SEBASTIAN SIGA-AN, G.R. No.

173227
Petitioner,
Present:

YNARES-SANTIAGO,
Chairperson,
AUSTRIA-MARTINEZ,
-versus CHICO-NAZARIO,
NACHURA, and
LEONARDO-DE CASTRO,* JJ.

Promulgated:
ALICIA VILLANUEVA,
Respondent. January 20, 2009
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

CHICO-NAZARIO, J.:

[1]
Before Us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking to set aside the Decision,
[2] [3]
dated 16 December 2005, and Resolution, dated 19 June 2006 of the Court of Appeals in CA-G.R. CV No. 71814, which affirmed
[4]
in toto the Decision, dated 26 January 2001, of the Las Pinas City Regional Trial Court, Branch 255, in Civil Case No. LP-98-0068.

The facts gathered from the records are as follows:

[5]
On 30 March 1998, respondent Alicia Villanueva filed a complaint for sum of money against petitioner Sebastian Siga-an
before the Las Pinas City Regional Trial Court (RTC), Branch 255, docketed as Civil Case No. LP-98-0068. Respondent alleged that
she was a businesswoman engaged in supplying office materials and equipments to the Philippine Navy Office (PNO) located at Fort
Bonifacio, Taguig City, while petitioner was a military officer and comptroller of the PNO from 1991 to 1996.

Respondent claimed that sometime in 1992, petitioner approached her inside the PNO and offered to loan her the amount
of P540,000.00. Since she needed capital for her business transactions with the PNO, she accepted petitioners proposal. The loan
[6]
agreement was not reduced in writing. Also, there was no stipulation as to the payment of interest for the loan.

On 31 August 1993, respondent issued a check worth P500,000.00 to petitioner as partial payment of the loan. On 31 October
1993, she issued another check in the amount of P200,000.00 to petitioner as payment of the remaining balance of the loan. Petitioner
told her that since she paid a total amount of P700,000.00 for the P540,000.00 worth of loan, the excess amount of P160,000.00 would
be applied as interest for the loan. Not satisfied with the amount applied as interest, petitioner pestered her to pay additional
interest. Petitioner threatened to block or disapprove her transactions with the PNO if she would not comply with his demand. As all
her transactions with the PNO were subject to the approval of petitioner as comptroller of the PNO, and fearing that petitioner might
block or unduly influence the payment of her vouchers in the PNO, she conceded. Thus, she paid additional amounts in cash and
checks as interests for the loan. She asked petitioner for receipt for the payments but petitioner told her that it was not necessary as
there was mutual trust and confidence between them. According to her computation, the total amount she paid to petitioner for the
[7]
loan and interest accumulated to P1,200,000.00.

Thereafter, respondent consulted a lawyer regarding the propriety of paying interest on the loan despite absence of agreement
to that effect. Her lawyer told her that petitioner could not validly collect interest on the loan because there was no agreement between
her and petitioner regarding payment of interest. Since she paid petitioner a total amount of P1,200,000.00 for the P540,000.00 worth
of loan, and upon being advised by her lawyer that she made overpayment to petitioner, she sent a demand letter to petitioner asking
for the return of the excess amount of P660,000.00. Petitioner, despite receipt of the demand letter, ignored her claim for
[8]
reimbursement.

Respondent prayed that the RTC render judgment ordering petitioner to pay respondent (1) P660,000.00 plus legal interest
from the time of demand; (2) P300,000.00 as moral damages; (3) P50,000.00 as exemplary damages; and (4) an amount equivalent to
[9]
25% of P660,000.00 as attorneys fees.

[10]
In his answer to the complaint, petitioner denied that he offered a loan to respondent. He averred that in 1992, respondent
approached and asked him if he could grant her a loan, as she needed money to finance her business venture with the PNO. At first, he
was reluctant to deal with respondent, because the latter had a spotty record as a supplier of the PNO. However, since respondent was
[11]
an acquaintance of his officemate, he agreed to grant her a loan. Respondent paid the loan in full.

Subsequently, respondent again asked him to give her a loan. As respondent had been able to pay the previous loan in full, he
agreed to grant her another loan. Later, respondent requested him to restructure the payment of the loan because she could not give full
payment on the due date. He acceded to her request. Thereafter, respondent pleaded for another restructuring of the payment of the
loan. This time he rejected her plea. Thus, respondent proposed to execute a promissory note wherein she would acknowledge her
obligation to him, inclusive of interest, and that she would issue several postdated checks to guarantee the payment of her obligation.
Upon his approval of respondents request for restructuring of the loan, respondent executed a promissory note dated 12 September
1994 wherein she admitted having borrowed an amount of P1,240,000.00, inclusive of interest, from petitioner and that she would pay
said amount in March 1995. Respondent also issued to him six postdated checks amounting to P1,240,000.00 as guarantee of
compliance with her obligation. Subsequently, he presented the six checks for encashment but only one check was honored. He
demanded that respondent settle her obligation, but the latter failed to do so. Hence, he filed criminal cases for Violation of the
Bouncing Checks Law (Batas Pambansa Blg. 22) against respondent. The cases were assigned to the Metropolitan Trial Court of
[12]
Makati City, Branch 65 (MeTC).

Petitioner insisted that there was no overpayment because respondent admitted in the latters promissory note that her
monetary obligation as of 12 September 1994 amounted to P1,240,000.00 inclusive of interests. He argued that respondent was
already estopped from complaining that she should not have paid any interest, because she was given several times to settle her
obligation but failed to do so. He maintained that to rule in favor of respondent is tantamount to concluding that the loan was given
interest-free. Based on the foregoing averments, he asked the RTC to dismiss respondents complaint.

After trial, the RTC rendered a Decision on 26 January 2001 holding that respondent made an overpayment of her loan
obligation to petitioner and that the latter should refund the excess amount to the former. It ratiocinated that respondents obligation
was only to pay the loaned amount of P540,000.00, and that the alleged interests due should not be included in the computation of
respondents total monetary debt because there was no agreement between them regarding payment of interest. It concluded that since
respondent made an excess payment to petitioner in the amount of P660,000.00 through mistake, petitioner should return the said
[13]
amount to respondent pursuant to the principle of solutio indebiti.

The RTC also ruled that petitioner should pay moral damages for the sleepless nights and wounded feelings experienced by
respondent. Further, petitioner should pay exemplary damages by way of example or correction for the public good, plus attorneys
fees and costs of suit.

The dispositive portion of the RTC Decision reads:

WHEREFORE, in view of the foregoing evidence and in the light of the provisions of law and
jurisprudence on the matter, judgment is hereby rendered in favor of the plaintiff and against the defendant as
follows:

(1) Ordering defendant to pay plaintiff the amount of P660,000.00 plus legal interest of 12% per
annum computed from 3 March 1998 until the amount is paid in full;
(2) Ordering defendant to pay plaintiff the amount of P300,000.00 as moral damages;

(3) Ordering defendant to pay plaintiff the amount of P50,000.00 as exemplary damages;

(4) Ordering defendant to pay plaintiff the amount equivalent to 25% of P660,000.00 as attorneys fees; and

[14]
(5) Ordering defendant to pay the costs of suit.

Petitioner appealed to the Court of Appeals. On 16 December 2005, the appellate court promulgated its Decision affirming in
toto the RTC Decision, thus:

WHEREFORE, the foregoing considered, the instant appeal is hereby DENIED and the assailed decision
[15]
[is] AFFIRMED in toto.

[16]
Petitioner filed a motion for reconsideration of the appellate courts decision but this was denied. Hence, petitioner lodged
the instant petition before us assigning the following errors:
I.

THE RTC AND THE COURT OF APPEALS ERRED IN RULING THAT NO INTEREST WAS DUE TO
PETITIONER;

II.

THE RTC AND THE COURT OF APPEALS ERRED IN APPLYING THE PRINCIPLE OF SOLUTIO INDEBITI.
[17]

Interest is a compensation fixed by the parties for the use or forbearance of money. This is referred to as monetary interest.
[18]
Interest may also be imposed by law or by courts as penalty or indemnity for damages. This is called compensatory interest. The
right to interest arises only by virtue of a contract or by virtue of damages for delay or failure to pay the principal loan on which
[19]
interest is demanded.

[20]
Article 1956 of the Civil Code, which refers to monetary interest, specifically mandates that no interest shall be due unless
it has been expressly stipulated in writing. As can be gleaned from the foregoing provision, payment of monetary interest is allowed
only if: (1) there was an express stipulation for the payment of interest; and (2) the agreement for the payment of interest was reduced
in writing. The concurrence of the two conditions is required for the payment of monetary interest. Thus, we have held that collection
[21]
of interest without any stipulation therefor in writing is prohibited by law.

It appears that petitioner and respondent did not agree on the payment of interest for the loan. Neither was there convincing
proof of written agreement between the two regarding the payment of interest. Respondent testified that although she accepted
petitioners offer of loan amounting to P540,000.00, there was, nonetheless, no verbal or written agreement for her to pay interest on
[22]
the loan.

[23]
Petitioner presented a handwritten promissory note dated 12 September 1994 wherein respondent purportedly admitted
owing petitioner capital and interest.Respondent, however, explained that it was petitioner who made a promissory note and she was
told to copy it in her own handwriting; that all her transactions with the PNO were subject to the approval of petitioner as comptroller
of the PNO; that petitioner threatened to disapprove her transactions with the PNO if she would not pay interest; that being unaware of
the law on interest and fearing that petitioner would make good of his threats if she would not obey his instruction to copy the
promissory note, she copied the promissory note in her own handwriting; and that such was the same promissory note presented by
[24]
petitioner as alleged proof of their written agreement on interest. Petitioner did not rebut the foregoing testimony. It is evident that
respondent did not really consent to the payment of interest for the loan and that she was merely tricked and coerced by petitioner to
pay interest. Hence, it cannot be gainfully said that such promissory note pertains to an express stipulation of interest or written
agreement of interest on the loan between petitioner and respondent.

Petitioner, nevertheless, claims that both the RTC and the Court of Appeals found that he and respondent agreed on the
payment of 7% rate of interest on the loan; that the agreed 7% rate of interest was duly admitted by respondent in her testimony in the
Batas Pambansa Blg. 22 cases he filed against respondent; that despite such judicial admission by respondent, the RTC and the Court
of Appeals, citing Article 1956 of the Civil Code, still held that no interest was due him since the agreement on interest was not
reduced in writing; that the application of Article 1956 of the Civil Code should not be absolute, and an exception to the application of
such provision should be made when the borrower admits that a specific rate of interest was agreed upon as in the present case; and
that it would be unfair to allow respondent to pay only the loan when the latter very well knew and even admitted in the Batas
[25]
Pambansa Blg. 22 cases that there was an agreed 7% rate of interest on the loan.

We have carefully examined the RTC Decision and found that the RTC did not make a ruling therein that petitioner and
respondent agreed on the payment of interest at the rate of 7% for the loan. The RTC clearly stated that although petitioner and
respondent entered into a valid oral contract of loan amounting to P540,000.00, they, nonetheless, never intended the payment of
[26]
interest thereon. While the Court of Appeals mentioned in its Decision that it concurred in the RTCs ruling that petitioner and
respondent agreed on a certain rate of interest as regards the loan, we consider this as merely an inadvertence because, as earlier
elucidated, both the RTC and the Court of Appeals ruled that petitioner is not entitled to the payment of interest on the loan. The rule
[27]
is that factual findings of the trial court deserve great weight and respect especially when affirmed by the appellate court. We found
no compelling reason to disturb the ruling of both courts.

Petitioners reliance on respondents alleged admission in the Batas Pambansa Blg. 22 cases that they had agreed on the
payment of interest at the rate of 7% deserves scant consideration. In the said case, respondent merely testified that after paying the
[28]
total amount of loan, petitioner ordered her to pay interest. Respondent did not categorically declare in the same case that she and
respondent made an express stipulation in writing as regards payment of interest at the rate of 7%. As earlier discussed, monetary
interest is due only if there was an express stipulation in writing for the payment of interest.

There are instances in which an interest may be imposed even in the absence of express stipulation, verbal or written,
regarding payment of interest. Article 2209 of the Civil Code states that if the obligation consists in the payment of a sum of money,
and the debtor incurs delay, a legal interest of 12% per annum may be imposed as indemnity for damages if no stipulation on the
payment of interest was agreed upon. Likewise, Article 2212 of the Civil Code provides that interest due shall earn legal interest from
the time it is judicially demanded, although the obligation may be silent on this point.

All the same, the interest under these two instances may be imposed only as a penalty or damages for breach of contractual
obligations. It cannot be charged as a compensation for the use or forbearance of money. In other words, the two instances apply only
[29]
to compensatory interest and not to monetary interest. The case at bar involves petitioners claim for monetary interest.

Further, said compensatory interest is not chargeable in the instant case because it was not duly proven that respondent
defaulted in paying the loan. Also, as earlier found, no interest was due on the loan because there was no written agreement as regards
payment of interest.

Apropos the second assigned error, petitioner argues that the principle of solutio indebiti does not apply to the instant
[30]
case. Thus, he cannot be compelled to return the alleged excess amount paid by respondent as interest.

Under Article 1960 of the Civil Code, if the borrower of loan pays interest when there has been no stipulation therefor, the
provisions of the Civil Code concerning solutioindebiti shall be applied. Article 2154 of the Civil Code explains the principle
of solutio indebiti. Said provision provides that if something is received when there is no right to demand it, and it was unduly
delivered through mistake, the obligation to return it arises. In such a case, a creditor-debtor relationship is created under a quasi-
contract whereby the payor becomes the creditor who then has the right to demand the return of payment made by mistake, and the
person who has no right to receive such payment becomes obligated to return the same. The quasi-contract of solutio indebiti harks
[31]
back to the ancient principle that no one shall enrich himself unjustly at the expense of another. The principle of solutio
indebiti applies where (1) a payment is made when there exists no binding relation between the payor, who has no duty to pay, and the
[32]
person who received the payment; and (2) the payment is made through mistake, and not through liberality or some other cause. We
[33]
have held that the principle of solutio indebiti applies in case of erroneous payment of undue interest.

It was duly established that respondent paid interest to petitioner. Respondent was under no duty to make such payment
because there was no express stipulation in writing to that effect. There was no binding relation between petitioner and respondent as
regards the payment of interest. The payment was clearly a mistake. Since petitioner received something when there was no right to
demand it, he has an obligation to return it.

We shall now determine the propriety of the monetary award and damages imposed by the RTC and the Court of Appeals.

[34]
Records show that respondent received a loan amounting to P540,000.00 from petitioner. Respondent issued two checks
[35]
with a total worth of P700,000.00 in favor of petitioner as payment of the loan. These checks were subsequently encashed by
[36]
petitioner. Obviously, there was an excess of P160,000.00 in the payment for the loan. Petitioner claims that the excess
of P160,000.00 serves as interest on the loan to which he was entitled. Aside from issuing the said two checks, respondent also paid
[37]
cash in the total amount of P175,000.00 to petitioner as interest. Although no receipts reflecting the same were presented because
[38]
petitioner refused to issue such to respondent, petitioner, nonetheless, admitted in his Reply-Affidavit in the Batas Pambansa Blg.
22 cases that respondent paid him a total amount of P175,000.00 cash in addition to the two checks. Section 26 Rule 130 of the Rules
of Evidence provides that the declaration of a party as to a relevant fact may be given in evidence against him. Aside from the
amounts of P160,000.00 and P175,000.00 paid as interest, no other proof of additional payment as interest was presented by
respondent. Since we have previously found that petitioner is not entitled to payment of interest and that the principle of solutio
indebiti applies to the instant case, petitioner should return to respondent the excess amount of P160,000.00 and P175,000.00 or the
total amount of P335,000.00. Accordingly, the reimbursable amount to respondent fixed by the RTC and the Court of Appeals should
be reduced from P660,000.00 to P335,000.00.

As earlier stated, petitioner filed five (5) criminal cases for violation of Batas Pambansa Blg. 22 against respondent. In the
said cases, the MeTC found respondent guilty of violating Batas Pambansa Blg. 22 for issuing five dishonored checks to petitioner.
Nonetheless, respondents conviction therein does not affect our ruling in the instant case. The two checks, subject matter of this case,
totaling P700,000.00 which respondent claimed as payment of the P540,000.00 worth of loan, were not among the five checks found
to be dishonored or bounced in the five criminal cases. Further, the MeTC found that respondent made an overpayment of the loan by
[39]
reason of the interest which the latter paid to petitioner.

Article 2217 of the Civil Code provides that moral damages may be recovered if the party underwent physical suffering,
mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation and similar injury.
Respondent testified that she experienced sleepless nights and wounded feelings when petitioner refused to return the amount paid as
interest despite her repeated demands. Hence, the award of moral damages is justified. However, its corresponding amount
of P300,000.00, as fixed by the RTC and the Court of Appeals, is exorbitant and should be equitably reduced. Article 2216 of the Civil
Code instructs that assessment of damages is left to the discretion of the court according to the circumstances of each case. This
discretion is limited by the principle that the amount awarded should not be palpably excessive as to indicate that it was the result of
[40]
prejudice or corruption on the part of the trial court. To our mind, the amount of P150,000.00 as moral damages is fair, reasonable,
and proportionate to the injury suffered by respondent.

Article 2232 of the Civil Code states that in a quasi-contract, such as solutio indebiti, exemplary damages may be imposed if
the defendant acted in an oppressive manner. Petitioner acted oppressively when he pestered respondent to pay interest and threatened
to block her transactions with the PNO if she would not pay interest. This forced respondent to pay interest despite lack of agreement
thereto. Thus, the award of exemplary damages is appropriate. The amount of P50,000.00 imposed as exemplary damages by the RTC
[41]
and the Court is fitting so as to deter petitioner and other lenders from committing similar and other serious wrongdoings.

Jurisprudence instructs that in awarding attorneys fees, the trial court must state the factual, legal or equitable justification for
[42]
awarding the same. In the case under consideration, the RTC stated in its Decision that the award of attorneys fees equivalent to
25% of the amount paid as interest by respondent to petitioner is reasonable and moderate considering the extent of work rendered by
[43]
respondents lawyer in the instant case and the fact that it dragged on for several years. Further, respondent testified that she agreed
[44]
to compensate her lawyer handling the instant case such amount. The award, therefore, of attorneys fees and its amount equivalent
to 25% of the amount paid as interest by respondent to petitioner is proper.

Finally, the RTC and the Court of Appeals imposed a 12% rate of legal interest on the amount refundable to respondent
computed from 3 March 1998 until its full payment. This is erroneous.

[45]
We held in Eastern Shipping Lines, Inc. v. Court of Appeals, that 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 rate of 6% per annum. We further
declared that when the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether
it is a loan/forbearance of money or not, shall be 12% per annum from such finality until its satisfaction, this interim period being
deemed equivalent to a forbearance of credit.

In the present case, petitioners obligation arose from a quasi-contract of solutio indebiti and not from a loan or forbearance of
money. Thus, an interest of 6% per annum should be imposed on the amount to be refunded as well as on the damages awarded and on
[46]
the attorneys fees, to be computed from the time of the extra-judicial demand on 3 March 1998, up to the finality of this Decision.
In addition, the interest shall become 12% per annum from the finality of this Decision up to its satisfaction.

WHEREFORE, the Decision of the Court of Appeals in CA-G.R. CV No. 71814, dated 16 December 2005, is
hereby AFFIRMED with the following MODIFICATIONS: (1) the amount of P660,000.00 as refundable amount of interest is
reduced to THREE HUNDRED THIRTY FIVE THOUSAND PESOS (P335,000.00); (2) the amount of P300,000.00 imposed as
moral damages is reduced to ONE HUNDRED FIFTY THOUSAND PESOS (P150,000.00); (3) an interest of 6% per annum is
imposed on the P335,000.00, on the damages awarded and on the attorneys fees to be computed from the time of the extra-judicial
demand on 3 March 1998 up to the finality of this Decision; and (4) an interest of 12% per annum is also imposed from the finality of
this Decision up to its satisfaction. Costs against petitioner.

SO ORDERED.

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

THE GOVERNMENT SERVICE INSURANCE SYSTEM, petitioner-appellant,
vs.
HONORABLE COURT OF APPEALS, NEMENCIO R. MEDINA and JOSEFINA G. MEDINA, respondents-appellants.
Coronel Law Office for private respondents.
Alberto C. Lerma collaborating counsel for private respondents

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 over-payment
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, ... 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, ...;
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
Fifty Thousand 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, p. 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 an 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 Pl,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 WITH RESPECT TO COMPOUNDING OF INTEREST;
2. WHETHER OR NOT THE COURT OF APPEALS ERRED IN SUSTAINING THE RESPONDENT-APPELLEE
SPOUSES MEDINA'S CLAIM OR 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;
3. 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.
The 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 Mortgage dated
July 6, 1962, the interpretation of which is the major issue in this case.
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 rewritten 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:
... 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. 162166), 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, 1962, 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:
... 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 petitioner-appellant 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 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,...
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 CA-G.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.
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 FA VILA, 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
1
continue enforcing Central Bank Circular No. 905, 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, non-stock corporation organized to engage in pro bono
2
concerns and activities relating to money lending issues. It was incorporated on July 9, 2010, 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 Monetary Board may, within the limits prescribed in the Usury Law fix 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)
3
In its Resolution No. 2224 dated December 3, 1982, 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:
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)
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
4
to 4303Q.9, 4303N.1, 4303P).
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
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:
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;
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;
5
c) Whether under R.A. No. 7653, the new BSP-MB may continue to enforce CB Circular No. 905.
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
6 7
commercial rates of interest imposed by these entities. Senate Bill (SB) Nos. 37 and 1860, 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
8 9 10
credit; Philippine Senate Resolution (SR) No. 1053, 1073 and 1102, 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
11
months of advance interest on any loan of money; and Senator Raul Roco filed SR No. 1144 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
12
clippings 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 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."
13
They further claim that just weeks after the issuance of CB Circular No. 905, the benchmark 91-day Treasury bills (T-bills), then
14
known as "Jobo" bills 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
15
discretion of the court. A petition for certiorari being an extraordinary remedy, the party seeking to avail of the same must strictly
16
observe the procedural rules laid down by law, and non-observance thereof may not be brushed aside as mere technicality.
As provided in Section 1 of Rule 65, a writ of certiorari is directed against a tribunal exercising judicial or quasi-judicial
17
functions. 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
18
hearings, and draw conclusions from them as a basis for their official action using discretion of a judicial nature.
The CB-MB (now BSP-MB) was created to perform executive functions with respect to the establishment, operation or liquidation of
19
banking and credit institutions, and branches and agencies thereof. It does not perform judicial or quasi-judicial functions. Certainly,
20
the issuance of CB Circular No. 905 was done in the exercise of an executive function. Certiorari will not lie in the instant case.
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."
21
Succinctly put, a partys standing is based on his own right to the relief sought.
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
22
injury as a result." 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.
23
Morato, 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
24
petitioners as civic leaders to say that their interest falls short of that required to maintain an action under the Rule 3, Sec. 2.
C. The Petition raises no issues of transcendental importance.
25
In the 1993 case of Joya v. Presidential Commission on Good Government, 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.
26
In Prof. David v. Pres. Macapagal-Arroyo, 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
27 28
petitioners failure to show a direct injury. In CREBA v. ERC, 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
29
Court stated in Anak Mindanao Party-List Group v. The Executive Secretary 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
30
ago, when the banks prime lending rates ranged from 26% to 31%, 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
31
very low, averaging 1.75% and 1.62%, respectively.
Judging from the most recent auctions of T-bills, the savings rates must be approaching 0%.1wphi1 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%,
32
respectively. According to Manila Bulletin, this very low interest regime has been attributed to "high liquidity and strong investor
33
demand amid positive economic indicators of the country."
While the Court acknowledges that cases of transcendental importance demand that they be settled promptly and definitely, brushing
34
aside, if we must, technicalities of procedure, 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.
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
35
the removal of the government-imposed interest rate ceilings.
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
36
cases. As the Court explained in the landmark case of Medel v. CA, citing several cases, CB Circular No. 905 "did not repeal nor in
37
anyway amend the Usury Law but simply suspended the latters effectivity;" that "a CB Circular cannot repeal a law, [for] only a law
38 39
can repeal another law;" that "by virtue of CB Circular No. 905, the Usury Law has been rendered ineffective;" and "Usury has
40
been legally non-existent in our jurisdiction. Interest can now be charged as lender and borrower may agree upon."
41 42
In First Metro Investment Corp. v. Este Del Sol Mountain Reserve, Inc. cited in DBP v. Perez, 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
43
law. x x x.
44
In PNB v. Court of Appeals, 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,
45
upward or downward, the interest previously stipulated. x x x.
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 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
46
full knowledge of all laws existing pertaining to the subject. 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
47
laws. 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
48 49
either enslave their borrowers or lead to a hemorrhaging of their assets. As held in Castro v. Tan:
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
50
imposition as righteous and as one that may be sustained within the sphere of public or private morals.
Stipulations authorizing iniquitous or unconscionable interests have been invariably struck down for being contrary to morals, if not
51
against the law. 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
52
affect the other terms thereof. 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
53
excessive interest, and a legal interest of 12% per annum will be added in place of the excessive interest formerly imposed, following
54
the guidelines laid down in the landmark case of Eastern Shipping Lines, Inc. v. Court of Appeals, 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
55
interim period being deemed to be by then an equivalent to a forbearance of credit. (Citations omitted)
56
The foregoing rules were further clarified in Sunga-Chan v. Court of Appeals, 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 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 filed 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
57
interest." (Citations omitted)
WHEREFORE, premises considered, the Petition for certiorari is DISMISSED.
SO ORDERED.
ANTONIO TAN, petitioner, vs. COURT OF APPEALS and the CULTURAL CENTER OF THE PHILIPPINES, respondents.

DECISION
DE LEON, JR., J.:

[1] [2]
Before us is a petition for review of the Decision dated August 31, 1993 and Resolution dated July 13, 1994 of the Court of
[3]
Appeals affirming the Decision 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 petitioners restructured loan which as of April 30, 1984 amounted to Six Million Eighty-Eight
Thousand Seven Hundred Thirty-Five Pesos and Three Centavos (P6,088,735.03).
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
petitioners proposals and so the trial of the case ensued.
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 defendants outstanding account as of August 28, 1986, with the corresponding stipulated
interest and charges thereof, until fully paid, plus attorneys fees in an amount equivalent to 25% of said outstanding account, plus
P50,000.00, as exemplary damages, plus costs.
Defendants counterclaims are ordered dismissed, for lack of merit.
[4]
SO ORDERED.
The trial court gave five (5) reasons in ruling in favor of respondent CCP. First, it gave little weight to the petitioners 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
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, attorneys
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:
WHEREFORE, with the foregoing modification, the judgment appealed from is hereby AFFIRMED.
[5]
SO ORDERED.
In affirming the decision of the trial court imposing surcharges and interest, the appellate court held that:
We are unable to accept appellants (petitioners) claim for modification on the basis of alleged partial or irregular performance, there
being none. Appellants 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 attorneys 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 attorneys 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 petitioners motion for reconsideration of the said decision.
Hence, this petition anchored on the following assigned errors:
I
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
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.
III
THE HONORABLE COURT OF APPEALS ERRED IN NOT DELETING AWARD OF ATTORNEYS FEES AND IN
REDUCING PENALTIES.
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 attorneys fees.
The petitioner imputes error on the part of the appellate court in not totally eliminating the award of attorneys fees and in not
reducing the penalties considering that the petitioner, contrary to the appellate courts 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 petitioners contention. Article 1226 of the New Civil Code provides that:
In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of non-
compliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is
guilty of fraud in the fulfillment 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
[6]
default on the part of the petitioner in the payment of the subjectrestructured loan. The pertinent 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
 [7]
on the note and is allowed under Article 1956 of the New Civil Code. 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.
[8]
Penalty on delinquent loans may take different forms. In Government Service Insurance System v. Court of Appeals, 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
[9]
and may be demanded separately. Quoting Equitable Banking Corp. v. Liwanag, 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 above-quoted provision of Article 1959 of the New Civil Code considering that:
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
[10]
when due and shall become part thereof, the whole amount to bear interest at the maximum rate allowed by law. Therefore, any
[11]
penalty interest not paid, when due, shall earn the legal interest of twelve percent (12%) per annum, 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
[12]
of National Power Corporation v. National Merchandising Corporation, 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.
[13]
The private respondents Statement of Account (marked Exhibits C to C-2) shows the following breakdown of the petitioners
indebtedness as of August 28, 1986:
Principal P2,838,454.68
Interest P 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
[14]
the period from May 13, 1983 to September 30, 1983. 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
[15]
percent (10%) of the unpaid debt in accordance with Bachrach Motor Company v. Espiritu.
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 petitioners 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 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 respondents 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,
[16]
the petitioner referred to the private respondents letter dated September 28, 1988 addressed to petitioner which partially reads:
Dear Mr. Tan:
xxx 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 petitioners 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 respondents reneging on its promise, his liability to pay the interest and
surcharge on the loan has not arisen. This is the petitioners contention.
It is our view, however, that the running of the interest and surcharge was not suspended by the private respondents 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 attorneys fees, the appellate court ruled correctly and justly in reducing the trial courts award of twenty-five
percent (25%) attorneys 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.

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.
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).
After trial, Branch 3 of the Manila RTC rendered judgment in favor of GOYU, disposing:
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;
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:
1) P50,000,000.00 from July 27, 1992 up to the time said amount was deposited with this Court on January 7, 1994;
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. For both defendants Malayan and RCBC:
a. To pay the plaintiff, jointly and severally, the following amounts:
1) P1,000,000.00 as exemplary damages;
2) P1,000,000.00 as, and for, attorneys fees;
3) Costs of suit.
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, 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.
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.
(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:
WHEREFORE, the decision of the lower court dated June 29, 1994 is hereby modified as follows:
1. FOR DEFENDANT MALAYAN INSURANCE CO., INC:
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 thirty-seven (37%) percent per annum which is twice the ceiling prescribed by the Monetary Board.
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:
a) To pay the plaintiff jointly and severally the following amounts:
1. P1,500,000.00 as exemplary damages;
2. P1,500,000.00 as and for attorneys fees.
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. 1-Malayan 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 without its aid injustice might result. It has been applied by this Court wherever and
whenever special circumstances of a case so demand.
(p. 368.)
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 non-confirmation 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 to designate RCBC as the party for whose benefit the insurance policies were taken
out. Consider thus the following:
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.
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 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:
INSURANCE POLICY PARTICULARS ENDORSEMENT
a. Policy Number : F-114-07795 None
Issue Date : March 18, 1992
Expiry Date : April 5, 1993
Amount : P9,646,224.92

b. Policy Number : ACIA/F-174-07660 Exhibit 1-Malayan

Issue Date : January 18, 1992
Expiry Date : February 9, 1993
Amount : P4,307,217.54

c. Policy Number : ACIA/F-114-07661 Exhibit 2-Malayan

Issue Date : January 18, 1992
Expiry Date : February 15, 1993
Amount : P6,603,586.43

d. Policy Number : ACIA/F-114-07662 Exhibit 3-Malayan

Issue Date : January 18, 1992
Expiry Date : (not legible)
Amount : P6,603,586.43
e. Policy Number : ACIA/F-114-07663 Exhibit 4-Malayan
Issue Date : January 18, 1992
Expiry Date : February 9, 1993
Amount : P9,457,972.76

f. Policy Number : ACIA/F-114-07623 Exhibit 7-Malayan

Issue Date : January 13, 1992
Expiry Date : January 13, 1993
Amount : P24,750,000.00

g. Policy Number : ACIA/F-174-07223 Exhibit 6-Malayan

Issue Date : May 29, 1991
Expiry Date : June 27, 1992
Amount : P6,000,000.00

h. Policy Number : CI/F-128-03341 None

Issue Date : May 3, 1991
Expiry Date : May 3, 1992
Amount : P10,000,000.00

i. Policy Number : F-114-07402 Exhibit 8-Malayan

Issue Date : September 16, 1991
Expiry Date : October 19, 1992
Amount : P32,252,125.20

j. Policy Number : F-114-07525 Exhibit 9-Malayan

Issue Date : November 20, 1991
Expiry Date : December 5, 1992
Amount : P6,603,586.43

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

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/F-128-03341 [(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.
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.
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.
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 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:
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.
 (Rollo, pp. 181-182.)
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]).
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
He is asking if he received all the amounts stated in Exhibits 1 to 29-RCBC?
WITNESS:
Yes, Your Honor, I received all the amounts.
COURT
Indicated in the Promissory Notes?
WITNESS
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.
(Exhibit BB.)
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.
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
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 admitted by GOYU as of January 21, 1993: P116,301,992.60
Broken down as follows
[1]
Principal Interest
Regular 80,535,946.32
FDU 7,548,025.17
____________ _____________
[2]
Total: 108,083,971.49 8,218,021.11
LESS:
1) Proceeds from
Seaboard Eastern
Insurance Company: 6,095,145.81
2) Proceeds from
Equitable Insurance
Company: 2,756,373.00
3) Payment from
foreign department
negotiation: 203,584.89
[3]
9,055,104.70
NET AMOUNT as of January 21, 1993: P 107,246,887.90
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.
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.
th
Bommarito [CCA 8 ] 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. 195-199). The Court of
Appeals was too accommodating in giving due consideration to this argument of GOYU, for the foreclosure suit is still 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.

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-
[1]
G.R. CV No. 75183 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
[2]
promissory note and disclosure statement.
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
[3]
P25,000.00 each before paying the principal loan of P500,000.00 on February 2, 1999. 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.
[4]
On October 12, 2001, 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
[5]
suit. 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.
[6]
SO ORDERED.
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
[7]
TRIAL COURT.
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.
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
[8]
intention of the parties, the terms are to be understood literally just as they appear on the face of the contract. 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
[9]
the framework of the agreement.
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
[10]
dictate.
Notably, petitioner even admitted that it was solely responsible for the preparation of the loan documents, and that it failed to
[11]
correct the pro forma note p.a. to per month. 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.
[12]
Court of Appeals, 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 awarded to every winning litigant. It must be shown
[13] [14]
that any of the instances enumerated under Art. 2208 of the Civil Code exists to justify the award thereof. 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.
G.R. No. L-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. L-60907 June 28, 1989
OVERSEAS BANK OF MANILA, petitioner,
vs.
COURT OF APPEALS, INTEGRATED REALTY CORPORATION, and RAUL L. SANTOS, respondents.

REGALADO, J.:
In these petitions for review on certiorari, Integrated Realty Corporation and Raul Santos (G.R. No. 60705), and Overseas Bank of
1
Manila (G.R. No. 60907) appeal from the decision of the Court of Appeals, 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 P 700,000.00 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
2
whatever amounts the latter will pay to PNB, with interest from the date of payment.
On the other hand, in G.R. No. 60907, petitioner OBM challenges the decision of respondent court insofar as it holds OBM liable for
3
interest on the time deposit with it of Santos corresponding to the period of its closure by order of the Central Bank.
4
In its assailed decision, the respondent Court of Appeals, quoting from the decision of the lower court, 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 P
500,000.00. (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 P 200,000.00 (Exhibit 11 OBM and was issued certificate of Time Deposit No. 2367 (Exhibit 2 Santos,
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 P 700,000.00 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 (Exhibits 1-Santos
and 2 Santos, also Exhibits D and E) in favor 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).
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 P 700,000.00 with
interest as well as attomey'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 cost.
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
foIlows
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 P 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 1-1/ 2% additional interest effective
February 28, 1968 and additional penalty interest of 1% per annum of the Id amount of P 700,000.00 from the time
of maturity of Id loan up to the time the said amount of P 700,000.00 is actually paid to the plaintiff;
2. The defendants topay l0% of the amount of P 700,000.00 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 P 10,000.00 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.
5
SO ORDERED.
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.
Therein defendants-appellants, through separate petitions, have brought the said decision to this Court for review.
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:
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 (P 700,000.00), Philippine Currency, ....
xxx xxx xxx
It is also understood that the herein Assignor/s shall remain hable 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
6
agreements, orders or decisions of the court or for any other cause whatsoever.
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. (Downey vs. Hicks, 55
7
U.S. [14 How.] 240 L. Ed. 404; See also Michie, Vol. 5-B Banks and Banking, p. 200).
We uphold respondent court on this score.
8
In Lopez vs. Court of appeals, et al., petitioner Benito Lopez obtained a loan for P 20,000.00 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 P 20,000.00 from Prudential Bank,
Lopez executed a promissory note for P 20,000.00, plus interest at the rate of ten (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 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 P l,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. ...
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 P 700,000.00 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?
9
c. In the application for a credit line (Exhibit A),the time deposits were offered as collateral.
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
10
circumstances excluding an intent to pledge.
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
11
authorized for the purpose. The further requirement that the thing pledged be placed in the possession of the creditor, or of a third
12
person by common agreement 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.
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 corresponding interest thereon.
2. We find nothing illegal in the interest of one and one-half percent (1-1/2%) 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.
13
We have held in The Overseas Bank of Manila vs. Court of Appeals and Tony D. Tapia, 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 dictated; 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 petition. 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. If 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 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 businesses 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 Id 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.
14
It appears that as early as April, 1967, the financial situation of OBM had already caused mounting concern in the Central Bank. 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
15
Overseas Bank. 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
16
suspended. 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.
17
Consequently, for having incurred in delay in the performance of its obligation, OBM should be held liable for damages. When
18
respondent Santos invested his money in time deposits with OBM they entered into a contract of simple loan or mutuum, 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
19
applies only to interest for the use of money. It does not comprehend interest paid as damages. 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 non-compliance with an obligation to pay a sum of money, is
20
recoverable from the date judicial or extra-judicial demand is made, Which latter mode of demand was made by PNB, after the
21
maturity of the certificates of time deposit, on March 1, 1968. The measure of such damages, there being no stipulation to the
22
contrary, shall be the payment of the interest agreed upon in the certificates of deposit Which is six and onehalf percent (6-1/2%).
23
Such interest due or accrued shall further earn legal interest from the time of judicial demand.
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 Id 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 refuse to comply with their obligations under the promissory notes, thus incurring liability for all damages reasonably
24
attributable to the non-payment of said obligations.
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 (P 700,000.00), 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 one-half percent (1-1/2%) 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 (P 700,000.00) from the
time of maturity of said loan up to the time the said amount of seven hundred thousand pesos (P 700,000.00) 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 (P 700,000.00) 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 (P 700,000.00) 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;
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 fifth 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 (P
l0,000.00) as and for attorney's fees.
SO ORDERED.

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
[1]
promulgated on October 14, 1998 by the Court of Appeals in CA-G.R. CV No. 52545, 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.
[2]
SO ORDERED.
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
[3]
land in Barangay Liyang, Pilar, Bataan within a period of three (3) years. BSAI likewise undertook to report to the DENR any event
[4]
or condition which delays or may delay or prevent completion of the work, and submit progress billings and accomplishment
[5]
reports. Concomitant with the contract is the Project Development Plan and the Approved Schedule of Progress Payments detailing
[6]
the annual cash flow and schedule of activities within the three-year period, and the Contract of Undertaking providing for the
[7]
mobilization fund in the amount of Seventy Five Thousand Fifty Four Pesos and Sixty Six Centavos (P75,054.66). 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
[8]
completion of the project or deducted from the periodic release of moneys to petitioners.
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.
[9]
Finally, the photodocuments taken on the plantation illustrates clearly the abandoned project area.
Due to their failure to respond to the notice of cancellation, as well as return the mobilization fund, respondent filed a Complaint
[10]
for Damages against petitioners, 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
(P137,504.47). Respondent also sought liquidated damages equivalent to 0.1% of the total contract cost due to BSAIs delay in the
[11]
performance of its obligations, and exemplary damages in the amount of Fifty Thousand Pesos (P50,000.00).
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
[12]
arbitrary.
The Regional Trial Court of Quezon City, Branch 217, rendered its decision ordering petitioners to pay the amount of Fifty
[13]
Thousand Pesos (P50,000.00) as exemplary damages. 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
[14]
Fifty Six Thousand Two Hundred Ninety Pesos and Sixty Nine Centavos (P56,290.69) with 12% interest.
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
[15]
balance of the mobilization fund, is palpably erroneous as being contrary to the facts.
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
[16]
damages for being without legal and factual basis.
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
[17] [18]
properly maintained. However, the Project Development Plan, appended and made integral part of the contract, 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
[19]
development of footpath, graded trail, plantation road, bunkhouse and look-out tower. Spread out during the three-year period is the
[20]
annual maintenance, protection, administration and supervision, and, monitoring and evaluation of the project area. 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.
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
[21]
Nursery, located in Pilar, Bataan for said seedlings. x x x
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 contract 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;
xxx
3. To repay the amount advanced in accordance with the Contract of Reforestation and DENR Administration order No. 14
[22]
Series of 1989 as amended; (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
[24]
Hundred Sixty Three Pesos and Fifty Six Centavos (P18,763.56), or 1/4 of the mobilization fund, was deducted, 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, 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 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
[25]
being deemed to be by then an equivalent to a forbearance of credit.
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
[26]
period of time, from requiring borrower or debtor to repay loan or debt then due and payable. 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
[27] [28]
is six percent (6%) per annum on the amount finally adjudged by the Court.
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
[29]
another but to serve as a deterrent against or as a negative incentive to curb socially deleterious actions.
WHEREFORE, the petition is partly GRANTED and the assailed Decision is AFFIRMED with the following
MODIFICATIONS:
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).
SO ORDERED.

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 three-storey 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.
[1]
On appeal, 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
 Not satisfied, respondent elevated the above decision of the CA before this Court. We, however, denied respondent's petition on
[2]
April 10, 1996.
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
[3]
from June 28, 1988, until she finally vacates the premises and to pay attorneys fees of P20,000.00. With costs against the defendant.
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
[4]
as prayed for in Civil Case No. 7767 were not awarded." 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 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 attorneys fees of P20,000.00. With costs against defendant.
[5]
So ordered.
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 a 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
[6]
defendant and considering further that the supersedeas bond posted by the defendant covered the increased rental.
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]
[7]
over to the plaintiffs-appellees; to pay attorneys fees in the amount of P20,000.00; and with costs.
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
[8]
P20,000.00 to P10,000.00 monthly. With this modification, the judgment below is AFFIRMED in all other respects.
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.
[9]
So ordered.
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 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
 THE REGIONAL TRIAL COURT HAD NO JURISDICTION TO MODIFY THE APPEALED JUDGMENT BY
[10]
INCREASING THE AWARD OF MONTHLY RENTALS FROM P13,000.00 TO P40,000.00.
[11]
We required respondent to comment on the petition. 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. 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[?]
2. DID THE RESPONDENT APPELLATE COURT COMMITTED [sic] ANY REVERSIBLE ERROR WHEN IT
RESOLVED TO RESTORE, REINSTATE, AFFIRM AND UPHOLD THE MTC - AMENDEDJUDGMENT 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[?]
3. 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
[12]
ASK FOR AFFIRMATIVE RELIEF SUCH AS INCREASE IN RENTAL[?]
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.
While respondent was finally evicted from the leased premises, the amount 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 lessor-lessee 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
[13]
is entitled to damages caused by his loss of the use and possession of the premises. 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
[14]
the property. 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 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.
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.
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:
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
[15]
establishments like the leased building owned by the private respondents.
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
[16]
upon without proof because they are already known to him, or is assumed to have, by virtue of his office. 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
[17]
negative. 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.
 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.
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.
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,
[18]
We held in Manila Bay Club Corporation vs. Court of Appeals:
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
[19]
establishments like the leased building owned by the private respondent.
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
[20]
the rental demanded is unconscionable or exorbitant rests upon private respondent as the lessee. 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,
[21]
stands.
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
[22]
the remanding (sic) of this Court to the Regional Trial Court.

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 respondents 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
[23]
technicality, a practice frowned upon by the Court. Our ruling in Martinez, et al. vs. De la Merced, et al. 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:
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
[24]
could validly resolve in the ejectment cases.
[25]
Respondent, argues that ejectment cases are tried under the Revised Rule on Summary Procedure, 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 FOLLOWING CASES:
A. CIVIL 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 courts duty to
[26] [27]
order such execution is practically ministerial. In City of Manila, et al. vs. CA, et al., 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.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.
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:
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 respondents
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;
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 attorneys fees and;
4. The costs of suit.
SO ORDERED.
BANCO FILIPINO SSAVINGS AND MORTGAGE BANK, petitioner, vs. COURT OF APPEALS and SANTIAGO (Isabela)
MEMORIAL PARK, INC., respondents.

DECISION
AUSTRIA-MARTINEZ, J.:

[1]
Before us is a petition for review on certiorari filed by petitioner seeking to annul the Decision of the Court of Appeals (CA)
dated March 31, 2000 in CA-G.R. CV No. 47044, which reversed the Order of the trial court dated May 10, 1994, dismissing private
[2]
respondents complaint for failure to state a cause of action; and the Resolution dated July 3, 2000
denying petitioners motion for reconsideration.
On December 20, 1993, private respondent Santiago (Isabela) Memorial Park, Inc. filed a complaint for redemption and specific
performance with the Regional Trial Court of Santiago, Isabela, Branch 21, against herein petitioner Banco Filipino Savings &
Mortgage Bank, the material and relevant allegations of which read as follows:
COMPLAINT
Plaintiff, by counsel, to this Honorable Court most respectfully alleges:
1. .
2. .
3. That in February 1981, plaintiff mortgaged the above described property in favor of defendant to secure a loan of P500,000.00
obtained by plaintiff from defendant;
4. That due to the failure of plaintiff to pay the aforementioned loan, defendant foreclosed the mortgage and in consequence thereof
Sheriff David R. Medina of this Honorable Court issued a SHERIFFS CERTIFICATE OF SALE in favor of defendant which is dated
October 9, 1990 and which instrument was inscribed at the back of TCT T-128647 of Isabela on January 21, 1991;
5. That in a letter of the President of plaintiff dated August 6, 1991, plaintiff made manifest its interest to exercise its right of
redemption and made an offer of P700,000.00 as redemption to defendant through the then Deputy Liquidator, ROSAURO NAPA;
this started the negotiation for the redemption of the above described property;
6. That in a letter of the Deputy Liquidator dated January 23, 1992, plaintiff was given up to the end of March 1992 to negotiate and
make special arrangement for any satisfactory plan of payment for the redemption;
7. That in a letter of the Deputy Liquidator dated March 12, 1992, plaintiff was directed to remit at least P50,000.00 to defendant
which would manifest the interest and willingness of plaintiff to redeem the property, and forthwith on March 24, 1992, plaintiff
remitted the sum of P50,000.00 to defendant which was duly receipted by the latter under Official Receipt No. 279968 A dated March
24, 1992;
8. That in a letter of the President of plaintiff dated January 20, 1993, plaintiff amended its first offer and made an offer
of P1,000,000.00 as redemption which offer included a plan of payment;
9. That between January 20, 1993 to November 1993, plaintiff exerted earnest efforts in order to finally effect the redemption, but
defendant dilly dallied on the matter.
10. That in a letter of Atty. ORLANDO O. SAMSON, Senior Vice President of defendant, dated November 5, 1993, there is a turn-
around by defendant and is now demanding P5,830,000.00 as purchase price of the property, instead of the original agreed
redemption;
11. That the delay of the defendant in the finalization of the terms of redemption did not in any manner alter the right of plaintiff to
redeem the property from defendant;
12. That plaintiff is still in actual possession of the property and intend to remain in actual possession of the property, while defendant
was never in actual possession of said property;
13. That plaintiff is ready and willing to pay the redemption money, which is the total bank claim of P925,448.17 plus lawful interest
and other allowable expenses incident to the foreclosure proceedings:
14. That the latest actuations of defendant are indicative of the refusal of defendant to allow the exercise of redemption by herein
plaintiff, reason for which there is a need for judicial determination of the rights and obligations of the parties to this case;
15. That on account of the unlawful actuations of defendant in refusing the redemption of the property by plaintiff, the latter engaged
the services of counsel for a fee of P30,000.00 which defendant should pay to plaintiff.
WHEREFORE, it is respectfully prayed of this Honorable Court that, after due hearing, judgment be rendered:
a. ordering defendant to accept from plaintiff the lawful redemption amount which shall be determined by this Honorable
Court;
b. ordering defendant to execute the necessary instrument in order to effect the redemption of the property;
c. ordering defendant to pay to plaintiff the sum of P30,000.00 by way of attorneys fees;
AND PLAINTIFF PRAYS for further reliefs just and equitable under the premises.
 Petitioner filed a motion to dismiss on the ground that the complaint does not state a cause of action. It alleges that assuming that
the allegations in the complaint are true and correct, still there was no redemption effected within one year from the date of
registration of the sheriffs certificate of sale with the Register of Deeds on January 21, 1991, thus private respondent had lost its right
to redeem the subject land. Petitioner claimed that the letter cited in paragraph 5 of the complaint was a mere offer to redeem the
property which was promptly answered by a letter dated August 28, 1991, which categorically denied private respondents offer and
stated that when it comes to redemption, the basis of payment is the total claim of the bank at the time the property was foreclosed
plus 12% thereof and all litigation expenses attached thereto or its present appraised value whichever is higher; that the letter
mentioned in paragraph 6 of the complaint dated January 23, 1992 of the Deputy Liquidator was about negotiation and special
arrangement and not redemption for at that stage the period of redemption had already expired; that the letter mentioned in paragraph
7 dated March 12, 1992 was of the postponement of the consolidation of the subject property and not of any extension for the period
of redemption; that the amount of P50,000.00 remitted by private respondent was in consideration of the postponement of the
consolidation of the property in petitioners name and as manifestation of private respondents sincerity to repurchase the foreclosed
property; that when private respondent remitted P50,000.00, the Deputy Liquidator of petitioner bank requested the legal counsel of
petitioner to defer consolidation of property in petitioners name; that in a letter dated November 5, 1993, petitioners Senior Vice
President declared that the subject property is available for repurchase in the amount of P5,830,600.00 to which private respondent in
another letter asked for an extension of 30 days to make an offer.
Private respondent filed its opposition to the motion to dismiss alleging among others that the complaint states a cause of action;
that the annexes of the motion to dismiss should not be considered in the resolution of such motion.
[3]
On May 10, 1994, the trial court rendered an Order dismissing the complaint. It ratiocinated that (1) the letter dated August 6,
1991 was an offer to redeem for P700,000.00 without any tender of the money; (2) the reply letter of petitioner dated August 28, 1991
stated that the redemption price is P1,146,837.81 representing the banks claim of P925,448.17 plus 12% interest and expenses of
foreclosure or the appraised value which was P1,457,650.00; (3) the March 12, 1992 letter of the petitioner categorically informed
private respondent that the period for redemption had expired, however, the bank agreed to postpone the consolidation of title of the
land in the banks name up to the end of March 1992 if the plaintiff shall deposit P50,000.00 in order to avoid consolidation. Under
Section 6 of Act 3135, on redemption of foreclosed property, it is provided that a debtor may redeem the property at anytime within
one year from and after the date of sale, i.e., one year period to be reckoned from the registration of the sheriffs certificate of sale. The
registration of sheriffs sale was on January 21, 1991 so that the redemption period was until January 21, 1992; that although there was
an offer to redeem the property for P700,000.00 on August 6, 1991, which was within the redemption period, there was no tender of
redemption price and the P700,000.00 offered was not the correct redemption price. It found that the complaint did not state that
private respondent tendered the correct redemption price within the redemption period as required under Section 30 of Rule 39 of the
[4]
Rules of Court. Private respondents motion for reconsideration was denied in an Order dated July 25, 1994.
Private respondent filed its appeal with the CA which reversed the trial court in its assailed decision, the dispositive portion of
which reads:
WHEREFORE, the Orders of the respondent trial court dated May 10, 1994, and July 25, 1994 are hereby REVERSED and SET
ASIDE. The appellants are declared entitled to repurchase the property in question within THIRTY (30) days from notice hereof
which shall be effected upon payment of the repurchase price of P925,448.17 less P50,000.00, which is the deposit on the redemption
price, with legal interest from March 24, 1992, the time the contract extending the period of redemption of the property took effect
[5]
until it is fully paid.
The CA ruled that:
A perusal of the allegations in the complaint shows that there was sufficient basis to make out a case against Banco Filipino. The
complaint alleged that as early as August 6, 1991 or about six (6) months before the statutory period for redemption would expire, the
appellant had exerted earnest efforts to effect the redemption of the property in question and that after an agreement had been reached
by the parties, with the corresponding deposit on the redemption price had been given by the appellant, the appellee bank led the
appellant to believe that the appellee was negotiating with the former in good faith. However, the true intention of the appellee bank
was to refuse the redemption of the property as manifested by its act of increasing the amount of the redemption price after the period
for redemption had expired and after a deposit on the redemption price had been duly accepted by it as evidenced by a receipt issued
by the appellee.
Even assuming however that the appellant is now barred from exercising its right of redemption, yet it can still repurchase the property
in question based on a new contract entered into between the parties extending the period within which to purchase the property as
evidenced by the appellees Deputy Liquidator Rosauro Napas letter to Belen Jocson dated March 12, 1992 and the letter addressed to
Atty. German M. Balot, Legal Counsel, Banco Filipino Santiago, Isabela dated April 7, 1992.
...
In the case of Philippine National Bank vs. Court of Appeals, the Court held: Indeed under Article 1482 of the Civil Code, earnest
money given in a sale transaction is considered part of the purchase price and proof of the perfection of the sale. This provision,
however, gives no more than a disputable presumption that prevails in the absence of contrary or rebuttal evidence. In the instant case,
the letter-agreements themselves are the evidence of an intention on the part of herein private parties to enter into negotiations leading
to a contract of sale that is mutually acceptable as to absolutely bind them to the performance of their obligations thereunder. The
letter-agreements are replete with substantial condition precedents, acceptance of which on the part of private respondent must first be
made in order for petitioner to proceed to the next step in the negotiations.
[6]
...
In compliance with the CA decision, private respondent on April 27, 2000, made a tender of payment and consignation with the
[7]
CA in the amount of P1,300,987.96 through a Philippine National Bank check which was duly receipted by the appellate court.
Hence, the herein petition for review on certiorari filed by petitioner alleging that the appellate court erred in holding that (1) the
allegations in the complaint of private respondent against petitioner are sufficient to constitute a cause of action for redemption and
specific performance; and (2) respondent was entitled to repurchase back from petitioner its foreclosed property for only P925,448.17.
The basic issue is whether private respondents complaint for redemption and specific performance states a cause of action against
petitioner.
[8]
It is a well-settled rule that the existence of a cause of action is determined by the allegations in the complaint. In resolving a
motion to dismiss based on the failure to state a cause of action, only the facts alleged in the complaint must be considered. The test is
[9]
whether the court can render a valid judgment on the complaint based on the facts alleged and the prayer asked for. Indeed, the
elementary test for failure to state a cause of action is whether the complaint alleges facts which if true would justify the relief
demanded. Only ultimate facts and not legal conclusions or evidentiary facts, which should not be alleged in the complaint in the first
demanded. Only ultimate facts and not legal conclusions or evidentiary facts, which should not be alleged in the complaint in the first
[10]
place, are considered for purposes of applying the test.
Based on the allegations in the complaint, we find that private respondent has no cause of action for redemption against
petitioner.
Paragraph 4 of the complaint states:
4. That due to the failure of plaintiff to pay the aforementioned loan, defendant foreclosed the mortgage and in consequence thereof
Sheriff David R. Medina of this Honorable Court issued a SHERIFFS CERTIFICATE OF SALE in favor of defendant which is dated
October 9, 1990 and which instrument was inscribed at the back of TCT T-128647 of Isabela on January 21, 1991;
The sheriffs certificate of sale was registered on January 21, 1991. Section 6 of Act 3135 provides for the requisites for a valid
redemption, thus:
SEC. 6. In all cases in which an extrajudicial sale is made under the special power hereinbefore referred to, the debtor, his successors
in interest or any judicial creditor or judgment creditor of said debtor, or any person having a lien on the property subsequent to the
mortgage or deed of trust under which the property is sold, may redeem the same at any time within the term of one year from and
after the date of sale; and such redemption shall be governed by the provisions of sections four hundred and sixty-four to four hundred
[11]
and sixty-six, inclusive, of the Code of Civil Procedure, insofar as these are not inconsistent with the provisions of this Act.
However, considering that petitioner is a banking institution, the determination of the redemption price is governed by Section 78
of the General Banking Act which provides:
In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real estate which is security for any loan granted
before the passage of this Act or under the provisions of this Act, the mortgagor or debtor whose real property has been sold at public
auction, judicially or extrajudicially, for the full or partial payment of an obligation to any bank, banking or credit institution, within
the purview of this Act shall have the right, within one year after the sale of the real estate as a result of the foreclosure of the
respective mortgage, to redeem the property by paying the amount fixed by the court in the order of execution, or the amount due
under the mortgage deed, as the case may be, with interest thereon at the rate specified in the mortgage, and all the costs, and judicial
and other expenses incurred by the bank or institution concerned by reason of the execution and sale and as a result of the custody of
said property less the income received from the property.
Clearly, the right of redemption should be exercised within the specified time limit, which is one year from the date of
registration of the certificate of sale. The redemptioner should make an actual tender in good faith of the full amount of the purchase
price as provided above, i.e., the amount fixed by the court in the order of execution or the amount due under the mortgage deed, as
the case may be, with interest thereon at the rate specified in the mortgage, and all the costs, and judicial and other expenses incurred
by the bank or institution concerned by reason of the execution and sale and as a result of the custody of said property less the income
received from the property.
In case of disagreement over the redemption price, the redemptioner may preserve his right of redemption through judicial action
[12]
which in every case must be filed within the one-year period of redemption. The filing of the court action to enforce redemption,
being equivalent to a formal offer to redeem, would have the effect of preserving his redemptive rights and freezing the expiration of
the one-year period. In this case, the period of redemption expired on January 21, 1992. The complaint was filed on December 20,
1992.
Moreover, while the complaint alleges that private respondent made an offer to redeem the subject property on August 6, 1991,
which was within the period of redemption, it is not alleged in the complaint that there was an actual tender of payment of the
redemption price as required by the rules. It was alleged that private respondent merely made an offer of P700,000.00 as redemption
price, which however, as stated under paragraph 13 of the same complaint, the redemption money was the total bank claim
of P925,448.17 plus lawful interest and other allowable expenses incident to the foreclosure proceedings. Thus, the offer was even
very much lower than the price paid by petitioner as the highest bidder in the auction sale.
[13]
In BPI Family Savings Bank, Inc. vs. Veloso, we held:
The general rule in redemption is that it is not sufficient that a person offering to redeem manifests his desire to do so. The statement
of intention must be accompanied by an actual and simultaneous tender of payment. This constitutes the exercise of the right to
repurchase.
...
Whether or not respondents were diligent in asserting their willingness to pay is irrelevant. Redemption within the period allowed by
law is not a matter of intent but a question of payment or valid tender of the full redemption price within said period.
Although the letter dated January 23, 1992 gave private respondent up to the end of March 1992, to negotiate and make special
arrangement for a satisfactory plan of payment for the redemption, there was no categorical allegation in the complaint that the
original period of redemption had been extended. Assuming arguendo that the period for redemption had been extended, i.e., up to end
of March 1992, still private respondent failed to exercise its right within said period. This is shown by private respondents allegation
under paragraph 8 of its complaint that in a letter dated January 20, 1993, private respondents President amended his first offer and
made an offer of P1 million as redemption price. Notably, such offer was made beyond the end of the March 1992 alleged extended
period. Thus, private respondent has no more right to seek redemption by force of law which petitioner was bound to accept.
We find that the CA also erred in stating that assuming appellant is now barred from exercising its right of redemption, it can still
repurchase the property in question based on a new contract entered into between the parties extending the period within which to
purchase the property.
The allegations in the complaint do not show that a new contract was entered into between the parties. The March 12, 1992 letter
referred to by the CA as well as in the complaint only directed private respondent to remit at least P50,000.00 to petitioner as a
manifestation of the formers interest and willingness to redeem the property. Thus, the P50,000.00 remitted by private respondent was
only the first step to show its interest in redeeming the property. In no way did it establish that a contract of sale, as found by the CA,
had been perfected and that the P50,000.00 remitted by private respondent is considered as earnest money.
Article 1475 of the Civil Code provides:
The contract of sale is perfected at the moment there is a meeting of minds upon the thing which is the object of the contract and upon
the price.
From that moment, the parties may reciprocally demand performance, subject to the provisions of the law governing the form of
contracts.
 There was no showing in the complaint that private respondent and petitioner had already agreed on the purchase price of the
foreclosed property. In fact, the allegations in paragraphs 8 to 10 of the complaint show otherwise, thus:
8. That in a letter of the President of plaintiff dated January 20, 1993, plaintiff amended its first offer and made an offer
of P1,000,000.00 as redemption which offer included a plan of payment;
9. That between January 20, 1993 to November 1993, plaintiff exerted earnest efforts in order to finally effect the redemption,
but defendant dilly dallied on the matter.
10. That in a letter of Atty. ORLANDO O. SAMSON, Senior Vice President of defendant, dated November 5, 1993, there is a
turn-around by defendant and is now demanding P5,830,000.00 as purchase price of the property, instead of the original agreed
redemption;
The complaint does not allege that there was already a meeting of the minds of the parties.
Based on the foregoing, there is no basis for the order of the CA to allow private respondent to repurchase the foreclosed
property in the amount of P925,448.17 plus the expenses incurred in the sale of the property, including the necessary and useful
expenses made on the thing sold.
WHEREFORE, the decision of the Court of Appeals dated March 31, 2000 is hereby REVERSED and SET ASIDE. The Order
of the Regional Trial Court of Santiago, Isabela, Branch 21, dated May 10, 1994 in Civil Case No. 2036 dismissing the complaint for
redemption and specific performance is REINSTATED and AFFIRMED.
SO ORDERED.
THE CONSOLIDATED BANK and TRUST CORPORATION, petitioner, vs. COURT OF APPEALS and L.C. DIAZ and
COMPANY, CPAs, respondents.

DECISION
CARPIO, J.:

The Case

[1]
Before us is a petition for review of the Decision of the Court of Appeals dated 27 October 1998 and its Resolution dated 11
[2]
May 1999. The assailed decision reversed the Decision of the Regional Trial Court of Manila, Branch 8, absolving petitioner
Consolidated Bank and Trust Corporation, now known as Solidbank Corporation (Solidbank), of any liability. The questioned
resolution of the appellate court denied the motion for reconsideration of Solidbank but modified the decision by deleting the award of
exemplary damages, attorneys fees, expenses of litigation and cost of suit.

The Facts

Solidbank is a domestic banking corporation organized and existing under Philippine laws. Private respondent L.C. Diaz and
Company, CPAs (L.C. Diaz), is a professional partnership engaged in the practice of accounting.
Sometime in March 1976, L.C. Diaz opened a savings account with Solidbank, designated as Savings Account No. S/A 200-
16872-6.
On 14 August 1991, L.C. Diaz through its cashier, Mercedes Macaraya (Macaraya), filled up a savings (cash) deposit slip
for P990 and a savings (checks) deposit slip for P50.Macaraya instructed the messenger of L.C. Diaz, Ismael Calapre (Calapre), to
deposit the money with Solidbank. Macaraya also gave Calapre the Solidbank passbook.
Calapre went to Solidbank and presented to Teller No. 6 the two deposit slips and the passbook. The teller acknowledged receipt
of the deposit by returning to Calapre the duplicate copies of the two deposit slips. Teller No. 6 stamped the deposit slips with the
words DUPLICATE and SAVING TELLER 6 SOLIDBANK HEAD OFFICE. Since the transaction took time and Calapre had to
make another deposit for L.C. Diaz with Allied Bank, he left the passbook with Solidbank. Calapre then went to Allied Bank. When

[3]
Calapre returned to Solidbank to retrieve the passbook, Teller No. 6 informed him that somebody got the passbook. Calapre went
back to L.C. Diaz and reported the incident to Macaraya.
Macaraya immediately prepared a deposit slip in duplicate copies with a check of P200,000. Macaraya, together with Calapre,
went to Solidbank and presented to Teller No. 6 the deposit slip and check. The teller stamped the words DUPLICATE and SAVING
TELLER 6 SOLIDBANK HEAD OFFICE on the duplicate copy of the deposit slip. When Macaraya asked for the passbook, Teller
No. 6 told Macaraya that someone got the passbook but she could not remember to whom she gave the passbook. When Macaraya
asked Teller No. 6 if Calapre got the passbook, Teller No. 6 answered that someone shorter than Calapre got the passbook. Calapre
was then standing beside Macaraya.
Teller No. 6 handed to Macaraya a deposit slip dated 14 August 1991 for the deposit of a check for P90,000 drawn on Philippine
[4]
Banking Corporation (PBC). This PBC check of L.C. Diaz was a check that it had long closed. PBC subsequently dishonored the
check because of insufficient funds and because the signature in the check differed from PBCs specimen signature. Failing to get back
the passbook, Macaraya went back to her office and reported the matter to the Personnel Manager of L.C. Diaz, Emmanuel Alvarez.
The following day, 15 August 1991, L.C. Diaz through its Chief Executive Officer, Luis C. Diaz (Diaz), called up Solidbank to
[5]
stop any transaction using the same passbook until L.C. Diaz could open a new account. On the same day, Diaz formally wrote
Solidbank to make the same request. It was also on the same day that L.C. Diaz learned of the unauthorized withdrawal the day
before, 14 August 1991, of P300,000 from its savings account. The withdrawal slip for the P300,000 bore the signatures of the
authorized signatories of L.C. Diaz, namely Diaz and Rustico L. Murillo. The signatories, however, denied signing the withdrawal
slip. A certain Noel Tamayo received the P300,000.
[6]
In an Information dated 5 September 1991, L.C. Diaz charged its messenger, Emerano Ilagan (Ilagan) and one Roscon
Verdazola with Estafa through Falsification of Commercial Document. The Regional Trial Court of Manila dismissed the criminal
case after the City Prosecutor filed a Motion to Dismiss on 4 August 1992.
 On 24 August 1992, L.C. Diaz through its counsel demanded from Solidbank the return of its money. Solidbank refused.
[7]
On 25 August 1992, L.C. Diaz filed a Complaint for Recovery of a Sum of Money against Solidbank with the Regional Trial
Court of Manila, Branch 8. After trial, the trial court rendered on 28 December 1994 a decision absolving Solidbank and dismissing
the complaint.
[8]
L.C. Diaz then appealed to the Court of Appeals. On 27 October 1998, the Court of Appeals issued its Decision reversing the
decision of the trial court.
On 11 May 1999, the Court of Appeals issued its Resolution denying the motion for reconsideration of Solidbank. The appellate
court, however, modified its decision by deleting the award of exemplary damages and attorneys fees.

The Ruling of the Trial Court

In absolving Solidbank, the trial court applied the rules on savings account written on the passbook. The rules state that
possession of this book shall raise the presumption of ownership and any payment or payments made by the bank upon the production
[9]
of the said book and entry therein of the withdrawal shall have the same effect as if made to the depositor personally.
At the time of the withdrawal, a certain Noel Tamayo was not only in possession of the passbook, he also presented a withdrawal
slip with the signatures of the authorized signatories of L.C. Diaz. The specimen signatures of these persons were in the signature
cards. The teller stamped the withdrawal slip with the words Saving Teller No. 5. The teller then passed on the withdrawal slip to
Genere Manuel (Manuel) for authentication. Manuel verified the signatures on the withdrawal slip. The withdrawal slip was then
given to another officer who compared the signatures on the withdrawal slip with the specimen on the signature cards. The trial court
concluded that Solidbank acted with care and observed the rules on savings account when it allowed the withdrawal of P300,000 from
the savings account of L.C. Diaz.
The trial court pointed out that the burden of proof now shifted to L.C. Diaz to prove that the signatures on the withdrawal slip
were forged. The trial court admonished L.C. Diaz for not offering in evidence the National Bureau of Investigation (NBI) report on
the authenticity of the signatures on the withdrawal slip for P300,000. The trial court believed that L.C. Diaz did not offer this
evidence because it is derogatory to its action.
[10]
Another provision of the rules on savings account states that the depositor must keep the passbook under lock and key. When
another person presents the passbook for withdrawal prior to Solidbanks receipt of the notice of loss of the passbook, that person is
considered as the owner of the passbook. The trial court ruled that the passbook presented during the questioned transaction was now
[11]
out of the lock and key and presumptively ready for a business transaction.
Solidbank did not have any participation in the custody and care of the passbook. The trial court believed that Solidbanks act of
allowing the withdrawal of P300,000 was not the direct and proximate cause of the loss. The trial court held that L.C. Diazs
negligence caused the unauthorized withdrawal. Three facts establish L.C. Diazs negligence: (1) the possession of the passbook by a
person other than the depositor L.C. Diaz; (2) the presentation of a signed withdrawal receipt by an unauthorized person; and (3) the
possession by an unauthorized person of a PBC check long closed by L.C. Diaz, which check was deposited on the day of the
fraudulent withdrawal.
The trial court debunked L.C. Diazs contention that Solidbank did not follow the precautionary procedures observed by the two
parties whenever L.C. Diaz withdrew significant amounts from its account. L.C. Diaz claimed that a letter must accompany
withdrawals of more than P20,000. The letter must request Solidbank to allow the withdrawal and convert the amount to a managers
check. The bearer must also have a letter authorizing him to withdraw the same amount. Another person driving a car must
accompany the bearer so that he would not walk from Solidbank to the office in making the withdrawal. The trial court pointed out
that L.C. Diaz disregarded these precautions in its past withdrawal. On 16 July 1991, L.C. Diaz withdrew P82,554 without any
separate letter of authorization or any communication with Solidbank that the money be converted into a managers check.
The trial court further justified the dismissal of the complaint by holding that the case was a last ditch effort of L.C. Diaz to
recover P300,000 after the dismissal of the criminal case against Ilagan.
The dispositive portion of the decision of the trial court reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered DISMISSING the complaint.

The Court further renders judgment in favor of defendant bank pursuant to its counterclaim the amount of Thirty Thousand Pesos
(P30,000.00) as attorneys fees.
With costs against plaintiff.
[12]
SO ORDERED.

The Ruling of the Court of Appeals

The Court of Appeals ruled that Solidbanks negligence was the proximate cause of the unauthorized withdrawal of P300,000
from the savings account of L.C. Diaz. The appellate court reached this conclusion after applying the provision of the Civil Code on
quasi-delict, to wit:
Article 2176. Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the damage
done. Such fault or negligence, if there is no pre-existing contractual relation between the parties, is called a quasi-delict and is
governed by the provisions of this chapter.
The appellate court held that the three elements of a quasi-delict are present in this case, namely: (a) damages suffered by the plaintiff;
(b) fault or negligence of the defendant, or some other person for whose acts he must respond; and (c) the connection of cause and
effect between the fault or negligence of the defendant and the damage incurred by the plaintiff.
The Court of Appeals pointed out that the teller of Solidbank who received the withdrawal slip for P300,000 allowed the
withdrawal without making the necessary inquiry. The appellate court stated that the teller, who was not presented by Solidbank
during trial, should have called up the depositor because the money to be withdrawn was a significant amount. Had the teller called up
L.C. Diaz, Solidbank would have known that the withdrawal was unauthorized. The teller did not even verify the identity of the
impostor who made the withdrawal. Thus, the appellate court found Solidbank liable for its negligence in the selection and supervision
of its employees.
The appellate court ruled that while L.C. Diaz was also negligent in entrusting its deposits to its messenger and its messenger in
leaving the passbook with the teller, Solidbank could not escape liability because of the doctrine of last clear chance. Solidbank could
have averted the injury suffered by L.C. Diaz had it called up L.C. Diaz to verify the withdrawal.
The appellate court ruled that the degree of diligence required from Solidbank is more than that of a good father of a family. The
business and functions of banks are affected with public interest. Banks are obligated to treat the accounts of their depositors with
meticulous care, always having in mind the fiduciary nature of their relationship with their clients. The Court of Appeals found
Solidbank remiss in its duty, violating its fiduciary relationship with L.C. Diaz.
The dispositive portion of the decision of the Court of Appeals reads:
WHEREFORE, premises considered, the decision appealed from is hereby REVERSED and a new one entered.
1. Ordering defendant-appellee Consolidated Bank and Trust Corporation to pay plaintiff-appellant the sum of Three
Hundred Thousand Pesos (P300,000.00), with interest thereon at the rate of 12% per annum from the date of filing
of the complaint until paid, the sum of P20,000.00 as exemplary damages, and P20,000.00 as attorneys fees and
expenses of litigation as well as the cost of suit; and
2. Ordering the dismissal of defendant-appellees counterclaim in the amount of P30,000.00 as attorneys fees.
[13]
SO ORDERED.
Acting on the motion for reconsideration of Solidbank, the appellate court affirmed its decision but modified the award of
[14]
damages. The appellate court deleted the award of exemplary damages and attorneys fees. Invoking Article 2231 of the Civil Code,
the appellate court ruled that exemplary damages could be granted if the defendant acted with gross negligence. Since Solidbank was
guilty of simple negligence only, the award of exemplary damages was not justified. Consequently, the award of attorneys fees was
also disallowed pursuant to Article 2208 of the Civil Code. The expenses of litigation and cost of suit were also not imposed on
Solidbank.
The dispositive portion of the Resolution reads as follows:
WHEREFORE, foregoing considered, our decision dated October 27, 1998 is affirmed with modification by deleting the award of
exemplary damages and attorneys fees, expenses of litigation and cost of suit.
[15]
SO ORDERED.
Hence, this petition.

The Issues

Solidbank seeks the review of the decision and resolution of the Court of Appeals on these grounds:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER BANK SHOULD SUFFER THE LOSS
BECAUSE ITS TELLER SHOULD HAVE FIRST CALLED PRIVATE RESPONDENT BY TELEPHONE
BEFORE IT ALLOWED THE WITHDRAWAL OF P300,000.00 TO RESPONDENTS MESSENGER EMERANO
ILAGAN, SINCE THERE IS NO AGREEMENT BETWEEN THE PARTIES IN THE OPERATION OF THE
SAVINGS ACCOUNT, NOR IS THERE ANY BANKING LAW, WHICH MANDATES THAT A BANK TELLER
SHOULD FIRST CALL UP THE DEPOSITOR BEFORE ALLOWING A WITHDRAWAL OF A BIG AMOUNT
IN A SAVINGS ACCOUNT.
II. THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE OF LAST CLEAR CHANCE AND IN
HOLDING THAT PETITIONER BANKS TELLER HAD THE LAST OPPORTUNITY TO WITHHOLD THE
WITHDRAWAL WHEN IT IS UNDISPUTED THAT THE TWO SIGNATURES OF RESPONDENT ON THE
WITHDRAWAL SLIP ARE GENUINE AND PRIVATE RESPONDENTS PASSBOOK WAS DULY PRESENTED,
AND CONTRARIWISE RESPONDENT WAS NEGLIGENT IN THE SELECTION AND SUPERVISION OF ITS
MESSENGER EMERANO ILAGAN, AND IN THE SAFEKEEPING OF ITS CHECKS AND OTHER
FINANCIAL DOCUMENTS.
III. THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE INSTANT CASE IS A LAST DITCH EFFORT
OF PRIVATE RESPONDENT TO RECOVER ITS P300,000.00 AFTER FAILING IN ITS EFFORTS TO
RECOVER THE SAME FROM ITS EMPLOYEE EMERANO ILAGAN.
IV. THE COURT OF APPEALS ERRED IN NOT MITIGATING THE DAMAGES AWARDED AGAINST PETITIONER
UNDER ARTICLE 2197 OF THE CIVIL CODE, NOTWITHSTANDING ITS FINDING THAT PETITIONER
[16]
BANKS NEGLIGENCE WAS ONLY CONTRIBUTORY.

The Ruling of the Court

The petition is partly meritorious.

Solidbanks Fiduciary Duty under the Law

The rulings of the trial court and the Court of Appeals conflict on the application of the law. The trial court pinned the liability on
L.C. Diaz based on the provisions of the rules on savings account, a recognition of the contractual relationship between Solidbank and
L.C. Diaz, the latter being a depositor of the former. On the other hand, the Court of Appeals applied the law on quasi-delict to
determine who between the two parties was ultimately negligent. The law on quasi-delict or culpa aquiliana is generally applicable
when there is no pre-existing contractual relationship between the parties.
 We hold that Solidbank is liable for breach of contract due to negligence, or culpa contractual.
[17]
The contract between the bank and its depositor is governed by the provisions of the Civil Code on simple loan. Article 1980
of the Civil Code expressly provides that x x x savings x x x deposits of money in banks and similar institutions shall be governed by
the provisions concerning simple loan. There is a debtor-creditor relationship between the bank and its depositor.The bank is the
debtor and the depositor is the creditor. The depositor lends the bank money and the bank agrees to pay the depositor on demand. The
savings deposit agreement between the bank and the depositor is the contract that determines the rights and obligations of the parties.
The law imposes on banks high standards in view of the fiduciary nature of banking. Section 2 of Republic Act No. 8791 (RA
[18]
8791), which took effect on 13 June 2000, declares that the State recognizes the fiduciary nature of banking that requires high
[19]
standards of integrity and performance. This new provision in the general banking law, introduced in 2000, is a statutory affirmation
[20]
of Supreme Court decisions, starting with the 1990 case of Simex International v. Court of Appeals, holding that the bank is under
obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship.
[21]

This fiduciary relationship means that the banks obligation to observe high standards of integrity and performance is deemed
written into every deposit agreement between a bank and its depositor. The fiduciary nature of banking requires banks to assume a
degree of diligence higher than that of a good father of a family. Article 1172 of the Civil Code states that the degree of diligence
required of an obligor is that prescribed by law or contract, and absent such stipulation then the diligence of a good father of a family.
[22]
Section 2 of RA 8791 prescribes the statutory diligence required from banks that banks must observe high standards of integrity
and performance in servicing their depositors. Although RA 8791 took effect almost nine years after the unauthorized withdrawal of
[23]
the P300,000 from L.C. Diazs savings account, jurisprudence at the time of the withdrawal already imposed on banks the same high
standard of diligence required under RA No. 8791.
However, the fiduciary nature of a bank-depositor relationship does not convert the contract between the bank and its depositors
from a simple loan to a trust agreement, whether express or implied. Failure by the bank to pay the depositor is failure to pay a simple
[24]
loan, and not a breach of trust. The law simply imposes on the bank a higher standard of integrity and performance in complying
with its obligations under the contract of simple loan, beyond those required of non-bank debtors under a similar contract of simple
loan.
The fiduciary nature of banking does not convert a simple loan into a trust agreement because banks do not accept deposits to
enrich depositors but to earn money for themselves. The law allows banks to offer the lowest possible interest rate to depositors while
charging the highest possible interest rate on their own borrowers. The interest spread or differential belongs to the bank and not to the
depositors who are not cestui que trust of banks. If depositors are cestui que trust of banks, then the interest spread or income belongs
to the depositors, a situation that Congress certainly did not intend in enacting Section 2 of RA 8791.

Solidbanks Breach of its Contractual Obligation

Article 1172 of the Civil Code provides that responsibility arising from negligence in the performance of every kind of obligation
is demandable. For breach of the savings deposit agreement due to negligence, or culpa contractual, the bank is liable to its depositor.
Calapre left the passbook with Solidbank because the transaction took time and he had to go to Allied Bank for another
transaction. The passbook was still in the hands of the employees of Solidbank for the processing of the deposit when Calapre left
Solidbank. Solidbanks rules on savings account require that the deposit book should be carefully guarded by the depositor and kept
under lock and key, if possible. When the passbook is in the possession of Solidbanks tellers during withdrawals, the law imposes on
Solidbank and its tellers an even higher degree of diligence in safeguarding the passbook.
Likewise, Solidbanks tellers must exercise a high degree of diligence in insuring that they return the passbook only to the
depositor or his authorized representative. The tellers know, or should know, that the rules on savings account provide that any person
in possession of the passbook is presumptively its owner. If the tellers give the passbook to the wrong person, they would be clothing
that person presumptive ownership of the passbook, facilitating unauthorized withdrawals by that person. For failing to return the
passbook to Calapre, the authorized representative of L.C. Diaz, Solidbank and Teller No. 6 presumptively failed to observe such high
degree of diligence in safeguarding the passbook, and in insuring its return to the party authorized to receive the same.
In culpa contractual, once the plaintiff proves a breach of contract, there is a presumption that the defendant was at fault or
negligent. The burden is on the defendant to prove that he was not at fault or negligent. In contrast, in culpa aquiliana the plaintiff has
the burden of proving that the defendant was negligent. In the present case, L.C. Diaz has established that Solidbank breached its
contractual obligation to return the passbook only to the authorized representative of L.C. Diaz. There is thus a presumption that
Solidbank was at fault and its teller was negligent in not returning the passbook to Calapre. The burden was on Solidbank to prove that
there was no negligence on its part or its employees.
Solidbank failed to discharge its burden. Solidbank did not present to the trial court Teller No. 6, the teller with whom Calapre
left the passbook and who was supposed to return the passbook to him. The record does not indicate that Teller No. 6 verified the
identity of the person who retrieved the passbook. Solidbank also failed to adduce in evidence its standard procedure in verifying the
identity of the person retrieving the passbook, if there is such a procedure, and that Teller No. 6 implemented this procedure in the
present case.
Solidbank is bound by the negligence of its employees under the principle of respondeat superior or command
responsibility. The defense of exercising the required diligence in the selection and supervision of employees is not a complete defense
[25]
in culpa contractual, unlike in culpa aquiliana.
The bank must not only exercise high standards of integrity and performance, it must also insure that its employees do likewise
because this is the only way to insure that the bank will comply with its fiduciary duty. Solidbank failed to present the teller who had
the duty to return to Calapre the passbook, and thus failed to prove that this teller exercised the high standards of integrity and
performance required of Solidbanks employees.

Proximate Cause of the Unauthorized Withdrawal

Another point of disagreement between the trial and appellate courts is the proximate cause of the unauthorized withdrawal. The
trial court believed that L.C. Diazs negligence in not securing its passbook under lock and key was the proximate cause that allowed
the impostor to withdraw the P300,000. For the appellate court, the proximate cause was the tellers negligence in processing the
withdrawal without first verifying with L.C. Diaz. We do not agree with either court.
Proximate cause is that cause which, in natural and continuous sequence, unbroken by any efficient intervening cause, produces
[26]
the injury and without which the result would not have occurred. Proximate cause is determined by the facts of each case upon
[27]
mixed considerations of logic, common sense, policy and precedent.
L.C. Diaz was not at fault that the passbook landed in the hands of the impostor. Solidbank was in possession of the passbook
while it was processing the deposit. After completion of the transaction, Solidbank had the contractual obligation to return the
passbook only to Calapre, the authorized representative of L.C. Diaz. Solidbank failed to fulfill its contractual obligation because it
gave the passbook to another person.
Solidbanks failure to return the passbook to Calapre made possible the withdrawal of the P300,000 by the impostor who took
possession of the passbook. Under Solidbanks rules on savings account, mere possession of the passbook raises the presumption of
ownership. It was the negligent act of Solidbanks Teller No. 6 that gave the impostor presumptive ownership of the passbook. Had the
passbook not fallen into the hands of the impostor, the loss of P300,000 would not have happened. Thus, the proximate cause of the
unauthorized withdrawal was Solidbanks negligence in not returning the passbook to Calapre.
We do not subscribe to the appellate courts theory that the proximate cause of the unauthorized withdrawal was the tellers failure
to call up L.C. Diaz to verify the withdrawal. Solidbank did not have the duty to call up L.C. Diaz to confirm the withdrawal. There is
no arrangement between Solidbank and L.C. Diaz to this effect. Even the agreement between Solidbank and L.C. Diaz pertaining to
measures that the parties must observe whenever withdrawals of large amounts are made does not direct Solidbank to call up L.C.
Diaz.
There is no law mandating banks to call up their clients whenever their representatives withdraw significant amounts from their
accounts. L.C. Diaz therefore had the burden to prove that it is the usual practice of Solidbank to call up its clients to verify a
withdrawal of a large amount of money. L.C. Diaz failed to do so.
Teller No. 5 who processed the withdrawal could not have been put on guard to verify the withdrawal. Prior to the withdrawal
of P300,000, the impostor deposited with Teller No. 6 theP90,000 PBC check, which later bounced. The impostor apparently
deposited a large amount of money to deflect suspicion from the withdrawal of a much bigger amount of money. The appellate court
thus erred when it imposed on Solidbank the duty to call up L.C. Diaz to confirm the withdrawal when no law requires this from banks
and when the teller had no reason to be suspicious of the transaction.
Solidbank continues to foist the defense that Ilagan made the withdrawal. Solidbank claims that since Ilagan was also a
messenger of L.C. Diaz, he was familiar with its teller so that there was no more need for the teller to verify the withdrawal. Solidbank
relies on the following statements in the Booking and Information Sheet of Emerano Ilagan:
xxx Ilagan also had with him (before the withdrawal) a forged check of PBC and indicated the amount of P90,000 which he deposited
in favor of L.C. Diaz and Company. After successfully withdrawing this large sum of money, accused Ilagan gave alias Rey (Noel
Tamayo) his share of the loot. Ilagan then hired a taxicab in the amount of P1,000 to transport him (Ilagan) to his home province at
Bauan, Batangas.Ilagan extravagantly and lavishly spent his money but a big part of his loot was wasted in cockfight and horse
[28]
racing. Ilagan was apprehended and meekly admitted his guilt. (Emphasis supplied.)
L.C. Diaz refutes Solidbanks contention by pointing out that the person who withdrew the P300,000 was a certain Noel
Tamayo. Both the trial and appellate courts stated that this Noel Tamayo presented the passbook with the withdrawal slip.
We uphold the finding of the trial and appellate courts that a certain Noel Tamayo withdrew the P300,000. The Court is not a trier
of facts. We find no justifiable reason to reverse the factual finding of the trial court and the Court of Appeals. The tellers who
processed the deposit of the P90,000 check and the withdrawal of the P300,000 were not presented during trial to substantiate
Solidbanks claim that Ilagan deposited the check and made the questioned withdrawal. Moreover, the entry quoted by Solidbank does
not categorically state that Ilagan presented the withdrawal slip and the passbook.

Doctrine of Last Clear Chance

The doctrine of last clear chance states that where both parties are negligent but the negligent act of one is appreciably later than
that of the other, or where it is impossible to determine whose fault or negligence caused the loss, the one who had the last clear
[29]
opportunity to avoid the loss but failed to do so, is chargeable with the loss. Stated differently, the antecedent negligence of the
plaintiff does not preclude him from recovering damages caused by the supervening negligence of the defendant, who had the last fair
[30]
chance to prevent the impending harm by the exercise of due diligence.
We do not apply the doctrine of last clear chance to the present case. Solidbank is liable for breach of contract due to negligence
in the performance of its contractual obligation to L.C. Diaz. This is a case of culpa contractual, where neither the contributory
[31]
negligence of the plaintiff nor his last clear chance to avoid the loss, would exonerate the defendant from liability. Such contributory
negligence or last clear chance by the plaintiff merely serves to reduce the recovery of damages by the plaintiff but does not exculpate
[32]
the defendant from his breach of contract.

Mitigated Damages

Under Article 1172, liability (for culpa contractual) may be regulated by the courts, according to the circumstances. This means
that if the defendant exercised the proper diligence in the selection and supervision of its employee, or if the plaintiff was guilty of
contributory negligence, then the courts may reduce the award of damages. In this case, L.C. Diaz was guilty of contributory
negligence in allowing a withdrawal slip signed by its authorized signatories to fall into the hands of an impostor. Thus, the liability of
Solidbank should be reduced.
[33]
In Philippine Bank of Commerce v. Court of Appeals, where the Court held the depositor guilty of contributory negligence,
we allocated the damages between the depositor and the bank on a 40-60 ratio. Applying the same ruling to this case, we hold that
L.C. Diaz must shoulder 40% of the actual damages awarded by the appellate court. Solidbank must pay the other 60% of the actual
damages.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED with MODIFICATION. Petitioner Solidbank Corporation
shall pay private respondent L.C. Diaz and Company, CPAs only 60% of the actual damages awarded by the Court of Appeals. The
remaining 40% of the actual damages shall be borne by private respondent L.C. Diaz and Company, CPAs.Proportionate costs.
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.:

[1]
Before us is a petition for review on certiorari of the Decision dated August 8, 1994 of the respondent Court of Appeals (Tenth
[2]
Division) in CA-G.R. CV No. 38036 reversing the judgment 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
[3]
PNB the following: 1) three (3) parcels of land 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.
[4]
The real estate mortgage 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,
[5]
which interest rate the Bank may, at any time, without notice, raise within the limits allowed by law xxx."
Petitioner made use of his LC/TR line to purchase raw materials from foreign importers. He signed a total of eleven (11)
[6]
documents denominated as "Application and Agreement for Commercial Letter of Credit," 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
[7]
charges at any time depending on whatever policy it may follow in the future."
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
[8]
term loan and for an additional LC/TR line of Two Million Pesos (P2,000,000.00). 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
[9]
give us more justification in recommending a plan of payment or restructuring of your accounts to higher authorities of the Bank."
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 semi-annually 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
[10]
the mortgaged properties and reduced the proposed new LC/TR line to One Million Pesos (P1,000,000.00). 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 semi-annually 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
[11]
out by respondent PNB to conform with the 5-year restructuring plan allegedly agreed upon. The first Promissory Note, No. 127/82,
 [11]
out by respondent PNB to conform with the 5-year restructuring plan allegedly agreed upon. The first Promissory Note, No. 127/82,
[12]
covered the principal while the second Promissory Note, 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. x x x
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.
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
[13]
five-year restructuring agreement would be implemented on the condition that he assigns 10% of his export earnings to the Bank. In
a letter dated August 22, 1983, petitioner Mendoza consented to assign 10% of the net export proceeds of a Letter of Credit covering
[14]
goods amounting to One Hundred Fourteen Thousand Dollars ($114,000.00). However, petitioner claimed that respondent PNB
[15]
subsequently debited 14% instead of 10% from his export proceeds.
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 Sheriffs 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 petitioners 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 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 five-year 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:
1. Audited Financial Statements for 1979 and 1980;
2. Projected cash flow (cash in - cash out) for five years detailed yearly; and
3. List of additional machinery and equipment and proof of ownership thereof.
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.
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
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.
We feel certain that Mr. Cura will be pleased to discuss matters of mutual interest with you.
xxx
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:
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.
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 petitioners 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
[16]
offer manifests the consent necessary to perfect a contract. 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
[17]
the parties.
There is nothing in the record that even suggests that respondent PNB assented to the alleged five-year restructure of petitioners
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
[18]
restructuring period, under the rule of promissory estoppel. Citing Ramos v. Central Bank, 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 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
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
following elements: (1) a promise reasonably expected to induce action or forebearance; (2) such promise did in fact induce such
[19]
action or forebearance, and (3) the party suffered detriment as a result.
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
[20]
understand the obligation assumed and enforce the promise according to its terms. 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
[21] [22]
reliance upon it was not reasonable. It does not operate to create liability where it does not otherwise exist.
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 basis in saying that the
[23]
acceptance of the five-year restructuring is totally absent from the record." 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
[24]
and regular. 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
[25]
to cover the interest for the corresponding month, we are hard-pressed to construe it as the required proof that respondent PNB
allegedly approved the proposed five-year restructuring of petitioners 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 petitioners 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
[26] [27]
contracts ordained in Article 1308 of the Civil Code. As held in one case:
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
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
[28]
his silence per se cannot be construed as an acceptance. 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.
[29]
Petitioner prays for the release of some of his movables 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 after-acquired 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
[30]
proceeds of the sale of such goods. 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
[31]
that those movables were in fact "immovables by destination" under Art. 415 (5) of the Civil Code. 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
[32]
constitution thereof.
Petitioner also contends that respondent PNBs 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
[33]
(P722,000.00) per the appraisal report dated September 20, 1990 of Cuervo Appraisers, Inc. That contention is not well taken
considering that:
1. The total of the principal amounts alone of petitioners 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
petitioners real estate and chattel mortgages have been effected way back on October 15, 1984, October 23, 1984 and
[34]
December 21, 1984. Common experience shows that real estate values especially in 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 petitioners 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 petitioners 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.
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.:

[1] [2]
Before us is a petition for review on certiorari of the Decision of the Court of Appeals dated November 8, 1999 in CA-G.R.
[3]
CV No. 53328 reversing the Decision 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
[4]
Reserve, a sports/resort complex project located at Barrio Puray, Montalban, Rizal.
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
[5]
accordance with the Schedule of Amortization. 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 attorneys fees equivalent to twenty-five (25%) percent of the sum sought to
[6]
be recovered, which in no case shall be less than Twenty Thousand Pesos (P20,000.00) if the services of a lawyer were hired.
[7]
In accordance with the terms of the Loan Agreement, respondent Este del Sol executed several documents 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
[8]
respondent Este del Sol up to the aggregate sum of Seven Million Five Hundred Thousand Pesos (P7,500,000 00) each.
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 Sols 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
[9]
Sol engaged the services of petitioner FMIC for a fee as consultant to render general consultancy services.
In three (3) letters all dated February 22, 1978 petitioner billed respondent 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,
[10]
1978, in accordance to the Underwriting Agreement. 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
appeared to have incurred a total obligation of Twelve Million Six Hundred Seventy-Nine Thousand Six Hundred Thirty Pesos and
[11]
Ninety-Eight Centavos (P12,679,630.98) per the petitioners Statement of Account dated June 23, 1980, to wit:
STATEMENT OF ACCOUNT OF
ESTE DEL SOL MOUNTAIN RESERVE, INC.
AS OF JUNE 23, 1980
PARTICULARS AMOUNT
Total amount due as of 11-22-78 per
revised amortization schedule dated
1-3-78 P7,999,631.42
Interest on P7,999,631.42 @ 16% p.a. from
11-22-78 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 Agreement 1,665,345.49
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
Total Amount Due and Collectible as of
June 23, 1980 P12,679,630.98
[12]
Accordingly, petitioner FMIC caused the extrajudicial foreclosure of the real estate mortgage on June 23, 1980. 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 Eighty-Eight 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 Sheriffs Notice of Sale, Four Thousand Nine Hundred
Sixty-Four Pesos (P4,964.00); for Sheriffs fees for conducting the foreclosure proceedings, Fifteen Thousand Pesos (P15,000.00); and
for Attorneys 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-
[13]
Three Centavos (P6,863,297.73) on the principal amount of the loan as of June 23, 1980.
Failing to secure from the individual respondents, as sureties of the loan of respondent Este del Sol by virtue of their continuing
[14]
surety agreements, the payment of the alleged deficiency balance, despite individual demands sent to each of them, petitioner
[15]
instituted on November 11, 1980 the instant collection suit 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 attorneys 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
[16]
petitioner FMIC.
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 attorneys fees, plus costs of suit.
Defendants counterclaims are dismissed, for lack of merit.
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 FMIC on the loan of respondent Este del Sol; and that the stipulated penalties, liquidated damages and
attorneys 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 attorneys 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 Seventy-One Thousand Pesos (P971,000.00) representing the difference between what is due to the petitioner and what is
[17]
due to respondent Este del Sol, based on the following computation:
A: DUE TO THE [PETITIONER]
Principal of Loan P7,382,500.00
Add: 20% one-time
Penalty 1,476,500.00
Attorneys fees 900,000.00 P9,759,000.00
Less: Proceeds of foreclosure
Sale 9,000,000.00
Deficiency P 759,000.00
B. DUE TO [RESPONDENT ESTE DEL SOL]
Return of usurious interest in the form of:
Underwriting fee P 200,000.00
Supervision fee 200,000.00
Consultancy fee 1,330,000.00
Total amount due Este P 1,730,000.00
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).
[18]
Petitioner moved for reconsideration of the appellate courts adverse decision. However, this was denied in a Resolution dated
February 9, 2000 of the appellate court.
[19]
Hence, the instant petition anchored on the following assigned errors:
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 PETITIONERS 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
ATTORNEYS 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 courts 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 FMICs 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
[20]
elementary rule of contracts that the laws, in force at the time the contract was made and entered into, govern it. More significantly,
[21]
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
[22] [23]
law. Thus, retroactive application of a Central Bank Circular cannot, and should not, be presumed.
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

[24]
parties. However, this rule is not without exception. 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
[25]
violate the Usury Law, the courts should and will permit no scheme, however ingenious, to becloud the crime of usury.
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
[26]
Agreement. Furthermore, under the Underwriting Agreement payment of the supervision and consultancy fees was set for a period
[27] [28]
of four (4) years to coincide ultimately with the term of the Loan Agreement. 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.
[29]
b) The Loan Agreement dated January 31, 1978 stipulated for the execution and delivery of an underwriting agreement and
[30]
specifically mentioned that such underwriting agreement is a condition precedent for petitioner FMIC to extend the loan to
[31]
respondent Este del Sol, indicating and as admitted by petitioner FMICs employees, that such Underwriting Agreement is part and
 [31]
respondent Este del Sol, indicating and as admitted by petitioner FMICs employees, that such Underwriting Agreement is part and
[32]
parcel of the Loan Agreement.
c) Respondent Este del Sol was billed by petitioner on February 28, 1978 One Million Three Hundred Thirty Thousand Pesos
[33]
(P1,330,000.00) 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
[34]
consultancy fee shall be due upon signing of the said consultancy agreement.
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
[35]
billed by petitioner to respondent Este del Sol on February 22, 1978, that is, on the same occasion of the first partial release of the
[36]
loan in the amount of Two Million Three Hundred Eighty-Two Thousand Five Hundred Pesos (P2,382,500.00). 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
[37]
(P1,730,000.00) as part of the amount loaned to respondent Este del Sol.
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
[39]
to sell its shares and all its shares have been sold through its marketing arm.
[40]
f) Petitioner FMIC failed to comply with its obligation under the Consultancy Agreement, aside from the fact that there was no
need for a Consultancy Agreement, since respondent Este del Sols officers appeared to be more competent to be consultants in the
[41]
development of the projected sports/resort complex.
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 lenders services which are
[42]
of little value or which are not in fact to be rendered, such as in the instant case. 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.
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
[43]
be considered without stipulation as to the interest. The reason for this rule was adequately explained in the case of Angel Jose
[44]
Warehousing Co., Inc. v. Child Enterprises 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 lenders 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
[45]
payment is deemed to have been made under restraint, rather than voluntarily.
This Court agrees with the factual findings and conclusion of the appellate court, to wit:
We find the stipulated penalties, liquidated damages and attorneys 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 (ESTEs) 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 attorneys 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.
Attorneys 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
[46]
attorneys fees if the same is iniquitous or unconscionable. Articles 1229 and 2227 of the New Civil Code provide that:
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 attorneys fees equivalent totwenty-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 attorneys fees to ten (10%) percent is appropriate and reasonable under the facts and circumstances of this case.
Lastly, there is no merit to petitioner FMICs 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
[47]
entitled to as much relief as the facts may warrant.
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.

G.R. No. 155223 April 4, 2007

BOBIE ROSE V. FRIAS, represented by her Attorney-in-fact, MARIE F. FUJITA, Petitioner,
vs.
FLORA SAN DIEGO-SISON, Respondent.
DECISION
AUSTRIA-MARTINEZ, J.:
Before us is a Petition for Review on Certiorari filed by Bobie Rose V. Frias represented by her Attorney-in-fact, Marie Regine F.
1 2
Fujita (petitioner) seeking to annul the Decision dated June 18, 2002 and the Resolution dated September 11, 2002 of the Court of
Appeals (CA) in CA-G.R. CV No. 52839.
Petitioner is the owner of a house and lot located at No. 589 Batangas East, Ayala Alabang, Muntinlupa, Metro Manila, which she
3
acquired from Island Masters Realty and Development Corporation (IMRDC) by virtue of a Deed of Sale dated Nov. 16, 1990. The
4
property is covered by TCT No. 168173 of the Register of Deeds of Makati in the name of IMRDC.
On December 7, 1990, petitioner, as the FIRST PARTY, and Dra. Flora San Diego-Sison (respondent), as the SECOND PARTY,
5
entered into a Memorandum of Agreement over the property with the following terms:
NOW, THEREFORE, for and in consideration of the sum of THREE MILLION PESOS (P3,000,000.00) receipt of which is hereby
acknowledged by the FIRST PARTY from the SECOND PARTY, the parties have agreed as follows:
1. That the SECOND PARTY has a period of Six (6) months from the date of the execution of this contract within which to
notify the FIRST PARTY of her intention to purchase the aforementioned parcel of land together within (sic) the
improvements thereon at the price of SIX MILLION FOUR HUNDRED THOUSAND PESOS (P6,400,000.00). Upon notice
to the FIRST PARTY of the SECOND PARTYs intention to purchase the same, the latter has a period of another six months
within which to pay the remaining balance of P3.4 million.
2. That prior to the six months period given to the SECOND PARTY within which to decide whether or not to purchase the
above-mentioned property, the FIRST PARTY may still offer the said property to other persons who may be interested to buy
the same provided that the amount of P3,000,000.00 given to the FIRST PARTY BY THE SECOND PARTY shall be paid to
the latter including interest based on prevailing compounded bank interest plus the amount of the sale in excess
of P7,000,000.00 should the property be sold at a price more than P7 million.
3. That in case the FIRST PARTY has no other buyer within the first six months from the execution of this contract, no
interest shall be charged by the SECOND PARTY on the P3 million however, in the event that on the sixth month the
SECOND PARTY would decide not to purchase the aforementioned property, the FIRST PARTY has a period of another six
months within which to pay the sum of P3 million pesos provided that the said amount shall earn compounded bank interest
for the last six months only. Under this circumstance, the amount of P3 million given by the SECOND PARTY shall be
treated as [a] loan and the property shall be considered as the security for the mortgage which can be enforced in accordance
with law.
6
x x x x.
Petitioner received from respondent two million pesos in cash and one million pesos in a post-dated check dated February 28, 1990,
7
instead of 1991, which rendered said check stale. Petitioner then gave respondent TCT No. 168173 in the name of IMRDC and the
Deed of Absolute Sale over the property between petitioner and IMRDC.
8
Respondent decided not to purchase the property and notified petitioner through a letter dated March 20, 1991, which petitioner
9
received only on June 11, 1991, reminding petitioner of their agreement that the amount of two million pesos which petitioner
received from respondent should be considered as a loan payable within six months. Petitioner subsequently failed to pay respondent
the amount of two million pesos.
10
On April 1, 1993, respondent filed with the Regional Trial Court (RTC) of Manila, a complaint for sum of money with preliminary
attachment against petitioner. The case was docketed as Civil Case No. 93-65367 and raffled to Branch 30. Respondent alleged the
foregoing facts and in addition thereto averred that petitioner tried to deprive her of the security for the loan by making a false
11
report of the loss of her owners copy of TCT No. 168173 to the Tagig Police Station on June 3, 1991, executing an affidavit of loss
12
and by filing a petition for the issuance of a new owners duplicate copy of said title with the RTC of Makati, Branch 142; that the
13
petition was granted in an Order dated August 31, 1991; that said Order was subsequently set aside in an Order dated April 10,
14
1992 where the RTC Makati granted respondents petition for relief from judgment due to the fact that respondent is in possession of
the owners duplicate copy of TCT No. 168173, and ordered the provincial public prosecutor to conduct an investigation of petitioner
for perjury and false testimony. Respondent prayed for the ex-parte issuance of a writ of preliminary attachment and payment of two
million pesos with interest at 36% per annum from December 7, 1991, P100,000.00 moral, corrective and exemplary damages
and P200,000.00 for attorneys fees.
In an Order dated April 6, 1993, the Executive Judge of the RTC of Manila issued a writ of preliminary attachment upon the filing of a
15
bond in the amount of two million pesos.
16
Petitioner filed an Amended Answer alleging that the Memorandum of Agreement was conceived and arranged by her lawyer, Atty.
Carmelita Lozada, who is also respondents lawyer; that she was asked to sign the agreement without being given the chance to read
the same; that the title to the property and the Deed of Sale between her and the IMRDC were entrusted to Atty. Lozada for
safekeeping and were never turned over to respondent as there was no consummated sale yet; that out of the two million pesos cash
paid, Atty. Lozada took the one million pesos which has not been returned, thus petitioner had filed a civil case against her; that she
was never informed of respondents decision not to purchase the property within the six month period fixed in the agreement; that
when she demanded the return of TCT No. 168173 and the Deed of Sale between her and the IMRDC from Atty. Lozada, the latter
gave her these documents in a brown envelope on May 5, 1991 which her secretary placed in her attache case; that the envelope
together with her other personal things were lost when her car was forcibly opened the following day; that she sought the help of Atty.
Lozada who advised her to secure a police report, to execute an affidavit of loss and to get the services of another lawyer to file a
petition for the issuance of an owners duplicate copy; that the petition for the issuance of a new owners duplicate copy was filed on
her behalf without her knowledge and neither did she sign the petition nor testify in court as falsely claimed for she was abroad; that
she was a victim of the manipulations of Atty. Lozada and respondent as shown by the filing of criminal charges for perjury and false
testimony against her; that no interest could be due as there was no valid mortgage over the property as the principal obligation is
vitiated with fraud and deception. She prayed for the dismissal of the complaint, counter-claim for damages and attorneys fees.
17
Trial on the merits ensued. On January 31, 1996, the RTC issued a decision, the dispositive portion of which reads:
WHEREFORE, judgment is hereby RENDERED:
1) Ordering defendant to pay plaintiff the sum of P2 Million plus interest thereon at the rate of thirty two (32%) per cent per
annum beginning December 7, 1991 until fully paid.
2) Ordering defendant to pay plaintiff the sum of P70,000.00 representing premiums paid by plaintiff on the attachment bond
with legal interest thereon counted from the date of this decision until fully paid.
3) Ordering defendant to pay plaintiff the sum of P100,000.00 by way of moral, corrective and exemplary damages.
18
4) Ordering defendant to pay plaintiff attorneys fees of P100,000.00 plus cost of litigation.
The RTC found that petitioner was under obligation to pay respondent the amount of two million pesos with compounded interest
pursuant to their Memorandum of Agreement; that the fraudulent scheme employed by petitioner to deprive respondent of her only
security to her loaned money when petitioner executed an affidavit of loss and instituted a petition for the issuance of an owners
duplicate title knowing the same was in respondents possession, entitled respondent to moral damages; and that petitioners bare
denial cannot be accorded credence because her testimony and that of her witness did not appear to be credible.
The RTC further found that petitioner admitted that she received from respondent the two million pesos in cash but the fact that
petitioner gave the one million pesos to Atty. Lozada was without respondents knowledge thus it is not binding on respondent; that
respondent had also proven that in 1993, she initially paid the sum of P30,000.00 as premium for the issuance of the attachment
bond, P20,000.00 for its renewal in 1994, and P20,000.00 for the renewal in 1995, thus plaintiff should be reimbursed considering that
she was compelled to go to court and ask for a writ of preliminary attachment to protect her rights under the agreement.
Petitioner filed her appeal with the CA. In a Decision dated June 18, 2002, the CA affirmed the RTC decision with modification, the
dispositive portion of which reads:
WHEREFORE, premises considered, the decision appealed from is MODIFIED in the sense that the rate of interest is reduced from
19
32% to 25% per annum, effective June 7, 1991 until fully paid.
The CA found that: petitioner gave the one million pesos to Atty. Lozada partly as her commission and partly as a loan; respondent did
not replace the mistakenly dated check of one million pesos because she had decided not to buy the property and petitioner knew of
her decision as early as April 1991; the award of moral damages was warranted since even granting petitioner had no hand in the filing
of the petition for the issuance of an owners copy, she executed an affidavit of loss of TCT No. 168173 when she knew all along that
said title was in respondents possession; petitioners claim that she thought the title was lost when the brown envelope given to her by
Atty. Lozada was stolen from her car was hollow; that such deceitful conduct caused respondent serious anxiety and emotional
distress.
The CA concluded that there was no basis for petitioner to say that the interest should be charged for six months only and no more;
20
that a loan always bears interest otherwise it is not a loan; that interest should commence on June 7, 1991 with compounded bank
interest prevailing at the time the two million was considered as a loan which was in June 1991; that the bank interest rate for loans
21
secured by a real estate mortgage in 1991 ranged from 25% to 32% per annum as certified to by Prudential Bank, that in fairness to
petitioner, the rate to be charged should be 25% only.
Petitioners motion for reconsideration was denied by the CA in a Resolution dated September 11, 2002.
Hence the instant Petition for Review on Certiorari filed by petitioner raising the following issues:
(A) WHETHER OR NOT THE COMPOUNDED BANK INTEREST SHOULD BE LIMITED TO SIX (6) MONTHS AS
CONTAINED IN THE MEMORANDUM OF AGREEMENT.
(B) WHETHER OR NOT THE RESPONDENT IS ENTITLED TO MORAL DAMAGES.
(C) WHETHER OR NOT THE GRANT OF CORRECTIVE AND EXEMPLARY DAMAGES AND ATTORNEYS FEES
22
IS PROPER EVEN IF NOT MENTIONED IN THE TEXT OF THE DECISION.
Petitioner contends that the interest, whether at 32% per annum awarded by the trial court or at 25% per annum as modified by the CA
which should run from June 7, 1991 until fully paid, is contrary to the parties Memorandum of Agreement; that the agreement
provides that if respondent would decide not to purchase the property, petitioner has the period of another six months to pay the loan
with compounded bank interest for the last six months only; that the CAs ruling that a loan always bears interest otherwise it is not a
loan is contrary to Art. 1956 of the New Civil Code which provides that no interest shall be due unless it has been expressly stipulated
in writing.
We are not persuaded.
While the CAs conclusion, that a loan always bears interest otherwise it is not a loan, is flawed since a simple loan may be gratuitous
23
or with a stipulation to pay interest, we find no error committed by the CA in awarding a 25% interest per annum on the two-million
peso loan even beyond the second six months stipulated period.
The Memorandum of Agreement executed between the petitioner and respondent on December 7, 1990 is the law between the parties.
In resolving an issue based upon a contract, we must first examine the contract itself, especially the provisions thereof which are
24
relevant to the controversy. The general rule is that if the terms of an agreement are clear and leave no doubt as to the intention of the
25
contracting parties, the literal meaning of its stipulations shall prevail. It is further required that the various stipulations of a contract
26
shall be interpreted together, attributing to the doubtful ones that sense which may result from all of them taken jointly.
In this case, the phrase "for the last six months only" should be taken in the context of the entire agreement. We agree with and adopt
the CAs interpretation of the phrase in this wise:
Their agreement speaks of two (2) periods of six months each. The first six-month period was given to plaintiff-appellee (respondent)
to make up her mind whether or not to purchase defendant-appellants (petitioner's) property. The second six-month period was given
to defendant-appellant to pay the P2 million loan in the event that plaintiff-appellee decided not to buy the subject property in which
case interest will be charged "for the last six months only", referring to the second six-month period. This means that no interest will
be charged for the first six-month period while appellee was making up her mind whether to buy the property, but only for the second
period of six months after appellee had decided not to buy the property. This is the meaning of the phrase "for the last six months
only". Certainly, there is nothing in their agreement that suggests that interest will be charged for six months only even if it takes
27
defendant-appellant an eternity to pay the loan.
The agreement that the amount given shall bear compounded bank interest for the last six months only, i.e., referring to the second six-
month period, does not mean that interest will no longer be charged after the second six-month period since such stipulation was made
on the logical and reasonable expectation that such amount would be paid within the date stipulated. Considering that petitioner failed
to pay the amount given which under the Memorandum of Agreement shall be considered as a loan, the monetary interest for the last
six months continued to accrue until actual payment of the loaned amount.
The payment of regular interest constitutes the price or cost of the use of money and thus, until the principal sum due is returned to the
28
creditor, regular interest continues to accrue since the debtor continues to use such principal amount. It has been held that for a
debtor to continue in possession of the principal of the loan and to continue to use the same after maturity of the loan without payment
29
of the monetary interest, would constitute unjust enrichment on the part of the debtor at the expense of the creditor.
Petitioner and respondent stipulated that the loaned amount shall earn compounded bank interests, and per the certification issued by
Prudential Bank, the interest rate for loans in 1991 ranged from 25% to 32% per annum. The CA reduced the interest rate to 25%
instead of the 32% awarded by the trial court which petitioner no longer assailed.1awphi1.nt
30
In Bautista v. Pilar Development Corp., we upheld the validity of a 21% per annum interest on a P142,326.43 loan. In Garcia v.
31
Court of Appeals, we sustained the agreement of the parties to a 24% per annum interest on an P8,649,250.00 loan. Thus, the interest
rate of 25% per annum awarded by the CA to a P2 million loan is fair and reasonable.
Petitioner next claims that moral damages were awarded on the erroneous finding that she used a fraudulent scheme to deprive
respondent of her security for the loan; that such finding is baseless since petitioner was acquitted in the case for perjury and false
testimony filed by respondent against her.
We are not persuaded.
Article 31 of the Civil Code provides that when the civil action is based on an obligation not arising from the act or omission
complained of as a felony, such civil action may proceed independently of the criminal proceedings and regardless of the result of the
32
latter.
While petitioner was acquitted in the false testimony and perjury cases filed by respondent against her, those actions are entirely
distinct from the collection of sum of money with damages filed by respondent against petitioner.
We agree with the findings of the trial court and the CA that petitioners act of trying to deprive respondent of the security of her loan
by executing an affidavit of loss of the title and instituting a petition for the issuance of a new owners duplicate copy of TCT No.
168173 entitles respondent to moral damages.1a\^/phi1.net Moral damages may be awarded in culpa contractual or breach of contract
cases when the defendant acted fraudulently or in bad faith. Bad faith does not simply connote bad judgment or negligence; it imports
33
a dishonest purpose or some moral obliquity and conscious doing of wrong. It partakes of the nature of fraud.
The Memorandum of Agreement provides that in the event that respondent opts not to buy the property, the money given by
respondent to petitioner shall be treated as a loan and the property shall be considered as the security for the mortgage. It was testified
to by respondent that after they executed the agreement on December 7, 1990, petitioner gave her the owners copy of the title to the
property, the Deed of Sale between petitioner and IMRDC, the certificate of occupancy, and the certificate of the Secretary of the
34
IMRDC who signed the Deed of Sale. However, notwithstanding that all those documents were in respondents possession, petitioner
executed an affidavit of loss that the owners copy of the title and the Deed of Sale were lost.
Although petitioner testified that her execution of the affidavit of loss was due to the fact that she was of the belief that since she had
demanded from Atty. Lozada the return of the title, she thought that the brown envelope with markings which Atty. Lozada gave her
on May 5, 1991 already contained the title and the Deed of Sale as those documents were in the same brown envelope which she gave
35
to Atty. Lozada prior to the transaction with respondent. Such statement remained a bare statement. It was not proven at all since
Atty. Lozada had not taken the stand to corroborate her claim. In fact, even petitioners own witness, Benilda Ynfante (Ynfante), was
not able to establish petitioner's claim that the title was returned by Atty. Lozada in view of Ynfante's testimony that after the brown
36
envelope was given to petitioner, the latter passed it on to her and she placed it in petitioners attach case and did not bother to look
37
at the envelope.
It is clear therefrom that petitioners execution of the affidavit of loss became the basis of the filing of the petition with the RTC for
the issuance of new owners duplicate copy of TCT No. 168173. Petitioners actuation would have deprived respondent of the security
for her loan were it not for respondents timely filing of a petition for relief whereby the RTC set aside its previous order granting the
issuance of new title. Thus, the award of moral damages is in order.
 38
The entitlement to moral damages having been established, the award of exemplary damages is proper. Exemplary damages may be
39
imposed upon petitioner by way of example or correction for the public good. The RTC awarded the amount of P100,000.00 as
moral and exemplary damages. While the award of moral and exemplary damages in an aggregate amount may not be the usual way
40
of awarding said damages, no error has been committed by CA. There is no question that respondent is entitled to moral and
exemplary damages.
Petitioner argues that the CA erred in awarding attorneys fees because the trial courts decision did not explain the findings of facts
and law to justify the award of attorneys fees as the same was mentioned only in the dispositive portion of the RTC decision.
We agree.
41
Article 2208 of the New Civil Code enumerates the instances where such may be awarded and, in all cases, it must be reasonable,
42
just and equitable if the same were to be granted. Attorney's fees as part of damages are not meant to enrich the winning party at the
expense of the losing litigant. They are not awarded every time a party prevails in a suit because of the policy that no premium should
43
be placed on the right to litigate. The award of attorney's fees is the exception rather than the general rule. As such, it is necessary for
the trial court to make findings of facts and law that would bring the case within the exception and justify the grant of such award. The
44
matter of attorney's fees cannot be mentioned only in the dispositive portion of the decision. They must be clearly explained and
justified by the trial court in the body of its decision. On appeal, the CA is precluded from supplementing the bases for awarding
attorneys fees when the trial court failed to discuss in its Decision the reasons for awarding the same. Consequently, the award of
attorney's fees should be deleted.
WHEREFORE, in view of all the foregoing, the Decision dated June 18, 2002 and the Resolution dated September 11, 2002 of the
Court of Appeals in CA-G.R. CV No. 52839 are AFFIRMED with MODIFICATION that the award of attorneys fees
is DELETED.
No pronouncement as to costs.
SO ORDERED.
SECOND DIVISION
SPOUSES DAVID B. CARPO G.R. Nos. 150773 &
and RECHILDA S. CARPO, 153599
Petitioners,
Present:

- versus - PUNO, J.,

Chairman,
AUSTRIA-MARTINEZ,
CALLEJO, SR.,
ELEANOR CHUA and TINGA, and
ELMA DY NG, CHICO-NAZARIO, JJ.
Respondents.
Promulgated:
September 30, 2005

x-------------------------------------------------------------------x

DECISION

TINGA, J.:

[1]
Before this Court are two consolidated petitions for review. The first, docketed as G.R. No. 150773, assails the Decision of
the Regional Trial Court (RTC), Branch 26 of Naga City dated 26 October 2001 in Civil Case No. 99-4376. RTC Judge Filemon B.
[2]
Montenegro dismissed the complaint for annulment of real estate mortgage and consequent foreclosure proceedings filed by the
spouses David B. Carpo and Rechilda S. Carpo (petitioners).

[3]
The second, docketed as G.R. No. 153599, seeks to annul the Court of Appeals Decision dated 30 April 2002 in CA-G.R. SP No.
57297. The Court of Appeals Third Division annulled and set aside the orders of Judge Corazon A. Tordilla to suspend the sheriffs
enforcement of the writ of possession.

The cases stemmed from a loan contracted by petitioners. On 18 July 1995, they borrowed from Eleanor Chua and Elma Dy Ng
(respondents) the amount of One Hundred Seventy-Five Thousand Pesos (P175,000.00), payable within six (6) months with an
interest rate of six percent (6%) per month. To secure the payment of the loan, petitioners mortgaged their residential house and lot
situated at San Francisco, Magarao, Camarines Sur, which lot is covered by Transfer Certificate of Title (TCT) No. 23180. Petitioners
failed to pay the loan upon demand. Consequently, the real estate mortgage was extrajudicially foreclosed and the mortgaged property
sold at a public auction on 8 July 1996. The house and lot was awarded to respondents, who were the only bidders, for the amount of
Three Hundred Sixty-Seven Thousand Four Hundred Fifty-Seven Pesos and Eighty Centavos (P367,457.80).

Upon failure of petitioners to exercise their right of redemption, a certificate of sale was issued on 5 September 1997 by
Sheriff Rolando A. Borja. TCT No. 23180 was cancelled and in its stead, TCT No. 29338 was issued in the name of respondents.

Despite the issuance of the TCT, petitioners continued to occupy the said house and lot, prompting respondents to file a
petition for writ of possession with the RTC docketed as Special Proceedings (SP) No. 98-1665. On 23 March 1999, RTC Judge
[4]
Ernesto A. Miguel issued an Order for the issuance of a writ of possession.

On 23 July 1999, petitioners filed a complaint for annulment of real estate mortgage and the consequent foreclosure
proceedings, docketed as Civil Case No. 99-4376 of the RTC. Petitioners consigned the amount of Two Hundred Fifty-Seven
Thousand One Hundred Ninety-Seven Pesos and Twenty-Six Centavos (P257,197.26) with the RTC.

Meanwhile, in SP No. 98-1665, a temporary restraining order was issued upon motion on 3 August 1999, enjoining the
[5]
enforcement of the writ of possession. In an Order dated 6 January 2000, the RTC suspended the enforcement of the writ of
possession pending the final disposition of Civil Case No. 99-4376. Against this Order, respondents filed a petition for certiorari and
mandamus before the Court of Appeals, docketed as CA-G.R. SP No. 57297.

During the pendency of the case before the Court of Appeals, RTC Judge Filemon B. Montenegro dismissed the complaint in
Civil Case No. 99-4376 on the ground that it was filed out of time and barred by laches. The RTC proceeded from the premise that the
complaint was one for annulment of a voidable contract and thus barred by the four-year prescriptive period. Hence, the first petition
for review now under consideration was filed with this Court, assailing the dismissal of the complaint.

The second petition for review was filed with the Court after the Court of Appeals on 30 April 2002 annulled and set aside
the RTC orders in SP No. 98-1665 on the ground that it was the ministerial duty of the lower court to issue the writ of possession when

title over the mortgaged property had been consolidated in the mortgagee.

This Court ordered the consolidation of the two cases, on motion of petitioners.

[6]
In G.R. No. 150773, petitioners claim that following the Courts ruling in Medel v. Court of Appeals the rate of interest stipulated in
the principal loan agreement is clearly null and void. Consequently, they also argue that the nullity of the agreed interest rate affects
the validity of the real estate mortgage. Notably, while petitioners were silent in their petition on the issues of prescription and laches
on which the RTC grounded the dismissal of the complaint, they belatedly raised the matters in their Memorandum. Nonetheless, these
points warrant brief comment.

On the other hand, petitioners argue in G.R. No. 153599 that the RTC did not commit any grave abuse of discretion when it issued the
orders dated 3 August 1999 and 6 January 2000, and that these orders could not have been the proper subjects of a petition for
certiorari and mandamus. More accurately, the justiciable issues before us are whether the Court of Appeals could properly entertain
the petition for certiorari from the timeliness aspect, and whether the appellate court correctly concluded that the writ of possession
could no longer be stayed.

We first resolve the petition in G.R. No. 150773.

Petitioners contend that the agreed rate of interest of 6% per month or 72% per annum is so excessive, iniquitous,
unconscionable and exorbitant that it should have been declared null and void. Instead of dismissing their complaint, they aver that the
lower court should have declared them liable to respondents for the original amount of the loan plus 12% interest per annum and 1%
[7] [8]
monthly penalty charge as liquidated damages, in view of the ruling in Medel v. Court of Appeals.

In Medel, the Court found that the interest stipulated at 5.5% per month or 66% per annum was so iniquitous or
unconscionable as to render the stipulation void.

Nevertheless, we find the interest at 5.5% per month, or 66% per annum, stipulated upon by the parties in
the promissory note iniquitous or unconscionable, and, hence, contrary to morals (contra bonos mores), if not
against the law. The stipulation is void. The Court shall reduce equitably liquidated damages, whether intended as an
[9]
indemnity or a penalty if they are iniquitous or unconscionable.

In a long line of cases, this Court has invalidated similar stipulations on interest rates for being excessive, iniquitous,
[10]
unconscionable and exorbitant. In Solangon v. Salazar, we annulled the stipulation of 6% per month or 72% per annum interest on
[11]
a P60,000.00 loan. In Imperial v. Jaucian, we reduced the interest rate from 16% to 1.167% per month or 14% per annum. In Ruiz v.
[12]
Court of Appeals, we equitably reduced the agreed 3% per month or 36% per annum interest to 1% per month or 12% per annum
interest. The 10% and 8% interest rates per month on a P1,000,000.00 loan were reduced to 12% per annum in Cuaton v. Salud.
[13] [14]
Recently, this Court, in Arrofo v. Quino, reduced the 7% interest per month on a P15,000.00 loan amounting to 84% interest per
annum to 18% per annum.

There is no need to unsettle the principle affirmed in Medel and like cases. From that perspective, it is apparent that the stipulated
interest in the subject loan is excessive, iniquitous, unconscionable and exorbitant. Pursuant to the freedom of contract principle
embodied in Article 1306 of the Civil Code, 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. In the ordinary
course, the codal provision may be invoked to annul the excessive stipulated interest.

In the case at bar, the stipulated interest rate is 6% per month, or 72% per annum. By the standards set in the above-cited
cases, this stipulation is similarly invalid. However, the RTC refused to apply the principle cited and employed in Medel on the ground
[15]
that Medel did not pertain to the annulment of a real estate mortgage, as it was a case for annulment of the loan contract itself. The
question thus sensibly arises whether the invalidity of the stipulation on interest carries with it the invalidity of the principal
obligation.

The question is crucial to the present petition even if the subject thereof is not the annulment of the loan contract but that of
the mortgage contract. The consideration of the mortgage contract is the same as that of the principal contract from which it receives
life, and without which it cannot exist as an independent contract. Being a mere accessory contract, the validity of the mortgage
[16]
contract would depend on the validity of the loan secured by it.

Notably in Medel, the Court did not invalidate the entire loan obligation despite the inequitability of the stipulated interest, but instead
reduced the rate of interest to the more reasonable rate of 12% per annum. The same remedial approach to the wrongful interest rates
involved was employed or affirmed by the Court in Solangon, Imperial, Ruiz, Cuaton, and Arrofo.

The Courts ultimate affirmation in the cases cited of the validity of the principal loan obligation side by side with the invalidation of
the interest rates thereupon is congruent with the rule that a usurious loan transaction is not a complete nullity but defective only with
respect to the agreed interest.

We are aware that the Court of Appeals, on certain occasions, had ruled that a usurious loan is wholly null and void both as to the loan
[17]
and as to the usurious interest. However, this Court adopted the contrary rule,

[18]
as comprehensively discussed in Briones v. Cammayo:

In Gui Jong & Co. vs. Rivera, et al., 45 Phil. 778, this Court likewise declared that, in any event, the debtor in a
usurious contract of loan should pay the creditor the amount which he justly owes him, citing in support of this ruling its
previous decisions in Go Chioco, Supra, Aguilar vs. Rubiato, et al., 40 Phil. 570, and Delgado vs. Duque Valgona, 44
Phil. 739.

....

Then in Lopez and Javelona vs. El Hogar Filipino, 47 Phil. 249, We also held that the standing jurisprudence of
this Court on the question under consideration was clearly to the effect that the Usury Law, by its letter and spirit, did not
deprive the lender of his right to recover from the borrower the money actually loaned to and enjoyed by the latter. This
Court went further to say that the Usury Law did not provide for the forfeiture of the capital in favor of the debtor in
usurious contracts, and that while the forfeiture might appear to be convenient as a drastic measure to eradicate the evil
of usury, the legal question involved should not be resolved on the basis of convenience.

Other cases upholding the same principle are Palileo vs. Cosio, 97 Phil. 919 and Pascua vs. Perez, L-19554,
January 31, 1964, 10 SCRA 199, 200-202. In the latter We expressly held that when a contract is found to be tainted with
usury "the only right of the respondent (creditor) . . . was merely to collect the amount of the loan, plus interest due
thereon."
 The view has been expressed, however, that the ruling thus consistently adhered to should now be abandoned
because Article 1957 of the new Civil Code a subsequent law provides that contracts and stipulations, under any cloak or
device whatever, intended to circumvent the laws against usury, shall be void, and that in such cases "the borrower may
recover in accordance with the laws on usury." From this the conclusion is drawn that the whole contract is void and that,
therefore, the creditor has no right to recover not even his capital.

The meaning and scope of our ruling in the cases mentioned heretofore is clearly stated, and the view referred to
in the preceding paragraph is adequately answered, in Angel Jose, etc. vs. Chelda Enterprises, et al. (L-25704, April 24,
1968). On the question of whether a creditor in a usurious contract may or may not recover the principal of the loan, and,
in the affirmative, whether or not he may also recover interest thereon at the legal rate, We said the following:

....

Appealing directly to Us, defendants raise two questions of law: (1) In a loan with usurious
interest, may the creditor recover the principal of the loan? (2) Should attorney's fees be awarded in
plaintiff's favor?"

Great reliance is made by appellants on Art. 1411 of the New Civil Code . . . .

Since, according to the appellants, a usurious loan is void due to illegality of cause or object, the rule of
pari delicto expressed in Article 1411, supra, applies, so that neither party can bring action against each
other. Said rule, however, appellants add, is modified as to the borrower, by express provision of the
law (Art. 1413, New Civil Code), allowing the borrower to recover interest paid in excess of the interest
allowed by the Usury Law. As to the lender, no exception is made to the rule; hence, he cannot recover
on the contract. So they continue the New Civil Code provisions must be upheld as against the Usury
Law, under which a loan with usurious interest is not totally void, because of Article 1961 of the New
Civil Code, that: "Usurious contracts shall be governed by the Usury Law and other special laws, so far
as they are not inconsistent with this Code."

We do not agree with such reasoning. Article 1411 of the New Civil Code is not new; it is the
same as Article 1305 of the Old Civil Code. Therefore, said provision is no warrant for departing from
previous interpretation that, as provided in the Usury Law (Act No. 2655, as amended), a loan with
usurious interest is not totally void only as to the interest.

. . . [a]ppellants fail to consider that a contract of loan with usurious interest consists of
principal and accessory stipulations; the principal one is to pay the debt; the accessory stipulation
is to pay interest thereon.

And said two stipulations are divisible in the sense that the former can still stand without
the latter. Article 1273, Civil Code, attests to this: "The renunciation of the principal debt shall
extinguish the accessory obligations; but the waiver of the latter shall leave the former in force."

The question therefore to resolve is whether the illegal terms as to payment of interest
likewise renders a nullity the legal terms as to payments of the principal debt. Article 1420 of the
New Civil Code provides in this regard: "In case of a divisible contract, if the illegal terms can be
separated from the legal ones, the latter may be enforced."

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.

....

The principal debt remaining without stipulation for payment of interest can thus be recovered
by judicial action. And in case of such demand, and the debtor incurs in delay, the debt earns interest
from the date of the demand (in this case from the filing of the complaint). Such interest is not due to
stipulation, for there was none, the same being void. Rather, it is due to the general provision of law that
in obligations to pay money, where the debtor incurs in delay, he has to pay interest by way of damages
(Art. 2209, Civil Code). The court a quo therefore, did not err in ordering defendants to pay the
[19]
principal debt with interest thereon at the legal rate, from the date of filing of the complaint."

The Courts wholehearted affirmation of the rule that the principal obligation subsists despite the nullity of the stipulated interest is
evinced by its subsequent rulings, cited above, in all of which the main obligation was upheld and the offending interest rate merely
corrected. Hence, it is clear and settled that the principal loan obligation still stands and remains valid. By the same token, since the
mortgage contract derives its vitality from the validity of the principal obligation, the invalid stipulation on interest rate is similarly
insufficient to render void the ancillary mortgage contract.

It should be noted that had the Court declared the loan and mortgage agreements void for being contrary to public policy, no
[20]
prescriptive period could have run. Such benefit is obviously not available to petitioners.

Yet the RTC pronounced that the complaint was barred by the four-year prescriptive period provided in Article 1391 of the
Civil Code, which governs voidable contracts. This conclusion was derived from the allegation in the complaint that the consent of
petitioners was vitiated through undue influence. While the RTC correctly acknowledged the rule of prescription for voidable
contracts, it erred in applying the rule in this case. We are hard put to conclude in this case that there was any undue influence in the
first place.

There is ultimately no showing that petitioners consent to the loan and mortgage agreements was vitiated by undue
influence. The financial condition of petitioners may have motivated them to contract with respondents, but undue influence cannot
be attributed to respondents simply because they had lent money. Article 1391, in relation to Article 1390 of the Civil Code, grants
the aggrieved party the right to obtain the annulment of contract on account of factors which vitiate consent. Article 1337 defines the
concept of undue influence, as follows:

There is undue influence when a person takes improper advantage of his power over the will of another,
depriving the latter of a reasonable freedom of choice. The following circumstances shall be considered: the
confidential, family, spiritual and other relations between the parties or the fact that the person alleged to have been
unduly influenced was suffering from mental weakness, or was ignorant or in financial distress.

While petitioners were allegedly financially distressed, it must be proven that there is deprivation of their free agency. In other words,
for undue influence to be present, the influence exerted must have so overpowered or subjugated the mind of a contracting party as to
[21]
destroy his free agency, making him express the will of another rather than his own. The alleged lingering financial woes of
petitioners per se cannot be equated with the presence of undue influence.

The RTC had likewise concluded that petitioners were barred by laches from assailing the validity of the real estate mortgage.
We wholeheartedly agree. If indeed petitioners unwillingly gave their consent to the agreement, they should have raised this issue as
early as in the foreclosure proceedings. It was only when the writ of possession was issued did petitioners challenge the stipulations in
the loan contract in their action for annulment of mortgage. Evidently, petitioners slept on their rights. The Court of Appeals
succinctly made the following observations:

In all these proceedings starting from the foreclosure, followed by the issuance of a provisional certificate of
sale; then the definite certificate of sale; then the issuance of TCT No. 29338 in favor of the defendants and finally the
petition for the issuance of the writ of possession in favor of the defendants, there is no showing that plaintiffs
questioned the validity of these proceedings. It was only after the issuance of the writ of possession in favor of the
defendants, that plaintiffs allegedly tendered to the defendants the amount of P260,000.00 which the defendants
[22]
refused. In all these proceedings, why did plaintiffs sleep on their rights?
Clearly then, with the absence of undue influence, petitioners have no cause of action. Even assuming undue influence vitiated their
consent to the loan contract, their action would already be barred by prescription when they filed it. Moreover, petitioners had clearly
slept on their rights as they failed to timely assail the validity of the mortgage agreement. The denial of the petition in G.R. No.
150773 is warranted.

We now resolve the petition in G.R. No. 153599.

Petitioners claim that the assailed RTC orders dated 3 August 1999 and 6 January 2000 could no longer be questioned in a special civil
action for certiorari and mandamus as the reglementary period for such action had already elapsed.

It must be noted that the Order dated 3 August 1999 suspending the enforcement of the writ of possession had a period of effectivity
of only twenty (20) days from 3 August 1999, or until 23 August 1999. Thus, upon the expiration of the twenty (20)-day period, the
said Order became functus officio. Thus, there is really no sense in assailing the validity of this Order, mooted as it was. For the same
reason, the validity of the order need not have been assailed by respondents in their special civil action before the Court of Appeals.

On the other hand, the Order dated 6 January 2000 is in the nature of a writ of injunction whose period of efficacy is indefinite. It may
be properly assailed by way of the special civil action for certiorari, as it is interlocutory in nature.
As a rule, the special civil action for certiorari under Rule 65 must be filed not later than sixty (60) days from notice of the judgment
[23]
or order. Petitioners argue that the 3 August 1999 Order could no longer be assailed by respondents in a special civil action for
certiorari before the Court of Appeals, as the petition was filed beyond sixty (60) days following respondents receipt of the Order.
Considering that the 3 August 1999 Orderhad become functus officio in the first place, this argument deserves scant consideration.

Petitioners further claim that the 6 January 2000 Order could not have likewise been the subject of a special civil action for certiorari,
as it is according to them a final order, as opposed to an interlocutory order. That the 6 January 2000 Order is interlocutory in nature
should be beyond doubt. An order is interlocutory if its effects would only be provisional in character and would still leave substantial
[24]
proceedings to be further had by the issuing court in order to put the controversy to rest. The injunctive relief granted by the order is
definitely final, but merely provisional, its effectivity hinging on the ultimate outcome of the then pending action for annulment of real
estate mortgage. Indeed, an interlocutory order hardly puts to a close, or disposes of, a case or a disputed issue leaving nothing else to
be done by the court in respect thereto, as is characteristic of a final order.

Since the 6 January 2000 Order is not a final order, but rather interlocutory in nature, we cannot agree with petitioners who insist that
it may be assailed only through an appeal perfected within fifteen (15) days from receipt thereof by respondents. It is axiomatic that an
interlocutory order cannot be challenged by an appeal,

[25]
but is susceptible to review only through the special civil action of certiorari. The sixty (60)-day reglementary period for special
civil actions under Rule 65 applies, and respondents petition was filed with the Court of Appeals well within the period.
Accordingly, no error can be attributed to the Court of Appeals in granting the petition for certiorari and mandamus. As pointed out by
respondents, the remedy of mandamus lies to compel the performance of a ministerial duty. The issuance of a writ of possession to a
[26]
purchaser in an extrajudicial foreclosure is merely a ministerial function.

Thus, we also affirm the Court of Appeals ruling to set aside the RTC orders enjoining the enforcement of the writ of
[27]
possession. The purchaser in a foreclosure sale is entitled as a matter of right to a writ of possession, regardless of whether or not
there is a pending suit for annulment of the mortgage or the foreclosure proceedings. An injunction to prohibit the issuance or
[28]
enforcement of the writ is entirely out of place.

One final note. The issue on the validity of the stipulated interest rates, regrettably for petitioners, was not raised at the
earliest possible opportunity. It should be pointed out though that since an excessive stipulated interest rate may be void for being
contrary to public policy, an action to annul said interest rate does not prescribe. Such indeed is the remedy; it is not the action for
annulment of the ancillary real estate mortgage. Despite the nullity of the stipulated interest rate, the principal loan obligation subsists,
and along with it the mortgage that serves as collateral security for it.

WHEREFORE, in view of all the foregoing, the petitions are DENIED. Costs against petitioners.
SO ORDERED.

TOLOMEO LIGUTAN and LEONIDAS DE LA LLANA, petitioners, vs. HON. COURT OF APPEALS & SECURITY BANK
& TRUST COMPANY, respondents.

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.
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
[1]
motion in an order, dated 5 September 1988, and on 20 October 1989, it rendered its decision, the dispositiveportion 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:
"1. 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;
"2. To pay the further sum equivalent to 10% of the total amount of indebtedness for and as attorneys fees; and
[2]
"3. To pay the costs of the suit.
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
[3]
decision 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
[4]
filed their respective motions for reconsideration. 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.
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 non-payment from the date of default.
xxxxxxxxx
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.
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.
xxxxxxxxx
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;
[5]
2. The sum equivalent to 10% of the total amount of the indebtedness as and for attorneys fees.
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 Llanawith 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 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
[7]
appeal and when the first motion for reconsideration was filed.
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
[8]
during the pendency of this case and the subsequent foreclosure of the mortgage.
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
[9]
would stress that only the amount of P5,584.00 had been remitted out of the entire loan of P120,000.00.
[10]
A penalty clause, expressly recognized by law, is an accessory undertaking to assume greater liability on the part of an obligor
[11]
in case of breach of an obligation. It functions to strengthen the coercive force of the obligation 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
[12]
without the necessity of proof on the existence and on the measure of damages caused by the breach. 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
[13]
iniquitous or unconscionable or if the principal obligation has been partly or irregularly complied with.
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
[14]
Appeals, 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
[15]
performance is made by the debtor. The stipulated penalty might even be deleted such as when there has been substantial
[16]
performance in good faith by the obligor, when the penalty clause itself suffers from fatal infirmity, or when exceptional
[17]
circumstances so exist as to warrant it.
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 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 non-payment or reduction of interest. Indeed, the interest
[19]
prescribed in loan financing arrangements is a fundamental part of the banking business and the core of a bank's existence.
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.
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 newly-discovered 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'
[20]
or 'newly discovered errors' therein, or thinking up some injury or prejudice to the rights of the movant for reconsideration.
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
[21]
and the bank. Respondent bank has correctly postulated that the mortgage is but an accessory contract to secure the loan in the
promissory note.
Extinctive novation requires, first, a previous valid obligation; second, the agreement of all the parties to the new
[22]
contract; third, the extinguishment of the obligation; and fourth, the validity of the new one. 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
[23]
new obligation be on every point incompatible with each other. 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
[24]
supplemented by the new one. 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
[25] [26]
from negotiorum gestio to agency, or from a mortgage to antichresis, or from a sale to one of loan; (2) the object or principal
[27]
conditions, such as a change of the nature of the prestation; or (3) the subjects, such as the substitution of a debtor 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.
G.R. No. 97412 July 12, 1994
EASTERN SHIPPING LINES, INC., petitioner,
vs.
HON. COURT OF APPEALS AND MERCANTILE INSURANCE COMPANY, INC., respondents.
Alojada & Garcia and Jimenea, Dala & Zaragoza for petitoner.
Zapa Law Office for private respondent.

VITUG, J.:
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%).
The findings of the court a quo, adopted by the Court of Appeals, on the antecedent and undisputed facts that have led to the
controversy are hereunder reproduced:
This is an action against defendants shipping company, arrastre operator and broker-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 plaintiff's Marine Insurance Policy No. 81/01177 for
P36,382,466.38.
Upon arrival of the shipment in Manila on December 12, 1981, it was discharged unto the custody of defendant
Metro Port 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).
On January 8 and 14, 1982, defendant Allied Brokerage Corporation made deliveries of the shipment to the
consignee's 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).
As a consequence of the losses sustained, plaintiff was compelled to pay the consignee P19,032.95 under the
aforestated marine insurance policy, so that it became subrogated to all the rights of action of said consignee against
defendants (per "Form of Subrogation", "Release" and Philbanking check, Exhs. M, N, and O). (pp. 85-86, Rollo.)
There were, to be sure, other factual issues that confronted both courts. Here, the appellate court said:
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.
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);
3. Whether or not defendant(s) should be held liable for the losses/damages (see plaintiff's pre-
Trial Brief, Records, p. 34; Allied's pre-Trial Brief, adopting plaintiff's Records, p. 38).
 As to the first issue, there can be no doubt that the shipment sustained losses/damages. The two
drums were shipped in good order and condition, as clearly shown by the Bill of Lading and
Commercial Invoice which do not indicate any damages drum that was shipped (Exhs. B and C).
But when on December 12, 1981 the shipment was delivered to defendant Metro Port Service,
Inc., it excepted to one drum in bad order.
Correspondingly, as to the second issue, it follows that the losses/damages were sustained while in
the respective and/or successive custody and possession of defendants carrier (Eastern), arrastre
operator (Metro Port) and broker (Allied Brokerage). This becomes evident when the Marine
Cargo Survey Report (Exh. G), with its "Additional Survey Notes", are considered. In the latter
notes, it is stated that when the shipment was "landed on vessel" to dock of Pier # 15, South
Harbor, Manila on December 12, 1981, it was observed that "one (1) fiber drum (was) in damaged
condition, covered by the vessel's Agent's Bad Order Tally Sheet No. 86427." The report further
states that when defendant Allied Brokerage withdrew the shipment from defendant arrastre
operator's custody on January 7, 1982, one drum was found opened without seal, cello bag partly
torn but contents intact. Net unrecovered spillages was
15 kgs. The report went on to state that when the drums reached the consignee, one drum was
found with adulterated/faked contents. It is obvious, therefore, that these losses/damages occurred
before the shipment reached the consignee while under the successive custodies of defendants.
Under Art. 1737 of the New Civil Code, the common carrier's duty to observe extraordinary
diligence in the vigilance of goods remains in full force and effect even if the goods are
temporarily unloaded and stored in transit in the warehouse of the carrier at the place of
destination, until the consignee has been advised and has had reasonable opportunity to remove or
dispose of the goods (Art. 1738, NCC). Defendant Eastern Shipping's own exhibit, the "Turn-Over
Survey of Bad Order Cargoes" (Exhs. 3-Eastern) states that on December 12, 1981 one drum was
found "open".
and thus held:
WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered:
A. Ordering defendants to pay plaintiff, jointly and severally:
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 attorney's fees, and
3. Costs.
B. Dismissing the counterclaims and crossclaim of defendant/cross-claimant
Allied Brokerage Corporation.
SO ORDERED. (p. 207, Record).
Dissatisfied, defendant's recourse to US.
The appeal is devoid of merit.
After a careful scrutiny of the evidence on record. We find that the conclusion drawn therefrom is correct. As there
is sufficient evidence that the shipment sustained damage while in the successive possession of appellants, and
therefore they are liable to the appellee, as subrogee for the amount it paid to the consignee. (pp. 87-89, Rollo.)
The Court of 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;
II. IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF PRIVATE RESPONDENT SHOULD
COMMENCE FROM THE DATE OF THE FILING OF THE COMPLAINT AT THE RATE OF TWELVE
PERCENT PER ANNUM INSTEAD OF FROM THE DATE OF THE DECISION OF THE TRIAL COURT AND
ONLY AT THE RATE OF SIX PERCENT PER ANNUM, PRIVATE RESPONDENT'S CLAIM BEING
INDISPUTABLY UNLIQUIDATED.
The petition is, in part, granted.
In this decision, we have begun by saying that the questions raised by petitioner carrier are not all that novel. Indeed, we do have a
fairly good number of previous decisions this Court can merely tack to.
The common carrier's duty to observe the requisite diligence in the shipment of goods lasts from the time the articles are surrendered
to or unconditionally placed in the possession of, and received by, the carrier for transportation until delivered to, or until the lapse of a
reasonable time for their acceptance by, the person entitled to receive them (Arts. 1736-1738, Civil Code; Ganzon vs. Court of
Appeals, 161 SCRA 646; Kui Bai vs. Dollar Steamship Lines, 52 Phil. 863). When the goods shipped either are lost or arrive in
damaged condition, a presumption arises against the carrier of its failure to observe that diligence, and there need not be an express
finding of negligence to hold it liable (Art. 1735, Civil Code; Philippine National Railways vs. Court of Appeals, 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
1
not observed but these cases, enumerated in Article 1734 of the Civil Code, are exclusive, not one of which can be applied to this
case.
The question of charging both the carrier and the arrastre operator with the obligation of properly delivering the goods to the
consignee has, too, been passed upon by the Court. In Fireman's Fund Insurance vs. Metro Port Services (182 SCRA 455), we have
explained, in holding the carrier and the arrastre operator liable 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
2 3
Service, decided 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
4
Court in Rivera vs. Perez, 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. 302)," then, interest "should be from the date of the decision." (Emphasis supplied)
5
The case of Reformina vs. Tomol, 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:
xxx xxx xxx
(g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of P131,084.00 which is the value of the boat F
B Pacita III together with its accessories, fishing gear and equipment minus P80,000.00 which is the value of the
insurance recovered and the amount of P10,000.00 a month as the estimated monthly loss suffered by them as a
result of the fire of May 6, 1969 up to the time they are actually paid or already the total sum of P370,000.00 as of
June 4, 1972 with legal interest from the filing of the complaint until paid and to pay attorney's fees of P5,000.00
with costs against defendants and third party plaintiffs. (Emphasis supplied.)
On appeal 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 court's decision became final, the
case was remanded to the lower court for execution, and this was when the trial court issued its assailed resolution which
applied the 6% interest per annum prescribed in Article 2209 of the Civil Code. In their petition for review 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. (Emphasis found in the text)

6
should have, instead, been applied. This Court ruled:
The judgments spoken of and referred to are judgments in litigations involving loans or forbearance of any money,
goods or credits. Any other kind of monetary judgment which has nothing to do with, nor involving loans or
forbearance of any money, goods or credits does not fall within the coverage of the said law for it is not within the
ambit of the authority granted to the Central Bank.
xxx xxx xxx
Coming to the case at bar, the decision herein sought to be executed is one rendered in an Action for Damages for
injury to persons and loss of property and does not involve any loan, much less forbearances of any money, goods or
credits. As correctly argued by the private respondents, the law applicable to the said case is Article 2209 of the New
Civil Code which reads
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.
7
The above rule was reiterated in Philippine Rabbit Bus Lines, Inc., v. Cruz, 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.
8
Relying on the Reformina v. Tomol case, this Court 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.
9
In Nakpil and Sons vs. Court of Appeals, the trial court, in an action for the recovery of damages arising from the collapse of a
building, ordered,
inter alia, the "defendant United Construction Co., Inc. (one of the petitioners)
. . . to pay the plaintiff, . . . , the sum of P989,335.68 with interest at the legal rate from November 29, 1968, the date of the filing of
the complaint until full payment . . . ." Save from the modification of the amount granted by the lower court, the Court of Appeals
sustained the trial court's decision. When taken to this Court for review, the case, on 03 October 1986, was decided, thus:
WHEREFORE, the decision appealed from is hereby MODIFIED and considering the special and environmental
circumstances of this case, we deem it reasonable to render a decision imposing, as We do hereby impose, upon the
defendant and the third-party defendants (with the exception of Roman Ozaeta) a solidary (Art. 1723, Civil
Code, Supra.
p. 10) indemnity in favor of the Philippine Bar Association of FIVE MILLION (P5,000,000.00) Pesos to cover all
damages (with the exception to attorney's 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 attorney's fees, the
total sum being payable upon the finality of this decision. Upon failure to pay on such finality, twelve (12%) per cent
interest per annum shall be imposed upon aforementioned amounts from finality until paid. Solidary costs against
the defendant and third-party defendants (Except Roman Ozaeta). (Emphasis supplied)
A motion for reconsideration was filed by United Construction, contending that "the interest of twelve (12%) per cent per
10
annum imposed on the total amount of the monetary award was in contravention of law." The Court 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 . . . 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. (Emphasis supplied.)
11
The subsequent case of American Express International, Inc., vs. Intermediate Appellate Court 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
12
trial court, later sustained by the IAC, to be inconceivably large. The Court thus set aside the decision of the appellate court and
rendered a new one, "ordering the petitioner to pay private respondent the sum of One Hundred Thousand (P100,000.00) Pesos as
moral damages, with
six (6%) percent interest thereon computed from the finality of this decision until paid. (Emphasis supplied)
13
Reformina came into fore again in the 21 February 1989 case of Florendo v. Ruiz which arose from a breach of employment
contract. For having been illegally dismissed, the petitioner was awarded by the trial court moral and exemplary damages without,
however, providing any legal interest thereon. When the decision was appealed to the Court of Appeals, the latter held:
WHEREFORE, except as modified hereinabove the decision of the CFI of Negros Oriental dated October 31, 1972
is affirmed in all respects, with the modification that defendants-appellants, except defendant-appellant Merton
Munn, are ordered to pay, jointly and severally, the amounts stated in the dispositive portion of the decision,
including the sum of P1,400.00 in concept of compensatory damages, with interest at the legal rate from the date of
the filing of the complaint until fully paid(Emphasis supplied.)
The petition for review to this Court was denied. The records were thereupon transmitted to the trial court, and an entry of
judgment was made. The writ of execution issued by the trial court directed that only compensatory damages should earn
interest at 6% per annum from the date of the filing of the complaint. Ascribing grave abuse of discretion on the part of the
trial judge, a petition for certiorari assailed the said order. This Court said:
. . . , it is to be noted that the Court of Appeals ordered the payment of interest "at the legal rate" from the time of the
filing of the complaint. . . Said circular [Central Bank Circular No. 416] does not apply to actions based on a breach
of employment contract like the case at bar. (Emphasis supplied)
The Court reiterated that the 6% interest per annum on the damages should be computed from the time the complaint was
filed until the amount is fully paid.
14
Quite recently, the Court had another occasion to rule on the matter. National Power Corporation vs. Angas, decided on 08 May
1992, involved the expropriation of certain parcels of land. After conducting a hearing on the complaints for eminent domain, the trial
court ordered the petitioner to pay the private respondents certain sums of money as just compensation for their lands so expropriated
"with legal interest thereon . . . until fully paid." Again, in applying the 6% legal interest per annum under the Civil Code, the
15
Court declared:
. . . , (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
16
Circular imposing the 12% interest per annum applies only to loans or forbearance 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.
17
The "second group", did not alter the pronounced rule on the application of the 6% or 12% interest per annum, 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.
18
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is breached, the
19
contravenor can be held liable for damages. The provisions under Title XVIII on "Damages" of the Civil Code govern in
20
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
21
due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the
22
time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from
23
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
24 25
may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated
26
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.
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.
G.R. No. 189871 August 13, 2013
DARIO NACAR, PETITIONER,
vs.
GALLERY FRAMES AND/OR FELIPE BORDEY, JR., RESPONDENTS.
DECISION
PERALTA, J.:
1
This is a petition for review on certiorari assailing the Decision dated September 23, 2008 of the Court of Appeals (CA) in CA-G.R.
2
SP No. 98591, and the Resolution dated October 9, 2009 denying petitioners motion for reconsideration.
The factual 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.
3
On October 15, 1998, the Labor Arbiter rendered a Decision 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
Date of Decision = Aug. 18, 1998
Length of Service = 8 yrs. & 1 month
P198.00 x 26 days x 8 months = 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 Rate per day = P62,986.00
P198.00 x 26 days x 6.4 mos. = P32,947.20
TOTAL = P95.933.76

xxxx
WHEREFORE, premises considered, judgment is hereby rendered finding respondents guilty of constructive dismissal and are
therefore, ordered:
To pay jointly and severally the complainant the amount of sixty-two thousand nine hundred eighty-six pesos and 56/100 (P62,986.56)
Pesos representing his separation pay;
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
All other claims are hereby dismissed for lack of merit.
4
SO ORDERED.
5
Respondents appealed to the NLRC, but it was dismissed for lack of merit in the Resolution dated February 29, 2000. Accordingly,
6
the NLRC sustained the decision of the Labor Arbiter. Respondents filed a motion for reconsideration, but it was denied.
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,
7
2001.
Respondents then sought relief before the Supreme Court, docketed as G.R. No. 151332. Finding no reversible error on the part of the
8
CA, this Court denied the petition in the Resolution dated April 17, 2002.

9
An Entry of Judgment was later issued certifying that the resolution became final and executory on May 27, 2002. The case was,
thereafter, referred back to the Labor Arbiter. A pre-execution conference was consequently scheduled, but respondents failed to
10
appear.
On November 5, 2002, petitioner filed a Motion for Correct Computation, praying that his backwages be computed from the date of
11
his dismissal on January 24, 1997 up to the finality of the Resolution of the Supreme Court on May 27, 2002. Upon recomputation,
12
the Computation and Examination Unit of the NLRC arrived at an updated amount in the sum of P471,320.31.
13
On December 2, 2002, a Writ of Execution 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 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
14 15 16
anymore. On January 13, 2003, the Labor Arbiter issued an Order denying the motion. Thus, an Alias Writ of Execution was
issued on January 14, 2003.
17
Respondents again appealed before the NLRC, which on June 30, 2003 issued a Resolution granting the appeal in favor of the
respondents and ordered the recomputation of the judgment award.
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
18
of Execution be issued to enforce the earlier recomputed judgment award in the sum of P471,320.31.
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.
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.
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.
Petitioner then filed a Manifestation and Motion praying for the re-computation of the monetary award to include the appropriate
19
interests.
20
On May 10, 2005, the Labor Arbiter issued an Order 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.
21 22
Petitioner then appealed before the NLRC, which appeal was denied by the NLRC in its Resolution dated September 27, 2006.
23
Petitioner filed a Motion for Reconsideration, but it was likewise denied in the Resolution dated January 31, 2007.
Aggrieved, petitioner then sought recourse before the CA, docketed as CA-G.R. SP No. 98591.
24
On September 23, 2008, the CA rendered a Decision 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.
25
Petitioner filed a Motion for Reconsideration, but it was denied in the Resolution 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
26
EXPRESSED IN THE BODY OF THE SAME DECISION.
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.
27
The instant case is similar to the case of Session Delights Ice Cream and Fast Foods v. Court of Appeals (Sixth Division), 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. 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
28
dismissal, computed as of the time of the labor arbiter's original decision.
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
29
dismissal declared by the Labor Arbiter in that decision. 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
30
of final judgments.
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
31
pay and backwages are to be computed up to that point.
32
Finally, anent the payment of legal interest. In the landmark case of Eastern Shipping Lines, Inc. v. Court of Appeals, the Court laid
down the guidelines regarding the manner of computing legal interest, to wit:
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
33
interim period being deemed to be by then an equivalent to a forbearance of credit.
Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its Resolution No. 796 dated May 16, 2013,
34 35
approved the amendment of Section 2 of Circular No. 905, Series of 1982 and, accordingly, issued Circular No. 799, Series of
2013, effective July 1, 2013, the pertinent portion of which reads:
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:
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.
36 37 38
Section 2. In view of the above, Subsection X305.1 of the Manual of Regulations for Banks and Sections 4305Q.1, 4305S.3 and
39
4303P.1 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
40
percent (12%) per annum - as reflected in the case of Eastern Shipping Lines 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 when applicable.
Corollarily, in the recent case of Advocates for Truth in Lending, Inc. and Eduardo B. Olaguer v. Bangko Sentral Monetary
41
Board, 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.1awp++i1
42
To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping Lines are accordingly modified to
embody BSP-MB Circular No. 799, as follows:
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.1wphi1
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:
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 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.
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 with this Decision.
SO ORDERED.

HERMOJINA ESTORES, G.R. No. 175139

Petitioner,
Present:

CORONA, C.J., Chairperson,

- versus - LEONARDO-DE CASTRO,
BERSAMIN,
DEL CASTILLO, and
VILLARAMA, JR., JJ.
SPOUSES ARTURO and
LAURA SUPANGAN, Promulgated:
Respondents. April 18, 2012
x-------------------------------------------------------------------x

DECISION

DEL CASTILLO, J.:

The only issue posed before us is the propriety of the imposition of interest and attorneys fees.

[1] [2]
Assailed in this Petition for Review filed under Rule 45 of the Rules of Court is the May 12, 2006 Decision of the Court of
Appeals (CA) in CA-G.R. CV No. 83123, the dispositive portion of which reads:

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

[3]
SO ORDERED.
[4]
Also assailed is the August 31, 2006 Resolution denying the motion for reconsideration.

Factual Antecedents

On October 3, 1993, petitioner Hermojina Estores and respondent-spouses Arturo and Laura Supangan entered into a Conditional
[5]
Deed of Sale whereby petitioner offered to sell, and respondent-spouses offered to buy, a parcel of land covered by Transfer
Certificate of Title No. TCT No. 98720 located at Naic, Cavite for the sum of P4.7 million. The parties likewise stipulated, among
others, to wit:

xxxx

1. Vendor will secure approved clearance from DAR requirements of which are (sic):
a) Letter request
b) Title
c) Tax Declaration
d) Affidavit of Aggregate Landholding Vendor/Vendee
e) Certification from the Provl. Assessors as to Landholdings of Vendor/Vendee
f) Affidavit of Non-Tenancy
g) Deed of Absolute Sale

xxxx

4. Vendee shall be informed as to the status of DAR clearance within 10 days upon signing of the documents.

xxxx

6. Regarding the house located within the perimeter of the subject [lot] owned by spouses [Magbago], said house
shall be moved outside the perimeter of this subject property to the 300 sq. m. area allocated for [it]. Vendor
hereby accepts the responsibility of seeing to it that such agreement is carried out before full payment of the
sale is made by vendee.

7. If and after the vendor has completed all necessary documents for registration of the title and the vendee fails to
complete payment as per agreement, a forfeiture fee of 25% or downpayment, shall be applied.However, if the
vendor fails to complete necessary documents within thirty days without any sufficient reason, or without
informing the vendee of its status, vendee has the right to demand return of full amount of down payment.

xxxx

9. As to the boundaries and partition of the lots (15,018 sq. m. and 300 sq. m.) Vendee shall be informed
immediately of its approval by the LRC.

10. The vendor assures the vendee of a peaceful transfer of ownership.

[6]
xxxx

After almost seven years from the time of the execution of the contract and notwithstanding payment of P3.5 million on the
part of respondent-spouses, petitioner still failed to comply with her obligation as expressly provided in paragraphs 4, 6, 7, 9 and 10 of
[7]
the contract. Hence, in a letter dated September 27, 2000, respondent-spouses demanded the return of the amount of P3.5 million
[8]
within 15 days from receipt of the letter. In reply, petitioner acknowledged receipt of the P3.5 million and promised to return the
same within 120 days. Respondent-spouses were amenable to the proposal provided an interest of 12% compounded annually shall be
[9]
imposed on the P3.5 million. When petitioner still failed to return the amount despite demand, respondent-spouses were constrained
[10]
to file a Complaint for sum of money before the Regional Trial Court (RTC) of Malabon against herein petitioner as well as Roberto
U. Arias (Arias) who allegedly acted as petitioners agent. The case was docketed as Civil Case No. 3201-MN and raffled off to Branch
170. In their complaint, respondent-spouses prayed that petitioner and Arias be ordered to:

1. Pay the principal amount of P3,500,000.00 plus interest of 12% compounded annually starting
October 1, 1993 or an estimated amount of P8,558,591.65;

2. Pay the following items of damages:

 a) Moral damages in the amount of P100,000.00;
b) Actual damages in the amount of P100,000.00;
c) Exemplary damages in the amount of P100,000.00;
d) [Attorneys] fee in the amount of P50,000.00 plus 20% of recoverable amount from the
[petitioner].
[11]
e) [C]ost of suit.

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

[15]
In its Pre-Trial Order dated June 29, 2001, the RTC noted that the parties agreed that the principal amount of 3.5 million
pesos should be returned to the [respondent-spouses] by the [petitioner] and the issue remaining [is] whether x x x [respondent-
[16]
spouses] are entitled to legal interest thereon, damages and attorneys fees.

Trial ensued thereafter. After the presentation of the respondent-spouses evidence, the trial court set the presentation of Arias
[17]
and petitioners evidence on September 3, 2003. However, despite several postponements, petitioner and Arias failed to appear hence
[18]
they were deemed to have waived the presentation of their evidence. Consequently, the case was deemed submitted for decision.

Ruling of the Regional Trial Court

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

The dispositive portion of the RTC Decision reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the [respondent-spouses] and
ordering the [petitioner and Roberto Arias] to jointly and severally:

1. Pay [respondent-spouses] the principal amount of Three Million Five Hundred Thousand pesos
(P3,500,000.00) with an interest of 6% compounded annually starting October 1, 1993 and attorneys fee in the
amount of Fifty Thousand pesos (P50,000.00) plus 20% of the recoverable amount from the defendants and cost of
the suit.

The Compulsory Counter Claim is hereby dismissed for lack of factual evidence.

[22]
SO ORDERED.

Ruling of the Court of Appeals

[23]
Aggrieved, petitioner and Arias filed their notice of appeal. The CA noted that the only issue submitted for its resolution is whether
it is proper to impose interest for an obligation that does not involve a loan or forbearance of money in the absence of stipulation of
[24]
the parties.

On May 12, 2006, the CA rendered the assailed Decision affirming the ruling of the RTC finding the imposition of 6%
[25]
interest proper. However, the same shall start to run only from September 27, 2000 when respondent-spouses formally demanded
the return of their money and not from October 1993 when the contract was executed as held by the RTC. The CA also modified the
RTCs ruling as regards the liability of Arias. It held that Arias could not be held solidarily liable with petitioner because he merely
acted as agent of the latter. Moreover, there was no showing that he expressly bound himself to be personally liable or that he
exceeded the limits of his authority. More importantly, there was even no showing that Arias was authorized to act as agent of
[26]
petitioner. Anent the award of attorneys fees, the CA found the award by the trial court (P50,000.00 plus 20% of the recoverable
[27] [28]
amount) excessive and thus reduced the same to P100,000.00.
The dispositive portion of the CA Decision reads:

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

[29]
SO ORDERED.

Petitioner moved for reconsideration which was denied in the August 31, 2006 Resolution of the CA.

Hence, this petition raising the sole issue of whether the imposition of interest and attorneys fees is proper.

Petitioners Arguments
Petitioner insists that she is not bound to pay interest on the P3.5 million because the Conditional Deed of Sale only provided for the
return of the downpayment in case of failure to comply with her obligations. Petitioner also argues that the award of attorneys fees in
favor of the respondent-spouses is unwarranted because it cannot be said that the latter won over the former since the CA even
sustained her contention that the imposition of 12% interest compounded annually is totally uncalled for.

Respondent-spouses Arguments

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

Our Ruling

The petition lacks merit.

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

contract.

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

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

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

The contract involved in this case is admittedly not a loan but a Conditional Deed of Sale. However, the contract provides
that the seller (petitioner) must return the payment made by the buyer (respondent-spouses) if the conditions are not fulfilled. There is
no question that they have in fact, not been fulfilled as the seller (petitioner) has admitted this. Notwithstanding demand by the buyer
(respondent-spouses), the seller (petitioner) has failed to return the money and

should be considered in default from the time that demand was made on September 27, 2000.

Even if the transaction involved a Conditional Deed of Sale, can the stipulation governing the return of the money be
considered as a forbearance of money which required payment of interest at the rate of 12%? We believe so.

[33]
In Crismina Garments, Inc. v. Court of Appeals, forbearance was defined as a contractual obligation of lender or creditor to
refrain during a given period of time, from requiring the borrower or debtor to repay a loan or debt then due and payable. This
definition describes a loan where a debtor is given a period within which to pay a loan or debt. In such case, forbearance of money,
goods or credits will have no distinct definition from a loan. We believe however, that the phrase forbearance of money, goods or
credits is meant to have a separate meaning from a loan, otherwise there would have been no need to add that phrase as a loan is
[34]
already sufficiently defined in the Civil Code. Forbearance of money, goods or credits should therefore refer to arrangements other
than loan agreements, where a person acquiesces to the temporary use of his money, goods or credits pending happening of certain
events or fulfillment of certain conditions. In this case, the respondent-spouses parted with their money even before the conditions
were fulfilled. They have therefore allowed or granted forbearance to the seller (petitioner) to use their money pending fulfillment of
the conditions. They were deprived of the use of their money for the period pending fulfillment of the conditions and when those
conditions were breached, they are entitled not only to the return of the principal amount paid, but also to compensation for the use of
their money. And the compensation for the use of their money, absent any stipulation, should be the same rate of legal interest
applicable to a loan since the use or deprivation of funds is similar to a loan.

Petitioners unwarranted withholding of the money which rightfully pertains to respondent-spouses amounts to forbearance of
money which can be considered as an involuntary loan.Thus, the applicable rate of interest is 12% per annum. In Eastern Shipping
[35] [36]
Lines, Inc. v. Court of Appeals, cited in Crismina Garments, Inc. v. Court of Appeals, the Court suggested the following
guidelines:

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 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
[37]
an equivalent to a forbearance of credit.

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

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

The award of attorneys fees is warranted.

Under Article 2208 of the Civil Code, attorneys fees may be recovered:

xxxx

(2) When the defendants act or omission has compelled the plaintiff to litigate with third persons or to incur
expenses to protect his interest;

xxxx

(11) In any other case where the court deems it just and equitable that attorneys fees and expenses of litigation
should be recovered.

In all cases, the attorneys fees and expenses of litigation must be reasonable.
Considering the circumstances of the instant case, we find respondent-spouses entitled to recover attorneys fees. There is no
doubt that they were forced to litigate to protect their interest, i.e., to recover their money. However, we find the amount of P50,000.00
more appropriate in line with the policy enunciated in Article 2208 of the Civil Code that the award of attorneys fees must always be
reasonable.

WHEREFORE, the Petition for Review is DENIED. The May 12, 2006 Decision of the Court of Appeals in CA-G.R. CV
No. 83123 is AFFIRMED with MODIFICATIONS that the rate of interest shall be twelve percent (12%) per annum, computed from
September 27, 2000 until fully satisfied. The award of attorneys fees is further reduced to P50,000.00.

SO ORDERED.
UNITED COCONUT PLANTERS BANK, G.R. No. 159912
Petitioner,
Present:

YNARES-SANTIAGO, J.,
Chairperson,
- versus - AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
NACHURA, and
REYES, JJ.

SPOUSES SAMUEL and ODETTE BELUSO,

Respondents. Promulgated:

August 17, 2007

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

CHICO-NAZARIO, J.:

This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, which seeks to annul the Court of Appeals
 This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, which seeks to annul the Court of Appeals
[1] [2]
Decision dated 21 January 2003 and its Resolution dated 9 September 2003 in CA-G.R. CV No. 67318. The assailed Court of
[3] [4]
Appeals Decision and Resolution affirmed in turn the Decision dated 23 March 2000 and Order dated 8 May 2000 of the Regional
Trial Court (RTC), Branch 65 of Makati City, in Civil Case No. 99-314, declaring void the interest rate provided in the promissory
notes executed by the respondents Spouses Samuel and Odette Beluso (spouses Beluso) in favor of petitioner United Coconut Planters
Bank (UCPB).

The procedural and factual antecedents of this case are as follows:

On 16 April 1996, UCPB granted the spouses Beluso a Promissory Notes Line under a Credit Agreement whereby the latter
could avail from the former credit of up to a maximum amount of P1.2 Million pesos for a term ending on 30 April 1997. The spouses
Beluso constituted, other than their promissory notes, a real estate mortgage over parcels of land in Roxas City, covered by Transfer
Certificates of Title No. T-31539 and T-27828, as additional security for the obligation. The Credit Agreement was subsequently
amended to increase the amount of the Promissory Notes Line to a maximum of P2.35 Million pesos and to extend the term thereof
to 28 February 1998.

The spouses Beluso availed themselves of the credit line under the following Promissory Notes:

PN # Date of PN Maturity Date Amount Secured

8314-96-00083-3 29 April 1996 27 August 1996 P 700,000
8314-96-00085-0 2 May 1996 30 August 1996 P 500,000
8314-96-000292-2 20 November 1996 20 March 1997 P 800,000

The three promissory notes were renewed several times. On 30 April 1997, the payment of the principal and interest of the
latter two promissory notes were debited from the spouses Belusos account with UCPB; yet, a consolidated loan for P1.3 Million was
again released to the spouses Beluso under one promissory note with a due date of 28 February 1998.

To completely avail themselves of the P2.35 Million credit line extended to them by UCPB, the spouses Beluso executed two
more promissory notes for a total of P350,000.00:

PN # Date of PN Maturity Date Amount Secured

97-00363-1 11 December 1997 28 February 1998 P 200,000
98-00002-4 2 January 1998 28 February 1998 P 150,000

However, the spouses Beluso alleged that the amounts covered by these last two promissory notes were never released or credited to
their account and, thus, claimed that the principal indebtedness was only P2 Million.

In any case, UCPB applied interest rates on the different promissory notes ranging from 18% to 34%. From 1996 to February
1998 the spouses Beluso were able to pay the total sum of P763,692.03.

From 28 February 1998 to 10 June 1998, UCPB continued to charge interest and penalty on the obligations of the spouses
Beluso, as follows:

PN # Amount Secured Interest Penalty Total

97-00363-1 P 200,000 31% 36% P 225,313.24
97-00366-6 P 700,000 30.17% 32.786% P 795,294.72
(7 days) (102 days)
97-00368-2 P 1,300,000 28% 30.41% (102 P 1,462,124.54
(2 days) days)
98-00002-4 P 150,000 33% 36% P 170,034.71
(102 days)

The spouses Beluso, however, failed to make any payment of the foregoing amounts.

On 2 September 1998, UCPB demanded that the spouses Beluso pay their total obligation of P2,932,543.00 plus 25%
attorneys fees, but the spouses Beluso failed to comply therewith. On 28 December 1998, UCPB foreclosed the properties mortgaged
by the spouses Beluso to secure their credit line, which, by that time, already ballooned to P3,784,603.00.

On 9 February 1999, the spouses Beluso filed a Petition for Annulment, Accounting and Damages against UCPB with the
RTC of Makati City.

On 23 March 2000, the RTC ruled in favor of the spouses Beluso, disposing of the case as follows:

PREMISES CONSIDERED, judgment is hereby rendered declaring the interest rate used by [UCPB] void
and the foreclosure and Sheriffs Certificate of Sale void. [UCPB] is hereby ordered to return to [the spouses Beluso]
the properties subject of the foreclosure; to pay [the spouses Beluso] the amount of P50,000.00 by way of attorneys
fees; and to pay the costs of suit.[The spouses Beluso] are hereby ordered to pay [UCPB] the sum of P1,560,308.00.
[5]

[6]
On 8 May 2000, the RTC denied UCPBs Motion for Reconsideration, prompting UCPB to appeal the RTC Decision with
the Court of Appeals. The Court of Appeals affirmed the RTC Decision, to wit:

WHEREFORE, premises considered, the decision dated March 23, 2000 of the Regional Trial Court,
Branch 65, Makati City in Civil Case No. 99-314 is hereby AFFIRMED subject to the modification that defendant-
 Branch 65, Makati City in Civil Case No. 99-314 is hereby AFFIRMED subject to the modification that defendant-
[7]
appellant UCPB is not liable for attorneys fees or the costs of suit.

On 9 September 2003, the Court of Appeals denied UCPBs Motion for Reconsideration for lack of merit. UCPB thus filed
the present petition, submitting the following issues for our resolution:

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND REVERSIBLE
ERROR WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT WHICH DECLARED VOID THE
PROVISION ON INTEREST RATE AGREED UPON BETWEEN PETITIONER AND RESPONDENTS

II

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND REVERSIBLE
ERROR WHEN IT AFFIRMED THE COMPUTATION BY THE TRIAL COURT OF RESPONDENTS
INDEBTEDNESS AND ORDERED RESPONDENTS TO PAY PETITIONER THE AMOUNT OF ONLY ONE
MILLION FIVE HUNDRED SIXTY THOUSAND THREE HUNDRED EIGHT PESOS (P1,560,308.00)

III

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND REVERSIBLE
ERROR WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT WHICH ANNULLED THE
FORECLOSURE BY PETITIONER OF THE SUBJECT PROPERTIES DUE TO AN ALLEGED INCORRECT
COMPUTATION OF RESPONDENTS INDEBTEDNESS

IV

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND REVERSIBLE
ERROR WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT WHICH FOUND PETITIONER
LIABLE FOR VIOLATION OF THE TRUTH IN LENDING ACT

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND REVERSIBLE
ERROR WHEN IT FAILED TO ORDER THE DISMISSAL OF THE CASE BECAUSE THE RESPONDENTS
[8]
ARE GUILTY OF FORUM SHOPPING

Validity of the Interest Rates

The Court of Appeals held that the imposition of interest in the following provision found in the promissory notes of the
spouses Beluso is void, as the interest rates and the bases therefor were determined solely by petitioner UCPB:

FOR VALUE RECEIVED, I, and/or We, on or before due date, SPS. SAMUEL AND ODETTE BELUSO
(BORROWER), jointly and severally promise to pay to UNITED COCONUT PLANTERS BANK (LENDER) or
order at UCPB Bldg., Makati Avenue, Makati City, Philippines, the sum of ______________ PESOS, (P_____),
Philippine Currency, with interest thereon at the rate indicative of DBD retail rate or as determined by the Branch
[9]
Head.

UCPB asserts that this is a reversible error, and claims that while the interest rate was not numerically quantified in the face
of the promissory notes, it was nonetheless categorically fixed, at the time of execution thereof, at the rate indicative of the DBD retail
rate. UCPB contends that said provision must be read with another stipulation in the promissory notes subjecting to review the interest
rate as fixed:
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
[10]
LENDER after due consideration of all dealings with the BORROWER.

In this regard, UCPB avers that these are valid reference rates akin to a prevailing rate or prime rate allowed by this Court
[11]
in Polotan v. Court of Appeals. Furthermore, UCPB argues that even if the proviso as determined by the branch head is considered
void, such a declaration would not ipso facto render the connecting clause indicative of DBD retail rate void in view of the
separability clause of the Credit Agreement, which reads:

Section 9.08 Separability Clause. If any one or more of the provisions contained in this AGREEMENT, or
documents executed in connection herewith shall be declared invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions hereof shall not in any way be affected or impaired.
[12]

According to UCPB, the imposition of the questioned interest rates did not infringe on the principle of mutuality of contracts,
because the spouses Beluso had the liberty to choose whether or not to renew their credit line at the new interest rates pegged by
[13]
petitioner. UCPB also claims that assuming there was any defect in the mutuality of the contract at the time of its inception, such
defect was cured by the subsequent conduct of the spouses Beluso in availing themselves of the credit line from April 1996 to
February 1998 without airing any protest with respect to the interest rates imposed by UCPB. According to UCPB, therefore, the
[14]
spouses Beluso are in estoppel.
 We agree with the Court of Appeals, and find no merit in the contentions of UCPB.

Article 1308 of the Civil Code provides:

Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the
will of one of them.

[15]
We applied this provision in Philippine National Bank v. Court of Appeals, where we held:

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 party's (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.

The provision stating that the interest shall be at the rate indicative of DBD retail rate or as determined by the Branch Head is
indeed dependent solely on the will of petitioner UCPB. Under such provision, petitioner UCPB has two choices on what the interest
rate shall be: (1) a rate indicative of the DBD retail rate; or (2) a rate as determined by the Branch Head. As UCPB is given this
choice, the rate should be categorically determinable in both choices. If either of these two choices presents an opportunity for UCPB
to fix the rate at will, the bank can easily choose such an option, thus making the entire interest rate provision violative of the principle
of mutuality of contracts.

Not just one, but rather both, of these choices are dependent solely on the will of UCPB. Clearly, a rate as determined by the
Branch Head gives the latter unfettered discretion on what the rate may be. The Branch Head may choose any rate he or she
desires. As regards the rate indicative of the DBD retail rate, the same cannot be considered as valid for being akin to a prevailing rate
or prime rate allowed by this Court in Polotan. The interest rate in Polotan reads:

The Cardholder agrees to pay interest per annum at 3% plus the prime rate of Security Bank and Trust Company. x x
[16]
x.

In this provision in Polotan, there is a fixed margin over the reference rate: 3%. Thus, the parties can easily determine the interest rate
by applying simple arithmetic. On the other hand, the provision in the case at bar does not specify any margin above or below the
DBD retail rate. UCPB can peg the interest at any percentage above or below the DBD retail rate, again giving it unfettered discretion
in determining the interest rate.

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 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
[17]
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 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.

UCPB likewise failed to convince us that the spouses Beluso were in estoppel.

Estoppel cannot be predicated on an illegal act. As between the parties to a contract, validity cannot be given to it by estoppel
[18]
if it is prohibited by law or is against public policy.

The interest rate provisions in the case at bar are illegal not only because of the provisions of the Civil Code on mutuality of
contracts, but also, as shall be discussed later, because they violate the Truth in Lending Act. Not disclosing the true finance charges in
connection with the extensions of credit is, furthermore, a form of deception which we cannot countenance. It is against the policy of
the State as stated in the Truth in Lending Act:

Sec. 2. Declaration of Policy. It is hereby declared to be the policy of the State to protect its citizens from a
lack of awareness of the true cost of credit to the user by assuring a full disclosure of such cost with a view of
[19]
preventing the uninformed use of credit to the detriment of the national economy.

Moreover, while the spouses Beluso indeed agreed to renew the credit line, the offending provisions are found in the

promissory notes themselves, not in the credit line. In fixing the interest rates in the promissory notes to cover the renewed credit line,
UCPB still reserved to itself the same two options (1) a rate indicative of the DBD retail rate; or (2) a rate as determined by the Branch
Head.

Error in Computation
UCPB asserts that while both the RTC and the Court of Appeals voided the interest rates imposed by UCPB, both failed to
include in their computation of the outstanding obligation of the spouses Beluso the legal rate of interest of 12% per
annum. Furthermore, the penalty charges were also deleted in the decisions of the RTC and the Court of Appeals. Section 2.04, Article
II on Interest and other Bank Charges of the subject Credit Agreement, provides:

Section 2.04 Penalty Charges. In addition to the interest provided for in Section 2.01 of this ARTICLE, any
principal obligation of the CLIENT hereunder which is not paid when due shall be subject to a penalty charge of one
percent (1%) of the amount of such obligation per month computed from due date until the obligation is paid in
full. If the bank accelerates teh (sic) payment of availments hereunder pursuant to ARTICLE VIII hereof, the penalty
charge shall be used on the total principal amount outstanding and unpaid computed from the date of acceleration
[20]
until the obligation is paid in full.

Paragraph 4 of the promissory notes also states:

In case of non-payment of this Promissory Note (Note) at maturity, I/We, jointly and severally, agree to pay
an additional sum equivalent to twenty-five percent (25%) of the total due on the Note as attorneys fee, aside from
the expenses and costs of collection whether actually incurred or not, and a penalty charge of one percent (1%) per
[21]
month on the total amount due and unpaid from date of default until fully paid.

Petitioner further claims that it is likewise entitled to attorneys fees, pursuant to Section 9.06 of the Credit Agreement, thus:

If the BANK shall require the services of counsel for the enforcement of its rights under this AGREEMENT,
the Note(s), the collaterals and other related documents, the BANK shall be entitled to recover attorneys fees
equivalent to not less than twenty-five percent (25%) of the total amounts due and outstanding exclusive of costs and
[22]
other expenses.

Another alleged computational error pointed out by UCPB is the negation of the Compounding Interest agreed upon by the
parties under Section 2.02 of the Credit Agreement:

Section 2.02 Compounding Interest. Interest not paid when due shall form part of the principal and shall be subject
[23]
to the same interest rate as herein stipulated.

and paragraph 3 of the subject promissory notes:

Interest not paid when due shall be added to, and become part of the principal and shall likewise bear interest at the
[24]
same rate.

UCPB lastly avers that the application of the spouses Belusos payments in the disputed computation does not reflect the
parties agreement. The RTC deducted the payment made by the spouses Beluso amounting to P763,693.00 from the principal
of P2,350,000.00. This was allegedly inconsistent with the Credit Agreement, as well as with the agreement of the parties as to the
facts of the case. In paragraph 7 of the spouses Belusos Manifestation and Motion on Proposed Stipulation of Facts and Issues vis--
vis UCPBs Manifestation, the parties agreed that the amount of P763,693.00 was applied to the interest and not to the principal, in
accord with Section 3.03, Article II of the Credit Agreement on Order of the Application of Payments, which provides:

Section 3.03 Application of Payment. Payments made by the CLIENT shall be applied in accordance with
the following order of preference:

1. Accounts receivable and other out-of-pocket expenses

2. Front-end Fee, Origination Fee, Attorneys Fee and other expenses of collection;
3. Penalty charges;
4. Past due interest;
5. Principal amortization/Payment in arrears;
6. Advance interest;
7. Outstanding balance; and
[25]
8. All other obligations of CLIENT to the BANK, if any.

Thus, according to UCPB, the interest charges, penalty charges, and attorneys fees had been erroneously excluded by the
RTC and the Court of Appeals from the computation of the total amount due and demandable from spouses Beluso.

The spouses Belusos defense as to all these issues is that the demand made by UCPB is for a considerably bigger amount
and, therefore, the demand should be considered void. There being no valid demand, according to the spouses Beluso, there would be
no default, and therefore the interests and penalties would not commence to run. As it was likewise improper to foreclose the
mortgaged properties or file a case against the spouses Beluso, attorneys fees were not warranted.

[26]
We agree with UCPB on this score. Default commences upon judicial or extrajudicial demand. The excess amount in such
a demand does not nullify the demand itself, which is valid with respect to the proper amount. A contrary ruling would put commercial
transactions in disarray, as validity of demands would be dependent on the exactness of the computations thereof, which are too often
contested.

There being a valid demand on the part of UCPB, albeit excessive, the spouses Beluso are considered in default with respect
to the proper amount and, therefore, the interests and the penalties began to run at that point.
 As regards the award of 12% legal interest in favor of petitioner, the RTC actually recognized that said legal interest should
[27]
be imposed, thus: There being no valid stipulation as to interest, the legal rate of interest shall be charged. It seems that the RTC
inadvertently overlooked its non-inclusion in its computation.

The spouses Beluso had even originally asked for the RTC to impose this legal rate of interest in both the body and the prayer
of its petition with the RTC:

12. Since the provision on the fixing of the rate of interest by the sole will of the respondent Bank is null and
void, only the legal rate of interest which is 12% per annum can be legally charged and imposed by the bank, which
would amount to only about P599,000.00 since 1996 up to August 31, 1998.

xxxx

WHEREFORE, in view of the foregoing, petiitoners pray for judgment or order:

xxxx

2. By way of example for the public good against the Banks taking unfair advantage of the weaker party to
their contract, declaring the legal rate of 12% per annum, as the imposable rate of interest up to February 28,
[28]
1999 on the loan of 2.350 million.

All these show that the spouses Beluso had acknowledged before the RTC their obligation to pay a 12% legal interest on their
loans. When the RTC failed to include the 12% legal interest in its computation, however, the spouses Beluso merely defended in the
appellate courts this non-inclusion, as the same was beneficial to them. We see, however, sufficient basis to impose a 12% legal
interest in favor of petitioner in the case at bar, as what we have voided is merely the stipulated rate of interest and not the stipulation
that the loan shall earn interest.

We must likewise uphold the contract stipulation providing the compounding of interest. The provisions in the Credit
Agreement and in the promissory notes providing for the compounding of interest were neither nullified by the RTC or the Court of
Appeals, nor assailed by the spouses Beluso in their petition with the RTC. The compounding of interests has furthermore been
[29]
declared by this Court to be legal. We have held in Tan v. Court of Appeals, 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.

As regards the imposition of penalties, however, although we are likewise upholding the imposition thereof in the contract,
we find the rate iniquitous. Like in the case of grossly excessive interests, the penalty stipulated in the contract may also be reduced by
[30]
the courts if it is iniquitous or unconscionable.

We find the penalty imposed by UCPB, ranging from 30.41% to 36%, to be iniquitous considering the fact that this penalty is
already over and above the compounded interest likewise imposed in the contract. If a 36% interest in itself has been declared
[31]
unconscionable by this Court, what more a 30.41% to 36% penalty, over and above the payment of compounded interest? UCPB
itself must have realized this, as it gave us a sample computation of the spouses Belusos obligation if both the interest and the penalty
charge are reduced to 12%.

As regards the attorneys fees, the spouses Beluso can actually be liable therefor even if there had been no demand. Filing a
[32]
case in court is the judicial demand referred to in Article 1169 of the Civil Code, which would put the obligor in delay.

The RTC, however, also held UCPB liable for attorneys fees in this case, as the spouses Beluso were forced to litigate the
issue on the illegality of the interest rate provision of the promissory notes. The award of attorneys fees, it must be recalled, falls under
[33]
the sound discretion of the court. Since both parties were forced to litigate to protect their respective rights, and both are entitled to
the award of attorneys fees from the other, practical reasons dictate that we set off or compensate both parties liabilities for attorneys
fees. Therefore, instead of awarding attorneys fees in favor of petitioner, we shall merely affirm the deletion of the award of attorneys
fees to the spouses Beluso.

In sum, we hold that spouses Beluso should still be held liable for a compounded legal interest of 12% per annum and a
penalty charge of 12% per annum. We also hold that, instead of awarding attorneys fees in favor of petitioner, we shall merely affirm
the deletion of the award of attorneys fees to the spouses Beluso.

Annulment of the Foreclosure Sale

Properties of spouses Beluso had been foreclosed, titles to which had already been consolidated on 19 February 2001 and 20
March 2001 in the name of UCPB, as the spouses Beluso failed to exercise their right of redemption which expired on 25 March
2000. The RTC, however, annulled the foreclosure of mortgage based on an alleged incorrect computation of the spouses Belusos
indebtedness.

UCPB alleges that none of the grounds for the annulment of a foreclosure sale are present in the case at bar. Furthermore, the
annulment of the foreclosure proceedings and the certificates of sale were mooted by the subsequent issuance of new certificates of
title in the name of said bank. UCPB claims that the spouses Belusos action for annulment of foreclosure constitutes a collateral attack
on its certificates of title, an act proscribed by Section 48 of Presidential Decree No. 1529, otherwise known as the Property
Registration Decree, which provides:

Section 48. Certificate not subject to collateral attack. A certificate of title shall not be subject to collateral
attack. It cannot be altered, modified or cancelled except in a direct proceeding in accordance with law.
 The spouses Beluso retort that since they had the right to refuse payment of an excessive demand on their account, they
cannot be said to be in default for refusing to pay the same. Consequently, according to the spouses Beluso, the enforcement of such
illegal and overcharged demand through foreclosure of mortgage should be voided.

We agree with UCPB and affirm the validity of the foreclosure proceedings. Since we already found that a valid demand was
made by UCPB upon the spouses Beluso, despite being excessive, the spouses Beluso are considered in default with respect to the
proper amount of their obligation to UCPB and, thus, the property they mortgaged to secure such amounts may be
foreclosed. Consequently, proceeds of the foreclosure sale should be applied to the extent of the amounts to which UCPB is rightfully
entitled.

As argued by UCPB, none of the grounds for the annulment of a foreclosure sale are present in this case. The grounds for the
proper annulment of the foreclosure sale are the following: (1) that there was fraud, collusion, accident, mutual mistake, breach of trust
or misconduct by the purchaser; (2) that the sale had not been fairly and regularly conducted; or (3) that the price was inadequate and
[34]
the inadequacy was so great as to shock the conscience of the court.

Liability for Violation of Truth in Lending Act

The RTC, affirmed by the Court of Appeals, imposed a fine of P26,000.00 for UCPBs alleged violation of Republic Act No.
3765, otherwise known as the Truth in Lending Act.

UCPB challenges this imposition, on the argument that Section 6(a) of the Truth in Lending Act which mandates the filing of
an action to recover such penalty must be made under the following circumstances:

Section 6. (a) Any creditor who in connection with any credit transaction fails to disclose to any person any
information in violation of this Act or any regulation issued thereunder shall be liable to such person in the amount
of P100 or in an amount equal to twice the finance charge required by such creditor in connection with such
transaction, whichever is greater, except that such liability shall not exceed P2,000 on any credit transaction. Action
to recover such penalty may be brought by such person within one year from the date of the occurrence of the
violation, in any court of competent jurisdiction. x x x (Emphasis ours.)

According to UCPB, the Court of Appeals even stated that [a]dmittedly the original complaint did not explicitly allege a
violation of the Truth in Lending Act and no action to formally admit the amended petition [which expressly alleges violation of the
[35]
Truth in Lending Act] was made either by [respondents] spouses Beluso and the lower court. x x x.

UCPB further claims that the action to recover the penalty for the violation of the Truth in Lending Act had been barred by
the one-year prescriptive period provided for in the Act. UCPB asserts that per the records of the case, the latest of the subject
promissory notes had been executed on 2 January 1998, but the original petition of the spouses Beluso was filed before the RTC on 9
February 1999, which was after the expiration of the period to file the same on 2 January 1999.

On the matter of allegation of the violation of the Truth in Lending Act, the Court of Appeals ruled:

Admittedly the original complaint did not explicitly allege a violation of the Truth in Lending Act and no action to
formally admit the amended petition was made either by [respondents] spouses Beluso and the lower court. In such
transactions, the debtor and the lending institutions do not deal on an equal footing and this law was intended to
protect the public from hidden or undisclosed charges on their loan obligations, requiring a full disclosure thereof by
the lender. We find that its infringement may be inferred or implied from allegations that when [respondents]
spouses Beluso executed the promissory notes, the interest rate chargeable thereon were left blank. Thus, [petitioner]
UCPB failed to discharge its duty to disclose in full to [respondents] Spouses Beluso the charges applicable on their
[36]
loans.

We agree with the Court of Appeals. The allegations in the complaint, much more than the title thereof, are controlling. Other
than that stated by the Court of Appeals, we find that the allegation of violation of the Truth in Lending Act can also be inferred from
the same allegation in the complaint we discussed earlier:

b.) In unilaterally imposing an increased interest rates (sic) respondent bank has relied on the provision of
their promissory note granting respondent bank the power to unilaterally fix the interest rates, which rate was not
determined in the promissory note but was left solely to the will of the Branch Head of the respondent Bank, x x x.
[37]

The allegation that the promissory notes grant UCPB the power to unilaterally fix the interest rates certainly also means that
the promissory notes do not contain a clear statement in writing of (6) the finance charge expressed in terms of pesos and centavos;
and (7) the percentage that the finance charge bears to the amount to be financed expressed as a simple annual rate on the outstanding
[38]
unpaid balance of the obligation. Furthermore, the spouses Belusos prayer for such other reliefs just and equitable in the premises
should be deemed to include the civil penalty provided for in Section 6(a) of the Truth in Lending Act.

UCPBs contention that this action to recover the penalty for the violation of the Truth in Lending Act has already prescribed
is likewise without merit. The penalty for the violation of the act is P100 or an amount equal to twice the finance charge required by
such creditor in connection with such transaction, whichever is greater, except that such liability shall not exceed P2,000.00 on any
[39]
credit transaction. As this penalty depends on the finance charge required of the borrower, the borrowers cause of action would
only accrue when such finance charge is required. In the case at bar, the date of the demand for payment of the finance charge is 2
September 1998, while the foreclosure was made on 28 December 1998. The filing of the case on 9 February 1999 is therefore within
the one-year prescriptive period.
 UCPB argues that a violation of the Truth in Lending Act, being a criminal offense, cannot be inferred nor implied from the
[40]
allegations made in the complaint. Pertinent provisions of the Act read:

Sec. 6. (a) Any creditor who in connection with any credit transaction fails to disclose to any person any
information in violation of this Act or any regulation issued thereunder shall be liable to such person in the amount
of P100 or in an amount equal to twice the finance charge required by such creditor in connection with such
transaction, whichever is the greater, except that such liability shall not exceed P2,000 on any credit
transaction. Action to recover such penalty may be brought by such person within one year from the date of the
occurrence of the violation, in any court of competent jurisdiction. In any action under this subsection in which any
person is entitled to a recovery, the creditor shall be liable for reasonable attorneys fees and court costs as
determined by the court.

xxxx

(c) Any person who willfully violates any provision of this Act or any regulation issued thereunder
shall be fined by not less than P1,000 or more than P5,000 or imprisonment for not less than 6 months, nor more than
one year or both.

As can be gleaned from Section 6(a) and (c) of the Truth in Lending Act, the violation of the said Act gives rise to both criminal and
civil liabilities. Section 6(c) considers a criminal offense the willful violation of the Act, imposing the penalty therefor of fine,
imprisonment or both. Section 6(a), on the other hand, clearly provides for a civil cause of action for failure to disclose any
information of the required information to any person in violation of the Act. The penalty therefor is an amount of P100 or in an
amount equal to twice the finance charge required by the creditor in connection with such transaction, whichever is greater, except that
the liability shall not exceed P2,000.00 on any credit transaction. The action to recover such penalty may be instituted by the
aggrieved private person separately and independently from the criminal case for the same offense.

In the case at bar, therefore, the civil action to recover the penalty under Section 6(a) of the Truth in Lending Act had been
jointly instituted with (1) the action to declare the interests in the promissory notes void, and (2) the action to declare the foreclosure
void. This joinder is allowed under Rule 2, Section 5 of the Rules of Court, which provides:

SEC. 5. Joinder of causes of action.A party may in one pleading assert, in the alternative or otherwise, as
many causes of action as he may have against an opposing party, subject to the following conditions:
(a) The party joining the causes of action shall comply with the rules on joinder of parties;
(b) The joinder shall not include special civil actions or actions governed by special rules;
(c) Where the causes of action are between the same parties but pertain to different venues or jurisdictions,
the joinder may be allowed in the Regional Trial Court provided one of the causes of action falls within the
jurisdiction of said court and the venue lies therein; and
(d) Where the claims in all the causes of action are principally for recovery of money, the aggregate amount
claimed shall be the test of jurisdiction.

In attacking the RTCs disposition on the violation of the Truth in Lending Act since the same was not alleged in the
complaint, UCPB is actually asserting a violation of due process. Indeed, due process mandates that a defendant should be sufficiently
apprised of the matters he or she would be defending himself or herself against. However, in the 1 July 1999 pre-trial brief filed by the
spouses Beluso before the RTC, the claim for civil sanctions for violation of the Truth in Lending Act was expressly alleged, thus:

Moreover, since from the start, respondent bank violated the Truth in Lending Act in not informing the borrower in
writing before the execution of the Promissory Notes of the interest rate expressed as a percentage of the total loan,
the respondent bank instead is liable to pay petitioners double the amount the bank is charging petitioners by way of
[41]
sanction for its violation.

In the same pre-trial brief, the spouses Beluso also expressly raised the following issue:

b.) Does the expression indicative rate of DBD retail (sic) comply with the Truth in Lending Act provision
[42]
to express the interest rate as a simple annual percentage of the loan?

These assertions are so clear and unequivocal that any attempt of UCPB to feign ignorance of the assertion of this issue in
this case as to prevent it from putting up a defense thereto is plainly hogwash.

Petitioner further posits that it is the Metropolitan Trial Court which has jurisdiction to try and adjudicate the alleged
violation of the Truth in Lending Act, considering that the present action allegedly involved a single credit transaction as there was
only one Promissory Note Line.

We disagree. We have already ruled that the action to recover the penalty under Section 6(a) of the Truth in Lending Act had
been jointly instituted with (1) the action to declare the interests in the promissory notes void, and (2) the action to declare the
foreclosure void. There had been no question that the above actions belong to the jurisdiction of the RTC. Subsection (c) of the above-
quoted Section 5 of the Rules of Court on Joinder of Causes of Action provides:
(c) Where the causes of action are between the same parties but pertain to different venues or jurisdictions,
the joinder may be allowed in the Regional Trial Court provided one of the causes of action falls within the
jurisdiction of said court and the venue lies therein.

Furthermore, opening a credit line does not create a credit transaction of loan or mutuum, since the former is merely a
preparatory contract to the contract of loan or mutuum. Under such credit line, the bank is merely obliged, for the considerations
specified therefor, to lend to the other party amounts not exceeding the limit provided. The credit transaction thus occurred not when

the credit line was opened, but rather when the credit line was availed of. In the case at bar, the violation of the Truth in Lending Act
allegedly occurred not when the parties executed the Credit Agreement, where no interest rate was mentioned, but when the parties
executed the promissory notes, where the allegedly offending interest rate was stipulated.

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:

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:

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

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

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

(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;

(5) the total amount to be financed;

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

(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.

Forum Shopping

UCPB had earlier moved to dismiss the petition (originally Case No. 99-314 in RTC, Makati City) on the ground that the
spouses Beluso instituted another case (Civil Case No. V-7227) before the RTC of Roxas City, involving the same parties and issues.
UCPB claims that while Civil Case No. V-7227 initially appears to be a different action, as it prayed for the issuance of a temporary
restraining order and/or injunction to stop foreclosure of spouses Belusos properties, it poses issues which are similar to those of the
[43]
present case. To prove its point, UCPB cited the spouses Belusos Amended Petition in Civil Case No. V-7227, which contains
similar allegations as those in the present case.The RTC of Makati denied UCPBs Motion to Dismiss Case No. 99-314 for lack of
merit. Petitioner UCPB raised the same issue with the Court of Appeals, and is raising the same issue with us now.

The spouses Beluso claim that the issue in Civil Case No. V-7227 before the RTC of Roxas City, a Petition for Injunction
Against Foreclosure, is the propriety of the foreclosure before the true account of spouses Beluso is determined. On the other hand, the
issue in Case No. 99-314 before the RTC of Makati City is the validity of the interest rate provision. The spouses Beluso claim that
Civil Case No. V-7227 has become moot because, before the RTC of Roxas City could act on the restraining order, UCPB proceeded
with the foreclosure and auction sale. As the act sought to be restrained by Civil Case No. V-7227 has already been accomplished, the
spouses Beluso had to file a different action, that of Annulment of the Foreclosure Sale, Case No. 99-314 with the RTC, Makati City.
Even if we assume for the sake of argument, however, that only one cause of action is involved in the two civil actions,
namely, the violation of the right of the spouses Beluso not to have their property foreclosed for an amount they do not owe, the Rules
of Court nevertheless allows the filing of the second action. Civil Case No. V-7227 was dismissed by the RTC of Roxas City before
the filing of Case No. 99-314 with the RTC of Makati City, since the venue of litigation as provided for in the Credit Agreement is
in Makati City.

Rule 16, Section 5 bars the refiling of an action previously dismissed only in the following instances:

SEC. 5. Effect of dismissal.Subject to the right of appeal, an order granting a motion to dismiss based on
paragraphs (f), (h) and (i) of section 1 hereof shall bar the refiling of the same action or claim. (n)

Improper venue as a ground for the dismissal of an action is found in paragraph (c) of Section 1, not in paragraphs (f), (h)
and (i):

SECTION 1. Grounds.Within the time for but before filing the answer to the complaint or pleading
asserting a claim, a motion to dismiss may be made on any of the following grounds:
 (a) That the court has no jurisdiction over the person of the defending party;

(b) That the court has no jurisdiction over the subject matter of the claim;

(c) That venue is improperly laid;

(d) That the plaintiff has no legal capacity to sue;

(e) That there is another action pending between the same parties for the same cause;

(f) That the cause of action is barred by a prior judgment or by the statute of limitations;

(g) That the pleading asserting the claim states no cause of action;

(h) That the claim or demand set forth in the plaintiffs pleading has been paid, waived, abandoned, or
otherwise extinguished;

(i) That the claim on which the action is founded is unenforceable under the provisions of the statute of
frauds; and

[44]
(j) That a condition precedent for filing the claim has not been complied with. (Emphases supplied.)

When an action is dismissed on the motion of the other party, it is only when the ground for the dismissal of an action is
found in paragraphs (f), (h) and (i) that the action cannot be refiled. As regards all the other grounds, the complainant is allowed to file
same action, but should take care that, this time, it is filed with the proper court or after the accomplishment of the erstwhile absent
condition precedent, as the case may be.

UCPB, however, brings to the attention of this Court a Motion for Reconsideration filed by the spouses Beluso on 15 January
1999 with the RTC of Roxas City, which Motion had not yet been ruled upon when the spouses Beluso filed Civil Case No. 99-314
with the RTC of Makati. Hence, there were allegedly two pending actions between the same parties on the same issue at the time of
the filing of Civil Case No. 99-314 on 9 February 1999 with the RTC of Makati. This will still not change our findings. It is indeed the
general rule that in cases where there are two pending actions between the same parties on the same issue, it should be the later case
that should be dismissed. However, this rule is not absolute. According to this Court in Allied Banking Corporation v. Court of
[45]
Appeals :

In these cases, it is evident that the first action was filed in anticipation of the filing of the later action and
the purpose is to preempt the later suit or provide a basis for seeking the dismissal of the second action.

Even if this is not the purpose for the filing of the first action, it may nevertheless be dismissed if the
later action is the more appropriate vehicle for the ventilation of the issues between the parties. Thus, in Ramos
v. Peralta, it was held:

[T]he rule on litis pendentia does not require that the later case should yield to the earlier
case. What is required merely is that there be another pending action, not a prior pending action.
Considering the broader scope of inquiry involved in Civil Case No. 4102 and the location of the
property involved, no error was committed by the lower court in deferring to the Bataan court's
jurisdiction.

Given, therefore, the pendency of two actions, the following are the relevant considerations in determining
which action should be dismissed: (1) the date of filing, with preference generally given to the first action filed to be
retained; (2) whether the action sought to be dismissed was filed merely to preempt the later action or to anticipate
its filing and lay the basis for its dismissal; and (3) whether the action is the appropriate vehicle for litigating the
issues between the parties.

In the case at bar, Civil Case No. V-7227 before the RTC of Roxas City was an action for injunction against a foreclosure
sale that has already been held, while Civil Case No. 99-314 before the RTC of Makati City includes an action for the annulment of
said foreclosure, an action certainly more proper in view of the execution of the foreclosure sale. The former case was improperly
filed in Roxas City, while the latter was filed in Makati City, the proper venue of the action as mandated by the Credit Agreement. It is
evident, therefore, that Civil Case No. 99-314 is the more appropriate vehicle for litigating the issues between the parties, as compared
to Civil Case No. V-7227. Thus, we rule that the RTC of Makati City was not in error in not dismissing Civil Case No. 99-314.

WHEREFORE, the Decision of the Court of Appeals is hereby AFFIRMED with the following MODIFICATIONS:

1. In addition to the sum of P2,350,000.00 as determined by the courts a quo, respondent spouses Samuel and
Odette Beluso are also liable for the following amounts:
[46]
a. Penalty of 12% per annum on the amount due from the date of demand; and
[47]
b. Compounded legal interest of 12% per annum on the amount due from date of demand;
2. The following amounts shall be deducted from the liability of the spouses Samuel and Odette Beluso:
a. Payments made by the spouses in the amount of P763,692.00. These payments shall be applied to the date of
actual payment of the following in the order that they are listed, to wit:
i. penalty charges due and demandable as of the time of payment;
ii. interest due and demandable as of the time of payment;
iii. principal amortization/payment in arrears as of the time of payment;
iv. outstanding balance.
b. Penalty under Republic Act No. 3765 in the amount of P26,000.00. This amount shall be deducted from the
liability of the spouses Samuel and Odette Beluso on 9 February 1999 to the following in the order that they
 are listed, to wit:
i. penalty charges due and demandable as of time of payment;
ii. interest due and demandable as of the time of payment;
iii. principal amortization/payment in arrears as of the time of payment;
iv. outstanding balance.
3. The foreclosure of mortgage is hereby declared VALID. Consequently, the amounts which the Regional Trial
Court and the Court of Appeals ordered respondents to pay, as modified in this Decision, shall be deducted from the
proceeds of the foreclosure sale.

SO ORDERED.