[G.R. No. 19190. November 29, 1922.] THE PEOPLE OF THE PHILIPPINE ISLANDS, plaintiff-appellee, vs.

VENANCIO CONCEPCION, defendant-appellant.

Recaredo Ma. Calvo for appellant. Attorney-General Villa-Real for appellee.

SYLLABUS 1. BANKS AND BANKING; "CREDIT AND LOAN." DEFINED AND DISTINGUISHED. The "credit" of an individual means his ability to borrow money by virtue of the confidence or trust reposed by a lender that he will pay what he may promise. A "loan" means the delivery by one party and the receipt by the other party of a given sum of money, upon an agreement, expresses or implied, to repay the sum loaned, with or without interest. The concession of a "credit" necessarily involves the granting of "loans" up to the limit of the amount fixed in the "credit." 2. ID.' "LOAN" AND "DISCOUNT" DISTINGUISHED. To discount a paper is a mode of loaning money, with these distinctions: (1) In a discount, interest is deducted in advanced, while in a loan, interest is taken at the expiration of a credit; (2) a discount is always on double-name paper; a loan is generally on single name paper. 3. STATUTES; INTERPRETATION AND CONSTRUCTION; IN GENERAL. In the interpretation and construction of statutes, the primary rule is to ascertain and give effect to the intention of the Legislature. 4. ID.; ID.; SECTION 35 OF ACT NO. 2747; PROHIBITION AGAINST INDIRECT LOANS. The purpose of the Legislature in enacting section 35 of Act No. 2747 was to erect a wall of safety against temptation for a director of the Philippine National Bank. The prohibition against indirect loans is a recognition of the familiar maxim that no man may serve two masters that where personal interest clashes with fidelity to duty the latter almost always suffers. 5. ID.; ID.; ID. A loan to a partnership of which the wife of a director is a member falls within the prohibition in section 35 of Act No. 2747 against indirect loans. 6. ID., ID.; ID.; PROHIBITION ON CORPORATION. When the corporation itself is forbidden to do an act, the prohibition extends to the board of directors, and to each director separately and individually. 7. ID.; REPEAL; EFFECT UPON VIOLATIONS OF THE OLD LAW. Where an Act of the Legislature which penalizes an offense repeals a former Act which penalized the same offense, such repeal does not have the effect of thereafter depriving the courts of jurisdiction to try, convict, and sentence offenders charged with violations of the old law. 8. CRIMINAL LAW; ACT NO. 2747; GOOD FAITH AS A DEFENSE Under section 35 of Act No. 2747, criminal intent is not necessarily material. The doing of the inhibited act, inhibited on account of public policy and public interest, constitutes the crime. 9. ID.; ID.; ID.; The law will not allow private profit from a trust, and will not listen to any proof of honest intent.

DECISION

MALCOLM, J :
p

By telegrams and a letter of confirmation to the manager of the Aparri branch of the Philippine National Bank, Venancio Conception, President of the Philippine National Bank, between April 10, 1919, and May 7, 1919, authorized an extension of credit in favor of "Puno y Conception, S. en C." in the amount of P300,000. This special authorization was essential in view of the memorandum order of President Conception dated May 17, 1918, limiting the discretional power of the local manager at Aparri, Cagayan, to grant loans and discount negotiable documents to P5,000, which, in certain cases, could be increased to P10,000. Pursuant to this authorization, credit aggregating P300,000, was granted the firm of "Puno y Conception, S. en C.," the only security required consisting of six demand notes. The notes, together with the interest, were taken up and paid by July 17, 1919. "Puno y Concepcion, S. en C." was a copartnership capitalized at P100,000. Anacleto Concepcion contributed P5,000; Clara Vda. de Concepcion, P5,000; Miguel S. Concepcion, P20,000; Clemente Puno, P20,000; and Rosario San Agustin, "casada con. Gral. Venancio Concepcion," P50,000. Member Miguel S. Conception was the administrator of the company. On the facts recounted, Venancio Concepcion, as President of the Philippine National Bank and as member of the board of directors of this bank, was charged in the Court of First Instance of Cagayan with a violation of section 35 of Act No. 2747. He was found guilty by the Honorable Enrique V Filamor, Judge of First Instance, and was sentenced to imprisonment for one year and six months, to pay a fine of P3,000, with subsidiary imprisonment in case of insolvency, and the costs. Section 35 of Act No. 2747, effective on February 20, 1918, just mentioned, to which reference must hereafter repeatedly be made, reads as follows: "The National Bank shall not, directly or indirectly, grant loans to any of the members of the board of directors of the bank nor to agents of the branch banks." Section 49 of the same Act provides: "Any person who shall violate any of the provisions of this Act shall be punished by a fine not to exceed ten thousand pesos, or by imprisonment not to exceed five years, or by both such fine and imprisonment." These two sections were in effect in 1919 when the alleged unlawful acts took place, but were repealed by Act No. 2938, approved on January 30, 1921. Counsel for the defense assign ten errors as having been committed by the trial court. These errors they have argued adroitly and exhaustively in their printed brief, and again in oral argument. AttorneyGeneral Villa-Real, in an exceptionally accurate and comprehensive brief, answers the propositions of appellant one by one. The questions presented are reduced to their simplest elements in the opinion which follows: I. Was the granting of a credit of P300,000 to the copartnership "Puno y Concepcion, S. en C." by Venacio Concepcion, President of the Philippine National Bank, a "loan" within the meaning of section 35 of Act No. 2747? Counsel argue that the documents of record do not prove that the authority to make a loan was given, but only show the concession of a credit. In this statement of fact, counsel is correct, for the exhibits in question speak of a "credito" (credit) and not of a "prestamo" (loan). The "credit" of an individual means his ability to borrow money by virtue of the confidence or trust reposed by a lender that he will pay what he may promise. (Donnell vs. Jones [1848], 13 Ala., 490; Bouvier's Law Dictionary.) A "loan" means the delivery by one party and the receipt by the other party of a given sum of money, upon an agreement, express or implied, to repay the sum of money, upon an agreement, express or implied, to repay the sum loaned, with or without interest. (Payne vs. Gardiner [1864], 29 N.Y., 146, 167.) The concession of a "credit" necessarily involves the granting of "loans" up to the limit of the amount fixed in the "credit." II. Was the granting of a credit of P300,000 to the copartnership "Puno y Conception, S. en C.," by Venancio Conception, President of the Philippine National Bank, a "loan" or a "discount." 2

In a letter dated August 7, 1916, H. Parker Willis, then President of the National Bank, inquired of the Insular Auditor whether section 37 of Act No. 2612 was intended to apply to discounts as well as to loans. The ruling of the Acting Insular Auditor, dated August 11, 1916, was to placed no restriction upon discount transactions. It be becomes material, therefore, to discover the distinction between a "loan" and a "discount," and to ascertain if the instant transaction comes under the first or the latter denomination. Discounts are favored by bankers because of their liquid nature, growing, as they do, out of an actual, live transaction. But in its last analysis, to discount a paper is only a mode of loaning money, with, however, these distinctions: (1) In a discount, interest is deducted in advance, while in a loan, interest is taken at the expiration of a credit; (2) a discount is always on double-name paper; a loan is generally on single-name paper. Conceding, without deciding, that, as ruled by the Insular Auditor, the law covers loans and not discounts, yet the conclusion is inevitable that the demand notes signed by the firm "Puno y Concepcion, S. en C." were not discount paper but were mere evidences of indebtedness, because (1) interest was not deducted from the face of the notes, but was paid when the notes fell due; and (2) they were single-name and not double-name paper. The facts of the instant case having relation to this phase of the argument are not essentially different from the facts in the Binalbagan Estate case. Just as there it was declared that the operations constituted a loan and not a discount, so should we here lay down the same ruling. III. Was the granting of a credit of P300,000 to the copartnership, "Puno y Concepcion, S. en C." by Venancio Concepcion, President of the Philippine National Bank, an "indirect loan" within the meaning of section 35 of Act No. 2747? Counsel argue that a loan to the partnership "Puno y Concepcion, S. en C." was not an "indirect loan." In this connection, it should be recalled that the wife of the defendant held one-half of the capital of this partnership. In the interpretation and construction of statutes, the primary rule is to ascertain and give effect to the intention of the Legislature. In this instance, the purpose of the Legislature is plainly to erect a wall of safety against temptation for a director of the bank. The prohibition against indirect loans is a recognition of the familiar maxim that no man may serve two masters that where personal interest clashes with fidelity to duty the latter almost always suffers. If, therefore, it is shown that the husband is financially interested in the success or failure of his wife's business venture, a loan to a partnership of which the wife of a director is a member, falls within the prohibition. Various provisions of the Civil Code serve to establish the familiar relationship called a conjugal partnership. (Articles 1315, 1393, 1401, 1408, and 1412 can be specially noted.) A loan, therefore, to a partnership of which the wife of a director of a bank is a member, is an indirect loan to such director. That it was the intention of the Legislature to prohibit exactly such an occurrence is shown by the acknowledged fact that in this instance the defendant was tempted to mingle his personal and family affairs with his official duties, and to permit the loan of P300,000 to a partnership of no established reputation and without asking for collateral security. In the case of Lester and Wife vs. Howard bank ([1870], 33 Md., 558; 3 Am. Rep., 211), the Supreme Court of Maryland said:
"What then was the purpose of the law when it declared that no director or officer should borrow of the bank, and "if any director,' etc., 'shall be convicted,' etc., 'of directly or indirectly violating this section he shall be punished by fine imprisonment?" We say to protect the stockholders, depositors and creditors of the bank, against the temptation to which the directors and officers might be exposed, and the power which as such they must necessarily possess in the control and management of the bank, and the legislature unwilling to rely upon the implied understanding that in assuming this relation

they would not acquire any interest hostile or adverse to the most exact and faithful discharge of duty, declared in express terms that they should not borrow, etc., of the bank."

In the case of People vs. Knapp ([1912], 206 N.Y., 373), relied upon in the Binalbagan Estate decision, it was said:
"We are of opinion the statute forbade the loan to his copartnership firm as well as to himself directly. The loan was made indirectly to him through his firm."

IV. Could Venancio Concepcion, President of the Philippine National Bank, be convicted of a violation of section 35 of Act No. 2747 in relation with section 49 of the same Act, when these portions of Act No. 2747 were repealed by Act No. 2938, prior to the filing of the information and the rendition of the judgment? As noted along toward the beginning of this opinion, section 49 of Act No. 2747, in relation to section 35 of the same Act, provides a punishment for any person who shall violate any of the provisions of the Act. It is contended, however, by the appellant, that the repeal of these sections of Act No. 2747 by Act No. 2747 by Act No. 2938 has served to take away the basis for criminal prosecution. This same question has been previously submitted and has received an answer adverse to such contention in the cases of United States vs. Cuna ([1908], 12 Phil., 241); People vs. Concepcion ([1922], 43 Phil., 653); and Ong Chang Wing and Kwong Fok vs. United States ([1910], 218 U.S., 272; 40 Phil., 1046). In other words, it has been the holding, and it must again be the holding, that where an Act of the Legislature which penalizes an offense, such repeal does not have the effect of thereafter depriving the courts of jurisdiction to try, convict, and sentence offenders charged with violations of the old law. V. Was the granting of a credit of P300,000 to the copartnership "Puno y Concepcion, S. en C." by Venancio Concepcion, President of the Philippine national Bank, in violation of section 35 of Act No. 2747, penalized by this law? Counsel argue that since the prohibition contained in section 35 of Act No. 2747 is on the bank, and since section 49 of said Act provides a punishment not on the bank when it violates any provision of the law, but on a person violating any provision of the law, but on a person violating any provision of the same, and imposing imprisonment as part of the penalty, the prohibition, contained in said 35 is without penal sanction. The answer is that when the corporation itself is forbidden to do an act, the prohibition extends to the board of directors, and to each director separately and individually. (People vs. Concepcion, supra.) VI. Does the alleged good faith of Venancio Concepcion, President of the Philippine National Bank, in extending the credit of P300,000 to the copartnership "Puno y Concepcion, S. en C." constitute a legal defense? Counsel argue that if defendant committed the acts of which he was convicted, it was because he was misled by rulings coming from the Insular Auditor. It is furthermore stated that since the loans made to the copartnership "Puno y Concepcion, S. en C." have been paid, no loss has been suffered by the Philippine National Bank. Neither argument, even if conceded to be true, is conclusive. Under the statute which the defendant has violated, criminal intent is not necessarily material. The doing of the inhabited act, inhibited on account of public policy and public interest, constitutes the crime. And, in this instance, as previously demonstrated, the acts of the President of the Philippine National Bank do not fall within the purview of the rulings have controlling effect. Morse, in his work, Banks and Banking, section 125, says:
"It is fraud for directors to secure by means of their trust, any advantage not common to the other stockholders. The law will not allow private profit from a trust, and will not listen to any proof of honest intent."

JUDGMENT On a review of the evidence of record, with reference to the decision of the trial court, and the errors assigned by the appellant, and with reference to previous decisions of this court on the same subject, we are irresistibly led to the conclusion that no reversible error was committed in the trial of this case, and that the defendant has been proved guilty beyond a reasonable doubt of the crime charged in the information. The penalty imposed by the trial judge falls within the limits of the punitive provisions of the law. Judgment is affirmed, with the costs of this instance against the appellant. So ordered.

Araullo, C.J., Johnson, Street, Avancea, Villamor, Ostrand, Johns, and Romualdez, JJ., concur.

[G.R. No. 154878. March 16, 2007.] CAROLYN M. GARCIA, petitioner, vs. RICA MARIE S. THIO, respondent.

DECISION

CORONA, J :
p

Assailed in this petition for review on certiorari 1 are the June 19, 2002 decision 2 and August 20, 2002 resolution 3 of the Court of Appeals (CA) in CA-G.R. CV No. 56577 which set aside the February 28, 1997 decision of the Regional Trial Court (RTC) of Makati City, Branch 58. Sometime in February 1995, respondent Rica Marie S. Thio received from petitioner Carolyn M. Garcia a crossed check 4 dated February 24, 1995 in the amount of US$100,000 payable to the order of a certain Marilou Santiago. 5 Thereafter, petitioner received from respondent every month (specifically, on March 24, April 26, June 26 and July 26, all in 1995) the amount of US$3,000 6 and P76,500 7 on July 26, 8 August 26, September 26 and October 26, 1995. In June 1995, respondent received from petitioner another crossed check 9 dated June 29, 1995 in the amount of P500,000, also payable to the order of Marilou Santiago. 10 Consequently, petitioner received from respondent the amount of P20,000 every month on August 5, September 5, October 5 and November 5, 1995. 11 According to petitioner, respondent failed to pay the principal amounts of the loans (US$100,000 and P500,000) when they fell due. Thus, on February 22, 1996, petitioner filed a complaint for sum of money and damages in the RTC of Makati City, Branch 58 against respondent, seeking to collect the sums of US$100,000, with interest thereon at 3% a month from October 26, 1995 and P500,000, with interest thereon at 4% a month from November 5, 1995, plus attorney's fees and actual damages. 12 Petitioner alleged that on February 24, 1995, respondent borrowed from her the amount of US$100,000 with interest thereon at the rate of 3% per month, which loan would mature on October 26, 1995. 13 The amount of this loan was covered by the first check. On June 29, 1995, respondent again borrowed the amount of P500,000 at an agreed monthly interest of 4%, the maturity date of which was on November 5, 1995. 14 The amount of this loan was covered by the second check. For both loans, no promissory note was executed since petitioner and respondent were close friends at the time. 15 Respondent paid the stipulated monthly interest 5

for both loans but on their maturity dates, she failed to pay the principal amounts despite repeated demands. 16 Respondent denied that she contracted the two loans with petitioner and countered that it was Marilou Santiago to whom petitioner lent the money. She claimed she was merely asked by petitioner to give the crossed checks to Santiago. 17 She issued the checks for P76,000 and P20,000 not as payment of interest but to accommodate petitioner's request that respondent use her own checks instead of Santiago's. 18 In a decision dated February 28, 1997, the RTC ruled in favor of petitioner. 19 It found that respondent borrowed from petitioner the amounts of US$100,000 with monthly interest of 3% and P500,000 at a monthly interest of 4%: 20
WHEREFORE, finding preponderance of evidence to sustain the instant complaint, judgment is hereby rendered in favor of [petitioner], sentencing [respondent] to pay the former the amount of: 1.[US$100,000.00] or its peso equivalent with interest thereon at 3% per month from October 26, 1995 until fully paid;
CcAESI

2.P500,000.00 with interest thereon at 4% per month from November 5, 1995 until fully paid. 3.P100,000.00 as and for attorney's fees; and 4.P50,000.00 as and for actual damages. For lack of merit, [respondent's] counterclaim is perforce dismissed. With costs against [respondent]. IT IS SO ORDERED.
21

On appeal, the CA reversed the decision of the RTC and ruled that there was no contract of loan between the parties:
A perusal of the record of the case shows that [petitioner] failed to substantiate her claim that [respondent] indeed borrowed money from her. There is nothing in the record that shows that [respondent] received money from [petitioner] . What is evident is the fact that [respondent] received a MetroBank [crossed] check dated February 24, 1995 in the sum of US$100,000.00, payable to the order of Marilou Santiago and a CityTrust [crossed] check dated June 29, 1995 in the amount of P500,000.00, again payable to the order of Marilou Santiago, both of which were issued by [petitioner]. The checks received by [respondent], being crossed, may not be encashed but only deposited in the bank by the payee thereof, that is, by Marilou Santiago herself . It must be noted that crossing a check has the following effects: (a) the check may not be encashed but only deposited in the bank; (b) the check may be negotiated only once to one who has an account with the bank; (c) and the act of crossing the check serves as warning to the holder that the check has been issued for a definite purpose so that he must inquire if he has received the check pursuant to that purpose, otherwise, he is not a holder in due course. Consequently, the receipt of the [crossed] check by [respondent] is not the issuance and delivery to the payee in contemplation of law since the latter is not the person who could take the checks as a holder, i.e., as a payee or indorsee thereof, with intent to transfer title thereto. Neither could she be deemed as an agent of Marilou Santiago with respect to the checks because she was merely facilitating the transactions between the former and [petitioner].

With the foregoing circumstances, it may be fairly inferred that there were really no contracts of loan that existed between the parties. . . . (emphasis supplied)22

Hence this petition.

23

As a rule, only questions of law may be raised in a petition for review on certiorari under Rule 45 of the Rules of Court. However, this case falls under one of the exceptions, i.e., when the factual findings of the CA (which held that there were no contracts of loan between petitioner and respondent) and the RTC (which held that there were contracts of loan) are contradictory. 24 The petition is impressed with merit. A loan is a real contract, not consensual, and as such is perfected only upon the delivery of the object of the contract. 25 This is evident in Art. 1934 of the Civil Code which provides:
An accepted promise to deliver something by way of commodatum or simple loan is binding upon the parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the object of the contract. (Emphasis supplied)

Upon delivery of the object of the contract of loan (in this case the money received by the debtor when the checks were encashed) the debtor acquires ownership of such money or loan proceeds and is bound to pay the creditor an equal amount. 26 It is undisputed that the checks were delivered to respondent. However, these checks were crossed and payable not to the order of respondent but to the order of a certain Marilou Santiago. Thus the main question to be answered is: who borrowed money from petitioner respondent or Santiago? Petitioner insists that it was upon respondent's instruction that both checks were made payable to Santiago. 27 She maintains that it was also upon respondent's instruction that both checks were delivered to her (respondent) so that she could, in turn, deliver the same to Santiago. 28 Furthermore, she argues that once respondent received the checks, the latter had possession and control of them such that she had the choice to either forward them to Santiago (who was already her debtor), to retain them or to return them to petitioner. 29 We agree with petitioner. Delivery is the act by which the res or substance thereof is placed within the actual or constructive possession or control of another. 30Although respondent did not physically receive the proceeds of the checks, these instruments were placed in her control and possession under an arrangement whereby she actually re-lent the amounts to Santiago.
STcHDC

Several factors support this conclusion. First, respondent admitted that petitioner did not personally know Santiago. 31 It was highly improbable that petitioner would grant two loans to a complete stranger without requiring as much as promissory notes or any written acknowledgment of the debt considering that the amounts involved were quite big. Respondent, on the other hand, already had transactions with Santiago at that time. 32 Second, Leticia Ruiz, a friend of both petitioner and respondent (and whose name appeared in both parties' list of witnesses) testified that respondent's plan was for petitioner to lend her money at a monthly interest rate of 3%, after which respondent would lend the same amount to Santiago at a higher rate of 5% and realize a profit of 2%. 33 This explained why respondent instructed petitioner to make the checks payable to Santiago. Respondent has not shown any reason why Ruiz' testimony should not be believed. 7

Third, for the US$100,000 loan, respondent admitted issuing her own checks in the amount of P76,000 each (peso equivalent of US$3,000) for eight months to cover the monthly interest. For the P500,000 loan, she also issued her own checks in the amount of P20,000 each for four months. 34 According to respondent, she merely accommodated petitioner's request for her to issue her own checks to cover the interest payments since petitioner was not personally acquainted with Santiago. 35She claimed, however, that Santiago would replace the checks with cash. 36 Her explanation is simply incredible. It is difficult to believe that respondent would put herself in a position where she would be compelled to pay interest, from her own funds, for loans she allegedly did not contract. We declared in one case that:

In the assessment of the testimonies of witnesses, this Court is guided by the rule that for evidence to be believed, it must not only proceed from the mouth of a credible witness, but must be credible in itself such as the common experience of mankind can approve as probable under the circumstances. We have no test of the truth of human testimony except its conformity to our knowledge, observation, and experience. Whatever is repugnant to these belongs to the miraculous, and is outside of juridical cognizance. 37

Fourth, in the petition for insolvency sworn to and filed by Santiago, it was respondent, not petitioner, who was listed as one of her (Santiago's) creditors. 38 Last, respondent inexplicably never presented Santiago as a witness to corroborate her story. 39 The presumption is that "evidence willfully suppressed would be adverse if produced." 40 Respondent was not able to overturn this presumption. We hold that the CA committed reversible error when it ruled that respondent did not borrow the amounts of US$100,000 and P500,000 from petitioner. We instead agree with the ruling of the RTC making respondent liable for the principal amounts of the loans. We do not, however, agree that respondent is liable for the 3% and 4% monthly interest for the US$100,000 and P500,000 loans respectively. There was no written proof of the interest payable except for the verbal agreement that the loans would earn 3% and 4% interest per month. Article 1956 of the Civil Code provides that "[n]o interest shall be due unless it has been expressly stipulated in writing." Be that as it may, while there can be no stipulated interest, there can be legal interest pursuant to Article 2209 of the Civil Code. It is well-settled that:
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. 41

Hence, respondent is liable for the payment of legal interest per annum to be computed from November 21, 1995, the date when she received petitioner's demand letter. 42 From the finality of the decision until it is fully paid, the amount due shall earn interest at 12% per annum, the interim period being deemed equivalent to a forbearance of credit. 43 The award of actual damages in the amount of P50,000 and P100,000 attorney's fees is deleted since the RTC decision did not explain the factual bases for these damages. 8

WHEREFORE, the petition is hereby GRANTED and the June 19, 2002 decision and August 20, 2002 resolution of the Court of Appeals in CA-G.R. CV No. 56577 are REVERSED and SET ASIDE. The February 28, 1997 decision of the Regional Trial Court in Civil Case No. 96-266 is AFFIRMED with the MODIFICATION that respondent is directed to pay petitioner the amounts of US$100,000 and P500,000 at 12% per annum interest from November 21, 1995 until the finality of the decision. The total amount due as of the date of finality will earn interest of 12% per annum until fully paid. The award of actual damages and attorney's fees is deleted.
cda

SO ORDERED.

Puno, C.J., Sandoval-Gutierrez, Azcuna and Garcia, JJ., concur.

[G.R. No. L-24968. April 27, 1972.] SAURA IMPORT & EXPORT CO., INC., plaintiff-appellee, vs. DEVELOPMENT BANK OF THE PHILIPPINES, defendant-appellant.

Mabanag, Eliger & Associates & Saura, Magno & Associates for plaintiff-appellee. Jesus A. Avacea and Hilario G. Orsolino for defendant-appellant.
SYLLABUS 1.CIVIL LAW; OBLIGATIONS AND CONTRACTS; CONTRACTS; PERFECTION UPON ACCEPTANCE OF PROMISE TO DELIVER SOMETHING BY WAY OF SIMPLE LOAN; ART. 1954 OF THE CIVIL CODE. Where the application of Saura Inc. for a loan of P500,000.00 was approved by resolution of the defendant, and the corresponding mortgage executed and registered, there is undoubtedly offer and acceptance and We hold that there was indeed a perfected consensual contract as recognized in Article 1954 of the Civil Code. 2.ID.; ID.; ID.; ID.; DEFENDANT DID NOT DEVIATE FROM PERFECTED CONTRACT IN CASE AT BAR. The terms laid down in RFC Resolution No. 145 passed on Jan. 7, 1954 which resolution approved the loan application state that: "the proceeds of the loan shall be utilized exclusively for the following purposes: for construction of factory building P250,000.00; for payment of the balance of purchase price of machinery and equipment P240,900.00, for working capital P9,100.00." There is no serious dispute that RFC entertained the loan application of Saura Inc., on the assumption that the factory to be constructed would utilize locally grown raw materials principally kenaf . It was in line with such assumption that when RFC, by Resolution 9083 approved on December 17, 1954, restored the loan to the original amount of P500,000.00, it imposed two conditions to wit: (1) that the raw materials needed by the borrower-corporation to carry out its operation are available in the immediate vicinity and (2) that there is prospect of increased production thereof to provide adequately for the requirements of the factory." The imposition of those conditions was by no means a deviation from the terms of the agreement, but rather a step in its implementation. There was nothing in said conditions that contradicted RFC Resolution No. 145. 3.ID.; ID.; ID.; ID.; DEVIATION MADE BY PLAINTIFF. Evidently Saura Inc., realized that it could not meet the conditions required by RFC in Resolution 9083, and so wrote its letter of January 21, 1955, stating that local jute "will not be available in sufficient quantity this year or probably next year," and asking that out of the loan agreed upon, the sum of P67,586.09 be released "for raw materials and labor." This was a deviation 9

from the terms laid down in Resolution No. 145 and embodied in the mortgage contract, implying as it did a diversion of part of the proceeds of the loan to purposes other than those agreed upon. 4.ID.; ID.; EXTINGUISHMENT OF OBLIGATION BY MUTUAL DESISTANCE; IN INSTANT CASE. When RFC turned down the request of Saura Inc., the negotiations which had been going on for the implementation of the agreement reached an impasse. Saura Inc., obviously was in no position to comply with RFC's conditions. So instead of doing so and insisting that the loan be released as agreed upon, Saura Inc., asked that the mortgage be cancelled, which was done on June 15, 1955. The action thus taken by both parties was in the nature of mutual desistance what Manresa terms "mutuo disenso" which is a mode of extinguishing obligations. It is a concept that derives from the principle that since mutual agreement by the parties can create a contract, mutual disagreement by the parties can cause its extinguishment.

DECISION

MAKALINTAL, J :
p

In Civil Case No. 55908 of the Court of First Instance of Manila, judgment was rendered on June 28, 1965 sentencing defendant Development Bank of the Philippines (DBP) to pay actual and consequential damages to plaintiff Saura Import and Export Co., Inc. in the amount of P383,343.68, plus interest at the legal rate from the date the complaint was filed and attorney's fees in the amount of P5,000.00. The present appeal is from that judgment. In July 1953 the plaintiff (hereinafter referred to as Saura, Inc.) applied to the Rehabilitation Finance Corporation (RFC), before its conversion into DBP, for an industrial loan of P500,000.00, to be used as follows: P250,000.00 for the construction of a factory building (for the manufacture of jute sacks); P240,900.00 to pay the balance of the purchase price of the jute mill machinery and equipment; and P9,100.00 as additional working capital. Parenthetically, it may be mentioned that the jute mill machinery had already been purchased by Saura on the strength of a letter of credit extended by the Prudential Bank and Trust Co., and arrived in Davao City in July 1953; and that to secure its release without first paying the draft, Saura, Inc. executed a trust receipt in favor of the said bank. On January 7, 1954 RFC passed Resolution No. 145 approving the loan application for P500,000.00, to be secured by a first mortgage on the factory buildings to be constructed, the land site thereof, and the machinery and equipment to be installed. Among the other terms spelled out in the resolution were the following:
"1.That the proceeds of the loan shall be utilized exclusively for the following purposes: For construction of factory buildingP250,000.00 For payment of the balance of purchase price of machinery & equipment240,900.00 For working capital9,100.00

10

T O T A LP500,000.00

4.That Mr. & Mrs. Ramon E. Saura, Inocencia Arellano, Aniceto Caolboy and Gregoria Estabillo and China Engineers, Ltd. shall sign the promissory notes jointly with the borrowercorporation; 5.That release shall be made at the discretion of the Rehabilitation Finance Corporation, subject to availability of funds, and as the construction of the factory buildings progresses, to be certified to by an appraiser of this Corporation;"

Saura, Inc. was officially notified of the resolution on January 9, 1954. The day before, however, evidently having otherwise been informed of its approval, Saura, Inc. wrote a letter to RFC, requesting a modification of the terms laid down by it, namely: that in lieu of having China Engineers, Ltd. (which was willing to assume liability only to the extent of its stock subscription with Saura, Inc.) sign as co-maker on the corresponding promissory notes, Saura, Inc. would put up a bond for P123,500.00, an amount equivalent to such subscription; and that Maria S. Roca would be substituted for Inocencia Arellano as one of the other comakers, having acquired the latter's shares in Saura, Inc. In view of such request RFC approved Resolution No. 736 on February 4, 1954, designating of the members of its Board of Governors, for certain reasons stated in the resolution, "to reexamine all the aspects of this approved loan . . . with special reference as to the advisability of financing this particular project based on present conditions obtaining in the operations of jute mills, and to submit his findings thereon at the next meeting of the Board." On March 24, 1954 Saura, Inc. wrote RFC that China Engineers, Ltd. had again agreed to act as co-signer for the loan, and asked that the necessary documents be prepared in accordance with the terms and conditions specified in Resolution No. 145 In connection with the re-examination of the project to be financed with the loan applied for, as stated in Resolution No. 736, the parties named their respective committees of engineers and technical men to meet with each other and undertake the necessary studies, although in appointing its own committee Saura, Inc. made the observation that the same "should not be taken as an acquiescence on (its) part to novate, or accept new conditions to, the agreement already entered into," referring to its acceptance of the terms and conditions mentioned in Resolution No. 145. On April 13, 1954 the loan documents were executed: the promissory note, with F.R. Halling, representing China Engineers, Ltd., as one of the co-signers; and the corresponding deed of mortgage, which was duly registered on the following April 17. It appears, however, that despite the formal execution of the loan agreement the re-examination contemplated in Resolution No. 736 proceeded. In a meeting of the RFC Board of Governors on June 10, 1954, at which Ramon Saura, President of Saura, Inc., was present, it was decided to reduce the loan from P500,000.00 to P300,000.00. Resolution No. 3989 was approved as follows:
"RESOLUTION No. 3989.Reducing the Loan Granted Saura Import & Export Co., Inc. under Resolution No. 145, C.S., from P500,000.00 to P300,000.00. Pursuant to Bd. Res. No. 736, c.s., authorizing the re-examination of all the various aspects of the loan granted the Saura Import & Export Co. under Resolution No. 145, c.s., for the purpose of financing the manufacture of jute sacks in Davao, with special reference as to the advisability of financing this particular project based on present conditions obtaining in the operation of jute mills, and after having heard Ramon E. Saura and after extensive discussion on the subject the Board, upon recommendation of the Chairman, RESOLVED that the loan granted the Saura Import & Export

11

Co. be REDUCED from P500,000 to P300,000 and that releases up to P100,000 may be authorized as may be necessary from time to time to place the factory in actual operation: PROVIDED that all terms and conditions of Resolution No. 145, c.s., not inconsistent herewith, shall remain in full force and effect."

On June 19, 1954 another hitch developed. F.R. Halling, who had signed the promissory note for China Engineers Ltd. jointly and severally with the other co-signers, wrote RFC that his company no longer wished to avail of the loan and therefore considered the same cancelled as far as it was concerned. A follow-up letter dated July 2 requested RFC that the registration of the mortgage be withdrawn. In the meantime Saura, Inc. had written RFC requesting that the loan of P500,000.00 be granted. The request was denied by RFC, which added in its letter-reply that it was "constrained to consider as cancelled the loan of P300,000.00 . . . in view of a notification . . . from the China Engineers, Ltd., expressing their desire to consider the loan cancelled insofar as they are concerned."

On July 24, 1954 Saura, Inc. took exception to the cancellation of the loan and informed RFC that China Engineers, Ltd. "will at any time reinstate their signature as co-signer of the note if RFC releases to us the P500,000.00 originally approved by you." On December 17, 1954 RFC passed Resolution No. 9083, restoring the loan to the original amount of P500,000.00, "it appearing that China Engineers, Ltd. is now willing to sign the promissory notes jointly with the borrower-corporation," but with the following proviso:
"That in view of observations made of the shortage and high cost of imported raw materials, the Department of Agriculture and Natural Resources shall certify to the following: 1.That the raw materials needed by the borrower-corporation to carry out its operation are available in the immediate vicinity; and 2.That there is prospect of increased production thereof to provide adequately for the requirements of the factory."

The action thus taken was communicated to Saura, Inc. in a letter of RFC dated December 22, 1954, wherein it was explained that the certification by the Department of Agriculture and Natural Resources was required "as the intention of the original approval (of the loan) is to develop the manufacture of sacks on the basis of locally available raw materials." This point is important, and sheds light on the subsequent actuations of the parties. Saura, Inc. does not deny that the factory he was building in Davao was for the manufacture of bags from local raw materials. The cover page of its brochure (Exh. M) describes the project as a "Joint venture by and between the Mindanao Industry Corporation and the Saura Import and Export Co., Inc. to finance, manage and operate a Kenaf mill plant, to manufacture copra and corn bags, runners, floor mattings, carpets, draperies, out of 100% local raw materials, principal kenaf." The explanatory note on page 1 of the same brochure states that the venture "is the first serious attempt in this country to use 100% locally grown raw materials notably kenaf which is presently grown commercially in the Island of Mindanao where the proposed jutemill is located . . ." This fact, according to defendant DBP, is what moved RFC to approve the loan application in the first place, and to require, in its Resolution No. 9083, a certification from the Department of Agriculture and Natural Resources as to the availability of local raw materials to provide adequately for the requirements of the factory. Saura, Inc. itself confirmed the defendant's stand impliedly in its letter of January 21, 1955: (1) 12

stating that according to a special study made by the Bureau of Forestry "kenaf will not be available in sufficient quantity this year or probably even next year;" (2) requesting "assurances (from RFC) that my company and associates will be able to bring in sufficient jute materials as may be necessary for the full operation of the jute mill;" and (3) asking that releases of the loan be made as follows:
a)For the payment of the receipt for jute mill machineries with the Prudential Bank & Trust CompanyP250,000.00 (For immediate release) b)For the purchase of materials and equipment per attached list to enable the jute mill to operateP182,413.91 c)For raw materials and labor67,586.09 1)P25,000.00 to be released on the opening of the letter of credit for raw jute for $25,000 00. 2)P25,000.00 to be released upon arrival of raw jute. 3)P17,586.09 to be released as soon as the mill is ready to operate.

On January 25, 1955 RFC sent to Saura, Inc. the following reply:
"Dear Sirs: This is with reference to your letter of January 21, 1955, regarding the release of your loan under consideration of P500,000. As stated in our letter of December 22, 1954, the releases of the loan, if revived, are proposed to be made from time to time, subject to availability of funds towards the end that the sack factory shall be placed in actual operating status. We shall be able to act on your request for revised purposes and manner of releases upon re-appraisal of the securities offered for the loan. With respect to our requirement that the Department of Agriculture and Natural Resources certify that the raw materials needed are available in the immediate vicinity and that there is prospect of increased production thereof to provide adequately the requirements of the factory, we wish to reiterate that the basis of the original approval is to develop the manufacture of sacks on the basis of the locally available raw materials. Your statement that you will have to rely on the importation of jute and your request that we give you assurance that your company will be able to bring in sufficient jute materials as may be necessary for the operation of your factory, would not be in line with our principle in approving the loan."

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

13

It appears that the cancellation was requested to make way for the registration of a mortgage contract, executed on August 6, 1954, over the same property in favor of the Prudential Bank and Trust Co., under which contract Saura, Inc. had up to December 31 of the same year within which to pay its obligation on the trust receipt heretofore mentioned. It appears further that for failure to pay the said obligation the Prudential Bank and Trust Co. sued Saura, Inc. on May 15, 1955. On January 9, 1964, almost 9 years after the mortgage in favor of RFC was cancelled at the request of Saura, Inc., the latter commenced the present suit for damages, alleging failure of RFC (as predecessor of the defendant DBP) to comply with its obligation to release the proceeds of the loan applied for and approved, thereby preventing the plaintiff from completing or paying contractual commitments it had entered into, in connection with its jute mill project. The trial court rendered judgment for the plaintiff, ruling that there was a perfected contract between the parties and that the defendant was guilty of breach thereof. The defendant pleaded below, and reiterates in this appeal: (1) that the plaintiff's cause of action had prescribed, or that its claim had been waived or abandoned; (2) that there was no perfected contract; and (3) that assuming there was, the plaintiff itself did not comply with the terms thereof. We hold that there was indeed a perfected consensual contract, as recognized in Article 1934 of the Civil Code, which provides:
"ART. 1954.An accepted promise to deliver something by way of commodatum or simple loan is binding upon the parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the object of the contract."

There was undoubtedly offer and acceptance in this case: the application of Saura, Inc. for a loan of P500,000.00 was approved by resolution of the defendant, and the corresponding mortgage was executed and registered. But this fact alone falls short of resolving the basic claim that the defendant failed to fulfill its obligation and that the plaintiff is therefore entitled to recover damages. It should be noted that RFC entertained the loan application of Saura, Inc. on the assumption that the factory to be constructed would utilize locally grown raw materials, principally kenaf. There is no serious dispute about this. It was in line with such assumption that when RFC, by Resolution No. 9033 approved on December 17, 1954, restored the loan to the original amount of P500,000.00, it imposed two conditions, to wit: "(1) that the raw materials needed by the borrower-corporation to carry out its operation are available in the immediate vicinity; and (2) that there is prospect of increased production thereof to provide adequately for the requirements of the factory." The imposition of those conditions was by no means a deviation from the terms of the agreement, but rather a step in its implementation. There was nothing in said conditions that contradicted the terms laid down in RFC Resolution No. 145, passed on January 7, 1954, namely "that the proceeds of the loan shall be utilized exclusively for the following purposes: for construction of factory building P250,000.00; for payment of the balance of purchase price of machinery and equipment P240,900.00; for working capital P9,100.00." Evidently Saura, Inc. realized that it could not meet the conditions required by RFC, and so wrote its letter of January 21, 1955, stating that local jute "will not be available in sufficient quantity this year or probably next year," and asking that out of the loan agreed upon the sum of P67,586.09 be released "for raw materials and labor." This was a deviation from the terms laid down in Resolution No. 145 and embodied in the mortgage contract, implying as it did a diversion of part of the proceeds of the loan to purposes other than those agreed upon. When RFC turned down the request in its letter of January 25, 1955 the negotiations which had been going on for the implementation of the agreement reached an impasse. Saura, Inc. obviously was in no position to comply with RFC's conditions. So instead of doing so and insisting that the loan be released as agreed upon, 14

Saura, Inc. asked that the mortgage be cancelled, which was done on June 15, 1955. The action thus taken by both parties was in the nature of mutual desistance what Manresa terms "mutuo disenso" 1 which is a mode of extinguishing obligations. It is a concept that derives from the principle that since mutual agreement can create a contract, mutual disagreement by the parties can cause its extinguishment. 2 The subsequent conduct of Saura, Inc. confirms this desistance. It did not protest against any alleged breach of contract by RFC, or even point out that the latter's stand was legally unjustified. Its request for cancellation of the mortgage carried no reservation of whatever rights it believed it might have against RFC for the latter's noncompliance. In 1962 it even applied with DBP for another loan to finance a rice and corn project, which application was disapproved. It was only in 1964, nine years after the loan agreement had been cancelled at its own request, that Saura, Inc. brought this action for damages. All these circumstances demonstrate beyond doubt that the said agreement had been extinguished by mutual desistance and that on the initiative of the plaintiff-appellee itself.

With this view we take of the case, we find it unnecessary to consider and resolve the other issues raised in the respective briefs of the parties. WHEREFORE, the judgment appealed from is reversed and the complaint dismissed, with costs against the plaintiff-appellee.

Reyes, J.B.L., Actg. C.J., Zaldivar, Castro, Fernando, Teehankee, Barredo and Antonio, JJ., concur. Makasiar, J., took no part.

[G.R. No. L-45710. October 3, 1985.] CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR ANTONIO T. CASTRO, JR. OF THE DEPARTMENT OF COMMERCIAL AND SAVINGS BANK, in his capacity as statutory receiver of Island Savings Bank, petitioners, vs. THE HONORABLE COURT OF APPEALS and SULPICIO M. TOLENTINO, respondents.

I.B. Regalado, Jr., Fabian S. Lombos and Marino E. Eslao for petitioners. Antonio R. Tupaz for private respondent.

DECISION

MAKASIAR, C.J :
p

This is a petition for review on certiorari to set aside as null and void the decision of the Court of Appeals, in C.A.-G.R. No. 52253-R dated February 11, 1977, modifying the decision dated February 15, 1972 of the Court of First Instance of Agusan, which dismissed the petition of respondent Sulpicio M. Tolentino for injunction, specific performance or rescission, and damages with preliminary injunction. 15

On April 28, 1965, Island Savings Bank, upon favorable recommendation of its legal department, approved the loan application for P80,000.00 of Sulpicio M. Tolentino, who, as a security for the loan, executed on the same day a real estate mortgage over his 100-hectare land located in Cubo, Las Nieves, Agusan, and covered by TCT No. T-305, and which mortgage was annotated on the said title the next day. The approved loan application called for a lump sum P80,000.00 loan, repayable in semi-annual installments for a period of 3 years, with 12% annual interest. It was required that Sulpicio M. Tolentino shall use the loan proceeds solely as an additional capital to develop his other property into a subdivision. On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00 loan was made by the Bank; and Sulpicio M. Tolentino and his wife Edita Tolentino signed a promissory note for P17,000.00 at 12% annual interest, payable within 3 years from the date of execution of the contract at semi-annual installments of P3,459.00 (p. 64, rec.), An advance interest for the P80,000.00 loan covering a 6-month period amounting to P4,800.00 was deducted from the partial release of P17,000.00. But this pre-deducted interest was refunded to Sulpicio M. Tolentino on July 23, 1965, after being informed by the Bank that there was no fund yet available for the release of the P63,000.00 balance (p. 47, rec.). The Bank, thru its vice-president and treasurer, promised repeatedly the release of the P63,000.00 balance (p. 113, rec.). On August 13, 1965, the Monetary Board of the Central Bank, after finding Island Savings Bank was suffering liquidity problems, issued Resolution No. 1049, which provides:
"In view of the chronic reserve deficiencies of the Island Savings Bank against its deposit liabilities, the Board, by unanimous vote, decided as follows: "1)To prohibit the bank from making new loans and investments [except investments in government securities] excluding extensions or renewals of already approved loans, provided that such extensions or renewals shall be subject to review by the Superintendent of Banks, who may impose such limitations as may be necessary to insure correction of the bank's deficiency as soon as possible; . . ." (p. 46, rec.).

On June 14, 1968, the Monetary Board, after finding that Island Savings Bank failed to put up the required capital to restore its solvency, issued Resolution No. 967 which prohibited Island Savings Bank from doing business in the Philippines and instructed the Acting Superintendent of Banks to take charge of the assets of Island Savings Bank (pp. 48-49, rec.). On August 1, 1968, Island Savings Bank, in view of non-payment of the P17,000.00 covered by the promissory note, filed an application for the extra-judicial foreclosure of the real estate mortgage covering the 100hectare land of Sulpicio M. Tolentino; and the sheriff scheduled the auction for January 22, 1969. On January 20, 1969, Sulpicio M. Tolentino filed a petition with the Court of First Instance of Agusan for injunction, specific performance or rescission and damages with preliminary injunction, alleging that since Island Savings Bank failed to deliver the P63,000.00 balance of the P80,000.00 loan, he is entitled to specific performance by ordering Island Savings Bank to deliver the P63,000.00 with interest of 12% per annum from April 28, 1965, and if said balance cannot be delivered, to rescind the real estate mortgage (pp. 32-43, rec.). On January 21, 1969, the trial court, upon the filing of a P5,000.00 surety bond, issued a temporary restraining order enjoining the Island Savings Bank from continuing with the foreclosure of the mortgage (pp. 86-87, rec.).

16

On January 29, 1969, the trial court admitted the answer in intervention praying for the dismissal of the petition of Sulpicio M. Tolentino and the setting aside of the restraining order, filed by the Central Bank and by the Acting Superintendent of Banks (pp. 65-76, rec.). On February 15, 1972, the trial court, after trial on the merits, rendered its decision, finding unmeritorious the petition of Sulpicio M. Tolentino, ordering him to pay Island Savings Bank the amount of P17,000.00 plus legal interest and legal charges due thereon, and lifting the restraining order so that the sheriff may proceed with the foreclosure (pp. 135-136, rec.). On February 11, 1977, the Court of Appeals, on appeal by Sulpicio M. Tolentino, modified the Court of First Instance decision by affirming the dismissal of Sulpicio M. Tolentino's petition for specific performance, but it ruled that Island Savings Bank can neither foreclose the real estate mortgage nor collect the P17,000.00 loan (pp. 30-31, rec.).
prcd

Hence, this instant petition by the Central Bank. The issues are: 1.Can the action of Sulpicio M. Tolentino for specific performance prosper? 2.Is Sulpicio M. Tolentino liable to pay the P17,000.00 debt covered by the promissory note? 3.If Sulpicio M. Tolentino's liability to pay the P17,000.00 subsists, can his real estate mortgage be foreclosed to satisfy said amount?. When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan agreement on April 28, 1965, they undertook reciprocal obligations. In reciprocal obligations, the obligation or promise of each party is the consideration for that of the other (Penaco vs. Ruaya, 110 SCRA 46 [1981]; Vda. de Quirino vs. Pelarca, 29 SCRA 1 [1969]); and when one party has performed or is ready and willing to perform his part of the contract, the other party who has not performed or is not ready and willing to perform incurs in delay (Art. 1169 of the Civil Code). The promise of Sulpicio M. Tolentino to pay was the consideration for the obligation of Island Savings Bank to furnish the P80,000.00 loan. When Sulpicio M. Tolentino executed a real estate mortgage on April 28, 1965, he signified his willingness to pay the P80,000.00 loan. From such date, the obligation of Island Savings Bank to furnish the P80,000.00 loan accrued. Thus, the Bank's delay in furnishing the entire loan started on April 28, 1965, and lasted for a period of 3 years or when the Monetary Board of the Central Bank issued Resolution No. 967 on June 14, 1968, which prohibited Island Savings Bank from doing further business. Such prohibition made it legally impossible for Island Savings Bank to furnish the P63,000.00 balance of the P80,000.00 loan. The power of the Monetary Board to take over insolvent banks for the protection of the public is recognized by Section 29 of R.A. No. 265, which took effect on June 15, 1948, the validity of which is not in question. The Monetary Board Resolution No. 1049 issued on August 13, 1965 cannot interrupt the default of Island Savings Bank in complying with its obligation of releasing the P63,000.00 balance because said resolution merely prohibited the Bank from making new loans and investments, and nowhere did it prohibit Island Savings Bank from releasing the balance of loan agreements previously contracted. Besides, the mere pecuniary inability to fulfill an engagement does not discharge the obligation of the contract, nor does it constitute any defense to a decree of specific performance (Gutierrez Repide vs. Afzelins and Afzelins, 39 Phil. 190 [1918]). And, the mere fact of insolvency of a debtor is never an excuse for the non-fulfillment of an obligation but instead it is taken as a breach of the contract by him (Vol. 17A, 1974 ed., CJS p. 650).
LexLib

17

The fact that Sulpicio M. Tolentino demanded and accepted the refund of the pre-deducted interest amounting to P4,800.00 for the supposed P80,000.00 loan covering a 6-month period cannot be taken as a waiver of his right to collect the P63,000.00 balance. The act of Island Savings Bank, in asking the advance interest for 6 months on the supposed P80,000.00 loan, was improper considering that only P17,000.00 out of the P80,000.00 loan was released. A person cannot be legally charged interest for a non-existing debt. Thus, the receipt by Sulpicio M. Tolentino of the pre-deducted interest was an exercise of his right to it, which right exist independently of his right to demand the completion of the P80,000.00 loan. The exercise of one right does not affect, much less neutralize, the exercise of the other. The alleged discovery by Island Savings Bank of the over-valuation of the loan collateral cannot exempt it from complying with its reciprocal obligation to furnish the entire P80,000.00 loan. This Court previously ruled that bank officials and employees are expected to exercise caution and prudence in the discharge of their functions (Rural Bank of Caloocan, Inc. vs. C.A., 104 SCRA 151 [1981]). It is the obligation of the bank's officials and employees that before they approve the loan application of their customers, they must investigate the existence and valuation of the properties being offered as a loan security. The recent rush of events where collaterals for bank loans turn out to be non-existent or grossly over-valued underscore the importance of this responsibility. The mere reliance by bank officials and employees on their customer's representation regarding the loan collateral being offered as loan security is a patent non-performance of this responsibility. If ever, bank officials and employees totally rely on the representation of their customers as to the valuation of the loan collateral, the bank shall bear the risk in case the collateral turn out to be over-valued. The representation made by the customer is immaterial to the bank's responsibility to conduct its own investigation. Furthermore, the lower court, on objections of Sulpicio M. Tolentino, had enjoined petitioners from presenting proof on the alleged over-valuation because of their failure to raise the same in their pleadings (pp. 198-199, t.s.n., Sept. 15, 1971). The lower court's action is sanctioned by the Rules of Court, Section 2, Rule 9, which states that "defenses and objections not pleaded either in a motion to dismiss or in the answer are deemed waived." Petitioners, thus, cannot raise the same issue before the Supreme Court.

Since Island Savings Bank was in default in fulfilling its reciprocal obligation under their loan agreement, Sulpicio M. Tolentino, under Article 1191 of the Civil Code, may choose between specific performance or rescission with damages in either case. But since Island Savings Bank is now prohibited from doing further business by Monetary Board Resolution No. 967, WE cannot grant specific performance in favor of Sulpicio M. Tolentino. Rescission is the only alternative remedy left. WE rule, however, that rescission is only for the P63,000.00 balance of the P80,000.00 loan, because the bank is in default only insofar as such amount is concerned, as there is no doubt that the bank failed to give the P63,000.00. As far as the partial release of P17,000.00, which Sulpicio M. Tolentino accepted and executed a promissory note to cover it, the bank was deemed to have complied with its reciprocal obligation to furnish a P17,000.00 loan. The promissory note gave rise to Sulpicio M. Tolentino's reciprocal obligation to pay the P17,000.00 loan when it falls due. His failure to pay the overdue amortizations under the promissory note made him a party in default, hence not entitled to rescission (Article 1191 of the Civil Code). If there is a right to rescind the promissory note, it shall belong to the aggrieved party, that is, Island Savings Bank. If Tolentino had not signed a promissory note setting the date for payment of P17,000.00 within 3 years, he would be entitled to ask for rescission of the entire loan because he cannot possibly be in default as there was no date for him to perform his reciprocal obligation to pay. Since both parties were in default in the performance of their respective reciprocal obligations, that is, Island Savings Bank failed to comply with its obligation to furnish the entire loan and Sulpicio M. Tolentino failed to comply with his obligation to pay his P17,000.00 debt within 3 years as stipulated, they are both liable for damages. 18
Cdpr

Article 1192 of the Civil Code provides that in case both parties have committed a breach of their reciprocal obligations, the liability of the first infractor shall be equitably tempered by the courts. WE rule that the liability of Island Savings Bank for damages in not furnishing the entire loan is offset by the liability of Sulpicio M. Tolentino for damages, in the form of penalties and surcharges, for not paying his overdue P17,000.00 debt. The liability of Sulpicio M. Tolentino for interest on his P17,000.00 debt shall not be included in offsetting the liabilities of both parties. Since Sulpicio M. Tolentino derived some benefit for his use of the P17,000.00, it is just that he should account for the interest thereon. WE hold, however, that the real estate mortgage of Sulpicio M. Tolentino cannot be entirely foreclosed to satisfy his P17,000.00 debt. The consideration of the accessory contract of real estate mortgage is the same as that of the principal contract (Banco de Oro vs. Bayuga, 93 SCRA 443 [1979]). For the debtor, the consideration of his obligation to pay is the existence of a debt. Thus, in the accessory contract of real estate mortgage, the consideration of the debtor in furnishing the mortgage is the existence of a valid, voidable, or unenforceable debt (Art. 2086, in relation to Art. 2052, of the Civil Code). The fact that when Sulpicio M. Tolentino executed his real estate mortgage, no consideration was then in existence, as there was no debt yet because Island Savings Bank had not made any release on the loan, does not make the real estate mortgage void for lack of consideration. It is not necessary that any consideration should pass at the time of the execution of the contract of real mortgage (Bonnevie vs. C.A., 125 SCRA 122 [1983]). It may either be a prior or subsequent matter. But when the consideration is subsequent to the mortgage, the mortgage can take effect only when the debt secured by it is created as a binding contract to pay (Parks vs. Sherman, Vol. 176 N.W. p. 583, cited in the 8th ed., Jones on Mortgage, Vol. 2, pp. 5-6). And, when there is partial failure of consideration, the mortgage becomes unenforceable to the extent of such failure (Dow, et al. vs. Poore, Vol. 172 N.E. p. 82, cited in Vol. 59, 1974 ed. CJS, p. 138). Where the indebtedness actually owing to the holder of the mortgage is less than the sum named in the mortgage, the mortgage cannot be enforced for more than the actual sum due (Metropolitan Life Ins. Co. vs. Peterson, Vol. 19, F(2d) p. 88, cited in 6th ed., Wiltsie on Mortgage, Vol. 1, p. 180).
LLpr

Since Island Savings Bank failed to furnish the P63,000.00 balance of the P80,000.00 loan, the real estate mortgage of Sulpicio M. Tolentino became unenforceable to such extent. P63,000.00 is 78.75% of P80,000.00, hence the real estate mortgage covering 100 hectares is unenforceable to the extent of 78.75 hectares. The mortgage covering the remainder of 21.25 hectares subsists as a security for the P17,000.00 debt. 21.25 hectares is more than sufficient to secure a P17,000.00 debt. The rule of indivisibility of a real estate mortgage provided for by Article 2089 of the Civil Code is inapplicable to the facts of this case. Article 2089 provides:
"A pledge or mortgage is indivisible even though the debt may be divided among the successors in interest of the debtor or creditor. "Therefore, the debtor's heirs who has paid a part of the debt can not ask for the proportionate extinguishment of the pledge or mortgage as long as the debt is not completely satisfied. "Neither can the creditor's heir who have received his share of the debt return the pledge or cancel the mortgage, to the prejudice of other heirs who have not been paid."

19

The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted presupposes several heirs of the debtor or creditor which does not obtain in this case. Hence, the rule of indivisibility of a mortgage cannot apply. WHEREFORE, THE DECISION OF THE COURT OF APPEALS DATED FEBRUARY 11, 1977 IS HEREBY MODIFIED, AND 1.SULPICIO M. TOLENTINO IS HEREBY ORDERED TO PAY IN FAVOR OF HEREIN PETITIONERS THE SUM OF P17,000.00, PLUS P41,210.00 REPRESENTING 12% INTEREST PER ANNUM COVERING THE PERIOD FROM MAY 22, 1965 TO AUGUST 22, 1985, AND 12% INTEREST ON THE TOTAL AMOUNT COUNTED' FROM AUGUST 22, 1985 UNTIL PAID; 2.IN CASE SULPICIO M. TOLENTINO FAILS TO PAY, HIS REAL ESTATE MORTGAGE COVERING 21.25 HECTARES SHALL BE FORECLOSED TO SATISFY HIS TOTAL INDEBTEDNESS; AND 3.THE REAL ESTATE MORTGAGE COVERING 78.75 HECTARES IS HEREBY DECLARED UNENFORCEABLE AND IS HEREBY ORDERED RELEASED IN FAVOR OF SULPICIO M. TOLENTINO. NO COSTS. SO ORDERED. Concepcion, Jr., Escolin, Cuevas and Alampay, JJ., concur. Aquino (Chairman) and Abad Santos, JJ., took no part.

[G.R. No. 115324. February 19, 2003.] PRODUCERS BANK OF THE PHILIPPINES (now FIRST INTERNATIONAL BANK), petitioner, vs. HON. COURT OF APPEALS AND FRANKLIN VIVES, respondents.

Domingo & Dizon for petitioner. Mauricio Law Office for private respondent.
SYNOPSIS Upon request of a friend, Franklin Vives accommodated Arturo Doronilla by opening a savings account for Sterela Marketing, in coordination with Producer's Bank assistant branch manager, Rufo Atienza. The purpose was for incorporation, and the agreement was that the money would not be removed from Sterela's savings account and returned to Vives after thirty (30) days. Later, however, part of the money had been withdrawn by Doronilla who also opened a current account and authorized the bank to debit the savings account to cover overdrawing in the current account. Vives filed a case for recovery of sum of money and both the trial court and the appellate court ruled on the solidary liability of Producers Bank to Vives. Hence, this appeal.
IDSEAH

The Court affirmed the appealed decision. Under Art. 2180 of the Civil Code, employers shall be held liable for damages caused by their employees acting within the scope of their assigned tasks. The Bank, through its employee Atienza, was partly responsible for the loss of Vives' money and is liable for its restitution. That 20

despite limitation on the savings account passbook issued to Mrs. Vives on behalf of Sterela, Doronilla was allowed to withdraw several times without presentation of a passbook as required. SYLLABUS 1.REMEDIAL LAW; EVIDENCE; FACTUAL FINDINGS OF THE TRIAL COURT ADOPTED BY THE APPELLATE COURT, RESPECTED. At the outset, it must be emphasized that only questions of law may be raised in a petition for review filed with this Court. The Court has repeatedly held that it is not its function to analyze and weigh all over again the evidence presented by the parties during trial. The Court's jurisdiction is in principle limited to reviewing errors of law that might have been committed by the Court of Appeals. Moreover, factual findings of courts, when adopted and confirmed by the Court of Appeals, are final and conclusive on this Court unless these findings are not supported by the evidence on record. There is no showing of any misapprehension of facts on the part of the Court of Appeals in the case at bar that would require this Court to review and overturn the factual findings of that court, especially since the conclusions of fact of the Court of Appeals and the trial court are not only consistent but are also amply supported by the evidence on record. 2.CIVIL LAW; SPECIAL CONTRACTS; LOAN; MUTUUM AND COMMODATUM, DISTINGUISHED. Article 1933 of the Civil Code distinguishes between the two kinds of loans in this wise: By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use the same for a certain time and return it, in which case the contract is called a commodatum; or money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid, in which case the contract is simply called a loan or mutuum. Commodatum is essentially gratuitous. Simple loan may be gratuitous or with a stipulation to pay interest. In commodatum, the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the borrower. The foregoing provision seems to imply that if the subject of the contract is a consumable thing, such as money, the contract would be a mutuum. However, there are some instances where a commodatum may have for its object a consumable thing. Article 1936 of the Civil Code provides: Consumable goods may be the subject of commodatum if the purpose of the contract is not the consumption of the object, as when it is merely for exhibition. Thus, if consumable goods are loaned only for purposes of exhibition, or when the intention of the parties is to lend consumable goods and to have the very same goods returned at the end of the period agreed upon, the loan is a commodatum and not a mutuum. The rule is that the intention of the parties thereto shall be accorded primordial consideration in determining the actual character of a contract. In case of doubt, the contemporaneous and subsequent acts of the parties shall be considered in such determination. 3.ID.; ID.; ID.; ADDITIONAL AMOUNT PAID TO ORIGINAL AMOUNT LOANED AS INTEREST DID NOT CONVERT AGREEMENT OF COMMODATUM TO MUTUUM. Doronilla's attempts to return to private respondent the amount of P200,000.00 which the latter deposited in Sterela's account together with an additional P12,000.00, allegedly representing interest on the mutuum, did not convert the transaction from a commodatum into a mutuum because such was not the intent of the parties and because the additional P12,000.00 corresponds to the fruits of the lending of the P200,000.00. Article 1935 of the Civil Code expressly states that "[t]he bailee in commodatum acquires the use of the thing loaned but not its fruits." Hence, it was only proper for Doronilla to remit to private respondent the interest accruing to the latter's money deposited with petitioner. 4.ID.; EXTRA-CONTRACTUAL OBLIGATIONS; QUASI-DELICTS; EMPLOYERS LIABLE FOR DAMAGES CAUSED BY EMPLOYEES ACTING WITHIN THE SCOPE OF THEIR ASSIGNED TASKS. Under Article 2180 of the Civil Code, employers shall be held primarily and solidarily liable for damages caused by their employees acting within the scope of their assigned tasks. To hold the employer liable under this provision, it must be shown that an employer-employee relationship exists, and that the employee was acting within the scope of his assigned task when the act complained of was committed. Case law in the United States of America has it that 21

a corporation that entrusts a general duty to its employee is responsible to the injured party for damages flowing from the employee's wrongful act done in the course of his general authority, even though in doing such act, the employee may have failed in its duty to the employer and disobeyed the latter's instructions.

ACTEHI

DECISION

CALLEJO, SR., J :
p

This is a petition for review on certiorari of the Decision 1 of the Court of Appeals dated June 25, 1991 in CAG.R. CV No. 11791 and of its Resolution 2 dated May 5, 1994, denying the motion for reconsideration of said decision filed by petitioner Producers Bank of the Philippines. Sometime in 1979, private respondent Franklin Vives was asked by his neighbor and friend Angeles Sanchez to help her friend and townmate, Col. Arturo Doronilla, in incorporating his business, the Sterela Marketing and Services ("Sterela" for brevity). Specifically, Sanchez asked private respondent to deposit in a bank a certain amount of money in the bank account of Sterela for purposes of its incorporation. She assured private respondent that he could withdraw his money from said account within a month's time. Private respondent asked Sanchez to bring Doronilla to their house so that they could discuss Sanchez's request. 3 On May 9, 1979, private respondent, Sanchez, Doronilla and a certain Estrella Dumagpi, Doronilla's private secretary, met and discussed the matter. Thereafter, relying on the assurances and representations of Sanchez and Doronilla, private respondent issued a check in the amount of Two Hundred Thousand Pesos (P200,000.00) in favor of Sterela. Private respondent instructed his wife, Mrs. Inocencia Vives, to accompany Doronilla and Sanchez in opening a savings account in the name of Sterela in the Buendia, Makati branch of Producers Bank of the Philippines. However, only Sanchez, Mrs. Vives and Dumagpi went to the bank to deposit the check. They had with them an authorization letter from Doronilla authorizing Sanchez and her companions, "in coordination with Mr. Rufo Atienza," to open an account for Sterela Marketing Services in the amount of P200,000.00. In opening the account, the authorized signatories were Inocencia Vives and/or Angeles Sanchez. A passbook for Savings Account No. 10-1567 was thereafter issued to Mrs. Vives. 4 Subsequently, private respondent learned that Sterela was no longer holding office in the address previously given to him. Alarmed, he and his wife went to the Bank to verify if their money was still intact. The bank manager referred them to Mr. Rufo Atienza, the assistant manager, who informed them that part of the money in Savings Account No. 10-1567 had been withdrawn by Doronilla, and that only P90,000.00 remained therein. He likewise told them that Mrs. Vives could not withdraw said remaining amount because it had to answer for some postdated checks issued by Doronilla. According to Atienza, after Mrs. Vives and Sanchez opened Savings Account No. 10-1567, Doronilla opened Current Account No. 10-0320 for Sterela and authorized the Bank to debit Savings; Account No. 10-1567 for the amounts necessary to cover overdrawings in Current Account No. 10-0320. In opening said current account, Sterela, through Doronilla, obtained a loan of P175,000.00 from the Bank. To cover payment thereof, Doronilla issued three postdated checks, all of which were dishonored. Atienza also said that Doronilla could assign or withdraw the money in Savings Account No. 10-1567 because he was the sole proprietor of Sterela. 5 Private respondent tried to get in touch with Doronilla through Sanchez. On June 29, 1979, he received a letter from Doronilla, assuring him that his money was intact and would be returned to him. On August 13, 1979, Doronilla issued a postdated check for Two Hundred Twelve Thousand Pesos (P212,000.00) in favor of private respondent. However, upon presentment thereof by private respondent to the drawee bank, the check 22

was dishonored. Doronilla requested private respondent to present the same check on September 15, 1979 but when the latter presented the check, it was again dishonored. 6

Private respondent referred the matter to a lawyer, who made a written demand upon Doronilla for the return of his client's money. Doronilla issued another check for P212,000.00 in private respondent's favor but the check was again dishonored for insufficiency of funds. 7 Private respondent instituted an action for recovery of sum of money in the Regional Trial Court (RTC) in Pasig, Metro Manila against Doronilla, Sanchez, Dumagpi and petitioner. The case was docketed as Civil Case No. 44485. He also filed criminal actions against Doronilla, Sanchez and Dumagpi in the RTC. However, Sanchez passed away on March 16, 1985 while the case was pending before the trial court. On October 3, 1995, the RTC of Pasig, Branch 157, promulgated its Decision in Civil Case No. 44485, the dispositive portion of which reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered sentencing defendants Arturo J. Doronila, Estrella Dumagpi and Producers Bank of the Philippines to pay plaintiff Franklin Vives jointly and severally (a)the amount of P200,000.00, representing the money deposited, with interest at the legal rate from the filing of the complaint until the same is fully paid; (b)the sum of P50,000.00 for moral damages and a similar amount for exemplary damages; (c)the amount of P40,000.00 for attorney's fees; and (d)the costs of the suit. SO ORDERED.
8

Petitioner appealed the trial court's decision to the Court of Appeals. In its Decision dated June 25, 1991, the appellate court affirmed in toto the decision of the RTC9 It likewise denied with finality petitioner's motion for reconsideration in its Resolution dated May 5, 1994. 10 On June 30, 1994, petitioner filed the present petition, arguing that
I. THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT THE TRANSACTION BETWEEN THE DEFENDANT DORONILLA AND RESPONDENT VIVES WAS ONE OF SIMPLE LOAN AND NOT ACCOMMODATION; II. THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT PETITIONER'S BANK MANAGER, MR. RUFO ATIENZA, CONNIVED WITH THE OTHER DEFENDANTS IN DEFRAUDING PETITIONER (Sic. Should be PRIVATE RESPONDENT) AND AS A CONSEQUENCE, THE PETITIONER SHOULD BE HELD LIABLE UNDER THE PRINCIPLE OF NATURAL JUSTICE; III.

23

THE HONORABLE COURT OF APPEALS ERRED IN ADOPTING THE ENTIRE RECORDS OF THE REGIONAL TRIAL COURT AND AFFIRMING THE JUDGMENT APPEALED FROM, AS THE FINDINGS OF THE REGIONAL TRIAL COURT WERE BASED ON A MISAPPREHENSION OF FACTS; IV. THE HONORABLE COURT OF APPEALS ERRED IN DECLARING THAT THE CITED DECISION IN SALUDARES VS. MARTINEZ, 29 SCRA 745, UPHOLDING THE LIABILITY OF AN EMPLOYER FOR ACTS COMMITTED BY AN EMPLOYEE IS APPLICABLE; V. THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THE DECISION OF THE LOWER COURT THAT HEREIN PETITIONER BANK IS JOINTLY AND SEVERALLY LIABLE WITH THE OTHER DEFENDANTS FOR THE AMOUNT OF P200,000.00 REPRESENTING THE SAVINGS ACCOUNT DEPOSIT, P50,000.00 FOR MORAL DAMAGES, P50,000.00 FOR EXEMPLARY DAMAGES, P40,000.00 FOR ATTORNEY'S FEES AND THE COSTS OF SUIT. 11

Private respondent filed his Comment on September 23, 1994. Petitioner filed its Reply thereto on September 25, 1995. The Court then required private respondent to submit a rejoinder to the reply. However, said rejoinder was filed only on April 21, 1997, due to petitioner's delay in furnishing private respondent with copy of the reply 12 and several substitutions of counsel on the part of private respondent. 13 On January 17, 2001, the Court resolved to give due course to the petition and required the parties to submit their respective memoranda. 14 Petitioner filed its memorandum on April 16, 2001 while private respondent submitted his memorandum on March 22, 2001. Petitioner contends that the transaction between private respondent and Doronilla is a simple loan (mutuum) since all the elements of a mutuum are present: first, what was delivered by private respondent to Doronilla was money, a consumable thing; and second, the transaction was onerous as Doronilla was obliged to pay interest, as evidenced by the check issued by Doronilla in the amount of P212,000.00, or P12,000 more than what private respondent deposited in Sterela's bank account. 15 Moreover, the fact that private respondent sued his good friend Sanchez for his failure to recover his money from Doronilla shows that the transaction was not merely gratuitous but "had a business angle" to it. Hence, petitioner argues that it cannot be held liable for the return of private respondent's P200,000.00 because it is not privy to the transaction between the latter and Doronilla. 16 It argues further that petitioner's Assistant Manager, Mr. Rufo Atienza, could not be faulted for allowing Doronilla to withdraw from the savings account of Sterela since the latter was the sole proprietor of said company. Petitioner asserts that Doronilla's May 8, 1979 letter addressed to the bank, authorizing Mrs. Vives and Sanchez to open a savings account for Sterela, did not contain any authorization for these two to withdraw from said account. Hence, the authority to withdraw therefrom remained exclusively with Doronilla, who was the sole proprietor of Sterela, and who alone had legal title to the savings account. 17 Petitioner points out that no evidence other than the testimonies of private respondent and Mrs. Vives was presented during trial to prove that private respondent deposited his P200,000.00 in Sterela's account for purposes of its incorporation. 18 Hence, petitioner should not be held liable for allowing Doronilla to withdraw from Sterela's savings account. Petitioner also asserts that the Court of Appeals erred in affirming the trial court's decision since the findings of fact therein were not accord with the evidence presented by petitioner during trial to prove that the transaction between private respondent and Doronilla was a mutuum, and that it committed no wrong in allowing Doronilla to withdraw from Sterela's savings account. 19 24

Finally, petitioner claims that since there is no wrongful act or omission on its part, it is not liable for the actual damages suffered by private respondent, and neither may it be held liable for moral and exemplary damages as well as attorney's fees. 20 Private respondent, on the other hand, argues that the transaction between him and Doronilla is not a mutuum but an accommodation, 21 since he did not actually part with the ownership of his P200,000.00 and in fact asked his wife to deposit said amount in the account of Sterela so that a certification can be issued to the effect that Sterela had sufficient funds for purposes of its incorporation but at the same time, he retained some degree of control over his money through his wife who was made a signatory to the savings account and in whose possession the savings account passbook was given. 22 He likewise asserts that the trial court did not err in finding that petitioner, Atienza's employer, is liable for the return of his money. He insists that Atienza, petitioner's assistant manager, connived with Doronilla in defrauding private respondent since it was Atienza who facilitated the opening of Sterela's current account three days after Mrs. Vives and Sanchez opened a savings account with petitioner for said company, as well as the approval of the authority to debit Sterela's savings account to cover any overdrawings in its current account. 23 There is no merit in the petition. At the outset, it must be emphasized that only questions of law may be raised in a petition for review filed with this Court. The Court has repeatedly held that it is not its function to analyze and weigh all over again the evidence presented by the parties during trial. 24 The Court's jurisdiction is in principle limited to reviewing errors of law that might have been committed by the Court of Appeals. 25 Moreover, factual findings of courts, when adopted and confirmed by the Court of Appeals, are final and conclusive on this Court unless these findings are not supported by the evidence on record. 26 There is no showing of any misapprehension of facts on the part of the Court of Appeals in the case at bar that would require this Court to review and overturn the factual findings of that court, especially since the conclusions of fact of the Court of Appeals and the trial court are not only consistent but are also amply supported by the evidence on record. No error was committed by the Court of Appeals when it ruled that the transaction between private respondent and Doronilla was a commodatum and not a mutuum. A circumspect examination of the records reveals that the transaction between them was a commodatum. Article 1933 of the Civil Code distinguishes between the two kinds of loans in this wise:
By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use the same for a certain time and return it, in which case the contract is called a commodatum; or money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid, in which case the contract is simply called a loan or mutuum.

Commodatum is essentially gratuitous.

Simple loan may be gratuitous or with a stipulation to pay interest. In commodatum, the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the borrower.

The foregoing provision seems to imply that if the subject of the contract is a consumable thing, such as money, the contract would be a mutuum. However, there are some instances where a commodatum may have for its object a consumable thing. Article 1936 of the Civil Code provides: 25

Consumable goods may be the subject of commodatum if the purpose of the contract is not the consumption of the object, as when it is merely for exhibition.

Thus, if consumable goods are loaned only for purposes of exhibition, or when the intention of the parties is to lend consumable goods and to have the very same goods returned at the end of the period agreed upon, the loan is a commodatum and not a mutuum.

The rule is that the intention of the parties thereto shall be accorded primordial consideration in determining the actual character of a contract. 27 In case of doubt, the contemporaneous and subsequent acts of the parties shall be considered in such determination. 28 As correctly pointed out by both the Court of Appeals and the trial court, the evidence shows that private respondent agreed to deposit his money in the savings account of Sterela specifically for the purpose of making it appear "that said firm had sufficient capitalization for incorporation, with the promise that the amount shall be returned within thirty (30) days. 29 Private respondent merely "accommodated" Doronilla by lending his money without consideration, as a favor to his good friend Sanchez. It was however clear to the parties to the transaction that the money would not be removed from Sterela's savings account and would be returned to private respondent after thirty (30) days. Doronilla's attempts to return to private respondent the amount of P200,000.00 which the latter deposited in Sterela's account together with an additional P12,000.00, allegedly representing interest on the mutuum, did not convert the transaction from a commodatum into a mutuum because such was not the intent of the parties and because the additional P12,000.00 corresponds to the fruits of the lending of the P200,000.00. Article 1935 of the Civil Code expressly states that "[t]he bailee in commodatum acquires the use of the thing loaned but not its fruits." Hence, it was only proper for Doronilla to remit to private respondent the interest accruing to the latter's money deposited with petitioner. Neither does the Court agree with petitioner's contention that it is not solidarily liable for the return of private respondent's money because it was not privy to the transaction between Doronilla and private respondent. The nature of said transaction, that is, whether it is a mutuum or a commodatum, has no bearing on the question of petitioner's liability for the return of private respondent's money because the factual circumstances of the case clearly show that petitioner, through its employee Mr. Atienza, was partly responsible for the loss of private respondent's money and is liable for its restitution. Petitioner's rules for savings deposits written on the passbook it issued Mrs. Vives on behalf of Sterela for Savings Account No. 10-1567 expressly states that
"2.Deposits and withdrawals must be made by the depositor personally or upon his written authority duly authenticated, and neither a deposit nor a withdrawal will be permitted except upon the production of the depositor savings bank book in which will be entered by the Bank the amount deposited or withdrawn." 30

Said rule notwithstanding, Doronilla was permitted by petitioner, through Atienza, the Assistant Branch Manager for the Buendia Branch of petitioner, to withdraw therefrom even without presenting the passbook (which Atienza very well knew was in the possession of Mrs. Vives), not just once, but several times. Both the Court of Appeals and the trial court found that Atienza allowed said withdrawals because he was party to Doronilla's "scheme" of defrauding private respondent:
xxx xxx xxx

26

But the scheme could not have been executed successfully without the knowledge, help and cooperation of Rufo Atienza, assistant manager and cashier of the Makati (Buendia) branch of the defendant bank. Indeed, the evidence indicates that Atienza had not only facilitated the commission of the fraud but he likewise helped in devising the means by which it can be done in such manner as to make it appear that the transaction was in accordance with banking procedure. To begin with, the deposit was made in defendant's Buendia branch precisely because Atienza was a key officer therein. The records show that plaintiff had suggested that the P200,000.00 be deposited in his bank, the Manila Banking Corporation, but Doronilla and Dumagpi insisted that it must be in defendant's branch Makati for "it will be easier for them to get a certification." In fact before he was introduced to plaintiff, Doronilla had already prepared a letter addressed to the Buendia branch manager authorizing Angeles B. Sanchez and company to open a savings account for Sterela in the amount of P200,000.00, as "per coordination with Mr. Rufo Atienza, Assistant Manager of the Bank . . ." (Exh. 1). This is a clear manifestation that the other defendants had been in consultation with Atienza from the inception of the scheme. Significantly, there were testimonies and admission that Atienza is the brother-in-law of a certain Romeo Mirasol, a friend and business associate of Doronilla. Then there is the matter of the ownership of the fund. Because of the "coordination" between Doronilla and Atienza, the latter knew before hand that the money deposited did not belong to Doronilla nor to Sterela. Aside from such foreknowledge, he was explicitly told by Inocencia Vives that the money belonged to her and her husband and the deposit was merely to accommodate Doronilla. Atienza even declared that the money came from Mrs. Vives. Although the savings account was in the name of Sterela, the bank records disclose that the only ones empowered to withdraw the same were Inocencia Vives and Angeles B. Sanchez. In the signature card pertaining to this account (Exh. J), the authorized signatories were Inocencia Vives &/or Angeles B. Sanchez. Atienza stated that it is the usual banking procedure that withdrawals of savings deposits could only be made by persons whose authorized signatures are in the signature cards on file with the bank. He, however, said that this procedure was not followed here because Sterela was owned by Doronilla. He explained that Doronilla had the full authority to withdraw by virtue of such ownership. The Court is not inclined to agree with Atienza. In the first place, he was all the time aware that the money came from Vives and did not belong to Sterela.. He was also told by Mrs. Vives that they were only accommodating Doronilla so that a certification can be issued to the effect that Sterela had a deposit of so much amount to be sued in the incorporation of the firm. In the second place, the signature of Doronilla was not authorized in so far as that account is concerned inasmuch as he had not signed the signature card provided by the bank whenever a deposit is opened. In the third place, neither Mrs. Vives nor Sanchez had given Doronilla the authority to withdraw. Moreover, the transfer of fund was done without the passbook having been presented. It is an accepted practice that whenever a withdrawal is made in a savings deposit, the bank requires the presentation of the passbook. In this case, such recognized practice was dispensed with. The transfer from the savings account to the current account was without the submission of the passbook which Atienza had given to Mrs. Vives. Instead, it was made to appear in a certification signed by Estrella Dumagpi that a duplicate passbook was issued to Sterela because the original passbook had been surrendered to the Makati Branch in view of a loan accommodation assigning the savings account (Exh. C). Atienza, who undoubtedly had a hand in the execution of this certification, was aware that the contents of the same are not true. He knew that the passbook was in the hands of Mrs. Vives for he was the one who gave it to her. Besides, as assistant manager of the branch and the bank official servicing the savings and current accounts in question, he also was aware that the original passbook was never surrendered. He was also cognizant that Estrella Dumagpi was not among those authorized to withdraw so her certification had no effect whatsoever. The circumstance surrounding the opening of the current account also demonstrate that Atienza's active participation in the perpetration of the fraud and deception that caused the loss. The records indicate that this account was opened three days later after the P200,000.00 was deposited. In spite of

27

his disclaimer, the Court believes that Atienza was mindful and posted regarding the opening of the current account considering that Doronilla was all the while in "coordination" with him. That it was he who facilitated the approval of the authority to debit the savings account to cover any overdrawings in the current account (Exh. 2) is not hard to comprehend. Clearly Atienza had committed wrongful acts that had resulted to the loss subject of this case . . . .
31

Under Article 2180 of the Civil Code, employers shall be held primarily and solidarily liable for damages caused by their employees acting within the scope of their assigned tasks. To hold the employer liable under this provision, it must be shown that an employer-employee relationship exists, and that the employee was acting within the scope of his assigned task when the act complained of was committed. 32 Case law in the United States of America has it that a corporation that entrusts a general duty to its employee is responsible to the injured party for damages flowing from the employee's wrongful act done in the course of his general authority, even though in doing such act, the employee may have failed in its duty to the employer and disobeyed the latter's instructions. 33 There is no dispute that Atienza was an employee of petitioner. Furthermore, petitioner did not deny that Atienza was acting within the scope of his authority as Assistant Branch Manager when he assisted Doronilla in withdrawing funds from Sterela's Savings Account No. 10-1567, in which account private respondent's money was deposited, and in transferring the money withdrawn to Sterela's Current Account with petitioner. Atienza's acts of helping Doronilla, a customer of the petitioner, were obviously done in furtherance of petitioner's interests 34 even though in the process, Atienza violated some of petitioner's rules such as those stipulated in its savings account passbook. 35 It was established that the transfer of funds from Sterela's savings account to its current account could not have been accomplished by Doronilla without the invaluable assistance of Atienza, and that it was their connivance which was the cause of private respondent's loss.

The foregoing shows that the Court of Appeals correctly held that under Article 2180 of the Civil Code, petitioner is liable for private respondent's loss and is solidarily liable with Doronilla and Dumagpi for the return of the P200,000.00 since it is clear that petitioner failed to prove that it exercised due diligence to prevent the unauthorized withdrawals from Sterela's savings account, and that it was not negligent in the selection and supervision of Atienza. Accordingly, no error was committed by the appellate court in the award of actual, moral and exemplary damages, attorney's fees and costs of suit to private respondent. WHEREFORE, the petition is hereby DENIED. The assailed Decision and Resolution of the Court of Appeals are AFFIRMED. SO ORDERED.

Bellosillo, Mendoza, Quisumbing and Austria-Martinez, JJ., concur.

[G.R. No. L-17474. October 25, 1962.] REPUBLIC OF THE PHILIPPINES, plaintiff-appellee, vs. JOSE V. BAGTAS, defendant. FELICIDAD M. BAGTAS, Administratrix of the Intestate Estate left by the late Jose V. Bagtas, petitioner-appellant.

28

D. T. Reyes, Luison & Associates for petitioner-appellant. Solicitor General for plaintiff-appellee.
SYLLABUS 1.CONTRACTS; LOAN OF BULLS FOR BREEDING PURPOSES; NATURE OF CONTRACT AFFECTED BY PAYMENT OF FEE. The loan by the Bureau of Animal Industry to the defendant of three bulls for breeding purposes for a period of one year, later on renewed for another as regards one bull, was subject to the payment by the borrower of breeding fee of 10% of the book value of the bulls. If the breeding fee be considered a compensation, the contract would be a lease of the bulls; it could not be a contract of commodatum, because that contract is essential gratuitous. 2.JUDGMENTS; PROCEEDINGS FOR ADMINISTRATIONS AND SETTLEMENT OF ESTATE OF THE DECEASED; ENFORCEMENT OF MONEY JUDGMENT. Where special proceedings for the administration and settlement of the estate of the deceased have been instituted, the money judgment rendered in favor of a party cannot be enforced by means of a writ of execution, but must be presented to the probate court for payment by the administrator appointed by the court.

DECISION

PADILLA, J :
p

The Court of Appeals certified this case to this Court because only questions of law are raised. On 8 May 1948 Jose V. Bagtas borrowed from the Republic of the Philippines through the Bureau of Animal Industry three bulls: a Red Sindhi with a book value of P1,176.46, a Bhagnari, of P1,320.56 and a Sahiniwal, of P744.46, for a period of one year from 8 May 1948 to 7 May 1949 for breeding purposes subject to a government charge of breeding fee of 10% of the book value of the bulls. Upon the expiration on 7 May 1949 of the contract, the borrower asked for a renewal for another period of one year. However, the Secretary of Agriculture and Natural Resources approved a renewal thereof of only one bull for another year from 8 May 1949 to 7 May 1950 and requested the return of the other two. On 25 March 1950 Jose V. Bagtas wrote to the Director of Animal Industry that he would pay the value of the three bulls. On 17 October 1950 he reiterated his desire to buy them at a value with a deduction of yearly depreciation to be approved by the Auditor General. On 19 October 1950 the Director of Animal Industry advised him that the book value of the three bulls could not be reduced and that they either be returned or their book value paid not later than 31 October 1950. Jose V. Bagtas failed to pay the book value of the three bulls or to return them. So, on 20 December 1950 in the Court of First Instance of Manila the Republic of the Philippines commenced an action against him praying that he be ordered to return the three bulls loaned to him or to pay their book value in the total sum of P3,241.45 and the unpaid breeding fee in the sum of P499.62, both with interests, and costs; and that other just and equitable relief be granted it (civil No. 12818). On 5 July 1951 Jose V. Bagtas, through counsel Navarro, Rosete and Manalo, answered that because of the bad peace and order situation in Cagayan Valley, particularly in the barrio of Baggao, and of the pending appeal he had taken to the Secretary of Agriculture and Natural Resources and the President of the Philippines from the refusal by the Director of Animal Industry to deduct from the book value of the bulls corresponding 29

yearly depreciation of 8% from the date of acquisition, to which depreciation the Auditor General did not object, he could not return the animals nor pay their value and prayed for the dismissal of the complaint. After hearing, on 30 July 1956 the trial court rendered judgment
. . . sentencing the latter (defendant) to pay the sum of P3,625.09 the total value of the three bulls plus the breeding fees in the amount of P626.17 with interest on both sums of (at) the legal rate from the filing of this complaint and costs.

On 9 October 1958 the plaintiff moved ex parte for a writ of execution which the court granted on 18 October and issued on 11 November 1958. On 2 December 1958 it granted an ex-parte motion filed by the plaintiff on 28 November 1958 for the appointment of a special sheriff to serve the writ outside Manila. Of this order appointing a special sheriff, on 6 December 1958 Felicidad M. Bagtas, the surviving spouse of the defendant Jose V. Bagtas who died on 23 October 1951 and as administratrix of his estate, was notified. On 7 January 1959 she filed a motion alleging that on 26 June 1952 the two bulls, Sindhi and Bhagnari, were returned to the Bureau of Animal Industry and that sometime in November 1953 the third bull, the Sahiniwal, died from gunshot wounds inflicted during a Huks raid on Hacienda Felicidad Intal, and praying that the writ of execution be quashed and that a writ of preliminary injunction be issued. On 31 January 1959 the plaintiff objected to her motion. On 6 February 1959 she filed a reply thereto. On the same day, 6 February, the Court denied her motion. Hence, this appeal certified by the Court of Appeals to this Court, as stated at the beginning of this opinion. It is true that on 26 June 1952 Jose M. Bagtas, Jr., son of the appellant by the late defendant, returned the Sindhi and Bhagnari bulls to Roman Remorin, Superintendent of the NVB Station, Bureau of Animal Industry, Bayombong, Nueva Vizcaya, as evidenced by a memorandum receipt signed by the latter (Exhibit 2). That is why in its objection of 31 January 1959 to the appellant's motion to quash the writ of execution the appellee prays "that another writ of execution in the sum of P859.5.3 be issued against the estate of defendant deceased Jos V. Bagtas." She cannot be held liable for the two bulls which already had been returned to and received by the appellee. The appellant contends that the Sahiniwal bull was accidentally killed during a raid by the Huks in November 1953 upon the surrounding barrios of Hacienda Felicidad Intal, Baggao, Cagayan, where the animal was kept, and that as such death was due to force majeure she is relieved from the duty of the returning the bull or paying its value to the appellee. The contention is without merit. The loan by the appellee to the late defendant Jos V. Bagtas of the three bulls for breeding purposes for a period of one year from 8 May 1948 to 7 May 1949, later on renewed for another year as regards one bull, was subject to the payment by the borrower of breeding fee of 10% of the book value of the bulls. The appellant contends that the contract was commodatum and that, for that reason, as the appellee retained ownership or title to the bull it should suffer its loss due to force majeure A contract of commodatum is essentially gratuitous.1 If the breeding fee be considered a compensation, then the contract would be a lease of the bull. Under article 1671 of the Civil Code the lessee would be subject to the responsibilities of a possessor in bad faith, because she had continued possession of the bull after the expiry of the contract. And even if the contract be commodatum, still the appellant is liable, because article 1942 of the Civil Code provides that a bailee in a contract of commodatum
. . . is liable for loss of the thing, even if it should be through a fortuitous event: (2)If he keeps it longer than the period stipulated. . . . (3)If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exempting the bailee from responsibility in case of a fortuitous event:

30

The original period of the loan was from 8 May 1948 to 7 May 1949. The loan of one bull was renewed for another period of one year to end on 8 May 1950. But the appellant kept and used the bull until November 1953 when during a Huk raid it was killed by stray bullets. Furthermore, when lent and delivered to the deceased husband of the appellant the bulls had each an appraised book value, to wit: the Sindhi, at P1,176.46; the Bhagnari, at P1,320.56 and the Sahiniwal; at P744.46. It was not stipulated that in case of loss of the bull due to fortuitous event the late husband of the appellant would be exempt from liability. The appellant's contention that the demand or prayer by the appellee for the return of the bull or the payment of its value being a money claim should be presented or filed in the intestate proceedings of the defendant who died on 23 October 1951, is not altogether without merit. However, the claim that his civil personality having ceased to exist the trial court lost jurisdiction over the case against him, is untenable, because section 17 of Rule 3 of the Rules of Court provides that
After a party dies and the claim is not thereby extinguished, the court shall order, upon proper notice, the legal representative of the deceased to appear and to be substituted for the deceased, within a period of thirty (30) days, or within such time as may be granted . . . .

and after the defendant's death on 23 October 1951 his counsel failed to comply with section 16 of Rule 3 which provides that
Whenever a party to a pending case dies . . . it shall be the duty of his attorney to inform the court promptly of such death . . . and to give the name and residence of the executor or administrator, guardian, or other legal representative of the deceased . . .

The notice by the probate court and its publication in the Voz de Manila that Felicidad M. Bagtas had been issued letters of administration of the estate of the late Jos V. Bagtas and that "all persons having claims for money against the deceased Jos V. Bagtas, arising from contract, express or implied, whether the same be due, not due, or contingent, for funeral expenses and expenses of the last sickness of the said decedent, and judgment for money against him, to file said claims with the Clerk of this Court at the City Hall Bldg., Highway 54, Quezon City, within six (6) months from the date of the first publication of this order, serving a copy thereof upon the aforementioned Felicidad M. Bagtas, the appointed administratrix of the estate of the said deceased," is not a notice to the court and the appellee who were to be notified of the defendant's death in accordance with the abovequoted rule, and there was no reason for such failure to notify, because the attorney who appeared for the defendant was the same who represented the administratrix in the special proceedings instituted for the administration and settlement of his estate. The appellee or its attorney or representative could not be expected to know of the death of the defendant or of the administration proceedings of his estate instituted in another court, if the attorney for the deceased defendant did not notify the plaintiff or its attorney of such death as required by the rule.

As the appellant already had returned the two bulls to the appellee, the estate of the late defendant is only liable for the sum of P859.63, the value of the bull which has not been returned to the appellee, because it was killed while in the custody of the administratrix of his estate. This is the amount prayed for by the appellee in its objection on 31 January 1959 to the motion filed on 7 January 1959 by the appellant for the quashing of the writ of execution. Special proceedings for the administration and settlement of the estate of the deceased Jos V. Bagtas having been instituted in the Court of First Instance of Rizal (Q-200), the money judgment rendered in favor of the appellee cannot be enforced by means of a writ of execution but must be presented to the probate court for payment by the appellant, the administratrix appointed by the court. 31

ACCORDINGLY, the writ of execution appealed from is set aside, without pronouncement as to costs.

Bengzon, C.J., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Paredes, Dizon, Regala and Makalintal, JJ., concur. Barrera, J., concurs in the result.

[G.R. No. 46240. November 3, 1939.] MARGARITA QUINTOS and ANGEL A. ANSALDO, plaintiffs-appellants, vs. BECK, defendant-appellee.

Mauricio Carlos; for appellants. Felipe Buencamino, Jr.; for appellee.

SYLLABUS 1.COMMODATUM; OBLIGATION OF THE PARTIES. The contract entered into between the parties is one of commodatum, because under t the plaintiff gratuitously granted the use of the furniture to the defendant reserving for herself the ownership thereof, by this contract the defendant bound himself to return the furniture to the plaintiff, upon the latter's demand (Clause 7 of the contract, Exhibit "A"; articles 1740, paragraph, and 1741 of the Civil Code). The obligation voluntarily assumed by the defendant to return the furniture upon the plaintiff's demand means that he should return all of them to the plaintiff at the latter's residence or house. The defendant did not comply with this obligation when he merely placed them at the disposal of the plaintiff, retaining for his benefit the three gas heaters and the four electric lamps. 2.ID.; ID.; EXPENSES FOR DEPOSIT OF FURNITURE. AS the defendant had voluntarily undertaken to return all the furniture to the plaintiff, upon the latter's demand, the Court could not legally compel her to bear the expenses occasioned by the deposit of the furniture at the defendant's behest. The latter, as bailee, was not entitled to place the furniture on deposit; nor was the plaintiff under a duty to accept the offer to return the furniture, because the defendant wanted to retain the three gas heaters and the four electric lamps. 3.ID.; ID.; VALUE OF FURNITURE. AS to the value of the furniture. we do not believe that the plaintiff is entitled to the payment thereof by the defendant in case of his inability to return some of the furniture, because under paragraph 6 of the stipulation of facts, the defendant has neither agreed to nor admitted the correctness of the said value. Should the defendant fail to deliver some of the furniture, the value thereof should be later determined by the trial Court through evidence which the parties may desire to present. 4.COSTS OF LITIGATION. The costs in both instances should be borne by the defendant because the plaintiff is the prevailing party (section 487 of the Code of Civil Procedure). The defendant was the one who breached the contract of Commodatum, and without any reason he refused to return and deliver all the furniture upon the plaintiff's demand. In these circumstances, it is just and equitable that he pay the legal expenses and other judicial costs which the plaintiff would not have otherwise defrayed.

32

DECISION

IMPERIAL, J :
p

The plaintiff brought this action to compel the defendant to return to her certain furniture which she lent him for his use. She appealed from the judgment of the Court of First Instance of Manila which ordered that the defendant return to her the three gas heaters and the four electric lamps found in the possession of the Sheriff of said city, that she call for the other furniture from the said Sheriff of Manila at her own expense, and that the fees which the sheriff may charge for the deposit of the furniture be paid pro rata by both parties, without pronouncement as to the costs. The defendant was a tenant of the plaintiff and as such occupied the latter's house on M. H. del Pilar street, No. 1175. On January 14, 1936, upon the novation of the contract of lease between the plaintiff and the defendant, the former gratuitously granted to the latter the use of the furniture described in the third paragraph of the stipulation of facts, subject to the condition that the defendant would return them to the plaintiff upon the latter's demand. The plaintiff sold the property to Maria Lopez and Rosario Lopez and on September 14, 1936, these three notified the defendant of the conveyance, giving him sixty days to vacate the premises under one of the clauses of the contract of lease. There after the plaintiff required the defendant to return all the furniture transferred to him for his use. The defendant answered that she may call for them in the house where they are found. On November 5, 1936, the defendant, through another person, wrote to the plaintiff reiterating that she may call for the furniture in the ground floor of the house. On the 7th of the same month, the defendant wrote another letter to the plaintiff informing her that he could not give up the three gas heaters and the four electric lamps because he would use them until the 15th of the same month when the lease is due to expire. The plaintiff refused to get the furniture in view of the fact that the defendant had declined to make delivers of all of them. On November 15th, before vacating the house, the defendant deposited with the Sheriff all the furniture belonging to the plaintiff and they are now on deposit in the warehouse situated at No. 1521, Rizal Avenue. in the custody of the said sheriff. In their seven assigned errors the plaintiffs contend that the trial court incorrectly applied the law: in holding that they violated the contract by not calling for all the furniture on November 5, 1936, when the defendant placed them at their disposal; in not ordering the defendant to pay them the value of the furniture in case they are not delivered; in holding that they should get all the furniture from the sheriff at their expenses; in ordering them to pay one-half of the expenses claimed by the Sheriff for the deposit of the furniture; in ruling that both parties should pay their respective legal expenses or the costs; and in denying the motions for reconsideration and new trial. To dispose of the case, it is only necessary to decide whether the defendant complied with his obligation to return the furniture upon the plaintiff's demand; whether the latter is bound to bear the deposit fees thereof, and whether she is entitled to the costs of litigation. The contract entered into between the parties is one of commodatum, because under it the plaintiff gratuitously granted the use of the furniture to the defendant, reserving for herself the ownership thereof; by this contract the defendant bound himself to return the furniture to the plaintiff, upon the latter's demand (clause 7 of the contract, Exhibit A; articles 1740, paragraph 1, and 1741 of the Civil Code) The obligation voluntarily assumed by the defendant to return the furniture upon the plaintiff's demand, means that he should return all of them to the plaintiff at the latter's residence or house. The defendant did not comply with this obligation when he merely placed them at the disposal of the plaintiff, retaining for his benefit the three gas heaters and the four electric lamps. The provisions of article 1169 of the Civil Code cited by counsel for the parties are not squarely applicable. The trial court, therefore, erred when it came to the legal conclusion that the plaintiff failed to comply with her obligation to get the furniture when they were offered to her. 33

As the defendant had voluntarily undertaken to return all the furniture to the plaintiff, upon the latter's demand, the Court could not legally compel her to bear the expenses occasioned by the deposit of the furniture at the defendant's behest. The latter, as bailee, was not entitled to place the furniture on deposit; nor was the plaintiff under a duty to accept the offer to return the furniture, because the defendant wanted to retain the three gas heaters and the four electric lamps. As to the value of the furniture, we do not believe that the plaintiff is entitled to the payment thereof by the defendant in case of his inability to return some of the furniture, because under paragraph 6 of the stipulation of facts, the defendant has neither agreed to nor admitted the correctness of the said value. Should the defendant fail to deliver some of the furniture, the value thereof should be later determined by the trial Court through evidence which the parties may desire to present. The costs in both instances should be borne by the defendant because the plaintiff is the prevailing party (section 487 of the Code of Civil Procedure). The defendant was the one who breached the contract of commodatum, and without any reason he refused to return and deliver all the furniture upon the plaintiff's demand. In these circumstances, it is just and equitable that he pay the legal expenses and other judicial costs which the plaintiff would not have otherwise defrayed. The appealed judgment is modified and the defendant is ordered to return and deliver to the plaintiff, in the residence or house of the latter, all the furniture described in paragraph 3 of the stipulation of facts Exhibit A. The expenses which may be occasioned by the delivery to and deposit of the furniture with the Sheriff shall be for the account of the defendant. The defendant shall pay the costs in both instances. So ordered.

Avancea, C.J., Villa-Real, Diaz, Laurel, Concepcionand Moran, JJ., concur.

[G.R. No. 175139. April 18, 2012.] HERMOJINA ESTORES, petitioner, vs. SPOUSES ARTURO and LAURA SUPANGAN, respondents.

DECISION

DEL CASTILLO, J :
p

The only issue posed before us is the propriety of the imposition of interest and attorney's fees.

acIASE

Assailed in this Petition for Review 1 filed under Rule 45 of the Rules of Court is the May 12, 2006 Decision 2 of the Court of Appeals (CA) in CA-G.R. CV No. 83123, the dispositive portion of which reads:
WHEREFORE, the appealed decision is MODIFIED. The rate of interest shall be six percent (6%) per annum, computed from September 27, 2000 until its full payment before finality of the judgment. If the adjudged principal and the interest (or any part thereof) remain unpaid thereafter, the interest rate shall be adjusted to twelve percent (12%) per annum, computed from the time the judgment becomes final and executory until it is fully satisfied. The award of attorney's fees is hereby reduced to P100,000.00. Costs against the defendants-appellants. SO ORDERED.
3

34

Also assailed is the August 31, 2006 Resolution 4 denying the motion for reconsideration.

Factual Antecedents
On October 3, 1993, petitioner Hermojina Estores and respondent-spouses Arturo and Laura Supangan entered into a Conditional Deed of Sale 5 whereby petitioner offered to sell, and respondent-spouses offered to buy, a parcel of land covered by Transfer Certificate of Title No. TCT No. 98720 located at Naic, Cavite for the sum of P4.7 million. The parties likewise stipulated, among others, to wit:
xxx xxx xxx 1.Vendor will secure approved clearance from DAR requirements of which are (sic): a)Letter request b)Title c)Tax Declaration d)Affidavit of Aggregate Landholding Vendor/Vendee e)Certification from the Prov'l. Assessor's as to Landholdings of Vendor/Vendee f)Affidavit of Non-Tenancy g)Deed of Absolute Sale xxx xxx xxx 4.Vendee shall be informed as to the status of DAR clearance within 10 days upon signing of the documents.
aSAHCE

xxx xxx xxx 6.Regarding the house located within the perimeter of the subject [lot] owned by spouses [Magbago], said house shall be moved outside the perimeter of this subject property to the 300 sq. m. area allocated for [it]. Vendor hereby accepts the responsibility of seeing to it that such agreement is carried out before full payment of the sale is made by vendee. 7.If and after the vendor has completed all necessary documents for registration of the title and the vendee fails to complete payment as per agreement, a forfeiture fee of 25% or downpayment, shall be applied. However, if the vendor fails to complete necessary documents within thirty days without any sufficient reason, or without informing the vendee of its status, vendee has the right to demand return of full amount of down payment. xxx xxx xxx 9.As to the boundaries and partition of the lots (15,018 sq. m. and 300 sq. m.) Vendee shall be informed immediately of its approval by the LRC. 10.The vendor assures the vendee of a peaceful transfer of ownership.

35

xxx xxx xxx

After almost seven years from the time of the execution of the contract and notwithstanding payment of P3.5 million on the part of respondent-spouses, petitioner still failed to comply with her obligation as expressly provided in paragraphs 4, 6, 7, 9 and 10 of the contract. Hence, in a letter 7 dated September 27, 2000, respondent-spouses demanded the return of the amount of P3.5 million within 15 days from receipt of the letter. In reply, 8 petitioner acknowledged receipt of the P3.5 million and promised to return the same within 120 days. Respondent-spouses were amenable to the proposal provided an interest of 12% compounded annually shall be imposed on the P3.5 million. 9 When petitioner still failed to return the amount despite demand, respondent-spouses were constrained to file a Complaint 10for sum of money before the Regional Trial Court (RTC) of Malabon against herein petitioner as well as Roberto U. Arias (Arias) who allegedly acted as petitioner's agent. The case was docketed as Civil Case No. 3201-MN and raffled off to Branch 170. In their complaint, respondent-spouses prayed that petitioner and Arias be ordered to:
1.Pay the principal amount of P3,500,000.00 plus interest of 12% compounded annually starting October 1, 1993 or an estimated amount of P8,558,591.65; 2.Pay the following items of damages: a)Moral damages in the amount of P100,000.00; b)Actual damages in the amount of P100,000.00; c)Exemplary damages in the amount of P100,000.00; d)[Attorney's] fee in the amount of P50,000.00 plus 20% of recoverable amount from the [petitioner]. e)[C]ost of suit.
11

In their Answer with Counterclaim, 12 petitioner and Arias averred that they are willing to return the principal amount of P3.5 million but without any interest as the same was not agreed upon. In their Pre-Trial Brief, 13 they reiterated that the only remaining issue between the parties is the imposition of interest. They argued that since the Conditional Deed of Sale provided only for the return of the downpayment in case of breach, they cannot be held liable to pay legal interest as well. 14
TIcEDC

In its Pre-Trial Order 15 dated June 29, 2001, the RTC noted that "the parties agreed that the principal amount of 3.5 million pesos should be returned to the [respondent-spouses] by the [petitioner] and the issue remaining [is] whether . . . [respondent-spouses] are entitled to legal interest thereon, damages and attorney's fees." 16 Trial ensued thereafter. After the presentation of the respondent-spouses' evidence, the trial court set the presentation of Arias and petitioner's evidence on September 3, 2003. 17 However, despite several postponements, petitioner and Arias failed to appear hence they were deemed to have waived the presentation of their evidence. Consequently, the case was deemed submitted for decision. 18

Ruling of the Regional Trial Court

On May 7, 2004, the RTC rendered its Decision 19 finding respondent-spouses entitled to interest but only at the rate of 6% per annum and not 12% as prayed by them. 20 It also found respondent-spouses entitled to attorney's fees as they were compelled to litigate to protect their interest. 21 36

The dispositive portion of the RTC Decision reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the [respondent-spouses] and ordering the [petitioner and Roberto Arias] to jointly and severally: 1.Pay [respondent-spouses] the principal amount of Three Million Five Hundred Thousand pesos (P3,500,000.00) with an interest of 6% compounded annually starting October 1, 1993 and attorney's fee in the amount of Fifty Thousand pesos (P50,000.00) plus 20% of the recoverable amount from the defendants and cost of the suit. The Compulsory Counter Claim is hereby dismissed for lack of factual evidence. SO ORDERED.
22

Ruling of the Court of Appeals

Aggrieved, petitioner and Arias filed their notice of appeal. 23 The CA noted that the only issue submitted for its resolution is "whether it is proper to impose interest for an obligation that does not involve a loan or forbearance of money in the absence of stipulation of the parties." 24 On May 12, 2006, the CA rendered the assailed Decision affirming the ruling of the RTC finding the imposition of 6% interest proper. 25 However, the same shall start to run only from September 27, 2000 when respondent-spouses formally demanded the return of their money and not from October 1993 when the contract was executed as held by the RTC. The CA also modified the RTC's ruling as regards the liability of Arias. It held that Arias could not be held solidarily liable with petitioner because he merely acted as agent of the latter. Moreover, there was no showing that he expressly bound himself to be personally liable or that he exceeded the limits of his authority. More importantly, there was even no showing that Arias was authorized to act as agent of petitioner. 26 Anent the award of attorney's fees, the CA found the award by the trial court (P50,000.00 plus 20% of the recoverable amount) excessive 27 and thus reduced the same to P100,000.00. 28
AcSHCD

The dispositive portion of the CA Decision reads:

WHEREFORE, the appealed decision is MODIFIED. The rate of interest shall be six percent (6%) per annum, computed from September 27, 2000 until its full payment before finality of the judgment. If the adjudged principal and the interest (or any part thereof) remain[s] unpaid thereafter, the interest rate shall be adjusted to twelve percent (12%) per annum, computed from the time the judgment becomes final and executory until it is fully satisfied. The award of attorney's fees is hereby reduced to P100,000.00. Costs against the [petitioner]. SO ORDERED.
29

Petitioner moved for reconsideration which was denied in the August 31, 2006 Resolution of the CA. Hence, this petition raising the sole issue of whether the imposition of interest and attorney's fees is proper.

Petitioner's Arguments
Petitioner insists that she is not bound to pay interest on the P3.5 million because the Conditional Deed of Sale only provided for the return of the downpayment in case of failure to comply with her obligations. Petitioner also argues that the award of attorney's fees in favor of the respondent-spouses is unwarranted because it 37

cannot be said that the latter won over the former since the CA even sustained her contention that the imposition of 12% interest compounded annually is totally uncalled for.

Respondent-spouses' Arguments
Respondent-spouses aver that it is only fair that interest be imposed on the amount they paid considering that petitioner failed to return the amount upon demand and had been using the P3.5 million for her benefit. Moreover, it is undisputed that petitioner failed to perform her obligations to relocate the house outside the perimeter of the subject property and to complete the necessary documents. As regards the attorney's fees, they claim that they are entitled to the same because they were forced to litigate when petitioner unjustly withheld the amount. Besides, the amount awarded by the CA is even smaller compared to the filing fees they paid. Our Ruling The petition lacks merit.

Interest may be imposed even in the absence of stipulation in the contract.

We sustain the ruling of both the RTC and the CA that it is proper to impose interest notwithstanding the absence of stipulation in the contract. Article 2210 of the Civil Code expressly provides that "[i]nterest may, in the discretion of the court, be allowed upon damages awarded for breach of contract." In this case, there is no question that petitioner is legally obligates to return the P3.5 million because of her failure to fulfill the obligation under the Conditional Deed of Sale, despite demand. She has in fact admitted that the conditions were not fulfilled and that she was willing to return the full amount of P3.5 million but has not actually done so. Petitioner enjoyed the use of the money from the time it was given to her 30 until now. Thus, she is already in default of her obligation from the date of demand, i.e., on September 27, 2000.

The interest at the rate of 12% is applicable in the instant case.

Anent the interest rate, the general rule is that the applicable rate of interest "shall be computed in accordance with the stipulation of the parties." 31 Absent any stipulation, the applicable rate of interest shall be 12% per annum "when the obligation arises out of a loan or a forbearance of money, goods or credits. In other cases, it shall be six percent (6%)." 32 In this case, the parties did not stipulate as to the applicable rate of interest. The only question remaining therefore is whether the 6% as provided under Article 2209 of the Civil Code, or 12% under Central Bank Circular No. 416, is due.
cACDaH

The contract involved in this case is admittedly not a loan but a Conditional Deed of Sale. However, the contract provides that the seller (petitioner) must return the payment made by the buyer (respondentspouses) if the conditions are not fulfilled. There is no question that they have in fact, not been fulfilled as the seller (petitioner) has admitted this. Notwithstanding demand by the buyer (respondent-spouses), the seller (petitioner) has failed to return the money and should be considered in default from the time that demand was made on September 27, 2000. Even if the transaction involved a Conditional Deed of Sale, can the stipulation governing the return of the money be considered as a forbearance of money which required payment of interest at the rate of 12%? We believe so. 38

In Crismina Garments, Inc. v. Court of Appeals, 33 "forbearance" was defined as a "contractual obligation of lender or creditor to refrain during a given period of time, from requiring the borrower or debtor to repay a loan or debt then due and payable." This definition describes a loan where a debtor is given a period within which to pay a loan or debt. In such case, "forbearance of money, goods or credits" will have no distinct definition from a loan. We believe however, that the phrase "forbearance of money, goods or credits" is meant to have a separate meaning from a loan, otherwise there would have been no need to add that phrase as a loan is already sufficiently defined in the Civil Code. 34 Forbearance of money, goods or credits should therefore refer to arrangements other than loan agreements, where a person acquiesces to the temporary use of his money, goods or credits pending happening of certain events or fulfillment of certain conditions. In this case, the respondent-spouses parted with their money even before the conditions were fulfilled. They have therefore allowed or granted forbearance to the seller (petitioner) to use their money pending fulfillment of the conditions. They were deprived of the use of their money for the period pending fulfillment of the conditions and when those conditions were breached, they are entitled not only to the return of the principal amount paid, but also to compensation for the use of their money. And the compensation for the use of their money, absent any stipulation, should be the same rate of legal interest applicable to a loan since the use or deprivation of funds is similar to a loan. Petitioner's unwarranted withholding of the money which rightfully pertains to respondent-spouses amounts to forbearance of money which can be considered as an involuntary loan. Thus, the applicable rate of interest is 12% per annum. In Eastern Shipping Lines, Inc. v. Court of Appeals, 35 cited in Crismina Garments, Inc. v. Court of Appeals, 36 the Court suggested the following guidelines:
I.When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasidelicts 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 ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged.
DSTCIa

39

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. 37

Eastern Shipping Lines, Inc. v. Court of Appeals

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

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

The award of attorney's fees is warranted.

Under Article 2208 of the Civil Code, attorney's fees may be recovered:
xxx xxx xxx (2)When the defendant's act or omission has compelled the plaintiff to litigate with third persons or to incur expenses to protect his interest; xxx xxx xxx (11)In any other case where the court deems it just and equitable that attorney's fees and expenses of litigation should be recovered. In all cases, the attorney's fees and expenses of litigation must be reasonable.

Considering the circumstances of the instant case, we find respondent-spouses entitled to recover attorney's fees. There is no doubt that they were forced to litigate to protect their interest, i.e., to recover their money. However, we find the amount of P50,000.00 more appropriate in line with the policy enunciated in Article 2208 of the Civil Code that the award of attorney's fees must always be reasonable. WHEREFORE, the Petition for Review is DENIED. The May 12, 2006 Decision of the Court of Appeals in CAG.R. CV No. 83123 is AFFIRMED withMODIFICATIONS that the rate of interest shall be twelve percent (12%) per annum, computed from September 27, 2000 until fully satisfied. The award of attorney's fees is further reduced to P50,000.00. SO ORDERED.
SCADIT

Corona, C.J., Leonardo-de Castro, Bersamin and Villarama, Jr., JJ., concur.

[G.R. No. 133632. February 15, 2002.] BPI INVESTMENT CORPORATION, petitioner, vs. HON. COURT OF APPEALS and ALS MANAGEMENT & DEVELOPMENT CORPORATION,respondents. 40

Benedicto Tale Versoza & Associates for petitioner. Vicente B. Chuidian for private respondent.
SYNOPSIS The appellate court affirmed the judgment of the Regional Trial Court of Pasig City in a case for foreclosure of mortgage by petitioner BPI Investment Corporation (BPIIC for brevity) against private respondents ALS Management and Development Corporation and Antonio K. Litonjua, consolidated with Civil Case No. 52093, for damages with prayer for the issuance of a writ of preliminary injunction by the private respondents against said petitioner. The trial court held that private respondents were not in default in the payment of their monthly amortization, hence, the extrajudicial foreclosure conducted by BPIIC was premature and made in bad faith. In the instant petition, petitioner contended that the Court of Appeals erred in ruling that because a simple loan is perfected upon the delivery of the object of the contract, the loan contract in this case was perfected only on September 13, 1982. Petitioner claimed that a contract of loan is a consensual contract, and a loan contract is perfected at the time the contract of mortgage is executed conformably with the Court's ruling in Bonnevie v. Court of Appeals. In the present case, the loan contract was perfected on March 31, 1981, the date when the mortgage deed was executed, hence, the amortization and interests on the loan should be computed from said date. The Supreme Court affirmed the judgment of the Court of Appeals with modification as to the damages. The Court ruled that a loan contract is not a consensual contract but a real contract. It is perfected only upon the delivery of the object of the contract. Petitioner misapplied Bonnevie. The contract in Bonnevie declared by the Court as a perfected consensual contract falls under the first clause of Article 1934, Civil Code. It is an accepted promise to deliver something by way of simple loan. In the present case, the loan contract between BPI, on the one hand, and ALS and Litonjua, on the other, was perfected only on September 13, 1982, the date of the second release of the loan. Following the intentions of the parties on the commencement of the monthly amortization, as found by the Court of Appeals, private respondents' obligation to pay commenced only on October 13, 1982, a month after the perfection of the contract. SYLLABUS 1.CIVIL LAW; CONTRACTS; LOAN; NOT A CONSENSUAL CONTRACT BUT A REAL CONTRACT; IT IS PERFECTED ONLY UPON DELIVERY OF THE OBJECT OF THE CONTRACT; CASE AT BAR. A loan contract is not a consensual contract but a real contract. It is perfected only upon the delivery of the object of the contract. Petitioner misapplied Bonnevie. The contract in Bonnevie declared by this Court as a perfected consensual contract falls under the first clause of Article 1934, Civil Code. It is an accepted promise to deliver something by way of simple loan. In Saura Import and Export Co. Inc. vs. Development Bank of the Philippines, 44 SCRA 445, petitioner applied for a loan of P500,000 with respondent bank. The latter approved the application through a board resolution. Thereafter, the corresponding mortgage was executed and registered. However, because of acts attributable to petitioner, the loan was not released. Later, petitioner instituted an action for damages. We recognized in this case, a perfected consensual contract which under normal circumstances could have made the bank liable for not releasing the loan. However, since the fault was attributable to petitioner therein, the court did not award it damages. A perfected consensual contract, as shown above, can give rise to an action for damages. However, said contract does not constitute the real contract of loan which requires the delivery of the object of the contract for its perfection and which gives rise to obligations only on the part of the borrower. In the present case, the loan contract between BPI, on the one hand, and ALS and Litonjua, on the other, was perfected only on September 13, 1982, the date of the second release of the loan. Following the intentions of the parties on the commencement of the monthly amortization, 41

as found by the Court of Appeals, private respondents' obligation to pay commenced only on October 13, 1982, a month after the perfection of the contract. 2.ID.; ID.; ID.; INVOLVES RECIPROCAL OBLIGATION WHEREIN THE OBLIGATION OR PROMISE OF EACH PARTY IS THE CONSIDERATION FOR THAT OF THE OTHER. We also agree with private respondents that a contract of loan involves a reciprocal obligation, wherein the obligation or promise of each party is the consideration for that of the other. As averred by private respondents, the promise of BPIIC to extend and deliver the loan is upon the consideration that ALS and Litonjua shall pay the monthly amortization commencing on May 1, 1981, one month after the supposed release of the loan. It is a basic principle in reciprocal obligations that neither party incurs in delay, if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. Only when a party has performed his part of the contract can he demand that the other party also fulfills his own obligation and if the latter fails, default sets in. Consequently, petitioner could only demand for the payment of the monthly amortization after September 13, 1982 for it was only then when it complied with its obligation under the loan contract. Therefore, in computing the amount due as of the date when BPIIC extrajudicially caused the foreclosure of the mortgage, the starting date is October 13, 1982 and not May 1, 1981.
HESCcA

3.ID.; DAMAGES; NO BASIS FOR AWARD OF MORAL AND EXEMPLARY DAMAGES; NOMINAL DAMAGES AWARDED TO RESPONDENTS BY REASON OF PETITIONER'S NEGLIGENCE. As admitted by private respondents themselves, they were irregular in their payment of monthly amortization. Conformably with our ruling in SSS, we can not properly declare BPIIC in bad faith. Consequently, we should rule out the award of moral and exemplary damages. However, in our view, BPIIC was negligent in relying merely on the entries found in the deed of mortgage, without checking and correspondingly adjusting its records on the amount actually released to private respondents and the date when it was released. Such negligence resulted in damage to private respondents, for which an award of nominal damages should be given in recognition of their rights which were violated by BPIIC. For this purpose, the amount of P25,000 is sufficient.

DECISION

QUISUMBING, J :
p

This petition for certiorari assails the decision dated February 28, 1997, of the Court of Appeals and its resolution dated April 21, 1998, in CA-G.R. CV No. 38887. The appellate court affirmed the judgment of the Regional Trial Court of Pasig City, Branch 151, in (a) Civil Case No. 11831, for foreclosure of mortgage by petitioner BPI Investment Corporation (BPIIC for brevity) against private respondents ALS Management and Development Corporation and Antonio K. Litonjua, 1 consolidated with (b) Civil Case No. 52093, for damages with prayer for the issuance of a writ of preliminary injunction by the private respondents against said petitioner. The trial court had held that private respondents were not in default in the payment of their monthly amortization, hence, the extrajudicial foreclosure conducted by BPIIC was premature and made in bad faith. It awarded private respondents the amount of P300,000 for moral damages, P50,000 for exemplary damages, and P50,000 for attorney's fees and expenses for litigation. It likewise dismissed the foreclosure suit for being premature. The facts are as follows:

42

Frank Roa obtained a loan at an interest rate of 16% per annum from Ayala Investment and Development Corporation (AIDC), the predecessor of petitioner BPIIC, for the construction of a house on his lot in New Alabang Village, Muntinlupa. Said house and lot were mortgaged to AIDC to secure the loan. Sometime in 1980, Roa sold the house and lot to private respondents ALS and Antonio Litonjua for P850,000. They paid P350,000 in cash and assumed the P500,000 balance of Roa's indebtedness with AIDC. The latter, however, was not willing to extend the old interest rate to private respondents and proposed to grant them a new loan of P500,000 to be applied to Roa's debt and secured by the same property, at an interest rate of 20% per annum and service fee of 1% per annum on the outstanding principal balance payable within ten years in equal monthly amortization of P9,996.58 and penalty interest at the rate of 21% per annum per day from the date the amortization became due and payable. Consequently, in March 1981, private respondents executed a mortgage deed containing the above stipulations with the provision that payment of the monthly amortization shall commence on May 1, 1981. On August 13, 1982, ALS and Litonjua updated Roa's arrearages by paying BPIIC the sum of P190,601.35. This reduced Roa's principal balance to P457,204.90 which, in turn, was liquidated when BPIIC applied thereto the proceeds of private respondents' loan of P500,000. On September 13, 1982, BPIIC released to private respondents P7,146.87, purporting to be what was left of their loan after full payment of Roa's loan. In June 1984, BPIIC instituted foreclosure proceedings against private respondents on the ground that they failed to pay the mortgage indebtedness which from May 1, 1981 to June 30, 1984, amounted to Four Hundred Seventy Five Thousand Five Hundred Eighty Five and 31/100 Pesos (P475,585.31). A notice of sheriff's sale was published on August 13, 1984. On February 28, 1985, ALS and Litonjua filed Civil Case No. 52093 against BPIIC. They alleged, among others, that they were not in arrears in their payment, but in fact made an overpayment as of June 30, 1984. They maintained that they should not be made to pay amortization before the actual release of the P500,000 loan in August and September 1982. Further, out of the P500,000 loan, only the total amount of P464,351.77 was released to private respondents. Hence, applying the effects of legal compensation, the balance of P35,648.23 should be applied to the initial monthly amortization for the loan.

On August 31, 1988, the trial court rendered its judgment in Civil Case Nos. 11831 and 52093, thus:
WHEREFORE, judgment is hereby rendered in favor of ALS Management and Development Corporation and Antonio K. Litonjua and against BPI Investment Corporation, holding that the amount of loan granted by BPI to ALS and Litonjua was only in the principal sum of P464,351.77, with interest at 20% plus service charge of 1% per annum, payable on equal monthly and successive amortizations at P9,283.83 for ten (10) years or one hundred twenty (120) months. The amortization schedule attached as Annex "A" to the "Deed of Mortgage" is correspondingly reformed as aforestated.

The Court further finds that ALS and Litonjua suffered compensable damages when BPI caused their publication in a newspaper of general circulation as defaulting debtors, and therefore orders BPI to pay ALS and Litonjua the following sums:
a)P300,000.00 for and as moral damages; b)P50,000.00 as and for exemplary damages;

43

c)P50,000.00 as and for attorney's fees and expenses of litigation. The foreclosure suit (Civil Case No. 11831) is hereby DISMISSED for being premature. Costs against BPI. SO ORDERED.
2

Both parties appealed to the Court of Appeals. However, private respondents' appeal was dismissed for nonpayment of docket fees. On February 28, 1997, the Court of Appeals promulgated its decision, the dispositive portion reads:
WHEREFORE, finding no error in the appealed decision the same is hereby AFFIRMED in toto. SO ORDERED.
3

In its decision, the Court of Appeals reasoned that a simple loan is perfected only upon the delivery of the object of the contract. The contract of loan between BPIIC and ALS & Litonjua was perfected only on September 13, 1982, the date when BPIIC released the purported balance of the P500,000 loan after deducting therefrom the value of Roa's indebtedness. Thus, payment of the monthly amortization should commence only a month after the said date, as can be inferred from the stipulations in the contract. This, despite the express agreement of the parties that payment shall commence on May 1, 1981. From October 1982 to June 1984, the total amortization due was only P194,960.43. Evidence showed that private respondents had an overpayment, because as of June 1984, they already paid a total amount of P201,791.96. Therefore, there was no basis for BPIIC to extrajudicially foreclose the mortgage and cause the publication in newspapers concerning private respondents' delinquency in the payment of their loan. This fact constituted sufficient ground for moral damages in favor of private respondents. The motion for reconsideration filed by petitioner BPIIC was likewise denied, hence this petition, where BPIIC submits for resolution the following issues: I.WHETHER OR NOT A CONTRACT OF LOAN IS A CONSENSUAL CONTRACT IN THE LIGHT OF THE RULE LAID DOWN IN BONNEVIE VS. COURT OF APPEALS, 125 SCRA 122. II.WHETHER OR NOT BPI SHOULD BE HELD LIABLE FOR MORAL AND EXEMPLARY DAMAGES AND ATTORNEY'S FEES IN THE FACE OF IRREGULAR PAYMENTS MADE BY ALS AND OPPOSED TO THE RULE LAID DOWN IN SOCIAL SECURITY SYSTEM VS. COURT OF APPEALS, 120 SCRA 707. On the first issue, petitioner contends that the Court of Appeals erred in ruling that because a simple loan is perfected upon the delivery of the object of the contract, the loan contract in this case was perfected only on September 13, 1982. Petitioner claims that a contract of loan is a consensual contract, and a loan contract is perfected at the time the contract of mortgage is executed conformably with our ruling in Bonnevie v. Court of Appeals, 125 SCRA 122. In the present case, the loan contract was perfected on March 31, 1981, the date when the mortgage deed was executed, hence, the amortization and interests on the loan should be computed from said date. Petitioner also argues that while the documents showed that the loan was released only on August 1982, the loan was actually released on March 31, 1981, when BPIIC issued a cancellation of mortgage of Frank Roa's loan. This finds support in the registration on March 31, 1981 of the Deed of Absolute Sale executed by Roa in 44

favor of ALS, transferring the title of the property to ALS, and ALS executing the Mortgage Deed in favor of BPIIC. Moreover, petitioner claims, the delay in the release of the loan should be attributed to private respondents. As BPIIC only agreed to extend a P500,000 loan, private respondents were required to reduce Frank Roa's loan below said amount. According to petitioner, private respondents were only able to do so in August 1982. In their comment, private respondents assert that based on Article 1934 of the Civil Code, 4 a simple loan is perfected upon the delivery of the object of the contract, hence a real contract. In this case, even though the loan contract was signed on March 31, 1981, it was perfected only on September 13, 1982, when the full loan was released to private respondents. They submit that petitioner misread Bonnevie. To give meaning to Article 1934, according to private respondents, Bonneviemust be construed to mean that the contract to extend the loan was perfected on March 31, 1981 but the contract of loan itself was only perfected upon the delivery of the full loan to private respondents on September 13, 1982. Private respondents further maintain that even granting, arguendo, that the loan contract was perfected on March 31, 1981, and their payment did not start a month thereafter, still no default took place. According to private respondents, a perfected loan agreement imposes reciprocal obligations, where the obligation or promise of each party is the consideration of the other party. In this case, the consideration for BPIIC in entering into the loan contract is the promise of private respondents to pay the monthly amortization. For the latter, it is the promise of BPIIC to deliver the money. In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. Therefore, private respondents conclude, they did not incur in delay when they did not commence paying the monthly amortization on May 1, 1981, as it was only on September 13, 1982 when petitioner fully complied with its obligation under the loan contract. We agree with private respondents. A loan contract is not a consensual contract but a real contract. It is perfected only upon the delivery of the object of the contract. 5 Petitioner misapplied Bonnevie. The contract in Bonnevie declared by this Court as a perfected consensual contract falls under the first clause of Article 1934, Civil Code. It is an accepted promise to deliver something by way of simple loan. In Saura Import and Export Co. Inc. vs. Development Bank of the Philippines, 44 SCRA 445, petitioner applied for a loan of P500,000 with respondent bank. The latter approved the application through a board resolution. Thereafter, the corresponding mortgage was executed and registered. However, because of acts attributable to petitioner, the loan was not released. Later, petitioner instituted an action for damages. We recognized in this case, a perfected consensual contract which under normal circumstances could have made the bank liable for not releasing the loan. However, since the fault was attributable to petitioner therein, the court did not award it damages. A perfected consensual contract, as shown above, can give rise to an action for damages. However, said contract does not constitute the real contract of loan which requires the delivery of the object of the contract for its perfection and which gives rise to obligations only on the part of the borrower. 6 In the present case, the loan contract between BPI, on the one hand, and ALS and Litonjua, on the other, was perfected only on September 13, 1982, the date of the second release of the loan. Following the intentions of the parties on the commencement of the monthly amortization, as found by the Court of Appeals, private respondents' obligation to pay commenced only on October 13, 1982, a month after the perfection of the contract. 7 We also agree with private respondents that a contract of loan involves a reciprocal obligation, wherein the obligation or promise of each party is the consideration for that of the other. 8 As averred by private respondents, the promise of BPIIC to extend and deliver the loan is upon the consideration that ALS and 45

Litonjua shall pay the monthly amortization commencing on May 1, 1981, one month after the supposed release of the loan. It is a basic principle in reciprocal obligations that neither party incurs in delay, if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. 9 Only when a party has performed his part of the contract can he demand that the other party also fulfills his own obligation and if the latter fails, default sets in. Consequently, petitioner could only demand for the payment of the monthly amortization after September 13, 1982 for it was only then when it complied with its obligation under the loan contract. Therefore, in computing the amount due as of the date when BPIIC extrajudicially caused the foreclosure of the mortgage, the starting date is October 13, 1982 and not May 1, 1981. Other points raised by petitioner in connection with the first issue, such as the date of actual release of the loan and whether private respondents were the cause of the delay in the release of the loan, are factual. Since petitioner has not shown that the instant case is one of the exceptions to the basic rule that only questions of law can be raised in a petition for review under Rule 45 of the Rules of Court, 10 factual matters need not tarry us now. On these points we are bound by the findings of the appellate and trial courts. On the second issue, petitioner claims that it should not be held liable for moral and exemplary damages for it did not act maliciously when it initiated the foreclosure proceedings. It merely exercised its right under the mortgage contract because private respondents were irregular in their monthly amortization. It invoked our ruling in Social Security System vs. Court of Appeals, 120 SCRA 707, where we said:

Nor can the SSS be held liable for moral and temperate damages. As concluded by the Court of Appeals "the negligence of the appellant is not so gross as to warrant moral and temperate damages," except that, said Court reduced those damages by only P5,000.00 instead of eliminating them. Neither can we agree with the findings of both the Trial Court and respondent Court that the SSS had acted maliciously or in bad faith. The SSS was of the belief that it was acting in the legitimate exercise of its right under the mortgage contract in the face of irregular payments made by private respondents and placed reliance on the automatic acceleration clause in the contract. The filing alone of the foreclosure application should not be a ground for an award of moral damages in the same way that a clearly unfounded civil action is not among the grounds for moral damages.

Private respondents counter that BPIIC was guilty of bad faith and should be liable for said damages because it insisted on the payment of amortization on the loan even before it was released. Further, it did not make the corresponding deduction in the monthly amortization to conform to the actual amount of loan released, and it immediately initiated foreclosure proceedings when private respondents failed to make timely payment. But as admitted by private respondents themselves, they were irregular in their payment of monthly amortization. Conformably with our ruling in SSS, we can not properly declare BPIIC in bad faith. Consequently, we should rule out the award of moral and exemplary damages. 11 However, in our view, BPIIC was negligent in relying merely on the entries found in the deed of mortgage, without checking and correspondingly adjusting its records on the amount actually released to private respondents and the date when it was released. Such negligence resulted in damage to private respondents, for which an award of nominal damages should be given in recognition of their rights which were violated by BPIIC. 12 For this purpose, the amount of P25,000 is sufficient. Lastly, as in SSS where we awarded attorney's fees because private respondents were compelled to litigate, we sustain the award of P50,000 in favor of private respondents as attorney's fees.

46

WHEREFORE, the decision dated February 28, 1997, of the Court of Appeals and its resolution dated April 21, 1998, are AFFIRMED WITH MODIFICATION as to the award of damages. The award of moral and exemplary damages in favor of private respondents is DELETED, but the award to them of attorney's fees in the amount of P50,000 is UPHELD. Additionally, petitioner is ORDERED to pay private respondents P25,000 as nominal damages. Costs against petitioner.
ACTIcS

SO ORDERED.

Bellosillo, Mendoza, Buena and De Leon, Jr., JJ., concur.

[G.R. No. 97412. July 12, 1994.] EASTERN SHIPPING LINES, INC., petitioner, vs. HON. COURT OF APPEALS AND MERCANTILE INSURANCE COMPANY, INC., respondents. SYLLABUS 1.CIVIL LAW; COMMON CARRIERS; TIME FRAME WITHIN WHICH DILIGENCE 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 vs. Court of Appeals, 161 SCRA 646; Kui Bai vs. 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 vs. Court of Appeals, 139 SCRA 87; Metro Port Service vs. 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 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 47

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 :
p

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%).
llcd

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. YMA8 (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).
Cdpr

"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: 48

"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);
prLL

'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 held: 'WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered: A.Ordering defendants to pay plaintiff, jointly and severally:

49

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);
LexLib

2.P3,000.00 as attorney's fees, and 3.Costs. B.Dismissing the counterclaims and crossclaim of defendant/crossclaimant Allied Brokerage Corporation. SO ORDERED.' (p. 207, Record). "Dissatisfied, defendant's recourse to US. "The appeal is devoid of merit. "After a careful scrutiny of the evidence on record. We find that the conclusion drawn therefrom is correct. As there is sufficient evidence that the shipment sustained 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.
Cdpr

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 vs. Court of Appeals, 161 SCRA 646; Kui Bai vs. 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 vs. Court of Appeals, 50

139 SCRA 87; Metro Port Service vs. 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. The question of charging both the carrier and the arrastre 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 vs. Metro Port Services (182 SCRA 455), we have explained in holding the carrier and the arrastre operator liable insolidum, thus:
Cdpr

"The legal relationship between the consignee and the arrastre operator is akin to that of a depositor and warehouseman (Lua Kian v. Manila Railroad Co., 19 SCRA 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 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.
llcd

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., vs. 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 vs. Perez 4 , L-6998, February 29, 1956, if the suit were for damages,'unliquidated and not known until definitely ascertained, assessed and determined by

51

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).
Cdpr

The case of Reformina vs. 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). . . "xxx xxx xxx "(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 oncertiorari, the petitioners contended that Central Bank Circular No. 416, providing thus
Cdpr

"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. "xxx xxx xxx "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

52

'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.
Cdpr

In Nakpil and Sons vs. Court of Appeals, 9 the trial court, in an action for the recovery of damages arising from the collapse of a building, ordered 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:
LLphil

"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 160161 [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., vs. 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 53

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).
Cdpr

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)

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 vs. 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:
LLpr

". . ., (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 54

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).
LLpr

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.
cdll

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 recoverable 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:
LibLex

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 ofArticle 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 thediscretion of the court 24 at the rate of 6% per annum. 25 No 55

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.
LLjur

3.When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit. WHEREFORE, the petition is partly GRANTED. The appealed decision is AFFIRMED with the MODIFICATION that the legal interest to be paid is SIX PERCENT(6%) on the amount due computed from the decision, dated 03 February 1988, of the court a quo. A TWELVE PERCENT (12%) interest, in lieu of SIX PERCENT (6%), shall be imposed on such amount upon finality of this decision until the payment thereof.
cdll

SO ORDERED.

Narvasa, C.J., Cruz, Feliciano, Padilla, Bidin, Regalado, Davide, Jr., Romero, Bellosillo, Melo, Quiason, Puno and Kapunan, JJ., concur. Mendoza, J., took no part.

[G.R. No. 131622. November 27, 1998.] LETICIA Y. MEDEL, DR. RAFAEL MEDEL and SERVANDO FRANCO, petitioners, vs. COURT OF APPEALS, SPOUSES VERONICA R. GONZALES and DANILO G. GONZALES, JR. doing lending business under the trade name and style "GONZALES CREDIT ENTERPRISES", respondents. SYLLABUS 1.CIVIL LAW; OBLIGATIONS AND CONTRACTS; LOAN; INTEREST; STIPULATED INTEREST RATE OF 5.5% PER MONTH CONSIDERED EXCESSIVE, INIQUITOUS, UNCONSCIONABLE AND EXORBITANT BUT NOT USURIOUS; CASE AT BAR. We agree with petitioners that the stipulated rate of interest at 5.5% per month on the P500,000.00 loan is excessive, iniquitous, unconscionable and exorbitant. However, we can not consider the rate "usurious" because this Court has consistently held that Circular No. 905 of the Central Bank, adopted on December 22, 1982, has expressly removed the interest ceilings prescribed by the Usury Law and that the Usury Law is now "legally inexistent."
cdasia

2.ID.; ID.; ID.; ID ; CENTRAL BANK CIRCULAR NO. 905 DID NOT REPEAL THE USURY LAW BUT MERELY RENDERED IT INEFFECTIVE. In Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch 61, the Court held that CB Circular No. 905 "did not repeal nor in anyway amend the Usury Law but simply suspended the latter's effectivity." Indeed, we have held that "a Central Bank Circular cannot repeal a law. Only a law can repeal another law." In the recent case ofFlorendo vs. Court of Appeals, the Court 56

reiterated the ruling that "by virtue of CB Circular No. 905, the Usury Law has been rendered ineffective." "Usury has been legally non-existent in our jurisdiction. Interest can now be charged as lender and borrower may agree upon." 3.ID.; ID.; ID.; ID.; RATE STIPULATED IN CASE AT BAR IS VOID; 12% INTEREST RATE PER ANNUM IS CONSIDERED REASONABLE; COURT SHALL EQUITABLY REDUCE LIQUIDATED DAMAGES IF THEY ARE UNCONSCIONABLE. We find the interest at 5.5% per month, or 66% per annum, stipulated upon by the parties in the promissory note iniquitous or unconscionable, and, hence, contrary to morals ("contra bonos mores"), if not against the law. The stipulation is void. The courts shall reduce equitably liquidated damages, whether intended as an indemnity or a penalty if they are iniquitous or unconscionable. Consequently, the Court of Appeals erred in upholding the stipulation of the parties. Rather, we agree with the trial court that, under the circumstances, interest at 12% per annum, and an additional 1% a month penalty charge as liquidated damages may be more reasonable.

DECISION

PARDO, J :
p

The case before the Court is a petition for review on certiorari, under Rule 45 of the Revised Rules of Court, seeking to set aside the decision of the Court of Appeals,1 and its resolution denying reconsideration, 2 the dispositive portion of which decision reads as follows:
cdrep

"WHEREFORE, the appealed judgment is hereby MODIFIED such that defendants are hereby ordered to pay the plaintiff: the sum of P500,000.00, plus 5.5% per month interest and 2% service charge per annum effective July 23, 1986, plus 1% per month of the total amount due and demandable as penalty charges effective August 23, 1986, until the entire amount is fully paid. "The award to the plaintiff of P50,000.00 as attorney's fees is affirmed. And so is the imposition of costs against the defendants. SO ORDERED."
3

The Court required the respondents to comment on the petition, 4 which was filed on April 3, 1998, 5 and the petitioners to reply thereto, which was filed on May 29, 1998. 6 We now resolve to give due course to the petition and decide the case. The facts of the case, as found by the Court of Appeals in its decision, which are considered binding and conclusive on the parties herein, as the appeal is limited to questions of law, are as follows: On November 7, 1985, Servando Franco and Leticia Medel (hereafter Servando and Leticia) obtained a loan from Veronica R. Gonzales (hereafter Veronica), who was engaged in the money lending business under the name "Gonzales Credit Enterprises", in the amount of P50,000.00, payable in two months. Veronica gave only the amount of P47,000.00, to the borrowers, as she retained P3,000.00, as advance interest for one month at 6% per month. Servando and Leticia executed a promissory note for P50,000.00, to evidence the loan, payable on January 7, 1986.

57

On November 19, 1985, Servando and Leticia obtained from Veronica another loan in the amount of P90,000.00, payable in two months, at 6% interest per month. They executed a promissory note to evidence the loan, maturing on January 19, 1986. They received only P84,000.00, out of the proceeds of the loan. On maturity of the two promissory notes, the borrowers failed to pay the indebtedness. On June 11, 1986, Servando and Leticia secured from Veronica still another loan in the amount of P300,000.00, maturing in one month, secured by a real estate mortgage over a property belonging to Leticia Makalintal Yaptinchay, who issued a special power of attorney in favor of Leticia Medel, authorizing her to execute the mortgage. Servando and Leticia executed a promissory note in favor of Veronica to pay the sum of P300,000.00, after a month, or on July 11, 1986. However, only the sum of P275,000.00, was given to them out of the proceeds of the loan. Like the previous loans, Servando and Medel failed to pay the third loan on maturity. On July 23, 1986, Servando and Leticia with the latter's husband, Dr. Rafael Medel, consolidated all their previous unpaid loans totaling P440,000.00, and sought from Veronica another loan in the amount of P60,000.00, bringing their indebtedness to a total of P500,000.00, payable on August 23, 1986. They executed a promissory note, reading as follows:
"Baliwag, Bulacan July 23, 1986 "Maturity Date August 23, 1986 "P500,000.00 "FOR VALUE RECEIVED, I/WE jointly and severally promise to pay to the order of VERONICA R. GONZALES doing business in the business style of GONZALES CREDIT ENTERPRISES, Filipino, of legal age, married to Danilo G. Gonzales, Jr., of Baliwag, Bulacan, the sum of PESOS . . . FIVE HUNDRED THOUSAND . . . (P500,000.00) Philippine Currency with interest thereon at the rate of 5.5 PER CENT per month plus 2% service charge per annum from date hereof until fully paid according to the amortization schedule contained herein. (Emphasis supplied) "Payment will be made in full at the maturity date. "Should I/We fail to pay my amortization or portion hereof when due , all the other installments together with all interest accrued shall immediately be due and payable and I/WE hereby agree to pay an additional amount equivalent to one per cent (1%) per month of the amount due and demandable as penalty charges in the form of liquidated damages until fully paid; and the further sum of TWENTY FIVE PER CENT (25%) thereof in full, without deductions as Attorney's Fee whether actually incurred or not, of the total amount due and demandable, exclusive of costs and judicial or extra judicial expenses. (Emphasis supplied). "I, WE further agree that in the event the present rate of interest on loan is increased by law or the Central Bank of the Philippines, the holder shall have the option to apply and collect the increased interest charges without notice although the original interest have already been collected wholly or partially unless the contrary is required by law. "It is also a special condition of this contract that the parties herein agree that the amount of pesoobligation under this agreement is based on the present value of the peso, and if there be any change in the value thereof, due to extraordinary inflation or deflation, or any other cause or reason, then the peso-obligation herein contracted shall be adjusted in accordance with the value of the peso then prevailing at the time of the complete fulfillment of the obligation.

58

"Demand and notice of dishonor waived. Holder may accept partial payments and grant renewals of this note or extension of payments, reserving rights against each and all indorsers and all parties to this note. "IN CASE OF JUDICIAL Execution of this obligation, or any part of it, the debtors waive all his/their rights under the provisions of Section 12, Rule 39, of the Revised Rules of Court."
LLphil

On maturity of the loan, the borrowers failed to pay the indebtedness of P500,000.00, plus interests and penalties, evidenced by the above-quoted promissory note. On February 20, 1990, Veronica R. Gonzales, joined by her husband Danilo G. Gonzales, filed with the Regional Trial Court of Bulacan, Branch 16, at Malolos, Bulacan, a complaint for collection of the full amount of the loan including interests and other charges. In his answer to the complaint filed with the trial court on April 5, 1990, defendant Servando alleged that he did not obtain any loan from the plaintiffs; that it was defendants Leticia and Dr. Rafael Medel who borrowed from the plaintiffs the sum of P500,000.00, and actually received the amount and benefited therefrom; that the loan was secured by a real estate mortgage executed in favor of the plaintiffs, and that he (Servando Franco) signed the promissory note only as a witness. In their separate answer filed on April 10, 1990, defendants Leticia and Rafael Medel alleged that the loan was the transaction of Leticia Yaptinchay, who executed a mortgage in favor of the plaintiffs over a parcel of real estate situated in San Juan, Batangas; that the interest rate is excessive at 5.5% per month with additional service charge of 2% per annum, and penalty charge of 1% per month; that the stipulation for attorney's fees of 25% of the amount due is unconscionable, illegal and excessive, and that substantial payments made were applied to interest, penalties and other charges. After due trial, the lower court declared that the due execution and genuineness of the four promissory notes had been duly proved, and ruled that although the Usury Law had been repealed, the interest charged by the plaintiffs on the loans was unconscionable and "revolting to the conscience". Hence, the trial court applied "the provision of the New [Civil] Code" that the "legal rate of interest for loan or forbearance of money, goods or credit is 12% per annum." 7

Accordingly, on December 9, 1991, the trial court rendered judgment, the dispositive portion of which reads as follows:
"WHEREFORE, premises considered, judgment is hereby rendered, as follows: "1.Ordering the defendants Servando Franco and Leticia Medel, jointly and severally, to pay plaintiffs the amount of P47,000.00 plus 12% interest per annum from November 7, 1985 and 1% per month as penalty, until the entire amount is paid in full. "2.Ordering the defendants Servando Franco and Leticia Y. Medel to plaintiffs, jointly and severally the amount of P84,000.00 with 12% interest per annum and 1% per cent per month as penalty from November 19, 1985 until the whole amount is fully paid; "3.Ordering the defendants to pay the plaintiffs, jointly and severally, the amount of P285,000.00 plus 12% interest per annum and 1% per month as penalty from July 11, 1986, until the whole amount is fully paid;

59

"4.Ordering the defendants to pay plaintiffs, jointly and severally, the amount of P50,000.00 as attorney's fees; "5.All counterclaims are hereby dismissed. "With costs against the defendants."
8

In due time, both plaintiffs and defendants appealed to the Court of Appeals. In their appeal, plaintiffs-appellants argued that the promissory note, which consolidated all the unpaid loans of the defendants, is the law that governs the parties. They further argued that Circular No. 416 of the Central Bank prescribing the rate of interest for loans or forbearance of money, goods or credit at 12% per annum, applies only in the absence of a stipulation on interest rate, but not when the parties agreed thereon. The Court of Appeals sustained the plaintiffs-appellants' contention. It ruled that "the Usury Law having become 'legally inexistent' with the promulgation by the Central Bank in 1982 of Circular No. 905, the lender and borrower could agree on any interest that may be charged on the loan". 9 The Court of Appeals further held that "the imposition of 'an additional amount equivalent to 1% per month of the amount due and demandable as penalty charges in the form of liquidated damages until fully paid' was allowed by law."10 Accordingly, on March 21, 1997, the Court of Appeals promulgated its decision reversing that of the Regional Trial Court, disposing as follows:
"WHEREFORE, the appealed judgment is hereby MODIFIED such that defendants are hereby ordered to pay the plaintiffs the sum of P500,000.00, plus 5.5% per month interest and 2% service charge per annum effective July 23, 1986, plus 1% per month of the total amount due and demandable as penalty charges effective August 24, 1986, until the entire amount is fully paid. "The award to the plaintiffs of P50,000.00 as attorney's fees is affirmed. And so is the imposition of costs against the defendants. "SO ORDERED."
11

On April 15, 1997, defendants-appellants filed a motion for reconsideration of the said decision. By resolution dated November 25, 1997, the Court of Appeals denied the motion. 12 Hence, defendants interposed the present recourse via petition for review on certiorari. We find the petition meritorious. Basically, the issue revolves on the validity of the interest rate stipulated upon. Thus, the question presented is whether or not the stipulated rate of interest at 5.5% per month on the loan in the sum of P500,000.00, that plaintiffs extended to the defendants is usurious. In other words, is the Usury Law still effective, or has it been repealed by Central Bank Circular No. 905, adopted on December 22, 1982, pursuant to its powers under P.D. No. 116, as amended by P.D. No. 1684?
cdll

13

We agree with petitioners that the stipulated rate of interest at 5.5% per month on the P500,000.00 loan is excessive, iniquitous, unconscionable and exorbitant. 13However, we can not consider the rate "usurious" because this Court has consistently held that Circular No. 905 of the Central Bank, adopted on December 22, 1982, has expressly removed the interest ceilings prescribed by the Usury Law 14 and that the Usury Law is now "legally inexistent". 15 60

In Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch 61 16 the Court held that CB Circular No. 905 "did not repeal nor in anyway amend the Usury Law but simply suspended the latter's effectivity." Indeed, we have held that "a Central Bank Circular can not repeal a law. Only a law can repeal another law."17 In the recent case of Florendo vs. Court of Appeals 18 , the Court reiterated the ruling that "by virtue of CB Circular 905, the Usury Law has been rendered ineffective". "Usury has been legally non-existent in our jurisdiction. Interest can now be charged as lender and borrower may agree upon." 19 Nevertheless, we find the interest at 5.5% per month, or 66% per annum, stipulated upon by the parties in the promissory note iniquitous or unconscionable, and, hence, contrary to morals ("contra bonos mores"), if not against the law. 20 The stipulation is void. 21 The courts shall reduce equitably liquidated damages, whether intended as an indemnity or a penalty if they are iniquitous or unconscionable. 22 Consequently, the Court of Appeals erred in upholding the stipulation of the parties. Rather, we agree with the trial court that, under the circumstances, interest at 12% per annum, and an additional 1% a month penalty charge as liquidated damages may be more reasonable. WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of the Court of Appeals promulgated on March 21, 1997, and its resolution dated November 25, 1997. Instead, we render judgment REVIVING and AFFIRMING the decision dated December 9, 1991, of the Regional Trial Court of Bulacan, Branch 16, Malolos, Bulacan, in Civil Case No. 134-M-90, involving the same parties. No pronouncement as to costs in this instance. SO ORDERED.
prLL

Narvasa, C .J ., Romero, Kapunan and Purisima, JJ ., concur.

61