G.R. No.

26085             August 12, 1927 In accordance with that agreement the defendant paid to the plaintiffs by means of a check the sum of
SEVERINO TOLENTINO and POTENCIANA MANIO, plaintiffs-appellants,  P16,965.09. The defendant, in addition to said amount paid by check, delivered to the plaintiffs the sum of
vs. P354.91 together with the sum of P180 which the plaintiffs paid to the attorneys for drafting said contract
BENITO GONZALEZ SY CHIAM, defendants-appellee. of pacto de retro, making a total paid by the defendant to the plaintiffs and for the plaintiffs of P17,500 upon
PRINCIPAL QUESTIONS PRESENTED BY THE APPEAL the execution and delivery of said contract. Said contracts was dated the 28th day of November, 1922, and is
The principal questions presented by this appeal are:  in the words and figures following:
(a) Is the contract in question a pacto de retro or a mortgage?  Sepan todos por la presente:
(b) Under a pacto de retro, when the vendor becomes a tenant of the purchaser and agrees to pay a Que nosotros, los conyuges Severino Tolentino y Potenciana Manio, ambos mayores de
certain amount per month as rent, may such rent render such a contract usurious when the amount edad, residentes en el Municipio de Calumpit, Provincia de Bulacan, propietarios y
paid as rent, computed upon the purchase price, amounts to a higher rate of interest upon said transeuntes en esta Ciudad de Manila, de una parte, y de otra, Benito Gonzalez Sy Chiam,
amount than that allowed by law?  mayor de edad, casado con Maria Santiago, comerciante y vecinos de esta Ciudad de
(c)             May the contract in the present case may be modified by parol evidence? Manila.
ANTECEDENT FACTS MANIFESTAMOS Y HACEMOS CONSTAR:
Sometime prior to the 28th day of November, 1922, the appellants purchased of the Luzon Rice Mills, Inc., a Primero. Que nosotros, Severino Tolentino y Potenciano Manio, por y en consideracion a
piece or parcel of land with the camarin located thereon, situated in the municipality of Tarlac of the Province la cantidad de diecisiete mil quinientos pesos (P17,500) moneda filipina, que en este acto
of Tarlac for the price of P25,000, promising to pay therefor in three installments. The first installment of hemos recibido a nuestra entera satisfaccion de Don Benito Gonzalez Sy Chiam,
P2,000 was due on or before the 2d day of May, 1921; the second installment of P8,000 was due on or before cedemos, vendemos y traspasamos a favor de dicho Don Benito Gonzalez Sy Chiam, sus
31st day of May, 1921; the balance of P15,000 at 12 per cent interest was due and payable on or about the herederos y causahabientes, una finca que, segun el Certificado de Transferencia de
30th day of November, 1922. One of the conditions of that contract of purchase was that on failure of the Titulo No. 40 expedido por el Registrador de Titulos de la Provincia de Tarlac a favor de
purchaser (plaintiffs and appellants) to pay the balance of said purchase price or any of the installments on "Luzon Rice Mills Company Limited" que al incorporarse se donomino y se denomina
the date agreed upon, the property bought would revert to the original owner. "Luzon Rice Mills Inc.," y que esta corporacion nos ha transferido en venta absoluta, se
The payments due on the 2d and 31st of May, 1921, amounting to P10,000 were paid so far as the record describe como sigue:
shows upon the due dates. The balance of P15,000 due on said contract of purchase was paid on or about Un terreno (lote No. 1) con las mejoras existentes en el mismo, situado en el Municipio de
the 1st day of December, 1922, in the manner which will be explained below. On the date when the balance of Tarlac. Linda por el O. y N. con propiedad de Manuel Urquico; por el E. con propiedad de
P15,000 with interest was paid, the vendor of said property had issued to the purchasers transfer certificate of la Manila Railroad Co.; y por el S. con un camino. Partiendo de un punto marcado 1 en el
title to said property, No. 528. Said transfer certificate of title (No. 528) was transfer certificate of title from No. plano, cuyo punto se halla al N. 41 gds. 17' E.859.42 m. del mojon de localizacion No. 2 de
40, which shows that said land was originally registered in the name of the vendor on the 7th day of la Oficina de Terrenos en Tarlac; y desde dicho punto 1 N. 81 gds. 31' O., 77 m. al punto
November, 1913. 2; desde este punto N. 4 gds. 22' E.; 54.70 m. al punto 3; desde este punto S. 86 gds. 17'
PRESENT FACTS E.; 69.25 m. al punto 4; desde este punto S. 2 gds. 42' E., 61.48 m. al punto de partida;
On the 7th day of November, 1922 the representative of the vendor of the property in question wrote a letter to midiendo una extension superficcial de cuatro mil doscientos diez y seis metros cuadrados
the appellant Potenciana Manio (Exhibit A, p. 50), notifying the latter that if the balance of said indebtedness (4,216) mas o menos. Todos los puntos nombrados se hallan marcados en el plano y
was not paid, an action would be brought for the purpose of recovering the property, together with damages sobre el terreno los puntos 1 y 2 estan determinados por mojones de P. L. S. de 20 x 20 x
for non compliance with the condition of the contract of purchase. The pertinent parts of said letter read as 70 centimetros y los puntos 3 y 4 por mojones del P. L. S. B. L.: la orientacion seguida es
follows: la verdadera, siendo la declinacion magnetica de 0 gds. 45' E. y la fecha de la medicion,
Sirvase notar que de no estar liquidada esta cuenta el dia 30 del corriente, procederemos 1.º de febrero de 1913.
judicialmente contra Vd. para reclamar la devolucion del camarin y los daños y perjuicios Segundo. Que es condicion de esta venta la de que si en el plazo de cinco (5) años
ocasionados a la compañia por su incumplimiento al contrato.  contados desde el dia 1.º de diciembre de 1922, devolvemos al expresado Don Benito
Somos de Vd. atentos y S. S.  Gonzalez Sy Chiam el referido precio de diecisiete mil quinientos pesos (P17,500) queda
SMITH, BELL & CO., LTD.  obligado dicho Sr. Benito Gonzalez y Chiam a retrovendernos la finca arriba descrita; pero
By (Sgd.) F. I. HIGHAM  si transcurre dicho plazo de cinco años sin ejercitar el derecho de retracto que nos hemos
Treasurer. reservado, entonces quedara esta venta absoluta e irrevocable.
General Managers  Tercero. Que durante el expresado termino del retracto tendremos en arrendamiento la
LUZON RICE MILLS INC. finca arriba descrita, sujeto a condiciones siguientes:
According to Exhibits B and D, which represent the account rendered by the vendor, there was due and (a) El alquiler que nos obligamos a pagar por mensualidades vencidas a Don
payable upon said contract of purchase on the 30th day of November, 1922, the sum P16,965.09. Upon Benito Gonzalez Sy Chiam y en su domicilio, era de trescientos setenta y cinco
receiving the letter of the vendor of said property of November 7, 1922, the purchasers, the appellants herein, pesos (P375) moneda filipina, cada mes.
realizing that they would be unable to pay the balance due, began to make an effort to borrow money with (b) El amillaramiento de la finca arrendada sera por cuenta de dicho Don Benito
which to pay the balance due, began to make an effort to borrow money with which to pay the balance of their Gonzalez Sy Chiam, asi como tambien la prima del seguro contra incendios, si el
indebtedness on the purchase price of the property involved. Finally an application was made to the defendant conviniera al referido Sr. Benito Gonzalez Sy Chiam asegurar dicha finca.
for a loan for the purpose of satisfying their indebtedness to the vendor of said property. After some (c) La falta de pago del alquiler aqui estipulado por dos meses consecutivos dara
negotiations the defendants agreed to loan the plaintiffs to loan the plaintiffs the sum of P17,500 upon lugar a la terminacion de este arrendamieno y a la perdida del derecho de
condition that the plaintiffs execute and deliver to him a pacto de retro of said property. retracto que nos hemos reservado, como si naturalmente hubiera expirado el

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 termino para ello, pudiendo en su virtud dicho Sr. Gonzalez Sy Chiam tomar
posesion de la finca y desahuciarnos de la misma.
Cuarto. Que yo, Benito Gonzalez Sy Chiam, a mi vez otorgo que acepto esta escritura en
los precisos terminos en que la dejan otorgada los conyuges Severino Tolentino y
Potenciana Manio.
En testimonio de todo lo cual, firmamos la presente de nuestra mano en Manila, por
cuadruplicado en Manila, hoy a 28 de noviembre de 1922.
(Fdo.) SEVERINO TOLENTINO
(Fda.) POTENCIANA MANIO
(Fdo.) BENITO GONZALEZ SY CHIAM
Firmado en presencia de:
(Fdos.) MOISES M. BUHAIN
B. S. BANAAG
An examination of said contract of sale with reference to the first question above, shows clearly that it is
a pacto de retro and not a mortgage. There is no pretension on the part of the appellant that said contract,
standing alone, is a mortgage. The pertinent language of the contract is:
Segundo. Que es condicion de esta venta la de que si en el plazo de cinco (5) años contados desde
el dia 1.º de diciembre de 1922, devolvemos al expresado Don Benito Gonzales Sy Chiam el
referido precio de diecisiete mil quinientos pesos (P17,500) queda obligado dicho Sr. Benito
Gonzales Sy Chiam a retrovendornos la finca arriba descrita; pero si transcurre dicho plazo de cinco
(5) años sin ejercitar al derecho de retracto que nos hemos reservado, entonces quedara esta venta
absoluta e irrevocable.
Language cannot be clearer. The purpose of the contract is expressed clearly in said quotation that there can
certainly be not doubt as to the purpose of the plaintiff to sell the property in question, reserving the right only
to repurchase the same. The intention to sell with the right to repurchase cannot be more clearly expressed.
It will be noted from a reading of said sale of pacto de retro, that the vendor, recognizing the absolute sale of
the property, entered into a contract with the purchaser by virtue of which she became the "tenant" of the
purchaser. That contract of rent appears in said quoted document above as follows:  opinion of Chief Justice Cayetano S. Arellano in the case of Government of the Philippine
Tercero. Que durante el expresado termino del retracto tendremos en arrendamiento la finca arriba
descrita, sujeto a condiciones siguientes:
(a) El alquiler que nos obligamos a pagar por mensualidades vencidas a Don Benito Gonzalez Sy
Chiam y en su domicilio, sera de trescientos setenta y cinco pesos (P375) moneda filipina, cada
mes.  According to article 1282 of the Civil Code, in order to judge of the intention of the contracting parties,
(b) El amillaramiento de la finca arrendada sera por cuenta de dicho Don Benito Gonzalez Sy
Chiam, asi como tambien la prima del seguro contra incendios, si le conviniera al referido Sr. Benito
Gonzalez Sy Chiam asegurar dicha finca.  they must not be held to include things and cases different from those with regard to which the interested
From the foregoing, we are driven to the following conclusions: First, that the contract of pacto de retro is an
absolute sale of the property with the right to repurchase and not a mortgage; and, second, that by virtue of
the said contract the vendor became the tenant of the purchaser, under the conditions mentioned in
paragraph 3 of said contact quoted above.
It has been the uniform theory of this court, due to the severity of a contract of pacto de retro, to declare the
same to be a mortgage and not a sale whenever the interpretation of such a contract justifies that conclusion.
There must be something, however, in the language of the contract or in the conduct of the parties which
shows clearly and beyond doubt that they intended the contract to be a "mortgage" and not a pacto de retro.
(International Banking Corporation vs. Martinez, 10 Phil., 252; Padilla vs. Linsangan, 19 Phil., 65;
Cumagun vs. Alingay, 19 Phil., 415; Olino vs. Medina, 13 Phil., 379; Manalo vs. Gueco, 42 Phil., 925;
Velazquez vs. Teodoro, 46 Phil., 757; Villa vs.Santiago, 38 Phil., 157.)  the construction adopted was rested upon a clearly erroneous assumption as to an established rule
We are not unmindful of the fact that sales with pacto de retro are not favored and that the court will not
construe an instrument to one of sale with pacto de retro, with the stringent and onerous effect which follows,
unless the terms of the document and the surrounding circumstances require it.
While it is general rule that parol evidence is not admissible for the purpose of varying the terms of a contract,
but when an issue is squarely presented that a contract does not express the intention of the parties, courts
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will, when a proper foundation is laid therefor, hear evidence for the purpose of ascertaining the true intention
of the parties.
In the present case the plaintiffs allege in their complaint that the contract in question is a pacto de retro. They
admit that they signed it. They admit they sold the property in question with the right to repurchase it. The
terms of the contract quoted by the plaintiffs to the defendant was a "sale" with pacto de retro, and the
plaintiffs have shown no circumstance whatever which would justify us in construing said contract to be a
mere "loan" with guaranty. In every case in which this court has construed a contract to be a mortgage or a
loan instead of a sale with pacto de retro, it has done so, either because the terms of such contract were
incompatible or inconsistent with the theory that said contract was one of purchase and sale.
(Olino vs. Medina, supra; Padilla vs. Linsangan, supra; Manlagnit vs. Dy Puico, 34 Phil., 325;
Rodriguez vs. Pamintuan and De Jesus, 37 Phil., 876.)
In the case of Padilla vs. Linsangan the term employed in the contract to indicate the nature of the
conveyance of the land was "pledged" instead of "sold". In the case of Manlagnit vs. Dy Puico, while the
vendor used to the terms "sale and transfer with the right to repurchase," yet in said contract he described
himself as a "debtor" the purchaser as a "creditor" and the contract as a "mortgage". In the case of Rodriguez
vs. Pamintuan and De Jesus the person who executed the instrument, purporting on its face to be a deed of
sale of certain parcels of land, had merely acted under a power of attorney from the owner of said land,
"authorizing him to borrow money in such amount and upon such terms and conditions as he might deem
proper, and to secure payment of the loan by a mortgage." In the case of Villa vs. Santiago (38 Phil., 157),
although a contract purporting to be a deed of sale was executed, the supposed vendor remained in
possession of the land and invested the money he had obtained from the supposed vendee in making
improvements thereon, which fact justified the court in holding that the transaction was a mere loan and not a
sale. In the case of Cuyugan vs. Santos (39 Phil., 970), the purchaser accepted partial payments from the
vendor, and such acceptance of partial payments is absolutely incompatible with the idea of irrevocability of
the title of ownership of the purchaser at the expiration of the term stipulated in the original contract for the
exercise of the right of repurchase."
Referring again to the right of the parties to vary the terms of written contract, we quote from the dissenting
Islands vs. Philippine Sugar Estates Development Co., which case was appealed to the Supreme Court of the
United States and the contention of the Chief Justice in his dissenting opinion was affirmed and the decision
of the Supreme Court of the Philippine Islands was reversed. (See decision of the Supreme Court of the
United States, June 3, 1918.)1 The Chief Justice said in discussing that question:
consideration must chiefly be paid to those acts executed by said parties which are contemporary with and
subsequent to the contract. And according to article 1283, however general the terms of a contract may be,
parties agreed to contract. "The Supreme Court of the Philippine Islands held the parol evidence was
admissible in that case to vary the terms of the contract between the Government of the Philippine Islands and
the Philippine Sugar Estates Development Co. In the course of the opinion of the Supreme Court of the United
States Mr. Justice Brandeis, speaking for the court, said:
It is well settled that courts of equity will reform a written contract where, owing to mutual mistake,
the language used therein did not fully or accurately express the agreement and intention of the
parties. The fact that interpretation or construction of a contract presents a question of law and that,
therefore, the mistake was one of law is not a bar to granting relief. . . . This court is always disposed
to accept the construction which the highest court of a territory or possession has placed upon a
local statute. But that disposition may not be yielded to where the lower court has clearly erred. Here
of equity. . . . The burden of proof resting upon the appellant cannot be satisfied by mere
preponderance of the evidence. It is settled that relief by way of reformation will not be granted
unless the proof of mutual mistake be of the clearest and most satisfactory character.
The evidence introduced by the appellant in the present case does not meet with that stringent requirement.
There is not a word, a phrase, a sentence or a paragraph in the entire record, which justifies this court in
holding that the said contract of pacto de retro is a mortgage and not a sale with the right to repurchase.
Article 1281 of the Civil Code provides: "If the terms of a contract are clear and leave no doubt as to the
intention of the contracting parties, the literal sense of its stipulations shall be followed." Article 1282 provides:
"in order to judge as to the intention of the contracting parties, attention must be paid principally to their
conduct at the time of making the contract and subsequently thereto."  agreement does not on this account involve any sign of ownership, nor other meaning than the will
We cannot thereto conclude this branch of our discussion of the question involved, without quoting from that
very well reasoned decision of the late Chief Justice Arellano, one of the greatest jurists of his time. He said,
in discussing the question whether or not the contract, in the case of Lichauco vs. Berenguer (20 Phil., 12),
was a pacto de retro or a mortgage:
The public instrument, Exhibit C, in part reads as follows: "Don Macarion Berenguer declares and
states that he is the proprietor in fee simple of two parcels of fallow unappropriated crown land
situated within the district of his pueblo. The first has an area of 73 quiñones, 8 balitas and 8 loanes,
located in the sitio of Batasan, and its boundaries are, etc., etc. The second is in the sitio of
Panantaglay, barrio of Calumpang has as area of 73 hectares, 22 ares, and 6 centares, and is
bounded on the north, etc., etc."
In the executory part of the said instrument, it is stated:  But in the present case, unlike others heard by this court, there is no proof that the sale with right of
'That under condition of right to repurchase (pacto de retro) he sells the said properties to
the aforementioned Doña Cornelia Laochangco for P4,000 and upon the following
conditions: First, the sale stipulated shall be for the period of two years, counting from this
date, within which time the deponent shall be entitled to repurchase the land sold upon
payment of its price; second, the lands sold shall, during the term of the present contract,
be held in lease by the undersigned who shall pay, as rental therefor, the sum of 400
pesos per annum, or the equivalent in sugar at the option of the vendor; third, all the fruits
of the said lands shall be deposited in the sugar depository of the vendee, situated in the
district of Quiapo of this city, and the value of which shall be applied on account of the
price of this sale; fourth, the deponent acknowledges that he has received from the vendor
the purchase price of P4,000 already paid, and in legal tender currency of this country . . .;
fifth, all the taxes which may be assessed against the lands surveyed by competent
authority, shall be payable by and constitute a charge against the vendor; sixth, if, through
any unusual event, such as flood, tempest, etc., the properties hereinbefore enumerated
should be destroyed, wholly or in part, it shall be incumbent upon the vendor to repair the
damage thereto at his own expense and to put them into a good state of cultivation, and
should he fail to do so he binds himself to give to the vendee other lands of the same area,
quality and value.'
xxx     xxx     xxx
The opponent maintained, and his theory was accepted by the trial court, that Berenguer's contract
with Laochangco was not one of sale with right of repurchase, but merely one of loan secured by
those properties, and, consequently, that the ownership of the lands in questions could not have
been conveyed to Laochangco, inasmuch as it continued to be held by Berenguer, as well as their
possession, which he had not ceased to enjoy.
Such a theory is, as argued by the appellant, erroneous. The instrument executed by Macario
Berenguer, the text of which has been transcribed in this decision, is very clear. Berenguer's heirs
may not go counter to the literal tenor of the obligation, the exact expression of the consent of the
contracting contained in the instrument, Exhibit C. Not because the lands may have continued in
possession of the vendor, not because the latter may have assumed the payment of the taxes on
such properties, nor yet because the same party may have bound himself to substitute by another
any one of the properties which might be destroyed, does the contract cease to be what it is, as set
forth in detail in the public instrument. The vendor continued in the possession of the lands, not as
the owner thereof as before their sale, but as the lessee which he became after its consummation,
by virtue of a contract executed in his favor by the vendee in the deed itself, Exhibit C. Right of
ownership is not implied by the circumstance of the lessee's assuming the responsibility of the
payment is of the taxes on the property leased, for their payment is not peculiarly incumbent upon
the owner, nor is such right implied by the obligation to substitute the thing sold for another while in
his possession under lease, since that obligation came from him and he continues under another
3
character in its possession—a reason why he guarantees its integrity and obligates himself to return
the thing even in a case of force majeure. Such liability, as a general rule, is foreign to contracts of
lease and, if required, is exorbitant, but possible and lawful, if voluntarily agreed to and such
to impose upon oneself scrupulous diligence in the care of a thing belonging to another.
The purchase and sale, once consummated, is a contract which by its nature transfers the
ownership and other rights in the thing sold. A pacto de retro, or sale with right to repurchase, is
nothing but a personal right stipulated between the vendee and the vendor, to the end that the latter
may again acquire the ownership of the thing alienated.
It is true, very true indeed, that the sale with right of repurchase is employed as a method of loan; it
is likewise true that in practice many cases occur where the consummation of a pacto de retro sale
means the financial ruin of a person; it is also, unquestionable that in pacto de retro sales very
important interests often intervene, in the form of the price of the lease of the thing sold, which is
stipulated as an additional covenant. (Manresa, Civil Code, p. 274.) 
repurchase, made by Berenguer in favor of Laonchangco is rather a mortgage to secure a loan.
We come now to a discussion of the second question presented above, and that is, stating the same in
another form: May a tenant charge his landlord with a violation of the Usury Law upon the ground that the
amount of rent he pays, based upon the real value of the property, amounts to a usurious rate of interest?
When the vendor of property under a pacto de retro rents the property and agrees to pay a rental value for the
property during the period of his right to repurchase, he thereby becomes a "tenant" and in all respects stands
in the same relation with the purchaser as a tenant under any other contract of lease.
The appellant contends that the rental price paid during the period of the existence of the right to repurchase,
or the sum of P375 per month, based upon the value of the property, amounted to usury. Usury, generally
speaking, may be defined as contracting for or receiving something in excess of the amount allowed by law for
the loan or forbearance of money—the taking of more interest for the use of money than the law allows. It
seems that the taking of interest for the loan of money, at least the taking of excessive interest has been
regarded with abhorrence from the earliest times. (Dunham vs. Gould, 16 Johnson [N. Y.], 367.) During the
middle ages the people of England, and especially the English Church, entertained the opinion, then, current
in Europe, that the taking of any interest for the loan of money was a detestable vice, hateful to man and
contrary to the laws of God. (3 Coke's Institute, 150; Tayler on Usury, 44.)
Chancellor Kent, in the case of Dunham vs. Gould, supra, said: "If we look back upon history, we shall find
that there is scarcely any people, ancient or modern, that have not had usury laws. . . . The Romans, through
the greater part of their history, had the deepest abhorrence of usury. . . . It will be deemed a little singular,
that the same voice against usury should have been raised in the laws of China, in the Hindu institutes of
Menu, in the Koran of Mahomet, and perhaps, we may say, in the laws of all nations that we know of, whether
Greek or Barbarian."
The collection of a rate of interest higher than that allowed by law is condemned by the Philippine Legislature
(Acts Nos. 2655, 2662 and 2992). But is it unlawful for the owner of a property to enter into a contract with the
tenant for the payment of a specific amount of rent for the use and occupation of said property, even though
the amount paid as "rent," based upon the value of the property, might exceed the rate of interest allowed by
law? That question has never been decided in this jurisdiction. It is one of first impression. No cases have
been found in this jurisdiction answering that question. Act No. 2655 is "An Act fixing rates of interest upon
'loans' and declaring the effect of receiving or taking usurious rates." 
It will be noted that said statute imposes a penalty upon a "loan" or forbearance of any money, goods, chattels
or credits, etc. The central idea of said statute is to prohibit a rate of interest on "loans." A contract of "loan," is
very different contract from that of "rent". A "loan," as that term is used in the statute, signifies the giving of a
sum of money, goods or credits to another, with a promise to repay, but not a promise to return the same
thing. To "loan," in general parlance, is to deliver to another for temporary use, on condition that the thing or
its equivalent be returned; or to deliver for temporary use on condition that an equivalent in kind shall be
returned with a compensation for its use. The word "loan," however, as used in the statute, has a technical
meaning. It never means the return of the same thing. It means the return of an equivalent only, but never the
same thing loaned. A "loan" has been properly defined as an advance payment of money, goods or credits
upon a contract or stipulation to repay, not to return, the thing loaned at some future day in accordance with paragraph, which in the slightest way indicates that the parties to the contract in question did not intend to sell
the terms of the contract. Under the contract of "loan," as used in said statute, the moment the contract is the property in question absolutely, simply with the right to repurchase. People who make their own beds must
completed the money, goods or chattels given cease to be the property of the former owner and becomes the lie thereon. 
property of the obligor to be used according to his own will, unless the contract itself expressly provides for a What has been said above with reference to the right to modify contracts by parol evidence, sufficiently
special or specific use of the same. At all events, the money, goods or chattels, the moment the contract is answers the third questions presented above. The language of the contract is explicit, clear, unambiguous and
executed, cease to be the property of the former owner and becomes the absolute property of the obligor. beyond question. It expresses the exact intention of the parties at the time it was made. There is not a word, a
A contract of "loan" differs materially from a contract of "rent." In a contract of "rent" the owner of the property phrase, a sentence or paragraph found in said contract which needs explanation. The parties thereto entered
does not lose his ownership. He simply loses his control over the property rented during the period of the into said contract with the full understanding of its terms and should not now be permitted to change or modify
contract. In a contract of "loan" the thing loaned becomes the property of the obligor. In a contract of "rent" the it by parol evidence.
thing still remains the property of the lessor. He simply loses control of the same in a limited way during the With reference to the improvements made upon said property by the plaintiffs during the life of the contract,
period of the contract of "rent" or lease. In a contract of "rent" the relation between the contractors is that of Exhibit C, there is hereby reserved to the plaintiffs the right to exercise in a separate action the right
landlord and tenant. In a contract of "loan" of money, goods, chattels or credits, the relation between the guaranteed to them under article 361 of the Civil Code. 
parties is that of obligor and obligee. "Rent" may be defined as the compensation either in money, provisions, For all of the foregoing reasons, we are fully persuaded from the facts of the record, in relation with the law
chattels, or labor, received by the owner of the soil from the occupant thereof. It is defined as the return or applicable thereto, that the judgment appealed from should be and is hereby affirmed, with costs. So ordered.
compensation for the possession of some corporeal inheritance, and is a profit issuing out of lands or Avanceña, C. J., Street, Villamor, Romualdez and Villa-Real, JJ., concur.
tenements, in return for their use. It is that, which is to paid for the use of land, whether in money, labor or
other thing agreed upon. A contract of "rent" is a contract by which one of the parties delivers to the other
some nonconsumable thing, in order that the latter may use it during a certain period and return it to the
Separate Opinions
former; whereas a contract of "loan", as that word is used in the statute, signifies the delivery of money or
MALCOLM, J., dissenting:
other consumable things upon condition of returning an equivalent amount of the same kind or quantity, in
I regret to have to dissent from the comprehensive majority decision. I stand squarely on the proposition that
which cases it is called merely a "loan." In the case of a contract of "rent," under the civil law, it is called a
the contract executed by the parties was merely a clever device to cover up the payment of usurious interest.
"commodatum."
The fact that the document purports to be a true sale with right of repurchase means nothing. The fact that the
From the foregoing it will be seen that there is a while distinction between a contract of "loan," as that word is
instrument includes a contract of lease on the property whereby the lessees as vendors apparently bind
used in the statute, and a contract of "rent" even though those words are used in ordinary parlance as
themselves to pay rent at the rate of P375 per month and whereby "Default in the payment of the rent agreed
interchangeable terms.
for two consecutive months will terminate this lease and will forfeit our right of repurchase, as though the term
The value of money, goods or credits is easily ascertained while the amount of rent to be paid for the use and
had expired naturally" does mean something, and taken together with the oral testimony is indicative of a
occupation of the property may depend upon a thousand different conditions; as for example, farm lands of
subterfuge hiding a usurious loan. (Usury Law, Act No. 2655, sec. 7, as amended; Padilla vs. Linsangan
exactly equal productive capacity and of the same physical value may have a different rental value, depending
[1911], 19 Phil., 65; U. S. vs. Tan Quingco Chua [1919], 39 Phil., 552; Russel vs. Southard [1851], 53 U. S.,
upon location, prices of commodities, proximity to the market, etc. Houses may have a different rental value
139 Monagas vs. Albertucci y Alvarez [1914], 235 U. S., 81; 10 Manresa, Codigo Civil Español, 3rd ed., p.
due to location, conditions of business, general prosperity or depression, adaptability to particular purposes,
318.) The transaction should be considered as in the nature of an equitable mortgage. My vote is for a
even though they have exactly the same original cost. A store on the Escolta, in the center of business,
modification of the judgment of the trial court.
constructed exactly like a store located outside of the business center, will have a much higher rental value
than the other. Two places of business located in different sections of the city may be constructed exactly on
the same architectural plan and yet one, due to particular location or adaptability to a particular business
which the lessor desires to conduct, may have a very much higher rental value than one not so located and
not so well adapted to the particular business. A very cheap building on the carnival ground may rent for more
money, due to the particular circumstances and surroundings, than a much more valuable property located
elsewhere. It will thus be seen that the rent to be paid for the use and occupation of property is not necessarily
fixed upon the value of the property. The amount of rent is fixed, based upon a thousand different conditions
and may or may not have any direct reference to the value of the property rented. To hold that "usury" can be
based upon the comparative actual rental value and the actual value of the property, is to subject every
landlord to an annoyance not contemplated by the law, and would create a very great disturbance in every
business or rural community. We cannot bring ourselves to believe that the Legislature contemplated any
such disturbance in the equilibrium of the business of the country.
In the present case the property in question was sold. It was an absolute sale with the right only to
repurchase. During the period of redemption the purchaser was the absolute owner of the property. During the
period of redemption the vendor was not the owner of the property. During the period of redemption the
vendor was a tenant of the purchaser. During the period of redemption the relation which existed between the
vendor and the vendee was that of landlord and tenant. That relation can only be terminated by a repurchase
of the property by the vendor in accordance with the terms of the said contract. The contract was one of rent.
The contract was not a loan, as that word is used in Act No. 2655. 
As obnoxious as contracts of pacto de retro are, yet nevertheless, the courts have no right to make contracts
for parties. They made their own contract in the present case. There is not a word, a phrase, a sentence or
4
G.R. No. L-24968 April 27, 1972
SAURA IMPORT and EXPORT CO., INC., plaintiff-appellee,  and technical men to meet with each other and undertake the necessary studies, although in appointing its
vs.
DEVELOPMENT BANK OF THE PHILIPPINES, defendant-appellant.
Mabanag, Eliger and Associates and Saura, Magno and Associates for plaintiff-appellee.
Jesus A. Avanceña and Hilario G. Orsolino for defendant-appellant.
MAKALINTAL, J.:p
In Civil Case No. 55908 of the Court of First Instance of Manila, judgment was rendered on June 28, 1965
sentencing defendant Development Bank of the Philippines (DBP) to pay actual and consequential damages
to plaintiff Saura Import and Export Co., Inc. in the amount of P383,343.68, plus interest at the legal rate from
the date the complaint was filed and attorney's fees in the amount of P5,000.00. The present appeal is from
that judgment.
In July 1953 the plaintiff (hereinafter referred to as Saura, Inc.) applied to the Rehabilitation Finance
Corporation (RFC), before its conversion into DBP, for an industrial loan of P500,000.00, to be used as
follows: P250,000.00 for the construction of a factory building (for the manufacture of jute sacks); P240,900.00
to pay the balance of the purchase price of the jute mill machinery and equipment; and P9,100.00 as
additional working capital.
Parenthetically, it may be mentioned that the jute mill machinery had already been purchased by Saura on the
strength of a letter of credit extended by the Prudential Bank and Trust Co., and arrived in Davao City in July
1953; and that to secure its release without first paying the draft, Saura, Inc. executed a trust receipt in favor
of the said bank.
On January 7, 1954 RFC passed Resolution No. 145 approving the loan application for P500,000.00, to be
secured by a first mortgage on the factory building to be constructed, the land site thereof, and the machinery
and equipment to be installed. Among the other terms spelled out in the resolution were the following:
1. That the proceeds of the loan shall be utilized exclusively for the following purposes:
For construction of factory building P250,000.00
For payment of the balance of purchase
price of machinery and equipment 240,900.00
For working capital 9,100.00
T O T A L P500,000.00
4. That Mr. & Mrs. Ramon E. Saura, Inocencia Arellano, Aniceto Caolboy and Gregoria Estabillo and China
Engineers, Ltd. shall sign the promissory notes jointly with the borrower-corporation;
5. That release shall be made at the discretion of the Rehabilitation Finance Corporation, subject to availability
of funds, and as the construction of the factory buildings progresses, to be certified to by an appraiser of this
Corporation;"
Saura, Inc. was officially notified of the resolution on January 9, 1954. The day before, however, evidently
having otherwise been informed of its approval, Saura, Inc. wrote a letter to RFC, requesting a modification of
the terms laid down by it, namely: that in lieu of having China Engineers, Ltd. (which was willing to assume
liability only to the extent of its stock subscription with Saura, Inc.) sign as co-maker on the corresponding
promissory notes, Saura, Inc. would put up a bond for P123,500.00, an amount equivalent to such
subscription; and that Maria S. Roca would be substituted for Inocencia Arellano as one of the other co-
makers, having acquired the latter's shares in Saura, Inc.
In view of such request RFC approved Resolution No. 736 on February 4, 1954, designating of the members
of its Board of Governors, for certain reasons stated in the resolution, "to reexamine all the aspects of this
approved loan ... with special reference as to the advisability of financing this particular project based on
present conditions obtaining in the operations of jute mills, and to submit his findings thereon at the next
meeting of the Board."
On March 24, 1954 Saura, Inc. wrote RFC that China Engineers, Ltd. had again agreed to act as co-signer for
the loan, and asked that the necessary documents be prepared in accordance with the terms and conditions
specified in Resolution No. 145. In connection with the reexamination of the project to be financed with the
5
loan applied for, as stated in Resolution No. 736, the parties named their respective committees of engineers
own committee Saura, Inc. made the observation that the same "should not be taken as an acquiescence on
(its) part to novate, or accept new conditions to, the agreement already) entered into," referring to its
acceptance of the terms and conditions mentioned in Resolution No. 145.
On April 13, 1954 the loan documents were executed: the promissory note, with F.R. Halling, representing
China Engineers, Ltd., as one of the co-signers; and the corresponding deed of mortgage, which was duly
registered on the following April 17.
It appears, however, that despite the formal execution of the loan agreement the reexamination contemplated
in Resolution No. 736 proceeded. In a meeting of the RFC Board of Governors on June 10, 1954, at which
Ramon Saura, President of Saura, Inc., was present, it was decided to reduce the loan from P500,000.00 to
P300,000.00. Resolution No. 3989 was approved as follows:
RESOLUTION No. 3989. Reducing the Loan Granted Saura Import & Export Co., Inc. under Resolution No.
145, C.S., from P500,000.00 to P300,000.00. Pursuant to Bd. Res. No. 736, c.s., authorizing the re-
examination of all the various aspects of the loan granted the Saura Import & Export Co. under Resolution No.
145, c.s., for the purpose of financing the manufacture of jute sacks in Davao, with special reference as to the
advisability of financing this particular project based on present conditions obtaining in the operation of jute
mills, and after having heard Ramon E. Saura and after extensive discussion on the subject the Board, upon
recommendation of the Chairman, RESOLVED that the loan granted the Saura Import & Export Co. be
REDUCED from P500,000 to P300,000 and that releases up to P100,000 may be authorized as may be
necessary from time to time to place the factory in actual operation: PROVIDED that all terms and conditions
of Resolution No. 145, c.s., not inconsistent herewith, shall remain in full force and effect."
On June 19, 1954 another hitch developed. F.R. Halling, who had signed the promissory note for China
Engineers Ltd. jointly and severally with the other RFC that his company no longer to of the loan and therefore
considered the same as cancelled as far as it was concerned. A follow-up letter dated July 2 requested RFC
that the registration of the mortgage be withdrawn.
In the meantime Saura, Inc. had written RFC requesting that the loan of P500,000.00 be granted. The request
was denied by RFC, which added in its letter-reply that it was "constrained to consider as cancelled the loan
of P300,000.00 ... in view of a notification ... from the China Engineers Ltd., expressing their desire to consider
the loan insofar as they are concerned."
On July 24, 1954 Saura, Inc. took exception to the cancellation of the loan and informed RFC that China
Engineers, Ltd. "will at any time reinstate their signature as co-signer of the note if RFC releases to us the
P500,000.00 originally approved by you.".
On December 17, 1954 RFC passed Resolution No. 9083, restoring the loan to the original amount of
P500,000.00, "it appearing that China Engineers, Ltd. is now willing to sign the promissory notes jointly with
the borrower-corporation," but with the following proviso:
That in view of observations made of the shortage and high cost of imported raw materials,
the Department of Agriculture and Natural Resources shall certify to the following:
1. That the raw materials needed by the borrower-corporation to carry out its operation are
available in the immediate vicinity; and
2. That there is prospect of increased production thereof to provide adequately for the
requirements of the factory."
The action thus taken was communicated to Saura, Inc. in a letter of RFC dated December 22, 1954, wherein
it was explained that the certification by the Department of Agriculture and Natural Resources was required
"as the intention of the original approval (of the loan) is to develop the manufacture of sacks on the basis of
locally available raw materials." This point is important, and sheds light on the subsequent actuations of the
parties. Saura, Inc. does not deny that the factory he was building in Davao was for the manufacture of bags
from local raw materials. The cover page of its brochure (Exh. M) describes the project as a "Joint venture by
and between the Mindanao Industry Corporation and the Saura Import and Export Co., Inc. to finance,
manage and operate a Kenaf mill plant, to manufacture copra and corn bags, runners, floor mattings, carpets,
draperies; out of 100% local raw materials, principal kenaf." The explanatory note on page 1 of the same
brochure states that, the venture "is the first serious attempt in this country to use 100% locally grown raw trust receipt heretofore mentioned. It appears further that for failure to pay the said obligation the Prudential
materials notably kenaf which is presently grown commercially in theIsland of Mindanao where the proposed Bank and Trust Co. sued Saura, Inc. on May 15, 1955.
jutemill is located ..." On January 9, 1964, ahnost 9 years after the mortgage in favor of RFC was cancelled at the request of Saura,
This fact, according to defendant DBP, is what moved RFC to approve the loan application in the first place, Inc., the latter commenced the present suit for damages, alleging failure of RFC (as predecessor of the
and to require, in its Resolution No. 9083, a certification from the Department of Agriculture and Natural defendant DBP) to comply with its obligation to release the proceeds of the loan applied for and approved,
Resources as to the availability of local raw materials to provide adequately for the requirements of the thereby preventing the plaintiff from completing or paying contractual commitments it had entered into, in
factory. Saura, Inc. itself confirmed the defendant's stand impliedly in its letter of January 21, 1955: (1) stating connection with its jute mill project.
that according to a special study made by the Bureau of Forestry "kenaf will not be available in sufficient The trial court rendered judgment for the plaintiff, ruling that there was a perfected contract between the
quantity this year or probably even next year;" (2) requesting "assurances (from RFC) that my company and parties and that the defendant was guilty of breach thereof. The defendant pleaded below, and reiterates in
associates will be able to bring in sufficient jute materials as may be necessary for the full operation of the jute this appeal: (1) that the plaintiff's cause of action had prescribed, or that its claim had been waived or
mill;" and (3) asking that releases of the loan be made as follows: abandoned; (2) that there was no perfected contract; and (3) that assuming there was, the plaintiff itself did
a) For the payment of the receipt for jute mill  not comply with the terms thereof.
machineries with the Prudential Bank & We hold that there was indeed a perfected consensual contract, as recognized in Article 1934 of the Civil
Trust Company P250,000.00 Code, which provides:
(For immediate release) ART. 1954. An accepted promise to deliver something, by way of commodatum or simple
b) For the purchase of materials and equip- loan is binding upon the parties, but the commodatum or simple loan itself shall not be
ment per attached list to enable the jute perferted until the delivery of the object of the contract.
mill to operate 182,413.91 There was undoubtedly offer and acceptance in this case: the application of Saura, Inc. for a loan of
c) For raw materials and labor 67,586.09 P500,000.00 was approved by resolution of the defendant, and the corresponding mortgage was executed
1) P25,000.00 to be released on the open- and registered. But this fact alone falls short of resolving the basic claim that the defendant failed to fulfill its
ing of the letter of credit for raw jute obligation and the plaintiff is therefore entitled to recover damages.
for $25,000.00. It should be noted that RFC entertained the loan application of Saura, Inc. on the assumption that the factory
2) P25,000.00 to be released upon arrival to be constructed would utilize locally grown raw materials, principally kenaf. There is no serious dispute about
of raw jute. this. It was in line with such assumption that when RFC, by Resolution No. 9083 approved on December 17,
3) P17,586.09 to be released as soon as the 1954, restored the loan to the original amount of P500,000.00. it imposed two conditions, to wit: "(1) that the
mill is ready to operate. raw materials needed by the borrower-corporation to carry out its operation are available in the immediate
On January 25, 1955 RFC sent to Saura, Inc. the following reply: vicinity; and (2) that there is prospect of increased production thereof to provide adequately for the
Dear Sirs: requirements of the factory." The imposition of those conditions was by no means a deviation from the terms
This is with reference to your letter of January 21, 1955, regarding the of the agreement, but rather a step in its implementation. There was nothing in said conditions that
release of your loan under consideration of P500,000. As stated in our contradicted the terms laid down in RFC Resolution No. 145, passed on January 7, 1954, namely — "that the
letter of December 22, 1954, the releases of the loan, if revived, are proceeds of the loan shall be utilized exclusively for the following purposes: for construction of factory building
proposed to be made from time to time, subject to availability of funds — P250,000.00; for payment of the balance of purchase price of machinery and equipment — P240,900.00;
towards the end that the sack factory shall be placed in actual operating for working capital — P9,100.00." Evidently Saura, Inc. realized that it could not meet the conditions required
status. We shall be able to act on your request for revised purpose and by RFC, and so wrote its letter of January 21, 1955, stating that local jute "will not be able in sufficient quantity
manner of releases upon re-appraisal of the securities offered for the this year or probably next year," and asking that out of the loan agreed upon the sum of P67,586.09 be
loan. released "for raw materials and labor." This was a deviation from the terms laid down in Resolution No. 145
With respect to our requirement that the Department of Agriculture and and embodied in the mortgage contract, implying as it did a diversion of part of the proceeds of the loan to
Natural Resources certify that the raw materials needed are available in purposes other than those agreed upon.
the immediate vicinity and that there is prospect of increased production When RFC turned down the request in its letter of January 25, 1955 the negotiations which had been going on
thereof to provide adequately the requirements of the factory, we wish for the implementation of the agreement reached an impasse. Saura, Inc. obviously was in no position to
to reiterate that the basis of the original approval is to develop the comply with RFC's conditions. So instead of doing so and insisting that the loan be released as agreed upon,
manufacture of sacks on the basis of the locally available raw materials. Saura, Inc. asked that the mortgage be cancelled, which was done on June 15, 1955. The action thus taken
Your statement that you will have to rely on the importation of jute and by both parties was in the nature cf mutual desistance — what Manresa terms "mutuo disenso"1 — which is a
your request that we give you assurance that your company will be able mode of extinguishing obligations. It is a concept that derives from the principle that since mutual agreement
to bring in sufficient jute materials as may be necessary for the can create a contract, mutual disagreement by the parties can cause its extinguishment.2
operation of your factory, would not be in line with our principle in The subsequent conduct of Saura, Inc. confirms this desistance. It did not protest against any alleged breach
approving the loan. of contract by RFC, or even point out that the latter's stand was legally unjustified. Its request for cancellation
With the foregoing letter the negotiations came to a standstill. Saura, Inc. did not pursue the matter further. of the mortgage carried no reservation of whatever rights it believed it might have against RFC for the latter's
Instead, it requested RFC to cancel the mortgage, and so, on June 17, 1955 RFC executed the corresponding non-compliance. In 1962 it even applied with DBP for another loan to finance a rice and corn project, which
deed of cancellation and delivered it to Ramon F. Saura himself as president of Saura, Inc. application was disapproved. It was only in 1964, nine years after the loan agreement had been cancelled at
It appears that the cancellation was requested to make way for the registration of a mortgage contract, its own request, that Saura, Inc. brought this action for damages.All these circumstances demonstrate beyond
executed on August 6, 1954, over the same property in favor of the Prudential Bank and Trust Co., under doubt that the said agreement had been extinguished by mutual desistance — and that on the initiative of the
which contract Saura, Inc. had up to December 31 of the same year within which to pay its obligation on the plaintiff-appellee itself.
6
With this view we take of the case, we find it unnecessary to consider and resolve the other issues raised in
the respective briefs of the parties.
WHEREFORE, the judgment appealed from is reversed and the complaint dismissed, with costs against the
plaintiff-appellee.

7
[G.R. NO. 154878 : March 16, 2007]
CAROLYN M. GARCIA, Petitioner, v. RICA MARIE S. THIO,Respondent.
DECISION
CORONA, J.:
Assailed in this Petition for Review on Certiorari 1 are the June 19, 2002 decision2 and August 20, 2002
resolution3 of the Court of Appeals (CA) in CA-G.R. CV No. 56577 which set aside the February 28, 1997
decision of the Regional Trial Court (RTC) of Makati City, Branch 58.
Sometime in February 1995, respondent Rica Marie S. Thio received from petitioner Carolyn M. Garcia a
crossed check4dated February 24, 1995 in the amount of US$100,000 payable to the order of a certain
Marilou Santiago.5Thereafter, petitioner received from respondent every month (specifically, on March 24,
April 26, June 26 and July 26, all in 1995) the amount of US$3,000 6 and P76,5007 on July 26,8August 26,
September 26 and October 26, 1995.
In June 1995, respondent received from petitioner another crossed check 9 dated June 29, 1995 in the amount
of P500,000, also payable to the order of Marilou Santiago.10Consequently, petitioner received from
respondent the amount of P20,000 every month on August 5, September 5, October 5 and November 5,
1995.11
According to petitioner, respondent failed to pay the principal amounts of the loans (US$100,000
and P500,000) when they fell due. Thus, on February 22, 1996, petitioner filed a complaint for sum of money
and damages in the RTC of Makati City, Branch 58 against respondent, seeking to collect the sums of
US$100,000, with interest thereon at 3% a month from October 26, 1995 and P500,000, with interest thereon
at 4% a month from November 5, 1995, plus attorney's fees and actual damages.12
Petitioner alleged that on February 24, 1995, respondent borrowed from her the amount of US$100,000 with
interest thereon at the rate of 3% per month, which loan would mature on October 26, 1995. 13 The amount of
this loan was covered by the first check. On June 29, 1995, respondent again borrowed the amount
of P500,000 at an agreed monthly interest of 4%, the maturity date of which was on November 5, 1995. 14 The
amount of this loan was covered by the second check. For both loans, no promissory note was executed since
petitioner and respondent were close friends at the time. 15 Respondent paid the stipulated monthly interest for
both loans but on their maturity dates, she failed to pay the principal amounts despite repeated
demands.16 Ï‚ηαñrοblεš  Î½Î¹r†υαl  lαω  lιbrαrÿ
Respondent denied that she contracted the two loans with petitioner and countered that it was Marilou
Santiago to whom petitioner lent the money. She claimed she was merely asked by petitioner to give the
crossed checks to Santiago.17She issued the checks for P76,000 and P20,000 not as payment of interest but
to accommodate petitioner's request that respondent use her own checks instead of Santiago's.18
In a decision dated February 28, 1997, the RTC ruled in favor of petitioner. 19 It found that respondent
borrowed from petitioner the amounts of US$100,000 with monthly interest of 3% and P500,000 at a monthly
interest of 4%:20
WHEREFORE, finding preponderance of evidence to sustain the instant complaint, judgment is hereby
rendered in favor of [petitioner], sentencing [respondent] to pay the former the amount of:
1. [US$100,000.00] or its peso equivalent with interest thereon at 3% per month from October 26, 1995 until
fully paid;
2. P500,000.00 with interest thereon at 4% per month from November 5, 1995 until fully paid.
3. P100,000.00 as and for attorney's fees; andcralawlibrary
4. P50,000.00 as and for actual damages.
For lack of merit, [respondent's] counterclaim is perforce dismissed.
With costs against [respondent].
IT IS SO ORDERED.21
On appeal, the CA reversed the decision of the RTC and ruled that there was no contract of loan between the
parties:
A perusal of the record of the case shows that [petitioner] failed to substantiate her claim that [respondent]
indeed borrowed money from her. There is nothing in the record that shows that [respondent] received
money from [petitioner]. What is evident is the fact that [respondent] received a MetroBank [crossed] check
8
dated February 24, 1995 in the sum of US$100,000.00, payable to the order of Marilou Santiago and a
CityTrust [crossed] check dated June 29, 1995 in the amount of P500,000.00, again payable to the order of
Marilou Santiago, both of which were issued by [petitioner]. The checks received by [respondent], being
crossed, may not be encashed but only deposited in the bank by the payee thereof, that is, by Marilou
Santiago herself.
It must be noted that crossing a check has the following effects: (a) the check may not be encashed but only
deposited in the bank; (b) the check may be negotiated only once to one who has an account with the bank;
(c) and the act of crossing the check serves as warning to the holder that the check has been issued for a
definite purpose so that he must inquire if he has received the check pursuant to that purpose, otherwise, he
is not a holder in due course.
Consequently, the receipt of the [crossed] check by [respondent] is not the issuance and delivery to the payee
in contemplation of law since the latter is not the person who could take the checks as a holder, i.e., as a
payee or indorsee thereof, with intent to transfer title thereto. Neither could she be deemed as an agent of
Marilou Santiago with respect to the checks because she was merely facilitating the transactions between the
former and [petitioner].
With the foregoing circumstances, it may be fairly inferred that there were really no contracts of loan that
existed between the parties. x x x (emphasis supplied)22
Hence this petition.23
As a rule, only questions of law may be raised in a Petition for Review on Certiorari under Rule 45 of the
Rules of Court. However, this case falls under one of the exceptions, i.e., when the factual findings of the CA
(which held that there were no contracts of loan between petitioner and respondent) and the RTC (which held
that there were contracts of loan) are contradictory.24
The petition is impressed with merit.
A loan is a real contract, not consensual, and as such is perfected only upon the delivery of the object of the
contract.25 This is evident in Art. 1934 of the Civil Code which provides:
An accepted promise to deliver something by way of commodatum or simple loan is binding upon the parties,
but the commodatum or simple loan itself shall not be perfected until the delivery of the object of the
contract. (Emphasis supplied)cralawlibrary
Upon delivery of the object of the contract of loan (in this case the money received by the debtor when the
checks were encashed) the debtor acquires ownership of such money or loan proceeds and is bound to pay
the creditor an equal amount.26
It is undisputed that the checks were delivered to respondent. However, these checks were crossed and
payable not to the order of respondent but to the order of a certain Marilou Santiago. Thus the main question
to be answered is: who borrowed money from petitioner - respondent or Santiago?cralaw library
Petitioner insists that it was upon respondent's instruction that both checks were made payable to
Santiago.27 She maintains that it was also upon respondent's instruction that both checks were delivered to
her (respondent) so that she could, in turn, deliver the same to Santiago.28 Furthermore, she argues that once
respondent received the checks, the latter had possession and control of them such that she had the choice to
either forward them to Santiago (who was already her debtor), to retain them or to return them to petitioner.29
We agree with petitioner. Delivery is the act by which the resor substance thereof is placed within the actual or
constructive possession or control of another. 30 Although respondent did not physically receive the proceeds
of the checks, these instruments were placed in her control and possession under an arrangement whereby
she actually re-lent the amounts to Santiago.
Several factors support this conclusion.
First, respondent admitted that petitioner did not personally know Santiago. 31 It was highly improbable that
petitioner would grant two loans to a complete stranger without requiring as much as promissory notes or any
written acknowledgment of the debt considering that the amounts involved were quite big. Respondent, on the
other hand, already had transactions with Santiago at that time.32
Second, Leticia Ruiz, a friend of both petitioner and respondent (and whose name appeared in both parties'
list of witnesses) testified that respondent's plan was for petitioner to lend her money at a monthly interest rate
of 3%, after which respondent would lend the same amount to Santiago at a higher rate of 5% and realize a
profit of 2%.33 This explained why respondent instructed petitioner to make the checks payable to Santiago.
Respondent has not shown any reason why Ruiz' testimony should not be believed.
Third, for the US$100,000 loan, respondent admitted issuing her own checks in the amount of P76,000 each
(peso equivalent of US$3,000) for eight months to cover the monthly interest. For the P500,000 loan, she also
issued her own checks in the amount of P20,000 each for four months.34 According to respondent, she merely
accommodated petitioner's request for her to issue her own checks to cover the interest payments since
petitioner was not personally acquainted with Santiago.35 She claimed, however, that Santiago would replace
the checks with cash.36 Her explanation is simply incredible. It is difficult to believe that respondent would put
herself in a position where she would be compelled to pay interest, from her own funds, for loans she
allegedly did not contract. We declared in one case that:
In the assessment of the testimonies of witnesses, this Court is guided by the rule that for evidence to be
believed, it must not only proceed from the mouth of a credible witness, but must be credible in itself such as
the common experience of mankind can approve as probable under the circumstances. We have no test of
the truth of human testimony except its conformity to our knowledge, observation, and experience. Whatever
is repugnant to these belongs to the miraculous, and is outside of juridical cognizance.37
Fourth, in the petition for insolvency sworn to and filed by Santiago, it was respondent, not petitioner, who was
listed as one of her (Santiago's) creditors.38
Last, respondent inexplicably never presented Santiago as a witness to corroborate her story. 39 The
presumption is that "evidence willfully suppressed would be adverse if produced." 40 Respondent was not able
to overturn this presumption.
We hold that the CA committed reversible error when it ruled that respondent did not borrow the amounts of
US$100,000 and P500,000 from petitioner. We instead agree with the ruling of the RTC making respondent
liable for the principal amounts of the loans.
We do not, however, agree that respondent is liable for the 3% and 4% monthly interest for the US$100,000
and P500,000 loans respectively. There was no written proof of the interest payable except for
the verbal agreement that the loans would earn 3% and 4% interest per month. Article 1956 of the Civil Code
provides that "[n]o interest shall be due unless it has been expressly stipulated in writing."
Be that as it may, while there can be no stipulated interest, there can be legal interest pursuant to Article 2209
of the Civil Code. It is well-settled that:
When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance
of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest
due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate
of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand
under and subject to the provisions of Article 1169 of the Civil Code.41
Hence, respondent is liable for the payment of legal interest per annum to be computed from November 21,
1995, the date when she received petitioner's demand letter. 42 From the finality of the decision until it is fully
paid, the amount due shall earn interest at 12% per annum, the interim period being deemed equivalent to a
forbearance of credit.43
The award of actual damages in the amount of P50,000 and P100,000 attorney's fees is deleted since the
RTC decision did not explain the factual bases for these damages.
WHEREFORE, the petition is hereby GRANTED and the June 19, 2002 decision and August 20, 2002
resolution of the Court of Appeals in CA-G.R. CV No. 56577 are REVERSED and SET ASIDE. The February
28, 1997 decision of the Regional Trial Court in Civil Case No. 96-266 is AFFIRMEDwith
the MODIFICATION that respondent is directed to pay petitioner the amounts of US$100,000 and P500,000
at 12% per annum interest from November 21, 1995 until the finality of the decision. The total amount due as
of the date of finality will earn interest of 12% per annum until fully paid. The award of actual damages and
attorney's fees is deleted. 
SO ORDERED.