G.R. No.

123498

November 23, 2007

BPI FAMILY BANK, Petitioner,

vs.
AMADO FRANCO and COURT OF APPEALS, Respondents.
DECISION
NACHURA, J.:
Banks are exhorted to treat the accounts of their depositors with meticulous care
and utmost fidelity. We reiterate this exhortation in the case at bench.
Before us is a Petition for Review on Certiorari seeking the reversal of the Court of
Appeals (CA) Decision1 in CA-G.R. CV No. 43424 which affirmed with modification
the judgment2 of the Regional Trial Court, Branch 55, Manila (Manila RTC), in Civil
Case No. 90-53295.
This case has its genesis in an ostensible fraud perpetrated on the petitioner BPI
Family Bank (BPI-FB) allegedly by respondent Amado Franco (Franco) in conspiracy
with other individuals,3 some of whom opened and maintained separate accounts
with BPI-FB, San Francisco del Monte (SFDM) branch, in a series of transactions.
On August 15, 1989, Tevesteco Arrastre-Stevedoring Co., Inc. (Tevesteco) opened
a savings and current account with BPI-FB. Soon thereafter, or on August 25,
1989, First Metro Investment Corporation (FMIC) also opened a time deposit
account with the same branch of BPI-FB with a deposit of P100,000,000.00, to
mature one year thence.
Subsequently, on August 31, 1989, Franco opened three accounts, namely, a
current,4 savings,5 and time deposit,6 with BPI-FB. The current and savings
accounts were respectively funded with an initial deposit of P500,000.00 each,
while the time deposit account had P1,000,000.00 with a maturity date of August
31, 1990. The total amount of P2,000,000.00 used to open these accounts is
traceable to a check issued by Tevesteco allegedly in consideration of Francos
introduction of Eladio Teves,7 who was looking for a conduit bank to facilitate
Tevestecos business transactions, to Jaime Sebastian, who was then BPI-FB
SFDMs Branch Manager. In turn, the funding for the P2,000,000.00 check was part
of the P80,000,000.00 debited by BPI-FB from FMICs time deposit account and
credited to Tevestecos current account pursuant to an Authority to Debit
purportedly signed by FMICs officers.
It appears, however, that the signatures of FMICs officers on the Authority to
Debit were forged.8 On September 4, 1989, Antonio Ong,9 upon being shown the
Authority to Debit, personally declared his signature therein to be a forgery.
Unfortunately, Tevesteco had already effected several withdrawals from its current
account (to which had been credited the P80,000,000.00 covered by the forged
Authority to Debit) amounting to P37,455,410.54, including the P2,000,000.00
paid to Franco.

On September 8, 1989, impelled by the need to protect its interests in light of

FMICs forgery claim, BPI-FB, thru its Senior Vice-President, Severino Coronacion,
instructed Jesus Arangorin10 to debit Francos savings and current accounts for
the amounts remaining therein.11 However, Francos time deposit account could
not be debited due to the capacity limitations of BPI-FBs computer.12
In the meantime, two checks13 drawn by Franco against his BPI-FB current
account were dishonored upon presentment for payment, and stamped with a
notation "account under garnishment." Apparently, Francos current account was
garnished by virtue of an Order of Attachment issued by the Regional Trial Court of
Makati (Makati RTC) in Civil Case No. 89-4996 (Makati Case), which had been filed
by BPI-FB against Franco et al.,14 to recover the P37,455,410.54 representing
Tevestecos total withdrawals from its account.
Notably, the dishonored checks were issued by Franco and presented for payment
at BPI-FB prior to Francos receipt of notice that his accounts were under
garnishment.15 In fact, at the time the Notice of Garnishment dated September
27, 1989 was served on BPI-FB, Franco had yet to be impleaded in the Makati case
where the writ of attachment was issued.
It was only on May 15, 1990, through the service of a copy of the Second
Amended Complaint in Civil Case No. 89-4996, that Franco was impleaded in the
Makati case.16 Immediately, upon receipt of such copy, Franco filed a Motion to
Discharge Attachment which the Makati RTC granted on May 16, 1990. The Order
Lifting the Order of Attachment was served on BPI-FB on even date, with Franco
demanding the release to him of the funds in his savings and current accounts.
Jesus Arangorin, BPI-FBs new manager, could not forthwith comply with the
demand as the funds, as previously stated, had already been debited because of
FMICs forgery claim. As such, BPI-FBs computer at the SFDM Branch indicated
that the current account record was "not on file."
With respect to Francos savings account, it appears that Franco agreed to an
arrangement, as a favor to Sebastian, whereby P400,000.00 from his savings
account was temporarily transferred to Domingo Quiaoits savings account,
subject to its immediate return upon issuance of a certificate of deposit which
Quiaoit needed in connection with his visa application at the Taiwan Embassy. As
part of the arrangement, Sebastian retained custody of Quiaoits savings account
passbook to ensure that no withdrawal would be effected therefrom, and to
preserve Francos deposits.
On May 17, 1990, Franco pre-terminated his time deposit account. BPI-FB
deducted the amount of P63,189.00 from the remaining balance of the time
deposit account representing advance interest paid to him.
These transactions spawned a number of cases, some of which we had already
resolved.
FMIC filed a complaint against BPI-FB for the recovery of the amount of
P80,000,000.00 debited from its account.17 The case eventually reached this
Court, and in BPI Family Savings Bank, Inc. v. First Metro Investment

Corporation,18 we upheld the finding of the courts below that BPI-FB failed to
exercise the degree of diligence required by the nature of its obligation to treat
the accounts of its depositors with meticulous care. Thus, BPI-FB was found liable
to FMIC for the debited amount in its time deposit. It was ordered to pay
P65,332,321.99 plus interest at 17% per annum from August 29, 1989 until fully
restored. In turn, the 17% shall itself earn interest at 12% from October 4, 1989
until fully paid.
In a related case, Edgardo Buenaventura, Myrna Lizardo and Yolanda Tica
(Buenaventura, et al.),19 recipients of a P500,000.00 check proceeding from the
P80,000,000.00 mistakenly credited to Tevesteco, likewise filed suit. Buenaventura
et al., as in the case of Franco, were also prevented from effecting withdrawals20
from their current account with BPI-FB, Bonifacio Market, Edsa, Caloocan City
Branch. Likewise, when the case was elevated to this Court docketed as BPI Family
Bank v. Buenaventura,21 we ruled that BPI-FB had no right to freeze
Buenaventura, et al.s accounts and adjudged BPI-FB liable therefor, in addition to
damages.
Meanwhile, BPI-FB filed separate civil and criminal cases against those believed to
be the perpetrators of the multi-million peso scam.22 In the criminal case, Franco,
along with the other accused, except for Manuel Bienvenida who was still at large,
were acquitted of the crime of Estafa as defined and penalized under Article 351,
par. 2(a) of the Revised Penal Code.23 However, the civil case24 remains under
litigation and the respective rights and liabilities of the parties have yet to be
adjudicated.
Consequently, in light of BPI-FBs refusal to heed Francos demands to unfreeze his
accounts and release his deposits therein, the latter filed on June 4, 1990 with the
Manila RTC the subject suit. In his complaint, Franco prayed for the following
reliefs: (1) the interest on the remaining balance25 of his current account which
was eventually released to him on October 31, 1991; (2) the balance26 on his
savings account, plus interest thereon; (3) the advance interest27 paid to him
which had been deducted when he pre-terminated his time deposit account; and
(4) the payment of actual, moral and exemplary damages, as well as attorneys
fees.
BPI-FB traversed this complaint, insisting that it was correct in freezing the
accounts of Franco and refusing to release his deposits, claiming that it had a
better right to the amounts which consisted of part of the money allegedly
fraudulently withdrawn from it by Tevesteco and ending up in Francos accounts.
BPI-FB asseverated that the claimed consideration of P2,000,000.00 for the
introduction facilitated by Franco between George Daantos and Eladio Teves, on
the one hand, and Jaime Sebastian, on the other, spoke volumes of Francos
participation in the fraudulent transaction.
On August 4, 1993, the Manila RTC rendered judgment, the dispositive portion of
which reads as follows:

WHEREFORE, in view of all the foregoing, judgment is hereby rendered in favor of

[Franco] and against [BPI-FB], ordering the latter to pay to the former the
following sums:
1. P76,500.00 representing the legal rate of interest on the amount of
P450,000.00 from May 18, 1990 to October 31, 1991;
2. P498,973.23 representing the balance on [Francos] savings account as of May
18, 1990, together with the interest thereon in accordance with the banks
guidelines on the payment therefor;
3. P30,000.00 by way of attorneys fees; and
4. P10,000.00 as nominal damages.
The counterclaim of the defendant is DISMISSED for lack of factual and legal
anchor.
Costs against [BPI-FB]. SO ORDERED.28
Unsatisfied with the decision, both parties filed their respective appeals before the
CA. Franco confined his appeal to the Manila RTCs denial of his claim for moral
and exemplary damages, and the diminutive award of attorneys fees. In affirming
with modification the lower courts decision, the appellate court decreed, to wit:
WHEREFORE, foregoing considered, the appealed decision is hereby AFFIRMED
with modification ordering [BPI-FB] to pay [Franco] P63,189.00 representing the
interest deducted from the time deposit of plaintiff-appellant. P200,000.00 as
moral damages and P100,000.00 as exemplary damages, deleting the award of
nominal damages (in view of the award of moral and exemplary damages) and
increasing the award of attorneys fees from P30,000.00 to P75,000.00. Cost
against [BPI-FB]. SO ORDERED.29
In this recourse, BPI-FB ascribes error to the CA when it ruled that: (1) Franco had
a better right to the deposits in the subject accounts which are part of the
proceeds of a forged Authority to Debit; (2) Franco is entitled to interest on his
current account; (3) Franco can recover the P400,000.00 deposit in Quiaoits
savings account; (4) the dishonor of Francos checks was not legally in order; (5)
BPI-FB is liable for interest on Francos time deposit, and for moral and exemplary
damages; and (6) BPI-FBs counter-claim has no factual and legal anchor.
The petition is partly meritorious.
We are in full accord with the common ruling of the lower courts that BPI-FB
cannot unilaterally freeze Francos accounts and preclude him from withdrawing
his deposits. However, contrary to the appellate courts ruling, we hold that Franco
is not entitled to unearned interest on the time deposit as well as to moral and
exemplary damages.
First. On the issue of who has a better right to the deposits in Francos accounts,
BPI-FB urges us that the legal consequence of FMICs forgery claim is that the
money transferred by BPI-FB to Tevesteco is its own, and considering that it was
able to recover possession of the same when the money was redeposited by

Franco, it had the right to set up its ownership thereon and freeze Francos
accounts.
BPI-FB contends that its position is not unlike that of an owner of personal
property who regains possession after it is stolen, and to illustrate this point, BPIFB gives the following example: where Xs television set is stolen by Y who
thereafter sells it to Z, and where Z unwittingly entrusts possession of the TV set
to X, the latter would have the right to keep possession of the property and
preclude Z from recovering possession thereof. To bolster its position, BPI-FB cites
Article 559 of the Civil Code, which provides:
Article 559. The possession of movable property acquired in good faith is
equivalent to a title. Nevertheless, one who has lost any movable or has been
unlawfully deprived thereof, may recover it from the person in possession of the
same.
If the possessor of a movable lost or of which the owner has been unlawfully
deprived, has acquired it in good faith at a public sale, the owner cannot obtain its
return without reimbursing the price paid therefor.
BPI-FBs argument is unsound. To begin with, the movable property mentioned in
Article 559 of the Civil Code pertains to a specific or determinate thing.30 A
determinate or specific thing is one that is individualized and can be identified or
distinguished from others of the same kind.31
In this case, the deposit in Francos accounts consists of money which, albeit
characterized as a movable, is generic and fungible.32 The quality of being
fungible depends upon the possibility of the property, because of its nature or the
will of the parties, being substituted by others of the same kind, not having a
distinct individuality.33
Significantly, while Article 559 permits an owner who has lost or has been
unlawfully deprived of a movable to recover the exact same thing from the current
possessor, BPI-FB simply claims ownership of the equivalent amount of money,
i.e., the value thereof, which it had mistakenly debited from FMICs account and
credited to Tevestecos, and subsequently traced to Francos account. In fact, this
is what BPI-FB did in filing the Makati Case against Franco, et al. It staked its claim
on the money itself which passed from one account to another, commencing with
the forged Authority to Debit.
It bears emphasizing that money bears no earmarks of peculiar ownership,34 and
this characteristic is all the more manifest in the instant case which involves
money in a banking transaction gone awry. Its primary function is to pass from
hand to hand as a medium of exchange, without other evidence of its title.35
Money, which had passed through various transactions in the general course of
banking business, even if of traceable origin, is no exception.
Thus, inasmuch as what is involved is not a specific or determinate personal
property, BPI-FBs illustrative example, ostensibly based on Article 559, is
inapplicable to the instant case.

There is no doubt that BPI-FB owns the deposited monies in the accounts of
Franco, but not as a legal consequence of its unauthorized transfer of FMICs
deposits to Tevestecos account. BPI-FB conveniently forgets that the deposit of
money in banks is governed by the Civil Code provisions on simple loan or
mutuum.36 As there is a debtor-creditor relationship between a bank and its
depositor, BPI-FB ultimately acquired ownership of Francos deposits, but such
ownership is coupled with a corresponding obligation to pay him an equal amount
on demand.37 Although BPI-FB owns the deposits in Francos accounts, it cannot
prevent him from demanding payment of BPI-FBs obligation by drawing checks
against his current account, or asking for the release of the funds in his savings
account. Thus, when Franco issued checks drawn against his current account, he
had every right as creditor to expect that those checks would be honored by BPIFB as debtor.
More importantly, BPI-FB does not have a unilateral right to freeze the accounts of
Franco based on its mere suspicion that the funds therein were proceeds of the
multi-million peso scam Franco was allegedly involved in. To grant BPI-FB, or any
bank for that matter, the right to take whatever action it pleases on deposits
which it supposes are derived from shady transactions, would open the floodgates
of public distrust in the banking industry.
Our pronouncement in Simex International (Manila), Inc. v. Court of Appeals38
continues to resonate, thus:
The banking system is an indispensable institution in the modern world and plays
a vital role in the economic life of every civilized nation. Whether as mere passive
entities for the safekeeping and saving of money or as active instruments of
business and commerce, banks have become an ubiquitous presence among the
people, who have come to regard them with respect and even gratitude and, most
of all, confidence. Thus, even the humble wage-earner has not hesitated to
entrust his lifes savings to the bank of his choice, knowing that they will be safe
in its custody and will even earn some interest for him. The ordinary person, with
equal faith, usually maintains a modest checking account for security and
convenience in the settling of his monthly bills and the payment of ordinary
expenses. x x x.
In every case, the depositor expects the bank to treat his account with the utmost
fidelity, whether such account consists only of a few hundred pesos or of millions.
The bank must record every single transaction accurately, down to the last
centavo, and as promptly as possible. This has to be done if the account is to
reflect at any given time the amount of money the depositor can dispose of as he
sees fit, confident that the bank will deliver it as and to whomever directs. A
blunder on the part of the bank, such as the dishonor of the check without good
reason, can cause the depositor not a little embarrassment if not also financial
loss and perhaps even civil and criminal litigation.
The point is that as a business affected with public interest and because of the
nature of its functions, the bank is under obligation to treat the accounts of its
depositors with meticulous care, always having in mind the fiduciary nature of
their relationship. x x x.

Ineluctably, BPI-FB, as the trustee in the fiduciary relationship, is duty bound to

know the signatures of its customers. Having failed to detect the forgery in the
Authority to Debit and in the process inadvertently facilitate the FMIC-Tevesteco
transfer, BPI-FB cannot now shift liability thereon to Franco and the other payees
of checks issued by Tevesteco, or prevent withdrawals from their respective
accounts without the appropriate court writ or a favorable final judgment.
Further, it boggles the mind why BPI-FB, even without delving into the authenticity
of the signature in the Authority to Debit, effected the transfer of P80,000,000.00
from FMICs to Tevestecos account, when FMICs account was a time deposit and
it had already paid advance interest to FMIC. Considering that there is as yet no
indubitable evidence establishing Francos participation in the forgery, he remains
an innocent party. As between him and BPI-FB, the latter, which made possible the
present predicament, must bear the resulting loss or inconvenience.
Second. With respect to its liability for interest on Francos current account, BPI-FB
argues that its non-compliance with the Makati RTCs Order Lifting the Order of
Attachment and the legal consequences thereof, is a matter that ought to be
taken up in that court.
The argument is tenuous. We agree with the succinct holding of the appellate
court in this respect. The Manila RTCs order to pay interests on Francos current
account arose from BPI-FBs unjustified refusal to comply with its obligation to pay
Franco pursuant to their contract of mutuum. In other words, from the time BPI-FB
refused Francos demand for the release of the deposits in his current account,
specifically, from May 17, 1990, interest at the rate of 12% began to accrue
thereon.39
Undeniably, the Makati RTC is vested with the authority to determine the legal
consequences of BPI-FBs non-compliance with the Order Lifting the Order of
Attachment. However, such authority does not preclude the Manila RTC from
ruling on BPI-FBs liability to Franco for payment of interest based on its continued
and unjustified refusal to perform a contractual obligation upon demand. After all,
this was the core issue raised by Franco in his complaint before the Manila RTC.
Third. As to the award to Franco of the deposits in Quiaoits account, we find no
reason to depart from the factual findings of both the Manila RTC and the CA.
Noteworthy is the fact that Quiaoit himself testified that the deposits in his
account are actually owned by Franco who simply accommodated Jaime
Sebastians request to temporarily transfer P400,000.00 from Francos savings
account to Quiaoits account.40 His testimony cannot be characterized as hearsay
as the records reveal that he had personal knowledge of the arrangement made
between Franco, Sebastian and himself.41
BPI-FB makes capital of Francos belated allegation relative to this particular
arrangement. It insists that the transaction with Quiaoit was not specifically
alleged in Francos complaint before the Manila RTC. However, it appears that BPIFB had impliedly consented to the trial of this issue given its extensive crossexamination of Quiaoit.

Section 5, Rule 10 of the Rules of Court provides:

Section 5. Amendment to conform to or authorize presentation of evidence.
When issues not raised by the pleadings are tried with the express or implied
consent of the parties, they shall be treated in all respects as if they had been
raised in the pleadings. Such amendment of the pleadings as may be necessary to
cause them to conform to the evidence and to raise these issues may be made
upon motion of any party at any time, even after judgment; but failure to amend
does not affect the result of the trial of these issues. If evidence is objected to at
the trial on the ground that it is now within the issues made by the pleadings, the
court may allow the pleadings to be amended and shall do so with liberality if the
presentation of the merits of the action and the ends of substantial justice will be
subserved thereby. The court may grant a continuance to enable the amendment
to be made. (Emphasis supplied)
In all, BPI-FBs argument that this case is not the right forum for Franco to recover
the P400,000.00 begs the issue. To reiterate, Quiaoit, testifying during the trial,
unequivocally disclaimed ownership of the funds in his account, and pointed to
Franco as the actual owner thereof. Clearly, Francos action for the recovery of his
deposits appropriately covers the deposits in Quiaoits account.
Fourth. Notwithstanding all the foregoing, BPI-FB continues to insist that the
dishonor of Francos checks respectively dated September 11 and 18, 1989 was
legally in order in view of the Makati RTCs supplemental writ of attachment issued
on September 14, 1989. It posits that as the party that applied for the writ of
attachment before the Makati RTC, it need not be served with the Notice of
Garnishment before it could place Francos accounts under garnishment.
The argument is specious. In this argument, we perceive BPI-FBs clever but
transparent ploy to circumvent Section 4,42 Rule 13 of the Rules of Court. It
should be noted that the strict requirement on service of court papers upon the
parties affected is designed to comply with the elementary requisites of due
process. Franco was entitled, as a matter of right, to notice, if the requirements of
due process are to be observed. Yet, he received a copy of the Notice of
Garnishment only on September 27, 1989, several days after the two checks he
issued were dishonored by BPI-FB on September 20 and 21, 1989. Verily, it was
premature for BPI-FB to freeze Francos accounts without even awaiting service of
the Makati RTCs Notice of Garnishment on Franco.
Additionally, it should be remembered that the enforcement of a writ of
attachment cannot be made without including in the main suit the owner of the
property attached by virtue thereof. Section 5, Rule 13 of the Rules of Court
specifically provides that "no levy or attachment pursuant to the writ issued x x x
shall be enforced unless it is preceded, or contemporaneously accompanied, by
service of summons, together with a copy of the complaint, the application for
attachment, on the defendant within the Philippines."
Franco was impleaded as party-defendant only on May 15, 1990. The Makati RTC
had yet to acquire jurisdiction over the person of Franco when BPI-FB garnished
his accounts.43 Effectively, therefore, the Makati RTC had no authority yet to bind

the deposits of Franco through the writ of attachment, and consequently, there
was no legal basis for BPI-FB to dishonor the checks issued by Franco.
Fifth. Anent the CAs finding that BPI-FB was in bad faith and as such liable for the
advance interest it deducted from Francos time deposit account, and for moral as
well as exemplary damages, we find it proper to reinstate the ruling of the trial
court, and allow only the recovery of nominal damages in the amount of
P10,000.00. However, we retain the CAs award of P75,000.00 as attorneys fees.
In granting Francos prayer for interest on his time deposit account and for moral
and exemplary damages, the CA attributed bad faith to BPI-FB because it (1)
completely disregarded its obligation to Franco; (2) misleadingly claimed that
Francos deposits were under garnishment; (3) misrepresented that Francos
current account was not on file; and (4) refused to return the P400,000.00 despite
the fact that the ostensible owner, Quiaoit, wanted the amount returned to Franco.
In this regard, we are guided by Article 2201 of the Civil Code which provides:
Article 2201. In contracts and quasi-contracts, the damages for which the obligor
who acted in good faith is liable shall be those that are the natural and probable
consequences of the breach of the obligation, and which the parties have foreseen
or could have reasonable foreseen at the time the obligation was constituted.
In case of fraud, bad faith, malice or wanton attitude, the obligor shall be
responsible for all damages which may be reasonably attributed to the nonperformance of the obligation. (Emphasis supplied.)
We find, as the trial court did, that BPI-FB acted out of the impetus of selfprotection and not out of malevolence or ill will. BPI-FB was not in the corrupt
state of mind contemplated in Article 2201 and should not be held liable for all
damages now being imputed to it for its breach of obligation. For the same reason,
it is not liable for the unearned interest on the time deposit.
Bad faith does not simply connote bad judgment or negligence; it imports a
dishonest purpose or some moral obliquity and conscious doing of wrong; it
partakes of the nature of fraud.44 We have held that it is a breach of a known
duty through some motive of interest or ill will.45 In the instant case, we cannot
attribute to BPI-FB fraud or even a motive of self-enrichment. As the trial court
found, there was no denial whatsoever by BPI-FB of the existence of the accounts.
The computer-generated document which indicated that the current account was
"not on file" resulted from the prior debit by BPI-FB of the deposits. The remedy of
freezing the account, or the garnishment, or even the outright refusal to honor
any transaction thereon was resorted to solely for the purpose of holding on to the
funds as a security for its intended court action,46 and with no other goal but to
ensure the integrity of the accounts.
We have had occasion to hold that in the absence of fraud or bad faith,47 moral
damages cannot be awarded; and that the adverse result of an action does not
per se make the action wrongful, or the party liable for it. One may err, but error
alone is not a ground for granting such damages.48

An award of moral damages contemplates the existence of the following

requisites: (1) there must be an injury clearly sustained by the claimant, whether
physical, mental or psychological; (2) there must be a culpable act or omission
factually established; (3) the wrongful act or omission of the defendant is the
proximate cause of the injury sustained by the claimant; and (4) the award for
damages is predicated on any of the cases stated in Article 2219 of the Civil
Code.49
Franco could not point to, or identify any particular circumstance in Article 2219 of
the Civil Code,50 upon which to base his claim for moral damages.1wphi1
Thus, not having acted in bad faith, BPI-FB cannot be held liable for moral
damages under Article 2220 of the Civil Code for breach of contract.51
We also deny the claim for exemplary damages. Franco should show that he is
entitled to moral, temperate, or compensatory damages before the court may
even consider the question of whether exemplary damages should be awarded to
him.52 As there is no basis for the award of moral damages, neither can
exemplary damages be granted.
While it is a sound policy not to set a premium on the right to litigate,53 we,
however, find that Franco is entitled to reasonable attorneys fees for having been
compelled to go to court in order to assert his right. Thus, we affirm the CAs grant
of P75,000.00 as attorneys fees.
Attorneys fees may be awarded when a party is compelled to litigate or incur
expenses to protect his interest,54 or when the court deems it just and
equitable.55 In the case at bench, BPI-FB refused to unfreeze the deposits of
Franco despite the Makati RTCs Order Lifting the Order of Attachment and
Quiaoits unwavering assertion that the P400,000.00 was part of Francos savings
account. This refusal constrained Franco to incur expenses and litigate for almost
two (2) decades in order to protect his interests and recover his deposits.
Therefore, this Court deems it just and equitable to grant Franco P75,000.00 as
attorneys fees. The award is reasonable in view of the complexity of the issues
and the time it has taken for this case to be resolved.56
Sixth. As for the dismissal of BPI-FBs counter-claim, we uphold the Manila RTCs
ruling, as affirmed by the CA, that BPI-FB is not entitled to recover P3,800,000.00
as actual damages. BPI-FBs alleged loss of profit as a result of Francos suit is, as
already pointed out, of its own making. Accordingly, the denial of its counter-claim
is in order.
WHEREFORE, the petition is PARTIALLY GRANTED. The Court of Appeals Decision
dated November 29, 1995 is AFFIRMED with the MODIFICATION that the award of
unearned interest on the time deposit and of moral and exemplary damages is
DELETED.
No pronouncement as to costs. SO ORDERED.
G.R. No. 122079 June 27, 1997

SPOUSES ANTONIO E.A. CONCEPCION and MANUELA S. CONCEPCION, petitioners,

vs.
HON. COURT OF APPEALS, HOME SAVINGS BANK AND TRUST COMPANY, and as
nominal party-defendants, THE SHERIFF ASSIGNED TO SAN JUAN, METRO MANILA,
and who conducted the auction sale and the REGISTER OF DEEDS or his
representative of San Juan, Metro Manila, and ASAJE REALTY CORPORATION,
respondents.

three quarterly payments plus interest, penalty, and service charges. Still, no
payment was received.

VITUG, J.:

On 14 April 1986, the bank finally filed with the Office of the Provincial Sheriff of
Pasig City a petition for extrajudicial foreclosure of the real estate mortgage
executed by the Concepcions. A notice of sale was issued on 15 May 1986, setting
the public auction sale on 11 June 1986. The notice was published in the
newspaper "Mabuhay." A copy of the notice was sent to the Concepcions at 59
Whitefield St., White Plains Subdivision, Quezon City and/or at 11 Albany St.,
Greenhills Subdivision, San Juan, Metro Manila. The public auction sale went on as
scheduled with the bank emerging as the highest bidder. A Certificate of Sale was
issued in favor of the bank.

The spouses Antonio E.A. Concepcion and Manuela S. Concepcion assail, via the
instant petition for review on certiorari, the decision, 1 dated 15 September 1995,
of the Court of Appeals, affirming with modification the judgment of the Regional
Trial Court ("RTC"), 2 Branch 157, of Pasig City, 3 that dismissed the complaint of
herein petitioners against private respondents.

The Concepcions were unable to exercise their right of redemption within the oneyear period provided under Act No. 3135. The bank thus consolidated its title over
the property and, after the cancellation of the title in the name of the
Concepcions, a new transfer certificate of title (No. 090-R) was issued in the name
of Home Savings Bank and Trust Company.

The facts, hereunder narrated, are culled from the findings of the appellate court.

On 31 July 1987, the bank executed a Deed of Absolute Sale in favor of Asaje
Realty Corporation and a new certificate of title was issued in the latter's name.

On 17 January 1979, the Home Savings Bank and Trust Company (now Insular Life
Savings and Trust Company) granted to the Concepcions a loan amounting to
P1,400,000.00. The Concepcions, in turn, executed in favor of the bank a
promissory note and a real estate mortgage over their property located at 11
Albany St., Greenhills, San Juan, Metro Manila. The loan was payable in equal
quarterly amortizations for a period of fifteen (15) years and carried an interest
rate of sixteen percent (16%) per annum. The promissory note provided that the
Concepcions had authorized
. . . the Bank to correspondingly increase the interest rate presently stipulated in
this transaction without advance notice to me/us in the event the Central Bank of
the Philippines raises its rediscount rate to member banks, and/or the interest rate
on savings and time deposit, and/or the interest rate on such loans and/or
advances. 4
In accordance with the above provision, the bank unilaterally increased the
interest rate from 16% to 21% effective 17 February 1980; from 21% to 30%
effective 17 October 1984; and from 30% to 38% effective 17 November 1984,
increasing the quarterly amortizations from P67,830.00 to, respectively,
P77,619.72, P104,661.10, and P123,797.05 for the periods aforestated. The
Concepcions paid, under protest, the increased amortizations of P77,619.72 and
P104,661.10 until January 1985 but thereafter failed to pay the quarterly
amortization of P123,797.05 (starting due date of 17 April 1985).
In a letter, dated 15 July 1985, the bank's President made a demand on the
Concepcions for the payment of the arrearages. The Concepcions failed to pay,
constraining the bank's counsel to send a final demand letter, dated 26 August
1985, for the payment of P393,878.81, covering the spouses' due account for

Meanwhile, on 29 July 1987, the Concepcions filed an action against Home

Savings Bank and Trust Company, the Sheriff of San Juan, Metro Manila, and the
Register of Deeds of San Juan, Metro Manila, for the cancellation of the foreclosure
sale, the declaration of nullity of the consolidation of title in favor of the bank, and
the declaration of nullity of the unilateral increases of the interest rates on their
loan. The spouses likewise claimed damages against the defendants. The
Concepcions, having learned of the sale of the property to Asaje Realty
Corporation, filed an amended complaint impleading the realty corporation and so
praying as well for the cancellation of the sale executed between said corporation
and the bank and the cancellation of the certificate of title issued in the name of
Asaje.
On 31 August 1992, the trial court found for the defendants and ruled:
In view of all the foregoing premises, this Court finally concludes that the plaintiffs
have no cause of action either against defendant Home Savings Bank & Trust
Company or defendant Asaje Realty Corporation; and under the circumstances of
this case, it deems it just and equitable that attorney's fees and expenses of
litigation should be recovered by said defendants.
WHEREFORE, judgment is hereby rendered dismissing the amended complaint of
plaintiffs Spouses Antonio E.A. Concepcion and Manuela S. Concepcion against the
defendants for lack of merit, and ordering the said plaintiffs to pay attorney's fees
and expenses of litigation in the sum of P30,000.00 to defendant Home Savings
Bank & Trust Company and in the amount of P25,000.00 to defendant Asaje Realty
Corporation, in addition to their respective costs of suit. SO ORDERED. 5
The Concepcions went to the Court of Appeals.

On 15 September 1995, the appellate court affirmed the trial court's decision, with
modification, as follows:
Under the facts and circumstances of the case at bench, the award of attorney's
fees, expenses of litigation and costs of suit in favor of defendant-appellee should
be deleted. It is not a sound policy to place a penalty on the right to litigate, nor
should counsel's fees be awarded everytime a party wins a suit (Arenas vs. Court
of Appeals, 169 SCRA 558).
WHEREFORE, the appealed judgment is AFFIRMED with the modification that the
award of attorneys fees, litigation expenses and costs of suit in favor of
defendant-appellees are deleted from the dispositive portion. SO ORDERED. 6
The Concepcions forthwith filed with this Court a petition for review on certiorari,
contending that they have been denied their contractually stipulated right to be
personally notified of the foreclosure proceedings on the mortgaged property.
There is some merit in the petition.
The three common types of forced sales arising from a failure to pay a mortgage
debt include (a) an extrajudicial foreclosure sale, governed by Act No. 3135; (b) a
judicial foreclosure sale, regulated by Rule 68 of the Rules of Court; and (c) an
ordinary execution sale, covered by Rule 39 of the Rules of Court. 7 Each mode,
peculiarly, has its own requirements.
In an extrajudicial foreclosure, such as here, Section 3 of Act No. 3135 8 is the law
applicable; 9 the provision reads:
Sec. 3. Notice shall be given by posting notices of the sale for not less than
twenty days in at least three public places of the municipality or city where the
property is situated, and if such property is worth more than four hundred pesos,
such notice shall also be published once a week for at least three consecutive
weeks in a newspaper of general circulation in the municipality or city.
The Act only requires (1) the posting of notices of sale in three
public places, and (2) the publication of the same in a newspaper of general
circulation. 10 Personal notice to the mortgagor is not necessary. 11,
Nevertheless, the parties to the mortgage contract are not precluded from
exacting additional requirements.
In the case at bar, the mortgage contract stipulated that
All correspondence relative to this Mortgage, including demand letters, summons,
subpoenas, or notifications of any judicial or extrajudicial actions shall be sent to
the Mortgagor at the address given above or at the address that may hereafter be
given in writing by the Mortgagor to the Mortgagee, and the mere act of sending
any correspondence by mail or by personal delivery to the said address shall be
valid and effective notice to the Mortgagor for all legal purposes, and fact that any
communication is not actually received by the Mortgagor, or that it has been
returned unclaimed to the Mortgagee, or that no person was found at the address

given, or that the address is fictitious or cannot be located, shall not excuse or
relieve Mortgagor from the effects of such notice. 12
The stipulation, not being contrary to law, morals, good customs, public order or
public policy, is the law between the contracting parties and should be faithfully
complied with. 13
Private respondent bank maintains that the stipulation that "all correspondence
relative to (the) Mortgage . . . shall be sent to the Mortgagor at the address given
above or at the address that may hereafter be given in writing by the Mortgagor
to the Mortgagee" 14 gives the mortgagee an alternative to send its
correspondence either at the old or the new address given. 15 This stand is
illogical. It could not have been the intendment of the parties to defeat the very
purpose of the provision referred to which is obviously to apprise the mortgagors
of the bank's action that might affect the property and to accord to them an
opportunity to safeguard their rights. The Court finds the bank's failure to comply
with its agreement with petitioners an inexcusable breach of the mortgagee's
covenant. Neither petitioners' subsequent opportunity to redeem the property nor
their failed negotiations with the bank for a new schedule of payments, 16 can be
a valid justification for the breach.
The foregoing notwithstanding, petitioners may no longer seek the reconveyance
of the property from private respondent Asaje Realty Corporation, the latter
having been, evidently, an innocent purchaser in good faith. 17 The realty
corporation purchased the property when the title was already in the name of the
bank. It was under no obligation to investigate the title of the bank or to look
beyond what clearly appeared to be on the face of the certificate. 18
Private respondent bank, however, can still be held to account for the bid price of
Asaje Realty Corporation over and above, if any, the amount due the bank on the
basis of the original interest rate, the unilateral increases made by the bank
having been correctly invalidated by the Court of Appeals.
The validity of "escalation" or "escalator" clauses in contracts, in general, was
upheld by the Supreme Court in Banco Filipino Savings and Mortgage Bank vs.
Hen. Navarro and Del Valle. 19 Hence:
Some contracts contain what is known as an "escalator clause," which is defined
as one in which the contract fixes a base price but contains a provision that in the
event of specified cost increases, the seller or contractor may raise the price up to
a fixed percentage of the base. Attacks on such a clause have usually been based
on the claim that, because of the open price-provision, the contract was too
indefinite to be enforceable and did not evidence actual meeting of the minds of
the parties or that the arrangement left the price to be determined arbitrarily by
one party so that the contract lacked mutuality. In most instances, however, these
attacks have been unsuccessful.
The Court further finds as a matter of law that the cost of living index adjustment,
or substantively unconscionable.

Cost of living index adjustment clauses are widely used in commercial contracts in
an effort to maintain fiscal stability and to retain "real dollar" value to the price
terms of long term contracts. The provision is a common one, and has been
universally upheld and enforced. Indeed, the Federal government has recognized
the efficacy of escalator clauses in tying Social Security benefits to the cost of
living index, 42 U.S.C.s 415(i). Pension benefits and labor contracts negotiated by
most of the major labor unions are other examples. That inflation, expected or
otherwise, will cause a particular bargain to be more costly in terms of total
dollars than originally contemplated can be of little solace to the plaintiffs. 20

Such a contract is a veritable trap for the weaker party whom the courts of justice
must protect against abuse and imposition. (Citations omitted.) 22

In Philippine National Bank vs. Court of Appeals, 21 the Court further elucidated,
as follows:
It is basic that there can be no contract in the true sense in the absence of the
element of agreement, or of mutual assent of the parties. If this assent is wanting
on the part of one who contracts his act has no more efficacy than if it had been
done under duress or by a person of unsound mind.

Letter of 19 July 1984:

Please be informed that the Bank has increased the interest rate of your existing
loan from 21 to 30% per annum beginning October 17, 1984. This increase of
interest rate is in accordance with the provision of Section 2 of Presidential Decree
No. 1684 23 amending Act No. 2655. This provision of the decree is reiterated
under paragraph 1 of your Promissory Note. Your quarterly amortization has been
increased to P104,661.10.

Similarly, contract changes must be made with the consent of the contracting
parties. The minds of all the parties must meet as to the proposed modification
especially when it affects an important aspect of the agreement. In the case of
loan contracts, it cannot be gainsaid that the rate of interest is component, for it
can make or break a capital venture. Thus, any change must be mutually agreed
upon, otherwise, it is bereft of any binding effect.
We cannot countenance petitioner bank's posturing that the escalation clause at
bench gives it unbridled right to unilaterally upwardly adjust the interest on
private respondents' loan. That would completely take away from private
respondents the right to assent to an important modification in their agreement,
and would negate the element of mutuality in contracts. In Philippine National
Bank v. Court of Appeals, et al., 196 SCRA 536, 544-545 (1991) we held
. . . (T)he unilateral action of the PNB in increasing the interest rate on the private
respondent's loan violated the mutuality of contracts ordained in Article 1308 of
the Civil Code:
Art. 1308.
The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.
In order that obligations arising from contracts may have the force or law between
the parties, there must be mutuality between the parties based on their essential
equality. A contract containing a condition which makes its fulfillment dependent
exclusively upon the uncontrolled will of one of the contracting parties, is void . . .
Hence, even assuming that the . . . loan agreement between the PNB and the
private respondent gave the PNB a license (although in fact there was none) to
increase the interest rate at will during the term of the loan, that license would
have been null and void for being violative of the principle of mutuality essential
in contracts. It would have invested the loan agreement with the character of a
contract of adhesion, where the parties do not equal footing the weaker party's
(the debtor) participation being reduced to the alternative to take it or leave it' . . .

Even if we were to consider that petitioners were bound by their agreement

allowing an increase in the interest rate despite the lack of advance notice to
them, the escalation should still be subject, as so contractually stipulated, to a
corresponding increase by the Central Bank of its rediscount rate to member
banks, or of the interest rate on savings and time deposit, or of the interest rate
on such loans and advances. The notices sent to petitioners merely read:

We trust that you will be guided accordingly. 24

Letter of 14 November 1984:
On account of the prevailing business and economic condition, we are compelled
to increase the interest rate of your existing loan from 30% to 38 % per annum
effective November 17, 1984. This increase is in accordance with your agreement
(escalation clause) in your promissory note/s.
In view of this increase in the interest rate of your loan, your Quarterly
amortization correspondingly increased to P123,797.05 commencing on April 17,
1985.
We trust that you will understand our position and please be guided accordingly.
25
Given the circumstances, the Court sees no cogent reasons to fault the appellate
court in its finding that there are no sufficient valid justifications aptly shown for
the unilateral increases by private respondent bank of the interest rates on the
loan.
WHEREFORE, the, decision of the appellate court is AFFIRMED subject to the
MODIFICATION that private respondent Home Savings Bank and Trust Company
shall pay to petitioners the excess, if any, of the bid price it received from Asaje
Realty Corporation for the foreclosed property in question over and above the
unpaid balance of the loan computed at the original interest rate. This case is
REMANDED to the trial court for the above determination. No costs.
SO ORDERED.
G.R. No. 155223

April 4, 2007

BOBIE ROSE V. FRIAS, represented by her Attorney-in-fact, MARIE F. FUJITA,

Petitioner,
vs.
FLORA SAN DIEGO-SISON, Respondent.

for the last six months only. Under this circumstance, the amount of P3 million
given by the SECOND PARTY shall be treated as [a] loan and the property shall be
considered as the security for the mortgage which can be enforced in accordance
with law.

DECISION

x x x x.6

AUSTRIA-MARTINEZ, J.:

Petitioner received from respondent two million pesos in cash and one million
pesos in a post-dated check dated February 28, 1990, instead of 1991, which
rendered said check stale.7 Petitioner then gave respondent TCT No. 168173 in
the name of IMRDC and the Deed of Absolute Sale over the property between
petitioner and IMRDC.

Before us is a Petition for Review on Certiorari filed by Bobie Rose V. Frias

represented by her Attorney-in-fact, Marie Regine F. Fujita (petitioner) seeking to
annul the Decision1 dated June 18, 2002 and the Resolution2 dated September
11, 2002 of the Court of Appeals (CA) in CA-G.R. CV No. 52839.
Petitioner is the owner of a house and lot located at No. 589 Batangas East, Ayala
Alabang, Muntinlupa, Metro Manila, which she acquired from Island Masters Realty
and Development Corporation (IMRDC) by virtue of a Deed of Sale dated Nov. 16,
1990.3 The property is covered by TCT No. 168173 of the Register of Deeds of
Makati in the name of IMRDC.4
On December 7, 1990, petitioner, as the FIRST PARTY, and Dra. Flora San DiegoSison (respondent), as the SECOND PARTY, entered into a Memorandum of
Agreement5 over the property with the following terms:
NOW, THEREFORE, for and in consideration of the sum of THREE MILLION PESOS
(P3,000,000.00) receipt of which is hereby acknowledged by the FIRST PARTY from
the SECOND PARTY, the parties have agreed as follows:
1. That the SECOND PARTY has a period of Six (6) months from the date of the
execution of this contract within which to notify the FIRST PARTY of her intention
to purchase the aforementioned parcel of land together within (sic) the
improvements thereon at the price of SIX MILLION FOUR HUNDRED THOUSAND
PESOS (P6,400,000.00). Upon notice to the FIRST PARTY of the SECOND PARTYs
intention to purchase the same, the latter has a period of another six months
within which to pay the remaining balance of P3.4 million.
2. That prior to the six months period given to the SECOND PARTY within which to
decide whether or not to purchase the above-mentioned property, the FIRST
PARTY may still offer the said property to other persons who may be interested to
buy the same provided that the amount of P3,000,000.00 given to the FIRST
PARTY BY THE SECOND PARTY shall be paid to the latter including interest based
on prevailing compounded bank interest plus the amount of the sale in excess of
P7,000,000.00 should the property be sold at a price more than P7 million.
3. That in case the FIRST PARTY has no other buyer within the first six months
from the execution of this contract, no interest shall be charged by the SECOND
PARTY on the P3 million however, in the event that on the sixth month the
SECOND PARTY would decide not to purchase the aforementioned property, the
FIRST PARTY has a period of another six months within which to pay the sum of P3
million pesos provided that the said amount shall earn compounded bank interest

Respondent decided not to purchase the property and notified petitioner through a
letter8 dated March 20, 1991, which petitioner received only on June 11, 1991,9
reminding petitioner of their agreement that the amount of two million pesos
which petitioner received from respondent should be considered as a loan payable
within six months. Petitioner subsequently failed to pay respondent the amount of
two million pesos.
On April 1, 1993, respondent filed with the Regional Trial Court (RTC) of Manila, a
complaint10 for sum of money with preliminary attachment against petitioner. The
case was docketed as Civil Case No. 93-65367 and raffled to Branch 30.
Respondent alleged the foregoing facts and in addition thereto averred that
petitioner tried to deprive her of the security for the loan by making a false
report11 of the loss of her owners copy of TCT No. 168173 to the Tagig Police
Station on June 3, 1991, executing an affidavit of loss and by filing a petition12 for
the issuance of a new owners duplicate copy of said title with the RTC of Makati,
Branch 142; that the petition was granted in an Order13 dated August 31, 1991;
that said Order was subsequently set aside in an Order dated April 10, 199214
where the RTC Makati granted respondents petition for relief from judgment due
to the fact that respondent is in possession of the owners duplicate copy of TCT
No. 168173, and ordered the provincial public prosecutor to conduct an
investigation of petitioner for perjury and false testimony. Respondent prayed for
the ex-parte issuance of a writ of preliminary attachment and payment of two
million pesos with interest at 36% per annum from December 7, 1991,
P100,000.00 moral, corrective and exemplary damages and P200,000.00 for
attorneys fees.
In an Order dated April 6, 1993, the Executive Judge of the RTC of Manila issued a
writ of preliminary attachment upon the filing of a bond in the amount of two
million pesos.15
Petitioner filed an Amended Answer16 alleging that the Memorandum of
Agreement was conceived and arranged by her lawyer, Atty. Carmelita Lozada,
who is also respondents lawyer; that she was asked to sign the agreement
without being given the chance to read the same; that the title to the property
and the Deed of Sale between her and the IMRDC were entrusted to Atty. Lozada
for safekeeping and were never turned over to respondent as there was no
consummated sale yet; that out of the two million pesos cash paid, Atty. Lozada

took the one million pesos which has not been returned, thus petitioner had filed a
civil case against her; that she was never informed of respondents decision not to
purchase the property within the six month period fixed in the agreement; that
when she demanded the return of TCT No. 168173 and the Deed of Sale between
her and the IMRDC from Atty. Lozada, the latter gave her these documents in a
brown envelope on May 5, 1991 which her secretary placed in her attache case;
that the envelope together with her other personal things were lost when her car
was forcibly opened the following day; that she sought the help of Atty. Lozada
who advised her to secure a police report, to execute an affidavit of loss and to
get the services of another lawyer to file a petition for the issuance of an owners
duplicate copy; that the petition for the issuance of a new owners duplicate copy
was filed on her behalf without her knowledge and neither did she sign the
petition nor testify in court as falsely claimed for she was abroad; that she was a
victim of the manipulations of Atty. Lozada and respondent as shown by the filing
of criminal charges for perjury and false testimony against her; that no interest
could be due as there was no valid mortgage over the property as the principal
obligation is vitiated with fraud and deception. She prayed for the dismissal of the
complaint, counter-claim for damages and attorneys fees.
Trial on the merits ensued. On January 31, 1996, the RTC issued a decision,17 the
dispositive portion of which reads:
WHEREFORE, judgment is hereby RENDERED:
1) Ordering defendant to pay plaintiff the sum of P2 Million plus interest thereon at
the rate of thirty two (32%) per cent per annum beginning December 7, 1991 until
fully paid.
2) Ordering defendant to pay plaintiff the sum of P70,000.00 representing
premiums paid by plaintiff on the attachment bond with legal interest thereon
counted from the date of this decision until fully paid.
3) Ordering defendant to pay plaintiff the sum of P100,000.00 by way of moral,
corrective and exemplary damages.
4) Ordering defendant to pay plaintiff attorneys fees of P100,000.00 plus cost of
litigation.18
The RTC found that petitioner was under obligation to pay respondent the amount
of two million pesos with compounded interest pursuant to their Memorandum of
Agreement; that the fraudulent scheme employed by petitioner to deprive
respondent of her only security to her loaned money when petitioner executed an
affidavit of loss and instituted a petition for the issuance of an owners duplicate
title knowing the same was in respondents possession, entitled respondent to
moral damages; and that petitioners bare denial cannot be accorded credence
because her testimony and that of her witness did not appear to be credible.
The RTC further found that petitioner admitted that she received from respondent
the two million pesos in cash but the fact that petitioner gave the one million
pesos to Atty. Lozada was without respondents knowledge thus it is not binding

on respondent; that respondent had also proven that in 1993, she initially paid the
sum of P30,000.00 as premium for the issuance of the attachment bond,
P20,000.00 for its renewal in 1994, and P20,000.00 for the renewal in 1995, thus
plaintiff should be reimbursed considering that she was compelled to go to court
and ask for a writ of preliminary attachment to protect her rights under the
agreement.
Petitioner filed her appeal with the CA. In a Decision dated June 18, 2002, the CA
affirmed the RTC decision with modification, the dispositive portion of which reads:
WHEREFORE, premises considered, the decision appealed from is MODIFIED in the
sense that the rate of interest is reduced from 32% to 25% per annum, effective
June 7, 1991 until fully paid.19
The CA found that: petitioner gave the one million pesos to Atty. Lozada partly as
her commission and partly as a loan; respondent did not replace the mistakenly
dated check of one million pesos because she had decided not to buy the property
and petitioner knew of her decision as early as April 1991; the award of moral
damages was warranted since even granting petitioner had no hand in the filing of
the petition for the issuance of an owners copy, she executed an affidavit of loss
of TCT No. 168173 when she knew all along that said title was in respondents
possession; petitioners claim that she thought the title was lost when the brown
envelope given to her by Atty. Lozada was stolen from her car was hollow; that
such deceitful conduct caused respondent serious anxiety and emotional distress.
The CA concluded that there was no basis for petitioner to say that the interest
should be charged for six months only and no more; that a loan always bears
interest otherwise it is not a loan; that interest should commence on June 7,
199120 with compounded bank interest prevailing at the time the two million was
considered as a loan which was in June 1991; that the bank interest rate for loans
secured by a real estate mortgage in 1991 ranged from 25% to 32% per annum as
certified to by Prudential Bank,21 that in fairness to petitioner, the rate to be
charged should be 25% only.
Petitioners motion for reconsideration was denied by the CA in a Resolution dated
September 11, 2002.
Hence the instant Petition for Review on Certiorari filed by petitioner raising the
following issues:
(A) WHETHER OR NOT THE COMPOUNDED BANK INTEREST SHOULD BE LIMITED
TO SIX (6) MONTHS AS CONTAINED IN THE MEMORANDUM OF AGREEMENT.
(B) WHETHER OR NOT THE RESPONDENT IS ENTITLED TO MORAL DAMAGES.
(C) WHETHER OR NOT THE GRANT OF CORRECTIVE AND EXEMPLARY DAMAGES
AND ATTORNEYS FEES IS PROPER EVEN IF NOT MENTIONED IN THE TEXT OF THE
DECISION.22

Petitioner contends that the interest, whether at 32% per annum awarded by the
trial court or at 25% per annum as modified by the CA which should run from June
7, 1991 until fully paid, is contrary to the parties Memorandum of Agreement;
that the agreement provides that if respondent would decide not to purchase the
property, petitioner has the period of another six months to pay the loan with
compounded bank interest for the last six months only; that the CAs ruling that a
loan always bears interest otherwise it is not a loan is contrary to Art. 1956 of the
New Civil Code which provides that no interest shall be due unless it has been
expressly stipulated in writing.
We are not persuaded.
While the CAs conclusion, that a loan always bears interest otherwise it is not a
loan, is flawed since a simple loan may be gratuitous or with a stipulation to pay
interest,23 we find no error committed by the CA in awarding a 25% interest per
annum on the two-million peso loan even beyond the second six months
stipulated period.
The Memorandum of Agreement executed between the petitioner and respondent
on December 7, 1990 is the law between the parties. In resolving an issue based
upon a contract, we must first examine the contract itself, especially the
provisions thereof which are relevant to the controversy.24 The general rule is that
if the terms of an agreement are clear and leave no doubt as to the intention of
the contracting parties, the literal meaning of its stipulations shall prevail.25 It is
further required that the various stipulations of a contract shall be interpreted
together, attributing to the doubtful ones that sense which may result from all of
them taken jointly.26
In this case, the phrase "for the last six months only" should be taken in the
context of the entire agreement. We agree with and adopt the CAs interpretation
of the phrase in this wise:
Their agreement speaks of two (2) periods of six months each. The first six-month
period was given to plaintiff-appellee (respondent) to make up her mind whether
or not to purchase defendant-appellants (petitioner's) property. The second sixmonth period was given to defendant-appellant to pay the P2 million loan in the
event that plaintiff-appellee decided not to buy the subject property in which case
interest will be charged "for the last six months only", referring to the second sixmonth period. This means that no interest will be charged for the first six-month
period while appellee was making up her mind whether to buy the property, but
only for the second period of six months after appellee had decided not to buy the
property. This is the meaning of the phrase "for the last six months only".
Certainly, there is nothing in their agreement that suggests that interest will be
charged for six months only even if it takes defendant-appellant an eternity to pay
the loan.27
The agreement that the amount given shall bear compounded bank interest for
the last six months only, i.e., referring to the second six-month period, does not
mean that interest will no longer be charged after the second six-month period
since such stipulation was made on the logical and reasonable expectation that

such amount would be paid within the date stipulated. Considering that petitioner
failed to pay the amount given which under the Memorandum of Agreement shall
be considered as a loan, the monetary interest for the last six months continued
to accrue until actual payment of the loaned amount.
The payment of regular interest constitutes the price or cost of the use of money
and thus, until the principal sum due is returned to the creditor, regular interest
continues to accrue since the debtor continues to use such principal amount.28 It
has been held that for a debtor to continue in possession of the principal of the
loan and to continue to use the same after maturity of the loan without payment
of the monetary interest, would constitute unjust enrichment on the part of the
debtor at the expense of the creditor.29
Petitioner and respondent stipulated that the loaned amount shall earn
compounded bank interests, and per the certification issued by Prudential Bank,
the interest rate for loans in 1991 ranged from 25% to 32% per annum. The CA
reduced the interest rate to 25% instead of the 32% awarded by the trial court
which petitioner no longer assailed.1awphi1.nt
In Bautista v. Pilar Development Corp.,30 we upheld the validity of a 21% per
annum interest on a P142,326.43 loan. In Garcia v. Court of Appeals,31 we
sustained the agreement of the parties to a 24% per annum interest on an
P8,649,250.00 loan. Thus, the interest rate of 25% per annum awarded by the CA
to a P2 million loan is fair and reasonable.
Petitioner next claims that moral damages were awarded on the erroneous finding
that she used a fraudulent scheme to deprive respondent of her security for the
loan; that such finding is baseless since petitioner was acquitted in the case for
perjury and false testimony filed by respondent against her.
We are not persuaded.
Article 31 of the Civil Code provides that when the civil action is based on an
obligation not arising from the act or omission complained of as a felony, such
civil action may proceed independently of the criminal proceedings and regardless
of the result of the latter.32
While petitioner was acquitted in the false testimony and perjury cases filed by
respondent against her, those actions are entirely distinct from the collection of
sum of money with damages filed by respondent against petitioner.
We agree with the findings of the trial court and the CA that petitioners act of
trying to deprive respondent of the security of her loan by executing an affidavit
of loss of the title and instituting a petition for the issuance of a new owners
duplicate copy of TCT No. 168173 entitles respondent to moral
damages.1a\^/phi1.net Moral damages may be awarded in culpa contractual or
breach of contract cases when the defendant acted fraudulently or in bad faith.
Bad faith does not simply connote bad judgment or negligence; it imports a
dishonest purpose or some moral obliquity and conscious doing of wrong. It
partakes of the nature of fraud.33

The Memorandum of Agreement provides that in the event that respondent opts
not to buy the property, the money given by respondent to petitioner shall be
treated as a loan and the property shall be considered as the security for the
mortgage. It was testified to by respondent that after they executed the
agreement on December 7, 1990, petitioner gave her the owners copy of the title
to the property, the Deed of Sale between petitioner and IMRDC, the certificate of
occupancy, and the certificate of the Secretary of the IMRDC who signed the Deed
of Sale.34 However, notwithstanding that all those documents were in
respondents possession, petitioner executed an affidavit of loss that the owners
copy of the title and the Deed of Sale were lost.
Although petitioner testified that her execution of the affidavit of loss was due to
the fact that she was of the belief that since she had demanded from Atty. Lozada
the return of the title, she thought that the brown envelope with markings which
Atty. Lozada gave her on May 5, 1991 already contained the title and the Deed of
Sale as those documents were in the same brown envelope which she gave to
Atty. Lozada prior to the transaction with respondent.35 Such statement remained
a bare statement. It was not proven at all since Atty. Lozada had not taken the
stand to corroborate her claim. In fact, even petitioners own witness, Benilda
Ynfante (Ynfante), was not able to establish petitioner's claim that the title was
returned by Atty. Lozada in view of Ynfante's testimony that after the brown
envelope was given to petitioner, the latter passed it on to her and she placed it in
petitioners attach case36 and did not bother to look at the envelope.37

the winning party at the expense of the losing litigant. They are not awarded
every time a party prevails in a suit because of the policy that no premium should
be placed on the right to litigate.43 The award of attorney's fees is the exception
rather than the general rule. As such, it is necessary for the trial court to make
findings of facts and law that would bring the case within the exception and justify
the grant of such award. The matter of attorney's fees cannot be mentioned only
in the dispositive portion of the decision.44 They must be clearly explained and
justified by the trial court in the body of its decision. On appeal, the CA is
precluded from supplementing the bases for awarding attorneys fees when the
trial court failed to discuss in its Decision the reasons for awarding the same.
Consequently, the award of attorney's fees should be deleted.
WHEREFORE, in view of all the foregoing, the Decision dated June 18, 2002 and
the Resolution dated September 11, 2002 of the Court of Appeals in CA-G.R. CV
No. 52839 are AFFIRMED with MODIFICATION that the award of attorneys fees is
DELETED.
No pronouncement as to costs.
SO ORDERED.

It is clear therefrom that petitioners execution of the affidavit of loss became the
basis of the filing of the petition with the RTC for the issuance of new owners
duplicate copy of TCT No. 168173. Petitioners actuation would have deprived
respondent of the security for her loan were it not for respondents timely filing of
a petition for relief whereby the RTC set aside its previous order granting the
issuance of new title. Thus, the award of moral damages is in order.
The entitlement to moral damages having been established, the award of
exemplary damages is proper.38 Exemplary damages may be imposed upon
petitioner by way of example or correction for the public good.39 The RTC
awarded the amount of P100,000.00 as moral and exemplary damages. While the
award of moral and exemplary damages in an aggregate amount may not be the
usual way of awarding said damages,40 no error has been committed by CA.
There is no question that respondent is entitled to moral and exemplary damages.
Petitioner argues that the CA erred in awarding attorneys fees because the trial
courts decision did not explain the findings of facts and law to justify the award of
attorneys fees as the same was mentioned only in the dispositive portion of the
RTC decision.
We agree.

G.R. No. 187678

April 10, 2013

Article 220841 of the New Civil Code enumerates the instances where such may
be awarded and, in all cases, it must be reasonable, just and equitable if the same
were to be granted.42 Attorney's fees as part of damages are not meant to enrich

SPOUSES IGNACIO F. JUICO and ALICE P. JUICO, Petitioners,

vs.
CHINA BANKING CORPORATION, Respondent.

DECISION
VILLARAMA, JR., J.:
Before us is a petition for review on certiorari under Rule 45 of the 1997 Rules of
Civil Procedure, as amended, assailing the February 20, 2009 Decision1 and April
27, 2009 Resolution2 of the Court of Appeals (CA) in CA G.R. CV No. 80338. The
CA affirmed the April 14, 2003 Decision3 of the Regional Trial Court (RTC) of Makati
City, Branch 147.
The factual antecedents:
Spouses Ignacio F. Juico and Alice P. Juico (petitioners) obtained a loan from China
Banking Corporation (respondent) as evidenced by two Promissory Notes both
dated October 6, 1998 and numbered 507-001051-34 and 507-001052-0,5 for the
sums of !!6,216,000 and P4, 139,000, respectively. The loan was secured by a
Real Estate Mortgage (REM) over petitioners property located at 49 Greensville
St., White Plains, Quezon City covered by Transfer Certificate of Title (TCT) No. RT103568 (167394) PR-412086 of the Register of Deeds of Quezon City.
When petitioners failed to pay the monthly amortizations due, respondent
demanded the full payment of the outstanding balance with accrued monthly
interests. On September 5, 2000, petitioners received respondents last demand
letter7 dated August 29, 2000.
As of February 23, 2001, the amount due on the two promissory notes totaled
P19,201,776.63 representing the principal, interests, penalties and attorneys
fees. On the same day, the mortgaged property was sold at public auction, with
respondent as highest bidder for the amount of P10,300,000.
On May 8, 2001, petitioners received8 a demand letter9 dated May 2, 2001 from
respondent for the payment of P8,901,776.63, the amount of deficiency after
applying the proceeds of the foreclosure sale to the mortgage debt. As its demand
remained unheeded, respondent filed a collection suit in the trial court. In its
Complaint,10 respondent prayed that judgment be rendered ordering the
petitioners to pay jointly and severally: (1) P8,901,776.63 representing the
amount of deficiency, plus interests at the legal rate, from February 23, 2001 until
fully paid; (2) an additional amount equivalent to 1/10 of 1% per day of the total
amount, until fully paid, as penalty; (3) an amount equivalent to 10% of the
foregoing amounts as attorneys fees; and (4) expenses of litigation and costs of
suit.
In their Answer,11 petitioners admitted the existence of the debt but interposed,
by way of special and affirmative defense, that the complaint states no cause of
action considering that the principal of the loan was already paid when the
mortgaged property was extrajudicially foreclosed and sold for P10,300,000.
Petitioners contended that should they be held liable for any deficiency, it should
be only for P55,000 representing the difference between the total outstanding
obligation of P10,355,000 and the bid price of P10,300,000. Petitioners also

argued that even assuming there is a cause of action, such deficiency cannot be
enforced by respondent because it consists only of the penalty and/or
compounded interest on the accrued interest which is generally not favored under
the Civil Code. By way of counterclaim, petitioners prayed that respondent be
ordered to pay P100,000 in attorneys fees and costs of suit.
At the trial, respondent presented Ms. Annabelle Cokai Yu, its Senior Loans
Assistant, as witness. She testified that she handled the account of petitioners and
assisted them in processing their loan application. She called them monthly to
inform them of the prevailing rates to be used in computing interest due on their
loan. As of the date of the public auction, petitioners outstanding balance was
P19,201,776.6312 based on the following statement of account which she
prepared:
STATEMENT OF ACCOUNT
As of FEBRUARY 23, 2001
IGNACIO F. JUICO
PN# 507-0010520 due on 04-07-2004
Principal balance of PN# 5070010520. . . . . . . . . . . . . .
4,139,000.00
Interest on P4,139,000.00 fr. 04-Nov-99
04-Nov-2000 366 days @ 15.00%. . . . . . . . . . . . . . . . .
622,550.96
Interest on P4,139,000.00 fr. 04-Nov-2000
04-Dec-2000 30 days @ 24.50%. . . . . . . . . . . . . . . . . .
83,346.99
Interest on P4,139,000.00 fr. 04-Dec-2000
04-Jan-2001 31 days @ 21.50%. . . . . . . . . . . . . . . . . . .
75,579.27
Interest on P4,139,000.00 fr. 04-Jan-2001
04-Feb-2001 31 days @ 19.50%. . . . . . . . . . . . . . . . . .
68,548.64
Interest on P4,139,000.00 fr. 04-Feb-2001
23-Feb-2001 19 days @ 18.00%. . . . . . . . . . . . . . . . . .
38,781.86
Penalty charge @ 1/10 of 1% of the total amount due
(P4,139,000.00 from 11-04-99 to 02-23-2001 @
1/10 of 1% per day). . . . . . . . . . . . . . . . .
1,974,303.00
Sub-total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,002,110.73
PN# 507-0010513 due on 04-07-2004
Principal balance of PN# 5070010513. . . . . . . . . . . . . .
6,216,000.00
Interest on P6,216,000.00 fr. 06-Oct-99
04-Nov-2000 395 days @ 15.00%. . . . . . . . . . . . . . . . .
1,009,035.62
Interest on P6,216,000.00 fr. 04-Nov-2000
04-Dec-2000 30 days @ 24.50%. . . . . . . . . . . . . . . . . .
125,171.51
Interest on P6,216,000.00 fr. 04-Dec-2000
04-Jan-2001 31 days @ 21.50%. . . . . . . . . . . . . . . . . . .
113,505.86
Interest on P6,216,000.00 fr. 04-Jan-2001
04-Feb-2001 31 days @ 19.50%. . . . . . . . . . . . . . . . . .
102,947.18
Interest on P6,216,000.00 fr. 04-Feb-2001
23-Feb-2001 19 days @ 18.00%. . . . . . . . . . . . . . . . . .
58,243.07
Penalty charge @ 1/10 of 1% of the total amount due
(P6,216,000.00 from 10-06-99 to 02-23-2001 @
1/10 of 1% per day). . . . . . . . . . . . . . . . .
3,145,296.00
Subtotal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,770,199.23

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17,772,309.96
Less: A/P applied to balance of principal
(55,000.00)
Less: Accounts payable L & D (261,149.39) 17,456,160.57
Add: 10% Attorneys Fee 1,745,616.06
Total amount due 19,201,776.63
Less: Bid Price
10,300,000.00
TOTAL DEFICIENCY AMOUNT AS OF
FEB. 23, 2001
8,901,776.63
13
Petitioners thereafter received a demand letter14 dated May 2, 2001 from
respondents counsel for the deficiency amount of P8,901,776.63. Ms. Yu further
testified that based on the Statement of Account15 dated March 15, 2002 which
she prepared, the outstanding balance of petitioners was P15,190,961.48.16
On cross-examination, Ms. Yu reiterated that the interest rate changes every
month based on the prevailing market rate and she notified petitioners of the
prevailing rate by calling them monthly before their account becomes past due.
When asked if there was any written authority from petitioners for respondent to
increase the interest rate unilaterally, she answered that petitioners signed a
promissory note indicating that they agreed to pay interest at the prevailing
rate.17
Petitioner Ignacio F. Juico testified that prior to the release of the loan, he was
required to sign a blank promissory note and was informed that the interest rate
on the loan will be based on prevailing market rates. Every month, respondent
informs him by telephone of the prevailing interest rate. At first, he was able to
pay his monthly amortizations but when he started to incur delay in his payments
due to the financial crisis, respondent pressured him to pay in full, including
charges and interests for the delay. His property was eventually foreclosed and
was sold at public auction.18
On cross-examination, petitioner testified that he is a Doctor of Medicine and also
engaged in the business of distributing medical supplies. He admitted having read
the promissory notes and that he is aware of his obligation under them before he
signed the same.19
In its decision, the RTC ruled in favor of respondent. The fallo of the RTC decision
reads:
WHEREFORE, premises considered, the Complaint is hereby sustained, and
Judgment is rendered ordering herein defendants to pay jointly and severally to
plaintiff, the following:
1. P8,901,776.63 representing the amount of the deficiency owing to the plaintiff,
plus interest thereon at the legal rate after February 23, 2001;
2. An amount equivalent to 10% of the total amount due as and for attorneys
fees, there being stipulation therefor in the promissory notes;
3. Costs of suit. SO ORDERED.20

The trial court agreed with respondent that when the mortgaged property was
sold at public auction on February 23, 2001 for P10,300,000 there remained a
balance of P8,901,776.63 since before foreclosure, the total amount due on the
two promissory notes aggregated to P19,201,776.63 inclusive of principal,
interests, penalties and attorneys fees. It ruled that the amount realized at the
auction sale was applied to the interest, conformably with Article 1253 of the Civil
Code which provides that if the debt produces interest, payment of the principal
shall not be deemed to have been made until the interests have been covered.
This being the case, petitioners principal obligation subsists but at a reduced
amount of P8,901,776.63.
The trial court further held that Ignacios claim that he signed the promissory
notes in blank cannot negate or mitigate his liability since he admitted reading the
promissory notes before signing them. It also ruled that considering the
substantial amount involved, it is unbelievable that petitioners threw all caution to
the wind and simply signed the documents without reading and understanding the
contents thereof. It noted that the promissory notes, including the terms and
conditions, are pro forma and what appears to have been left in blank were the
promissory note number, date of the instrument, due date, amount of loan, and
condition that interest will be at the prevailing rates. All of these details, the trial
court added, were within the knowledge of the petitioners.
When the case was elevated to the CA, the latter affirmed the trial courts
decision. The CA recognized respondents right to claim the deficiency from the
debtor where the proceeds of the sale in an extrajudicial foreclosure of mortgage
are insufficient to cover the amount of the debt. Also, it found as valid the
stipulation in the promissory notes that interest will be based on the prevailing
rate. It noted that the parties agreed on the interest rate which was not
unilaterally imposed by the bank but was the rate offered daily by all commercial
banks as approved by the Monetary Board. Having signed the promissory notes,
the CA ruled that petitioners are bound by the stipulations contained therein.
Petitioners are now before this Court raising the sole issue of whether the interest
rates imposed upon them by respondent are valid. Petitioners contend that the
interest rates imposed by respondent are not valid as they were not by virtue of
any law or Bangko Sentral ng Pilipinas (BSP) regulation or any regulation that was
passed by an appropriate government entity. They insist that the interest rates
were unilaterally imposed by the bank and thus violate the principle of mutuality
of contracts. They argue that the escalation clause in the promissory notes does
not give respondent the unbridled authority to increase the interest rate
unilaterally. Any change must be mutually agreed upon.
Respondent, for its part, points out that petitioners failed to show that their case
falls under any of the exceptions wherein findings of fact of the CA may be
reviewed by this Court. It contends that an inquiry as to whether the interest rates
imposed on the loans of petitioners were supported by appropriate regulations
from a government agency or the Central Bank requires a reevaluation of the
evidence on records. Thus, the Court would in effect, be confronted with a factual
and not a legal issue.
The appeal is partly meritorious.

The principle of mutuality of contracts is expressed in Article 1308 of the Civil

Code, which provides:
Article 1308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them. Article 1956 of the Civil Code
likewise ordains that "no interest shall be due unless it has been expressly
stipulated in writing."
The binding effect of any agreement between parties to a contract is premised on
two settled principles: (1) that any obligation arising from contract has the force of
law between the parties; and (2) that there must be mutuality between the parties
based on their essential equality. Any contract which appears to be heavily
weighed in favor of one of the parties so as to lead to an unconscionable result is
void. Any stipulation regarding the validity or compliance of the contract which is
left solely to the will of one of the parties, is likewise, invalid.21
Escalation clauses refer to stipulations allowing an increase in the interest rate
agreed upon by the contracting parties. This Court has long recognized that there
is nothing inherently wrong with escalation clauses which are valid stipulations in
commercial contracts to maintain fiscal stability and to retain the value of money
in long term contracts.22 Hence, such stipulations are not void per se.23
Nevertheless, an escalation clause "which grants the creditor an unbridled right to
adjust the interest independently and upwardly, completely depriving the debtor
of the right to assent to an important modification in the agreement" is void. A
stipulation of such nature violates the principle of mutuality of contracts.24 Thus,
this Court has previously nullified the unilateral determination and imposition by
creditor banks of increases in the rate of interest provided in loan contracts.25
In Banco Filipino Savings & Mortgage Bank v. Navarro,26 the escalation clause
stated: "I/We hereby authorize Banco Filipino to correspondingly increase the
interest rate stipulated in this contract without advance notice to me/us in the
event a law should be enacted increasing the lawful rates of interest that may be
charged on this particular kind of loan." While escalation clauses in general are
considered valid, we ruled that Banco Filipino may not increase the interest on
respondent borrowers loan, pursuant to Circular No. 494 issued by the Monetary
Board on January 2, 1976, because said circular is not a law although it has the
force and effect of law and the escalation clause has no provision for reduction of
the stipulated interest "in the event that the applicable maximum rate of interest
is reduced by law or by the Monetary Board" (de-escalation clause).
Subsequently, in Insular Bank of Asia and America v. Spouses Salazar27 we
reiterated that escalation clauses are valid stipulations but their enforceability are
subject to certain conditions. The increase of interest rate from 19% to 21% per
annum made by petitioner bank was disallowed because it did not comply with
the guidelines adopted by the Monetary Board to govern interest rate adjustments
by banks and non-banks performing quasi-banking functions.

In the 1991 case of Philippine National Bank v. Court of Appeals,28 the promissory
notes authorized PNB to increase the stipulated interest per annum "within the
limits allowed by law at any time depending on whatever policy PNB may adopt in
the future; Provided, that, the interest rate on this note shall be correspondingly
decreased in the event that the applicable maximum interest rate is reduced by
law or by the Monetary Board." This Court declared the increases (from 18% to
32%, then to 41% and then to 48%) unilaterally imposed by PNB to be in violation
of the principle of mutuality essential in contracts.29
A similar ruling was made in a 1994 case30 also involving PNB where the credit
agreement provided that "PNB reserves the right to increase the interest rate
within the limits allowed by law at any time depending on whatever policy it may
adopt in the future: Provided, that the interest rate on this accommodation shall
be correspondingly decreased in the event that the applicable maximum interest
is reduced by law or by the Monetary Board x x x".
Again, in 1996, the Court invalidated escalation clauses authorizing PNB to raise
the stipulated interest rate at any time without notice, within the limits allowed by
law. The Court observed that there was no attempt made by PNB to secure the
conformity of respondent borrower to the successive increases in the interest rate.
The borrowers assent to the increases cannot be implied from their lack of
response to the letters sent by PNB, informing them of the increases.31
In the more recent case of Philippine Savings Bank v. Castillo,32 we sustained the
CA in declaring as unreasonable the following escalation clause: "The rate of
interest and/or bank charges herein stipulated, during the terms of this promissory
note, its extensions, renewals or other modifications, may be increased,
decreased or otherwise changed from time to time within the rate of interest and
charges allowed under present or future law(s) and/or government regulation(s) as
the PSBank may prescribe for its debtors." Clearly, the increase or decrease of
interest rates under such clause hinges solely on the discretion of petitioner as it
does not require the conformity of the maker before a new interest rate could be
enforced. We also said that respondents assent to the modifications in the
interest rates cannot be implied from their lack of response to the memos sent by
petitioner, informing them of the amendments, nor from the letters requesting for
reduction of the rates. Thus:
the validity of the escalation clause did not give petitioner the unbridled right to
unilaterally adjust interest rates. The adjustment should have still been subjected
to the mutual agreement of the contracting parties. In light of the absence of
consent on the part of respondents to the modifications in the interest rates, the
adjusted rates cannot bind them notwithstanding the inclusion of a de-escalation
clause in the loan agreement.33
It is now settled that an escalation clause is void where the creditor unilaterally
determines and imposes an increase in the stipulated rate of interest without the
express conformity of the debtor. Such unbridled right given to creditors to adjust
the interest independently and upwardly would completely take away from the
debtors the right to assent to an important modification in their agreement and
would also negate the element of mutuality in their contracts.34 While a ceiling on

interest rates under the Usury Law was already lifted under Central Bank Circular
No. 905, nothing therein "grants lenders carte blanche authority to raise interest
rates to levels which will either enslave their borrowers or lead to a hemorrhaging
of their assets."35
The two promissory notes signed by petitioners provide:
I/We hereby authorize the CHINA BANKING CORPORATION to increase or decrease
as the case may be, the interest rate/service charge presently stipulated in this
note without any advance notice to me/us in the event a law or Central Bank
regulation is passed or promulgated by the Central Bank of the Philippines or
appropriate government entities, increasing or decreasing such interest rate or
service charge.36
Such escalation clause is similar to that involved in the case of Floirendo, Jr. v.
Metropolitan Bank and Trust Company37 where this Court ruled:
The provision in the promissory note authorizing respondent bank to increase,
decrease or otherwise change from time to time the rate of interest and/or bank
charges "without advance notice" to petitioner, "in the event of change in the
interest rate prescribed by law or the Monetary Board of the Central Bank of the
Philippines," does not give respondent bank unrestrained freedom to charge any
rate other than that which was agreed upon. Here, the monthly upward/downward
adjustment of interest rate is left to the will of respondent bank alone. It violates
the essence of mutuality of the contract.38
More recently in Solidbank Corporation v. Permanent Homes, Incorporated,39 we
upheld as valid an escalation clause which required a written notice to and
conformity by the borrower to the increased interest rate. Thus:
The Usury Law had been rendered legally ineffective by Resolution No. 224 dated
3 December 1982 of the Monetary Board of the Central Bank, and later by Central
Bank Circular No. 905 which took effect on 1 January 1983. These circulars
removed the ceiling on interest rates for secured and unsecured loans regardless
of maturity. The effect of these circulars is to allow the parties to agree on any
interest that may be charged on a loan. The virtual repeal of the Usury Law is
within the range of judicial notice which courts are bound to take into account.
Although interest rates are no longer subject to a ceiling, the lender still does not
have an unbridled license to impose increased interest rates. The lender and the
borrower should agree on the imposed rate, and such imposed rate should be in
writing.
The three promissory notes between Solidbank and Permanent all contain the
following provisions:
"5. We/I irrevocably authorize Solidbank to increase or decrease at any time the
interest rate agreed in this Note or Loan on the basis of, among others, prevailing
rates in the local or international capital markets. For this purpose, We/I authorize
Solidbank to debit any deposit or placement account with Solidbank belonging to
any one of us. The adjustment of the interest rate shall be effective from the date

indicated in the written notice sent to us by the bank, or if no date is indicated,

from the time the notice was sent.
6. Should We/I disagree to the interest rate adjustment, We/I shall prepay all
amounts due under this Note or Loan within thirty (30) days from the receipt by
anyone of us of the written notice. Otherwise, We/I shall be deemed to have given
our consent to the interest rate adjustment."
The stipulations on interest rate repricing are valid because (1) the parties
mutually agreed on said stipulations; (2) repricing takes effect only upon
Solidbanks written notice to Permanent of the new interest rate; and (3)
Permanent has the option to prepay its loan if Permanent and Solidbank do not
agree on the new interest rate. The phrases "irrevocably authorize," "at any time"
and "adjustment of the interest rate shall be effective from the date indicated in
the written notice sent to us by the bank, or if no date is indicated, from the time
the notice was sent," emphasize that Permanent should receive a written notice
from Solidbank as a condition for the adjustment of the interest rates. (Emphasis
supplied.)
In this case, the trial and appellate courts, in upholding the validity of the
escalation clause, underscored the fact that there was actually no fixed rate of
interest stipulated in the promissory notes as this was made dependent on
prevailing rates in the market. The subject promissory notes contained the
following condition written after the first paragraph:
With one year grace period on principal and thereafter payable in 54 equal
monthly instalments to start on the second year. Interest at the prevailing rates
payable quarterly in arrears.40
In Polotan, Sr. v. CA (Eleventh Div.),41 petitioner cardholder assailed the trial and
appellate courts in ruling for the validity of the escalation clause in the
Cardholders Agreement. On petitioners contention that the interest rate was
unilaterally imposed and based on the standards and rate formulated solely by
respondent credit card company, we held:
The contractual provision in question states that "if there occurs any change in the
prevailing market rates, the new interest rate shall be the guiding rate in
computing the interest due on the outstanding obligation without need of serving
notice to the Cardholder other than the required posting on the monthly
statement served to the Cardholder." This could not be considered an escalation
clause for the reason that it neither states an increase nor a decrease in interest
rate. Said clause simply states that the interest rate should be based on the
prevailing market rate.
Interpreting it differently, while said clause does not expressly stipulate a
reduction in interest rate, it nevertheless provides a leeway for the interest rate to
be reduced in case the prevailing market rates dictate its reduction.
Admittedly, the second paragraph of the questioned proviso which provides that
"the Cardholder hereby authorizes Security Diners to correspondingly increase the

rate of such interest in the event of changes in prevailing market rates x x x" is an
escalation clause. However, it cannot be said to be dependent solely on the will of
private respondent as it is also dependent on the prevailing market rates.
Escalation clauses are not basically wrong or legally objectionable as long as they
are not solely potestative but based on reasonable and valid grounds. Obviously,
the fluctuation in the market rates is beyond the control of private respondent.42
(Emphasis supplied.)
In interpreting a contract, its provisions should not be read in isolation but in
relation to each other and in their entirety so as to render them effective, having
in mind the intention of the parties and the purpose to be achieved. The various
stipulations of a contract shall be interpreted together, attributing to the doubtful
ones that sense which may result from all of them taken jointly.43
Here, the escalation clause in the promissory notes authorizing the respondent to
adjust the rate of interest on the basis of a law or regulation issued by the Central
Bank of the Philippines, should be read together with the statement after the first
paragraph where no rate of interest was fixed as it would be based on prevailing
market rates. While the latter is not strictly an escalation clause, its clear import
was that interest rates would vary as determined by prevailing market rates.
Evidently, the parties intended the interest on petitioners loan, including any
upward or downward adjustment, to be determined by the prevailing market rates
and not dictated by respondents policy. It may also be mentioned that since the
deregulation of bank rates in 1983, the Central Bank has shifted to a marketoriented interest rate policy.44
There is no indication that petitioners were coerced into agreeing with the
foregoing provisions of the promissory notes. In fact, petitioner Ignacio, a
physician engaged in the medical supply business, admitted having understood
his obligations before signing them. At no time did petitioners protest the new
rates imposed on their loan even when their property was foreclosed by
respondent.
This notwithstanding, we hold that the escalation clause is still void because it
grants respondent the power to impose an increased rate of interest without a
written notice to petitioners and their written consent. Respondents monthly
telephone calls to petitioners advising them of the prevailing interest rates would
not suffice. A detailed billing statement based on the new imposed interest with
corresponding computation of the total debt should have been provided by the
respondent to enable petitioners to make an informed decision. An appropriate
form must also be signed by the petitioners to indicate their conformity to the new
rates. Compliance with these requisites is essential to preserve the mutuality of
contracts. For indeed, one-sided impositions do not have the force of law between
the parties, because such impositions are not based on the parties essential
equality.45
Modifications in the rate of interest for loans pursuant to an escalation clause
must be the result of an agreement between the parties. Unless such important
change in the contract terms is mutually agreed upon, it has no binding effect.46
In the absence of consent on the part of the petitioners to the modifications in the

interest rates, the adjusted rates cannot bind them. Hence, we consider as invalid
the interest rates in excess of 15%, the rate charged for the first year.
Based on the August 29, 2000 demand letter of China Bank, petitioners total
principal obligation under the two promissory notes which they failed to settle is
P10,355,000. However, due to China Banks unilateral increases in the interest
rates from 15% to as high as 24.50% and penalty charge of 1/10 of 1% per day or
36.5% per annum for the period November 4, 1999 to February 23, 2001,
petitioners balance ballooned to P19,201,776.63. Note that the original amount of
principal loan almost doubled in only 16 months. The Court also finds the penalty
charges imposed excessive and arbitrary, hence the same is hereby reduced to
1% per month or 12% per annum.1wphi1
Petitioners Statement of Account, as of February 23, 2001, the date of the
foreclosure proceedings, should thus be modified as follows:
Principal P10,355,000.00
Interest at 15% per annum
P10,355,000 x .15 x 477 days/365 days
2,029,863.70
Penalty at 12% per annum 1,623 ,890. 96
P10,355,000 x .12 x 477days/365 days
Sub-Total
14,008,754.66
Less: A/P applied to balance of principal
(55,000.00)
Less: Accounts payable L & D
(261,149.39)
13,692,605.27
Add: Attorney's Fees
1,369,260.53
Total Amount Due15,061,865.79
Less: Bid Price
10,300,000.00
TOTAL DEFICIENCY AMOUNT
4,761,865.79
WHEREFORE, the petition for review on certiorari is PARTLY GRANTED. The
February 20, 2009 Decision and April 27, 2009 Resolution of the Court of Appeals
in CA G.R. CV No. 80338 are hereby MODIFIED. Petitioners Spouses Ignacio F. Juico
and Alice P. Juico are hereby ORDERED to pay jointly and severally respondent
China Banking Corporation P4, 7 61 ,865. 79 representing the amount of
deficiency inclusive of interest, penalty charge and attorney's fees. Said amount
shall bear interest at 12% per annum, reckoned from the time of the filing of the
complaint until its full satisfaction.
No pronouncement as to costs. SO ORDERED.
CONCURRING OPINION
SERENO, J.:
I fully concur with the majority that the increases in interest rates unilaterally
imposed by China Bank without petitioners' assent violates the principle of
mutuality of contracts. This principle renders void a contract containing a
provision that makes its fulfillment exclusively dependent upon the uncontrolled
will of one of the contracting parties.1 In this case, the provision reads:

I/We hereby authorize the CHINA BANKING CORPORATION to increase or decrease

as the case may be, the interest rate/service charge presently stipulated in this
note without any advance notice to me/us in the event a law or Central Bank
regulation is passed or promulgated by the Central Bank of the Philippines or
appropriate government entities, increasing or decreasing such interest rate or
service charge.
This Court dealt with a similarly worded provision in Floirendo, Jr. v. Metropolitan
Bank and Trust Company.2 It noted that the "provision in the promissory note
authorizing respondent bank to increase, decrease or otherwise change from time
to time the rate of interest and/or bank charges 'without advance notice' to
petitioner, 'in the event of change in the interest rate prescribed by law or the
Monetary Board of the Central Bank of the Philippines,' does not give respondent
bank unrestrained freedom to charge any rate other than that which was agreed
upon."

Appeals.10 In that case, the contractual provision stating that "if there occurs any
change in the prevailing market rates, the new interest rate shall be the guiding
rate in computing the interest due on the outstanding obligation without need of
serving notice to the Cardholder other than the required posting on the monthly
statement served to the Cardholder" was considered valid. The aforequoted
provision was upheld notwithstanding that it may partake of the nature of an
escalation clause, because at the same time it provides for the decrease in the
interest rate in case the prevailing market rates dictate its reduction. In other
words, unlike the stipulation subject of the instant case, the interest rate involved
in the Polotan case is designed to be based on the prevailing market rate. On the
other hand, a stipulation ostensibly signifying an agreement to "any increase or
decrease in the interest rate," without more, cannot be accepted by this Court as
valid for it leaves solely to the creditor the determination of what interest rate to
charge against an outstanding loan. (Emphasis in the original and underscoring
supplied)

However, I write to clarify that not all escalation clauses in loan agreements are
void per se.3 It is actually the rule that "escalation clauses are valid stipulations in
commercial contracts to maintain fiscal stability and to retain the value of money
in long term contracts."4 In The Consolidated Bank and Trust Corporation v. Court
of Appeals,5 citing Polotan, Sr. v. Court of Appeals,6 this Court already accepted
that, given the fluctuating economic conditions, practical reasons allow banks to
stipulate that interest rates on a loan will not be fixed and will instead depend on
market conditions. In adjudging so, we differentiated a valid escalation clause
from an otherwise invalid proviso in this wise:7

Evidently, the point of difference in the cited escalation clauses lies in the use of
the phrase "any increase or decrease in the interest rate" without reference to the
prevailing market rate actually imposed by the regulations of the Central Bank.8 It
is thus not enough to state, as akin to China Bank's provision, that the bank may
increase or decrease the interest rate in the event a law or a Central Bank
regulation is passed. To adopt that stance will necessarily involve a determination
of the interest rate by the creditor since the provision spells a vague condition - it
only requires that any change in the imposable interest must conform to the
upward or downward movement of borrowing rates.

Neither do we find error when the lower court and the Court of Appeals set aside
as invalid the floating rate of interest exhorted by petitioner to be applicable. The
pertinent provision in the trust receipt agreement of the parties fixing the interest
rate states:

And if that determination is not subjected to the mutual agreement of the

contracting parties, then the resulting interest rates to be imposed by the creditor
would be unilaterally determined. Consequently, the escalation clause violates the
principle of mutuality of contracts.

I, WE jointly and severally agree to any increase or decrease in the interest rate
which may occur after July 1, 1981, when the Central Bank floated the interest
rate, and to pay additionally the penalty of I% per month until the amount/s or
installments/s due and unpaid under the trust receipt on the reverse side hereof
is/are fully paid.

Based on jurisprudence, therefore, these points must be considered by creditors

and debtors in the drafting of valid escalation clauses. Firstly, as a matter of
equity and consistent with P.O. No. 1684, the escalation clause must be paired
with a de-escalation clause.9 Secondly, so as not to violate the principle of
mutuality, the escalation must be pegged to the prevailing market rates, and not
merely make a generalized reference to "any increase or decrease in the interest
rate" in the event a law or a Central Bank regulation is passed. Thirdly, consistent
with the nature of contracts, the proposed modification must be the result of an
agreement between the parties. In this way, our credit system would be facilitated
by firm loan provisions that not only aid fiscal stability, but also avoid numerous
disputes and litigations between creditors and debtors.

We agree with respondent Court of Appeals that the foregoing stipulation is

invalid, there being no reference rate set either by it or by the Central Bank,
leaving the determination thereof at the sole will and control of petitioner.
While it may be acceptable, for practical reasons given the fluctuating economic
conditions, for banks to stipulate that interest rates on a loan not be fixed and
instead be made dependent upon prevailing market conditions, there should
always be a reference rate upon which to peg such variable interest rates. An
example of such a valid variable interest rate was found in Polotan, Sr. v. Court of

MARIA LOURDES P. A. SERENO Chief Justice