1|Page CREDIT TRANSACTION I ACJUCO
EN BANC continue to pay interest, we cannot, in law, indulge in any
[G.R. No. 47878. July 24, 1942.]
GIL JARDENIL, Plaintiff-Appellant, v. HEFTI SOLAS
(alias HEPTI SOLAS, JEPTI SOLAS), Defendant-
Appellee.
SYLLABUS
1. INTEREST; ARTICLE 1755 OF THE CIVIL CODE;
INTERPRETATION OF CONTRACTS. — Defendant has
agreed to pay interest only up to the late of maturity, or
until March 31, 1934. As the contract is silent as to
whether after that date, in the event of non-payment, the
debtor would continue to pay interest, no legal
presumption as to such interest can be indulged, for this
would be imposing upon the debtor an obligation that the
parties have not chosen to agree. article 1755 of the Civil
Code provides that "interests shall be due only when it
has been expressly stipulated."
2. ID.; ID.; ID. — As the contract is clear and
unmistakable and the terms therein have not been shown
to belie or otherwise fail to express the true intention of
the parties, and that the deed has not been assailed on
the ground of mutual mistake which would require its
reformation, same should be given its full force and effect.
When a party sues on a written contract and no attempt
is made to show any vice therein, he cannot be allowed
to lay any claim than what its clear stipulations accord.
His omission, to which the law attaches a definite meaning
as in the instant case, cannot by the courts be arbitrarily
supplied by what their own notions of justice or equity
may dictate.
DECISION
MORAN, J. p.
This is an action for foreclosure of mortgage. The only
question raised in this appeal is: Is defendant-appellee
bound to pay the stipulated interest only up to the date
of maturity as fixed in the promissory note, or up to the
date payment is effected? This question is, in our opinion,
controlled by the express stipulation of the parties.
Paragraph 4 of the mortgage deed recites:
"Que en consideracion a dicha suma aun por pagar de
DOS MIL CUATROCIENTOS PESOS (P2,400.00), moneda
filipina, que el Sr. Hepti Solas se compromete a pagar al
Sr. Jardenil en o antes del dia treintaiuno (31) de marzo
de mil novecientos treintaicuatro (1934), con los intereses
de dicha suma al tipo de doce por ciento (12%) anual a
partir desde esta fecha hasta el dia de su vencimiento, o
sea el treintaiuno (31) de marzo de mil novecientos
treintaicuatro (1934), por la presente, el Sr. Hepti Solas
cede y traspasa, por via de primera hipoteca, a favor del
Sr. Jardenil, sus herederos y causahabientes, la parcela
de terreno descrita en el parrafo primero (1. °) de esta
escritura."
Defendant-appellee has, therefore, clearly agreed to pay
interest only up to the date of maturity, or until March 31,
1934. As the contract is silent as to whether after that
date, in the event of non- payment, the debtor would
presumption as to such interest; otherwise, we would be
imposing upon the debtor an obligation that the parties
have not chosen to agree upon. Article 1755 of the Civil
Code provides that "interest shall be due only when it has
been expressly stipulated." (Italic supplied.) .
A writing must be interpreted according to the legal
meaning of its language (section 286, Act No. 190, now
section 58, Rule 123), and only when the wording of the
written instrument appears to be contrary to the evident
intention of the parties that such intention must prevail.
(Article 1281, Civil Code.) There is nothing in the
mortgage deed to show that the terms employed by the
parties thereto are at war with their evident intent. On the
contrary, the act of the mortgagee of granting to the
mortgagor, on the same date of the execution of the deed
of mortgage, an extension of one year from the date of
maturity within which to make payment, without making
any mention of any interest which the mortgagor should
pay during the additional period (see Exhibit B attached
to the complaint), indicates that the true intention of the
parties was that no interest should be paid during the
period of grace. What reasons the parties may have
therefor, we need not here seek to explore.
Neither has either of the parties shown that, by mutual
mistake, the deed of mortgage fails to express their true
agreement, for if such mistake existed, plaintiff would
have undoubtedly adduced evidence to establish it and
asked that the deed be reformed accordingly, under the
parcel-evidence rule.
We hold, therefore, that as the contract is clear and
unmistakable and the terms employed therein have not
been shown to belie or otherwise fail to express the true
intention of the parties, and that the deed has not been
assailed on the ground of mutual mistake which would
require its reformation, same should be given its full force
and effect. When a party sues on a written contract and
no attempt is made to show any vice therein, he cannot
be allowed to lay any claim more than what its clear
stipulations accord. His omission, to which the law
attaches a definite meaning as in the instant case, cannot
by the courts be arbitrarily supplied by what their own
notions of justice or equity may dictate.
Plaintiff is, therefore, entitled only to the stipulated
interest of 12 per cent on the loan of P2,400 from
November 8, 1932 to March 31, 1934. And it being a fact
that extrajudicial demands have been made which we
may assume to have been so made on the expiration of
the year of grace, he shall be entitled to legal interest
upon the principal and the accrued interest from April 1,
1935, until full payment.
Thus modified, judgment is affirmed, with costs
against Appellant.
EN BANC
[G.R. No. 32644. October 4, 1930.]
CU UNJIENG E HIJOS, Plaintiff-Appellee, v. THE
 2|Page CREDIT TRANSACTION I ACJUCO
MABALACAT SUGAR CO., ET AL., Defendants. THE
MABALACAT SUGAR CO., Appellant.
SYLLABUS
1. INTEREST; COMPOUND INTEREST; STIPULATION FOR
PAYMENT OF INTEREST AT STATED INTERVALS DURING
YEAR. — A stipulation to the effect that interest shall be
at the rate of 12 per centum per annum payable at the
end of each month upon the unpaid capital of the loan,
does not authorize the compounding of interest payments
at intervals of one month.
2. USURY; INTEREST IN EXCESS OF LEGAL RATE;
VOLUNTARY PAYMENT NOT BINDING ON DEBTOR. —
Where interest is charged at an unlawful rate, in excess
of the limit allowed by the Usury Law, the mere voluntary
payment of it to the creditor by the debtor is not binding.
DECISION
STREET, J.:
This action was instituted in the Court of First Instance of
Pampanga by Cu Unjieng e Hijos, for the purpose of
recovering from the Mabalacat Sugar Company an
indebtedness amounting to more than P163,000, with
interest, and to foreclose a mortgage given by the debtor
to secure the same, as well as to recover stipulated
attorney’s fee and the sum of P1,206, paid by the plaintiff
for insurance upon the mortgaged property, with
incidental relief. In the complaint Siuliong & Co., Inc., was
joined as defendant, as a surety of the Mabalacat Sugar
Company, and as having a third mortgage on the
mortgaged property. The Philippine National Bank was
also joined by reason of its interest as second mortgagee
of the land covered by the mortgage to the plaintiff. After
the cause had been brought to issue by the answers of
the several defendants, the cause was heard and
judgment rendered, the dispositive portion of the decision
being as follows:
"Por las consideraciones expuestas, el Juzgado condena a
The Mabalacat Sugar Company a pagar la demandante la
suma de P163,534.73, con sus intereses de 12 por ciento
al año, compuestos mensualmente desde el 1. ° de mayo
de 1929. Tambien se le condena a pagar a dicha
demandante la suma de P2,412 por las primas de seguros
abonadas por esta, con sus intereses de 12 por ciento al
año, compuestos tambien mensualmente desde el 15 de
mayo de 1928, mas la de P7,500 por honorarios de
abogados y las costas del juicio. Y si esta deuda no se
pagare dentro del plazo de tres meses, se ejecutaran los
bienes hipotecados de acuerdo con la ley.
"Si del producto de la venta hubiese algun remanente,
este, se destinara al pago del credito del Banco Nacional,
o sea de P32,704.69, con sus intereses de 9 por ciento al
año desde el 7 de junio de 1929, sin perjuicio de la orden
de ejecucion que pudiera expedirse en el asunto No.
26435 del Juzgado de Primera Instancia de Manila.
"Se condena ademas a The Mabalacat Sugar Company al
pago de la suma de P3,205.78 reclamada por Siuliong &
Co., con sus intereses de 9 por ciento al año desde el 29
de julio de 1926 hasta su completo pago, ordenandola que
rinda cuentas del azucar por ella producido y pague la
comision correspondeniente bajo la base de 5 por ciento
de su valor, descontandose, desde luego, las cantidades
ya pagadas.
"Se absuelve de la demanda de Cu Unjieng e Hijos a
Siuliong & Co., Inc."
From this judgment the defendant, the Mabalacat Sugar
Company, appealed.
The first point assigned as error has relation to the
question whether the action was prematurely started. In
this connection we note that the mortgage executed by
the Mabalacat Sugar Company contains, in paragraph 5,
a provision to the effect that non-compliance on the part
of the mortgage debtor with any of the obligations
assumed in virtue of this contract will cause the entire
debt to become due and give occasion for the foreclosure
of the mortgage. The debtor party failed to comply with
the obligation, imposed upon it in the mortgage, to pay
the mortgage debt in the stipulated instalments at the
time specified in the contract. It results that the creditor
was justified in treating the entire mortgage debt as
having been accelerated by such failure of the debtor in
paying the instalments.
It appears, however, that on or about October 20, 1928,
the mortgage 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 be made upon specified dates prior to the
contemplated final liquidation of the whole indebtedness.
But the debtor party failed to make the interim payments
due on February 25, 1929, March 25, 1929, and April 25,
1929, and failed altogether to pay the balance due,
according to the terms of this extension, on June 30,
1929. Notwithstanding the failure of the debtor to comply
with the terms of this extension, it is insisted for the
appellant that this agreement for the extension of the
time of payment had the effect of abrogating the
stipulation of the original contract with respect to the
acceleration of the maturity of the debt by non-
compliance with the terms of the mortgage. As the trial
court pointed out, this contention is untenable. The
agreement to extend the time of payment was voluntary
and without consideration so far as the creditor is
concerned; and the failure of the debtor to comply with
the terms of the extension justified the creditor in treating
it as of no effect. The first error is therefore without
merit.
The second error is directed to the propriety of the
interest charges made by the plaintiff in estimating the
amount of the indebtedness. In this connection we note
that, under the second clause of the mortgage, interest
should be calculated upon the indebtedness at the rate of
12 per cent per annum. In the same clause, but in a
separate paragraph, there is another provision with
respect to the payment of interest expressed in Spanish
in the following words:
"Los intereses seran pagados mensualmente a fin de cada
mes, computados teniendo en cuenta el capital de
prestano aun no pagado." Translated into English this
provision reads substantially as follows:
"Interest, to be computed upon the still unpaid capital of
the loan, shall be paid monthly, at the end of each
month."
 3|Page CREDIT TRANSACTION I ACJUCO

It is well settled that, under article 1109 of the Civil Code, importance is discoverable by the plaintiff in the result
as well as under section 5 of the Usury Law (Act No. here reached, it will be at liberty to submit a revised
2655), the parties may stipulate that interest shall be computation in this court, upon motion for
compounded; and rests for the computation of compound reconsideration, wherein interest shall be computed in
interest can certainly be made monthly, as well as accordance with this opinion, that is to say, that no
quarterly, semiannually, or annually. But in the absence accumulation of interest will be permitted at monthly
of express stipulation for the accumulation of compound intervals, as regards the capital of the debt, but such
interest, no interest can be collected upon interest until unpaid interest shall draw interest at the rate of 6 per cent
the debt is judicially claimed, and then the rate at which from the date of the institution of the action.
interest upon accrued interest must be computed is fixed
at 6 per cent per annum. In the third assignment of error the appellant complains,
as excessive, of the attorney’s fees allowed by the court
In the present case, however, the language which we in accordance with stipulation in the mortgage. The
have quoted above does not justify the charging of allowance made on the principal debt was around 4 per
interest upon interest, so far as interest on the capital is cent, and about the same upon the fee allowed to the
concerned. The provision quoted merely requires the bank. Under the circumstances we think the debtor has
debtor to pay interest monthly at the end of each month, no just cause for complaint upon this score.
such interest to be computed upon the capital of the loan
not already paid. Clearly this provision does not justify the The fourth assignment of error complains of the failure of
charging of compound interest upon the interest accruing the trial court to permit an amendment to be filed by the
upon the capital monthly. It is true that in subsections debtor to its answer, the application therefor having been
(a), (b) and (c) of article IV of the mortgage, it is made on the day when the cause had been set for trial,
stipulated that the interest can be thus computed upon with notice that the period was non- extendible. The point
sums which the creditor would have to pay out (a) to was a matter in the discretion of the court, and no abuse
maintain insurance upon the mortgaged property, (b) to of discretion is shown.
pay the land tax upon the same property, and (c) upon
disbursements that might be made by the mortgagee to From what has been stated, it follows that the appealed
maintain the property in good condition. But the chief judgment must be modified by deducting the sum of
thing is that interest cannot be thus accumulated on P1,136.12 from the principal debt, so that the amount of
unpaid interest accruing upon the capital of the debt. said indebtedness shall be P162,398.61, with interest at
12 per cent per annum, from May 1, 1929. In other
The trial court was of the opinion that interest could be so respects the judgment will be affirmed, and it is so
charged, because of the Exhibit 1 of the Mabalacat Sugar ordered, with costs against the Appellant.
Company, which the court considered as an interpretation
by the parties to the contract and a recognition 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 P256.28 was, on March
19, 1928, paid by the debtor to the plaintiff as interest
upon interest. But where interest is improperly charged,
at an unlawful rate, the mere voluntary payment of it to
the creditor by the debtor is not binding. Such payment,
in the case before us, was usurious, being in excess of 12
per cent which is allowed to be charged, under section 2
of the Usury Law, when a debt is secured by mortgage
upon real property. The Exhibit 1 therefore adds no
support to the contention of the plaintiff that interest upon
interest can be accumulated in the manner adopted by
the creditor in this case. The point here ruled is in exact
conformity with the decision of this court in Bachrach
Garage and Taxicab Co. v. Golingco (39 Phil., 912), where
this court held that interest cannot be allowed in the
absence of stipulation, or in default thereof, except when
the debt is judicially claimed; and when the debt is
judicially claimed, the interest upon the interest can only
be computed at the rate of 6 per cent per annum.

It results that the appellant’s second assignment of error

is well taken, and the compound interest must be
eliminated from the judgment. With respect to the SECOND DIVISION
amount improperly charged, we accept the estimate
submitted by the president and manager of the Mabalacat [G.R. No. L-52478. October 30, 1986.]
Sugar Company, who says that the amount improperly
included in the computation made by the plaintiff’s THE GOVERNMENT SERVICE INSURANCE
bookkeeper is P879.84, in addition to the amount of SYSTEM, Petitioner-Appellant, v. HONORABLE
P256.28 covered by Exhibit 1 of the Mabalacat Sugar COURT OF APPEALS, NEMENCIO R. MEDINA and
Company. But the plaintiff creditor had the right to charge JOSEFINA G. MEDINA, Respondents-Appellants.
interest, in the manner adopted by it, upon insurance
premiums which it had paid out; and if any discrepancy of
 4|Page CREDIT TRANSACTION I ACJUCO
DECISION
PARAS, J.:
This is a petition for review on certiorari of the decision of
the Court of Appeals in CA-G.R. No. 62541-R (Nemencio
R. Medina and Josefina G. Medina, Plaintiffs-Appellants v.
The Government Service Insurance System, Defendant-
Appellant) affirming the January 21, 1977 Decision of the
trial court, and at the same time ordering the GSIS to
reimburse the amount of P9,580.00 as over-payment and
to pay the spouses Nemencio R. Medina and Josefina G.
Medina P3,000.00 and P1,000.00 as attorney’s fees and
litigation expenses.
In 1961, herein private respondents spouses Nemencio R.
Medina and Josefina G. Medina (Medinas for short) applied
with the herein petitioner Government Service Insurance
System (GSIS for short) for a loan of P600,000.00. The
GSIS Board of Trustees, in its Resolution of December 20,
1961, approved under Resolution No, 5041 only the
amount of P350,000.00, subject to the following
conditions: that the rate of interest shall be 9% per
annum compounded monthly; repayable in ten (10) years
at a monthly amortization of P4,433.65 including principal
and interest, and that any installment or amortization that
remains due and unpaid shall bear interest at the rate of
9%/12% per month. The Office of the Economic
Coordinator, in a 2nd Indorsement dated March 26, 1962,
further reduced the approved amount to P295,000.00. On
April 4, 1962, the Medinas accepting the reduced amount,
executed a promissory note and a real estate mortgage in
favor of GSIS. On May 29, 1962, the GSIS, and on June
6, 1962, the Office of the Economic Coordinator, upon
request of the Medinas, both approved the restoration of
the amount of P350,000.00 (P295,000.00 + P55,000.00)
originally approved by the GSIS. This P350,000.00 loan
was denominated by the GSIS as Account No. 31055.
On July 6, 1962, the Medinas executed in favor of the
GSIS an Amendment of Real Estate Mortgage, the
pertinent portion of which reads:
"WHEREAS, on the 4th day of April 1962, the Mortgagor
executed, signed and delivered a real estate mortgage to
and in favor of the Mortgagee on real estate properties
located in the City of Manila, . . . to secure payment to
the mortgages of a loan of Two Hundred Ninety Five
Thousand Pesos (P295,000.00) Philippine Currency,
granted by the mortgagee to the Mortgagors, . . .;
"WHEREAS, the parties herein have agreed as they
hereby agree to increase the aforementioned loan from
Two Hundred Ninety Five Thousand Pesos (P295,000.00)
to Three Hundred Fifty Thousand Pesos (P350,000.00),
Philippine Currency;
"NOW, THEREFORE, for and in consideration of the
foregoing premises, the aforementioned parties have
amended and by these presents do hereby amend the
said mortgage dated April 4, 1962, mentioned in the
second paragraph hereof by increasing the loan from Two
Hundred Ninety Five Thousand Pesos (P295,000.00) to
Three Hundred Fifty Thousand Pesos (P350,000.00)
subject to this additional condition.
"(1) That the mortgagor shall pay to the system
P4,433.65 monthly including principal and interest.
"It is hereby expressly understood that with the foregoing
amendment, all other terms and conditions of the said
real estate mortgage dated April 4, 1962 insofar as they
are not inconsistent herewith are hereby confirmed,
ratified and continued in full force and effect and that the
parties thereto agree that this amendment be an integral
part of said real estate mortgage." (Rollo, p. 153-154).
Upon application by the Medinas, the GSIS Board of
Trustees adopted Resolution No. 121 on January 18,
1963, as amended by Resolution No. 348 dated February
25, 1963, approving an additional loan of P230,000.00 in
favor of the Medinas on the security of the same
mortgaged properties and the additional properties
covered by TCT Nos. 49234, 49235 and 49236, to bear
interest at 9% per annum compounded monthly and
repayable in ten years. This additional loan of
P230,000.00 was denominated by the GSIS as Account
No. 31442.
On March 18, 1963, the Economic Coordinator thru the
Auditor General interposed no objection thereto, subject
to the conditions of Resolution No. 121 as amended by
Resolution No. 348 of the GSIS.
Beginning 1965, the Medinas having defaulted in the
payment of the monthly amortization on their loan, the
GSIS imposed 9%/12% interest on all installments due
and unpaid. In 1967, the Medinas began defaulting in the
payment of fire insurance premiums.
On May 3, 1974, the GSIS notified the Medinas that they
had arrearages in the aggregate amount of P575,652.42
as of April 18, 1974 (Exhibit "9," p. 149, Joint Record on
Appeal, Rollo, p. 79), and demanded payment within
seven (7) days from notice thereof, otherwise, it would
foreclose the mortgage.
On April 21, 1975, the GSIS filed an Application for
Foreclosure of Mortgage with the Sheriff of the City of
Manila (Exhibit "22," pp. 63 and 149; Rollo, p. 79). On
June 30, 1975, the Medinas filed with the Court of First
Instance of Manila a complaint, praying, among other
things, that a restraining order or writ of preliminary
injunction be issued to prevent the GSIS and the Sheriff
of the City of Manila from proceeding with the extra-
judicial foreclosure of their mortgaged properties (CFI
Decision, p. 121; Rollo, p. 79). However, in view of
Section 2 of Presidential Decree No. 385, no restraining
order or writ of preliminary injunction was issued by the
trial court (CFI Decision, p. 212; Rollo, p. 79). On April
25, 1975, the Medinas made a last partial payment in the
amount of P209,662.80.
Under a Notice of Sale on Extra-Judicial Foreclosure dated
June 18, 1975, the real properties of the Medinas covered
by Transfer Certificates of Title Nos. 32231, 43527,
51394, 58626, 60534, 63304, 67550, 67551 and 67552
of the Registry of Property of the City of Manila were sold
at public auction to the GSIS as the highest bidder for the
total amount of P440,080.00 on January 12, 1976, and
the corresponding Certificate of Sale was executed by the
Sheriff of Manila on January 27, 1976 (CFI Decision, pp.
212-213; Rollo, p. 79).
On January 30, 1976, the Medinas filed an Amended
Complaint with the trial court, praying for (a) the
declaration of nullity of their two real estate mortgage
contracts with the GSIS as well as of the extra-judicial
 5|Page CREDIT TRANSACTION I ACJUCO
foreclosure proceedings; and (b) the refund of excess
payments, plus damages and attorney’s fees (CFI
Decision, p. 213; Rollo, p. 79). : red
On March 19, 1976, the GSIS filed its Amended Answer
(Joint Record on Appeal, pp. 99-105; Rollo, p. 79). After
trial, the trial court rendered a Decision dated January 21,
1977 (Joint Record on Appeal, pp. 210-232), the pertinent
dispositive portion of which reads:
"WHEREFORE, judgment is hereby rendered declaring the
extra-judicial foreclosure conducted by the Sheriff of
Manila of real estate mortgage contracts executed by
plaintiffs on April 4, 1962, as amended on July 6, 1962,
and February 17, 1963, null and void and the Sheriff’s
Certificate of Sale dated January 27, 1976, in favor of the
GSIS of no legal force and effect; and directing plaintiffs
to pay the GSIS the sum of P1,611.12 in full payment of
their obligation to the latter with interest of 9% per
annum from December 11, 1975, until fully paid."
Dissatisfied with the said judgment, both parties appealed
with the Court of Appeals.
The Court of Appeals, in a Decision promulgated on
January 18, 1980 (Record, pp. 72-77), ruled in favor of
the Medinas — GSIS claims that the amendment of the real estate
"WHEREFORE, the defendant GSIS is ordered to
reimburse the amount of P9,580.00 as overpayment and
to pay plaintiffs P3,000.00 and P1,000.00 as attorney’s
fees and litigation expenses, respectively. With these
modifications, the judgment appealed from is AFFIRMED
in all other respects, with costs against defendant GSIS."
Hence this petition.
The Second Division of this Court, in a Resolution dated
April 25, 1980 (Rollo, p. 88), resolved to deny the petition
for lack of merit.
Petitioner filed on June 26, 1980 a Motion for
Reconsideration dated June 17, 1980 (Rollo, pp. 95-103),
of the abovestated Resolution and respondents in a
Resolution dated July 9, 1980 (Rollo, p. 105), were
required to comment thereon which comment they filed
on August 6, 1980. (Rollo, pp. 106-116).
The petition was given due course in the Resolution dated
July 6, 1981 (Rollo, p. 128). Petitioner filed its brief on
November 26, 1981 (Rollo, pp. 147-177); while private
respondents filed their brief on January 27, 1982 (Rollo,
pp. 181-224), and the case was considered submitted for
decision in the Resolution of July 19, 1982 (Rollo, p. 229).
The issues in this case are:
1. WHETHER OR NOT THE COURT OF APPEALS ERRED IN
HOLDING THAT THE AMENDMENT OF REAL ESTATE
MORTGAGE DATED JULY 6, 1962 SUPERSEDED THE
MORTGAGE CONTRACT DATED APRIL 4, 1962,
PARTICULARLY WITH RESPECT TO COMPOUNDING OF
INTEREST;
2 WHETHER OR NOT THE COURT OF APPEALS ERRED IN
SUSTAINING THE RESPONDENT-APPELLEE SPOUSES
MEDINA’S CLAIM OR OVERPAYMENT, BY CREDITING THE
FIRE INSURANCE PROCEEDS IN THE SUM OF P11,152.02
TO THE TOTAL PAYMENT MADE BY SAID SPOUSES AS OF
DECEMBER 11, 1975;
3. WHETHER OR NOT THE COURT OF APPEALS ERRED IN
HOLDING THAT THE INTEREST RATES ON THE LOAN
ACCOUNTS OF RESPONDENT-APPELLEE SPOUSES ARE
USURIOUS;
4. WHETHER OR NOT THE COURT OF APPEALS ERRED IN
AFFIRMING THE ANNULMENT OF THE SUBJECT
EXTRAJUDICIAL FORECLOSURE AND SHERIFF’S
CERTIFICATE OF SALE; AND
5. WHETHER OR NOT THE COURT OF APPEALS ERRED IN
HOLDING THE GSIS LIABLE FOR ATTORNEY’S FEES,
EXPENSES OF LITIGATION AND COSTS.
The petition is impressed with merit.
There is no dispute as to the facts of the case. By
agreement of the parties the issues in this case are limited
to the loan of P350,000.00 denominated as Account No.
31065 (Rollo, p. 79; Joint Record on Appeal, p. 129)
subject of the Amendment of Real Mortgage dated July 6,
1962, the interpretation of which is the major issue in this
case.
mortgage did not supersede the original mortgage
contract dated April 4, 1962 which was being amended
only with respect to the amount secured thereby, and the
amount of monthly amortizations. All other provisions of
aforesaid mortgage contract including that on
compounding of interest were deemed rewritten and thus
binding on and enforceable against the respondent
spouses. (Rollo, pp. 162-166).
Accordingly, payments made by the Medinas in the total
amount of P991,845.53 was applied as follows: the
amount of P600,495.31 to Account No. 31055,
P466,965.31 of which to interest and P133,530.20 to
principal and P390,845.66 to Account No. 31442,
P230,774.29 to interest and P159,971.37 to principal.
(Joint Record on Appeal, p. 216; Rollo, p. 79).
On the other hand the Medinas maintain that there is no
express stipulation on compounded interest in the
amendment of mortgage contract of July 6, 1962 so that
the compounded interest stipulation in the original
mortgage contract of April 4, 1962 which has been
superseded cannot be enforced in the later mortgage.
(Rollo, p. 185).
Hence the Medinas claim an overpayment in Account No.
31055. The application of their total payment in the
amount of P991,845.53 as computed by the trial court
and by the Court of Appeals is as follows:
". . . It appearing and so the parties admit in their own
exhibits that as of December 11, 1975, plaintiffs had paid
a total of P991,241.17 excluding fire insurance,
P532,038.00 of said amount should have been applied to
the full payment of Acct. No. 31055 and the balance of
P459,203.17 applied to the payment of Acct. No. 31442.
"According to the computation of the GSIS (Exhibit C, also
Exhibit 38) the total amounts, collected on Acct. No.
31442 as of December 11, 1975 total P390,745.66 thus
leaving an unpaid balance of P70,028.63. The total
amount plaintiffs should pay on said account should
 6|Page CREDIT TRANSACTION I ACJUCO
therefore be P460,774.29. Deduct this amount from
P459,163.17 which has been shown to be the difference
between the total payments made by plaintiffs to the
G.S.I.S. as of December 11, 1975 and the amount said
plaintiffs should pay under their Acct. No. 31055, there
remains an outstanding balance of P1,611.12. This
amount represents the balance of the obligation of the
plaintiffs to the G.S.I.S. on Acct. No. 31442 as of
December 11, 1975." (Decision, Civil Case No. 98390;
Joint Record on Appeal pp. 227-228; Rollo, p. 79).
To recapitulate, the difference in the computation lies in
the inclusion of the compounded interest as demanded by
the GSIS on the one hand and the exclusion thereof, as
insisted by the Medinas on the other.
It is a basic and fundamental rule in the interpretation of
contract that if the terms thereof are clear and leave no
doubt as to the intention of the contracting parties, the
literal meaning of the stipulations shall control but when
the words appear contrary to the evident intention of the
parties, the latter shall prevail over the former. In order
to judge the intention of the parties, their
contemporaneous and subsequent acts shall be principally
considered. (Sy v. Court of Appeals, 131 SCRA 116; July
31, 1984).
There appears no ambiguity whatsoever in the terms and
conditions of the amendment of the mortgage contract
herein quoted earlier. On the contrary, an opposite
conclusion cannot be otherwise but absurd.
As correctly stated by the GSIS in its brief (Rollo, pp. 162-
166), a careful perusal of the title, preamble and body of
the Amendment of Real Estate Mortgage dated July 6,
1962, taking into account the prior, contemporaneous,
and subsequent acts of the parties, ineluctably shows that
said Amendment was never intended to completely
supersede the mortgage contract dated April 4,
1962.chanrobles.com : virtual law library
First, the title "Amendment of Real Estate Mortgage"
recognizes the existence and effectivity of the previous
mortgage contract. Second, nowhere in the aforesaid
Amendment did the parties manifest their intention to
supersede the original contract. On the contrary in the
WHEREAS clauses, the existence of the previous
mortgage contract was fully recognized and the fact that
the same was just being amended as to amount and
amortization is fully established as to obviate any doubt.
Third, the Amendment of Real Estate Mortgage dated July
6, 1962 does not embody the act of conveyancing the
subject properties by way of mortgage. In fact the
intention of the parties to be bound by the unaffected
provisions of the mortgage contract of April 4, 1962
expressed in unmistakable language is clearly evident in
the last provision of the Amendment of Real Estate
Mortgage dated July 6, 1962 which reads:
"It is hereby expressly understood that with the foregoing
amendment, all other terms and conditions of the said
real estate mortgage dated April 4, 1962, insofar as they
are not inconsistent herewith, are hereby confirmed
ratified and continued to be in full force and effect and
that the parties hereto agree that the amendment be an
integral part of said real estate mortgage." (Emphasis
supplied).
A review of prior, contemporaneous, and subsequent acts
supports the conclusion that both contracts are fully
subsisting insofar as the latter is not inconsistent with the
former, The fact is the GSIS, as a matter of policy,
imposes uniform terms and conditions for all its real
estate loans, particularly with respect to compounding of
interest. As shown in the case at bar, the original
mortgage contract embodies the same terms and
conditions as in the additional loan denominated as
Account No. 31442 while the amendment carries the
provision that it shall be subject to the same terms and
conditions as the real estate mortgage of April 4, 1962
except as to amount and amortization.
Furthermore, it would be contrary to human experience
and to ordinary practice for the mortgagee to impose less
onerous conditions on an increased loan by the deletion
of compound interest exacted on a lesser loan.
II.
There is an obvious error in the ruling of the Court of
Appeals in its Decision dated January 18, 1980, which
reads:
". . . We agree that plaintiff should be credited with
P11,152.02 of the fire insurance proceeds as the same is
admitted in paragraph (4) of its Answer and should be
added to their payments." (par. 13).
Contrary thereto, paragraph 4 of the Answer of the GSIS
states:
"That they (GSIS) specifically deny the allegations in
Paragraph 11, the truth being that plaintiffs are not
entitled to a credit of P19,381.07 as fire insurance
proceeds since they were only entitled to, and were
credited with, the amount of P11,152.02 as proceeds of
their fire insurance policy." (par. 4, Amended Answer).
As can be gleaned from the foregoing, petitioner-
appellant GSIS had already credited the amount of
P11,152.02. Thus, when the Court of Appeals made the
aforequoted ruling, it was actually doubly crediting the
amount of P11,152.02 which had been previously credited
by petitioner-appellant GSIS (Rollo, pp. 170-171).
III.
As to whether or not the interest rates on the loan
accounts of the Medinas are usurious, it has already been
settled that the Usury Law applies only to interest by way
of compensation for the use or forbearance of money
(Lopez v. Hernaez, 32 Phil. 631; Bachrach Motor Co. v.
Espiritu, 52 Phil. 346; Equitable Banking Corporation v.
Liwanag, 32 SCRA 293, March 30, 1970). Interest by way
of damages is governed by Article 2209 of the Civil Code
of the Philippines which provides:
"Art. 2209. If the obligation consists in the payment of a
sum of money, and the debtor incurs in delay, the
indemnity for damages, there being no stipulation to the
contrary, shall be the payment of the interest agreed
upon, . . ."
In the Bachrach case (supra) the Supreme Court ruled
that the Civil Code permits the agreement upon a penalty
apart from the interest, Should there be such an
agreement, the penalty does not include the interest, and
as such the two are different and distinct things which
 7|Page CREDIT TRANSACTION I ACJUCO

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-13,
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.

THIRD DIVISION

[G.R. No. 138677. February 12, 2002.]

TOLOMEO LIGUTAN and LEONIDAS DE LA

LLANA, Petitioners, v. HON. COURT OF APPEALS &
SECURITY BANK & TRUST COMPANY, Respondents.

DECISION

VITUG, J.:

Before the Court is a petition for review

on certiorari under Rule 45 of the Rules of Court, assailing
the decision and resolutions of the Court of Appeals in CA-
G.R. CV No. 34594, entitled "Security Bank and Trust Co.
v. Tolomeo Ligutan, Et. Al."
 8|Page CREDIT TRANSACTION I ACJUCO
Petitioners Tolomeo Ligutan and Leonidas dela Llana
obtained on 11 May 1981 a loan in the amount of
P120,000.00 from respondent Security Bank and Trust
Company. Petitioners executed a promissory note binding
themselves, jointly and severally, to pay the sum
borrowed with an interest of 15.189% per annum upon
maturity and to pay a penalty of 5% every month on the
outstanding principal and interest in case of default. In
addition, petitioners agreed to pay 10% of the total
amount due by way of attorney’s fees if the matter were
indorsed to a lawyer for collection or if a suit were
instituted to enforce payment. The obligation matured on
8 September 1981; the bank, however, granted an
extension but only up until 29 December 1981.
Despite several demands from the bank, petitioners failed
to settle the debt which, as of 20 May 1982, amounted to
P114,416.10. On 30 September 1982, the bank sent a
final demand letter to petitioners informing them that
they had five days within which to make full payment.
Since petitioners still defaulted on their obligation, the
bank filed on 3 November 1982, with the Regional Trial
Court of Makati, Branch 143, a complaint for recovery of
the due amount.
After petitioners had filed a joint answer to the complaint,
the bank presented its evidence and, on 27 March 1985,
rested its case. Petitioners, instead of introducing their
own evidence, had the hearing of the case reset on two
consecutive occasions. In view of the absence of
petitioners and their counsel on 28 August 1985, the third
hearing date, the bank moved, and the trial court
resolved, to consider the case submitted for decision.
Two years later, or on 23 October 1987, petitioners filed
a motion for reconsideration of the order of the trial court
declaring them as having waived their right to present
evidence and prayed that they be allowed to prove their
case. The court a quo denied the motion in an order, dated
5 September 1988, and on 20 October 1989, it rendered
its decision, 1 the dispositive portion of which read:
"WHEREFORE, judgment is hereby rendered in favor of
the plaintiff and against the defendants, ordering the
latter to pay, jointly and severally, to the plaintiff, as
follows:
"1. The sum of P114,416.00 with interest thereon at the
rate of 15.189% per annum, 2% service charge and 5%
per month penalty charge, commencing on 20 May 1982
until fully paid;
"2. To pay the further sum equivalent to 10% of the total
amount of indebtedness for and as attorney’s fees; and
"3. To pay the costs of the suit." 2 On 16 November 1998, petitioners filed an omnibus
Petitioners interposed an appeal with the Court of
Appeals, questioning the rejection by the trial court of
their motion to present evidence and assailing the
imposition of the 2% service charge, the 5% per month
penalty charge and 10% attorney’s fees. In its decision 3
of 7 March 1996, the appellate court affirmed the
judgment of the trial court except on the matter of the
2% service charge which was deleted pursuant to Central
Bank Circular No. 783. Not fully satisfied with the decision
of the appellate court, both parties filed their respective
motions for reconsideration. 4 Petitioners prayed for the
reduction of the 5% stipulated penalty for being
unconscionable. The bank, on the other hand, asked that
the payment of interest and penalty be commenced not
from the date of filing of complaint but from the time of
default as so stipulated in the contract of the parties.
On 28 October 1998, the Court of Appeals resolved the
two motions thusly:
"We find merit in plaintiff-appellee’s claim that the
principal sum of P114,416.00 with interest thereon must
commence not on the date, of filing of the complaint as
we have previously held in our decision but on the date
when the obligation became due.
"Default generally begins from the moment the creditor
demands the performance of the obligation. However,
demand is not necessary to render the obligor in default
when the obligation or the law so provides.
"In the case at bar, defendants-appellants executed a
promissory note where they undertook to pay the
obligation on its maturity date ‘without necessity of
demand.’ They also agreed to pay the interest in case of
non-payment from the date of default.
"x x x
"While we maintain that defendants-appellants must be
bound by the contract which they acknowledged and
signed, we take cognizance of their plea for the
application of the provisions of Article 1229 . . .
"Considering that defendants-appellants partially
complied with their obligation under the promissory note
by the reduction of the original amount of P120,000.00 to
P114,416.00 and in order that they will finally settle their
obligation, it is our view and we so hold that in the interest
of justice and public policy, a penalty of 3% per month or
36% per annum would suffice.
"x x x
"WHEREFORE, the decision sought to be reconsidered is
hereby MODIFIED. The defendants-appellants Tolomeo
Ligutan and Leonidas dela Llana are hereby ordered to
pay the plaintiff-appellee Security Bank and Trust
Company the following:
"1. The sum of P114,416.00 with interest thereon at the
rate of 15.189% per annum and 3% per month penalty
charge commencing May 20, 1982 until fully paid;
"2. The sum equivalent to 10% of the total amount of the
indebtedness as and for attorney’s fees." 5
motion for reconsideration and to admit newly discovered
evidence, 6 alleging that while the case was pending
before the trial court, petitioner Tolomeo Ligutan and his
wife Bienvenida Ligutan executed a real estate mortgage
on 18 January 1984 to secure the existing indebtedness
of petitioners Ligutan and dela Llana with the bank.
Petitioners contended that the execution of the real estate
mortgage had the effect of novating the contract between
them and the bank. Petitioners further averred that the
mortgage was extrajudicially foreclosed on 26 August
1986, that they were not informed about it, and the bank
did not credit them with the proceeds of the sale. The
appellate court denied the omnibus motion for
 9|Page CREDIT TRANSACTION I ACJUCO
reconsideration and to admit newly discovered evidence,
ratiocinating that such a second motion for
reconsideration cannot be entertained under Section 2,
Rule 52, of the 1997 Rules of Civil Procedure.
Furthermore, the appellate court said, the newly-
discovered evidence being invoked by petitioners had
actually been known to them when the case was brought
on appeal and when the first motion for reconsideration
was filed. 7 the Court has tempered the penalty charges after taking
Aggrieved by the decision and resolutions of the Court of
Appeals, petitioners elevated their case to this Court on 9
July 1999 via a petition for review on certiorari under Rule
45 of the Rules of Court, submitting thusly —
"I. The respondent Court of Appeals seriously erred in not
holding that the 15.189% interest and the penalty of
three (3%) percent per month or thirty-six (36%) percent
per annum imposed by private respondent bank on
petitioners’ loan obligation are still manifestly exorbitant,
iniquitous and unconscionable.
"II. The respondent Court of Appeals gravely erred in not
reducing to a reasonable level the ten (10%) percent
award of attorney’s fees which is highly and grossly
excessive, unreasonable and unconscionable.
"III. The respondent Court of Appeals gravely erred in not
admitting petitioners’ newly discovered evidence which
could not have been timely produced during the trial of
this case.
"IV. The respondent Court of Appeals seriously erred in
not holding that there was a novation of the cause of
action of private respondent’s complaint in the instant
case due to the subsequent execution of the real estate
mortgage during the pendency of this case and the
subsequent foreclosure of the mortgage." 8 preclusive of interest, if there is an agreement to that
Respondent bank, which did not take an appeal, would,
however, have it that the penalty sought to be deleted by
petitioners was even insufficient to fully cover and
compensate for the cost of money brought about by the
radical devaluation and decrease in the purchasing power
of the peso, particularly vis-a-vis the U.S. dollar, taking
into account the time frame of its occurrence. The Bank
would stress that only the amount of P5,584.00 had been
remitted out of the entire loan of P120,000.00. 9
A penalty clause, expressly recognized by law, 10 is an
accessory undertaking to assume greater liability on the
part of an obligor in case of breach of an obligation. It
functions to strengthen the coercive force of the obligation
11 and to provide, in effect, for what could be the
liquidated damages resulting from such a breach. The
obligor would then be bound to pay the stipulated
indemnity without the necessity of proof on the existence
and on the measure of damages caused by the breach. 12
Although a court may not at liberty ignore the freedom of
the parties to agree on such terms and conditions as they
see fit that contravene neither law nor morals, good
customs, public order or public policy, a stipulated
penalty, nevertheless, may be equitably reduced by the
courts if it is iniquitous or unconscionable or if the
principal obligation has been partly or irregularly complied
with. 13
The question of whether a penalty is reasonable or
iniquitous can be partly subjective and partly objective.
Its resolution would depend on such factors as, but not
necessarily confined to, the type, extent and purpose of
the penalty, the nature of the obligation, the mode of
breach and its consequences, the supervening realities,
the standing and relationship of the parties, and the like,
the application of which, by and large, is addressed to the
sound discretion of the court. In Rizal Commercial
Banking Corp. v. Court of Appeals, 14 just an example,
into account the debtor’s pitiful situation and its offer to
settle the entire obligation with the creditor bank. The
stipulated penalty might likewise be reduced when a
partial or irregular performance is made by the debtor. 15
The stipulated penalty might even be deleted such as
when there has been substantial performance in good
faith by the obligor, 16 when the penalty clause itself
suffers from fatal infirmity, or when exceptional
circumstances so exist as to warrant it. 17
The Court of Appeals, exercising its good judgment in the
instant case, has reduced the penalty interest from 5% a
month to 3% a month which petitioner still disputes.
Given the circumstances, not to mention the repeated
acts of breach by petitioners of their contractual
obligation, the Court sees no cogent ground to modify the
ruling of the appellate court..
Anent the stipulated interest of 15.189% per
annum, Petitioners, for the first time, question its
reasonableness and prays that the Court reduce the
amount. This contention is a fresh issue that has not been
raised and ventilated before the courts below. In any
event, the interest stipulation, on its face, does not
appear as being that excessive. The essence or rationale
for the payment of interest, quite often referred to as cost
of money, is not exactly the same as that of a surcharge
or a penalty. A penalty stipulation is not necessarily
effect, the two being distinct concepts which may
separately be demanded. 18 What may justify a court in
not allowing the creditor to impose full surcharges and
penalties, despite an express stipulation therefor in a valid
agreement, may not equally justify the nonpayment or
reduction of interest. Indeed, the interest prescribed in
loan financing arrangements is a fundamental part of the
banking business and the core of a bank’s existence. 19
Petitioners next assail the award of 10% of the total
amount of indebtedness by way of attorney’s fees for
being, grossly excessive, exorbitant and unconscionable
vis-a-vis the time spent and the extent of services
rendered by counsel for the bank and the nature of the
case. Bearing in mind that the rate of attorney’s fees has
been agreed to by the parties and intended to answer not
only for litigation expenses but also for collection efforts
as well, the Court, like the appellate court, deems the
award of 10% attorney’s fees to be reasonable.
Neither can the appellate court be held to have erred in
rejecting petitioners’ call for a new trial or to admit newly
discovered evidence. As the appellate court so held in its
resolution of 14 May 1999 —
"Under Section 2, Rule 52 of the 1997 Rules of Civil
Procedure, no second motion for reconsideration of a
judgment or final resolution by the same party shall be
entertained. Considering that the instant motion is
already a second motion for reconsideration, the same
must therefore be denied.
 10 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O

"Furthermore, it would appear from the records available

to this court that the newly-discovered evidence being
invoked by defendants-appellants have actually been
existent when the case was brought on appeal to this
court as well as when the first motion for reconsideration
was filed. Hence, it is quite surprising why defendants-
appellants raised the alleged newly-discovered evidence
only at this stage when they could have done so in the
earlier pleadings filed before this court.

"The propriety or acceptability of such a second motion

for reconsideration is not contingent upon the averment
of ‘new’ grounds to assail the judgment, i.e., grounds
other than those theretofore presented and rejected.
Otherwise, attainment of finality of a judgment might be
stayed off indefinitely, depending on the party’s
ingenuousness or cleverness in conceiving and
formulating ‘additional flaws’ or ‘newly discovered errors’
therein, or thinking up some injury or prejudice to the
rights of the movant for reconsideration." 20

At any rate, the subsequent execution of the real estate

mortgage as security for the existing loan would not have
resulted in the extinguishment of the original contract of
loan because of novation. Petitioners acknowledge that
the real estate mortgage contract does not contain any
express stipulation by the parties intending it to
supersede the existing loan agreement between the
petitioners and the bank. 21 Respondent bank has
correctly postulated that the mortgage is but an accessory
contract to secure the loan in the promissory note.

Extinctive novation requires, first, a previous valid

obligation; second, the agreement of all the parties to the
new contract; third, the extinguishment of the obligation;
and fourth, the validity of the new one. 22 In order that
an obligation may be extinguished by another which
substitutes the same, it is imperative that it be so
declared in unequivocal terms, or that the old and the new
obligation be on every point incompatible with each other. SECOND DIVISION
23 An obligation to pay a sum of money is not extinctively
novated by a new instrument which merely changes the [G.R. No. 116285. October 19, 2001.]
terms of payment or adding compatible covenants or
where the old contract is merely supplemented by the ANTONIO TAN, Petitioner, v. COURT OF APPEALS
new one. 24 When not expressed, incompatibility is and the CULTURAL CENTER OF THE
required so as to ensure that the parties have indeed PHILIPPINES, Respondents.
intended such novation despite their failure to express it
in categorical terms. The incompatibility, to be sure, DECISION
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 DE LEON, JR., J.:
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 Before us is a petition for review of the Decision 1 dated
nature of the prestation; or (3) the subjects, such as the August 31, 1993 and Resolution 2 dated July 13, 1994 of
substitution of a debtor 27 or the subrogation of the the Court of Appeals affirming the Decision 3 dated May
creditor. Extinctive novation does not necessarily imply 8, 1991 of the Regional Trial Court (RTC) of Manila,
that the new agreement should be complete by itself; Branch 27.
certain terms and conditions may be carried, expressly or
by implication, over to the new obligation. The facts are as follows:

WHEREFORE, the petition is DENIED. On May 14, 1978 and July 6, 1978, petitioner Antonio Tan
obtained two (2) loans each in the principal amount of
SO ORDERED. Two Million Pesos (P2,000,000.00) or in the total principal
amount of Four Million Pesos (P4,000,000.00), from
respondent Cultural Center of the Philippines (CCP, for
brevity) evidenced by two (2) promissory notes with
maturity dates on May 14, 1979 and July 6, 1979,
 11 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
respectively. Petitioner defaulted but after a few partial
payments he had the loans restructured by respondent
CCP, and petitioner accordingly executed a promissory
note (Exhibit "A") on August 31, 1979 in the amount of
Three Million Four Hundred Eleven Thousand Four
Hundred Twenty-One Pesos and Thirty-Two Centavos
(P3,411,421.32) payable in five (5) installments.
Petitioner Tan failed to pay any installment on the said
restructured loan of Three Million Four Hundred Eleven
Thousand Four Hundred Twenty-One Pesos and Thirty-
Two Centavos (P3,411,421.32), the last installment
falling due on December 31, 1980. In a letter dated
January 26, 1982, petitioner requested and proposed to
respondent CCP a mode of paying the restructured loan,
i.e., (a) twenty percent (20%) of the principal amount of
the loan upon the respondent giving its conformity to his
proposal; and (b) the balance on the principal obligation
payable in thirty-six (36) equal monthly installments until
fully paid. On October 20, 1983, petitioner again sent a
letter to respondent CCP requesting for a moratorium on
his loan obligation until the following year allegedly due
to a substantial deduction in the volume of his business
and on account of the peso devaluation. No favorable
response was made to said letters. Instead, respondent
CCP, through counsel, wrote a letter dated May 30, 1984
to the petitioner demanding full payment, within ten (10)
days from receipt of said letter, of the petitioner’s
restructured loan which as of April 30, 1984 amounted to
Six Million Eighty-Eight Thousand Seven Hundred Thirty-
Five Pesos and Three Centavos (P6,088,735.03).
On August 29, 1984, respondent CCP filed in the RTC of
Manila a complaint for collection of a sum of money,
docketed as Civil Case No. 84-26363, against the
petitioner after the latter failed to settle his said
restructured loan obligation. The petitioner interposed the
defense that he merely accommodated a friend, Wilson
Lucmen, who allegedly asked for his help to obtain a loan
from respondent CCP. Petitioner claimed that he has not
been able to locate Wilson Lucmen. While the case was
pending in the trial court, the petitioner filed a
Manifestation wherein he proposed to settle his
indebtedness to respondent CCP by proposing to make a
down payment of One Hundred Forty Thousand Pesos
(P140,000.00) and to issue twelve (12) checks every
beginning of the year to cover installment payments for
one year, and every year thereafter until the balance is
fully paid. However, respondent CCP did not agree to the
petitioner’s proposals and so the trial of the case ensued.
On May 8, 1991, the trial court rendered a decision, the
dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of
plaintiff and against defendant, ordering defendant to pay
plaintiff, the amount of P7,996,314.67, representing
defendant’s outstanding account as or August 28, 1986,
with the corresponding stipulated interest and charges
thereof, until fully paid, plus attorney’s fees in an amount
equivalent to 25% of said outstanding account, plus
P50,000.00, as exemplary damages, plus costs.
Defendant’s counterclaims are ordered dismissed, for lack
of merit.
SO ORDERED. 4 MISTAKE IN GIVING ITS IMPRIMATUR TO THE DECISION
The trial court gave five (5) reasons in ruling in favor of
respondent CCP. First, it gave little weight to the
petitioner’s contention that the loan was merely for the
accommodation of Wilson Lucmen for the reason that the
defense propounded was not credible in itself. Second,
assuming, arguendo that the petitioner did not personally
benefit from the said loan he should have filed a third
party complaint against Wilson Lucmen, the alleged
accommodated party but he did not. Third, for three (3)
times the petitioner offered to settle his loan obligation
with respondent CCP. Fourth, petitioner may not avoid his
liability to pay his obligation under the promissory note
(Exh. "A") which he must comply with in good faith
pursuant to Article 1159 of the New Civil Code. Fifth,
petitioner is estopped from denying his liability or loan
obligation to the private Respondent.
The petitioner appealed the decision of the trial court to
the Court of Appeals insofar as it charged interest,
surcharges, attorney’s fees and exemplary damages
against the petitioner. In his appeal, the petitioner asked
for the reduction of the penalties and charges on his loan
obligation. He abandoned his alleged defense in the trial
court that he merely accommodated his friend, Wilson
Lucmen, in obtaining the loan, and instead admitted the
validity of the same. On August 31, 1993, the appellate
court rendered a decision, the dispositive portion of which
reads:
WHEREFORE, with the foregoing modification, the
judgment appealed from is hereby AFFIRMED.
SO ORDERED. 5
In affirming the decision of the trial court imposing
surcharges and interest, the appellate court held that:
We are unable to accept appellant’s (petitioner’s) claim
for modification on the basis of alleged partial or irregular
performance, there being none. Appellant’s offer or
tender of payment cannot be deemed as a partial or
irregular performance of the contract, not a single
centavo appears to have been paid by the defendant.
However, the appellate court modified the decision of the
trial court by deleting the award for exemplary damages
and reducing the amount of awarded attorney’s fees to
five percent (5%), by ratiocinating as follows:
Given the circumstances of the case, plus the fact that
plaintiff was represented by a government lawyer, We
believe the award of 25% as attorney’s fees and
P500,000.00 as exemplary damages is out of proportion
to the actual damage caused by the non-performance of
the contract and is excessive, unconscionable and
iniquitous.
In a Resolution dated July 13, 1994, the appellate court
denied the petitioner’s motion for reconsideration of the
said decision.
Hence, this petition anchored on the following assigned
errors:
I
THE HONORABLE COURT OF APPEALS COMMITTED A
OF THE TRIAL COURT WHICH COMPOUNDED INTEREST
ON SURCHARGES.
II
 12 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
THE HONORABLE COURT OF APPEALS ERRED IN NOT
SUSPENDING IMPOSITION OF INTEREST FOR THE
PERIOD OF TIME THAT PRIVATE RESPONDENT HAS
FAILED TO ASSIST PETITIONER IN APPLYING FOR RELIEF
OF LIABILITY THROUGH THE COMMISSION ON AUDIT
AND THE OFFICE OF THE PRESIDENT.
III
THE HONORABLE COURT OF APPEALS ERRED IN NOT
DELETING AWARD OF ATTORNEY’S FEES AND IN
REDUCING PENALTIES.
Significantly, the petitioner does not question his liability
for his restructured loan under the promissory note
marked Exhibit "A." The first question to be resolved in
the case at bar is whether there are contractual and legal
bases for the imposition of the penalty, interest on the
penalty and attorney’s fees.
The petitioner imputes error on the part of the appellate
court in not totally eliminating the award of attorney’s
fees and in not reducing the penalties considering that the
petitioner, contrary to the appellate court’s findings, has
allegedly made partial payments on the loan. And if
penalty is to be awarded, the petitioner is asking for the
non-imposition of interest on the surcharges inasmuch as
the compounding of interest on surcharges is not provided
in the promissory note marked Exhibit "A." The petitioner
takes exception to the computation of the private
respondent whereby the interest, surcharge and the
principal were added together and that on the total sum
interest was imposed. Petitioner also claims that there is
no basis in law for the charging of interest on the
surcharges for the reason that the New Civil Code is
devoid of any provision allowing the imposition of interest
on surcharges.
We find no merit in the petitioner’s contention. Article
1226 of the New Civil Code provides that:
In obligations with a penal clause, the penalty shall
substitute the indemnity for damages and the payment of
interests in case of non-compliance, if there is no
stipulation to the contrary. Nevertheless, damages shall
be paid if the obligor refuses to pay the penalty or is guilty
of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable
in accordance with the provisions of this Code.
In the case at bar, the promissory note (Exhibit "A")
expressly provides for the imposition of both interest and
penalties in case of default on the part of the petitioner in
the payment of the subject restructured loan. The
pertinent 6 portion of the promissory note (Exhibit "A")
imposing interest and penalties provides that:
For value received, I/We jointly and severally promise to
pay to the CULTURAL CENTER OF THE PHILIPPINES at its
office in Manila, the sum of THREE MILLION FOUR
HUNDRED ELEVEN THOUSAND FOUR HUNDRED + PESOS
(P3,411.421.32) Philippine Currency, . . .
x x x imposition of interest on the penalty charge for the reason
With interest at the rate of FOURTEEN per cent (14%) per
annum from the date hereof until paid. PLUS THREE
PERCENT (3%) SERVICE CHARGE.
In case of non-payment of this note at maturity/on
demand or upon default of payment of any portion of it
when due, I/We jointly and severally agree to pay
additional penalty charges at the rate of TWO per cent
(2%) per month on the total amount due until paid,
payable and computed monthly. Default of payment of
this note or any portion thereof when due shall render all
other installments and all existing promissory notes made
by us in favor of the CULTURAL CENTER OF THE
PHILIPPINES immediately due and demandable.
(Emphasis supplied)
x x x
The stipulated fourteen percent (14%) per annum interest
charge until full payment of the loan constitutes the
monetary interest on the note and is allowed under Article
1956 of the New Civil Code. 7 On the other hand, the
stipulated two percent (2%) per month penalty is in the
form of penalty charge which is separate and distinct from
the monetary interest on the principal of the loan.
Penalty on delinquent loans may take different forms. In
Government Service Insurance System v. Court of
Appeals, 8 this Court has ruled that the New Civil Code
permits an agreement upon a penalty apart from the
monetary interest. If the parties stipulate this kind of
agreement, the penalty does not include the monetary
interest, and as such the two are different and distinct
from each other and may be demanded separately.
Quoting Equitable Banking Corp. v. Liwanag, 9 the GSIS
case went on to state that such a stipulation about
payment of an additional interest rate partakes of the
nature of a penalty clause which is sanctioned by law,
more particularly under Article 2209 of the New Civil Code
which provides that:
If the obligation consists in the payment of a sum of
money, and the debtor incurs in delay, the indemnity for
damages, there being no stipulation to the contrary, shall
be the payment of the interest agreed upon, and in the
absence of stipulation, the legal interest, which is six per
cent per annum.
The penalty charge of two percent (2%) per month in the
case at bar began to accrue from the time of default by
the petitioner. There is no doubt that the petitioner is
liable for both the stipulated monetary interest and the
stipulated penalty charge. The penalty charge is also
called penalty or compensatory interest. Having clarified
the same, the next issue to be resolved is whether interest
may accrue on the penalty or compensatory interest
without violating the provisions of Article 1959 of the New
Civil Code, which provides that:
Without prejudice to the provisions of Article 2212,
interest due and unpaid shall not earn interest. However,
the contracting parties may by stipulation capitalize the
interest due and unpaid, which as added principal, shall
earn new interest.
According to the petitioner, there is no legal basis for the
that the law only allows imposition of interest on
monetary interest but not the charging of interest on
penalty. He claims that since there is no law that allows
 13 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
imposition of interest on penalties, the penalties should
not earn interest. But as we have already explained,
penalty clauses can be in the form of penalty or
compensatory interest. Thus, the compounding of the
penalty or compensatory interest is sanctioned by and
allowed pursuant to the above-quoted provision of Article
1959 of the New Civil Code considering that:
First, there is an express stipulation in the promissory
note (Exhibit "A") permitting the compounding of interest.
The fifth paragraph of the said promissory note provides
that: "Any interest which may be due if not paid shall be
added to the total amount when due and shall become
part thereof, the whole amount to bear interest at the
maximum rate allowed by law." 10 Therefore, any penalty
interest not paid, when due, shall earn the legal interest
of twelve percent (12%) per annum, 11 in the absence of
express stipulation on the specific rate of interest, as in
the case at bar.
Second, Article 2212 of the New Civil Code provides that
"Interest due shall earn legal interest from the time it is
judicially demanded, although the obligation may be
silent upon this point." In the instant case, interest
likewise began to run on the penalty interest upon the
filing of the complaint in court by respondent CCP on
August 29, 1984. Hence, the courts a quo did not err in
ruling that the petitioner is bound to pay the interest on
the total amount of the principal, the monetary interest
and the penalty interest.
The petitioner seeks the elimination of the compounded
interest imposed on the total amount based allegedly on
the case of National Power Corporation v. National
Merchandising Corporation, 12 wherein we ruled that the
imposition of interest on the damages from the filing of
the complaint is unjust where the litigation was prolonged
for twenty-five (25) years through no fault of the
defendant. However, the ruling in the said National Power
Corporation (NPC) case is not applicable to the case at bar
inasmuch as our ruling on the issue of interest in that NPC
case was based on equitable considerations and on the
fact that the said case lasted for twenty-five (25) years
"through no fault of the defendant." In the case at bar,
however, equity cannot be considered inasmuch as there
is a contractual stipulation in the promissory note
whereby the petitioner expressly agreed to the
compounding of interest in case of failure on his part to
pay the loan at maturity. Inasmuch as the said stipulation
on the compounding of interest has the force of law
between the parties and does not appear to be inequitable
or unjust, the said written stipulation should be respected.
The private respondent’s Statement of Account (marked
Exhibits "C" to "C-2") 13 shows the following breakdown
of the petitioner’s indebtedness as of August 28, 1986:
Principal P2,838,454.68
Interest P576,167.89
Surcharge P4,581,692.10
——————
P7,996,314.67
The said statement of account also shows that the above
amounts stated therein are net of the partial payments
amounting to a total of Four Hundred Fifty-Two Thousand
Five Hundred Sixty-One Pesos and Forty-Three Centavos
(P452,561.43) which were made during the period from
May 13, 1983 to September 30, 1983. 14 The petitioner
now seeks the reduction of the penalty due to the said
partial payments. The principal amount of the promissory
note (Exhibit "A") was Three Million Four Hundred Eleven
Thousand Four Hundred Twenty-One Pesos and Thirty-
Two Centavos (P3,411,421.32) when the loan was
restructured on August 31, 1979. As of August 28, 1986,
the principal amount of the said restructured loan has
been reduced to Two Million Eight Hundred Thirty-Eight
Thousand Four Hundred Fifty-Four Pesos and Sixty-Eight
Centavos (P2,838,454.68). Thus, petitioner contends that
reduction of the penalty is justifiable pursuant to Article
1229 of the New Civil Code which provides that: "The
judge shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied
with by the debtor. Even if there has been no
performance, the penalty may also be reduced by the
courts if it is iniquitous or unconscionable." Petitioner
insists that the penalty should be reduced to ten percent
(10%) of the unpaid debt in accordance with Bachrach
Motor Company v. Espiritu. 15
There appears to be a justification for a reduction of the
penalty charge but not necessarily to ten percent (10%)
of the unpaid balance of the loan as suggested by
petitioner. Inasmuch as petitioner has made partial
payments which showed his good faith, a reduction of the
penalty charge from two percent (2%) per month on the
total amount due, compounded monthly, until paid can
indeed be justified under the said provision of Article 1229
of the New Civil Code.
In other words, we find the continued monthly accrual of
the two percent (2%) penalty charge on the total amount
due to be unconscionable inasmuch as the same appeared
to have been compounded monthly.
Considering petitioner’s several partial payments and the
fact he is liable under the note for the two percent (2%)
penalty charge per month on the total amount due,
compounded monthly, for twenty-one (21) years since his
default in 1980, we find it fair and equitable to reduce the
penalty charge to a straight twelve percent (12%) per
annum on the total amount due starting August 28, 1986,
the date of the last Statement of Account (Exhibits "C" to
"C-2"). We also took into consideration the offers of the
petitioner to enter into a compromise for the settlement
of his debt by presenting proposed payment schemes to
respondent CCP. The said offers at compromise also
showed his good faith despite difficulty in complying with
his loan obligation due to his financial problems. However,
we are not unmindful of the respondent’s long overdue
deprivation of the use of its money collectible from the
petitioner.
The petitioner also imputes error on the part of the
appellate court for not declaring the suspension of the
running of the interest during that period when the
respondent allegedly failed to assist the petitioner in
applying for relief from liability. In this connection, the
petitioner referred to the private respondent’s letter 16
dated September 28, 1988 addressed to petitioner which
partially reads:
Dear Mr. Tan:
x x x
 14 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O

SO ORDERED.
With reference to your appeal for condonation of interest
and surcharge, we wish to inform you that the center will
assist you in applying for relief of liability through the
Commission on Audit and Office of the President . . . .

While your application is being processed and awaiting

approval, the center will be accepting your proposed
payment scheme with the downpayment of P160,000.00
and monthly remittances of P60,000.00 . . .
x x x

The petitioner alleges that his obligation to pay the

interest and surcharge should have been suspended
because the obligation to pay such interest and surcharge
has become conditional, that is dependent on a future and
uncertain event which consists of whether the petitioner’s
request for condonation of interest and surcharge would
be recommended by the Commission on Audit and the
Office of the President to the House of Representatives for
approval as required under Section 36 of Presidential
Decree No. 1445. Since the condition has not happened
allegedly due to the private respondent’s reneging on its
promise, his liability to pay the interest and surcharge on
the loan has not arisen. This is the petitioner’s contention.
It is our view, however, that the running of the interest
and surcharge was not suspended by the private
respondent’s promise to assist the petitioners in applying
for relief therefrom through the Commission on Audit and
the Office of the President.
First, the letter dated September 28, 1988 alleged to have
been sent by the respondent CCP to the petitioner is not
part of the formally offered documentary evidence of
either party in the trial court. That letter cannot be
considered evidence pursuant to Rule 132, Section 34 of
the Rules of Court which provides that: "The court shall
consider no evidence which has not been formally offered
. . . ." Besides, the said letter does not contain any
categorical agreement on the part of respondent CCP that
the payment of the interest and surcharge on the loan is
deemed suspended while his appeal for condonation of
the interest and surcharge was being processed.
Second, the private respondent correctly asserted that it
was the primary responsibility of petitioner to inform the
Commission on Audit and the Office of the President of his
application for condonation of interest and surcharge. It
was incumbent upon the petitioner to bring his
administrative appeal for condonation of interest and
penalty charges to the attention of the said government
offices.
On the issue of attorney’s fees, the appellate court ruled
correctly and justly in reducing the trial court’s award of
twenty-five percent (25%) attorney’s fees to five percent
(5%) of the total amount due.
WHEREFORE, the assailed Decision of the Court of
Appeals is hereby AFFIRMED with MODIFICATION in that
the penalty charge of two percent (2%) per month on the
total amount due, compounded monthly, is hereby
reduced to a straight twelve percent (12%) per annum
starting from August 28, 1986. With costs against the
petitioner.
SECOND DIVISION
G.R. Nos. 128833. April 20, 1998
RIZAL COMMERCIAL BANKING CORPORATION, UY
CHUN BING AND ELI D. LAO, Petitioners, v. COURT
OF APPEALS and GOYU & SONS, INC., Respondents.
D EC I S I O N
MELO, J.:
The issues relevant to the herein three consolidated
petitions revolve around the fire loss claims of respondent
Goyu & Sons, Inc. (GOYU) with petitioner Malayan
Insurance Company, Inc. (MICO) in connection with the
mortgage contracts entered into by and between Rizal
Commercial Banking Corporation (RCBC) and GOYU.
The Court of Appeals ordered MICO to pay GOYU its claims
in the total amount of P74,040,518.58, plus 37% interest
per annum commencing July 27, 1992. RCBC was ordered
to pay actual and compensatory damages in the amount
of P5,000,000.00. MICO and RCBC were held solidarily
liable to pay GOYU P1,500,000.00 as exemplary damages
and P1,500,000.00 for attorneys fees. GOYUs obligation
to RCBC was fixed at P68,785,069.04 as of April 1992,
without any interest, surcharges, and penalties. RCBC and
MICO appealed separately but, in view of the common
facts and issues involved, their individual petitions were
consolidated.
The undisputed facts may be summarized as follows:
GOYU applied for credit facilities and accommodations
with RCBC at its Binondo Branch. After due evaluation,
RCBC Binondo Branch, through its key officers, petitioners
Uy Chun Bing and Eli D. Lao, recommended GOYUs
application for approval by RCBCs executive committee.
A credit facility in the amount of P30 million was initially
granted. Upon GOYUs application and Uys and Laos
recommendation, RCBCs executive committee increased
GOYUs credit facility to P50 million, then to P90 million,
and finally to P117 million.
 15 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
As security for its credit facilities with RCBC, GOYU
executed two real estate mortgages and two chattel
mortgages in favor of RCBC, which were registered with
the Registry of Deeds at Valenzuela, Metro Manila. Under
each of these four mortgage contracts, GOYU committed
itself to insure the mortgaged property with an insurance
company approved by RCBC, and subsequently, to
endorse and deliver the insurance policies to RCBC.
GOYU obtained in its name a total of ten insurance policies
from MICO. In February 1992, Alchester Insurance
Agency, Inc., the insurance agent where GOYU obtained
the Malayan insurance policies, issued nine endorsements
in favor of RCBC seemingly upon instructions of GOYU
(Exhibits 1-Malayan to 9-Malayan).
On April 27, 1992, one of GOYUs factory buildings in
Valenzuela was gutted by fire. Consequently, GOYU
submitted its claim for indemnity on account of the loss
insured against. MICO denied the claim on the ground
that the insurance policies were either attached pursuant
to writs of attachments/garnishments issued by various
courts or that the insurance proceeds were also claimed
by other creditors of GOYU alleging better rights to the
proceeds than the insured. GOYU filed a complaint for
specific performance and damages which was docketed at
the Regional Trial Court of the National Capital Judicial
Region (Manila, Branch 3) as Civil Case No. 93-65442,
now subject of the present G.R. No. 128833 and 128866.
RCBC, one of GOYUs creditors, also filed with MICO its
formal claim over the proceeds of the insurance policies,
but said claims were also denied for the same reasons
that MICO denied GOYUs claims.
In an interlocutory order dated October 12, 1993 (Record,
pp. 311-312), the Regional Trial Court of Manila (Branch
3), confirmed that GOYUs other creditors, namely, Urban
Bank, Alfredo Sebastian, and Philippine Trust Company
obtained their respective writs of attachments from
various courts, covering an aggregate amount of
P14,938,080.23, and ordered that the proceeds of the ten
insurance policies be deposited with the said court minus
the aforementioned P14,938,080.23. Accordingly, on
January 7, 1994, MICO deposited the amount of
P50,505,594.60 with Branch 3 of the Manila RTC.
In the meantime, another notice of garnishment was
handed down by another Manila RTC sala (Branch 28) for
the amount of P8,696,838.75 (Exhibit 22-Malayan).
After trial, Branch 3 of the Manila RTC rendered judgment
in favor of GOYU, disposing:
WHEREFORE, judgment is hereby rendered in favor of the
plaintiff and against the defendant, Malayan Insurance
Company, Inc. and Rizal Commercial Banking
Corporation, ordering the latter as follows:
1. For defendant Malayan Insurance Co., Inc.:
a. To pay the plaintiff its fire loss claims in the total
amount of P74,040,518.58 less the amount of
P50,000,000.00 which is deposited with this Court;
b. To pay the plaintiff damages by way of interest for the
duration of the delay since July 27, 1992 (ninety days
after defendant insurers receipt of the required proof of
loss and notice of loss) at the rate of twice the ceiling
prescribed by the Monetary Board, on the following
amounts:
1) P50,000,000.00 from July 27, 1992 up
to the time said amount was
deposited with this Court on
January 7, 1994;
2) P24,040,518.58 from July 27, 1992 up
to the time when the writs of
attachments were received by
defendant Malayan;
2. For defendant Rizal Commercial Banking Corporation:
a. To pay the plaintiff actual and compensatory damages
in the amount of P2,000,000.00;
3. For both defendants Malayan and RCBC:
a. To pay the plaintiff, jointly and severally, the following
amounts:
1) P1,000,000.00 as exemplary damages;
2) P1,000,000.00 as, and for, attorneys fees;
3) Costs of suit.
and on the Counterclaim of defendant RCBC,
ordering the plaintiff to pay its loan obligations
with defendant RCBC in the amount of
P68,785,069.04, as of April 27, 1992, with
interest thereon at the rate stipulated in the
respective promissory notes (without
surcharges and penalties) per computation, pp.
14-A, 14-B & 14-C.
FURTHER, the Clerk of Court of the Regional Trial Court of
Manila is hereby ordered to release immediately to the
plaintiff the amount of P50,000,000.00 deposited with the
Court by defendant Malayan, together with all the
interests earned thereon.
Record, pp. 478-479.)
From this judgment, all parties interposed their respective
appeals. GOYU was unsatisfied with the amounts awarded
in its favor. MICO and RCBC disputed the trial courts
findings of liability on their part. The Court of Appeals
partly granted GOYUs appeal, but sustained the findings
of the trial court with respect to MICO and RCBCs
liabilities, thusly:
WHEREFORE, the decision of the lower court dated June
29, 1994 is hereby modified as follows:
1. FOR DEFENDANT MALAYAN INSURANCE CO., INC:
a) To pay the plaintiff its fire loss claim in the total amount
of P74,040,518.58 less the amount of P50,505,594.60
(per O.R. No. 3649285) plus deposited in court and
damages by way of interest commencing July 27, 1992
until the time Goyu receives the said amount at the rate
of thirty-seven (37%) percent per annum which is twice
the ceiling prescribed by the Monetary Board.
2. FOR DEFENDANT RIZAL COMMERCIAL BANKING
CORPORATION:
a) To pay the plaintiff actual and compensatory damages
in the amount of P5,000,000.00.
3. FOR DEFENDANTS MALAYAN INSURANCE CO., INC.,
RIZAL COMMERCIAL BANKING CORPORATION, UY CHUN
BING AND ELI D. LAO:
a) To pay the plaintiff jointly and severally the following
amounts:
 16 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
1. P1,500,000.00 as exemplary damages;
2. P1,500,000.00 as and for attorneys fees.
4. And on RCBCs Counterclaim, ordering the plaintiff Goyu
& Sons, Inc. to pay its loan obligation with RCBC in the
amount of P68,785,069.04 as of April 27, 1992 without
any interest, surcharges and penalties.
The Clerk of the Court of the Regional Trial Court of Manila
is hereby ordered to immediately release to Goyu & Sons,
Inc. the amount of P50,505,594.60 (per O.R. No.
3649285) deposited with it by Malayan Insurance Co.,
Inc., together with all the interests thereon.
Rollo, p. 200.)
RCBC and MICO are now before us in G.R. No. 128833
and 128866, respectively, seeking review and consequent
reversal of the above dispositions of the Court of Appeals.
In G.R. No. 128834, RCBC likewise appeals from the
decision in C.A. G.R. No. CV-48376, which case, by virtue
of the Court of Appeals resolution dated August 7, 1996,
was consolidated with C.A. G.R. No. CV-46162 (subject of
herein G.R. No. 128833). At issue in said petition is RCBCs
right to intervene in the action between Alfredo C.
Sebastian (the creditor) and GOYU (the debtor), where
the subject insurance policies were attached in favor of
Sebastian.
After a careful review of the material facts as found by the
two courts below in relation to the pertinent and
applicable laws, we find merit in the submissions of RCBC
and MICO.
The several causes of action pursued below by GOYU gave
rise to several related issues which are now submitted in
the petitions before us. This Court, however, discerns one
primary and central issue, and this is, whether or not
RCBC, as mortgagee, has any right over the insurance
policies taken by GOYU, the mortgagor, in case of the
occurrence of loss.
As earlier mentioned, accordant with the credit facilities
extended by RCBC to GOYU, the latter executed several
mortgage contracts in favor of RCBC. It was expressly
stipulated in these mortgage contracts that GOYU shall
insure the mortgaged property with any of the insurance
companies acceptable to RCBC. GOYU indeed insured the
mortgaged property with MICO, an insurance company
acceptable to RCBC. Based on their stipulations in the
mortgage contracts, GOYU was supposed to endorse
these insurance policies in favor of, and deliver them, to
RCBC. Alchester Insurance Agency, Inc., MICOs
underwriter from whom GOYU obtained the subject
insurance policies, prepared the nine endorsements (see
Exh. 1-Malayan to 9-Malayan; also Exh. 51-RCBC to 59-
RCBC), copies of which were delivered to GOYU, RCBC,
and MICO. However, because these endorsements do not
bear the signature of any officer of GOYU, the trial court,
as well as the Court of Appeals, concluded that the
endorsements are defective.
We do not quite agree.
It is settled that a mortgagor and a mortgagee have
separate and distinct insurable interests in the same
mortgaged property, such that each one of them may
insure the same property for his own sole benefit. There
is no question that GOYU could insure the mortgaged
property for its own exclusive benefit. In the present case,
although it appears that GOYU obtained the subject
insurance policies naming itself as the sole payee, the
intentions of the parties as shown by their
contemporaneous acts, must be given due consideration
in order to better serve the interest of justice and equity.
It is to be noted that nine endorsement documents were
prepared by Alchester in favor of RCBC. The Court is in a
quandary how Alchester could arrive at the idea of
endorsing any specific insurance policy in favor of any
particular beneficiary or payee other than the insured had
not such named payee or beneficiary been specifically
disclosed by the insured itself. It is also significant that
GOYU ( voluntarily and purposely took the insurance
policies from MICO, a sister company of RCBC, and not
just from any other insurance company. Alchester would
not have found out that the subject pieces of property
were mortgaged to RCBC had not such information been
voluntarily disclosed by GOYU itself. Had it not been for
GOYU, Alchester would not have known of GOYUs
intention of obtaining insurance coverage in compliance
with its undertaking in the mortgage contracts with RCBC,
and verily, Alchester would not have endorsed the policies
to RCBC had it not been so directed by GOYU.
On equitable principles, particularly on the ground of
estoppel, the Court is constrained to rule in favor of
mortgagor RCBC. The basis and purpose of the doctrine
was explained in Philippine National Bank vs. Court of
Appeals (94 SCRA 357 [1979]), to wit:
The doctrine of estoppel is based upon the grounds of
public policy, fair dealing, good faith and justice, and its
purpose is to forbid one to speak against his own act,
representations, or commitments to the injury of one to
whom they were directed and who reasonably relied
thereon. The doctrine of estoppel springs from equitable
principles and the equities in the case. It is designed to
aid the law in the administration of justice where without
its aid injustice might result. It has been applied by this
Court wherever and whenever special circumstances of a
case so demand. (p. 368.)
Evelyn Lozada of Alchester testified that upon instructions
of Mr. Go, through a certain Mr. Yam, she prepared in
quadruplicate on February 11, 1992 the nine
endorsement documents for GOYUs nine insurance
policies in favor of RCBC. The original copies of each of
these nine endorsement documents were sent to GOYU,
and the others were sent to RCBC and MICO, while the
fourth copies were retained for Alchesters file (tsn,
February 23, pp. 7-8). GOYU has not denied having
received from Alchester the originals of these
endorsements.
RCBC, in good faith, relied upon the endorsement
documents sent to it as this was only pursuant to the
stipulation in the mortgage contracts. We find such
reliance to be justified under the circumstances of the
case. GOYU failed to seasonably repudiate the authority
of the person or persons who prepared such
endorsements. Over and above this, GOYU continued, in
the meantime, to enjoy the benefits of the credit facilities
extended to it by RCBC. After the occurrence of the loss
insured against, it was too late for GOYU to disown the
endorsements for any imagined or contrived lack of
authority of Alchester to prepare and issue said
endorsements. If there had not been actually an implied
ratification of said endorsements by virtue of GOYUs
inaction in this case, GOYU is at the very least estopped
from assailing their operative effects. To permit GOYU to
 17 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O

capitalize on its non-confirmation of these endorsements ART. 2127. The mortgage extends to the natural
while it continued to enjoy the benefits of the credit accessions, to the improvements, growing fruits, and the
facilities of RCBC which believed in good faith that there rents or income not yet received when the obligation
was due endorsement pursuant to their mortgage becomes due, and to the amount of the indemnity granted
contracts, is to countenance grave contravention of public or owing to the proprietor from the insurers of the
policy, fair dealing, good faith, and justice. Such an unjust property mortgaged, or in virtue of expropriation for
situation, the Court cannot sanction. Under the peculiar public use, with the declarations, amplifications and
circumstances obtaining in this case, the Court is bound limitations established by law, whether the estate remains
to recognize RCBCs right to the proceeds of the insurance in the possession of the mortgagor, or it passes into the
policies if not for the actual endorsement of the policies, hands of a third person.
at least on the basis of the equitable principle of estoppel.
Significantly, the Court notes that out of the 10 insurance
GOYU cannot seek relief under Section 53 of the policies subject of this case, only 8 of them appear to have
Insurance Code which provides that the proceeds of been subject of the endorsements prepared and delivered
insurance shall exclusively apply to the interest of the by Alchester for and upon instructions of GOYU as shown
person in whose name or for whose benefit it is made. below:
The peculiarity of the circumstances obtaining in the
instant case presents a justification to take exception to
the strict application of said provision, it having been INSURANCE POLICY PARTICULARS ENDORSEMENT
sufficiently established that it was the intention of the
parties to designate RCBC as the party for whose benefit a. Policy Number : F-114-07795 None
the insurance policies were taken out. Consider thus the Issue Date : March 18, 1992
following: Expiry Date : April 5, 1993
Amount : P9,646,224.92
1. It is undisputed that the insured pieces of property b. Policy Number : ACIA/F-174-07660 Exhibit 1-Malayan
were the subject of mortgage contracts entered into Issue Date : January 18, 1992
between RCBC and GOYU in consideration of and for Expiry Date : February 9, 1993
securing GOYUs credit facilities from RCBC. The mortgage Amount : P4,307,217.54
contracts contained common provisions whereby GOYU, c. Policy Number : ACIA/F-114-07661 Exhibit 2-Malayan
as mortgagor, undertook to have the mortgaged property Issue Date : January 18, 1992
properly covered against any loss by an insurance Expiry Date : February 15, 1993
company acceptable to RCBC. Amount : P6,603,586.43
d. Policy Number : ACIA/F-114-07662 Exhibit 3-Malayan
2. GOYU voluntarily procured insurance policies to cover Issue Date : January 18, 1992
the mortgaged property from MICO, no less than a sister Expiry Date : (not legible)
company of RCBC and definitely an acceptable insurance Amount : P6,603,586.43
company to RCBC. e. Policy Number : ACIA/F-114-07663 Exhibit 4-Malayan
Issue Date : January 18, 1992
3. Endorsement documents were prepared by MICOs Expiry Date : February 9, 1993
underwriter, Alchester Insurance Agency, Inc., and copies Amount : P9,457,972.76
thereof were sent to GOYU, MICO, and RCBC. GOYU did f. Policy Number : ACIA/F-114-07623 Exhibit 7-Malayan
not assail, until of late, the validity of said endorsements. Issue Date : January 13, 1992
4. GOYU continued until the occurrence of the fire, to Expiry Date : January 13, 1993
enjoy the benefits of the credit facilities extended by Amount : P24,750,000.00
RCBC which was conditioned upon the endorsement of the g. Policy Number : ACIA/F-174-07223 Exhibit 6-Malayan
insurance policies to be taken by GOYU to cover the Issue Date : May 29, 1991
mortgaged properties. Expiry Date : June 27, 1992
Amount : P6,000,000.00
This Court can not over stress the fact that upon receiving h. Policy Number : CI/F-128-03341 None
its copies of the endorsement documents prepared by Issue Date : May 3, 1991
Alchester, GOYU, despite the absence of its written Expiry Date : May 3, 1992
conformity thereto, obviously considered said Amount : P10,000,000.00
endorsement to be sufficient compliance with its i. Policy Number : F-114-07402 Exhibit 8-Malayan
obligation under the mortgage contracts since RCBC Issue Date : September 16, 1991
accordingly continued to extend the benefits of its credit Expiry Date : October 19, 1992
facilities and GOYU continued to benefit therefrom. Just Amount : P32,252,125.20
as plain too is the intention of the parties to constitute j. Policy Number : F-114-07525 Exhibit 9-Malayan
RCBC as the beneficiary of the various insurance policies Issue Date : November 20, 1991
obtained by GOYU. The intention of the parties will have Expiry Date : December 5, 1992
to be given full force and effect in this particular case. The Amount : P6,603,586.43
insurance proceeds may, therefore, be exclusively applied (pp. 456-457,
to RCBC, which under the factual circumstances of the Record;
case, is truly the person or entity for whose benefit the Folder of
policies were clearly intended. Exhibits for
MICO.)
Moreover, the laws evident intention to protect the
interests of the mortgagee upon the mortgaged property Policy Number F-114-07795 [(a) above] has not been
is expressed in Article 2127 of the Civil Code which states: endorsed. This fact was admitted by MICOs witness, Atty.
Farolan (tsn, February 16, 1994, p. 25). Likewise, the
 18 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
record shows no endorsement for Policy Number CI/F-
128-03341 [(h) above]. Also, one of the endorsement
documents, Exhibit5-Malayan, refers to a certain
insurance policy number ACIA-F-07066, which is not
among the insurance policies involved in the complaint.
The proceeds of the 8 insurance policies endorsed to
RCBC aggregate to P89,974,488.36.
Being exclusively payable to RCBC by reason of the
endorsement by Alchester to RCBC, which we already
ruled to have the force and effect of an endorsement by
GOYU itself, these 8 policies can not be attached by
GOYUs other creditors up to the extent of the GOYUs
outstanding obligation in RCBCs favor. Section 53 of the
Insurance Code ordains that the insurance proceeds of
the endorsed policies shall be applied exclusively to the
proper interest of the person for whose benefit it was
made. In this case, to the extent of GOYUs obligation with
RCBC, the interest of GOYU in the subject policies had
been transferred to RCBC effective as of the time of the
endorsement. These policies may no longer be attached
by the other creditors of GOYU, like Alfredo Sebastian in
the present G.R. No. 128834, which may nonetheless
forthwith be dismissed for being moot and academic in
view of the results reached herein. Only the two other
policies amounting to P19,646,224.92 may be validly
attached, garnished, and levied upon by GOYUs other
creditors. To the extent of GOYUs outstanding obligation
with RCBC, all the rest of the other insurance policies
above-listed which were endorsed to RCBC, are,
therefore, to be released from attachment, garnishment,
and levy by the other creditors of GOYU.
This brings us to the next relevant issue to be resolved,
which is, the extent of GOYUs outstanding obligation with
RCBC which the proceeds of the 8 insurance policies will
discharge and liquidate, or put differently, the actual
amount of GOYUs liability to RCBC.
The Court of Appeals simply echoed the declaration of the
trial court finding that GOYUS total obligation to RCBC was
only P68,785,060.04 as of April 27, 1992, thus
sanctioning the trial courts exclusion of Promissory Note
No. 421-92 (renewal of Promissory Note No. 908-91) and
Promissory Note No. 420-92 (renewal of Promissory Note
No. 952-91) on the ground that their execution is highly
questionable for not only are these dated after the fire,
but also because the signatures of either GOYU or any its
representative are conspicuously absent. Accordingly, the
Court of Appeals speculated thusly:
Hence, this Court is inclined to conclude that said
promissory notes were pre-signed by plaintiff in blank
terms, as averred by plaintiff, in contemplation of the
speedy grant of future loans, for the same practice of
procedure has always been adopted in its previous
dealings with the bank. (Rollo, pp. 181-182.)
The fact that the promissory notes bear dates posterior to
the fire does not necessarily mean that the documents are
spurious, for it is presumed that the ordinary course of
business had been followed (Metropolitan Bank and Trust
Company vs. Quilts and All, Inc., 222 SCRA 486 [1993]).
The obligor and not the holder of the negotiable
instrument has the burden of proof of showing that he no
longer owes the obligee any amount (Travel-On, Inc. vs.
Court of Appeals, 210 SCRA 351 [1992]).
Even casting aside the presumption of regularity of
private transactions, receipt of the loan amounting to
P121,966,058.67 (Exhibits 1-29, RCBC) was admitted by
GOYU as indicated in the testimony of Go Song Hiap when
he answered the queries of the trial court:
ATTY. NATIVIDAD
Q: But insofar as the amount stated in Exhibits 1 to 29-
RCBC, you received all the amounts stated therein?
A: Yes, sir, I received the amount.
COURT
He is asking if he received all the amounts stated in
Exhibits 1 to 29-RCBC?
WITNESS:
Yes, Your Honor, I received all the amounts.
COURT
Indicated in the Promissory Notes?
WITNESS
A. The promissory Notes they did not give to me but the
amount I asked which is correct, Your Honor.
COURT
Q: You mean to say the amounts indicated in Exhibits 1
to 29-RCBC is correct?
A: Yes, Your Honor.
(tsn, Jan. 14, 1994, p. 26.)
Furthermore, aside from its judicial admission of having
received all the proceeds of the 29 promissory notes as
hereinabove quoted, GOYU also offered and admitted to
RCBC that its obligation be fixed at P116,301,992.60 as
shown in its letter dated March 9, 1993, which pertinently
reads:
We wish to inform you, therefore that we are ready and
willing to pay the current past due account of this
company in the amount of P116,301,992.60 as of 21
January 1993, specified in pars. 15, p. 10, and 18, p. 13
of your affidavits of Third Party Claims in the Urban case
at Makati, Metro Manila and in the Zamboanga case at
Zamboanga city, respectively, less the total of
P8,851,519.71 paid from the Seaboard and Equitable
insurance companies and other legitimate deductions. We
accept and confirm this amount of P116,301,992.60 as
stated as true and correct.
Exhibit BB.)
The Court of Appeals erred in placing much significance
on the fact that the excluded promissory notes are dated
after the fire. It failed to consider that said notes had for
their origin transactions consummatedprior to the fire.
Thus, careful attention must be paid to the fact that
Promissory Notes No. 420-92 and 421-92 are
mere renewals of Promissory Notes No. 908-91 and 952-
91, loans already availed of by GOYU.
The two courts below erred in failing to see that the
promissory notes which they ruled should be excluded for
bearing dates which are after that of the fire, are
mere renewals of previous ones. The proceeds of the loan
represented by these promissory notes were admittedly
received by GOYU. There is ample factual and legal basis
for giving GOYUs judicial admission of liability in the
amount of P116,301,992.60 full force and effect
It should, however, be quickly added that whatever
amount RCBC may have recovered from the other
insurers of the mortgaged property will, nonetheless,
have to be applied as payment against GOYUs obligation.
But, contrary to the lower courts findings, payments
 19 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O

effected by GOYU prior to January 21, 1993 should no

longer be deducted. Such payments had obviously been
duly considered by GOYU, in its aforequoted letter dated
March 9, 1993, wherein it admitted that its past due
account totaled P116,301,992.60 as of January 21, 1993.

The net obligation of GOYU, after deductions, is thus

reduced to P107,246,887.90 as of January 21, 1993, to
wit:

Total Obligation as admitted by GOYU as of January 21,

1993: P116,301,992.60
Broken down as follows
Principal1 Interest The essence or rationale for the payment of interest or
Regular 80,535,946.32 cost of money is separate and distinct from that of
FDU 7,548,025.17 surcharges and penalties. What may justify a court in not
____________ _____________ allowing the creditor to charge surcharges and penalties
Total: 108,083,971.49 8,218,021.112cräläwvirtualibräry despite express stipulation therefor in a valid agreement,
LESS: may not equally justify non-payment of interest. The
1) Proceeds from charging of interest for loans forms a very essential and
Seaboard Eastern fundamental element of the banking business, which may
Insurance Company: 6,095,145.81 truly be considered to be at the very core of its existence
2) Proceeds from or being. It is inconceivable for a bank to grant loans for
Equitable Insurance which it will not charge any interest at all. We fail to find
Company: 2,756,373.00 justification for the Court of Appeals outright deletion of
3) Payment from the payment of interest as agreed upon in the respective
foreign department promissory notes. This constitutes gross error.
negotiation: 203,584.89
9,055,104.703cräläwvirtualibräry For the computation of the interest due to be paid to
NET AMOUNT as of January 21, 1993: P RCBC, the following rules of thumb laid down by this Court
107,246,887.90 in Eastern Shipping Lines, Inc. vs. Court of Appeals (234
SCRA 78 [1994]), shall apply, to wit:
The need for the payment of interest due upon the
principal amount of the obligation, which is the cost of I. When an obligation, regardless of its source, i.e., law,
money to RCBC, the primary end and the ultimate reason contracts, quasi-contracts, delicts or quasi-delicts is
for RCBCs existence and being, was duly recognized by breached, the contravenor can be held liable for damages.
the trial court when it ruled favorably on RCBCs The provisions under Title XVIII on Damages of the Civil
counterclaim, ordering GOYU to pay its loan obligation Code govern in determining the measure of recoverable
with RCBC in the amount of P68,785,069.04, as of April damages.
27,1992, with interest thereon at the rate stipulated in
the respective promissory notes (without surcharges and II. With regard particularly to an award of interest in the
penalties) per computation, pp. 14-A, 14-B, 14-C concept of actual and compensatory damages, the rate of
(Record, p. 479). Inexplicably, the Court of Appeals, interest, as well as the accrual thereof, is imposed, as
without even laying down the factual or legal justification follows:
for its ruling, modified the trial courts ruling and ordered
GOYU to pay the principal amount of 1. When the obligation is breached, and it consists in the
P68,785,069.04 without any interest, surcharges and payment of a sum of money, i.e., a loan or forbearance of
penalties (Rollo, p. 200). money, the interest due should be that which may have
been stipulated in writing. Furthermore, the interest due
It is to be noted in this regard that even the trial court shall itself earn legal interest from the time it is judicially
hedgingly and with much uncertainty deleted the demanded. In the absence of stipulation, the rate of
payment of additional interest, penalties, and charges, in interest shall be 12% per annum to be computed from
this manner: default, i.e., from judicial or extrajudicial demand under
and subject to the provisions of Article 1169 of the Civil
Regarding defendant RCBCs commitment not to charge Code.
additional interest, penalties and surcharges, the same
does not require that it be embodied in a document or 2. When an obligation, not constituting a loan or
some form of writing to be binding and enforceable. The forbearance of money, is breached, an interest on the
principle is well known that generally a verbal agreement amount of damages awarded may be imposed at the
or contract is no less binding and effective than a written discretion of the court at the rate of 6% per annum. No
one. And the existence of such a verbal agreement has interest, however, shall be adjudged on unliquidated
been amply established by the evidence in this case. In claims or damages except when or until the demand can
any event, regardless of the existence of such verbal be established with reasonable certainty. Accordingly,
agreement, it would still be unjust and inequitable for where the demand is established with reasonable
defendant RCBC to charge the plaintiff with surcharges certainty, the interest shall begin to run from the time the
and penalties considering the latters pitiful situation. claim is made judicially or extrajudicially (Art. 1169, Civil
(Emphasis supplied.) Code) but when such certainty cannot be so reasonably
established
( at the time the demand is made, the interest
shall begin
R to run only from the date of the judgment of
 20 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
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. (pp. 95-97.)
There being written stipulations as to the rate of interest
owing on each specific promissory note as summarized
and tabulated by the trial court in its decision (pp.470 and
471, Record) such agreed interest rates must be followed.
This is very clear from paragraph II, sub-paragraph 1
quoted above.
On the issue of payment of surcharges and penalties, we
partly agree that GOYUs pitiful situation must be taken
into account. We do not agree, however, that payment of
any amount as surcharges and penalties should
altogether be deleted. Even assuming that RCBC, through
its responsible officers, herein petitioners Eli Lao and Uy
Chun Bing, may have relayed its assurance for assistance
to GOYU immediately after the occurrence of the fire, we
cannot accept the lower courts finding that RCBC had
therebyipso facto effectively waived collection of any
additional interests, surcharges, and penalties from
GOYU. Assurances of assistance are one thing, but waiver
of additional interests, surcharges, and penalties is
another.
Surcharges and penalties agreed to be paid by the debtor
in case of default partake of the nature of liquidated
damages, covered by Section 4, Chapter 3, Title XVIII of
the Civil Code. Article 2227 thereof provides:
ART. 2227. Liquidated damages, whether intended as a
indemnity or penalty, shall be equitably reduced if they
are iniquitous and unconscionable.
In exercising this vested power to determine what is
iniquitous and unconscionable, the Court must consider
the circumstances of each case. It should be stressed that
the Court will not make any sweeping ruling that
surcharges and penalties imposed by banks for non-
payment of the loans extended by them are generally
iniquitous and unconscionable. What may be iniquitous
and unconscionable in one case, may be totally just and
equitable in another. This provision of law will have to be
applied to the established facts of any given case. Given
the circumstances under which GOYU found itself after the
occurrence of the fire, the Court rules the surcharges
rates ranging anywhere from 9% to 27%, plus the penalty
charges of 36%, to be definitely iniquitous and
unconscionable. The Court tempers these rates to 2% and
3%, respectively. Furthermore, in the light of GOYUs offer
to pay the amount of P116,301,992.60 to RCBC as March
1993 (See: Exhibit BB), which RCBC refused, we find it
more in keeping with justice and equity for RCBC not to
charge additional interest, surcharges, and penalties from
that time onward.
Given the factual milieu spread hereover, we rule that it
was error to hold MICO liable in damages for denying or
withholding the proceeds of the insurance claim to GOYU.
Firstly, by virtue of the mortgage contracts as well as the
endorsements of the insurance policies, RCBC has the
right to claim the insurance proceeds, in substitution of
the property lost in the fire. Having assigned its rights,
GOYU lost its standing as the beneficiary of the said
insurance policies.
Secondly, for an insurance company to be held liable for
unreasonably delaying and withholding payment of
insurance proceeds, the delay must be wanton,
oppressive, or malevolent (Zenith Insurance Corporation
vs. CA, 185 SCRA 403 [1990]). It is generally agreed,
however, that an insurer may in good faith and honesty
entertain a difference of opinion as to its liability.
Accordingly, the statutory penalty for vexatious refusal of
an insurer to pay a claim should not be inflicted unless the
evidence and circumstances show that such refusal was
willful and without reasonable cause as the facts appear
to a reasonable and prudent man (Buffalo Ins. Co. vs.
Bommarito [CCA 8th] 42 F [2d] 53, 70 ALR 1211; Phoenix
Ins. Co. vs. Clay, 101 Ga. 331, 28 SE 853, 65 Am St Rep
307; Kusnetsky vs. Security Ins. Co., 313 Mo. 143, 281
SW 47, 45 ALR 189). The case at bar does not show that
MICO wantonly and in bad faith delayed the release of the
proceeds. The problem in the determination of who is the
actual beneficiary of the insurance policies, aggravated by
the claim of various creditors who wanted to partake of
the insurance proceeds, not to mention the importance of
the endorsement to RCBC, to our mind, and as now borne
out by the outcome herein, justified MICO in withholding
payment to GOYU.
In adjudging RCBC liable in damages to GOYU, the Court
of Appeals said that RCBC cannot avail itself of two
simultaneous remedies in enforcing the claim of an unpaid
creditor, one for specific performance and the other for
foreclosure. In doing so, said the appellate court, the
second action is deemed barred, RCBC having split a
single cause of action (Rollo, pp. 195-199). The Court of
Appeals was too accommodating in giving due
consideration to this argument of GOYU, for the
foreclosure suit is still pending appeal before the same
Court of Appeals in CA G.R CV No. 46247, the case having
been elevated by RCBC.
In finding that the foreclosure suit cannot prosper, the
Fifteenth Division of the Court of Appeals pre-empted the
resolution of said foreclosure case which is not before it.
This is plain reversible error if not grave abuse of
discretion.
As held in Pea vs. Court of Appeals (245 SCRA
691[1995]):
It should have been enough, nonetheless, for the
appellate court to merely set aside the questioned orders
of the trial court for having been issued by the latter with
grave abuse of discretion. In likewise enjoining
permanently herein petitioner from entering in and
interfering with the use or occupation and enjoyment of
petitioners (now private respondent) residential house
and compound, the appellate court in effect, precipitately
resolved with finality the case for injunction that was yet
to be heard on the merits by the lower court. Elevated to
the appellate court, it might be stressed, were mere
 21 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
incidents of the principal case still pending with the trial
court. In Municipality of Bian, Laguna vs. Court of
Appeals, 219 SCRA 69, we ruled that the Court of Appeals
would have no jurisdiction in a certiorari proceeding
involving an incident in a case to rule on the merits of the
main case itself which was not on appeal before it. (pp.
701-702.)
Anent the right of RCBC to intervene in Civil Case No.
1073, before the Zamboanga Regional Trial Court, since
it has been determined that RCBC has the right to the
insurance proceeds, the subject matter of intervention is
rendered moot and academic. Respondent Sebastian
must, however, yield to the preferential right of RCBC
over the MICO insurance policies. It is basic and
fundamental that the first mortgagee has superior rights
over junior mortgagees or attaching creditors (Alpha
Insurance & Surety Co. vs. Reyes, 106 SCRA 274
[1981]; Sun Life Assurance Co. of Canada vs. Gonzales
Diaz, 52 Phil. 271 [1928]).
WHEREFORE, the petitions are hereby GRANTED and the
decision and resolution of December 16, 1996 and April
3, 1997 in CA-G.R. CV No. 46162 are hereby REVERSED
and SET ASIDE, and a new one entered:
1. Dismissing the Complaint of private respondent GOYU
in Civil Case No. 93-65442 before Branch 3 of the Manila
Regional Trial Court for lack of merit;
2. Ordering Malayan Insurance Company, Inc. to deliver
to Rizal Commercial Banking Corporation the proceeds of
the insurance policies in the amount of P51,862,390.94
(per report of adjuster Toplis & Harding (Far East), Inc.,
Exhibits 2 and 2-1), less the amount of P50,505,594.60
(per O.R. No. 3649285);
3. Ordering the Clerk of Court to release the amount of
P50,505,594.60 including the interests earned to Rizal
Commercial Banking Corporation;
4. Ordering Goyu & Sons, Inc. to pay its loan obligation
with Rizal Commercial Banking Corporation in the
principal amount of P107,246,887.90, with interest at the
respective rates stipulated in each promissory note from
January 21, 1993 until finality of this judgment, and
surcharges at 2% and penalties at 3% from January 21,
1993 to March 9, 1993, minus payments made by
Malayan Insurance Company, Inc. and the proceeds of the
amount deposited with the trial court and its earned
interest. The total amount due RCBC at the time of the
finality of this judgment shall earn interest at the legal
rate of 12% in lieu of all other stipulated interests and
charges until fully paid.
The petition of Rizal Commercial Banking Corporation
against the respondent Court in CA-GR CV 48376 is
DISMISSED for being moot and academic in view of the
results herein arrived at. Respondent Sebastians right as
attaching creditor must yield to the preferential rights of
Rizal Commercial Banking Corporation over the Malayan
insurance policies as first mortgagee.
SO ORDERED.
EN BANC
[G.R. No. 97412. July 12, 1994.]
EASTERN SHIPPING INES, INC., Petitioner, v. HON.
COURT OF APPEALS AND MERCANTILE INSURANCE
COMPANY, INC., Respondents.
SYLLABUS
1. CIVIL LAW; COMMON CARRIERS; TIME FRAME WITHIN
WHICH DILIGNCE REQUIRED IN SHIPMENT OF GOODS
LAST. — The common carrier’s duty to observe the
requisite diligence in the shipment of goods lasts from the
time the articles are surrendered to or unconditionally
placed in the possession of, and received by, the carrier
for transportation until delivered to, or until the lapse of
a reasonable time for their acceptance, by the person
entitled to receive them (Arts. 1736-1738, Civil Code;
Ganzon v. Court of Appeals, 161 SCRA 646; Kui Bai v.
Dollar Steamship Lines, 52 Phil. 863).
2. ID.; ID.; ID.; PRESUMPTION OF CARRIER’S FAULT ON
LOST OR DAMAGED GOODS SHIPPED; CASE AT BAR NOT
AN EXCEPTION. — When the goods shipped either are lost
or arrive in damaged condition, a presumption arises
against the carrier of its failure to observe that diligence,
and there need not be an express finding of negligence to
hold it liable (Art. 1735, Civil Code; Philippine National
Railways v. Court of Appeals, 139 SCRA 87; Metro Port
Service v. Court of Appeals, 131 SCRA 365). There are,
of course, exceptional cases when such presumption of
fault is not observed but these cases, enumerated in
Article 1734 of the Civil Code, are exclusive, not one of
which can be applied to this case.
3. ID.; DAMAGES; INTEREST AWARDED AS A CONCEPT
THEREOF; RATE AND ACCRUAL THEREOF, HOW
DETERMINED. — With regard particularly to an award of
interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual
thereof, is imposed, as follows: 1. When the obligation is
breached, and it consists in the payment of a sum of
money, i.e., a loan or forbearance of money, the interest
due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn
legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be
12% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the
 22 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
provisions of Article 1169 of the Civil Code. 2. When a
obligation, not constituting a loan or forbearance of
money, is breached, an interest on the amount of
damages awarded may be imposed at the discretion of
the court at the rate of 6% per annum. No interest,
however, shall be adjudged on unliquidated claims or
damages except when or until the demand can be
established with reasonable certainty. Accordingly, where
the demand is established with reasonable certainty, the
interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but
when such certainty cannot be so reasonably established
at the time the demand is made, the interest shall begin
to run only from the date of 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 of 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.
DECISION
VITUG, J.:
The issues, albeit not completely novel, are: (a) whether
or not a claim for damage sustained on a shipment of
goods can be a solidary, or joint and several, liability of
the common carrier, the arrastre operator and the
customs broker; (b) whether the payment of legal interest
on an award of loss or damage is to be computed from
the time the complaint is filed or from the date the
decision appealed from is rendered; and (c) whether the
applicable rate of interest, referred to above, is twelve
percent (12%) or six percent (6%).chanrobles lawlibrary
: rednad
The findings of the court a quo, adopted by the Court of
Appeals, on the antecedent and undisputed facts that
have led to the controversy are hereunder reproduced:
"This is an action against defendants shipping company,
arrastre operator and broker-forwarded for damages
sustained by a shipment while in defendants’ custody,
filed by the insurer-subrogee who paid the consignee the
value of such losses/damages.
"On December 4, 1981, two fiber drums of riboflavin were
shipped from Yokohama, Japan for delivery vessel `SS
EASTERN COMET’ owned by defendant Eastern Shipping
Lines under Bill of Lading No. YMA-8 (Exh. B). The
shipment was insured under plaintiff’s Marine Insurance
Policy No. 81/01177 for P36,382,466.38.
"Upon arrival of the shipment in Manila on December 12,
1981, it was discharged unto the custody of defendant
Metro Port Services, Inc. The latter excepted to one drum,
said to be in bad order, which damage was unknown to
plaintiff.
"On January 7, 1982 defendant Allied Brokerage
Corporation received the shipment from defendant Metro
Port Service, Inc., one drum opened and without seal (per
‘Request for Bad Order Survey.’ (Exh. D).
"On January 8 and 14, 1982, defendant Allied Brokerage
Corporation made deliveries of the shipment to the
consignees’ warehouse. The latter excepted to one drum
which contained spillages, while the rest of the contents
was adulterated/fake (per ‘Bad Order Waybill’ No. 10649,
Exh. E).
"Plaintiff contended that due to the losses/damage
sustained by said drum, the consignee suffered losses
totaling P19,032.95, due to the fault and negligence of
defendants. Claims were presented against defendants
who failed and refused to pay the same (Exhs. H, I, J, K,
L).
"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 it became
subrogated to all the rights of action of said consignee
against defendants (per ‘Form of Subrogation,’ ‘Release’
and Philbanking check, Exhs. M, N, and O)." (pp. 85-86,
Rollo.)
There were, to be sure, other factual issues that
confronted both courts. Here, the appellate court said:
"Defendants filed their respective answers, traversing the
material allegations of the compliant contending that: As
for defendant Eastern Shipping it alleged that the
shipment was discharged in good order from the vessel
unto the custody of Metro Port Service so that any
damage/losses incurred after 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 shipment was discharged unto its
custody, portion of the same was already in bad order (p.
11, Record); Allied Brokerage alleged that plaintiff has no
cause of action against it, not having negligent or at fault
for the shipment was already in damage and bad order
condition when received by it, but nonetheless, it still
exercised extra ordinary care and diligence in he
handling/delivery of the cargo to consignee in the same
condition shipment was received by it.
"From the evidence that court found the following:
"‘The issues are:
‘1. Whether or not the shipment sustained
losses/damages;
‘2. Whether or not these losses/damages were sustained
while in the custody of defendants (in whose respective
custody, if determinable);
‘3. Whether or not defendant(s) should be held liable for
the losses/damages (see plaintiff’s pre-Trial Brief,
Records, p. 34; Allied’s pre-Trial Brief, adopting plaintiff’s
Records, p. 38).’
‘As to the first issue, there can be no doubt that the
shipment sustained losses/damages. The two drums were
shipped in good order and condition, as clearly shown by
the Bill of Lading and Commercial Invoice which do not
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 Service, Inc., it
excepted to one drum in bad order.

‘Correspondingly, as to the second issue, it follows that
the losses/damages were sustained while in the
respective and/or successive custody and possession of
defendants carrier (Eastern), arrastre operator (Metro
Port) and broker (Allied Brokerage). This becomes evident
when the Marine Cargo Survey Report (Exh. G), with its
‘Additional Survey Notes,’ are considered. In the latter
notes, it is stated that when the shipment was ‘landed on
vessel’ 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 vessel’s
Agent’s Bad order Tally Sheet No. 86427.’ The report
further states that when defendant Allied Brokerage
withdrew the shipment, from defendant arrastre
operator’s custody on January 7, 1982, one drum was
found opened without seal, cello bag partly torn but
contents intact. Net unrecovered spillages was 15 kgs.
The report went on to state that when the drums reached
the consignee, one drum was found with
adulterated/faked contents. It is obvious, therefore, that
these losses/damages occurred before the shipment
reached the consignee while under the successive
custodies of defendants. Under Art. 1737 of the New Civil
Code, the common carrier’s duty to observe extraordinary
diligence in the vigilance of goods remains in full 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 consignee has been advised
and has had reasonable opportunity to remove or dispose
of the goods (Art. 1738, NCC). Defendant Eastern
Shipping’s own exhibit, the ‘Turn-Over Survey of Bad
Order Cargoes’ (Exhs. 3-Eastern) states that on
December 12, 1981 one drum was found ‘open.’
"and thus
‘WHEREFORE, PREMISES CONSIDERED, judgment is
hereby rendered:
A. Ordering defendants to pay plaintiff, jointly and
severally:
1. The amount of P19,032.95 with the present legal
interest of 12% per annum from October 1, 1982, the
date of filing of this complaints, until fully paid (the
liability of defendant Eastern Shipping, Inc. shall not
exceed 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 actual
invoice value of each package, crate box or container in
no case to exceed P5,000.00 each, pursuant to Section
6.01 of the Management Contract);
2. P3,000.00 as attorney’s fees,
3.
B. Dismissing the counterclaims and crossclaim of
defendant/cross-claimant Allied Brokerage Corporation.
SO ORDERED.’ (p. 207, Record).
"Dissatisfied, defendant’s recourse to
"The appeal is devoid of
"After a careful scrunity of the evidence on record. We
find that the conclusion drawn therefrom is correct. As
there is sufficient evidence that the shipment sustained
23 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
damage while in the successive possession of appellants,
and therefore they are liable to the appellee, as subrogee
for the amount it paid to the consignee." (pp. 87-89,
Rollo.)
The Court of Appeal thus affirmed in toto the judgment of
the court a quo.
In this petition, Eastern Shipping Lines, Inc., the common
carrier, attributes error and grave abuse of discretion on
the part of the appellate court when —
I. IT HELD PETITIONER CARRIER JOINTLY AND
SEVERALLY LIABLE WITH THE ARRASTRE OPERATOR AND
CUSTOMS BROKER FOR THE CLAIM OF PRIVATE
RESPONDENT AS GRANTED IN THE QUESTIONED
DECISION;
II. IT HELD THAT THE GRANT OF INTEREST ON THE
CLAIM OF PRIVATE RESPONDENT SHOULD COMMENCE
FROM THE DATE OF THE FILING OF THE COMPLAINT AT
THE RATE OF TWELVE PERCENT PER ANNUM INSTEAD OF
FROM THE DATE OF THE DECISION OF THE TRIAL COURT
AND ONLY AT THE RATE OF SIX PERCENT PER ANNUM,
PRIVATE RESPONDENT’S CLAIM BEING INDISPUTABLY
UNLIQUIDATED.
The petition is, in part, granted.
In this decision, we have begun by saying that the
questions raised by petitioner carrier are not all that
novel. Indeed, we do have a fairly good number of
previous decisions this Court can merely tack to.
held: The common carrier’s duty to observe the requisite
diligence in the shipment of goods lasts from the time the
articles are surrendered to or unconditionally placed in the
possession of, and received by, the carrier for
transportation until delivered to, or until the lapse of a
reasonable time for their acceptance, by the person
entitled to receive them (Arts. 1736-1738, Civil Code;
Ganzon v. Court of Appeals, 161 SCRA 646; Kui Bai v.
Dollar Steamship Lines, 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 that diligence, and there need not be an express
finding of negligence to hold it liable (Art. 1735, Civil
Code; Philippine National Railways v. Court of Appeals,
139 SCRA 87; Metro Port Service v. Court of Appeals, 131
SCRA 365). There are, of course, exceptional cases when
such presumption of fault is not observed but these cases,
enumerated in Article 1734 1 of the Civil Code, are
exclusive, not one of which can be applied to this case.
and
The question of charging both the carrier and the arrastre
Costs. operator with the obligation of properly delivering the
goods to the consignee has, too, been passed upon by the
Court. In Fireman’s Fund Insurance v. Metro Port Services
(182 SCRA 455), we have explained in holding the carrier
and the arrastre operator liable in solidum, thus:
"The legal relationship between the consignee and the
US. arrastre operator is akin to that of a depositor and
warehouseman (Lua Kian v. Manila Railroad Co., 19 SCRA
merit. 5 [1967]. The relationship between the consignee and the
common carrier is similar to that of the consignee and the
arrastre operator (Northern Motors, Inc. v. Prince Line, Et
Al., 107 Phil. 253 [1960]). Since it is the duty of the
ARRASTRE to take good care of the goods that are in its
 24 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
custody and to deliver them in good condition to the
consignee, such responsibility also devolves upon the
CARRIER. Both the ARRASTRE and the CARRIER are
therefore charged with the obligation to deliver the goods
in goods condition to the consignee."
We do not, of course, imply by the above pronouncement
that the arrastre operator and the customs broker are
themselves always and necessarily liable solidarily with
the carrier, or vice-versa, nor that attendant facts in a
given 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 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 court, we take note, is that "there
is sufficient evidence that the shipment sustained damage
while in the successive possession of appellants" (the
herein petitioner among them). Accordingly, the liability
imposed on Eastern Shipping Lines, Inc., the sole
petitioner in this case, is inevitable regardless of whether
there are others solidarily liable with it.chanrobles
lawlibrary : rednad
It is over the issue of legal interest adjudged by the
appellate court that deserves more than just a passing
remark.
Let us first see a chronological recitation of the major
rulings of this Court:
The early case of Malayan Insurance Co., Inc., v. Manila
Port Service, 2 decided 3 on 15 may 1969, involved a suit
for recovery of money arising out of short deliveries and
pilferage of goods. In this case, appellee Malayan
Insurance (the plaintiff in the lower court) averred in its
complaint that the total amount of its claim for the value
of the undelivered goods amounted to P3,947.20. This
demand, however, was neither established in its 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 trial court rendered
judgment ordering the appellants (defendants) Manila
Port Service and Manila Railroad Company to pay appellee
Malayan Insurance the sum of P1,447.51 with legal
interest thereon from the date the complaint was filed on
28 December 1962 until full payment thereof. The
appellants then assailed, inter alia, the award of legal
interest. In sustaining the appellants, this Court ruled:
"Interest upon an obligation which calls for the payment
of money, absent a stipulation, is the legal rate. Such
interest normally is allowable from the date of demand,
judicial or extrajudicial. The trial court opted for judicial
demand as the starting point.
"But then upon the provisions of Article 2213 of the Civil
Code, interest ‘cannot be recovered upon unliquidated
claims or damages, except when the demand can be
established with reasonable certainty.’ And as was held
by this Court in Rivera v. Perez 4 , L-6998, February 29,
1956, if the suit were for damages, ‘unliquidated and not
known until definitely ascertained, assessed and
determined by the courts after proof (Montilla c.
Corporacion de P. P. Agustinos, 25 Phil. 447; Lichauco v.
Guzman, 38 Phil. 302),’ then, interest ‘should be from the
date of the decision.’" (Emphasis supplied).
The case of Reformina v. Tomol, 5 rendered on 11 October
1985, was for "Recovery of Damages for Injury to Person
and Loss of Property." After trial, the lower court decreed:
"WHEREFORE, judgment is hereby rendered in favor of
the plaintiffs and third party defendants and against the
defendants and third party plaintiffs as follows:
"Ordering defendants and third party plaintiffs Shell and
Michael, Incorporated to pay jointly and severally the
following persons:
"(a) . . .
"x x x
"(g) Plaintiffs Pacita F. Reformina and Francisco
Reformina the sum of 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 of the insurance recovered and the amount of
P10,000.00 a month as the estimated monthly loss
suffered by them as a result of the fire of May 6, 1969 up
to the time they are actually paid or already the total sum
of P370,000.00 as of June 4, 1972 with legal interest from
the filing of the complaint until paid and to pay attorney’s
fees of P5,000.00 with costs against defendants and third
party plaintiffs." (Emphasis supplied.)
On appeal of the Court of Appeals, the latter modified the
amount of damages awarded but sustained the trial court
in adjudging legal interest from the filing of the complaint
until fully paid. When the appellate court’s decision
became final, the case was remanded to the lower court
for execution, and this was when the trial court issued its
assailed resolution which applied the 6% interest per
annum prescribed in Article 2209 of the Civil Code. In
their petition for review on certiorari, the petitioners
contended that Central Bank Circular No. 416, providing
thus —
"By virtue of the authority granted to it under Section 1
of Act 2655, as amended, Monetary Board in its
Resolution No. 1622 dated July 29, 1974, has prescribed
that the rate of interest for the loan, or forbearance of any
money, goods, or credits and the rate allowed in
judgments, in the absence of express contract as to such
rate of interest, shall be twelve (12%) percent per annum.
This Circular shall take effect immediately." (Emphasis
found in the text) —
should have, instead, been applied. This Court 6 ruled:
"The judgments spoken of and referred to are judgments
in litigations involving loans or forbearance of any money,
goods or credits. any other 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 coverage of the said law for it is not within the
ambit of the authority granted to the Central Bank.
"x x x
"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 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 to the said case is Article
2209 of the New Civil Code which reads —
 25 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
‘ARTICLE 2209. If the obligation consists in the payment
of a sum of money, and the debtor incurs in delay, the
indemnity for damages, there being no stipulation to the
contrary, shall be the payment of interest agreed upon,
and in the absence of stipulation, the legal interest which
is six percent per annum.’"
The above rule was reiterated in Philippine Rabbit Bus
Lines, Inc., v. Cruz, 7 promulgated on 28 July 1986. The
case was for damages occasioned by an injury to person
and loss of property. The trial court awarded private
respondent Pedro Manabat actual and compensatory
damages in the amount of P72,500.00 with legal interest
thereon from the filing of the complaint until fully paid.
Relying on the Reformina v. Tomol case, this Court 8
modified the interest award from 12% to 6% interest per
annum but sustained the time computation thereof, i.e.,
from the filing of the complaint until fully paid.
In Nakpil and Sons v. Court of Appeals, 9 the trial court,
in an action for the recovery of damages arising from the
collapse of a building, ordered inter alia, the "defendant
United Construction Co., Inc. (one of the petitioners) . . .
to pay the plaintiff, . . ., the sum of P989,335.68 with
interest at the legal rate from November 29, 1968, the
date of the filing of the complaint until full payment . . .
." Save from the modification of the amount granted by
the lower court, the Court of Appeals sustained the trial
court’s decision. When taken to this Court for review, the
case, on 03 October 1986, was decided, thus:
"WHEREFORE, the decision appealed from is hereby
MODIFIED and considering the special and environmental
circumstances of this case, we deem it reasonable to
render a decision imposing, as We do hereby impose,
upon the defendant and the third-party defendants (with
the exception of Roman Ozaeta) a solidary (Art. 1723,
Civil Code, Supra. p. 10) indemnity in favor of the
Philippine Bar Association of FIVE MILLION
(P5,000,000.00) Pesos to cover all damages (with the
exception of attorney’s fees) occasioned by the loss of the
building and an additional ONE HUNDRED THOUSAND
(P100,000.00) Pesos as and for attorney’s fees, the total
sum being payable upon the finality of this decision. Upon
failure to pay on such finality, twelve (12%) per cent
interest per annum shall be imposed upon
aforementioned amounts from finality until paid. Solidary
costs against the defendant and third-party defendants
(except Roman Ozaeta)." (Emphasis supplied).
A motion for reconsideration was filed by United
Construction, contending that "the interest of twelve
(12%) per cent per annum imposed on the total amount
of the monetary award was in contravention of law." The
Court 10 ruled out the applicability of the Reformina and
Philippine Rabbit Bus Lines cases and, in its resolution of
15 April 1988, it explained:
"There should be no dispute that the imposition of 12%
interest pursuant to Central Bank Circular No. 416 . . . is
applicable only in the following: (1) loans; (2) forbearance
of any money, goods or credit; and (3) rate allowed in
judgments (judgments spoken of refer to judgments
involving loans or forbearance of any money, goods or
credits. (Philippine Rabbit Bus Lines Inc. v. Cruz, 143
SCRA 160-161 [1986]; Reformina v. 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 provided the sums referred to in the
judgment are paid upon the finality of the judgment. It is
delay in the payment of such final judgment, that will
cause the imposition of the interest.
"It will be noted that in the cases already adverted to, the
rate of interest is 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 to
the instant case." (Emphasis supplied)
The subsequent case of American Express International,
Inc., v. International Appellate Court 11 was a petition for
review on certiorari from the decision, dated 27 February
1985, of the then Intermediate Appellate Court reducing
the amount of moral and exemplary damages awarded by
the trial court, to P240,000.00 and P100,000.00,
respectively, and its resolution, dated 29 April 1985,
restoring the amount of damages awarded by the trial
court, i.e., P2,000,000,00 as moral damages and
P400,000.00 as exemplary damages with interest thereon
at 12% per annum from notice of judgment, plus costs of
suit. In a decision of 09 November 1988, this Court, while
recognizing the right of the private respondent to recover
damages, held the award, however, for moral damages
by the trial court, later sustained by the IAC, to be
inconceivably large. The Court 12 thus set aside the
decision of the appellate court and rendered a new one,
"ordering the petitioner to pay private respondent the
sum of One Hundred Thousand (P100,000.00) Pesos as
moral damages, with six (6%) percent interest thereon
computed from the finality of this decision until paid."
(Emphasis supplied).
Reformina came into fore again in the 21 February 1989
case of Florendo v. Ruiz 13 which arose from a breach of
employment contract. For having been illegally dismissed,
the petitioner was awarded by the trial court moral and
exemplary damages without, however, providing any
legal interest thereon. When the decision was appealed to
the Court of Appeals, the latter held:
"WHEREFORE, except as modified hereinabove the
decision of the CFI of Negros Oriental dated October 31,
1972 is affirmed in all respects, with the modification that
defendants-appellants, except defendant-appellant
Merton Munn, are ordered to pay, jointly and severally,
the amounts stated in the dispositive portion of the
decision, including the sum of P1,400.00 in concept of
compensatory damages, with interest at the legal rate
from the date of the filing of the complaint until fully paid."
(Emphasis supplied)
The petition for review to this Court was denied. The
records were thereupon transmitted to the trial court, and
an entry of judgment was made. The writ of execution
issued by the trial court directed that only compensatory
damages 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 petition
for certiorari assailed the said order. This court said:
". . ., it is to be noted that the Court of Appeals ordered
the payment of 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)
 26 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
The Court reiterated that the 6% interest per annum on
the damages should be computed from the time the
complaint was filed until the amount is fully paid.
Quite recently, the Court had another occasion to rule on
the matter. National Power Corporation v. Angas, 14
decided on 08 May 1992, involved the expropriation of
certain parcels of land. After conducting a hearing on the
complaints for eminent domain, the trial court ordered the
petitioner to pay the private respondents certain sums of
money as just compensation for their lands so
expropriated "with legal interest thereon . . . until fully
paid." Again, in applying the 6% legal interest per annum
under the Civil Code, the Court 15 declared: : red
". . ., (T)he transaction involved is clearly not a loan or
forbearance of money, goods or credits but expropriation
of certain parcels of land for a public purpose, the
payment of which is without stipulation regarding
interest, and the interest adjudged by the trial court is in
the nature of indemnity for damages. The legal interest
required to be paid on the amount of just compensation
for the properties expropriated is manifestly in the form
of indemnity for damages for the delay in the payment
thereof. Therefore, since the kind of interest involved in
the joint judgment of the lower court sought 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."
Concededly, there have been seeming variances in the
above holdings. The cases can perhaps be classified into
two groups according to the similarity of the issues
involved and the corresponding rulings rendered by the
court. The" first group" would consist of the cases of
Reformina v. Tomol (1985), Philippine Rabbit Bus LInes
v. Cruz (1986), Florendo v. Ruiz (1989) and National
Power Corporation v. angas (1992). In the "second group"
would be Malayan Insurance Company v. Manila Port
Service (1969), Nakpil and Sons v. Court of Appeals
(1988), and American Express International v.
Intermediate Appellate Court (1988). : red
In the" first group," the basic issue focus on the
application of either the 6% (under the Civil Code) or 12%
(under the Central Bank Circular) interest per annum. It
is easily discernible in these cases that there has been a
consistent holding that the Central Bank Circular imposing
the 12% interest per annum applies only to loans or
forbearance 16 of money, goods or credits, as well as to
judgments involving such loan or forbearance of money,
goods or credits, and that the 6% interest under the Civil
Code governs when the transaction involves the payment
of indemnities in the concept of damage arising from the
breach of a delay in the performance of obligations in
general. Observe, too, that in these cases, a common
time frame in the computation of the 6% interest per
annum has been applied, i.e., from the time the complaint
is filed until the adjudged amount is fully paid.
The "second group," did not alter the pronounced rule on
the application of the 6% or 12% interest per annum, 17
depending on whether or not the amount involved is a
loan or forbearance, on the one hand, or one of indemnity
for damage, on the other hand. Unlike, however, the "first
group" which remained consistent in holding that the
running of the legal interest should be from the time of
the filing of the complaint until fully paid, the "second
group" varied on the commencement of the running of the
legal interest.
Malayan held that the amount awarded should bear legal
interest from the date of the decision of the court a quo,
explaining that "if the suit were for damages,
‘unliquidated and not known until definitely ascertained,
assessed and determined by the courts after proof,’ then,
interest ‘should be from the date of the decision.’"
American Express International v. IAC, introduced a
different time frame for reckoning the 6% interest by
ordering it to be "computed from the finality of (the)
decision until paid." The Nakpil and Sons case ruled that
12% interest per annum should be imposed from the
finality of the decision until the judgment amount is paid.
The ostensible discord is not difficult to explain. The
factual circumstances may have called for different
applications, guided by the rule that the courts are vested
with discretion, depending on the equities of each case,
on the award of interest. Nonetheless, it may not be
unwise, by way of clarification and reconciliation, to
suggest the following rules of thumb for future guidance.
I. When an obligation, regardless of its source, i.e., law,
contracts, quasi-contracts, delicts or quasi-delicts 18 is
breached, the contravenor can be held liable for damages.
19 The provisions under Title XVIII on "Damages" of the
Civil Code govern in determining the measure of
reoverable damages. 20
II. With regard particularly to an award of interest in the
concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as
follows:
1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have
been stipulated in writing. 21 Furthermore, the interest
due shall itself earn legal interest from the time it is
judicially demanded. 22 In the absence of stipulation, the
rate of interest shall be 12% per annum to be computed
from default, i.e., from judicial or extrajudicial demand
under and subject to the provisions of Article 1169 23 of
the Civil Code.
2. When a obligation, not constituting a loan or
forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the
discretion of the court 24 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 of 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 of 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
 27 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O

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.
G.R. No. 189871, August 13, 2013
DARIO NACAR, Petitioner, v. GALLERY FRAMES
AND/OR FELIPE BORDEY, JR., Respondents.
DECISION
PERALTA, J.:
This is a petition for review on certiorari assailing the
Decision1 dated September 23, 2008 of the Court of
Appeals (CA) in CA-G.R. SP No. 98591, and the
Resolution2 dated October 9, 2009 denying petitioner’s
motion for reconsideration.

The factual antecedents are undisputed.

Petitioner Dario Nacar filed a complaint for constructive

dismissal before the Arbitration Branch of the National
Labor Relations Commission (NLRC) against respondents
Gallery Frames (GF) and/or Felipe Bordey, Jr., docketed
as NLRC NCR Case No. 01-00519-97.

On October 15, 1998, the Labor Arbiter rendered a

Decision3 in favor of petitioner and found that he was
dismissed from employment without a valid or just cause.
Thus, petitioner was awarded backwages and separation
pay in lieu of reinstatement in the amount of
P158,919.92. The dispositive portion of the decision,
reads:
With the foregoing, we find and so rule that respondents
failed to discharge the burden of showing that
complainant was dismissed from employment for a just or
valid cause. All the more, it is clear from the records that
complainant was never afforded due process before he
was terminated. As such, we are perforce constrained to
grant complainant’s prayer for the payments of
separation pay in lieu of reinstatement to his former
position, considering the strained relationship between
the parties, and his apparent reluctance to be reinstated,
computed only up to promulgation of this decision as
follows:

SEPARATION PAY

Date Hired = August 1990

Rate = P198/day
Date of Decision = Aug. 18, 1998
Length of Service = 8 yrs. & 1 month
P198.00 x 26 days x 8 months

BACKWAGES

Date Dismissed = January 24, 1997

Rate per day = P196.00
Date of Decisions = Aug. 18, 1998

a) 1/24/97 to 2/5/98 = 12.36 mos.

P196.00/day x 12.36 mos.

b) 2/6/98 to 8/18/98 = 6.4 months

Prevailing Rate per day
P198.00 x 26 days x 6.4 mos.
TOTAL

x x x x

WHEREFORE, premises considered, judgment is hereby

 28 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
rendered finding respondents guilty of constructive
dismissal and are therefore, ordered:
1. To pay jointly and severally the complainant the
amount of sixty-two thousand nine hundred
eighty-six pesos and 56/100 (P62,986.56) Pesos
representing his separation
pay;chanr0blesvirtualawlibrary
2. To pay jointly and severally the complainant the
amount of nine (sic) five thousand nine hundred
thirty-three and 36/100 (P95,933.36)
representing his backwages; and
3. All other claims are hereby dismissed for lack of
merit.
SO ORDERED.4
Respondents appealed to the NLRC, but it was dismissed
for lack of merit in the Resolution5 dated February 29,
2000. Accordingly, the NLRC sustained the decision of the
Labor Arbiter. Respondents filed a motion for
reconsideration, but it was denied.6
Dissatisfied, respondents filed a Petition for Review
on Certiorari before the CA. On August 24, 2000, the CA
issued a Resolution dismissing the petition. Respondents
filed a Motion for Reconsideration, but it was likewise
denied in a Resolution dated May 8, 2001.7
Respondents then sought relief before the Supreme
Court, docketed as G.R. No. 151332. Finding no reversible
error on the part of the CA, this Court denied the petition
in the Resolution dated April 17, 2002.8
An Entry of Judgment was later issued certifying that the
resolution became final and executory on May 27,
2002.9 The case was, thereafter, referred back to the
Labor Arbiter. A pre-execution conference was
consequently scheduled, but respondents failed to
appear.10
On November 5, 2002, petitioner filed a Motion for Correct
Computation, praying that his backwages be computed
from the date of his dismissal on January 24, 1997 up to
the finality of the Resolution of the Supreme Court on May
27, 2002.11 Upon recomputation, the Computation and
Examination Unit of the NLRC arrived at an updated
amount in the sum of P471,320.31.12
On December 2, 2002, a Writ of Execution13 was issued
by the Labor Arbiter ordering the Sheriff to collect from
respondents the total amount of P471,320.31.
Respondents filed a Motion to Quash Writ of Execution,
arguing, among other things, that since the Labor Arbiter
awarded separation pay of P62,986.56 and limited
backwages of P95,933.36, no more recomputation is
required to be made of the said awards. They claimed that
after the decision becomes final and executory, the same
cannot be altered or amended anymore.14 On January 13,
2003, the Labor Arbiter issued an Order15 denying the
motion. Thus, an Alias Writ of Execution16 was issued on
January 14, 2003.
Respondents again appealed before the NLRC, which on
June 30, 2003 issued a Resolution17 granting the appeal
in favor of the respondents and ordered the
recomputation of the judgment award.
On August 20, 2003, an Entry of Judgment was issued
declaring the Resolution of the NLRC to be final and
executory. Consequently, another pre-execution
conference was held, but respondents failed to appear on
time. Meanwhile, petitioner moved that an Alias Writ of
Execution be issued to enforce the earlier recomputed
judgment award in the sum of P471,320.31.18
The records of the case were again forwarded to the
Computation and Examination Unit for recomputation,
where the judgment award of petitioner was reassessed
to be in the total amount of only P147,560.19.
Petitioner then moved that a writ of execution be issued
ordering respondents to pay him the original amount as
determined by the Labor Arbiter in his Decision dated
October 15, 1998, pending the final computation of his
backwages and separation pay.
On January 14, 2003, the Labor Arbiter issued an Alias
Writ of Execution to satisfy the judgment award that was
due to petitioner in the amount of P147,560.19, which
petitioner eventually received.
Petitioner then filed a Manifestation and Motion praying
for the re-computation of the monetary award to include
the appropriate interests.19
On May 10, 2005, the Labor Arbiter issued an
Order20 granting the motion, but only up to the amount of
P11,459.73. The Labor Arbiter reasoned that it is the
October 15, 1998 Decision that should be enforced
considering that it was the one that became final and
executory. However, the Labor Arbiter reasoned that
since the decision states that the separation pay and
backwages are computed only up to the promulgation of
the said decision, it is the amount of P158,919.92 that
should be executed. Thus, since petitioner already
received P147,560.19, he is only entitled to the balance
of P11,459.73.
Petitioner then appealed before the NLRC,21 which appeal
was denied by the NLRC in its Resolution22dated
September 27, 2006. Petitioner filed a Motion for
Reconsideration, but it was likewise denied in the
Resolution23 dated January 31, 2007.
Aggrieved, petitioner then sought recourse before the CA,
docketed as CA-G.R. SP No. 98591.
On September 23, 2008, the CA rendered a
Decision24 denying the petition. The CA opined that since
petitioner no longer appealed the October 15, 1998
Decision of the Labor Arbiter, which already became final
and executory, a belated correction thereof is no longer
allowed. The CA stated that there is nothing left to be
done except to enforce the said judgment. Consequently,
it can no longer be modified in any respect, except to
correct clerical errors or mistakes.
Petitioner filed a Motion for Reconsideration, but it was
denied in the Resolution25 dated October 9, 2009.
Hence, the petition assigning the lone error:
I
WITH DUE RESPECT, THE HONORABLE COURT OF
APPEALS SERIOUSLY ERRED, COMMITTED GRAVE ABUSE
OF DISCRETION AND DECIDED CONTRARY TO LAW IN
UPHOLDING THE QUESTIONED RESOLUTIONS OF THE
NLRC WHICH, IN TURN, SUSTAINED THE MAY 10, 2005
ORDER OF LABOR ARBITER MAGAT MAKING THE
DISPOSITIVE PORTION OF THE OCTOBER 15, 1998
 29 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
DECISION OF LABOR ARBITER LUSTRIA SUBSERVIENT
TO AN OPINION EXPRESSED IN THE BODY OF THE SAME
DECISION.26
Petitioner argues that notwithstanding the fact that there
was a computation of backwages in the Labor Arbiter’s
decision, the same is not final until reinstatement is made
or until finality of the decision, in case of an award of
separation pay. Petitioner maintains that considering that
the October 15, 1998 decision of the Labor Arbiter did not
become final and executory until the April 17, 2002
Resolution of the Supreme Court in G.R. No. 151332 was
entered in the Book of Entries on May 27, 2002, the
reckoning point for the computation of the backwages and
separation pay should be on May 27, 2002 and not when
the decision of the Labor Arbiter was rendered on October
15, 1998. Further, petitioner posits that he is also entitled
to the payment of interest from the finality of the decision
until full payment by the respondents.
On their part, respondents assert that since only
separation pay and limited backwages were awarded to
petitioner by the October 15, 1998 decision of the Labor
Arbiter, no more recomputation is required to be made of
said awards. Respondents insist that since the decision
clearly stated that the separation pay and backwages are
“computed only up to [the] promulgation of this decision,”
and considering that petitioner no longer appealed the
decision, petitioner is only entitled to the award as
computed by the Labor Arbiter in the total amount of
P158,919.92. Respondents added that it was only during
the execution proceedings that the petitioner questioned
the award, long after the decision had become final and
executory. Respondents contend that to allow the further
recomputation of the backwages to be awarded to
petitioner at this point of the proceedings would
substantially vary the decision of the Labor Arbiter as it
violates the rule on immutability of judgments.
The petition is meritorious.
The instant case is similar to the case of Session Delights
Ice Cream and Fast Foods v. Court of Appeals (Sixth
Division),27 wherein the issue submitted to the Court for
resolution was the propriety of the computation of the
awards made, and whether this violated the principle of
immutability of judgment. Like in the present case, it was
a distinct feature of the judgment of the Labor Arbiter in
the above-cited case that the decision already provided
for the computation of the payable separation pay and
backwages due and did not further order the computation
of the monetary awards up to the time of the finality of
the judgment. Also in Session Delights, the dismissed
employee failed to appeal the decision of the labor arbiter.
The Court clarified, thus:
In concrete terms, the question is whether a re-
computation in the course of execution of the labor
arbiter's original computation of the awards made,
pegged as of the time the decision was rendered and
confirmed with modification by a final CA decision, is
legally proper. The question is posed, given that the
petitioner did not immediately pay the awards stated in
the original labor arbiter's decision; it delayed payment
because it continued with the litigation until final
judgment at the CA level.
A source of misunderstanding in implementing the final
decision in this case proceeds from the way the original
labor arbiter framed his decision. The decision consists
essentially of two parts.
The first is that part of the decision that cannot now be
disputed because it has been confirmed with finality. This
is the finding of the illegality of the dismissal and the
awards of separation pay in lieu of reinstatement,
backwages, attorney's fees, and legal interests.
The second part is the computation of the awards made.
On its face, the computation the labor arbiter made shows
that it was time-bound as can be seen from the figures
used in the computation. This part, being merely a
computation of what the first part of the decision
established and declared, can, by its nature, be re-
computed. This is the part, too, that the petitioner now
posits should no longer be re-computed because the
computation is already in the labor arbiter's decision that
the CA had affirmed. The public and private respondents,
on the other hand, posit that a re-computation is
necessary because the relief in an illegal dismissal
decision goes all the way up to reinstatement if
reinstatement is to be made, or up to the finality of the
decision, if separation pay is to be given in lieu
reinstatement.
That the labor arbiter's decision, at the same time that it
found that an illegal dismissal had taken place, also made
a computation of the award, is understandable in light of
Section 3, Rule VIII of the then NLRC Rules of Procedure
which requires that a computation be made. This Section
in part states:
[T]he Labor Arbiter of origin, in cases involving monetary
awards and at all events, as far as practicable, shall
embody in any such decision or order the detailed and full
amount awarded.
Clearly implied from this original computation is its
currency up to the finality of the labor arbiter's decision.
As we noted above, this implication is apparent from the
terms of the computation itself, and no question would
have arisen had the parties terminated the case and
implemented the decision at that point.
However, the petitioner disagreed with the labor arbiter's
findings on all counts - i.e., on the finding of illegality as
well as on all the consequent awards made. Hence, the
petitioner appealed the case to the NLRC which, in turn,
affirmed the labor arbiter's decision. By law, the NLRC
decision is final, reviewable only by the CA on
jurisdictional grounds.
The petitioner appropriately sought to nullify the NLRC
decision on jurisdictional grounds through a timely filed
Rule 65 petition for certiorari. The CA decision, finding
that NLRC exceeded its authority in affirming the payment
of 13th month pay and indemnity, lapsed to finality and
was subsequently returned to the labor arbiter of origin
for execution.
It was at this point that the present case arose. Focusing
on the core illegal dismissal portion of the original labor
arbiter's decision, the implementing labor arbiter ordered
the award re-computed; he apparently read the figures
originally ordered to be paid to be the computation due
had the case been terminated and implemented at the
labor arbiter's level. Thus, the labor arbiter re-computed
the award to include the separation pay and the
backwages due up to the finality of the CA decision that
fully terminated the case on the merits. Unfortunately, the
 30 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
labor arbiter's approved computation went beyond the
finality of the CA decision (July 29, 2003) and included as
well the payment for awards the final CA decision had
deleted - specifically, the proportionate 13th month pay
and the indemnity awards. Hence, the CA issued the
decision now questioned in the present petition.
We see no error in the CA decision confirming that a re-
computation is necessary as it essentially considered the
labor arbiter's original decision in accordance with its
basic component parts as we discussed above. To
reiterate, the first part contains the finding of illegality
and its monetary consequences; the second part is the
computation of the awards or monetary consequences of
the illegal dismissal, computed as of the time of the labor
arbiter's original decision.28
Consequently, from the above disquisitions, under the
terms of the decision which is sought to be executed by
the petitioner, no essential change is made by a
recomputation as this step is a necessary consequence
that flows from the nature of the illegality of dismissal
declared by the Labor Arbiter in that decision.29 A
recomputation (or an original computation, if no previous
computation has been made) is a part of the law –
specifically, Article 279 of the Labor Code and the
established jurisprudence on this provision – that is read
into the decision. By the nature of an illegal dismissal
case, the reliefs continue to add up until full satisfaction,
as expressed under Article 279 of the Labor Code. The
recomputation of the consequences of illegal dismissal
upon execution of the decision does not constitute an
alteration or amendment of the final decision being
implemented. The illegal dismissal ruling stands; only the
computation of monetary consequences of this dismissal
is affected, and this is not a violation of the principle of
immutability of final judgments.
That the amount respondents shall now pay has greatly
increased is a consequence that it cannot avoid as it is the
risk that it ran when it continued to seek recourses against
the Labor Arbiter's decision. Article 279 provides for the
consequences of illegal dismissal in no uncertain terms,
qualified only by jurisprudence in its interpretation of
when separation pay in lieu of reinstatement is allowed.
When that happens, the finality of the illegal dismissal
decision becomes the reckoning point instead of the
reinstatement that the law decrees. In allowing
separation pay, the final decision effectively declares that
the employment relationship ended so that separation
pay and backwages are to be computed up to that point.
Finally, anent the payment of legal interest. In the
landmark case of Eastern Shipping Lines, Inc. v. Court of
Appeals,32 the Court laid down the guidelines regarding
the manner of computing legal interest, to wit:
II. With regard particularly to an award of interest in the
concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as
follows:
1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have
been stipulated in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of
interest shall be 12% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under
and subject to the provisions of Article 1169 of the Civil
Code.
2. When an obligation, not constituting a loan or
forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at
the discretion of the courtat the rate of 6% per annum.
No interest, however, shall be adjudged on unliquidated
claims or damages except when or until the demand can
be established with reasonable certainty. Accordingly,
where the demand is established with reasonable
certainty, the interest shall begin to run from the time the
claim is made judicially or extrajudicially (Art. 1169, Civil
Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest
shall begin to run only from the date the judgment of the
court is made (at which time the quantification of
damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount finally
adjudged.
3. When the judgment of the court awarding a sum of
money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of
credit.33
Recently, however, the Bangko Sentral ng Pilipinas
Monetary Board (BSP-MB), in its Resolution No. 796 dated
May 16, 2013, approved the amendment of Section 234 of
Circular No. 905, Series of 1982 and, accordingly, issued
Circular No. 799,35 Series of 2013, effective July 1, 2013,
the pertinent portion of which reads:
The Monetary Board, in its Resolution No. 796 dated 16
May 2013, approved the following revisions governing the
rate of interest in the absence of stipulation in loan
contracts, thereby amending Section 2 of Circular No.
905, Series of 1982:
Section 1. The rate of interest for the loan or forbearance
of any money, goods or credits and the rate allowed in
judgments, in the absence of an express contract as to
such rate of interest, shall be six percent (6%) per
annum.
Section 2. In view of the above, Subsection X305.136 of
the Manual of Regulations for Banks and Sections
4305Q.1,37 4305S.338 and 4303P.139 of the Manual of
Regulations for Non-Bank Financial Institutions are
hereby amended accordingly.
This Circular shall take effect on 1 July 2013.
Thus, from the foregoing, in the absence of an express
stipulation as to the rate of interest that would govern the
parties, the rate of legal interest for loans or forbearance
of any money, goods or credits and the rate allowed in
judgments shall no longer be twelve percent (12%) per
annum - as reflected in the case of Eastern Shipping
Lines40 and Subsection X305.1 of the Manual of
Regulations for Banks and Sections 4305Q.1, 4305S.3
and 4303P.1 of the Manual of Regulations for Non-Bank
Financial Institutions, before its amendment by BSP-MB
Circular No. 799 - but will now be six percent (6%) per
annum effective July 1, 2013. It should be noted,
 31 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O

nonetheless, that the new rate could only be applied
prospectively and not retroactively. Consequently, the
twelve percent (12%) per annum legal interest shall
apply only until June 30, 2013. Come July 1, 2013 the
new rate of six percent (6%) per annum shall be the
prevailing rate of interest when applicable.
Corollarily, in the recent case of Advocates for Truth in
Lending, Inc. and Eduardo B. Olaguer v. Bangko Sentral
Monetary Board,41 this Court affirmed the authority of the
BSP-MB to set interest rates and to issue and enforce
Circulars when it ruled that “the BSP-MB may prescribe
the maximum rate or rates of interest for all loans or
renewals thereof or the forbearance of any money, goods
or credits, including those for loans of low priority such as
consumer loans, as well as such loans made by
pawnshops, finance companies and similar credit
institutions. It even authorizes the BSP-MB to prescribe
different maximum rate or rates for different types of
borrowings, including deposits and deposit substitutes, or
loans of financial intermediaries.”
Nonetheless, with regard to those judgments that have
become final and executory prior to July 1, 2013, said
judgments shall not be disturbed and shall continue to be
implemented applying the rate of interest fixed therein.
To recapitulate and for future guidance, the
guidelines laid down in the case of Eastern Shipping
Lines42 are accordingly modified to embody BSP-MB
Circular No. 799, as follows:
I. When an obligation, regardless of its source, i.e., law,
contracts, quasi-contracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for damages.
The provisions under Title XVIII on “Damages” of the Civil
Code govern in determining the measure of recoverable
damages.
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 6%
per annum from such finality until its satisfaction,
this interim period being deemed to be by then an
equivalent to a forbearance of credit.
And, in addition to the above, judgments that have
become final and executory prior to July 1, 2013, shall not
be disturbed and shall continue to be implemented
applying the rate of interest fixed therein.
WHEREFORE, premises considered, the Decision dated
September 23, 2008 of the Court of Appeals in CA-G.R.
SP No. 98591, and the Resolution dated October 9, 2009
are REVERSED and SET ASIDE. Respondents
are Ordered to Pay petitioner:
(1) backwages computed from the time petitioner was
illegally dismissed on January 24, 1997 up to May 27,
2002, when the Resolution of this Court in G.R. No.
151332 became final and
executory;chanr0blesvirtualawlibrary
(2) separation pay computed from August 1990 up to May
27, 2002 at the rate of one month pay per year of service;
and
(3) interest of twelve percent (12%) per annum of the
total monetary awards, computed from May 27, 2002 to
June 30, 2013 and six percent (6%) per annum from July
1, 2013 until their full satisfaction.

II. With regard particularly to an award of interest in the The Labor Arbiter is hereby ORDERED to make another
concept of actual and compensatory damages, the rate of recomputation of the total monetary benefits awarded
interest, as well as the accrual thereof, is imposed, as and due to petitioner in accordance with this Decision.
follows:
1. When the obligation is breached, and it consists SO ORDERED.
in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be
that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn
legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate
of interest shall be 6% per annum to be computed
from default, i.e., from judicial or extrajudicial
demand under and subject to the provisions of
Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or
forbearance of money, is breached, an interest on
the amount of damages awarded may be imposed
at the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged
on unliquidated claims or damages, except when
or until the demand can be established with
reasonable certainty. Accordingly, where the
demand is established with reasonable certainty,
the interest shall begin to run from the time the
claim is made judicially or extrajudicially (Art.
1169, Civil Code), but when such certainty cannot
be so reasonably established at the time the
demand is made, the interest shall begin to run
only from the date the judgment of the court is
 32 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O

Before us is a Petition for Review under Rule 45 of the

Rules of Court, seeking a reversal of the Court of Appeals'
decision in CA-G.R. CV No. 751831 dated October 16,
2003, which reversed and set aside the decision of the
Regional Trial Court of Manila, Branch 21 in Civil Case No.
00-96235.

On July 22, 1997, respondent Gloria D. Padillo obtained a

P500,000.00 loan from petitioner First Fil-Sin Lending
Corp. On September 7, 1997, respondent obtained
another P500,000.00 loan from petitioner. In both
instances, respondent executed a promissory note and
disclosure statement.2

For the first loan, respondent made 13 monthly interest

payments of P22,500.00 each before she settled the
P500,000.00 outstanding principal obligation on February
2, 1999. As regards the second loan, respondent made 11
monthly interest payments of P25,000.00 each before
paying the principal loan of P500,000.00 on February 2,
1999.3 In sum, respondent paid a total of P792,500.00 for
the first loan and P775,000.00 for the second loan.

On January 27, 2000, respondent filed an action for sum

of money against herein petitioner before the Regional
Trial Court of Manila. Alleging that she only agreed to pay
interest at the rates of 4.5% and 5% per annum,
respectively, for the two loans, and not 4.5% and 5% per
month, respondent sought to recover the amounts she
allegedly paid in excess of her actual obligations.

On October 12, 2001,4 the trial court dismissed

respondent's complaint, and on the counterclaim, ordered
her to pay petitioner P311,125.00 with legal interest from
February 3, 1999 until fully paid plus 10% of the amount
due as attorney's fees and costs of the suit.5 The trial
court ruled that by issuing checks representing interest
payments at 4.5% and 5% monthly interest rates,
respondent is now estopped from questioning the
provisions of the promissory notes.

On appeal, the Court of Appeals (CA) reversed and set

aside the decision of the court a quo, the dispositive
portion of which reads:

IN VIEW OF ALL THE FOREGOING, the appealed decision

is REVERSED and SET ASIDE and a new one entered: (1)
ordering First Fil-Sin Lending Corporation to return the
amount of P114,000.00 to Gloria D. Padillo, and (2)
deleting the award of attorney's fees in favor of appellee.
Other claims and counterclaims are dismissed for lack of
sufficient causes. No pronouncement as to cost.

SO ORDERED.6
The appellate court ruled that, based on the disclosure
statements executed by respondent, the interest rates
should be imposed on a monthly basis but only for the 3-
month term of the loan.

[G.R. NO. 160533 : January 12, 2005]
FIRST FIL-SIN LENDING
CORPORATION, Petitioner, v. GLORIA D.
PADILLO, Respondent.
Thereafter, the legal interest rate will apply. The CA also
found the penalty charges pegged at 1% per day of delay
highly unconscionable as it would translate to 365% per
annum. Thus, it was reduced to 1% per month or 12%
per annum.

Hence, the instant petition on the following assignment of

errors:
DECISION
I
YNARES-SANTIAGO, J.:
 33 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
THE COURT OF APPEALS ERRED IN FINDING THAT THE
APPLICABLE INTEREST SHOULD BE THE LEGAL INTEREST
OF TWELVE PER CENT (12%) PER ANNUM DESPITE THE
CLEAR AGREEMENT OF THE PARTIES ON ANOTHER
APPLICABLE RATE.
II
THE COURT OF APPEALS ERRED IN IMPOSING A PENALTY
COMPUTED AT THE RATE OF TWELVE PER CENT (12%)
PER ANNUM DESPITE THE CLEAR AGREEMENT OF THE
PARTIES ON ANOTHER APPLICABLE RATE.
III
THE COURT OF APPEALS ERRED IN DELETING THE
ATTORNEY'S FEES AWARDED BY THE REGIONAL TRIAL
COURT.7
Petitioner maintains that the trial court and the CA are
correct in ruling that the interest rates are to be imposed
on a monthly and not on a per annum basis. However, it
insists that the 4.5% and 5% monthly interest shall be
imposed until the outstanding obligations have been fully
paid.
As to the penalty charges, petitioner argues that the 12%
per annum penalty imposed by the CA in lieu of the 1%
per day as agreed upon by the parties violates their
freedom to stipulate terms and conditions as they may
deem proper.
Petitioner finally contends that the CA erred in deleting
the trial court's award of attorney's fees arguing that the
same is anchored on sound and legal ground.
Respondent, on the other hand, avers that the interest on
the loans is per annum as expressly stated in the
promissory notes and disclosure statements. The
provision as to annual interest rate is clear and requires
no room for interpretation. Respondent asserts that any
ambiguity in the promissory notes and disclosure
statements should not favor petitioner since the loan
documents were prepared by the latter.
We agree with respondent.
Perusal of the promissory notes and the disclosure
statements pertinent to the July 22, 1997 and September
7, 1997 loan obligations of respondent clearly and
unambiguously provide for interest rates of 4.5% per
annum and 5% per annum, respectively. Nowhere was it
stated that the interest rates shall be applied on a monthly
basis.
Thus, when the terms of the agreement are clear and
explicit that they do not justify an attempt to read into it
any alleged intention of the parties, the terms are to be
understood literally just as they appear on the face of the
contract.8 It is only in instances when the language of a
contract is ambiguous or obscure that courts ought to
apply certain established rules of construction in order to
ascertain the supposed intent of the parties.
However, these rules will not be used to make a new
contract for the parties or to rewrite the old one, even if
the contract is inequitable or harsh. They are applied by
the court merely to resolve doubts and ambiguities within
the framework of the agreement.9
The lower court and the CA mistook the Loan Transactions
Summary for the Disclosure Statement. The former was
prepared exclusively by petitioner and merely
summarizes the payments made by respondent and the
income earned by petitioner. There was no mention of any
interest rates and having been prepared exclusively by
petitioner, the same is self serving. On the contrary, the
Disclosure Statements were signed by both parties and
categorically stated that interest rates were to be imposed
annually, not monthly.
As such, since the terms and conditions contained in the
promissory notes and disclosure statements are clear and
unambiguous, the same must be given full force and
effect. The expressed intention of the parties as laid down
on the loan documents controls.
Also, reformation cannot be resorted to as the documents
have not been assailed on the ground of mutual mistake.
When a party sues on a written contract and no attempt
is made to show any vice therein, he cannot be allowed
to lay claim for more than what its clear stipulations
accord. His omission cannot be arbitrarily supplied by the
courts by what their own notions of justice or equity may
dictate.10
Notably, petitioner even admitted that it was solely
responsible for the preparation of the loan documents,
and that it failed to correct the pro forma note "p.a." to
"per month".11 Since the mistake is exclusively attributed
to petitioner, the same should be charged against it. This
unilateral mistake cannot be taken against respondent
who merely affixed her signature on the pro forma loan
agreements. As between two parties to a written
agreement, the party who gave rise to the mistake or
error in the provisions of the same is estopped from
asserting a contrary intention to that contained therein.
The checks issued by respondent do not clearly and
convincingly prove that the real intent of the parties is to
apply the interest rates on a monthly basis. Absent any
proof of vice of consent, the promissory notes and
disclosure statements remain the best evidence to
ascertain the real intent of the parties.
The same promissory note provides that "x x x any and
all remaining amount due on the principal upon maturity
hereof shall earn interest at the rate of _____ from date
of maturity until fully paid." The CA thus properly imposed
the legal interest of 12% per annum from the time the
loans matured until the same has been fully paid on
February 2, 1999. As decreed in Eastern Shipping Lines,
Inc. v. Court of Appeals,12"in the absence of stipulation,
the rate of interest shall be 12% per annum to be
computed from default."
As regards the penalty charges, we agree with the CA in
ruling that the 1% penalty per day of delay is highly
unconscionable. Applying Article 1229 of the Civil Code,
courts shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied
with, or if it is iniquitous or unconscionable.
With regard to the attorney's fees, the CA correctly
deleted the award in favor of petitioner since the trial
court's decision does not reveal any explicit basis for such
an award. Attorney's fees are not automatically awarded
to every winning litigant.
It must be shown that any of the instances enumerated
under Art. 220813 of the Civil Code exists to justify the
 34 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
award thereof.14 Not one of such instances exists here.
Besides, by filing the complaint, respondent was merely
asserting her rights which, after due deliberations, proved
to be lawful, proper and valid.
WHEREFORE, in view of the foregoing, the October 16,
2003 decision of the Court of Appeals in CA-G.R. CV No.
75183 is AFFIRMED with the MODIFICATION that the
interest rates on the July 22, 1997 and September 7,
1997 loan obligations of respondent Gloria D. Padillo from
petitioner First Fil-Sin Lending Corporation be imposed
and computed on a per annum basis, and upon their
respective maturities, the interest rate of 12% per annum
shall be imposed until full payment. In addition, the
penalty at the rate of 12% per annum shall be imposed
on the outstanding obligations from date of default until
full payment.
SO ORDERED.
[G.R. No. 60705. June 28, 1989.]
INTEGRATED REALTY CORPORATION and RAUL L.
SANTOS, Petitioners, v. PHILIPPINE NATIONAL
BANK, OVERSEAS BANK OF MANILA and THE HON.
COURT OF APPEALS, Respondents.
SYLLABUS
1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; NON-
PERFORMANCE OF OBLIGATIONS; LEGAL INTEREST
RECOVERABLE FROM DEMAND. — Legal interest, in the
nature of damages for non-compliance with an obligation
to pay a sum of money, is recoverable from the date
judicial or extrajudicial demand is made.
2. ID.; ID.; PARTY NOT PRIVY TO A CONTRACT, NOT
LIABLE. — We reject the proposition of IRC and Santos
that OBM should reimburse them the entire amount they
may be adjudged to pay PNB. It must be noted that their
liability to pay the various interests is an offshoot of their
failure to pay under the terms of the two promissory notes
executed in favor of PNB. OBM was never a party to said
promissory notes. There is, therefore, no privity of
contract between OBM and PNB which will justify the
imposition of the aforesaid interests upon OBM whose
liability should be strictly confined to and within the
provisions of the certificates of time deposit involved in
this case.
3. ID.; DAMAGES; PARTY IN BAD FAITH LIABLE THERETO.
— IRC and Santos are not without fault. They likewise
acted in bad faith when they refused to comply with their
obligations under the promissory notes, thus incurring
liability for all damages reasonably attributable to the
non-payment of said obligations.
DECISION
REGALADO, J.:
In these petitions for review on certiorari, Integrated
Realty Corporation and Raul Santos (G.R. No. 60705),
and Overseas Bank of Manila (G.R. No. 60907) appeal
from the decision of the Court of Appeals, 1 the decretal
portion of which states:
"WHEREFORE, with the modification that appellee
Overseas Bank of Manila is ordered to pay to the appellant
Raul Santos the sum of P700,000.00 due under the time
deposit certificates Nos. 2308 and 2367 with 6 1/2 (sic)
interest per annum from date of issue until fully paid, the
appealed decision is affirmed in all other respects."
In G.R. No. 60705, petitioners Integrated Realty
Corporation (hereafter, IRC) and Raul L. Santos
(hereafter, Santos) seek the dismissal of the complaint
filed by the Philippine National Bank (hereafter, PNB), or
in the event that they be held liable thereunder, to revive
and affirm that portion of the decision of the trial court
ordering Overseas Bank of Manila (hereafter, OBM) to pay
IRC and Santos whatever amounts the latter will pay to
PNB, with interest from the date of payment. 2
On the other hand, in G.R. No. 60907, petitioner OBM
challenges the decision of respondent court insofar as it
holds OBM liable for interest on the time deposit with it of
Santos corresponding to the period of its closure by order
of the Central Bank. 3
In its assailed decision, the respondent Court of Appeals,
quoting from the decision of the lower court, 4 narrated
the antecedents this case in this wise:
"The facts of this case are not seriously disputed by any
of the parties. They are set forth in the decision of the
trial court as follows:
Under date 11 January 1967 defendant Raul L. Santos
made a time deposit with defendant OBM in the amount
 35 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
of P500,000.00. (Exhibit-10 OBM) and was issued a
Certificate of Time Deposit No. 2308 (Exhibit 1-Santos,
Exhibit D). Under date 6 February 1967 defendant Raul L.
Santos also made a time deposit with defendant OBM in
the amount of P200,000.00 (Exhibit 11-OBM) and was
issued certificate of Time Deposit No. 2367 (
Under date 9 February 1967 defendant IRC, thru its
President — defendant Raul L. Santos, applied for a loan
and/or credit line (Exhibit A) in the amount of
P700,000.00 with plaintiff bank. To secure the said loan,
defendant Raul L. Santos executed on August 11, 1967 a
Deed of Assignment (Exhibit C) of the two time deposits
(Exhibits 1-Santos and 2-Santos, also Exhibits D and E)
in favor of plaintiff. Defendant OBM gave its conformity to
the assignment thru letter dated 11 August 1967 (Exhibit
F). On the same date, defendant IRC, thru its President
Raul L. Santos, also executed a Deed of Conformity to
Loan Conditions (Exhibit G).
The defendant OBM, after the due dates of the time
deposit certificates, did not pay plaintiff PNB. Plaintiff
demanded payment from defendants IRC and Raul L.
Santos (Exhibit K) and from defendant OBM (Exhibit L).
Defendants IRC and Raul L. Santos replied that the
obligation (loan) of defendant IRC was deemed paid with
the irrevocable assignment of the time deposit certificates
(Exhibits 5-Santos, 6-Santos and 7-Santos).
"On April 6, 1969 (sic), * PNB filed a complaint to collect
from IRC and Santos the loan of P700,000.00 with
interest as well as attorney’s fees. It impleaded OBM as a
defendant to compel it to redeem and pay to it Santos’
time deposit certificates with interest, plus exemplary and
corrective damages, attorney’s fees, and costs.
"In their answer to the complaint, IRC and Santos alleged
that PNB has no cause of action against them because
their obligation to PNB was fully paid or extinguished upon
the ‘irrevocable’ assignment of the time deposit
certificates, and that they are not answerable for the
insolvency of OBM. They filed a counterclaim for damages
against PNB and a cross-claim against OBM, alleging that
OBM acted fraudulently in refusing to pay the time deposit
certificates to PNB resulting in the filing of the suit against
them by PNB, and that, therefore, OBM should pay them
whatever amount they may be ordered by the court to
pay PNB with interest. They also asked that OBM be
ordered to pay them compensatory, moral, exemplary
and corrective damages.
"In its answer to the complaint, OBM denied knowledge of
the time deposit certificates because the alleged time
deposit of Santos ‘does not appear’ in its books of
account.
"Whereupon, IRC and Santos, with leave of court, filed a
third-party complaint against Emerito B. Ramos, Jr.,
president of OBM, and Rodolfo R. Sunico, treasurer of said
bank, who allegedly received the time deposits of Santos
and issued the certificates therefor.
"Answering the third-party complaint, Ramos and Sunico
alleged that IRC and Santos have no cause of action
against them because they received and signed the time
deposit certificates as officers of OBM, that the time
deposits are recorded in the subsidiary ledgers of the
bank and are ‘civil liabilities of the defendant OBM.’
"On November 18, 1970, OBM filed an amended or
supplemental answer to the complaint, acknowledging the
certificates of time deposit that it issued to Santos, and
admitting its failure to pay the same due to its distressed
financial situation. As affirmative defenses, it alleged that
by reason of its state of insolvency its operations have
been suspended by the Central Bank since August 1,
1968; that the time deposits ceased to earn interest from
that date; that it may not give preference to any depositor
or creditor; and that payment of the plaintiff’s claim is
prohibited.
"On January 30, 1976, the lower court rendered judgment
for the plaintiff, the dispositive portion of which reads as
follows:
‘WHEREFORE, judgment is hereby rendered, ordering:
1. The defendant Integrated Realty Corporation and Raul
L. Santos to pay the plaintiff, jointly and solidarily, the
total amount of P700,000.00 plus interest at the rate of
9% per annum from maturity dates of the two promissory
notes on January 11 and February 6, 1968, respectively
(Exhibits M and I), plus 1-1/ 2% additional interest
effective February 28, 1968 and additional penalty
interest of 1% per annum of the said amount of
P700,000.00 from the time of maturity of said loan up to
the time the said amount of P700,000.00 is actually paid
to the plaintiff;
2. The defendants to pay 10% of the amount of
P700,000.00 as and for attorney’s fees;
3. The defendant Overseas Bank of Manila to pay cross
plaintiffs Integrated Realty Corporation and Raul L.
Santos whatever amounts the latter will pay to the
plaintiff with interest from date of payment;
4. The defendant Overseas Bank of Manila to pay cross
plaintiffs Integrated Realty Corporation and Raul L.
Santos the amount of P10,000.00 as and for attorney’s
fees;
5. The third-party complaint and cross-claim dismissed;
6. The defendant Overseas Bank of Manila to pay the
costs.
SO ORDERED.’" 5
IRC, Santos and OBM all appealed to the respondent
Court of Appeals. As stated in limine, on March 16, 1982
respondent court promulgated its appealed decision, with
a modification and the deletion of that portion of the
judgment of the trial court ordering OBM to pay IRC and
Santos whatever amounts they will pay to PNB with
interest from the date of payment.
Therein defendants-appellants, through separate
petitions, have brought the said decision to this Court for
review.
1. The first issue posed before Us for resolution is whether
the liability of IRC ,and Santos with PNB should be
deemed to have been paid by virtue of the deed of
assignment made by the former in favor of PNB, which
reads:
"KNOW ALL MEN BY THESE PRESENTS;
 36 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
I, RAUL L. SANTOS, of legal age, Filipino, with residence
and postal address at 661 Richmond St., Mandaluyong,
Rizal for and in consideration of certain loans, overdrafts
and other credit accommodations granted or those that
may hereafter be granted to me/us by the PHILIPPINE
NATIONAL BANK, have assigned, transferred and
conveyed and by these presents, do hereby assign,
transfer and convey by way of security unto said
PHILIPPINE NATIONAL BANK its successors and assigns
the following Certificates of Time Deposit issued by the
OVERSEAS BANK OF MANILA, its CONFORMITY issued on
August 11, 1967, hereto enclosed as Annex ‘A’, in favor
of RAUL L. SANTOS and/or NORA S. SANTOS, in the
aggregate sum of SEVEN HUNDRED THOUSAND PESOS
ONLY (P700,000.00), Philippine Currency, . . .
x x x obtaining at the time of the execution thereof.
"It is also understood that the herein Assignor/s shall
remain liable for any outstanding balance of his/their
obligation if the Bank is unable to actually receive or
collect the above assigned sums, monies or properties
resulting from any agreements, orders or decisions of the
court or for any other cause whatsoever." 6
x x x In return for the undertaking of Philamgen under the
Respondent Court of Appeals did not consider the
aforesaid assignment as payment, thus:
"The contention of IRC and Santos that the irrevocable
assignment of the time deposit certificates to PNB
constituted ‘payment’ of their obligation to the latter is
not well taken.
‘Where a certificate of deposit in a bank, payable at a
future day, was handed over by a debtor to his creditor,
it was not payment, unless there was an express
agreement on the part of the creditor to receive it as such,
and the question whether there was or was not such an
agreement, was one of facts to be decided by the jury.’
(Downey v. Hicks, 55 U.S. [14 How.] 240 L. Ed. 404; See
also Michie, Vol. 5B Banks and Banking, p. 200)." 7
We uphold respondent court on this score.
In Lopez v. Court of Appeals, Et Al., 8 petitioner Benito
Lopez obtained a loan for P20,000.00 from the Prudential
Bank and Trust Company. On the same day, he executed
a promissory note in favor of the bank and, in addition,
he executed a surety bond in which he, as principal, and
Philippine American General Insurance Co., Inc.
(Philamgen), as surety, bound themselves jointly and
severally in favor of the bank for the payment of the loan.
On the same occasion, Lopez also executed in favor of
Philamgen an indemnity agreement whereby he agreed to
indemnify the company against any damages which the
latter may sustain in consequence of having become a
surety upon the bond. At the same time, Lopez executed
a deed of assignment of his shares of stock in the Baguio
Military Institute, Inc. in favor of Philamgen. When Lopez’
obligation matured without being settled, Philamgen
caused the transfer of the shares of stocks to its name in
order that it may sell the same and apply the proceeds
thereof in payment of the loan to the bank. However,
when no payment was still made by the principal debtor
or surety, the bank filed a complaint which compelled
Philamgen to pay the bank. Thereafter, Philamgen filed an
action to recover the amount of the loan against Lopez.
The trial court therein held that the obligation of Lopez
was deemed paid when his shares of stocks were
transferred in the name of Philamgen. On appeal, the
Court of Appeals ruled that Lopez was still liable to
Philamgen because, pending payment, Philamgen was
merely holding the stock as security for the payment of
Lopez’ obligation.
In upholding the finding therein of the Court of Appeals,
We held that:
"Notwithstanding the express terms of the ‘Stock
Assignment Separate from Certificate’, however, We hold
and rule that the transaction should not be regarded as
an absolute conveyance in view of the circumstances
"It should be remembered that on June 2, 1959, the day
Lopez obtained a loan of P20,000.00 from Prudential
Bank, Lopez executed a promissory note for P20,000.00,
plus interest at the rate of ten (10%) per cent per annum,
in favor of said Bank. He likewise posted a surety bond to
secure his full and faithful performance of his obligation
under the promissory note with Philamgen as his surety.
surety bond, Lopez executed on the same day not only an
indemnity agreement but also a stock assignment.
"The indemnity agreement and stock assignment must be
considered together as related transactions because in
order to judge the intention of the contracting parties,
their contemporaneous and subsequent acts shall be
principally considered. (Article 1371, New Civil Code).
Thus, considering that the indemnity agreement connotes
a continuing obligation of Lopez towards Philamgen while
the stock assignment indicates a complete discharge of
the same obligation, the existence of the indemnity
agreement whereby Lopez had to pay a premium of
P1,000.00 for a period of one year and agreed at all times
to indemnify Philamgen of any and all kinds of losses
which the latter might sustain by reason of it becoming a
surety, is inconsistent with the theory of an absolute sale
for and in consideration of the same undertaking of
Philamgen. There would have been no necessity for the
execution of the indemnity agreement if the stock
assignment was really intended as an absolute
conveyance . . ."
Along the same vein, in the case at bar it would not have
been necessary on the part of IRC and Santos to execute
promissory notes in favor of PNB if the assignment of the
time deposits of Santos was really intended as an absolute
conveyance.
There are cogent reasons to conclude that the parties
intended said deed of assignment to complement the
promissory notes. In declaring that the deed of
assignment did not operate as payment of the loan so as
to extinguish the obligations of IRC and Santos with PNB,
the trial court advanced several valid bases, to wit:
"a. It is clear from the Deed of Assignment that it was
only by way of security;
x x x
"b. The promissory notes (Exhibits H and I) were executed
on August 16, 1967. If defendants IRC and Raul L. Santos,
upon executing the Deed of Assignment on August 11,
 37 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
1967 had already paid their loan of P700,000.00 or
otherwise extinguished the same, why were the
promissory notes made on August 16, 1967 still executed
by IRC and signed by Raul L. Santos as President?
"c. In the application for a credit line (Exhibit A), the time
deposits were offered as collateral." 9 presenting countervailing evidence. What was merely
For all intents and purposes, the deed of assignment in
this case is actually a pledge. Adverting again to the
Court’s pronouncements in Lopez, supra, we quote
therefrom:
"The character of the transaction between the parties is
to be determined by their intention, regardless of what
language was used or what the form of the transfer was.
If it was intended to secure the payment of money, it
must be construed as a pledge; but if there was some
other intention, it is not a pledge. However, even though
a transfer, if regarded by itself, appears to have been
absolute, its object and character might still be qualified
and explained by a contemporaneous writing declaring it
to have been a deposit of the property as collateral
security. It has been said that a transfer of property by
the debtor to a creditor, even if sufficient on its face to
make an absolute conveyance, should be treated as a
pledge if the debt continues in existence and is not
discharged by the transfer, and that accordingly, the use
of the terms ordinarily importing conveyance, of absolute
ownership will not be given that effect in such a
transaction if they are also commonly used in pledges and
mortgages and therefore do not unqualifiedly indicate a
transfer of absolute ownership, in the absence of clear
and unambiguous language or other circumstances
excluding an intent to pledge." 10
The facts and circumstances leading to the execution of
the deed of assignment, as found by the court a quo and
the respondent court, yield said conclusion that it is in fact
a pledge. The deed of assignment has satisfied the
requirements of a contract of pledge (1) that it be
constituted to secure the fulfillment of a principal
obligation; (2) that the pledgor be the absolute owner of
the thing pledged; (3) that the persons constituting the
pledge have the free disposal of their property, and in the
absence thereof, that they be legally authorized for the
purpose. 11 The further requirement that the thing
pledged be placed in the possession of the creditor, or of
a third person by common agreement 12 was complied
with by the execution of the deed of assignment in favor
of PNB.
It must also be emphasized that Santos, as assignor,
made an express undertaking that he would remain liable
for any outstanding balance of his obligation should PNB
be unable to actually receive or collect the assigned sums
resulting from any agreements, orders or decisions of the
court or for any other cause whatsoever. The term "for
any cause whatsoever" is broad enough to include the
situation involved in the present case.
Under the foregoing circumstances and considerations,
the unavoidable conclusion is that IRC and Santos should
be held liable to PNB for the amount of the loan with the
corresponding interest thereon.
2. We find nothing illegal in the interest of one and one-
half percent (1-1/2%) imposed by PNB pursuant to the
resolution of its Board which presumably was done in
accordance with ordinary banking procedures. Not only
did IRC and Santos fail to overcome the presumption of
regularity of business transactions, but they are likewise
estopped from questioning the validity thereof for the first
time in this petition. There is nothing in the records to
show that they raised this issue during the trial by
touched upon during the proceedings in the court below
was the alleged lack of notice to them of the board
resolution, but not the veracity or validity thereof.
3. On the issue of whether OBM should be held liable for
interests on the time deposits of IRC and Santos from the
time it ceased operations until it resumed its business, the
answer is in the negative.
We have held in The Overseas Bank of Manila v. Court of
Appeals and Tony D. Tapia, 13 that:
"It is a matter of common knowledge, which We take
judicial notice of, that what enables a bank to pay
stipulated interest on money deposited with it is that thru
the other aspects of its operation it is able to generate
funds to cover the payment of such interest. Unless a
bank can lend money, engage in international
transactions, acquire foreclosed mortgaged properties or
their 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 depository
obligated to pay stipulated interest. Conventional wisdom
dictates this inexorable fair and just conclusion. And it can
be said that all who deposit money in banks are aware of
such a simple economic proposition. Consequently, it
should be 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
completely suspended by the duly constituted authority,
the Central Bank.
"We consider it of trivial consequence that the stoppage
of the bank’s operation by the Central Bank has been
subsequently declared illegal by the Supreme Court, for
before the Court’s order, the bank had no alternative
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 stubborn fact remained
that the petitioner was totally crippled from then on from
earning the income needed to meet its obligations to its
depositors. If such a situation cannot, strictly speaking,
be legally denominated as ‘force majeure’, as maintained
by private respondent, We hold it is a matter of simple
equity that it be treated as such."
The Court further adjured that:
"Parenthetically, We may add for the guidance of those
who might be concerned, and so that unnecessary
litigations be avoided from further clogging the dockets of
the courts, that in the light of the considerations
expounded in the above opinion, the same formula that
exempts petitioner from the payment of interest to its
depositors during the whole period of factual stoppage of
its operations by orders of the Central Bank, modified in
effect by the decision as well as the approval of a formula
of rehabilitation by this Court, should be, as a matter of
consistency, applicable or followed in respect to all other
obligations of petitioner which could not be paid during
the period of its actual complete closure."
 38 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
We cannot accept the holding of the respondent Court of
Appeals that the above-cited decisions apply only where
the bank is in a state of liquidation. In the very case
aforecited, this issue was likewise raised and We
resolved:
"Thus, Our task is narrowed down to the resolution of the
legal problem of whether or not, for purposes of the
payment of the interest here in question, stoppage of the
operations of a bank by a legal order of liquidation may
be equated with actual cessation of the bank’s operation,
not different, factually speaking, in its effects, from legal
liquidation the factual cessation having been ordered by
the Central Bank.
"In the case of Chinese Grocer’s Association, Et. Al. v.
American Apothecaries, 65 Phil. 395, this Court held:
"As to the second assignment of error, this Court, in G.R.
No. 43682, In re Liquidation of the Mercantile Bank of
China, Tan Tiong Tick, claimant and appellant, v.
American Apothecaries, C., Et Al., claimants and
appellees, through Justice Imperial, held the following:
‘4. The court held that the appellant is not entitled to
charge interest on the amounts of his claims, and this is
the object of the second assignment of error. Upon this
point a distinction must be made between the interest
which the deposits should earn from their existence until
the bank ceased to operate, and that which they may earn
from the time the bank’s operations were stopped until
the date of payment of the deposits. As to the first class,
we hold that it should be paid because such interest has
been earned in the ordinary course of the bank’s business
and before the latter has been declared in a state of
liquidation. Moreover, the bank being authorized by law
to make use of the deposits with the limitation stated, to
invest the same in its business and other operations, it
may be presumed that it bound itself to pay interest to
the depositors as in fact it paid interest prior to the dates
of the said claims. As to the interest which may be
charged from the date the bank ceased to do business
because it was declared in a state of liquidation, we hold
that the said interest should not be paid.’
"The Court of Appeals considered this ruling inapplicable
to the instant case, precisely because, as contended by
private respondent, the said Apothecaries case had in fact
in contemplation a valid order of liquidation of the bank
concerned, whereas here, the order of the Central Bank
of August 13, 1968 completely forbidding herein
petitioner to do business preparatory to its liquidation was
first restrained and then nullified by this Supreme Court.
In other words, as far as private respondent is concerned,
it is the legal reason for cessation of operations, not the
actual cessation thereof, that matters and is decisive
insofar as his right to the continued payment of the
interest on his deposit during the period of cessation is
concerned.
"In the light of the peculiar circumstances of this
particular case, We disagree. It is Our considered view,
after mature deliberation, that it is utterly unfair to award
private respondent his prayer for payment of interest on
his deposit during the period that petitioner bank was not
allowed by the Central Bank to operate."
4. Lastly, IRC and Santos claim that OBM should
reimburse them for whatever amounts they may be
adjudged to pay PNB by way of compensation for
damages incurred, pursuant to Articles 1170 and 2201 of
the Civil Code.
It appears that as early as April, 1967, the financial
situation of OBM had already caused mounting concern in
the Central Bank. 14 On December 5, 1967, new directors
and officers drafted from the Central Bank (CB) itself, the
Philippine National Bank (PNB) and the Development
Bank of the Philippines (DBP) were elected and installed
and they took over the management and control of the
Overseas Bank. 15 However, it was only on July 31, 1968
when OBM was excluded from clearing with the CB under
Monetary Board Resolution No. 1263. Subsequently, on
August 2, 1968, pursuant to Resolution No. 1290 of the
CB, OBM’s operations were suspended. 16 These CB
resolutions were eventually annulled and set aside by this
Court on October 4, 1971 in the decision rendered in the
herein cited case of Ramos.
Thus, when PNB demanded from OBM payment of the
amounts due on the two time deposits which matured on
January 11, 1968 and February 6, 1968, respectively,
there was as yet no obstacle to the faithful compliance by
OBM of its liabilities thereunder. Consequently, for having
incurred in delay in the performance of its obligation, OBM
should be held liable for damages. 17 When respondent
Santos invested his money in time deposits with OBM,
they entered into a contract of simple loan or mutuum, 18
not a contract of deposit.
While it is true that under Article 1956 of the Civil Code
no interest shall be due unless it has been expressly
stipulated in writing, this applies only to interest for the
use of money. It does not comprehend interest paid as
damages. 19 OBM contends that it had agreed to pay
interest only up to the dates of maturity of the certificates
of time deposit and that respondent Santos is not entitled
to interest after the maturity dates had expired, unless
the contracts are renewed. This is true with respect to the
stipulated interest, but the obligations consisting as they
did in the payment of money, under Article 1108 of the
Civil Code he has the right to recover damages resulting
from the default of OBM, and the measure of such
damages is interest at the legal rate of six percent (6%)
per annum on the amounts due and unpaid at the
expiration of the periods respectively provided in the
contracts. In fine, OBM is being required to pay such
interest, not as interest income stipulated in the
certificates of time deposit, but as damages for failure and
delay in the payment of its obligations which thereby
compelled IRC and Santos to resort to the courts.
The applicable rule is that legal interest, in the nature of
damages for non-compliance with an obligation to pay a
sum of money, is recoverable from the date judicial or
extrajudicial demand is made, 20 which latter mode of
demand was made by PNB, after the maturity of the
certificates of time deposit, on March 1, 1968. 21 The
measure of such damages, there being no stipulation to
the contrary, shall be the payment of the interest agreed
upon in the certificates of deposit 22 which is six and one-
half percent (6-1/2%). Such interest due or accrued shall
further earn legal interest from the time of judicial
demand. 23
We reject the proposition of IRC and Santos that OBM
should reimburse them the entire amount they may be
adjudged to pay PNB. It must be noted that their liability
 39 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O

to pay the various interests of nine percent (9%) on the

principal obligation, one and one-half percent (1-1/2%)
additional interest and one percent (1%) penalty interest
is an offshoot of their failure to pay under the terms of
the two promissory notes executed in favor of PNB. OBM
was never a party to said promissory notes. There is,
therefore, no privity of contract between OBM and PNB
which will justify the imposition of the aforesaid interests
upon OBM whose liability should be strictly confined to
and within the provisions of the certificates of time deposit
involved in this case. In fact, as noted by respondent
court, when OBM assigned as error that portion of the
judgment of the court a quo requiring OBM to make the
disputed reimbursement, IRC and Santos did not dispute
that objection of OBM. Besides, IRC and Santos are not
without fault. They likewise acted in bad faith when they
refused to comply with their obligations under the
promissory notes, thus incurring liability for all damages
reasonably attributable to the non-payment of said
obligations. 24

WHEREFORE, judgment is hereby rendered, ordering:

1. Integrated Realty Corporation and Raul L. Santos to

pay Philippine National Bank, jointly and severally, the
total amount of seven hundred thousand pesos
(P700,000.00), with interest thereon at the rate of nine
percent (9%) per annum from the maturity dates of the
two promissory notes on January 11 and February 6,
1968, respectively, plus one and one-half percent (1-
1/2%) additional interest per annum effective February
28, 1968 and additional penalty interest of one percent
(1%) per annum of the said amount of seven hundred
thousand pesos (P700,000.00) from the time of maturity
of said loan up to the time the said amount of seven
hundred thousand pesos (P700,000.00) is fully paid to
Philippine National Bank.

2. Integrated Realty Corporation and Raul L. Santos to

pay solidarily Philippine National Bank ten percent (10%)
of the amount of seven hundred thousand pesos
(P700,000.00) as and for attorney’s fees.

3. Overseas Bank of Manila to pay Integrated Realty

Corporation and Raul L. Santos the sum of seven hundred
thousand pesos (P700,000.00) due under Time Deposit
Certificates Nos. 2308 and 2367, with interest thereon of
six and one-half percent (6-1/2%) per annum from their
dates of issue on January 11, 1967 and February 6, 1967,
respectively, until the same are fully paid, except that no
interest shall be paid during the entire period of actual
cessation of operations by Overseas Bank of Manila;

4. Overseas Bank of Manila to pay Integrated Realty

Corporation and Raul L. Santos six and one-half per cent
(6-1/2%) interest in the concept of damages on the
principal amounts of said certificates of time deposit from
the date of extrajudicial demand by PNB on March 1,
1968, plus legal interest of six percent (6%) on said
interest from April 6, 1968, until full payment thereof,
except during the entire period of actual cessation of
operations of said bank.

5. Overseas Bank of Manila to pay Integrated Realty

Corporation and Raul L. Santos ten thousand pesos
(P10,000.00) as and for attorney’s fees.

SO ORDERED.
 40 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
[G.R. No. 141009. July 2, 2002.]
BATAAN SEEDLING ASSOCIATION, INC. and
CARLOS VALENCIA, Petitioners, v. REPUBLIC OF
THE PHILIPPINES, represented by the
DEPARTMENT OF ENVIRONMENT and NATURAL
RESOURCES, Respondent.
RESOLUTION
AUSTRIA-MARTINEZ, J.:
Before us is a petition for review on certiorari under Rule
45 of the Rules of Court which seeks to set aside the
Decision promulgated on October 14, 1998 by the Court
of Appeals in CA-G.R. CV No. 52545, 1 affirming with
modification the decision of the Regional Trial Court of
Quezon City. The dispositive portion of the assailed
Decision reads:
"IN THE LIGHT OF ALL THE FOREGOING, the Decision
appealed from is AFFIRMED with the following
modifications:
1. The Appellants are hereby ordered to pay, jointly and
severally, to the Republic of the Philippines, the principal
amount of P56,290.69, with interest thereon at the rate
of 12% per annum, from January 27, 1994 until the said
amount is paid in full;
2. The Appellant BSAI is hereby ordered to pay to the
appellant Republic of the Philippines the amount of
P50,000.00 as and by way of exemplary damages.
No pronouncement as to cost.
SO ORDERED." 2
Petitioner Bataan Seedling Association, Inc. (BSAI for
brevity) entered into a Community Based Reforestation
Contract on October 26, 1990 with the Republic of the
Philippines, represented by the Department of
Environment and Natural Resources (DENR). Under said
contract, BSAI, in consideration of the amount of Nine
Hundred Seventy Five Thousand One Hundred Twenty Six
Pesos and Sixty One Centavos (P975,126.61), bound
itself to undertake the reforestation of a fifty-hectare
open/denuded forest land in Barangay Liyang, Pilar,
Bataan within a period of three (3) years. 3 BSAI likewise
undertook to report to the DENR any event or condition
which delays or may delay or prevent completion of the
work, 4 and submit progress billings and accomplishment
reports. 5 Concomitant with the contract is the Project
Development Plan and the Approved Schedule of Progress
Payments detailing the annual cash flow and schedule of
activities within the three-year periods, 6 and the
Contract of Undertaking providing for the mobilization
fund in the amount of Seventy Five Thousand Fifty Four
Pesos and Sixty Six Centavos (P75,054.66). 7 Said fund
was allotted and released by respondent to enable BSAI
to start with the project, but the fund was to be returned
to respondent upon completion of the project or deducted
from the periodic release of moneys to petitioners. 8
Believing that petitioners failed to comply with their
obligations under the contract, respondent sent a notice
of cancellation dated July 31, 1992 to petitioner Carlos
Valencia, President of BSAI, asking the latter to show
cause why the contract should not be terminated on the
following grounds:
"1. Willful violation of the material terms and conditions,
stipulations and covenants of the Contract, to wit: a) The
association failed to fully plant/establish the whole 50-
hectare contracted area during the first year of operations
as provided for in the Contract; b) The seedlings raised in
the nursery were disposed of to other contractors and the
seedlings left were practically overgrown indicating lack
of proper care and maintenance; c) Inspite of the fact that
a forest fire occurred sometime in December, 1991, no
report was ever made to the DENR in violation of Article
1.1.5 of the Contract; d) The Association even failed to
submit to the DENR accomplishment reports and other
relevant information required and expected from it.
"2. Abandonment of the project area. The PENRO/CENRO
monitoring and Evaluation Team which inspected the
project area on March 18, 25 and 31, 1992 reported that
except for the family that actually resides in the
bunkhouse, no laborers were observed at the project area
during the time of the field inspections. Even you failed to
show up despite written and verbal notices served to you.
Finally, the photo documents taken on the plantation
 41 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
illustrates clearly the abandoned project area." 9
Due to their failure to respond to the notice of
cancellation, as well as return the mobilization fund,
respondent filed a Complaint for Damages against
petitioners, 10 praying that the latter jointly and solidarily
pay actual damages in the amount of Seventy Five
Thousand Fifty Four Pesos and Twenty Five Centavos
(P75,054.25) representing the portion of the mobilization
fund released to them, and Sixty Two Thousand Pesos
Four Hundred Fifty Pesos and Twenty Two Centavos
(P62,450.22) as the amount paid under the
accomplishment bills, totaling One Hundred Thirty Seven
Thousand Five Hundred Four Pesos and Forty Seven
Centavos (P137,504.47). Respondent also sought
liquidated damages equivalent to 0.1% of the total
contract cost due to BSAI’s delay in the performance of
its obligations, and exemplary damages in the amount of
Fifty Thousand Pesos (P50,000.00). 11
In their Amended Answer, petitioners deny the
allegations, arguing that: (1) the whole area was totally
destroyed by a forest fire in December 1991 without their
fault and negligence, which incident was duly reported to
respondent, and (2) the cancellation was arbitrary. 12
The Regional Trial Court of Quezon City, Branch 217,
rendered its decision ordering petitioners to pay the
amount of Fifty Thousand Pesos (P50,000.00) as
exemplary damages. 13 The trial court held that
respondent had sufficient grounds to cancel the contract
but saw no reason why the "mobilization fund" and the
advance payments should be refunded, or that petitioners
should be liable for liquidated damages.
Not satisfied, both respondent and petitioners appealed
the decision to the Court of Appeals. The appellate court
affirmed with modification the decision of the trial court,
adjudicating the balance of the mobilization fund refunded
by petitioners in the amount of Fifty Six Thousand Two
Hundred Ninety Pesos and Sixty Nine Centavos
(P56,290.69) with 12% interest. 14
Hence, the petition for review on certiorari.
Petitioners submit that the issues to be resolved are as
follows:
"1. Whether the unilateral cancellation by the respondent
of the Community-Based Reforestation Contract is invalid,
being without factual and legal basis.
"2. Whether the order to refund the amount of P56,290.69
with interest at the rate of 12% per annum, representing
the balance of the mobilization fund, is palpably erroneous
as being contrary to the facts." 15
At the outset, it must be stated that the foregoing issues
and the respective arguments in support thereof have
been raised by the parties and passed upon by both the
trial court and the appellate court.
Petitioners deny that they were bound to fully plant the
fifty (50) hectares during the first (1st) year of the
program as their commitment under clause 1.1.9 of the
Reforestation Contract was to "turn-over to the DENR at
the end of the third (3rd) year the contracted area of fifty
hectares, fully planted and properly maintained."
Petitioners also refute the finding that they abandoned the
project area, arguing that the investigation conducted by
the PENCO/CENRO Monitoring and Evaluation Team is
suspect; and that its report ignored the fact that a forest
fire occurred sometime in December 1991 destroying the
plants and seedlings already introduced in the area.
Petitioners further claim that their failure to immediately
report the fire and submit progress reports is not a
substantial breach of their undertaking to warrant the
cancellation of the contract; and that they cannot be
made to refund the balance of the mobilization fund
because these correspond to the work already done in the
area. Finally, petitioners object to the award of exemplary
damages for being without legal and factual basis. 16
On the issue of whether or not respondent had sufficient
basis to cancel the contract, both the trial and appellate
courts found that there was basis for the cancellation. A
perusal of the records of this case confirms such finding.
True, under the reforestation contract, petitioners were to
turn over at the end of the third year the project area fully
planted and properly maintained. 17 However, the Project
Development Plan, appended and made integral part of
the contract, 18 specifically defines and details
petitioners’ undertaking. Under the Plan, the following
tasks were to be completed during the first year of the
project: (1) survey and mapping of the whole fifty (50)
hectares; (2) nursery operations for fast-growth,
medium-growing, and slow-growth species; (3)
plantation establishment, including site preparation, spot
hoeing, staking, holing, and planting and seed
transporting of 83,333 pieces, medium-sized seedlings
and sucklers in planting holes; and (4) infrastructure
work, including the development of footpath, graded trail,
plantation road, bunkhouse and look-out tower. 19
Spread out during the three-year period is the annual
maintenance, protection, administration and supervision,
and, monitoring and evaluation of the project area. 20
Clearly, based on said schedule, petitioners were to
undertake the principal task of planting the fifty (50)
hectare-project area during the 1st year of the project.
What is to be carried out during the entire 3-year period
is the maintenance and aftercare of the project site, and
petitioners were to turn over the project at the end of the
third year fully planted and established. Therefore,
petitioners’ argument that they are not bound to fully
plant/establish the whole fifty (50) hectares during the
1st year of operations is without merit.
Moreover, contrary to petitioners’ posture, there was a
material breach of the contract warranting its
cancellation. One (1) year after the commencement of the
project or sometime in December, 1991, a fire razed the
reforestation area. As admitted by petitioners, they failed
to inform respondent of said incident. Neither did they
attempt to submit progress reports on the project, which
duties were expressly required of them under the
contract. Thus, the appellate court correctly observed,
viz.:
". . . The Appellant BSAI unabashedly admitted failing to
establish/plant the project area. Under Section 1.1.5 of
the Contract, the Appellant BSAI was obliged to report to
the DENR any event or condition which delayed or may
delay the progress or prevent the completion, of the work
under the time-table set forth under the contract or any
relevant facts known to the Appellant BSAI. A fire in the
area which gutted the improvements in contract area
occurred in December, 1991. However, the Appellant
 42 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
BSAI never informed the DENR of said fire. Worse, the
Appellant BSAI did not anymore conduct any replanting
activities on the area, thus accounting, in part, for the
failure of the said Appellant to submit periodic progress
reports on its activities in said area. Even before the fire
occurred, in December 1991, the Appellant BSAI already
failed to submit any periodic reports of progress of its
activities in the area. This prompted the DENR to conduct
an on the site inspection of the subject project area.
Indeed, Carlos Valencia and Hernani Salaya Jr., even
ignored the requests of DENR for them to be present
during the said inspections. The DENR inspection team
found and discovered that the Appellant BSAI failed to
fully establish planting on the subject project area.
Instead of planting the seedlings on the project area, the
Appellant BSAI sold some of the seedlings because of its
failure to pay the nursery owner, Anilao Satellite Nursery,
located in Pilar, Bataan for said seedlings. . ." 21
Petitioners attempt to trivialize their lapse, but the Court
believes that this is not merely a slight or casual breach,
but a substantial one giving sanction to the cancellation.
Under Clause 4.1 of the contract, respondents "shall have
the right to suspend, terminate or cancel" the contract
upon petitioners’ substantial failure to fulfill their
obligations, or a willful violation of the material conditions,
stipulations and covenants thereof. It can be concluded
from the tenor of said clause that the parties intended
mandatory compliance with all the provisions of the
contract. As stated previously, among such provisions
requiring strict adherence are the submission of progress
reports and the reporting of such event which may delay
or prevent the project. Hence, upon petitioners’ failure to
comply with said obligations, respondent was well within
its right to cancel the contract by express grant of Clause
4.1.
Anent the refund of the mobilization fund, the Contract of
Undertaking signed by petitioners is explicit in this regard,
to wit:
"THAT BATAAN SEEDLING ASSOCIATION,
INCORPORATED . . . for and in consideration of the sum
of Seventy Five Thousand Fifty four pesos and sixty six
centavos (P75,054.66) representing advance payment
under said contract receipt of which is hereby
acknowledge in full, as hereby bind ourselves;
x x x ascertained). The actual base for the computation of legal
3. To repay the amount advanced in accordance with the
Contract of Reforestation and DENR Administration Order
No. 14 Series of 1989 as amended;" 22 (Emphasis ours)
The amount of Seventy Five Thousand Fifty Four Pesos
and Sixty Six Centavos (P75,054.66) advanced to BSAI,
represents 15% of Five Hundred Thousand Three Hundred
Sixty One Pesos and Seventy Two Centavos
(P500,361.72), the contract cost for the 1st year. 23
When initial payment was made by respondent to
petitioners on February 25, 1991, the amount of Eighteen
Thousand Seven Hundred Sixty Three Pesos and Fifty Six
Centavos (P18,763.56), or ¼ of the mobilization fund,
was deducted, 24 leaving a balance of Fifty Six Thousand
Two Hundred Ninety Pesos and Sixty Nine Centavos
(P56,290.69). Respondent thereafter made no deductions
on the subsequent payments of the contract price
remitted to petitioners. Hence, they remain liable on the
balance of said fund in the amount of Fifty Six Thousand
Two Hundred Ninety Pesos and Sixty Nine Centavos
(P56,290.69). We find no error committed by the
Appellate Court on this matter.
Nevertheless, the appellate court erred in imposing a 12%
interest on the amount due. In Eastern Shipping Lines,
Inc. v. Court of Appeals, we enunciated the following
rules:
"I. When an obligation, regardless of its source, i.e., law,
contracts, quasi-contracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for damages.
The provisions under Title XVIII on ‘Damages’ of the Civil
Code govern in determining the measure of recoverable
damages.
"II. With regard particularly to an award of interest in the
concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as
follows:
"1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have
been stipulated in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of
interest shall be 12% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under
and subject to the provisions of Article 1169 of the Civil
Code.
"2. When an obligation, not constituting a loan or
forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the
discretion of the court at the rate of 6% per annum. No
interest, however, shall be adjudged on unliquidated
claims or damages except when or until the demand can
be established with reasonable certainty. Accordingly,
where the demand is established with reasonable
certainty, the interest shall begin to run from the time the
claim is made judicially or extrajudicially (Art. 1169, Civil
Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest
shall begin to run only from the date the judgment of the
court is made (at which time the quantification of
damages may be deemed to have been reasonably
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."25cralaw:red
Interest at the rate of 12% per annum is imposable if
there is no stipulation in the contract. Herein subject
contract does not contain any stipulation as to interest.
However, the amount that is due the respondent does not
represent a loan or forbearance of money. The word
"forbearance" is defined, within the context of usury law,
as a contractual obligation of lender or creditor to refrain,
during given period of time, from requiring borrower or
debtor to repay loan or debt then due and payable. 26
The contract between petitioner and respondent is a
 43 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O

Community Based Reforestation Contract by virtue of

which petitioner undertook the reforestation of a fifty-
hectare open/denuded forest land. The amount of Fifty
Six Thousand Two Hundred Ninety Pesos and Sixty Nine
Centavos (P56,290.69) due to respondent, represents the
balance of the mobilization fund which petitioner is
obliged to return because of its failure to fully comply with
its undertaking to plant the entire area with seedlings
within the period contracted for reforestation. Under the
reforestation contract, the fund released to petitioner was
supposed to be returned to respondent upon completion
of the project or deducted from the periodic releases of
money. Clearly therefrom, the amount of Fifty Six
Thousand Two Hundred Ninety Pesos and Sixty Nine
Centavos (P56,290.69) was neither a loan nor
forbearance of money.

Thus, the above-quoted paragraph II, sub-paragraph 1,

applies to the present case. In the absence of stipulation,
the legal interest is six percent (6%) per annum 27 on the
amount finally adjudged by the Court. 28

In addition, under the above-quoted paragraph II, sub-

paragraph 3, the amount of Fifty Six Thousand Two
Hundred Ninety Pesos and Sixty Nine Centavos
(P56,290.69) shall earn 12% interest per annum from
date of finality of herein judgment.

Finally, the Court finds the award of Fifty Thousand Pesos

(P50,000.00) as exemplary damages to be excessive and
should therefore be reduced to Twenty Thousand Pesos
(P20,000.00). Exemplary damages are imposed not to
enrich one party or impoverish another but to serve as a
deterrent against or as a negative incentive to curb
socially deleterious actions. 29

WHEREFORE, the petition is partly GRANTED and the

assailed Decision is AFFIRMED with the following
MODIFICATIONS:

1) The interest to be paid on the amount of Fifty Six

Thousand Two Hundred Ninety Pesos and Sixty Nine
Centavos (P56,290.69) shall be at the rate of 6% per
annum from the Court of Appeals Decision dated October
14, 1998. A twelve percent (12%) interest, in lieu of six
percent (6%) shall be imposed upon finality of this
decision, until full payment thereof.

2) The award of exemplary damages is reduced from Fifty

Thousand Pesos (P50,000.00) to Twenty Thousand Pesos
(P20,000.00).

SO ORDERED.
 44 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O

the lease contract between her and Aniana Galang,

respondent filed a complaint for Annulment of Sale with
Damages docketed as Civil Case No. 88-491 of the
Regional Trial Court (RTC) of Makati, Metro Manila.

Meanwhile, the lease agreement between BPI and Galang

expired.

Upon expiration of the lease agreements, petitioner

spouses sent demand letters to respondent for her to
vacate the building. The demand letters were unheeded
by respondent causing petitioners to file two complaints
for ejectment, docketed as Civil Cases Nos. 7666 and
7667 of the Metropolitan Trial Court (MeTC) of Parañaque,
Metro Manila.

The institution of the ejectment cases prompted

respondent to file an action for injunction docketed as
Civil Case No. 90-758 of the RTC of Makati, to stop the
MeTC of Parañaque from proceeding therewith pending
the settlement of the issue of ownership raised in Civil
Case No. 88-491. These two cases for annulment of sale
and for injunction were also consolidated before Branch
63 of the RTC of Makati which rendered a Decision dated
September 19, 1991, granting the injunction and
annulling the contract of sale between Aniana Galang and
petitioners.

On appeal, 1 the Court of Appeals reversed and set aside

the decision of the RTC and the complaints in Civil Cases
Nos. 88-491 and 90-758 were accordingly dismissed.

Not satisfied, respondent elevated the above decision of

[G.R. No. 134972. March 22, 2001.] the CA before this Court. We, however, denied
respondent’s petition on April 10, 1996. 2
SPS. ERNESTO and MINA CATUNGAL, Petitioners,
v. DORIS HAO, Respondent. The MeTC of Parañaque, after the reversal of the decision
in Civil Case No. 90-758 for injunction, proceeded with
DECISION the trial of the ejectment cases.

KAPUNAN, J.: On January 22, 1997, the MeTC of Parañaque rendered a

Decision, the dispositive portion of which reads:

This is a petition for review of the Decision of the Court of IN VIEW OF THE FOREGOING, judgment is hereby
Appeals dated 10 March 1998 and Resolution dated 30 rendered ordering the defendant Doris T. Hao who is in
July 1998 in the case entitled Doris Hao v. Sps. Ernesto actual possession of the property and all persons claiming
and Mina Catungal docketed as CA-G.R. SP No. 46158. rights under her to vacate the premises in question and
Said decision affirmed with modification the judgment to pay the plaintiffs the amount of P20,000.00 a month
rendered by the Regional Trial Court. from June 28, 1988, until she finally vacates the premises
and to pay attorney’s fees of P20,000.00. With costs
The antecedents of this case are as follows: against the defendant. 3

On December 28, 1972, the original owner, Aniana
Galang, leased a three-storey building situated at Quirino
Avenue, Baclaran, Parañaque, Metro Manila, to the Bank
of the Philippine Islands (BPI) for a period of about fifteen
(15) years, to expire on June 20, 1986. During the
existence of the lease, BPI subleased the ground floor of
said building to respondent Doris Hao.
On August 24, 1984, Galang and respondent executed a
contract of lease on the second and third floors of the
building The lease was for a term of four (4) years
commencing on August 15, 1984 and ending on August
15, 1988. On August 15, 1986, petitioner spouses Ernesto
and Mina Catungal bought the property from Aniana
Galang.
Invoking her "right of first refusal" purportedly based on
Petitioners filed a motion for clarificatory or amended
judgment on the ground that although MeTC "ordered the
defendant to vacate the entire subject property, it only
awarded rent or compensation for the use of said property
and attorney’s fees for said ground floor and not the entire
subject property. Compensation for the use of the subject
property’s second and third floors and attorney’s fees as
prayed for in Civil Case No. 7767 were not awarded." 4 In
response to said motion, the MeTC issued an Order dated
March 3, 1997, the dispositive portion of which reads:
IN VIEW OF THE FOREGOING, the Decision of this Court
is hereby clarified in such a way that the dispositive
portion would read as follows: "IN VIEW OF THE
FOREGOING, judgment is hereby rendered ordering the
defendant Doris T. Hao who is in actual possession of the
property and all persons claiming rights under her to
 45 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
vacate the premises and to pay the plaintiffs the amount
of P8,000.00 a month in Civil Case No. 7666 for the use
and occupancy of the first floor of the premises in question
from June 28, 1998 until she finally vacates the premises
and to pay the plaintiff a rental of P5,000.00 a month in
Civil Case No. 7667 from June 28, 1988, until she finally
vacates the premises and to pay attorney’s fees of
P20,000.00. With costs against defendant.
SO ORDERED. 5 reconsideration filed by the petitioners before the MeTC
Petitioners sought reconsideration of the above order,
praying that respondent be ordered to pay P20,000.00
monthly for the use and occupancy of the ground floor
and P10,000.00 each monthly for the second and third
floors.
Respondent, on the other hand, filed a notice of appeal.
Instead of resolving the motion for reconsideration, on
May 7, 1997, the MeTC of Parañaque issued an Order,
elevating the case to the Regional Trial Court:
Considering the Motion for Reconsideration of the Order
of this Court dated March 3, 1997 and the Comment and
Opposition thereto of the counsel for the defendant, the
Court finds that the said Motion for Reconsideration
should already be addressed to the Regional Trial Court
considering that whatever disposition that this Court will
award will still be subject to the appeal taken by the
defendant and considering further that the supersede as
bond posted by the defendant covered the increased
rental. 6
On September 30, 1997, the RTC of Parañaque, Branch
259, rendered a Decision modifying that of the MeTC, the
dispositive portion of which reads:
IN THE LIGHT OF THE FOREGOING, the appealed
decision, being in accordance with law, is hereby
AFFIRMED as to the order to vacate the property in
question and MODIFIED as to the amount of rentals which
is hereby increased to P20,000.00 a month for the ground
floor starting June 28, 1988 and P10,000.00 a month for
the second floor and also P10,000.00 a month for the third
floor (or) a total of P40,000.00 monthly rentals
commencing June 28, 1988 until the subject property has
been vacated and possession thereof turner [sic] over to
the plaintiffs-appellees; to pay attorney’s fees in the
amount of P20,000.00; and with costs. 7
In her Motion dated October 6, 1997, respondent sought
a reconsideration of the above ruling of the RTC. The
same was denied on November 25, 1997.
Respondent elevated her case to the Court of Appeals.
The CA rendered the Decision subject of this petition the
dispositive portion thereof reads:
WHEREFORE, the decision appealed from is hereby
MODIFIED by reducing the amount of rentals for both the
second and third floors from P20,000.00 to P10,000.00
monthly. With this modification, the judgment below is
AFFIRMED in all other respects. 8 [sic] ANY REVERSIBLE ERROR WHEN IT RESOLVED TO
The parties filed their respective motions for
reconsideration to the Court of Appeals. Petitioners asked
that the decision of the Regional Trial Court fixing the total
monthly rentals at P40,000.00 be sustained. On the other
hand, respondent sought a revival of the decision of the
MeTC on the ground that since petitioners did not
interpose an appeal from the amended judgment of the
MeTC, the RTC could not validly increase the amount of
rentals awarded by the former.
In its Resolution dated 30 July 1998, the Court of Appeals
resolved the parties’ motions for reconsideration in favor
of the Respondent. It ruled that the motion for
was a prohibited pleading under the Rules of Summary
Procedure. Such being the case, said motion for
reconsideration did not produce any legal effect and thus
the amended judgment of the MeTC had become final and
executory insofar as the petitioners are concerned. The
dispositive portion of the CA’s resolution reads as follows:
WHEREFORE, the decision appealed from is hereby
MODIFIED by reducing the monthly rentals for the
first/ground floor from P20,000.00 to P8,000.00 and for
the second and third floors from P10,000.00 each to
P5,000.00 for both floors. With this modification the
judgment below is AFFIRMED in all other respects.
No pronouncement as to costs.
SO ORDERED. 9
Petitioners now come before this Court assigning the
following errors:
A.
IN THE ASSAILED DECISION, THE HONORABLE COURT OF
APPEALS GRAVELY ERRED IN REVERSING THE FINDINGS
OF THE REGIONAL TRIAL COURT BY USING AS BASIS FOR
REDUCING THE RENTAL ONLY THE EVIDENCE
SUBMITTED BY THE PARTIES AND IGNORING
CIRCUMSTANCES OF WHICH THE REGIONAL TRIAL
COURT PROPERLY TOOK JUDICIAL NOTICE.
B.
IN THE ASSAILED DECISION, THE HONORABLE COURT OF
APPEALS GRAVELY ERRED IN ITS FINDINGS THAT THE
REGIONAL TRIAL COURT HAD NO JURISDICTION TO
MODIFY THE APPEALED JUDGMENT BY INCREASING THE
AWARD OF MONTHLY RENTALS FROM P13,000.00 TO
P40,000.00. 10
We required respondent to comment on the petition. 11
In her Comment/Compliance, respondent contends that
the petition should be dismissed and the resolution of the
case should be based on the following issues:
1. DID THE RESPONDENT APPELLATE COURT COMMITTED
[sic] ANY REVERSIBLE ERROR WHEN IT CONSIDERED
PETITIONERS "MOTION FOR RECONSIDERATION"
(ANNEX "I" -PETITION) FILED WITH THE MTC-COURT AS
A PROHIBITIVE [sic] PLEADING, IN A SUMMARY
PROCEDURE CASE SUCH AS THE ONE AT BAR[?]
2. DID THE RESPONDENT APPELLATE COURT COMMITTED
RESTORE, REINSTATE, AFFIRM AND UPHOLD THE MTC —
AMENDED JUDGMENT OF MARCH 3, 1997 FIXING THE
TOTAL AWARD OF P13,000.00 GROUNDED ON A
PROHIBITIVE [sic] PLEADING AND FAILURE TO FILE A
NOTICE OF APPEAL[?]
 46 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
3. DID THE APPELLATE COURT COMMITTED [SIC] ANY
REVERSIBLE ERROR WHEN IT RESOLVED TO SUSTAIN
RESPONDENT’S POSITION CONSISTENT WITH THE LAW
AND JURISPRUDENCE THAT FOR PETITIONERS’ FAILURE
TO APPEAL AND HAVING FILED A PROHIBITIVE [SIC]
PLEADING, THEY CANNOT ASK FOR AFFIRMATIVE RELIEF
SUCH AS INCREASE IN RENTAL[?] 12
There is no question that after the expiration of the lease
contracts which respondent contracted with Aniana
Galang and BPI, she lost her right to possess the property
since, as early as the actual expiration date of the lease
contract, petitioners were not negligent in enforcing their
right of ownership over the property.
While respondent was finally evicted from the leased
premises, the amount of monthly rentals which
respondent should pay the petitioners as forced lessors of
said property from 20 June 1988 (for the ground floor)
and 15 August 1988 until 6 January 1998 (for the second
and third floors), or a period of almost ten years remains
to be resolved.
Petitioners, in the main, posit that there should be a
reinstatement of the decision of the regional trial court
which fixed the monthly rentals to be paid by herein
respondent at the total of P40,000.00, P20,000.00 for the
occupancy of the first floor, and P10,000.00 each for the
occupancy of the second and third floors of the building,
effective after the lapse of the original lease contract
between respondent and the original owner of the
building.
On the other hand, respondent insists on the ruling of the
Metropolitan Trial Court, which was thereafter reinstated
by the Court of Appeals in its 30 July 1998 Resolution,
that the monthly rental rates of only P8,000.00 for the
first floor and P5,000.00 for each of the second and third
floors should prevail.
At the outset, it should be recalled that there existed no
consensual lessor-lessee relationship between the
parties. At most, what we have is a forced lessor-lessee
relationship inasmuch as the respondent, by way of
detaining the property without the consent of herein
petitioners, was in unlawful possession of the property
belonging to petitioner spouses.
We cannot allow the respondent to insist on the payment
of a measly sum of P8,000 for the rentals of the first floor
of the property in question and P5,000.00 for each of the
second and the third floors of the leased premises. The
plaintiff in an ejectment case is entitled to damages
caused by his loss of the use and possession of the
premises. 13 Damages in the context of Section 17, Rule
70 of the 1997 Rules of Civil Procedure is limited to "rent"
or fair rental value or the reasonable compensation for
the use and occupation of the property. 14 What therefore
constitutes the fair rental value in the case at bench?
In ruling that the increased rental rates of P40,000.00
should be awarded the petitioners, the regional trial court
based its decision on the doctrine of judicial notice. The
RTC held, thus:
While this Court is fully in agreement with the Court of
Origin that plaintiffs-appellees have the better right to the
possession of the premises in question being the present
owners and the contract of lease between the former
owner and herein defendant-appellant had already
expired, the amount of rentals as laid down in the
Clarificatory Order dated 3 March 1997 is inadequate, if
not unreasonable.
The Court a quo misappreciated the nature of the
property, its location and the business practice in the
vicinity and indeed committed an error in fixing the
amount of rentals in the aforementioned Order. Said
premises is situated along Quirino Avenue, a main
thoroughfare in Barangay Baclaran, Parañaque, Metro
Manila, a fully developed commercial area and the place
where the famous shrine of the Mother of Perpetual Help
stands. Withal, devotees, traders, tourists and practically
people from all walks of life visit said barangay making it
suitable for commerce, not to mention thousand of
residents therein. Needless to say, every square meter of
said community is valuable for all kinds of business or
commerce of man.
Further, considering that the questioned property has
three floors and strategically located along the main road
and consistent with the prevailing rental rates in said
business area which is between P20,000.00 and
P30,000.00 as testified to by Divina Q. Roco, a real estate
agent and Mina Catungal, this Court finds the amount of
P20,000.00 a month for the ground floor and P10,000.00
a month each for the second floor and third floor or a total
of P40,000.00 monthly rentals as appropriate and
reasonable rentals for the use and occupation of said
premises.
Finally, worth mentioning here as parallel is [the] ruling
of the Supreme Court in the case of Manila Bay Club
Corporation v. Court of Appeals, 245 SCRA 715 and 731-
732 citing Licmay v. Court of Appeals, 215 SCRA 1 (1992)
and Commander Realty Inc. v. Court of Appeals, 168
SCRA 181. It reads as follows:
It is worth stressing at this juncture that the trial court
had the authority to fix the reasonable value for the
continued use and occupancy of the leased premises after
the termination of the lease contract, and that it was not
bound by the stipulated rental in the contract of lease
since it is equally settled that upon termination or
expiration of the Contract of Lease, the rental stipulated
therein may no longer be the reasonable value for the use
and occupation of the premises as a result or by reason
of the change or rise in values. Moreover, the trial court
can take judicial notice of the general increase in rentals
of real estate especially of business establishments like
the leased building owned by the private respondents. 15
We find that the RTC correctly applied and construed the
legal concept of judicial notice in the case at bench.
Judicial knowledge may be defined as the cognizance of
certain facts which a judge under rules of legal procedure
or otherwise may properly take or act upon without proof
because they are already known to him, or is assumed to
have, by virtue of his office. 16 Judicial cognizance is
taken only of those matters that are "commonly" known.
The power of taking judicial notice is to be exercised by
courts with caution; care must be taken that the requisite
notoriety exists; and every reasonable doubt on the
subject should be promptly resolved in the negative. 17
Matters of judicial notice have three material requisites:
(1) the matter must be one of common and general
knowledge; (2) it must be well and authoritatively settled
 47 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
and not doubtful or uncertain; and (3) it must be known
to be within the limits of jurisdiction of the court.
The RTC correctly took judicial notice of the nature of the
leased property subject of the case at bench based on its
location and the commercial viability. The above quoted
assessment by the RTC of the Baclaran area, where the
subject property is located, is fairly grounded.
Furthermore, the RTC also had factual basis in arriving at
the said conclusion, the same being based on testimonies
of witnesses, such as real estate broker Divina Roco and
the petitioner Mina Catungal.
The RTC rightly modified the rental award from
P13,000.00 to P40,000.00, considering that it is settled
jurisprudence that courts may take judicial notice of the
general increase in rentals of lease contract renewals
much more with business establishments. Thus, We held
in Manila Bay Club Corporation v. Court of Appeals: 18
It is worth stressing at this juncture that the trial court
had the authority to fix the reasonable value for the
continued use and occupancy of the leased premises after
the termination of the lease contract, and that it was not
bound by the stipulated rental in the contract of lease
since it is equally settled that upon termination or
expiration of the contract of lease, the rental stipulated
therein may no longer be the reasonable value for the use
and occupation of the premises as a result or by reason
of the change or rise in values. Moreover, the trial court
can take judicial notice of the general increase in rentals
of real estate especially of business establishments like
the leased building owned by the private Respondent. 19
The increased award of rentals ruled by the RTC is
reasonable given the circumstances of the case at bench.
We note that respondent was able to deny petitioners the
benefits, including possession, of their rightful ownership
over the subject property for almost a decade.
The Court of Appeals failed to justify its reduction of the
P40,000.00 fair rental value as determined by the RTC.
Neither has respondent shown that the rental pegged by
the RTC is exorbitant or unconscionable. This is because
the burden of proof to show that the rental demanded is
unconscionable or exorbitant rests upon private
respondent as the lessee. 20 Here, respondent neither
discharged this burden when she omitted to present any
evidence at all on what she considers to be fair rental
value, nor did she controvert the evidence submitted by
petitioners by way of testimonies of the real estate broker
and petitioner Mina Catungal. Thus, in Sia v. CA, we
ruled:chanrobles virtual law library
. . . On the contrary, the records bear out that the
P5,000.00 monthly rental is a reasonable amount,
considering that the subject lot is prime commercial real
property whose value has significantly increased and that
P5,000.00 is within the range of prevailing rental rates in
that vicinity. Moreover, petitioner has not proffered
controverting evidence to support what he believes to be
the fair rental value of the leased building since the
burden of proof to show that the rental demanded is
unconscionable or exorbitant rests upon the lessee. Thus,
here and now we rule, as we did in the case of Manila Bay
Club v. Court of Appeals, that petitioner having failed to
prove its claim of excessive rentals, the valuation made
by the Regional Trial Court, as affirmed by the respondent
Court of Appeals, stands. 21
The Court of Appeals merely anchored its decision to
reduce the P40,000.00 rental on procedural grounds.
According to the Court of Appeals, the motion for
reconsideration filed by petitioners before the MeTC is a
prohibited pleading under the Rule on Summary
Procedure and did not have any effect in stalling the
running of the period to appeal the decision nor could it
be considered as notice of appeal and consequently this
affected the elevation of the case to the RTC. Not having
appealed the case to the RTC, the amended judgment of
the MeTC fixing the rental rate at P13,000.00 is final and
executory as far as petitioners are concerned.
We disagree. A reading of the order issued by the MeTC
will show that said court elevated the issue on the amount
of rentals raised by the petitioner to the RTC because the
appeal of respondent had already been perfected, thus:
Considering the Motion for Reconsideration of the Order
of this Court dated March 3, 1997 and the Comment and
Opposition thereto of the counsel for the defendant, the
Court finds the said Motion for Reconsideration should
already be addressed to the Regional Trial Court
considering that whatever disposition that this Court will
award will still be subject to the appeal taken by the
defendant and considering further that the supersede as
bond posted by the defendant covered the increased
rental.
In order that this case will be immediately forwarded to
the Regional Trial Court in view of the appeal of the
defendant, the Court deemed it wise not to act on the said
motion for reconsideration and submit the matter to the
Regional Trial Court who has the final say on whether the
rental or the premises in question will be raised or not.
It will be to the advantage of both parties that this Court
refrain from acting on the said Motion for Reconsideration
so as to expedite the remanding (sic) of this Court to the
Regional Trial Court. 22
When the MeTC referred petitioners’ motion to the RTC
for its disposition, respondent could have opposed such
irregularity in the proceeding. This respondent failed to
do. Before this Court, respondent now insists that the
petition should be denied on the ground that the Motion
for Reconsideration filed before the MeTC is a prohibited
pleading and hence could not be treated as a notice of
appeal. Respondent is precluded by estoppel from doing
so. To grant respondent’s prayer will not only do injustice
to the petitioners, but also it will make a mockery of the
judicial process as it will result in the nullity of the entire
proceedings already had on a mere technicality, a practice
frowned upon by the Court. Our ruling in Martinez, Et. Al.
v. De la Merced, Et Al., 23 is illustrative:
. . . In fine, these are acts amounting to a waiver of the
irregularity of the proceedings. For it has been
consistently held by this Court that while lack of
jurisdiction may be assailed at any stage, a party’s active
participation in the proceedings before a court without
jurisdiction will estop such party from assailing such lack
of jurisdiction.
The Court of Appeals in the assailed Decision correctly
observed that the "peculiar circumstances attendant to
the ejectment cases warrant departure" from the
 48 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
presumption that a party who did not interject an appeal
is satisfied with the adjudication made by the lower court:
As regard the issue on the propriety of the increase in the
award of damages/rentals made by the RTC, the Court
notes that, while respondent spouses did not formally
appeal the decision in the ejectment cases, their motion
for reconsideration assailing the clarificatory order
reducing the award of damages/rentals was, by order of
the MTC, referred to the RTC for appropriate action.
Reason for such action is stated in the Order of May 7,
1997, thus:
x x x Finally, respondent questions why petitioners would want
Neither petitioner nor respondent spouses assailed the
above order. In fact, in their appeal memorandum,
respondent spouses reiterated their claim, first ventilated
in their motion for reconsideration dated March 24, 1997,
that the MTC grievously erred in finding that plaintiffs-
appellees are only entitled to a meager monthly rental of
P8,000.00 for the ground floor and P5,000.00 for the
second and third floors.
Hence, while the entrenched procedure in this jurisdiction
is that a party who has not himself appealed cannot obtain
from the appellate court affirmative relief other than those
granted in the decision of the lower court, the peculiar
circumstances attendant to the ejectment cases warrant
a departure therefrom. The rule is premised on the
presumption that a party who did not interpose an appeal
is satisfied with the adjudication made by the lower court.
Respondent spouses, far from showing satisfaction with
the clarificatory order of March 3, 1997, assailed it in their
motion for reconsideration which, however, was referred
to the RTC for appropriate action in view of the appeal
taken by the petitioner. Clearly, the increase in the
damages/rentals awarded by the MTC was an issue the
RTC could validly resolve in the ejectment cases. 24
Respondent, argues that ejectment cases are tried under
the Revised Rule on Summary Procedure, 25 hence, the
motion for reconsideration filed by petitioner was a
prohibited pleading and could not take the place of the
required notice of appeal.
The argument by respondent is misleading. Simply
because the case was one for ejectment does not
automatically mean that the same was triable under the
Rules of Summary Procedure. At the time of the filing of
the complaint by petitioner in 1989, said Rules provide:
SECTION 1. SCOPE — THIS RULE SHALL GOVERN THE
PROCEDURE IN THE METROPOLITAN TRIAL COURTS, THE
MUNICIPAL TRIAL COURTS, AND THE MUNICIPAL
CIRCUIT TRIAL COURTS IN THE FOLLOWING CASES:
A. CIVIL CASES:
(1) CASES OF FORCIBLE ENTRY AND UNLAWFUL
DETAINER, EXCEPT WHERE THE QUESTION OF
OWNERSHIP IS INVOLVED, OR WHERE THE DAMAGES OR
UNPAID RENTALS SOUGHT TO BE RECOVERED BY THE
PLAINTIFF EXCEED TWENTY THOUSAND PESOS
(P20,000.00) AT THE TIME OF THE FILING OF THE
COMPLAINT. . . . default, i.e., from judicial or extrajudicial demand under
In their complaint, petitioners prayed, among others, for
rentals for the period covering June, 1988 to April 1989,
at a rate of P20,000.00 for the first floor alone, as well as
P10,000.00 for attorney’s fees. Clearly, considering the
amount of rentals and damages claimed by petitioners,
said case before the MeTC was not governed by the Rules
on Summary Procedure. Said case was governed by the
ordinary rules where the general proposition is that the
filing of a motion for reconsideration of a final judgment
is allowed. In the interest of substantial justice, in this
particular case, we rule that the MeTC did not err in
treating the motion for reconsideration filed by petitioner
as a notice of appeal.
to reinstate the RTC decision when in fact they had
already applied for a writ of execution of the 8 March 1997
Decision. Respondent is of the view that since petitioners
had already moved for the execution of the decision
awarding a smaller amount of damages or fair rental
value, the same is inconsistent with a petition asking for
a greater fair rental value and, therefore, a possible case
of unjust enrichment in favor of the petitioners. We are
not persuaded.
In order to avoid further injustice to a lawful possessor,
an immediate execution of a judgment is mandated and
the court’s duty to order such execution is practically
ministerial. 26 In City of Manila, Et. Al. v. CA, Et Al., 27
We held that "Section 8 (now Section 19), Rule 70, on
execution pending appeal, also applies even if the
plaintiff-lessor appeals where, as in that case, judgment
was rendered in favor of the lessor but it was not satisfied
with the increased rentals granted by the trial court,
hence the appeal . . . ."
As above discussed, the petitioners have long been
deprived of the exercise of their proprietary rights over
the leased premises and the rightful amount of rentals at
the rate of P40,000.00 a month. Consequently,
petitioners are entitled to accrued monthly rentals of
P27,000.00, which is the difference between P40,000.00
awarded by the Regional Trial Court and P13,000.00
awarded by the MeTC and affirmed by the Court of
Appeals. Said amount of P27,000.00 should rightly be the
subject of another writ of execution being distinct from
the subject of the first writ of execution filed by
petitioners.
The Court also awards interest in favor of petitioners. In
Eastern Shipping Lines, Inc. v. Court of Appeals, we gave
the following guidelines in the award of interest:
x x x
II With regard particularly to an award of interest in the
concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as
follows:
1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have
been stipulated in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of
interest shall be 12% per annum to be computed from
and subject to the provisions of Article 1169 of the Civil
Code.
 49 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O

The back rentals in this case being equivalent to a loan or

forbearance of money, the interest due thereon in twelve
percent (12%) per annum from the time of extra-judicial
demand on September 27, 1988.

WHEREFORE, premises considered, judgment is hereby

rendered in favor of petitioners by REINSTATING the
decision of the RTC, with modifications, and ordering
respondent to further PAY:

1. The sum of Twenty Seven Thousand Pesos

(P27,000.00), corresponding to the difference between
the P40,000.00 awarded by the Regional Trial Court and
the P13,000.00 awarded by the Metropolitan Trial Court,
as monthly arrears, computed from respondent’s unlawful
detainer, 20 June 1988 (for the ground floor) and 15
August 1988 (for the second and third floors) of the
subject property until the time she vacated the premises
on 7 January 1998;

2. Legal interest of twelve percent (12%) per annum on

the foregoing sum from the date of notice of demand on
27 September 1988 until fully paid;

3. The sum of Twenty Thousand Pesos (P20,000.00) as

and for attorney’s fees and;

4. The costs of suit.

SO ORDERED.
 50 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
[G.R. No. 129227. May 30, 2000.]
BANCO FILIPINO SAVINGS AND MORTGAGE
BANK, Petitioners, v. THE HON. COURT OF
APPEALS, and CALVIN & ELSA
ARCILLA, Respondents.
DECISION
GONZAGA-REYES, J.:
Before us is a Petition for Review on Certiorari of the
Decision of the Court of Appeals 1 in CA-G.R. CV No.
45891 entitled CALVIN S. ARCILLA and ELSA B. ARCILLA
v. BANCO FILIPINO SAVINGS and MORTGAGE BANK, ET.
AL. which affirmed the decision of the Regional Trial Court
(RTC), Branch 33, Manila orderinG BANCO FILIPINO to
pay CALVIN and ELSA ARCILLA the amount of
P126,139.00 with interest thereon at 12% per annum
from the filing of the complaint.
The undisputed facts as found by the Court of Appeals are
as follows:
Elsa Arcilla and her husband, Calvin Arcilla, the Appellees
in the present recourse, secured, on three (3) occasions,
loans from the Banco Filipino Savings and Mortgage Bank,
the Appellant in the present recourse, in the total amount
of P107,946.00 as evidenced by "Promissory Note"
executed by the Appellees in favor of the Appellant. To
secure the payment of said loans, the Appellees executed
"Real Estate Mortgages" in favor of the Appellants over
their parcels of land located in BF-Parañaque, covered by
Transfer Certificate of Title Nos. 444645, 450406, 450407
and 455410 of the Registry of Deeds of Parañaque
(Annexes "B" to "B-2." Amended Complaint). Under said
deeds, the Appellant may increase the rate of interest, on
said loans, within the limits allowed by law, as Appellant’s
Board of Directors may prescribe for its borrowers. At that
time, under the Usury Law, Act 2655, as amended, the
maximum rate of interest for loans secured by real estate
mortgages was 12% per annum. On January 10, 1975,
the Appellees and the Appellant executed a "Deed of
Consolidation and Amendment of Real Estate Mortgage"
whereby the aforementioned loans of the Appellees and
the "Real Estate Mortgage" executed by them as security
for the payment of said loans were consolidated (pages
33-35, Record). Likewise, under said deed, the loan of the
Appellees from the Appellant was increased to
P188,000.00. The Appellees executed a "Promissory
Note", dated January 15, 1975, whereby they bound and
obliged themselves, jointly and severally, to pay the
Appellant the aforesaid amount of P188,000.00 with
interest at the rate of 12% per annum, in nineteen (19)
years from date thereof, in stated installments of
P2,096.93 a month (page 32. Records). On January 2,
1976, the Central Bank of the Philippines issued Central
Bank Circular No. 494, quoted infra, as follows:
x x x
‘3 The maximum rate of interest, including commissions,
premiums, fees and other charges on loans with maturity
of more than seven hundred thirty (730) days, by banking
institutions, including thrift banks, or by financial
intermediaries authorized to engage in quasi-banking
functions shall be nineteen percent (19%) per annum.’. .
.
x x x
‘7. Except as provided in this Circular and Circular No.
493, loans or renewals thereof shall continue to be
governed by the Usury Law, as amended.’ (idem, supra).
In the meantime, the Skyline Builders, Inc., through its
President, Appellee Calvin Arcilla, secured loans from the
Bank of the Philippine Islands in the total amount of
P450,000.00. To insure payment of the aforesaid loan,
the FGU Insurance Corporation, issued PG Bond No. 1003
for the amount of P225,000.00 (pages 434-436, Records)
in favor of the Bank of the Philippine Islands. Skyline
Buildings, Inc., and the Appellees executed an
"Agreement of Counter-Guaranty with Mortgage" in favor
of the FGU Insurance Corporation covering the aforesaid
parcels of land to assure payment of any amount that the
insurance company may pay on account of said loans
(pages 429-436, Records). The mortgage was annotated
as Entry No. 58009 at the dorsal portion of Appellees’
titles.
After October 30, 1978, the Appellant prepared and
issued a "Statement of Account" to the Appellees on their
loan account to the effect that, as of October 30, 1978,
the balance of their loan account, inclusive of interests,
computed at 17% per annum. amounted to 284,490.75
(page 555, Records). It turned out that the Appellant
unilaterally increased the rate of interest on the loan
account of the Appellees from 12% per annum, as
covenanted in the "Real Estate Mortgage" and "Deed of
Consolidated and Amended Real Estate Mortgage" to 17%
per annum on the authority of the aforequoted Central
Bank Circular.
The Appellees failed to pay their monthly amortizations to
Appellant. The latter forthwith filed, on April 3, 1979, a
petition, with the Provincial Sheriff, for the extrajudicial
foreclosure of Appellees’ "Real Esate Mortgage" in favor
of the Appellant for the amount of P342,798.00 inclusive
of the 17% per annum which purportedly was the totality
of Appellees’ account with the Appellant on their loans.
The Appellant was the purchaser of the property at public
auction for the aforesaid amount of P324,798.00. On May
25, 1979, the Sheriff executed a "Certificate of Sale" over
the aforesaid properties in favor of the Appellant for the
aforesaid amount (Pages 37-38, Records).
The Appellant filed a "Petition for a Writ of Possession"
with the Regional Trial Court entitled "Banco Filipino
Savings and Mortgage Bank v. Elsa Arcilla, Et Al., LRC
 51 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O

Case No. P-7757-P." On February 28, 1980, the Court
rendered a Decision granting the Petition of the Appellant.
The Appellees appealed to the Court of Appeals but the
latter Court, on June 29, 1985, promulgated a Decision
affirming the Decision of the Regional Trial Court (pages
190-1 98, Records).
In the meantime, the FGU Insurance Corporation, Inc.,
redeemed the aforesaid properties from the Appellant by
paying to the latter the amount of P389,289.41 inclusive
of interest computed at 17% per annum. The Appellant
and FGU Insurance Corp., Inc. executed, on May 27,
1980, a "Deed of Redemption" (pages 126-129,
Records.)
On September 2, 1985, the Appellees filed a complaint in
the court a quo, for the "Annulment of the Loan Contracts,
Foreclose Sale with Prohibition and Injunction, Etc.,
"entitled "Calvin Arcilla, et al v. Banco Filipino Savings and
Mortgage Bank, Et. Al." (pages 1-38, Records).
The Appellees averred, in their complaint inter alia, that
the loan contracts and mortgages between the Appellees
and the Appellant were null and void because: (a) the
interests, charges, etc. were deducted in advance from
the face value of the "Promissory Notes" executed by the
Appellees; and (b) the rate of interests charged by the
Appellant were usurious. The Appellees prayed that
judgment be rendered in their favor as follows:
x x x (pages 83-129, Records). The Court granted said motion
In the interim, the Supreme Court promulgated its
Decision in the precedent - setting case of "Banco Filipino
Savings and Mortgage Bank v. Hon. Miguel Navarro, Et
Al., 152 SCRA 346" where it declared that Central Bank
Circular No. 494 was not the "law" envisaged in the
mortgage deeds of borrowers of the Bank; that the
escalation clause incorporated in said deeds giving
authority to the Appellant to increase the rate of interests
without the corresponding de-escalation clause should not
be given effect because of its one-sidedness in favor of
the Appellant; that the aforesaid Central Bank Circular did
not apply to loans secured by real estate mortgages, and
that, therefore, the Appellant cannot rely said Circular as
authority for it to unilaterally increase the rate of interests
on loans secured by Real Estate Mortgages.
In the meantime, the FGU Insurance Corp., Inc., filed a
"Motion for Substitution" with the Regional Trial Court, in
LRC Case No. Pq-7757-P praying that it be substituted as
the Petitioner in said case (pages 354-356, Records). The
Appellees were served with a copy of said motion and filed
their Opposition thereto. However, on November 10,
1987, the Regional Trial Court rendered a Decision
granting the motion of FGU Insurance Company (page
369, Records)
On December 3, 1987, the Appellees filed a Motion, with
the Court a quo, for leave to file an "Amended Complaint"
to implead FGU Insurance Corporation as party defendant
and admitted Appellees’ Amended Complaint.

WHEREFORE, it is respectfully prayed
a) Pending hearing on the prayer for the issuance of the
Writ of Preliminary Injunction, a restraining order be
immediately issued against the defendants or anyone
acting in their behalf from enforcing the writ of possession
issued against the plaintiffs:
b) After notice and hearing, a writ of preliminary
injunction be issued against the defendants, particularly
defendants FGU Insurance Corporation and the City
Sheriff of Pasay City, MM. or any of his deputies or anyone
acting in their behalf from enforcing the writ of
possession;
— After the requisite pre-trial, the Court a quo issued a Pre-
Trial Order which defined, inter alia, Appellees’ action
against the Appellant. and the latter’s defenses. to wit:
x x x
On the part of the defendants Banco Filipino Savings to
simplify the case, it seeks to declare as null and void
plaintiff’s loan contract with Banco Filipino obtained in
May 1974, on the ground that the interest agreed in the
contract was usurious. Plaintiffs also seek to declare as
null and void the foreclosure of their mortgage by Banco
Filipino on the ground that the loan with the said
mortgagee foreclosure maybe validly done.

c) After trial — DEFENSES

1) To make the injunction permanent; 1. Prescription

2) Declare the loan contracts null and void: 2. Laches

3) Declare the extrajudicial foreclosure null and void: 3. Estoppel" (page 496, Records)

4) Ordering the defendants to pay the plaintiffs the sums In the meantime, the Appellees and FGU Insurance
of P100,000.00 as moral damages; P50,000.00 as Corporation entered into and forged a "Compromise
attorney fees; and, costs of suit.. Agreement." The Court a quo promulgated a Decision,
dated April 3, 1991, based on said Compromise
PLAINTIFFS further pray for such other reliefs and Agreement." Under the cOmpromise Agreement", the
remedies just and equitable in the premises." (pages 88- Appellees bound and obliged themselves, jointly and
89. Records) severally, to pay to FGU Insurance Corporation the
amount of 91,964,117.00 in three (3) equal installments
In its Answer to the Complaint the Appellant averred that and that:
the interests charged by it on Appellees’ loan accounts
and that the said loan contracts and mortgages were "x x x
lawful. The Appellant further averred that the Appellees’
action had already prescribed. 6. Upon faithful compliance by plaintiffs Calvin S. Arcilla
and Elsa B. Arcilla with their Agreement, defendant FGU
 52 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
Insurance Corporation shall renounce in their favor all its
rights, interests and claims to the four (4) parcels of land
mentioned in paragraph No. 4 of this Compromise
Agreement, together with all the improvements thereon,
and plaintiffs Calvin S. Arcilla and Elsa B. Arcilla shall be
subrogated to all such rights, interests and claims. In
addition, defendant FGU Insurance Corporation shall
execute in favor of plaintiffs Calvin S. Arcilla and Elsa B.
Arcilla a deed of cancellation of the real estate mortgage
constituted in its favor on the above-mentioned four (4)
parcels of land, together with all the improvements
thereon. All documentary stamps and expenses for
registration of the said deed of cancellation of mortgage
shall be for the account of plaintiffs Calvin S. Arcilla and
Elsa B. Arcilla.
7. Subject to the provisions of paragraph No. 4 of this
Compromise Agreement, the execution of this
Compromise Agreement shall be without prejudice to the
prosecution of the claims of plaintiffs Calvin S. Arcilla and
Elsa B. Arcilla. (pages 543-544, Records)
Thereafter, the Appellees and the Appellant agreed, upon
the prodding of the Court a quo, that the only issue to be
resolved by the Court a quo was, whether or not the
Appellees were entitled to the refund, under the Decision
of the Supreme Court in "Banco Filipino Savings and
Mortgage Bank v. Hon. Miguel Navarro, Et Al.," supra. On
November 8, 1991. the Appellees filed a "Motion for
Summary Judgment" appending thereto, inter alia, the
Affidavit of Appellee Calvin S. Arcilla and the appendages
thereof (pages 550-555, Records). Appellant filed its
Opposition but did not append any affidavit to said
Opposition. On March 26, 1993, the Court a quo
promulgated a Decision, the decretal portion of which
reads as follows:
‘WHEREFORE, premises considered, judgment is hereby
rendered in favor of the plaintiffs and against defendant
Banco Filipino ordering defendant Banco Filipino to pay
spouses Calvin S. Arcilla and Elsa B. Arcilla the sum of
P126,139.00 with interest thereon at 12% per annum
reckoned from the filing of the complaint.
SO ORDERED.’ (pages 584-585, Records)" 2
Petitioner appealed to the Court of Appeals, which
affirmed the decision of the RTC the dispositive portion of
which reads:
"IN THE LIGHT OF ALL THE FOREGOING, the assailed
Decision is AFFIRMED. Appellant’s appeal is DISMISSED.
With costs against the Appellant.
SO ORDERED." 3 September 2, 1985 or almost eight years thereafter, their
Their Motion for Reconsideration 4 was denied hence this
petition where the petitioner assigns the following errors:
"I. THE HONORABLE COURT OF APPEALS ERRED WHEN IT
HELD THAT THE CAUSE OF ACTION OF THE PRIVATE
RESPONDENTS ACCRUED ON OCTOBER 30, 1978, AND
THEREFORE THE FILING OF THEIR COMPLAINT FOR
ANNULMENT OF THEIR LOAN CONTRACTS WITH THE
PETITIONER IN 1985 WAS NOT YET BARRED BY
PRESCRIPTION.
II. THE HONORABLE COURT OF APPEALS ERRED WHEN IT
HELD THAT THE MATERIAL ALLEGATIONS OF THE
PRIVATE RESPONDENTS COMPLAINT WERE SUFFICIENT
TO WARRANT THE RELIEFS GRANTED TO THEM BY THE
LOWER COURT, PARTICULARLY THE REFUND OF
P126,139.00 REPRESENTING ALLEGED EXCESS
INTEREST PAID ON THEIR LOAN.
III. THE HONORABLE COURT OF APPEALS ERRED IN
HOLDING THAT THE PRIVATE RESPONDENTS WERE
ENTITLED TO THE SAID REFUND OF P126,139.00
CLAIMED BY THEM." 5
The petitioner maintains that the complaint filed by herein
private respondents was an action for Annulment of Loan
Contracts, foreclosure sale with prohibition and
injunction. It is contended that these causes of action
accrued on the date of the execution of the promissory
note and deed of mortgage on January 15, 1975 and not
October 30, 1978 as found by the Court of Appeals. Thus,
private respondents cause of action has already
prescribed inasmuch as the case was filed on September
2, 1985 or more than ten years thereafter. Petitioner
further contends that private respondents cannot rely on
the ruling in the case of Banco Filipino Savings & Mortgage
Bank v. Navarro 6 considering that they were not parties
to said case. Petitioner also maintains that the order of
the lower court, which was affirmed by the Court of
Appeals ordering the petitioner to refund the excess
interest paid by private respondents in the amount of
P126,318.00 was without any legal basis since private
respondents never raised the issue of interest nor prayed
for any relief with respect thereto. Moreover, the private
respondents never paid said amount to the petitioner.
While the amount was included in the bid price of the bank
when it bought the mortgaged properties during the
public auction, said bid price did not prejudice the private
respondents because when the private respondents
repurchased the properties, the amount they paid was
different and independent of the redemption price of the
bank. Besides, the agreement between the private
respondents and FGU Insurance Corporation was one of
sale and not redemption. Thus, any amount paid by the
private respondents to FGU was voluntarily entered into
by them and was not a consequence of the foreclosure of
the mortgage properties.
Conversely, private respondents allege that their action
has not prescribed considering that prescription begins to
run from the day the action may be brought; the date
their right of action accrued. It is their contention that the
period of prescription of their action should commence to
run from October 30, 1978 when the petitioner
unilaterally increased the rate of interest on private
respondents’ loan to 17% per annum. Thus, when private
respondents filed their action against the petitioner on
action had not yet prescribed. Moreover, private
respondents aver that they are entitled to the refund
inasmuch as the escalation clause incorporated in the loan
contracts do not have a corresponding de-escalation
clause and is therefore illegal.
The appeal is unmeritorious.
There are only two issues, which must be resolved in the
present appeal. First, has the action of the private
respondents prescribed; and second, are the respondents
entitled to the refund of the alleged interest
overpayments.
 53 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
Petitioner’s claim that the action of the private
respondents has, prescribed is bereft of merit. Under
Article 1150 of the Civil Code, the time for prescription of
all kinds of actions, when there is no special provision
which ordains otherwise, shall be counted from the day
they may be brought. Thus, the period of prescription of
any cause of action is reckoned only from the date the
cause of action accrued. 7 And a cause of action arises
when that which should have been done is not done, or
that which should not have been done is done. 8 The
period should not be made to retroact to the date of the
execution of the contract on January 15, 1975 as claimed
by the petitioner for at that time, there would be no way
for the respondents to know of the violation of their rights.
9 The Court of Appeals therefore correctly found that
respondents’ cause of action accrued on October 30,
1978, the date they received the statement of account
showing the increased rate of interest, for it was only from
that moment that they discovered the petitioner’s
unilateral increase thereof. We quote with approval the
pertinent portions of the Court of Appeals decision as
follows:
"It is the legal possibility of bringing the action that
determines the starting point for the computation of the
period of prescription (Constancia C. Telentino v. Court of
Appeals, Et Al., 162 SCRA 66). In fine, the ten-year
prescriptive period is to be reckoned from the accrual of
Appellees’ right of action, not necessarily on the very date
of the execution of the contracts subject of the action
(Naga Telephone Co. Inc. v. Court of Appeals, Et Al., 230
SCRA 351). A party’s right of action accrues only when
the confluence of the following elements is established:
." . : a) a right in favor of the plaintiff by whatever means
and under whatever law it arises or is created; b) an
obligation on the part of defendant to respect such right;
and c) an act or omission on the part of such defendant
violative of the right of the plaintiff (Cole v. Vda. de
Gregorio, 116 SCRA 670 [1982]; Mathay v. Consolidated
Bank & Trust Co., 58 SCRA 559 [1974]; Vda. de Enriquez
v. Dela Cruz, 54 SCRA 1 [1973]. It is only when the last
element occurs or takes place that it can be said in law
that a cause of action has arisen (Cole v. Vda. De
Gregorio, supra)" (Maria U. Espanol v. Chairman, etc., Et
Al., 137 SCRA 314, page 318)
More, the aggrieved must have either actual or
presumptive knowledge of the violation, by the guilty
party of his rights either by an act or omission. The
question that now comes to the fore is when the Appellees
became precisely aware of the unilateral increase, by the
Appellant, of the rate of interest on their loan account to
17% per annum. As can be ascertained from the records,
the Appellees discovered or should have discovered, for
the first time, the unilateral increase by the Appellant of
the rate of interest to 17% per annum when they received
the "Statement of Account" of the Appellant as of October
30, 1978. Hence, it was only then that the prescriptive
period for the Appellees to institute their action in the
Court a quo commenced. Since the Appellees filed their
complaint in the Court a quo on September 2, 1985, the
same was seasonably filed within the ten-year
prescriptive Period." 10
Anent the second issue as to whether the respondents are
entitled to recover the alleged overpayments of interest,
we find that they are despite the absence of any prayer
therefor. This Court has ruled that it is the material
allegations of fact in the complaint, not the legal
conclusion made therein or the prayer that determines the
relief to which the plaintiff is entitled. 11 It is the
allegations of the pleading which determine the nature of
the action and the Court shall grant relief warranted by
the allegations and the proof even if no such relief is
prayed for. 12 Thus, even if the complaint seeks the
declaration of nullity of the contract, the Court of Appeals
correctly ruled that the factual allegations contained
therein ultimately seek the return of the excess interests
paid.
The amended complaint 13 of herein private respondents
specifically allege that the contracts of loan entered into
by them and the petitioner were contrary to and signed in
violation of the Usury Law 14 and consequentially pray
that said contracts be declared null and void. The
amended complaint reads:
"6. The aforementioned loans granted by defendant
Banco Filipino to the plaintiffs as stated on the face of the
promissory note and real estate mortgage (Annexes "B"
to "D", inclusive) were not actually received by the
plaintiffs because interests, charges, etc. were deducted
in advance from the face value of the loans not in
accordance with the contracts;
7. Even the loan contracts (Annexes "B" to "D", inclusive)
required by defendant Banco Filipino to be signed by the
plaintiffs were contrary to and in violation of the then
Usury Law, as amended;
8. Assuming arguendo that the loan contracts between
plaintiffs and defendant Banco Filipino are valid the extra-
judicial foreclosure of the properties of the plaintiffs on
May 24, 1979 was null and void for having been
conducted in clear violation of the law (Act 3135).
namely: a) lack of proper notice to the plaintiffs; b) lack
of proper publication and costing as required by law; c)
the alleged sale was conducted at the place other than
that prescribed by law, among others;
9. On May 27, 1990 defendant Banco Filipino purportedly
executed in favor of defendant FGU Insurance Corporation
a Deed of Redemption over the foreclosed properties of
the plaintiffs, again, without notice to the latter as
evidenced by the said Deed of Redemption, copy of which
is hereto attached and marked as Annex "F."
10. The Deed of Redemption (Annex "F") is clearly null
and void for having been executed in violation of Rule 39,
Rules of Court, and other related provisions of the Rules
of Court. 15
The loan contracts with real estate mortgage entered into
by and between the petitioner and respondent stated that
the petitioner may increase the interest on said loans,
within the limits allowed by law, as petitioner’s Board of
Directors may prescribe for its borrowers. At the time the
contracts were entered into, said escalation clause was
valid. 16 It was only pursuant to P.D. No. 1684 which
became effective March 17, 1980 wherein to be valid,
escalation clauses should provide: 1.) that there can be
an increase in interest if increased by law or by the
Monetary Board; and 2.) in order for such stipulation to
be valid, it must include a provision for the reduction of
the stipulated interest in the event that the maximum rate
of interest is reduced by law or by the Monetary Board.
17
 54 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O

Given the validity of the escalation clause, could the

petitioner increase the stipulated interest pursuant to the
Central Bank Circular 494 from 12% to 17%.

We rule that it may not.

The escalation clause in the loan contracts reads as

follows:

". . . g.) The rate of interest charged on the obligation

secured by this mortgage, as well as the interest on the
amount which may have been advanced by the Mortgagee
in accordance with paragraph (b) and (d) hereof, shall be
subject , during the terms of this contract, to such an
increase, within the limits allowed by law, as the Board of
Directors of the Mortgagee may prescribe for its debtors;
. . ." (Emphasis supplied). 18

In Banco Filipino Savings & Mortgage Bank v. Navarro, 19

which involved a similar escalation clause, 20 we ruled
that Central Bank Circular 494, although it has the force
and effect of law, is not a law and is not the law
contemplated by the parties which authorizes the
petitioner to unilaterally raise the interest rate of the loan.
21 Consequently, the reliance by the petitioner on Central
Bank Circular 494 to unilaterally raise the interest rates
on the loan in question was without any legal basis.

Petitioner’s argument that the Banco Filipino case cannot

be applied to the present case since the respondents were
not intervenors therein is flawed. Only the judgment in
said case cannot bind the respondents as they were not
parties thereto, however, the doctrine enunciated therein
is a judicial decision and forms part of the legal system of
the land. 22 It forms a precedent, which must be adhered
to under the doctrine of stare decisis. 23 Thus, even if the
respondents were not parties to the above-mentioned
case, the doctrine enunciated therein may be applied to
the present case.

WHEREFORE, the decision of the Court of Appeals in CA-

G.R. CV No. 45891 is AFFIRMED and the instant petition
is hereby DENIED.

No pronouncement as to costs.

SO ORDERED.
 55 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
[G.R. No. 114286. April 19, 2001.]
THE CONSOLIDATED BANK AND TRUST
CORPORATION (SOLIDBANK), Petitioner, v. THE
COURT OF APPEALS, CONTINENTAL CEMENT
CORPORATION, GREGORY T.. LIM and SPOUSE,
Respondents.
DECISION
YNARES-SANTIAGO, J.:
The instant petition for review seeks to partially set aside
the July 26, 1993 Decision 1 of respondent Court of
Appeals in CA-G.R. CV No. 29950, insofar as it orders
petitioner to reimburse respondent Continental Cement
Corporation the amount of P490,228.90 with interest
thereon at the legal rate from July 26, 1988 until fully
paid. The petition also seeks to set aside the March 8,
1994 Resolution 2 of respondent Court of Appeals denying
its Motion for Reconsideration.
The facts are as follows:
On July 13, 1982, respondents Continental Cement
Corporation (hereinafter, respondent Corporation) and
Gregory T. Lim (hereinafter, respondent Lim) obtained
from petitioner Consolidated Bank and Trust Corporation
Letter of Credit No. DOM-23277 in the amount of
P1,068,150.00 On the same date, respondent Corporation
paid a marginal deposit of P320,445.00 to petitioner. The
letter of credit was used to purchase around five hundred
thousand liters of bunker fuel oil from Petrophil
Corporation, which the latter delivered directly to
respondent Corporation in its Bulacan plant. In relation to
the same transaction, a trust receipt for the amount of
P1,001,520.93 was executed by respondent Corporation,
with respondent Lim as signatory.
Claiming that respondents failed to turn over the goods
covered by the trust receipt or the proceeds thereof,
petitioner filed a complaint for sum of money with
application for preliminary attachment 3 before the
Regional Trial Court of Manila. In answer to the complaint,
respondents averred that the transaction between them
was a simple loan and not a trust receipt transaction, and
that the amount claimed by petitioner did not take into
account payments already made by them. Respondent
Lim also denied any personal liability in the subject
transactions. In a Supplemental Answer, respondents
prayed for reimbursement of alleged overpayment to
petitioner of the amount of P490,228.90.
At the pre-trial conference, the parties agreed on the
following issues:
1) Whether or not the transaction involved is a loan
transaction or a trust receipt transaction;
2) Whether or not the interest rates charged against the
defendants by the plaintiff are proper under the letter of
credit, trust receipt and under existing rules or regulations
of the Central Bank;
3) Whether or not the plaintiff properly applied the
previous payment of P300,456.27 by the defendant
corporation on July 13, 1982 as payment for the latter’s
account; and
4) Whether or not the defendants are personally liable
under the transaction sued for in this case. 4
On September 17, 1990, the trial court rendered its
Decision, 5 dismissing the Complaint and ordering
petitioner to pay respondents the following amounts
under their counterclaim: P490,228.90 representing
overpayment of respondent Corporation, with interest
thereon at the legal rate from July 26, 1988 until fully
paid; P10,000.00 as attorney’s fees; and costs.
Both parties appealed to the Court of Appeals, which
partially modified the Decision by deleting the award of
attorney’s fees in favor of respondents and, instead,
ordering respondent Corporation to pay petitioner
P37,469.22 as and for attorney’s fees and litigation
expenses.
Hence, the instant petition raising the following issues:
1. WHETHER OR NOT THE RESPONDENT APPELLATE
COURT ACTED INCORRECTLY OR COMMITTED
REVERSIBLE ERROR IN HOLDING THAT THERE WAS
OVERPAYMENT BY PRIVATE RESPONDENTS TO THE
PETITIONER IN THE AMOUNT OF P490,228.90 DESPITE
THE ABSENCE OF ANY COMPUTATION MADE IN THE
DECISION AND THE ERRONEOUS APPLICATION OF
PAYMENTS WHICH IS IN VIOLATION OF THE NEW CIVIL
CODE.
2. WHETHER OR NOT THE MANNER OF COMPUTATION OF
THE MARGINAL DEPOSIT BY THE RESPONDENT
APPELLATE COURT IS IN ACCORDANCE WITH BANKING
PRACTICE.
3. WHETHER OR NOT THE AGREEMENT AMONG THE
PARTIES AS TO THE FLOATING OF INTEREST RATE IS
VALID UNDER APPLICABLE JURISPRUDENCE AND THE
RULES AND REGULATIONS OF THE CENTRAL BANK.
4. WHETHER OR NOT THE RESPONDENT APPELLATE
COURT GRIEVOUSLY ERRED IN NOT CONSIDERING THE
TRANSACTION AT BAR AS A TRUST RECEIPT
TRANSACTION ON THE BASIS OF THE JUDICIAL
ADMISSIONS OF THE PRIVATE RESPONDENTS AND FOR
WHICH RESPONDENTS ARE LIABLE THEREFOR.
5. WHETHER OR NOT THE RESPONDENT APPELLATE
COURT GRIEVOUSLY ERRED IN NOT HOLDING PRIVATE
RESPONDENT SPOUSES LIABLE UNDER THE TRUST
RECEIPT TRANSACTION. 6
The petition must be denied.
On the first issue respecting the fact of overpayment
found by both the lower court and respondent Court of
Appeals, we stress the time-honored rule that findings of
fact by the Court of Appeals especially if they affirm
factual findings of the trial court will not be disturbed by
this Court, unless these findings are not supported by
evidence. 7
Petitioner decries the lack of computation by the lower
court as basis for its ruling that there was an overpayment
made. While such a computation may not have appeared
 56 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
in the Decision itself, we note that the trial court’s finding
of overpayment is supported by evidence presented
before it. At any rate, we painstakingly reviewed and
computed the payments together with the interest and
penalty charges due thereon and found that the amount
of overpayment made by respondent Bank to petitioner,
i.e., P563,070.13, was more than what was ordered
reimbursed by the lower court. However, since
respondents did not file an appeal in this case, the amount
ordered reimbursed by the lower court should stand.
Moreover, petitioner’s contention that the marginal
deposit made by respondent Corporation should not be
deducted outright from the amount of the letter of credit
is untenable. Petitioner argues that the marginal deposit
should be considered only after computing the principal
plus accrued interests and other charges. However, to
sustain petitioner on this score would be to countenance
a clear case of unjust enrichment, for while a marginal
deposit earns no interest in favor of the debtor-depositor,
the bank is not only able to use the same for its own
purposes, interest-free, but is also able to earn interest
on the money loaned to respondent Corporation. Indeed,
it would be onerous to compute interest and other charges
on the face value of the letter of credit which the
petitioner issued, without first crediting or setting off the
marginal deposit which the respondent Corporation paid
to it. Compensation is proper and should take effect by
operation of law because the requisites in Article 1279 of
the Civil Code are present and should extinguish both
debts to the concurrent amount. 8 normally obtains in a pure trust receipt transaction,
Hence, the interests and other charges on the subject
letter of credit should be computed only on the balance of
P681,075.93, which was the portion actually loaned by
the bank to respondent Corporation.
Neither do we find error when the lower court and the
Court of Appeals set aside as invalid the floating rate of
interest exhorted by petitioner to be applicable. The
pertinent provision in the trust receipt agreement of the
parties fixing the interest rate states:
I, WE jointly and severally agree to any increase or
decrease in the interest rate which may occur after July
1, 1981, when the Central Bank floated the interest rate,
and to pay additionally the penalty of 1% per month until
the amount/s or installment/s due and unpaid under the
trust receipt on the reverse side hereof is/are fully paid.
9
We agree with respondent Court of Appeals that the
foregoing stipulation is invalid, there being no reference
rate set either by it or by the Central Bank, leaving the
determination thereof at the sole will and control of
petitioner.
While it may be acceptable, for practical reasons given the
fluctuating economic conditions, for banks to stipulate
that interest rates on a loan not be fixed and instead be
made dependent upon prevailing market conditions, there
should always be a reference rate upon which to peg such
variable interest rates. An example of such a valid
variable interest rate was found in Polotan, Sr. v. Court of
Appeals. 10 In that case, the contractual provision stating
that "if there occurs any change in the prevailing market
rates, the new interest rate shall be the guiding rate in
computing the interest due on the outstanding obligation
without need of serving notice to the Cardholder other
than the required posting on the monthly statement
served to the Cardholder" 11 was considered valid. The
aforequoted provision was upheld notwithstanding that it
may partake of the nature of an escalation clause,
because at the same time it provides for the decrease in
the interest rate in case the prevailing market rates
dictate its reduction. In other words, unlike the stipulation
subject of the instant case, the interest rate involved in
the Polotan case is designed to be based on the prevailing
market rate. On the other hand, a stipulation ostensibly
signifying an agreement to "any increase or decrease in
the interest rate," without more, cannot be accepted by
this Court as valid for it leaves solely to the creditor the
determination of what interest rate to charge against an
outstanding loan.
Petitioner has also failed to convince us that its
transaction with respondent Corporation is really a trust
receipt transaction instead of merely a simple loan, as
found by the lower court and the Court of Appeals.
The recent case of Colinares v. Court of Appeals 12
appears to be foursquare with the facts obtaining in the
case at bar. There, we found that inasmuch as the debtor
received the goods subject of the trust receipt before the
trust receipt itself was entered into, the transaction in
question was a simple loan and not a trust receipt
agreement. Prior to the date of execution of the trust
receipt, ownership over the goods was already transferred
to the debtor. This situation is inconsistent with what
wherein the goods belong in ownership to the bank and
are only released to the importer in trust after the loan is
granted.
In the case at bar, as in Colinares, the delivery to
respondent Corporation of the goods subject of the trust
receipt occurred long before the trust receipt itself was
executed. More specifically, delivery of the bunker fuel oil
to respondent Corporation’s Bulacan plant commenced on
July 7, 1982 and was completed by July 19, 1982. 13
Further, the oil was used up by respondent Corporation in
its normal operations by August, 1982. 14 On the other
hand, the subject trust receipt was only executed nearly
two months after full delivery of the oil was made to
respondent Corporation, or on September 2, 1982.
The danger in characterizing a simple loan as a trust
receipt transaction was explained in Colinares, to wit:
The Trust Receipts Law does not seek to enforce payment
of the loan, rather it punishes the dishonesty and abuse
of confidence in the handling of money or goods to the
prejudice of another regardless of whether the latter is
the owner. Here, it is crystal clear that on the part of
Petitioners there was neither dishonesty nor abuse of
confidence in the handling of money to the prejudice of
PBC. Petitioners continually endeavored to meet their
obligations, as shown by several receipts issued by PBC
acknowledging payment of the loan.
The Information charges Petitioners with intent to defraud
and misappropriating the money for their personal use.
The mala prohibita nature of the alleged offense
notwithstanding, intent as a state of mind was not proved
to be present in Petitioners’ situation. Petitioners
employed no artifice in dealing with PBC and never did
they evade payment of their obligation nor attempt to
abscond. Instead, Petitioners sought favorable terms
 57 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O

precisely to meet their obligation. Q So by your statement who really owns the bunker fuel
oil?
Also noteworthy is the fact that Petitioners are not
importers acquiring the goods for re-sale, contrary to the ATTY. RACHON:
express provision embodied in the trust receipt. They are
contractors who obtained the fungible goods for their Objection already answered.
construction project. At no time did title over the
construction materials pass to the bank, but directly to COURT:
the Petitioners from CM Builders Centre. This impresses
upon the trust receipt in question vagueness and Give time to the other counsel to object.
ambiguity, which should not be the basis for criminal
prosecution in the event of violation of its provisions. ATTY. RACHON:

The practice of banks of making borrowers sign trust He has testified that ownership was acknowledged in
receipts to facilitate collection of loans and place them favor of Continental Cement Corp. so that question has
under the threats of criminal prosecution should they be already been answered.
unable to pay it may be unjust and inequitable, if not
reprehensible. Such agreements are contracts of ATTY. BAÑAGA:
adhesion which borrowers have no option but to sign lest
their loan be disapproved. The resort to this scheme That is why I made a follow up question asking ownership
leaves poor and hapless borrowers at the mercy of banks, of the bunker fuel oil.
and is prone to misinterpretation, as had happened in this
case. Eventually, PBC showed its true colors and admitted COURT:
that it was only after collection of the money, as
manifested by its Affidavit of Desistance. Proceed.

Similarly, respondent Corporation cannot be said to have ATTY. BAÑAGA:

been dishonest in its dealings with petitioner. Neither has
it been shown that it has evaded payment of its
obligations. Indeed, it continually endeavored to meet the
same, as shown by the various receipts issued by
petitioner acknowledging payment on the loan. Certainly,
the payment of the sum of P1,832,158.38 on a loan with
a principal amount of only P681,075.93 negates any
badge of dishonesty, abuse of confidence or mishandling
of funds on the part of respondent Corporation, which are
the gravamen of a trust receipt violation. Furthermore,
respondent Corporation is not an importer which acquired
the bunker fuel oil for re-sale; it needed the oil for its own
operations. More importantly, at no time did title over the
oil pass to petitioner, but directly to respondent
Corporation to which the oil was directly delivered long
before the trust receipt was executed. The fact that
ownership of the oil belonged to respondent Corporation,
through its President, Gregory Lim, was acknowledged by
petitioner’s own account officer on the witness stand, to
wit:
Q After the bank opened a letter of credit in favor of
Petrophil Corp. for the account of the defendants thereby
paying the value of the bunker fuel oil what transpired
next after that?
A Upon purchase of the bunker fuel oil and upon the
requests of the defendant possession of the bunker fuel
oil were transferred to them.
Q You mentioned them to whom are you referring to?
A To the Continental Cement Corp. upon the execution of
the trust receipt acknowledging the ownership of the
bunker fuel oil this should be acceptable for whatever
disposition he may make.
Q You mentioned about acknowledging ownership of the
bunker fuel oil to whom by whom?
A By the Continental Cement Corp.
Q Who owns the bunker fuel oil after purchase from
Petrophil Corp.?
A Gregory Lim. 15
By all indications, then, it is apparent that there was really
no trust receipt transaction that took place. Evidently,
respondent Corporation was required to sign the trust
receipt simply to facilitate collection by petitioner of the
loan it had extended to the former.
Finally, we are not convinced that respondent Gregory T.
Lim and his spouse should be personally liable under the
subject trust receipt. Petitioner’s argument that
respondent Corporation and respondent Lim and his
spouse are one and the same cannot be sustained. The
transactions sued upon were clearly entered into by
respondent Lim in his capacity as Executive Vice President
of respondent Corporation. We stress the hornbook law
that corporate personality is a shield against personal
liability of its officers. Thus, we agree that respondents
Gregory T. Lim and his spouse cannot be made personally
liable since respondent Lim entered into and signed the
contract clearly in his official capacity as Executive Vice-
President. The personality of the corporation is separate
and distinct from the persons composing it. 16
WHEREFORE, in view of all the foregoing, the instant
Petition for Review is DENIED. The Decision of the Court
of Appeals dated July 26, 1993 in CA-G.R. CV No. 29950
is AFFIRMED.
SO ORDERED.
[G.R. No. 116710. June 25, 2001.]
DANILO D. MENDOZA, also doing business under
the name and style of ATLANTIC EXCHANGE
PHILIPPINES, Petitioner, v. COURT OF APPEALS,
PHILIPPINE NATIONAL BANK, FERNANDO
 58 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
MARAMAG, JR., RICARDO G. DECEPIDA and
BAYANI A. BAUTISTA, Respondents.
DECISION
DE LEON, JR., J.:
Before us is a petition for review on certiorari of the
Decision 1 dated August 8, 1994 of the respondent Court
of Appeals (Tenth Division) in CA-G.R. CV No. 38036
reversing the judgment 2 of the Regional Trial Court
(RTC) and dismissing the complaint therein.
Petitioner Danilo D. Mendoza is engaged in the domestic
and international trading of raw materials and chemicals.
He operates under the business name Atlantic Exchange
Philippines (Atlantic), a single proprietorship registered
with the Department of Trade and Industry (DTI).
Sometime in 1978 he was granted by respondent
Philippine National Bank (PNB) a Five Hundred Thousand
Pesos (P500,000.00) credit line and a One Million Pesos
(P1,000,000.00) Letter of Credit/Trust Receipt (LC/TR)
line.
As security for the credit accommodations and for those
which may thereinafter be granted, petitioner mortgaged
to respondent PNB the following: 1) three (3) parcels of
land 3 with improvements in F. Pasco Avenue, Santolan,
Pasig; 2) his house and lot in Quezon City; and 3) several
pieces of machinery and equipment in his Pasig coco-
chemical plant.
The real estate mortgage 4 provided the following
escalation clause:
(f) The rate of interest charged on the obligation secured
by this mortgage as well as the interest on the amount
which may have been advanced by the Mortgagee in
accordance with paragraph (d) of the conditions herein
stipulated shall be subject during the life of this contract
to such increase within the rates allowed by law, as the
Board of Directors of the Mortgagee may prescribe for its
debtors.
Petitioner executed in favor of respondent PNB three (3)
promissory notes covering the Five Hundred Thousand
Pesos (P500,000.00) credit line, one dated March 8, 1979
for Three Hundred Ten Thousand Pesos (P310,000.00);
another dated March 30, 1979 for Forty Thousand Pesos
(P40,000.00); and the last dated September 27, 1979 for
One Hundred Fifty Thousand Pesos (P150,000.00). The
said 1979 promissory notes uniformly stipulated: "with
interest thereon at the rate of 12% per annum, until paid,
which interest rate the Bank may, at any time, without
notice, raise within the limits allowed by law . . ." 5
Petitioner made use of his LC/TR line to purchase raw
materials from foreign importers. He signed a total of
eleven (11) documents denominated as "Application and
Agreement for Commercial Letter of Credit," 6 on various
dates from February 8 to September 11, 1979, which
uniformly contained the following clause: "Interest shall
be at the rate of 9% per annum from the date(s) of the
draft(s) to the date(s) of arrival of payment therefor in
New York. The Bank, however, reserves the right to raise
the interest charges at any time depending on whatever
policy it may follow in the future." 7 mortgaged properties; 6) assignment of all his export
In a letter dated January 3, 1980 and signed by Branch
Manager Fil S. Carreon Jr., respondent PNB advised
petitioner Mendoza that effective December 1, 1979, the
bank raised its interest rates to 14% per annum, in line
with Central Bank’s Monetary Board Resolution No. 2126
dated November 29, 1979.
On March 9, 1981, he wrote a letter to respondent PNB
requesting for the restructuring of his past due accounts
into a five-year term loan and for an additional LC/TR line
of Two Million Pesos (P2,000,000.00). 8 According to the
letter, because of the shut-down of his end-user
companies and the huge amount spent for the expansion
of his business, petitioner failed to pay to respondent
bank his LC/TR accounts as they became due and
demandable.
Ceferino D. Cura, Branch Manager of PNB Mandaluyong
replied on behalf of the respondent bank and required
petitioner to submit the following documents before the
bank would act on his request: 1) Audited Financial
Statements for 1979 and 1980; 2) Projected cash flow
(cash in-cash out) for five (5) years detailed yearly; and
3) List of additional machinery and equipment and proof
of ownership thereof. Cura also suggested that petitioner
reduce his total loan obligations to Three Million Pesos
(P3,000,000.00) "to give us more justification in
recommending a plan of payment or restructuring of your
accounts to higher authorities of the Bank." 9
On September 25, 1981, petitioner sent another letter
addressed to PNB Vice-President Jose Salvador, regarding
his request for restructuring of his loans. He offered
respondent PNB the following proposals: 1) the disposal
of some of the mortgaged properties, more particularly,
his house and lot and a vacant lot in order to pay the
overdue trust receipts; 2) capitalization and conversion of
the balance into a 5-year term loan payable semi-annually
or on annual installments; 3) a new Two Million Pesos
(P2,000,000.00) LC/TR line in order to enable Atlantic
Exchange Philippines to operate at full capacity; 4)
assignment of all his receivables to PNB from all domestic
and export sales generated by the LC/TR line; and 5)
maintenance of the existing Five Hundred Thousand Pesos
(P500,000.00) credit line.
The petitioner testified that respondent PNB Mandaluyong
Branch found his proposal favorable and recommended
the implementation of the agreement. However, Fernando
Maramag, PNB Executive Vice-President, disapproved the
proposed release of the mortgaged properties and
reduced the proposed new LC/TR line to One Million Pesos
(P1,000,000.00). 10 Petitioner claimed he was forced to
agree to these changes and that he was required to
submit a new formal proposal and to sign two (2) blank
promissory notes.
In a letter dated July 2, 1982, petitioner offered the
following revised proposals to respondent bank: 1) the
restructuring of past due accounts including interests and
penalties into a 5-year term loan, payable semi-annually
with one year grace period on the principal; 2) payment
of Four Hundred Thousand Pesos (P400,000.00) upon the
approval of the proposal; 3) reduction of penalty from 3%
to 1%; 4) capitalization of the interest component with
interest rate at 16% per annum; 5) establishment of a
One Million Pesos (P1,000,000.00) LC/TR line against the
 59 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
proceeds to respondent bank to guarantee payment of his
loans.
According to petitioner, respondent PNB approved his
proposal. He further claimed that he and his wife were
asked to sign two (2) blank promissory note forms.
According to petitioner, they were made to believe that
the blank promissory notes were to be filled out by
respondent PNB to conform with the 5-year restructuring
plan allegedly agreed upon. The first Promissory Note, 11
No. 127/82, covered the principal while the second
Promissory Note, 12 No. 128/82, represented the accrued
interest.
Petitioner testified that respondent PNB allegedly
contravened their verbal agreement by 1) affixing dates
on the two (2) subject promissory notes to make them
mature in two (2) years instead of five (5) years as
supposedly agreed upon; 2) inserting in the first
Promissory Note No. 127/82 an interest rate of 21%
instead of 18%; 3) inserting in the second Promissory
Note No. 128/82, the amount stated therein representing
the accrued interest as One Million Five Hundred Thirty
Six Thousand Four Hundred Ninety Eight Pesos and
Seventy Three Centavos (P1,536,498.73) when it should
only be Seven Hundred Sixty Thousand Three Hundred
Ninety Eight Pesos and Twenty Three Centavos
(P760,398.23) and pegging the interest rate thereon at
18% instead of 12%.
The subject Promissory Notes Nos. 127/82 and 128/82
both dated December 29, 1982 in the principal amounts
of Two Million Six Hundred Fifty One Thousand One
Hundred Eighteen Pesos and Eighty Six Centavos
(P2,651,118.86) and One Million Five Hundred Thirty Six
Thousand Seven Hundred Ninety Eight and Seventy Three
Centavos (P1,536,798.73) respectively and marked
Exhibits "BB" and "CC" respectively, were payable on
equal semi-annual amortization and contained the
following escalation clause:
. . . .which interest rate the BANK may increase within the
limits allowed by law at any time depending on whatever
policy it may adopt in the future; Provided, that, the
interest rate on this note shall be correspondingly
decreased in the event that the applicable maximum
interest rate is reduced by law or by the Monetary Board.
In either case, the adjustment in the interest rate agreed
upon shall take effect on the effectivity date of the
increase or decrease in the maximum interest rate.
x x x amounting to Two Million Four Thousand Four Hundred
It appears from the record that the subject Promissory
Notes Nos. 127/82 and 128/82 superseded and novated
the three (3) 1979 promissory notes and the eleven (11)
1979 "Application and Agreement for Commercial Letter
of Credit" which the petitioner executed in favor of
respondent PNB.
According to the petitioner, sometime in June 1983 the
new PNB Mandaluyong Branch Manager Bayani A.
Bautista suggested that he sell the coco-chemical plant so
that he could keep up with the semi-annual amortizations.
On three (3) occasions, Bautista even showed up at the
plant with some unidentified persons who claimed that
they were interested in buying the plant.
Petitioner testified that when he confronted the PNB
management about the two (2) Promissory Notes Nos.
127/82 and 128/82 (marked Exhibits "BB" and "CC"
respectively) which he claimed were improperly filled out,
Bautista and Maramag assured him that the five-year
restructuring agreement would be implemented on the
condition that he assigns 10% of his export earnings to
the Bank. 13 In a letter dated August 22, 1983, petitioner
Mendoza consented to assign 10% of the net export
proceeds of a Letter of Credit covering goods amounting
to One Hundred Fourteen Thousand Dollars
($114,000.00). 14 However, petitioner claimed that
respondent PNB subsequently debited 14% instead of
10% from his export proceeds. 15
Pursuant to the escalation clauses of the subject two (2)
promissory notes, the interest rate on the principal
amount in Promissory Note No. 127/82 was increased
from 21% to 29% on May 28, 1984, and to 32% on July
3, 1984 while the interest rate on the accrued interest per
Promissory Note No. 128/82 was increased from 18% to
29 % on May 28, 1984, and to 32% on July 3, 1984.
Petitioner failed to pay the subject two (2) Promissory
Notes Nos. 127/82 and 128/82 (Exhibits" " and "CC") as
they fell due. Respondent PNB extrajudicially foreclosed
the real and chattel mortgages, and the mortgaged
properties were sold at public auction to respondent PNB,
as highest bidder, for a total of Three Million Seven
Hundred Ninety Eight Thousand Seven Hundred Nineteen
Pesos and Fifty Centavos (P3,798,719.50).
The petitioner filed in the RTC in Pasig, Rizal a complaint
for specific performance, nullification of the extrajudicial
foreclosure and damages against respondents PNB,
Fernando Maramag Jr., Ricardo C. Decepida, Vice-
President for Metropolitan Branches, and Bayani A.
Bautista. He alleged that the Extrajudicial Foreclosure
Sale of the mortgaged properties was null and void since
his loans were restructured to a five-year term loan;
hence, it was not yet due and demandable; that the
escalation clauses in the subject two (2) Promissory Notes
Nos. 127/82 and 128/82 were null and void, that the total
amount presented by PNB as basis of the foreclosure sale
did not reflect the actual loan obligations of the plaintiff
to PNB; that Bautista purposely delayed payments on his
exports and caused delays in the shipment of materials;
that PNB withheld certain personal properties not covered
by the chattel mortgage; and that the foreclosure of his
mortgages was premature so that he was unable to
service his foreign clients, resulting in actual damages
Sixty One Pesos (P2,004,461.00).
On March 16, 1992, the trial court rendered judgment in
favor of the petitioner and ordered the nullification of the
extrajudicial foreclosure of the real estate mortgage, the
Sheriff’s sale of the mortgaged real properties by virtue
of consolidation thereof and the cancellation of the new
titles issued to PNB; that PNB vacate the subject premises
in Pasig and turn the same over to the petitioner; and also
the nullification of the extrajudicial foreclosure and
sheriff’s sale of the mortgaged chattels, and that the
chattels be returned to petitioner Mendoza if they were
removed from his Pasig premises or be paid for if they
were lost or rendered unserviceable.
The trial court also ordered respondent PNB to restructure
to five-years petitioner’s principal loan of Two Million Six
Hundred Fifty One Thousand One Hundred Eighteen Pesos
 60 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
and Eighty Six Centavos (P2,651,118.86) and the
accumulated capitalized interest on the same in the
amount of Seven Hundred Sixty Thousand Three Hundred
Eighty Nine Pesos and Twenty Three Centavos
(P760,389.23) as of December 1982, and that respondent
PNB should compute the additional interest from January
1983 up to October 15, 1984 only when respondent PNB
took possession of the said properties, at the rate of 12%
and 9% respectively.
The trial court also ordered respondent PNB to grant
petitioner Mendoza an additional Two Million Pesos
(P2,000,000.00) loan in order for him to have the
necessary capital to resume operation. It also ordered
respondents PNB, Bayani A. Bautista and Ricardo C.
Decepida to pay to petitioner actual damages in the
amount of Two Million One Hundred Thirteen Thousand
Nine Hundred Sixty One Pesos (P2,113,961.00) and the
peso equivalent of Six Thousand Two Hundred Fifteen
Dollars ($6,215.00) at the prevailing foreign exchange
rate on October 11, 1983; and exemplary damages in the
amount of Two Hundred Thousand Pesos (P200,000.00).
Respondent PNB appealed this decision of the trial court
to the Court of Appeals. And the Court of Appeals reversed
the decision of the trial court and dismissed the complaint.
Hence, this petition.
It is the petitioner’s contention that the PNB management
restructured his existing loan obligations to a five-year
term loan and granted him another Two Million Pesos
(P2,000,000.00) LC/TR line; that the Promissory Notes
Nos. 127/82 and 128/82 evidencing a 2-year
restructuring period or with the due maturity date
"December 29, 1984" were filled out fraudulently by
respondent PNB, and contrary to his verbal agreement
with respondent PNB; hence, his indebtedness to
respondent PNB was not yet due and the extrajudicial
foreclosure of his real estate and chattel mortgages was
premature. On the other hand, respondent PNB denies
that petitioner’s loan obligations were restructured to five
(5) years and maintains that the subject two (2)
Promissory Notes Nos. 127/82 and 128/82 were filled out
regularly and became due as of December 29, 1984 as
shown on the face thereof.
Respondent Court of Appeals held that there is no
evidence of a promise from respondent PNB, admittedly a
banking corporation, that it had accepted the proposals of
the petitioner to have a five-year restructuring of his
overdue loan obligations. It found and held, on the basis
of the evidence adduced, that "appellee’s (Mendoza)
communications were mere proposals while the bank’s
responses were not categorical that the appellee’s request
had been favorably accepted by the bank."
Contending that respondent PNB had allegedly approved
his proposed five-year restructuring plan, petitioner
presented three (3) documents executed by respondent
PNB officials. The first document is a letter dated March
16, 1981 addressed to the petitioner and signed by
Ceferino D. Cura, Branch Manager of PNB Mandaluyong,
which states:
. . . . In order to study intelligently the feasibility of your
above request, please submit the following
documents/papers within thirty (30) days from the date
thereof, viz:
1. Audited Financial Statements for 1979 and 1980;
2. Projected cash flow (cash in - cash out) for five years
detailed yearly; and
3. List of additional machinery and equipment and proof
of ownership thereof.
We would strongly suggest, however, that you reduce
your total obligations to at least P3 million (principal and
interest and other charges) to give us more justification
in recommending a plan of payment or restructuring of
your accounts to higher authorities of this bank.
The second document is a letter dated May 11, 1981
addressed to Mr. S. Pe Benito, Jr., Managing Director of
the Technological Resources Center and signed by said
PNB Branch Manager, Ceferino D. Cura. According to
petitioner, this letter showed that respondent PNB
seriously considered the restructuring of his loan
obligations to a five-year term loan, to wit:
x x x
At the request of our client, we would like to furnish you
with the following information pertinent to his accounts
with us:
x x x
We are currently evaluating the proposal of the client to
re-structure his accounts with us into a five-year plan.
We hope that the above information will guide you in
evaluating the proposals of Mr. Danilo Mendoza.
x x x
The third document is a letter dated July 8, 1981
addressed to petitioner and signed by PNB Assistant Vice-
President Apolonio B. Francisco.
x x x
Considering that your accounts/accommodations were
granted and carried in the books of our Mandaluyong
Branch, we would suggest that your requests and
proposals be directed to Ceferino Cura, Manager of our
said Branch.
We feel certain that Mr. Cura will be pleased to discuss
matters of mutual interest with you.
Petitioner also presented a letter which he addressed to
Mr. Jose Salvador, Vice-President of the Metropolitan
Branches of PNB, dated September 24, 1981, which
reads:
Re: Restructuring of our Account into a 5-year Term Loan
and Request for the Establishment of a P2.0 Million LC/TR
Line
Dear Sir:
In compliance with our discussion last September 17, we
would like to formalize our proposal to support our above
requested assistance from the Philippine National Bank.
x x x
 61 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
Again we wish to express our sincere appreciation for your
open-minded approach towards the solution of this
problem which we know and will be beneficial and to the
best interest of the bank and mutually advantageous to
your client.
x x x sufficiently specific so that the Judiciary can understand
Petitioner argues that he submitted the requirements
according to the instructions given to him and that upon
submission thereof, his proposed five-year restructuring
plan was deemed automatically approved by respondent
PNB.
We disagree.
Nowhere in those letters is there a categorical statement
that respondent PNB had approved the petitioner’s
proposed five-year restructuring plan. It is stretching the
imagination to construe them as evidence that his
proposed five-year restructuring plan has been approved
by the respondent PNB which is admittedly a banking
corporation. Only an absolute and unqualified acceptance
of a definite offer manifests the consent necessary to
perfect a contract. 16 If anything, those correspondences
only prove that the parties had not gone beyond the
preparation stage, which is the period from the start of
the negotiations until the moment just before the
agreement of the parties. 17
There is nothing in the record that even suggests that
respondent PNB assented to the alleged five-year
restructure of petitioner’s overdue loan obligations to
PNB. However, the trial court ruled in favor of petitioner
Mendoza, holding that since petitioner has complied with
the conditions of the alleged oral contract, the latter may
not renege on its obligation to honor the five-year
restructuring period, under the rule of promissory
estoppel. Citing Ramos v. Central Bank, 18 the trial court
said:
The broad general rule to the effect that a promise to do
or not to do something in the future does not work an
estoppel must be qualified, since there are numerous
cases in which an estoppel has been predicated on
promises or assurances as to future conduct. The doctrine
of ‘promissory estoppel’ is by no means new, although the
name has been adopted only in comparatively recent
years. According to that doctrine, an estoppel may arise
from the making of a promise, even though without
consideration, if it was intended that the promise should
be relied upon and in fact it was relied upon, and if a
refusal to enforce it would be virtually to sanction the
perpetration of fraud or would result in other injustice. In
this respect, the reliance by the promisee is generally
evidenced by action or forbearance on his part, and the
idea has been expressed that such action or forbearance
would reasonably have been expected by the promisor. .
. .
The doctrine of promissory estoppel is an exception to the
general rule that a promise of future conduct does not
constitute an estoppel. In some jurisdictions, in order to
make out a claim of promissory estoppel, a party bears
the burden of establishing the following elements: (1) a
promise reasonably expected to induce action or
forbearance; (2) such promise did in fact induce such
action or forbearance, and (3) the party suffered
detriment as a result. 19
It is clear from the forgoing that the doctrine of
promissory estoppel presupposes the existence of a
promise on the part of one against whom estoppel is
claimed. The promise must be plain and unambiguous and
the obligation assumed and enforce the promise
according to its terms. 20 For petitioner to claim that
respondent PNB is estopped to deny the five-year
restructuring plan, he must first prove that respondent
PNB had promised to approve the plan in exchange for the
submission of the proposal. As discussed earlier, no such
promise was proven, therefore, the doctrine does not
apply to the case at bar. A cause of action for promissory
estoppel does not lie where an alleged oral promise was
conditional, so that reliance upon it was not reasonable.
21 It does not operate to create liability where it does not
otherwise exist. 22
Since there is no basis to rule that petitioner’s overdue
loan obligations were restructured to mature in a period
of five (5) years, we see no other option but to respect
the two-year period as contained in the two (2) subject
Promissory Notes Nos. 127/82 and 128/82, marked as
Exhibits "BB" and "CC" respectively which superseded and
novated all prior loan documents signed by petitioner in
favor of respondent PNB. Petitioner argues, in his
memorandum, that "respondent Court of Appeals had no
basis in saying that the acceptance of the five-year
restructuring is totally absent from the record." 23 On the
contrary, the subject Promissory Notes Nos. 127/82 and
128/82 are clear on their face that they were due on
December 29, 1984 or two (2) years from the date of the
signing of the said notes on December 29, 1982.
Petitioner claims that the two (2) subject Promissory
Notes Nos. 127/82 and 128/82 were signed by him in
blank with the understanding that they were to be
subsequently filled out to conform with his alleged oral
agreements with PNB officials, among which is that they
were to become due only after five (5) years. If petitioner
were to be believed, the PNB officials concerned
committed a fraudulent act in filling out the subject two
(2) promissory notes in question. Private transactions are
presumed to be fair and regular. 24 The burden of
presenting evidence to overcome this presumption falls
upon petitioner. Considering that petitioner imputes a
serious act of fraud on respondent PNB, which is a banking
corporation, this court will not be satisfied with anything
but the most convincing evidence. However, apart from
petitioner’s self-serving verbal declarations, we find no
sufficient proof that the subject two (2) Promissory Notes
Nos. 127/82 and 128/82 were completed irregularly.
Therefore, we rule that the presumption has not been
rebutted.
Besides, it could be gleaned from the record that the
petitioner is an astute businessman who took care to
reduce in writing his business proposals to the respondent
bank. It is unthinkable that the same person would
commit the careless mistake of leaving his subject two (2)
promissory notes in blank in the hands of other persons.
As the respondent Court of Appeals correctly pointed
Surely, plaintiff-appellee who is a C.P.A and a Tax
Consultant (p. 3 TSN, January 9, 1990) will insist that the
details of the two promissory notes he and his wife
 62 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
executed in 1982 should be specific to enable them to
make the precise computation in the event of default as
in the case at bench. In fact, his alleged omission as a
C.P.A. and a Tax Consultant to insist that the two
promissory notes be filled up on important details like the
rates of interest is inconsistent with the legal presumption
of a person who takes ordinary care of his concerns
(Section 3 (c), Rule 131, Revised Rules on Evidence).
As pointed out by the Court of Appeals, Orlando
Montecillo, Chief, Loans and Discounts, PNB Mandaluyong
Branch, testified that the said Promissory Notes Nos.
127/82 and 128/82 were completely filled out when
Danilo Mendoza signed them (Rollo, p. 14).
In a last-ditch effort to save his five-year loan
restructuring theory, petitioner contends that respondent
PNB’s action of withholding 10% from his export proceeds
is proof that his proposal had been accepted and the
contract had been partially executed. He claims that he
would not have consented to the additional burden if there
were no corresponding benefit. This contention is not well
taken. There is no credible proof that the 10% assignment
of his export proceeds was not part of the conditions of
the two-year restructuring deal. Considering that the
resulting amount obtained from this assignment of export
proceeds was not even enough to cover the interest for
the corresponding month, 25 we are hard-pressed to
construe it as the required proof that respondent PNB
allegedly approved the proposed five-year restructuring
of petitioner’s overdue loan obligations.
It is interesting to note that in his Complaint, petitioner
made no mention that the assignment of his export
proceeds was a condition for the alleged approval of his
proposed five-year loan restructuring plan. The Complaint
merely alleged that "plaintiff in a sincere effort to make
payments on his obligations agreed to assign 10% of his
export proceeds to defendant PNB." This curious omission
leads the court to believe that the alleged link between
the petitioner’s assignment of export proceeds and the
alleged five-year restructuring of his overdue loans was
more contrived than real.
It appears that respondent bank increased the interest
rates on the two (2) subject Promissory Notes Nos.
127/82 and 128/82 without the prior consent of the
petitioner. The petitioner did not agree to the increase in
the stipulated interest rate of 21% per annum on
Promissory Note No. 127/82 and 18% per annum on
Promissory Note No. 128/82. As held in several cases, the
unilateral determination and imposition of increased
interest rates by respondent bank is violative of the
principle of mutuality of contracts ordained in Article 1308
of the Civil Code. 26 As held in one case: 27
It is basic that there can be no contract in the true sense
in the absence of the element of agreement, or of mutual
assent of the parties. If this assent is wanting on the part
of one who contracts, his act has no more efficacy than if
it had been done under duress or by a person of unsound
mind.
Similarly, contract changes must be made with the
consent of the contracting parties. The minds of all the
parties must meet as to the proposed modification,
especially when it affects an important aspect of the
agreement. In the case of loan contracts, it cannot be
gainsaid that the rate of interest is always a vital
component, for it can make or break a capital venture.
It has been held that no one receiving a proposal to
change a contract to which he is a party is obliged to
answer the proposal, and his silence per se cannot be
construed as an acceptance. 28 Estoppel will not lie
against the petitioner regarding the increase in the
stipulated interest on the subject Promissory Notes Nos.
127/82 and 128/82 inasmuch as he was not even
informed beforehand by respondent bank of the change
in the stipulated interest rates. However, we also note
that the said two (2) subject Promissory Notes Nos.
127/82 and 128/82 expressly provide for a penalty charge
of 3% per annum to be imposed on any unpaid amount
when due.
Petitioner prays for the release of some of his movables
29 being withheld by respondent PNB, alleging that they
were not included among the chattels he mortgaged to
respondent bank. However, petitioner did not present any
proof as to when he acquired the subject movables and
hence, we are not disposed to believe that the same were
"after-acquired" chattels not covered by the chattel and
real estate mortgages.
In asserting its rights over the subject movables,
respondent PNB relies on a common provision in the two
(2) subject Promissory Notes Nos. 127/82 and 128/82
which states:
In the event that this note is not paid at maturity or when
the same becomes due under any of the provisions
hereof, we hereby authorized the BANK at its option and
without notice, to apply to the payment of this note, any
and all moneys, securities and things of value which may
be in its hands on deposit or otherwise belonging to me/us
and for this purpose. We hereby, jointly and severally,
irrevocably constitute and appoint the BANK to be our true
Attorney-in-Fact with full power and authority for us in
our name and behalf and without prior notice to negotiate,
sell and transfer any moneys securities and things of
value which it may hold, by public or private sale and
apply the proceeds thereof to the payment of this note.
It is clear, however, from the above-quoted provision of
the said promissory notes that respondent bank is
authorized, in case of default, to sell "things of value"
belonging to the mortgagor "which may be on its hands
for deposit or otherwise belonging to me/us and for this
purpose." Besides the petitioner executed not only a
chattel mortgage but also a real estate mortgage to
secure his loan obligations to respondent bank.
A stipulation in the mortgage, extending its scope and
effect to after-acquired property is valid and binding
where the after-acquired property is in renewal of, or in
substitution for, goods on hand when the mortgage was
executed, or is purchased with the proceeds of the sale of
such goods. 30 As earlier pointed out, the petitioner did
not present any proof as to when the subject movables
were acquired.
More importantly, respondent bank makes a valid
argument for the retention of the subject movables.
Respondent PNB asserts that those movables were in fact
"immovables by destination" under Art. 415 (5) of the
Civil Code. 31 It is an established rule that a mortgage
constituted on an immovable includes not only the land
but also the buildings, machinery and accessories
 63 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O

installed at the time the mortgage was constituted as well

as the buildings, machinery and accessories belonging to
the mortgagor, installed after the constitution thereof. 32

Petitioner also contends that respondent PNB’s bid prices

for this foreclosed properties in the total amount of Three
Million Seven Hundred Ninety Eight Thousand Seven
Hundred Nineteen Pesos and Fifty Centavos
(P3,798,719.50), were allegedly "unconscionable and
shocking to the conscience of men." He claims that the
fair market appraisal of his foreclosed plant site together
with the improvements thereon located in Pasig, Metro
Manila amounted to Five Million Four Hundred Forty One
Thousand Six Hundred Fifty Pesos (P5,441,650.00) while
that of his house and lot in Quezon City amounted to
Seven Hundred Twenty Two Thousand Pesos
(P722,000.00) per the appraisal report dated September
20, 1990 of Cuervo Appraisers, Inc. 33 That contention is
not well taken considering that:

1. The total of the principal amounts alone of petitioner’s

subject Promissory Notes Nos. 127/82 and 128/82 which
are both overdue amounted to Four Million One Hundred
Eighty Seven Thousand Nine Hundred Seventeen Pesos
and Fifty Nine Centavos (P4,187,917.59).

2. While the appraisal of Cuervo Appraisers, Inc. was

undertaken in September 1990, the extrajudicial
foreclosure of petitioner’s real estate and chattel
mortgages have been effected way back on October 15,
1984, October 23, 1984 and December 21, 1984. 34
Common experience shows that real estate values
especially in Metro Manila tend to go upward due to
developments in the locality.

3. In the public auction/foreclosure sales, respondent

PNB, as mortgagee, was not obliged to bid more than its
claims or more than the amount of petitioner’s loan
obligations which are all overdue. The foreclosed real
estate and chattel mortgages which petitioner earlier
executed are accessory contracts covering the collaterals
or security of his loans with respondent PNB. The principal
contracts are the Promissory Notes Nos. 127/82 and
128/82 which superseded and novated the 1979
promissory notes and the 1979 eleven (11) Applications
and Agreements for Commercial Letter of Credit.

Finally, the record shows that petitioner did not even
attempt to tender any redemption price to respondent
PNB, as highest bidder of the said foreclosed real estate
properties, during the one-year redemption period.
In view of all the foregoing, it is our view and we hold that
the extrajudicial foreclosure of petitioner’s real estate and
chattel mortgages was not premature and that it was in
fact legal and valid.
[G.R. No. 141811. November 15, 2001.]
FIRST METRO INVESTMENT
CORPORATION, Petitioner, v. ESTE DEL SOL
MOUNTAIN RESERVE, INC., VALENTIN S. DAEZ,
JR., MANUEL Q. SALIENTES, MA. ROCIO A. DE
VEGA, ALEXANDER G. ASUNCION, ALBERTO * M.
LADORES, VICENTE M. DE VERA, JR., and FELIPE B.
SESE, Respondents.

WHEREFORE, the petition is hereby DENIED. The DECISION

challenged Decision of the Court of Appeals in CA-G.R. CV
No. 38036 is AFFIRMED with modification that the
increase in the stipulated interest rates of 21% per annum
and 18% per annum appearing on Promissory Notes Nos.
127/82 and 128/82 respectively is hereby declared null
and void.
SO ORDERED.
DE LEON, JR., J.:
Before us is a petition for review on certiorari of the
Decision 1 of the Court of Appeals 2 dated November 8,
1999 in CA-G.R. CV No. 53328 reversing the Decision 3
of the Regional Trial Court of Pasig City, Branch 159 dated
June 2, 1994 in Civil Case No. 39224. Essentially, the
Court of Appeals found and declared that the fees
 64 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O

provided for in the Underwriting and Consultancy
Agreements executed by and between petitioner First
Metro Investment Corp. (FMIC) and respondent Este del
Sol Mountain Reserve, Inc. (Este del Sol) simultaneously
with the Loan Agreement dated January 31, 1978 were
mere subterfuges to camouflage the usurious interest
charged by petitioner FMIC.
The facts of the case are as follows:
It appears that on January 31, 1978, petitioner FMIC
granted respondent Este del Sol a loan of Seven Million
Three Hundred Eighty-Five Thousand Five Hundred Pesos
(P7,385,500.00) to finance the construction and
development of the Este del Sol Mountain Reserve, a
sports/resort complex project located at Barrio Puray,
Montalban, Rizal. 4 In three (3) letters all dated February 22, 1978 petitioner
Under the terms of the Loan Agreement, the proceeds of
the loan were to be released on staggered basis. Interest
on the loan was pegged at sixteen (16%) percent per
annum based on the diminishing balance. The loan was
payable in thirty-six (36) equal and consecutive monthly
amortizations to commence at the beginning of the
thirteenth month from the date of the first release in
accordance with the Schedule of Amortization. 5 In case
of default, an acceleration clause was, among others,
provided and the amount due was made subject to a
twenty (20%) percent one-time penalty on the amount
due and such amount shall bear interest at the highest
rate permitted by law from the date of default until full
payment thereof plus liquidated damages at the rate of
two (2%) percent per month compounded quarterly on
the unpaid balance and accrued interests together with all
the penalties, fees, expenses or charges thereon until the
unpaid balance is fully paid, plus attorney’s fees
equivalent to twenty-five (25%) percent of the sum
sought to be recovered, which in no case shall be less than
Twenty Thousand Pesos (P20,000.00) if the services of a
lawyer were hired. 6 STATEMENT
Underwriting Agreement provided that for supervising the
public offering of the shares, respondent Este del Sol shall
pay petitioner FMIC an annual supervision fee of Two
Hundred Thousand Pesos (P200,000.00) per annum for a
period of four (4) consecutive years. The Underwriting
Agreement also stipulated for the payment by respondent
Este del Sol to petitioner FMIC a consultancy fee of Three
Hundred Thirty-Two Thousand Five Hundred Pesos
(P332,500.00) per annum for a period of four (4)
consecutive years. Simultaneous with the execution of
and in accordance with the terms of the Underwriting
Agreement, a Consultancy Agreement was also executed
on January 31, 1978 whereby respondent Este del Sol
engaged the services of petitioner FMIC for a fee as
consultant to render general consultancy services. 9
billed respondent Este del Sol for the amounts of [a] Two
Hundred Thousand Pesos (P200,000.00) as the
underwriting fee of petitioner FMIC in connection with the
public offering of the common shares of stock of
respondent Este del Sol; [b] One Million Three Hundred
Thirty Thousand Pesos (P1,330,000.00) as consultancy
fee for a period of four (4) years; and [c] Two Hundred
Thousand Pesos (P200,000.00) as supervision fee for the
year beginning February, 1978, in accordance to the
Underwriting Agreement. 10 The said amounts of fees
were deemed paid by respondent Este del Sol to petitioner
FMIC which deducted the same from the first release of
the loan.
Since respondent Este del Sol failed to meet the schedule
of repayment in accordance with a revised Schedule of
Amortization, it appeared to have incurred a total
obligation of Twelve Million Six Hundred Seventy-Nine
Thousand Six Hundred Thirty Pesos and Ninety-Eight
Centavos (P12,679,630.98) per the petitioner’s
Statement of Account dated June 23, 1980, 11 to wit:
OF ACCOUNT OF

In accordance with the terms of the Loan Agreement, ESTE DEL SOL MOUNTAIN RESERVE, INC.
respondent Este del Sol executed several documents 7 as
security for payment, among them, (a) a Real Estate AS OF JUNE 23, 1980
Mortgage dated January 31, 1978 over two (2) parcels of
land being utilized as the site of its development project PARTICULARS AMOUNT
with an area of approximately One Million Twenty-Eight
Thousand and Twenty-Nine (1,028,029) square meters Total amount due as of 11-22-78 per
and particularly described in TCT Nos. N-24332 and N-
24356 of the Register of Deeds of Rizal, inclusive of all revised amortization schedule dated
improvements, as well as all the machineries, equipment,
furnishings and furnitures existing thereon; and (b) 1-3-78 P7,999,631.42
individual Continuing Suretyship agreements by co-
respondents Valentin S. Daez, Jr., Manuel Q. Salientes, Interest on P7,999,631.42 @ 16% p.a. from
Ma. Rocio A. De Vega, Alexander G. Asuncion, Alberto M.
Ladores, Vicente M. De Vera, Jr. and Felipe B. Sese, all 11-22-78 to 2-22-79 (92 days) 327,096.04
dated February 2, 1978, to guarantee the payment of all
the obligations of respondent Este del Sol up to the ——————
aggregate sum of Seven Million Five Hundred Thousand
Pesos (P7,500,000.00) each. 8 Balance 8,326,727.46

Respondent Este del Sol also executed, as provided for by One time penalty of 20% of the entire unpaid
the Loan Agreement, an Underwriting Agreement on
January 31, 1978 whereby petitioner FMIC shall obligations under Section 6.02 (ii) of
underwrite on a best-efforts basis the public offering of
One Hundred Twenty Thousand (120,000) common Loan Agreement 1,665,345.49
shares of respondent Este del Sol’s capital stock for a one-
time underwriting fee of Two Hundred Thousand Pesos Past due interest under Section 6.02 (iii)
(P200,000.00). In addition to the underwriting fee, the
 65 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O

of loan Agreement: to by petitioner FMIC and imposed upon respondent Este

del Sol to camouflage the usurious interest being charged
@ 19% p.a. from 2-22-79 to 11-30-79 by petitioner FMIC. 16

(281 days) 1,481,879.93 The petitioner FMIC presented as its witnesses during the
trial: Cesar Valenzuela, its former Senior Vice-President,
@ 21% p.a. from 11-30-79 to 6-23-80 Felipe Neri, its Vice-President for Marketing, and Dennis
Aragon, an Account Manager of its Account Management
(206 days) 1,200,714.10 Group, as well as documentary evidence. On the other
hand, co-respondents Vicente M. De Vera, Jr. and Valentin
Other charges — publication of extra judicial S. Daez, Jr., and Perfecto Doroja, former Senior Manager
and Assistant Vice-President of FMIC, testified for the
foreclosure of REM made on respondents.

5-23-80 & 6-6-80 4,964.00
———————
Total Amount Due and Collectible as of
June 23, 1980 P12,679,630.98
============
Accordingly, petitioner FMIC caused the extrajudicial
foreclosure of the real estate mortgage on June 23, 1980.
12 At the public auction, petitioner FMIC was the highest
bidder of the mortgaged properties for Nine Million Pesos
(P9,000,000.00). The total amount of Three Million One
Hundred Eighty-Eight Thousand Six Hundred Thirty Pesos
and Seventy-Five Centavos (P3,188,630.75) was
deducted therefrom, that is, for the publication fee for the
publication of the Sheriff’s Notice of Sale, Four Thousand
Nine Hundred Sixty-Four Pesos (P4,964.00); for Sheriff’s
fees for conducting the foreclosure proceedings, Fifteen
Thousand Pesos (P15,000.00); and for Attorney’s fees,
Three Million One Hundred Sixty-Eight Thousand Six
Hundred Sixty-Six Pesos and Seventy-Five Centavos
(P3,168,666.75). The remaining balance of Five Million
Eight Hundred Eleven Thousand Three Hundred Sixty-
Nine Pesos and Twenty-Five Centavos (P5,811,369.25)
was applied to interests and penalty charges and partly
against the principal, due as of June 23, 1980, thereby
leaving a balance of Six Million Eight Hundred Sixty-Three
Thousand Two Hundred Ninety-Seven Pesos and Seventy-
Three Centavos (P6,863,297.73) on the principal amount
of the loan as of June 23, 1980. 13
Failing to secure from the individual respondents, as
sureties of the loan of respondent Este del Sol by virtue
of their continuing surety agreements, the payment of the
alleged deficiency balance, despite individual demands
sent to each of them, 14 petitioner instituted on
November 11, 1980 the instant collection suit 15 against
the respondents to collect the alleged deficiency balance
of Six Million Eight Hundred Sixty-Three Thousand Two
Hundred Ninety-Seven Pesos and Seventy-Three
Centavos (P6,863,297.73) plus interest thereon at
twenty-one (21%) percent per annum from June 24, 1980
until fully paid, and twenty-five (25%) percent thereof as
and for attorney’s fees and costs.
After the trial, the trial court rendered its decision in favor
of petitioner FMIC, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of
plaintiff and against defendants, ordering defendants
jointly and severally to pay to plaintiff the amount of
P6,863,297.73 plus 21% interest per annum, from June
24, 1980, until the entire amount is fully paid, plus the
amount equivalent to 25% of the total amount due, as
attorney’s fees, plus costs of suit.
Defendants’ counterclaims are dismissed, for lack of
merit.
Finding the decision of the trial court unacceptable,
respondents interposed an appeal to the Court of Appeals.
On November 8, 1999, the appellate court reversed the
challenged decision of the trial court. The appellate court
found and declared that the fees provided for in the
Underwriting and Consultancy Agreements were mere
subterfuges to camouflage the excessively usurious
interest charged by the petitioner FMIC on the loan of
respondent Este del Sol; and that the stipulated penalties,
liquidated damages and attorney’s fees were "excessive,
iniquitous, unconscionable and revolting to the
conscience," and declared that in lieu thereof, the
stipulated one time twenty (20%) percent penalty on the
amount due and ten (10%) percent of the amount due as
attorney’s fees would be reasonable and suffice to
compensate petitioner FMIC for those items. Thus, the
appellate court dismissed the complaint as against the
individual respondents sureties and ordered petitioner
FMIC to pay or reimburse respondent Este del Sol the
amount of Nine Hundred Seventy-One Thousand Pesos
(P971,000.00) representing the difference between what
is due to the petitioner and what is due to respondent Este
del Sol, based on the following computation: 17
A: DUE TO THE [PETITIONER]
Principal of Loan P7,382,500.00
Add: 20% one-time
Penalty 1,476,500.00
Attorney’s fees 900,000.00 P9,759,000.00

In their Answer, the respondents sought the dismissal of ——————

the case and set up several special and affirmative
defenses, foremost of which is that the Underwriting and Less: Proceeds of foreclosure
Consultancy Agreements executed simultaneously with
and as integral parts of the Loan Agreement and which Sale 9,000,000.00
provided for the payment of Underwriting, Consultancy
and Supervision fees were in reality subterfuges resorted ——————
 66 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O

UNCONSCIONABLE AND REVOLTING TO THE

Deficiency P759,000.00 CONSCIENCE" AND [ii] THE UNDERWRITING,
SUPERVISION AND CONSULTANCY SERVICES
=========== AGREEMENT AS SUPPOSEDLY "MERE SUBTERFUGES TO
CAMOUFLAGE THE USURIOUS INTEREST CHARGED"
B. DUE TO [RESPONDENT ESTE DEL SOL] UPON THE RESPONDENT ESTE BY PETITIONER.

Return of usurious interest in the form of: f] REFUSED TO CONSIDER THE FACT THAT RESPONDENT
ESTE, AND THUS THE INDIVIDUAL RESPONDENTS, ARE
Underwriting fee P 200,000.00 STILL OBLIGATED TO THE PETITIONER.

Supervision fee 200,000.00 Petitioner essentially assails the factual findings and
conclusion of the appellate court that the Underwriting
Consultancy fee 1,330,000.00 and Consultancy Agreements were executed to conceal a
usurious loan. Inquiry upon the veracity of the appellate
—————— court’s factual findings and conclusion is not the function
of this Court for the Supreme Court is not a trier of facts.
Total amount due Este P1,730,000.00 Only when the factual findings of the trial court and the
appellate court are opposed to each other does this Court
============ exercise its discretion to re-examine the factual findings
of both courts and weigh which, after considering the
The appellee is, therefore, obliged to return to the record of the case, is more in accord with law and justice.
appellant Este del Sol the difference of P971,000.00 or
(P1,730,000.00 less P759,000.00). After a careful and thorough review of the record
including the evidence adduced, we find no reason to
Petitioner moved for reconsideration of the appellate depart from the findings of the appellate court.
court’s adverse decision. However, this was denied in a
Resolution 18 dated February 9, 2000 of the appellate First, there is no merit to petitioner FMIC’s contention that
court. Central Bank Circular No. 905 which took effect on
January 1, 1983 and removed the ceiling on interest rates
Hence, the instant petition anchored on the following for secured and unsecured loans, regardless of maturity,
assigned errors: 19 should be applied retroactively to a contract executed on
January 31, 1978, as in the case at bar, that is, while the
THE APPELLATE COURT HAS DECIDED QUESTIONS OF Usury Law was in full force and effect. It is an elementary
SUBSTANCE IN A WAY NOT IN ACCORD WITH LAW AND rule of contracts that the laws, in force at the time the
WITH APPLICABLE DECISIONS OF THIS HONORABLE contract was made and entered into, govern it. 20 More
COURT WHEN IT: significantly, Central Bank Circular No. 905 did not repeal
nor in any way amend the Usury Law but simply
a] HELD THAT ALLEGEDLY THE UNDERWRITING AND suspended the latter’s effectivity. 21 The illegality of
CONSULTANCY AGREEMENTS SHOULD NOT BE usury is wholly the creature of legislation. A Central Bank
CONSIDERED SEPARATE AND DISTINCT FROM THE LOAN Circular cannot repeal a law. Only a law can repeal
AGREEMENT, AND INSTEAD, THEY SHOULD BE another law. 22 Thus, retroactive application of a Central
CONSIDERED AS A SINGLE CONTRACT. Bank Circular cannot, and should not, be presumed. 23

b] HELD THAT THE UNDERWRITING AND CONSULTANCY Second, when a contract between two (2) parties is
AGREEMENTS ARE "MERE SUBTERFUGES TO evidenced by a written instrument, such document is
CAMOUFLAGE THE USURIOUS INTEREST CHARGED" BY ordinarily the best evidence of the terms of the contract.
THE PETITIONER. Courts only need to rely on the face of written contracts
to determine the intention of the parties. However, this
c] REFUSED TO CONSIDER THE TESTIMONIES OF rule is not without exception. 24 The form of the contract
PETITIONER’S WITNESSES ON THE SERVICES is not conclusive for the law will not permit a usurious loan
PERFORMED BY PETITIONER. to hide itself behind a legal form. Parol evidence is
admissible to show that a written document though legal
d] REFUSED TO CONSIDER THE FACT [i] THAT in form was in fact a device to cover usury. If from a
RESPONDENTS HAD WAIVED THEIR RIGHT TO SEEK construction of the whole transaction it becomes apparent
RECOVERY OF THE AMOUNTS THEY PAID TO PETITIONER, that there exists a corrupt intention to violate the Usury
AND [ii] THAT RESPONDENTS HAD ADMITTED THE Law, the courts should and will permit no scheme,
VALIDITY OF THE UNDERWRITING AND CONSULTANCY however ingenious, to becloud the crime of
AGREEMENTS. usury.25cralaw:red

e] MADE AN ERRONEOUS COMPUTATION ON
SUPPOSEDLY "WHAT IS DUE TO EACH PARTY AFTER THE
FORECLOSURE SALE", AS SHOWN IN PP. 34-35 OF THE
ASSAILED DECISION, EVEN GRANTING JUST FOR THE
SAKE OF ARGUMENT THAT THE APPELLATE COURT WAS
CORRECT IN STIGMATIZING [i] THE PROVISIONS OF THE
LOAN AGREEMENT THAT REFER TO STIPULATED
PENALTIES, LIQUIDATED DAMAGES AND ATTORNEY’S
FEES AS SUPPOSEDLY "EXCESSIVE, INIQUITOUS AND
In the instant case, several facts and circumstances taken
altogether show that the Underwriting and Consultancy
Agreements were simply cloaks or devices to cover an
illegal scheme employed by petitioner FMIC to conceal
and collect excessively usurious interest, and these are:
a) The Underwriting and Consultancy Agreements are
both dated January 31, 1978 which is the same date of
the Loan Agreement. 26 Furthermore, under the
 67 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
Underwriting Agreement payment of the supervision and
consultancy fees was set for a period of four (4) years 27
to coincide ultimately with the term of the Loan
Agreement. 28 This fact means that all the said
agreements which were executed simultaneously were
set to mature or shall remain effective during the same
period of time.
b) The Loan Agreement dated January 31, 1978 stipulated
for the execution and delivery of an underwriting
agreement 29 and specifically mentioned that such
underwriting agreement is a condition precedent 30 for
petitioner FMIC to extend the loan to respondent Este del
Sol, indicating and as admitted by petitioner FMIC’s
employees, 31 that such Underwriting Agreement is "part
and parcel of the Loan Agreement." 32
c) Respondent Este del Sol was billed by petitioner on
February 28, 1978 One Million Three Hundred Thirty
Thousand Pesos (P1,330,000.00) 33 as consultancy fee
despite the clear provision in the Consultancy Agreement
that the said agreement is for Three Hundred Thirty-Two
Thousand Five Hundred Pesos (P332,500.00) per annum
for four (4) years and that only the first year consultancy
fee shall be due upon signing of the said consultancy
agreement. 34
d) The Underwriting, Supervision and Consultancy fees in
the amounts of Two Hundred Thousand Pesos
(P200,000.00), and one Million Three Hundred Thirty
Thousand Pesos (P1,330,000.00), respectively, were
billed by petitioner to respondent Este del Sol on February
22, 1978, 35 that is, on the same occasion of the first
partial release of the loan in the amount of Two Million
Three Hundred Eighty-Two Thousand Five Hundred Pesos
(P2,382,500.00). 36 It is from this first partial release of
the loan that the said corresponding bills for Underwriting,
Supervision and Constantly fees were conducted and
apparently paid, thus, reverting back to petitioner FMIC
the total amount of One Million Seven Hundred Thirty
Thousand Pesos (P1,730,000.00) as part of the amount
loaned to respondent Este del Sol. 37
e) Petitioner FMIC was in fact unable to organize an
underwriting/selling syndicate to sell any share of stock
of respondent Este del Sol and much less to supervise
such a syndicate, thus failing to comply with its obligation
under the Underwriting Agreement. 38 Besides, there was
really no need for an Underwriting Agreement since
respondent Este del Sol had its own licensed marketing
arm to sell its shares and all its shares have been sold
through its marketing arm. 39
f) Petitioner FMIC failed to comply with its obligation
under the Consultancy Agreement, 40 aside from the fact
that there was no need for a Consultancy Agreement,
since respondent Este del Sol’s officers appeared to be
more competent to be consultants in the development of
the projected sports/resort complex. 41
All the foregoing established facts and circumstances
clearly belie the contention of petitioner FMIC that the
Loan, Underwriting and Consultancy Agreements are
separate and independent transactions. The Underwriting
and Consultancy Agreements which were executed and
delivered contemporaneously with the Loan Agreement
on January 31, 1978 were exacted by petitioner FMIC as
essential conditions for the grant of the loan. An
apparently lawful loan is usurious when it is intended that
additional compensation for the loan be disguised by an
ostensibly unrelated contract providing for payment by
the borrower for the lender’s services which are of little
value or which are not in fact to be rendered, such as in
the instant case. 42 In this connection, Article 1957 of the
New Civil Code clearly provides that:
Art. 1957. Contracts and stipulations, under any cloak or
device whatever, intended to circumvent the laws against
usury shall be void. The borrower may recover in
accordance with the laws on usury.
In usurious loans, the entire obligation does not become
void because of an agreement for usurious interest; the
unpaid principal debt still stands and remains valid but the
stipulation as to the usurious interest is void,
consequently, the debt is to be considered without
stipulation as to the interest. 43 The reason for this rule
was adequately explained in the case of Angel Jose
Warehousing Co., Inc. v. Chelda Enterprises 44 where this
Court held:
In simple loan with stipulation of usurious interest, the
prestation of the debtor to pay the principal debt, which
is the cause of the contract (Article 1350, Civil Code), is
not illegal. The illegality lies only as to the prestation to
pay the stipulated interest; hence, being separable, the
latter only should be deemed void, since it is the only one
that is illegal.
Thus, the nullity of the stipulation on the usurious interest
does not affect the lender’s right to receive back the
principal amount of the loan. With respect to the debtor,
the amount paid as interest under a usurious agreement
is recoverable by him, since the payment is deemed to
have been made under restraint, rather than voluntarily.
45
This Court agrees with the factual findings and conclusion
of the appellate court, to wit:
We find the stipulated penalties, liquidated damages and
attorney’s fees, excessive, iniquitous and unconscionable
and revolting to the conscience as they hardly allow the
borrower any chance of survival in case of default. And
true enough, ESTE folded up when the appellee
extrajudicially foreclosed on its (ESTE’s) development
project and literally closed its offices as both the appellee
and ESTE were at the time holding office in the same
building. Accordingly, we hold that 20% penalty on the
amount due and 10% of the proceeds of the foreclosure
sale as attorney’s fees would suffice to compensate the
appellee, especially so because there is no clear showing
that the appellee hired the services of counsel to effect
the foreclosure, it engaged counsel only when it was
seeking the recovery of the alleged deficiency.
Attorney’s fees as provided in penal clauses are in the
nature of liquidated damages. So long as such stipulation
does not contravene any law, morals, or public order, it is
binding upon the parties. Nonetheless, courts are
empowered to reduce the amount of attorney’s fees if the
same is "iniquitous or unconscionable." 46 Articles 1229
and 2227 of the New Civil Code provide that:
Art. 1229. The judge shall equitably reduce the penalty
when the principal obligation has been partly or irregularly
complied with by the debtor. Even if there has been no
performance, the penalty may also be reduced by the
 68 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O

courts if it is iniquitous or unconscionable.

Art. 2227. Liquidated damages, whether intended as an

indemnity or a penalty, shall be equitably reduced if they
are iniquitous or unconscionable.

In the case at bar, the amount of Three Million One

Hundred Eighty-Eight Thousand Six Hundred Thirty Pesos
and Seventy-Five Centavos (93,188,630.75) for the
stipulated attorney’s fees equivalent to twenty-five (25%)
percent of the alleged amount due, as of the date of the
auction sale on June 23, 1980, is manifestly exorbitant
and unconscionable. Accordingly, we agree with the
appellate court that a reduction of the attorney’s fees to
ten (10%) percent is appropriate and reasonable under
the facts and circumstances of this case.

Lastly, there is no merit to petitioner FMIC’s contention

that the appellate court erred in awarding an amount
allegedly not asked nor prayed for by respondents.
Whether the exact amount of the relief was not expressly
prayed for is of no moment for the reason that the relief
was plainly warranted by the allegations of the
respondents as well as by the facts as found by the
appellate court. A party is entitled to as much relief as the
facts may warrant. 47

In view of all the foregoing, the Court is convinced that

the appellate court committed no reversible error in its
challenged Decision.

WHEREFORE, the instant petition is hereby DENIED, and

the assailed Decision of the Court of Appeals is AFFIRMED. [G.R. No. 171925: July 23, 2010]
Costs against petitioner.
SOLIDBANK CORPORATION, (NOW
SO ORDERED. METROPOLITAN BANK AND TRUST COMPANY),
PETITIONER, VS. PERMANENT HOMES,
INCORPORATED, RESPONDENT.

DECISION

CARPIO, J.:

G.R. No. 171925 is a petition for review[1] assailing the

Decision[2] promulgated on 29 June 2005 by the Court of
Appeals (appellate court) as well as the
Resolution[3] promulgated on 14 March 2006 in CA-G.R.
CV No. 75926. The appellate court granted the petition
filed by Permanent Homes, Incorporated (Permanent)
and reversed the decision of the Regional Trial Court of
Makati City, Branch 58 (trial court) dated 5 July 2002 in
Civil Case No. 98-654. The appellate court ordered
Solidbank Corporation (Solidbank) and Permanent to
enter into an express agreement about the applicable
interest rates on Permanent's loan. Solidbank was also
ordered to render an accounting of Permanent's
payments, not to impose interest on interest upon
Permanent's loans, and to release the remaining amount
available under Permanent's omnibus credit line.

The Facts

The appellate court narrated the facts as follows:

The records disclose that PERMANENT HOMES is a real
estate development company, and to finance its housing
project known as the "Buena Vida Townhomes" located
within Merville Subdivision, Paraסaque City, it applied
and was subsequently granted by SOLIDBANK with an
"Omnibus Line" credit facility in the total amount of SIXTY
 69 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
MILLION PESOS. Of the entire loan, FIFTY NINE MILLION
as [sic] time loan for a term of up to three hundred sixty
(360) days, with interest thereon at prevailing market
rates, and subject to monthly repricing. The remaining
ONE MILLION was available for domestic bills purchase.
To secure the aforesaid loan, PERMANENT HOMES initially
mortgaged three (3) townhouse units within the Buena
Vida project in Paraסaque. At the time, however, the
instant complaint was filed against SOLIDBANK, a total of
thirty six (36) townhouse units were mortgaged with said
bank.
Of the 60 million available to PERMANENT HOMES, it
availed of a total of 41.5 million pesos, covered by three
(3) promissory notes, which contain the following
provisions, thus:
"xxx
5. We/I irrevocably authorize Solidbank to increase or
decrease at any time the interest rate agreed in this Note
or Loan on the basis of, among others, prevailing rates in
the local or international capital markets. For this
purpose, We/I authorize Solidbank to debit any deposit or
placement account with Solidbank belonging to any one
of us. The adjustment of the interest rate shall be
effective from the date indicated in the written notice sent
to us by the bank, or if no date is indicated, from the time
the notice was sent.
6. Should We/I disagree to the interest rate adjustment,
We/I shall prepay all amounts due under this Note or Loan
within thirty (30) days from the receipt by anyone of us
of the written notice. Otherwise, We/I shall be deemed
to have given our consent to the interest rate
adjustment."
Contrary, however, to the specific provisions as afore-
quoted, there was a standing agreement by the parties
that any increase or decrease in interest rates shall be
subject to the mutual agreement of the parties.
For the first loan availment of PERMANENT HOMES on
March 20, 1997, in the amount of 19.6 MILLION, from the
initial interest rate of 14.25% per annum (p.a.), the
same was increased 15% p.a. effective May 19, 1997; it
was again increased to 26% p.a. effective July 18,
1997. It was thereafter reduced to 20% p.a. effective
August 18, 1997, and then increased to 24%
p.a. effective September 17, 1997. The rate was
increased further to 30% p.a. effective October 17,
1997, then decreased to 27% p.a. on November 17,
1997, and again increased to 34% p.a. effective
December 17, 1997. The rate then decreased to 30%
p.a. on January 16, 1998.
For the second loan availment in the amount of 18 million,
the rate was initially pegged at15.75% p.a. on June 24,
1997. A month later, the rate increased to 23.5% p.a. It
thereafter decreased to 20% p.a. effective August 24,
1997, but again increased to22.5% p.a. effective
September 24, 1997. For the next month, the rate
surged to 30% p.a., and decreased to 27% p.a. for
the month of November. The rate again surged to 34%
p.a. for the month of December, and was decreased
to 30% p.a. from January 22, 1998 to February 20,
1998.
For the third loan availment on July 15, 1997, in the
amount of 3.9 million, the interest rate was initially
pegged at 35% p.a., but this was decreased to 21%
p.a. from August 14 until September 11, 1997. The rate
increased slightly to 23% p.a. on September 12, 1997,
and surged to 27% p.a. on October 13, 1997. The rate
went down slightly to 27% p.a. for the month of
November, and to 26% p.a. for the month of December.
The rate, however, again surged to 30% p.a. on January
12, 1998 before settling at 29% p.a. for the month of
February.
It is [Permanent's] stand that SOLIDBANK unilaterally
and arbitrarily accelerated the interest rates without any
declared basis of such increases, of which PERMANENT
HOMES had not agreed to, or at the very least, been
informed of. This is contrary to their earlier agreement
that any interest rate changes will be subject to mutual
agreement of the parties. PERMANENT HOMES further
admits that it was not able to protest such arbitrary
increases at the time they were imposed by SOLIDBANK,
for fear that SOLIDBANK might cut off the credit facility it
extended to PERMANENT HOMES. Permanent was then in
the midst of the construction of its project in Merville,
Paraסaque City, and SOLIDBANK knew that it was
relying substantially on the credit facility the latter
extended to it.
[Permanent] thus filed a case before the trial court
seeking the following: (1) the annulment of the increases
in interest rates on the loans it obtained from
SOLIDBANK, on the ground that it was violative of the
principle of mutuality of agreement of the parties, as
enunciated in Article 1409 of the New Civil Code, (2) the
fixing of the interest rates at the applicable interest rate,
and (3) for the trial court to order SOLIDBANK to make
an accounting of the payments it made, so as to
determine the amount of refund PERMANENT is entitled
to, as well as to order SOLIDBANK to release the
remaining available balance of the loan it extended to
PERMANENT. In addition, [Permanent] prays for the
payment of compensatory, moral and exemplary
damages.
SOLIDBANK, on the other hand, avers that PERMANENT
HOMES has no cause of action against it, in view of the
pertinent provisions of the Omnibus Credit Line and the
promissory notes agreed to and signed by PERMANENT
HOMES. Thus, in accordance with said provisions,
SOLIDBANK was authorized to, upon due notice,
periodically adjust the interest rates on PERMANENT
HOMES' loan availments during the monthly interest
repricing dates, depending on the changes in prevailing
interest rates in the local and international capital
markets. In fact, SOLIDBANK avers that four (4) days
before July 15, 1997, the Bangko Sentral ng Pilipinas
(BSP) declared that it could no longer support the
Philippine currency from external speculative forces,
hence, the local currency was allowed to seek its own
exchange rate level. As a result of the volatile exchange
rate ratio, banks were then hesitant to extend loans, and
in some instances that it granted loans, they had to
ensure that they will not be at the losing end of the deal,
so to speak, by the repricing of the interest rates every
month. SOLIDBANK insists that PERMANENT HOMES
should not be allowed to renege on its contractual
obligations, as it freely and voluntarily bound itself to the
provisions of the Omnibus Credit Line and the promissory
notes.
 70 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
PERMANENT HOMES presented as witnesses Jacqueline S.
Lim, its Vice President and Chief Financial Officer, Engr.
Rey A. Romasanta, its Executive Vice President and Chief
Operating Officer, and Martha Julia Flores, its Treasury
Officer.
On March 24, 1998, the trial court issued a temporary
restraining order (TRO), after a summary hearing, which
enjoined SOLIDBANK from implementing and collecting
the increases in interest rates and from initiating any
action, including the foreclosure of the mortgaged
properties.
Ms. Lim's testimony centered on PERMANENT HOMES'
allegations that the repricing of the interest rates was
done by SOLIDBANK without any written agreement
entered into between the parties. In fact, Ms. Lim
accounted that SOLIDBANK will merely advise them of the
interest rate for the period, after said period had already
commenced, and at times very late in the period, by fax
messages. When PERMANENT HOMES called
SOLIDBANK's attention to the seemingly surging rates it
imposed on its loan, SOLIDBANK will merely answer that
it was the bank's policy, without offering any basis for
such increase. Furthermore, Ms. Lim also mentioned
SOLIDBANK's alleged practice of imposing interest on
unpaid interest, at the highest rate of 30% p.a.. Ms. Lim
also presented a tabulation, which presents the number
of days their billing statements were sent late, from the
time the interest period started. It is PERMANENT
HOMES' stand that since the purpose of the billing
statements was to inform them beforehand of the
applicable interest rate for the period, the late billings will
clearly show SOLIDBANK's arbitrary imposition of the
repriced interest rates, as well as its indifference to
PERMANENT HOMES' plight.
To illustrate, for the first loan availment in the amount of
P19.6 million, the billing statements which should have
notified PERMANENT HOMES of the repriced interest rates
were faxed to PERMANENT HOMES between eighteen
(18) to thirty-three (33) days late. For the second loan
availment in the amount of P18 million, the faxed billings
were late between six (6) to twenty-one (21) days, and
one instance where PERMANENT HOMES received no
billing at all. For the third loan availment in the amount
of P3.9 million, the faxed billings were late between seven
(7) to twenty-nine (29) days, and also an instance where
PERMANENT HOMES received no billing at all.
This practice, according to Ms. Lim, clearly affected its
operations, as the completion of its construction project
was unnecessarily delayed, to its prejudice and its
buyers. This was the import of the testimony of
PERMANENT HOMES' second witness, Engr. Rey A.
Romasanta. According to Engr. Rey, the target date of
completion was August 1997, but in view of the shortage
of funds by reason of SOLIDBANK's refusal for
PERMANENT HOMES to make further availments on its
omnibus credit line, the project was completed only on
February 1998.
PERMANENT HOMES' third and final witness was Martha
Julia Flores, its Treasury Officer, who explained that as
such, it was her who received the late billings from
SOLIDBANK. She would also call up SOLIDBANK to ask
what the repriced interest rate for the coming interest
period, to no avail, as SOLIDBANK will merely fax its
billings almost always, as abovementioned, late in the
period. Ms. Flores admitted that she prepared the
tabulation presented before the court, which showed how
late SOLIDBANK's billings were sent to PERMANENT
HOMES, as well as the computation of interest rates that
SOLIDBANK had allegedly overcharged on its loan, vis-a-
vis the average of the high and the low published lending
rates of SOLIDBANK.
SOLIDBANK, to establish its defense, presented its lone
witness, Mr. Cesar Lugtu, who testified to the effect that,
contrary to PERMANENT HOMES' assertions that it was not
promptly informed of the repriced interest rates,
SOLIDBANK's officers verbally advised PERMANENT
HOMES of the repriced rates at the start of the period,
and even added that their transaction[s] were based on
trust. Aside from these allegations, however, no written
memorandum or note was presented by SOLIDBANK to
support their assertion that PERMANENT HOMES was
timely advised of the repriced interests.[4]
The Trial Court's Ruling
On 5 July 2002, the trial court promulgated its Decision in
favor of Solidbank. The trial court ratiocinated and ruled
thus:
It becomes crystal clear that there is sufficient proof to
show that the instant case was instituted
by [Permanent] as an after-thought and as an obvious
subterfuge intended to completely lay on the defendant
the blame for the debacle of its Buena Vida project. An
afterthought because the records of the case show that
the complaint was filed in March 16, 1998, already after
it was having difficulty making the amortization
payments, the last of which being in February 1998. A
subterfuge because plaintiff, instead of blaming itself and
its own business judgment that went sour, would rather
put the blame on [Solidbank], taking advantage of every
conceivable gray area of its contract with [Solidbank] to
avoid its own liabilities. In fact, this complaint was made
the very basis for [Permanent] to altogether stop the
payment of its loan from [Solidbank] including the
interest payment (TSN, May 07, 1998, p. 60).
x x x x
WHEREFORE, finding the complaint not impressed with
merit, judgment is hereby rendered dismissing the said
complaint. The Counterclaim is likewise dismissed for
lack of evidence to support the same.
SO ORDERED.[5]
Permanent filed an appeal before the appellate court.
The Appellate Court's Ruling
The appellate court granted Permanent's appeal, and set
aside the trial court's ruling. The appellate court not only
recognized the validity of escalation clauses, but also
underscored the necessity of a basis for the increase in
interest rates and of the principle of mutuality of
contracts.
The dispositive portion of the appellate court's decision
reads, thus:
THE FOREGOING CONSIDERED, the instant appeal is
hereby GRANTED, the assailed decision dated July 5, 2002
is REVERSED and SET ASIDE, and a new one is hereby
entered as follows:
 71 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
(1) Unless the parties herein subsequently enter into
an express agreement regarding the applicable interest
rates on PERMANENT HOMES' loan availments subsequent
to the initial thirty-day (30) period, the legal rate of
twelve percent (12%) per annum is hereby FIXED, to be
applied on the outstanding balance of the loan;
(2) SOLIDBANK is ordered to render an accounting of all
the payments made by PERMANENT HOMES, and in case
there is excess payment by reason of the wrongful
imposition of the repriced interest rates, to apply such
amount to the interest payment at the legal rate, and
thereafter to the outstanding principal amount;
(3) SOLIDBANK is directed not to impose penalties,
particularly interest on interest, upon PERMANENT
HOMES' loan, there being no evidence that the latter was
in default on its payments;
(4) SOLIDBANK is hereby ordered to release the
remaining amount available under the omnibus credit
line, subject, however, to availability of funds on the part
of SOLIDBANK.
No pronouncement as to costs.
SO ORDERED.[6]
The appellate court resolved to deny Solidbank's Motion
for Reconsideration for lack of merit.[7]
The Issues
Solidbank raised the following issues in their petition:
(A) Whether the Honorable Court of Appeals was correct
in ruling that the increases in the interest rates
on [Permanent's] loans are void for having been
unilaterally imposed without basis.
(B) Whether the Honorable Court of Appeals was correct
in ordering the parties to enter into an express agreement
regarding the applicable interest rates on Permanent's
loan availments subsequent to the initial thirty-day (30)
period.
(C) Whether the Honorable Court of Appeals was correct
in ruling that [Permanent] is entitled to attorney's fees
notwithstanding the absence of bad faith or malice on the
part of[Solidbank].[8]
The Court's Ruling
The petition has merit.
The Usury Law had been rendered legally ineffective by
Resolution No. 224 dated 3 December 1982 of the
Monetary Board of the Central Bank, and later by Central
Bank Circular No. 905 which took effect on 1 January
1983. These circulars removed the ceiling on interest
rates for secured and unsecured loans regardless of
maturity. The effect of these circulars is to allow the
parties to agree on any interest that may be charged on
a loan. The virtual repeal of the Usury Law is within the
range of judicial notice which courts are bound to take
into account.[9] Although interest rates are no longer
subject to a ceiling, the lender still does not have an
unbridled license to impose increased interest rates. The
lender and the borrower should agree on the imposed
rate, and such imposed rate should be in writing.
The three promissory notes between Solidbank and
Permanent all contain the following provisions:
5. We/I irrevocably authorize Solidbank to increase or
decrease at any time the interest rate agreed in this Note
or Loan on the basis of, among others, prevailing rates in
the local or international capital markets. For this
purpose, We/I authorize Solidbank to debit any deposit or
placement account with Solidbank belonging to any one
of us. The adjustment of the interest rate shall be
effective from the date indicated in the written notice sent
to us by the bank, or if no date is indicated, from the time
the notice was sent.
6. Should We/I disagree to the interest rate adjustment,
We/I shall prepay all amounts due under this Note or Loan
within thirty (30) days from the receipt by anyone of us
of the written notice. Otherwise, We/I shall be deemed
to have given our consent to the interest rate adjustment.
The stipulations on interest rate repricing are valid
because (1) the parties mutually agreed on said
stipulations; (2) repricing takes effect only upon
Solidbank's written notice to Permanent of the new
interest rate; and (3) Permanent has the option to prepay
its loan if Permanent and Solidbank do not agree on the
new interest rate. The phrases "irrevocably authorize," "at
any time" and "adjustment of the interest rate shall be
effective from the date indicated in the written notice sent
to us by the bank, or if no date is indicated, from the time
the notice was sent," emphasize that Permanent should
receive a written notice from Solidbank as a condition for
the adjustment of the interest rates.
In order that obligations arising from contracts may have
the force of law between the parties, there must be a
mutuality between the parties based on their essential
equality.[10] A contract containing a condition which
makes its fulfillment dependent exclusively upon the
uncontrolled will of one of the contracting parties is
void.[11] There was no showing that either Solidbank or
Permanent coerced each other to enter into the loan
agreements. The terms of the Omnibus Line Agreement
and the promissory notes were mutually and freely agreed
upon by the parties.
Moreover, Solidbank's range of lending rates were
consistent with "prevailing rates in the local or
international capital markets." Permanent presented a
tabulation[12] of the range of Solidbank's lending rates, as
reported to Bangko Sentral ng Pilipinas and compared the
lending rates with the interest rates charged by Solidbank
on Permanent's loans, thus:
Solidbank's range of
lending rates as per
BSP records
High Low Interest Excess
rates Interest
charged by Rate Over
Solidbank the
on Average of
Permanent's High and
loans Low Rates
Sept. 12, 25.0% 22.0% 23.0%
1997
Sept. 17, 27.0% 24.0% 24.0%
1997
 72 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O

Sept. 22, 26.0% 23.0% 22.5% 05/19/97 06/19/97 no statement

1997 received
Oct. 13, 29.0% 26.0% 28.0% 3 06/19/97 07/18/97 07/12/97 23
1997 4 07/18/97 08/18/97 08/05/97 18
Oct. 17, 30.0% 27.0% 30.0% 5 08/18/97 09/17/97 09/10/97 23
1997 6 09/17/97 10/17/97 10/06/97 19
Oct. 22, 32.0% 29.0% 30.0% 7 10/17/97 11/17/97 11/11/97 25
1997
8 11/17/97 12/17/97 12/12/97 25
Nov. 12, 28.0% 25.0% 27.0% 9 12/17/97 01/16/98 01/09/98 23
1997
14 01/16/98 02/20/98 02/18/98 33
Nov. 17, 28.0% 25.0% 27.0%
1997
Nov. 21, 27.0% 24.0% 27.0%
1997
PN #969 - P18MM
Dec. 12, 25.0% 23.0% 26.0% 2.0%
Reference Interest Period Date Billing Number of
1997
No. Statements days Billing
Dec. 17, 25.0% 23.0% 34.0% 10.0%
were faxed to Statement
1997
Permanent was Late
Dec. 22, 25.0% 23.0% 32.0% 8.0% 3 06/24/97 07/24/97 07/12/97 18
1997
4 07/24/97 08/22/97 08/05/97 12
Jan. 12, 26.0% 24.0% 30.0% 5.0%
5 08/22/97 09/22/97 09/10/97 19
1998
6 09/22/97 10/22/97 10/06/97 14
Jan. 16, 28.0% 25.0% 30.0% 3.5%
1998 7 10/22/97 11/21/97 11/11/97 20
Jan. 22, 28.0% 25.0% 30.0% 3.5% 8 11/21/97 12/22/97 12/12/97 21
1998 9 12/22/97 01/22/98 01/09/98 18
Feb. 9, 27.0% 24.0% 30.0% 3.5% 01/22/98 02/12/97 no statement
1998 received
Feb. 11, 27.0% 24.0% 29.0% 4.5% 14 02/12/98 02/20/98 02/18/98 6
1998
Feb. 12, 27.0% 24.0% 30.0% 4.5%
1998 PN #1077 - P3.9MM
Reference Interest Period Date Billing Number of
No. Statements days Billing
The repriced interest rates from 12 September to 21 were faxed to Statement
November 1997 conformed to the range of Solidbank's Permanent was Late
lending rates to other borrowers. The 12 December 1997 10 07/15/97 08/14/97 08/14/97 30
to 12 February 1998 repriced interest rates were not 11 08/14/97 08/26/97 08/26/97 12
unconscionably out of line with the upper range of lending 5 08/26/97 09/12/97 09/10/97 15
rates to other borrowers. The interest rate repricing
6 09/12/97 10/13/97 10/06/97 24
happened at the height of the Asian financial crises in late
1997, when banks clamped down on lendings because of 7 10/13/97 11/12/97 11/11/97 29
higher credit risks across industries, particularly the real 12 11/12/97 12/12/97 12/10/97 28
estate industry. 9 12/12/97 01/12/98 01/09/98 28
13 01/12/98 02/09/98 02/09/98 28
We also recognize that Solidbank admitted that it did not 02/09/98 02/11/98 no statement
promptly send Permanent written repriced rates, but received
rather verbally advised Permanent's officers over the 14 02/11/98 03/13/98 02/18/98 7
phone at the start of the period. Solidbank did not
present any written memorandum to support its
We rule that Solidbank's computation of the interest due
allegation that it promptly advised Permanent of the
from Permanent should be adjusted to take effect only
change in interest rates.[13] Solidbank advised Permanent
upon Permanent's receipt of the written notice from
on the repriced interest rate applicable for the 30-day
Solidbank.
interest period only after the period had
begun. Permanent presented a tabulation which showed
WHEREFORE, we GRANT the petition in part. We SET
that Solidbank either did not send a billing statement, or
ASIDE the Decision of the Court of Appeals promulgated
sent a billing statement 6 to 33 days late.[14] We
on 29 June 2005 as well as the Resolution promulgated
reproduce the tabulation below:
on 14 March 2006 in CA-G.R. CV No. 75926
PN #435 - P19.6MM and AFFIRM the decision of the Regional Trial Court of
Reference Interest Period Date Billing Number of Makati City, Branch 58 dated 5 July 2002 in Civil Case No.
No. Statements days Billing 98-654 with the MODIFICATION that the repricing of
were faxed to Statement the interest rates should take effect only upon Permanent
Permanent was Late Homes, Incorporated's receipt of the written notice from
1 03/20/97 04/18/97 04/17/97 28 Solidbank Corporation of the adjustment in interest
2 04/18/97 05/19/97 05/16/97 28 rate. The records of this case are therefore remanded to
the trial court for the computation of the proper interest
 73 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O

payments based on the dates of receipt of written notice.

SO ORDERED.

G.R. No. 181045, July 02, 2014

SPOUSES EDUARDO AND LYDIA

SILOS, Petitioners, v. PHILIPPINE NATIONAL
BANK, Respondent.

DECISION

DEL CASTILLO, J.:

In loan agreements, it cannot be denied that the rate of

interest is a principal condition, if not the most important
component. Thus, any modification thereof must be
mutually agreed upon; otherwise, it has no binding effect.
Moreover, the Court cannot consider a stipulation
granting a party the option to prepay the loan if said party
is not agreeable to the arbitrary interest rates imposed.
Premium may not be placed upon a stipulation in a
contract which grants one party the right to choose
whether to continue with or withdraw from the agreement
if it discovers that what the other party has been doing all
along is improper or illegal.

This Petition for Review on Certiorari1 questions the May

8, 2007 Decision2 of the Court of Appeals (CA) in CA-G.R.
CV No. 79650, which affirmed with modifications the
February 28, 2003 Decision3 and the June 4, 2003
Order4 of the Regional Trial Court (RTC), Branch 6 of
Kalibo, Aklan in Civil Case No. 5975.

Factual Antecedents

Spouses Eduardo and Lydia Silos (petitioners) have been

in business for about two decades of operating a
department store and buying and selling of ready-to-wear
apparel. Respondent Philippine National Bank (PNB) is a
banking corporation organized and existing under
Philippine laws.

To secure a one-year revolving credit line of P150,000.00

obtained from PNB, petitioners constituted in August 1987
a Real Estate Mortgage5 over a 370-square meter lot in
Kalibo, Aklan covered by Transfer Certificate of Title No.
 74 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
(TCT) T-14250. In July 1988, the credit line was increased
to P1.8 million and the mortgage was correspondingly
increased to P1.8 million.6 And in July 1989,
a Supplement to the Existing Real Estate Mortgage7 was
executed to cover the same credit line, which was
increased to P2.5 million, and additional security was
given in the form of a 134-square meter lot covered by
TCT T-16208. In addition, petitioners issued eight
Promissory Notes8 and signed a Credit
Agreement.9 This July 1989 Credit Agreement contained
a stipulation on interest which provides as follows:
1.03. Interest. (a) The Loan shall be subject to
interest at the rate of 19.5% per annum. Interest
shall be payable in advance every one hundred twenty
days at the rate prevailing at the time of the renewal.
(b) The Borrower agrees that the Bank may modify
the interest rate in the Loan depending on whatever
policy the Bank may adopt in the future, including
without limitation, the shifting from the floating interest
rate system to the fixed interest rate system, or vice
versa. Where the Bank has imposed on the Loan interest
at a rate per annum, which is equal to the Bank’s spread
over the current floating interest rate, the Borrower
hereby agrees that the Bank may, without need of
notice to the Borrower, increase or decrease its
spread over the floating interest rate at any time
depending on whatever policy it may adopt in the
future.10 (Emphases supplied)
The eight Promissory Notes, on the other hand, contained
a stipulation granting PNB the right to increase or reduce
interest rates “within the limits allowed by law or by the
Monetary Board.”11 The Real Estate Mortgage agreement
provided the same right to increase or reduce interest
rates “at any time depending on whatever policy PNB may
adopt in the future.”12cralawred
Petitioners religiously paid interest on the notes at the
following rates:
1. 1st Promissory Note dated July 24, 1989 –
19.5%;
2. 2nd Promissory Note dated November 22, 1989 –
23%;
3. 3rd Promissory Note dated March 21, 1990 –
22%;
4. 4th Promissory Note dated July 19, 1990 – 24%;
5. 5th Promissory Note dated December 17, 1990 –
28%;
6. 6th Promissory Note dated February 14, 1991 –
32%;
7. 7th Promissory Note dated March 1, 1991 – 30%;
and
8. 8th Promissory Note dated July 11, 1991 – 24%.13
In August 1991, an Amendment to Credit
Agreement14 was executed by the parties, with the
following stipulation regarding interest:
1.03. Interest on Line Availments. (a) The Borrowers
agree to pay interest on each Availment from date of
each Availment up to but not including the date of full
payment thereof at the rate per annum which is
determined by the Bank to be prime rate plus
applicable spread in effect as of the date of each
Availment.15 (Emphases supplied)
Under this Amendment to Credit Agreement, petitioners
issued in favor of
PNB the following 18 Promissory Notes, which
petitioners settled – except the last (the note covering the
principal) – at the following interest rates:
1. 9th Promissory Note dated November 8, 1991 –
26%;
2. 10th Promissory Note dated March 19, 1992 –
25%;
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%;
6. 14th Promissory Note dated July 12, 1993 –
17.5%;
7. 15th Promissory Note dated November 17, 1993
– 21%;
8. 16th Promissory Note dated March 28, 1994 –
21%;
9. 17th Promissory Note dated July 13, 1994 – 21%;
10. 18th Promissory Note dated November 16, 1994
– 16%;
11. 19th Promissory Note dated April 10, 1995 –
21%;
12. 20th Promissory Note dated July 19, 1995 –
18.5%;
13. 21st Promissory Note dated December 18, 1995
– 18.75%;
14. 22nd Promissory Note dated April 22, 1996 –
18.5%;
15. 23rd Promissory Note dated July 22, 1996 –
18.5%;
16. 24th Promissory Note dated November 25, 1996
– 18%;c
17. 25th Promissory Note dated May 30, 1997 –
17.5%; and
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 at the “rate the Bank may at any time
without notice, raise within the limits allowed by law x x
x.”17 On the other hand, the 18th up to the 26th
promissory notes – including PN 9707237, which is the
26th promissory note – carried the following provision:
x x x For this purpose, I/We agree that the rate of
interest herein stipulated may be increased or
decreased for the subsequent Interest Periods, with
prior notice to the Borrower in the event of changes
in interest rate prescribed by law or the Monetary
Board of the Central Bank of the Philippines, or in
the Bank’s overall cost of funds. I/We hereby agree
that in the event I/we are not agreeable to the
interest rate fixed for any Interest Period, I/we
shall have the option to prepay the loan or credit
facility without penalty within ten (10) calendar
days from the Interest Setting Date.18 (Emphasis
supplied)
Respondent regularly renewed the line from 1990 up to
1997, and petitioners made good on the promissory
notes, religiously paying the interests without objection or
fail. But in 1997, petitioners faltered when the interest
rates soared due to the Asian financial crisis. Petitioners’
sole outstanding promissory note for P2.5 million – PN
9707237 executed in July 1997 and due 120 days later or
on October 28, 1997 – became past due, and despite
 75 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
repeated demands, petitioners failed to make good on the
note.
Incidentally, PN 9707237 provided for the penalty
equivalent to 24% per annum in case of default, as
follows:
Without need for notice or demand, failure to pay this
note or any installment thereon, when due, shall
constitute default and in such cases or in case of
garnishment, receivership or bankruptcy or suit of any
kind filed against me/us by the Bank, the outstanding
principal of this note, at the option of the Bank and
without prior notice of demand, shall immediately become
due and payable and shall be subject to a penalty
charge of twenty four percent (24%) per
annum based on the defaulted principal amount. x
x x19 (Emphasis supplied)
PNB prepared a Statement of Account20 as of October 12,
1998, detailing the amount due and demandable from
petitioners in the total amount of P3,620,541.60, broken
down as follows:
P Real Estate Mortgage and the Supplement thereto were
Principal
2,500,000.00
Interest 538,874.94
Penalties 581,666.66
P interest rate; that as to the Amendment to Credit
Total
3,620,541.60
Despite demand, petitioners failed to pay the foregoing
amount. Thus, PNB foreclosed on the mortgage, and on
January 14, 1999, TCTs T-14250 and T-16208 were sold
to it at auction for the amount of P4,324,172.96.21 The
sheriff’s certificate of sale was registered on March 11,
1999.
More than a year later, or on March 24, 2000, petitioners
filed Civil Case No. 5975, seeking annulment of the
foreclosure sale and an accounting of the PNB credit.
Petitioners theorized that after the first promissory note
where they agreed to pay 19.5% interest, the succeeding
stipulations for the payment of interest in their loan
agreements with PNB – which allegedly left to the latter
the sole will to determine the interest rate – became null
and void. Petitioners added that because the interest
rates were fixed by respondent without their prior consent
or agreement, these rates are void, and as a result,
petitioners should only be made liable for interest at the
legal rate of 12%. They claimed further that they overpaid
interests on the credit, and concluded that due to this
overpayment of steep interest charges, their debt should
now be deemed paid, and the foreclosure and sale of TCTs
T-14250 and T-16208 became unnecessary and wrongful.
As for the imposed penalty of P581,666.66, petitioners
alleged that since the Real Estate Mortgage and the
Supplement thereto did not include penalties as part of
the secured amount, the same should be excluded from
the foreclosure amount or bid price, even if such penalties
are provided for in the final Promissory Note, or PN
9707237.22cralawred
In addition, petitioners sought to be reimbursed an
alleged overpayment of P848,285.00 made during the
period August 21, 1991 to March 5, 1998, resulting from
respondent’s imposition of the alleged illegal and steep
interest rates. They also prayed to be awarded
P200,000.00 by way of attorney’s fees.23cralawred
In its Answer,24 PNB denied that it unilaterally imposed or
fixed interest rates; that petitioners agreed that without
prior notice, PNB may modify interest rates depending on
future policy adopted by it; and that the imposition of
penalties was agreed upon in the Credit Agreement. It
added that the imposition of penalties is supported by the
all-inclusive clause in the Real Estate Mortgage
agreement which provides that the mortgage shall stand
as security for any and all other obligations of whatever
kind and nature owing to respondent, which thus includes
penalties imposed upon default or non-payment of the
principal and interest on due date.
On pre-trial, the parties mutually agreed to the following
material facts, among others:
a) That since 1991 up to 1998, petitioners had paid PNB
the total amount of P3,484,287.00;25 and
b) That PNB sent, and petitioners received, a March 10,
2000 demand letter.26
During trial, petitioner Lydia Silos (Lydia) testified that the
Credit Agreement, the Amendment to Credit Agreement,
all prepared by respondent PNB and were presented to
her and her husband Eduardo only for signature; that she
was told by PNB that the latter alone would determine the
Agreement, she was told that PNB would fill up the
interest rate portion thereof; that at the time the parties
executed the said Credit Agreement, she was not
informed about the applicable spread that PNB would
impose on her account; that the interest rate portion of
all Promissory Notes she and Eduardo issued were always
left in blank when they executed them, with respondent’s
mere assurance that it would be the one to enter or
indicate thereon the prevailing interest rate at the time of
availment; and that they agreed to such arrangement.
She further testified that the two Real Estate Mortgage
agreements she signed did not stipulate the payment of
penalties; that she and Eduardo consulted with a lawyer,
and were told that PNB’s actions were improper, and so
on March 20, 2000, they wrote to the latter seeking a
recomputation of their outstanding obligation; and when
PNB did not oblige, they instituted Civil Case No.
5975.27cralawred
On cross-examination, Lydia testified that she has been
in business for 20 years; that she also borrowed from
other individuals and another bank; that it was only with
banks that she was asked to sign loan documents with no
indicated interest rate; that she did not bother to read the
terms of the loan documents which she signed; and that
she received several PNB statements of account detailing
their outstanding obligations, but she did not complain;
that she assumed instead that what was written therein
is correct.28cralawred
For his part, PNB Kalibo Branch Manager Diosdado Aspa,
Jr. (Aspa), the sole witness for respondent, stated on
cross-examination that as a practice, the determination of
the prime rates of interest was the responsibility solely of
PNB’s Treasury Department which is based in Manila; that
these prime rates were simply communicated to all PNB
branches for implementation; that there are a multitude
of considerations which determine the interest rate, such
as the cost of money, foreign currency values, PNB’s
spread, bank administrative costs, profitability, and the
practice in the banking industry; that in every repricing of
 76 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
each loan availment, the borrower has the right to
question the rates, but that this was not done by the
petitioners; and that anything that is not found in the
Promissory Note may be supplemented by the Credit
Agreement.29cralawred
Ruling of the Regional Trial Court
On February 28, 2003, the trial court rendered judgment
dismissing Civil Case No. 5975.30 It ruled that:
1. While the Credit Agreement allows PNB to
unilaterally increase its spread over the floating
interest rate at any time depending on whatever
policy it may adopt in the future, it likewise allows
for the decrease at any time of the same. Thus,
such stipulation authorizing both the increase and
decrease of interest rates as may be applicable is
valid,31 as was held in Consolidated Bank and
Trust Corporation (SOLIDBANK) v. Court of
Appeals;32cralawred
2. Banks are allowed to stipulate that interest rates
on loans need not be fixed and instead be made
dependent on prevailing rates upon which to peg
such variable interest rates;33cralawred
3. The Promissory Note, as the principal contract
evidencing petitioners’ loan, prevails over the
Credit Agreement and the Real Estate Mortgage.
As such, the rate of interest, penalties and
attorney’s fees stipulated in the Promissory Note
prevail over those mentioned in the Credit
Agreement and the Real Estate Mortgage
agreements;34cralawred
4. Roughly, PNB’s computation of the total amount
of petitioners’ obligation is correct;35cralawred
5. Because the loan was admittedly due and
demandable, the foreclosure was regularly
made;36cralawred
6. By the admission of petitioners during pre-trial,
all payments made to PNB were properly applied
to the principal, interest and penalties.37
The dispositive portion of the trial court’s Decision reads:
IN VIEW OF THE FOREGOING, judgment is hereby
rendered in favor of the respondent and against the
petitioners by DISMISSING the latter’s petition.
Costs against the petitioners.
SO ORDERED.38
Petitioners moved for reconsideration. In an
Order39 dated June 4, 2003, the trial court granted only a
modification in the award of attorney’s fees, reducing the
same from 10% to 1%. Thus, PNB was ordered to refund
to petitioner the excess in attorney’s fees in the amount
of P356,589.90, viz:
WHEREFORE, judgment is hereby rendered upholding the
validity of the interest rate charged by the respondent as
well as the extra-judicial foreclosure proceedings and the
Certificate of Sale. However, respondent is directed to
refund to the petitioner the amount of P356,589.90
representing the excess interest charged against the
latter.
No pronouncement as to costs.
SO ORDERED.40
Ruling of the Court of Appeals
Petitioners appealed to the CA, which issued the
questioned Decision with the following decretal portion:
WHEREFORE, in view of the foregoing, the instant appeal
is PARTLY GRANTED. The modified Decision of the
Regional Trial Court per Order dated June 4, 2003 is
hereby AFFIRMED with MODIFICATIONS, to wit:
1. [T]hat the interest rate to be applied after the
expiration of the first 30-day interest period for PN. No.
9707237 should be 12% per annum;
2. [T]hat the attorney’s fees of 10% is valid and binding;
and
3. [T]hat [PNB] is hereby ordered to reimburse
[petitioners] the excess in the bid price of P377,505.99
which is the difference between the total amount due
[PNB] and the amount of its bid price.
SO ORDERED.41
On the other hand, respondent did not appeal the June 4,
2003 Order of the trial court which reduced its award of
attorney’s fees. It simply raised the issue in its appellee’s
brief in the CA, and included a prayer for the reversal of
said Order.
In effect, the CA limited petitioners’ appeal to the
following issues:
1) Whether x x x the interest rates on petitioners’
outstanding obligation were unilaterally and arbitrarily
imposed by PNB;
2) Whether x x x the penalty charges were secured by the
real estate mortgage; and
3) Whether x x x the extrajudicial foreclosure and sale are
valid.42
The CA noted that, based on receipts presented by
petitioners during trial, the latter dutifully paid a total of
P3,027,324.60 in interest for the period August 7, 1991
to August 6, 1997, over and above the P2.5 million
principal obligation. And this is exclusive of payments for
insurance premiums, documentary stamp taxes, and
penalty. All the while, petitioners did not complain nor
object to the imposition of interest; they in fact paid the
same religiously and without fail for seven years. The
appellate court ruled that petitioners are thus estopped
from questioning the same.
The CA nevertheless noted that for the period July 30,
1997 to August 14, 1997, PNB wrongly applied an interest
rate of 25.72% instead of the agreed 25%; thus it
overcharged petitioners, and the latter paid, an excess of
P736.56 in interest.
On the issue of penalties, the CA ruled that the express
tenor of the Real Estate Mortgage agreements
contemplated the inclusion of the PN 9707237-stipulated
24% penalty in the amount to be secured by the
mortgaged property, thus –
For and in consideration of certain loans, overdrafts and
other credit accommodations obtained from the
MORTGAGEE and to secure the payment of the same
and those others that the MORTGAGEE may extend

to the MORTGAGOR, including interest and
expenses, and other obligations owing by the
MORTGAGOR to the MORTGAGEE, whether direct or
indirect, principal or secondary, as appearing in the
accounts, books and records of the MORTGAGEE, the
MORTGAGOR does hereby transfer and convey by way of
mortgage unto the MORTGAGEE x x x43 (Emphasis
supplied)
The CA believes that the 24% penalty is covered by the
phrase “and other obligations owing by the mortgagor to
the mortgagee” and should thus be added to the amount
secured by the mortgages.44cralawred
The CA then proceeded to declare valid the foreclosure
and sale of properties covered by TCTs T-14250 and T-
16208, which came as a necessary result of petitioners’
failure to pay the outstanding obligation upon
demand.45 The CA saw fit to increase the trial court’s
award of 1% to 10%, finding the latter rate to be
reasonable and citing the Real Estate Mortgage
agreement which authorized the collection of the higher
rate.46cralawred
Finally, the CA ruled that petitioners are entitled to
P377,505.09 surplus, which is the difference between
PNB’s bid price of P4,324,172.96 and petitioners’ total
computed obligation as of January 14, 1999, or the date
of the auction sale, in the amount of
P3,946,667.87.47cralawred
Hence, the present
Issues
The following issues are raised in this
I as Circular 90549 of the then Central Bank had been
A. THE COURT OF APPEALS AS WELL AS THE LOWER
COURT ERRED IN NOT NULLIFYING THE
INTEREST RATE PROVISION IN THE CREDIT
AGREEMENT DATED JULY 24, 1989 X X X AND IN
THE AMENDMENT TO CREDIT AGREEMENT DATED
AUGUST 21, 1991 X X X WHICH LEFT TO THE
SOLE UNILATERAL DETERMINATION OF THE
RESPONDENT PNB THE ORIGINAL FIXING OF
INTEREST RATE AND ITS INCREASE, WHICH
AGREEMENT IS CONTRARY TO LAW, ART. 1308
OF THE [NEW CIVIL CODE], AS ENUNCIATED IN
PONCIANO ALMEIDA V. COURT OF APPEALS, G.R.
[NO.] 113412, APRIL 17, 1996, AND CONTRARY
TO PUBLIC POLICY AND PUBLIC INTEREST, AND
IN APPLYING THE PRINCIPLE OF ESTOPPEL
ARISING FROM THE ALLEGED DELAYED
COMPLAINT OF PETITIONER[S], AND [THEIR]
PAYMENT OF THE INTEREST CHARGED.
B. CONSEQUENTLY, THE COURT OF APPEALS AND
THE LOWER COURT ERRED IN NOT DECLARING
THAT PNB IS NOT AT ALL ENTITLED TO ANY
INTEREST EXCEPT THE LEGAL RATE FROM DATE
OF DEMAND, AND IN NOT APPLYING THE EXCESS
OVER THE LEGAL RATE OF THE ADMITTED
PAYMENTS MADE BY PETITIONER[S] FROM 1991-
1998 IN THE ADMITTED TOTAL AMOUNT OF
P3,484,287.00, TO PAYMENT OF THE PRINCIPAL
OF P2,500,000.00 LEAVING AN OVERPAYMENT
OF P984,287.00 REFUNDABLE BY RESPONDENT
TO PETITIONER[S] WITH INTEREST OF 12% PER
ANNUM.
II
77 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
THE COURT OF APPEALS AND THE LOWER COURT ERRED
IN HOLDING THAT PENALTIES ARE INCLUDED IN THE
SECURED AMOUNT, SUBJECT TO FORECLOSURE, WHEN
NO PENALTIES ARE MENTIONED [NOR] PROVIDED FOR
IN THE REAL ESTATE MORTGAGE AS A SECURED AMOUNT
AND THEREFORE THE AMOUNT OF PENALTIES SHOULD
HAVE BEEN EXCLUDED FROM [THE] FORECLOSURE
AMOUNT.
III
THE COURT OF APPEALS ERRED IN REVERSING THE
RULING OF THE LOWER COURT, WHICH REDUCED THE
ATTORNEY’S FEES OF 10% OF THE TOTAL
INDEBTEDNESS CHARGED IN THE X X X EXTRAJUDICIAL
FORECLOSURE TO ONLY 1%, AND [AWARDING] 10%
ATTORNEY’S FEES.48
Petitioners’ Arguments
Petitioners insist that the interest rate provision in the
Credit Agreement and the Amendment to Credit
Agreement should be declared null and void, for they
relegated to PNB the sole power to fix interest rates based
on arbitrary criteria or factors such as bank policy,
profitability, cost of money, foreign currency values, and
bank administrative costs; spaces for interest rates in the
two Credit Agreements and the promissory notes were left
blank for PNB to unilaterally fill, and their consent or
agreement to the interest rates imposed thereafter was
Petition. not obtained; the interest rate, which consists of the
prime rate plus the bank spread, is determined not by
agreement of the parties but by PNB’s Treasury
Department in Manila. Petitioners conclude that by this
Petition: method of fixing the interest rates, the principle of
mutuality of contracts is violated, and public policy as well
breached.
Petitioners question the CA’s application of the principle
of estoppel, saying that no estoppel can proceed from an
illegal act. Though they failed to timely question the
imposition of the alleged illegal interest rates and
continued to pay the loan on the basis of these rates, they
cannot be deemed to have acquiesced, and hence could
recover what they erroneously paid.50cralawred
Petitioners argue that if the interest rates were nullified,
then their obligation to PNB is deemed extinguished as of
July 1997; moreover, it would appear that they even
made an overpayment to the bank in the amount of
P984,287.00.
Next, petitioners suggest that since the Real Estate
Mortgage agreements did not include nor specify, as part
of the secured amount, the penalty of 24% authorized in
PN 9707237, such amount of P581,666.66 could not be
made answerable by or collected from the mortgages
covering TCTs T-14250 and T-16208. Claiming support
from Philippine Bank of Communications [PBCom] v.
Court of Appeals,51 petitioners insist that the phrase “and
other obligations owing by the mortgagor to the
mortgagee”52 in the mortgage agreements cannot
embrace the P581,666.66 penalty, because, as held in the
PBCom case, “[a] penalty charge does not belong to the
species of obligations enumerated in the mortgage,
hence, the said contract cannot be understood to secure
the penalty”;53 while the mortgages are the accessory
contracts, what items are secured may only be
 78 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
determined from the provisions of the mortgage
contracts, and not from the Credit Agreement or the
promissory notes.
Finally, petitioners submit that the trial court’s award of
1% attorney’s fees should be maintained, given that in
foreclosures, a lawyer’s work consists merely in the
preparation and filing of the petition, and involves
minimal study.54 To allow the imposition of a staggering
P396,211.00 for such work would be contrary to equity.
Petitioners state that the purpose of attorney’s fees in
cases of this nature “is not to give respondent a larger
compensation for the loan than the law already allows,
but to protect it against any future loss or damage by
being compelled to retain counsel x x x to institute judicial
proceedings for the collection of its credit.”55 And because
the instant case involves a simple extrajudicial
foreclosure, attorney’s fees may be equitably tempered.
Respondent’s Arguments
For its part, respondent disputes petitioners’ claim that
interest rates were unilaterally fixed by it, taking relief in
the CA pronouncement that petitioners are deemed
estopped by their failure to question the imposed rates
and their continued payment thereof without opposition.
It adds that because the Credit Agreement and
promissory notes contained both an escalation clause and
a de-escalation clause, it may not be said that the bank
violated the principle of mutuality. Besides, the increase
or decrease in interest rates have been mutually agreed
upon by the parties, as shown by petitioners’ continuous
payment without protest. Respondent adds that the
alleged unilateral imposition of interest rates is not a
proper subject for review by the Court because the issue
was never raised in the lower court.
As for petitioners’ claim that interest rates imposed by it
are null and void for the reasons that 1) the Credit
Agreements and the promissory notes were signed in
blank; 2) interest rates were at short periods; 3) no
interest rates could be charged where no agreement on
interest rates was made in writing; 4) PNB fixed interest
rates on the basis of arbitrary policies and standards left
to its choosing; and 5) interest rates based on prime rate
plus applicable spread are indeterminate and arbitrary –
PNB counters:
a. That Credit Agreements and promissory notes
were signed by petitioner[s] in blank –
Respondent claims that this issue was never
raised in the lower court. Besides, documentary
evidence prevails over testimonial evidence;
Lydia Silos’ testimony in this regard is self-
serving, unsupported and uncorroborated, and for
being the lone evidence on this issue. The fact
remains that these documents are in proper form,
presumed regular, and endure, against arbitrary
claims by Silos – who is an experienced business
person – that she signed questionable loan
documents whose provisions for interest rates
were left blank, and yet she continued to pay the
interests without protest for a number of
years.56cralawred
b. That interest rates were at short periods –
Respondent argues that the law which governs
and prohibits changes in interest rates made
more than once every twelve months has been
removed57 with the issuance of Presidential
Decree No. 858.58cralawred
c. That no interest rates could be charged where no
agreement on interest rates was made in writing
in violation of Article 1956 of the Civil Code, which
provides that no interest shall be due unless it has
been expressly stipulated in writing – Respondent
insists that the stipulated 25% per annum as
embodied in PN 9707237 should be imposed
during the interim, or the period after the loan
became due and while it remains unpaid, and not
the legal interest of 12% as claimed by
petitioners.59cralawred
d. That PNB fixed interest rates on the basis of
arbitrary policies and standards left to its
choosing – According to respondent, interest
rates were fixed taking into consideration
increases or decreases as provided by law or by
the Monetary Board, the bank’s overall costs of
funds, and upon agreement of the
parties.60cralawred
e. That interest rates based on prime rate plus
applicable spread are indeterminate and arbitrary
– On this score, respondent submits there are
various factors that influence interest rates, from
political events to economic developments, etc.;
the cost of money, profitability and foreign
currency transactions may not be discounted.61
On the issue of penalties, respondent reiterates the trial
court’s finding that during pre-trial, petitioners admitted
that the Statement of Account as of October 12, 1998 –
which detailed and included penalty charges as part of the
total outstanding obligation owing to the bank – was
correct. Respondent justifies the imposition and collection
of a penalty as a normal banking practice, and the
standard rate per annumfor all commercial banks, at the
time, was 24%. Respondent adds that the purpose of the
penalty or a penal clause for that matter is to ensure the
performance of the obligation and substitute for damages
and the payment of interest in the event of non-
compliance.62 And the promissory note – being the
principal agreement as opposed to the mortgage, which
is a mere accessory – should prevail. This being the case,
its inclusion as part of the secured amount in the
mortgage agreements is valid and necessary.
Regarding the foreclosure of the mortgages, respondent
accuses petitioners of pre-empting consolidation of its
ownership over TCTs T-14250 and T-16208; that
petitioners filed Civil Case No. 5975 ostensibly to question
the foreclosure and sale of properties covered by TCTs T-
14250 and T-16208 in a desperate move to retain
ownership over these properties, because they failed to
timely redeem them.
Respondent directs the attention of the Court to its
petition in G.R. No. 181046,63 where the propriety of the
CA’s ruling on the following issues is squarely raised:
1. That the interest rate to be applied after the
expiration of the first 30-day interest period for
PN 9707237 should be 12% per annum; and
2. That PNB should reimburse petitioners the excess
in the bid price of P377,505.99 which is the
difference between the total amount due to PNB
and the amount of its bid price.
Our Ruling
 79 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
The Court grants the Petition.
Before anything else, it must be said that it is not the
function of the Court to re-examine or re-evaluate
evidence adduced by the parties in the proceedings
below. The rule admits of certain well-recognized
exceptions, though, as when the lower courts’ findings are
not supported by the evidence on record or are based on
a misapprehension of facts, or when certain relevant and
undisputed facts were manifestly overlooked that, if
properly considered, would justify a different conclusion.
This case falls within such exceptions.
The Court notes that on March 5, 2008, a Resolution was
issued by the Court’s First Division denying respondent’s
petition in G.R. No. 181046, due to late filing, failure to
attach the required affidavit of service of the petition on
the trial court and the petitioners, and submission of a
defective verification and certification of non-forum
shopping. On June 25, 2008, the Court issued another
Resolution denying with finality respondent’s motion for
reconsideration of the March 5, 2008 Resolution. And on
August 15, 2008, entry of judgment was made. This thus
settles the issues, as above-stated, covering a) the
interest rate – or 12% per annum – that applies upon
expiration of the first 30 days interest period provided
under PN 9707237, and b) the CA’s decree that PNB
should reimburse petitioner the excess in the bid price of
P377,505.09.
It appears that respondent’s practice, more than once
proscribed by the Court, has been carried over once more
to the petitioners. In a number of decided cases, the Court
struck down provisions in credit documents issued by PNB
to, or required of, its borrowers which allow the bank to
increase or decrease interest rates “within the limits
allowed by law at any time depending on whatever policy
it may adopt in the future.” Thus, in Philippine National
Bank v. Court of Appeals,64 such stipulation and similar
ones were declared in violation of Article 130865 of the
Civil Code. In a second case, Philippine National Bank v.
Court of Appeals,66 the very same stipulations found in
the credit agreement and the promissory notes prepared
and issued by the respondent were again invalidated. The
Court therein said:
The Credit Agreement provided inter alia, that —
(a) The BANK reserves the right to increase the
interest rate within the limits allowed by law at any
time depending on whatever policy it may adopt in
the future; Provided, that the interest rate on this
accommodation shall be correspondingly decreased in the
event that the applicable maximum interest is reduced by
law or by the Monetary Board. In either case, the
adjustment in the interest rate agreed upon shall take
effect on the effectivity date of the increase or decrease
in the maximum interest rate.
The Promissory Note, in turn, authorized the PNB to
raise the rate of interest, at any time without notice,
beyond the stipulated rate of 12% but only “within
the limits allowed by law.”
The Real Estate Mortgage contract likewise provided
that — accrue on a loan or forbearance of money, goods or
(k) INCREASE OF INTEREST RATE: The rate of interest
charged on the obligation secured by this mortgage as
well as the interest on the amount which may have been
advanced by the MORTGAGEE, in accordance with the
provision hereof, shall be subject during the life of
this contract to such an increase within the rate
allowed by law, as the Board of Directors of the
MORTGAGEE may prescribe for its debtors.
xxxx
In making the unilateral increases in interest rates,
petitioner bank relied on the escalation clause contained
in their credit agreement which provides, as follows:
The Bank reserves the right to increase the interest rate
within the limits allowed by law at any time depending
on whatever policy it may adopt in the future and
provided, that, the interest rate on this accommodation
shall be correspondingly decreased in the event that the
applicable maximum interest rate is reduced by law or by
the Monetary Board. In either case, the adjustment in the
interest rate agreed upon shall take effect on the
effectivity date of the increase or decrease in maximum
interest rate.
This clause is authorized by Section 2 of Presidential
Decree (P.D.) No. 1684 which further amended Act No.
2655 (“The Usury Law”), as amended, thus:
Section 2. The same Act is hereby amended by adding a
new section after Section 7, to read as follows:
Sec. 7-a. Parties to an agreement pertaining to a loan or
forbearance of money, goods or credits may stipulate that
the rate of interest agreed upon may be increased in the
event that the applicable maximum rate of interest is
increased by law or by the Monetary Board; Provided,
That such stipulation shall be valid only if there is also a
stipulation in the agreement that the rate of interest
agreed upon shall be reduced in the event that the
applicable maximum rate of interest is reduced by law or
by the Monetary Board; Provided further, That the
adjustment in the rate of interest agreed upon shall take
effect on or after the effectivity of the increase or
decrease in the maximum rate of interest.
Section 1 of P.D. No. 1684 also empowered the Central
Bank’s Monetary Board to prescribe the maximum rates
of interest for loans and certain forbearances. Pursuant to
such authority, the Monetary Board issued Central Bank
(C.B.) Circular No. 905, series of 1982, Section 5 of which
provides:
Sec. 5. Section 1303 of the Manual of Regulations (for
Banks and Other Financial Intermediaries) is hereby
amended to read as follows:
Sec. 1303. Interest and Other Charges. — The rate of
interest, including commissions, premiums, fees and
other charges, on any loan, or forbearance of any money,
goods or credits, regardless of maturity and whether
secured or unsecured, shall not be subject to any ceiling
prescribed under or pursuant to the Usury Law, as
amended.
P.D. No. 1684 and C.B. Circular No. 905 no more than
allow contracting parties to stipulate freely regarding any
subsequent adjustment in the interest rate that shall
credits. In fine, they can agree to adjust, upward or
downward, the interest previously stipulated. However,
contrary to the stubborn insistence of petitioner
bank, the said law and circular did not authorize
 80 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
either party to unilaterally raise the interest rate
without the other’s consent.
It is basic that there can be no contract in the true
sense in the absence of the element of agreement,
or of mutual assent of the parties. If this assent is
wanting on the part of the one who contracts, his
act has no more efficacy than if it had been done
under duress or by a person of unsound mind.
Similarly, contract changes must be made with the
consent of the contracting parties. The minds of all
the parties must meet as to the proposed
modification, especially when it affects an
important aspect of the agreement. In the case of
loan contracts, it cannot be gainsaid that the rate of
interest is always a vital component, for it can make
or break a capital venture. Thus, any change must be
mutually agreed upon, otherwise, it is bereft of any
binding effect.
We cannot countenance petitioner bank’s posturing
that the escalation clause at bench gives it
unbridled right to unilaterally upwardly adjust the
interest on private respondents’ loan. That would
completely take away from private respondents the
right to assent to an important modification in their
agreement, and would negate the element of
mutuality in contracts. In Philippine National Bank v.
Court of Appeals, et al., 196 SCRA 536, 544-545 (1991)
we held —
x x x The unilateral action of the PNB in increasing
the interest rate on the private respondent’s loan
violated the mutuality of contracts ordained in
Article 1308 of the Civil Code:
Art. 1308. The contract must bind both contracting
parties; its validity or compliance cannot be left to the will
of one of them.
In order that obligations arising from contracts may have
the force of law between the parties, there must be
mutuality between the parties based on their essential
equality. A contract containing a condition which makes
its fulfillment dependent exclusively upon the
uncontrolled will of one of the contracting parties, is void
. . . . Hence, even assuming that the . . . loan agreement
between the PNB and the private respondent gave the
PNB a license (although in fact there was none) to
increase the interest rate at will during the term of the
loan, that license would have been null and void for being
violative of the principle of mutuality essential in
contracts. It would have invested the loan agreement with
the character of a contract of adhesion, where the parties
do not bargain on equal footing, the weaker party’s (the
debtor) participation being reduced to the alternative “to
take it or leave it” . . . . Such a contract is a veritable trap
for the weaker party whom the courts of justice must
protect against abuse and imposition.67(Emphases
supplied)
Then again, in a third case, Spouses Almeda v. Court of
Appeals,68 the Court invalidated the very same provisions
in the respondent’s prepared Credit Agreement, declaring
thus:
The binding effect of any agreement between parties to a
contract is premised on two settled principles: (1) that
any obligation arising from contract has the force of law
between the parties; and (2) that there must be mutuality
between the parties based on their essential equality. Any
contract which appears to be heavily weighed in favor of
one of the parties so as to lead to an unconscionable result
is void. Any stipulation regarding the validity or
compliance of the contract which is left solely to the will
of one of the parties, is likewise, invalid.
It is plainly obvious, therefore, from the undisputed
facts of the case that respondent bank unilaterally
altered the terms of its contract with petitioners by
increasing the interest rates on the loan without the
prior assent of the latter. In fact, the manner of
agreement is itself explicitly stipulated by the Civil Code
when it provides, in Article 1956 that “No interest shall be
due unless it has been expressly stipulated in
writing.” What has been “stipulated in writing” from
a perusal of interest rate provision of the credit
agreement signed between the parties is that
petitioners were bound merely to pay 21% interest,
subject to a possible escalation or de-escalation,
when 1) the circumstances warrant such escalation
or de-escalation; 2) within the limits allowed by
law; and 3) upon agreement.
Indeed, the interest rate which appears to have
been agreed upon by the parties to the contract in
this case was the 21% rate stipulated in the interest
provision. Any doubt about this is in fact readily
resolved by a careful reading of the credit
agreement because the same plainly uses the
phrase “interest rate agreed upon,” in reference to
the original 21% interest rate. x x x
x x x x
Petitioners never agreed in writing to pay the increased
interest rates demanded by respondent bank in
contravention to the tenor of their credit agreement. That
an increase in interest rates from 18% to as much as 68%
is excessive and unconscionable is
indisputable. Between 1981 and 1984, petitioners
had paid an amount equivalent to virtually half of
the entire principal (P7,735,004.66) which was
applied to interest alone. By the time the spouses
tendered the amount of P40,142,518.00 in
settlement of their obligations; respondent bank
was demanding P58,377,487.00 over and above
those amounts already previously paid by the
spouses.
Escalation clauses are not basically wrong or legally
objectionable so long as they are not solely potestative
but based on reasonable and valid grounds. Here, as
clearly demonstrated above, not only [are] the increases
of the interest rates on the basis of the escalation clause
patently unreasonable and unconscionable, but also there
are no valid and reasonable standards upon which the
increases are anchored.
x x x x
In the face of the unequivocal interest rate provisions in
the credit agreement and in the law requiring the parties
to agree to changes in the interest rate in writing, we hold
that the unilateral and progressive increases imposed by
respondent PNB were null and void. Their effect was to
increase the total obligation on an eighteen million peso
 81 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O

loan to an amount way over three times that which was effectivity, there must nevertheless be a de-escalation
originally granted to the borrowers. That these increases, clause to mitigate the one-sidedness of the escalation
occasioned by crafty manipulations in the interest rates is clause. Indeed because of concern for the unequal status
unconscionable and neutralizes the salutary policies of of borrowers vis-a-vis the banks, our cases after Banco
extending loans to spur business cannot be Filipino have fashioned the rule that any increase in the
disputed.69 (Emphases supplied) rate of interest made pursuant to an escalation
Still, in a fourth case, Philippine National Bank v. Court of clause must be the result of agreement between the
Appeals,70 the above doctrine was reiterated: parties.

The promissory note contained the following stipulation: Thus in Philippine National Bank v. Court of
Appeals, two promissory notes authorized PNB to
For value received, I/we, [private respondents] jointly increase the stipulated interest per annum “within
and severally promise to pay to the ORDER of the the limits allowed by law at any time depending on
PHILIPPINE NATIONAL BANK, at its office in San Jose City, whatever policy [PNB] may adopt in the future;
Philippines, the sum of FIFTEEN THOUSAND ONLY Provided, that the interest rate on this note shall be
(P15,000.00), Philippine Currency, together with correspondingly decreased in the event that the
interest thereon at the rate of 12% per annum until applicable maximum interest rate is reduced by law
paid, which interest rate the Bank may at any time or by the Monetary Board.” The real estate
without notice, raise within the limits allowed by mortgage likewise provided:
law, and I/we also agree to pay jointly and severally The rate of interest charged on the obligation secured by
____% per annum penalty charge, by way of liquidated this mortgage as well as the interest on the amount which
damages should this note be unpaid or is not renewed on may have been advanced by the MORTGAGEE, in
due dated. accordance with the provisions hereof, shall be subject
during the life of this contract to such an increase within
Payment of this note shall be as follows: the rate allowed by law, as the Board of Directors of the
MORTGAGEE may prescribe for its debtors.
*THREE HUNDRED SIXTY FIVE DAYS* AFTER DATE Pursuant to these clauses, PNB successively increased the
interest from 18% to 32%, then to 41% and then to
On the reverse side of the note the following condition 48%. This Court declared the increases unilaterally
was stamped: imposed by [PNB] to be in violation of the principle
of mutuality as embodied in Art. 1308 of the Civil Code,
All short-term loans to be granted starting January 1, which provides that “[t]he contract must bind both
1978 shall be made subject to the condition that any contracting parties; its validity or compliance cannot be
and/or all extensions hereof that will leave any portion of left to the will of one of them.” As the Court explained:
the amount still unpaid after 730 days shall automatically
convert the outstanding balance into a medium or long- In order that obligations arising from contracts may
term obligation as the case may be and give the Bank have the force of law between the parties, there
the right to charge the interest rates prescribed must be mutuality between the parties based on
under its policies from the date the account was their essential equality. A contract containing a
originally granted. condition which makes its fulfillment dependent
exclusively upon the uncontrolled will of one of the
To secure payment of the loan the parties executed a real contracting parties, is void (Garcia vs. Rita Legarda, Inc.,
estate mortgage contract which provided: 21 SCRA 555). Hence, even assuming that the P1.8
million loan agreement between the PNB and the private
(k) INCREASE OF INTEREST RATE: respondent gave the PNB a license (although in fact there
was none) to increase the interest rate at will during the
The rate of interest charged on the obligation secured term of the loan, that license would have been null and
by this mortgage as well as the interest on the amount void for being violative of the principle of mutuality
which may have been advanced by the MORTGAGEE, in essential in contracts. It would have invested the loan
accordance with the provision hereof, shall be subject agreement with the character of a contract of adhesion,
during the life of this contract to such an increase where the parties do not bargain on equal footing, the
within the rate allowed by law, as the Board of weaker party’s (the debtor) participation being reduced to
Directors of the MORTGAGEE may prescribe for its the alternative “to take it or leave it” (Qua vs. Law Union
debtors. & Rock Insurance Co., 95 Phil. 85). Such a contract is a
veritable trap for the weaker party whom the courts of
x x x x justice must protect against abuse and imposition.

To begin with, PNB’s argument rests on a A similar ruling was made in Philippine National
misapprehension of the import of the appellate court’s Bank v. Court of Appeals. The credit agreement in
ruling. The Court of Appeals nullified the interest rate that case provided:
increases not because the promissory note did not comply
with P.D. No. 1684 by providing for a de-escalation, but The BANK reserves the right to increase the interest
because the absence of such provision made the clause rate within the limits allowed by law at any time
so one-sided as to make it unreasonable. depending on whatever policy it may adopt in the
future: Provided, that the interest rate on this
That ruling is correct. It is in line with our decision accommodation shall be correspondingly decreased in the
in Banco Filipino Savings & Mortgage Bank v. event that the applicable maximum interest is reduced by
Navarro that although P.D. No. 1684 is not to be law or by the Monetary Board. . . .
retroactively applied to loans granted before its
 82 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
As in the first case, PNB successively increased the
stipulated interest so that what was originally 12% per
annum became, after only two years, 42%. In declaring
the increases invalid, we held:
We cannot countenance petitioner bank’s posturing that
the escalation clause at bench gives it unbridled right to
unilaterally upwardly adjust the interest on private
respondents’ loan. That would completely take away from
private respondents the right to assent to an important
modification in their agreement, and would negate the
element of mutuality in contracts.
Only recently we invalidated another round of
interest increases decreed by PNB pursuant to a
similar agreement it had with other borrowers:
[W]hile the Usury Law ceiling on interest rates was lifted
by C.B. Circular 905, nothing in the said circular could
possibly be read as granting respondent bank carte
blanche authority to raise interest rates to levels
which would either enslave its borrowers or lead to
a hemorrhaging of their assets.
In this case no attempt was made by PNB to secure
the conformity of private respondents to the
successive increases in the interest rate. Private
respondents’ assent to the increases can not be
implied from their lack of response to the letters
sent by PNB, informing them of the increases. For
as stated in one case, no one receiving a proposal
to change a contract is obliged to answer the
proposal.71 (Emphasis supplied)
We made the same pronouncement in a fifth case, New
Sampaguita Builders Construction, Inc. v. Philippine
National Bank,72 thus – without limitation, the shifting from the floating interest
Courts have the authority to strike down or to modify
provisions in promissory notes that grant the lenders
unrestrained power to increase interest rates, penalties
and other charges at the latter’s sole discretion and
without giving prior notice to and securing the consent of
the borrowers. This unilateral authority is anathema to
the mutuality of contracts and enable lenders to take
undue advantage of borrowers. Although the Usury Law
has been effectively repealed, courts may still reduce
iniquitous or unconscionable rates charged for the use of
money. Furthermore, excessive interests, penalties
and other charges not revealed in disclosure
statements issued by banks, even if stipulated in
the promissory notes, cannot be given effect under
the Truth in Lending Act.73 (Emphasis supplied)
Yet again, in a sixth disposition, Philippine National Bank
v. Spouses Rocamora,74 the above pronouncements were
reiterated to debunk PNB’s repeated reliance on its
invalidated contract stipulations:
We repeated this rule in the 1994 case of PNB v. CA and
Jayme-Fernandez and the 1996 case of PNB v. CA and
Spouses Basco. Taking no heed of these rulings, the
escalation clause PNB used in the present case to justify
the increased interest rates is no different from the
escalation clause assailed in the 1996 PNB case; in both,
the interest rates were increased from the agreed
12% per annum rate to 42%. x x x 4th Promissory Note dated July 19, 1990 – 24%;
x x x x
On the strength of this ruling, PNB’s argument –
that the spouses Rocamora’s failure to contest the
increased interest rates that were purportedly
reflected in the statements of account and the
demand letters sent by the bank amounted to their
implied acceptance of the increase – should
likewise fail.
Evidently, PNB’s failure to secure the spouses Rocamora’s
consent to the increased interest rates prompted the
lower courts to declare excessive and illegal the interest
rates imposed. To go around this lower court finding, PNB
alleges that the P206,297.47 deficiency claim was
computed using only the original 12% per annum interest
rate. We find this unlikely. Our examination of PNB’s own
ledgers, included in the records of the case, clearly
indicates that PNB imposed interest rates higher than the
agreed 12% per annum rate. This confirmatory finding,
albeit based solely on ledgers found in the records,
reinforces the application in this case of the rule that
findings of the RTC, when affirmed by the CA, are binding
upon this Court.75 (Emphases supplied)
Verily, all these cases, including the present one, involve
identical or similar provisions found in respondent’s credit
agreements and promissory notes. Thus, the July 1989
Credit Agreement executed by petitioners and respondent
contained the following stipulation on interest:
1.03. Interest. (a) The Loan shall be subject to interest
at the rate of 19.5% [per annum]. Interest shall be
payable in advance every one hundred twenty days at the
rate prevailing at the time of the renewal.
(b) The Borrower agrees that the Bank may modify the
interest rate in the Loan depending on whatever
policy the Bank may adopt in the future, including
rate system to the fixed interest rate system, or vice
versa. Where the Bank has imposed on the Loan interest
at a rate per annum which is equal to the Bank’s spread
over the current floating interest rate, the Borrower
hereby agrees that the Bank may, without need of
notice to the Borrower, increase or decrease its
spread over the floating interest rate at any time
depending on whatever policy it may adopt in the
future.76 (Emphases supplied)
while the eight promissory notes issued pursuant thereto
granted PNB the right to increase or reduce interest rates
“within the limits allowed by law or the Monetary
Board”77 and the Real Estate Mortgage agreement
included the same right to increase or reduce interest
rates “at any time depending on whatever policy PNB may
adopt in the future.”78cralawred
On the basis of the Credit Agreement, petitioners issued
promissory notes which they signed in blank, and
respondent later on entered their corresponding interest
rates, as follows:
1st Promissory Note dated July 24, 1989 – 19.5%;
2nd Promissory Note dated November 22, 1989 – 23%;
3rd Promissory Note dated March 21, 1990 – 22%;
5th Promissory Note dated December 17, 1990 – 28%;
6th Promissory Note dated February 14, 1991 – 32%;
 83 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
7th Promissory Note dated March 1, 1991 – 30%; and
8th Promissory Note dated July 11, 1991 – 24%.79
On the other hand, the August 1991 Amendment to Credit
Agreement contains the following stipulation regarding
interest:
1.03. Interest on Line Availments. (a) The Borrowers
agree to pay interest on each Availment from date of
each Availment up to but not including the date of full
payment thereof at the rate per annum which is
determined by the Bank to be prime rate plus
applicable spread in effect as of the date of each
Availment.80 (Emphases supplied)
and under this Amendment to Credit Agreement,
petitioners again executed and signed the following
promissory notes in blank, for the respondent to later on
enter the corresponding interest rates, which it did, as
follows:
9th Promissory Note dated November 8, 1991 – 26%;
10th Promissory Note dated March 19, 1992 – 25%;
11th Promissory Note dated July 11, 1992 – 23%;
12th Promissory Note dated November 10, 1992 – 21%;
13th Promissory Note dated March 15, 1993 – 21%;
14th Promissory Note dated July 12, 1993 – 17.5%;
15th Promissory Note dated November 17, 1993 – 21%;
16th Promissory Note dated March 28, 1994 – 21%;
17th Promissory Note dated July 13, 1994 – 21%;
18th Promissory Note dated November 16, 1994 – 16%;
19th Promissory Note dated April 10, 1995 – 21%;
20th Promissory Note dated July 19, 1995 – 18.5%;
21st Promissory Note dated December 18, 1995 –
18.75%;
22nd Promissory Note dated April 22, 1996 – 18.5%;
23rd Promissory Note dated July 22, 1996 – 18.5%;
24th Promissory Note dated November 25, 1996 – 18%;
25th Promissory Note dated May 30, 1997 – 17.5%; and
26th Promissory Note (PN 9707237) dated July 30,
1997 – 25%.81
The 9th up to the 17th promissory notes provide for the
payment of interest at the “rate the Bank may at any time
without notice, raise within the limits allowed by law x x
x.”82 On the other hand, the 18th up to the 26th
promissory notes – which includes PN 9707237 – carried
the following provision:
x x x For this purpose, I/We agree that the rate of
interest herein stipulated may be increased or
decreased for the subsequent Interest Periods, with
prior notice to the Borrower in the event of changes
in interest rate prescribed by law or the Monetary
Board of the Central Bank of the Philippines, or in
the Bank’s overall cost of funds. I/We hereby agree
that in the event I/we are not agreeable to the
interest rate fixed for any Interest Period, I/we
shall have the option to prepay the loan or credit
facility without penalty within ten (10) calendar
days from the Interest Setting Date.83 (Emphasis
supplied)
These stipulations must be once more invalidated, as was
done in previous cases. The common denominator in
these cases is the lack of agreement of the parties to the
imposed interest rates. For this case, this lack of consent
by the petitioners has been made obvious by the fact that
they signed the promissory notes in blank for the
respondent to fill. We find credible the testimony of Lydia
in this respect. Respondent failed to discredit her; in fact,
its witness PNB Kalibo Branch Manager Aspa admitted
that interest rates were fixed solely by its Treasury
Department in Manila, which were then simply
communicated to all PNB branches for implementation. If
this were the case, then this would explain why petitioners
had to sign the promissory notes in blank, since the
imposable interest rates have yet to be determined and
fixed by respondent’s Treasury Department in Manila.
Moreover, in Aspa’s enumeration of the factors that
determine the interest rates PNB fixes – such as cost of
money, foreign currency values, bank administrative
costs, profitability, and considerations which affect the
banking industry – it can be seen that considerations
which affect PNB’s borrowers are ignored. A borrower’s
current financial state, his feedback or opinions, the
nature and purpose of his borrowings, the effect of foreign
currency values or fluctuations on his business or
borrowing, etc. – these are not factors which influence the
fixing of interest rates to be imposed on him. Clearly,
respondent’s method of fixing interest rates based on
one-sided, indeterminate, and subjective criteria such as
profitability, cost of money, bank costs, etc. is arbitrary
for there is no fixed standard or margin above or below
these considerations.
The stipulation in the promissory notes subjecting the
interest rate to review does not render the imposition by
UCPB of interest rates on the obligations of the spouses
Beluso valid. According to said stipulation:
The interest rate shall be subject to review and may be
increased or decreased by the LENDER considering
among others the prevailing financial and monetary
conditions; or the rate of interest and charges
which other banks or financial institutions charge
or offer to charge for similar accommodations;
and/or the resulting profitability to the
LENDER after due consideration of all dealings with the
BORROWER.
It should be pointed out that the authority to review
the interest rate was given [to] UCPB alone as the
lender. Moreover, UCPB may apply the considerations
enumerated in this provision as it wishes. As worded in
the above provision, UCPB may give as much weight as it
desires to each of the following considerations: (1) the
prevailing financial and monetary condition; (2) the rate
of interest and charges which other banks or financial
institutions charge or offer to charge for similar
 84 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
accommodations; and/or (3) the resulting profitability to
the LENDER (UCPB) after due consideration of all dealings
with the BORROWER (the spouses Beluso). Again, as in
the case of the interest rate provision, there is no
fixed margin above or below these considerations.
In view of the foregoing, the Separability Clause cannot
save either of the two options of UCPB as to the interest
to be imposed, as both options violate the principle of
mutuality of contracts.84 (Emphases supplied)
To repeat what has been said in the above-cited cases,
any modification in the contract, such as the interest
rates, must be made with the consent of the contracting
parties. The minds of all the parties must meet as to the
proposed modification, especially when it affects an
important aspect of the agreement. In the case of loan
agreements, the rate of interest is a principal condition, if
not the most important component. Thus, any
modification thereof must be mutually agreed upon;
otherwise, it has no binding effect.
What is even more glaring in the present case is that, the
stipulations in question no longer provide that the parties
shall agree upon the interest rate to be fixed; -instead,
they are worded in such a way that the borrower shall
agree to whatever interest rate respondent fixes. In credit
agreements covered by the above-cited cases, it is
provided that:
The Bank reserves the right to increase the interest rate
within the limits allowed by law at any time depending on
whatever policy it may adopt in the future: Provided, that,
the interest rate on this accommodation shall be
correspondingly decreased in the event that the
applicable maximum interest rate is reduced by law or by
the Monetary Board. In either case, the adjustment in the
interest rate agreed upon shall take effect on the
effectivity date of the increase or decrease in maximum
interest rate.85 (Emphasis supplied)
Whereas, in the present credit agreements under
scrutiny, it is stated that:
IN THE JULY 1989 CREDIT AGREEMENT
(b) The Borrower agrees that the Bank may modify the
interest rate on the Loan depending on whatever policy
the Bank may adopt in the future, including without
limitation, the shifting from the floating interest rate
system to the fixed interest rate system, or vice versa.
Where the Bank has imposed on the Loan interest at a
rate per annum, which is equal to the Bank’s spread over
the current floating interest rate, the Borrower hereby
agrees that the Bank may, without need of notice to
the Borrower, increase or decrease its spread over the
floating interest rate at any time depending on whatever
policy it may adopt in the future.86 (Emphases supplied)
IN THE AUGUST 1991 AMENDMENT TO CREDIT
AGREEMENT
1.03. Interest on Line Availments. (a) The Borrowers
agree to pay interest on each Availment from date of
each Availment up to but not including the date of full
payment thereof at the rate per annum which is
determined by the Bank to be prime rate plus applicable
spread in effect as of the date of each
Availment.87 (Emphasis supplied)
Plainly, with the present credit agreement, the element of
consent or agreement by the borrower is nowcompletely
lacking, which makes respondent’s unlawful act all the
more reprehensible.
Accordingly, petitioners are correct in arguing that
estoppel should not apply to them, for “[e]stoppel cannot
be predicated on an illegal act. As between the parties to
a contract, validity cannot be given to it by estoppel if it
is prohibited by law or is against public policy.”88 It
appears that by its acts, respondent violated the Truth in
Lending Act, or Republic Act No. 3765, which was enacted
“to protect x x x citizens from a lack of awareness of the
true cost of credit to the user by using a full disclosure of
such cost with a view of preventing the uninformed use of
credit to the detriment of the national economy.”89 The
law “gives a detailed enumeration of the specific
information required to be disclosed, among which are the
interest and other charges incident to the extension of
credit.”90 Section 4 thereof provides that a disclosure
statement must be furnished prior to the consummation
of the transaction, thus:
SEC. 4. Any creditor shall furnish to each person to whom
credit is extended, prior to the consummation of the
transaction, a clear statement in writing setting forth, to
the extent applicable and in accordance with rules and
regulations prescribed by the Board, the following
information:
(1) the cash price or delivered price of the property or
service to be acquired;
(2) the amounts, if any, to be credited as down payment
and/or trade-in;
(3) the difference between the amounts set forth under
clauses (1) and (2);
(4) the charges, individually itemized, which are paid or
to be paid by such person in connection with the
transaction but which are not incident to the extension of
credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and
centavos; and
(7) the percentage that the finance bears to the total
amount to be financed expressed as a simple annual rate
on the outstanding unpaid balance of the obligation.
Under Section 4(6), “finance charge” represents the
amount to be paid by the debtor incident to the extension
of credit such as interest or discounts, collection fees,
credit investigation fees, attorney’s fees, and other
service charges. The total finance charge represents the
difference between (1) the aggregate consideration
(down payment plus installments) on the part of the
debtor, and (2) the sum of the cash price and non-finance
charges.
By requiring the petitioners to sign the credit documents
and the promissory notes in blank, and then unilaterally
filling them up later on, respondent violated the Truth in
Lending Act, and was remiss in its disclosure obligations.
In one case, which the Court finds applicable here, it was
 85 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
held:
UCPB further argues that since the spouses Beluso
were duly given copies of the subject promissory
notes after their execution, then they were duly
notified of the terms thereof, in substantial
compliance with the Truth in Lending Act.
Once more, we disagree. Section 4 of the Truth in Lending
Act clearly provides that the disclosure statement must be
furnished prior to the consummation of the transaction:
SEC. 4. Any creditor shall furnish to each person to whom
credit is extended, prior to the consummation of the
transaction, a clear statement in writing setting forth, to
the extent applicable and in accordance with rules and
regulations prescribed by the Board, the following
information:
(1) the cash price or delivered price of the property or
service to be acquired;
(2) the amounts, if any, to be credited as down payment
and/or trade-in;
(3) the difference between the amounts set forth under
clauses (1) and (2);
(4) the charges, individually itemized, which are paid or
to be paid by such person in connection with the
transaction but which are not incident to the extension of
credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and
centavos; and
(7) the percentage that the finance bears to the total
amount to be financed expressed as a simple annual rate
on the outstanding unpaid balance of the obligation.
The rationale of this provision is to protect users of
credit from a lack of awareness of the true cost
thereof, proceeding from the experience that banks
are able to conceal such true cost by hidden
charges, uncertainty of interest rates, deduction of
interests from the loaned amount, and the like. The
law thereby seeks to protect debtors by permitting
them to fully appreciate the true cost of their loan,
to enable them to give full consent to the contract,
and to properly evaluate their options in arriving at
business decisions. Upholding UCPB’s claim of
substantial compliance would defeat these purposes of
the Truth in Lending Act.The belated discovery of the
true cost of credit will too often not be able to
reverse the ill effects of an already consummated
business decision.
In addition, the promissory notes, the copies of
which were presented to the spouses Beluso after
execution, are not sufficient notification from UCPB.
As earlier discussed, the interest rate provision
therein does not sufficiently indicate with
particularity the interest rate to be applied to the
loan covered by said promissory notes.92 (Emphases
supplied)
However, the one-year period within which an action for
violation of the Truth in Lending Act may be filed evidently
prescribed long ago, or sometime in 2001, one year after
petitioners received the March 2000 demand letter which
contained the illegal charges.
The fact that petitioners later received several statements
of account detailing its outstanding obligations does not
cure respondent’s breach. To repeat, the belated
discovery of the true cost of credit does not reverse the ill
effects of an already consummated business
decision.93 Neither may the statements be considered
proposals sent to secure the petitioners’ conformity; they
were sent after the imposition and application of the
interest rate, and not before. And even if it were to be
presumed that these are proposals or offers, there was no
acceptance by petitioners. “No one receiving a proposal
to modify a loan contract, especially regarding interest, is
obliged to answer the proposal.”94cralawred
Loan and credit arrangements may be made enticing by,
or “sweetened” with, offers of low initial interest rates, but
actually accompanied by provisions written in fine print
that allow lenders to later on increase or decrease interest
rates unilaterally, without the consent of the borrower,
and depending on complex and subjective factors.
Because they have been lured into these contracts by
initially low interest rates, borrowers get caught and stuck
in the web of subsequent steep rates and penalties,
surcharges and the like. Being ordinary individuals or
entities, they naturally dread legal complications and
cannot afford court litigation; they succumb to whatever
charges the lenders impose. At the very least, borrowers
should be charged rightly; but then again this is not
possible in a one-sided credit system where the
temptation to abuse is strong and the willingness to
rectify is made weak by the eternal desire for profit.
Given the above supposition, the Court cannot subscribe
to respondent’s argument that in every repricing of
petitioners’ loan availment, they are given the right to
question the interest rates imposed. The import of
respondent’s line of reasoning cannot be other than that
if one out of every hundred borrowers questions
respondent’s practice of unilaterally fixing interest rates,
then only the loan arrangement with that lone
complaining borrower will enjoy the benefit of review or
re-negotiation; as to the 99 others, the questionable
practice will continue unchecked, and respondent will
continue to reap the profits from such unscrupulous
practice. The Court can no more condone a view so
perverse. This is exactly what the Court meant in the
immediately preceding cited case when it said that “the
belated discovery of the true cost of credit does not
reverse the ill effects of an already consummated
business decision;”95 as to the 99 borrowers who did not
or could not complain, the illegal act shall have become
a fait accompli – to their detriment, they
have already suffered the oppressive rates.
Besides, that petitioners are given the right to question
the interest rates imposed is, under the circumstances,
irrelevant; we have a situation where the petitioners do
not stand on equal footing with the respondent. It is
doubtful that any borrower who finds himself in
petitioners’ position would dare question respondent’s
power to arbitrarily modify interest rates at any time. In
the second place, on what basis could any borrower
question such power, when the criteria or standards –
which are really one-sided, arbitrary and subjective – for
the exercise of such power are precisely lost on him?
 86 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
For the same reasons, the Court cannot validly consider
that, as stipulated in the 18th up to the 26thpromissory
notes, petitioners are granted the option to prepay the
loan or credit facility without penalty within 10 calendar
days from the Interest Setting Date if they are not
agreeable to the interest rate fixed. It has been shown
that the promissory notes are executed and signed in
blank, meaning that by the time petitioners learn of the
interest rate, they are already bound to pay it because
they have already pre-signed the note where the rate is
subsequently entered. Besides, premium may not be
placed upon a stipulation in a contract which grants one
party the right to choose whether to continue with or
withdraw from the agreement if it discovers that what the
other party has been doing all along is improper or illegal.
Thus said, respondent’s arguments relative to the credit
documents – that documentary evidence prevails over
testimonial evidence; that the credit documents are in
proper form, presumed regular, and endure, against
arbitrary claims by petitioners, experienced business
persons that they are, they signed questionable loan
documents whose provisions for interest rates were left
blank, and yet they continued to pay the interests without
protest for a number of years – deserve no consideration.
With regard to interest, the Court finds that since the
escalation clause is annulled, the principal amount of the
loan is subject to the original or stipulated rate of interest,
and upon maturity, the amount due shall be subject to
legal interest at the rate of 12% per annum. This is the
uniform ruling adopted in previous cases, including those
cited here.96 The interests paid by petitioners should be
applied first to the payment of the stipulated or legal and
unpaid interest, as the case may be, and later, to the
capital or principal.97 Respondent should then refund the
excess amount of interest that it has illegally imposed
upon petitioners; “[t]he amount to be refunded refers to
that paid by petitioners when they had no obligation to do
so.”98 Thus, the parties’ original agreement stipulated the
payment of 19.5% interest; however, this rate was
intended to apply only to the first promissory note which
expired on November 21, 1989 and was paid by
petitioners; it was not intended to apply to the whole
duration of the loan. Subsequent higher interest rates
have been declared illegal; but because only the rates are
found to be improper, the obligation to pay interest
subsists, the same to be fixed at the legal rate of 12% per
annum. However, the 12% interest shall apply only until
June 30, 2013. Starting July 1, 2013, the prevailing rate
of interest shall be 6% per annum pursuant to our ruling
in Nacar v. Gallery Frames99 andBangko Sentral ng
Pilipinas-Monetary Board Circular No. 799.
Now to the issue of penalty. PN 9707237 provides that
failure to pay it or any installment thereon, when due,
shall constitute default, and a penalty charge of 24% per
annum based on the defaulted principal amount shall be
imposed. Petitioners claim that this penalty should be
excluded from the foreclosure amount or bid price
because the Real Estate Mortgage and the Supplement
thereto did not specifically include it as part of the secured
amount. Respondent justifies its inclusion in the secured
amount, saying that the purpose of the penalty or a penal
clause is to ensure the performance of the obligation and
substitute for damages and the payment of interest in the
event of non-compliance.100 Respondent adds that the
imposition and collection of a penalty is a normal banking
practice, and the standard rate per annum for all
commercial banks, at the time, was 24%. Its inclusion as
part of the secured amount in the mortgage agreements
is thus valid and necessary.
The Court sustains petitioners’ view that the penalty may
not be included as part of the secured amount. Having
found the credit agreements and promissory notes to be
tainted, we must accord the same treatment to the
mortgages. After all, “[a] mortgage and a note secured
by it are deemed parts of one transaction and are
construed together.”101 Being so tainted and having the
attributes of a contract of adhesion as the principal credit
documents, we must construe the mortgage contracts
strictly, and against the party who drafted it. An
examination of the mortgage agreements reveals that
nowhere is it stated that penalties are to be included in
the secured amount. Construing this silence strictly
against the respondent, the Court can only conclude that
the parties did not intend to include the penalty allowed
under PN 9707237 as part of the secured amount. Given
its resources, respondent could have – if it truly wanted
to – conveniently prepared and executed an amended
mortgage agreement with the petitioners, thereby
including penalties in the amount to be secured by the
encumbered properties. Yet it did not.
With regard to attorney’s fees, it was plain error for the
CA to have passed upon the issue since it was not raised
by the petitioners in their appeal; it was the respondent
that improperly brought it up in its appellee’s brief, when
it should have interposed an appeal, since the trial court’s
Decision on this issue is adverse to it. It is an elementary
principle in the subject of appeals that an appellee who
does not himself appeal cannot obtain from the appellate
court any affirmative relief other than those granted in
the decision of the court below.
x x x [A]n appellee, who is at the same time not an
appellant, may on appeal be permitted to make counter
assignments of error in ordinary actions, when the
purpose is merely to defend himself against an appeal in
which errors are alleged to have been committed by the
trial court both in the appreciation of facts and in the
interpretation of the law, in order to sustain the judgment
in his favor but not when his purpose is to seek
modification or reversal of the judgment, in which case it
is necessary for him to have excepted to and appealed
from the judgment.102
Since petitioners did not raise the issue of reduction of
attorney’s fees, the CA possessed no authority to pass
upon it at the instance of respondent. The ruling of the
trial court in this respect should remain undisturbed.
For the fixing of the proper amounts due and owing to the
parties – to the respondent as creditor and to the
petitioners who are entitled to a refund as a consequence
of overpayment considering that they paid more by way
of interest charges than the 12% per annum103 herein
allowed – the case should be remanded to the lower court
for proper accounting and computation, applying the
following procedure:
1. The 1st Promissory Note with the 19.5% interest
rate is deemed proper and paid;
2. All subsequent promissory notes (from the 2nd to
the 26th promissory notes) shall carry an interest
rate of only 12% per annum.104 Thus, interest
payment made in excess of 12% on the 2nd
 87 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
promissory note shall immediately be applied to
the principal, and the principal shall be
accordingly reduced. The reduced principal shall
then be subjected to the 12%105 interest on the
3rd promissory note, and the excess over 12%
interest payment on the 3rd promissory note shall
again be applied to the principal, which shall again
be reduced accordingly. The reduced principal
shall then be subjected to the 12% interest on the
4th promissory note, and the excess over 12%
interest payment on the 4th promissory note shall
again be applied to the principal, which shall again
be reduced accordingly. And so on and so forth;
3. After the above procedure is carried out, the
trial court shall be able to conclude if
petitioners a) still have an OUTSTANDING
BALANCE/OBLIGATION or b) MADE
PAYMENTS OVER AND ABOVE THEIR TOTAL
OBLIGATION (principal and interest);
4. Such outstanding balance/obligation, if
there be any, shall then be subjected to
a 12% per annum interest from October 28,
1997 until January 14, 1999, which is the date of
the auction sale;
5. Such outstanding balance/obligation shall also be
charged a 24% per annum penalty from
August 14, 1997 until January 14, 1999. But from
this total penalty, the petitioners’ previous
payment of penalties in the amount of
P202,000.00 made on January 27, 1998106 shall
be DEDUCTED;
6. To this outstanding balance (3.), the interest (4.),
penalties (5.), and the final and executory award
of 1% attorney’s fees shall be ADDED;
7. The sum total of the outstanding balance (3.),
interest (4.) and 1% attorney’s fees (6.) shall be
DEDUCTED from the bid price of P4,324,172.96.
The penalties (5.) are not included because they
are not included in the secured amount;
8. The difference in (7.) [P4,324,172.96 LESS sum
total of the outstanding balance (3.), interest (4.),
and 1% attorney’s fees (6.)] shall be DELIVERED
TO THE PETITIONERS;
9. Respondent may then proceed to consolidate its
title to TCTs T-14250 and T-16208;
10. ON THE OTHER HAND, if after performing the
procedure in (2.), it turns out that petitioners
made an OVERPAYMENT, the interest (4.),
penalties (5.), and the award of 1% attorney’s
fees (6.) shall be DEDUCTED from the
overpayment. There is no outstanding
balance/obligation precisely because petitioners
have paid beyond the amount of the principal and
interest;
11. If the overpayment exceeds the sum total of the
interest (4.), penalties (5.), and award of 1%
attorney’s fees (6.), the excess shall be
RETURNED to the petitioners, with legal interest,
under the principle of solutio indebiti;107cralawred
12. Likewise, if the overpayment exceeds the total
amount of interest (4.) and award of 1%
attorney’s fees (6.), the trial court shall
INVALIDATE THE EXTRAJUDICIAL FORECLOSURE
AND SALE;
13. HOWEVER, if the total amount of interest (4.)
and award of 1% attorney’s fees (6.) exceed
petitioners’ overpayment, then the excess shall
be DEDUCTED from the bid price of
P4,324,172.96;
14. The difference in (13.) [P4,324,172.96 LESS sum
total of the interest (4.) and 1% attorney’s fees
(6.)] shall be DELIVERED TO THE PETITIONERS;
15. Respondent may then proceed to consolidate its
title to TCTs T-14250 and T-16208. The
outstanding penalties, if any, shall be collected by
other means.
From the above, it will be seen that if, after proper
accounting, it turns out that the petitioners made
payments exceeding what they actually owe by way of
principal, interest, and attorney’s fees, then the
mortgaged properties need not answer for any
outstanding secured amount, because there is not any;
quite the contrary, respondent must refund the excess to
petitioners. In such case, the extrajudicial foreclosure and
sale of the properties shall be declared null and void for
obvious lack of basis, the case being one of solutio
indebiti instead. If, on the other hand, it turns out that
petitioners’ overpayments in interests do not exceed their
total obligation, then the respondent may consolidate its
ownership over the properties, since the period for
redemption has expired. Its only obligation will be to
return the difference between its bid price
(P4,324,172.96) 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
areDECLARED 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;
7. The reimbursement of the excess in the bid price
of P377,505.99, which respondent Philippine
 88 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
National Bank is ordered to reimburse petitioners,
should be HELD IN ABEYANCE until the true
amount owing to or owed by the parties as
against each other is determined;
8. Considering that this case has been pending for
such a long time and that further proceedings,
albeit uncomplicated, are required, the trial court
is ORDERED to proceed with dispatch.
[G.R. NO. 149004 : April 14, 2004]
RESTITUTA M. IMPERIAL, Petitioner, v. ALEX A.
JAUCIAN, Respondent.
DECISION
PANGANIBAN, J.:
Iniquitous and unconscionable stipulations on interest
rates, penalties and attorneys fees are contrary to morals.
Consequently, courts are granted authority to reduce
them equitably. If reasonably exercised, such authority
shall not be disturbed by appellate courts.
The Case
Before us is a Petition for Review1 under Rule 45 of the
Rules of Court, assailing the July 19, 2000Decision2 and
the June 14, 2001Resolution3 of the Court of Appeals (CA)
in CA-GR CV No. 43635. The decretal portion of the
Decision is as follows:chanroblesvirtua1awlibrary
WHEREFORE, premises considered, the appealed
Decision of the Regional Trial Court, 5thJudicial Region,
Branch 21, NagaCity, dated August 31, 1993, in Civil Case
No. 89-1911 for Sum of Money, is hereby AFFIRMED in
toto.4 cralawred
The assailed Resolution denied petitioners Motion for
Reconsideration.
The dispositive portion of the August 31, 1993 Decision,
promulgated by the Regional Trial Court (RTC) of Naga
City (Branch 21) and affirmed by the CA, reads as follows:
Wherefore, Judgment is hereby rendered declaring
Section I, Central Bank Circular No. 905, series of 1982
to be of no force and legal effect, it having been
promulgated by the Monetary Board of the Central Bank
of the Philippines with grave abuse of discretion
amounting to excess of jurisdiction; declaring that the
rate of interest, penalty, and charges for attorneys fees
agreed upon between the parties are unconscionable,
iniquitous, and in violation of Act No. 2655, otherwise
known as the Usury Law, as amended; and ordering
Defendant to pay Plaintiff the amount of FOUR HUNDRED
SEVENTY-EIGHT THOUSAND, ONE HUNDRED NINETY-
FOUR and 54/100 (P478,194. 54) PESOS, Philippine
currency, with regular and compensatory interests
thereon at the rate of twenty-eight (28%) per centum per
annum, computed from August 31, 1993 until full
payment of the said amount, and in addition, an amount
equivalent to ten (10%) per centum of the total amount
due and payable, for attorneys fees, without
pronouncement as to costs.5
The Facts
The CA summarized the facts of the case in this
wise:chanroblesvirtua1awlibrary
The present controversy arose from a case for collection
of money, filed by Alex A. Jaucian against Restituta
Imperial, on October 26, 1989. The complaint
alleges, inter alia, that defendant obtained from plaintiff
six (6) separate loans for which the former executed in
favor of the latter six (6) separate promissory notes and
issued several checks as guarantee for payment. When
the said loans became overdue and unpaid, especially
when the defendants checks were dishonored, plaintiff
made repeated oral and written demands for payment.
Specifically, the six (6) separate loans obtained by
defendant from plaintiff on various dates are as follows:
(a) November 13, 1987 P50,000. 00
(b) December 28, 1987 40,000. 00
(c) January 6, 1988 30,000. 00
 89 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
(d) January 11, 1988 50,000. 00
(e) January 12, 1988 50,000. 00
(f) January 13, 1988 100,000. 00
Total P320,000. 00
The loans were covered by six (6) separate promissory
notes executed by defendant. The face value of each
promissory notes is bigger [than] the amount released to
defendant because said face value already include[d] the
interest from date of note to date of maturity. Said
promissory notes, which indicate the interest of 16% per
month, date of issue, due date, the corresponding
guarantee checks issued by defendant, penalties and
attorneys fees, are the following:
1. Exhibit D for loan of P40,000. 00 on December 28,
1987, with face value of P65,000. 00;
2. Exhibit E for loan of P50,000. 00 on January 11, 1988,
with face value of P82,000. 00;
3. Exhibit F for loan of P50,000. 00 on January 12, 1988,
with face value of P82,000. 00;
4. Exhibit G for loan of P100,000. 00 on January 13, 1988,
with face value of P164,000. 00;
5. Exhibit H This particular promissory note covers the
second renewal of the original loan of P50,000. 00 on
November 13, 1987, which was renewed for the first time
on March 16, 1988 after certain payments, and which was
renewed finally for the second time on January 4, 1988
also after certain payments, with a face value of P56,240.
00;
6. Exhibit I This particular promissory note covers the
second renewal of the original loan of P30,000. 00 on
January 6, 1988, which was renewed for the first time on
June 4, 1988 after certain payments, and which was
finally renewed for the second time on August 6, 1988,
also after certain payments, with [a] face value
of P12,760. 00;
The particulars about the postdated checks, i. e., number,
amount, date, etc., are indicated in each of the
promissory notes. Thus, for Exhibit D, four (4) PB checks
were issued; for Exhibit E four (4) checks; for Exhibit F
four (4) checks; for Exhibit G four (4) checks; for Exhibit
H one (1) check; for Exhibit I one (1) check;
The arrangement between plaintiff and defendant
regarding these guarantee checks was that each time a
check matures the defendant would exchange it with
cash.
Although, admittedly, defendant made several payments,
the same were not enough and she always defaulted
whenever her loans mature[d]. As of August 16, 1991,
the total unpaid amount, including accrued interest,
penalties and attorneys fees, [was] P2,807,784. 20.
On the other hand, defendant claims that she was
extended loans by the plaintiff on several occasions, i. e.,
from November 13, 1987 to January 13, 1988, in the total
sum of P320,000. 00 at the rate of sixteen percent (16%)
per month. The notes mature[d] every four (4) months
with unearned interest compounding every four (4)
months if the loan [was] not fully paid. The loan releases
[were] as follows:chanroblesvirtua1awlibrary
(a) November 13, 1987 P50,000. 00
(b) December 28, 1987 40,000. 00
(c) January 6, 1988 30,000. 00
(d) January 11, 1988 50,000. 00
(e) January 12, 1988 50,000. 00
(f) January 13, 1988 100,000. 00
Total P320,000. 00
The loan on November 13, 1987and January 6, 1988ha[d]
been fully paid including the usurious interests of 16% per
month, this is the reason why these were not included in
the complaint.
Defendant alleges that all the above amounts were
released respectively by checks drawn by the plaintiff,
and the latter must produce these checks as these were
returned to him being the drawer if only to serve the
truth. The above amount are the real amount released to
the defendant but the plaintiff by masterful machinations
made it appear that the total amount released
was P462,600. 00. Because in his computation he made
it appear that the true amounts released was not the
original amount, since it include[d] the unconscionable
interest for four months.
Further, defendant claims that as of January 25, 1989,
the total payments made by defendants [were] as
follows:chanroblesvirtua1awlibrary
A. Paid releases on November 13, 1987of P50,000. 00
and January 6, 1988of P30,000. 00 these two items were
not included in the complaint affirming the fact that these
were paid P80,000. 00
b. Exhibit 26 Receipt 231,000. 00
c. Exhibit 8-25 Receipt 65,300. 00
d. Exhibit 27 Receipt 65,000. 00
Total P441,780. 00
Less: > 320,000. 00
Excess Payment P121,780. 00
Defendant contends that from all perspectives the above
excess payment of P121,780. 00 is more than the interest
that could be legally charged, and in fact as of January
25, 1989, the total releases have been fully paid.
On 31 August 1993, the trial court rendered the assailed
decision.6
Ruling of the Court of Appeals
On appeal, the CA held that without judicial inquiry, it was
improper for the RTC to rule on the constitutionality of
Section 1, Central Bank Circular No. 905, Series of 1982.
Nonetheless, the appellate court affirmed the judgment of
the trial court, holding that the latters clear and detailed
computation of petitioners outstanding obligation to
respondent was convincing and satisfactory.
Hence, this Petition.7
The Issues
Petitioner raises the following arguments for our
consideration:chanroblesvirtua1awlibrary
1. That the petitioner has fully paid her obligations even
before filing of this case.
2. That the charging of interest of twenty-eight (28%) per
centum per annum without any writing is illegal.
3. That charging of excessive attorneys fees is
hemorrhagic.
4. Charging of excessive penalties per month is in the
guise of hidden interest.
5. The non-inclusion of the husband of the petitioner at
the time the case was filed should have dismissed this
case.8
 90 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
The Courts Ruling
The Petition has no merit.
First Issue:
Computation of Outstanding Obligation
Arguing that she had already fully paid the loan before the
filing of the case, petitioner alleges that the two lower
courts misappreciated the facts when they ruled that she
still had an outstanding balance ofP208,430.
This issue involves a question of fact. Such question exists
when a doubt or difference arises as to the truth or the
falsehoodof alleged facts; and when there is need for a
calibration of the evidence, considering mainly the
credibility of witnesses and the existence and the
relevancy of specific surrounding circumstances, their
relation to each other and to the whole, and the
probabilities of the situation.9 cralawred
It is a well-entrenched rule that pure questions of fact
may not be the subject of an appeal by certiorariunder
Rule 45 of the Rules of Court, as this remedy is generally
confined to questions of law.10 The jurisdiction of this
Court over cases brought to it is limited to the review and
rectification of errors of law allegedly committed by the
lower court. As a rule, the latters factual findings, when
adopted and affirmed by the CA, are final and conclusive
and may not be reviewed on appeal.11 cralawred
Generally, this Court is not required to analyze and weigh
all over again the evidence already considered in the
proceedings below.12 In the present case, we find no
compelling reason to overturn the factual findings of the
RTC -- that the total amount of the loans extended to
petitioner was P320,000, and that she paid a total of
only P116,540 on twenty-nine dates. These findings are
supported by a preponderance of evidence. Moreover, the
amount of the outstanding obligation has been
meticulously computed by the trial court and affirmed by
the CA. Petitioner has not given us sufficient reason why
her cause falls under any of the exceptions to this rule on
the finality of factual findings.
Second Issue:
Rate of Interest
The trial court, as affirmed by the CA, reduced the interest
rate from 16 percent to 1. 167 percent per month or 14
percent per annum; and the stipulated penalty charge,
from 5 percent to 1. 167 percent per month or 14 percent
per annum.
Petitioner alleges that absent any written stipulation
between the parties, the lower courts should have
imposed the rate of 12 percent per annum only.
The records show that there was a written agreement
between the parties for the payment of interest on the
subject loans at the rate of 16 percent per month. As
decreed by the lower courts, this rate must be equitably
reduced for being iniquitous, unconscionable and
exorbitant. While the Usury Law ceiling on interest rates
was lifted by C. B. Circular No. 905, nothing in the said
circular grants lenders carte blancheauthority to raise
interest rates to levels which will either enslave their
borrowers or lead to a hemorrhaging of their
assets.13 cralawred
In Medel v. CA,14 the Court found the stipulated interest
rate of 5. 5 percent per month, or 66 percent per annum,
unconscionable. In the present case, the rate is even
more iniquitous and unconscionable, as it amounts to 192
percent per annum. When the agreed rate is iniquitous or
unconscionable, it is considered contrary to morals, if not
against the law. [Such] stipulation is void.15 cralawred
Since the stipulation on the interest rate is void, it is as if
there were no express contract thereon.16Hence, courts
may reduce the interest rate as reason and equity
demand. We find no justification to reverse or modify the
rate imposed by the two lower courts.
Third and Fourth Issue:
Penalties and Attorneys Fees
Article 1229 of the Civil Code states thus:
The judge shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied
with by the debtor. Even if there has been no
performance, the penalty may also be reduced by the
courts if it is iniquitous or unconscionable.
In exercising this power to determine what is iniquitous
and unconscionable, courts must consider the
circumstances of each case.17 What may be iniquitous and
unconscionable in one may be totally just and equitable
in another. In the present case, iniquitous and
unconscionable was the parties stipulated penalty charge
of 5 percent per month or 60 percent per annum, in
addition to regular interests and attorneys fees. Also,
there was partial performance by petitioner when she
remitted P116,540 as partial payment of her principal
obligation of P320,000. Under the circumstances, the trial
court was justified in reducing the stipulated penalty
charge to the more equitable rate of 14 percent per
annum.
The Promissory Note carried a stipulation for attorneys
fees of 25 percent of the principal amount and accrued
interests. Strictly speaking, this covenant on attorneys
fees is different from that mentioned in and regulated by
the Rules of Court.18 Rather, the attorneys fees here are
in the nature of liquidated damages and the stipulation
therefor is aptly called a penal clause.19 So long as the
stipulation does not contravene the law, morals, public
order or public policy, it is binding upon the obligor. It is
the litigant, not the counsel, who is the judgment creditor
entitled to enforce the judgment by execution.
Nevertheless, it appears that petitioners failure to comply
fully with her obligation was not motivated by ill will or
malice. The twenty-nine partial payments she made were
a manifestation of her good faith. Again, Article 1229 of
the Civil Code specifically empowers the judge to reduce
the civil penalty equitably, when the principal obligation
has been partly or irregularly complied with. Upon this
premise, we hold that the RTCs reduction of attorneys
fees -- from 25 percent to 10 percent of the total amount
due and payable -- is reasonable.
Fifth Issue:
Non-Inclusion of Petitioners Husband
Petitioner contends that the case against her should have
been dismissed, because her husband was not included in
the proceedings before the RTC.
 91 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
We are not persuaded. The husbands non-joinder does
not warrant dismissal, as it is merely a formal
requirement that may be cured by amendment.20 Since
petitioner alleges that her husband has already passed
away, such an amendment has thus become moot.
WHEREFORE, the Petition is DENIED. Costs against
petitioner.
SO ORDERED.
[G.R. No. 192986, January 15, 2013]
ADVOCATES FOR TRUTH IN LENDING, INC. AND
EDUARDO B. OLAGUER, Petitioners, v. BANGKO
SENTRAL MONETARY BOARD, REPRESENTED BY
ITS CHAIRMAN, GOVERNOR ARMANDO M.
TETANGCO, JR., AND ITS INCUMBENT MEMBERS:
JUANITA D. AMATONG, ALFREDO C. ANTONIO,
PETER FAVILA, NELLY F. VILLAFUERTE, IGNACIO
R. BUNYE AND CESAR V. PURISIMA, Respondents.
DECISION
REYES, J.:
Petitioners, claiming that they are raising issues of
transcendental importance to the public, filed directly with
this Court this Petition for Certiorari under Rule 65 of the
1997 Rules of Court, seeking to declare that the Bangko
Sentral ng Pilipinas Monetary Board (BSP-MB), replacing
the Central Bank Monetary Board (CB-MB) by virtue of
Republic Act (R.A.) No. 7653, has no authority to continue
enforcing Central Bank Circular No. 905,1ςrνl1 issued by
the CB-MB in 1982, which "suspended" Act No. 2655, or
the Usury Law of 1916.
Factual Antecedents
Petitioner "Advocates for Truth in Lending, Inc." (AFTIL)
is a non- profit, non-stock corporation organized to
engage in pro bono concerns and activities relating to
money lending issues. It was incorporated on July 9,
2010,2ςrνl1 and a month later, it filed this petition,
joined by its founder and president, Eduardo B. Olaguer,
suing as a taxpayer and a citizen.
R.A. No. 265, which created the Central Bank (CB) of the
Philippines on June 15, 1948, empowered the CB-MB to,
among others, set the maximum interest rates which
banks may charge for all types of loans and other credit
operations, within limits prescribed by the Usury Law.
Section 109 of R.A. No. 265 reads:
Sec. 109. Interest Rates, Commissions and Charges. –
The Monetary Board may fix the maximum rates of
interest which banks may pay on deposits and on other
obligations.
The Monetary Board may, within the limits prescribed in
the Usury Law fix the maximum rates of interest which
banks may charge for different types of loans and for any
other credit operations, or may fix the maximum
differences which may exist between the interest or
rediscount rates of the Central Bank and the rates which
the banks may charge their customers if the respective
credit documents are not to lose their eligibility for
rediscount or advances in the Central Bank.
Any modifications in the maximum interest rates
permitted for the borrowing or lending operations of the
banks shall apply only to future operations and not to
those made prior to the date on which the modification
becomes effective.
In order to avoid possible evasion of maximum interest
rates set by the Monetary Board, the Board may also fix
the maximum rates that banks may pay to or collect from
their customers in the form of commissions, discounts,
charges, fees or payments of any sort. (Underlining ours)
On March 17, 1980, the Usury Law was amended by
Presidential Decree (P.D.) No. 1684, giving the CB-MB
authority to prescribe different maximum rates of interest
which may be imposed for a loan or renewal thereof or
the forbearance of any money, goods or credits, provided
that the changes are effected gradually and announced in
advance. Thus, Section 1-a of Act No. 2655 now reads:
Sec. 1-a. The Monetary Board is hereby authorized to
prescribe the maximum rate or rates of interest for the
loan or renewal thereof or the forbearance of any money,
goods or credits, and to change such rate or rates
whenever warranted by prevailing economic and social
 92 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
conditions: Provided, That changes in such rate or rates
may be effected gradually on scheduled dates announced
in advance.
In the exercise of the authority herein granted the
Monetary Board may prescribe higher maximum rates for
loans of low priority, such as consumer loans or renewals
thereof as well as such loans made by pawnshops, finance
companies and other similar credit institutions although
the rates prescribed for these institutions need not
necessarily be uniform. The Monetary Board is also
authorized to prescribe different maximum rate or rates
for different types of borrowings, including deposits and
deposit substitutes, or loans of financial intermediaries.
(Underlining and emphasis ours)
In its Resolution No. 2224 dated December 3,
1982,3ςrνl1 the CB-MB issued CB Circular No. 905,
Series of 1982, effective on January 1, 1983. Section 1 of
the Circular, under its General Provisions, removed the
ceilings on interest rates on loans or forbearance
of any money, goods or credits, to wit:
Sec. 1. The rate of interest, including commissions,
premiums, fees and other charges, on a loan or
forbearance of any money, goods, or credits, regardless
of maturity and whether secured or unsecured, that may
be charged or collected by any person, whether natural or
juridical, shall not be subject to any ceiling prescribed
under or pursuant to the Usury Law, as amended.
(Underscoring and emphasis ours)
The Circular then went on to amend Books I to IV of the
CB's "Manual of Regulations for Banks and Other Financial
Intermediaries" (Manual of Regulations) by removing the
applicable ceilings on specific interest rates. Thus,
Sections 5, 9 and 10 of CB Circular No. 905 amended Book
I, Subsections 1303, 1349, 1388.1 of the Manual of
Regulations, by removing the ceilings for interest and
other charges, commissions, premiums, and fees
applicable to commercial banks; Sections 12 and 17
removed the interest ceilings for thrift banks (Book II,
Subsections 2303, 2349); Sections 19 and 21 removed
the ceilings applicable to rural banks (Book III, Subsection
3152.3-c); and, Sections 26, 28, 30 and 32 removed the
ceilings for non-bank financial intermediaries (Book IV,
Subsections 4303Q.1 to 4303Q.9, 4303N.1,
4303P).4ςrνl1
On June 14, 1993, President Fidel V. Ramos signed into
law R.A. No. 7653 establishing the Bangko Sentral ng
Pilipinas (BSP) to replace the CB. The repealing clause
thereof, Section 135, reads:
Sec. 135. Repealing Clause. – Except as may be provided
for in Sections 46 and 132 of this Act, Republic Act No.
265, as amended, the provisions of any other law, special
charters, rule or regulation issued pursuant to said
Republic Act No. 265, as amended, or parts thereof, which
may be inconsistent with the provisions of this Act are
hereby repealed. Presidential Decree No. 1792 is likewise
repealed.
Petition for Certiorari
To justify their skipping the hierarchy of courts and going
directly to this Court to secure a writ ofcertiorari,
petitioners contend that the transcendental importance of
their Petition can readily be seen in the issues raised
therein, to wit:
a) Whether under R.A. No. 265 and/or P.D. No. 1684, the
CB-MB had the statutory or constitutional authority to
prescribe the maximum rates of interest for all kinds of
credit transactions and forbearance of money, goods
or credit beyond the limits prescribed in the Usury Law;
b) If so, whether the CB-MB exceeded its authority when
it issued CB Circular No. 905, which removed all
interest ceilings and thus suspended Act No. 2655 as
regards usurious interest rates;
c) Whether under R.A. No. 7653, the new BSP-MB may
continue to enforce CB Circular No. 905.5ςrνl1
Petitioners attached to their petition copies of several
Senate Bills and Resolutions of the 10th Congress, which
held its sessions from 1995 to 1998, calling for
investigations by the Senate Committee on Banks and
Financial Institutions into alleged unconscionable
commercial rates of interest imposed by these entities.
Senate Bill (SB) Nos. 376ςrνl1 and 1860,7ςrνl1 filed
by Senator Vicente C. Sotto III and the late Senator Blas
F. Ople, respectively, sought to amend Act No. 2655 by
fixing the rates of interest on loans and forbearance of
credit; Philippine Senate Resolution (SR) No.
1053,8ςrνl1 10739ςrνl1 and 1102,10ςrνl1 filed by
Senators Ramon B. Magsaysay, Jr., Gregorio B. Honasan
and Franklin M. Drilon, respectively, urged the aforesaid
Senate Committee to investigate ways to curb the high
commercial interest rates then obtaining in the country;
Senator Ernesto Maceda filed SB No. 1151 to prohibit the
collection of more than two months of advance interest
on any loan of money; and Senator Raul Roco filed SR No.
114411ςrνl1 seeking an investigation into an alleged
cartel of commercial banks, called "Club 1821―,
reportedly behind the regime of high interest rates. The
petitioners also attached news clippings12ςrνl1 showing
that in February 1998 the banks' prime lending rates, or
interests on loans to their best borrowers, ranged from
26% to 31%.
Petitioners contend that under Section 1-a of Act No.
2655, as amended by P.D. No. 1684, the CB-MB was
authorized only to prescribe or set the maximum rates of
interest for a loan or renewal thereof or for the
forbearance of any money, goods or credits, and to
change such rates whenever warranted by prevailing
economic and social conditions, the changes to be
effected gradually and on scheduled dates; that nothing
in P.D. No. 1684 authorized the CB-MB to lift or suspend
the limits of interest on all credit transactions, when it
issued CB Circular No. 905. They further insist that under
Section 109 of R.A. No. 265, the authority of the CB-MB
was clearly only to fix the banks' maximum rates of
interest, but always within the limits prescribed by the
Usury Law.
Thus, according to petitioners, CB Circular No. 905, which
was promulgated without the benefit of any prior public
hearing, is void because it violated Article 5 of the New
Civil Code, which provides that "Acts executed against the
provisions of mandatory or prohibitory laws shall be void,
except when the law itself authorizes their validity.―
They further claim that just weeks after the issuance of
CB Circular No. 905, the benchmark 91-day Treasury bills
(T-bills),13ςrνl1 then known as "Jobo" bills14ςrνl1 shot
up to 40% per annum, as a result. The banks immediately
 93 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
followed suit and re-priced their loans to rates which were
even higher than those of the "Jobo" bills. Petitioners thus
assert that CB Circular No. 905 is also unconstitutional in
light of Section 1 of the Bill of Rights, which commands
that "no person shall be deprived of life, liberty or
property without due process of law, nor shall any person
be denied the equal protection of the laws.―
Finally, petitioners point out that R.A. No. 7653 did not
re-enact a provision similar to Section 109 of R.A. No.
265, and therefore, in view of the repealing clause in
Section 135 of R.A. No. 7653, the BSP-MB has been
stripped of the power either to prescribe the maximum
rates of interest which banks may charge for different
kinds of loans and credit transactions, or to suspend Act
No. 2655 and continue enforcing CB Circular No. 905.
Ruling
The petition must fail.
A. The Petition is procedurally infirm.
The decision on whether or not to accept a petition
for certiorari, as well as to grant due course thereto, is
addressed to the sound discretion of the court.15ςrνl1 A
petition for certiorari being an extraordinary remedy, the
party seeking to avail of the same must strictly observe
the procedural rules laid down by law, and non-
observance thereof may not be brushed aside as mere
technicality.16ςrνl1
As provided in Section 1 of Rule 65, a writ of certiorari is
directed against a tribunal exercising judicial or quasi-
judicial functions.17ςrνl1 Judicial functions are exercised
by a body or officer clothed with authority to determine
what the law is and what the legal rights of the parties
are with respect to the matter in controversy. Quasi-
judicial function is a term that applies to the action or
discretion of public administrative officers or bodies given
the authority to investigate facts or ascertain the
existence of facts, hold hearings, and draw conclusions
from them as a basis for their official action using
discretion of a judicial nature.
The CB-MB (now BSP-MB) was created to perform
executive functions with respect to the establishment,
operation or liquidation of banking and credit institutions,
and branches and agencies thereof.19ςrνl1 It does not
perform judicial or quasi-judicial functions. Certainly, the
issuance of CB Circular No. 905 was done in the exercise
of an executive function. Certiorari will not lie in the
instant case.
B. Petitioners have no locus standi
to file the Petition
Locus standi is defined as "a right of appearance in a court
of justice on a given question." In private suits, Section
2, Rule 3 of the 1997 Rules of Civil Procedure provides
that "every action must be prosecuted or defended in the
name of the real party in interest," who is "the party who
stands to be benefited or injured by the judgment in the
suit or the party entitled to the avails of the suit."
Succinctly put, a party's standing is based on his own right
to the relief sought.21ςrνl1
Even in public interest cases such as this petition, the
Court has generally adopted the "direct injury" test that
the person who impugns the validity of a statute must
have "a personal and substantial interest in the case such
that he has sustained, or will sustain direct injury as a
result.―22ςrνl1 Thus, while petitioners assert a public
right to assail CB Circular No. 905 as an illegal executive
action, it is nonetheless required of them to make out a
sufficient interest in the vindication of the public order and
the securing of relief. It is significant that in this petition,
the petitioners do not allege that they sustained any
personal injury from the issuance of CB Circular No. 905.
Petitioners also do not claim that public funds were being
misused in the enforcement of CB Circular No. 905.
In Kilosbayan, Inc. v. Morato,23ςrνl1 involving the on-
line lottery contract of the PCSO, there was no allegation
that public funds were being misspent, which according to
the Court would have made the action a public one, "and
justify relaxation of the requirement that an action must
be prosecuted in the name of the real party-in-interest."
The Court held, moreover, that the status
of Kilosbayan as a people's organization did not give it the
requisite personality to question the validity of the
contract. Thus:
Petitioners do not in fact show what particularized interest
they have for bringing this suit. It does not detract from
the high regard for petitioners as civic leaders to say that
their interest falls short of that required to maintain an
action under the Rule 3, Sec. 2.24ςrνl1
C. The Petition raises no issues of
transcendental importance.
In the 1993 case of Joya v. Presidential Commission on
Good Government,25ςrνl1 it was held that no question
involving the constitutionality or validity of a law or
governmental act may be heard and decided by the court
unless there is compliance with the legal requisites for
judicial inquiry, namely: (a) that the question must be
raised by the proper party; (b) that there must be an
actual case or controversy; (c) that the question must be
raised at the earliest possible opportunity; and (d) that
the decision on the constitutional or legal question must
be necessary to the determination of the case itself.
In Prof. David v. Pres. Macapagal-Arroyo,26ςrνl1 the
Court summarized the requirements before taxpayers,
voters, concerned citizens, and legislators can be
accorded a standing to sue, viz:
(1)the cases involve constitutional issues;
(2)for taxpayers, there must be a claim of illegal
disbursement of public funds or that the tax measure
is unconstitutional;
(3)for voters, there must be a showing of obvious interest
in the validity of the election law in question;
(4)for concerned citizens, there must be a showing that
the issues raised are of transcendental importance
which must be settled early; and (5) for legislators,
there must be a claim that the official action
complained of infringes upon their prerogatives as
legislators.
While the Court may have shown in recent decisions a
certain toughening in its attitude concerning the question
of legal standing, it has nonetheless always made an
exception where the transcendental importance of the
issues has been established, notwithstanding the
petitioners' failure to show a direct
injury.27ςrνl1 In CREBA v. ERC,28ςrνl1 the Court set
out the following instructive guides as determinants on
 94 | P a g e C R E D I T T R A N S A C T I O N I A C J U C O
whether a matter is of transcendental importance,
namely: (1) the character of the funds or other assets
involved in the case; (2) the presence of a clear case of
disregard of a constitutional or statutory prohibition by
the public respondent agency or instrumentality of the
government; and (3) the lack of any other party with a
more direct and specific interest in the questions being
raised. Further, the Court stated in Anak Mindanao Party-
List Group v. The Executive Secretary29ςrνl1 that the
rule on standing will not be waived where these
determinants are not established.
In the instant case, there is no allegation of misuse of
public funds in the implementation of CB Circular No. 905.
Neither were borrowers who were actually affected by the
suspension of the Usury Law joined in this petition. Absent
any showing of transcendental importance, the petition
must fail.
More importantly, the Court notes that the instant petition
adverted to the regime of high interest rates which
obtained at least 15 years ago, when the banks' prime
lending rates ranged from 26% to 31%,30ςrνl1or even
29 years ago, when the 91-day Jobo bills reached
40% per annum. In contrast, according to the BSP, in the
first two (2) months of 2012 the bank lending rates
averaged 5.91%, which implies that the banks' prime
lending rates were lower; moreover, deposit interests on
savings and long-term deposits have also gone very low,
averaging 1.75% and 1.62%, respectively.31ςrνl1
Judging from the most recent auctions of T-bills, the
savings rates must be approaching 0%. In the auctions
held on November 12, 2012, the rates of 3-month, 6-
month and 1-year T-bills have dropped to 0.150%,
0.450% and 0.680%, respectively.32ςrνl1 According
to Manila Bulletin, this very low interest regime has been
attributed to "high liquidity and strong investor demand
amid positive economic indicators of the
country.―33ςrνl1
While the Court acknowledges that cases of
transcendental importance demand that they be settled
promptly and definitely, brushing aside, if we must,
technicalities of procedure,34ςrνl1 the delay of at least
15 years in the filing of the instant petition has actually
rendered moot and academic the issues it now raises.
For its part, BSP-MB maintains that the petitioners'
allegations of constitutional and statutory violations of CB
Circular No. 905 are really mere challenges made by
petitioners concerning the wisdom of the Circular. It
explains that it was in view of the global economic
downturn in the early 1980's that the executive
department through the CB-MB had to formulate policies
to achieve economic recovery, and among these policies
was the establishment of a market-oriented interest rate
structure which would require the removal of the
government-imposed interest rate ceilings.35ςrνl1
D. The CB-MB merely suspended
the effectivity of the Usury Law
when it issued CB Circular No. 905.
The power of the CB to effectively suspend the Usury Law
pursuant to P.D. No. 1684 has long been recognized and
upheld in many cases. As the Court explained in the
landmark case of Medel v. CA,36ςrνl1citing several
cases, CB Circular No. 905 "did not repeal nor in anyway
amend the Usury Law but simply suspended the latter's
effectivity; that "a [CB] Circular cannot repeal a law, [for]
only a law can repeal another law; that "by virtue of CB
Circular No. 905, the Usury Law has been rendered
ineffective; and "Usury has been legally non-existent in
our jurisdiction. Interest can now be charged as lender
and borrower may agree upon.
In First Metro Investment Corp. v. Este Del Sol Mountain
Reserve, Inc.41ςrνl1 cited in DBP v. Perez, we also
belied the contention that the CB was engaged in self-
legislation. Thus:
Central Bank Circular No. 905 did not repeal nor in any
way amend the Usury Law but simply suspended the
latter's effectivity. The illegality of usury is wholly the
creature of legislation. A Central Bank Circular cannot
repeal a law. Only a law can repeal another law. x x x.
In PNB v. Court of Appeals, an escalation clause in a loan
agreement authorized the PNB to unilaterally increase the
rate of interest to 25% per annum, plus a penalty of 6%
per annum on past dues, then to 30% on October 15,
1984, and to 42% on October 25, 1984. The Supreme
Court invalidated the rate increases made by the PNB and
upheld the 12% interest imposed by the CA, in this wise:
P.D. No. 1684 and C.B. Circular No. 905 no more than
allow contracting parties to stipulate freely regarding any
subsequent adjustment in the interest rate that shall
accrue on a loan or forbearance of money, goods or
credits. In fine, they can agree to adjust, upward or
downward, the interest previously stipulated. x x x.
Thus, according to the Court, by lifting the interest ceiling,
CB Circular No. 905 merely upheld the parties' freedom of
contract to agree freely on the rate of interest. It cited
Article 1306 of the New Civil Code, under which the
contracting parties may establish such stipulations,
clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals,
good customs, public order, or public policy.
E. The BSP-MB has authority to
enforce CB Circular No. 905.
Section 1 of CB Circular No. 905 provides that "The rate
of interest, including commissions, premiums, fees and
other charges, on a loan or forbearance of any money,
goods, or credits, regardless of maturity and whether
secured or unsecured, that may be charged or collected
by any person, whether natural or juridical, shall not be
subject to any ceiling prescribed under or pursuant to the
Usury Law, as amended.― It does not purport to
suspend the Usury Law only as it applies to banks, but to
all lenders.
Petitioners contend that, granting that the CB had power
to "suspend" the Usury Law, the new BSP-MB did not
retain this power of its predecessor, in view of Section 135
of R.A. No. 7653, which expressly repealed R.A. No. 265.
The petitioners point out that R.A. No. 7653 did not
reenact a provision similar to Section 109 of R.A. No.
265.
A closer perusal shows that Section 109 of R.A. No. 265
covered only loans extended by banks, whereas under
Section 1-a of the Usury Law, as amended, the BSP-MB
may prescribe the maximum rate or rates of interest for
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all loans or renewals thereof or the forbearance of any
money, goods or credits, including those for loans of low
priority such as consumer loans, as well as such loans
made by pawnshops, finance companies and similar credit
institutions. It even authorizes the BSP-MB to prescribe
different maximum rate or rates for different types of
borrowings, including deposits and deposit substitutes, or
loans of financial intermediaries.
Act No. 2655, an earlier law, is much broader in scope,
whereas R.A. No. 265, now R.A. No. 7653, merely
supplemented it as it concerns loans by banks and other
financial institutions. Had R.A. No. 7653 been intended to
repeal Section 1-a of Act No. 2655, it would have so
stated in unequivocal terms.
Moreover, the rule is settled that repeals by implication
are not favored, because laws are presumed to be passed
with deliberation and full knowledge of all laws existing
pertaining to the subject.46ςrνl1 An implied repeal is
predicated upon the condition that a substantial conflict
or repugnancy is found between the new and prior laws.
Thus, in the absence of an express repeal, a subsequent
law cannot be construed as repealing a prior law unless
an irreconcilable inconsistency and repugnancy exists in
the terms of the new and old laws. We find no such conflict
between the provisions of Act 2655 and R.A. No. 7653.
F. The lifting of the ceilings for interest
rates does not authorize stipulations
charging excessive, unconscionable,
and iniquitous interest.
It is settled that nothing in CB Circular No. 905 grants
lenders a carte blanche authority to raise interest rates to
levels which will either enslave their borrowers or lead to
a hemorrhaging of their assets.48ςrνl1 As held in Castro
v. Tan:
The imposition of an unconscionable rate of interest on a
money debt, even if knowingly and voluntarily assumed,
is immoral and unjust. It is tantamount to a repugnant
spoliation and an iniquitous deprivation of property,
repulsive to the common sense of man. It has no support
in law, in principles of justice, or in the human conscience
nor is there any reason whatsoever which may justify
such imposition as righteous and as one that may be
sustained within the sphere of public or private morals.
Stipulations authorizing iniquitous or unconscionable
interests have been invariably struck down for being
contrary to morals, if not against the
law.51ςrνl1 Indeed, under Article 1409 of the Civil Code,
these contracts are deemed inexistent and void ab initio,
and therefore cannot be ratified, nor may the right to set
up their illegality as a defense be waived.
Nonetheless, the nullity of the stipulation of usurious
interest does not affect the lender's right to recover the
principal of a loan, nor affect the other terms
thereof.52ςrνl1 Thus, in a usurious loan with mortgage,
the right to foreclose the mortgage subsists, and this right
can be exercised by the creditor upon failure by the debtor
to pay the debt due. The debt due is considered as without
the stipulated excessive interest, and a legal interest of
12% per annum will be added in place of the excessive
interest formerly imposed, following the guidelines laid
down in the landmark case of Eastern Shipping Lines, Inc.
v. Court of Appeals,regarding the manner of computing
legal interest:
II. With regard particularly to an award of interest in the
concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as
follows:
1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have
been stipulated in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of
interest shall be 12% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under
and subject to the provisions of Article 1169 of the Civil
Code.
2. When an obligation, not constituting a loan or
forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at
the discretion of the courtat the rate of 6% per annum.
No interest, however, shall be adjudged on unliquidated
claims or damages except when or until the demand can
be established with reasonable certainty. Accordingly,
where the demand is established with reasonable
certainty, the interest shall begin to run from the time the
claim is made judicially or extrajudicially (Art. 1169, Civil
Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest
shall begin to run only from the date the judgment of the
court is made (at which time the quantification of
damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount finally
adjudged.
3. When the judgment of the court awarding a sum of
money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of
credit.55ςrνl1 (Citations omitted)
The foregoing rules were further clarified in Sunga-Chan
v. Court of Appeals, as follows:
Eastern Shipping Lines, Inc. synthesized the rules on the
imposition of interest, if proper, and the applicable rate,
as follows: The 12% per annum rate under CB Circular
No. 416 shall apply only to loans or forbearance of money,
goods, or credits, as well as to judgments involving such
loan or forbearance of money, goods, or credit, while the
6% per annum under Art. 2209 of the Civil Code applies
"when the transaction involves the payment of
indemnities in the concept of damage arising from the
breach or a delay in the performance of obligations in
general," with the application of both rates reckoned
"from the time the complaint was tiled until the
[adjudged] amount is fully paid." In either instance, the
reckoning period for the commencement of the running of
the legal interest shall be subject to the condition "that
the courts are vested with discretion, depending on the
equities of each case, on the award of interest." (Citations
omitted)
WHEREFORE, premises considered, the Petition for
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certiorari is DISMISSED.

SO ORDERED.