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II. Loans (Mutuum)


1.) Republic of the Philippines The aggregate amount due as principal of the five loans in question,
SUPREME COURT computed under the Ballantyne scale of values as of the time that the loans
Manila were incurred in 1943, was P889.64; and the interest due thereon at the rate
EN BANC of 6% per annum compounded quarterly, computed as of December 31, 1959
G.R. No. L-20240 December 31, 1965 was P2,377.23.
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,
vs. On January 17, 1961 the appellee filed a complaint in the Justice of the Peace
JOSE GRIJALDO, defendant-appellant. Court of Hinigaran, Negros Occidental, to collect from the appellant the
Office of the Solicitor General for plaintiff-appellee. unpaid account in question. The Justice of the Peace Of Hinigaran, after
Isabelo P. Samson for defendant-appellant. hearing, dismissed the case on the ground that the action had prescribed. The
appellee appealed to the Court of First Instance of Negros Occidental and on
ZALDIVAR, J.: March 26, 1962 the court a quo rendered a decision ordering the appellant to
In the year 1943 appellant Jose Grijaldo obtained five loans from the branch pay the appellee the sum of P2,377.23 as of December 31, 1959, plus interest
office of the Bank of Taiwan, Ltd. in Bacolod City, in the total sum of at the rate of 6% per annum compounded quarterly from the date of the filing
P1,281.97 with interest at the rate of 6% per annum, compounded quarterly. of the complaint until full payment was made. The appellant was also
These loans are evidenced by five promissory notes executed by the ordered to pay the sum equivalent to 10% of the amount due as attorney's
appellant in favor of the Bank of Taiwan, Ltd., as follows: On June 1, 1943, fees and costs.
P600.00; on June 3, 1943, P159.11; on June 18, 1943, P22.86; on August 9, The appellant appealed directly to this Court. During the pendency of this
1943,P300.00; on August 13, 1943, P200.00, all notes without due dates, but appeal the appellant Jose Grijaldo died. Upon motion by the Solicitor
because the loans were due one year after they were incurred. To secure the General this Court, in a resolution of May 13, 1963, required Manuel
payment of the loans the appellant executed a chattel mortgage on the Lagtapon, Jacinto Lagtapon, Ruben Lagtapon and Anita L. Aguilar, who are
standing crops on his land, Lot No. 1494 known as Hacienda Campugas in the legal heirs of Jose Grijaldo to appear and be substituted as appellants in
Hinigiran, Negros Occidental. accordance with Section 17 of Rule 3 of the Rules of Court.
By virtue of Vesting Order No. P-4, dated January 21, 1946, and under the In the present appeal the appellant contends: (1) that the appellee has no
authority provided for in the Trading with the Enemy Act, as amended, the cause of action against the appellant; (2) that if the appellee has a cause of
assets in the Philippines of the Bank of Taiwan, Ltd. were vested in the action at all, that action had prescribed; and (3) that the lower court erred in
Government of the United States. Pursuant to the Philippine Property Act of ordering the appellant to pay the amount of P2,377.23.
1946 of the United States, these assets, including the loans in question, were
subsequently transferred to the Republic of the Philippines by the In discussing the first point of contention, the appellant maintains that the
Government of the United States under Transfer Agreement dated July 20, appellee has no privity of contract with the appellant. It is claimed that the
1954. These assets were among the properties that were placed under the transaction between the Taiwan Bank, Ltd. and the appellant, so that the
administration of the Board of Liquidators created under Executive Order appellee, Republic of the Philippines, could not legally bring action against
No. 372, dated November 24, 1950, and in accordance with Republic Acts the appellant for the enforcement of the obligation involved in said
Nos. 8 and 477 and other pertinent laws. transaction. This contention has no merit. It is true that the Bank of Taiwan,
Ltd. was the original creditor and the transaction between the appellant and
On September 29, 1954 the appellee, Republic of the Philippines, represented the Bank of Taiwan was a private contract of loan. However, pursuant to the
by the Chairman of the Board of Liquidators, made a written extrajudicial Trading with the Enemy Act, as amended, and Executive Order No. 9095 of
demand upon the appellant for the payment of the account in question. The the United States; and under Vesting Order No. P-4, dated January 21, 1946,
record shows that the appellant had actually received the written demand for the properties of the Bank of Taiwan, Ltd., an entity which was declared to
payment, but he failed to pay. be under the jurisdiction of the enemy country (Japan), were vested in the
United States Government and the Republic of the Philippines, the assets of
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II. Loans (Mutuum)
the Bank of Taiwan, Ltd. were transferred to and vested in the Republic of parties delivers to another ... money or other consumable thing upon the
the Philippines. The successive transfer of the rights over the loans in condition that the same amount of the same kind and quality shall be paid."
question from the Bank of Taiwan, Ltd. to the United States Government, (Article 1933, Civil Code) The obligation of the appellant under the five
and from the United States Government to the government of the Republic of promissory notes evidencing the loans in questions is to pay the value
the Philippines, made the Republic of the Philippines the successor of the thereof; that is, to deliver a sum of money — a clear case of an obligation to
rights, title and interest in said loans, thereby creating a privity of contract deliver, a generic thing. Article 1263 of the Civil Code provides:
between the appellee and the appellant. In defining the word "privy" this
Court, in a case, said: In an obligation to deliver a generic thing, the loss or destruction of anything
of the same kind does not extinguish the obligation.
The word "privy" denotes the idea of succession ... hence an assignee of a
credit, and one subrogated to it, etc. will be privies; in short, he who by The chattel mortgage on the crops growing on appellant's land simply stood
succession is placed in the position of one of those who contracted the as a security for the fulfillment of appellant's obligation covered by the five
judicial relation and executed the private document and appears to be promissory notes, and the loss of the crops did not extinguish his obligation
substituting him in the personal rights and obligation is a privy (Alpurto vs. to pay, because the account could still be paid from other sources aside from
Perez, 38 Phil. 785, 790). the mortgaged crops.

The United States of America acting as a belligerent sovereign power seized In his second point of contention, the appellant maintains that the action of
the assets of the Bank of Taiwan, Ltd. which belonged to an enemy country. the appellee had prescribed. The appellant points out that the loans became
The confiscation of the assets of the Bank of Taiwan, Ltd. being an due on June 1, 1944; and when the complaint was filed on January 17,1961 a
involuntary act of war, and sanctioned by international law, the United States period of more than 16 years had already elapsed — far beyond the period of
succeeded to the rights and interests of said Bank of Taiwan, Ltd. over the ten years when an action based on a written contract should be brought to
assets of said bank. As successor in interest in, and transferee of, the property court.
rights of the United States of America over the loans in question, the
Republic of the Philippines had thereby become a privy to the original This contention of the appellant has no merit. Firstly, it should be considered
contracts of loan between the Bank of Taiwan, Ltd. and the appellant. It that the complaint in the present case was brought by the Republic of the
follows, therefore, that the Republic of the Philippines has a legal right to Philippines not as a nominal party but in the exercise of its sovereign
bring the present action against the appellant Jose Grijaldo. functions, to protect the interests of the State over a public property. Under
paragraph 4 of Article 1108 of the Civil Code prescription, both acquisitive
The appellant likewise maintains, in support of his contention that the and extinctive, does not run against the State. This Court has held that the
appellee has no cause of action, that because the loans were secured by a statute of limitations does not run against the right of action of the
chattel mortgage on the standing crops on a land owned by him and these Government of the Philippines (Government of the Philippine Islands vs.
crops were lost or destroyed through enemy action his obligation to pay the Monte de Piedad, etc., 35 Phil. 738-751).Secondly, the running of the period
loans was thereby extinguished. This argument is untenable. The terms of the of prescription of the action to collect the loan from the appellant was
promissory notes and the chattel mortgage that the appellant executed in interrupted by the moratorium laws (Executive Orders No. 25, dated
favor of the Bank of Taiwan, Ltd. do not support the claim of appellant. The November 18, 1944; Executive Order No. 32. dated March 10, 1945; and
obligation of the appellant under the five promissory notes was not to deliver Republic Act No. 342, approved on July 26, 1948). The loan in question, as
a determinate thing namely, the crops to be harvested from his land, or the evidenced by the five promissory notes, were incurred in the year 1943, or
value of the crops that would be harvested from his land. Rather, his during the period of Japanese occupation of the Philippines. This case is
obligation was to pay a generic thing — the amount of money representing squarely covered by Executive Order No. 25, which became effective on
the total sum of the five loans, with interest. The transaction between the November 18, 1944, providing for the suspension of payments of debts
appellant and the Bank of Taiwan, Ltd. was a series of five contracts of incurred after December 31, 1941. The period of prescription was, therefore,
simple loan of sums of money. "By a contract of (simple) loan, one of the suspended beginning November 18, 1944. This Court, in the case of Rutter
vs. Esteban (L-3708, May 18, 1953, 93 Phil. 68), declared on May 18, 1953
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that the Moratorium Laws, R.A. No. 342 and Executive Orders Nos. 25 and It is the stand of the appellee that the Ballantyne scale of values should be
32, are unconstitutional; but in that case this Court ruled that the moratorium applied as of the time the obligation was incurred, and that was in June 1943.
laws had suspended the prescriptive period until May 18, 1953. This ruling This stand of the appellee was upheld by the lower court; and the decision of
was categorically reiterated in the decision in the case of Manila Motors vs. the lower court is supported by the ruling of this Court in the case of Hilado
Flores, L-9396, August 16, 1956. It follows, therefore, that the prescriptive vs. De la Costa (G.R. No. L-150, April 30, 1949; 46 O.G. 5472), which
period in the case now before US was suspended from November 18,1944, states:
when Executive Orders Nos. 25 and 32 were declared unconstitutional by
this Court. Computed accordingly, the prescriptive period was suspended for ... Contracts stipulating for payments presumably in Japanese war notes may
8 years and 6 months. By the appellant's own admission, the cause of action be enforced in our Courts after the liberation to the extent of the just
on the five promissory notes in question arose on June 1, 1944. The obligation of the contracting parties and, as said notes have become
complaint in the present case was filed on January 17, 1961, or after a period worthless, in order that justice may be done and the party entitled to be paid
of 16 years, 6 months and 16 days when the cause of action arose. If the can recover their actual value in Philippine Currency, what the debtor or
prescriptive period was not interrupted by the moratorium laws, the action defendant bank should return or pay is the value of the Japanese military
would have prescribed already; but, as We have stated, the prescriptive notes in relation to the peso in Philippine Currency obtaining on the date
period was suspended by the moratorium laws for a period of 8 years and 6 when and at the place where the obligation was incurred unless the parties
months. If we deduct the period of suspension (8 years and 6 months) from had agreed otherwise. ... . (italics supplied)
the period that elapsed from the time the cause of action arose to the time
when the complaint was filed (16 years, 6 months and 16 days) there remains IN VIEW OF THE FOREGOING, the decision appealed from is affirmed,
a period of 8 years and 16 days. In other words, the prescriptive period ran with costs against the appellant. Inasmuch as the appellant Jose Grijaldo died
for only 8 years and 16 days. There still remained a period of one year, 11 during the pendency of this appeal, his estate must answer in the execution of
months and 14 days of the prescriptive period when the complaint was filed. the judgment in the present case.

In his third point of contention the appellant maintains that the lower court
erred in ordering him to pay the amount of P2,377.23. It is claimed by the
appellant that it was error on the part of the lower court to apply the
Ballantyne Scale of values in evaluating the Japanese war notes as of June
1943 when the loans were incurred, because what should be done is to
evaluate the loans on the basis of the Ballantyne Scale as of the time the
loans became due, and that was in June 1944. This contention of the
appellant is also without merit.

The decision of the court a quo ordered the appellant to pay the sum of
P2,377.23 as of December 31, 1959, plus interest rate of 6% per annum
compounded quarterly from the date of the filing of the complaint. The sum
total of the five loans obtained by the appellant from the Bank of Taiwan,
Ltd. was P1,281.97 in Japanese war notes. Computed under the Ballantyne
Scale of values as of June 1943, this sum of P1,281.97 in Japanese war notes
in June 1943 is equivalent to P889.64 in genuine Philippine currency which
was considered the aggregate amount due as principal of the five loans, and
the amount of P2,377.23 as of December 31, 1959 was arrived at after
computing the interest on the principal sum of P889.64 compounded
quarterly from the time the obligations were incurred in 1943.

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II. Loans (Mutuum)
3.) Republic of the Philippines of LUCIA TAN the herein plaintiff. Due to the failure of defendant Arador
SUPREME COURT Valdehueza to redeem the said land within the period of one year as being
Manila provided by law, MR. VICENTE D. ROA who was then the Ex-Officio
EN BANC Provincial Sheriff executed an ABSOLUTE DEED OF SALE in favor of the
plaintiff LUCIA TAN.
G.R. No. L-38745 August 6, 1975
LUCIA TAN, plaintiff-appellee, A copy of the NOTICE OF SHERIFFS SALE is hereby marked as 'Annex
vs. A', the CERTIFICATE OF SALE is marked as 'Annex B' and the
ARADOR VALDEHUEZA and REDICULO ABSOLUTE DEED OF SALE is hereby marked as Annex C and all of
VALDEHUEZA, defendants-appellants. which are made as integral parts of this stipulation of facts.
Alaric P. Acosta for plaintiff-appellee. 4. That the party-plaintiff is the same plaintiff in Civil Case No. 2002; that
Lorenzo P. de Guzman for defendants-appellants. the parties defendants Arador, Rediculo and Pacita, all Valdehueza were the
same parties-defendants in the same said Civil Case No. 2002; the complaint
CASTRO, J.: in Civil Case No. 2002 to be marked as Exhibit 1; the answer as Exhibit 2
This appeal was certified to this Court by the Court of Appeals as involving and the order dated May 22, 1963 as Exhibit 3, and said exhibits are made
questions purely of law. integral part of this stipulation.

The decision a quo was rendered by the Court of First Instance of Misamis 5. That defendants ARADOR VALDEHUEZA and REDICULO
Occidental (Branch I) in an action instituted by the plaintiff-appellee Lucia VALDEHUEZA have executed two documents of DEED OF PACTO DE
Tan against the defendants-appellants Arador Valdehueza and Rediculo RETRO SALE in favor of the plaintiff herein, LUCIA TAN of two portions
Valdehueza (docketed as civil case 2574) for (a) declaration of ownership of a parcel of land which is described in the second cause of action with the
and recovery of possession of the parcel of land described in the first cause total amount of ONE THOUSAND FIVE HUNDRED PESOS (P1,500.00),
of action of the complaint, and (b) consolidation of ownership of two Philippine Currency, copies of said documents are marked as 'Annex D' and
portions of another parcel of (unregistered) land described in Annex E', respectively and made as integral parts of this stipulation of facts.
the second cause of action of the complaint, purportedly sold to the plaintiff 6. That from the execution of the Deed of Sale with right to repurchase
in two separate deeds of pacto de retro. mentioned in the second cause of action, defendants Arador Valdehueza and
After the issues were joined, the parties submitted the following stipulation Rediculo Valdehueza remained in the possession of the land; that land taxes
of facts: to the said land were paid by the same said defendants.

1. That parties admit the legal capacity of plaintiff to sue; that defendants Civil case 2002 referred to in stipulation of fact no. 4 was a complaint for
herein, Arador, Rediculo, Pacita, Concepcion and Rosario, all surnamed injunction filed by Tan on July 24, 1957 against the Valdehuezas, to enjoin
Valdehueza, are brothers and sisters; that the answer filed by Arador and them "from entering the above-described parcel of land and gathering the
Rediculo stand as the answer of Pacita, Concepcion and Rosario. nuts therein ...." This complaint and the counterclaim were subsequently
dismissed for failure of the parties "to seek for the immediate trial thereof,
2. That the parties admit the identity of the land in the first cause of action. thus evincing lack of interest on their part to proceed with the case. 1

3. That the parcel of land described in the first cause of action was the The Deed of Pacto de Retro referred to in stipulation of fact no. 5 as "Annex
subject matter of the public auction sale held on May 6, 1955 at the Capitol D" (dated August 5, 1955) was not registered in the Registry of Deeds, while
Building in Oroquieta, Misamis Occidental, wherein the plaintiff was the the Deed of Pacto de Retro referred to as "Annex E" (dated March 15, 1955)
highest bidder and as such a Certificate of Sale was executed by MR. was registered.
VICENTE D. ROA who was then the Ex-Officio Provincial Sheriff in favor
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II. Loans (Mutuum)
On the basis of the stipulation of facts and the annexes, the trial court civil case 2002 operated, upon the principle of res judicata, as a bar to the
rendered judgment, as follows: first cause of action in civil case 2574. We rule that this contention is
untenable as the causes of action in the two cases are not identical. Case 2002
WHEREFORE, judgment is hereby rendered in favor of the plaintiff: was for injunction against the entry into and the gathering of nuts from the
land, while case 2574 seeks to "remove any doubt or cloud of the plaintiff's
1. Declaring Lucia Tan the absolute owner of the property described in the ownership ..." (Amended complaint, Rec. on App., p. 27), with a prayer for
first cause of action of the amended complaint; and ordering the herein declaration of ownership and recovery of possession.
defendants not to encroach and molest her in the exercise of her proprietary
rights; and, from which property they must be dispossessed; Applying the test of absence of inconsistency between prior and subsequent
judgments,2 we hold that the failure of Tan, in case 2002, to secure an
2. Ordering the defendants, Arador Valdehueza and Rediculo Valdehueza injunction against the Valdehuezas to prevent them from entering the land
jointly and severally to pay to the plaintiff, Lucia Tan, on Annex 'E' the and gathering nuts is not inconsistent with her being adjudged, in case 2574,
amount of P1,200, with legal interest of 6% as of August 15, 1966, within 90 as owner of the land with right to recover possession thereof. Case 2002
days to be deposited with the Office of the Court within 90 days from the involved only the possession of the land and the fruits thereof, while case
date of service of this decision, and that in default of such payment the 2574 involves ownership of the land, with possession as a mere attribute of
property shall be sold in accordance with the Rules of Court for the release of ownership. The judgment in the first case could not and did not encompass
the mortgage debt, plus costs; the judgment in the second, although the second judgment would encompass
3. And as regards the land covered by deed of pacto de retro annex 'D', the the first. Moreover, the new Civil Code provides that suitors in actions to
herein defendants Arador Valdehueza and Rediculo Valdehueza are hereby quiet title "need not be in possession of said property. 3
ordered to pay the plaintiff the amount of P300 with legal interest of 6% 2. The trial court treated the registered deed of pacto de retro as an equitable
from August 15, 1966, the said land serving as guaranty of the said amount mortgage but considered the unregistered deed of pacto de retro "as a mere
of payment; case of simple loan, secured by the property thus sold under pacto de retro,"
4. Sentencing the defendants Arador Valdehueza and Rediculo Valdehueza on the ground that no suit lies to foreclose an unregistered mortgage. It
to pay jointly and severally to the herein plaintiff Lucia Tan the amount of would appear that the trial judge had not updated himself on law and
1,000.00 as attorney's fees; and . jurisprudence; he cited, in support of his ruling, article 1875 of the old Civil
Code and decisions of this Court circa 1910 and 1912.
5. To pay the costs of the proceedings.
Under article 1875 of the Civil Code of 1889, registration was a necessary
The Valdehuezas appealed, assigning the following errors: requisite for the validity of a mortgage even as between the parties, but under
article 2125 of the new Civil Code (in effect since August 30,1950), this is
That the lower court erred in failing to adjudge on the first cause of action no longer so.4
that there exists res judicata; and
If the instrument is not recorded, the mortgage is nonetheless binding
That the lower court erred in making a finding on the second cause of action between the parties. (Article 2125, 2nd sentence).
that the transactions between the parties were simple loan, instead, it should
be declared as equitable mortgage. The Valdehuezas having remained in possession of the land and the realty
taxes having been paid by them, the contracts which purported to be pacto de
We affirm in part and modify in part. retro transactions are presumed to be equitable mortgages,5 whether
registered or not, there being no third parties involved.
1. Relying on Section 3 of Rule 17 of the Rules of Court which pertinently
provides that a dismissal for failure to prosecute "shall have the effect of an 3. The Valdehuezas claim that their answer to the complaint of the plaintiff
adjudication upon the merits," the Valdehuezas submit that the dismissal of affirmed that they remained in possession of the land and gave the proceeds
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of the harvest to the plaintiff; it is thus argued that they would suffer double
prejudice if they are to pay legal interest on the amounts stated in the pacto
de retro contracts, as the lower court has directed, and that therefore the court
should have ordered evidence to be adduced on the harvest.

The record does not support this claim. Nowhere in the original and the
amended complaints is an allegation of delivery to the plaintiff of the harvest
from the land involved in the second cause of action. Hence, the defendants'
answer had none to affirm.

In submitting their stipulation of facts, the parties prayed "for its approval
and maybe made the basis of the decision of this Honorable Court. "
(emphasis supplied) This, the court did. It cannot therefore be faulted for not
receiving evidence on who profited from the harvest.

4. The imposition of legal interest on the amounts subject of the equitable


mortgages, P1,200 and P300, respectively, is without legal basis, for, "No
interest shall be due unless it has been expressly stipulated in writing."
(Article 1956, new Civil Code) Furthermore, the plaintiff did not pray for
such interest; her thesis was a consolidation of ownership, which was
properly rejected, the contracts being equitable mortgages.

With the definitive resolution of the rights of the parties as discussed above,
we find it needless to pass upon the plaintiffs petition for receivership.
Should the circumstances so warrant, she may address the said petition to the
court a quo.

ACCORDINGLY, the judgment a quo is hereby modified, as follows: (a) the


amounts of P1,200 and P300 mentioned in Annexes E and D shall bear
interest at six percent per annum from the finality of this decision; and (b) the
parcel of land covered by Annex D shall be treated in the same manner as
that covered by Annex E, should the defendants fail to pay to the plaintiff the
sum of P300 within 90 days from the finality of this decision. In all other
respects the judgment is affirmed. No costs.

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II. Loans (Mutuum)
4.) Republic of the Philippines A writing must be interpreted according to the legal meaning of its language
SUPREME COURT (section 286, Act No. 190, now section 58, Rule 123), and only when the
Manila wording of the written instrument appears to be contrary to the evident
EN BANC intention of the parties that such intention must prevail. (Article 1281, Civil
G.R. No. L-47878 July 24, 1942 Code.) There is nothing in the mortgage deed to show that the terms
GIL JARDENIL, plaintiff-appellant, employed by the parties thereto are at war with their evident intent. On the
vs. contrary the act of the mortgage of granting to the mortgagor on the same
HEFTI SOLAS (alias HEPTI SOLAS, JEPTI SOLAS), defendant- date of execution of the deed of mortgage, an extension of one year from the
appellee. date of maturity within which to make payment, without making any mention
Eleuterio J. Gustilo for appellant. of any interest which the mortgagor should pay during the additional period
Jose C. Robles for appellee. (see Exhibit B attached to the complaint), indicates that the true intention of
the parties was that no interest should be paid during the period of grace.
MORAN, J.: What reason the parties may have therefor, we need not here seek to explore.
This is an action for foreclosure of mortgage. The only question raised in this
appeal is: Is defendant-appellee bound to pay the stipulated interest only up Neither has either of the parties shown that, by mutual mistake, the deed of
to the date of maturity as fixed in the promissory note, or up to the date mortgage fails to express their agreement, for if such mistake existed,
payment is effected? This question is, in our opinion controlled by the plaintiff would have undoubtedly adduced evidence to establish it and asked
express stipulation of the parties. that the deed be reformed accordingly, under the parcel-evidence rule.

Paragraph 4 of the mortgage deed recites: We hold therefore, that as the contract is clear and unmistakable and the
terms employed therein have not been shown to belie or otherwise fail to
Que en consideracion a dicha suma aun por pagar de DOS MIL express the true intention of the parties and that the deed has not been
CUATROCIENTOS PESOS (P2,4000.00), moneda filipina, que el Sr. Hepti assailed on the ground of mutual mistake which would require its
Solas se compromete a pagar al Sr. Jardenil en o antes del dia treintaiuno reformation, same should be given its full force and effect. When a party sues
(31) de marzo de mil novecientos treintaicuarto (1934), con los intereses de on a written contract and no attempt is made to show any vice therein, he
dicha suma al tipo de doce por ciento (12%) anual a partir desde fecha hasta cannot be allowed to lay any claim more than what its clear stipulations
el dia de su vencimiento o sea treintaiuno (31) de marzo de mil novecientos accord. His omission, to which the law attaches a definite warning as an in
treintaicuatro (1934), por la presente, el Sr. Hepti Solas cede y traspasa, por the instant case, cannot by the courts be arbitrarily supplied by what their
via de primera hipoteca, a favor del Sr. Jardenil, sus herederos y own notions of justice or equity may dictate.
causahabientes, la parcela de terreno descrita en el parrafo primero (1.º) de
esta escritura. Plaintiff is, therefore, entitled only to the stipulated interest of 12 per cent on
the loan of P2, 400 from November 8, 1932 to March 31, 1934. And it being
Defendant-appellee has, therefore, clearly agreed to pay interest only up to a fact that extra judicial demands have been made which we may assume to
the date of maturity, or until March 31, 1934. As the contract is silent as to have been so made on the expiration of the year of grace, he shall be entitled
whether after that date, in the event of non-payment, the debtor would to legal interest upon the principal and the accrued interest from April 1,
continue to pay interest, we cannot in law, indulge in any presumption as to 1935, until full payment.
such interest; otherwise, we would be imposing upon the debtor an obligation
that the parties have not chosen to agree upon. Article 1755 of the Civil Code Thus modified judgment is affirmed, with costs against appellant.
provides that "interest shall be due only when it has been expressly
stipulated." (Emphasis supplied.)

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5.) THIRD DIVISION NOW, THEREFORE, for and in consideration of the sum of THREE
MILLION PESOS (P3,000,000.00) receipt of which is hereby acknowledged
by the FIRST PARTY from the SECOND PARTY, the parties have agreed
BOBIE ROSE V. FRIAS, G.R. No. 155223 as follows:
represented by her Attorney-in-
fact, MARIE F. FUJITA, Present: 1. That the SECOND PARTY has a period of Six (6) months from the
Petitioner, date of the execution of this contract within which to notify the FIRST
YNARES-SANTIAGO, J., PARTY of her intention to purchase the aforementioned parcel of land
Chairperson, together within (sic) the improvements thereon at the price of SIX MILLION
AUSTRIA-MARTINEZ, FOUR HUNDRED THOUSAND PESOS (P6,400,000.00). Upon notice to
- versus - CALLEJO, SR., the FIRST PARTY of the SECOND PARTYs intention to purchase the
CHICO-NAZARIO, and same, the latter has a period of another six months within which to pay the
NACHURA, JJ. remaining balance of P3.4 million.

Promulgated: 2. That prior to the six months period given to the SECOND PARTY
FLORA SAN DIEGO-SISON,
Respondent. April 4, 2007 within which to decide whether or not to purchase the above-mentioned
x------------------------------------------------x property, the FIRST PARTY may still offer the said property to other
persons who may be interested to buy the same provided that the amount
of P3,000,000.00 given to the FIRST PARTY BY THE SECOND PARTY
shall be paid to the latter including interest based on prevailing compounded
DECISION
bank interest plus the amount of the sale in excess of P7,000,000.00 should
the property be sold at a price more than P7 million.
AUSTRIA-MARTINEZ, J.: 3. That in case the FIRST PARTY has no other buyer within the first six
months from the execution of this contract, no interest shall be charged by
the SECOND PARTY on the P3 million however, in the event that on the
Before us is a Petition for Review on Certiorari filed by Bobie Rose sixth month the SECOND PARTY would decide not to purchase the
V. Frias represented by her Attorney-in-fact, Marie Regine F. Fujita aforementioned property, the FIRST PARTY has a period of another six
(petitioner) seeking to annul the Decision[1] dated June 18, 2002 and the months within which to pay the sum of P3 million pesos provided that the
Resolution[2] dated September 11, 2002 of the Court of Appeals (CA) in CA- said amount shall earn compounded bank interest for the last six months
G.R. CV No. 52839. only. Under this circumstance, the amount of P3 million given by the
SECOND PARTY shall be treated as [a] loan and the property shall be
Petitioner is the owner of a house and lot located at No. 589 Batangas East, considered as the security for the mortgage which can be enforced in
Ayala Alabang, Muntinlupa, Metro Manila, which she acquired from Island accordance with law.
Masters Realty and Development Corporation (IMRDC) by virtue of a Deed
of Sale dated Nov. 16, 1990.[3] The property is covered by TCT No. 168173 Petitioner received from respondent two million pesos in cash and one
of the Register of Deeds of Makati in the name of IMRDC.[4] million pesos in a post-dated check dated February 28, 1990, instead of 1991,
which rendered said check stale.[7]Petitioner then gave respondent TCT No.
On December 7, 1990, petitioner, as the FIRST PARTY, and Dra. Flora San 168173 in the name of IMRDC and the Deed of Absolute Sale over the
Diego-Sison (respondent), as the SECOND PARTY, entered into a property between petitioner and IMRDC.
Memorandum of Agreement[5] over the property with the following terms:
Respondent decided not to purchase the property and notified petitioner
through a letter[8] dated March 20, 1991, which petitioner received only
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II. Loans (Mutuum)
on June 11, 1991,[9] reminding petitioner of their agreement that the amount May 5, 1991 which her secretary placed in her attache case; that the envelope
of two million pesos which petitioner received from respondent should be together with her other personal things were lost when her car was forcibly
considered as a loan payable within six months. Petitioner subsequently opened the following day; that she sought the help of Atty. Lozada who
failed to pay respondent the amount of two million pesos. advised her to secure a police report, to execute an affidavit of loss and to get
the services of another lawyer to file a petition for the issuance of an owners
On April 1, 1993, respondent filed with the Regional Trial Court (RTC) duplicate copy; that the petition for the issuance of a new owners duplicate
of Manila, a complaint[10] for sum of money with preliminary attachment copy was filed on her behalf without her knowledge and neither did she sign
against petitioner. The case was docketed as Civil Case No. 93-65367 and the petition nor testify in court as falsely claimed for she was abroad; that she
raffled to Branch 30. Respondent alleged the foregoing facts and in addition was a victim of the manipulations of Atty. Lozada and respondent as shown
thereto averred that petitioner tried to deprive her of the security for the loan by the filing of criminal charges for perjury and false testimony against her;
by making a false report[11] of the loss of her owners copy of TCT No. that no interest could be due as there was no valid mortgage over the
168173 to the Tagig Police Station on June 3, 1991, executing an affidavit of property as the principal obligation is vitiated with fraud and deception. She
loss and by filing a petition[12] for the issuance of a new owners duplicate prayed for the dismissal of the complaint, counter-claim for damages and
copy of said title with the RTC of Makati, Branch 142; that the petition was attorneys fees.
granted in an Order[13] dated August 31, 1991; that said Order was
subsequently set aside in an Order dated April 10, 1992 [14] where the Trial on the merits ensued. On January 31, 1996, the RTC issued a
RTC Makati granted respondents petition for relief from judgment due to the decision,[17] the dispositive portion of which reads:
fact that respondent is in possession of the owners duplicate copy of TCT
No. 168173, and ordered the provincial public prosecutor to conduct WHEREFORE, judgment is hereby RENDERED:
an investigation of petitioner for perjury and false testimony. Respondent
prayed for the ex-parte issuance of a writ of preliminary attachment and 1) Ordering defendant to pay plaintiff the sum of P2 Million plus interest
payment of two million pesos with interest at 36% per annum thereon at the rate of thirty two (32%) per cent per annum
from December 7, 1991, P100,000.00 moral, corrective and exemplary beginning December 7, 1991 until fully paid.
damages and P200,000.00 for attorneys fees.
2) Ordering defendant to pay plaintiff the sum of P70,000.00 representing
In an Order dated April 6, 1993, the Executive Judge of the RTC of Manila premiums paid by plaintiff on the attachment bond with legal interest thereon
issued a writ of preliminary attachment upon the filing of a bond in the counted from the date of this decision until fully paid.
amount of two million pesos.[15]
3) Ordering defendant to pay plaintiff the sum of P100,000.00 by way of
Petitioner filed an Amended Answer[16] alleging that the Memorandum of moral, corrective and exemplary damages.
Agreement was conceived and arranged by her lawyer, Atty.
Carmelita Lozada, who is also respondents lawyer; that she was asked to sign 4) Ordering defendant to pay plaintiff attorneys fees of P100,000.00 plus
the agreement without being given the chance to read the same; that the title cost of litigation.[18]
to the property and the Deed of Sale between her and the IMRDC were
entrusted to Atty. Lozadafor safekeeping and were never turned over to The RTC found that petitioner was under obligation to pay respondent the
respondent as there was no consummated sale yet; that out of the two million amount of two million pesos with compounded interest pursuant to their
pesos cash paid, Atty. Lozada took the one million pesos which has not been Memorandum of Agreement; that the fraudulent scheme employed by
returned, thus petitioner had filed a civil case against her; that she was never petitioner to deprive respondent of her only security to her loaned money
informed of respondents decision not to purchase the property within the six when petitioner executed an affidavit of loss and instituted a petition for the
month period fixed in the agreement; that when she demanded the return issuance of an owners duplicate title knowing the same was in respondents
of TCT No. 168173 and the Deed of Sale between her and the IMRDC from possession, entitled respondent to moral damages; and that petitioners bare
Atty. Lozada, the latter gave her these documents in a brown envelope on

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denial cannot be accorded credence because her testimony and that of her Petitioners motion for reconsideration was denied by the CA in a Resolution
witness did not appear to be credible. dated September 11, 2002.

The RTC further found that petitioner admitted that she received from
respondent the two million pesos in cash but the fact that petitioner gave the
one million pesos to Atty. Lozada was without respondents knowledge thus it Hence the instant Petition for Review on Certiorari filed by petitioner raising
is not binding on respondent; that respondent had also proven that in 1993, the following issues:
she initially paid the sum of P30,000.00 as premium for the issuance of the
attachment bond, P20,000.00 for its renewal in 1994, and P20,000.00 for the (A) WHETHER OR NOT THE COMPOUNDED BANK INTEREST
renewal in 1995, thus plaintiff should be reimbursed considering that she was SHOULD BE LIMITED TO SIX (6) MONTHS AS CONTAINED IN THE
compelled to go to court and ask for a writ of preliminary attachment to MEMORANDUM OF AGREEMENT.
protect her rights under the agreement.
(B) WHETHER OR NOT THE RESPONDENT IS ENTITLED TO
Petitioner filed her appeal with the CA. In a Decision dated June 18, 2002, MORAL DAMAGES.
the CA affirmed the RTC decision with modification, the dispositive portion
of which reads: (C) WHETHER OR NOT THE GRANT OF CORRECTIVE AND
EXEMPLARY DAMAGES AND ATTORNEYS FEES IS PROPER EVEN
WHEREFORE, premises considered, the decision appealed from is IF NOT MENTIONED IN THE TEXT OF THE DECISION. [22]
MODIFIED in the sense that the rate of interest is reduced from 32% to 25% Petitioner contends that the interest, whether at 32% per annum awarded by
per annum, effective June 7, 1991 until fully paid.[19] the trial court or at 25% per annum as modified by the CA which should run
from June 7, 1991 until fully paid, is contrary to the parties Memorandum of
The CA found that: petitioner gave the one million pesos to Agreement; that the agreement provides that if respondent would decide not
Atty. Lozada partly as her commission and partly as a loan; respondent did to purchase the property, petitioner has the period of another six months to
not replace the mistakenly dated check of one million pesos because she had pay the loan with compounded bank interest for the last six months only; that
decided not to buy the property and petitioner knew of her decision as early the CAs ruling that a loan always bears interest otherwise it is not a loan is
as April 1991; the award of moral damages was warranted since even contrary to Art. 1956 of the New Civil Code which provides that no interest
granting petitioner had no hand in the filing of the petition for the issuance of shall be due unless it has been expressly stipulated in writing.
an owners copy, she executed an affidavit of loss of TCT No. 168173 when
she knew all along that said title was in respondents possession; petitioners We are not persuaded.
claim that she thought the title was lost when the brown envelope given to
her by Atty. Lozada was stolen from her car was hollow; that such deceitful
conduct caused respondent serious anxiety and emotional distress. While the CAs conclusion, that a loan always bears interest otherwise it is
not a loan, is flawed since a simple loan may be gratuitous or with a
The CA concluded that there was no basis for petitioner to say that the stipulation to pay interest,[23] we find no error committed by the CA in
interest should be charged for six months only and no more; that a loan awarding a 25% interest per annum on the two-million peso loan even
always bears interest otherwise it is not a loan; that interest should beyond the second six months stipulated period.
commence on June 7, 1991[20] with compounded bank interest prevailing at
the time the two million was considered as a loan which was in June 1991; The Memorandum of Agreement executed between the petitioner and
that the bank interest rate for loans secured by a real estate mortgage in 1991 respondent on December 7, 1990 is the law between the parties. In resolving
ranged from 25% to 32% per annum as certified to by Prudential an issue based upon a contract, we must first examine the contract itself,
Bank,[21] that in fairness to petitioner, the rate to be charged should be 25% especially the provisions thereof which are relevant to the
only. controversy.[24] The general rule is that if the terms of an agreement are clear
and leave no doubt as to the intention of the contracting parties, the literal
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meaning of its stipulations shall prevail.[25] It is further required that the Petitioner and respondent stipulated that the loaned amount shall earn
various stipulations of a contract shall be interpreted together, attributing to compounded bank interests, and per the certification issued by Prudential
the doubtful ones that sense which may result from all of them taken Bank, the interest rate for loans in 1991 ranged from 25% to 32% per
jointly.[26] annum. The CA reduced the interest rate to 25% instead of the 32% awarded
by the trial court which petitioner no longer assailed.
In this case, the phrase for the last six months only should be taken in the
context of the entire agreement. We agree with and adopt the CAs In Bautista v. Pilar Development Corp.,[30] we upheld the validity of a 21%
interpretation of the phrase in this wise: per annum interest on a P142,326.43 loan. In Garcia v. Court of
Appeals,[31] we sustained the agreement of the parties to a 24% per annum
Their agreement speaks of two (2) periods of six months each. The first six- interest on an P8,649,250.00 loan. Thus, the interest rate of 25% per annum
month period was given to plaintiff-appellee (respondent) to make up her awarded by the CA to a P2 million loan is fair and reasonable.
mind whether or not to purchase defendant-appellants (petitioner's)
property. The second six-month period was given to defendant-appellant to Petitioner next claims that moral damages were awarded on the erroneous
pay the P2 million loan in the event that plaintiff-appellee decided not to buy finding that she used a fraudulent scheme to deprive respondent of her
the subject property in which case interest will be charged for the last six security for the loan; that such finding is baseless since petitioner was
months only, referring to the second six-month period. This means that no acquitted in the case for perjury and false testimony filed by respondent
interest will be charged for the first six-month period while appellee was against her.
making up her mind whether to buy the property, but only for the second
period of six months after appellee had decided not to buy the property. This We are not persuaded.
is the meaning of the phrase for the last six months only. Certainly, there is
nothing in their agreement that suggests that interest will be charged for six Article 31 of the Civil Code provides that when the civil action is based on
months only even if it takes defendant-appellant an eternity to pay the an obligation not arising from the act or omission complained of as a felony,
loan.[27] such civil action may proceed independently of the criminal proceedings and
regardless of the result of the latter.[32]
The agreement that the amount given shall bear compounded bank interest
for the last six months only, i.e., referring to the second six-month period, While petitioner was acquitted in the false testimony and perjury cases filed
does not mean that interest will no longer be charged after the second six- by respondent against her, those actions are entirely distinct from the
month period since such stipulation was made on the logical and reasonable collection of sum of money with damages filed by respondent against
expectation that such amount would be paid within the date petitioner.
stipulated. Considering that petitioner failed to pay the amount given which We agree with the findings of the trial court and the CA that petitioners act of
under the Memorandum of Agreement shall be considered as a loan, the trying to deprive respondent of the security of her loan by executing an
monetary interest for the last six months continued to accrue until actual affidavit of loss of the title and instituting a petition for the issuance of a new
payment of the loaned amount. owners duplicate copy of TCT No. 168173 entitles respondent to moral
The payment of regular interest constitutes the price or cost of the use of damages. Moral damages may be awarded in culpa contractual or breach of
money and thus, until the principal sum due is returned to the creditor, contract cases when the defendant acted fraudulently or in bad faith. Bad
regular interest continues to accrue since the debtor continues to use such faith does not simply connote bad judgment or negligence; it imports a
principal amount.[28] It has been held that for a debtor to continue in dishonest purpose or some moral obliquity and conscious doing of wrong. It
possession of the principal of the loan and to continue to use the same after partakes of the nature of fraud.[33]
maturity of the loan without payment of the monetary interest, would The Memorandum of Agreement provides that in the event that respondent
constitute unjust enrichment on the part of the debtor at the expense of the opts not to buy the property, the money given by respondent to petitioner
creditor.[29] shall be treated as a loan and the property shall be considered as the security

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for the mortgage. It was testified to by respondent that after they executed the We agree.
agreement on December 7, 1990, petitioner gave her the owners copy of the
title to the property, the Deed of Sale between petitioner and IMRDC, the Article 2208[41] of the New Civil Code enumerates the instances where such
certificate of occupancy, and the certificate of the Secretary of the IMRDC may be awarded and, in all cases, it must be reasonable, just and equitable if
who signed the Deed of Sale.[34] However, notwithstanding that all those the same were to be granted.[42]Attorney's fees as part of damages are not
documents were in respondents possession, petitioner executed an affidavit meant to enrich the winning party at the expense of the losing litigant. They
of loss that the owners copy of the title and the Deed of Sale were lost. are not awarded every time a party prevails in a suit because of the policy
that no premium should be placed on the right to litigate.[43] The award of
Although petitioner testified that her execution of the affidavit of loss was attorney's fees is the exception rather than the general rule. As such, it is
due to the fact that she was of the belief that since she had demanded from necessary for the trial court to make findings of facts and law that would
Atty. Lozada the return of the title, she thought that the brown envelope with bring the case within the exception and justify the grant of such award. The
markings which Atty. Lozada gave her on May 5, 1991 already contained the matter of attorney's fees cannot be mentioned only in the dispositive portion
title and the Deed of Sale as those documents were in the same brown of the decision.[44] They must be clearly explained and justified by the trial
envelope which she gave to Atty. Lozada prior to the transaction with court in the body of its decision. On appeal, the CA is precluded from
respondent.[35] Such statement remained a bare statement. It was not proven supplementing the bases for awarding attorneys fees when the trial court
at all since Atty. Lozada had not taken the stand to corroborate her claim. In failed to discuss in its Decision the reasons for awarding the
fact, even petitioners own witness, Benilda Ynfante (Ynfante), was not able same. Consequently, the award of attorney's fees should be deleted.
to establish petitioner's claim that the title was returned by Atty. Lozada in
view of Ynfante'stestimony that after the brown envelope was given to WHEREFORE, in view of all the foregoing, the Decision dated June 18,
petitioner, the latter passed it on to her and she placed it in petitioners attach 2002 and the Resolution dated September 11, 2002 of the Court of Appeals
case[36] and did not bother to look at the envelope.[37] in CA-G.R. CV No. 52839 are AFFIRMED with MODIFICATION that
the award of attorneys fees is DELETED.
It is clear therefrom that petitioners execution of the affidavit of loss became
the basis of the filing of the petition with the RTC for the issuance of new No pronouncement as to costs.
owners duplicate copy of TCT No. 168173. Petitioners actuation would have
deprived respondent of the security for her loan were it not for respondents SO ORDERED.
timely filing of a petition for relief whereby the RTC set aside its previous
order granting the issuance of new title. Thus, the award of moral damages is
in order.

The entitlement to moral damages having been established, the award of


exemplary damages is proper.[38] Exemplary damages may be imposed upon
petitioner by way of example or correction for the public good. [39] The RTC
awarded the amount of P100,000.00 as moral and exemplary damages. While
the award of moral and exemplary damages in an aggregate amount may not
be the usual way of awarding said damages,[40] no error has been committed
by CA. There is no question that respondent is entitled to moral and
exemplary damages.

Petitioner argues that the CA erred in awarding attorneys fees because the
trial courts decision did not explain the findings of facts and law to justify the
award of attorneys fees as the same was mentioned only in
the dispositive portion of the RTC decision.
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II. Loans (Mutuum)
6.) THIRD DIVISION After trial, the court below resolved to grant the relief prayed for by
respondent, thus:
[G.R. No. 142277. December 11, 2002]
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and
ARWOOD INDUSTRIES, INC., petitioner, vs. D.M. CONSUNJI, against defendant ordering the latter to pay the former the following:
INC., respondent.
(1) the sum of P962,434.78 representing the balance of contract price with
DECISION interest at 2% per month from November 1990 up to the time of payment;
CORONA, J .: (2) the amount of P150,000.00 as attorney's fees; and
This is a petition for review of the decision[1] dated November 12, 1999 of (3) Cost(s) of suit.
the Court of Appeals, which affirmed, with modification, the
decision[2] dated April 1, 1997 of the Regional Trial Court, Branch 153, Pasig SO ORDERED.[6]
City in Civil Case No. 63489.
Petitioner appealed to the Court of Appeals, particularly opposing the finding
The core issue of this petition is the propriety of the imposition of two of the trial court with regard to the imposition of the monetary interest of 2%
percent (2%) interest on the amount adjudged by the trial court and later per month on the adjudicated amount.
affirmed by the Court of Appeals in favor of respondent D.M. Consunji,
Inc. and against petitioner Arwood Industries, Inc. The Court of Appeals upheld the trial court despite dauntless demurring by
petitioner. Respondent court found basis in Article 6.03 of the Agreement
The factual backdrop of this case is as follows: concerning the imposition of the 2% interest, which reads:

Petitioner and respondent, as owner and contractor, respectively, entered into Payment shall be made by the OWNER to the CONTRACTOR within fifteen
a Civil, Structural and Architectural Works Agreement[3] (Agreement) dated (15) calendar days after receipt of the Construction Manager's Certificate. In
February 6, 1989 for the construction of petitioner's Westwood the event OWNER delays the payments (i.e. beyond the stipulated time) to
Condominium at No. 23 Eisenhower St., Greenhills, San Juan, Metro the CONTRACTOR of monthly progress billings, the CONTRACTOR
Manila. The contract price for the condominium project shall have the option to either suspend the works on the Project until
aggregated P20,800,000.00. such payments have been remitted by the OWNER or continue the work
but the OWNER shall be required to pay the interest at a rate of two
Despite the completion of the condominium project, the amount (2%) percent per month or the fraction thereof in days of the amount
of P962,434.78 remained unpaid by petitioner. Repeated demands by due for payment by the OWNER. The same interest shall be added to the
respondent for petitioner to pay went unheeded. billing of the following month. Furthermore, the progress payments shall be
reduced by a portion of the downpayment made by the OWNER
Thus, on August 13, 1993, respondent, as plaintiff in Civil Case No. 63489 corresponding to the value of the work completed. [7]
filed its complaint[4] for the recovery of the balance of the contract price and
for damages against petitioner. Respondent court, however, modified the decision of the trial court by
deleting the award of attorney's fees for the following reasons:
Respondent specifically prayed for the payment of the (a) amount
of P962,434.78 with interest of 2% per month or a fraction thereof, from Finally, defendant-appellant argues that the court a quo erred in awarding
November 1990 up to the time of payment; (b) the amount of P250,000 as attorneys fees because the same was not mentioned in the body of the
attorney's fees and litigation expenses; (c) amount of P150,000 as exemplary decision.
damages and (d) costs of suit.[5]
On this ultimate point, We agree.

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II. Loans (Mutuum)
In the case of Del Rosario vs. Court of Appeals (267 SCRA 158, 175), the provision on interest was neither sub-marked nor formally offered in
Supreme Court held that: evidence.[10] Hence, the imposition of interest is wanting in basis as it is not
even explicitly alleged in the complaint before the trial court.
Finally, like the adjudication of actual or compensatory damages, the award
of attorneys fees must be deleted. The matter was dealt with only in the Petitioner's stance hardly deserves this Court's attention.
dispositive portion of the Trial Courts decision. Since the judgment does not
say why attorneys fees were awarded, there is no basis for such award, which The Agreement or the contract between the parties is the formal expression
should consequently be removed. So did this Court rule, for instance, in Scott of the parties rights, duties and obligations. It is the best evidence of the
Consultants and Resource Development Corp., Inc. et al. (242 SCRA 393, intention of the parties. Thus, when the terms of an agreement have been
406): reduced to writing, it is considered as containing all the terms agreed upon
and there can be, between the parties and their successors in interest, no
It is settled that the award of attorneys fees is the exception rather than the evidence of such terms other than the contents of the written agreement. [11]
rule and counsels fees are not to be awarded every time a party wins. The
power of the court to award attorneys fees under Article 2208 of the Civil Consequently, upon the fulfillment by respondent of its obligation to
Code demands factual, legal, and equitable justification; its basis cannot be complete the construction project, petitioner had the correlative duty to pay
left to speculation or conjecture. Where granted, the court must explicitly for respondents services. However, petitioner refused to pay the balance of
state in the body of the decision, and not only in the dispositive portion the contract price. From the moment respondent completed the construction
thereof, the legal reason for the award of attorneys fees. [8] of the condominium project and petitioner refused to pay in full, there was
delay on the part of petitioner. This delay was never disputed.
Petitioner moved to reconsider, unsuccessfully.
Delay in the performance of an obligation is looked upon with disfavor
Hence, this petition for review. The only issue is the correctness of imposing because, when a party to a contract incurs delay, the other party who
a 2% per month interest on the award of P962,434.78. performs his part of the contract suffers damages thereby.Dilationes in lege
sunt idiosae.[12] Obviously, respondent suffered damages brought about by
Petitioner argues that the trial court's decision has no basis in imposing the the failure of petitioner to comply with its obligation on time. And, sans
2% interest per month. Although the Agreement contained a provision with elaboration of the matter at hand, damages take the form of
regard to the interest, this provision was not mentioned by the trial court in interest. Accordingly, the appropriate measure of damages in this case is the
awarding interest in the dispositive portion. This provision of the Agreement payment of interest at the rate agreed upon, which is 2% interest for every
does not apply to the claim of respondent but refers to the monthly progress month of delay.
billings. The amount of P962,434.78 is not a monthly progress billing and
should not therefore be subject to interest. It must be noted that the Agreement provided the contractor, respondent in
this case, two options in case of delay in monthly payments, to wit: a)
Furthermore, the pre-trial order of the trial court dated February 4, 1994 did suspend work on the project until payment is remitted by the owner or b)
not include interest as one of the issues to be resolved and determined during continue the work but the owner shall be required to pay interest at a rate of
the trial; the parties agreed that the main issue was two percent (2%) per month or a fraction thereof. Evidently, respondent
chose the latter option, as the condominium project was in fact already
x x x whether or not defendant is liable to pay the balance of P964,434.78 as completed. The payment of the 2% monthly interest, therefore, cannot be
stated in the Complaint.[9] jettisoned overboard.
Thus, the trial court erroneously disposed of the issue on payment of interest. Since the Agreement stands as the law between the parties, [13] this Court
Petitioner points to the error of the Court of Appeals in basing its decision cannot ignore the existence of such provision providing for a penalty for
(on the issue of interest) on Article 6.03 of the Agreement. It reasons that every months delay. Facta legem facunt inter partes.[14]Neither can petitioner
while there was a formal offer of the Agreement and its sub-markings, the impugn the Agreement to which it willingly gave its consent. From the
14
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II. Loans (Mutuum)
moment petitioner gave its consent, it was bound not only to fulfill what was Respondents claim, it must be noted, includes payment of the sum
expressly stipulated in the Agreement but also all the consequences which, of P962,474.78, exclusive of damages. The Complaint of plaintiff-respondent
according to their nature, may be in keeping with good faith, usage and prayed for the amount of P962,474.78 exclusive of damages. Petitioner had
law.[15] Petitioners attempt to mitigate its liability to respondent should thus all the opportunity to squarely meet the issue on interest at the pre-trial as it
fail. was deemed included in the phrase exclusive of damages. The appeal to the
respondent court on the matter of interest was, therefore, a belated effort to
As a last-ditch effort to evade liability, petitioner argues that the amount object to the contents of the Agreement. Petitioner cannot resort to this
of P962,434.78 claimed by respondent and later awarded by the lower courts sneaky scheme. Objection to evidence cannot be raised for the first time on
does not refer to monthly progress billings, the delayed payment of which appeal; when a party desires the court to reject the evidence offered, he must
would earn interest at 2% per month. so state in the form of objection. Without such objection, he cannot raise the
question for the first time on appeal.[19] And, since there was no timely
We disagree. objection to the contents of the Agreement, the Agreement and its contents
Petitioner appears confused by a semantics problem. Monthly progress form part of the evidence of the case. All the parties to the case, therefore,
billings certainly form part of the contract price. If the amount claimed by are considered bound by any favorable or unfavorable effects resulting from
respondent is not the monthly progress billings provided in the contract, what the evidence.[20]
then does such amount represent? Petitioner has not in point of fact Needless to state, it is not indispensable that Article 6.03 of the Agreement
convincingly supplied an answer to this query. Neither has petitioner shown be sub-marked and formally offered in evidence during the pre-trial before
any effort to clarify the meaning of monthly progress billings to support its said provision may take effect. For one, the provision on the payment of
position. This leaves us no choice but to agree with respondent that the monthly interest is included in the Agreement, the existence and validity of
phrase monthly progress billings refers to a portion of the contract price which, to reiterate, were not objected to by petitioner. For another, the
payable by the owner (petitioner) of the project to the contractor (respondent) payment of interest as penalty is a necessary consequence of petitioners
based on the percentage of completion of the project or on work failure to exercise diligence in the discharge of its obligation under the
accomplished at a particular stage. It refers to that portion of the contract contract.
price still to be paid as work progresses, after the downpayment is made. [16]
Moreover, even assuming that there was a default of stipulation or agreement
This definition is, indeed, not without basis. Articles 6.02 and 6.03 of the on interest, respondent may still recover on the basis of the general provision
Agreement, which respectively provides that the (b)alance shall be paid in of law, which is Article 2209 of the Civil Code, thus:
monthly progress payments based on actual value of the work
accomplished[17] and that the progress payments shall be reduced by a portion Art. 2209. If the obligation consists in the payment of a sum of money, and
of the downpayment made by the OWNER corresponding to the value of the the debtor incurs in delay, the indemnity for damages, there being no
work completed give sense to respondents interpretation of monthly progress stipulation to the contrary, shall be the payment of the interest agreed upon,
billings. and in the absence of stipulation, the legal interest, which is six percent per
annum.
Even supposing that petitioner has a different definition of monthly progress
billings, it must nonetheless be interpreted in favor of herein respondent Article 2209 of the Civil Code, as abovementioned, specifies the appropriate
because Article 6.03 of the Agreement, which gives respondent the options in measure of damages where the obligation breached consisted of the payment
case of petitioners default in payment, was obviously stipulated for of sum of money. Article 2209 was, in extent, explicated by the Court in
respondents benefit.[18] State Investment House, Inc. vs. Court of Appeals, [21] which provides:
Thus, respondent correctly contends that the amount claimed, which is part The appropriate measure for damages in case of delay in discharging an
of the contract price, would not have accumulated had petitioner been obligation consisting of the payment of a sum of money, is the payment
diligent in the monthly payment of the work accomplished by respondent. of penalty interest at the rate agreed upon; and in the absence of a
15
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II. Loans (Mutuum)
stipulation of a particular rate of penalty interest, then the payment of
additional interest at a rate equal to the regular monetary interest; and if no
regular interest had been agreed upon, then payment of legal interest or six
percent (6%) per annum.[22]

Hence, even in the absence of a stipulation on interest, under Article 2209 of


the Civil Code, respondent would still be entitled to recover the balance of
the contract price with interest. Respondent court, therefore, correctly
interpreted the terms of the agreement which provides that the OWNER shall
be required to pay the interest at a rate of two percent (2%) per month or the
fraction thereof in days of the amount due for payment by the OWNER.

We, therefore, find no basis to alter the findings of the Court of Appeals
affirming the decision of the trial court.

WHEREFORE, the petition is hereby DENIED.

SO ORDERED.

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II. Loans (Mutuum)
7.) Republic of the Philippines the exception of Joaquin Azarraga, be ordered to make up to 123 hectares, 13
SUPREME COURT ares and 99 centares the land which the latter had sold to him, because
Manila plaintiff did not take possession of the land, except a portion thereof, having
an area of 72 hectares, 83 ares and 5 centares. In other words, the defendants
EN BANC should deliver to the plaintiff an additional 50 hectares , 30 ares and 94
centares inasmuch as the participation of said Joaquin Azarraga in the estate
G.R. No. L-43579 June 14, 1938 left to him and his brothers, his co-defendants herein, by their common
grandfather, Juan Azarraga y Galvez, which Joaquin Azarraga sold to
JOSUE SONCUYA, plaintiff-appellant,
plaintiff, had that area according to the deed of partition, executed by all of
vs.
them, and the plan of said estate which was subsequently drawn up.
JUAN AZARRAGA, ET AL., defendants-appellants.
In their answer of February 26, 1931, the defendants Azarraga interposed a
Gervasio Diaz, Joaquin Azarraga, Sumulong Lavidez and Sumulong, and
general denial of each and all the allegations of the plaintiff's complaint,
Laurel,
excepting those relating the following special defenses; First, that the
Del Rosario and Sabido for defendants and appellants.
complaint does not allege facts constituting causes of action; second, that the
Joseu Soncuya in his own behalf.
plaintiff and his predecessor in interest were negligent in failing to inscribe in
DIAZ, J.: the office of the register of deeds the supposed encumbrances in their favor
over the lands in question, granting that said encumbrances had ever existed;
This case is now before us on appeal from the Court of First Instance of third, that the plaintiff knew and was personally informed that the lands
Capiz. After trial, the plaintiff filed a second amended complaint, which the aforesaid would be surveyed at their instance and inscribed in their names as
lower court at first refused to consider, but later on admitted after it was their own property, but that he did nothing to defend or protect his rights
convinced that the allowance thereof was proper in order to make the either during the pendency of the proceedings for the registration of the lands
allegations conform to the established facts. This was done without the in question or during the period prescribed by law after the issuance of a
defendants interposing any exception, notwithstanding that they had decree and title, within which the validity of the same may be assailed;
previously opposed the admission of the amendment. They not afterwards fourth, that at the time of filing their application for registration as well as of
and not now, in their brief on appeal, question the aforesaid amendment. the issuance of the decree ordering the inscription in their names in the
registry of property of the lands in question, they were the sole owners of the
It appears from the allegations of the complaint thus amended that the same, and that admitting for the sake of argument the theory of the plaintiff
plaintiff has four causes of action. Under the first cause he seeks to recover that he had a right to said lands, it was nothing more than an expectation that
from the defendants the sum of P118,635.68 as damages, which he alleges to he would be someday their owner; fifth, that the plaintiff had no right to
have been caused by the defendants in fraudulently depriving him of the apply for or obtain from the court a writ of preliminary injunction,
possession of four parcels of land with a total area of 296 hectares, 58 ares wherefore, that obtained was illegal; and sixth, that the right of action of the
and 92 centares, which they, with knowledge that said real properties plaintiff, if any, had prescribed.
belonged to him exclusively, registered in their names in the registry of
property and mortgaged in favor of "Hijos de I. de la Rama" to pay a certain The defendants Azarraga further alleged the following counterclaims:
obligation which they had contracted with the Panay Municipal Cadastre.
Under the second cause, plaintiff seeks to recover P6,080 as the supposed (a) That plaintiff is liable to them in damages in the sum of P100,000 because
value of the heads of cattle belonging to him, which the tenants of the while the contract which the defendants had entered into with Leodegario
defendants had slaughtered. Under the third cause, he seeks payment of the Azarraga was still in force, the plaintiff took possession of their lands not
sum of P5,575 as the supposed value of 1,115 coconut trees which he had covered by the said contract; that he set loose therein his cattle, utilizing the
planted on the four parcels of land in question. Under the fourth and last same as grazing ground in a negligent manner and without taking the
cause of action, plaintiff prays that the defendants surnamed Azarraga, with necessary steps to avoid damages to their plantations; that notwithstanding

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repeated requests, the plaintiff refused to fence the lands in which he had set office of the register of deeds of Capiz, the plaintiff be sentenced to pay the
loose his animals, thereby causing damages and destruction to their costs of the suit.
plantations; that the animals belonging to the plaintiff not only destroyed and
damaged the coconut, palay and corn plantation existing already on the lands "Hijos de I. de la Rama" and Panay Municipal Cadastre were included in the
before said animals were brought thereto, but also destroyed their farms and complaint only for the purpose of enjoining the former from increasing to
plantations on their enclosed lands; that all this was due to the neglect and P25,000 the credit it had extend to the defendants Azarraga, who had already
carelessness of the plaintiff; that by reason of his refusal to enclosed the obtained P16,000 on a mortgage of the lands in questions executed by them
lands converted into grazing grounds, the defendants were unable to derive in its favor; and of restraining the latter from collecting from said loan of
any benefits from their lands or to sell or rent them to those who desire to do P25,000, extended by "Hijos de I. de la Rama" to the defendants, the credit
so. which it claims to have against them under a contract whereby they bound
themselves to provide it with funds to carry on the enterprise for which it has
(b) That the plaintiff is further liable and should be sentenced to pay them in been organized.
damages the sum of P 15,000 for having caused the annotation in the
corresponding registry of the book of the office of the register of deeds of the "Hijos de I. de la Rama" showed very little interest in the case, for, according
Province of Capiz of a notice of lis pendens not only with regard to the 150 to the lower court, it merely filed an answer with a general denial.
hectares, 48 ares and 50 centares which he claims in his complaint, but also
with regard to the whole area of 246 hectares, 27 ares and 98 centares, Panay Municipal Cadastre, in its answer, denied all the allegations of the
described in the original certificate of title No. 9785 issued in the name of the complaint in so far as it might be affected thereby, and alleged as special
defendants; that as a result of this act of the plaintiff, they could not enter defense that the plaintiff had no right to ask for, and much less obtain, a writ
into any transactions over that unquestioned portion of the land to which said of preliminary injunction against it. It further alleged as a counterclaim that
title relates. the said plaintiff has become liable to it in damages in the sum of P15,000,
plus P5,000, plus P5,000 every month, beginning February 7, 1931, because
(c) That the plaintiff is likewise liable and the defendants pray that he should the plaintiff prevented if from receiving from the defendants Azarraga or
be sentenced to pay them the sum of P30,000 also in damages, for having from "Hijos de I. de la Rama" the sums which they had bound themselves to
sought and secured the issuance of an order of preliminary attachment of deliver under a contract which they had executed on September 20, 1929.
their properties described in certificates of title No. 9804 and 10361. After trial, the court rendered judgment as follows:

(d) That the plaintiff is liable and should be sentenced to pay them in Wherefore, the defendants Juan, Jose, Salvador, Joaquin, Emilio, Luis,
damages the sum of P10,000 for having asked and secured from the court on Rosario, Julio, all surnamed Azarraga, are hereby sentenced to pay the
February 7, 1931 a writ of preliminary injunction in the same case, thereby plaintiff, jointly and severally, the sum of P24,627.98, with legal interest
preventing the defendants from exercising acts of ownership not only on the from November 10, 1926, as damages because they fraudulently deprived the
four parcels in questions, but also on all the other lands belonging to them. plaintiff of his lands in Bay-ang, and likewise to pay the plaintiff, jointly and
severally, the sum of P5,575 with legal interest from November 10, 1926,
(e) That in case it is adjudged that the lands in controversy had been representing the value of 1,115 coconut trees as improvements on said lands,
improperly inscribed by the defendants in their names in the registry of and, with the exception of Joaquin Azarraga, to pay the plaintiff, jointly and
property, they pray that the plaintiff be ordered to reimburse them in the sum severally, the sum of P5,030.94 with interest at the legal rate from November
of P5,000 which represent the taxes paid by them on said lands, plus interest 10, 1926 for eviction and warranty.
from the dates said taxes were paid;
In case the defendants Azarraga have no unencumbered properties or can not
(f) The defendants lastly pray that upon the dissolution of the writ of redeem the mortgage over their properties, with which to satisfy the
preliminary injunction issued against them on the date above-stated and the indemnity for damages, the payment of said indemnity shall be charged
cancellation of the annotation of said writ in the corresponding book of the against the bond of the sureties, who secured the lifting of the attachment on
the properties of the defendants.
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The writ of preliminary injunction issued in this case on February 7, 1931 V. The trial court erred in holding that the defendants procured the
against the defendants Azarraga, Hijos de I. de la Rama and Panay Municipal registration of the lands in question by fraudulent means.
Cadastre is hereby made final, with the exception of that portion which
enjoins Hijos de I. de la Rama from delivering to the defendants surnamed VI. The trial court erred in not holding that the plaintiff, having no real right
Azarraga and Panay Municipal Cadastre more than the sum of P16,000, over the lands in question, the omission of his name from the application is
which had already been delivered, and which likewise enjoins the latter from not fraudulent and not fatal to the registration of the lands.
demanding from said entity more than the above-mentioned sum of P16,000,
which portion is hereby declared dissolved. VII. The trial court erred in not holding that the plaintiff, being a mere
usufructuary of the lands in question for a limited period of time by grace of
The plaintiff is absolved from the counterclaims interposed by the defendants the owners, was not entitled to be mentioned in the application for
Azarraga and by the Panay Municipal Cadastre. The defendants Azarraga registration and to be notified personally of its proceedings.
and by the Panay Municipal Cadastre. The defendants Azarraga shall pay the
costs. VIII. The trial court erred in not holding that the plaintiff had been negligent
in not asking for the review of the decree within one year, and in not holding
From the foregoing judgment the defendants as well as the plaintiff appealed, that the plaintiff purposely allowed the one-year period, within which he
and in their respective briefs they assign the following errors; could petition for review of the decree, to elapse in order that he might have
a cause of action for damages against the defendants.
ASSIGNMENTS OF ERROR OF THE DEFENDANTS
IX. The trial court erred in permitting the plaintiff to prove the market value
I. The trial court erred in holding that the true nature of the stipulation of the lands in question although there was absolutely no allegation to that
between Attorney Leodegario Azarraga and the heirs of Don Juan and the effect in the complaint notwithstanding the objection thereto and the
heirs of Don Juan Azarraga y Galvez as contained in the plan of partition exception taken by the defendants.
Exhibit "A" is one of cession of property in payment of a debt known in
Spanish law as "dacion en pago." X. The trial court erred in not holding that Joaquin Azarraga has not
intervened in the registration of the lands in question, he being only a
II. the trial court erred in not holding that the stipulation between Attorney coowner pro indiviso and as such has not been guilty of fraud in connection
Leodegario Azarraga and the heirs of the deceased Juan Azarraga y Galvez with the registration of the lands.
to the effect that the lands were to become the property of Attorney
Leodegario Azarraga in case the defendants failed to pay his fees within five XI. The trial court erred in not holding that the plaintiff had no real right over
years and that during this period the said attorney had the usufruct and the land referred to in Exhibit 'E' in view of the fact that the said document
possession of the lands, as contained in Exhibit "A", is one of pacto had not been registered.
comisorio, which is prohibited by article 1884 of the Civil Code.
XII. The trial court erred in holding that the land referred to in Exhibit "E"
III. The trial court erred in finding that the three parcels of land in question, contains an area of 164 hectares instead of 63 hectares only.
lots Nos. 81, 82, and 83, were sold by Attorney Leodegario Azarraga to the
plaintiff herein. XIII. the trial court erred in finding that the total area of lots 81, 82, and 83,
which are the subject matter of the "pactum commissorium" between
IV. The trial court erred in not holding that the right established by Attorney Attorney Leodegario Azarraga and the defendants, is 243 hectares instead of
Leodegario Azarraga by virtue of Exhibit "A" and transferred to the plaintiff 87 hectares only.
is at most an attorney's lien over the properties in question and that the action
of the plaintiff as transferee of this lien should be to compel the defendants to XIV. The trial court erred in sentencing the defendants to pay to the plaintiff
recognize it as a lien. the sum of P35,233.92 and in not absolving them from the complaint.

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XV. The trial court erred in disallowing all the five counterclaims of the Azarraga, as his property, in payment of his fees, and all sums which he may
defendants amounting to P58,000. have received from time to time from the interested parties in these testate
proceedings, within the said period, shall be returned to said
ASSIGNMENTS OF ERROR OF THE PLAINTIFF parties: Provided, further, that in case said interested parties in the testate
proceedings shall be able to pay in full the fees of the attorney for the estate
(a) The lower court erred in not finding that the market value of the lands in before the expiration of said period of five years, then said parcels of land
litigation in 1926 was P118,635.68; situated in Bay-ang shall continue in the possession of said attorney for an
(b) The lower court erred in not sentencing the defendants to pay the plaintiff additional period of three years from the date of the last payment in the event
the sum of P6,080 as indemnity for the wrongful slaughter of his animals; that said attorney may have kept livestock in said lands.
and About nine months after the court approved Exhibit A, or to be exact, on
(c) The lower court erred in not sentencing the defendants to pay the June 9, 1920, which was long before the expiration of the period of five years
plaintiff, jointly and severally, the sum of P13,290.68 as indemnity, plus within which the defendants Azarraga were bound to pay Attorney
legal interest from November 10, 1926. Leodegario Azarraga his fees, which had been fixed at P3,000, said attorney
decided to sell and did sell to the plaintiff his credit against the defendants
The salient facts established at the trial which may serve as a basis for an for the sum of P2,500 with all the rights inherent therein in accordance with
intelligent discussion of the questions raised by the parties and for a proper the agreements and stipulations appearing in said document (Exhibit C). One
decision of the same, may be briefly stated as follows: of said agreement was that Attorney Leodegario Azarraga would take
possession of the said parcels of land and, occupy the same, if he so desired,
By reason of the proceedings had in case No. 11489 of the Court of First without paying any rent or annuity, until fees shall have been fully paid. Said
Instance of Manila, entitled "Testate Estate of the Deceased Juan Azarraga y parcels were identical with lots Nos. 81, 82 and 83 described in paragraph II
Galvez", the defendants surnamed Azarraga became indebted to Attorney of the plaintiff's second amended complaint.
Leodegario Azarraga, who represented them in said case, for attorney's fees,
which on October 21, 1919 the court, which took cognizance of the case, When the plaintiff became the creditor of the defendants Azarraga by virtue
fixed at P3,000 (Exhibit B). of the sale and cession which Attorney Azarraga had made in his favor of the
rights which said attorney had under Exhibit A, he allowed the defendants an
The defendants Azarraga had previously agreed among themselves to pay extension of a few years over the five years with in which they would have to
Attorney Leodegario Azarraga attorney's fees in the manner set out in Exhibit pay him his credit, or up to February 16, 1926, but with the express condition
A, which they executed on January 20, 1919 and approved by the court on that they would pay him interest at the rate of 12 per cent per annum, from
August 29, of the same year. (Exhibit C.) The pertinent part of the aforesaid August 30, 1924 (Exhibit 5). This term was later extended to April 26, 1926
Exhibit A reads as follows: on the request of the defendants, but also with the condition that they would
pay the plaintiff the same interest of 12 per cent. (Exhibits l and M.) The
The parties also agree that the parcels of land located in Bay-ang, New plaintiff granted another extension to expire on October 31, 1928, but subject
Washington, Capiz, P. I., which are enumerated in the inventory of this to the condition that instead of seven thousand and odd pesos, which
partition as Nos. 81, 82 and 83, are specially mortgaged and subject to the undoubtedly referred to the interest of 12 per cent per annum charged the
payment of the fees of said attorney of the testate estate, which fees shall be defendants, they should pay him P12,000 (Exhibit 2). In said two amounts of
fixed by the court, and said attorney may hold said lands under no obligation P7,000 and P12,000 the sum of P4,000 which the plaintiff had given to the
to pay any rent until his fees shall have been fully paid: Provided, however, defendant Joaquin Azarraga and which will be dealt with further in detail,
that if, at the end of the period of five years from the date of the approval of was included.
this project of partition, said parties shall not have been able to pay in full the
fees of said attorney, then said parcels of land, Nos. 81, 82 and 83, located in Aside from the above transactions between the plaintiff and the defendants
Bay-ang, shall be definitely adjudicated to said attorney, Mr. Leodegario Azarraga, one of the latter, Joaquin Azarraga, executed in favor of the

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former, the deed known as Exhibit E of the record and dated October 14, Sometimes in May, 1928, the plaintiff went to the house of the defendants
1922, by which he sold to the plaintiff, for the sum of P4,000, his portion of Joaquin Azarraga to collect not only his credit against all the defendants
the inheritance in the testate estate of the late Juan Azarraga y Galvez, Azarraga, but also the special credit which, according to him, he had against
consisting of an undivided tract of land containing an estimated area of 63 Joaquin Azarraga. And on October 9, 1928, he addressed a letter to each and
hectares and located in Bay-ang Chico, New Washington, Capiz. It is further every one of the defendants including Joaquin Azarraga whom he expressly
stated therein that the period of redemption would be five years to be counted mentioned therein, and, among other things, told them that:
from February 16, 1921, which was later extended to April 26, 1926. In
granting him this extension, the plaintiff imposed on Joaquin Azarraga the Last May, Messrs. Salvador and Joaquin came to an agreement with me
condition that he should pay him interest at the rate of 12 per cent from the whereby they were to redeem the land in Bay-ang for seven thousand and
expiration of the first term (Exhibit M; par. III of the second amended odd pesos las September, and in default thereof to transfer in my name the
complaint of plaintiff; and page 5 of the brief of the plaintiff as appellant). A Torrens title of the portion belonging to me; but until now neither of these
second extension was further granted, but under the condition that he should, has been done.
together with his brothers, pay the plaintiff instead of seven thousand and
odd pesos, representing the interest referred to in the preceding paragraph, in For this reason and in view of the fact that you have not stated in the Torrens
which the P3,000 mentioned in Exhibit A were included, P12,000 (Exhibit title of the land in Bay-ang when you applied for the same, the two
20. The deed referred to was never annotated or inscribed in any register in encumbrances thereon in my favor, I am compelled by this omission, which
the office of the register of deeds of said province. is a clear disregard of my rights, to seek redress therefor in the courts, if you
refuse the same to me. Therefore, if you desire to redeem the land, you may
By virtue of the transfer made to him by Joaquin Azarraga and also of the do so for the sum of twelve thousand pesos (P12,000) until the 31st of this
terms conditions enumerated in said Exhibit A, the plaintiff took possession month of October; but should you not wish to redeem it, then in order to
of practically the whole land of the defendants Azarraga, located in Bay-ang, avoid the inconvenience of a law suit, I would request that on the same day
placing therein livestock from the month of August, 1920 and in the same or prior thereto that you shall have at least submitted to the court your motion
year built sheepfolds therein, besides erecting some wire fences. When the praying for an order approving the segregation and transfer of the portion of
plaintiff took possession of part of the land in question in August, 1920 and said land which belongs to me, together with the corresponding plan, namely,
another part thereof in February, 1922, after the execution in his favor of the that corresponding to the land which shall be in my name in the Torrens title.
deed of transfer, which is a clarification of Exhibit E, he found fruit-bearing In the understanding that if said date, October 31st, arrives, and you have not
and young coconut trees, the latter being more numerous. In 1925, 1926 and done anything either one way or the other, then through your own fault, I
1927, Joaquin Azarraga, either by himself or his laborers, planted therein would be compelled to resort to the courts to ask protection of my rights
hundreds of coconut trees of which but a few hundreds, as we the case with before I lose them, urging the court to order you to pay me by reason of such
the old ones, remained on account of the long droughts or other causes. There fraudulent omission a sum more than double the amount above-mentioned.
is nothing definite in the record to show the exact number of animals which (Exhibit 2.)
the plaintiff had brought to Bay-ang or the cause of the death of some of
them. It seems that some had been wounded, by whom it is not known, much The land in Bay-ang to which the above-transcribed letters refers is the same
less it is known whether they were wounded by men of the defendants land made up by the four parcels mentioned in paragraph II of the second
Azarraga. The plaintiff himself has not spoken with certainly; his statements amended complaint of the plaintiff, as parcels 81, 82, 83 and that having an
on this point are mere conjectures uncorroborated by anybody or anything area of 63 hectares.
(transcript of stenographic notes, pages 145-147). There have been also no Between the date of the execution of the document Exhibit A (January 20,
exact accounts as to whether the animals of the plaintiff where those which 1919) and the date of said letter Exhibit 2 (October 9, 1928), the defendants
destroyed the coconut trees planted on the land by Joaquin Azarraga during secured the inscription in the registry of property and the issuance in their
the years 1925, 1926 and 1927 above-mentioned, or were the animals of favor of the corresponding certificate of title of the lands described in
other persons. original certificate of title No. 9785, by virtue of the decree of registration of
October 27, 1925 (Exhibit Q). Of this fact the plaintiff had full knowledge by
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reason of the letter dated July 9, 1924, which was sent to him by the or on September 9, of said year, the aforementioned attachment was lifted by
defendant Juan Azarraga, wherein the latter, besides asking for an extension order of September 7, 1929 (Exhibit X) upon the filing of a bond required by
of three years, informed him (plaintiff) of the registration proceedings which the court in the sum of P12,500 by the interested parties. Said bond having
were then going on. (Exhibit 1.) The plaintiff did not then nor thereafter take been filed by the defendants, the court, on the same day, ordered the
any step to oppose the same, or to ask at least for the revision of the decree of cancellation of the notice of lis pendens annotated in the office of the register
registration, which was issued later, within the period of one year prescribed of deeds and the inscription of all the necessary annotations. (Exhibit Y.)
by law. To this letter, the plaintiff replied on the 30th of the same month and
year, stating, among other things: As clearly proven as the foregoing are the facts that the defendant "Hijos de
I. de la Rama" entered into a contract with its co-defendants Azarraga for the
Now that I am somewhat relieved from the pressure of work, I am writing to purpose of granting them a credit of P25,000, having delivered to them on
inform you that, although I need cash to meet my pressing financial different occasions after the execution by said defendants of a deed of
obligations, your requests have compelled me to grant you, as administrator mortgage Exhibit 16 in its favor on September 20, 1929, as part of the
the undivided properties of the Azarraga brothers, an extension of the term aforementioned sum, the total amount of P16,000. The Azarragas needed
for the payment of the credit which encumbers the land in Bay-ang, and, said amount for carrying on the business for which the defendant Panay
consequently, of the redemption of the same, up to February 16, 1926. Said Municipal Cadastre, Inc., had been organized, as set forth in said Exhibit 16
land and its encumbrances are described in the deed of sale of the said credit and clarified in Exhibit 17.
with all the rights inherent therein, executed by Mr. Leodegario Azarraga in
favor of the undersigned on July 9, 1920. By virtue of the writ of injunction issued by the lower court on February 7,
1931, enjoining the defendants Azarraga and the Panay Municipal Cadastre
As the granting of this extension is causing me a real sacrifice and a great from obtaining from their co-defendant "Hijos de I. de la Rama" another
financial strain, in justice and equity, I also ask from you, as administrator of loan, arise from the P16,000 which they had previously obtained (Exhibit
the undivided properties of the Azarraga brothers, the lucrum cessans so that 14), said defendant "Hijos de I. de la Rama" did not extend the credit, which
from August 30, 1924 the aforesaid credit of P3,000 shall earn 12 per cent it had opened to its co-defendants, to P25,000 as required by the contracts
annual interest. Exhibits 16 and 17 above-referred to. In connection with the issuance of the
writ of preliminary injunction, the following facts must be mentioned: After
This letter will serve you as evidence of the granting of the extension of the the plaintiff commenced the present case against the defendants Azarraga on
term for redemption of the said land in Bay-ang and, therefore, there is no January 28, 1929 by means of his original complaint, he instituted another
necessity for executing another document to that effect. (Exhibit 5.) action against them, which was civil case No. 2643, for the purpose of
obtaining a writ of injunction to prevent them from securing the
At the time of the filing of the original complaint, plaintiff simultaneously aforementioned loan of P25,000 from "Hijos de I. de la Rama". This latter
asked for and obtained on February 7, 1931, upon posting a bond in the case reached this court on certiorari filed on March 22, 1930. As its sole
amount of P2,000, a writ of preliminary injunction against the defendants object was the issuance of a writ of preliminary injunction, this court,
(Exh. 15), and in due time caused the annotation in the office of the register reiterating once more the ruling that said remedy is purely subsidiary
of deeds of the Province of Capiz of a notice of lis pendens not only with available only in aid of the right sought to be enforced in the action wherein
regard to the portion having an area of 150 hectares, 48 ares and 50 centares the same is issued, and that a separate action to secure the same does not lie
of the lands of the defendants Azarraga, but also with regard to the whole as it would permit of multiplicity of suits with the consequent needless
area of 246 hectares, 27 ares and 98 centares described in original certificate expenses (Panay Municipal Cadastre vs. Garduño and Soncuya, 55 Phil.,
of title No. 9785. 574, 578), granted the certiorari prayed for on January 22, 1931, thus setting
The plaintiff also secured from the Court of First Instance a preliminary aside the writ of preliminary injunction issued by the court of Capiz on
attachment of the properties of the defendants, described in certificates of October 21, 1929, hence, it was in being for not more than one year, three
title No. 9804 and 10351, on February 5, 1929 (Exhibit R); and the same was months and one day.
annotated in the registry of property in the same month. Seven months after,
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The writ of preliminary injunction subsequently issued on February 7, 1931, The facts of the case being as above set out, the questions raised by the
has remained in force up to the present, as the lower court declared in its parties in their respective assignments of error, should now be considered. In
judgment that it shall be final with respect to the P9,000 still owing from fact, the most important or those discussed in the first fourteen errors
"Hijos de I, de la Rama" on account of the loan which it had agreed to extend attributed by the defendants to the lower court, and in the first and last errors,
to the other defendants. which plaintiff, in turn, assigned, may be reduced to the following:

The works for which the Panay Municipal Cadastre had been organized were I. Was the contract entered into by-the Azarraga brothers, the defendants
begun in October, 1929. According to the testimony of Gaspar Ferraren, for herein, with Attorney Leodegario Azarraga from whom the plaintiff derived
all the work which they intended of Gaspar Ferraren, for all the work which his right, a sale with pacto de retro, or an assignment in payment of a debt, or
they intended to undertake, they needed a capital of not more than P40,000 to was it an antichresis partaking of the nature of what was anciently known
make a gross profit of P100,000. Of this estimated capital they invested the as pacto comisorio, or a mortgage, or was it merely a loan with real estate
P16,000, obtained from "Hijos de I. de la Rama", which immediately yielded security?
a return of P6,000. He also stated that the Panay Municipal Cadastre
completed half of its works with only the capital obtained from "Hijos de I. II. Was the contract executed by the defendant Joaquin Azarraga, on the one
de la Rama" (P16,000), plus its first profit of P6,000 and that it made a profit hand, and the plaintiff, on the other, embodied in Exhibit E, a sale with pacto
of P24,277.15 meaning thereby that with the aforemention P16,000 it de retro or simply a loan with real estate security?
obtained P30,277. 15, or a net profit of P14,277.15.
The first question offers no difficulty if account is taken of the established
Another fact which has been clearly established by the testimony of the facts and the conduct of the interested parties after the expiration of the term
plaintiff himself is that he decided to sell all the animals which he had placed of five years fixed in Exhibit A. When the plaintiff extended the period to
on the land in question because he became discouraged by the destruction of February 16, 1926 within which the defendants Azarraga could pay him his
said animals by the tenants of the defendants Azarraga. This fact, however, credit, but imposed on them the condition that they pay him 12 per cent
has been established not by competent evidence, but by hearsay testimony, annual interest from August 30, 1924 on the principal of P3,000 (Exh. 5) and
which was of course timely objected to; and, although he testified in the gave them another extension up to April 26, 1926, under the same conditions
same breath that he had still some cattle there, he could not state their exact as regard interest (Exh. M), what perhaps could have been considered as a
number, but limited himself to saying "I cannot tell whether there were fifty antichresis or pacto comisorio — not an assignment in payment of a debt, or
of them." (Transcript, page 14.) a sale with pacto de retro because there is nothing in Exhibit A to indicate
that such was the intention of the defendants Azarraga or, at least, that they
In his subsequent dealings with the defendants Azarraga, including Joaquin bound themselves to deliver the land in question to the plaintiff and that the
Azarraga, as in his pleadings and testimony, the plaintiff, in referring to the latter should pay them the value thereof; and because there was what may be
amount of P2,700 or P3,000, the value of the credit which he had purchased considered the resolutory condition of five years — was converted into a
from Attorney Leodegario Azarraga, and to that of P4,000 which he gave to simple loan by the decisive circumstance that plaintiff chose to collect
Joaquin Azarraga on the date and under the circumstances stated in Exhibit thereafter, and the obligors agreed to pay him, 12 per cent annual interest. It
E, he alluded to, and considered them as his "credit". Thus, on page 176 of is only in contracts of loan, with or without guaranty, that interest may be
the transcript of the stenographic notes, he said: ". . . land mortgaged to me . . demanded (articles 1108, 1740, 1755, 1868, 1876, and 1881 of the Civil
.;" and on pages 192 and 194 of said transcript, he also said: "Now I am not Code. As a matter of fact, the contract embodied in Exhibit A was novated
collecting the credit; I am collecting the damages. Although they may have by Exhibits 5 and M, and the plaintiff wanted to have it novated for the third
sold that property to me for P1, if its commercial value has increased after time by means of Exhibit 2. It does not appear of record, however, that the
they have deprive me of the same, I should collect from them such value;" defendants Azarraga ever assented to the latter novation. Perhaps, their
and ". . . I want so say again that what I am collecting now is not the credit refusal to agree to the same was due to the fact that the plaintiff wanted to
which I have against them, but the damages they have caused me by raise their old obligation (P3,000 or P2,700 of all the Azarraga brothers, plus
depriving me of the property." P4,000 which Joaquin Azarraga alone owed, which two accounts both the

23
CREDIT
II. Loans (Mutuum)
plaintiff and the defendants considered as amounting to P7,000, exclusive of moreover, has no reason to complain that his lien, if his right over said lands
the annual interest of 12 per cent) to the round sum of P12,000. From all this could be termed as such, was not annotated in the certificate of title which
it may easily be inferred that the obligation which the defendants had the defendants Azarraga had obtained, or that the latter did not ask that it be
imposed upon themselves by Exhibit A had ceased to exist and became a stated therein that the lands to which it refers are charged with his credit
simple loan with security, if so desired, of the lands in question, but without against them; inasmuch as he was himself negligent in that he did not ask the
prejudice to third parties as neither Exhibit A nor the deed of assignment court, while the registration case relating to said lands was being heard, for
Exhibit C, executed by Leodegario Azarraga in favor of the plaintiff, was the annotation of what he considered necessary to protect his rights, and in
inscribed in the registry of deeds. not seeking the revision of modification of the decree of registration within
the period of one year provided for the purpose.
There is also no difficulty in disposing of the second question, considering
the various novations which, as has been said, had taken place and had been As to the fifteenth error attributed to the lower court by the defendants
extended not only to the Azarraga brothers with respect to their obligation of Azarraga, we hold that, in view of the established facts above-related, they
P3,000 or P2,700, but also to the defendant Joaquin Azarraga as regard his have failed to show satisfactorily that they have any right under all or any of
personal debt of P4,000. We must not lose sight of the fact that the plaintiff their several counterclaims. If the coconut trees planted by Joaquin Azarraga
never considered the contract entered into by him with Joaquin Azarraga as, on a portion of the land in question were indeed lost or destroyed, it was due
strictly speaking, a sale with pacto de retro. And if he had ever considered it more to his own negligence than to the of the plaintiff; for he well knew on
as such, it is, nevertheless, true that he novated it on February 16, 1926, planting them in 1925, 1926 and 1927 that the plaintiff maintained therein,
considering it from the time on as a simple loan, inasmuch as on that date he with his (Joaquin Azarraga's) approval, livestock which might destroy them,
began to charge the said defendant 12 per cent annual interest with the latter's and he did not take the necessary precautions against such occurrence. This
assent and confirmity. This clearly appears in Exhibit M which must be is, of course, upon the supposition that his coconut plantations died by reason
considered together with paragraphs 7 and 8 of Exhibit E, as the plaintiff of the devastation caused by the animals of the plaintiff. The preponderance
himself does in his brief (brief for the plaintiff as appellant, pages 4 and 5), of the evidence, however, has shown that they died on account of the drought
because the term of five years to which said Exhibit E refers and which alone.
should have expired on February 16, 1926 was extended by the said plaintiff,
by Exhibit M, up to April 26, 1926 under the aforementioned condition that We likewise hold that the issuance of the writs of preliminary injunction and
he should be paid 12 per cent annual interest. attachment at the instance of the plaintiff did not prejudice the defendants,
inasmuch as there is no competent evidence of record to the contrary. On the
Consequently, the contention of the defendants that the plaintiff did not and other hand, there is evidence to show that from the loan which the defendants
could never receive the lands in question as an assignment in payment of a Azarraga had obtained from "Hijos de I. de la Rama" they derived a net
debt, and much less did he acquire them by purchase with pacto de retro, is profit of P14,277.15 within the short period of one year and a few months.
well taken. It must also be noted that at no time did the plaintiff claim any
rights of dominion over the lands since he did not even intimate to the There is no support for the contention of the defendants that they suffered
defendants, either directly or indirectly, that for their failure to pay him his damages by reason of the preliminary attachment ordered by the lower court
credit within the time provided therefor, he become the absolute owner because they were unable to sell one of their houses to the Calibo Institute
thereof. Notwithstanding the fact that all the extensions he had given for the price agreed upon by them and said entity. The record shows that they
defendants had expired, he did not, even only for tax declaration purposes, lost nothing because the Calibo Institute is at present occupying a portion of
declare the lands as his property. Having reached this conclusion, it is said house and they may, if they so desire, sell it even now to the occupant. It
needless to state that the plaintiff has no right to the various sums which he does not appear, on the other hand, that the latter desisted from buying it on
seeks in his complaint and to which he refers in the first and last errors finding a better building.
assigned by him. If, as has been shown, he never became the owner of the
lands in question, he can neither claim payment of the value of the same nor As to the second error assigned by the plaintiff, it suffices to recall that the
ask to be indemnified for the deprivation of their possession. The plaintiff, established facts do not show that the tenants of the defendants were
responsible for the killing and wounding of the animals belonging to him or
24
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II. Loans (Mutuum)
that said tenants acted upon the instigation of the defendants. Consequently,
the plaintiff's claim to this effect is entirely without merit.

In view of all the foregoing and in resume, we hold that the plaintiff alone
has the right (1) to recover from the defendants Azarraga, by virtue of the
assignment and sale made to him by Attorney Leodegario Azarraga of the
latters' credit of P2,700 against the said defendants, the aforesaid sum plus
interest at the rate of 12 per cent per annum from August 30, 1924; (2) to
recover from the defendant Joaquin Azarraga, in particular, the sum of
P4,000 plus interest at the rate of 12 per cent per annum from April 26, 1926.
We also hold that the defendants are not entitled to anything under their
counterclaims.

Wherefore, reversing the appealed judgment,

(a) All the defendants are hereby sentenced to pay jointly the sum of P2,700
to the plaintiff, with 12 per cent annual interest from August 30, 1924 until
said sum is fully paid; ;and

(b) The defendant Joaquin Azarraga is sentenced to pay the plaintiff the sum
of P4,000 plus interest at the rate of 12 per cent per annum from April 26,
1926, until fully paid.

The plaintiff is absolved from defendants' counterclaims and the writ of


preliminary injunction issued by the lower court on February 7, 1931, is
hereby dissolved. There is no special pronouncement as to costs. So ordered.

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II. Loans (Mutuum)
8.) Republic of the Philippines was one of outright sale at P7 per pair of shoes, sales tax included, the court
SUPREME COURT accepting the version given by the plaintiff to the effect that on the basis of
Manila the order slip (Exhibit A), the defendant had 9 days from delivery of the
shoes to make his choice of the two alternatives, that is to consider the sale of
EN BANC the 350 pairs of shoes closed at the flat rate of P7 per pair, sales tax included,
or, at the expiration of 9 days to pay for the shoes sold at P8 per pair, and to
G.R. No. L-6313 May 14, 1954 return the remaining unsold ones to plaintiff; and that, inasmuch as
defendant, at the expiration of the 9 days stipulated, failed to return the
THE ROYAL SHIRT FACTORY, INC., plaintiff-appellee,
shoes, and actually began making partial payments on account of the
vs.
purchase price agreed upon, the transaction in the nature of a straight sale,
CO BON TIC, defendant-appellant.
was considered closed. The court also found as did the Municipal Court that
Quisumbing, Sycip, Quisumbing and Salazar for appellant. the amount of P420 represented by Check No. 790624 was never replaced or
Ramirez and Ortigas for appellee. exchanged for cash by the defendant upon its return to him, and
consequently, it may not be considered as part payment.
MONTEMAYOR, J.:
Judgment was rendered in favor of the plaintiff and against the defendant and
The present appeal involves an action originally brought in the Municipal the latter was ordered to pay to the former the sum of P1,422, the unpaid
Court of Manila by the plaintiff, the ROYAL SHIRT COURT, INC., to balance of the sales price of 350 pairs of shoes in question, with interest on
recover from defendant CO BON TIC the sum of P1,422 said to represent the the amount due at the rate of 12 per cent per annum from August 27, 1948
balance of the purchase price of 350 pairs of "Balleteenas" shoes at P7 a pair, until final payment plus the amount of 25 per cent of the same sum for
with interest at 12 per cent per annum from August 27, 1948, and 25 per cent attorney's fees as stipulated, and costs. After failing to get a reconsideration
of said sum as attorney's fees, and costs. of the judgment, the defendant appealed the case to the Court of Appeals
which Tribunal after the submission of the briefs for both parties, and acting
The principal issues in the Municipal Court was the nature of the sale of the upon a motion filed by counsel for the appellant that the case be certified to
350 pairs of shoes by plaintiff to defendant — whether it was an outright sale the Supreme Court for the reason that the question raised in his first and
as contended by the plaintiff, or a sale merely on consignment as claimed by second assignment of errors involved the jurisdiction of the trial court,
the defendant who wanted to return the shoes not yet sold by him. There was granted the same and certified the appeal to us for final determination
also involved the question of the amount already paid by the defendant to the pursuant to Section 17, par. 2 (3) of Republic Act. 296.
plaintiff. The Municipal Court held that the contract was of sale on
consignment; that of the 350 pairs of shoes consigned, 207 pairs were sold at Under the first and second assignment of errors, the defendant raises the
the rate of P8 a pair, amounting to a total of P1,656; and that defendant had question of jurisdiction of the Court of First Instance of Manila in reviewing
paid the sum of P1,028 to plaintiff on account of the purchase price of the and passing upon the issues already passed upon and decided by the
shoes sold, excluding the amount of P420, value of Check No. 790264 issued Municipal Court but not appealed from by plaintiff. It is the theory of the
by defendant as payment but returned to him by the plaintiff and not replaced appellant that as for instance, when the Municipal Court found that the
with cash. Judgment was rendered sentencing the defendant to pay plaintiff transaction between plaintiff and defendant was a sale on consignment and
the sum of P628 with interest thereon at the legal rate from the date of the plaintiff failed to appeal from that decision, that part of the judgment became
filing of the complaint, and to return to plaintiff the 143 pairs of shoes still final as to him (plaintiff), and should be regarded as res adjudicata, and that
unsold, unless he preferred to retain and pay for them at the rate of P8 a pair the Court of First Instance in the exercise of its appellate not original
within a period of fifteen days from receipt of a copy of the decision. jurisdiction may not review and pass upon the same question or issue, and
that in so doing it exceeded its appellate jurisdiction. Defendant further
The defendant appealed from the judgment to the Court of First Instance of contends and cites authorities in support of his contention that regardless of
Manila, and after trial, the appellate court held that the transaction involved the provisions of Rule 40, section 9, of the Rules of Court whose provisions

26
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II. Loans (Mutuum)
are to the effect that a perfected appeal from a decision of the justice of the appealed upon by any or both parties, are thrown open and may be passed
peace or the municipal court shall operate to vacate the said judgment and upon by the Court of First Instance when the case is appealed to it.
shall stand for trial de novoupon its merits in accordance with the regular Consequently, the Court of First Instance of Manila had jurisdiction and
procedure in that court as though the same had never been tried before and authority to rule on the issue as to the nature of the transaction between
had been originally commenced there, an appeal brings up for review only plaintiff and defendants as to the sale of the shoes. Now, was it an absolute
that which was decided against the appellant so that that part of the judgment sale or a sale on consignment?
favorable to him is not reviewable if the other party does not appeal; that a
party who has not appealed a judgment cannot assail it, neither can he ask for Exhibit A of the plaintiff which was accepted, admitted and considered by
a judgment more favorable to him than that rendered in the court below; that the Court of First Instance of Manila is an order slip which lists down and
the party who has not appealed a judgment signifies his acceptance of the classifies the 350 shoes in question according to color, and contains the
correctness of the said judgment, and that in the appeal his position is merely following condition of the sale in the handwriting of Mr. Chebat, the agent of
defensive and he may only refute appellant's assignment of errors and sustain the plaintiff who sold the shoes to the defendant —
the judgment of the trial court.
CONDICION (Terms)
The above contention of appellant might possibly hold with regards to
appeals from judgments of Courts of First Instance to the Court of Appeals or Al cabo de 9 dias, pagar todo a razon de P7 al par, o pagar lo vendido a P8 el
to the Supreme Court in that one cannot seek further remedy or relief in the par.
appeal not taken by him than that granted him by the trial court, unless of Explaining said condition, Mr. Chebat testifying, said that it meant that the
course, the appellate court motu propriotakes cognizance of palpable errors defendant could either consider the sale as one on consignment, sell as many
committed by the trial court and proceeds to correct the same even if the shoes as he could at any price, pay for them at P8 a pair and at the end of
correction favors the appellee (Section 5, Rule 53, Rules of Court). However, nine days return the shoes unsold to the plaintiff, or, consider the sale of the
we have a special legal provision governing an appeal from justice of the 350 shoes as absolute at P7 a pair; and that since the defendant did not return
peace or municipal courts to Courts of First Instance, the very Rule 40, any of the shoes at the expiration of 9 days he must be held to have chosen
section 9, of the Rules of Court cited by defendant-appellant. Such appeal the second alternative, namely, that he bought the whole stock of shoes at P7
serves to vacate the judgment appealed from and the action will stand for a pair. It will be noted, however, that Exhibit "A" was never accepted much
trial de novo upon its merits as though the same had never been tried before less signed by the defendant or his sales manager Mr. Bernardo Geronimo,
and had been originally commenced in the Court of First Instance. The Court and therefore, cannot bind the defendant and so is but a self-serving evidence
of First Instance will try the case without regard to the proof presented in the which should not have been admitted and considered by the trial court.
Justice of the Peace or Municipal Court or the conclusions arrived by said
court. The Court of First Instance will not affirm, reverse, or modify the Disregarding Exhibit "A", the nature of the transaction must be judged by
rulings or the judgment appealed from for the simple reason that there is no other evidence, including the conduct of the parties at the time of making the
ruling or judgment to affirm, reverse or modify because all the proceedings contract and subsequent thereto (Art. 1282 of the old Civil Code and Art.
had in the justice of the peace or municipal court, including the judgment, do 1371 of the new Civil Code). Exhibit "B" of the plaintiff is an invoice of the
not in contemplation of law exist, having been vacated; and the only instance same 350 pairs of shoes whose price including sales tax is listed as P2,450. It
when said judgment appealed from is revived in when the appeal is was evidently not only accepted by the defendant but on it he noted down in
withdrawn or dismissed (Crisostomo vs. Director of Prisons. 41 Phil., 368; his own handwriting the different partial payments of P500, P528 and lastly
Colegio de San Jose vs. Sison, 56 Phil., 344, 351; Lizo vs. Carandang 2 Off. of the controversial P420 by check. It will also be noticed that the defendant
Gaz., 302, March 1943; Co Tiamco vs. Diaz,* 42 Off. Gaz., 1169, 1231; in making said notations of payment considered the full purchase price of the
Lichauco vs. Guash, 42 Off. Gaz., 1863, 1865; Rule 40, Sec. 9, Rules of 350 pairs of shoes at P7.00 or P2,450, and it was against said total that he had
Court). From all this it is evident that the contention of the appellant is been making the payments, putting down the balance after each payment. For
untenable; and that any and all issues involved in a case originating in an instance, after paying P500 on account, he put P1,950 as balance, and after
inferior court, whether or not passed upon by said court and whether or not paying another P528, he put down as balance P1,422. In other words, he
27
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II. Loans (Mutuum)
obviously accepted the straight sale to him on credit of the whole 350 pairs of sale about rate of interest and attorney's fees found in the order slip
of shoes for P2,450 and made partial payments on account thereof. In making (Exhibit "A") and the invoice (Exhibit "B") both of the plaintiff. Anyway,
said partial payments, he made no mention whatsoever of the number of neither did the defendant sign Exhibit "B". If we hold defendant bound by
shoes sold by him and the number of shoes remaining unsold, which he Exhibit "B" at all, it is because of his tacit acceptance of the total value of
should have done had the sale been on the consignment basis. On the other 350 pairs of shoes and by his notation against it of his partial payments. We
hand, he merely mentioned the balance of the purchase price after deducting do not think it fair for him to be bound also by the printed terms of the
the several partial payments made by him. Furthermore, if the sale had been conditions of sale. Moreover, we find under said printed form the clause in
on consignment, a stipulation as to the period of time for the return of the pencil: "as agreed with Mr. Chebat." We may even say that said clause in
unsold shoes should have been made; but evidently that had not been done handwriting may be considered as having overruled what was printed as to
and defendant kept the shoes unsold more or less indefinitely, but giving the the rate of interest and the attorney's fees. We therefore hold that the
same excuse that he could not return them to the plaintiff because he did not defendant should only pay 6 per cent interest on the amount due him from
know where to return them. The plaintiff Royal Shirt Factory, Inc., is quite the date of the filing of the complaint, with costs, and nothing for attorney's
well-known. Is has a store at the Escolta and according to the invoice fees. It is also interesting to note that this was the same ruling of the
(Exhibit B), it is an importer, wholesaler and manufacturer, and it could not Municipal Court on this point.
have been hard, much less impossible for the defendant to return the shoes
unsold by him had the transaction really been a sale on consignment. So, on With the above modification, the decision appealed from is hereby affirmed,
this issue of the nature of the transaction between the parties, we agree with with costs.
the trial court that it was a straight sale at the rate of P7 per pair of shoes.

As regards Check No. 790264 of the China Banking Corporation, Exhibit F,


in the amount of P420 with which defendant attempted to make another
partial payment as appears in Exhibit 'B', both parties agree that since the
check was postdated, it was returned by the plaintiff to the defendant who
however claims that he replaced it with cash. This was stoutly denied by
plaintiff. After a careful review of the evidence, we agree with the trial court
that the preponderance thereof is to the effect that the amount of said check
of P420 was never replaced by the defendant. It is also interesting to note that
the Municipal Court of Manila where this issue was first considered, came to
the same conclusion that the defendant never replaced the amount of this
check in cash.

The decision appealed from the sentences the defendant to pay to the plaintiff
P1,422 with interest at 12 percent per annum from August 27, 1948, plus 25
per cent of the same sum for attorney's fees, besides costs. This rate of
interest and the 25 per cent for attorney's fees appears in Exhibit "B" in
printed form as terms or conditions. In Exhibit "A", the order slip, the
conditions of sale also printed provide for 20 per cent only as attorney's fees
and no rate of interest in case of litigation. Had the defendant signed Exhibit
"A", which he did not, he would have been bound by it and would be liable
to 20 per cent of any amount due from him, but because of the absence of
stipulation as to the rate of interest he would be paying only the legal rate of
6 per cent per annum. There is no explanation of this difference in conditions

28
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II. Loans (Mutuum)
9.) Republic of the Philippines of respondent would create a preference in favor of a particular creditor to
SUPREME COURT the prejudice of other creditors and/or depositors of petitioner bank.
Manila
SECOND DIVISION After pre-trial, petitioner filed on November 29, 1968, a motion to dismiss,
G.R. No. L-33582 March 30, 1982 reiterating the same defenses raised in its answer. Finding the same
THE OVERSEAS BANK OF MANILA, petitioner, unmeritorious, the lower court denied the motion and proceeded with the trial
vs. on the merits. In due time, the lower court rendered the aforesaid decision.
VICENTE CORDERO and COURT OF APPEALS, respondents. Dissatisfied, petitioner appealed to the Court of Appeals, which affirmed the
decision of the lower court.
ESCOLIN, J.: Hence, this petition for review on certiorari.
Again, We are confronted with another case involving the Overseas Bank of The issues raised in this petition are quite novel. Petitioner stands firm on its
Manila, filed by one of its depositors. contentions that the suit filed by respondent Cordero for recovery of his time
This is a petition for review on certiorari of the decision of the Court of deposit is barred or abated by the state of insolvency of petitioner as found
Appeals which affirmed the judgment of the Court of First Instance of by the Monetary Board of the Central Bank of the Philippines; and that the
Manila, holding petitioner bank liable to respondent Vicente Cordero in the judgment rendered in favor of respondent would in effect create a preference
amount of P80,000.00 representing the latter's time deposit with petitioner, in his favor to the prejudice of other creditors of the bank.
plus interest thereon at 6% per annum until fully paid, and costs. Certain supervening events, however, have rendered these issues moot and
On July 20, 1967, private respondent opened a one-year time deposit with academic. The first of these supervening events is the letter of Julian
petitioner bank in the amount of P80,000.00 to mature on July 20, 1968 with Cordero, brother and attorney-in-fact of respondent Vicente Cordero,
interest at the rate of 6% per annum. However, due to its distressed financial addressed to the Commercial Bank of Manila (Combank), successor of
condition, petitioner was unable to pay Cordero his said time deposit together petitioner Overseas Bank of Manila. In this letter dated February 13, 1981,
with the interest. To enforce payment, Cordero instituted an action in the copy of which was furnished this Court, it appears that respondent Cordero
Court of First Instance of Manila. had received from the Philippine Deposit Insurance Company the amount of
P10,000.00.
Petitioner, in its answer, raised as special defense the finding by the
Monetary Board of its state of insolvency. It cited the Resolution of August The second is a Manifestation by the same Julian Cordero dated July 3, 1981,
1, 1968 of the Monetary Board which authorized petitioner's board of acknowledging receipt of the sum of P73,840.00. Said Manifestation is in the
directors to suspend all its operations, and the Resolution of August 13, 1968 nature of a quitclaim, pertinent portions of which We quote:
of the same Board, ordering the Superintendent of Banks to take over the I, the undersigned acting for and in behalf of my brother Vicente R. Cordero
assets of petitioner for purposes of liquidation. who resides in Canada and by virtue of a Special Power of Attorney issued
Petitioner contended that although the Resolution of August 13, 1968 was by Vicente Romero, our Consul General in Vancouver, Canada, xerox copy
then pending review before the Supreme Court, 1 it effectively barred or attached, do hereby manifest to this honorable court that we have decided to
abated the action of respondent for even if judgment be ultimately rendered waive all and any damages that may be awarded to the above-mentioned case
in favor of Cordero, satisfaction thereof would not be possible in view of the and we hereby also agree to accept the amount of Seventy Three Thousand
restriction imposed by the Monetary Board, prohibiting petitioner from Eight Hundred Forty Pesos (P73,840.00) representing the principal and
issuing manager's and cashier's checks and the provisions of Section 85 of interest as computed by the Commercial Bank of Manila. We also agree to
Rep. Act 337, otherwise known as the General Banking Act, forbidding its hold free and harmless the Commercial Bank of Manila against any claim by
directors and officers from making any payment out of its funds after the any third party or any suit that may arise against this agreement of payment.
bank had become insolvent. It was further claimed that a judgment in favor
29
CREDIT
II. Loans (Mutuum)
... We also confirm receipt of Seventy Three Thousand Eight Hundred Forty depository obligated to pay stipulated interest. ... Consequently, it should be
Pesos (P73,840.00) with our full satisfaction. ... deemed read into every contract of deposit with a bank that the obligation to
pay interest on the deposit ceases the moment the operation of the bank is
When asked to comment on this Manifestation, counsel for Combank filed completely suspended by the duly constituted authority, the Central Bank.
on August 12, 1981 a Comment confirming and ratifying the same,
particularly the portions which state: We consider it of trivial consequence that the stoppage of the bank's
operations by the Central Bank has been subsequently declared illegal by the
We also agree to hold free and harmless the Commercial Bank any third Supreme Court, for before the Court's order, the bank had no alternative
party or any suit that may arise against this agreement of payment, and under the law than to obey the orders of the Central Bank. Whatever be the
juridical significance of the subsequent action of the Supreme Court, the
We also confirm receipt of Seventy Three Thousand Eight Hundred Forty stubborn fact remained that the petitioner was totally crippled from then on
Pesos (P73,840.00) with our full satisfaction. from earning the income needed to meet its obligations to its depositors. If
However, upon further examination, this Court noted the absence of the such a situation cannot, strictly speaking be legally denominated as "force
alleged special power of attorney executed by private respondent in favor of majeure" as maintained by private respondent, We hold it is a matter of
Julian Cordero. When directed to produce the same, Julian Cordero simple equity that it be treated as such.
submitted the following explanatory Comment, to which was attached the And concluding, this Court stated:
special power of attorney executed by respondent Vicente Cordero:
Parenthetically, We may add for the guidance of those who might be
3. This manifestation (referring to the Manifestation of July 3, 1981) applies concerned and so that unnecessary litigations may be avoided from further
only to third party claims, suit and other damages. It does not mean waiving clogging the dockets of the courts that in the light of the consideration
the interest it should earn while the bank is closed and also the attorney's fees expounded in the above opinion, the same formula that exempts petitioner
as decided by the lower court. It is very clear. I did not waive the attorney's from the payment of interest to its depositors during the whole period of
fees because it belongs to our attorney and interest because it belongs to us factual stoppage of its operations by orders of the Central Bank, modified in
and we are entitled to it. effect by the decision as well as the approval of a formula of rehabilitation by
Thus, with the principal claim of respondent having been satisfied, the only this Court, should be, as a matter of consistency, applicable or followed in
remaining issue to be determined is whether respondent is entitled to (1) respect to all other obligations of petitioner which could not be paid during
interest on his time deposit during the period that petitioner was closed and the period of its actual complete closure.
(2) to attorney's fees. Neither can respondent Cordero recover attorney's fees. The trial court found
We find the answer to be in the negative. that herein petitioner's refusal to pay was not due to a wilful and dishonest
refusal to comply with its obligation but to restrictions imposed by the
The pronouncement made by this Court, per Justice Barredo, in the recent Central Bank. 3 Since respondent did not appeal from this decision, he is now
case of Overseas Bank of Manila vs. Court of Appeals 2 is explicit and barred from contesting the same.
categorical. We quote:
WHEREFORE, that portion of the lower court's decision ordering petitioner
It is a matter of common knowledge which we take judicial notice of, that to pay interest on Cordero's time deposit is set aside. It appearing that the
what enables a bank to pay stipulated interest on money deposited with it is amount of the latter's time deposit had been fully paid, this case is hereby
that thru the other aspects of its operation, it is able to generate funds to dismissed. No costs.
cover the payment of such interest. Unless a bank can lend money, engage in
international transactions, acquire foreclosed mortgaged properties or their SO ORDERED.
proceeds and generally engage in other banking and financing activities,
from which it can derive income, it is inconceivable how it can carry on as a
30
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II. Loans (Mutuum)
10.) Republic of the Philippines by the aforecited cases is fully applicable to the non-payment of interest,
SUPREME COURT during the period of the bank's forcible closure, on loans and advances made
Manila by respondent Central Bank. Respondent Central Bank itself when it was
EN BANC then managing the Overseas Bank of Manila (now Commercial Bank of
G.R. No. L-29352 July 22, 1985 Manila) under a holding trust agreement, held the same position in Idelfonso
EMERITO M. RAMOS, et al., petitioners, D. Yap vs. OBM and CB (CA-G.R. No. 48887-R) wherein it argued in its
vs. brief that "(I)n a suit against the receiver of a national bank for money loaned
CENTRAL BANK OF THE PHILIPPINES, respondents; to the Bank while it was a going concern, it was error to permit plaintiff to
COMMERCIAL BANK OF MANILA, intervenor. recover interest on the loan after the bank's suspension" (citing Zollman
RESOLUTION Banks and Banking). In Pablo R. Roman et al vs. Central Bank (CA-G.R.
No. 49144-R, October 18, 1973, per then Court of Appeals Justice
TEEHANKEE, J.: Hermogenes Concepcion, Jr.), the appellate court by final judgment affirmed
the trial court's judgment ordering appellant Central Bank to condone all
Pending final determination is respondent Central Bank's motion for interests on Central Bank loans to the Republic Bank, as well as penalties
reconsideration dated December 28, 1982 of the Court's Resolution of imposed on it which would be tantamount "to force the Republic Bank to
October 19, 1982 which ruled "applying the Tapia ruling as reaffirmed by liquidate as an insolvent." It should be further noted that the respondent
the Court in the subsequent cases cited above OBM vs. Vicente Cordero, 113 Central Bank when called upon to deal with commercial banks and extend to
SCRA 303 (March 30, 1982), per Escolin, J.; OBM vs. Julian Cordero, 113 them emergency loans and advances, deals with them not as an ordinary
SCRA 778 (April 27, 1982), per Barredo, J.) that the bank is not liable for creditor engaged in business, but as the ultimate monetary authority of
interest on the Central Bank loans and advances during the period of its government charged with the supervision and preservation of the banking
closure from August 21 1968 to January 8, 1981." system.

In the Tapia ruling (105 SCRA 49, June 11, 1981), the Court held that "the A significant development of the case also is set forth in the manifestation
obligation to pay interest on the deposit ceases the moment the operation of dated October 19, 1984 of Government Corporate Counsel and general
the bank is completely suspended by the duly constituted authority, the counsel of the COMBANK Manuel M. Lazaro confirming inter alia that
Central Bank," and that "for the guidance of those who might be concerned, "(T)he Government Service Insurance System (GSIS) has acquired
and so that unnecessary litigations may be avoided from further clogging the ownership of 99.93% of the outstanding capital stock of COMBANK," and
dockets of the courts, that in the light of the considerations expounded in the urging resolution at the earliest time possible of the sole issue raised in
above opinion, the same formula that exempts petitioner from the payment of respondent Central Bank's motion for reconsideration of the Resolution of
interest to its depositors during the whole period of factual stoppage of its October 19, 1982 that "applying the Tapia ruling as reaffirmed by the Court
operations by orders of the Central Bank, modified in effect by the decision in subsequent cases, COMBANK is not liable for interest on CB loans and
as well as the approval of a formula of rehabilitation by this Court, should be, advances during the period of its closure from August 2, 1968 to January 8,
as a matter of consistency, applicable or followed in respect to all other 1981 " (Record, Vol. V, p. 2261). In his earlier petition for early resolution,
obligations of petitioner which could not be paid during the period of its Government Corporate Counsel Manuel M. Lazaro had likewise urged that
actual complete closure." "(T)he raison d' etre of the Honorable Court's Resolution of October 19, 1982
is but a re- affirmation of the ruling laid down and firmly established in
The parties have been extensively heard on the pending incident through previous decisions that have long become final, notably OBM vs. Tapia, 105
their various pleadings and in oral argument on October 23, 1984 as well as SCRA 49 (June 11, 1981), OBM vs. Vicente Cordero and Court of Appeals,
in their memoranda in amplification of oral argument. 113 SCRA 303 (Mar. 30, 1982), and OBM vs. Court of Appeals and Julian
R. Cordero, 113 SCRA 778 (April 27, 1982)" (idem, p. 2242). Government
Respondents have failed to adduce any cogent argument to persuade the
Corporate Counsel Lazaro in his aforecited manifestation removes any and
Court to reconsider its Resolution at bar that the Tapia ruling as reaffirmed
all doubts as to the propriety of the Court having rendered its Resolution of
31
CREDIT
II. Loans (Mutuum)
October 19, 1982 pursuant to the bank's motion for a clarificatory ruling in
the present case made pursuant to the express agreement between the bank
and the respondent Central Bank then under Governor Jaime Laya. As stated
in the Resolution itself, "the bank's letter of July 1, 1981 invoking
the Tapia ruling was precisely the subject of the Central Bank's reply of
November 12, 1981 above quoted, agreeing anew that the Central Bank and
the Combank seek a clarificatory ruling from the Supreme Court on the
applicability of the Tapia ruling to the case at bar with both parties ultimately
agreeing to 'abide by any clarificatory ruling which the Supreme Court may
render on the matter" (Record, Vol. IV, pp. 1993-1994). The COMBANK in
its said manifestation makes of record that it has likewise entered into an
agreement with its sister government banking institution, the Philippine
National Bank, that "both banks have agreed to abide by the final resolution
of this Honorable Court on the CB's pending Motion for Reconsideration,"
and that "COMBANK is represented in the above-captioned case by its
General Counsel, the Government Corporate Counsel who is also the legal
counsel for the PNB and whose services were recently retained by CB in
connection with the controversy involving Banco Filipino and Governor Jose
B. Fernandez, Jr." This certainly makes moot any previous doubts raised
during the oral argument that then Central Bank Governor Jaime Laya may
not have had the authority to enter into such agreement.

The Court's Resolution of October 19, 1982 manifestly redounds to the


benefit of another government institution, the GSIS, which has acquired
99.93% of the outstanding capital stock of the COMBANK and to the
preservation of the banking system. It is time to write finis to this case which
had its beginnings long ago when the original judgment of October 4, 1971
was rendered against the Central Bank, as succinctly stated by the now Chief
Justice in his "[concurrence] in the result primarily on the ground that
respondent's arbitrary and improvident exercise of its asserted power in the
premises is violative of due process" (Ramos vs. Central Bank, 41 SCRA
565).

ACCORDINGLY, the Court Resolved to DENY with finality respondent


Central Bank's motion for reconsideration, for lack of necessary votes.

32
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II. Loans (Mutuum)
11.) Republic of the Philippines 4. That in accordance with paragraph 3 of the Purchase Agreement of
SUPREME COURT September 4, 1961 which provides for the repurchase by the Lirag Textile
Manila Mills, Inc. of the shares of stock at regular intervals of one year beginning
with the 4th year following the date of issue, Stock Certificates Nos. 128 and
THIRD DIVISION 139 were to be repurchased by the Lirag Textile Mills, Inc. thus:

G.R. No. L-33205 August 31, 1987 CERT. No. AMOUNT DATE OF REDEMPTION

LIRAG TEXTILE MILLS, INC., and BASILIO L. LIRAG, petitioners, 128 P100,000.00 February 14, 1965
vs.
SOCIAL SECURITY SYSTEM, and HON. PACIFICO DE 100,000.00 February 14, 1966
CASTRO, respondents.
100,000.00 February 14, 1967

100,000.00 February 14, 1968


FERNAN, J.:
100,000.00 February 14, 1969
This is an appeal by certiorari involving purely questions of law from the
decision rendered by respondent judge in Civil Case No. Q-12275 entitled 139 P100,000.00 July 3, 1966
"Social Security System versus Lirag Textile Mills, Inc. and Basilio L. 100,000.00 July 3,1967
Lirag."
100,000.00 July 3,1968
The antecedent facts, as stipulated by the parties during the trial, are as
follows: 100,000.00 July 3, 1969
1. That on September 4, 1961, the plaintiff [herein respondent Social 100,000.00 July 3,1970
Security System] and the defendants [herein petitioners] Lirag Textile Mills,
Inc. and Basilio Lirag entered into a Purchase Agreement under which the 5. That to guarantee the redemption of the stocks purchased by the plaintiff,
plaintiff agreed to purchase from the said defendant preferred shares of stock the payment of dividends, as well as the other obligations of the Lirag Textile
worth ONE MILLION PESOS [P1,000,000.00] subject to the conditions set Mills, Inc., defendants Basilio L. Lirag signed the Purchase Agreement of
forth in such agreement;... September 4, 1961 not only as president of the defendant corporation, but
also as surety so that should the Lirag Textile Mills, Inc. fail to perform any
2. That pursuant to the Purchase Agreement of September 4, 1961, the of its obligations in the said Purchase Agreement, the surety shall
plaintiff, on January 31, 1962, paid the defendant Lirag Textile Mills, Inc. the immediately pay to the vendee the amounts then outstanding pursuant to
sum of FIVE HUNDRED THOUSAND PESOS [P500,000.00] for which the Condition No. 4, to wit:
said defendant issued to plaintiff 5,000 preferred shares with a par value of
one hundred pesos [P10000] per share as evidenced by stock Certificate No. To guarantee the redemption of the stocks herein purchased, the payment of
128, ... the dividends, as well as other obligations of the VENDOR herein, the
SURETY hereby binds himself jointly and severally liable with the
3. That further in pursuance of the Purchase Agreement of September 4, VENDOR so that should the VENDOR fail to perform any of its obligations
1961, the plaintiff paid to the Lirag Textile Mills, Inc. the sum of FIVE hereunder, the SURETY shall immediately pay to the VENDEE the amounts
UNDRED THOUSAND PESOS [P500,000.00] for which the said defendant then outstanding. '
issued to plaintiff 5,000 preferred shares with a par value of one hundred
pesos [P100.00] per share as evidenced by Stock Certificate No. 139, ...
33
CREDIT
II. Loans (Mutuum)
6. That defendant corporation failed to redeem certificates of Stock Nos. 128 its workers as a result of which two costly strikes had occurred, one in 1965
and 139 by payment of the amounts mentioned in paragraph 4 above; and another in 1968; and

7. That the Lirag Textile Mills, lnc. has not paid dividends in the amounts [g] The occurrence of a fire which destroyed more than 1 million worth of
and within the period set forth in paragraph 10 of the complaint;* raw cotton, paralyzed operations partially, increased overhead costs and
wiped out any expected profits that year;
8. That letters of demands have been sent by the plaintiff to the defendant to
redeem the foregoing stock certificates and pay the dividends set forth in 13. That it has been the policy of the plaintiff to be represented in the board
paragraph 10 of the complaint, but the Lirag Textile Mills, Inc. has not made of directors of the corporation or entity which has obtained financial
such redemption nor made such dividend payments; assistance from the System be it in terms of loans, mortgages or equity
investments. Thus, pursuant to paragraph 6 of the Purchase Agreement of
9. That defendant Basilio L. Lirag likewise received letters of demand from September 4, 1961 which provides as follows:
the plaintiff requiring him to make good his obligation as surety;
The VENDEE shall be allowed to have a representative in the Board of
10. That notwithstanding such letters of demand to the defendant Basilio L. Directors of the VENDOR with the right to participate in the discussions and
Lirag, Stock Certificates Nos. 128 and 139 issued to plaintiff are still to vote therein;
unredeemed and no dividends have been paid on said stock certificates;
14. That Messrs. Rene Espina, Bernardino Abes and Heber Catalan were
11. That paragraph 5 of the Purchase Agreement provides that should the each issued one common share of stock as a qualifying share to their election
Lirag Textile Mills, Inc. fail to effect any of the redemptions stipulated to the Board of Directors of the Lirag Textiles Mills, Inc.;
therein, the entire obligation shall immediately become due and demandable
and the Lirag Textile Mills, Inc., shall, furthermore, be liable to the plaintiff 15. That Messrs. Rene Espina, Bernardino Abes and Heber Catalan, during
in an amount equivalent to twelve per cent [12%] of the amount then their respective tenure as member of the Board of Directors of the Lirag
outstanding as liquidated damages; Textile Mills, Inc. attended the meetings of the said Board, received per
diems for their attendance therein in the same manner and in the same
12. That the failure of the Lirag Textile Mills, Inc. to redeem the foregoing amount as any other member of the Board of Directors, participated in the
certificates of stock and pay dividends thereon were due to financial reverses, deliberations therein and freely exercised their right to vote in such meetings.
to wit: However, the per diems received by the SSS representative do not go to the
coffers of the System but personally to the representative in the said board of
[a] Unrestrained smuggling into the country of textiles from the United States directors. 1
and other countries;
For failure of Lirag Textile Mills, Inc. and Basilio L. Lirag to comply with
[b] Unrestricted entry of supposed remmants which competed with textiles of the terms of the Purchase Agreement, the SSS filed an action for specific
domestic produce to the disadvantage and economic prejudice of the latter; performance and damages before the then Court of First Instance of Rizal,
[c] Scarcity of money and the unavailability of financing facilities; Quezon City, praying that therein defendants Lirag Textile Mills, Inc. and
Basilio L. Lirag be adjudged liable for [1] the entire obligation of P1M which
[d] Payment of interest on matured loans extended to defendant corporation; became due and demandable upon defendants' failure to repurchase the
stocks as scheduled; [21 dividends in the amount of P220,000.00; [31
[e] Construction of the Montalban plant of the defendant corporation liquidated damages in an amount equivalent to twelve percent (12%) of the
financed largely through reparation benefits; amount then outstanding; [4] exemplary damages in the amount of
P100,000.00 and [5] attorney's fees of P20,000.00.
[f] Labor problems occasioned by the fact that the defendant company is
financial (sic) unable to improve, in a substantial way, the economic plight of

34
CREDIT
II. Loans (Mutuum)
Lirag Textile Mills, Inc. and Basilio L. Lirag moved for the dismissal of the 4. Respondent judge erred in sentencing petitioners to pay P10,000.00 by
complaint, but were denied the relief sought. Thus, they filed their answer way of attorney's fees;
with counterclaim, denying the existence of any obligation on their part to
redeem the preferred stocks, on the ground that the SSS became and still is a 5. Respondent judge erred in sentencing petitioners to pay interest from the
preferred stockholder of the corporation so that redemption of the shares time of firing the complaint u to the time of full payment both on the
purchased depended upon the financial ability of said corporation. Insofar as P1,000,000.00 invested by respondent SSS in petitioner's corporation and on
defendant Basilio Lirag is concerned, it was alleged that his liability arises the P220,000.00 which the SSS claims as dividends due on its investments;
only if the corporation is liable and does not perform its obligations under the
Purchase Agreement. They further contended that no liability on their part 6. Respondent judge erred in holding that petitioner Lirag is liable to redeem
has arisen because of the financial condition of the corporation upon which the P1,000,000.00 worth of preferred shares purchased by respondent SSS
such liability was made to depend, particularly the non-realization of any from petitioner corporation and the 8% cumulative dividend, it appearing that
profit or earned surplus. Thus, the other claims for dividends, liquidated Lirag was merely a surety and not an insurer of the obligation;
damages and exemplary damages are allegedly without basis. 7. Respondent judge erred in dismissing the counterclaim of petitioners.
After entering into the Stipulation of Facts above-quoted, the parties filed The fundamental issue in this case is whether or not the Purchase Agreement
their respective memoranda and submitted the case for decision. entered into by petitioners and respondent SSS is a debt instrument.
The lower court, ruling that the purchase agreement was a debt instrument, Petitioners claim that respondent SSS merely became and still is a preferred
decided in favor of SSS and sentenced Lirag Textile Mills, Inc. and Basilio stockholder of the petitioner corporation, the redemption of the shares
L. Lirag to pay SSS jointly and severally P1,000,000.00 plus legal interest purchased by said respondent being dependent upon the financial ability of
until the said amount is fully paid; P220,000.00 representing the 8% per petitioner corporation. Petitioner corporation, thus, has no obligation to
annum dividends on the preferred shares plus legal interest up to the time of redeem the preferred stocks.
actual payment; P146,400.00 as liquidated damages; and P10,000.00 as
attorney's fees. The counterclaim of Lirag Textile Mills, Inc. and Basilio L. On the other hand, respondent SSS claims that the Purchase Agreement is a
Lirag was dismissed. debt instrument, imposing upon the petitioners the obligation to pay the
amount owed, and creating as between them the relation of creditor and
Hence, this petition. debtor, not that of a stockholder and a corporation.
Petitioners assign the following errors: We uphold the lower court's finding that the Purchase Agreement is, indeed,
1. The trial court erred in deciding that the Purchase Agreement is a debt a debt instrument. Its terms and conditions unmistakably show that the
instrument; parties intended the repurchase of the preferred shares on the respective
scheduled dates to be an absolute obligation which does not depend upon the
2. Respondent judge erred in holding petitioner corporation liable for the financial ability of petitioner corporation. This absolute obligation on the part
payment of the 8% preferred and cumulative dividends on the preferred of petitioner corporation is made manifest by the fact that a surety was
shares since the purchase agreement provides that said dividends shall be required to see to it that the obligation is fulfilled in the event of the principal
paid from the net profits and earned surplus of petitioner corporation and debtor's inability to do so. The unconditional undertaking of petitioner
respondent SSS has admitted that due to losses sustained since -1964, no corporation to redeem the preferred shares at the specified dates constitutes a
dividends had been and can be declared by petitioner corporation; debt which is defined "as an obligation to pay money at some fixed future
time, or at a time which becomes definite and fixed by acts of either party
3. Respondent judge erred in sentencing petitioners to pay P146,400.00 in and which they expressly or impliedly, agree to perform in the contract. 2
liquidated damages;

35
CREDIT
II. Loans (Mutuum)
A stockholder sinks or swims with the corporation and there is no obligation clearly show the intent of the parties to be bound therein as debtor and
to return the value of his shares by means of repurchase if the corporation creditor, and not as corporation and stockholder.
incurs losses and financial reverses, much less guarantee such repurchase
through a surety. Petitioners' contention that it is beyond the power and competence of
petitioner corporation to redeem the preferred shares or pay the accrued
As private respondent rightly contends, if the parties intended it [SSS] to be dividends due to financial reverses can not serve as legal justification for
merely a stockholder of petitioner corporation, it would have been sufficient their failure to perform under the Purchase Agreement. The Purchase
that Preferred Certificates Nos. 128 and 139 were issued in its name as the Agreement constitutes the law between the parties and obligations arising ex
preferred certificates contained all the rights of a stockholder as well as contractu must be fulfilled in accordance with the stipulations. 4 Besides, it
certain obligations on the part of petitioner corporation. However, the parties was precisely this eventuality that was sought to be avoided when respondent
did in fact execute the Purchase Agreement, at the same time that the SSS required a surety for the obligation.
petitioner corporation issued its preferred stock to the respondent SSS. The
Purchase Agreement serves to define the rights and obligations of the parties Thus, it follows that petitioner Basilio L. Lirag cannot deny liability for
and to establish firmly the liability of petitioners in case of breach of petitioner corporation's default. As surety, Basilio L. Lirag is bound
contract. The Certificates of Preferred Stock serve as additional evidence of immediately to pay respondent SSS the amount then outstanding.
the agreement between the parties, though the precise terms and conditions
thereof must be read together with, and regarded as qualified by the terms The obligation of a surety differs from that of a guarantor in that the surety
and conditions of the Purchase Agreement. insures the debt, whereas the guarantor merely insures solvency of the
debtor; and the surety undertakes to pay if the principal does not pay,
The rights given by the Purchase Agreement to respondent SSS are rights not whereas a guarantor merely binds itself to pay if the principal is unable to
enjoyed by ordinary stockholders. This fact could only lead to the conclusion pay. 5
made by the trial court that:
On the liability of petitioners to pay 8% cumulative dividend, We agree with
The aforementioned rights specially stipulated for the benefit of the plaintiff the observation of the lower court that the dividends stipulated by the parties
[respondent SSS] suggest eloquently an intention on the part of the plaintiff served evidently as interests. 6 The amount thereof was fixed at 8% per
[respondent SSS] to facilitate a loan to the defendant corporation upon the annum and was not made to depend upon or to fluctuate with the amount of
latter's request. In order to afford protection to the plaintiff which otherwise profits or surplus realized, a clear indication that the parties intended to give
is provided by means of collaterals, as the plaintiff exacts in its grants of a sure and fixed earnings on the principal loan. The fact that the dividends
loans in its ordinary transactions of this kind, as it is looked upon more as a were supposed to be paid out of net profits and earned surplus, of which there
lending institution rather than as an investing agency, the purchase agreement were none, does not excuse petitioners from the payment thereof, again for
supplied these protective rights which would otherwise be furnished by the reason that the undertaking of petitioner Basilio L. Lirag as surety,
collaterals to the loan. Thus, the membership in the board is to have a included the payment of dividends and other obligations then outstanding.
watchdog in the operation of the business of the corporation, so as to insure
against mismanagement which may result in losses not entirely unavoidable The award of the sum of P146,400.00 in liquidated damages representing
since payment for purposes of redemption as well as the dividends is 12% of the amount then outstanding is correct, considering that petitioners in
expressly stipulated to come from profits and/or surplus. Such a right is never the stipulation of facts admitted having failed to fulfill their obligations under
exacted by an ordinary stockholder merely investing in the corporation. 3 the Purchase Agreement. The grant of liquidated damages in the amount
stated is expressly provided for in the Purchase Agreement in case of
Moreover, the Purchase Agreement provided that failure on the part of contractual breach.
petitioner to repurchase the preferred shares on the scheduled due dates
renders the entire obligation due and demandable, with petitioner in such The pronouncement of the lower court for the payment of interests on both
eventuality liable to pay 12% of the then outstanding obligation as liquidated the unredeemed shares and unpaid dividends is also in order. Per stipulation
damages. These features of the Purchase Agreement, taken collectively, of facts, petitioners did not deny the fact of non-payment of dividends nor
36
CREDIT
II. Loans (Mutuum)
their failure to purchase the preferred shares. Since these involve sums of
money which are overdue, they are bound to earn legal interest from the time
of demand, in this case, judicial, i.e., the time of filing the action.

Petitioner Basilio L. Lirag is precluded from denying his liability under the-
Purchase Agreement. After his firm representation to "pay immediately to
the VENDEE the amounts then outstanding" evidencing his commitment as
SURETY, he is estopped from denying the same. His signature in the
agreement carries with it the official imprimatur as petitioner corporation's
president, in his personal capacity as majority stockholder, as surety and as
solidary obligor. The essence of his obligation as surety is to pay
immediately without qualification whatsoever if petitioner corporation does
not pay. To have another interpretation of petitioner Lirag's liability as surety
would violate the integrity of the Purchase Agreement as well as the clear
and unmistakable intent of the parties to the same.

WHEREFORE, the decision in Civil Case No. Q-12275 entitled "Social


Security System vs. Lirag Textile Mills, Inc. and Basilio L. Lirag" is hereby
affirmed in toto. Costs against petitioners.

SO ORDERED.

37
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II. Loans (Mutuum)
12.) Republic of the Philippines amount of P1,048.15 should therefore be deducted from the unpaid principal
SUPREME COURT of P20,287.50, leaving a balance of P19,247.351 still payable to the plaintiff.
Manila Said court held that notwithstanding the usurious interests charged, plaintiff
is not barred from collecting the principal of the loan or its balance of
EN BANC P19,247.35. Accordingly, it stated, in the dispositive portion of the decision,
thus:
G.R. No. L-25704 April 24, 1968
WHEREFORE, judgment is hereby rendered, ordering the defendant
ANGEL JOSE WAREHOUSING CO., INC., plaintiff-appellee, partnership to pay to the plaintiff the amount of P19,247.35, with legal
vs. interest thereon from May 29, 1964 until paid, plus an additional sum of
CHELDA ENTERPRISES and DAVID SYJUECO, defendants- P2,000.00 as damages for attorney's fee; and, in case the assets of defendant
appellants. partnership be insufficient to satisfy this judgment in full, ordering the
defendant David Syjueco to pay to the plaintiff one-half (1/2) of the
Luis A. Guerrero for plaintiff-appellee.
unsatisfied portion of this judgment.
Burgos and Sarte for defendants-appellants.
With costs against the defendants.1äwphï1.ñët
BENGZON, J.P., J.:
Appealing directly to Us, defendants raise two questions of law: (1) In a loan
Plaintiff corporation filed suit in the Court of First Instance of Manila on
with usurious interest, may the creditor recover the principal of the loan? (2)
May 29, 1964 against the partnership Chelda Enterprises and David Syjueco,
Should attorney's fees be awarded in plaintiff's favor?
its capitalist partner, for recovery of alleged unpaid loans in the total amount
of P20,880.00, with legal interest from the filing of the complaint, plus To refute the lower court's decision which is based on the doctrine laid down
attorney's fees of P5,000.00. Alleging that post dated checks issued by by this Court in Lopez v. El Hogar Filipino, 47 Phil. 249, holding that a
defendants to pay said account were dishonored, that defendants' industrial contract of loan with usurious interest is valid as to the loan but void as to the
partner, Chellaram I. Mohinani, had left the country, and that defendants usurious interest, appellants argue that in light of the New Civil Code
have removed or disposed of their property, or are about to do so, with intent provisions said doctrine no longer applies. In support thereof, they cite the
to defraud their creditors, preliminary attachment was also sought. case decided by the Court of Appeals in Sebastian v. Bautista, 58 O.G. No.
15, p. 3146.
Answering, defendants averred that they obtained four loans from plaintiff in
the total amount of P26,500.00, of which P5,620.00 had been paid, leaving a The Sebastian case was an action for recovery of a parcel of land. The Court
balance of P20,880.00; that plaintiff charged and deducted from the loan of First Instance therein decided in plaintiff's favor, on the ground that the so-
usurious interests thereon, at rates of 2% and 2.5% per month, and, called sale with pacto de retro of said land was in fact only an equitable
consequently, plaintiff has no cause of action against defendants and should mortgage. In affirming the trial court, the writer of the opinion of the Court
not be permitted to recover under the law. A counterclaim for P2,000.00 of Appeals went further to state the view that the loan secured by said
attorney's fees was interposed. mortgage was usurious in nature, and, thus, totally void. Such reasoning of
the writer, however, was not concurred in by the other members of the Court,
Plaintiff filed on June 25, 1964 an answer to the counterclaim, specifically
who concurred in the result and voted for affirmance on the grounds stated
denying under oath the allegations of usury.
by the trial court. Furthermore, the affirmance of the existence of equitable
After trial, decision was rendered, on November 10, 1965. The court found mortgage necessarily implies the existence of a valid contract of loan,
that there remained due from defendants an unpaid principal amount of because the former is an accessory contract to the latter.
P20,287.50; that plaintiff charged usurious interests, of which P1,048.15 had
Great reliance is made by appellants on Art. 1411 of the New Civil Code
actually been deducted in advance by plaintiff from the loan; that said
which states:
38
CREDIT
II. Loans (Mutuum)
Art. 1411. When the nullity proceeds from the illegality of the cause or The question therefore to resolve is whether the illegal terms as to payment
object of the contract, and the act constitutes criminal offense, both parties of interest likewise renders a nullity the legal terms as to payments of the
being in pari delicto, they shall have no action against each other, and both principal debt. Article 1420 of the New Civil Code provides in this regard:
shall be prosecuted. Moreover, the provisions of the Penal Code relative to "In case of a divisible contract, if the illegal terms can be separated from the
the disposal of effects or instruments of a crime shall be applicable to the legal ones, the latter may be enforced."
things or the price of the contract.
In simple loan with stipulation of usurious interest, the prestation of the
This rule shall be applicable when only one of the parties is guilty; but the debtor to pay the principal debt, which is the cause of the contract (Article
innocent one may claim what he has given, and shall not be bound to comply 1350, Civil Code), is not illegal. The illegality lies only as to the prestation to
with his promise. pay the stipulated interest; hence, being separable, the latter only should be
deemed void, since it is the only one that is illegal.
Since, according to the appellants, a usurious loan is void due to illegality of
cause or object, the rule of pari delictoexpressed in Article 1411, supra, Neither is there a conflict between the New Civil Code and the Usury Law.
applies, so that neither party can bring action against each other. Said rule, Under the latter, in Sec. 6, any person who for a loan shall have paid a higher
however, appellants add, is modified as to the borrower, by express provision rate or greater sum or value than is allowed in said law, may recover
of the law (Art. 1413, New Civil Code), allowing the borrower to recover the whole interest paid. The New Civil Code, in Article 1413 states: "Interest
interest paid in excess of the interest allowed by the Usury Law. As to the paid in excess of the interest allowed by the usury laws may be recovered by
lender, no exception is made to the rule; hence, he cannot recover on the the debtor, with interest thereon from the date of payment." Article 1413, in
contract. So — they continue — the New Civil Code provisions must be speaking of "interest paid in excess of the interest allowed by the usury laws"
upheld as against the Usury Law, under which a loan with usurious interest is means the whole usurious interest; that is, in a loan of P1,000, with interest
not totally void, because of Article 1961 of the New Civil Code, that: of P20% per annum P200 for one year, if the borrower pays said P200, the
"Usurious contracts shall be governed by the Usury Law and other special whole P200 is the usurious interest, not just that part thereof in excess of the
laws, so far as they are not inconsistent with this Code." (Emphasis ours.) interest allowed by law. It is in this case that the law does not allow division.
The whole stipulation as to interest is void, since payment of said interest is
We do not agree with such reasoning. Article 1411 of the New Civil Code is the cause or object and said interest is illegal. The only change effected,
not new; it is the same as Article 1305 of the Old Civil Code. Therefore, said therefore, by Article 1413, New Civil Code, is not to provide for the recovery
provision is no warrant for departing from previous interpretation that, as of the interest paid in excess of that allowed by law, which the Usury Law
provided in the Usury Law (Act No. 2655, as amended), a loan with usurious already provided for, but to add that the same can be recovered "with interest
interest is not totally void only as to the interest. thereon from the date of payment."
True, as stated in Article 1411 of the New Civil Code, the rule of pari The foregoing interpretation is reached with the philosophy of usury
delicto applies where a contract's nullity proceeds from illegality of the cause legislation in mind; to discourage stipulations on usurious interest, said
or object of said contract. stipulations are treated as wholly void, so that the loan becomes one without
stipulation as to payment of interest. It should not, however, be interpreted to
However, appellants fail to consider that a contract of loan with usurious mean forfeiture even of the principal, for this would unjustly enrich the
interest consists of principal and accessory stipulations; the principal one is borrower at the expense of the lender. Furthermore, penal sanctions are
to pay the debt; the accessory stipulation is to pay interest thereon. 2 available against a usurious lender, as a further deterrence to usury.
And said two stipulations are divisible in the sense that the former can still The principal debt remaining without stipulation for payment of interest can
stand without the latter. Article 1273, Civil Code, attests to this: "The thus be recovered by judicial action. And in case of such demand, and the
renunciation of the principal debt shall extinguish the accessory obligations; debtor incurs in delay, the debt earns interest from the date of the demand (in
but the waiver of the latter shall leave the former in force." this case from the filing of the complaint). Such interest is not due
to stipulation, for there was none, the same being void. Rather, it is due to the
39
CREDIT
II. Loans (Mutuum)
general provision of law that in obligations to pay money, where the debtor
incurs in delay, he has to pay interest by way of damages (Art. 2209, Civil
Code). The court a quo therefore, did not err in ordering defendants to pay
the principal debt with interest thereon at the legal rate, from the date of
filing of the complaint.

As regards, however, the attorney's fees, the court a quo stated no basis for
its award, beyond saying that as a result of defendants' refusal to pay the
amount of P19,247.35 notwithstanding repeated demands, plaintiff was
obliged to retain the services of counsel. The rule as to attorney's fees is that
the same are not recoverable, in the absence of stipulation. Several
exceptions to this rule are provided (Art. 2208, Civil Code). Unless shown to
fall under an exception, the act of plaintiff in engaging counsel's services due
to refusal of defendants to pay his demand, does not justify award of
attorney's fees (Estate of Buan v. Camaganacan, L-21569, Feb. 28, 1966).
Defendants, moreover, had reason to resist the claim, since there was yet no
definite ruling of this Court on the point of law involved herein in light of the
New Civil Code. Said award should therefore be deleted.

WHEREFORE, with the modification that the award of attorney's fees in


plaintiff's favor is deleted therefrom, and the correction of the clerical error
as to the principal still recoverable, from P19,247.35 to P19,239.35, the
appealed judgment is hereby affirmed. No costs. So ordered.

40
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II. Loans (Mutuum)
13.) Republic of the Philippines Y si esta deuda no se pagare dentro del plazo de tres meses, se ejecutaran los
SUPREME COURT bienes hipotecados de acuerdo con la ley.
Manila
Si del producto de la venta hubiese algun remanente, este se destinara al pago
EN BANC del credito del Banco Nacional, o sea de P32,704.69, con sus intereses de 9
por ciento al ano desde el 7 de junio de 1929, sin perjuicio de la orden de
G.R. No. L-32644 October 4, 1930 ejecucion que pudiera expedirse en el asundo No. 26435 del Juzgado de
Primera Instancia de Manila.
CU UNJIENG E HIJOS, plaintiff-appelle,
vs. Se condena ademas a The Mabalacat Sugar Company al pago de la suma de
THE MABALACAT SUGAR CO., ET AL., defendants. P3,205.78 reclamada por Siuliong & Co., con sus intereses de 9 por ciento al
THE MABALACAT SUGAR CO., appellant. ano desde el 29 de julio de 1926 hasta su completo pago, ordenandola que
rinda cuentas del azucar por ella producido y pague la comision
Romeo Mercado for appellant. correspondiente bajo la base de 5 por ciento de su valor, descontandose,
Araneta and Zaragoza for plaintiff-appellee. desde luego, las cantidades ya pagadas.
Duran and Lim for defendant-appellee Siuliong and Co.
Se absuelve de la demanda de Cu Unjieng e Hijos a Siuliong & Co.,
Inc.1awph!l.net

From this judgment the defendant, the Mabalacat Sugar Company, appealed.
STREET, J.:
The first point assigned as error has relation to the question whether the
This action was instituted in the Court of First Instance of Pampanga by Cu action was prematurely stated. In this connection we note that the mortgage
Unjieng e Hijos, for the purpose of recovering from the Mabalacat Sugar executed by the Mabalacat Sugar Company contains, in paragraph 5, a
Company an indebtedness amounting to more than P163,00, with interest, provision to the effect that non-compliance on the part of the mortgage
and to foreclose a mortgage given by the debtor to secure the same, as well debtor with any of the obligations assumed in virtue of this contract will
as to recover stipulated attorney's fee and the sum of P1,206, paid by the cause the entire debt to become due and give occasion for the foreclosure of
plaintiff for insurance upon the mortgaged property, with incidental relief. In the mortgage. The debtor party failed to comply with the obligation, imposed
the complaint Siuliong & Co., Inc., was joined as defendant, as a surety of upon it in the mortgage, to pay the mortgage debt in the stipulated
the Mabalacat Sugar Company, and as having a third mortgage on the installments at the time specified in the contract. It results that the creditor
mortgaged property. The Philippine National Bank was also joined by reason was justified in treating the entire mortgage debt as having been accelerated
of its interest as second mortgagee of the land covered by the mortgage to the by such failure of the debtor in paying the installments.
plaintiff. After the cause had been brought to issue by the answers of the
several defendants, the cause was heard and judgment rendered, the It appears, however, that on or about October 20, 1928, the mortgage
dispositive portion of the decision being as follows: creditor, Cu Unjieng e Hijos, agreed to extend the time for payment of the
mortgage indebtedness until June 30, 1929, with certain interim payments to
Por las consideraciones expuestas, el Juzgado condena a The Mabalacat be made upon specified dates prior to the contemplated final liquidation of
Sugar Company a pagar a la demandante la suma de P163,534.73, con sus the whole indebtedness. But the debtor party failed to make the interim
intereses de 12 por ciento al ano, compuestos mensualmente desde el 1. de payments due on February 25, 1929, March 25, 1929, and April 25, 1929,
mayo de 1929. Tambien se le condena a pagar a dicha demandante la suma and failed altogether to pay the balance due, according to the terms of this
de P2,412 por las primas de seguros abonadas por esta, con sus intereses de extension, on June 30, 1929. Notwithstanding the failure of the debtor to
12 por ciento al ano, compuestos tambien mensualmente desde el 15 de mayo comply with the terms of this extension, it is insisted for the appellant that
de 1928, mas la de P7,500 por honorarios de abogados y las costas del juicio. this agreement for the extension of the time of payment had the effect of
41
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II. Loans (Mutuum)
abrogating the stipulation of the original contract with respect to the property in good condition. But the chief thing is that interest cannot be thus
acceleration of the maturity of the debt by non-compliance with the terms of accumulated on unpaid interest accruing upon the capital of the debt.
the mortgage. As the trial court pointed out, this contention is untenable. The
agreement to extend the time of payment was voluntary and without The trial court was of the opinion that interest could be so charged, because
consideration so far as the creditor is concerned; and the failure of the debtor of the Exhibit 1 of the Mabalacat Sugar Company, which the court
to comply with the terms of the extension justified the creditor in treating it considered as an interpretation by the parties to the contract and a recognition
as of no effect. The first error is therefore without merit. by the debtor of the propriety of compounding the interest earned by the
capital. But the exhibit referred to is merely a receipt showing that the sum of
The second error is directed to the propriety of the interest charges made by P256.28 was, on March 19, 1928, paid by the debtor to the plaintiff as
the plaintiff in estimating the amount of the indebtedness. In this connection interest upon interest. But where interest is improperly charged, at an
we note that, under the second clause of the mortgage, interest should be unlawful rate, the mere voluntary payment of it to the creditor by the debtor
calculated upon the indebtedness at the rate of 12 per cent per annum. In the is not binding. Such payment, in the case before us, was usurious, being in
same clause, but in a separate paragraph, there is another provision with excess of 12 per cent which is allowed to be charged, under section 2 of the
respect to the payment of interest expressed in Spanish in the following Usury Law, when a debt is secured by mortgage upon real property. The
words: Exhibit 1 therefore adds no support to the contention of the plaintiff that
interest upon interest can be accumulated in the manner adopter by the
Los intereses seran pagados mensualmente a fin de cada mes, computados creditor in this case. The point here ruled is in exact conformity with the
teniendo en cuenta el capital del prestamo aun no pagado. decision of this court in Bachrach Garage and Taxicab Co. vs. Golingco (39
Phil., 192), where this court held that interest cannot be allowed in the
Translated into English this provision reads substantially as follows: absence of stipulation, or in default thereof, except when the debt is
"Interest, to be computed upon the still unpaid capital of the loan, shall be judicially claimed; and when the debt is judicially claimed, the interest upon
paid monthly, at the end of each month." the interest can only be computed at the rate of 6 per cent per annum.
It is well settled that, under article 1109 of the Civil Code, as well as under It results that the appellant's second assignment of error is well taken, and the
section 5 of the Usury Law (Act No. 2655), the parties may stipulate that compound interest must be eliminated from the judgment. With respect to the
interest shall be compounded; and rests for the computation of compound amount improperly charged, we accept the estimate submitted by the
interest can certainly be made monthly, as well as quarterly, semiannually, or president and manager of the Mabalacat Sugar Company, who says that the
annually. But in the absence of express stipulation for the accumulation of amount improperly included in the computation made by the plaintiff's
compound interest, no interest can be collected upon interest until the debt is bookkeeper is P879.84, in addition to the amount of P256.28 covered by
judicially claimed, and then the rate at which interest upon accrued interest Exhibit 1 of the Mabalacat Sugar Company. But the plaintiff creditor had the
must be computed is fixed at 6 per cent per annum. right to charge interest, in the manner adopted by it, upon insurance
In the present case, however, the language which we have quoted above does premiums which it had paid out; and if any discrepancy of importance is
not justify the charging of interest upon interest, so far as interest on the discoverable by the plaintiff in the result here reached, it will be at liberty to
capital is concerned. The provision quoted merely requires the debtor to pay submit a revised computation in this court, upon motion for reconsideration,
interest monthly at the end of each month, such interest to be computed upon wherein interest shall be computed in accordance with this opinion, that is to
the capital of the loan not already paid. Clearly this provision does not justify say, that no accumulation of interest will be permitted at monthly intervals,
the charging of compound interest upon the interest accruing upon the capital as regards the capital of the debt, but such unpaid interest shall draw interest
monthly. It is true that in subsections (a), (b) and (c) of article IV of the at the rate of 6 per cent from the date of the institution of the action.
mortgage, it is stipulated that the interest can be thus computed upon sums In the third assignment of error the appellant complains, as excessive, of the
which the creditor would have to pay out (a) to maintain insurance upon the attorney's fees allowed by the court in accordance with stipulation in the
mortgaged property, (b) to pay the land tax upon the same property, and (c) mortgage. The allowance made on the principal debt was around 4 per cent,
upon disbursements that might be made by the mortgagee to maintain the
42
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II. Loans (Mutuum)
and about the same upon the fee allowed to the bank. Under the
circumstances we think the debtor has no just cause for complaint upon this
score.

The fourth assignment of error complains of the failure of the trial court to
permit an amendment to be filed by the debtor to its answer, the application
therefore having been made on the day when the cause had been set for trial,
with notice that the period was non-extendible. The point was a matter in the
discretion of the court, and no abuse of discretion is shown.

From what has been stated, it follows that the appealed judgment must be
modified by deducting the sum of P1,136.12 from the principal debt, so that
the amount of said indebtedness shall be P162,398.61, with interest at 12 per
cent per annum, from May 1, 1929. In other respects the judgment will be
affirmed, and it is so ordered, with cost against the appellant.

43
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II. Loans (Mutuum)
14.) [G.R. No. 115821. October 13, 1999] P. Cruz, for the final execution of the Decision dated October 31, 1979, as
amended by the Order dated June 20, 1980.
JESUS T. DAVID, petitioner, vs. THE COURT OF APPEALS, HON.
EDGARDO P. CRUZ, MELCHOR P. PEA, and VALENTIN AFABLE, Upon petitioners motion, respondent Judge issued an Alias Writ of Execution
JR., respondents. by virtue of which respondent Sheriff Melchor P. Pea conducted a public
auction. Sheriff Pea informed the petitioner that the total amount of the
DECISION judgment is P270,940.52. The amount included a computation of simple
interest. Petitioner, however, claimed that the judgment award should be
QUISUMBING, J.: P3,027,238.50, because the amount due ought to be based on compounded
This is a petition for review, under Rule 45 of the Rules of Court, seeking the interest.
reversal of the Decision dated May 30, 1994, of the Court of Appeals, Ninth Although the auctioned properties were sold to the petitioner, Sheriff Pea did
Division, in CA-G.R. SP No. 32782. not issue the Certificate of Sale because there was an excess in the bid price
The parties do not dispute the facts in this case. The dispute concerns only in the amount of P2,941,524.47, which the petitioner failed to pay despite
the execution of the Decision of the Regional Trial Court of Manila, Branch notice. This excess was computed by the Sheriff on the basis of petitioners
27, in Civil Case No. 94781, dated October 31, 1979, as amended by an bid price of P3,027,238.50 minus the amount of P270,940.52 computed in
Order dated June 20, 1980. the judgment award.

The Regional Trial Court of Manila, Branch 27, with Judge Ricardo Diaz, On May 18, 1993, petitioner filed a Motion praying that respondent Judge
then presiding, issued a writ of attachment over real properties covered by Cruz issue an order directing respondent Sheriff Pea to prepare and execute a
TCT Nos. 80718 and 10289 of private respondents. In his Decision dated certificate of sale in favor of the petitioner, placing therein the amount of the
October 31, 1979, Judge Diaz ordered private respondent Afable to pay judgment as P3,027,238.50, the amount he bid during the auction which he
petitioner P66,500.00 plus interest from July 24, 1974, until fully paid, plus won. His reason is that compound interest, which is allowed by Article 2212
P5,000.00 as attorneys fees, and to pay the costs of suit. of the Civil Code, should apply in this case.

On June 20, 1980, however, Judge Diaz issued an Order amending said On July 5, 1993, respondent Judge issued an Order denying petitioners
Decision, so that the legal rate of interest should be computed from January Motion dated May 18, 1993, which pertinently states:
4, 1966, instead of from July 24, 1974. The amended Decision in the decretal In accordance with CB Circular No. 416 and as construed in Reformina vs.
portion reads: Tomol (139 SCRA 260), legal interest on P66,500.00 corresponds to 6% per
WHEREFORE, judgment is hereby rendered against the defendant, Valentin annum for the period January 4, 1966 to July 28, 1974 and 12% per annum
Afable Jr., ordering him to pay to the plaintiff the sum of P66,500.00 plus from July 29, 1974 up to April 26, 1993, amounting to P34,180.92 and
the legal rate of interest thereon from January 4, 1966 up to the time the P149,582.32, respectively, or a grand total of P183,763.24.
same is fully paid plus the amount of P5,000.00 as and for attorneys fees and Conformably with the Sheriffs Computation of Interest dated April 26, 1993
to pay the costs of the suit. ordering the private respondent Afable to pay the and Supplemental Report dated June 14, 1993, the judgment as of April 26,
petitioner the sum of P66,500.00 plus the legal rate of interest thereon from 1993 amounted to P271,039.84, broken down as follows:
July 24, 1974, plus the amount of P5,000.00 as attorneys fees and to pay the
costs of suit[1] (Emphasis ours.) Principal P 66,500.00
Respondent Afable appealed to the Court of Appeals and then to the Interest 183,763.24
Supreme Court. In both instances, the decision of the lower court was
affirmed. Entries of judgment were made and the record of the case was Attorneys fees 5,000.00
remanded to Branch 27, presided at that time by respondent Judge Edgardo
44
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II. Loans (Mutuum)
Publication expenses 15,500.00 was made regarding compound interest. Ergo, the judgment award must
be computed as simple legal interest only. (Emphasis ours.)
Costs of suit 276.60
Foregoing considered, We find no grave abuse of discretion amounting to
Total P271,039.84 lack or excess of jurisdiction committed by public respondent judge in
issuing the assailed orders
Considering that plaintiffs P3,027,238.50 bid exceeds the amount of his
judgment, then he is not entitled to a certificate of sale without paying the WHEREFORE, the petition is DENIED due course and is hereby
excess in the sum of P2,756,198.66 (Secs. 22 and 23 Rule 39, Rules of DISMISSED.
Court). And since plaintiff did not pay the excess, then the sale did not
materialize and the sheriff may again sell the property to the highest bidder SO ORDERED. [3]
(Sec. 22, Rule 39, id.).[2]
Petitioner now comes before the Court, claiming the appellate court
On August 11, 1993, petitioner moved for reconsideration of the Order dated committed the following errors in the abovecited decision:
July 5, 1993, reiterating his Motion dated May 18, 1993.
First Assigned Error
On November 17, 1993, respondent Judge issued his Order denying the
petitioners motion for reconsideration. THE RESPONDENT COURT OF APPEALS ERRED IN RULING THAT
ARTICLE 2212 OF THE CIVIL CODE APPLIES ONLY WHERE THE
Petitioner elevated said Orders to the Court of Appeals in a petition PARTIES TO AN OBLIGATION STIPULATED OR AGREED TO PAY
for certiorari, prohibition and mandamus. However, respondent appellate COMPOUNDED INTEREST.
court dismissed the petition in a Decision dated May 30, 1994. Pertinent
portions of said decision reads: Second Assigned Error

. . . In this case, the records show that no interest was stipulated by the THE RESPONDENT COURT OF APPEALS ERRED IN CONFUSING
parties. In the promissory note denominated as Compromise Agreement LEGAL INTEREST (AS DISTINGUISHED FROM CONSENSUAL
signed by private respondent which was duly accepted by petitioner, no INTEREST) WITH SIMPLE INTEREST, JUST AS IT ALSO ERRED IN
interest was mentioned. In his complaint, petitioner merely prayed that CONFUSING THE INTEREST ON THE PRINCIPAL WITH INTEREST
defendant be ordered to pay plaintiff the sum of P66,500.00 with interest ON THE INTEREST.
thereon at the legal rate from the date of filing of the complaint until fully
paid. Clearly, there was no accrued conventional interest which could further Third Assigned Error
earn interest when plaintiff-appellant made his judicial demand, thus, the THE RESPONDENT COURT OF APPEALS ERRED IN REFUSING TO
respondent court awarded x x x the sum of P66,500.00 plus the legal rate of APPLY THE SIMPLE MANDATE OF ARTICLE 2212 OF THE CIVIL
interest thereon x x x. CODE TO THE CASE AT BAR.
Further the Supreme Court in the same case [Referring to Philippine Fourth Assigned Error
American Accident Insurance Company, Inc. vs. the Hon. Jose P. Flores and
Concordia G. Navalta, 97 SCRA 811; Rollo, p.9.] stressed that when the THE RESPONDENT COURT OF APPEALS ERRED IN
judgment ordered payment of simple legal interest only and nothing said PROMULGATING ITS DECISION WHICH IS CLEARLY CONTRARY
about payment of compound interest, said interest should not be TO LAW.
compounded. In this case, the decretal portion is clearly worded, that is, the
legal rate of interest thereon from January 4, 1966. No mention or reference

45
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II. Loans (Mutuum)
Essentially, we find that the issue here is whether respondent appellate court Phil. 500 [1909]; Salvador vs. Palencia, 25 Phil. 661 [1913]; Bachrach vs.
erred in affirming respondent Judges order for the payment of simple interest Golingco, 39 Phil 912 [1919]; Robinson vs. Sackermann, 46 Phil. 539
only rather than compounded interest. [1924]; Philippine Engineering Co. vs. Green, 48 Phil. 466 [1925]; and Cu
Unjieng vs. Mabalacat Sugar Co., 54 Phil. 916 [1930].) ... In other words,
Petitioner insists that in computing the interest due of the P66,500.00, there was no accrued conventional interests which could further earn
interest should be computed at 6% on the principal sum of P66,500.00 interest upon judicial demand.
pursuant to Article 2209 and then interest on the legal interest should also be
computed in accordance with the language of Article 2212 of the Civil Note that in the case now before us, the Court of Appeals made the factual
Code.[4] In his view, said article meant compound interest. finding that . . . no interest was stipulated by the parties. In the promissory
note denominated as Compromise Agreement signed by the private
However, this Court has already interpreted Article 2212, and defined the respondent which was duly accepted by petitioner no interest was
standards for its application in Philippine American Accident Insurance vs. mentioned. In his complaint, petitioner merely prayed that defendant be
Flores, 97 SCRA 811. As therein held, Article 2212 contemplates the ordered to pay plaintiff the sum of P66,500.00 with interest thereon at the
presence of stipulated or conventional interest which has accrued when legal rate from the date of the filing of the complaint until fully
demand was judicially made. In cases where no interest had been stipulated paid.[6] Clearly here the Philippine American Accident Insurance ruling
by the parties, as in the case of Philippine American Accident Insurance, no applies.
accrued conventional interest could further earn interest upon judicial
demand.[5] Petitioner also alleges that when the case was remanded to the trial court,
respondent Judge, abused his discretion when he modified the Decision and
In the said case, we further held that when the judgment sought to be amended its dispositive portion. He argues that when a decision has become
executed ordered the payment of simple legal interest only and said nothing final and executory, the court may no longer amend, revoke, nor alter the
about payment of compound interest, but the respondent judge orders dispositive portion, and the only power of the court is to order its execution.
payment of compound interest, then, he goes beyond the confines of a
judgment which had become final. Thus: But the rule that once a judgment has become final and executory, it is the
ministerial duty of the courts to order its execution is not absolute. It admits
The judgment which was sought to be executed ordered the payment of of certain exceptions.[7] One exception is that where facts and/or events
simple legal interest only. It said nothing about the payment of compound transpire after a decision has become executory, which facts and/or events
interest. Accordingly, when the respondent judge ordered the payment of present a supervening cause or reason which renders the final and executory
compound interest he went beyond the confines of his own judgment which decision of the court no longer enforceable.[8] Under the law, the court may
had been affirmed by the Court of Appeals and which had become modify or alter a judgment even after the same has become executory
final. Fundamental is the rule that execution must conform to that ordained or whenever circumstances transpire rendering its execution unjust and
decreed in the dispositive part of the decision. Likewise, a court can not, inequitable, as where certain facts and circumstances justifying or requiring
except for clerical errors or omissions amend a judgment that has become such modification or alteration transpired after the judgment has become
final (Jabon et. al. vs. Alo, et al., 91 Phil. 750 [1952]; Robles vs. Timario, et final and executory.[9]
al., 107 Phil. 809 [1960]; Collector of Internal Revenue vs. Gutierrez, et al.,
108 Phil 215[1960]; Ablaza vs. Sycip, et al., 110 Phil 4 [1060].) We earlier held that a case, in which an execution order has been issued, is
still pending, so that all proceedings on the execution are still proceedings in
Private respondent invokes Sec.5 of the Usury Law . . . as well as Art.2212 the suit.[10] In the present case, after the case was remanded to the lower
of the Civil Code which stipulates: Interest due shall earn legal interest court, petitioner filed a motion for the issuance of an alias Writ of
from the time it is judicially demanded, although the obligation may be silent Execution. The motion was only finally resolved on July 5, 1993. When
upon this point. Both legal provisions are in applicable (sic) for they Central Bank Circular No. 416 took effect on July 29, 1974, the suit was still
contemplate the presence of stipulated or conventional interest which pending.Hence, when respondent Judge ordered the computation of legal
has accrued when demand was judicially made. (Sunico v. Ramirez, 14 interest for the execution of the amended October 31,1979 order, he correctly
46
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II. Loans (Mutuum)
took judicial notice of the Courts pronouncement in Reformina vs. Tomol,
Jr., 139 SCRA 260.

In Reformina, the Court applied Central Bank Circular No. 416 which took
effect on July 29,1974, pursuant to P.D. 116, amending Act. 2655 (Usury
Law) and raising the legal rate of interest from 6% to 12% per
annum.Respondent Judge followed Reformina and did not err in modifying
the Order of October 31, 1979. The passage of the Central Bank Circular No.
416 was a supervening event which happened after the decision had become
executory. Had respondent Judge failed to order the assailed amendment, the
result would have been iniquitous. Hence, here, no error nor grave abuse of
discretion could be ascribed to respondent Judges order dated June 30,
1980.Likewise, respondent appellate court could not be faulted for affirming
said order of respondent Judge.

WHEREFORE, the instant petition is DENIED. The Decision of the Court


of Appeals dated May 30, 1994, in CA-G.R. SP NO. 32782 is hereby
AFFIRMED. The records of the case are ordered remanded to the Regional
Trial Court of Manila, Branch 27, for execution of the Decision in due
course.

Costs against petitioner.

SO ORDERED.

47
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II. Loans (Mutuum)
15.) Republic of the Philippines amount, executed a promissory note and a real estate mortgage in favor of
SUPREME COURT GSIS. On May 29, 1962, the GSIS, and on June 6, 1962, the Office of the
Manila Economic Coordinator, upon request of the Medinas, both approved the
restoration of the amount of P350,000.00 (P295,000.00 + P55,000.00)
SECOND DIVISION originally approved by the GSIS. This P350,000.00 loan was denominated by
the GSIS as Account No. 31055.
G.R. No. L-52478 October 30, 1986
On July 6, 1962, the Medinas executed in favor of the GSIS an Amendment
THE GOVERNMENT SERVICE INSURANCE SYSTEM, petitioner- of Real Estate Mortgage, the pertinent portion of which reads:
appellant,
vs. WHEREAS, on the 4th day of April, 1962, the Mortgagor executed signed
HONORABLE COURT OF APPEALS, NEMENCIO R. MEDINA and and delivered a real estate mortgage to and in favor of the Mortgagee on real
JOSEFINA G. MEDINA, respondents-appellants. estate properties located in the City of Manila, ... to secure payment to the
mortgages of a loan of Two Hundred Ninety Five Thousand Pesos
Coronel Law Office for private respondents. (P295,000.00) Philippine Currency, granted by the mortgagee to the
Mortgagors, ...;
Alberto C. Lerma collaborating counsel for private respondents
WHEREAS, the parties herein have agreed as they hereby agree to increase
the aforementioned loan from Two Hundred Ninety Five Thousand Pesos
PARAS, J.: (P295,000.00) to Three Hundred Fifty Thousand Pesos (P350,000.00),
Philippine Currency;
This is a petition for review on certiorari of the decision of the Court of
Appeals in CA-G.R. No. 62541-R (Nemencio R. Medina and Josefina G. NOW, THEREFORE, for and in consideration of the foregoing premises, the
Medina, Plaintiffs-Appellants vs. The Government Service Insurance aforementioned parties have amended and by these presents do hereby
System, Defendant-Appellant) affirming the January 21, 1977 Decision of amend the said mortgage dated April 4, 1962, mentioned in the second
the trial court, and at the same time ordering the GSIS to reimburse the paragraph hereof by increasing the loan from Two Hundred Ninety Five
amount of P9,580.00 as over-payment and to pay the spouses Nemencio R. Thousand Pesos (P295,000.00) to Three Hundred Fifty Thousand Pesos
Medina and Josefina G. Medina P3,000.00 and P1,000.00 as attorney's fees (P350,000.00) subject to this additional condition.
and litigation expenses.
(1) That the mortgagor shall pay to the system P4,433.65 monthly including
In 1961, herein private respondents spouses Nemencio R. Medina and principal and interest.
Josefina G. Medina (Medinas for short) applied with the herein petitioner
It is hereby expressly understood that with the foregoing amendment, all
Government Service Insurance System (GSIS for short) for a loan of
other terms and conditions of the said real estate mortgage dated April 4,
P600,000.00. The GSIS Board of Trustees, in its Resolution of December 20,
1962 insofar as they are not inconsistent herewith, are hereby confirmed,
1961, approved under Resolution No. 5041 only the amount of P350,000.00,
ratified and continued in full force and effect and that the parties thereto
subject to the following conditions: that the rate of interest shall be 9% per
agree that this amendment be an integral part of said real estate mortgage.
annum compounded monthly; repayable in ten (10) years at a monthly
(Rollo, p. 153-154).
amortization of P4,433.65 including principal and interest, and that any
installment or amortization that remains due and unpaid shall bear interest at Upon application by the Medinas, the GSIS Board of Trustees adopted
the rate of 9%/12% per month. The Office of the Economic Coordinator, in a Resolution No. 121 on January 18, 1963, as amended by Resolution No. 348
2nd Indorsement dated March 26, 1962, further reduced the approved dated February 25, 1963, approving an additional loan of P230,000.00 in
amount to P295,000.00. On April 4, 1962, the Medinas accepting the reduced favor of the Medinas on the security of the same mortgaged properties and

48
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II. Loans (Mutuum)
the additional properties covered by TCT Nos. 49234, 49235 and 49236, to proceedings; and (b) the refund of excess payments, plus damages and
bear interest at 9% per annum compounded monthly and repayable in ten attorney's fees (CFI Decision, p. 213; Rollo, p. 79).
years. This additional loan of P230,000.00 was denominated by the GSIS as
Account No. 31442. On March 19, 1976, the GSIS filed its Amended Answer (Joint Record on
Appeal, pp. 99-105; Rollo, p. 79). After trial, the trial court rendered a
On March 18, 1963, the Economic Coordinator thru the Auditor General Decision dated January 21, 1977 (Joint Record on Appeal, pp. 210-232), the
interposed no objection thereto, subject to the conditions of Resolution No. pertinent dispositive portion of which reads:
121 as amended by Resolution No. 348 of the GSIS.
WHEREFORE, judgment is hereby rendered declaring the extra-judicial
Beginning 1965, the Medinas having defaulted in the payment of the foreclosure conducted by the Sheriff of Manila of real estate mortgage
monthly amortization on their loan, the GSIS imposed 9%/12% interest on an contracts executed by plaintiffs on April 4, 1962, as amended on July 6,
installments due and unpaid. In 1967, the Medinas began defaulting in the 1962, and February 17, 1963, null and void and the Sheriff's Certificate of
payment of fire insurance premiums. Sale dated January 27, 1976, in favor of the GSIS of no legal force and
effect; and directing plaintiffs to pay the GSIS the sum of P1,611.12 in full
On May 3, 1974, the GSIS notified the Medinas that they had arrearages in payment of their obligation to the latter with interest of 9% per annum from
the aggregate amount of P575,652.42 as of April 18, 1974 (Exhibit 9, p. 149, December 11, 1975, until fully paid.
Joint Record on Appeal, Rollo, p. 79), and demanded payment within seven
(7) days from notice thereof, otherwise, it would foreclose the mortgage. Dissatisfied with the said judgment, both parties appealed with the Court of
Appeals.
On April 21, 1975, the GSIS filed an Application for Foreclosure of
Mortgage with the Sheriff of the City of Manila (Exhibit "22," pp. 63 and The Court of Appeals, in a Decision promulgated on January 18, 1980
149; Rollo, p. 79). On June 30, 1975, the Medinas filed with the Court of (Record, pp. 72-77), ruled in favor of the Medinas —
First Instance of Manila a complaint, praying, among other things, that a
restraining order or writ of preliminary injunction be issued to prevent the WHEREFORE, the defendant GSIS is ordered to reimburse the amount of
GSIS and the Sheriff of the City of Manila from proceeding with the extra- P9,580.00 as overpayment and to pay plaintiffs P3,000.00 and Pl,000.00 as
judicial foreclosure of their mortgaged properties (CFI Decision, p. 121; attorney's fees and litigation expenses, respectively. With these
Rollo, p. 79). However, in view of Section 2 of Presidential Decree No. 385, modifications, the judgment appealed from is AFFIRMED in all other
no restraining order or writ of preliminary injunction was issued by the trial respects, with costs against defendant GSIS."
court (CFI Decision, p. 212; Rollo, p. 79). On April 25, 1975, the Medinas
made a last partial payment in the amount of P209,662.80. Hence this petition.

Under a Notice of Sale on Extra-Judicial Foreclosure dated June 18, 1975, The Second Division of this Court, in a Resolution dated April 25, 1980
the real properties of the Medinas covered by Transfer Certificates of Title (Rollo, p.. 88), resolved to deny the petition for lack of merit.
Nos. 32231, 43527, 51394, 58626, 60534, 63304, 67550, 67551 and 67552 Petitioner filed on June 26, 1980 a Motion for Reconsideration dated June
of the Registry of Property of the City of Manila were sold at public auction 17, 1980 (Rollo, pp. 95-103), of the above-stated Resolution and respondents
to the GSIS as the highest bidder for the total amount of P440,080.00 on in a Resolution dated July 9, 1980 (Rollo, p. 105), were required to comment
January 12, 1976, and the corresponding Certificate of Sale was executed by thereon which comment they filed on August 6, 1980. (Rollo, pp. 106-116).
the Sheriff of Manila on January 27, 1976 (CFI Decision, pp. 212-213; Rollo,
p. 79). The petition was given due course in the Resolution dated July 6, 1981
(Rollo, p. 128). Petitioner filed its brief on November 26, 1981 (Rollo, pp.
On January 30, 1976, the Medinas filed an Amended Complaint with the trial 147-177); while private respondents filed their brief on January 27, 1982
court, praying for (a) the declaration of nullity of their two real estate (Rollo, pp. 181-224), and the case was considered submitted for decision in
mortgage contracts with the GSIS as well as of the extra-judicial foreclosure the Resolution of July 19, 1982 (Rollo, p. 229).
49
CREDIT
II. Loans (Mutuum)
The issues in this case are: No. 31055, P466,965.31 of which to interest and P133,530.20 to principal
and P390,845.66 to Account No. 31442, P230,774.29 to interest and
1. WHETHER OR NOT THE COURT OF APPEALS ERRED IN P159,971.37 to principal. (Joint Record on Appeal, p. 216; Rollo, p. 79).
HOLDING THAT THE AMENDMENT OF REAL ESTATE MORTGAGE
DATED JULY 6, 1962 SUPERSEDED THE MORTGAGE CONTRACT On the other hand the Medinas maintain that there is no express stipulation
DATED APRIL 4, 1962, PARTICULARLY WITH RESPECT TO on compounded interest in the amendment of mortgage contract of July 6,
COMPOUNDING OF INTEREST; 1962 so that the compounded interest stipulation in the original mortgage
contract of April 4, 1962 which has been superseded cannot be enforced in
2. WHETHER OR NOT THE COURT OF APPEALS ERRED IN the later mortgage. (Rollo, p. 185).
SUSTAINING THE RESPONDENT-APPELLEE SPOUSES MEDINA'S
CLAIM OR OVERPAYMENT, BY CREDITING THE FIRE INSURANCE Hence the Medinas claim an overpayment in Account No. 31055. The
PROCEEDS IN THE SUM OF P11,152.02 TO THE TOTAL PAYMENT application of their total payment in the amount of P991,845.53 as computed
MADE BY SAID SPOUSES AS OF DECEMBER 11, 1975; by the trial court and by the Court of Appeals is as follows:

3. WHETHER OR NOT THE COURT OF APPEALS ERRED IN ... It appearing and so the parties admit in their own exhibits that as of
HOLDING THAT THE INTEREST RATES ON THE LOAN ACCOUNTS December 11, 1975, plaintiffs had paid a total of P991,241.17 excluding fire
OF RESPONDENT-APPELLEE SPOUSES ARE USURIOUS; insurance, P532,038.00 of said amount should have been applied to the full
payment of Acct. No. 31055 and the balance of P459,203.17 applied to the
4. WHETHER OR NOT THE COURT OF APPEALS ERRED IN payment of Acct. No. 31442.
AFFIRMING THE ANNULMENT OF THE SUBJECT EXTRAJUDICIAL
FORECLOSURE AND SHERIFF'S CERTIFICATE OF SALE; AND According to the computation of the GSIS (Exhibit C, also Exhibit 38) the
total amounts, collected on Acct. No. 31442 as of December 11, 1975 total
5. WHETHER OR NOT THE COURT OF APPEALS ERRED IN P390,745.66 thus leaving an unpaid balance of P70,028.63. The total amount
HOLDING THE GSIS LIABLE FOR ATTORNEY'S FEES, EXPENSES plaintiffs should pay on said account should therefore be P460,774.29.
OF LITIGATION AND COSTS. Deduct this amount from P459,163.17 which has been shown to be the
difference between the total payments made by plaintiffs to the G.S.I.S. as of
The petition is impressed with merit. December 11, 1975 and the amount said plaintiffs should pay under their
There is no dispute as to the facts of the case. By agreement of the parties the Acct. No. 31055, there remains an outstanding balance of P1,611.12. This
issues in this case are limited to the loan of P350,000.00 denominated as amount represents the balance of the obligation of the plaintiffs to the
Account No. 31055 (Rollo, p. 79; Joint Record on Appeal, p. 129) subject of G.S.I.S. on Acct. No. 31442 as of December 11, 1975." (Decision, Civil Case
the Amendment of Real Mortgage dated July 6, 1962, the interpretation of No. 98390; Joint Record on Appeal, pp. 227-228; Rollo, p. 79).
which is the major issue in this case. To recapitulate, the difference in the computation lies in the inclusion of the
GSIS claims that the amendment of the real estate mortgage did not compounded interest as demanded by the GSIS on the one hand and the
supersede the original mortgage contract dated April 4, 1962 which was exclusion thereof, as insisted by the Medinas on the other.
being amended only with respect to the amount secured thereby, and the It is a basic and fundamental rule in the interpretation of contract that if the
amount of monthly amortizations. All other provisions of aforesaid mortgage terms thereof are clear and leave no doubt as to the intention of the
contract including that on compounding of interest were deemed rewritten contracting parties, the literal meaning of the stipulations shall control but
and thus binding on and enforceable against the respondent spouses. (Rollo, when the words appear contrary to the evident intention of the parties, the
pp. 162-166). latter shall prevail over, the former. In order to judge the intention of the
Accordingly, payments made by the Medinas in the total amount of parties, their contemporaneous and subsequent acts shall be principally
P991,845.53 was applied as follows: the amount of P600,495.51 to Account considered. (Sy v. Court of Appeals, 131 SCRA 116; July 31, 1984).
50
CREDIT
II. Loans (Mutuum)
There appears no ambiguity whatsoever in the terms and conditions of the Furthermore, it would be contrary to human experience and to ordinary
amendment of the mortgage contract herein quoted earlier. On the contrary, practice for the mortgagee to impose less onerous conditions on an increased
an opposite conclusion cannot be otherwise but absurd. loan by the deletion of compound interest exacted on a lesser loan.

As correctly stated by the GSIS in its brief (Rollo, pp. 162166), a careful II
perusal of the title, preamble and body of the Amendment of Real Estate
Mortgage dated July 6, 1962, taking into account the prior, There is an obvious error in the ruling of the Court of Appeals in its Decision
contemporaneous, and subsequent acts of the parties, ineluctably shows that dated January 18, 1980, which reads:
said Amendment was never intended to completely supersede the mortgage
contract dated April 4, 1962. ... We agree that plaintiff should be credited with P11,152.02 of the fire
insurance proceeds as the same is admitted in paragraph (4) of its Answer
First, the title "Amendment of Real Estate Mortgage" recognizes the and should be added to their payments. (par. 13).
existence and effectivity of the previous mortgage contract. Second, nowhere
in the aforesaid Amendment did the parties manifest their intention to Contrary thereto, paragraph 4 of the Answer of the GSIS states:
supersede the original contract. On the contrary in the WHEREAS clauses, That they (GSIS) specifically deny the allegations in Paragraph 11, the truth
the existence of the previous mortgage contract was fully recognized and the being that plaintiffs are not entitled to a credit of P19,381.07 as fire insurance
fact that the same was just being amended as to amount and amortization is proceeds since they were only entitled to, and were credited with, the amount
fully established as to obviate any doubt. Third, the Amendment of Real of P11,152.02 as proceeds of their fire insurance policy. (par. 4, Amended
Estate Mortgage dated July 6, 1962 does not embody the act of conveyancing Answer).
the subject properties by way of mortgage. In fact the intention of the parties
to be bound by the unaffected provisions of the mortgage contract of April 4, As can be gleaned from the foregoing, petitioner-appellant GSIS
1962 expressed in unmistakable language is clearly evident in the last had already credited the amount of P11,152.02. Thus, when the Court of
provision of the Amendment of Real Estate Mortgage dated July 6, 1962 Appeals made the aforequoted ruling, it was actually doubly crediting the
which reads: amount of P11,152.02 which had been previously credited by petitioner-
appellant GSIS (Rollo, pp. 170-171).
It is hereby expressly understood that with the foregoing amendment, all
other terms and conditions of the said real estate mortgage dated April 4, III.
1962, insofar as they are not inconsistent herewith, are hereby confirmed,
ratified and continued to be in full force and effect, and that the parties As to whether or not the interest rates on the loan accounts of the Medinas
hereto agree that the amendment be an integral part of said real estate are usurious, it has already been settled that the Usury Law applies only to
mortgage. (Emphasis supplied). interest by way of compensation for the use or forbearance of money (Lopez
v. Hernaez, 32 Phil. 631; Bachrach Motor Co. v. Espiritu, 52 Phil. 346;
A review of prior, contemporaneous, and subsequent acts supports the Equitable Banking Corporation v. Liwanag, 32 SCRA 293, March 30, 1970).
conclusion that both contracts are fully subsisting insofar as the latter is not Interest by way of damages is governed by Article 2209 of the Civil Code of
inconsistent with the former. The fact is the GSIS, as a matter of policy, the Philippines which provides:
imposes uniform terms and conditions for all its real estate loans, particularly
with respect to compounding of interest. As shown in the case at bar, the Art. 2209. If the obligation consists in the payment of a sum of money, and
original mortgage contract embodies the same terms and conditions as in the the debtor incurs in delay, the indemnity for damages, there being no
additional loan denominated as Account No. 31442 while the amendment stipulation to the contrary, shall be the payment of the interest agreed upon,...
carries the provision that it shall be subject to the same terms and conditions
as the real estate mortgage of April 4, 1962 except as to amount and In the Bachrach case (supra) the Supreme Court ruled that the Civil Code
amortization. permits the agreement upon a penalty apart from the interest. Should there be
such an agreement, the penalty does not include the interest, and as such the
51
CREDIT
II. Loans (Mutuum)
two are different and distinct things which may be demanded separately.
Reiterating the same principle in the later case of Equitable Banking Corp.
(supra), where this Court held that the stipulation about payment of such
additional rate partakes of the nature of a penalty clause, which is sanctioned
by law.

IV.

Based on the finding that the GSIS had the legal right to impose an interest
9% per annum, compounded monthly, on the loans of the Medinas and an
interest of 9%/12% per annum on all due and unpaid amortizations or
installments, there is no question that the Medinas failed to settle their
accounts with the GSIS which as computed by the latter reached an
outstanding balance of P630,130.55 as of April 12, 1975 and that the GSIS
had a perfect right to foreclose the mortgage.

In the same manner, there is obvious error in invalidating the extra-judicial


foreclosure on the basis of a typographical error in the Sheriff's Certificate of
Sale which stated that the mortgage was foreclosed on May 17, 1963 instead
of February 17, 1963.

There is merit in GSIS' contention that the Sheriff's Certificate of Sale is


merely provisional in character and is not intended to operate as an absolute
transfer of the subject property, but merely to Identify the property, to show
the price paid and the date when the right of redemption expires (Section 27,
Rule 39, Rules of Court, Francisco, The Revised Rules of Court, 1972 Vol.,
IV-B, Part I, p. 681). Hence the date of the foreclosed mortgage is not even a
material content of the said Certificate. (Rollo, p. 174).

V.

PREMISES CONSIDERED, the decision of the Court of Appeals, in CA-


G.R. No. 62541-R Medina, et al. v. Government Service Insurance System et
al., is hereby REVERSED and SET ASIDE, and a new one is hereby
RENDERED, affirming the validity of the extra-judicial foreclosure of the
real estate mortgages of the respondent-appellee spouses Medina dated April
4, 1962, as amended on July 6, 1962, and February 17, 1963.

SO ORDERED

52
CREDIT
II. Loans (Mutuum)
17.) [G.R. No. 138677. February 12, 2002] Two years later, or on 23 October 1987, petitioners filed a motion for
reconsideration of the order of the trial court declaring them as having
TOLOMEO LIGUTAN and LEONIDAS DE LA LLANA, petitioners, waived their right to present evidence and prayed that they be allowed to
vs. HON. COURT OF APPEALS & SECURITY BANK & TRUST prove their case. The court a quo denied the motion in an order, dated 5
COMPANY, respondents. September 1988, and on 20 October 1989, it rendered its
decision,[1] the dispositive portion of which read:
DECISION
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and
VITUG, J.: against the defendants, ordering the latter to pay, jointly and severally, to the
Before the Court is a petition for review on certiorari under Rule 45 of the plaintiff, as follows:
Rules of Court, assailing the decision and resolutions of the Court of Appeals "1. The sum of P114,416.00 with interest thereon at the rate of 15.189% per
in CA-G.R. CV No. 34594, entitled "Security Bank and Trust Co. annum, 2% service charge and 5% per month penalty charge, commencing
vs. Tolomeo Ligutan, et al." on 20 May 1982 until fully paid;
Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained on 11 May "2. To pay the further sum equivalent to 10% of the total amount of
1981 a loan in the amount of P120,000.00 from respondent Security Bank indebtedness for and as attorneys fees; and
and Trust Company. Petitioners executed a promissory note binding
themselves, jointly and severally, to pay the sum borrowed with an interest of "3. To pay the costs of the suit.[2]
15.189% per annum upon maturity and to pay a penalty of 5% every month
on the outstanding principal and interest in case of default. In addition, Petitioners interposed an appeal with the Court of Appeals, questioning the
petitioners agreed to pay 10% of the total amount due by way of attorneys rejection by the trial court of their motion to present evidence and assailing
fees if the matter were indorsed to a lawyer for collection or if a suit were the imposition of the 2% service charge, the 5% per month penalty charge
instituted to enforce payment. The obligation matured on 8 September 1981; and 10% attorney's fees. In its decision[3] of 7 March 1996, the appellate
the bank, however, granted an extension but only up until 29 December court affirmed the judgment of the trial court except on the matter of the 2%
1981. service charge which was deleted pursuant to Central Bank Circular No.
783. Not fully satisfied with the decision of the appellate court, both parties
Despite several demands from the bank, petitioners failed to settle the debt filed their respective motions for reconsideration. [4] Petitioners prayed for the
which, as of 20 May 1982, amounted to P114,416.10. On 30 September reduction of the 5% stipulated penalty for being unconscionable. The bank,
1982, the bank sent a final demand letter to petitioners informing them that on the other hand, asked that the payment of interest and penalty be
they had five days within which to make full payment. Since petitioners still commenced not from the date of filing of complaint but from the time of
defaulted on their obligation, the bank filed on 3 November 1982, with the default as so stipulated in the contract of the parties.
Regional Trial Court of Makati, Branch 143, a complaint for recovery of the
due amount. On 28 October 1998, the Court of Appeals resolved the two motions thusly:

After petitioners had filed a joint answer to the complaint, the bank presented We find merit in plaintiff-appellees claim that the principal sum of
its evidence and, on 27 March 1985, rested its case. Petitioners, instead of P114,416.00 with interest thereon must commence not on the date of filing of
introducing their own evidence, had the hearing of the case reset on two the complaint as we have previously held in our decision but on the date
consecutive occasions. In view of the absence of petitioners and their counsel when the obligation became due.
on 28 August 1985, the third hearing date, the bank moved, and the trial
court resolved, to consider the case submitted for decision. Default generally begins from the moment the creditor demands the
performance of the obligation. However, demand is not necessary to render
the obligor in default when the obligation or the law so provides.

53
CREDIT
II. Loans (Mutuum)
In the case at bar, defendants-appellants executed a promissory note where motion for reconsideration cannot be entertained under Section 2, Rule 52, of
they undertook to pay the obligation on its maturity date 'without necessity of the 1997 Rules of Civil Procedure. Furthermore, the appellate court said, the
demand.' They also agreed to pay the interest in case of non-payment from newly-discovered evidence being invoked by petitioners had actually been
the date of default. known to them when the case was brought on appeal and when the first
motion for reconsideration was filed.[7]
xxxxxxxxx
Aggrieved by the decision and resolutions of the Court of Appeals,
While we maintain that defendants-appellants must be bound by the contract petitioners elevated their case to this Court on 9 July 1999 via a petition for
which they acknowledged and signed, we take cognizance of their plea for review on certiorari under Rule 45 of the Rules of Court, submitting thusly -
the application of the provisions of Article 1229 x x x.
I. The respondent Court of Appeals seriously erred in not holding that the
Considering that defendants-appellants partially complied with their 15.189% interest and the penalty of three (3%) percent per month or thirty-
obligation under the promissory note by the reduction of the original amount six (36%) percent per annum imposed by private respondent bank on
of P120,000.00 to P114,416.00 and in order that they will finally settle their petitioners loan obligation are still manifestly exorbitant, iniquitous and
obligation, it is our view and we so hold that in the interest of justice and unconscionable.
public policy, a penalty of 3% per month or 36% per annum would suffice.
II. The respondent Court of Appeals gravely erred in not reducing to a
xxxxxxxxx reasonable level the ten (10%) percent award of attorneys fees which is
highly and grossly excessive, unreasonable and unconscionable.
WHEREFORE, the decision sought to be reconsidered is hereby
MODIFIED. The defendants- III. The respondent Court of Appeals gravely erred in not admitting
appellants Tolomeo Ligutan and Leonidas dela Llana are hereby ordered to petitioners newly discovered evidence which could not have been timely
pay the plaintiff-appellee Security Bank and Trust Company the following: produced during the trial of this case.
1. The sum of P114,416.00 with interest thereon at the rate of 15.189% per IV. The respondent Court of Appeals seriously erred in not holding that there
annum and 3% per month penalty charge commencing May 20, 1982 until was a novation of the cause of action of private respondents complaint in the
fully paid; instant case due to the subsequent execution of the real estate mortgage
during the pendency of this case and the subsequent foreclosure of the
2. The sum equivalent to 10% of the total amount of the indebtedness as and mortgage.[8]
for attorneys fees.[5]
Respondent bank, which did not take an appeal, would, however, have it that
On 16 November 1998, petitioners filed an omnibus motion for the penalty sought to be deleted by petitioners was even insufficient to fully
reconsideration and to admit newly discovered evidence, [6] alleging that cover and compensate for the cost of money brought about by the radical
while the case was pending before the trial court, devaluation and decrease in the purchasing power of the peso,
petitioner TolomeoLigutan and his wife Bienvenida Ligutan executed a real particularly vis-a-vis the U.S. dollar, taking into account the time frame of its
estate mortgage on 18 January 1984 to secure the existing indebtedness of occurrence. The Bank would stress that only the amount of P5,584.00 had
petitioners Ligutan and dela Llana with the bank. Petitioners contended that been remitted out of the entire loan of P120,000.00.[9]
the execution of the real estate mortgage had the effect of novating the
contract between them and the bank. Petitioners further averred that the A penalty clause, expressly recognized by law,[10] is an accessory
mortgage was extrajudicially foreclosed on 26 August 1986, that they were undertaking to assume greater liability on the part of an obligor in case of
not informed about it, and the bank did not credit them with the proceeds of breach of an obligation. It functions to strengthen the coercive force of the
the sale. The appellate court denied the omnibus motion for reconsideration obligation[11] and to provide, in effect, for what could be the liquidated
and to admit newly discovered evidence, ratiocinating that such a second damages resulting from such a breach. The obligor would then be bound to

54
CREDIT
II. Loans (Mutuum)
pay the stipulated indemnity without the necessity of proof on the existence interest prescribed in loan financing arrangements is a fundamental part of
and on the measure of damages caused by the breach. [12] Although a court the banking business and the core of a bank's existence.[19]
may not at liberty ignore the freedom of the parties to agree on such terms
and conditions as they see fit that contravene neither law nor morals, good Petitioners next assail the award of 10% of the total amount of indebtedness
customs, public order or public policy, a stipulated penalty, nevertheless, by way of attorney's fees for being grossly excessive, exorbitant and
may be equitably reduced by the courts if it is iniquitous or unconscionable unconscionable vis-a-vis the time spent and the extent of services rendered
or if the principal obligation has been partly or irregularly complied with. [13] by counsel for the bank and the nature of the case. Bearing in mind that the
rate of attorneys fees has been agreed to by the parties and intended to
The question of whether a penalty is reasonable or iniquitous can be partly answer not only for litigation expenses but also for collection efforts as
subjective and partly objective. Its resolution would depend on such factors well, the Court, like the appellate court, deems the award of 10% attorneys
as, but not necessarily confined to, the type, extent and purpose of the fees to be reasonable.
penalty, the nature of the obligation, the mode of breach and its
consequences, the supervening realities, the standing and relationship of the Neither can the appellate court be held to have erred in rejecting petitioners'
parties, and the like, the application of which, by and large, is addressed to call for a new trial or to admit newly discovered evidence. As the appellate
the sound discretion of the court. In Rizal Commercial Banking Corp. vs. court so held in its resolution of 14 May 1999 -
Court of Appeals,[14] just an example, the Court has tempered the penalty
charges after taking into account the debtors pitiful situation and its offer to Under Section 2, Rule 52 of the 1997 Rules of Civil Procedure, no second
settle the entire obligation with the creditor bank. The stipulated penalty motion for reconsideration of a judgment or final resolution by the same
might likewise be reduced when a partial or irregular performance is made party shall be entertained. Considering that the instant motion is already a
by the debtor.[15] The stipulated penalty might even be deleted such as when second motion for reconsideration, the same must therefore be denied.
there has been substantial performance in good faith by the obligor, [16] when Furthermore, it would appear from the records available to this court that the
the penalty clause itself suffers from fatal infirmity, or when exceptional newly-discovered evidence being invoked by defendants-appellants have
circumstances so exist as to warrant it.[17] actually been existent when the case was brought on appeal to this court as
The Court of Appeals, exercising its good judgment in the instant case, has well as when the first motion for reconsideration was filed. Hence, it is quite
reduced the penalty interest from 5% a month to 3% a month which surprising why defendants-appellants raised the alleged newly-discovered
petitioner still disputes. Given the circumstances, not to mention the repeated evidence only at this stage when they could have done so in the earlier
acts of breach by petitioners of their contractual obligation, the Court sees no pleadings filed before this court.
cogent ground to modify the ruling of the appellate court.. The propriety or acceptability of such a second motion for reconsideration is
Anent the stipulated interest of 15.189% per annum, petitioners, for the first not contingent upon the averment of 'new' grounds to assail the judgment,
time, question its reasonableness and prays that the Court reduce the i.e., grounds other than those theretofore presented and rejected. Otherwise,
amount. This contention is a fresh issue that has not been raised and attainment of finality of a judgment might be stayed off indefinitely,
ventilated before the courts below. In any event, the interest stipulation, on depending on the partys ingenuousness or cleverness in conceiving and
its face, does not appear as being that excessive. The essence or rationale for formulating 'additional flaws' or 'newly discovered errors' therein, or thinking
the payment of interest, quite often referred to as cost of money, is not up some injury or prejudice to the rights of the movant for reconsideration.[20]
exactly the same as that of a surcharge or a penalty. A penalty stipulation is At any rate, the subsequent execution of the real estate mortgage as security
not necessarily preclusive of interest, if there is an agreement to that effect, for the existing loan would not have resulted in the extinguishment of the
the two being distinct concepts which may separately be demanded. [18] What original contract of loan because of novation. Petitioners acknowledge that
may justify a court in not allowing the creditor to impose full surcharges and the real estate mortgage contract does not contain any express stipulation by
penalties, despite an express stipulation therefor in a valid agreement, may the parties intending it to supersede the existing loan agreement between the
not equally justify the non-payment or reduction of interest. Indeed, the petitioners and the bank.[21]Respondent bank has correctly postulated that the
55
CREDIT
II. Loans (Mutuum)
mortgage is but an accessory contract to secure the loan in the promissory
note.

Extinctive novation requires, first, a previous valid obligation; second, the


agreement of all the parties to the new contract; third, the extinguishment of
the obligation; and fourth, the validity of the new one.[22]In order that an
obligation may be extinguished by another which substitutes the same, it is
imperative that it be so declared in unequivocal terms, or that the old and the
new obligation be on every point incompatible with each other. [23] An
obligation to pay a sum of money is not extinctively novated by a new
instrument which merely changes the terms of payment or adding compatible
covenants or where the old contract is merely supplemented by the new
one.[24] When not expressed, incompatibility is required so as to ensure that
the parties have indeed intended such novation despite their failure to express
it in categorical terms. The incompatibility, to be sure, should take place in
any of the essential elements of the obligation, i.e., (1) the juridical relation
or tie, such as from a mere commodatum to lease of things, or
from negotiorum gestio to agency, or from a mortgage to antichresis,[25] or
from a sale to one of loan;[26] (2) the object or principal conditions, such as a
change of the nature of the prestation; or (3) the subjects, such as the
substitution of a debtor[27] or the subrogation of the
creditor. Extinctive novation does not necessarily imply that the new
agreement should be complete by itself; certain terms and conditions may be
carried, expressly or by implication, over to the new obligation.

WHEREFORE, the petition is DENIED.

SO ORDERED

56
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II. Loans (Mutuum)
18.) Republic of the Philippines On January 7, 1982 defendant Allied Brokerage Corporation received the
SUPREME COURT shipment from defendant Metro Port Service, Inc., one drum opened and
Manila without seal (per "Request for Bad Order Survey." Exh. D).
EN BANC
On January 8 and 14, 1982, defendant Allied Brokerage Corporation made
G.R. No. 97412 July 12, 1994 deliveries of the shipment to the consignee's warehouse. The latter excepted
EASTERN SHIPPING LINES, INC., petitioner, to one drum which contained spillages, while the rest of the contents was
vs. adulterated/fake (per "Bad Order Waybill" No. 10649, Exh. E).
HON. COURT OF APPEALS AND MERCANTILE INSURANCE Plaintiff contended that due to the losses/damage sustained by said drum, the
COMPANY, INC., respondents. consignee suffered losses totaling P19,032.95, due to the fault and negligence
Alojada & Garcia and Jimenea, Dala & Zaragoza for petitoner. of defendants. Claims were presented against defendants who failed and
Zapa Law Office for private respondent. refused to pay the same (Exhs. H, I, J, K, L).
VITUG, J.: As a consequence of the losses sustained, plaintiff was compelled to pay the
consignee P19,032.95 under the aforestated marine insurance policy, so that
The issues, albeit not completely novel, are: (a) whether or not a claim for it became subrogated to all the rights of action of said consignee against
damage sustained on a shipment of goods can be a solidary, or joint and defendants (per "Form of Subrogation", "Release" and Philbanking check,
several, liability of the common carrier, the arrastre operator and the customs Exhs. M, N, and O). (pp. 85-86, Rollo.)
broker; (b) whether the payment of legal interest on an award for loss or
damage is to be computed from the time the complaint is filed or from the There were, to be sure, other factual issues that confronted both courts. Here,
date the decision appealed from is rendered; and (c) whether the applicable the appellate court said:
rate of interest, referred to above, is twelve percent (12%) or six percent
(6%). Defendants filed their respective answers, traversing the material allegations
of the complaint contending that: As for defendant Eastern Shipping it
The findings of the court a quo, adopted by the Court of Appeals, on the alleged that the shipment was discharged in good order from the vessel unto
antecedent and undisputed facts that have led to the controversy are the custody of Metro Port Service so that any damage/losses incurred after
hereunder reproduced: the shipment was incurred after the shipment was turned over to the latter, is
no longer its liability (p. 17, Record); Metroport averred that although subject
This is an action against defendants shipping company, arrastre operator and shipment was discharged unto its custody, portion of the same was already in
broker-forwarder for damages sustained by a shipment while in defendants' bad order (p. 11, Record); Allied Brokerage alleged that plaintiff has no
custody, filed by the insurer-subrogee who paid the consignee the value of cause of action against it, not having negligent or at fault for the shipment
such losses/damages. was already in damage and bad order condition when received by it, but
On December 4, 1981, two fiber drums of riboflavin were shipped from nonetheless, it still exercised extra ordinary care and diligence in the
Yokohama, Japan for delivery vessel "SS EASTERN COMET" owned by handling/delivery of the cargo to consignee in the same condition shipment
defendant Eastern Shipping Lines under Bill of Lading was received by it.
No. YMA-8 (Exh. B). The shipment was insured under plaintiff's Marine From the evidence the court found the following:
Insurance Policy No. 81/01177 for P36,382,466.38.
The issues are:
Upon arrival of the shipment in Manila on December 12, 1981, it was
discharged unto the custody of defendant Metro Port Service, Inc. The latter 1. Whether or not the shipment sustained losses/damages;
excepted to one drum, said to be in bad order, which damage was unknown
to plaintiff.
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II. Loans (Mutuum)
2. Whether or not these losses/damages were sustained while in the custody A. Ordering defendants to pay plaintiff, jointly and severally:
of defendants (in whose respective custody, if determinable);
1. The amount of P19,032.95, with the present legal interest of 12% per
3. Whether or not defendant(s) should be held liable for the losses/damages annum from October 1, 1982, the date of filing of this complaints, until fully
(see plaintiff's pre-Trial Brief, Records, p. 34; Allied's pre-Trial Brief, paid (the liability of defendant Eastern Shipping, Inc. shall not exceed
adopting plaintiff's Records, p. 38). US$500 per case or the CIF value of the loss, whichever is lesser, while the
liability of defendant Metro Port Service, Inc. shall be to the extent of the
As to the first issue, there can be no doubt that the shipment sustained actual invoice value of each package, crate box or container in no case to
losses/damages. The two drums were shipped in good order and condition, as exceed P5,000.00 each, pursuant to Section 6.01 of the Management
clearly shown by the Bill of Lading and Commercial Invoice which do not Contract);
indicate any damages drum that was shipped (Exhs. B and C). But when on
December 12, 1981 the shipment was delivered to defendant Metro Port 2. P3,000.00 as attorney's fees, and
Service, Inc., it excepted to one drum in bad order.
3. Costs.
Correspondingly, as to the second issue, it follows that the losses/damages
were sustained while in the respective and/or successive custody and B. Dismissing the counterclaims and crossclaim of defendant/cross-claimant
possession of defendants carrier (Eastern), arrastre operator (Metro Port) and Allied Brokerage Corporation.
broker (Allied Brokerage). This becomes evident when the Marine Cargo
Survey Report (Exh. G), with its "Additional Survey Notes", are considered. SO ORDERED. (p. 207, Record).
In the latter notes, it is stated that when the shipment was "landed on vessel" Dissatisfied, defendant's recourse to US.
to dock of Pier # 15, South Harbor, Manila on December 12, 1981, it was
observed that "one (1) fiber drum (was) in damaged condition, covered by The appeal is devoid of merit.
the vessel's Agent's Bad Order Tally Sheet No. 86427." The report further
states that when defendant Allied Brokerage withdrew the shipment from After a careful scrutiny of the evidence on record. We find that the
defendant arrastre operator's custody on January 7, 1982, one drum was conclusion drawn therefrom is correct. As there is sufficient evidence that the
found opened without seal, cello bag partly torn but contents intact. Net shipment sustained damage while in the successive possession of appellants,
unrecovered spillages was and therefore they are liable to the appellee, as subrogee for the amount it
15 kgs. The report went on to state that when the drums reached the paid to the consignee. (pp. 87-89, Rollo.)
consignee, one drum was found with adulterated/faked contents. It is
obvious, therefore, that these losses/damages occurred before the shipment The Court of Appeals thus affirmed in toto the judgment of the court
reached the consignee while under the successive custodies of defendants. a quo.
Under Art. 1737 of the New Civil Code, the common carrier's duty to
In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes
observe extraordinary diligence in the vigilance of goods remains in full
error and grave abuse of discretion on the part of the appellate court when —
force and effect even if the goods are temporarily unloaded and stored in
transit in the warehouse of the carrier at the place of destination, until the I. IT HELD PETITIONER CARRIER JOINTLY AND SEVERALLY
consignee has been advised and has had reasonable opportunity to remove or LIABLE WITH THE ARRASTRE OPERATOR AND CUSTOMS
dispose of the goods (Art. 1738, NCC). Defendant Eastern Shipping's own BROKER FOR THE CLAIM OF PRIVATE RESPONDENT AS
exhibit, the "Turn-Over Survey of Bad Order Cargoes" (Exhs. 3-Eastern) GRANTED IN THE QUESTIONED DECISION;
states that on December 12, 1981 one drum was found "open".
II. IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF
and thus held: PRIVATE RESPONDENT SHOULD COMMENCE FROM THE DATE OF
THE FILING OF THE COMPLAINT AT THE RATE OF TWELVE
WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered:
58
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II. Loans (Mutuum)
PERCENT PER ANNUM INSTEAD OF FROM THE DATE OF THE We do not, of course, imply by the above pronouncement that the arrastre
DECISION OF THE TRIAL COURT AND ONLY AT THE RATE OF SIX operator and the customs broker are themselves always and necessarily liable
PERCENT PER ANNUM, PRIVATE RESPONDENT'S CLAIM BEING solidarily with the carrier, or vice-versa, nor that attendant facts in a given
INDISPUTABLY UNLIQUIDATED. case may not vary the rule. The instant petition has been brought solely by
Eastern Shipping Lines, which, being the carrier and not having been able to
The petition is, in part, granted. rebut the presumption of fault, is, in any event, to be held liable in this
particular case. A factual finding of both the court a quo and the appellate
In this decision, we have begun by saying that the questions raised by court, we take note, is that "there is sufficient evidence that the shipment
petitioner carrier are not all that novel. Indeed, we do have a fairly good sustained damage while in the successive possession of appellants" (the
number of previous decisions this Court can merely tack to. herein petitioner among them). Accordingly, the liability imposed on Eastern
The common carrier's duty to observe the requisite diligence in the shipment Shipping Lines, Inc., the sole petitioner in this case, is inevitable regardless
of goods lasts from the time the articles are surrendered to or unconditionally of whether there are others solidarily liable with it.
placed in the possession of, and received by, the carrier for transportation It is over the issue of legal interest adjudged by the appellate court that
until delivered to, or until the lapse of a reasonable time for their acceptance deserves more than just a passing remark.
by, the person entitled to receive them (Arts. 1736-1738, Civil Code; Ganzon
vs. Court of Appeals, 161 SCRA 646; Kui Bai vs. Dollar Steamship Lines, Let us first see a chronological recitation of the major rulings of this Court:
52 Phil. 863). When the goods shipped either are lost or arrive in damaged
condition, a presumption arises against the carrier of its failure to observe The early case of Malayan Insurance Co., Inc., vs. Manila Port
that diligence, and there need not be an express finding of negligence to hold Service,2 decided3 on 15 May 1969, involved a suit for recovery of money
it liable (Art. 1735, Civil Code; Philippine National Railways vs. Court of arising out of short deliveries and pilferage of goods. In this case, appellee
Appeals, 139 SCRA 87; Metro Port Service vs. Court of Appeals, 131 SCRA Malayan Insurance (the plaintiff in the lower court) averred in its complaint
365). There are, of course, exceptional cases when such presumption of fault that the total amount of its claim for the value of the undelivered goods
is not observed but these cases, enumerated in Article 1734 1 of the Civil amounted to P3,947.20. This demand, however, was neither established in its
Code, are exclusive, not one of which can be applied to this case. totality nor definitely ascertained. In the stipulation of facts later entered into
by the parties, in lieu of proof, the amount of P1,447.51 was agreed upon.
The question of charging both the carrier and the arrastre operator with the The trial court rendered judgment ordering the appellants (defendants)
obligation of properly delivering the goods to the consignee has, too, been Manila Port Service and Manila Railroad Company to pay appellee Malayan
passed upon by the Court. In Fireman's Fund Insurance vs. Metro Port Insurance the sum of P1,447.51 with legal interest thereon from the date the
Services (182 SCRA 455), we have explained, in holding the carrier and the complaint was filed on 28 December 1962 until full payment thereof. The
arrastre operator liable in solidum, thus: appellants then assailed, inter alia, the award of legal interest. In sustaining
the appellants, this Court ruled:
The legal relationship between the consignee and the arrastre operator is akin
to that of a depositor and warehouseman (Lua Kian v. Manila Railroad Co., Interest upon an obligation which calls for the payment of money, absent a
19 SCRA 5 [1967]. The relationship between the consignee and the common stipulation, is the legal rate. Such interest normally is allowable from the date
carrier is similar to that of the consignee and the arrastre operator (Northern of demand, judicial or extrajudicial. The trial court opted for judicial demand
Motors, Inc. v. Prince Line, et al., 107 Phil. 253 [1960]). Since it is the duty as the starting point.
of the ARRASTRE to take good care of the goods that are in its custody and
to deliver them in good condition to the consignee, such responsibility also But then upon the provisions of Article 2213 of the Civil Code, interest
devolves upon the CARRIER. Both the ARRASTRE and the CARRIER are "cannot be recovered upon unliquidated claims or damages, except when the
therefore charged with the obligation to deliver the goods in good condition demand can be established with reasonable certainty." And as was held by
to the consignee. this Court in Rivera vs. Perez,4 L-6998, February 29, 1956, if the suit were
for damages, "unliquidated and not known until definitely ascertained,
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II. Loans (Mutuum)
assessed and determined by the courts after proof (Montilla c. Corporacion annum. This Circular shall take effect immediately. (Emphasis found in the
de P.P. Agustinos, 25 Phil. 447; Lichauco v. Guzman, text) —
38 Phil. 302)," then, interest "should be from the date of the decision."
(Emphasis supplied) should have, instead, been applied. This Court6 ruled:

The case of Reformina vs. Tomol,5 rendered on 11 October 1985, was for The judgments spoken of and referred to are judgments in litigations
"Recovery of Damages for Injury to Person and Loss of Property." After involving loans or forbearance of any money, goods or credits. Any other
trial, the lower court decreed: kind of monetary judgment which has nothing to do with, nor involving loans
or forbearance of any money, goods or credits does not fall within the
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and coverage of the said law for it is not within the ambit of the authority granted
third party defendants and against the defendants and third party plaintiffs as to the Central Bank.
follows:
xxx xxx xxx
Ordering defendants and third party plaintiffs Shell and Michael,
Incorporated to pay jointly and severally the following persons: Coming to the case at bar, the decision herein sought to be executed is one
rendered in an Action for Damages for injury to persons and loss of property
xxx xxx xxx and does not involve any loan, much less forbearances of any money, goods
or credits. As correctly argued by the private respondents, the law applicable
(g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of to the said case is Article 2209 of the New Civil Code which reads —
P131,084.00 which is the value of the boat F B Pacita III together with its
accessories, fishing gear and equipment minus P80,000.00 which is the value Art. 2209. — If the obligation consists in the payment of a sum of money,
of the insurance recovered and the amount of P10,000.00 a month as the and the debtor incurs in delay, the indemnity for damages, there being no
estimated monthly loss suffered by them as a result of the fire of May 6, stipulation to the contrary, shall be the payment of interest agreed upon, and
1969 up to the time they are actually paid or already the total sum of in the absence of stipulation, the legal interest which is six percent per
P370,000.00 as of June 4, 1972 with legal interest from the filing of the annum.
complaint until paid and to pay attorney's fees of P5,000.00 with costs
against defendants and third party plaintiffs. (Emphasis supplied.) The above rule was reiterated in Philippine Rabbit Bus Lines, Inc.,
v. Cruz,7 promulgated on 28 July 1986. The case was for damages
On appeal to the Court of Appeals, the latter modified the amount of occasioned by an injury to person and loss of property. The trial court
damages awarded but sustained the trial court in adjudging legal interest awarded private respondent Pedro Manabat actual and compensatory
from the filing of the complaint until fully paid. When the appellate court's damages in the amount of P72,500.00 with legal interest thereon from the
decision became final, the case was remanded to the lower court for filing of the complaint until fully paid. Relying on the Reformina
execution, and this was when the trial court issued its assailed resolution v. Tomol case, this Court8 modified the interest award from 12% to 6%
which applied the 6% interest per annum prescribed in Article 2209 of the interest per annum but sustained the time computation thereof, i.e., from the
Civil Code. In their petition for review on certiorari, the petitioners filing of the complaint until fully paid.
contended that Central Bank Circular
No. 416, providing thus — In Nakpil and Sons vs. Court of Appeals,9 the trial court, in an action for the
recovery of damages arising from the collapse of a building, ordered,
By virtue of the authority granted to it under Section 1 of Act 2655, as inter alia, the "defendant United Construction Co., Inc. (one of the
amended, Monetary Board in its Resolution No. 1622 dated July 29, 1974, petitioners)
has prescribed that the rate of interest for the loan, or forbearance of any . . . to pay the plaintiff, . . . , the sum of P989,335.68 with interest at the legal
money, goods, or credits and the rate allowed in judgments, in the absence of rate from November 29, 1968, the date of the filing of the complaint until full
express contract as to such rate of interest, shall be twelve (12%) percent per payment . . . ." Save from the modification of the amount granted by the

60
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II. Loans (Mutuum)
lower court, the Court of Appeals sustained the trial court's decision. When The subsequent case of American Express International, Inc.,
taken to this Court for review, the case, on 03 October 1986, was decided, vs. Intermediate Appellate Court11 was a petition for review
thus: on certiorari from the decision, dated 27 February 1985, of the then
Intermediate Appellate Court reducing the amount of moral and exemplary
WHEREFORE, the decision appealed from is hereby MODIFIED and damages awarded by the trial court, to P240,000.00 and P100,000.00,
considering the special and environmental circumstances of this case, we respectively, and its resolution, dated 29 April 1985, restoring the amount of
deem it reasonable to render a decision imposing, as We do hereby impose, damages awarded by the trial court, i.e., P2,000,000.00 as moral damages
upon the defendant and the third-party defendants (with the exception of and P400,000.00 as exemplary damages with interest thereon at 12% per
Roman Ozaeta) a solidary (Art. 1723, Civil Code, Supra. annum from notice of judgment, plus costs of suit. In a decision of 09
p. 10) indemnity in favor of the Philippine Bar Association of FIVE November 1988, this Court, while recognizing the right of the private
MILLION (P5,000,000.00) Pesos to cover all damages (with the exception to respondent to recover damages, held the award, however, for moral damages
attorney's fees) occasioned by the loss of the building (including interest by the trial court, later sustained by the IAC, to be inconceivably large. The
charges and lost rentals) and an additional ONE HUNDRED THOUSAND Court12 thus set aside the decision of the appellate court and rendered a new
(P100,000.00) Pesos as and for attorney's fees, the total sum being payable one, "ordering the petitioner to pay private respondent the sum of One
upon the finality of this decision. Upon failure to pay on such finality, twelve Hundred Thousand (P100,000.00) Pesos as moral damages, with
(12%) per cent interest per annum shall be imposed upon aforementioned six (6%) percent interest thereon computed from the finality of this decision
amounts from finality until paid. Solidary costs against the defendant and until paid. (Emphasis supplied)
third-party defendants (Except Roman Ozaeta). (Emphasis supplied)
Reformina came into fore again in the 21 February 1989 case of Florendo
A motion for reconsideration was filed by United Construction, contending v. Ruiz13 which arose from a breach of employment contract. For having been
that "the interest of twelve (12%) per cent per annum imposed on the total illegally dismissed, the petitioner was awarded by the trial court moral and
amount of the monetary award was in contravention of law." The exemplary damages without, however, providing any legal interest thereon.
Court10 ruled out the applicability of the Reformina and Philippine Rabbit When the decision was appealed to the Court of Appeals, the latter held:
Bus Lines cases and, in its resolution of 15 April 1988, it explained:
WHEREFORE, except as modified hereinabove the decision of the CFI of
There should be no dispute that the imposition of 12% interest pursuant to Negros Oriental dated October 31, 1972 is affirmed in all respects, with the
Central Bank Circular No. 416 . . . is applicable only in the following: (1) modification that defendants-appellants, except defendant-appellant Merton
loans; (2) forbearance of any money, goods or credit; and Munn, are ordered to pay, jointly and severally, the amounts stated in the
(3) rate allowed in judgments (judgments spoken of refer to judgments dispositive portion of the decision, including the sum of P1,400.00 in concept
involving loans or forbearance of any money, goods or credits. (Philippine of compensatory damages, with interest at the legal rate from the date of the
Rabbit Bus Lines Inc. v. Cruz, 143 SCRA 160-161 [1986]; Reformina v. filing of the complaint until fully paid(Emphasis supplied.)
Tomol, Jr., 139 SCRA 260 [1985]). It is true that in the instant case, there is
neither a loan or a forbearance, but then no interest is actually imposed The petition for review to this Court was denied. The records were thereupon
provided the sums referred to in the judgment are paid upon the finality of transmitted to the trial court, and an entry of judgment was made. The writ of
the judgment. It is delay in the payment of such final judgment, that will execution issued by the trial court directed that only compensatory damages
cause the imposition of the interest. should earn interest at 6% per annum from the date of the filing of the
complaint. Ascribing grave abuse of discretion on the part of the trial judge, a
It will be noted that in the cases already adverted to, the rate of interest is petition for certiorari assailed the said order. This Court said:
imposed on the total sum, from the filing of the complaint until paid; in other
words, as part of the judgment for damages. Clearly, they are not applicable . . . , it is to be noted that the Court of Appeals ordered the payment of
to the instant case. (Emphasis supplied.) interest "at the legal rate" from the time of the filing of the complaint. . . Said
circular [Central Bank Circular No. 416] does not apply to actions based on a
breach of employment contract like the case at bar. (Emphasis supplied)
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II. Loans (Mutuum)
The Court reiterated that the 6% interest per annum on the damages should general. Observe, too, that in these cases, a common time frame in the
be computed from the time the complaint was filed until the amount is fully computation of the 6% interest per annum has been applied, i.e., from the
paid. time the complaint is filed until the adjudged amount is fully paid.

Quite recently, the Court had another occasion to rule on the matter. National The "second group", did not alter the pronounced rule on the application of
Power Corporation vs. Angas,14decided on 08 May 1992, involved the the 6% or 12% interest per annum,17depending on whether or not the amount
expropriation of certain parcels of land. After conducting a hearing on the involved is a loan or forbearance, on the one hand, or one of indemnity for
complaints for eminent domain, the trial court ordered the petitioner to pay damage, on the other hand. Unlike, however, the "first group" which
the private respondents certain sums of money as just compensation for their remained consistent in holding that the running of the legal interest should be
lands so expropriated "with legal interest thereon . . . until fully paid." Again, from the time of the filing of the complaint until fully paid, the "second
in applying the 6% legal interest per annum under the Civil Code, the group" varied on the commencement of the running of the legal interest.
Court15 declared:
Malayan held that the amount awarded should bear legal interest from the
. . . , (T)he transaction involved is clearly not a loan or forbearance of money, date of the decision of the court a quo,explaining that "if the suit were for
goods or credits but expropriation of certain parcels of land for a public damages, 'unliquidated and not known until definitely ascertained, assessed
purpose, the payment of which is without stipulation regarding interest, and and determined by the courts after proof,' then, interest 'should be from the
the interest adjudged by the trial court is in the nature of indemnity for date of the decision.'" American Express International v. IAC, introduced a
damages. The legal interest required to be paid on the amount of just different time frame for reckoning the 6% interest by ordering it to be
compensation for the properties expropriated is manifestly in the form of "computed from the finality of (the) decision until paid." The Nakpil and
indemnity for damages for the delay in the payment thereof. Therefore, since Sons case ruled that 12% interest per annum should be imposed from the
the kind of interest involved in the joint judgment of the lower court sought finality of the decision until the judgment amount is paid.
to be enforced in this case is interest by way of damages, and not by way of
earnings from loans, etc. Art. 2209 of the Civil Code shall apply. The ostensible discord is not difficult to explain. The factual circumstances
may have called for different applications, guided by the rule that the courts
Concededly, there have been seeming variances in the above holdings. The are vested with discretion, depending on the equities of each case, on the
cases can perhaps be classified into two groups according to the similarity of award of interest. Nonetheless, it may not be unwise, by way of clarification
the issues involved and the corresponding rulings rendered by the court. The and reconciliation, to suggest the following rules of thumb for future
"first group" would consist of the cases of Reformina v. Tomol (1985), guidance.
Philippine Rabbit Bus Lines v. Cruz(1986), Florendo v. Ruiz (1989)
and National Power Corporation v. Angas (1992). In the "second group" I. When an obligation, regardless of its source, i.e., law, contracts, quasi-
would be Malayan Insurance Company v.Manila Port Service (1969), Nakpil contracts, delicts or quasi-delicts18 is breached, the contravenor can be held
and Sons v. Court of Appeals (1988), and American Express International liable for damages.19 The provisions under Title XVIII on "Damages" of the
v.Intermediate Appellate Court (1988). Civil Code govern in determining the measure of recoverable damages. 20

In the "first group", the basic issue focuses on the application of either the II. With regard particularly to an award of interest in the concept of actual
6% (under the Civil Code) or 12% (under the Central Bank Circular) and compensatory damages, the rate of interest, as well as the accrual
interest per annum. It is easily discernible in these cases that there has been a thereof, is imposed, as follows:
consistent holding that the Central Bank Circular imposing the 12%
interest per annum applies only to loans or forbearance16 of money, goods or 1. When the obligation is breached, and it consists in the payment of a sum of
credits, as well as to judgments involving such loan or forbearance of money, money, i.e., a loan or forbearance of money, the interest due should be that
goods or credits, and that the 6% interest under the Civil Code governs when which may have been stipulated in writing.21 Furthermore, the interest due
the transaction involves the payment of indemnities in the concept of damage shall itself earn legal interest from the time it is judicially demanded.22 In the
arising from the breach or a delay in the performance of obligations in absence of stipulation, the rate of interest shall be 12% per annum to be
62
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II. Loans (Mutuum)
computed from default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 116923 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 court24 at the rate of 6% per annum.25 No interest,
however, shall be adjudged on unliquidated claims or damages except when
or until the demand can be established with reasonable
certainty.26 Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty
cannot be so reasonably established at the time the demand is made, the
interest shall begin to run only from the date the judgment of the court is
made (at which time the quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final
and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance of credit.

WHEREFORE, the petition is partly GRANTED. The appealed decision is


AFFIRMED with the MODIFICATION that the legal interest to be paid is
SIX PERCENT (6%) on the amount due computed from the decision, dated
03 February 1988, of the court a quo. A TWELVE PERCENT (12%)
interest, in lieu of SIX PERCENT (6%), shall be imposed on such amount
upon finality of this decision until the payment thereof.

SO ORDERED.

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II. Loans (Mutuum)
19.) THIRD DIVISION On August 15, 1989, Tevesteco Arrastre-Stevedoring Co., Inc. (Tevesteco)
opened a savings and current account with BPI-FB. Soon thereafter, or on
BPI FAMILY BANK, G.R. No. 123498 August 25, 1989, First Metro Investment Corporation (FMIC) also opened a
Petitioner, time deposit account with the same branch of BPI-FB with a deposit
Present: of P100,000,000.00, to mature one year thence.

YNARES-SANTIAGO, J.,
Subsequently, on August 31, 1989, Franco opened three accounts, namely, a
Chairperson, current,[4] savings,[5] and time deposit,[6] with BPI-FB. The current and
- versus - AUSTRIA-MARTINEZ, savings accounts were respectively funded with an initial deposit
CHICO-NAZARIO, of P500,000.00 each, while the time deposit account had P1,000,000.00 with
NACHURA, and a maturity date of August 31, 1990. The total amount of P2,000,000.00 used
REYES, JJ. to open these accounts is traceable to a check issued by Tevesteco allegedly
in consideration of Francos introduction of Eladio Teves, [7] who was looking
AMADO FRANCO and COURT OF APPEALS, Promulgated: for a conduit bank to facilitate Tevestecos business transactions, to Jaime
Respondents. Sebastian, who was then BPI-FB SFDMs Branch Manager. In turn, the
November 23, 2007 funding for the P2,000,000.00 check was part of the P80,000,000.00 debited
by BPI-FB from FMICs time deposit account and credited to Tevestecos
x------------------------------------------------------------------------------------x current account pursuant to an Authority to Debit purportedly signed by
FMICs officers.

DECISION It appears, however, that the signatures of FMICs officers on the Authority to
Debit were forged.[8] On September 4, 1989, Antonio Ong,[9] upon being
NACHURA, J.: shown the Authority to Debit, personally declared his signature therein to be
a forgery. Unfortunately, Tevesteco had already effected several withdrawals
from its current account (to which had been credited the P80,000,000.00
covered by the forged Authority to Debit) amounting to P37,455,410.54,
including the P2,000,000.00 paid to Franco.
Banks are exhorted to treat the accounts of their depositors with meticulous
care and utmost fidelity. We reiterate this exhortation in the case at bench. On September 8, 1989, impelled by the need to protect its interests in light of
FMICs forgery claim, BPI-FB, thru its Senior Vice-President, Severino
Before us is a Petition for Review on Certiorari seeking the reversal of the Coronacion, instructed Jesus Arangorin[10] to debit Francos savings and
Court of Appeals (CA) Decision[1] in CA-G.R. CV No. 43424 which current accounts for the amounts remaining therein. [11] However, Francos
affirmed with modification the judgment[2] of the Regional Trial Court, time deposit account could not be debited due to the capacity limitations of
Branch 55, Manila (Manila RTC), in Civil Case No. 90-53295. BPI-FBs computer.[12]

This case has its genesis in an ostensible fraud perpetrated on the petitioner In the meantime, two checks[13] drawn by Franco against his BPI-FB current
BPI Family Bank (BPI-FB) allegedly by respondent Amado Franco (Franco) account were dishonored upon presentment for payment, and stamped with a
in conspiracy with other individuals,[3]some of whom opened and maintained notation account under garnishment. Apparently, Francos current account
separate accounts with BPI-FB, San Francisco del Monte (SFDM) branch, in was garnished by virtue of an Order of Attachment issued by the Regional
a series of transactions. Trial Court of Makati (Makati RTC) in Civil Case No. 89-4996 (Makati
Case), which had been filed by BPI-FB against Franco et al.,[14] to recover

64
CREDIT
II. Loans (Mutuum)
the P37,455,410.54 representing Tevestecos total withdrawals from its treat the accounts of its depositors with meticulous care. Thus, BPI-FB was
account. found liable to FMIC for the debited amount in its time deposit. It was
ordered to pay P65,332,321.99 plus interest at 17% per annum from August
Notably, the dishonored checks were issued by Franco and presented for 29, 1989 until fully restored. In turn, the 17% shall itself earn interest at 12%
payment at BPI-FB prior to Francos receipt of notice that his accounts were from October 4, 1989 until fully paid.
under garnishment.[15] In fact, at the time the Notice of Garnishment
dated September 27, 1989 was served on BPI-FB, Franco had yet to be In a related case, Edgardo Buenaventura, Myrna Lizardo and Yolanda Tica
impleaded in the Makati case where the writ of attachment was issued. (Buenaventura, et al.),[19] recipients of a P500,000.00 check proceeding from
the P80,000,000.00 mistakenly credited to Tevesteco, likewise filed suit.
It was only on May 15, 1990, through the service of a copy of the Second Buenaventura et al., as in the case of Franco, were also prevented from
Amended Complaint in Civil Case No. 89-4996, that Franco was impleaded effecting withdrawals[20] from their current account with BPI-FB, Bonifacio
in the Makati case.[16] Immediately, upon receipt of such copy, Franco filed a Market, Edsa, Caloocan City Branch. Likewise, when the case was elevated
Motion to Discharge Attachment which the Makati RTC granted on May 16, to this Court docketed as BPI Family Bank v. Buenaventura,[21] we ruled that
1990. The Order Lifting the Order of Attachment was served on BPI-FB on BPI-FB had no right to freeze Buenaventura, et al.s accounts and adjudged
even date, with Franco demanding the release to him of the funds in his BPI-FB liable therefor, in addition to damages.
savings and current accounts. Jesus Arangorin, BPI-FBs new manager, could
not forthwith comply with the demand as the funds, as previously stated, had Meanwhile, BPI-FB filed separate civil and criminal cases against those
already been debited because of FMICs forgery claim. As such, BPI-FBs believed to be the perpetrators of the multi-million peso scam.[22] In the
computer at the SFDM Branch indicated that the current account record was criminal case, Franco, along with the other accused, except for Manuel
not on file. Bienvenida who was still at large, were acquitted of the crime of Estafa as
defined and penalized under Article 351, par. 2(a) of the Revised Penal
With respect to Francos savings account, it appears that Franco agreed to an Code.[23] However, the civil case[24] remains under litigation and the
arrangement, as a favor to Sebastian, whereby P400,000.00 from his savings respective rights and liabilities of the parties have yet to be adjudicated.
account was temporarily transferred to Domingo Quiaoits savings account,
subject to its immediate return upon issuance of a certificate of deposit which Consequently, in light of BPI-FBs refusal to heed Francos demands to
Quiaoit needed in connection with his visa application at the Taiwan unfreeze his accounts and release his deposits therein, the latter filed on June
Embassy. As part of the arrangement, Sebastian retained custody of Quiaoits 4, 1990 with the Manila RTC the subject suit. In his complaint, Franco
savings account passbook to ensure that no withdrawal would be effected prayed for the following reliefs: (1) the interest on the remaining
therefrom, and to preserve Francos deposits. balance[25] of his current account which was eventually released to him on
October 31, 1991; (2) the balance[26] on his savings account, plus interest
On May 17, 1990, Franco pre-terminated his time deposit account. BPI-FB thereon; (3) the advance interest[27] paid to him which had been deducted
deducted the amount of P63,189.00 from the remaining balance of the time when he pre-terminated his time deposit account; and (4) the payment of
deposit account representing advance interest paid to him. actual, moral and exemplary damages, as well as attorneys fees.

These transactions spawned a number of cases, some of which we had BPI-FB traversed this complaint, insisting that it was correct in freezing the
already resolved. accounts of Franco and refusing to release his deposits, claiming that it had a
better right to the amounts which consisted of part of the money allegedly
FMIC filed a complaint against BPI-FB for the recovery of the amount fraudulently withdrawn from it by Tevesteco and ending up in Francos
of P80,000,000.00 debited from its account.[17] The case eventually reached accounts. BPI-FB asseverated that the claimed consideration
this Court, and in BPI Family Savings Bank, Inc. v. First Metro Investment of P2,000,000.00 for the introduction facilitated by Franco between George
Corporation,[18] we upheld the finding of the courts below that BPI-FB failed Daantos and Eladio Teves, on the one hand, and Jaime Sebastian, on the
to exercise the degree of diligence required by the nature of its obligation to other, spoke volumes of Francos participation in the fraudulent transaction.
65
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On August 4, 1993, the Manila RTC rendered judgment, the dispositive SO ORDERED.[29]
portion of which reads as follows:

WHEREFORE, in view of all the foregoing, judgment is hereby rendered in In this recourse, BPI-FB ascribes error to the CA when it ruled that: (1)
favor of [Franco] and against [BPI-FB], ordering the latter to pay to the Franco had a better right to the deposits in the subject accounts which are
former the following sums: part of the proceeds of a forged Authority to Debit; (2) Franco is entitled to
interest on his current account; (3) Franco can recover the P400,000.00
1. P76,500.00 representing the legal rate of interest on the amount deposit in Quiaoits savings account; (4) the dishonor of Francos checks was
of P450,000.00 from May 18, 1990 to October 31, 1991; not legally in order; (5) BPI-FB is liable for interest on Francos time deposit,
and for moral and exemplary damages; and (6) BPI-FBs counter-claim has
2. P498,973.23 representing the balance on [Francos] savings account as no factual and legal anchor.
of May 18, 1990, together with the interest thereon in accordance with the
banks guidelines on the payment therefor; The petition is partly meritorious.

3. P30,000.00 by way of attorneys fees; and We are in full accord with the common ruling of the lower courts that BPI-
FB cannot unilaterally freeze Francos accounts and preclude him from
4. P10,000.00 as nominal damages. withdrawing his deposits. However, contrary to the appellate courts ruling,
we hold that Franco is not entitled to unearned interest on the time deposit as
The counterclaim of the defendant is DISMISSED for lack of factual and well as to moral and exemplary damages.
legal anchor.
First. On the issue of who has a better right to the deposits in Francos
Costs against [BPI-FB]. accounts, BPI-FB urges us that the legal consequence of FMICs forgery
claim is that the money transferred by BPI-FB to Tevesteco is its own, and
SO ORDERED.[28] considering that it was able to recover possession of the same when the
money was redeposited by Franco, it had the right to set up its ownership
thereon and freeze Francos accounts.
Unsatisfied with the decision, both parties filed their respective appeals
before the CA. Franco confined his appeal to the Manila RTCs denial of his BPI-FB contends that its position is not unlike that of an owner of personal
claim for moral and exemplary damages, and the diminutive award of property who regains possession after it is stolen, and to illustrate this point,
attorneys fees. In affirming with modification the lower courts decision, the BPI-FB gives the following example: where Xs television set is stolen by Y
appellate court decreed, to wit: who thereafter sells it to Z, and where Z unwittingly entrusts possession of
the TV set to X, the latter would have the right to keep possession of the
WHEREFORE, foregoing considered, the appealed decision is hereby property and preclude Z from recovering possession thereof. To bolster its
AFFIRMED with modification ordering [BPI-FB] to pay position, BPI-FB cites Article 559 of the Civil Code, which provides:
[Franco] P63,189.00 representing the interest deducted from the time deposit
of plaintiff-appellant. P200,000.00 as moral damages and P100,000.00 as Article 559. The possession of movable property acquired in good faith is
exemplary damages, deleting the award of nominal damages (in view of the equivalent to a title. Nevertheless, one who has lost any movable or has been
award of moral and exemplary damages) and increasing the award of unlawfully deprived thereof, may recover it from the person in possession of
attorneys fees from P30,000.00 to P75,000.00. the same.

Cost against [BPI-FB].


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If the possessor of a movable lost or of which the owner has been unlawfully of money in banks is governed by the Civil Code provisions on simple loan
deprived, has acquired it in good faith at a public sale, the owner cannot or mutuum.[36] As there is a debtor-creditor relationship between a bank and
obtain its return without reimbursing the price paid therefor. its depositor, BPI-FB ultimately acquired ownership of Francos deposits, but
such ownership is coupled with a corresponding obligation to pay him an
equal amount on demand.[37] Although BPI-FB owns the deposits in Francos
BPI-FBs argument is unsound. To begin with, the movable property accounts, it cannot prevent him from demanding payment of BPI-FBs
mentioned in Article 559 of the Civil Code pertains to a specific or obligation by drawing checks against his current account, or asking for the
determinate thing.[30] A determinate or specific thing is one that is release of the funds in his savings account. Thus, when Franco issued checks
individualized and can be identified or distinguished from others of the same drawn against his current account, he had every right as creditor to expect
kind.[31] that those checks would be honored by BPI-FB as debtor.

In this case, the deposit in Francos accounts consists of money which, albeit More importantly, BPI-FB does not have a unilateral right to freeze the
characterized as a movable, is generic and fungible. [32] The quality of being accounts of Franco based on its mere suspicion that the funds therein were
fungible depends upon the possibility of the property, because of its nature or proceeds of the multi-million peso scam Franco was allegedly involved in.
the will of the parties, being substituted by others of the same kind, not To grant BPI-FB, or any bank for that matter, the right to take whatever
having a distinct individuality.[33] action it pleases on deposits which it supposes are derived from shady
transactions, would open the floodgates of public distrust in the banking
Significantly, while Article 559 permits an owner who has lost or has been industry.
unlawfully deprived of a movable to recover the exact same thing from the
current possessor, BPI-FB simply claims ownership of the equivalent amount Our pronouncement in Simex International (Manila), Inc. v. Court of
of money, i.e., the value thereof, which it had mistakenly debited from Appeals[38] continues to resonate, thus:
FMICs account and credited to Tevestecos, and subsequently traced to
Francos account. In fact, this is what BPI-FB did in filing the Makati Case The banking system is an indispensable institution in the modern world and
against Franco, et al. It staked its claim on the money itself which passed plays a vital role in the economic life of every civilized nation. Whether as
from one account to another, commencing with the forged Authority to mere passive entities for the safekeeping and saving of money or as active
Debit. instruments of business and commerce, banks have become an ubiquitous
presence among the people, who have come to regard them with respect and
It bears emphasizing that money bears no earmarks of peculiar even gratitude and, most of all, confidence. Thus, even the humble wage-
ownership,[34] and this characteristic is all the more manifest in the instant earner has not hesitated to entrust his lifes savings to the bank of his choice,
case which involves money in a banking transaction gone awry. Its primary knowing that they will be safe in its custody and will even earn some interest
function is to pass from hand to hand as a medium of exchange, without for him. The ordinary person, with equal faith, usually maintains a modest
other evidence of its title.[35] Money, which had passed through various checking account for security and convenience in the settling of his monthly
transactions in the general course of banking business, even if of traceable bills and the payment of ordinary expenses. x x x.
origin, is no exception.
In every case, the depositor expects the bank to treat his account with the
Thus, inasmuch as what is involved is not a specific or determinate personal utmost fidelity, whether such account consists only of a few hundred pesos or
property, BPI-FBs illustrative example, ostensibly based on Article 559, is of millions. The bank must record every single transaction accurately, down
inapplicable to the instant case. to the last centavo, and as promptly as possible. This has to be done if the
account is to reflect at any given time the amount of money the depositor can
There is no doubt that BPI-FB owns the deposited monies in the accounts of dispose of as he sees fit, confident that the bank will deliver it as and to
Franco, but not as a legal consequence of its unauthorized transfer of FMICs whomever directs. A blunder on the part of the bank, such as the dishonor of
deposits to Tevestecos account. BPI-FB conveniently forgets that the deposit the check without good reason, can cause the depositor not a little
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II. Loans (Mutuum)
embarrassment if not also financial loss and perhaps even civil and criminal RTC from ruling on BPI-FBs liability to Franco for payment of interest
litigation. based on its continued and unjustified refusal to perform a contractual
obligation upon demand. After all, this was the core issue raised by Franco in
The point is that as a business affected with public interest and because of the his complaint before the Manila RTC.
nature of its functions, the bank is under obligation to treat the accounts of its
depositors with meticulous care, always having in mind the fiduciary nature Third. As to the award to Franco of the deposits in Quiaoits account, we find
of their relationship. x x x. no reason to depart from the factual findings of both the Manila RTC and the
CA.

Ineluctably, BPI-FB, as the trustee in the fiduciary relationship, is duty Noteworthy is the fact that Quiaoit himself testified that the deposits in his
bound to know the signatures of its customers. Having failed to detect the account are actually owned by Franco who simply accommodated Jaime
forgery in the Authority to Debit and in the process inadvertently facilitate Sebastians request to temporarily transfer P400,000.00 from Francos savings
the FMIC-Tevesteco transfer, BPI-FB cannot now shift liability thereon to account to Quiaoits account.[40] His testimony cannot be characterized as
Franco and the other payees of checks issued by Tevesteco, or prevent hearsay as the records reveal that he had personal knowledge of the
withdrawals from their respective accounts without the appropriate court writ arrangement made between Franco, Sebastian and himself. [41]
or a favorable final judgment.
BPI-FB makes capital of Francos belated allegation relative to this particular
Further, it boggles the mind why BPI-FB, even without delving into the arrangement. It insists that the transaction with Quiaoit was not specifically
authenticity of the signature in the Authority to Debit, effected the transfer alleged in Francos complaint before the Manila RTC. However, it appears
of P80,000,000.00 from FMICs to Tevestecos account, when FMICs account that BPI-FB had impliedly consented to the trial of this issue given its
was a time deposit and it had already paid advance interest to FMIC. extensive cross-examination of Quiaoit.
Considering that there is as yet no indubitable evidence establishing Francos
participation in the forgery, he remains an innocent party. As between him Section 5, Rule 10 of the Rules of Court provides:
and BPI-FB, the latter, which made possible the present predicament, must
bear the resulting loss or inconvenience. Section 5. Amendment to conform to or authorize presentation of
evidence. When issues not raised by the pleadings are tried with the
Second. With respect to its liability for interest on Francos current account, express or implied consent of the parties, they shall be treated in all
BPI-FB argues that its non-compliance with the Makati RTCs Order Lifting respects as if they had been raised in the pleadings. Such amendment of
the Order of Attachment and the legal consequences thereof, is a matter that the pleadings as may be necessary to cause them to conform to the
ought to be taken up in that court. evidence and to raise these issues may be made upon motion of any party
at any time, even after judgment; but failure to amend does not affect
The argument is tenuous. We agree with the succinct holding of the appellate the result of the trial of these issues. If evidence is objected to at the trial on
court in this respect. The Manila RTCs order to pay interests on Francos the ground that it is now within the issues made by the pleadings, the court
current account arose from BPI-FBs unjustified refusal to comply with its may allow the pleadings to be amended and shall do so with liberality if the
obligation to pay Franco pursuant to their contract of mutuum. In other presentation of the merits of the action and the ends of substantial justice will
words, from the time BPI-FB refused Francos demand for the release of the be subserved thereby. The court may grant a continuance to enable the
deposits in his current account, specifically, from May 17, 1990, interest at amendment to be made. (Emphasis supplied)
the rate of 12% began to accrue thereon.[39]

Undeniably, the Makati RTC is vested with the authority to determine the In all, BPI-FBs argument that this case is not the right forum for Franco to
legal consequences of BPI-FBs non-compliance with the Order Lifting the recover the P400,000.00 begs the issue. To reiterate, Quiaoit, testifying
Order of Attachment. However, such authority does not preclude the Manila during the trial, unequivocally disclaimed ownership of the funds in his
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II. Loans (Mutuum)
account, and pointed to Franco as the actual owner thereof. Clearly, Francos ruling of the trial court, and allow only the recovery of nominal damages in
action for the recovery of his deposits appropriately covers the deposits in the amount of P10,000.00. However, we retain the CAs award of P75,000.00
Quiaoits account. as attorneys fees.
In granting Francos prayer for interest on his time deposit account and for
Fourth. Notwithstanding all the foregoing, BPI-FB continues to insist that moral and exemplary damages, the CA attributed bad faith to BPI-FB
the dishonor of Francos checks respectively dated September 11 and 18, because it (1) completely disregarded its obligation to Franco; (2)
1989 was legally in order in view of the Makati RTCs supplemental writ of misleadingly claimed that Francos deposits were under garnishment; (3)
attachment issued on September 14, 1989. It posits that as the party that misrepresented that Francos current account was not on file; and (4) refused
applied for the writ of attachment before the Makati RTC, it need not be to return the P400,000.00 despite the fact that the ostensible owner, Quiaoit,
served with the Notice of Garnishment before it could place Francos wanted the amount returned to Franco.
accounts under garnishment.
In this regard, we are guided by Article 2201 of the Civil Code which
The argument is specious. In this argument, we perceive BPI-FBs clever but provides:
transparent ploy to circumvent Section 4,[42] Rule 13 of the Rules of Court. It
should be noted that the strict requirement on service of court papers upon Article 2201. In contracts and quasi-contracts, the damages for which the
the parties affected is designed to comply with the elementary requisites of obligor who acted in good faith is liable shall be those that are the natural and
due process. Franco was entitled, as a matter of right, to notice, if the probable consequences of the breach of the obligation, and which the parties
requirements of due process are to be observed. Yet, he received a copy of have foreseen or could have reasonable foreseen at the time the obligation
the Notice of Garnishment only on September 27, 1989, several days after was constituted.
the two checks he issued were dishonored by BPI-FB on September 20 and
21, 1989. Verily, it was premature for BPI-FB to freeze Francos accounts In case of fraud, bad faith, malice or wanton attitude, the obligor shall
without even awaiting service of the Makati RTCs Notice of Garnishment on be responsible for all damages which may be reasonably attributed to
Franco. the non-performance of the obligation. (Emphasis supplied.)

Additionally, it should be remembered that the enforcement of a writ of


attachment cannot be made without including in the main suit the owner of We find, as the trial court did, that BPI-FB acted out of the impetus of self-
the property attached by virtue thereof. Section 5, Rule 13 of the Rules of protection and not out of malevolence or ill will. BPI-FB was not in the
Court specifically provides that no levy or attachment pursuant to the writ corrupt state of mind contemplated in Article 2201 and should not be held
issued x x x shall be enforced unless it is preceded, or contemporaneously liable for all damages now being imputed to it for its breach of obligation.
accompanied, by service of summons, together with a copy of the complaint, For the same reason, it is not liable for the unearned interest on the time
the application for attachment, on the defendant within the Philippines. deposit.

Franco was impleaded as party-defendant only on May 15, 1990. The Makati Bad faith does not simply connote bad judgment or negligence; it imports a
RTC had yet to acquire jurisdiction over the person of Franco when BPI-FB dishonest purpose or some moral obliquity and conscious doing of wrong; it
garnished his accounts.[43] Effectively, therefore, the Makati RTC had no partakes of the nature of fraud.[44] We have held that it is a breach of a known
authority yet to bind the deposits of Franco through the writ of attachment, duty through some motive of interest or ill will.[45] In the instant case, we
and consequently, there was no legal basis for BPI-FB to dishonor the checks cannot attribute to BPI-FB fraud or even a motive of self-enrichment. As the
issued by Franco. trial court found, there was no denial whatsoever by BPI-FB of the existence
of the accounts. The computer-generated document which indicated that the
Fifth. Anent the CAs finding that BPI-FB was in bad faith and as such liable current account was not on file resulted from the prior debit by BPI-FB of the
for the advance interest it deducted from Francos time deposit account, and deposits. The remedy of freezing the account, or the garnishment, or even the
for moral as well as exemplary damages, we find it proper to reinstate the outright refusal to honor any transaction thereon was resorted to solely for
69
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the purpose of holding on to the funds as a security for its intended court complexity of the issues and the time it has taken for this case to be
action,[46] and with no other goal but to ensure the integrity of the accounts. resolved.[56]

We have had occasion to hold that in the absence of fraud or bad Sixth. As for the dismissal of BPI-FBs counter-claim, we uphold the Manila
faith,[47] moral damages cannot be awarded; and that the adverse result of an RTCs ruling, as affirmed by the CA, that BPI-FB is not entitled to
action does not per se make the action wrongful, or the party liable for it. recover P3,800,000.00 as actual damages. BPI-FBs alleged loss of profit as a
One may err, but error alone is not a ground for granting such damages. [48] result of Francos suit is, as already pointed out, of its own
An award of moral damages contemplates the existence of the following making. Accordingly, the denial of its counter-claim is in order.
requisites: (1) there must be an injury clearly sustained by the claimant,
whether physical, mental or psychological; (2) there must be a culpable act or WHEREFORE, the petition is PARTIALLY GRANTED. The Court of
omission factually established; (3) the wrongful act or omission of the Appeals Decision dated November 29, 1995 is AFFIRMED with
defendant is the proximate cause of the injury sustained by the claimant; and the MODIFICATION that the award of unearned interest on the time
(4) the award for damages is predicated on any of the cases stated in Article deposit and of moral and exemplary damages is DELETED.
2219 of the Civil Code.[49]
No pronouncement as to costs.
Franco could not point to, or identify any particular circumstance in Article
2219 of the Civil Code,[50] upon which to base his claim for moral damages. SO ORDERED.

Thus, not having acted in bad faith, BPI-FB cannot be held liable for moral
damages under Article 2220 of the Civil Code for breach of contract. [51]

We also deny the claim for exemplary damages. Franco should show that he
is entitled to moral, temperate, or compensatory damages before the court
may even consider the question of whether exemplary damages should be
awarded to him.[52] As there is no basis for the award of moral damages,
neither can exemplary damages be granted.

While it is a sound policy not to set a premium on the right to litigate, [53] we,
however, find that Franco is entitled to reasonable attorneys fees for having
been compelled to go to court in order to assert his right. Thus, we affirm the
CAs grant of P75,000.00 as attorneys fees.

Attorneys fees may be awarded when a party is compelled to litigate or incur


expenses to protect his interest,[54] or when the court deems it just and
equitable.[55] In the case at bench, BPI-FB refused to unfreeze the deposits of
Franco despite the Makati RTCs Order Lifting the Order of Attachment and
Quiaoits unwavering assertion that the P400,000.00 was part of Francos
savings account. This refusal constrained Franco to incur expenses and
litigate for almost two (2) decades in order to protect his interests and recover
his deposits. Therefore, this Court deems it just and equitable to grant
Franco P75,000.00 as attorneys fees. The award is reasonable in view of the

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20.) Republic of the Philippines Iloilo, without the knowledge and/or consent of the management of the Bank
SUPREME COURT and with intent of gain, did then and there willfully, unlawfully and
Manila feloniously take, steal and carry away the sum of FIFTEEN THOUSAND
PESOS (P15,000.00), Philippine Currency, to the damage and prejudice of
THIRD DIVISION the said bank in the aforesaid amount.

G.R. Nos. 173654-765 August 28, 2008 After perusing the Informations in these cases, the trial court did not find the
existence of probable cause that would have necessitated the issuance of a
PEOPLE OF THE PHILIPPINES, petitioner, warrant of arrest based on the following grounds:
vs.
TERESITA PUIG and ROMEO PORRAS, respondents. (1) the element of ‘taking without the consent of the owners’ was missing
on the ground that it is the depositors-clients, and not the Bank, which filed
DECISION the complaint in these cases, who are the owners of the money allegedly
taken by respondents and hence, are the real parties-in-interest; and
CHICO-NAZARIO, J.:
(2) the Informations are bereft of the phrase alleging "dependence,
This is a Petition for Review under Rule 45 of the Revised Rules of Court
guardianship or vigilance between the respondents and the offended
with petitioner People of the Philippines, represented by the Office of the
party that would have created a high degree of confidence between them
Solicitor General, praying for the reversal of the Orders dated 30 January
which the respondents could have abused."
2006 and 9 June 2006 of the Regional Trial Court (RTC) of the 6 th Judicial
Region, Branch 68, Dumangas, Iloilo, dismissing the 112 cases of Qualified It added that allowing the 112 cases for Qualified Theft filed against the
Theft filed against respondents Teresita Puig and Romeo Porras, and denying respondents to push through would be violative of the right of the
petitioner’s Motion for Reconsideration, in Criminal Cases No. 05-3054 to respondents under Section 14(2), Article III of the 1987 Constitution which
05-3165. states that in all criminal prosecutions, the accused shall enjoy the right to be
informed of the nature and cause of the accusation against him. Following
The following are the factual antecedents:
Section 6, Rule 112 of the Revised Rules of Criminal Procedure, the RTC
On 7 November 2005, the Iloilo Provincial Prosecutor’s Office filed before dismissed the cases on 30 January 2006 and refused to issue a warrant of
Branch 68 of the RTC in Dumangas, Iloilo, 112 cases of Qualified Theft arrest against Puig and Porras.
against respondents Teresita Puig (Puig) and Romeo Porras (Porras) who
A Motion for Reconsideration2 was filed on 17 April 2006, by the petitioner.
were the Cashier and Bookkeeper, respectively, of private complainant Rural
Bank of Pototan, Inc. The cases were docketed as Criminal Cases No. 05- On 9 June 2006, an Order3 denying petitioner’s Motion for Reconsideration
3054 to 05-3165. was issued by the RTC, finding as follows:
The allegations in the Informations1 filed before the RTC were uniform and Accordingly, the prosecution’s Motion for Reconsideration should be, as it
pro-forma, except for the amounts, date and time of commission, to wit: hereby, DENIED. The Order dated January 30, 2006 STANDS in all
respects.
INFORMATION
Petitioner went directly to this Court via Petition for Review
That on or about the 1st day of August, 2002, in the Municipality of Pototan,
on Certiorari under Rule 45, raising the sole legal issue of:
Province of Iloilo, Philippines, and within the jurisdiction of this Honorable
Court, above-named [respondents], conspiring, confederating, and helping WHETHER OR NOT THE 112 INFORMATIONS FOR QUALIFIED
one another, with grave abuse of confidence, being THEFT SUFFICIENTLY ALLEGE THE ELEMENT OF TAKING
the Cashier and Bookkeeper of the Rural Bank of Pototan, Inc., Pototan,
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II. Loans (Mutuum)
WITHOUT THE CONSENT OF THE OWNER, AND THE QUALIFYING the qualifying circumstance of grave abuse of confidence; and (b) the
CIRCUMSTANCE OF GRAVE ABUSE OF CONFIDENCE. element of taking, with intent to gain and without the consent of the owner,
which is the Bank.
Petitioner prays that judgment be rendered annulling and setting aside the
Orders dated 30 January 2006 and 9 June 2006 issued by the trial court, and In determining the existence of probable cause to issue a warrant of arrest,
that it be directed to proceed with Criminal Cases No. 05-3054 to 05-3165. the RTC judge found the allegations in the Information inadequate. He ruled
that the Information failed to state facts constituting the qualifying
Petitioner explains that under Article 1980 of the New Civil Code, "fixed, circumstance of grave abuse of confidence and the element of taking without
savings, and current deposits of money in banks and similar institutions shall the consent of the owner, since the owner of the money is not the Bank, but
be governed by the provisions concerning simple loans." Corollary thereto, the depositors therein. He also cites People v. Koc Song,4 in which this Court
Article 1953 of the same Code provides that "a person who receives a loan of held:
money or any other fungible thing acquires the ownership thereof, and is
bound to pay to the creditor an equal amount of the same kind and quality." There must be allegation in the information and proof of a relation, by reason
Thus, it posits that the depositors who place their money with the bank are of dependence, guardianship or vigilance, between the respondents and the
considered creditors of the bank. The bank acquires ownership of the money offended party that has created a high degree of confidence between them,
deposited by its clients, making the money taken by respondents as which the respondents abused.
belonging to the bank.
At this point, it needs stressing that the RTC Judge based his conclusion that
Petitioner also insists that the Informations sufficiently allege all the there was no probable cause simply on the insufficiency of the allegations in
elements of the crime of qualified theft, citing that a perusal of the the Informations concerning the facts constitutive of the elements of the
Informations will show that they specifically allege that the respondents were offense charged. This, therefore, makes the issue of sufficiency of the
the Cashier and Bookkeeper of the Rural Bank of Pototan, Inc., respectively, allegations in the Informations the focal point of discussion.
and that they took various amounts of money with grave abuse of confidence,
and without the knowledge and consent of the bank, to the damage and Qualified Theft, as defined and punished under Article 310 of the Revised
prejudice of the bank. Penal Code, is committed as follows, viz:

Parenthetically, respondents raise procedural issues. They challenge the ART. 310. Qualified Theft. – The crime of theft shall be punished by the
petition on the ground that a Petition for Review on Certiorari via Rule 45 is penalties next higher by two degrees than those respectively specified in the
the wrong mode of appeal because a finding of probable cause for the next preceding article, if committed by a domestic servant, or with grave
issuance of a warrant of arrest presupposes evaluation of facts and abuse of confidence, or if the property stolen is motor vehicle, mail matter or
circumstances, which is not proper under said Rule. large cattle or consists of coconuts taken from the premises of a plantation,
fish taken from a fishpond or fishery or if property is taken on the occasion
Respondents further claim that the Department of Justice (DOJ), through the of fire, earthquake, typhoon, volcanic eruption, or any other calamity,
Secretary of Justice, is the principal party to file a Petition for Review on vehicular accident or civil disturbance. (Emphasis supplied.)
Certiorari, considering that the incident was indorsed by the DOJ.
Theft, as defined in Article 308 of the Revised Penal Code, requires the
We find merit in the petition. physical taking of another’s property without violence or intimidation against
persons or force upon things. The elements of the crime under this Article
The dismissal by the RTC of the criminal cases was allegedly due to are:
insufficiency of the Informations and, therefore, because of this defect, there
is no basis for the existence of probable cause which will justify the issuance 1. Intent to gain;
of the warrant of arrest. Petitioner assails the dismissal contending that the
Informations for Qualified Theft sufficiently state facts which constitute (a) 2. Unlawful taking;

72
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II. Loans (Mutuum)
3. Personal property belonging to another; It is beyond doubt that tellers, Cashiers, Bookkeepers and other employees of
a Bank who come into possession of the monies deposited therein enjoy the
4. Absence of violence or intimidation against persons or force upon things. confidence reposed in them by their employer. Banks, on the other hand,
where monies are deposited, are considered the owners thereof. This is very
To fall under the crime of Qualified Theft, the following elements must clear not only from the express provisions of the law, but from established
concur: jurisprudence. The relationship between banks and depositors has been held
1. Taking of personal property; to be that of creditor and debtor. Articles 1953 and 1980 of the New Civil
Code, as appropriately pointed out by petitioner, provide as follows:
2. That the said property belongs to another;
Article 1953. A person who receives a loan of money or any other fungible
3. That the said taking be done with intent to gain; thing acquires the ownership thereof, and is bound to pay to the creditor an
equal amount of the same kind and quality.
4. That it be done without the owner’s consent;
Article 1980. Fixed, savings, and current deposits of money in banks and
5. That it be accomplished without the use of violence or intimidation against similar institutions shall be governed by the provisions concerning loan.
persons, nor of force upon things;
In a long line of cases involving Qualified Theft, this Court has firmly
6. That it be done with grave abuse of confidence. established the nature of possession by the Bank of the money deposits
therein, and the duties being performed by its employees who have custody
On the sufficiency of the Information, Section 6, Rule 110 of the Rules of of the money or have come into possession of it. The Court has consistently
Court requires, inter alia, that the information must state the acts or considered the allegations in the Information that such employees acted with
omissions complained of as constitutive of the offense. grave abuse of confidence, to the damage and prejudice of the Bank, without
particularly referring to it as owner of the money deposits, as sufficient to
On the manner of how the Information should be worded, Section 9, Rule
make out a case of Qualified Theft. For a graphic illustration, we cite Roque
110 of the Rules of Court, is enlightening:
v. People,6 where the accused teller was convicted for Qualified Theft based
Section 9. Cause of the accusation. The acts or omissions complained of as on this Information:
constituting the offense and the qualifying and aggravating circumstances
That on or about the 16th day of November, 1989, in the municipality of
must be stated in ordinary and concise language and not necessarily in the
Floridablanca, province of Pampanga, Philippines and within the jurisdiction
language used in the statute but in terms sufficient to enable a person of
of his Honorable Court, the above-named accused ASUNCION GALANG
common understanding to know what offense is being charged as well as its
ROQUE, being then employed as teller of the Basa Air Base Savings and
qualifying and aggravating circumstances and for the court to pronounce
Loan Association Inc. (BABSLA) with office address at Basa Air Base,
judgment.
Floridablanca, Pampanga, and as such was authorized and reposed with the
It is evident that the Information need not use the exact language of the responsibility to receive and collect capital contributions from its
statute in alleging the acts or omissions complained of as constituting the member/contributors of said corporation, and having collected and received
offense. The test is whether it enables a person of common understanding to in her capacity as teller of the BABSLA the sum of TEN THOUSAND
know the charge against him, and the court to render judgment properly. 5 PESOS (P10,000.00), said accused, with intent of gain, with grave abuse of
confidence and without the knowledge and consent of said corporation, did
The portion of the Information relevant to this discussion reads: then and there willfully, unlawfully and feloniously take, steal and carry
away the amount of P10,000.00, Philippine currency, by making it appear
A]bove-named [respondents], conspiring, confederating, and helping one another, with grave abuse of confidence, being
that a certain depositor by the name of Antonio Salazar withdrew from his
the Cashier and Bookkeeper of the Rural Bank of Pototan, Inc., Pototan, Iloilo, without the knowledge and/or consent of
Savings Account No. 1359, when in truth and in fact said Antonio Salazar
the management of the Bank x x x.
did not withdr[a]w the said amount of P10,000.00 to the damage and
73
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II. Loans (Mutuum)
prejudice of BABSLA in the total amount of P10,000.00, Philippine therein that when the defendant, with grave abuse of confidence, removed the
currency. money and appropriated it to his own use without the consent of the Bank,
there was taking as contemplated in the crime of Qualified Theft.11
In convicting the therein appellant, the Court held that:
Conspicuously, in all of the foregoing cases, where the Informations merely
[S]ince the teller occupies a position of confidence, and the bank places alleged the positions of the respondents; that the crime was committed with
money in the teller’s possession due to the confidence reposed on the teller, grave abuse of confidence, with intent to gain and without the knowledge and
the felony of qualified theft would be committed.7 consent of the Bank, without necessarily stating the phrase being assiduously
insisted upon by respondents, "of a relation by reason of dependence,
Also in People v. Sison,8 the Branch Operations Officer was convicted of the guardianship or vigilance, between the respondents and the offended party
crime of Qualified Theft based on the Information as herein cited: that has created a high degree of confidence between them, which
That in or about and during the period compressed between January 24, 1992 respondents abused,"12 and without employing the word "owner" in lieu of
and February 13, 1992, both dates inclusive, in the City of Manila, the "Bank" were considered to have satisfied the test of sufficiency of
Philippines, the said accused did then and there wilfully, unlawfully and allegations.
feloniously, with intent of gain and without the knowledge and consent of the As regards the respondents who were employed as Cashier and Bookkeeper
owner thereof, take, steal and carry away the following, to wit: of the Bank in this case, there is even no reason to quibble on the allegation
Cash money amounting to P6,000,000.00 in different denominations in the Informations that they acted with grave abuse of confidence. In fact,
belonging to the PHILIPPINE COMMERCIAL INTERNATIONAL BANK the Information which alleged grave abuse of confidence by accused herein
(PCIBank for brevity), Luneta Branch, Manila represented by its Branch is even more precise, as this is exactly the requirement of the law in
Manager, HELEN U. FARGAS, to the damage and prejudice of the said qualifying the crime of Theft.
owner in the aforesaid amount of P6,000,000.00, Philippine Currency. In summary, the Bank acquires ownership of the money deposited by its
That in the commission of the said offense, herein accused acted with grave clients; and the employees of the Bank, who are entrusted with the
abuse of confidence and unfaithfulness, he being the Branch Operation possession of money of the Bank due to the confidence reposed in them,
Officer of the said complainant and as such he had free access to the place occupy positions of confidence. The Informations, therefore, sufficiently
where the said amount of money was kept. allege all the essential elements constituting the crime of Qualified Theft.

The judgment of conviction elaborated thus: On the theory of the defense that the DOJ is the principal party who may file
the instant petition, the ruling in Mobilia Products, Inc. v. Hajime
The crime perpetuated by appellant against his employer, the Philippine Umezawa13 is instructive. The Court thus enunciated:
Commercial and Industrial Bank (PCIB), is Qualified Theft. Appellant could
not have committed the crime had he not been holding the position of Luneta In a criminal case in which the offended party is the State, the interest of the
Branch Operation Officer which gave him not only sole access to the bank private complainant or the offended party is limited to the civil liability
vault xxx. The management of the PCIB reposed its trust and confidence in arising therefrom. Hence, if a criminal case is dismissed by the trial court or
the appellant as its Luneta Branch Operation Officer, and it was this trust and if there is an acquittal, a reconsideration of the order of dismissal or acquittal
confidence which he exploited to enrich himself to the damage and prejudice may be undertaken, whenever legally feasible, insofar as the criminal aspect
of PCIB x x x.9 thereof is concerned and may be made only by the public prosecutor; or in
the case of an appeal, by the State only, through the OSG. x x x.
From another end, People v. Locson,10 in addition to People v. Sison,
described the nature of possession by the Bank. The money in this case was On the alleged wrong mode of appeal by petitioner, suffice it to state that the
in the possession of the defendant as receiving teller of the bank, and the rule is well-settled that in appeals by certiorari under Rule 45 of the Rules of
possession of the defendant was the possession of the Bank. The Court held
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II. Loans (Mutuum)
Court, only errors of law may be raised,14 and herein petitioner certainly
raised a question of law.

As an aside, even if we go beyond the allegations of the Informations in these


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

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

WHEREFORE, premises considered, the Petition for Review


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

SO ORDERED.

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II. Loans (Mutuum)
21.) [G.R. 133877. November 14, 2001] On appeal, the Court of Appeals affirmed with modification[2] the RTC
decision, thus:
RIZAL COMMERCIAL BANKING
CORPORATION, petitioner, vs. ALFA RTW MANUFACTURING WHEREFORE, premises considered, the decision appealed from is hereby
CORPORATION, BA FINANCE CORPORATION, NORTH AFFIRMED, with the modification that instead of P18,961,372.43, all the
AMERICAN GARMENTS CORPORATION, JOHNNY TENG, defendants are hereby ordered to pay, jointly and severally to plaintiff the
RAMON LEE, ANTONIO LACDAO, RAMON LUY and ALFA amount of P3,060,406.25, Philippine Currency, inclusive of stipulated
INTEGRATED TEXTILE MILLS, respondents. interest, service charges, litigation expenses and attorneys fees, with interest
thereon at the legal rate from February 15, 1988, until fully paid.
DECISION
"All other disquisitions of the trial court are hereby AFFIRMED.
SANDOVAL-GUTIERREZ, J.:
"SO ORDERED.
Petition for review on certiorari assailing the decision of the Court of
Appeals in CA-G.R. C.V. No. 42293. In this petition, RCBC questions the Court of Appeals decision insofar as it
modified the RTC decision by decreasing the award in its favor from
On March 12, 1982, Rizal Banking Corporation (RCBC) filed with the P18,961.372.43 to P3,060,406.25. In assailing the Court of Appeals decision,
Regional Trial Court of Makati, Branch 145, Civil Case No. 2624 for a sum petitioner RCBC raises a question of law, that is, whether or not the Court of
of money against Alfa RTW Manufacturing Corporation, Johnny Teng, Appeals can deviate from the provisions of the contract between the parties,
Ramon Lee, Antonio Lacdao, Ramon Luy and Alfa Integrated Textile which contract is the law between them.
Mills. Asserting a superior right over the property involved in the suit, North
Atlantic Garments Corporation filed a complaint in intervention. BA Finance The facts as summarized by the Court of Appeals are:
Corporation, claiming as mortgagee of the same property, filed an answer in
intervention. After hearing, the trial court rendered judgment on August 19, From the records of the case, it appears that defendant Alfa RTW
1991, the dispositive portion[1] of which reads: Manufacturing Corporation (Alfa RTW), on separate instances, had applied
for and was granted by the plaintiff Rizal Commercial Banking Corporation
WHEREFORE, judgment is rendered in favor of plaintiff as follows: (RCBC) four Letters of Credit (RO-80/2487, RO-80/2789, RO-80/D-1795
and RO-81/D-1800 marked as Exhibits A, D, G, and J, respectively) to
1. Ordering all defendants to pay, jointly and severally, to plaintiff the facilitate its purchase of raw materials for its garments business. Upon such
amount of Eighteen Million Nine Hundred Sixty-one Thousand Three letters of credit, corresponding bills of exchange (Exhibits B, E, H, and K) of
Hundred Seventy-two Pesos and Forty-three Centavos (P18,961,372.43), various amounts were drawn, and charged to the account of said defendants.
Philippine Currency, (inclusive of interest, service charges, litigation
expenses and attorneys fees), with interest thereon at the legal rate from The defendant Alfa RTW, in turn, had executed four Trust Receipts (Exhibits
February 15, 1988 until fully paid. The proceeds from the sale of defendant C, F, I and L), stipulating that it had received in trust for the plaintiff bank
Alfas ready to wear apparel, in the sum of P73,133.70, should be deducted the goods and merchandise described therein, and which were purchased
from the principal obligation of P18,961,372.43; with the drawings upon the letters of credit.

2. Declaring that the respective liens of intervenors BA Finance Corporation When the obligations upon the said commercial documents became due, the
and North American Garments Corporation over the properties attached by plaintiff demanded payment of the defendants undertakings, citing two
the sheriff are inferior to that of plaintiff. documents allegedly executed by the individual defendants Johnny Teng,
Ramon Lee, Antonio D. Lacdao and Ramon Uy and Alfa Integrated Textile
3. Ordering defendants and intervenors to pay the proportionate costs. Mills Inc. (Alfa ITM), labeled Comprehensive Surety Agreements (Exhibits
N and M) dated September 8, 1978 and October 10, 1979.
"SO ORDERED.
76
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II. Loans (Mutuum)
Under such Comprehensive Surety Agreements, it was essentially agreed that and conditions agreed upon by petitioner RCBC and respondent borrowers in
for and in consideration of any existing indebtedness to plaintiff bank of the Trust Receipts[4] and the Comprehensive Surety Agreements.[5]
defendant Alfa RTW and/or in order to induce the plaintiff bank at any time
thereafter to make loans or advances or increases thereof or to extend credit Significantly, the validity of those contracts is not being questioned. It
in any other manner to or for the account of defendant, Alfa ITM and the follows that the very terms and conditions of the same contracts become the
signatory officers agreed to guarantee in joint and several capacity the law between the parties.
punctual payment at maturity to plaintiff bank of any and all such
indebtedness and/or other obligations and also any and all indebtedness of Herein lies the reversible error on the part of the Court of Appeals. When it
every kind which was then or may thereafter become due or owing to ruled that only P3,060,406.25 should be awarded to petitioner RCBC, the
plaintiff bank by the defendant Alfa RTW, together with any and all Appellate Court disregarded the parties stipulations in their contracts of loan,
expenses of collection, etc., provided, however, that the liability of individual more specifically, those pertaining to the agreed (1) interest rates, (2) service
defendants and defendant Alfa Integrated Textile Mills, Inc. thereunder shall charges and (3) penalties in case of any breach thereof.[6] Indeed, the Court of
not exceed the sum of P4,000,000.00 and P7,500,000.00 and such interest as Appeals failed to apply this time-honored doctrine:
may accrue thereon and expenses as may be incurred by plaintiff bank. (p. 4, That which is agreed to in a contract is the law between the parties. Thus,
Complaint) obligations arising from contracts have the force of law between the
Petitioner RCBC contends that the Court of Appeals erred in awarding to it contracting parties and should be complied with in good faith. [7]
the minimal sum of P3,060,406.25 instead of P18,961,372.43 granted by the The Court cannot vary the terms and conditions therein stipulated unless such
trial court. stipulation is contrary to law, morals, good customs, public order or public
The rule is well settled that the jurisdiction of this Court in cases brought policy.[8]
before it from the Court of Appeals via Rule 45 of the 1997 Rules of Civil In relation to the determination and computation of interest payments, this
Procedure, as amended, is limited to reviewing errors of law. Findings of fact Court, in Eastern Shipping Lines, Inc. vs. Court of Appeals,[9] through Mr.
of the latter court are conclusive, except in a number of instances. In Siguan Justice Jose C. Vitug, held:
vs. Lim[3] this Court enumerated those instances when the factual findings of
the Court of Appeals are not deemed conclusive, to wit: (1) when the The ostensible discord is not difficult to explain. The factual circumstances
conclusion is a finding grounded entirely on speculations, surmises or may have called for different applications, guided by the rule that the courts
conjectures; (2) when the inference made is manifestly mistaken, absurd or are vested with discretion, depending on the equities of each case, on the
impossible; (3) when there is grave abuse of discretion; (4) when the award of interest. Nonetheless, it may not be unwise, by way of clarification
judgment is based on a misapprehension of facts; (5) when the findings of and reconciliation, to suggest the following rules of thumb for future
facts are conflicting; (6) when the Court of Appeals, in making its findings, guidance.
went beyond the issues of the case and the same is contrary to the admissions
of both the appellant and appellee; (7) when the findings are contrary to those I. When an obligation, regardless of its source, i.e., law, contracts, quasi-
of the trial court; (8) when the findings are conclusions without citation of contracts, delicts or quasi-delicts is breached, the contravenor can be held
specific evidence on which they are based; (9) when the facts set forth in the liable for damages. The provisions under Title XVIII on Damages of the
petition as well as in the petitioners main and reply briefs are not disputed by Civil Code govern in determining the measure of recoverable damages.
the respondent; and (10) when the findings of fact are premised on the
supposed absence of evidence and contradicted by the evidence on record. 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
In the case at bar, exception No. 6 is present. Here, the Court of Appeals thereof, is imposed, as follows:
made findings contrary to the admissions of the parties. We refer to the terms
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
77
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II. Loans (Mutuum)
which may have been stipulated in writing. Furthermore, the interest All obligations of the undersigned under this Trust Receipt shall bear interest
due shall itself earn legal interest from the time it is judicially at the rate of sixteen per centum (16%) per annum plus service charge of
demanded. In the absence of stipulation, the rate of interest shall be 12% two per centum (2%) per annum from the date of the execution of this Trust
per annum to be computed from default, i.e., from judicial or Receipt until paid. It is expressly agreed and understood that regardless of the
extrajudicial demand under and subject to the provisions of Article 1169 maturity date hereof, I/we hereby authorize the said Bank to correspondingly
of the Civil Code. increase the interest of this Trust Receipt to the extent allowed by law
without notice to me/us whenever the Central Bank of the Philippines raises
2. When an obligation, not constituting a loan or forbearance of money, is the interest on borrowings of Banks or the interest provided for in the Usury
breached, an interest on the amount of damages awarded may be imposed at Law, or whenever , in the sole judgment of the holder of this Trust Receipt is
the discretion of the court at the rate of 6% per annum. No interest, warranted by the increase in money market rates or by similar events.
however, shall be adjudged on unliquidated claims or damages except when
or until the demand can be established with reasonable certainty. Without prejudice to the criminal action that may be brought by the Bank
Accordingly, where the demand is established with reasonable certainty, the against the entrustee by reason of default or breach of this Trust Receipt,
interest shall begin to run from the time the claim is made judicially or I/we agree to pay a penalty and/or liquidated damages equivalent to six per
extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so centum(6%) per annum of the amount due and unpaid.
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 In the event of the bringing of any action or suit by you or any default of the
time the quantification of damages may be deemed to have been reasonably undersigned hereunder: I/we shall on demand pay you reasonable attorneys
ascertained). The actual base for the computation of legal interest shall, in and other fees and cost of collection, which shall in no case be less than
any case, be on the amount finally adjudged. ten per centum (10%) of the value of the property and the amount involved
by the action or suit.
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 If there are two or more signatories on this Trust Receipt, our obligations
paragraph 1 or paragraph 2, above, shall be 12% per annum from such hereunder shall in all cases be joint and several.
finality until its satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance of credit.. (Emphasis supplied). Applying the above-quoted rules of thumb in the computation of interest, as
enunciated by this Court in Eastern Shipping Lines, Inc.,[14] the principal
The case now before us involves an obligation arising from a letter of credit- amount of loans corresponding to each trust receipt must earn an interest at
trust receipt transaction. Under this arrangement, a bank extends to a the rate of sixteen percent (16%) per annum[15] with the stipulated service
borrower a loan covered by the letter of credit, with the trust receipt as charge of two percent (2%) per annum on the loan principal or the
security of the loan.[10] A trust receipt is a security transaction intended to aid outstanding balance thereof,[16] from the date of execution until finality of
in financing importers and retail dealers who do not have sufficient funds or this Decision.[17] A penalty of six percent (6%) per annum of the amount due
resources to finance the importation or purchase of merchandise, and who and unpaid must also be imposed computed from the date of demand (in this
may not be able to acquire credit except thru utilization, as collateral, of the case on March 9, 1982),[18] until finality of Judgment.[19] The interest of 16%
merchandise imported or purchased.[11] percent per annum, as long as unpaid, also earns interest, computed from the
date of the filing of the complaint (March 12, 1982) until finality of this
In contracts contained in trust receipts, the contracting parties may establish Courts Decision.[20] From such date of finality, the total unpaid amount
agreements, terms and conditions they may deem advisable, provided they (principal + interest + service charge + penalty + interest on the interest)
are not contrary to law, morals or public order.[12] In the case at bar, there are computed shall earn interest of 12% per annum until satisfied.
specific amounts of interest, service charges and penalties agreed upon by the
parties. Pertinent provisions in the four (4) trust receipts (TR. No. 1909, TR. The Court of Appeals awarded only the sum of P3,060,406.25 as it was the
No. 1932, TR. No. 1732, and TR No. 2065)[13] read: amount prayed for in the complaint. The Appellate Court, however, failed to
consider that the complaint was filed on March 12, 1982, or just a year after
78
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II. Loans (Mutuum)
the execution of the trust receipts. The computed interests then, the service
charge, the penalty and the attorneys fees corresponded only to one year. The
interest on the interest could not have been computed then since the finality
of judgment could not yet be ascertained. Significantly, from the filing of the
complaint on March 12, 1982 up to the time the Appellate Courts decision
was promulgated, on May 14, 1998, there had been a lapse of sixteen
years. The computed interest in 1982 would no longer be true in 1998. What
the Appellate Court should have done then was to compute the total amount
due in accordance with the rules of thumb laid down by this Court in Eastern
Shipping Lines, Inc.,[21] the resulting formula of which is as follows:

TOTAL AMOUNT DUE = principal + interest + service charge + penalty +


interest on interest

Interest = principal x 16 % per annum x no. of years from date of execution


until finality of judgment

Service charge = principal x 2% per annum x no. of years from date of


execution until finality of judgment

Penalty = principal x 6% per annum x no. of years from demand (March 9,


1982) until finality of judgment

Interest on interest = Interest computed as of the filing of the complaint


(March 12, 1982) x 12% x no. of years until finality of judgment

Attorneys fees is 10% of the total amount computed as of finality of


judgment

Total amount due as of the date of finality of judgment will earn an interest
of 12% per annum until fully paid.

The total amount due corresponding to each of the four (4) contracts of loan
may be easily determined by the trial court through a simple mathematical
computation based on the formula specified above. Mathematics is an exact
science, the application of which needs no further proof from the parties.

WHEREFORE, the petition is hereby GRANTED. The assailed decision of


the Court of Appeals is MODIFIED in the sense that the award to petitioner
RCBC of P3,060,406.25 is SET ASIDE and substituted with an amount to be
computed by the trial court, upon finality of this Decision, in accordance
with the formula indicated above.

SO ORDERED.
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II. Loans (Mutuum)
22.) Republic of the Philippines satisfied. The award of attorneys fees is hereby reduced
Supreme Court to P100,000.00. Costs against the defendants-appellants.
Baguio City
SO ORDERED.[3]
FIRST DIVISION Also assailed is the August 31, 2006 Resolution[4] denying the motion for
reconsideration.
HERMOJINA ESTORES, G.R. No. 175139
Petitioner, Factual Antecedents
Present:
On October 3, 1993, petitioner Hermojina Estores and respondent-spouses
Arturo and Laura Supangan entered into a Conditional Deed of
CORONA, C.J., Chairperson, Sale[5] whereby petitioner offered to sell, and respondent-spouses offered to
- versus - LEONARDO-DE CASTRO, buy, a parcel of land covered by Transfer Certificate of Title No. TCT No.
98720 located at Naic, Cavite for the sum of P4.7 million. The parties
BERSAMIN, likewise stipulated, among others, to wit:
DEL CASTILLO, and
VILLARAMA, JR., JJ. xxxx
SPOUSES ARTURO and
1. Vendor will secure approved clearance from DAR requirements of which
LAURA SUPANGAN, Promulgated: are (sic):
Respondents. April 18, 2012 a) Letter request
x---------------------------------------------------- b) Title
---------------x c) Tax Declaration
d) Affidavit of Aggregate Landholding Vendor/Vendee
DECISION e) Certification from the Provl. Assessors as to Landholdings of
Vendor/Vendee
DEL CASTILLO, J.: f) Affidavit of Non-Tenancy
g) Deed of Absolute Sale
The only issue posed before us is the propriety of the imposition of interest
and attorneys fees. xxxx

Assailed in this Petition for Review[1] filed under Rule 45 of the Rules of 4. Vendee shall be informed as to the status of DAR clearance within 10 days
Court is the May 12, 2006 Decision[2] of the Court of Appeals (CA) in CA- upon signing of the documents.
G.R. CV No. 83123, the dispositive portion of which reads:
xxxx
WHEREFORE, the appealed decision is MODIFIED. The rate of interest
shall be six percent (6%) per annum, computed from September 27, 2000 6. Regarding the house located within the perimeter of the subject [lot]
until its full payment before finality of the judgment. If the adjudged owned by spouses [Magbago], said house shall be moved outside the
principal and the interest (or any part thereof) remain unpaid thereafter, the perimeter of this subject property to the 300 sq. m. area allocated for
interest rate shall be adjusted to twelve percent (12%) per annum, computed [it]. Vendor hereby accepts the responsibility of seeing to it that such
from the time the judgment becomes final and executory until it is fully agreement is carried out before full payment of the sale is made by vendee.

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II. Loans (Mutuum)
7. If and after the vendor has completed all necessary documents for b) Actual damages in the amount of P100,000.00;
registration of the title and the vendee fails to complete payment as per c) Exemplary damages in the amount of P100,000.00;
agreement, a forfeiture fee of 25% or downpayment, shall be d) [Attorneys] fee in the amount of P50,000.00 plus 20% of
applied. However, if the vendor fails to complete necessary documents recoverable amount from the [petitioner].
within thirty days without any sufficient reason, or without informing the e) [C]ost of suit.[11]
vendee of its status, vendee has the right to demand return of full amount of
down payment.
In their Answer with Counterclaim,[12] petitioner and Arias averred that they
xxxx are willing to return the principal amount of P3.5 million but without any
interest as the same was not agreed upon. In their Pre-Trial Brief,[13] they
9. As to the boundaries and partition of the lots (15,018 sq. m. and 300 sq. reiterated that the only remaining issue between the parties is the imposition
m.) Vendee shall be informed immediately of its approval by the LRC. of interest. They argued that since the Conditional Deed of Sale provided
only for the return of the downpayment in case of breach, they cannot be held
10. The vendor assures the vendee of a peaceful transfer of ownership. liable to pay legal interest as well.[14]

x x x x [6] In its Pre-Trial Order[15] dated June 29, 2001, the RTC noted that the parties
agreed that the principal amount of 3.5 million pesos should be returned to
the [respondent-spouses] by the [petitioner] and the issue remaining [is]
After almost seven years from the time of the execution of the contract and whether x x x [respondent-spouses] are entitled to legal interest thereon,
notwithstanding payment of P3.5 million on the part of respondent-spouses, damages and attorneys fees.[16]
petitioner still failed to comply with her obligation as expressly provided in
paragraphs 4, 6, 7, 9 and 10 of the contract. Hence, in a letter[7] dated Trial ensued thereafter. After the presentation of the respondent-spouses
September 27, 2000, respondent-spouses demanded the return of the amount evidence, the trial court set the presentation of Arias and petitioners evidence
of P3.5 million within 15 days from receipt of the letter. In reply,[8] petitioner on September 3, 2003.[17] However, despite several postponements, petitioner
acknowledged receipt of the P3.5 million and promised to return the same and Arias failed to appear hence they were deemed to have waived the
within 120 days. Respondent-spouses were amenable to the proposal presentation of their evidence. Consequently, the case was deemed submitted
provided an interest of 12% compounded annually shall be imposed on for decision.[18]
the P3.5 million.[9] When petitioner still failed to return the amount despite
demand, respondent-spouses were constrained to file a Complaint[10] for sum Ruling of the Regional Trial Court
of money before the Regional Trial Court (RTC) of Malabon against herein
petitioner as well as Roberto U. Arias (Arias) who allegedly acted as On May 7, 2004, the RTC rendered its Decision[19] finding respondent-
petitioners agent. The case was docketed as Civil Case No. 3201-MN and spouses entitled to interest but only at the rate of 6% per annum and not 12%
raffled off to Branch 170. In their complaint, respondent-spouses prayed that as prayed by them.[20] It also found respondent-spouses entitled to attorneys
petitioner and Arias be ordered to: fees as they were compelled to litigate to protect their interest. [21]

1. Pay the principal amount of P3,500,000.00 plus interest of 12% The dispositive portion of the RTC Decision reads:
compounded annually starting October 1, 1993 or an estimated amount
of P8,558,591.65; WHEREFORE, premises considered, judgment is hereby rendered in favor
of the [respondent-spouses] and ordering the [petitioner and Roberto Arias]
2. Pay the following items of damages: to jointly and severally:

a) Moral damages in the amount of P100,000.00;


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1. Pay [respondent-spouses] the principal amount of Three Million
Five Hundred Thousand pesos (P3,500,000.00) with an interest of 6% SO ORDERED.[29]
compounded annually starting October 1, 1993 and attorneys fee in the
amount of Fifty Thousand pesos (P50,000.00) plus 20% of the recoverable
amount from the defendants and cost of the suit. Petitioner moved for reconsideration which was denied in the August 31,
2006 Resolution of the CA.
The Compulsory Counter Claim is hereby dismissed for lack of factual
evidence. Hence, this petition raising the sole issue of whether the imposition of
interest and attorneys fees is proper.
SO ORDERED.[22]
Petitioners Arguments

Ruling of the Court of Appeals Petitioner insists that she is not bound to pay interest on the P3.5 million
because the Conditional Deed of Sale only provided for the return of the
Aggrieved, petitioner and Arias filed their notice of appeal. [23] The CA noted downpayment in case of failure to comply with her obligations.Petitioner
that the only issue submitted for its resolution is whether it is proper to also argues that the award of attorneys fees in favor of the respondent-
impose interest for an obligation that does not involve a loan or forbearance spouses is unwarranted because it cannot be said that the latter won over the
of money in the absence of stipulation of the parties. [24] former since the CA even sustained her contention that the imposition of
12% interest compounded annually is totally uncalled for.
On May 12, 2006, the CA rendered the assailed Decision affirming the ruling
of the RTC finding the imposition of 6% interest proper. [25] However, the Respondent-spouses Arguments
same shall start to run only from September 27, 2000 when respondent-
spouses formally demanded the return of their money and not from October Respondent-spouses aver that it is only fair that interest be imposed on the
1993 when the contract was executed as held by the RTC. The CA also amount they paid considering that petitioner failed to return the amount upon
modified the RTCs ruling as regards the liability of Arias. It held that Arias demand and had been using the P3.5 million for her benefit. Moreover, it is
could not be held solidarily liable with petitioner because he merely acted as undisputed that petitioner failed to perform her obligations to relocate the
agent of the latter. Moreover, there was no showing that he expressly bound house outside the perimeter of the subject property and to complete the
himself to be personally liable or that he exceeded the limits of his authority. necessary documents. As regards the attorneys fees, they claim that they are
More importantly, there was even no showing that Arias was authorized to entitled to the same because they were forced to litigate when petitioner
act as agent of petitioner.[26] Anent the award of attorneys fees, the CA found unjustly withheld the amount. Besides, the amount awarded by the CA is
the award by the trial court (P50,000.00 plus 20% of the recoverable amount) even smaller compared to the filing fees they paid.
excessive[27] and thus reduced the same to P100,000.00.[28]
The dispositive portion of the CA Decision reads: Our Ruling

WHEREFORE, the appealed decision is MODIFIED. The rate of interest The petition lacks merit.
shall be six percent (6%) per annum, computed from September 27, 2000
until its full payment before finality of the judgment. If the adjudged Interest may be imposed even in the absence of stipulation in the contract.
principal and the interest (or any part thereof) remain[s] unpaid thereafter,
the interest rate shall be adjusted to twelve percent (12%) per annum,
computed from the time the judgment becomes final and executory until it is We sustain the ruling of both the RTC and the CA that it is proper to impose
fully satisfied. The award of attorneys fees is hereby reduced interest notwithstanding the absence of stipulation in the contract. Article
to P100,000.00. Costs against the [petitioner]. 2210 of the Civil Code expressly provides that [i]nterest may, in the
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discretion of the court, be allowed upon damages awarded for breach of given a period within which to pay a loan or debt. In such case, forbearance
contract. In this case, there is no question that petitioner is legally obligated of money, goods or credits will have no distinct definition from a loan. We
to return the P3.5 million because of her failure to fulfill the obligation under believe however, that the phrase forbearance of money, goods or credits is
the Conditional Deed of Sale, despite demand. She has in fact admitted that meant to have a separate meaning from a loan, otherwise there would have
the conditions were not fulfilled and that she was willing to return the full been no need to add that phrase as a loan is already sufficiently defined in the
amount of P3.5 million but has not actually done so. Petitioner enjoyed the Civil Code.[34] Forbearance of money, goods or credits should therefore refer
use of the money from the time it was given to her[30] until now. Thus, she is to arrangements other than loan agreements, where a person acquiesces to the
already in default of her obligation from the date of demand, i.e., on temporary use of his money, goods or credits pending happening of certain
September 27, 2000. events or fulfillment of certain conditions. In this case, the respondent-
spouses parted with their money even before the conditions were
The interest at the rate of 12% is applicable in the instant case. fulfilled. They have therefore allowed or granted forbearance to the seller
(petitioner) to use their money pending fulfillment of the conditions. They
were deprived of the use of their money for the period pending fulfillment of
Anent the interest rate, the general rule is that the applicable rate of interest the conditions and when those conditions were breached, they are entitled not
shall be computed in accordance with the stipulation of the parties. [31] Absent only to the return of the principal amount paid, but also to compensation for
any stipulation, the applicable rate of interest shall be 12% per annum when the use of their money. And the compensation for the use of their money,
the obligation arises out of a loan or a forbearance of money, goods or absent any stipulation, should be the same rate of legal interest applicable to
credits. In other cases, it shall be six percent (6%).[32] In this case, the parties a loan since the use or deprivation of funds is similar to a loan.
did not stipulate as to the applicable rate of interest. The only question
remaining therefore is whether the 6% as provided under Article 2209 of the Petitioners unwarranted withholding of the money which rightfully pertains
Civil Code, or 12% under Central Bank Circular No. 416, is due. to respondent-spouses amounts to forbearance of money which can be
considered as an involuntary loan. Thus, the applicable rate of interest is 12%
The contract involved in this case is admittedly not a loan but a Conditional per annum. In Eastern Shipping Lines, Inc. v. Court of Appeals, [35]cited
Deed of Sale. However, the contract provides that the seller (petitioner) must in Crismina Garments, Inc. v. Court of Appeals,[36] the Court suggested the
return the payment made by the buyer (respondent-spouses) if the conditions following guidelines:
are not fulfilled. There is no question that they have in fact, not been fulfilled
as the seller (petitioner) has admitted this. Notwithstanding demand by the I. When an obligation, regardless of its source, i.e., law, contracts,
buyer (respondent-spouses), the seller (petitioner) has failed to return the quasi-contracts, delicts or quasi-delicts is breached, the contravenor can be
money and held liable for damages. The provisions under Title XVIII on Damages of the
Civil Code govern in determining the measure of recoverable damages.
should be considered in default from the time that demand was made on
September 27, 2000. 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
Even if the transaction involved a Conditional Deed of Sale, can the accrual thereof, is imposed, as follows:
stipulation governing the return of the money be considered as a forbearance
of money which required payment of interest at the rate of 12%? We believe 1. When the obligation is breached, and it consists in the
so. 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
In Crismina Garments, Inc. v. Court of Appeals,[33] forbearance was defined writing.Furthermore, the interest due shall itself earn legal interest from
as a contractual obligation of lender or creditor to refrain during a given the time it is judicially demanded. In the absence of stipulation, the rate
period of time, from requiring the borrower or debtor to repay a loan or of interest shall be 12% per annum to be computed from default, i.e.,
debt then due and payable. This definition describes a loan where a debtor is
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II. Loans (Mutuum)
from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code. (2) When the defendants act or omission has compelled the plaintiff to
litigate with third persons or to incur expenses to protect his interest;
2. When an obligation, not constituting a loan or forbearance of
money, is breached, an interest on the amount of damages awarded may be xxxx
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 (11) In any other case where the court deems it just and equitable that
except when or until the demand can be established with reasonable attorneys fees and expenses of litigation should be recovered.
certainty. Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made In all cases, the attorneys fees and expenses of litigation must be reasonable.
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty Considering the circumstances of the instant case, we find respondent-
cannot be so reasonably established at the time the demand is made, the spouses entitled to recover attorneys fees. There is no doubt that they were
interest shall begin to run only from the date the judgment of the court is forced to litigate to protect their interest, i.e., to recover their
made (at which time the quantification of damages may be deemed to have money. However, we find the amount of P50,000.00 more appropriate in line
been reasonably ascertained). The actual base for the computation of legal with the policy enunciated in Article 2208 of the Civil Code that the award of
interest shall, in any case, be on the amount finally adjudged. attorneys fees must always be reasonable.

3. When the judgment of the court awarding a sum of money WHEREFORE, the Petition for Review is DENIED. The May 12, 2006
becomes final and executory, the rate of legal interest, whether the case falls Decision of the Court of Appeals in CA-G.R. CV No. 83123
under paragraph 1 or paragraph 2, above, shall be 12% per annum from such is AFFIRMED with MODIFICATIONS that the rate of interest shall be
finality until its satisfaction, this interim period being deemed to be by then twelve percent (12%) per annum, computed from September 27, 2000 until
an equivalent to a forbearance of credit.[37] fully satisfied. The award of attorneys fees is further reduced to P50,000.00.

SO ORDERED.
Eastern Shipping Lines, Inc. v. Court of Appeals[38]and its predecessor
case, Reformina v. Tongol[39] both involved torts cases and hence, there was
no forbearance of money, goods, or credits. Further, the amount claimed (i.e.,
damages) could not be established with reasonable certainty at the time the
claim was made. Hence, we arrived at a different ruling in those cases.

Since the date of demand which is September 27, 2000 was satisfactorily
established during trial, then the interest rate of 12% should be reckoned
from said date of demand until the principal amount and the interest thereon
is fully satisfied.

The award of attorneys fees is warranted.

Under Article 2208 of the Civil Code, attorneys fees may be recovered:

xxxx
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II. Loans (Mutuum)
23.) Republic of the Philippines 1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5%
SUPREME COURT per annum. Interest shall be payable in advance every one hundred twenty
Manila days at the rate prevailing at the time of the renewal.
SECOND DIVISION (b) The Borrower agrees that the Bank may modify the interest rate in the
G.R. No. 181045 July 2, 2014 Loan depending on whatever policy the Bank may adopt in the future,
SPOUSES EDUARDO and LYDIA SILOS, Petitioners, including without limitation, the shifting from the floating interest rate
vs. system to the fixed interest rate system, or vice versa. Where the Bank has
PHILIPPINE NATIONAL BANK, Respondent. imposed on the Loan interest at a rate per annum, which is equal to the
DECISION Bank’s spread over the current floating interest rate, the Borrower hereby
DEL CASTILLO, J.: agrees that the Bank may, without need of notice to the Borrower, increase or
In loan agreements, it cannot be denied that the rate of interest is a principal decrease its spread over the floating interest rate at any time depending on
condition, if not the most important component. Thus, any modification whatever policy it may adopt in the future.10 (Emphases supplied)
thereof must be mutually agreed upon; otherwise, it has no binding effect. The eight Promissory Notes, on the other hand, contained a stipulation
Moreover, the Court cannot consider a stipulation granting a party the option granting PNB the right to increase or reduce interest rates "within the limits
to prepay the loan if said party is not agreeable to the arbitrary interest rates allowed by law or by the Monetary Board."11
imposed. Premium may not be placed upon a stipulation in a contract which The Real Estate Mortgage agreement provided the same right to increase or
grants one party the right to choose whether to continue with or withdraw reduce interest rates "at any time depending on whatever policy PNB may
from the agreement if it discovers that what the other party has been doing all adopt in the future."12
along is improper or illegal. Petitioners religiously paid interest on the notes at the following rates:
This Petition for Review on Certiorari1 questions the May 8, 2007 1. 1st Promissory Note dated July 24, 1989 – 19.5%;
Decision2 of the Court of Appeals (CA) in CA-G.R. CV No. 79650, which 2. 2nd Promissory Note dated November 22, 1989 – 23%;
affirmed with modifications the February 28, 2003 Decision3 and the June 4, 3. 3rd Promissory Note dated March 21, 1990 – 22%;
2003 Order4 of the Regional Trial Court (RTC), Branch 6 of Kalibo, Aklan in 4. 4th Promissory Note dated July 19, 1990 – 24%;
Civil Case No. 5975. 5. 5th Promissory Note dated December 17, 1990 – 28%;
Factual Antecedents 6. 6th Promissory Note dated February 14, 1991 – 32%;
Spouses Eduardo and Lydia Silos (petitioners) have been in business for 7. 7th Promissory Note dated March 1, 1991 – 30%; and
about two decades of operating a department store and buying and selling of 8. 8th Promissory Note dated July 11, 1991 – 24%.13
ready-to-wear apparel. Respondent Philippine National Bank (PNB) is a In August 1991, an Amendment to Credit Agreement14 was executed by the
banking corporation organized and existing under Philippine laws. parties, with the following stipulation regarding interest:
To secure a one-year revolving credit line of ₱150,000.00 obtained from 1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on
PNB, petitioners constituted in August 1987 a Real Estate Mortgage5 over a each Availment from date of each Availment up to but not including the date
370-square meter lot in Kalibo, Aklan covered by Transfer Certificate of of full payment thereof at the rate per annum which is determined by the
Title No. (TCT) T-14250. In July 1988,the credit line was increased to ₱1.8 Bank to be prime rate plus applicable spread in effect as of the date of each
million and the mortgage was correspondingly increased to ₱1.8 million. 6 Availment.15 (Emphases supplied)
And in July 1989, a Supplement to the Existing Real Estate Mortgage7 was Under this Amendment to Credit Agreement, petitioners issued in favor of
executed to cover the same credit line, which was increased to ₱2.5 million, PNB the following 18 Promissory Notes, which petitioners settled – except
and additional security was given in the form of a 134-square meter lot the last (the note covering the principal) – at the following interest rates:
covered by TCT T-16208. In addition, petitioners issued eight Promissory 1. 9th Promissory Note dated November 8, 1991 – 26%;
Notes8 and signed a Credit Agreement.9 This July 1989 Credit Agreement 2. 10th Promissory Note dated March 19, 1992 – 25%;
contained a stipulation on interest which provides as follows: 3. 11th Promissory Note dated July 11, 1992 – 23%;
4. 12th Promissory Note dated November 10, 1992 – 21%;
5. 13th Promissory Note dated March 15, 1993 – 21%;
85
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II. Loans (Mutuum)
6. 14th Promissory Note dated July 12, 1993 – 17.5%; per annum based on the defaulted principal amount. x x x 19 (Emphasis
7. 15th Promissory Note dated November 17, 1993 – 21%; supplied)
8. 16th Promissory Note dated March 28, 1994 – 21%; PNB prepared a Statement of Account20 as of October 12, 1998, detailing the
9. 17th Promissory Note dated July 13, 1994 – 21%; amount due and demandable from petitioners in the total amount of
10. 18th Promissory Note dated November 16, 1994 – 16%; ₱3,620,541.60, broken down as follows:
11. 19th Promissory Note dated April 10, 1995 – 21%; Principal P 2,500,000.00
12. 20th Promissory Note dated July 19, 1995 – 18.5%;
13. 21st Promissory Note dated December 18, 1995 – 18.75%; Interest 538,874.94
14. 22nd Promissory Note dated April 22, 1996 – 18.5%;
15. 23rd Promissory Note dated July 22, 1996 – 18.5%; Penalties 581,666.66
16. 24th Promissory Note dated November 25, 1996 – 18%;
17. 25th Promissory Note dated May 30, 1997 – 17.5%; and
Total P 3,620,541.60
18. 26th Promissory Note (PN 9707237) dated July 30, 1997 – 25%.16
The 9th up to the 17th promissory notes provide for the payment of interest Despite demand, petitioners failed to pay the foregoing amount. Thus, PNB
at the "rate the Bank may at any time without notice, raise within the limits foreclosed on the mortgage, and on January 14, 1999, TCTs T-14250 and T-
allowed by law x x x."17 16208 were sold to it at auction for the amount of ₱4,324,172.96.21 The
On the other hand, the 18th up to the 26th promissory notes – including PN sheriff’s certificate of sale was registered on March 11, 1999.
9707237, which is the 26th promissory note – carried the following More than a year later, or on March 24, 2000, petitioners filed Civil Case No.
provision: 5975, seeking annulment of the foreclosure sale and an accounting of the
x x x For this purpose, I/We agree that the rate of interest herein stipulated PNB credit. Petitioners theorized that after the first promissory note where
may be increased or decreased for the subsequent Interest Periods, with prior they agreed to pay 19.5% interest, the succeeding stipulations for the
notice to the Borrower in the event of changes in interest rate prescribed by payment of interest in their loan agreements with PNB – which allegedly left
law or the Monetary Board of the Central Bank of the Philippines, or in the to the latter the sole will to determine the interest rate – became null and
Bank’s overall cost of funds. I/We hereby agree that in the event I/we are not void. Petitioners added that because the interest rates were fixed by
agreeable to the interest rate fixed for any Interest Period, I/we shall have the respondent without their prior consent or agreement, these rates are void, and
option top repay the loan or credit facility without penalty within ten (10) as a result, petitioners should only be made liable for interest at the legal rate
calendar days from the Interest Setting Date.18 (Emphasis supplied) of 12%. They claimed further that they overpaid interests on the credit, and
Respondent regularly renewed the line from 1990 up to 1997, and petitioners concluded that due to this overpayment of steep interest charges, their debt
made good on the promissory notes, religiously paying the interests without should now be deemed paid, and the foreclosure and sale of TCTs T-14250
objection or fail. But in 1997, petitioners faltered when the interest rates and T-16208 became unnecessary and wrongful. As for the imposed penalty
soared due to the Asian financial crisis. Petitioners’ sole outstanding of ₱581,666.66, petitioners alleged that since the Real Estate Mortgage and
promissory note for ₱2.5 million – PN 9707237 executed in July 1997 and the Supplement thereto did not include penalties as part of the secured
due 120 days later or on October 28, 1997 – became past due, and despite amount, the same should be excluded from the foreclosure amount or bid
repeated demands, petitioners failed to make good on the note. price, even if such penalties are provided for in the final Promissory Note, or
Incidentally, PN 9707237 provided for the penalty equivalent to 24% per PN 9707237.22
annum in case of default, as follows: In addition, petitioners sought to be reimbursed an alleged overpayment of
Without need for notice or demand, failure to pay this note or any installment ₱848,285.00 made during the period August 21, 1991 to March 5,
thereon, when due, shall constitute default and in such cases or in case of 1998,resulting from respondent’s imposition of the alleged illegal and steep
garnishment, receivership or bankruptcy or suit of any kind filed against interest rates. They also prayed to be awarded ₱200,000.00 by way of
me/us by the Bank, the outstanding principal of this note, at the option of the attorney’s fees.23
Bank and without prior notice of demand, shall immediately become due and In its Answer,24 PNB denied that it unilaterally imposed or fixed interest
payable and shall be subject to a penalty charge of twenty four percent (24%) rates; that petitioners agreed that without prior notice, PNB may modify
86
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II. Loans (Mutuum)
interest rates depending on future policy adopted by it; and that the rates were simply communicated to all PNB branches for implementation;
imposition of penalties was agreed upon in the Credit Agreement. It added that there are a multitude of considerations which determine the interest rate,
that the imposition of penalties is supported by the all-inclusive clause in the such as the cost of money, foreign currency values, PNB’s spread, bank
Real Estate Mortgage agreement which provides that the mortgage shall administrative costs, profitability, and the practice in the banking industry;
stand as security for any and all other obligations of whatever kind and that in every repricing of each loan availment, the borrower has the right to
nature owing to respondent, which thus includes penalties imposed upon question the rates, but that this was not done by the petitioners; and that
default or non-payment of the principal and interest on due date. anything that is not found in the Promissory Note may be supplemented by
On pre-trial, the parties mutually agreed to the following material facts, the Credit Agreement.29
among others: Ruling of the Regional Trial Court
a) That since 1991 up to 1998, petitioners had paid PNB the total amount of On February 28, 2003, the trial court rendered judgment dismissing Civil
₱3,484,287.00;25 and Case No. 5975.30
b) That PNB sent, and petitioners received, a March 10, 2000 demand It ruled that:
letter.26 1. While the Credit Agreement allows PNB to unilaterally increase its spread
During trial, petitioner Lydia Silos (Lydia) testified that the Credit over the floating interest rate at any time depending on whatever policy it
Agreement, the Amendment to Credit Agreement, Real Estate Mortgage and may adopt in the future, it likewise allows for the decrease at any time of the
the Supplement thereto were all prepared by respondent PNB and were same. Thus, such stipulation authorizing both the increase and decrease of
presented to her and her husband Eduardo only for signature; that she was interest rates as may be applicable is valid,31 as was held in Consolidated
told by PNB that the latter alone would determine the interest rate; that as to Bank and Trust Corporation (SOLIDBANK) v. Court of Appeals;32
the Amendment to Credit Agreement, she was told that PNB would fill up 2. Banks are allowed to stipulate that interest rates on loans need not be fixed
the interest rate portion thereof; that at the time the parties executed the said and instead be made dependent on prevailing rates upon which to peg such
Credit Agreement, she was not informed about the applicable spread that variable interest rates;33
PNB would impose on her account; that the interest rate portion of all 3. The Promissory Note, as the principal contract evidencing petitioners’
Promissory Notes she and Eduardo issued were always left in blank when loan, prevails over the Credit Agreement and the Real Estate Mortgage.
they executed them, with respondent’s mere assurance that it would be the As such, the rate of interest, penalties and attorney’s fees stipulated in the
one to enter or indicate thereon the prevailing interest rate at the time of Promissory Note prevail over those mentioned in the Credit Agreement and
availment; and that they agreed to such arrangement. She further testified the Real Estate Mortgage agreements;34
that the two Real Estate Mortgage agreements she signed did not stipulate the 4. Roughly, PNB’s computation of the total amount of petitioners’ obligation
payment of penalties; that she and Eduardo consulted with a lawyer, and is correct;35
were told that PNB’s actions were improper, and so on March 20, 2000, they 5. Because the loan was admittedly due and demandable, the foreclosure was
wrote to the latter seeking a recomputation of their outstanding obligation; regularly made;36
and when PNB did not oblige, they instituted Civil Case No. 5975.27 6. By the admission of petitioners during pre-trial, all payments made to PNB
On cross-examination, Lydia testified that she has been in business for 20 were properly applied to the principal, interest and penalties. 37
years; that she also borrowed from other individuals and another bank; that it The dispositive portion of the trial court’s Decision reads:
was only with banks that she was asked to sign loan documents with no IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of
indicated interest rate; that she did not bother to read the terms of the loan the respondent and against the petitioners by DISMISSING the latter’s
documents which she signed; and that she received several PNB statements petition.
of account detailing their outstanding obligations, but she did not complain; Costs against the petitioners.
that she assumed instead that what was written therein is correct. 28 SO ORDERED.38
For his part, PNB Kalibo Branch Manager Diosdado Aspa, Jr. (Aspa), the Petitioners moved for reconsideration. In an Order39 dated June 4, 2003, the
sole witness for respondent, stated on cross-examination that as a practice, trial court granted only a modification in the award of attorney’s fees,
the determination of the prime rates of interest was the responsibility solely reducing the same from 10% to 1%. Thus, PNB was ordered to refund to
of PNB’s Treasury Department which is based in Manila; that these prime petitioner the excess in attorney’s fees in the amount of ₱356,589.90, viz:
87
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II. Loans (Mutuum)
WHEREFORE, judgment is hereby rendered upholding the validity of the On the issue of penalties, the CA ruled that the express tenor of the Real
interest rate charged by the respondent as well as the extra-judicial Estate Mortgage agreements contemplated the inclusion of the PN 9707237-
foreclosure proceedings and the Certificate of Sale. However, respondent is stipulated 24% penalty in the amount to be secured by the mortgaged
directed to refund to the petitioner the amount of ₱356,589.90 representing property, thus –
the excess interest charged against the latter. For and in consideration of certain loans, overdrafts and other credit
No pronouncement as to costs. accommodations obtained from the MORTGAGEE and to secure the
SO ORDERED.40 payment of the same and those others that the MORTGAGEE may extend to
Ruling of the Court of Appeals the MORTGAGOR, including interest and expenses, and other obligations
Petitioners appealed to the CA, which issued the questioned Decision with owing by the MORTGAGOR to the MORTGAGEE, whether direct or
the following decretal portion: indirect, principal or secondary, as appearing in the accounts, books and
WHEREFORE, in view of the foregoing, the instant appeal is PARTLY records of the MORTGAGEE, the MORTGAGOR does hereby transfer and
GRANTED. The modified Decision of the Regional Trial Court per Order convey by way of mortgage unto the MORTGAGEE x x x 43 (Emphasis
dated June 4, 2003 is hereby AFFIRMED with MODIFICATIONS, to wit: supplied)
1. [T]hat the interest rate to be applied after the expiration of the first 30-day The CA believes that the 24% penalty is covered by the phrase "and other
interest period for PN. No. 9707237 should be 12% per annum; obligations owing by the mortgagor to the mortgagee" and should thus be
2. [T]hat the attorney’s fees of10% is valid and binding; and added to the amount secured by the mortgages.44
3. [T]hat [PNB] is hereby ordered to reimburse [petitioners] the excess in the The CA then proceeded to declare valid the foreclosure and sale of properties
bid price of ₱377,505.99 which is the difference between the total amount covered by TCTs T-14250 and T-16208, which came as a necessary result of
due [PNB] and the amount of its bid price. petitioners’ failure to pay the outstanding obligation upon demand. 45The CA
SO ORDERED.41 saw fit to increase the trial court’s award of 1% to 10%, finding the latter rate
On the other hand, respondent did not appeal the June 4,2003 Order of the to be reasonable and citing the Real Estate Mortgage agreement which
trial court which reduced its award of attorney’s fees. It simply raised the authorized the collection of the higher rate.46
issue in its appellee’s brief in the CA, and included a prayer for the reversal Finally, the CA ruled that petitioners are entitled to ₱377,505.09 surplus,
of said Order. which is the difference between PNB’s bid price of ₱4,324,172.96 and
In effect, the CA limited petitioners’ appeal to the following issues: petitioners’ total computed obligation as of January 14, 1999, or the date of
1) Whether x x x the interest rates on petitioners’ outstanding obligation were the auction sale, in the amount of ₱3,946,667.87.47
unilaterally and arbitrarily imposed by PNB; Hence, the present Petition.
2) Whether x x x the penalty charges were secured by the real estate Issues
mortgage; and The following issues are raised in this Petition:
3) Whether x x x the extrajudicial foreclosure and sale are valid. 42 I
The CA noted that, based on receipts presented by petitioners during trial, the A. THE COURT OF APPEALS AS WELL AS THE LOWER COURT
latter dutifully paid a total of ₱3,027,324.60 in interest for the period August ERRED IN NOT NULLIFYING THE INTEREST RATE PROVISION IN
7, 1991 to August 6, 1997, over and above the ₱2.5 million principal THE CREDIT AGREEMENT DATED JULY 24, 1989 X X X AND IN
obligation. And this is exclusive of payments for insurance premiums, THE AMENDMENT TO CREDIT AGREEMENT DATEDAUGUST 21,
documentary stamp taxes, and penalty. All the while, petitioners did not 1991 X X X WHICH LEFT TO THE SOLE UNILATERAL
complain nor object to the imposition of interest; they in fact paid the same DETERMINATION OF THE RESPONDENT PNB THE ORIGINAL
religiously and without fail for seven years. The appellate court ruled that FIXING OF INTEREST RATE AND ITS INCREASE, WHICH
petitioners are thus estopped from questioning the same. AGREEMENT IS CONTRARY TO LAW, ART. 1308 OF THE [NEW
The CA nevertheless noted that for the period July 30, 1997 to August 14, CIVIL CODE], AS ENUNCIATED IN PONCIANO ALMEIDA V. COURT
1997, PNB wrongly applied an interest rate of 25.72% instead of the agreed OF APPEALS,G.R. [NO.] 113412, APRIL 17, 1996, AND CONTRARY TO
25%; thus it overcharged petitioners, and the latter paid, an excess of PUBLIC POLICY AND PUBLIC INTEREST, AND IN APPLYING THE
₱736.56 in interest. PRINCIPLE OF ESTOPPEL ARISING FROM THE ALLEGED DELAYED
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CREDIT
II. Loans (Mutuum)
COMPLAINT OF PETITIONER[S], AND [THEIR] PAYMENT OF THE question the imposition of the alleged illegal interest rates and continued to
INTEREST CHARGED. pay the loan on the basis of these rates, they cannot be deemed to have
B. CONSEQUENTLY, THE COURT OF APPEALS AND THE LOWER acquiesced, and hence could recover what they erroneously paid. 50
COURT ERRED IN NOT DECLARING THAT PNB IS NOT AT ALL Petitioners argue that if the interest rates were nullified, then their obligation
ENTITLED TO ANY INTEREST EXCEPT THE LEGAL RATE FROM to PNB is deemed extinguished as of July 1997; moreover, it would appear
DATE OF DEMAND, AND IN NOT APPLYING THE EXCESS OVER that they even made an over payment to the bank in the amount of
THE LEGAL RATE OF THE ADMITTED PAYMENTS MADE BY ₱984,287.00.
PETITIONER[S] FROM 1991-1998 IN THE ADMITTED TOTAL Next, petitioners suggest that since the Real Estate Mortgage agreements did
AMOUNT OF ₱3,484,287.00, TO PAYMENT OF THE PRINCIPAL OF not include nor specify, as part of the secured amount, the penalty of 24%
₱2,500,000.[00] LEAVING AN OVERPAYMENT OF₱984,287.00 authorized in PN 9707237, such amount of ₱581,666.66 could not be made
REFUNDABLE BY RESPONDENT TO PETITIONER[S] WITH answerable by or collected from the mortgages covering TCTs T-14250 and
INTEREST OF 12% PER ANNUM. T-16208. Claiming support from Philippine Bank of Communications
II [PBCom] v. Court of Appeals,51 petitioners insist that the phrase "and other
THE COURT OF APPEALS AND THE LOWER COURT ERRED IN obligations owing by the mortgagor to the mortgagee"52 in the mortgage
HOLDING THAT PENALTIES ARE INCLUDEDIN THE SECURED agreements cannot embrace the ₱581,666.66 penalty, because, as held in the
AMOUNT, SUBJECT TO FORECLOSURE, WHEN NO PENALTIES ARE PBCom case, "[a] penalty charge does not belong to the species of
MENTIONED [NOR] PROVIDED FOR IN THE REAL ESTATE obligations enumerated in the mortgage, hence, the said contract cannot be
MORTGAGE AS A SECURED AMOUNT AND THEREFORE THE understood to secure the penalty";53while the mortgages are the accessory
AMOUNT OF PENALTIES SHOULDHAVE BEEN EXCLUDED FROM contracts, what items are secured may only be determined from the
[THE] FORECLOSURE AMOUNT. provisions of the mortgage contracts, and not from the Credit Agreement or
III the promissory notes.
THE COURT OF APPEALS ERRED IN REVERSING THE RULING OF Finally, petitioners submit that the trial court’s award of 1% attorney’s fees
THE LOWER COURT, WHICH REDUCED THE ATTORNEY’S FEES OF should be maintained, given that in foreclosures, a lawyer’s work consists
10% OF THE TOTAL INDEBTEDNESS CHARGED IN THE X X X merely in the preparation and filing of the petition, and involves minimal
EXTRAJUDICIAL FORECLOSURE TOONLY 1%, AND [AWARDING] study.54 To allow the imposition of a staggering ₱396,211.00 for such work
10% ATTORNEY’S FEES.48 would be contrary to equity. Petitioners state that the purpose of attorney’s
Petitioners’ Arguments fees in cases of this nature "is not to give respondent a larger compensation
Petitioners insist that the interest rate provision in the Credit Agreement and for the loan than the law already allows, but to protect it against any future
the Amendment to Credit Agreement should be declared null and void, for loss or damage by being compelled to retain counsel x x x to institute judicial
they relegated to PNB the sole power to fix interest rates based on arbitrary proceedings for the collection of its credit."55 And because the instant case
criteria or factors such as bank policy, profitability, cost of money, foreign involves a simple extrajudicial foreclosure, attorney’s fees may be equitably
currency values, and bank administrative costs; spaces for interest rates in the tempered.
two Credit Agreements and the promissory notes were left blank for PNB to Respondent’s Arguments
unilaterally fill, and their consent or agreement to the interest rates imposed For its part, respondent disputes petitioners’ claim that interest rates were
thereafter was not obtained; the interest rate, which consists of the prime rate unilaterally fixed by it, taking relief in the CA pronouncement that
plus the bank spread, is determined not by agreement of the parties but by petitioners are deemed estopped by their failure to question the imposed rates
PNB’s Treasury Department in Manila. Petitioners conclude that by this and their continued payment thereof without opposition. It adds that because
method of fixing the interest rates, the principle of mutuality of contracts is the Credit Agreement and promissory notes contained both an escalation
violated, and public policy as well as Circular 90549 of the then Central Bank clause and a de-escalation clause, it may not be said that the bank violated
had been breached. the principle of mutuality. Besides, the increase or decrease in interest rates
Petitioners question the CA’s application of the principle of estoppel, saying have been mutually agreed upon by the parties, as shown by petitioners’
that no estoppel can proceed from an illegal act. Though they failed to timely continuous payment without protest. Respondent adds that the alleged
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II. Loans (Mutuum)
unilateral imposition of interest rates is not a proper subject for review by the October 12, 1998 – which detailed and included penalty charges as part of
Court because the issue was never raised in the lower court. the total outstanding obligation owing to the bank – was correct. Respondent
As for petitioners’ claim that interest rates imposed by it are null and void for justifies the imposition and collection of a penalty as a normal banking
the reasons that 1) the Credit Agreements and the promissory notes were practice, and the standard rate per annum for all commercial banks, at the
signed in blank; 2) interest rates were at short periods; 3) no interest rates time, was 24%.
could be charged where no agreement on interest rates was made in writing; Respondent adds that the purpose of the penalty or a penal clause for that
4) PNB fixed interest rates on the basis of arbitrary policies and standards left matter is to ensure the performance of the obligation and substitute for
to its choosing; and 5) interest rates based on prime rate plus applicable damages and the payment of interest in the event of non-compliance.62 And
spread are indeterminate and arbitrary – PNB counters: the promissory note – being the principal agreement as opposed to the
a. That Credit Agreements and promissory notes were signed by petitioner[s] mortgage, which is a mere accessory – should prevail. This being the case, its
in blank – Respondent claims that this issue was never raised in the lower inclusion as part of the secured amount in the mortgage agreements is valid
court. Besides, documentary evidence prevails over testimonial evidence; and necessary.
Lydia Silos’ testimony in this regard is self-serving, unsupported and Regarding the foreclosure of the mortgages, respondent accuses petitioners
uncorroborated, and for being the lone evidence on this issue. The fact of pre-empting consolidation of its ownership over TCTs T-14250 and T-
remains that these documents are in proper form, presumed regular, and 16208; that petitioners filed Civil Case No. 5975 ostensibly to question the
endure, against arbitrary claims by Silos – who is an experienced business foreclosure and sale of properties covered by TCTs T-14250 and T-16208 in
person – that she signed questionable loan documents whose provisions for a desperate move to retain ownership over these properties, because they
interest rates were left blank, and yet she continued to pay the interests failed to timely redeem them.
without protest for a number of years.56 Respondent directs the attention of the Court to its petition in G.R. No.
b. That interest rates were at short periods – Respondent argues that the law 181046,63 where the propriety of the CA’s ruling on the following issues is
which governs and prohibits changes in interest rates made more than once squarely raised:
every twelve months has been removed57 with the issuance of Presidential 1. That the interest rate to be applied after the expiration of the first 30-day
Decree No. 858.58 interest period for PN 9707237 should be 12% per annum; and
c. That no interest rates could be charged where no agreement on interest 2. That PNB should reimburse petitioners the excess in the bid price of
rates was made in writing in violation of Article 1956 of the Civil Code, ₱377,505.99 which is the difference between the total amount due to PNB
which provides that no interest shall be due unless it has been expressly and the amount of its bid price.
stipulated in writing – Respondent insists that the stipulated 25% per annum Our Ruling
as embodied in PN 9707237 should be imposed during the interim, or the The Court grants the Petition.
period after the loan became due and while it remains unpaid, and not the Before anything else, it must be said that it is not the function of the Court to
legal interest of 12% as claimed by petitioners. 59 re-examine or re-evaluate evidence adduced by the parties in the proceedings
d. That PNB fixed interest rates on the basis of arbitrary policies and below. The rule admits of certain well-recognized exceptions, though, as
standards left to its choosing – According to respondent, interest rates were when the lower courts’ findings are not supported by the evidence on record
fixed taking into consideration increases or decreases as provided by law or or are based on a misapprehension of facts, or when certain relevant and
by the Monetary Board, the bank’s overall costs of funds, and upon undisputed facts were manifestly overlooked that, if properly considered,
agreement of the parties.60 would justify a different conclusion. This case falls within such exceptions.
e. That interest rates based on prime rate plus applicable spread are The Court notes that on March 5, 2008, a Resolution was issued by the
indeterminate and arbitrary – On this score, respondent submits there are Court’s First Division denying respondent’s petition in G.R. No. 181046, due
various factors that influence interest rates, from political events to economic to late filing, failure to attach the required affidavit of service of the petition
developments, etc.; the cost of money, profitability and foreign currency on the trial court and the petitioners, and submission of a defective
transactions may not be discounted.61 verification and certification of non-forum shopping. On June 25, 2008, the
On the issue of penalties, respondent reiterates the trial court’s finding that Court issued another Resolution denying with finality respondent’s motion
during pre-trial, petitioners admitted that the Statement of Account as of for reconsideration of the March 5, 2008 Resolution. And on August 15,
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CREDIT
II. Loans (Mutuum)
2008, entry of judgment was made. This thus settles the issues, as above- rate is reduced by law or by the Monetary Board. In either case, the
stated, covering a) the interest rate – or 12% per annum– that applies upon adjustment in the interest rate agreed upon shall take effect on the effectivity
expiration of the first 30 days interest period provided under PN 9707237, date of the increase or decrease in maximum interest rate.
and b)the CA’s decree that PNB should reimburse petitioner the excess in the This clause is authorized by Section 2 of Presidential Decree (P.D.) No. 1684
bid price of ₱377,505.09. which further amended Act No. 2655 ("The Usury Law"), as amended, thus:
It appears that respondent’s practice, more than once proscribed by the Court, Section 2. The same Act is hereby amended by adding a new section after
has been carried over once more to the petitioners. In a number of decided Section 7, to read as follows:
cases, the Court struck down provisions in credit documents issued by PNB Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of
to, or required of, its borrowers which allow the bank to increase or decrease money, goods or credits may stipulate that the rate of interest agreed upon
interest rates "within the limits allowed by law at any time depending on may be increased in the event that the applicable maximum rate of interest is
whatever policy it may adopt in the future." Thus, in Philippine National increased bylaw or by the Monetary Board; Provided, That such stipulation
Bank v. Court of Appeals,64 such stipulation and similar ones were declared shall be valid only if there is also a stipulation in the agreement that the rate
in violation of Article 130865 of the Civil Code. In a second case, Philippine of interest agreed upon shall be reduced in the event that the applicable
National Bank v. Court of Appeals,66 the very same stipulations found in the maximum rate of interest is reduced by law or by the Monetary Board;
credit agreement and the promissory notes prepared and issued by the Provided further, That the adjustment in the rate of interest agreed upon shall
respondent were again invalidated. The Court therein said: take effect on or after the effectivity of the increase or decrease in the
The Credit Agreement provided inter alia, that — maximum rate of interest.
(a) The BANK reserves the right to increase the interest rate within the limits Section 1 of P.D. No. 1684 also empowered the Central Bank’s Monetary
allowed by law at any time depending on whatever policy it may adopt in the Board to prescribe the maximum rates of interest for loans and certain
future; Provided, that the interest rate on this accommodation shall be forbearances. Pursuant to such authority, the Monetary Board issued Central
correspondingly decreased in the event that the applicable maximum interest Bank (C.B.) Circular No. 905, series of 1982, Section 5 of which provides:
is reduced by law or by the Monetary Board. In either case, the adjustment in Sec. 5. Section 1303 of the Manual of Regulations (for Banks and Other
the interest rate agreed upon shall take effect on the effectivity date of the Financial Intermediaries) is hereby amended to read as follows:
increase or decrease in the maximum interest rate. Sec. 1303. Interest and Other Charges.
The Promissory Note, in turn, authorized the PNB to raise the rate of interest, — The rate of interest, including commissions, premiums, fees and other
at any time without notice, beyond the stipulated rate of 12% but only charges, on any loan, or forbearance of any money, goods or credits,
"within the limits allowed by law." regardless of maturity and whether secured or unsecured, shall not be subject
The Real Estate Mortgage contract likewise provided that — to any ceiling prescribed under or pursuant to the Usury Law, as amended.
(k) INCREASE OF INTEREST RATE: The rate of interest charged on the P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting
obligation secured by this mortgage as well as the interest on the amount parties to stipulate freely regarding any subsequent adjustment in the interest
which may have been advanced by the MORTGAGEE, in accordance with rate that shall accrue on a loan or forbearance of money, goods or credits. In
the provision hereof, shall be subject during the life of this contract to such fine, they can agree to adjust, upward or downward, the interest previously
an increase within the rate allowed by law, as the Board of Directors of the stipulated. However, contrary to the stubborn insistence of petitioner bank,
MORTGAGEE may prescribe for its debtors. the said law and circular did not authorize either party to unilaterally raise the
xxxx interest rate without the other’s consent.
In making the unilateral increases in interest rates, petitioner bank relied on It is basic that there can be no contract in the true sense in the absence of the
the escalation clause contained in their credit agreement which provides, as element of agreement, or of mutual assent of the parties. If this assent is
follows: wanting on the part of the one who contracts, his act has no more efficacy
The Bank reserves the right to increase the interest rate within the limits than if it had been done under duress or by a person of unsound mind.
allowed by law at any time depending on whatever policy it may adopt in the Similarly, contract changes must be made with the consent of the contracting
future and provided, that, the interest rate on this accommodation shall be parties. The minds of all the parties must meet as to the proposed
correspondingly decreased in the event that the applicable maximum interest modification, especially when it affects an important aspect of the agreement.
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II. Loans (Mutuum)
In the case of loan contracts, it cannot be gainsaid that the rate of interest is It is plainly obvious, therefore, from the undisputed facts of the case that
always a vital component, for it can make or break a capital venture. Thus, respondent bank unilaterally altered the terms of its contract with petitioners
any change must be mutually agreed upon, otherwise, it is bereft of any by increasing the interest rates on the loan without the prior assent of the
binding effect. latter. In fact, the manner of agreement is itself explicitly stipulated by the
We cannot countenance petitioner bank’s posturing that the escalation clause Civil Code when it provides, in Article 1956 that "No interest shall be due
at bench gives it unbridled right to unilaterally upwardly adjust the interest unless it has been expressly stipulated in writing." What has been "stipulated
on private respondents’ loan. That would completely take away from private in writing" from a perusal of interest rate provision of the credit agreement
respondents the right to assent to an important modification in their signed between the parties is that petitioners were bound merely to pay 21%
agreement, and would negate the element of mutuality in contracts. In interest, subject to a possible escalation or de-escalation, when 1) the
Philippine National Bank v. Court of Appeals, et al., 196 SCRA 536, 544- circumstances warrant such escalation or de-escalation; 2) within the limits
545 (1991) we held — allowed by law; and 3) upon agreement.
x x x The unilateral action of the PNB in increasing the interest rate on the Indeed, the interest rate which appears to have been agreed upon by the
private respondent’s loan violated the mutuality of contracts ordained in parties to the contract in this case was the 21% rate stipulated in the interest
Article 1308 of the Civil Code: provision. Any doubt about this is in fact readily resolved by a careful
Art. 1308. The contract must bind both contracting parties; its validity or reading of the credit agreement because the same plainly uses the phrase
compliance cannot be left to the will of one of them. "interest rate agreed upon," in reference to the original 21% interest rate. x x
In order that obligations arising from contracts may have the force of law x
between the parties, there must be mutuality between the parties based on xxxx
their essential equality. A contract containing a condition which makes its Petitioners never agreed in writing to pay the increased interest rates
fulfillment dependent exclusively upon the uncontrolled will of one of the demanded by respondent bank in contravention to the tenor of their credit
contracting parties, is void . . . . Hence, even assuming that the . . . loan agreement. That an increase in interest rates from 18% to as much as 68% is
agreement between the PNB and the private respondent gave the PNB a excessive and unconscionable is indisputable. Between 1981 and 1984,
license (although in fact there was none) to increase the interest rate at will petitioners had paid an amount equivalent to virtually half of the entire
during the term of the loan, that license would have been null and void for principal (₱7,735,004.66) which was applied to interest alone. By the time
being violative of the principle of mutuality essential in contracts. It would the spouses tendered the amount of ₱40,142,518.00 in settlement of their
have invested the loan agreement with the character of a contract of obligations; respondent bank was demanding ₱58,377,487.00 over and above
adhesion, where the parties do not bargain on equal footing, the weaker those amounts already previously paid by the spouses.
party’s (the debtor) participation being reduced to the alternative "to take it Escalation clauses are not basically wrong or legally objectionable so long as
or leave it" . . . . Such a contract is a veritable trap for the weaker party whom they are not solely potestative but based on reasonable and valid grounds.
the courts of justice must protect against abuse and imposition. 67 (Emphases Here, as clearly demonstrated above, not only [are] the increases of the
supplied) interest rates on the basis of the escalation clause patently unreasonable and
Then again, in a third case, Spouses Almeda v. Court of Appeals,68 the Court unconscionable, but also there are no valid and reasonable standards upon
invalidated the very same provisions in the respondent’s prepared Credit which the increases are anchored.
Agreement, declaring thus: xxxx
The binding effect of any agreement between parties to a contract is In the face of the unequivocal interest rate provisions in the credit agreement
premised on two settled principles: (1) that any obligation arising from and in the law requiring the parties to agree to changes in the interest rate in
contract has the force of law between the parties; and (2) that there must be writing, we hold that the unilateral and progressive increases imposed by
mutuality between the parties based on their essential equality. Any contract respondent PNB were null and void. Their effect was to increase the total
which appears to be heavily weighed in favor of one of the parties so as to obligation on an eighteen million peso loan to an amount way over three
lead to an unconscionable result is void. Any stipulation regarding the times that which was originally granted to the borrowers. That these
validity or compliance of the contract which is left solely to the will of one of increases, occasioned by crafty manipulations in the interest rates is
the parties, is likewise, invalid.
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CREDIT
II. Loans (Mutuum)
unconscionable and neutralizes the salutary policies of extending loans to nevertheless be a de-escalation clause to mitigate the one-sidedness of the
spur business cannot be disputed.69 (Emphases supplied) escalation clause. Indeed because of concern for the unequal status of
Still, in a fourth case, Philippine National Bank v. Court of Appeals,70 the borrowers vis-à-vis the banks, our cases after Banco Filipino have fashioned
above doctrine was reiterated: the rule that any increase in the rate of interest made pursuant to an
The promissory note contained the following stipulation: escalation clause must be the result of agreement between the parties.
For value received, I/we, [private respondents] jointly and severally promise Thus in Philippine National Bank v. Court of Appeals, two promissory notes
to pay to the ORDER of the PHILIPPINE NATIONAL BANK, at its office authorized PNB to increase the stipulated interest per annum" within the
in San Jose City, Philippines, the sum of FIFTEEN THOUSAND ONLY limits allowed by law at any time depending on whatever policy [PNB] may
(₱15,000.00), Philippine Currency, together with interest thereon at the rate adopt in the future; Provided, that the interest rate on this note shall be
of 12% per annum until paid, which interest rate the Bank may at any time correspondingly decreased in the event that the applicable maximum interest
without notice, raise within the limits allowed by law, and I/we also agree to rate is reduced by law or by the Monetary Board." The real estate mortgage
pay jointly and severally ____% per annum penalty charge, by way of likewise provided:
liquidated damages should this note be unpaid or is not renewed on due The rate of interest charged on the obligation secured by this mortgage as
dated. well as the interest on the amount which may have been advanced by the
Payment of this note shall be as follows: MORTGAGEE, in accordance with the provisions hereof, shall be subject
*THREE HUNDRED SIXTY FIVE DAYS* AFTER DATE during the life of this contract to such an increase within the rate allowed by
On the reverse side of the note the following condition was stamped: law, as the Board of Directors of the MORTGAGEE may prescribe for its
All short-term loans to be granted starting January 1, 1978 shall be made debtors.
subject to the condition that any and/or all extensions hereof that will leave Pursuant to these clauses, PNB successively increased the interest from 18%
any portion of the amount still unpaid after 730 days shall automatically to 32%, then to 41% and then to 48%. This Court declared the increases
convert the outstanding balance into a medium or long-term obligation as the unilaterally imposed by [PNB] to be in violation of the principle of mutuality
case may be and give the Bank the right to charge the interest rates as embodied in Art.1308 of the Civil Code, which provides that "[t]he
prescribed under its policies from the date the account was originally contract must bind both contracting parties; its validity or compliance cannot
granted. be left to the will of one of them." As the Court explained:
To secure payment of the loan the parties executed a real estate mortgage In order that obligations arising from contracts may have the force of law
contract which provided: between the parties, there must be mutuality between the parties based on
(k) INCREASE OF INTEREST RATE: their essential equality. A contract containing a condition which makes its
The rate of interest charged on the obligation secured by this mortgage as fulfillment dependent exclusively upon the uncontrolled will of one of the
well as the interest on the amount which may have been advanced by the contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555).
MORTGAGEE, in accordance with the provision hereof, shall be subject Hence, even assuming that the ₱1.8 million loan agreement between the PNB
during the life of this contract to such an increase within the rate allowed by and the private respondent gave the PNB a license (although in fact there was
law, as the Board of Directors of the MORTGAGEE may prescribe for its none) to increase the interest rate at will during the term of the loan, that
debtors. license would have been null and void for being violative of the principle of
xxxx mutuality essential in contracts. It would have invested the loan agreement
To begin with, PNB’s argument rests on a misapprehension of the import of with the character of a contract of adhesion, where the parties do not bargain
the appellate court’s ruling. The Court of Appeals nullified the interest rate on equal footing, the weaker party’s (the debtor) participation being reduced
increases not because the promissory note did not comply with P.D. No. to the alternative "to take it or leave it" (Qua vs. Law Union & Rock
1684 by providing for a de-escalation, but because the absence of such Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for the weaker
provision made the clause so one-sided as to make it unreasonable. party whom the courts of justice must protect against abuse and imposition.
That ruling is correct. It is in line with our decision in Banco Filipino Savings A similar ruling was made in Philippine National Bank v. Court of Appeals.
& Mortgage Bank v. Navarro that although P.D. No. 1684 is not to be The credit agreement in that case provided:
retroactively applied to loans granted before its effectivity, there must
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II. Loans (Mutuum)
The BANK reserves the right to increase the interest rate within the limits We repeated this rule in the 1994 case of PNB v. CA and Jayme Fernandez
allowed by law at any time depending on whatever policy it may adopt in the and the 1996 case of PNB v. CA and Spouses Basco. Taking no heed of these
future: Provided, that the interest rate on this accommodation shall be rulings, the escalation clause PNB used in the present case to justify the
correspondingly decreased in the event that the applicable maximum interest increased interest rates is no different from the escalation clause assailed in
is reduced by law or by the Monetary Board. . . . the 1996 PNB case; in both, the interest rates were increased from the agreed
As in the first case, PNB successively increased the stipulated interest so that 12% per annum rate to 42%. x x x
what was originally 12% per annum became, after only two years, 42%. In xxxx
declaring the increases invalid, we held: On the strength of this ruling, PNB’s argument – that the spouses
We cannot countenance petitioner bank’s posturing that the escalation clause Rocamora’s failure to contest the increased interest rates that were
at bench gives it unbridled right to unilaterally upwardly adjust the interest purportedly reflected in the statements of account and the demand letters sent
on private respondents’ loan. That would completely take away from private by the bank amounted to their implied acceptance of the increase – should
respondents the right to assent to an important modification in their likewise fail.
agreement, and would negate the element of mutuality in contracts. Evidently, PNB’s failure to secure the spouses Rocamora’s consent to the
Only recently we invalidated another round of interest increases decreed by increased interest rates prompted the lower courts to declare excessive and
PNB pursuant to a similar agreement it had with other borrowers: illegal the interest rates imposed. Togo around this lower court finding, PNB
[W]hile the Usury Law ceiling on interest rates was lifted by C.B. Circular alleges that the ₱206,297.47 deficiency claim was computed using only the
905, nothing in the said circular could possibly be read as granting original 12% per annum interest rate. We find this unlikely. Our examination
respondent bank carte blanche authority to raise interest rates to levels which of PNB’s own ledgers, included in the records of the case, clearly indicates
would either enslave its borrowers or lead to a hemorrhaging of their assets. that PNB imposed interest rates higher than the agreed 12% per annum rate.
In this case no attempt was made by PNB to secure the conformity of private This confirmatory finding, albeit based solely on ledgers found in the
respondents to the successive increases in the interest rate. Private records, reinforces the application in this case of the rule that findings of the
respondents’ assent to the increases can not be implied from their lack of RTC, when affirmed by the CA, are binding upon this Court. 75 (Emphases
response to the letters sent by PNB, informing them of the increases. For as supplied)
stated in one case, no one receiving a proposal to change a contract is obliged Verily, all these cases, including the present one, involve identical or similar
to answer the proposal.71 (Emphasis supplied) provisions found in respondent’s credit agreements and promissory notes.
We made the same pronouncement in a fifth case, New Sampaguita Builders Thus, the July 1989 Credit Agreement executed by petitioners and
Construction, Inc. v. Philippine National Bank,72 thus – respondent contained the following stipulation on interest:
Courts have the authority to strike down or to modify provisions in 1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5%
promissory notes that grant the lenders unrestrained power to increase [per annum]. Interest shall be payable in advance every one hundred twenty
interest rates, penalties and other charges at the latter’s sole discretion and days at the rate prevailing at the time of the renewal.
without giving prior notice to and securing the consent of the borrowers. This (b) The Borrower agrees that the Bank may modify the interest rate in the
unilateral authority is anathema to the mutuality of contracts and enable Loan depending on whatever policy the Bank may adopt in the future,
lenders to take undue advantage of borrowers. Although the Usury Law has including without limitation, the shifting from the floating interest rate
been effectively repealed, courts may still reduce iniquitous or system to the fixed interest rate system, or vice versa. Where the Bank has
unconscionable rates charged for the use of money. Furthermore, excessive imposed on the Loan interest at a rate per annum which is equal to the
interests, penalties and other charges not revealed in disclosure statements Bank’s spread over the current floating interest rate, the Borrower hereby
issued by banks, even if stipulated in the promissory notes, cannot be given agrees that the Bank may, without need of notice to the Borrower, increase or
effect under the Truth in Lending Act.73 (Emphasis supplied) decrease its spread over the floating interest rate at any time depending on
Yet again, in a sixth disposition, Philippine National Bank v. Spouses whatever policy it may adopt in the future.76 (Emphases supplied)
Rocamora,74 the above pronouncements were reiterated to debunk PNB’s while the eight promissory notes issued pursuant thereto granted PNB the
repeated reliance on its invalidated contract stipulations: right to increase or reduce interest rates "within the limits allowed by law or
the Monetary Board"77 and the Real Estate Mortgage agreement included the
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same right to increase or reduce interest rates "at any time depending on The 9th up to the 17th promissory notes provide for the payment of interest
whatever policy PNB may adopt in the future."78 at the "rate the Bank may at any time without notice, raise within the limits
On the basis of the Credit Agreement, petitioners issued promissory notes allowed by law x x x."82 On the other hand, the 18th up to the 26th
which they signed in blank, and respondent later on entered their promissory notes – which includes PN 9707237 – carried the following
corresponding interest rates, as follows: provision:
1st Promissory Note dated July 24, 1989 – 19.5%; x x x For this purpose, I/We agree that the rate of interest herein stipulated
2nd Promissory Note dated November 22, 1989 – 23%; may be increased or decreased for the subsequent Interest Periods, with prior
3rd Promissory Note dated March 21, 1990 – 22%; notice to the Borrower in the event of changes in interest rate prescribed by
4th Promissory Note dated July 19, 1990 – 24%; law or the Monetary Board of the Central Bank of the Philippines, or in the
5th Promissory Note dated December 17, 1990 – 28%; Bank’s overall cost of funds. I/We hereby agree that in the event I/we are not
6th Promissory Note dated February 14, 1991 – 32%; agreeable to the interest rate fixed for any Interest Period, I/we shall have the
7th Promissory Note dated March 1, 1991 – 30%; and option to prepay the loan or credit facility without penalty within ten (10)
8th Promissory Note dated July 11, 1991 – 24%.79 calendar days from the Interest Setting Date.83 (Emphasis supplied)
On the other hand, the August 1991 Amendment to Credit Agreement These stipulations must be once more invalidated, as was done in previous
contains the following stipulation regarding interest: cases. The common denominator in these cases is the lack of agreement of
1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on the parties to the imposed interest rates. For this case, this lack of consent by
each Availment from date of each Availment up to but not including the date the petitioners has been made obvious by the fact that they signed the
of full payment thereof at the rate per annum which is determined by the promissory notes in blank for the respondent to fill. We find credible the
Bank to be prime rate plus applicable spread in effect as of the date of each testimony of Lydia in this respect. Respondent failed to discredit her; in fact,
Availment.80 (Emphases supplied) its witness PNB Kalibo Branch Manager Aspa admitted that interest rates
and under this Amendment to Credit Agreement, petitioners again executed were fixed solely by its Treasury Department in Manila, which were then
and signed the following promissory notes in blank, for the respondent to simply communicated to all PNB branches for implementation. If this were
later on enter the corresponding interest rates, which it did, as follows: the case, then this would explain why petitioners had to sign the promissory
9th Promissory Note dated November 8, 1991 – 26%; notes in blank, since the imposable interest rates have yet to be determined
10th Promissory Note dated March 19, 1992 – 25%; and fixed by respondent’s Treasury Department in Manila.
11th Promissory Note dated July 11, 1992 – 23%; Moreover, in Aspa’s enumeration of the factors that determine the interest
12th Promissory Note dated November 10, 1992 – 21%; rates PNB fixes – such as cost of money, foreign currency values, bank
13th Promissory Note dated March 15, 1993 – 21%; administrative costs, profitability, and considerations which affect the
14th Promissory Note dated July 12, 1993 – 17.5%; banking industry – it can be seen that considerations which affect PNB’s
15th Promissory Note dated November 17, 1993 – 21%; borrowers are ignored. A borrower’s current financial state, his feedback or
16th Promissory Note dated March 28, 1994 – 21%; opinions, the nature and purpose of his borrowings, the effect of foreign
17th Promissory Note dated July 13, 1994 – 21%; currency values or fluctuations on his business or borrowing, etc. – these are
18th Promissory Note dated November 16, 1994 – 16%; not factors which influence the fixing of interest rates to be imposed on him.
19th Promissory Note dated April 10, 1995 – 21%; Clearly, respondent’s method of fixing interest rates based on one-sided,
20th Promissory Note dated July 19, 1995 – 18.5%; indeterminate, and subjective criteria such as profitability, cost of money,
21st Promissory Note dated December 18, 1995 – 18.75%; bank costs, etc. is arbitrary for there is no fixed standard or margin above or
22nd Promissory Note dated April 22, 1996 – 18.5%; below these considerations.
23rd Promissory Note dated July 22, 1996 – 18.5%; The stipulation in the promissory notes subjecting the interest rate to review
24th Promissory Note dated November 25, 1996 – 18%; does not render the imposition by UCPB of interest rates on the obligations
25th Promissory Note dated May 30, 1997 – 17.5%; and of the spouses Beluso valid. According to said stipulation:
26th Promissory Note (PN 9707237) dated July 30, 1997 – 25%.81 The interest rate shall be subject to review and may be increased or decreased
by the LENDER considering among others the prevailing financial and
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monetary conditions; or the rate of interest and charges which other banks or including without limitation, the shifting from the floating interest rate
financial institutions charge or offer to charge for similar accommodations; system to the fixed interest rate system, or vice versa. Where the Bank has
and/or the resulting profitability to the LENDER after due consideration of imposed on the Loan interest at a rate per annum, which is equal to the
all dealings with the BORROWER. Bank’s spread over the current floating interest rate, the Borrower hereby
It should be pointed out that the authority to review the interest rate was agrees that the Bank may, without need of notice to the Borrower, increase or
given [to] UCPB alone as the lender. Moreover, UCPB may apply the decrease its spread over the floating interest rate at any time depending on
considerations enumerated in this provision as it wishes. As worded in the whatever policy it may adopt in the future.86 (Emphases supplied)
above provision, UCPB may give as much weight as it desires to each of the IN THE AUGUST 1991 AMENDMENT TO CREDIT AGREEMENT
following considerations: (1) the prevailing financial and monetary 1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on
condition;(2) the rate of interest and charges which other banks or financial each Availment from date of each Availment up to but not including the date
institutions charge or offer to charge for similar accommodations; and/or(3) of full payment thereof at the rate per annum which is determined by the
the resulting profitability to the LENDER (UCPB) after due consideration of Bank to be prime rate plus applicable spread in effect as of the date of each
all dealings with the BORROWER (the spouses Beluso). Again, as in the Availment.87 (Emphasis supplied)
case of the interest rate provision, there is no fixed margin above or below Plainly, with the present credit agreement, the element of consent or
these considerations. agreement by the borrower is now completely lacking, which makes
In view of the foregoing, the Separability Clause cannot save either of the respondent’s unlawful act all the more reprehensible.
two options of UCPB as to the interest to be imposed, as both options violate Accordingly, petitioners are correct in arguing that estoppel should not apply
the principle of mutuality of contracts.84 (Emphases supplied) to them, for "[e]stoppel cannot be predicated on an illegal act. As between
To repeat what has been said in the above-cited cases, any modification in the parties to a contract, validity cannot be given to it by estoppel if it is
the contract, such as the interest rates, must be made with the consent of the prohibited by law or is against public policy." 88
contracting parties.1âwphi1 The minds of all the parties must meet as to the It appears that by its acts, respondent violated the Truth in Lending Act, or
proposed modification, especially when it affects an important aspect of the Republic Act No. 3765, which was enacted "to protect x x x citizens from a
agreement. In the case of loan agreements, the rate of interest is a principal lack of awareness of the true cost of credit to the user by using a full
condition, if not the most important component. Thus, any modification disclosure of such cost with a view of preventing the uninformed use of
thereof must be mutually agreed upon; otherwise, it has no binding effect. credit to the detriment of the national economy."89 The law "gives a detailed
What is even more glaring in the present case is that, the stipulations in enumeration of the specific information required to be disclosed, among
question no longer provide that the parties shall agree upon the interest rate which are the interest and other charges incident to the extension of
to be fixed; -instead, they are worded in such a way that the borrower shall credit."90 Section 4 thereof provides that a disclosure statement must be
agree to whatever interest rate respondent fixes. In credit agreements covered furnished prior to the consummation of the transaction, thus:
by the above-cited cases, it is provided that: SEC. 4. Any creditor shall furnish to each person to whom credit is extended,
The Bank reserves the right to increase the interest rate within the limits prior to the consummation of the transaction, a clear statement in writing
allowed by law at any time depending on whatever policy it may adopt in the setting forth, to the extent applicable and in accordance with rules and
future: Provided, that, the interest rate on this accommodation shall be regulations prescribed by the Board, the following information:
correspondingly decreased in the event that the applicable maximum interest (1) the cash price or delivered price of the property or service to be acquired;
rate is reduced by law or by the Monetary Board. In either case, the (2) the amounts, if any, to be credited as down payment and/or trade-in;
adjustment in the interest rate agreed upon shall take effect on the effectivity (3) the difference between the amounts set forth under clauses (1) and (2);
date of the increase or decrease in maximum interest rate. 85 (Emphasis (4) the charges, individually itemized, which are paid or to be paid by such
supplied) person in connection with the transaction but which are not incident to the
Whereas, in the present credit agreements under scrutiny, it is stated that: extension of credit;
IN THE JULY 1989 CREDIT AGREEMENT (5) the total amount to be financed;
(b) The Borrower agrees that the Bank may modify the interest rate on the (6) the finance charge expressed in terms of pesos and centavos; and
Loan depending on whatever policy the Bank may adopt in the future,
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II. Loans (Mutuum)
(7) the percentage that the finance bears to the total amount to be financed UCPB’s claim of substantial compliance would defeat these purposes of the
expressed as a simple annual rate on the outstanding unpaid balance of the Truth in Lending Act. The belated discovery of the true cost of credit will too
obligation. often not be able to reverse the ill effects of an already consummated
Under Section 4(6), "finance charge" represents the amount to be paid by the business decision.
debtor incident to the extension of credit such as interest or discounts, In addition, the promissory notes, the copies of which were presented to the
collection fees, credit investigation fees, attorney’s fees, and other service spouses Beluso after execution, are not sufficient notification from UCPB.
charges. The total finance charge represents the difference between (1) the As earlier discussed, the interest rate provision therein does not sufficiently
aggregate consideration (down payment plus installments) on the part of the indicate with particularity the interest rate to be applied to the loan covered
debtor, and (2) the sum of the cash price and non-finance charges.91 by said promissory notes.92 (Emphases supplied)
By requiring the petitioners to sign the credit documents and the promissory However, the one-year period within which an action for violation of the
notes in blank, and then unilaterally filling them up later on, respondent Truth in Lending Act may be filed evidently prescribed long ago, or
violated the Truth in Lending Act, and was remiss in its disclosure sometime in 2001, one year after petitioners received the March 2000
obligations. In one case, which the Court finds applicable here, it was held: demand letter which contained the illegal charges.
UCPB further argues that since the spouses Beluso were duly given copies of The fact that petitioners later received several statements of account detailing
the subject promissory notes after their execution, then they were duly its outstanding obligations does not cure respondent’s breach. To repeat, the
notified of the terms thereof, in substantial compliance with the Truth in belated discovery of the true cost of credit does not reverse the ill effects of
Lending Act. an already consummated business decision.93
Once more, we disagree. Section 4 of the Truth in Lending Act clearly Neither may the statements be considered proposals sent to secure the
provides that the disclosure statement must be furnished prior to the petitioners’ conformity; they were sent after the imposition and application
consummation of the transaction: of the interest rate, and not before. And even if it were to be presumed that
SEC. 4. Any creditor shall furnish to each person to whom credit is extended, these are proposals or offers, there was no acceptance by petitioners. "No one
prior to the consummation of the transaction, a clear statement in writing receiving a proposal to modify a loan contract, especially regarding interest,
setting forth, to the extent applicable and in accordance with rules and is obliged to answer the proposal."94
regulations prescribed by the Board, the following information: Loan and credit arrangements may be made enticing by, or "sweetened" with,
(1) the cash price or delivered price of the property or service to be acquired; offers of low initial interest rates, but actually accompanied by provisions
(2) the amounts, if any, to be credited as down payment and/or trade-in; written in fine print that allow lenders to later on increase or decrease interest
(3) the difference between the amounts set forth under clauses (1) and (2); rates unilaterally, without the consent of the borrower, and depending on
(4) the charges, individually itemized, which are paid or to be paid by such complex and subjective factors. Because they have been lured into these
person in connection with the transaction but which are not incident to the contracts by initially low interest rates, borrowers get caught and stuck in the
extension of credit; web of subsequent steep rates and penalties, surcharges and the like. Being
(5) the total amount to be financed; ordinary individuals or entities, they naturally dread legal complications and
(6) the finance charge expressed in terms of pesos and centavos; and cannot afford court litigation; they succumb to whatever charges the lenders
(7) the percentage that the finance bears to the total amount to be financed impose. At the very least, borrowers should be charged rightly; but then
expressed as a simple annual rate on the outstanding unpaid balance of the again this is not possible in a one-sided credit system where the temptation to
obligation. abuse is strong and the willingness to rectify is made weak by the eternal
The rationale of this provision is to protect users of credit from a lack of desire for profit.
awareness of the true cost thereof, proceeding from the experience that banks Given the above supposition, the Court cannot subscribe to respondent’s
are able to conceal such true cost by hidden charges, uncertainty of interest argument that in every repricing of petitioners’ loan availment, they are
rates, deduction of interests from the loaned amount, and the like. The law given the right to question the interest rates imposed. The import of
thereby seeks to protect debtors by permitting them to fully appreciate the respondent’s line of reasoning cannot be other than that if one out of every
true cost of their loan, to enable them to give full consent to the contract, and hundred borrowers questions respondent’s practice of unilaterally fixing
to properly evaluate their options in arriving at business decisions. Upholding interest rates, then only the loan arrangement with that lone complaining
97
CREDIT
II. Loans (Mutuum)
borrower will enjoy the benefit of review or re-negotiation; as to the 99 and unpaid interest, as the case may be, and later, to the capital or
others, the questionable practice will continue unchecked, and respondent principal.97 Respondent should then refund the excess amount of interest that
will continue to reap the profits from such unscrupulous practice. The Court it has illegally imposed upon petitioners; "[t]he amount to be refunded refers
can no more condone a view so perverse. This is exactly what the Court to that paid by petitioners when they had no obligation to do so."98 Thus, the
meant in the immediately preceding cited case when it said that "the belated parties’ original agreement stipulated the payment of 19.5% interest;
discovery of the true cost of credit does not reverse the ill effects of an however, this rate was intended to apply only to the first promissory note
already consummated business decision;"95 as to the 99 borrowers who did which expired on November 21, 1989 and was paid by petitioners; it was not
not or could not complain, the illegal act shall have become a fait accompli– intended to apply to the whole duration of the loan. Subsequent higher
to their detriment, they have already suffered the oppressive rates. interest rates have been declared illegal; but because only the rates are found
Besides, that petitioners are given the right to question the interest rates to be improper, the obligation to pay interest subsists, the same to be fixed at
imposed is, under the circumstances, irrelevant; we have a situation where the legal rate of 12% per annum. However, the 12% interest shall apply only
the petitioners do not stand on equal footing with the respondent. It is until June 30, 2013. Starting July1, 2013, the prevailing rate of interest shall
doubtful that any borrower who finds himself in petitioners’ position would be 6% per annum pursuant to our ruling in Nacar v. Gallery Frames99 and
dare question respondent’s power to arbitrarily modify interest rates at any Bangko Sentral ng Pilipinas-Monetary Board Circular No. 799.
time. In the second place, on what basis could any borrower question such Now to the issue of penalty. PN 9707237 provides that failure to pay it or
power, when the criteria or standards – which are really one-sided, arbitrary any installment thereon, when due, shall constitute default, and a penalty
and subjective – for the exercise of such power are precisely lost on him? charge of 24% per annum based on the defaulted principal amount shall be
For the same reasons, the Court cannot validly consider that, as stipulated in imposed. Petitioners claim that this penalty should be excluded from the
the 18th up to the 26th promissory notes, petitioners are granted the option to foreclosure amount or bid price because the Real Estate Mortgage and the
prepay the loan or credit facility without penalty within 10 calendar days Supplement thereto did not specifically include it as part of the secured
from the Interest Setting Date if they are not agreeable to the interest rate amount. Respondent justifies its inclusion in the secured amount, saying that
fixed. It has been shown that the promissory notes are executed and signed in the purpose of the penalty or a penal clause is to ensure the performance of
blank, meaning that by the time petitioners learn of the interest rate, they are the obligation and substitute for damages and the payment of interest in the
already bound to pay it because they have already pre-signed the note where event of non-compliance.100 Respondent adds that the imposition and
the rate is subsequently entered. collection of a penalty is a normal banking practice, and the standard rate per
Besides, premium may not be placed upon a stipulation in a contract which annum for all commercial banks, at the time, was 24%. Its inclusion as part
grants one party the right to choose whether to continue with or withdraw of the secured amount in the mortgage agreements is thus valid and
from the agreement if it discovers that what the other party has been doing all necessary.
along is improper or illegal. The Court sustains petitioners’ view that the penalty may not be included as
Thus said, respondent’s arguments relative to the credit documents – that part of the secured amount. Having found the credit agreements and
documentary evidence prevails over testimonial evidence; that the credit promissory notes to be tainted, we must accord the same treatment to the
documents are in proper form, presumed regular, and endure, against mortgages. After all, "[a] mortgage and a note secured by it are deemed parts
arbitrary claims by petitioners, experienced business persons that they are, of one transaction and are construed together."101 Being so tainted and having
they signed questionable loan documents whose provisions for interest rates the attributes of a contract of adhesion as the principal credit documents, we
were left blank, and yet they continued to pay the interests without protest for must construe the mortgage contracts strictly, and against the party who
a number of years – deserve no consideration. drafted it. An examination of the mortgage agreements reveals that nowhere
With regard to interest, the Court finds that since the escalation clause is is it stated that penalties are to be included in the secured amount. Construing
annulled, the principal amount of the loan is subject to the original or this silence strictly against the respondent, the Court can only conclude that
stipulated rate of interest, and upon maturity, the amount due shall be subject the parties did not intend to include the penalty allowed under PN 9707237
to legal interest at the rate of 12% per annum. This is the uniform ruling as part of the secured amount. Given its resources, respondent could have – if
adopted in previous cases, including those cited here. 96 The interests paid by it truly wanted to – conveniently prepared and executed an amended
petitioners should be applied first to the payment of the stipulated or legal
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mortgage agreement with the petitioners, thereby including penalties in the 3. After the above procedure is carried out, the trial court shall be able to
amount to be secured by the encumbered properties. Yet it did not. conclude if petitioners a) still have an OUTSTANDING
With regard to attorney’s fees, it was plain error for the CA to have passed BALANCE/OBLIGATION or b) MADE PAYMENTS OVER AND
upon the issue since it was not raised by the petitioners in their appeal; it was ABOVE THEIR TOTAL OBLIGATION (principal and interest);
the respondent that improperly brought it up in its appellee’s brief, when it 4. Such outstanding balance/obligation, if there be any, shall then be
should have interposed an appeal, since the trial court’s Decision on this subjected to a 12% per annum interest from October 28, 1997 until January
issue is adverse to it. It is an elementary principle in the subject of appeals 14, 1999, which is the date of the auction sale;
that an appellee who does not himself appeal cannot obtain from the 5. Such outstanding balance/obligation shall also be charged a 24% per
appellate court any affirmative relief other than those granted in the decision annum penalty from August 14, 1997 until January 14, 1999. But from this
of the court below. total penalty, the petitioners’ previous payment of penalties in the amount of
x x x [A]n appellee, who is at the same time not an appellant, may on appeal ₱202,000.00made on January 27, 1998106 shall be DEDUCTED;
be permitted to make counter assignments of error in ordinary actions, when 6. To this outstanding balance (3.), the interest (4.), penalties (5.), and the
the purpose is merely to defend himself against an appeal in which errors are final and executory award of 1% attorney’s fees shall be ADDED;
alleged to have been committed by the trial court both in the appreciation of 7. The sum total of the outstanding balance (3.), interest (4.) and 1%
facts and in the interpretation of the law, in order to sustain the judgment in attorney’s fees (6.) shall be DEDUCTED from the bid price of
his favor but not when his purpose is to seek modification or reversal of the ₱4,324,172.96. The penalties (5.) are not included because they are not
judgment, in which case it is necessary for him to have excepted to and included in the secured amount;
appealed from the judgment.102 8. The difference in (7.) [₱4,324,172.96 LESS sum total of the outstanding
Since petitioners did not raise the issue of reduction of attorney’s fees, the balance (3.), interest (4.), and 1% attorney’s fees (6.)] shall be DELIVERED
CA possessed no authority to pass upon it at the instance of respondent. The TO THE PETITIONERS;
ruling of the trial court in this respect should remain undisturbed. 9. Respondent may then proceed to consolidate its title to TCTs T-14250 and
For the fixing of the proper amounts due and owing to the parties – to the T-16208;
respondent as creditor and to the petitioners who are entitled to a refund as a 10. ON THE OTHER HAND, if after performing the procedure in (2.), it
consequence of overpayment considering that they paid more by way of turns out that petitioners made an OVERPAYMENT, the interest (4.),
interest charges than the 12% per annum103 herein allowed – the case should penalties (5.), and the award of 1% attorney’s fees (6.) shall be DEDUCTED
be remanded to the lower court for proper accounting and computation, from the overpayment. There is no outstanding balance/obligation precisely
applying the following procedure: because petitioners have paid beyond the amount of the principal and
1. The 1st Promissory Note with the 19.5% interest rate is deemed proper and interest;
paid; 11. If the overpayment exceeds the sum total of the interest (4.), penalties
2. All subsequent promissory notes (from the 2nd to the 26th promissory (5.), and award of 1% attorney’s fees (6.), the excess shall be RETURNED to
notes) shall carry an interest rate of only 12% per annum.104 Thus, interest the petitioners, with legal interest, under the principle of solutio indebiti;107
payment made in excess of 12% on the 2nd promissory note shall 12. Likewise, if the overpayment exceeds the total amount of interest (4.) and
immediately be applied to the principal, and the principal shall be award of 1% attorney’s fees (6.), the trial court shall INVALIDATE THE
accordingly reduced. The reduced principal shall then be subjected to the EXTRAJUDICIAL FORECLOSURE AND SALE;
12%105 interest on the 3rd promissory note, and the excess over 12% interest 13. HOWEVER, if the total amount of interest (4.) and award of 1%
payment on the 3rd promissory note shall again be applied to the principal, attorney’s fees (6.) exceed petitioners’ overpayment, then the excess shall be
which shall again be reduced accordingly. The reduced principal shall then DEDUCTED from the bid price of ₱4,324,172.96;
be subjected to the 12% interest on the 4th promissory note, and the excess 14. The difference in (13.) [₱4,324,172.96 LESS sum total of the interest (4.)
over12% interest payment on the 4th promissory note shall again be applied and 1% attorney’s fees (6.)] shall be DELIVERED TO THE PETITIONERS;
to the principal, which shall again be reduced accordingly. And so on and so 15. Respondent may then proceed to consolidate its title to TCTs T-14250
forth; and T-16208. The outstanding penalties, if any, shall be collected by other
means.
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From the above, it will be seen that if, after proper accounting, it turns out 7. The reimbursement of the excess in the bid price of ₱377,505.99, which
that the petitioners made payments exceeding what they actually owe by way respondent Philippine National Bank is ordered to reimburse petitioners,
of principal, interest, and attorney’s fees, then the mortgaged properties need should be HELD IN ABEYANCE until the true amount owing to or owed by
not answer for any outstanding secured amount, because there is not any; the parties as against each other is determined;
quite the contrary, respondent must refund the excess to 8. Considering that this case has been pending for such a long time and that
petitioners.1âwphi1 In such case, the extrajudicial foreclosure and sale of the further proceedings, albeit uncomplicated, are required, the trial court is
properties shall be declared null and void for obvious lack of basis, the case ORDERED to proceed with dispatch.
being one of solutio indebiti instead. If, on the other hand, it turns out that SO ORDERED.
petitioners’ overpayments in interests do not exceed their total obligation,
then the respondent may consolidate its ownership over the properties, since
the period for redemption has expired. Its only obligation will be to return the
difference between its bid price (₱4,324,172.96) and petitioners’ total
obligation outstanding – except penalties – after applying the latter’s
overpayments.
WHEREFORE, premises considered, the Petition is GRANTED. The May 8,
2007 Decision of the Court of Appeals in CA-G.R. CV No. 79650 is
ANNULLED and SET ASIDE. Judgment is hereby rendered as follows:
1. The interest rates imposed and indicated in the 2nd up to the 26th
Promissory Notes are DECLARED NULL AND VOID, and such notes shall
instead be subject to interest at the rate of twelve percent (12%) per annum
up to June 30, 2013, and starting July 1, 2013, six percent (6%) per annum
until full satisfaction;
2. The penalty charge imposed in Promissory Note No. 9707237 shall be
EXCLUDED from the amounts secured by the real estate mortgages;
3. The trial court’s award of one per cent (1%) attorney’s fees is
REINSTATED;
4. The case is ordered REMANDED to the Regional Trial Court, Branch 6 of
Kalibo, Aklan for the computation of overpayments made by petitioners
spouses Eduardo and Lydia Silos to respondent Philippine National Bank,
taking into consideration the foregoing dispositions, and applying the
procedure hereinabove set forth;
5. Thereafter, the trial court is ORDERED to make a determination as to the
validity of the extrajudicial foreclosure and sale, declaring the same null and
void in case of overpayment and ordering the release and return of Transfer
Certificates of Title Nos. T-14250 and TCT T-16208 to petitioners, or
ordering the delivery to the petitioners of the difference between the bid price
and the total remaining obligation of petitioners, if any;
6. In the meantime, the respondent Philippine National Bank is ENJOINED
from consolidating title to Transfer Certificates of Title Nos. T-14250 and T-
16208 until all the steps in the procedure above set forth have been taken and
applied;

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