1
improvements therein, all situated in Batangas City and
LOAN
SPS BAYANNI ANDAL…………………………………….1
S.C. MEGAWORLD CONSTRUCTION………………….4
DARIO NACAR……………………………………………10
ADVOCATES FOR TRUTH IN LENDING, INC………14
FRANCISCO HERRERA…………………………………18
PRODUCERS BANK OF THE PHILIPPINES…………20
CATHOLIC VICAR APOSTOLIC………………………24
CASA FILIPINA…………………………………………..27
SECURITY BANK AND TRUST COMPANY…………29
SPOUSES JOVENAL……………………………………..30
LIAM LAW………………………………………………...32
Spouses PONCIANO ALMEDA………………………….33
LETICIA Y. MEDEL……………………………………...35
RESTITUTA M. IMPERIAL……………………………..37
PHILIPPINE NATIONAL BANK………………………..41
EQUITABLE PCI BANK…………………………………44
G.R. No. 194201 November 27, 2013
SPOUSES BAYANI H. ANDAL AND GRACIA G.
ANDAL, Petitioners,
vs.
PHILIPPINE NATIONAL BANK REGISTER OF
DEEDS OF BATANGAS CITY JOSE C.
CORALES, Respondents.
DECISION
PEREZ, J.:
Before the Court is a Petition for Review on Certiorari1 under
Rule 45 of the Rules of Court seeking to partially set aside the
Decision,2 dated 30 March 2010, and the Resolution,3 dated 13
October 2010, of the Court of Appeals (CA) in CA-G.R. CV
No. 91250. The challenged Decision dismissed the appeal of
herein respondent Philippine National Bank (respondent bank)
and affirmed the decision of the Regional Trial Court (RTC),
Branch 84, Batangas City with the modification that the
interest rate to be applied by respondent bank on the principal
loan obligation of petitioners Spouses Bayani H. Andal and
annum, to be computed from default.
As found by the CA, the facts of this case are as follows:
x x x on September 7, 1995, [petitioners-spouses] obtained a
loan from [respondent bank] in the amount of ₱21,805,000.00,
for which they executed twelve (12) promissory notes x x x
[undertaking] to pay [respondent bank] the principal loan with
varying interest rates of 17.5% to 27% per interest period. It
was agreed upon by the parties that the rate of interest may be
increased or decreased for the subsequent interest periods,
with prior notice to [petitioners-spouses], in the event of
changes in interest rates prescribed by law or the Monetary
Board x x x, or in the bank’s overall cost of funds.
To secure the payment of the said loan, [petitioners-spouses]
executed in favor of [respondent bank] a real estate mortgage
using as collateral five (5) parcels of land including all
covered by Transfer Certificate of Title (TCT) Nos. T-641, T-
32037, T-16730, T-31193 and RT 363 (3351) of the Registry
of Deeds of Batangas City, in the name of [petitioners-
spouses].
Subsequently, [respondent bank] advised [petitioners-spouses]
to pay their loan obligation, otherwise the former will declare
the latter’s loan due and demandable. On July 17, 2001,
[petitioners-spouses] paid ₱14,800,000.00 to [respondent
bank] to avoid foreclosure of the properties subject of the real
estate mortgage. Accordingly, [respondent bank] executed a
release of real estate mortgage over the parcels of land
covered by TCT Nos. T-31193 and RT-363 (3351). However,
despite payment x x x, [respondent bank] proceeded to
foreclose the real estate mortgage, particularly with respect to
the three (3) parcels of land covered by TCT Nos. T-641, T-
32037 and T-16730 x x x.
x x x [A] public auction sale of the properties proceeded, with
the [respondent bank] emerging as the highest and winning
bidder. Accordingly, on August 30, 2002, a certificate of sale
of the properties involved was issued. [Respondent bank]
consolidated its ownership over the said properties and TCT
Nos. T-52889, T-52890, and T-52891 were issued in lieu of
the cancelled TCT[s] x x x. This prompted [petitioners-
spouses] to file x x x a complaint for annulment of mortgage,
sheriff’s certificate of sale, declaration of nullity of the
increased interest rates and penalty charges plus damages,
with the RTC of Batangas City.
In their amended complaint, [petitioners-spouses] alleged that
they tried to religiously pay their loan obligation to
[respondent bank], but the exorbitant rate of interest
unilaterally determined and imposed by the latter prevented
the former from paying their obligation. [Petitioners-spouses]
also alleged that they signed the promissory notes in blank,
relying on the representation of [respondent bank] that they
were merely proforma [sic] bank requirements. Further,
[petitioners-spouses] alleged that the unilateral increase of
interest rates and exorbitant penalty charges are akin to unjust
enrichment at their expense, giving [respondent bank] no right
to foreclose their mortgaged properties. x x x.
xxxx
On August 27, 2004 [respondent bank] filed its answer,
denying the allegations in the complaint. x x x [respondent
bank] alleged that: the penalty charges imposed on the loan
was expressly stipulated under the credit agreements and in
the promissory notes; although [petitioners-spouses] paid to
[respondent bank] ₱14,800,000.00 on July 10, 2001, the
former was still indebted to the latter in the amount of
₱33,960,633.87; assuming arguendo that the imposition was
improper, the foreclosure of the mortgaged properties is in
order since [respondent bank’s] bid in the amount of
₱28,965,100.00 was based on the aggregate appraised rates of
the foreclosed properties. x x x4
After trial, the RTC rendered judgment 5 in favor of
petitioners-spouses and against respondent bank, ordering that:
1. The rate of interest should be reduced as it is hereby
reduced to 6% in accordance with Article 2209 of the Civil
Code effective the next 30, 31 and 180 days respectively from
the date of the twelve (12) promissory notes x x x covered by
the real estate x x x mortgages, to be applied on a declining

balance of the principal after the partial payments of
₱14,800,00.00 (paid July 17, 2001) and
₱2,000,000.006 (payments of ₱300,000.00 on October 1, 1999,
₱1,800,000.00 as [of] December 1, 1999, ₱700,000.00 [on]
January 31, 2000) per certification of [respondent bank] to be
reckoned at (sic) the dates the said payments were made, thus
the corrected amounts of the liability for principal balance and
the said 6% charges per annum shall be the new basis for the
[petitioners-spouses] to make payments to the [respondent
bank] x x x which shall automatically extinguish and release
the mortgage contracts and the outstanding liabilities of the
[petitioners-spouses]; [respondent bank] shall then surrender
the new transfer certificates of title x x x in its name to the
[c]ourt x x x, [c]anceling the penalty charges.
xxxx
3. Declaring as illegal and void the foreclosure sales x x x, the
Certificates of Sales and the consolidation of titles of the
subject real properties, including the cancellation of the new
Transfer Certificates of Title x x x in the name of the
[respondent] bank and reinstating Transfer Certificates of Title
Nos. T-641, T-32037 and T-16730 in the names of the
[petitioners-spouses]; the latter acts to be executed by the
Register of Deeds of Batangas City.7
The foregoing disposition of the RTC was based on the
following findings of fact:
As of this writing the [respondent] bank have (sic) not
complied with the said orders as to the interest rates it had
been using on the loan of [petitioners-spouses] and the
monthly computation of interest vis a vis (sic) the total shown
in the statement of account as of Aug 30, 2002. Such refusal
amounts to suppression of evidence thus tending to show that
the interest used by the bank was unilaterally increased
without the written consent of the [petitioners-
spouses]/borrower as required by law and Central Bank
Circular No. 1171. The latter circular provides that any
increase of interest in a given interest period will have to be
expressly agreed to in writing by the borrower. The mortgaged
properties were subject of foreclosure and were sold on
August 30, 2002 and the [respondent] bank’s statement of
account as of August 30, 2002 x x x shows unpaid interest up
to July 17, 2001 of ₱12,695,718.99 without specifying the rate
of interest for each interest period of thirty days. Another
statement of account of [respondent bank] x x x as [of] the
date of foreclosure on August 30, 2002 shows account balance
of ₱20,505,916.51 with a bid price of ₱28,965,100.00 and
showing an interest of ₱16,163,281.65. Again, there are no
details of the interest used for each interest period from the
time these loans were incurred up to the date of foreclosure.
These statements of account together with the stated interest
and expenses after foreclosure were furnished by the
[respondent] bank during the court hearings. The central legal
question is that there is no agreement in writing from the
[petitioners-spouses]/borrowers for the interest rate for each
interest period neither from the data coming from the Central
Bank or the cost of money which is understood to mean the
interest cost of the bank deposits form the public. Such
imposition of the increased interest without the consent of the
borrower is null and void pursuant to Article 1956 of the Civil
Code and as held in the pronouncement of the Supreme Court
in several cases and C.B. Circular No. 1191 that the interest
2
rate for each re-pricing period under the floating rate of
interest is subject to mutual agreement in writing. Art. 1956
states that no interest is due unless it has been expressly
stipulated and agreed to in writing.
Any stipulation where the fixing of interest rate is the sole
prerogative of the creditor/mortgagee, belongs to the class of
potestative condition which is null and void under Art. 1308 of
the New Civil Code. The fulfillment of a condition cannot be
left to the sole will of [one of] the contracting parties.
xxxx
In the instant case, if the interest is declared null and void, the
foreclosure sale for a higher amount than what is legally due is
likewise null and void because under the Civil Code, a
mortgage may be foreclosed only to enforce the fulfillment of
the obligation for whose security it was constituted (Art. 2126,
Civil Code).
xxxx
Following the declaration of nullity of the stipulation on
floating rate of interest since no interest may be collected
based on the stipulation that is null and void and legally
inexistent and unenforceable. x x x. Since the interest imposed
is illegal and void only the rate of 6% interest per month shall
be imposed as liquidated damages under Art. 2209 of the Civil
Code.
It is worth mentioning that these forms used by the bank are
pre- printed forms and therefore contracts of adhesion and x x
x any dispute or doubt concerning them shall be resolved in
favor of the x x x borrower. This (sic) circumstances tend to
support the contention of the [petitioners-spouses] that they
were made to sign the real estate mortgages/promissory notes
in blank with respect to the interest rates.
xxxx
[Respondent bank has] no right to foreclose [petitioners-
spouses’] property and any foreclosure thereof is illegal,
unreasonable and void, since [petitioners-spouses] are not and
cannot be considered in default for their inability to pay the
arbitrarily, illegally, and unconscionably adjusted interest rates
and penalty charges unilaterally made and imposed by
[respondent] bank.
The [petitioners-spouses] submitted to the court certified
copies of the weighted average of Selected Domestic Interest
Rates of the local banks obtained from the Bangko Sentral ng
Pilipinas Statistical Center and it shows a declining balance of
interest rates x x x.
xxxx
There is no showing by the [respondent bank] that any of the
foregoing rate was ever used to increase or decrease the
interest rates charged upon the [petitioners-spouses’] mortgage
loan for the 30 day re- pricing period subsequent to the first 30
days from [the] dates of the promissory notes. These
documents submitted being certified public documents are
entitled to being taken cognizance of by the court as an aid to
its decision making. x x x.8
Respondent bank appealed the above judgment of the trial
court to the CA. Its main contention is that the lower court
erred in ordering the re-computation of petitioners-spouses’
loans and applying the interest rate of 6% per annum.
According to respondent bank, the stipulation on the interest
rates of 17.5% to 27%, subject to periodic adjustments, was
voluntarily agreed upon by the parties; hence, it was not left to

the sole will of respondent bank. Thus, the lower court erred in
reducing the interest rate to 6% and in setting aside the penalty
charges, as such is contrary to the principle of the obligatory
force of contracts under Articles 1315 and 1159 of the Civil
Code.9
The CA disposed of the issue in the following manner:
We partly agree with [respondent bank’s] contention.
Settled is the rule that the contracting parties are free to enter
into stipulations, clauses, terms and conditions as they may
deem convenient, as long as these are not contrary to law,
morals, good customs, public order or public policy. Pursuant
to Article 1159 of the Civil Code, these obligations arising
from such contracts have the force of law between the parties
and should be complied with in good faith. x x x.
xxxx
In the case at bar, [respondent bank] and [petitioners-spouses]
expressly stipulated in the promissory notes the rate of interest
to be applied to the loan obtained by the latter from the
former, x x x.
xxxx
[Respondent bank] insists that [petitioner-spouses] agreed to
the interest rates stated in the promissory notes since the latter
voluntarily signed the same. However, we find more credible
and believable the version of [petitioners-spouses] that they
were made to sign the said promissory notes in blank with
respect to the rate of interest and penalty charges, and
subsequently, [respondent] bank filled in the blanks, imposing
high interest rate beyond which they were made to understand
at the time of the signing of the promissory notes.
xxxx
The signing by [petitioners-spouses] of the promissory notes
in blank enabled [respondent] bank to impose interest rates on
the loan obligation without prior notice to [petitioners-
spouses]. The unilateral determination and imposition of
interest rates by [respondent] bank without [petitioners-
spouses’] assent is obviously violative of the principle of
mutuality of contracts ordained in Article 1308 of the Civil
Code x x x.
xxxx
[Respondent bank’s] act converted the loan agreement into a
contract of adhesion where the parties do not bargain on equal
footing, the weaker party’s participation, herein [petitioners-
spouses], being reduced to the alternative to take it or leave it.
[Respondent] bank tried to sidestep this issue by averring that
[petitioners-spouses], as businessmen, were on equal footing
with [respondent bank] as far as the subject loan agreements
are concerned. That may be true insofar as entering into the
original loan agreements and mortgage contracts are
concerned. However, that does not hold true when it comes to
the unilateral determination and imposition of the escalated
interest rates imposed by [respondent] bank.
xxxx
The Court further notes that in the case at bar, [respondent]
bank imposed different rates in the twelve (12) promissory
notes: interest rate of 18% in five (5) promissory notes; 17.5%
in two (2) promissory notes; 23% in one (1) promissory note;
and 27% in three (3) promissory notes. Obviously, the interest
rates are excessive and arbitrary. Thus, the foregoing interest
rates imposed on [petitioners-spouses’] loan obligation
without their knowledge and consent should be disregarded,
3
not only for being iniquitous and exorbitant, but also for being
violative of the principle of mutuality of contracts.
However, we do not agree with the trial court in fixing the rate
of interest of 6%. It is well-settled that when an obligation is
breached and consists in the payment of a sum of money, i.e.,
loan or forbearance of money, the interest due shall be that
which may have been stipulated in writing. In the absence of
stipulation, the rate of interest shall be 12% interest per annum
to be computed from default, i.e., from judicial or extra-
judicial demand and subject to the provisions of Article 1169
of the Civil Code. Since the interest rates printed in the
promissory notes are void for the reasons above-stated, the
rate of interest to be applied to the loan should be 12% per
annum only.10
The CA, consequently, dismissed respondent bank’s appeal
and affirmed the decision of the trial court with the
modification that the rate of interest shall be 12% per annum
instead of 6%. Respondent bank filed a Motion for
Reconsideration of the CA decision. Petitioners-spouses, on
the other hand, filed a comment praying for the denial of
respondent bank’s motion for reconsideration. They also filed
an "Urgent Manifestation"11 calling the attention of the CA to
its respective decisions in the cases of Spouses Enrique and
Epifania Mercado v. China Banking Corporation, et. al. (CA-
GR CV No. 75303)12 and Spouses Bonifacio Caraig and
Ligaya Caraig v. The Ex-Officio Sheriff of RTC, Batangas
City, et. al. (CA-G.R. CV No. 76029).13
According to petitioners-spouses, in Spouses Mercado v.
China Banking, the Special Seventh Division of the CA held
that where the interest rate is potestative, the entire interest is
null and void and no interest is due.
On the other hand, in the case of Spouses Caraig v. The Ex-
Officio Sheriff of RTC, Batangas City, the then Ninth
Division of the CA ruled that under the doctrine of operative
facts, no interest is due after the auction sale because the loan
is paid in kind by the auction sale, and interest shall
commence to run again upon finality of the judgment
declaring the auction sale null and void. 14
The CA denied respondent bank’s Motion for Reconsideration
for lack of merit. It likewise found no merit in petitioners-
spouses’ contention that no interest is due on their principal
loan obligation from the time of foreclosure until finality of
the judgment annulling the foreclosure sale. According to the
CA:
x x x Notably, this Court disregarded the stipulated rate[s] of
interest on the subject promissory notes after finding that the
same are iniquitous and exorbitant, and for being violative of
the principle of mutuality of contracts. Nevertheless, in
Equitable PCI Bank v. Ng Sheung Ngor, the Supreme Court
ruled that because the escalation clause was annulled, the
principal amount of the loan was subject to the original or
stipulated interest rate of interest, and that upon maturity, the
amount due was subject to legal interest at the rate of 12% per
annum. In this case, while we similarly annulled the escalation
clause contained in the promissory notes, this Court opted not
to impose the original rates of interest stipulated therein for
being excessive, the same being 17.5% to 27% per interest
period.
Relevantly, the High Court held in Asian Cathay Finance and
Leasing Corporation v. Spouses Cesario Gravador and Norma

De Vera, et. al. that stipulations authorizing the imposition of
iniquitous or unconscionable interest are contrary to morals, if
not against the law. x x x. The nullity of the stipulation on the
usurious interest does not, however, affect the lender’s right to
recover the principal of the loan. The debt due is to be
considered without the stipulation of the excessive interest. A
legal interest of 12% per annum will be added in place of the
excessive interest formerly imposed.
Following the foregoing rulings of the Supreme Court, it is
clear that the imposition by this Court of a 12% rate of interest
per annum on the principal loan obligation of [petitioners-
spouses], computed from the time of default, is proper as it is
consistent with prevailing jurisprudence.
While the decisions of the Special Seventh Division and the
Ninth Division of this Court in CA-G.R. CV No. 75303 and in
CA-G.R. No. 76029 are final and executory, the same merely
have persuasive effect but do not outweigh the decisions of the
Supreme Court which we are duty-bound to follow,
conformably with the principle of stare decisis.
The doctrine of stare decisis enjoins adherence to judicial
precedents.1âwphi1 It requires courts in a country to follow
the rule established in a decision of the Supreme Court
thereof. That decision becomes a judicial precedent to be
followed in subsequent cases by all courts in the land. The
doctrine of stare decisis is based on the principle that once a
question of law has been examined and decided, it should be
deemed settled and closed to further argument.15 (Emphasis
supplied.)
Petitioners-spouses are now before us, reiterating their
position that no interest should be imposed on their loan,
following the respective pronouncements of the CA in the
Caraig and Mercado Cases. Petitioners-spouses insist that "if
the application of the doctrine of operative facts is upheld, as
applied in Caraig vs. Alday, x x x, interest in the instant case
would be computed only from the finality of judgment
declaring the foreclosure sale null and void. If Mercado vs.
China Banking Corporation x x x, applying by analogy the
rule on void usurious interest to void potestative interest rate,
is further sustained, no interest is due when the potestative
interest rate stipulation is declared null and void, as in the
instant case.16
Our Ruling
We dismiss the appeal.
We cannot subscribe to the contention of petitioners-spouses
that no interest should be due on the loan they obtained from
respondent bank, or that, at the very least, interest should be
computed only from the finality of the judgment declaring the
foreclosure sale null and void, on account of the exorbitant
rate of interest imposed on their loan.
It is clear from the contract of loan between petitioners-
spouses and respondent bank that petitioners-spouses, as
borrowers, agreed to the payment of interest on their loan
obligation. That the rate of interest was subsequently declared
illegal and unconscionable does not entitle petitioners-spouses
to stop payment of interest.1âwphi1 It should be emphasized
that only the rate of interest was declared void. The stipulation
requiring petitioners-spouses to pay interest on their loan
remains valid and binding. They are, therefore, liable to pay
interest from the time they defaulted in payment until their
loan is fully paid.
4
It is worth mentioning that both the RTC and the CA are one
in saying that "[petitioners-spouses] cannot be considered in
default for their inability to pay the arbitrary, illegal and
unconscionable interest rates and penalty charges unilaterally
imposed by [respondent] bank."17 This is precisely the reason
why the foreclosure proceedings involving petitioners-
spouses’ properties were invalidated. As pointed out by the
CA, "since the interest rates are null and void, [respondent]
bank has no right to foreclose [petitioners-spouses’] properties
and any foreclosure thereof is illegal. x x x. Since there was no
default yet, it is premature for [respondent] bank to foreclose
the properties subject of the real estate mortgage contract."18
Thus, for the purpose of computing the amount of liability of
petitioners-spouses, they are considered in default from the
date the Resolution of the Court in G.R. No. 194164
(Philippine National Bank v. Spouses Bayani H. Andal and
Gracia G. Andal) – which is the appeal interposed by
respondent bank to the Supreme Court from the judgment of
the CA – became final and executory. Based on the records of
G.R. No. 194164, the Court denied herein respondent bank’s
appeal in a Resolution dated 10 January 2011. The Resolution
became final and executory on 20 May 2011. 19
In addition, pursuant to Circular No. 799, series of 2013,
issued by the Office of the Governor of the Bangko Sentral ng
Pilipinas on 21 June 2013, and in accordance with the ruling
of the Supreme Court in the recent case of Dario Nacar v.
Gallery Frames and/or Felipe Bordey, Jr., 20 effective 1 July
2013, 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. Accordingly, the rate of
interest of 12% per annum on petitioners-spouses’ obligation
shall apply from 20 May 2011 – the date of default – until 30
June 2013 only. From 1 July 2013 until fully paid, the legal
rate of 6% per annum shall be applied to petitioners-spouses’
unpaid obligation.
IN VIEW OF THE FOREGOING, the Petition is DENIED
and the Judgment of the Court of Appeals in CA-G.R. CV No.
91250 is AFFIRMED with the MODIFICATION that the 12%
interest per annum shall be applied from the date of default
until 30 June 2013 only, after which date and until fully paid,
the outstanding obligation of petitioners-spouses shall earn
interest at 6% per annum. Let the records of this case be
remanded to the trial court for the proper computation of the
amount of liability of petitioners Spouses Bayani H. Andal
and Gracia G. Andal, in accordance with the pronouncements
of the Court herein and with due regard to the payments
previously made by petitioners-spouses.
SO ORDERED.
G.R. No. 183804 September 11, 2013
S.C. MEGAWORLD CONSTRUCTION and
DEVELOPMENT CORPORATION, Petitioner,
vs.
ENGR. LUIS U. PARADA, represented by ENGR.
LEONARDO A. PARADA of GENLITE
INDUSTRIES,Respondent.
DECISION
REYES, J.:
Before us on appeal by certiorari1 is the Decision2 dated April
30, 2008 of the Court of Appeals (CA) in CA-G.R. CV No.

83811 which upheld the Decision3 dated May 8, 2004 of the
Regional Trial Court (RTC) of Quezon City, Branch 100, in
Civil Case No. Q-01-45212.
Factual Antecedents
S.C. Megaworld Construction and Development Corporation
(petitioner) bought electrical lighting materials from Gentile
Industries, a sole proprietorship owned by Engineer Luis U.
Parada (respondent), for its Read-Rite project in Canlubang,
Laguna. The petitioner was unable to pay for the above
purchase on due date, but blamed it on its failure to collect
under its sub-contract with the Enviro KleenTechnologies, Inc.
(Enviro Kleen). It was however able to persuade Enviro Kleen
to agree to settle its above purchase, but after paying the
respondent ₱250,000.00 on June 2, 1999, 4 Enviro Kleen
stopped making further payments, leaving an outstanding
balance of ₱816,627.00. It also ignored the various demands
of the respondent, who then filed a suit in the RTC, docketed
as Civil Case No.Q-01-45212, to collect from the petitioner
the said balance, plus damages, costs and expenses, as
summarized in the RTC’s decision, as follows:
The petitioner in its answer denied liability, claiming that it
was released from its indebtedness to the respondent by reason
of the novation of their contract, which, it reasoned, took place
when the latter accepted the partial payment of Enviro Kleen
in its behalf, and thereby acquiesced to the substitution of
Enviro Kleen as the new debtor in the petitioner’s place. After
trial, the RTC rendered judgment 6 on May 28, 2004 in favor of
the respondent, the fallo of which reads, as follows:
WHEREFORE, judgment is hereby rendered for the
respondent. The petitioner is hereby ordered to pay the
respondent the following:
A. the sum of ₱816,627.00 representing the principal
obligation due;
B. the sum equivalent to twenty percent (20%)per month of
the principal obligation due from date of judicial demand until
fully paid as and for interest; and
C. the sum equivalent to twenty-five percent (25%) of the
principal sum due as and for attorney’s fees and other costs of
suits. The compulsory counterclaim interposed by the
petitioner is hereby ordered dismissed for lack of merit.
SO ORDERED.7 (Emphasis supplied)
On appeal to the CA, the petitioner maintained that the trial
court erred in ruling that no novation of the contract took place
through the substitution of Enviro Kleen as the new debtor.
But for the first time, it further argued that the trial court
should have dismissed the complaint for failure of the
respondent to implead Genlite Industries as "a proper party in
interest", as provided in Section 2 of Rule 3 of the 1997 Rules
of Civil Procedure. The said section provides:
SEC. 2. Parties in interest. — A real party in interest is the
party who stands to be benefited or injured by the judgment in
the suit, or the party entitled to the avails of the suit. Unless
otherwise authorized by law or these Rules, every action must
be prosecuted or defended in the name of the real party in
interest.
In Section 1(g) of Rule 16 of the Rules of Court, it is also
provided that the defendant may move to dismiss the suit on
the ground that it was not brought in the name of or against the
real party in interest, with the effect that the complaint is then
deemed to state no cause of action.
5
In dismissing the appeal, the CA noted that the petitioner in its
answer below raised only the defense of novation, and that at
no stage in the proceedings did it raise the question of whether
the suit was brought in the name of the real party in interest.
Moreover, the appellate court found from the sales invoices
and receipts that the respondent is the sole proprietor of
Genlite Industries, and therefore the real party-plaintiff. Said
the CA:
Settled is the rule that litigants cannot raise an issue for the
first time on appeal as this would contravene the basic rules of
fair play and justice.
In any event, there is no question that respondent Engr.Luis U.
Parada is the proprietor of Genlite Industries, as shown on the
sales invoice and delivery receipts. There is also no question
that a special power of attorney was executed by respondent
Engr.Luis U. Parada in favor of Engr. Leonardo A. Parada
authorizingthe latter to file a complaint against the
petitioner.8 (Citations omitted)
The petitioner also contended that a binding novation of the
purchase contract between the parties took place when the
respondent accepted the partial payment of Enviro Kleen of
₱250,000.00 in its behalf, and thus acquiesced to the
substitution by Enviro Kleen of the petitioner as the new
debtor. But the CA noted that there is nothing in the two (2)
letters of the respondent to Enviro Kleen, dated April 14, 1999
and June 16, 1999, which would imply that he consented to
the alleged novation, and, particularly, that he intended to
release the petitioner from its primary obligation to pay him
for its purchase of lighting materials. The appellate court cited
the RTC’s finding9 that the respondent informed Enviro Kleen
in his first letter that he had served notice to the petitioner that
he would take legal action against it for its overdue account,
and that he retained his option to pull out the lighting materials
and charge the petitioner for any damage they might sustain
during the pull-out:
Respondent x x x has served notice to the petitioner that unless
the overdue account is paid, the matter will be referred to its
lawyers and there may be a pull-out of the delivered lighting
fixtures. It was likewise stated therein that incidental damages
that may result to the structure in the course of the pull-out
will be to the account of the petitioner. 10
The CA concurred with the RTC that by retaining his option to
seek satisfaction from the petitioner, any acquiescence which
the respondent had made was limited to merely accepting
Enviro Kleen as an additional debtor from whom he could
demand payment, but without releasing the petitioner as the
principal debtor from its debt to him.
On motion for reconsideration,11 the petitioner raised for the
first time the issue of the validity of the verification and
certification of non-forum shopping attached to the complaint.
On July 18, 2008, the CA denied the said motion for lack of
merit.12
Petition for Review in the Supreme Court
In this petition, the petitioner insists, firstly, that the complaint
should have been dismissed outright by the trial court for an
invalid non-forum shopping certification; and, secondly, that
the appellate court erred in not declaring that there was a
novation of the contract between the parties through
substitution of the debtor, which resulted in the release of the

petitioner from its obligation to pay the respondent the amount
of its purchase.13
Our Ruling
The petition is devoid of merit.
The verification and certification
non-forum shopping in
complaint is not a jurisdictional
a formal requirement, and
objection as to non-compliance
therewith should be raised in
proceedings below and not for
first time on appeal.
"It is well-settled that no question will be entertained on
appeal unless it has been raised in the proceedings below.
Points of law, theories, issues and arguments not brought to
the attention of the lower court, administrative agency or
quasi-judicial body, need not be considered by are viewing
court, as they cannot be raised for the first time at that late
stage. Basic considerations of fairness and due process impel
this rule. Any issue raised for the first time on appeal is barred
by estoppel."14
Through a Special Power of Attorney (SPA), the respondent
authorized Engr. Leonardo A. Parada (Leonardo), the eldest of
his three children, to perform the following acts in his behalf:
a) to file a complaint against the petitioner for sum of money
with damages; and b) to testify in the trial thereof and sign all
papers and documents related thereto, with full powers to
enter into stipulation and compromise. 15 Incidentally, the
respondent, a widower, died of cardio-pulmonary arrest on
January 21,2009,16 survived by his legitimate children,
namely, Leonardo, Luis, Jr., and Lalaine, all surnamed Parada.
They have since substituted him in this petition, per the
Resolution of the Supreme Court dated September 2,
2009.17 Also, on July 23, 2009, Luis, Jr. and Lalaine Parada
executed an SPA authorizing their brother Leonardo to
represent them in the instant petition. 18
In the verification and certification of non-forum shopping
attached to the complaint in Civil Case No. Q01-45212,
Leonardo as attorney-in-fact of his father acknowledged as
follows:
xxxx
That I/we am/are the Plaintiff in the above-captioned case;
That I/we have caused the preparation of this Complaint;
That I/we have read the same and that all the allegations
therein are true and correct to the best of my/our knowledge;
x x x x.19
In this petition, the petitioner reiterates its argument before the
CA that the above verification is invalid, since the SPA
executed by the respondent did not specifically include an
authority for Leonardo to sign the verification and certification
of non-forum shopping, thus rendering the complaint defective
for violation of Sections 4 and 5 of Rule 7. The said sections
provide, as follows:
Sec. 4. Verification. — A pleading is verified by an affidavit
that the affiant has read the pleading and that the allegations
therein are true and correct of his personal knowledge or based
on authentic records.
Sec. 5. Certification against forum shopping. –– The plaintiff
or principal party shall certify under oath in the complaint or
other initiatory pleading asserting a claim for relief, or in a
6
sworn certification annexed thereto and simultaneously filed
therewith: (a) that he has not thereto fore commenced any
action or filed any claim involving the same issues in any
court, or tribunal x x x and, to the best of his knowledge, no
of such other action or claim is pending therein; (b) if there is
the such other pending action or claim, a complete statement of
but the present status thereof; and (c) if he should thereafter learn
any that the same or similar action or claim has been filed or is
pending, he shall report that fact x x x to the court wherein his
the aforesaid complaint or initiatory pleading has been filed.
the Failure to comply with the foregoing requirements shall not be
curable by mere amendment of the complaint or other
initiatory pleading but shall be cause for the dismissal of the
case without prejudice, unless otherwise provided, upon
motion and after hearing.
The petitioner’s argument is untenable. The petitioner failed to
reckon that any objection as to compliance with the
requirement of verification in the complaint should have been
raised in the proceedings below, and not in the appellate court
for the first time.20 In KILUSAN-OLALIA v. CA,21 it was
held that verification is a formal, not a jurisdictional requisite:
We have emphasized, time and again, that verification is a
formal, not a jurisdictional requisite, as it is mainly intended to
secure an assurance that the allegations therein made are done
in good faith or are true and correct and not mere speculation.
The Court may order the correction of the pleading, if not
verified, or act on the unverified pleading if the attending
circumstances are such that a strict compliance with the rule
may be dispensed with in order that the ends of justice may be
served.
Further, in rendering justice, courts have always been, as they
ought to be, conscientiously guided by the norm that on the
balance, technicalities take a backseat vis-à-vis substantive
rights, and not the other way around. x x x. 22(Citations
omitted)
In Young v. John Keng Seng,23 it was also held that the
question of forum shopping cannot be raised in the CA and in
the Supreme Court, since such an issue must be raised at the
earliest opportunity in a motion to dismiss or a similar
pleading. The high court even warned that "invoking it in the
later stages of the proceedings or on appeal may result in the
dismissal of the action x x x."24
Moreover, granting that Leonardo has no personal knowledge
of the transaction subject of the complaint below, Section 4 of
Rule 7 provides that the verification need not be based on the
verifier’s personal knowledge but even only on authentic
records. Sales invoices, statements of accounts, receipts and
collection letters for the balance of the amount still due to the
respondent from the petitioner are such records. There is
clearly substantial compliance by the respondent’s attorney-in-
fact with the requirement of verification.
Lastly, it is well-settled that a strict compliance with the rules
may be dispensed with in order that the ends of substantial
justice may be served.25 It is clear that the present controversy
must be resolved on its merits, lest for a technical oversight
the respondent should be deprived of what is justly due him.
A sole proprietorship has no
juridical personality separate and
distinct from that of its owner, and

need not be impleaded as a party-
plaintiff in a civil case.
On the question of whether Genlite Industries should have
been impleaded as a party-plaintiff, Section 1 of Rule 3 of the
Rules of Court provides that only natural or juridical persons
or entities authorized by law may be parties in a civil case.
Article 44 of the New Civil Code enumerates who are juridical
persons:
Art. 44. The following are juridical persons:
(1) The State and its political subdivisions;
(2) Other corporations, institutions and entities for public
interest or purpose, created by law; their personality begins as
soon as they have been constituted according to law;
(3) Corporations, partnerships and associations for private
interest or purpose to which the law grants a juridical
personality, separate and distinct from that of each
shareholder, partner or member.
Genlite Industries is merely the DTI-registered trade name or
style of the respondent by which he conducted his business.
As such, it does not exist as a separate entity apart from its
owner, and therefore it has no separate juridical personality to
sue or be sued.26 As the sole proprietor of Genlite Industries,
there is no question that the respondent is the real party in
interest who stood to be directly benefited or injured by the
judgment in the complaint below. There is then no necessity
for Genlite Industries to be impleaded as a party-plaintiff,
since the complaint was already filed in the name of its
proprietor, Engr. Luis U. Parada. To heed the petitioner’s
sophistic reasoning is to permit a dubious technicality to
frustrate the ends of substantial justice.
Novation is never presumed but
must be clearly and unequivocally
shown.
Novation is a mode of extinguishing an obligation by
changing its objects or principal obligations, by substituting a
new debtor in place of the old one, or by subrogating a third
person to the rights of the creditor.27 It is "the substitution of a
new contract, debt, or obligation for an existing one between
the same or different parties."28 Article 1293 of the Civil Code
defines novation as follows:
Art. 1293. Novation which consists in substituting a new
debtor in the place of the original one, may be made even
without the knowledge or against the will of the latter, but not
without the consent of the creditor. Payment by the new debtor
gives him rights mentioned in Articles 1236and 1237.
Thus, in order to change the person of the debtor, the former
debtor must be expressly released from the obligation, and the
third person or new debtor must assume the former’s place in
the contractual relation.29 Article 1293 speaks of substitution
of the debtor, which may either be in the form of expromision
or delegacion, as seems to be the case here. In both cases, the
old debtor must be released from the obligation, otherwise,
there is no valid novation. As explained in Garcia30:
In general, there are two modes of substituting the person of
the debtor: (1) expromision and (2) delegacion. In
expromision, the initiative for the change does not come
from—and may even be made without the knowledge of—the
debtor, since it consists of a third person’s assumption of the
obligation. As such, it logically requires the consent of the
third person and the creditor. In delegacion, the debtor offers,
7
and the creditor accepts, a third person who consents to the
substitution and assumes the obligation; thus, the consent of
these three persons are necessary. Both modes of substitution
by the debtor require the consent of the creditor.31 (Citations
omitted)
From the circumstances obtaining below, we can infer no clear
and unequivocal consent by the respondent to the release of
the petitioner from the obligation to pay the cost of the
lighting materials. In fact, from the letters of the respondent to
Enviro Kleen, it can be said that he retained his option to go
after the petitioner if Enviro Kleen failed to settle the
petitioner’s debt. As the trial court held:
The fact that Enviro Kleen Technologies, Inc. made payments
to the respondent and the latter accepted it does not ipso facto
result innovation. Novation to be given its legal effect requires
that the creditor should consent to the substitution of a new
debtor and the old debtor be released from its obligation (Art.
1293, New Civil Code). A reading of the letters dated 14 April
1999 (Exh. 1) and dated 16 June 1999 (Exhs. 4 &4-a) sent by
the respondent to Enviro Kleen Technologies, Inc. clearly
shows that there was nothing therein that would evince that
the[respondent] has consented to the exchange of the person of
the debtor from the petitioner to Enviro Kleen Technologies,
Inc.
xxxx
Notably in Exh. 1, albeit addressed to Enviro Kleen
Technologies, Inc., the respondent expressly stated that it has
served notice to the petitioner that unless the overdue account
is paid, the matter will be referred to its lawyers and there may
be a pull-out of the delivered lighting fixtures. It was likewise
stated therein that incident damages that may result to the
structure in the course of the pull-out will be to the account of
the petitioner.
It is evident from the two (2) aforesaid letters that there is no
indication of the respondent’s intention to release the
petitioner from its obligation to pay and to transfer it to Enviro
Kleen Technologies, Inc. The acquiescence of Enviro Kleen
Technologies, Inc. to assume the obligation of the petitioner to
pay the unpaid balance of [P]816,627.00 to the respondent
when there is clearly no agreement to release the petitioner
will result merely to the addition of debtors and not novation.
Hence, the creditor can still enforce the obligation against the
original debtor x x x. A fact which points strongly to the
conclusion that the respondent did not assent to the
substitution of Enviro Kleen Technologies, Inc. as the new
debtor is the present action instituted by the respondent against
the petitioner for the fulfillment of its obligation. A mere
recital that the respondent has agreed or consented to the
substitution of the debtor is not sufficient to establish the fact
that there was a novation. x x x.32
The settled rule is that novation is never presumed, 33 but must
be clearly and unequivocally shown.34 In order for a new
agreement to supersede the old one, the parties to a contract
must expressly agree that they are abrogating their old contract
in favor of a new one.35 Thus, the mere substitution of debtors
will not result innovation,36 and the fact that the creditor
accepts payments from a third person, who has assumed the
obligation, will result merely in the addition of debtors and not
novation, and the creditor may enforce the obligation against
both debtors.37 If there is no agreement as to solidarity, the
 8

first and new debtors are considered obligated jointly. 38 As decision, for it incorrectly ordered the defendant there into pay
explained in Reyes v. CA39: "the sum equivalent to twenty percent (20%) per month of the
The consent of the creditor to a novation by change of debtor principal obligation due from date of judicial demand until
is as indispensable as the creditor’s consent in conventional fully paid as and for interest."42
subrogation in order that a novation shall legally take place. A clerical mistake is one which is visible to the eyes or
The mere circumstance of AFP-MBAI receiving payments obvious to the understanding; an error made by a clerk or a
from respondent Eleazar who acquiesced to assume the transcriber; a mistake in copying or writing.43 The Latin
obligation of petitioner under the contract of sale of securities, maxims Error placitandi aequitatem non tollit ("A clerical
when there is clearly no agreement to release petitioner from error does not take away equity"), and Error scribentis nocere
her responsibility, does not constitute novation. At most, it non debit ("An error made by a clerk ought not to injure; a
only creates a juridical relation of co-debtorship or surety ship clerical error may be corrected") are apt in this case. 44 Viewed
on the part of respondent Eleazar to the contractual obligation against the landmark case of Medel v. CA45, an award of
of petitioner to AFP-MBAI and the latter can still enforce the interest of 20% per month on the amount due is clearly
obligation against the petitioner. In Ajax Marketing and excessive and iniquitous. It could not have been the intention
Development Corporation vs. Court of Appeals which is of the trial court, not to mention that it is way beyond what the
relevant in the instant case, we stated that — plaintiff had prayed for below.
"In the same vein, to effect a subjective novation by a change It is settled that other than in the case of judgments which are
in the person of the debtor, it is necessary that the old debtor void ab initio for lack of jurisdiction, or which are null and
be released expressly from the obligation, and the third person void per se, and thus may be questioned at any time, when a
or new debtor assumes his place in the relation. There is no decision is final, even the court which issued it can no longer
novation without such release as the third person who has alter or modify it, except to correct clerical errors or
assumed the debtor’s obligation becomes merely a co-debtor mistakes.46
or surety. xxx. Novation arising from a purported change in The foregoing notwithstanding, of more important
the person of the debtor must be clear and express xxx." consideration in the case before us is the fact that it is nowhere
In the civil law setting, novatio is literally construed as to stated in the trial court’s decision that the parties had in fact
make new. So it is deeply rooted in the Roman Law stipulated an interest on the amount due to the respondent.
jurisprudence, the principle – novatio non praesumitur — that Even granting that there was such an agreement, there is no
novation is never presumed. At bottom, for novation to be a finding by the trial court that the parties stipulated that the
jural reality, its animus must be ever present, debitum pro outstanding debt of the petitioner would be subject to two
debito — basically extinguishing the old obligation for the percent (2%) monthly interest. The most that the decision
new one.40 (Citation omitted) discloses is that the respondent demanded a monthly interest
The trial court found that the respondent never agreed to of 2% on the amount outstanding.
release the petitioner from its obligation, and this conclusion Article 2209 of the Civil Code provides that "if the obligation
was upheld by the CA. We generally accord utmost respect consists in the payment of a sum of money, and the debtor
and great weight to factual findings of the trial court and the incurs in delay, the indemnity for damages, there being no
CA, unless there appears in the record some fact or stipulation to the contrary, shall be the payment of the interest
circumstance of weight and influence which has been agreed upon, and in the absence of stipulation, the legal
overlooked, or the significance of which has been interest, which is six percent per annum." Pursuant to the said
misinterpreted, that if considered would have affected the provision, then, since there is no finding of a stipulation by the
result of the case.41 We find no such oversight in the parties as to the imposition of interest, only the amount of
appreciation of the facts below, nor such a misinterpretation 12% per annum47 may be awarded by the court by way of
thereof, as would otherwise provide a clear and unequivocal damages in its discretion, not two percent(2%) per month,
showing that a novation has occurred in the contract between following the guidelines laid down in the landmark case of
the parties resulting in the release of the petitioner. Eastern Shipping Lines v. Court of Appeals, 48 to wit:
Pursuant to Article 2209 of the II. With regard particularly to an award of interest in the
Civil Code, except as provided concept of actual and compensatory damages, the rate of
under Central Bank Circular interest, as well as the accrual thereof, is imposed, as follows:
No. 905, and now under Bangko 1. When the obligation is breached, and it consists in the
Sentral ng Pilipinas Circular payment of a sum of money, i.e., a loan or forbearance of
No. 799, which took effect on money, the interest due should be that which may have been
July 1, 2013, the respondent may stipulated in writing. Furthermore, the interest due shall itself
be awarded interest of six percent earn legal interest from the time it is judicially demanded. In
(6%) of the judgment amount by the absence of stipulation, the rate of interest shall be 12% per
way of actual and compensatory annum to be computed from default, i.e., from judicial or
damages. extrajudicial demand under and subject to the provisions of
It appears from the recital of facts in the trial court’s decision Article 1169 of the Civil Code.
that the respondent demanded interest of two percent (2%) per 2. When an obligation, not constituting a loan or forbearance
month upon the balance of the purchase price of ₱816,627.00, of money, is breached, an interest on the amount of damages
from judicial demand until full payment. There is then an awarded may be imposed at the discretion of the court at the
obvious clerical error committed in the fallo of the trial court’s 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.49 (Citations omitted)
As further clarified in the case of Sunga-Chan v. CA,50 a loan
or forbearance of money, goods or credit describes a
contractual obligation whereby a lender or creditor has
refrained during a given period from requiring the borrower or
debtor to repay the loan or debt then due and payable. 51 Thus:
In Reformina v. Tomol, Jr., the Court held that the legal
interest at 12% per annum under Central Bank (CB) Circular
No. 416 shall be adjudged only in cases involving the loan or
forbearance of money. And for transactions involving
payment of indemnities in the concept of damages arising
from default in the performance of obligations in general
and/or for money judgment not involving a loan or
forbearance of money, goods, or credit, the governing
provision is Art. 2209 of the Civil Code prescribing a yearly
6% interest. Art. 2209 pertinently provides:
"Art. 2209. If the obligation consists in the payment of a sum
of money, and the debtor incurs in delay, the indemnity for
damages, there being no stipulation to the contrary, shall be
the payment of the interest agreed upon, and in the absence of
stipulation, the legal interest, which is six per cent per
annum."
The term "forbearance," within the context of usury law, has
been described as a contractual obligation of a lender or
creditor to refrain, during a given period of time, from
requiring the borrower or debtor to repay the loan or debt then
due and payable.
Eastern Shipping Lines, Inc. synthesized the rules on the
imposition of interest, if proper, and the applicable rate, as
follows: The12% per annum rate under CB Circular No. 416
shall apply only to loans or forbearance of money, goods, or
credits, as well as to judgments involving such loan or
forbearance of money, goods, or credit, while the 6% per
annum under Art. 2209 of the Civil Code applies "when the
transaction involves the payment of indemnities in the concept
of damage arising from the breach or a delay in the
performance of obligations in general," with the application of
both rates reckoned "from the time the complaint was filed
until the adjudged amount is fully paid." In either instance, the
reckoning period for the commencement of the running of the
legal interest shall be subject to the condition "that the courts
are vested with discretion, depending on the equities of each
9
case, on the award of interest."52 (Citations omitted and
emphasis ours)
Pursuant, then, to Central Bank Circular No. 416, issued on
July 29,1974,53 in the absence of a written stipulation, the
interest rate to be imposed in judgments involving a
forbearance of credit shall be 12% per annum, up from 6%
under Article 2209 of the Civil Code. This was reiterated in
Central Bank Circular No. 905, which suspended the
effectivity of the Usury Law from January 1, 1983. 54 But if the
judgment refers to payment of interest as damages arising
from a breach or delay in general, the applicable interest rate
is 6% per annum, following Article 2209 of the Civil
Code.55 Both interest rates apply from judicial or extrajudicial
demand until finality of the judgment. But from the finality of
the judgment awarding a sum of money until it is satisfied, the
award shall be considered a forbearance of credit, regardless
of whether the award in fact pertained to one, and therefore
during this period, the interest rate of 12% per annum for
forbearance of money shall apply. 56
But notice must be taken that in Resolution No. 796 dated
May 16,2013, the Monetary Board of the Bangko Sentral ng
Pilipinas approved the revision of the interest rate to be
imposed 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. Thus, under BSP
Circular No.799, issued on June 21, 2013 and effective on July
1, 2013, the said rate of interest is now back at six percent
(6%), viz:
BANGKO SENTRAL NG PILIPINAS
OFFICE OF THE GOVERNOR
CIRCULAR NO. 799
Series of 2013
Subject: Rate of interest in the absence of stipulation
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 X305.1 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 are hereby amended accordingly.
This Circular shall take effect on 1 July 2013.
FOR THE MONETARY BOARD:
DIWA C. GUINIGUNDO
Officer-In-Charge
The award of attorney’s fees is not proper.
Other than to say that the petitioner "unjustifiably failed and
refused to pay the respondent," the trial court did not state in
the body of its decision the factual or legal basis for its award
of attorney’s fees to the respondent, as required under Article
2208 of the New Civil Code, for which reason we have
resolved to delete the same. The rule is settled that the trial
court must state the factual, legal or equitable justification for
its award of attorney’s fees.57Indeed, the matter of attorney’s
fees cannot be stated only in the dispositive portion, but the
reasons must be stated in the body of the court’s
 10

decision.58 This failure or oversight of the trial court cannot With the foregoing, we find and so rule that respondents failed
even be supplied by the CA. As concisely explained in Frias v. to discharge the burden of showing that complainant was
San Diego-Sison59: dismissed from employment for a just or valid cause. All the
Article 2208 of the New Civil Code enumerates the instances more, it is clear from the records that complainant was never
where such may be awarded and, in all cases, it must be afforded due process before he was terminated. As such, we
reasonable, just and equitable if the same were to be granted. are perforce constrained to grant complainant’s prayer for the
Attorney’s fees as part of damages are not meant to enrich the payments of separation pay in lieu of reinstatement to his
winning party at the expense of the losing litigant. They are former position, considering the strained relationship between
not awarded every time a party prevails in a suit because of the parties, and his apparent reluctance to be reinstated,
the policy that no premium should be placed on the right to computed only up to promulgation of this decision as follows:
litigate. The award of attorney’s fees is the exception rather
SEPARATION PAY
than the general rule. As such, it is necessary for the trial court
to make findings of facts and law that would bring the caseDate Hired = August 1990
within the exception and justify the grant of such award. The
matter of attorney’s fees cannot be mentioned only in theRate = ₱198/day
dispositive portion of the decision. They must be clearly
explained and justified by the trial court in the body of itsDate of Decision = Aug. 18, 1998
decision. On appeal, the CA is precluded from supplementing
the bases for awarding attorney’s fees when the trial courtLength of Service = 8 yrs. & 1 month
failed to discuss in its Decision the reasons for awarding the₱198.00 x 26 days x 8 months = ₱41,184.00
same.1âwphi1Consequently, the award of attorney’s fees
should be deleted.60 (Citations omitted) BACKWAGES
WHEREFORE, premises considered, the Decision dated April
30, 2008 of the Court of Appeals in CA-G.R. CV No. 83811 isDate Dismissed = January 24, 1997
AFFIRMED with MODIFICATION. Petitioner S.C.
Megaworld Construction and Development Corporation isRate per day = ₱196.00
ordered to pay respondent Engr. Luis A. Parada, represented
Date of Decisions = Aug. 18, 1998
by Engr. Leonardo A. Parada, the principal amount due of
₱816,627.00, plus interest at twelve percent (12%) per annum,a) 1/24/97 to 2/5/98 = 12.36 mos.
reckoned from judicial demand until June 30, 2013, and six
percent (6%) per an own from July 1, 2013 until finality₱196.00/day x 12.36 mos. = ₱62,986.56
hereof, by way of actual and compensatory damages.
Thereafter, the principal amount due as adjusted by interestb) 2/6/98 to 8/18/98 = 6.4 months
shall likewise earn interest at six percent (6%) per annum until
fully paid. The award of attorney's fees is DELETED. Prevailing Rate per day = ₱62,986.00
G.R. No. 189871 August 13, 2013 ₱198.00 x 26 days x 6.4 mos. = ₱32,947.20
DARIO NACAR, PETITIONER,
vs. TOTAL = ₱95.933.76
GALLERY FRAMES AND/OR FELIPE BORDEY,
JR., RESPONDENTS. xxxx
DECISION WHEREFORE, premises considered, judgment is hereby
PERALTA, J.: rendered finding respondents guilty of constructive dismissal
This is a petition for review on certiorari assailing the and are therefore, ordered:
1
Decision dated September 23, 2008 of the Court of Appeals To pay jointly and severally the complainant the amount of
(CA) in CA-G.R. SP No. 98591, and the Resolution dated 2 sixty-two thousand nine hundred eighty-six pesos and 56/100
October 9, 2009 denying petitioner’s motion for (₱62,986.56) Pesos representing his separation pay;
reconsideration. To pay jointly and severally the complainant the amount of
The factual antecedents are undisputed. nine (sic) five thousand nine hundred thirty-three and 36/100
Petitioner Dario Nacar filed a complaint for constructive (₱95,933.36) representing his backwages; and
dismissal before the Arbitration Branch of the National Labor All other claims are hereby dismissed for lack of merit.
Relations Commission (NLRC) against respondents Gallery SO ORDERED.4
Frames (GF) and/or Felipe Bordey, Jr., docketed as NLRC Respondents appealed to the NLRC, but it was dismissed for
NCR Case No. 01-00519-97. lack of merit in the Resolution5 dated February 29, 2000.
On October 15, 1998, the Labor Arbiter rendered a Accordingly, the NLRC sustained the decision of the Labor
3
Decision in favor of petitioner and found that he was Arbiter. Respondents filed a motion for reconsideration, but it
dismissed from employment without a valid or just cause. was denied.6
Thus, petitioner was awarded backwages and separation pay in Dissatisfied, respondents filed a Petition for Review on
lieu of reinstatement in the amount of ₱158,919.92. The Certiorari before the CA. On August 24, 2000, the CA issued
dispositive portion of the decision, reads: a Resolution dismissing the petition. Respondents filed a

Motion for Reconsideration, but it was likewise denied in a
Resolution dated May 8, 2001.7
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, 2002.9The
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 Order 15 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
11
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 Resolution23dated 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 Resolution25 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 Arbiter’s 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
12
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 234 of Circular No.
13
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 X305.1 36 of the
Manual of Regulations for Banks and Sections
4305Q.1,37 4305S.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 Lines40and
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.1âwphi1

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.
G.R. No. 192986 January 15, 2013
ADVOCATES FOR TRUTH IN LENDING, INC. and
EDUARDO B. OLAGUER, Petitioners,
14
vs.
BANGKO SENTRAL MONETARY BOARD, represented
by its Chairman, GOVERNOR ARMANDO M.
TETANGCO, JR., and its incumbent members: JUANITA
D. AMATONG, ALFREDO C. ANTONIO, PETER FA
VILA, NELLY F. VILLAFUERTE, IGNACIO R. BUNYE
and CESAR V. PURISIMA, Respondents.
DECISION
REYES, J.:
Petitioners, claiming that they are raising issues of
transcendental importance to the public, filed directly with this
Court this Petition for Certiorari under Rule 65 of the 1997
Rules of Court, seeking to declare that the Bangko Sentral ng
Pilipinas Monetary Board (BSP-MB), replacing the Central
Bank Monetary Board (CB-MB) by virtue of Republic Act
(R.A.) No. 7653, has no authority to continue enforcing
Central Bank Circular No. 905,1 issued by the CB-MB in
1982, which "suspended" Act No. 2655, or the Usury Law of
1916.
Factual Antecedents
Petitioner "Advocates for Truth in Lending, Inc." (AFTIL) is a
non-profit, non-stock corporation organized to engage in pro
bono concerns and activities relating to money lending issues.
It was incorporated on July 9, 2010, 2 and a month later, it filed
this petition, joined by its founder and president, Eduardo B.
Olaguer, suing as a taxpayer and a citizen.
R.A. No. 265, which created the Central Bank (CB) of the
Philippines on June 15, 1948, empowered the CB-MB to,
among others, set the maximum interest rates which banks
may charge for all types of loans and other credit operations,
within limits prescribed by the Usury Law. Section 109 of
R.A. No. 265 reads:
Sec. 109. Interest Rates, Commissions and Charges. — The
Monetary Board may fix the maximum rates of interest which
banks may pay on deposits and on other obligations.
The Monetary Board may, within the limits prescribed in the
Usury Law fix the maximum rates of interest which banks
may charge for different types of loans and for any other credit
operations, or may fix the maximum differences which may
exist between the interest or rediscount rates of the Central
Bank and the rates which the banks may charge their
customers if the respective credit documents are not to lose
their eligibility for rediscount or advances in the Central Bank.
Any modifications in the maximum interest rates permitted for
the borrowing or lending operations of the banks shall apply
only to future operations and not to those made prior to the
date on which the modification becomes effective.
In order to avoid possible evasion of maximum interest rates
set by the Monetary Board, the Board may also fix the
maximum rates that banks may pay to or collect from their
customers in the form of commissions, discounts, charges,
fees or payments of any sort. (Underlining ours)
On March 17, 1980, the Usury Law was amended by
Presidential Decree (P.D.) No. 1684, giving the CB-MB
authority to prescribe different maximum rates of interest
which may be imposed for a loan or renewal thereof or the
forbearance of any money, goods or credits, provided that the
changes are effected gradually and announced in advance.
Thus, Section 1-a of Act No. 2655 now reads:

Sec. 1-a. The Monetary Board is hereby authorized to
prescribe the maximum rate or rates of interest for the loan or
renewal thereof or the forbearance of any money, goods or
credits, and to change such rate or rates whenever warranted
by prevailing economic and social conditions: Provided, That
changes in such rate or rates may be effected gradually on
scheduled dates announced in advance.
In the exercise of the authority herein granted the Monetary
Board may prescribe higher maximum rates for loans of low
priority, such as consumer loans or renewals thereof as well as
such loans made by pawnshops, finance companies and other
similar credit institutions although the rates prescribed for
these institutions need not necessarily be uniform. The
Monetary Board is also authorized to prescribe different
maximum rate or rates for different types of borrowings,
including deposits and deposit substitutes, or loans of financial
intermediaries. (Underlining and emphasis ours)
In its Resolution No. 2224 dated December 3, 1982, 3 the CB-
MB issued CB Circular No. 905, Series of 1982, effective on
January 1, 1983. Section 1 of the Circular, under its General
Provisions, removed the ceilings on interest rates on loans or
forbearance of any money, goods or credits, to wit:
Sec. 1. The rate of interest, including commissions, premiums,
fees and other charges, on a loan or forbearance of any money,
goods, or credits, regardless of maturity and whether secured
or unsecured, that may be charged or collected by any person,
whether natural or juridical, shall not be subject to any ceiling
prescribed under or pursuant to the Usury Law, as amended.
(Underscoring and emphasis ours)
The Circular then went on to amend Books I to IV of the CB’s
"Manual of Regulations for Banks and Other Financial
Intermediaries" (Manual of Regulations) by removing the
applicable ceilings on specific interest rates. Thus, Sections 5,
9 and 10 of CB Circular No. 905 amended Book I,
Subsections 1303, 1349, 1388.1 of the Manual of Regulations,
by removing the ceilings for interest and other charges,
commissions, premiums, and fees applicable to commercial
banks; Sections 12 and 17 removed the interest ceilings for
thrift banks (Book II, Subsections 2303, 2349); Sections 19
and 21 removed the ceilings applicable to rural banks (Book
III, Subsection 3152.3-c); and, Sections 26, 28, 30 and 32
removed the ceilings for non-bank financial intermediaries
(Book IV, Subsections 4303Q.1 to 4303Q.9, 4303N.1,
4303P).4
On June 14, 1993, President Fidel V. Ramos signed into law
R.A. No. 7653 establishing the Bangko Sentral ng Pilipinas
(BSP) to replace the CB. The repealing clause thereof, Section
135, reads:
Sec. 135. Repealing Clause. — Except as may be provided for
in Sections 46 and 132 of this Act, Republic Act No. 265, as
amended, the provisions of any other law, special charters,
rule or regulation issued pursuant to said Republic Act No.
265, as amended, or parts thereof, which may be inconsistent
with the provisions of this Act are hereby repealed.
Presidential Decree No. 1792 is likewise repealed.
Petition for Certiorari
To justify their skipping the hierarchy of courts and going
directly to this Court to secure a writ of certiorari, petitioners
contend that the transcendental importance of their Petition
can readily be seen in the issues raised therein, to wit:
15
a) Whether under R.A. No. 265 and/or P.D. No. 1684, the CB-
MB had the statutory or constitutional authority to prescribe
the maximum rates of interest for all kinds of credit
transactions and forbearance of money, goods or credit beyond
the limits prescribed in the Usury Law;
b) If so, whether the CB-MB exceeded its authority when it
issued CB Circular No. 905, which removed all interest
ceilings and thus suspended Act No. 2655 as regards usurious
interest rates;
c) Whether under R.A. No. 7653, the new BSP-MB may
continue to enforce CB Circular No. 905.5
Petitioners attached to their petition copies of several Senate
Bills and Resolutions of the 10th Congress, which held its
sessions from 1995 to 1998, calling for investigations by the
Senate Committee on Banks and Financial Institutions into
alleged unconscionable commercial rates of interest imposed
by these entities. Senate Bill (SB) Nos. 376 and 1860,7 filed by
Senator Vicente C. Sotto III and the late Senator Blas F. Ople,
respectively, sought to amend Act No. 2655 by fixing the rates
of interest on loans and forbearance of credit; Philippine
Senate Resolution (SR) No. 1053,8 10739 and 1102,10 filed by
Senators Ramon B. Magsaysay, Jr., Gregorio B. Honasan and
Franklin M. Drilon, respectively, urged the aforesaid Senate
Committee to investigate ways to curb the high commercial
interest rates then obtaining in the country; Senator Ernesto
Maceda filed SB No. 1151 to prohibit the collection of more
than two months of advance interest on any loan of money;
and Senator Raul Roco filed SR No. 114411seeking an
investigation into an alleged cartel of commercial banks,
called "Club 1821", reportedly behind the regime of high
interest rates. The petitioners also attached news
clippings12 showing that in February 1998 the banks’ prime
lending rates, or interests on loans to their best borrowers,
ranged from 26% to 31%.
Petitioners contend that under Section 1-a of Act No. 2655, as
amended by P.D. No. 1684, the CB-MB was authorized only
to prescribe or set the maximum rates of interest for a loan or
renewal thereof or for the forbearance of any money, goods or
credits, and to change such rates whenever warranted by
prevailing economic and social conditions, the changes to be
effected gradually and on scheduled dates; that nothing in P.D.
No. 1684 authorized the CB-MB to lift or suspend the limits
of interest on all credit transactions, when it issued CB
Circular No. 905. They further insist that under Section 109 of
R.A. No. 265, the authority of the CB-MB was clearly only to
fix the banks’ maximum rates of interest, but always within
the limits prescribed by the Usury Law.
Thus, according to petitioners, CB Circular No. 905, which
was promulgated without the benefit of any prior public
hearing, is void because it violated Article 5 of the New Civil
Code, which provides that "Acts executed against the
provisions of mandatory or prohibitory laws shall be void,
except when the law itself authorizes their validity."
They further claim that just weeks after the issuance of CB
Circular No. 905, the benchmark 91-day Treasury bills (T-
bills),13 then known as "Jobo" bills14 shot up to 40% per
annum, as a result. The banks immediately followed suit and
re-priced their loans to rates which were even higher than
those of the "Jobo" bills. Petitioners thus assert that CB
Circular No. 905 is also unconstitutional in light of Section 1

of the Bill of Rights, which commands that "no person shall be
deprived of life, liberty or property without due process of
law, nor shall any person be denied the equal protection of the
laws."
Finally, petitioners point out that R.A. No. 7653 did not re-
enact a provision similar to Section 109 of R.A. No. 265, and
therefore, in view of the repealing clause in Section 135 of
R.A. No. 7653, the BSP-MB has been stripped of the power
either to prescribe the maximum rates of interest which banks
may charge for different kinds of loans and credit transactions,
or to suspend Act No. 2655 and continue enforcing CB
Circular No. 905.
Ruling
The petition must fail.
A. The Petition is procedurally infirm.
The decision on whether or not to accept a petition for
certiorari, as well as to grant due course thereto, is addressed
to the sound discretion of the court.15 A petition for certiorari
being an extraordinary remedy, the party seeking to avail of
the same must strictly observe the procedural rules laid down
by law, and non-observance thereof may not be brushed aside
as mere technicality.16
As provided in Section 1 of Rule 65, a writ of certiorari is
directed against a tribunal exercising judicial or quasi-judicial
functions.17 Judicial functions are exercised by a body or
officer clothed with authority to determine what the law is and
what the legal rights of the parties are with respect to the
matter in controversy. Quasi-judicial function is a term that
applies to the action or discretion of public administrative
officers or bodies given the authority to investigate facts or
ascertain the existence of facts, hold hearings, and draw
conclusions from them as a basis for their official action using
discretion of a judicial nature.18
The CB-MB (now BSP-MB) was created to perform executive
functions with respect to the establishment, operation or
liquidation of banking and credit institutions, and branches
and agencies thereof.19 It does not perform judicial or quasi-
judicial functions. Certainly, the issuance of CB Circular No.
905 was done in the exercise of an executive function.
Certiorari will not lie in the instant case. 20
B. Petitioners have no locus standi to file the Petition
Locus standi is defined as "a right of appearance in a court of
justice on a given question." In private suits, Section 2, Rule 3
of the 1997 Rules of Civil Procedure provides that "every
action must be prosecuted or defended in the name of the real
party in interest," who is "the party who stands to be benefited
or injured by the judgment in the suit or the party entitled to
the avails of the suit." Succinctly put, a party’s standing is
based on his own right to the relief sought.21
Even in public interest cases such as this petition, the Court
has generally adopted the "direct injury" test that the person
who impugns the validity of a statute must have "a personal
and substantial interest in the case such that he has sustained,
or will sustain direct injury as a result."22 Thus, while
petitioners assert a public right to assail CB Circular No. 905
as an illegal executive action, it is nonetheless required of
them to make out a sufficient interest in the vindication of the
public order and the securing of relief. It is significant that in
this petition, the petitioners do not allege that they sustained
any personal injury from the issuance of CB Circular No. 905.
16
Petitioners also do not claim that public funds were being
misused in the enforcement of CB Circular No. 905. In
Kilosbayan, Inc. v. Morato,23 involving the on-line lottery
contract of the PCSO, there was no allegation that public
funds were being misspent, which according to the Court
would have made the action a public one, "and justify
relaxation of the requirement that an action must be
prosecuted in the name of the real party-in-interest." The
Court held, moreover, that the status of Kilosbayan as a
people’s organization did not give it the requisite personality
to question the validity of the contract. Thus:
Petitioners do not in fact show what particularized interest
they have for bringing this suit. It does not detract from the
high regard for petitioners as civic leaders to say that their
interest falls short of that required to maintain an action under
the Rule 3, Sec. 2.24
C. The Petition raises no issues of transcendental importance.
In the 1993 case of Joya v. Presidential Commission on Good
Government,25 it was held that no question involving the
constitutionality or validity of a law or governmental act may
be heard and decided by the court unless there is compliance
with the legal requisites for judicial inquiry, namely: (a) that
the question must be raised by the proper party; (b) that there
must be an actual case or controversy; (c) that the question
must be raised at the earliest possible opportunity; and (d) that
the decision on the constitutional or legal question must be
necessary to the determination of the case itself.
In Prof. David v. Pres. Macapagal-Arroyo,26 the Court
summarized the requirements before taxpayers, voters,
concerned citizens, and legislators can be accorded a standing
to sue, viz:
(1) the cases involve constitutional issues;
(2) for taxpayers, there must be a claim of illegal disbursement
of public funds or that the tax measure is unconstitutional;
(3) for voters, there must be a showing of obvious interest in
the validity of the election law in question;
(4) for concerned citizens, there must be a showing that the
issues raised are of transcendental importance which must be
settled early; and
(5) for legislators, there must be a claim that the official action
complained of infringes upon their prerogatives as legislators.
While the Court may have shown in recent decisions a certain
toughening in its attitude concerning the question of legal
standing, it has nonetheless always made an exception where
the transcendental importance of the issues has been
established, notwithstanding the petitioners’ failure to show a
direct injury.27 In CREBA v. ERC,28 the Court set out the
following instructive guides as determinants on whether a
matter is of transcendental importance, namely: (1) the
character of the funds or other assets involved in the case; (2)
the presence of a clear case of disregard of a constitutional or
statutory prohibition by the public respondent agency or
instrumentality of the government; and (3) the lack of any
other party with a more direct and specific interest in the
questions being raised. Further, the Court stated in Anak
Mindanao Party-List Group v. The Executive Secretary29 that
the rule on standing will not be waived where these
determinants are not established.
In the instant case, there is no allegation of misuse of public
funds in the implementation of CB Circular No. 905. Neither

were borrowers who were actually affected by the suspension
of the Usury Law joined in this petition. Absent any showing
of transcendental importance, the petition must fail.
More importantly, the Court notes that the instant petition
adverted to the regime of high interest rates which obtained at
least 15 years ago, when the banks’ prime lending rates ranged
from 26% to 31%,30 or even 29 years ago, when the 91-day
Jobo bills reached 40% per annum. In contrast, according to
the BSP, in the first two (2) months of 2012 the bank lending
rates averaged 5.91%, which implies that the banks’ prime
lending rates were lower; moreover, deposit interests on
savings and long-term deposits have also gone very low,
averaging 1.75% and 1.62%, respectively. 31
Judging from the most recent auctions of T-bills, the savings
rates must be approaching 0%.1âwphi1 In the auctions held on
November 12, 2012, the rates of 3-month, 6-month and 1-year
T-bills have dropped to 0.150%, 0.450% and 0.680%,
respectively.32 According to Manila Bulletin, this very low
interest regime has been attributed to "high liquidity and
strong investor demand amid positive economic indicators of
the country."33
While the Court acknowledges that cases of transcendental
importance demand that they be settled promptly and
definitely, brushing aside, if we must, technicalities of
procedure,34 the delay of at least 15 years in the filing of the
instant petition has actually rendered moot and academic the
issues it now raises.
For its part, BSP-MB maintains that the petitioners’
allegations of constitutional and statutory violations of CB
Circular No. 905 are really mere challenges made by
petitioners concerning the wisdom of the Circular. It explains
that it was in view of the global economic downturn in the
early 1980’s that the executive department through the CB-
MB had to formulate policies to achieve economic recovery,
and among these policies was the establishment of a market-
oriented interest rate structure which would require the
removal of the government-imposed interest rate ceilings.35
D. The CB-MB merely suspended the effectivity of the Usury
Law when it issued CB Circular No. 905.
The power of the CB to effectively suspend the Usury Law
pursuant to P.D. No. 1684 has long been recognized and
upheld in many cases. As the Court explained in the landmark
case of Medel v. CA,36 citing several cases, CB Circular No.
905 "did not repeal nor in anyway amend the Usury Law but
simply suspended the latter’s effectivity;"37that "a CB Circular
cannot repeal a law, [for] only a law can repeal another
law;"38 that "by virtue of CB Circular No. 905, the Usury Law
has been rendered ineffective;"39 and "Usury has been legally
non-existent in our jurisdiction. Interest can now be charged as
lender and borrower may agree upon."40
In First Metro Investment Corp. v. Este Del Sol Mountain
Reserve, Inc.41 cited in DBP v. Perez,42 we also belied the
contention that the CB was engaged in self-legislation. Thus:
Central Bank Circular No. 905 did not repeal nor in any way
amend the Usury Law but simply suspended the latter’s
effectivity. The illegality of usury is wholly the creature of
legislation. A Central Bank Circular cannot repeal a law. Only
a law can repeal another law. x x x. 43
In PNB v. Court of Appeals,44 an escalation clause in a loan
agreement authorized the PNB to unilaterally increase the rate
17
of interest to 25% per annum, plus a penalty of 6% per annum
on past dues, then to 30% on October 15, 1984, and to 42% on
October 25, 1984. The Supreme Court invalidated the rate
increases made by the PNB and upheld the 12% interest
imposed by the CA, in this wise:
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. x x x.45
Thus, according to the Court, by lifting the interest ceiling, CB
Circular No. 905 merely upheld the parties’ freedom of
contract to agree freely on the rate of interest. It cited Article
1306 of the New Civil Code, under which the contracting
parties may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are
not contrary to law, morals, good customs, public order, or
public policy.
E. The BSP-MB has authority to enforce CB Circular No. 905.
Section 1 of CB Circular No. 905 provides that "The rate of
interest, including commissions, premiums, fees and other
charges, on a loan or forbearance of any money, goods, or
credits, regardless of maturity and whether secured or
unsecured, that may be charged or collected by any person,
whether natural or juridical, shall not be subject to any ceiling
prescribed under or pursuant to the Usury Law, as amended."
It does not purport to suspend the Usury Law only as it applies
to banks, but to all lenders.
Petitioners contend that, granting that the CB had power to
"suspend" the Usury Law, the new BSP-MB did not retain this
power of its predecessor, in view of Section 135 of R.A. No.
7653, which expressly repealed R.A. No. 265. The petitioners
point out that R.A. No. 7653 did not reenact a provision
similar to Section 109 of R.A. No. 265.
A closer perusal shows that Section 109 of R.A. No. 265
covered only loans extended by banks, whereas under Section
1-a of the Usury Law, as amended, 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.
Act No. 2655, an earlier law, is much broader in scope,
whereas R.A. No. 265, now R.A. No. 7653, merely
supplemented it as it concerns loans by banks and other
financial institutions. Had R.A. No. 7653 been intended to
repeal Section 1-a of Act No. 2655, it would have so stated in
unequivocal terms.
Moreover, the rule is settled that repeals by implication are not
favored, because laws are presumed to be passed with
deliberation and full knowledge of all laws existing pertaining
to the subject.46 An implied repeal is predicated upon the
condition that a substantial conflict or repugnancy is found
between the new and prior laws. Thus, in the absence of an
express repeal, a subsequent law cannot be construed as
repealing a prior law unless an irreconcilable inconsistency

and repugnancy exists in the terms of the new and old
laws.47 We find no such conflict between the provisions of Act
2655 and R.A. No. 7653.
F. The lifting of the ceilings for interest rates does not
authorize stipulations charging excessive, unconscionable, and
iniquitous interest.
It is settled that nothing in CB Circular No. 905 grants lenders
a carte blanche authority to raise interest rates to levels which
will either enslave their borrowers or lead to a hemorrhaging
of their assets.48 As held in Castro v. Tan:49
The 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. It has no support in law, in principles
of justice, or in the human conscience nor is there any reason
whatsoever which may justify such imposition as righteous
and as one that may be sustained within the sphere of public or
private morals.50
Stipulations authorizing iniquitous or unconscionable interests
have been invariably struck down for being contrary to
morals, if not against the law.51 Indeed, under Article 1409 of
the Civil Code, these contracts are deemed inexistent and void
ab initio, and therefore cannot be ratified, nor may the right to
set up their illegality as a defense be waived.
Nonetheless, the nullity of the stipulation of usurious interest
does not affect the lender’s right to recover the principal of a
loan, nor affect the other terms thereof.52 Thus, in a usurious
loan with mortgage, the right to foreclose the mortgage
subsists, and this right can be exercised by the creditor upon
failure by the debtor to pay the debt due. The debt due is
considered as without the stipulated excessive interest, and a
legal interest of 12% per annum will be added in place of the
excessive interest formerly imposed,53following the guidelines
laid down in the landmark case of Eastern Shipping Lines, Inc.
v. Court of Appeals,54 regarding the manner of computing
legal interest:
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
18
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.55 (Citations omitted)
The foregoing rules were further clarified in Sunga-Chan v.
Court of Appeals, 56 as follows:
Eastern Shipping Lines, Inc. synthesized the rules on the
imposition of interest, if proper, and the applicable rate, as
follows: The 12% per annum rate under CB Circular No. 416
shall apply only to loans or forbearance of money, goods, or
credits, as well as to judgments involving such loan or
forbearance of money, goods, or credit, while the 6% per
annum under Art. 2209 of the Civil Code applies "when the
transaction involves the payment of indemnities in the concept
of damage arising from the breach or a delay in the
performance of obligations in general," with the application of
both rates reckoned "from the time the complaint was filed
until the [adjudged] amount is fully paid." In either instance,
the reckoning period for the commencement of the running of
the legal interest shall be subject to the condition "that the
courts are vested with discretion, depending on the equities of
each case, on the award of interest."57 (Citations omitted)
G.R. No. L-48349 December 29, 1986
FRANCISCO HERRERA, plaintiff-appellant,
vs.
PETROPHIL CORPORATION, defendant-appellee.
Paterno R. Canlas Law Offices for plaintiff-appellant.
CRUZ, J.:
This is an appeal by the plaintiff-appellant from a decision
rendered by the then Court of First Instance of Rizal on a pure
question of law. 1
The judgment appealed from was rendered on the pleadings,
the parties having agreed during the pretrial conference on the
factual antecedents.
The facts are as follows: On December 5, 1969, the plaintiff-
appellant and ESSO Standard Eastern. Inc., (later substituted
by Petrophil Corporation) entered into a "Lease Agreement"
whereby the former leased to the latter a portion of his
property for a period of twenty (20) years from said date,
subject inter alia to the following conditions:
3. Rental: The LESSEE shall pay the LESSOR a rental of
Pl.40 sqm. per month on 400 sqm. and are to be expropriated
later on (sic) or P560 per month and Fl.40 per sqm. per month
on 1,693 sqm. or P2,370.21 per month or a total of P2,930.20
per month 2,093 sqm. more or less, payable yearly in advance
within the 1st twenty days of each year; provided, a financial
aid in the sum of P15,000 to clear the leased premises of
existing improvements thereon is paid in this manner; P10,000
upon execution of this lease and P5,000 upon delivery of
leased premises free and clear of improvements thereon within
30 days from the date of execution of this agreement. The
portion on the side of the leased premises with an area of 365

sqrm. more or less, will be occupied by LESSEE without
rental during the lifetime of this lease. PROVIDED
FINALLY, that the Lessor is paid 8 years advance rental
based on P2,930.70 per month discounted at 12% interest per
annum or a total net amount of P130,288.47 before
registration of lease. Leased premises shall be delivered within
30 days after 1st partial payment of financial aid. 2
On December 31, 1969, pursuant to the said contract, the
defendant-appellee paid to the plaintfff-appellant advance
rentals for the first eight years, subtracting therefrom the
amount of P101,010.73, the amount it computed as
constituting the interest or discount for the first eight years, in
the total sum P180,288.47. On August 20, 1970, the
defendant-appellee, explaining that there had been a mistake
in computation, paid to the appellant the additional sum of
P2,182.70, thereby reducing the deducted amount to only
P98,828.03. 3
On October 14, 1974, the plaintiff-appellant sued the
defendant-appellee for the sum of P98,828.03, with interest,
claiming this had been illegally deducted from him in
violation of the Usury Law. 4 He also prayed for moral
damages and attorney's fees. In its answer, the defendant-
appellee admitted the factual allegations of the complaint but
argued that the amount deducted was not usurious interest but
a given to it for paying the rentals in advance for eight
years. 5 Judgment on the pleadings was rendered for the
defendant. 6
Plaintiff-appellant now prays for a reversal of that judgment,
insisting that the lower court erred in the computation of the
interest collected out of the rentals paid for the first eight
years; that such interest was excessive and violative of the
Usury Law; and that he had neither agreed to nor accepted the
defendant-appellant's computation of the total amount to be
deducted for the eight years advance rentals. 7
The thrust of the plaintiff-appellant's position is set forth in
paragraph 6 of his complaint, which read:
6. The interest collected by defendant out of the rentals for the
first eight years was excessive and beyond that allowable by
law, because the total interest on the said amount is only
P33,755.90 at P4,219.4880 per yearly rental; and considering
that the interest should be computed excluding the first year
rental because at the time the amount of P281, 199.20 was
paid it was already due under the lease contract hence no
interest should be collected from the rental for the first year,
the amount of P29,536.42 only as the total interest should
have been deducted by defendant from the sum of
P281,299.20.
The defendant maintains that the correct amount of the
discount is P98,828.03 and that the same is not excessive and
above that allowed by law.
As its title plainly indicates, the contract between the parties is
one of lease and not of loan. It is clearly denominated a
"LEASE AGREEMENT." Nowhere in the contract is there
any showing that the parties intended a loan rather than a
lease. The provision for the payment of rentals in advance
cannot be construed as a repayment of a loan because there
was no grant or forbearance of money as to constitute an
indebtedness on the part of the lessor. On the contrary, the
defendant-appellee was discharging its obligation in advance
19
by paying the eight years rentals, and it was for this advance
payment that it was getting a rebate or discount.
The provision for a discount is not unusual in lease contracts.
As to its validity, it is settled that the parties may establish
such stipulations, clauses, terms and condition as they may
want to include; and as long as such agreements are not
contrary to law, morals, good customs, public policy or public
order, they shall have the force of law between them. 8
There is no usury in this case because no money was given by
the defendant-appellee to the plaintiff-appellant, nor did it
allow him to use its money already in his possession. 9 There
was neither loan nor forbearance but a mere discount which
the plaintiff-appellant allowed the defendant-appellee to
deduct from the total payments because they were being made
in advance for eight years. The discount was in effect a
reduction of the rentals which the lessor had the right to
determine, and any reduction thereof, by any amount, would
not contravene the Usury Law.
The difference between a discount and a loan or forbearance is
that the former does not have to be repaid. The loan or
forbearance is subject to repayment and is therefore governed
by the laws on usury. 10
To constitute usury, "there must be loan or forbearance; the
loan must be of money or something circulating as money; it
must be repayable absolutely and in all events; and something
must be exacted for the use of the money in excess of and in
addition to interest allowed by law." 11
It has been held that the elements of usury are (1) a loan,
express or implied; (2) an understanding between the parties
that the money lent shall or may be returned; that for such loan
a greater rate or interest that is allowed by law shall be paid, or
agreed to be paid, as the case may be; and (4) a corrupt intent
to take more than the legal rate for the use of money loaned.
Unless these four things concur in every transaction, it is safe
to affirm that no case of usury can be declared. 12
Concerning the computation of the deductible discount, the
trial court declared:
As above-quoted, the 'Lease Agreement' expressly provides
that the lessee (defendant) shag pay the lessor (plaintiff) eight
(8) years in advance rentals based on P2,930.20 per month
discounted at 12% interest per annum. Thus, the total rental
for one-year period is P35,162.40 (P2,930.20 multiplied by 12
months) and that the interest therefrom is P4,219.4880
(P35,162.40 multiplied by 12%). So, therefore, the total
interest for the first eight (8) years should be only P33,755.90
(P4,129.4880 multiplied by eight (8) years and not P98,828.03
as the defendant claimed it to be.
The afore-quoted manner of computation made by plaintiff is
patently erroneous. It is most seriously misleading. He just
computed the annual discount to be at P4,129.4880 and then
simply multiplied it by eight (8) years. He did not take into
consideration the naked fact that the rentals due on the eight
year were paid in advance by seven (7) years, the rentals due
on the seventh year were paid in advance by six (6) years,
those due on the sixth year by five (5) years, those due on the
fifth year by four (4) years, those due on the fourth year by
three (3) years, those due on the third year by two (2) years,
and those due on the second year by one (1) year, so much so
that the total number of years by which the annual rental of
P4,129.4880 was paid in advance is twenty-eight (28),

resulting in a total amount of P118,145.44 (P4,129.48
multiplied by 28 years) as the discount. However, defendant
was most fair to plaintiff. It did not simply multiply the annual
rental discount by 28 years. It computed the total discount
with the principal diminishing month to month as shown by
Annex 'A' of its memorandum. This is why the total discount
amount to only P 8,828.03.
The allegation of plaintiff that defendant made the
computation in a compounded manner is erroneous. Also after
making its own computations and after examining closely
defendant's Annex 'A' of its memorandum, the court finds that
defendant did not charge 12% discount on the rentals due for
the first year so much so that the computation conforms with
the provision of the Lease Agreement to the effect that the
rentals shall be 'payable yearly in advance within the 1st 20
days of each year. '
We do not agree. The above computation appears to be too
much technical mumbo-jumbo and could not have been the
intention of the parties to the transaction. Had it been so, then
it should have been clearly stipulated in the contract. Contracts
should be interpreted according to their literal meaning and
should not be interpreted beyond their obvious intendment. 13
The plaintfff-appellant simply understood that for every year
of advance payment there would be a deduction of 12% and
this amount would be the same for each of the eight years.
There is no showing that the intricate computation applied by
the trial court was explained to him by the defendant-appellee
or that he knowingly accepted it.
The lower court, following the defendant-appellee's formula,
declared that the plaintiff-appellant had actually agreed to a
12% reduction for advance rentals for all of twenty eight years.
That is absurd. It is not normal for a person to agree to a
reduction corresponding to twenty eight years advance rentals
when all he is receiving in advance rentals is for only eight
years.
The deduction shall be for only eight years because that was
plainly what the parties intended at the time they signed the
lease agreement. "Simplistic" it may be, as the Solicitor
General describes it, but that is how the lessor understood the
arrangement. In fact, the Court will reject his subsequent
modification that the interest should be limited to only seven
years because the first year rental was not being paid in
advance. The agreement was for a uniform deduction for the
advance rentals for each of the eight years, and neither of the
parties can deviate from it now.
On the annual rental of P35,168.40, the deducted 12%
discount was P4,220.21; and for eight years, the total rental
was P281,347.20 from which was deducted the total discount
of P33,761.68, leaving a difference of P247,585.52.
Subtracting from this amount, the sum of P182,471.17 already
paid will leave a balance of P65,114.35 still due the plaintiff-
appellant.
The above computation is based on the more reasonable
interpretation of the contract as a whole rather on the single
stipulation invoked by the respondent for the flat reduction of
P130,288.47.
WHEREFORE, the decision of the trial court is hereby
modified, and the defendant-appellee Petrophil Corporation is
ordered to pay plaintiff-appellant the amount of Sixty Five
Thousand One Hundred Fourteen pesos and Thirty-Five
20
Centavos (P65,114.35), with interest at the legal rate until
fully paid, plus Ten Thousand Pesos (P10,000.00) as
attorney's fees. Costs against the defendant-appellee.
G.R. No. 115324 February 19, 2003
PRODUCERS BANK OF THE PHILIPPINES (now
FIRST INTERNATIONAL BANK), petitioner,
vs.
HON. COURT OF APPEALS AND FRANKLIN
VIVES, respondents.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari of the Decision1 of
the Court of Appeals dated June 25, 1991 in CA-G.R. CV No.
11791 and of its Resolution2 dated May 5, 1994, denying the
motion for reconsideration of said decision filed by petitioner
Producers Bank of the Philippines.
Sometime in 1979, private respondent Franklin Vives was
asked by his neighbor and friend Angeles Sanchez to help her
friend and townmate, Col. Arturo Doronilla, in incorporating
his business, the Sterela Marketing and Services ("Sterela" for
brevity). Specifically, Sanchez asked private respondent to
deposit in a bank a certain amount of money in the bank
account of Sterela for purposes of its incorporation. She
assured private respondent that he could withdraw his money
from said account within a month’s time. Private respondent
asked Sanchez to bring Doronilla to their house so that they
could discuss Sanchez’s request.3
On May 9, 1979, private respondent, Sanchez, Doronilla and a
certain Estrella Dumagpi, Doronilla’s private secretary, met
and discussed the matter. Thereafter, relying on the assurances
and representations of Sanchez and Doronilla, private
respondent issued a check in the amount of Two Hundred
Thousand Pesos (₱200,000.00) in favor of Sterela. Private
respondent instructed his wife, Mrs. Inocencia Vives, to
accompany Doronilla and Sanchez in opening a savings
account in the name of Sterela in the Buendia, Makati branch
of Producers Bank of the Philippines. However, only Sanchez,
Mrs. Vives and Dumagpi went to the bank to deposit the
check. They had with them an authorization letter from
Doronilla authorizing Sanchez and her companions, "in
coordination with Mr. Rufo Atienza," to open an account for
Sterela Marketing Services in the amount of ₱200,000.00. In
opening the account, the authorized signatories were Inocencia
Vives and/or Angeles Sanchez. A passbook for Savings
Account No. 10-1567 was thereafter issued to Mrs. Vives.4
Subsequently, private respondent learned that Sterela was no
longer holding office in the address previously given to him.
Alarmed, he and his wife went to the Bank to verify if their
money was still intact. The bank manager referred them to Mr.
Rufo Atienza, the assistant manager, who informed them that
part of the money in Savings Account No. 10-1567 had been
withdrawn by Doronilla, and that only ₱90,000.00 remained
therein. He likewise told them that Mrs. Vives could not
withdraw said remaining amount because it had to answer for
some postdated checks issued by Doronilla. According to
Atienza, after Mrs. Vives and Sanchez opened Savings
Account No. 10-1567, Doronilla opened Current Account No.
10-0320 for Sterela and authorized the Bank to debit Savings
Account No. 10-1567 for the amounts necessary to cover

overdrawings in Current Account No. 10-0320. In opening
said current account, Sterela, through Doronilla, obtained a
loan of ₱175,000.00 from the Bank. To cover payment
thereof, Doronilla issued three postdated checks, all of which
were dishonored. Atienza also said that Doronilla could assign
or withdraw the money in Savings Account No. 10-1567
because he was the sole proprietor of Sterela. 5
Private respondent tried to get in touch with Doronilla through
Sanchez. On June 29, 1979, he received a letter from
Doronilla, assuring him that his money was intact and would
be returned to him. On August 13, 1979, Doronilla issued a
postdated check for Two Hundred Twelve Thousand Pesos
(₱212,000.00) in favor of private respondent. However, upon
presentment thereof by private respondent to the drawee bank,
the check was dishonored. Doronilla requested private
respondent to present the same check on September 15, 1979
but when the latter presented the check, it was again
dishonored.6
Private respondent referred the matter to a lawyer, who made a
written demand upon Doronilla for the return of his client’s
money. Doronilla issued another check for ₱212,000.00 in
private respondent’s favor but the check was again dishonored
for insufficiency of funds.7
Private respondent instituted an action for recovery of sum of
money in the Regional Trial Court (RTC) in Pasig, Metro
Manila against Doronilla, Sanchez, Dumagpi and petitioner.
The case was docketed as Civil Case No. 44485. He also filed
criminal actions against Doronilla, Sanchez and Dumagpi in
the RTC. However, Sanchez passed away on March 16, 1985
while the case was pending before the trial court. On October
3, 1995, the RTC of Pasig, Branch 157, promulgated its
Decision in Civil Case No. 44485, the dispositive portion of
which reads:
IN VIEW OF THE FOREGOING, judgment is hereby
rendered sentencing defendants Arturo J. Doronila, Estrella
Dumagpi and Producers Bank of the Philippines to pay
plaintiff Franklin Vives jointly and severally –
(a) the amount of ₱200,000.00, representing the money
deposited, with interest at the legal rate from the filing of the
complaint until the same is fully paid;
(b) the sum of ₱50,000.00 for moral damages and a similar
amount for exemplary damages;
(c) the amount of ₱40,000.00 for attorney’s fees; and
(d) the costs of the suit.
SO ORDERED.8
Petitioner appealed the trial court’s decision to the Court of
Appeals. In its Decision dated June 25, 1991, the appellate
court affirmed in toto the decision of the RTC. 9 It likewise
denied with finality petitioner’s motion for reconsideration in
its Resolution dated May 5, 1994.10
On June 30, 1994, petitioner filed the present petition, arguing
that –
I.
THE HONORABLE COURT OF APPEALS ERRED IN
UPHOLDING THAT THE TRANSACTION BETWEEN
THE DEFENDANT DORONILLA AND RESPONDENT
VIVES WAS ONE OF SIMPLE LOAN AND NOT
ACCOMMODATION;
II.
21
THE HONORABLE COURT OF APPEALS ERRED IN
UPHOLDING THAT PETITIONER’S BANK MANAGER,
MR. RUFO ATIENZA, CONNIVED WITH THE OTHER
DEFENDANTS IN DEFRAUDING PETITIONER (Sic.
Should be PRIVATE RESPONDENT) AND AS A
CONSEQUENCE, THE PETITIONER SHOULD BE HELD
LIABLE UNDER THE PRINCIPLE OF NATURAL
JUSTICE;
III.
THE HONORABLE COURT OF APPEALS ERRED IN
ADOPTING THE ENTIRE RECORDS OF THE REGIONAL
TRIAL COURT AND AFFIRMING THE JUDGMENT
APPEALED FROM, AS THE FINDINGS OF THE
REGIONAL TRIAL COURT WERE BASED ON A
MISAPPREHENSION OF FACTS;
IV.
THE HONORABLE COURT OF APPEALS ERRED IN
DECLARING THAT THE CITED DECISION IN
SALUDARES VS. MARTINEZ, 29 SCRA 745,
UPHOLDING THE LIABILITY OF AN EMPLOYER FOR
ACTS COMMITTED BY AN EMPLOYEE IS
APPLICABLE;
V.
THE HONORABLE COURT OF APPEALS ERRED IN
UPHOLDING THE DECISION OF THE LOWER COURT
THAT HEREIN PETITIONER BANK IS JOINTLY AND
SEVERALLY LIABLE WITH THE OTHER DEFENDANTS
FOR THE AMOUNT OF P200,000.00 REPRESENTING
THE SAVINGS ACCOUNT DEPOSIT, P50,000.00 FOR
MORAL DAMAGES, P50,000.00 FOR EXEMPLARY
DAMAGES, P40,000.00 FOR ATTORNEY’S FEES AND
THE COSTS OF SUIT.11
Private respondent filed his Comment on September 23, 1994.
Petitioner filed its Reply thereto on September 25, 1995. The
Court then required private respondent to submit a rejoinder to
the reply. However, said rejoinder was filed only on April 21,
1997, due to petitioner’s delay in furnishing private
respondent with copy of the reply12 and several substitutions of
counsel on the part of private respondent. 13 On January 17,
2001, the Court resolved to give due course to the petition and
required the parties to submit their respective
memoranda.14 Petitioner filed its memorandum on April 16,
2001 while private respondent submitted his memorandum on
March 22, 2001.
Petitioner contends that the transaction between private
respondent and Doronilla is a simple loan (mutuum) since all
the elements of a mutuum are present: first, what was
delivered by private respondent to Doronilla was money, a
consumable thing; and second, the transaction was onerous as
Doronilla was obliged to pay interest, as evidenced by the
check issued by Doronilla in the amount of ₱212,000.00, or
₱12,000 more than what private respondent deposited in
Sterela’s bank account.15 Moreover, the fact that private
respondent sued his good friend Sanchez for his failure to
recover his money from Doronilla shows that the transaction
was not merely gratuitous but "had a business angle" to it.
Hence, petitioner argues that it cannot be held liable for the
return of private respondent’s ₱200,000.00 because it is not
privy to the transaction between the latter and Doronilla.16

It argues further that petitioner’s Assistant Manager, Mr. Rufo
Atienza, could not be faulted for allowing Doronilla to
withdraw from the savings account of Sterela since the latter
was the sole proprietor of said company. Petitioner asserts that
Doronilla’s May 8, 1979 letter addressed to the bank,
authorizing Mrs. Vives and Sanchez to open a savings account
for Sterela, did not contain any authorization for these two to
withdraw from said account. Hence, the authority to withdraw
therefrom remained exclusively with Doronilla, who was the
sole proprietor of Sterela, and who alone had legal title to the
savings account.17 Petitioner points out that no evidence other
than the testimonies of private respondent and Mrs. Vives was
presented during trial to prove that private respondent
deposited his ₱200,000.00 in Sterela’s account for purposes of
its incorporation.18 Hence, petitioner should not be held liable
for allowing Doronilla to withdraw from Sterela’s savings
account.1a\^/phi1.net
Petitioner also asserts that the Court of Appeals erred in
affirming the trial court’s decision since the findings of fact
therein were not accord with the evidence presented by
petitioner during trial to prove that the transaction between
private respondent and Doronilla was a mutuum, and that it
committed no wrong in allowing Doronilla to withdraw from
Sterela’s savings account.19
Finally, petitioner claims that since there is no wrongful act or
omission on its part, it is not liable for the actual damages
suffered by private respondent, and neither may it be held
liable for moral and exemplary damages as well as attorney’s
fees.20
Private respondent, on the other hand, argues that the
transaction between him and Doronilla is not a mutuum but an
accommodation,21 since he did not actually part with the
ownership of his ₱200,000.00 and in fact asked his wife to
deposit said amount in the account of Sterela so that a
certification can be issued to the effect that Sterela had
sufficient funds for purposes of its incorporation but at the
same time, he retained some degree of control over his money
through his wife who was made a signatory to the savings
account and in whose possession the savings account
passbook was given.22
He likewise asserts that the trial court did not err in finding
that petitioner, Atienza’s employer, is liable for the return of
his money. He insists that Atienza, petitioner’s assistant
manager, connived with Doronilla in defrauding private
respondent since it was Atienza who facilitated the opening of
Sterela’s current account three days after Mrs. Vives and
Sanchez opened a savings account with petitioner for said
company, as well as the approval of the authority to debit
Sterela’s savings account to cover any overdrawings in its
current account.23
There is no merit in the petition.
At the outset, it must be emphasized that only questions of law
may be raised in a petition for review filed with this Court.
The Court has repeatedly held that it is not its function to
analyze and weigh all over again the evidence presented by
the parties during trial.24 The Court’s jurisdiction is in
principle limited to reviewing errors of law that might have
been committed by the Court of Appeals. 25 Moreover, factual
findings of courts, when adopted and confirmed by the Court
of Appeals, are final and conclusive on this Court unless these
22
findings are not supported by the evidence on record. 26 There
is no showing of any misapprehension of facts on the part of
the Court of Appeals in the case at bar that would require this
Court to review and overturn the factual findings of that court,
especially since the conclusions of fact of the Court of
Appeals and the trial court are not only consistent but are also
amply supported by the evidence on record.
No error was committed by the Court of Appeals when it ruled
that the transaction between private respondent and Doronilla
was a commodatum and not a mutuum. A circumspect
examination of the records reveals that the transaction
between them was a commodatum. Article 1933 of the Civil
Code distinguishes between the two kinds of loans in this
wise:
By the contract of loan, one of the parties delivers to another,
either something not consumable so that the latter may use the
same for a certain time and return it, in which case the contract
is called a commodatum; or money or other consumable thing,
upon the condition that the same amount of the same kind and
quality shall be paid, in which case the contract is simply
called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay
interest.
In commodatum, the bailor retains the ownership of the thing
loaned, while in simple loan, ownership passes to the
borrower.
The foregoing provision seems to imply that if the subject of
the contract is a consumable thing, such as money, the
contract would be a mutuum. However, there are some
instances where a commodatum may have for its object a
consumable thing. Article 1936 of the Civil Code provides:
Consumable goods may be the subject of commodatum if the
purpose of the contract is not the consumption of the object, as
when it is merely for exhibition.
Thus, if consumable goods are loaned only for purposes of
exhibition, or when the intention of the parties is to lend
consumable goods and to have the very same goods returned
at the end of the period agreed upon, the loan is a
commodatum and not a mutuum.
The rule is that the intention of the parties thereto shall be
accorded primordial consideration in determining the actual
character of a contract.27 In case of doubt, the
contemporaneous and subsequent acts of the parties shall be
considered in such determination.28
As correctly pointed out by both the Court of Appeals and the
trial court, the evidence shows that private respondent agreed
to deposit his money in the savings account of Sterela
specifically for the purpose of making it appear "that said firm
had sufficient capitalization for incorporation, with the
promise that the amount shall be returned within thirty (30)
days."29 Private respondent merely "accommodated" Doronilla
by lending his money without consideration, as a favor to his
good friend Sanchez. It was however clear to the parties to the
transaction that the money would not be removed from
Sterela’s savings account and would be returned to private
respondent after thirty (30) days.
Doronilla’s attempts to return to private respondent the
amount of ₱200,000.00 which the latter deposited in Sterela’s
account together with an additional ₱12,000.00, allegedly

representing interest on the mutuum, did not convert the
transaction from a commodatum into a mutuum because such
was not the intent of the parties and because the additional
₱12,000.00 corresponds to the fruits of the lending of the
₱200,000.00. Article 1935 of the Civil Code expressly states
that "[t]he bailee in commodatum acquires the use of the thing
loaned but not its fruits." Hence, it was only proper for
Doronilla to remit to private respondent the interest accruing
to the latter’s money deposited with petitioner.
Neither does the Court agree with petitioner’s contention that
it is not solidarily liable for the return of private respondent’s
money because it was not privy to the transaction between
Doronilla and private respondent. The nature of said
transaction, that is, whether it is a mutuum or a commodatum,
has no bearing on the question of petitioner’s liability for the
return of private respondent’s money because the factual
circumstances of the case clearly show that petitioner, through
its employee Mr. Atienza, was partly responsible for the loss
of private respondent’s money and is liable for its restitution.
Petitioner’s rules for savings deposits written on the passbook
it issued Mrs. Vives on behalf of Sterela for Savings Account
No. 10-1567 expressly states that—
"2. Deposits and withdrawals must be made by the depositor
personally or upon his written authority duly authenticated,
and neither a deposit nor a withdrawal will be permitted
except upon the production of the depositor savings bank book
in which will be entered by the Bank the amount deposited or
withdrawn."30
Said rule notwithstanding, Doronilla was permitted by
petitioner, through Atienza, the Assistant Branch Manager for
the Buendia Branch of petitioner, to withdraw therefrom even
without presenting the passbook (which Atienza very well
knew was in the possession of Mrs. Vives), not just once, but
several times. Both the Court of Appeals and the trial court
found that Atienza allowed said withdrawals because he was
party to Doronilla’s "scheme" of defrauding private
respondent:
XXX
But the scheme could not have been executed successfully
without the knowledge, help and cooperation of Rufo Atienza,
assistant manager and cashier of the Makati (Buendia) branch
of the defendant bank. Indeed, the evidence indicates that
Atienza had not only facilitated the commission of the fraud
but he likewise helped in devising the means by which it can
be done in such manner as to make it appear that the
transaction was in accordance with banking procedure.
To begin with, the deposit was made in defendant’s Buendia
branch precisely because Atienza was a key officer therein.
The records show that plaintiff had suggested that the
₱200,000.00 be deposited in his bank, the Manila Banking
Corporation, but Doronilla and Dumagpi insisted that it must
be in defendant’s branch in Makati for "it will be easier for
them to get a certification". In fact before he was introduced to
plaintiff, Doronilla had already prepared a letter addressed to
the Buendia branch manager authorizing Angeles B. Sanchez
and company to open a savings account for Sterela in the
amount of ₱200,000.00, as "per coordination with Mr. Rufo
Atienza, Assistant Manager of the Bank x x x" (Exh. 1). This
is a clear manifestation that the other defendants had been in
consultation with Atienza from the inception of the scheme.
23
Significantly, there were testimonies and admission that
Atienza is the brother-in-law of a certain Romeo Mirasol, a
friend and business associate of Doronilla.1awphi1.nét
Then there is the matter of the ownership of the fund. Because
of the "coordination" between Doronilla and Atienza, the latter
knew before hand that the money deposited did not belong to
Doronilla nor to Sterela. Aside from such foreknowledge, he
was explicitly told by Inocencia Vives that the money
belonged to her and her husband and the deposit was merely to
accommodate Doronilla. Atienza even declared that the
money came from Mrs. Vives.
Although the savings account was in the name of Sterela, the
bank records disclose that the only ones empowered to
withdraw the same were Inocencia Vives and Angeles B.
Sanchez. In the signature card pertaining to this account (Exh.
J), the authorized signatories were Inocencia Vives &/or
Angeles B. Sanchez. Atienza stated that it is the usual banking
procedure that withdrawals of savings deposits could only be
made by persons whose authorized signatures are in the
signature cards on file with the bank. He, however, said that
this procedure was not followed here because Sterela was
owned by Doronilla. He explained that Doronilla had the full
authority to withdraw by virtue of such ownership. The Court
is not inclined to agree with Atienza. In the first place, he was
all the time aware that the money came from Vives and did
not belong to Sterela. He was also told by Mrs. Vives that they
were only accommodating Doronilla so that a certification can
be issued to the effect that Sterela had a deposit of so much
amount to be sued in the incorporation of the firm. In the
second place, the signature of Doronilla was not authorized in
so far as that account is concerned inasmuch as he had not
signed the signature card provided by the bank whenever a
deposit is opened. In the third place, neither Mrs. Vives nor
Sanchez had given Doronilla the authority to withdraw.
Moreover, the transfer of fund was done without the passbook
having been presented. It is an accepted practice that
whenever a withdrawal is made in a savings deposit, the bank
requires the presentation of the passbook. In this case, such
recognized practice was dispensed with. The transfer from the
savings account to the current account was without the
submission of the passbook which Atienza had given to Mrs.
Vives. Instead, it was made to appear in a certification signed
by Estrella Dumagpi that a duplicate passbook was issued to
Sterela because the original passbook had been surrendered to
the Makati branch in view of a loan accommodation assigning
the savings account (Exh. C). Atienza, who undoubtedly had a
hand in the execution of this certification, was aware that the
contents of the same are not true. He knew that the passbook
was in the hands of Mrs. Vives for he was the one who gave it
to her. Besides, as assistant manager of the branch and the
bank official servicing the savings and current accounts in
question, he also was aware that the original passbook was
never surrendered. He was also cognizant that Estrella
Dumagpi was not among those authorized to withdraw so her
certification had no effect whatsoever.
The circumstance surrounding the opening of the current
account also demonstrate that Atienza’s active participation in
the perpetration of the fraud and deception that caused the
loss. The records indicate that this account was opened three
days later after the ₱200,000.00 was deposited. In spite of his

disclaimer, the Court believes that Atienza was mindful and
posted regarding the opening of the current account
considering that Doronilla was all the while in "coordination"
with him. That it was he who facilitated the approval of the
authority to debit the savings account to cover any
overdrawings in the current account (Exh. 2) is not hard to
comprehend.
Clearly Atienza had committed wrongful acts that had resulted
to the loss subject of this case. x x x.31
Under Article 2180 of the Civil Code, employers shall be held
primarily and solidarily liable for damages caused by their
employees acting within the scope of their assigned tasks. To
hold the employer liable under this provision, it must be
shown that an employer-employee relationship exists, and that
the employee was acting within the scope of his assigned task
when the act complained of was committed.32 Case law in the
United States of America has it that a corporation that entrusts
a general duty to its employee is responsible to the injured
party for damages flowing from the employee’s wrongful act
done in the course of his general authority, even though in
doing such act, the employee may have failed in its duty to the
employer and disobeyed the latter’s instructions. 33
There is no dispute that Atienza was an employee of
petitioner. Furthermore, petitioner did not deny that Atienza
was acting within the scope of his authority as Assistant
Branch Manager when he assisted Doronilla in withdrawing
funds from Sterela’s Savings Account No. 10-1567, in which
account private respondent’s money was deposited, and in
transferring the money withdrawn to Sterela’s Current
Account with petitioner. Atienza’s acts of helping Doronilla, a
customer of the petitioner, were obviously done in furtherance
of petitioner’s interests34 even though in the process, Atienza
violated some of petitioner’s rules such as those stipulated in
its savings account passbook.35 It was established that the
transfer of funds from Sterela’s savings account to its current
account could not have been accomplished by Doronilla
without the invaluable assistance of Atienza, and that it was
their connivance which was the cause of private respondent’s
loss.
The foregoing shows that the Court of Appeals correctly held
that under Article 2180 of the Civil Code, petitioner is liable
for private respondent’s loss and is solidarily liable with
Doronilla and Dumagpi for the return of the ₱200,000.00 since
it is clear that petitioner failed to prove that it exercised due
diligence to prevent the unauthorized withdrawals from
Sterela’s savings account, and that it was not negligent in the
selection and supervision of Atienza. Accordingly, no error
was committed by the appellate court in the award of actual,
moral and exemplary damages, attorney’s fees and costs of
suit to private respondent.
WHEREFORE, the petition is hereby DENIED. The assailed
Decision and Resolution of the Court of Appeals are
AFFIRMED.
G.R. No. 80294-95 September 21, 1988
CATHOLIC VICAR APOSTOLIC OF THE MOUNTAIN
PROVINCE, petitioner,
vs.
COURT OF APPEALS, HEIRS OF EGMIDIO
OCTAVIANO AND JUAN VALDEZ, respondents.
Valdez, Ereso, Polido & Associates for petitioner.
24
Claustro, Claustro, Claustro Law Office collaborating counsel
for petitioner.
Jaime G. de Leon for the Heirs of Egmidio Octaviano.
Cotabato Law Office for the Heirs of Juan Valdez.
GANCAYCO, J.:
The principal issue in this case is whether or not a decision of
the Court of Appeals promulgated a long time ago can
properly be considered res judicata by respondent Court of
Appeals in the present two cases between petitioner and two
private respondents.
Petitioner questions as allegedly erroneous the Decision dated
August 31, 1987 of the Ninth Division of Respondent Court of
Appeals 1 in CA-G.R. No. 05148 [Civil Case No. 3607 (419)]
and CA-G.R. No. 05149 [Civil Case No. 3655 (429)], both for
Recovery of Possession, which affirmed the Decision of the
Honorable Nicodemo T. Ferrer, Judge of the Regional Trial
Court of Baguio and Benguet in Civil Case No. 3607 (419)
and Civil Case No. 3655 (429), with the dispositive portion as
follows:
WHEREFORE, Judgment is hereby rendered ordering the
defendant, Catholic Vicar Apostolic of the Mountain Province
to return and surrender Lot 2 of Plan Psu-194357 to the
plaintiffs. Heirs of Juan Valdez, and Lot 3 of the same Plan to
the other set of plaintiffs, the Heirs of Egmidio Octaviano
(Leonardo Valdez, et al.). For lack or insufficiency of
evidence, the plaintiffs' claim or damages is hereby denied.
Said defendant is ordered to pay costs. (p. 36, Rollo)
Respondent Court of Appeals, in affirming the trial court's
decision, sustained the trial court's conclusions that the
Decision of the Court of Appeals, dated May 4,1977 in CA-
G.R. No. 38830-R, in the two cases affirmed by the Supreme
Court, touched on the ownership of lots 2 and 3 in question;
that the two lots were possessed by the predecessors-in-
interest of private respondents under claim of ownership in
good faith from 1906 to 1951; that petitioner had been in
possession of the same lots as bailee in commodatum up to
1951, when petitioner repudiated the trust and when it applied
for registration in 1962; that petitioner had just been in
possession as owner for eleven years, hence there is no
possibility of acquisitive prescription which requires 10 years
possession with just title and 30 years of possession without;
that the principle of res judicata on these findings by the Court
of Appeals will bar a reopening of these questions of facts;
and that those facts may no longer be altered.
Petitioner's motion for reconsideation of the respondent
appellate court's Decision in the two aforementioned cases
(CA G.R. No. CV-05418 and 05419) was denied.
The facts and background of these cases as narrated by the
trail court are as follows —
... The documents and records presented reveal that the whole
controversy started when the defendant Catholic Vicar
Apostolic of the Mountain Province (VICAR for brevity) filed
with the Court of First Instance of Baguio Benguet on
September 5, 1962 an application for registration of title over
Lots 1, 2, 3, and 4 in Psu-194357, situated at Poblacion
Central, La Trinidad, Benguet, docketed as LRC N-91, said
Lots being the sites of the Catholic Church building, convents,
high school building, school gymnasium, school dormitories,
social hall, stonewalls, etc. On March 22, 1963 the Heirs of

Juan Valdez and the Heirs of Egmidio Octaviano filed their
Answer/Opposition on Lots Nos. 2 and 3, respectively,
asserting ownership and title thereto. After trial on the merits,
the land registration court promulgated its Decision, dated
November 17, 1965, confirming the registrable title of VICAR
to Lots 1, 2, 3, and 4.
The Heirs of Juan Valdez (plaintiffs in the herein Civil Case
No. 3655) and the Heirs of Egmidio Octaviano (plaintiffs in
the herein Civil Case No. 3607) appealed the decision of the
land registration court to the then Court of Appeals, docketed
as CA-G.R. No. 38830-R. The Court of Appeals rendered its
decision, dated May 9, 1977, reversing the decision of the land
registration court and dismissing the VICAR's application as
to Lots 2 and 3, the lots claimed by the two sets of oppositors
in the land registration case (and two sets of plaintiffs in the
two cases now at bar), the first lot being presently occupied by
the convent and the second by the women's dormitory and the
sister's convent.
On May 9, 1977, the Heirs of Octaviano filed a motion for
reconsideration praying the Court of Appeals to order the
registration of Lot 3 in the names of the Heirs of Egmidio
Octaviano, and on May 17, 1977, the Heirs of Juan Valdez
and Pacita Valdez filed their motion for reconsideration
praying that both Lots 2 and 3 be ordered registered in the
names of the Heirs of Juan Valdez and Pacita Valdez. On
August 12,1977, the Court of Appeals denied the motion for
reconsideration filed by the Heirs of Juan Valdez on the
ground that there was "no sufficient merit to justify
reconsideration one way or the other ...," and likewise denied
that of the Heirs of Egmidio Octaviano.
Thereupon, the VICAR filed with the Supreme Court a
petition for review on certiorari of the decision of the Court of
Appeals dismissing his (its) application for registration of Lots
2 and 3, docketed as G.R. No. L-46832, entitled 'Catholic
Vicar Apostolic of the Mountain Province vs. Court of
Appeals and Heirs of Egmidio Octaviano.'
From the denial by the Court of Appeals of their motion for
reconsideration the Heirs of Juan Valdez and Pacita Valdez,
on September 8, 1977, filed with the Supreme Court a petition
for review, docketed as G.R. No. L-46872, entitled, Heirs of
Juan Valdez and Pacita Valdez vs. Court of Appeals, Vicar,
Heirs of Egmidio Octaviano and Annable O. Valdez.
On January 13, 1978, the Supreme Court denied in a minute
resolution both petitions (of VICAR on the one hand and the
Heirs of Juan Valdez and Pacita Valdez on the other) for lack
of merit. Upon the finality of both Supreme Court resolutions
in G.R. No. L-46832 and G.R. No. L- 46872, the Heirs of
Octaviano filed with the then Court of First Instance of
Baguio, Branch II, a Motion For Execution of Judgment
praying that the Heirs of Octaviano be placed in possession of
Lot 3. The Court, presided over by Hon. Salvador J. Valdez,
on December 7, 1978, denied the motion on the ground that
the Court of Appeals decision in CA-G.R. No. 38870 did not
grant the Heirs of Octaviano any affirmative relief.
On February 7, 1979, the Heirs of Octaviano filed with the
Court of Appeals a petitioner for certiorari and mandamus,
docketed as CA-G.R. No. 08890-R, entitled Heirs of Egmidio
Octaviano vs. Hon. Salvador J. Valdez, Jr. and Vicar. In its
decision dated May 16, 1979, the Court of Appeals dismissed
the petition.
25
It was at that stage that the instant cases were filed. The Heirs
of Egmidio Octaviano filed Civil Case No. 3607 (419) on July
24, 1979, for recovery of possession of Lot 3; and the Heirs of
Juan Valdez filed Civil Case No. 3655 (429) on September 24,
1979, likewise for recovery of possession of Lot 2 (Decision,
pp. 199-201, Orig. Rec.).
In Civil Case No. 3607 (419) trial was held. The plaintiffs
Heirs of Egmidio Octaviano presented one (1) witness,
Fructuoso Valdez, who testified on the alleged ownership of
the land in question (Lot 3) by their predecessor-in-interest,
Egmidio Octaviano (Exh. C ); his written demand (Exh. B—
B-4 ) to defendant Vicar for the return of the land to them; and
the reasonable rentals for the use of the land at P10,000.00 per
month. On the other hand, defendant Vicar presented the
Register of Deeds for the Province of Benguet, Atty. Nicanor
Sison, who testified that the land in question is not covered by
any title in the name of Egmidio Octaviano or any of the
plaintiffs (Exh. 8). The defendant dispensed with the
testimony of Mons.William Brasseur when the plaintiffs
admitted that the witness if called to the witness stand, would
testify that defendant Vicar has been in possession of Lot 3,
for seventy-five (75) years continuously and peacefully and
has constructed permanent structures thereon.
In Civil Case No. 3655, the parties admitting that the material
facts are not in dispute, submitted the case on the sole issue of
whether or not the decisions of the Court of Appeals and the
Supreme Court touching on the ownership of Lot 2, which in
effect declared the plaintiffs the owners of the land
constitute res judicata.
In these two cases , the plaintiffs arque that the defendant
Vicar is barred from setting up the defense of ownership
and/or long and continuous possession of the two lots in
question since this is barred by prior judgment of the Court of
Appeals in CA-G.R. No. 038830-R under the principle of res
judicata. Plaintiffs contend that the question of possession and
ownership have already been determined by the Court of
Appeals (Exh. C, Decision, CA-G.R. No. 038830-R) and
affirmed by the Supreme Court (Exh. 1, Minute Resolution of
the Supreme Court). On his part, defendant Vicar maintains
that the principle of res judicata would not prevent them from
litigating the issues of long possession and ownership because
the dispositive portion of the prior judgment in CA-G.R. No.
038830-R merely dismissed their application for registration
and titling of lots 2 and 3. Defendant Vicar contends that only
the dispositive portion of the decision, and not its body, is the
controlling pronouncement of the Court of Appeals. 2
The alleged errors committed by respondent Court of Appeals
according to petitioner are as follows:
1. ERROR IN APPLYING LAW OF THE CASE AND RES
JUDICATA;
2. ERROR IN FINDING THAT THE TRIAL COURT
RULED THAT LOTS 2 AND 3 WERE ACQUIRED BY
PURCHASE BUT WITHOUT DOCUMENTARY
EVIDENCE PRESENTED;
3. ERROR IN FINDING THAT PETITIONERS' CLAIM IT
PURCHASED LOTS 2 AND 3 FROM VALDEZ AND
OCTAVIANO WAS AN IMPLIED ADMISSION THAT
THE FORMER OWNERS WERE VALDEZ AND
OCTAVIANO;

4. ERROR IN FINDING THAT IT WAS PREDECESSORS
OF PRIVATE RESPONDENTS WHO WERE IN
POSSESSION OF LOTS 2 AND 3 AT LEAST FROM 1906,
AND NOT PETITIONER;
5. ERROR IN FINDING THAT VALDEZ AND
OCTAVIANO HAD FREE PATENT APPLICATIONS AND
THE PREDECESSORS OF PRIVATE RESPONDENTS
ALREADY HAD FREE PATENT APPLICATIONS SINCE
1906;
6. ERROR IN FINDING THAT PETITIONER DECLARED
LOTS 2 AND 3 ONLY IN 1951 AND JUST TITLE IS A
PRIME NECESSITY UNDER ARTICLE 1134 IN
RELATION TO ART. 1129 OF THE CIVIL CODE FOR
ORDINARY ACQUISITIVE PRESCRIPTION OF 10
YEARS;
7. ERROR IN FINDING THAT THE DECISION OF THE
COURT OF APPEALS IN CA G.R. NO. 038830 WAS
AFFIRMED BY THE SUPREME COURT;
8. ERROR IN FINDING THAT THE DECISION IN CA G.R.
NO. 038830 TOUCHED ON OWNERSHIP OF LOTS 2 AND
3 AND THAT PRIVATE RESPONDENTS AND THEIR
PREDECESSORS WERE IN POSSESSION OF LOTS 2
AND 3 UNDER A CLAIM OF OWNERSHIP IN GOOD
FAITH FROM 1906 TO 1951;
9. ERROR IN FINDING THAT PETITIONER HAD BEEN
IN POSSESSION OF LOTS 2 AND 3 MERELY AS BAILEE
BOR ROWER) IN COMMODATUM, A GRATUITOUS
LOAN FOR USE;
10. ERROR IN FINDING THAT PETITIONER IS A
POSSESSOR AND BUILDER IN GOOD FAITH WITHOUT
RIGHTS OF RETENTION AND REIMBURSEMENT AND
IS BARRED BY THE FINALITY AND
CONCLUSIVENESS OF THE DECISION IN CA G.R. NO.
038830. 3
The petition is bereft of merit.
Petitioner questions the ruling of respondent Court of Appeals
in CA-G.R. Nos. 05148 and 05149, when it clearly held that it
was in agreement with the findings of the trial court that the
Decision of the Court of Appeals dated May 4,1977 in CA-
G.R. No. 38830-R, on the question of ownership of Lots 2 and
3, declared that the said Court of Appeals Decision CA-G.R.
No. 38830-R) did not positively declare private respondents as
owners of the land, neither was it declared that they were not
owners of the land, but it held that the predecessors of private
respondents were possessors of Lots 2 and 3, with claim of
ownership in good faith from 1906 to 1951. Petitioner was in
possession as borrower in commodatum up to 1951, when it
repudiated the trust by declaring the properties in its name for
taxation purposes. When petitioner applied for registration of
Lots 2 and 3 in 1962, it had been in possession in concept of
owner only for eleven years. Ordinary acquisitive prescription
requires possession for ten years, but always with just title.
Extraordinary acquisitive prescription requires 30 years. 4
On the above findings of facts supported by evidence and
evaluated by the Court of Appeals in CA-G.R. No. 38830-R,
affirmed by this Court, We see no error in respondent
appellate court's ruling that said findings are res
judicatabetween the parties. They can no longer be altered by
presentation of evidence because those issues were resolved
with finality a long time ago. To ignore the principle of res
26
judicata would be to open the door to endless litigations by
continuous determination of issues without end.
An examination of the Court of Appeals Decision dated May
4, 1977, First Division 5 in CA-G.R. No. 38830-R, shows that
it reversed the trial court's Decision 6 finding petitioner to be
entitled to register the lands in question under its ownership,
on its evaluation of evidence and conclusion of facts.
The Court of Appeals found that petitioner did not meet the
requirement of 30 years possession for acquisitive prescription
over Lots 2 and 3. Neither did it satisfy the requirement of 10
years possession for ordinary acquisitive prescription because
of the absence of just title. The appellate court did not believe
the findings of the trial court that Lot 2 was acquired from
Juan Valdez by purchase and Lot 3 was acquired also by
purchase from Egmidio Octaviano by petitioner Vicar because
there was absolutely no documentary evidence to support the
same and the alleged purchases were never mentioned in the
application for registration.
By the very admission of petitioner Vicar, Lots 2 and 3 were
owned by Valdez and Octaviano. Both Valdez and Octaviano
had Free Patent Application for those lots since 1906. The
predecessors of private respondents, not petitioner Vicar, were
in possession of the questioned lots since 1906.
There is evidence that petitioner Vicar occupied Lots 1 and 4,
which are not in question, but not Lots 2 and 3, because the
buildings standing thereon were only constructed after
liberation in 1945. Petitioner Vicar only declared Lots 2 and 3
for taxation purposes in 1951. The improvements oil Lots 1, 2,
3, 4 were paid for by the Bishop but said Bishop was
appointed only in 1947, the church was constructed only in
1951 and the new convent only 2 years before the trial in
1963.
When petitioner Vicar was notified of the oppositor's claims,
the parish priest offered to buy the lot from Fructuoso Valdez.
Lots 2 and 3 were surveyed by request of petitioner Vicar only
in 1962.
Private respondents were able to prove that their predecessors'
house was borrowed by petitioner Vicar after the church and
the convent were destroyed. They never asked for the return of
the house, but when they allowed its free use, they became
bailors in commodatum and the petitioner the bailee. The
bailees' failure to return the subject matter of commodatum to
the bailor did not mean adverse possession on the part of the
borrower. The bailee held in trust the property subject matter
of commodatum. The adverse claim of petitioner came only in
1951 when it declared the lots for taxation purposes. The
action of petitioner Vicar by such adverse claim could not
ripen into title by way of ordinary acquisitive prescription
because of the absence of just title.
The Court of Appeals found that the predecessors-in-interest
and private respondents were possessors under claim of
ownership in good faith from 1906; that petitioner Vicar was
only a bailee in commodatum; and that the adverse claim and
repudiation of trust came only in 1951.
We find no reason to disregard or reverse the ruling of the
Court of Appeals in CA-G.R. No. 38830-R. Its findings of fact
have become incontestible. This Court declined to review said
decision, thereby in effect, affirming it. It has become final
and executory a long time ago.

Respondent appellate court did not commit any reversible
error, much less grave abuse of discretion, when it held that
the Decision of the Court of Appeals in CA-G.R. No. 38830-R
is governing, under the principle of res judicata, hence the
rule, in the present cases CA-G.R. No. 05148 and CA-G.R.
No. 05149. The facts as supported by evidence established in
that decision may no longer be altered.
WHEREFORE AND BY REASON OF THE FOREGOING,
this petition is DENIED for lack of merit, the Decision dated
Aug. 31, 1987 in CA-G.R. Nos. 05148 and 05149, by
respondent Court of Appeals is AFFIRMED, with costs
against petitioner.
G.R. No. 96494 May 28, 1992
CASA FILIPINA DEVELOPMENT
CORPORATION, petitioner,
vs.
THE DEPUTY EXECUTIVE SECRETARY, OFFICE OF
THE PRESIDENT, MALACAÑANG, MANILA, AND
JOSE VALENZUELA, JR., respondents.
MEDIALDEA, J.:
This is a petition for review on certiorari (treated as a petition
for certiorari) seeking reversal of the decision of the Office of
the President dated April 11, 1989, in O.P. Case No. 3722,
entitled "Casa Filipina Development Corporation,
Respondent-Appellant, v. Jose Valenzuela, Jr., Complainant-
Appellee," which affirmed the decision of the Housing and
Land Use Regulatory Board dated October 6, 1987; and its
resolution dated September 26, 1989, which denied the motion
for reconsideration for Lack of merit.
The antecedent facts are, as follows:
On June 30, 1986, private respondent Jose Valenzuela, Jr.
filed a complaint against petitioner Casa Filipina Development
Corporation before the Office of Appeals, Adjudication and
Legal Affairs (OAALA) of the then Human Settlements
Regulatory Commission (now Housing and Land Use
Regulatory Board) for its failure to execute and deliver the
deed of sale and transfer certificate of title. He alleged therein
that on May 2, 1984, he entered into a contract to sell with
petitioner for the purchase of a 120 sq. m. lot denominated as
Lot 8, Block 9, Phase II of Casa Filipina, Sucat II, Bo. San
Dionisio, Parañaque, Metro Manila, for a total purchase price
of P68,400.00 with P16,416.00 as downpayment and the
balance of P51,984.00 to be paid in 12 equal monthly
installments of P4,915.16 with 24% interest per
annum starting September 3, 1984; that on October 7, 1985, he
made his full and final payment under O.R. No. 6266; that
despite full payment of the lot, petitioner refused to execute
the necessary deed of absolute sale and deliver the
corresponding transfer certificate of title to him; that since
October 1985, he had offered to pay for or reimburse
petitioner the expenses for the transfer of the title but the latter
refuses to accept the same; and that he was constrained to hire
a lawyer for a fee to protect his interests.
For petitioner's defense, it contended that private respondent's
action is premature because of his failure to comply with the
other conditional requirements of their contract such as
payment of transfer expenses, and that had the latter paid said
fees, it would have been very much willing to effect the
transfer of the title.
27
On January 21, 1987, the OAALA rendered judgment in favor
of private respondent, relying on Section 25 of Presidential
Decree No. 957 (Regulating the Sale of Subdivision Lots and
Condominiums, Providing Penalties for Violations thereof),
which provides:
Sec. 25. Issuance of Title –– The owner or developer shall
deliver the title of the lot or unit to the buyer upon full
payment of the lot or unit. No fee except those required for the
registration of the deed of sale in the Registry of deeds shall
be collected for the issuance of such title. In the event a
mortgage over the lot or unit is outstanding at the time of the
issuance of the title to the buyer, the owner of or developer
shall redeem the mortgage or the corresponding portion
thereof within six months from such issuance in order that the
title over any fully paid lot or unit may be secured and
delivered to the buyer in accordance herewith.
The dispositive portion of its decision reads (p. 19, Rollo):
WHEREFORE, PREMISES CONSIDERED, judgment is
rendered ordering respondent, within 15 days from finality of
this decision, to execute the deed of absolute sale for Lot 8,
Block 9, Phase II, Casa Filipina, Sucat II, Bo. San Dionisio,
Parañaque, Metro Manila in favor of the complainant and
thereafter to bill complainant the total amount due for the
registration and transfer expenses of the title. Respondent is
further ordered, within 15 days from receipt of complainant's
payment for registration and transfer expenses, to deliver to
the latter the transfer certificate of title of subject lot free from
all liens and encumbrances. In the event respondent is unable
to deliver the title to the said lot, respondent is hereby ordered
to refund (to) complainant his total payments amounting to
SEVENTY SIX THOUSAND ONE HUNDRED EIGHTY
PESOS and 82/100 (P76,180.82) plus 24% interest per
annum from June 30, 1986, the date of the filing of the
complaint, until fully paid. Respondent is likewise ordered to
pay complainant TWO THOUSAND PESOS (P2,000.00) by
way of attorney's fees, for compelling the latter to litigate and
incur expenses in the protection of his rights.
It is SO ORDERED.
Petitioner then filed an appeal before the Housing and Land
Use Regulatory Board. In petitioner's memorandum, it
narrated the events that transpired which led to its failure to
deliver the title, namely: its original mortgagee bank was
Royal Savings Bank which was absorbed by Comsavings
Bank apparently due to bankrun; Comsavings Bank is not
amenable to petitioner's earlier arrangement with Royal
Savings Bank on individual redemption of title, thus, it
demanded that petitioner's obligations should be paid prior to
the release of any individual title; petitioner cannot seasonably
meet such demand due to the inability of the past
administration to put up a viable and progressive economic
program that brought it into a fix situation wherein it has no
participation either intentionally or by negligence.
On October 6, 1987, the HLURB dismissed petitioner's appeal
for lack of merit and affirmed in toto the questioned decision
of the OAALA (p. 23, Rollo). It opined that (ibid):
. . . Suffice it to state that the payment in full by the
complainant-appellee of the purchased (sic) price of the lot
should warrant the immediate delivery of the title to the lot so
purchased. Section 25 of P.D. 957 clearly provides that the
redemption by the mortgagor or (sic) any mortgage (sic)

property shall be within a period of six (6) months from (the)
date of issuance of the title in favor of the buyer. Obviously
from the moment full payment is made by the buyer to (sic)
his purchased lot, the maximum period contemplated by law
for delivery of title is only six (6) months. Within this period it
becomes mandatory upon the owner or developer of a
subdivision to deliver (the) title to the lot buyer. In the case at
bar, full payment was made on October 7, 1985 and despite
the lapse of one (1) year more or less from (the) date of full
payment, delivery of (the) title is still uncertain.
The defense of the respondent-appellant that its failure to
deliver the title allegedly due to the inability of the past
administration to put up a viable and progressive economic
program which led to the closure of the Royal Savings Bank
as its original mortgagee bank in not well-taken since there is
no proof submitted to this Board to sunbstantiate appellant's
claim. On the contrary it was only the OAALA decision that
made the respondent-appellant change its line of justification
which happened to be just an allegation which need not be
passed upon by this Board.
Petitioner appealed further to the Office of the President.
Again, on April 11, 1989, its appeal was dismissed for lack of
merit and the questioned decision of the HLURB was affirmed
(p. 32, Rollo). On September 26, 1989, the motion for
reconsideration was denied for lack of merit (p. 36, Rollo).
Hence, the present petition, wherein petitioner raises the
following issues (pp. 9-10 Rollo):
1. THE RESPONDENT DEPUTY EXECUTIVE
SECRETARY, WITH DUE RESPECT ERRED IN NOT
APPLYING SETTLED JURISPRUDENCE AND THE
PROVISION OF LAW APPLICABLE IN THIS CASE.
2. THE RESPONDENT DEPUTY EXECUTIVE
SECRETARY, WITH DUE RESPECT, ERRED IN
ARRIVING AT A CONCLUSION CONTRADICTORY OF
(sic) THE FACTS AND EVIDENCE, AMOUNTING TO
GRAVE ABUSE OF DISCRETION.
Mainly, petitioner asseverates that in granting both remedies
of specific performance and rescission, public respondent
ignored a well-pronounced rule that these remedies cannot be
availed of at the same time. There is no evidence showing that
private respondent had offered to pay the expenses for the
transfer of the title. Furthermore the amount of 24% interest
imposed by the OAALA in case of refund is high and without
basis: firstly, HLURB Resolution No. R-421, series of 1988,
strictly enjoins the maximum interest to be awarded in case of
refund to 12%; secondly, although condition no. 1 of their
contract to sell provides for said rate of interest, it merely
applies to interest on installment payments but not with
respect to refunds; thirdly, since the contract between them is
not a forbearance of money or loan, the doctrine laid down in
the case of Reformina v. Tomol, Jr., G.R. No. 59096, 139
SCRA 260 applies, that is, except where the action involves
forbearance of money or loan, interest which courts may
award is only up to 12% (should be 6%). Finally, inasmuch as
issuance of the title has not yet been effected because of the
take over by Comsavings Bank of Royal Savings Bank, the
period specified under Section 25 of P.D. No. 957 has not
begun to run for the purpose of redemption.
The arguments advanced by petitioner utterly lack merit.
28
It is plain enough in the OAALA decision that rescission is
being ordered only in the event specific performance is not
feasible. Moreover, petitioner is already estopped from raising
this issue because in its appeal memorandum submitted before
the HLURB, it leaded that (p. 28, Rollo):
5. Appellant prays that it be given a period/time to redeem the
title or the demand for issuance of title be suspended from the
Comsavings Bank before any deed of absolute sale be
executed so that the Transfer Certificate of Title be issued
and/or refund be ordered.
The OAALA found as a fact that "the complaint-appellee was
ready, willing and able to pay for the expenses for the transfer
of title as stipulated in the Contract to Sell . . . " (p. 22, Rollo).
We accord respect and finality to this finding (Filipinas
Manufacturers Bank v. NLRC, et al., G.R. No. 72805,
February 28, 1990, 182 SCRA 848; Vda. de Pineda, et al. v.
Peña, etc., et al., G.R. No. 57665, July 2, 1990, 187 SCRA
22).
We adopt the disposition of the Office of the Solicitor General
on the correct rate of interest as Our own (pp. 124-125, Rollo):
The ruling in Reformina v. Tomol, it must be underscored,
deals exclusively with cases where damages in the form of
interest is due but no specific rate has been previously set by
the parties. In such cases, the legal interest of 12% per
annum must be applied. In the present case, however, the
interest rate of 24% per annum was mutually agreed upon by
petitioner and private respondent in their contract to sell —
this was the interest rate imposed on private respondent for the
payment of the installments on the contract price and there is
no reason why this same interest rate should not be equally
applied to petitioner which is guilty of violating the reciprocal
obligation.
In Solid Homes Inc. v. Court of Appeals (170 SCRA 63
[1989]), a subdivision owner, in violation of their Offsetting
Agreement, incurred delay in the delivery of a house and lot to
the supplier of the construction materials. On review, the issue
of which rate of interest — the 6% per annum which was then
the legal interest or the stipulated interest rate of 12% — was
raised. This Honorable Court ruled:
On the matter of interest, we agree with the trial court and the
Court of Appeals that the proper rate of interest is twelve
(12%) per centum per annum, which is the rate of interest
expressly agreed upon in writing by the parties, as appearing
in the invoices (Exhibits "C" and "D"), and sanctioned by Art.
2209 of the Civil Code, . . .(Emphasis supplied)
It is, thus, evident that if a particular rate of interest has been
expressly stipulated by the parties, that interest, not the legal
rate of interest, shall be applied.
Section 25 of P.D. No. 957 imposes an obligation on the part
of the owner or developer, in the event the mortgage over the
lot or unit is outstanding at the time of the issuance of the title
to the buyer, to redeem the mortgage or the corresponding
portion thereof within six months from such issuance. We
focus Our attention on the period of "six months" to be
reckoned "from the issuance of the title." Supposing there is
no such issuance of the title, as in this case, from what event is
the six month period to be counted? Or, will this period not
begin to run at all unless the title has been issued? The
argument of petitioner that the issuance of the title is a
prerequisite to the running of the six month period of

redemption, fails to convince Us. Otherwise, the owner or
developer can readily concoct a thousand and one reasons as
justifications for its failure to issue the title and in the process,
prolong the period within which to deliver the title to the
buyer free from any liens or encumbrances. Additionally, by
not issuing/delivering the title of the lot to private respondent
upon full payment thereof, petitioner has already violated the
explicit mandate of the first sentence of Section 25 of P.D. No.
957. If We were to count the six month period of redemption
from the belated issuance of the title, petitioner will have a lot
to gain from its own non-observance of said provision. We
shall not countenance such absurdity. Of equal importance as
the preceding ratiocination are the reasons behind the
enactment of P.D. No. 957, as expressed succinctly in its
"whereas" clauses, to wit:
WHEREAS, reports of alarming magnitude also show cases of
swindling and fraudulent manipulations perpetrated by
unscrupulous subdivision and condominium sellers and
operators, such as failure to deliver titles to the buyers or titles
free from liens and encumbrances, and to pay real estate taxes,
and fraudulent sales of the same subdivision lots to different
innocent purchasers for value;
WHEREAS, these acts not only undermine the land and
housing program of the government but also defeat the
objectives of the New Society, particularly the promotion of
peace and order and the enhancement of the economic, social
and moral condition of the Filipino people;
WHEREAS, this state of affairs has rendered it imperative that
the real estate subdivision and condominium businesses be
closely supervised and regulated, and that penalties be
imposed on fraudulent practices and manipulations committed
in connection therewith.
ACCORDINGLY, the petition is hereby DISMISSED. The
decision of the Office of the President dated April 11, 1989
and its resolution dated September 26, 1989 are AFFIRMED.
SO ORDERED
G.R. No. 113926 October 23, 1996
SECURITY BANK AND TRUST COMPANY, petitioner,
vs.
REGIONAL TRIAL COURT OF MAKATI, BRANCH 61,
MAGTANGGOL EUSEBIO and LEILA
VENTURA, respondents.
HERMOSISIMA, JR. J.:p
Questions of law which are of first impression are sought to be
resolved in this case: Should the rate of interest on a loan or
forbearance of money, goods or credits, as stipulated in a
contract, far in excess of the ceiling prescribed under or
pursuant to the Usury Law, prevail over Section 2 of Central
Bank Circular No. 905 which prescribes that the rate of
interest thereof shall continue to be 12% per annum? Do the
Courts have the discretion to arbitrarily override stipulated
interest rates of promissory notes and stipulated interest rates
of promissory notes and thereby impose a 12% interest on the
loans, in the absence of evidence justifying the imposition of a
higher rate?
This is a petition for review on certiorari for the purpose of
assailing the decision of Honorable Judge Fernando V.
Gorospe of the Regional Trial Court of Makati, Branch 61,
29
dated March 30, 1993, which found private respondent
Eusebio liable to petitioner for a sum of money. Interest was
lowered by the court a quo from 23% per annum as agreed
upon the parties to 12% per annum.
The undisputed facts are as follows:
On April 27, 1983, private respondent Magtanggol Eusebio
executed Promissory Note No. TL/74/178/83 in favor of
petitioner Security Bank and Trust Co. (SBTC) in the total
amount of One Hundred Thousand Pesos (P100,000.00)
payable in six monthly installments with a stipulated interest
of 23% per annum up to the fifth installment. 1
On July 28, 1983, respondent Eusebio again executed
Promissory Note No. TL/74/1296/83 in favor of petitioner
SBTC. Respondent bound himself to pay the sum of One
Hundred Thousand Pesos (P100,000.00) in six (6) monthly
installments plus 23% interest per annum. 2
Finally, another Promissory Note No. TL74/1491/83 was
executed on August 31, 1983 in the amount of Sixty Five
Thousand Pesos (P65,000.00). Respondent agreed to pay this
note in six (6) monthly installments plus interest at the rate of
23% per annum. 3
On all the abovementioned promissory notes, private
respondent Leila Ventura had signed as co-maker. 4
Upon maturity which fell on the different dates below, the
principal balance remaining on the notes stood at:
1) PN No. TL/74/748/83 — P16,665.00 as of September 1983.
2) PN No. TL/74/1296/83 — P83,333.00 as of August 1983.
3) PN No. TL/74/1991/83 — P65,000.00 as of August 1983.
Upon the failure and refusal of respondent Eusebio to pay the
aforestated balance payable, a collection case was filed in
court by petitioner SBTC. 5 On March 30, 1993, the court a
quo rendered a judgment in favor of petitioner SBTC, the
dispositive portion which reads:
WHEREFORE, premises above-considered, and plaintiff's
claim having been duly proven, judgment is hereby rendered
in favor of plaintiff and as against defendant Eusebio who is
hereby ordered to:
1. Pay the sum of P16,655.00, plus interest of 12% per
annum starting 27 September 1983, until fully paid;
2. Pay the sum of P83,333.00, plus interest of 12% per
annum starting 28 August 1983, until fully paid;
3. Pay the sum of P65,000.00, plus interest of 12% per
annum starting 31 August 1983, until fully paid;
4. Pay the sum equivalent to 20% of the total amount due and
payable to plaintiff as and by way of attorney's fees; and to
5. Pay the costs of this suit.
SO ORDERED. 6
On August 6, 1993, a motion for partial reconsideration was
filed by petitioner SBTC contending that:
(1) the interest rate agreed upon by the parties during the
signing of the promissory notes was 23% per annum;
(2) the interests awarded should be compounded quarterly
from due date as provided in the three (3) promissory notes;
(3) defendants Leila Ventura should likewise be held liable to
pay the balance on the promissory notes since she has signed
as co-maker and as such, is liable jointly and severally with
defendant Eusebio without a need for demand upon her. 7
Consequently, an Order was issued by the court a quo denying
the motion to grant the rates of interest beyond 12%per

annum; and holding defendant Leila Ventura jointly and
severally liable with co-defendants Eusebio.
Hence, this petition.
The sole issue to be settled in this petition is whether or not
the 23% rate of interest per annum agreed upon by petitioner
bank and respondents is allowable and not against the Usury
Law.
We find merit in this petition.
From the examination of the records, it appears that indeed the
agreed rate of interest as stipulated on the three (3) promissory
notes is 23% per annum. 8 The applicable provision of law is
the Central Bank Circular No. 905 which took effect on
December 22, 1982, particularly Sections 1 and 2 which
state: 9
Sec. 1. The rate of interest, including commissions, premiums,
fees and other charges, on a loan or forbearance of any money,
goods or credits, regardless of maturity and whether secured
or unsecured, that may be charged or collected by any person,
whether natural or judicial, shall not be subject to any ceiling
prescribed under or pursuant to the Usury Law, as amended.
Sec. 2. 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 express contract as to such rate of interest, shall
continue to be twelve per cent (12%) per annum.
CB Circular 905 was issued by the Central Bank's Monetary
Board pursuant to P.D. 1684 empowering them to prescribe
the maximum rates of interest for loans and certain
forbearances, to wit:
Sec. 1. Section 1-a of Act No. 2655, as amended, is hereby
amended to read as follows:
Sec. 1-a. The Monetary Board is hereby authorized to
prescribe the maximum rate of interest for the loan or renewal
thereof or the forbearance of any money, goods or credits, and
to change such rate or rates whenever warranted by prevailing
economic and social conditions: Provided, That changes in
such rate or rates may be effected gradually on scheduled
dates announced in advance.
In the exercise of the authority herein granted, the Monetary
Board may prescribe higher maximum rates for loans of low
priority, such as consumer loans or renewals thereof as well as
such loans made by pawnshops, finance companies and other
similar credit institutions although the rates prescribed for
these institutions need not necessarily be uniform. The
Monetary Board is also authorized to prescribed different
maximum rate or rates for different types of borrowings,
including deposits and deposit substitutes, or loans of financial
intermediaries. 10
The court has ruled in the case of Philippine National Bank
v. Court of Appeals 11 that:
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.
All the promissory notes were signed in 1983 and, therefore,
were already covered by CB Circular No. 905. Contrary to the
claim of respondent court, this circular did not repeal nor in
anyway amend the Usury Law but simply suspended the
latter's effectivity.
30
Basic is the rule of statutory construction that when the law is
clear and unambiguous, the court is left with no alternative but
to apply the same according to its clear language. As we have
held in the case of Quijano v. Development Bank of the
Philippines: 12
. . . We cannot see any room for interpretation or construction
in the clear and unambiguous language of the above-quoted
provision of law. This Court had steadfastly adhered to the
doctrine that its first and fundamental duty is the application
of the law according to its express terms, interpretation being
called for only when such literal application is impossible. No
process of interpretation or construction need be resorted to
where a provision of law peremptorily calls for application.
Where a requirement or condition is made in explicit and
unambiguous terms, no discretion is left to the judiciary. It
must see to it that is mandate is obeyed.
The rate of interest was agreed upon by the parties freely.
Significantly, respondent did not question that rate. It is not
for respondent court a quo to change the stipulations in the
contract where it is not illegal. Furthermore, Article 1306 of
the New Civil Code provides that contracting parties may
establish such stipulations, clauses, terms and conditions as
they may deem convenient, provided they are not contrary to
law, morals, good customs, public order, or public policy. We
find no valid reason for the respondent court a quo to impose a
12% rate of interest on the principal balance owing to
petitioner by respondent in the presence of a valid stipulation.
In a loan or forbearance of money, the interest due should be
that stipulated in writing, and in the absence thereof, the rate
shall be 12% per annum. 13 Hence, only in the absence of a
stipulation can the court impose the 12% rate of interest.
The promissory notes were signed by both parties voluntarily.
Therefore, stipulations therein are binding between them.
Respondent Eusebio, likewise, did not question any of the
stipulations therein. In fact, in the Comment filed by
respondent Eusebio to this court, he chose not to question the
decision and instead expressed his desire to negotiate with the
petitioner bank for "terms within which to settle his
obligation." 14
IN VIEW OF THE FOREGOING, the decision of the
respondent court a quo, is hereby AFFIRMED with the
MODIFICATION that the rate of interest that should be
imposed be 23% per annum.
SO ORDERED.
SPOUSES JOVENAL TORING and CECILIA G.R. No. 168782
ESCALONA-TORING,
Petitioners, Present:
QUISUMBING, J.,
- versus - CARPIO MORALE
TINGA,
VELASCO, JR., a
BRION, JJ.
SPOUSES ROSALIE GANZON-OLAN and
GILBERT OLAN, and ROWENA OLAN, Promulgated:
Respondents.
October 10, 2008
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
- - - - - - - - -x

DECISION
QUISUMBING, J.:
This petition for review on certiorari assails the
Decision[1] and Resolution,[2] dated March 28, 2005 and June
30, 2005, respectively, of the Court of Appeals in CA-G.R.
CV No. 76831. The Court of Appeals affirmed the
Resolution[3] dated June 10, 2002 of the Regional Trial Court,
Branch 276, Muntinlupa City, in Civil Case No. 00-137 which
had ordered petitioners to pay respondents the sum
of P20,000,000 representing the total amount of petitioners
loan and interest due.
The facts are as follows:
On September 4, 1998, petitioner Jovenal Toring
obtained from respondents a loan amounting to P6,000,000 at
3% interest per month. The loan was secured by a mortgage
on a parcel of land covered by Transfer Certificate of Title No.
T-27418,[4] as evidenced by a Deed of Real Estate
Mortgage[5] dated September 8, 1998.
On September 23, 1998, the parties executed a Deed
of Absolute Sale[6] conveying the mortgaged property in favor
of respondents. Subsequently, respondents gave petitioners an
exclusive option to repurchase the land for P10,000,000. This
was embodied in a document denominated as an Option to
Buy[7] dated September 28, 1998. On this same document,
respondents acknowledged receipt of a total sum
of P10,000,000 as consideration for the purchase of the
land.[8] The Option to Buy provided that if the option is
exercised after December 5, 1998, the purchase price shall
increase at the rate of P300,000 or 3% of the purchase price
every month until September 5, 1999 and thereafter at the rate
of P381,000 or 3.81% of the purchase price every month, with
the fifth of every month as the cut-off date for said increases.[9]
On July 28, 2000, petitioners filed a did not mention any rate of interest chargeable to the loan but
Complaint[10] docketed as Civil Case No. 00-137 for
reformation of instruments, abuse of rights and damages
against respondents.Petitioners prayed that the Deed of
Absolute Sale dated September 23, 1998 and Option to Buy
dated September 28, 1998, be treated as an equitable mortgage
instead of a sale.
At the pre-trial, the parties made the following
stipulations: (1) the principal amount of P10,000,000 has long
become overdue; (2) no payment has been made; (3) the
parties had agreed on an equitable mortgage and not a
sale.[11] The parties limited the issues on the amount of interest
due and the time of payment of the entire
obligation.Thereafter, the court ordered the parties to submit
their respective position papers, but only respondents
complied. All other claims for damages were waived by the
parties.[12]
On June 10, 2002, the trial court issued its
Resolution, the pertinent portion of which reads:
...the document of mortgage specified the interest at
3.81% per month from the time it was obtained, and which
was now estimated to be P7,239,000.00. This sum should be
added to the total loan of TEN MILLION PESOS, . . .
xxxx
Therefore, judgment is rendered for defendants
ROSALIE GANZON OLAN and GILBERT OLAN [and]
ROWENA GANZON since the loan is not denied, directing
31
spouses [p]laintiffs JOVENAL TORING and CECILIA
ESCALONA TORING, to pay the sum of TWENTY
MILLION PESOS within one month from receipt of this
decision.
xxxx
It [i]s SO ORDERED.[13] (Emphasis supplied.)
Petitioners appealed, contending that the trial court
erred in awarding interest. Petitioners stress that Article
1602[14] of the Civil Code governing equitable mortgages
provides that any money, fruits or other benefit to be received
by the vendee as rent or otherwise shall be considered as
interest which shall be subject to the usury laws. Thus, there
should have been no award of interest.
On March 28, 2005, the Court of Appeals affirmed
the trial courts ruling, as follows:
WHEREFORE, the June 10, 2002 Resolution of the
Regional Trial Court, Branch 276, Muntinlupa City, is hereby
AFFIRMED.
SO ORDERED.[15]
Their motion for reconsideration having been denied,
petitioners now come before us raising the sole issue:
WHETHER OR NOT THE HONORABLE COURT OF
APPEALS COMMITTED A REVERSIBLE ERROR IN
DENYING PETITIONERS APPEAL AND IN AFFIRMING
THE DECISION OF [THE] TRIAL COURT DATED JUNE
10, 2002.[16]
Simply put, the issue is: Did the Court of Appeals err in
sustaining the trial courts ruling upholding the 3% and 3.81%
stipulated monthly interest?
Petitioners contend that they are not liable to pay interest as
the stipulated monthly rates of 3% and 3.81%[17] are
unconscionable. Petitioners further contend that the reformed
instrument, i.e., the Option to Buy dated September 28, 1998,
rather, an escalation[18] of the purchase price.
On the other hand, respondents maintain that petitioners are
liable to pay interest based on the Deed of Absolute Sale and
Option to Buy executed by the parties. Respondents assert that
the P300,000 and P381,000 differences per month as stated in
the Option to Buy represents the 3% or 3.81% interest to be
charged on the loan. Respondents further assert that the 3% or
3.81% interest is not usurious since Central Bank Circular No.
905-82[19] removed the ceiling on interest rates on secured and
unsecured loans.
In resolving the issue in this controversy, we have agreed to
focus our attention on the basic provisions of statutes as well
as the prior decisions of this Court bearing on rates of interest
on monetary obligations.
In a loan or forbearance of money, according to the
Civil Code, the interest due should be that stipulated in
writing,[20] and in the absence thereof, the rate shall be 12%
per annum.[21]
The first time that the parties in this case entered into
a loan transaction was on September 4, 1998 when petitioners
obtained the P6,000,000 loan from respondents. Based on the
Deed of Real Estate Mortgage dated September 8,
1998 embodying the promissory note dated September 4,
1998, the parties agreed on an interest rate of 3% per month.
The second and third times that the parties transacted
were on September 23 and 28, 1998 when they executed the

Deed of Absolute Sale and the Option to Buy,
respectively. These two documents were the instruments
reformed in Civil Case No. 00-137, where both parties agreed
that the transactions embodied therein were really that of an
equitable mortgage. The stipulation in a contract sharply
escalating the repurchase price every month is for the purpose
of securing the return of money invested with substantial
profit or interest.[22] Undoubtedly, the P300,000 and P381,000
successive increases stated in the Option to Buy represent the
monthly interest which respondents sought to recover from
petitioners.
While the parties are free to stipulate on the interest
to be imposed on monetary obligations, the Court will temper
interest rates if they are unconscionable. [23] Even if the Usury
Law has been suspended by Central Bank Circular No. 905-
82, and parties to a loan agreement have been given wide
latitude to agree on any interest rate, we have held that
stipulated interest rates are illegal if they are
unconscionable.[24] Consequently, in our view, the Court of
Appeals erred in sustaining the trial courts decision upholding
the stipulated interest of 3% and 3.81%. Thus, we are
unanimous now in our ruling to reduce the above stipulated
interest rates to 1% per month, in conformity with our ruling
in Ruiz v. Court of Appeals.[25] For as well stressed in that
case:
Nothing in the said circular [CB Circular No. 905, s.
1982] grants lenders carte blanche authority to raise interest
rates to levels which will either enslave their borrowers or lead
to a hemorrhaging of their assets.
Undeniably, in the present case, petitioners failed to
pay the principal loan on its maturity and upon demand by
respondents, as well as the interest payments
thereafter.Indeed, petitioners cannot turn their backs on their
obligation; they have to comply with what is incumbent upon
them. All other claims for damages having been waived by the
parties, petitioners are bound to pay respondents the principal
loan of P10,000,000, plus what we have repeatedly held as the
appropriate rate of interest of 1% per month, from December
6, 1998[26] until fully paid.
WHEREFORE, the assailed Decision and
Resolution dated March 28, 2005 and June 30, 2005,
respectively, of the Court of Appeals in CA-G.R. CV No.
76831 are MODIFIED to the effect that the stipulated interest
rate of 3% or 3.81% per month on the subject equitable
mortgage is hereby ordered REDUCED to 1% per month
only. No pronouncement as to cos
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-30771 May 28, 1984
LIAM LAW, plaintiff-appellee,
vs.
OLYMPIC SAWMILL CO. and ELINO LEE
CHI, defendants-appellants.
Felizardo S.M. de Guzman for plaintiff-appellee.
Mariano M. de Joya for defendants-appellants.
MELENCIO-HERRERA, J.:
32
This is an appeal by defendants from a Decision rendered by
the then Court of First Instance of Bulacan. The appeal was
originally taken to the then Court of Appeals, which endorsed
it to this instance stating that the issue involved was one of
law.
It appears that on or about September 7, 1957, plaintiff loaned
P10,000.00, without interest, to defendant partnership and
defendant Elino Lee Chi, as the managing partner. The loan
became ultimately due on January 31, 1960, but was not paid
on that date, with the debtors asking for an extension of three
months, or up to April 30, 1960.
On March 17, 1960, the parties executed another loan
document. Payment of the P10,000.00 was extended to April
30, 1960, but the obligation was increased by P6,000.00 as
follows:
That the sum of SIX THOUSAND PESOS (P6,000.00),
Philippine currency shall form part of the principal obligation
to answer for attorney's fees, legal interest, and other cost
incident thereto to be paid unto the creditor and his successors
in interest upon the termination of this agreement.
Defendants again failed to pay their obligation by April 30,
1960 and, on September 23, 1960, plaintiff instituted this
collection case. Defendants admitted the P10,000.00 principal
obligation, but claimed that the additional P6,000.00
constituted usurious interest.
Upon application of plaintiff, the Trial Court issued, on the
same date of September 23, 1960, a writ of Attachment on real
and personal properties of defendants located at Karanglan,
Nueva Ecija. After the Writ of Attachment was implemented,
proceedings before the Trial Court versed principally in
regards to the attachment.
On January 18, 1961, an Order was issued by the Trial Court
stating that "after considering the manifestation of both
counsel in Chambers, the Court hereby allows both parties to
simultaneously submit a Motion for Summary
Judgment. 1 The plaintiff filed his Motion for Summary
Judgment on January 31, 1961, while defendants filed theirs
on February 2, 196l. 2
On June 26, 1961, the Trial Court rendered decision ordering
defendants to pay plaintiff "the amount of P10,000.00 plus the
further sum of P6,000.00 by way of liquidated damages . . .
with legal rate of interest on both amounts from April 30,
1960." It is from this judgment that defendants have appealed.
We have decided to affirm.
Under Article 1354 of the Civil Code, in regards to the
agreement of the parties relative to the P6,000.00 obligation,
"it is presumed that it exists and is lawful, unless the debtor
proves the contrary". No evidentiary hearing having been held,
it has to be concluded that defendants had not proven that the
P6,000.00 obligation was illegal. Confirming the Trial Court's
finding, we view the P6,000.00 obligation as liquidated
damages suffered by plaintiff, as of March 17, 1960,
representing loss of interest income, attorney's fees and
incidentals.
The main thrust of defendants' appeal is the allegation in their
Answer that the P6,000.00 constituted usurious interest. They
insist the claim of usury should have been deemed admitted by
plaintiff as it was "not denied specifically and under oath". 3
Section 9 of the Usury Law (Act 2655) provided:

SEC. 9. The person or corporation sued shall file its answer in
writing under oath to any complaint brought or filed against
said person or corporation before a competent court to recover
the money or other personal or real property, seeds or
agricultural products, charged or received in violation of the
provisions of this Act. The lack of taking an oath to an answer
to a complaint will mean the admission of the facts contained
in the latter.
The foregoing provision envisages a complaint filed against an
entity which has committed usury, for the recovery of the
usurious interest paid. In that case, if the entity sued shall not
file its answer under oath denying the allegation of usury, the
defendant shall be deemed to have admitted the usury. The
provision does not apply to a case, as in the present, where it is
the defendant, not the plaintiff, who is alleging usury.
Moreover, for sometime now, usury has been legally non-
existent. Interest can now be charged as lender and borrower
may agree upon. 4 The Rules of Court in regards to allegations
of usury, procedural in nature, should be considered repealed
with retroactive effect.
Statutes regulating the procedure of the courts will be
construed as applicable to actions pending and undetermined
at the time of their passage. Procedural laws are retrospective
in that sense and to that extent. 5
... Section 24(d), Republic Act No. 876, known as the
Arbitration Law, which took effect on 19 December 1953, and
may be retroactively applied to the case at bar because it is
procedural in nature. ... 6
WHEREFORE, the appealed judgment is hereby affirmed,
without pronouncement as to costs.
SO ORDERED.
G.R. No. 113412 April 17, 1996
Spouses PONCIANO ALMEDA and EUFEMIA P.
ALMEDA, petitioner,
vs.
THE COURT OF APPEALS and PHILIPPINE
NATIONAL BANK, respondents.
KAPUNAN, J.:p
On various dates in 1981, the Philippine National Bank
granted to herein petitioners, the spouses Ponciano L. Almeda
and Eufemia P. Almeda several loan/credit accommodations
totaling P18.0 Million pesos payable in a period of six years at
an interest rate of 21% per annum. To secure the loan, the
spouses Almeda executed a Real Estate Mortgage Contract
covering a 3,500 square meter parcel of land, together with the
building erected thereon (the Marvin Plaza) located at Pasong
Tamo, Makati, Metro Manila. A credit agreement embodying
the terms and conditions of the loan was executed between the
parties. Pertinent portions of the said agreement are quoted
below:
SPECIAL CONDITIONS
xxx xxx xxx
The loan shall be subject to interest at the rate of twenty one
per cent (21%) per annum, payable semi-annually in arrears,
the first interest payment to become due and payable six (6)
months from date of initial release of the loan. The loan shall
likewise be subject to the appropriate service charge and a
penalty charge of three per cent (30%) per annum to be
33
imposed on any amount remaining unpaid or not rendered
when due.
xxx xxx xxx
III. OTHER CONDITIONS
(c) Interest and Charges
(1) 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/these accommodations 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 of the maximum interest rate.1
Between 1981 and 1984, petitioners made several partial
payments on the loan totaling. P7,735,004.66,2 a substantial
portion of which was applied to accrued interest.3 On March
31, 1984, respondent bank, over petitioners' protestations,
raised the interest rate to 28%, allegedly pursuant to Section
III-c (1) of its credit agreement. Said interest rate thereupon
increased from an initial 21% to a high of 68% between March
of 1984 to September, 1986.4
Petitioner protested the increase in interest rates, to no avail.
Before the loan was to mature in March, 1988, the spouses
filed on February 6, 1988 a petition for declaratory relief with
prayer for a writ of preliminary injunction and temporary
restraining order with the Regional Trial Court of Makati,
docketed as Civil Case No. 18872. In said petition, which was
raffled to Branch 134 presided by Judge Ignacio Capulong, the
spouses sought clarification as to whether or not the PNB
could unilaterally raise interest rates on the loan, pursuant to
the credit agreement's escalation clause, and in relation to
Central Bank Circular No. 905. As a preliminary measure, the
lower court, on March 3, 1988, issued a writ of preliminary
injunction enjoining the Philippine National Bank from
enforcing an interest rate above the 21% stipulated in the
credit agreement. By this time the spouses were already in
default of their loan obligations.
Invoking the Law on Mandatory Foreclosure (Act 3135, as
amended and P.D. 385), the PNB countered by ordering the
extrajudicial foreclosure of petitioner's mortgaged properties
and scheduled an auction sale for March 14, 1989. Upon
motion by petitioners, however, the lower court, on April 5,
1989, granted a supplemental writ of preliminary injunction,
staying the public auction of the mortgaged property.
On January 15, 1990, upon the posting of a counterbond by
the PNB, the trial court dissolved the supplemental writ of
preliminary injunction. Petitioners filed a motion for
reconsideration. In the interim, respondent bank once more set
a new date for the foreclosure sale of Marvin Plaza which was
March 12, 1990. Prior to the scheduled date, however,
petitioners tendered to respondent bank the amount of
P40,142,518.00, consisting of the principal (P18,000,000.00)
and accrued interest calculated at the originally stipulated rate
of 21%. The PNB refused to accept the payment.5
As a result of PNB's refusal of the tender of payment,
petitioners, on March 8, 1990, formally consigned the amount
of P40,142,518.00 with the Regional Trial Court in Civil Case
No. 90-663. They prayed therein for a writ of preliminary
injunction with a temporary restraining order. The case was

raffled to Branch 147, presided by Judge Teofilo Guadiz. On
March 15, 1990, respondent bank sought the dismissal of the
case.
On March 30, 1990 Judge Guadiz in Civil Case No. 90-663
issued an order granting the writ of preliminary injunction
enjoining the foreclosure sale of "Marvin Plaza" scheduled on
March 12, 1990. On April 17, 1990 respondent bank filed a
motion for reconsideration of the said order.
On August 16, 1991, Civil Case No. 90-663 we transferred to
Branch 66 presided by Judge Eriberto Rosario who issued an
order consolidating said case with Civil Case 18871 presided
by Judge Ignacio Capulong.
For Judge Ignacio's refusal to lift the writ of preliminary
injunction issued March 30, 1990, respondent bank filed a
petition for Certiorari, Prohibition and Mandamus with
respondent Court of Appeals, assailing the following orders of
the Regional Trial Court:
1. Order dated March 30, 1990 of Judge Guadiz granting the
writ of preliminary injunction restraining the foreclosure sale
of Mavin Plaza set on March 12, 1990;
2. Order of Judge Ignacio Capulong dated January 10, 1992
denying respondent bank's motion to lift the writ of injunction
issued by Judge Guadiz as well as its motion to dismiss Civil
Case No. 90-663;
3. Order of Judge Capulong dated July 3, 1992 denying
respondent bank's subsequent motion to lift the writ of
preliminary injunction; and
4. Order of Judge Capulong dated October 20, 1992 denying
respondent bank's motion for reconsideration.
On August 27, 1993, respondent court rendered its decision
setting aside the assailed orders and upholding respondent
bank's right to foreclose the mortgaged property pursuant to
Act 3135, as amended and P.D. 385. Petitioners' Motion for
Reconsideration and Supplemental Motion for
Reconsideration, dated September 15, 1993 and October 28,
1993, respectively, were denied by respondent court in its
resolution dated January 10, 1994.
Hence the instant petition.
This appeal by certiorari from the respondent court's decision
dated August 27, 1993 raises two principal issues namely: 1)
Whether or not respondent bank was authorized to raise its
interest rates from 21% to as high as 68% under the credit
agreement; and 2) Whether or not respondent bank is granted
the authority to foreclose the Marvin Plaza under the
mandatory foreclosure provisions of P.D. 385.
In its comment dated April 19, 1994, respondent bank
vigorously denied that the increases in the interest rates were
illegal, unilateral, excessive and arbitrary, it argues that the
escalated rates of interest it imposed was based on the
agreement of the parties. Respondent bank further contends
that it had a right to foreclose the mortgaged property pursuant
to P.D. 385, after petitioners were unable to pay their loan
obligations to the bank based on the increased rates upon
maturity in 1984.
The instant petition is impressed with merit.
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. 6 Any contract which
34
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. The interest provision states:
(c) interest and Charges
(1) 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/these accommodations 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 of the maximum interest rate.
In Philippine National Bank v. Court of Appeals, 7 this Court
disauthorized respondent bank from unilaterally raising the
interest rate in the borrower's loan from 18% to 32%, 41% and
48% partly because the aforestated increases violated the
principle of mutuality of contracts expressed in Article 1308
of the Civil Code. The Court held:
CB Circular No. 905, Series of 1982 (Exh. 11) removed the
Usury Law ceiling on interest rates —
. . . increases in interest rates are not subject to any ceiling
prescribed by the Usury Law.
but it did not authorize the PNB, or any bank for that matter,
to unilaterally and successively increase the agreed interest
rates from 18% to 48% within a span of four (4) months, in
violation of P.D. 116 which limits such changes to once every
twelve months.
Besides violating P.D. 116, the unilateral action of the PNB in
increasing the interest rate on the private respondent's loan,
violated the mutuality of contracts ordained in Article 1308 of
the Civil Code:
Art. 308. 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 (Garcia vs. Rita
Legarda, Inc., 21 SCRA 555). Hence, even assuming that the
P1.8 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 party's (the debtor) participation
being reduced to the alternative "to take it or lease 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.
PNB's successive increases of the interest rate on the private
respondent's loan, over the latter's protest, were arbitrary as
they violated an express provision of the Credit Agreement
(Exh. 1) Section 9.01 that its terms "may be amended only by
an instrument in writing signed by the party to be bound as
burdened by such amendment." The increases imposed by
PNB also contravene Art. 1956 of the Civil Code which
provides that "no interest shall be due unless it has been
expressly stipulated in writing."
The debtor herein never agreed in writing to pay the interest
increases fixed by the PNB beyond 24%per annum, hence, he
is not bound to pay a higher rate than that.
That an increase in the interest rate from 18% to 48% within a
period of four (4) months is excessive, as found by the Court
of Appeals, is indisputable.
Clearly, the galloping increases in interest rate imposed by
respondent bank on petitioners' loan, over the latter's
vehement protests, were arbitrary.
Moreover, respondent bank's reliance on C.B. Circular No.
905, Series of 1982 did not authorize the bank, or any lending
institution for that matter, to progressively increase interest
rates on borrowings to an extent which would have made it
virtually impossible for debtors to comply with their own
obligations. True, escalation clauses in credit agreements are
perfectly valid and do not contravene public policy. Such
clauses, however, (as are stipulations in other contracts) are
nonetheless still subject to laws and provisions governing
agreements between parties, which agreements — while they
may be the law between the contracting parties — implicitly
incorporate provisions of existing law. Consequently, while
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.
Borrowing represents a transfusion of capital from lending
institutions to industries and businesses in order to stimulate
growth. This would not, obviously, be the effect of PNB's
unilateral and lopsided policy regarding the interest rates of
petitioners' borrowings in the instant case.
Apart from violating the principle of mutuality of contracts,
there is authority for disallowing the interest rates imposed by
respondent bank, for the credit agreement specifically requires
that the increase be "within the limits allowed by law". In the
case of PNB v. Court of Appeals, cited above, this Court
35
clearly emphasized that C.B. Circular No. 905 could not be
properly invoked to justify the escalation clauses of such
contracts, not being a grant of specific authority.
Furthermore, the escalation clause of the credit agreement
requires that the same be made "within the limits allowed by
law," obviously referring specifically to legislative enactments
not administrative circulars. Note that the phrase "limits
imposed by law," refers only to the escalation clause.
However, the same agreement allows reduction on the basis of
law or the Monetary Board. Had the parties intended the word
"law" to refer to both legislative enactments and
administrative circulars and issuances, the agreement would
not have gone as far as making a distinction between "law or
the Monetary Board Circulars" in referring to mutually agreed
upon reductions in interest rates. This distinction was the
subject of the Court's disquisition in the case of Banco
Filipino Savings and Mortgage Bank v. Navarro8 where the
Court held that:
What should be resolved is whether BANCO FILIPINO can
increase the interest rate on the LOAN from 12% to 17% per
annum under the Escalation Clause. It is our considered
opinion that it may not.
The Escalation Clause reads as follows:
I/We hereby authorize Banco Filipino to correspondingly
increase.
the interest rate stipulated in this contract without advance
notice to me/us in the event.
a law
increasing
the lawful rates of interest that may be charged
on this particular
kind of loan. (Paragraphing and emphasis supplied)
It is clear from the stipulation between the parties that the
interest rate may be increased "in the event a law should be
enacted increasing the lawful rate of interest that may be
charged on this particular kind of loan." The Escalation
Clause was dependent on an increase of rate made by "law"
alone.
CIRCULAR No. 494, although it has the effect of law, is not a
law. "Although a circular duly issued is not strictly a statute or
a law, it has, however, the force and effect of law." (Emphasis
supplied). "An administrative regulation adopted pursuant to
law has the force and effect of law." "That administrative rules
and regulations have the force of law can no longer be
questioned."
The distinction between a law and an administrative regulation
is recognized in the Monetary Board guidelines quoted in the
latter to the BORROWER of Ms. Paderes of September 24,
1976 (supra). According to the guidelines, for a loan's interest
to be subject to the increases provided in CIRCULAR No.
494, there must be an Escalation Clause allowing the increase
"in the event that any law or Central Bank regulation is
promulgated increasing the maximum rate for loans." The
guidelines thus presuppose that a Central Bank regulation is
not within the term "any law."
The distinction is again recognized by P.D. No. 1684,
promulgated on March 17, 1980, adding section 7-a to the
Usury Law, providing that parties to an agreement pertaining
to a loan could stipulate that the rate of interest agreed upon
may be increased in the event that the applicable maximum

rate of interest is increased "by law or by the Monetary
Board." To quote:
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 by law 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.'
(Paragraphing and emphasis supplied).
It is now clear that from March 17, 1980, escalation clauses to
be valid should specifically provide: (1) that there can be an
increase in interest if increased by law or by the Monetary
Board; and (2) in order for such stipulation to be valid, it must
include a provision for reduction of the stipulated interest "in
the event that the applicable maximum rate of interest is
reduced by law or by the Monetary Board."
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 (P7,735,004.66) which was applied to
interest alone. By the time the spouses tendered the amount of
P40,142,518.00 in settlement of their obligations; respondent
bank was demanding P58,377,487.00 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. 9 Here, as clearly
demonstrated above, not only 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.
We go now to respondent bank's claim that the principal issue
in the case at bench involves its right to foreclose petitioners'
properties under P.D. 385. We find respondent's pretense
untenable.
Presidential Decree No. 385 was issued principally to
guarantee that government financial institutions would not be
denied substantial cash inflows necessary to finance the
government's development projects all over the country by
large borrowers who resort to litigation to prevent or delay the
government's collection of their debts or loans. 10 In
facilitating collection of debts through its automatic
foreclosure provisions, the government is however, not
exempted from observing basic principles of law, and ordinary
fairness and decency under the due process clause of the
Constitution. 11
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 petitioner's obligations
could not be determined. Thus, the foreclosure provisions of
36
P.D. 385 could be validly invoked by respondent 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. In Filipinas Marble
Corporation v. Intermediate Appellate Court, 12 involving
P.D. 385's provisions on mandatory foreclosure, we held that:
We cannot, at this point, conclude that respondent DBP
together with the Bancom people actually misappropriated and
misspent the $5 million loan in whole or in part although the
trial court found that there is "persuasive" evidence that such
acts were committed by the respondent. This matter should
rightfully be litigated below in the main action. Pending the
outcome of such litigation, P.D. 385 cannot automatically be
applied for if it is really proven that respondent DBP is
responsible for the misappropriation of the loan, even if only
in part, then the foreclosure of the petitioner's properties under
the provisions of P.D. 385 to satisfy the whole amount of the
loan would be a gross mistake. It would unduly prejudice the
petitioner, its employees and their families.
Only after trial on the merits of the main case can the true
amount of the loan which was applied wisely or not, for the
benefit of the petitioner be determined. Consequently, the
extent of the loan where there was no failure of consideration
and which may be properly satisfied by foreclosure
proceedings under P.D. 385 will have to await the presentation
of evidence in a trial on the merits.
In Republic Planters Bank v. Court of Appeals 13 the Court
reiterating the dictum in Filipinas Marble Corporation, held:
The enforcement of P.D. 385 will sweep under the rug' this
iceberg of a scandal in the sugar industry during the Marcos
Martial Law years. This we can not allow to happen. For the
benefit of future generations, all the dirty linen in the
PHILSUCUCOM/NASUTRA/RPB closets have to be exposed
in public so that the same may NEVER be repeated.
It is of paramount national interest, that we allow the trial
court to proceed with dispatch to allow the parties below to
present their evidence.
Furthermore, petitioners made a valid consignation of what
they, in good faith and in compliance with the letter of the
Credit Agreement, honestly believed to be the real amount of
their remaining obligations with the respondent bank. The
latter could not therefore claim that there was no honest-to-
goodness attempt on the part of the spouse to settle their
obligations. Respondent's rush to inequitably invoke the
foreclosure provisions of P.D. 385 through its legal
machinations in the courts below, in spite of the unsettled
differences in interpretation of the credit agreement was
obviously made in bad faith, to gain the upper hand over
petitioners.
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.

WHEREFORE, PREMISES CONSIDERED, the decision of
the Court of Appeals dated August 27, 1993, as well as the
resolution dated February 10, 1994 is hereby REVERSED
AND SET ASIDE. The case is remanded to the Regional Trial
Court of Makati for further proceedings.
SO ORDERED.
G.R. No. 131622 November 27, 1998
LETICIA Y. MEDEL, DR. RAFAEL MEDEL and
SERVANDO FRANCO, petitioners,
vs.
COURT OF APPEALS, SPOUSES VERONICA R.
GONZALES and DANILO G. GONZALES, JR. doing
lending business under the trade name and style
"GONZALES CREDIT ENTERPRISES", respondents.
PARDO, J.:
The case before the Court is a petition for review
on certiorari, under Rule 45 of the Revised Rules of Court,
seeking to set aside the decision of the Court of Appeals, 1 and
its resolution denying reconsideration, 2 the dispositive
portion of which decision reads as follows:
WHEREFORE, the appealed judgment is hereby
MODIFIED such that defendants are hereby-ordered to
pay the plaintiff: the sum of P500,000.00, plus 5.5% per
month interest and 2% service charge per annum effective
July 23, 1986, plus 1% per month of the total amount due
and demandable as penalty charges effective August 23,
1986, until the entire amount is fully paid.
The award to the plaintiff of P50,000.00 as attorney's fees
is affirmed. And so is the imposition of costs against the
defendants.
SO ORDERED. 3
The Court required the respondents to comment on the
petition,4 which was filed on April 3, 1998,5 and the
petitioners to reply thereto, which was filed on May 29,
1998.6 We now resolve to give due course to the petition
and decide the case.
The facts of the case, as found by the Court of Appeals in
its decision, which are considered binding and conclusive
on the parties herein, as the appeal is limited to questions
of law, are as follows:
On November 7, 1985, Servando Franco and Leticia Medel
(hereafter Servando and Leticia) obtained a loan from
Veronica R. Gonzales (hereafter Veronica), who was
engaged in the money lending business under the name
"Gonzales Credit Enterprises", in the amount of
P50,000.00, payable in two months. Veronica gave only the
amount of P47,000.00, to the borrowers, as she retained
P3,000.00, as advance interest for one month at 6% per
month. Servando and Leticia executed a promissory note
for P50,000.00, to evidence the loan, payable on January 7,
1986.
On November 19, 1985, Servando and Liticia obtained
from Veronica another loan in the amount of P90,000.00,
payable in two months, at 6% interest per month. They
executed a promissory note to evidence the loan, maturing
on Janaury 19, 1986. They received only P84,000.00, out of
the proceeds of the loan.
37
On maturity of the two promissory notes, the borrowers failed
to pay the indebtedness.
On June 11, 1986, Servando and Leticia secured from
Veronica still another loan in the amout of P300,000.00,
maturing in one month, secured by a real estate mortgage over
a property belonging to Leticia Makalintal Yaptinchay, who
issued a special power of attorney in favor of Leticia Medel,
authorizing her to execute the mortgage. Servando and Leticia
executed a promissory note in favor of Veronica to pay the
sum of P300,000.00, after a month, or on July 11, 1986.
However, only the sum of P275.000.00, was given to them out
of the proceeds of the loan.
Like the previous loans, Servando and Medel failed to pay the
third loan on maturity.
On July 23, 1986, Servando and Leticia with the latter's
husband, Dr. Rafael Medel, consolidated all their previous
unpaid loans totaling P440,000.00, and sought from Veronica
another loan in the amount of P60,000.00, bringing their
indebtedness to a total of P500,000.00, payable on August 23,
1986. They executed a promissory note, reading as follows:
Baliwag, Bulacan July 23, 1986
Maturity Date Augsut 23, 1986
P500,000.00
FOR VALUE RECEIVED, I/WE jointly and severally
promise to pay to the order of VERONICA R. GONZALES
doing business in the business style of GONZALES CREDIT
ENTERPRISES, Filipino, of legal age, married to Danilo G.
Gonzales, Jr., of Baliwag, Bulacan, the sum of PESOS . . .
FIVE HUNDRED THOUSAND . . . (P500,000.00) Philippine
Currency with interest thereon at the rate of 5.5 PER CENT
per month plus 2% service charge per annum from date
hereof until fully paid according to the amortization schedule
contained herein. (Emphasis supplied)
Payment will be made in full at the maturity date.
Should I/WE fail to pay any amortization or portion hereof
when due, all the other installments together with all interest
accrued shall immediately be due and payable and I/WE
hereby agree to pay an additional amount equivalent to one
per cent (1%) per month of the amount due and demandable
as penalty charges in the form of liquidated damages until
fully paid; and the further sum of TWENTY FIVE PER CENT
(25%) thereof in full, without deductions as Attorney's
Fee whether actually incurred or not, of the total amount due
and demandable, exclusive of costs and judicial or extra
judicial expenses. (Emphasis supplied).
I, WE further agree that in the event the present rate of interest
on loan is increased by law or the Central Bank of the
Philippines, the holder shall have the option to apply and
collect the increased interest charges without notice although
the original interest have already been collected wholly or
partially unless the contrary is required by law.
It is also a special condition of this contract that the parties
herein agree that the amount of peso-obligation under this
agreement is based on the present value of the peso, and if
there be any change in the value thereof, due to extraordinary
inflation or deflation, or any other cause or reason, then the
peso-obligation herein contracted shall be adjusted in
accordance with the value of the peso then prevailing at the
time of the complete fulfillment of the obligation.

Demand and notice of dishonor waived. Holder may accept
partial payments and grant renewals of this note or extension
of payments, reserving rights against each and all indorsers
and all parties to this note.
IN CASE OF JUDICIAL Execution of this obligation, or any
part of it, the debtors waive all his/their rights under the
provisions of Section 12, Rule 39, of the Revised Rules of
Court.
On maturity of the loan, the borrowers failed to pay the
indebtedness of P500,000.00, plus interests and penalties,
evidenced by the above-quoted promissory note.
On February 20, 1990, Veronica R. Gonzales, joined by her
husband Danilo G. Gonzales, filed with the Regional Trial
Court of Bulacan, Branch 16, at Malolos, Bulacan, a
complaint for collection of the full amount of the loan
including interests and other charges.
In his answer to the complaint filed with the trial court on
April 5, 1990, defendant Servando alleged that he did not
obtain any loan from the plaintiffs; that it was defendants
Leticia and Dr. Rafael Medel who borrowed from the
plaintiffs the sum of P500,000.00, and actually received the
amount and benefited therefrom; that the loan was secured by
a real estate mortgage executed in favor of the plaintiffs, and
that he (Servando Franco) signed the promissory note only as
a witness.
In their separate answer filed on April 10, 1990, defendants
Leticia and Rafael Medel alleged that the loan was the
transaction of Leticia Yaptinchay, who executed a mortgage in
favor of the plaintiffs over a parcel of real estate situated in
San Juan, Batangas; that the interest rate is excessive at 5.5%
per month with additional service charge of 2% per annum,
and penalty charge of 1% per month; that the stipulation for
attorney's fees of 25% of the amount due is unconscionable,
illegal and excessive, and that substantial payments made were
applied to interest, penalties and other charges.
After due trial, the lower court declared that the due execution
and genuineness of the four promissory notes had been duly
proved, and ruled that although the Usury Law had been
repealed, the interest charged by the plaintiffs on the loans was
unconscionable and "revolting to the conscience". Hence, the
trial court applied "the provision of the New [Civil] Code" that
the "legal rate of interest for loan or forbearance of money,
goods or credit is 12% per annum."7
Accordingly, on December 9, 1991, the trial court rendered
judgment, the dispositive portion of which reads as follows:
WHEREFORE, premises considered, judgment is hereby
rendered, as follows:
1. Ordering the defendants Servando Franco and Leticia
Medel, jointly and severally, to pay plaintiffs the amount of
P47,000.00 plus 12% interest per annum from November 7,
1985 and 1% per month as penalty, until the entire amount is
paid in full.
2. Ordering the defendants Servando Franco and Leticia Y.
Medel to plaintiffs, jointly and severally the amount of
P84,000.00 with 12% interest per annum and 1% per cent per
month as penalty from November 19, 1985 until the whole
amount is fully paid;
3. Ordering the defendants to pay the plaintiffs, jointly and
severally, the amount of P285,000.00 plus 12% interest per
38
annum and 1% per month as penalty from July 11, 1986, until
the whole amount is fully paid;
4. Ordering the defendants to pay plaintiffs, jointly and
severally, the amount of P50,000.00 as attorney's fees;
5. All counterclaims are hereby dismissed.
With costs against the defendants.8
In due time, both plaintiffs and defendants appealed to the
Court of Appeals.
In their appeal, plaintiffs-appellants argued that the
promissory note, which consolidated all the unpaid loans of
the defendants, is the law that governs the parties. They
further argued that Circular No. 416 of the Central Bank
prescribing the rate of interest for loans or forbearance of
money, goods or credit at 12% per annum, applies only in the
absence of a stipulation on interest rate, but not when the
parties agreed thereon.
The Court of Appeals sustained the plaintiffs-appellants'
contention. It ruled that "the Usury Law having become
'legally inexistent' with the promulgation by the Central Bank
in 1982 of Circular No. 905, the lender and borrower could
agree on any interest that may be charged on the loan". 9 The
Court of Appeals further held that "the imposition of 'an
additional amount equivalent to 1% per month of the amount
due and demandable as penalty charges in the form of
liquidated damages until fully paid' was allowed by
law". 10
Accordingly, on March 21, 1997, the Court of Appeals
promulgated its decision reversing that of the Regional Trial
Court, disposing as follows:
WHEREFORE, the appealed judgment is hereby MODIFIED
such that defendants are hereby ordered to pay the plaintiffs
the sum of P500,000.00, plus 5.5% per month interest and 2%
service charge per annum effective July 23, 1986, plus 1% per
month of the total amount due and demandable as penalty
charges effective August 24, 1986, until the entire amount is
fully paid.
The award to the plaintiffs of P50,000.00 as attorney's fees is
affirmed. And so is the imposition of costs against the
defendants.
SO ORDERED. 11
On April 15, 1997, defendants-appellants filed a motion for
reconsideration of the said decision. By resolution dated
November 25, 1997, the Court of Appeals denied the
motion. 12
Hence, defendants interposed the present recourse via petition
for review on certiorari. 13
We find the petition meritorious.
Basically, the issue revolves on the validity of the interest rate
stipulated upon. Thus, the question presented is whether or not
the stipulated rate of interest at 5.5% per month on the loan in
the sum of P500,000.00, that plaintiffs extended to the
defendants is usurious. In other words, is the Usury Law still
effective, or has it been repealed by Central Bank Circular No.
905, adopted on December 22, 1982, pursuant to its powers
under P.D. No. 116, as amended by P.D. No. 1684?
We agree with petitioners that the stipulated rate of interest at
5.5% per month on the P500,000.00 loan is excessive,
iniquitous, unconscionable and exorbitant. 13 However, we can
not consider the rate "usurious" because this Court has
consistently held that Circular No. 905 of the Central Bank,

adopted on December 22, 1982, has expressly removed the
interest ceilings prescribed by the Usury Law 14 and that the
Usury Law is now "legally inexistent". 15
In Security Bank and Trust Company vs. Regional Trial Court
of Makati, Branch 61 16 the Court held that CB Circular No.
905 "did not repeal nor in anyway amend the Usury Law but
simply suspended the latter's effectivity." Indeed, we have
held that "a Central Bank Circular can not repeal a law. Only a
law can repeal another law." 17 In the recent case of Florendo
vs. Court of Appeals 18, the Court reiterated the ruling that "by
virtue of CB Circular 905, the Usury Law has been rendered
ineffective". "Usury has been legally non-existent in our
jurisdiction. Interest can now be charged as lender and
borrower may agree upon." 19
Nevertheless, we find the interest at 5.5% per month, or 66%
per annum, stipulated upon by the parties in the promissory
note iniquitous or unconscionable, and, hence, contrary to
morals ("contra bonos mores"), if not against the law. 20 The
stipulation is void. 21 The courts shall reduce equitably
liquidated damages, whether intended as an indemnity or a
penalty if they are iniquitous or unconscionable. 22
Consequently, the Court of Appeals erred in upholding the
stipulation of the parties. Rather, we agree with the trial court
that, under the circumstances, interest at 12% per annum, and
an additional 1% a month penalty charge as liquidated
damages may be more reasonable.
WHEREFORE, the Court hereby REVERSES and SETS
ASIDE the decision of the Court of Appeals promulgated on
March 21, 1997, and its resolution dated November 25, 1997.
Instead, we render judgment REVIVING and AFFIRMING
the decision dated December 9, 1991, of the Regional Trial
Court of Bulacan, Branch 16, Malolos, Bulacan, in Civil Case
No. 134-M-90, involving the same parties.
No pronouncement as to costs in this instance.
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 attorney’s 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 petitioner’s Motion for
Reconsideration.
39
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
attorney’s 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
attorney’s 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 defendant’s 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 attorney’s 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 ‘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 checks was that each time a check matures the
defendant would exchange it with cash.
"Although, admittedly, defendant made several payments, the
same were not enough and she always defaulted whenever her
loans mature[d]. As of August 16, 1991, the total unpaid
amount, including accrued interest, penalties and attorney’s
fees, [was] ₱2,807,784.20.
"On the other hand, defendant claims that she was extended
loans by the plaintiff 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 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:
(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 loan on November 13, 1987 and January 6, 1988 ha[d]
been fully paid including the usurious interests of 16% per
month, this is the reason why these were not included in the
complaint.
"Defendant alleges that all the above amounts were released
respectively by checks drawn by the plaintiff, and the latter
must produce these checks as these were returned to him being
40
the drawer if only to serve the truth. The above amount are the
real amount released to the defendant but the plaintiff by
masterful machinations made it appear that the total amount
released was ₱462,600.00. Because in his computation he
made it appear that the true amounts released was not the
original amount, since it include[d] the unconscionable
interest for four months.
"Further, defendant claims that as of January 25, 1989, the
total payments made by defendants [were] as follows:
a. Paid releases on November 13, 1987 of ₱50,000
and January 6, 1988 of ₱30,000.00 these two items w
not included in the complaint affirming the fact t
these were paid
b. Exhibit ‘26’ Receipt
c. Exhibit ‘8-25’ Receipt
d. Exhibit ‘27’ Receipt
Total
Less:
Excess Payment
"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 of January 25, 1989,
the total releases have been fully paid.
"On 31 August 1993, the trial court rendered the assailed
decision."6
Ruling of the Court of Appeals
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, the appellate court affirmed the judgment of the
trial court, holding that the latter’s clear and detailed
computation of petitioner’s outstanding obligation to
respondent was convincing and satisfactory.
Hence, this Petition.7
The Issues
Petitioner raises the following arguments for our
consideration:
"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 without any writing is illegal.
"3. That charging of excessive attorney’s fees is hemorrhagic.
"4. Charging of excessive penalties per month is in the guise
of hidden interest.
"5. The non-inclusion of the husband of the petitioner at the
time the case was filed should have dismissed this case."8
The Court’s Ruling
The Petition has no merit.
First Issue:
Computation of Outstanding Obligation
Arguing that she had already fully paid the loan before the
filing of the case, petitioner alleges that the two lower courts

misappreciated the facts when they ruled that she still had an
outstanding balance of ₱208,430.
This issue involves a question of fact. Such question exists
when a doubt or difference arises as to the truth or the
falsehood of alleged facts; and when there is need for a
calibration of the evidence, considering mainly the credibility
of witnesses and the existence and the relevancy of specific
surrounding circumstances, their relation to each other and to
the 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
latter’s 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
blanche authority 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
41
justification to reverse or modify the rate imposed by the two
lower courts.
Third and Fourth Issue:
Penalties and Attorney’s 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 attorney’s 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 attorney’s fees
of 25 percent of the principal amount and accrued interests.
Strictly speaking, this covenant on attorney’s fees is different
from that mentioned in and regulated by the Rules of
Court.18 "Rather, the attorney’s 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 petitioner’s 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 RTC’s reduction of attorney’s fees -- from 25
percent to 10 percent of the total amount due and payable -- is
reasonable.
Fifth Issue:
Non-Inclusion of Petitioner’s 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 husband’s 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
[G.R. No. 109563. July 9, 1996]
PHILIPPINE NATIONAL BANK, petitioner, vs. COURT OF
APPEALS, MARIA AMOR BASCOS and MARCIANO
BASCOS, respondents.

DECISION
MENDOZA, J.:
This is a petition seeking review of the decision dated August
10, 1992,[1] of the Eight Division of the Court of Appeals and
its resolution dated March 25, 1993,[2] both rendered in CA-
G.R. CV No. 27653, which affirmed the decision of the
Regional Trial Court (RTC) of San Jose City (Branch 38).
The facts are as follows:
On June 4, 1979, private respondent spouses Maria Amor and
Marciano Bascos obtained a loan from the Philippine National
Bank in the amount of P15,000.00 evidenced by a promissory
note and secured by a real estate mortgage.
The promissory note contained the following stipulation: [3]
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
(P15,000.00), 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:[4]
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:[5]
(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.
On December 12, 1980, PNB extended the period of payment
of the loan to June 5, 1981, thus converting the loan from a
short-term to a medium-term loan, i.e., a loan which matured
over two to five years.[6] PNB also increased the rate of
interest per annum, first to 14%, effective December 1,
1979;[7] then to 22% effective February 21, 1983;[8] to 22.5%
effective June 20, 1983;[9] to 23% from November 2,
1983;[10] to 25% effective March 2, 1984;[11] and finally to
28% from April 10, 1984.[12]
Because private respondents defaulted in paying their
obligation, the Provincial Sheriff of Nueva Ecija scheduled the
extrajudicial foreclosure of the mortgage on June 15, 1984 to
pay private respondents' indebtedness which, according to
42
PNB, had increased from P15,000.00 to P35,125.84, plus 28%
annual interest.[13]
Private respondents brought suit against PNB, its Branch
Manager Jetro Godoy, and the Provincial Sheriff of Nueva
Ecija Numeriano Y. Galang (1) for a declaration of nullity of
C.B. Monetary Board Resolution No. 2126 dated November
29, 1979 (embodied in C.B. Circular No. 705 dated December
1, 1979), which increased the ceiling on the interest rate of
secured and unsecured loans to 16% per annum and 14% per
annum, respectively, on the ground that it was contrary to the
Usury Law, good morals, public policy, customs and
traditions, social justice, due process and the equal protection
clause of the Constitution; and (2) for a declaration that the
interest rate increases on their loan were contrary to Art. 1959
of the Civil Code which provides that interest due and unpaid
shall not earn interest. Pending final determination of the case,
private respondents asked that the auction sale be enjoined.
PNB filed an answer with compulsory counterclaim. It alleged
that private respondents had no cause of action because 1-a of
the Usury Law, as amended by P.D. No. 1684, did not limit
the number of times the interest could be increased and that
private respondents were estopped from questioning the
increases because they failed to object to the same. PNB asked
that the complaint be dismissed and that private respondents
be ordered to pay P35,125.84, plus interest from April 10,
1984, until the obligation was fully paid, attorney's fees and
moral damages in such amount as may be determined by the
court.
On June 13, 1984 private respondents deposited with the clerk
of court P8,000.00[14] and on January 15, 1985
P2,000.00,[15] in partial payment of their loan.
On June 15, 1990, the RTC rendered a decision, the
dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered as follows:
1. There having [sic] no evidence against the defendants Jetro
Godoy, and the Provincial Sheriff of Nueva Ecija, Numeriano
Galang, the case against them is dismissed;
2. The increase in interest rates based on the escalation clauses
in the Promissory Note and the Real Estate Mortgage, par. K,
being contrary to Sec. 3, P.D. No. 116 are declared null and
void, that henceforth, the defendant PNB is hereby directed to
desist from enforcing the increased rate of interest more than
TWELVE (12%) per cent on plaintiffs' loan;
3. The compulsory counterclaim of the defendants is also
dismissed;
4. On the other hand, the plaintiffs can settle their unpaid
obligation with the defendant PNB at the interest rate of
TWELVE (12%) per cent per annum computed from the
inception of the loan until the same is fully paid; advances
made by the PNB for insurance premiums and penalties
added; and the 10,000.00 paid to and defendant bank to be
credited as payment by the plaintiffs;
5. Plaintiffs' claim for damages is, likewise, dismissed; and
6. The parties shall each bear out [sic] the expenses incurred
by them.
SO ORDERED.
The RTC invalidated the stipulations in the promissory note
and the real estate mortgage, which authorized PNB to
increase the interest rate, on the ground that there was no
corresponding stipulation that the interest rate would be

reduced in the event the law reduced the applicable maximum
rate as provided under P.D. No. 1684; that P.D. No. 116,
which sets a ceiling of 12% interest on secured loans, is a
"law," which should prevail over Circular No. 705, used by
PNB to increase the interest; that collection of the increased
interest sanctions unjust enrichment contrary to Art. 22 of the
Civil Code; and that the promissory note and real estate
mortgage were contracts of adhesion which should be
interpreted in favor of private respondents.
PNB appealed. However, the Court of Appeals affirmed the
trial court's decision. The appellate court held that the
escalation clause in the promissory note could not be given
effect because of the absence of a provision for a de-escalation
in the event a reduction of interest was ordered by law. In
addition it held that pursuant to the escalation clause any
increase in interest must be within "the limits allowed by law"
but C.B. circulars, on the basis of which PNB increased the
interest, could not be considered "laws."
PNB moved for a reconsideration. As its motion was denied, it
filed this petition. PNB's argument is that the Court of Appeals
erred in applying 2 of P.D. No. 1684, which makes the validity
of an escalation clause turn on the presence of a de-escalation
clause, to the promissory note and the real estate mortgage in
this case. PNB contends that the two had been executed on
June 4, 1979, before the effectivity of P.D. No. 1684 on March
17, 1980.
To begin with, PNB's argument rests on a misapprehension of
the import of the appellate court's 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[16] that
although P.D. 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-sideness of the escalation
clause. Indeed because of concern for the unequal status of
borrowers vis-a-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,[17] 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
43
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:[18]
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
P1.8 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 party's (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.[19] 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:[20]
We cannot countenance petitioner bank's posturing that the
escalation clause at bench gives it unbridled right
to unilaterally upwardly adjust the interest on private
respondents' loan. That would completelytake away from
private respondents the right to assent to an important
modification in their agreement, and would negate the element
of mutuality in contracts.
Only recently we invalidated another round of interest
increases decreed by PNB pursuant to a similar agreement it
had with other borrowers:[21]
[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,[22] no one receiving a proposal to change a contract
is obliged to answer the proposal.

WHEREFORE, the decision of the Court of Appeals is
AFFIRMED.
SO ORDERED.
G.R. No. 171545 December 19, 2007
EQUITABLE PCI BANK,* AIMEE YU and BEJAN
LIONEL APAS, Petitioners,
vs.
NG SHEUNG NGOR** doing business under the name
and style "KEN MARKETING," KEN APPLIANCE
DIVISION, INC. and BENJAMIN E. GO, Respondents.
DECISION
CORONA, J.:
This petition for review on certiorari1 seeks to set aside the
decision2 of the Court of Appeals (CA) in CA-G.R. SP No.
83112 and its resolution3 denying reconsideration.
On October 7, 2001, respondents Ng Sheung Ngor, 4 Ken
Appliance Division, Inc. and Benjamin E. Go filed an action
for annulment and/or reformation of documents and
contracts5 against petitioner Equitable PCI Bank (Equitable)
and its employees, Aimee Yu and Bejan Lionel Apas, in the
Regional Trial Court (RTC), Branch 16 of Cebu
City.6 They claimed that Equitable induced them to avail of its
peso and dollar credit facilities by offering low interest
rates7 so they accepted Equitable's proposal and signed the
bank's pre-printed promissory notes on various dates
beginning 1996. They, however, were unaware that the
documents contained identical escalation clauses granting
Equitable authority to increase interest rates without their
consent.8
Equitable, in its answer, asserted that respondents knowingly
accepted all the terms and conditions contained in the
promissory notes.9 In fact, they continuously availed of and
benefited from Equitable's credit facilities for five years. 10
After trial, the RTC upheld the validity of the promissory
notes. It found that, in 2001 alone, Equitable restructured
respondents' loans amounting to US$228,200 and
₱1,000,000.11 The trial court, however, invalidated the
escalation clause contained therein because it violated the
principle of mutuality of contracts.12 Nevertheless, it took
judicial notice of the steep depreciation of the peso during the
intervening period13 and declared the existence of
extraordinary deflation.14 Consequently, the RTC ordered the
use of the 1996 dollar exchange rate in computing
respondents' dollar-denominated loans.15 Lastly, because the
business reputation of respondents was (allegedly) severely
damaged when Equitable froze their accounts,16 the trial court
awarded moral and exemplary damages to them. 17
The dispositive portion of the February 5, 2004 RTC
decision18 provided:
WHEREFORE, premises considered, judgment is hereby
rendered:
A) Ordering [Equitable] to reinstate and return the amount of
[respondents'] deposit placed on hold status;
B) Ordering [Equitable] to pay [respondents] the sum of ₱12
[m]illion [p]esos as moral damages;
C) Ordering [Equitable] to pay [respondents] the sum of ₱10
[m]illion [p]esos as exemplary damages;
D) Ordering defendants Aimee Yu and Bejan [Lionel] Apas to
pay [respondents], jointly and severally, the sum of [t]wo
[m]illion [p]esos as moral and exemplary damages;
44
E) Ordering [Equitable, Aimee Yu and Bejan Lionel Apas],
jointly and severally, to pay [respondents'] attorney's fees in
the sum of ₱300,000; litigation expenses in the sum of
₱50,000 and the cost of suit;
F) Directing plaintiffs Ng Sheung Ngor and Ken Marketing to
pay [Equitable] the unpaid principal obligation for the peso
loan as well as the unpaid obligation for the dollar
denominated loan;
G) Directing plaintiff Ng Sheung Ngor and Ken Marketing to
pay [Equitable] interest as follows:
1) 12% per annum for the peso loans;
2) 8% per annum for the dollar loans. The basis for the
payment of the dollar obligation is the conversion rate of
P26.50 per dollar availed of at the time of incurring of the
obligation in accordance with Article 1250 of the Civil Code
of the Philippines;
H) Dismissing [Equitable's] counterclaim except the payment
of the aforestated unpaid principal loan obligations and
interest.
SO ORDERED.19
Equitable and respondents filed their respective notices of
appeal.20
In the March 1, 2004 order of the RTC, both notices were
denied due course because Equitable and respondents "failed
to submit proof that they paid their respective appeal fees."21
WHEREFORE, premises considered, the appeal interposed
by defendants from the Decision in the above-entitled case
is DENIED due course. As of February 27, 2004, the
Decision dated February 5, 2004, is considered final and
executory in so far as [Equitable, Aimee Yu and Bejan
Lionel Apas] are concerned.22 (emphasis supplied)
Equitable moved for the reconsideration of the March 1, 2004
order of the RTC23 on the ground that it did in fact pay the
appeal fees. Respondents, on the other hand, prayed for the
issuance of a writ of execution.24
On March 24, 2004, the RTC issued an omnibus order
denying Equitable's motion for reconsideration for lack of
merit25 and ordered the issuance of a writ of execution in favor
of respondents.26 According to the RTC, because
respondents did not move for the reconsideration of the
previous order (denying due course to the parties’ notices of
appeal),27 the February 5, 2004 decision became final and
executory as to both parties and a writ of execution against
Equitable was in order.28
A writ of execution was thereafter issued29 and three real
properties of Equitable were levied upon.30
On March 26, 2004, Equitable filed a petition for relief in the
RTC from the March 1, 2004 order.31 It, however, withdrew
that petition on March 30, 200432 and instead filed a petition
for certiorari with an application for an injunction in the CA to
enjoin the implementation and execution of the March 24,
2004 omnibus order.33
On June 16, 2004, the CA granted Equitable's application for
injunction. A writ of preliminary injunction was
correspondingly issued.34
Notwithstanding the writ of injunction, the properties of
Equitable previously levied upon were sold in a public auction
on July 1, 2004. Respondents were the highest bidders and
certificates of sale were issued to them. 35

On August 10, 2004, Equitable moved to annul the July 1,
2004 auction sale and to cite the sheriffs who conducted the
sale in contempt for proceeding with the auction despite the
injunction order of the CA.36
On October 28, 2005, the CA dismissed the petition for
certiorari.37 It found Equitable guilty of forum shopping
because the bank filed its petition for certiorari in the CA
several hours before withdrawing its petition for relief in the
RTC.38 Moreover, Equitable failed to disclose, both in the
statement of material dates and certificate of non-forum
shopping (attached to its petition for certiorari in the CA), that
it had a pending petition for relief in the RTC. 39
Equitable moved for reconsideration40 but it was
denied.41 Thus, this petition.
Equitable asserts that it was not guilty of forum shopping
because the petition for relief was withdrawn on the same
day the petition for certiorari was filed.42 It likewise avers that
its petition for certiorari was meritorious because the RTC
committed grave abuse of discretion in issuing the March 24,
2004 omnibus order which was based on an erroneous
assumption. The March 1, 2004 order denying its notice of
appeal for non payment of appeal fees was erroneous because
it had in fact paid the required fees.43 Thus, the RTC, by
issuing its March 24, 2004 omnibus order, effectively
prevented Equitable from appealing the patently
wrong February 5, 2004 decision.44
This petition is meritorious.
Equitable Was Not Guilty Of Forum shopping
Forum shopping exists when two or more actions involving
the same transactions, essential facts and circumstances are
filed and those actions raise identical issues, subject matter
and causes of action.45 The test is whether, in two or more
pending cases, there is identity of parties, rights or causes of
actions and reliefs.46
Equitable's petition for relief in the RTC and its petition for
certiorari in the CA did not have identical causes of action.
The petition for relief from the denial of its notice of appeal
was based on the RTC’s judgment or final order preventing it
from taking an appeal by "fraud, accident, mistake or
excusable negligence."47 On the other hand, its petition for
certiorari in the CA, a special civil action, sought to correct the
grave abuse of discretion amounting to lack of jurisdiction
committed by the RTC.48
In a petition for relief, the judgment or final order is rendered
by a court with competent jurisdiction. In a petition for
certiorari, the order is rendered by a court without or in excess
of its jurisdiction.
Moreover, Equitable substantially complied with the rule on
non-forum shopping when it moved to withdraw its petition
for relief in the RTC on the same day (in fact just four hours
and forty minutes after) it filed the petition for certiorari in the
CA. Even if Equitable failed to disclose that it had a pending
petition for relief in the RTC, it rectified what was doubtlessly
a careless oversight by withdrawing the petition for relief just
a few hours after it filed its petition for certiorari in the CA ―
a clear indication that it had no intention of maintaining the
two actions at the same time.
The Trial Court Committed Grave Abuse of Discretion In
Issuing Its March 1, 2004 and March 24, 2004 Orders
Section 1, Rule 65 of the Rules of Court provides:
45
Section 1. Petition for Certiorari. When any tribunal, board
or officer exercising judicial or quasi-judicial function 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, nor any plain, speedy
or 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 certificate of non-forum shopping as provided in the
third paragraph of Section 3, Rule 46.
There are two substantial requirements in a petition for
certiorari. These are:
1. that the tribunal, board or officer exercising judicial or
quasi-judicial functions acted without or in excess of his or its
jurisdiction or with grave abuse of discretion amounting to
lack or excess of jurisdiction; and
2. that there is no appeal or any plain, speedy and adequate
remedy in the ordinary course of law.
For a petition for certiorari premised on grave abuse of
discretion to prosper, petitioner must show that the public
respondent patently and grossly abused his discretion and that
abuse amounted to an evasion of positive duty or a virtual
refusal to perform a duty enjoined by law or to act at all in
contemplation of law, as where the power was exercised in an
arbitrary and despotic manner by reason of passion or
hostility.49
The March 1, 2004 order denied due course to the notices of
appeal of both Equitable and respondents. However, it
declared that the February 5, 2004 decision was final and
executory only with respect to Equitable. 50 As expected, the
March 24, 2004 omnibus order denied Equitable's motion for
reconsideration and granted respondents' motion for the
issuance of a writ of execution.51
The March 1, 2004 and March 24, 2004 orders of the RTC
were obviously intended to prevent Equitable, et al. from
appealing the February 5, 2004 decision. Not only that. The
execution of the decision was undertaken with indecent haste,
effectively obviating or defeating Equitable's right to avail of
possible legal remedies. No matter how we look at it, the RTC
committed grave abuse of discretion in rendering those orders.
With regard to whether Equitable had a plain, speedy and
adequate remedy in the ordinary course of law, we hold that
there was none. The RTC denied due course to its notice of
appeal in the March 1, 2004 order. It affirmed that denial in
the March 24, 2004 omnibus order. Hence, there was no way
Equitable could have possibly appealed the February 5, 2004
decision.52
Although Equitable filed a petition for relief from the March
24, 2004 order, that petition was not a plain, speedy and
adequate remedy in the ordinary course of law.53 A petition for
relief under Rule 38 is an equitable remedy allowed only in
exceptional circumstances or where there is no other available
or adequate remedy.54

Thus, we grant Equitable's petition for certiorari and
consequently give due course to its appeal.
Equitable Raised Pure Questions of Law in Its Petition For
Review
The jurisdiction of this Court in Rule 45 petitions is limited to
questions of law.55 There is a question of law "when the doubt
or controversy concerns the correct application of law or
jurisprudence to a certain set of facts; or when the issue does
not call for the probative value of the evidence presented, the
truth or falsehood of facts being admitted."56
Equitable does not assail the factual findings of the trial court.
Its arguments essentially focus on the nullity of the RTC’s
February 5, 2004 decision. Equitable points out that that
decision was patently erroneous, specially the exorbitant
award of damages, as it was inconsistent with existing law
and jurisprudence.57
The Promissory Notes Were Valid
The RTC upheld the validity of the promissory notes despite
respondents’ assertion that those documents were contracts of
adhesion.
A contract of adhesion is a contract whereby almost all of its
provisions are drafted by one party. 58 The participation of the
other party is limited to affixing his signature or his
"adhesion" to the contract.59 For this reason, contracts of
adhesion are strictly construed against the party who drafted
it.60
It is erroneous, however, to conclude that contracts of
adhesion are invalid per se. They are, on the contrary, as
binding as ordinary contracts. A party is in reality free to
accept or reject it. A contract of adhesion becomes void only
when the dominant party takes advantage of the weakness of
the other party, completely depriving the latter of the
opportunity to bargain on equal footing. 61
That was not the case here. As the trial court noted, if the
terms and conditions offered by Equitable had been truly
prejudicial to respondents, they would have walked out and
negotiated with another bank at the first available instance.
But they did not. Instead, they continuously availed of
Equitable's credit facilities for five long years.
While the RTC categorically found that respondents had
outstanding dollar- and peso-denominated loans with
Equitable, it, however, failed to ascertain the total amount due
(principal, interest and penalties, if any) as of July 9, 2001.
The trial court did not explain how it arrived at the amounts of
US$228,200 and ₱1,000,000.62 In Metro Manila Transit
Corporation v. D.M. Consunji,63 we reiterated that this Court
is not a trier of facts and it shall pass upon them only for
compelling reasons which unfortunately are not present in this
case.64 Hence, we ordered the partial remand of the case for
the sole purpose of determining the amount of actual
damages.65
Escalation Clause Violated The Principle Of Mutuality Of
Contracts
Escalation clauses are not void per se. However, one "which
grants the creditor an unbridled right to adjust the interest
independently and upwardly, completely depriving the debtor
of the right to assent to an important modification in the
agreement" is void. Clauses of that nature violate the principle
of mutuality of contracts.66 Article 130867 of the Civil Code
holds that a contract must bind both contracting parties; its
46
validity or compliance cannot be left to the will of one of
them.68
For this reason, we have consistently held that a valid
escalation clause provides:
1. that the rate of interest will only be increased if the
applicable maximum rate of interest is increased by law or by
the Monetary Board; and
2. that the stipulated rate of interest will be reduced if the
applicable maximum rate of interest is reduced by law or by
the Monetary Board (de-escalation clause).69
The RTC found that Equitable's promissory notes
uniformly stated:
If subject promissory note is extended, the interest for
subsequent extensions shall be at such rate as shall be
determined by the bank.70
Equitable dictated the interest rates if the term (or period for
repayment) of the loan was extended. Respondents had no
choice but to accept them. This was a violation of Article 1308
of the Civil Code. Furthermore, the assailed escalation clause
did not contain the necessary provisions for validity, that is, it
neither provided that the rate of interest would be increased
only if allowed by law or the Monetary Board, nor allowed de-
escalation. For these reasons, the escalation clause was void.
With regard to the proper rate of interest, in New Sampaguita
Builders v. Philippine National Bank71 we held that, because
the escalation clause was annulled, the principal amount of the
loan was subject to the original or stipulated rate of interest.
Upon maturity, the amount due was subject to legal interest at
the rate of 12% per annum.72
Consequently, respondents should pay Equitable the interest
rates of 12.66% p.a. for their dollar-denominated loans and
20% p.a. for their peso-denominated loans from January 10,
2001 to July 9, 2001. Thereafter, Equitable was entitled to
legal interest of 12% p.a. on all amounts due.
There Was No Extraordinary Deflation
Extraordinary inflation exists when there is an unusual
decrease in the purchasing power of currency (that is, beyond
the common fluctuation in the value of currency) and such
decrease could not be reasonably foreseen or was manifestly
beyond the contemplation of the parties at the time of the
obligation. Extraordinary deflation, on the other hand,
involves an inverse situation.73
Article 1250 of the Civil Code provides:
Article 1250. In case an extraordinary inflation or deflation of
the currency stipulated should intervene, the value of the
currency at the time of the establishment of the obligation
shall be the basis of payment, unless there is an agreement to
the contrary.
For extraordinary inflation (or deflation) to affect an
obligation, the following requisites must be proven:
1. that there was an official declaration of extraordinary
inflation or deflation from the Bangko Sentral ng Pilipinas
(BSP);74
2. that the obligation was contractual in nature;75 and
3. that the parties expressly agreed to consider the effects of
the extraordinary inflation or deflation. 76
Despite the devaluation of the peso, the BSP never declared a
situation of extraordinary inflation. Moreover, although the
obligation in this instance arose out of a contract, the parties
did not agree to recognize the effects of extraordinary inflation

(or deflation).77 The RTC never mentioned that there was a
such stipulation either in the promissory note or loan
agreement. Therefore, respondents should pay their dollar-
denominated loans at the exchange rate fixed by the BSP on
the date of maturity.78
The Award Of Moral And Exemplary Damages Lacked
Basis
Moral damages are in the category of an award designed to
compensate the claimant for actual injury suffered, not to
impose a penalty to the wrongdoer.79 To be entitled to moral
damages, a claimant must prove:
1. That he or she suffered besmirched reputation, or physical,
mental or psychological suffering sustained by the claimant;
2. That the defendant committed a wrongful act or omission;
3. That the wrongful act or omission was the proximate cause
of the damages the claimant sustained;
4. The case is predicated on any of the instances expressed or
envisioned by Article 221980 and 222081 . 82
In culpa contractual or breach of contract, moral damages are
recoverable only if the defendant acted fraudulently or in bad
faith or in wanton disregard of his contractual
obligations.83 The breach must be wanton, reckless, malicious
or in bad faith, and oppressive or abusive. 84
The RTC found that respondents did not pay Equitable the
interest due on February 9, 2001 (or any month thereafter prior
to the maturity of the loan)85 or the amount due (principal plus
interest) due on July 9, 2001.86Consequently, Equitable
applied respondents' deposits to their loans upon maturity.
The relationship between a bank and its depositor is that of
creditor and debtor.87 For this reason, a bank has the right to
set-off the deposits in its hands for the payment of a
depositor's indebtedness.88
Respondents indeed defaulted on their obligation. For this
reason, Equitable had the option to exercise its legal right to
set-off or compensation. However, the RTC mistakenly (or, as
it now appears, deliberately) concluded that Equitable acted
"fraudulently or in bad faith or in wanton disregard" of its
contractual obligations despite the absence of proof. The
undeniable fact was that, whatever damage respondents
sustained was purely the consequence of their failure to pay
their loans. There was therefore absolutely no basis for the
award of moral damages to them.
Neither was there reason to award exemplary damages. Since
respondents were not entitled to moral damages, neither
should they be awarded exemplary damages. 89 And if
respondents were not entitled to moral and exemplary
damages, neither could they be awarded attorney's fees and
litigation expenses.90
ACCORDINGLY, the petition is hereby GRANTED.
The October 28, 2005 decision and February 3, 2006
resolution of the Court of Appeals in CA-G.R. SP No. 83112
are hereby REVERSED and SET ASIDE.
The March 24, 2004 omnibus order of the Regional Trial
Court, Branch 16, Cebu City in Civil Case No. CEB-26983 is
hereby ANNULLED for being rendered with grave abuse of
discretion amounting to lack or excess of jurisdiction. All
proceedings undertaken pursuant thereto are likewise declared
null and void.
The March 1, 2004 order of the Regional Trial Court, Branch
16 of Cebu City in Civil Case No. CEB-26983 is hereby SET
47
ASIDE. The appeal of petitioners Equitable PCI Bank, Aimee
Yu and Bejan Lionel Apas is therefore given due
course.1avvphi1
The February 5, 2004 decision of the Regional Trial Court,
Branch 16 of Cebu City in Civil Case No. CEB-26983 is
accordingly SET ASIDE. New judgment is hereby entered:
1. ordering respondents Ng Sheung Ngor, doing business
under the name and style of "Ken Marketing," Ken Appliance
Division, Inc. and Benjamin E. Go to pay petitioner Equitable
PCI Bank the principal amount of their dollar- and peso-
denominated loans;
2. ordering respondents Ng Sheung Ngor, doing business
under the name and style of "Ken Marketing," Ken Appliance
Division, Inc. and Benjamin E. Go to pay petitioner Equitable
PCI Bank interest at:
a) 12.66% p.a. with respect to their dollar-denominated loans
from January 10, 2001 to July 9, 2001;
b) 20% p.a. with respect to their peso-denominated loans from
January 10, 2001 to July 9, 2001;91
c) pursuant to our ruling in Eastern Shipping Lines v. Court of
Appeals,92 the total amount due on July 9, 2001 shall earn
legal interest at 12% p.a. from the time petitioner Equitable
PCI Bank demanded payment, whether judicially or extra-
judicially; and
d) after this Decision becomes final and executory, the
applicable rate shall be 12% p.a. until full satisfaction;
3. all other claims and counterclaims are dismissed.
As a starting point, the Regional Trial Court, Branch 16 of
Cebu City shall compute the exact amounts due on the
respective dollar-denominated and peso-denominated loans, as
of July 9, 2001, of respondents Ng Sheung Ngor, doing
business under the name and style of "Ken Marketing," Ken
Appliance Division and Benjamin E. Go.
SO ORDERED.
DEPOSIT
BANK OF THE PHILIPPINE ISLANDS…………………1
CA AGRO-INDUSTRIAL…………………………………3
YHT REALTY CORPORATION…………………………6
De Los Santos VS Tan KHey………….di ko mahanap
G.R. No. 104612 May 10, 1994
BANK OF THE PHILIPPINE ISLANDS (successor-in-
interest of COMMERCIAL AND TRUST CO.), petitioner,
vs.
HON. COURT OF APPEALS, EASTERN PLYWOOD
CORP. and BENIGNO D. LIM, respondents.
Leonen, Ramirez & Associates for petitioner.
Constante A. Ancheta for private respondents.
DAVIDE, JR., J.:
The petitioner urges us to review and set aside the amended
Decision1 of 6 March 1992 of respondent Court of Appeals in
CA- G.R. CV No. 25739 which modified the Decision of 15
November 1990 of Branch 19 of the Regional Trial Court
(RTC) of Manila in Civil Case No. 87-42967, entitled Bank of
the Philippine Islands (successor-in-interest of Commercial
Bank and Trust Company) versus Eastern Plywood
Corporation and Benigno D. Lim. The Court of Appeals had
affirmed the dismissal of the complaint but had granted the

defendants' counterclaim for P331,261.44 which represents the
outstanding balance of their account with the plaintiff.
As culled from the records and the pleadings of the parties, the
following facts were duly established:
Private respondents Eastern Plywood Corporation (Eastern)
and
Benigno D. Lim (Lim), an officer and stockholder of Eastern,
held at least one joint bank account ("and/or" account) with
the Commercial Bank and Trust Co. (CBTC), the predecessor-
in-interest of petitioner Bank of the Philippine Islands (BPI).
Sometime in March 1975, a joint checking account ("and"
account) with Lim in the amount of P120,000.00 was opened
by Mariano Velasco with funds withdrawn from the account
of Eastern and/or Lim. Various amounts were later deposited
or withdrawn from the joint account of Velasco and Lim. The
money therein was placed in the money market.
Velasco died on 7 April 1977. At the time of his death, the
outstanding balance of the account stood at P662,522.87. On 5
May 1977, by virtue of an Indemnity Undertaking executed by
Lim for himself and as President and General Manager of
Eastern, 2 one-half of this amount was provisionally released
and transferred to one of the bank accounts of Eastern with
CBTC. 3
Thereafter, on 18 August 1978, Eastern obtained a loan of
P73,000.00 from CBTC as "Additional Working Capital,"
evidenced by the "Disclosure Statement on Loan/Credit
Transaction" (Disclosure Statement) signed by CBTC through
its branch manager, Ceferino Jimenez, and Eastern, through
Lim, as its President and General Manager. 4The loan was
payable on demand with interest at 14% per annum.
For this loan, Eastern issued on the same day a negotiable
promissory note for P73,000.00 payable on demand to the
order of CBTC with interest at 14% per annum. 5 The note
was signed by Lim both in his own capacity and as President
and General Manager of Eastern. No reference to any security
for the loan appears on the note. In the Disclosure Statement,
the box with the printed word "UNSECURED" was marked
with "X" — meaning unsecured, while the line with the words
"this loan is wholly/partly secured by" is followed by the
typewritten words "Hold-Out on a 1:1 on C/A No. 2310-001-
42," which refers to the joint account of Velasco and Lim with
a balance of P331,261.44.
In addition, Eastern and Lim, and CBTC signed another
document entitled "Holdout Agreement," also dated 18 August
1978, 6 wherein it was stated that "as security for the Loan
[Lim and Eastern] have offered [CBTC] and the latter accepts
a holdout on said [Current Account No. 2310-011-42 in the
joint names of Lim and Velasco] to the full extent of their
alleged interests therein as these may appear as a result of final
and definitive judicial action or a settlement between and
among the contesting parties thereto." 7 Paragraph 02 of the
Agreement provides as follows:
Eastply [Eastern] and Mr. Lim hereby confer upon Comtrust
[CBTC], when and if their alleged interests in the Account
Balance shall have been established with finality, ample and
sufficient power as shall be necessary to retain said Account
Balance and enable Comtrust to apply the Account Balance
for the purpose of liquidating the Loan in respect of principal
and/or accrued interest.
And paragraph 05 thereof reads:
48
The acceptance of this holdout shall not impair the right of
Comtrust to declare the loan payable on demand at any time,
nor shall the existence hereof and the non-resolution of the
dispute between the contending parties in respect of
entitlement to the Account Balance, preclude Comtrust from
instituting an action for recovery against Eastply and/or Mr.
Lim in the event the Loan is declared due and payable and
Eastply and/or Mr. Lim shall default in payment of all
obligations and liabilities thereunder.
In the meantime, a case for the settlement of Velasco's estate
was filed with Branch 152 of the RTC of Pasig, entitled "In re
Intestate Estate of Mariano Velasco," and docketed as Sp.
Proc. No. 8959. In the said case, the whole balance of
P331,261.44 in the aforesaid joint account of Velasco and Lim
was being claimed as part of Velasco's estate. On 9 September
1986, the intestate court granted the urgent motion of the heirs
of Velasco to withdraw the deposit under the joint account of
Lim and Velasco and authorized the heirs to divide among
themselves the amount withdrawn. 8
Sometime in 1980, CBTC was merged with BPI. 9 On 2
December 1987, BPI filed with the RTC of Manila a
complaint against Lim and Eastern demanding payment of the
promissory note for P73,000.00. The complaint was docketed
as Civil Case No. 87- 42967 and was raffled to Branch 19 of
the said court, then presided over by Judge Wenceslao M.
Polo. Defendants Lim and Eastern, in turn, filed a
counterclaim against BPI for the return of the balance in the
disputed account subject of the Holdout Agreement and the
interests thereon after deducting the amount due on the
promissory note.
After due proceedings, the trial court rendered its decision on
15 November 1990 dismissing the complaint because BPI
failed to make out its case. Furthermore, it ruled that "the
promissory note in question is subject to the 'hold-out'
agreement," 10 and that based on this agreement, "it was the
duty of plaintiff Bank [BPI] to debit the account of the
defendants under the promissory note to set off the loan even
though the same has no fixed maturity." 11 As to the
defendants' counterclaim, the trial court, recognizing the fact
that the entire amount in question had been withdrawn by
Velasco's heirs pursuant to the order of the intestate court in
Sp. Proc. No. 8959, denied it because the "said claim cannot
be awarded without disturbing the resolution" of the intestate
court. 12
Both parties appealed from the said decision to the Court of
Appeals. Their appeal was docketed as CA-G.R. CV No.
25739.
On 23 January 1991, the Court of Appeals rendered a decision
affirming the decision of the trial court. It, however, failed to
rule on the defendants' (private respondents') partial appeal
from the trial court's denial of their counterclaim. Upon their
motion for reconsideration, the Court of Appeals promulgated
on 6 March 1992 an Amended Decision 13 wherein it ruled
that the settlement of Velasco's estate had nothing to do with
the claim of the defendants for the return of the balance of
their account with CBTC/BPI as they were not privy to that
case, and that the defendants, as depositors of CBTC/BPI, are
the latter's creditors; hence, CBTC/BPI should have protected
the defendants' interest in Sp. Proc. No. 8959 when the said
account was claimed by Velasco's estate. It then ordered BPI

"to pay defendants the amount of P331,261.44 representing
the outstanding balance in the bank account of defendants." 14
On 22 April 1992, BPI filed the instant petition alleging
therein that the Holdout Agreement in question was subject to
a suspensive condition stated therein, viz., that the
"P331,261.44 shall become a security for respondent Lim's
promissory note only if respondents' Lim and Eastern
Plywood Corporation's interests to that amount are established
as a result of a final and definitive judicial action or a
settlement between and among the contesting parties
thereto." 15 Hence, BPI asserts, the Court of Appeals erred in
affirming the trial court's decision dismissing the complaint on
the ground that it was the duty of CBTC to debit the account
of the defendants to set off the amount of P73,000.00 covered
by the promissory note.
Private respondents Eastern and Lim dispute the "suspensive
condition" argument of the petitioner. They interpret the
findings of both the trial and appellate courts that the money
deposited in the joint account of Velasco and Lim came from
Eastern and Lim's own account as a finding that the money
deposited in the joint account of Lim and Velasco "rightfully
belong[ed] to Eastern Plywood Corporation and/or Benigno
Lim." And because the latter are the rightful owners of the
money in question, the suspensive condition does not find any
application in this case and the bank had the duty to set off this
deposit with the loan. They add that the ruling of the lower
court that they own the disputed amount is the final and
definitive judicial action required by the Holdout Agreement;
hence, the petitioner can only hold the amount of P73,000.00
representing the security required for the note and must return
the rest. 16
The petitioner filed a Reply to the aforesaid Comment. The
private respondents filed a Rejoinder thereto.
We gave due course to the petition and required the parties to
submit simultaneously their memoranda.
The key issues in this case are whether BPI can demand
payment of the loan of P73,000.00 despite the existence of the
Holdout Agreement and whether BPI is still liable to the
private respondents on the account subject of the Holdout
Agreement after its withdrawal by the heirs of Velasco.
The collection suit of BPI is based on the promissory note for
P73,000.00. On its face, the note is an unconditional promise
to pay the said amount, and as stated by the respondent Court
of Appeals, "[t]here is no question that the promissory note is
a negotiable instrument." 17 It further correctly ruled that BPI
was not a holder in due course because the note was not
indorsed to BPI by the payee, CBTC. Only a negotiation by
indorsement could have operated as a valid transfer to make
BPI a holder in due course. It acquired the note from CBTC by
the contract of merger or sale between the two banks. BPI,
therefore, took the note subject to the Holdout Agreement.
We disagree, however, with the Court of Appeals in its
interpretation of the Holdout Agreement. It is clear from
paragraph 02 thereof that CBTC, or BPI as its successor-in-
interest, had every right to demand that Eastern and Lim settle
their liability under the promissory note. It cannot be
compelled to retain and apply the deposit in Lim and Velasco's
joint account to the payment of the note. What the agreement
conferred on CBTC was a power, not a duty. Generally, a
bank is under no duty or obligation to make the
49
application. 18 To apply the deposit to the payment of a loan is
a privilege, a right of set-off which the bank has the option to
exercise. 19
Also, paragraph 05 of the Holdout Agreement itself states that
notwithstanding the agreement, CBTC was not in any way
precluded from demanding payment from Eastern and from
instituting an action to recover payment of the loan. What it
provides is an alternative, not an exclusive, method of
enforcing its claim on the note. When it demanded payment of
the debt directly from Eastern and Lim, BPI had opted not to
exercise its right to apply part of the deposit subject of the
Holdout Agreement to the payment of the promissory note for
P73,000.00. Its suit for the enforcement of the note was then
in order and it was error for the trial court to dismiss it on the
theory that it was set off by an equivalent portion in C/A No.
2310-001-42 which BPI should have debited. The Court of
Appeals also erred in affirming such dismissal.
The "suspensive condition" theory of the petitioner is,
therefore, untenable.
The Court of Appeals correctly decided on the counterclaim.
The counterclaim of Eastern and Lim for the return of the
P331,261.44 20 was equivalent to a demand that they be
allowed to withdraw their deposit with the bank. Article 1980
of the Civil Code expressly provides that "[f]ixed, savings,
and current deposits of money in banks and similar institutions
shall be governed by the provisions concerning simple loan."
In Serrano vs. Central Bank of the Philippines, 21 we held that
bank deposits are in the nature of irregular deposits; they are
really loans because they earn interest. The relationship then
between a depositor and a bank is one of creditor and debtor.
The deposit under the questioned account was an ordinary
bank deposit; hence, it was payable on demand of the
depositor. 22
The account was proved and established to belong to Eastern
even if it was deposited in the names of Lim and Velasco. As
the real creditor of the bank, Eastern has the right to withdraw
it or to demand payment thereof. BPI cannot be relieved of its
duty to pay Eastern simply because it already allowed the
heirs of Velasco to withdraw the whole balance of the account.
The petitioner should not have allowed such withdrawal
because it had admitted in the Holdout Agreement the
questioned ownership of the money deposited in the account.
As early as 12 May 1979, CBTC was notified by the
Corporate Secretary of Eastern that the deposit in the joint
account of Velasco and Lim was being claimed by them and
that one-half was being claimed by the heirs of Velasco.23
Moreover, the order of the court in Sp. Proc. No. 8959 merely
authorized the heirs of Velasco to withdraw the account. BPI
was not specifically ordered to release the account to the said
heirs; hence, it was under no judicial compulsion to do so. The
authorization given to the heirs of Velasco cannot be
construed as a final determination or adjudication that the
account belonged to Velasco. We have ruled that when the
ownership of a particular property is disputed, the
determination by a probate court of whether that property is
included in the estate of a deceased is merely provisional in
character and cannot be the subject of execution. 24
Because the ownership of the deposit remained undetermined,
BPI, as the debtor with respect thereto, had no right to pay to
persons other than those in whose favor the obligation was

constituted or whose right or authority to receive payment is
indisputable. The payment of the money deposited with BPI
that will extinguish its obligation to the creditor-depositor is
payment to the person of the creditor or to one authorized by
him or by the law to receive it. 25 Payment made by the debtor
to the wrong party does not extinguish the obligation as to the
creditor who is without fault or negligence, even if the debtor
acted in utmost good faith and by mistake as to the person of
the creditor, or through error induced by fraud of a third
person. 26 The payment then by BPI to the heirs of Velasco,
even if done in good faith, did not extinguish its obligation to
the true depositor, Eastern.
In the light of the above findings, the dismissal of the
petitioner's complaint is reversed and set aside. The award on
the counterclaim is sustained subject to a modification of the
interest.
WHEREFORE, the instant petition is partly GRANTED. The
challenged amended decision in CA-G.R. CV No. 25735 is
hereby MODIFIED. As modified:
(1) Private respondents are ordered to pay the petitioner the
promissory note for P73,000.00 with interest at:
(a) 14% per annum on the principal, computed from
18 August 1978 until payment;
(b) 12% per annum on the interest which had accrued up to
the date of the filing of the complaint, computed from that
date until payment pursuant to Article 2212 of the Civil Code.
(2) The award of P331,264.44 in favor of the private
respondents shall bear interest at the rate of 12%per
annum computed from the filing of the counterclaim.
No pronouncement as to costs.
SO ORDERED.
G.R. No. 90027 March 3, 1993
CA AGRO-INDUSTRIAL DEVELOPMENT
CORP., petitioner,
vs.
THE HONORABLE COURT OF APPEALS and
SECURITY BANK AND TRUST
COMPANY, respondents.
Dolorfino & Dominguez Law Offices for petitioner.
Danilo B. Banares for private respondent.
DAVIDE, JR., J.:
Is the contractual relation between a commercial bank and
another party in a contract of rent of a safety deposit box with
respect to its contents placed by the latter one of bailor and
bailee or one of lessor and lessee?
This is the crux of the present controversy.
On 3 July 1979, petitioner (through its President, Sergio
Aguirre) and the spouses Ramon and Paula Pugao entered into
an agreement whereby the former purchased from the latter
two (2) parcels of land for a consideration of P350,625.00. Of
this amount, P75,725.00 was paid as downpayment while the
balance was covered by three (3) postdated checks. Among
the terms and conditions of the agreement embodied in a
Memorandum of True and Actual Agreement of Sale of Land
were that the titles to the lots shall be transferred to the
petitioner upon full payment of the purchase price and that the
owner's copies of the certificates of titles thereto, Transfer
Certificates of Title (TCT) Nos. 284655 and 292434, shall be
deposited in a safety deposit box of any bank. The same could
50
be withdrawn only upon the joint signatures of a
representative of the petitioner and the Pugaos upon full
payment of the purchase price. Petitioner, through Sergio
Aguirre, and the Pugaos then rented Safety Deposit Box No.
1448 of private respondent Security Bank and Trust Company,
a domestic banking corporation hereinafter referred to as the
respondent Bank. For this purpose, both signed a contract of
lease (Exhibit "2") which contains, inter alia, the following
conditions:
13. The bank is not a depositary of the contents of the safe and
it has neither the possession nor control of the same.
14. The bank has no interest whatsoever in said contents,
except herein expressly provided, and it assumes absolutely no
liability in connection therewith.1
After the execution of the contract, two (2) renter's keys were
given to the renters — one to Aguirre (for the petitioner) and
the other to the Pugaos. A guard key remained in the
possession of the respondent Bank. The safety deposit box has
two (2) keyholes, one for the guard key and the other for the
renter's key, and can be opened only with the use of both keys.
Petitioner claims that the certificates of title were placed inside
the said box.
Thereafter, a certain Mrs. Margarita Ramos offered to buy
from the petitioner the two (2) lots at a price of P225.00 per
square meter which, as petitioner alleged in its complaint,
translates to a profit of P100.00 per square meter or a total of
P280,500.00 for the entire property. Mrs. Ramos demanded
the execution of a deed of sale which necessarily entailed the
production of the certificates of title. In view thereof, Aguirre,
accompanied by the Pugaos, then proceeded to the respondent
Bank on 4 October 1979 to open the safety deposit box and
get the certificates of title. However, when opened in the
presence of the Bank's representative, the box yielded no such
certificates. Because of the delay in the reconstitution of the
title, Mrs. Ramos withdrew her earlier offer to purchase the
lots; as a consequence thereof, the petitioner allegedly failed
to realize the expected profit of P280,500.00. Hence, the latter
filed on 1 September 1980 a complaint 2 for damages against
the respondent Bank with the Court of First Instance (now
Regional Trial Court) of Pasig, Metro Manila which docketed
the same as Civil Case No. 38382.
In its Answer with Counterclaim,3 respondent Bank alleged
that the petitioner has no cause of action because of
paragraphs 13 and 14 of the contract of lease (Exhibit "2");
corollarily, loss of any of the items or articles contained in the
box could not give rise to an action against it. It then
interposed a counterclaim for exemplary damages as well as
attorney's fees in the amount of P20,000.00. Petitioner
subsequently filed an answer to the counterclaim. 4
In due course, the trial court, now designated as Branch 161 of
the Regional Trial Court (RTC) of Pasig, Metro Manila,
rendered a decision5 adverse to the petitioner on 8 December
1986, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby
rendered dismissing plaintiff's complaint.
On defendant's counterclaim, judgment is hereby rendered
ordering plaintiff to pay defendant the amount of FIVE
THOUSAND (P5,000.00) PESOS as attorney's fees.
With costs against plaintiff.6

The unfavorable verdict is based on the trial court's conclusion
that under paragraphs 13 and 14 of the contract of lease, the
Bank has no liability for the loss of the certificates of title. The
court declared that the said provisions are binding on the
parties.
Its motion for reconsideration7 having been denied, petitioner
appealed from the adverse decision to the respondent Court of
Appeals which docketed the appeal as CA-G.R. CV No.
15150. Petitioner urged the respondent Court to reverse the
challenged decision because the trial court erred in (a)
absolving the respondent Bank from liability from the loss, (b)
not declaring as null and void, for being contrary to law,
public order and public policy, the provisions in the contract
for lease of the safety deposit box absolving the Bank from
any liability for loss, (c) not concluding that in this
jurisdiction, as well as under American jurisprudence, the
liability of the Bank is settled and (d) awarding attorney's fees
to the Bank and denying the petitioner's prayer for nominal
and exemplary damages and attorney's fees.8
In its Decision promulgated on 4 July 1989, 9 respondent Court
affirmed the appealed decision principally on the theory that
the contract (Exhibit "2") executed by the petitioner and
respondent Bank is in the nature of a contract of lease by
virtue of which the petitioner and its co-renter were given
control over the safety deposit box and its contents while the
Bank retained no right to open the said box because it had
neither the possession nor control over it and its contents. As
such, the contract is governed by Article 1643 of the Civil
Code 10 which provides:
Art. 1643. In the lease of things, one of the parties binds
himself to give to another the enjoyment or use of a thing for a
price certain, and for a period which may be definite or
indefinite. However, no lease for more than ninety-nine years
shall be valid.
It invoked Tolentino vs. Gonzales 11 — which held that the
owner of the property loses his control over the property
leased during the period of the contract — and Article 1975 of
the Civil Code which provides:
Art. 1975. The depositary holding certificates, bonds,
securities or instruments which earn interest shall be bound to
collect the latter when it becomes due, and to take such steps
as may be necessary in order that the securities may preserve
their value and the rights corresponding to them according to
law.
The above provision shall not apply to contracts for the rent of
safety deposit boxes.
and then concluded that "[c]learly, the defendant-appellee is
not under any duty to maintain the contents of the box. The
stipulation absolving the defendant-appellee from liability is in
accordance with the nature of the contract of lease and cannot
be regarded as contrary to law, public order and public
policy." 12 The appellate court was quick to add, however, that
under the contract of lease of the safety deposit box,
respondent Bank is not completely free from liability as it may
still be made answerable in case unauthorized persons enter
into the vault area or when the rented box is forced open.
Thus, as expressly provided for in stipulation number 8 of the
contract in question:
8. The Bank shall use due diligence that no unauthorized
person shall be admitted to any rented safe and beyond this,
51
the Bank will not be responsible for the contents of any safe
rented from it. 13
Its motion for reconsideration 14 having been denied in the
respondent Court's Resolution of 28 August 1989, 15petitioner
took this recourse under Rule 45 of the Rules of Court and
urges Us to review and set aside the respondent Court's ruling.
Petitioner avers that both the respondent Court and the trial
court (a) did not properly and legally apply the correct law in
this case, (b) acted with grave abuse of discretion or in excess
of jurisdiction amounting to lack thereof and (c) set a
precedent that is contrary to, or is a departure from precedents
adhered to and affirmed by decisions of this Court and
precepts in American jurisprudence adopted in the Philippines.
It reiterates the arguments it had raised in its motion to
reconsider the trial court's decision, the brief submitted to the
respondent Court and the motion to reconsider the latter's
decision. In a nutshell, petitioner maintains that regardless of
nomenclature, the contract for the rent of the safety deposit
box (Exhibit "2") is actually a contract of deposit governed by
Title XII, Book IV of the Civil Code of the
Philippines. 16 Accordingly, it is claimed that the respondent
Bank is liable for the loss of the certificates of title pursuant to
Article 1972 of the said Code which provides:
Art. 1972. The depositary is obliged to keep the thing safely
and to return it, when required, to the depositor, or to his heirs
and successors, or to the person who may have been
designated in the contract. His responsibility, with regard to
the safekeeping and the loss of the thing, shall be governed by
the provisions of Title I of this Book.
If the deposit is gratuitous, this fact shall be taken into account
in determining the degree of care that the depositary must
observe.
Petitioner then quotes a passage from American
Jurisprudence 17 which is supposed to expound on the
prevailing rule in the United States, to wit:
The prevailing rule appears to be that where a safe-deposit
company leases a safe-deposit box or safe and the lessee takes
possession of the box or safe and places therein his securities
or other valuables, the relation of bailee and bail or is created
between the parties to the transaction as to such securities or
other valuables; the fact that the
safe-deposit company does not know, and that it is not
expected that it shall know, the character or description of the
property which is deposited in such safe-deposit box or safe
does not change that relation. That access to the contents of
the safe-deposit box can be had only by the use of a key
retained by the lessee ( whether it is the sole key or one to be
used in connection with one retained by the lessor) does not
operate to alter the foregoing rule. The argument that there is
not, in such a case, a delivery of exclusive possession and
control to the deposit company, and that therefore the situation
is entirely different from that of ordinary bailment, has been
generally rejected by the courts, usually on the ground that as
possession must be either in the depositor or in the company,
it should reasonably be considered as in the latter rather than
in the former, since the company is, by the nature of the
contract, given absolute control of access to the property, and
the depositor cannot gain access thereto without the consent
and active participation of the company. . . . (citations
omitted).

and a segment from Words and Phrases 18 which states that a
contract for the rental of a bank safety deposit box in
consideration of a fixed amount at stated periods is a bailment
for hire.
Petitioner further argues that conditions 13 and 14 of the
questioned contract are contrary to law and public policy and
should be declared null and void. In support thereof, it cites
Article 1306 of the Civil Code which provides that parties to a
contract may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are
not contrary to law, morals, good customs, public order or
public policy.
After the respondent Bank filed its comment, this Court gave
due course to the petition and required the parties to
simultaneously submit their respective Memoranda.
The petition is partly meritorious.
We agree with the petitioner's contention that the contract for
the rent of the safety deposit box is not an ordinary contract of
lease as defined in Article 1643 of the Civil Code. However,
We do not fully subscribe to its view that the same is a
contract of deposit that is to be strictly governed by the
provisions in the Civil Code on deposit; 19 the contract in the
case at bar is a special kind of deposit. It cannot be
characterized as an ordinary contract of lease under Article
1643 because the full and absolute possession and control of
the safety deposit box was not given to the joint renters — the
petitioner and the Pugaos. The guard key of the box remained
with the respondent Bank; without this key, neither of the
renters could open the box. On the other hand, the respondent
Bank could not likewise open the box without the renter's key.
In this case, the said key had a duplicate which was made so
that both renters could have access to the box.
Hence, the authorities cited by the respondent Court 20 on this
point do not apply. Neither could Article 1975, also relied
upon by the respondent Court, be invoked as an argument
against the deposit theory. Obviously, the first paragraph of
such provision cannot apply to a depositary of certificates,
bonds, securities or instruments which earn interest if such
documents are kept in a rented safety deposit box. It is clear
that the depositary cannot open the box without the renter
being present.
We observe, however, that the deposit theory itself does not
altogether find unanimous support even in American
jurisprudence. We agree with the petitioner that under the
latter, the prevailing rule is that the relation between a bank
renting out safe-deposit boxes and its customer with respect to
the contents of the box is that of a bail or and bailee, the
bailment being for hire and mutual benefit. 21 This is just the
prevailing view because:
There is, however, some support for the view that the
relationship in question might be more properly characterized
as that of landlord and tenant, or lessor and lessee. It has also
been suggested that it should be characterized as that of
licensor and licensee. The relation between a bank, safe-
deposit company, or storage company, and the renter of a safe-
deposit box therein, is often described as contractual, express
or implied, oral or written, in whole or in part. But there is
apparently no jurisdiction in which any rule other than that
applicable to bailments governs questions of the liability and
52
rights of the parties in respect of loss of the contents of safe-
deposit boxes. 22 (citations omitted)
In the context of our laws which authorize banking institutions
to rent out safety deposit boxes, it is clear that in this
jurisdiction, the prevailing rule in the United States has been
adopted. Section 72 of the General Banking Act 23pertinently
provides:
Sec. 72. In addition to the operations specifically authorized
elsewhere in this Act, banking institutions other than building
and loan associations may perform the following services:
(a) Receive in custody funds, documents, and valuable objects,
and rent safety deposit boxes for the safeguarding of such
effects.
xxx xxx xxx
The banks shall perform the services permitted under
subsections (a), (b) and (c) of this section as depositories or as
agents. . . . 24 (emphasis supplied)
Note that the primary function is still found within the
parameters of a contract of deposit, i.e., the receiving in
custody of funds, documents and other valuable objects for
safekeeping. The renting out of the safety deposit boxes is not
independent from, but related to or in conjunction with, this
principal function. A contract of deposit may be entered into
orally or in writing 25 and, pursuant to Article 1306 of the
Civil Code, the parties thereto may establish such stipulations,
clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs,
public order or public policy. The depositary's responsibility
for the safekeeping of the objects deposited in the case at bar
is governed by Title I, Book IV of the Civil Code.
Accordingly, the depositary would be liable if, in performing
its obligation, it is found guilty of fraud, negligence, delay or
contravention of the tenor of the agreement. 26 In the absence
of any stipulation prescribing the degree of diligence required,
that of a good father of a family is to be observed. 27 Hence,
any stipulation exempting the depositary from any liability
arising from the loss of the thing deposited on account of
fraud, negligence or delay would be void for being contrary to
law and public policy. In the instant case, petitioner maintains
that conditions 13 and 14 of the questioned contract of lease of
the safety deposit box, which read:
13. The bank is not a depositary of the contents of the safe and
it has neither the possession nor control of the same.
14. The bank has no interest whatsoever in said contents,
except herein expressly provided, and it assumes absolutely no
liability in connection therewith. 28
are void as they are contrary to law and public policy. We find
Ourselves in agreement with this proposition for indeed, said
provisions are inconsistent with the respondent Bank's
responsibility as a depositary under Section 72(a) of the
General Banking Act. Both exempt the latter from any liability
except as contemplated in condition 8 thereof which limits its
duty to exercise reasonable diligence only with respect to who
shall be admitted to any rented safe, to wit:
8. The Bank shall use due diligence that no unauthorized
person shall be admitted to any rented safe and beyond this,
the Bank will not be responsible for the contents of any safe
rented from it. 29
Furthermore, condition 13 stands on a wrong premise and is
contrary to the actual practice of the Bank. It is not correct to

assert that the Bank has neither the possession nor control of
the contents of the box since in fact, the safety deposit box
itself is located in its premises and is under its absolute
control; moreover, the respondent Bank keeps the guard key to
the said box. As stated earlier, renters cannot open their
respective boxes unless the Bank cooperates by presenting and
using this guard key. Clearly then, to the extent above stated,
the foregoing conditions in the contract in question are void
and ineffective. It has been said:
With respect to property deposited in a safe-deposit box by a
customer of a safe-deposit company, the parties, since the
relation is a contractual one, may by special contract define
their respective duties or provide for increasing or limiting the
liability of the deposit company, provided such contract is not
in violation of law or public policy. It must clearly appear that
there actually was such a special contract, however, in order to
vary the ordinary obligations implied by law from the
relationship of the parties; liability of the deposit company
will not be enlarged or restricted by words of doubtful
meaning. The company, in renting
safe-deposit boxes, cannot exempt itself from liability for loss
of the contents by its own fraud or negligence or that of its
agents or servants, and if a provision of the contract may be
construed as an attempt to do so, it will be held ineffective for
the purpose. Although it has been held that the lessor of a safe-
deposit box cannot limit its liability for loss of the contents
thereof through its own negligence, the view has been taken
that such a lessor may limits its liability to some extent by
agreement or stipulation. 30 (citations omitted)
Thus, we reach the same conclusion which the Court of
Appeals arrived at, that is, that the petition should be
dismissed, but on grounds quite different from those relied
upon by the Court of Appeals. In the instant case, the
respondent Bank's exoneration cannot, contrary to the holding
of the Court of Appeals, be based on or proceed from a
characterization of the impugned contract as a contract of
lease, but rather on the fact that no competent proof was
presented to show that respondent Bank was aware of the
agreement between the petitioner and the Pugaos to the effect
that the certificates of title were withdrawable from the safety
deposit box only upon both parties' joint signatures, and that
no evidence was submitted to reveal that the loss of the
certificates of title was due to the fraud or negligence of the
respondent Bank. This in turn flows from this Court's
determination that the contract involved was one of deposit.
Since both the petitioner and the Pugaos agreed that each
should have one (1) renter's key, it was obvious that either of
them could ask the Bank for access to the safety deposit box
and, with the use of such key and the Bank's own guard key,
could open the said box, without the other renter being
present.
Since, however, the petitioner cannot be blamed for the filing
of the complaint and no bad faith on its part had been
established, the trial court erred in condemning the petitioner
to pay the respondent Bank attorney's fees. To this extent, the
Decision (dispositive portion) of public respondent Court of
Appeals must be modified.
WHEREFORE, the Petition for Review is partially
GRANTED by deleting the award for attorney's fees from the
4 July 1989 Decision of the respondent Court of Appeals in
53
CA-G.R. CV No. 15150. As modified, and subject to the
pronouncement We made above on the nature of the
relationship between the parties in a contract of lease of safety
deposit boxes, the dispositive portion of the said Decision is
hereby AFFIRMED and the instant Petition for Review is
otherwise DENIED for lack of merit.
No pronouncement as to costs.
SO ORDERED.
G.R. No. 126780 February 17, 2005
YHT REALTY CORPORATION, ERLINDA LAINEZ
and ANICIA PAYAM, petitioners,
vs.
THE COURT OF APPEALS and MAURICE
McLOUGHLIN, respondents.
DECISION
TINGA, J.:
The primary question of interest before this Court is the only
legal issue in the case: It is whether a hotel may evade liability
for the loss of items left with it for safekeeping by its guests,
by having these guests execute written waivers holding the
establishment or its employees free from blame for such loss
in light of Article 2003 of the Civil Code which voids such
waivers.
Before this Court is a Rule 45 petition for review of
the Decision1 dated 19 October 1995 of the Court of Appeals
which affirmed the Decision2 dated 16 December 1991 of the
Regional Trial Court (RTC), Branch 13, of Manila, finding
YHT Realty Corporation, Brunhilda Mata-Tan (Tan), Erlinda
Lainez (Lainez) and Anicia Payam (Payam) jointly and
solidarily liable for damages in an action filed by Maurice
McLoughlin (McLoughlin) for the loss of his American and
Australian dollars deposited in the safety deposit box of
Tropicana Copacabana Apartment Hotel, owned and operated
by YHT Realty Corporation.
The factual backdrop of the case follow.
Private respondent McLoughlin, an Australian businessman-
philanthropist, used to stay at Sheraton Hotel during his trips
to the Philippines prior to 1984 when he met Tan. Tan
befriended McLoughlin by showing him around, introducing
him to important people, accompanying him in visiting
impoverished street children and assisting him in buying gifts
for the children and in distributing the same to charitable
institutions for poor children. Tan convinced McLoughlin to
transfer from Sheraton Hotel to Tropicana where Lainez,
Payam and Danilo Lopez were employed. Lopez served as
manager of the hotel while Lainez and Payam had custody of
the keys for the safety deposit boxes of Tropicana. Tan took
care of McLoughlin's booking at the Tropicana where he
started staying during his trips to the Philippines from
December 1984 to September 1987.3
On 30 October 1987, McLoughlin arrived from Australia and
registered with Tropicana. He rented a safety deposit box as it
was his practice to rent a safety deposit box every time he
registered at Tropicana in previous trips. As a tourist,
McLoughlin was aware of the procedure observed by
Tropicana relative to its safety deposit boxes. The safety
deposit box could only be opened through the use of two keys,
one of which is given to the registered guest, and the other
remaining in the possession of the management of the hotel.
When a registered guest wished to open his safety deposit box,

he alone could personally request the management who then
would assign one of its employees to accompany the guest and
assist him in opening the safety deposit box with the two
keys.4
McLoughlin allegedly placed the following in his safety
deposit box: Fifteen Thousand US Dollars (US$15,000.00)
which he placed in two envelopes, one envelope containing
Ten Thousand US Dollars (US$10,000.00) and the other
envelope Five Thousand US Dollars (US$5,000.00); Ten
Thousand Australian Dollars (AUS$10,000.00) which he also
placed in another envelope; two (2) other envelopes
containing letters and credit cards; two (2) bankbooks; and a
checkbook, arranged side by side inside the safety deposit
box.5
On 12 December 1987, before leaving for a brief trip to
Hongkong, McLoughlin opened his safety deposit box with
his key and with the key of the management and took
therefrom the envelope containing Five Thousand US Dollars
(US$5,000.00), the envelope containing Ten Thousand
Australian Dollars (AUS$10,000.00), his passports and his
credit cards.6 McLoughlin left the other items in the box as he
did not check out of his room at the Tropicana during his short
visit to Hongkong. When he arrived in Hongkong, he opened
the envelope which contained Five Thousand US Dollars
(US$5,000.00) and discovered upon counting that only Three
Thousand US Dollars (US$3,000.00) were enclosed
therein.7 Since he had no idea whether somebody else had
tampered with his safety deposit box, he thought that it was
just a result of bad accounting since he did not spend anything
from that envelope.8
After returning to Manila, he checked out of Tropicana on 18
December 1987 and left for Australia. When he arrived in
Australia, he discovered that the envelope with Ten Thousand
US Dollars (US$10,000.00) was short of Five Thousand US
Dollars (US$5,000). He also noticed that the jewelry which he
bought in Hongkong and stored in the safety deposit box upon
his return to Tropicana was likewise missing, except for a
diamond bracelet.9
When McLoughlin came back to the Philippines on 4 April
1988, he asked Lainez if some money and/or jewelry which he
had lost were found and returned to her or to the management.
However, Lainez told him that no one in the hotel found such
things and none were turned over to the management. He
again registered at Tropicana and rented a safety deposit box.
He placed therein one (1) envelope containing Fifteen
Thousand US Dollars (US$15,000.00), another envelope
containing Ten Thousand Australian Dollars
(AUS$10,000.00) and other envelopes containing his traveling
papers/documents. On 16 April 1988, McLoughlin requested
Lainez and Payam to open his safety deposit box. He noticed
that in the envelope containing Fifteen Thousand US Dollars
(US$15,000.00), Two Thousand US Dollars (US$2,000.00)
were missing and in the envelope previously containing Ten
Thousand Australian Dollars (AUS$10,000.00), Four
Thousand Five Hundred Australian Dollars (AUS$4,500.00)
were missing.10
When McLoughlin discovered the loss, he immediately
confronted Lainez and Payam who admitted that Tan opened
the safety deposit box with the key assigned to
him.11 McLoughlin went up to his room where Tan was
54
staying and confronted her. Tan admitted that she had stolen
McLoughlin's key and was able to open the safety deposit box
with the assistance of Lopez, Payam and Lainez. 12 Lopez also
told McLoughlin that Tan stole the key assigned to
McLoughlin while the latter was asleep.13
McLoughlin requested the management for an investigation of
the incident. Lopez got in touch with Tan and arranged for a
meeting with the police and McLoughlin. When the police did
not arrive, Lopez and Tan went to the room of McLoughlin at
Tropicana and thereat, Lopez wrote on a piece of paper a
promissory note dated 21 April 1988. The promissory note
reads as follows:
I promise to pay Mr. Maurice McLoughlin the amount of
AUS$4,000.00 and US$2,000.00 or its equivalent in
Philippine currency on or before May 5, 1988.14
Lopez requested Tan to sign the promissory note which the
latter did and Lopez also signed as a witness. Despite the
execution of promissory note by Tan, McLoughlin insisted
that it must be the hotel who must assume responsibility for
the loss he suffered. However, Lopez refused to accept the
responsibility relying on the conditions for renting the safety
deposit box entitled "Undertaking For the Use Of Safety
Deposit Box,"15 specifically paragraphs (2) and (4) thereof, to
wit:
2. To release and hold free and blameless TROPICANA
APARTMENT HOTEL from any liability arising from any
loss in the contents and/or use of the said deposit box for any
cause whatsoever, including but not limited to the presentation
or use thereof by any other person should the key be lost;
...
4. To return the key and execute the RELEASE in favor of
TROPICANA APARTMENT HOTEL upon giving up the use
of the box.16
On 17 May 1988, McLoughlin went back to Australia and he
consulted his lawyers as to the validity of the abovementioned
stipulations. They opined that the stipulations are void for
being violative of universal hotel practices and customs. His
lawyers prepared a letter dated 30 May 1988 which was
signed by McLoughlin and sent to President Corazon
Aquino.17 The Office of the President referred the letter to the
Department of Justice (DOJ) which forwarded the same to the
Western Police District (WPD).18
After receiving a copy of the indorsement in Australia,
McLoughlin came to the Philippines and registered again as a
hotel guest of Tropicana. McLoughlin went to Malacaňang to
follow up on his letter but he was instructed to go to the DOJ.
The DOJ directed him to proceed to the WPD for
documentation. But McLoughlin went back to Australia as he
had an urgent business matter to attend to.
For several times, McLoughlin left for Australia to attend to
his business and came back to the Philippines to follow up on
his letter to the President but he failed to obtain any concrete
assistance.19
McLoughlin left again for Australia and upon his return to the
Philippines on 25 August 1989 to pursue his claims against
petitioners, the WPD conducted an investigation which
resulted in the preparation of an affidavit which was
forwarded to the Manila City Fiscal's Office. Said affidavit
became the basis of preliminary investigation. However,
McLoughlin left again for Australia without receiving the

notice of the hearing on 24 November 1989. Thus, the case at
the Fiscal's Office was dismissed for failure to prosecute.
Mcloughlin requested the reinstatement of the criminal charge
for theft. In the meantime, McLoughlin and his lawyers wrote
letters of demand to those having responsibility to pay the
damage. Then he left again for Australia.
Upon his return on 22 October 1990, he registered at the
Echelon Towers at Malate, Manila. Meetings were held
between McLoughlin and his lawyer which resulted to the
filing of a complaint for damages on 3 December 1990 against
YHT Realty Corporation, Lopez, Lainez, Payam and Tan
(defendants) for the loss of McLoughlin's money which was
discovered on 16 April 1988. After filing the complaint,
McLoughlin left again for Australia to attend to an urgent
business matter. Tan and Lopez, however, were not served
with summons, and trial proceeded with only Lainez, Payam
and YHT Realty Corporation as defendants.
After defendants had filed their Pre-Trial Brief admitting that
they had previously allowed and assisted Tan to open the
safety deposit box, McLoughlin filed
an Amended/Supplemental Complaint20 dated 10 June 1991
which included another incident of loss of money and jewelry
in the safety deposit box rented by McLoughlin in the same
hotel which took place prior to 16 April 1988. 21 The trial court
admitted the Amended/Supplemental Complaint.
During the trial of the case, McLoughlin had been in and out
of the country to attend to urgent business in Australia, and
while staying in the Philippines to attend the hearing, he
incurred expenses for hotel bills, airfare and other
transportation expenses, long distance calls to Australia,
Meralco power expenses, and expenses for food and
maintenance, among others.22
After trial, the RTC of Manila rendered judgment in favor of
McLoughlin, the dispositive portion of which reads:
WHEREFORE, above premises considered, judgment is
hereby rendered by this Court in favor of plaintiff and against
the defendants, to wit:
1. Ordering defendants, jointly and severally, to pay plaintiff
the sum of US$11,400.00 or its equivalent in Philippine
Currency of ₱342,000.00, more or less, and the sum of
AUS$4,500.00 or its equivalent in Philippine Currency of
₱99,000.00, or a total of ₱441,000.00, more or less, with 12%
interest from April 16 1988 until said amount has been paid to
plaintiff (Item 1, Exhibit CC);
2. Ordering defendants, jointly and severally to pay plaintiff
the sum of ₱3,674,238.00 as actual and consequential damages
arising from the loss of his Australian and American dollars
and jewelries complained against and in prosecuting his claim
and rights administratively and judicially (Items II, III, IV, V,
VI, VII, VIII, and IX, Exh. "CC");
3. Ordering defendants, jointly and severally, to pay plaintiff
the sum of ₱500,000.00 as moral damages (Item X, Exh.
"CC");
4. Ordering defendants, jointly and severally, to pay plaintiff
the sum of ₱350,000.00 as exemplary damages (Item XI, Exh.
"CC");
5. And ordering defendants, jointly and severally, to pay
litigation expenses in the sum of ₱200,000.00 (Item XII, Exh.
"CC");
55
6. Ordering defendants, jointly and severally, to pay plaintiff
the sum of ₱200,000.00 as attorney's fees, and a fee of
₱3,000.00 for every appearance; and
7. Plus costs of suit.
SO ORDERED.23
The trial court found that McLoughlin's allegations as to the
fact of loss and as to the amount of money he lost were
sufficiently shown by his direct and straightforward manner of
testifying in court and found him to be credible and worthy of
belief as it was established that McLoughlin's money, kept in
Tropicana's safety deposit box, was taken by Tan without
McLoughlin's consent. The taking was effected through the
use of the master key which was in the possession of the
management. Payam and Lainez allowed Tan to use the
master key without authority from McLoughlin. The trial court
added that if McLoughlin had not lost his dollars, he would
not have gone through the trouble and personal inconvenience
of seeking aid and assistance from the Office of the President,
DOJ, police authorities and the City Fiscal's Office in his
desire to recover his losses from the hotel management and
Tan.24
As regards the loss of Seven Thousand US Dollars
(US$7,000.00) and jewelry worth approximately One
Thousand Two Hundred US Dollars (US$1,200.00) which
allegedly occurred during his stay at Tropicana previous to 4
April 1988, no claim was made by McLoughlin for such losses
in his complaint dated 21 November 1990 because he was not
sure how they were lost and who the responsible persons were.
But considering the admission of the defendants in their pre-
trial brief that on three previous occasions they allowed Tan to
open the box, the trial court opined that it was logical and
reasonable to presume that his personal assets consisting of
Seven Thousand US Dollars (US$7,000.00) and jewelry were
taken by Tan from the safety deposit box without
McLoughlin's consent through the cooperation of Payam and
Lainez.25
The trial court also found that defendants acted with gross
negligence in the performance and exercise of their duties and
obligations as innkeepers and were therefore liable to answer
for the losses incurred by McLoughlin.26
Moreover, the trial court ruled that paragraphs (2) and (4) of
the "Undertaking For The Use Of Safety Deposit Box" are not
valid for being contrary to the express mandate of Article
2003 of the New Civil Code and against public policy. 27 Thus,
there being fraud or wanton conduct on the part of defendants,
they should be responsible for all damages which may be
attributed to the non-performance of their contractual
obligations.28
The Court of Appeals affirmed the disquisitions made by the
lower court except as to the amount of damages awarded. The
decretal text of the appellate court's decision reads:
THE FOREGOING CONSIDERED, the appealed Decision is
hereby AFFIRMED but modified as follows:
The appellants are directed jointly and severally to pay the
plaintiff/appellee the following amounts:
1) ₱153,200.00 representing the peso equivalent of
US$2,000.00 and AUS$4,500.00;
2) ₱308,880.80, representing the peso value for the air fares
from Sidney [sic] to Manila and back for a total of eleven (11)
trips;

3) One-half of ₱336,207.05 or ₱168,103.52 representing
payment to Tropicana Apartment Hotel;
4) One-half of ₱152,683.57 or ₱76,341.785 representing
payment to Echelon Tower;
5) One-half of ₱179,863.20 or ₱89,931.60 for the taxi xxx
transportation from the residence to Sidney [sic] Airport and
from MIA to the hotel here in Manila, for the eleven (11) trips;
6) One-half of ₱7,801.94 or ₱3,900.97 representing Meralco
power expenses;
7) One-half of ₱356,400.00 or ₱178,000.00 representing
expenses for food and maintenance;
8) ₱50,000.00 for moral damages;
9) ₱10,000.00 as exemplary damages; and
10) ₱200,000 representing attorney's fees.
With costs.
SO ORDERED.29
Unperturbed, YHT Realty Corporation, Lainez and Payam
went to this Court in this appeal by certiorari.
Petitioners submit for resolution by this Court the following
issues: (a) whether the appellate court's conclusion on the
alleged prior existence and subsequent loss of the subject
money and jewelry is supported by the evidence on record; (b)
whether the finding of gross negligence on the part of
petitioners in the performance of their duties as innkeepers is
supported by the evidence on record; (c) whether the
"Undertaking For The Use of Safety Deposit Box" admittedly
executed by private respondent is null and void; and (d)
whether the damages awarded to private respondent, as well as
the amounts thereof, are proper under the circumstances. 30
The petition is devoid of merit.
It is worthy of note that the thrust of Rule 45 is the resolution
only of questions of law and any peripheral factual question
addressed to this Court is beyond the bounds of this mode of
review.
Petitioners point out that the evidence on record is insufficient
to prove the fact of prior existence of the dollars and the
jewelry which had been lost while deposited in the safety
deposit boxes of Tropicana, the basis of the trial court and the
appellate court being the sole testimony of McLoughlin as to
the contents thereof. Likewise, petitioners dispute the finding
of gross negligence on their part as not supported by the
evidence on record.
We are not persuaded.l^vvphi1.net We adhere to the findings
of the trial court as affirmed by the appellate court that the fact
of loss was established by the credible testimony in open court
by McLoughlin. Such findings are factual and therefore
beyond the ambit of the present petition.1awphi1.nét
The trial court had the occasion to observe the demeanor of
McLoughlin while testifying which reflected the veracity of
the facts testified to by him. On this score, we give full
credence to the appreciation of testimonial evidence by the
trial court especially if what is at issue is the credibility of the
witness. The oft-repeated principle is that where the credibility
of a witness is an issue, the established rule is that great
respect is accorded to the evaluation of the credibility of
witnesses by the trial court.31 The trial court is in the best
position to assess the credibility of witnesses and their
testimonies because of its unique opportunity to observe the
witnesses firsthand and note their demeanor, conduct and
attitude under grilling examination.32
56
We are also not impressed by petitioners' argument that the
finding of gross negligence by the lower court as affirmed by
the appellate court is not supported by evidence. The evidence
reveals that two keys are required to open the safety deposit
boxes of Tropicana. One key is assigned to the guest while the
other remains in the possession of the management. If the
guest desires to open his safety deposit box, he must request
the management for the other key to open the same. In other
words, the guest alone cannot open the safety deposit box
without the assistance of the management or its employees.
With more reason that access to the safety deposit box should
be denied if the one requesting for the opening of the safety
deposit box is a stranger. Thus, in case of loss of any item
deposited in the safety deposit box, it is inevitable to conclude
that the management had at least a hand in the consummation
of the taking, unless the reason for the loss is force majeure.
Noteworthy is the fact that Payam and Lainez, who were
employees of Tropicana, had custody of the master key of the
management when the loss took place. In fact, they even
admitted that they assisted Tan on three separate occasions in
opening McLoughlin's safety deposit box.33 This only proves
that Tropicana had prior knowledge that a person aside from
the registered guest had access to the safety deposit box. Yet
the management failed to notify McLoughlin of the incident
and waited for him to discover the taking before it disclosed
the matter to him. Therefore, Tropicana should be held
responsible for the damage suffered by McLoughlin by reason
of the negligence of its employees.
The management should have guarded against the occurrence
of this incident considering that Payam admitted in open court
that she assisted Tan three times in opening the safety deposit
box of McLoughlin at around 6:30 A.M. to 7:30 A.M. while
the latter was still asleep.34 In light of the circumstances
surrounding this case, it is undeniable that without the
acquiescence of the employees of Tropicana to the opening of
the safety deposit box, the loss of McLoughlin's money could
and should have been avoided.
The management contends, however, that McLoughlin, by his
act, made its employees believe that Tan was his spouse for
she was always with him most of the time. The evidence on
record, however, is bereft of any showing that McLoughlin
introduced Tan to the management as his wife. Such an
inference from the act of McLoughlin will not exculpate the
petitioners from liability in the absence of any showing that he
made the management believe that Tan was his wife or was
duly authorized to have access to the safety deposit box. Mere
close companionship and intimacy are not enough to warrant
such conclusion considering that what is involved in the
instant case is the very safety of McLoughlin's deposit. If only
petitioners exercised due diligence in taking care of
McLoughlin's safety deposit box, they should have confronted
him as to his relationship with Tan considering that the latter
had been observed opening McLoughlin's safety deposit box a
number of times at the early hours of the morning. Tan's acts
should have prompted the management to investigate her
relationship with McLoughlin. Then, petitioners would have
exercised due diligence required of them. Failure to do so
warrants the conclusion that the management had been remiss
in complying with the obligations imposed upon hotel-keepers
under the law.

Under Article 1170 of the New Civil Code, those who, in the
performance of their obligations, are guilty of negligence, are
liable for damages. As to who shall bear the burden of paying
damages, Article 2180, paragraph (4) of the same Code
provides that the owners and managers of an establishment or
enterprise are likewise responsible for damages caused by
their employees in the service of the branches in which the
latter are employed or on the occasion of their functions. Also,
this Court has ruled that if an employee is found negligent, it
is presumed that the employer was negligent in selecting
and/or supervising him for it is hard for the victim to prove the
negligence of such employer.35 Thus, given the fact that the
loss of McLoughlin's money was consummated through the
negligence of Tropicana's employees in allowing Tan to open
the safety deposit box without the guest's consent, both the
assisting employees and YHT Realty Corporation itself, as
owner and operator of Tropicana, should be held solidarily
liable pursuant to Article 2193.36
The issue of whether the "Undertaking For The Use of Safety
Deposit Box" executed by McLoughlin is tainted with nullity
presents a legal question appropriate for resolution in this
petition. Notably, both the trial court and the appellate court
found the same to be null and void. We find no reason to
reverse their common conclusion. Article 2003 is controlling,
thus:
Art. 2003. The hotel-keeper cannot free himself from
responsibility by posting notices to the effect that he is not
liable for the articles brought by the guest. Any stipulation
between the hotel-keeper and the guest whereby the
responsibility of the former as set forth in Articles 1998 to
200137 is suppressed or diminished shall be void.
Article 2003 was incorporated in the New Civil Code as an
expression of public policy precisely to apply to situations
such as that presented in this case. The hotel business like the
common carrier's business is imbued with public interest.
Catering to the public, hotelkeepers are bound to provide not
only lodging for hotel guests and security to their persons and
belongings. The twin duty constitutes the essence of the
business. The law in turn does not allow such duty to the
public to be negated or diluted by any contrary stipulation in
so-called "undertakings" that ordinarily appear in prepared
forms imposed by hotel keepers on guests for their signature.
In an early case,38 the Court of Appeals through its then
Presiding Justice (later Associate Justice of the Court) Jose P.
Bengzon, ruled that to hold hotelkeepers or innkeeper liable
for the effects of their guests, it is not necessary that they be
actually delivered to the innkeepers or their employees. It is
enough that such effects are within the hotel or inn.39 With
greater reason should the liability of the hotelkeeper be
enforced when the missing items are taken without the guest's
knowledge and consent from a safety deposit box provided by
the hotel itself, as in this case.
Paragraphs (2) and (4) of the "undertaking" manifestly
contravene Article 2003 of the New Civil Code for they allow
Tropicana to be released from liability arising from any loss in
the contents and/or use of the safety deposit box for any cause
whatsoever.40 Evidently, the undertaking was intended to bar
any claim against Tropicana for any loss of the contents of the
safety deposit box whether or not negligence was incurred by
Tropicana or its employees. The New Civil Code is explicit
57
that the responsibility of the hotel-keeper shall extend to loss
of, or injury to, the personal property of the guests even if
caused by servants or employees of the keepers of hotels or
inns as well as by strangers, except as it may proceed from
any force majeure.41 It is the loss through force majeure that
may spare the hotel-keeper from liability. In the case at bar,
there is no showing that the act of the thief or robber was done
with the use of arms or through an irresistible force to qualify
the same as force majeure.42
Petitioners likewise anchor their defense on Article
200243 which exempts the hotel-keeper from liability if the
loss is due to the acts of his guest, his family, or visitors. Even
a cursory reading of the provision would lead us to reject
petitioners' contention. The justification they raise would
render nugatory the public interest sought to be protected by
the provision. What if the negligence of the employer or its
employees facilitated the consummation of a crime committed
by the registered guest's relatives or visitor? Should the law
exculpate the hotel from liability since the loss was due to the
act of the visitor of the registered guest of the hotel? Hence,
this provision presupposes that the hotel-keeper is not guilty of
concurrent negligence or has not contributed in any degree to
the occurrence of the loss. A depositary is not responsible for
the loss of goods by theft, unless his actionable negligence
contributes to the loss.44
In the case at bar, the responsibility of securing the safety
deposit box was shared not only by the guest himself but also
by the management since two keys are necessary to open the
safety deposit box. Without the assistance of hotel employees,
the loss would not have occurred. Thus, Tropicana was guilty
of concurrent negligence in allowing Tan, who was not the
registered guest, to open the safety deposit box of
McLoughlin, even assuming that the latter was also guilty of
negligence in allowing another person to use his key. To rule
otherwise would result in undermining the safety of the safety
deposit boxes in hotels for the management will be given
imprimatur to allow any person, under the pretense of being a
family member or a visitor of the guest, to have access to the
safety deposit box without fear of any liability that will attach
thereafter in case such person turns out to be a complete
stranger. This will allow the hotel to evade responsibility for
any liability incurred by its employees in conspiracy with the
guest's relatives and visitors.
Petitioners contend that McLoughlin's case was mounted on
the theory of contract, but the trial court and the appellate
court upheld the grant of the claims of the latter on the basis of
tort.45 There is nothing anomalous in how the lower courts
decided the controversy for this Court has pronounced a
jurisprudential rule that tort liability can exist even if there are
already contractual relations. The act that breaks the contract
may also be tort.46
As to damages awarded to McLoughlin, we see no reason to
modify the amounts awarded by the appellate court for the
same were based on facts and law. It is within the province of
lower courts to settle factual issues such as the proper amount
of damages awarded and such finding is binding upon this
Court especially if sufficiently proven by evidence and not
unconscionable or excessive. Thus, the appellate court
correctly awarded McLoughlin Two Thousand US Dollars
(US$2,000.00) and Four Thousand Five Hundred Australian
 58

dollars (AUS$4,500.00) or their peso equivalent at the time of

payment,47 being the amounts duly proven by evidence. 48 The
alleged loss that took place prior to 16 April 1988 was not Guaranty and
considered since the amounts alleged to have been taken were
not sufficiently established by evidence. The appellate court
also correctly awarded the sum of ₱308,880.80, representing Suretyship
the peso value for the air fares from Sydney to Manila and
back for a total of eleven (11) trips;49 one-half of ₱336,207.05
or ₱168,103.52 representing payment to Tropicana;50 one-half
of ₱152,683.57 or ₱76,341.785 representing payment to LIm v. Security Bank Corporation, GR No. 188539,
Echelon Tower;51 one-half of ₱179,863.20 or ₱89,931.60 for March 12, 2014................................................................ 58
the taxi or transportation expenses from McLoughlin's
residence to Sydney Airport and from MIA to the hotel here in
Manila, for the eleven (11) trips;52 one-half of ₱7,801.94 or JN Dev’t Corp v. Phil Export and Foreign Loan
₱3,900.97 representing Meralco power expenses;53 one-half of
₱356,400.00 or ₱178,000.00 representing expenses for food
Guarantee Corp., GR No. 151060, August 31, 2005 ........ 60
and maintenance.54
The amount of ₱50,000.00 for moral damages is reasonable.
Visayan Surety & Insurance Corporation v. CA, GR No.
Although trial courts are given discretion to determine the
amount of moral damages, the appellate court may modify or 127261, Sept. 7, 2001 ...................................................... 63
change the amount awarded when it is palpably and
scandalously excessive.l^vvphi1.net Moral damages are not
intended to enrich a complainant at the expense of a South City Homes, Inc. et al v. BA Finance Corp., GR
defendant.l^vvphi1.net They are awarded only to enable the No. 135462, Dec. 7, 2001 ................................................ 64
injured party to obtain means, diversion or amusements that
will serve to alleviate the moral suffering he has undergone,
by reason of defendants' culpable action. 55 Palmares v. CA, GR No. 126490, March 31, 1998 .............. 67
The awards of ₱10,000.00 as exemplary damages and
₱200,000.00 representing attorney's fees are likewise
sustained. Willex Plastic Industries Corp. v. CA, GR No. 103066,
WHEREFORE, foregoing premises considered, April 25, 1996.................................................................. 72
the Decision of the Court of Appeals dated 19 October 1995 is
hereby AFFIRMED. Petitioners are directed, jointly and
severally, to pay private respondent the following amounts: PNB v. CA, GR No. 33174, July 4, 1991............................. 75
(1) US$2,000.00 and AUS$4,500.00 or their peso equivalent
at the time of payment;
(2) ₱308,880.80, representing the peso value for the air fares Finman General Assurance Corp. v. Salik, GR No.
from Sydney to Manila and back for a total of eleven (11) 84084, Aug. 20, 1990 ...................................................... 81
trips;
(3) One-half of ₱336,207.05 or ₱168,103.52 representing
payment to Tropicana Copacabana Apartment Hotel; Towers Assurance Corp. v. Ororama Supermart, GR No.
(4) One-half of ₱152,683.57 or ₱76,341.785 representing L-45848, November 9, 1977 ............................................ 83
payment to Echelon Tower;
(5) One-half of ₱179,863.20 or ₱89,931.60 for the taxi or
transportation expense from McLoughlin's residence to
Sydney Airport and from MIA to the hotel here in Manila, for
the eleven (11) trips;
(6) One-half of ₱7,801.94 or ₱3,900.97 representing Meralco LIm v. Security Bank Corporation, GR No.
power expenses;
(7) One-half of ₱356,400.00 or ₱178,200.00 representing 188539, March 12, 2014
expenses for food and maintenance; G.R. No. 188539 March 12, 2014
(8) ₱50,000.00 for moral damages; MARIANO LIM, Petitioner,
(9) ₱10,000.00 as exemplary damages; and vs.
(10) ₱200,000 representing attorney's fees. SECURITY BANK CORPORATION,* Respondent.
With costs.
SO ORDERED. DECISION
Puno, (Chairman), Callejo, Sr., and Chico-Nazario, JJ., PERALTA, J.:
concur.
Austria-Martinez, J., no part. This deals with the Petition for Review on Certiorari under Rule 45
of the Rules of Court praying that the Decision1of the Court of

Appeals (CA), promulgated on July 30, 2008, and the
Resolution2 dated June 1, 2009, denying petitioner's motion for
reconsideration thereof, be reversed and set aside.
Petitioner executed a Continuing Suretyship in favor of respondent to
secure "any and all types of credit accommodation that may be
granted by the bank hereinto and hereinafter" in favor of Raul Arroyo
for the amount of ₱ 2,000,000.00 which is covered by a Credit
Agreement/Promissory Note.3 Said promissory note stated that the
interest on the loan shall be 19% per annum, compounded monthly,
for the first 30 days from the date thereof, and if the note is not fully
paid when due, an additional penalty of 2% per month of the total
outstanding principal and interest due and unpaid, shall be imposed.
In turn, the Continuing Suretyship4 executed by petitioner stipulated
that:
3. Liability of the Surety. - The liability of the Surety is solidary and
not contingent upon the pursuit of the Bank of whatever remedies it
may have against the Debtor or the collaterals/liens it may possess. If
any of the Guaranteed Obligations is not paid or performed on due
date (at stated maturity or by acceleration), the Surety shall, without
need for any notice, demand or any other act or deed, immediately
become liable therefor and the Surety shall pay and perform the
same.5
Guaranteed Obligations are defined in the same document as follows:
a) "Guaranteed Obligations" - the obligations of the Debtor arising
from all credit accommodations extended by the Bank to the Debtor,
including increases, renewals, roll-overs, extensions, restructurings,
amendments or novations thereof, as well as (i) all obligations of the
Debtor presently or hereafter owing to the Bank, as appears in the
accounts, books and records of the Bank, whether direct or indirect,
and (ii) any and all expenses which the Bank may incur in enforcing
any of its rights, powers and remedies under the Credit Instruments as
defined hereinbelow.6
The debtor, Raul Arroyo, defaulted on his loan obligation. Thereafter,
petitioner received a Notice of Final Demand dated August 2, 2001,
informing him that he was liable to pay the loan obtained by Raul and
Edwina Arroyo, including the interests and penalty fees amounting to
₱ 7,703,185.54, and demanding payment thereof. For failure of
petitioner to comply with said demand, respondent filed a complaint
for collection of sum of money against him and the Arroyo spouses.
Since the Arroyo spouses can no longer be located, summons was not
served on them, hence, only petitioner actively participated in the
case.
After trial, the Regional Trial Court of Davao (RTC) rendered
judgment against petitioner.7 The dispositive portion of the RTC
Decision reads as follows:
Wherefore, judgment is hereby rendered ordering defendant Lim to
pay the following sums.
1. The principal sum of two million pesos plus nineteen percent
interest of the outstanding principal interest due and unpaid to be
computed from January 28, 1997 until fully paid, plus two percent
interest per month as penalty to be computed from February 28, 1997
until fully paid.
2. Four hundred thousand pesos as attorney's fees.
3. Thirty thousand pesos as litigation expenses.
SO ORDERED.8
Petitioner appealed to the CA, but the appellate court, in its Decision
dated July 30, 2008, affirmed the RTC judgment with the
59
modification that interest be computed from August 1, 1997; the
penalty should start only from August 28, 1997; the award of
attorney's fees is set at 10% of the total amount due; and the award
for litigation expenses increased to ₱ 92,321.10.9
Petitioner's motion for reconsideration of the CA Decision was
denied per Resolution dated June 1, 2009.
Petitioner then elevated the matter to this Court via a petition for
review on certiorari, where the main issue is whether petitioner may
validly be held liable for the principal debtor's loan obtained six
months after the execution of the Continuing Suretyship.
The other issues, such as the proper computation of the total
indebtedness and the amount of litigation expenses are factual
matters that had been satisfactorily addressed by the CA, to wit: (1)
the CA ruled that respondent should recompute the total amount due,
since the proceeds from the foreclosure of the real estate and chattel
mortgages were deducted only on June 20, 2001, when the public
auctions were conducted on August 26, 1998 and September 7, 1999,
respectively, thus, the amount of the proceeds from the foreclosure of
the mortgaged properties should have been deducted from the amount
of indebtedness on the date the public auction was held; and (2) the
CA likewise pointed out that as can be seen from the Legal Fees
Form,10 the litigation expense incurred by respondent was
₱ 92,321.10, the amount it paid as filing fee. It is hornbook principle
that this Court is not a trier of facts, hence, such issues will not be
revisited by this Court in the present petition. With regard to the
propriety of making petitioner a hostile witness, respondent is correct
that the issue cannot be raised for the first time on appeal. Thus, the
Court will no longer address these issues which had been improperly
raised in this petition for review on certiorari.
The main issue deserves scant consideration, but the matter of the
award of attorney's fees deserves reexamination.
The nature of a suretyship is elucidated in Philippine Charter
Insurance Corporation v. Petroleum Distributors & Service
Corporation11 in this wise:
A contract of suretyship is an agreement whereby a party, called the
surety, guarantees the performance by another party, called the
principal or obligor, of an obligation or undertaking in favor of
another party, called the obligee. Although the contract of a surety is
secondary only to a valid principal obligation, the surety becomes
liable for the debt or duty of another although it possesses no direct
or personal interest over the obligations nor does it receive any
benefit therefrom. This was explained in the case of Stronghold
Insurance Company, Inc. v. Republic-Asahi Glass Corporation,
where it was written:
The surety's obligation is not an original and direct one for the
performance of his own act, but merely accessory or collateral to the
obligation contracted by the principal. Nevertheless, although the
contract of a surety is in essence secondary only to a valid principal
obligation, his liability to the creditor or promisee of the principal is
said to be direct, primary and absolute; in other words, he is directly
and equally bound with the principal.
xxxx
Thus, suretyship arises upon the solidary binding of a person deemed
the surety with the principal debtor for the purpose of fulfilling an
obligation. A surety is considered in law as being the same party as
the debtor in relation to whatever is adjudged touching the obligation
of the latter, and their liabilities are interwoven as to be inseparable. x
x x.12

In this case, what petitioner executed was a Continuing Suretyship,
which the Court described in Saludo, Jr. v. Security Bank
Corporation13 as follows:
The essence of a continuing surety has been highlighted in the case of
Totanes v. China Banking Corporation in this wise:
Comprehensive or continuing surety agreements are, in fact, quite
commonplace in present day financial and commercial practice. A
bank or financing company which anticipates entering into a series of
credit transactions with a particular company, normally requires the
projected principal debtor to execute a continuing surety agreement
along with its sureties. By executing such an agreement, the principal
places itself in a position to enter into the projected series of
transactions with its creditor; with such suretyship agreement, there
would be no need to execute a separate surety contract or bond for
each financing or credit accommodation extended to the principal
debtor.14
The terms of the Continuing Suretyship executed by petitioner,
quoted earlier, are very clear. It states that petitioner, as surety, shall,
1âwphi1
without need for any notice, demand or any other act or deed,
immediately become liable and shall pay "all credit accommodations
extended by the Bank to the Debtor, including increases, renewals,
roll-overs, extensions, restructurings, amendments or novations
thereof, as well as (i) all obligations of the Debtor presently or
hereafter owing to the Bank, as appears in the accounts, books and
records of the Bank, whether direct or indirect, and
(ii) any and all expenses which the Bank may incur in enforcing any
of its rights, powers and remedies under the Credit Instruments as
defined hereinbelow."15 Such stipulations are valid and legal and
constitute the law between the parties, as Article 2053 of the Civil
Code provides that "[a] guaranty may also be given as security for
future debts, the amount of which is not yet known; x x x." Thus,
petitioner is unequivocally bound by the terms of the Continuing
Suretyship. There can be no cavil then that petitioner is liable for the
principal of the loan, together with the interest and penalties due
thereon, even if said loan was obtained by the principal debtor even
after the date of execution of the Continuing Suretyship.
With regard to the award of attorney's fees, it should be noted that
Article 2208 of the Civil Code does not prohibit recovery of
attorney's fees if there is a stipulation in the contract for payment of
the same. Thus, in Asian Construction and Development Corporation
v. Cathay Pacific Steel Corporation (CAPASCO),16 the Court, citing
Titan Construction Corporation v. Uni-Field Enterprises,
Inc.,17 expounded as follows:
The law allows a party to recover attorney's fees under a written
agreement. In Barons Marketing Corporation v. Court of Appeals, the
Court ruled that:
[T]he attorney's fees here are in the nature of liquidated damages and
the stipulation therefor is aptly called a penal clause. It has been said
that so long as such stipulation does not contravene law, morals, or
public order, it is strictly binding upon defendant. The attorney's fees
so provided are awarded in favor of the litigant, not his counsel.
On the other hand, the law also allows parties to a contract to
stipulate on liquidated damages to be paid in case of breach. A
stipulation on liquidated damages is a penalty clause where the
obligor assumes a greater liability in case of breach of an obligation.
The obligor is bound to pay the stipulated amount without need for
proof on the existence and on the measure of damages caused by the
breach.18
However, even if such attorney's fees are allowed by law, the courts
still have the power to reduce the same if it is unreasonable. In Trade
60
& Investment Corporation of the Philippines v. Roblett Industrial
Construction Corp.,19 the Court equitably reduced the amount of
attorney's fees to be paid since interests and penalties had ballooned
to thrice as much as the principal debt. That is also the case here. The
award of attorney's fees amounting to ten percent (10%) of the
principal debt, plus interest and penalty charges, would definitely
exceed the principal amount; thus, making the attorney's fees
manifestly exorbitant. Hence, we reduce the amount of attorney's fees
to ten percent (10%) of the principal debt only.
WHEREFORE, the petition is PARTIALLY GRANTED. The
Decision of the Court of Appeals, dated July 30, 2008, in CA-G.R.
CV No. 00462, is AFFIRMED with MODIFICATION in that the
award of attorney's fees is reduced to ten percent (10%) of the
principal debt only.
SO ORDERED.
JN Dev’t Corp v. Phil Export and Foreign Loan
Guarantee Corp., GR No. 151060, August 31,
2005
G.R. No. 151060. August 31, 2005
JN DEVELOPMENT CORPORATION, and SPS. RODRIGO and
LEONOR STA. ANA, Petitioners,
vs.
PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE
CORPORATION, respondent.
G.R. No. 151311. August 31, 2005
NARCISO V. CRUZ, Petitioners,
vs.
PHILIPPINE EXPORT and FOREIGN LOAN GUARANTEE
CORPORATION, Respondent.
DECISION
TINGA, J.:
Before us are consolidated petitions questioning the Decision1 of the
Court of Appeals (CA) in CA-G.R. CV No. 61318,
entitled Philippine Export and Foreign Loan Guarantee Corporation
v. JN Development Corporation, et al., which reversed
the Decision of the Regional Trial Court (RTC) of Makati, Branch
60.
On 13 December 1979, petitioner JN Development Corporation
("JN") and Traders Royal Bank (TRB) entered into an agreement
whereby TRB would extend to JN an Export Packing Credit Line for
Two Million Pesos (₱ 2,000,000.00). The loan was covered by
several securities, including a real estate mortgage2 and a letter of
guarantee from respondent Philippine Export and Foreign Loan
Guarantee Corporation ("PhilGuarantee"), now Trade and Investment
Development Corporation of the Philippines, covering seventy
percent (70%) of the credit line.3 With PhilGuarantee issuing a
guarantee in favor of TRB,4 JN, petitioner spouses Rodrigo and
Leonor Sta. Ana5 and petitioner Narciso Cruz6 executed a Deed of
Undertaking7 (Undertaking) to assure repayment to PhilGuarantee.
It appears that JN failed to pay the loan to TRB upon its maturity;
thus, on 8 October 1980 TRB requested PhilGuarantee to make good
its guarantee.8 PhilGuarantee informed JN about the call made by
TRB, and inquired about the action of JN to settle the loan.9 Having
received no response from JN, on 10 March 1981 PhilGuarantee paid
TRB Nine Hundred Thirty Four Thousand Eight Hundred Twenty
Four Pesos and Thirty Four Centavos

(₱ 934,824.34).10 Subsequently, PhilGuarantee made several
demands on JN, but the latter failed to pay. On 30 May 1983, JN,
through Rodrigo Sta. Ana, proposed to settle the obligation "by way
of development and sale" of the mortgaged property.11 PhilGuarantee,
however, rejected the proposal.
PhilGuarantee thus filed a Complaint12 for collection of money and
damages against herein petitioners.
In its Decision dated 20 August 1998, the RTC dismissed
PhilGuarantee’s Complaint as well as the counterclaim of petitioners.
It ruled that petitioners are not liable to reimburse PhilGuarantee
what it had paid to TRB. Crucial to this holding was the court’s
finding that TRB was able to foreclose the real estate mortgage
executed by JN, thus extinguishing petitioners’
obligation.13 Moreover, there was no showing that after the said
foreclosure, TRB had demanded from JN any deficiency or the
payment of the difference between the proceeds of the foreclosure
sale and the actual loan.14 In addition, the RTC held that since
PhilGuarantee’s guarantee was good for only one year from 17
December 1979, or until 17 December 1980, and since it was not
renewed after the expiry of said period, PhilGuarantee had no more
legal duty to pay TRB on 10 March 1981.15 The RTC likewise ruled
that Cruz cannot be held liable under the Undertaking since he was
not the one who signed the document, in line with its finding that his
signature found in the records is totally different from the signature
on the Undertaking.16
According to the RTC, the failure of TRB to sue JN for the recovery
of the loan precludes PhilGuarantee from seeking recoupment from
the spouses Sta. Ana and Cruz what it paid to TRB. Thus,
PhilGuarantee’s payment to TRB amounts to a waiver of its right
under Art. 2058 of the Civil Code.17
Aggrieved by the RTC Decision, PhilGuarantee appealed to the CA.
The appellate court reversed the RTC and ordered petitioners to pay
PhilGuarantee Nine Hundred Thirty Four Thousand Six Hundred
Twenty Four Pesos and Thirty Four Centavos (₱ 934,624.34), plus
service charge and interest.18
In reaching its denouement, the CA held that the RTC’s finding that
the loan was extinguished by virtue of the foreclosure sale of the
mortgaged property had no factual support,19 and that such finding is
negated by Rodrigo Sta. Ana’s testimony that JN did not receive any
notice of foreclosure from PhilGuarantee or from TRB. 20 Moreover,
Sta. Ana even offered the same mortgaged property to PhilGuarantee
to settle its obligations with the latter.21
The CA also ruled that JN’s obligation had become due and
demandable within the one-year period of effectivity of the
guarantee; thus, PhilGuarantee’s payment to TRB conformed with its
guarantee, although the payment itself was effected one year after the
maturity date of the loan.22 Contrary to the trial court’s finding, the
CA ruled that the contract of guarantee was not extinguished by the
alleged lack of evidence on PhilGuarantee’s consent to the extensions
granted by TRB to JN.23 Interpreting Art. 2058 of the Civil
Code,24 the appellate court explained that while the provision states
that the guarantor cannot be compelled to pay unless the properties of
the debtor are exhausted, the guarantor is not precluded from waiving
the benefit of excussion and paying the obligation altogether.25
Finally, the CA found that Narciso Cruz was unable to prove the
alleged forgery of his signature in the Undertaking, the evidence
presented not being sufficient to overcome the presumption of
regularity of the Undertaking which is a notarized document. 26
Petitioners sought reconsideration of the Decision and prayed for
the admission of documents evidencing the foreclosure of the real
61
estate mortgage, but the motion for reconsideration was denied by the
CA for lack of merit. The CA ruled that the documentary evidence
presented by petitioners cannot be considered as newly discovered
evidence, it being already in existence while the case was pending
before the trial court, the very forum before which it should have
been presented. Besides, a foreclosure sale per se is not proof of
petitioners’ payment of the loan to PhilGuarantee, the CA added.27
So now before the Court are the separate petitions for review of the
CA Decision. JN and the spouses Sta. Ana, petitioners in G.R. No.
151060, posit that the CA erred in interpreting Articles 2079, 2058,
and 2059 of the Civil Code in its Decision.28 Meanwhile, petitioner
Narciso Cruz in G.R. No. 151311 claims that the CA erred when it
held that petitioners are liable to PhilGuarantee despite its payment
after the expiration of its contract of guarantee and the lack of
PhilGuarantee’s consent to the extensions granted by TRB to JN.
Moreover, Cruz questions the reversal of the ruling of the trial court
anent his liability as a signatory to the Undertaking.29
On the other hand, PhilGuarantee maintains that the date of default,
not the actual date of payment, determines the liability of the
guarantor and that having paid TRB when the loan became due, it
should be indemnified by petitioners.30 It argues that, contrary to
petitioners’ claim, there could be no waiver of its right to excussion
more explicit than its act of payment to TRB very directly.31 Besides,
the right to excussion is for the benefit of the guarantor and is not a
defense for the debtor to raise and use to evade liability.32 Finally,
PhilGuarantee maintains that there is no sufficient evidence proving
the alleged forgery of Cruz’s signature on the Undertaking, which is a
notarized document and as such must be accorded the presumption of
regularity.33
The Court finds for PhilGuarantee.
Under a contract of guarantee, the guarantor binds himself to the
creditor to fulfill the obligation of the principal debtor in case the
latter should fail to do so.34 The guarantor who pays for a debtor, in
turn, must be indemnified by the latter.35 However, the guarantor
cannot be compelled to pay the creditor unless the latter has
exhausted all the property of the debtor and resorted to all the legal
remedies against the debtor.36 This is what is otherwise known as the
benefit of excussion.
It is clear that excussion may only be invoked after legal remedies
against the principal debtor have been expanded. Thus, it was held
that the creditor must first obtain a judgment against the principal
debtor before assuming to run after the alleged guarantor, "for
obviously the ‘exhaustion of the principal’s property’ cannot even
begin to take place before judgment has been obtained."37 The law
imposes conditions precedent for the invocation of the defense. Thus,
in order that the guarantor may make use of the benefit of excussion,
he must set it up against the creditor upon the latter’s demand for
payment and point out to the creditor available property of the debtor
within the Philippines sufficient to cover the amount of the debt.38
While a guarantor enjoys the benefit of excussion, nothing prevents
him from paying the obligation once demand is made on him.
Excussion, after all, is a right granted to him by law and as such he
may opt to make use of it or waive it. PhilGuarantee’s waiver of the
right of excussion cannot prevent it from demanding reimbursement
from petitioners. The law clearly requires the debtor to indemnify the
guarantor what the latter has paid.39
Petitioners’ claim that PhilGuarantee had no more obligation to pay
TRB because of the alleged expiration of the contract of guarantee is
untenable. The guarantee, dated17 December 1979, states:
In the event of default by JNDC and as a consequence thereof,
PHILGUARANTEE is made to pay its obligation arising under the

aforesaid guarantee PHILGUARANTEE shall pay the BANK the
amount of ₱ 1.4 million or 70% of the total obligation unpaid…
....
This guarantee shall be valid for a period of one (1) year from date
hereof but may be renewed upon payment by JNDC of the guarantee
fee at the same rate of 1.5% per annum.40
The guarantee was only up to 17 December 1980. JN’s obligation
with TRB fell due on 30 June 1980, and demand on PhilGuarantee
was made by TRB on 08 October 1980. That payment was actually
made only on 10 March 1981 does not take it out of the terms of the
guarantee. What is controlling is that default and demand on
PhilGuarantee had taken place while the guarantee was still in force.
There is likewise no merit in petitioners’ claim that PhilGuarantee’s
failure to give its express consent to the alleged extensions granted by
TRB to JN had extinguished the guarantee. The requirement that the
guarantor should consent to any extension granted by the creditor to
the debtor under Art. 2079 is for the benefit of the guarantor. As
such, it is likewise waivable by the guarantor. Thus, even assuming
that extensions were indeed granted by TRB to JN, PhilGuarantee
could have opted to waive the need for consent to such extensions.
Indeed, a guarantor is not precluded from waiving his right to be
notified of or to give his consent to extensions obtained by the debtor.
Such waiver is not contrary to public policy as it is purely personal
and does not affect public interest.41 In the instant case,
PhilGuarantee’s waiver can be inferred from its actual payment to
TRB after the latter’s demand, despite JN’s failure to pay the
renewal/guarantee fee as indicated in the guarantee.42
For the above reasons, there is no basis for petitioner’s claim that
PhilGuarantee was a mere volunteer payor and had no legal
obligation to pay TRB. The law does not prohibit the payment by a
guarantor on his own volition, heedless of the benefit of excussion. In
fact, it recognizes the right of a guarantor to recover what it has paid,
even if payment was made before the debt becomes due,43 or if made
without notice to the debtor,44 subject of course to some conditions.
Petitioners’ invocation of our ruling in Willex Plastic Industries,
Corp. v. Court of Appeals45 is misplaced, if not irrelevant. In the said
case, the guarantor claimed that it could not be proceeded against
without first exhausting all of the properties of the debtor. The Court,
finding that there was an express renunciation of the benefit of
excussion in the contract of guarantee, ruled against the guarantor.
The cited case finds no application in the case a quo. PhilGuarantee
is not invoking the benefit of excussion. It cannot be overemphasized
that excussion is a right granted to the guarantor and, therefore, only
he may invoke it at his discretion.
The benefit of excussion, as well as the requirement of consent to
extensions of payment, is a protective device pertaining to and
conferred on the guarantor. These may be invoked by the guarantor
against the creditor as defenses to bar the unwarranted enforcement
of the guarantee. However, PhilGuarantee did not avail of these
defenses when it paid its obligation according to the tenor of the
guarantee once demand was made on it. What is peculiar in the
instant case is that petitioners, the principal debtors themselves, are
muddling the issues and raising the same defenses against the
guarantor, which only the guarantor may invoke against the creditor,
to avoid payment of their own obligation to the guarantor. The Court
cannot countenance their self-seeking desire to be exonerated from
the duty to reimburse PhilGuarantee after it had paid TRB on their
behalf and to unjustly enrich themselves at the expense of
PhilGuarantee.
62
Petitioners assert that TRB’s alleged foreclosure of the real estate
mortgage over the land executed as security for the loan agreement
had extinguished PhilGuarantee’s obligation; thus, PhilGuarantee’s
recourse should be directed against TRB, as per the pari-
passu provision46 in the contract of guarantee.47 We disagree.
The foreclosure was made on 27 August 1993, "after the case was
submitted for decision in 1992 and before the issuance of the decision
of the court a quo in 1998".48 Thus, foreclosure was resorted to by
TRB against JN when they both had become aware that
PhilGuarantee had already paid TRB and that there was a pending
case filed by PhilGuarantee against petitioners. This matter was not
raised and proved in the trial court, nor in the appeal before the CA,
but raised for the first time in petitioners’ motion for reconsideration
in the CA. In their appellants’ Brief, petitioners claimed that "there
was no need for the defendant-appellee JNDC to present any
evidence before the lower court to show that indeed foreclosure of
the REM took place."49 As properly held by the CA,
… Firstly, the documents evidencing foreclosure of mortgage cannot
be considered as newly discovered evidence. The said documents
were already subsisting and should have been presented during the
trial of the case. The alleged foreclosure sale was made on August 23,
1993 … while the decision was rendered by the trial court on August
20, 1998 about five (5) years thereafter. These documents were
likewise not submitted by the defendants-appellees when they
submitted their appellees’ Brief to this Court. Thus, these cannot be
considered as newly discovered evidence but are more correctly
ascribed as suppressed forgotten evidence… Secondly, the alleged
foreclosure sale is not proof of payment of the loan by defendant-
appellees to the plaintiffs-appellants.50
Besides, the complaint a quo was filed by PhilGuarantee as guarantor
for JN, and its cause of action was premised on its payment of JN’s
obligation after the latter’s default. PhilGuarantee was well within its
rights to demand reimbursement for such payment made, regardless
of whether the creditor, TRB, was subsequently able to obtain
payment from JN. If double payment was indeed made, then it is JN
which should go after TRB, and not PhilGuarantee. Petitioners have
no one to blame but themselves, having allowed the foreclosure of
the property for the full value of the loan despite knowledge of
PhilGuarantee’s payment to TRB. Having been aware of such
payment, they should have opposed the foreclosure, or at the very
least, filed a supplemental pleading with the trial court informing the
same of the foreclosure sale.
Likewise, petitioners cannot invoke the pari-passu clause in the
guarantee, not being parties to the said agreement. The clause is
clearly for the benefit of the guarantor and no other.
The Court notes the letter51 of Rodrigo Sta. Ana offering, by way of
settlement of JN’s obligations to PhilGuarantee, the very same parcel
of land mortgaged as security for the loan agreement. This further
weakens the position of petitioners, since it becomes obvious that
they acknowledged the payment made by PhilGuarantee on their
behalf and that they were in fact willing to negotiate with
PhilGuarantee for the settlement of the said obligation before the
filing of the complaint a quo.
Anent the issue of forgery, the CA is correct in reversing the decision
of the trial court. Save for the denial of Narciso Cruz that it was not
his signature in the Undertaking and the perfunctory comparison of
the signatures, nothing in the records would support the claim of
forgery. Forgery cannot be presumed and must be proved by clear,
positive and convincing evidence and the burden of proof lies on the
party alleging forgery.52 Mere denial will not suffice to overcome the
positive value of the Undertaking, which is a notarized document, has
in its favor the presumption of regularity, and carries the evidentiary

weight conferred upon it with respect to its due execution.53 Even in
cases where the alleged forged signature was compared to samples of
genuine signatures to show its variance therefrom, this Court still
found such evidence insufficient.54 Mere variance of the signatures
cannot be considered as conclusive proof that the same were forged.55
WHEREFORE, the consolidated petitions are DENIED.
The Decision of the Court of Appeals in CA-G.R. CV No. 61318 is
AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
Visayan Surety & Insurance Corporation v. CA,
GR No. 127261, Sept. 7, 2001
G.R. No. 127261 September 7, 2001
VISAYAN SURETY & INSURANCE CORPORATION, petitioner,
vs.
THE HONORABLE COURT OF APPEALS, SPOUSES JUN
+
BARTOLOME and SUSAN BARTOLOME and DOMINADOR V.
+
IBAJAN , respondents.
PARDO, J.:
The Case
1 jeepney in the amount of P150,000.00 and such other damages as
The case is a petition to review and set aside a decision of the Court
of Appeals affirming that of the Regional Trial Court, Biñan, Laguna,
Branch 24, holding the surety liable to the intervenor in lieu of the
principal on a replevin bond.
The Facts
2 On August 16, 1994, the trial court denied both motions.
The facts, as found by the Court of Appeals, are as follows:
On February 2, 1993, the spouses Danilo Ibajan and Mila Ambe
Ibajan filed with the Regional Trial Court, Laguna, Biñan a complaint
against spouses Jun and Susan Bartolome, for replevin to recover
from them the possession of an Isuzu jeepney, with damages.
Plaintiffs Ibajan alleged that they were the owners of an Isuzu
jeepney which was forcibly and unlawfully taken by defendants Jun
and Susan Bartolome on December 8, 1992, while parked at their
residence.
On February 8, 1993, plaintiffs filed a replevin bond through
petitioner Visayan Surety & Insurance Corporation. The contract of
surety provided thus:
"WHEREFORE, we, sps. Danilo Ibajan and Mila Ibajan and the
VISAYAN SURETY & INSURANCE CORP., of Cebu, Cebu, with
branch office at Manila, jointly and severally bind ourselves in the
sum of Three Hundred Thousand Pesos (P300,000.00) for the return
of the property to the defendant, if the return thereof be adjudged, and
for the payment to the defendant of such sum as he/she may recover
from the plaintiff in the action."
3 the personality of the original defendants in relation to the plaintiffs’
On February 8, 1993, the trial court granted issuance of a writ of
replevin directing the sheriff to take the Isuzu jeepney into his
custody. Consequently, on February 22, 1993, Sheriff Arnel Magat
seized the subject vehicle and turned over the same to plaintiff
spouses Ibajan.4
On February 15, 1993, the spouses Bartolome filed with the trial
court a motion to quash the writ of replevin and to order the return of
the jeepney to them.
63
On May 3, 1993, Dominador V. Ibajan, father of plaintiff Danilo
Ibajan, filed with the trial court a motion for leave of court to
intervene, stating that he has a right superior to the plaintiffs over the
ownership and possession of the subject vehicle.
On June 1, 1993, the trial court granted the motion to intervene.
On August 8, 1993, the trial court issued an order granting the motion
to quash the writ of replevin and ordering plaintiff Mila Ibajan to
5
return the subject jeepney to the intervenor Dominador Ibajan.
On August 31, 1993, the trial court ordered the issuance of a writ of
replevin directing the sheriff to take into his custody the subject
motor vehicle and to deliver the same to the intervenor who was the
6
registered owner.
On September 1, 1993, the trial court issued a writ of replevin in
favor of intervenor Dominador Ibajan but it was returned unsatisfied.
On March 7, 1994, intervenor Dominador Ibajan filed with the trial
court a motion/application for judgment against plaintiffs’ bond.
On June 6, 1994, the trial court rendered judgement the dispositive
portion of which reads:
"WHEREFORE, in the light of the foregoing premises, judgment is
hereby rendered in favor of Dominador Ibajan and against Mila
Ibajan and the Visayan Surety and Insurance Corporation ordering
them to pay the former jointly and severally the value of the subject
7
may be proved by Dominador Ibajan plus costs."
On June 28, 1994, Visayan Surety and Insurance Corporation and
Mila Ibajan filed with the trial court their respective motions for
reconsideration.
On November 24, 1995, Visayan Surety and Insurance Corporation
(hereafter Visayan Surety) appealed the decision to the Court of
8
Appeals.
On August 30, 1996, the Court of Appeals promulgated its decision
9
affirming the judgment of the trial court. On September 19, 1996,
10
petitioner filed a motion for reconsideration. On December 2, 1996,
the Court of Appeals denied the motion for reconsideration for lack
11
of merit.
12
Hence, this petition.
The Issue
The issue in this case is whether the surety is liable to an intervenor
13
on a replevin bond posted by petitioner in favor of respondents.
Respondent Dominador Ibajan asserts that as intervenor, he assumed
bond for the issuance of a writ of replevin.
Petitioner Visayan Surety contends that it is not liable to the
intervenor, Dominador Ibajan, because the intervention of the
intervenor makes him a party to the suit, but not a beneficiary to the
plaintiffs’ bond. The intervenor was not a party to the contract of
surety, hence, he was not bound by the contract.
The Court’s Ruling
The petition is meritorious.

An intervenor is a person, not originally impleaded in a proceeding,
who has legal interest in the matter in litigation, or in the success of
either of the parties, or an interest against both, or is so situated as to
be adversely affected by a distribution or other disposition of
14
property in the custody of the court or of an officer thereof.
May an intervenor be considered a party to a contract of surety which
he did not sign and which was executed by plaintiffs and defendants?
It is a basic principle in law that contracts can bind only the parties
who had entered into it; it cannot favor or prejudice a third
15
person. Contracts take effect between the parties, their assigns, and
heirs, except in cases where the rights and obligations arising from
the contract are not transmissible by their nature, or by stipulation or
16
by provision of law.
A contract of surety is an agreement where a party called the surety
guarantees the performance by another party called the principal or
obligor of an obligation or undertaking in favor of a third person
17
called the obligee. Specifically, suretyship is a contractual relation
resulting from an agreement whereby one person, the surety, engages
to be answerable for the debt, default or miscarriage of another,
18
known as the principal.
The obligation of a surety cannot be extended by implication beyond
19
its specified limits. "When a surety executes a bond, it does not
guarantee that the plaintiff’s cause of action is meritorious, and that it
will be responsible for all the costs that may be adjudicated against its
principal in case the action fails. The extent of a surety’s liability is
20
determined only by the clause of the contract of suretyship." A
contract of surety is not presumed; it cannot extend to more than what
21
is stipulated.
Since the obligation of the surety cannot be extended by implication,
it follows that the surety cannot be held liable to the intervenor when
the relationship and obligation of the surety is limited to the
defendants specified in the contract of surety.
WHEREFORE, the Court REVERSES and sets aside the decision
of the Court of Appeals in CA-G. R. CV No. 49094. The Court rules
that petitioner Visayan Surety & Insurance Corporation is not liable
under the replevin bond to the intervenor, respondent Dominador V.
Ibajan.1âwphi1.n êt
No costs.
SO ORDERED.
South City Homes, Inc. et al v. BA Finance Corp.,
GR No. 135462, Dec. 7, 2001
G.R. No. 135462 December 7, 2001
SOUTH CITY HOMES, INC., FORTUNE MOTORS (PHILS.),
PALAWAN LUMBER MANUFACTURING
CORPORATION, petitioners,
vs.
BA FINANCE CORPORATION, respondent.
PARDO, J.:
The Case
1 guaranteed the "full, faithful and prompt payment and discharge of
The case is a petition to set aside the decision of the Court of
Appeals, the dispositive portion of which reads:
"WHEREFORE, premises considered, the appealed Decision (as
amended by that Order of July 22, 1992) of the lower court in Civil
64
Case No. 21944 is hereby AFFIRMED with the MODIFICATION
that defendant-appellee South City Homes, Inc. is hereby ordered to
pay, jointly and severally, with Fortune Motors Corporation, Palawan
Lumber Manufacturing Corporation and Joseph L. G. Chua, the
outstanding amounts due under the six (6) drafts and trust receipts,
with interest thereon at the legal rate from the date of filing of this
case until said amounts shall have been fully paid, as follows:
Date of Draft Amount Balance
July 26, 1983 P244,269.00
July 27, 1983 967,765.50
July 28, 1983 1,138,941.00
August 2, 1983 244,269.00
August 5, 1983 275,079.00
August 8, 1983 475,046.10
and the attorney's fees and costs of suit.
2
"SO ORDERED."
The Facts
The facts, as found by the Court of Appeals, are as follows:
"The present controversy relates to the rights of an assignee
(financing company) of drafts and trust receipts backed up by
sureties, in the event of default by the debtor (car dealer) to whom the
assignor creditor (car manufacturer) sold and delivered motor
vehicles for resale. A consistent ruling on these cases is hereby
reiterated: that a surety may secure obligations incurred subsequent to
the execution of the surety contract.
"Prior to the transactions covered by the subject drafts and trust
receipts, defendant-appellant Fortune Motors Corporation (Phils.) has
been availing of the credit facilities of plaintiff-appellant BA Finance
Corporation. On January 17, 1983, Joseph L. G. Chua, President of
Fortune Motors Corporation, executed in favor of plaintiff-appellant
a Continuing Suretyship Agreement, in which he "jointly and
severally unconditionally" guaranteed the "full, faithful and prompt
payment and discharge of any and all indebtedness" of Fortune
Motors Corporation to BA Finance Corporation (Folder of Exhibits,
pp. 21-22).
"On February 3, 1983, Palawan Lumber Manufacturing Corporation
represented by Joseph L.G. Chua, George D. Tan, Edgar C.
Rodrigueza and Joselito C. Baltazar, executed in favor of plaintiff-
appellant a Continuing Suretyship Agreement in which, said
corporation "jointly and severally unconditionally" guaranteed the
"full, faithful and prompt payment and discharge of any and all
indebtedness of Fortune Motors Corporation to BA Finance
Corporation (Folder of Exhibits, pp. 19-20). On the same date, South
City Homes, Inc. represented by Edgar C. Rodrigueza and Aurelio F.
Tablante, likewise executed a Continuing Suretyship Agreement in
which said corporation "jointly and severally unconditionally"
any and all indebtedness" of Fortune Motors Corporation to BA
Finance Corporation (Folder of Exhibits, pp. 17-18).

"Subsequently, Canlubang Automotive Resources Corporation
(CARCO) drew six (6) Drafts in its own favor, payable thirty (30)
days after sight, charged to the account of Fortune Motors
Corporation, as follows:
Date of Draft
July 26, 1983
July 27, 1983
July 28, 1983
August 2, 1983
August 5, 1983
August 8, 1983
"(Folder of Exhibits, pp. 1, 4, 7, 8, 11 and 14).
"Fortune Motors Corporation thereafter executed trust receipts
covering the motor vehicles delivered to it by CARCO under which it
agreed to remit to the Entruster (CARCO) the proceeds of any sale
and immediately surrender the remaining unsold vehicles (Folder of
Exhibits, pp. 2, 5, 7-A, 9, 12 and 15). The drafts and trust receipts
were assigned to plaintiff-appellant, under Deeds of Assignment
executed by CARCO (Folder of Exhibits, pp. 3, 6, 7-B, 10, 13 and
16).
"Upon failure of the defendant-appellant Fortune Motors Corporation
to pay the amounts due under the drafts and to remit the proceeds of
motor vehicles sold or to return those remaining unsold in accordance
with the terms of the trust receipt agreements, BA Finance
Corporation sent demand letter to Edgar C. Rodrigueza, South City
Homes, Inc., Aurelio Tablante, Palawan Lumber Manufacturing
Corporation, Joseph L. G. Chua, George D. Tan and Joselito C.
Baltazar (Folder of Exhibits, pp. 29-37). Since the defendants-
appellants failed to settle their outstanding account with plaintiff-
appellant, the latter filed on December 22, 1983 a complaint for a
sum of money with prayer for preliminary attachment, with the
Regional Trial Court of Manila, Branch 1, which was docketed as
Civil Case No. 83-21944 (Record, pp. 1-12). Plaintiff-appellant filed
a surety bond in the amount of P3,391,546.56 and accordingly, Judge
Rosalio C. Segundo ordered the issuance of a writ of preliminary
attachment on January 3, 1984 (Record, pp. 37-47). Defendants
Fortune Motors Corporation, South City Homes, Inc., Edgar C.
Rodrigueza, Aurelio F. Tablante, Palawan Lumber Manufacturing
Corporation, Joseph L. G. Chua, George D. Tan and Joselito C.
Baltazar filed a Motion to Discharge Attachment, which was opposed
by plaintiff-appellant (Record, pp. 49-56). In an Order dated January
11, 1984, Judge Segundo dissolved the writ of attachment except as
against defendant Fortune Motors Corporation and set the said
incident for hearing (Record, p. 57). On January 19, 1984, the
defendants filed a Motion to Dismiss. Therein, they alleged that
conventional subrogation effected a novation without the consent of
the debtor (Fortune Motors Corporation) and thereby extinguished
the latter's liability; that pursuant to the trust receipt transaction, it
was premature under P. D. No. 115 to immediately file a complaint
for a sum of money as the remedy of the entruster is an action for
specific performance; that the suretyship agreements are null and
void for having been entered into without an existing principal
obligation; and that being such sureties does not make them solidary
debtors (Record, pp. 58-64).
65
"After due hearing, the court denied the motion to discharge
attachment with respect to defendant Fortune Motors Corporation as
well as the motion to dismiss by the defendants (Record, pp. 68 and
87). In their Answer, defendants stressed that their obligations to the
creditor (CARCO) was extinguished by the assignment of the drafts
Amount
and trust receipts to plaintiff-appellant without their knowledge and
consent, and pursuant to legal provision on conventional subrogation
a novation was effected, thereby extinguishing the liability of the
P244,269.00
sureties; that plaintiff-appellant failed to immediately demand the
return of the goods under the trust receipt agreements or exercise the
967,765.50
courses of action by the entruster as provided for under P. D. No.
115; and that at the time the suretyship agreements were entered into,
1,138,941.00
there were no principal obligations, thus rendering them null and
void. A counterclaim for the award of actual, moral and exemplary
damages was prayed for by defendants (Record, pp. 91-110).
244,269.00
"During the pre-trial, efforts to reach a compromise was not
275,079.00
successful, and in view of the retirement of Judge Rosalio C.
Segundo of RTC Manila, Branch 1, the case was-re-raffled off to
475,046.10
Branch XXXIII, presided over by Judge Felix V. Barbers (Record,
pp. 155-160).
"Fortune Motors Corporation filed a motion to lift the writ of
attachment covering three (3) vehicles described in the Third-Party
Claim filed with the Office of Deputy Sheriff Jorge C. Victorino
(RTC, Branch 1) by Fortune Equipment, Inc. which was opposed by
plaintiff-appellant (Record, pp. 173-181). On June 15, 1984, Deputy
Sheriff Jorge C. Victorino issued a "Notice of Levy Upon Personal
Properties Pursuant to Order of Attachment" which was duly served
on defendant Fortune Motors Corporation (Record, pp. 191-199). In
an Order dated April 28, 1986, the court a quo denied the motion to
lift the writ of attachment on three (3) vehicles described in the
Third-Party Claim filed by Fortune Equipment Inc. (Record, p. 207).
On motion of their respective counsel, the trial court granted the
parties time to sit down and appraise the machineries and spare parts
owned by defendant Fortune Motors Corporation which are now in
the possession of plaintiff corporation by virtue of the attachment. A
series of conferences was allowed by the court, as means toward
possible compromise agreement. In an Order dated June 2, 1987, the
case was returned to Branch I, now presided over by Judge Rebecca
G. Salvador (Record, p. 237). The pre-trial period was terminated and
the case was set for trial on the merits (Record, p. 259).
"Acting on the motion to sell levied properties filed by defendant
George D. Tan, the trial court ordered the public sale of the attached
properties (Record, p. 406). The court likewise allowed the
complaint-in-intervention filed by Fortune Equipment Inc. and South
Fortune Motors Corporation who claimed ownership of four (4)
vehicles earlier seized and attached (Record, p. 471-475). Plaintiff
corporation admitted the allegations contained in the complaint-in-
intervention only with respect to one truck so attached but denied the
rest of intervenors' allegations (Record, pp. 479-482). Thereafter, the
parties submitted their respective pre-trial briefs on the complaint-in-
intervention, and after the submission of evidence thereon, the case
was submitted for decision (Record, pp. 573-577).
"On November 25, 1991, the lower court rendered its judgment, the
dispositive portion of which reads as follows:
"WHEREFORE, judgment is hereby rendered:
"1. Ordering defendants Fortune Motors, Palawan Lumber
Manufacturing Corporation and Joseph Chua, jointly and severally to
pay the plaintiff on the July 27, 1983 Draft, the sum of P324,767.41
with the interest thereon at the legal rate from the date of filing of this
case, December 21, 1983 until the amount shall have been fully paid;
"2. Ordering defendants Fortune Motors, Palawan Manufacturing
Corporation and Joseph Chua jointly and severally to pay to the

plaintiff on the July 26, 1983 Draft, the sum of P198,659.52 with
interest thereon at the legal rate from the date of filing of this case,
until the amount shall have been fully paid;
"3. Ordering defendant Fortune Motors, Palawan Manufacturing
Corporation and Joseph Chua jointly and severally to pay to the
plaintiff on the July 28, 1983 Draft the sum of P1,138,941.00 with
interest thereon at the legal rate from the date of filing of this case,
until the amount shall have been fully paid;
"4. Ordering defendants Fortune Motors, Palawan Lumber
Manufacturing Corporation and Joseph Chua jointly and severally to
pay to the plaintiff on the August 2, 1983 Draft, the sum of
P244,269.00 with interest thereon at the legal rate from the date of
filing of this case, until the amount shall have been fully paid;
"5. Ordering defendants Fortune Motors, Palawan Lumber
Manufacturing Corporation and Joseph Chua jointly and severally to
pay to the plaintiff on the August 5, 1983 Draft the sum of
P275,079.60 with interest thereon at the legal rate from the date of
the filing of this case, until the amount shall have been fully paid;
"6. Ordering defendants Fortune Motors, Palawan Lumber
Manufacturing Corporation and Joseph Chua jointly and severally to
pay to the plaintiff on the August 8, 1983 Draft the sum of
P475,046.10 with interest thereon at legal rate from the date of the
filing of this case, until the amount shall been fully paid;
"7. Ordering defendant Fortune Motors, Palawan Lumber
Manufacturing Corporation and Joseph Chua jointly and severally to
pay the sum of P300,000.00 as attorney's fees and the costs of this
suit;
"8. Dismissing plaintiff's complaint against South City Homes,
Aurelio Tablante, Joselito Baltazar, George Tan and Edgar
Rodrigueza and the latter's counterclaim for lack of basis;
"9. Ordering Deputy Sheriff Jorge Victorino to return to Intervenor
Fortune Equipment the Mitsubishi Truck Canter with Motor No.
310913 and Chassis No. 513234;
"10. Dismissing the complaint-in-intervention in so far as the three
other vehicles mentioned in the complaint-in-intervention are
concerned for lack of cause of action;
"11. Dismissing the complaint-in-intervention against Fortune Motor
for lack of basis; and
"12. Ordering the parties-in-intervention to bear their respective
damages, attorneys fees and the costs of the suit.
"Upon execution, the sheriff may cause the judgment to be satisfied
out of the properties attached with the exception of one (1) unit
Mitsubishi Truck Canter with Motor No. 310913 and Chassis No.
513234, if they be sufficient for that purpose. The officer shall make
a return in writing to the court of his proceedings. Whenever the
judgment shall have been paid, the officer, upon reasonable demand
must return to the judgment debtor the attached properties remaining
in his hand, and any of the proceeds of the properties not applied to
the judgment.
"SO ORDERED.
"On two (2) separate motions for reconsideration, one filed by
plaintiffs-intervenors dated December 18, 1991 and the other by
plaintiff dated December 26, 1991, the trial court issued an Order
dated July 22, 1992 amending its Decision dated November 25, 1991.
Specifically, said Order amended paragraphs 9 and 10 thereof and
deleted the last paragraph of the said Decision.
"Paragraphs 9 and 10 now read:
66
"9. Ordering Deputy Sheriff Jorge C. Victorino to return to
Intervenor Fortune Equipment, Inc. the Mitsubishi Truck Canter with
Motor No. 310913 and Chassis No. 513234; Mitsubishi Truck Canter
with Motor No. 4D30-313012 and Chassis No. 513696, and Fuso
Truck with Motor No. 006769 and Chassis No. 20756, and to
Intervenor South Fortune Motors Corporation the Cimaron Jeepney
with Plate No. NET-849;
"10. Ordering the plaintiff, in the event the motor vehicles could no
longer be returned to pay the estimated value thereof i.e.,
P750,000.00 for the three trucks, and P5,000.00 for the Cimaron
Jeepney, to the plaintiffs-intervenors.
"x x x" (Records, pp. 664-665)
"Plaintiffs BA Finance Corporation, defendants Fortune Motors
Corp. (Phils.) and Palawan Lumber Manufacturing Corporation, and
intervenors Fortune Equipment and South Fortune Motors, interposed
3
the present appeal and filed their respective Briefs."
On September 8, 1998, the Court of Appeals promulgated a decision,
the dispositive portion of which is quoted in the opening paragraph of
this decision.
4
Hence, this appeal.
The Issues
The issues presented are: (1) whether the suretyship agreement is
valid; (2) whether there was a novation of the obligation so as to
extinguish the liability of the sureties; and (3) whether respondent
BAFC has a valid cause of action for a sum of money following the
5
drafts and trust receipts transactions.
The Court's Ruling
On the first issue, petitioners assert that the suretyship agreement
they signed is void because there was no principal obligation at the
time of signing as the principal obligation was signed six (6) months
later. The Civil Code, however, allows a suretyship agreement to
secure future loans even if the amount is not yet known.
Article 2053 of the Civil Code provides that:
"Art. 2053. A guaranty may also be given as security for future debts,
the amount of which is not yet known. x x x"
6
In Fortune Motors (Phils.) Corporation v. Court of Appeals, we
held:
"To fund their acquisition of new vehicles (which are later retailed or
resold to the general public), car dealers normally enter into
wholesale automotive financing schemes whereby vehicles are
delivered by the manufacturer or assembler on the strength of trust
receipts or drafts executed by the car dealers, which are backed up by
sureties. These trust receipts or drafts are then assigned and/or
discounted by the manufacturer to/with financing companies, which
assume payment of the vehicles but with the corresponding right to
collect such payment from the car dealers and/or the sureties. In this
manner, car dealers are able to secure delivery of their stock-in-trade
without having to pay cash therefor; manufacturers get paid without
any receivables/collection problems; and financing companies earn
their margins with the assurance of payment not only from the
dealers but also from the sureties. When the vehicles are eventually
resold, the car dealers are supposed to pay the financing companies
— and the business goes merrily on. However, in the event the car
dealer defaults in paying the financing company, may the surety
escape liability on the legal ground that the obligations were incurred
subsequent to the execution of the surety contract?

"x x x Of course, a surety is not bound under any particular principal
obligation until that principal obligation is born. But there is no
theoretical or doctrinal difficulty inherent in saying that the
suretyship agreement itself is valid and binding even before the
principal obligation intended to be secured thereby is born, any more
than there would be in saying that obligations which are subject to a
condition precedent are valid and binding before the occurrence of
the condition precedent.
"Comprehensive or continuing surety agreements are in fact quite
commonplace in present day financial and commercial practice. A
bank or financing company which anticipates entering into a series of
credit transactions with a particular company, commonly requires the
projected principal debtor to execute a continuing surety agreement
along with its sureties. By executing such an agreement, the principal
places itself in a position to enter into the projected series of
transactions with its creditor; with such suretyship agreement, there
would be no need to execute a separate surety contract or bond for
each financing or credit accommodation extended to the principal
debtor."
Petitioners next posit (second issue) that a novation, as a result of the
assignment of the drafts and trust receipts by the creditor (CARCO)
in favor of respondent BAFC without the consent of the principal
debtor (Fortune Motors), extinguished their liabilities.
An assignment of credit is an agreement by virtue of which the owner
of a credit, known as the assignor, by a legal cause, such as
sale, dacion en pago, exchange or donation, and without the consent
of the debtor, transfers his credit and accessory rights to another,
known as the assignee, who acquires the power to enforce it to the
7 Palmares v. CA, GR No. 126490, March 31, 1998
same extent as the assignor could enforce it against the debtor. As a
consequence, the third party steps into the shoes of the original
creditor as subrogee of the latter. Petitioners' obligations were not
extinguished. Thus:
"x x x Moreover, in assignment, the debtor's consent is not essential
for the validity of the assignment (Art. 1624 in relation to Art. 1475,
Civil Code), his knowledge thereof affecting only the validity of the
payment he might make (Article 1626, Civil Code).
"Article 1626 also shows that payment of an obligation which is
already existing does not depend on the consent of the debtor. It, in
effect, mandates that such payment of the existing obligation shall
already be made to the new creditor from the time the debtor acquires
knowledge of the assignment of the obligation.
"The law is clear that the debtor had the obligation to pay and should
have paid from the date of notice whether or not he consented.
"We have ruled in Sison & Sison vs. Yap Tico and Avanceña, 37
Phil. 587 [1918] that definitely, consent is not necessary in order that
assignment may fully produce legal effects. Hence, the duty to pay
does not depend on the consent of the debtor. Otherwise, all creditors
would be prevented from assigning their credits because of the
possibility of the debtor's refusal to give consent.
"What the law requires in an assignment of credit is not the consent
of the debtor but merely notice to him. A creditor may, therefore,
validly assign his credit and its accessories without the debtor's
consent (National Investment and Development Co. v. De Los
Angeles, 40 SCRA 489 [1971]. The purpose of the notice is only to
inform that debtor from the date of the assignment, payment should
8
be made to the assignee and not to the original creditor."
Petitioners finally posit (third issue) that as an entruster, respondent
BAFC must first demand the return of the unsold vehicles from
Fortune Motors Corporation, pursuant to the terms of the trust
receipts. Having failed to do so, petitioners had no cause of action
67
whatsoever against Fortune Motors Corporation and the action for
collection of sum of money was, therefore, premature. A trust receipt
is a security transaction intended to aid in financing importers and
retail dealers who do not have sufficient funds or resources to finance
the importation or purchase of merchandise, and who may not be able
to acquire credit except through utilization, as collateral, of the
9
merchandise imported or purchased. In the event of default by the
entrustee on his obligations under the trust receipt agreement, it is not
absolutely necessary that the entruster cancel the trust and take
possession of the goods to be able to enforce his rights thereunder.
We ruled:
"x x x Significantly, the law uses the word "may" in granting to the
entruster the right to cancel the trust and take possession of the
goods. Consequently, petitioner has the discretion to avail of such
right or seek any alternative action, such as a third party claim or a
separate civil action which it deems best to protect its right, at any
time upon default or failure of the entrustee to comply with any of the
10
terms and conditions of the trust agreement."
The Judgment
WHEREFORE, the appealed decision is hereby
AFFIRMED. However, the award of attorneys fees is deleted.
No costs.
SO ORDERED.
Davide, Jr., C .J ., Puno, Kapunan and Ynares-Santiago, JJ ., concur.
G.R. No. 126490 March 31, 1998
ESTRELLA PALMARES, petitioner,
vs.
COURT OF APPEALS and M.B. LENDING
CORPORATION, respondents.
REGALADO, J.:
Where a party signs a promissory note as a co-maker and binds
herself to be jointly and severally liable with the principal debtor in
case the latter defaults in the payment of the loan, is such undertaking
of the former deemed to be that of a surety as an insurer of the debt,
or of a guarantor who warrants the solvency of the debtor?
Pursuant to a promissory note dated March 13, 1990, private
respondent M.B. Lending Corporation extended a loan to the spouses
Osmeña and Merlyn Azarraga, together with petitioner Estrella
Palmares, in the amount of P30,000.00 payable on or before May 12,
1990, with compounded interest at the rate of 6% per annum to be
computed every 30 days from the date thereof.1 On four occasions
after the execution of the promissory note and even after the loan
matured, petitioner and the Azarraga spouses were able to pay a total
of P16,300.00, thereby leaving a balance of P13,700.00. No
payments were made after the last payment on September 26, 1991.2
Consequently, on the basis of petitioner's solidary liability under the
promissory note, respondent corporation filed a complaint3 against
petitioner Palmares as the lone party-defendant, to the exclusion of
the principal debtors, allegedly by reason of the insolvency of the
latter.
In her Amended Answer with Counterclaim,4 petitioner alleged that
sometime in August 1990, immediately after the loan matured, she
offered to settle the obligation with respondent corporation but the
latter informed her that they would try to collect from the spouses

Azarraga and that she need not worry about it; that there has already
been a partial payment in the amount of P17,010.00; that the interest
of 6% per month compounded at the same rate per month, as well as
the penalty charges of 3% per month, are usurious and
unconscionable; and that while she agrees to be liable on the note but
only upon default of the principal debtor, respondent corporation
acted in bad faith in suing her alone without including the Azarragas
when they were the only ones who benefited from the proceeds of the
loan.
During the pre-trial conference, the parties submitted the following
issues for the resolution of the trial court: (1) what the rate of interest,
penalty and damages should be; (2) whether the liability of the
defendant (herein petitioner) is primary or subsidiary; and (3)
whether the defendant Estrella Palmares is only a guarantor with a
subsidiary liability and not a co-maker with primary liability.5
Thereafter, the parties agreed to submit the case for decision based on
the pleadings filed and the memoranda to be submitted by them. On
November 26, 1992, the Regional Trial Court of Iloilo City, Branch
23, rendered judgment dismissing the complaint without prejudice to
the filing of a separate action for a sum of money against the spouses
Osmeña and Merlyn Azarraga who are primarily liable on the
instrument.6 This was based on the findings of the court a quo that
the filing of the complaint against herein petitioner Estrella Palmares,
to the exclusion of the Azarraga spouses, amounted to a discharge of
a prior party; that the offer made by petitioner to pay the obligation is
considered a valid tender of payment sufficient to discharge a
person's secondary liability on the instrument; as co-maker, is only
secondarily liable on the instrument; and that the promissory note is a
contract of adhesion.
Respondent Court of Appeals, however, reversed the decision of the
trial court, and rendered judgment declaring herein petitioner
Palmares liable to pay respondent corporation:
1. The sum of P13,700.00 representing the outstanding balance still
due and owing with interest at six percent (6%) per month computed
from the date the loan was contracted until fully paid;
2. The sum equivalent to the stipulated penalty of three percent (3%)
per month, of the outstanding balance;
3. Attorney's fees at 25% of the total amount due per stipulations;
4. Plus costs of suit.7
Contrary to the findings of the trial court, respondent appellate court
declared that petitioner Palmares is a surety since she bound herself
to be jointly and severally or solidarily liable with the principal
debtors, the Azarraga spouses, when she signed as a co-maker. As
such, petitioner is primarily liable on the note and hence may be sued
by the creditor corporation for the entire obligation. It also adverted
to the fact that petitioner admitted her liability in her Answer
although she claims that the Azarraga spouses should have been
impleaded. Respondent court ordered the imposition of the stipulated
6% interest and 3% penalty charges on the ground that the Usury
Law is no longer enforceable pursuant to Central Bank Circular No.
905. Finally, it rationalized that even if the promissory note were to
be considered as a contract of adhesion, the same is not entirely
prohibited because the one who adheres to the contract is free to
reject it entirely; if he adheres, he gives his consent.
Hence this petition for review on certiorari wherein it is asserted
that:
A. The Court of Appeals erred in ruling that Palmares acted as surety
and is therefore solidarily liable to pay the promissory note.
68
1. The terms of the promissory note are vague. Its conflicting
provisions do not establish Palmares' solidary liability.
2. The promissory note contains provisions which establish the co-
maker's liability as that of a guarantor.
3. There is no sufficient basis for concluding that Palmares' liability
is solidary.
4. The promissory note is a contract of adhesion and should be
construed against M. B. Lending Corporation.
5. Palmares cannot be compelled to pay the loan at this point.
B. Assuming that Palmares' liability is solidary, the Court of Appeals
erred in strictly imposing the interests and penalty charges on the
outstanding balance of the promissory note.
The foregoing contentions of petitioner are denied and contradicted
in their material points by respondent corporation. They are further
refuted by accepted doctrines in the American jurisdiction after
which we patterned our statutory law on surety and guaranty. This
case then affords us the opportunity to make an extended exposition
on the ramifications of these two specialized contracts, for such
guidance as may be taken therefrom in similar local controversies in
the future.
The basis of petitioner Palmares' liability under the promissory note
is expressed in this wise:
ATTENTION TO CO-MAKERS: PLEASE READ WELL
I, Mrs. Estrella Palmares, as the Co-maker of the above-quoted loan,
have fully understood the contents of this Promissory Note for Short-
Term Loan:
That as Co-maker, I am fully aware that I shall be jointly and
severally or solidarily liable with the above principal maker of this
note;
That in fact, I hereby agree that M.B. LENDING CORPORATION
may demand payment of the above loan from me in case the principal
maker, Mrs. Merlyn Azarraga defaults in the payment of the note
subject to the same conditions above-contained.8
Petitioner contends that the provisions of the second and third
paragraph are conflicting in that while the second paragraph seems to
define her liability as that of a surety which is joint and solidary with
the principal maker, on the other hand, under the third paragraph her
liability is actually that of a mere guarantor because she bound
herself to fulfill the obligation only in case the principal debtor
should fail to do so, which is the essence of a contract of guaranty.
More simply stated, although the second paragraph says that she is
liable as a surety, the third paragraph defines the nature of her
liability as that of a guarantor. According to petitioner, these are two
conflicting provisions in the promissory note and the rule is that
clauses in the contract should be interpreted in relation to one another
and not by parts. In other words, the second paragraph should not be
taken in isolation, but should be read in relation to the third
paragraph.
In an attempt to reconcile the supposed conflict between the two
provisions, petitioner avers that she could be held liable only as a
guarantor for several reasons. First, the words "jointly and severally
or solidarily liable" used in the second paragraph are technical and
legal terms which are not fully appreciated by an ordinary layman
like herein petitioner, a 65-year old housewife who is likely to enter
into such transactions without fully realizing the nature and extent of
her liability. On the contrary, the wordings used in the third
paragraph are easier to comprehend. Second, the law looks upon the
contract of suretyship with a jealous eye and the rule is that the

obligation of the surety cannot be extended by implication beyond
specified limits, taking into consideration the peculiar nature of a
surety agreement which holds the surety liable despite the absence of
any direct consideration received from either the principal obligor or
the creditor. Third, the promissory note is a contract of adhesion
since it was prepared by respondent M.B. Lending Corporation. The
note was brought to petitioner partially filled up, the contents thereof
were never explained to her, and her only participation was to sign
thereon. Thus, any apparent ambiguity in the contract should be
strictly construed against private respondent pursuant to Art. 1377 of
the Civil Code.9
Petitioner accordingly concludes that her liability should be deemed
restricted by the clause in the third paragraph of the promissory note
to be that of a guarantor.
Moreover, petitioner submits that she cannot as yet be compelled to
pay the loan because the principal debtors cannot be considered in
default in the absence of a judicial or extrajudicial demand. It is true
that the complaint alleges the fact of demand, but the purported
demand letters were never attached to the pleadings filed by private
respondent before the trial court. And, while petitioner may have
admitted in her Amended Answer that she received a demand letter
from respondent corporation sometime in 1990, the same did not
effectively put her or the principal debtors in default for the simple
reason that the latter subsequently made a partial payment on the loan
in September, 1991, a fact which was never controverted by herein
private respondent.
Finally, it is argued that the Court of Appeals gravely erred in
awarding the amount of P2,745,483.39 in favor of private respondent
when, in truth and in fact, the outstanding balance of the loan is only
P13,700.00. Where the interest charged on the loan is exorbitant,
iniquitous or unconscionable, and the obligation has been partially
complied with, the court may equitably reduce the penalty10 on
grounds of substantial justice. More importantly, respondent
corporation never refuted petitioner's allegation that immediately
after the loan matured, she informed said respondent of her desire to
settle the obligation. The court should, therefore, mitigate the
damages to be paid since petitioner has shown a sincere desire for a
compromise.11
After a judicious evaluation of the arguments of the parties, we are
constrained to dismiss the petition for lack of merit, but to except
therefrom the issue anent the propriety of the monetary award
adjudged to herein respondent corporation.
At the outset, let it here be stressed that even assuming arguendo that
the promissory note executed between the parties is a contract of
adhesion, it has been the consistent holding of the Court that
contracts of adhesion are not invalid per se and that on numerous
occasions the binding effects thereof have been upheld. The peculiar
nature of such contracts necessitate a close scrutiny of the factual
milieu to which the provisions are intended to apply. Hence, just as
consistently and unhesitatingly, but without categorically invalidating
such contracts, the Court has construed obscurities and ambiguities in
the restrictive provisions of contracts of adhesion strictly albeit not
unreasonably against the drafter thereof when justified in light of the
operative facts and surrounding circumstances.12 The factual scenario
obtaining in the case before us warrants a liberal application of the
rule in favor of respondent corporation.
The Civil Code pertinently provides:
Art. 2047. By guaranty, a person called the guarantor binds himself to
the creditor to fulfill the obligation of the principal debtor in case the
latter should fail to do so.
69
If a person binds himself solidarily with the principal debtor, the
provisions of Section 4, Chapter 3, Title I of this Book shall be
observed. In such case the contract is called a suretyship.
It is a cardinal rule in the interpretation of contracts that if the terms
of a contract are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of its stipulation shall
control.13 In the case at bar, petitioner expressly bound herself to be
jointly and severally or solidarily liable with the principal maker of
the note. The terms of the contract are clear, explicit and unequivocal
that petitioner's liability is that of a surety.
Her pretension that the terms "jointly and severally or solidarily
liable" contained in the second paragraph of her contract are technical
and legal terms which could not be easily understood by an ordinary
layman like her is diametrically opposed to her manifestation in the
contract that she "fully understood the contents" of the promissory
note and that she is "fully aware" of her solidary liability with the
principal maker. Petitioner admits that she voluntarily affixed her
signature thereto; ergo, she cannot now be heard to claim otherwise.
Any reference to the existence of fraud is unavailing. Fraud must be
established by clear and convincing evidence, mere preponderance of
evidence not even being adequate. Petitioner's attempt to prove fraud
must, therefore, fail as it was evidenced only by her own
uncorroborated and, expectedly, self-serving allegations.14
Having entered into the contract with full knowledge of its terms and
conditions, petitioner is estopped to assert that she did so under a
misapprehension or in ignorance of their legal effect, or as to the
legal effect of the undertaking.15 The rule that ignorance of the
contents of an instrument does not ordinarily affect the liability of
one who signs it also applies to contracts of suretyship. And the
mistake of a surety as to the legal effect of her obligation is ordinarily
no reason for relieving her of liability.16
Petitioner would like to make capital of the fact that although she
obligated herself to be jointly and severally liable with the principal
maker, her liability is deemed restricted by the provisions of the third
paragraph of her contract wherein she agreed "that M.B. Lending
Corporation may demand payment of the above loan from me in case
the principal maker, Mrs. Merlyn Azarraga defaults in the payment of
the note," which makes her contract one of guaranty and not
suretyship. The purported discordance is more apparent than real.
A surety is an insurer of the debt, whereas a guarantor is an insurer of
the solvency of the debtor.17 A suretyship is an undertaking that the
debt shall be paid; a guaranty, an undertaking that the debtor shall
pay.18 Stated differently, a surety promises to pay the principal's debt
if the principal will not pay, while a guarantor agrees that the
creditor, after proceeding against the principal, may proceed against
the guarantor if the principal is unable to pay.19 A surety binds
himself to perform if the principal does not, without regard to his
ability to do so. A guarantor, on the other hand, does not contract that
the principal will pay, but simply that he is able to do so.20 In other
words, a surety undertakes directly for the payment and is so
responsible at once if the principal debtor makes default, while a
guarantor contracts to pay if, by the use of due diligence, the debt
cannot be made out of the principal debtor.21
Quintessentially, the undertaking to pay upon default of the principal
debtor does not automatically remove it from the ambit of a contract
of suretyship. The second and third paragraphs of the aforequoted
portion of the promissory note do not contain any other condition for
the enforcement of respondent corporation's right against petitioner.
It has not been shown, either in the contract or the pleadings, that
respondent corporation agreed to proceed against herein
petitioner only if and when the defaulting principal has become
insolvent. A contract of suretyship, to repeat, is that wherein one

lends his credit by joining in the principal debtor's obligation, so as to
render himself directly and primarily responsible with him, and
without reference to the solvency of the principal.22
In a desperate effort to exonerate herself from liability, petitioner
erroneously invokes the rule on strictissimi juris, which holds that
when the meaning of a contract of indemnity or guaranty has once
been judicially determined under the rule of reasonable construction
applicable to all written contracts, then the liability of the surety,
under his contract, as thus interpreted and construed, is not to be
extended beyond its strict meaning.23 The rule, however, will apply
only after it has been definitely ascertained that the contract is one of
suretyship and not a contract of guaranty. It cannot be used as an aid
in determining whether a party's undertaking is that of a surety or a
guarantor.
Prescinding from these jurisprudential authorities, there can be no
doubt that the stipulation contained in the third paragraph of the
controverted suretyship contract merely elucidated on and made more
specific the obligation of petitioner as generally defined in the second
paragraph thereof. Resultantly, the theory advanced by petitioner,
that she is merely a guarantor because her liability attaches only upon
default of the principal debtor, must necessarily fail for being
incongruent with the judicial pronouncements adverted to above.
It is a well-entrenched rule that in order to judge the intention of the
contracting parties, their contemporaneous and subsequent acts shall
also be principally considered.24 Several attendant factors in that
genre lend support to our finding that petitioner is a surety. For one,
when petitioner was informed about the failure of the principal debtor
to pay the loan, she immediately offered to settle the account with
respondent corporation. Obviously, in her mind, she knew that she
was directly and primarily liable upon default of her principal. For
another, and this is most revealing, petitioner presented the receipts
of the payments already made, from the time of initial payment up to
the last, which were all issued in her name and of the Azarraga
spouses.25 This can only be construed to mean that the payments
made by the principal debtors were considered by respondent
corporation as creditable directly upon the account and inuring to the
benefit of petitioner. The concomitant and simultaneous compliance
of petitioner's obligation with that of her principals only goes to show
that, from the very start, petitioner considered herself equally bound
by the contract of the principal makers.
In this regard, we need only to reiterate the rule that a surety is bound
equally and absolutely with the principal,26 and as such is deemed an
original promisor and debtor from the beginning.27 This is because in
suretyship there is but one contract, and the surety is bound by the
same agreement which binds the principal.28 In essence, the contract
of a surety starts with the agreement,29 which is precisely the
situation obtaining in this case before the Court.
It will further be observed that petitioner's undertaking as co-maker
immediately follows the terms and conditions stipulated between
respondent corporation, as creditor, and the principal obligors. A
surety is usually bound with his principal by the same instrument,
executed at the same time and upon the same consideration; he is an
original debtor, and his liability is immediate and direct.30 Thus, it
has been held that where a written agreement on the same sheet of
paper with and immediately following the principal contract between
the buyer and seller is executed simultaneously therewith, providing
that the signers of the agreement agreed to the terms of the principal
contract, the signers were "sureties" jointly liable with the buyer.31 A
surety usually enters into the same obligation as that of his principal,
and the signatures of both usually appear upon the same instrument,
and the same consideration usually supports the obligation for both
the principal and the surety.32
70
There is no merit in petitioner's contention that the complaint was
prematurely filed because the principal debtors cannot as yet be
considered in default, there having been no judicial or extrajudicial
demand made by respondent corporation. Petitioner has agreed that
respondent corporation may demand payment of the loan from her in
case the principal maker defaults, subject to the same conditions
expressed in the promissory note. Significantly, paragraph (G) of the
note states that "should I fail to pay in accordance with the above
schedule of payment, I hereby waive my right to notice and demand."
Hence, demand by the creditor is no longer necessary in order that
delay may exist since the contract itself already expressly so
declares.33 As a surety, petitioner is equally bound by such waiver.
Even if it were otherwise, demand on the sureties is not necessary
before bringing suit against them, since the commencement of the
suit is a sufficient demand.34 On this point, it may be worth
mentioning that a surety is not even entitled, as a matter of right, to
be given notice of the principal's default. Inasmuch as the creditor
owes no duty of active diligence to take care of the interest of the
surety, his mere failure to voluntarily give information to the surety
of the default of the principal cannot have the effect of discharging
the surety. The surety is bound to take notice of the principal's default
and to perform the obligation. He cannot complain that the creditor
has not notified
him in the absence of a special agreement to that effect in the contract
of suretyship.35
The alleged failure of respondent corporation to prove the fact of
demand on the principal debtors, by not attaching copies thereof to its
pleadings, is likewise immaterial. In the absence of a statutory or
contractual requirement, it is not necessary that payment or
performance of his obligation be first demanded of the principal,
especially where demand would have been useless; nor is it a
requisite, before proceeding against the sureties, that the principal be
called on to account.36 The underlying principle therefor is that a
suretyship is a direct contract to pay the debt of another. A surety is
liable as much as his principal is liable, and absolutely liable as soon
as default is made, without any demand upon the principal
whatsoever or any notice of default.37 As an original promisor and
debtor from the beginning, he is held ordinarily to know every default
of his principal.38
Petitioner questions the propriety of the filing of a complaint solely
against her to the exclusion of the principal debtors who allegedly
were the only ones who benefited from the proceeds of the loan.
What petitioner is trying to imply is that the creditor, herein
respondent corporation, should have proceeded first against the
principal before suing on her obligation as surety. We disagree.
A creditor's right to proceed against the surety exists independently
of his right to proceed against the principal.39 Under Article 1216 of
the Civil Code, the creditor may proceed against any one of the
solidary debtors or some or all of them simultaneously. The rule,
therefore, is that if the obligation is joint and several, the creditor has
the right to proceed even against the surety alone.40 Since, generally,
it is not necessary for the creditor to proceed against a principal in
order to hold the surety liable, where, by the terms of the contract, the
obligation of the surety is the same that of the principal, then soon as
the principal is in default, the surety is likewise in default, and may
be sued immediately and before any proceedings are had against the
principal.41 Perforce, in accordance with the rule that, in the absence
of statute or agreement otherwise, a surety is primarily liable, and
with the rule that his proper remedy is to pay the debt and pursue the
principal for reimbursement, the surety cannot at law, unless
permitted by statute and in the absence of any agreement limiting the
application of the security, require the creditor or obligee, before
proceeding against the surety, to resort to and exhaust his remedies

against the principal, particularly where both principal and surety are
equally bound.42
We agree with respondent corporation that its mere failure to
immediately sue petitioner on her obligation does not release her
from liability. Where a creditor refrains from proceeding against the
principal, the surety is not exonerated. In other words, mere want of
diligence or forbearance does not affect the creditor's rights vis-a-
vis the surety, unless the surety requires him by appropriate notice to
sue on the obligation. Such gratuitous indulgence of the principal
does not discharge the surety whether given at the principal's request
or without it, and whether it is yielded by the creditor through
sympathy or from an inclination to favor the principal, or is only the
result of passiveness. The neglect of the creditor to sue the principal
at the time the debt falls due does not discharge the surety, even if
such delay continues until the principal becomes insolvent.43 And, in
the absence of proof of resultant injury, a surety is not discharged by
the creditor's mere statement that the creditor will not look to the
surety,44 or that he need not trouble himself.45 The consequences of
the delay, such as the subsequent insolvency of the principal,46 or the
fact that the remedies against the principal may be lost by lapse of
time, are immaterial.47
The raison d'être for the rule is that there is nothing to prevent the
creditor from proceeding against the principal at any time.48 At any
rate, if the surety is dissatisfied with the degree of activity displayed
by the creditor in the pursuit of his principal, he may pay the debt
himself and become subrogated to all the rights and remedies of the
creditor.49
It may not be amiss to add that leniency shown to a debtor in default,
by delay permitted by the creditor without change in the time when
the debt might be demanded, does not constitute an extension of the
time of payment, which would release the surety.50 In order to
constitute an extension discharging the surety, it should appear that
the extension was for a definite period, pursuant to an enforceable
agreement between the principal and the creditor, and that it was
made without the consent of the surety or with a reservation of rights
with respect to him. The contract must be one which precludes the
creditor from, or at least hinders him in, enforcing the principal
contract within the period during which he could otherwise have
enforced it, and which precludes the surety from paying the debt.51
None of these elements are present in the instant case. Verily, the
mere fact that respondent corporation gave the principal debtors an
extended period of time within which to comply with their obligation
did not effectively absolve here in petitioner from the consequences
of her undertaking. Besides, the burden is on the surety, herein
petitioner, to show that she has been discharged by some act of the
creditor,52 herein respondent corporation, failing in which we cannot
grant the relief prayed for.
As a final issue, petitioner claims that assuming that her liability is
solidary, the interests and penalty charges on the outstanding balance
of the loan cannot be imposed for being illegal and unconscionable.
Petitioner additionally theorizes that respondent corporation
intentionally delayed the collection of the loan in order that the
interests and penalty charges would accumulate. The statement,
likewise traversed by said respondent, is misleading.
In an affidavit53 executed by petitioner, which was attached to her
petition, she stated, among others, that:
8. During the latter part of 1990, I was surprised to learn that Merlyn
Azarraga's loan has been released and that she has not paid the same
upon its maturity. I received a telephone call from Mr. Augusto
Banusing of MB Lending informing me of this fact and of my
liability arising from the promissory note which I signed.
71
9. I requested Mr. Banusing to try to collect first from Merlyn and
Osmeña Azarraga. At the same time, I offered to pay MB Lending
the outstanding balance of the principal obligation should he fail to
collect from Merlyn and Osmeña Azarraga. Mr. Banusing advised me
not to worry because he will try to collect first from Merlyn and
Osmeña Azarraga.
10. A year thereafter, I received a telephone call from the secretary of
Mr. Banusing who reminded that the loan of Merlyn and Osmeña
Azarraga, together with interest and penalties thereon, has not been
paid. Since I had no available funds at that time, I offered to pay MB
Lending by delivering to them a parcel of land which I own. Mr.
Banusing's secretary, however, refused my offer for the reason that
they are not interested in real estate.
11. In March 1992, I received a copy of the summons and of the
complaint filed against me by MB Lending before the RTC-Iloilo.
After learning that a complaint was filed against me, I instructed
Sheila Gatia to go to MB Lending and reiterate my first offer to pay
the outstanding balance of the principal obligation of Merlyn
Azarraga in the amount of P30,000.00.
12. Ms. Gatia talked to the secretary of Mr. Banusing who referred
her to Atty. Venus, counsel of MB Lending.
13. Atty. Venus informed Ms. Gatia that he will consult Mr.
Banusing if my offer to pay the outstanding balance of the principal
obligation loan (sic) of Merlyn and Osmeña Azarraga is acceptable.
Later, Atty. Venus informed Ms. Gatia that my offer is not acceptable
to Mr. Banusing.
The purported offer to pay made by petitioner can not be deemed
sufficient and substantial in order to effectively discharge her from
liability. There are a number of circumstances which conjointly
inveigh against her aforesaid theory.
1. Respondent corporation cannot be faulted for not immediately
demanding payment from petitioner. It was petitioner who initially
requested that the creditor try to collect from her principal first, and
she offered to pay only in case the creditor fails to collect. The delay,
if any, was occasioned by the fact that respondent corporation merely
acquiesced to the request of petitioner. At any rate, there was here no
actual offer of payment to speak of but only a commitment to pay if
the principal does not pay.
2. Petitioner made a second attempt to settle the obligation by
offering a parcel of land which she owned. Respondent corporation
was acting well within its rights when it refused to accept the offer.
The debtor of a thing cannot compel the creditor to receive a different
one, although the latter may be of the same value, or more valuable
than that which is due.54 The obligee is entitled to demand fulfillment
of the obligation or performance as stipulated. A change of the object
of the obligation would constitute novation requiring the express
consent of the parties.55
3. After the complaint was filed against her, petitioner reiterated her
offer to pay the outstanding balance of the obligation in the amount
of P30,000.00 but the same was likewise rejected. Again, respondent
corporation cannot be blamed for refusing the amount being offered
because it fell way below the amount it had computed, based on the
stipulated interests and penalty charges, as owing and due from
herein petitioner. A debt shall not be understood to have been paid
unless the thing or service in which the obligation consists has been
completely delivered or rendered, as the case may be.56 In other
words, the prestation must be fulfilled completely. A person entering
into a contract has a right to insist on its performance in all
particulars.57

Petitioner cannot compel respondent corporation to accept the
amount she is willing to pay because the moment the latter accepts
the performance, knowing its incompleteness or irregularity, and
without expressing any protest or objection, then the obligation shall
be deemed fully complied with.58 Precisely, this is what respondent
corporation wanted to avoid when it continually refused to settle with
petitioner at less than what was actually due under their contract.
This notwithstanding, however, we find and so hold that the penalty
charge of 3% per month and attorney's fees equivalent to 25% of the
total amount due are highly inequitable and unreasonable.
It must be remembered that from the principal loan of P30,000.00,
the amount of P16,300.00 had already been paid even before the
filing of the present case. Article 1229 of the Civil Code provides that
the court shall equitably reduce the penalty when the principal
obligation has been partly or irregularly complied with by the debtor.
And, even if there has been no performance, the penalty may also be
reduced if it is iniquitous or leonine.
In a case previously decided by this Court which likewise involved
private respondent M.B. Lending Corporation, and which is
substantially on all fours with the one at bar, we decided to eliminate
altogether the penalty interest for being excessive and unwarranted
under the following rationalization:
Upon the matter of penalty interest, we agree with the Court of
Appeals that the economic impact of the penalty interest of three
percent (3 %) per month on total amount due but unpaid should be
equitably reduced. The purpose for which the penalty interest is
intended — that is, to punish the obligor — will have been
sufficiently served by the effects of compounded interest. Under the
exceptional circumstances in the case at bar, e.g., the original amount
loaned was only P15,000.00; partial payment of P8,600.00 was made
on due date; and the heavy (albeit still lawful) regular compensatory
interest, the penalty interest stipulated in the parties' promissory note
is iniquitous and unconscionable and may be equitably reduced
further by eliminating such penalty interest altogether.59
Accordingly, the penalty interest of 3% per month being imposed on
petitioner should similarly be eliminated.
Finally, with respect to the award of attorney's fees, this Court has
previously ruled that even with an agreement thereon between the
parties, the court may nevertheless reduce such attorney's fees fixed
in the contract when the amount thereof appears to be unconscionable
or unreasonable.60 To that end, it is not even necessary to show, as in
other contracts, that it is contrary to morals or public policy.61 The
grant of attorney's fees equivalent to 25% of the total amount due is,
in our opinion, unreasonable and immoderate, considering the
minimal unpaid amount involved and the extent of the work involved
in this simple action for collection of a sum of money. We, therefore,
hold that the amount of P10,000.00 as and for attorney's fee would be
sufficient in this case.62
WHEREFORE, the judgment appealed from is hereby AFFIRMED,
subject to the MODIFICATION that the penalty interest of 3% per
month is hereby deleted and the award of attorney's fees is reduced to
P10,000.00.
SO ORDERED.
Willex Plastic Industries Corp. v. CA, GR No.
103066, April 25, 1996
G.R. No. 103066 April 25, 1996
WILLEX PLASTIC INDUSTRIES, CORPORATION, petitioner,
vs.
72
HON. COURT OF APPEALS and INTERNATIONAL
CORPORATE BANK, respondents.
MENDOZA, J.:p
This is a petition for review on certiorari of the decision1 of the
Court of Appeals in C.A.-G.R. CV No. 19094, affirming the decision
of the Regional Trial Court of the National Capital Judicial Region,
Branch XLV, Manila, which ordered petitioner Willex Plastic
Industries Corporation and the Inter-Resin Industrial Corporation,
jointly and severally, to pay private respondent International
Corporate Bank certain sums of money, and the appellate court's
resolution of October 17, 1989 denying petitioner's motion for
reconsideration.
The facts are as follows:
Sometime in 1978, Inter-Resin Industrial Corporation opened a letter
of credit with the Manila Banking Corporation. To secure payment of
the credit accomodation, Inter-Resin Industrial and the Investment
and Underwriting Corporation of the Philippines (IUCP) executed
two documents, both entitled "Continuing Surety Agreement" and
dated December 1, 1978, whereby they bound themselves solidarily
to pay Manilabank "obligations of every kind, on which the [Inter-
Resin Industrial] may now be indebted or hereafter become indebted
to the [Manilabank]." The two agreements (Exhs. J and K) are the
same in all respects, except as to the limit of liability of the surety,
the first surety agreement being limited to US$333,830.00, while the
second one is limited to US$334,087.00.
On April 2, 1979, Inter-Resin Industrial, together with Willex Plastic
Industries Corp., executed a "Continuing Guaranty" in favor of IUCP
whereby "For and in consideration of the sum or sums obtained
and/or to be obtained by Inter-Resin Industrial Corporation" from
IUCP, Inter-Resin Industrial and Willex Plastic jointly and severally
guaranteed "the prompt and punctual payment at maturity of the
NOTE/S issued by the DEBTOR/S . . . to the extent of the aggregate
principal sum of FIVE MILLION PESOS (P5,000,000.00) Philippine
Currency and such interests, charges and penalties as hereafter may
be specified."
On January 7, 1981, following demand upon it, IUCP paid to
Manilabank the sum of P4,334,280.61 representing Inter-Resin
Industrial's outstanding obligation. (Exh. M-1) On February 23 and
24, 1981, Atrium Capital Corp., which in the meantime had
succeeded IUCP, demanded from Inter-Resin Industrial and Willex
Plastic the payment of what it (IUCP) had paid to Manilabank. As
neither one of the sureties paid, Atrium filed this case in the court
below against Inter-Resin Industrial and Willex Plastic.
On August 11, 1982, Inter-Resin Industrial paid Interbank, which had
in turn succeeded Atrium, the sum of P687,600.00 representing the
proceeds of its fire insurance policy for the destruction of its
properties.
In its answer, Inter-Resin Industrial admitted that the "Continuing
Guaranty" was intended to secure payment to Atrium of the amount
of P4,334,280.61 which the latter had paid to Manilabank. It claimed,
however, that it had already fully paid its obligation to Atrium
Capital.
On the other hand, Willex Plastic denied the material allegations of
the complaint and interposed the following Special Affirmative
Defenses:
(a) Assuming arguendo that main defendant is indebted to plaintiff,
the former's liability is extinguished due to the accidental fire that

destroyed its premises, which liability is covered by sufficient
insurance assigned to plaintiff;
(b) Again, assuming arguendo, that the main defendant is indebted to
plaintiff, its account is now very much lesser than those stated in the
complaint because of some payments made by the former;
(c) The complaint states no cause of action against WILLEX;
(d) WLLLEX is only a guarantor of the principal obliger, and thus, its
liability is only secondary to that of the principal;
(e) Plaintiff failed to exhaust the ultimate remedy in pursuing its
claim against the principal obliger;
(f) Plaintiff has no personality to sue.
On April 29, 1986, Interbank was substituted as plaintiff in the
action. The case then proceeded to trial.
On March 4, 1988, the trial court declared Inter-Resin Industrial to
have waived the right to present evidence for its failure to appear at
the hearing despite due notice. On the other hand, Willex Plastic
rested its case without presenting any evidence. Thereafter Interbank
and Willex Plastic submitted their respective memoranda.
On April 5, 1988, the trial court rendered judgment, ordering Inter-
Resin Industrial and Willex Plastic jointly and severally to pay to
Interbank the following amounts:
(a) P3, 646,780.61, representing their indebtedness to the plaintiff,
with interest of 17% per annum from August 11, 1982, when Inter-
Resin Industrial paid P687,500.00 to the plaintiff, until full payment
of the said amount;
(b) Liquidated damages equivalent to 178 of the amount due; and
(c) Attorney's fees and expenses of litigation equivalent to 208 of the
total amount due.
Inter-Resin Industrial and Willex Plastic appealed to the Court of
Appeals. Willex Plastic filed its brief, while Inter-Resin Industrial
presented a "Motion to Conduct Hearing and to Receive Evidence to
Resolve Factual Issues and to Defer Filing of the Appellant's Brief."
After its motion was denied, Inter-Resin Industrial did not file its
brief anymore.
On February 22, 1991, the Court of Appeals rendered a decision
affirming the ruling of the trial court.
Willex Plastic filed a motion for reconsideration praying that it be
allowed to present evidence to show that Inter-Resin Industrial had
already paid its obligation to Interbank, but its motion was denied on
December 6, 1991:
The motion is denied for lack of merit. We denied defendant-
appellant Inter-Resin Industrial's motion for reception of evidence
because the situation or situations in which we could exercise the
power under BP 129 did not exist. Movant here has not presented any
argument which would show otherwise.
Hence, this petition by Willex Plastic for the review of the decision
of February 22, 1991 and the resolution of December 6, 1991 of the
Court of Appeals.
Petitioner raises a number of issues.
[1] The main issue raised is whether under the "Continuing
Guaranty" signed on April 2, 1979 petitioner Willex Plastic may be
held jointly and severally liable with Inter-Resin Industrial for the
amount paid by Interbank to Manilabank.
73
As already stated, the amount had been paid by Interbank's
predecessor-in-interest, Atrium Capital, to Manilabank pursuant to
the "Continuing Surety Agreements" made on December 1, 1978. In
denying liability to Interbank for the amount, Willex Plastic argues
that under the "Continuing Guaranty," its liability is for sums
obtained by Inter-Resin Industrial from Interbank, not for sums paid
by the latter to Manilabank for the account of Inter-Resin Industrial.
In support of this contention Willex Plastic cites the following
portion of the "Continuing Guaranty":
For and in consideration of the sums obtained and/or to be obtained
by INTER-RESIN INDUSTRIAL CORPORATION, hereinafter
referred to as the DEBTOR/S, from you and/or your principal/s as
may be evidenced by promissory note/s, checks, bills receivable/s
and/or other evidence/s of indebtedness (hereinafter referred to as the
NOTE/S), I/We hereby jointly and severally and unconditionally
guarantee unto you and/or your principal/s, successor/s and assigns
the prompt and punctual payment at maturity of the NOTE/S issued
by the DEBTOR/S in your and/or your principal/s, successor/s and
assigns favor to the extent of the aggregate principal sum of FIVE
MILLION PESOS (P5,000,000.00), Philippine Currency, and such
interests, charges and penalties as may hereinafter be specified.
The contention is untenable. What Willex Plastic has overlooked is
the fact that evidence aliunde was introduced in the trial court to
explain that it was actually to secure payment to Interbank (formerly
IUCP) of amounts paid by the latter to Manilabank that the
"Continuing Guaranty" was executed. In its complaint below,
Interbank's predecessor-in-interest, Atrium Capital, alleged:
5. to secure the guarantee made by plaintiff of the credit
accommodation granted to defendant IRIC [Inter-Resin Industrial] by
Manilabank, the plaintiff required defendant IRIC [Inter-Resin
Industrial] to execute a chattel mortgage in its favor and a Continuing
Guaranty which was signed by the other defendant WPIC [Willex
Plastic].
In its answer, Inter-Resin Industrial admitted this allegation although
it claimed that it had already paid its obligation in its entirety. On the
other hand, Willex Plastic, while denying the allegation in question,
merely did so "for lack of knowledge or information of the same."
But, at the hearing of the case on September 16, 1986, when asked by
the trial judge whether Willex Plastic had not filed a crossclaim
against Inter-Resin Industrial, Willex Plastic's counsel replied in the
negative and manifested that "the plaintiff in this case [Interbank] is
the guarantor and my client [Willex Plastic] only signed as a
guarantor to the guarantee."2
For its part Interbank adduced evidence to show that the "Continuing
Guaranty" had been made to guarantee payment of amounts made by
it to Manilabank and not of any sums given by it as loan to Inter-
Resin Industrial. Interbank's witness testified under cross
examination by counsel for Willex Plastic that Willex "guaranteed
the exposure/of whatever exposure of ACP [Atrium Capital] will
later be made because of the guarantee to Manila Banking
Corporation."3
It has been held that explanatory evidence may be received to show
the circumstances under which a document has been made and to
what debt it relates.4 At all events, Willex Plastic cannot now claim
that its liability is limited to any amount which Interbank, as creditor,
might give directly to Inter-Resin Industrial as debtor because, by
failing to object to the parol evidence presented, Willex Plastic
waived the protection of the parol evidence rule.5
Accordingly, the trial court found that it was "to secure the guarantee
made by plaintiff of the credit accommodation granted to defendant
IRIC [Inter-Resin Industrial] by Manilabank, [that] the plaintiff
required defendant IRIC to execute a chattel mortgage in its favor

and a Continuing Guaranty which was signed by the defendant
Willex Plastic Industries Corporation."6
Similarly, the Court of Appeals found it to be an undisputed fact that
"to secure the guarantee undertaken by plaintiff-appellee [Interbank]
of the credit accommodation granted to Inter-Resin Industrial by
Manilabank, plaintiff-appellee required defendant-appellants to sign a
Continuing Guaranty." These factual findings of the trial court and of
the Court of Appeals are binding on us not only because of the rule
that on appeal to the Supreme Court such findings are entitled to
great weight and respect but also because our own examination of the
record of the trial court confirms these findings of the two courts.7
Nor does the record show any other transaction under which Inter-
Resin Industrial may have obtained sums of money from Interbank. It
can reasonably be assumed that Inter-Resin Industrial and Willex
Plastic intended to indemnify Interbank for amounts which it may
have paid Manilabank on behalf of Inter-Resin Industrial.
Indeed, in its Petition for Review in this Court, Willex Plastic
admitted that it was "to secure the aforesaid guarantee, that
INTERBANK required principal debtor IRIC [Inter-Resin Industrial]
to execute a chattel mortgage in its favor, and so a "Continuing
Guaranty" was executed on April 2, 1979 by WILLEX PLASTIC
INDUSTRIES CORPORATION (WILLEX for brevity) in favor of
INTERBANK for and in consideration of the loan obtained by IRIC
[Inter-Resin Industrial]."
[2] Willex Plastic argues that the "Continuing Guaranty," being an
accessory contract, cannot legally exist because of the absence of a
valid principal obligation.8 Its contention is based on the fact that it is
not a party either to the "Continuing Surety Agreement" or to the loan
agreement between Manilabank and Interbank Industrial.
Put in another way the consideration necessary to support a surety
obligation need not pass directly to the surety, a consideration
moving to the principal alone being sufficient. For a "guarantor or
surety is bound by the same consideration that makes the contract
effective between the principal parties thereto. It is never necessary
that a guarantor or surety should receive any part or benefit, if such
there be, accruing to his principal."9 In an analogous case, 10 this
Court held:
At the time the loan of P100,000.00 was obtained from petitioner by
Daicor, for the purpose of having an additional capital for buying and
selling coco-shell charcoal and importation of activated carbon, the
comprehensive surety agreement was admittedly in full force and
effect. The loan was, therefore, covered by the said agreement, and
private respondent, even if he did not sign the promissory note, is
liable by virtue of the surety agreement. The only condition that
would make him liable thereunder is that the Borrower "is or may
become liable as maker, endorser, acceptor or otherwise." There is no
doubt that Daicor is liable on the promissory note evidencing the
indebtedness.
The surety agreement which was earlier signed by Enrique Go, Sr.
and private respondent, is an accessory obligation, it being dependent
upon a principal one which, in this case is the loan obtained by
Daicor as evidenced by a promissory note.
[3] Willex Plastic contends that the "Continuing Guaranty" cannot be
retroactivelt applied so as to secure payments made by Interbank
under the two "Continuing Surety Agreements." Willex Plastic
invokes the ruling in El Vencedor v. Canlas 11 and Diño v. Court of
Appeals 12 in support of its contention that a contract of suretyship or
guaranty should be applied prospectively.
The cases cited are, however, distinguishable from the present case.
In El Vencedor v. Canlas we held that a contract of suretyship "is not
74
retrospective and no liability attaches for defaults occurring before it
is entered into unless an intent to be so liable is indicated." There we
found nothing in the contract to show that the paries intended the
surety bonds to answer for the debts contracted previous to the
execution of the bonds. In contrast, in this case, the parties to the
"Continuing Guaranty" clearly provided that the guaranty would
cover "sums obtained and/or to be obtained" by Inter-Resin Industrial
from Interbank.
On the other hand, in Diño v. Court of Appeals the issue was whether
the sureties could be held liable for an obligation contracted after the
execution of the continuing surety agreement. It was held that by its
very nature a continuing suretyship contemplates a future course of
dealing. "It is prospective in its operation and is generallyintended to
provide security with respect to future transactions." By no means,
however, was it meant in that case that in all instances a contrast of
guaranty or suretyship should be prospective in application.
Indeed, as we also held in Bank of the Philippine Islands
v. Foerster, 13 although a contract of suretyship is ordinarily not to be
construed as retrospective, in the end the intention of the parties as
revealed by the evidence is controlling. What was said
there 14 applies mutatis mutandis to the case at bar:
In our opinion, the appealed judgment is erroneous. It is very true that
bonds or other contracts of suretyship are ordinarily not to be
construed as retrospective, but that rule must yield to the intention of
the contracting parties as revealed by the evidence, and does not
interfere with the use of the ordinary tests and canons of
interpretation which apply in regard to other contracts.
In the present case the circumstances so clearly indicate that the bond
given by Echevarria was intended to cover all of the indebtedness of
the Arrocera upon its current account with the plaintiff Bank that we
cannot possibly adopt the view of the court below in regard to the
effect of the bond.
[4] Willex Plastic says that in any event it cannot be proceeded
against without first exhausting all property of Inter-Resin Industrial.
Willex Plastic thus claims the benefit of excussion. The Civil Code
provides, however:
Art. 2059. This excussion shall not take place:
(1) If the guarantor has expressly renounced it;
(2) If he has bound himself solidarily with the debtor;
The pertinent portion of the "Continuing Guaranty" executed by
Willex Plastic and Inter-Resin Industrial in favor of IUCP (now
Interbank) reads:
If default be made in the payment of the NOTE/s herein guaranteed
you and/or your principal/s may directly proceed against
Me/Us without first proceeding against and exhausting DEBTOR/s
propertiesin the same manner as if all such liabilities constituted
My/Our direct and primary obligations. (emphasis supplied)
This stipulation embodies an express renunciation of the right of
excussion. In addition, Willex Plastic bound itself solidarily liable
with Inter-Resin Industrial under the same agreement:
For and in consideration of the sums obtained and/or to be obtained
by INTER-RESIN INDUSTRIAL CORPORATION, hereinafter
referred to as the DEBTOR/S, from you and/or your principal/s as
may be evidenced by promissory note/s, checks, bills receivable/s
and/or other evidence/s of indebtedness (hereinafter referred to as the
NOTE/S), I/We hereby jointly and severally and unconditionally
guarantee unto you and/or your principal/s, successor/s and assigns
the prompt and punctual payment at maturity of the NOTE/S issued

by the DEBTOR/S in your and/or your principal/s, successor/s and
assigns favor to the extent of the aggregate principal sum of FIVE
MILLION PESOS (P5,000,000.00), Philippine Currency, and such
interests, charges and penalties as may hereinafter he specified.
[5] Finally it is contended that Inter-Resin Industrial had already paid
its indebtedness to Interbank and that Willex Plastic should have been
allowed by the Court of Appeals to adduce evidence to prove this.
Suffice it to say that Inter-Resin Industrial had been given generous
opportunity to present its evidence but it failed to make use of the
same. On the otherhand, Willex Plastic rested its case without
presenting evidence.
The reception of evidence of Inter-Resin Industrial was set on
January 29, 1987, but because of its failure to appear on that date, the
hearing was reset on March 12, 26 and April 2, 1987.
On March 12, 1987 Inter-Resin Industrial again failed to appear.
Upon motion of Willex Plastic, the hearings on March 12 and 26,
1987 were cancelled and "reset for the last time" on April 2 and 30,
1987.
On April 2, 1987, Inter-Resin Industrial again failed to appear.
Accordingly the trial court issued the following order:
Considering that, as shown by the records, the Court had exerted
every earnest effort to cause the service of notice or subpoena on the
defendant Inter-Resin Industrial but to no avail, even with the
assistance of the defendant Willex the defendant Inter-Resin
Industrial is hereby deemed to have waived the right to present its
evidence.
On the other hand, Willex Plastic announced it was resting its case
without presenting any evidence.
Upon motion of Inter-Resin Industrial, however, the trial court
reconsidered its order and set the hearing anew on July 23, 1987. But
Inter-Resin Industrial again moved for the postponement of the
hearing be postponed to August 11, 1987. The hearing was, therefore,
reset on September 8 and 22, 1987 but the hearings were reset on
October 13, 1987, this time upon motion of Interbank. To give
Interbank time to comment on a motion filed by Inter-Resin
Industrial, the reception of evidence for Inter-Resin Industrial was
again reset on November 17, 26 and December 11, 1987. However,
Inter-Resin Industrial again moved for the postponement of the
hearing. Accordingly the hearing was reset on November 26 and
December 11, 1987, with warning that the hearings were
intransferrable.
Again, the reception of evidence for Inter-Resin Industrial was reset
on January 22, 1988 and February 5, 1988 upon motion of its
counsel. As Inter-Resin Industrial still failed to present its evidence, it
was declared to have waived its evidence.
To give Inter-Resin Industrial a last opportunity to present its
evidence, however, the hearing was postponed to March 4, 1988.
Again Inter-Resin Industrial's counsel did not appear. The trial court,
therefore, finally declared Inter-Resin Industrial to have waived the
right to present its evidence. On the other hand, Willex Plastic, as
before, manifested that it was not presenting evidence and requested
instead for time to file a memorandum.
There is therefore no basis for the plea made by Willex Plastic that it
be given the opportunity of showing that Inter-Resin Industrial has
already paid its obligation to Interbank.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED,
with costs against the petitioner.
SO ORDERED.
75
PNB v. CA, GR No. 33174, July 4, 1991
G.R. No. 33174 July 4, 1991
PHILIPPINE NATIONAL BANK, petitioner,
vs.
THE HONORABLE COURT OF APPEALS (Special Fourth
Division), LUZON SURETY CO., INC., and ESTANISLAO E.
DEPUSOY, trading under the style of E.E. DEPUSOY
CONSTRUCTION, respondents.
Domingo A. Santiago, Jr., Lucas R. Vidad, Nicolas C. Alino, Cesar
T. Basa and Roland A. Niedo for petitioner.
Tolentino, Cruz, Reyes, Lava & Manuel for respondent Luzon Surety
Co., Inc.
F.M. Ejercito for respondent E.E. Depusoy Construction.
DAVIDE, JR., J.:
Before Us is a petition for the review on certiorari of the decision of
the Court of Appeals promulgated on 12 December 1970 in CA-G.R.
No. 36615-R1 affirming, with modification, the decision of the then
Court of First Instance (now Regional Trial Court) of Manila, Branch
VII, dated 30 September 1959 in Civil Case No. 351632 an action for
collection of sum of money filed by petitioner against private
respondents. The dispositive portion of the trial court's decision
reads:
IN VIEW WHEREOF:
1. The case against Luzon Surety Co. is dismissed but its
counterclaim is also dismissed for lack of sufficient merit;
2. Defendant Estanislao Depusoy is condemned to pay unto the
Philippine National Bank the respective sums as principal of
P35,000.00, P30,000.00, P10,000.00, and P25,000.00 together with
the interests as outlined in the statement of account set forth in the
body of this decision. No pronouncements as to costs.
SO ORDERED.3
The dispositive portion of the decision of respondent Court of
Appeals reads:
WHEREFORE, with the modification that the defendant Depusoy
shall pay 10% interest on the amount of the judgment, the decision of
the trial court is hereby affirmed in all other respects. Without
pronouncement as to costs.4
However, immediately preceding this is a paragraph reading:
We agree with the appellant that the trial court erred in not sentencing
Estanislao Depusoy to pay attorney's fees equivalent to 10% of the
amount due. This is expressly provided for in the promissory notes,
and as it does not appear to be unreasonable, the stipulations of the
parties should be given effect.
As carefully summarized by the Court of Appeals, the relevant facts
in this case are as follows:
On August 6, 1955, Estanislao Depusoy, doing business under the
name of E.E. Depusoy Construction, and the Republic of the
Philippines, represented by the Director of Public Works, entered into
a building contract, Exhibit 2-Luzon, for the construction of the GSIS
building at Arroceros Street, Manila, Depusoy to furnish all
materials, labor, plans, and supplies needed in the construction.
Depusoy applied for credit accommodation with the plaintiff. This

was approved by the Board of Directors in various resolutions subject
to the conditions that he would assign all payments to be received
from the Bureau of Public Works of the GSIS to the bank, furnish a
surety bond, and the surety to deposit P10,000.00 to the plaintiff. The
total accommodation granted to Depusoy was P100,000.00. This was
later extended by another P10,000.00 and P25,000.00, but in no case
should the loan exceed P100,000.00, Exhibits K-1, K-2, K-3 and K-4.
In compliance with these conditions, Depusoy executed a Deed of
Assignment of all money to be received by him from the GSIS as
follows:
That I, Estanislao Depusoy, of legal age, Filipino, married to Lourdes
G. Gonzales, doing business under the style of E. E. San Beda
Subdivision, Manila, for and in consideration of certain loans,
overdrafts or other credit accommodations to be granted by the
PHILIPPINE NATIONAL BANK, Manila, have assigned,
transferred and conveyed and by these presents do hereby assign,
transfer and convey unto the said PHILIPPINE NATIONAL BANK,
its successors and assigns all payment to be received from my
contract with the Bureau of Public Works, Republic of the
Philippines date (sic) August 6, 1955.
By virtue of this assignment it is hereby understood that the assignor
hereby acknowledges the monies, sums or payments due from the
Bureau of Public Works, Republic of the Philippines, and which are
hereby assigned to the PHILIPPINE NATIONAL BANK as monies,
sums and payments belonging to the PHILIPPINE NATIONAL
BANK, and that any act or misappropriation or conversion which the
assignor or the latter's representatives may commit with respect to the
said sums, monies and payments will subject the assignor or the
latter's representatives to the criminal liabilities imposed by the Penal
Code and such other damages which the Civil Code provides.
It is further understood that the PHILIPPINE NATIONAL BANK
can collect and receive any and all sums, monies and payments
above-mentioned from the Bureau of Public Works, Republic of the
Philippines, and for that matter said bank is hereby authorized to
indorse for deposit or for encashment any and all checks, treasury
warrants, money orders, drafts and other kinds of negotiable
instruments that might be issued in connection with the payment
herein assigned.
This assignment shall be irrevocable subject to the terms and
conditions of the promissory notes, overdrafts and any other kind of
documents which the PHILIPPINE NATIONAL BANK have (sic)
required or may require the assignor to execute to evidence the
above-mentioned obligation.
Luzon thereafter executed two surety bonds, one for the sum of
P40,000.00 Exhibit D, and the other for P60,000.00, Exhibit E.
Exhibit its D and E, except for the amount, are expressed in the same
words as follows:
That we, E. E. DEPUSOY CONSTRUCTION CO., of 32 2nd Street,
San Beda Subdv., Manila, as principal and LUZON SURETY
COMPANY, INC., a corporation duly organized and existing under
and by virtue of the laws of the Philippines, as surety, are held and
firmly bound unto the PHILIPPINE NATIONAL BANK of Manila
in the sum of SIXTY THOUSAND PESOS ONLY (P60,000.00),
Philippine Currency, for the payment of which sum, well and truly to
be made, we bind ourselves, our heirs, executors, administrators,
successors, and assigns, jointly and severally, firmly by these
presents:
The conditions of the obligation are as follows:
WHEREAS, the above bounden principal, on the . . . . day of
September, 1956 in consideration of a certain loan of (P60,000.00)
executed a Deed of Assignment in favor of the Philippine National
76
Bank on all payments to be received by him from the Bureau of
Public Works in connection with a contract dated August 6, 1956.
WHEREAS, said PHILIPPINE NATIONAL BANK, requires said
principal to give a good and sufficient bond in the above stated sum
to secure the full and faithful performance on his part of said
Agreement.
NOW, THEREFORE, if the principal shall well and truly perform
and fulfill all the undertakings, covenants, terms, conditions and
agreement stipulated in said Agreement then, this obligation shall be
null and void; otherwise, it shall remain in full force and effect.
The liability of LUZON SURETY COMPANY, INC., under this
bond will expire January 31, 1957. Furthermore, it is hereby agreed
and understood that the LUZON SURETY COMPANY, INC. will
not be liable for any claim not discovered and presented to the
company within THREE (3) months from the expiration of this bond
and that the obligee hereby waives his right to file any court action
against the surety after the termination of the period of the three
months above mentioned.
With the consent of Luzon, the bond was extended for another 6
months from January 31, 1957.
Under the credit accommodation granted by the plaintiff bank,
Depusoy obtained several amounts from the bank. On January 14,
1957, Depusoy received P50,000.00 from the bank which he
promised to pay in installments on the dates therein indicated, Exhibit
A. On January 17, 1957, he received another P50,000.00 under the
same conditions as the promissory note Exhibit A, except with
respect to the time of payment. Under this arrangement all payments
made by the GSIS were payable to the Philippine National Bank. The
treasury warrants or checks, however, were not sent directly to the
plaintiff. They were received by Depusoy, who in turn delivered them
to the plaintiff bank. The plaintiff then applied the money thus
received, first, to the payment of the amount due on the promissory
notes at the time of the receipt of the treasury warrants or checks, and
the balance was credited to the current account of Depusoy with the
plaintiff bank. A total of P1,309,461.89 were (sic) paid by the GSIS
to the plaintiff bank for the account of Estanislao Depusoy, Exhibit 1-
Luzon. Of this amount, P246,408.91 were (sic) paid according to
Exhibit 1 for the importation of construction materials, and
P1,063,408.91 were (sic) received by the Loans and Discounts
Department of the plaintiff bank. This amount was disposed off by
the plaintiffs Loans & Discounts Department as follows:
a) P795,976.64 were (sic) credited to the current account of Depusoy
with the plaintiff;
b) P20,000.00 were (sic) credited to the plaintiffs Foreign
Department;
c) P2,552.94 were (sic) credited to the payment of interest; and
d) P210,000.00 were (sic) applied to the principal of indebtedness.
(Exh. N-1).
Depusoy defaulted in his building contract with the Bureau of Public
Works, and sometime in September, 1957, the Bureau of Public
Works rescinded its contract with Depusoy. No further amounts were
thereafter paid by the GSIS to the plaintiff bank. The amount of the
loan of Depusoy which remains unpaid, including interest, is over
P100,000.00. Demands for payment were made upon Depusoy and
Luzon, and as no payment was made, . . .5
herein petitioner filed with the trial court a complaint (Civil Case No.
35163) against Estanislao Depusoy and private respondent Luzon
Surety Co. Inc. (LSCI).

After trial on the merits, the trial court rendered a decision the
dispositive portion of which is above adverted to.
In dismissing the case as against LSCI, the trial court ruled that the
surety bonds it issued, Exhs. "D" and "E";
. . . guaranteed only the faithful performance of the deed of
assignments, Exhibit C, and nothing else. That the bonds were
extended by the letters Exhs. E and I did not change their conditions.
. . .6
Petitioner appealed from said decision to the Court of Appeals,
(C.A.-G.R. No. 6615-R) relying on the following assigned errors:
I and that trial court (sic) erred in not finding that there was a breach of
The trial court erred in holding that defendant-appellee Luzon Surety
Company, Inc. "guaranteed only the faithful performance of the deed
of assignment, Exh. "C", and nothing else"; in holding the defense of
the appellee Luzon Surety Company, Inc., that there has been no
breach of the terms and conditions of the bonds Exhs. "D" and "E"; in
finding that the "bonds" can only be therefore understood to
guarantee that the payment due from the GSIS to Depusoy would be
delivered unto the bank.
II
The trial court erred in not finding that the bonds (Exhs. "D" and "E")
should be read jointly with the resolutions approving the loan (Exhs.
"K" to "K-5"), the promissory notes and the deed of assignment in the
determination of the true intent of the parties in the execution of the
bonds which are the basis of the liability of the defendant-appellee
Luzon Surety Company, Inc., in not considering resolutions Exhs.
"K" to "K-5"; promissory notes Exhs. "B", "G", and "H" and the deed
of assignment, Exh. "C" as integral parts of the surety bonds Exhs.
"D" and "E" as therein incorporated by reference in said surety bonds
as such necessarily bound the appellee Luzon Surety Company to
their terms.
III
The trial court erred in not construing the terms of the bonds in favor
of the plaintiff-appellant PNB and against the defendant-appellee
Luzon Surety Company, Inc.
IV
The lower court erred in not holding that the bonds Exhs. "D" and
"E" and letters of extension Exhs. "F" and "I" were compensated
surety agreements executed as required by PNB board resolution
Exhs. "K" to "K-5" for the purpose of securing the payment to the
PNB of the amount advanced by the said bank to the appellee
Estanislao Depusoy to finance the construction of the GSIS building
subject to the construction contract Exh. "2-Luzon" or Exh. "O-
PNB"; in not finding that Exhs. "F" and "I" are indubitable proofs
that defendant-appellee Luzon Surety Company, Inc., is liable for the
repayment of the P100,000.00 loan and the additional
accommodations granted to the defendant-appellee Estanislao
Depusoy; and in not finding and holding that Exhs. "D" and "E" in
the sense that they have been extended so as to secure new
accommodations aside from the original obligation mentioned in said
bonds.
V in the sum of P100,000.00. It recited that the principal, Depusoy, and
The trial court erred in finding that all payments due from the GSIS
construction to Depusoy were actually delivered unto the bank; and
in not finding that Depusoy made diversions from these amounts for
which the surety should be bound to answer under the terms of its
bonds.
77
VI
The trial court erred in not finding that when appellee Depusoy
incurred breach (sic) in his construction contract with the Bureau of
Public Works said default on the part of the principal in his contract
resulted in a consequent breach of his undertaking under the deed of
assignment; and that consequently any breach in the undertaking of
the principal in said deed of assignment communicated liability to the
surety; in not finding likewise that breach on the part of the appellee
Depusoy in his undertaking under the promissory notes meant breach
of the terms of the deed of assignment which incorporated said
promissory notes and that this breach in the deed of assignment
communicated liability to the surety under the terms of the bonds;
the bonds due to the failure of the appellee Luzon Surety Company,
Inc. to see to it that the full amount of P1,309,461.89 remitted by the
GSIS to the PNB was actually received by the PNB; in not finding
that the PNB did not receive all the amounts still due to the said
institutions as remitted by the GSIS under the terms of the deed of
assignment.
VII
The trial court erred in not sentencing defendant-appellee Estanislao
Depusoy to pay the attorney's fees equivalent to 10% of the amounts
due and the costs of the suit.
VIII
The trial court erred in not admitting in the evidence proof of the
amount actually received by the foreign department of the PNB and
the letter of the GSIS to the PNB as part of the rebuttal evidence of
the defendant-appellee (see evidences (sic) offered as part of the
record on appeal for purposes of review).
IX
The trial court erred in relying exclusively for its decision on the
relation of facts presented by the appellee-Luzon Surety Company;
disregarding evidences (sic) presented by the PNB consist of
documentary evidences (sic) disclosing patent facts appearing on the
face of said documents and that consequently the decision is not
based on the real facts and law of the case; and consequently
dismissing the case against the Luzon Surety.7
In due course the Court of Appeals rendered the decision adverted to
above. In disposing of the assigned errors, it patiently examined and
analyzed the facts and made an extensive, exhaustive and well-
reasoned disquisition thereon which We deem necessary to quote:
The assignment of error maybe (sic) reduced into one single question,
— what is the obligation of Luzon under the surety bonds, or, stated
otherwise, what obligation had been guaranteed by Luzon under the
terms of the surety bonds? It is the contention of the plaintiff that the
surety bonds, Exhibits D and E, guaranteed the payment of the loans
or the debt of Depusoy to the plaintiff to the extent of P100,000.00.
Luzon, however, contends that what it guaranteed was the
performance of Depusoy of his obligation under the Deed of
Assignment, Exhibit C, and not other agreements between Depusoy
and the bank. This contention was upheld by the lower court. This,
we believe is the correct construction of the surety bonds. Under the
surety bonds, Depusoy and Luzon bound themselves to the plaintiff
Luzon bound themselves jointly and severally to the PNB under the
following conditions: that "in consideration of a certain loan,
Depusoy executed a Deed of Assignment in favor of the PNB on all
payments to be received by him from the Bureau of Public Works in
connection with a contract of August 6, 1956"; that the PNB required
the principal to give a good and sufficient bond to secure the full and

faithful performance on his part of said agreement; and that, "if the
principal shall well and truly perform and fulfill all the undertakings,
covenants, terms and conditions, and agreements stipulated in said
agreement, this obligation shall be null and void". Now, what are the
undertakings, covenants, terms, conditions, and agreements stipulated
in the said agreement or Deed of Assignment? The undertakings of
the principal Depusoy, under the Deed of Assignment, Exhibit C,
were to assign, transfer, and convey to the plaintiff bank all payments
to be received by Depusoy from the Bureau of Public Works; that
Depusoy acknowledged that such sums assigned and received by the
plaintiff would belong to the PNB, and if any conversion should be
made by the assignor or his representative, he would be criminally
liable; that the PNB could collect and receive all sums and monies,
and payments, and the bank was authorized to endorse for deposit or
for encashment all checks or money orders, or negotiable instruments
that it might receive in connection with the assignment. Nowhere in
the Deed of Assignment nor in the bonds did Luzon guarantee that
Depusoy would pay his indebtedness to the plaintiff and that upon
Depusoy's default, Luzon would be liable. When the terms of the
agreement are clear, there can be no room for construction. If the
intention of the parties, and particularly of Luzon, was to guarantee
the payment of the debt of Depusoy to the plaintiff, the bonds would
have recited in its preamble that the principal was indebted to the
PNB and that the PNB required the principal to give a good and
sufficient bond to secure the faithful performance on his part of the
terms of the promissory notes. Instead of doing so, it recited that in
1âwphi1
consideration of a certain loan, the principal had executed a Deed of
Assignment. The recital of the loan in the amount of P40,000.00,
Exhibit D and P60,000.00, Exhibit E, is merely a statement of the
cause or consideration of the Deed of Assignment and not a statement
of the obligation. The Deed of Assignment necessarily was executed
for a consideration, otherwise, it would be null and void. The
obligation recited in the surety bonds, Exhibits D and E, is not the
loan, but the Deed of Assignment; and that precisely was what was
guaranteed by Luzon in the bonds, Exhibits D and E, as shown by the
following:
1) Contrary to the usual practice of the plaintiff, Luzon did not sign
the promissory notes, Exhibits A and B;
2) Although the resolutions of the Board of Directors required that
the surety should make a deposit of P10,000.00, Luzon did not make
such a deposit, the verbal testimony of Delfin Santiago, Manager of
the Loans and Discounts Department, to the contrary
notwithstanding. The documentary evidence was submitted to prove
that was the fact;
3) Delfin Santiago finally admitted that what was guaranteed was not
the loan but the Deed of Assignment.
Delfin Santiago testified as follows:
Q Did you inform the Luzon Surety Company, Inc. of your actuation
on this fact, that is in your giving Mr. Depusoy portions of the
payments made by the GSIS to the Philippine National Bank pursuant
to the Deed of Assignment?
A No, because I understand that the Luzon Surety Company, Inc.
stands as surety on that assignment on which the full payment of the
contract is assigned to the payments. (TSN, p. 54)
xxx xxx xxx
Q Usually Mr. Santiago, it is the practice of the Philippine National
Bank in cases where a surety company guarantees the account of the
borrower, the Philippine National Bank requires the surety company
to sign the promissory note as a co-maker, is it not?
78
A In case the condition is approved, the surety I remember very well,
the last accommodation given to Mr. Depusoy . . . that was the
condition, but the Luzon Surety Company, Inc. did not want to sign,
so at the request of the Luzon Surety Company, Inc. and Mr.
Depusoy, the approved accommodation was modified in such a way
as only to the surety bond.
ATTY. NERI: If Your Honor please. We object to the question, it
was not covered by the direct examination.
COURT: Answer.
A Well, apparently that was the intention because you decided to sign
jointly and severally the promissory note.
Q And because that was our intention the Philippine National Bank
agreed to that desire of Luzon Surety Company, Inc. by issuing only
a similar surety bond and not signing as co-maker, and jointly and
severally on the promissory note?
ATTY. NERI: Objection Your Honor, the contract is the best
evidence.
COURT: Answer.
A As usual, as at the beginning, we take it that your bonding the
Deed of Assignment is the understanding that all payments for the
whole contract will go to us. (TSN, pp. 55-57, July 21, 1958)
xxx xxx xxx
Q Did you read the terms of the bond?
A Yes, sir, that's right.
Q And you further noted in the bond it merely guaranteed the deed of
assignment, is that correct? of Mr. Depusoy?
A Yes, sir.
ATTY. CRUZ: And not this particular loan, is it not?
ATTY. NERI: We refer to the document, Your Honor.
COURT: Sustained.
(TSN, pp. 9-10, June 26, 1959)
xxx xxx xxx
ATTY. NERI: Now, Mr. Depusoy in his testimony stated that when
you received these amounts from the GSIS and issued credit memos .
. . in favor of Mr. Depusoy, you did not notify the Luzon Surety
Company, Inc. of the fact of the issuance of this (sic) credit memos in
favor of Mr. Depusoy will you state to this Honorable Court the
reason why is that you did not give notice to the Luzon Surety
Company, Inc.?
A I did not notify the Luzon Surety Company, Inc. of this transaction
because the bond filed by the Luzon Surety Company, Inc., but the
terms of the bond filed by Luzon Surety Company is that they
understand the transaction of Mr. Depusoy with the Philippine
National Bank.
COURT: They understand the transaction to be. . .
WITNESS: . . . The nature of the transaction with Mr. Depusoy in the
sense that as we . . . as appearing in this bond Exhibit D . . . all
payments to be received by him from the Bureau of Public Works in
connection with the contract to secure the full and faithfully
performance on his part of the said agreement, the agreement referred
to is the assignment of payment in connection with the contract of
Mr. Depusoy with the GSIS.

(TSN, pp. 27-29 June 1, 1959)
In support of his contention that the surety bond was intended to
guarantee the loan, the appellant gave the following grounds or
reasons:
1) The resolution of the Board of Directors of the plaintiff approving
the loan or credit accommodation to Depusoy required that Depusoy
should put up a bond executed by the Luzon Surety Company, Inc.,
Exhibits K-3, K-4 and K-5. The resolutions of the Board of Directors
were unilateral acts of the plaintiff and were conditions imposed upon
the debtor, Depusoy, Luzon was not a party to these resolutions and
under the rule of res inter alios acta, they cannot bind or prejudice
Luzon in the absence of evidence that the terms of the resolutions had
been brought to the attention of Luzon and that it had acceded
thereto. All that the bond stated is that the PNB required the principal
to give a good and sufficient bond. There can be no other
consideration for the execution of the bonds other than stated thereon
in the absence of allegation that they did not express the true
intention of the parties.
2) Appellant contends that the promissory notes and the building
contract mentioned in the Deed of Assignment became part and
parcel of the Deed of Assignment under the principle of incorporation
by reference. We agree that the Deed of Assignment became part and
parcel of the bond, but to say that all promissory notes, overdrafts,
and any other kind of documents which the PNB might require the
assignor to execute to evidence the aforementioned obligation were
also incorporated by reference to the surety bond and became
obligation of Luzon is to include in the assignment, covenants and
obligations beyond the contemplation of the parties. The appellant
relies on the last paragraph of the Deed of Assignment which reads:
"This assignment shall be irrevocable and subject to the terms and
conditions of the promissory notes, overdrafts, and any other kind of
document which the PNB can require or may require the assignor to
execute to evidence the above-mentioned obligation".
It is argued that under this stipulation, Luzon guaranteed the payment
of the promissory notes which are the subject of this action and also
the building contract between Depusoy, its principal, and the Bureau
of Public Works. This is a very far-fetched construction. This
paragraph does not impose any obligation upon Depusoy. All that
was required of Depusoy was to execute such documents which
might be required by the PNB to evidence the Deed of Assignment.
The words of the phrase "subject to" are words of qualification and
not of contract (Cox vs. Vat 149, 110 pp. 96-148 CCH 147) and
means subject to, meaning under the control, power or dominion or
subordinate to and not being words of contract imposing upon
defendant no contractual obligation (40 Words & Phrases 386-389).
What was evidently intended is the Deed of Assignment when it
stated "subject to the terms and conditions of the promissory notes
and overdrafts" was that any amount received by the PNB would be
applied to the payment of the promissory notes and overdrafts in
accordance with their terms and conditions as they fell due because
the Deed of Assignment was executed not for the purpose of making
the PNB the owner of all the monies received from the GSIS, but as a
security for the payment of the debt of Depusoy arising from the
credit accommodation granted to him by the appellant. And that this
was the intention is evident from the fact that upon receipt of the
treasury warrants and checks from the GSIS, the appellant applied the
same to the payment of the debt of Depusoy which was due with
interest and the remainder was credited to Depusoy's current account.
This balance was subject to the free disposal of Depusoy. Hence, out
of the over P1 million received by the Loans & Discounts
Department of the appellant, almost P800,000.00 were credited to the
current account of Depusoy and only a little over P200,000.00 was
applied to his debt. Appellant contends that since in the Deed of
Assignment, Depusoy undertook to assign, transfer, and convey to
79
PNB all payments to be received by him from his contract with the
Bureau of Public Works, Luzon had thereby guaranteed the faithful
performance by Depusoy of his building contract with the Bureau of
Public Works, and Depusoy having defaulted in his building contract
by reason of which the Bureau of Public Works rescinded the
building contract, the PNB did not receive from the GSIS the full
contract price of over P2 million. This indeed is a very far-fetched
construction of the contract. What was transferred or assigned by
Depusoy to the PNB were all payments to be received by him under
the contract with the Bureau of Public Works. Necessarily, what was
to be received by Depusoy depends upon his performance under the
contract. As long as he faithfully performed the contract, he would
receive from the GSIS the amount due him. From the moment he
defaulted and failed to comply with the terms of the contract, he
would receive nothing and he could not assign what he did not have.
To argue that under the terms of the Deed of Assignment, Luzon also
guaranteed the faithful performance of the building contract of
Depusoy with the Bureau of Public Works is fanciful and wishful
thinking.
3) Appellant also contends that under Exhibits F and I, it can be seen
that what was really intended to be guaranteed by the surety
agreement was the payment of the loan. We quote Exhibits F and I.
Relative to our above-captioned bonds in the amount of P40,000.00
dated May 28, 1956 and September 24, 1956, respectively, please be
advised that same is hereby extended for a further period of six (6)
months from January 31, 1957. All other terms and conditions of our
above-mentioned bonds shall remain the same except the period of
expiration herein above mentioned. These bonds also cover the new
accommodation given our Principal.
Relative to the above numbered bonds, in the amount of P40,000.00
and P60,000.00 dated May 28, 1956 and September 24, 1956,
respectively, the account secured thereby having been reduced by
virtue of payments made by our principal, which, according to him
has but a balance of P75,000.00 we have the honor to inform you that
we are agreeable to the extension of further credit to our principal to
the extent of the amount of the said bonds, under the same terms and
conditions thereof.
At first glance, from the statement in Exhibit F, which reads: "This
bond also covers the new accommodation given our principal", and in
Exhibit I, that "we are agreeable to the extension of further credit to
or principal to the extent of the amount of the said bond", it would
appear that Luzon was referring to the obligation of Depusoy to pay
the loan. But particular attention must be paid to the statement in
Exhibit F that "all of the terms and conditions of our above-
mentioned bonds shall remain the same except the period of
expiration herein below mentioned". What was really agreed by
Luzon was the extension of the duration of the surety bond, for under
the terms of the bonds they expired six months from their respective
dates. Any statement in Exhibit I that may be construed as referring
to the debt of Depusoy was made only by an Asst. Manager who
evidently was not familiar with the terms of the surety bond. It must
be noted that the surety bond was executed by CS Rodriguez, General
Manager. Moreover, it cannot prevail over the testimony of Delfin
Santiago, Manager of the Loans & Discounts Department, that what
was guaranteed by the surety bond was the Deed of Assignment.
It is also contended that if what was intended to be guaranteed by
Luzon is the Deed of Assignment, the surety bond guaranteed
nothing, because with the execution of the Deed of Assignment,
nothing thereafter remained to be done. This is not true, for the terms
of the Deed of Assignment, Depusoy authorized the PNB to receive
all monies due from the Bureau of Public Works and to endorse for
deposit all instruments of credit that might be issued in connection
with the payments therein assigned. Under this stipulation, Luzon

guaranteed that all the monies due Depusoy under his building
contract with the Bureau of Public Works should be paid to the PNB.
It is true that all the checks and warrants issued by the GSIS were to
be made payable to the PNB. But under the arrangement between the
PNB, GSIS, and the Bureau of Public Works, and Depusoy, it was
Depusoy who received the warrants or checks either from the Bureau
of Public Works or from the GSIS, and Depusoy delivered the same
to the PNB. The PNB did not take the trouble of going to the GSIS or
the Bureau of Public Works to get the checks. One reason because
the PNB did not know when any amount would be due. There is
nothing then that could prevent an arrangement thereafter between
Depusoy and the GSIS, or the Bureau of Public Works to make the
checks payable to Depusoy, and Depusoy from forging the signature
of the PNB and appropriating the money. This would be a violation
of the Deed of Assignment for which Luzon would be liable.
It is not disputed that no payment was made directly to Depusoy after
the Deed of Assignment. All amounts due to Depusoy were paid to
the PNB for the account of Depusoy. It is true that in accordance with
Exhibit M, only P1,063,408.91 were received by the Loans and
Discounts Department of the plaintiff bank, and that of the total
amount of P1,309,461.89 paid by the GSIS, P246,062.98 were paid
for the importation of construction materials. As to the so-called 10%
retention fund, there is no evidence that the Bureau of Public Works
had retained any amount. In any case what was assigned was "all
payments to be received" under the building contract, and the 10%
retention was not to be received by Depusoy until certain conditions
had been met.
In its eight assignment of error, the appellant contends that the lower
court in not admitting proof of the amount actually received by the
PNB and the letter of the GSIS, Exhibit Q (sic). Aside from the
purely technical reason for their rejection, their admission cannot
affect the result. Exhibit Q is a letter of the General Manager of the
GSIS to plaintiff advising plaintiff of the rescission of the building
contract. Exhibits Q, P, P-1 and P-2 are statements of the amounts
received by plaintiff's foreign department. There is no evidence that
the GSIS had paid any amount to Depusoy in violation of the Deed of
Assignment. Not a single cent had been received directly by Depusoy
from the GSIS or the Bureau of Public Works.
xxx xxx xxx
We agree with the appellant that the trial court erred in not sentencing
Estanislao Depusoy to pay attorney's fees equivalent to 10% of the
amount due. This is expressly provided for in the promissory notes,
and as it does not appear to be unreasonable, the stipulation of the
parties should be given effect.8
Its motion for reconsideration9 having been denied by the respondent
Court of Appeals in its resolution of 1 February 1971,10 petitioner
filed the instant petition on 3 March 1971 asserting therein that:
. . . the Decision and the Resolution of respondent COURT (Annexes
A and B) are both not in accord with the evidence, the law, and
jurisprudence on the matter.
I. THE SURETY BONDS COVER THE PRINCIPAL LOANS, THE
SURETY THEREBY BECOMING LIABLE UPON DEFAULT OF
THE LATTER.
II. EVEN ASSUMING ARGUENDO THAT THE BONDS SECURE
ONLY THE DEED OF ASSIGNMENT, STILL THE SURETY IS
LIABLE FOR FAILURE OF THE PRINCIPAL TO COMPLY
WITH THE TERMS OF SUCH DEED.
III. THE DISPOSITIVE PORTION OF THE DECISION SHOULD
BE AMENDED TO THE END THAT PRIVATE RESPONDENT
80
RESPONDENTS BE ADJUDGED LIABLE FOR ATTORNEY'S
FEES.11
In support of its petition, petitioner practically summoned the same
arguments which it relied upon before the Court of Appeals.
On 3 March 1971 private respondent filed a motion to dismiss the
petition12 on the following grounds:
1. That the petition is without merit;
2. That the question raised therein are too unsubstantial to require
consideration; and
3. That the question raised are factual.
In the resolution of 8 March 1971 this Court dismissed the petition
for being factual and for lack of merit;13 however, upon motion for
reconsideration14 this Court reconsidered the resolution and gave due
course to the petition.15 The petitioner was then required to submit its
Brief,16 which it complied with on 12 July 1971 .17 Private
respondent LSCI filed its brief on 10 August 1971.18 Private
respondent Depusoy did not file any.
Except for the third assigned error, We find no merit in this petition.
The issues raised are factual.
The findings of facts of the Court of Appeals can withstand the most
incisive scrutiny. They are sufficiently supported by the evidence on
record and the conclusions drawn therefrom do not justify a departure
from the deeply rooted and well settled doctrine that findings of facts
of the Court of Appeals are conclusive on this Court,19 considering
that the recognized exceptions thereto20 do not come to the rescue of
petitioner.
We are in full accord with the conclusion of the trial court and the
Court of Appeals that the bonds executed by private respondent LSCI
were to guarantee the faithful performance of Depusoy of his
obligation under the Deed of Assignment and not to guarantee the
payment of the loans or the debt of Depusoy to petitioner to the
extent of P100,000.00. The language of the bonds is clear, explicit
and unequivocal. It leaves no room for interpretation. Article 1370 of
the Civil Code provides:
If the terms of a contract are clear and leave no doubt upon the
intention of the contracting parties, the literal meaning of its
stipulations shall control.
Besides, even if there had been any doubt on the terms and conditions
of the surety agreement, the doubt should be resolved in favor of the
surety. As concretely put in Article 2055 of the Civil Code, "A
guaranty is not presumed, it must be expressed and cannot extend to
more than what is stipulated therein."
In the recent case of Umali, et al. vs. Court of Appeals, et al.,21 We
reiterated the unrippled rule that the liability of the surety is measured
by the terms of the contract, and, while he is liable to the full extent
thereof, such liability is strictly limited to that assumed by its terms.22
In La Insular vs. Machuca Go Tanco, et al., supra., this Court held:
It is undoubtedly true that the law looks upon the contract of
suretyship with a jealous eye, and the rule is settled that the
obligations of the surety cannot be extended by implication beyond
its specified limits.
Article 1827 of the Civil Code so discloses (Uy Aloc vs. Cho Jan
Ling, 27 Phil. Rep., 427); and with this doctrine the common law is
accordant. As was said by Justice Story in Miller vs. Stewart (9
Wheat. 680; 6 L. ed., 189):

Nothing can be clearer, both upon principles and authority, than the
doctrine that the liability of a surety is not to be extended, by
implication, beyond the terms of his contract. To the extent and in the
manner, and under the circumstances pointed out in his obligation, he
is bound, and no farther.
As earlier adverted to, there is merit in the third assigned error. The
1âwphi1
paragraph immediately preceding the decretal portion of the decision
of respondent Court of Appeals reads as follows:
We agree with the appellant that the trial court erred in not sentencing
Estanislao Depusoy to pay attorney's fees equivalent to 10% of the
amount due. This is expressly provided for in the promissory notes,
and as it does not appear to be unreasonable, the stipulation of the
parties should be given effect.
The dispositive portion of the questioned decision should then be
modified in the sense that the "10% interest" indicated therein should
be considered and understood as and for attorney's fees.
WHEREFORE, with the above modification, the Decision of the
Court of Appeals of 12 December 1970 in CA-G.R.No. 36615-R is
AFFIRMED, with costs against petitioner.
SO ORDERED.
Finman General Assurance Corp. v. Salik, GR No.
84084, Aug. 20, 1990
G.R. No. 84084 August 20, 1990
FINMAN GENERAL ASSURANCE CORPORATION, petitioner,
vs.
ABDULGANI SALIK, BALABAGAN AMPILAN ALI KUBA
GANDHI PUA, DAVID MALANAO, THE ADMINISTRATOR,
PHILIPPINE OVERSEAS AND EMPLOYMENT
ADMINISTRATION, THE SECRETARY OF LABOR AND
EMPLOYMENT, respondents.
David I. Unay, Jr. for petitioner.
Kamid D. Abdul for private respondents.
PARAS, J.:
This is a petition for certiorari seeking to annul 1) the Order dated
March 28, 1988 of the Honorable Secretary of Labor and
Employment in POEA, LRO/RRD Case No. 87-09-1022-DP
entitled Abdulgani Salik, et al, v. Pan Pacific Overseas and
Recruiting Services and Finman General Assurance Corporation,
which directed herein petitioner to pay jointly and severally with Pan
Pacific the claims of herein private respondents amounting to
P25,000.00 and 2) the Order dated June 7, 1988, which denied
petitioner's motion for reconsideration (Rollo, p. 2).
The facts of the case are as follows:
Abdulgani Salik et al., private respondents, allegedly applied with
Pan Pacific Overseas Recruiting Services, Inc. (hereinafter referred to
as Pan Pacific) on April 22, 1987 and were assured employment
abroad by a certain Mrs. Normita Egil. In consideration thereof, they
allegedly paid fees totalling P30,000.00. But despite numerous
assurances of employment abroad given by Celia Arandia and Mrs.
Egil, they were not employed (Ibid., p. 15).
Accordingly, they filed a joint complaint with the Philippine
Overseas Employment Administration (herein referred to as POEA)
against Pan Pacific for Violation of Articles 32 and 34(a) of the
81
Labor Code, as amended, with claims for refund of a total amount of
P30,000.00 (Ibid.).
The POEA motu proprio impleaded and summoned herein petitioner
surety Finman General Assurance Corporation (hereinafter referred
to as Finman), in the latter's capacity as Pan Pacific's bonding
company.
Summons were served upon both Pan Pacific and Finman, but they
failed to answer.
On October 9, 1987, a hearing was called, but only the private
respondents appeared. Despite being deemed in default for failing to
answer, both Finman and Pan Pacific were still notified of the
scheduled hearing. Again they failed to appear. Thus, ex-parte
proceedings ensued.
During the hearing, herein private respondents reiterated the
allegations in their complaint that they first paid P20,000.00 thru
Hadji Usop Kabagani for which a receipt was issued signed by
Engineer Arandia and countersigned by Mrs. Egil and a certain
Imelda who are allegedly employed by Pan Pacific; that they paid
another P10,000.00 to Engr. Arandia who did not issue any receipt
therefor; that the total payment of P30,000.00 allegedly represents
payments for herein private respondents in the amount of P5,000.00
each, and Abdulnasser Ali, who did not file any complaint against
Pan Pacific (Ibid., pp. 15-16).
Herein private respondents presented as their witness, Hadji Usop
Kabagani who they Identified as the one who actually financed their
application and who corroborated their testimonies on all material
points including the non-issuance of a receipt for P10,000.00 by
Engr. Arandia.
Herein petitioner, Finman, in an answer which was not timely filed,
alleged, among others, that herein private respondents do not have a
valid cause of action against it; that Finman is not privy to any
transaction undertaken by Pan Pacific with herein private
respondents; that herein private respondents claims are barred by the
statute of frauds and by the fact that they executed a waiver; that the
receipts presented by herein private respondents are mere scraps of
paper; that it is not liable for the acts of Mrs. Egil that Finman has a
cashbond of P75,000.00 only which is less than the required amount
of P100,000.00; and that herein private respondents should proceed
directly against the cash bond of Pan Pacific or against Mrs. Egil
(Ibid., pp. 1617).
On March 18,1988, the Honorable Franklin M. Drilon, then the
Secretary of Labor and Employment, upon the recommendation of
the POEA hearing officer, issued an Order, the dispositive portion of
which reads:
WHEREFORE, premises considered, both respondents are hereby
directed to pay jointly and severally the claims of complainants, as
follows:
1. Abdulgani Salik P5,000.00
2. Balabagan Ampilan 5,000.00
3. Ali Kuba 5,000.00
4. Gandhi Dua 5,000.00
5. David Malanao 5,000.00
Based on the records of this Administration, respondent agency is
presently serving a total period of suspension of seventeen (1 7)
months imposed in three (3) separate orders issued on June 2, 1987,
August 17, 1987 and September 23, 1987. Under the new schedule of
penalties published on January 21, 1987 in the Philippine Inquirer,

the penalty of cancellation shall be imposed when the offender has
been previously penalized with suspension the total period of which
is 12 months or more. Moreover, the penalty imposable in the case at
bar is two (2) months suspension for each count of violation or a total
period of suspension of ten (10) months as the acts were committed
in April 1987. Thus, whether under the old schedule of penalties
which required a total period of suspension of twenty-four (24)
months for cancellation to be imposed or under the new schedule
which provides for a twelve (12) month total suspension period, the
penalty of cancellation may be properly imposed upon the herein
respondent agency.
In view thereof, the license of Pan Pacific Overseas Recruiting
Services is hereby cancelled, effective immediately.
SO ORDERED. (Ibid., pp. 20-21).
A motion for reconsideration having been denied (Ibid., p. 22), herein
petitioner instituted the instant petition for certiorari, raising the
following assigned errors:
I on the principal debtor "that the surety is considered in law as being
THE HONORABLE ADMINISTRATOR AND THE
HONORABLE, SECRETARY OF LABOR ACTED WITH GRAVE
ABUSE OF DISCRETION AMOUNTING TO LACK OF
JURISDICTION IN MOTU PROPRIO IMPLEADING FINMAN AS
CO-RESPONDENT OF PAN PACIFIC IN POEA LRO/RRD CASE
NO. 87-09-1022 DP WHICH WAS FILED BY ABDULGANI
SALIK, ET AL.;
II
THE HONORABLE SECRETARY OF LABOR ACTED
WITHOUT OR IN EXCESS OF JURISDICTION AND WITH
GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OF
JURISDICTION IN DIRECTING FINMAN TO PAY JOINTLY
AND SEVERALLY WITH PAN PACIFIC THE CLAIMS OF
PRIVATE RESPONDENTS ON THE BASIS OF THE
SURETYSHIP AGREEMENT BETWEEN FINMAN AND PAN
PACIFIC AND THE PHILIPPINE OVERSEAS EMPLOYMENT
ADMINISTRATION (POEA FOR SHORT); AND
III
THE FINDINGS OF FACT MADE BY THE POEA AND UPON
WHICH THE HONORABLE SECRETARY OF LABOR BASED
ITS QUESTIONED ORDERS ARE NOT SUPPORTED BY
SUBSTANTIAL EVIDENCE AND ARE CONTRARY TO LAW.
(Ibid., p. 101)
As required by this Court, herein public respondents filed their
memorandum on July 28, 1989 (Ibid., p. 84); while that of petitioner
and private respondents were filed on September 11, 1989 (Ibid., p.
89) and March 16, 1990 (Ibid., p. 120), respectively.
The petition is devoid of merit.
In its first and second assigned errors, petitioner maintains that POEA
has no jurisdiction to directly enforce the suretyship undertaking of
FINMAN (herein petitioner) under the surety bond (Ibid., p. 104).
In the case at bar, it remains uncontroverted that herein petitioner and
Pan Pacific entered into a suretyship agreement, with the former
agreeing that the bond is conditioned upon the true and faithful
performance and observance of the bonded principal (Pan Pacific) of
its duties and obligations. It was also understood that under the
suretyship agreement, herein petitioner undertook itself to be jointly
and severally liable for all claims arising from recruitment violation
of Pan Pacific (Ibid., p. 23), in keeping with Section 4, Rule V, Book
I of the Implementing Rules of the Labor Code, which provides:
82
Section 4. Upon approval of the application, the applicant shall pay to
the Ministry (now Department) a license fee of P6,000.00, post a cash
bond of P50,000.00 or negotiable bonds of equivalent amount
convertible to cash issued by banking or financial institution duly
endorsed to the Ministry (now Department) as well as a surety bond
of P150,000.00 from an accredited bonding company to answer for
valid and legal claims arising from violations of the conditions of the
license or the contracts of employment and guarantee compliance
with the provisions of the Code, its implementing rules and
regulations and appropriate issuances of the Ministry (now
Department). (Emphasis supplied)
Accordingly, the nature of Finman's obligation under the suretyship
agreement makes it privy to the proceedings against its principal (Pan
Pacific). As such Finman is bound, in the absence of collusion, by a
judgment against its principal even though it was not a party to the
proceedings Leyson v. Rizal Surety and Insurance Co., 16 SCRA 551
(1966). Furthermore, in Government of the Philippines v. Tizon (20
SCRA 1182 [1967]), this Court ruled that where the surety bound
itself solidarily with the principal obligor the former is so dependent
the same party as the debtor in relation to whatever is adjudged
touching the obligation of the latter." Applying the foregoing
principles to the case at bar, it can be very well said that even if
herein Finman was not impleaded in the instant case, still it
(petitioner) can be held jointly and severally liable for all claims
arising from recruitment violation of Pan Pacific. Moreover, as
correctly stated by the Solicitor General, private respondents have a
legal claim against Pan Pacific and its insurer for the placement and
processing fees they paid, so much so that in order to provide a
complete relief to private respondents, petitioner had to be impleaded
in the case (Rollo, p. 87).
Furthermore, Finman contends that herein respondent Secretary of
Labor cannot validly assume jurisdiction over the case at bar;
otherwise, proceedings will be railroaded resulting in the deprivation
of the former of any remedial measures under the law.
The records of the case reveal that herein Finman filed a motion for
reconsideration of the adverse decision dated March 18, 1988 of
respondent Secretary of Labor. In the said motion for reconsideration,
no jurisdictional challenge was made (Ibid., p. 22). It was only when
it filed this petition that it assailed the jurisdiction of the respondent
Secretary of Labor, and that of the POEA. But then, it was too late.
Estoppel had barred herein petitioner from raising the issue,
regardless of its merits (Akay Printing Press v. Minister of Labor and
Employment, 140 SCRA 381 [1985]).
Hence, Finman's contention that POEA's and respondent Secretary's
actions in impleading and directing herein petitioner to pay jointly
and severally with Pan Pacific the claims of private respondents
constitute a grave abuse of discretion amounting to lack of
jurisdiction has no basis. (Ibid., p. 101.)
As regards the third assigned error, herein petitioner maintains that
the findings of fact made by the POEA upon which respondent
Secretary of Labor based his questioned Orders are not supported by
substantial evidence and are contrary to law, is likewise untenable.
Herein petitioner, in raising this third issue, is, in effect, asking this
Court to review the respondent Secretary's findings of facts.
Well-settled is the rule that findings of facts of the respondent
Secretary are generally accorded great weight unless there was grave
abuse of discretion or lack of jurisdiction in arriving at such findings
(Asiaworld Publishing House, Inc. vs. Ople, 152 SCRA 219 (1987).
In the case at bar, it is undisputed that when the case was first set for
hearing, only the private respondents appeared, despite summons
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having been served upon both herein petitioner and Pan Pacific. This,
notwithstanding, both herein petitioner and Pan Pacific were again
notified of the scheduled hearing, but, as aforestated they also' failed
to a pear (Rollo, p. 15). Accordingly, owing to the absence of any
controverting evidence, respondent Secretary of Labor admitted and
considered private respondents' testimonies and evidence as
substantial. Under the circumstances, no justifiable reason can be
found to justify disturbance of the findings of facts of the respondent
Secretary of Labor, supported as they are by substantial evidence and
in the absence of grave abuse of discretion (Asiaworld Publishing
House, Inc. v. Ople, supra); and in line with the well established
principle that the findings of administrative agencies which have
acquired expertise because their jurisdiction is confined to specific
matters are generally accorded not only respect but at times even
finality. (National Federation of Labor Union (NAFLU) v. Ople, 143
SCRA 124 [1986])
PREMISES CONSIDERED, the questioned Orders of respondent
Secretary of Labor are hereby AFFIRMED in toto,
SO ORDERED.
We hold that the lower court acted with grave abuse of discretion in
issuing a writ of execution against the surety without first giving it an
opportunity to be heard as required in Rule 57 of tie Rules of Court
which provides:
SEC. 17. When execution returned unsatisfied, recovery had upon
bound. — If the execution be returned unsatisfied in whole or in part,
the surety or sureties on any counterbound given pursuant to the
provisions of this rule to secure the payment of the judgment shall
become charged on such counterbound, and bound to pay to the
judgment creditor upon demand, the amount due under the judgment,
which amount may be recovered from such surety or sureties after
notice and summary hearing in the same action.
Under section 17, in order that the judgment creditor might recover
from the surety on the counterbond, it is necessary (1) that execution
be first issued against the principal debtor and that such execution
was returned unsatisfied in whole or in part; (2) that the creditor
made a demand upon the surety for the satisfaction of the judgment,
and (3) that the surety be given notice and a summary hearing in the
same action as to his liability for the judgment under his counterbond.

Towers Assurance Corp. v. Ororama Supermart,
GR No. L-45848, November 9, 1977
Benjamin Tabique & Zosimo T. Vasalla for petitioner.
Rodrigo F. Lim, Jr. for private respondent.
AQUINO, J.:
This case is about the liability of a surety in a counterbond for the
lifting of a writ of preliminary attachment.
On February 17, 1976 See Hong, the proprietor of Ororama
Supermart in Cagayan de Oro City, sued the spouses Ernesto Ong
and Conching Ong in the Court of First Instance of Misamis Oriental
for the collection of the sum of P 58,400 plus litigation expenses and
attorney's fees (Civil Case No. 4930).
The first requisite mentioned above is not applicable to this case
because Towers Assurance Corporation assumed a solidary liability
for the satisfaction of the judgment. A surety is not entitled to the
exhaustion of the properties of the principal debtor (Art. 2959, Civil
Code; Luzon Steel Corporation vs. Sia, L-26449, May 15, 1969, 28
SCRA 58, 63).
But certainly, the surety is entitled to be heard before an execution
can be issued against him since he is not a party in the case involving
his principal. Notice and hearing constitute the essence of procedural
due process. (Martinez vs. Villacete 116 Phil. 326; Insurance &
Surety Co., Inc. vs. Hon. Piccio, 105 Phil. 1192, 1200, Luzon Surety
Co., Inc. vs. Beson, L-26865-66, January 30. 1970. 31 SCRA 313).
WHEREFORE, the order and writ of execution, insofar as they
concern Towers Corporation, are set aside. The lower court is
directed to conduct a summary hearing on the surety's liability on its
counterbound. No costs.

See Hong asked for a writ of preliminary attachment. On March 5, SO ORDERED.

1976, the lower court issued an order of attachment. The deputy
sheriff attached the properties of the Ong spouses in Valencia,
Bukidnon and in Cagayan de Oro City.
To lift the attachment, the Ong spouses filed on March 11, 1976 a
counterbond in 'the amount of P 58,400 with Towers Assurance
Corporation as surety. In that undertaking, the Ong spouses and
Towers Assurance Corporation bound themselves to pay solidarity to
See Hong the sum of P 58,400.
On March 24, 1976 the Ong spouses filed an answer with a
counterclaim. For non-appearance at the pre- trial, the Ong spouses
were declared in default.
On October 25, 1976, the lower court rendered a decision, ordering
not only the Ong spouses but also their surety, Towers Assurance
Corporation, to pay solidarily to See Hong the sum of P 58,400. The
court also ordered the Ong spouses to pay P 10,000 as litigation
expenses and attorney's fees.
Ernesto Ong manifested that he did not want to appeal. On March 8,
1977, Ororama Supermart filed a motion for execution. The lower
court granted that motion. The writ of execution was issued on March
14 against the judgment debtors and their surety. On March 29, 1977,
Towers Assurance Corporation filed the instant petition for certiorari
where it assails the decision and writ of execution.