the doctrine of estoppel in the present case since the facts and circumstances,

as established by the record, negate its application. Under the promissory note, 81[44] what the
petitioners agreed to was the payment of a specific sum of P40,000.00 per month for six months not a
4% rate of interest per month for six (6) months on a loan whose principal is P1,000,000.00, for the
total amount of P1,240,000.00. Thus, no reason exists to place the petitioners in estoppel, barring them

79

80

81
from raising their present defenses against a 4% per month interest after the six-month period of the

agreement. The board resolution,82[45] on the other hand, simply authorizes Pantaleon to contract for
a loan with a monthly interest of not more than 4%. This resolution merely embodies the extent of
Pantaleons authority to contract and does not create any right or obligation except as between
Pantaleon and the board. Again, no cause exists to place the petitioners in estoppel.

Piercing the corporate veil unfounded

We find it unfounded and unwarranted for the lower courts to pierce the corporate veil of
PRISMA.

The doctrine of piercing the corporate veil applies only in three (3) basic instances, namely: a)
when the separate and distinct corporate personality defeats public convenience, as when the corporate
fiction is used as a vehicle for the evasion of an existing obligation; b) in fraud cases, or when the
corporate entity is used to justify a wrong, protect a fraud, or defend a crime; or c) is used in alter ego
cases, i.e., where a corporation is essentially a farce, since it is a mere alter ego or business conduit of a
person, or where the corporation is so organized and controlled and its affairs so conducted as to make it

merely an instrumentality, agency, conduit or adjunct of another corporation. 83[46] In the absence of
malice, bad faith, or a specific provision of law making a corporate officer liable, such corporate officer

cannot be made personally liable for corporate liabilities. 84[47]

In the present case, we see no competent and convincing evidence of any wrongful, fraudulent
or unlawful act on the part of PRISMA to justify piercing its corporate veil. While Pantaleon denied
personal liability in his Answer, he made himself accountable in the promissory note in his personal

82

83

84
capacity and as authorized by the Board Resolution of PRISMA.85[48] With this statement of personal
liability and in the absence of any representation on the part of PRISMA that the obligation is all its own
because of its separate corporate identity, we see no occasion to consider piercing the corporate veil as
material to the case.

WHEREFORE, in light of all the foregoing, we hereby REVERSE and SET


ASIDE the Decision dated May 5, 2003 of the Court of Appeals in CA-G.R. CV No.
69627. The petitioners loan of P1,000,000.00 shall bear interest of P40,000.00
per month for six (6) months from December 8, 1993 as indicated in the
promissory note. Any portion of this loan, unpaid as of the end of the six-month
payment period, shall thereafter bear interest at 12% per annum. The total
amount due and unpaid, including accrued interests, shall bear interest at 12%
per annum from the finality of this Decision. Let this case be REMANDED to the
Regional Trial Court, Branch 73, Antipolo City for the proper computation of the
amount due as herein directed, with due regard to the payments the petitioners
have already remitted. Costs against the respondent.

SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila

85
THIRD DIVISION

G.R. No. 173227 January 20, 2009

SEBASTIAN SIGA-AN, Petitioner,


vs.
ALICIA VILLANUEVA, Respondent.

DECISION

CHICO-NAZARIO, J.:

Before Us is a Petition1 for Review on Certiorari under Rule 45 of the Rules of Court seeking to
set aside the Decision,2 dated 16 December 2005, and Resolution,3 dated 19 June 2006 of the
Court of Appeals in CA-G.R. CV No. 71814, which affirmed in toto the Decision,4 dated 26
January 2001, of the Las Pinas City Regional Trial Court, Branch 255, in Civil Case No. LP-98-
0068.

The facts gathered from the records are as follows:

On 30 March 1998, respondent Alicia Villanueva filed a complaint5 for sum of money against
petitioner Sebastian Siga-an before the Las Pinas City Regional Trial Court (RTC), Branch 255,
docketed as Civil Case No. LP-98-0068. Respondent alleged that she was a businesswoman
engaged in supplying office materials and equipments to the Philippine Navy Office (PNO)
located at Fort Bonifacio, Taguig City, while petitioner was a military officer and comptroller of
the PNO from 1991 to 1996.

Respondent claimed that sometime in 1992, petitioner approached her inside the PNO and
offered to loan her the amount of P540,000.00. Since she needed capital for her business
transactions with the PNO, she accepted petitioners proposal. The loan agreement was not
reduced in writing. Also, there was no stipulation as to the payment of interest for the loan.6

On 31 August 1993, respondent issued a check worth P500,000.00 to petitioner as partial


payment of the loan. On 31 October 1993, she issued another check in the amount of
P200,000.00 to petitioner as payment of the remaining balance of 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 answer10 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 of
P1,240,000.00, inclusive of interest, from petitioner and that she would pay said amount in
March 1995. Respondent also issued to him six postdated checks amounting to P1,240,000.00 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 199423 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 solutio indebiti 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-Affidavit38 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 of P160,000.00 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.

SECOND DIVISION

SPOUSES DAVID B. CARPO G.R. Nos. 150773 &

and RECHILDA S. CARPO, 153599

Petitioners,

Present:

- versus - PUNO, J.,

Chairman,

AUSTRIA-MARTINEZ,
CALLEJO, SR.,

ELEANOR CHUA and TINGA, and

ELMA DY NG, CHICO-NAZARIO, JJ.

Respondents.

Promulgated:

September 30, 2005

x-------------------------------------------------------------------x

DECISION

TINGA, J.:

Before this Court are two consolidated petitions for review.


The first, docketed as G.R. No. 150773, assails the Decision[1] of
the Regional Trial Court (RTC), Branch 26 of Naga City dated 26
October 2001 in Civil Case No. 99-4376. RTC Judge Filemon B.
Montenegro dismissed the complaint[2] for annulment of real estate
mortgage and consequent foreclosure proceedings filed by the
spouses David B. Carpo and Rechilda S. Carpo (petitioners).

The second, docketed as G.R. No. 153599, seeks to annul the


Court of Appeals Decision[3] dated 30 April 2002 in CA-G.R. SP No.
57297. The Court of Appeals Third Division annulled and set aside
the orders of Judge Corazon A. Tordilla to suspend the sheriffs
enforcement of the writ of possession.

The cases stemmed from a loan contracted by petitioners. On


18 July 1995, they borrowed from Eleanor Chua and Elma Dy Ng
(respondents) the amount of One Hundred Seventy-Five Thousand
Pesos (P175,000.00), payable within six (6) months with an interest
rate of six percent (6%) per month. To secure the payment of the
loan, petitioners mortgaged their residential house and lot situated
at San Francisco, Magarao, Camarines Sur, which lot is covered by
Transfer Certificate of Title (TCT) No. 23180. Petitioners failed to
pay the loan upon demand. Consequently, the real estate mortgage
was extrajudicially foreclosed and the mortgaged property sold at a
public auction on 8 July 1996. The house and lot was awarded to
respondents, who were the only bidders, for the amount of Three
Hundred Sixty-Seven Thousand Four Hundred Fifty-Seven Pesos
and Eighty Centavos (P367,457.80).
Upon failure of petitioners to exercise their right of
redemption, a certificate of sale was issued on 5 September 1997 by
Sheriff Rolando A. Borja. TCT No. 23180 was cancelled and in its
stead, TCT No. 29338 was issued in the name of respondents.

Despite the issuance of the TCT, petitioners continued to


occupy the said house and lot, prompting respondents to file a
petition for writ of possession with the RTC docketed as Special
Proceedings (SP) No. 98-1665. On 23 March 1999, RTC Judge
Ernesto A. Miguel issued an Order[4] for the issuance of a writ of
possession.

On 23 July 1999, petitioners filed a complaint for annulment


of real estate mortgage and the consequent foreclosure proceedings,
docketed as Civil Case No. 99-4376 of the RTC. Petitioners
consigned the amount of Two Hundred Fifty-Seven Thousand One
Hundred Ninety-Seven Pesos and Twenty-Six Centavos
(P257,197.26) with the RTC.

Meanwhile, in SP No. 98-1665, a temporary restraining order


was issued upon motion on 3 August 1999, enjoining the
enforcement of the writ of possession. In an Order[5] dated 6
January 2000, the RTC suspended the enforcement of the writ of
possession pending the final disposition of Civil Case No. 99-4376.
Against this Order, respondents filed a petition for certiorari and
mandamus before the Court of Appeals, docketed as CA-G.R. SP
No. 57297.

During the pendency of the case before the Court of Appeals,


RTC Judge Filemon B. Montenegro dismissed the complaint in Civil
Case No. 99-4376 on the ground that it was filed out of time and
barred by laches. The RTC proceeded from the premise that the
complaint was one for annulment of a voidable contract and thus
barred by the four-year prescriptive period. Hence, the first petition
for review now under consideration was filed with this Court,
assailing the dismissal of the complaint.

The second petition for review was filed with the Court after
the Court of Appeals on 30 April 2002 annulled and set aside the
RTC orders in SP No. 98-1665 on the ground that it was the
ministerial duty of the lower court to issue the writ of possession
when title over the mortgaged property had been consolidated in the
mortgagee.
This Court ordered the consolidation of the two cases, on
motion of petitioners.

In G.R. No. 150773, petitioners claim that following the


Courts ruling in Medel v. Court of Appeals[6] the rate of interest
stipulated in the principal loan agreement is clearly null and void.
Consequently, they also argue that the nullity of the agreed interest
rate affects the validity of the real estate mortgage. Notably, while
petitioners were silent in their petition on the issues of prescription
and laches on which the RTC grounded the dismissal of the
complaint, they belatedly raised the matters in their Memorandum.
Nonetheless, these points warrant brief comment.

On the other hand, petitioners argue in G.R. No. 153599 that


the RTC did not commit any grave abuse of discretion when it
issued the orders dated 3 August 1999 and 6 January 2000, and
that these orders could not have been the proper subjects of a
petition for certiorari and mandamus. More accurately, the
justiciable issues before us are whether the Court of Appeals could
properly entertain the petition for certiorari from the timeliness
aspect, and whether the appellate court correctly concluded that
the writ of possession could no longer be stayed.
We first resolve the petition in G.R. No. 150773.

Petitioners contend that the agreed rate of interest of 6% per


month or 72% per annum is so excessive, iniquitous,
unconscionable and exorbitant that it should have been declared
null and void. Instead of dismissing their complaint, they aver that
the lower court should have declared them liable to respondents for
the original amount of the loan plus 12% interest per annum and
1% monthly penalty charge as liquidated damages,[7] in view of the
ruling in Medel v. Court of Appeals.[8]

In Medel, the Court found that the interest stipulated at 5.5%


per month or 66% per annum was so iniquitous or unconscionable
as to render the stipulation void.

Nevertheless, we find the interest at 5.5% per month, or 66% per


annum, stipulated upon by the parties in the promissory note iniquitous
or unconscionable, and, hence, contrary to morals (contra bonos
mores), if not against the law. The stipulation is void. The Court shall
reduce equitably liquidated damages, whether intended as an indemnity
or a penalty if they are iniquitous or unconscionable.[9]
In a long line of cases, this Court has invalidated similar
stipulations on interest rates for being excessive, iniquitous,
unconscionable and exorbitant. In Solangon v. Salazar,[10] we
annulled the stipulation of 6% per month or 72% per annum
interest on a P60,000.00 loan. In Imperial v. Jaucian,[11] we
reduced the interest rate from 16% to 1.167% per month or 14%
per annum. In Ruiz v. Court of Appeals,[12] we equitably reduced
the agreed 3% per month or 36% per annum interest to 1% per
month or 12% per annum interest. The 10% and 8% interest rates
per month on a P1,000,000.00 loan were reduced to 12% per
annum in Cuaton v. Salud.[13] Recently, this Court, in Arrofo v.
Quino,[14] reduced the 7% interest per month on a P15,000.00 loan
amounting to 84% interest per annum to 18% per annum.

There is no need to unsettle the principle affirmed in Medel


and like cases. From that perspective, it is apparent that the
stipulated interest in the subject loan is excessive, iniquitous,
unconscionable and exorbitant. Pursuant to the freedom of
contract principle embodied in Article 1306 of the Civil Code,
contracting parties may establish such stipulations, clauses, terms
and conditions as they may deem convenient, provided they are not
contrary to law, morals, good customs, public order, or public
policy. In the ordinary course, the codal provision may be invoked
to annul the excessive stipulated interest.
In the case at bar, the stipulated interest rate is 6% per
month, or 72% per annum. By the standards set in the above-cited
cases, this stipulation is similarly invalid. However, the RTC refused
to apply the principle cited and employed in Medel on the ground
that Medel did not pertain to the annulment of a real estate
mortgage,[15] as it was a case for annulment of the loan contract
itself. The question thus sensibly arises whether the invalidity of
the stipulation on interest carries with it the invalidity of the
principal obligation.

The question is crucial to the present petition even if the


subject thereof is not the annulment of the loan contract but that of
the mortgage contract. The consideration of the mortgage contract
is the same as that of the principal contract from which it receives
life, and without which it cannot exist as an independent contract.
Being a mere accessory contract, the validity of the mortgage
contract would depend on the validity of the loan secured by it.[16]

Notably in Medel, the Court did not invalidate the entire loan
obligation despite the inequitability of the stipulated interest, but
instead reduced the rate of interest to the more reasonable rate of
12% per annum. The same remedial approach to the wrongful
interest rates involved was employed or affirmed by the Court in
Solangon, Imperial, Ruiz, Cuaton, and Arrofo.

The Courts ultimate affirmation in the cases cited of the


validity of the principal loan obligation side by side with the
invalidation of the interest rates thereupon is congruent with the
rule that a usurious loan transaction is not a complete nullity but
defective only with respect to the agreed interest.

We are aware that the Court of Appeals, on certain occasions,


had ruled that a usurious loan is wholly null and void both as to
the loan and as to the usurious interest.[17] However, this Court
adopted the contrary rule,
as comprehensively discussed in Briones v. Cammayo:[18]

In Gui Jong & Co. vs. Rivera, et al., 45 Phil. 778, this Court likewise
declared that, in any event, the debtor in a usurious contract of loan should
pay the creditor the amount which he justly owes him, citing in support of
this ruling its previous decisions in Go Chioco, Supra, Aguilar vs. Rubiato, et
al., 40 Phil. 570, and Delgado vs. Duque Valgona, 44 Phil. 739.

....

Then in Lopez and Javelona vs. El Hogar Filipino, 47 Phil. 249, We


also held that the standing jurisprudence of this Court on the question
under consideration was clearly to the effect that the Usury Law, by its letter
and spirit, did not deprive the lender of his right to recover from the
borrower the money actually loaned to and enjoyed by the latter. This Court
went further to say that the Usury Law did not provide for the forfeiture of
the capital in favor of the debtor in usurious contracts, and that while the
forfeiture might appear to be convenient as a drastic measure to eradicate
the evil of usury, the legal question involved should not be resolved on the
basis of convenience.

Other cases upholding the same principle are Palileo vs. Cosio, 97
Phil. 919 and Pascua vs. Perez, L-19554, January 31, 1964, 10 SCRA 199,
200-202. In the latter We expressly held that when a contract is found to be
tainted with usury "the only right of the respondent (creditor) . . . was merely
to collect the amount of the loan, plus interest due thereon."

The view has been expressed, however, that the ruling thus
consistently adhered to should now be abandoned because Article 1957 of
the new Civil Code a subsequent law provides that contracts and
stipulations, under any cloak or device whatever, intended to circumvent the
laws against usury, shall be void, and that in such cases "the borrower may
recover in accordance with the laws on usury." From this the conclusion is
drawn that the whole contract is void and that, therefore, the creditor has no
right to recover not even his capital.

The meaning and scope of our ruling in the cases mentioned


heretofore is clearly stated, and the view referred to in the preceding
paragraph is adequately answered, in Angel Jose, etc. vs. Chelda
Enterprises, et al. (L-25704, April 24, 1968). On the question of whether a
creditor in a usurious contract may or may not recover the principal of the
loan, and, in the affirmative, whether or not he may also recover interest
thereon at the legal rate, We said the following:

. . . .

Appealing directly to Us, defendants raise two questions


of law: (1) In a loan with usurious interest, may the creditor
recover the principal of the loan? (2) Should attorney's fees be
awarded in plaintiff's favor?"

Great reliance is made by appellants on Art. 1411 of the


New Civil Code . . . .

Since, according to the appellants, a usurious loan is void due


to illegality of cause or object, the rule of pari delicto expressed
in Article 1411, supra, applies, so that neither party can bring
action against each other. Said rule, however, appellants add,
is modified as to the borrower, by express provision of the law
(Art. 1413, New Civil Code), allowing the borrower to recover
interest paid in excess of the interest allowed by the Usury Law.
As to the lender, no exception is made to the rule; hence, he
cannot recover on the contract. So they continue the New
Civil Code provisions must be upheld as against the Usury
Law, under which a loan with usurious interest is not totally
void, because of Article 1961 of the New Civil Code, that:
"Usurious contracts shall be governed by the Usury Law and
other special laws, so far as they are not inconsistent with this
Code."

We do not agree with such reasoning. Article 1411 of the


New Civil Code is not new; it is the same as Article 1305 of the
Old Civil Code. Therefore, said provision is no warrant for
departing from previous interpretation that, as provided in the
Usury Law (Act No. 2655, as amended), a loan with usurious
interest is not totally void only as to the interest.

. . . [a]ppellants fail to consider that a contract of


loan with usurious interest consists of principal and
accessory stipulations; the principal one is to pay the debt;
the accessory stipulation is to pay interest thereon.

And said two stipulations are divisible in the sense


that the former can still stand without the latter. Article
1273, Civil Code, attests to this: "The renunciation of the
principal debt shall extinguish the accessory obligations;
but the waiver of the latter shall leave the former in force."

The question therefore to resolve is whether the


illegal terms as to payment of interest likewise renders a
nullity the legal terms as to payments of the principal debt.
Article 1420 of the New Civil Code provides in this regard:
"In case of a divisible contract, if the illegal terms can be
separated from the legal ones, the latter may be enforced."

In simple loan with stipulation of usurious interest,


the prestation of the debtor to pay the principal debt,
which is the cause of the contract (Article 1350, Civil
Code), is not illegal. The illegality lies only as to the
prestation to pay the stipulated interest; hence, being
separable, the latter only should be deemed void, since it is
the only one that is illegal.
....

The principal debt remaining without stipulation for


payment of interest can thus be recovered by judicial action.
And in case of such demand, and the debtor incurs in delay,
the debt earns interest from the date of the demand (in this
case from the filing of the complaint). Such interest is not due
to stipulation, for there was none, the same being void. Rather,
it is due to the general provision of law that in obligations to
pay money, where the debtor incurs in delay, he has to pay
interest by way of damages (Art. 2209, Civil Code). The court a
quo therefore, did not err in ordering defendants to pay the
principal debt with interest thereon at the legal rate, from the
date of filing of the complaint."[19]

The Courts wholehearted affirmation of the rule that the


principal obligation subsists despite the nullity of the stipulated
interest is evinced by its subsequent rulings, cited above, in all of
which the main obligation was upheld and the offending interest
rate merely corrected. Hence, it is clear and settled that the
principal loan obligation still stands and remains valid. By the same
token, since the mortgage contract derives its vitality from the
validity of the principal obligation, the invalid stipulation on interest
rate is similarly insufficient to render void the ancillary mortgage
contract.

It should be noted that had the Court declared the loan and
mortgage agreements void for being contrary to public policy, no
prescriptive period could have run.[20] Such benefit is obviously not
available to petitioners.

Yet the RTC pronounced that the complaint was barred by the
four-year prescriptive period provided in Article 1391 of the Civil
Code, which governs voidable contracts. This conclusion was
derived from the allegation in the complaint that the consent of
petitioners was vitiated through undue influence. While the RTC
correctly acknowledged the rule of prescription for voidable
contracts, it erred in applying the rule in this case. We are hard put
to conclude in this case that there was any undue influence in the
first place.

There is ultimately no showing that petitioners consent to the


loan and mortgage agreements was vitiated by undue influence.
The financial condition of petitioners may have motivated them to
contract with respondents, but undue influence cannot be
attributed to respondents simply because they had lent money.
Article 1391, in relation to Article 1390 of the Civil Code, grants the
aggrieved party the right to obtain the annulment of contract on
account of factors which vitiate consent. Article 1337 defines the
concept of undue influence, as follows:
There is undue influence when a person takes improper advantage
of his power over the will of another, depriving the latter of a reasonable
freedom of choice. The following circumstances shall be considered: the
confidential, family, spiritual and other relations between the parties or
the fact that the person alleged to have been unduly influenced was
suffering from mental weakness, or was ignorant or in financial distress.

While petitioners were allegedly financially distressed, it must


be proven that there is deprivation of their free agency. In other
words, for undue influence to be present, the influence exerted
must have so overpowered or subjugated the mind of a contracting
party as to destroy his free agency, making him express the will of
another rather than his own.[21] The alleged lingering financial
woes of petitioners per se cannot be equated with the presence of
undue influence.

The RTC had likewise concluded that petitioners were barred


by laches from assailing the validity of the real estate mortgage. We
wholeheartedly agree. If indeed petitioners unwillingly gave their
consent to the agreement, they should have raised this issue as
early as in the foreclosure proceedings. It was only when the writ of
possession was issued did petitioners challenge the stipulations in
the loan contract in their action for annulment of mortgage.
Evidently, petitioners slept on their rights. The Court of Appeals
succinctly made the following observations:
In all these proceedings starting from the foreclosure, followed by
the issuance of a provisional certificate of sale; then the definite certificate
of sale; then the issuance of TCT No. 29338 in favor of the defendants and
finally the petition for the issuance of the writ of possession in favor of the
defendants, there is no showing that plaintiffs questioned the validity of
these proceedings. It was only after the issuance of the writ of possession
in favor of the defendants, that plaintiffs allegedly tendered to the
defendants the amount of P260,000.00 which the defendants refused. In
all these proceedings, why did plaintiffs sleep on their rights?[22]

Clearly then, with the absence of undue influence, petitioners


have no cause of action. Even assuming undue influence vitiated
their consent to the loan contract, their action would already be
barred by prescription when they filed it. Moreover, petitioners had
clearly slept on their rights as they failed to timely assail the validity
of the mortgage agreement. The denial of the petition in G.R. No.
150773 is warranted.

We now resolve the petition in G.R. No. 153599.

Petitioners claim that the assailed RTC orders dated 3 August


1999 and 6 January 2000 could no longer be questioned in a
special civil action for certiorari and mandamus as the reglementary
period for such action had already elapsed.
It must be noted that the Order dated 3 August 1999
suspending the enforcement of the writ of possession had a period
of effectivity of only twenty (20) days from 3 August 1999, or until
23 August 1999. Thus, upon the expiration of the twenty (20)-day
period, the said Order became functus officio. Thus, there is really
no sense in assailing the validity of this Order, mooted as it was.
For the same reason, the validity of the order need not have been
assailed by respondents in their special civil action before the Court
of Appeals.

On the other hand, the Order dated 6 January 2000 is in the


nature of a writ of injunction whose period of efficacy is indefinite. It
may be properly assailed by way of the special civil action for
certiorari, as it is interlocutory in nature.

As a rule, the special civil action for certiorari under Rule 65


must be filed not later than sixty (60) days from notice of the
judgment or order.[23] Petitioners argue that the 3 August 1999
Order could no longer be assailed by respondents in a special civil
action for certiorari before the Court of Appeals, as the petition was
filed beyond sixty (60) days following respondents receipt of the
Order. Considering that the 3 August 1999 Order had become
functus officio in the first place, this argument deserves scant
consideration.
Petitioners further claim that the 6 January 2000 Order could
not have likewise been the subject of a special civil action for
certiorari, as it is according to them a final order, as opposed to an
interlocutory order. That the 6 January 2000 Order is interlocutory
in nature should be beyond doubt. An order is interlocutory if its
effects would only be provisional in character and would still leave
substantial proceedings to be further had by the issuing court in
order to put the controversy to rest.[24] The injunctive relief granted
by the order is definitely final, but merely provisional, its effectivity
hinging on the ultimate outcome of the then pending action for
annulment of real estate mortgage. Indeed, an interlocutory order
hardly puts to a close, or disposes of, a case or a disputed issue
leaving nothing else to be done by the court in respect thereto, as is
characteristic of a final order.

Since the 6 January 2000 Order is not a final order, but rather
interlocutory in nature, we cannot agree with petitioners who insist
that it may be assailed only through an appeal perfected within
fifteen (15) days from receipt thereof by respondents. It is axiomatic
that an interlocutory order cannot be challenged by an appeal,
but is susceptible to review only through the special civil action of
certiorari.[25] The sixty (60)-day reglementary period for special
civil actions under Rule 65 applies, and respondents petition was
filed with the Court of Appeals well within the period.

Accordingly, no error can be attributed to the Court of Appeals


in granting the petition for certiorari and mandamus. As pointed
out by respondents, the remedy of mandamus lies to compel the
performance of a ministerial duty. The issuance of a writ of
possession to a purchaser in an extrajudicial foreclosure is merely a
ministerial function.[26]

Thus, we also affirm the Court of Appeals ruling to set aside


the RTC orders enjoining the enforcement of the writ of possession.
[27] The purchaser in a foreclosure sale is entitled as a matter of
right to a writ of possession, regardless of whether or not there is a
pending suit for annulment of the mortgage or the foreclosure
proceedings. An injunction to prohibit the issuance or enforcement
of the writ is entirely out of place.[28]
One final note. The issue on the validity of the stipulated
interest rates, regrettably for petitioners, was not raised at the
earliest possible opportunity. It should be pointed out though that
since an excessive stipulated interest rate may be void for being
contrary to public policy, an action to annul said interest rate does
not prescribe. Such indeed is the remedy; it is not the action for
annulment of the ancillary real estate mortgage. Despite the nullity
of the stipulated interest rate, the principal loan obligation subsists,
and along with it the mortgage that serves as collateral security for
it.

WHEREFORE, in view of all the foregoing, the petitions are


DENIED. Costs against petitioners.

SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-52482 February 23, 1990


SENTINEL INSURANCE CO., INC., petitioner,
vs.
THE HONORABLE COURT OF APPEALS, HON. FLORELIANA CASTRO-
BARTOLOME, Presiding Judge, Court of First Instance of Rizal, Seventh Judicial
District, Branch XV, THE PROVINCIAL SHERIFF OF RIZAL, and ROSE
INDUSTRIES, INC., respondents.

Jesus I. Santos Law Office for petitioner.

Quasha, Asperilla, Ancheta, Valmonte, Pea & Marcos for private respondent.

REGALADO, J.:

Before us is a petition seeking the amendment and modification of the dispositive


portion of respondent court's decision in CA-G.R. No. SP-09331, 1 allegedly to make it
conform with the findings, arguments and observations embodied in said decision which
relief was denied by respondent court in its resolution, dated January 15, 1980, 2
rejecting petitioner's ex parte motion filed for that purpose. 3

While not involving the main issues in the case threshed out in the court a quo, the
judgment in which had already become final and executory, the factual backdrop of the
present petition is summarized by respondent court as follows:

Petitioner Sentinel Insurance Co., Inc., was the surety in a contract of suretyship entered
into on November 15, 1974 with Nemesio Azcueta, Sr., who is doing business under the
name and style of 'Malayan Trading as reflected in SICO Bond No. G(16)00278 where
both of them bound themselves, 'jointly and severally, to fully and religiously guarantee
the compliance with the terms and stipulations of the credit line granted by private
respondent Rose Industries, Inc., in favor of Nemesio Azcueta, Sr., in the amount of
P180,00.00.' Between November 23 to December 23, 1974, Azcueta made various
purchases of tires, batteries and tire tubes from the private respondent but failed to pay
therefor, prompting the latter to demand payment but because Azcueta failed to settle his
accounts, the case was referred to the Insurance Commissioner who invited the attention
of the petitioner on the matter and the latter cancelled the Suretyship Agreement on May
13, 1975 with due notice to the private respondent. Meanwhile, private respondent filed
with the respondent court of Makati a complaint for collection of sum of money against
herein petitioner and Azcueta, docketed as Civil Case No. 21248 alleging the foregoing
antecedents and praying that said defendants be ordered to pay jointly and severally unto
the plaintiff.

a) The amount of P198,602.41 as its principal obligation, including


interest and damage dues as of April 29, 1975;

b) To pay interest at 14% per annum and damage dues at the rate of 2%
every 45 days commencing from April 30, 1975 up to the time the full
amount is fully paid:

xxx xxx xxx


After petitioner filed its answer with counterclaim, the case, upon agreement of the
parties, was submitted for summary judgment and on December 29, 1975, respondent
court rendered its decision with the following dispositive portion:

xxx xxx xxx

a) To pay interest on the principal obligation at the rate of 14% per


annum at the rate of 2% every 45 days commencing from April 30, 1975
until the amount is fully paid.

The decision having become final and executory, the prevailing party moved for its
execution which respondent judge granted and pursuant thereto, a notice of attachment
and levy was served by respondent Provincial Sheriff upon the petitioner. On the same
day, however, the latter filed a motion for 'clarification of the judgment as to its real and
true import because on its face, it would appear that aside from the 14% interest imposed
on the principal obligation, an additional 2% every 45 days corresponding to the
additional penalty has been imposed against the petitioner which imposition would be
usurious and could not have been the intention of respondent Judge.' But the move did
nor prosper because oil May 22, 1971, the judge denied the motion on the theory that the
judgment, having become final and executory, it can no longer be amended or corrected.
4

Contending that the order was issued with grave abuse of discretion, petitioner went to
respondent court on a petition for certiorari and mandamus to compel the court below to
clarify its decision, particularly Paragraph l(a) of the dispositive portion thereof.

Respondent court granted tile petition in its decision dated December 3, 1979, the
disquisition and dispositive portion whereof read:

While it is an elementary rule of procedure that after a decision, order or ruling has
become final, the court loses its jurisdiction orderover the same and can no longer be
subjected to any modification or alteration, it is likewise well-settled that courts are
empowered even after such finality, to correct clerical errors or mistakes in the decisions
(Potenciano vs. CA, L-11569, 55 O.G. 2895). A clerical error is one that is visible to the
eyes or obvious to the understanding (Black vs. Republic, 104 Phil. 849).

That there was a mistake in the dispositive portion of the decision cannot be denied
considering that in the complaint filed against the petitioner, the prayer as specifically
stated in paragraph (b) was to 'order the latter, to pay interest at 14% per annum and
damage dues at the rate of 2% every 45 days commencing from April 30, 1975 up to the
time the amount is fully paid.' But this notwithstanding the respondent court in its
questioned decision decreed the petitioner to pay the interest on the principal obligation
at the rate of 14% per annum and 2% every 45 days commencing from April 30, 1975
until the amount is fully paid,' so that, as petitioner correctly observes, it would appear
that on top of the 14% per annum on the principal obligation, another 2% interest every
45 days commencing from April 30, 1975 until the amount is fully paid has been imposed
against him (petitioner). In other words, 365 days in one year divided by 45 days equals
8-1/9 which, multiplied by 2% as ordered by respondent-judge would amount to a little
more than 16%. Adding 16% per annum to the 14% interest imposed on the principal
obligation would be 30% which is veritably usurious and this cannot be countenanced,
much less sanctioned by any court of justice.
We agree with this observation and what is more, it is likewise a settled rule that although
a court may grant any relief allowed by law, such prerogative is delimited by the cardinal
principle that it cannot grant anything more than what is prayed for, for certainly, the relief
to be dispensed cannot rise above its source. (Potenciano vs. CA, supra.)

WHEREFORE, the writ of certiorari is hereby granted and the respondent judge is
ordered to clarify its judgment complained of in the following manner:

xxx xxx xxx

a) to pay interest at 14% per annum on the principal obligation and


damage dues at the rate of 2% every 45 days commencing from April 30,
1975 up to the time the full amount is fully paid; 5

xxx xxx xxx

As earlier stated, petitioner filed an ex parte motion seeking to amend the above-quoted
decretal portion which respondent court denied, hence the petition at bar.

The amendment sought, ostensibly in order that the dispositive portion of said decision
would conform with the body thereof, is the sole issue for resolution by the Court.
Petitioner itself cites authorities in support of its contention that it is entitled to a correct
and clear expression of a judgment to avoid substantial injustice. 6 In amplification of its
plaint, petitioner further asseverates that respondent court should not have made an
award for "damage dues" at such late stage of the proceeding since said dues were not
the subject of the award made by the trial court. 7

We disagree with petitioner.

To clarify an ambiguity or correct a clerical error in the judgment, the court may resort to
the pleadings filed by the parties, the findings of fact and the conclusions of law
expressed in the text or body of the decision. 8

Indeed, this was what respondent court did in resolving the original petition. It examined
the complaint filed against the petitioner and noted that the prayer as stated in
Paragraph (b) thereof was to "order defendant to pay interest at 14 per centum and
damage dues at the rate of 2% every 45 days commencing from April 30, 1975 up to the
time the full amount is fully paid." 9

Insofar as the findings and the dispositive portion set forth in respondent court's
decision are concerned, there is really no inconsistency as wittingly or unwittingly
asserted by petitioner.

The findings made by respondent court did not actually nullify the judgment of the trial
court. More specifically, the statement that the imposition of 2% interest every 45 days
commencing from April 30, 1975 on top of the 14% per annum (as would be the
impression from a superficial reading of the dispositive portion of the trial court's
decision) would be usurious is a sound observation. It should, however, be stressed that
such observation was on the theoretical assumption that the rate of 2% is being
imposed as interest, not as damage dues which was the intendment of the trial court.

Certainly, the damage dues in this case do not include and are not included in the
computation of interest as the two are of different categories and are distinct claims
which may be demanded separately, in the same manner that commissions, fines and
penalties are excluded in the computation of interest where the loan or forbearance is
not secured in whole or in part by real estate or an interest therein. 10

While interest forms part of the consideration of the contract itself, damage dues
(penalties, and so forth) are usually made payable only in case of default or non-
performance of the contract. 11 Also, although interest is subject to the provisions of the
Usury Law, 12 there is no policy or provision in such law preventing the enforcement of
damage dues although the effect may be to increase the sum payable beyond the
prescribed ceiling rates.

Petitioner's assertion that respondent court acted without authority in appending the
award of damage dues to the judgment of the trial court should be rejected. As correctly
pointed out by private respondent, the opening sentence of Paragraph l(a) of the
dispositive portion of the lower court's decision explicitly ordered petitioner to pay
private respondent the amount of P198,602.41 as principal obligation including interest
and damage dues, which is a clear and unequivocal indication of the lower court's intent
to award both interest and damage dues. 13

Significantly, it bears mention that on several occasions before petitioner moved for a
clarificatory judgment, it offered to settle its account with private respondent without
assailing the imposition of the aforementioned damage dues. 14 As ramified by private
respondent:

2. ... the then counsel of record for the petitioner, Atty. Porfirio Bautista, and Atty. Teodulfo
L. Reyes, petitioner's Assistant Vice- President for Operations, had a conference with the
undersigned attorneys as to how petitioner will settle its account to avoid execution.
During the conference, both parties arrived at almost the same computation and the
amount due from petitioner, which includes 2% damage dues every 45 days from 30 April
1975 until the amount is fully paid, under the judgment. No question was ever raised as
regards same.

xxx xxx xxx

5. The very face of Annex 'D' shows that the '2%' damage dues being questioned by the
present counsel of petitioner had been mentioned no less than TEN (10) TIMES and was
clearly and distinctly defined by petitioner and included in the computation of its obligation
to herein petitioner as '2% penalty for every 45 days.'

xxx xxx xxx

Petitioner's pretense that it was not the intent of the court to award the damage dues of
2% every 45 days commencing 30 April 1975 is belied by the fact (and this is admitted by
petitioner) that upon agreement of the parties, the case before the lower court was
submitted for summary judgment; in other words, the case was submitted upon the facts
as appear in the pleadings with no other evidence presented and a fact that appears
clearly in the pleadings is that the defendants in the case before the lower court were
under contract to pay private respondent, among others, the damage dues of 2% every
45 days commencing on 30 April 1975 until the obligation is fully paid; .... 15

Respondent court demonstrably did not err in ordering the clarification of the decision of
the trial court by amending the questioned part of its dispositive portion to include
therein the phrase damage dues to modify the stated rate of 2%, and thereby obviate
any misconception that it is being imposed as interest.

ACCORDINGLY, certiorari is hereby DENIED and the decision of respondent Court of


Appeals is hereby AFFIRMED.

SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila

EN BANC

G.R. Nos. L-43697 and L-442200 March 31, 1938

In re Liquidation of the Mercantile Bank of China,


GOPOCO GROCERY (GOPOCO), ET AL., claimants-appellants,
vs.
PACIFIC COAST BISCUIT CO., ET AL., oppositors-appellees.

A.M. Zarate for appellants Gopoco Grocery et al.


Laurel, Del Rosario and Sabido for appellant Tiong-Chui Gion.
Ross, Lawrence and Selph for appellees Pacific Coast Biscuit Co. et al.
Eusebio Orense and Carmelino G. Alvendia for appellees Chinese Grocers Asso. et al.
Marcelo Nubla for appellees Ang Cheng Lian et al.

DIAZ, J.:

On petition of the Bank Commissioner who alleged to have found, after an investigation, that the
Mercantile Bank of China could not continue operating as such without running the risk of
suffering losses and prejudice its depositors and customers; and that with the requisite approval
of the corresponding authorities, he had taken charge of all the assets thereof; the Court of First
Instance of Manila declared the said bank in liquidation; approved all the acts theretofore
executed by the commissioner; prohibited the officers and agents of the bank from interfering
with said commissioner in the possession of the assets thereof, its documents, deed, vouchers,
books of account, papers, memorandum, notes, bond, bonds and accounts, obligations or
securities and its real and personal properties; required its creditors and all those who had any
claim against it, to present the same in writing before the commissioner within ninety days; and
ordered the publication, as was in fact done, of the order containing all these provisions, for the
two consecutive weeks in two news-papers of general circulation in the City of Manila, at the
expenses of the aforesaid bank. After these publications, and within the period of ninety days, the
following creditors, among others, presented their presented their claims:

Tiong Chui Gion, Gopoco Grocery, Tan Locko, Woo & Lo & Co., Sy Guan Huat and La Bella
Tondea.

I. The claim of Tiong Chui Gion is for the sum of P10,285.27. He alleged that he
deposited said sum in the bank under liquidation on current account.
II. The claim of Gopoco Grocery (Gopoco) is for the sum of P4,932.48 plus P460. It
described its claim as follows:
Balance due on open
P4,927.95
account subject to check
Interest on c/a 4,53

4,932.48
Surety deposit 460.00
III. The claim of Tan Locko is for the sum of P7,624.20, and he describes it in turn as
follows:
Balance due on open
account subject to check L- P7,610.44
759
Savings account No. 156
(foreign) with Mercantile
Bank of China L-1611
Amoy $15,000,00 Interest
on said Savings Account
No. 156 8.22
Interest on checking a/c 10.54

7,624.20
IV. The claim of Woo & Lo & Co. is for the sum of P6,972.88 and is set out in its written
claim appearing in the record on appeal as follows:
Balance due on open
P6,961.01
subject to check L-845
Interest on checking a/c 11.37
6,972.83
V. The claim of Sy Guan Huat is for the sum of P6,232.88 and the described it as follows:
Balance due on open
account subject to check L- P6,224.34
718
Interest on checking a/c 8.54

6,232.88
VI. The claim of La Bella Tondea is for the sum of P1,912.79, also described as follows:
Balance due on open
P1910.59
account subject to check
Interest on account 2.20

1,912.79

To better resolve not only these claims but also the many others which were presented against the
bank, the lower court, on July 15, 1932, appointed Fulgencio Borromeo as commissioner and
referee to receive the evidence which the interested parties may desire to present; and the
commissioner and referee thus named, after qualifying for the office and receiving the evidence
presented to him, resolved the aforesaid six claims by recommending that the same be
considered as an ordinary credit only, and not as a preferred credit as the interested parties
wanted, because they were at the same time debtors of the bank.

The evidence adduced and the very admissions of the said interested parties in fact show that (a)
the claimant Tiong Chui Gion, while he was a creditor of the Mercantile Bank of China in the
sum of P10,285.27 which he deposited on current account, was also a debtor not only in the sum
of P633.76 but also in the sum of P664.77, the amount of a draft which he accepted, plus interest
thereon and the protest fees paid therefor; (b) the claimant Gopoco Grocery (Gopoco) had a
current account in the bank in the sum of P5,392.48, but it is indebted to it, in Turn, in the sum of
$2,334.80, the amount of certain drafts which it had accepted; (c) the claimant Tan Locko had a
deposit of P7,624.20, but he owed $1,378.90, the amount of a draft which he also accepted; (d)
the claimant Woo & Lo & Co. had a deposit of P6,972.88, but it was indebted in the sum of
$3,464.84, the amount also of certain drafts accepted by it; (e) the claimants Sy Guan Huat and
Sy Kia had a deposit of P6,232.88, but they owed the sum of $3,107.37, for two drafts accepted
by them and already due; and (f) the claimant La Bella Tondea had, in turn, a deposit of
P1,912.79, but it was, in turn, indebted in the sum of $565.40 including interest and other
expenses, the amount of two drafts drawn upon and accepted by it.

The lower court approved all the recommendations of The commissioner and referee as to claims
of the six appellants as follows; (1) To approve the claim of Tiong Chui Gion (P10,285.27) but
only as an ordinary credit, minus the amount of the draft for P664.77; (2) to approve the claim of
Gopoco Grocery (Gopoco) but also as an ordinary credit only (P5,387.95 according to the
referee), minus its obligation amounting to $2,334.80 or P4,669.60; (3) to approve the claim of
Tan Locko but as an ordinary credit only (P7,610.44 according to the referee), deducting
therefrom his obligation amounting to $1,378.90 or P2,757.80; to approve the claim of Woo &
Lo & Co. but only as an ordinary credit (P6,961.01 according to the referee). after deducting its
obligation to the bank, amounting to $3,464.84 or P6,929.68; (5) to approve the claim of Sy
Guan Huat but only as an ordinary credit (P6,224.34 according to the referee), after deducting his
obligation amounting to $3,107.37) or P6,214.74; and, finally, (6) to approve the claim of la
Bella Tondea but also as an ordinary credit only (1,917.50 according to the referee), after
deducting it obligation amounting to $565.40 or P1,130.80; but he expressly refused to authorize
the payment of the interest by reason of impossibility upon the ground set out in the decision.
Not agreeable to the decision of the lower court, each of the interested parties appealed therefrom
and thereafter filed their respective briefs.

Tiong Chui Gion argues in his brief filed in case in G. R. No. 442200, that the lower court erred:

1. In holding that his deposit of P10,285.27 in the Mercantile Bank of China, constitutes
an ordinary credit only and not a preferred credit.

2. In holding as preferred credits the drafts and checks issued by the bank under
liquidation in payment of the drafts remitted to it for collection from merchants residing
in the country, by foreign entities or banks; and in not holding that the deposits on current
account in said bank should enjoy preference over said drafts and checks; and

3. In holding that the amount of P633.76 (which should be understood as P664.77), which
the claimant owes to the bank under liquidation, be deducted from his current account
deposit therein, amounting to P10,285.27, upon the distribution of the assets of the bank
among its various creditors, instead of holding that, after deducting the aforesaid sum of
P633.76 (should be P664.77) from his aforesaid deposit, there be turned over to him the
balance together with the dividends or shares then corresponding to him, on the basis of
said amount.

The other five claimants, that is, Gopoco Grocery Tan Locko, Woo & Lo & Co., Sy Guan Huat
and La Bella Tondea, in turn argue in the brief they jointly filed in case G. R. No. 43697, that
the lower court erred:

1. In not first deducting from their respective deposits in the bank under liquidation,
whose payment they claim, their respective obligation thereto.

2. In not holding that their claims constitute a preferred credit.

3. In holding that the drafts and checks issued by the bank under liquidation in payment
of the drafts remitted to it by foreign entitles and banks for collection from the certain
merchant residing in the country, are preferred credits; and in not holding that the
deposits made by each of them enjoy preference over said drafts and checks, and

4. In denying their motion for a new trial base on the proposition that the appealed
decision is not in accordance with law and is contrary to the evidence adduced at the trial.
The questions raised by the appellant in case G. R. No. 44200 and by appellants in case G.R.
43697 being identical in nature, we believe it practical and proper to resolve said questions
jointly in one decision. Before proceeding, however, it is convenient to note that the
commissioner and referee, classifying the various claims presented against the bank, placed
under one group those partaking of the same nature, the classification having resulted in six
groups.

In the first group he included all the claims for current account, savings and fixed deposits.

In the second group he included the claims for checks or drafts sold by the bank under
liquidation and not paid by the agents or banks in whose favor they had been issued.

In the third group he included the claims checks or drafts issued by the bank under liquidation in
payment or reimbursement of the drafts or goods remitted to it for collection, from resident
merchants and entitles, by foreign banks and entities.

In the fourth group he included the claims for drafts or securities to be collected from resident
merchants and entities to be collected from resident merchants and entities which were pending
collection on the date payments were suspended.

In the fifth group he included the claims of certain depositors or creditors of the bank who were
at the same time debtors thereof; and he considered of this class the claims of the appellants in
these two cases, and

In the sixth group he included the other claims different in nature from the of the aforesaid five
claims.

I. Now, then, should the appellants' deposits on current account in the bank now under
liquidation be considered preferred credits, and not otherwise, or should they be considered
ordinary credits only? The appellants contend that they are preferred credits only? The appellants
contend that they are preferred credits because they are deposits in contemplation of law, and as
such should be returned with the corresponding interest thereon. In support thereof they cite
Manresa (11 Manresa, Civil Code, page 663), and what has been insinuated in the case of Rogers
vs. Smith, Bell & Co. (10 Phil., 319), citing the said commentator who maintains that,
notwithstanding the provisions of articles 1767 and 1768 and others of the aforesaid Code, from
which it is inferred that the so-called irregular deposits no longer exist, the fact is that said
deposits still exist. And they contend and argue that what they had in the bank should be
considered as of this character. But it happens that they themselves admit that the bank owes
them interest which should have been paid to them before it was declared in a state of
liquidation. This fact undoubtedly destroys the character which they nullifies their contention
that the same be considered as irregular deposits, because the payment of interest only takes
place in the case of loans. On the other hand, as we stated with respect to the claim of Tan Tiong
Tick (In re Liquidation of Mercantile Bank of China, G.R. No. 43682), the provisions of the
Code of Commerce, and not those of the Civil Code, are applicable to cases of the nature of
those at bar, which have to do with parties who are both merchants. (Articles 303 and 309, Code
of Commerce.) We there said, and it is not amiss to repeat now, that the so-called current account
and savings deposits have lost their character of deposits, properly so-called and are convertible
into simple commercial loans because, in cases of such deposits, the bank has made use thereof
in the ordinary course of its transactions as an institution engaged in the banking business, not
because it so wishes, but precisely because of the authority deemed to have been granted to it by
the appellants to enable them to collect the interest which they had been and they are now
collecting, and by virtue further of the authority granted to it by section 125 of the Corporation
Law (Act No. 1459), as amended by Acts Nos. 2003 and 3610 and section 9 of the Banking Law
(Act No. 3154), without considering of course the provisions of article 1768 of the Civil Code.
Wherefore, it is held that the deposits on current account of the appellants in the bank under
liquidation, with the right on their right on their part to collect interest, have not created and
could not create a juridical relation between them except that of creditors and debtor, they being
the creditors and the bank the debtor.

What has so far been said resolves adversely the contention of the appellants, the question raised
in the first and second assigned errors Tiong Chui Gion in case G. R. No. 44200, and the
appellants' second and third assigned errors in case G. R. No. 43697.

II. As to the third and first errors attributed to lower court by Tiong Chui Gion in his case, and by
the other appellants in theirs, respectively, it should be stated that the question of set-off raised
by them cannot be resolved a like question in the said case, G. R. No. 43682, entitled "In re
Liquidation of Mercantile Bank of China. Tan Tiong Tick, claimant." It is proper that set-offs be
made, inasmuch as the appellants and the bank being reciprocally debtors and creditors, the same
is only just and according to law (art. 1195, Civil Code), particularly as none of the appellants
falls within the exceptions mentioned in section 58 of the Insolvency Law (Act No. 1956),
reading:

SEC. 58. In all cases of mutual debts and mutual credits between the parties, the account
between them shall be stated, and one debt set off against the other, and the balance only shall be
allowed and paid. But no set-off or counterclaim shall be allowed of a claim in its nature not
provable against the estate: Provided, That no set-off on counterclaim shall be allowed in favor
of any debtor to the insolvent of a claim purchased by or transferred to such debtor within thirty
days immediately preceding the filing, or after the filing of the petition by or against the
insolvent.

It has been said with much basis by Morse, in his work on Bank and Banking (6th ed., vol. 1,
pages 776 and 784) that:

The rules of law as to the right of set-off between the bank and its depositors are not different
from those applicable to other parties. (Page 776.)

Where the bank itself stops payment and becomes insolvent, the customer may avail himself in
set-off against his indebtedness to the bank of any indebtedness of the bank to himself, as, for
example, the balance due him on his deposit account. (Page 784.)
But if set-offs are proper in these cases, when and how should they be made, considering that the
appellants ask for the payment of interest? Are they by any chance entitled to interest? If they
are, when and until what time should they be paid the same?

The question of whether they are entitled to interest should be resolved in the same way that we
resolved the case of the claimant Tan Tiong Tick in the said case, G. R. No. 43682. The
circumstances in these two cases are certainly the same as those in the said case with reference to
the said question. The Mercantile Bank of China owes to each of the appellants the interest
claimed by them, corresponding to the year ending December 4, 1931, the date it was declared in
a state of liquidation, but not which the appellants claim should be earned by their deposits after
said date and until the full amounts thereof are paid to them. And with respect to the question of
set-off, this should be deemed made, of course, as of the date when the Mercantile Bank of China
was declared in a state of liquidation, that is, on December 4, 1931, for then there was already a
reciprocal concurrence of debts, with respect to said bank and the appellants. (Arts. 1195 and
1196 of the Civil Code; 8 Manresa, 4th ed., p. 361.)

III. With respect to the fourth assigned error of the appellants in case G. R. No. 43697, we hold,
in view of the considerations set out in resolving the other assignments of errors, that the lower
court properly denied the motion for new trial of said appellants.

In view of the foregoing, we modify the appealed judgments by holding that the deposits claimed
by the appellants, and declared by the lower court to be ordinary credits are for the following
amounts: P10,285.27 of Tiong Chui Gion; P5,387.95 of Gopoco Grocery (Gopoco); P7,610.44 of
Tan Locko; P6961.01 of Woo & Lo & Co.; P6,224.34 of Sy Guan Huat; and P1,917.50 of La
Bella Tondea, plus their corresponding interest up to December 4, 1931; that their obligations to
the bank under liquidation which should be set off against said deposits, are respectively for the
following amounts: P664.77 of Tiong Chui Gion; P4,669.60 of Gopoco Grocery (Gopoco);
P2,757.80 of Tan Locko; P6,929.68 of Woo & Lo & Co.; P6,214.74 of Sy Huat; and P1,130.80
of La Bella Todea; and we order that the set-offs in question be made in the manner stated in
this decision, that is, as of the date already indicated, December 4, 1931. In all other respects, we
affirm the aforesaid judgments, without special pronouncement as to costs. So ordered.

Republic of the Philippines


SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-60033 April 4, 1984

TEOFISTO GUINGONA, JR., ANTONIO I. MARTIN, and TERESITA SANTOS,


petitioners,
vs.
THE CITY FISCAL OF MANILA, HON. JOSE B. FLAMINIANO, ASST. CITY FISCAL
FELIZARDO N. LOTA and CLEMENT DAVID, respondents.

MAKASIAR, Actg. C.J.:+.wph!1

This is a petition for prohibition and injunction with a prayer for the immediate issuance
of restraining order and/or writ of preliminary injunction filed by petitioners on March 26,
1982.

On March 31, 1982, by virtue of a court resolution issued by this Court on the same
date, a temporary restraining order was duly issued ordering the respondents, their
officers, agents, representatives and/or person or persons acting upon their
(respondents') orders or in their place or stead to refrain from proceeding with the
preliminary investigation in Case No. 8131938 of the Office of the City Fiscal of Manila
(pp. 47-48, rec.). On January 24, 1983, private respondent Clement David filed a motion
to lift restraining order which was denied in the resolution of this Court dated May 18,
1983.

As can be gleaned from the above, the instant petition seeks to prohibit public
respondents from proceeding with the preliminary investigation of I.S. No. 81-31938, in
which petitioners were charged by private respondent Clement David, with estafa and
violation of Central Bank Circular No. 364 and related regulations regarding foreign
exchange transactions principally, on the ground of lack of jurisdiction in that the
allegations of the charged, as well as the testimony of private respondent's principal
witness and the evidence through said witness, showed that petitioners' obligation is
civil in nature.

For purposes of brevity, We hereby adopt the antecedent facts narrated by the Solicitor
General in its Comment dated June 28,1982, as follows:t.hqw

On December 23,1981, private respondent David filed I.S. No. 81-31938 in the Office of
the City Fiscal of Manila, which case was assigned to respondent Lota for preliminary
investigation (Petition, p. 8).

In I.S. No. 81-31938, David charged petitioners (together with one Robert Marshall and
the following directors of the Nation Savings and Loan Association, Inc., namely Homero
Gonzales, Juan Merino, Flavio Macasaet, Victor Gomez, Jr., Perfecto Manalac, Jaime V.
Paz, Paulino B. Dionisio, and one John Doe) with estafa and violation of Central Bank
Circular No. 364 and related Central Bank regulations on foreign exchange transactions,
allegedly committed as follows (Petition, Annex "A"):t.hqw

"From March 20, 1979 to March, 1981, David invested with the Nation
Savings and Loan Association, (hereinafter called NSLA) the sum of
P1,145,546.20 on nine deposits, P13,531.94 on savings account
deposits (jointly with his sister, Denise Kuhne), US$10,000.00 on time
deposit, US$15,000.00 under a receipt and guarantee of payment and
US$50,000.00 under a receipt dated June 8, 1980 (au jointly with Denise
Kuhne), that David was induced into making the aforestated investments
by Robert Marshall an Australian national who was allegedly a close
associate of petitioner Guingona Jr., then NSLA President, petitioner
Martin, then NSLA Executive Vice-President of NSLA and petitioner
Santos, then NSLA General Manager; that on March 21, 1981 N LA was
placed under receivership by the Central Bank, so that David filed claims
therewith for his investments and those of his sister; that on July 22,
1981 David received a report from the Central Bank that only
P305,821.92 of those investments were entered in the records of NSLA;
that, therefore, the respondents in I.S. No. 81-31938 misappropriated the
balance of the investments, at the same time violating Central Bank
Circular No. 364 and related Central Bank regulations on foreign
exchange transactions; that after demands, petitioner Guingona Jr. paid
only P200,000.00, thereby reducing the amounts misappropriated to
P959,078.14 and US$75,000.00."

Petitioners, Martin and Santos, filed a joint counter-affidavit (Petition, Annex' B') in which
they stated the following.t.hqw

"That Martin became President of NSLA in March 1978 (after the


resignation of Guingona, Jr.) and served as such until October 30, 1980,
while Santos was General Manager up to November 1980; that because
NSLA was urgently in need of funds and at David's insistence, his
investments were treated as special- accounts with interest above the
legal rate, an recorded in separate confidential documents only a portion
of which were to be reported because he did not want the Australian
government to tax his total earnings (nor) to know his total investments;
that all transactions with David were recorded except the sum of
US$15,000.00 which was a personal loan of Santos; that David's check
for US$50,000.00 was cleared through Guingona, Jr.'s dollar account
because NSLA did not have one, that a draft of US$30,000.00 was
placed in the name of one Paz Roces because of a pending transaction
with her; that the Philippine Deposit Insurance Corporation had already
reimbursed David within the legal limits; that majority of the stockholders
of NSLA had filed Special Proceedings No. 82-1695 in the Court of First
Instance to contest its (NSLA's) closure; that after NSLA was placed
under receivership, Martin executed a promissory note in David's favor
and caused the transfer to him of a nine and on behalf (9 1/2) carat
diamond ring with a net value of P510,000.00; and, that the liabilities of
NSLA to David were civil in nature."

Petitioner, Guingona, Jr., in his counter-affidavit (Petition, Annex' C') stated the
following:t.hqw

"That he had no hand whatsoever in the transactions between David and


NSLA since he (Guingona Jr.) had resigned as NSLA president in March
1978, or prior to those transactions; that he assumed a portion o; the
liabilities of NSLA to David because of the latter's insistence that he
placed his investments with NSLA because of his faith in Guingona, Jr.;
that in a Promissory Note dated June 17, 1981 (Petition, Annex "D") he
(Guingona, Jr.) bound himself to pay David the sums of P668.307.01 and
US$37,500.00 in stated installments; that he (Guingona, Jr.) secured
payment of those amounts with second mortgages over two (2) parcels
of land under a deed of Second Real Estate Mortgage (Petition, Annex
"E") in which it was provided that the mortgage over one (1) parcel shall
be cancelled upon payment of one-half of the obligation to David; that he
(Guingona, Jr.) paid P200,000.00 and tendered another P300,000.00
which David refused to accept, hence, he (Guingona, Jr.) filed Civil Case
No. Q-33865 in the Court of First Instance of Rizal at Quezon City, to
effect the release of the mortgage over one (1) of the two parcels of land
conveyed to David under second mortgages."

At the inception of the preliminary investigation before respondent Lota, petitioners


moved to dismiss the charges against them for lack of jurisdiction because David's claims
allegedly comprised a purely civil obligation which was itself novated. Fiscal Lota denied
the motion to dismiss (Petition, p. 8).

But, after the presentation of David's principal witness, petitioners filed the instant petition
because: (a) the production of the Promisory Notes, Banker's Acceptance, Certificates of
Time Deposits and Savings Account allegedly showed that the transactions between
David and NSLA were simple loans, i.e., civil obligations on the part of NSLA which were
novated when Guingona, Jr. and Martin assumed them; and (b) David's principal witness
allegedly testified that the duplicate originals of the aforesaid instruments of indebtedness
were all on file with NSLA, contrary to David's claim that some of his investments were
not record (Petition, pp. 8-9).

Petitioners alleged that they did not exhaust available administrative remedies because
to do so would be futile (Petition, p. 9) [pp. 153-157, rec.].

As correctly pointed out by the Solicitor General, the sole issue for resolution is whether
public respondents acted without jurisdiction when they investigated the charges (estafa
and violation of CB Circular No. 364 and related regulations regarding foreign exchange
transactions) subject matter of I.S. No. 81-31938.

There is merit in the contention of the petitioners that their liability is civil in nature and
therefore, public respondents have no jurisdiction over the charge of estafa.

A casual perusal of the December 23, 1981 affidavit. complaint filed in the Office of the
City Fiscal of Manila by private respondent David against petitioners Teopisto Guingona,
Jr., Antonio I. Martin and Teresita G. Santos, together with one Robert Marshall and the
other directors of the Nation Savings and Loan Association, will show that from March
20, 1979 to March, 1981, private respondent David, together with his sister, Denise
Kuhne, invested with the Nation Savings and Loan Association the sum of
P1,145,546.20 on time deposits covered by Bankers Acceptances and Certificates of
Time Deposits and the sum of P13,531.94 on savings account deposits covered by
passbook nos. 6-632 and 29-742, or a total of P1,159,078.14 (pp. 15-16, roc.). It
appears further that private respondent David, together with his sister, made
investments in the aforesaid bank in the amount of US$75,000.00 (p. 17, rec.).

Moreover, the records reveal that when the aforesaid bank was placed under
receivership on March 21, 1981, petitioners Guingona and Martin, upon the request of
private respondent David, assumed the obligation of the bank to private respondent
David by executing on June 17, 1981 a joint promissory note in favor of private
respondent acknowledging an indebtedness of Pl,336,614.02 and US$75,000.00 (p. 80,
rec.). This promissory note was based on the statement of account as of June 30, 1981
prepared by the private respondent (p. 81, rec.). The amount of indebtedness assumed
appears to be bigger than the original claim because of the added interest and the
inclusion of other deposits of private respondent's sister in the amount of P116,613.20.

Thereafter, or on July 17, 1981, petitioners Guingona and Martin agreed to divide the
said indebtedness, and petitioner Guingona executed another promissory note
antedated to June 17, 1981 whereby he personally acknowledged an indebtedness of
P668,307.01 (1/2 of P1,336,614.02) and US$37,500.00 (1/2 of US$75,000.00) in favor
of private respondent (p. 25, rec.). The aforesaid promissory notes were executed as a
result of deposits made by Clement David and Denise Kuhne with the Nation Savings
and Loan Association.

Furthermore, the various pleadings and documents filed by private respondent David,
before this Court indisputably show that he has indeed invested his money on time and
savings deposits with the Nation Savings and Loan Association.

It must be pointed out that when private respondent David invested his money on nine.
and savings deposits with the aforesaid bank, the contract that was perfected was a
contract of simple loan or mutuum and not a contract of deposit. Thus, Article 1980 of
the New Civil Code provides that:t.hqw

Article 1980. Fixed, savings, and current deposits of-money in banks and similar
institutions shall be governed by the provisions concerning simple loan.

In the case of Central Bank of the Philippines vs. Morfe (63 SCRA 114,119 [1975], We
said:t.hqw

It should be noted that fixed, savings, and current deposits of money in banks and similar
institutions are hat true deposits. are considered simple loans and, as such, are not
preferred credits (Art. 1980 Civil Code; In re Liquidation of Mercantile Batik of China Tan
Tiong Tick vs. American Apothecaries Co., 66 Phil 414; Pacific Coast Biscuit Co. vs.
Chinese Grocers Association 65 Phil. 375; Fletcher American National Bank vs. Ang
Chong UM 66 PWL 385; Pacific Commercial Co. vs. American Apothecaries Co., 65 PhiL
429; Gopoco Grocery vs. Pacific Coast Biscuit CO.,65 Phil. 443)."

This Court also declared in the recent case of Serrano vs. Central Bank of the
Philippines (96 SCRA 102 [1980]) that:t.hqw

Bank deposits are in the nature of irregular deposits. They are really 'loans because they
earn interest. All kinds of bank deposits, whether fixed, savings, or current are to be
treated as loans and are to be covered by the law on loans (Art. 1980 Civil Code Gullas
vs. Phil. National Bank, 62 Phil. 519). Current and saving deposits, are loans to a bank
because it can use the same. The petitioner here in making time deposits that earn
interests will respondent Overseas Bank of Manila was in reality a creditor of the
respondent Bank and not a depositor. The respondent Bank was in turn a debtor of
petitioner. Failure of the respondent Bank to honor the time deposit is failure to pay its
obligation as a debtor and not a breach of trust arising from a depositary's failure to
return the subject matter of the deposit (Emphasis supplied).
Hence, the relationship between the private respondent and the Nation Savings and
Loan Association is that of creditor and debtor; consequently, the ownership of the
amount deposited was transmitted to the Bank upon the perfection of the contract and it
can make use of the amount deposited for its banking operations, such as to pay
interests on deposits and to pay withdrawals. While the Bank has the obligation to
return the amount deposited, it has, however, no obligation to return or deliver the same
money that was deposited. And, the failure of the Bank to return the amount deposited
will not constitute estafa through misappropriation punishable under Article 315, par. l(b)
of the Revised Penal Code, but it will only give rise to civil liability over which the public
respondents have no- jurisdiction.

WE have already laid down the rule that:t.hqw

In order that a person can be convicted under the above-quoted provision, it must be
proven that he has the obligation to deliver or return the some money, goods or personal
property that he received Petitioners had no such obligation to return the same money,
i.e., the bills or coins, which they received from private respondents. This is so because
as clearly as stated in criminal complaints, the related civil complaints and the supporting
sworn statements, the sums of money that petitioners received were loans.

The nature of simple loan is defined in Articles 1933 and 1953 of the Civil Code.t.
hqw

"Art. 1933. By the contract of loan, one of the parties delivers to


another, either something not consumable so that the latter may use the
same for a certain time- and return it, in which case the contract is called
a commodatum; or money or other consumable thing, upon the condition
that the same amount of the same kind and quality shall he paid in which
case the contract is simply called a loan or mutuum.

"Commodatum is essentially gratuitous.

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

"In commodatum the bailor retains the ownership of the thing loaned
while in simple loan, ownership passes to the borrower.

"Art. 1953. A person who receives a loan of money or any other


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

It can be readily noted from the above-quoted provisions that in simple loan (mutuum), as
contrasted to commodatum the borrower acquires ownership of the money, goods or
personal property borrowed Being the owner, the borrower can dispose of the thing
borrowed (Article 248, Civil Code) and his act will not be considered misappropriation
thereof' (Yam vs. Malik, 94 SCRA 30, 34 [1979]; Emphasis supplied).

But even granting that the failure of the bank to pay the time and savings deposits of
private respondent David would constitute a violation of paragraph 1(b) of Article 315 of
the Revised Penal Code, nevertheless any incipient criminal liability was deemed
avoided, because when the aforesaid bank was placed under receivership by the
Central Bank, petitioners Guingona and Martin assumed the obligation of the bank to
private respondent David, thereby resulting in the novation of the original contractual
obligation arising from deposit into a contract of loan and converting the original trust
relation between the bank and private respondent David into an ordinary debtor-creditor
relation between the petitioners and private respondent. Consequently, the failure of the
bank or petitioners Guingona and Martin to pay the deposits of private respondent
would not constitute a breach of trust but would merely be a failure to pay the obligation
as a debtor.

Moreover, while it is true that novation does not extinguish criminal liability, it may
however, prevent the rise of criminal liability as long as it occurs prior to the filing of the
criminal information in court. Thus, in Gonzales vs. Serrano ( 25 SCRA 64, 69 [1968])
We held that:t.hqw

As pointed out in People vs. Nery, novation prior to the filing of the criminal information
as in the case at bar may convert the relation between the parties into an ordinary
creditor-debtor relation, and place the complainant in estoppel to insist on the original
transaction or "cast doubt on the true nature" thereof.

Again, in the latest case of Ong vs. Court of Appeals (L-58476, 124 SCRA 578, 580-581
[1983] ), this Court reiterated the ruling in People vs. Nery ( 10 SCRA 244 [1964] ),
declaring that:t.hqw

The novation theory may perhaps apply prior to the filling of the criminal information in
court by the state prosecutors because up to that time the original trust relation may be
converted by the parties into an ordinary creditor-debtor situation, thereby placing the
complainant in estoppel to insist on the original trust. But after the justice authorities have
taken cognizance of the crime and instituted action in court, the offended party may no
longer divest the prosecution of its power to exact the criminal liability, as distinguished
from the civil. The crime being an offense against the state, only the latter can renounce it
(People vs. Gervacio, 54 Off. Gaz. 2898; People vs. Velasco, 42 Phil. 76; U.S. vs.
Montanes, 8 Phil. 620).

It may be observed in this regard that novation is not one of the means recognized by the
Penal Code whereby criminal liability can be extinguished; hence, the role of novation
may only be to either prevent the rise of criminal habihty or to cast doubt on the true
nature of the original basic transaction, whether or not it was such that its breach would
not give rise to penal responsibility, as when money loaned is made to appear as a
deposit, or other similar disguise is resorted to (cf. Abeto vs. People, 90 Phil. 581; U.S.
vs. Villareal, 27 Phil. 481).

In the case at bar, there is no dispute that petitioners Guingona and Martin executed a
promissory note on June 17, 1981 assuming the obligation of the bank to private
respondent David; while the criminal complaint for estafa was filed on December 23,
1981 with the Office of the City Fiscal. Hence, it is clear that novation occurred long
before the filing of the criminal complaint with the Office of the City Fiscal.

Consequently, as aforestated, any incipient criminal liability would be avoided but there
will still be a civil liability on the part of petitioners Guingona and Martin to pay the
assumed obligation.
Petitioners herein were likewise charged with violation of Section 3 of Central Bank
Circular No. 364 and other related regulations regarding foreign exchange transactions
by accepting foreign currency deposit in the amount of US$75,000.00 without authority
from the Central Bank. They contend however, that the US dollars intended by
respondent David for deposit were all converted into Philippine currency before
acceptance and deposit into Nation Savings and Loan Association.

Petitioners' contention is worthy of behelf for the following reasons:

1. It appears from the records that when respondent David was about to make a deposit
of bank draft issued in his name in the amount of US$50,000.00 with the Nation Savings
and Loan Association, the same had to be cleared first and converted into Philippine
currency. Accordingly, the bank draft was endorsed by respondent David to petitioner
Guingona, who in turn deposited it to his dollar account with the Security Bank and Trust
Company. Petitioner Guingona merely accommodated the request of the Nation
Savings and loan Association in order to clear the bank draft through his dollar account
because the bank did not have a dollar account. Immediately after the bank draft was
cleared, petitioner Guingona authorized Nation Savings and Loan Association to
withdraw the same in order to be utilized by the bank for its operations.

2. It is safe to assume that the U.S. dollars were converted first into Philippine pesos
before they were accepted and deposited in Nation Savings and Loan Association,
because the bank is presumed to have followed the ordinary course of the business
which is to accept deposits in Philippine currency only, and that the transaction was
regular and fair, in the absence of a clear and convincing evidence to the contrary (see
paragraphs p and q, Sec. 5, Rule 131, Rules of Court).

3. Respondent David has not denied the aforesaid contention of herein petitioners
despite the fact that it was raised. in petitioners' reply filed on May 7, 1982 to private
respondent's comment and in the July 27, 1982 reply to public respondents' comment
and reiterated in petitioners' memorandum filed on October 30, 1982, thereby adding
more support to the conclusion that the US$75,000.00 were really converted into
Philippine currency before they were accepted and deposited into Nation Savings and
Loan Association. Considering that this might adversely affect his case, respondent
David should have promptly denied petitioners' allegation.

In conclusion, considering that the liability of the petitioners is purely civil in nature and
that there is no clear showing that they engaged in foreign exchange transactions, We
hold that the public respondents acted without jurisdiction when they investigated the
charges against the petitioners. Consequently, public respondents should be restrained
from further proceeding with the criminal case for to allow the case to continue, even if
the petitioners could have appealed to the Ministry of Justice, would work great injustice
to petitioners and would render meaningless the proper administration of justice.
While as a rule, the prosecution in a criminal offense cannot be the subject of prohibition
and injunction, this court has recognized the resort to the extraordinary writs of
prohibition and injunction in extreme cases, thus:t.hqw

On the issue of whether a writ of injunction can restrain the proceedings in Criminal Case
No. 3140, the general rule is that "ordinarily, criminal prosecution may not be blocked by
court prohibition or injunction." Exceptions, however, are allowed in the following
instances:t.hqw

"1. for the orderly administration of justice;

"2. to prevent the use of the strong arm of the law in an oppressive and
vindictive manner;

"3. to avoid multiplicity of actions;

"4. to afford adequate protection to constitutional rights;

"5. in proper cases, because the statute relied upon is unconstitutional or


was held invalid" ( Primicias vs. Municipality of Urdaneta, Pangasinan,
93 SCRA 462, 469-470 [1979]; citing Ramos vs. Torres, 25 SCRA 557
[1968]; and Hernandez vs. Albano, 19 SCRA 95, 96 [1967]).

Likewise, in Lopez vs. The City Judge, et al. ( 18 SCRA 616, 621-622 [1966]), We held
that:t.hqw

The writs of certiorari and prohibition, as extraordinary legal remedies, are in the ultimate
analysis, intended to annul void proceedings; to prevent the unlawful and oppressive
exercise of legal authority and to provide for a fair and orderly administration of justice.
Thus, in Yu Kong Eng vs. Trinidad, 47 Phil. 385, We took cognizance of a petition for
certiorari and prohibition although the accused in the case could have appealed in due
time from the order complained of, our action in the premises being based on the public
welfare policy the advancement of public policy. In Dimayuga vs. Fajardo, 43 Phil. 304,
We also admitted a petition to restrain the prosecution of certain chiropractors although, if
convicted, they could have appealed. We gave due course to their petition for the orderly
administration of justice and to avoid possible oppression by the strong arm of the law.
And in Arevalo vs. Nepomuceno, 63 Phil. 627, the petition for certiorari challenging the
trial court's action admitting an amended information was sustained despite the
availability of appeal at the proper time.

WHEREFORE, THE PETITION IS HEREBY GRANTED; THE TEMPORARY


RESTRAINING ORDER PREVIOUSLY ISSUED IS MADE PERMANENT. COSTS
AGAINST THE PRIVATE RESPONDENT.

SO ORDERED.1wph1.t

THIRD DIVISION
PEOPLE OF THE PHILIPPINES, G.R. No. 173654-765

Petitioners,
Present:

YNARES-SANTIAGO, J.,

Chairperson,

AUSTRIA-MARTINEZ,

- versus - CHICO-NAZARIO,

REYES, and

DE CASTRO,* JJ.

Promulgated:

TERESITA PUIG and ROMEO PORRAS,

Respondent.

August 28, 2008

x---------------------------- -----------------------x

DECISION

*
CHICO-NAZARIO, J.:

This is a Petition for Review under Rule 45 of the Revised Rules of Court
with petitioner People of the Philippines, represented by the Office of the Solicitor
General, praying for the reversal of the Orders dated 30 January 2006 and 9 June
2006 of the Regional Trial Court (RTC) of the 6 th Judicial Region, Branch 68,
Dumangas, Iloilo, dismissing the 112 cases of Qualified Theft filed against
respondents Teresita Puig and Romeo Porras, and denying petitioners Motion for
Reconsideration, in Criminal Cases No. 05-3054 to 05-3165.

The following are the factual antecedents:

On 7 November 2005, the Iloilo Provincial Prosecutors Office filed before


Branch 68 of the RTC in Dumangas, Iloilo, 112 cases of Qualified Theft against
respondents Teresita Puig (Puig) and Romeo Porras (Porras) who were the Cashier
and Bookkeeper, respectively, of private complainant Rural Bank of Pototan, Inc.
The cases were docketed as Criminal Cases No. 05-3054 to 05-3165.
The allegations in the Informations86[1] filed before the RTC were uniform
and pro-forma, except for the amounts, date and time of commission, to wit:

INFORMATION

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


Pototan, Province of Iloilo, Philippines, and within the jurisdiction of this
Honorable Court, above-named [respondents], conspiring, confederating, and
helping one another, with grave abuse of confidence, being the Cashier and
Bookkeeper of the Rural Bank of Pototan, Inc., Pototan, Iloilo, without the
knowledge and/or consent of the management of the Bank and with intent of gain,
did then and there willfully, unlawfully and feloniously take, steal and carry away
the sum of FIFTEEN THOUSAND PESOS (P15,000.00), Philippine Currency, to
the damage and prejudice of the said bank in the aforesaid amount.

After perusing the Informations in these cases, the trial court did not find the
existence of probable cause that would have necessitated the issuance of a warrant
of arrest based on the following grounds:

(1) the element of taking without the consent of the owners was missing on the
ground that it is the depositors-clients, and not the Bank, which filed the
complaint in these cases, who are the owners of the money allegedly taken by
respondents and hence, are the real parties-in-interest; and

(2) the Informations are bereft of the phrase alleging dependence, guardianship
or vigilance between the respondents and the offended party that would
have created a high degree of confidence between them which the
respondents could have abused.

86
It added that allowing the 112 cases for Qualified Theft filed against the
respondents to push through would be violative of the right of the respondents
under Section 14(2), Article III of the 1987 Constitution which states that in all
criminal prosecutions, the accused shall enjoy the right to be informed of the
nature and cause of the accusation against him. Following Section 6, Rule 112 of
the Revised Rules of Criminal Procedure, the RTC dismissed the cases on 30
January 2006 and refused to issue a warrant of arrest against Puig and Porras.

A Motion for Reconsideration87[2] was filed on 17 April 2006, by the


petitioner.

On 9 June 2006, an Order88[3] denying petitioners Motion for


Reconsideration was issued by the RTC, finding as follows:

Accordingly, the prosecutions Motion for Reconsideration should be, as it


hereby, DENIED. The Order dated January 30, 2006 STANDS in all respects.

Petitioner went directly to this Court via Petition for Review on Certiorari
under Rule 45, raising the sole legal issue of:

87

88
WHETHER OR NOT THE 112 INFORMATIONS FOR QUALIFIED THEFT
SUFFICIENTLY ALLEGE THE ELEMENT OF TAKING WITHOUT THE
CONSENT OF THE OWNER, AND THE QUALIFYING CIRCUMSTANCE OF
GRAVE ABUSE OF CONFIDENCE.

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

Petitioner explains that under Article 1980 of the New Civil Code, fixed,
savings, and current deposits of money in banks and similar institutions shall be
governed by the provisions concerning simple loans. Corollary thereto, Article
1953 of the same Code provides that a person who receives a loan of money or
any other fungible thing acquires the ownership thereof, and is bound to pay to the
creditor an equal amount of the same kind and quality. Thus, it posits that the
depositors who place their money with the bank are considered creditors of the
bank. The bank acquires ownership of the money deposited by its clients, making
the money taken by respondents as belonging to the bank.

Petitioner also insists that the Informations sufficiently allege all the
elements of the crime of qualified theft, citing that a perusal of the Informations
will show that they specifically allege that the respondents were the Cashier and
Bookkeeper of the Rural Bank of Pototan, Inc., respectively, and that they took
various amounts of money with grave abuse of confidence, and without the
knowledge and consent of the bank, to the damage and prejudice of the bank.

Parenthetically, respondents raise procedural issues. They challenge the


petition on the ground that a Petition for Review on Certiorari via Rule 45 is the
wrong mode of appeal because a finding of probable cause for the issuance of a
warrant of arrest presupposes evaluation of facts and circumstances, which is not
proper under said Rule.

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

We find merit in the petition.

The dismissal by the RTC of the criminal cases was allegedly due to
insufficiency of the Informations and, therefore, because of this defect, there is no
basis for the existence of probable cause which will justify the issuance of the
warrant of arrest. Petitioner assails the dismissal contending that the Informations
for Qualified Theft sufficiently state facts which constitute (a) the qualifying
circumstance of grave abuse of confidence; and (b) the element of taking, with
intent to gain and without the consent of the owner, which is the Bank.
In determining the existence of probable cause to issue a warrant of arrest,
the RTC judge found the allegations in the Information inadequate. He ruled that
the Information failed to state facts constituting the qualifying circumstance of
grave abuse of confidence and the element of taking without the consent of the
owner, since the owner of the money is not the Bank, but the depositors therein.
He also cites People v. Koc Song,89[4] in which this Court held:

There must be allegation in the information and proof of a relation, by reason of


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

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

Qualified Theft, as defined and punished under Article 310 of the Revised
Penal Code, is committed as follows, viz:

89
ART. 310. Qualified Theft. The crime of theft shall be punished by the
penalties next higher by two degrees than those respectively specified in the next
preceding article, if committed by a domestic servant, or with grave abuse of
confidence, or if the property stolen is motor vehicle, mail matter or large cattle
or consists of coconuts taken from the premises of a plantation, fish taken from a
fishpond or fishery or if property is taken on the occasion of fire, earthquake,
typhoon, volcanic eruption, or any other calamity, vehicular accident or civil
disturbance. (Emphasis supplied.)

Theft, as defined in Article 308 of the Revised Penal Code, requires the
physical taking of anothers property without violence or intimidation against
persons or force upon things. The elements of the crime under this Article are:

1. Intent to gain;

2. Unlawful taking;

3. Personal property belonging to another;

4. Absence of violence or intimidation against persons or force upon things.

To fall under the crime of Qualified Theft, the following elements must
concur:

1. Taking of personal property;

2. That the said property belongs to another;

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

4. That it be done without the owners consent;


5. That it be accomplished without the use of violence or intimidation against
persons, nor of force upon things;

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

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


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

On the manner of how the Information should be worded, Section 9, Rule


110 of the Rules of Court, is enlightening:

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


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

It is evident that the Information need not use the exact language of the
statute in alleging the acts or omissions complained of as constituting the offense.
The test is whether it enables a person of common understanding to know the
charge against him, and the court to render judgment properly.90[5]

The portion of the Information relevant to this discussion reads:

90
[A]bove-named [respondents], conspiring, confederating, and helping one
another, with grave abuse of confidence, being the Cashier and Bookkeeper of
the Rural Bank of Pototan, Inc., Pototan, Iloilo, without the knowledge and/or
consent of the management of the Bank x x x.

It is beyond doubt that tellers, Cashiers, Bookkeepers and other employees


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

Article 1953. A person who receives a loan of money or any other fungible
thing acquires the ownership thereof, and is bound to pay to the creditor an equal
amount of the same kind and quality.

Article 1980. Fixed, savings, and current deposits of money in banks and
similar institutions shall be governed by the provisions concerning loan.

In a long line of cases involving Qualified Theft, this Court has firmly
established the nature of possession by the Bank of the money deposits therein, and
the duties being performed by its employees who have custody of the money or
have come into possession of it. The Court has consistently considered the
allegations in the Information that such employees acted with grave abuse of
confidence, to the damage and prejudice of the Bank, without particularly referring
to it as owner of the money deposits, as sufficient to make out a case of Qualified
Theft. For a graphic illustration, we cite Roque v. People,91[6] where the accused
teller was convicted for Qualified Theft based on this Information:

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


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

In convicting the therein appellant, the Court held that:

[S]ince the teller occupies a position of confidence, and the bank places money in
the tellers possession due to the confidence reposed on the teller, the felony of
qualified theft would be committed.92[7]

Also in People v. Sison,93[8] the Branch Operations Officer was convicted of


the crime of Qualified Theft based on the Information as herein cited:

91

92

93
That in or about and during the period compressed between January 24,
1992 and February 13, 1992, both dates inclusive, in the City of Manila,
Philippines, the said accused did then and there wilfully, unlawfully and
feloniously, with intent of gain and without the knowledge and consent of the
owner thereof, take, steal and carry away the following, to wit:

Cash money amounting to P6,000,000.00 in different denominations


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

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

The judgment of conviction elaborated thus:

The crime perpetuated by appellant against his employer, the Philippine


Commercial and Industrial Bank (PCIB), is Qualified Theft. Appellant could not
have committed the crime had he not been holding the position of Luneta Branch
Operation Officer which gave him not only sole access to the bank vault xxx. The
management of the PCIB reposed its trust and confidence in the appellant as its
Luneta Branch Operation Officer, and it was this trust and confidence which he
exploited to enrich himself to the damage and prejudice of PCIB x x x.94[9]

From another end, People v. Locson,95[10] in addition to People v. Sison,


described the nature of possession by the Bank. The money in this case was in the
possession of the defendant as receiving teller of the bank, and the possession of
the defendant was the possession of the Bank. The Court held therein that when
the defendant, with grave abuse of confidence, removed the money and

94

95
appropriated it to his own use without the consent of the Bank, there was taking as
contemplated in the crime of Qualified Theft.96[11]

Conspicuously, in all of the foregoing cases, where the Informations merely


alleged the positions of the respondents; that the crime was committed with grave
abuse of confidence, with intent to gain and without the knowledge and consent of
the Bank, without necessarily stating the phrase being assiduously insisted upon by
respondents, of a relation by reason of dependence, guardianship or vigilance,
between the respondents and the offended party that has created a high degree
of confidence between them, which respondents abused,97[12] and without
employing the word owner in lieu of the Bank were considered to have
satisfied the test of sufficiency of allegations.

As regards the respondents who were employed as Cashier and Bookkeeper


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

96

97
In summary, the Bank acquires ownership of the money deposited by its
clients; and the employees of the Bank, who are entrusted with the possession of
money of the Bank due to the confidence reposed in them, occupy positions of
confidence. The Informations, therefore, sufficiently allege all the essential
elements constituting the crime of Qualified Theft.

On the theory of the defense that the DOJ is the principal party who may file
the instant petition, the ruling in Mobilia Products, Inc. v. Hajime Umezawa98[13]
is instructive. The Court thus enunciated:

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

On the alleged wrong mode of appeal by petitioner, suffice it to state that the
rule is well-settled that in appeals by certiorari under Rule 45 of the Rules of
Court, only errors of law may be raised,99[14] and herein petitioner certainly raised
a question of law.

98

99
As an aside, even if we go beyond the allegations of the Informations in
these cases, a closer look at the records of the preliminary investigation conducted
will show that, indeed, probable cause exists for the indictment of herein
respondents. Pursuant to Section 6, Rule 112 of the Rules of Court, the judge shall
issue a warrant of arrest only upon a finding of probable cause after personally
evaluating the resolution of the prosecutor and its supporting evidence. Soliven v.
Makasiar,100[15] as reiterated in Allado v. Driokno,101[16] explained that probable
cause for the issuance of a warrant of arrest is the existence of such facts and
circumstances that would lead a reasonably discreet and prudent person to believe
that an offense has been committed by the person sought to be arrested. 102[17] The
records reasonably indicate that the respondents may have, indeed, committed the
offense charged.

Before closing, let it be stated that while it is truly imperative upon the fiscal
or the judge, as the case may be, to relieve the respondents from the pain of going
through a trial once it is ascertained that no probable cause exists to form a
sufficient belief as to the guilt of the respondents, conversely, it is also equally
imperative upon the judge to proceed with the case upon a showing that there is a
prima facie case against the respondents.

100

101

102
WHEREFORE, premises considered, the Petition for Review on Certiorari
is hereby GRANTED. The Orders dated 30 January 2006 and 9 June 2006 of the
RTC dismissing Criminal Cases No. 05-3054 to 05-3165 are REVERSED and
SET ASIDE. Let the corresponding Warrants of Arrest issue against herein
respondents TERESITA PUIG and ROMEO PORRAS. The RTC Judge of Branch
68, in Dumangas, Iloilo, is directed to proceed with the trial of Criminal Cases No.
05-3054 to 05-3165, inclusive, with reasonable dispatch. No pronouncement as to
costs.

SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila

EN BANC

G.R. No. L-7593 March 27, 1913

THE UNITED STATES, plaintiff-appellee,


vs.
JOSE M. IGPUARA, defendant-appellant.

W. A. Kincaid, Thos. L. Hartigan, and Jose Robles Lahesa for appellant.


Office of the Solicitor-General Harvey for appellee.

ARELLANO, C.J.:

The defendant therein is charged with the crime of estafa, for having swindled Juana Montilla
and Eugenio Veraguth out of P2,498 Philippine currency, which he had take on deposit from the
former to be at the latter's disposal. The document setting forth the obligation reads:
We hold at the disposal of Eugenio Veraguth the sum of two thousand four hundred and ninety-
eight pesos (P2,498), the balance from Juana Montilla's sugar. Iloilo, June 26, 1911, Jose
Igpuara, for Ramirez and Co.

The Court of First Instance of Iloilo sentenced the defendant to two years of presidio
correccional, to pay Juana Montilla P2,498 Philippine currency, and in case of insolvency to
subsidiary imprisonment at P2.50 per day, not to exceed one-third of the principal penalty, and
the costs.

The defendant appealed, alleging as errors: (1) Holding that the document executed by him was a
certificate of deposit; (2) holding the existence of a deposit, without precedent transfer or
delivery of the P2,498; and (3) classifying the facts in the case as the crime of estafa.

A deposit is constituted from the time a person receives a thing belonging to another with
the obligation of keeping and returning it. (Art. 1758, Civil Code.)

That the defendant received P2,498 is a fact proven. The defendant drew up a document
declaring that they remained in his possession, which he could not have said had he not received
them. They remained in his possession, surely in no other sense than to take care of them, for
they remained has no other purpose. They remained in the defendant's possession at the disposal
of Veraguth; but on August 23 of the same year Veraguth demanded for him through a notarial
instrument restitution of them, and to date he has not restored them.

The appellant says: "Juana Montilla's agent voluntarily accepted the sum of P2,498 in an
instrument payable on demand, and as no attempt was made to cash it until August 23, 1911, he
could indorse and negotiate it like any other commercial instrument. There is no doubt that if
Veraguth accepted the receipt for P2,498 it was because at that time he agreed with the defendant
to consider the operation of sale on commission closed, leaving the collection of said sum until
later, which sum remained as a loan payable upon presentation of the receipt." (Brief, 3 and 4.)

Then, after averring the true facts: (1) that a sales commission was precedent; (2) that this
commission was settled with a balance of P2,498 in favor of the principal, Juana Montilla; and
(3) that this balance remained in the possession of the defendant, who drew up an instrument
payable on demand, he has drawn two conclusions, both erroneous: One, that the instrument
drawn up in the form of a deposit certificate could be indorsed or negotiated like any other
commercial instrument; and the other, that the sum of P2,498 remained in defendant's possession
as a loan.

It is erroneous to assert that the certificate of deposit in question is negotiable like any other
commercial instrument: First, because every commercial instrument is not negotiable; and
second, because only instruments payable to order are negotiable. Hence, this instrument not
being to order but to bearer, it is not negotiable.

It is also erroneous to assert that sum of money set forth in said certificate is, according to it, in
the defendant's possession as a loan. In a loan the lender transmits to the borrower the use of the
thing lent, while in a deposit the use of the thing is not transmitted, but merely possession for its
custody or safe-keeping.

In order that the depositary may use or dispose oft he things deposited, the depositor's consent is
required, and then:

The rights and obligations of the depositary and of the depositor shall cease, and the rules
and provisions applicable to commercial loans, commission, or contract which took the
place of the deposit shall be observed. (Art. 309, Code of Commerce.)

The defendant has shown no authorization whatsoever or the consent of the depositary for using
or disposing of the P2,498, which the certificate acknowledges, or any contract entered into with
the depositor to convert the deposit into a loan, commission, or other contract.

That demand was not made for restitution of the sum deposited, which could have been claimed
on the same or the next day after the certificate was signed, does not operate against the
depositor, or signify anything except the intention not to press it. Failure to claim at once or
delay for sometime in demanding restitution of the things deposited, which was immediately
due, does not imply such permission to use the thing deposited as would convert the deposit into
a loan.

Article 408 of the Code of Commerce of 1829, previous to the one now in force, provided:

The depositary of an amount of money cannot use the amount, and if he makes use of it,
he shall be responsible for all damages that may accrue and shall respond to the depositor
for the legal interest on the amount.

Whereupon the commentators say:

In this case the deposit becomes in fact a loan, as a just punishment imposed upon him
who abuses the sacred nature of a deposit and as a means of preventing the desire of gain
from leading him into speculations that may be disastrous to the depositor, who is much
better secured while the deposit exists when he only has a personal action for recovery.

According to article 548, No. 5, of the Penal Code, those who to the prejudice of another
appropriate or abstract for their own use money, goods, or other personal property which
they may have received as a deposit, on commission, or for administration, or for any
other purpose which produces the obligation of delivering it or returning it, and deny
having received it, shall suffer the penalty of the preceding article," which punishes such
act as the crime of estafa. The corresponding article of the Penal Code of the Philippines
in 535, No. 5.

In a decision of an appeal, September 28, 1895, the principle was laid down that: "Since he
commits the crime of estafa under article 548 of the Penal Code of Spain who to another's
detriment appropriates to himself or abstracts money or goods received on commission for
delivery, the court rightly applied this article to the appellant, who, to the manifest detriment of
the owner or owners of the securities, since he has not restored them, willfully and wrongfully
disposed of them by appropriating them to himself or at least diverting them from the purpose to
which he was charged to devote them."

It is unquestionable that in no sense did the P2,498 which he willfully and wrongfully disposed
of to the detriments of his principal, Juana Montilla, and of the depositor, Eugenio Veraguth,
belong to the defendant.

Likewise erroneous is the construction apparently at tempted to be given to two decisions of this
Supreme Court (U. S. vs. Dominguez, 2 Phil. Rep., 580, and U. S. vs. Morales and Morco, 15
Phil. Rep., 236) as implying that what constitutes estafa is not the disposal of money deposited,
but denial of having received same. In the first of said cases there was no evidence that the
defendant had appropriated the grain deposited in his possession.

On the contrary, it is entirely probable that, after the departure of the defendant from
Libmanan on September 20, 1898, two days after the uprising of the civil guard in Nueva
Caceres, the rice was seized by the revolutionalists and appropriated to their own uses.

In this connection it was held that failure to return the thing deposited was not sufficient, but that
it was necessary to prove that the depositary had appropriated it to himself or diverted the deposit
to his own or another's benefit. He was accused or refusing to restore, and it was held that the
code does not penalize refusal to restore but denial of having received. So much for the crime of
omission; now with reference to the crime of commission, it was not held in that decision that
appropriation or diversion of the thing deposited would not constitute the crime of estafa.

In the second of said decisions, the accused "kept none of the proceeds of the sales. Those, such
as they were, he turned over to the owner;" and there being no proof of the appropriation, the
agent could not be found guilty of the crime of estafa.

Being in accord and the merits of the case, the judgment appealed from is affirmed, with costs.

Torres, Johnson and Trent, JJ., concur.

Republic of the Philippines


SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 90027 March 3, 1993

CA AGRO-INDUSTRIAL DEVELOPMENT CORP., petitioner,


vs.
THE HONORABLE COURT OF APPEALS and SECURITY BANK AND TRUST
COMPANY, respondents.

Dolorfino & Dominguez Law Offices for petitioner.

Danilo B. Banares for private respondent.

DAVIDE, JR., J.:

Is the contractual relation between a commercial bank and another party in a contract of
rent of a safety deposit box with respect to its contents placed by the latter one of bailor
and bailee or one of lessor and lessee?

This is the crux of the present controversy.

On 3 July 1979, petitioner (through its President, Sergio Aguirre) and the spouses
Ramon and Paula Pugao entered into an agreement whereby the former purchased
from the latter two (2) parcels of land for a consideration of P350,625.00. Of this
amount, P75,725.00 was paid as downpayment while the balance was covered by three
(3) postdated checks. Among the terms and conditions of the agreement embodied in a
Memorandum of True and Actual Agreement of Sale of Land were that the titles to the
lots shall be transferred to the petitioner upon full payment of the purchase price and
that the owner's copies of the certificates of titles thereto, Transfer Certificates of Title
(TCT) Nos. 284655 and 292434, shall be deposited in a safety deposit box of any bank.
The same could be withdrawn only upon the joint signatures of a representative of the
petitioner and the Pugaos upon full payment of the purchase price. Petitioner, through
Sergio Aguirre, and the Pugaos then rented Safety Deposit Box No. 1448 of private
respondent Security Bank and Trust Company, a domestic banking corporation
hereinafter referred to as the respondent Bank. For this purpose, both signed a contract
of lease (Exhibit "2") which contains, inter alia, the following conditions:

13. The bank is not a depositary of the contents of the safe and it has neither the
possession nor control of the same.

14. The bank has no interest whatsoever in said contents, except herein expressly
provided, and it assumes absolutely no liability in connection therewith. 1

After the execution of the contract, two (2) renter's keys were given to the renters one
to Aguirre (for the petitioner) and the other to the Pugaos. A guard key remained in the
possession of the respondent Bank. The safety deposit box has two (2) keyholes, one
for the guard key and the other for the renter's key, and can be opened only with the use
of both keys. Petitioner claims that the certificates of title were placed inside the said
box.
Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner the two (2)
lots at a price of P225.00 per square meter which, as petitioner alleged in its complaint,
translates to a profit of P100.00 per square meter or a total of P280,500.00 for the entire
property. Mrs. Ramos demanded the execution of a deed of sale which necessarily
entailed the production of the certificates of title. In view thereof, Aguirre, accompanied
by the Pugaos, then proceeded to the respondent Bank on 4 October 1979 to open the
safety deposit box and get the certificates of title. However, when opened in the
presence of the Bank's representative, the box yielded no such certificates. Because of
the delay in the reconstitution of the title, Mrs. Ramos withdrew her earlier offer to
purchase the lots; as a consequence thereof, the petitioner allegedly failed to realize the
expected profit of P280,500.00. Hence, the latter filed on 1 September 1980 a complaint
2
for damages against the respondent Bank with the Court of First Instance (now
Regional Trial Court) of Pasig, Metro Manila which docketed the same as Civil Case No.
38382.

In its Answer with Counterclaim, 3 respondent Bank alleged that the petitioner has no
cause of action because of paragraphs 13 and 14 of the contract of lease (Exhibit "2");
corollarily, loss of any of the items or articles contained in the box could not give rise to
an action against it. It then interposed a counterclaim for exemplary damages as well as
attorney's fees in the amount of P20,000.00. Petitioner subsequently filed an answer to
the counterclaim. 4

In due course, the trial court, now designated as Branch 161 of the Regional Trial Court
(RTC) of Pasig, Metro Manila, rendered a decision 5 adverse to the petitioner on 8
December 1986, the dispositive portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered dismissing plaintiff's


complaint.

On defendant's counterclaim, judgment is hereby rendered ordering plaintiff to pay


defendant the amount of FIVE THOUSAND (P5,000.00) PESOS as attorney's fees.

With costs against plaintiff. 6

The unfavorable verdict is based on the trial court's conclusion that under paragraphs
13 and 14 of the contract of lease, the Bank has no liability for the loss of the certificates
of title. The court declared that the said provisions are binding on the parties.

Its motion for reconsideration 7 having been denied, petitioner appealed from the
adverse decision to the respondent Court of Appeals which docketed the appeal as CA-
G.R. CV No. 15150. Petitioner urged the respondent Court to reverse the challenged
decision because the trial court erred in (a) absolving the respondent Bank from liability
from the loss, (b) not declaring as null and void, for being contrary to law, public order
and public policy, the provisions in the contract for lease of the safety deposit box
absolving the Bank from any liability for loss, (c) not concluding that in this jurisdiction,
as well as under American jurisprudence, the liability of the Bank is settled and (d)
awarding attorney's fees to the Bank and denying the petitioner's prayer for nominal and
exemplary damages and attorney's fees. 8

In its Decision promulgated on 4 July 1989, 9 respondent Court affirmed the appealed
decision principally on the theory that the contract (Exhibit "2") executed by the
petitioner and respondent Bank is in the nature of a contract of lease by virtue of which
the petitioner and its co-renter were given control over the safety deposit box and its
contents while the Bank retained no right to open the said box because it had neither
the possession nor control over it and its contents. As such, the contract is governed by
Article 1643 of the Civil Code 10 which provides:

Art. 1643. In the lease of things, one of the parties binds himself to give to another the
enjoyment or use of a thing for a price certain, and for a period which may be definite or
indefinite. However, no lease for more than ninety-nine years shall be valid.

It invoked Tolentino vs. Gonzales 11 which held that the owner of the property
loses his control over the property leased during the period of the contract and
Article 1975 of the Civil Code which provides:

Art. 1975. The depositary holding certificates, bonds, securities or instruments which earn
interest shall be bound to collect the latter when it becomes due, and to take such steps
as may be necessary in order that the securities may preserve their value and the rights
corresponding to them according to law.

The above provision shall not apply to contracts for the rent of safety deposit boxes.

and then concluded that "[c]learly, the defendant-appellee is not under any duty
to maintain the contents of the box. The stipulation absolving the defendant-
appellee from liability is in accordance with the nature of the contract of lease
and cannot be regarded as contrary to law, public order and public policy." 12 The
appellate court was quick to add, however, that under the contract of lease of the
safety deposit box, respondent Bank is not completely free from liability as it may
still be made answerable in case unauthorized persons enter into the vault area
or when the rented box is forced open. Thus, as expressly provided for in
stipulation number 8 of the contract in question:

8. The Bank shall use due diligence that no unauthorized person shall be admitted to any
rented safe and beyond this, the Bank will not be responsible for the contents of any safe
rented from it. 13

Its motion for reconsideration 14 having been denied in the respondent Court's
Resolution of 28 August 1989, 15 petitioner took this recourse under Rule 45 of the Rules
of Court and urges Us to review and set aside the respondent Court's ruling. Petitioner
avers that both the respondent Court and the trial court (a) did not properly and legally
apply the correct law in this case, (b) acted with grave abuse of discretion or in excess
of jurisdiction amounting to lack thereof and (c) set a precedent that is contrary to, or is
a departure from precedents adhered to and affirmed by decisions of this Court and
precepts in American jurisprudence adopted in the Philippines. It reiterates the
arguments it had raised in its motion to reconsider the trial court's decision, the brief
submitted to the respondent Court and the motion to reconsider the latter's decision. In
a nutshell, petitioner maintains that regardless of nomenclature, the contract for the rent
of the safety deposit box (Exhibit "2") is actually a contract of deposit governed by Title
XII, Book IV of the Civil Code of the
Philippines. 16 Accordingly, it is claimed that the respondent Bank is liable for the loss of
the certificates of title pursuant to Article 1972 of the said Code which provides:

Art. 1972. The depositary is obliged to keep the thing safely and to return it, when
required, to the depositor, or to his heirs and successors, or to the person who may have
been designated in the contract. His responsibility, with regard to the safekeeping and the
loss of the thing, shall be governed by the provisions of Title I of this Book.

If the deposit is gratuitous, this fact shall be taken into account in determining the degree
of care that the depositary must observe.

Petitioner then quotes a passage from American Jurisprudence 17 which is


supposed to expound on the prevailing rule in the United States, to wit:

The prevailing rule appears to be that where a safe-deposit company leases a safe-
deposit box or safe and the lessee takes possession of the box or safe and places
therein his securities or other valuables, the relation of bailee and bail or is created
between the parties to the transaction as to such securities or other valuables; the fact
that the
safe-deposit company does not know, and that it is not expected that it shall know, the
character or description of the property which is deposited in such safe-deposit box or
safe does not change that relation. That access to the contents of the safe-deposit box
can be had only by the use of a key retained by the lessee ( whether it is the sole key or
one to be used in connection with one retained by the lessor) does not operate to alter
the foregoing rule. The argument that there is not, in such a case, a delivery of exclusive
possession and control to the deposit company, and that therefore the situation is entirely
different from that of ordinary bailment, has been generally rejected by the courts, usually
on the ground that as possession must be either in the depositor or in the company, it
should reasonably be considered as in the latter rather than in the former, since the
company is, by the nature of the contract, given absolute control of access to the
property, and the depositor cannot gain access thereto without the consent and active
participation of the company. . . . (citations omitted).

and a segment from Words and Phrases 18 which states that a contract for the
rental of a bank safety deposit box in consideration of a fixed amount at stated
periods is a bailment for hire.

Petitioner further argues that conditions 13 and 14 of the questioned contract are
contrary to law and public policy and should be declared null and void. In support
thereof, it cites Article 1306 of the Civil Code which provides that parties to a contract
may establish such stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good customs, public order or
public policy.
After the respondent Bank filed its comment, this Court gave due course to the petition
and required the parties to simultaneously submit their respective Memoranda.

The petition is partly meritorious.

We agree with the petitioner's contention that the contract for the rent of the safety
deposit box is not an ordinary contract of lease as defined in Article 1643 of the Civil
Code. However, We do not fully subscribe to its view that the same is a contract of
deposit that is to be strictly governed by the provisions in the Civil Code on deposit; 19
the contract in the case at bar is a special kind of deposit. It cannot be characterized as
an ordinary contract of lease under Article 1643 because the full and absolute
possession and control of the safety deposit box was not given to the joint renters the
petitioner and the Pugaos. The guard key of the box remained with the respondent
Bank; without this key, neither of the renters could open the box. On the other hand, the
respondent Bank could not likewise open the box without the renter's key. In this case,
the said key had a duplicate which was made so that both renters could have access to
the box.

Hence, the authorities cited by the respondent Court 20 on this point do not apply.
Neither could Article 1975, also relied upon by the respondent Court, be invoked as an
argument against the deposit theory. Obviously, the first paragraph of such provision
cannot apply to a depositary of certificates, bonds, securities or instruments which earn
interest if such documents are kept in a rented safety deposit box. It is clear that the
depositary cannot open the box without the renter being present.

We observe, however, that the deposit theory itself does not altogether find unanimous
support even in American jurisprudence. We agree with the petitioner that under the
latter, the prevailing rule is that the relation between a bank renting out safe-deposit
boxes and its customer with respect to the contents of the box is that of a bail or and
bailee, the bailment being for hire and mutual benefit. 21 This is just the prevailing view
because:

There is, however, some support for the view that the relationship in question might be
more properly characterized as that of landlord and tenant, or lessor and lessee. It has
also been suggested that it should be characterized as that of licensor and licensee. The
relation between a bank, safe-deposit company, or storage company, and the renter of a
safe-deposit box therein, is often described as contractual, express or implied, oral or
written, in whole or in part. But there is apparently no jurisdiction in which any rule other
than that applicable to bailments governs questions of the liability and rights of the parties
in respect of loss of the contents of safe-deposit boxes. 22 (citations omitted)

In the context of our laws which authorize banking institutions to rent out safety deposit
boxes, it is clear that in this jurisdiction, the prevailing rule in the United States has been
adopted. Section 72 of the General Banking Act 23 pertinently provides:

Sec. 72. In addition to the operations specifically authorized elsewhere in this Act,
banking institutions other than building and loan associations may perform the following
services:
(a) Receive in custody funds, documents, and valuable objects, and rent
safety deposit boxes for the safeguarding of such effects.

xxx xxx xxx

The banks shall perform the services permitted under subsections (a), (b) and (c) of this
section as depositories or as agents. . . . 24 (emphasis supplied)

Note that the primary function is still found within the parameters of a contract of
deposit, i.e., the receiving in custody of funds, documents and other valuable objects for
safekeeping. The renting out of the safety deposit boxes is not independent from, but
related to or in conjunction with, this principal function. A contract of deposit may be
entered into orally or in writing 25 and, pursuant to Article 1306 of the Civil Code, the
parties thereto may establish such stipulations, clauses, terms and conditions as they
may deem convenient, provided they are not contrary to law, morals, good customs,
public order or public policy. The depositary's responsibility for the safekeeping of the
objects deposited in the case at bar is governed by Title I, Book IV of the Civil Code.
Accordingly, the depositary would be liable if, in performing its obligation, it is found
guilty of fraud, negligence, delay or contravention of the tenor of the agreement. 26 In the
absence of any stipulation prescribing the degree of diligence required, that of a good
father of a family is to be observed. 27 Hence, any stipulation exempting the depositary
from any liability arising from the loss of the thing deposited on account of fraud,
negligence or delay would be void for being contrary to law and public policy. In the
instant case, petitioner maintains that conditions 13 and 14 of the questioned contract of
lease of the safety deposit box, which read:

13. The bank is not a depositary of the contents of the safe and it has neither the
possession nor control of the same.

14. The bank has no interest whatsoever in said contents, except herein expressly
provided, and it assumes absolutely no liability in connection therewith. 28

are void as they are contrary to law and public policy. We find Ourselves in
agreement with this proposition for indeed, said provisions are inconsistent with
the respondent Bank's responsibility as a depositary under Section 72(a) of the
General Banking Act. Both exempt the latter from any liability except as
contemplated in condition 8 thereof which limits its duty to exercise reasonable
diligence only with respect to who shall be admitted to any rented safe, to wit:

8. The Bank shall use due diligence that no unauthorized person shall be admitted to any
rented safe and beyond this, the Bank will not be responsible for the contents of any safe
rented from it. 29

Furthermore, condition 13 stands on a wrong premise and is contrary to the


actual practice of the Bank. It is not correct to assert that the Bank has neither
the possession nor control of the contents of the box since in fact, the safety
deposit box itself is located in its premises and is under its absolute control;
moreover, the respondent Bank keeps the guard key to the said box. As stated
earlier, renters cannot open their respective boxes unless the Bank cooperates
by presenting and using this guard key. Clearly then, to the extent above stated,
the foregoing conditions in the contract in question are void and ineffective. It has
been said:

With respect to property deposited in a safe-deposit box by a customer of a safe-deposit


company, the parties, since the relation is a contractual one, may by special contract
define their respective duties or provide for increasing or limiting the liability of the deposit
company, provided such contract is not in violation of law or public policy. It must clearly
appear that there actually was such a special contract, however, in order to vary the
ordinary obligations implied by law from the relationship of the parties; liability of the
deposit company will not be enlarged or restricted by words of doubtful meaning. The
company, in renting
safe-deposit boxes, cannot exempt itself from liability for loss of the contents by its own
fraud or negligence or that of its agents or servants, and if a provision of the contract may
be construed as an attempt to do so, it will be held ineffective for the purpose. Although it
has been held that the lessor of a safe-deposit box cannot limit its liability for loss of the
contents thereof through its own negligence, the view has been taken that such a lessor
may limits its liability to some extent by agreement or stipulation. 30 (citations omitted)

Thus, we reach the same conclusion which the Court of Appeals arrived at, that is, that
the petition should be dismissed, but on grounds quite different from those relied upon
by the Court of Appeals. In the instant case, the respondent Bank's exoneration cannot,
contrary to the holding of the Court of Appeals, be based on or proceed from a
characterization of the impugned contract as a contract of lease, but rather on the fact
that no competent proof was presented to show that respondent Bank was aware of the
agreement between the petitioner and the Pugaos to the effect that the certificates of
title were withdrawable from the safety deposit box only upon both parties' joint
signatures, and that no evidence was submitted to reveal that the loss of the certificates
of title was due to the fraud or negligence of the respondent Bank. This in turn flows
from this Court's determination that the contract involved was one of deposit. Since both
the petitioner and the Pugaos agreed that each should have one (1) renter's key, it was
obvious that either of them could ask the Bank for access to the safety deposit box and,
with the use of such key and the Bank's own guard key, could open the said box,
without the other renter being present.

Since, however, the petitioner cannot be blamed for the filing of the complaint and no
bad faith on its part had been established, the trial court erred in condemning the
petitioner to pay the respondent Bank attorney's fees. To this extent, the Decision
(dispositive portion) of public respondent Court of Appeals must be modified.

WHEREFORE, the Petition for Review is partially GRANTED by deleting the award for
attorney's fees from the 4 July 1989 Decision of the respondent Court of Appeals in CA-
G.R. CV No. 15150. As modified, and subject to the pronouncement We made above on
the nature of the relationship between the parties in a contract of lease of safety deposit
boxes, the dispositive portion of the said Decision is hereby AFFIRMED and the instant
Petition for Review is otherwise DENIED for lack of merit.

No pronouncement as to costs.
SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila

EN BANC

G.R. No. 4015 August 24, 1908

ANGEL JAVELLANA, plaintiff-appellee,


vs.
JOSE LIM, ET AL., defendants-appellants.

R. Zaldarriaga for appellants.


B. Montinola for appellee.

TORRES, J.:

The attorney for the plaintiff, Angel Javellana, file a complaint on the 30th of October, 1906,
with the Court of First Instance of Iloilo, praying that the defendants, Jose Lim and Ceferino
Domingo Lim, he sentenced to jointly and severally pay the sum of P2,686.58, with interest
thereon at the rate of 15 per cent per annum from the 20th of January, 1898, until full payment
should be made, deducting from the amount of interest due the sum of P1,102.16, and to pay the
costs of the proceedings.

Authority from the court having been previously obtained, the complaint was amended on the
10th of January, 1907; it was then alleged, on the 26th of May, 1897, the defendants executed
and subscribed a document in favor of the plaintiff reading as follows:

We have received from Angel Javellana, as a deposit without interest, the sum of two thousand
six hundred and eighty-six cents of pesos fuertes, which we will return to the said gentleman,
jointly and severally, on the 20th of January, 1898. Jaro, 26th of May, 1897. Signed Jose
Lim. Signed: Ceferino Domingo Lim.

That, when the obligation became due, the defendants begged the plaintiff for an extension of
time for the payment thereof, building themselves to pay interest at the rate of 15 per cent on the
amount of their indebtedness, to which the plaintiff acceded; that on the 15th of May, 1902, the
debtors paid on account of interest due the sum of P1,000 pesos, with the exception of either
capital or interest, had thereby been subjected to loss and damages.

A demurrer to the original complaint was overruled, and on the 4th of January, 1907, the
defendants answered the original complaint before its amendment, setting forth that they
acknowledged the facts stated in Nos. 1 and 2 of the complaint; that they admitted the statements
of the plaintiff relative to the payment of 1,102.16 pesos made on the 15th of November, 1902,
not, however, as payment of interest on the amount stated in the foregoing document, but on
account of the principal, and denied that there had been any agreement as to an extension of the
time for payment and the payment of interest at the rate of 15 per cent per annum as alleged in
paragraph 3 of the complaint, and also denied all the other statements contained therein.

As a counterclaim, the defendants alleged that they had paid to the plaintiff sums which, together
with the P1,102.16 acknowledged in the complaint, aggregated the total sum of P5,602.16, and
that, deducting therefrom the total sum of P2,686.58 stated in the document transcribed in the
complaint, the plaintiff still owed the defendants P2,915.58; therefore, they asked that judgment
be entered absolving them, and sentencing the plaintiff to pay them the sum of P2,915.58 with
the costs.

Evidence was adduced by both parties and, upon their exhibits, together with an account book
having been made of record, the court below rendered judgment on the 15th of January, 1907, in
favor of the plaintiff for the recovery of the sum of P5,714.44 and costs.

The defendants excepted to the above decision and moved for a new trial. This motion was
overruled and was also excepted to by them; the bill of exceptions presented by the appellants
having been approved, the same was in due course submitted to this court.

The document of indebtedness inserted in the complaint states that the plaintiff left on deposit
with the defendants a given sum of money which they were jointly and severally obliged to
return on a certain date fixed in the document; but that, nevertheless, when the document
appearing as Exhibits 2, written in the Visayan dialect and followed by a translation into Spanish
was executed, it was acknowledged, at the date thereof, the 15th of November, 1902, that the
amount deposited had not yet been returned to the creditor, whereby he was subjected to losses
and damages amounting to 830 pesos since the 20th of January, 1898, when the return was again
stipulated with the further agreement that the amount deposited should bear interest at the rate of
15 per cent per annum, from the aforesaid date of January 20, and that the 1,000 pesos paid to the
depositor on the 15th of May, 1900, according to the receipt issued by him to the debtors, would
be included, and that the said rate of interest would obtain until the debtors on the 20th of May,
1897, it is called a deposit consisted, and they could have accomplished the return agreed upon
by the delivery of a sum equal to the one received by them. For this reason it must be understood
that the debtors were lawfully authorized to make use of the amount deposited, which they have
done, as subsequent shown when asking for an extension of the time for the return thereof,
inasmuch as, acknowledging that they have subjected the letter, their creditor, to losses and
damages for not complying with what had been stipulated, and being conscious that they had
used, for their own profit and gain, the money that they received apparently as a deposit, they
engaged to pay interest to the creditor from the date named until the time when the refund should
be made. Such conduct on the part of the debtors is unquestionable evidence that the transaction
entered into between the interested parties was not a deposit, but a real contract of loan.

Article 1767 of the Civil Code provides that

The depository can not make use of the thing deposited without the express permission of
the depositor.
Otherwise he shall be liable for losses and damages.

Article 1768 also provides that

When the depository has permission to make use of the thing deposited, the contract loses
the character of a deposit and becomes a loan or bailment.

The permission shall not be presumed, and its existence must be proven.

When on one of the latter days of January, 1898, Jose Lim went to the office of the creditor
asking for an extension of one year, in view of the fact the money was scare, and because neither
himself nor the other defendant were able to return the amount deposited, for which reason he
agreed to pay interest at the rate of 15 per cent per annum, it was because, as a matter of fact, he
did not have in his possession the amount deposited, he having made use of the same in his
business and for his own profit; and the creditor, by granting them the extension, evidently
confirmed the express permission previously given to use and dispose of the amount stated as
having bee deposited, which, in accordance with the loan, to all intents and purposes
gratuitously, until the 20th of January, 1898, and from that dated with interest at 15 per cent per
annum until its full payment, deducting from the total amount of interest the sum of 1,000 pesos,
in accordance with the provisions of article 1173 of the Civil Code.

Notwithstanding that it does not appear that Jose Lim signed the document (Exhibit 2) executed
in the presence of three witnesses on the 15th of November, 1902, by Ceferino Domingo Lim on
behalf of himself and the former, nevertheless, the said document has not been contested as false,
either by a criminal or by a civil proceeding, nor has any doubt been cast upon the authenticity of
the signatures of the witnesses who attested the execution of the same; and from the evidence in
the case one is sufficiently convinced that the said Jose Lim was perfectly aware of and
authorized his joint codebtor to liquidate the interest, to pay the sum of 1,000 pesos, on account
thereof, and to execute the aforesaid document No. 2. A true ratification of the original document
of deposit was thus made, and not the least proof is shown in the record that Jose Lim had ever
paid the whole or any part of the capital stated in the original document, Exhibit 1.

If the amount, together with interest claimed in the complaint, less 1,000 pesos appears as fully
established, such is not the case with the defendant's counterclaim for P5,602.16, because the
existence and certainty of said indebtedness imputed to the plaintiff has not been proven, and the
defendants, who call themselves creditors for the said amount have not proven in a satisfactory
manner that the plaintiff had received partial payments on account of the same; the latter alleges
with good reason, that they should produce the receipts which he may have issued, and which he
did issue whenever they paid him any money on account. The plaintiffs allegation that the two
amounts of 400 and 1,200 pesos, referred to in documents marked "C" and "D" offered in
evidence by the defendants, had been received from Ceferino Domingo Lim on account of other
debts of his, has not been contradicted, and the fact that in the original complaint the sum of
1,102.16 pesos, was expressed in lieu of 1,000 pesos, the only payment made on account of
interest on the amount deposited according to documents No. 2 and letter "B" above referred to,
was due to a mistake.
Moreover, for the reason above set forth it may, as a matter of course, be inferred that there was
no renewal of the contract deposited converted into a loan, because, as has already been stated,
the defendants received said amount by virtue of real loan contract under the name of a deposit,
since the so-called bailees were forthwith authorized to dispose of the amount deposited. This
they have done, as has been clearly shown.

The original joint obligation contracted by the defendant debtor still exists, and it has not been
shown or proven in the proceedings that the creditor had released Joe Lim from complying with
his obligation in order that he should not be sued for or sentenced to pay the amount of capital
and interest together with his codebtor, Ceferino Domingo Lim, because the record offers
satisfactory evidence against the pretension of Jose Lim, and it further appears that document
No. 2 was executed by the other debtor, Ceferino Domingo Lim, for himself and on behalf of
Jose Lim; and it has also been proven that Jose Lim, being fully aware that his debt had not yet
been settled, took steps to secure an extension of the time for payment, and consented to pay
interest in return for the concession requested from the creditor.

In view of the foregoing, and adopting the findings in the judgment appealed from, it is our
opinion that the same should be and is hereby affirmed with the costs of this instance against the
appellant, provided that the interest agreed upon shall be paid until the complete liquidation of
the debt. So ordered.

Arellano, C.J., Carson, Willard and Tracey, JJ., concur.

BPI vs. Intermediate Appellate Court GR# L-66826, August 19, 1988

Facts:

Rizaldy T. Zshornack and his wife maintained in COMTRUST a dollar savings account and a
peso current account. An application for a dollar drat was accomplished by Virgillo Garcia
branch manager of COMTRUST payable to a certain Leovigilda Dizon. In the PPLICtion, Garcia
indicated that the amount was to be charged to the dolar savings account of the Zshornacks.
There wasa no indication of the name of the purchaser of the dollar draft. Comtrust issued a
check payable to the order of Dizon. When Zshornack noticed the withdrawal from his account,
he demanded an explainaiton from the bank. In its answer, Comtrust claimed that the peso value
of the withdrawal was given to Atty. Ernesto Zshornack, brother of Rizaldy. When he encashed
with COMTRUST a cashiers check for P8450 issued by the manila banking corporation payable
to Ernesto.

Issue: Whether the contract between petitioner and respondent bank is a deposit?

Held: The document which embodies the contract states that the US$3,000.00 was received by
the bank for safekeeping. The subsequent acts of the parties also show that the intent of the
parties was really for the bank to safely keep the dollars and to return it to Zshornack at a later
time. Thus, Zshornack demanded the return of the money on May 10, 1976, or over five months
later.

The above arrangement is that contract defined under Article 1962, New Civil Code, which
reads:
Art. 1962. A deposit is constituted from the moment a person receives a thing belonging to
another, with the obligation of safely keeping it and of returning the same. If the safekeeping of
the thing delivered is not the principal purpose of the contract, there is no deposit but some other
contract.