Republic of the Philippines Saura, Inc. was officially notified of the resolution on January 9, 1954.
The day before,
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;"
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 a) For the payment of the receipt for jute mill
follow-up letter dated July 2 requested RFC that the registration of the mortgage be machineries with the Prudential Bank &
withdrawn. Trust Company P250,000.00
In the meantime Saura, Inc. had written RFC requesting that the loan of P500,000.00 be (For immediate release)
granted. The request was denied by RFC, which added in its letter-reply that it was b) For the purchase of materials and equip-
"constrained to consider as cancelled the loan of P300,000.00 ... in view of a notification ... ment per attached list to enable the jute
from the China Engineers Ltd., expressing their desire to consider the loan insofar as they are mill to operate 182,413.91
concerned." c) For raw materials and labor 67,586.09
On July 24, 1954 Saura, Inc. took exception to the cancellation of the loan and informed RFC 1) P25,000.00 to be released on the open-
that China Engineers, Ltd. "will at any time reinstate their signature as co-signer of the note if ing of the letter of credit for raw jute
RFC releases to us the P500,000.00 originally approved by you.". for $25,000.00.
On December 17, 1954 RFC passed Resolution No. 9083, restoring the loan to the original 2) P25,000.00 to be released upon arrival
amount of P500,000.00, "it appearing that China Engineers, Ltd. is now willing to sign the of raw jute.
promissory notes jointly with the borrower-corporation," but with the following proviso: 3) P17,586.09 to be released as soon as the
That in view of observations made of the shortage and high cost of mill is ready to operate.
imported raw materials, the Department of Agriculture and Natural On January 25, 1955 RFC sent to Saura, Inc. the following reply:
Resources shall certify to the following: Dear Sirs:
1. That the raw materials needed by the borrower-corporation to carry This is with reference to your letter of January 21, 1955, regarding the release of
out its operation are available in the immediate vicinity; and your loan under consideration of P500,000. As stated in our letter of December 22,
2. That there is prospect of increased production thereof to provide 1954, the releases of the loan, if revived, are proposed to be made from time to
adequately for the requirements of the factory." time, subject to availability of funds towards the end that the sack factory shall be
The action thus taken was communicated to Saura, Inc. in a letter of RFC dated December 22, placed in actual operating status. We shall be able to act on your request for
1954, wherein it was explained that the certification by the Department of Agriculture and revised purpose and manner of releases upon re-appraisal of the securities offered
Natural Resources was required "as the intention of the original approval (of the loan) is to for the loan.
develop the manufacture of sacks on the basis of locally available raw materials." This point With respect to our requirement that the Department of Agriculture and Natural
is important, and sheds light on the subsequent actuations of the parties. Saura, Inc. does not Resources certify that the raw materials needed are available in the immediate
deny that the factory he was building in Davao was for the manufacture of bags from local vicinity and that there is prospect of increased production thereof to provide
raw materials. The cover page of its brochure (Exh. M) describes the project as a "Joint adequately the requirements of the factory, we wish to reiterate that the basis of
venture by and between the Mindanao Industry Corporation and the Saura Import and the original approval is to develop the manufacture of sacks on the basis of the
Export Co., Inc. to finance, manage and operate a Kenaf mill plant, to manufacture copra and locally available raw materials. Your statement that you will have to rely on the
corn bags, runners, floor mattings, carpets, draperies; out of 100% local raw materials, importation of jute and your request that we give you assurance that your company
principal kenaf." The explanatory note on page 1 of the same brochure states that, the will be able to bring in sufficient jute materials as may be necessary for the
venture "is the first serious attempt in this country to use 100% locally grown raw materials operation of your factory, would not be in line with our principle in approving the
notably kenafwhich is presently grown commercially in theIsland of Mindanao where the loan.
proposed jutemill is located ..." With the foregoing letter the negotiations came to a standstill. Saura, Inc. did not pursue the
This fact, according to defendant DBP, is what moved RFC to approve the loan application in matter further. Instead, it requested RFC to cancel the mortgage, and so, on June 17, 1955
the first place, and to require, in its Resolution No. 9083, a certification from the Department RFC executed the corresponding deed of cancellation and delivered it to Ramon F. Saura
of Agriculture and Natural Resources as to the availability of local raw materials to provide himself as president of Saura, Inc.
adequately for the requirements of the factory. Saura, Inc. itself confirmed the defendant's It appears that the cancellation was requested to make way for the registration of a
stand impliedly in its letter of January 21, 1955: (1) stating that according to a special study mortgage contract, executed on August 6, 1954, over the same property in favor of the
made by the Bureau of Forestry "kenaf will not be available in sufficient quantity this year or Prudential Bank and Trust Co., under which contract Saura, Inc. had up to December 31 of
probably even next year;" (2) requesting "assurances (from RFC) that my company and the same year within which to pay its obligation on the trust receipt heretofore mentioned. It
associates will be able to bring in sufficient jute materials as may be necessary for the full appears further that for failure to pay the said obligation the Prudential Bank and Trust Co.
operation of the jute mill;" and (3) asking that releases of the loan be made as follows: 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 vs.
utilized exclusively for the following purposes: for construction of factory building JOSE V. BAGTAS, defendant,
P250,000.00; for payment of the balance of purchase price of machinery and equipment FELICIDAD M. BAGTAS, Administratrix of the Intestate Estate left by the late Jose V.
P240,900.00; for working capital P9,100.00." Evidently Saura, Inc. realized that it could not Bagtas, petitioner-appellant.
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.
Footnotes
1 8 Manresa, p. 294.
2 2 Castan, p. 560.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-17474 October 25, 1962
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,
D. T. Reyes, Liaison and Associates for petitioner-appellant.
Office of the Solicitor General for plaintiff-appellee.
PADILLA, J.:
The Court of Appeals certified this case to this Court because only questions of law are
raised.
On 8 May 1948 Jose V. Bagtas borrowed from the Republic of the Philippines through the
Bureau of Animal Industry three bulls: a Red Sindhi with a book value of P1,176.46, a
Bhagnari, of P1,320.56 and a Sahiniwal, of P744.46, for a period of one year from 8 May 1948
to 7 May 1949 for breeding purposes subject to a government charge of breeding fee of 10%
of the book value of the bulls. Upon the expiration on 7 May 1949 of the contract, the
borrower asked for a renewal for another period of one year. However, the Secretary of
Agriculture and Natural Resources approved a renewal thereof of only one bull for another
year from 8 May 1949 to 7 May 1950 and requested the return of the other two. On 25
March 1950 Jose V. Bagtas wrote to the Director of Animal Industry that he would pay the
value of the three bulls. On 17 October 1950 he reiterated his desire to buy them at a value
with a deduction of yearly depreciation to be approved by the Auditor General. On 19
October 1950 the Director of Animal Industry advised him that the book value of the three
bulls could not be reduced and that they either be returned or their book value paid not later
than 31 October 1950. Jose V. Bagtas failed to pay the book value of the three bulls or to
return them. So, on 20 December 1950 in the Court of First Instance of Manila the Republic
of the Philippines commenced an action against him praying that he be ordered to return the
three bulls loaned to him or to pay their book value in the total sum of P3,241.45 and the
unpaid breeding fee in the sum of P199.62, both with interests, and costs; and that other just
and equitable relief be granted in (civil No. 12818).
On 5 July 1951 Jose V. Bagtas, through counsel Navarro, Rosete and Manalo, answered that
because of the bad peace and order situation in Cagayan Valley, particularly in the barrio of
Baggao, and of the pending appeal he had taken to the Secretary of Agriculture and Natural
Resources and the President of the Philippines from the refusal by the Director of Animal
Industry to deduct from the book value of the bulls corresponding yearly depreciation of 8%
from the date of acquisition, to which depreciation the Auditor General did not object, he
could not return the animals nor pay their value and prayed for the dismissal of the
complaint.
After hearing, on 30 July 1956 the trial court render judgment
. . . sentencing the latter (defendant) to pay the sum of P3,625.09 the total value of
the three bulls plus the breeding fees in the amount of P626.17 with interest on
both sums of (at) the legal rate from the filing of this complaint and costs.
On 9 October 1958 the plaintiff moved ex parte for a writ of execution which the court
granted on 18 October and issued on 11 November 1958. On 2 December 1958 granted an
ex-parte motion filed by the plaintiff on November 1958 for the appointment of a special
sheriff to serve the writ outside Manila. Of this order appointing a special sheriff, on 6
December 1958, Felicidad M. Bagtas, the surviving spouse of the defendant Jose Bagtas who
died on 23 October 1951 and as administratrix of his estate, was notified. On 7 January 1959
she file a motion alleging that on 26 June 1952 the two bull Sindhi and Bhagnari were
returned to the Bureau Animal of Industry and that sometime in November 1958 the third
bull, the Sahiniwal, died from gunshot wound inflicted during a Huk raid on Hacienda
Felicidad Intal, and praying that the writ of execution be quashed and that a writ of
preliminary injunction be issued. On 31 January 1959 the plaintiff objected to her motion. On
6 February 1959 she filed a reply thereto. On the same day, 6 February, the Court denied her
motion. Hence, this appeal certified by the Court of Appeals to this Court as stated at the
beginning of this opinion.
It is true that on 26 June 1952 Jose M. Bagtas, Jr., son of the appellant by the late defendant,
returned the Sindhi and Bhagnari bulls to Roman Remorin, Superintendent of the NVB
Station, Bureau of Animal Industry, Bayombong, Nueva Vizcaya, as evidenced by a
memorandum receipt signed by the latter (Exhibit 2). That is why in its objection of 31
January 1959 to the appellant's motion to quash the writ of execution the appellee prays
"that another writ of execution in the sum of P859.53 be issued against the estate of
defendant deceased Jose V. Bagtas." She cannot be held liable for the two bulls which
already had been returned to and received by the appellee.
The appellant contends that the Sahiniwal bull was accidentally killed during a raid by the
Huk in November 1953 upon the surrounding barrios of Hacienda Felicidad Intal, Baggao,
Cagayan, where the animal was kept, and that as such death was due to force majeure she is
relieved from the duty of returning the bull or paying its value to the appellee. The
contention is without merit. The loan by the appellee to the late defendant Jose V. Bagtas of
the three bulls for breeding purposes for a period of one year from 8 May 1948 to 7 May
1949, later on renewed for another year as regards one bull, was subject to the payment by
the borrower of breeding fee of 10% of the book value of the bulls. The appellant contends
that the contract was commodatum and that, for that reason, as the appellee retained
ownership or title to the bull it should suffer its loss due to force majeure. A contract
of commodatum is essentially gratuitous.1 If the breeding fee be considered a compensation,
then the contract would be a lease of the bull. Under article 1671 of the Civil Code the lessee
would be subject to the responsibilities of a possessor in bad faith, because she had
continued possession of the bull after the expiry of the contract. And even if the contract
be commodatum, still the appellant is liable, because article 1942 of the Civil Code provides
that a bailee in a contract ofcommodatum
. . . is liable for loss of the things, even if it should be through a fortuitous event:
(2) If he keeps it longer than the period stipulated . . .
(3) If the thing loaned has been delivered with appraisal of its value, unless there is
a stipulation exempting the bailee from responsibility in case of a fortuitous event;
The original period of the loan was from 8 May 1948 to 7 May 1949. The loan of one bull was
renewed for another period of one year to end on 8 May 1950. But the appellant kept and
used the bull until November 1953 when during a Huk raid it was killed by stray bullets.
Furthermore, when lent and delivered to the deceased husband of the appellant the bulls
had each an appraised book value, to with: the Sindhi, at P1,176.46, the Bhagnari at
P1,320.56 and the Sahiniwal at P744.46. It was not stipulated that in case of loss of the bull
due to fortuitous event the late husband of the appellant would be exempt from liability.
The appellant's contention that the demand or prayer by the appellee for the return of the
bull or the payment of its value being a money claim should be presented or filed in the
intestate proceedings of the defendant who died on 23 October 1951, is not altogether
without merit. However, the claim that his civil personality having ceased to exist the trial
court lost jurisdiction over the case against him, is untenable, because section 17 of Rule 3 of
the Rules of Court provides that
After a party dies and the claim is not thereby extinguished, the court shall order,
upon proper notice, the legal representative of the deceased to appear and to be
substituted for the deceased, within a period of thirty (30) days, or within such
time as may be granted. . . .
and after the defendant's death on 23 October 1951 his counsel failed to comply with section
16 of Rule 3 which provides that
 Whenever a party to a pending case dies . . . it shall be the duty of his attorney to
inform the court promptly of such death . . . and to give the name and residence of
the executory administrator, guardian, or other legal representative of the
deceased . . . .
The notice by the probate court and its publication in the Voz de Manila that Felicidad M.
Bagtas had been issue letters of administration of the estate of the late Jose Bagtas and that
"all persons having claims for monopoly against the deceased Jose V. Bagtas, arising from
contract express or implied, whether the same be due, not due, or contingent, for funeral
expenses and expenses of the last sickness of the said decedent, and judgment for monopoly
against him, to file said claims with the Clerk of this Court at the City Hall Bldg., Highway 54,
Quezon City, within six (6) months from the date of the first publication of this order, serving
a copy thereof upon the aforementioned Felicidad M. Bagtas, the appointed administratrix of
the estate of the said deceased," is not a notice to the court and the appellee who were to be
notified of the defendant's death in accordance with the above-quoted rule, and there was
no reason for such failure to notify, because the attorney who appeared for the defendant
was the same who represented the administratrix in the special proceedings instituted for
the administration and settlement of his estate. The appellee or its attorney or
representative could not be expected to know of the death of the defendant or of the
administration proceedings of his estate instituted in another court that if the attorney for
the deceased defendant did not notify the plaintiff or its attorney of such death as required
by the rule.
As the appellant already had returned the two bulls to the appellee, the estate of the late
defendant is only liable for the sum of P859.63, the value of the bull which has not been
returned to the appellee, because it was killed while in the custody of the administratrix of
his estate. This is the amount prayed for by the appellee in its objection on 31 January 1959
to the motion filed on 7 January 1959 by the appellant for the quashing of the writ of
execution.
Special proceedings for the administration and settlement of the estate of the deceased Jose
V. Bagtas having been instituted in the Court of First Instance of Rizal (Q-200), the money
judgment rendered in favor of the appellee cannot be enforced by means of a writ of
execution but must be presented to the probate court for payment by the appellant, the
administratrix appointed by the court.
ACCORDINGLY, the writ of execution appealed from is set aside, without pronouncement as
to costs.
Bengzon, C.J., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Paredes, Dizon, Regala
and Makalintal, JJ., concur.
Barrera, J., concurs in the result.
Footnotes
1Article 1933 of the Civil Code.
FIRST DIVISION
[G.R. No. 146364. June 3, 2004]
COLITO T. PAJUYO, petitioner, vs. COURT OF APPEALS and EDDIE GUEVARRA, respondents.
DECISION
CARPIO, J.:
The Case
Before us is a petition for review[1] of the 21 June 2000 Decision[2] and 14 December
2000 Resolution of the Court of Appeals in CA-G.R. SP No. 43129. The Court of Appeals set
aside the 11 November 1996 decision[3] of the Regional Trial Court of Quezon City, Branch
81,[4] affirming the 15 December 1995 decision[5] of the Metropolitan Trial Court of Quezon
City, Branch 31.[6]
The Antecedents
In June 1979, petitioner Colito T. Pajuyo (Pajuyo) paid P400 to a certain Pedro Perez for
the rights over a 250-square meter lot in Barrio Payatas, Quezon City. Pajuyo then
constructed a house made of light materials on the lot. Pajuyo and his family lived in the
house from 1979 to 7 December 1985.
On 8 December 1985, Pajuyo and private respondent Eddie Guevarra (Guevarra)
executed a Kasunduan or agreement. Pajuyo, as owner of the house, allowed Guevarra to
live in the house for free provided Guevarra would maintain the cleanliness and orderliness
of the house. Guevarra promised that he would voluntarily vacate the premises on Pajuyos
demand.
In September 1994, Pajuyo informed Guevarra of his need of the house and demanded
that Guevarra vacate the house. Guevarra refused.
Pajuyo filed an ejectment case against Guevarra with the Metropolitan Trial Court of
Quezon City, Branch 31 (MTC).
In his Answer, Guevarra claimed that Pajuyo had no valid title or right of possession
over the lot where the house stands because the lot is within the 150 hectares set aside by
Proclamation No. 137 for socialized housing. Guevarra pointed out that from December 1985
to September 1994, Pajuyo did not show up or communicate with him. Guevarra insisted
that neither he nor Pajuyo has valid title to the lot.
On 15 December 1995, the MTC rendered its decision in favor of Pajuyo. The
dispositive portion of the MTC decision reads:
WHEREFORE, premises considered, judgment is hereby rendered for the plaintiff and against
defendant, ordering the latter to:
A) vacate the house and lot occupied by the defendant or any other person or
persons claiming any right under him;
B) pay unto plaintiff the sum of THREE HUNDRED PESOS (P300.00) monthly as
reasonable compensation for the use of the premises starting from the last
demand;
C) pay plaintiff the sum of P3,000.00 as and by way of attorneys fees; and
D) pay the cost of suit.
SO ORDERED.[7]
Aggrieved, Guevarra appealed to the Regional Trial Court of Quezon City, Branch 81
(RTC).
On 11 November 1996, the RTC affirmed the MTC decision. The dispositive portion of
the RTC decision reads:
WHEREFORE, premises considered, the Court finds no reversible error in the decision
appealed from, being in accord with the law and evidence presented, and the same is hereby
affirmed en toto.
SO ORDERED.[8]
Guevarra received the RTC decision on 29 November 1996. Guevarra had only until 14
December 1996 to file his appeal with the Court of Appeals. Instead of filing his appeal with
the Court of Appeals, Guevarra filed with the Supreme Court a Motion for Extension of Time
to File Appeal by Certiorari Based on Rule 42 (motion for extension). Guevarra theorized that
his appeal raised pure questions of law. The Receiving Clerk of the Supreme Court received
the motion for extension on 13 December 1996 or one day before the right to appeal
expired.
On 3 January 1997, Guevarra filed his petition for review with the Supreme Court.
On 8 January 1997, the First Division of the Supreme Court issued a
Resolution[9] referring the motion for extension to the Court of Appeals which has concurrent
jurisdiction over the case. The case presented no special and important matter for the
Supreme Court to take cognizance of at the first instance.
On 28 January 1997, the Thirteenth Division of the Court of Appeals issued a
Resolution[10] granting the motion for extension conditioned on the timeliness of the filing of
the motion.
On 27 February 1997, the Court of Appeals ordered Pajuyo to comment on Guevaras
petition for review. On 11 April 1997, Pajuyo filed his Comment.
On 21 June 2000, the Court of Appeals issued its decision reversing the RTC
decision. The dispositive portion of the decision reads:
WHEREFORE, premises considered, the assailed Decision of the court a quo in Civil Case No.
Q-96-26943 is REVERSED and SET ASIDE; and it is hereby declared that the ejectment case
filed against defendant-appellant is without factual and legal basis.
SO ORDERED.[11]
Pajuyo filed a motion for reconsideration of the decision. Pajuyo pointed out that the
Court of Appeals should have dismissed outright Guevarras petition for review because it was
filed out of time. Moreover, it was Guevarras counsel and not Guevarra who signed the
certification against forum-shopping.
On 14 December 2000, the Court of Appeals issued a resolution denying Pajuyos
motion for reconsideration. The dispositive portion of the resolution reads:
WHEREFORE, for lack of merit, the motion for reconsideration is hereby DENIED. No costs.
SO ORDERED.[12]
The Ruling of the MTC
The MTC ruled that the subject of the agreement between Pajuyo and Guevarra is the
house and not the lot. Pajuyo is the owner of the house, and he allowed Guevarra to use the
house only by tolerance. Thus, Guevarras refusal to vacate the house on Pajuyos demand
made Guevarras continued possession of the house illegal.
The Ruling of the RTC
The RTC upheld the Kasunduan, which established the landlord and tenant relationship
between Pajuyo and Guevarra. The terms of the Kasunduan bound Guevarra to return
possession of the house on demand.
The RTC rejected Guevarras claim of a better right under Proclamation No. 137, the
Revised National Government Center Housing Project Code of Policies and other pertinent
laws. In an ejectment suit, the RTC has no power to decide Guevarras rights under these
laws. The RTC declared that in an ejectment case, the only issue for resolution is material or
physical possession, not ownership.
The Ruling of the Court of Appeals
The Court of Appeals declared that Pajuyo and Guevarra are squatters. Pajuyo and
Guevarra illegally occupied the contested lot which the government owned.
Perez, the person from whom Pajuyo acquired his rights, was also a squatter. Perez had
no right or title over the lot because it is public land. The assignment of rights between Perez
and Pajuyo, and the Kasunduan between Pajuyo and Guevarra, did not have any legal
effect. Pajuyo and Guevarra are in pari delicto or in equal fault. The court will leave them
where they are.
The Court of Appeals reversed the MTC and RTC rulings, which held that
the Kasunduan between Pajuyo and Guevarra created a legal tie akin to that of a landlord
and tenant relationship. The Court of Appeals ruled that theKasunduan is not a lease contract
but a commodatum because the agreement is not for a price certain.
Since Pajuyo admitted that he resurfaced only in 1994 to claim the property, the
appellate court held that Guevarra has a better right over the property under Proclamation
No. 137. President Corazon C. Aquino (President Aquino) issued Proclamation No. 137 on 7
September 1987. At that time, Guevarra was in physical possession of the property. Under
Article VI of the Code of Policies Beneficiary Selection and Disposition of Homelots and
Structures in the National Housing Project (the Code), the actual occupant or caretaker of the
lot shall have first priority as beneficiary of the project. The Court of Appeals concluded that
Guevarra is first in the hierarchy of priority.
In denying Pajuyos motion for reconsideration, the appellate court debunked Pajuyos
claim that Guevarra filed his motion for extension beyond the period to appeal.
The Court of Appeals pointed out that Guevarras motion for extension filed before the
Supreme Court was stamped 13 December 1996 at 4:09 PM by the Supreme Courts Receiving
Clerk. The Court of Appeals concluded that the motion for extension bore a date, contrary to
Pajuyos claim that the motion for extension was undated. Guevarra filed the motion for
extension on time on 13 December 1996 since he filed the motion one day before the
expiration of the reglementary period on 14 December 1996. Thus, the motion for extension
properly complied with the condition imposed by the Court of Appeals in its 28 January 1997
Resolution. The Court of Appeals explained that the thirty-day extension to file the petition
for review was deemed granted because of such compliance.
The Court of Appeals rejected Pajuyos argument that the appellate court should have
dismissed the petition for review because it was Guevarras counsel and not Guevarra who
signed the certification against forum-shopping.The Court of Appeals pointed out that Pajuyo
did not raise this issue in his Comment. The Court of Appeals held that Pajuyo could not now
seek the dismissal of the case after he had extensively argued on the merits of the case.This
technicality, the appellate court opined, was clearly an afterthought.
The Issues
Pajuyo raises the following issues for resolution:
WHETHER THE COURT OF APPEALS ERRED OR ABUSED ITS AUTHORITY AND DISCRETION
TANTAMOUNT TO LACK OF JURISDICTION:
1) in GRANTING, instead of denying, Private Respondents Motion for
an Extension of thirty days to file petition for review at the time
 when there was no more period to extend as the decision of the
Regional Trial Court had already become final and executory.
2) in giving due course, instead of dismissing, private
respondents Petition for Review even though the certification
against forum-shopping was signed only by counsel instead of by
petitioner himself.
3) in ruling that the Kasunduan voluntarily entered into by the
parties was in fact a commodatum, instead of a Contract of Lease
as found by the Metropolitan Trial Court and in holding that the
ejectment case filed against defendant-appellant is without legal
and factual basis.
4) in reversing and setting aside the Decision of the Regional Trial
Court in Civil Case No. Q-96-26943 and in holding that the parties
are in pari delicto being both squatters, therefore, illegal
occupants of the contested parcel of land.
5) in deciding the unlawful detainer case based on the so-called Code
of Policies of the National Government Center Housing Project
instead of deciding the same under the Kasunduan voluntarily
executed by the parties, the terms and conditions of which are
the laws between themselves.[13]
The Ruling of the Court
The procedural issues Pajuyo is raising are baseless. However, we find merit in the
substantive issues Pajuyo is submitting for resolution.
Procedural Issues
Pajuyo insists that the Court of Appeals should have dismissed outright Guevarras
petition for review because the RTC decision had already become final and executory when
the appellate court acted on Guevarras motion for extension to file the petition. Pajuyo
points out that Guevarra had only one day before the expiry of his period to appeal the RTC
decision. Instead of filing the petition for review with the Court of Appeals, Guevarra filed
with this Court an undated motion for extension of 30 days to file a petition for review. This
Court merely referred the motion to the Court of Appeals. Pajuyo believes that the filing of
the motion for extension with this Court did not toll the running of the period to perfect the
appeal. Hence, when the Court of Appeals received the motion, the period to appeal had
already expired.
We are not persuaded.
Decisions of the regional trial courts in the exercise of their appellate jurisdiction are
appealable to the Court of Appeals by petition for review in cases involving questions of fact
or mixed questions of fact and law.[14] Decisions of the regional trial courts involving pure
questions of law are appealable directly to this Court by petition for review.[15] These modes
of appeal are now embodied in Section 2, Rule 41 of the 1997 Rules of Civil Procedure.
Guevarra believed that his appeal of the RTC decision involved only questions of
law. Guevarra thus filed his motion for extension to file petition for review before this Court
on 14 December 1996. On 3 January 1997, Guevarra then filed his petition for review with
this Court. A perusal of Guevarras petition for review gives the impression that the issues he
raised were pure questions of law. There is a question of law when the doubt or difference is
on what the law is on a certain state of facts.[16] There is a question of fact when the doubt or
difference is on the truth or falsity of the facts alleged.[17]
In his petition for review before this Court, Guevarra no longer disputed the
facts. Guevarras petition for review raised these questions: (1) Do ejectment cases pertain
only to possession of a structure, and not the lot on which the structure stands? (2) Does a
suit by a squatter against a fellow squatter constitute a valid case for ejectment? (3) Should a
Presidential Proclamation governing the lot on which a squatters structure stands be
considered in an ejectment suit filed by the owner of the structure?
These questions call for the evaluation of the rights of the parties under the law on
ejectment and the Presidential Proclamation. At first glance, the questions Guevarra raised
appeared purely legal. However, some factual questions still have to be resolved because
they have a bearing on the legal questions raised in the petition for review. These factual
matters refer to the metes and bounds of the disputed property and the application of
Guevarra as beneficiary of Proclamation No. 137.
The Court of Appeals has the power to grant an extension of time to file a petition for
review. In Lacsamana v. Second Special Cases Division of the Intermediate Appellate
Court,[18] we declared that the Court of Appeals could grant extension of time in appeals by
petition for review. In Liboro v. Court of Appeals,[19] we clarified that the prohibition against
granting an extension of time applies only in a case where ordinary appeal is perfected by a
mere notice of appeal. The prohibition does not apply in a petition for review where the
pleading needs verification. A petition for review, unlike an ordinary appeal, requires
preparation and research to present a persuasive position.[20] The drafting of the petition for
review entails more time and effort than filing a notice of appeal.[21] Hence, the Court of
Appeals may allow an extension of time to file a petition for review.
In the more recent case of Commissioner of Internal Revenue v. Court of
Appeals,[22] we held that Liboros clarification of Lacsamana is consistent with the Revised
Internal Rules of the Court of Appeals and Supreme Court Circular No. 1-91. They all allow an
extension of time for filing petitions for review with the Court of Appeals. The extension,
however, should be limited to only fifteen days save in exceptionally meritorious cases where
the Court of Appeals may grant a longer period.
A judgment becomes final and executory by operation of law. Finality of judgment
becomes a fact on the lapse of the reglementary period to appeal if no appeal is
perfected.[23] The RTC decision could not have gained finality because the Court of Appeals
granted the 30-day extension to Guevarra.
The Court of Appeals did not commit grave abuse of discretion when it approved
Guevarras motion for extension. The Court of Appeals gave due course to the motion for
extension because it complied with the condition set by the appellate court in its resolution
dated 28 January 1997. The resolution stated that the Court of Appeals would only give due
course to the motion for extension if filed on time. The motion for extension met this
condition.
The material dates to consider in determining the timeliness of the filing of the motion
for extension are (1) the date of receipt of the judgment or final order or resolution subject
of the petition, and (2) the date of filing of the motion for extension. [24] It is the date of the
filing of the motion or pleading, and not the date of execution, that determines the
timeliness of the filing of that motion or pleading. Thus, even if the motion for extension
bears no date, the date of filing stamped on it is the reckoning point for determining the
timeliness of its filing.
Guevarra had until 14 December 1996 to file an appeal from the RTC
decision. Guevarra filed his motion for extension before this Court on 13 December 1996, the
date stamped by this Courts Receiving Clerk on the motion for extension. Clearly, Guevarra
filed the motion for extension exactly one day before the lapse of the reglementary period to
appeal.
Assuming that the Court of Appeals should have dismissed Guevarras appeal on
technical grounds, Pajuyo did not ask the appellate court to deny the motion for extension
and dismiss the petition for review at the earliest opportunity. Instead, Pajuyo vigorously
discussed the merits of the case. It was only when the Court of Appeals ruled in Guevarras
favor that Pajuyo raised the procedural issues against Guevarras petition for review.
A party who, after voluntarily submitting a dispute for resolution, receives an adverse
decision on the merits, is estopped from attacking the jurisdiction of the court. [25] Estoppel
sets in not because the judgment of the court is a valid and conclusive adjudication, but
because the practice of attacking the courts jurisdiction after voluntarily submitting to it is
against public policy.[26]
In his Comment before the Court of Appeals, Pajuyo also failed to discuss Guevarras
failure to sign the certification against forum shopping. Instead, Pajuyo harped on Guevarras
counsel signing the verification, claiming that the counsels verification is insufficient since it is
based only on mere information.
A partys failure to sign the certification against forum shopping is different from the
partys failure to sign personally the verification. The certificate of non-forum shopping must
be signed by the party, and not by counsel.[27] The certification of counsel renders the
petition defective.[28]
On the other hand, the requirement on verification of a pleading is a formal and not a
jurisdictional requisite.[29] It is intended simply to secure an assurance that what are alleged
in the pleading are true and correct and not the product of the imagination or a matter of
speculation, and that the pleading is filed in good faith.[30] The party need not sign the
verification. A partys representative, lawyer or any person who personally knows the truth of
the facts alleged in the pleading may sign the verification. [31]
We agree with the Court of Appeals that the issue on the certificate against forum
shopping was merely an afterthought. Pajuyo did not call the Court of Appeals attention to
this defect at the early stage of the proceedings.Pajuyo raised this procedural issue too late
in the proceedings.
Absence of Title over the Disputed Property will not Divest the Courts of Jurisdiction to
Resolve the Issue of Possession
Settled is the rule that the defendants claim of ownership of the disputed property will
not divest the inferior court of its jurisdiction over the ejectment case.[32] Even if the
pleadings raise the issue of ownership, the court may pass on such issue to determine only
the question of possession, especially if the ownership is inseparably linked with the
possession.[33] The adjudication on the issue of ownership is only provisional and will not bar
an action between the same parties involving title to the land. [34] This doctrine is a necessary
consequence of the nature of the two summary actions of ejectment, forcible entry and
unlawful detainer, where the only issue for adjudication is the physical or material possession
over the real property.[35]
In this case, what Guevarra raised before the courts was that he and Pajuyo are not the
owners of the contested property and that they are mere squatters. Will the defense that the
parties to the ejectment case are not the owners of the disputed lot allow the courts to
renounce their jurisdiction over the case? The Court of Appeals believed so and held that it
would just leave the parties where they are since they are in pari delicto.
We do not agree with the Court of Appeals.
Ownership or the right to possess arising from ownership is not at issue in an action for
recovery of possession. The parties cannot present evidence to prove ownership or right to
legal possession except to prove the nature of the possession when necessary to resolve the
issue of physical possession.[36] The same is true when the defendant asserts the absence of
title over the property. The absence of title over the contested lot is not a ground for the
courts to withhold relief from the parties in an ejectment case.
The only question that the courts must resolve in ejectment proceedings is - who is
entitled to the physical possession of the premises, that is, to the possession de facto and not
to the possession de jure.[37] It does not even matter if a partys title to the property is
questionable,[38] or when both parties intruded into public land and their applications to own
the land have yet to be approved by the proper government agency.[39] Regardless of the
actual condition of the title to the property, the party in peaceable quiet possession shall not
be thrown out by a strong hand, violence or terror.[40] Neither is the unlawful withholding of
property allowed. Courts will always uphold respect for prior possession.
Thus, a party who can prove prior possession can recover such possession even against
the owner himself.[41] Whatever may be the character of his possession, if he has in his favor
prior possession in time, he has the security that entitles him to remain on the property until
a person with a better right lawfully ejects him.[42] To repeat, the only issue that the court has
to settle in an ejectment suit is the right to physical possession.
In Pitargue v. Sorilla,[43] the government owned the land in dispute. The government
did not authorize either the plaintiff or the defendant in the case of forcible entry case to
occupy the land. The plaintiff had prior possession and had already introduced improvements
on the public land. The plaintiff had a pending application for the land with the Bureau of
Lands when the defendant ousted him from possession. The plaintiff filed the action of
forcible entry against the defendant. The government was not a party in the case of forcible
entry.
The defendant questioned the jurisdiction of the courts to settle the issue of
possession because while the application of the plaintiff was still pending, title remained with
the government, and the Bureau of Public Lands had jurisdiction over the case. We disagreed
with the defendant. We ruled that courts have jurisdiction to entertain ejectment suits even
before the resolution of the application. The plaintiff, by priority of his application and of his
entry, acquired prior physical possession over the public land applied for as against other
private claimants. That prior physical possession enjoys legal protection against other private
claimants because only a court can take away such physical possession in an ejectment case.
While the Court did not brand the plaintiff and the defendant in Pitargue[44] as
squatters, strictly speaking, their entry into the disputed land was illegal. Both the plaintiff
and defendant entered the public land without the owners permission. Title to the land
remained with the government because it had not awarded to anyone ownership of the
contested public land. Both the plaintiff and the defendant were in effect squatting on
government property. Yet, we upheld the courts jurisdiction to resolve the issue of
possession even if the plaintiff and the defendant in the ejectment case did not have any title
over the contested land.
Courts must not abdicate their jurisdiction to resolve the issue of physical possession
because of the public need to preserve the basic policy behind the summary actions of
forcible entry and unlawful detainer. The underlying philosophy behind ejectment suits is to
prevent breach of the peace and criminal disorder and to compel the party out of possession
to respect and resort to the law alone to obtain what he claims is his.[45] The party deprived
of possession must not take the law into his own hands. [46] Ejectment proceedings are
summary in nature so the authorities can settle speedily actions to recover possession
because of the overriding need to quell social disturbances.[47]
We further explained in Pitargue the greater interest that is at stake in actions for
recovery of possession. We made the following pronouncements in Pitargue:
The question that is before this Court is: Are courts without jurisdiction to take cognizance of
possessory actions involving these public lands before final award is made by the Lands
Department, and before title is given any of the conflicting claimants? It is one of utmost
importance, as there are public lands everywhere and there are thousands of settlers,
especially in newly opened regions. It also involves a matter of policy, as it requires the
determination of the respective authorities and functions of two coordinate branches of the
Government in connection with public land conflicts.
Our problem is made simple by the fact that under the Civil Code, either in the old, which
was in force in this country before the American occupation, or in the new, we have a
possessory action, the aim and purpose of which is the recovery of the physical possession of
real property, irrespective of the question as to who has the title thereto. Under the Spanish
Civil Code we had the accion interdictal, a summary proceeding which could be brought
within one year from dispossession (Roman Catholic Bishop of Cebu vs. Mangaron, 6 Phil.
286, 291); and as early as October 1, 1901, upon the enactment of the Code of Civil
Procedure (Act No. 190 of the Philippine Commission) we implanted the common law action
of forcible entry (section 80 of Act No. 190), the object of which has been stated by this Court
to be to prevent breaches of the peace and criminal disorder which would ensue from the
withdrawal of the remedy, and the reasonable hope such withdrawal would create that
some advantage must accrue to those persons who, believing themselves entitled to the
possession of property, resort to force to gain possession rather than to some appropriate
action in the court to assert their claims. (Supia and Batioco vs. Quintero and Ayala, 59 Phil.
312, 314.) So before the enactment of the first Public Land Act (Act No. 926) the action of
forcible entry was already available in the courts of the country. So the question to be
resolved is, Did the Legislature intend, when it vested the power and authority to alienate
and dispose of the public lands in the Lands Department, to exclude the courts from
entertaining the possessory action of forcible entry between rival claimants or occupants of
any land before award thereof to any of the parties? Did Congress intend that the lands
applied for, or all public lands for that matter, be removed from the jurisdiction of the judicial
Branch of the Government, so that any troubles arising therefrom, or any breaches of the
peace or disorders caused by rival claimants, could be inquired into only by the Lands
Department to the exclusion of the courts? The answer to this question seems to us evident.
The Lands Department does not have the means to police public lands; neither does it have
the means to prevent disorders arising therefrom, or contain breaches of the peace among
settlers; or to pass promptly upon conflicts of possession. Then its power is clearly limited to
disposition and alienation, and while it may decide conflicts of possession in order to make
proper award, the settlement of conflicts of possession which is recognized in the court
herein has another ultimate purpose, i.e., the protection of actual possessors and
occupants with a view to the prevention of breaches of the peace. The power to dispose
and alienate could not have been intended to include the power to prevent or settle
disorders or breaches of the peace among rival settlers or claimants prior to the final
award. As to this, therefore, the corresponding branches of the Government must continue
to exercise power and jurisdiction within the limits of their respective functions. The vesting
of the Lands Department with authority to administer, dispose, and alienate public lands,
therefore, must not be understood as depriving the other branches of the Government of
the exercise of the respective functions or powers thereon, such as the authority to stop
disorders and quell breaches of the peace by the police, the authority on the part of the
courts to take jurisdiction over possessory actions arising therefrom not involving, directly
or indirectly, alienation and disposition.
Our attention has been called to a principle enunciated in American courts to the effect that
courts have no jurisdiction to determine the rights of claimants to public lands, and that until
the disposition of the land has passed from the control of the Federal Government, the
courts will not interfere with the administration of matters concerning the same. (50 C. J.
1093-1094.) We have no quarrel with this principle. The determination of the respective
rights of rival claimants to public lands is different from the determination of who has the
actual physical possession or occupation with a view to protecting the same and preventing
disorder and breaches of the peace. A judgment of the court ordering restitution of the
possession of a parcel of land to the actual occupant, who has been deprived thereof by
another through the use of force or in any other illegal manner, can never be prejudicial
interference with the disposition or alienation of public lands. On the other hand, if courts
were deprived of jurisdiction of cases involving conflicts of possession, that threat of
judicial action against breaches of the peace committed on public lands would be
eliminated, and a state of lawlessness would probably be produced between applicants,
occupants or squatters, where force or might, not right or justice, would rule.
It must be borne in mind that the action that would be used to solve conflicts of possession
between rivals or conflicting applicants or claimants would be no other than that of forcible
entry. This action, both in England and the United States and in our jurisdiction, is a summary
and expeditious remedy whereby one in peaceful and quiet possession may recover the
possession of which he has been deprived by a stronger hand, by violence or terror; its
ultimate object being to prevent breach of the peace and criminal disorder. (Supia and
Batioco vs. Quintero and Ayala, 59 Phil. 312, 314.) The basis of the remedy is mere
possession as a fact, of physical possession, not a legal possession. (Mediran vs. Villanueva,
37 Phil. 752.) The title or right to possession is never in issue in an action of forcible entry; as
a matter of fact, evidence thereof is expressly banned, except to prove the nature of the
possession. (Second 4, Rule 72, Rules of Court.) With this nature of the action in mind, by no
stretch of the imagination can conclusion be arrived at that the use of the remedy in the
courts of justice would constitute an interference with the alienation, disposition, and
control of public lands. To limit ourselves to the case at bar can it be pretended at all that its
result would in any way interfere with the manner of the alienation or disposition of the land
contested? On the contrary, it would facilitate adjudication, for the question of priority of
possession having been decided in a final manner by the courts, said question need no longer
waste the time of the land officers making the adjudication or award. (Emphasis ours)
The Principle of Pari Delicto is not Applicable to Ejectment Cases
The Court of Appeals erroneously applied the principle of pari delicto to this case.
Articles 1411 and 1412 of the Civil Code[48] embody the principle of pari delicto. We
explained the principle of pari delicto in these words:
The rule of pari delicto is expressed in the maxims ex dolo malo non eritur actio and in pari
delicto potior est conditio defedentis. The law will not aid either party to an illegal agreement.
It leaves the parties where it finds them.[49]
The application of the pari delicto principle is not absolute, as there are exceptions to
its application. One of these exceptions is where the application of the pari delicto rule would
violate well-established public policy.[50]
In Drilon v. Gaurana,[51] we reiterated the basic policy behind the summary actions of
forcible entry and unlawful detainer. We held that:
It must be stated that the purpose of an action of forcible entry and detainer is that,
regardless of the actual condition of the title to the property, the party in peaceable quiet
possession shall not be turned out by strong hand, violence or terror. In affording this
remedy of restitution the object of the statute is to prevent breaches of the peace and
criminal disorder which would ensue from the withdrawal of the remedy, and the reasonable
hope such withdrawal would create that some advantage must accrue to those persons who,
believing themselves entitled to the possession of property, resort to force to gain
possession rather than to some appropriate action in the courts to assert their claims. This is
the philosophy at the foundation of all these actions of forcible entry and detainer which are
designed to compel the party out of possession to respect and resort to the law alone to
obtain what he claims is his.[52]
Clearly, the application of the principle of pari delicto to a case of ejectment between
squatters is fraught with danger. To shut out relief to squatters on the ground of pari
delicto would openly invite mayhem and lawlessness. A squatter would oust another
squatter from possession of the lot that the latter had illegally occupied, emboldened by the
knowledge that the courts would leave them where they are. Nothing would then stand in
the way of the ousted squatter from re-claiming his prior possession at all cost.
Petty warfare over possession of properties is precisely what ejectment cases or
actions for recovery of possession seek to prevent.[53] Even the owner who has title over the
disputed property cannot take the law into his own hands to regain possession of his
property. The owner must go to court.
Courts must resolve the issue of possession even if the parties to the ejectment suit are
squatters. The determination of priority and superiority of possession is a serious and urgent
matter that cannot be left to the squatters to decide. To do so would make squatters receive
better treatment under the law. The law restrains property owners from taking the law into
their own hands. However, the principle of pari delicto as applied by the Court of Appeals
would give squatters free rein to dispossess fellow squatters or violently retake possession of
properties usurped from them. Courts should not leave squatters to their own devices in
cases involving recovery of possession.
Possession is the only Issue for Resolution in an Ejectment Case
The case for review before the Court of Appeals was a simple case of ejectment. The
Court of Appeals refused to rule on the issue of physical possession. Nevertheless, the
appellate court held that the pivotal issue in this case is who between Pajuyo and Guevarra
has the priority right as beneficiary of the contested land under Proclamation No.
137.[54] According to the Court of Appeals, Guevarra enjoys preferential right under
Proclamation No. 137 because Article VI of the Code declares that the actual occupant or
caretaker is the one qualified to apply for socialized housing.
The ruling of the Court of Appeals has no factual and legal basis.
First. Guevarra did not present evidence to show that the contested lot is part of a
relocation site under Proclamation No. 137. Proclamation No. 137 laid down the metes and
bounds of the land that it declared open for disposition to bona fide residents.
The records do not show that the contested lot is within the land specified by
Proclamation No. 137. Guevarra had the burden to prove that the disputed lot is within the
coverage of Proclamation No. 137. He failed to do so.
Second. The Court of Appeals should not have given credence to Guevarras
unsubstantiated claim that he is the beneficiary of Proclamation No. 137. Guevarra merely
alleged that in the survey the project administrator conducted, he and not Pajuyo appeared
as the actual occupant of the lot.
There is no proof that Guevarra actually availed of the benefits of Proclamation No.
137. Pajuyo allowed Guevarra to occupy the disputed property in 1985. President Aquino
signed Proclamation No. 137 into law on 11 March 1986. Pajuyo made his earliest demand
for Guevarra to vacate the property in September 1994.
During the time that Guevarra temporarily held the property up to the time that
Proclamation No. 137 allegedly segregated the disputed lot, Guevarra never applied as
beneficiary of Proclamation No. 137. Even when Guevarra already knew that Pajuyo was
reclaiming possession of the property, Guevarra did not take any step to comply with the
requirements of Proclamation No. 137.
Third. Even assuming that the disputed lot is within the coverage of Proclamation No.
137 and Guevarra has a pending application over the lot, courts should still assume
jurisdiction and resolve the issue of possession. However, the jurisdiction of the courts would
be limited to the issue of physical possession only.
In Pitargue,[55] we ruled that courts have jurisdiction over possessory actions involving
public land to determine the issue of physical possession. The determination of the
respective rights of rival claimants to public land is, however, distinct from the determination
of who has the actual physical possession or who has a better right of physical
possession.[56] The administrative disposition and alienation of public lands should be
threshed out in the proper government agency.[57]
The Court of Appeals determination of Pajuyo and Guevarras rights under Proclamation
No. 137 was premature. Pajuyo and Guevarra were at most merely potential beneficiaries of
the law. Courts should not preempt the decision of the administrative agency mandated by
law to determine the qualifications of applicants for the acquisition of public lands. Instead,
courts should expeditiously resolve the issue of physical possession in ejectment cases to
prevent disorder and breaches of peace.[58]
Pajuyo is Entitled to Physical Possession of the Disputed Property
Guevarra does not dispute Pajuyos prior possession of the lot and ownership of the
house built on it. Guevarra expressly admitted the existence and due execution of
the Kasunduan. The Kasunduan reads:
Ako, si COL[I]TO PAJUYO, may-ari ng bahay at lote sa Bo. Payatas, Quezon City, ay nagbibigay
pahintulot kay G. Eddie Guevarra, na pansamantalang manirahan sa nasabing bahay at lote
ng walang bayad. Kaugnay nito, kailangang panatilihin nila ang kalinisan at kaayusan ng
bahay at lote.
Sa sandaling kailangan na namin ang bahay at lote, silay kusang aalis ng walang reklamo.
Based on the Kasunduan, Pajuyo permitted Guevarra to reside in the house and lot free
of rent, but Guevarra was under obligation to maintain the premises in good condition.
Guevarra promised to vacate the premises on Pajuyos demand but Guevarra broke his
promise and refused to heed Pajuyos demand to vacate.
These facts make out a case for unlawful detainer. Unlawful detainer involves the
withholding by a person from another of the possession of real property to which the latter is
entitled after the expiration or termination of the formers right to hold possession under a
contract, express or implied.[59]
Where the plaintiff allows the defendant to use his property by tolerance without any
contract, the defendant is necessarily bound by an implied promise that he will vacate on
demand, failing which, an action for unlawful detainer will lie.[60] The defendants refusal to
comply with the demand makes his continued possession of the property unlawful. [61] The
status of the defendant in such a case is similar to that of a lessee or tenant whose term of
lease has expired but whose occupancy continues by tolerance of the owner.[62]
This principle should apply with greater force in cases where a contract embodies the
permission or tolerance to use the property. The Kasunduan expressly articulated Pajuyos
forbearance. Pajuyo did not require Guevarra to pay any rent but only to maintain the house
and lot in good condition. Guevarra expressly vowed in the Kasunduan that he would vacate
the property on demand. Guevarras refusal to comply with Pajuyos demand to vacate made
Guevarras continued possession of the property unlawful.
We do not subscribe to the Court of Appeals theory that the Kasunduan is one
of commodatum.
In a contract of commodatum, one of the parties delivers to another something not
consumable so that the latter may use the same for a certain time and return it. [63] An
essential feature of commodatum is that it is gratuitous. Another feature of commodatum is
that the use of the thing belonging to another is for a certain period. [64] Thus, the bailor
cannot demand the return of the thing loaned until after expiration of the period stipulated,
or after accomplishment of the use for which the commodatum is constituted.[65] If the bailor
should have urgent need of the thing, he may demand its return for temporary use. [66] If the
use of the thing is merely tolerated by the bailor, he can demand the return of the thing at
will, in which case the contractual relation is called a precarium.[67] Under the Civil
Code, precarium is a kind of commodatum.[68]
The Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra was
not essentially gratuitous. While the Kasunduan did not require Guevarra to pay rent, it
obligated him to maintain the property in good condition. The imposition of this obligation
makes the Kasunduan a contract different from a commodatum. The effects of
the Kasunduan are also different from that of a commodatum. Case law on ejectment has
treated relationship based on tolerance as one that is akin to a landlord-tenant relationship
where the withdrawal of permission would result in the termination of the lease. [69] The
tenants withholding of the property would then be unlawful.This is settled jurisprudence.
Even assuming that the relationship between Pajuyo and Guevarra is one
of commodatum, Guevarra as bailee would still have the duty to turn over possession of the
property to Pajuyo, the bailor. The obligation to deliver or to return the thing received
attaches to contracts for safekeeping, or contracts of commission, administration
and commodatum.[70] These contracts certainly involve the obligation to deliver or return the
thing received.[71]
Guevarra turned his back on the Kasunduan on the sole ground that like him, Pajuyo is
also a squatter. Squatters, Guevarra pointed out, cannot enter into a contract involving the
land they illegally occupy. Guevarra insists that the contract is void.
Guevarra should know that there must be honor even between squatters. Guevarra
freely entered into the Kasunduan. Guevarra cannot now impugn the Kasunduan after he
had benefited from it. The Kasunduan binds Guevarra.
The Kasunduan is not void for purposes of determining who between Pajuyo and
Guevarra has a right to physical possession of the contested property. The Kasunduan is the
undeniable evidence of Guevarras recognition of Pajuyos better right of physical possession.
Guevarra is clearly a possessor in bad faith. The absence of a contract would not yield a
different result, as there would still be an implied promise to vacate.
Guevarra contends that there is a pernicious evil that is sought to be avoided, and that
is allowing an absentee squatter who (sic) makes (sic) a profit out of his illegal
act.[72] Guevarra bases his argument on the preferential right given to the actual occupant or
caretaker under Proclamation No. 137 on socialized housing.
We are not convinced.
Pajuyo did not profit from his arrangement with Guevarra because Guevarra stayed in
the property without paying any rent. There is also no proof that Pajuyo is a professional
squatter who rents out usurped properties to other squatters. Moreover, it is for the proper
government agency to decide who between Pajuyo and Guevarra qualifies for socialized
housing. The only issue that we are addressing is physical possession.
Prior possession is not always a condition sine qua non in ejectment.[73] This is one of
the distinctions between forcible entry and unlawful detainer.[74] In forcible entry, the
plaintiff is deprived of physical possession of his land or building by means of force,
intimidation, threat, strategy or stealth. Thus, he must allege and prove prior
possession.[75] But in unlawful detainer, the defendant unlawfully withholds possession after
the expiration or termination of his right to possess under any contract, express or implied.
In such a case, prior physical possession is not required.[76]
Pajuyos withdrawal of his permission to Guevarra terminated
the Kasunduan. Guevarras transient right to possess the property ended as well. Moreover, it
was Pajuyo who was in actual possession of the property because Guevarra had to seek
Pajuyos permission to temporarily hold the property and Guevarra had to follow the
conditions set by Pajuyo in the Kasunduan. Control over the property still rested with Pajuyo
and this is evidence of actual possession.
Pajuyos absence did not affect his actual possession of the disputed property.
Possession in the eyes of the law does not mean that a man has to have his feet on every
square meter of the ground before he is deemed in possession.[77] One may acquire
possession not only by physical occupation, but also by the fact that a thing is subject to the
action of ones will.[78] Actual or physical occupation is not always necessary.[79]
Ruling on Possession Does not Bind Title to the Land in Dispute
We are aware of our pronouncement in cases where we declared that squatters and
intruders who clandestinely enter into titled government property cannot, by such act,
acquire any legal right to said property.[80] We made this declaration because the person who
had title or who had the right to legal possession over the disputed property was a party in
the ejectment suit and that party instituted the case against squatters or usurpers.
In this case, the owner of the land, which is the government, is not a party to the
ejectment case. This case is between squatters. Had the government participated in this
case, the courts could have evicted the contending squatters, Pajuyo and Guevarra.
Since the party that has title or a better right over the property is not impleaded in this
case, we cannot evict on our own the parties. Such a ruling would discourage squatters from
seeking the aid of the courts in settling the issue of physical possession. Stripping both the
plaintiff and the defendant of possession just because they are squatters would have the
same dangerous implications as the application of the principle of pari delicto. Squatters
would then rather settle the issue of physical possession among themselves than seek relief
from the courts if the plaintiff and defendant in the ejectment case would both stand to lose
possession of the disputed property. This would subvert the policy underlying actions for
recovery of possession.
Since Pajuyo has in his favor priority in time in holding the property, he is entitled to
remain on the property until a person who has title or a better right lawfully ejects
him. Guevarra is certainly not that person. The ruling in this case, however, does not
preclude Pajuyo and Guevarra from introducing evidence and presenting arguments before
the proper administrative agency to establish any right to which they may be entitled under
the law.[81]
In no way should our ruling in this case be interpreted to condone squatting. The ruling
on the issue of physical possession does not affect title to the property nor constitute a
binding and conclusive adjudication on the merits on the issue of ownership.[82] The owner
can still go to court to recover lawfully the property from the person who holds the property
without legal title. Our ruling here does not diminish the power of government agencies,
including local governments, to condemn, abate, remove or demolish illegal or unauthorized
structures in accordance with existing laws.
Attorneys Fees and Rentals
The MTC and RTC failed to justify the award of P3,000 attorneys fees to
Pajuyo. Attorneys fees as part of damages are awarded only in the instances enumerated in
Article 2208 of the Civil Code.[83] Thus, the award of attorneys fees is the exception rather
than the rule.[84] Attorneys fees are not awarded every time a party prevails in a suit because
of the policy that no premium should be placed on the right to litigate. [85] We therefore
delete the attorneys fees awarded to Pajuyo.
We sustain the P300 monthly rentals the MTC and RTC assessed against
Guevarra. Guevarra did not dispute this factual finding of the two courts. We find the
amount reasonable compensation to Pajuyo. The P300 monthly rental is counted from the
last demand to vacate, which was on 16 February 1995.
WHEREFORE, we GRANT the petition. The Decision dated 21 June 2000 and Resolution
dated 14 December 2000 of the Court of Appeals in CA-G.R. SP No. 43129 are SET ASIDE. The
Decision dated 11 November 1996 of the Regional Trial Court of Quezon City, Branch 81 in
Civil Case No. Q-96-26943, affirming the Decision dated 15 December 1995 of the
Metropolitan Trial Court of Quezon City, Branch 31 in Civil Case No. 12432, is REINSTATED
with MODIFICATION. The award of attorneys fees is deleted. No costs.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Panganiban, Ynares-Santiago, and Azcuna, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-46240 November 3, 1939
MARGARITA QUINTOS and ANGEL A. ANSALDO, plaintiffs-appellants,
vs.
BECK, defendant-appellee.
Mauricio Carlos for appellants.
Felipe Buencamino, Jr. for appellee.
IMPERIAL, J.:
The plaintiff brought this action to compel the defendant to return her certain furniture
which she lent him for his use. She appealed from the judgment of the Court of First Instance
of Manila which ordered that the defendant return to her the three has heaters and the four
electric lamps found in the possession of the Sheriff of said city, that she call for the other
furniture from the said sheriff of Manila at her own expense, and that the fees which the
Sheriff may charge for the deposit of the furniture be paid pro rata by both parties, without
pronouncement as to the costs.
The defendant was a tenant of the plaintiff and as such occupied the latter's house on M. H.
del Pilar street, No. 1175. On January 14, 1936, upon the novation of the contract of lease
between the plaintiff and the defendant, the former gratuitously granted to the latter the
use of the furniture described in the third paragraph of the stipulation of facts, subject to the
condition that the defendant would return them to the plaintiff upon the latter's demand.
The plaintiff sold the property to Maria Lopez and Rosario Lopez and on September 14, 1936,
these three notified the defendant of the conveyance, giving him sixty days to vacate the
premises under one of the clauses of the contract of lease. There after the plaintiff required
the defendant to return all the furniture transferred to him for them in the house where they
were found. On November 5, 1936, the defendant, through another person, wrote to
the plaintiff reiterating that she may call for the furniture in the ground floor of the house.
On the 7th of the same month, the defendant wrote another letter to the plaintiff informing
her that he could not give up the three gas heaters and the four electric lamps because he
would use them until the 15th of the same month when the lease in due to expire. The
plaintiff refused to get the furniture in view of the fact that the defendant had declined to
make delivery of all of them. On November 15th, before vacating the house, the
defendant deposited with the Sheriff all the furniture belonging to the plaintiff and they are
now on deposit in the warehouse situated at No. 1521, Rizal Avenue, in the custody of the
said sheriff.
In their seven assigned errors the plaintiffs contend that the trial court incorrectly applied
the law: in holding that they violated the contract by not calling for all the furniture on
November 5, 1936, when the defendant placed them at their disposal; in not ordering the
defendant to pay them the value of the furniture in case they are not delivered; in holding
that they should get all the furniture from the Sheriff at their expenses; in ordering them to
pay-half of the expenses claimed by the Sheriff for the deposit of the furniture; in ruling that
both parties should pay their respective legal expenses or the costs; and in denying pay their
respective legal expenses or the costs; and in denying the motions for reconsideration and
new trial. To dispose of the case, it is only necessary to decide whether the defendant
complied with his obligation to return the furniture upon the plaintiff's demand; whether the
latter is bound to bear the deposit fees thereof, and whether she is entitled to the costs of
litigation.lawphi1.net
The contract entered into between the parties is one of commadatum, because under it the
plaintiff gratuitously granted the use of the furniture to the defendant, reserving for herself
the ownership thereof; by this contract the defendant bound himself to return the furniture
to the plaintiff, upon the latters demand (clause 7 of the contract, Exhibit A; articles 1740,
paragraph 1, and 1741 of the Civil Code). The obligation voluntarily assumed by the
defendant to return the furniture upon the plaintiff's demand, means that he should return
all of them to the plaintiff at the latter's residence or house. The defendant did not comply
with this obligation when he merely placed them at the disposal of the plaintiff, retaining for
his benefit the three gas heaters and the four eletric lamps. The provisions of article 1169 of
the Civil Code cited by counsel for the parties are not squarely applicable. The trial court,
therefore, erred when it came to the legal conclusion that the plaintiff failed to comply with
her obligation to get the furniture when they were offered to her.
As the defendant had voluntarily undertaken to return all the furniture to the plaintiff, upon
the latter's demand, the Court could not legally compel her to bear the expenses occasioned
by the deposit of the furniture at the defendant's behest. The latter, as bailee, was not
entitled to place the furniture on deposit; nor was the plaintiff under a duty to accept the
offer to return the furniture, because the defendant wanted to retain the three gas heaters
and the four electric lamps.
As to the value of the furniture, we do not believe that the plaintiff is entitled to the payment
thereof by the defendant in case of his inability to return some of the furniture because
under paragraph 6 of the stipulation of facts, the defendant has neither agreed to nor
admitted the correctness of the said value. Should the defendant fail to deliver some of the
furniture, the value thereof should be latter determined by the trial Court through evidence
which the parties may desire to present.
The costs in both instances should be borne by the defendant because the plaintiff is the
prevailing party (section 487 of the Code of Civil Procedure). The defendant was the one who
breached the contract of commodatum, and without any reason he refused to return and
deliver all the furniture upon the plaintiff's demand. In these circumstances, it is just and
equitable that he pay the legal expenses and other judicial costs which the plaintiff would not
have otherwise defrayed.
The appealed judgment is modified and the defendant is ordered to return and deliver to the
plaintiff, in the residence to return and deliver to the plaintiff, in the residence or house of
the latter, all the furniture described in paragraph 3 of the stipulation of facts Exhibit A. The
expenses which may be occasioned by the delivery to and deposit of the furniture with the
Sheriff shall be for the account of the defendant. the defendant shall pay the costs in both
instances. So ordered.
Avancea, C.J., Villa-Real, Laurel, Concepcion and Moran, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 183360 September 8, 2014
ROLANDO C. DE LA PAZ,* Petitioner,
vs.
L & J DEVELOPMENT COMPANY, Respondent.
DECISION
DEL CASTILLO, J.:
"No interest shall be due unless it has been expressly stipulated in writing."1
This is a Petition for Review on Certiorari2 assailing the February 27, 2008 Decision3 of the
Court of Appeals (CA) in CA-G.R. SP No. 100094, which reversed and set aside the
Decision4 dated April 19, 2007 of the Regional Trial Court (RTC), Branch 192, Marikina City in
Civil Case No. 06-1145-MK. The said RTC Decision affirmed in all respects the Decision5 dated
June 30, 2006 of the Metropolitan Trial Court (MeTC), Branch 75, Marikina City in Civil Case
No. 05-7755, which ordered respondent L & J Development Company (L&J) to pay petitioner
Architect Rolando C. De La Paz (Rolando) its principal obligation of 350,000.00, plus 12%
interest per annumreckoned from the filing of the Complaint until full payment of the
obligation.
Likewise assailed is the CAs June 6, 2008 Resolution6 which denied Rolandos Motion for
Reconsideration.
Factual Antecedents
On December 27, 2000, Rolando lent 350,000.00 without any security to L&J, a property
developer with Atty. Esteban Salonga (Atty. Salonga) as its President and General Manager.
The loan, with no specified maturity date, carried a 6% monthly interest, i.e., 21,000.00.
From December 2000 to August 2003, L&J paid Rolando a total of 576,000.00 7 representing
interest charges.
As L&J failed to pay despite repeated demands, Rolando filed a Complaint8 for Collection of
Sum of Money with Damages against L&J and Atty. Salonga in his personal capacity before
the MeTC, docketed as Civil Case No. 05-7755. Rolando alleged, amongothers, that L&Js
debtas of January 2005, inclusive of the monthly interest, stood at 772,000.00; that the 6%
monthly interest was upon Atty. Salongas suggestion; and, that the latter tricked him into
parting with his money without the loan transaction being reduced into writing.
In their Answer,9 L&J and Atty. Salonga denied Rolandos allegations. While they
acknowledged the loan as a corporate debt, they claimed that the failure to pay the same
was due to a fortuitous event, that is, the financial difficulties brought about by the economic
crisis. They further argued that Rolando cannot enforce the 6% monthly interest for being
unconscionable and shocking to the morals. Hence, the payments already made should be
applied to the 350,000.00 principal loan.
During trial, Rolando testified that he had no communication with Atty. Salonga prior to the
loan transaction but knew him as a lawyer, a son of a former Senator, and the owner of L&J
which developed Brentwood Subdivision in Antipolo where his associate Nilo Velasco (Nilo)
lives. When Nilo told him that Atty. Salonga and L&J needed money to finish their projects,
heagreed to lend them money. He personally met withAtty. Salonga and their meeting was
cordial.
He narrated that when L&J was in the process of borrowing the 350,000.00 from him, it was
Arlene San Juan (Arlene), the secretary/treasurer of L&J, who negotiated the terms and
conditions thereof.She said that the money was to finance L&Js housing project. Rolando
claimed that it was not he who demanded for the 6% monthly interest. It was L&J and Atty.
Salonga, through Arlene, who insisted on paying the said interest as they asserted that the
loan was only a short-term one.
Ruling of the Metropolitan Trial Court
The MeTC, in its Decision10 of June 30, 2006, upheld the 6% monthly interest. In so ruling, it
ratiocinated that since L&J agreed thereto and voluntarily paid the interest at suchrate from
2000 to 2003, it isalready estopped from impugning the same. Nonetheless, for reasons of
equity, the saidcourt reduced the interest rate to 12% per annumon the remaining principal
obligation of 350,000.00. With regard to Rolandos prayer for moral damages, the MeTC
denied the same as it found no malice or bad faith on the part ofL&J in not paying the
obligation. It likewise relieved Atty. Salonga of any liability as it found that he merely acted in
his official capacity in obtaining the loan. The MeTC disposed of the case as follows:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff,
Arch. Rolando C. Dela Paz, and against the defendant, L & J Development Co., Inc., as follows:
a) ordering the defendant L & J Development Co., Inc. to pay plaintiff the amount
of Three Hundred Fifty Thousand Pesos (350,000.00) representing the principal
obligation, plus interest at the legal rate of 12% per annum to be computed from
January 20, 2005, the date of the filing of the complaint, until the whole obligation
is fully paid;
b) ordering the defendant L & J Development Co., Inc. to pay plaintiff the amount
of Five Thousand Pesos (5,000.00) as and for attorneys fees; and
c) to pay the costs of this suit.
SO ORDERED.11
Ruling of the Regional Trial Court
L&J appealed to the RTC. It asserted in its appeal memorandum12 that from December 2000
to March 2003, it paid monthly interest of 21,000.00 based on the agreed-upon interest
rate of 6%monthly and from April 2003 to August 2003, interest paymentsin various
amounts.13The total of interest payments made amounts to 576,000.00 an amount which
is even more than the principal obligation of 350,000.00
L&J insisted that the 6% monthly interest rate is unconscionable and immoral. Hence, the
12% per annumlegal interest should have been applied from the time of the constitution of
the obligation. At 12% per annum interest rate, it asserted that the amount of interestit
ought to pay from December 2000 to March 2003 and from April 2003 to August 2003, only
amounts to 105,000.00. If this amount is deducted from the total interest paymentsalready
made, which is 576,000.00, the amount of 471,000.00 appears to have beenpaid over and
above what is due. Applying the rule on compensation, the principal loan of 350,000.00
should be set-off against the 471,000.00, resulting in the complete payment of the principal
loan.
Unconvinced, the RTC, inits April 19, 2007 Decision,14 affirmed the MeTC Decision, viz:
WHEREFORE, premises considered, the Decision appealed from is hereby AFFIRMED in all
respects, with costs against the appellant.
SO ORDERED.15
Ruling of the Court of Appeals
Undaunted, L&J went to the CA and echoed its arguments and proposed computation as
proffered before the RTC.
In a Decision16 dated February 27, 2008, the CAreversed and set aside the RTC Decision. The
CA stressed that the parties failedto stipulate in writing the imposition of interest on the
loan. Hence, no interest shall be due thereon pursuant to Article 1956 of the Civil
Code.17 And even if payment of interest has been stipulated in writing, the 6% monthly
interest is still outrightly illegal and unconscionable because it is contrary to morals, if not
against the law. Being void, this cannot be ratified and may be set up by the debtor as
defense. For these reasons, Rolando cannot collect any interest even if L&J offered to pay
interest. Consequently, he has to return all the interest payments of 576,000.00 to L&J.
Considering further that Rolando and L&J thereby became creditor and debtor of each other,
the CA applied the principle of legal compensation under Article 1279 of the Civil
Code.18 Accordingly, it set off the principal loan of 350,000.00 against the 576,000.00 total
interest payments made, leaving an excess of 226,000.00, which the CA ordered Rolando to
pay L&J plus interest. Thus:
WHEREFORE, the DECISION DATED APRIL 19, 2007 is REVERSED and SET ASIDE.
CONSEQUENT TO THE FOREGOING, respondent Rolando C. Dela Paz is ordered to pay to the
petitioner the amount of 226,000.00,plus interest of 12% per annumfrom the finality of this
decision.
Costs of suit to be paid by respondent Dela Paz.
SO ORDERED.19
In his Motion for Reconsideration,20 Rolando argued thatthe circumstances exempt both the
application of Article 1956 and of jurisprudence holding that a 6% monthly interest is
unconscionable, unreasonable, and exorbitant. He alleged that Atty. Salonga, a lawyer,
should have taken it upon himself to have the loan and the stipulated rate of interest
documented but, by way of legal maneuver, Atty. Salonga, whom he fully trusted and relied
upon, tricked him into believing that the undocumented and uncollateralized loan was
withinlegal bounds. Had Atty. Salonga told him that the stipulated interest should be in
writing, he would have readily assented. Furthermore, Rolando insisted that the 6% monthly
interest ratecould not be unconscionable as in the first place, the interest was not imposed
by the creditor but was in fact offered by the borrower, who also dictated all the terms of the
loan. He stressed that in cases where interest rates were declared unconscionable, those
meant to be protected by such declaration are helpless borrowers which is not the case here.
Still, the CA denied Rolandos motion in its Resolution21 of June 6, 2008.
Hence, this Petition.
The Parties Arguments
Rolando argues that the 6%monthly interest rateshould not have been invalidated because
Atty. Salonga took advantage of his legal knowledge to hoodwink him into believing that no
document was necessaryto reflect the interest rate. Moreover, the cases anent
unconscionable interest rates that the CA relied upon involve lenders who imposed the
excessive rates,which are totally different from the case at bench where it is the borrower
who decided on the high interest rate. This case does not fall under a scenariothat enslaves
the borrower or that leads to the hemorrhaging of his assets that the courts seek to prevent.
L&J, in controverting Rolandos arguments, contends that the interest rate is subject of
negotiation and is agreedupon by both parties, not by the borrower alone. Furthermore,
jurisprudence has nullified interestrates on loans of 3% per month and higher as these rates
are contrary to moralsand public interest. And while Rolando raises bad faithon Atty.
Salongas part, L&J avers thatsuch issue is a question of fact, a matter that cannot be raised
under Rule 45.
Issue
The Courts determination of whether to uphold the judgment of the CA that the principal
loan is deemed paid isdependent on the validity of the monthly interest rate imposed. And in
determining such validity, the Court must necessarily delve into matters regarding a) the
form of the agreement of interest under the law and b) the alleged unconscionability of the
interest rate. Our Ruling
The Petition is devoid of merit.
The lack of a written stipulation to pay interest on the loaned amount disallows a creditor
from charging monetary interest.
Under Article 1956 of the Civil Code, no interest shall bedue unless it has been expressly
stipulated in writing. Jurisprudence on the matter also holds that for interest to be due and
payable, two conditions must concur: a) express stipulation for the payment of interest; and
b) the agreement to pay interest is reduced in writing.
Here, it is undisputed that the parties did not put down in writing their agreement. Thus, no
interest is due. The collection of interest without any stipulation in writing is prohibited by
law.22
But Rolando asserts that his situation deserves an exception to the application of Article
1956. He blames Atty. Salonga for the lack of a written document, claiming that said lawyer
used his legal knowledge to dupe him. Rolando thus imputes bad faith on the part of L&J and
Atty. Salonga. The Court, however, finds no deception on the partof L&J and Atty. Salonga.
For one, despite the lack of a document stipulating the payment of interest, L&J nevertheless
devotedly paid interests on the loan. It only stopped when it suffered from financial
difficulties that prevented it from continuously paying the 6% monthly rate. For
another,regardless of Atty. Salongas profession, Rolando who is an architect and an
educated man himself could have been a more reasonably prudent person under the
circumstances. To top it all, he admitted that he had no prior communication with Atty.
Salonga. Despite Atty. Salonga being a complete stranger, he immediately trusted him and
lent his company 350,000.00, a significant amount. Moreover, as the creditor,he could have
requested or required that all the terms and conditions of the loan agreement, which include
the payment of interest, be put down in writing to ensure that he and L&J are on the same
page. Rolando had a choice of not acceding and to insist that their contract be put in written
form as this will favor and safeguard him as a lender. Unfortunately, he did not. It must be
stressed that "[c]ourts cannot follow one every step of his life and extricate him from bad
bargains, protect him from unwise investments, relieve him from one-sided contracts,or
annul the effects of foolish acts. Courts cannotconstitute themselves guardians of persons
who are not legally incompetent."23
It may be raised that L&J is estopped from questioning the interest rate considering that it
has been paying Rolando interest at such ratefor more than two and a half years. In fact, in
its pleadings before the MeTCand the RTC, L&J merely prayed for the reduction of interest
from 6% monthly to 1% monthly or 12% per annum. However, in Ching v. Nicdao, 24 the daily
payments of the debtor to the lender were considered as payment of the principal amount of
the loan because Article 1956 was not complied with. This was notwithstanding the debtors
admission that the payments made were for the interests due. The Court categorically stated
therein that "[e]stoppel cannot give validity to an act that is prohibited by law or one thatis
against public policy."
Even if the payment of interest has been reduced in writing, a 6% monthly interest rate on a
loan is unconscionable, regardless of who between the parties proposed the rate.
Indeed at present, usury has been legally non-existent in view of the suspension of the Usury
Law25 by Central Bank Circular No. 905 s. 1982.26 Even so, not all interest rates levied upon
loans are permitted by the courts as they have the power to equitably reduce unreasonable
interest rates. In Trade & Investment Development Corporation of the Philippines v. Roblett
Industrial Construction Corporation,27 we said:
While the Court recognizes the right of the parties to enter into contracts and who are
expectedto comply with their terms and obligations, this rule is not absolute. Stipulated
interest rates are illegal if they are unconscionable and the Court is allowed to temper
interest rates when necessary. In exercising this vested power to determine what is
iniquitous and unconscionable, the Court must consider the circumstances of each case.
What may be iniquitous and unconscionable in onecase, may be just in another. x x x28
Time and again, it has been ruled in a plethora of cases that stipulated interest rates of 3%
per month and higher, are excessive, iniquitous, unconscionable and exorbitant. Such
stipulations are void for being contrary to morals, if not against the law.29 The Court,
however, stresses that these rates shall be invalidated and shall be reduced only in cases
where the terms of the loans are open-ended, and where the interest rates are applied for
an indefinite period. Hence, the imposition of a specific sum of 40,000.00 a month for six
months on a 1,000,000.00 loan is not considered unconscionable. 30
In the case at bench, there is no specified period as to the payment of the loan. Hence,
levying 6% monthly or 72% interest per annumis "definitely outrageous and
inordinate."31 The situation that it was the debtor who insisted on the interest rate will not
exempt Rolando from a ruling that the rate is void. As this Court cited in Asian Cathay
Finance and Leasing Corporation v. Gravador,32 "[t]he imposition of an unconscionable rate
of interest on a money debt, even if knowingly and voluntarily assumed, is immoral and
unjust. It is tantamount to a repugnant spoliation and an iniquitous deprivation of property,
repulsive to the common sense of man."33 Indeed, "voluntariness does notmake the
SEPARATION PAY
stipulation on [an unconscionable] interest valid."34
As exhaustibly discussed,no monetary interest isdue Rolando pursuant to Article Date Hired = August 1990
1956.1wphi1 The CA thus correctly adjudged that the excess interest payments made by
L&J should be applied to its principal loan. As computed by the CA, Rolando is bound to Rate = 198/day
return the excess payment of 226,000.00 to L&J following the principle of solutio indebiti.35
However, pursuant to Central Bank Circular No. 799 s. 2013 which took effect on July 1, Date of Decision = Aug. 18, 1998
2013,36 the interest imposed by the CA must be accordingly modified. The 226,000.00 which
Rolando is ordered to pay L&J shall earn an interest of 6% per annumfrom the finality of this Length of Service = 8 yrs. & 1 month
Decision.
198.00 x 26 days x 8 months = 41,184.00
WHEREFORE, the Decision dated February 27, 2008 of the Court of Appeals in CA-G.R. SP No.
100094 is hereby AFFIRMED with modification that petitioner Rolando C. De La Paz is BACKWAGES
ordered to pay respondent L&J Development Company the amount of ,226,000.00, plus
interest of 6o/o per annum from the finality of this Decision until fully paid. Date Dismissed = January 24, 1997
SO ORDERED.
MARIANO C. DEL CASTILLO Rate per day = 196.00
Associate Justice
epublic of the Philippines Date of Decisions = Aug. 18, 1998
SUPREME COURT
Manila a) 1/24/97 to 2/5/98 = 12.36 mos.
EN BANC
196.00/day x 12.36 mos. = 62,986.56
G.R. No. 189871 August 13, 2013
DARIO NACAR, PETITIONER, b) 2/6/98 to 8/18/98 = 6.4 months
vs.
GALLERY FRAMES AND/OR FELIPE BORDEY, JR., RESPONDENTS. Prevailing Rate per day = 62,986.00
DECISION
PERALTA, J.: 198.00 x 26 days x 6.4 mos. = 32,947.20
This is a petition for review on certiorari assailing the Decision 1 dated September 23, 2008 of
the Court of Appeals (CA) in CA-G.R. SP No. 98591, and the Resolution2 dated October 9, TOTAL = 95.933.76
2009 denying petitioners motion for reconsideration. xxxx
The factual antecedents are undisputed. WHEREFORE, premises considered, judgment is hereby rendered finding respondents guilty
Petitioner Dario Nacar filed a complaint for constructive dismissal before the Arbitration of constructive dismissal and are therefore, ordered:
Branch of the National Labor Relations Commission (NLRC) against respondents Gallery To pay jointly and severally the complainant the amount of sixty-two thousand nine hundred
Frames (GF) and/or Felipe Bordey, Jr., docketed as NLRC NCR Case No. 01-00519-97. eighty-six pesos and 56/100 (62,986.56) Pesos representing his separation pay;
On October 15, 1998, the Labor Arbiter rendered a Decision3 in favor of petitioner and found To pay jointly and severally the complainant the amount of nine (sic) five thousand nine
that he was dismissed from employment without a valid or just cause. Thus, petitioner was hundred thirty-three and 36/100 (95,933.36) representing his backwages; and
awarded backwages and separation pay in lieu of reinstatement in the amount of All other claims are hereby dismissed for lack of merit.
158,919.92. The dispositive portion of the decision, reads: SO ORDERED.4
With the foregoing, we find and so rule that respondents failed to discharge the burden of Respondents appealed to the NLRC, but it was dismissed for lack of merit in the
showing that complainant was dismissed from employment for a just or valid cause. All the Resolution5 dated February 29, 2000. Accordingly, the NLRC sustained the decision of the
more, it is clear from the records that complainant was never afforded due process before he Labor Arbiter. Respondents filed a motion for reconsideration, but it was denied.6
was terminated. As such, we are perforce constrained to grant complainants prayer for the Dissatisfied, respondents filed a Petition for Review on Certiorari before the CA. On August
payments of separation pay in lieu of reinstatement to his former position, considering the 24, 2000, the CA issued a Resolution dismissing the petition. Respondents filed a Motion for
strained relationship between the parties, and his apparent reluctance to be reinstated, Reconsideration, but it was likewise denied in a Resolution dated May 8, 2001.7
computed only up to promulgation of this decision as follows:
Respondents then sought relief before the Supreme Court, docketed as G.R. No. 151332.
Finding no reversible error on the part of the CA, this Court denied the petition in the
Resolution dated April 17, 2002.8
An Entry of Judgment was later issued certifying that the resolution became final and
executory on May 27, 2002.9 The case was, thereafter, referred back to the Labor Arbiter. A
pre-execution conference was consequently scheduled, but respondents failed to appear.10
On November 5, 2002, petitioner filed a Motion for Correct Computation, praying that his
backwages be computed from the date of his dismissal on January 24, 1997 up to the finality
of the Resolution of the Supreme Court on May 27, 2002.11 Upon recomputation, the
Computation and Examination Unit of the NLRC arrived at an updated amount in the sum of
471,320.31.12
On December 2, 2002, a Writ of Execution13 was issued by the Labor Arbiter ordering the
Sheriff to collect from respondents the total amount of 471,320.31. Respondents filed a
Motion to Quash Writ of Execution, arguing, among other things, that since the Labor Arbiter
awarded separation pay of 62,986.56 and limited backwages of 95,933.36, no more
recomputation is required to be made of the said awards. They claimed that after the
decision becomes final and executory, the same cannot be altered or amended
anymore.14 On January 13, 2003, the Labor Arbiter issued an Order15 denying the motion.
Thus, an Alias Writ of Execution16 was issued on January 14, 2003.
Respondents again appealed before the NLRC, which on June 30, 2003 issued a
Resolution17 granting the appeal in favor of the respondents and ordered the recomputation
of the judgment award.
On August 20, 2003, an Entry of Judgment was issued declaring the Resolution of the NLRC to
be final and executory. Consequently, another pre-execution conference was held, but
respondents failed to appear on time. Meanwhile, petitioner moved that an Alias Writ of
Execution be issued to enforce the earlier recomputed judgment award in the sum of
471,320.31.18
The records of the case were again forwarded to the Computation and Examination Unit for
recomputation, where the judgment award of petitioner was reassessed to be in the total
amount of only 147,560.19.
Petitioner then moved that a writ of execution be issued ordering respondents to pay him
the original amount as determined by the Labor Arbiter in his Decision dated October 15,
1998, pending the final computation of his backwages and separation pay.
On January 14, 2003, the Labor Arbiter issued an Alias Writ of Execution to satisfy the
judgment award that was due to petitioner in the amount of 147,560.19, which petitioner
eventually received.
Petitioner then filed a Manifestation and Motion praying for the re-computation of the
monetary award to include the appropriate interests.19
On May 10, 2005, the Labor Arbiter issued an Order20 granting the motion, but only up to the
amount of 11,459.73. The Labor Arbiter reasoned that it is the October 15, 1998 Decision
that should be enforced considering that it was the one that became final and executory.
However, the Labor Arbiter reasoned that since the decision states that the separation pay
and backwages are computed only up to the promulgation of the said decision, it is the
amount of 158,919.92 that should be executed. Thus, since petitioner already received
147,560.19, he is only entitled to the balance of 11,459.73.
Petitioner then appealed before the NLRC,21 which appeal was denied by the NLRC in its
Resolution22 dated September 27, 2006. Petitioner filed a Motion for Reconsideration, but it
was likewise denied in the Resolution23 dated January 31, 2007.
Aggrieved, petitioner then sought recourse before the CA, docketed as CA-G.R. SP No. 98591.
On September 23, 2008, the CA rendered a Decision24 denying the petition. The CA opined
that since petitioner no longer appealed the October 15, 1998 Decision of the Labor Arbiter,
which already became final and executory, a belated correction thereof is no longer allowed.
The CA stated that there is nothing left to be done except to enforce the said judgment.
Consequently, it can no longer be modified in any respect, except to correct clerical errors or
mistakes.
Petitioner filed a Motion for Reconsideration, but it was denied in the Resolution 25 dated
October 9, 2009.
Hence, the petition assigning the lone error:
I
WITH DUE RESPECT, THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED, COMMITTED
GRAVE ABUSE OF DISCRETION AND DECIDED CONTRARY TO LAW IN UPHOLDING THE
QUESTIONED RESOLUTIONS OF THE NLRC WHICH, IN TURN, SUSTAINED THE MAY 10, 2005
ORDER OF LABOR ARBITER MAGAT MAKING THE DISPOSITIVE PORTION OF THE OCTOBER 15,
1998 DECISION OF LABOR ARBITER LUSTRIA SUBSERVIENT TO AN OPINION EXPRESSED IN THE
BODY OF THE SAME DECISION.26
Petitioner argues that notwithstanding the fact that there was a computation of backwages
in the Labor Arbiters decision, the same is not final until reinstatement is made or until
finality of the decision, in case of an award of separation pay. Petitioner maintains that
considering that the October 15, 1998 decision of the Labor Arbiter did not become final and
executory until the April 17, 2002 Resolution of the Supreme Court in G.R. No. 151332 was
entered in the Book of Entries on May 27, 2002, the reckoning point for the computation of
the backwages and separation pay should be on May 27, 2002 and not when the decision of
the Labor Arbiter was rendered on October 15, 1998. Further, petitioner posits that he is also
entitled to the payment of interest from the finality of the decision until full payment by the
respondents.
On their part, respondents assert that since only separation pay and limited backwages were
awarded to petitioner by the October 15, 1998 decision of the Labor Arbiter, no more
recomputation is required to be made of said awards. Respondents insist that since the
decision clearly stated that the separation pay and backwages are "computed only up to
[the] promulgation of this decision," and considering that petitioner no longer appealed the
decision, petitioner is only entitled to the award as computed by the Labor Arbiter in the
total amount of 158,919.92. Respondents added that it was only during the execution
proceedings that the petitioner questioned the award, long after the decision had become
final and executory. Respondents contend that to allow the further recomputation of the
backwages to be awarded to petitioner at this point of the proceedings would substantially
vary the decision of the Labor Arbiter as it violates the rule on immutability of judgments.
The petition is meritorious.
The instant case is similar to the case of Session Delights Ice Cream and Fast Foods v. Court of
Appeals (Sixth Division),27 wherein the issue submitted to the Court for resolution was the
propriety of the computation of the awards made, and whether this violated the principle of
immutability of judgment. Like in the present case, it was a distinct feature of the judgment
of the Labor Arbiter in the above-cited case that the decision already provided for the
computation of the payable separation pay and backwages due and did not further order the
computation of the monetary awards up to the time of the finality of the judgment. Also in
Session Delights, the dismissed employee failed to appeal the decision of the labor arbiter.
The Court clarified, thus:
In concrete terms, the question is whether a re-computation in the course of execution of
the labor arbiter's original computation of the awards made, pegged as of the time the
decision was rendered and confirmed with modification by a final CA decision, is legally
proper. The question is posed, given that the petitioner did not immediately pay the awards
stated in the original labor arbiter's decision; it delayed payment because it continued with
the litigation until final judgment at the CA level.
A source of misunderstanding in implementing the final decision in this case proceeds from
the way the original labor arbiter framed his decision. The decision consists essentially of two
parts.
The first is that part of the decision that cannot now be disputed because it has been
confirmed with finality. This is the finding of the illegality of the dismissal and the awards of
separation pay in lieu of reinstatement, backwages, attorney's fees, and legal interests.
The second part is the computation of the awards made. On its face, the computation the
labor arbiter made shows that it was time-bound as can be seen from the figures used in the
computation. This part, being merely a computation of what the first part of the decision
established and declared, can, by its nature, be re-computed. This is the part, too, that the
petitioner now posits should no longer be re-computed because the computation is already
in the labor arbiter's decision that the CA had affirmed. The public and private respondents,
on the other hand, posit that a re-computation is necessary because the relief in an illegal
dismissal decision goes all the way up to reinstatement if reinstatement is to be made, or up
to the finality of the decision, if separation pay is to be given in lieu reinstatement.
That the labor arbiter's decision, at the same time that it found that an illegal dismissal had
taken place, also made a computation of the award, is understandable in light of Section 3,
Rule VIII of the then NLRC Rules of Procedure which requires that a computation be made.
This Section in part states:
[T]he Labor Arbiter of origin, in cases involving monetary awards and at all events, as far as
practicable, shall embody in any such decision or order the detailed and full amount
awarded.
Clearly implied from this original computation is its currency up to the finality of the labor
arbiter's decision. As we noted above, this implication is apparent from the terms of the
computation itself, and no question would have arisen had the parties terminated the case
and implemented the decision at that point.
However, the petitioner disagreed with the labor arbiter's findings on all counts - i.e., on the
finding of illegality as well as on all the consequent awards made. Hence, the petitioner
appealed the case to the NLRC which, in turn, affirmed the labor arbiter's decision. By law,
the NLRC decision is final, reviewable only by the CA on jurisdictional grounds.
The petitioner appropriately sought to nullify the NLRC decision on jurisdictional grounds
through a timely filed Rule 65 petition for certiorari. The CA decision, finding that NLRC
exceeded its authority in affirming the payment of 13th month pay and indemnity, lapsed to
finality and was subsequently returned to the labor arbiter of origin for execution.
It was at this point that the present case arose. Focusing on the core illegal dismissal portion
of the original labor arbiter's decision, the implementing labor arbiter ordered the award re-
computed; he apparently read the figures originally ordered to be paid to be the
computation due had the case been terminated and implemented at the labor arbiter's level.
Thus, the labor arbiter re-computed the award to include the separation pay and the
backwages due up to the finality of the CA decision that fully terminated the case on the
merits. Unfortunately, the labor arbiter's approved computation went beyond the finality of
the CA decision (July 29, 2003) and included as well the payment for awards the final CA
decision had deleted - specifically, the proportionate 13th month pay and the indemnity
awards. Hence, the CA issued the decision now questioned in the present petition.
We see no error in the CA decision confirming that a re-computation is necessary as it
essentially considered the labor arbiter's original decision in accordance with its basic
component parts as we discussed above. To reiterate, the first part contains the finding of
illegality and its monetary consequences; the second part is the computation of the awards
or monetary consequences of the illegal dismissal, computed as of the time of the labor
arbiter's original decision.28
Consequently, from the above disquisitions, under the terms of the decision which is sought
to be executed by the petitioner, no essential change is made by a recomputation as this step
is a necessary consequence that flows from the nature of the illegality of dismissal declared
by the Labor Arbiter in that decision.29 A recomputation (or an original computation, if no
previous computation has been made) is a part of the law specifically, Article 279 of the
Labor Code and the established jurisprudence on this provision that is read into the
decision. By the nature of an illegal dismissal case, the reliefs continue to add up until full
satisfaction, as expressed under Article 279 of the Labor Code. The recomputation of the
consequences of illegal dismissal upon execution of the decision does not constitute an
alteration or amendment of the final decision being implemented. The illegal dismissal ruling
stands; only the computation of monetary consequences of this dismissal is affected, and this
is not a violation of the principle of immutability of final judgments.30
That the amount respondents shall now pay has greatly increased is a consequence that it
cannot avoid as it is the risk that it ran when it continued to seek recourses against the Labor
Arbiter's decision. Article 279 provides for the consequences of illegal dismissal in no
uncertain terms, qualified only by jurisprudence in its interpretation of when separation pay
in lieu of reinstatement is allowed. When that happens, the finality of the illegal dismissal
decision becomes the reckoning point instead of the reinstatement that the law decrees. In
allowing separation pay, the final decision effectively declares that the employment
relationship ended so that separation pay and backwages are to be computed up to that
point.31
Finally, anent the payment of legal interest. In the landmark case of Eastern Shipping Lines,
Inc. v. Court of Appeals,32 the Court laid down the guidelines regarding the manner of
computing legal interest, to wit:
II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
 1. When the obligation is breached, and it consists in the payment of a sum of
money, i.e., a loan or forbearance of money, the interest due should be that which
may have been stipulated in writing. Furthermore, the interest due shall itself earn
legal interest from the time it is judicially demanded. In the absence of stipulation,
the rate of interest shall be 12% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of Article 1169
of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is
breached, an interest on the amount of damages awarded may be imposed at the
discretion of the court at the rate of 6% per annum. No interest, however, shall be
adjudged on unliquidated claims or damages except when or until the demand can
be established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time
the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such
certainty cannot be so reasonably established at the time the demand is made, the
interest shall begin to run only from the date the judgment of the court is made (at
which time the quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest shall, in any
case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its satisfaction,
this interim period being deemed to be by then an equivalent to a forbearance of
credit.33
Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its
Resolution No. 796 dated May 16, 2013, approved the amendment of Section 2 34 of Circular
No. 905, Series of 1982 and, accordingly, issued Circular No. 799,35 Series of 2013, effective
July 1, 2013, the pertinent portion of which reads:
The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the following
revisions governing the rate of interest in the absence of stipulation in loan contracts,
thereby amending Section 2 of Circular No. 905, Series of 1982:
Section 1. The rate of interest for the loan or forbearance of any money, goods or credits and
the rate allowed in judgments, in the absence of an express contract as to such rate of
interest, shall be six percent (6%) per annum.
Section 2. In view of the above, Subsection X305.136 of the Manual of Regulations for Banks
and Sections 4305Q.1,374305S.338 and 4303P.139 of the Manual of Regulations for Non-Bank
Financial Institutions are hereby amended accordingly.
This Circular shall take effect on 1 July 2013.
Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest
that would govern the parties, the rate of legal interest for loans or forbearance of any
money, goods or credits and the rate allowed in judgments shall no longer be twelve percent
(12%) per annum - as reflected in the case of Eastern Shipping Lines40 and Subsection X305.1
of the Manual of Regulations for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the
Manual of Regulations for Non-Bank Financial Institutions, before its amendment by BSP-MB
Circular No. 799 - but will now be six percent (6%) per annum effective July 1, 2013. It should
be noted, nonetheless, that the new rate could only be applied prospectively and not
retroactively. Consequently, the twelve percent (12%) per annum legal interest shall apply
only until June 30, 2013. Come July 1, 2013 the new rate of six percent (6%) per annum shall
be the prevailing rate of interest when applicable.
Corollarily, in the recent case of Advocates for Truth in Lending, Inc. and Eduardo B. Olaguer
v. Bangko Sentral Monetary Board,41 this Court affirmed the authority of the BSP-MB to set
interest rates and to issue and enforce Circulars when it ruled that "the BSP-MB may
prescribe the maximum rate or rates of interest for all loans or renewals thereof or the
forbearance of any money, goods or credits, including those for loans of low priority such as
consumer loans, as well as such loans made by pawnshops, finance companies and similar
credit institutions. It even authorizes the BSP-MB to prescribe different maximum rate or
rates for different types of borrowings, including deposits and deposit substitutes, or loans of
financial intermediaries."
Nonetheless, with regard to those judgments that have become final and executory prior to
July 1, 2013, said judgments shall not be disturbed and shall continue to be implemented
applying the rate of interest fixed therein.1awp++i1
To recapitulate and for future guidance, the guidelines laid down in the case of Eastern
Shipping Lines42 are accordingly modified to embody BSP-MB Circular No. 799, as follows:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts,
delicts or quasi-delicts is breached, the contravenor can be held liable for damages.
The provisions under Title XVIII on "Damages" of the Civil Code govern in
determining the measure of recoverable damages.1wphi1
II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is
imposed, as follows:
When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the
time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 6%
per annum to be computed from default, i.e., from judicial or extrajudicial demand under
and subject to the provisions of Article 1169 of the Civil Code.
When an obligation, not constituting a loan or forbearance of money, is breached, an interest
on the amount of damages awarded may be imposed at the discretion of the court at the
rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or
damages, except when or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty, the interest shall
begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil
Code), but when such certainty cannot be so reasonably established at the time the demand
is made, the interest shall begin to run only from the date the judgment of the court is made
(at which time the quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest shall, in any case, be on
the amount finally adjudged.
When the judgment of the court awarding a sum of money becomes final and executory, the
rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall
be 6% per annum from such finality until its satisfaction, this interim period being deemed to
be by then an equivalent to a forbearance of credit.
And, in addition to the above, judgments that have become final and executory prior to July
1, 2013, shall not be disturbed and shall continue to be implemented applying the rate of
interest fixed therein.
WHEREFORE, premises considered, the Decision dated September 23, 2008 of the Court of
Appeals in CA-G.R. SP No. 98591, and the Resolution dated October 9, 2009 are REVERSED
and SET ASIDE. Respondents are Ordered to Pay petitioner:
(1) backwages computed from the time petitioner was illegally dismissed on
January 24, 1997 up to May 27, 2002, when the Resolution of this Court in G.R. No.
151332 became final and executory;
(2) separation pay computed from August 1990 up to May 27, 2002 at the rate of
one month pay per year of service; and
(3) interest of twelve percent (12%) per annum of the total monetary awards,
computed from May 27, 2002 to June 30, 2013 and six percent (6%) per annum
from July 1, 2013 until their full satisfaction.
The Labor Arbiter is hereby ORDERED to make another recomputation of the total monetary
benefits awarded and due to petitioner in accordance with this Decision.
SO ORDERED.
DIOSDADO M. PERALTA
Associate Justice
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 181045 July 2, 2014
SPOUSES EDUARDO and LYDIA SILOS, Petitioners,
vs.
PHILIPPINE NATIONAL BANK, Respondent.
DECISION
DEL CASTILLO, J.:
In loan agreements, it cannot be denied that the rate of interest is a principal condition, if not
the most important component. Thus, any modification thereof must be mutually agreed
upon; otherwise, it has no binding effect. Moreover, the Court cannot consider a stipulation
granting a party the option to prepay the loan if said party is not agreeable to the arbitrary
interest rates imposed. Premium may not be placed upon a stipulation in a contract which
grants one party the right to choose whether to continue with or withdraw from the
agreement if it discovers that what the other party has been doing all along is improper or
illegal.
This Petition for Review on Certiorari1 questions the May 8, 2007 Decision2 of the Court of
Appeals (CA) in CA-G.R. CV No. 79650, which affirmed with modifications the February 28,
2003 Decision3 and the June 4, 2003 Order4 of the Regional Trial Court (RTC), Branch 6 of
Kalibo, Aklan in Civil Case No. 5975.
Factual Antecedents
Spouses Eduardo and Lydia Silos (petitioners) have been in business for about two decades of
operating a department store and buying and selling of ready-to-wear apparel. Respondent
Philippine National Bank (PNB) is a banking corporation organized and existing under
Philippine laws.
To secure a one-year revolving credit line of 150,000.00 obtained from PNB, petitioners
constituted in August 1987 a Real Estate Mortgage5over a 370-square meter lot in Kalibo,
Aklan covered by Transfer Certificate of Title No. (TCT) T-14250. In July 1988,the credit line
was increased to 1.8 million and the mortgage was correspondingly increased to 1.8
million.6
And in July 1989, a Supplement to the Existing Real Estate Mortgage7 was executed to cover
the same credit line, which was increased to 2.5 million, and additional security was given in
the form of a 134-square meter lot covered by TCT T-16208. In addition, petitioners issued
eight Promissory Notes8 and signed a Credit Agreement.9 This July 1989 Credit Agreement
contained a stipulation on interest which provides as follows:
1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5% per annum.
Interest shall be payable in advance every one hundred twenty days at the rate prevailing at
the time of the renewal.
(b) The Borrower agrees that the Bank may modify the interest rate in the Loan depending
on whatever policy the Bank may adopt in the future, including without limitation, the
shifting from the floating interest rate system to the fixed interest rate system, or vice versa.
Where the Bank has imposed on the Loan interest at a rate per annum, which is equal to the
Banks spread over the current floating interest rate, the Borrower hereby agrees that the
Bank may, without need of notice to the Borrower, increase or decrease its spread over the
floating interest rate at any time depending on whatever policy it may adopt in the
future.10 (Emphases supplied)
The eight Promissory Notes, on the other hand, contained a stipulation granting PNB the
right to increase or reduce interest rates "within the limits allowed by law or by the
Monetary Board."11
The Real Estate Mortgage agreement provided the same right to increase or reduce interest
rates "at any time depending on whatever policy PNB may adopt in the future." 12
Petitioners religiously paid interest on the notes at the following rates:
1. 1st Promissory Note dated July 24, 1989 19.5%;
2. 2nd Promissory Note dated November 22, 1989 23%;
3. 3rd Promissory Note dated March 21, 1990 22%;
4. 4th Promissory Note dated July 19, 1990 24%;
5. 5th Promissory Note dated December 17, 1990 28%;
6. 6th Promissory Note dated February 14, 1991 32%;
7. 7th Promissory Note dated March 1, 1991 30%; and
8. 8th Promissory Note dated July 11, 1991 24%.13
In August 1991, an Amendment to Credit Agreement14 was executed by the parties, with the
following stipulation regarding interest:
1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each Availment
from date of each Availment up to but not including the date of full payment thereof at the
rate per annum which is determined by the Bank to be prime rate plus applicable spread in
effect as of the date of each Availment.15 (Emphases supplied)
Under this Amendment to Credit Agreement, petitioners issued in favor of PNB the following become due and payable and shall be subject to a penalty charge of twenty four percent
18 Promissory Notes, which petitioners settled except the last (the note covering the (24%) per annum based on the defaulted principal amount. x x x19 (Emphasis supplied)
principal) at the following interest rates: PNB prepared a Statement of Account20 as of October 12, 1998, detailing the amount due
1. 9th Promissory Note dated November 8, 1991 26%; and demandable from petitioners in the total amount of 3,620,541.60, broken down as
2. 10th Promissory Note dated March 19, 1992 25%; follows:
3. 11th Promissory Note dated July 11, 1992 23%;
Principal P 2,500,000.00
4. 12th Promissory Note dated November 10, 1992 21%;
5. 13th Promissory Note dated March 15, 1993 21%; Interest 538,874.94
6. 14th Promissory Note dated July 12, 1993 17.5%;
7. 15th Promissory Note dated November 17, 1993 21%; Penalties 581,666.66
8. 16th Promissory Note dated March 28, 1994 21%;
9. 17th Promissory Note dated July 13, 1994 21%;
10. 18th Promissory Note dated November 16, 1994 16%; Total P 3,620,541.60
11. 19th Promissory Note dated April 10, 1995 21%;
Despite demand, petitioners failed to pay the foregoing amount. Thus, PNB foreclosed on the
12. 20th Promissory Note dated July 19, 1995 18.5%;
mortgage, and on January 14, 1999, TCTs T-14250 and T-16208 were sold to it at auction for
13. 21st Promissory Note dated December 18, 1995 18.75%;
the amount of 4,324,172.96.21 The sheriffs certificate of sale was registered on March 11,
14. 22nd Promissory Note dated April 22, 1996 18.5%;
1999.
15. 23rd Promissory Note dated July 22, 1996 18.5%;
More than a year later, or on March 24, 2000, petitioners filed Civil Case No. 5975, seeking
16. 24th Promissory Note dated November 25, 1996 18%;
annulment of the foreclosure sale and an accounting of the PNB credit. Petitioners theorized
17. 25th Promissory Note dated May 30, 1997 17.5%; and that after the first promissory note where they agreed to pay 19.5% interest, the succeeding
18. 26th Promissory Note (PN 9707237) dated July 30, 1997 25%.16
stipulations for the payment of interest in their loan agreements with PNB which allegedly
The 9th up to the 17th promissory notes provide for the payment of interest at the "rate the left to the latter the sole will to determine the interest rate became null and void.
Bank may at any time without notice, raise within the limits allowed by law x x x."17
Petitioners added that because the interest rates were fixed by respondent without their
On the other hand, the 18th up to the 26th promissory notes including PN 9707237, which
prior consent or agreement, these rates are void, and as a result, petitioners should only be
is the 26th promissory note carried the following provision:
made liable for interest at the legal rate of 12%. They claimed further that they overpaid
x x x For this purpose, I/We agree that the rate of interest herein stipulated may be increased
interests on the credit, and concluded that due to this overpayment of steep interest
or decreased for the subsequent Interest Periods, with prior notice to the Borrower in the
charges, their debt should now be deemed paid, and the foreclosure and sale of TCTs T-
event of changes in interest rate prescribed by law or the Monetary Board of the Central
14250 and T-16208 became unnecessary and wrongful. As for the imposed penalty of
Bank of the Philippines, or in the Banks overall cost of funds. I/We hereby agree that in the
581,666.66, petitioners alleged that since the Real Estate Mortgage and the Supplement
event I/we are not agreeable to the interest rate fixed for any Interest Period, I/we shall have
thereto did not include penalties as part of the secured amount, the same should be
the option top repay the loan or credit facility without penalty within ten (10) calendar days excluded from the foreclosure amount or bid price, even if such penalties are provided for in
from the Interest Setting Date.18 (Emphasis supplied)
the final Promissory Note, or PN 9707237.22
Respondent regularly renewed the line from 1990 up to 1997, and petitioners made good on
In addition, petitioners sought to be reimbursed an alleged overpayment of 848,285.00
the promissory notes, religiously paying the interests without objection or fail. But in 1997,
made during the period August 21, 1991 to March 5, 1998,resulting from respondents
petitioners faltered when the interest rates soared due to the Asian financial crisis.
imposition of the alleged illegal and steep interest rates. They also prayed to be awarded
Petitioners sole outstanding promissory note for 2.5 million PN 9707237 executed in July
200,000.00 by way of attorneys fees.23
1997 and due 120 days later or on October 28, 1997 became past due, and despite
In its Answer,24 PNB denied that it unilaterally imposed or fixed interest rates; that
repeated demands, petitioners failed to make good on the note.
petitioners agreed that without prior notice, PNB may modify interest rates depending on
Incidentally, PN 9707237 provided for the penalty equivalent to 24% per annum in case of
future policy adopted by it; and that the imposition of penalties was agreed upon in the
default, as follows: Credit Agreement. It added that the imposition of penalties is supported by the all-inclusive
Without need for notice or demand, failure to pay this note or any installment thereon, when
clause in the Real Estate Mortgage agreement which provides that the mortgage shall stand
due, shall constitute default and in such cases or in case of garnishment, receivership or
as security for any and all other obligations of whatever kind and nature owing to
bankruptcy or suit of any kind filed against me/us by the Bank, the outstanding principal of
respondent, which thus includes penalties imposed upon default or non-payment of the
this note, at the option of the Bank and without prior notice of demand, shall immediately
principal and interest on due date.
On pre-trial, the parties mutually agreed to the following material facts, among others:
 a) That since 1991 up to 1998, petitioners had paid PNB the total amount of
3,484,287.00;25 and
b) That PNB sent, and petitioners received, a March 10, 2000 demand letter.26
During trial, petitioner Lydia Silos (Lydia) testified that the Credit Agreement, the
Amendment to Credit Agreement, Real Estate Mortgage and the Supplement thereto were
all prepared by respondent PNB and were presented to her and her husband Eduardo only
for signature; that she was told by PNB that the latter alone would determine the interest
rate; that as to the Amendment to Credit Agreement, she was told that PNB would fill up the
interest rate portion thereof; that at the time the parties executed the said Credit
Agreement, she was not informed about the applicable spread that PNB would impose on
her account; that the interest rate portion of all Promissory Notes she and Eduardo issued
were always left in blank when they executed them, with respondents mere assurance that
it would be the one to enter or indicate thereon the prevailing interest rate at the time of
availment; and that they agreed to such arrangement. She further testified that the two Real
Estate Mortgage agreements she signed did not stipulate the payment of penalties; that she
and Eduardo consulted with a lawyer, and were told that PNBs actions were improper, and
so on March 20, 2000, they wrote to the latter seeking a recomputation of their outstanding
obligation; and when PNB did not oblige, they instituted Civil Case No. 5975.27
On cross-examination, Lydia testified that she has been in business for 20 years; that she also
borrowed from other individuals and another bank; that it was only with banks that she was
asked to sign loan documents with no indicated interest rate; that she did not bother to read
the terms of the loan documents which she signed; and that she received several PNB
statements of account detailing their outstanding obligations, but she did not complain; that
she assumed instead that what was written therein is correct.28
For his part, PNB Kalibo Branch Manager Diosdado Aspa, Jr. (Aspa), the sole witness for
respondent, stated on cross-examination that as a practice, the determination of the prime
rates of interest was the responsibility solely of PNBs Treasury Department which is based in
Manila; that these prime rates were simply communicated to all PNB branches for
implementation; that there are a multitude of considerations which determine the interest
rate, such as the cost of money, foreign currency values, PNBs spread, bank administrative
costs, profitability, and the practice in the banking industry; that in every repricing of each
loan availment, the borrower has the right to question the rates, but that this was not done
by the petitioners; and that anything that is not found in the Promissory Note may be
supplemented by the Credit Agreement.29
Ruling of the Regional Trial Court
On February 28, 2003, the trial court rendered judgment dismissing Civil Case No. 5975.30
It ruled that:
1. While the Credit Agreement allows PNB to unilaterally increase its spread over
the floating interest rate at any time depending on whatever policy it may adopt in
the future, it likewise allows for the decrease at any time of the same. Thus, such
stipulation authorizing both the increase and decrease of interest rates as may be
applicable is valid,31 as was held in Consolidated Bank and Trust Corporation
(SOLIDBANK) v. Court of Appeals;32
2. Banks are allowed to stipulate that interest rates on loans need not be fixed and
instead be made dependent on prevailing rates upon which to peg such variable
interest rates;33
3. The Promissory Note, as the principal contract evidencing petitioners loan,
prevails over the Credit Agreement and the Real Estate Mortgage.
As such, the rate of interest, penalties and attorneys fees stipulated in the
Promissory Note prevail over those mentioned in the Credit Agreement and the
Real Estate Mortgage agreements;34
4. Roughly, PNBs computation of the total amount of petitioners obligation is
correct;35
5. Because the loan was admittedly due and demandable, the foreclosure was
regularly made;36
6. By the admission of petitioners during pre-trial, all payments made to PNB were
properly applied to the principal, interest and penalties.37
The dispositive portion of the trial courts Decision reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of the respondent and
against the petitioners by DISMISSING the latters petition.
Costs against the petitioners.
SO ORDERED.38
Petitioners moved for reconsideration. In an Order 39 dated June 4, 2003, the trial court
granted only a modification in the award of attorneys fees, reducing the same from 10% to
1%. Thus, PNB was ordered to refund to petitioner the excess in attorneys fees in the
amount of 356,589.90, viz:
WHEREFORE, judgment is hereby rendered upholding the validity of the interest rate charged
by the respondent as well as the extra-judicial foreclosure proceedings and the Certificate of
Sale. However, respondent is directed to refund to the petitioner the amount of 356,589.90
representing the excess interest charged against the latter.
No pronouncement as to costs.
SO ORDERED.40
Ruling of the Court of Appeals
Petitioners appealed to the CA, which issued the questioned Decision with the following
decretal portion:
WHEREFORE, in view of the foregoing, the instant appeal is PARTLY GRANTED. The modified
Decision of the Regional Trial Court per Order dated June 4, 2003 is hereby AFFIRMED with
MODIFICATIONS, to wit:
1. [T]hat the interest rate to be applied after the expiration of the first 30-day
interest period for PN. No. 9707237 should be 12% per annum;
2. [T]hat the attorneys fees of10% is valid and binding; and
3. [T]hat [PNB] is hereby ordered to reimburse [petitioners] the excess in the bid
price of 377,505.99 which is the difference between the total amount due [PNB]
and the amount of its bid price.
SO ORDERED.41
On the other hand, respondent did not appeal the June 4,2003 Order of the trial court which
reduced its award of attorneys fees. It simply raised the issue in its appellees brief in the CA,
and included a prayer for the reversal of said Order.
In effect, the CA limited petitioners appeal to the following issues:
1) Whether x x x the interest rates on petitioners outstanding obligation were
unilaterally and arbitrarily imposed by PNB;
2) Whether x x x the penalty charges were secured by the real estate mortgage;
and
3) Whether x x x the extrajudicial foreclosure and sale are valid.42
The CA noted that, based on receipts presented by petitioners during trial, the latter dutifully
paid a total of 3,027,324.60 in interest for the period August 7, 1991 to August 6, 1997, over
and above the 2.5 million principal obligation. And this is exclusive of payments for
insurance premiums, documentary stamp taxes, and penalty. All the while, petitioners did
not complain nor object to the imposition of interest; they in fact paid the same religiously
and without fail for seven years. The appellate court ruled that petitioners are thus estopped
from questioning the same.
The CA nevertheless noted that for the period July 30, 1997 to August 14, 1997, PNB wrongly
applied an interest rate of 25.72% instead of the agreed 25%; thus it overcharged petitioners,
and the latter paid, an excess of 736.56 in interest.
On the issue of penalties, the CA ruled that the express tenor of the Real Estate Mortgage
agreements contemplated the inclusion of the PN 9707237-stipulated 24% penalty in the
amount to be secured by the mortgaged property, thus
For and in consideration of certain loans, overdrafts and other credit accommodations
obtained from the MORTGAGEE and to secure the payment of the same and those others
that the MORTGAGEE may extend to the MORTGAGOR, including interest and expenses, and
other obligations owing by the MORTGAGOR to the MORTGAGEE, whether direct or indirect,
principal or secondary, as appearing in the accounts, books and records of the MORTGAGEE,
the MORTGAGOR does hereby transfer and convey by way of mortgage unto the
MORTGAGEE x x x43 (Emphasis supplied)
The CA believes that the 24% penalty is covered by the phrase "and other obligations owing
by the mortgagor to the mortgagee" and should thus be added to the amount secured by the
mortgages.44
The CA then proceeded to declare valid the foreclosure and sale of properties covered by
TCTs T-14250 and T-16208, which came as a necessary result of petitioners failure to pay the
outstanding obligation upon demand.45 The CA saw fit to increase the trial courts award of
1% to 10%, finding the latter rate to be reasonable and citing the Real Estate Mortgage
agreement which authorized the collection of the higher rate.46
Finally, the CA ruled that petitioners are entitled to 377,505.09 surplus, which is the
difference between PNBs bid price of 4,324,172.96 and petitioners total computed
obligation as of January 14, 1999, or the date of the auction sale, in the amount of
3,946,667.87.47
Hence, the present Petition.
Issues
The following issues are raised in this Petition:
I can proceed from an illegal act. Though they failed to timely question the imposition of the
A. THE COURT OF APPEALS AS WELL AS THE LOWER COURT ERRED IN
NOT NULLIFYING THE INTEREST RATE PROVISION IN THE CREDIT
AGREEMENT DATED JULY 24, 1989 X X X AND IN THE AMENDMENT TO
CREDIT AGREEMENT DATEDAUGUST 21, 1991 X X X WHICH LEFT TO THE
SOLE UNILATERAL DETERMINATION OF THE RESPONDENT PNB THE
ORIGINAL FIXING OF INTEREST RATE AND ITS INCREASE, WHICH
AGREEMENT IS CONTRARY TO LAW, ART. 1308 OF THE [NEW CIVIL CODE],
AS ENUNCIATED IN PONCIANO ALMEIDA V. COURT OF APPEALS,G.R.
[NO.] 113412, APRIL 17, 1996, AND CONTRARY TO PUBLIC POLICY AND
PUBLIC INTEREST, AND IN APPLYING THE PRINCIPLE OF ESTOPPEL
ARISING FROM THE ALLEGED DELAYED COMPLAINT OF PETITIONER[S],
AND [THEIR] PAYMENT OF THE INTEREST CHARGED.
B. CONSEQUENTLY, THE COURT OF APPEALS AND THE LOWER COURT
ERRED IN NOT DECLARING THAT PNB IS NOT AT ALL ENTITLED TO ANY
INTEREST EXCEPT THE LEGAL RATE FROM DATE OF DEMAND, AND IN NOT
APPLYING THE EXCESS OVER THE LEGAL RATE OF THE ADMITTED
PAYMENTS MADE BY PETITIONER[S] FROM 1991-1998 IN THE ADMITTED
TOTAL AMOUNT OF 3,484,287.00, TO PAYMENT OF THE PRINCIPAL OF
2,500,000.[00] LEAVING AN OVERPAYMENT OF984,287.00
REFUNDABLE BY RESPONDENT TO PETITIONER[S] WITH INTEREST OF 12%
PER ANNUM.
II
THE COURT OF APPEALS AND THE LOWER COURT ERRED IN HOLDING THAT PENALTIES ARE
INCLUDEDIN THE SECURED AMOUNT, SUBJECT TO FORECLOSURE, WHEN NO PENALTIES ARE
MENTIONED [NOR] PROVIDED FOR IN THE REAL ESTATE MORTGAGE AS A SECURED AMOUNT
AND THEREFORE THE AMOUNT OF PENALTIES SHOULDHAVE BEEN EXCLUDED FROM [THE]
FORECLOSURE AMOUNT.
III
THE COURT OF APPEALS ERRED IN REVERSING THE RULING OF THE LOWER COURT, WHICH
REDUCED THE ATTORNEYS FEES OF 10% OF THE TOTAL INDEBTEDNESS CHARGED IN THE X X
X EXTRAJUDICIAL FORECLOSURE TOONLY 1%, AND [AWARDING] 10% ATTORNEYS FEES.48
Petitioners Arguments
Petitioners insist that the interest rate provision in the Credit Agreement and the
Amendment to Credit Agreement should be declared null and void, for they relegated to PNB
the sole power to fix interest rates based on arbitrary criteria or factors such as bank policy,
profitability, cost of money, foreign currency values, and bank administrative costs; spaces
for interest rates in the two Credit Agreements and the promissory notes were left blank for
PNB to unilaterally fill, and their consent or agreement to the interest rates imposed
thereafter was not obtained; the interest rate, which consists of the prime rate plus the bank
spread, is determined not by agreement of the parties but by PNBs Treasury Department in
Manila. Petitioners conclude that by this method of fixing the interest rates, the principle of
mutuality of contracts is violated, and public policy as well as Circular 90549 of the then
Central Bank had been breached.
Petitioners question the CAs application of the principle of estoppel, saying that no estoppel
alleged illegal interest rates and continued to pay the loan on the basis of these rates, they
cannot be deemed to have acquiesced, and hence could recover what they erroneously
paid.50
Petitioners argue that if the interest rates were nullified, then their obligation to PNB is
deemed extinguished as of July 1997; moreover, it would appear that they even made an
over payment to the bank in the amount of 984,287.00.
Next, petitioners suggest that since the Real Estate Mortgage agreements did not include nor
specify, as part of the secured amount, the penalty of 24% authorized in PN 9707237, such
amount of 581,666.66 could not be made answerable by or collected from the mortgages
covering TCTs T-14250 and T-16208. Claiming support from Philippine Bank of
Communications [PBCom] v. Court of Appeals,51 petitioners insist that the phrase "and other
obligations owing by the mortgagor to the mortgagee" 52 in the mortgage agreements cannot
embrace the 581,666.66 penalty, because, as held in the PBCom case, "[a] penalty charge
does not belong to the species of obligations enumerated in the mortgage, hence, the said
contract cannot be understood to secure the penalty";53 while the mortgages are the
accessory contracts, what items are secured may only be determined from the provisions of
the mortgage contracts, and not from the Credit Agreement or the promissory notes.
Finally, petitioners submit that the trial courts award of 1% attorneys fees should be
maintained, given that in foreclosures, a lawyers work consists merely in the preparation
and filing of the petition, and involves minimal study.54 To allow the imposition of a
staggering 396,211.00 for such work would be contrary to equity. Petitioners state that the
purpose of attorneys fees in cases of this nature "is not to give respondent a larger
compensation for the loan than the law already allows, but to protect it against any future
loss or damage by being compelled to retain counsel x x x to institute judicial proceedings for
the collection of its credit."55 And because the instant case involves a simple extrajudicial
foreclosure, attorneys fees may be equitably tempered.
Respondents Arguments
For its part, respondent disputes petitioners claim that interest rates were unilaterally fixed
by it, taking relief in the CA pronouncement that petitioners are deemed estopped by their
failure to question the imposed rates and their continued payment thereof without
opposition. It adds that because the Credit Agreement and promissory notes contained both
an escalation clause and a de-escalation clause, it may not be said that the bank violated the
principle of mutuality. Besides, the increase or decrease in interest rates have been mutually
agreed upon by the parties, as shown by petitioners continuous payment without protest.
Respondent adds that the alleged unilateral imposition of interest rates is not a proper
subject for review by the Court because the issue was never raised in the lower court.
As for petitioners claim that interest rates imposed by it are null and void for the reasons
that 1) the Credit Agreements and the promissory notes were signed in blank; 2) interest
rates were at short periods; 3) no interest rates could be charged where no agreement on
interest rates was made in writing; 4) PNB fixed interest rates on the basis of arbitrary
policies and standards left to its choosing; and 5) interest rates based on prime rate plus
applicable spread are indeterminate and arbitrary PNB counters:
a. That Credit Agreements and promissory notes were signed by petitioner[s] in
blank Respondent claims that this issue was never raised in the lower court.
Besides, documentary evidence prevails over testimonial evidence; Lydia Silos
testimony in this regard is self-serving, unsupported and uncorroborated, and for
being the lone evidence on this issue. The fact remains that these documents are in
proper form, presumed regular, and endure, against arbitrary claims by Silos who
is an experienced business person that she signed questionable loan documents
whose provisions for interest rates were left blank, and yet she continued to pay
the interests without protest for a number of years.56
b. That interest rates were at short periods Respondent argues that the law
which governs and prohibits changes in interest rates made more than once every
twelve months has been removed57 with the issuance of Presidential Decree No.
858.58
c. That no interest rates could be charged where no agreement on interest rates
was made in writing in violation of Article 1956 of the Civil Code, which provides
that no interest shall be due unless it has been expressly stipulated in writing
Respondent insists that the stipulated 25% per annum as embodied in PN 9707237
should be imposed during the interim, or the period after the loan became due and
while it remains unpaid, and not the legal interest of 12% as claimed by
petitioners.59
d. That PNB fixed interest rates on the basis of arbitrary policies and standards left
to its choosing According to respondent, interest rates were fixed taking into
consideration increases or decreases as provided by law or by the Monetary Board,
the banks overall costs of funds, and upon agreement of the parties.60
e. That interest rates based on prime rate plus applicable spread are indeterminate
and arbitrary On this score, respondent submits there are various factors that
influence interest rates, from political events to economic developments, etc.; the
cost of money, profitability and foreign currency transactions may not be
discounted.61
On the issue of penalties, respondent reiterates the trial courts finding that during pre-trial,
petitioners admitted that the Statement of Account as of October 12, 1998 which detailed
and included penalty charges as part of the total outstanding obligation owing to the bank
was correct. Respondent justifies the imposition and collection of a penalty as a normal
banking practice, and the standard rate per annum for all commercial banks, at the time, was
24%.
Respondent adds that the purpose of the penalty or a penal clause for that matter is to
ensure the performance of the obligation and substitute for damages and the payment of
interest in the event of non-compliance.62 And the promissory note being the principal
agreement as opposed to the mortgage, which is a mere accessory should prevail. This
being the case, its inclusion as part of the secured amount in the mortgage agreements is
valid and necessary.
Regarding the foreclosure of the mortgages, respondent accuses petitioners of pre-empting
consolidation of its ownership over TCTs T-14250 and T-16208; that petitioners filed Civil
Case No. 5975 ostensibly to question the foreclosure and sale of properties covered by TCTs
T-14250 and T-16208 in a desperate move to retain ownership over these properties,
because they failed to timely redeem them.
Respondent directs the attention of the Court to its petition in G.R. No. 181046, 63 where the
propriety of the CAs ruling on the following issues is squarely raised:
1. That the interest rate to be applied after the expiration of the first 30-day
interest period for PN 9707237 should be 12% per annum; and
 2. That PNB should reimburse petitioners the excess in the bid price of 377,505.99
which is the difference between the total amount due to PNB and the amount of its
bid price.
Our Ruling
The Court grants the Petition.
Before anything else, it must be said that it is not the function of the Court to re-examine or
re-evaluate evidence adduced by the parties in the proceedings below. The rule admits of
certain well-recognized exceptions, though, as when the lower courts findings are not
supported by the evidence on record or are based on a misapprehension of facts, or when
certain relevant and undisputed facts were manifestly overlooked that, if properly
considered, would justify a different conclusion. This case falls within such exceptions.
The Court notes that on March 5, 2008, a Resolution was issued by the Courts First Division
denying respondents petition in G.R. No. 181046, due to late filing, failure to attach the
required affidavit of service of the petition on the trial court and the petitioners, and
submission of a defective verification and certification of non-forum shopping. On June 25,
2008, the Court issued another Resolution denying with finality respondents motion for
reconsideration of the March 5, 2008 Resolution. And on August 15, 2008, entry of judgment
was made. This thus settles the issues, as above-stated, covering a) the interest rate or 12%
per annum that applies upon expiration of the first 30 days interest period provided under
PN 9707237, and b)the CAs decree that PNB should reimburse petitioner the excess in the
bid price of 377,505.09.
It appears that respondents practice, more than once proscribed by the Court, has been
carried over once more to the petitioners. In a number of decided cases, the Court struck
down provisions in credit documents issued by PNB to, or required of, its borrowers which
allow the bank to increase or decrease interest rates "within the limits allowed by law at any
time depending on whatever policy it may adopt in the future." Thus, in Philippine National
Bank v. Court of Appeals,64 such stipulation and similar ones were declared in violation of
Article 130865 of the Civil Code. In a second case, Philippine National Bank v. Court of
Appeals,66 the very same stipulations found in the credit agreement and the promissory
notes prepared and issued by the respondent were again invalidated. The Court therein said:
The Credit Agreement provided inter alia, that
(a) The BANK reserves the right to increase the interest rate within the limits allowed by law
at any time depending on whatever policy it may adopt in the future; Provided, that the
interest rate on this accommodation shall be correspondingly decreased in the event that the
applicable maximum interest is reduced by law or by the Monetary Board. In either case, the
adjustment in the interest rate agreed upon shall take effect on the effectivity date of the
increase or decrease in the maximum interest rate.
The Promissory Note, in turn, authorized the PNB to raise the rate of interest, at any time
without notice, beyond the stipulated rate of 12% but only "within the limits allowed by law."
The Real Estate Mortgage contract likewise provided that
(k) INCREASE OF INTEREST RATE: The rate of interest charged on the obligation secured by
this mortgage as well as the interest on the amount which may have been advanced by the
MORTGAGEE, in accordance with the provision hereof, shall be subject during the life of this
contract to such an increase within the rate allowed by law, as the Board of Directors of the
MORTGAGEE may prescribe for its debtors.
xxxx
In making the unilateral increases in interest rates, petitioner bank relied on the escalation
clause contained in their credit agreement which provides, as follows:
The Bank reserves the right to increase the interest rate within the limits allowed by law at
any time depending on whatever policy it may adopt in the future and provided, that, the
interest rate on this accommodation shall be correspondingly decreased in the event that the
applicable maximum interest rate is reduced by law or by the Monetary Board. In either case,
the adjustment in the interest rate agreed upon shall take effect on the effectivity date of the
increase or decrease in maximum interest rate.
This clause is authorized by Section 2 of Presidential Decree (P.D.) No. 1684 which further
amended Act No. 2655 ("The Usury Law"), as amended, thus:
Section 2. The same Act is hereby amended by adding a new section after Section 7, to read
as follows:
Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods or
credits may stipulate that the rate of interest agreed upon may be increased in the event
that the applicable maximum rate of interest is increased bylaw or by the Monetary Board;
Provided, That such stipulation shall be valid only if there is also a stipulation in the
agreement that the rate of interest agreed upon shall be reduced in the event that the
applicable maximum rate of interest is reduced by law or by the Monetary Board; Provided
further, That the adjustment in the rate of interest agreed upon shall take effect on or after
the effectivity of the increase or decrease in the maximum rate of interest.
Section 1 of P.D. No. 1684 also empowered the Central Banks Monetary Board to prescribe
the maximum rates of interest for loans and certain forbearances. Pursuant to such
authority, the Monetary Board issued Central Bank (C.B.) Circular No. 905, series of 1982,
Section 5 of which provides:
Sec. 5. Section 1303 of the Manual of Regulations (for Banks and Other Financial
Intermediaries) is hereby amended to read as follows:
Sec. 1303. Interest and Other Charges.
The rate of interest, including commissions, premiums, fees and other charges, on any
loan, or forbearance of any money, goods or credits, regardless of maturity and whether
secured or unsecured, shall not be subject to any ceiling prescribed under or pursuant to the
Usury Law, as amended.
P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate
freely regarding any subsequent adjustment in the interest rate that shall accrue on a loan or
forbearance of money, goods or credits. In fine, they can agree to adjust, upward or
downward, the interest previously stipulated. However, contrary to the stubborn insistence
of petitioner bank, the said law and circular did not authorize either party to unilaterally raise
the interest rate without the others consent.
It is basic that there can be no contract in the true sense in the absence of the element of
agreement, or of mutual assent of the parties. If this assent is wanting on the part of the one
who contracts, his act has no more efficacy than if it had been done under duress or by a
person of unsound mind.
Similarly, contract changes must be made with the consent of the contracting parties. The
minds of all the parties must meet as to the proposed modification, especially when it affects
an important aspect of the agreement. In the case of loan contracts, it cannot be gainsaid
that the rate of interest is always a vital component, for it can make or break a capital
venture. Thus, any change must be mutually agreed upon, otherwise, it is bereft of any
binding effect.
We cannot countenance petitioner banks posturing that the escalation clause at bench gives
it unbridled right to unilaterally upwardly adjust the interest on private respondents loan.
That would completely take away from private respondents the right to assent to an
important modification in their agreement, and would negate the element of mutuality in
contracts. In Philippine National Bank v. Court of Appeals, et al., 196 SCRA 536, 544-545
(1991) we held
x x x The unilateral action of the PNB in increasing the interest rate on the private
respondents loan violated the mutuality of contracts ordained in Article 1308 of the Civil
Code:
Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot
be left to the will of one of them.
In order that obligations arising from contracts may have the force of law between the
parties, there must be mutuality between the parties based on their essential equality. A
contract containing a condition which makes its fulfillment dependent exclusively upon the
uncontrolled will of one of the contracting parties, is void . . . . Hence, even assuming that the
. . . loan agreement between the PNB and the private respondent gave the PNB a license
(although in fact there was none) to increase the interest rate at will during the term of the
loan, that license would have been null and void for being violative of the principle of
mutuality essential in contracts. It would have invested the loan agreement with the
character of a contract of adhesion, where the parties do not bargain on equal footing, the
weaker partys (the debtor) participation being reduced to the alternative "to take it or leave
it" . . . . Such a contract is a veritable trap for the weaker party whom the courts of justice
must protect against abuse and imposition.67 (Emphases supplied)
Then again, in a third case, Spouses Almeda v. Court of Appeals, 68 the Court invalidated the
very same provisions in the respondents prepared Credit Agreement, declaring thus:
The binding effect of any agreement between parties to a contract is premised on two
settled principles: (1) that any obligation arising from contract has the force of law between
the parties; and (2) that there must be mutuality between the parties based on their
essential equality. Any contract which appears to be heavily weighed in favor of one of the
parties so as to lead to an unconscionable result is void. Any stipulation regarding the validity
or compliance of the contract which is left solely to the will of one of the parties, is likewise,
invalid.
It is plainly obvious, therefore, from the undisputed facts of the case that respondent bank
unilaterally altered the terms of its contract with petitioners by increasing the interest rates
on the loan without the prior assent of the latter. In fact, the manner of agreement is itself
explicitly stipulated by the Civil Code when it provides, in Article 1956 that "No interest shall
be due unless it has been expressly stipulated in writing." What has been "stipulated in
writing" from a perusal of interest rate provision of the credit agreement signed between the
parties is that petitioners were bound merely to pay 21% interest, subject to a possible
escalation or de-escalation, when 1) the circumstances warrant such escalation or de-
escalation; 2) within the limits allowed by law; and 3) upon agreement.
Indeed, the interest rate which appears to have been agreed upon by the parties to the
contract in this case was the 21% rate stipulated in the interest provision. Any doubt about
this is in fact readily resolved by a careful reading of the credit agreement because the same
plainly uses the phrase "interest rate agreed upon," in reference to the original 21% interest
rate. x x x
xxxx
Petitioners never agreed in writing to pay the increased interest rates demanded by
respondent bank in contravention to the tenor of their credit agreement. That an increase in
interest rates from 18% to as much as 68% is excessive and unconscionable is indisputable.
Between 1981 and 1984, petitioners had paid an amount equivalent to virtually half of the
entire principal (7,735,004.66) which was applied to interest alone. By the time the spouses
tendered the amount of 40,142,518.00 in settlement of their obligations; respondent bank
was demanding 58,377,487.00 over and above those amounts already previously paid by
the spouses.
Escalation clauses are not basically wrong or legally objectionable so long as they are not
solely potestative but based on reasonable and valid grounds. Here, as clearly demonstrated
above, not only [are] the increases of the interest rates on the basis of the escalation clause
patently unreasonable and unconscionable, but also there are no valid and reasonable
standards upon which the increases are anchored.
xxxx
In the face of the unequivocal interest rate provisions in the credit agreement and in the law
requiring the parties to agree to changes in the interest rate in writing, we hold that the
unilateral and progressive increases imposed by respondent PNB were null and void. Their
effect was to increase the total obligation on an eighteen million peso loan to an amount way
over three times that which was originally granted to the borrowers. That these increases,
occasioned by crafty manipulations in the interest rates is unconscionable and neutralizes
the salutary policies of extending loans to spur business cannot be disputed. 69 (Emphases
supplied)
Still, in a fourth case, Philippine National Bank v. Court of Appeals, 70 the above doctrine was
reiterated:
The promissory note contained the following stipulation:
For value received, I/we, [private respondents] jointly and severally promise to pay to the
ORDER of the PHILIPPINE NATIONAL BANK, at its office in San Jose City, Philippines, the sum
of FIFTEEN THOUSAND ONLY (15,000.00), Philippine Currency, together with interest
thereon at the rate of 12% per annum until paid, which interest rate the Bank may at any
time without notice, raise within the limits allowed by law, and I/we also agree to pay jointly
and severally ____% per annum penalty charge, by way of liquidated damages should this
note be unpaid or is not renewed on due dated.
Payment of this note shall be as follows:
*THREE HUNDRED SIXTY FIVE DAYS* AFTER DATE
On the reverse side of the note the following condition was stamped:
All short-term loans to be granted starting January 1, 1978 shall be made subject to the
condition that any and/or all extensions hereof that will leave any portion of the amount still
unpaid after 730 days shall automatically convert the outstanding balance into a medium or
long-term obligation as the case may be and give the Bank the right to charge the interest
rates prescribed under its policies from the date the account was originally granted.
To secure payment of the loan the parties executed a real estate mortgage contract which
provided:
(k) INCREASE OF INTEREST RATE:
The rate of interest charged on the obligation secured by this mortgage as well as the
interest on the amount which may have been advanced by the MORTGAGEE, in accordance
with the provision hereof, shall be subject during the life of this contract to such an increase
within the rate allowed by law, as the Board of Directors of the MORTGAGEE may prescribe
for its debtors.
xxxx
To begin with, PNBs argument rests on a misapprehension of the import of the appellate
courts ruling. The Court of Appeals nullified the interest rate increases not because the
promissory note did not comply with P.D. No. 1684 by providing for a de-escalation, but
because the absence of such provision made the clause so one-sided as to make it
unreasonable.
That ruling is correct. It is in line with our decision in Banco Filipino Savings & Mortgage Bank
v. Navarro that although P.D. No. 1684 is not to be retroactively applied to loans granted
before its effectivity, there must nevertheless be a de-escalation clause to mitigate the one-
sidedness of the escalation clause. Indeed because of concern for the unequal status of
borrowers vis--vis the banks, our cases after Banco Filipino have fashioned the rule that any
increase in the rate of interest made pursuant to an escalation clause must be the result of
agreement between the parties.
Thus in Philippine National Bank v. Court of Appeals, two promissory notes authorized PNB to
increase the stipulated interest per annum" within the limits allowed by law at any time
depending on whatever policy [PNB] may adopt in the future; Provided, that the interest rate
on this note shall be correspondingly decreased in the event that the applicable maximum
interest rate is reduced by law or by the Monetary Board." The real estate mortgage likewise
provided:
The rate of interest charged on the obligation secured by this mortgage as well as the
interest on the amount which may have been advanced by the MORTGAGEE, in accordance
with the provisions hereof, shall be subject during the life of this contract to such an increase
within the rate allowed by law, as the Board of Directors of the MORTGAGEE may prescribe
for its debtors.
Pursuant to these clauses, PNB successively increased the interest from 18% to 32%, then to
41% and then to 48%. This Court declared the increases unilaterally imposed by [PNB] to be
in violation of the principle of mutuality as embodied in Art.1308 of the Civil Code, which
provides that "[t]he contract must bind both contracting parties; its validity or compliance
cannot be left to the will of one of them." As the Court explained:
In order that obligations arising from contracts may have the force of law between the
parties, there must be mutuality between the parties based on their essential equality. A
contract containing a condition which makes its fulfillment dependent exclusively upon the
uncontrolled will of one of the contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21
SCRA 555). Hence, even assuming that the 1.8 million loan agreement between the PNB and
the private respondent gave the PNB a license (although in fact there was none) to increase
the interest rate at will during the term of the loan, that license would have been null and
void for being violative of the principle of mutuality essential in contracts. It would have
invested the loan agreement with the character of a contract of adhesion, where the parties
do not bargain on equal footing, the weaker partys (the debtor) participation being reduced
to the alternative "to take it or leave it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil.
85). Such a contract is a veritable trap for the weaker party whom the courts of justice must
protect against abuse and imposition.
A similar ruling was made in Philippine National Bank v. Court of Appeals. The credit
agreement in that case provided:
The BANK reserves the right to increase the interest rate within the limits allowed by law at
any time depending on whatever policy it may adopt in the future: Provided, that the interest
rate on this accommodation shall be correspondingly decreased in the event that the
applicable maximum interest is reduced by law or by the Monetary Board. . . .
As in the first case, PNB successively increased the stipulated interest so that what was
originally 12% per annum became, after only two years, 42%. In declaring the increases
invalid, we held:
We cannot countenance petitioner banks posturing that the escalation clause at bench gives
it unbridled right to unilaterally upwardly adjust the interest on private respondents loan.
That would completely take away from private respondents the right to assent to an
important modification in their agreement, and would negate the element of mutuality in
contracts.
Only recently we invalidated another round of interest increases decreed by PNB pursuant to
a similar agreement it had with other borrowers:
[W]hile the Usury Law ceiling on interest rates was lifted by C.B. Circular 905, nothing in the
said circular could possibly be read as granting respondent bank carte blanche authority to
raise interest rates to levels which would either enslave its borrowers or lead to a
hemorrhaging of their assets.
In this case no attempt was made by PNB to secure the conformity of private respondents to
the successive increases in the interest rate. Private respondents assent to the increases can
not be implied from their lack of response to the letters sent by PNB, informing them of the
increases. For as stated in one case, no one receiving a proposal to change a contract is
obliged to answer the proposal.71 (Emphasis supplied)
We made the same pronouncement in a fifth case, New Sampaguita Builders Construction,
Inc. v. Philippine National Bank,72 thus
Courts have the authority to strike down or to modify provisions in promissory notes that
grant the lenders unrestrained power to increase interest rates, penalties and other charges
at the latters sole discretion and without giving prior notice to and securing the consent of
the borrowers. This unilateral authority is anathema to the mutuality of contracts and enable
lenders to take undue advantage of borrowers. Although the Usury Law has been effectively
repealed, courts may still reduce iniquitous or unconscionable rates charged for the use of
money. Furthermore, excessive interests, penalties and other charges not revealed in
disclosure statements issued by banks, even if stipulated in the promissory notes, cannot be
given effect under the Truth in Lending Act.73 (Emphasis supplied)
Yet again, in a sixth disposition, Philippine National Bank v. Spouses Rocamora,74 the above
pronouncements were reiterated to debunk PNBs repeated reliance on its invalidated
contract stipulations:
We repeated this rule in the 1994 case of PNB v. CA and Jayme Fernandez and the 1996 case
of PNB v. CA and Spouses Basco. Taking no heed of these rulings, the escalation clause PNB
used in the present case to justify the increased interest rates is no different from the
escalation clause assailed in the 1996 PNB case; in both, the interest rates were increased
from the agreed 12% per annum rate to 42%. x x x
xxxx
On the strength of this ruling, PNBs argument that the spouses Rocamoras failure to from date of each Availment up to but not including the date of full payment thereof at the
contest the increased interest rates that were purportedly reflected in the statements of
account and the demand letters sent by the bank amounted to their implied acceptance of
the increase should likewise fail.
Evidently, PNBs failure to secure the spouses Rocamoras consent to the increased interest
rates prompted the lower courts to declare excessive and illegal the interest rates imposed.
Togo around this lower court finding, PNB alleges that the 206,297.47 deficiency claim was
computed using only the original 12% per annum interest rate. We find this unlikely. Our
examination of PNBs own ledgers, included in the records of the case, clearly indicates that
PNB imposed interest rates higher than the agreed 12% per annum rate. This confirmatory
finding, albeit based solely on ledgers found in the records, reinforces the application in this
case of the rule that findings of the RTC, when affirmed by the CA, are binding upon this
Court.75 (Emphases supplied)
Verily, all these cases, including the present one, involve identical or similar provisions found
in respondents credit agreements and promissory notes. Thus, the July 1989 Credit
Agreement executed by petitioners and respondent contained the following stipulation on
interest:
1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5% [per annum].
Interest shall be payable in advance every one hundred twenty days at the rate prevailing at
the time of the renewal.
(b) The Borrower agrees that the Bank may modify the interest rate in the Loan depending
on whatever policy the Bank may adopt in the future, including without limitation, the
shifting from the floating interest rate system to the fixed interest rate system, or vice versa.
Where the Bank has imposed on the Loan interest at a rate per annum which is equal to the
Banks spread over the current floating interest rate, the Borrower hereby agrees that the
Bank may, without need of notice to the Borrower, increase or decrease its spread over the
floating interest rate at any time depending on whatever policy it may adopt in the
future.76 (Emphases supplied)
while the eight promissory notes issued pursuant thereto granted PNB the right to increase
or reduce interest rates "within the limits allowed by law or the Monetary Board"77 and the
Real Estate Mortgage agreement included the same right to increase or reduce interest rates
"at any time depending on whatever policy PNB may adopt in the future." 78
On the basis of the Credit Agreement, petitioners issued promissory notes which they signed
in blank, and respondent later on entered their corresponding interest rates, as follows:
1st Promissory Note dated July 24, 1989 19.5%;
2nd Promissory Note dated November 22, 1989 23%;
3rd Promissory Note dated March 21, 1990 22%;
4th Promissory Note dated July 19, 1990 24%;
5th Promissory Note dated December 17, 1990 28%;
6th Promissory Note dated February 14, 1991 32%;
7th Promissory Note dated March 1, 1991 30%; and
8th Promissory Note dated July 11, 1991 24%.79
On the other hand, the August 1991 Amendment to Credit Agreement contains the following
stipulation regarding interest:
1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each Availment
rate per annum which is determined by the Bank to be prime rate plus applicable spread in
effect as of the date of each Availment.80 (Emphases supplied)
and under this Amendment to Credit Agreement, petitioners again executed and signed the
following promissory notes in blank, for the respondent to later on enter the corresponding
interest rates, which it did, as follows:
9th Promissory Note dated November 8, 1991 26%;
10th Promissory Note dated March 19, 1992 25%;
11th Promissory Note dated July 11, 1992 23%;
12th Promissory Note dated November 10, 1992 21%;
13th Promissory Note dated March 15, 1993 21%;
14th Promissory Note dated July 12, 1993 17.5%;
15th Promissory Note dated November 17, 1993 21%;
16th Promissory Note dated March 28, 1994 21%;
17th Promissory Note dated July 13, 1994 21%;
18th Promissory Note dated November 16, 1994 16%;
19th Promissory Note dated April 10, 1995 21%;
20th Promissory Note dated July 19, 1995 18.5%;
21st Promissory Note dated December 18, 1995 18.75%;
22nd Promissory Note dated April 22, 1996 18.5%;
23rd Promissory Note dated July 22, 1996 18.5%;
24th Promissory Note dated November 25, 1996 18%;
25th Promissory Note dated May 30, 1997 17.5%; and
26th Promissory Note (PN 9707237) dated July 30, 1997 25%.81
The 9th up to the 17th promissory notes provide for the payment of interest at the "rate the
Bank may at any time without notice, raise within the limits allowed by law x x x."82 On the
other hand, the 18th up to the 26th promissory notes which includes PN 9707237 carried
the following provision:
x x x For this purpose, I/We agree that the rate of interest herein stipulated may be increased
or decreased for the subsequent Interest Periods, with prior notice to the Borrower in the
event of changes in interest rate prescribed by law or the Monetary Board of the Central
Bank of the Philippines, or in the Banks overall cost of funds. I/We hereby agree that in the
event I/we are not agreeable to the interest rate fixed for any Interest Period, I/we shall have
the option to prepay the loan or credit facility without penalty within ten (10) calendar days
from the Interest Setting Date.83 (Emphasis supplied)
These stipulations must be once more invalidated, as was done in previous cases. The
common denominator in these cases is the lack of agreement of the parties to the imposed
interest rates. For this case, this lack of consent by the petitioners has been made obvious by
the fact that they signed the promissory notes in blank for the respondent to fill. We find
credible the testimony of Lydia in this respect. Respondent failed to discredit her; in fact, its
witness PNB Kalibo Branch Manager Aspa admitted that interest rates were fixed solely by its
Treasury Department in Manila, which were then simply communicated to all PNB branches
for implementation. If this were the case, then this would explain why petitioners had to sign
the promissory notes in blank, since the imposable interest rates have yet to be determined
and fixed by respondents Treasury Department in Manila.
Moreover, in Aspas enumeration of the factors that determine the interest rates PNB fixes
such as cost of money, foreign currency values, bank administrative costs, profitability, and
considerations which affect the banking industry it can be seen that considerations which
affect PNBs borrowers are ignored. A borrowers current financial state, his feedback or
opinions, the nature and purpose of his borrowings, the effect of foreign currency values or
fluctuations on his business or borrowing, etc. these are not factors which influence the
fixing of interest rates to be imposed on him. Clearly, respondents method of fixing interest
rates based on one-sided, indeterminate, and subjective criteria such as profitability, cost of
money, bank costs, etc. is arbitrary for there is no fixed standard or margin above or below
these considerations.
The stipulation in the promissory notes subjecting the interest rate to review does not render
the imposition by UCPB of interest rates on the obligations of the spouses Beluso valid.
According to said stipulation:
The interest rate shall be subject to review and may be increased or decreased by the
LENDER considering among others the prevailing financial and monetary conditions; or the
rate of interest and charges which other banks or financial institutions charge or offer to
charge for similar accommodations; and/or the resulting profitability to the LENDER after due
consideration of all dealings with the BORROWER.
It should be pointed out that the authority to review the interest rate was given [to] UCPB
alone as the lender. Moreover, UCPB may apply the considerations enumerated in this
provision as it wishes. As worded in the above provision, UCPB may give as much weight as it
desires to each of the following considerations: (1) the prevailing financial and monetary
condition;(2) the rate of interest and charges which other banks or financial institutions
charge or offer to charge for similar accommodations; and/or(3) the resulting profitability to
the LENDER (UCPB) after due consideration of all dealings with the BORROWER (the spouses
Beluso). Again, as in the case of the interest rate provision, there is no fixed margin above or
below these considerations.
In view of the foregoing, the Separability Clause cannot save either of the two options of
UCPB as to the interest to be imposed, as both options violate the principle of mutuality of
contracts.84 (Emphases supplied)
To repeat what has been said in the above-cited cases, any modification in the contract, such
as the interest rates, must be made with the consent of the contracting parties.1wphi1 The
minds of all the parties must meet as to the proposed modification, especially when it affects
an important aspect of the agreement. In the case of loan agreements, the rate of interest is
a principal condition, if not the most important component. Thus, any modification thereof
must be mutually agreed upon; otherwise, it has no binding effect.
What is even more glaring in the present case is that, the stipulations in question no longer
provide that the parties shall agree upon the interest rate to be fixed; -instead, they are
worded in such a way that the borrower shall agree to whatever interest rate respondent
fixes. In credit agreements covered by the above-cited cases, it is provided that:
The Bank reserves the right to increase the interest rate within the limits allowed by law at
any time depending on whatever policy it may adopt in the future: Provided, that, the
interest rate on this accommodation shall be correspondingly decreased in the event that the
applicable maximum interest rate is reduced by law or by the Monetary Board. In either case,
the adjustment in the interest rate agreed upon shall take effect on the effectivity date of the
increase or decrease in maximum interest rate.85 (Emphasis supplied)
Whereas, in the present credit agreements under scrutiny, it is stated that:
IN THE JULY 1989 CREDIT AGREEMENT
(b) The Borrower agrees that the Bank may modify the interest rate on the Loan depending
on whatever policy the Bank may adopt in the future, including without limitation, the
shifting from the floating interest rate system to the fixed interest rate system, or vice versa.
Where the Bank has imposed on the Loan interest at a rate per annum, which is equal to the
Banks spread over the current floating interest rate, the Borrower hereby agrees that the
Bank may, without need of notice to the Borrower, increase or decrease its spread over the
floating interest rate at any time depending on whatever policy it may adopt in the
future.86 (Emphases supplied)
IN THE AUGUST 1991 AMENDMENT TO CREDIT AGREEMENT
1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each Availment
from date of each Availment up to but not including the date of full payment thereof at the
rate per annum which is determined by the Bank to be prime rate plus applicable spread in
effect as of the date of each Availment.87 (Emphasis supplied)
Plainly, with the present credit agreement, the element of consent or agreement by the
borrower is now completely lacking, which makes respondents unlawful act all the more
reprehensible.
Accordingly, petitioners are correct in arguing that estoppel should not apply to them, for
"[e]stoppel cannot be predicated on an illegal act. As between the parties to a contract,
validity cannot be given to it by estoppel if it is prohibited by law or is against public policy."88
It appears that by its acts, respondent violated the Truth in Lending Act, or Republic Act No.
3765, which was enacted "to protect x x x citizens from a lack of awareness of the true cost
of credit to the user by using a full disclosure of such cost with a view of preventing the
uninformed use of credit to the detriment of the national economy." 89 The 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." 90 Section 4 thereof
provides that a disclosure statement must be furnished prior to the consummation of the
transaction, thus:
SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the
consummation of the transaction, a clear statement in writing setting forth, to the extent
applicable and in accordance with rules and regulations prescribed by the Board, the
following information:
 (1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2);
(4) the charges, individually itemized, which are paid or to be paid by such person
in connection with the transaction but which are not incident to the extension of
credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be financed
expressed as a simple annual rate on the outstanding unpaid balance of the
obligation.
Under Section 4(6), "finance charge" represents the amount to be paid by the debtor
incident to the extension of credit such as interest or discounts, collection fees, credit
investigation fees, attorneys fees, and other service charges. The total finance charge
represents the difference between (1) the aggregate consideration (down payment plus
installments) on the part of the debtor, and (2) the sum of the cash price and non-finance
charges.91
By requiring the petitioners to sign the credit documents and the promissory notes in blank,
and then unilaterally filling them up later on, respondent violated the Truth in Lending Act,
and was remiss in its disclosure obligations. In one case, which the Court finds applicable
here, it was held:
UCPB further argues that since the spouses Beluso were duly given copies of the subject
promissory notes after their execution, then they were duly notified of the terms thereof, in
substantial compliance with the Truth in Lending Act.
Once more, we disagree. Section 4 of the Truth in Lending Act clearly provides that the
disclosure statement must be furnished prior to the consummation of the transaction:
SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the
consummation of the transaction, a clear statement in writing setting forth, to the extent
applicable and in accordance with rules and regulations prescribed by the Board, the
following information:
(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2);
(4) the charges, individually itemized, which are paid or to be paid by such person
in connection with the transaction but which are not incident to the extension of
credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be financed
expressed as a simple annual rate on the outstanding unpaid balance of the
obligation.
The rationale of this provision is to protect users of credit from a lack of awareness of the
true cost thereof, proceeding from the experience that banks are able to conceal such true
cost by hidden charges, uncertainty of interest rates, deduction of interests from the loaned
amount, and the like. The law thereby seeks to protect debtors by permitting them to fully
appreciate the true cost of their loan, to enable them to give full consent to the contract, and
to properly evaluate their options in arriving at business decisions. Upholding UCPBs claim of
substantial compliance would defeat these purposes of the Truth in Lending Act. The belated
discovery of the true cost of credit will too often not be able to reverse the ill effects of an
already consummated business decision.
In addition, the promissory notes, the copies of which were presented to the spouses Beluso
after execution, are not sufficient notification from UCPB. As earlier discussed, the interest
rate provision therein does not sufficiently indicate with particularity the interest rate to be
applied to the loan covered by said promissory notes.92 (Emphases supplied)
However, the one-year period within which an action for violation of the Truth in Lending Act
may be filed evidently prescribed long ago, or sometime in 2001, one year after petitioners
received the March 2000 demand letter which contained the illegal charges.
The fact that petitioners later received several statements of account detailing its
outstanding obligations does not cure respondents breach. To repeat, the belated discovery
of the true cost of credit does not reverse the ill effects of an already consummated business
decision.93
Neither may the statements be considered proposals sent to secure the petitioners
conformity; they were sent after the imposition and application of the interest rate, and not
before. And even if it were to be presumed that these are proposals or offers, there was no
acceptance by petitioners. "No one receiving a proposal to modify a loan contract, especially
regarding interest, is obliged to answer the proposal."94
Loan and credit arrangements may be made enticing by, or "sweetened" with, offers of low
initial interest rates, but actually accompanied by provisions written in fine print that allow
lenders to later on increase or decrease interest rates unilaterally, without the consent of the
borrower, and depending on complex and subjective factors. Because they have been lured
into these contracts by initially low interest rates, borrowers get caught and stuck in the web
of subsequent steep rates and penalties, surcharges and the like. Being ordinary individuals
or entities, they naturally dread legal complications and cannot afford court litigation; they
succumb to whatever charges the lenders impose. At the very least, borrowers should be
charged rightly; but then again this is not possible in a one-sided credit system where the
temptation to abuse is strong and the willingness to rectify is made weak by the eternal
desire for profit.
Given the above supposition, the Court cannot subscribe to respondents argument that in
every repricing of petitioners loan availment, they are given the right to question the
interest rates imposed. The import of respondents line of reasoning cannot be other than
that if one out of every hundred borrowers questions respondents practice of unilaterally
fixing interest rates, then only the loan arrangement with that lone complaining borrower
will enjoy the benefit of review or re-negotiation; as to the 99 others, the questionable
practice will continue unchecked, and respondent will continue to reap the profits from such
unscrupulous practice. The Court can no more condone a view so perverse. This is exactly
what the Court meant in the immediately preceding cited case when it said that "the belated
discovery of the true cost of credit does not reverse the ill effects of an already
consummated business decision;"95 as to the 99 borrowers who did not or could not
complain, the illegal act shall have become a fait accompli to their detriment, they have
already suffered the oppressive rates.
Besides, that petitioners are given the right to question the interest rates imposed is, under
the circumstances, irrelevant; we have a situation where the petitioners do not stand on
equal footing with the respondent. It is doubtful that any borrower who finds himself in
petitioners position would dare question respondents power to arbitrarily modify interest
rates at any time. In the second place, on what basis could any borrower question such
power, when the criteria or standards which are really one-sided, arbitrary and subjective
for the exercise of such power are precisely lost on him?
For the same reasons, the Court cannot validly consider that, as stipulated in the 18th up to
the 26th promissory notes, petitioners are granted the option to prepay the loan or credit
facility without penalty within 10 calendar days from the Interest Setting Date if they are not
agreeable to the interest rate fixed. It has been shown that the promissory notes are
executed and signed in blank, meaning that by the time petitioners learn of the interest rate,
they are already bound to pay it because they have already pre-signed the note where the
rate is subsequently entered.
Besides, premium may not be placed upon a stipulation in a contract which grants one party
the right to choose whether to continue with or withdraw from the agreement if it discovers
that what the other party has been doing all along is improper or illegal.
Thus said, respondents arguments relative to the credit documents that documentary
evidence prevails over testimonial evidence; that the credit documents are in proper form,
presumed regular, and endure, against arbitrary claims by petitioners, experienced business
persons that they are, they signed questionable loan documents whose provisions for
interest rates were left blank, and yet they continued to pay the interests without protest for
a number of years deserve no consideration.
With regard to interest, the Court finds that since the escalation clause is annulled, the
principal amount of the loan is subject to the original or stipulated rate of interest, and upon
maturity, the amount due shall be subject to legal interest at the rate of 12% per annum. This
is the uniform ruling adopted in previous cases, including those cited here. 96 The interests
paid by petitioners should be applied first to the payment of the stipulated or legal and
unpaid interest, as the case may be, and later, to the capital or principal. 97 Respondent
should then refund the excess amount of interest that it has illegally imposed upon
petitioners; "[t]he amount to be refunded refers to that paid by petitioners when they had
no obligation to do so."98 Thus, the parties original agreement stipulated the payment of
19.5% interest; however, this rate was intended to apply only to the first promissory note
which expired on November 21, 1989 and was paid by petitioners; it was not intended to
apply to the whole duration of the loan. Subsequent higher interest rates have been declared
illegal; but because only the rates are found to be improper, the obligation to pay interest
subsists, the same to be fixed at the legal rate of 12% per annum. However, the 12% interest
shall apply only until June 30, 2013. Starting July1, 2013, the prevailing rate of interest shall
be 6% per annum pursuant to our ruling in Nacar v. Gallery Frames99 and Bangko Sentral ng
Pilipinas-Monetary Board Circular No. 799.
Now to the issue of penalty. PN 9707237 provides that failure to pay it or any installment
thereon, when due, shall constitute default, and a penalty charge of 24% per annum based
on the defaulted principal amount shall be imposed. Petitioners claim that this penalty
should be excluded from the foreclosure amount or bid price because the Real Estate
Mortgage and the Supplement thereto did not specifically include it as part of the secured
amount. Respondent justifies its inclusion in the secured amount, saying that the purpose of
the penalty or a penal clause is to ensure the performance of the obligation and substitute
for damages and the payment of interest in the event of non-compliance.100 Respondent
adds that the imposition and collection of a penalty is a normal banking practice, and the
standard rate per annum for all commercial banks, at the time, was 24%. Its inclusion as part
of the secured amount in the mortgage agreements is thus valid and necessary.
The Court sustains petitioners view that the penalty may not be included as part of the
secured amount. Having found the credit agreements and promissory notes to be tainted, we
must accord the same treatment to the mortgages. After all, "[a] mortgage and a note
secured by it are deemed parts of one transaction and are construed together." 101 Being so
tainted and having the attributes of a contract of adhesion as the principal credit documents,
we must construe the mortgage contracts strictly, and against the party who drafted it. An
examination of the mortgage agreements reveals that nowhere is it stated that penalties are
to be included in the secured amount. Construing this silence strictly against the respondent,
the Court can only conclude that the parties did not intend to include the penalty allowed
under PN 9707237 as part of the secured amount. Given its resources, respondent could
have if it truly wanted to conveniently prepared and executed an amended mortgage
agreement with the petitioners, thereby including penalties in the amount to be secured by
the encumbered properties. Yet it did not.
With regard to attorneys fees, it was plain error for the CA to have passed upon the issue
since it was not raised by the petitioners in their appeal; it was the respondent that
improperly brought it up in its appellees brief, when it should have interposed an appeal,
since the trial courts Decision on this issue is adverse to it. It is an elementary principle in the
subject of appeals that an appellee who does not himself appeal cannot obtain from the
appellate court any affirmative relief other than those granted in the decision of the court
below.
x x x [A]n appellee, who is at the same time not an appellant, may on appeal be permitted to
make counter assignments of error in ordinary actions, when the purpose is merely to
defend himself against an appeal in which errors are alleged to have been committed by the
trial court both in the appreciation of facts and in the interpretation of the law, in order to
sustain the judgment in his favor but not when his purpose is to seek modification or reversal
of the judgment, in which case it is necessary for him to have excepted to and appealed from
the judgment.102
Since petitioners did not raise the issue of reduction of attorneys fees, the CA possessed no
authority to pass upon it at the instance of respondent. The ruling of the trial court in this
respect should remain undisturbed.
For the fixing of the proper amounts due and owing to the parties to the respondent as
creditor and to the petitioners who are entitled to a refund as a consequence of
overpayment considering that they paid more by way of interest charges than the 12% per
annum103 herein allowed the case should be remanded to the lower court for proper
accounting and computation, applying the following procedure:
1. The 1st Promissory Note with the 19.5% interest rate is deemed proper and paid;
2. All subsequent promissory notes (from the 2nd to the 26th promissory notes)
shall carry an interest rate of only 12% per annum.104Thus, interest payment made
in excess of 12% on the 2nd promissory note shall immediately be applied to the
principal, and the principal shall be accordingly reduced. The reduced principal shall
then be subjected to the 12%105 interest on the 3rd promissory note, and the
excess over 12% interest payment on the 3rd promissory note shall again be
applied to the principal, which shall again be reduced accordingly. The reduced
principal shall then be subjected to the 12% interest on the 4th promissory note,
and the excess over12% interest payment on the 4th promissory note shall again
be applied to the principal, which shall again be reduced accordingly. And so on
and so forth;
3. After the above procedure is carried out, the trial court shall be able to conclude
if petitioners a) still have an OUTSTANDING BALANCE/OBLIGATION or b) MADE
PAYMENTS OVER AND ABOVE THEIR TOTAL OBLIGATION (principal and interest);
4. Such outstanding balance/obligation, if there be any, shall then be subjected to a
12% per annum interest from October 28, 1997 until January 14, 1999, which is the
date of the auction sale;
5. Such outstanding balance/obligation shall also be charged a 24% per annum
penalty from August 14, 1997 until January 14, 1999. But from this total penalty,
the petitioners previous payment of penalties in the amount of 202,000.00made
on January 27, 1998106shall be DEDUCTED;
6. To this outstanding balance (3.), the interest (4.), penalties (5.), and the final and
executory award of 1% attorneys fees shall be ADDED;
7. The sum total of the outstanding balance (3.), interest (4.) and 1% attorneys fees
(6.) shall be DEDUCTED from the bid price of 4,324,172.96. The penalties (5.) are
not included because they are not included in the secured amount;
8. The difference in (7.) [4,324,172.96 LESS sum total of the outstanding balance
(3.), interest (4.), and 1% attorneys fees (6.)] shall be DELIVERED TO THE
PETITIONERS;
9. Respondent may then proceed to consolidate its title to TCTs T-14250 and T-
16208;
10. ON THE OTHER HAND, if after performing the procedure in (2.), it turns out that
petitioners made an OVERPAYMENT, the interest (4.), penalties (5.), and the award
of 1% attorneys fees (6.) shall be DEDUCTED from the overpayment. There is no
outstanding balance/obligation precisely because petitioners have paid beyond the
amount of the principal and interest;
11. If the overpayment exceeds the sum total of the interest (4.), penalties (5.), and
award of 1% attorneys fees (6.), the excess shall be RETURNED to the petitioners,
with legal interest, under the principle of solutio indebiti;107
12. Likewise, if the overpayment exceeds the total amount of interest (4.) and
award of 1% attorneys fees (6.), the trial court shall INVALIDATE THE
EXTRAJUDICIAL FORECLOSURE AND SALE;
13. HOWEVER, if the total amount of interest (4.) and award of 1% attorneys fees
(6.) exceed petitioners overpayment, then the excess shall be DEDUCTED from the
bid price of 4,324,172.96;
14. The difference in (13.) [4,324,172.96 LESS sum total of the interest (4.) and 1%
attorneys fees (6.)] shall be DELIVERED TO THE PETITIONERS;
15. Respondent may then proceed to consolidate its title to TCTs T-14250 and T-
16208. The outstanding penalties, if any, shall be collected by other means.
From the above, it will be seen that if, after proper accounting, it turns out that the
petitioners made payments exceeding what they actually owe by way of principal,
interest, and attorneys fees, then the mortgaged properties need not answer for
any outstanding secured amount, because there is not any; quite the contrary,
respondent must refund the excess to petitioners.1wphi1 In such case, the
extrajudicial foreclosure and sale of the properties shall be declared null and void
for obvious lack of basis, the case being one of solutio indebiti instead. If, on the
other hand, it turns out that petitioners overpayments in interests do not exceed
their total obligation, then the respondent may consolidate its ownership over the
properties, since the period for redemption has expired. Its only obligation will be
to return the difference between its bid price (4,324,172.96) and petitioners total
obligation outstanding except penalties after applying the latters
overpayments.
WHEREFORE, premises considered, the Petition is GRANTED. The May 8, 2007 Decision of the
Court of Appeals in CA-G.R. CV No. 79650 is ANNULLED and SET ASIDE. Judgment is hereby
rendered as follows:
1. The interest rates imposed and indicated in the 2nd up to the 26th Promissory
Notes are DECLARED NULL AND VOID, and such notes shall instead be subject to
interest at the rate of twelve percent (12%) per annum up to June 30, 2013, and
starting July 1, 2013, six percent (6%) per annum until full satisfaction;
2. The penalty charge imposed in Promissory Note No. 9707237 shall be EXCLUDED
from the amounts secured by the real estate mortgages;
3. The trial courts award of one per cent (1%) attorneys fees is REINSTATED;
4. The case is ordered REMANDED to the Regional Trial Court, Branch 6 of Kalibo,
Aklan for the computation of overpayments made by petitioners spouses Eduardo
and Lydia Silos to respondent Philippine National Bank, taking into consideration
the foregoing dispositions, and applying the procedure hereinabove set forth;
5. Thereafter, the trial court is ORDERED to make a determination as to the validity
of the extrajudicial foreclosure and sale, declaring the same null and void in case of
overpayment and ordering the release and return of Transfer Certificates of Title
Nos. T-14250 and TCT T-16208 to petitioners, or ordering the delivery to the
petitioners of the difference between the bid price and the total remaining
obligation of petitioners, if any;
6. In the meantime, the respondent Philippine National Bank is ENJOINED from
consolidating title to Transfer Certificates of Title Nos. T-14250 and T-16208 until
all the steps in the procedure above set forth have been taken and applied;
7. The reimbursement of the excess in the bid price of 377,505.99, which
respondent Philippine National Bank is ordered to reimburse petitioners, should be
HELD IN ABEYANCE until the true amount owing to or owed by the parties as
against each other is determined;
8. Considering that this case has been pending for such a long time and that further
proceedings, albeit uncomplicated, are required, the trial court is ORDERED to
proceed with dispatch.
SO ORDERED.
MARIANO C. DEL CASTILLO
Associate Justice
WE CONCUR:
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 153852 October 24, 2012
SPOUSES HUMBERTO P. DELOSSANTOS AND CARMENCITA M. DELOS SANTOS, Petitioners,
vs.
METROPOLITAN BANK AND TRUST COMPANY, Respondent.
DECISION
BERSAMIN, J.:
A writ of preliminary injunction to enjoin an impending extrajudicial foreclosure sale is issued
only upon a clear showing of a violation of the mortgagor's unmistakable right.1
This appeal is taken by the petitioners to review and reverse the decision promulgated on
February 19, 2002,2 whereby the Court of Appeals (CA) dismissed their petition for certiorari
that assailed the denial by the Regional Trial Court in Davao City (RTC) of their application for
the issuance of a writ of preliminary injunction to prevent the extrajudicial foreclosure sale of
their mortgaged asset initiated by their mortgagee, respondent Metropolitan Bank and Trust
Company (Metrobank).
Antecedents
From December 9, 1996 until March 20, 1998, the petitioners took out several loans totaling
P12,000,000.00 from Metrobank, Davao City Branch, the proceeds of which they would use
in constructing a hotel on their 305-square-meter parcel of land located in Davao City and
covered by Transfer Certificate of Title No. I-218079 of the Registry of Deeds of Davao City.
They executed various promissory notes covering the loans, and constituted a mortgage over
their parcel of land to secure the performance of their obligation. The stipulated interest
rates were 15.75% per annum for the long term loans (maturing on December 9, 2006) and
22.204% per annum for a short term loan of P4,400,000.00 (maturing on March 12,
1999).3 The interest rates were fixed for the first year, subject to escalation or de-escalation
in certain events without advance notice to them. The loan agreements further stipulated
that the entire amount of the loans would become due and demandable upon default in the
payment of any installment, interest or other charges.4
On December 27, 1999, Metrobank sought the extrajudicial foreclosure of the real estate
mortgage5 after the petitioners defaulted in their installment payments. The petitioners were
notified of the foreclosure and of the forced sale being scheduled on March 7, 2000. The
notice of the sale stated that the total amount of the obligation was P16,414,801.36 as of
October 26, 1999.6
On April 4, 2000, prior to the scheduled foreclosure sale (i.e., the original date of March 7,
2000 having been meanwhile reset to April 6, 2000), the petitioners filed in the RTC a
complaint (later amended) for damages, fixing of interest rate, and application of excess
payments (with prayer for a writ of preliminary injunction). They alleged therein that
Metrobank had no right to foreclose the mortgage because they were not in default of their
obligations; that Metrobank had imposed interest rates (i.e., 15.75% per annum for two long-
term loans and 22.204% per annum for the short term loan) on three of their loans that were
different from the rate of 14.75% per annum agreed upon; that Metrobank had increased
the interest rates on some of their loans without any basis by invoking the escalation clause
written in the loan agreement; that they had paid P2,561,557.87 instead of only
P1,802,867.00 based on the stipulated interest rates, resulting in their excess payment of
P758,690.87 as interest, which should then be applied to their accrued obligation; that they
had requested the reduction of the escalated interest rates on several occasions because of
its damaging effect on their hotel business, but Metrobank had denied their request; and
that they were not yet in default because the long-term loans would become due and
demandable on December 9, 2006 yet and they had been paying interest on the short-term
loan in advance.
The complaint prayed that a writ of preliminary injunction to enjoin the scheduled
foreclosure sale be issued. They further prayed for a judgment making the injunction
permanent, and directing Metrobank, namely: (a) to apply the excess payment of
P758,690.87 to the accrued interest; (b) to pay P150,000.00 for the losses suffered in their
hotel business; (c) to fix the interest rates of the loans; and (d) to pay moral and exemplary
damages plus attorneys fees.7
In its answer, Metrobank stated that the increase in the interest rates had been made
pursuant to the escalation clause stipulated in the loan agreements; and that not all of the
payments by the petitioners had been applied to the loans covered by the real estate
mortgage, because some had been applied to another loan of theirs amounting to
P500,000.00 that had not been secured by the mortgage.
In the meantime, the RTC issued a temporary restraining order to enjoin the foreclosure
sale.8 After hearing on notice, the RTC issued its order dated May 2, 2000, 9 granting the
petitioners application for a writ of preliminary injunction.
Metrobank moved for reconsideration.10 The petitioners did not file any opposition to
Metrobanks motion for reconsideration; also, they did not attend the scheduled hearing of
the motion for reconsideration.
On May 19, 2000, the RTC granted Metrobanks motion for reconsideration, holding in
part,11 as follows:
xxx In the motion at bench as well as at the hearing this morning defendant Metro Bank
pointed out that in all the promissory notes executed by the plaintiffs there is typewritten
inside a box immediately following the first paragraph the following:
"At the effective rate of 15.75% for the first year subject to upward/downward adjustments
for the next year thereafter."
Moreover, in the form of the same promissory notes, there is the additional stipulation
which reads:
"The rate of interest and/or bank charges herein-stipulated, during the term of this
Promissory Note, its extension, renewals or other modifications, may be increased,
decreased, or otherwise changed from time to time by the bank without advance notice to
me/us in the event of changes in the interest rates prescribed by law of the Monetary Board
of the Central Bank of the Philippines, in the rediscount rate of member banks with the
Central Bank of the Philippines, in the interest rates on savings and time deposits, in the
interest rates on the Banks borrowings, in the reserve requirements, or in the overall costs
of funding or money;"
There being no opposition to the motion despite receipt of a copy thereof by the plaintiffs
through counsel and finding merit to the motion for reconsideration, this Court resolves to
reconsider and set aside the Order of this Court dated May 2, 2000.
xxxx
SO ORDERED.
The petitioners sought the reconsideration of the order, for which the RTC required the
parties to submit their respective memoranda. In their memorandum, the petitioners
insisted that they had an excess payment sufficient to cover the amounts due on the
principal.
Nonetheless, on June 8, 2001, the RTC denied the petitioners motion for
reconsideration,12 to wit:
The record does not show that plaintiffs have updated their installment payments by
depositing the same with this Court, with the interest thereon at the rate they contend to be
the true and correct rate agreed upon by the parties.
Hence, even if their contention with respect to the rates of interest is true and correct, they
are in default just the same in the payment of their principal obligation.
WHEREFORE, the MOTION FOR RECONSIDERATION is denied.
Ruling of the CA
Aggrieved, the petitioners commenced a special civil action for certiorari in the CA, ascribing
grave abuse of discretion to the RTC when it issued the orders dated May 19, 2000 and June
8, 2001.
On February 19, 2002, the CA rendered the assailed decision dismissing the petition for
certiorari for lack of merit, and affirming the assailed orders,13 stating:
Petitioners aver that the respondent Court gravely abused its discretion in finding that
petitioners are in default in the payment of their obligation to the private respondent.
We disagree.
The Court below did not excessively exercise its judicial authority not only in setting aside the
May 2, 2000 Order, but also in denying petitioners motion for reconsideration due to the
faults attributable to them.
When private respondent Metrobank moved for the reconsideration of the Order of May 2,
2000 which granted the issuance of the writ of preliminary injunction, petitioners failed to
oppose the same despite receipt of said motion for reconsideration. The public respondent
Court said
"For resolution is the Motion for Reconsideration filed by the defendant Metropolitan Bank
and Trust Company, dated May 12, 2000, a copy of which was received by Atty. Philip
Pantojan for the plaintiffs on May 16, 2000. There is no opposition nor appearance for the
plaintiffs this morning at the scheduled hearing of said motion x x x".
Corollarily, the issuance of the Order of June 8, 2001 was xxx based on petitioners being
remiss in their obligation to update their installment payments.
The Supreme Court ruled in this wise:
To justify the issuance of the writ of certiorari, the abuse of discretion on the part of the
tribunal or officer must be grave, as when the power is exercised in an arbitrary or despotic
manner by reason of passion or personal hostility.
Petitioners likewise discussed at length the issue of whether or not the private respondent
has collected the right interest rate on the loans they obtained from the private respondent,
as well as the propriety of the application of escalated interest rate which was applied to
their loans by the latter. In the instant petition, questions of fact are not generally permitted,
the inquiry being limited essentially to whether the public respondent acted without or in
excess of its jurisdiction or with grave abuse of discretion in issuing the questioned Orders,
neither is the instant petition available to correct mistakes in the judges findings and
conclusions, nor to cure erroneous conclusions of law and fact, if there be any.
Certiorari will issue only to correct errors of jurisdiction, not errors of procedure or mistakes
in the findings or conclusions of the lower court.
A review of facts and evidence is not the province of the extraordinary remedy of certiorari.
WHEREFORE, the petition is DENIED for lack of merit. The assailed Orders of the respondent
Court are AFFIRMED.
SO ORDERED.
The petitioners moved for reconsideration of the decision, but the CA denied the motion for
lack of merit on May 7, 2002.14
Hence, this appeal.
Issues
The petitioners pose the following issues, namely:
1. Whether or not the Presiding Judge in issuing the 08 June 2001 Order, finding
the petitioners in default of their obligation with the Bank, has committed grave
abuse of discretion amounting to excess or lack of jurisdiction as the same run
counter against the legal principle enunciated in the Almeda Case;
2. Assuming that the Presiding Judge did not excessively exercise his judicial
authority in the issuance of the assailed orders, notwithstanding their consistency
with the legal principle enunciated in the Almeda Case, whether or not the
petitioners can avail of the remedy under Rule 65, taking into consideration the
sense of urgency involved in the resolution of the issue raised;
3. Whether or not the Petition lodged before the Court of Appeals presented a
question of fact, and hence not within the province of the extraordinary remedy of
certiorari.15
The petitioners argue that the foreclosure of their mortgage was premature; that they could
not yet be considered in default under the ruling in Almeda v. Court of Appeals, 16 because
the trial court was still to determine with certainty the exact amount of their obligation to
Metrobank; that they would likely prevail in their action because Metrobank had altered the
terms of the loan agreement by increasing the interest rates without their prior assent; and
that unless the foreclosure sale was restrained their action would be rendered moot. They
urge that despite finding no grave abuse of discretion on the part of the RTC in denying their
application for preliminary injunction, the CA should have nonetheless issued a writ of
certiorari considering that they had no other plain and speedy remedy.
Metrobank counters that Almeda v. Court of Appeals was not applicable because that ruling
presupposed the existence of the following conditions, to wit: (a) the escalation and de-
escalation of the interest rate were subject to the agreement of the parties; (b) the
petitioners as obligors must have protested the highly escalated interest rates prior to the
application for foreclosure; (c) they must not be in default in their obligations; (d) they must
have tendered payment to Metrobank equivalent to the principal and accrued interest
calculated at the originally stipulated rate; and (e) upon refusal of Metrobank to receive
payment, they should have consigned the tendered amount in court.17 It asserts that the
petitioners loans, unlike the obligation involved in Almeda v. Court of Appeals, had already
matured prior to the filing of the case, and that they had not tendered or consigned in court
the amount of the principal and the accrued interest at the rate they claimed to be the
correct one.18
Based on the foregoing, the issues to be settled are, firstly, whether the petitioners had a
cause of action for the grant of the extraordinary writ of certiorari; and, secondly, whether
the petitioners were entitled to the writ of preliminary injunction in light of the ruling in
Almeda v. Court of Appeals.
Ruling
The appeal has no merit.
To begin with, the petitioners resort to the special civil action of certiorari to assail the May
19, 2000 order of the RTC (reconsidering and setting aside its order dated May 2, 2000
issuing the temporary restraining order against Metrobank to stop the foreclosure sale) was
improper. They thereby apparently misapprehended the true nature and function of a writ of
certiorari. It is clear to us, therefore, that the CA justly and properly dismissed their petition
for the writ of certiorari.
We remind that the writ of certiorari being a remedy narrow in scope and inflexible in
character, whose purpose is to keep an inferior court within the bounds of its jurisdiction, or
to prevent an inferior court from committing such grave abuse of discretion amounting to
excess of jurisdiction, or to relieve parties from arbitrary acts of courts (i.e., acts that courts
have no power or authority in law to perform) is not a general utility tool in the legal
workshop,19 and cannot be issued to correct every error committed by a lower court.
In the common law, from which the remedy of certiorari evolved, the writ of certiorari was
issued out of Chancery, or the Kings Bench, commanding agents or officers of the inferior
courts to return the record of a cause pending before them, so as to give the party more sure
and speedy justice, for the writ would enable the superior court to determine from an
inspection of the record whether the inferior courts judgment was rendered without
authority.20 The errors were of such a nature that, if allowed to stand, they would result in a
substantial injury to the petitioner to whom no other remedy was available. 21 If the inferior
court acted without authority, the record was then revised and corrected in matters of
law.22 The writ of certiorari was limited to cases in which the inferior court was said to be
exceeding its jurisdiction or was not proceeding according to essential requirements of law
and would lie only to review judicial or quasi-judicial acts.23
The concept of the remedy of certiorari in our judicial system remains much the same as it
has been in the common law. In this jurisdiction, however, the exercise of the power to issue
the writ of certiorari is largely regulated by laying down the instances or situations in the
Rules of Court in which a superior court may issue the writ of certiorari to an inferior court or
officer. Section 1, Rule 65 of the Rules of Court compellingly provides the requirements for
that purpose, viz:
Section 1. Petition for certiorari. When any tribunal, board or officer exercising judicial or
quasi-judicial functions has acted without or in excess of its or his jurisdiction, or with grave
abuse of discretion amounting to lack or excess of jurisdiction, and there is no appeal, or any
plain, speedy, and adequate remedy in the ordinary course of law, a person aggrieved
thereby may file a verified petition in the proper court, alleging the facts with certainty and
praying that judgment be rendered annulling or modifying the proceedings of such tribunal,
board or officer, and granting such incidental reliefs as law and justice may require.
The petition shall be accompanied by a certified true copy of the judgment, order or
resolution subject thereof, copies of all pleadings and documents relevant and pertinent
thereto, and a sworn certification of non-forum shopping as provided in the third paragraph
of section 3, Rule 46.
(1a)
Pursuant to Section 1, supra, the petitioner must show that, one, the tribunal, board or
officer exercising judicial or quasi-judicial functions acted without or in excess of jurisdiction
or with grave abuse of discretion amounting to lack or excess of jurisdiction, and, two, there
is neither an appeal nor any plain, speedy and adequate remedy in the ordinary course of law
for the purpose of amending or nullifying the proceeding.
Considering that the requisites must concurrently be attendant, the herein petitioners
stance that a writ of certiorari should have been issued even if the CA found no showing of
grave abuse of discretion is absurd. The commission of grave abuse of discretion was a
fundamental requisite for the writ of certiorari to issue against the RTC. Without their strong
showing either of the RTCs lack or excess of jurisdiction, or of grave abuse of discretion by
the RTC amounting to lack or excess of jurisdiction, the writ of certiorari would not issue for
being bereft of legal and factual bases. We need to emphasize, too, that with certiorari being
an extraordinary remedy, they must strictly observe the rules laid down by law for granting
the relief sought.24
The sole office of the writ of certiorari is the correction of errors of jurisdiction, which
includes the commission of grave abuse of discretion amounting to lack of jurisdiction. In this
regard, mere abuse of discretion is not enough to warrant the issuance of the writ. The abuse
of discretion must be grave, which means either that the judicial or quasi-judicial power was
exercised in an arbitrary or despotic manner by reason of passion or personal hostility, or
that the respondent judge, tribunal or board evaded a positive duty, or virtually refused to
perform the duty enjoined or to act in contemplation of law, such as when such judge,
tribunal or board exercising judicial or quasi-judicial powers acted in a capricious or
whimsical manner as to be equivalent to lack of jurisdiction.
Secondly, the Court must find that the petitioners were not entitled to enjoin or prevent the
extrajudicial foreclosure of their mortgage by Metrobank. They were undeniably already in
default of their obligations the performance of which the mortgage had precisely secured.
Hence, Metrobank had the unassailable right to the foreclosure. In contrast, their right to
prevent the foreclosure did not exist. Hence, they could not be validly granted the injunction
they sought.
The foreclosure of a mortgage is but a necessary consequence of the non-payment of an
obligation secured by the mortgage. Where the parties have stipulated in their agreement,
mortgage contract and promissory note that the mortgagee is authorized to foreclose the
mortgage upon the mortgagors default, the mortgagee has a clear right to the foreclosure in
case of the mortgagors default. Thereby, the issuance of a writ of preliminary injunction
upon the application of the mortgagor will be improper.25 Mindful that an injunction would
be a limitation upon the freedom of action of Metrobank, the RTC justifiably refused to grant
the petitioners application for the writ of preliminary injunction. We underscore that the
writ could be granted only if the RTC was fully satisfied that the law permitted it and the
emergency demanded it.26 That, needless to state, was not true herein.
In City Government of Butuan v. Consolidated Broadcasting System (CBS), Inc.,27 the Court
restated the nature and concept of a writ of preliminary injunction in the following manner,
to wit:
A preliminary injunction is an order granted at any stage of an action or proceeding prior to
the judgment or final order requiring a party or a court, an agency, or a person to refrain
from a particular act or acts. It may also require the performance of a particular act or acts, in
which case it is known as a preliminary mandatory injunction. Thus, a prohibitory injunction
is one that commands a party to refrain from doing a particular act, while a mandatory
injunction commands the performance of some positive act to correct a wrong in the
past.1wphi1
As with all equitable remedies, injunction must be issued only at the instance of a party who
possesses sufficient interest in or title to the right or the property sought to be protected. It
is proper only when the applicant appears to be entitled to the relief demanded in the
complaint, which must aver the existence of the right and the violation of the right, or whose
averments must in the minimum constitute a prima facie showing of a right to the final relief
sought. Accordingly, the conditions for the issuance of the injunctive writ are: (a) that the
right to be protected exists prima facie; (b) that the act sought to be enjoined is violative of
that right; and (c) that there is an urgent and paramount necessity for the writ to prevent
serious damage. An injunction will not issue to protect a right not in esse, or a right which is
merely contingent and may never arise; or to restrain an act which does not give rise to a
cause of action; or to prevent the perpetration of an act prohibited by statute. Indeed, a
right, to be protected by injunction, means a right clearly founded on or granted by law or is
enforceable as a matter of law. (Bold emphasis supplied)
Thirdly, the petitioners allege that: (a) Metrobank had increased the interest rates without
their assent and without any basis; and (b) they had an excess payment sufficient to cover
the amounts due. In support of their allegation, they submitted a table of the interest
payments, wherein they projected what they had actually paid to Metrobank and contrasted
the payments to what they claimed to have been the correct amounts of interest, resulting in
an excess payment of P605,557.81.
The petitioners fail to convince.
We consider to be unsubstantiated the petitioners claim of their lack of consent to the
escalation clauses. They did not adduce evidence to show that they did not assent to the
increases in the interest rates. The records reveal instead that they requested only the
reduction of the interest rate or the restructuring of their loans.28 Moreover, the mere
averment that the excess payments were sufficient to cover their accrued obligation
computed on the basis of the stipulated interest rate cannot be readily accepted. Their
computation, as their memorandum submitted to the RTC would explain, 29 was too
simplistic, for it factored only the principal due but not the accrued interests and penalty
charges that were also stipulated in the loan agreements.
It is relevant to observe in this connection that escalation clauses like those affecting the
petitioners were not void per se, and that an increase in the interest rate pursuant to such
clauses were not necessarily void. In Philippine National Bank v. Rocamora,30 the Court has
said:
Escalation clauses are valid and do not contravene public policy. These clauses are common
in credit agreements as means of maintaining fiscal stability and retaining the value of money
on long-term contracts. To avoid any resulting one-sided situation that escalation clauses
may bring, we required in Banco Filipino the inclusion in the parties agreement of a de-
escalation clause that would authorize a reduction in the interest rates corresponding to
downward changes made by law or by the Monetary Board.
The validity of escalation clauses notwithstanding, we cautioned that these clauses do not
give creditors the unbridled right to adjust interest rates unilaterally. As we said in the same
Banco Filipino case, any increase in the rate of interest made pursuant to an escalation clause
must be the result of an agreement between the parties. The minds of all the parties must
meet on the proposed modification as this modification affects an important aspect of the
agreement. There can be no contract in the true sense in the absence of the element of an
agreement, i.e., the parties mutual consent. Thus, any change must be mutually agreed
upon, otherwise, the change carries no binding effect. A stipulation on the validity or
compliance with the contract that is left solely to the will of one of the parties is void; the
stipulation goes against the principle of mutuality of contract under Article 1308 of the Civil
Code.
We reiterate that injunction will not protect contingent, abstract or future rights whose
existence is doubtful or disputed.31 Indeed, there must exist an actual right,32 because
injunction will not be issued to protect a right not in esse and which may never arise, or to
restrain an act which does not give rise to a cause of action. At any rate, an application for
injunctive relief is strictly construed against the pleader.33
Nor do we discern any substantial controversy that had any real bearing on Metrobanks
right to foreclose the mortgage. The mere possibility that the RTC would rule in the end in
the petitioners favor by lowering the interest rates and directing the application of the
excess payments to the accrued principal and interest did not diminish the fact that when
Metrobank filed its application for extrajudicial foreclosure they were already in default as to
their obligations and that their short-term loan of P4,400,000.00 had already matured. Under
such circumstances, their application for the writ of preliminary injunction could not but be
viewed as a futile attempt to deter or delay the forced sale of their property.
Lastly, citing the ruling in Almeda v. Court of Appeals, to the effect that the issuance of a
preliminary injunction pending the resolution of the issue on the correct interest rate would
be justified, the petitioners submit that they could be rightly considered in default only after
they had failed to settle the exact amount of their obligation as determined by the trial court
in the main case.
The petitioners reliance on the ruling in Almeda v. Court of Appeals was misplaced.
Although it is true that the ruling in Almeda v. Court of Appeals sustained the issuance of the
preliminary injunction pending the determination of the issue on the interest rates, with the
Court stating:
In the first place, because of the dispute regarding the interest rate increases, an issue which
was never settled on merit in the courts below, the exact amount of petitioners obligations
could not be determined. Thus, the foreclosure provisions of P.D. 385 could be validly
invoked by respondent bank only after settlement of the question involving the interest rate
on the loan, and only after the spouses refused to meet their obligations following such
determination.34 x x x.
Almeda v. Court of Appeals involved circumstances that were far from identical with those
obtaining herein. To start with, Almeda v. Court of Appeals involved the mandatory
foreclosure of a mortgage by a government financial institution pursuant to Presidential
Decree No. 38535should the arrears reach 20% of the total outstanding obligation. On the
other hand, Metrobank is not a government financial institution. Secondly, the petitioners in
Almeda v. Court of Appeals were not yet in default at the time they brought the action
questioning the propriety of the interest rate increases, hut the herein petitioners were
already in default and the mortgage had already been foreclosed when they assailed the
interest rates in court. Thirdly, the Court found in Almeda v. Court of Appeals that the
increases in the interest rates had been made without the prior assent of the borrowers, who
had even consistently protested the increases in the stipulated interest rate. In contrast, the
Court cannot make the same conclusion herein for lack of basis. Fourthly, the interest rates
in Almeda v. Court of Appeals were raised to such a very high level that the borrowers were
practically enslaved and their assets depleted, with the interest rate even reaching at one
point a high of 68% per annum. Here, however, the increases reached a high of only 31% per
annum, according to the petitioners themselves. Lastly, the Court in Almeda v. Court of
Appeals attributed good faith to the petitioners by their act of consigning in court the
amounts of what they believed to be their remaining obligation. No similar tender or
consignation of the amount claimed by the petitioners herein to be their correct outstanding
obligation was made by them.
In fine, the petitioners in Almeda v. Court o{Appeals had the existing right to a writ of
preliminary injunction pending the resolution of the main case, but the herein petitioners did
not. Stated otherwise, no writ of preliminary injunction to enjoin an impending extrajudicial
foreclosure sale should issue except upon a clear showing of a violation of the mortgagors'
unmistakable right to the injunction.
WHEREFORE, the Court UENIES the petition for review on certiorari; AFFIRMS the decision
promulgated on February 19, 2002; and ORDERS the petitioners to pay the costs of suit.
SO ORDERED.
LUCAS P. BERSAMIN
Associate Justice
WE CONCUR:
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 119379 September 25, 1998
RODELO G. POLOTAN, SR., petitioner,
vs.
HON. COURT OF APPEALS (Eleventh Division), REGIONAL TRIAL COURT IN MAKATI CITY
(Branch 132), and SECURITY DINERS INTERNATIONAL CORPORATION, respondents.
ROMERO, J.:
Assailed before this Court in a Petition for Review on Certiorari is the decision 1 of the Court
of Appeals in CA-G.R. CV No. 33270 affirming the decision of Branch 132 of the Regional Trial
Court of Makati City.
Private respondent Security Diners International Corporation (Diners Club), a credit card
company, extends credit accommodations to its cardholders for the purchase of goods and
other services from member establishments. Said goods and services are reimbursed later on
by cardholders upon proper billing.
Petitioner Rodelo G. Polotan, Sr. applied for membership and credit accommodations with
Diners Club in October 1985. The application form contained terms and conditions governing
the use and availment of the Diners Club card, among which is for the cardholder to pay all
charges made through the use of said card within the period indicated in the statement of
account and any remaining unpaid balance to earn 3% interest per annum plus prime rate of
Security Bank & Trust Company. Notably, in the application form submitted by petitioner,
Ofricano Canlas obligated himself to pay jointly and severally with petitioner the latter's
obligation to private respondent.
Upon acceptance of his application, petitioner was issued Diners Club card No. 3651-212766-
3005. As of May 8, 1987, petitioner incurred credit charges plus appropriate interest and
service charges in the aggregate amount of P33,819.84 which had become due and
demandable.
Demands for payment made against petitioner proved futile. Hence, private respondent filed
a Complaint for Collection of Sum of Money against petitioner before the lower court.
The lower court rued, thus:
WHEREFORE, judgment is hereby rendered ordering defendants to pay
jointly and severally plaintiff:
a) The amount of P33,819.84 and interest of 3% per annum plus prime
rate of SBTC and service charges of 2% per month starting May 9, 1987
until the entire obligation is fully paid;
b) An amount equivalent to 25% of any and all amounts due and payable
as attorney's fees, plus costs of suit.
With respect to the cross-claim of defendant Ofricano Canlas, defendant
Rodelo G. Polotan, Sr. is ordered to indemnify and/or reimburse the
former for whatever he may be ordered to pay plaintiff.
The Court of Appeals affirmed the ruling of the lower court. Hence, this petition. Petitioner
assigns the following errors:
I
RESPONDENT COURT OF APPEALS COMMITTED AN ERROR OF LAW IN
RULING AS VALID AND LEGAL THE FOLLOWING PROVISION ON INTEREST
IN THE DINERS CARD CONTRACT, TO WIT:
PAYMENT OF CHARGES . . . The Cardholder agrees to pay interest per
annum at 3% plus the prime rate of Security Bank and Trust Company. . .
. Provided that if there occurs any change in the prevailing market rates
the new interest rate shall be the guiding rate of computing the interest
due on the outstanding obligation without need of serving notice to the
 Cardholder other than the required posting on the monthly statement
served to the Cardholder.
The Cardholder hereby authorizes Security Diners to correspondingly
increase the rate of such interest in the event of changes in prevailing
market rates and to charge additional service fees as may be deemed
necessary in order to maintain its service to the Cardholder.
II
RESPONDENT COURT OF APPEALS COMMITTED AN ERROR OF LAW IN
RULING IN EFFECT THAT PRIVATE RESPONDENT'S STATEMENT OF
ACCOUNT (Exh. "2"). AS A JUDICIAL ADMISSION THAT MRS. POLOTAN
HAD ALREADY PAID COULD BE CONTRADICTED WITHOUT THE PRIVATE
RESPONDENT LAYING THE PROPER BASIS FOR THE INTRODUCTION OF
CONTRARY EVIDENCE;
III
RESPONDENT COURT OF APPEALS COMMITTED A GRIEVOUS ERROR OF
FACT IN FINDING AS CREDIBLE THE ILLOGICAL AND ABSURD
EXPLANATION OF PRIVATE RESPONDENT'S MR. VICENTE;
IV
RESPONDENT COURT OF APPEALS ERRED IN NOT AWARDING DAMAGES
TO PETITIONER.
In the first assignment of error, petitioner argues that the provision on interest rate is
"obscure and ambiguous and not susceptible of reasonable interpretation" particularly the
terms "prime rate", "prevailing market rate" and "guiding rate". In effect, there was no
meeting of minds. As such, this being a contract of adhesion, any ambiguity should be
resolved against the one who caused it.
Petitioner added that the said provision was also illegal as it violated the laws and Central
Bank Circulars. While said proviso allowed for the escalation of interest, it did not allow for a
downward adjustment of the same.
In his second and third assignment of error, petitioner claimed that Diners Club admitted,
through its statement of account, that petitioner's wife, Mrs. Polotan, had no more account
with it. But then, he claimed that the lower court and the Court of Appeals allowed the
testimony of one Mr. Vicente explaining that the reason why Mrs. Polotan had no more
account with it was that being a supplementary cardholder, her account was consolidated
with that of petitioner in accordance with its new policy. He argued that since Diners Club
admitted that Mrs. Polotan had no more account with it, the only way it could contradict
such admission was by declaring that the same was a result of a palpable mistake in
accordance with Section 4 of Rule 129 of the Revised Rules on Evidence. In admitting said
explanation, the lower court and the Court of Appeals violated the rule on the weight to be
accorded conflicting evidence. In effect, petitioner insists that both courts favored the
uncorroborated testimonial evidence of Mr. Vicente over the documentary evidence
presented by petitioner and admitted by Diners Club.
In its fourth assignment of error, petitioner claimed that he should have been awarded
damages because of Diners Club's bad faith.
This Court finds Petitioner's contentions without merit.
The issues presented by petitioner are clearly questions of law. Notwithstanding petitioner's
submission of the above errors, however, the core issue is basically one of fact. This case
stemmed from a simple complaint for collection of sum of money. The lower court and the
Court of Appeals found that petitioner indeed owed Diners Club the amount being
demanded.
In the case of Reyes v. CA, 2 this Court held that factual findings of the trial court, adopted
and confirmed by the Court of Appeals, are final and conclusive and may not be reviewed on
appeal. The exceptions to this rule are as follows: (1) when the inference made is manifestly
mistaken, absurd or impossible; (2) when there is a grave abuse of discretion; (3) when the
finding is grounded entirely on speculations, surmises or conjectures; (4) when the judgment
of the Court of Appeals is based on misapprehension of facts; (5) when the findings of fact
are conflicting; (6) when the Court of Appeals, in making its findings, went beyond the issues
of the case and the same is contrary to the admissions of both appellant and appellee; (7)
when the findings of the Court of Appeals are contrary to those of the trial court; (8) when
the findings of fact are conclusions without citation of specific evidence on which they are
based; (9) when the Court of Appeals manifestly overlooked certain relevant facts not
disputed by the parties and which, if properly considered, would justify a different conclusion
and (10) when the findings of fact of the Court of Appeals are premised on the absence of
evidence and are contradicted by the evidence on record.
Only a clear showing that any of the above-cited exceptions exists would justify a review of
the findings of fact made by the lower court and upheld by the Court of Appeals. In the
instant case, a review of the decisions of the lower court, as well as the Court of Appeals,
shows that the conclusions have been logically arrived at and substantially supported by the
evidence presented by the parties.
Be that as it may, this Court sees it fit and proper to discuss the merits of this petition based
on petitioner's claim that since the contract he signed with Diners Club was a contract of
adhesion, the obscure provision on interest should be resolved in his favor.
A contract of adhesion is one in which one of the contracting parties imposes a ready-made
form of contract which the other party may accept or reject, but cannot modify. One party
prepares the stipulation in the contract, while the other party merely affixes his signature or
his "adhesion" thereto, giving no room for negotiation and depriving the latter of the
opportunity to bargain on equal footing. 3
Admittedly, the contract containing standard stipulations imposed upon those who seek to
avail of its credit services was prepared by Diners Club. There is no way a prospective credit
card holder can object to any onerous provision as it is offered on a take-it-or-leave-it basis.
Being a contract of adhesion, any ambiguity in its provisions trust be construed against
private respondent.
Indeed, the terms "prime rate", "prevailing market rate", "2% penalty charge", "service fee",
and "guiding rate" are technical terms which are beyond the ken of an ordinary layman. To
be sure, petitioner hardly falls into the category of an "ordinary layman." As aptly observed
by the Court of Appeals:
. . . [A]ppellant by his own admission is a "lawyer by profession, a
reputable businessman and a note leader of a number of socio-civic
organizations." With such impressive credentials, this Court is hard-put to
 fathom someone of his calibre entering into a contract with eyes
"blindfolded". 4
Nevertheless, these types of contracts have been declared as binding ordinary contracts, the
reason being that the party who adheres to the contract is free to reject it entirely. 5
The binding effect of any agreement between parties to a contract is premised on two
settled principles: (1) that any obligation arising from a contract has the force of law between
the parties; and (2) that there must be mutuality between the parties based on their
essential equality. Any contract which appears to be heavily weighed in favor of one of the
parties so as to lead to an unconscionable result is void. Any stipulation regarding the validity
or compliance of the contract which is left solely to the will of one of the parties, is likewise,
invalid. 6 It is important to stress that the Court is not precluded from ruling out blind
adherence to their terms if the attendant facts and circumstances show that they should be
ignored for being obviously too one-sided.7
In this case, petitioner, in effect, claims that the subject contract is one-sided in that the
contract allows for the escalation of interests, but does not provide for a downward
adjustment of the same in violation of Central Bank Circular 905.
The claim is without basis. First, by signing the contract, petitioner and private respondent
agreed upon the rate as stipulated in the subject contract. Such is now allowed by C.B.
Circular 905. 8 Second, petitioner failed to cite any particular provision of said Circular which
was allegedly violated by the subject contract.
Be that as it may, there is nothing inherently wrong with escalation clauses. Escalation
clauses are valid stipulations in commercial contracts to maintain fiscal stability and to retain
the value of money in long term contracts.9
Petitioner further argues that the interest rate was unilaterally imposed and based on the
standards and rate formulated solely by Diners Club.
In Florendo v. CA, 10 this Court has held that:
. . . the unilateral determination and imposition of increased interest
rates by the herein respondent bank is obviously violative of the principle
of mutuality of contracts ordained in Article 1308 of the Civil Code. As this
Court held in PNB v. CA (196 SCRA 536 [1991]):
In order that obligations arising from contracts may
have the force of law between the parties, there must
bemutuality between the parties based on their
essential equality. A contract containing a condition
which makes its fulfillment dependent exclusively
upon the uncontrolled will of one of the contracting
parties, is void. . . .
The contractual provision in question states that "if there occurs any change in the prevailing
market rates, the new interest rate shall be the guiding rate in computing the interest due on
the outstanding obligation without need of serving notice to the Cardholder other than the
required posting on the monthly statement served to the Cardholder." This could not be
considered an escalation clause for the reason that it neither states all increase nor a
decrease in interest rate. Said clause simply states that the interest rate should be based on
the prevailing market rate.
Interpreting it differently, while said clause does not expressly stipulate a reduction in
interest rate, it nevertheless provides a leeway for the interest rate to be reduced in case the
prevailing market rates dictate its reduction.
Admittedly, the second paragraph of the questioned proviso which provides that "the
Cardholder hereby authorizes Security Diners to correspondingly increase the rate of such
interest in the event of changes in prevailing market rates . . ." is an escalation clause.
However, it cannot be said to be dependent solely on the will of private respondent as it is
also dependent on the prevailing market rates.
Escalation clauses are not basically wrong or legally objectionable as long as they are not
solely potestative but based on reasonable and valid grounds. 11 Obviously, the fluctuation in
the markets rates is beyond the control of private respondent.
As to the second and third assignments of error, it is misleading for petitioner to say that
private respondent had judicially admitted that its statement of account is proof that Mrs.
Polotan has already paid her account with private respondent. Proceeding from said premise,
it is further misleading for petitioner to conclude that private respondent's testimonial
evidence about a new policy contradicted its judicially admitted documentary evidence
without laying the proper basis for the introduction of contrary evidence and in violation of
Section 2, Rule 129 of the Revised Rules on Evidence, which provides that:
Admissions made by the parties in the pleadings, or in the course of the
trial or other proceedings do not require proof and can be contradicted
unless previously shown to have been made through palpable mistake.
Certainly, Diners Club could not deny the existence of Exhibit "2" which is the Statement of
Account issued to Mrs. Polotan since, precisely, it was the one which issued said statement.
But to conclude that said Statement of Account was likewise an admission that Mrs. Polotan
has no more account with Diners Club would be equivocatory, or non-sequitur.
While private respondent admitted the existence of Exhibit "2", it could not have agreed to
the purpose for which the exhibit was presented. As satisfactorily found by the Court of
Appeals and to which this Court agrees:
Appellant's allegation is misleading. On the contrary, appellee's rebuttal
witness, Alfredo Vicente, categorically stated that the reason the
Statement of Account in the name of Alicia Polotan showed a zero
balance (Exh. "2") was due to the fact that effective February 1989, under
a new system, separate monthly statements were produced on
supplementary card members. Prior to February 1989, the availment of
Mr. and Mrs. Polotan were incorporated under one statement.
Moreover, it is to be observed that while the Complaint was filed on 15
May 1987, the Diners Club Monthly Statement in the name of Alicia B.
Polotan is dated almost two (2) years later or "02/08/89" (Exh. "2"). This
bolsters the testimony of Alfredo Vicente regarding the entry of zero
balance in Mrs. Polotan's name.
Although said exhibit would, by itself, show that Mrs. Polotan had no more account with
Diners Club, it would not have been conclusive to prove that said account was already paid.
The proper evidence would have been a receipt of payment.
Significantly, petitioner did not contest the purchases as indicated in the statements of
account but merely alleged that some of the purchases being claimed to have been made by
petitioner were not supported by invoices. The lower court found otherwise. 12
In light of the above, this Court sees no reason to award damages to petitioner.
WHEREFORE, in view of the foregoing, the petition for certiorari is hereby DENIED and the
Decision of the Court of Appeals AFFIRMED with the MODIFICATION that the attorney's fees
are reduced to 15%.
SO ORDERED.
G.R. No. 149004 April 14, 2004
RESTITUTA M. IMPERIAL, petitioner,
vs.
ALEX A. JAUCIAN, respondent.
DECISION
PANGANIBAN, J.:
Iniquitous and unconscionable stipulations on interest rates, penalties and attorneys fees
are contrary to morals. Consequently, courts are granted authority to reduce them equitably.
If reasonably exercised, such authority shall not be disturbed by appellate courts.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the July 19,
2000 Decision2 and the June 14, 2001 Resolution3 of the Court of Appeals (CA) in CA-GR CV
No. 43635. The decretal portion of the Decision is as follows:
"WHEREFORE, premises considered, the appealed Decision of the Regional Trial
Court, 5th Judicial Region, Branch 21, Naga City, dated August 31, 1993, in Civil
Case No. 89-1911 for Sum of Money, is hereby AFFIRMED in toto."4
The assailed Resolution denied petitioners Motion for Reconsideration.
The dispositive portion of the August 31, 1993 Decision, promulgated by the Regional Trial
Court (RTC) of Naga City (Branch 21) and affirmed by the CA, reads as follows:
"Wherefore, Judgment is hereby rendered declaring Section I, Central Bank Circular
No. 905, series of 1982 to be of no force and legal effect, it having been
promulgated by the Monetary Board of the Central Bank of the Philippines with
grave abuse of discretion amounting to excess of jurisdiction; declaring that the
rate of interest, penalty, and charges for attorneys fees agreed upon between the
parties are unconscionable, iniquitous, and in violation of Act No. 2655, otherwise
known as the Usury Law, as amended; and ordering Defendant to pay Plaintiff the
amount of FOUR HUNDRED SEVENTY-EIGHT THOUSAND, ONE HUNDRED NINETY-
FOUR and 54/100 (478,194.54) PESOS, Philippine currency, with regular and
compensatory interests thereon at the rate of twenty-eight (28%) per centum per
annum, computed from August 31, 1993 until full payment of the said amount, and
in addition, an amount equivalent to ten (10%) per centum of the total amount due
and payable, for attorneys fees, without pronouncement as to costs."5
The Facts
The CA summarized the facts of the case in this wise:
"The present controversy arose from a case for collection of money, filed by Alex A.
Jaucian against Restituta Imperial, on October 26, 1989. The complaint
alleges, inter alia, that defendant obtained from plaintiff six (6) separate loans for
which the former executed in favor of the latter six (6) separate promissory notes
and issued several checks as guarantee for payment. When the said loans became
overdue and unpaid, especially when the defendants checks were dishonored,
plaintiff made repeated oral and written demands for payment.
"Specifically, the six (6) separate loans obtained by defendant from plaintiff on
various dates are as follows:
(a) November 13, 1987 50,000.00
(b) December 28, 1987 40,000.00
(c) January 6, 1988 30,000.00
(d) January 11, 1988 50,000.00
(e) January 12, 1988 50,000.00
(f) January 13, 1988 100,000.00
Total 320,000.00
"The loans were covered by six (6) separate promissory notes executed by
defendant. The face value of each promissory notes is bigger [than] the amount
released to defendant because said face value already include[d] the interest from
date of note to date of maturity. Said promissory notes, which indicate the interest
of 16% per month, date of issue, due date, the corresponding guarantee checks
issued by defendant, penalties and attorneys fees, are the following:
1. Exhibit D for loan of 40,000.00 on December 28, 1987, with face
value of 65,000.00;
2. Exhibit E for loan of 50,000.00 on January 11, 1988, with face value
of 82,000.00;
3. Exhibit F for loan of 50,000.00 on January 12, 1988, with face value
of 82,000.00;
4. Exhibit G for loan of 100,000.00 on January 13, 1988, with face
value of 164,000.00;
5. Exhibit H This particular promissory note covers the second renewal
of the original loan of 50,000.00 on November 13, 1987, which was
renewed for the first time on March 16, 1988 after certain payments, and
which was renewed finally for the second time on January 4, 1988 also
after certain payments, with a face value of 56,240.00;
6. Exhibit I This particular promissory note covers the second renewal
of the original loan of 30,000.00 on January 6, 1988, which was renewed
for the first time on June 4, 1988 after certain payments, and which was
finally renewed for the second time on August 6, 1988, also after certain
payments, with [a] face value of 12,760.00;
"The particulars about the postdated checks, i.e., number, amount, date, etc., are
indicated in each of the promissory notes. Thus, for Exhibit D, four (4) PB checks
were issued; for Exhibit E four (4) checks; for Exhibit F four (4) checks; for Exhibit
b. Exhibit 26 Receipt 231,000.00
G four (4) checks; for Exhibit H one (1) check; for Exhibit I one (1) check;
"The arrangement between plaintiff and defendant regarding these guarantee c. Exhibit 8-25 Receipt 65,300.00
checks was that each time a check matures the defendant would exchange it with
cash. d. Exhibit 27 Receipt 65,000.00
"Although, admittedly, defendant made several payments, the same were not
enough and she always defaulted whenever her loans mature[d]. As of August 16, Total
1991, the total unpaid amount, including accrued interest, penalties and attorneys 441,780.00
fees, [was] 2,807,784.20.
"On the other hand, defendant claims that she was extended loans by the plaintiff Less: 320,000.00
on several occasions, i.e., from November 13, 1987 to January 13, 1988, in the total
sum of 320,000.00 at the rate of sixteen percent (16%) per month. The notes
Excess Payment 121,780.00
mature[d] every four (4) months with unearned interest compounding every four
(4) months if the loan [was] not fully paid. The loan releases [were] as follows: "Defendant contends that from all perspectives the above excess payment of
121,780.00 is more than the interest that could be legally charged, and in fact as
(a) November 13, 1987 50,000.00
of January 25, 1989, the total releases have been fully paid.
(b) December 28, 1987 40,000.00 "On 31 August 1993, the trial court rendered the assailed decision."6
Ruling of the Court of Appeals
(c) January 6, 1988 30,000.00 On appeal, the CA held that without judicial inquiry, it was improper for the RTC to rule on
the constitutionality of Section 1, Central Bank Circular No. 905, Series of 1982. Nonetheless,
(d) January 11, 1988 50,000.00 the appellate court affirmed the judgment of the trial court, holding that the latters clear
and detailed computation of petitioners outstanding obligation to respondent was
(e) January 12, 1988 50,000.00 convincing and satisfactory.
Hence, this Petition.7
(f) January 13, 1988 100,000.00
The Issues
Petitioner raises the following arguments for our consideration:
Total 320,000.00 "1. That the petitioner has fully paid her obligations even before filing of this case.
"2. That the charging of interest of twenty-eight (28%) per centum per annum
"The loan on November 13, 1987 and January 6, 1988 ha[d] been fully paid without any writing is illegal.
including the usurious interests of 16% per month, this is the reason why these "3. That charging of excessive attorneys fees is hemorrhagic.
were not included in the complaint. "4. Charging of excessive penalties per month is in the guise of hidden interest.
"Defendant alleges that all the above amounts were released respectively by "5. The non-inclusion of the husband of the petitioner at the time the case was
checks drawn by the plaintiff, and the latter must produce these checks as these filed should have dismissed this case."8
were returned to him being the drawer if only to serve the truth. The above The Courts Ruling
amount are the real amount released to the defendant but the plaintiff by The Petition has no merit.
masterful machinations made it appear that the total amount released was First Issue:
462,600.00. Because in his computation he made it appear that the true amounts Computation of Outstanding Obligation
released was not the original amount, since it include[d] the unconscionable Arguing that she had already fully paid the loan before the filing of the case, petitioner
interest for four months. alleges that the two lower courts misappreciated the facts when they ruled that she still had
"Further, defendant claims that as of January 25, 1989, the total payments made by an outstanding balance of 208,430.
defendants [were] as follows: This issue involves a question of fact. Such question exists when a doubt or difference arises
a. Paid releases on November 13, 1987 of 50,000.00 and as to the truth or the falsehood of alleged facts; and when there is need for a calibration of
January 6, 1988 of 30,000.00 these two items were not the evidence, considering mainly the credibility of witnesses and the existence and the
included in the complaint affirming the fact that these were relevancy of specific surrounding circumstances, their relation to each other and to the
paid 80,000.00 whole, and the probabilities of the situation.9
It is a well-entrenched rule that pure questions of fact may not be the subject of an appeal by
certiorari under Rule 45 of the Rules of Court, as this remedy is generally confined to
questions of law.10 The jurisdiction of this Court over cases brought to it is limited to the
review and rectification of errors of law allegedly committed by the lower court. As a rule,
the latters factual findings, when adopted and affirmed by the CA, are final and conclusive
and may not be reviewed on appeal.11
Generally, this Court is not required to analyze and weigh all over again the evidence already
considered in the proceedings below.12 In the present case, we find no compelling reason to
overturn the factual findings of the RTC -- that the total amount of the loans extended to
petitioner was 320,000, and that she paid a total of only 116,540 on twenty-nine dates.
These findings are supported by a preponderance of evidence. Moreover, the amount of the
outstanding obligation has been meticulously computed by the trial court and affirmed by
the CA. Petitioner has not given us sufficient reason why her cause falls under any of the
exceptions to this rule on the finality of factual findings.
Second Issue:
Rate of Interest
The trial court, as affirmed by the CA, reduced the interest rate from 16 percent to 1.167
percent per month or 14 percent per annum; and the stipulated penalty charge, from 5
percent to 1.167 percent per month or 14 percent per annum.
Petitioner alleges that absent any written stipulation between the parties, the lower courts
should have imposed the rate of 12 percent per annum only.
The records show that there was a written agreement between the parties for the payment
of interest on the subject loans at the rate of 16 percent per month. As decreed by the lower
courts, this rate must be equitably reduced for being iniquitous, unconscionable and
exorbitant. "While the Usury Law ceiling on interest rates was lifted by C.B. Circular No. 905,
nothing in the said circular grants lenders carte blancheauthority to raise interest rates to
levels which will either enslave their borrowers or lead to a hemorrhaging of their assets."13
In Medel v. CA,14 the Court found the stipulated interest rate of 5.5 percent per month, or 66
percent per annum, unconscionable. In the present case, the rate is even more iniquitous
and unconscionable, as it amounts to 192 percent per annum. When the agreed rate is
iniquitous or unconscionable, it is considered "contrary to morals, if not against the law.
[Such] stipulation is void."15
Since the stipulation on the interest rate is void, it is as if there were no express contract
thereon.16 Hence, courts may reduce the interest rate as reason and equity demand. We find
no justification to reverse or modify the rate imposed by the two lower courts.
Third and Fourth Issue:
Penalties and Attorneys Fees
Article 1229 of the Civil Code states thus:
"The judge shall equitably reduce the penalty when the principal obligation has
been partly or irregularly complied with by the debtor. Even if there has been no
performance, the penalty may also be reduced by the courts if it is iniquitous or
unconscionable."
In exercising this power to determine what is iniquitous and unconscionable, courts must
consider the circumstances of each case.17 What may be iniquitous and unconscionable in
one may be totally just and equitable in another. In the present case, iniquitous and
unconscionable was the parties stipulated penalty charge of 5 percent per month or 60
percent per annum, in addition to regular interests and attorneys fees. Also, there was
partial performance by petitioner when she remitted 116,540 as partial payment of her
principal obligation of 320,000. Under the circumstances, the trial court was justified in
reducing the stipulated penalty charge to the more equitable rate of 14 percent per annum.
The Promissory Note carried a stipulation for attorneys fees of 25 percent of the principal
amount and accrued interests. Strictly speaking, this covenant on attorneys fees is different
from that mentioned in and regulated by the Rules of Court.18 "Rather, the attorneys fees
here are in the nature of liquidated damages and the stipulation therefor is aptly called a
penal clause."19 So long as the stipulation does not contravene the law, morals, public order
or public policy, it is binding upon the obligor. It is the litigant, not the counsel, who is the
judgment creditor entitled to enforce the judgment by execution.
Nevertheless, it appears that petitioners failure to comply fully with her obligation was not
motivated by ill will or malice. The twenty-nine partial payments she made were a
manifestation of her good faith. Again, Article 1229 of the Civil Code specifically empowers
the judge to reduce the civil penalty equitably, when the principal obligation has been partly
or irregularly complied with. Upon this premise, we hold that the RTCs reduction of
attorneys fees -- from 25 percent to 10 percent of the total amount due and payable -- is
reasonable.
Fifth Issue:
Non-Inclusion of Petitioners Husband
Petitioner contends that the case against her should have been dismissed, because her
husband was not included in the proceedings before the RTC.
We are not persuaded. The husbands non-joinder does not warrant dismissal, as it is merely
a formal requirement that may be cured by amendment.20 Since petitioner alleges that her
husband has already passed away, such an amendment has thus become moot.
WHEREFORE, the Petition is DENIED. Costs against petitioner.
SO ORDERED.
Davide, Jr., Ynares-Santiago, Carpio, and Azcuna, JJ., concur.