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G.R. No.

47878, July 24, 1942


GIL JARDENIL, PLAINTIFF AND APPELLANT, VS. HEFTI SOLAS (ALIAS
HEPTI SOLAS, JEPTI SOLAS), DEFENDANT AND APPELLEE.
DECISION
MORAN, J.:
This is an action for foreclosure of mortgage. The only question raised in
this appeal is: Is defendant-appellee bound to pay the stipulated interest
only up to the date of maturity as fixed in the promissory note, or up to the
date payment is effected? This question is, in our opinion, controlled by the
express
stipulation
of
the
parties.
Paragraph 4 of the mortgage deed recites:
"Que en considered on a dicha suma aun por pagar de DOS MIL
CUATROCIENTOS PESOS (P2,400.00), moneda filipina, que el Sr. Hepti Solas
se compromete a pagar al Sr. Jardenil en o antes del dia treintaiuno (31) de
marzo de mil novecientos treintaicuatro (1934), con los intereses de dicha
suma al tipo de doce por ciento (12%) anual a partir desde esta fecha
hasta el dia de su vencimiento, o sea el treintaiuno (31) de marzo de mil
novecientos treintaicuatro (1934), por la pre-sente, el Sr. Hepti Solas cede
y traspaaa, por via de primcra hipoteca, a favor del Sr. Jardenil, sus
herederos y causahabientes, la parcela de terreno descrita en el parrafo
primero (1.) de esta escritura."
That in consideration of this unpaid sum of TWO THOUSAND FOUR
HUNDRED PESOS (P2,400.00), Philippine currency, which Mr. Hepti Solas
undertakes to pay to Mr. Jardenil on or before the thirtieth day (31) of
March One thousand nine hundred and thirty-four (1934), with the interest
of said sum at the rate of twelve percent (12%) per annum from that date
to the day of its expiration, that is thirty-first (31) March, nineteen hundred
and thirty-four 1934), Mr. Hepti Solas hereby cedes and transfers, by
means of a preliminary mortgage, to Mr. Jardenil, his heirs and successors,
the parcel of land described in the first paragraph (1) Of this writing
Defendant-appellee has, therefore, clearly agreed to pay interest only up
to the date of maturity, or until March 31, 1934. As the contract is silent as
to whether after that date, in the event of non-payment, the debtor would
continue to pay interest, we cannot, in law, indulge in any presumption as
to such interest; otherwise, we would be imposing upon the debtor an

obligation that the parties have not chosen to agree upon. Article 1755 of
the Civil Code provides that "interest shall be due only when it has been
expressly
stipulated."
(Italic
supplied.)
A writing must be interpreted according to the legal meaning of its
language (section 286, Act No. 190, now section 58, Rule 123). and only
when the wording of the written instrument appears to be contrary to the
evident intention of the parties that such intention must prevail. (Article
1281, Civil Code.) There is nothing in the mortgage deed to show that the
terms employed by the parties thereto are at war with their evident intent.
On the contrary, the act of the mortgagee of granting to the mortgagor, on
the same date of the execution of the deed of mortgage, an extension of
one year from the date of maturity within which to make payment, without
making any mention of any interest which the mortgagor should pay
during the additional period (see Exhibit B attached to the complaint),
indicates that the true intention of the parties was that no interest should
be paid during the period of grace. What reasons the parties may have
therefor,
we
need
not
here
seek
to
explore.
Neither has either of the parties shown that, by mutual mistake, the deed
of mortgage fails to express their true agreement, for if such mistake
existed, plaintiff would have undoubtedly adduced evidence to establish it
and asked that the deed be reformed accordingly, under the parcelevidence
rule.
We hold, therefore, that as the contract is clear and unmistakable and the
terms employed therein have not been shown to belie or otherwise fail to
express the true intention of the parties, and that the deed has not been
assailed on the ground of mutual mistake which would require its
reformation, same should be given its full force and effect When a party
sues on a written contract and no attempt is made to show any vice
therein, he cannot be allowed to lay any claim more than what its clear
stipulations accord. His omission, to which the law attaches a definite
meaning as in the instant case, cannot by the courts be arbitrarily supplied
by what their own notions of justice or equity may dictate.
Plaintiff is, therefore, entitled only to the stipulated interest of 12 per cent
on the loan of P2,400 from November 8, 1932 to March 31, 1934. And it
being a fact that extra-judicial demands have been made which we may
assume to have been so made on the expiration of the year of grace, he
shall be entitled to legal interest upon the principal and the accrued
interest
from
April
1,
1935,
until
full
payment.

Thus modified, judgment is affirmed, with costs against appellant.


Yulo, C. J., Ozaeta and Bocobo, JJ., concur.
DISSENTING

PARAS,

J.,

Under the facts stated in the decision of the majority, I come to the
conclusion that interest at the rate of 12 per cent per annum should be
paid up to the date of payment of the whole indebtedness is made.
Payment of such interest is expressly stipulated. True, it is stated in the
mortgage contract that interest was to be paid up to March 31, 1934, but
this date was inserted merely because it was the date of maturity. The
extension note is silent as regards interest, but its payment is clearly
implied from the nature of the transaction which is only a renewal of the
old obligation. In my opinion, the ruling of the majority is anomalous and at
war with common practice and everyday business usage. Judgment
modified.

G.R. No. L-32644

October 4, 1930

CU
UNJIENG
E
vs.
THE
MABALACAT
SUGAR
CO.,
THE MABALACAT SUGAR CO., appellant.

HIJOS, plaintiff-appelle,
ET

Romeo
Mercado
for
Araneta
and
Zaragoza
for
Duran and Lim for defendant-appellee Siuliong and Co.

AL., defendants.

appellant.
plaintiff-appellee.

de la orden de ejecucion que pudiera expedirse en el asundo No. 26435 del


Juzgado de Primera Instancia de Manila.
Se condena ademas a The Mabalacat Sugar Company al pago de la suma
de P3,205.78 reclamada por Siuliong & Co., con sus intereses de 9 por
ciento al ano desde el 29 de julio de 1926 hasta su completo pago,
ordenandola que rinda cuentas del azucar por ella producido y pague la
comision correspondiente bajo la base de 5 por ciento de su valor,
descontandose, desde luego, las cantidades ya pagadas.
Se absuelve de la demanda de Cu Unjieng e Hijos a Siuliong & Co.,
Inc.1awph!l.net

STREET, J.:
This action was instituted in the Court of First Instance of Pampanga by Cu
Unjieng e Hijos, for the purpose of recovering from the Mabalacat Sugar
Company an indebtedness amounting to more than P163,00, with interest,
and to foreclose a mortgage given by the debtor to secure the same, as
well as to recover stipulated attorney's fee and the sum of P1,206, paid by
the plaintiff for insurance upon the mortgaged property, with incidental
relief. In the complaint Siuliong & Co., Inc., was joined as defendant, as a
surety of the Mabalacat Sugar Company, and as having a third mortgage
on the mortgaged property. The Philippine National Bank was also joined
by reason of its interest as second mortgagee of the land covered by the
mortgage to the plaintiff. After the cause had been brought to issue by the
answers of the several defendants, the cause was heard and judgment
rendered, the dispositive portion of the decision being as follows:
Por las consideraciones expuestas, el Juzgado condena a The Mabalacat
Sugar Company a pagar a la demandante la suma de P163,534.73, con sus
intereses de 12 por ciento al ano, compuestos mensualmente desde el 1.
de mayo de 1929. Tambien se le condena a pagar a dicha demandante la
suma de P2,412 por las primas de seguros abonadas por esta, con sus
intereses de 12 por ciento al ano, compuestos tambien mensualmente
desde el 15 de mayo de 1928, mas la de P7,500 por honorarios de
abogados y las costas del juicio. Y si esta deuda no se pagare dentro del
plazo de tres meses, se ejecutaran los bienes hipotecados de acuerdo con
la ley.
Si del producto de la venta hubiese algun remanente, este se destinara al
pago del credito del Banco Nacional, o sea de P32,704.69, con sus
intereses de 9 por ciento al ano desde el 7 de junio de 1929, sin perjuicio

From this judgment the defendant, the Mabalacat Sugar Company,


appealed.
The first point assigned as error has relation to the question whether the
action was prematurely stated. In this connection we note that the
mortgage executed by the Mabalacat Sugar Company contains, in
paragraph 5, a provision to the effect that non-compliance on the part of
the mortgage debtor with any of the obligations assumed in virtue of this
contract will cause the entire debt to become due and give occasion for the
foreclosure of the mortgage. The debtor party failed to comply with the
obligation, imposed upon it in the mortgage, to pay the mortgage debt in
the stipulated installments at the time specified in the contract. It results
that the creditor was justified in treating the entire mortgage debt as
having been accelerated by such failure of the debtor in paying the
installments.
It appears, however, that on or about October 20, 1928, the mortgage
creditor, Cu Unjieng e Hijos, agreed to extend the time for payment of the
mortgage indebtedness until June 30, 1929, with certain interim payments
to be made upon specified dates prior to the contemplated final liquidation
of the whole indebtedness. But the debtor party failed to make the interim
payments due on February 25, 1929, March 25, 1929, and April 25, 1929,
and failed altogether to pay the balance due, according to the terms of this
extension, on June 30, 1929. Notwithstanding the failure of the debtor to
comply with the terms of this extension, it is insisted for the appellant that
this agreement for the extension of the time of payment had the effect of
abrogating the stipulation of the original contract with respect to the
acceleration of the maturity of the debt by non-compliance with the terms
of the mortgage. As the trial court pointed out, this contention is
untenable. The agreement to extend the time of payment was voluntary

and without consideration so far as the creditor is concerned; and the


failure of the debtor to comply with the terms of the extension justified the
creditor in treating it as of no effect. The first error is therefore without
merit.
The second error is directed to the propriety of the interest charges made
by the plaintiff in estimating the amount of the indebtedness. In this
connection we note that, under the second clause of the mortgage,
interest should be calculated upon the indebtedness at the rate of 12 per
cent per annum. In the same clause, but in a separate paragraph, there is
another provision with respect to the payment of interest expressed in
Spanish in the following words:
Los intereses seran pagados mensualmente a fin de cada mes,
computados teniendo en cuenta el capital del prestamo aun no pagado.
Translated into English this provision reads substantially as follows:
"Interest, to be computed upon the still unpaid capital of the loan, shall be
paid monthly, at the end of each month."
It is well settled that, under article 1109 of the Civil Code, as well as under
section 5 of the Usury Law (Act No. 2655), the parties may stipulate that
interest shall be compounded; and rests for the computation of compound
interest can certainly be made monthly, as well as quarterly, semiannually,
or annually. But in the absence of express stipulation for the accumulation
of compound interest, no interest can be collected upon interest until the
debt is judicially claimed, and then the rate at which interest upon accrued
interest must be computed is fixed at 6 per cent per annum.
In the present case, however, the language which we have quoted above
does not justify the charging of interest upon interest, so far as interest on
the capital is concerned. The provision quoted merely requires the debtor
to pay interest monthly at the end of each month, such interest to be
computed upon the capital of the loan not already paid. Clearly this
provision does not justify the charging of compound interest upon the
interest accruing upon the capital monthly. It is true that in subsections (a),
(b) and (c) of article IV of the mortgage, it is stipulated that the interest
can be thus computed upon sums which the creditor would have to pay out
(a) to maintain insurance upon the mortgaged property, (b) to pay the land
tax upon the same property, and (c) upon disbursements that might be
made by the mortgagee to maintain the property in good condition. But
the chief thing is that interest cannot be thus accumulated on unpaid
interest accruing upon the capital of the debt.

The trial court was of the opinion that interest could be so charged,
because of the Exhibit 1 of the Mabalacat Sugar Company, which the court
considered as an interpretation by the parties to the contract and a
recognition by the debtor of the propriety of compounding the interest
earned by the capital. But the exhibit referred to is merely a receipt
showing that the sum of P256.28 was, on March 19, 1928, paid by the
debtor to the plaintiff as interest upon interest. But where interest is
improperly charged, at an unlawful rate, the mere voluntary payment of it
to the creditor by the debtor is not binding. Such payment, in the case
before us, was usurious, being in excess of 12 per cent which is allowed to
be charged, under section 2 of the Usury Law, when a debt is secured by
mortgage upon real property. The Exhibit 1 therefore adds no support to
the contention of the plaintiff that interest upon interest can be
accumulated in the manner adopter by the creditor in this case. The point
here ruled is in exact conformity with the decision of this court in Bachrach
Garage and Taxicab Co. vs. Golingco (39 Phil., 192), where this court held
that interest cannot be allowed in the absence of stipulation, or in default
thereof, except when the debt is judicially claimed; and when the debt is
judicially claimed, the interest upon the interest can only be computed at
the rate of 6 per cent per annum.
It results that the appellant's second assignment of error is well taken, and
the compound interest must be eliminated from the judgment. With
respect to the amount improperly charged, we accept the estimate
submitted by the president and manager of the Mabalacat Sugar Company,
who says that the amount improperly included in the computation made by
the plaintiff's bookkeeper is P879.84, in addition to the amount of P256.28
covered by Exhibit 1 of the Mabalacat Sugar Company. But the plaintiff
creditor had the right to charge interest, in the manner adopted by it, upon
insurance premiums which it had paid out; and if any discrepancy of
importance is discoverable by the plaintiff in the result here reached, it will
be at liberty to submit a revised computation in this court, upon motion for
reconsideration, wherein interest shall be computed in accordance with
this opinion, that is to say, that no accumulation of interest will be
permitted at monthly intervals, as regards the capital of the debt, but such
unpaid interest shall draw interest at the rate of 6 per cent from the date of
the institution of the action.
In the third assignment of error the appellant complains, as excessive, of
the attorney's fees allowed by the court in accordance with stipulation in
the mortgage. The allowance made on the principal debt was around 4 per
cent, and about the same upon the fee allowed to the bank. Under the

circumstances we think the debtor has no just cause for complaint upon
this score.
The fourth assignment of error complains of the failure of the trial court to
permit an amendment to be filed by the debtor to its answer, the
application therefore having been made on the day when the cause had
been set for trial, with notice that the period was non-extendible. The point
was a matter in the discretion of the court, and no abuse of discretion is
shown.
From what has been stated, it follows that the appealed judgment must be
modified by deducting the sum of P1,136.12 from the principal debt, so
that the amount of said indebtedness shall be P162,398.61, with interest at
12 per cent per annum, from May 1, 1929. In other respects the judgment
will be affirmed, and it is so ordered, with cost against the appellant.
Avancea, C.J., Malcolm, Villamor, Ostrand, Johns, Romualdez and VillaReal, JJ., concur.

G.R. No. L-52478, October 30, 1986


THE GOVERNMENT SERVICE INSURANCE SYSTEM, PETITIONERAPPELLANT, VS. HONORABLE COURT OF APPEALS, NEMENCIO R.
MEDINA AND JOSEFINA G. MEDINA, RESPONDENTS-APPELLANTS.
DECISION
PARAS, J.:
This is a petition for review on certiorari of the decision of the Court of
Appeals in CA-G.R. No. 62541-R (Nemencio R. Medina and Josefina G.
Medina, Plaintiffs-Appellants vs. The Government Service Insurance
System, Defendant-Appellant) affirming the January 21, 1977 Decision of
the trial court, and at the same time ordering the GSIS to reimburse the
amount of P9,580.00 as overpayment and to pay the spouses Nemencio R.
Medina and Josefina G. Medina P3,000.00 and P1,000.00 as attorney's fees
and
litigation
expenses.
In 1961, herein private respondents spouses Nemencio R. Medina and
Josefina G. Medina (Medinas for short) applied with the herein petitioner
Government Service Insurance System (GSIS for short) for a loan of
P600,000.00. The GSIS Board of Trustees, in its Resolution of December
20, 1961, approved under Resolution No. 5041 only the amount of
P350,000.00, subject to the following conditions: that the rate of interest
shall be 9% per annum compounded monthly; repayable in ten (10) years
at a monthly amortization of P4,433.65 including principal and interest,
and that any installment or amortization that remains due and unpaid shall
bear interest at the rate of 9%/12% per month.
The Office of the Economic Coordinator, in a 2nd Indorsement dated March
26, 1962, further reduced the approved amount to P295,000.00. On April
4, 1962, the Medinas accepting the reduced amount, executed a
promissory note and a real estate mortgage in favor of GSIS.
On May 29, 1962, the GSIS, and on June 6, 1962, the Office of the
Economic Coordinator, upon request of the Medinas, both approved the
restoration of the amount of P350,000.00 (P295,000.00 + P55,000.00)
originally approved by the GSIS. This P350,000.00 loan was denominated
by
the
GSIS
as
Account
No.
31055.
On July 6, 1962, the Medinas executed in favor of the GSIS an Amendment
of Real Estate Mortgage, the pertinent portion of which reads:

"WHEREAS, on the 4th day of April, 1962, the Mortgagor executed, signed
and delivered a real estate mortgage to and in favor of the Mortgagee on
real estate properties located in the City of Manila, x x x to secure payment
to the mortgages of a loan of Two Hundred Ninety Five Thousand Pesos
(P295,000.00) Philippine Currency, granted by the mortgagee to the
Mortgagors,
x
x
x;
"WHEREAS, the parties herein have agreed as they hereby agree to
increase the aforementioned loan from Two Hundred Ninety Five Thousand
Pesos (P295,000.00) to Three Hundred Fifty Thousand Pesos (P350,000.00),
Philippine
Currency;
"NOW, THEREFORE, for and in consideration of the foregoing premises, the
aforementioned parties have amended and by these presents do hereby
amend the said mortgage dated April 4, 1962, mentioned in the second
paragraph hereof by increasing the loan from Two Hundred Ninety Five
Thousand Pesos (P295,000.00) to Three Hundred Pesos (P350,000.00)
subject
to
this
additional
condition:
"1) That the mortgagor shall pay to the system P4,433.65 monthly
including
principal
and
interest.
"It is hereby expressly understood that with the foregoing amendment, all
other terms and conditions of the said real estate mortgage dated April 4,
1962 insofar as they are not inconsistent herewith, are hereby confirmed,
ratified and continued in full force and effect and that the parties thereto
agree that this amendment be an integral part of said real estate
mortgage." (Rollo, pp. 153- 154).
Upon application by the Medinas, the GSIS Board of Trustees adopted
Resolution No. 121 on January 18, 1963, as amended by Resolution No. 348
dated February 25, 1963, approving an additional loan of P230,000.00 in
favor of the Medinas on the security of the same mortgaged properties and
the additional properties covered by TCT Nos. 49234, 49235 and 49236, to
bear interest at 9% per annum compounded monthly and repayable in ten
years. This additional loan of P230,000.00 was denominated by the GSIS
as
Account
No.
31442.
On March 18, 1963, the Economic Coordinator thru the Auditor General
interposed no objection thereto, subject to the conditions of Resolution No.
121
as
amended
by
Resolution
No.
348
of
the
GSIS.

Beginning 1965, the Medinas having defaulted in the payment of the


monthly amortization on their loan, the GSIS imposed 9%/12% interest on
all installments due and unpaid. In 1967, the Medinas began defaulting in
the
payment
of
fire
insurance
premiums.
On May 3, 1974, the GSIS notified the Medinas that they had arrearages in
the aggregate amount of P575,652.42 as of April 18, 1974 (Exhibit "9", p.
149, Joint Record on Appeal, Rollo p. 79), and demanded payment within
seven (7) days from notice thereof, otherwise, it would foreclose the
mortgage.
On April 21, 1975, the GSIS filed an Application for Foreclosure of Mortgage
with the Sheriff of the City of Manila (Exhibit "22", pp. 63 and 149; Rollo, p.
79). On June 30, 1975, the Medinas filed with the Court of First Instance of
Manila a complaint, praying, among other things, that a restraining order
or writ of preliminary injunction be issued to prevent the GSIS and the
Sheriff of the City of Manila from proceeding with the extra-judicial
foreclosure of their mortgaged properties (CFI Decision, p. 121; Rollo, p.
79). However, in view of Section 2 of Presidential Decree No. 385, no
restraining order or writ of preliminary injunction was issued by the trial
court (CFI Decision, p. 212; Rollo, p. 79). On April 25, 1975, the Medinas
made a last partial payment in the amount of P209,662.80.
Under a Notice of Sale on Extra-Judicial Foreclosure dated June 18, 1975,
the real properties of the Medinas covered by Transfer Certificates of Title
Nos. 32231, 43527, 51394, 58626, 60534, 63304, 67550, 67551 and
67552 of the Registry of Property of the City of Manila were sold at public
auction to the GSIS as the highest bidder for the total amount of
P440,080.00 on January 12, 1976, and the corresponding Certificate of Sale
was executed by the Sheriff of Manila on January 27, 1976 (CFI Decision,
pp.
212-213;
Rollo,
p.
79).
On January 30, 1976, the Medinas filed an Amended Complaint with the
trial court, praying for (a) the declaration of nullity of their two real estate
mortgage contracts with the GSIS as well as of the extra-judicial
foreclosure proceedings; and (b) the refund of excess payments, plus
damages and attorney's fees (CFI Decision, p. 213; Rollo, p. 79).
On March 19, 1976, the GSIS filed its Amended Answer (Joint Record on
Appeal, pp. 99-105; Rollo, p. 79). After trial, the trial court rendered a
Decision dated January 21, 1977 (Joint Record on Appeal, pp. 210-232), the
pertinent dispositive portion of which reads:

"WHEREFORE, judgment is hereby rendered declaring the extra-judicial


foreclosure conducted by the Sheriff of Manila of real estate mortgage
contracts executed by plaintiffs on April 4, 1962, as amended on July 6,
1962, and February 17, 1963, null and void and the Sheriff's Certificate of
Sale dated January 27, 1976, in favor of the GSIS of no legal force and
effect; and directing plaintiffs to pay the GSIS the sum of P1,611.12 in full
payment of their obligation to the latter with interest of 9% per annum
from December 11, 1975, until fully paid."
Dissatisfied with the said judgment, both parties appealed with the Court
of
Appeals.
The Court of Appeals, in a Decision promulgated on January 18, 1980
(Record, pp. 72-77), ruled in favor of the Medinas "WHEREFORE, the defendant GSIS is ordered to reimburse the amount of
P9,580.00 as overpayment and to pay plaintiffs P3,000.00 and P1,000.00
as attorney's fees and litigation expenses, respectively. With these
modifications, the judgment appealed from is AFFIRMED in all other
respects, with costs against defendant GSIS."
Hence

this

petition.

The Second Division of this Court, in a Resolution dated April 25, 1980
(Rollo, p. 88), resolved to deny the petition for lack of merit.
Petitioner filed on June 26, 1980 a Motion for Reconsideration dated June
17, 1980 (Rollo, pp. 95-103), of the above-stated Resolution and
respondents in a Resolution dated July 9, 1980 (Rollo, p. 105), were
required to comment thereon which comment they filed on August 6,
1980.
(Rollo,
pp.
106-116).
The petition was given due course in the Resolution dated July 6, 1981
(Rollo, p. 128). Petitioner filed its brief on November 26, 1981 (Rollo, pp.
147-177); while private respondents filed their brief on January 27, 1982
(Rollo, pp. 181-224), and the case was considered submitted for decision in
the
Resolution
of
July
19,
1982
(Rollo,
p.
229).
The issues in this case are:
1.

WHETHER OR NOT THE COURT OF APPEALS ERRED IN HOLDING


THAT THE AMENDMENT OF REAL ESTATE MORTGAGE DATED JULY 6,
1962 SUPERSEDED THE MORTGAGE CONTRACT DATED APRIL 4,

1962, PARTICULARLY
INTEREST;
2.

3.

The

WITH

RESPECT

TO

COMPOUNDING

OF

WHETHER OR NOT THE COURT OF APPEALS ERRED IN SUSTAINING


THE RESPONDENT-APPELLEE SPOUSES MEDINA'S CLAIM OF
OVERPAYMENT, BY CREDITING THE FIRE INSURANCE PROCEEDS IN
THE SUM OF P11,152.02 TO THE TOTAL PAYMENT MADE BY SAID
SPOUSES AS OF DECEMBER 11, 1975;
WHETHER OR NOT THE COURT OF APPEALS ERRED IN HOLDING
THAT THE INTEREST RATES ON THE LOAN ACCOUNTS OF
RESPONDENT-APPELLEE SPOUSES ARE USURIOUS;

4.

WHETHER OR NOT THE COURT OF APPEALS ERRED IN AFFIRMING


THE ANNULMENT OF THE SUBJECT EXTRAJUDICIAL FORECLOSURE
AND SHERIFF'S CERTIFICATE OF SALE; AND

5.

WHETHER OR NOT THE COURT OF APPEALS ERRED IN HOLDING


THE GSIS LIABLE FOR ATTORNEY'S FEES, EXPENSES OF LITIGATION
AND COSTS.
petition

is

impressed

with

merit.

There is no dispute as to the facts of the case. By agreement of the parties


the issues in this case are limited to the loan of P350,000.00 denominated
as Account No. 31055 (Rollo, p. 79; Joint Record on Appeal, p. 129) subject
of the Amendment of Real Estate Mortgage dated July 6, 1962, the
interpretation of which is the major issue in this case.
I.
GSIS claims that the amendment of the real estate mortgage did not
supersede the original mortgage contract dated April 4, 1962 which was
being amended only with respect to the amount secured thereby, and the
amount of monthly amortizations. All other provisions of aforesaid
mortgage contract including that on compounding of interest were deemed
re-written and thus binding on and enforceable against the respondent
spouses,
(Rollo,
pp.
162-166).
Accordingly, payments made by the Medinas in the total amount of
P991,845.53 was applied as follows: the amount of P600,495.51 to
Account No. 31055, P466,965.31 of which to interest and P133,530.20 to
principal and P390,845.66 to Account No. 31442, P230,774.29 to interest
and P159,971.37 to principal. (Joint Record on Appeal, p. 216; Rollo, p. 79).

On the other hand the Medinas maintain that there is no express


stipulation on compounded interest in the amendment of mortgage
contract of July 6, 1962 so that the compounded interest stipulation in the
original mortgage contract of April 4, 1962 which has been superseded
cannot be enforced in the later mortgage.
(Rollo, p. 185).
Hence the Medinas claim an overpayment in Account No. 31055. The
application of their total payment in the amount of P991,845.53 as
computed by the trial court and by the Court of Appeals is as follows:
x x x It appearing and so the parties admit in their own exhibits that as of
December 11, 1975, plaintiffs had paid a total of P991,241.17 excluding
fire insurance, P532,038.00 of said amount should have been applied to
the full payment of Acct. No. 31055 and the balance of P459,203.17
applied
to
the
payment
of
Acct.
No.
31442.
"According to the computation of the GSIS (Exhibit C, also Exhibit 38) the
total amounts, collected on Acct. No. 31442 as of December 11, 1975 total
P390,745.66 thus leaving an unpaid balance of P70,028.63. The total
amount plaintiffs should pay on said account should therefore be
P460,774.29. Deduct this amount from P459,163.17 which has been
shown to be the difference between the total payments made by plaintiffs
to the G.S.I.S. as of December 11, 1975 and the amount said plaintiffs
should pay under their Acct. No. 31055, there remains an outstanding
balance of P1,611.12. This amount represents the balance of the
obligation of the plaintiffs to the G.S.I.S. on Acct. No. 31442 as of
December 11, 1975." (Decision, Civil Case No. 98390; Joint Record on
Appeal, pp. 227-228; Rollo, p. 79).
To recapitulate, the difference in the computation lies in the inclusion of the
compounded interest as demanded by the GSIS on the one hand and the
exclusion thereof, as insisted by the Medinas on the other.
It is a basic and fundamental rule in the interpretation of contract that if
the terms thereof are clear and leave no doubt as to the intention of the
contracting parties, the literal meaning of the stipulations shall control but
when the words appear contrary to the evident intention of the parties, the
latter shall prevail over the former. In order to judge the intention of the
parties, their contemporaneous and subsequent acts shall be principally
considered. (Sy v. Court of Appeals, 131 SCRA 116; July 31, 1984).
There appears no ambiguity whatsoever in the terms and conditions of the

amendment of the mortgage contract herein quoted earlier. On the


contrary, an opposite conclusion cannot be otherwise but absurd.
As correctly stated by the GSIS in its brief (Rollo, pp. 162-166), a careful
perusal of the title, preamble and body of the Amendment of Real Estate
Mortgage dated July 6, 1962, taking into account the prior,
contemporaneous, and subsequent acts of the parties, ineluctably shows
that said Amendment was never intended to completely supersede the
mortgage
contract
dated
April
4,
1962.
First, the title "Amendment of Real Estate Mortgage" recognizes the
existence and effectivity of the previous mortgage contract. Second,
nowhere in the aforesaid Amendment did the parties manifest their
intention to supersede the original contract. On the contrary in the
WHEREAS clauses, the existence of the previous mortgage contract was
fully recognized and the fact that the same was just being amended as to
amount and amortization is fully established as to obviate any doubt.
Third, the Amendment of Real Estate Mortgage dated July 6, 1962 does not
embody the act of conveyancing the subject properties by way of
mortgage. In fact the intention of the parties to be bound by the
unaffected provisions of the mortgage contract of April 4, 1962 expressed
in unmistakable language is clearly evident in the last provision of the
Amendment of Real Estate Mortgage dated July 6, 1962 which reads:
"It is hereby expressly understood that with the foregoing amendment, all
other terms and conditions of the said real estate mortgage dated April 4,
1968, insofar as they are not inconsistent herewith, are hereby confirmed,
ratified and continued to be in full force and effect, and that the parties
hereto agree that the amendment be an integral part of said real estate
mortgage." (Emphasis supplied).
A review of prior, contemporaneous, and subsequent acts supports the
conclusion that both contracts are fully subsisting insofar as the latter is
not inconsistent with the former. The fact is the GSIS, as a matter of
policy, imposes uniform terms and conditions for all its real estate loans,
particularly with respect to compounding of interest. As shown in the case
at bar, the original mortgage contract embodies the same terms and
conditions as in the additional loan denominated as Account No, 31442
while the amendment carries the provision that it shall be subject to the
same terms and conditions as the real estate mortgage of April 4, 1962
except
as
to
amount
and
amortization.
Furthermore, it would be contrary to human experience and to ordinary

practice for the mortgagee to impose less onerous conditions on an


increased loan by the deletion of compound interest exacted on a lesser
loan.
II. There is an obvious error in the ruling of the Court of Appeals in its
Decision dated January 18, 1980, which reads:
x x x We agree that plaintiff should be credited with P11,152.02 of the fire
insurance proceeds as the same is admitted in paragraph (4) of its Answer
and should be added to their payments. (par. 13).
Contrary thereto, paragraph 4 of the Answer of the GSIS states:
"That they (GSIS) specifically deny the allegations in Paragraph 11, the
truth being that plaintiffs are not entitled to a credit of P19,381.07 as fire
insurance proceeds since they were only entitled to, and were credited
with, the amount of P11,152.02 as proceeds of their fire insurance policy."
(Par.
4,
Amended
Answer).
As can be gleaned from the foregoing, petitioner-appellant GSIS had
already credited the amount of P11,152.02. Thus, when the Court of
Appeals made the aforequoted ruling, it was actually doubly crediting the
amount of P11,152.02 which had been previously credited by petitionerappellant GSIS (Rollo, pp. 170-171).
III. As to whether or not the interest rates on the loan accounts of the
Medinas are usurious, it has already been settled that the Usury Law
applies only to interest by way of compensation for the use or forbearance
of money (Lopez v. Hernaez, 32 Phil. 631; Bachrach Motor Co. v. Espiritu,
52 Phil. 346; Equitable Banking Corporation v. Liwanag, 32 SCRA 293,
March 30, 1970). Interest by way of damages is governed by Article 2209
of the Civil Code of the Philippines which provides:
"Art. 2209. If the obligation consists in the payment of a sum of moneys,
and the debtor incurs in delay, the indemnity for damages, there being no
stipulation to the contrary, shall be the payment of the interest agreed
upon, x x x."
In the Bachrach case (supra) the Supreme Court ruled that the Civil Code
permits the agreement upon a penalty apart from the interest. Should
there be such an agreement, the penalty does not include the interest, and
as such the two are different and distinct things which may be demanded
separately. Reiterating the same principle in the later case of Equitable

Banking Corp. (supra), where this Court held that the stipulation about
payment of such additional rate partakes of the nature of a penalty clause,
which is sanctioned by law.
IV. Based on the finding that the GSIS had the legal right to impose an
interest 9% per annum, compounded monthly, on the loans of the Medinas
and an interest of 9%/12% per annum on all due and unpaid amortizations
or installments, there is no question that the Medinas failed to settle their
accounts with the GSIS which as computed by the latter reached an
outstanding balance of P630,130.55 as of April 12, 1975 and that the GSIS
had
a
perfect
right
to
foreclose
the
mortgage.
In the same manner, there is obvious error in invalidating the extra-judicial
foreclosure on the basis of a typographical error in the Sheriff's Certificate
of Sale which stated that the mortgage was foreclosed on May 17, 1963
instead
of
February
17,
1963.
There is merit in GSIS' contention that the Sheriff's Certificate of Sale is
merely provisional in character and is not intended to operate as an
absolute transfer of the subject property, but merely to identify the
property, to show the price paid and the date when the right of redemption
expires (Section 27, Rule 39, Rules of Court, Francisco, The Revised Rules
of Court, 1972 Vol., IV-B, Part I, p. 681). Hence the date of the foreclosed
mortgage is not even a material content of the said Certificate. (Rollo, p.
174).

V. PREMISES CONSIDERED, the decision of the Court of Appeals, in CAG.R. No. 62541-R Medina, et al, v. Government Service Insurance System,
et al. is hereby REVERSED and SET ASIDE, and a new one is hereby
RENDERED, affirming the validity of the extra-judicial foreclosure of the
real estate mortgages of the respondent-appellee spouses Medina dated
April 4, 1962, as amended on July 6, 1962, and February 17, 1963.
SO ORDERED. Feria, (Chairman), Fernan, Alampay, and Gutierrez, Jr., JJ.,
concur.

DECISION
VITUG, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the
Rules of Court, assailing the decision and resolutions of the Court of
Appeals in CA-G.R. CV No. 34594, entitled "Security Bank and Trust Co. vs.
Tolomeo
Ligutan,
et
al."
Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained on 11 May
1981 a loan in the amount of P120,000.00 from respondent Security Bank
and Trust Company. Petitioners executed a promissory note binding
themselves, jointly and severally, to pay the sum borrowed with an interest
of 15.189% per annum upon maturity and to pay a penalty of 5% every
month on the outstanding principal and interest in case of default. In
addition, petitioners agreed to pay 10% of the total amount due by way of
attorneys fees if the matter were indorsed to a lawyer for collection or if a
suit were instituted to enforce payment. The obligation matured on 8
September 1981; the bank, however, granted an extension but only up
until 29 December 1981.
Despite several demands from the bank, petitioners failed to settle the
debt which, as of 20 May 1982, amounted to P114,416.10. On 30
September 1982, the bank sent a final demand letter to petitioners
informing them that they had five days within which to make full payment.
Since petitioners still defaulted on their obligation, the bank filed on 3
November 1982, with the Regional Trial Court of Makati, Branch 143, a
complaint
for
recovery
of
the
due
amount.
After petitioners had filed a joint answer to the complaint, the bank
presented its evidence and, on 27 March 1985, rested its case. Petitioners,
instead of introducing their own evidence, had the hearing of the case
reset on two consecutive occasions. In view of the absence of petitioners
and their counsel on 28 August 1985, the third hearing date, the bank
moved, and the trial court resolved, to consider the case submitted for
decision.

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


TOLOMEO LIGUTAN AND LEONIDAS DE LA LLANA, PETITIONERS, VS.
HON. COURT OF APPEALS & SECURITY BANK & TRUST COMPANY,
RESPONDENTS.

Two years later, or on 23 October 1987, petitioners filed a motion for


reconsideration of the order of the trial court declaring them as having
waived their right to present evidence and prayed that they be allowed to
prove their case. The court a quo denied the motion in an order, dated 5

10

September 1988, and on 20 October 1989, it rendered its decision, [1] the
dispositive portion of which read:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and
against the defendants, ordering the latter to pay, jointly and severally, to
the plaintiff, as follows:

In the case at bar, defendants-appellants executed a promissory note


where they undertook to pay the obligation on its maturity date 'without
necessity of demand.' They also agreed to pay the interest in case of nonpayment from the date of default.
x x x

xxx

xxx

The sum of P114,416.00 with interest thereon at the rate of


15.189% per annum, 2% service charge and 5% per month penalty
charge, commencing on 20 May 1982 until fully paid;

While we maintain that defendants-appellants must be bound by the


contract which they acknowledged and signed, we take cognizance of their
plea for the application of the provisions of Article 1229 x x x.

"2.

To pay the further sum equivalent to 10% of the total amount of


indebtedness for and as attorneys fees; and

Considering that defendants-appellants partially complied with their


obligation under the promissory note by the reduction of the original
amount of P120,000.00 to P114,416.00 and in order that they will finally
settle their obligation, it is our view and we so hold that in the interest of
justice and public policy, a penalty of 3% per month or 36% per annum
would suffice.

"3.

To pay the costs of the suit.[2]

"1.

Petitioners interposed an appeal with the Court of Appeals, questioning the


rejection by the trial court of their motion to present evidence and assailing
the imposition of the 2% service charge, the 5% per month penalty charge
and 10% attorney's fees. In its decision[3] of 7 March 1996, the appellate
court affirmed the judgment of the trial court except on the matter of the
2% service charge which was deleted pursuant to Central Bank Circular No.
783. Not fully satisfied with the decision of the appellate court, both
parties filed their respective motions for reconsideration. [4] Petitioners
prayed for the reduction of the 5% stipulated penalty for being
unconscionable. The bank, on the other hand, asked that the payment of
interest and penalty be commenced not from the date of filing of complaint
but from the time of default as so stipulated in the contract of the parties.
On 28 October 1998, the Court of Appeals resolved the two motions thusly:
We find merit in plaintiff-appellees claim that the principal sum of
P114,416.00 with interest thereon must commence not on the date of filing
of the complaint as we have previously held in our decision but on the date
when
the
obligation
became
due.
Default generally begins from the moment the creditor demands the
performance of the obligation. However, demand is not necessary to
render the obligor in default when the obligation or the law so provides.

x x x
xxx
x x x WHEREFORE,
the decision sought to be reconsidered is hereby MODIFIED. The
defendants-appellants Tolomeo Ligutan and Leonidas dela Llana are hereby
ordered to pay the plaintiff-appellee Security Bank and Trust Company the
following:
1.

The sum of P114,416.00 with interest thereon at the rate of


15.189% per annum and 3% per month penalty charge
commencing May 20, 1982 until fully paid;

2.

The sum equivalent to 10% of the total amount of


indebtedness as and for attorneys fees.[5]

the

On 16 November 1998, petitioners filed an omnibus motion for


reconsideration and to admit newly discovered evidence, [6] alleging that
while the case was pending before the trial court, petitioner Tolomeo
Ligutan and his wife Bienvenida Ligutan executed a real estate mortgage
on 18 January 1984 to secure the existing indebtedness of petitioners
Ligutan and dela Llana with the bank. Petitioners contended that the
execution of the real estate mortgage had the effect of novating the
contract between them and the bank. Petitioners further averred that the
mortgage was extrajudicially foreclosed on 26 August 1986, that they were
not informed about it, and the bank did not credit them with the proceeds
of the sale. The appellate court denied the omnibus motion for

11

reconsideration and to admit newly discovered evidence, ratiocinating that


such a second motion for reconsideration cannot be entertained under
Section 2, Rule 52, of the 1997 Rules of Civil Procedure. Furthermore, the
appellate court said, the newly-discovered evidence being invoked by
petitioners had actually been known to them when the case was brought
on appeal and when the first motion for reconsideration was filed. [7]
Aggrieved by the decision and resolutions of the Court of Appeals,
petitioners elevated their case to this Court on 9 July 1999 via a petition for
review on certiorari under Rule 45 of the Rules of Court, submitting thusly
I.

The respondent Court of Appeals seriously erred in not holding that


the 15.189% interest and the penalty of three (3%) percent per
month or thirty-six (36%) percent per annum imposed by private
respondent bank on petitioners loan obligation are still manifestly
exorbitant, iniquitous and unconscionable.

II.

The respondent Court of Appeals gravely erred in not reducing to a


reasonable level the ten (10%) percent award of attorneys fees
which is highly and grossly excessive, unreasonable and
unconscionable.

III.

The respondent Court of Appeals gravely erred in not admitting


petitioners newly discovered evidence which could not have been
timely produced during the trial of this case.

IV.

The respondent Court of Appeals seriously erred in not holding that


there was a novation of the cause of action of private respondents
complaint in the instant case due to the subsequent execution of
the real estate mortgage during the pendency of this case and the
subsequent foreclosure of the mortgage.[8]

Respondent bank, which did not take an appeal, would, however, have it
that the penalty sought to be deleted by petitioners was even insufficient
to fully cover and compensate for the cost of money brought about by the
radical devaluation and decrease in the purchasing power of the peso,
particularly vis-a-vis the U.S. dollar, taking into account the time frame of
its occurrence. The Bank would stress that only the amount of P5,584.00
had been remitted out of the entire loan of P120,000.00. [9]
A penalty clause, expressly recognized by law, [10] is an accessory
undertaking to assume greater liability on the part of an obligor in case of

breach of an obligation. It functions to strengthen the coercive force of the


obligation[11] and to provide, in effect, for what could be the liquidated
damages resulting from such a breach. The obligor would then be bound
to pay the stipulated indemnity without the necessity of proof on the
existence and on the measure of damages caused by the breach. [12]
Although a court may not at liberty ignore the freedom of the parties to
agree on such terms and conditions as they see fit that contravene neither
law nor morals, good customs, public order or public policy, a stipulated
penalty, nevertheless, may be equitably reduced by the courts if it is
iniquitous or unconscionable or if the principal obligation has been partly or
irregularly
complied
with.[13]
The question of whether a penalty is reasonable or iniquitous can be partly
subjective and partly objective. Its resolution would depend on such
factors as, but not necessarily confined to, the type, extent and purpose of
the penalty, the nature of the obligation, the mode of breach and its
consequences, the supervening realities, the standing and relationship of
the parties, and the like, the application of which, by and large, is
addressed to the sound discretion of the court. In Rizal Commercial
Banking Corp. vs. Court of Appeals,[14] just an example, the Court has
tempered the penalty charges after taking into account the debtors pitiful
situation and its offer to settle the entire obligation with the creditor bank.
The stipulated penalty might likewise be reduced when a partial or
irregular performance is made by the debtor. [15] The stipulated penalty
might even be deleted such as when there has been substantial
performance in good faith by the obligor,[16] when the penalty clause itself
suffers from fatal infirmity, or when exceptional circumstances so exist as
to
warrant
it.[17]
The Court of Appeals, exercising its good judgment in the instant case, has
reduced the penalty interest from 5% a month to 3% a month which
petitioner still disputes. Given the circumstances, not to mention the
repeated acts of breach by petitioners of their contractual obligation, the
Court sees no cogent ground to modify the ruling of the appellate court..
Anent the stipulated interest of 15.189% per annum, petitioners, for the
first time, question its reasonableness and prays that the Court reduce the
amount. This contention is a fresh issue that has not been raised and
ventilated before the courts below. In any event, the interest stipulation,
on its face, does not appear as being that excessive. The essence or
rationale for the payment of interest, quite often referred to as cost of
money, is not exactly the same as that of a surcharge or a penalty. A

12

penalty stipulation is not necessarily preclusive of interest, if there is an


agreement to that effect, the two being distinct concepts which may
separately be demanded.[18] What may justify a court in not allowing the
creditor to impose full surcharges and penalties, despite an express
stipulation therefor in a valid agreement, may not equally justify the nonpayment or reduction of interest. Indeed, the interest prescribed in loan
financing arrangements is a fundamental part of the banking business and
the
core
of
a
bank's
existence.[19]

At any rate, the subsequent execution of the real estate mortgage as


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

Petitioners next assail the award of 10% of the total amount of


indebtedness by way of attorney's fees for being grossly excessive,
exorbitant and unconscionable vis-a-vis the time spent and the extent of
services rendered by counsel for the bank and the nature of the case.
Bearing in mind that the rate of attorneys fees has been agreed to by the
parties and intended to answer not only for litigation expenses but also for
collection efforts as well, the Court, like the appellate court, deems the
award
of
10%
attorneys
fees
to
be
reasonable.

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


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

Neither can the appellate court be held to have erred in rejecting


petitioners' call for a new trial or to admit newly discovered evidence. As
the appellate court so held in its resolution of 14 May 1999 - Under
Section 2, Rule 52 of the 1997 Rules of Civil Procedure, no second motion
for reconsideration of a judgment or final resolution by the same party
shall be entertained. Considering that the instant motion is already a
second motion for reconsideration, the same must therefore be denied.
Furthermore, it would appear from the records available to this court that
the newly-discovered evidence being invoked by defendants-appellants
have actually been existent when the case was brought on appeal to this
court as well as when the first motion for reconsideration was filed. Hence,
it is quite surprising why defendants-appellants raised the alleged newlydiscovered evidence only at this stage when they could have done so in
the earlier pleadings filed before this court.
The propriety or acceptability of such a second motion for reconsideration
is not contingent upon the averment of 'new' grounds to assail the
judgment, i.e., grounds other than those theretofore presented and
rejected. Otherwise, attainment of finality of a judgment might be stayed
off indefinitely, depending on the partys ingenuousness or cleverness in
conceiving and formulating 'additional flaws' or 'newly discovered errors'
therein, or thinking up some injury or prejudice to the rights of the movant
for reconsideration.[20]

13

G.R. No. 116285, October 19, 2001

Thirty-Five

ANTONIO TAN, PETITIONER, VS. COURT OF APPEALS AND THE


CULTURAL
CENTER
OF
THE
PHILIPPINES,
RESPONDENTS.

On August 29, 1984, respondent CCP filed in the RTC of Manila a complaint
for collection of a sum of money, docketed as Civil Case No. 84-26363,
against the petitioner after the latter failed to settle his said restructured
loan obligation. The petitioner interposed the defense that he merely
accommodated a friend, Wilson Lucmen, who allegedly asked for his help
to obtain a loan from respondent CCP. Petitioner claimed that he has not
been able to locate Wilson Lucmen. While the case was pending in the trial
court, the petitioner filed a Manifestation wherein he proposed to settle his
indebtedness to respondent CCP by proposing to make a down payment of
One Hundred Forty Thousand Pesos (P140,000.00) and to issue twelve (12)
checks every beginning of the year to cover installment payments for one
year, and every year thereafter until the balance is fully paid. However,
respondent CCP did not agree to the petitioner's proposals and so the trial
of
the
case
ensued.

DECISION
DE LEON, JR., J.:
Before us is a petition for review of the Decision [1] dated August 31, 1993
and Resolution[2] dated July 13, 1994 of the Court of Appeals affirming the
Decision[3] dated May 8, 1991 of the Regional Trial Court (RTC) of Manila,
Branch
27.
The

facts

are

as

follows:

On May 14, 1978 and July 6, 1978, petitioner Antonio Tan obtained two (2)
loans each in the principal amount of Two Million Pesos (P2,000,000.00), or
in the total principal amount of Four Million Pesos (P4,000,000.00) from
respondent Cultural Center of the Philippines (CCP, for brevity) evidenced
by two (2) promissory notes with maturity dates on May 14, 1979 and July
6, 1979, respectively. Petitioner defaulted but after a few partial payments
he had the loans restructured by respondent CCP, and petitioner
accordingly executed a promissory note (Exhibit "A") on August 31, 1979 in
the amount of Three Million Four Hundred Eleven Thousand Four Hundred
Twenty-One Pesos and Thirty-Two Centavos (P3,411,421.32) payable in five
(5) installments. Petitioner Tan failed to pay any installment on the said
restructured loan of Three Million Four Hundred Eleven Thousand Four
Hundred Twenty-One Pesos and Thirty-Two Centavos (P3,411,421.32), the
last installment falling due on December 31, 1980. In a letter dated
January 26, 1982, petitioner requested and proposed to respondent CCP a
mode of paying the restructured loan, i.e., (a) twenty percent (20%) of the
principal amount of the loan upon the respondent giving its conformity to
his proposal; and (b) the balance on the principal obligation payable in
thirty-six (36) equal monthly installments until fully paid. On October 20,
1983, petitioner again sent a letter to respondent CCP requesting for a
moratorium on his loan obligation until the following year allegedly due to
a substantial deduction in the volume of his business and on account of the
peso devaluation. No favorable response was made to said letters.
Instead, respondent CCP, through counsel, wrote a letter dated May 30,
1984 to the petitioner demanding full payment, within ten (10) days from
receipt of said letter, of the petitioner's restructured loan which as of April
30, 1984 amounted to Six Million Eighty-Eight Thousand Seven Hundred

Pesos

and

Three

Centavos

(P6,088,735.03).

On May 8, 1991, the trial court rendered a decision, the dispositive portion
of which reads:
WHEREFORE, judgment is hereby rendered in favor of plaintiff and against
defendant, ordering defendant to pay plaintiff, the amount of
P7,996,314.67, representing defendant's outstanding account as of August
28, 1986, with the corresponding stipulated interest and charges thereof,
until fully paid, plus attorney's fees in an amount equivalent to 25% of said
outstanding account, plus P50,000.00, as exemplary damages, plus costs.
Defendant's counterclaims are ordered dismissed, for lack of merit.
SO ORDERED.[4]

The trial court gave five (5) reasons in ruling in favor of respondent CCP.
First, it gave little weight to the petitioner's contention that the loan was
merely for the accommodation of Wilson Lucmen for the reason that the
defense propounded was not credible in itself. Second, assuming,
arguendo, that the petitioner did not personally benefit from the said loan,
he should have filed a third party complaint against Wilson Lucmen, the
alleged accommodated party but he did not. Third, for three (3) times the
petitioner offered to settle his loan obligation with respondent CCP. Fourth,
petitioner may not avoid his liability to pay his obligation under the
promissory note (Exh. "A") which he must comply with in good faith
pursuant to Article 1159 of the New Civil Code. Fifth, petitioner is estopped

14

from denying his liability or loan obligation to the private respondent.


The petitioner appealed the decision of the trial court to the Court of
Appeals insofar as it charged interest, surcharges, attorney's fees and
exemplary damages against the petitioner. In his appeal, the petitioner
asked for the reduction of the penalties and charges on his loan obligation.
He abandoned his alleged defense in the trial court that he merely
accommodated his friend, Wilson Lucmen, in obtaining the loan, and
instead admitted the validity of the same. On August 31, 1993, the
appellate court rendered a decision, the dispositive portion of which reads:

THE HONORABLE COURT OF APPEALS COMMITTED A MISTAKE IN GIVING ITS


IMPRIMATUR TO THE DECISION OF THE TRIAL COURT WHICH COMPOUNDED
INTEREST ON SURCHARGES.
II

WHEREFORE, with the foregoing modification, the judgment appealed from


is
hereby
AFFIRMED.

THE HONORABLE COURT OF APPEALS ERRED IN NOT SUSPENDING


IMPOSITION OF INTEREST FOR THE PERIOD OF TIME THAT PRIVATE
RESPONDENT HAS FAILED TO ASSIST PETITIONER IN APPLYING FOR RELIEF
OF LIABILITY THROUGH THE COMMISSION ON AUDIT AND THE OFFICE OF
THE PRESIDENT.

SO ORDERED.[5]

III

In affirming the decision of the trial court imposing surcharges and interest,
the appellate court held that:

THE HONORABLE COURT OF APPEALS ERRED IN NOT DELETING AWARD OF


ATTORNEY'S FEES AND IN REDUCING PENALTIES.

We are unable to accept appellant's (petitioner's) claim for modification on


the basis of alleged partial or irregular performance, there being none.
Appellant's offer or tender of payment cannot be deemed as a partial or
irregular performance of the contract, not a single centavo appears to have
been paid by the defendant.

However, the appellate court modified the decision of the trial court by
deleting the award for exemplary damages and reducing the amount of
awarded attorney's fees to five percent (5%), by ratiocinating as follows:
Given the circumstances of the case, plus the fact that plaintiff was
represented by a government lawyer, We believe the award of 25% as
attorney's fees and P500,000.00 as exemplary damages is out of
proportion to the actual damage caused by the non-performance of the
contract and is excessive, unconscionable and iniquitous.

In a Resolution dated July 13, 1994, the appellate court denied the
petitioner's
motion
for
reconsideration
of
the
said
decision.
Hence, this petition anchored on the following assigned errors:
I

Significantly, the petitioner does not question his liability for his
restructured loan under the promissory note marked Exhibit "A". The first
question to be resolved in the case at bar is whether there are contractual
and legal bases for the imposition of the penalty, interest on the penalty
and
attorney's
fees.
The petitioner imputes error on the part of the appellate court in not totally
eliminating the award of attorney's fees and in not reducing the penalties
considering that the petitioner, contrary to the appellate court's findings,
has allegedly made partial payments on the loan. And if penalty is to be
awarded, the petitioner is asking for the non-imposition of interest on the
surcharges inasmuch as the compounding of interest on surcharges is not
provided in the promissory note marked Exhibit "A". The petitioner takes
exception to the computation of the private respondent whereby the
interest, surcharge and the principal were added together and that on the
total sum interest was imposed. Petitioner also claims that there is no
basis in law for the charging of interest on the surcharges for the reason
that the New Civil Code is devoid of any provision allowing the imposition
of
interest
on
surcharges.
We find no merit in the petitioner's contention. Article 1226 of the New
Civil Code provides that:

15

In obligations with a penal clause, the


indemnity for damages and the payment
compliance, if there is no stipulation to
damages shall be paid if the obligor refuses
of
fraud
in
the
fulfillment

penalty shall substitute the


of interests in case of nonthe contrary. Nevertheless,
to pay the penalty or is guilty
of
the
obligation.

The penalty may be enforced only when it is demandable in accordance


with the provisions of this Code.

In the case at bar, the promissory note (Exhibit "A") expressly provides for
the imposition of both interest and penalties in case of default on the part
of the petitioner in the payment of the subject restructured loan. The
pertinent[6] portion of the promissory note (Exhibit "A") imposing interest
and penalties provides that:
For value received, I/We jointly and severally promise to pay to the
CULTURAL CENTER OF THE PHILIPPINES at its office in Manila, the sum of
THREE MILLION FOUR HUNDRED ELEVEN THOUSAND FOUR HUNDRED +
PESOS
(P3,411,421.32)
Philippine
Currency,
xxx.
xxx

xxx

xxx

With interest at the rate of FOURTEEN per cent (14%) per annum from the
date hereof until paid. PLUS THREE PERCENT (3%) SERVICE CHARGE.
In case of non-payment of this note at maturity/on demand or upon default
of payment of any portion of it when due, I/We jointly and severally agree
to pay additional penalty charges at the rate of TWO per cent (2%) per
month on the total amount due until paid, payable and computed monthly.
Default of payment of this note or any portion thereof when due shall
render all other installments and all existing promissory notes made by us
in favor of the CULTURAL CENTER OF THE PHILIPPINES immediately due
and
demandable.
(Underscoring
supplied)
xxx

xxx

xxx

The stipulated fourteen percent (14%) per annum interest charge until full
payment of the loan constitutes the monetary interest on the note and is
allowed under Article 1956 of the New Civil Code. [7] On the other hand, the
stipulated two percent (2%) per month penalty is in the form of penalty
charge which is separate and distinct from the monetary interest on the

principal

of

the

loan.

Penalty on delinquent loans may take different forms. In Government


Service Insurance System v. Court of Appeals, [8] this Court has ruled that
the New Civil Code permits an agreement upon a penalty apart from the
monetary interest. If the parties stipulate this kind of agreement, the
penalty does not include the monetary interest, and as such the two are
different and distinct from each other and may be demanded separately.
Quoting Equitable Banking Corp. v. Liwanag, [9] the GSIS case went on to
state that such a stipulation about payment of an additional interest rate
partakes of the nature of a penalty clause which is sanctioned by law, more
particularly under Article 2209 of the New Civil Code which provides that:
If the obligation consists in the payment of a sum of money, and the debtor
incurs in delay, the indemnity for damages, there being no stipulation to
the contrary, shall be the payment of the interest agreed upon, and in the
absence of stipulation, the legal interest, which is six per cent per annum.

The penalty charge of two percent (2%) per month in the case at bar
began to accrue from the time of default by the petitioner. There is no
doubt that the petitioner is liable for both the stipulated monetary interest
and the stipulated penalty charge. The penalty charge is also called
penalty or compensatory interest. Having clarified the same, the next
issue to be resolved is whether interest may accrue on the penalty or
compensatory interest without violating the provisions of Article 1959 of
the
New
Civil
Code,
which
provides
that:
Without prejudice to the provisions of Article 2212, interest due and unpaid
shall not earn interest. However, the contracting parties may by stipulation
capitalize the interest due and unpaid, which as added principal, shall earn
new
interest.
According to the petitioner, there is no legal basis for the imposition of
interest on the penalty charge for the reason that the law only allows
imposition of interest on monetary interest but not the charging of interest
on penalty. He claims that since there is no law that allows imposition of
interest on penalties, the penalties should not earn interest. But as we
have already explained, penalty clauses can be in the form of penalty or
compensatory interest. Thus, the compounding of the penalty or
compensatory interest is sanctioned by and allowed pursuant to the abovequoted provision of Article 1959 of the New Civil Code considering that:

16

First, there is an express stipulation in the promissory note (Exhibit "A")


permitting the compounding of interest. The fifth paragraph of the said
promissory note provides that: "Any interest which may be due if not paid
shall be added to the total amount when due and shall become part
thereof, the whole amount to bear interest at the maximum rate allowed
by law."[10] Therefore, any penalty interest not paid, when due, shall earn
the legal interest of twelve percent (12%) per annum, [11] in the absence of
express stipulation on the specific rate of interest, as in the case at bar.
Second, Article 2212 of the New Civil Code provides that "Interest due shall
earn legal interest from the time it is judicially demanded, although the
obligation may be silent upon this point." In the instant case, interest
likewise began to run on the penalty interest upon the filing of the
complaint in court by respondent CCP on August 29, 1984. Hence, the
courts a quo did not err in ruling that the petitioner is bound to pay the
interest on the total amount of the principal, the monetary interest and the
penalty
interest.
The petitioner seeks the elimination of the compounded interest imposed
on the total amount based allegedly on the case of National Power
Corporation v. National Merchandising Corporation,[12] wherein we ruled
that the imposition of interest on the damages from the filing of the
complaint is unjust where the litigation was prolonged for twenty-five (25)
years through no fault of the defendant. However, the ruling in the said
National Power Corporation (NPC) case is not applicable to the case at bar
inasmuch as our ruling on the issue of interest in that NPC case was based
on equitable considerations and on the fact that the said case lasted for
twenty-five (25) years "through no fault of the defendant." In the case at
bar, however, equity cannot be considered inasmuch as there is a
contractual stipulation in the promissory note whereby the petitioner
expressly agreed to the compounding of interest in case of failure on his
part to pay the loan at maturity. Inasmuch as the said stipulation on the
compounding of interest has the force of law between the parties and does
not appear to be inequitable or unjust, the said written stipulation should
be
respected.
The private respondent's Statement of Account (marked Exhibits "C" to "C2")[13] shows the following breakdown of the petitioner's indebtedness as of
August 28, 1986:
Principal
Interest

P2,838,454.68
576,167.89

Surcharge

P4,581,692.10
P7,996,314.67

The said statement of account also shows that the above amounts stated
therein are net of the partial payments amounting to a total of Four
Hundred Fifty-Two Thousand Five Hundred Sixty-One Pesos and Forty-Three
Centavos (P452,561.43) which were made during the period from May 13,
1983 to September 30, 1983.[14] The petitioner now seeks the reduction of
the penalty due to the said partial payments. The principal amount of the
promissory note (Exhibit "A") was Three Million Four Hundred Eleven
Thousand Four Hundred Twenty-One Pesos and Thirty-Two Centavos
(P3,411,421.32) when the loan was restructured on August 31, 1979. As of
August 28, 1986, the principal amount of the said restructured loan has
been reduced to Two Million Eight Hundred Thirty-Eight Thousand Four
Hundred Fifty-Four Pesos and Sixty-Eight Centavos (P2,838,454.68). Thus,
petitioner contends that reduction of the penalty is justifiable pursuant to
Article 1229 of the New Civil Code which provides that: "The judge shall
equitably reduce the penalty when the principal obligation has been partly
or irregularly complied with by the debtor. Even if there has been no
performance, the penalty may also be reduced by the courts if it is
iniquitous or unconscionable." Petitioner insists that the penalty should be
reduced to ten percent (10%) of the unpaid debt in accordance with
Bachrach
Motor
Company
v.
Espiritu.[15]
There appears to be a justification for a reduction of the penalty charge but
not necessarily to ten percent (10%) of the unpaid balance of the loan as
suggested by petitioner. Inasmuch as petitioner has made partial
payments which showed his good faith, a reduction of the penalty charge
from two percent (2%) per month on the total amount due, compounded
monthly, until paid can indeed be justified under the said provision of
Article
1229
of
the
New
Civil
Code.
In other words, we find the continued monthly accrual of the two percent
(2%) penalty charge on the total amount due to be unconscionable
inasmuch as the same appeared to have been compounded monthly.
Considering petitioner's several partial payments and the fact he is liable
under the note for the two percent (2%) penalty charge per month on the
total amount due, compounded monthly, for twenty-one (21) years since
his default in 1980, we find it fair and equitable to reduce the penalty
charge to a straight twelve percent (12%) per annum on the total amount

17

due starting August 28, 1986, the date of the last Statement of Account
(Exhibits "C" to "C-2"). We also took into consideration the offers of the
petitioner to enter into a compromise for the settlement of his debt by
presenting proposed payment schemes to respondent CCP. The said offers
at compromise also showed his good faith despite difficulty in complying
with his loan obligation due to his financial problems. However, we are not
unmindful of the respondent's long overdue deprivation of the use of its
money
collectible
from
the
petitioner.
The petitioner also imputes error on the part of the appellate court for not
declaring the suspension of the running of the interest during that period
when the respondent allegedly failed to assist the petitioner in applying for
relief from liability. In this connection, the petitioner referred to the private
respondent's letter[16] dated September 28, 1988 addressed to petitioner
which partially reads:
Dear
xxx

Mr.

Tan:

xxx

xxx

With reference to your appeal for condonation of interest and surcharge,


we wish to inform you that the center will assist you in applying for relief of
liability through the Commission on Audit and Office of the President xxx.
While your application is being processed and awaiting approval, the
center will be accepting your proposed payment scheme with the
downpayment of P160,000.00 and monthly remittances of P60,000.00 xxx.
xxx

xxx

xxx

The petitioner alleges that his obligation to pay the interest and surcharge
should have been suspended because the obligation to pay such interest
and surcharge has become conditional, that is dependent on a future and
uncertain event which consists of whether the petitioner's request for
condonation of interest and surcharge would be recommended by the
Commission on Audit and the Office of the President to the House of
Representatives for approval as required under Section 36 of Presidential
Decree No. 1445. Since the condition has not happened allegedly due to
the private respondent's reneging on its promise, his liability to pay the
interest and surcharge on the loan has not arisen. This is the petitioner's
contention.

It is our view, however, that the running of the interest and surcharge was
not suspended by the private respondent's promise to assist the
petitioners in applying for relief therefrom through the Commission on
Audit
and
the
Office
of
the
President.
First, the letter dated September 28, 1988 alleged to have been sent by
the respondent CCP to the petitioner is not part of the formally offered
documentary evidence of either party in the trial court. That letter cannot
be considered evidence pursuant to Rule 132, Section 34 of the Rules of
Court which provides that: "The court shall consider no evidence which has
not been formally offered xxx." Besides, the said letter does not contain
any categorical agreement on the part of respondent CCP that the
payment of the interest and surcharge on the loan is deemed suspended
while his appeal for condonation of the interest and surcharge was being
processed.
Second, the private respondent correctly asserted that it was the primary
responsibility of petitioner to inform the Commission on Audit and the
Office of the President of his application for condonation of interest and
surcharge. It was incumbent upon the petitioner to bring his
administrative appeal for condonation of interest and penalty charges to
the
attention
of
the
said
government
offices.
On the issue of attorney's fees, the appellate court ruled correctly and
justly in reducing the trial court's award of twenty-five percent (25%)
attorney's fees to five percent (5%) of the total amount due.
WHEREFORE, the assailed Decision of the Court of Appeals is hereby
AFFIRMED with MODIFICATION in that the penalty charge of two percent
(2%) per month on the total amount due, compounded monthly, is hereby
reduced to a straight twelve percent (12%) per annum starting from
August
28,
1986.
With
costs
against
the
petitioner.
SO

ORDERED.

Bellosillo, (Chairman), Mendoza, Quisumbing, and Buena, JJ., concur.

18

G.R. Nos. 128833, April 20, 1998


RIZAL COMMERCIAL BANKING CORPORATION, UY CHUN BING AND
ELI D. LAO, PETITIONERS, VS. COURT OF APPEALS AND GOYU &
SONS,
INC.,
RESPONDENTS.
[G.R.

NO.

128834.

APRIL

20,

1998]

RIZAL COMMERCIAL BANKING CORPORATION, PETITIONERS, VS.


COURT OF APPEALS, ALFREDO C. SEBASTIAN, GOYU & SONS, INC.,
GO SONG HIAP, SPOUSES GO TENG KOK AND BETTY CHIU SUK YING
ALIAS
BETTY
GO,
RESPONDENTS.
[G.R.

NO.

128866.

APRIL

20,

1998]

MALAYAN INSURANCE INC., PETITIONER, VS. GOYU & SONS, INC.


RESPONDENT. D EC I S I O N
MELO, J.:
The issues relevant to the herein three consolidated petitions revolve
around the fire loss claims of respondent Goyu & Sons, Inc. (GOYU) with
petitioner Malayan Insurance Company, Inc. (MICO) in connection with the
mortgage contracts entered into by and between Rizal Commercial
Banking Corporation (RCBC) and GOYU.
The Court of Appeals ordered MICO to pay GOYU its claims in the total
amount of P74,040,518.58, plus 37% interest per annum commencing July
27, 1992. RCBC was ordered to pay actual and compensatory damages in
the amount of P5,000,000.00. MICO and RCBC were held solidarily liable to
pay GOYU P1,500,000.00 as exemplary damages and P1,500,000.00 for
attorneys fees. GOYUs obligation to RCBC was fixed at P68,785,069.04 as
of April 1992, without any interest, surcharges, and penalties. RCBC and
MICO appealed separately but, in view of the common facts and issues
involved, their individual petitions were consolidated.
The undisputed facts may be summarized as follows:
GOYU applied for credit facilities and accommodations with RCBC at its
Binondo Branch. After due evaluation, RCBC Binondo Branch, through its
key officers, petitioners Uy Chun Bing and Eli D. Lao, recommended GOYUs
application for approval by RCBCs executive committee. A credit facility in
the amount of P30 million was initially granted. Upon GOYUs application

and Uys and Laos recommendation, RCBCs executive committee


increased GOYUs credit facility to P50 million, then to P90 million, and
finally to P117 million.
As security for its credit facilities with RCBC, GOYU executed two real
estate mortgages and two chattel mortgages in favor of RCBC, which were
registered with the Registry of Deeds at Valenzuela, Metro Manila. Under
each of these four mortgage contracts, GOYU committed itself to insure the
mortgaged property with an insurance company approved by RCBC, and
subsequently, to endorse and deliver the insurance policies to RCBC.
GOYU obtained in its name a total of ten insurance policies from MICO. In
February 1992, Alchester Insurance Agency, Inc., the insurance agent
where GOYU obtained the Malayan insurance policies, issued nine
endorsements in favor of RCBC seemingly upon instructions of GOYU
(Exhibits 1-Malayan to 9-Malayan).
On April 27, 1992, one of GOYUs factory buildings in Valenzuela was
gutted by fire. Consequently, GOYU submitted its claim for indemnity on
account of the loss insured against. MICO denied the claim on the ground
that the insurance policies were either attached pursuant to writs of
attachments/garnishments issued by various courts or that the insurance
proceeds were also claimed by other creditors of GOYU alleging better
rights to the proceeds than the insured. GOYU filed a complaint for specific
performance and damages which was docketed at the Regional Trial Court
of the National Capital Judicial Region (Manila, Branch 3) as Civil Case No.
93-65442, now subject of the present G.R. No. 128833 and 128866.
RCBC, one of GOYUs creditors, also filed with MICO its formal claim over
the proceeds of the insurance policies, but said claims were also denied for
the same reasons that MICO denied GOYUs claims.
In an interlocutory order dated October 12, 1993 (Record, pp. 311-312),
the Regional Trial Court of Manila (Branch 3), confirmed that GOYUs other
creditors, namely, Urban Bank, Alfredo Sebastian, and Philippine Trust
Company obtained their respective writs of attachments from various
courts, covering an aggregate amount of P14,938,080.23, and ordered that
the proceeds of the ten insurance policies be deposited with the said court
minus the aforementioned P14,938,080.23. Accordingly, on January 7,
1994, MICO deposited the amount of P50,505,594.60 with Branch 3 of the
Manila RTC.

19

In the meantime, another notice of garnishment was handed down by


another Manila RTC sala (Branch 28) for the amount of P8,696,838.75
(Exhibit 22-Malayan).

as of April 27, 1992, with interest thereon at the rate stipulated in the
respective promissory notes (without surcharges and penalties) per
computation, pp. 14-A, 14-B & 14-C.

After trial, Branch 3 of the Manila RTC rendered judgment in favor of GOYU,
disposing:

FURTHER, the Clerk of Court of the Regional Trial Court of Manila is hereby
ordered to release immediately to the plaintiff the amount of
P50,000,000.00 deposited with the Court by defendant Malayan, together
with all the interests earned thereon.

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and


against the defendant, Malayan Insurance Company, Inc. and Rizal
Commercial Banking Corporation, ordering the latter as follows:
1.

For defendant Malayan Insurance Co., Inc.:

a.
To pay the plaintiff its fire loss claims in the total amount of
P74,040,518.58 less the amount of P50,000,000.00 which is deposited with
this Court;

(Record, pp. 478-479.)


From this judgment, all parties interposed their respective appeals. GOYU
was unsatisfied with the amounts awarded in its favor. MICO and RCBC
disputed the trial courts findings of liability on their part. The Court of
Appeals partly granted GOYUs appeal, but sustained the findings of the
trial court with respect to MICO and RCBCs liabilities, thusly:

b.
To pay the plaintiff damages by way of interest for the duration of
the delay since July 27, 1992 (ninety days after defendant insurers receipt
of the required proof of loss and notice of loss) at the rate of twice the
ceiling prescribed by the Monetary Board, on the following amounts:

WHEREFORE, the decision of the lower court dated June 29, 1994 is hereby
modified as follows:

1)
P50,000,000.00 from July 27, 1992 up to the time said amount
was deposited with this Court on January 7, 1994;

a)
To pay the plaintiff its fire loss claim in the total amount of
P74,040,518.58 less the amount of P50,505,594.60 (per O.R. No. 3649285)
plus deposited in court and damages by way of interest commencing July
27, 1992 until the time Goyu receives the said amount at the rate of thirtyseven (37%) percent per annum which is twice the ceiling prescribed by
the Monetary Board.

2)
P24,040,518.58 from July 27, 1992 up to the time when the
writs of attachments were received by defendant Malayan;
2.

For defendant Rizal Commercial Banking Corporation:

a.
To pay the plaintiff actual and compensatory damages in the amount
of P2,000,000.00;
3.
a.

For both defendants Malayan and RCBC:


To pay the plaintiff, jointly and severally, the following amounts:

1. FOR DEFENDANT MALAYAN INSURANCE CO., INC:

2. FOR DEFENDANT RIZAL COMMERCIAL BANKING CORPORATION:


a)
To pay the plaintiff actual and compensatory damages in the
amount of P5,000,000.00.
3.
FOR DEFENDANTS MALAYAN INSURANCE CO., INC., RIZAL
COMMERCIAL BANKING CORPORATION, UY CHUN BING AND ELI D. LAO:

1)

P1,000,000.00 as exemplary damages;

a)

2)

P1,000,000.00 as, and for, attorneys fees;

1.

P1,500,000.00 as exemplary damages;

3)

Costs of suit.

2.

P1,500,000.00 as and for attorneys fees.

To pay the plaintiff jointly and severally the following amounts:

and on the Counterclaim of defendant RCBC, ordering the plaintiff to pay


its loan obligations with defendant RCBC in the amount of P68,785,069.04,

20

4.
And on RCBCs Counterclaim, ordering the plaintiff Goyu & Sons, Inc.
to pay its loan obligation with RCBC in the amount of P68,785,069.04 as of
April 27, 1992 without any interest, surcharges and penalties.
The Clerk of the Court of the Regional Trial Court of Manila is hereby
ordered to immediately release to Goyu& Sons, Inc. the amount of
P50,505,594.60 (per O.R. No. 3649285) deposited with it by Malayan
Insurance Co., Inc., together with all the interests thereon.
(Rollo, p. 200.)
RCBC and MICO are now before us in G.R. No. 128833 and 128866,
respectively, seeking review and consequent reversal of the above
dispositions of the Court of Appeals.
In G.R. No. 128834, RCBC likewise appeals from the decision in C.A. G.R.
No. CV-48376, which case, by virtue of the Court of Appeals resolution
dated August 7, 1996, was consolidated with C.A. G.R. No. CV-46162
(subject of herein G.R. No. 128833). At issue in said petition is RCBCs right
to intervene in the action between Alfredo C. Sebastian (the creditor) and
GOYU (the debtor), where the subject insurance policies were attached in
favor of Sebastian.
After a careful review of the material facts as found by the two courts
below in relation to the pertinent and applicable laws, we find merit in the
submissions of RCBC and MICO.
The several causes of action pursued below by GOYU gave rise to several
related issues which are now submitted in the petitions before us. This
Court, however, discerns one primary and central issue, and this is,
whether or not RCBC, as mortgagee, has any right over the insurance
policies taken by GOYU, the mortgagor, in case of the occurrence of loss.
As earlier mentioned, accordant with the credit facilities extended by RCBC
to GOYU, the latter executed several mortgage contracts in favor of RCBC.
It was expressly stipulated in these mortgage contracts that GOYU shall
insure the mortgaged property with any of the insurance companies
acceptable to RCBC. GOYU indeed insured the mortgaged property with
MICO, an insurance company acceptable to RCBC. Based on their
stipulations in the mortgage contracts, GOYU was supposed to endorse
these insurance policies in favor of, and deliver them, to RCBC. Alchester
Insurance Agency, Inc., MICOs underwriter from whom GOYU obtained the
subject insurance policies, prepared the nine endorsements (see Exh. 1Malayan to 9-Malayan; also Exh. 51-RCBC to 59-RCBC), copies of

which were delivered to GOYU, RCBC, and MICO. However, because these
endorsements do not bear the signature of any officer of GOYU, the trial
court, as well as the Court of Appeals, concluded that the endorsements
are defective.
We do not quite agree.
It is settled that a mortgagor and a mortgagee have separate and distinct
insurable interests in the same mortgaged property, such that each one of
them may insure the same property for his own sole benefit. There is no
question that GOYU could insure the mortgaged property for its own
exclusive benefit. In the present case, although it appears that GOYU
obtained the subject insurance policies naming itself as the sole payee, the
intentions of the parties as shown by their contemporaneous acts, must be
given due consideration in order to better serve the interest of justice and
equity.
It is to be noted that nine endorsement documents were prepared by
Alchester in favor of RCBC. The Court is in a quandary how Alchester could
arrive at the idea of endorsing any specific insurance policy in favor of any
particular beneficiary or payee other than the insured had not such named
payee or beneficiary been specifically disclosed by the insured itself. It is
also significant that GOYU voluntarily and purposely took the insurance
policies from MICO, a sister company of RCBC, and not just from any other
insurance company. Alchester would not have found out that the subject
pieces of property were mortgaged to RCBC had not such information been
voluntarily disclosed by GOYU itself. Had it not been for GOYU, Alchester
would not have known of GOYUs intention of obtaining insurance coverage
in compliance with its undertaking in the mortgage contracts with RCBC,
and verily, Alchester would not have endorsed the policies to RCBC had it
not been so directed by GOYU.
On equitable principles, particularly on the ground of estoppel, the Court is
constrained to rule in favor of mortgagor RCBC. The basis and purpose of
the doctrine was explained in Philippine National Bank vs. Court of Appeals
(94 SCRA 357 [1979]), to wit:
The doctrine of estoppel is based upon the grounds of public policy, fair
dealing, good faith and justice, and its purpose is to forbid one to speak
against his own act, representations, or commitments to the injury of one
to whom they were directed and who reasonably relied thereon. The
doctrine of estoppel springs from equitable principles and the equities in
the case. It is designed to aid the law in the administration of justice where

21

without its aid injustice might result. It has been applied by this Court
wherever and whenever special circumstances of a case so demand.

to designate RCBC as the party for whose benefit the insurance policies
were taken out. Consider thus the following:

(p. 368.)

1.
It is undisputed that the insured pieces of property were the subject
of mortgage contracts entered into between RCBC and GOYU in
consideration of and for securing GOYUs credit facilities from RCBC. The
mortgage contracts contained common provisions whereby GOYU, as
mortgagor, undertook to have the mortgaged property properly covered
against any loss by an insurance company acceptable to RCBC.

Evelyn Lozada of Alchester testified that upon instructions of Mr. Go,


through a certain Mr. Yam, she prepared in quadruplicate on February 11,
1992 the nine endorsement documents for GOYUs nine insurance policies
in favor of RCBC. The original copies of each of these nine endorsement
documents were sent to GOYU, and the others were sent to RCBC and
MICO, while the fourth copies were retained for Alchesters file (tsn,
February 23, pp. 7-8). GOYU has not denied having received from Alchester
the originals of these endorsements.
RCBC, in good faith, relied upon the endorsement documents sent to it as
this was only pursuant to the stipulation in the mortgage contracts. We find
such reliance to be justified under the circumstances of the case. GOYU
failed to seasonably repudiate the authority of the person or persons who
prepared such endorsements. Over and above this, GOYU continued, in the
meantime, to enjoy the benefits of the credit facilities extended to it by
RCBC. After the occurrence of the loss insured against, it was too late for
GOYU to disown the endorsements for any imagined or contrived lack of
authority of Alchester to prepare and issue said endorsements. If there had
not been actually an implied ratification of said endorsements by virtue of
GOYUs inaction in this case, GOYU is at the very least estopped from
assailing their operative effects. To permit GOYU to capitalize on its nonconfirmation of these endorsements while it continued to enjoy the
benefits of the credit facilities of RCBC which believed in good faith that
there was due endorsement pursuant to their mortgage contracts, is to
countenance grave contravention of public policy, fair dealing, good faith,
and justice. Such an unjust situation, the Court cannot sanction. Under the
peculiar circumstances obtaining in this case, the Court is bound to
recognize RCBCs right to the proceeds of the insurance policies if not for
the actual endorsement of the policies, at least on the basis of the
equitable principle of estoppel.
GOYU cannot seek relief under Section 53 of the Insurance Code which
provides that the proceeds of insurance shall exclusively apply to the
interest of the person in whose name or for whose benefit it is made. The
peculiarity of the circumstances obtaining in the instant case presents a
justification to take exception to the strict application of said provision, it
having been sufficiently established that it was the intention of the parties

2.
GOYU voluntarily procured insurance policies to cover the mortgaged
property from MICO, no less than a sister company of RCBC and definitely
an acceptable insurance company to RCBC.
3.
Endorsement documents were prepared by MICOs underwriter,
Alchester Insurance Agency, Inc., and copies thereof were sent to GOYU,
MICO, and RCBC. GOYU did not assail, until of late, the validity of said
endorsements.
4.
GOYU continued until the occurrence of the fire, to enjoy the benefits
of the credit facilities extended by RCBC which was conditioned upon the
endorsement of the insurance policies to be taken by GOYU to cover the
mortgaged properties.
This Court can not over stress the fact that upon receiving its copies of the
endorsement documents prepared by Alchester, GOYU, despite the
absence of its written conformity thereto, obviously considered said
endorsement to be sufficient compliance with its obligation under the
mortgage contracts since RCBC accordingly continued to extend the
benefits of its credit facilities and GOYU continued to benefit therefrom.
Just as plain too is the intention of the parties to constitute RCBC as the
beneficiary of the various insurance policies obtained by GOYU. The
intention of the parties will have to be given full force and effect in this
particular case. The insurance proceeds may, therefore, be exclusively
applied to RCBC, which under the factual circumstances of the case, is truly
the person or entity for whose benefit the policies were clearly intended.
Moreover, the laws evident intention to protect the interests of the
mortgagee upon the mortgaged property is expressed in Article 2127 of
the Civil Code which states:
ART. 2127. The mortgage extends to the natural accessions, to the
improvements, growing fruits, and the rents or income not yet received
when the obligation becomes due, and to the amount of the indemnity

22

granted or owing to the proprietor from the insurers of the property


mortgaged, or in virtue of expropriation for public use, with the
declarations, amplifications and limitations established by law, whether the
estate remains in the possession of the mortgagor, or it passes into the
hands of a third person.
Significantly, the Court notes that out of the 10 insurance policies subject
of this case, only 8 of them appear to have been subject of the
endorsements prepared and delivered by Alchester for and upon
instructions of GOYU as shown below:

e.

Policy Number : F-114-07795


Issue Date

: March 18, 1992

Expiry Date

: April 5, 1993

Amount
b.

f.

c.

d.

None

: January 18, 1992

Expiry Date

: February 9, 1993

g.

Exhibit 1-Malayan

Issue Date

: January 13, 1992

Expiry Date

: January 13, 1993

Issue Date

: May 29, 1991

Expiry Date

: June 27, 1992

: January 18, 1992

Expiry Date

: February 9, 1993

Issue Date

: May 3, 1991

Amount

: P4,307,217.54

Expiry Date

: May 3, 1992

Policy Number : ACIA/F-114-07661

Exhibit 2-Malayan

Policy Number : CI/F-128-03341

Amount

: January 18, 1992

Expiry Date

: February 15, 1993

Issue Date

: September 16, 1991

Amount

: P6,603,586.43

Expiry Date

: October 19, 1992

Policy Number : ACIA/F-114-07662

Exhibit 3-Malayan

Policy Number : F-114-07402

Amount

Exhibit 8-Malayan

: P32,252,125.20

Issue Date

: January 18, 1992

Expiry Date

: (not legible)

Issue Date

: November 20, 1991

Amount

: P6,603,586.43

Expiry Date

: December 5, 1992

j.

None

: P10,000,000.00

Issue Date

i.

Exhibit 6-Malayan

: P6,000,000.00

Issue Date

h.

Exhibit 7-Malayan

: P24,750,000.00

Policy Number : ACIA/F-174-07223

Amount

Exhibit 4-Malayan

: P9,457,972.76

Policy Number : ACIA/F-114-07623

Amount

: P9,646,224.92

Policy Number : ACIA/F-174-07660

Issue Date

Amount

INSURANCE POLICY PARTICULARS ENDORSEMENT


a.

Policy Number : ACIA/F-114-07663

Policy Number : F-114-07525

Exhibit 9-Malayan

23

Amount

: P6,603,586.43

(pp. 456-457, Record; Folder of Exhibits for MICO.)

after the fire, but also because the signatures of either GOYU or any its
representative are conspicuously absent. Accordingly, the Court of Appeals
speculated thusly:

Policy Number F-114-07795 [(a) above] has not been endorsed. This fact
was admitted by MICOs witness, Atty. Farolan (tsn, February 16, 1994, p.
25). Likewise, the record shows no endorsement for Policy Number CI/F128-03341 [(h) above]. Also, one of the endorsement documents, Exhibit
5-Malayan, refers to a certain insurance policy number ACIA-F-07066,
which is not among the insurance policies involved in the complaint.

Hence, this Court is inclined to conclude that said promissory notes were
pre-signed by plaintiff in blank terms, as averred by plaintiff, in
contemplation of the speedy grant of future loans, for the same practice of
procedure has always been adopted in its previous dealings with the bank.

The proceeds of the 8 insurance policies endorsed to RCBC aggregate to


P89,974,488.36. Being exclusively payable to RCBC by reason of the
endorsement by Alchester to RCBC, which we already ruled to have the
force and effect of an endorsement by GOYU itself, these 8 policies can not
be attached by GOYUs other creditors up to the extent of the GOYUs
outstanding obligation in RCBCs favor. Section 53 of the Insurance Code
ordains that the insurance proceeds of the endorsed policies shall be
applied exclusively to the proper interest of the person for whose benefit it
was made. In this case, to the extent of GOYUs obligation with RCBC, the
interest of GOYU in the subject policies had been transferred to RCBC
effective as of the time of the endorsement. These policies may no longer
be attached by the other creditors of GOYU, like Alfredo Sebastian in the
present G.R. No. 128834, which may nonetheless forthwith be dismissed
for being moot and academic in view of the results reached herein. Only
the two other policies amounting to P19,646,224.92 may be validly
attached, garnished, and levied upon by GOYUs other creditors. To the
extent of GOYUs outstanding obligation with RCBC, all the rest of the other
insurance policies above-listed which were endorsed to RCBC, are,
therefore, to be released from attachment, garnishment, and levy by the
other creditors of GOYU.

The fact that the promissory notes bear dates posterior to the fire does not
necessarily mean that the documents are spurious, for it is presumed that
the ordinary course of business had been followed (Metropolitan Bank and
Trust Company vs. Quilts and All, Inc., 222 SCRA 486 [1993]). The obligor
and not the holder of the negotiable instrument has the burden of proof of
showing that he no longer owes the obligee any amount (Travel-On, Inc.
vs. Court of Appeals, 210 SCRA 351 [1992]).

This brings us to the next relevant issue to be resolved, which is, the
extent of GOYUs outstanding obligation with RCBC which the proceeds of
the 8 insurance policies will discharge and liquidate, or put differently, the
actual amount of GOYUs liability to RCBC.

He is asking if he received all the amounts stated in Exhibits 1 to 29-RCBC?

The Court of Appeals simply echoed the declaration of the trial court
finding that GOYUS total obligation to RCBC was only P68,785,060.04 as of
April 27, 1992, thus sanctioning the trial courts exclusion of Promissory
Note No. 421-92 (renewal of Promissory Note No. 908-91) and Promissory
Note No. 420-92 (renewal of Promissory Note No. 952-91) on the ground
that their execution is highly questionable for not only are these dated

(Rollo, pp. 181-182.)

Even casting aside the presumption of regularity of private transactions,


receipt of the loan amounting to P121,966,058.67 (Exhibits 1-29, RCBC)
was admitted by GOYU as indicated in the testimony of Go Song Hiap when
he answered the queries of the trial court:
ATTY. NATIVIDAD
Q:
But insofar as the amount stated in Exhibits 1 to 29-RCBC, you
received all the amounts stated therein?
A:

Yes, sir, I received the amount.

COURT

WITNESS:
Yes, Your Honor, I received all the amounts.
COURT
Indicated in the Promissory Notes?
WITNESS

24

A. The promissory Notes they did not give to me but the amount I asked
which is correct, Your Honor.
COURT
Q: You mean to say the amounts indicated in Exhibits 1 to 29-RCBC is
correct?
A:

Yes, Your Honor.

(tsn, Jan. 14, 1994, p. 26.)


Furthermore, aside from its judicial admission of having received all the
proceeds of the 29 promissory notes as hereinabove quoted, GOYU also
offered and admitted to RCBC that its obligation be fixed at
P116,301,992.60 as shown in its letter dated March 9, 1993, which
pertinently reads:
We wish to inform you, therefore that we are ready and willing to pay the
current past due account of this company in the amount of
P116,301,992.60 as of 21 January 1993, specified in pars. 15, p. 10, and
18, p. 13 of your affidavits of Third Party Claims in the Urban case at
Makati, Metro Manila and in the Zamboanga case at Zamboanga city,
respectively, less the total of P8,851,519.71 paid from the Seaboard and
Equitable insurance companies and other legitimate deductions. We accept
and confirm this amount of P116,301,992.60 as stated as true and correct.

It should, however, be quickly added that whatever amount RCBC may


have recovered from the other insurers of the mortgaged property will,
nonetheless, have to be applied as payment against GOYUs obligation.
But, contrary to the lower courts findings, payments effected by GOYU
prior to January 21, 1993 should no longer be deducted. Such payments
had obviously been duly considered by GOYU, in its aforequoted letter
dated March 9, 1993, wherein it admitted that its past due account totaled
P116,301,992.60 as of January 21, 1993.
The net obligation of GOYU, after deductions, is thus reduced to
P107,246,887.90 as of January 21, 1993, to wit:
Total Obligation as
P116,301,992.60

by

GOYU

as

of

January

21,

1993:

Broken down as follows


Principal[1]

Interest

Regular

80,535,946.32

FDU

7,548,025.17

____________ _____________
Total: 108,083,971.49

(Exhibit BB.)

LESS:

The Court of Appeals erred in placing much significance on the fact that
the excluded promissory notes are dated after the fire. It failed to consider
that said notes had for their origin transactions consummated prior to the
fire. Thus, careful attention must be paid to the fact that Promissory Notes
No. 420-92 and 421-92 are mere renewals of Promissory Notes No. 908-91
and 952-91, loans already availed of by GOYU.

1)

The two courts below erred in failing to see that the promissory notes
which they ruled should be excluded for bearing dates which are after that
of the fire, are mere renewals of previous ones. The proceeds of the loan
represented by these promissory notes were admittedly received by GOYU.
There is ample factual and legal basis for giving GOYUs judicial admission
of liability in the amount of P116,301,992.60 full force and effect

admitted

8,218,021.11[2]

Proceeds from
Seaboard Eastern
Insurance Company:

2)

6,095,145.81

Proceeds from
Equitable Insurance
Company:

3)

2,756,373.00

Payment from
foreign department

25

negotiation:

203,584.89

9,055,104.70[3]
NET AMOUNT as
107,246,887.90

of

January

21,

1993:

The need for the payment of interest due upon the principal amount of the
obligation, which is the cost of money to RCBC, the primary end and the
ultimate reason for RCBCs existence and being, was duly recognized by
the trial court when it ruled favorably on RCBCs counterclaim, ordering
GOYU to pay its loan obligation with RCBC in the amount of
P68,785,069.04, as of April 27,1992, with interest thereon at the rate
stipulated in the respective promissory notes (without surcharges and
penalties) per computation, pp. 14-A, 14-B, 14-C (Record, p. 479).
Inexplicably, the Court of Appeals, without even laying down the factual or
legal justification for its ruling, modified the trial courts ruling and ordered
GOYU to pay the principal amount of P68,785,069.04 without any interest,
surcharges and penalties (Rollo, p. 200).
It is to be noted in this regard that even the trial court hedgingly and with
much uncertainty deleted the payment of additional interest, penalties,
and charges, in this manner:
Regarding defendant RCBCs commitment not to charge additional interest,
penalties and surcharges, the same does not require that it be embodied in
a document or some form of writing to be binding and enforceable. The
principle is well known that generally a verbal agreement or contract is no
less binding and effective than a written one. And the existence of such a
verbal agreement has been amply established by the evidence in this case.
In any event, regardless of the existence of such verbal agreement, it
would still be unjust and inequitable for defendant RCBC to charge the
plaintiff with surcharges and penalties considering the latters pitiful
situation. (Emphasis supplied.)
(Record, p. 476)
The essence or rationale for the payment of interest or cost of money is
separate and distinct from that of surcharges and penalties. What may
justify a court in not allowing the creditor to charge surcharges and
penalties despite express stipulation therefor in a valid agreement, may
not equally justify non-payment of interest. The charging of interest for
loans forms a very essential and fundamental element of the banking
business, which may truly be considered to be at the very core of its

existence or being. It is inconceivable for a bank to grant loans for which it


will not charge any interest at all. We fail to find justification for the Court
of Appeals outright deletion of the payment of interest as agreed upon in
the respective promissory notes. This constitutes gross error.
For the computation of the interest due to be paid to RCBC, the following
rules of thumb laid down by this Court in Eastern Shipping Lines, Inc. vs.
Court of Appeals (234 SCRA 78 [1994]), shall apply, to wit:
I.
When an obligation, regardless of its source, i.e., law, contracts,
quasi-contracts, delicts or quasi-delicts is breached, the contravenor can
be held liable for damages. The provisions under Title XVIII on Damages
of the Civil Code govern in determining the measure of recoverable
damages.
II.
With regard particularly to an award of interest in the concept of
actual and compensatory damages, the rate of interest, as well as the
accrual thereof, is imposed, as follows:
1.
When the obligation is breached, and it consists in the payment of a
sum of money, i.e., a loan or forbearance of money, the interest due
should be that which may have been stipulated in writing. Furthermore, the
interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 12%
per annum to be computed from default, i.e., from judicial or extrajudicial
demand under and subject to the provisions of Article 1169 of the Civil
Code.
2.
When an obligation, not constituting a loan or forbearance of money,
is breached, an interest on the amount of damages awarded may be
imposed at the discretion of the court at the rate of 6% per annum. No
interest, however, shall be adjudged on unliquidated claims or damages
except when or until the demand can be established with reasonable
certainty. Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty
cannot be so reasonably established at the time the demand is made, the
interest shall begin to run only from the date of the judgment of the court
is made (at which time the quantification of damages may be deemed to
have been reasonably ascertained). The actual base for the computation of
legal interest shall, in any case, be on the amount finally adjudged.

26

3.
When the judgment of the court awarding a sum of money becomes
final and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance of credit.
(pp. 95-97.)
There being written stipulations as to the rate of interest owing on each
specific promissory note as summarized and tabulated by the trial court in
its decision (pp.470 and 471, Record) such agreed interest rates must be
followed. This is very clear from paragraph II, sub-paragraph 1 quoted
above.
On the issue of payment of surcharges and penalties, we partly agree that
GOYUs pitiful situation must be taken into account. We do not agree,
however, that payment of any amount as surcharges and penalties should
altogether be deleted. Even assuming that RCBC, through its responsible
officers, herein petitioners Eli Lao and Uy Chun Bing, may have relayed its
assurance for assistance to GOYU immediately after the occurrence of the
fire, we cannot accept the lower courts finding that RCBC had thereby ipso
facto effectively waived collection of any additional interests, surcharges,
and penalties from GOYU. Assurances of assistance are one thing, but
waiver of additional interests, surcharges, and penalties is another.
Surcharges and penalties agreed to be paid by the debtor in case of default
partake of the nature of liquidated damages, covered by Section 4, Chapter
3, Title XVIII of the Civil Code. Article 2227 thereof provides:
ART. 2227. Liquidated damages, whether intended as a indemnity or
penalty, shall be equitably reduced if they are iniquitous and
unconscionable.
In exercising this vested power to determine what is iniquitous and
unconscionable, the Court must consider the circumstances of each case.
It should be stressed that the Court will not make any sweeping ruling that
surcharges and penalties imposed by banks for non-payment of the loans
extended by them are generally iniquitous and unconscionable. What may
be iniquitous and unconscionable in one case, may be totally just and
equitable in another. This provision of law will have to be applied to the
established facts of any given case. Given the circumstances under which
GOYU found itself after the occurrence of the fire, the Court rules the
surcharges rates ranging anywhere from 9% to 27%, plus the penalty

charges of 36%, to be definitely iniquitous and unconscionable. The Court


tempers these rates to 2% and 3%, respectively. Furthermore, in the light
of GOYUs offer to pay the amount of P116,301,992.60 to RCBC as March
1993 (See: Exhibit BB), which RCBC refused, we find it more in keeping
with justice and equity for RCBC not to charge additional interest,
surcharges, and penalties from that time onward.
Given the factual milieu spread hereover, we rule that it was error to hold
MICO liable in damages for denying or withholding the proceeds of the
insurance claim to GOYU.
Firstly, by virtue of the mortgage contracts as well as the endorsements of
the insurance policies, RCBC has the right to claim the insurance proceeds,
in substitution of the property lost in the fire. Having assigned its rights,
GOYU lost its standing as the beneficiary of the said insurance policies.
Secondly, for an insurance company to be held liable for unreasonably
delaying and withholding payment of insurance proceeds, the delay must
be wanton, oppressive, or malevolent (Zenith Insurance Corporation vs.
CA, 185 SCRA 403 [1990]). It is generally agreed, however, that an insurer
may in good faith and honesty entertain a difference of opinion as to its
liability. Accordingly, the statutory penalty for vexatious refusal of an
insurer to pay a claim should not be inflicted unless the evidence and
circumstances show that such refusal was willful and without reasonable
cause as the facts appear to a reasonable and prudent man (Buffalo Ins.
Co. vs. Bommarito [CCA 8th] 42 F [2d] 53, 70 ALR 1211; Phoenix Ins. Co. vs.
Clay, 101 Ga. 331, 28 SE 853, 65 Am St Rep 307; Kusnetsky vs. Security
Ins. Co., 313 Mo. 143, 281 SW 47, 45 ALR 189). The case at bar does not
show that MICO wantonly and in bad faith delayed the release of the
proceeds. The problem in the determination of who is the actual
beneficiary of the insurance policies, aggravated by the claim of various
creditors who wanted to partake of the insurance proceeds, not to mention
the importance of the endorsement to RCBC, to our mind, and as now
borne out by the outcome herein, justified MICO in withholding payment to
GOYU.
In adjudging RCBC liable in damages to GOYU, the Court of Appeals said
that RCBC cannot avail itself of two simultaneous remedies in enforcing the
claim of an unpaid creditor, one for specific performance and the other for
foreclosure. In doing so, said the appellate court, the second action is
deemed barred, RCBC having split a single cause of action (Rollo, pp. 195199). The Court of Appeals was too accommodating in giving due
consideration to this argument of GOYU, for the foreclosure suit is still

27

pending appeal before the same Court of Appeals in CA G.R CV No. 46247,
the case having been elevated by RCBC.
In finding that the foreclosure suit cannot prosper, the Fifteenth Division of
the Court of Appeals pre-empted the resolution of said foreclosure case
which is not before it. This is plain reversible error if not grave abuse of
discretion.
As held in Pea vs. Court of Appeals (245 SCRA 691[1995]):
It should have been enough, nonetheless, for the appellate court to merely
set aside the questioned orders of the trial court for having been issued by
the latter with grave abuse of discretion. In likewise enjoining permanently
herein petitioner from entering in and interfering with the use or
occupation and enjoyment of petitioners (now private respondent)
residential house and compound, the appellate court in effect,
precipitately resolved with finality the case for injunction that was yet to be
heard on the merits by the lower court. Elevated to the appellate court, it
might be stressed, were mere incidents of the principal case still pending
with the trial court. In Municipality of Bian, Laguna vs. Court of Appeals,
219 SCRA 69, we ruled that the Court of Appeals would have no
jurisdiction in a certiorari proceeding involving an incident in a case to rule
on the merits of the main case itself which was not on appeal before it.
(pp. 701-702.)
Anent the right of RCBC to intervene in Civil Case No. 1073, before the
Zamboanga Regional Trial Court, since it has been determined that RCBC
has the right to the insurance proceeds, the subject matter of intervention
is rendered moot and academic. Respondent Sebastian must, however,
yield to the preferential right of RCBC over the MICO insurance policies. It is
basic and fundamental that the first mortgagee has superior rights over
junior mortgagees or attaching creditors (Alpha Insurance & Surety Co. vs.
Reyes, 106 SCRA 274 [1981]; Sun Life Assurance Co. of Canada vs.
Gonzales Diaz, 52 Phil. 271 [1928]).
WHEREFORE, the petitions are hereby GRANTED and the decision and
resolution of December 16, 1996 and April 3, 1997 in CA-G.R. CV No.
46162 are hereby REVERSED and SET ASIDE, and a new one entered:
1.
Dismissing the Complaint of private respondent GOYU in Civil Case
No. 93-65442 before Branch 3 of the Manila Regional Trial Court for lack of
merit;

2. Ordering Malayan Insurance Company, Inc. to deliver to Rizal


Commercial Banking Corporation the proceeds of the insurance policies in
the amount of P51,862,390.94 (per report of adjuster Toplis & Harding (Far
East), Inc., Exhibits 2 and 2-1), less the amount of P50,505,594.60 (per
O.R. No. 3649285);
3. Ordering the Clerk of Court to release the amount of P50,505,594.60
including the interests earned to Rizal Commercial Banking Corporation;
4. Ordering Goyu & Sons, Inc. to pay its loan obligation with Rizal
Commercial Banking Corporation in the principal amount of
P107,246,887.90, with interest at the respective rates stipulated in each
promissory note from January 21, 1993 until finality of this judgment, and
surcharges at 2% and penalties at 3% from January 21, 1993 to March 9,
1993, minus payments made by Malayan Insurance Company, Inc. and the
proceeds of the amount deposited with the trial court and its earned
interest. The total amount due RCBC at the time of the finality of this
judgment shall earn interest at the legal rate of 12% in lieu of all other
stipulated interests and charges until fully paid.
The petition of Rizal Commercial Banking Corporation against the
respondent Court in CA-GR CV 48376 is DISMISSED for being moot and
academic in view of the results herein arrived at. Respondent Sebastians
right as attaching creditor must yield to the preferential rights of Rizal
Commercial Banking Corporation over the Malayan insurance policies as
first mortgagee.
SO ORDERED.
Regalado, (Chairman), Puno, Mendoza, and Martinez, JJ., concur.
See: Exhibit 70-RCBC

[1] 1

Computed by deducting P108,083,971.49 from the admitted amount of


P116,301,992.60.
[2]

To be deducted from interest payments due in accordance with Article


1253 of the Civil Code which provides:
[3]

ART. 1253. If debt produces interest, payment of the principal shall not be
deemed to have been made until the interests have been covered.

28

G.R. No. 97412, July 12, 1994


EASTERN SHIPPING LINES, INC., PETITIONER, VS. HON. COURT OF
APPEALS
AND
MERCANTILE
INSURANCE
COMPANY,
INC.,
RESPONDENTS.
DECISION
VITUG, J.:

On January 8 and 14, 1982, defendant Allied Brokerage Corporation made


deliveries of the shipment to the consignees warehouse. The latter
excepted to one drum which contained spillages, while the rest of the
contents was adulterated/fake (per Bad Order Waybill No. 10649, Exh. E).
Plaintiff contended that due to the losses/damage sustained by said drum,
the consignee suffered losses totaling P19,032.95, due to the fault and
negligence of defendants. Claims were presented against defendants who
failed and refused to pay the same (Exhs. H, I, J, K, L).

The issues, albeit not completely novel, are: (a) whether or not a claim for
damage sustained on a shipment of goods can be a solidary, or joint and
several, liability of the common carrier, the arrastre operator and the
customs broker; (b) whether the payment of legal interest on an award for
loss or damage is to be computed from the time the complaint is filed or
from the date the decision appealed from is rendered; and (c) whether the
applicable rate of interest, referred to above, is twelve percent (12%) or six
percent (6%).

As a consequence of the losses sustained, plaintiff was compelled to pay


the consignee P19,032.95 under the aforestated marine insurance policy,
so that it became subrogated to all the rights of action of said consignee
against defendants (per Form of Subrogation, Release and Philbanking
check, Exhs. M, N, and O). (pp. 85-86, Rollo.)

The findings of the court a quo, adopted by the Court of Appeals, on the
antecedent and undisputed facts that have led to the controversy are
hereunder reproduced:

Defendants filed their respective answers, traversing the material


allegations of the complaint contending that: As for defendant Eastern
Shipping it alleged that the shipment was discharged in good order from
the vessel unto the custody of Metro Port Service so that any
damage/losses incurred after the shipment was incurred after the shipment
was turned over to the latter, is no longer its liability (p. 17, Record);
Metroport averred that although subject shipment was discharged unto its
custody, portion of the same was already in bad order (p. 11, Record);
Allied Brokerage alleged that plaintiff has no cause of action against it, not
having negligent or at fault for the shipment was already in damage and
bad order condition when received by it, but nonetheless, it still exercised
extra ordinary care and diligence in the handling/delivery of the cargo to
consignee in the same condition shipment was received by it.

This is an action against defendants shipping company, arrastre operator


and broker-forwarder for damages sustained by a shipment while in
defendants custody, filed by the insurer-subrogee who paid the consignee
the value of such losses/damages.
On December 4, 1981, two fiber drums of riboflavin were shipped from
Yokohama, Japan for delivery vessel SS EASTERN COMET owned by
defendant Eastern Shipping Lines under Bill of Lading No. YMA-8 (Exh. B).
The shipment was insured under plaintiffs Marine Insurance Policy No.
81/01177 for P36,382,466.38.
Upon arrival of the shipment in Manila on December 12, 1981, it was
discharged unto the custody of defendant Metro Port Service, Inc. The
latter excepted to one drum, said to be in bad order, which damage was
unknown to plaintiff.
On January 7, 1982 defendant Allied Brokerage Corporation received the
shipment from defendant Metro Port Service, Inc., one drum opened and
without seal (per Request for Bad Order Survey. (Exh. D).

There were, to be sure, other factual issues that confronted both courts.
Here, the appellate court said:

From the evidence the court found the following:


The issues are:
1. Whether or not the shipment sustained losses/damages;
2. Whether or not these losses/damages were sustained while in the
custody of defendants (in whose respective custody, if determinable);

29

3.
Whether or not defendant(s) should be held liable for the
losses/damages (see plaintiffs pre-Trial Brief, Records, p. 34; Allieds preTrial Brief, adopting plaintiffs Records, p. 38).
As to the first issue, there can be no doubt that the shipment sustained
losses/damages. The two drums were shipped in good order and condition,
as clearly shown by the Bill of Lading and Commercial Invoice which do not
indicate any damages drum that was shipped (Exhs. B and C). But when on
December 12, 1981 the shipment was delivered to defendant Metro Port
Service, Inc., it excepted to one drum in bad order.

1. The amount of P19,032.95, with the present legal interest of 12% per
annum from October 1, 1982, the date of filing of this complaints, until
fully paid (the liability of defendant Eastern Shipping, Inc. shall not exceed
US$500 per case or the CIF value of the loss, whichever is lesser, while the
liability of defendant Metro Port Service, Inc. shall be to the extent of the
actual invoice value of each package, crate box or container in no case to
exceed P5,000.00 each, pursuant to Section 6.01 of the Management
Contract);
2. P3,000.00 as attorneys fees, and

Correspondingly, as to the second issue, it follows that the


losses/damages were sustained while in the respective and/or successive
custody and possession of defendants carrier (Eastern), arrastre operator
(Metro Port) and broker (Allied Brokerage). This becomes evident when the
Marine Cargo Survey Report (Exh. G), with its Additional Survey Notes, are
considered. In the latter notes, it is stated that when the shipment was
landed on vessel to dock of Pier # 15, South Harbor, Manila on December
12, 1981, it was observed that one (1) fiber drum (was) in damaged
condition, covered by the vessels Agents Bad Order Tally Sheet No.
86427. The report further states that when defendant Allied Brokerage
withdrew the shipment from defendant arrastre operators custody on
January 7, 1982, one drum was found opened without seal, cello bag partly
torn but contents intact. Net unrecovered spillages was 15 kgs. The report
went on to state that when the drums reached the consignee, one drum
was found with adulterated/faked contents. It is obvious, therefore, that
these losses/damages occurred before the shipment reached the
consignee while under the successive custodies of defendants. Under Art.
1737 of the New Civil Code, the common carriers duty to observe
extraordinary diligence in the vigilance of goods remains in full force and
effect even if the goods are temporarily unloaded and stored in transit in
the warehouse of the carrier at the place of destination, until the consignee
has been advised and has had reasonable opportunity to remove or
dispose of the goods (Art. 1738, NCC). Defendant Eastern Shippings own
exhibit, the Turn-Over Survey of Bad Order Cargoes (Exhs. 3-Eastern)
states that on December 12, 1981 one drum was found open.

3. Costs.

and thus held:

II. IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF PRIVATE


RESPONDENT SHOULD COMMENCE FROM THE DATE OF THE FILING OF THE
COMPLAINT AT THE RATE OF TWELVE PERCENT PER ANNUM INSTEAD OF
FROM THE DATE OF THE DECISION OF THE TRIAL COURT AND ONLY AT THE
RATE OF SIX PERCENT PER ANNUM, PRIVATE RESPONDENTS CLAIM BEING
INDISPUTABLY UNLIQUIDATED.

WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered:


A. Ordering defendants to pay plaintiff, jointly and severally:

B. Dismissing the counterclaims and crossclaim of defendant/crossclaimant Allied Brokerage Corporation.


SO ORDERED. (p. 207, Record).
Dissatisfied, defendants recourse to US.
The appeal is devoid of merit.
After a careful scrunity of the evidence on record. We find that the
conclusion drawn therefrom is correct. As there is sufficient evidence that
the shipment sustained damage while in the successive possession of
appellants, and therefore they are liable to the appellee, as subrogee for
the amount it paid to the consignee. (pp. 87-89, Rollo.)
The Court of Appeals thus affirmed in toto the judgment of the court a quo.
In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes
error and grave abuse of discretion on the part of the appellate court when
I. IT HELD PETITIONER CARRIER JOINTLY AND SEVERALLY LIABLE WITH
THE ARRASTRE OPERATOR AND CUSTOMS BROKER FOR THE CLAIM OF
PRIVATE RESPONDENT AS GRANTED IN THE QUESTIONED DECISION;

30

The petition is, in part, granted.


In this decision, we have begun by saying that the questions raised by
petitioner carrier are not all that novel. Indeed, we do have a fairly good
number of previous decisions this Court can merely tack to.
The common carriers duty to observe the requisite diligence in the
shipment of goods lasts from the time the articles are surrendered to or
unconditionally placed in the possession of, and received by, the carrier for
transportation until delivered to, or until the lapse of a reasonable time for
their acceptance by, the person entitled to receive them (Arts. 1736-1738,
Civil Code; Ganzon vs. Court of Appeals, 161 SCRA 646; Kui Bai vs. Dollar
Steamship Lines, 52 Phil. 863). When the goods shipped either are lost or
arrive in damaged condition, a presumption arises against the carrier of its
failure to observe that diligence, and there need not be an express finding
of negligence to hold it liable (Art. 1735, Civil Code; Philippine National
Railways vs. Court of Appeals, 139 SCRA 87; Metro Port Service vs. Court of
Appeals, 131 SCRA 365). There are, of course, exceptional cases when
such presumption of fault is not observed but these cases, enumerated in
Article 1734[1] of the Civil Code, are exclusive, not one of which can be
applied to this case.
The question of charging both the carrier and the arrastre operator with
the obligation of properly delivering the goods to the consignee has, too,
been passed upon by the Court. In Firemans Fund Insurance vs. Metro Port
Services (182 SCRA 455), we have explained, in holding the carrier and the
arrastre operator liable in solidum, thus:
The legal relationship between the consignee and the arrastre operator is
akin to that of a depositor and warehouseman (Lua Kian v. Manila Railroad
Co., 19 SCRA 5 [1967]. The relationship between the consignee and the
common carrier is similar to that of the consignee and the arrastre
operator (Northern Motors, Inc. v. Prince Line, et al., 107 Phil 253 [1960]).
Since it is the duty of the ARRASTRE to take good care of the goods that
are in its custody and to deliver them in good condition to the consignee,
such responsibility also devolves upon the CARRIER. Both the ARRASTRE
and the CARRIER are therefore charged with the obligation to deliver the
goods in good condition to the consignee.
We do not, of course, imply by the above pronouncement that the arrastre
operator and the customs broker are themselves always and necessarily
liable solidarily with the carrier, or vice-versa, nor that attendant facts in a
given case may not vary the rule. The instant petition has been brought

solely by Eastern Shipping Lines which, being the carrier and not having
been able to rebut the presumption of fault, is, in any event, to be held
liable in this particular case. A factual finding of both the court a quo and
the appellate court, we take note, is that there is sufficient evidence that
the shipment sustained damage while in the successive possession of
appellants (the herein petitioner among them). Accordingly, the liability
imposed on Eastern Shipping Lines, Inc., the sole petitioner in this case, is
inevitable regardless of whether there are others solidarily liable with it.
It is over the issue of legal interest adjudged by the appellate court that
deserves more than just a passing remark.
Let us first see a chronological recitation of the major rulings of this Court:
The early case of Malayan Insurance Co., Inc., vs. Manila Port
Service,[2] decided[3] on 15 May 1969, involved a suit for recovery of
money arising out of short deliveries and pilferage of goods. In this case,
appellee Malayan Insurance (the plaintiff in the lower court) averred in its
complaint that the total amount of its claim for the value of the
undelivered goods amounted to P3,947.20. This demand, however, was
neither established in its totality nor definitely ascertained. In the
stipulation of facts later entered into by the parties, in lieu of proof, the
amount of P1,447.51 was agreed upon. The trial court rendered judgment
ordering the appellants (defendants) Manila Port Service and Manila
Railroad Company to pay appellee Malayan Insurance the sum of
P1,447.51 with legal interest thereon from the date the complaint was filed
on 28 December 1962 until full payment thereof. The appellants then
assailed, inter alia, the award of legal interest. In sustaining the appellants,
this Court ruled:
Interest upon an obligation which calls for the payment of money, absent
a stipulation, is the legal rate. Such interest normally is allowable from the
date of demand, judicial or extrajudicial. The trial court opted for judicial
demand as the starting point.
But then upon the provisions of Article 2213 of the Civil Code, interest
cannot be recovered upon unliquidated claims or damages, except when
the demand can be established with reasonable certainty. And as was held
by this Court in Rivera vs. Perez [4], L-6998, February 29, 1956, if the suit
were for damages, unliquidated and not known until definitely
ascertained, assessed and determined by the courts after proof (Montilla c.
Corporacion de P. P. Agustinos, 25 Phil. 447; Lichauco v. Guzman, 38 Phil.

31

302), then, interest should be from the date of the decision.


(Underscoring supplied)
The case of Reformina vs. Tomol, [5] rendered on 11 October 1985, was for
Recovery of Damages for Injury to Person and Loss of Property. After
trial, the lower court decreed:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and
third party defendants and against the defendants and third party plaintiffs
as follows:
Ordering defendants and third party plaintiffs Shell and Michael,
Incorporated to pay jointly and severally the following persons:
(a) . . . . .
x x x

xxx

(g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of


P131,084.00 which is the value of the boat F B Pacita III together with its
accessories, fishing gear and equipment minus P80,000.00 which is the
value of the insurance recovered and the amount of P10,000.00 a month
as the estimated monthly loss suffered by them as a result of the fire of
May 6, 1969 up to the time they are actually paid or already the total sum
of P370,000.00 as of June 4, 1972 with legal interest from the filing of the
complaint until paid and to pay attorneys fees of P5,000.00 with costs
against defendants and third party plaintiffs. (Underscoring supplied.)
On appeal to the Court of Appeals, the latter modified the amount of
damages awarded but sustained the trial court in adjudging legal interest
from the filing of the complaint until fully paid. When the appellate courts
decision became final, the case was remanded to the lower court for
execution, and this was when the trial court issued its assailed resolution
which applied the 6% interest per annum prescribed in Article 2209 of the
Civil Code. In their petition for review on certiorari, the petitioners
contended that Central Bank Circular No. 416, providing thus By virtue of the authority granted to it under Section 1 of Act 2655, as
amended, Monetary Board in its Resolution No. 1622 dated July 29, 1974,
has prescribed that the rate of interest for the loan, or forbearance of any
money, goods, or credits and the rate allowed in judgments, in the absence
of express contract as to such rate of interest, shall be twelve (12%)
percent per annum. This Circular shall take effect immediately. (Italics
found in the text) -

should have, instead, been applied. This Court [6] ruled:


The judgments spoken of and referred to are judgments in litigations
involving loans or forbearance of any money, goods or credits. Any other
kind of monetary judgment which has nothing to do with, nor involving
loans or forbearance of any money, goods or credits does not fall within
the coverage of the said law for it is not within the ambit of the authority
granted to the Central Bank.
x x x

xxx

xxx

Coming to the case at bar, the decision herein sought to be executed is


one rendered in an Action for Damages for injury to persons and loss of
property and does not involve any loan, much less forbearances of any
money, goods or credits. As correctly argued by the private respondents,
the law applicable to the said case is Article 2209 of the New Civil Code
which reads Art. 2209. - If the obligation consists in the payment of a sum of money,
and the debtor incurs in delay, the indemnity for damages, there being no
stipulation to the contrary, shall be the payment of interest agreed upon,
and in the absence of stipulation, the legal interest which is six percent per
annum.
The above rule was reiterated in Philippine Rabbit Bus Lines, Inc., v. Cruz, [7]
promulgated on 28 July 1986. The case was for damages occasioned by an
injury to person and loss of property. The trial court awarded private
respondent Pedro Manabat actual and compensatory damages in the
amount of P72,500.00 with legal interest thereon from the filing of the
complaint until fully paid. Relying on the Reformina v. Tomol case, this
Court[8] modified the interest award from 12% to 6% interest per annum
but sustained the time computation thereof, i.e., from the filing of the
complaint until fully paid.
In Nakpil and Sons vs. Court of Appeals,[9] the trial court, in an action
for the recovery of damages arising from the collapse of a building,
ordered, inter alia, the defendant United Construction Co., Inc. (one of the
petitioners) x x x to pay the plaintiff, x x x, the sum of P989,335.68 with
interest at the legal rate from November 29, 1968, the date of the filing of
the complaint until full payment x x x. Save from the modification of the
amount granted by the lower court, the Court of Appeals sustained the trial
courts decision. When taken to this Court for review, the case, on 03
October 1986, was decided, thus:

32

WHEREFORE, the decision appealed from is hereby MODIFIED and


considering the special and environmental circumstances of this case, we
deem it reasonable to render a decision imposing, as We do hereby
impose, upon the defendant and the third-party defendants (with the
exception of Roman Ozaeta) a solidary (Art. 1723, Civil Code, Supra. p. 10)
indemnity in favor of the Philippine Bar Association of FIVE MILLION
(P5,000,000.00) Pesos to cover all damages (with the exception of
attorneys fees) occasioned by the loss of the building (including interest
charges and lost rentals) and an additional ONE HUNDRED THOUSAND
(P100,000.00) Pesos as and for attorneys fees, the total sum being
payable upon the finality of this decision. Upon failure to pay on such
finality, twelve (12%) per cent interest per annum shall be imposed upon
aforementioned amounts from finality until paid. Solidary costs against the
defendant and third-party defendants (except Roman Ozaeta).
(Underscoring supplied)
A motion for reconsideration was filed by United Construction, contending
that the interest of twelve (12%) per cent per annum imposed on the total
amount of the monetary award was in contravention of law. The Court [10]
ruled out the applicability of the Reformina and Philippine Rabbit Bus Lines
cases and, in its resolution of 15 April 1988, it explained:
There should be no dispute that the imposition of 12% interest pursuant
to Central Bank Circular No. 416 x x x is applicable only in the following: (1)
loans; (2) forbearance of any money, goods or credit; and (3) rate allowed
in judgments (judgments spoken of refer to judgments involving loans or
forbearance of any money, goods or credits. (Philippine Rabbit Bus Lines
Inc. v. Cruz, 143 SCRA 160-161 [1986]; Reformina v. Tomol, Jr., 139 SCRA
260 [1985]). It is true that in the instant case, there is neither a loan or a
forbearance, but then no interest is actually imposed provided the sums
referred to in the judgment are paid upon the finality of the judgment. It is
delay in the payment of such final judgment, that will cause the imposition
of the interest.
It will be noted that in the cases already adverted to, the rate of interest is
imposed on the total sum, from the filing of the complaint until paid; in
other words, as part of the judgment for damages. Clearly, they are not
applicable to the instant case. (Underscoring supplied.)
The subsequent case of American Express International, Inc., vs.
Intermediate Appellate Court[11] was a petition for review on certiorari
from the decision, dated 27 February 1985, of the then Intermediate
Appellate Court reducing the amount of moral and exemplary damages

awarded by the trial court, to P240,000.00 and P100,000.00, respectively,


and its resolution, dated 29 April 1985, restoring the amount of damages
awarded by the trial court, i.e., P2,000,000.00 as moral damages and
P400,000.00 as exemplary damages with interest thereon at 12% per
annum from notice of judgment, plus costs of suit. In a decision of 09
November 1988, this Court, while recognizing the right of the private
respondent to recover damages, held the award, however, for moral
damages by the trial court, later sustained by the IAC, to be inconceivably
large. The Court[12] thus set aside the decision of the appellate court and
rendered a new one, ordering the petitioner to pay private respondent the
sum of One Hundred Thousand (P100,000.00) Pesos as moral damages,
with six (6%) percent interest thereon computed from the finality of this
decision until paid. (Underscoring supplied)
Reformina came into fore again in the 21 February 1989 case of Florendo v.
Ruiz[13] which arose from a breach of employment contract. For having
been illegally dismissed, the petitioner was awarded by the trial court
moral and exemplary damages without, however, providing any legal
interest thereon. When the decision was appealed to the Court of Appeals,
the latter held:
WHEREFORE, except as modified hereinabove the decision of the CFI of
Negros Oriental dated October 31, 1972 is affirmed in all respects, with the
modification that defendants-appellants, except defendant-appellant
Merton Munn, are ordered to pay, jointly and severally, the amounts stated
in the dispositive portion of the decision, including the sum of P1,400.00 in
concept of compensatory damages, with interest at the legal rate from the
date of the filing of the complaint until fully paid. (Underscoring supplied.)
The petition for review to this Court was denied. The records were
thereupon transmitted to the trial court, and an entry of judgment was
made. The writ of execution issued by the trial court directed that only
compensatory damages should earn interest at 6% per annum from the
date of the filing of the complaint. Ascribing grave abuse of discretion on
the part of the trial judge, a petition for certiorari assailed the said order.
This Court said:
x x x, it is to be noted that the Court of Appeals ordered the payment of
interest at the legal rate from the time of the filing of the complaint. x x x.
Said circular [Central Bank Circular No. 416] does not apply to actions
based on a breach of employment contract like the case at bar.
(Underscoring supplied)

33

The Court reiterated that the 6% interest per annum on the damages
should be computed from the time the complaint was filed until the
amount is fully paid.
Quite recently, the Court had another occasion to rule on the matter.
National Power Corporation vs. Angas,[14] decided on 08 May 1992,
involved the expropriation of certain parcels of land. After conducting a
hearing on the complaints for eminent domain, the trial court ordered the
petitioner to pay the private respondents certain sums of money as just
compensation for their lands so expropriated with legal interest thereon x
x x until fully paid. Again, in applying the 6% legal interest per annum
under the Civil Code, the Court[15] declared:
x x x, (T)he transaction involved is clearly not a loan or forbearance of
money, goods or credits but expropriation of certain parcels of land for a
public purpose, the payment of which is without stipulation regarding
interest, and the interest adjudged by the trial court is in the nature of
indemnity for damages. The legal interest required to be paid on the
amount of just compensation for the properties expropriated is manifestly
in the form of indemnity for damages for the delay in the payment thereof.
Therefore, since the kind of interest involved in the joint judgment of the
lower court sought to be enforced in this case is interest by way of
damages, and not by way of earnings from loans, etc. Art. 2209 of the Civil
Code shall apply.
Concededly, there have been seeming variances in the above holdings.
The cases can perhaps be classified into two groups according to the
similarity of the issues involved and the corresponding rulings rendered by
the court. The first group would consist of the cases of Reformina v.
Tomol (1985), Philippine Rabbit Bus Lines v. Cruz (1986), Florendo v. Ruiz
(1989) and National Power Corporation v. Angas (1992). In the second
group would be Malayan Insurance Company v. Manila Port Service
(1969), Nakpil and Sons v. Court of Appeals (1988), and American Express
International v. Intermediate Appellate Court (1988).
In the first group, the basic issue focuses on the application of either the
6% (under the Civil Code) or 12% (under the Central Bank Circular) interest
per annum. It is easily discernible in these cases that there has been a
consistent holding that the Central Bank Circular imposing the 12% interest
per annum applies only to loans or forbearance[16] of money, goods or
credits, as well as to judgments involving such loan or forbearance of
money, goods or credits, and that the 6% interest under the Civil Code
governs when the transaction involves the payment of indemnities in the

concept of damage arising from the breach or a delay in the performance


of obligations in general. Observe, too, that in these cases, a common time
frame in the computation of the 6% interest per annum has been applied,
i.e., from the time the complaint is filed until the adjudged amount is fully
paid.
The second group, did not alter the pronounced rule on the application of
the 6% or 12% interest per annum, [17] depending on whether or not the
amount involved is a loan or forbearance, on the one hand, or one of
indemnity for damage, on the other hand. Unlike, however, the first
group which remained consistent in holding that the running of the legal
interest should be from the time of the filing of the complaint until fully
paid, the second group varied on the commencement of the running of
the legal interest.
Malayan held that the amount awarded should bear legal interest from the
date of the decision of the court a quo, explaining that if the suit were for
damages, unliquidated and not known until definitely ascertained,
assessed and determined by the courts after proof, then, interest should
be from the date of the decision. American Express International v. IAC,
introduced a different time frame for reckoning the 6% interest by ordering
it to be computed from the finality of (the) decision until paid. The Nakpil
and Sons case ruled that 12% interest per annum should be imposed from
the finality of the decision until the judgment amount is paid.
The ostensible discord is not difficult to explain. The factual circumstances
may have called for different applications, guided by the rule that the
courts are vested with discretion, depending on the equities of each case,
on the award of interest. Nonetheless, it may not be unwise, by way of
clarification and reconciliation, to suggest the following rules of thumb for
future guidance.
I. When an obligation, regardless of its source, i.e., law, contracts, quasicontracts, delicts or quasi-delicts [18] is breached, the contravenor can be
held liable for damages.[19] The provisions under Title XVIII on Damages
of the Civil Code govern in determining the measure of recoverable
damages.[20]
II. With regard particularly to an award of interest in the concept of actual
and compensatory damages, the rate of interest, as well as the accrual
thereof, is imposed, as follows:

34

1. When the obligation is breached, and it consists in the payment of a


sum of money, i.e., a loan or forbearance of money, the interest due
should be that which may have been stipulated in writing. [21] Furthermore,
the interest due shall itself earn legal interest from the time it is judicially
demanded.[22] In the absence of stipulation, the rate of interest shall be
12% per annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of Article 1169 [23]
of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is
breached, an interest on the amount of damages awarded may be imposed
at the discretion of the court[24] at the rate of 6% per annum. [25] No interest,
however, shall be adjudged on unliquidated claims or damages except
when or until the demand can be established with reasonable certainty. [26]
Accordingly, where the demand is established with reasonable certainty,
the interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so
reasonably established at the time the demand is made, the interest shall
begin to run only from the date the judgment of the court is made (at
which time the quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes
final and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance of credit.
WHEREFORE, the petition is partly GRANTED. The appealed decision is
AFFIRMED with the MODIFICATION that the legal interest to be paid is SIX
PERCENT (6%) on the amount due computed from the decision, dated 03
February 1988, of the court a quo. A TWELVE PERCENT (12%) interest, in
lieu of SIX PERCENT (6%), shall be imposed on such amount upon finality of
this decision until the payment thereof.
SO

ORDERED.

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

35

G.R. No. 189871, August 13, 2013


DARIO NACAR, PETITIONER, VS. GALLERY FRAMES AND/OR FELIPE
BORDEY,
JR.,
RESPONDENTS.
DECISION

This is a petition for review on certiorari assailing the Decision [1] dated
September 23, 2008 of the Court of Appeals (CA) in CA-G.R. SP No. 98591,
and the Resolution[2] dated October 9, 2009 denying petitioners motion for
reconsideration.
factual

= Aug. 18, 1998

Length of Service

= 8 yrs. & 1 month

P198.00 x 26 days x 8
months

PERALTA, J.:

The

Date of Decision

antecedents

are

undisputed.

Petitioner Dario Nacar filed a complaint for constructive dismissal before


the Arbitration Branch of the National Labor Relations Commission (NLRC)
against respondents Gallery Frames (GF) and/or Felipe Bordey, Jr., docketed
as
NLRC
NCR
Case
No.
01-00519-97.
On October 15, 1998, the Labor Arbiter rendered a Decision [3] in favor of
petitioner and found that he was dismissed from employment without a
valid or just cause. Thus, petitioner was awarded backwages and
separation pay in lieu of reinstatement in the amount of P158,919.92. The
dispositive portion of the decision, reads:
With the foregoing, we find and so rule that respondents failed to discharge
the burden of showing that complainant was dismissed from employment
for a just or valid cause. All the more, it is clear from the records that
complainant was never afforded due process before he was terminated. As
such, we are perforce constrained to grant complainants prayer for the
payments of separation pay in lieu of reinstatement to his former position,
considering the strained relationship between the parties, and his apparent
reluctance to be reinstated, computed only up to promulgation of this
decision as follows:
SEPARATION PAY

Date Hired

= August 1990

Rate

= P198/day

= P41,184
.00

BACKWAGES

Date Dismissed

= January 24, 1997

Rate per day

= P196.00

Date of Decisions

= Aug. 18, 1998

a) 1/24/97
to
2/5/98 = 12.36 mos.
P196.00/day x 12.36
mos.

= P62,986.
56

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

per

= P62,986.
00

P198.00 x 26 days x
6.4 mos.

= P32,947.
20

TOTAL

= P95.933.
76

Rate

WHEREFORE, premises considered, judgment is hereby rendered finding


respondents guilty of constructive dismissal and are therefore, ordered:

36

1.

To pay jointly and severally the complainant the amount of sixtytwo thousand nine hundred eighty-six pesos and 56/100
(P62,986.56) Pesos representing his separation pay;

2.

To pay jointly and severally the complainant the amount of nine


(sic) five thousand nine hundred thirty-three and 36/100
(P95,933.36) representing his backwages; and

3.

All other claims are hereby dismissed for lack of merit.

SO ORDERED.[4]

more recomputation is required to be made of the said awards. They


claimed that after the decision becomes final and executory, the same
cannot be altered or amended anymore. [14] On January 13, 2003, the Labor
Arbiter issued an Order[15] denying the motion. Thus, an Alias Writ of
Execution[16]
was
issued
on
January
14,
2003.
Respondents again appealed before the NLRC, which on June 30, 2003
issued a Resolution[17] granting the appeal in favor of the respondents and
ordered
the
recomputation
of
the
judgment
award.

Respondents appealed to the NLRC, but it was dismissed for lack of merit
in the Resolution[5] dated February 29, 2000. Accordingly, the NLRC
sustained the decision of the Labor Arbiter. Respondents filed a motion for
reconsideration,
but
it
was
denied.[6]

On August 20, 2003, an Entry of Judgment was issued declaring the


Resolution of the NLRC to be final and executory. Consequently, another
pre-execution conference was held, but respondents failed to appear on
time. Meanwhile, petitioner moved that an Alias Writ of Execution be
issued to enforce the earlier recomputed judgment award in the sum of
P471,320.31.[18]

Dissatisfied, respondents filed a Petition for Review on Certiorari before the


CA. On August 24, 2000, the CA issued a Resolution dismissing the
petition. Respondents filed a Motion for Reconsideration, but it was likewise
denied
in
a
Resolution
dated
May
8,
2001. [7]

The records of the case were again forwarded to the Computation and
Examination Unit for recomputation, where the judgment award of
petitioner was reassessed to be in the total amount of only P147,560.19.

Respondents then sought relief before the Supreme Court, docketed as


G.R. No. 151332. Finding no reversible error on the part of the CA, this
Court denied the petition in the Resolution dated April 17, 2002. [8]

Petitioner then moved that a writ of execution be issued ordering


respondents to pay him the original amount as determined by the Labor
Arbiter in his Decision dated October 15, 1998, pending the final
computation
of
his
backwages
and
separation
pay.

An Entry of Judgment was later issued certifying that the resolution


became final and executory on May 27, 2002.[9] The case was, thereafter,
referred back to the Labor Arbiter. A pre-execution conference was
consequently
scheduled,
but
respondents
failed
to
appear. [10]

On January 14, 2003, the Labor Arbiter issued an Alias Writ of Execution to
satisfy the judgment award that was due to petitioner in the amount of
P147,560.19,
which
petitioner
eventually
received.

On November 5, 2002, petitioner filed a Motion for Correct Computation,


praying that his backwages be computed from the date of his dismissal on
January 24, 1997 up to the finality of the Resolution of the Supreme Court
on May 27, 2002.[11] Upon recomputation, the Computation and
Examination Unit of the NLRC arrived at an updated amount in the sum of
P471,320.31.[12]
On December 2, 2002, a Writ of Execution [13] was issued by the Labor
Arbiter ordering the Sheriff to collect from respondents the total amount of
P471,320.31. Respondents filed a Motion to Quash Writ of Execution,
arguing, among other things, that since the Labor Arbiter awarded
separation pay of P62,986.56 and limited backwages of P95,933.36, no

Petitioner then filed a Manifestation and Motion praying for the recomputation of the monetary award to include the appropriate interests. [19]
On May 10, 2005, the Labor Arbiter issued an Order [20] granting the motion,
but only up to the amount of P11,459.73. The Labor Arbiter reasoned that
it is the October 15, 1998 Decision that should be enforced considering
that it was the one that became final and executory. However, the Labor
Arbiter reasoned that since the decision states that the separation pay and
backwages are computed only up to the promulgation of the said decision,
it is the amount of P158,919.92 that should be executed. Thus, since
petitioner already received P147,560.19, he is only entitled to the balance
of
P11,459.73.

37

Petitioner then appealed before the NLRC,[21] which appeal was denied by
the NLRC in its Resolution [22] dated September 27, 2006. Petitioner filed a
Motion for Reconsideration, but it was likewise denied in the Resolution [23]
dated
January
31,
2007.
Aggrieved, petitioner then sought recourse before the CA, docketed as CAG.R.
SP
No.
98591.
On September 23, 2008, the CA rendered a Decision [24] denying the
petition. The CA opined that since petitioner no longer appealed the
October 15, 1998 Decision of the Labor Arbiter, which already became final
and executory, a belated correction thereof is no longer allowed. The CA
stated that there is nothing left to be done except to enforce the said
judgment. Consequently, it can no longer be modified in any respect,
except
to
correct
clerical
errors
or
mistakes.
Petitioner filed a Motion for Reconsideration, but it was denied in the
Resolution[25]
dated
October
9,
2009.
Hence, the petition assigning the lone error:
I

WITH DUE RESPECT, THE HONORABLE COURT OF APPEALS SERIOUSLY


ERRED, COMMITTED GRAVE ABUSE OF DISCRETION AND DECIDED
CONTRARY TO LAW IN UPHOLDING THE QUESTIONED RESOLUTIONS OF THE
NLRC WHICH, IN TURN, SUSTAINED THE MAY 10, 2005 ORDER OF LABOR
ARBITER MAGAT MAKING THE DISPOSITIVE PORTION OF THE OCTOBER 15,
1998 DECISION OF LABOR ARBITER LUSTRIA SUBSERVIENT TO AN OPINION
EXPRESSED IN THE BODY OF THE SAME DECISION. [26]
Petitioner argues that notwithstanding the fact that there was a
computation of backwages in the Labor Arbiters decision, the same is not
final until reinstatement is made or until finality of the decision, in case of
an award of separation pay. Petitioner maintains that considering that the
October 15, 1998 decision of the Labor Arbiter did not become final and
executory until the April 17, 2002 Resolution of the Supreme Court in G.R.
No. 151332 was entered in the Book of Entries on May 27, 2002, the
reckoning point for the computation of the backwages and separation pay
should be on May 27, 2002 and not when the decision of the Labor Arbiter
was rendered on October 15, 1998. Further, petitioner posits that he is also

entitled to the payment of interest from the finality of the decision until full
payment
by
the
respondents.
On their part, respondents assert that since only separation pay and
limited backwages were awarded to petitioner by the October 15, 1998
decision of the Labor Arbiter, no more recomputation is required to be
made of said awards. Respondents insist that since the decision clearly
stated that the separation pay and backwages are computed only up to
[the] promulgation of this decision, and considering that petitioner no
longer appealed the decision, petitioner is only entitled to the award as
computed by the Labor Arbiter in the total amount of P158,919.92.
Respondents added that it was only during the execution proceedings that
the petitioner questioned the award, long after the decision had become
final and executory. Respondents contend that to allow the further
recomputation of the backwages to be awarded to petitioner at this point
of the proceedings would substantially vary the decision of the Labor
Arbiter as it violates the rule on immutability of judgments.
The

petition

is

meritorious.

The instant case is similar to the case of Session Delights Ice Cream and
Fast Foods v. Court of Appeals (Sixth Division),[27] wherein the issue
submitted to the Court for resolution was the propriety of the computation
of the awards made, and whether this violated the principle of immutability
of judgment. Like in the present case, it was a distinct feature of the
judgment of the Labor Arbiter in the above-cited case that the decision
already provided for the computation of the payable separation pay and
backwages due and did not further order the computation of the monetary
awards up to the time of the finality of the judgment. Also in Session
Delights, the dismissed employee failed to appeal the decision of the labor
arbiter. The Court clarified, thus:
In concrete terms, the question is whether a re-computation in the course
of execution of the labor arbiter's original computation of the awards
made, pegged as of the time the decision was rendered and confirmed
with modification by a final CA decision, is legally proper. The question is
posed, given that the petitioner did not immediately pay the awards stated
in the original labor arbiter's decision; it delayed payment because it
continued with the litigation until final judgment at the CA level.
A source of misunderstanding in implementing the final decision in this
case proceeds from the way the original labor arbiter framed his decision.

38

The

decision

consists

essentially

of

two

parts.

The first is that part of the decision that cannot now be disputed because it
has been confirmed with finality. This is the finding of the illegality of the
dismissal and the awards of separation pay in lieu of reinstatement,
backwages,
attorney's
fees,
and
legal
interests.
The second part is the computation of the awards made. On its face, the
computation the labor arbiter made shows that it was time-bound as can
be seen from the figures used in the computation. This part, being merely
a computation of what the first part of the decision established and
declared, can, by its nature, be re-computed. This is the part, too, that the
petitioner now posits should no longer be re-computed because the
computation is already in the labor arbiter's decision that the CA had
affirmed. The public and private respondents, on the other hand, posit that
a re-computation is necessary because the relief in an illegal dismissal
decision goes all the way up to reinstatement if reinstatement is to be
made, or up to the finality of the decision, if separation pay is to be given
in
lieu
reinstatement.
That the labor arbiter's decision, at the same time that it found that an
illegal dismissal had taken place, also made a computation of the award, is
understandable in light of Section 3, Rule VIII of the then NLRC Rules of
Procedure which requires that a computation be made. This Section in part
states:
[T]he Labor Arbiter of origin, in cases involving monetary awards and at all
events, as far as practicable, shall embody in any such decision or order
the detailed and full amount awarded.
Clearly implied from this original computation is its currency up to the
finality of the labor arbiter's decision. As we noted above, this implication
is apparent from the terms of the computation itself, and no question
would have arisen had the parties terminated the case and implemented
the
decision
at
that
point.
However, the petitioner disagreed with the labor arbiter's findings on all
counts - i.e., on the finding of illegality as well as on all the consequent
awards made. Hence, the petitioner appealed the case to the NLRC which,
in turn, affirmed the labor arbiter's decision. By law, the NLRC decision is
final, reviewable only by the CA on jurisdictional grounds.
The petitioner appropriately sought to nullify the NLRC decision on

jurisdictional grounds through a timely filed Rule 65 petition for certiorari.


The CA decision, finding that NLRC exceeded its authority in affirming the
payment of 13th month pay and indemnity, lapsed to finality and was
subsequently returned to the labor arbiter of origin for execution.
It was at this point that the present case arose. Focusing on the core illegal
dismissal portion of the original labor arbiter's decision, the implementing
labor arbiter ordered the award re-computed; he apparently read the
figures originally ordered to be paid to be the computation due had the
case been terminated and implemented at the labor arbiter's level. Thus,
the labor arbiter re-computed the award to include the separation pay and
the backwages due up to the finality of the CA decision that fully
terminated the case on the merits. Unfortunately, the labor arbiter's
approved computation went beyond the finality of the CA decision (July 29,
2003) and included as well the payment for awards the final CA decision
had deleted - specifically, the proportionate 13th month pay and the
indemnity awards. Hence, the CA issued the decision now questioned in
the
present
petition.
We see no error in the CA decision confirming that a re-computation is
necessary as it essentially considered the labor arbiter's original decision in
accordance with its basic component parts as we discussed above. To
reiterate, the first part contains the finding of illegality and its monetary
consequences; the second part is the computation of the awards or
monetary consequences of the illegal dismissal, computed as of the time of
the labor arbiter's original decision.[28]
Consequently, from the above disquisitions, under the terms of the
decision which is sought to be executed by the petitioner, no essential
change is made by a recomputation as this step is a necessary
consequence that flows from the nature of the illegality of dismissal
declared by the Labor Arbiter in that decision. [29] A recomputation (or an
original computation, if no previous computation has been made) is a part
of the law specifically, Article 279 of the Labor Code and the established
jurisprudence on this provision that is read into the decision. By the
nature of an illegal dismissal case, the reliefs continue to add up until full
satisfaction, as expressed under Article 279 of the Labor Code. The
recomputation of the consequences of illegal dismissal upon execution of
the decision does not constitute an alteration or amendment of the final
decision being implemented. The illegal dismissal ruling stands; only the
computation of monetary consequences of this dismissal is affected, and
this is not a violation of the principle of immutability of final judgments. [30]

39

That the amount respondents shall now pay has greatly increased is a
consequence that it cannot avoid as it is the risk that it ran when it
continued to seek recourses against the Labor Arbiter's decision. Article
279 provides for the consequences of illegal dismissal in no uncertain
terms, qualified only by jurisprudence in its interpretation of when
separation pay in lieu of reinstatement is allowed. When that happens, the
finality of the illegal dismissal decision becomes the reckoning point
instead of the reinstatement that the law decrees. In allowing separation
pay, the final decision effectively declares that the employment
relationship ended so that separation pay and backwages are to be
computed
up
to
that
point.[31]

3. When the judgment of the court awarding a sum of money becomes


final and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance of credit.[33]

Finally, anent the payment of legal interest. In the landmark case of


Eastern Shipping Lines, Inc. v. Court of Appeals,[32] the Court laid down the
guidelines regarding the manner of computing legal interest, to wit:

The Monetary Board, in its Resolution No. 796 dated 16 May 2013,
approved the following revisions governing the rate of interest in the
absence of stipulation in loan contracts, thereby amending Section 2 of
Circular No. 905, Series of 1982:

II. With regard particularly to an award of interest in the concept of actual


and compensatory damages, the rate of interest, as well as the accrual
thereof,
is
imposed,
as
follows:
1. When the obligation is breached, and it consists in the payment of a sum
of money, i.e., a loan or forbearance of money, the interest due should be
that which may have been stipulated in writing. Furthermore, the interest
due shall itself earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 12% per annum to
be computed from default, i.e., from judicial or extrajudicial demand under
and subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is
breached, an interest on the amount of damages awarded may be imposed
at the discretion of the court at the rate of 6% per annum. No interest,
however, shall be adjudged on unliquidated claims or damages except
when or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty,
the interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so
reasonably established at the time the demand is made, the interest shall
begin to run only from the date the judgment of the court is made (at
which time the quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount finally adjudged.

Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSPMB), in its Resolution No. 796 dated May 16, 2013, approved the
amendment of Section 2[34] of Circular No. 905, Series of 1982 and,
accordingly, issued Circular No. 799,[35] Series of 2013, effective July 1,
2013, the pertinent portion of which reads:

Section 1. The rate of interest for the loan or forbearance of any money,
goods or credits and the rate allowed in judgments, in the absence of an
express contract as to such rate of interest, shall be six percent (6%) per
annum.
Section 2. In view of the above, Subsection X305.1 [36] of the Manual of
Regulations for Banks and Sections 4305Q.1, [37] 4305S.3[38] and 4303P.1[39]
of the Manual of Regulations for Non-Bank Financial Institutions are hereby
amended
accordingly.
This Circular shall take effect on 1 July 2013.
Thus, from the foregoing, in the absence of an express stipulation as to the
rate of interest that would govern the parties, the rate of legal interest for
loans or forbearance of any money, goods or credits and the rate allowed
in judgments shall no longer be twelve percent (12%) per annum - as
reflected in the case of Eastern Shipping Lines[40] and Subsection X305.1 of
the Manual of Regulations for Banks and Sections 4305Q.1, 4305S.3 and
4303P.1 of the Manual of Regulations for Non-Bank Financial Institutions,
before its amendment by BSP-MB Circular No. 799 - but will now be six
percent (6%) per annum effective July 1, 2013. It should be noted,
nonetheless, that the new rate could only be applied prospectively and not
retroactively. Consequently, the twelve percent (12%) per annum legal
interest shall apply only until June 30, 2013. Come July 1, 2013 the new
rate of six percent (6%) per annum shall be the prevailing rate of interest

40

when

applicable.

awarded may be imposed at the discretion of the court at the rate


of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages, except when or until the demand
can be established with reasonable certainty. Accordingly, where
the demand is established with reasonable certainty, the interest
shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code), but when such certainty
cannot be so reasonably established at the time the demand is
made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of
damages may be deemed to have been reasonably ascertained).
The actual base for the computation of legal interest shall, in any
case, be on the amount finally adjudged.

Corollarily, in the recent case of Advocates for Truth in Lending, Inc. and
Eduardo B. Olaguer v. Bangko Sentral Monetary Board,[41] this Court
affirmed the authority of the BSP-MB to set interest rates and to issue and
enforce Circulars when it ruled that the BSP-MB may prescribe the
maximum rate or rates of interest for all loans or renewals thereof or the
forbearance of any money, goods or credits, including those for loans of
low priority such as consumer loans, as well as such loans made by
pawnshops, finance companies and similar credit institutions. It even
authorizes the BSP-MB to prescribe different maximum rate or rates for
different types of borrowings, including deposits and deposit substitutes, or
loans
of
financial
intermediaries.
Nonetheless, with regard to those judgments that have become final and
executory prior to July 1, 2013, said judgments shall not be disturbed and
shall continue to be implemented applying the rate of interest fixed
therein.
To recapitulate and for future guidance, the guidelines laid down
in the case of Eastern Shipping Lines[42] are accordingly modified to
embody
BSP-MB
Circular
No.
799,
as
follows:
I. When an obligation, regardless of its source, i.e., law, contracts, quasicontracts, delicts or quasi-delicts is breached, the contravenor can be held
liable for damages. The provisions under Title XVIII on Damages of the
Civil Code govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual
and compensatory damages, the rate of interest, as well as the accrual
thereof, is imposed, as follows:
1.

2.

When the obligation is breached, and it consists in the payment of


a sum of money, i.e., a loan or forbearance of money, the interest
due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from
the time it is judicially demanded. In the absence of stipulation, the
rate of interest shall be 6% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code.
When an obligation, not constituting a loan or forbearance of
money, is breached, an interest on the amount of damages

3.

When the judgment of the court awarding a sum of money


becomes final and executory, the rate of legal interest, whether the
case falls under paragraph 1 or paragraph 2, above, shall be 6%
per annum from such finality until its satisfaction, this interim
period being deemed to be by then an equivalent to a forbearance
of credit.

And, in addition to the above, judgments that have become final and
executory prior to July 1, 2013, shall not be disturbed and shall continue to
be implemented applying the rate of interest fixed therein.
WHEREFORE, premises considered, the Decision dated September 23,
2008 of the Court of Appeals in CA-G.R. SP No. 98591, and the Resolution
dated October 9, 2009 are REVERSED and SET ASIDE. Respondents are
Ordered
to
Pay
petitioner:
(1) backwages computed from the time petitioner was illegally dismissed
on January 24, 1997 up to May 27, 2002, when the Resolution of this Court
in
G.R.
No.
151332
became
final
and
executory;
(2) separation pay computed from August 1990 up to May 27, 2002 at the
rate
of
one
month
pay
per
year
of
service;
and
(3) interest of twelve percent (12%) per annum of the total monetary
awards, computed from May 27, 2002 to June 30, 2013 and six percent
(6%) per annum from July 1, 2013 until their full satisfaction.
The Labor Arbiter is hereby ORDERED to make another recomputation of
the total monetary benefits awarded and due to petitioner in accordance

41

with
SO

this

Decision.
ORDERED.

Sereno, C.J., Carpio, Velasco, Jr., Leonardo-De Castro, Brion, Bersamin, Del
Castillo, Abad, Villarama, Jr., Perez, Mendoza, Reyes, Perlas-Bernabe, and
Leonen, JJ., concur.

42

G.R. NO. 160533, January 12, 2005


FIRST FIL-SIN LENDING CORPORATION, PETITIONER, VS. GLORIA D.
PADILLO,
RESPONDENT.
DECISION
YNARES-SANTIAGO, J.:
Before us is a petition for review under Rule 45 of the Rules of Court,
seeking a reversal of the Court of Appeals decision in CA-G.R. CV No.
75183[1] dated October 16, 2003, which reversed and set aside the decision
of the Regional Trial Court of Manila, Branch 21 in Civil Case No. 00-96235.
On July 22, 1997, respondent Gloria D. Padillo obtained a P500,000.00 loan
from petitioner First Fil-Sin Lending Corp. On September 7, 1997,
respondent obtained another P500,000.00 loan from petitioner. In both
instances, respondent executed a promissory note and disclosure
statement.[2]
For the first loan, respondent made 13 monthly interest payments of
P22,500.00 each before she settled the P500,000.00 outstanding principal
obligation on February 2, 1999. As regards the second loan, respondent
made 11 monthly interest payments of P25,000.00 each before paying the
principal loan of P500,000.00 on February 2, 1999. [3] In sum, respondent
paid a total of P792,500.00 for the first loan and
P775,000.00 for the
second
loan.
On January 27, 2000, respondent filed an action for sum of money against
herein petitioner before the Regional Trial Court of Manila. Alleging that
she only agreed to pay interest at the rates of 4.5% and 5% per annum,
respectively, for the two loans, and not 4.5% and 5% per month,
respondent sought to recover the amounts she allegedly paid in excess of
her
actual
obligations.
On October 12, 2001,[4] the trial court dismissed respondents complaint,
and on the counterclaim, ordered her to pay petitioner P311,125.00 with
legal interest from February 3, 1999 until fully paid plus 10% of the amount
due as attorneys fees and costs of the suit. [5] The trial court ruled that by
issuing checks representing interest payments at 4.5% and 5% monthly
interest rates, respondent is now estopped from questioning the provisions
of
the
promissory
notes.

On appeal, the Court of Appeals (CA) reversed and set aside the decision of
the court a quo, the dispositive portion of which reads:
IN VIEW OF ALL THE FOREGOING, the appealed decision is REVERSED and
SET ASIDE and a new one entered: (1) ordering First Fil-Sin Lending
Corporation to return the amount of P114,000.00 to Gloria D. Padillo, and
(2) deleting the award of attorneys fees in favor of appellee. Other claims
and counterclaims are dismissed for lack of sufficient causes. No
pronouncement
as
to
cost.
SO ORDERED.[6]
The appellate court ruled that, based on the disclosure statements
executed by respondent, the interest rates should be imposed on a
monthly basis but only for the 3-month term of the loan. Thereafter, the
legal interest rate will apply. The CA also found the penalty charges
pegged at 1% per day of delay highly unconscionable as it would translate
to 365% per annum. Thus, it was reduced to 1% per month or 12% per
annum.
Hence, the instant petition on the following assignment of errors:
I. THE COURT OF APPEALS ERRED IN FINDING THAT THE APPLICABLE
INTEREST SHOULD BE THE LEGAL INTEREST OF TWELVE PER CENT (12%)
PER ANNUM DESPITE THE CLEAR AGREEMENT OF THE PARTIES ON
ANOTHER APPLICABLE RATE.
II. THE COURT OF APPEALS ERRED IN IMPOSING A PENALTY COMPUTED AT
THE RATE OF TWELVE PER CENT (12%) PER ANNUM DESPITE THE CLEAR
AGREEMENT OF THE PARTIES ON ANOTHER APPLICABLE RATE.
III. THE COURT OF APPEALS ERRED IN DELETING THE ATTORNEYS FEES
AWARDED BY THE REGIONAL TRIAL COURT.[7]
Petitioner maintains that the trial court and the CA are correct in ruling that
the interest rates are to be imposed on a monthly and not on a per annum
basis. However, it insists that the 4.5% and 5% monthly interest shall be
imposed until the outstanding obligations have been fully paid.
As to the penalty charges, petitioner argues that the 12% per annum
penalty imposed by the CA in lieu of the 1% per day as agreed upon by the
parties violates their freedom to stipulate terms and conditions as they
may
deem
proper.

43

Petitioner finally contends that the CA erred in deleting the trial courts
award of attorneys fees arguing that the same is anchored on sound and
legal
ground.
Respondent, on the other hand, avers that the interest on the loans is per
annum as expressly stated in the promissory notes and disclosure
statements. The provision as to annual interest rate is clear and requires
no room for interpretation. Respondent asserts that any ambiguity in the
promissory notes and disclosure statements should not favor petitioner
since
the
loan
documents
were
prepared
by
the
latter.
We

agree

with

respondent.

Perusal of the promissory notes and the disclosure statements pertinent to


the July 22, 1997 and September 7, 1997 loan obligations of respondent
clearly and unambiguously provide for interest rates of 4.5% per annum
and 5% per annum, respectively. Nowhere was it stated that the interest
rates
shall
be
applied
on
a
monthly
basis.
Thus, when the terms of the agreement are clear and explicit that they do
not justify an attempt to read into it any alleged intention of the parties,
the terms are to be understood literally just as they appear on the face of
the contract.[8] It is only in instances when the language of a contract is
ambiguous or obscure that courts ought to apply certain established rules
of construction in order to ascertain the supposed intent of the parties.
However, these rules will not be used to make a new contract for the
parties or to rewrite the old one, even if the contract is inequitable or
harsh. They are applied by the court merely to resolve doubts and
ambiguities
within
the
framework
of
the
agreement. [9]
The lower court and the CA mistook the Loan Transactions Summary for
the Disclosure Statement. The former was prepared exclusively by
petitioner and merely summarizes the payments made by respondent and
the income earned by petitioner. There was no mention of any interest
rates and having been prepared exclusively by petitioner, the same is self
serving. On the contrary, the Disclosure Statements were signed by both
parties and categorically stated that interest rates were to be imposed
annually,
not
monthly.
As such, since the terms and conditions contained in the promissory notes
and disclosure statements are clear and unambiguous, the same must be

given full force and effect. The expressed intention of the parties as laid
down
on
the
loan
documents
controls.
Also, reformation cannot be resorted to as the documents have not been
assailed on the ground of mutual mistake. When a party sues on a written
contract and no attempt is made to show any vice therein, he cannot be
allowed to lay claim for more than what its clear stipulations accord. His
omission cannot be arbitrarily supplied by the courts by what their own
notions
of
justice
or
equity
may
dictate. [10]
Notably, petitioner even admitted that it was solely responsible for the
preparation of the loan documents, and that it failed to correct the pro
forma note p.a. to per month. [11] Since the mistake is exclusively
attributed to petitioner, the same should be charged against it. This
unilateral mistake cannot be taken against respondent who merely affixed
her signature on the pro forma loan agreements. As between two parties
to a written agreement, the party who gave rise to the mistake or error in
the provisions of the same is estopped from asserting a contrary intention
to that contained therein. The checks issued by respondent do not clearly
and convincingly prove that the real intent of the parties is to apply the
interest rates on a monthly basis. Absent any proof of vice of consent, the
promissory notes and disclosure statements remain the best evidence to
ascertain
the
real
intent
of
the
parties.
The same promissory note provides that x x x any and all remaining
amount due on the principal upon maturity hereof shall earn interest at the
rate of _____ from date of maturity until fully paid. The CA thus properly
imposed the legal interest of 12% per annum from the time the loans
matured until the same has been fully paid on February 2, 1999. As
decreed in Eastern Shipping Lines, Inc. v. Court of Appeals,[12] in the
absence of stipulation, the rate of interest shall be 12% per annum to be
computed
from
default.
As regards the penalty charges, we agree with the CA in ruling that the 1%
penalty per day of delay is highly unconscionable. Applying Article 1229 of
the Civil Code, courts shall equitably reduce the penalty when the principal
obligation has been partly or irregularly complied with, or if it is iniquitous
or
unconscionable.
With regard to the attorneys fees, the CA correctly deleted the award in
favor of petitioner since the trial courts decision does not reveal any
explicit basis for such an award. Attorneys fees are not automatically

44

awarded to every winning litigant. It must be shown that any of the


instances enumerated under Art. 2208[13] of the Civil Code exists to justify
the award thereof.[14] Not one of such instances exists here. Besides, by
filing the complaint, respondent was merely asserting her rights which,
after due deliberations, proved to be lawful, proper and valid.
WHEREFORE, in view of the foregoing, the October 16, 2003 decision of
the Court of Appeals in CA-G.R. CV No. 75183 is AFFIRMED with the
MODIFICATION that the interest rates on the July 22, 1997 and
September 7, 1997 loan obligations of respondent Gloria D. Padillo from
petitioner First Fil-Sin Lending Corporation be imposed and computed on a
per annum basis, and upon their respective maturities, the interest rate of
12% per annum shall be imposed until full payment. In addition, the
penalty at the rate of 12% per annum shall be imposed on the outstanding
obligations
from
date
of
default
until
full
payment.
SO

ORDERED.

Davide, Jr., C.J., (Chairman), Quisumbing, Carpio, and Azcuna, JJ., concur.
G.R. No. 60705, June 28, 1989
INTEGRATED REALTY CORPORATION AND RAUL L. SANTOS,
PETITIONERS, VS. PHILIPPINE NATIONAL BANK, OVERSEAS BANK
OF MANILA AND THE HON. COURT OF APPEALS, RESPONDENTS.
[G.R.

No.

60907.

June

28,

1989]

OVERSEAS BANK OF MANILA, PETITIONER, VS. COURT OF APPEALS,


INTEGRATED REALTY CORPORATION, AND RAUL L. SANTOS,
RESPONDENTS.
DECISION
REGALADO, J.:
In these petitions for review on certiorari, Integrated Realty Corporation
and Raul Santos (G.R. No. 60705), and Overseas Bank of Manila (G.R. No.
60907) appeal from the decision of the Court of Appeals, [1] the decretal
portion of which states:
"WHEREFORE, with the modification that appellee Overseas Bank of Manila
is ordered to pay to the appellant Raul Santos the sum of P700,000.00 due

under the time deposit certificates Nos. 2308 and 2367 with 6 1/2 (sic)
interest per annum from date of issue until fully paid, the appealed
decision is affirmed in all other respects."
In G.R. No. 60705, petitioners Integrated Realty Corporation (hereafter,
IRC) and Raul L. Santos (hereafter, Santos) seek the dismissal of the
complaint filed by the Philippine National Bank (hereafter, PNB), or in the
event that they be held liable thereunder, to revive and affirm that portion
of the decision of the trial court ordering Overseas Bank of Manila
(hereafter, OBM) to pay IRC and Santos whatever amounts the latter will
pay PNB, with interest from the date of Payment.[2]
On the other hand, in G.R. No. 60907, petitioner OBM challenges the
decision of respondent court insofar as it holds OBM liable for interest on
the time deposit with it of Santos corresponding to the period of its closure
by order of the Central Bank.[3]
In its assailed decision, the respondent Court of Appeals, quoting from the
decision of the lower court,[4] narrated the antecedents of this case in this
wise:
The facts of this case are not seriously disputed by any of the parties.
They are set forth in the decision of the trial court as follows:

Under date 11 January 1967 defendant Raul L. Santos made a time deposit
with defendant OBM in the amount of P500,000.00. (Exhibit-10 OBM) and
was issued a Certificate of Time Deposit No. 2308 (Exhibit 1-Santos, Exhibit
D). Under date 6 February 1967 defendant Raul L. Santos also made a time
deposit with defendant OBM in the amount of P200,000.00 (Exhibit 11OBM) and was issued certificate of Time Deposit No. 2367 (Exhibit 2Santos, Exhibit E).
Under date 9 February 1967 defendant IRC, thru its President - defendant
Raul L. Santos, applied for a loan and/ or credit line (Exhibit A) in the
amount of P700,000.00 with plaintiff bank. To secure the said loan,
defendant Raul L. Santos executed on August 11, 1967 a Deed of
Assignment (Exhibit C) of the two time deposits (Exhibit 1-Santos and
Exhibit 2-Santos, also Exhibits D and E) in favour of plaintiff. Defendant
OBM gave its conformity to the assignment thru letter dated 11 August
1967 (Exhibit F). On the same date, defendant IRC, thru its President Raul
L. Santos, also executed a Deed of Conformity to Loan Conditions (Exhibit
G).

45

The defendant OBM, after the due dates of the time deposit certificates,
did not pay plaintiff PNB. Plaintiff demanded payment from defendants IRC
and Raul L. Santos (Exhibit K) and from defendant OBM (Exhibit L).
Defendants IRC and Raul L. Santos replied that the obligation (loan) of
defendant IRC was deemed paid with the irrevocable assignment of the
time deposit certificates (Exhibits 5-Santos, 6-Santos and 7-Santos).
"On April 6, 1969 (sic) *PNB filed a complaint to collect from IRC and Santos
the loan of P700,000.00 with interest as well as attorney's fees. It
impleaded OBM as a defendant to compel it to redeem and pay to it
Santos' time deposit certificates with interest, plus exemplary and
corrective damages, attorney's fees, and costs.
"In their answer to the complaint, IRC and Santos alleged that PNB has no
cause of action against them because their obligation to PNB was fully paid
or extinguished upon the 'irrevocable' assignment of the time deposit
certificates, and that they are not answerable for the insolvency of OBM.
They filed a-counterclaim for damages against PNB and a cross-claim
against OBM, alleging that OBM acted fraudulently in refusing to pay the
time deposit certificates to PNB resulting in the filing of the suit against
them by PNB, and that, therefore, OBM should pay them whatever amount
they may be ordered by the court to pay PNB with interest. They also
asked that OBM be ordered to pay them compensatory, moral, exemplary
and corrective damages.
"In its answer to the complaint, OBM denied knowledge of the time deposit
certificates because the alleged time deposit of Santos 'does not appear' in
its books of account.
"Whereupon, IRC and Santos, with leave of court, filed a third-party
complaint against Emerito B. Ramos, Jr., president of OBM, and Rodolfo R.
Sunico, treasurer of said bank, who allegedly received the time deposits of
Santos and issued the certificates therefor.
"Answering the third-party complaint, Ramos and Sunico alleged that IRC
and Santos have no cause of action against them because they received
and signed the time deposit certificates as officers of OBM, that the time
deposits are recorded in the subsidiary ledgers of the bank and are 'civil
liabilities of the defendant OBM.'
"On November 18, 1970, OBM filed an amended or supplemental answer to
the complaint, acknowledging the certificates of time deposit that it issued
to Santos, and admitting its failure to pay the same due to its distressed

financial situation. As affirmative defenses, it alleged that by reason of its


state of insolvency its operations have been suspended by the Central
Bank since August 1, 1968; that the time deposits ceased to earn interest
from that date; that it may not give preference to any depositor or creditor;
and that payment of the plaintiffs claim is prohibited.
"On January 30, 1976, the lower court rendered judgment for the plaintiff,
the dispositive portion of which reads as follows:
'WHEREFORE, judgment is hereby rendered, ordering:
1. The defendant Integrated Realty Corporation and Raul L. Santos to pay
the plaintiff, jointly and solidarily, the total amount of 700,000.00 plus
interest at the rate of 9% per annum from maturity dates of the two
promissory notes on January 11 and February 6, 1968, respectively
(Exhibits M and I), plus l-1/2% additional interest effective February 28,
1968 and additional penalty interest of 1% per annum of the said amount
of P700,000.00 from the time of maturity of said loan up to the time the
said amount of 700,000.00 is actually paid to the plaintiff;
2. The defendants to pay 10% of the amount of P700,000.00 as and for
attorney's fees;
3. The defendant Overseas Bank of Manila to pay cross-plaintiffs Integrated
Realty Corporation and Raul L. Santos whatever amounts the latter will pay
to the plaintiff with interest from date of payment;
4. The defendant Overseas Bank of Manila to pay cross-plaintiffs Integrated
Realty Corporation and Raul L. Santos the amount of P10,000.00 as and for
attorney's fees;
5. The third-party complaint and cross-claim dismissed;
6. The defendant Overseas Bank of Manila to pay the costs.
SO ORDERED.'"[5]
IRC, Santos and OBM all appealed to the respondent Court of Appeals. As
stated in limine, on March 16, 1982 respondent court promulgated its
appealed decision, with a modification and the deletion of that portion of
the judgment of the trial court ordering OBM to pay IRC and Santos
whatever amounts they will pay to PNB with interest from the date of
payment.

46

Therein defendants-appellants, through separate petitions, have brought


the said decision to this Court for review.

How.] 240 L. Ed. 404; See also Michie, Vol. 5B Banks and Banking, p.
200)."[7]

1. The first issue posed before Us for resolution is whether the liability of
IRC and Santos with PNB should be deemed to have been paid by virtue of
the deed of assignment made by the former in favor of PNB, which reads:

We uphold respondent court on this score.

"KNOW ALL MEN BY THESE PRESENTS:


I, RAUL L. SANTOS, of legal age, Filipino, with residence and postal address
at 661 Richmond St., Mandaluyong, Rizal for and in consideration of certain
loans, overdrafts and other credit accommodations granted or those that
may hereafter be granted to me/us by the PHILIPPINE NATIONAL BANK,,
have assigned, transferred and conveyed and by these presents, do hereby
assign, transfer and convey by way of security unto said PHILIPPINE
NATIONAL BANK its successors and assigns the following Certificates of
Time Deposit issued by the OVERSEAS BANK OF MANILA, its CONFORMITY
issued on August 11, 1967, hereto enclosed as Annex 'A', in favor of RAUL
L. SANTOS and/or NORA S. SANTOS, in the aggregate sum of SEVEN
HUNDRED THOUSAND PESOS ONLY (P700,000.00), Philippine Currency, x x
x.
XXX

XXX

XXX

"It is also understood that the herein Assignor/s shall remain liable for any
outstanding balance of his/their obligation if the Bank is unable to actually
receive or collect the above assigned sums, monies or properties resulting
from any agreements, orders or decisions of the court or for any other
cause whatsoever."[6]
XXX

XXX

XXX

Respondent Court of Appeals did not consider the aforesaid assignment as


payment, thus:
"The contention of IRC and Santos that the irrevocable assignment of the
time deposit certificates to PNB constituted 'payment' of their obligation to
the latter is not well taken.
'Where a certificate of deposit in a bank, payable at a future day, was
handed over by a debtor to his creditor, it was not payment, unless there
was an express agreement on the part of the creditor to receive it as such,
and the question whether there was or was not such an agreement, was
one of facts to be decided by the jury.1 (Downey vs. Hicks, 55 U.S. [14

In Lopez vs. Court of Appeals, et al.,[8] petitioner Benito Lopez obtained a


loan for P20,000.00 from the Prudential Bank and Trust Company. On the
same day, he executed a promissory note in favor of the bank and, in
addition, he executed a surety bond in which he, as principal, and
Philippine American General Insurance Co., Inc. (Philamgen), as surety,
bound themselves jointly and severally in favor of the bank for the
payment of the loan. On the same occasion, Lopez also executed in favor
of Philamgen an indemnity agreement whereby he agreed to indemnify the
company against any damages which the latter may sustain in
consequence of having become a surety upon the bond. At the same time,
Lopez executed a deed of assignment of his shares of stock in the Baguio
Military Institute, Inc. in favor of Philamgen. When Lopez' obligation
matured without being settled, Philamgen caused the transfer of the
shares of stocks to its name in order that it may sell the same and apply
the proceeds thereof in payment of the loan to the bank. However, when
no payment was still made by the principal debtor or surety, the bank filed
a complaint which compelled Philamgen to pay the bank. Thereafter,
Philamgen filed an action to recover the amount of the loan against Lopez.
The trial court therein held that the obligation of Lopez was deemed paid
when his shares of stocks were transferred in the name of Philamgen. On
appeal, the Court of Appeals ruled that Lopez was still liable to Philamgen
because, pending payment, Philamgen was merely holding the stock as
security for the payment of Lopez' obligation.
In upholding the finding therein of the Court of Appeals, We held that:
"Notwithstanding the express terms of the 'Stock Assignment Separate
from Certificate,' however, We hold and rule that the transaction should
not be regarded as an absolute conveyance in view of the circumstances
obtaining at the time of the execution thereof.
"It should be remembered that on June 2, 1959, the day Lopez obtained a
loan of P20,000.00 from Prudential Bank, Lopez executed a promissory
note for P20,000.00, plus interest at the rate often (10%) per cent per
annum, in favor of said Bank. He likewise posted a surety bond to secure
his full and faithful performance of his obligation under the promissory
note with Philamgen as his surety. In return for the undertaking of

47

Philamgen under the surety bond, Lopez executed on the same day not
only an indemnity agreement but also a stock assignment.
"The indemnity agreement and stock assignment must be considered
together as related transactions because in order to judge the intention of
the contracting parties, their contemporaneous and subsequent acts shall
be principally considered. (Article 1371, New Civil Code). Thus, considering
that the indemnity agreement connotes a continuing obligation of Lopez
towards Philamgen while the stock assignment indicates a complete
discharge of the same obligation, the existence of the indemnity
agreement whereby Lopez had to pay a premium of Pl ,000.00 for a period
of one year and agreed at all times to indemnify Philamgen of any and all
kinds of losses which the latter might sustain by reason of it becoming a
surety, is inconsistent with the theory of an absolute sale for and in
consideration of the same undertaking of Philamgen. There would have
been no necessity for the execution of the indemnity agreement if the
stock assignment was really intended as an absolute conveyance, x x x"
Along the same vein, in the case at bar it would not have been necessary
on the part of IRC and Santos to execute promissory notes in favor of PNB
if the assignment of the time deposits of Santos was really intended as an
absolute conveyance.
There are cogent reasons to conclude that the parties intended said deed
of assignment to complement the promissory notes. In declaring that the
deed of assignment did not operate as payment of the loan so as to
extinguish the obligations of IRC and Santos with PNB, the trial court
advanced several valid bases, to wit:
"a. It is clear from the Deed of Assignment that it was only by way of
security;
XXX

XXX

XXX

"b. The promissory notes (Exhibits H and I) were executed on August 16,
1967. If defendants IRC and Raul L. Santos, upon executing the Deed of
Assignment on August 11, 1967 had already paid their loan of P700,000.00
or otherwise extinguished the same, why were the promissory notes made
on August 16, 1967 still executed by IRC and signed by Raul L. Santos as
President?

For all intents and purposes, the deed of assignment in this case is actually
a pledge. Adverting again to the Court's pronouncements in Lopez, supra,
we quote therefrom:
"The character of the transaction between the parties is to be determined
by their intention, regardless of what language was used or what the form
of the transfer was. If it was intended to secure the payment of money, it
must be construed as a pledge; but if there was some other intention, it is
not a pledge. However, even though a transfer, if regarded by itself,
appears to have been absolute, its object and character might still be
qualified and explained by a contemporaneous writing declaring it to have
been a deposit of the property as collateral security. It has been said that a
transfer of property by the debtor to a creditor, even if sufficient on its face
to make an absolute conveyance, should be treated as a pledge if the debt
continues in existence and is not discharged by the transfer, and that
accordingly, the use of the terms ordinarily importing conveyance, of
absolute ownership will not be given that effect in such a transaction if
they are also commonly used in pledges and mortgages and therefore do
not unqualifiedly indicate a transfer of absolute ownership, in the absence
of clear and unambiguous language or other circumstances excluding an
intent to pledge."[10]
The facts and circumstances leading to the execution of the deed of
assignment, as found by the court a quo and the respondent court, yield
said conclusion that it is in fact a pledge. The deed of assignment has
satisfied the requirements of a contract of pledge (1) that it be constituted
to secure the fulfillment of a principal obligation; (2) that the pledgor be
the absolute owner of the thing pledged; (3) that the persons constituting
the pledge have the free disposal of their property, and in the absence
thereof, that they be legally authorized for the purpose. [11] The further
requirement that the thing pledged be placed in the possession of the
creditor, or of a third person by common agreement [12] was complied with
by the execution of the deed of assignment in favor of PNB.
It must also be emphasized that Santos, as assignor, made an express
undertaking that he would remain liable for any outstanding balance of his
obligation should PNB be unable to actually receive or collect the assigned
sums resulting from any agreements, orders or decisions of the court or for
any other cause whatsoever. The term "for any cause whatsoever" is broad
enough to include the situation involved in the present case.

"c. In the application for a credit line (Exhibit A), the time deposits were
offered as collateral."[9]

48

Under the foregoing circumstances and considerations, the unavoidable


conclusion is that IRC and Santos should be held liable to PNB for the
amount of the loan with the correspondinginterest thereon.
2. We find nothing illegal in the interest of one and one-half percent (1/2%)
imposed by PNB pursuant to the resolution of its Board which presumably
was done in accordance with ordinary banking procedures. Not only did IRC
and Santos fail to overcome the presumption of regularity of business
transactions, but they are likewise estopped from questioning the validity
thereof for the first time in this petition. There is nothing in the records to
show that they raised this issue during the trial by presenting
countervailing evidence. What was merely touched upon during the
proceedings in the court below was the alleged lack of notice to them of
the board resolution, but not the veracity or validity thereof.
3. On the issue of whether OBM should be held liable for interests on the
time deposits of IRC and Santos from the time it ceased operations until it
resumed its business, the answer is in the negative.
We have held in The Overseas Bank of Manila vs. Court of Appeals and
Tony D. Tapia [13] that:
"It is a matter of common knowledge, which We take judicial notice of, that
what enables a bank to pay stipulated interest on money deposited with it
is that thru the other aspects of its operation it is able to generate funds to
cover the payment of such interest. Unless a bank can lend money, engage
in international transactions, acquire foreclosed mortgaged properties or
their proceeds and generally engage in other banking and financing
activities from which it can derive income, it is inconceivable how it can
carry on as a depository obligated to pay stipulated interest. Conventional
wisdom dictates this inexorable fair and just conclusion. And it can be said
that all who deposit money in banks are aware of such a simple economic
proposition. Consequently, it should be deemed read into every contract of
deposit with a bank that the obligation to pay interest on the deposit
ceases the moment the operation of the bank is completely suspended by
the duly constituted authority, the Central Bank.
"We consider it of trivial consequence that the stoppage of the bank's
operation by the Central Bank has been subsequently declared illegal by
the Supreme Court, for before the Court's order, the bank had no
alternative under the law than to obey the orders of the Central Bank.
Whatever be the juridical significance of the subsequent action of the
Supreme Court, the stubborn fact remained that the petitioner was totally

crippled from then on from earning the income needed to meet its
obligations to its depositors. Tf such a situation cannot, strictly speaking,
be legally denominated as 'force majeure,' as maintained by private
respondent, We hold it is a matter of simple equity that it be treated as
such."
The Court further adjured that:
"Parenthetically, We may add for the guidance of those who might be
concerned, and so that unnecessary litigations be avoided from further
clogging the dockets of the courts, that in the light of the considerations
expounded in the above opinion, the same formula that exempts petitioner
from the payment of interest to its depositors during the whole period of
factual stoppage of its operations by orders of the Central Bank, modified
in effect by the decision as well as the approval of a formula of
rehabilitation by this*Court, should be, as a matter of consistency,
applicable or followed in respect to all other obligations of petitioner which
could not be paid during the period of its actual complete closure."
We cannot accept the holding of the respondent Court of Appeals that the
above-cited decisions apply only where the bank is in a state of liquidation.
In the very case aforecited, this issue was likewise raised and We resolved:

"Thus, Our task is narrowed down to the resolution of the legal problem of
whether or not, for purposes of the payment of the interest here in
question, stoppage of the operations of a bank by a legal order of
liquidation may be equated with actual cessation of the bank's operation,
not different, factually speaking, in its effects, from legal liquidation the
factual cessation having been ordered by the Central Bank.
"In the case of Chinese Grocer's Association, et al, vs. American
Apothecaries, 65 Phil. 395, this Court held:
'As to the second assignment of error, this Court, in G.R. No. 43682, In re
Liquidation of the Mercantile Bank of China, Tan Tiong Tick, claimant and
appellant, vs. American Apothecaries, C, et al., claimants and appellees,
through Justice Imperial, held the following:
'4. The court held that the appellant is not entitled to charge interest on
the amounts of his claims, and this is the object of the second assignment
of error. Upon this point a distinction must be made between the interest
which the deposits should earn from their existence until the bank ceased

49

to operate, and that which they may earn from the time the bank's
operations were stopped until the date of payment of the deposits. As to
the first class, we hold that it should be paid because such interest has
been earned in the ordinary course of the bank's business and before the
latter has been declared in a state of liquidation. Moreover, the bank being
authorized by law to make use of the deposits with the limitation stated, to
invest the same in its business and other operations, it may be presumed
that it bound itself to pay interest to the depositors as in fact it paid
interest prior to the dates of the said claims. As to the interest which may
be charged from the date the bank ceased to do business because it was
declared in a state of liquidation, we hold that the said interest should not
be paid.'
"The Court of Appeals considered this ruling inapplicable to the instant
case, precisely because, as contended by private respondent, the said
Apothecaries case had in fact in contemplation a valid order of liquidation
of the bank concerned, whereas here, the order of the Central Bank of
August 13, 1968 completely forbidding herein petitioner to do business
preparatory to its liquidation was first restrained and then nullified by this
Supreme Court. In other words, as far as private respondent is concerned,
it is the legal reason for cessation of operations, not the actual cessation
thereof, that matters and is decisive insofar as his right to the continued
payment of the interest on his deposit during the period of cessation is
concerned.
"In the light of the peculiar circumstances of this particular case, We
disagree. It is Our considered view, after mature deliberation, that it is
utterly unfair to award private respondent his prayer for payment of
interest on his deposit during the period that petitioner bank was not
allowed by the Central Bank to operate."
4. Lastly, IRC and Santos claim that OBM should reimburse them for
whatever amounts they may be adjudged to pay PNB by way of
compensation for damages incurred, pursuant to Articles 1170 and 2201 of
the Civil Code.
It appears that as early as April, 1967, the financial situation of OBM had
already caused mounting concern in the Central Bank. [14] On December
5,1967, new directors and officers drafted from the Central Bank (CB)
itself, the Philippine National Bank (PNB) and the Development Bank of the
Philippines (DBP) were elected and installed and they took over the
management and control of the Overseas Bank. [15] However, it was only on
July 31. 1968 when OBM was excluded from clearing with the CB under

Monetary Board Resolution No. 1263. Subsequently, on August 2, 1968,


pursuant to Resolution No. 1290 of the CB, OBM's operations were
suspended.[16] These CB resolutions were eventually annulled and set aside
by this Court on October 4, 1971 in the decision rendered in the herein
cited case of Ramos.
Thus, when PNB demanded from OBM payment of the amounts due on the
two time deposits which matured on January 11, 1968 and February 6,
1968, respectively, there was as yet no obstacle to the faithful compliance
by OBM of its liabilities thereunder. Consequently, for having incurred in
delay in the performance of its obligation, OBM should be held liable for
damages.[17] When respondent Santos invested his money in time deposits
with OBM, they entered into a contract of simple loan or mutuum[18] not a
contract of deposit.
While it is true that under Article 1956 of the Civil Code no interest shall be
due unless it has been expressly stipulated in writing, this applies only to
interest for the use of money. It does not comprehend interest paid as
damages.[19] OBM contends that it had agreed to pay interest only up to the
dates of maturity of the certificates of time deposit and that respondent
Santos is not entitled to interest after the maturity dates had expired,
unless the contracts are renewed. This is true with respect to the stipulated
interest, but the obligations consisting as they did in the payment of
money, under Article 1108 of the Civil Code he has the right to recover
damages resulting from the default of OBM, and the measure of such
damages is interest at the legal rate of six percent (6%) per annum on the
amounts due and unpaid at the expiration of the periods respectively
provided in the contracts. In fine, OBM is being required to pay such
interest, not as interest income stipulated in the certificates of time
deposit, but as damages for failure and delay in the payment of its
obligations which thereby compelled IRC and Santos to resort to the courts.
The applicable rule is that legal interest, in the nature of damages for noncompliance with an obligation to pay a sum of money, is recoverable from
the date judicial or extrajudicial demand is made, [20] which latter mode of
demand was made by PNB, after the maturity of the certificates of time
deposit, on March 1, 1968.[21] The measure of such damages, there being
no stipulation to the contrary, shall be the payment of the interest agreed
upon in the certificates of deposit [22] which is six and one-half percent (6
l/2%). Such interest due or accrued shall further earn legal interest from
the time of judicial demand.[23]

50

We reject the proposition of IRC and Santos that OBM should reimburse
them the entire amount they may be adjudged to pay PNB. It must be
noted that their liability to pay the various interests of nine percent (9%)
on the principal obligation, one and one-half percent (1 1/2) additional
interest and one percent (1%) penalty interest is an offshoot of their failure
to pay under the terms of the two promissory notes executed in favor of
PNB. OBM was never a party to said promissory notes. There is, therefore,
no privity of contract between OBM and PNB which will justify the
imposition of the aforesaid interests upon OBM whose liability should be
strictly confined to and within the provisions of the certificates of time
deposit involved in this case. In fact, as noted by respondent court, when
OBM assigned as error that portion of the judgment of the court a quo
requiring OBM to make the disputed reimbursement, IRC and Santos did
not dispute that objection of OBM. Besides, IRC and Santos are not without
fault. They likewise acted in bad faith when they refused to comply with
their obligations under the promissory notes, thus incurring liability for all
damages reasonably attributable to the non-payment of said obligations.24

4. Overseas Bank of Manila to pay Integrated Realty Corporation and Raul


L. Santos six and one-half per cent (6 1/2%) interest in the concept of
damages on the principal amounts of said certificates of time deposit from
the date of extrajudicial demand by PNB on March 1, 1968, plus legal
interest of six percent (6%) on said interest from April 6, 1968, until full
payment thereof, except during the entire period of actual cessation of
operations of said bank.
5. Overseas Bank of Manila to pay Integrated Realty Corporation and Raul
L, Santos ten thousand pesos (P10,000.00) as and for attorney's fees.
SO ORDERED.
Melencio-Herrera (Chairperson), Paras, Padilla, and Sarmiento, JJ., concur.

WHEREFORE, judgment is hereby rendered, ordering:


1. Integrated Realty Corporation and Raul L. Santos to pay Philippine
National Bank, jointly and severally, the total amount of seven hundred
thousand pesos (P700,000.00), with interest thereon at the rate of nine
percent (9%) per annum from the maturity dates of the two promissory
notes on January 11 and February 6, 1968, respectively, plus one and onehalf percent (114%) additional interest per annum effective February 28,
1968 and additional penalty interest of one percent (1%) per annum of the
said amount of seven hundred thousand pesos (P700,000.00) from the
time of maturity of said loan up to the time the said amount of seven
hundred thousand pesos (P700,000.00) is fully paid to Philippine National
Bank.
2. Integrated Realty Corporation and Raul L. Santos to pay solidarily
Philippine National Bank ten percent (10%) of the amount of seven
hundred thousand pesos (P700,000.00) as and for attorney's fees.
3. Overseas Bank of Manila to pay Integrated Realty Corporation and Raul
L. Santos the sum of seven hundred thousand pesos (P700,000.00) due
under Time Deposit Certificates Nos. 2308 and 2367, with interest thereon
of six and one-half percent (6 1/2%) per annum from their dates of issue on
January 11, 1967 and February 6, 1967, respectively, until the same are
fully paid, except that no interest shall be paid during the entire period of
actual cessation of operations by Overseas Bank of Manila;

51

G.R. No. 141009, July 02, 2002


BATAAN SEEDLING ASSOCIATION, INC. AND CARLOS VALENCIA,
PETITIONERS, VS. REPUBLIC OF THE PHILIPPINES, REPRESENTED
BY
THE
DEPARTMENT
OF
ENVIRONMENT
AND
NATURAL
RESOURCES,
RESPONDENT.
RESOLUTION
AUSTRIA-MARTINEZ, J.:
Before us is a petition for review on certiorari under Rule 45 of the Rules of
Court which seeks to set aside the Decision promulgated on October 14,
1998 by the Court of Appeals in CA-G.R. CV No. 52545, [1] affirming with
modification the decision of the Regional Trial Court of Quezon City. The
dispositive portion of the assailed Decision reads:
IN THE LIGHT OF ALL THE FOREGOING, the Decision appealed from is
AFFIRMED with the following modifications:
1.

The Appellants are hereby ordered to pay, jointly and severally, to


the Republic of the Philippines, the principal amount of P56,290.69,
with interest thereon at the rate of 12% per annum, from January
27, 1994 until the said amount is paid in full;

2.

The Appellant BSAI is hereby ordered to pay to the appellant


Republic of the Philippines the amount of P50,000.00 as and by
way
of
exemplary
damages.
No

pronouncement

as

to

cost.

SO ORDERED.[2]
Petitioner Bataan Seedling Association, Inc. (BSAI for brevity) entered into
a Community Based Reforestation Contract on October 26, 1990 with the
Republic of the Philippines, represented by the Department of Environment
and Natural Resources (DENR). Under said contract, BSAI, in consideration
of the amount of Nine Hundred Seventy Five Thousand One Hundred
Twenty Six Pesos and Sixty One Centavos (P975,126.61), bound itself to
undertake the reforestation of a fifty-hectare open/denuded forest land in
Barangay Liyang, Pilar, Bataan within a period of three (3) years. [3] BSAI
likewise undertook to report to the DENR any event or condition which
delays or may delay or prevent completion of the work, [4] and submit
progress billings and accomplishment reports. [5] Concomitant with the

contract is the Project Development Plan and the Approved Schedule of


Progress Payments detailing the annual cash flow and schedule of activities
within the three-year period,[6] and the Contract of Undertaking providing
for the mobilization fund in the amount of Seventy Five Thousand Fifty Four
Pesos and Sixty Six Centavos (P75,054.66). [7] Said fund was allotted and
released by respondent to enable BSAI to start with the project, but the
fund was to be returned to respondent upon completion of the project or
deducted from the periodic release of moneys to petitioners. [8]
Believing that petitioners failed to comply with their obligations under the
contract, respondent sent a notice of cancellation dated July 31, 1992 to
petitioner Carlos Valencia, President of BSAI, asking the latter to show
cause why the contract should not be terminated on the following grounds:
1. Willful violation of the material terms and conditions, stipulations and
covenants of the Contract, to wit: a) The association failed to fully
plant/establish the whole 50-hectare contracted area during the first year
of operations as provided for in the Contract; b) The seedlings raised in the
nursery were disposed of to other contractors and the seedlings left were
practically overgrown indicating lack of proper care and maintenance; c)
Inspite of the fact that a forest fire occurred sometime in December, 1991,
no report was ever made to the DENR in violation of Article 1.1.5 of the
Contract; d) The Association even failed to submit to the DENR
accomplishment reports and other relevant information required and
expected
from
it.
2. Abandonment of the project area. The PENRO/CENRO monitoring and
Evaluation Team which inspected the project area on March 18, 25 and 31,
1992 reported that except for the family that actually resides in the
bunkhouse, no laborers were observed at the project area during the time
of the field inspections. Even you failed to show up despite written and
verbal notices served to you. Finally, the photodocuments taken on the
plantation illustrates clearly the abandoned project area. [9]
Due to their failure to respond to the notice of cancellation, as well as
return the mobilization fund, respondent filed a Complaint for Damages
against petitioners,[10] praying that the latter jointly and solidarily pay
actual damages in the amount of Seventy Five Thousand Fifty Four Pesos
and Twenty Five Centavos (P75,054.25) representing the portion of the
mobilization fund released to them, and Sixty Two Thousand Pesos Four
Hundred Fifty Pesos and Twenty Two Centavos (P62,450.22) as the amount
paid under the accomplishment bills, totaling One Hundred Thirty Seven
Thousand Five Hundred Four Pesos and Forty Seven Centavos

52

(P137,504.47). Respondent also sought liquidated damages equivalent to


0.1% of the total contract cost due to BSAIs delay in the performance of its
obligations, and exemplary damages in the amount of Fifty Thousand Pesos
(P50,000.00).[11]
In their Amended Answer, petitioners deny the allegations, arguing that:
(1) the whole area was totally destroyed by a forest fire in December 1991
without their fault and negligence, which incident was duly reported to
respondent,
and
(2)
the
cancellation
was
arbitrary. [12]
The Regional Trial Court of Quezon City, Branch 217, rendered its decision
ordering petitioners to pay the amount of Fifty Thousand Pesos
(P50,000.00) as exemplary damages. [13] The trial court held that
respondent had sufficient grounds to cancel the contract but saw no reason
why the mobilization fund and the advance payments should be
refunded, or that petitioners should be liable for liquidated damages.
Not satisfied, both respondent and petitioners appealed the decision to the
Court of Appeals. The appellate court affirmed with modification the
decision of the trial court, adjudicating the balance of the mobilization fund
refunded by petitioners in the amount of Fifty Six Thousand Two Hundred
Ninety Pesos and Sixty Nine Centavos (P56,290.69) with 12% interest. [14]
Hence,

the

petition

for

review

on

certiorari.

Petitioners submit that the issues to be resolved are as follows:


1. Whether the unilateral cancellation by the respondent of the
Community-Based Reforestation Contract is invalid, being without
factual and legal basis.

2. Whether the order to refund the amount of P56,290.69 with interest at


the rate of 12% per annum, representing the balance of the
mobilization fund, is palpably erroneous as being contrary to the
facts. [15]
At the outset, it must be stated that the foregoing issues and the
respective arguments in support thereof have been raised by the parties
and passed upon by both the trial court and the appellate court.
Petitioners deny that they were bound to fully plant the fifty (50) hectares

during the first (1st) year of the program as their commitment under clause
1.1.9 of the Reforestation Contract was to turn-over to the DENR at the
end of the third (3rd) year the contracted area of fifty hectares, fully planted
and properly maintained. Petitioners also refute the finding that they
abandoned the project area, arguing that the investigation conducted by
the PENCO/CENRO Monitoring and Evaluation Team is suspect; and that its
report ignored the fact that a forest fire occurred sometime in December
1991 destroying the plants and seedlings already introduced in the area.
Petitioners further claim that their failure to immediately report the fire and
submit progress reports is not a substantial breach of their undertaking to
warrant the cancellation of the contract; and that they cannot be made to
refund the balance of the mobilization fund because these correspond to
the work already done in the area. Finally, petitioners object to the award
of exemplary damages for being without legal and factual basis. [16]
On the issue of whether or not respondent had sufficient basis to cancel
the contract, both the trial and appellate courts found that there was basis
for the cancellation. A perusal of the records of this case confirms such
finding.
True, under the reforestation contract, petitioners were to turn over at the
end of the third year the project area fully planted and properly
maintained.[17] However, the Project Development Plan, appended and
made integral part of the contract, [18] specifically defines and details
petitioners undertaking. Under the Plan, the following tasks were to be
completed during the first year of the project: (1) survey and mapping of
the whole fifty (50) hectares; (2) nursery operations for fast-growth,
medium-growing, and slow-growth species; (3) plantation establishment,
including site preparation, spot hoeing, staking, holing, and planting and
seed transporting of 83,333 pieces, medium-sized seedlings and sucklers
in planting holes; and (4) infrastructure work, including the development of
footpath, graded trail, plantation road, bunkhouse and look-out tower. [19]
Spread out during the three-year period is the annual maintenance,
protection, administration and supervision, and, monitoring and evaluation
of the project area. [20] Clearly, based on said schedule, petitioners were to
undertake the principal task of planting the fifty (50) hectare-project area
during the 1st year of the project. What is to be carried out during the
entire 3-year period is the maintenance and aftercare of the project site,
and petitioners were to turn over the project at the end of the third year
fully planted and established. Therefore, petitioners argument that they
are not bound to fully plant/establish the whole fifty (50) hectares during
the
1st
year
of
operations
is
without
merit.

53

contract
Moreover, contrary to petitioners posture, there was a material breach of
the contract warranting its cancellation. One (1) year after the
commencement of the project or sometime in December, 1991, a fire
razed the reforestation area. As admitted by petitioners, they failed to
inform respondent of said incident. Neither did they attempt to submit
progress reports on the project, which duties were expressly required of
them under the contract. Thus, the appellate court correctly observed, viz.:
x x x The Appellant BSAI unabashedly admitted failing to establish/plant
the project area. Under Section 1.1.5 of the Contract, the Appellant BSAI
was obliged to report to the DENR any event or condition which delayed or
may delay the progress or prevent the completion, of the work under the
time-table set forth under the contract or any relevant facts known to the
Appellant BSAI. A fire in the area which gutted the improvements in
contract area occurred in December, 1991. However, the Appellant BSAI
never informed the DENR of said fire. Worse, the Appellant BSAI did not
anymore conduct any replanting activities on the area, thus accounting, in
part, for the failure of the said Appellant to submit periodic progress
reports on its activities in said area. Even before the fire occurred, in
December 1991, the Appellant BSAI already failed to submit any periodic
reports of progress of its activities in the area. This prompted the DENR to
conduct an on the site inspection of the subject project area. Indeed,
Carlos Valencia and Hernani Salaya Jr., even ignored the requests of DENR
for them to be present during the said inspections. The DENR inspection
team found and discovered that the Appellant BSAI failed to fully establish
planting on the subject project area. Instead of planting the seedlings on
the project area, the Appellant BSAI sold some of the seedlings because of
its failure to pay the nursery owner, Anilao Satellite Nursery, located in
Pilar, Bataan for said seedlings. x x x[21]
Petitioners attempt to trivialize their lapse, but the Court believes that this
is not merely a slight or casual breach, but a substantial one giving
sanction to the cancellation. Under Clause 4.1 of the contract, respondents
shall have the right to suspend, terminate or cancel the contract upon
petitioners substantial failure to fulfill their obligations, or a willful violation
of the material conditions, stipulations and covenants thereof. It can be
concluded from the tenor of said clause that the parties intended
mandatory compliance with all the provisions of the contract. As stated
previously, among such provisions requiring strict adherence are the
submission of progress reports and the reporting of such event which may
delay or prevent the project. Hence, upon petitioners failure to comply
with said obligations, respondent was well within its right to cancel the

by

express

grant

of

Clause

4.1.

Anent the refund of the mobilization fund, the Contract of Undertaking


signed by petitioners is explicit in this regard, to wit:
THAT BATAAN SEEDLING ASSOCIATION, INCORPORATED x x x, for and in
consideration of the sum of Seventy Five Thousand Fifty four pesos and
sixty six centavos (P75,054.66) representing advance payment under said
contract receipt of which is hereby acknowledge in full, as hereby bind
ourselves;
x x x

3. To repay the amount advanced in accordance with the Contract


of Reforestation and DENR Administration order No. 14 Series of
1989 as amended;[22] (Emphasis Ours)
The amount of Seventy Five Thousand Fifty Four Pesos and Sixty Six
Centavos (P75,054.66) advanced to BSAI, represents 15% of Five Hundred
Thousand Three Hundred Sixty One Pesos and Seventy Two Centavos
(P500,361.72), the contract cost for the 1st year. [23] When initial payment
was made by respondent to petitioners on February 25, 1991, the amount
of Eighteen Thousand Seven Hundred Sixty Three Pesos and Fifty Six
Centavos (P18,763.56), or 1/4 of the mobilization fund, was deducted, [24]
leaving a balance of Fifty Six Thousand Two Hundred Ninety Pesos and
Sixty Nine Centavos (P56,290.69). Respondent thereafter made no
deductions on the subsequent payments of the contract price remitted to
petitioners. Hence, they remain liable on the balance of said fund in the
amount of Fifty Six Thousand Two Hundred Ninety Pesos and Sixty Nine
Centavos (P56,290.69). We find no error committed by the Appellate Court
on
this
matter.
Nevertheless, the appellate court erred in imposing a 12% interest on the
amount due. In Eastern Shipping Lines, Inc. vs. Court of Appeals, we
enunciated the following rules:
I. When an obligation, regardless of its source, i.e., law, contracts, quasicontracts, delicts or quasi-delicts is breached, the contravenor can be held
liable for damages. The provisions under Title XVIII on Damages of the
Civil Code govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual

54

and compensatory damages, the rate of interest, as well as the accrual


thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a
sum of money, i.e., a loan or forbearance of money, the interest due
should be that which may have been stipulated in writing. Furthermore, the
interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 12%
per annum to be computed from default, i.e., from judicial or extrajudicial
demand under and subject to the provisions of Article 1169 of the Civil
Code.
2. When an obligation, not constituting a loan or forbearance of money, is
breached, an interest on the amount of damages awarded may be imposed
at the discretion of the court at the rate of 6% per annum. No interest,
however, shall be adjudged on unliquidated claims or damages except
when or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty,
the interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so
reasonably established at the time the demand is made, the interest shall
begin to run only from the date the judgment of the court is made (at
which time the quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes
final and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance of credit. [25]
Interest at the rate of 12% per annum is imposable if there is no stipulation
in the contract. Herein subject contract does not contain any stipulation as
to interest. However, the amount that is due the respondent does not
represent a loan or forbearance of money. The word forbearance is
defined, within the context of usury law, as a contractual obligation of
lender or creditor to refrain, during given period of time, from requiring
borrower or debtor to repay loan or debt then due and payable. [26] The
contract between petitioner and respondent is a Community Based
Reforestation Contract by virtue of which petitioner undertook the
reforestation of a fifty-hectare open/denuded forest land. The amount of
Fifty Six Thousand Two Hundred Ninety Pesos and Sixty Nine Centavos

(P56,290.69) due to respondent, represents the balance of the mobilization


fund which petitioner is obliged to return because of its failure to fully
comply with its undertaking to plant the entire area with seedlings within
the period contracted for reforestation. Under the reforestation contract,
the fund released to petitioner was supposed to be returned to respondent
upon completion of the project or deducted from the periodic releases of
money. Clearly therefrom, the amount of Fifty Six Thousand Two Hundred
Ninety Pesos and Sixty Nine Centavos (P56,290.69) was neither a loan nor
forbearance
of
money.
Thus, the above-quoted paragraph II, sub-paragraph 1, applies to the
present case. In the absence of stipulation, the legal interest is six percent
(6%) per annum[27] on the amount finally adjudged by the Court. [28]
In addition, under the above-quoted paragraph II, sub-paragraph 3, the
amount of Fifty Six Thousand Two Hundred Ninety Pesos and Sixty Nine
Centavos (P56,290.69) shall earn 12% interest per annum from date of
finality
of
herein
judgment.
Finally, the Court finds the award of Fifty Thousand Pesos (P50,000.00) as
exemplary damages to be excessive and should therefore be reduced to
Twenty Thousand Pesos (P20,000.00). Exemplary damages are imposed not
to enrich one party or impoverish another but to serve as a deterrent
against or as a negative incentive to curb socially deleterious actions. [29]
WHEREFORE, the petition is partly GRANTED and the assailed Decision is
AFFIRMED with the following MODIFICATIONS:

SO

1)

The interest to be paid on the amount of Fifty Six Thousand Two


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

2)

The award of exemplary damages is reduced from Fifty Thousand


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

ORDERED.

55

Davide, Jr., C.J., (Chairman), Vitug, Kapunan, and Ynares-Santiago, JJ.,


concur.

56

G.R. No. 134972, March 22, 2001


SPS. ERNESTO AND MINA CATUNGAL, PETITIONERS, VS. DORIS
HAO,
RESPONDENT.
DECISION
KAPUNAN, J.:
This is a petition for review of the Decision of the Court of Appeals dated
10 March 1998 and Resolution dated 30 July 1998 in the case entitled Doris
Hao vs. Sps. Ernesto and Mina Catungal docketed as CA-G.R. SP No. 46158.
Said decision affirmed with modification the judgment rendered by the
Regional
Trial
Court.
The

antecedents

of

this

case

are

as

follows:

On December 28, 1972, the original owner, Aniana Galang, leased a threestorey building situated at Quirino Avenue, Baclaran, Paraaque, Metro
Manila, to the Bank of the Philippine Islands (BPI) for a period of about
fifteen (15) years, to expire on June 20, 1986. During the existence of the
lease, BPI subleased the ground floor of said building to respondent Doris
Hao.
On August 24, 1984, Galang and respondent executed a contract of lease
on the second and third floors of the building. The lease was for a term of
four (4) years commencing on August 15, 1984 and ending on August 15,
1988. On August 15, 1986, petitioner spouses Ernesto and Mina Catungal
bought
the
property
from
Aniana
Galang.
Invoking her "right of first refusal" purportedly based on the lease contract
between her and Aniana Galang, respondent filed a complaint for
Annulment of Sale with Damages docketed as Civil Case No. 88-491 of the
Regional
Trial
Court
(RTC)
of
Makati,
Metro
Manila.
Meanwhile, the lease agreement between BPI and Galang expired.
Upon expiration of the lease agreements, petitioner spouses sent demand
letters to respondent for her to vacate the building. The demand letters
were unheeded by respondent causing petitioners to file two complaints for
ejectment, docketed as Civil Cases Nos. 7666 and 7667 of the Metropolitan
Trial
Court
(MeTC)
of
Paraaque,
Metro
Manila.

The institution of the ejectment cases prompted respondent to file an


action for injunction docketed as Civil Case No. 90-758 of the RTC of
Makati, to stop the MeTC of Paraaque from proceeding therewith pending
the settlement of the issue of ownership raised in Civil Case No. 88-491.
These two cases for annulment of sale and for injunction were also
consolidated before Branch 63 of the RTC of Makati which rendered a
Decision dated September 19, 1991, granting the injunction and annulling
the contract of sale between Aniana Galang and petitioners.
On appeal,[1] the Court of Appeals reversed and set aside the decision of
the RTC and the complaints in Civil Cases Nos. 88-491 and 90-758 were
accordingly
dismissed.
Not satisfied, respondent elevated the above decision of the CA before this
Court. We, however, denied respondent's petition on April 10, 1996. [2]
The MeTC of Paraaque, after the reversal of the decision in Civil Case No.
90-758 for injunction, proceeded with the trial of the ejectment cases.
On January 22, 1997, the MeTC of Paraaque rendered a Decision, the
dispositive portion of which reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered ordering the
defendant Doris T. Hao who is in actual possession of the property and all
persons claiming rights under her to vacate the premises in question and
to pay the plaintiffs the amount of P20,000.00 a month from June 28, 1988,
until she finally vacates the premises and to pay attorney's fees of
P20,000.00. With costs against the defendant.[3]
Petitioners filed a motion for clarificatory or amended judgment on the
ground that although MeTC "ordered the defendant to vacate the entire
subject property, it only awarded rent or compensation for the use of said
property and attorney's fees for said ground floor and not the entire
subject property. Compensation for the use of the subject property's
second and third floors and attorney's fees as prayed for in Civil Case No.
7767 were not awarded."[4] In response to said motion, the MeTC issued an
Order dated March 3, 1997, the dispositive portion of which reads:
IN VIEW OF THE FOREGOING, the Decision of this Court is hereby clarified
in such a way that the dispositive portion would read as follows: "in view of
the foregoing, judgment is hereby rendered ordering the defendant Doris T.
Hao who is in actual possession of the property and all persons claiming
rights under her to vacate the premises and to pay the plaintiffs the

57

amount of P8,000.00 a month in Civil Case No. 7666 for the use and
occupancy of the first floor of the premises in question from June 28, 1998
until she finally vacates the premises and to pay the plaintiff a rental of
P5,000.00 a month in Civil Case No. 7667 from June 28, 1988, until she
finally vacates the premises and to pay attorney's fees of P20,000.00. With
costs
against
defendant.
So ordered.[5]
Petitioners sought reconsideration of the above order, praying that
respondent be ordered to pay P20,000.00 monthly for the use and
occupancy of the ground floor and P10,000.00 each monthly for the second
and
third
floors.
Respondent,

on

the

other

hand,

filed

notice

of

appeal.

Instead of resolving the motion for reconsideration, on May 7, 1997, the


MeTC of Paraaque issued an Order, elevating the case to the Regional
Trial Court:
Considering the Motion for Reconsideration of the Order of this Court dated
March 3, 1997 and the Comment and Opposition thereto of the counsel for
the defendant, the Court finds that the said Motion for Reconsideration
should already be addressed to the Regional Trial Court considering that
whatever disposition that this Court will award will still be subject to the
appeal taken by the defendant and considering further that the
supersedeas bond posted by the defendant covered the increased rental. [6]
On September 30, 1997, the RTC of Paraaque, Branch 259, rendered a
Decision modifying that of the MeTC, the dispositive portion of which reads:
IN THE LIGHT OF THE FOREGOING, the appealed decision, being in
accordance with law, is hereby affirmed as to the order to vacate the
property in question and modified as to the amount of rentals which is
hereby increased to P20,000.00 a month for the ground floor starting June
28, 1988 and P10,000.00 a month for the second floor and also P10,000.00
a month for the third floor (or) a total of P40,000.00 monthly rentals
commencing June 28, 1988 until the subject property has been vacated
and possession thereof turner [sic] over to the plaintiffs-appellees; to pay
attorney's fees in the amount of P20,000.00; and with costs. [7]
In her Motion dated October 6, 1997, respondent sought a reconsideration
of the above ruling of the RTC. The same was denied on November 25,

1997.
Respondent elevated her case to the Court of Appeals. The CA rendered
the Decision subject of this petition the dispositive portion thereof reads:
Wherefore, the decision appealed from is hereby modified by reducing the
amount of rentals for both the second and third floors from P20,000.00 to
P10,000.00 monthly. With this modification, the judgment below is
AFFIRMED in all other respects.[8]
The parties filed their respective motions for reconsideration to the Court
of Appeals. Petitioners asked that the decision of the Regional Trial Court
fixing the total monthly rentals at P40,000.00 be sustained. On the other
hand, respondent sought a revival of the decision of the MeTC on the
ground that since petitioners did not interpose an appeal from the
amended judgment of the MeTC, the RTC could not validly increase the
amount
of
rentals
awarded
by
the
former.
In its Resolution dated 30 July 1998, the Court of Appeals resolved the
parties' motions for reconsideration in favor of the respondent. It ruled that
the motion for reconsideration filed by the petitioners before the MeTC was
a prohibited pleading under the Rules of Summary Procedure. Such being
the case, said motion for reconsideration did not produce any legal effect
and thus the amended judgment of the MeTC had become final and
executory insofar as the petitioners are concerned. The dispositive portion
of the CA's resolution reads as follows:
WHEREFORE, the decision appealed from is hereby MODIFIED by reducing
the monthly rentals for the first/ground floor from P20,000.00 to P8,000.00
and for the second and third floors from P10,000.00 each to P5,000.00 for
both floors. With this modification the judgment below is AFFIRMED in all
other
respects.
No

pronouncement

as

to

costs.

So ordered.[9]
Petitioners now come before this Court assigning the following errors:
A.
IN THE ASSAILED DECISION, THE HONORABLE COURT OF APPEALS GRAVELY
ERRED IN REVERSING THE FINDINGS OF THE REGIONAL TRIAL COURT BY

58

USING AS BASIS FOR REDUCING THE RENTAL ONLY THE EVIDENCE


SUBMITTED BY THE PARTIES AND IGNORING CIRCUMSTANCES OF WHICH
THE REGIONAL TRIAL COURT PROPERLY TOOK JUDICIAL NOTICE.
B.

IN THE ASSAILED DECISION, THE HONORABLE COURT OF APPEALS GRAVELY


ERRED IN ITS FINDINGS THAT THE REGIONAL TRIAL COURT HAD NO
JURISDICTION TO MODIFY THE APPEALED JUDGMENT BY INCREASING THE
AWARD OF MONTHLY RENTALS FROM P13,000.00 TO P40,000.00. [10]
We required respondent to comment on the petition. [11] In her
Comment/Compliance, respondent contends that the petition should be
dismissed and the resolution of the case should be based on the following
issues:
1.

2.

3.

DID THE RESPONDENT APPELLATE COURT COMMITTED [sic] ANY


REVERSIBLE ERROR WHEN IT CONSIDERED PETITIONERS' "MOTION
FOR RECONSIDERATION" (ANNEX "I" - PETITION) FILED WITH THE
MTC-COURT AS A PROHIBITVE [sic] PLEADING IN A SUMMARY
PROCEDURE CASE SUCH AS THE ONE AT BAR[?]
DID THE RESPONDENT APPELLATE COURT COMMITTED [sic] ANY
REVERSIBLE ERROR WHEN IT RESOLVED TO RESTORE, REINSTATE,
AFFIRM AND UPHOLD THE MTC - AMENDED JUDGMENT OF MARCH
3, 1997 FIXING THE TOTAL AWARD OF P13,000.00 GROUNDED ON
A PROHIBITIVE [sic] PLEADING AND FAILURE TO FILE A NOTICE OF
APPEAL[?]
DID
THE
APPELLATE
COURT
COMMITTED
[sic]
ANY
REVERSIBLEERROR
WHEN
IT
RESOLVED
TO
SUSTAIN
RESPONDENT'S POSITION CONSISTENT WITH THE LAW AND
JURISPRUDENCE THAT FOR PETITIONERS' FAILURE TO APPEAL AND
HAVING FILED A PROHIBITIVE [sic] PLEADING, THEY CANNOT ASK
FOR AFFIRMATIVE RELIEF SUCH AS INCREASE IN RENTAL[?] [12]

There is no question that after the expiration of the lease contracts which
respondent contracted with Aniana Galang and BPI, she lost her right to
possess the property since, as early as the actual expiration date of the
lease contract, petitioners were not negligent in enforcing their right of
ownership
over
the
property.

of monthly rentals which respondent should pay the petitioners as forced


lessors of said property from 20 June 1988 (for the ground floor) and 15
August 1988 until 6 January 1998 (for the second and third floors), or a
period
of
almost
ten
years
remains
to
be
resolved.
Petitioners, in the main, posit that there should be a reinstatement of the
decision of the regional trial court which fixed the monthly rentals to be
paid by herein respondent at the total of P40,000.00, P20,000.00 for the
occupancy of the first floor, and P10,000.00 each for the occupancy of the
second and third floors of the building, effective after the lapse of the
original lease contract between respondent and the original owner of the
building.
On the other hand, respondent insists on the ruling of the Metropolitan Trial
Court, which was thereafter reinstated by the Court of Appeals in its 30 July
1998 Resolution, that the monthly rental rates of only P8,000.00 for the
first floor and P5,000.00 for each of the second and third floors should
prevail.
At the outset, it should be recalled that there existed no consensual lessorlessee relationship between the parties. At most, what we have is a forced
lessor-lessee relationship inasmuch as the respondent, by way of detaining
the property without the consent of herein petitioners, was in unlawful
possession of the property belonging to petitioner spouses.
We cannot allow the respondent to insist on the payment of a measly sum
of P8,000 for the rentals of the first floor of the property in question and
P5,000.00 for each of the second and the third floors of the leased
premises. The plaintiff in an ejectment case is entitled to damages caused
by his loss of the use and possession of the premises. [13] Damages in the
context of Section 17, Rule 70 of the 1997 Rules of Civil Procedure is
limited to "rent" or fair rental value or the reasonable compensation for the
use and occupation of the property. [14] What therefore constitutes the fair
rental
value
in
the
case
at
bench?
In ruling that the increased rental rates of P40,000.00 should be awarded
the petitioners, the regional trial court based its decision on the doctrine of
judicial notice. The RTC held, thus:
While this Court is fully in agreement with the Court of Origin that
plaintiffs-appellees have the better right to the possession of the premises
in question being the present owners and the contract of lease between

While respondent was finally evicted from the leased premises, the amount

59

the former owner and herein defendant-appellant had already expired, the
amount of rentals as laid down in the Clarificatory Order dated 3 March
1997
is
inadequate,
if
not
unreasonable.
The Court a quo misappreciated the nature of the property, its location and
the business practice in the vicinity and indeed committed an error in
fixing the amount of rentals in the aforementioned Order. Said premises is
situated along Quirino Avenue, a main thoroughfare in Barangay Baclaran,
Paraaque, Metro Manila, a fully developed commercial area and the place
where the famous shrine of the Mother of Perpetual Help stands. Withal,
devotees, traders, tourists and practically people from all walks of life visit
said barangay making it suitable for commerce, not to mention thousand
of residents therein. Needless to say, every square meter of said
community is valuable for all kinds of business or commerce of man.

We find that the RTC correctly applied and construed the legal concept of
judicial notice in the case at bench. Judicial knowledge may be defined as
the cognizance of certain facts which a judge under rules of legal
procedure or otherwise may properly take or act upon without proof
because they are already known to him, or is assumed to have, by virtue of
his office.[16] Judicial cognizance is taken only of those matters that are
"commonly" known. The power of taking judicial notice is to be exercised
by courts with caution; care must be taken that the requisite notoriety
exists; and every reasonable doubt on the subject should be promptly
resolved in the negative.[17] Matters of judicial notice have three material
requisites: (1) the matter must be one of common and general knowledge;
(2) it must be well and authoritatively settled and not doubtful or
uncertain; and (3) it must be known to be within the limits of jurisdiction of
the
court.

Further, considering that the questioned property has three floors and
strategically located along the main road and consistent with the prevailing
rental rates in said business area which is between P20,000.00 and
P30,000.00 as testified to by Divina Q. Roco, a real estate agent and Mina
Catungal, this Court finds the amount of P20,000.00 a month for the
ground floor and P10,000.00 a month each for the second floor and third
floor or a total of P40,000.00 monthly rentals as appropriate and
reasonable rentals for the use and occupation of said premises.

The RTC correctly took judicial notice of the nature of the leased property
subject of the case at bench based on its location and the commercial
viability. The above quoted assessment by the RTC of the Baclaran area,
where
the
subject
property
is
located,
is
fairly
grounded.

Finally, worth mentioning here as parallel is [the] ruling of the Supreme


Court in the case of Manila Bay Club Corporation vs. Court of Appeals, 245
SCRA 715 and 731-732 citing Licmay vs. Court of Appeals, 215 SCRA 1
(1992) and Commander Realty Inc. v. Court of Appeals, 168 SCRA 181. It
reads as follows:

The RTC rightly modified the rental award from P13,000.00 to P40,000.00,
considering that it is settled jurisprudence that courts may take judicial
notice of the general increase in rentals of lease contract renewals much
more with business establishments. Thus, We held in Manila Bay Club
Corporation vs. Court of Appeals:[18]

It is worth stressing at this juncture that the trial court had the authority to
fix the reasonable value for the continued use and occupancy of the leased
premises after the termination of the lease contract, and that it was not
bound by the stipulated rental in the contract of lease since it is equally
settled that upon termination or expiration of the Contract of Lease, the
rental stipulated therein may no longer be the reasonable value for the use
and occupation of the premises as a result or by reason of the change or
rise in values. Moreover, the trial court can take judicial notice of the
general increase in rentals of real estate especially of business
establishments like the leased building owned by the private respondents.

It is worth stressing at this juncture that the trial court had the authority to
fix the reasonable value for the continued use and occupancy of the leased
premises after the termination of the lease contract, and that it was not
bound by the stipulated rental in the contract of lease since it is equally
settled that upon termination or expiration of the contract of lease, the
rental stipulated therein may no longer be the reasonable value for the use
and occupation of the premises as a result or by reason of the change or
rise in values. Moreover, the trial court can take judicial notice of the
general increase in rentals of real estate especially of business
establishments like the leased building owned by the private respondent.

[15]

[19]

Furthermore, the RTC also had factual basis in arriving at the said
conclusion, the same being based on testimonies of witnesses, such as real
estate broker Divina Roco and the petitioner Mina Catungal.

60

The increased award of rentals ruled by the RTC is reasonable given the
circumstances of the case at bench. We note that respondent was able to
deny petitioners the benefits, including possession, of their rightful
ownership over the subject property for almost a decade.
The Court of Appeals failed to justify its reduction of the P40,000.00 fair
rental value as determined by the RTC. Neither has respondent shown that
the rental pegged by the RTC is exorbitant or unconscionable. This is
because the burden of proof to show that the rental demanded is
unconscionable or exorbitant rests upon private respondent as the lessee.
[20]
Here, respondent neither discharged this burden when she omitted to
present any evidence at all on what she considers to be fair rental value,
nor did she controvert the evidence submitted by petitioners by way of
testimonies of the real estate broker and petitioner Mina Catungal. Thus, in
Sia v. CA, we ruled:
xxx On the contrary, the records bear out that the P5,000.00 monthly
rental is a reasonable amount, considering that the subject lot is prime
commercial real property whose value has significantly increased and that
P5,000.00 is within the range of prevailing rental rates in that vicinity.
Moreover, petitioner has not proffered controverting evidence to support
what he believes to be the fair rental value of the leased building since the
burden of proof to show that the rental demanded is unconscionable or
exorbitant rests upon the lessee. Thus, here and now we rule, as we did in
the case of Manila Bay Club v. Court of Appeals, that petitioner having
failed to prove its claim of excessive rentals, the valuation made by the
Regional Trial Court, as affirmed by the respondent Court of Appeals,
stands.[21]
The Court of Appeals merely anchored its decision to reduce the
P40,000.00 rental on procedural grounds. According to the Court of
Appeals, the motion for reconsideration filed by petitioners before the
MeTC is a prohibited pleading under the Rule on Summary Procedure and
did not have any effect in stalling the running of the period to appeal the
decision nor could it be considered as notice of appeal and consequently
this affected the elevation of the case to the RTC. Not having appealed the
case to the RTC, the amended judgment of the MeTC fixing the rental rate
at P13,000.00 is final and executory as far as petitioners are concerned.
We disagree. A reading of the order issued by the MeTC will show that said
court elevated the issue on the amount of rentals raised by the petitioner
to the RTC because the appeal of respondent had already been perfected,
thus:

Considering the Motion for Reconsideration of the Order of this Court dated
March 3, 1997 and the Comment and Opposition thereto of the counsel for
the defendant, the Court finds the said Motion for Reconsideration should
already be addressed to the Regional Trial Court considering that whatever
disposition that this Court will award will still be subject to the appeal taken
by the defendant and considering further that the supersedeas bond
posted
by
the
defendant
covered
the
increased
rental.
In order that this case will be immediately forwarded to the Regional Trial
Court in view of the appeal of the defendant, the Court deemed it wise not
to act on the said motion for reconsideration and submit the matter to the
Regional Trial Court who has the final say on whether the rental or the
premises
in
question
will
be
raised
or
not.
It will be to the advantage of both parties that this Court refrain from
acting on the said Motion for Reconsideration so as to expedite the
remanding (sic) of this Court to the Regional Trial Court. [22]
When the MeTC referred petitioners' motion to the RTC for its disposition,
respondent could have opposed such irregularity in the proceeding.
This respondent failed to do. Before this Court, respondent now insists that
the petition should be denied on the ground that the Motion for
Reconsideration filed before the MeTC is a prohibited pleading and hence
could not be treated as a notice of appeal. Respondent is precluded by
estoppel from doing so. To grant respondent's prayer will not only do
injustice to the petitioners, but also it will make a mockery of the judicial
process as it will result in the nullity of the entire proceedings already had
on a mere technicality, a practice frowned upon by the Court. Our ruling in
Martinez, et al. vs. De la Merced, et al.[23] is illustrative :
xxx In fine, these are acts amounting to a waiver of the irregularity of the
proceedings. For it has been consistently held by this Court that while lack
of jurisdiction may be assailed at any stage, a party's active participation
in the proceedings before a court without jurisdiction will estop such party
from assailing such lack of jurisdiction.
The Court of Appeals in the assailed Decision correctly observed that the
"peculiar circumstances attendant to the ejectment cases warrant
departure" from the presumption that a party who did not interject an
appeal is satisfied with the adjudication made by the lower court:

61

As regard the issue on the propriety of the increase in the award of


damages/rentals made by the RTC, the Court notes that, while respondent
spouses did not formally appeal the decision in the ejectment cases, their
motion for reconsideration assailing the clarificatory order reducing the
award of damages/rentals was, by order of the MTC, referred to the RTC for
appropriate action. Reason for such action is stated in the Order of May 7,
1997, thus:
xxx

Neither petitioner nor respondent spouses assailed the above order. In fact,
in their appeal memorandum, respondent spouses reiterated their claim,
first ventilated in their motion for reconsideration dated March 24, 1997,
that the MTC grievously erred in finding that plaintiffs-appellees are only
entitled to a meager monthly rental of P8,000.00 for the ground floor and
P5,000.00
for
the
second
and
third
floors.
Hence, while the entrenched procedure in this jurisdiction is that a party
who has not himself appealed cannot obtain from the appellate court
affirmative relief other than those granted in the decision of the lower
court, the peculiar circumstances attendant to the ejectment cases warrant
a departure therefrom. The rule is premised on the presumption that a
party who did not interpose an appeal is satisfied with the adjudication
made by the lower court. Respondent spouses, far from showing
satisfaction with the clarificatory order of March 3, 1997, assailed it in their
motion for reconsideration which, however, was referred to the RTC for
appropriate action in view of the appeal taken by the petitioner. Clearly,
the increase in the damages/rentals awarded by the MTC was an issue the
RTC could validly resolve in the ejectment cases. [24]
Respondent, argues that ejectment cases are tried under the Revised Rule
on Summary Procedure,[25] hence, the motion for reconsideration filed by
petitioner was a prohibited pleading and could not take the place of the
required
notice
of
appeal.
The argument by respondent is misleading. Simply because the case was
one for ejectment does not automatically mean that the same was triable
under the Rules of Summary Procedure. At the time of the filing of the
complaint by petitioner in 1989, said Rules provide:
SECTION 1. SCOPE - THIS RULE SHALL GOVERN THE PROCEDURE IN THE
METROPOLITAN TRIAL COURTS, THE MUNICIPAL CIRCUIT TRIAL COURTS IN

THE
A.

FOLLOWING
CIVIL

CASES:
CASES:

(1) CASES OF FORCIBLE ENTRY AND UNLAWFUL DETAINER, EXCEPT WHERE


THE QUESTION OF OWNERSHIP IS INVOLVED, OR WHERE THE DAMAGES OR
UNPAID RENTALS SOUGHT TO BE RECOVERED BY THE PLAINTIFF EXCEED
TWENTY THOUSAND PESOS (P20,000.00) AT THE TIME OF THE FILING OF
COMPLAINT. x x x
In their complaint, petitioners prayed, among others, for rentals for the
period covering June 1988 to April 1989, at a rate of P20,000.00 for the
first floor alone, as well as P10,000.00 for attorney's fees. Clearly,
considering the amount of rentals and damages claimed by petitioners,
said case before the MeTC was not governed by the Rules on Summary
Procedure. Said case was governed by the ordinary rules where the general
proposition is that the filing of a motion for reconsideration of a final
judgment is allowed. In the interest of substantial justice, in this particular
case, we rule that the MeTC did not err in treating the motion for
reconsideration
filed
by
petitioner
as
a
notice
of
appeal.
Finally, respondent questions why petitioners would want to reinstate the
RTC decision when in fact they had already applied for a writ of execution
of the 8 March 1997 Decision. Respondent is of the view that since
petitioners had already moved for the execution of the decision awarding a
smaller amount of damages or fair rental value, the same is inconsistent
with a petition asking for a greater fair rental value and, therefore, a
possible case of unjust enrichment in favor of the petitioners. We are not
persuaded.
In order to avoid further injustice to a lawful possessor, an immediate
execution of a judgment is mandated and the court's duty to order such
execution is practically ministerial. [26] In City of Manila, et al. vs. CA, et al.,
[27]
We held that "Section 8 (now Section 19), Rule 70, on execution pending
appeal, also applies even if the plaintiff-lessor appeals where, as in that
case, judgment was rendered in favor of the lessor but it was not satisfied
with the increased rentals granted by the trial court, hence the appeal
xxx."
As above discussed, the petitioners have long been deprived of the
exercise of their proprietary rights over the leased premises and the
rightful amount of rentals at the rate of P40,000.00 a month.

62

Consequently, petitioners are entitled to accrued monthly rentals of


P27,000.00, which is the difference between P40,000.00 awarded by the
Regional Trial Court and P13,000.00 awarded by the MeTC and affirmed by
the Court of Appeals. Said amount of P27,000.00 should rightly be the
subject of another writ of execution being distinct from the subject of the
first
writ
of
execution
filed
by
petitioners.

2.

Legal interest of twelve percent (12%) per annum on the foregoing


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

3.

The sum of Twenty Thousand Pesos (P20,000.00) as and for


attorney's fees and;

The Court also awards interest in favor of petitioners. In Eastern Shipping


Lines, Inc. vs. Court of Appeals, we gave the following guidelines in the
award of interest:

4.

The costs of suit.

SO

ORDERED.

Davide, Jr., C.J., (Chairman), Puno, Pardo, and Ynares-Santiago, JJ., concur.

xxx
II With regard particularly to an award of interest in the concept of actual
and compensatory damages, the rate of interest, as well as the accrual
thereof, is imposed, as follows:
1.

When the obligation is breached, and it consists in the payment of


a sum of money, i.e., a loan or forbearance of money, the interest
due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from
the time it is judicially demanded. In the absence of stipulation, the
rate of interest shall be 12% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code.

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


money, the interest due thereon in twelve percent (12%) per annum from
the time of extra-judicial demand on September 27, 1988.
WHEREFORE, premises considered, judgment is hereby rendered in favor
of petitioners by REINSTATING the decision of the RTC, with modifications,
and ordering respondent to further pay:
1.

The sum of Twenty Seven Thousand Pesos (P27,000.00),


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

63

G.R. No. 129227, May 30, 2000


BANCO FILIPINO SAVINGS AND MORTGAGE BANK, PETITIONERS,
VS. THE HON. COURT OF APPEALS, AND CALVIN & ELSA ARCILLA,
RESPONDENTS.

annum, in nineteen (19) years from date thereof, in stated installments of


P2,096.93
a
month
(page
32,
Records).
On January 2, 1976, the Central Bank of the Philippines issued Central Bank
Circular No. 494, quoted infra, as follows:

DECISION

GONZAGA-REYES, J.:

3. The maximum rate of interest, including commissions, premiums, fees


and other charges on loans with maturity of more than seven hundred
thirty (730) days, by banking institutions, including thrift banks, or by
financial intermediaries authorized to engage in quasi-banking functions
shall
be
nineteen
percent
(19%)
per
annum.

Before us is a Petition for Review on Certiorari of the Decision of the Court


of Appeals[1] in CA-G.R. CV No. 45891 entitled CALVIN S. ARCILLA and ELSA
B. ARCILLA vs. BANCO FILIPINO SAVINGS and MORTGAGE BANK, ET. AL.
which affirmed the decision of the Regional Trial Court (RTC), Branch 33,
Manila ordering BANCO FILIPINO to pay CALVIN and ELSA ARCILLA the
amount of P126,139.00 with interest thereon at 12% per annum from the
filing
of
the
complaint.
The undisputed facts as found by the Court of Appeals are as follows:
"Elsa Arcilla and her husband, Calvin Arcilla, the Appellees in the present
recourse, secured, on three (3) occasions, loans from the Banco Filipino
Savings and Mortgage Bank, the Appellant in the present recourse, in the
total amount of P107,946.00 as evidenced by "Promissory Note" executed
by the Appellees in favor of the Appellant. To secure the payment of said
loans, the Appellees executed "Real Estate Mortgages" in favor of the
Appellants over their parcels of land located in BF-Paraaque, covered by
Transfer Certificate of Title Nos. 444645, 450406, 450407 and 455410 of
the Registry of Deeds of Paraaque (Annexes "B" to "B-2", Amended
Complaint). Under said deeds, the Appellant may increase the rate of
interest, on said loans, within the limits allowed by law, as Appellants
Board of Directors may prescribe for its borrowers. At that time, under the
Usury Law, Act 2655, as amended, the maximum rate of interest for loans
secured by real estate mortgages was 12% per annum. On January 10,
1975, the Appellees and the Appellant executed a "Deed of Consolidation
and Amendment of Real Estate Mortgage" whereby the aforementioned
loans of the Appellees and the "Real Estate Mortgage" executed by them
as security for the payment of said loans were consolidated (pages 33-35,
Record). Likewise, under said deed, the loan of the Appellees from the
Appellant was increased to P188,000.00. The Appellees executed a
"Promissory Note", dated January 15, 1975, whereby they bound and
obliged themselves, jointly and severally, to pay the Appellant the
aforesaid amount of P188,000.00 with interest at the rate of 12% per

7. Except as provided in this Circular and Circular No. 493, loans or


renewals thereof shall continue to be governed by the Usury Law, as
amended. (idem, supra)
In the meantime, the Skyline Builders, Inc., through its President, Appellee
Calvin Arcilla, secured loans from the Bank of the Philippine Islands in the
total amount of P450,000.00. To insure payment of the aforesaid loan, the
FGU Insurance Corporation, issued PG Bond No. 1003 for the amount of
P225,000.00 (pages 434-436, Records) in favor of the Bank of the
Philippine Islands. Skyline Buildings, Inc., and the Appellees executed an
"Agreement of Counter-Guaranty with Mortgage" in favor of the FGU
Insurance Corporation covering the aforesaid parcels of land to assure
payment of any amount that the insurance company may pay on account
of said loans (pages 429-436, Records). The mortgage was annotated as
Entry No. 58009 at the dorsal portion of Appellees titles.
After October 30, 1978, the Appellant prepared and issued a "Statement of
Account" to the Appellees on their loan account to the effect that, as of
October 30, 1978, the balance of their loan account, inclusive of interests,
computed at 17% per annum, amounted to 284,490.75 (page 555,
Records). It turned out that the Appellant unilaterally increased the rate of
interest on the loan account of the Appellees from 12% per annum, as
covenanted in the "Real Estate Mortgage" and "Deed of Consolidated and
Amended Real Estate Mortgage" to 17% per annum on the authority of the
aforequoted
Central
Bank
Circular.
The Appellees failed to pay their monthly amortizations to Appellant. The

64

latter forthwith filed, on April 3, 1979, a petition, with the Provincial Sheriff,
for the extrajudicial foreclosure of Appellees "Real Esate Mortgage" in
favor of the Appellant for the amount of P342,798.00 inclusive of the 17%
per annum which purportedly was the totality of Appellees account with
the Appellant on their loans. The Appellant was the purchaser of the
property at public auction for the aforesaid amount of P324,798.00. On
May 25, 1979, the Sheriff executed a "Certificate of Sale" over the
aforesaid properties in favor of the Appellant for the aforesaid amount
(pages
37-38,
Records).
The Appellant filed a "Petition for a Writ of Possession" with the Regional
Trial Court entitled "Banco Filipino Savings and Mortgage Bank vs. Elsa
Arcilla, et al., LRC Case No. P-7757-P". On February 28, 1980, the Court
rendered a Decision granting the Petition of the Appellant. The Appellees
appealed to the Court of Appeals but the latter Court, on June 29, 1985,
promulgated a Decision affirming the Decision of the Regional Trial Court
(pages
190-198,
Records).
In the meantime, the FGU Insurance Corporation, Inc., redeemed the
aforesaid properties from the Appellant by paying to the latter the amount
of P389,289.41 inclusive of interest computed at 17% per annum. The
Appellant and FGU Insurance Corp., Inc., executed, on May 27, 1980, a
"Deed
of
Redemption"
(pages
126-129,
Records).
On September 2, 1985, the Appellees filed a complaint in the Court a quo
for the "Annulment of the Loan Contracts, Foreclose Sale with Prohibition
and Injunction, Etc." entitled "Calvin Arcilla, et al. vs. Banco Filipino Savings
and
Mortgage
Bank,
et
al."
(pages
1-38,
Records).
The Appellees averred, in their complaint, inter alia, that the loan contracts
and mortgages between the Appellees and the Appellant were null and
void because: (a) the interests, charges, etc., were deducted in advance
from the face value of the "Promissory Notes" executed by the Appellees;
and (b) the rate of interests charged by the Appellant were usurious. The
Appellees prayed that judgment be rendered in their favor as follows:
"x

WHEREFORE, it is respectfully prayed


a)

Pending hearing on the prayer for the issuance of the Writ of


Preliminary Injunction, a restraining order be immediately issued
against the defendants or anyone acting in their behalf from

enforcing the writ of possession issued against the plaintiffs;


b)

After notice and hearing, a writ of preliminary injunction be issued


against the defendants, particularly defendants FGU Insurance
Corporation and the City Sheriff of Pasay City, MM, or any of his
deputies or anyone acting in their behalf from enforcing the writ of
possession;

c)

After trial

1)

To make the injunction permanent;

2)

Declare the loan contracts null and void;

3)

Declare the extrajudicial foreclosure null and void;

4)

Ordering the defendants to pay the plaintiffs the sums of


P100,000.00 as moral damages; P50,000.00 as attorney fees; and,
costs of suit.

PLAINTIFFS further pray for such other reliefs and remedies just and
equitable in the premises." (pages 88-89, Records)
In its Answer to the Complaint, the Appellant averred that the interests
charged by it on Appellees loan accounts and that the said loan contracts
and mortgages were lawful. The Appellant further averred that the
Appellees
action
had
already
prescribed.
In the interim, the Supreme Court promulgated its Decision in the
precedent - setting case of "Banco Filipino Savings and Mortgage Bank vs.
Hon. Miguel Navarro, et al., 152 SCRA 346" where it declared that Central
Bank Circular No. 494 was not the "law" envisaged in the mortgage deeds
of borrowers of the Bank; that the escalation clause incorporated in said
deeds giving authority to the Appellant to increase the rate of interests
without the corresponding deescalation clause should not be given effect
because of its one-sidedness in favor of the Appellant; that the aforesaid
Central Bank Circular did not apply to loans secured by real estate
mortgages, and that, therefore, the Appellant cannot rely said Circular as
authority for it to unilaterally increase the rate of interests on loans
secured
by
Real
Estate
Mortgages.
In the meantime, the FGU Insurance Corp., Inc., filed a "Motion for

65

Substitution" with the Regional Trial Court, in LRC Case No. Pq-7757-P
praying that it be substituted as the Petitioner in said case (pages 354-356,
Records). The Appellees were served with a copy of said motion and filed
their Opposition thereto. However, on November 10, 1987, the Regional
Trial Court rendered a Decision granting the motion of FGU Insurance
Company
(page
369,
Records)
On December 3, 1987, the Appellees filed a Motion, with the Court a quo,
for leave to file an "Amended Complaint" to implead FGU Insurance
Corporation as party defendant (pages 83-129, Records). The Court
granted said motion and admitted Appellees Amended Complaint.
After the requisite pre-trial, the Court a quo issued a Pre-Trial Order which
defined, inter alia, Appellees action against the Appellant, and the latters
defenses, to wit:
"x

On the part of the defendants Banco Filipino Savings to simplify the case, it
seeks to declare as null and void plaintiffs loan contract with Banco Filipino
obtained in May 1974, on the ground that the interest agreed in the
contract was usurious. Plaintiffs also seek to declare as null and void the
foreclosure of their mortgage by Banco Filipino on the ground that the loan
with
the
said
mortgagee
foreclosure
maybe
validly
done.
DEFENSES
1.

Prescription

2.

Laches

3.

Estoppel" (page 496, Records)

In the meantime, the Appellees and FGU Insurance Corporation entered


into and forged a "Compromise Agreement." The Court a quo promulgated
a Decision, dated April 3, 1991, based on said "Compromise Agreement."
Under the "Compromise Agreement", the Appellees bound and obliged
themselves, jointly and severally, to pay to FGU Insurance Corporation the
amount of P1,964,117.00 in three (3) equal installments and that:
"x x x 6. Upon faithful compliance by plaintiffs Calvin S. Arcilla and Elsa B.
Arcilla with their Agreement, defendant FGU Insurance Corporation shall
renounce in their favor all its rights, interests and claims to the four (4)

parcels of land mentioned in paragraph No. 4 of this Compromise


Agreement, together with all the improvements thereon, and plaintiffs
Calvin S. Arcilla and Elsa B. Arcilla shall be subrogated to all such rights,
interests and claims. In addition, defendant FGU Insurance Corporation
shall execute in favor of plaintiffs Calvin S. Arcilla and Elsa B. Arcilla a deed
of cancellation of the real estate mortgage constituted in its favor on the
above-mentioned four (4) parcels of land, together with all the
improvements thereon. All documentary stamps and expenses for
registration of the said deed of cancellation of mortgage shall be for the
account of plaintiffs Calvin S. Arcilla and Elsa B. Arcilla.
7. Subject to the provisions of paragraph No. 4 of this Compromise
Agreement, the execution of this Compromise Agreement shall be without
prejudice to the prosecution of the claims of plaintiffs Calvin S. Arcilla and
Elsa B. Arcilla. (pages 543-544, Records)
Thereafter, the Appellees and the Appellant agreed, upon the prodding of
the Court a quo, that the only issue to be resolved by the Court a quo was,
whether or not the Appellees were entitled to the refund, under the
Decision of the Supreme Court in "Banco Filipino Savings and Mortgage
Bank vs. Hon. Miguel Navarro, et al.," supra. On November 8, 1991, the
Appellees filed a "Motion for Summary Judgment" appending thereto, inter
alia, the Affidavit of Appellee Calvin S. Arcilla and the appendages thereof
(pages 550-555, Records). Appellant filed its Opposition but did not append
any affidavit to said Opposition. On March 26, 1993, the Court a quo
promulgated a Decision, the decretal portion of which reads as follows:
WHEREFORE, premises considered, judgment is hereby rendered in favor
of the plaintiffs and against defendant Banco Filipino ordering defendant
Banco Filipino to pay spouses Calvin S. Arcilla and Elsa B. Arcilla the sum of
P126,139.00 with interest thereon at 12% per annum reckoned from the
filing
of
the
complaint.
SO ORDERED. (pages 584-585, Records)"[2]
Petitioner appealed to the Court of Appeals, which affirmed the decision of
the RTC the dispositive portion of which reads:
"IN THE LIGHT OF ALL THE FOREGOING, the assailed Decision is AFFIRMED.
Appellants appeal is DISMISSED. With costs against the Appellant.
SO ORDERED."[3]

66

Their Motion for Reconsideration[4] was denied hence this petition where
the petitioner assigns the following errors:

"I. THE HONORABLE COURT OF APPEALS ERRED WHEN IT HELD THAT THE
CAUSE OF ACTION OF THE PRIVATE RESPONDENTS ACCRUED ON OCTOBER
30, 1978, AND THEREFORE THE FILING OF THEIR COMPLAINT FOR
ANNULMENT OF THEIR LOAN CONTRACTS WITH THE PETITIONER IN 1985
WAS
NOT
YET
BARRED
BY
PRESCRIPTION.
II. THE HONORABLE COURT OF APPEALS ERRED WHEN IT HELD THAT THE
MATERIAL ALLEGATIONS OF THE PRIVATE RESPONDENTS COMPLAINT WERE
SUFFICIENT TO WARRANT THE RELIEFS GRANTED TO THEM BY THE LOWER
COURT, PATICULARLY THE REFUND OF P126,139.00 REPRESENTING
ALLEGED
EXCESS
INTEREST
PAID
ON
THEIR
LOAN.
III. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE
PRIVATE RESPONDENTS WERE ENTITLED TO THE SAID REFUND OF
P126,139.00 CLAIMED BY THEM."[5]
The petitioner maintains that the complaint filed by herein private
respondents was an action for Annulment of Loan Contracts, foreclosure
sale with prohibition and injunction. It is contended that these causes of
action accrued on the date of the execution of the promissory note and
deed of mortgage on January 15, 1975 and not October 30, 1978 as found
by the Court of Appeals. Thus, private respondents cause of action has
already prescribed inasmuch as the case was filed on September 2, 1985
or more than ten years thereafter. Petitioner further contends that private
respondents cannot rely on the ruling in the case of Banco Filipino Savings
& Mortgage Bank vs. Navarro[6] considering that they were not parties to
said case. Petitioner also maintains that the order of the lower court, which
was affirmed by the Court of Appeals ordering the petitioner to refund the
excess interest paid by private respondents in the amount of P126,318.00
was without any legal basis since private respondents never raised the
issue of interest nor prayed for any relief with respect thereto. Moreover,
the private respondents never paid said amount to the petitioner. While the
amount was included in the bid price of the bank when it bought the
mortgaged properties during the public auction, said bid price did not
prejudice the private respondents because when the private respondents
repurchased the properties, the amount they paid was different and
independent of the redemption price of the bank. Besides, the agreement
between the private respondents and FGU Insurance Corporation was one
of sale and not redemption. Thus, any amount paid by the private
respondents to FGU was voluntarily entered into by them and was not a

consequence

of

the

foreclosure

of

the

mortgage

properties.

Conversely, private respondents allege that their action has not prescribed
considering that prescription begins to run from the day the action may be
brought; the date their right of action accrued. It is their contention that
the period of prescription of their action should commence to run from
October 30, 1978 when the petitioner unilaterally increased the rate of
interest on private respondents loan to 17% per annum. Thus, when
private respondents filed their action against the petitioner on September
2, 1985 or almost eight years thereafter, their action had not yet
prescribed. Moreover, private respondents aver that they are entitled to
the refund inasmuch as the escalation clause incorporated in the loan
contracts do not have a corresponding de-escalation clause and is
therefore
illegal.
The

appeal

is

unmeritorious.

There are only two issues, which must be resolved in the present appeal.
First, has the action of the private respondents prescribed; and second, are
the respondents entitled to the refund of the alleged interest
overpayments.
Petitioners claim that the action of the private respondents has prescribed
is bereft of merit. Under Article 1150 of the Civil Code, the time for
prescription of all kinds of actions, when there is no special provision which
ordains otherwise, shall be counted from the day they may be brought.
Thus, the period of prescription of any cause of action is reckoned only
from the date the cause of action accrued. [7] And a cause of action arises
when that which should have been done is not done, or that which should
not have been done is done.[8] The period should not be made to retroact
to the date of the execution of the contract on January 15, 1975 as claimed
by the petitioner for at that time, there would be no way for the
respondents to know of the violation of their rights. [9] The Court of Appeals
therefore correctly found that respondents cause of action accrued on
October 30, 1978, the date they received the statement of account
showing the increased rate of interest, for it was only from that moment
that they discovered the petitioners unilateral increase thereof. We quote
with approval the pertinent portions of the Court of Appeals decision as
follows:
"It is the legal possibility of bringing the action that determines the starting
point for the computation of the period of prescription (Constancia C.
Telentino vs. Court of Appeals, et al., 162 SCRA 66). In fine, the ten-year

67

prescriptive period is to be reckoned from the accrual of Appellees right of


action, not necessarily on the very date of the execution of the contracts
subject of the action (Naga Telepone Co. Inc. vs. Court of Appeals, et al.,
230 SCRA 351). A partys right of action accrues only when the confluence
of the following elements is established:
"xxx: a) a right in favor of the plaintiff by whatever means and under
whatever law it arises or is created; b) an obligation on the part of
defendant to respect such right; and c) an act or omission on the part of
such defendant violative of the right of the plaintiff (Cole vs. Vda. de
Gregorio, 116 SCRA 670 [1982]; Mathay vs. Consolidated Bank & Trust Co.,
58 SCRA 559 [1974]; Vda. de Enriquez vs. Dela Cruz, 54 SCRA 1 [1973]. It
is only when the last element occurs or takes place that it can be said in
law that a cause of action has arisen (Cole vs. Vda. De Gregorio, supra)"
(Maria U. Espaol vs. Chairman, etc., et al.,, 137 SCRA 314, page 318)
More, the aggrieved must have either actual or presumptive knowledge of
the violation, by the guilty party of his rights either by an act or omission.
The question that now comes to the fore is when the Appellees became
precisely aware of the unilateral increase, by the Appellant, of the rate of
interest on their loan account to 17% per annum. As can be ascertained
from the records, the Appellees discovered or should have discovered, for
the first time, the unilateral increase by the Appellant of the rate of interest
to 17% per annum when they received the "Statement of Account" of the
Appellant as of October 30, 1978. Hence, it was only then that the
prescriptive period for the Appellees to institute their action in the Court a
quo commenced. Since the Appellees filed their complaint in the Court a
quo on September 2, 1985, the same was seasonably filed within the tenyear prescriptive period."[10]
Anent the second issue as to whether the respondents are entitled to
recover the alleged overpayments of interest, we find that they are despite
the absence of any prayer therefor. This Court has ruled that it is the
material allegations of fact in the complaint, not the legal conclusion made
therein or the prayer that determines the relief to which the plaintiff is
entitled.[11] It is the allegations of the pleading which determine the nature
of the action and the Court shall grant relief warranted by the allegations
and the proof even if no such relief is prayed for. [12] Thus, even if the
complaint seeks the declaration of nullity of the contract, the Court of
Appeals correctly ruled that the factual allegations contained therein
ultimately
seek
the
return
of
the
excess
interests
paid.
The amended complaint[13] of herein private respondents specifically allege

that the contracts of loan entered into by them and the petitioner were
contrary to and signed in violation of the Usury Law [14] and consequentially
pray that said contracts be declared null and void. The amended complaint
reads:
"6. The aforementioned loans granted by defendant Banco Filipino to the
plaintiffs as stated on the face of the promissory note and real estate
mortgage (Annexes "B" to "D", inclusive) were not actually received by the
plaintiffs because interests, charges, etc. were deducted in advance from
the face value of the loans not in accordance with the contracts;
7. Even the loan contracts (Annexes "B" to "D", inclusive) required by
defendant Banco Filipino to be signed by the plaintiffs were contrary to and
in
violation
of
the
then
Usury
Law,
as
amended;
8. Assuming arguendo that the loan contracts between plaintiffs and
defendant Banco Filipino are valid, the extra-judicial foreclosure of the
properties of the plaintiffs on May 24, 1979 was null and void for having
been conducted in clear violation of the law (Act 3135), namely: a) lack of
roper notice to the plaintiffs; b) lack of proper publication and posting as
required by law; c) the alleged sale was conducted at the place other than
that
prescribed
by
law,
among
others;
9. On May 27, 1990, defendant
favor of defendant FGU Insurance
the foreclosed properties of the
latter, as evidenced by the said
hereto
attached
and

Banco Filipino purportedly executed in


Corporation a Deed of Redemption over
plaintiffs, again, without notice to the
Deed of Redemption, copy of which is
marked
as
Annex
"F".

10. The Deed of Redemption (Annex "F") is clearly null and void for having
been executed in violation of Rule 39, Rules of Court, and other related
provisions of the Rules of Court."[15]
The loan contracts with real estate mortgage entered into by and between
the petitioner and respondent stated that the petitioner may increase the
interest on said loans, within the limits allowed by law, as petitioners
Board of Directors may prescribe for its borrowers. At the time the
contracts were entered into, said escalation clause was valid. [16] It was only
pursuant to P.D. No. 1684 which became effective March 17, 1980 wherein
to be valid, escalation clauses should provide: 1.) that there can be an
increase in interest if increased by law or by the Monetary Board; and 2.) in
order for such stipulation to be valid, it must include a provision for the
reduction of the stipulated interest in the event that the maximum rate of

68

interest

is

reduced

by

law

or

by

the

Monetary

Board. [17]

Given the validity of the escalation clause, could the petitioner increase the
stipulated interest pursuant to the Central Bank Circular 494 from 12% to
17%.
We

rule

that

it

may

not.

The escalation clause in the loan contracts reads as follows:


"xxx g) The rate of interest charged on the obligation secured by this
mortgage, as well as the interest on the amount which may have been
advanced by the Mortgagee in accordance with paragraph (b) and (d)
hereof, shall be subject, during the terms of this contract, to such an
increase, within the limits allowed by law, as the Board of Directors of the
Mortgagee may prescribe for its debtors; xxx" (emphasis supplied) [18]
In Banco Filipino Savings & Mortgage Bank vs. Navarro,[19] which involved a
similar escalation clause[20], we ruled that Central Bank Circular 494,
although it has the force and effect of law, is not a law and is not the law
contemplated by the parties which authorizes the petitioner to unilaterally
raise the interest rate of the loan. [21] Consequently, the reliance by the
petitioner on Central Bank Circular 494 to unilaterally raise the interest
rates on the loan in question was without any legal basis.
Petitioners argument that the Banco Filipino case cannot be applied to the
present case since the respondents were not intervenors therein is flawed.
Only the judgment in said case cannot bind the respondents as they were
not parties thereto, however, the doctrine enunciated therein is a judicial
decision and forms part of the legal system of the land. [22] It forms a
precedent, which must be adhered to under the doctrine of stare decisis. [23]
Thus, even if the respondents were not parties to the above-mentioned
case, the doctrine enunciated therein may be applied to the present case.
WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No.
45891 is AFFIRMED and the instant petition is hereby DENIED.
No pronouncement as to costs.
SO ORDERED.
Melo, (Chairman), Vitug, and Purisima, JJ., concur. Panganiban, J., on leave.

69

G.R. No. 114286, April 19, 2001


THE
CONSOLIDATED
BANK
AND
TRUST
CORPORATION
(SOLIDBANK), PETITIONER, VS. THE COURT OF APPEALS,
CONTINENTAL CEMENT CORPORATION, GREGORY T. LIM AND
SPOUSE,
RESPONDENTS.

YNARES-SANTIAGO, J.:
The instant petition for review seeks to partially set aside the July 26, 1993
Decision[1] of respondent Court of Appeals in CA-G.R. CV No. 29950, insofar
as it orders petitioner to reimburse respondent Continental Cement
Corporation the amount of P490,228.90 with interest thereon at the legal
rate from July 26, 1988 until fully paid. The petition also seeks to set aside
the March 8, 1994 Resolution [2] of respondent Court of Appeals denying its
Motion
for
Reconsideration.
facts

1)
trust

Whether or not the transaction involved is a loan transaction or a


receipt
transaction;

2)
Whether or not the interest rates charged against the defendants
by the plaintiff are proper under the letter of credit, trust receipt and under
existing
rules
or
regulations
of
the
Central
Bank;

DECISION

The

At the pre-trial conference, the parties agreed on the following issues:

are

as

follows:

On July 13, 1982, respondents Continental Cement Corporation


(hereinafter, respondent Corporation) and Gregory T. Lim (hereinafter,
respondent Lim) obtained from petitioner Consolidated Bank and Trust
Corporation Letter of Credit No. DOM-23277 in the amount of
P1,068,150.00 On the same date, respondent Corporation paid a marginal
deposit of P320,445.00 to petitioner. The letter of credit was used to
purchase around five hundred thousand liters of bunker fuel oil from
Petrophil Corporation, which the latter delivered directly to respondent
Corporation in its Bulacan plant. In relation to the same transaction, a trust
receipt for the amount of P1,001,520.93 was executed by respondent
Corporation,
with
respondent
Lim
as
signatory.
Claiming that respondents failed to turn over the goods covered by the
trust receipt or the proceeds thereof, petitioner filed a complaint for sum of
money with application for preliminary attachment [3] before the Regional
Trial Court of Manila. In answer to the complaint, respondents averred that
the transaction between them was a simple loan and not a trust receipt
transaction, and that the amount claimed by petitioner did not take into
account payments already made by them. Respondent Lim also denied
any personal liability in the subject transactions. In a Supplemental
Answer, respondents prayed for reimbursement of alleged overpayment to
petitioner
of
the
amount
of
P490,228.90.

3)
Whether or not the plaintiff properly applied the previous
payment of P300,456.27 by the defendant corporation on July 13, 1982 as
payment
for
the
latter's
account;
and
4)
Whether or not the defendants are personally liable under the
transaction sued for in this case. [4] On September 17, 1990, the trial court
rendered its Decision,[5] dismissing the Complaint and ordering petitioner to
pay respondents the following amounts under their counterclaim:
P490,228.90 representing overpayment of respondent Corporation, with
interest thereon at the legal rate from July 26, 1988 until fully paid;
P10,000.00 as attorney's fees; and costs.

Both parties appealed to the Court of Appeals, which partially modified the
Decision by deleting the award of attorney's fees in favor of respondents
and, instead, ordering respondent Corporation to pay petitioner P37,469.22
as
and
for
attorney's
fees
and
litigation
expenses.
Hence, the instant petition raising the following issues:
1.
WHETHER OR NOT THE RESPONDENT APPELLATE COURT ACTED
INCORRECTLY OR COMMITTED REVERSIBLE ERROR IN HOLDING THAT
THERE WAS OVERPAYMENT BY PRIVATE RESPONDENTS TO THE PETITIONER
IN THE AMOUNT OF P490,228.90 DESPITE THE ABSENCE OF ANY
COMPUTATION MADE IN THE DECISION AND THE ERRONEOUS APPLICATION
OF PAYMENTS WHICH IS IN VIOLATION OF THE NEW CIVIL CODE.
2.
WHETHER OR NOT THE MANNER OF COMPUTATION OF THE
MARGINAL DEPOSIT BY THE RESPONDENT APPELLATE COURT IS IN
ACCORDANCE
WITH
BANKING
PRACTICE.
3.
THE

WHETHER OR NOT THE AGREEMENT AMONG THE PARTIES AS TO


FLOATING OF INTEREST RATE IS VALID UNDER APPLICABLE

70

JURISPRUDENCE AND THE RULES AND REGULATIONS OF THE CENTRAL


BANK.
4.
WHETHER OR NOT THE RESPONDENT APPELLATE COURT
GRIEVOUSLY ERRED IN NOT CONSIDERING THE TRANSACTION AT BAR AS A
TRUST RECEIPT TRANSACTION ON THE BASIS OF THE JUDICIAL ADMISSIONS
OF THE PRIVATE RESPONDENTS AND FOR WHICH RESPONDENTS ARE
LIABLE
THEREFOR.

charges on the face value of the letter of credit which the petitioner issued,
without first crediting or setting off the marginal deposit which the
respondent Corporation paid to it. Compensation is proper and should take
effect by operation of law because the requisites in Article 1279 of the Civil
Code are present and should extinguish both debts to the concurrent
amount.[8] Hence, the interests and other charges on the subject letter of
credit should be computed only on the balance of P681,075.93, which was
the portion actually loaned by the bank to respondent Corporation.

5.
WHETHER OR NOT THE RESPONDENT APPELLATE COURT
GRIEVOUSLY ERRED IN NOT HOLDING PRIVATE RESPONDENT SPOUSES
LIABLE UNDER THE TRUST RECEIPT TRANSACTION. [6]

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:

The

I, WE jointly and severally agree to any increase or decrease in the interest


rate which may occur after July 1, 1981, when the Central Bank floated the
interest rate, and to pay additionally the penalty of 1% per month until the
amount/s or installment/s due and unpaid under the trust receipt on the
reverse side hereof is/are fully paid. [9] We agree with respondent Court of
Appeals that the foregoing stipulation is invalid, there being no reference
rate set either by it or by the Central Bank, leaving the determination
thereof
at
the
sole
will
and
control
of
petitioner.

petition

must

be

denied.

On the first issue respecting the fact of overpayment found by both the
lower court and respondent Court of Appeals, we stress the time-honored
rule that findings of fact by the Court of Appeals especially if they affirm
factual findings of the trial court will not be disturbed by this Court, unless
these findings are not supported by evidence. [7] Petitioner decries the lack
of computation by the lower court as basis for its ruling that there was an
overpayment made. While such a computation may not have appeared in
the Decision itself, we note that the trial court's finding of overpayment is
supported by evidence presented before it. At any rate, we painstakingly
reviewed and computed the payments together with the interest and
penalty charges due thereon and found that the amount of overpayment
made by respondent Bank to petitioner, i.e., P563,070.13, was more than
what was ordered reimbursed by the lower court. However, since
respondents did not file an appeal in this case, the amount ordered
reimbursed
by
the
lower
court
should
stand.
Moreover, petitioner's contention that the marginal deposit made by
respondent Corporation should not be deducted outright from the amount
of the letter of credit is untenable. Petitioner argues that the marginal
deposit should be considered only after computing the principal plus
accrued interests and other charges. However, to sustain petitioner on this
score would be to countenance a clear case of unjust enrichment, for while
a marginal deposit earns no interest in favor of the debtor-depositor, the
bank is not only able to use the same for its own purposes, interest-free,
but is also able to earn interest on the money loaned to respondent
Corporation. Indeed, it would be onerous to compute interest and other

While it may be acceptable, for practical reasons given the fluctuating


economic conditions, for banks to stipulate that interest rates on a loan not
be fixed and instead be made dependent upon prevailing market
conditions, there should always be a reference rate upon which to peg such
variable interest rates. An example of such a valid variable interest rate
was found in Polotan, Sr. v. Court of Appeals. [10] In that case, the
contractual provision stating that "if there occurs any change in the
prevailing market rates, the new interest rate shall be the guiding
rate in computing the interest due on the outstanding obligation without
need of serving notice to the Cardholder other than the required posting on
the monthly statement served to the Cardholder" [11] was considered valid.
The aforequoted provision was upheld notwithstanding that it may partake
of the nature of an escalation clause, because at the same time it provides
for the decrease in the interest rate in case the prevailing market rates
dictate its reduction. In other words, unlike the stipulation subject of the
instant case, the interest rate involved in the Polotan case is designed to
be based on the prevailing market rate. On the other hand, a stipulation
ostensibly signifying an agreement to "any increase or decrease in the
interest rate," without more, cannot be accepted by this Court as valid for

71

it leaves solely to the creditor the determination of what interest rate to


charge
against
an
outstanding
loan.
Petitioner has also failed to convince us that its transaction with
respondent Corporation is really a trust receipt transaction instead of
merely a simple loan, as found by the lower court and the Court of
Appeals.
The recent case of Colinares v. Court of Appeals [12] appears to be
foursquare with the facts obtaining in the case at bar. There, we found
that inasmuch as the debtor received the goods subject of the trust receipt
before the trust receipt itself was entered into, the transaction in question
was a simple loan and not a trust receipt agreement. Prior to the date of
execution of the trust receipt, ownership over the goods was already
transferred to the debtor. This situation is inconsistent with what normally
obtains in a pure trust receipt transaction, wherein the goods belong in
ownership to the bank and are only released to the importer in trust after
the
loan
is
granted.
In the case at bar, as in Colinares, the delivery to respondent Corporation
of the goods subject of the trust receipt occurred long before the trust
receipt itself was executed. More specifically, delivery of the bunker fuel
oil to respondent Corporation's Bulacan plant commenced on July 7, 1982
and was completed by July 19, 1982. [13] Further, the oil was used up by
respondent Corporation in its normal operations by August, 1982. [14] On the
other hand, the subject trust receipt was only executed nearly two months
after full delivery of the oil was made to respondent Corporation, or on
September
2,
1982.
The danger in characterizing a simple loan as a trust receipt transaction
was explained in Colinares, to wit:
The Trust Receipts Law does not seek to enforce payment of the loan,
rather it punishes the dishonesty and abuse of confidence in the handling
of money or goods to the prejudice of another regardless of whether the
latter is the owner. Here, it is crystal clear that on the part of Petitioners
there was neither dishonesty nor abuse of confidence in the handling of
money to the prejudice of PBC. Petitioners continually endeavored to meet
their obligations, as shown by several receipts issued by PBC
acknowledging
payment
of
the
loan.
The

Information

charges

Petitioners

with

intent

to

defraud

misappropriating the money for their personal use. The mala prohibita
nature of the alleged offense notwithstanding, intent as a state of mind
was not proved to be present in Petitioners' situation. Petitioners
employed no artifice in dealing with PBC and never did they evade
payment of their obligation nor attempt to abscond. Instead, Petitioners
sought
favorable
terms
precisely
to
meet
their
obligation.
Also noteworthy is the fact that Petitioners are not importers acquiring the
goods for re-sale, contrary to the express provision embodied in the trust
receipt. They are contractors who obtained the fungible goods for their
construction project. At no time did title over the construction materials
pass to the bank, but directly to the Petitioners from CM Builders Centre.
This impresses upon the trust receipt in question vagueness and
ambiguity, which should not be the basis for criminal prosecution in the
event
of
violation
of
its
provisions.
The practice of banks of making borrowers sign trust receipts to facilitate
collection of loans and place them under the threats of criminal
prosecution should they be unable to pay it may be unjust and inequitable,
if not reprehensible. Such agreements are contracts of adhesion which
borrowers have no option but to sign lest their loan be disapproved. The
resort to this scheme leaves poor and hapless borrowers at the mercy of
banks, and is prone to misinterpretation, as had happened in this case.
Eventually, PBC showed its true colors and admitted that it was only after
collection of the money, as manifested by its Affidavit of Desistance.

Similarly, respondent Corporation cannot be said to have been dishonest in


its dealings with petitioner. Neither has it been shown that it has evaded
payment of its obligations. Indeed, it continually endeavored to meet the
same, as shown by the various receipts issued by petitioner acknowledging
payment on the loan. Certainly, the payment of the sum of P1,832,158.38
on a loan with a principal amount of only P681,075.93 negates any badge
of dishonesty, abuse of confidence or mishandling of funds on the part of
respondent Corporation, which are the gravamen of a trust receipt
violation. Furthermore, respondent Corporation is not an importer which
acquired the bunker fuel oil for re-sale; it needed the oil for its own
operations. More importantly, at no time did title over the oil pass to
petitioner, but directly to respondent Corporation to which the oil was
directly delivered long before the trust receipt was executed. The fact that
ownership of the oil belonged to respondent Corporation, through its

and

72

President, Gregory Lim, was acknowledged by petitioner's own account


officer on the witness stand, to wit:
Q-

A-

After the bank opened a letter of credit in favor of Petrophil Corp.


for the account of the defendants thereby paying the value of the
bunker fuel oil what transpired next after that?

answered.

ATTY. BAAGA:
That is why I made a follow up question asking ownership of the
bunker fuel oil.

Upon purchase of the bunker fuel oil and upon the requests of the
defendant possession of the bunker fuel oil were transferred to
them.
COURT:

Proceed.

Q-

You mentioned them to whom are you referring to?

A-

To the Continental Cement Corp. upon the execution of the trust


receipt acknowledging the ownership of the bunker fuel oil this
should be acceptable for whatever disposition he may make.

ATTY. BAAGA:
Q-

Who owns the bunker fuel oil after purchase from Petrophil Corp.?

Q-

You mentioned about acknowledging ownership of the bunker fuel


oil to whom by whom?

A-

A-

By the Continental Cement Corp.

Gregory Lim.[15] By all indications, then, it is apparent that there


was really no trust receipt transaction that took place. Evidently,
respondent Corporation was required to sign the trust receipt
simply to facilitate collection by petitioner of the loan it had
extended to the former.

Q-

So by your statement who really owns the bunker fuel oil?

ATTY. RACHON:
Objection already answered.

COURT:
Give time to the other counsel to object.

ATTY. RACHON:
He has testified that ownership was acknowledged in favor of
Continental Cement Corp. so that question has already been

By all indications, then, it is apparent that there was really no trust receipt
transaction that took place. Evidently, respondent Corporation was
required to sign the trust receipt simply to facilitate collection by petitioner
of
the
loan
it
had
extended
to
the
former.
Finally, we are not convinced that respondent Gregory T. Lim and his
spouse should be personally liable under the subject trust receipt.
Petitioner's argument that respondent Corporation and respondent Lim and
his spouse are one and the same cannot be sustained. The transactions
sued upon were clearly entered into by respondent Lim in his capacity as
Executive Vice President of respondent Corporation. We stress the
hornbook law that corporate personality is a shield against personal
liability of its officers. Thus, we agree that respondents Gregory T. Lim and
his spouse cannot be made personally liable since respondent Lim entered
into and signed the contract clearly in his official capacity as Executive
Vice President. The personality of the corporation is separate and distinct

73

from

the

persons

composing

it. [16]

WHEREFORE, in view of all the foregoing, the instant Petition for Review is
DENIED. The Decision of the Court of Appeals dated July 26, 1993 in CAG.R.
CV
No.
29950
is
AFFIRMED.
SO
Davide, Jr., C.J.,
Pardo J., no part.

ORDERED.
(Chairman),

Puno,

and

Kapunan,

JJ.,

concur.

74

G.R. No. 116710, June 25, 2001


DANILO D. MENDOZA, ALSO DOING BUSINESS UNDER THE NAME
AND STYLE OF ATLANTIC EXCHANGE PHILIPPINES, PETITIONER, VS.
COURT OF APPEALS, PHILIPPINE NATIONAL BANK, FERNANDO
MARAMAG, JR., RICARDO G. DECEPIDA AND BAYANI A. BAUTISTA,
RESPONDENTS.
DECISION
DE LEON, JR., J.:
Before us is a petition for review on certiorari of the Decision[1] dated
August 8, 1994 of the respondent Court of Appeals (Tenth Division) in CAG.R. CV No. 38036 reversing the judgment [2] of the Regional Trial Court
(RTC)
and
dismissing
the
complaint
therein.
Petitioner Danilo D. Mendoza is engaged in the domestic and international
trading of raw materials and chemicals. He operates under the business
name Atlantic Exchange Philippines (Atlantic), a single proprietorship
registered with the Department of Trade and Industry (DTI). Sometime in
1978 he was granted by respondent Philippine National Bank (PNB) a Five
Hundred Thousand Pesos (P500,000.00) credit line and a One Million Pesos
(P1,000,000.00)
Letter
of
Credit/Trust
Receipt
(LC/TR)
line.
As security for the credit accommodations and for those which may
thereinafter be granted, petitioner mortgaged to respondent PNB the
following: 1) three (3) parcels of land[3] with improvements in F. Pasco
Avenue, Santolan, Pasig; 2) his house and lot in Quezon City; and 3)
several pieces of machinery and equipment in his Pasig coco-chemical
plant.
The real estate mortgage[4] provided the following escalation clause:
(f) The rate of interest charged on the obligation secured by this mortgage
as well as the interest on the amount which may have been advanced by
the Mortgagee in accordance with paragraph (d) of the conditions herein
stipulated shall be subject during the life of this contract to such increase
within the rates allowed by law, as the Board of Directors of the Mortgagee
may prescribe for its debtors.

Petitioner executed in favor of respondent PNB three (3) promissory notes

covering the Five Hundred Thousand Pesos (P500,000.00) credit line, one
dated March 8, 1979 for Three Hundred Ten Thousand Pesos
(P310,000.00); another dated March 30, 1979 for Forty Thousand Pesos
(P40,000.00); and the last dated September 27, 1979 for One Hundred Fifty
Thousand Pesos (P150,000.00). The said 1979 promissory notes uniformly
stipulated: "with interest thereon at the rate of 12% per annum, until paid,
which interest rate the Bank may, at any time, without notice, raise within
the
limits
allowed
by
law
xxx." [5]
Petitioner made use of his LC/TR line to purchase raw materials from
foreign importers. He signed a total of eleven (11) documents
denominated as "Application and Agreement for Commercial Letter of
Credit,"[6] on various dates from February 8 to September 11, 1979, which
uniformly contained the following clause: "Interest shall be at the rate of
9% per annum from the date(s) of the draft(s) to the date(s) of arrival of
payment therefor in New York. The Bank, however, reserves the right to
raise the interest charges at any time depending on whatever policy it may
follow
in
the
future."[7]
In a letter dated January 3, 1980 and signed by Branch Manager Fil S.
Carreon Jr., respondent PNB advised petitioner Mendoza that effective
December 1, 1979, the bank raised its interest rates to 14% per annum, in
line with Central Bank's Monetary Board Resolution No. 2126 dated
November
29,
1979.
On March 9, 1981, he wrote a letter to respondent PNB requesting for the
restructuring of his past due accounts into a five-year term loan and for an
additional LC/TR line of Two Million Pesos (P2,000,000.00). [8] According to
the letter, because of the shut-down of his end-user companies and the
huge amount spent for the expansion of his business, petitioner failed to
pay to respondent bank his LC/TR accounts as they became due and
demandable.
Ceferino D. Cura, Branch Manager of PNB Mandaluyong replied on behalf of
the respondent bank and required petitioner to submit the following
documents before the bank would act on his request: 1) Audited Financial
Statements for 1979 and 1980; 2) Projected cash flow (cash in - cash out)
for five (5) years detailed yearly; and 3) List of additional machinery and
equipment and proof of ownership thereof. Cura also suggested that
petitioner reduce his total loan obligations to Three Million Pesos
(P3,000,000.00) "to give us more justification in recommending a plan of
payment or restructuring of your accounts to higher authorities of the

75

Bank."[9]
On September 25, 1981, petitioner sent another letter addressed to PNB
Vice-President Jose Salvador, regarding his request for restructuring of his
loans. He offered respondent PNB the following proposals: 1) the disposal
of some of the mortgaged properties, more particularly, his house and lot
and a vacant lot in order to pay the overdue trust receipts; 2) capitalization
and conversion of the balance into a 5-year term loan payable semiannually or on annual installments; 3) a new Two Million Pesos
(P2,000,000.00) LC/TR line in order to enable Atlantic Exchange Philippines
to operate at full capacity; 4) assignment of all his receivables to PNB from
all domestic and export sales generated by the LC/TR line; and 5)
maintenance of the existing Five Hundred Thousand Pesos (P500,000.00)
credit
line.
The petitioner testified that respondent PNB Mandaluyong Branch found his
proposal favorable and recommended the implementation of the
agreement. However, Fernando Maramag, PNB Executive Vice-President,
disapproved the proposed release of the mortgaged properties and
reduced the proposed new LC/TR line to One Million Pesos (P1,000,000.00).
[10]
Petitioner claimed he was forced to agree to these changes and that he
was required to submit a new formal proposal and to sign two (2) blank
promissory
notes.
In a letter dated July 2, 1982, petitioner offered the following revised
proposals to respondent bank: 1) the restructuring of past due accounts
including interests and penalties into a 5-year term loan, payable semiannually with one year grace period on the principal; 2) payment of Four
Hundred Thousand Pesos (P400,000.00) upon the approval of the proposal;
3) reduction of penalty from 3% to 1%; 4) capitalization of the interest
component with interest rate at 16% per annum; 5) establishment of a One
Million Pesos (P1,000,000.00) LC/TR line against the mortgaged properties;
6) assignment of all his export proceeds to respondent bank to guarantee
payment
of
his
loans.
According to petitioner, respondent PNB approved his proposal. He further
claimed that he and his wife were asked to sign two (2) blank promissory
note forms. According to petitioner, they were made to believe that the
blank promissory notes were to be filled out by respondent PNB to conform
with the 5-year restructuring plan allegedly agreed upon. The first
Promissory Note,[11] No. 127/82, covered the principal while the second
Promissory Note,[12] No. 128/82, represented the accrued interest.

Petitioner testified that respondent PNB allegedly contravened their verbal


agreement by 1) affixing dates on the two (2) subject promissory notes to
make them mature in two (2) years instead of five (5) years as supposedly
agreed upon; 2) inserting in the first Promissory Note No. 127/82 an
interest rate of 21% instead of 18%; 3) inserting in the second Promissory
Note No. 128/82, the amount stated therein representing the accrued
interest as One Million Five Hundred Thirty Six Thousand Four Hundred
Ninety Eight Pesos and Seventy Three Centavos (P1,536,498.73) when it
should only be Seven Hundred Sixty Thousand Three Hundred Ninety Eight
Pesos and Twenty Three Centavos (P760,398.23) and pegging the interest
rate
thereon
at
18%
instead
of
12%.
The subject Promissory Notes Nos. 127/82 and 128/82 both dated
December 29, 1982 in the principal amounts of Two Million Six Hundred
Fifty One Thousand One Hundred Eighteen Pesos and Eighty Six Centavos
(P2,651,118.86) and One Million Five Hundred Thirty Six Thousand Seven
Hundred Ninety Eight and Seventy Three Centavos (P1,536,798.73)
respectively and marked Exhibits "BB" and "CC" respectively, were payable
on equal semi-annual amortization and contained the following escalation
clause:
x x x which interest rate the BANK may increase within the limits allowed
by law at any time depending on whatever policy it may adopt in the
future; Provided, that, the interest rate on this note shall be
correspondingly decreased in the event that the applicable maximum
interest rate is reduced by law or by the Monetary Board. In either case,
the adjustment in the interest rate agreed upon shall take effect on the
effectivity date of the increase or decrease in the maximum interest rate.
xxx

It appears from the record that the subject Promissory Notes Nos. 127/82
and 128/82 superseded and novated the three (3) 1979 promissory notes
and the eleven (11) 1979 "Application and Agreement for Commercial
Letter of Credit" which the petitioner executed in favor of respondent PNB.
According to the petitioner, sometime in June 1983 the new PNB
Mandaluyong Branch Manager Bayani A. Bautista suggested that he sell
the coco-chemical plant so that he could keep up with the semi-annual
amortizations. On three (3) occasions, Bautista even showed up at the
plant with some unidentified persons who claimed that they were
interested
in
buying
the
plant.

76

Petitioner testified that when he confronted the PNB management about


the two (2) Promissory Notes Nos. 127/82 and 128/82 (marked Exhibits
"BB" and "CC" respectively) which he claimed were improperly filled out,
Bautista and Maramag assured him that the five-year restructuring
agreement would be implemented on the condition that he assigns 10% of
his export earnings to the Bank. [13] In a letter dated August 22, 1983,
petitioner Mendoza consented to assign 10% of the net export proceeds of
a Letter of Credit covering goods amounting to One Hundred Fourteen
Thousand Dollars ($114,000.00).[14] However, petitioner claimed that
respondent PNB subsequently debited 14% instead of 10% from his export
proceeds.[15]
Pursuant to the escalation clauses of the subject two (2) promissory notes,
the interest rate on the principal amount in Promissory Note No. 127/82
was increased from 21% to 29% on May 28, 1984, and to 32% on July 3,
1984 while the interest rate on the accrued interest per Promissory Note
No. 128/82 was increased from 18% to 29% on May 28, 1984, and to 32%
on
July
3,
1984.
Petitioner failed to pay the subject two (2) Promissory Notes Nos. 127/82
and 128/82 (Exhibits "BB" and "CC") as they fell due. Respondent PNB
extra-judicially foreclosed the real and chattel mortgages, and the
mortgaged properties were sold at public auction to respondent PNB, as
highest bidder, for a total of Three Million Seven Hundred Ninety Eight
Thousand Seven Hundred Nineteen Pesos and Fifty Centavos
(P3,798,719.50).
The petitioner filed in the RTC in Pasig, Rizal a complaint for specific
performance, nullification of the extra-judicial foreclosure and damages
against respondents PNB, Fernando Maramag Jr., Ricardo C. Decepida,
Vice-President for Metropolitan Branches, and Bayani A. Bautista. He
alleged that the Extrajudicial Foreclosure Sale of the mortgaged properties
was null and void since his loans were restructured to a five-year term
loan; hence, it was not yet due and demandable; that the escalation
clauses in the subject two (2) Promissory Notes Nos. 127/82 and 128/82
were null and void, that the total amount presented by PNB as basis of the
foreclosure sale did not reflect the actual loan obligations of the plaintiff to
PNB; that Bautista purposely delayed payments on his exports and caused
delays in the shipment of materials; that PNB withheld certain personal
properties not covered by the chattel mortgage; and that the foreclosure of
his mortgages was premature so that he was unable to service his foreign

clients, resulting in actual damages amounting to Two Million Four


Thousand
Four
Hundred
Sixty
One
Pesos
(P2,004,461.00).
On March 16, 1992, the trial court rendered judgment in favor of the
petitioner and ordered the nullification of the extrajudicial foreclosure of
the real estate mortgage, the Sheriff's sale of the mortgaged real
properties by virtue of consolidation thereof and the cancellation of the
new titles issued to PNB; that PNB vacate the subject premises in Pasig and
turn the same over to the petitioner; and also the nullification of the
extrajudicial foreclosure and sheriff's sale of the mortgaged chattels, and
that the chattels be returned to petitioner Mendoza if they were removed
from his Pasig premises or be paid for if they were lost or rendered
unserviceable.
The trial court also ordered respondent PNB to restructure to five-years
petitioner's principal loan of Two Million Six Hundred Fifty One Thousand
One Hundred Eighteen Pesos and Eighty Six Centavos (P2,651,118.86) and
the accumulated capitalized interest on the same in the amount of Seven
Hundred Sixty Thousand Three Hundred Eighty Nine Pesos and Twenty
Three Centavos (P760,389.23) as of December 1982, and that respondent
PNB should compute the additional interest from January 1983 up to
October 15, 1984 only when respondent PNB took possession of the said
properties,
at
the
rate
of
12%
and
9%
respectively.
The trial court also ordered respondent PNB to grant petitioner Mendoza an
additional Two Million Pesos (P2,000,000.00) loan in order for him to have
the necessary capital to resume operation. It also ordered respondents
PNB, Bayani A. Bautista and Ricardo C. Decepida to pay to petitioner actual
damages in the amount of Two Million One Hundred Thirteen Thousand
Nine Hundred Sixty One Pesos (P2,113,961.00) and the peso equivalent of
Six Thousand Two Hundred Fifteen Dollars ($6,215.00) at the prevailing
foreign exchange rate on October 11, 1983; and exemplary damages in the
amount
of
Two
Hundred
Thousand
Pesos
(P200,000.00).
Respondent PNB appealed this decision of the trial court to the Court of
Appeals. And the Court of Appeals reversed the decision of the trial court
and
dismissed
the
complaint.
Hence,
this
petition.
It is the petitioner's contention that the PNB management restructured his
existing loan obligations to a five-year term loan and granted him another
Two Million Pesos (P2,000,000.00) LC/TR line; that the Promissory Notes
Nos. 127/82 and 128/82 evidencing a 2-year restructuring period or with

77

the due maturity date "December 29, 1984" were filled out fraudulently by
respondent PNB, and contrary to his verbal agreement with respondent
PNB; hence, his indebtedness to respondent PNB was not yet due and the
extrajudicial foreclosure of his real estate and chattel mortgages was
premature. On the other hand, respondent PNB denies that petitioner's
loan obligations were restructured to five (5) years and maintains that the
subject two (2) Promissory Notes Nos. 127/82 and 128/82 were filled out
regularly and became due as of December 29, 1984 as shown on the face
thereof.
Respondent Court of Appeals held that there is no evidence of a promise
from respondent PNB, admittedly a banking corporation, that it had
accepted the proposals of the petitioner to have a five-year restructuring of
his overdue loan obligations. It found and held, on the basis of the
evidence adduced, that "appellee's (Mendoza) communications were mere
proposals while the bank's responses were not categorical that the
appellee's request had been favorably accepted by the bank."
Contending that respondent PNB had allegedly approved his proposed fiveyear restructuring plan, petitioner presented three (3) documents executed
by respondent PNB officials. The first document is a letter dated March 16,
1981 addressed to the petitioner and signed by Ceferino D. Cura, Branch
Manager of PNB Mandaluyong, which states:
x x x In order to study intelligently the feasibility of your above request,
please submit the following documents/papers within thirty (30) days from
the date thereof, viz:

The second document is a letter dated May 11, 1981 addressed to Mr. S. Pe
Benito, Jr., Managing Director of the Technological Resources Center and
signed by said PNB Branch Manager, Ceferino D. Cura. According to
petitioner, this letter showed that respondent PNB seriously considered the
restructuring of his loan obligations to a five-year term loan, to wit:
xxx
At the request of our client, we would like to furnish you with the following
information pertinent to his accounts with us:
xxx
We are currently evaluating the proposal of the client to re-structure his
accounts
with
us
into
a
five-year
plan.
We hope that the above information will guide you in evaluating the
proposals of Mr. Danilo Mendoza.
xxx
The third document is a letter dated July 8, 1981 addressed to petitioner
and signed by PNB Assistant Vice-President Apolonio B. Francisco.
xxx

1.

Audited Financial Statements for 1979 and 1980;

Considering that your accounts/accommodations were granted and carried


in the books of our Mandaluyong Branch, we would suggest that your
requests and proposals be directed to Ceferino Cura, Manager of our said
Branch.

2.

Projected cash flow (cash in - cash out) for five years detailed
yearly; and

We feel certain that Mr. Cura will be pleased to discuss matters of mutual
interest with you.

3.

List of additional machinery and equipment and proof of ownership


thereof.

xxx

We would strongly suggest, however, that you reduce your total obligations
to at least P3 million (principal and interest and other charges) to give us
more justification in recommending a plan of payment or restructuring of
your accounts to higher authorities of this bank.

Petitioner also presented a letter which he addressed to Mr. Jose Salvador,


Vice-President of the Metropolitan Branches of PNB, dated September 24,
1981, which reads:
Re: Restructuring of our Account into a 5-year Term Loan and Request for
the
Establishment
of
a
P2.0
Million
LC/TR
Line
Dear

Sir:

78

In compliance with our discussion last September 17, we would like to


formalize our proposal to support our above requested assistance from the
Philippine National Bank.
xxx

Again we wish to express our sincere appreciation for your open-minded


approach towards the solution of this problem which we know and will be
beneficial and to the best interest of the bank and mutually advantageous
to your client.

there are numerous cases in which an estoppel has been predicated on


promises or assurances as to future conduct. The doctrine of `promissory
estoppel' is by no means new, although the name has been adopted only
in comparatively recent years. According to that doctrine, an estoppel may
arise from the making of a promise, even though without consideration, if
it was intended that the promise should be relied upon and in fact it was
relied upon, and if a refusal to enforce it would be virtually to sanction the
perpetration of fraud or would result in other injustice. In this respect, the
reliance by the promisee is generally evidenced by action or forbearance
on his part, and the idea has been expressed that such action or
forbearance would reasonably have been expected by the promissor. xxx

xxx

Petitioner argues that he submitted the requirements according to the


instructions given to him and that upon submission thereof, his proposed
five-year restructuring plan was deemed automatically approved by
respondent
PNB.
We

disagree.

Nowhere in those letters is there a categorical statement that respondent


PNB had approved the petitioner's proposed five-year restructuring plan. It
is stretching the imagination to construe them as evidence that his
proposed five-year restructuring plan has been approved by the
respondent PNB which is admittedly a banking corporation. Only an
absolute and unqualified acceptance of a definite offer manifests the
consent necessary to perfect a contract.[16] If anything, those
correspondences only prove that the parties had not gone beyond the
preparation stage, which is the period from the start of the negotiations
until the moment just before the agreement of the parties. [17]
There is nothing in the record that even suggests that respondent PNB
assented to the alleged five-year restructure of petitioner's overdue loan
obligations to PNB. However, the trial court ruled in favor of petitioner
Mendoza, holding that since petitioner has complied with the conditions of
the alleged oral contract, the latter may not renege on its obligation to
honor the five-year restructuring period, under the rule of promissory
estoppel. Citing Ramos v. Central Bank,[18] the trial court said:
The broad general rule to the effect that a promise to do or not to do
something in the future does not work an estoppel must be qualified, since

The doctrine of promissory estoppel is an exception to the general rule that


a promise of future conduct does not constitute an estoppel. In some
jurisdictions, in order to make out a claim of promissory estoppel, a party
bears the burden of establishing the following elements: (1) a promise
reasonably expected to induce action or forebearance; (2) such promise
did in fact induce such action or forebearance, and (3) the party suffered
detriment
as
a
result.[19]
It is clear from the forgoing that the doctrine of promissory estoppel
presupposes the existence of a promise on the part of one against whom
estoppel is claimed. The promise must be plain and unambiguous and
sufficiently specific so that the Judiciary can understand the obligation
assumed and enforce the promise according to its terms. [20] For petitioner
to claim that respondent PNB is estopped to deny the five-year
restructuring plan, he must first prove that respondent PNB had promised
to approve the plan in exchange for the submission of the proposal. As
discussed earlier, no such promise was proven, therefore, the doctrine
does not apply to the case at bar. A cause of action for promissory
estoppel does not lie where an alleged oral promise was conditional, so
that reliance upon it was not reasonable. [21] It does not operate to create
liability
where
it
does
not
otherwise
exist. [22]
Since there is no basis to rule that petitioner's overdue loan obligations
were restructured to mature in a period of five (5) years, we see no other
option but to respect the two-year period as contained in the two (2)
subject Promissory Notes Nos. 127/82 and 128/82, marked as Exhibits "BB"
and "CC" respectively which superseded and novated all prior loan
documents signed by petitioner in favor of respondent PNB. Petitioner
argues, in his memorandum, that "respondent Court of Appeals had no

79

basis in saying that the acceptance of the five-year restructuring is totally


absent from the record." [23] On the contrary, the subject Promissory Notes
Nos. 127/82 and 128/82 are clear on their face that they were due on
December 29, 1984 or two (2) years from the date of the signing of the
said
notes
on
December
29,
1982.
Petitioner claims that the two (2) subject Promissory Notes Nos. 127/82
and 128/82 were signed by him in blank with the understanding that they
were to be subsequently filled out to conform with his alleged oral
agreements with PNB officials, among which is that they were to become
due only after five (5) years. If petitioner were to be believed, the PNB
officials concerned committed a fraudulent act in filling out the subject two
(2) promissory notes in question. Private transactions are presumed to be
fair and regular.[24] The burden of presenting evidence to overcome this
presumption falls upon petitioner. Considering that petitioner imputes a
serious act of fraud on respondent PNB, which is a banking corporation,
this court will not be satisfied with anything but the most convincing
evidence.
However, apart from petitioner's self-serving verbal
declarations, we find no sufficient proof that the subject two (2) Promissory
Notes Nos. 127/82 and 128/82 were completed irregularly. Therefore, we
rule
that
the
presumption
has
not
been
rebutted.
Besides, it could be gleaned from the record that the petitioner is an astute
businessman who took care to reduce in writing his business proposals to
the respondent bank. It is unthinkable that the same person would commit
the careless mistake of leaving his subject two (2) promissory notes in
blank in the hands of other persons. As the respondent Court of Appeals
correctly pointed out:
Surely, plaintiff-appellee who is a C.P.A and a Tax Consultant (p. 3 TSN,
January 9, 1990) will insist that the details of the two promissory notes he
and his wife executed in 1982 should be specific to enable them to make
the precise computation in the event of default as in the case at bench. In
fact, his alleged omission as a C.P.A. and a Tax Consultant to insist that the
two promissory notes be filled up on important details like the rates of
interest is inconsistent with the legal presumption of a person who takes
ordinary care of his concerns (Section 3 (c), Rule 131, Revised Rules on
Evidence).

As pointed out by the Court of Appeals, Orlando Montecillo, Chief, Loans


and Discounts, PNB Mandaluyong Branch, testified that the said Promissory
Notes Nos. 127/82 and 128/82 were completely filled out when Danilo

Mendoza

signed

them

(Rollo,

p.

14).

In a last-ditch effort to save his five-year loan restructuring theory,


petitioner contends that respondent PNB's action of withholding 10% from
his export proceeds is proof that his proposal had been accepted and the
contract had been partially executed. He claims that he would not have
consented to the additional burden if there were no corresponding benefit.
This contention is not well taken. There is no credible proof that the 10%
assignment of his export proceeds was not part of the conditions of the
two-year restructuring deal. Considering that the resulting amount
obtained from this assignment of export proceeds was not even enough to
cover the interest for the corresponding month, [25] we are hard-pressed to
construe it as the required proof that respondent PNB allegedly approved
the proposed five-year restructuring of petitioner's overdue loan
obligations.
It is interesting to note that in his Complaint, petitioner made no mention
that the assignment of his export proceeds was a condition for the alleged
approval of his proposed five-year loan restructuring plan. The Complaint
merely alleged that "plaintiff in a sincere effort to make payments on his
obligations agreed to assign 10% of his export proceeds to defendant
PNB." This curious omission leads the court to believe that the alleged link
between the petitioner's assignment of export proceeds and the alleged
five-year restructuring of his overdue loans was more contrived than real.
It appears that respondent bank increased the interest rates on the two (2)
subject Promissory Notes Nos. 127/82 and 128/82 without the prior
consent of the petitioner. The petitioner did not agree to the increase in
the stipulated interest rate of 21% per annum on Promissory Note No.
127/82 and 18% per annum on Promissory Note No. 128/82. As held in
several cases, the unilateral determination and imposition of increased
interest rates by respondent bank is violative of the principle of mutuality
of contracts ordained in Article 1308 of the Civil Code. [26] As held in one
case:[27]
It is basic that there can be no contract in the true sense in the absence of
the element of agreement, or of mutual assent of the parties. If this assent
is wanting on the part of one who contracts, his act has no more efficacy
than if it had been done under duress or by a person of unsound mind.
Similarly, contract changes must be made with the consent of the
contracting parties. The minds of all the parties must meet as to the

80

proposed modification, especially when it affects an important aspect of


the agreement. In the case of loan contracts, it cannot be gainsaid that the
rate of interest is always a vital component, for it can make or break a
capital venture.

It has been held that no one receiving a proposal to change a contract to


which he is a party is obliged to answer the proposal, and his silence per se
cannot be construed as an acceptance. [28] Estoppel will not lie against the
petitioner regarding the increase in the stipulated interest on the subject
Promissory Notes Nos. 127/82 and 128/82 inasmuch as he was not even
informed beforehand by respondent bank of the change in the stipulated
interest rates. However, we also note that the said two (2) subject
Promissory Notes Nos. 127/82 and 128/82 expressly provide for a penalty
charge of 3% per annum to be imposed on any unpaid amount when due.
Petitioner prays for the release of some of his movables[29] being withheld
by respondent PNB, alleging that they were not included among the
chattels he mortgaged to respondent bank. However, petitioner did not
present any proof as to when he acquired the subject movables and hence,
we are not disposed to believe that the same were "after-acquired"
chattels not covered by the chattel and real estate mortgages.
In asserting its rights over the subject movables, respondent PNB relies on
a common provision in the two (2) subject Promissory Notes Nos. 127/82
and 128/82 which states:
In the event that this note is not paid at maturity or when the same
becomes due under any of the provisions hereof, we hereby authorized the
BANK at its option and without notice, to apply to the payment of this note,
any and all moneys, securities and things of value which may be in its
hands on deposit or otherwise belonging to me/us and for this purpose.
We hereby, jointly and severally, irrevocably constitute and appoint the
BANK to be our true Attorney-in-Fact with full power and authority for us in
our name and behalf and without prior notice to negotiate, sell and
transfer any moneys securities and things of value which it may hold, by
public or private sale and apply the proceeds thereof to the payment of
this note.
It is clear, however, from the above-quoted provision of the said
promissory notes that respondent bank is authorized, in case of default, to
sell "things of value" belonging to the mortgagor "which may be on its
hands for deposit or otherwise belonging to me/us and for this purpose."

Besides the petitioner executed not only a chattel mortgage but also a real
estate mortgage to secure his loan obligations to respondent bank.
A stipulation in the mortgage, extending its scope and effect to afteracquired property is valid and binding where the after-acquired property is
in renewal of, or in substitution for, goods on hand when the mortgage was
executed, or is purchased with the proceeds of the sale of such goods. [30]
As earlier pointed out, the petitioner did not present any proof as to when
the
subject
movables
were
acquired.
More importantly, respondent bank makes a valid argument for the
retention of the subject movables. Respondent PNB asserts that those
movables were in fact "immovables by destination" under Art. 415 (5) of
the Civil Code.[31] It is an established rule that a mortgage constituted on
an immovable includes not only the land but also the buildings, machinery
and accessories installed at the time the mortgage was constituted as well
as the buildings, machinery and accessories belonging to the mortgagor,
installed
after
the
constitution
thereof. [32]
Petitioner also contends that respondent PNB's bid prices for this
foreclosed properties in the total amount of Three Million Seven Hundred
Ninety Eight Thousand Seven Hundred Nineteen Pesos and Fifty Centavos
(P3,798,719.50), were allegedly "unconscionable and shocking to the
conscience of men". He claims that the fair market appraisal of his
foreclosed plant site together with the improvements thereon located in
Pasig, Metro Manila amounted to Five Million Four Hundred Forty One
Thousand Six Hundred Fifty Pesos (P5,441,650.00) while that of his house
and lot in Quezon City amounted to Seven Hundred Twenty Two Thousand
Pesos (P722,000.00) per the appraisal report dated September 20, 1990 of
Cuervo Appraisers, Inc.[33] That contention is not well taken considering
that:
1.

The total of the principal amounts alone of petitioner's subject


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

2.

While the appraisal of Cuervo Appraisers, Inc. was undertaken in


September 1990, the extrajudicial foreclosure of petitioner's real
estate and chattel mortgages have been effected way back on
October 15, 1984, October 23, 1984 and December 21, 1984. [34]
Common experience shows that real estate values especially in

81

Metro Manila tend to go upward due to developments in the


locality.
3.

In the public auction/foreclosure sales, respondent PNB, as


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

Finally, the record shows that petitioner did not even attempt to tender any
redemption price to respondent PNB, as highest bidder of the said
foreclosed real estate properties, during the one-year redemption period.
In view of all the foregoing, it is our view and we hold that the extrajudicial
foreclosure of petitioner's real estate and chattel mortgages was not
premature
and
that
it
was
in
fact
legal
and
valid.
WHEREFORE, the petition is hereby DENIED. The challenged Decision of
the Court of Appeals in CA-G.R. CV No. 38036 is AFFIRMED with
modification that the increase in the stipulated interest rates of 21% per
annum and 18% per annum appearing on Promissory Notes Nos. 127/82
and 128/82 respectively is hereby declared null and void.
SO

ORDERED.

Bellosillo, (Chairman), Mendoza, Quisumbing, and Buena, JJ., concur.

82

G.R. No. 141811, November 15, 2001


FIRST METRO INVESTMENT CORPORATION, PETITIONER, VS. ESTE
DEL SOL MOUNTAIN RESERVE, INC., VALENTIN S. DAEZ, JR.,
MANUEL Q. SALIENTES, MA. ROCIO A. DE VEGA, ALEXANDER G.
ASUNCION, ALBERTO* M. LADORES, VICENTE M. DE VERA, JR., AND
FELIPE
B.
SESE,
RESPONDENTS.
DECISION
DE LEON, JR., J.:
Before us is a petition for review on certiorari of the Decision [1] of the Court
of Appeals[2] dated November 8, 1999 in CA-G.R. CV No. 53328 reversing
the Decision[3] of the Regional Trial Court of Pasig City, Branch 159 dated
June 2, 1994 in Civil Case No. 39224. Essentially, the Court of Appeals
found and declared that the fees provided for in the Underwriting and
Consultancy Agreements executed by and between petitioner First Metro
Investment Corp. (FMIC) and respondent Este del Sol Mountain Reserve,
Inc. (Este del Sol) simultaneously with the Loan Agreement dated January
31, 1978 were mere subterfuges to camouflage the usurious interest
charged
by
petitioner
FMIC.
The

facts

of

the

case

are

as

follows:

It appears that on January 31, 1978, petitioner FMIC granted respondent


Este del Sol a loan of Seven Million Three Hundred Eighty-Five Thousand
Five Hundred Pesos (P7,385,500.00) to finance the construction and
development of the Este del Sol Mountain Reserve, a sports/resort complex
project
located
at
Barrio
Puray,
Montalban,
Rizal.[4]
Under the terms of the Loan Agreement, the proceeds of the loan were to
be released on staggered basis. Interest on the loan was pegged at sixteen
(16%) percent per annum based on the diminishing balance. The loan was
payable in thirty-six (36) equal and consecutive monthly amortizations to
commence at the beginning of the thirteenth month from the date of the
first release in accordance with the Schedule of Amortization. [5] In case of
default, an acceleration clause was, among others, provided and the
amount due was made subject to a twenty (20%) percent one-time penalty
on the amount due and such amount shall bear interest at the highest rate
permitted by law from the date of default until full payment thereof plus
liquidated damages at the rate of two (2%) percent per month
compounded quarterly on the unpaid balance and accrued interests

together with all the penalties, fees, expenses or charges thereon until the
unpaid balance is fully paid, plus attorney's fees equivalent to twenty-five
(25%) percent of the sum sought to be recovered, which in no case shall be
less than Twenty Thousand Pesos (P20,000.00) if the services of a lawyer
were
hired.[6]
In accordance with the terms of the Loan Agreement, respondent Este del
Sol executed several documents[7] as security for payment, among them,
(a) a Real Estate Mortgage dated January 31, 1978 over two (2) parcels of
land being utilized as the site of its development project with an area of
approximately One Million Twenty-Eight Thousand and Twenty-Nine
(1,028,029) square meters and particularly described in TCT Nos. N-24332
and N-24356 of the Register of Deeds of Rizal, inclusive of all
improvements, as well as all the machineries, equipment, furnishings and
furnitures existing thereon; and (b) individual Continuing Suretyship
agreements by co-respondents Valentin S. Daez, Jr., Manuel Q. Salientes,
Ma. Rocio A. De Vega, Alexander G. Asuncion, Alberto M. Ladores, Vicente
M. De Vera, Jr. and Felipe B. Sese, all dated February 2, 1978, to guarantee
the payment of all the obligations of respondent Este del Sol up to the
aggregate sum of Seven Million Five Hundred Thousand Pesos (P7,500,000
00)
each.[8]
Respondent Este del Sol also executed, as provided for by the Loan
Agreement, an Underwriting Agreement on January 31, 1978 whereby
petitioner FMIC shall underwrite on a best-efforts basis the public offering
of One Hundred Twenty Thousand (120,000) common shares of respondent
Este del Sol's capital stock for a one-time underwriting fee of Two Hundred
Thousand Pesos (P200,000.00). In addition to the underwriting fee, the
Underwriting Agreement provided that for supervising the public offering of
the shares, respondent Este del Sol shall pay petitioner FMIC an annual
supervision fee of Two Hundred Thousand Pesos (P200,000.00) per annum
for a period of four (4) consecutive years. The Underwriting Agreement
also stipulated for the payment by respondent Este del Sol to petitioner
FMIC a consultancy fee of Three Hundred Thirty-Two Thousand Five
Hundred Pesos (P332,500.00) per annum for a period of four (4)
consecutive years. Simultaneous with the execution of and in accordance
with the terms of the Underwriting Agreement, a Consultancy Agreement
was also executed on January 31, 1978 whereby respondent Este del Sol
engaged the services of petitioner FMIC for a fee as consultant to render
general
consultancy
services.[9]
In three (3) letters all dated February 22, 1978 petitioner billed respondent

83

Este del Sol for the amounts of [a] Two Hundred Thousand Pesos
(P200,000.00) as the underwriting fee of petitioner FMIC in connection with
the public offering of the common shares of stock of respondent Este del
Sol; [b] One Million Three Hundred Thirty Thousand Pesos (P1,330,000.00)
as consultancy fee for a period of four (4) years; and [c] Two Hundred
Thousand Pesos (P200,000.00) as supervision fee for the year beginning
February, 1978, in accordance to the Underwriting Agreement. [10] The said
amounts of fees were deemed paid by respondent Este del Sol to petitioner
FMIC which deducted the same from the first release of the loan.
Since respondent Este del Sol failed to meet the schedule of repayment in
accordance with a revised Schedule of Amortization, it appeared to have
incurred a total obligation of Twelve Million Six Hundred Seventy-Nine
Thousand Six Hundred Thirty Pesos and Ninety-Eight Centavos
(P12,679,630.98) per the petitioner's Statement of Account dated June 23,
1980,[11] to wit:

Agreement

Past due interest under Section 6.02 (iii) of loan


Agreement:

@ 19% p.a. from 2-22-79 to 11-30-79 (281 days)

1,481,879.93

@ 21% p.a. from 11-30-79 to 6-23-80 (206 days)

1,200,714.10

Other charges - publication of extra judicial


foreclosure of REM made on 5-23-80 & 6-6-80

4,964.00
----------------------

STATEMENT OF ACCOUNT OF
Total Amount Due and Collectible as of June 23,
1980

ESTE DEL SOL MOUNTAIN RESERVE, INC.


AS OF JUNE 23, 1980

PARTICULARS

Total amount due as of 11-22-78 per revised


amortization schedule dated 1-3-78

AMOUNT

P7,999,631.4
2

Interest on P7,999,631.42 @ 16% p.a. from 11-2278 to 2-22-79 (92 days)

327,096.04

Balance

8,326,727.46

One time penalty of 20% of the entire unpaid


obligations under Section 6.02 (ii) of Loan

1,665,345.49

P12,679,63
0.98

Accordingly, petitioner FMIC caused the extrajudicial foreclosure of the real


estate mortgage on June 23, 1980. [12] At the public auction, petitioner FMIC
was the highest bidder of the mortgaged properties for Nine Million Pesos
(P9,000,000.00). The total amount of Three Million One Hundred EightyEight Thousand Six Hundred Thirty Pesos and Seventy-Five Centavos
(P3,188,630.75) was deducted therefrom, that is, for the publication fee for
the publication of the Sheriff's Notice of Sale, Four Thousand Nine Hundred
Sixty-Four Pesos (P4,964.00); for Sheriff's fees for conducting the
foreclosure proceedings, Fifteen Thousand Pesos (P15,000.00); and for
Attorney's fees, Three Million One Hundred Sixty-Eight Thousand Six
Hundred Sixty-Six Pesos and Seventy-Five Centavos (P3,168,666.75). The
remaining balance of Five Million Eight Hundred Eleven Thousand Three
Hundred Sixty-Nine Pesos and Twenty-Five Centavos (P5,811,369.25) was
applied to interests and penalty charges and partly against the principal,
due as of June 23, 1980, thereby leaving a balance of Six Million Eight
Hundred Sixty-Three Thousand Two Hundred Ninety-Seven Pesos and
Seventy-Three Centavos (P6,863,297.73) on the principal amount of the
loan
as
of
June
23,
1980.[13]
Failing to secure from the individual respondents, as sureties of the loan of
respondent Este del Sol by virtue of their continuing surety agreements,

84

the payment of the alleged deficiency balance, despite individual demands


sent to each of them,[14] petitioner instituted on November 11, 1980 the
instant collection suit[15] against the respondents to collect the alleged
deficiency balance of Six Million Eight Hundred Sixty-Three Thousand Two
Hundred Ninety-Seven Pesos and Seventy-Three Centavos (P6,863,297.73)
plus interest thereon at twenty-one (21%) percent per annum from June
24, 1980 until fully paid, and twenty-five (25%) percent thereof as and for
attorney's
fees
and
costs.
In their Answer, the respondents sought the dismissal of the case and set
up several special and affirmative defenses, foremost of which is that the
Underwriting and Consultancy Agreements executed simultaneously with
and as integral parts of the Loan Agreement and which provided for the
payment of Underwriting, Consultancy and Supervision fees were in reality
subterfuges resorted to by petitioner FMIC and imposed upon respondent
Este del Sol to camouflage the usurious interest being charged by
petitioner
FMIC.[16]
The petitioner FMIC presented as its witnesses during the trial: Cesar
Valenzuela, its former Senior Vice-President, Felipe Neri, its Vice-President
for Marketing, and Dennis Aragon, an Account Manager of its Account
Management Group, as well as documentary evidence. On the other hand,
co-respondents Vicente M. De Vera, Jr. and Valentin S. Daez, Jr., and
Perfecto Doroja, former Senior Manager and Assistant Vice-President of
FMIC,
testified
for
the
respondents.
After the trial, the trial court rendered its decision in favor of petitioner
FMIC, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of plaintiff and against
defendants, ordering defendants jointly and severally to pay to plaintiff the
amount of P6,863,297.73 plus 21% interest per annum, from June 24,
1980, until the entire amount is fully paid, plus the amount equivalent to
25% of the total amount due, as attorney's fees, plus costs of suit.

FMIC on the loan of respondent Este del Sol; and that the stipulated
penalties, liquidated damages and attorney's fees were "excessive,
iniquitous, unconscionable and revolting to the conscience," and declared
that in lieu thereof, the stipulated one time twenty (20%) percent penalty
on the amount due and ten (10%) percent of the amount due as attorney's
fees would be reasonable and suffice to compensate petitioner FMIC for
those items. Thus, the appellate court dismissed the complaint as against
the individual respondents sureties and ordered petitioner FMIC to pay or
reimburse respondent Este del Sol the amount of Nine Hundred SeventyOne Thousand Pesos (P971,000.00) representing the difference between
what is due to the petitioner and what is due to respondent Este del Sol,
based on the following computation:[17]
"A: DUE TO THE [PETITIONER]
P7,382,500
.00

Principal of Loan
Add:
time

20%

one-

Penalty

1,476,500.
00

Attorney's
fees

900,000.00

P9,759,000
.00

Les Proceeds
of
s: foreclosure
Sale
Deficiency

9,000,000.0
0
P
759,000.00

Defendants' counterclaims are dismissed, for lack of merit.

B. DUE TO [RESPONDENT ESTE DEL SOL]

Finding the decision of the trial court unacceptable, respondents


interposed an appeal to the Court of Appeals. On November 8, 1999, the
appellate court reversed the challenged decision of the trial court. The
appellate court found and declared that the fees provided for in the
Underwriting and Consultancy Agreements were mere subterfuges to
camouflage the excessively usurious interest charged by the petitioner

Return of usurious interest in the form of:


Underwritin
P 200,000.00
g fee
Supervision 200,000.00

85

fee
Consultanc
1,330,000.00
y fee
Total
amount
due Este

P
1,730,000.0
0

The appellee is, therefore, obliged to return to the appellant Este del Sol
the difference of P971,000.00 or (P1,730,000.00 less P759,000.00)."
Petitioner moved for reconsideration of the appellate court's adverse
decision. However, this was denied in a Resolution [18] dated February 9,
2000
of
the
appellate
court.
Hence, the instant petition anchored on the following assigned errors: [19]
THE APPELLATE COURT HAS DECIDED QUESTIONS OF SUBSTANCE
IN A WAY NOT IN ACCORD WITH LAW AND WITH APPLICABLE
DECISIONS OF THIS HONORABLE COURT WHEN IT:
a] HELD THAT ALLEGEDLY THE UNDERWRITING AND CONSULTANCY
AGREEMENTS SHOULD NOT BE CONSIDERED SEPARATE AND
DISTINCT FROM THE LOAN AGREEMENT, AND INSTEAD, THEY
SHOULD
BE
CONSIDERED
AS
A
SINGLE
CONTRACT.
b]
HELD
THAT
THE
UNDERWRITING
AND
CONSULTANCY
AGREEMENTS ARE "MERE SUBTERFUGES TO CAMOUFLAGE THE
USURIOUS
INTEREST
CHARGED"
BY
THE
PETITIONER.
c] REFUSED TO CONSIDER THE TESTIMONIES OF PETITIONER'S
WITNESSES ON THE SERVICES PERFORMED BY PETITIONER.
d] REFUSED TO CONSIDER THE FACT [i] THAT RESPONDENTS HAD
WAIVED THEIR RIGHT TO SEEK RECOVERY OF THE AMOUNTS THEY
PAID TO PETITIONER, AND [ii] THAT RESPONDENTS HAD ADMITTED
THE VALIDITY OF THE UNDERWRITING AND CONSULTANCY
AGREEMENTS.
e] MADE AN ERRONEOUS COMPUTATION ON SUPPOSEDLY "WHAT IS
DUE TO EACH PARTY AFTER THE FORECLOSURE SALE", AS SHOWN
IN PP. 34-35 OF THE ASSAILED DECISION, EVEN GRANTING JUST

FOR THE SAKE OF ARGUMENT THAT THE APPELLATE COURT WAS


CORRECT IN STIGMATIZING [i] THE PROVISIONS OF THE LOAN
AGREEMENT THAT REFER TO STIPULATED PENALTIES, LIQUIDATED
DAMAGES AND ATTORNEY'S FEES AS SUPPOSEDLY "EXCESSIVE,
INIQUITOUS AND UNCONSCIONABLE AND REVOLTING TO THE
CONSCIENCE" AND [ii] THE UNDERWRITING, SUPERVISION AND
CONSULTANCY SERVICES AGREEMENT AS SUPPOSEDLY "MERE
SUBTERFUGES TO CAMOUFLAGE THE USURIOUS INTEREST
CHARGED" UPON THE RESPONDENT ESTE BY PETITIONER.
f] REFUSED TO CONSIDER THE FACT THAT RESPONDENT ESTE, AND
THUS THE INDIVIDUAL RESPONDENTS, ARE STILL OBLIGATED TO
THE PETITIONER.
Petitioner essentially assails the factual findings and conclusion of the
appellate court that the Underwriting and Consultancy Agreements were
executed to conceal a usurious loan. Inquiry upon the veracity of the
appellate court's factual findings and conclusion is not the function of this
Court for the Supreme Court is not a trier of facts. Only when the factual
findings of the trial court and the appellate court are opposed to each
other does this Court exercise its discretion to re-examine the factual
findings of both courts and weigh which, after considering the record of the
case,
is
more
in
accord
with
law
and
justice.
After a careful and thorough review of the record including the evidence
adduced, we find no reason to depart from the findings of the appellate
court.
First, there is no merit to petitioner FMIC's contention that Central Bank
Circular No. 905 which took effect on January 1, 1983 and removed the
ceiling on interest rates for secured and unsecured loans, regardless of
maturity, should be applied retroactively to a contract executed on January
31, 1978, as in the case at bar, that is, while the Usury Law was in full
force and effect. It is an elementary rule of contracts that the laws, in force
at the time the contract was made and entered into, govern it. [20] More
significantly, Central Bank Circular No. 905 did not repeal nor in any way
amend the Usury Law but simply suspended the latter's effectivity. [21] The
illegality of usury is wholly the creature of legislation. A Central Bank
Circular cannot repeal a law. Only a law can repeal another law. [22] Thus,
retroactive application of a Central Bank Circular cannot, and should not,
be
presumed.[23]

86

Second, when a contract between two (2) parties is evidenced by a written


instrument, such document is ordinarily the best evidence of the terms of
the contract. Courts only need to rely on the face of written contracts to
determine the intention of the parties. However, this rule is not without
exception.[24] The form of the contract is not conclusive for the law will not
permit a usurious loan to hide itself behind a legal form. Parol evidence is
admissible to show that a written document though legal in form was in
fact a device to cover usury. If from a construction of the whole transaction
it becomes apparent that there exists a corrupt intention to violate the
Usury Law, the courts should and will permit no scheme, however
ingenious,
to
becloud
the
crime
of
usury. [25]
In the instant case, several facts and circumstances taken altogether show
that the Underwriting and Consultancy Agreements were simply cloaks or
devices to cover an illegal scheme employed by petitioner FMIC to conceal
and
collect
excessively
usurious
interest,
and
these
are:
a) The Underwriting and Consultancy Agreements are both dated January
31, 1978 which is the same date of the Loan Agreement. [26] Furthermore,
under the Underwriting Agreement payment of the supervision and
consultancy fees was set for a period of four (4) years [27] to coincide
ultimately with the term of the Loan Agreement. [28] This fact means that all
the said agreements which were executed simultaneously were set to
mature or shall remain effective during the same period of time.
b) The Loan Agreement dated January 31, 1978 stipulated for the
execution and delivery of an underwriting agreement [29] and specifically
mentioned that such underwriting agreement is a condition precedent [30]
for petitioner FMIC to extend the loan to respondent Este del Sol, indicating
and as admitted by petitioner FMIC's employees, [31] that such Underwriting
Agreement is "part and parcel of the Loan Agreement." [32]
c) Respondent Este del Sol was billed by petitioner on February 28, 1978
One Million Three Hundred Thirty Thousand Pesos (P1,330,000.00) [33] as
consultancy fee despite the clear provision in the Consultancy Agreement
that the said agreement is for Three Hundred Thirty-Two Thousand Five
Hundred Pesos (P332,500.00) per annum for four (4) years and that only
the first year consultancy fee shall be due upon signing of the said
consultancy
agreement.[34]
d) The Underwriting, Supervision and Consultancy fees in the amounts of
Two Hundred Thousand Pesos (P200,000.00), Two Hundred Thousand Pesos

(P200,000.00) and One Million Three Hundred Thirty Thousand Pesos


(P1,330,000.00), respectively, were billed by petitioner to respondent Este
del Sol on February 22, 1978, [35] that is, on the same occasion of the first
partial release of the loan in the amount of Two Million Three Hundred
Eighty-Two Thousand Five Hundred Pesos (P2,382,500.00). [36] It is from this
first partial release of the loan that the said corresponding bills for
Underwriting, Supervision and Consultancy fees were deducted and
apparently paid, thus, reverting back to petitioner FMIC the total amount of
One Million Seven Hundred Thirty Thousand Pesos (P1,730,000.00) as part
of
the
amount
loaned
to
respondent
Este
del
Sol. [37]
e) Petitioner FMIC was in fact unable to organize an underwriting/selling
syndicate to sell any share of stock of respondent Este del Sol and much
less to supervise such a syndicate, thus failing to comply with its obligation
under the Underwriting Agreement.[38] Besides, there was really no need for
an Underwriting Agreement since respondent Este del Sol had its own
licensed marketing arm to sell its shares and all its shares have been sold
through
its
marketing
arm.[39]
f) Petitioner FMIC failed to comply with its obligation under the Consultancy
Agreement,[40] aside from the fact that there was no need for a Consultancy
Agreement, since respondent Este del Sol's officers appeared to be more
competent to be consultants in the development of the projected
sports/resort
complex.[41]
All the foregoing established facts and circumstances clearly belie the
contention of petitioner FMIC that the Loan, Underwriting and Consultancy
Agreements are separate and independent transactions. The Underwriting
and Consultancy Agreements which were executed and delivered
contemporaneously with the Loan Agreement on January 31, 1978 were
exacted by petitioner FMIC as essential conditions for the grant of the loan.
An apparently lawful loan is usurious when it is intended that additional
compensation for the loan be disguised by an ostensibly unrelated contract
providing for payment by the borrower for the lender's services which are
of little value or which are not in fact to be rendered, such as in the instant
case.[42] In this connection, Article 1957 of the New Civil Code clearly
provides that:
"Art. 1957. Contracts and stipulations, under any cloak or device whatever,
intended to circumvent the laws against usury shall be void. The borrower
may recover in accordance with the laws on usury."

87

In usurious loans, the entire obligation does not become void


because of an agreement for usurious interest; the unpaid
principal debt still stands and remains valid but the stipulation as
to the usurious interest is void, consequently, the debt is to be
considered without stipulation as to the interest.[43] The reason for
this rule was adequately explained in the case of Angel Jose Warehousing
Co., Inc. v. Child Enterprises [44] where this Court held:
In simple loan with stipulation of usurious interest, the prestation of the
debtor to pay the principal debt, which is the cause of the contract (Article
1350, Civil Code), is not illegal. The illegality lies only as to the prestation
to pay the stipulated interest; hence, being separable, the latter only
should be deemed void, since it is the only one that is illegal.
Thus, the nullity of the stipulation on the usurious interest does not affect
the lender's right to receive back the principal amount of the loan. With
respect to the debtor, the amount paid as interest under a usurious
agreement is recoverable by him, since the payment is deemed to have
been
made
under
restraint,
rather
than
voluntarily. [45]
This Court agrees with the factual findings and conclusion of the appellate
court, to wit:
We find the stipulated penalties, liquidated damages and attorney's fees,
excessive, iniquitous and unconscionable and revolting to the conscience
as they hardly allow the borrower any chance of survival in case of default.
And true enough, ESTE folded up when the appellee extrajudicially
foreclosed on its (ESTE's) development project and literally closed its
offices as both the appellee and ESTE were at the time holding office in the
same building. Accordingly, we hold that 20% penalty on the amount due
and 10% of the proceeds of the foreclosure sale as attorney's fees would
suffice to compensate the appellee, especially so because there is no clear
showing that the appellee hired the services of counsel to effect the
foreclosure; it engaged counsel only when it was seeking the recovery of
the alleged deficiency.

Art. 1229. The judge shall equitably reduce the penalty when the principal
obligation has been partly or irregularly complied with by the debtor. Even
if there has been no performance, the penalty may also be reduced by the
courts
if
it
is
iniquitous
or
unconscionable.
Art. 2227. Liquidated damages, whether intended as an indemnity or a
penalty, shall be equitably reduced if they are iniquitous or
unconscionable.
In the case at bar, the amount of Three Million One Hundred Eighty-Eight
Thousand Six Hundred Thirty Pesos and Seventy-Five Centavos
(P3,188,630.75) for the stipulated attorney's fees equivalent to twenty-five
(25%) percent of the alleged amount due, as of the date of the auction sale
on June 23, 1980, is manifestly exorbitant and unconscionable.
Accordingly, we agree with the appellate court that a reduction of the
attorney's fees to ten (10%) percent is appropriate and reasonable under
the
facts
and
circumstances
of
this
case.
Lastly, there is no merit to petitioner FMIC's contention that the appellate
court erred in awarding an amount allegedly not asked nor prayed for by
respondents. Whether the exact amount of the relief was not expressly
prayed for is of no moment for the reason that the relief was plainly
warranted by the allegations of the respondents as well as by the facts as
found by the appellate court. A party is entitled to as much relief as the
facts
may
warrant.[47]
In view of all the foregoing, the Court is convinced that the appellate court
committed
no
reversible
error
in
its
challenged
Decision.
WHEREFORE, the instant petition is hereby DENIED, and the assailed
Decision of the Court of Appeals is AFFIRMED. Costs against petitioner.
SO

ORDERED.

Bellosillo, (Chairman), Mendoza, Quisumbing, and Buena, JJ., concur.

Attorney's fees as provided in penal clauses are in the nature of liquidated


damages. So long as such stipulation does not contravene any law, morals,
or public order, it is binding upon the parties. Nonetheless, courts are
empowered to reduce the amount of attorney's fees if the same is
"iniquitous or unconscionable."[46] Articles 1229 and 2227 of the New Civil
Code provide that:

88

G.R. No. 171925, July 23, 2010


SOLIDBANK CORPORATION, (NOW METROPOLITAN BANK AND
TRUST
COMPANY),
PETITIONER,
VS.
PERMANENT
HOMES,
INCORPORATED,
RESPONDENT.
DECISION
CARPIO, J.:
G.R. No. 171925 is a petition for review [1] assailing the Decision[2]
promulgated on 29 June 2005 by the Court of Appeals (appellate court) as
well as the Resolution[3] promulgated on 14 March 2006 in CA-G.R. CV No.
75926. The appellate court granted the petition filed by Permanent
Homes, Incorporated (Permanent) and reversed the decision of the
Regional Trial Court of Makati City, Branch 58 (trial court) dated 5 July 2002
in Civil Case No. 98-654. The appellate court ordered Solidbank
Corporation (Solidbank) and Permanent to enter into an express agreement
about the applicable interest rates on Permanent's loan. Solidbank was
also ordered to render an accounting of Permanent's payments, not to
impose interest on interest upon Permanent's loans, and to release the
remaining amount available under Permanent's omnibus credit line.
The Facts

The appellate court narrated the facts as follows:


The records disclose that PERMANENT HOMES is a real estate development
company, and to finance its housing project known as the "Buena Vida
Townhomes" located within Merville Subdivision, Paraaque City, it
applied and was subsequently granted by SOLIDBANK with an "Omnibus
Line" credit facility in the total amount of SIXTY MILLION PESOS. Of the
entire loan, FIFTY NINE MILLION as [sic] time loan for a term of up to three
hundred sixty (360) days, with interest thereon at prevailing market rates,
and subject to monthly repricing. The remaining ONE MILLION was
available
for
domestic
bills
purchase.
To secure the aforesaid loan, PERMANENT HOMES initially mortgaged three
(3) townhouse units within the Buena Vida project in Paraaque. At the
time, however, the instant complaint was filed against SOLIDBANK, a total
of thirty six (36) townhouse units were mortgaged with said bank.

Of the 60 million available to PERMANENT HOMES, it availed of a total of


41.5 million pesos, covered by three (3) promissory notes, which contain
the following provisions, thus:
"xxx
5. We/I irrevocably authorize Solidbank to increase or decrease at any time
the interest rate agreed in this Note or Loan on the basis of, among others,
prevailing rates in the local or international capital markets. For this
purpose, We/I authorize Solidbank to debit any deposit or placement
account with Solidbank belonging to any one of us. The adjustment of the
interest rate shall be effective from the date indicated in the written notice
sent to us by the bank, or if no date is indicated, from the time the notice
was
sent.
6. Should We/I disagree to the interest rate adjustment, We/I shall prepay
all amounts due under this Note or Loan within thirty (30) days from the
receipt by anyone of us of the written notice. Otherwise, We/I shall be
deemed to have given our consent to the interest rate adjustment."

Contrary, however, to the specific provisions as afore-quoted, there was a


standing agreement by the parties that any increase or decrease in
interest rates shall be subject to the mutual agreement of the parties.
For the first loan availment of PERMANENT HOMES on March 20, 1997, in
the amount of 19.6 MILLION, from the initial interest rate of 14.25% per
annum (p.a.), the same was increased 15% p.a. effective May 19, 1997; it
was again increased to 26% p.a. effective July 18, 1997. It was thereafter
reduced to 20% p.a. effective August 18, 1997, and then increased to
24% p.a. effective September 17, 1997. The rate was increased further to
30% p.a. effective October 17, 1997, then decreased to 27% p.a. on
November 17, 1997, and again increased to 34% p.a. effective December
17, 1997. The rate then decreased to 30% p.a. on January 16, 1998.
For the second loan availment in the amount of 18 million, the rate was
initially pegged at 15.75% p.a. on June 24, 1997. A month later, the rate
increased to 23.5% p.a. It thereafter decreased to 20% p.a. effective
August 24, 1997, but again increased to 22.5% p.a. effective September
24, 1997. For the next month, the rate surged to 30% p.a., and
decreased to 27% p.a. for the month of November. The rate again surged
to 34% p.a. for the month of December, and was decreased to 30% p.a.
from
January
22,
1998
to
February
20,
1998.

89

For the third loan availment on July 15, 1997, in the amount of 3.9 million,
the interest rate was initially pegged at 35% p.a., but this was decreased
to 21% p.a. from August 14 until September 11, 1997. The rate
increased slightly to 23% p.a. on September 12, 1997, and surged to
27% p.a. on October 13, 1997. The rate went down slightly to 27% p.a.
for the month of November, and to 26% p.a. for the month of December.
The rate, however, again surged to 30% p.a. on January 12, 1998 before
settling
at
29%
p.a.
for
the
month
of
February.
It is [Permanent's] stand that SOLIDBANK unilaterally and arbitrarily
accelerated the interest rates without any declared basis of such increases,
of which PERMANENT HOMES had not agreed to, or at the very least, been
informed of. This is contrary to their earlier agreement that any interest
rate changes will be subject to mutual agreement of the parties.
PERMANENT HOMES further admits that it was not able to protest such
arbitrary increases at the time they were imposed by SOLIDBANK, for fear
that SOLIDBANK might cut off the credit facility it extended to PERMANENT
HOMES. Permanent was then in the midst of the construction of its project
in Merville, Paraaque City, and SOLIDBANK knew that it was relying
substantially on the credit facility the latter extended to it.
[Permanent] thus filed a case before the trial court seeking the following:
(1) the annulment of the increases in interest rates on the loans it obtained
from SOLIDBANK, on the ground that it was violative of the principle of
mutuality of agreement of the parties, as enunciated in Article 1409 of the
New Civil Code, (2) the fixing of the interest rates at the applicable interest
rate, and (3) for the trial court to order SOLIDBANK to make an accounting
of the payments it made, so as to determine the amount of refund
PERMANENT is entitled to, as well as to order SOLIDBANK to release the
remaining available balance of the loan it extended to PERMANENT. In
addition, [Permanent] prays for the payment of compensatory, moral and
exemplary
damages.
SOLIDBANK, on the other hand, avers that PERMANENT HOMES has no
cause of action against it, in view of the pertinent provisions of the
Omnibus Credit Line and the promissory notes agreed to and signed by
PERMANENT HOMES. Thus, in accordance with said provisions, SOLIDBANK
was authorized to, upon due notice, periodically adjust the interest rates
on PERMANENT HOMES' loan availments during the monthly interest
repricing dates, depending on the changes in prevailing interest rates in
the local and international capital markets. In fact, SOLIDBANK avers that

four (4) days before July 15, 1997, the Bangko Sentral ng Pilipinas (BSP)
declared that it could no longer support the Philippine currency from
external speculative forces, hence, the local currency was allowed to seek
its own exchange rate level. As a result of the volatile exchange rate ratio,
banks were then hesitant to extend loans, and in some instances that it
granted loans, they had to ensure that they will not be at the losing end of
the deal, so to speak, by the repricing of the interest rates every month.
SOLIDBANK insists that PERMANENT HOMES should not be allowed to
renege on its contractual obligations, as it freely and voluntarily bound
itself to the provisions of the Omnibus Credit Line and the promissory
notes.
PERMANENT HOMES presented as witnesses Jacqueline S. Lim, its Vice
President and Chief Financial Officer, Engr. Rey A. Romasanta, its Executive
Vice President and Chief Operating Officer, and Martha Julia Flores, its
Treasury
Officer.
On March 24, 1998, the trial court issued a
(TRO), after a summary hearing, which
implementing and collecting the increases
initiating any action, including the foreclosure

temporary restraining order


enjoined SOLIDBANK from
in interest rates and from
of the mortgaged properties.

Ms. Lim's testimony centered on PERMANENT HOMES' allegations that the


repricing of the interest rates was done by SOLIDBANK without any written
agreement entered into between the parties. In fact, Ms. Lim accounted
that SOLIDBANK will merely advise them of the interest rate for the period,
after said period had already commenced, and at times very late in the
period, by fax messages. When PERMANENT HOMES called SOLIDBANK's
attention to the seemingly surging rates it imposed on its loan, SOLIDBANK
will merely answer that it was the bank's policy, without offering any basis
for such increase. Furthermore, Ms. Lim also mentioned SOLIDBANK's
alleged practice of imposing interest on unpaid interest, at the highest rate
of 30% p.a.. Ms. Lim also presented a tabulation, which presents the
number of days their billing statements were sent late, from the time the
interest period started. It is PERMANENT HOMES' stand that since the
purpose of the billing statements was to inform them beforehand of the
applicable interest rate for the period, the late billings will clearly show
SOLIDBANK's arbitrary imposition of the repriced interest rates, as well as
its
indifference
to
PERMANENT
HOMES'
plight.
To illustrate, for the first loan availment in the amount of P19.6 million, the
billing statements which should have notified PERMANENT HOMES of the

90

repriced interest rates were faxed to PERMANENT HOMES between


eighteen (18) to thirty-three (33) days late. For the second loan availment
in the amount of P18 million, the faxed billings were late between six (6) to
twenty-one (21) days, and one instance where PERMANENT HOMES
received no billing at all. For the third loan availment in the amount of
P3.9 million, the faxed billings were late between seven (7) to twenty-nine
(29) days, and also an instance where PERMANENT HOMES received no
billing
at
all.
This practice, according to Ms. Lim, clearly affected its operations, as the
completion of its construction project was unnecessarily delayed, to its
prejudice and its buyers. This was the import of the testimony of
PERMANENT HOMES' second witness, Engr. Rey A. Romasanta. According to
Engr. Rey, the target date of completion was August 1997, but in view of
the shortage of funds by reason of SOLIDBANK's refusal for PERMANENT
HOMES to make further availments on its omnibus credit line, the project
was
completed
only
on
February
1998.
PERMANENT HOMES' third and final witness was Martha Julia Flores, its
Treasury Officer, who explained that as such, it was her who received the
late billings from SOLIDBANK. She would also call up SOLIDBANK to ask
what the repriced interest rate for the coming interest period, to no avail,
as SOLIDBANK will merely fax its billings almost always, as
abovementioned, late in the period. Ms. Flores admitted that she prepared
the tabulation presented before the court, which showed how late
SOLIDBANK's billings were sent to PERMANENT HOMES, as well as the
computation of interest rates that SOLIDBANK had allegedly overcharged
on its loan, vis-a-vis the average of the high and the low published lending
rates
of
SOLIDBANK.
SOLIDBANK, to establish its defense, presented its lone witness, Mr. Cesar
Lugtu, who testified to the effect that, contrary to PERMANENT HOMES'
assertions that it was not promptly informed of the repriced interest rates,
SOLIDBANK's officers verbally advised PERMANENT HOMES of the
repriced rates at the start of the period, and even added that their
transaction[s] were based on trust. Aside from these allegations, however,
no written memorandum or note was presented by SOLIDBANK to support
their assertion that PERMANENT HOMES was timely advised of the repriced
interests.[4]
The Trial Court's Ruling

On 5 July 2002, the trial court promulgated its Decision in favor of


Solidbank. The trial court ratiocinated and ruled thus:
It becomes crystal clear that there is sufficient proof to show that the
instant case was instituted by [Permanent] as an after-thought and as an
obvious subterfuge intended to completely lay on the defendant the blame
for the debacle of its Buena Vida project. An afterthought because the
records of the case show that the complaint was filed in March 16, 1998,
already after it was having difficulty making the amortization payments,
the last of which being in February 1998. A subterfuge because plaintiff,
instead of blaming itself and its own business judgment that went sour,
would rather put the blame on [Solidbank], taking advantage of every
conceivable gray area of its contract with [Solidbank] to avoid its own
liabilities. In fact, this complaint was made the very basis for [Permanent]
to altogether stop the payment of its loan from [Solidbank] including the
interest
payment
(TSN,
May
07,
1998,
p.
60).
x

WHEREFORE, finding the complaint not impressed with merit, judgment is


hereby rendered dismissing the said complaint. The Counterclaim is
likewise dismissed for lack of evidence to support the same.
SO ORDERED.[5]

Permanent filed an appeal before the appellate court.


The Appellate Court's Ruling

The appellate court granted Permanent's appeal, and set aside the trial
court's ruling. The appellate court not only recognized the validity of
escalation clauses, but also underscored the necessity of a basis for the
increase in interest rates and of the principle of mutuality of contracts.
The dispositive portion of the appellate court's decision reads, thus:
THE FOREGOING CONSIDERED, the instant appeal is hereby GRANTED, the
assailed decision dated July 5, 2002 is REVERSED and SET ASIDE, and a
new
one
is
hereby
entered
as
follows:

91

(1) Unless the parties herein subsequently enter into an express


agreement regarding the applicable interest rates on PERMANENT HOMES'
loan availments subsequent to the initial thirty-day (30) period, the legal
rate of twelve percent (12%) per annum is hereby FIXED, to be applied on
the
outstanding
balance
of
the
loan;

(C) Whether the Honorable Court of Appeals was correct in ruling that
[Permanent] is entitled to attorney's fees notwithstanding the absence of
bad faith or malice on the part of [Solidbank].[8]

(2) SOLIDBANK is ordered to render an accounting of all the payments


made by PERMANENT HOMES, and in case there is excess payment by
reason of the wrongful imposition of the repriced interest rates, to apply
such amount to the interest payment at the legal rate, and thereafter to
the
outstanding
principal
amount;

The Court's Ruling

(3) SOLIDBANK is directed not to impose penalties, particularly interest on


interest, upon PERMANENT HOMES' loan, there being no evidence that the
latter
was
in
default
on
its
payments;
(4) SOLIDBANK is hereby ordered to release the remaining amount
available under the omnibus credit line, subject, however, to availability of
funds
on
the
part
of
SOLIDBANK.
No

pronouncement

as

to

costs.

SO ORDERED.[6]

The appellate court resolved


Reconsideration for lack of merit.[7]

to

deny

Solidbank's

Motion

for

The Issues

Solidbank raised the following issues in their petition:

(A) Whether the Honorable Court of Appeals was correct in ruling that the
increases in the interest rates on [Permanent's] loans are void for having
been
unilaterally
imposed
without
basis.
(B) Whether the Honorable Court of Appeals was correct in ordering the
parties to enter into an express agreement regarding the applicable
interest rates on Permanent's loan availments subsequent to the initial
thirty-day
(30)
period.

The

petition

has

merit.

The Usury Law had been rendered legally ineffective by Resolution No. 224
dated 3 December 1982 of the Monetary Board of the Central Bank, and
later by Central Bank Circular No. 905 which took effect on 1 January
1983. These circulars removed the ceiling on interest rates for secured
and unsecured loans regardless of maturity. The effect of these circulars is
to allow the parties to agree on any interest that may be charged on a
loan. The virtual repeal of the Usury Law is within the range of judicial
notice which courts are bound to take into account. [9] Although interest
rates are no longer subject to a ceiling, the lender still does not have an
unbridled license to impose increased interest rates. The lender and the
borrower should agree on the imposed rate, and such imposed rate should
be
in
writing.
The three promissory notes between Solidbank and Permanent all contain
the following provisions:
5. We/I irrevocably authorize Solidbank to increase or decrease at any time
the interest rate agreed in this Note or Loan on the basis of, among others,
prevailing rates in the local or international capital markets. For this
purpose, We/I authorize Solidbank to debit any deposit or placement
account with Solidbank belonging to any one of us. The adjustment of the
interest rate shall be effective from the date indicated in the written notice
sent to us by the bank, or if no date is indicated, from the time the notice
was
sent.
6. Should We/I disagree to the interest rate adjustment, We/I shall prepay
all amounts due under this Note or Loan within thirty (30) days from the
receipt by anyone of us of the written notice. Otherwise, We/I shall be
deemed to have given our consent to the interest rate adjustment.

The stipulations on interest rate repricing are valid because (1) the parties

92

mutually agreed on said stipulations; (2) repricing takes effect only upon
Solidbank's written notice to Permanent of the new interest rate; and (3)
Permanent has the option to prepay its loan if Permanent and Solidbank do
not agree on the new interest rate. The phrases "irrevocably authorize," "at
any time" and "adjustment of the interest rate shall be effective from the
date indicated in the written notice sent to us by the bank, or if no date is
indicated, from the time the notice was sent," emphasize that Permanent
should receive a written notice from Solidbank as a condition for the
adjustment
of
the
interest
rates.

Oct. 13, 1997 29.0%

26.0%

28.0%

Oct. 17, 1997 30.0%

27.0%

30.0%

Oct. 22, 1997 32.0%

29.0%

30.0%

Nov. 12, 1997 28.0%

25.0%

27.0%

Nov. 17, 1997 28.0%

25.0%

27.0%

In order that obligations arising from contracts may have the force of law
between the parties, there must be a mutuality between the parties based
on their essential equality. [10] A contract containing a condition which
makes its fulfillment dependent exclusively upon the uncontrolled will of
one of the contracting parties is void. [11] There was no showing that either
Solidbank or Permanent coerced each other to enter into the loan
agreements. The terms of the Omnibus Line Agreement and the
promissory notes were mutually and freely agreed upon by the parties.

Nov. 21, 1997 27.0%

24.0%

27.0%

Dec. 12, 1997 25.0%

23.0%

26.0%

2.0%

Dec. 17, 1997 25.0%

23.0%

34.0%

10.0%

Dec. 22, 1997 25.0%

23.0%

32.0%

8.0%

Jan. 12, 1998 26.0%

24.0%

30.0%

5.0%

Jan. 16, 1998 28.0%

25.0%

30.0%

3.5%

Jan. 22, 1998 28.0%

25.0%

30.0%

3.5%

Feb. 9, 1998

27.0%

24.0%

30.0%

3.5%

Feb. 11, 1998 27.0%

24.0%

29.0%

4.5%

Feb. 12, 1998 27.0%

24.0%

30.0%

4.5%

Moreover, Solidbank's range of lending rates were consistent with


"prevailing rates in the local or international capital markets." Permanent
presented a tabulation[12] of the range of Solidbank's lending rates, as
reported to Bangko Sentral ng Pilipinas and compared the lending rates
with the interest rates charged by Solidbank on Permanent's loans, thus:
Solidbank's range of lending
rates as per BSP records
High

Low

Interest rates Excess


charged
by Interest Rate
Solidbank on Over
the
Permanent's Average
of
loans
High and Low
Rates

Sept. 12, 1997 25.0%

22.0%

23.0%

Sept. 17, 1997 27.0%

24.0%

24.0%

Sept. 22, 1997 26.0%

23.0%

22.5%

The repriced interest rates from 12 September to 21 November 1997


conformed to the range of Solidbank's lending rates to other borrowers.
The 12 December 1997 to 12 February 1998 repriced interest rates were
not unconscionably out of line with the upper range of lending rates to
other borrowers. The interest rate repricing happened at the height of the
Asian financial crises in late 1997, when banks clamped down on lendings
because of higher credit risks across industries, particularly the real estate
industry.
We also recognize that Solidbank admitted that it did not promptly send
Permanent written repriced rates, but rather verbally advised Permanent's

93

officers over the phone at the start of the period. Solidbank did not
present any written memorandum to support its allegation that it promptly
advised Permanent of the change in interest rates. [13] Solidbank advised
Permanent on the repriced interest rate applicable for the 30-day interest
period only after the period had begun. Permanent presented a tabulation
which showed that Solidbank either did not send a billing statement, or
sent a billing statement 6 to 33 days late. [14] We reproduce the tabulation
below:

PN #969 - P18MM

PN #435 - P19.6MM
Reference Interest Period
No.

Date
Billing Number of days
Statements were Billing Statement
faxed
to was Late
Permanent

03/20/97

04/18/97

04/17/97

28

04/18/97

05/19/97

05/16/97

28

05/19/97

06/19/97

Reference Interest Period


No.

Date
Billing Number of days
Statements were Billing Statement
faxed
to was Late
Permanent

06/24/97

07/24/97

07/12/97

18

07/24/97

08/22/97

08/05/97

12

08/22/97

09/22/97

09/10/97

19

09/22/97

10/22/97

10/06/97

14

10/22/97

11/21/97

11/11/97

20

11/21/97

12/22/97

12/12/97

21

12/22/97

01/22/98

01/09/98

18

01/22/98

02/12/97

02/12/98

02/20/98

no
statement
received

no
statement
received

06/19/97

07/18/97

07/12/97

23

07/18/97

08/18/97

08/05/97

18

08/18/97

09/17/97

09/10/97

23

09/17/97

10/17/97

10/06/97

19

PN #1077 - P3.9MM

10/17/97

11/17/97

11/11/97

25

11/17/97

12/17/97

12/12/97

25

Reference Interest Period


No.

12/17/97

01/16/98

01/09/98

23

Date
Billing Number of days
Statements were Billing Statement
faxed
to was Late
Permanent

14

01/16/98

02/20/98

02/18/98

33

10

07/15/97

08/14/97

08/14/97

30

11

08/14/97

08/26/97

08/26/97

12

14

02/18/98

94

95

96

08/26/97

09/12/97

09/10/97

15

09/12/97

10/13/97

10/06/97

24

10/13/97

11/12/97

11/11/97

29

12

11/12/97

12/12/97

12/10/97

28

12/12/97

01/12/98

01/09/98

28

13

01/12/98

02/09/98

02/09/98

28

02/09/98

02/11/98

02/11/98

03/13/98

14

no
statement
received
02/18/98

We rule that Solidbank's computation of the interest due from Permanent


should be adjusted to take effect only upon Permanent's receipt of the
written
notice
from
Solidbank.
WHEREFORE, we GRANT the petition in part. We SET ASIDE the
Decision of the Court of Appeals promulgated on 29 June 2005 as well as
the Resolution promulgated on 14 March 2006 in CA-G.R. CV No. 75926
and AFFIRM the decision of the Regional Trial Court of Makati City, Branch
58 dated 5 July 2002 in Civil Case No. 98-654 with the MODIFICATION
that the repricing of the interest rates should take effect only upon
Permanent Homes, Incorporated's receipt of the written notice from
Solidbank Corporation of the adjustment in interest rate. The records of
this case are therefore remanded to the trial court for the computation of
the proper interest payments based on the dates of receipt of written
notice.
SO

ORDERED.

Nachura, Peralta, Del Castillo,* and Abad, JJ., concur.

97

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


SPOUSES EDUARDO AND LYDIA
PHILIPPINE
NATIONAL
DECISION
DEL CASTILLO, J.:

SILOS,
BANK,

PETITIONERS, VS.
RESPONDENT.

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


principal condition, if not the most important component. Thus, any
modification thereof must be mutually agreed upon; otherwise, it has no
binding effect. Moreover, the Court cannot consider a stipulation granting a
party the option to prepay the loan if said party is not agreeable to the
arbitrary interest rates imposed. Premium may not be placed upon a
stipulation in a contract which grants one party the right to choose
whether to continue with or withdraw from the agreement if it discovers
that what the other party has been doing all along is improper or illegal.
This Petition for Review on Certiorari[1] questions the May 8, 2007
Decision[2] of the Court of Appeals (CA) in CA-G.R. CV No. 79650, which
affirmed with modifications the February 28, 2003 Decision [3] and the June
4, 2003 Order[4] of the Regional Trial Court (RTC), Branch 6 of Kalibo, Aklan
in
Civil
Case
No.
5975.
Factual

Antecedents

Spouses Eduardo and Lydia Silos (petitioners) have been in business for
about two decades of operating a department store and buying and selling
of ready-to-wear apparel. Respondent Philippine National Bank (PNB) is a
banking corporation organized and existing under Philippine laws.
To secure a one-year revolving credit line of P150,000.00 obtained from
PNB, petitioners constituted in August 1987 a Real Estate Mortgage[5]
over a 370-square meter lot in Kalibo, Aklan covered by Transfer Certificate
of Title No. (TCT) T-14250. In July 1988, the credit line was increased to
P1.8 million and the mortgage was correspondingly increased to P1.8
million.[6] And in July 1989, a Supplement to the Existing Real Estate
Mortgage[7] was executed to cover the same credit line, which was
increased to P2.5 million, and additional security was given in the form of a
134-square meter lot covered by TCT T-16208. In addition, petitioners
issued eight Promissory Notes[8] and signed a Credit Agreement.[9]
This July 1989 Credit Agreement contained a stipulation on interest which
provides as follows:
1.03. Interest. (a) The Loan shall be subject to interest at the rate of
19.5% per annum. Interest shall be payable in advance every one
hundred twenty days at the rate prevailing at the time of the renewal.
(b) The Borrower agrees that the Bank may modify the interest
rate in the Loan depending on whatever policy the Bank may

98

adopt in the future, including without limitation, the shifting from the
floating interest rate system to the fixed interest rate system, or vice
versa. Where the Bank has imposed on the Loan interest at a rate per
annum, which is equal to the Banks spread over the current floating
interest rate, the Borrower hereby agrees that the Bank may,
without need of notice to the Borrower, increase or decrease its
spread over the floating interest rate at any time depending on
whatever policy it may adopt in the future.[10] (Emphases supplied)
The eight Promissory Notes, on the other hand, contained a stipulation
granting PNB the right to increase or reduce interest rates within the
limits allowed by law or by the Monetary Board.[11] The Real Estate
Mortgage agreement provided the same right to increase or reduce
interest rates at any time depending on whatever policy PNB may adopt
in
the
future.[12]
Petitioners religiously paid interest on the notes at the following rates:
1.

1st Promissory Note dated July 24, 1989 19.5%;

2.

2nd Promissory Note dated November 22, 1989 23%;

3.

3rd Promissory Note dated March 21, 1990 22%;

4.

4th Promissory Note dated July 19, 1990 24%;

5.

5th Promissory Note dated December 17, 1990 28%;

6.

6th Promissory Note dated February 14, 1991 32%;

7.

7th Promissory Note dated March 1, 1991 30%; and

8.

8th Promissory Note dated July 11, 1991 24%.[13]

In August 1991, an Amendment to Credit Agreement[14] was executed


by the parties, with the following stipulation regarding interest:
1.03. Interest on Line Availments. (a) The Borrowers agree to pay
interest on each Availment from date of each Availment up to but not
including the date of full payment thereof at the rate per annum which
is determined by the Bank to be prime rate plus applicable spread
in effect as of the date of each Availment.[15] (Emphases supplied)

Under this Amendment to Credit Agreement, petitioners issued in favor of


PNB the following 18 Promissory Notes, which petitioners settled
except the last (the note covering the principal) at the following interest
rates:
1.

9th Promissory Note dated November 8, 1991 26%;

2.

10th Promissory Note dated March 19, 1992 25%;

3.

11th Promissory Note dated July 11, 1992 23%;

4.

12th Promissory Note dated November 10, 1992 21%;

5.

13th Promissory Note dated March 15, 1993 21%;

6.

14th Promissory Note dated July 12, 1993 17.5%;

7.

15th Promissory Note dated November 17, 1993 21%;

8.

16th Promissory Note dated March 28, 1994 21%;

9.

17th Promissory Note dated July 13, 1994 21%;

10. 18th Promissory Note dated November 16, 1994 16%;


11. 19th Promissory Note dated April 10, 1995 21%;
12. 20th Promissory Note dated July 19, 1995 18.5%;
13. 21st Promissory Note dated December 18, 1995 18.75%;
14. 22nd Promissory Note dated April 22, 1996 18.5%;
15. 23rd Promissory Note dated July 22, 1996 18.5%;
16. 24th Promissory Note dated November 25, 1996 18%;
17. 25th Promissory Note dated May 30, 1997 17.5%; and
18. 26th Promissory Note (PN 9707237) dated July 30, 1997 25%.[16]
The 9th up to the 17th promissory notes provide for the payment of
interest at the rate the Bank may at any time without notice, raise within
the limits allowed by law x x x.[17] On the other hand, the 18th up to the

99

26th promissory notes including PN 9707237, which is the 26 th


promissory note carried the following provision:
x x x For this purpose, I/We agree that the rate of interest herein
stipulated may be increased or decreased for the subsequent
Interest Periods, with prior notice to the Borrower in the event of
changes in interest rate prescribed by law or the Monetary Board
of the Central Bank of the Philippines, or in the Banks overall cost
of funds. I/We hereby agree that in the event I/we are not
agreeable to the interest rate fixed for any Interest Period, I/we
shall have the option to prepay the loan or credit facility without
penalty within ten (10) calendar days from the Interest Setting
Date.[18] (Emphasis supplied)
Respondent regularly renewed the line from 1990 up to 1997, and
petitioners made good on the promissory notes, religiously paying the
interests without objection or fail. But in 1997, petitioners faltered when
the interest rates soared due to the Asian financial crisis. Petitioners sole
outstanding promissory note for P2.5 million PN 9707237 executed in July
1997 and due 120 days later or on October 28, 1997 became past due,
and despite repeated demands, petitioners failed to make good on the
note.
Incidentally, PN 9707237 provided for the penalty equivalent to 24% per
annum in case of default, as follows:
Without need for notice or demand, failure to pay this note or any
installment thereon, when due, shall constitute default and in such cases
or in case of garnishment, receivership or bankruptcy or suit of any kind
filed against me/us by the Bank, the outstanding principal of this note, at
the option of the Bank and without prior notice of demand, shall
immediately become due and payable and shall be subject to a penalty
charge of twenty four percent (24%) per annum based on the
defaulted principal amount. x x x[19] (Emphasis supplied)
PNB prepared a Statement of Account
as of October 12, 1998, detailing
the amount due and demandable from petitioners in the total amount of
P3,620,541.60, broken down as follows:
[20]

Principal

P 2,500,000.00

Interest

538,874.94

Penalties

581,666.66

Total

P 3,620,541.60

Despite demand, petitioners failed to pay the foregoing amount. Thus, PNB
foreclosed on the mortgage, and on January 14, 1999, TCTs T-14250 and T16208 were sold to it at auction for the amount of P4,324,172.96. [21] The
sheriffs certificate of sale was registered on March 11, 1999.
More than a year later, or on March 24, 2000, petitioners filed Civil Case
No. 5975, seeking annulment of the foreclosure sale and an accounting of
the PNB credit. Petitioners theorized that after the first promissory note
where they agreed to pay 19.5% interest, the succeeding stipulations for
the payment of interest in their loan agreements with PNB which
allegedly left to the latter the sole will to determine the interest rate
became null and void. Petitioners added that because the interest rates
were fixed by respondent without their prior consent or agreement, these
rates are void, and as a result, petitioners should only be made liable for
interest at the legal rate of 12%. They claimed further that they overpaid
interests on the credit, and concluded that due to this overpayment of
steep interest charges, their debt should now be deemed paid, and the
foreclosure and sale of TCTs T-14250 and T-16208 became unnecessary
and wrongful. As for the imposed penalty of P581,666.66, petitioners
alleged that since the Real Estate Mortgage and the Supplement thereto
did not include penalties as part of the secured amount, the same should
be excluded from the foreclosure amount or bid price, even if such
penalties are provided for in the final Promissory Note, or PN 9707237. [22]
In addition, petitioners sought to be reimbursed an alleged overpayment of
P848,285.00 made during the period August 21, 1991 to March 5, 1998,
resulting from respondents imposition of the alleged illegal and steep
interest rates. They also prayed to be awarded P200,000.00 by way of
attorneys
fees.[23]
In its Answer,[24] PNB denied that it unilaterally imposed or fixed interest
rates; that petitioners agreed that without prior notice, PNB may modify
interest rates depending on future policy adopted by it; and that the
imposition of penalties was agreed upon in the Credit Agreement. It added
that the imposition of penalties is supported by the all-inclusive clause in
the Real Estate Mortgage agreement which provides that the mortgage
shall stand as security for any and all other obligations of whatever kind
and nature owing to respondent, which thus includes penalties imposed
upon default or non-payment of the principal and interest on due date.

100

On pre-trial, the parties mutually agreed to the following material facts,


among others:
a) That since 1991 up to 1998, petitioners had paid PNB the total amount
of P3,484,287.00;[25] and

b) That PNB sent, and petitioners received, a March 10, 2000 demand
letter.[26]
During trial, petitioner Lydia Silos (Lydia) testified that the Credit
Agreement, the Amendment to Credit Agreement, Real Estate Mortgage
and the Supplement thereto were all prepared by respondent PNB and
were presented to her and her husband Eduardo only for signature; that
she was told by PNB that the latter alone would determine the interest
rate; that as to the Amendment to Credit Agreement, she was told that
PNB would fill up the interest rate portion thereof; that at the time the
parties executed the said Credit Agreement, she was not informed about
the applicable spread that PNB would impose on her account; that the
interest rate portion of all Promissory Notes she and Eduardo issued were
always left in blank when they executed them, with respondents mere
assurance that it would be the one to enter or indicate thereon the
prevailing interest rate at the time of availment; and that they agreed to
such arrangement. She further testified that the two Real Estate Mortgage
agreements she signed did not stipulate the payment of penalties; that she
and Eduardo consulted with a lawyer, and were told that PNBs actions
were improper, and so on March 20, 2000, they wrote to the latter seeking
a recomputation of their outstanding obligation; and when PNB did not
oblige,
they
instituted
Civil
Case
No.
5975. [27]
On cross-examination, Lydia testified that she has been in business for 20
years; that she also borrowed from other individuals and another bank;
that it was only with banks that she was asked to sign loan documents with
no indicated interest rate; that she did not bother to read the terms of the
loan documents which she signed; and that she received several PNB
statements of account detailing their outstanding obligations, but she did
not complain; that she assumed instead that what was written therein is
correct.[28]

determination of the prime rates of interest was the responsibility solely of


PNBs Treasury Department which is based in Manila; that these prime
rates were simply communicated to all PNB branches for implementation;
that there are a multitude of considerations which determine the interest
rate, such as the cost of money, foreign currency values, PNBs spread,
bank administrative costs, profitability, and the practice in the banking
industry; that in every repricing of each loan availment, the borrower has
the right to question the rates, but that this was not done by the
petitioners; and that anything that is not found in the Promissory Note may
be
supplemented
by
the
Credit
Agreement.[29]
Ruling

of

the

Regional

Trial

Court

On February 28, 2003, the trial court rendered judgment dismissing Civil
Case No. 5975.[30] It ruled that:
1.

While the Credit Agreement allows PNB to unilaterally increase its


spread over the floating interest rate at any time depending on
whatever policy it may adopt in the future, it likewise allows for the
decrease at any time of the same. Thus, such stipulation
authorizing both the increase and decrease of interest rates as
may be applicable is valid,[31] as was held in Consolidated Bank and
Trust Corporation (SOLIDBANK) v. Court of Appeals;[32]

2.

Banks are allowed to stipulate that interest rates on loans need not
be fixed and instead be made dependent on prevailing rates upon
which to peg such variable interest rates;[33]

3.

The Promissory Note, as the principal contract evidencing


petitioners loan, prevails over the Credit Agreement and the Real
Estate Mortgage. As such, the rate of interest, penalties and
attorneys fees stipulated in the Promissory Note prevail over those
mentioned in the Credit Agreement and the Real Estate Mortgage
agreements;[34]

4.

Roughly, PNBs computation of the total amount of petitioners


obligation is correct;[35]

5.

Because the loan was admittedly due and demandable, the


foreclosure was regularly made;[36]

For his part, PNB Kalibo Branch Manager Diosdado Aspa, Jr. (Aspa), the sole
witness for respondent, stated on cross-examination that as a practice, the

101

6.

By the admission of petitioners during pre-trial, all payments made


to PNB were properly applied to the principal, interest and
penalties.[37]

SO ORDERED.[41]

The dispositive portion of the trial courts Decision reads:


IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of the
respondent and against the petitioners by DISMISSING the latters petition.
Costs

against

the

petitioners.

Petitioners moved for reconsideration. In an Order [39] dated June 4, 2003,


the trial court granted only a modification in the award of attorneys fees,
reducing the same from 10% to 1%. Thus, PNB was ordered to refund to
petitioner the excess in attorneys fees in the amount of P356,589.90, viz:
WHEREFORE, judgment is hereby rendered upholding the validity of the
interest rate charged by the respondent as well as the extra-judicial
foreclosure proceedings and the Certificate of Sale. However, respondent is
directed to refund to the petitioner the amount of P356,589.90
representing
the excess
interest charged against the latter.
pronouncement

as

to

costs.

of

Appeals

SO ORDERED.[40]
Ruling

of

On the other hand, respondent did not appeal the June 4, 2003 Order of
the trial court which reduced its award of attorneys fees. It simply raised
the issue in its appellees brief in the CA, and included a prayer for the
reversal
of
said
Order.
In effect, the CA limited petitioners appeal to the following issues:

SO ORDERED.[38]

No

the bid price of P377,505.99 which is the difference between the total
amount
due
[PNB]
and
the
amount
of
its
bid
price.

the

Court

Petitioners appealed to the CA, which issued the questioned Decision with
the following decretal portion:
WHEREFORE, in view of the foregoing, the instant appeal is PARTLY
GRANTED. The modified Decision of the Regional Trial Court per Order
dated June 4, 2003 is hereby AFFIRMED with MODIFICATIONS, to wit:
1. [T]hat the interest rate to be applied after the expiration of the first 30day interest period for PN. No. 9707237 should be 12% per annum;
2.

[T]hat the attorneys fees of 10% is valid and binding; and

3.

[T]hat [PNB] is hereby ordered to reimburse [petitioners] the excess in

1) Whether x x x the interest rates on petitioners outstanding obligation


were unilaterally and arbitrarily imposed by PNB;

2) Whether x x x the penalty charges were secured by the real estate


mortgage; and

3) Whether x x x the extrajudicial foreclosure and sale are valid. [42]


The CA noted that, based on receipts presented by petitioners during trial,
the latter dutifully paid a total of P3,027,324.60 in interest for the period
August 7, 1991 to August 6, 1997, over and above the P2.5 million
principal obligation. And this is exclusive of payments for insurance
premiums, documentary stamp taxes, and penalty. All the while,
petitioners did not complain nor object to the imposition of interest; they in
fact paid the same religiously and without fail for seven years. The
appellate court ruled that petitioners are thus estopped from questioning
the
same.
The CA nevertheless noted that for the period July 30, 1997 to August 14,
1997, PNB wrongly applied an interest rate of 25.72% instead of the
agreed 25%; thus it overcharged petitioners, and the latter paid, an excess
of
P736.56
in
interest.
On the issue of penalties, the CA ruled that the express tenor of the Real
Estate Mortgage agreements contemplated the inclusion of the PN
9707237-stipulated 24% penalty in the amount to be secured by the
mortgaged property, thus

102

For and in consideration of certain loans, overdrafts and other credit


accommodations obtained from the MORTGAGEE and to secure the
payment of the same and those others that the MORTGAGEE may
extend to the MORTGAGOR, including interest and expenses, and
other obligations owing by the MORTGAGOR to the MORTGAGEE,
whether direct or indirect, principal or secondary, as appearing in
the accounts, books and records of the MORTGAGEE, the MORTGAGOR
does hereby transfer and convey by way of mortgage unto the
MORTGAGEE x x x[43] (Emphasis supplied)

ALMEIDA V. COURT OF APPEALS, G.R. [NO.] 113412, APRIL 17,


1996, AND CONTRARY TO PUBLIC POLICY AND PUBLIC INTEREST,
AND IN APPLYING THE PRINCIPLE OF ESTOPPEL ARISING FROM THE
ALLEGED DELAYED COMPLAINT OF PETITIONER[S], AND [THEIR]
PAYMENT OF THE INTEREST CHARGED.
B. CONSEQUENTLY, THE COURT OF APPEALS AND THE LOWER COURT
ERRED IN NOT DECLARING THAT PNB IS NOT AT ALL ENTITLED TO
ANY INTEREST EXCEPT THE LEGAL RATE FROM DATE OF DEMAND,
AND IN NOT APPLYING THE EXCESS OVER THE LEGAL RATE OF THE
ADMITTED PAYMENTS MADE BY PETITIONER[S] FROM 1991-1998 IN
THE ADMITTED TOTAL AMOUNT OF P3,484,287.00, TO PAYMENT OF
THE PRINCIPAL OF P2,500,000.00 LEAVING AN OVERPAYMENT OF
P984,287.00 REFUNDABLE BY RESPONDENT TO PETITIONER[S]
WITH INTEREST OF 12% PER ANNUM.

The CA believes that the 24% penalty is covered by the phrase and other
obligations owing by the mortgagor to the mortgagee and should thus be
added
to
the
amount
secured
by
the
mortgages.[44]
The CA then proceeded to declare valid the foreclosure and sale of
properties covered by TCTs T-14250 and T-16208, which came as a
necessary result of petitioners failure to pay the outstanding obligation
upon demand.[45] The CA saw fit to increase the trial courts award of 1% to
10%, finding the latter rate to be reasonable and citing the Real Estate
Mortgage agreement which authorized the collection of the higher rate. [46]
Finally, the CA ruled that petitioners are entitled to P377,505.09 surplus,
which is the difference between PNBs bid price of P4,324,172.96 and
petitioners total computed obligation as of January 14, 1999, or the date
of
the
auction
sale,
in
the
amount
of
P3,946,667.87. [47]
Hence, the present Petition.
Issues

The following issues are raised in this Petition:


I

II

THE COURT OF APPEALS AND THE LOWER COURT ERRED IN HOLDING THAT
PENALTIES ARE INCLUDED IN THE SECURED AMOUNT, SUBJECT TO
FORECLOSURE, WHEN NO PENALTIES ARE MENTIONED [NOR] PROVIDED
FOR IN THE REAL ESTATE MORTGAGE AS A SECURED AMOUNT AND
THEREFORE THE AMOUNT OF PENALTIES SHOULD HAVE BEEN EXCLUDED
FROM [THE] FORECLOSURE AMOUNT.
III

THE COURT OF APPEALS ERRED IN REVERSING THE RULING OF THE LOWER


COURT, WHICH REDUCED THE ATTORNEYS FEES OF 10% OF THE TOTAL
INDEBTEDNESS CHARGED IN THE X X X EXTRAJUDICIAL FORECLOSURE TO
ONLY 1%, AND [AWARDING] 10% ATTORNEYS FEES.[48]
Petitioners

A.

THE COURT OF APPEALS AS WELL AS THE LOWER COURT ERRED IN


NOT NULLIFYING THE INTEREST RATE PROVISION IN THE CREDIT
AGREEMENT DATED JULY 24, 1989 X X X AND IN THE AMENDMENT
TO CREDIT AGREEMENT DATED AUGUST 21, 1991 X X X WHICH
LEFT TO THE SOLE UNILATERAL DETERMINATION OF THE
RESPONDENT PNB THE ORIGINAL FIXING OF INTEREST RATE AND
ITS INCREASE, WHICH AGREEMENT IS CONTRARY TO LAW, ART.
1308 OF THE [NEW CIVIL CODE], AS ENUNCIATED IN PONCIANO

Arguments

Petitioners insist that the interest rate provision in the Credit Agreement
and the Amendment to Credit Agreement should be declared null and void,
for they relegated to PNB the sole power to fix interest rates based on
arbitrary criteria or factors such as bank policy, profitability, cost of money,
foreign currency values, and bank administrative costs; spaces for interest
rates in the two Credit Agreements and the promissory notes were left
blank for PNB to unilaterally fill, and their consent or agreement to the

103

interest rates imposed thereafter was not obtained; the interest rate, which
consists of the prime rate plus the bank spread, is determined not by
agreement of the parties but by PNBs Treasury Department in Manila.
Petitioners conclude that by this method of fixing the interest rates, the
principle of mutuality of contracts is violated, and public policy as well as
Circular 905[49] of the then Central Bank had been breached.
Petitioners question the CAs application of the principle of estoppel, saying
that no estoppel can proceed from an illegal act. Though they failed to
timely question the imposition of the alleged illegal interest rates and
continued to pay the loan on the basis of these rates, they cannot be
deemed to have acquiesced, and hence could recover what they
erroneously
paid.[50]
Petitioners argue that if the interest rates were nullified, then their
obligation to PNB is deemed extinguished as of July 1997; moreover, it
would appear that they even made an overpayment to the bank in the
amount
of
P984,287.00.
Next, petitioners suggest that since the Real Estate Mortgage agreements
did not include nor specify, as part of the secured amount, the penalty of
24% authorized in PN 9707237, such amount of P581,666.66 could not be
made answerable by or collected from the mortgages covering TCTs T14250 and T-16208. Claiming support from Philippine Bank of
Communications [PBCom] v. Court of Appeals,[51] petitioners insist that the
phrase and other obligations owing by the mortgagor to the
mortgagee[52] in the mortgage agreements cannot embrace the
P581,666.66 penalty, because, as held in the PBCom case, [a] penalty
charge does not belong to the species of obligations enumerated in the
mortgage, hence, the said contract cannot be understood to secure the
penalty;[53] while the mortgages are the accessory contracts, what items
are secured may only be determined from the provisions of the mortgage
contracts, and not from the Credit Agreement or the promissory notes.
Finally, petitioners submit that the trial courts award of 1% attorneys fees
should be maintained, given that in foreclosures, a lawyers work consists
merely in the preparation and filing of the petition, and involves minimal
study.[54] To allow the imposition of a staggering P396,211.00 for such work
would be contrary to equity. Petitioners state that the purpose of attorneys
fees in cases of this nature is not to give respondent a larger
compensation for the loan than the law already allows, but to protect it
against any future loss or damage by being compelled to retain counsel x x

x to institute judicial proceedings for the collection of its credit. [55] And
because the instant case involves a simple extrajudicial foreclosure,
attorneys
fees
may
be
equitably
tempered.
Respondents

Arguments

For its part, respondent disputes petitioners claim that interest rates were
unilaterally fixed by it, taking relief in the CA pronouncement that
petitioners are deemed estopped by their failure to question the imposed
rates and their continued payment thereof without opposition. It adds that
because the Credit Agreement and promissory notes contained both an
escalation clause and a de-escalation clause, it may not be said that the
bank violated the principle of mutuality. Besides, the increase or decrease
in interest rates have been mutually agreed upon by the parties, as shown
by petitioners continuous payment without protest. Respondent adds that
the alleged unilateral imposition of interest rates is not a proper subject for
review by the Court because the issue was never raised in the lower court.
As for petitioners claim that interest rates imposed by it are null and void
for the reasons that 1) the Credit Agreements and the promissory notes
were signed in blank; 2) interest rates were at short periods; 3) no interest
rates could be charged where no agreement on interest rates was made in
writing; 4) PNB fixed interest rates on the basis of arbitrary policies and
standards left to its choosing; and 5) interest rates based on prime rate
plus applicable spread are indeterminate and arbitrary PNB counters:
a.

That Credit Agreements and promissory notes were signed by


petitioner[s] in blank Respondent claims that this issue was never
raised in the lower court. Besides, documentary evidence prevails
over testimonial evidence; Lydia Silos testimony in this regard is
self-serving, unsupported and uncorroborated, and for being the
lone evidence on this issue. The fact remains that these documents
are in proper form, presumed regular, and endure, against
arbitrary claims by Silos who is an experienced business person
that she signed questionable loan documents whose provisions for
interest rates were left blank, and yet she continued to pay the
interests without protest for a number of years.[56]

b.

That interest rates were at short periods Respondent argues that


the law which governs and prohibits changes in interest rates
made more than once every twelve months has been removed [57]
with the issuance of Presidential Decree No. 858.[58]

104

c.

d.

e.

That no interest rates could be charged where no agreement on


interest rates was made in writing in violation of Article 1956 of the
Civil Code, which provides that no interest shall be due unless it
has been expressly stipulated in writing Respondent insists that
the stipulated 25% per annum as embodied in PN 9707237 should
be imposed during the interim, or the period after the loan became
due and while it remains unpaid, and not the legal interest of 12%
as claimed by petitioners.[59]
That PNB fixed interest rates on the basis of arbitrary policies and
standards left to its choosing According to respondent, interest
rates were fixed taking into consideration increases or decreases
as provided by law or by the Monetary Board, the banks overall
costs of funds, and upon agreement of the parties.[60]
That interest rates based on prime rate plus applicable spread are
indeterminate and arbitrary On this score, respondent submits
there are various factors that influence interest rates, from political
events to economic developments, etc.; the cost of money,
profitability and foreign currency transactions may not be
discounted.[61]

On the issue of penalties, respondent reiterates the trial courts finding


that during pre-trial, petitioners admitted that the Statement of Account as
of October 12, 1998 which detailed and included penalty charges as part
of the total outstanding obligation owing to the bank was correct.
Respondent justifies the imposition and collection of a penalty as a normal
banking practice, and the standard rate per annum for all commercial
banks, at the time, was 24%. Respondent adds that the purpose of the
penalty or a penal clause for that matter is to ensure the performance of
the obligation and substitute for damages and the payment of interest in
the event of non-compliance.[62] And the promissory note being the
principal agreement as opposed to the mortgage, which is a mere
accessory should prevail. This being the case, its inclusion as part of the
secured amount in the mortgage agreements is valid and necessary.
Regarding the foreclosure of the mortgages, respondent accuses
petitioners of pre-empting consolidation of its ownership over TCTs T-14250
and T-16208; that petitioners filed Civil Case No. 5975 ostensibly to
question the foreclosure and sale of properties covered by TCTs T-14250
and T-16208 in a desperate move to retain ownership over these
properties,
because
they
failed
to
timely
redeem
them.

Respondent directs the attention of the Court to its petition in G.R. No.
181046,[63] where the propriety of the CAs ruling on the following issues is
squarely raised:
1.

That the interest rate to be applied after the expiration of the first
30-day interest period for PN 9707237 should be 12% per annum;
and

2.

That PNB should reimburse petitioners the excess in the bid price
of P377,505.99 which is the difference between the total amount
due to PNB and the amount of its bid price.

Our Ruling

The

Court

grants

the

Petition.

Before anything else, it must be said that it is not the function of the Court
to re-examine or re-evaluate evidence adduced by the parties in the
proceedings below. The rule admits of certain well-recognized exceptions,
though, as when the lower courts findings are not supported by the
evidence on record or are based on a misapprehension of facts, or when
certain relevant and undisputed facts were manifestly overlooked that, if
properly considered, would justify a different conclusion. This case falls
within
such
exceptions.
The Court notes that on March 5, 2008, a Resolution was issued by the
Courts First Division denying respondents petition in G.R. No. 181046, due
to late filing, failure to attach the required affidavit of service of the
petition on the trial court and the petitioners, and submission of a
defective verification and certification of non-forum shopping. On June 25,
2008, the Court issued another Resolution denying with finality
respondents motion for reconsideration of the March 5, 2008 Resolution.
And on August 15, 2008, entry of judgment was made. This thus settles the
issues, as above-stated, covering a) the interest rate or 12% per annum
that applies upon expiration of the first 30 days interest period provided
under PN 9707237, and b) the CAs decree that PNB should reimburse
petitioner
the
excess
in
the
bid
price
of
P377,505.09.
It appears that respondents practice, more than once proscribed by the
Court, has been carried over once more to the petitioners. In a number of
decided cases, the Court struck down provisions in credit documents
issued by PNB to, or required of, its borrowers which allow the bank to

105

increase or decrease interest rates within the limits allowed by law at any
time depending on whatever policy it may adopt in the future. Thus, in
Philippine National Bank v. Court of Appeals,[64] such stipulation and similar
ones were declared in violation of Article 1308 [65] of the Civil Code. In a
second case, Philippine National Bank v. Court of Appeals,[66] the very same
stipulations found in the credit agreement and the promissory notes
prepared and issued by the respondent were again invalidated. The Court
therein said:
The Credit Agreement provided inter alia, that
(a) The BANK reserves the right to increase the interest rate within
the limits allowed by law at any time depending on whatever
policy it may adopt in the future; Provided, that the interest rate on
this accommodation shall be correspondingly decreased in the event that
the applicable maximum interest is reduced by law or by the Monetary
Board. In either case, the adjustment in the interest rate agreed upon shall
take effect on the effectivity date of the increase or decrease in the
maximum interest rate.
The Promissory Note, in turn, authorized the PNB to raise the rate
of interest, at any time without notice, beyond the stipulated rate
of 12% but only within the limits allowed by law.
The

Real

Estate

Mortgage

contract

likewise

provided

that

(k) INCREASE OF INTEREST RATE: The rate of interest charged on the


obligation secured by this mortgage as well as the interest on the amount
which may have been advanced by the MORTGAGEE, in accordance with
the provision hereof, shall be subject during the life of this contract
to such an increase within the rate allowed by law, as the Board of
Directors of the MORTGAGEE may prescribe for its debtors.
xxxx
In making the unilateral increases in interest rates, petitioner bank relied
on the escalation clause contained in their credit agreement which
provides, as follows:
The Bank reserves the right to increase the interest rate within the limits
allowed by law at any time depending on whatever policy it may adopt
in the future and provided, that, the interest rate on this accommodation
shall be correspondingly decreased in the event that the applicable

maximum interest rate is reduced by law or by the Monetary Board. In


either case, the adjustment in the interest rate agreed upon shall take
effect on the effectivity date of the increase or decrease in maximum
interest rate.
This clause is authorized by Section 2 of Presidential Decree (P.D.) No. 1684
which further amended Act No. 2655 (The Usury Law), as amended, thus:
Section 2. The same Act is hereby amended by adding a new section after
Section 7, to read as follows:
Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of
money, goods or credits may stipulate that the rate of interest agreed
upon may be increased in the event that the applicable maximum rate of
interest is increased by law or by the Monetary Board; Provided, That such
stipulation shall be valid only if there is also a stipulation in the agreement
that the rate of interest agreed upon shall be reduced in the event that the
applicable maximum rate of interest is reduced by law or by the Monetary
Board; Provided further, That the adjustment in the rate of interest agreed
upon shall take effect on or after the effectivity of the increase or decrease
in the maximum rate of interest.
Section 1 of P.D. No. 1684 also empowered the Central Banks Monetary
Board to prescribe the maximum rates of interest for loans and certain
forbearances. Pursuant to such authority, the Monetary Board issued
Central Bank (C.B.) Circular No. 905, series of 1982, Section 5 of which
provides:
Sec. 5. Section 1303 of the Manual of Regulations (for Banks and Other
Financial Intermediaries) is hereby amended to read as follows:
Sec. 1303. Interest and Other Charges. The rate of interest, including
commissions, premiums, fees and other charges, on any loan, or
forbearance of any money, goods or credits, regardless of maturity and
whether secured or unsecured, shall not be subject to any ceiling
prescribed under or pursuant to the Usury Law, as amended.
P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting
parties to stipulate freely regarding any subsequent adjustment in the
interest rate that shall accrue on a loan or forbearance of money, goods or
credits. In fine, they can agree to adjust, upward or downward, the interest
previously stipulated. However, contrary to the stubborn insistence
of petitioner bank, the said law and circular did not authorize
either party to unilaterally raise the interest rate without the

106

others

consent.

It is basic that there can be no contract in the true sense in the


absence of the element of agreement, or of mutual assent of the
parties. If this assent is wanting on the part of the one who
contracts, his act has no more efficacy than if it had been done
under
duress
or
by
a
person
of
unsound
mind.
Similarly, contract changes must be made with the consent of the
contracting parties. The minds of all the parties must meet as to
the proposed modification, especially when it affects an important
aspect of the agreement. In the case of loan contracts, it cannot
be gainsaid that the rate of interest is always a vital component,
for it can make or break a capital venture. Thus, any change must be
mutually agreed upon, otherwise, it is bereft of any binding effect.
We cannot countenance petitioner banks posturing that the
escalation clause at bench gives it unbridled right to unilaterally
upwardly adjust the interest on private respondents loan. That
would completely take away from private respondents the right to
assent to an important modification in their agreement, and would
negate the element of mutuality in contracts. In Philippine National
Bank v. Court of Appeals, et al., 196 SCRA 536, 544-545 (1991) we held
x x x The unilateral action of the PNB in increasing the interest
rate on the private respondents loan violated the mutuality of
contracts ordained in Article 1308 of the Civil Code:
Art. 1308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.
In order that obligations arising from contracts may have the force of law
between the parties, there must be mutuality between the parties based
on their essential equality. A contract containing a condition which makes
its fulfillment dependent exclusively upon the uncontrolled will of one of
the contracting parties, is void . . . . Hence, even assuming that the . . .
loan agreement between the PNB and the private respondent gave the PNB
a license (although in fact there was none) to increase the interest rate at
will during the term of the loan, that license would have been null and void
for being violative of the principle of mutuality essential in contracts. It
would have invested the loan agreement with the character of a contract
of adhesion, where the parties do not bargain on equal footing, the weaker
partys (the debtor) participation being reduced to the alternative to take

it or leave it . . . . Such a contract is a veritable trap for the weaker party


whom the courts of justice must protect against abuse and imposition. [67]
(Emphases supplied)
Then again, in a third case, Spouses Almeda v. Court of Appeals,[68] the
Court invalidated the very same provisions in the respondents prepared
Credit Agreement, declaring thus:
The binding effect of any agreement between parties to a contract is
premised on two settled principles: (1) that any obligation arising from
contract has the force of law between the parties; and (2) that there must
be mutuality between the parties based on their essential equality. Any
contract which appears to be heavily weighed in favor of one of the parties
so as to lead to an unconscionable result is void. Any stipulation regarding
the validity or compliance of the contract which is left solely to the will of
one
of
the
parties,
is
likewise,
invalid.
It is plainly obvious, therefore, from the undisputed facts of the
case that respondent bank unilaterally altered the terms of its
contract with petitioners by increasing the interest rates on the
loan without the prior assent of the latter. In fact, the manner of
agreement is itself explicitly stipulated by the Civil Code when it provides,
in Article 1956 that No interest shall be due unless it has been expressly
stipulated in writing. What has been stipulated in writing from a
perusal of interest rate provision of the credit agreement signed
between the parties is that petitioners were bound merely to pay
21% interest, subject to a possible escalation or de-escalation,
when 1) the circumstances warrant such escalation or deescalation; 2) within the limits allowed by law; and 3) upon
agreement.
Indeed, the interest rate which appears to have been agreed upon
by the parties to the contract in this case was the 21% rate
stipulated in the interest provision. Any doubt about this is in fact
readily resolved by a careful reading of the credit agreement
because the same plainly uses the phrase interest rate agreed
upon, in reference to the original 21% interest rate. x x x
x

Petitioners never agreed in writing to pay the increased interest rates


demanded by respondent bank in contravention to the tenor of their credit
agreement. That an increase in interest rates from 18% to as much as 68%

107

is excessive and unconscionable is indisputable. Between 1981 and


1984, petitioners had paid an amount equivalent to virtually half
of the entire principal (P7,735,004.66) which was applied to
interest alone. By the time the spouses tendered the amount of
P40,142,518.00 in settlement of their obligations; respondent
bank was demanding P58,377,487.00 over and above those
amounts
already
previously
paid
by
the
spouses.
Escalation clauses are not basically wrong or legally objectionable so long
as they are not solely potestative but based on reasonable and valid
grounds. Here, as clearly demonstrated above, not only [are] the increases
of the interest rates on the basis of the escalation clause patently
unreasonable and unconscionable, but also there are no valid and
reasonable standards upon which the increases are anchored.
x

Payment
*THREE

of

this

HUNDRED

note
SIXTY

shall
FIVE

be
DAYS*

as
AFTER

follows:
DATE

On the reverse side of the note the following condition was stamped:
All short-term loans to be granted starting January 1, 1978 shall be made
subject to the condition that any and/or all extensions hereof that will leave
any portion of the amount still unpaid after 730 days shall automatically
convert the outstanding balance into a medium or long-term obligation as
the case may be and give the Bank the right to charge the interest
rates prescribed under its policies from the date the account was
originally
granted.
To secure payment of the loan the parties executed a real estate mortgage
contract
which
provided:

In the face of the unequivocal interest rate provisions in the credit


agreement and in the law requiring the parties to agree to changes in the
interest rate in writing, we hold that the unilateral and progressive
increases imposed by respondent PNB were null and void. Their effect was
to increase the total obligation on an eighteen million peso loan to an
amount way over three times that which was originally granted to the
borrowers. That these increases, occasioned by crafty manipulations in the
interest rates is unconscionable and neutralizes the salutary policies of
extending loans to spur business cannot be disputed. [69] (Emphases
supplied)

(k)

Still, in a fourth case, Philippine National Bank v. Court of Appeals,[70] the


above doctrine was reiterated:

To begin with, PNBs argument rests on a misapprehension of the import of


the appellate courts ruling. The Court of Appeals nullified the interest rate
increases not because the promissory note did not comply with P.D. No.
1684 by providing for a de-escalation, but because the absence of such
provision made the clause so one-sided as to make it unreasonable.

The

promissory

note

contained

the

following

stipulation:

For value received, I/we, [private respondents] jointly and severally


promise to pay to the ORDER of the PHILIPPINE NATIONAL BANK, at its
office in San Jose City, Philippines, the sum of FIFTEEN THOUSAND ONLY
(P15,000.00), Philippine Currency, together with interest thereon at the
rate of 12% per annum until paid, which interest rate the Bank
may at any time without notice, raise within the limits allowed by
law, and I/we also agree to pay jointly and severally ____% per annum
penalty charge, by way of liquidated damages should this note be unpaid
or
is
not
renewed
on
due
dated.

INCREASE

OF

INTEREST

RATE:

The rate of interest charged on the obligation secured by this mortgage


as well as the interest on the amount which may have been advanced by
the MORTGAGEE, in accordance with the provision hereof, shall be
subject during the life of this contract to such an increase within
the rate allowed by law, as the Board of Directors of the
MORTGAGEE
may
prescribe
for
its
debtors.
x

That ruling is correct. It is in line with our decision in Banco Filipino Savings
& Mortgage Bank v. Navarro that although P.D. No. 1684 is not to be
retroactively applied to loans granted before its effectivity, there must
nevertheless be a de-escalation clause to mitigate the one-sidedness of
the escalation clause. Indeed because of concern for the unequal status of
borrowers vis-a-vis the banks, our cases after Banco Filipino have
fashioned the rule that any increase in the rate of interest made
pursuant to an escalation clause must be the result of agreement

108

between

the

parties.

Thus in Philippine National Bank v. Court of Appeals, two


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. The real estate mortgage likewise provided:
The rate of interest charged on the obligation secured by this mortgage as
well as the interest on the amount which may have been advanced by the
MORTGAGEE, in accordance with the provisions hereof, shall be subject
during the life of this contract to such an increase within the rate allowed
by law, as the Board of Directors of the MORTGAGEE may prescribe for its
debtors.
Pursuant to these clauses, PNB successively increased the interest from
18% to 32%, then to 41% and then to 48%. This Court declared the
increases unilaterally imposed by [PNB] to be in violation of the
principle of mutuality as embodied in Art. 1308 of the Civil Code, which
provides that [t]he contract must bind both contracting parties; its validity
or compliance cannot be left to the will of one of them. As the Court
explained:
In order that obligations arising from contracts may have the force
of law between the parties, there must be mutuality between the
parties based on their essential equality. A contract containing a
condition which makes its fulfillment dependent exclusively upon the
uncontrolled will of one of the contracting parties, is void (Garcia vs. Rita
Legarda, Inc., 21 SCRA 555). Hence, even assuming that the P1.8 million
loan agreement between the PNB and the private respondent gave the PNB
a license (although in fact there was none) to increase the interest rate at
will during the term of the loan, that license would have been null and void
for being violative of the principle of mutuality essential in contracts. It
would have invested the loan agreement with the character of a contract
of adhesion, where the parties do not bargain on equal footing, the weaker
partys (the debtor) participation being reduced to the alternative to take
it or leave it (Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a
contract is a veritable trap for the weaker party whom the courts of justice
must
protect
against
abuse
and
imposition.

A similar ruling was made in Philippine National Bank v. Court of


Appeals. The credit agreement in that case provided:
The BANK reserves the right to increase the interest rate within
the limits allowed by law at any time depending on whatever
policy it may adopt in the future: Provided, that the interest rate on
this accommodation shall be correspondingly decreased in the event that
the applicable maximum interest is reduced by law or by the Monetary
Board.
.
.
.
As in the first case, PNB successively increased the stipulated interest so
that what was originally 12% per annum became, after only two years,
42%.
In
declaring
the
increases
invalid,
we
held:
We cannot countenance petitioner banks posturing that the escalation
clause at bench gives it unbridled right to unilaterally upwardly adjust the
interest on private respondents loan. That would completely take away
from private respondents the right to assent to an important modification
in their agreement, and would negate the element of mutuality in
contracts.
Only recently we invalidated another round of interest increases
decreed by PNB pursuant to a similar agreement it had with other
borrowers:
[W]hile the Usury Law ceiling on interest rates was lifted by C.B. Circular
905, nothing in the said circular could possibly be read as granting
respondent bank carte blanche authority to raise interest rates to
levels which would either enslave its borrowers or lead to a
hemorrhaging
of
their
assets.
In this case no attempt was made by PNB to secure the conformity
of private respondents to the successive increases in the interest
rate. Private respondents assent to the increases can not be
implied from their lack of response to the letters sent by PNB,
informing them of the increases. For as stated in one case, no one
receiving a proposal to change a contract is obliged to answer the
proposal.[71] (Emphasis supplied)
We made the same pronouncement in a fifth case, New Sampaguita
Builders Construction, Inc. v. Philippine National Bank,[72] thus

109

Courts have the authority to strike down or to modify provisions in


promissory notes that grant the lenders unrestrained power to increase
interest rates, penalties and other charges at the latters sole discretion
and without giving prior notice to and securing the consent of the
borrowers. This unilateral authority is anathema to the mutuality of
contracts and enable lenders to take undue advantage of borrowers.
Although the Usury Law has been effectively repealed, courts may still
reduce iniquitous or unconscionable rates charged for the use of money.
Furthermore, excessive interests, penalties and other charges not
revealed in disclosure statements issued by banks, even if
stipulated in the promissory notes, cannot be given effect under
the Truth in Lending Act.[73] (Emphasis supplied)
Yet again, in a sixth disposition, Philippine National Bank v. Spouses
Rocamora,[74] the above pronouncements were reiterated to debunk PNBs
repeated reliance on its invalidated contract stipulations:
We repeated this rule in the 1994 case of PNB v. CA and Jayme-Fernandez
and the 1996 case of PNB v. CA and Spouses Basco. Taking no heed of
these rulings, the escalation clause PNB used in the present case to justify
the increased interest rates is no different from the escalation clause
assailed in the 1996 PNB case; in both, the interest rates were increased
from the agreed 12% per annum rate to 42%. x x x
x

Verily, all these cases, including the present one, involve identical or
similar provisions found in respondents credit agreements and promissory
notes. Thus, the July 1989 Credit Agreement executed by petitioners and
respondent contained the following stipulation on interest:
1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5%
[per annum]. Interest shall be payable in advance every one hundred
twenty days at the rate prevailing at the time of the renewal.
(b) The Borrower agrees that the Bank may modify the interest rate in
the Loan depending on whatever policy the Bank may adopt in the
future, including without limitation, the shifting from the floating interest
rate system to the fixed interest rate system, or vice versa. Where the
Bank has imposed on the Loan interest at a rate per annum which is equal
to the Banks spread over the current floating interest rate, the Borrower
hereby agrees that the Bank may, without need of notice to the
Borrower, increase or decrease its spread over the floating
interest rate at any time depending on whatever policy it may
adopt in the future.[76] (Emphases supplied)
while the eight promissory notes issued pursuant thereto granted PNB the
right to increase or reduce interest rates within the limits allowed by law
or the Monetary Board[77] and the Real Estate Mortgage agreement
included the same right to increase or reduce interest rates at any time
depending on whatever policy PNB may adopt in the future.[78]

On the strength of this ruling, PNBs argument that the spouses


Rocamoras failure to contest the increased interest rates that
were purportedly reflected in the statements of account and the
demand letters sent by the bank amounted to their implied
acceptance
of
the
increase

should
likewise
fail.

On the basis of the Credit Agreement, petitioners issued promissory notes


which they signed in blank, and respondent later on entered their
corresponding interest rates, as follows:
1st

Promissory

Evidently, PNBs failure to secure the spouses Rocamoras consent to the


increased interest rates prompted the lower courts to declare excessive
and illegal the interest rates imposed. To go around this lower court
finding, PNB alleges that the P206,297.47 deficiency claim was computed
using only the original 12% per annum interest rate. We find this unlikely.
Our examination of PNBs own ledgers, included in the records of the case,
clearly indicates that PNB imposed interest rates higher than the agreed
12% per annum rate. This confirmatory finding, albeit based solely on
ledgers found in the records, reinforces the application in this case of the
rule that findings of the RTC, when affirmed by the CA, are binding upon
this Court.[75] (Emphases supplied)

2nd

Promissory

3rd

Promissory

4th

Promissory

Note
Note
Note
Note

dated
dated
dated
dated

July

24,

November
March

1989
22,

1989

21,

July

19,

1990
1990

19.5%;

23%;

22%;

24%;

5th

Promissory

Note

dated

December

17,

1990

28%;

6th

Promissory

Note

dated

February

14,

1991

32%;

7th

Promissory

30%;

and

Note

dated

March

1,

1991

110

22nd

Promissory

Note

dated

April

22,

1996

18.5%;

23rd

Promissory

Note

dated

July

22,

1996

18.5%;

8th Promissory Note dated July 11, 1991 24%.[79]


On the other hand, the August 1991 Amendment to Credit Agreement
contains the following stipulation regarding interest:
1.03. Interest on Line Availments. (a) The Borrowers agree to pay
interest on each Availment from date of each Availment up to but not
including the date of full payment thereof at the rate per annum which
is determined by the Bank to be prime rate plus applicable spread
in effect as of the date of each Availment.[80] (Emphases supplied)
and under this Amendment to Credit Agreement, petitioners again
executed and signed the following promissory notes in blank, for the
respondent to later on enter the corresponding interest rates, which it did,
as follows:
9th

Promissory

10th

Promissory

11th

Promissory

Note
Note
Note

November

dated
dated

13th

Promissory

Note

dated

March

14th

Promissory

Note

dated

July

16th

Promissory

17th

Promissory

18th

Promissory

Note
Note
Note
Note

dated
dated
dated
dated

12,
17,

13,

November
April

20th

Promissory

Note

dated

July

December

1991

26%;

1992

25%;

1992

23%;

1992
1993
1993

28,

July

dated

dated

15,

March

Note

Note

10,

November

Promissory

Promissory

11,

November

19th

21st

8,
19,

July

Promissory

Promissory

dated

March

12th

15th

Note

dated

16,
10,

19,
18,

21%;

21%;

1993

17.5%;

21%;

1994

21%;

1994

21%;

1994

1995
1995
1995

16%;
21%;

18.5%;

18.75%;

24th

Promissory

Note

25th

Promissory

Note

dated
dated

November
May

30,

25,
1997

1996

17.5%;

18%;
and

26th Promissory Note (PN 9707237) dated July 30, 1997 25%.[81]
The 9th up to the 17th promissory notes provide for the payment of
interest at the rate the Bank may at any time without notice, raise within
the limits allowed by law x x x.[82] On the other hand, the 18th up to the
26th promissory notes which includes PN 9707237 carried the following
provision:
x x x For this purpose, I/We agree that the rate of interest herein
stipulated may be increased or decreased for the subsequent
Interest Periods, with prior notice to the Borrower in the event of
changes in interest rate prescribed by law or the Monetary Board
of the Central Bank of the Philippines, or in the Banks overall cost
of funds. I/We hereby agree that in the event I/we are not
agreeable to the interest rate fixed for any Interest Period, I/we
shall have the option to prepay the loan or credit facility without
penalty within ten (10) calendar days from the Interest Setting
Date.[83] (Emphasis supplied)
These stipulations must be once more invalidated, as was done in previous
cases. The common denominator in these cases is the lack of agreement of
the parties to the imposed interest rates. For this case, this lack of consent
by the petitioners has been made obvious by the fact that they signed the
promissory notes in blank for the respondent to fill. We find credible the
testimony of Lydia in this respect. Respondent failed to discredit her; in
fact, its witness PNB Kalibo Branch Manager Aspa admitted that interest
rates were fixed solely by its Treasury Department in Manila, which were
then simply communicated to all PNB branches for implementation. If this
were the case, then this would explain why petitioners had to sign the
promissory notes in blank, since the imposable interest rates have yet to
be determined and fixed by respondents Treasury Department in Manila.
Moreover, in Aspas enumeration of the factors that determine the interest
rates PNB fixes such as cost of money, foreign currency values, bank
administrative costs, profitability, and considerations which affect the

111

banking industry it can be seen that considerations which affect PNBs


borrowers are ignored. A borrowers current financial state, his feedback or
opinions, the nature and purpose of his borrowings, the effect of foreign
currency values or fluctuations on his business or borrowing, etc. these
are not factors which influence the fixing of interest rates to be imposed on
him. Clearly, respondents method of fixing interest rates based on onesided, indeterminate, and subjective criteria such as profitability, cost of
money, bank costs, etc. is arbitrary for there is no fixed standard or margin
above or below these considerations.

principal condition, if not the most important component. Thus, any


modification thereof must be mutually agreed upon; otherwise, it has no
binding
effect.

The stipulation in the promissory notes subjecting the interest rate to


review does not render the imposition by UCPB of interest rates on the
obligations of the spouses Beluso valid. According to said stipulation:

The Bank reserves the right to increase the interest rate within the limits
allowed by law at any time depending on whatever policy it may adopt in
the future: Provided, that, the interest rate on this accommodation shall be
correspondingly decreased in the event that the applicable maximum
interest rate is reduced by law or by the Monetary Board. In either case,
the adjustment in the interest rate agreed upon shall take effect on the
effectivity date of the increase or decrease in maximum interest rate. [85]
(Emphasis supplied)

The interest rate shall be subject to review and may be increased or


decreased by the LENDER considering among others the prevailing
financial and monetary conditions; or the rate of interest and
charges which other banks or financial institutions charge or offer
to charge for similar accommodations; and/or the resulting
profitability to the LENDER after due consideration of all dealings with
the BORROWER.
It should be pointed out that the authority to review the interest
rate was given [to] UCPB alone as the lender. Moreover, UCPB may
apply the considerations enumerated in this provision as it wishes. As
worded in the above provision, UCPB may give as much weight as it
desires to each of the following considerations: (1) the prevailing financial
and monetary condition; (2) the rate of interest and charges which other
banks or financial institutions charge or offer to charge for similar
accommodations; and/or (3) the resulting profitability to the LENDER
(UCPB) after due consideration of all dealings with the BORROWER (the
spouses Beluso). Again, as in the case of the interest rate provision,
there is no fixed margin above or below these considerations.
In view of the foregoing, the Separability Clause cannot save either of the
two options of UCPB as to the interest to be imposed, as both options
violate the principle of mutuality of contracts.[84] (Emphases supplied)
To repeat what has been said in the above-cited cases, any modification in
the contract, such as the interest rates, must be made with the consent of
the contracting parties. The minds of all the parties must meet as to the
proposed modification, especially when it affects an important aspect of
the agreement. In the case of loan agreements, the rate of interest is a

What is even more glaring in the present case is that, the stipulations in
question no longer provide that the parties shall agree upon the interest
rate to be fixed; -instead, they are worded in such a way that the borrower
shall agree to whatever interest rate respondent fixes. In credit
agreements covered by the above-cited cases, it is provided that:

Whereas, in the present credit agreements under scrutiny, it is stated that:


IN

THE

JULY

1989

CREDIT

AGREEMENT

(b) The Borrower agrees that the Bank may modify the interest rate on
the Loan depending on whatever policy the Bank may adopt in the future,
including without limitation, the shifting from the floating interest rate
system to the fixed interest rate system, or vice versa. Where the Bank has
imposed on the Loan interest at a rate per annum, which is equal to the
Banks spread over the current floating interest rate, the Borrower
hereby agrees that the Bank may, without need of notice to the
Borrower, increase or decrease its spread over the floating interest rate at
any time depending on whatever policy it may adopt in the future. [86]
(Emphases
supplied)
IN

THE

AUGUST

1991

AMENDMENT

TO

CREDIT

AGREEMENT

1.03. Interest on Line Availments. (a) The Borrowers agree to pay


interest on each Availment from date of each Availment up to but not
including the date of full payment thereof at the rate per annum which is
determined by the Bank to be prime rate plus applicable spread in effect
as of the date of each Availment.[87] (Emphasis supplied)

112

Plainly, with the present credit agreement, the element of consent or


agreement by the borrower is now completely lacking, which makes
respondents
unlawful
act
all
the
more
reprehensible.
Accordingly, petitioners are correct in arguing that estoppel should not
apply to them, for [e]stoppel cannot be predicated on an illegal act. As
between the parties to a contract, validity cannot be given to it by estoppel
if it is prohibited by law or is against public policy. [88] It appears that by its
acts, respondent violated the Truth in Lending Act, or Republic Act No.
3765, which was enacted to protect x x x citizens from a lack of
awareness of the true cost of credit to the user by using a full disclosure of
such cost with a view of preventing the uninformed use of credit to the
detriment of the national economy. [89] The law gives a detailed
enumeration of the specific information required to be disclosed, among
which are the interest and other charges incident to the extension of
credit.[90] Section 4 thereof provides that a disclosure statement must be
furnished prior to the consummation of the transaction, thus:
SEC. 4. Any creditor shall furnish to each person to whom credit is
extended, prior to the consummation of the transaction, a clear statement
in writing setting forth, to the extent applicable and in accordance with
rules and regulations prescribed by the Board, the following information:

Under Section 4(6), finance charge represents the amount to be paid by


the debtor incident to the extension of credit such as interest or discounts,
collection fees, credit investigation fees, attorneys fees, and other service
charges. The total finance charge represents the difference between (1)
the aggregate consideration (down payment plus installments) on the part
of the debtor, and (2) the sum of the cash price and non-finance charges.
[91]

By requiring the petitioners to sign the credit documents and the


promissory notes in blank, and then unilaterally filling them up later on,
respondent violated the Truth in Lending Act, and was remiss in its
disclosure obligations. In one case, which the Court finds applicable here, it
was held:
UCPB further argues that since the spouses Beluso were duly given
copies of the subject promissory notes after their execution, then
they were duly notified of the terms thereof, in substantial
compliance
with
the
Truth
in
Lending
Act.
Once more, we disagree. Section 4 of the Truth in Lending Act clearly
provides that the disclosure statement must be furnished prior to the
consummation of the transaction:

(2) the amounts, if any, to be credited as down payment and/or trade-in;

SEC. 4. Any creditor shall furnish to each person to whom credit is


extended, prior to the consummation of the transaction, a clear statement
in writing setting forth, to the extent applicable and in accordance with
rules and regulations prescribed by the Board, the following information:

(3) the difference between the amounts set forth under clauses (1) and
(2);

(1) the cash price or delivered price of the property or service to be


acquired;

(4) the charges, individually itemized, which are paid or to be paid by such
person in connection with the transaction but which are not incident to the
extension
of
credit;

(2) the amounts, if any, to be credited as down payment and/or trade-in;

(1) the cash price or delivered price of the property or service to be


acquired;

(5)

the

total

amount

to

be

financed;

(3) the difference between the amounts set forth under clauses (1) and
(2);

(6) the finance charge expressed in terms of pesos and centavos; and

(4) the charges, individually itemized, which are paid or to be paid by such
person in connection with the transaction but which are not incident to the
extension
of
credit;

(7) the percentage that the finance bears to the total amount to be
financed expressed as a simple annual rate on the outstanding unpaid
balance of the obligation.

(5)

the

total

amount

to

be

financed;

(6) the finance charge expressed in terms of pesos and centavos; and

113

(7) the percentage that the finance bears to the total amount to be
financed expressed as a simple annual rate on the outstanding unpaid
balance of the obligation.
The rationale of this provision is to protect users of credit from a
lack of awareness of the true cost thereof, proceeding from the
experience that banks are able to conceal such true cost by
hidden charges, uncertainty of interest rates, deduction of
interests from the loaned amount, and the like. The law thereby
seeks to protect debtors by permitting them to fully appreciate
the true cost of their loan, to enable them to give full consent to
the contract, and to properly evaluate their options in arriving at
business decisions. Upholding UCPBs claim of substantial compliance
would defeat these purposes of the Truth in Lending Act. The belated
discovery of the true cost of credit will too often not be able to
reverse the ill effects of an already consummated business
decision.
In addition, the promissory notes, the copies of which were
presented to the spouses Beluso after execution, are not sufficient
notification from UCPB. As earlier discussed, the interest rate
provision therein does not sufficiently indicate with particularity
the interest rate to be applied to the loan covered by said
promissory notes.[92] (Emphases supplied)
However, the one-year period within which an action for violation of the
Truth in Lending Act may be filed evidently prescribed long ago, or
sometime in 2001, one year after petitioners received the March 2000
demand
letter
which
contained
the
illegal
charges.
The fact that petitioners later received several statements of account
detailing its outstanding obligations does not cure respondents breach. To
repeat, the belated discovery of the true cost of credit does not reverse the
ill effects of an already consummated business decision. [93] Neither may the
statements be considered proposals sent to secure the petitioners
conformity; they were sent after the imposition and application of the
interest rate, and not before. And even if it were to be presumed that these
are proposals or offers, there was no acceptance by petitioners. No one
receiving a proposal to modify a loan contract, especially regarding
interest,
is
obliged
to
answer
the
proposal. [94]
Loan and credit arrangements may be made enticing by, or sweetened

with, offers of low initial interest rates, but actually accompanied by


provisions written in fine print that allow lenders to later on increase or
decrease interest rates unilaterally, without the consent of the borrower,
and depending on complex and subjective factors. Because they have
been lured into these contracts by initially low interest rates, borrowers get
caught and stuck in the web of subsequent steep rates and penalties,
surcharges and the like. Being ordinary individuals or entities, they
naturally dread legal complications and cannot afford court litigation; they
succumb to whatever charges the lenders impose. At the very least,
borrowers should be charged rightly; but then again this is not possible in a
one-sided credit system where the temptation to abuse is strong and the
willingness to rectify is made weak by the eternal desire for profit.
Given the above supposition, the Court cannot subscribe to respondents
argument that in every repricing of petitioners loan availment, they are
given the right to question the interest rates imposed. The import of
respondents line of reasoning cannot be other than that if one out of every
hundred borrowers questions respondents practice of unilaterally fixing
interest rates, then only the loan arrangement with that lone complaining
borrower will enjoy the benefit of review or re-negotiation; as to the 99
others, the questionable practice will continue unchecked, and respondent
will continue to reap the profits from such unscrupulous practice. The Court
can no more condone a view so perverse. This is exactly what the Court
meant in the immediately preceding cited case when it said that the
belated discovery of the true cost of credit does not reverse the ill effects
of an already consummated business decision; [95] as to the 99 borrowers
who did not or could not complain, the illegal act shall have become a fait
accompli to their detriment, they have already suffered the oppressive
rates.
Besides, that petitioners are given the right to question the interest rates
imposed is, under the circumstances, irrelevant; we have a situation where
the petitioners do not stand on equal footing with the respondent. It is
doubtful that any borrower who finds himself in petitioners position would
dare question respondents power to arbitrarily modify interest rates at any
time. In the second place, on what basis could any borrower question such
power, when the criteria or standards which are really one-sided,
arbitrary and subjective for the exercise of such power are precisely lost
on
him?
For the same reasons, the Court cannot validly consider that, as stipulated
in the 18th up to the 26th promissory notes, petitioners are granted the

114

option to prepay the loan or credit facility without penalty within 10


calendar days from the Interest Setting Date if they are not agreeable to
the interest rate fixed. It has been shown that the promissory notes are
executed and signed in blank, meaning that by the time petitioners learn of
the interest rate, they are already bound to pay it because they have
already pre-signed the note where the rate is subsequently entered.
Besides, premium may not be placed upon a stipulation in a contract which
grants one party the right to choose whether to continue with or withdraw
from the agreement if it discovers that what the other party has been
doing
all
along
is
improper
or
illegal.
Thus said, respondents arguments relative to the credit documents that
documentary evidence prevails over testimonial evidence; that the credit
documents are in proper form, presumed regular, and endure, against
arbitrary claims by petitioners, experienced business persons that they
are, they signed questionable loan documents whose provisions for interest
rates were left blank, and yet they continued to pay the interests without
protest for a number of years deserve no consideration.
With regard to interest, the Court finds that since the escalation clause is
annulled, the principal amount of the loan is subject to the original or
stipulated rate of interest, and upon maturity, the amount due shall be
subject to legal interest at the rate of 12% per annum. This is the uniform
ruling adopted in previous cases, including those cited here. [96] The
interests paid by petitioners should be applied first to the payment of the
stipulated or legal and unpaid interest, as the case may be, and later, to
the capital or principal.[97] Respondent should then refund the excess
amount of interest that it has illegally imposed upon petitioners; [t]he
amount to be refunded refers to that paid by petitioners when they had no
obligation to do so.[98] Thus, the parties original agreement stipulated the
payment of 19.5% interest; however, this rate was intended to apply only
to the first promissory note which expired on November 21, 1989 and was
paid by petitioners; it was not intended to apply to the whole duration of
the loan. Subsequent higher interest rates have been declared illegal; but
because only the rates are found to be improper, the obligation to pay
interest subsists, the same to be fixed at the legal rate of 12% per annum.
However, the 12% interest shall apply only until June 30, 2013. Starting
July 1, 2013, the prevailing rate of interest shall be 6% per annum pursuant
to our ruling in Nacar v. Gallery Frames[99] and Bangko Sentral ng PilipinasMonetary
Board
Circular
No.
799.
Now to the issue of penalty. PN 9707237 provides that failure to pay it or

any installment thereon, when due, shall constitute default, and a penalty
charge of 24% per annum based on the defaulted principal amount shall
be imposed. Petitioners claim that this penalty should be excluded from
the foreclosure amount or bid price because the Real Estate Mortgage and
the Supplement thereto did not specifically include it as part of the secured
amount. Respondent justifies its inclusion in the secured amount, saying
that the purpose of the penalty or a penal clause is to ensure the
performance of the obligation and substitute for damages and the
payment of interest in the event of non-compliance. [100] Respondent adds
that the imposition and collection of a penalty is a normal banking practice,
and the standard rate per annum for all commercial banks, at the time,
was 24%. Its inclusion as part of the secured amount in the mortgage
agreements
is
thus
valid
and
necessary.
The Court sustains petitioners view that the penalty may not be included
as part of the secured amount. Having found the credit agreements and
promissory notes to be tainted, we must accord the same treatment to the
mortgages. After all, [a] mortgage and a note secured by it are deemed
parts of one transaction and are construed together. [101] Being so tainted
and having the attributes of a contract of adhesion as the principal credit
documents, we must construe the mortgage contracts strictly, and against
the party who drafted it. An examination of the mortgage agreements
reveals that nowhere is it stated that penalties are to be included in the
secured amount. Construing this silence strictly against the respondent,
the Court can only conclude that the parties did not intend to include the
penalty allowed under PN 9707237 as part of the secured amount. Given
its resources, respondent could have if it truly wanted to conveniently
prepared and executed an amended mortgage agreement with the
petitioners, thereby including penalties in the amount to be secured by the
encumbered
properties.
Yet
it
did
not.
With regard to attorneys fees, it was plain error for the CA to have passed
upon the issue since it was not raised by the petitioners in their appeal; it
was the respondent that improperly brought it up in its appellees brief,
when it should have interposed an appeal, since the trial courts Decision
on this issue is adverse to it. It is an elementary principle in the subject of
appeals that an appellee who does not himself appeal cannot obtain from
the appellate court any affirmative relief other than those granted in the
decision of the court below.
x x x [A]n appellee, who is at the same time not an appellant, may on
appeal be permitted to make counter assignments of error in ordinary

115

actions, when the purpose is merely to defend himself against an appeal in


which errors are alleged to have been committed by the trial court both in
the appreciation of facts and in the interpretation of the law, in order to
sustain the judgment in his favor but not when his purpose is to seek
modification or reversal of the judgment, in which case it is necessary for
him to have excepted to and appealed from the judgment. [102]
Since petitioners did not raise the issue of reduction of attorneys fees, the
CA possessed no authority to pass upon it at the instance of respondent.
The ruling of the trial court in this respect should remain undisturbed.
For the fixing of the proper amounts due and owing to the parties to the
respondent as creditor and to the petitioners who are entitled to a refund
as a consequence of overpayment considering that they paid more by way
of interest charges than the 12% per annum[103] herein allowed the case
should be remanded to the lower court for proper accounting and
computation, applying the following procedure:
1.

The 1st Promissory Note with the 19.5% interest rate is deemed
proper and paid;

2.

All subsequent promissory notes (from the 2nd to the 26th


promissory notes) shall carry an interest rate of only 12% per
annum.[104] Thus, interest payment made in excess of 12% on the
2nd promissory note shall immediately be applied to the principal,
and the principal shall be accordingly reduced. The reduced
principal shall then be subjected to the 12% [105] interest on the 3rd
promissory note, and the excess over 12% interest payment on the
3rd promissory note shall again be applied to the principal, which
shall again be reduced accordingly. The reduced principal shall
then be subjected to the 12% interest on the 4th promissory note,
and the excess over 12% interest payment on the 4th promissory
note shall again be applied to the principal, which shall again be
reduced accordingly. And so on and so forth;

3.

4.

After the above procedure is carried out, the trial court


shall be able to conclude if petitioners a) still have an
OUTSTANDING BALANCE/OBLIGATION or b) MADE PAYMENTS
OVER AND ABOVE THEIR TOTAL OBLIGATION (principal and
interest);
Such outstanding balance/obligation, if there be any, shall
then be subjected to a 12% per annum interest from October

28, 1997 until January 14, 1999, which is the date of the auction
sale;
5.

Such outstanding balance/obligation shall also be charged a 24%


per annum penalty from August 14, 1997 until January 14, 1999.
But from this total penalty, the petitioners previous payment of
penalties in the amount of P202,000.00 made on January 27,
1998[106] shall be DEDUCTED;

6.

To this outstanding balance (3.), the interest (4.), penalties (5.),


and the final and executory award of 1% attorneys fees shall be
ADDED;

7.

The sum total of the outstanding balance (3.), interest (4.) and 1%
attorneys fees (6.) shall be DEDUCTED from the bid price of
P4,324,172.96. The penalties (5.) are not included because they
are not included in the secured amount;

8.

The difference in (7.) [P4,324,172.96 LESS sum total of the


outstanding balance (3.), interest (4.), and 1% attorneys fees (6.)]
shall be DELIVERED TO THE PETITIONERS;

9.

Respondent may then proceed to consolidate its title to TCTs T14250 and T-16208;

10. ON THE OTHER HAND, if after performing the procedure in (2.), it


turns out that petitioners made an OVERPAYMENT, the interest
(4.), penalties (5.), and the award of 1% attorneys fees (6.) shall
be DEDUCTED from the overpayment. There is no outstanding
balance/obligation precisely because petitioners have paid beyond
the amount of the principal and interest;
11. If the overpayment exceeds the sum total of the interest (4.),
penalties (5.), and award of 1% attorneys fees (6.), the excess
shall be RETURNED to the petitioners, with legal interest, under the
principle of solutio indebiti;[107]
12. Likewise, if the overpayment exceeds the total amount of interest
(4.) and award of 1% attorneys fees (6.), the trial court shall
INVALIDATE THE EXTRAJUDICIAL FORECLOSURE AND SALE;
13. HOWEVER, if the total amount of interest (4.) and award of 1%
attorneys fees (6.) exceed petitioners overpayment, then the
excess shall be DEDUCTED from the bid price of P4,324,172.96;

116

14. The difference in (13.) [P4,324,172.96 LESS sum total of the


interest (4.) and 1% attorneys fees (6.)] shall be DELIVERED TO
THE PETITIONERS;

Philippine National Bank, taking into consideration the foregoing


dispositions, and applying the procedure hereinabove set forth;
5.

Thereafter, the trial court is ORDERED to make a determination as


to the validity of the extrajudicial foreclosure and sale, declaring
the same null and void in case of overpayment and ordering the
release and return of Transfer Certificates of Title Nos. T-14250 and
TCT T-16208 to petitioners, or ordering the delivery to the
petitioners of the difference between the bid price and the total
remaining obligation of petitioners, if any;

6.

In the meantime, the respondent Philippine National Bank is


ENJOINED from consolidating title to Transfer Certificates of Title
Nos. T-14250 and T-16208 until all the steps in the procedure
above set forth have been taken and applied;

7.

The reimbursement of the excess in the bid price of P377,505.99,


which respondent Philippine National Bank is ordered to reimburse
petitioners, should be HELD IN ABEYANCE until the true amount
owing to or owed by the parties as against each other is
determined;

8.

Considering that this case has been pending for such a long time
and that further proceedings, albeit uncomplicated, are required,
the trial court is ORDERED to proceed with dispatch.

15. Respondent may then proceed to consolidate its title to TCTs T14250 and T-16208. The outstanding penalties, if any, shall be
collected by other means.
From the above, it will be seen that if, after proper accounting, it turns out
that the petitioners made payments exceeding what they actually owe by
way of principal, interest, and attorneys fees, then the mortgaged
properties need not answer for any outstanding secured amount, because
there is not any; quite the contrary, respondent must refund the excess to
petitioners. In such case, the extrajudicial foreclosure and sale of the
properties shall be declared null and void for obvious lack of basis, the
case being one of solutio indebiti instead. If, on the other hand, it turns out
that petitioners overpayments in interests do not exceed their total
obligation, then the respondent may consolidate its ownership over the
properties, since the period for redemption has expired. Its only obligation
will be to return the difference between its bid price (P4,324,172.96) and
petitioners total obligation outstanding except penalties after applying
the
latters
overpayments.
WHEREFORE, premises considered, the Petition is GRANTED. The May 8,
2007 Decision of the Court of Appeals in CA-G.R. CV No. 79650 is
ANNULLED and SET ASIDE. Judgment is hereby rendered as follows:
1.

The interest rates imposed and indicated in the 2nd up to the 26th
Promissory Notes are DECLARED NULL AND VOID, and such
notes shall instead be subject to interest at the rate of twelve
percent (12%) per annum up to June 30, 2013, and starting July 1,
2013, six percent (6%) per annum until full satisfaction;

2.

The penalty charge imposed in Promissory Note No. 9707237 shall


be EXCLUDED from the amounts secured by the real estate
mortgages;

3.

The trial courts award of one per cent (1%) attorneys fees is
REINSTATED;

4.

The case is ordered REMANDED to the Regional Trial Court,


Branch 6 of Kalibo, Aklan for the computation of overpayments
made by petitioners spouses Eduardo and Lydia Silos to respondent

SO

ORDERED.

Carpio, (Chairperson), Leonardo-De Castro, * Perez, and Perlas-Bernabe, JJ.,


concur.

117

G.R. No. 149004, April 14, 2004


RESTITUTA M. IMPERIAL, PETITIONER, VS. ALEX A. JAUCIAN,
RESPONDENT.

centum per annum, computed from August 31, 1993 until full payment of
the said amount, and in addition, an amount equivalent to ten (10%) per
centum of the total amount due and payable, for attorneys fees, without
pronouncement as to costs.[5]

DECISION

The Facts

PANGANIBAN, J.:
Iniquitous and unconscionable stipulations on interest rates, penalties and
attorneys fees are contrary to morals. Consequently, courts are granted
authority to reduce them equitably. If reasonably exercised, such authority
shall not be disturbed by appellate courts.
The Case

Before us is a Petition for Review[1] under Rule 45 of the Rules of Court,


assailing the July 19, 2000 Decision [2] and the June 14, 2001 Resolution [3] of
the Court of Appeals (CA) in CA-GR CV No. 43635. The decretal portion of
the Decision is as follows:
WHEREFORE, premises considered, the appealed Decision of the
Regional Trial Court, 5th Judicial Region, Branch 21, Naga City, dated
August 31, 1993, in Civil Case No. 89-1911 for Sum of Money, is hereby
AFFIRMED in toto.[4]
The assailed Resolution denied petitioners Motion for Reconsideration.
The dispositive portion of the August 31, 1993 Decision, promulgated by
the Regional Trial Court (RTC) of Naga City (Branch 21) and affirmed by the
CA, reads as follows:
Wherefore, Judgment is hereby rendered declaring Section I, Central Bank
Circular No. 905, series of 1982 to be of no force and legal effect, it having
been promulgated by the Monetary Board of the Central Bank of the
Philippines with grave abuse of discretion amounting to excess of
jurisdiction; declaring that the rate of interest, penalty, and charges for
attorneys fees agreed upon between the parties are unconscionable,
iniquitous, and in violation of Act No. 2655, otherwise known as the Usury
Law, as amended; and ordering Defendant to pay Plaintiff the amount of
FOUR HUNDRED SEVENTY-EIGHT THOUSAND, ONE HUNDRED NINETY-FOUR
and 54/100 (P478,194.54) PESOS, Philippine currency, with regular and
compensatory interests thereon at the rate of twenty-eight (28%) per

The CA summarized the facts of the case in this wise:


The present controversy arose from a case for collection of money, filed
by Alex A. Jaucian against Restituta Imperial, on October 26, 1989. The
complaint alleges, inter alia, that defendant obtained from plaintiff six (6)
separate loans for which the former executed in favor of the latter six (6)
separate promissory notes and issued several checks as guarantee for
payment. When the said loans became overdue and unpaid, especially
when the defendants checks were dishonored, plaintiff made repeated oral
and
written
demands
for
payment.
Specifically, the six (6) separate loans obtained by defendant from
plaintiff on various dates are as follows:
(a)

November 13, 1987

P 50,000.00

(b)

December 28, 1987

40,000.00

(c)

January 6, 1988

30,000.00

(d)

January 11, 1988

50,000.00

(e)

January 12, 1988

50,000.00

(f)

January 13, 1988

100,000.00

Total

P320,000.00

The loans were covered by six (6) separate promissory notes executed by
defendant. The face value of each promissory notes is bigger [than] the
amount released to defendant because said face value already include[d]
the interest from date of note to date of maturity. Said promissory notes,
which indicate the interest of 16% per month, date of issue, due date, the
corresponding guarantee checks issued by defendant, penalties and
attorneys fees, are the following:

118

1.

Exhibit D for loan of P40,000.00 on December 28, 1987, with


face value of P65,000.00;

2.

Exhibit E for loan of P50,000.00 on January 11, 1988, with face


value of P82,000.00;

3.

Exhibit F for loan of P50,000.00 on January 12, 1988, with face


value of P82,000.00;

4.

5.

6.

1988, in the total sum of P320,000.00 at the rate of sixteen percent (16%)
per month. The notes mature[d] every four (4) months with unearned
interest compounding every four (4) months if the loan [was] not fully paid.
The loan releases [were] as follows:
(a)

November 13, 1987

P 50,000.00

(b)

December 28, 1987

40,000.00

Exhibit G for loan of P100,000.00 on January 13, 1988, with face


value of P164,000.00;

(c)

January 6, 1988

30,000.00

(d)

January 11, 1988

50,000.00

Exhibit H This particular promissory note covers the second


renewal of the original loan of P50,000.00 on November 13, 1987,
which was renewed for the first time on March 16, 1988 after
certain payments, and which was renewed finally for the second
time on January 4, 1988 also after certain payments, with a face
value of P56,240.00;

(e)

January 12, 1988

50,000.00

(f)

January 13, 1988

100,000.00

Total

P320,000.00

Exhibit I This particular promissory note covers the second


renewal of the original loan of P30,000.00 on January 6, 1988,
which was renewed for the first time on June 4, 1988 after certain
payments, and which was finally renewed for the second time on
August 6, 1988, also after certain payments, with [a] face value of
P12,760.00;

The particulars about the postdated checks, i.e., number, amount, date,
etc., are indicated in each of the promissory notes. Thus, for Exhibit D,
four (4) PB checks were issued; for Exhibit E four (4) checks; for Exhibit F
four (4) checks; for Exhibit G four (4) checks; for Exhibit H one (1) check;
for
Exhibit
I
one
(1)
check;
The arrangement between plaintiff and defendant regarding these
guarantee checks was that each time a check matures the defendant
would
exchange
it
with
cash.

The loan on November 13, 1987 and January 6, 1988 ha[d] been fully paid
including the usurious interests of 16% per month, this is the reason why
these
were
not
included
in
the
complaint.
Defendant alleges that all the above amounts were released respectively
by checks drawn by the plaintiff, and the latter must produce these checks
as these were returned to him being the drawer if only to serve the truth.
The above amount are the real amount released to the defendant but the
plaintiff by masterful machinations made it appear that the total amount
released was P462,600.00. Because in his computation he made it appear
that the true amounts released was not the original amount, since it
include[d]
the
unconscionable
interest
for
four
months.
Further, defendant claims that as of January 25, 1989, the total payments
made by defendants [were] as follows:
a.

Although, admittedly, defendant made several payments, the same were


not enough and she always defaulted whenever her loans mature[d]. As of
August 16, 1991, the total unpaid amount, including accrued interest,
penalties
and
attorneys
fees,
[was]
P2,807,784.20.
On the other hand, defendant claims that she was extended loans by the
plaintiff on several occasions, i.e., from November 13, 1987 to January 13,

b.

Paid releases on November 13, 1987 of


P50,000.00 and January 6, 1988 of
P30,000.00 these two items were not
included in the complaint affirming
the fact that these were paid

P 80,000.00

Exhibit 26 Receipt

231,000.00

119

c.

Exhibit 8-25 Receipt

65,300.00

d.

Exhibit 27 Receipt

65,000.00

Total

P441,780.00

Less:

320,000.00

Excess Payment

P121,780.00

Defendant contends that from all perspectives the above excess payment
of P121,780.00 is more than the interest that could be legally charged, and
in fact as of January 25, 1989, the total releases have been fully paid.

3. That charging of excessive attorneys fees is hemorrhagic.

4. Charging of excessive penalties per month is in the guise of hidden


interest.

5. The non-inclusion of the husband of the petitioner at the time the case
was filed should have dismissed this case. [8]

The Courts Ruling

On 31 August 1993, the trial court rendered the assailed decision. [6]
The Petition has no merit.
Ruling of the Court of Appeals

On appeal, the CA held that without judicial inquiry, it was improper for the
RTC to rule on the constitutionality of Section 1, Central Bank Circular No.
905, Series of 1982. Nonetheless, the appellate court affirmed the
judgment of the trial court, holding that the latters clear and detailed
computation of petitioners outstanding obligation to respondent was
convincing
and
satisfactory.
Hence, this Petition.[7]
The Issues

Petitioner raises the following arguments for our consideration:


1. That the petitioner has fully paid her obligations even before filing of
this case.

2. That the charging of interest of twenty-eight (28%) per centum per


annum without any writing is illegal.

First
Computation of Outstanding Obligation

Issue:

Arguing that she had already fully paid the loan before the filing of the
case, petitioner alleges that the two lower courts misappreciated the facts
when they ruled that she still had an outstanding balance of P208,430.
This issue involves a question of fact. Such question exists when a doubt or
difference arises as to the truth or the falsehood of alleged facts; and when
there is need for a calibration of the evidence, considering mainly the
credibility of witnesses and the existence and the relevancy of specific
surrounding circumstances, their relation to each other and to the whole,
and
the
probabilities
of
the
situation.[9]
It is a well-entrenched rule that pure questions of fact may not be the
subject of an appeal by certiorari under Rule 45 of the Rules of Court, as
this remedy is generally confined to questions of law. [10] The jurisdiction of
this Court over cases brought to it is limited to the review and rectification
of errors of law allegedly committed by the lower court. As a rule, the
latters factual findings, when adopted and affirmed by the CA, are final
and
conclusive
and
may
not
be
reviewed
on
appeal. [11]
Generally, this Court is not required to analyze and weigh all over again
the evidence already considered in the proceedings below. [12] In the present

120

case, we find no compelling reason to overturn the factual findings of the


RTC -- that the total amount of the loans extended to petitioner was
P320,000, and that she paid a total of only P116,540 on twenty-nine dates.
These findings are supported by a preponderance of evidence. Moreover,
the amount of the outstanding obligation has been meticulously computed
by the trial court and affirmed by the CA. Petitioner has not given us
sufficient reason why her cause falls under any of the exceptions to this
rule on the finality of factual findings.
Second
Rate of Interest

Issue:

The trial court, as affirmed by the CA, reduced the interest rate from 16
percent to 1.167 percent per month or 14 percent per annum; and the
stipulated penalty charge, from 5 percent to 1.167 percent per month or
14
percent
per
annum.
Petitioner alleges that absent any written stipulation between the parties,
the lower courts should have imposed the rate of 12 percent per annum
only.
The records show that there was a written agreement between the parties
for the payment of interest on the subject loans at the rate of 16 percent
per month. As decreed by the lower courts, this rate must be equitably
reduced for being iniquitous, unconscionable and exorbitant. While the
Usury Law ceiling on interest rates was lifted by C.B. Circular No. 905,
nothing in the said circular grants lenders carte blanche authority to raise
interest rates to levels which will either enslave their borrowers or lead to a
hemorrhaging
of
their
assets.[13]
In Medel v. CA,[14] the Court found the stipulated interest rate of 5.5 percent
per month, or 66 percent per annum, unconscionable. In the present case,
the rate is even more iniquitous and unconscionable, as it amounts to 192
percent per annum. When the agreed rate is iniquitous or unconscionable,
it is considered contrary to morals, if not against the law. [Such]
stipulation
is
void.[15]
Since the stipulation on the interest rate is void, it is as if there were no
express contract thereon.[16] Hence, courts may reduce the interest rate as
reason and equity demand. We find no justification to reverse or modify the
rate imposed by the two lower courts.

Third
and
Penalties and Attorneys Fees

Fourth

Issue:

Article 1229 of the Civil Code states thus:


The judge shall equitably reduce the penalty when the principal obligation
has been partly or irregularly complied with by the debtor. Even if there
has been no performance, the penalty may also be reduced by the courts if
it is iniquitous or unconscionable.
In exercising this power to determine what is iniquitous and
unconscionable, courts must consider the circumstances of each case. [17]
What may be iniquitous and unconscionable in one may be totally just and
equitable in another. In the present case, iniquitous and unconscionable
was the parties stipulated penalty charge of 5 percent per month or 60
percent per annum, in addition to regular interests and attorneys fees.
Also, there was partial performance by petitioner when she remitted
P116,540 as partial payment of her principal obligation of P320,000. Under
the circumstances, the trial court was justified in reducing the stipulated
penalty charge to the more equitable rate of 14 percent per annum.
The Promissory Note carried a stipulation for attorneys fees of 25 percent
of the principal amount and accrued interests. Strictly speaking, this
covenant on attorneys fees is different from that mentioned in and
regulated by the Rules of Court. [18] Rather, the attorneys fees here are in
the nature of liquidated damages and the stipulation therefor is aptly
called a penal clause.[19] So long as the stipulation does not contravene
the law, morals, public order or public policy, it is binding upon the obligor.
It is the litigant, not the counsel, who is the judgment creditor entitled to
enforce
the
judgment
by
execution.
Nevertheless, it appears that petitioners failure to comply fully with her
obligation was not motivated by ill will or malice. The twenty-nine partial
payments she made were a manifestation of her good faith. Again, Article
1229 of the Civil Code specifically empowers the judge to reduce the civil
penalty equitably, when the principal obligation has been partly or
irregularly complied with. Upon this premise, we hold that the RTCs
reduction of attorneys fees -- from 25 percent to 10 percent of the total
amount due and payable -- is reasonable.
Fifth
Non-Inclusion of Petitioners Husband

Issue:

121

Petitioner contends that the case against her should have been dismissed,
because her husband was not included in the proceedings before the RTC.
We are not persuaded. The husbands non-joinder does not warrant
dismissal, as it is merely a formal requirement that may be cured by
amendment.[20] Since petitioner alleges that her husband has already
passed away, such an amendment has thus become moot.

WHEREFORE,

SO

the

Petition

is

DENIED.

Costs

against

petitioner.

ORDERED.

Davide, Jr., C.J., (Chairman), Ynares-Santiago, Carpio, and Azcuna, JJ.,


concur.

122

G.R. No. 192986, January 15, 2013


ADVOCATES FOR TRUTH IN LENDING, INC. AND EDUARDO B.
OLAGUER, PETITIONERS, VS. BANGKO SENTRAL MONETARY BOARD,
REPRESENTED BY ITS CHAIRMAN, GOVERNOR ARMANDO M.
TETANGCO, JR., AND ITS INCUMBENT MEMBERS: JUANITA D.
AMATONG, ALFREDO C. ANTONIO, PETER FAVILA, NELLY F.
VILLAFUERTE, IGNACIO R. BUNYE AND CESAR V. PURISIMA,
RESPONDENTS.
DECISION
REYES, J.:
Petitioners, claiming that they are raising issues of transcendental
importance to the public, filed directly with this Court this Petition for
Certiorari under Rule 65 of the 1997 Rules of Court, seeking to declare that
the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), replacing the
Central Bank Monetary Board (CB-MB) by virtue of Republic Act (R.A.) No.
7653, has no authority to continue enforcing Central Bank Circular No. 905,
[1]
issued by the CB-MB in 1982, which suspended Act No. 2655, or the
Usury Law of 1916.
Factual Antecedents

Petitioner Advocates for Truth in Lending, Inc. (AFTIL) is a non- profit, nonstock corporation organized to engage in pro bono concerns and activities
relating to money lending issues. It was incorporated on July 9, 2010, [2] and
a month later, it filed this petition, joined by its founder and president,
Eduardo
B.
Olaguer,
suing
as
a
taxpayer
and
a
citizen.
R.A. No. 265, which created the Central Bank (CB) of the Philippines on
June 15, 1948, empowered the CB-MB to, among others, set the maximum
interest rates which banks may charge for all types of loans and other
credit operations, within limits prescribed by the Usury Law. Section 109 of
R.A. No. 265 reads:
Sec. 109. Interest Rates, Commissions and Charges. The Monetary
Board may fix the maximum rates of interest which banks may pay on
deposits
and
on
other
obligations.

the maximum rates of interest which banks may charge for different types
of loans and for any other credit operations, or may fix the maximum
differences which may exist between the interest or rediscount rates of the
Central Bank and the rates which the banks may charge their customers if
the respective credit documents are not to lose their eligibility for
rediscount
or
advances
in
the
Central
Bank.
Any modifications in the maximum interest rates permitted for the
borrowing or lending operations of the banks shall apply only to future
operations and not to those made prior to the date on which the
modification
becomes
effective.
In order to avoid possible evasion of maximum interest rates set by the
Monetary Board, the Board may also fix the maximum rates that banks
may pay to or collect from their customers in the form of commissions,
discounts, charges, fees or payments of any sort. (Underlining ours)

On March 17, 1980, the Usury Law was amended by Presidential Decree
(P.D.) No. 1684, giving the CB-MB authority to prescribe different maximum
rates of interest which may be imposed for a loan or renewal thereof or the
forbearance of any money, goods or credits, provided that the changes are
effected gradually and announced in advance. Thus, Section 1-a of Act No.
2655 now reads:
Sec. 1-a. The Monetary Board is hereby authorized to prescribe the
maximum rate or rates of interest for the loan or renewal thereof or the
forbearance of any money, goods or credits, and to change such rate or
rates whenever warranted by prevailing economic and social conditions:
Provided, That changes in such rate or rates may be effected gradually on
scheduled
dates
announced
in
advance.
In the exercise of the authority herein granted the Monetary Board may
prescribe higher maximum rates for loans of low priority, such as consumer
loans or renewals thereof as well as such loans made by pawnshops,
finance companies and other similar credit institutions although the rates
prescribed for these institutions need not necessarily be uniform. The
Monetary Board is also authorized to prescribe different maximum rate or
rates for different types of borrowings, including deposits and deposit
substitutes, or loans of financial intermediaries. (Underlining and emphasis
ours)

The Monetary Board may, within the limits prescribed in the Usury Law fix

123

In its Resolution No. 2224 dated December 3, 1982, [3] the CB-MB issued CB
Circular No. 905, Series of 1982, effective on January 1, 1983. Section 1 of
the Circular, under its General Provisions, removed the ceilings on interest
rates on loans or forbearance of any money, goods or credits, to wit:

To justify their skipping the hierarchy of courts and going directly to this
Court to secure a writ of certiorari, petitioners contend that the
transcendental importance of their Petition can readily be seen in the
issues raised therein, to wit:

Sec. 1. The rate of interest, including commissions, premiums, fees and


other charges, on a loan or forbearance of any money, goods, or credits,
regardless of maturity and whether secured or unsecured, that may be
charged or collected by any person, whether natural or juridical, shall not
be subject to any ceiling prescribed under or pursuant to the Usury Law,
as amended. (Underscoring and emphasis ours)

a) Whether under R.A. No. 265 and/or P.D. No. 1684, the CB-MB had the
statutory or constitutional authority to prescribe the maximum rates of
interest for all kinds of credit transactions and forbearance of money,
goods or credit beyond the limits prescribed in the Usury Law;

The Circular then went on to amend Books I to IV of the CBs Manual of


Regulations for Banks and Other Financial Intermediaries (Manual of
Regulations) by removing the applicable ceilings on specific interest rates.
Thus, Sections 5, 9 and 10 of CB Circular No. 905 amended Book I,
Subsections 1303, 1349, 1388.1 of the Manual of Regulations, by removing
the ceilings for interest and other charges, commissions, premiums, and
fees applicable to commercial banks; Sections 12 and 17 removed the
interest ceilings for thrift banks (Book II, Subsections 2303, 2349); Sections
19 and 21 removed the ceilings applicable to rural banks (Book III,
Subsection 3152.3-c); and, Sections 26, 28, 30 and 32 removed the
ceilings for non-bank financial intermediaries (Book IV, Subsections
4303Q.1
to
4303Q.9,
4303N.1,
4303P). [4]
On June 14, 1993, President Fidel V. Ramos signed into law R.A. No. 7653
establishing the Bangko Sentral ng Pilipinas (BSP) to replace the CB. The
repealing clause thereof, Section 135, reads:
Sec. 135. Repealing Clause. Except as may be provided for in Sections
46 and 132 of this Act, Republic Act No. 265, as amended, the provisions of
any other law, special charters, rule or regulation issued pursuant to said
Republic Act No. 265, as amended, or parts thereof, which may be
inconsistent with the provisions of this Act are hereby repealed.
Presidential Decree No. 1792 is likewise repealed.

Petition for Certiorari

b) If so, whether the CB-MB exceeded its authority when it issued CB


Circular No. 905, which removed all interest ceilings and thus
suspended Act No. 2655 as regards usurious interest rates;
c) Whether under R.A. No. 7653, the new BSP-MB may continue to enforce
CB Circular No. 905.[5]

Petitioners attached to their petition copies of several Senate Bills and


Resolutions of the 10th Congress, which held its sessions from 1995 to
1998, calling for investigations by the Senate Committee on Banks and
Financial Institutions into alleged unconscionable commercial rates of
interest imposed by these entities. Senate Bill (SB) Nos. 37 [6] and 1860,[7]
filed by Senator Vicente C. Sotto III and the late Senator Blas F. Ople,
respectively, sought to amend Act No. 2655 by fixing the rates of interest
on loans and forbearance of credit; Philippine Senate Resolution (SR) No.
1053,[8] 1073[9] and 1102,[10] filed by Senators Ramon B. Magsaysay, Jr.,
Gregorio B. Honasan and Franklin M. Drilon, respectively, urged the
aforesaid Senate Committee to investigate ways to curb the high
commercial interest rates then obtaining in the country; Senator Ernesto
Maceda filed SB No. 1151 to prohibit the collection of more than two
months of advance interest on any loan of money; and Senator Raul Roco
filed SR No. 1144[11] seeking an investigation into an alleged cartel of
commercial banks, called Club 1821, reportedly behind the regime of
high interest rates. The petitioners also attached news clippings [12] showing
that in February 1998 the banks prime lending rates, or interests on loans
to
their
best
borrowers,
ranged
from
26%
to
31%.
Petitioners contend that under Section 1-a of Act No. 2655, as amended by
P.D. No. 1684, the CB-MB was authorized only to prescribe or set the
maximum rates of interest for a loan or renewal thereof or for the
forbearance of any money, goods or credits, and to change such rates

124

whenever warranted by prevailing economic and social conditions, the


changes to be effected gradually and on scheduled dates; that nothing in
P.D. No. 1684 authorized the CB-MB to lift or suspend the limits of interest
on all credit transactions, when it issued CB Circular No. 905. They further
insist that under Section 109 of R.A. No. 265, the authority of the CB-MB
was clearly only to fix the banks maximum rates of interest, but always
within
the
limits
prescribed
by
the
Usury
Law.
Thus, according to petitioners, CB Circular No. 905, which was promulgated
without the benefit of any prior public hearing, is void because it violated
Article 5 of the New Civil Code, which provides that Acts executed against
the provisions of mandatory or prohibitory laws shall be void, except when
the
law
itself
authorizes
their
validity.
They further claim that just weeks after the issuance of CB Circular No.
905, the benchmark 91-day Treasury bills (T-bills), [13] then known as Jobo
bills[14] shot up to 40% per annum, as a result. The banks immediately
followed suit and re-priced their loans to rates which were even higher
than those of the Jobo bills. Petitioners thus assert that CB Circular No.
905 is also unconstitutional in light of Section 1 of the Bill of Rights, which
commands that no person shall be deprived of life, liberty or property
without due process of law, nor shall any person be denied the equal
protection
of
the
laws.
Finally, petitioners point out that R.A. No. 7653 did not re-enact a provision
similar to Section 109 of R.A. No. 265, and therefore, in view of the
repealing clause in Section 135 of R.A. No. 7653, the BSP-MB has been
stripped of the power either to prescribe the maximum rates of interest
which banks may charge for different kinds of loans and credit
transactions, or to suspend Act No. 2655 and continue enforcing CB
Circular No. 905.
Ruling
The petition must fail.
A. The Petition is procedurally infirm.
The decision on whether or not to accept a petition for certiorari, as well as
to grant due course thereto, is addressed to the sound discretion of the
court.[15] A petition for certiorari being an extraordinary remedy, the party
seeking to avail of the same must strictly observe the procedural rules laid
down by law, and non-observance thereof may not be brushed aside as

mere

technicality.[16]

As provided in Section 1 of Rule 65, a writ of certiorari is directed against a


tribunal exercising judicial or quasi-judicial functions. [17] Judicial functions
are exercised by a body or officer clothed with authority to determine what
the law is and what the legal rights of the parties are with respect to the
matter in controversy. Quasi-judicial function is a term that applies to the
action or discretion of public administrative officers or bodies given the
authority to investigate facts or ascertain the existence of facts, hold
hearings, and draw conclusions from them as a basis for their official action
using
discretion
of
a
judicial
nature. [18]
The CB-MB (now BSP-MB) was created to perform executive functions with
respect to the establishment, operation or liquidation of banking and credit
institutions, and branches and agencies thereof. [19] It does not perform
judicial or quasi-judicial functions. Certainly, the issuance of CB Circular No.
905 was done in the exercise of an executive function. Certiorari will not lie
in
the
instant
case.[20]
B. Petitioners have no locus standi to file the Petition
Locus standi is defined as a right of appearance in a court of justice on a
given question. In private suits, Section 2, Rule 3 of the 1997 Rules of Civil
Procedure provides that every action must be prosecuted or defended in
the name of the real party in interest, who is the party who stands to be
benefited or injured by the judgment in the suit or the party entitled to the
avails of the suit. Succinctly put, a partys standing is based on his own
right
to
the
relief
sought. [21]
Even in public interest cases such as this petition, the Court has generally
adopted the direct injury test that the person who impugns the validity of
a statute must have a personal and substantial interest in the case such
that he has sustained, or will sustain direct injury as a result. [22] Thus,
while petitioners assert a public right to assail CB Circular No. 905 as an
illegal executive action, it is nonetheless required of them to make out a
sufficient interest in the vindication of the public order and the securing of
relief. It is significant that in this petition, the petitioners do not allege that
they sustained any personal injury from the issuance of CB Circular No.
905.
Petitioners also do not claim that public funds were being misused in the
enforcement of CB Circular No. 905. In Kilosbayan, Inc. v. Morato,[23]

125

involving the on-line lottery contract of the PCSO, there was no allegation
that public funds were being misspent, which according to the Court would
have made the action a public one, and justify relaxation of the
requirement that an action must be prosecuted in the name of the real
party-in-interest. The Court held, moreover, that the status of Kilosbayan
as a peoples organization did not give it the requisite personality to
question the validity of the contract. Thus:
Petitioners do not in fact show what particularized interest they have for
bringing this suit. It does not detract from the high regard for petitioners as
civic leaders to say that their interest falls short of that required to
maintain an action under the Rule 3, Sec. 2.[24]

C. The Petition raises no issues of transcendental importance.


In the 1993 case of Joya v. Presidential Commission on Good Government,
[25]
it was held that no question involving the constitutionality or validity of
a law or governmental act may be heard and decided by the court unless
there is compliance with the legal requisites for judicial inquiry, namely: (a)
that the question must be raised by the proper party; (b) that there must
be an actual case or controversy; (c) that the question must be raised at
the earliest possible opportunity; and (d) that the decision on the
constitutional or legal question must be necessary to the determination of
the
case
itself.
In Prof. David v. Pres. Macapagal-Arroyo,[26] the Court summarized the
requirements before taxpayers, voters, concerned citizens, and legislators
can be accorded a standing to sue, viz:
(1) the cases involve constitutional issues;
(2) for taxpayers, there must be a claim of illegal disbursement of public
funds or that the tax measure is unconstitutional;
(3) for voters, there must be a showing of obvious interest in the validity of
the election law in question;
(4) for concerned citizens, there must be a showing that the issues raised
are of transcendental importance which must be settled early; and (5)
for legislators, there must be a claim that the official action complained
of infringes upon their prerogatives as legislators.

While the Court may have shown in recent decisions a certain toughening
in its attitude concerning the question of legal standing, it has nonetheless
always made an exception where the transcendental importance of the
issues has been established, notwithstanding the petitioners failure to
show a direct injury.[27] In CREBA v. ERC,[28] the Court set out the following
instructive guides as determinants on whether a matter is of
transcendental importance, namely: (1) the character of the funds or other
assets involved in the case; (2) the presence of a clear case of disregard of
a constitutional or statutory prohibition by the public respondent agency or
instrumentality of the government; and (3) the lack of any other party with
a more direct and specific interest in the questions being raised. Further,
the Court stated in Anak Mindanao Party-List Group v. The Executive
Secretary[29] that the rule on standing will not be waived where these
determinants
are
not
established.
In the instant case, there is no allegation of misuse of public funds in the
implementation of CB Circular No. 905. Neither were borrowers who were
actually affected by the suspension of the Usury Law joined in this petition.
Absent any showing of transcendental importance, the petition must fail.
More importantly, the Court notes that the instant petition adverted to the
regime of high interest rates which obtained at least 15 years ago, when
the banks prime lending rates ranged from 26% to 31%, [30] or even 29
years ago, when the 91-day Jobo bills reached 40% per annum. In contrast,
according to the BSP, in the first two (2) months of 2012 the bank lending
rates averaged 5.91%, which implies that the banks prime lending rates
were lower; moreover, deposit interests on savings and long-term deposits
have also gone very low, averaging 1.75% and 1.62%, respectively. [31]
Judging from the most recent auctions of T-bills, the savings rates must be
approaching 0%. In the auctions held on November 12, 2012, the rates of
3-month, 6-month and 1-year T-bills have dropped to 0.150%, 0.450% and
0.680%, respectively.[32] According to Manila Bulletin, this very low interest
regime has been attributed to high liquidity and strong investor demand
amid
positive
economic
indicators
of
the
country. [33]
While the Court acknowledges that cases of transcendental importance
demand that they be settled promptly and definitely, brushing aside, if we
must, technicalities of procedure, [34] the delay of at least 15 years in the
filing of the instant petition has actually rendered moot and academic the
issues
it
now
raises.

126

For its part, BSP-MB maintains that the petitioners allegations of


constitutional and statutory violations of CB Circular No. 905 are really
mere challenges made by petitioners concerning the wisdom of the
Circular. It explains that it was in view of the global economic downturn in
the early 1980s that the executive department through the CB-MB had to
formulate policies to achieve economic recovery, and among these policies
was the establishment of a market-oriented interest rate structure which
would require the removal of the government-imposed interest rate
ceilings.[35]
D. The CB-MB merely suspended the effectivity of the Usury Law
when it issued CB Circular No. 905.
The power of the CB to effectively suspend the Usury Law pursuant to P.D.
No. 1684 has long been recognized and upheld in many cases. As the
Court explained in the landmark case of Medel v. CA,[36] citing several
cases, CB Circular No. 905 did not repeal nor in anyway amend the Usury
Law but simply suspended the latters effectivity;[37] that a [CB] Circular
cannot repeal a law, [for] only a law can repeal another law; [38] that by
virtue of CB Circular No. 905, the Usury Law has been rendered
ineffective;[39] and Usury has been legally non-existent in our jurisdiction.
Interest can now be charged as lender and borrower may agree upon. [40]
In First Metro Investment Corp. v. Este Del Sol Mountain Reserve, Inc.[41]
cited in DBP v. Perez,[42] we also belied the contention that the CB was
engaged in self-legislation. Thus:
Central Bank Circular No. 905 did not repeal nor in any way amend the
Usury Law but simply suspended the latters effectivity. The illegality of
usury is wholly the creature of legislation. A Central Bank Circular cannot
repeal a law. Only a law can repeal another law. x x x. [43]

In PNB v. Court of Appeals, [44] an escalation clause in a loan agreement


authorized the PNB to unilaterally increase the rate of interest to 25% per
annum, plus a penalty of 6% per annum on past dues, then to 30% on
October 15, 1984, and to 42% on October 25, 1984. The Supreme Court
invalidated the rate increases made by the PNB and upheld the 12%
interest imposed by the CA, in this wise:
P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting
parties to stipulate freely regarding any subsequent adjustment in the

interest rate that shall accrue on a loan or forbearance of money, goods or


credits. In fine, they can agree to adjust, upward or downward, the interest
previously stipulated. x x x.[45]

Thus, according to the Court, by lifting the interest ceiling, CB Circular No.
905 merely upheld the parties freedom of contract to agree freely on the
rate of interest. It cited Article 1306 of the New Civil Code, under which the
contracting parties may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not contrary to
law,
morals,
good
customs,
public
order,
or public
policy.
E. The BSP-MB has authority to

enforce CB Circular No. 905.

Section 1 of CB Circular No. 905 provides that The rate of interest,


including commissions, premiums, fees and other charges, on a loan or
forbearance of any money, goods, or credits, regardless of maturity and
whether secured or unsecured, that may be charged or collected by any
person, whether natural or juridical, shall not be subject to any ceiling
prescribed under or pursuant to the Usury Law, as amended. It does not
purport to suspend the Usury Law only as it applies to banks, but to all
lenders.
Petitioners contend that, granting that the CB had power to suspend the
Usury Law, the new BSP-MB did not retain this power of its predecessor, in
view of Section 135 of R.A. No. 7653, which expressly repealed R.A. No.
265. The petitioners point out that R.A. No. 7653 did not reenact a
provision
similar
to
Section
109
of
R.A.
No.
265.
A closer perusal shows that Section 109 of R.A. No. 265 covered only loans
extended by banks, whereas under Section 1-a of the Usury Law, as
amended, the BSP-MB may prescribe the maximum rate or rates of interest
for all loans or renewals thereof or the forbearance of any money, goods or
credits, including those for loans of low priority such as consumer loans, as
well as such loans made by pawnshops, finance companies and similar
credit institutions. It even authorizes the BSP-MB to prescribe different
maximum rate or rates for different types of borrowings, including deposits
and deposit substitutes, or loans of financial intermediaries.
Act No. 2655, an earlier law, is much broader in scope, whereas R.A. No.
265, now R.A. No. 7653, merely supplemented it as it concerns loans by
banks and other financial institutions. Had R.A. No. 7653 been intended to

127

repeal Section 1-a of Act No. 2655, it would have so stated in unequivocal
terms.
Moreover, the rule is settled that repeals by implication are not favored,
because laws are presumed to be passed with deliberation and full
knowledge of all laws existing pertaining to the subject. [46] An implied
repeal is predicated upon the condition that a substantial conflict or
repugnancy is found between the new and prior laws. Thus, in the absence
of an express repeal, a subsequent law cannot be construed as repealing a
prior law unless an irreconcilable inconsistency and repugnancy exists in
the terms of the new and old laws. [47] We find no such conflict between the
provisions
of
Act
2655
and
R.A.
No.
7653.
F. The lifting of the ceilings for interest rates does not authorize
stipulations charging excessive, unconscionable, and iniquitous
interest.
It is settled that nothing in CB Circular No. 905 grants lenders a carte
blanche authority to raise interest rates to levels which will either enslave
their borrowers or lead to a hemorrhaging of their assets. [48] As held in
Castro v. Tan:[49]
The imposition of an unconscionable rate of interest on a money debt,
even if knowingly and voluntarily assumed, is immoral and unjust. It is
tantamount to a repugnant spoliation and an iniquitous deprivation of
property, repulsive to the common sense of man. It has no support in law,
in principles of justice, or in the human conscience nor is there any reason
whatsoever which may justify such imposition as righteous and as one that
may be sustained within the sphere of public or private morals. [50]

Stipulations authorizing iniquitous or unconscionable interests have been


invariably struck down for being contrary to morals, if not against the law.
[51]
Indeed, under Article 1409 of the Civil Code, these contracts are
deemed inexistent and void ab initio, and therefore cannot be ratified, nor
may the right to set up their illegality as a defense be waived.
Nonetheless, the nullity of the stipulation of usurious interest does not
affect the lenders right to recover the principal of a loan, nor affect the
other terms thereof.[52] Thus, in a usurious loan with mortgage, the right to
foreclose the mortgage subsists, and this right can be exercised by the
creditor upon failure by the debtor to pay the debt due. The debt due is
considered as without the stipulated excessive interest, and a legal interest
of 12% per annum will be added in place of the excessive interest formerly

imposed,[53] following the guidelines laid down in the landmark case of


Eastern Shipping Lines, Inc. v. Court of Appeals, [54] regarding the manner of
computing legal interest:
II. With regard particularly to an award of interest in the concept of actual
and compensatory damages, the rate of interest, as well as the accrual
thereof,
is
imposed,
as
follows:
1. When the obligation is breached, and it consists in the payment of a sum
of money, i.e., a loan or forbearance of money, the interest due should be
that which may have been stipulated in writing. Furthermore, the interest
due shall itself earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 12% per annum to
be computed from default, i.e., from judicial or extrajudicial demand under
and subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is
breached, an interest on the amount of damages awarded may be imposed
at the discretion of the court at the rate of 6% per annum. No interest,
however, shall be adjudged on unliquidated claims or damages except
when or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty,
the interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so
reasonably established at the time the demand is made, the interest shall
begin to run only from the date the judgment of the court is made (at
which time the quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes
final and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance of credit.[55] (Citations omitted)

The foregoing rules were further clarified in Sunga-Chan v. Court of


Appeals,[56] as follows:
Eastern Shipping Lines, Inc. synthesized the rules on the imposition of
interest, if proper, and the applicable rate, as follows: The 12% per annum
rate under CB Circular No. 416 shall apply only to loans or forbearance of

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money, goods, or credits, as well as to judgments involving such loan or


forbearance of money, goods, or credit, while the 6% per annum under Art.
2209 of the Civil Code applies "when the transaction involves the payment
of indemnities in the concept of damage arising from the breach or a delay
in the performance of obligations in general," with the application of both
rates reckoned "from the time the complaint was tiled until the [adjudged]
amount is fully paid." In either instance, the reckoning period for the
commencement of the running of the legal interest shall be subject to the
condition "that the courts are vested with discretion, depending on the
equities of each case, on the award of interest." [57] (Citations omitted)

WHEREFORE,
DISMISSED.
SO

premises

considered,

the

Petition

for

certiorari

is

ORDERED.

Sereno, C.J, Carpio, Velasco, Jr., Leonardo-De Castro,Peralta, Bersamin, Del


Castillo, Abad, Villarama, Jr., Perez, Mendoza, Perlas-Bernabe, and Leonen,
JJ.,
concur.
Brion, J., on leave.

129