G.R. No.

103576, 260 SCRA 714, August 22, 1996

ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA PAC, petitioners, vs. HON.
COURT OF APPEALS, BANK OF THE PHILIPPINES and REGIONAL SHERIFF OF
CALOOCAN CITY, respondents.
VITUG, J.:p
Would it be valid and effective to have a clause in a chattel mortgage that purports to likewise
extend its coverage to obligations yet to be contracted or incurred? This question is the core
issue in the instant petition for review on certiorari.
Petitioner Chua Pac, the president and general manager of co-petitioner "Acme Shoe, Rubber &
Plastic Corporation," executed on 27 June 1978, for and in behalf of the company, a chattel
mortgage in favor of private respondent Producers Bank of the Philippines. The mortgage stood
by way of security for petitioner's corporate loan of three million pesos (P3,000,000.00). A
provision in the chattel mortgage agreement was to this effect
(c) If the MORTGAGOR, his heirs, executors or administrators shall well and truly perform the
full obligation or obligations above-stated according to the terms thereof, then this mortgage
shall be null and void. . . .
In case the MORTGAGOR executes subsequent promissory note or notes either as a renewal of
the former note, as an extension thereof, or as a new loan, or is given any other kind of
accommodations such as overdrafts, letters of credit, acceptances and bills of exchange,
releases of import shipments on Trust Receipts, etc., this mortgage shall also stand as security
for the payment of the said promissory note or notes and/or accommodations without the
necessity of executing a new contract and this mortgage shall have the same force and effect as
if the said promissory note or notes and/or accommodations were existing on the date thereof.
This mortgage shall also stand as security for said obligations and any and all other obligations
of the MORTGAGOR to the MORTGAGEE of whatever kind and nature, whether such obligations
have been contracted before, during or after the constitution of this mortgage. 1
In due time, the loan of P3,000,000.00 was paid by petitioner corporation. Subsequently, in
1981, it obtained from respondent bank additional financial accommodations totalling
P2,700,000.00. 2 These borrowings were on due date also fully paid.
On 10 and 11 January 1984, the bank yet again extended to petitioner corporation a loan of one
million pesos (P1,000,000.00) covered by four promissory notes for P250,000.00 each. Due to
financial constraints, the loan was not settled at maturity. 3 Respondent bank thereupon applied
for an extra judicial foreclosure of the chattel mortgage, herein before cited, with the Sheriff of
Caloocan City, prompting petitioner corporation to forthwith file an action for injunction, with
damages and a prayer for a writ of preliminary injunction, before the Regional Trial Court of
Caloocan City (Civil Case No. C-12081). Ultimately, the court dismissed the complaint and
ordered the foreclosure of the chattel mortgage. It held petitioner corporation bound by the
stipulations, aforequoted, of the chattel mortgage.
Petitioner corporation appealed to the Court of Appeals 4 which, on 14 August 1991, affirmed,
"in all respects," the decision of the court a quo. The motion for reconsideration was denied on
24 January 1992.

The instant petition interposed by petitioner corporation was initially denied on 04 March 1992
by this Court for having been insufficient in form and substance. Private respondent filed a
motion to dismiss the petition while petitioner corporation filed a compliance and an opposition
to private respondent's motion to dismiss. The Court denied petitioner's first motion for
reconsideration but granted a second motion for reconsideration, thereby reinstating the petition
and requiring private respondent to comment thereon. 5
Except in criminal cases where the penalty of reclusion perpetua or death is imposed 6 which the
Court so reviews as a matter of course, an appeal from judgments of lower courts is not a
matter of right but of sound judicial discretion. The circulars of the Court prescribing technical
and other procedural requirements are meant to weed out unmeritorious petitions that can
unnecessarily clog the docket and needlessly consume the time of the Court. These technical
and procedural rules, however, are intended to help secure, not suppress, substantial justice. A
deviation from the rigid enforcement of the rules may thus be allowed to attain the prime
objective for, after all, the dispensation of justice is the core reason for the existence of courts.
In this instance, once again, the Court is constrained to relax the rules in order to give way to
and uphold the paramount and overriding interest of justice.
Contracts of security are either personal or real. In contracts of personal security, such as a
guaranty or a suretyship, the faithful performance of the obligation by the principal debt or is
secured by the personal commitment of another (the guarantor or surety). In contracts of real
security, such as a pledge, a mortgage or an antichresis, that fulfillment is secured by an
encumbrance of property in pledge, the placing of movable property in the possession of the
creditor; in chattel mortgage, by the execution of the corresponding deed substantially in the
form prescribed by law; in real estate mortgage, by the execution of a public instrument
encumbering the real property covered thereby; and in antichresis, by a written instrument
granting to the creditor the right to receive the fruits of an immovable property with the
obligation to apply such fruits to the payment of interest, if owing, and thereafter to the principal
of his credit upon the essential condition that if the obligation becomes due and the debtor
defaults, then the property encumbered can be alienated for the payment of the obligation, 7
but that should the obligation be duly paid, then the contract is automatically extinguished
proceeding from the accessory character 8 of the agreement. As the law so puts it, once the
obligation is complied with, then the contract of security becomes, ipso facto, null and void. 9
While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred
obligations so long as these future debts are accurately described, 10 a chattel mortgage,
however, can only cover obligations existing at the time the mortgage is constituted. Although a
promise expressed in a chattel mortgage to include debts that are yet to be contracted can be a
binding commitment that can be compelled upon, the security itself, however, does not come
into existence or arise until after a chattel mortgage agreement covering the newly contracted
debt is executed either by concluding a fresh chattel mortgage or by amending the old contract
conformably with the form prescribed by the Chattel Mortgage Law. 11 Refusal on the part of the
borrower to execute the agreement so as to cover the after-incurred obligation can constitute an
act of default on the part of the borrower of the financing agreement whereon the promise is
written but, of course, the remedy of foreclosure can only cover the debts extant at the time of
constitution and during the life of the chattel mortgage sought to be foreclosed.

A chattel mortgage, as hereinbefore so intimated, must comply substantially with the form
prescribed by the Chattel Mortgage Law itself. One of the requisites, under Section 5 thereof, is
an affidavit of good faith. While it is not doubted that if such an affidavit is not appended to the
agreement, the chattel mortgage would still be valid between the parties (not against third
persons acting in good faith 12), the fact, however, that the statute has provided that the
parties to the contract must execute an oath that
. . . (the) mortgage is made for the purpose of securing the obligation specified in the conditions
thereof, and for no other purpose, and that the same is a just and valid obligation, and one not
entered into for the purpose of fraud. 13
makes it obvious that the debt referred to in the law is a current, not an obligation that is yet
merely contemplated. In the chattel mortgage here involved, the only obligation specified in the
chattel mortgage contract was the P3,000,000.00 loan which petitioner corporation later fully
paid. By virtue of Section 3 of the Chattel Mortgage Law, the payment of the obligation
automatically rendered the chattel mortgage void or terminated. In Belgian Catholic
Missionaries, Inc., vs. Magallanes Press, Inc., et al., 14 the Court
said
. . . A mortgage that contains a stipulation in regard to future advances in the credit will take
effect only from the date the same are made and not from the date of the mortgage. 15
The significance of the ruling to the instant problem would be that since the 1978 chattel
mortgage had ceased to exist coincidentally with the full payment of the P3,000,000.00 loan, 16
there no longer was any chattel mortgage that could cover the new loans that were concluded
thereafter.
We find no merit in petitioner corporation's other prayer that the case should be remanded to
the trial court for a specific finding on the amount of damages it has sustained "as a result of the
unlawful action taken by respondent bank against it." 17 This prayer is not reflected in its
complaint which has merely asked for the amount of P3,000,000.00 by way of moral damages.
18 In LBC Express, Inc. vs. Court of Appeals, 19 we have said:
Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious
anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar
injury. A corporation, being an artificial person and having existence only in legal contemplation,
has no feelings, no emotions, no senses; therefore, it cannot experience physical suffering and
mental anguish. Mental suffering can be experienced only by one having a nervous system and it
flows from real ills, sorrows, and griefs of life all of which cannot be suffered by respondent
bank as an artificial person. 20
While Chua Pac is included in the case, the complaint, however, clearly states that he has merely
been so named as a party in representation of petitioner corporation.
Petitioner corporation's counsel could be commended for his zeal in pursuing his client's cause. It
instead turned out to be, however, a source of disappointment for this Court to read in
petitioner's reply to private respondent's comment on the petition his so-called "One Final
Word;" viz:

In simply quoting in toto the patently erroneous decision of the trial court, respondent Court of
Appeals should be required to justify its decision which completely disregarded the basic laws on
obligations and contracts, as well as the clear provisions of the Chattel Mortgage Law and wellsettled jurisprudence of this Honorable Court; that in the event that its explanation is wholly
unacceptable, this Honorable Court should impose appropriate sanctions on the erring justices.
This is one positive step in ridding our courts of law of incompetent and dishonest magistrates
especially members of a superior court of appellate jurisdiction. 21 (Emphasis supplied.)
The statement is not called for. The Court invites counsel's attention to the admonition in
Guerrero vs. Villamor; 22 thus:
(L)awyers . . . should bear in mind their basic duty "to observe and maintain the respect due to
the courts of justice and judicial officers and . . . (to) insist on similar conduct by others." This
respectful attitude towards the court is to be observed, "not for the sake of the temporary
incumbent of the judicial office, but for the maintenance of its supreme importance." And it is
through a scrupulous preference for respectful language that a lawyer best demonstrates his
observance of the respect due to the courts and judicial officers . . . 23
The virtues of humility and of respect and concern for others must still live on even in an age of
materialism.
WHEREFORE, the questioned decisions of the appellate court and the lower court are set aside
without prejudice to the appropriate legal recourse by private respondent as may still be
warranted as an unsecured creditor. No costs.
Atty. Francisco R. Sotto, counsel for petitioners, is admonished to be circumspect in dealing with
the courts.
SO ORDERED.
FIRST DIVISION
G.R. No. L-48349

December 29, 1986

FRANCISCO HERRERA, plaintiff-appellant, vs. PETROPHIL CORPORATION, defendant-appellee.

Paterno R. Canlas Law Offices for plaintiff-appellant.
CRUZ, J.:
This is an appeal by the plaintiff-appellant from a decision rendered by the then Court of First
Instance of Rizal on a pure question of law. 1
The judgment appealed from was rendered on the pleadings, the parties having agreed during
the pretrial conference on the factual antecedents.
The facts are as follows: On December 5, 1969, the plaintiff-appellant and ESSO Standard
Eastern. Inc., (later substituted by Petrophil Corporation) entered into a "Lease Agreement"
whereby the former leased to the latter a portion of his property for a period of twenty (20)
years from said date, subject inter alia to the following conditions:

3.
Rental: The LESSEE shall pay the LESSOR a rental of Pl.40 sqm. per month on 400 sqm.
and are to be expropriated later on (sic) or P560 per month and Fl.40 per sqm. per month on
1,693 sqm. or P2,370.21 per month or a total of P2,930.20 per month 2,093 sqm. more or less,
payable yearly in advance within the 1st twenty days of each year; provided, a financial aid in
the sum of P15,000 to clear the leased premises of existing improvements thereon is paid in this
manner; P10,000 upon execution of this lease and P5,000 upon delivery of leased premises free
and clear of improvements thereon within 30 days from the date of execution of this agreement.
The portion on the side of the leased premises with an area of 365 sqrm. more or less, will be
occupied by LESSEE without rental during the lifetime of this lease. PROVIDED FINALLY, that the
Lessor is paid 8 years advance rental based on P2,930.70 per month discounted at 12% interest
per annum or a total net amount of P130,288.47 before registration of lease. Leased premises
shall be delivered within 30 days after 1st partial payment of financial aid. 2
On December 31, 1969, pursuant to the said contract, the defendant-appellee paid to the
plaintfff-appellant advance rentals for the first eight years, subtracting therefrom the amount of
P101,010.73, the amount it computed as constituting the interest or discount for the first eight
years, in the total sum P180,288.47. On August 20, 1970, the defendant-appellee, explaining
that there had been a mistake in computation, paid to the appellant the additional sum of
P2,182.70, thereby reducing the deducted amount to only P98,828.03. 3
On October 14, 1974, the plaintiff-appellant sued the defendant-appellee for the sum of
P98,828.03, with interest, claiming this had been illegally deducted from him in violation of the
Usury Law. 4 He also prayed for moral damages and attorney's fees. In its answer, the
defendant-appellee admitted the factual allegations of the complaint but argued that the amount
deducted was not usurious interest but a given to it for paying the rentals in advance for eight
years. 5 Judgment on the pleadings was rendered for the defendant. 6
Plaintiff-appellant now prays for a reversal of that judgment, insisting:
1. that the lower court erred in the computation of the interest collected out of the
rentals paid for the first eight years;
2. that such interest was excessive and violative of the Usury Law; and
3. that he had neither agreed to nor accepted the defendant-appellant's computation
of the total amount to be deducted for the eight years advance rentals. 7
The thrust of the plaintiff-appellant's position is set forth in paragraph 6 of his complaint, which
read:
6.
The interest collected by defendant out of the rentals for the first eight years
was excessive and beyond that allowable by law, because the total interest on the said
amount is only P33,755.90 at P4,219.4880 per yearly rental; and considering that the
interest should be computed excluding the first year rental because at the time the
amount of P281, 199.20 was paid it was already due under the lease contract hence no
interest should be collected from the rental for the first year, the amount of
P29,536.42 only as the total interest should have been deducted by defendant from
the sum of P281,299.20.
The defendant maintains that the correct amount of the discount is P98,828.03 and that the
same is not excessive and above that allowed by law.

As its title plainly indicates, the contract between the parties is one of lease and not of loan. It is
clearly denominated a "LEASE AGREEMENT." Nowhere in the contract is there any showing that
the parties intended a loan rather than a lease. The provision for the payment of rentals in
advance cannot be construed as a repayment of a loan because there was no grant or
forbearance of money as to constitute an indebtedness on the part of the lessor. On the
contrary, the defendant-appellee was discharging its obligation in advance by paying the eight
years rentals, and it was for this advance payment that it was getting a rebate or discount.
The provision for a discount is not unusual in lease contracts. As to its validity, it is settled that
the parties may establish such stipulations, clauses, terms and condition as they may want to
include; and as long as such agreements are not contrary to law, morals, good customs, public
policy or public order, they shall have the force of law between them. 8
There is no usury in this case because no money was given by the defendant-appellee to the
plaintiff-appellant, nor did it allow him to use its money already in his possession. 9 There was
neither loan nor forbearance but a mere discount which the plaintiff-appellant allowed the
defendant-appellee to deduct from the total payments because they were being made in
advance for eight years. The discount was in effect a reduction of the rentals which the lessor
had the right to determine, and any reduction thereof, by any amount, would not contravene the
Usury Law.
The difference between a discount and a loan or forbearance is that the former does not have to
be repaid. The loan or forbearance is subject to repayment and is therefore governed by the
laws on usury. 10
To constitute usury, "there must be loan or forbearance; the loan must be of money or
something circulating as money; it must be repayable absolutely and in all events; and
something must be exacted for the use of the money in excess of and in addition to interest
allowed by law." 11
It has been held that the elements of usury are (1) a loan, express or implied; (2) an
understanding between the parties that the money lent shall or may be returned; that for such
loan a greater rate or interest that is allowed by law shall be paid, or agreed to be paid, as the
case may be; and (4) a corrupt intent to take more than the legal rate for the use of money
loaned. Unless these four things concur in every transaction, it is safe to affirm that no case of
usury can be declared. 12
Concerning the computation of the deductible discount, the trial court declared:
As above-quoted, the 'Lease Agreement' expressly provides that the lessee (defendant) shag
pay the lessor (plaintiff) eight (8) years in advance rentals based on P2,930.20 per month
discounted at 12% interest per annum. Thus, the total rental for one-year period is P35,162.40
(P2,930.20 multiplied by 12 months) and that the interest therefrom is P4,219.4880
(P35,162.40 multiplied by 12%). So, therefore, the total interest for the first eight (8) years
should be only P33,755.90 (P4,129.4880 multiplied by eight (8) years and not P98,828.03 as
the defendant claimed it to be.
The afore-quoted manner of computation made by plaintiff is patently erroneous. It is most
seriously misleading. He just computed the annual discount to be at P4,129.4880 and then

simply multiplied it by eight (8) years. He did not take into consideration the naked fact that the
rentals due on the eight year were paid in advance by seven (7) years, the rentals due on the
seventh year were paid in advance by six (6) years, those due on the sixth year by five (5)
years, those due on the fifth year by four (4) years, those due on the fourth year by three (3)
years, those due on the third year by two (2) years, and those due on the second year by one
(1) year, so much so that the total number of years by which the annual rental of P4,129.4880
was paid in advance is twenty-eight (28), resulting in a total amount of P118,145.44 (P4,129.48
multiplied by 28 years) as the discount. However, defendant was most fair to plaintiff. It did not
simply multiply the annual rental discount by 28 years. It computed the total discount with the
principal diminishing month to month as shown by Annex 'A' of its memorandum. This is why the
total discount amount to only P 8,828.03.
The allegation of plaintiff that defendant made the computation in a compounded manner is
erroneous. Also after making its own computations and after examining closely defendant's
Annex 'A' of its memorandum, the court finds that defendant did not charge 12% discount on
the rentals due for the first year so much so that the computation conforms with the provision of
the Lease Agreement to the effect that the rentals shall be 'payable yearly in advance within the
1st 20 days of each year. '
We do not agree. The above computation appears to be too much technical mumbo-jumbo and
could not have been the intention of the parties to the transaction. Had it been so, then it should
have been clearly stipulated in the contract. Contracts should be interpreted according to their
literal meaning and should not be interpreted beyond their obvious intendment. 13
The plaintfff-appellant simply understood that for every year of advance payment there would be
a deduction of 12% and this amount would be the same for each of the eight years. There is no
showing that the intricate computation applied by the trial court was explained to him by the
defendant-appellee or that he knowingly accepted it.
The lower court, following the defendant-appellee's formula, declared that the plaintiff-appellant
had actually agreed to a 12% reduction for advance rentals for all of twenty eight years. That is
absurd. It is not normal for a person to agree to a reduction corresponding to twenty eight years
advance rentals when all he is receiving in advance rentals is for only eight years.
The deduction shall be for only eight years because that was plainly what the parties intended at
the time they signed the lease agreement. "Simplistic" it may be, as the Solicitor General
describes it, but that is how the lessor understood the arrangement. In fact, the Court will reject
his subsequent modification that the interest should be limited to only seven years because the
first year rental was not being paid in advance. The agreement was for a uniform deduction for
the advance rentals for each of the eight years, and neither of the parties can deviate from it
now.
On the annual rental of P35,168.40, the deducted 12% discount was P4,220.21; and for eight
years, the total rental was P281,347.20 from which was deducted the total discount of
P33,761.68, leaving a difference of P247,585.52. Subtracting from this amount, the sum of
P182,471.17 already paid will leave a balance of P65,114.35 still due the plaintiff-appellant.

The above computation is based on the more reasonable interpretation of the contract as a
whole rather on the single stipulation invoked by the respondent for the flat reduction of
P130,288.47.
WHEREFORE, the decision of the trial court is hereby modified, and the defendant-appellee
Petrophil Corporation is ordered to pay plaintiff-appellant the amount of Sixty Five Thousand
One Hundred Fourteen pesos and Thirty-Five Centavos (P65,114.35), with interest at the legal
rate until fully paid, plus Ten Thousand Pesos (P10,000.00) as attorney's fees. Costs against the
defendant-appellee.
SO ORDERED.
Yap (Chairman), Narvasa, Melencio-Herrera and Feliciano, JJ., concur.

SECOND DIVISION
[G.R. No. 133632. February 15, 2002]
BPI INVESTMENT CORPORATION, petitioner, vs. HON. COURT OF APPEALS and ALS
MANAGEMENT & DEVELOPMENT CORPORATION, respondents.
DECISION
QUISUMBING, J.:
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 attorneys fees and expenses for
litigation. It likewise dismissed the foreclosure suit for being premature.
The facts are as follows:
Frank Roa obtained a loan at an interest rate of 16 1/4% 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 Roas 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 Roas 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 Roas arrearages by paying BPIIC the sum of
P190,601.35. This reduced Roas 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 Roas 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 sheriffs 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;
c) P50,000.00 as and for attorneys 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 non-payment 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 Roas 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 ATTORNEYS 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 Roas loan. This finds support in the registration on March 31,
1981 of the Deed of Absolute Sale executed by Roa in 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 Roas 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,
Bonnevie must 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 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 attorneys fees because private respondents were
compelled to litigate, we sustain the award of P50,000 in favor of private respondents as
attorneys fees.
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 attorneys 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.
SO ORDERED.
Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur.