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Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-19190

November 29, 1922

THE PEOPLE OF THE PHILIPPINE ISLANDS, plaintiff-appellee,


vs.
VENANCIO CONCEPCION, defendant-appellant.
Recaredo Ma. Calvo for appellant.
Attorney-General Villa-Real for appellee.

MALCOLM, J.:
By telegrams and a letter of confirmation to the manager of the Aparri branch of
the Philippine National Bank, Venancio Concepcion, President of the Philippine National Bank,
between April 10, 1919, and May 7, 1919, authorized an extension of credit in favor of "Puno y
Concepcion, S. en C." in the amount of P300,000. This special authorization was essential in view
of the memorandum order of President Concepcion dated May 17, 1918, limiting the discretional
power of the local manager at Aparri, Cagayan, to grant loans and discount negotiable documents
to P5,000, which, in certain cases, could be increased to P10,000. Pursuant to this authorization,
credit aggregating P300,000, was granted the firm of "Puno y Concepcion, S. en C.," the only
security required consisting of six demand notes. The notes, together with the interest, were taken
up and paid by July 17, 1919.
"Puno y Concepcion, S. en C." was a copartnership capitalized at P100,000. Anacleto Concepcion
contributed P5,000; Clara Vda. de Concepcion, P5,000; Miguel S. Concepcion, P20,000;
Clemente Puno, P20,000; and RosarioSan Agustin, "casada con Gral. Venancio Concepcion,"
P50,000. Member Miguel S. Concepcion was the administrator of the company.
On the facts recounted, Venancio Concepcion, as President of the Philippine National Bank and
as member of the board of directors of this bank, was charged in the Court of First Instance of
Cagayan with a violation of section 35 of Act No. 2747. He was found guilty by the Honorable
Enrique V. Filamor, Judge of First Instance, and was sentenced to imprisonment for one year and
six months, to pay a fine of P3,000, with subsidiary imprisonment in case of insolvency, and the
costs.
Section 35 of Act No. 2747, effective on February 20, 1918, just mentioned, to which reference
must hereafter repeatedly be made, reads as follows: "The National Bank shall not, directly or
indirectly, grant loans to any of the members of the board of directors of the bank nor to agents of
the branch banks." Section 49 of the same Act provides: "Any person who shall violate any of the
provisions of this Act shall be punished by a fine not to exceed ten thousand pesos, or by
imprisonment not to exceed five years, or by both such fine and imprisonment." These two
sections were in effect in 1919 when the alleged unlawful acts took place, but were repealed by
Act No. 2938, approved on January 30, 1921.

Counsel for the defense assign ten errors as having been committed by the trial court. These
errors they have argued adroitly and exhaustively in their printed brief, and again in oral argument.
Attorney-General Villa-Real, in an exceptionally accurate and comprehensive brief, answers the
proposition of appellant one by one.
The question presented are reduced to their simplest elements in the opinion which follows:
I. Was the granting of a credit of P300,000 to the copartnership "Puno y Concepcion, S. en C." by
Venancio Concepcion, President of the Philippine National Bank, a "loan" within the meaning of
section 35 of Act No. 2747?
Counsel argue that the documents of record do not prove that authority to make a loan was given,
but only show the concession of a credit. In this statement of fact, counsel is correct, for the
exhibits in question speak of a "credito" (credit) and not of a " prestamo" (loan).
The "credit" of an individual means his ability to borrow MONEY by virtue of the confidence or
trust reposed by a lender that he will pay what he may promise. (Donnell vs. Jones [1848], 13 Ala.,
490; Bouvier's Law Dictionary.) A "loan" means the delivery by one party and the receipt by the
other party of a given sum of MONEY , upon an agreement, express or implied, to repay the sum
loaned, with or without interest. (Payne vs. Gardiner [1864], 29 N. Y., 146, 167.) The concession of
a "credit" necessarily involves the granting of "loans" up to the limit of the amount fixed in the
"credit,"
II. Was the granting of a credit of P300,000 to the copartnership "Puno y Concepcion, S. en C.,"
by Venancio Concepcion, President of the Philippine National Bank, a "loan" or a "discount"?
Counsel argue that while section 35 of Act No. 2747 prohibits the granting of a "loan," it does not
prohibit what is commonly known as a "discount."
In a letter dated August 7, 1916, H. Parker Willis, then President of the National Bank, inquired of
the Insular Auditor whether section 37 of Act No. 2612 was intended to apply to discounts
as WELL as to loans. The ruling of the Acting Insular Auditor, dated August 11, 1916, was to the
effect that said section referred to loans alone, and placed no restriction upon discount
transactions. It becomes material, therefore, to discover the distinction between a "loan" and a
"discount," and to ascertain if the instant transaction comes under the first or the latter
denomination.
Discounts are favored by bankers because of their liquid nature, growing, as they do, out of an
actual, live, transaction. But in its last analysis, to discount a paper is only a mode of
loaning MONEY , with, however, these distinctions: (1) In a discount, interest is deducted in
advance, while in a loan, interest is taken at the expiration of a credit; (2) a discount is always on
double-name paper; a loan is generally on single-name paper.
Conceding, without deciding, that, as ruled by the Insular Auditor, the law covers loans and not
discounts, yet the conclusion is inevitable that the demand notes signed by the firm "Puno y
Concepcion, S. en C." were not discount paper but were mere evidences of indebtedness,
because (1) interest was not deducted from the face of the notes, but was paid when the notes fell
due; and (2) they were single-name and not double-name paper.

The facts of the instant case having relation to this phase of the argument are not essentially
different from the facts in the Binalbagan Estate case. Just as there it was declared that the
operations constituted a loan and not a discount, so should we here lay down the same ruling.
III. Was the granting of a credit of P300,000 to the copartnership, "Puno y Concepcion, S. en C."
by Venancio Concepcion, President of the Philippine National Bank, an "indirect loan" within the
meaning of section 35 of Act No. 2747?
Counsel argue that a loan to the partnership "Puno y Concepcion, S. en C." was not an "indirect
loan." In this connection, it should be recalled that the wife of the defendant held one-half of the
capital of this partnership.
In the interpretation and construction of statutes, the primary rule is to ascertain and give effect to
the intention of the Legislature. In this instance, the purpose of the Legislature is plainly to erect a
wall of safety against temptation for a director of the bank. The prohibition against indirect loans is
a recognition of the familiar maxim that no man may serve two masters that where personal
interest clashes with fidelity to duty the latter almost always suffers. If, therefore, it is shown that
the husband is financially interested in the success or failure of his wife's business venture, a loan
to partnership of which the wife of a director is a member, falls within the prohibition.
Various provisions of the Civil serve to establish the familiar relationship called a conjugal
partnership. (Articles 1315, 1393, 1401, 1407, 1408, and 1412 can be specially noted.) A loan,
therefore, to a partnership of which the wife of a director of a bank is a member, is an indirect loan
to such director.
That it was the intention of the Legislature to prohibit exactly such an occurrence is shown by the
acknowledged fact that in this instance the defendant was tempted to mingle his personal and
family affairs with his official duties, and to permit the loan P300,000 to a partnership of no
established reputation and without asking for collateral security.
In the case of Lester and Wife vs. Howard Bank ([1870], 33 Md., 558; 3 Am. Rep., 211), the
Supreme Court of Maryland said:
What then was the purpose of the law when it declared that no director or officer should
borrow of the bank, and "if any director," etc., "shall be convicted," etc., "of directly or
indirectly violating this section he shall be punished by fine and imprisonment?" We say to
protect the stockholders, depositors and creditors of the bank, against the temptation to
which the directors and officers might be exposed, and the power which as such they must
necessarily possess in the control and management of the bank, and the legislature
unwilling to rely upon the implied understanding that in assuming this relation they would
not acquire any interest hostile or adverse to the most exact and faithful discharge of duty,
declared in express terms that they should not borrow, etc., of the bank.
In the case of People vs. Knapp ([1912], 206 N. Y., 373), relied upon in the Binalbagan Estate
decision, it was said:
We are of opinion the statute forbade the loan to his copartnership firm as WELL as to
himself directly. The loan was made indirectly to him through his firm.
IV. Could Venancio Concepcion, President of the Philippine National Bank, be convicted of a
violation of section 35 of Act No. 2747 in relation with section 49 of the same Act, when these

portions of Act No. 2747 were repealed by Act No. 2938, prior to the finding of the information and
the rendition of the judgment?
As noted along toward the beginning of this opinion, section 49 of Act No. 2747, in relation to
section 35 of the same Act, provides a punishment for any person who shall violate any of the
provisions of the Act. It is contended, however, by the appellant, that the repeal of these sections
of Act No. 2747 by Act No. 2938 has served to take away the basis for criminal prosecution.
This same question has been previously submitted and has received an answer adverse to such
contention in the cases of United Stated vs. Cuna ([1908], 12 Phil., 241); People vs.
Concepcion ([1922], 43 Phil., 653); and Ong Chang Wing and Kwong Fok vs. United States
([1910], 218 U. S., 272; 40 Phil., 1046). In other words, it has been the holding, and it must again
be the holding, that where an Act of the Legislature which penalizes an offense, such repeals a
former Act which penalized the same offense, such repeal does not have the effect of thereafter
depriving the courts of jurisdiction to try, convict, and sentenced offenders charged with violations
of the old law.
V. Was the granting of a credit of P300,000 to the copartnership "Puno y Concepcion, S. en C." by
Venancio Concepcion, President of the Philippine National Bank, in violation of section 35 of Act
No. 2747, penalized by this law?
Counsel argue that since the prohibition contained in section 35 of Act No. 2747 is on the bank,
and since section 49 of said Act provides a punishment not on the bank when it violates any
provisions of the law, but on a personviolating any provisions of the same, and imposing
imprisonment as a part of the penalty, the prohibition contained in said section 35 is without penal
sanction.lawph!l.net
The answer is that when the corporation itself is forbidden to do an act, the prohibition extends to
the board of directors, and to each director separately and individually.
(People vs. Concepcion, supra.)
VI. Does the alleged good faith of Venancio Concepcion, President of the Philippine National
Bank, in extending the credit of P300,000 to the copartnership "Puno y Concepcion, S. en C."
constitute a legal defense?
Counsel argue that if defendant committed the acts of which he was convicted, it was because he
was misled by rulings coming from the Insular Auditor. It is furthermore stated that since the loans
made to the copartnership "Puno y Concepcion, S. en C." have been paid, no loss has been
suffered by the Philippine National Bank.
Neither argument, even if conceded to be true, is conclusive. Under the statute which the
defendant has violated, criminal intent is not necessarily material. The doing of the inhibited act,
inhibited on account of public policy and public interest, constitutes the crime. And, in this
instance, as previously demonstrated, the acts of the President of the Philippine National Bank do
not fall within the purview of the rulings of the Insular Auditor, even conceding that such rulings
have controlling effect.
Morse, in his work, Banks and Banking, section 125, says:

It is fraud for directors to secure by means of their trust, and advantage not common to the
other stockholders. The law will not allow private profit from a trust, and will not listen to any
proof of honest intent.
JUDGMENT
On a review of the evidence of record, with reference to the decision of the trial court, and the
errors assigned by the appellant, and with reference to previous decisions of this court on the
same subject, we are irresistibly led to the conclusion that no reversible error was committed in
the trial of this case, and that the defendant has been proved guilty beyond a reasonable doubt of
the crime charged in the information. The penalty imposed by the trial judge falls within the limits
of the punitive provisions of the law.
Judgment is affirmed, with the costs of this instance against the appellant. So ordered.

PEOPLE vs. CONCEPCION, 44 Phil. 126FACTS:


Venancio Concepcion, President of the Philippine National Bank and a member of theBoard thereof,
authorized an extension of credit in favor of "Puno y Concepcion, S. en C. to themanager of the Aparri
branch of the Philippine National Bank. "Puno y Concepcion, S. en C." was a co-partnership
where Concepcion is a partner. Subsequently, Concepcion was charged andfound guilty in the Court of
First Instance of Cagayan with violation of section 35 of Act
No.2 7 4 7 . S e c t i o n 3 5 o f A c t N o . 2 7 4 7 p r o v i d e s t h a t t h e N a t i o n a l B a n k s h a l l
n o t , d i r e c t l y o r indirectly, grant loans to any of the members of the board of directors of the bank nor
to agentsof the branch banks. Counsel for the defense argue that the documents of record do
not provethat authority to make a loan was given, but only show the concession of a credit. They
averredthat the granting of a credit to the co-partnership "Puno y Concepcion, S. en C." by
VenancioConcepcion, President of the Philippine National Bank, is not a "loan" within the
meaning of section 35 of Act No. 2747.
ISSUE:
Whether or not the granting of a credit of P300,000 to the co-partnership "Puno
y Concepcion, S. en C." by Venancio Concepcion, President of the Philippine National Bank,
a"loan" within the meaning of section 35 of Act No. 2747.
HELD:
The Supreme Court ruled in the affirmative. The "credit" of an individual means his ability to
borrow MONEY by virtue of the confidence or trust reposed by a lender that he will paywhat he may
promise. A "loan" means the delivery by one party and the receipt by the other party of a given
sum of MONEY , upon an agreement, express or implied, to repay the sum loaned,with or without interest.
The concession of a "credit" necessarily involves the granting of "loans"up to the limit of the amount fixed
in the "credit,"

Republic of the Philippines


SUPREME COURT
Manila
THIRD DIVISION
PEOPLE OF THE PHILIPPINES,
Plaintiff-Appellee,

G.R. No. 178202


Present:

- versus -

NORMAN SITCO and RAYMUNDO BAGTAS


(deceased),
Accused-Appellants.

CORONA, J., Chairperson,


VELASCO, JR.,
PERALTA,
BERSAMIN,* and
MENDOZA, JJ.
Promulgated:

May 14, 2010


x-----------------------------------------------------------------------------------------x
DECISION
VELASCO, JR., J.:

This is an appeal from the October 19, 2006 Decision of the Court of Appeals (CA) in CA-G.R. CR-H.C. No. 00038
entitledPeople of the Philippines v. Norman Sitco y De Jesus and Raymundo Bagtas y Caparas, which affirmed the Decision of
the Regional Trial Court (RTC), Branch 72 in Malabon, in Criminal Case Nos. 19456-MN to 19459-MN for violation of Sections
15 and 16 of Republic Act No. (RA) 6425 or The Dangerous Drugs Act of 1972. The affirmed RTC decision adjudged accusedappellants Raymundo Bagtas and Norman Sitco guilty in Crim. Case No. 19456-MN for drug pushing and sentenced them
toreclusion perpetua. For illegal possession of drugs, Bagtas was sentenced to two months and one day of arresto mayor, as
minimum, to one year and one day of prision correccional, as maximum, in Crim. Case No. 19458-MN, and reclusion
perpetua in Crim. Case No. 19459-MN. While the RTC convicted Sitco in Crim. Case No. 19457-MN, the CA would later
overturn his conviction in this case.
The Facts
In Crim. Case No. 19456-MN, Sitco and Bagtas were charged with drug pushing in an information reading:
That on or about the 11th day of May 1998, in Navotas, Metro Manila, and within the jurisdiction of this Honorable Court,
the above-named accused, being private persons and without authority of law, conspiring[,] confederating and mutually helping
with one another, did then and there willfully, unlawfully and feloniously sell and deliver, in consideration of the sum of
P2,000.00+, most of which were boodle or fake money to a poseur buyer[,] two (2) heat-sealed transparent plastic bags containing
white crystalline substance with net weight of 108.40 grams and 105.84 grams respectively, which substance when subjected to
chemistry examination gave positive result for Methamphetamine Hydrochloride, otherwise known as Shabu, a regulated
[drug].[1]

The other informations for illegal possession of drugs that were separately filed against either Sitco or Bagtas read as
follows:
Crim. Case No. 19457-MN against Sitco (illegal possession)
That on or about the 11th day of May 1998, in Navotas, Metro Manila, and within the jurisdiction of this Honorable Court,
the above-named accused, being [a] private person and without authority of law, did then and there willfully, unlawfully and
feloniously have in [his] possession, custody and control One (1) heat-sealed transparent plastic bag, containing white crystalline
substance with net weight of 20.29 grams, which substance when subjected to chemistry examination gave positive result for
Methamphetamine Hydrochloride otherwise known as Shabu, a regulated drug. [2]
Crim. Case No. 19458-MN against Bagtas (illegal possession)
That on or about the 11th day of May 1998, in Navotas, Metro Manila, and within the jurisdiction of this Honorable Court,
the above-named accused, being [a] private person and without authority of law, did then and there willfully, unlawfully and
feloniously have in his possession, custody and control One (1) heat-sealed transparent plastic bag, containing white crystalline
substance with net weight of 1.31 grams, which substance when subjected to chemistry examination gave positive result for
Methamphetamine Hydrochloride otherwise known as Shabu, a regulated drug.
Crim. Case No. 19459-MN against Bagtas (illegal possession)
That on or about the 11th day of May 1998, in Navotas, Metro Manila, and within the jurisdiction of this Honorable Court,
the above-named accused, being [a] private person and without authority of law, did then and there willfully, unlawfully and
feloniously have in his possession, custody and control One (1) brick of suspected marijuana with net weight of 887.01 grams,
which is a regulated drug.[3]
During the arraignment, both accused-appellants entered a not guilty plea to all the charges. A joint trial then ensued.
Version of the Prosecution
From the testimony of the prosecution witness, Police Officer 3 (PO3) Alex Buan, the following version is gathered:
Acting on a tip from an informant, Senior Inspector Gatlet of the Navotas Police Station ordered the conduct of a buybust operation against accused-appellants, who were allegedly selling illegal drugs on Espina St. in Navotas, Metro Manila. The
team consisted of Buan, as poseur-buyer, a confidential informant, and several police operatives as back-up. Marked money,
consisting of four (4) PhP 500 bills for a total of PhP 2,000 and boodles or fake money amounting to PhP 196,000, was prepared.
On May 11, 1998 at 11:15 in the evening, the team proceeded to a house in the target place where Bagtas answered the
knocking of the door. Thereupon, the confidential informant introduced him to Buan who, then and there, expressed his desire to
buy shabu. Bagtas replied that he did not have enough supply of shabu, but manifested that marijuana was available. Buan,
however, insisted on buying only shabu.[4]
Bagtas informed Buan that someone would be delivering more shabu. After waiting for a few minutes, a man, who turned
out to be Sitco, arrived. After the usual introductions, Sitco told Buan to follow him to his motorcycle. He asked for the payment
and took out a bag with two plastic bags of shabu inside. Buan examined the contents, then identified himself as a police officer,
and arrested Sitco. The back-up officers joined the scene and frisked Sitco and Bagtas. Sitco was found to have in his possession a
loaded caliber .38 paltik revolver, the buy-bust money, and more shabu. Bagtas had in his possession marijuana and shabu.[5]

The seized items were sent to Forensic Chemist Grace N. Eustaquio for laboratory examination and were found positive
forshabu and marijuana per Physical Science No. D-411-98.
During trial, Buan identified accused-appellants, the four (4) PhP 500-bill marked money used, the shabu confiscated from
both accused-appellants, and the marijuana seized from Bagtas. Buan explained during his testimony that the boodle money
placed in-between the genuine marked money the buy-bust team used was unavailable as it had been confiscated by a policeman
named Barlin when he himself (Buan) was arrested for violating Sec. 27 of the Dangerous Drugs Act.[6]
Version of the Defense
The evidence for the defense consists of the testimonies of Sitco and Bagtas.
Bagtas branded as fabricated the accusations against him and Sitco. According to him, on the day of the alleged buy-bust
operation, he was busy cleaning his motorcycle when, all of a sudden, policemen, led by Buan, entered his house. Buan came
armed with an armalite rifle and a .45 caliber pistol, but did not show any document to justifying the police officers entry into his
(Bagtas) home. The intruders pointed guns at Bagtas, his common-law wife, his nephew, a certain Boy Macapagal, a certain
Malou, a helper in his store, a girl applying for work as a househelper, and Sitco, who was visiting Buan at the time. They were
ordered to lie face down as Bagtas house was being searched. He was told that he was a suspect in the killing of a Navotas
policeman named Ira. After the search was done, no illegal drugs were found. Yet the police officers took his camera, tape
recorder, and the cash from his stores sales. The pieces of jewelry they were wearing, including his ring and necklace, were also
confiscated. Afterwards, all of them were handcuffed and asked to board the police officers vehicles. Two motorcycles belonging
to Sitco and Bagtas were also seized.[7]
At the police headquarters, Buan and the other police officers demanded payment for the release of Bagtas group. After
some haggling, the group relented and paid some amount for their freedom. Sitco and Bagtas, however, were detained. Instead,
they were handcuffed to a steel post after being blindfolded by the police. [8] Bagtas overheard the police officers dividing the
jewelry among them. He was then beaten along with Sitco to extort money for their release. The police officers eventually told
them to pay a reduced amount, which they still could not afford to give. Complaints were thus filed against them, with the police
officers manufacturing the evidence used by the prosecution. Bagtas ended his testimony with a declaration that he was filing
complaints against the police officers once he was released from detention.[9]
Sitco corroborated Bagtas testimony, adding that Buan had already been dismissed from the service. [10] He testified that the
police officers frisked him and confiscated his wallet, watch, ring, and motorbike. He was told that they were suspects in the
killing of a Navotas policeman. At the headquarters, he claimed being tortured. Eventually, he fell asleep. When he woke up, he
saw Buan with two others sniffing shabu. He declined Buans invitation to join the session. The police officer likewise instructed
him to produce PhP 100,000 for his release. Sitco informed Buan that he could not afford the amount. The next day, May 12,
Buan took some shabu from the cabinet and told Sitco that the charge against him would push through if he did not pay. Sitco was
also warned about the difficulty of posting bail once charged. Since he could not raise the money, the police officers brought him
to the prosecutors office for inquest where manufactured evidence allegedly taken from him and Bagtas were shown to the fiscal.
[11]

On cross-examination, he admitted to having been previously arrested for possession of shabu and violation of Presidential

Decree No. 1866.[12]

Ruling of the Trial Court


The RTC gave full credence to the testimony of Buan and, mainly on that basis, convicted Bagtas and Sitco of the crimes
charged.
The dispositive portion of the RTC Decision[13] reads:
WHEREFORE, premises considered, judgment is hereby rendered finding the two accused, namely Norman Sitco y de
Jesus and Raymundo Bagtas y Caparas guilty beyond reasonable doubt of the offenses charged against them in these cases. In the
absence of any mitigating or aggravating circumstances and applying the provisions of the Indeterminate Sentence Law (where
applicable), the two accused are hereby sentenced as follows:
1) In Crim. Case No. 19456-MN: for drug pushing under Section 15, Article III, RA 6425, as amended by RA 7659, involving
more than 200 grams of shabu, for each of them to suffer imprisonment of reclusion perpetua and for each of them to pay a fine
in the amount of Php500,000.00;
2) In Crim. Case No. 19457-MN against Sitco only for illegal possession of 20.29 grams of shabu under Section 16, Article III,
RA 6425, as amended by RA 7659, to a prison term ranging from SIX (6) MONTHS of arresto mayor as minimum, to SIX (6)
years of prision correccional, as maximum;
3) In Crim. Case No. 19458-MN against Bagtas only for illegal possession of 1.31 grams of shabu under Section 16, Article III,
RA 6425, as amended by RA 7659, to a prison term ranging from TWO (2) MONTHS and ONE (1) DAY of arresto mayor, as
minimum, to ONE (1) YEAR and ONE (1) DAY of prision correccional, as maximum;
4) In Crim. Case No. 19459-MN against Bagtas only for illegal possession of 887.01 grams of marijuana under Section 8, Article
II, RA 6425, as amended by RA 7659, said accused is sentenced to suffer the prison term of reclusion perpetua and to pay a fine
of P500,000.00.

Since the death penalty was imposed, the case came to this Court on automatic review. In accordance with People v.
Mateo,[14] however, we ordered the transfer of the case to the CA for intermediate review.
Pending CA review of the case, or on May 5, 2006, Bagtas died at the National Bilibid Prison Hospital.
Ruling of the Appellate Court
Before the CA, Sitco argued against the credibility of Buan as witness, the latter having been involved in drug-related
activities and was in fact dismissed from the service in March 1999. He also claimed that the alleged drug sale involving him was
improbable as no one would sell drugs to a stranger.
On October 19, 2006, the CA acquitted Sitco of illegal possession of drugs but affirmed his conviction of the other
offenses charged. It reasoned that Buans testimony was focused only on the two (2) plastic bags of shabu which were the object
of the buy-bust; no attempt was made to make a distinction between the said bags and the additional bag of shabu supposedly
recovered from Sitco when he was frisked. The quantum of proof necessary to sustain a conviction for illegal possession
of shabu was, thus, not met. However, as to the other charges, the CA ruled that the factual findings of the trial court on Buans
credibility must be respected and upheld.
The fallo of the CAs Decision[15] reads:
WHEREFORE, premises considered, the assailed Joint Decision dated August 26, 1999 of the RTC of Malabon, Metro
Manila,
Branch
72
in
Criminal
Case
Nos.
19456-MN
to
19459
is
hereby AFFIRMED with
modification ACQUITTING accused-appellant Norman Sitco y De Jesus in Criminal Case No. 19457-MN for violation of Sec.
16, Art. II of RA 6425, as amended by RA 7659, on the basis of reasonable doubt. The rest of the Joint Decision stand[s].

SO ORDERED.
On November 14, 2006, Sitco filed his Notice of Appeal of the appellate courts Decision.
On September 24, 2007, this Court required the parties to submit supplemental briefs if they so desired. The People,
represented by the Office of the Solicitor General, manifested that it was submitting the case for decision based on the records
previously submitted. In his Supplemental Brief, Sitco submits that PO3 Buan is not a credible witness given his arrest on drug
charges and dismissal from the service.
The Issue
WHETHER THE COURT OF APPEALS ERRED IN AFFIRMING ACCUSED-APPELLANTS CONVICTION ON THE
BASIS OF AN UNRELIABLE WITNESS.

The Ruling of the Court


We find sufficient compelling reasons to acquit the surviving accused-appellant Sitco.
Credibility of Buan as Witness
We start with the credibility of the lone prosecution witness, Buan, whose testimony Sitco has assailed at every turn. Sitco
insists and with reason that Buan cannot competently make a plausible account of something of which he himself was equally
culpable.
Sitcos assault on the credibility of Buan is well-taken. As it were, Buans involvement as a police officer in illegal drug
activities makes him a polluted source and renders his testimony against Sitco and Bagtas suspect, at best. It is like a pot calling a
kettle black.
To be believed, testimonial evidence should come only from the mouth of a credible witness. [16] Given his service record,
Buan can hardly qualify as a witness worthy, under the limited confines of this case, of full faith and credit. And lest it be
overlooked, Buan is a rogue cop, having, per his own admission, been arrested for indulging in a pot session, eventually charged
and dismissed from the police service. [17] It would appear, thus, that Buans had been a user. His arrest for joining a pot session
only confirms this undesirable habit.
The Court, to be sure, has taken stock of the well-settled rule that prosecutions involving illegal drugs depend largely on the
credibility of police buy-bust operators, and that the trial courts finding on the police-witness credibility deserves respect.
Juxtaposed with this rule, however, is the postulate that when confronted with circumstances that would support a reasonable
doubt in favor of the accused, then acquittal or the least liability is in order. Buans involvement in drugs and his alleged attempt
to extort money from appellant Sitco in exchange for his freedom has put his credibility under a heavy cloud.
The imperative of proof beyond reasonable doubt has a vital role in our criminal justice system, the accused, during a
criminal prosecution, having a stake interest of immense importance, both because of the possibility that he may lose his freedom
if convicted and because of the certainty that his conviction will leave a permanent stain on his reputation and name. [18] As
articulated in Rabanal v. People:

Law and jurisprudence demand proof beyond reasonable doubt before any person may be deprived of his life, liberty, or
even property. Enshrined in the Bill of Rights is the right of the petitioner to be presumed innocent until the contrary is proved,
and to overcome the presumption, nothing but proof beyond reasonable doubt must be established by the prosecution. The
constitutional presumption of innocence requires courts to take a more than casual consideration of every
circumstances or doubt proving the innocence of petitioner.[19] (Emphasis added.)
Chain of Custody
But over and above the credibility of the prosecutions lone witness as ground for acquittal looms the matter of the custodial
chain, a term which has gained traction in the prosecution of drug-related cases.
In prosecutions involving narcotics and other illegal substances, the substance itself constitutes part of the corpus delicti of the offense
and the fact of its existence is vital to sustain a judgment of conviction beyond reasonable doubt. [20] Of chief concern in drug cases then is
the requirement that the prosecution prove that what was seized by police officers is the same item presented in court. This
identification, as we have held in the past, must be established with moral certainty [21] and is a function of the rule on chain of
custody. The chain of custody requirement is essential to ensure that doubts regarding the identity of the evidence are removed
through the monitoring and tracking of the movements of the seized drugs from the accused, to the police, to the forensic chemist,
and finally to the court.[22]
The procedure to be followed in adhering to the chain of custody requirements is found in Sec. 21 of RA 9165:
Section 21. Custody and Disposition of Confiscated, Seized, and/or Surrendered Dangerous Drugs, Plant Sources of Dangerous
Drugs, Controlled Precursors and Essential Chemicals, Instruments/Paraphernalia and/or Laboratory Equipment. The PDEA
shall take charge and have custody of all dangerous drugs, plant sources of dangerous drugs, controlled precursors and essential
chemicals, as well as instruments/paraphernalia and/or laboratory equipment so confiscated, seized and/or surrendered, for proper
disposition in the following manner:
(1) The apprehending team having initial custody and control of the drugs shall, immediately after seizure and confiscation,
physically inventory and photograph the same in the presence of the accused or the person/s from whom such items were
confiscated and/or seized, or his/her representative or counsel, a representative from the media and the Department of Justice
(DOJ), and any elected public official who shall be required to sign the copies of the inventory and be given a copy thereof;
(2) Within twenty-four (24) hours upon confiscation/seizure of dangerous drugs, plant sources of dangerous drugs, controlled
precursors and essential chemicals, as well as instruments/paraphernalia and/or laboratory equipment, the same shall be submitted
to the PDEA Forensic Laboratory for a qualitative and quantitative examination.
The trial court summarized the chain of custody over the evidence as follows:
x x x [Sitco] asked for the money and then took from a covered part of the motorcycle a plastic bag inside [of] which
were two plastic bags with shabu which Sitco gave to Buan. Buan examined the same and upon being satisfied that it was really
shabu, identified himself as a policeman and arrested Sitco. Buans companions then approached and Sitco and Bagtas were
frisked. Found from Sitco was a caliber .38 paltik revolver with six bullets, the buy-bust money and additional shabu. The
marijuana earlier shown to Buan by Bagtas was also recovered along with the additional shabu found in the motorcycle of Bagtas
which was parked nearby.
The buy-bust shabu, the marijuana and the confiscated additional shabu from Sitco and Bagtas were sent to a Forensic
Chemist for laboratory examination (Exhibit A) and were found to be positive for being shabu and marijuana, respectively, by
examining PNP Forensic Chemist Grace N. Eustaquio under an initial laboratory report (Exhibit B) and a final report (Physical
Science No. D-411-98) marked as Exhibit C.[23]
From this narration and an examination of the records, a number of disturbing questions arise as to the identification and
handling of the prohibited drugs seized. It is unclear at the outset whether Buan himself made the inventory of the seized items.
There is no detail as to who brought the specimens to the forensic laboratory and who received it prior to the examination by the

forensic chemist. It is also uncertain who took custody of the specimens before they were presented as evidence in court. There
are, thus, glaring gaps or missing links in the chain of custody of evidence, raising doubt as to the identity of the seized items and
necessarily their evidentiary value. This broken chain of custody is especially significant given that what are involved are fungible
items that may be easily altered or tampered with.[24]
It cannot be over-emphasized that pertinent provisions of RA 9165 require that the seized illegal items shall, after their
inventory, be photographed in the presence of the drug dealer, representatives of media, the Department of Justice, or any elected
public official who participated in the operation. The records do not yield an indication that this particular requirement has been
complied with.
The Court reiterates that, on account of the built-in danger of abuse that it carries, a buy-bust operation is governed by
specific procedures on the seizure and custody of drugs, separately from the general law procedures geared to ensure that the
rights of persons under criminal investigation and of the accused facing a criminal charge are safeguarded.[25] To reiterate, the
chain of custody requirement is necessary in order to remove doubts as to the identity of the evidence, by monitoring and tracking
custody of the seized drugs from the accused, until they reach the court. We find that the procedure and statutory safeguards
prescribed for compliance by drug enforcement agencies have not been followed in this case. A failure to comply with the
aforequoted Sec. 21(1) of RA 9165 implies a concomitant failure on the part of the prosecution to establish the identity of the
seized illegal items as part of the corpus delicti.[26]
Although the non-presentation of some of the witnesses who can attest to an unbroken chain of custody of evidence may, in
some instances, be excused, there should be a justifying factor for the prosecution to dispense with their testimonies. [27] In People
v. Denoman,[28] the Court discussed the saving mechanism provided by Sec. 21(a), Article II of the Implementing Rules and
Regulations of RA 9165.[29] Denoman explains that the aforementioned provision contains a saving mechanism to ensure that not
every case of non-compliance will permanently prejudice the prosecutions case. The saving mechanism applies when the
prosecution recognizes and explains the lapse or lapses in the prescribed procedures. [30] In this case, the prosecution did not even
acknowledge and discuss the reasons for the missing links in the chain.
To reiterate, in prosecutions involving dangerous drugs, the substance itself constitutes the key part of the corpus delicti of
the offense and the fact of its existence is vital to sustain a judgment of conviction beyond reasonable doubt. [31] Taken with the
uncorroborated testimony of Buan, the broken chain of custody over the marijuana and shabu in the instant case creates
reasonable doubt on accused-appellants guilt.
In a string of cases,[32] we declared that the failure of the prosecution to offer the testimony of key witnesses to establish a
sufficiently complete chain of custody of a specimen of shabu, and the irregularity which characterized the handling of the
evidence before it was finally offered in court, fatally conflicts with every proposition relative to the culpability of the accused.
As in People v. Partoza,[33] this case suffers from the failure of the prosecution witness to provide the details establishing an
unbroken chain of custody. In Partoza, the police officer testifying did not relate to whom the custody of the drugs was turned
over. The evidence of the prosecution likewise did not disclose the identity of the person who had the custody and safekeeping of
the drugs after its examination and pending presentation in court.

Given the prosecutions failure to abide by the rules on the chain of custody, the evidentiary presumption that official duties
have been regularly performed cannot apply to this case. This presumption, it must be emphasized, is not conclusive. Not only is
it rebutted by contrary proof, as here, but it is also inferior to the constitutional presumption of innocence. [34] On this score, we
have held that while an accuseds defense engenders suspicion that he probably perpetrated the crime charged, it is not sufficient
for a conviction that the evidence establishes a strong suspicion or probability of guilt. It is the burden of the prosecution to
overcome the presumption of innocence by presenting the quantum of evidence required. [35] This quantum of evidence has not
been met in the instant case.
WHEREFORE, the assailed CA Decision in CA-G.R. CR-H.C. No. 00038 is REVERSED and SET ASIDE. Accusedappellant Norman Sitco y De Jesus is ACQUITTED on reasonable doubt and is ordered immediately RELEASED from
detention, unless he is confined for any other lawful cause. The Director of the Bureau of Corrections
is DIRECTED to IMPLEMENT this Decision and to report to this Court the action taken hereon within five (5) days from
receipt.
SO ORDERED.
PRESBITERO J. VELASCO, JR.
Associate Justice
WE CONCUR:
RENATO C. CORONA
Associate Justice
Chairperson
DIOSDADO M. PERALTA
Associate Justice

LUCAS P. BERSAMIN
Associate Justice
JOSE CATRAL MENDOZA
Associate Justice
AT T E S TAT I O N

I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to the
writer of the opinion of the Courts Division.

RENATO C. CORONA
Associate Justice
Chairperson
C E R T I F I C AT I O N
Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairpersons Attestation, I certify that the
conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of
the Courts Division.
REYNATO S. PUNO
Chief Justice

REPUBLIC v. BAGTAS, 116 SCRA 262FACTS:


On May 8, 1948, Jose Bagtas borrowed from the Bureau of Animal Industry three bullsfor one year
for breeding purposes upon payment of a breeding fee of 10% of the book value of the bulls. After
one year, the contract was renewed but only for one bull. Bagtas offered to buythe bulls
at book value less depreciation, but the Bureau told him that he should either return the bulls or
pay for their book value. Bagtas failed to pay the book value, so the Republic filed
anaction with the CFI Manila to order the return of the bulls or the payment of the
book value.Felicidad Bagtas, the surviving spouse and administratrix of the decedents estate, said
that thetwo bulls have already been returned in 1952, and that the remaining one died of gunshot
duringa Huk raid. It was established that the two bulls were returned, thus, there is no more
obligationon the part of Bagtas. With regards the bull not returned, Felicidad maintained that the
obligationis extinguished since the contract is that of a commodatum and that the loss
through fortuitousevent should be borne by the owner.
ISSUE:
Whether or not the contract entered into between Bagtas and the Republic is that
of commodatum making Bagtas not liable for the death of the bull.
HELD:
A contract of commodatum is essentially gratuitous. If the breeding fee be
consideredcompensation, then the contract would be a lease of the bull. Under article
1671 of the CivilCode the lessee would be subject to the responsibilities of a possessor
in bad faith because sheh a d c o n t i n u e d p o s s e s s i o n o f t h e b u l l a f t e r t h e e x p i r y o f
t h e c o n t r a c t . E v e n i f t h e c o n t r a c t be commodatum, still Bagtas is liable because
article 1942 of the Civil Code provides that a bailee in a contract of commodatum is liable for
loss of the things even if it should be through afortuitous event if he keeps it longer than the
period stipulated or if the thing loaned has beendelivered with appraisal of its value,
unless there is a stipulation exempting the bailee from responsibility in case of a fortuitous
event. The loan of one bull was renewed for another periodof one year but Bagtas kept and used the
bull more than one year where during a Huk raid it waskilled by stray bullets. Furthermore, when
lent and delivered to the deceased husband of Bagtas,the bulls had each an appraised book
value. It was not stipulated that in case of loss of the bull due to fortuitous event the late
husband of the appellant would be exempt from liability

Republic of the Philippines


SUPREME COURT
Manila
EN BANC
G.R. No. L-46240
November 3, 1939
MARGARITA QUINTOS and ANGEL A. ANSALDO, plaintiffs-appellants,
vs.
BECK, defendant-appellee.
Mauricio Carlos for appellants.
Felipe Buencamino, Jr. for appellee.
IMPERIAL, J.:
The plaintiff brought this action to compel the defendant to return her certain furniture which she lent
him for his use. She appealed from the judgment of the Court of First Instance of Manila which
ordered that the defendant return to her the three has heaters and the four electric lamps found in
the possession of the Sheriff of said city, that she call for the other furniture from the said sheriff of
Manila at her own expense, and that the fees which the Sheriff may charge for the deposit of the
furniture be paid pro rata by both parties, without pronouncement as to the costs.
The defendant was a tenant of the plaintiff and as such occupied the latter's house on M. H. del
Pilar street, No. 1175. On January 14, 1936, upon the novation of the contract of lease between the
plaintiff and the defendant, the former gratuitously granted to the latter the use of the furniture
described in the third paragraph of the stipulation of facts, subject to the condition that the
defendant would return them to the plaintiff upon the latter's demand. The plaintiff sold the property
to Maria Lopez and Rosario Lopez and on September 14, 1936, these three notified the defendant
of the conveyance, giving him sixty days to vacate the premises under one of the clauses of the
contract of lease. There after the plaintiff required the defendant to return all the furniture
transferred to him for them in the house where they were found. On
November 5, 1936, the
defendant, through another person, wrote to the plaintiff reiterating that she may call for the furniture
in the ground floor of the house. On the 7th of the same month, the defendant wrote another letter
to the plaintiff informing her that he could not give up the three gas heaters and the four electric
lamps because he would use them until the 15th of the same month when the lease in due to
expire. The plaintiff refused to get the furniture in view of the fact that the defendant had declined to
make delivery of all of them. On
November 15th, before vacating the house, the defendant
deposited with the Sheriff all the furniture belonging to the plaintiff and they are now on deposit in
the warehouse situated at No. 1521, Rizal Avenue, in the custody of the said sheriff.
In their seven assigned errors the plaintiffs contend that the trial court incorrectly applied the law: in
holding that they violated the contract by not calling for all the furniture on November 5, 1936, when
the defendant placed them at their disposal; in not ordering the defendant to pay them the value of
the furniture in case they are not delivered; in holding that they should get all the furniture from the
Sheriff at their expenses; in ordering them to pay-half of the expenses claimed by the Sheriff for the
deposit of the furniture; in ruling that both parties should pay their respectivelegal expenses or the
costs; and in denying pay their respective legal expenses or the costs; and in denying the motions
for reconsideration and new trial. To dispose of the case, it is only necessary to decide whether the
defendant complied with his obligation to return the furniture upon the plaintiff's demand; whether
the latter is bound to bear the deposit fees thereof, and whether she is entitled to the costs of
litigation.lawphi1.net
The contract entered into between the parties is one of commadatum, because under it the plaintiff
gratuitously granted the use of the furniture to the defendant, reserving for herself the ownership
thereof; by this contract the defendant bound himself to return the furniture to the plaintiff, upon the
latters demand (clause 7 of the contract, Exhibit A; articles 1740, paragraph 1, and 1741 of the Civil
Code). The obligation voluntarily assumed by the defendant to return the furniture upon the
plaintiff's demand, means that he should return all of them to the plaintiff at the latter's residence or

house. The defendant did not comply with this obligation when he merely placed them at the
disposal of the plaintiff, retaining for his benefit the three gas heaters and the four eletric lamps. The
provisions of article 1169 of the Civil Code cited by counsel for the parties are not squarely
applicable. The trial court, therefore, erred when it came to the legal conclusion that the plaintiff
failed to comply with her obligation to get the furniture when they were offered to her.
As the defendant had voluntarily undertaken to return all the furniture to the plaintiff, upon the
latter's demand, the Court could not legally compel her to bear the expenses occasioned by the
deposit of the furniture at the defendant's behest. The latter, as bailee, was not entitled to place the
furniture on deposit; nor was the plaintiff under a duty to accept the offer to return the furniture,
because the defendant wanted to retain the three gas heaters and the four electric lamps.
As to the value of the furniture, we do not believe that the plaintiff is entitled to the payment thereof
by the defendant in case of his inability to return some of the furniture because under paragraph 6
of the stipulation of facts, the defendant has neither agreed to nor admitted the correctness of the
said value. Should the defendant fail to deliver some of the furniture, the value thereof should be
latter determined by the trial Court through evidence which the parties may desire to present.
The costs in both instances should be borne by the defendant because the plaintiff is the prevailing
party (section 487 of the Code of Civil Procedure). The defendant was the one who breached the
contract of commodatum, and without any reason he refused to return and deliver all the furniture
upon the plaintiff's demand. In these circumstances, it is just and equitable that he pay the legal
expenses and other judicial costs which the plaintiff would not have otherwise defrayed.
The appealed judgment is modified and the defendant is ordered to return and deliver to the
plaintiff, in the residence to return and deliver to the plaintiff, in the residence or house of the latter,
all the furniture described in paragraph 3 of the stipulation of facts Exhibit A. The expenses which
may be occasioned by the delivery to and deposit of the furniture with the Sheriff shall be for the
account of the defendant. the defendant shall pay the costs in both instances. So ordered.

QUINTOS VS BECK 69 PHIL 108


Facts:
Quintos and Beck entered into a contract of lease, whereby the latteroccupied the formers
house. On Jan 14, 19!, the contract of lease was no"ated,wherein the Q#intos $ratuitously
$ranted to Beck the use of the furniture, sub%ect tothe condition that Beck should return
the furnitures to Quintos upon demand. &hereafter, Quintos sold the property to 'aria and (osario
)ope*. Beck was noti+edof the con"eyance and $i"en him ! days to "acate the premises. -
addition,Quintos re/uired Beck to return all the furniture. Beck refused to return $asheaters and
4 electric lamps since he would use them until the lease was due toe0pire. Quintos refused to $et the
furniture since Beck had declined to return all ofthem. Beck deposited all the furniture belon$in$
to Q#intos to the sheri.
ISSUE: WON
Beck complied with his obli$ation of returnin$ the furnitures toQuintos when it deposited the furnitures to
the sheri.
RULING:
&he contract entered into between the parties is one of
commadatum
,because under it the plainti $ratuitously $ranted the use of the furniture to thedefendant, reser"in$ for
herself the ownership thereof2 by this contract thedefendant bound himself to return the furniture
to the plainti, upon the lattersdemand 3clause of the contract, 50hibit 62 articles 14,
para$raph 1, and 141 of the 7i"il 7ode8. &he obli$ation "oluntarily assumed by
the defendant to return thefurniture upon the plaintis demand, means that he should return all of
them to theplainti at the latters residence or house. &he defendant did not comply with thisobli$ation
when he merely placed them at the disposal of the plainti, retainin$ forhis bene+t the three
$as heaters and the four eletric lamps.6s the defendant had "oluntarily undertaken to return all the furniture
to theplainti, upon the latters demand, the 7ourt could not le$ally compel her to bearthe
e0penses occasioned by the deposit of the furniture at the defendants behest. &he latter, as bailee,
was nt entitled to place the furniture on deposit2 nor was theplainti under a duty to accept the

oer to return the furniture, because thedefendant wanted to retain the three $as heaters and the four
electric lamps.

Republic of the Philippines


SUPREME COURT
Manila
EN BANC

G.R. No. L-24968 April 27, 1972


SAURA IMPORT and EXPORT CO., INC., plaintiff-appellee,
vs.
DEVELOPMENT BANK OF THE PHILIPPINES, defendant-appellant.
Mabanag, Eliger and Associates and Saura, Magno and Associates for plaintiff-appellee.
Jesus A. Avancea and Hilario G. Orsolino for defendant-appellant.

MAKALINTAL, J.:p
In Civil Case No. 55908 of the Court of First Instance of Manila, judgment was rendered on June 28, 1965
sentencing defendant Development Bank of the Philippines (DBP) to pay actual and consequential damages to
plaintiff Saura Import and Export Co., Inc. in the amount of P383,343.68, plus interest at the legal rate from the
date the complaint was filed and attorney's fees in the amount of P5,000.00. The present appeal is from that
judgment.
In July 1953 the plaintiff (hereinafter referred to as Saura, Inc.) applied to the Rehabilitation Finance
Corporation(RFC), before its conversion into DBP, for an industrial loan of P500,000.00, to be used as follows:
P250,000.00 for the construction of a factory building (for the manufacture of jute sacks); P240,900.00 to pay
the balance of the purchase price of the jute mill machinery and equipment; and P9,100.00 as additional working
capital.
Parenthetically, it may be mentioned that the jute mill machinery had already been purchased by Saura on the
strength of a letter of credit extended by the Prudential Bank and Trust Co., and arrived in Davao City in July
1953; and that to secure its release without first paying the draft, Saura, Inc. executed a trust receipt in favor of
the said bank.
On January 7, 1954 RFC passed Resolution No. 145 approving the loan application for P500,000.00, to be
secured by a first mortgage on the factory building to be constructed, the land site thereof, and the machinery
and equipment to be installed. Among the other terms spelled out in the resolution were the following:
1. That the proceeds of the loan shall be utilized exclusively for the following purposes:
For construction of factory building P250,000.00
For payment of the balance of purchase

price of machinery and equipment 240,900.00


For working capital 9,100.00
T O T A L P500,000.00
4. That Mr. & Mrs. Ramon E. Saura, Inocencia Arellano, Aniceto Caolboy and Gregoria Estabillo and China
Engineers, Ltd. shall sign the promissory notes jointly with the borrower-corporation;
5. That release shall be made at the discretion of the Rehabilitation Finance Corporation, subject to availability
of funds, and as the construction of the factory buildings progresses, to be certified to by an appraiser of this
Corporation;"
Saura, Inc. was officially notified of the resolution on January 9, 1954. The day before, however, evidently
having otherwise been informed of its approval, Saura, Inc. wrote a letter to RFC, requesting a modification of
the terms laid down by it, namely: that in lieu of having China Engineers, Ltd. (which was willing to assume
liability only to the extent of its stock subscription with Saura, Inc.) sign as co-maker on the corresponding
promissory notes, Saura, Inc. would put up a bond for P123,500.00, an amount equivalent to such subscription;
and that Maria S. Roca would be substituted for Inocencia Arellano as one of the other co-makers, having
acquired the latter's shares in Saura, Inc.
In view of such request RFC approved Resolution No. 736 on February 4, 1954, designating of the members of
its Board of Governors, for certain reasons stated in the resolution, "to reexamine all the aspects of this
approved loan ... with special reference as to the advisability of financing this particular project based on present
conditions obtaining in the operations of jute mills, and to submit his findings thereon at the next meeting of the
Board."
On March 24, 1954 Saura, Inc. wrote RFC that China Engineers, Ltd. had again agreed to act as co-signer for
the loan, and asked that the necessary documents be prepared in accordance with the terms and conditions
specified in Resolution No. 145. In connection with the reexamination of the project to be financed with the loan
applied for, as stated in Resolution No. 736, the parties named their respective committees of engineers and
technical men to meet with each other and undertake the necessary studies, although in appointing its own
committee Saura, Inc. made the observation that the same "should not be taken as an acquiescence on (its)
part to novate, or accept new conditions to, the agreement already) entered into," referring to its acceptance of
the terms and conditions mentioned in Resolution No. 145.
On April 13, 1954 the loan documents were executed: the promissory note, with F.R. Halling, representing China
Engineers, Ltd., as one of the co-signers; and the corresponding deed of mortgage, which was duly registered
on the following April 17.
It appears, however, that despite the formal execution of the loan agreement the reexamination contemplated in
Resolution No. 736 proceeded. In a meeting of the RFC Board of Governors on June 10, 1954, at which Ramon
Saura, President of Saura, Inc., was present, it was decided to reduce the loan from P500,000.00 to
P300,000.00. Resolution No. 3989 was approved as follows:
RESOLUTION No. 3989. Reducing the Loan Granted Saura Import & Export Co., Inc. under Resolution No.
145, C.S., from P500,000.00 to P300,000.00. Pursuant to Bd. Res. No. 736, c.s., authorizing the re-examination
of all the various aspects of the loan granted the Saura Import & Export Co. under Resolution No. 145, c.s., for
the purpose of financing the manufacture of jute sacks in Davao, with special reference as to the advisability of
financing this particular project based on present conditions obtaining in the operation of jute mills, and after
having heard Ramon E. Saura and after extensive discussion on the subject the Board, upon recommendation
of the Chairman, RESOLVED that the loan granted the Saura Import & Export Co. be REDUCED from P500,000
to P300,000 and that releases up to P100,000 may be authorized as may be necessary from time to time to
place the factory in actual operation: PROVIDED that all terms and conditions of Resolution No. 145, c.s., not
inconsistent herewith, shall remain in full force and effect."
On June 19, 1954 another hitch developed. F.R. Halling, who had signed the promissory note for China
Engineers Ltd. jointly and severally with the other RFC that his company no longer to of the loan and therefore
considered the same as cancelled as far as it was concerned. A follow-up letter dated July 2 requested RFC that
the registration of the mortgage be withdrawn.

In the meantime Saura, Inc. had written RFC requesting that the loan of P500,000.00 be granted. The request
was denied by RFC, which added in its letter-reply that it was "constrained to consider as cancelled the loan of
P300,000.00 ... in view of a notification ... from the China Engineers Ltd., expressing their desire to consider the
loan insofar as they are concerned."
On July 24, 1954 Saura, Inc. took exception to the cancellation of the loan and informed RFC that China
Engineers, Ltd. "will at any time reinstate their signature as co-signer of the note if RFC releases to us the
P500,000.00 originally approved by you.".
On December 17, 1954 RFC passed Resolution No. 9083, restoring the loan to the original amount of
P500,000.00, "it appearing that China Engineers, Ltd. is now willing to sign the promissory notes jointly with the
borrower-corporation," but with the following proviso:
That in view of observations made of the shortage and high cost of imported raw materials, the
Department of Agriculture and Natural Resources shall certify to the following:
1. That the raw materials needed by the borrower-corporation to carry out its operation are
available in the immediate vicinity; and
2. That there is prospect of increased production thereof to provide adequately for the
requirements of the factory."
The action thus taken was communicated to Saura, Inc. in a letter of RFC dated December 22, 1954, wherein it
was explained that the certification by the Department of Agriculture and Natural Resources was required "as
the intention of the original approval (of the loan) is to develop the manufacture of sacks on the basis of locally
available raw materials." This point is important, and sheds light on the subsequent actuations of the parties.
Saura, Inc. does not deny that the factory he was building in Davao was for the manufacture of bags from local
raw materials. The cover page of its brochure (Exh. M) describes the project as a "Joint venture by and between
the Mindanao Industry Corporation and the Saura Import and Export Co., Inc. to finance, manage and operate
a Kenaf mill plant, to manufacture copra and corn bags, runners, floor mattings, carpets, draperies; out of 100%
local raw materials, principal kenaf." The explanatory note on page 1 of the same brochure states that, the
venture "is the first serious attempt in this country to use 100% locally grown raw materials notably kenaf which
is presently grown commercially in theIsland of Mindanao where the proposed jutemill is located ..."
This fact, according to defendant DBP, is what moved RFC to approve the loan application in the first place, and
to require, in its Resolution No. 9083, a certification from the Department of Agriculture and Natural Resources
as to the availability of local raw materials to provide adequately for the requirements of the factory. Saura, Inc.
itself confirmed the defendant's stand impliedly in its letter of January 21, 1955: (1) stating that according to a
special study made by the Bureau of Forestry "kenaf will not be available in sufficient quantity this year or
probably even next year;" (2) requesting "assurances (from RFC) that my company and associates will be able
to bring in sufficient jute materials as may be necessary for the full operation of the jute mill;" and (3) asking that
releases of the loan be made as follows:
a) For the payment of the receipt for jute mill
machineries with the Prudential Bank &
Trust Company P250,000.00
(For immediate release)
b) For the purchase of materials and equipment per attached list to enable the jute
mill to operate 182,413.91
c) For raw materials and labor 67,586.09
1) P25,000.00 to be released on the opening of the letter of credit for raw jute
for $25,000.00.

2) P25,000.00 to be released upon arrival


of raw jute.
3) P17,586.09 to be released as soon as the
mill is ready to operate.
On January 25, 1955 RFC sent to Saura, Inc. the following reply:
Dear Sirs:
This is with reference to your letter of January 21, 1955, regarding the release of
your loan under consideration of P500,000. As stated in our letter of December
22, 1954, the releases of the loan, if revived, are proposed to be made from time
to time, subject to availability of funds towards the end that the sack factory shall
be placed in actual operating status. We shall be able to act on your request for
revised purpose and manner of releases upon re-appraisal of the securities
offered for the loan.
With respect to our requirement that the Department of Agriculture and Natural
Resources certify that the raw materials needed are available in the immediate
vicinity and that there is prospect of increased production thereof to provide
adequately the requirements of the factory, we wish to reiterate that the basis of
the original approval is to develop the manufacture of sacks on the basis of the
locally available raw materials. Your statement that you will have to rely on the
importation of jute and your request that we give you assurance that your
company will be able to bring in sufficient jute materials as may be necessary for
the operation of your factory, would not be in line with our principle in approving
the loan.
With the foregoing letter the negotiations came to a standstill. Saura, Inc. did not pursue the matter further.
Instead, it requested RFC to cancel the mortgage, and so, on June 17, 1955 RFC executed the corresponding
deed of cancellation and delivered it to Ramon F. Saura himself as president of Saura, Inc.
It appears that the cancellation was requested to make way for the registration of a mortgage contract, executed
on August 6, 1954, over the same property in favor of the Prudential Bank and Trust Co., under which contract
Saura, Inc. had up to December 31 of the same year within which to pay its obligation on the trust receipt
heretofore mentioned. It appears further that for failure to pay the said obligation the Prudential Bank and Trust
Co. sued Saura, Inc. on May 15, 1955.
On January 9, 1964, ahnost 9 years after the mortgage in favor of RFC was cancelled at the request of Saura,
Inc., the latter commenced the present suit for damages, alleging failure of RFC (as predecessor of the
defendant DBP) to comply with its obligation to release the proceeds of the loan applied for and approved,
thereby preventing the plaintiff from completing or paying contractual commitments it had entered into, in
connection with its jute mill project.
The trial court rendered judgment for the plaintiff, ruling that there was a perfected contract between the parties
and that the defendant was guilty of breach thereof. The defendant pleaded below, and reiterates in this appeal:
(1) that the plaintiff's cause of action had prescribed, or that its claim had been waived or abandoned; (2) that
there was no perfected contract; and (3) that assuming there was, the plaintiff itself did not comply with the
terms thereof.
We hold that there was indeed a perfected consensual contract, as recognized in Article 1934 of the Civil Code,
which provides:
ART. 1954. An accepted promise to deliver something, by way of commodatum or simple loan is
binding upon the parties, but the commodatum or simple loan itself shall not be perferted until
the delivery of the object of the contract.
There was undoubtedly offer and acceptance in this case: the application of Saura, Inc. for a loan of
P500,000.00 was approved by resolution of the defendant, and the corresponding mortgage was executed and

registered. But this fact alone falls short of resolving the basic claim that the defendant failed to fulfill its
obligation and the plaintiff is therefore entitled to recover damages.
It should be noted that RFC entertained the loan application of Saura, Inc. on the assumption that the factory to
be constructed would utilize locally grown raw materials, principally kenaf. There is no serious dispute about
this. It was in line with such assumption that when RFC, by Resolution No. 9083 approved on December 17,
1954, restored the loan to the original amount of P500,000.00. it imposed two conditions, to wit: "(1) that the raw
materials needed by the borrower-corporation to carry out its operation are available in the immediate vicinity;
and (2) that there is prospect of increased production thereof to provide adequately for the requirements of the
factory." The imposition of those conditions was by no means a deviation from the terms of the agreement, but
rather a step in its implementation. There was nothing in said conditions that contradicted the terms laid down in
RFC Resolution No. 145, passed on January 7, 1954, namely "that the proceeds of the loan shall be
utilized exclusively for the following purposes: for construction of factory building P250,000.00; for payment of
the balance of purchase price of machinery and equipment P240,900.00; for working capital P9,100.00."
Evidently Saura, Inc. realized that it could not meet the conditions required by RFC, and so wrote its letter of
January 21, 1955, stating that local jute "will not be able in sufficient quantity this year or probably next year,"
and asking that out of the loan agreed upon the sum of P67,586.09 be released "for raw materials and labor."
This was a deviation from the terms laid down in Resolution No. 145 and embodied in the mortgage contract,
implying as it did a diversion of part of the proceeds of the loan to purposes other than those agreed upon.
When RFC turned down the request in its letter of January 25, 1955 the negotiations which had been going on
for the implementation of the agreement reached an impasse. Saura, Inc. obviously was in no position to comply
with RFC's conditions. So instead of doing so and insisting that the loan be released as agreed upon, Saura,
Inc. asked that the mortgage be cancelled, which was done on June 15, 1955. The action thus taken by both
parties was in the nature cf mutual desistance what Manresa terms "mutuo disenso" 1 which is a mode of
extinguishing obligations. It is a concept that derives from the principle that since mutual agreement can create a
contract, mutual disagreement by the parties can cause its extinguishment. 2
The subsequent conduct of Saura, Inc. confirms this desistance. It did not protest against any alleged breach of
contract by RFC, or even point out that the latter's stand was legally unjustified. Its request for cancellation of
the mortgage carried no reservation of whatever rights it believed it might have against RFC for the latter's noncompliance. In 1962 it even applied with DBP for another loan to finance a rice and corn project, which
application was disapproved. It was only in 1964, nine years after the loan agreement had been cancelled at its
own request, that Saura, Inc. brought this action for damages.All these circumstances demonstrate beyond
doubt that the said agreement had been extinguished by mutual desistance and that on the initiative of the
plaintiff-appellee itself.
With this view we take of the case, we find it unnecessary to consider and resolve the other issues raised in the
respective briefs of the parties.
WHEREFORE, the judgment appealed from is reversed and the complaint dismissed, with costs against the
plaintiff-appellee.
Reyes, J.B.L., Actg. C.J., Zaldivar, Castro, Fernando, Teehankee, Barredo and Antonio, JJ., concur.
Makasiar, J., took no part.

SAURA IMPORT and EXPORT CO., INC., plaintiff-appellee,


vs.
DEVELOPMENT BANK OF THE PHILIPPINES, defendant-appellant.
G.R. No. L-15184 May 31, 1963
Lessons Applicable: Mortgagor (Insurance)
Laws Applicable:

FACTS:

Saura Import & Export Co Inc., mortgaged to the Phil. National Bank, a parcel of
land.

The mortgage was amended to guarantee an increased amount, bringing the


total mortgaged debt to P37,000

On the land mortgage is a building owned by Saura Import & Export Co Inc.
which was insured with Philippine International Surety (Insurer) even before
the mortgage contract so it was required to endorse to mortgagee PNB

October 15, 1954: Barely 13 days after the issuance of the fire insurance policy,
the insurer cancelled it. Notice of the cancellation was given to PNB (mortgagee).
But Saura (insured) was not informed.

April 6, 1955: The building and all its contents worth P40,685.69
wereburned so Saura filed a claim with the Insurer and mortgagee Bank

RTC: dismissed
ISSUE: W/N Philippine International Surety should be held liable for the claim because
notice to only the mortgagee is not substantial

HELD:YES. Appealed from is hereby reversed. Philippine International Surety Co., Inc.,

to pay Saura Import & Export Co., Inc., P29,000

It was the primary duty of Philippine International Surety to notify the insured,
but it did not

If a mortgage or lien exists against the property insured, and the policy contains
a clause stating that loss, if any, shall be payable to such mortgagee or the holder
of such lien as interest may appear, notice of cancellation to the mortgagee or
lienholder alone is ineffective as a cancellation of the policy to the owner of the
property.

liability attached principally the insurance company, for its failure to give notice
of the cancellation of the policy to Saura

it is unnecessary to discuss the errors assigned against appellee bank

Republic of the Philippines


SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 199650

June 26, 2013

J PLUS ASIA DEVELOPMENT CORPORATION, Petitioner,


vs.
UTILITY ASSURANCE CORPORATION, Respondent.
DECISION
VILLARAMA, JR., J.:
Before the Court is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as
amended, assailing the Decision1 dated January 27,2011 and Resolution2 dated December 8, 2011 of the Court
of Appeals (CA) in CA-G.R. SP No. 112808.
The Facts
On December 24, 2007, petitioner J Plus Asia Development Corporation represented by its Chairman, Joo Han
Lee, and Martin E. Mabunay, doing business under the name and style of Seven Shades of Blue Trading and
Services, entered into a Construction Agreement3 whereby the latter undertook to build the former's 72-room
condominium/hotel (Condotel Building 25) located at the Fairways & Bluewaters Golf & Resort in Boracay
Island, Malay, Aklan. The project, costing P42,000,000.00, was to be completed within one year or 365 days
reckoned from the first calendar day after signing of the Notice of Award and Notice to Proceed and receipt of
down payment (20% of contract price). The P8,400,000.00 down payment was fully paid on January 14,
2008.4 Payment of the balance of the contract price will be based on actual work finished within 15 days from
receipt of the monthly progress billings. Per the agreed work schedule, the completion date of the project was
December 2008.5 Mabuhay also submitted the required Performance Bond6 issued by respondent
Utility Assurance Corporation (UTASSCO) in the amount equivalent to 20% down payment or P8.4 million.
Mabunay commenced work at the project site on January 7, 2008. Petitioner paid up to the 7th monthly progress
billing sent by Mabunay. As of September 16, 2008, petitioner had paid the total amount of P15,979,472.03
inclusive of the 20% down payment. However, as of said date, Mabunay had accomplished only 27.5% of the
project.7
In the Joint Construction Evaluation Result and Status Report8 signed by Mabunay assisted by Arch. Elwin
Olavario, and Joo Han Lee assisted by Roy V. Movido, the following findings were accepted as true, accurate
and correct:
III STATUS OF PROJECT AS OF 14 NOVEMBER 2008

1) After conducting a joint inspection and evaluation of the project to determine the actual percentage of
accomplishment, the contracting parties, assisted by their respective technical groups, SSB assisted by
Arch. Elwin Olavario and JPLUS assisted by Engrs. Joey Rojas and Shiela Botardo, concluded and
agreed that as of 14 November 2008, the project is only Thirty One point Thirty Nine Percent (31.39%)
complete.
2) Furthermore, the value of construction materials allocated for the completion of the project and
currently on site has been determined and agreed to be ONE MILLION FORTY NINE THOUSAND
THREE HUNDRED SIXTY FOUR PESOS AND FORTY FIVE CENTAVOS (P1,049,364.45)
3) The additional accomplishment of SSB, reflected in its reconciled and consolidated 8th and 9th
billings, is Three point Eighty Five Percent (3.85%) with a gross value of P1,563,553.34 amount
creditable to SSB after deducting the withholding tax is P1,538,424.84
4) The unrecouped amount of the down payment is P2,379,441.53 after deducting the cost of materials
on site and the net billable amount reflected in the reconciled and consolidated 8th and 9th billings. The
uncompleted portion of the project is 68.61% with an estimated value per construction agreement signed
isP27,880,419.52.9 (Emphasis supplied.)
On November 19, 2008, petitioner terminated the contract and sent demand letters to Mabunay and respondent
surety. As its demands went unheeded, petitioner filed a Request for Arbitration10 before the Construction
Industry Arbitration Commission (CIAC). Petitioner prayed that Mabunay and respondent be ordered to pay the
sums ofP8,980,575.89 as liquidated damages and P2,379,441.53 corresponding to the unrecouped down
payment or overpayment petitioner made to Mabunay.11
In his Answer,12 Mabunay claimed that the delay was caused by retrofitting and other revision works ordered by
Joo Han Lee. He asserted that he actually had until April 30, 2009 to finish the project since the 365 days period
of completion started only on May 2, 2008 after clearing the retrofitted old structure. Hence, the termination of
the contract by petitioner was premature and the filing of the complaint against him was baseless, malicious and
in bad faith.
Respondent, on the other hand, filed a motion to dismiss on the ground that petitioner has no cause of action
and the complaint states no cause of action against it. The CIAC denied the motion to dismiss. Respondents
motion for reconsideration was likewise denied.13
In its Answer Ex Abundante Ad Cautelam With Compulsory Counterclaims and Cross-claims, 14 respondent
argued that the performance bond merely guaranteed the 20% down payment and not the entire obligation of
Mabunay under the Construction Agreement. Since the value of the projects accomplishment already exceeded
the said amount, respondents obligation under the performance bond had been fully extinguished. As to the
claim for alleged overpayment to Mabunay, respondent contended that it should not be credited against the 20%
down payment which was already exhausted and such application by petitioner is tantamount to reviving an
obligation that had been legally extinguished by payment. Respondent also set up a cross-claim against
Mabunay who executed in its favor an Indemnity Agreement whereby Mabunay undertook to indemnify
respondent for whatever amounts it may be adjudged liable to pay petitioner under the surety bond.
Both petitioner and respondent submitted their respective documentary and testimonial evidence. Mabunay
failed to appear in the scheduled hearings and to present his evidence despite due notice to his counsel of
record. The CIAC thus declared that Mabunay is deemed to have waived his right to present evidence. 15
On February 2, 2010, the CIAC rendered its Decision16 and made the following award:
Accordingly, in view of our foregoing discussions and dispositions, the Tribunal hereby adjudges, orders and
directs:
1. Respondents Mabunay and Utassco to jointly and severally pay claimant the following:
a) P4,469,969.90, as liquidated damages, plus legal interest thereon at the rate of 6% per
annum computed from the date of this decision up to the time this decision becomes final, and
12% per annum computed from the date this decision becomes final until fully paid, and

b) P2,379,441.53 as unrecouped down payment plus interest thereon at the rate of 6% per
annum computed from the date of this decision up to the time this decision becomes final, and
12% per annum computed from the date this decision becomes final until fully paid.
It being understood that respondent Utasscos liability shall in no case exceed P8.4 million.
2. Respondent Mabunay to pay to claimant the amount of P98,435.89, which is respondent Mabunays
share in the arbitration cost claimant had advanced, with legal interest thereon from January 8, 2010
until fully paid.
3. Respondent Mabunay to indemnify respondent Utassco of the amounts respondent Utassco will have
paid to claimant under this decision, plus interest thereon at the rate of 12% per annum computed from
the date he is notified of such payment made by respondent Utassco to claimant until fully paid, and to
pay UtasscoP100,000.00 as attorneys fees.
SO ORDERED.17
Dissatisfied, respondent filed in the CA a petition for review under Rule 43 of the 1997 Rules of Civil Procedure,
as amended.
In the assailed decision, the CA agreed with the CIAC that the specific condition in the Performance Bond did
not clearly state the limitation of the suretys liability. Pursuant to Article 1377 18 of the Civil Code, the CA said that
the provision should be construed in favor of petitioner considering that the obscurely phrased provision was
drawn up by respondent and Mabunay. Further, the appellate court stated that respondent could not possibly
guarantee the down payment because it is not Mabunay who owed the down payment to petitioner but the other
way around. Consequently, the completion by Mabunay of 31.39% of the construction would not lead to the
extinguishment of respondents liability. The P8.4 million was a limit on the amount of respondents liability and
not a limitation as to the obligation or undertaking it guaranteed.
However, the CA reversed the CIACs ruling that Mabunay had incurred delay which entitled petitioner to the
stipulated liquidated damages and unrecouped down payment. Citing Aerospace Chemical Industries, Inc. v.
Court of Appeals,19 the appellate court said that not all requisites in order to consider the obligor or debtor in
default were present in this case. It held that it is only from December 24, 2008 (completion date) that we should
reckon default because the Construction Agreement provided only for delay in the completion of the project and
not delay on a monthly basis using the work schedule approved by petitioner as the reference point. Hence,
petitioners termination of the contract was premature since the delay in this case was merely speculative; the
obligation was not yet demandable.
The dispositive portion of the CA Decision reads:
WHEREFORE, premises considered, the instant petition for review is GRANTED. The assailed Decision dated
13 January 2010 rendered by the CIAC Arbitral Tribunal in CIAC Case No. 03-2009 is hereby REVERSED and
SET ASIDE. Accordingly, the Writ of Execution dated 24 November 2010 issued by the same tribunal is hereby
ANNULLED and SET ASIDE.
SO ORDERED.20
Petitioner moved for reconsideration of the CA decision while respondent filed a motion for partial
reconsideration. Both motions were denied.
The Issues
Before this Court petitioner seeks to reverse the CA insofar as it denied petitioners claims under the
Performance Bond and to reinstate in its entirety the February 2, 2010 CIAC Decision. Specifically, petitioner
alleged that
A. THE COURT OF APPEALS SERIOUSLY ERRED IN NOT HOLDING THAT THE ALTERNATIVE
DISPUTE RESOLUTION ACT AND THE SPECIAL RULES ON ALTERNATIVE DISPUTE RESOLUTION
HAVE STRIPPED THE COURT OF APPEALS OF JURISDICTION TO REVIEW ARBITRAL AWARDS.

B. THE COURT OF APPEALS SERIOUSLY ERRED IN REVERSING THE ARBITRAL AWARD ON AN


ISSUE THAT WAS NOT RAISED IN THE ANSWER. NOT IDENTIFIED IN THE TERMS OF
REFERENCE, NOT ASSIGNED AS ANERROR, AND NOT ARGUED IN ANY OF THE PLEADINGS
FILED BEFORE THE COURT.
C. THE COURT OF APPEALS SERIOUSLY ERRED IN RELYING ON THE CASE OF AEROSPACE
CHEMICAL INDUSTRIES, INC. v. COURT OF APPEALS, 315 SCRA 94, WHICH HAS NOTHING TO
DO WITH CONSTRUCTION AGREEMENTS.21
Our Ruling
On the procedural issues raised, we find no merit in petitioners contention that with the institutionalization of
alternative dispute resolution under Republic Act (R.A.) No. 9285, 22 otherwise known as the Alternative Dispute
Resolution Act of 2004, the CA was divested of jurisdiction to review the decisions or awards of the CIAC.
Petitioner erroneously relied on the provision in said law allowing any party to a domestic arbitration to file in the
Regional Trial Court (RTC) a petition either to confirm, correct or vacate a domestic arbitral award.
We hold that R.A. No. 9285 did not confer on regional trial courts jurisdiction to review awards or decisions of
the CIAC in construction disputes. On the contrary, Section 40 thereof expressly declares that confirmation by
the RTC is not required, thus:
SEC. 40. Confirmation of Award. The confirmation of a domestic arbitral award shall be governed by Section
23 of R.A. 876.
A domestic arbitral award when confirmed shall be enforced in the same manner as final and executory
decisions of the Regional Trial Court.
The confirmation of a domestic award shall be made by the regional trial court in accordance with the Rules of
Procedure to be promulgated by the Supreme Court.
A CIAC arbitral award need not be confirmed by the regional trial court to be executory as provided under E.O.
No. 1008. (Emphasis supplied.)
Executive Order (EO) No. 1008 vests upon the CIAC original and exclusive jurisdiction over disputes arising
from, or connected with, contracts entered into by parties involved in construction in the Philippines, whether the
dispute arises before or after the completion of the contract, or after the abandonment or breach thereof. By
express provision of Section 19 thereof, the arbitral award of the CIAC is final and unappealable, except on
questions of law, which are appealable to the Supreme Court. With the amendments introduced by R.A. No.
7902 and promulgation of the 1997 Rules of Civil Procedure, as amended, the CIAC was included in the
enumeration of quasijudicial agencies whose decisions or awards may be appealed to the CA in a petition for
review under Rule 43. Such review of the CIAC award may involve either questions of fact, of law, or of fact and
law.23
Petitioner misread the provisions of A.M. No. 07-11-08-SC (Special ADR Rules) promulgated by this Court and
which took effect on October 30, 2009. Since R.A. No. 9285 explicitly excluded CIAC awards from domestic
arbitration awards that need to be confirmed to be executory, said awards are therefore not covered by Rule 11
of the Special ADR Rules,24 as they continue to be governed by EO No. 1008, as amended and the rules of
procedure of the CIAC. The CIAC Revised Rules of Procedure Governing Construction Arbitration 25 provide for
the manner and mode of appeal from CIAC decisions or awards in Section 18 thereof, which reads:
SECTION 18.2 Petition for review. A petition for review from a final award may be taken by any of the parties
within fifteen (15) days from receipt thereof in accordance with the provisions of Rule 43 of the Rules of Court.
As to the alleged error committed by the CA in deciding the case upon an issue not raised or litigated before the
CIAC, this assertion has no basis. Whether or not Mabunay had incurred delay in the performance of his
obligations under the Construction Agreement was the very first issue stipulated in the Terms of
Reference26 (TOR), which is distinct from the issue of the extent of respondents liability under the Performance
Bond.

Indeed, resolution of the issue of delay was crucial upon which depends petitioners right to the liquidated
damages pursuant to the Construction Agreement. Contrary to the CIACs findings, the CA opined that delay
should be reckoned only after the lapse of the one-year contract period, and consequently Mabunays liability for
liquidated damages arises only upon the happening of such condition.
We reverse the CA.
Default or mora on the part of the debtor is the delay in the fulfillment of the prestation by reason of a cause
imputable to the former. It is the non-fulfillment of an obligation with respect to time. 27
Article 1169 of the Civil Code provides:
ART. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or
extrajudicially demands from them the fulfillment of their obligation.
xxxx
It is a general rule that one who contracts to complete certain work within a certain time is liable for the damage
for not completing it within such time, unless the delay is excused or waived. 28
The Construction Agreement provides in Article 10 thereof the following conditions as to completion time for the
project
1. The CONTRACTOR shall complete the works called for under this Agreement within ONE (1) YEAR
or 365 Days reckoned from the 1st calendar day after signing of the Notice of Award and Notice to
Proceed and receipt of down payment.
2. In this regard the CONTRACTOR shall submit a detailed work schedule for approval by OWNER
within Seven (7) days after signing of this Agreement and full payment of 20% of the agreed contract
price. Said detailed work schedule shall follow the general schedule of activities and shall serve as basis
for the evaluation of the progress of work by CONTRACTOR.29
In this jurisdiction, the following requisites must be present in order that the debtor may be in default: (1) that the
obligation be demandable and already liquidated; (2) that the debtor delays performance; and (3) that the
creditor requires the performance judicially or extrajudicially.30
In holding that Mabunay has not at all incurred delay, the CA pointed out that the obligation to perform or
complete the project was not yet demandable as of November 19, 2008 when petitioner terminated the contract,
because the agreed completion date was still more than one month away (December 24, 2008). Since the
parties contemplated delay in the completion of the entire project, the CA concluded that the failure of the
contractor to catch up with schedule of work activities did not constitute delay giving rise to the contractors
liability for damages.
We cannot sustain the appellate courts interpretation as it is inconsistent with the terms of the Construction
Agreement. Article 1374 of the Civil Code requires that the various stipulations of a contract shall be interpreted
together, attributing to the doubtful ones that sense which may result from all of them taken jointly. Here, the
work schedule approved by petitioner was intended, not only to serve as its basis for the payment of monthly
progress billings, but also for evaluation of the progress of work by the contractor. Article 13.01 (g) (iii) of the
Construction Agreement provides that the contractor shall be deemed in default if, among others, it had delayed
without justifiable cause the completion of the project "by more than thirty (30) calendar days based on official
work schedule duly approved by the OWNER."31
Records showed that as early as April 2008, or within four months after Mabunay commenced work activities,
the project was already behind schedule for reasons not attributable to petitioner. In the succeeding months,
Mabunay was still unable to catch up with his accomplishment even as petitioner constantly advised him of the
delays, as can be gleaned from the following notices of delay sent by petitioners engineer and construction
manager, Engr. Sheila N. Botardo:
April 30, 2008

Seven Shades of Blue


Boracay Island
Malay, Aklan
1wphi1

Attention

: Mr. Martin Mabunay


General Manager

Thru

: Engr. Reynaldo Gapasin

Project

: Villa Beatriz

Subject

: Notice of Delay

Dear Mr. Mabunay:


This is to formalize our discussion with your Engineers during our meeting last April 23, 2008 regarding the
delay in the implementation of major activities based on your submitted construction schedule. Substantial delay
was noted in concreting works that affects your roof framing that should have been 40% completed as of this
date. This delay will create major impact on your over-all schedule as the finishing works will all be dependent
on the enclosure of the building.
In this regard, we recommend that you prepare a catch-up schedule and expedite the delivery of critical
materials on site. We would highly appreciate if you could attend our next regular meeting so we could
immediately address this matter. Thank you.
Very truly yours,
Engr. Sheila N. Botardo
Construction Manager LMI/FEPI32
October 15, 2008
xxxx
Dear Mr. Mabunay,
We have noticed continuous absence of all the Engineers that you have assigned on-site to administer and
supervise your contracted work. For the past two (2) weeks, your company does not have a Technical
Representative manning the jobsite considering the critical activities that are in progress and the delays in
schedule that you have already incurred. In this regard, we would highly recommend the immediate replacement
of your Project Engineer within the week.
We would highly appreciate your usual attention on this matter.
x x x x33
November 5, 2008
xxxx
Dear Mr. Mabunay,
This is in reference to your discussion during the meeting with Mr. Joohan Lee last October 30, 2008 regarding
the construction of the Field Office and Stock Room for Materials intended for Villa Beatriz use only. We
understand that you have committed to complete it November 5, 2008 but as of this date there is no
improvement or any ongoing construction activity on the said field office and stockroom.
We are expecting deliveries of Owner Supplied Materials very soon, therefore, this stockroom is badly needed.
We will highly appreciate if this matter will be given your immediate attention.

Thank you.
x x x x34
November 6, 2008
xxxx
Dear Mr. Mabunay,
We would like to call your attention regarding the decrease in your manpower assigned on site. We have
observed that for the past three (3) weeks instead of increasing your manpower to catch up with the delay it was
reduced to only 8 workers today from an average of 35 workers in the previous months.
Please note that based on your submitted revised schedule you are already delayed by approximately 57% and
this will worsen should you not address this matter properly.
We are looking forward for [sic] your cooperation and continuous commitment in delivering this project as per
contract agreement.
x x x x35
Subsequently, a joint inspection and evaluation was conducted with the assistance of the architects and
engineers of petitioner and Mabunay and it was found that as of November 14, 2008, the project was only
31.39% complete and that the uncompleted portion was 68.61% with an estimated value per Construction
Agreement asP27,880,419.52. Instead of doubling his efforts as the scheduled completion date approached,
Mabunay did nothing to remedy the delays and even reduced the deployment of workers at the project site.
Neither did Mabunay, at anytime, ask for an extension to complete the project. Thus, on November 19, 2008,
petitioner advised Mabunay of its decision to terminate the contract on account of the tremendous delay the
latter incurred. This was followed by the claim against the Performance Bond upon the respondent on December
18, 2008.
Petitioners claim against the Performance Bond included the liquidated damages provided in the Construction
Agreement, as follows:
ARTICLE 12 LIQUIDATED DAMAGES:
12.01 Time is of the essence in this Agreement. Should the CONTRACTOR fail to complete the PROJECT
within the period stipulated herein or within the period of extension granted by the OWNER, plus One (1) Week
grace period, without any justifiable reason, the CONTRACTOR hereby agrees
a. The CONTRACTOR shall pay the OWNER liquidated damages equivalent to One Tenth of One
Percent (1/10 of 1%) of the Contract Amount for each day of delay after any and all extensions and the
One (1) week Grace Period until completed by the CONTRACTOR.
b. The CONTRACTOR, even after paying for the liquidated damages due to unexecuted works and/or
delays shall not relieve it of the obligation to complete and finish the construction.
Any sum which maybe payable to the OWNER for such loss may be deducted from the amounts retained under
Article 9 or retained by the OWNER when the works called for under this Agreement have been finished and
completed.
Liquidated Damage[s] payable to the OWNER shall be automatically deducted from the contractors collectibles
without prior consent and concurrence by the CONTRACTOR.
12.02 To give full force and effect to the foregoing, the CONTRACTOR hereby, without necessity of any further
act and deed, authorizes the OWNER to deduct any amount that may be due under Item (a) above, from any
and all MONEY or amounts due or which will become due to the CONTRACTOR by virtue of this Agreement

and/or to collect such amounts from the Performance Bond filed by the CONTRACTOR in this
Agreement.36 (Emphasis supplied.)
Liability for liquidated damages is governed by Articles 2226 to 2228 of the Civil Code, which provide:
ART. 2226. Liquidated damages are those agreed upon by the parties to a contract, to be paid in case of breach
thereof.
ART. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if
they are iniquitous or unconscionable.
ART. 2228. When the breach of the contract committed by the defendant is not the one contemplated by the
parties in agreeing upon the liquidated damages, the law shall determine the measure of damages, and not the
stipulation.
A stipulation for liquidated damages is attached to an obligation in order to ensure performance and has a
double function: (1) to provide for liquidated damages, and (2) to strengthen the coercive force of the obligation
by the threat of greater responsibility in the event of breach. 37 The amount agreed upon answers for damages
suffered by the owner due to delays in the completion of the project.38 As a precondition to such award, however,
there must be proof of the fact of delay in the performance of the obligation. 39
Concededly, Article 12.01 of the Construction Agreement mentioned only the failure of the contractor to
complete the project within the stipulated period or the extension granted by the owner. However, this will not
defeat petitioners claim for damages nor respondents liability under the Performance Bond. Mabunay was
clearly in default considering the dismal percentage of his accomplishment (32.38%) of the work he contracted
on account of delays in executing the scheduled work activities and repeated failure to provide sufficient
manpower to expedite construction works. The events of default and remedies of the Owner are set forth in
Article 13, which reads:
ARTICLE 13 DEFAULT OF CONTRACTOR:
13.01 Any of the following shall constitute an Event of Default on the part of the CONTRACTOR.
xxxx
g. In case the CONTRACTOR has done any of the following:
(i.) has abandoned the Project
(ii.) without reasonable cause, has failed to commence the construction or has suspended the progress
of the Project for twenty-eight days
(iii.) without justifiable cause, has delayed the completion of the Project by more than thirty (30) calendar
days based on official work schedule duly approved by the OWNER
(iv.) despite previous written warning by the OWNER, is not executing the construction works in
accordance with the Agreement or is persistently or flagrantly neglecting to carry out its obligations
under the Agreement.
(v.) has, to the detriment of good workmanship or in defiance of the Owners instructions to the contrary,
sublet any part of the Agreement.
13.02 If the CONTRACTOR has committed any of the above reasons cited in Item 13.01, the OWNER may after
giving fourteen (14) calendar days notice in writing to the CONTRACTOR, enter upon the site and expel the
CONTRACTOR therefrom without voiding this Agreement, or releasing the CONTRACTOR from any of its
obligations, and liabilities under this Agreement. Also without diminishing or affecting the rights and powers
conferred on the OWNER by this Agreement and the OWNER may himself complete the work or may employ
any other contractor to complete the work. If the OWNER shall enter and expel the CONTRACTOR under this
clause, the OWNER shall be entitled to confiscate the performance bond of the CONTRACTOR to compensate

for all kinds of damages the OWNER may suffer. All expenses incurred to finish the Project shall be charged to
the CONTRACTOR and/or his bond. Further, the OWNER shall not be liable to pay the CONTRACTOR until the
cost of execution, damages for the delay in the completion, if any, and all; other expenses incurred by the
OWNER have been ascertained which amount shall be deducted from any money due to the CONTRACTOR on
account of this Agreement. The CONTRACTOR will not be compensated for any loss of profit, loss of goodwill,
loss of use of any equipment or property, loss of BUSINESS OPPORTUNITY , additional financing cost or
overhead or opportunity losses related to the unaccomplished portions of the work. 40 (Emphasis supplied.)
As already demonstrated, the contractors default in this case pertains to his failure to substantially perform the
work on account of tremendous delays in executing the scheduled work activities. Where a party to a building
construction contract fails to comply with the duty imposed by the terms of the contract, a breach results for
which an action may be maintained to recover the damages sustained thereby, and of course, a breach occurs
where the contractor inexcusably fails to perform substantially in accordance with the terms of the contract. 41
The plain and unambiguous terms of the Construction Agreement authorize petitioner to confiscate the
Performance Bond to answer for all kinds of damages it may suffer as a result of the contractors failure to
complete the building. Having elected to terminate the contract and expel the contractor from the project site
under Article 13 of the said Agreement, petitioner is clearly entitled to the proceeds of the bond as
indemnification for damages it sustained due to the breach committed by Mabunay. Such stipulation allowing the
confiscation of the contractors performance bond partakes of the nature of a penalty clause. A penalty clause,
expressly recognized by law, is an accessory undertaking to assume greater liability on the part of the obligor in
case of breach of an obligation. It functions to strengthen the coercive force of 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 without the necessity of proof on the existence and on the measure of damages
caused by the breach. It is well-settled that so long as such stipulation does not contravene law, morals, or
public order, it is strictly binding upon the obligor.42
Respondent, however, insists that it is not liable for the breach committed by Mabunay because by the terms of
the surety bond it issued, its liability is limited to the performance by said contractor to the extent equivalent to
20% of the down payment. It stresses that with the 32.38% completion of the project by Mabunay, its liability
was extinguished because the value of such accomplishment already exceeded the sum equivalent to 20%
down payment (P8.4 million).
The appellate court correctly rejected this theory of respondent when it ruled that the Performance Bond
guaranteed the full and faithful compliance of Mabunays obligations under the Construction Agreement, and
that nowhere in law or jurisprudence does it state that the obligation or undertaking by a surety may be
apportioned.
The pertinent portions of the Performance Bond provide:
The conditions of this obligation are as follows:
Whereas the JPLUS ASIA, requires the principal SEVEN SHADES OF BLUE CONSTRUCTION AND
DEVELOPMENT, INC. to post a bond of the abovestated sum to guarantee 20% down payment for the
construction of Building 25 (Villa Beatriz) 72-Room Condotel, The Lodgings inside Fairways and Bluewater,
Boracay Island, Malay, Aklan.
Whereas, said contract required said Principal to give a good and sufficient bond in the above-stated sum to
secure the full and faithful performance on his part of said contract.
It is a special provision of this undertaking that the liability of the surety under this bond shall in no case exceed
the sum of P8,400,000.00 Philippine Currency.
Now, Therefore, if the Principal shall WELL and truly perform and fulfill all the undertakings, covenants, terms,
conditions and agreements stipulated in said contract, then this obligation shall be null and void; otherwise to
remain in full force and effect.43 (Emphasis supplied.)
While the above condition or specific guarantee is unclear, the rest of the recitals in the bond unequivocally
declare that it secures the full and faithful performance of Mabunays obligations under the Construction
Agreement with petitioner. By its nature, a performance bond guarantees that the contractor will perform the

contract, and usually provides that if the contractor defaults and fails to complete the contract, the surety can
itself complete the contract or pay damages up to the limit of the bond. 44 Moreover, the rule is that if the
language of the bond is ambiguous or uncertain, it will be construed most strongly against a compensated
surety and in favor of the obligees or beneficiaries under the bond, in this case petitioner as the Project Owner,
for whose benefit it was ostensibly executed.45
The imposition of interest on the claims of petitioner is likewise in order. As we held in Commonwealth Insurance
Corporation v. Court of Appeals46
Petitioner argues that it should not be made to pay interest because its issuance of the surety bonds was made
on the condition that its liability shall in no case exceed the amount of the said bonds.
We are not persuaded. Petitioners argument is misplaced.
Jurisprudence is clear on this matter. As early as Tagawa vs. Aldanese and Union Gurantee Co. and reiterated
in Plaridel Surety & Insurance Co., Inc. vs. P.L. Galang Machinery Co., Inc., and more recently, in Republic vs.
Court of Appeals and R & B Surety and Insurance Company, Inc., we have sustained the principle that if a
surety upon demand fails to pay, he can be held liable for interest, even if in thus paying, its liability becomes
more than the principal obligation. The increased liability is not because of the contract but because of the
default and the necessity of judicial collection.
Petitioners liability under the suretyship contract is different from its liability under the law. There is no question
that as a surety, petitioner should not be made to pay more than its assumed obligation under the surety bonds.
However, it is clear from the above-cited jurisprudence that petitioners liability for the payment of interest is not
by reason of the suretyship agreement itself but because of the delay in the payment of its obligation under the
said agreement.47 (Emphasis supplied; citations omitted.)
1wphi1

WHEREFORE, the petition for review on certiorari is GRANTED. The Decision dated January 27, 2011 and
Resolution dated December 8, 2011 of the Court of Appeals in CA-G.R. SP No. 112808 are hereby REVERSED
and SET ASIDE.
The Award made in the Decision dated February 2, 2010 of the Construction Industry Arbitration Commission Is
hereby REINSTATED with the following MODIFICATIONS:
"Accordingly, in view of our foregoing discussions and dispositions, the Tribunal hereby adjudges, orders and
directs:
1) Respondent Utassco to pay to petitioner J Plus Asia Development Corporation the full amount of the
Performance Bond, P8,400,000.00, pursuant to Art. 13 of the Construction Agreement dated December
24, 2007, with interest at the rate of 6% per annum computed from the date of the filing of the complaint
until the finality of this decision, and 12% per annum computed from the date this decision becomes final
until fully paid; and
2) Respondent Mabunay to indemnify respondent Utassco of the amounts respondent Utassco will have
paid to claimant under this decision, plus interest thereon at the rate of 12% per annum computed from
the date he is notified of such payment made by respondent Utassco to claimant until fully paid, and to
pay UtasscoP100,000.00 as attorney's fees.
SO ORDERED.
With the above modifications, the Writ of Execution dated November 24, 2010 issued by the CIAC Arbitral
Tribunal in CIAC Case No. 03-2009 is hereby REINSTATED and UPHELD.
No pronouncement as to costs.
SO ORDERED.
MARTIN S. VILLARAMA, JR.
Associate Justice

WE CONCUR:
MARIA LOURDES P. A. SERENO
Chief Justice
Chairperson
TERESITA J. LEONARDO-DE CASTRO
Associate Justice

LUCAS P. BERSAMIN
Associate Justice

BIENVENIDO L. REYES
Associate Justice
C E R TI F I C ATI O N
Pursuant to Section 13, Article VIII of the 1987 Constitution, I certify that the conclusions in the above Decision
had been reached in consultation before the case was assigned to the writer of the opinion of the Court's
Division.
MARIA LOURDES P. A. SERENO
Chief Justice

Ligutan vs. CA G.R#138677


Facts: Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained a loan in the amount of P12
0,000.00 from respondent Security Bank and Trust Company. Petitioners executed a promissorynote binding
themselves, jointly and severally, with an interest of 15.189% per annum upon maturityand to pay a penalty of
5% every month on the outstanding principal and interest in case of default and
also a 10% attorneys fees if the matter were indorsed to a lawyer for collection.
The obligation matured, the petitioners were not able to settle the obligation; The bank gave anextension, still
the same happened. Since the petitioners still defaulted, the former filed a complaint forrecovery of
the due amount.
Issue: Whether the interest and penalty charge imposed by private respondent bank on
petitioners loan
are manifestly exorbitant, iniquitous and unconscionable?Ruling: The obligor would then be bound
to pay the stipulated indemnity without the necessity of proof on the existence and on the measure of
damages caused by the breach. Although a court may not atliberty ignore the freedom of the parties to
agree on such terms and conditions as they see fit thatcontravene neither law nor morals, good
customs, public order or public policy, a stipulated penalty,nevertheless, may be equitably reduced
by the courts if it is iniquitous or unconscionable or if theprincipal obligation has been partly
or irregularly complied with.The question of whether a penalty is reasonable or iniquitous can be
partly subjective and partlyobjective. 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 itsconsequences, the supervening realities, the standing and relationship
of the parties, and the like, theapplication of which, by and large, is addressed to the sound
discretion of the court.The CA EXERCISED good judgment in reducing the stipulated penalty interest from
5% to 3% a month. It
was also been held that the 15.189% per annum stipulated interest and the 10% attorneys is reasonable
and not excessive. The interest prescribed in loan financing arrangements is a fundamental part of
thebanking business and the core of a bank's existence.

Republic of the Philippines


SUPREME COURT
Manila
EN BANC
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
customsbroker; (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 not observed but these cases, enumerated in Article 1734 1 of the Civil Code,
are exclusive, not one of which can be applied to this case.
The question of charging both the carrier and the arrastre operator with the obligation of properly delivering the
goods to the consignee has, too, been passed upon by the Court. In 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
Service, 2 decided 3 on 15 May 1969, involved a suit for recovery of MONEY arising out of short deliveries and
pilferage of goods. In this case, appellee Malayan Insurance (the plaintiff in the lower court) averred in its complaint
that the total amount of its claim for the value of the undelivered goods amounted to P3,947.20. This demand,
however, was neither established in its totality nor definitely ascertained. In the stipulation of facts later entered into by
the parties, in lieu of proof, the amount of P1,447.51 was agreed upon. The trial court rendered judgment ordering the
appellants (defendants) Manila Port Service and Manila Railroad Company to pay appellee Malayan Insurance the

sum of P1,447.51 with legal interest thereon from the date the complaint was filed on 28 December 1962 until full
payment thereof. The appellants then assailed,inter alia, the award of legal interest. In sustaining the appellants, this
Court ruled:

Interest upon an obligation which calls for the payment of MONEY , absent a stipulation, is the
legal rate. Such interest normally is allowable from the date of demand, judicial or extrajudicial.
The trial court opted for judicial demand as the starting point.
But then upon the provisions of Article 2213 of the Civil Code, interest "cannot be recovered
upon unliquidated claims or damages, except when the demand can be established with
reasonable certainty." And as was held by this Court in Rivera vs. Perez, 4 L-6998, February 29,
1956, if the suit were for damages, "unliquidated and not known until definitely ascertained, assessed
and determined by the courts after proof (Montilla c. Corporacion de P.P. Agustinos, 25 Phil. 447;
Lichauco v. Guzman,
38 Phil. 302)," then, interest "should be from the date of the decision." (Emphasis supplied)
The case of Reformina vs. Tomol, 5 rendered on 11 October 1985, was for "Recovery of Damages for Injury to
Person and Loss of Property." After trial, the lower court decreed:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and third party defendants
and against the defendants and third party plaintiffs as follows:
Ordering defendants and third party plaintiffs Shell and Michael, Incorporated to pay jointly and
severally the following persons:
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)
should have, instead, been applied. This Court 6 ruled:
The judgments spoken of and referred to are judgments in litigations involving loans or
forbearance of any MONEY , goods or credits. Any other kind of monetary judgment which has
nothing to do with, nor involving loans or forbearance of any MONEY , goods or credits does
not fall within the coverage of the said law for it is not within the ambit of the authority granted to
the Central Bank.
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.
The above rule was reiterated in Philippine Rabbit Bus Lines, Inc., v. Cruz, 7 promulgated on 28 July 1986. The
case was for damages occasioned by an injury to person and loss of property. The trial court awarded private
respondent Pedro Manabat actual and compensatory damages in the amount of P72,500.00 with legal interest
thereon from the filing of the complaint until fully paid. Relying on the Reformina v. Tomol case, this Court 8 modified
the interest award from 12% to 6% interest per annum but sustained the time computation thereof, i.e., from the filing
of the complaint until fully paid.
In Nakpil and Sons vs. Court of Appeals, 9 the trial court, in an action for the recovery of damages arising from the
collapse of a building, ordered,

inter alia, the "defendant United Construction Co., Inc. (one of the petitioners)
. . . 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 annum imposed on the total amount of the monetary award was in contravention of
law." The Court 10 ruled out the applicability of the Reformina and Philippine Rabbit Bus Lines cases and, in
its resolution of 15 April 1988, it explained:
There should be no dispute that the imposition of 12% interest pursuant to Central Bank Circular
No. 416 . . . 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.)
The subsequent case of American Express International, Inc., vs. Intermediate Appellate Court 11 was a petition
for review on certiorari from the decision, dated 27 February 1985, of the then Intermediate Appellate Court reducing
the amount of moral and exemplary damages awarded by the trial court, to P240,000.00 and P100,000.00,
respectively, and its resolution, dated 29 April 1985, restoring the amount of damages awarded by the trial court, i.e.,
P2,000,000.00 as moral damages and P400,000.00 as exemplary damages with interest thereon at 12% per annum
from notice of judgment, plus costs of suit. In a decision of 09 November 1988, this Court, while recognizing the right
of the private respondent to recover damages, held the award, however, for moral damages by the trial court, later
sustained by the IAC, to be inconceivably large. The Court 12 thus set aside the decision of the appellate court and
rendered a new one, "ordering the petitioner to pay private respondent the sum of One Hundred Thousand
(P100,000.00) Pesos as moral damages, with
six (6%) percent interest thereon computed from the finality of this decision until paid. (Emphasis supplied)
Reformina came into fore again in the 21 February 1989 case of Florendo v. Ruiz 13 which arose from a breach
of EMPLOYMENT contract. For having been illegally dismissed, the petitioner was awarded by the trial court moral
and exemplary damages without, however, providing any legal interest thereon. When the decision was appealed to
the Court of Appeals, the latter held:
WHEREFORE, except as modified hereinabove the decision of the CFI of Negros Oriental dated
October 31, 1972 is affirmed in all respects, with the modification that defendants-appellants,
except defendant-appellant Merton Munn, are ordered to pay, jointly and severally, the amounts
stated in the dispositive portion of the decision, including the sum of P1,400.00 in concept of
compensatory damages, with interest at the legal rate from the date of the filing of the complaint
until fully paid(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.
Quite recently, the Court had another occasion to rule on the matter. National Power Corporation
vs. Angas, 14decided 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 Court 15 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 Circular imposing the 12% interest per annum applies only to loans or
forbearance 16of money, goods or credits, as WELL as to judgments involving such loan or forbearance of money,
goods or credits, and that the 6% interest under the Civil Code governs when the transaction involves the payment of
indemnities in the concept of damage arising from the breach or a delay in the performance of obligations in general.
Observe, too, that in these cases, a common time frame in the computation of the 6% interest per annum has been
applied, i.e., from the time the complaint is filed until the adjudged amount is fully paid.
The "second group", did not alter the pronounced rule on the application of the 6% or 12% interest per
annum, 17depending on whether or not the amount involved is a loan or forbearance, on the one hand, or one of
indemnity for damage, on the other hand. Unlike, however, the "first group" which remained consistent in holding that
the running of the legal interest should be from the time of the filing of the complaint until fully paid, the "second
group" varied on the commencement of the running of the legal interest.
Malayan held that the amount awarded should bear legal interest from the date of the decision of the court a
quo,explaining that "if the suit were for damages, 'unliquidated and not known until definitely ascertained,
assessed and determined by the courts after proof,' then, interest 'should be from the date of the
decision.'" American Express International v. IAC, introduced a different time frame for reckoning the 6% interest
by ordering it to be "computed from the finality of (the) decision until paid." The Nakpil and Sons case ruled that
12% interest per annum should be imposed from the finality of the decision until the judgment amount is paid.
The ostensible discord is not difficult to explain. The factual circumstances may have called for different
applications, guided by the rule that the courts are vested with discretion, depending on the equities of each
case, on the award of interest. Nonetheless, it may not be unwise, by way of clarification and reconciliation, to
suggest the following rules of thumb for future guidance.
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts 18 is
breached, the contravenor can be held liable for damages. 19 The provisions under Title XVIII on "Damages" of the
Civil Code govern in determining the measure of recoverable damages. 20
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate
of interest, as WELL as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of MONEY , i.e., a loan or
forbearance of MONEY , the interest due should be that which may have been stipulated in
writing. 21 Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. 22 In the
absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of Article 1169 23 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of MONEY , is breached, an interest on the
amount of damages awarded may be imposed at the discretion of the court 24 at the rate of 6% per annum. 25 No
interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be
established with reasonable certainty. 26 Accordingly, where the demand is established with reasonable certainty, the
interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when
such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run
only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to

have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the
amount finally adjudged.

3. When the judgment of the court awarding a sum of MONEY becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of
credit.
WHEREFORE, the petition is partly GRANTED. The appealed decision is AFFIRMED with the MODIFICATION
that the legal interest to be paid is SIX PERCENT (6%) on the amount due computed from the decision, dated
03 February 1988, of the court a quo. A TWELVE PERCENT (12%) interest, in lieu of SIX PERCENT (6%), shall
be imposed on such amount upon finality of this decision until the payment thereof.
SO ORDERED.
Narvasa, C.J., Cruz, Feliciano, Padilla, Bidin, Regalado, Davide, Jr., Romero, Bellosillo, Melo, Quiason,
Puno and Kapunan, JJ., concur.
Mendoza, J., took no part.
#Footnotes

1 Art. 1734. Common carriers are responsible for the loss, destruction, or deterioration of the
goods, unless the same is due to any of the following causes only:
(1) Flood, storm, earthquake, lightning, or other natural disaster or calamity;
(2) Act of the public enemy in war, whether international or civil;
(3) Act or omission of the shipper or owner of the goods;
(4) The character of the goods or defects in the packing or in the containers;
(5) Order or act of competent public authority.
2 28 SCRA 65.
3 Penned by Justice Conrado Sanchez, concurred in by Justices Jose B.L. Reyes, Arsenio
Dizon, Querube Makalintal, Calixto Zaldivar, Enrique Fernando, Francisco Capistrano, Claudio
Teehankee and Antonio Barredo, Chief Justice Roberto Concepcion and Justice Fred Ruiz
Castro were on official leave.
4 The correct caption of the case is "Claro Rivera vs. Amadeo Matute, L-6998,
29 February 1956," 98 Phil. 516.
5 139 SCRA 260, 265.
6 Penned by Justice Serafin Cuevas, concurred in by Justices Hermogenes Concepcion, Jr.,
Vicente Abad Santos, Ameurfina Melencio-Herrera, Venicio Escolin, Lorenzo Relova, Hugo
Gutierrez, Jr., Buenaventura de la Fuente, Nestor Alampay and Lino Patajo. Justice Ramon
Aquino concurred in the result. Justice Efren Plana filed a concurring and dissenting opinion,
concurred in by Justice Claudio Teehankee while Chief Justice Felix Makasiar concurred with the
separate opinion of Justice Plana.
7 143 SCRA 158.
8 Penned by then Justice, now Chief Justice, Andres Narvasa, concurred in by Justices Pedro
Yap, Ameurfina Melencio-Herrera, Isagani A. Cruz and Edgardo Paras.
9 160 SCRA 334.
10 Penned by Justice Edgardo Paras, with the concurrence of Justices Marcelo Fernan, Teodoro
Padilla, Abdulwahid Bidin, and Irene Cortes. Justice Hugo Gutierrez, Jr., took no part because he
was the ponente in the Court of Appeals.
11 167 SCRA 209.
12 Rendered per curiam with the concurrence of then Chief Justice Marcelo Fernan, Justices
Andres Narvasa, Isagani A. Cruz, Emilio Gancayco, Teodoro Padilla, Abdulwahid Bidin, Abraham
Sarmiento, Irene Cortes, Carolina Grio-Aquino, Leo Medialdea and Florenz Regalado. Justices
Ameurfina Melencio-Herrera and Hugo Gutierrez, Jr., took no part because they did not
participate in the deliberations. Justices Edgardo Paras and Florentino Feliciano also took no
part.
13 170 SCRA 461.
14 208 SCRA 542.
15 Penned by Justice Edgardo Paras with the concurrence of Justices Ameurfina MelencioHerrera, Teodoro Padilla, Florenz Regalado and Rodolfo Nocon.
16 Black's Law Dictionary (1990 ed., 644) citing the case of Hafer v. Spaeth,
22 Wash. 2d 378, 156 P.2d 408, 411 defines the word forbearance, within the context of usury
law, as a contractual obligation of lender or creditor to refrain, during given period of time, from
requiring borrower or debtor to repay loan or debt then due and payable.
17 In the case of Malayan Insurance, the application of the 6% and 12% interest per annum has
no bearing considering that this case was decided upon before the issuance of Circular No. 416
by the Central Bank.

18 Art. 1157. Obligations arise from.


(1) Law;
(2) Contracts;
(3) Quasi-contracts;
(4) Acts or omissions punished by law; and
(5) Qausi-delicts."
19 Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or
delay, and those who in any manner contravene the tenor thereof, are liable for damages.
20 Art. 2195. The provisions of this Title (on Damages) shall be respectively applicable to all
obligations mentioned in article 1157.
21 Art. 1956. No interest shall be due unless it has been expressly stipulated in writing.
22 Art. 2212. Interest due shall earn legal interest from the time it is judicially demanded,
although the obligation may be silent upon this point.
23 Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfillment of their obligation.
"However, the demand by the creditor shall not be necessary in order that delay may
exist:
(1) When the obligation or the law expressly so declare; or
(2) When from the nature and the circumstances of the obligation it appears that the
designation of the time when the thing is to be delivered or the service is to be rendered
was a controlling motive for the establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it beyond his
power to perform.
"In reciprocal obligations, neither party incurs in delay if the other does not comply or is
not ready to comply in a proper manner with what is incumbent upon him. From the
moment one of the parties fulfills his obligation, delay by the other begins."
24 Art. 2210. Interest may, in the discretion of the court, be allowed upon damages awarded for
breach of contract.
Art. 2211. In crimes and quasi-delicts, interest as a part of the damages may, in a proper case,
be adjudicated in the discretion of the court.
25 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, and in the absence of stipulation, the legal interest, which
is six per cent per annum.
26 Art. 2213. Interest cannot be recovered upon unliquidated claims or damages, except when
the demand can be established with reasonable certainty.

Eastern Shipping Lines, Inc. v. CA and The First Nationwide Assurance Corp.
G.R. No. 97412 July 12, 1994
Vitug, J.
FACTS:
13 coils of uncoated 7-wire stress relieved wire strand for pre-stressed concrete
wereshipped on board a vessel owned and operated by Eastern Shipping Lines at Kobe,
Japan,for delivery to Stresstek Post-Tensioning Phils., Inc. in Manila
while en route from Kobe to Manila, the carrying vessel encountered very rough seas andstormy
weather; the coils wrapped in burlap cloth and cardboard paper were stored in thelower hold of
the hatch of the vessel which was flooded with water; the water entered thehatch when the
vessel encountered heavy weather en route to Manila; upon request, a survey of bad
order cargo was conducted at the pier in the presence of the representativesof the consignee
and E. Razon, Inc. and it was found that 7 coils were rusty on one side each; upon
survey conducted at the consignees warehouse it was found that the
wettingo f t h e c a r g o w a s c a u s e d b y f r e s h w a t e r t h a t e n t e r e d t h e h a t c h w
h e n t h e v e s s e l encountered heavy weather; all 13 coils were extremely rusty and totally
unsuitable forthe intended purpose
The First Nationwide Assurance Corp. indemnified the consignee in the amo
u n t o f P171,923.00 for damage and loss to the insured cargo
ISSUE:

WON Eastern Shipping Lines is liable


HELD:
Yes. under Art. 1733, common carriers are bound to observe extraordinary vigilance overgoods according to all circumstances of each case
Art. 1735: In all cases other than those mentioned in Art. 1734, if the goods are
lost,destroyed or deteriorated, common carriers are presumed to have been at fault or to
haveacted negligently, unless they prove that they observed extraordinary diligence
Since the carrier has failed to establish any caso fortuito, the presumption by law of faultor
negligence on the part of the carrier applies; and the carrier must present evidence thatit has
observed the extraordinary diligence required by Article 1733 of the Civil Code inorder
to escape liability for damage or destruction to the goods that it had admittedlycarried
in this case. But no evidence was presented; hence, the carrier cannot escape liability.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 111584
September 17, 2001
PRODUCERS BANK OF THE PHILIPPINES, petitioner,
vs.
COURT OF APPEALS and SPOUSES SALVADOR Y. CHUA and EMILIA U. CHUA, respondents.
MELO, J.:
The instant petition assails the decision of the Court of Appeals in its CA G.R.CV No. 20220, dated October 31,
1991, affirming with modification the decision of Branch 48 of the Regional Trial Court of the 6th Judicial Region
stationed in Bacolod City, as WELL as the resolution dated August 12, 1993 denying petitioner's motion for
partial consideration. Undersigned ponente was given this case in pursuance of A. M. No. 00-9-03-SC dated
February 27, 2001 distributing the so-called back-log cases.
The generative facts of the case may be chronicled as follows:
Sometime in April, 1982, respondent Salvador Chua was offered by Mr. Jimmy Rojas, manager of petitioner
bank, to transfer his account from Pacific Banking Corporation to herein petitioner Producers Bank of the
Philippines. In view of Rojas' assurances of longer loan terms and lower rates of interest, respondent spouses
opened and maintained substantial savings and current deposits with the Bacolod branch of petitioner bank.
Likewise, private respondents obtained various loans from petitioner bank, one of which was a loan for
P2,000,000.00 which was secured by a real estate mortgage and payable within a period of three (3) years or
from 1982 to 1985. On January 20, 1984, private respondents deposited with petitioner bank the total sum of
P960,000.00, which was duly entered in private respondents' savings account passbook. However, petitioner
bank failed to credit this deposit in private respondents' savings account due to the fact that its Branch Manager,
Sixto Castillo, absconded with the MONEY of the bank's depositors. Also, petitioner bank dishonored the
checks drawn out by private respondents in favor of their various creditors on the ground of insufficient funds,
despite the fact that at that time, the balance of private respondents' deposit was in the amount of
P1,051,051.19. These events prompted private respondents to request for copies of their ledgers covering their
savings and current accounts, but petitioner bank refused. Due to petitioner bank's refusal to furnish private
respondents copies of their ledgers, private respondents instituted on January 30, 1984 an action for damages
against petitioner bank which was docketed as Civil Case No. 2718. On the other hand, petitioner bank filed with
the City Sheriff of Bacolod a petition for extrajudicial foreclosure of the real estate mortgage during the pendency
of Civil Case No. 2718. As a result, private respondents filed a complaint for injunction and damages docketed
as Civil Case No. 3276, alleging that the petition for extrajudicial foreclosure was without basis and was
instituted maliciously in order to harass private respondents. On April 26, 1988, the trial court rendered its
decision on the latter case, the dispositive portion of which reads:
WHEREFORE, from the evidence adduced, judgment is hereby rendered in favor of plaintiff ordering the
defendant as follows:
1) To pay plaintiff the sum of P2,000,000.00 as moral damages, with legal rate of interest; the
sum of P90,000.00 per month and P18,000.00 per month representing plaintiff's unrealized
profits from his cement and gasoline station business, respectively, to commence from October
16, 1984, with legal rate of interest until fully paid; the sum of P250,000.00 as exemplary
damages;
2) To off-set the sum of P960,000.00 deposited by plaintiff on January 20, 1984 and entered in
his Passbook No. 38240, together with its incremental interests computed at banking rate and to
commence from January 20, 1984 with his agricultural loan account in the sum of P1,300,000.00
with interest thereon computed at fourteen (14%) percent per annum, to commence from

January 4, 1984, covered by a real estate mortgage, both of which shall have a cut-off time
frame on the date of this decision;
3) That should the said savings deposit and its interest be sufficient to cover the off-setting,
compensation shall take place and to be taken from the amounts awarded to plaintiff in the form
of moral, actual and compensatory damages;
4) That the time loan in the sum of P175,000.00 and the clean loan of P400,000.00, both without
interest, shall be off-settled by the moral, actual and compensatory damages herein awarded to
plaintiff;
5) That after compensation or set-off had taken place, to pay plaintiff the balance of the adjudged
moral, actual and compensatory damages, with legal rate of interest until fully paid;
6) To render an accounting to plaintiff with respect to his Account Nos. 0142-0014-0 and 0420014-1 for the period covering January to December, 1982;
7) That in order to make the bank's record complete, to reform the deed of real estate mortgage
conformably with the agreement by stipulating in the said document that the maturity date of the
agricultural loan is April 5, 1987 at the same rate of interest of fourteen (14%) percent per
annum, deducting from the original amount of the loan the payments made on the principal and
interests; this reformation shall take place simultaneously with the off-setting of accounts;
8) To pay plaintiff the sum equivalent to fifteen (15%) percent of the amount representing the
balance of the sums awarded as moral, actual and compensatory damages as attorney's fees;
9) To pay plaintiff the costs of suit;
10) The writ of preliminary injunction issued by this Court is rendered permanent; and
11) The counterclaim is hereby dismissed.
SO ORDERED.
(Rollo, pp. 261-263.)
On October 31, 1991, upon appeal by petitioner bank, the Court of Appeals modified the decision of the trial
court as follows:
WHEREFORE, from the evidence adduced, judgment is hereby rendered as follows:
1. Ordering the defendant
a. To pay plaintiff the sum of P500,000.00 as moral and exemplary damages;
b. To pay the sum of P18,000.00 per month representing plaintiffs' unrealized profits from his
gasoline station business to commence from October 16, 1984, with legal rate of interest, until
fully paid;
c. To allow the plaintiffs to offset their financial obligation with the defendant bank by the moral,
exemplary, actual and compensatory damages herein awarded in favor of the aforesaid plaintiffs;
d. If, after the off-setting, a balance remains in favor of the plaintiffs, to pay the said plaintiffs
such balance of the adjudged moral, exemplary, actual and compensatory damages, with legal
rate of interest until fully paid, as of the time of off-setting;
e. To render an accounting to plaintiffs with respect to their Account Nos. 0142-0014-0 and 0420014-1 for the period covering January to December, 1982;
f. To pay plaintiffs the sum of P100,000.00 as attorney's fees.
g. To pay the costs of suit.
2. Ordering the plaintiffs
a. To settle their loan obligation with the defendant bank within 90 days from the finality of this
decision, subject to the resolution of this Court to the effect that they shall be relieved from the
payment of penalties and surcharges on their outstanding balance starting January 20, 1984;
3. The plaintiffs' prayer for reformation of their mortgage contract or annulment thereof is hereby denied;
4. The counterclaim of defendant-appellant are hereby dismissed.
SO ORDERED.
(Rollo, pp. 86-87.)
Petitioner moved for a partial reconsideration of the above decision but the same was denied on August 12,
1993. Hence, the instant petition with the following submissions which allegedly warrant our review of the
assailed decision, viz.:
1. The Court of Appeals erred in not ruling that the application for extrajudicial foreclosure of real estate
mortgage is legal and valid;
2. The Court of Appeals erred in not granting petitioner bank its right to foreclose extrajudicially the real
estate mortgage and to proceed with its application for extrajudicial foreclosure of real estate mortgage;
3. The Court of Appeals erred in ruling that private respondents be relieved from the payment of
penalties and surcharges on their outstanding balance starting January 20, 1984;
4. The Court of Appeals erred in awarding moral and exemplary damages of P500,000.00, unrealized
profit of P18,000.00 per month, and attorney's fees of P100,000.00 against petitioner bank;

5. The Court of Appeals erred in ordering an accounting to private respondents with respect to their
Account Nos. 0142-0014-0 and 042-0014-1 for the period covering January to December, 1982.
It should at once be apparent that except for the first and second imputed errors which involve petitioner bank's
right to foreclose extrajudicially the real estate mortgage, the resolution of the assigned errors entails a review of
the factual conclusions of the appellate court and the evidentiary bases thereof. Such an assessment is not, as
a rule, proper in appeals from the Court of Appeals which should be confined to a consideration and
determination only of issues of law as its findings of fact are deemed conclusive (Villanueva vs. Court of
Appeals, 294 SCRA 90 [1998]) especially so in this case because the findings of fact of the appellate court
concur with those of the trial court. To reiterate, this Court's jurisdiction is only limited to reviewing errors of law
in the absence of any showing that the findings complained of are totally devoid of support in the record or they
are glaringly erroneous as to constitute serious abuse of discretion. Nonetheless, considering the amount
involved, as WELL as for the satisfaction of the parties who have vigorously pursued this case since 1984, the
Court, in the EXERCISE of its discretion, examined the factual bases, particularly with respect to the propriety
of the damages awarded to private respondents.
The first and second assignments of error, being interrelated, shall be jointly discussed.
Petitioner contends that it has the right to foreclose the real estate mortgage executed by private respondents in
its favor as the loan under the real estate mortgage contract had become due and demandable. This argument
is not well-taken. Foreclosure is but a necessary consequence of non-payment of a mortgage indebtedness. As
a rule, the mortgage can be foreclosed only when the debt remains unpaid at the time it is due (Gov't. of the P.I.
vs. Espejo, 57 Phil. 496 [1932]). As found by the trial court and the Court of Appeals, and as borne by the
evidence on record, private respondents were constantly paying their loan obligations with petitioner bank. In
fact the amount of P960,000.00 was properly deposited with petitioner bank as evidenced by the corresponding
deposit slip and the entry made in private respondents' savings account passbook. It is, therefore, not the fault
of private respondents that their payment amounting to P960,000.00 was not credited to their account. Thus, it is
certain that the loan which was secured by a real estate mortgage cannot be considered as unpaid so as to
warrant foreclosure on the mortgage.
Clearly, private respondents have not yet defaulted on the payment of their loans. Moreover, the term of the
loan, as agreed upon by the parties, is three years, or from 1982 to 1985. But petitioner filed its application for
extrajudicial foreclosure on October 15, 1984. Indisputably, the application for foreclosure of the mortgage on
October 15, 1984 was premature because by then, private respondents' loan was not yet due and demandable.
Likewise, both the Court of Appeals and the trial court found that private respondents are entitled to moral and
exemplary damages. We agree. Moral and exemplary damages may be awarded without proof of pecuniary
loss. In awarding such damages, the court shall take into account the circumstances obtaining in the case and
assess damages according to its discretion. As borne out by the record of this case, private respondents are
engaged in several businesses, such as rice and corn trading, cement dealership, and gasoline proprietorship.
The dishonor of private respondents' checks and the foreclosure initiated by petitioner adversely affected the
credit standing as well as the business dealings of private respondents as their suppliers discontinued credit
lines resulting in the collapse of their businesses. In the case of Leopoldo Araneta vs. Bank of America (40
SCRA 144 [1971]), we held that:
"The financial credit of a businessman is a prized and valuable asset, it being a significant part of the
foundation of his business. Any adverse reflection thereon constitutes some financial loss to him."
The damage to private respondents' reputation and social standing entitles them to moral damages. Article
2217, in relation to Article 2220, of the Civil Code explicitly provides that "moral damages include physical
suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social
humiliation, and similar injury." Obviously, petitioner bank's wrongful act caused serious anxiety, embarrassment,
and humiliation to private respondents for which they are entitled to recover moral damages in the amount of
P300,000.00 which we deem to be reasonable.
The award of exemplary damages is in order in view of the malicious and unwarranted application for
extrajudicial foreclosure by petitioner which was obviously done to harass, embarrass, annoy, or ridicule private
respondents. Likewise, petitioner, in its application for extrajudicial foreclosure, included the other loans of
private respondents which were not covered by the real estate mortgage agreement, such as the loan of
P175,000.00 which was a time loan, and the amount of P400,000.00 which was a clean loan. Moreover,
petitioner unjustifiably refused to give private respondents copies of their account ledgers which would show the
deposits made by them. Also, petitioner bank's failure to credit the deposit in the account of private respondents
constituted gross negligence in the performance of its contractual obligation which amounts to evident bad faith.
Verily, all these acts of petitioner were accompanied by bad faith and done in wanton, fraudulent and malevolent
manner warranting the award of exemplary damages in favor of private respondents, in accordance with Article
2232 of the Civil Code which provides:
ART. 2232. In contracts and quasi-contracts, the court may award exemplary damages if the defendant
acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.
Of course, a plaintiff need not prove the actual extent of exemplary damages, for its determination is addressed
to the sound discretion of the court upon proof of the plaintiff's entitlement to moral, temperate, or compensatory

damages (Article 2234, Civil Code). In the instant case, exemplary damages in the amount of P150,000.00 are
proper.
Anent the award of actual damages, the Court of Appeals granted private respondents the amount of
P18,000.00 per month representing private respondents' unrealized profits from his gasoline station business, to
commence from October 16, 1984. Under Articles 2199 and 2200 of the Civil Code, actual or compensatory
damages are those awarded in satisfaction of, or in recompense for, loss or injury sustained. They proceed from
a sense of natural justice and are designed to repair the wrong that has been done. There are two kinds of
actual or compensatory damages one is the loss of what a person already possesses, and the other is the
failure to receive as a benefit that which would have pertained to him (Tolentino, Civil Code of the Phil., Vol. V,
1992 ed., pp. 633-636). In the latter instance, the familiar rule is that damages consisting of unrealized profits,
frequently referred as "ganacias frustradas" or "lucrum cessans," are not to be granted on the basis of mere
speculation, conjecture, or surmise, but rather by reference to some reasonably definite standard such as
market value, established experienced, or direct inference from known circumstances (Talisay-Silay Milling Co.,
Inc. vs. Asociacion de Agricultores de Talisay-Silay, Inc., 247 SCRA 361 [1995])
In the case at bar, actual damages in the form of unrealized profits were awarded on the basis of the sole
testimony of private respondent Salvador Chua, to wit:
Atty. Chua:
Q:
You mentioned earlier during your direct testimony that you are engaged in gasoline business.
Do you have a gasoline station?
A:
Yes, sir.
Q:
Where is that located?
A:
It is located at Corner Araneta-San Sebastian Sts.
Q:
Before the filing of the Extra Judicial Foreclosure, how much more or less, you earned from that
gasoline station by way of conservative estimate?
A:
In my gasoline business, based on my record, I have an average of 114,000 liters.
Q:
Do you mean to say you can dispose 114,000 liters a month?
A:
Yes, sir.
Q:
How much is the mark up per liter?
A:
Before the publication of the Extra Judicial Foreclosure the markup is P0.27 per liter. So, it
comes out that the profit is P30,78.00 (sic).
Q:
How much is your overhead for disposing that much liters of gasoline every month?
A:
The overhead is about 12,280.00.
Q:
That will give you an average of P18,000.00 a month?
A:
Yes, sir.
Q:
After the filing of the Extra Judicial Foreclosure, what happened to your gasoline business?
A:
Because of the publication of the Extra Judicial Foreclosure I did not have credit line anymore.
Since I have no capital I was forced to sell my right to operate to my relatives.
(tsn, March 25, 1986, pp. 9-12)
However, other than the testimony of Salvador Chua, private respondents failed to present documentary
evidence which is necessary to substantiate their claim for actual or compensatory damages. In order to recover
this kind of damages, the injured party must prove his case, thus:
When the existence of a loss is established, absolute certainty as to its amount is not required. The benefit to be
derived from a contract which one of the parties has absolutely failed to perform is of necessity to some extent,
a matter of speculation, but the injured party is not to be denied for that reason alone. He must produce the best
evidence of which his case is susceptible and if that evidence warrants the inference that he has been damaged
by the loss of profits which he might with reasonable certainty have anticipated but for the defendant's wrongful
act, he is entitled to recover. (Cerreno vs. Tan Chuco, 28 Phil. 312 [1914] quoted in Central Bank of the
Philippines vs. Court of Appeals, 63 SCRA 431 [1975])
Applying the foregoing test to the instant case, the Court finds the evidence of private respondents insufficient to
be considered within the purview of "best evidence." The bare assertion of private respondent Salvador Chua
that he lost an average of P18,000.00 per month is inadequate if not speculative and should be admitted with
extreme caution especially because it is not supported by independent evidence. Private respondents could
have presented such evidence as reports on the average actual profits earned by their gasoline business, their
financial statements, and other evidence of profitability which could aid the court in arriving with reasonable
certainty at the amount of profits which private respondents failed to earn. Private respondents did not even
present any instrument or deed evidencing their claim that they have transferred their right to operate their
gasoline station to their relatives. We cannot, therefore, sustain the award of P18,000.00 a month as unrealized
profits commencing from October 16, 1984 because this amount is not amply justified by the evidence on
record.
Further, well-settled is the rule that even if the petition for extrajudicial foreclosure filed by petitioner against
private respondents is clearly unfounded, this does not necessarily mean, in the absence of specific facts
proving damages, that actual damage has been sustained. The Court cannot rely on speculations as to the fact

and amount of damages. It must depend on actual proof of the damages alleged to have been suffered
(Perfecto vs. Gonzales, 128 SCRA 635 [1984]).
Finally, the award of attorney's fees as part of damages is deemed just and equitable under the circumstances.
Attorney's fees may be awarded when a party is compelled to litigate or to incur expenses to protect his interest
by reason of an unjustified act of the other party (Ching Sen Ben vs. Court of Appeals, 314 SCRA 762 [1999]). In
this case, petitioner bank's act of not crediting private respondents' deposit of P960,000.00, as WELL as the
premature filing of the extrajudicial foreclosure, have compelled private respondents to institute an action for
injunction and damages primarily in order to protect their rights and interests. The award of attorney's fees is
also justified under Article 2208 of the Civil Code which provides:
ART. 2208. In the absence of stipulation, attorney's fees and expenses of litigation, other than judicial
costs, cannot be recovered, except:
(1) when exemplary damages are awarded;
(2) when the defendant's act or omission has compelled the plaintiff to litigate with third persons
or to incur expenses to protect his interest;
WHEREFORE, the decision of the Court of Appeals in its CA-G.R. CV No. 20220 is affirmed with
MODIFICATION only as to the award of damages in that petitioner bank is ordered to pay private respondents
the following:
1. Three Hundred Thousand Pesos (P300,000.00) as moral damages;
2. One Hundred Fifty Thousand Pesos (P150,000.00) as exemplary damages; and
3. One Hundred Thousand Pesos (P100,000.00) as attorney's fees and litigation expenses.
In all other respects, the said judgment is affirmed.
SO ORDERED.

G.R. No. 111584

September 17, 2001

Producers Bank vs CA case digest


Lessons Applicable: Factors in determining amount (Torts and Damages)
Laws Applicable: ART. 2208, Article 2232 of the Civil Code

FACTS:

April, 1982: Salvador Chua was offered by Mr. Jimmy Rojas, manager of Producers

Bank of the Philippines to transfer his account from Pacific Banking Corporation to
Producers Bank.
Chua did and was able to obtain a loan for P2,000,000 which was secured by a real

estate mortgage and payable within a period of 3 years or from 1982 to 1985
January 20, 1984: Chua deposited with Producers Bank P960,000 which was entered

into their savings account passbook but failed to credit it because Sixto Castillo,
absconded with the MONEY .
Producers Bank dishonored the checks drawn by Chua in favor of various creditors.

Although his balance was P1,051,051.19.


Despite their request for copies of the bank's ledgers, it refused so Chua filed an action

for damages.
October 15, 1984: Producer's Bank filed a petition for extrajudicialforeclosure of the

real estate mortgage


RTC: favored Chua ordering Producers to pay P2,000,000 moral damages, with legal
rate of interest; P90,000/month and P18,000/month unrealized profits from his cement
and gasoline station business, to commence from October 16, 1984, with legal rate of
interest until fully paid; P250,000 exemplary damages. Offset the P960,000 with his
agricultural loan of P1,300,000 with 14% interest, to commence from January 4, 1984,
covered by a real estate mortgage, both of which shall have a cut-off time frame on the
date of this decision. Loan of P175,000 and the clean loan of P400,000 without interest

shall be off-settled by the moral, actual and compensatory damages. 15% of moral, actual
and compensatory damages as attorney's fees. Cost of suit.
CA: modified moral damages to P500,000. P100,000.00 attorney's fees

ISSUE: W/N the award for damages is reasonable.

HELD: YES. affirmed with MODIFICATION. P300,000 moral damages. P150,000 exemplary
damages. P100,000 attorney's fees and litigation expenses.

Obviously, petitioner bank's wrongful act caused serious anxiety, embarrassment, and

humiliation to private respondents for which they are entitled to recover moral damages in
the amount of P300,000.00 which we deem to be reasonable
Producer's bank failure to credit the deposit constituted gross negligence in the

performance of its contractual obligation which amounts to evident bad faith


Verily, all these acts of petitioner were accompanied by bad faith and done in wanton,

fraudulent and malevolent manner warranting the award of exemplary damages in favor
of private respondents, in accordance with Article 2232 of the Civil Code
Need not prove the actual extent of exemplary damages, for its determination is

addressed to the sound discretion of the court upon proof of the plaintiff's entitlement to
moral, temperate, or compensatory damages (Article 2234, Civil Code)
There are two kinds of actual or compensatory damages:
loss of what a person already possesses
failure to receive as a benefit that which would have pertained to him
damages consisting of unrealized profits, frequently referred as "ganacias

frustradas" or "lucrum cessans," are not to be granted on the basis of mere


speculation, conjecture, or surmise, but rather by reference to some reasonably definite
standard such as market value, established experienced, or direct inference from known
circumstances
When the existence of a loss is established, absolute certainty as to its

amount is not required. The benefit to be derived from a contract which one of the parties
has absolutely failed to perform is of necessity to some extent, a matter of speculation,
but the injured party is not to be denied for that reason alone. He must produce the best
evidence of which his case is susceptible and if that evidence warrants the inference that
he has been damaged by the loss of profits which he might with reasonable certainty have
anticipated but for the defendant's wrongful act, he is entitled to recover.
evidence of private respondents insufficient to be considered within the purview of

"best evidence."
The bare assertion of private respondent Salvador Chua that he lost an average

of P18,000/month is inadequate if not speculative and should be admitted with extreme


caution especially because it is not supported by independent evidence.
Could have presented such evidence as reports on the average actual

profits earned by their gasoline business, their financial statements, and other evidence of
profitability which could aid the court in arriving with reasonable certainty at the amount
of profits which private respondents failed to earn. Did not even present any instrument
or deed evidencing their claim that they have transferred their right to operate
their gasoline station to their relatives.

Extrajudicial foreclosure is clearly unfounded, this does not necessarily mean, in the

absence of specific facts proving damages, that actual damage has been sustained.
It must depend on actual proof of the damages alleged to have been suffered.
Attorney's fees may be awarded when a party is compelled to litigate or to incur

expenses to protect his interest by reason of an unjustified act of the other party
act of not crediting private respondents' deposit of P960,000.00, as WELL as
the premature filing of the extrajudicial foreclosure, have compelled private respondents
to institute an action for injunction and damages primarily in order to protect their rights
and interests

FIRST DIVISION
[G.R. No. 146364. June 3, 2004]
COLITO T. PAJUYO, petitioner, vs. COURT OF APPEALS and EDDIE GUEVARRA, respondents.
DECISION
CARPIO, J.:
The Case
Before us is a petition for review [1] of the 21 June 2000 Decision[2] and 14 December 2000 Resolution of the Court of Appeals in CA-G.R. SP
No. 43129. The Court of Appeals set aside the 11 November 1996 decision [3] of the Regional Trial Court of Quezon City, Branch 81,[4] affirming the
15 December 1995 decision[5] of the Metropolitan Trial Court of Quezon City, Branch 31.[6]
The Antecedents
In June 1979, petitioner Colito T. Pajuyo (Pajuyo) paid P400 to a certain Pedro Perez for the rights over a 250-square meter lot in Barrio
Payatas, Quezon City. Pajuyo then constructed a house made of light materials on the lot. Pajuyo and his family lived in the house from 1979 to 7
December 1985.
On 8 December 1985, Pajuyo and private respondent Eddie Guevarra (Guevarra) executed a Kasunduan or agreement. Pajuyo, as owner
of the house, allowed Guevarra to live in the house for free provided Guevarra would maintain the cleanliness and orderliness of the house.
Guevarra promised that he would voluntarily vacate the premises on Pajuyos demand.
In September 1994, Pajuyo informed Guevarra of his need of the house and demanded that Guevarra vacate the house. Guevarrarefused.
Pajuyo filed an ejectment case against Guevarra with the Metropolitan Trial Court of Quezon City, Branch 31 (MTC).
In his Answer, Guevarra claimed that Pajuyo had no valid title or right of possession over the lot where the house stands because the lot is
within the 150 hectares set aside by Proclamation No. 137 for socialized housing. Guevarra pointed out that from December 1985 to September
1994, Pajuyo did not show up or communicate with him. Guevarra insisted that neither he nor Pajuyo has valid title to the lot.
On 15 December 1995, the MTC rendered its decision in favor of Pajuyo. The dispositive portion of the MTC decision reads:
WHEREFORE, premises considered, judgment is hereby rendered for the plaintiff and against defendant, ordering the latter to:
A) vacate the house and lot occupied by the defendant or any other person or persons claiming any right under him;
B) pay unto plaintiff the sum of THREE HUNDRED PESOS (P300.00) monthly as reasonable compensation for the use of the premises
starting from the last demand;
C) pay plaintiff the sum of P3,000.00 as and by way of attorneys fees; and
D) pay the cost of suit.
SO ORDERED.[7]
Aggrieved, Guevarra appealed to the Regional Trial Court of Quezon City, Branch 81 (RTC).
On 11 November 1996, the RTC affirmed the MTC decision. The dispositive portion of the RTC decision reads:
WHEREFORE, premises considered, the Court finds no reversible error in the decision appealed from, being in accord with the law and evidence
presented, and the same is hereby affirmed en toto.
SO ORDERED.[8]
Guevarra received the RTC decision on 29 November 1996. Guevarra had only until 14 December 1996 to file his appeal with the Court of
Appeals. Instead of filing his appeal with the Court of Appeals, Guevarra filed with the Supreme Court a Motion for Extension of Time to File Appeal
by Certiorari Based on Rule 42 (motion for extension). Guevarra theorized that his appeal raised pure questions of law. The Receiving Clerk of
the Supreme Court received the motion for extension on 13 December 1996 or one day before the right to appeal expired.
On 3 January 1997, Guevarra filed his petition for review with the Supreme Court.
On 8 January 1997, the First Division of the Supreme Court issued a Resolution [9] referring the motion for extension to the Court of Appeals
which has concurrent jurisdiction over the case. The case presented no special and important matter for the Supreme Court to take cognizance of
at the first instance.
On 28 January 1997, the Thirteenth Division of the Court of Appeals issued a Resolution [10] granting the motion for extension conditioned on
the timeliness of the filing of the motion.
On 27 February 1997, the Court of Appeals ordered Pajuyo to comment on Guevaras petition for review. On 11 April 1997, Pajuyo filed his
Comment.
On 21 June 2000, the Court of Appeals issued its decision reversing the RTC decision. The dispositive portion of the decision reads:
WHEREFORE, premises considered, the assailed Decision of the court a quo in Civil Case No. Q-96-26943 is REVERSED and SET ASIDE; and it
is hereby declared that the ejectment case filed against defendant-appellant is without factual and legal basis.
SO ORDERED.[11]
Pajuyo filed a motion for reconsideration of the decision. Pajuyo pointed out that the Court of Appeals should have dismissed outright
Guevarras petition for review because it was filed out of time. Moreover, it was Guevarras counsel and not Guevarra who signed the certification
against forum-shopping.
On 14 December 2000, the Court of Appeals issued a resolution denying Pajuyos motion for reconsideration. The dispositive portion of the
resolution reads:
WHEREFORE, for lack of merit, the motion for reconsideration is hereby DENIED. No costs.
SO ORDERED.[12]
The Ruling of the MTC
The MTC ruled that the subject of the agreement between Pajuyo and Guevarra is the house and not the lot. Pajuyo is the owner of the
house, and he allowed Guevarra to use the house only by tolerance. Thus, Guevarras refusal to vacate the house on Pajuyos demand made
Guevarras continued possession of the house illegal.

The Ruling of the RTC


The RTC upheld the Kasunduan, which established the landlord and tenant relationship between Pajuyo and Guevarra. The terms of
the Kasunduan bound Guevarra to return possession of the house on demand.
The RTC rejected Guevarras claim of a better right under Proclamation No. 137, the Revised National Government Center Housing Project
Code of Policies and other pertinent laws. In an ejectment suit, the RTC has no power to decide Guevarras rights under these laws. The RTC
declared that in an ejectment case, the only issue for resolution is material or physical possession, not ownership.
The Ruling of the Court of Appeals
The Court of Appeals declared that Pajuyo and Guevarra are squatters. Pajuyo and Guevarra illegally occupied the contested lot which the
government owned.
Perez, the person from whom Pajuyo acquired his rights, was also a squatter. Perez had no right or title over the lot because it is public
land. The assignment of rights between Perez and Pajuyo, and the Kasunduan between Pajuyo and Guevarra, did not have any legal
effect. Pajuyo and Guevarra are in pari delicto or in equal fault. The court will leave them where they are.
The Court of Appeals reversed the MTC and RTC rulings, which held that the Kasunduan between Pajuyo and Guevarra created a legal tie
akin to that of a landlord and tenant relationship. The Court of Appeals ruled that the Kasunduan is not a lease contract but
acommodatum because the agreement is not for a price certain.
Since Pajuyo admitted that he resurfaced only in 1994 to claim the property, the appellate court held that Guevarra has a better right over the
property under Proclamation No. 137. President Corazon C. Aquino (President Aquino) issued Proclamation No. 137 on 7 September 1987. At
that time, Guevarra was in physical possession of the property. Under Article VI of the Code of Policies Beneficiary Selection and Disposition of
Homelots and Structures in the National Housing Project (the Code), the actual occupant or caretaker of the lot shall have first priority as
beneficiary of the project. The Court of Appeals concluded that Guevarra is first in the hierarchy of priority.
In denying Pajuyos motion for reconsideration, the appellate court debunked Pajuyos claim that Guevarra filed his motion for extension
beyond the period to appeal.
The Court of Appeals pointed out that Guevarras motion for extension filed before the Supreme Court was stamped 13 December 1996 at
4:09 PM by the Supreme Courts Receiving Clerk. The Court of Appeals concluded that the motion for extension bore a date, contrary to Pajuyos
claim that the motion for extension was undated. Guevarra filed the motion for extension on time on 13 December 1996 since he filed the motion
one day before the expiration of the reglementary period on 14 December 1996. Thus, the motion for extension properly complied with the
condition imposed by the Court of Appeals in its 28 January 1997 Resolution. The Court of Appeals explained that the thirty-day extension to file
the petition for review was deemed granted because of such compliance.
The Court of Appeals rejected Pajuyos argument that the appellate court should have dismissed the petition for review because it was
Guevarras counsel and not Guevarra who signed the certification against forum-shopping. The Court of Appeals pointed out that Pajuyo did not
raise this issue in his Comment. The Court of Appeals held that Pajuyo could not now seek the dismissal of the case after he had extensively
argued on the merits of the case. This technicality, the appellate court opined, was clearly an afterthought.
The Issues
Pajuyo raises the following issues for resolution:
WHETHER THE COURT OF APPEALS ERRED OR ABUSED ITS AUTHORITY AND DISCRETION TANTAMOUNT TO LACK OF JURISDICTION:
1) in GRANTING, instead of denying, Private Respondents Motion for an Extension of thirty days to file petition for review
at the time when there was no more period to extend as the decision of the Regional Trial Court had already become
final and executory.
2) in giving due course, instead of dismissing, private respondents Petition for Review even though the certification
against forum-shopping was signed only by counsel instead of by petitioner himself.
3) in ruling that the Kasunduan voluntarily entered into by the parties was in fact a commodatum, instead of a Contract of
Lease as found by the Metropolitan Trial Court and in holding that the ejectment case filed against defendantappellant is without legal and factual basis.
4) in reversing and setting aside the Decision of the Regional Trial Court in Civil Case No. Q-96-26943 and in holding that
the parties are in pari delicto being both squatters, therefore, illegal occupants of the contested parcel of land.
5) in deciding the unlawful detainer case based on the so-called Code of Policies of the National Government Center
Housing Project instead of deciding the same under the Kasunduan voluntarily executed by the parties, the terms and
conditions of which are the laws between themselves.[13]
The Ruling of the Court
The procedural issues Pajuyo is raising are baseless. However, we find merit in the substantive issues Pajuyo is submitting for resolution.
Procedural Issues
Pajuyo insists that the Court of Appeals should have dismissed outright Guevarras petition for review because the RTC decision had already
become final and executory when the appellate court acted on Guevarras motion for extension to file the petition. Pajuyo points out that Guevarra
had only one day before the expiry of his period to appeal the RTC decision. Instead of filing the petition for review with the Court of Appeals,
Guevarra filed with this Court an undated motion for extension of 30 days to file a petition for review. This Court merely referred the motion to the
Court of Appeals. Pajuyo believes that the filing of the motion for extension with this Court did not toll the running of the period to perfect the
appeal. Hence, when the Court of Appeals received the motion, the period to appeal had already expired.
We are not persuaded.
Decisions of the regional trial courts in the EXERCISE of their appellate jurisdiction are appealable to the Court of Appeals by petition for
review in cases involving questions of fact or mixed questions of fact and law. [14] Decisions of the regional trial courts involving pure questions of law
are appealable directly to this Court by petition for review. [15] These modes of appeal are now embodied in Section 2, Rule 41 of the 1997 Rules of
Civil Procedure.
Guevarra believed that his appeal of the RTC decision involved only questions of law. Guevarra thus filed his motion for extension to file
petition for review before this Court on 14 December 1996. On 3 January 1997, Guevarra then filed his petition for review with this Court. A perusal
of Guevarras petition for review gives the impression that the issues he raised were pure questions of law. There is a question of law when the
doubt or difference is on what the law is on a certain state of facts. [16] There is a question of fact when the doubt or difference is on the truth or
falsity of the facts alleged.[17]
In his petition for review before this Court, Guevarra no longer disputed the facts. Guevarras petition for review raised these questions: (1)
Do ejectment cases pertain only to possession of a structure, and not the lot on which the structure stands? (2) Does a suit by a squatter against a
fellow squatter constitute a valid case for ejectment? (3) Should a Presidential Proclamation governing the lot on which a squatters structure
stands be considered in an ejectment suit filed by the owner of the structure?
These questions call for the evaluation of the rights of the parties under the law on ejectment and the Presidential Proclamation. At first
glance, the questions Guevarra raised appeared purely legal. However, some factual questions still have to be resolved because they have a
bearing on the legal questions raised in the petition for review. These factual matters refer to the metes and bounds of the disputed property and
the application of Guevarra as beneficiary of Proclamation No. 137.
The Court of Appeals has the power to grant an extension of time to file a petition for review. In Lacsamana v. Second Special Cases
Division of the Intermediate Appellate Court,[18] we declared that the Court of Appeals could grant extension of time in appeals by petition for
review. In Liboro v. Court of Appeals,[19] we clarified that the prohibition against granting an extension of time applies only in a case where
ordinary appeal is perfected by a mere notice of appeal. The prohibition does not apply in a petition for review where the pleading needs
verification. A petition for review, unlike an ordinary appeal, requires preparation and research to present a persuasive position. [20] The drafting of
the petition for review entails more time and effort than filing a notice of appeal. [21] Hence, the Court of Appeals may allow an extension of time to
file a petition for review.

In the more recent case of Commissioner of Internal Revenue v. Court of Appeals,[22] we held that Liboros clarification ofLacsamana is
consistent with the Revised Internal Rules of the Court of Appeals and Supreme Court Circular No. 1-91. They all allow an extension of time for
filing petitions for review with the Court of Appeals. The extension, however, should be limited to only fifteen days save in exceptionally meritorious
cases where the Court of Appeals may grant a longer period.
A judgment becomes final and executory by operation of law. Finality of judgment becomes a fact on the lapse of the reglementary period to
appeal if no appeal is perfected. [23] The RTC decision could not have gained finality because the Court of Appeals granted the 30-day extension to
Guevarra.
The Court of Appeals did not commit grave abuse of discretion when it approved Guevarras motion for extension. The Court of Appeals gave
due course to the motion for extension because it complied with the condition set by the appellate court in its resolution dated 28 January
1997. The resolution stated that the Court of Appeals would only give due course to the motion for extension if filed on time. The motion for
extension met this condition.
The material dates to consider in determining the timeliness of the filing of the motion for extension are (1) the date of receipt of the judgment
or final order or resolution subject of the petition, and (2) the date of filing of the motion for extension. [24] It is the date of the filing of the motion or
pleading, and not the date of execution, that determines the timeliness of the filing of that motion or pleading. Thus, even if the motion for
extension bears no date, the date of filing stamped on it is the reckoning point for determining the timeliness of its filing.
Guevarra had until 14 December 1996 to file an appeal from the RTC decision. Guevarra filed his motion for extension before this Court on
13 December 1996, the date stamped by this Courts Receiving Clerk on the motion for extension. Clearly, Guevarra filed the motion for extension
exactly one day before the lapse of the reglementary period to appeal.
Assuming that the Court of Appeals should have dismissed Guevarras appeal on technical grounds, Pajuyo did not ask the appellate court to
deny the motion for extension and dismiss the petition for review at the earliest opportunity. Instead, Pajuyo vigorously discussed the merits of the
case. It was only when the Court of Appeals ruled in Guevarras favor that Pajuyo raised the procedural issues against Guevarras petition for
review.
A party who, after voluntarily submitting a dispute for resolution, receives an adverse decision on the merits, is estopped from attacking the
jurisdiction of the court.[25] Estoppel sets in not because the judgment of the court is a valid and conclusive adjudication, but because the practice of
attacking the courts jurisdiction after voluntarily submitting to it is against public policy.[26]
In his Comment before the Court of Appeals, Pajuyo also failed to discuss Guevarras failure to sign the certification against forum
shopping. Instead, Pajuyo harped on Guevarras counsel signing the verification, claiming that the counsels verification is insufficient since it is
based only on mere information.
A partys failure to sign the certification against forum shopping is different from the partys failure to sign personally the verification. The
certificate of non-forum shopping must be signed by the party, and not by counsel. [27] The certification of counsel renders the petition defective.[28]
On the other hand, the requirement on verification of a pleading is a formal and not a jurisdictional requisite. [29] It is intended simply to secure
an assurance that what are alleged in the pleading are true and correct and not the product of the imagination or a matter of speculation, and that
the pleading is filed in good faith. [30] The party need not sign the verification. A partys representative, lawyer or any person who personally knows
the truth of the facts alleged in the pleading may sign the verification. [31]
We agree with the Court of Appeals that the issue on the certificate against forum shopping was merely an afterthought. Pajuyo did not call
the Court of Appeals attention to this defect at the early stage of the proceedings. Pajuyo raised this procedural issue too late in the proceedings.
Absence of Title over the Disputed Property will not Divest the Courts of Jurisdiction to Resolve the Issue of Possession
Settled is the rule that the defendants claim of ownership of the disputed property will not divest the inferior court of its jurisdiction over the
ejectment case.[32] Even if the pleadings raise the issue of ownership, the court may pass on such issue to determine only the question of
possession, especially if the ownership is inseparably linked with the possession. [33] The adjudication on the issue of ownership is only provisional
and will not bar an action between the same parties involving title to the land. [34] This doctrine is a necessary consequence of the nature of the two
summary actions of ejectment, forcible entry and unlawful detainer, where the only issue for adjudication is the physical or material possession over
the real property.[35]
In this case, what Guevarra raised before the courts was that he and Pajuyo are not the owners of the contested property and that they are
mere squatters. Will the defense that the parties to the ejectment case are not the owners of the disputed lot allow the courts to renounce their
jurisdiction over the case? The Court of Appeals believed so and held that it would just leave the parties where they are since they are in pari
delicto.
We do not agree with the Court of Appeals.
Ownership or the right to possess arising from ownership is not at issue in an action for recovery of possession. The parties cannot present
evidence to prove ownership or right to legal possession except to prove the nature of the possession when necessary to resolve the issue of
physical possession.[36] The same is true when the defendant asserts the absence of title over the property. The absence of title over the contested
lot is not a ground for the courts to withhold relief from the parties in an ejectment case.
The only question that the courts must resolve in ejectment proceedings is - who is entitled to the physical possession of the premises, that
is, to the possession de facto and not to the possession de jure.[37] It does not even matter if a partys title to the property is questionable, [38] or when
both parties intruded into public land and their applications to own the land have yet to be approved by the proper government agency.
[39]
Regardless of the actual condition of the title to the property, the party in peaceable quiet possession shall not be thrown out by a strong hand,
violence or terror.[40] Neither is the unlawful withholding of property allowed. Courts will always uphold respect for prior possession.
Thus, a party who can prove prior possession can recover such possession even against the owner himself. [41] Whatever may be the
character of his possession, if he has in his favor prior possession in time, he has the security that entitles him to remain on the property until a
person with a better right lawfully ejects him. [42] To repeat, the only issue that the court has to settle in an ejectment suit is the right to physical
possession.
In Pitargue v. Sorilla,[43] the government owned the land in dispute. The government did not authorize either the plaintiff or the defendant in
the case of forcible entry case to occupy the land. The plaintiff had prior possession and had already introduced improvements on the public
land. The plaintiff had a pending application for the land with the Bureau of Lands when the defendant ousted him from possession. The plaintiff
filed the action of forcible entry against the defendant. The government was not a party in the case of forcible entry.
The defendant questioned the jurisdiction of the courts to settle the issue of possession because while the application of the plaintiff was still
pending, title remained with the government, and the Bureau of Public Lands had jurisdiction over the case. We disagreed with the defendant. We
ruled that courts have jurisdiction to entertain ejectment suits even before the resolution of the application. The plaintiff, by priority of his application
and of his entry, acquired prior physical possession over the public land applied for as against other private claimants. That prior physical
possession enjoys legal protection against other private claimants because only a court can take away such physical possession in an ejectment
case.
While the Court did not brand the plaintiff and the defendant in Pitargue[44] as squatters, strictly speaking, their entry into the disputed land
was illegal. Both the plaintiff and defendant entered the public land without the owners permission. Title to the land remained with the government
because it had not awarded to anyone ownership of the contested public land. Both the plaintiff and the defendant were in effect squatting on
government property. Yet, we upheld the courts jurisdiction to resolve the issue of possession even if the plaintiff and the defendant in the
ejectment case did not have any title over the contested land.
Courts must not abdicate their jurisdiction to resolve the issue of physical possession because of the public need to preserve the basic policy
behind the summary actions of forcible entry and unlawful detainer. The underlying philosophy behind ejectment suits is to prevent breach of the
peace and criminal disorder and to compel the party out of possession to respect and resort to the law alone to obtain what he claims is his. [45] The
party deprived of possession must not take the law into his own hands. [46] Ejectment proceedings are summary in nature so the authorities can
settle speedily actions to recover possession because of the overriding need to quell social disturbances. [47]

We further explained in Pitargue the greater interest that is at stake in actions for recovery of possession. We made the following
pronouncements in Pitargue:
The question that is before this Court is: Are courts without jurisdiction to take cognizance of possessory actions involving these public lands before
final award is made by the Lands Department, and before title is given any of the conflicting claimants? It is one of utmost importance, as there are
public lands everywhere and there are thousands of settlers, especially in newly opened regions. It also involves a matter of policy, as it requires
the determination of the respective authorities and functions of two coordinate branches of the Government in connection with public land conflicts.
Our problem is made simple by the fact that under the Civil Code, either in the old, which was in force in this country before the American
occupation, or in the new, we have a possessory action, the aim and purpose of which is the recovery of the physical possession of real property,
irrespective of the question as to who has the title thereto. Under the Spanish Civil Code we had the accion interdictal, a summary proceeding
which could be brought within one year from dispossession (Roman Catholic Bishop of Cebu vs. Mangaron, 6 Phil. 286, 291); and as early as
October 1, 1901, upon the enactment of the Code of Civil Procedure (Act No. 190 of the Philippine Commission) we implanted the common law
action of forcible entry (section 80 of Act No. 190), the object of which has been stated by this Court to be to prevent breaches of the peace and
criminal disorder which would ensue from the withdrawal of the remedy, and the reasonable hope such withdrawal would create that
some advantage must accrue to those persons who, believing themselves entitled to the possession of property, resort to force to gain
possession rather than to some appropriate action in the court to assert their claims. (Supia and Batioco vs. Quintero and Ayala, 59 Phil.
312, 314.) So before the enactment of the first Public Land Act (Act No. 926) the action of forcible entry was already available in the courts of the
country. So the question to be resolved is, Did the Legislature intend, when it vested the power and authority to alienate and dispose of the public
lands in the Lands Department, to exclude the courts from entertaining the possessory action of forcible entry between rival claimants or occupants
of any land before award thereof to any of the parties? Did Congress intend that the lands applied for, or all public lands for that matter, be removed
from the jurisdiction of the judicial Branch of the Government, so that any troubles arising therefrom, or any breaches of the peace or disorders
caused by rival claimants, could be inquired into only by the Lands Department to the exclusion of the courts? The answer to this question seems
to us evident. The Lands Department does not have the means to police public lands; neither does it have the means to prevent disorders arising
therefrom, or contain breaches of the peace among settlers; or to pass promptly upon conflicts of possession. Then its power is clearly limited to
disposition and alienation, and while it may decide conflicts of possession in order to make proper award, the settlement of conflicts of
possession which is recognized in the court herein has another ultimate purpose, i.e., the protection of actual possessors and
occupants with a view to the prevention of breaches of the peace. The power to dispose and alienate could not have been intended to
include the power to prevent or settle disorders or breaches of the peace among rival settlers or claimants prior to the final award. As to
this, therefore, the corresponding branches of the Government must continue to EXERCISE power and jurisdiction within the limits of their
respective functions. The vesting of the Lands Department with authority to administer, dispose, and alienate public lands, therefore, must
not be understood as depriving the other branches of the Government of the EXERCISE of the respective functions or powers thereon,
such as the authority to stop disorders and quell breaches of the peace by the police, the authority on the part of the courts to take
jurisdiction over possessory actions arising therefrom not involving, directly or indirectly, alienation and disposition.
Our attention has been called to a principle enunciated in American courts to the effect that courts have no jurisdiction to determine the rights of
claimants to public lands, and that until the disposition of the land has passed from the control of the Federal Government, the courts will not
interfere with the administration of matters concerning the same. (50 C. J. 1093-1094.) We have no quarrel with this principle. The determination of
the respective rights of rival claimants to public lands is different from the determination of who has the actual physical possession or occupation
with a view to protecting the same and preventing disorder and breaches of the peace. A judgment of the court ordering restitution of the
possession of a parcel of land to the actual occupant, who has been deprived thereof by another through the use of force or in any other illegal
manner, can never be prejudicial interference with the disposition or alienation of public lands. On the other hand, if courts were deprived of
jurisdiction of cases involving conflicts of possession, that threat of judicial action against breaches of the peace committed on public
lands would be eliminated, and a state of lawlessness would probably be produced between applicants, occupants or squatters, where
force or might, not right or justice, would rule.
It must be borne in mind that the action that would be used to solve conflicts of possession between rivals or conflicting applicants or claimants
would be no other than that of forcible entry. This action, both in England and the United States and in our jurisdiction, is a summary and
expeditious remedy whereby one in peaceful and quiet possession may recover the possession of which he has been deprived by a stronger hand,
by violence or terror; its ultimate object being to prevent breach of the peace and criminal disorder. (Supia and Batioco vs. Quintero and Ayala, 59
Phil. 312, 314.) The basis of the remedy is mere possession as a fact, of physical possession, not a legal possession. (Mediran vs. Villanueva, 37
Phil. 752.) The title or right to possession is never in issue in an action of forcible entry; as a matter of fact, evidence thereof is expressly banned,
except to prove the nature of the possession. (Second 4, Rule 72, Rules of Court.) With this nature of the action in mind, by no stretch of the
imagination can conclusion be arrived at that the use of the remedy in the courts of justice would constitute an interference with the alienation,
disposition, and control of public lands. To limit ourselves to the case at bar can it be pretended at all that its result would in any way interfere with
the manner of the alienation or disposition of the land contested? On the contrary, it would facilitate adjudication, for the question of priority of
possession having been decided in a final manner by the courts, said question need no longer waste the time of the land officers making the
adjudication or award. (Emphasis ours)
The Principle of Pari Delicto is not Applicable to Ejectment Cases
The Court of Appeals erroneously applied the principle of pari delicto to this case.
Articles 1411 and 1412 of the Civil Code[48] embody the principle of pari delicto. We explained the principle of pari delicto in these words:
The rule of pari delicto is expressed in the maxims ex dolo malo non eritur actio and in pari delicto potior est conditio defedentis. The law will not
aid either party to an illegal agreement. It leaves the parties where it finds them.[49]
The application of the pari delicto principle is not absolute, as there are exceptions to its application. One of these exceptions is where the
application of the pari delicto rule would violate well-established public policy.[50]
In Drilon v. Gaurana,[51] we reiterated the basic policy behind the summary actions of forcible entry and unlawful detainer. We held that:
It must be stated that the purpose of an action of forcible entry and detainer is that, regardless of the actual condition of the title to the property, the
party in peaceable quiet possession shall not be turned out by strong hand, violence or terror. In affording this remedy of restitution the object of the
statute is to prevent breaches of the peace and criminal disorder which would ensue from the withdrawal of the remedy, and the reasonable hope
such withdrawal would create that some advantage must accrue to those persons who, believing themselves entitled to the possession of property,
resort to force to gain possession rather than to some appropriate action in the courts to assert their claims. This is the philosophy at the foundation
of all these actions of forcible entry and detainer which are designed to compel the party out of possession to respect and resort to the law alone to
obtain what he claims is his.[52]
Clearly, the application of the principle of pari delicto to a case of ejectment between squatters is fraught with danger. To shut out relief to
squatters on the ground of pari delicto would openly invite mayhem and lawlessness. A squatter would oust another squatter from possession of
the lot that the latter had illegally occupied, emboldened by the knowledge that the courts would leave them where they are. Nothing would then
stand in the way of the ousted squatter from re-claiming his prior possession at all cost.
Petty warfare over possession of properties is precisely what ejectment cases or actions for recovery of possession seek to prevent. [53]Even
the owner who has title over the disputed property cannot take the law into his own hands to regain possession of his property. The owner must go
to court.
Courts must resolve the issue of possession even if the parties to the ejectment suit are squatters. The determination of priority and
superiority of possession is a serious and urgent matter that cannot be left to the squatters to decide. To do so would make squatters receive better
treatment under the law. The law restrains property owners from taking the law into their own hands. However, the principle of pari delicto as
applied by the Court of Appeals would give squatters free rein to dispossess fellow squatters or violently retake possession of properties usurped
from them. Courts should not leave squatters to their own devices in cases involving recovery of possession.
Possession is the only Issue for Resolution in an Ejectment Case

The case for review before the Court of Appeals was a simple case of ejectment. The Court of Appeals refused to rule on the issue of
physical possession. Nevertheless, the appellate court held that the pivotal issue in this case is who between Pajuyo and Guevarra has the priority
right as beneficiary of the contested land under Proclamation No. 137. [54] According to the Court of Appeals, Guevarra enjoys preferential right
under Proclamation No. 137 because Article VI of the Code declares that the actual occupant or caretaker is the one qualified to apply for
socialized housing.
The ruling of the Court of Appeals has no factual and legal basis.
First. Guevarra did not present evidence to show that the contested lot is part of a relocation site under Proclamation No. 137. Proclamation
No. 137 laid down the metes and bounds of the land that it declared open for disposition to bona fide residents.
The records do not show that the contested lot is within the land specified by Proclamation No. 137. Guevarra had the burden to prove that
the disputed lot is within the coverage of Proclamation No. 137. He failed to do so.
Second. The Court of Appeals should not have given credence to Guevarras unsubstantiated claim that he is the beneficiary of Proclamation
No. 137. Guevarra merely alleged that in the survey the project administrator conducted, he and not Pajuyo appeared as the actual occupant of the
lot.
There is no proof that Guevarra actually availed of the benefits of Proclamation No. 137. Pajuyo allowed Guevarra to occupy the disputed
property in 1985. President Aquino signed Proclamation No. 137 into law on 11 March 1986. Pajuyo made his earliest demand for Guevarra to
vacate the property in September 1994.
During the time that Guevarra temporarily held the property up to the time that Proclamation No. 137 allegedly segregated the disputed lot,
Guevarra never applied as beneficiary of Proclamation No. 137. Even when Guevarra already knew that Pajuyo was reclaiming possession of the
property, Guevarra did not take any step to comply with the requirements of Proclamation No. 137.
Third. Even assuming that the disputed lot is within the coverage of Proclamation No. 137 and Guevarra has a pending application over the
lot, courts should still assume jurisdiction and resolve the issue of possession. However, the jurisdiction of the courts would be limited to the issue
of physical possession only.
In Pitargue,[55] we ruled that courts have jurisdiction over possessory actions involving public land to determine the issue of physical
possession. The determination of the respective rights of rival claimants to public land is, however, distinct from the determination of who has the
actual physical possession or who has a better right of physical possession. [56] The administrative disposition and alienation of public lands should
be threshed out in the proper government agency.[57]
The Court of Appeals determination of Pajuyo and Guevarras rights under Proclamation No. 137 was premature. Pajuyo and Guevarra
were at most merely potential beneficiaries of the law. Courts should not preempt the decision of the administrative agency mandated by law to
determine the qualifications of applicants for the acquisition of public lands. Instead, courts should expeditiously resolve the issue of physical
possession in ejectment cases to prevent disorder and breaches of peace.[58]
Pajuyo is Entitled to Physical Possession of the Disputed Property
Guevarra does not dispute Pajuyos prior possession of the lot and ownership of the house built on it. Guevarra expressly admitted the
existence and due execution of the Kasunduan. The Kasunduan reads:
Ako, si COL[I]TO PAJUYO, may-ari ng bahay at lote sa Bo. Payatas, Quezon City, ay nagbibigay pahintulot kay G. Eddie Guevarra, na
pansamantalang manirahan sa nasabing bahay at lote ng walang bayad. Kaugnay nito, kailangang panatilihin nila ang kalinisan at kaayusan ng
bahay at lote.
Sa sandaling kailangan na namin ang bahay at lote, silay kusang aalis ng walang reklamo.
Based on the Kasunduan, Pajuyo permitted Guevarra to reside in the house and lot free of rent, but Guevarra was under obligation to
maintain the premises in good condition. Guevarra promised to vacate the premises on Pajuyos demand but Guevarra broke his promise and
refused to heed Pajuyos demand to vacate.
These facts make out a case for unlawful detainer. Unlawful detainer involves the withholding by a person from another of the possession of
real property to which the latter is entitled after the expiration or termination of the formers right to hold possession under a contract, express or
implied.[59]
Where the plaintiff allows the defendant to use his property by tolerance without any contract, the defendant is necessarily bound by an
implied promise that he will vacate on demand, failing which, an action for unlawful detainer will lie. [60] The defendants refusal to comply with the
demand makes his continued possession of the property unlawful.[61] The status of the defendant in such a case is similar to that of a lessee or
tenant whose term of lease has expired but whose occupancy continues by tolerance of the owner.[62]
This principle should apply with greater force in cases where a contract embodies the permission or tolerance to use the
property. TheKasunduan expressly articulated Pajuyos forbearance. Pajuyo did not require Guevarra to pay any rent but only to maintain the
house and lot in good condition. Guevarra expressly vowed in the Kasunduan that he would vacate the property on demand. Guevarras refusal to
comply with Pajuyos demand to vacate made Guevarras continued possession of the property unlawful.
We do not subscribe to the Court of Appeals theory that the Kasunduan is one of commodatum.
In a contract of commodatum, one of the parties delivers to another something not consumable so that the latter may use the same for a
certain time and return it.[63] An essential feature of commodatum is that it is gratuitous. Another feature of commodatum is that the use of the thing
belonging to another is for a certain period. [64] Thus, the bailor cannot demand the return of the thing loaned until after expiration of the period
stipulated, or after accomplishment of the use for which the commodatum is constituted.[65] If the bailor should have urgent need of the thing, he
may demand its return for temporary use. [66] If the use of the thing is merely tolerated by the bailor, he can demand the return of the thing at will, in
which case the contractual relation is called a precarium.[67] Under the Civil Code, precarium is a kind ofcommodatum.[68]
The Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra was not essentially gratuitous. While the Kasunduandid
not require Guevarra to pay rent, it obligated him to maintain the property in good condition. The imposition of this obligation makes
theKasunduan a contract different from a commodatum. The effects of the Kasunduan are also different from that of a commodatum. Case law on
ejectment has treated relationship based on tolerance as one that is akin to a landlord-tenant relationship where the withdrawal of permission would
result in the termination of the lease.[69] The tenants withholding of the property would then be unlawful. This is settled jurisprudence.
Even assuming that the relationship between Pajuyo and Guevarra is one of commodatum, Guevarra as bailee would still have the duty to
turn over possession of the property to Pajuyo, the bailor. The obligation to deliver or to return the thing received attaches to contracts for
safekeeping, or contracts of commission, administration and commodatum.[70] These contracts certainly involve the obligation to deliver or return the
thing received.[71]
Guevarra turned his back on the Kasunduan on the sole ground that like him, Pajuyo is also a squatter. Squatters, Guevarra pointed out,
cannot enter into a contract involving the land they illegally occupy. Guevarra insists that the contract is void.
Guevarra should know that there must be honor even between squatters. Guevarra freely entered into the Kasunduan. Guevarra cannot
now impugn the Kasunduan after he had benefited from it. The Kasunduan binds Guevarra.
The Kasunduan is not void for purposes of determining who between Pajuyo and Guevarra has a right to physical possession of the
contested property. The Kasunduan is the undeniable evidence of Guevarras recognition of Pajuyos better right of physical possession. Guevarra
is clearly a possessor in bad faith. The absence of a contract would not yield a different result, as there would still be an implied promise to vacate.
Guevarra contends that there is a pernicious evil that is sought to be avoided, and that is allowing an absentee squatter who (sic) makes
(sic) a profit out of his illegal act. [72] Guevarra bases his argument on the preferential right given to the actual occupant or caretaker under
Proclamation No. 137 on socialized housing.
We are not convinced.
Pajuyo did not profit from his arrangement with Guevarra because Guevarra stayed in the property without paying any rent. There is also no
proof that Pajuyo is a professional squatter who rents out usurped properties to other squatters. Moreover, it is for the proper government agency
to decide who between Pajuyo and Guevarra qualifies for socialized housing. The only issue that we are addressing is physical possession.

Prior possession is not always a condition sine qua non in ejectment.[73] This is one of the distinctions between forcible entry and unlawful
detainer.[74] In forcible entry, the plaintiff is deprived of physical possession of his land or building by means of force, intimidation, threat, strategy or
stealth. Thus, he must allege and prove prior possession. [75] But in unlawful detainer, the defendant unlawfully withholds possession after the
expiration or termination of his right to possess under any contract, express or implied. In such a case, prior physical possession is not required. [76]
Pajuyos withdrawal of his permission to Guevarra terminated the Kasunduan. Guevarras transient right to possess the property ended
as WELL . Moreover, it was Pajuyo who was in actual possession of the property because Guevarra had to seek Pajuyos permission to
temporarily hold the property and Guevarra had to follow the conditions set by Pajuyo in the Kasunduan. Control over the property still rested with
Pajuyo and this is evidence of actual possession.
Pajuyos absence did not affect his actual possession of the disputed property. Possession in the eyes of the law does not mean that a man
has to have his feet on every square meter of the ground before he is deemed in possession. [77] One may acquire possession not only by physical
occupation, but also by the fact that a thing is subject to the action of ones will.[78] Actual or physical occupation is not always necessary.[79]
Ruling on Possession Does not Bind Title to the Land in Dispute
We are aware of our pronouncement in cases where we declared that squatters and intruders who clandestinely enter into titled government
property cannot, by such act, acquire any legal right to said property. [80] We made this declaration because the person who had title or who had the
right to legal possession over the disputed property was a party in the ejectment suit and that party instituted the case against squatters or
usurpers.
In this case, the owner of the land, which is the government, is not a party to the ejectment case. This case is between squatters. Had the
government participated in this case, the courts could have evicted the contending squatters, Pajuyo and Guevarra.
Since the party that has title or a better right over the property is not impleaded in this case, we cannot evict on our own the parties. Such a
ruling would discourage squatters from seeking the aid of the courts in settling the issue of physical possession. Stripping both the plaintiff and the
defendant of possession just because they are squatters would have the same dangerous implications as the application of the principle of pari
delicto. Squatters would then rather settle the issue of physical possession among themselves than seek relief from the courts if the plaintiff and
defendant in the ejectment case would both stand to lose possession of the disputed property. This would subvert the policy underlying actions for
recovery of possession.
Since Pajuyo has in his favor priority in time in holding the property, he is entitled to remain on the property until a person who has title or a
better right lawfully ejects him. Guevarra is certainly not that person. The ruling in this case, however, does not preclude Pajuyo and Guevarra from
introducing evidence and presenting arguments before the proper administrative agency to establish any right to which they may be entitled under
the law.[81]
In no way should our ruling in this case be interpreted to condone squatting. The ruling on the issue of physical possession does not affect
title to the property nor constitute a binding and conclusive adjudication on the merits on the issue of ownership. [82] The owner can still go to court to
recover lawfully the property from the person who holds the property without legal title. Our ruling here does not diminish the power of government
agencies, including local governments, to condemn, abate, remove or demolish illegal or unauthorized structures in accordance with existing laws.
Attorneys Fees and Rentals
The MTC and RTC failed to justify the award of P3,000 attorneys fees to Pajuyo. Attorneys fees as part of damages are awarded only in the
instances enumerated in Article 2208 of the Civil Code. [83] Thus, the award of attorneys fees is the exception rather than the rule. [84]Attorneys fees
are not awarded every time a party prevails in a suit because of the policy that no premium should be placed on the right to litigate. [85] We therefore
delete the attorneys fees awarded to Pajuyo.
We sustain the P300 monthly rentals the MTC and RTC assessed against Guevarra. Guevarra did not dispute this factual finding of the two
courts. We find the amount reasonable compensation to Pajuyo. The P300 monthly rental is counted from the last demand to vacate, which was
on 16 February 1995.
WHEREFORE, we GRANT the petition. The Decision dated 21 June 2000 and Resolution dated 14 December 2000 of the Court of Appeals
in CA-G.R. SP No. 43129 are SET ASIDE. The Decision dated 11 November 1996 of the Regional Trial Court of Quezon City, Branch 81 in Civil
Case No. Q-96-26943, affirming the Decision dated 15 December 1995 of the Metropolitan Trial Court of Quezon City, Branch 31 in Civil Case No.
12432, is REINSTATED with MODIFICATION. The award of attorneys fees is deleted. No costs.
SO ORDERED.

COLITO T. PAJUYO, petitioner, vs. COURT OF APPEALS and EDDIE GUEVARRA, respondents.[G.R. No. 146364, June 3,
2004, Carpio, J.]Topic: CommodatumDoctrine:
In a contract for commodatum, one of the parties delivers to another something not so consumable sothat the latter may use
the same for a certain time and return it. An essential feature of commodatum is that it isgratuitous. Another feature of
commodatum is that the use of the thing belonging to another is for a certainperiod. Thus, the bailor cannot demand the return of
the thing loaned until after expiration of the of the periodstipulated or after the accomplishment of the use for which commodatum is
constituted. If the bailor should haveurgent need of the thing, he may demand its return for temporary use. If the use of the thing is
merely toleratedby the bailor, he can demand the return of the thing at will, in which case the contract relation is called the
aprecarium. Under the Civil Code, precarium is a kind of commodatum.
Nature:
Petition for review
Facts:
1.
Petitioner Colito T. Pajuyo (Pajuyo) paid P400 to a certain Pedro Perez for the rights over a 250
-square meter lot in Barrio Payatas, QC. Pajuyo then constructed a house made of light materials on thelot. Pajuyo and
his family lived in the house from 1979 to 1985.
2.
In
1985, Pajuyo and private respondent Eddie Guevarra (Guevarra) executed a Kasunduan or
agreement.
>
Pajuyo, as owner of the house, allowed Guevarra to live in the house for free provided Guevarra wouldmaintain the
cleanliness and orderliness of the house. Guevarra promised that he would voluntarily
vacate the premises on Pajuyos demand.
3.
In 1994, Pajuyo informed Guevarra of his need of the house and demanded that Guevarra vacate thehouse.
>
Guevarra refused.
4. Pajuyo filed an ejectment case against Guevarra with the MTC of QC> In his Answer, Guevarra claimed that:a) Pajuyo had no
valid title or right of possession over the lot where the house stands because the lot is withinthe 150 hectares set aside by
Proclamation No. 137 for socialized housing.b) from December 1985 to September 1994, Pajuyo did not show up or communicate

with himc) neither he nor Pajuyo has valid title to the lot> the MTC rendered its decision in favor of Pajuyo, ordering Guevarra
to:a) vacate the house and lot or have anyone claiming a right under him to vacate it.b) pay Pajuyo 300php/month from last
demand for the use of the premises
c) pay attoneys fees + cost of the suit
> the subject of the agreement between Pajuyo and Guevarra is the house and not the lot. Pajuyo is the ownerof the house, and
he allowed Guevarra to use the house only b
y tolerance. Thus, Guevarras refusal to vacate thehouse on Pajuyos demand made Guevarras continued possession of the
house illegal.
5. Guevarra appealed to the RTC.> the RTC affirmed the MTC decision> The RTC upheld the Kasunduan, which established
the landlord and tenant relationship between Pajuyo andGuevarra, and so the terms of the Kasunduan bound Guevarra to return
possession of the house on demand.
> The RTC rejected Guevarras claim of a better right under Proclamation No. 137, t
he Revised NationalGovernment Center Housing Project Code of Policies and other pertinent laws.>
In an ejectment suit, the RTC has no power to decide Guevarras right
s under these laws because in anejectment case, the only issue for resolution is material or physical possession, not
ownership.> both MTC and RTC: the Kasunduan between Pajuyo and Guevarra created a legal tie akin to that of a landlordand
tenant relationship.

Republic of the Philippines


SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 123498
November 23, 2007
BPI FAMILY BANK, Petitioner,
vs.
AMADO FRANCO and COURT OF APPEALS, Respondents.
DECISION
NACHURA, J.:
Banks are exhorted to treat the accounts of their depositors with meticulous care and utmost fidelity. We reiterate this exhortation in
the case at bench.
Before us is a Petition for Review on Certiorari seeking the reversal of the Court of Appeals (CA) Decision 1 in CA-G.R. CV No.
43424 which affirmed with modification the judgment2 of the Regional Trial Court, Branch 55, Manila (Manila RTC), in Civil Case
No. 90-53295.
This case has its genesis in an ostensible fraud perpetrated on the petitioner BPI Family Bank (BPI-FB) allegedly by respondent
Amado Franco (Franco) in conspiracy with other individuals,3 some of whom opened and maintained separate accounts with BPIFB, San Francisco del Monte (SFDM) branch, in a series of transactions.
On August 15, 1989, Tevesteco Arrastre-Stevedoring Co., Inc. (Tevesteco) opened a savings and current account with BPI-FB.
Soon thereafter, or on August 25, 1989, First Metro INVESTMENT Corporation (FMIC) also opened a time deposit account with
the same branch of BPI-FB with a deposit of P100,000,000.00, to mature one year thence.
Subsequently, on August 31, 1989, Franco opened three accounts, namely, a current,4 savings,5 and time deposit,6with BPI-FB.
The current and savings accounts were respectively funded with an initial deposit of P500,000.00 each, while the time deposit
account had P1,000,000.00 with a maturity date of August 31, 1990. The total amount of P2,000,000.00 used to open these
accounts is traceable to a check issued by Tevesteco allegedly in consideration of Francos introduction of Eladio Teves,7 who was
looking for a conduit bank to facilitate Tevestecosbusiness transactions, to Jaime Sebastian, who was then BPI-FB SFDMs
Branch Manager. In turn, the funding for the P2,000,000.00 check was part of the P80,000,000.00 debited by BPI-FB from FMICs
time deposit account and credited to Tevestecos current account pursuant to an Authority to Debit purportedly signed by FMICs
officers.
It appears, however, that the signatures of FMICs officers on the Authority to Debit were forged.8 On September 4, 1989, Antonio
Ong,9 upon being shown the Authority to Debit, personally declared his signature therein to be a forgery. Unfortunately, Tevesteco
had already effected several withdrawals from its current account (to which had been credited the P80,000,000.00 covered by the
forged Authority to Debit) amounting to P37,455,410.54, including the P2,000,000.00 paid to Franco.
On September 8, 1989, impelled by the need to protect its interests in light of FMICs forgery claim, BPI-FB, thru its Senior VicePresident, Severino Coronacion, instructed Jesus Arangorin10 to debit Francos savings and current accounts for the amounts
remaining therein.11 However, Francos time deposit account could not be debited due to the capacity limitations of BPI-FBs
computer.12
In the meantime, two checks13 drawn by Franco against his BPI-FB current account were dishonored upon presentment for
payment, and stamped with a notation "account under garnishment." Apparently, Francos current account was garnished by virtue
of an Order of Attachment issued by the Regional Trial Court of Makati (Makati RTC) in Civil Case No. 89-4996 (Makati Case),
which had been filed by BPI-FB against Franco et al.,14 to recover the P37,455,410.54 representing Tevestecos total withdrawals
from its account.
Notably, the dishonored checks were issued by Franco and presented for payment at BPI-FB prior to Francos receipt of notice that
his accounts were under garnishment.15 In fact, at the time the Notice of Garnishment dated September 27, 1989 was served on
BPI-FB, Franco had yet to be impleaded in the Makati case where the writ of attachment was issued.
It was only on May 15, 1990, through the service of a copy of the Second Amended Complaint in Civil Case No. 89-4996, that
Franco was impleaded in the Makati case.16 Immediately, upon receipt of such copy, Franco filed a Motion to Discharge Attachment
which the Makati RTC granted on May 16, 1990. The Order Lifting the Order of Attachment was served on BPI-FB on even date,
with Franco demanding the release to him of the funds in his savings and current accounts. Jesus Arangorin, BPI-FBs new

manager, could not forthwith comply with the demand as the funds, as previously stated, had already been debited because of
FMICs forgery claim. As such, BPI-FBs computer at the SFDM Branch indicated that the current account record was "not on file."
With respect to Francos savings account, it appears that Franco agreed to an arrangement, as a favor to Sebastian,
whereby P400,000.00 from his savings account was temporarily transferred to Domingo Quiaoits savings account, subject to its
immediate return upon issuance of a certificate of deposit which Quiaoit needed in connection with his visa application at the
Taiwan Embassy. As part of the arrangement, Sebastian retained custody of Quiaoits savings account passbook to ensure that no
withdrawal would be effected therefrom, and to preserve Francos deposits.
On May 17, 1990, Franco pre-terminated his time deposit account. BPI-FB deducted the amount of P63,189.00 from the remaining
balance of the time deposit account representing advance interest paid to him.
These transactions spawned a number of cases, some of which we had already resolved.
FMIC filed a complaint against BPI-FB for the recovery of the amount of P80,000,000.00 debited from its account.17The case
eventually reached this Court, and in BPI Family Savings Bank, Inc. v. First Metro INVESTMENT Corporation,18 we upheld the
finding of the courts below that BPI-FB failed to EXERCISE the degree of diligence required by the nature of its obligation to treat
the accounts of its depositors with meticulous care. Thus, BPI-FB was found liable to FMIC for the debited amount in its time
deposit. It was ordered to pay P65,332,321.99 plus interest at 17% per annum from August 29, 1989 until fully restored. In turn, the
17% shall itself earn interest at 12% from October 4, 1989 until fully paid.
In a related case, Edgardo Buenaventura, Myrna Lizardo and Yolanda Tica (Buenaventura, et al.),19 recipients of aP500,000.00
check proceeding from the P80,000,000.00 mistakenly credited to Tevesteco, likewise filed suit. Buenaventura et al., as in the case
of Franco, were also prevented from effecting withdrawals20 from their current account with BPI-FB, Bonifacio Market, Edsa,
Caloocan City Branch. Likewise, when the case was elevated to this Court docketed as BPI Family Bank v. Buenaventura, 21 we
ruled that BPI-FB had no right to freeze Buenaventura, et al.s accounts and adjudged BPI-FB liable therefor, in addition to
damages.
Meanwhile, BPI-FB filed separate civil and criminal cases against those believed to be the perpetrators of the multi-million peso
scam.22 In the criminal case, Franco, along with the other accused, except for Manuel Bienvenida who was still at large, were
acquitted of the crime of Estafa as defined and penalized under Article 351, par. 2(a) of the Revised Penal Code.23 However, the
civil case24 remains under litigation and the respective rights and liabilities of the parties have yet to be adjudicated.
Consequently, in light of BPI-FBs refusal to heed Francos demands to unfreeze his accounts and release his deposits therein, the
latter filed on June 4, 1990 with the Manila RTC the subject suit. In his complaint, Franco prayed for the following reliefs: (1) the
interest on the remaining balance25 of his current account which was eventually released to him on October 31, 1991; (2) the
balance26 on his savings account, plus interest thereon; (3) the advance interest27 paid to him which had been deducted when he
pre-terminated his time deposit account; and (4) the payment of actual, moral and exemplary damages, as WELL as attorneys
fees.
BPI-FB traversed this complaint, insisting that it was correct in freezing the accounts of Franco and refusing to release his deposits,
claiming that it had a better right to the amounts which consisted of part of the MONEY allegedly fraudulently withdrawn from it by
Tevesteco and ending up in Francos accounts. BPI-FB asseverated that the claimed consideration of P2,000,000.00 for the
introduction facilitated by Franco between George Daantos and Eladio Teves, on the one hand, and Jaime Sebastian, on the other,
spoke volumes of Francos participation in the fraudulent transaction.
On August 4, 1993, the Manila RTC rendered judgment, the dispositive portion of which reads as follows:
WHEREFORE, in view of all the foregoing, judgment is hereby rendered in favor of [Franco] and against [BPI-FB], ordering the
latter to pay to the former the following sums:
1. P76,500.00 representing the legal rate of interest on the amount of P450,000.00 from May 18, 1990 to October 31,
1991;
2. P498,973.23 representing the balance on [Francos] savings account as of May 18, 1990, together with the interest
thereon in accordance with the banks guidelines on the payment therefor;
3. P30,000.00 by way of attorneys fees; and
4. P10,000.00 as nominal damages.
The counterclaim of the defendant is DISMISSED for lack of factual and legal anchor.
Costs against [BPI-FB].
SO ORDERED.28
Unsatisfied with the decision, both parties filed their respective appeals before the CA. Franco confined his appeal to the Manila
RTCs denial of his claim for moral and exemplary damages, and the diminutive award of attorneys fees. In affirming with
modification the lower courts decision, the appellate court decreed, to wit:
WHEREFORE, foregoing considered, the appealed decision is hereby AFFIRMED with modification ordering [BPI-FB] to pay
[Franco] P63,189.00 representing the interest deducted from the time deposit of plaintiff-appellant.P200,000.00 as moral damages
and P100,000.00 as exemplary damages, deleting the award of nominal damages (in view of the award of moral and exemplary
damages) and increasing the award of attorneys fees fromP30,000.00 to P75,000.00.
Cost against [BPI-FB].
SO ORDERED.29
In this recourse, BPI-FB ascribes error to the CA when it ruled that: (1) Franco had a better right to the deposits in the subject
accounts which are part of the proceeds of a forged Authority to Debit; (2) Franco is entitled to interest on his current account; (3)
Franco can recover the P400,000.00 deposit in Quiaoits savings account; (4) the dishonor of Francos checks was not legally in
order; (5) BPI-FB is liable for interest on Francos time deposit, and for moral and exemplary damages; and (6) BPI-FBs counterclaim has no factual and legal anchor.
The petition is partly meritorious.
We are in full accord with the common ruling of the lower courts that BPI-FB cannot unilaterally freeze Francos accounts and
preclude him from withdrawing his deposits. However, contrary to the appellate courts ruling, we hold that Franco is not entitled to
unearned interest on the time deposit as WELL as to moral and exemplary damages.
First. On the issue of who has a better right to the deposits in Francos accounts, BPI-FB urges us that the legal consequence of
FMICs forgery claim is that the MONEY transferred by BPI-FB to Tevesteco is its own, and considering that it was able to
recover possession of the same when the MONEY was redeposited by Franco, it had the right to set up its ownership thereon
and freeze Francos accounts.
BPI-FB contends that its position is not unlike that of an owner of personal property who regains possession after it is stolen, and to
illustrate this point, BPI-FB gives the following example: where Xs television set is stolen by Y who thereafter sells it to Z, and

where Z unwittingly entrusts possession of the TV set to X, the latter would have the right to keep possession of the property and
preclude Z from recovering possession thereof. To bolster its position, BPI-FB cites Article 559 of the Civil Code, which provides:
Article 559. The possession of movable property acquired in good faith is equivalent to a title. Nevertheless, one who has lost any
movable or has been unlawfully deprived thereof, may recover it from the person in possession of the same.
If the possessor of a movable lost or of which the owner has been unlawfully deprived, has acquired it in good faith at a public sale,
the owner cannot obtain its return without reimbursing the price paid therefor.
BPI-FBs argument is unsound. To begin with, the movable property mentioned in Article 559 of the Civil Code pertains to a specific
or determinate thing.30 A determinate or specific thing is one that is individualized and can be identified or distinguished from others
of the same kind.31
In this case, the deposit in Francos accounts consists of MONEY which, albeit characterized as a movable, is generic and
fungible.32 The quality of being fungible depends upon the possibility of the property, because of its nature or the will of the parties,
being substituted by others of the same kind, not having a distinct individuality.33
Significantly, while Article 559 permits an owner who has lost or has been unlawfully deprived of a movable to recover the exact
same thing from the current possessor, BPI-FB simply claims ownership of the equivalent amount of money, i.e., the value thereof,
which it had mistakenly debited from FMICs account and credited to Tevestecos, and subsequently traced to Francos account. In
fact, this is what BPI-FB did in filing the Makati Case against Franco, et al. It staked its claim on the money itself which passed from
one account to another, commencing with the forged Authority to Debit.
It bears emphasizing that MONEY bears no earmarks of peculiar ownership,34 and this characteristic is all the more manifest in
the instant case which involves MONEY in a banking transaction gone awry. Its primary function is to pass from hand to hand as
a medium of exchange, without other evidence of its title.35 MONEY , which had passed through various transactions in the
general course of banking business, even if of traceable origin, is no exception.
Thus, inasmuch as what is involved is not a specific or determinate personal property, BPI-FBs illustrative example, ostensibly
based on Article 559, is inapplicable to the instant case.
There is no doubt that BPI-FB owns the deposited monies in the accounts of Franco, but not as a legal consequence of its
unauthorized transfer of FMICs deposits to Tevestecos account. BPI-FB conveniently forgets that the deposit of MONEY in
banks is governed by the Civil Code provisions on simple loan or mutuum.36 As there is a debtor-creditor relationship between a
bank and its depositor, BPI-FB ultimately acquired ownership of Francos deposits, but such ownership is coupled with a
corresponding obligation to pay him an equal amount on demand.37 Although BPI-FB owns the deposits in Francos accounts, it
cannot prevent him from demanding payment of BPI-FBs obligation by drawing checks against his current account, or asking for
the release of the funds in his savings account. Thus, when Franco issued checks drawn against his current account, he had every
right as creditor to expect that those checks would be honored by BPI-FB as debtor.
More importantly, BPI-FB does not have a unilateral right to freeze the accounts of Franco based on its mere suspicion that the
funds therein were proceeds of the multi-million peso scam Franco was allegedly involved in. To grant BPI-FB, or any bank for that
matter, the right to take whatever action it pleases on deposits which it supposes are derived from shady transactions, would open
the floodgates of public distrust in the banking industry.
Our pronouncement in Simex International (Manila), Inc. v. Court of Appeals38 continues to resonate, thus:
The banking system is an indispensable institution in the modern world and plays a vital role in the economic life of every civilized
nation. Whether as mere passive entities for the safekeeping and saving of MONEY or as active instruments of business and
commerce, banks have become an ubiquitous presence among the people, who have come to regard them with respect and even
gratitude and, most of all, confidence. Thus, even the humble wage-earner has not hesitated to entrust his lifes savings to the
bank of his choice, knowing that they will be safe in its custody and will even earn some interest for him. The ordinary person, with
equal faith, usually maintains a modest checking account for security and convenience in the settling of his monthly bills and the
payment of ordinary expenses. x x x.
In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether such account consists only of a
few hundred pesos or of millions. The bank must record every single transaction accurately, down to the last centavo, and as
promptly as possible. This has to be done if the account is to reflect at any given time the amount of MONEY the depositor can
dispose of as he sees fit, confident that the bank will deliver it as and to whomever directs. A blunder on the part of the bank, such
as the dishonor of the check without good reason, can cause the depositor not a little embarrassment if not also financial loss and
perhaps even civil and criminal litigation.
The point is that as a business affected with public interest and because of the nature of its functions, the bank is under obligation
to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship. x x x.
Ineluctably, BPI-FB, as the trustee in the fiduciary relationship, is duty bound to know the signatures of its customers. Having failed
to detect the forgery in the Authority to Debit and in the process inadvertently facilitate the FMIC-Tevesteco transfer, BPI-FB cannot
now shift liability thereon to Franco and the other payees of checks issued by Tevesteco, or prevent withdrawals from their
respective accounts without the appropriate court writ or a favorable final judgment.
Further, it boggles the mind why BPI-FB, even without delving into the authenticity of the signature in the Authority to Debit,
effected the transfer of P80,000,000.00 from FMICs to Tevestecos account, when FMICs account was a time deposit and it had
already paid advance interest to FMIC. Considering that there is as yet no indubitable evidence establishing Francos participation
in the forgery, he remains an innocent party. As between him and BPI-FB, the latter, which made possible the present predicament,
must bear the resulting loss or inconvenience.
Second. With respect to its liability for interest on Francos current account, BPI-FB argues that its non-compliance with the Makati
RTCs Order Lifting the Order of Attachment and the legal consequences thereof, is a matter that ought to be taken up in that court.
The argument is tenuous. We agree with the succinct holding of the appellate court in this respect. The Manila RTCs order to pay
interests on Francos current account arose from BPI-FBs unjustified refusal to comply with its obligation to pay Franco pursuant to
their contract of mutuum. In other words, from the time BPI-FB refused Francos demand for the release of the deposits in his
current account, specifically, from May 17, 1990, interest at the rate of 12% began to accrue thereon.39
Undeniably, the Makati RTC is vested with the authority to determine the legal consequences of BPI-FBs non-compliance with the
Order Lifting the Order of Attachment. However, such authority does not preclude the Manila RTC from ruling on BPI-FBs liability
to Franco for payment of interest based on its continued and unjustified refusal to perform a contractual obligation upon demand.
After all, this was the core issue raised by Franco in his complaint before the Manila RTC.
Third. As to the award to Franco of the deposits in Quiaoits account, we find no reason to depart from the factual findings of both
the Manila RTC and the CA.

Noteworthy is the fact that Quiaoit himself testified that the deposits in his account are actually owned by Franco who simply
accommodated Jaime Sebastians request to temporarily transfer P400,000.00 from Francos savings account to Quiaoits
account.40 His testimony cannot be characterized as hearsay as the records reveal that he had personal knowledge of the
arrangement made between Franco, Sebastian and himself.41
BPI-FB makes capital of Francos belated allegation relative to this particular arrangement. It insists that the transaction with
Quiaoit was not specifically alleged in Francos complaint before the Manila RTC. However, it appears that BPI-FB had impliedly
consented to the trial of this issue given its extensive cross-examination of Quiaoit.
Section 5, Rule 10 of the Rules of Court provides:
Section 5. Amendment to conform to or authorize presentation of evidence. When issues not raised by the pleadings are tried
with the express or implied consent of the parties, they shall be treated in all respects as if they had been raised in the pleadings.
Such amendment of the pleadings as may be necessary to cause them to conform to the evidence and to raise these issues may
be made upon motion of any party at any time, even after judgment; but failure to amend does not affect the result of the trial of
these issues. If evidence is objected to at the trial on the ground that it is now within the issues made by the pleadings, the court
may allow the pleadings to be amended and shall do so with liberality if the presentation of the merits of the action and the ends of
substantial justice will be subserved thereby. The court may grant a continuance to enable the amendment to be made. (Emphasis
supplied)
In all, BPI-FBs argument that this case is not the right forum for Franco to recover the P400,000.00 begs the issue. To reiterate,
Quiaoit, testifying during the trial, unequivocally disclaimed ownership of the funds in his account, and pointed to Franco as the
actual owner thereof. Clearly, Francos action for the recovery of his deposits appropriately covers the deposits in Quiaoits
account.
Fourth. Notwithstanding all the foregoing, BPI-FB continues to insist that the dishonor of Francos checks respectively dated
September 11 and 18, 1989 was legally in order in view of the Makati RTCs supplemental writ of attachment issued on September
14, 1989. It posits that as the party that applied for the writ of attachment before the Makati RTC, it need not be served with the
Notice of Garnishment before it could place Francos accounts under garnishment.
The argument is specious. In this argument, we perceive BPI-FBs clever but transparent ploy to circumvent Section 4,42 Rule 13 of
the Rules of Court. It should be noted that the strict requirement on service of court papers upon the parties affected is designed to
comply with the elementary requisites of due process. Franco was entitled, as a matter of right, to notice, if the requirements of due
process are to be observed. Yet, he received a copy of the Notice of Garnishment only on September 27, 1989, several days after
the two checks he issued were dishonored by BPI-FB on September 20 and 21, 1989. Verily, it was premature for BPI-FB to freeze
Francos accounts without even awaiting service of the Makati RTCs Notice of Garnishment on Franco.
Additionally, it should be remembered that the enforcement of a writ of attachment cannot be made without including in the main
suit the owner of the property attached by virtue thereof. Section 5, Rule 13 of the Rules of Court specifically provides that "no levy
or attachment pursuant to the writ issued x x x shall be enforced unless it is preceded, or contemporaneously accompanied, by
service of summons, together with a copy of the complaint, the application for attachment, on the defendant within the Philippines."
Franco was impleaded as party-defendant only on May 15, 1990. The Makati RTC had yet to acquire jurisdiction over the person of
Franco when BPI-FB garnished his accounts.43 Effectively, therefore, the Makati RTC had no authority yet to bind the deposits of
Franco through the writ of attachment, and consequently, there was no legal basis for BPI-FB to dishonor the checks issued by
Franco.
Fifth. Anent the CAs finding that BPI-FB was in bad faith and as such liable for the advance interest it deducted from Francos time
deposit account, and for moral as WELL as exemplary damages, we find it proper to reinstate the ruling of the trial court, and
allow only the recovery of nominal damages in the amount of P10,000.00. However, we retain the CAs award of P75,000.00 as
attorneys fees.
In granting Francos prayer for interest on his time deposit account and for moral and exemplary damages, the CA attributed bad
faith to BPI-FB because it (1) completely disregarded its obligation to Franco; (2) misleadingly claimed that Francos deposits were
under garnishment; (3) misrepresented that Francos current account was not on file; and (4) refused to return the P400,000.00
despite the fact that the ostensible owner, Quiaoit, wanted the amount returned to Franco.
In this regard, we are guided by Article 2201 of the Civil Code which provides:
Article 2201. In contracts and quasi-contracts, the damages for which the obligor who acted in good faith is liable shall be those
that are the natural and probable consequences of the breach of the obligation, and which the parties have foreseen or could have
reasonable foreseen at the time the obligation was constituted.
In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for all damages which may be reasonably
attributed to the non-performance of the obligation. (Emphasis supplied.)
We find, as the trial court did, that BPI-FB acted out of the impetus of self-protection and not out of malevolence or ill will. BPI-FB
was not in the corrupt state of mind contemplated in Article 2201 and should not be held liable for all damages now being imputed
to it for its breach of obligation. For the same reason, it is not liable for the unearned interest on the time deposit.
Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and
conscious doing of wrong; it partakes of the nature of fraud.44 We have held that it is a breach of a known duty through some
motive of interest or ill will.45 In the instant case, we cannot attribute to BPI-FB fraud or even a motive of self-enrichment. As the
trial court found, there was no denial whatsoever by BPI-FB of the existence of the accounts. The computer-generated document
which indicated that the current account was "not on file" resulted from the prior debit by BPI-FB of the deposits. The remedy of
freezing the account, or the garnishment, or even the outright refusal to honor any transaction thereon was resorted to solely for
the purpose of holding on to the funds as a security for its intended court action,46 and with no other goal but to ensure the integrity
of the accounts.
We have had occasion to hold that in the absence of fraud or bad faith,47 moral damages cannot be awarded; and that the adverse
result of an action does not per se make the action wrongful, or the party liable for it. One may err, but error alone is not a ground
for granting such damages.48
An award of moral damages contemplates the existence of the following requisites: (1) there must be an injury clearly sustained by
the claimant, whether physical, mental or psychological; (2) there must be a culpable act or omission factually established; (3) the
wrongful act or omission of the defendant is the proximate cause of the injury sustained by the claimant; and (4) the award for
damages is predicated on any of the cases stated in Article 2219 of the Civil Code.49
Franco could not point to, or identify any particular circumstance in Article 2219 of the Civil Code,50 upon which to base his claim for
moral damages.1wphi1

Thus, not having acted in bad faith, BPI-FB cannot be held liable for moral damages under Article 2220 of the Civil Code for breach
of contract.51
We also deny the claim for exemplary damages. Franco should show that he is entitled to moral, temperate, or compensatory
damages before the court may even consider the question of whether exemplary damages should be awarded to him.52 As there is
no basis for the award of moral damages, neither can exemplary damages be granted.
While it is a sound policy not to set a premium on the right to litigate,53 we, however, find that Franco is entitled to reasonable
attorneys fees for having been compelled to go to court in order to assert his right. Thus, we affirm the CAs grant of P75,000.00 as
attorneys fees.
Attorneys fees may be awarded when a party is compelled to litigate or incur expenses to protect his interest,54 or when the court
deems it just and equitable.55 In the case at bench, BPI-FB refused to unfreeze the deposits of Franco despite the Makati RTCs
Order Lifting the Order of Attachment and Quiaoits unwavering assertion that theP400,000.00 was part of Francos savings
account. This refusal constrained Franco to incur expenses and litigate for almost two (2) decades in order to protect his interests
and recover his deposits. Therefore, this Court deems it just and equitable to grant Franco P75,000.00 as attorneys fees. The
award is reasonable in view of the complexity of the issues and the time it has taken for this case to be resolved.56
Sixth. As for the dismissal of BPI-FBs counter-claim, we uphold the Manila RTCs ruling, as affirmed by the CA, that BPI-FB is not
entitled to recover P3,800,000.00 as actual damages. BPI-FBs alleged loss of profit as a result of Francos suit is, as already
pointed out, of its own making. Accordingly, the denial of its counter-claim is in order.
WHEREFORE, the petition is PARTIALLY GRANTED. The Court of Appeals Decision dated November 29, 1995 is AFFIRMED with
the MODIFICATION that the award of unearned interest on the time deposit and of moral and exemplary damages is DELETED.
No pronouncement as to costs.
SO ORDERED.
ANTONIO EDUARDO B. NACHURA
Associate Justice
WE CONCUR:
CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson
MA. ALICIA AUSTRIA-MARTINEZ
MINITA V. CHICO-NAZARIO
Associate Justice
Associate Justice
RUBEN T. REYES
Associate Justice
AT T E S TAT I O N
I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the
opinion of the Courts Division.
CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson, Third Division
C E R T I F I C AT I O N
Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's Attestation, I certify that the conclusions in the
above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.
REYNATO S. PUNO
Chief Justice

BPI FAMILY BANK VS. FRANCO


G.R. No. 123498 November 23, 2007 J. Nachura
FACTS:
On August 15, 1989, Tevesteco opened a savings and current account with BPI-FB. Soon thereafter,
FMIC also opened a time deposit account with the same branch of BPIFB O n A u g u s t 3 1 , 1 9 8 9 , F r a n c o o p e n e d t h r e e a c c o u n t s , n a m e l y, a c u r r e n t , s a v i n g s , a n d t i
medeposit, with BPI-FB. The total amount of P2,000,000.00 used to open these accounts
i s traceable to a check issued by Tevesteco allegedly in consideration of Francos introduction of Eladio Teves, to
Jaime Sebastian, who was then BPI-FB SFDMs Branch Manager. In turn, thefunding for the
P2,000,000.00 check was part of the P80,000,000.00 debited by BPIFB fromF M I C s t i m e d e p o s i t a c c o u n t a n d c r e d i t e d t o Tev e s t e c o s c u r r e n t a c c o u n t p u r s u a n
t t o a n Authority to Debit purportedly signed by FMICs officers. It appears, however, that the signatures of FMICs
officers on the Authority to Debit weref o r g e d . B P I F B , d e b i t e d F r a n c o s s a v i n g s a n d c u r r e n t a c c o u n t s f o r t h e a m o u n t s r e m a i n i n g therein. In the
meantime, two checks drawn by Franco against his BPI-FB current account weredishonored and stamped with
a notation account under garnishment. Apparently, Francoscurrent account was garnished by virtue of an
Order of Notably, the dishonored checks were issued by Franco and presented for payment at BPI-FB prior to
Francos receipt of notice that his accounts were under garnishment. It was only onMay 15, 1990, that Franco was
impleaded in the Makati case. Immediately, upon receipt of suchcopy, Franco filed a Motion to Discharge Attachment.
On May 17, 1990, Franco pre-terminatedhis time deposit account.BPI-FB deducted the amount of P63,189.00 from
the remaining balance of the time depositaccount representing advance interest paid to him. Consequently, in light of
BPI-FBs refusal toheed Francos demands to unfreeze his accounts and release his deposits therein, Franco filed
on June 4, 1990 with the Manila RTC the subject suit.

ISSUE
: WON Respondent had better right to the deposits in the subject accounts which are partof the proceeds of a forged
Authority to Debit
HELD
: NO

Republic of the Philippines


SUPREME COURT
Manila
THIRD DIVISION
G.R. Nos. 173654-765
August 28, 2008
PEOPLE OF THE PHILIPPINES, petitioner,
vs.
TERESITA PUIG and ROMEO PORRAS, respondents.
DECISION
CHICO-NAZARIO, J.:
This is a Petition for Review under Rule 45 of the Revised Rules of Court with petitioner People of the Philippines,
represented by the Office of the Solicitor General, praying for the reversal of the Orders dated 30 January 2006 and 9
June 2006 of the Regional Trial Court (RTC) of the 6th Judicial Region, Branch 68, Dumangas, Iloilo, dismissing the
112 cases of Qualified Theft filed against respondents Teresita Puig and Romeo Porras, and denying petitioners
Motion for Reconsideration, in CriminalCases No. 05-3054 to 05-3165.
The following are the factual antecedents:
On 7 November 2005, the Iloilo Provincial Prosecutors Office filed before Branch 68 of the RTC in Dumangas, Iloilo,
112 cases of Qualified Theft against respondents Teresita Puig (Puig) and Romeo Porras (Porras) who were the
Cashier and Bookkeeper, respectively, of private complainant Rural Bank of Pototan, Inc. The cases were docketed
as Criminal Cases No. 05-3054 to 05-3165.
The allegations in the Informations1 filed before the RTC were uniform and pro-forma, except for the amounts, date
and time of commission, to wit:
INFORMATION
That on or about the 1st day of August, 2002, in the Municipality of Pototan, Province of Iloilo, Philippines, and
within the jurisdiction of this Honorable Court, above-named [respondents], conspiring, confederating, and
helping one another, with grave abuse of confidence, being the Cashier and Bookkeeper of the
Rural Bank of Pototan, Inc., Pototan, Iloilo, without the knowledge and/or consent of the management of the
Bank and with intent of gain, did then and there willfully, unlawfully and feloniously take, steal and carry away
the sum of FIFTEEN THOUSAND PESOS (P15,000.00), Philippine Currency, to the damage and prejudice of
the said bank in the aforesaid amount.
After perusing the Informations in these cases, the trial court did not find the existence of probable cause that would
have necessitated the issuance of a warrant of arrest based on the following grounds:
(1) the element of taking without the consent of the owners was missing on the ground that it is the
depositors-clients, and not the Bank, which filed the complaint in these cases, who are the owners of
the MONEY allegedly taken by respondents and hence, are the real parties-in-interest; and
(2) the Informations are bereft of the phrase alleging "dependence, guardianship or vigilance between the
respondents and the offended party that would have created a high degree of confidence between
them which the respondents could have abused."
It added that allowing the 112 cases for Qualified Theft filed against the respondents to push through would be
violative of the right of the respondents under Section 14(2), Article III of the 1987 Constitution which states that in all
criminal prosecutions, the accused shall enjoy the right to be informed of the nature and cause of the accusation
against him. Following Section 6, Rule 112 of the Revised Rules of Criminal Procedure, the RTC dismissed the cases
on 30 January 2006 and refused to issue a warrant of arrest against Puig and Porras.
A Motion for Reconsideration2 was filed on 17 April 2006, by the petitioner.
On 9 June 2006, an Order3 denying petitioners Motion for Reconsideration was issued by the RTC, finding as follows:

Accordingly, the prosecutions Motion for Reconsideration should be, as it hereby, DENIED. The Order dated
January 30, 2006 STANDS in all respects.
Petitioner went directly to this Court via Petition for Review on Certiorari under Rule 45, raising the sole legal issue of:
WHETHER OR NOT THE 112 INFORMATIONS FOR QUALIFIED THEFT SUFFICIENTLY ALLEGE THE
ELEMENT OF TAKING WITHOUT THE CONSENT OF THE OWNER, AND THE QUALIFYING
CIRCUMSTANCE OF GRAVE ABUSE OF CONFIDENCE.
Petitioner prays that judgment be rendered annulling and setting aside the Orders dated 30 January 2006 and 9 June
2006 issued by the trial court, and that it be directed to proceed with Criminal Cases No. 05-3054 to 05-3165.
Petitioner explains that under Article 1980 of the New Civil Code, "fixed, savings, and current deposits of MONEY in
banks and similar institutions shall be governed by the provisions concerning simple loans." Corollary thereto, Article
1953 of the same Code provides that "a person who receives a loan of MONEY or any other fungible thing acquires
the ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and quality." Thus, it
posits that the depositors who place their money with the bank are considered creditors of the bank. The bank
acquires ownership of the money deposited by its clients, MAKING THE MONEY taken by respondents as
belonging to the bank.
Petitioner also insists that the Informations sufficiently allege all the elements of the crime of qualified theft, citing that
a perusal of the Informations will show that they specifically allege that the respondents were the Cashier and
Bookkeeper of the Rural Bank of Pototan, Inc., respectively, and that they took various amounts of money with grave
abuse of confidence, and without the knowledge and consent of the bank, to the damage and prejudice of the bank.
Parenthetically, respondents raise procedural issues. They challenge the petition on the ground that a Petition for
Review on Certiorari via Rule 45 is the wrong mode of appeal because a finding of probable cause for the issuance of
a warrant of arrest presupposes evaluation of facts and circumstances, which is not proper under said Rule.
Respondents further claim that the Department of Justice (DOJ), through the Secretary of Justice, is the principal
party to file a Petition for Review on Certiorari, considering that the incident was indorsed by the DOJ.
We find merit in the petition.
The dismissal by the RTC of the criminal cases was allegedly due to insufficiency of the Informations and, therefore,
because of this defect, there is no basis for the existence of probable cause which will justify the issuance of the
warrant of arrest. Petitioner assails the dismissal contending that the Informations for Qualified Theft sufficiently state
facts which constitute (a) the qualifying circumstance of grave abuse of confidence; and (b) the element of taking, with
intent to gain and without the consent of the owner, which is the Bank.
In determining the existence of probable cause to issue a warrant of arrest, the RTC judge found the allegations in the
Information inadequate. He ruled that the Information failed to state facts constituting the qualifying circumstance
of grave abuse of confidence and the element of taking without the consent of the owner, since the owner of the
money is not the Bank, but the depositors therein. He also cites People v. Koc Song,4 in which this Court held:
There must be allegation in the information and proof of a relation, by reason of dependence, guardianship or
vigilance, between the respondents and the offended party that has created a high degree of confidence
between them, which the respondents abused.
At this point, it needs stressing that the RTC Judge based his conclusion that there was no probable cause simply on
the insufficiency of the allegations in the Informations concerning the facts constitutive of the elements of the offense
charged. This, therefore, makes the issue of sufficiency of the allegations in the Informations the focal point of
discussion.
Qualified Theft, as defined and punished under Article 310 of the Revised Penal Code, is committed as follows, viz:
ART. 310. Qualified Theft. The crime of theft shall be punished by the penalties next higher by two degrees
than those respectively specified in the next preceding article, if committed by a domestic servant, or with
grave abuse of confidence, or if the property stolen is motor vehicle, mail matter or large cattle or consists of
coconuts taken from the premises of a plantation, fish taken from a fishpond or fishery or if property is taken
on the occasion of fire, earthquake, typhoon, volcanic eruption, or any other calamity, vehicular accident or
civil disturbance. (Emphasis supplied.)
Theft, as defined in Article 308 of the Revised Penal Code, requires the physical taking of anothers property without
violence or intimidation against persons or force upon things. The elements of the crime under this Article are:
1. Intent to gain;
2. Unlawful taking;
3. Personal property belonging to another;
4. Absence of violence or intimidation against persons or force upon things.
To fall under the crime of Qualified Theft, the following elements must concur:
1. Taking of personal property;
2. That the said property belongs to another;
3. That the said taking be done with intent to gain;
4. That it be done without the owners consent;
5. That it be accomplished without the use of violence or intimidation against persons, nor of force upon
things;
6. That it be done with grave abuse of confidence.
On the sufficiency of the Information, Section 6, Rule 110 of the Rules of Court requires, inter alia, that the information
must state the acts or omissions complained of as constitutive of the offense.
On the manner of how the Information should be worded, Section 9, Rule 110 of the Rules of Court, is enlightening:

Section 9. Cause of the accusation. The acts or omissions complained of as constituting the offense and the
qualifying and aggravating circumstances must be stated in ordinary and concise language and not
necessarily in the language used in the statute but in terms sufficient to enable a person of common
understanding to know what offense is being charged as WELL as its qualifying and aggravating
circumstances and for the court to pronounce judgment.
It is evident that the Information need not use the exact language of the statute in alleging the acts or omissions
complained of as constituting the offense. The test is whether it enables a person of common understanding to know
the charge against him, and the court to render judgment properly.5
The portion of the Information relevant to this discussion reads:
A]bove-named [respondents], conspiring, confederating, and helping one another, with grave abuse of confidence, being the Cashier and Bookkeeper of the Rural Bank of Pototan, Inc.,
Pototan, Iloilo, without the knowledge and/or consent of the management of the Bank x x x.

It is beyond doubt that tellers, Cashiers, Bookkeepers and other employees of a Bank who come into possession of
the monies deposited therein enjoy the confidence reposed in them by their EMPLOYER . Banks, on the other hand,
where monies are deposited, are considered the owners thereof. This is very clear not only from the express
provisions of the law, but from established jurisprudence. The relationship between banks and depositors has been
held to be that of creditor and debtor. Articles 1953 and 1980 of the New Civil Code, as appropriately pointed out by
petitioner, provide as follows:
Article 1953. A person who receives a loan of MONEY or any other fungible thing acquires the ownership
thereof, and is bound to pay to the creditor an equal amount of the same kind and quality.
Article 1980. Fixed, savings, and current deposits of MONEY in banks and similar institutions shall be
governed by the provisions concerning loan.
In a long line of cases involving Qualified Theft, this Court has firmly established the nature of possession by the Bank
of the MONEY deposits therein, and the duties being performed by its employees who have custody of the money or
have come into possession of it. The Court has consistently considered the allegations in the Information that such
employees acted with grave abuse of confidence, to the damage and prejudice of the Bank, without particularly
referring to it as owner of the money deposits, as sufficient to make out a case of Qualified Theft. For a graphic
illustration, we cite Roque v. People,6 where the accused teller was convicted for Qualified Theft based on this
Information:
That on or about the 16th day of November, 1989, in the municipality of Floridablanca, province of Pampanga,
Philippines and within the jurisdiction of his Honorable Court, the above-named accused ASUNCION
GALANG ROQUE, being then EMPLOYED as teller of the Basa Air Base Savings and Loan Association Inc.
(BABSLA) with office address at Basa Air Base, Floridablanca, Pampanga, and as such was authorized and
reposed with the responsibility to receive and collect capital contributions from its member/contributors of said
corporation, and having collected and received in her capacity as teller of the BABSLA the sum of TEN
THOUSAND PESOS (P10,000.00), said accused, with intent of gain, with grave abuse of confidence and
without the knowledge and consent of said corporation, did then and there willfully, unlawfully and
feloniously take, steal and carry away the amount of P10,000.00, Philippine currency, by making it appear that
a certain depositor by the name of Antonio Salazar withdrew from his Savings Account No. 1359, when in
truth and in fact said Antonio Salazar did not withdr[a]w the said amount of P10,000.00 to the damage and
prejudice of BABSLA in the total amount of P10,000.00, Philippine currency.
In convicting the therein appellant, the Court held that:
[S]ince the teller occupies a position of confidence, and the bank places MONEY in the tellers possession
due to the confidence reposed on the teller, the felony of qualified theft would be committed. 7
Also in People v. Sison,8 the Branch Operations Officer was convicted of the crime of Qualified Theft based on the
Information as herein cited:
That in or about and during the period compressed between January 24, 1992 and February 13, 1992, both
dates inclusive, in the City of Manila, Philippines, the said accused did then and there wilfully, unlawfully and
feloniously, with intent of gain and without the knowledge and consent of the owner thereof, take, steal and
carry away the following, to wit:
Cash MONEY amounting to P6,000,000.00 in different denominations belonging to the PHILIPPINE
COMMERCIAL INTERNATIONAL BANK (PCIBank for brevity), Luneta Branch, Manila represented by its
Branch Manager, HELEN U. FARGAS, to the damage and prejudice of the said owner in the aforesaid
amount of P6,000,000.00, Philippine Currency.
That in the commission of the said offense, herein accused acted with grave abuse of confidence and
unfaithfulness, he being the Branch Operation Officer of the said complainant and as such he had free access
to the place where the said amount of MONEY was kept.
The judgment of conviction elaborated thus:
The crime perpetuated by appellant against his EMPLOYER , the Philippine Commercial and Industrial Bank
(PCIB), is Qualified Theft. Appellant could not have committed the crime had he not been holding the position
of Luneta Branch Operation Officer which gave him not only sole access to the bank vault xxx. The
management of the PCIB reposed its trust and confidence in the appellant as its Luneta Branch Operation
Officer, and it was this trust and confidence which he exploited to enrich himself to the damage and prejudice
of PCIB x x x.9
From another end, People v. Locson,10 in addition to People v. Sison, described the nature of possession by the
Bank. The MONEY in this case was in the possession of the defendant as receiving teller of the bank, and the

possession of the defendant was the possession of the Bank. The Court held therein that when the defendant, with
grave abuse of confidence, removed the money and appropriated it to his own use without the consent of the Bank,
there was taking as contemplated in the crime of Qualified Theft. 11
Conspicuously, in all of the foregoing cases, where the Informations merely alleged the positions of the respondents;
that the crime was committed with grave abuse of confidence, with intent to gain and without the knowledge and
consent of the Bank, without necessarily stating the phrase being assiduously insisted upon by respondents, "of a
relation by reason of dependence, guardianship or vigilance, between the respondents and the offended
party that has created a high degree of confidence between them, which respondents abused,"12 and
without EMPLOYING the word "owner" in lieu of the "Bank" were considered to have satisfied the test of sufficiency
of allegations.
As regards the respondents who were EMPLOYED as Cashier and Bookkeeper of the Bank in this case, there is
even no reason to quibble on the allegation in the Informations that they acted with grave abuse of confidence. In fact,
the Information which alleged grave abuse of confidence by accused herein is even more precise, as this is exactly
the requirement of the law in qualifying the crime of Theft.
In summary, the Bank acquires ownership of the MONEY deposited by its clients; and the employees of the Bank,
who are entrusted with the possession of money of the Bank due to the confidence reposed in them, occupy positions
of confidence. The Informations, therefore, sufficiently allege all the essential elements constituting the crime of
Qualified Theft.
On the theory of the defense that the DOJ is the principal party who may file the instant petition, the ruling in Mobilia
Products, Inc. v. Hajime Umezawa13 is instructive. The Court thus enunciated:
In a criminal case in which the offended party is the State, the interest of the private complainant or the
offended party is limited to the civil liability arising therefrom. Hence, if a criminal case is dismissed by the trial
court or if there is an acquittal, a reconsideration of the order of dismissal or acquittal may be undertaken,
whenever legally feasible, insofar as the criminal aspect thereof is concerned and may be made only by the
public prosecutor; or in the case of an appeal, by the State only, through the OSG. x x x.
On the alleged wrong mode of appeal by petitioner, suffice it to state that the rule is well-settled that in appeals by
certiorari under Rule 45 of the Rules of Court, only errors of law may be raised, 14 and herein petitioner certainly raised
a question of law.
As an aside, even if we go beyond the allegations of the Informations in these cases, a closer look at the records of
the preliminary investigation conducted will show that, indeed, probable cause exists for the indictment of herein
respondents. Pursuant to Section 6, Rule 112 of the Rules of Court, the judge shall issue a warrant of arrest only upon
a finding of probable cause after personally evaluating the resolution of the prosecutor and its supporting
evidence. Soliven v. Makasiar,15 as reiterated inAllado v. Driokno,16 explained that probable cause for the issuance
of a warrant of arrest is the existence of such facts and circumstances that would lead a reasonably discreet and
prudent person to believe that an offense has been committed by the person sought to be arrested. 17 The records
reasonably indicate that the respondents may have, indeed, committed the offense charged.
Before closing, let it be stated that while it is truly imperative upon the fiscal or the judge, as the case may be, to
relieve the respondents from the pain of going through a trial once it is ascertained that no probable cause exists to
form a sufficient belief as to the guilt of the respondents, conversely, it is also equally imperative upon the judge to
proceed with the case upon a showing that there is a prima facie case against the respondents.
WHEREFORE, premises considered, the Petition for Review on Certiorari is hereby GRANTED. The Orders dated 30
January 2006 and 9 June 2006 of the RTC dismissing Criminal Cases No. 05-3054 to 053165 are REVERSED and SET ASIDE. Let the corresponding Warrants of Arrest issue against herein respondents
TERESITA PUIG and ROMEO PORRAS. The RTC Judge of Branch 68, in Dumangas, Iloilo, is directed to proceed
with the trial of Criminal Cases No. 05-3054 to 05-3165, inclusive, with reasonable dispatch. No pronouncement as to
costs.
SO ORDERED.

PEOPLE OF THE PHILIPPINES, Plaintiff-Appellee, v. TERESITA PUIG and ROMEO PORRAS,Accused-Appellant.


THIRD DIVISION
RESOLUTION
CHICO-NAZARIO, J.:
In a Decision dated 28 August 2008, the Court granted the Petition for Review on Certiorari filed in this case. The
dispositive portion of the Decision reads:
WHEREFORE, premises considered, the Petition for Review on Certiorari is hereby GRANTED. The Orders dated 30
January 2006 and 9 June 2006 of the RTC dismissing Criminal Cases No. 05-3054 to 05-3165 are REVERSED and SET
ASIDE. Let the corresponding Warrants of Arrest issue against herein respondents TERESITA PUIG and ROMEO PORRAS.
The RTC Judge of Branch 68, in Dumangas, Iloilo, is directed to proceed with the trial of Criminal Cases No. 05-3054 to
05-3165, inclusive, with reasonable dispatch. No pronouncement as to costs. 1

However, on 2 September 2008, the Supreme Court En Banc, instead of ordering the arrest of respondents Teresita Puig
and Romeo Porras for purposes of proceeding with the trial of Criminal Cases No. 05-3054 to 05-3165, issued a Warrant
of Arrest addressed to the Director of the National Bureau of Investigation (NBI) and the Chief of the Philippine National
Police (PNP), commanding them to effectuate the immediate arrest of herein respondent Teresita Puig only and commit
her to the Correctional Institution for Women in Mandaluyong City.
rbl r l l lbrr

In light of the 28 August 2008 Decision of this Court and considering that trial on the merits has yet to proceed, the
Warrant of Arrest ordering the arrest and commitment of respondent Teresita Puig to theCorrectional Institution is hereby
recalled.
rbl r l l lbrr

ACCORDINGLY, a new WARRANT of ARREST is hereby entered commanding the Director of the NBI and the PNP Chief to
immediately ARREST, for the purpose of further proceedings (trial on the merits) in Criminal Cases No. 05-3054 to No.
05-3165, both respondents TERESITA PUIG and ROMEO PORRAS whose known address is Poblacion, Pototan, Iloilo, or
anywhere in the Republic of the Philippines. FURTHER, the said officials are both DIRECTED to SUBMIT a report within
ten (10) days from compliance herewith.
SO ORDERED.

THIRD DIVISION
[G.R. No. 138677. February 12, 2002]
TOLOMEO LIGUTAN and LEONIDAS DE LA LLANA, petitioners, vs. HON. COURT OF APPEALS & SECURITY
BANK & TRUST COMPANY, respondents.
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. On30 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 motion in an order, dated 5 September 1988, and on 20 October 1989, it rendered
its decision,[1] the dispositive portion of which read:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants, ordering the latter to pay, jointly
and severally, to the plaintiff, as follows:
"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
"3. To pay the costs of the suit.[2]
Petitioners interposed an appeal with the Court of Appeals, questioning the rejection by the trial court of their
motion to present evidence and assailing the imposition of the 2% service charge, the 5% per month penalty charge
and 10% attorney's fees. In its decision[3]of 7 March 1996, the appellate court affirmed the judgment of the trial court
except on the matter of the 2% service charge which was deleted pursuant to Central Bank Circular No. 783. Not fully
satisfied with the decision of the appellate court, both parties filed their respective motions for reconsideration.
[4]
Petitioners prayed for the reduction of the 5% stipulated penalty for being unconscionable. The bank, on the other
hand, asked that the payment of interest and penalty be commenced not from the date of filing of complaint but from
the time of default as so stipulated in the contract of the parties.
On 28 October 1998, the Court of Appeals resolved the two motions thusly:
We find merit in plaintiff-appellees claim that the principal sum of P114,416.00 with interest thereon must commence not on the
date of filing of the complaint as we have previously held in our decision but on the date when the obligation became due.
Default generally begins from the moment the creditor demands the performance of the obligation. However, demand is not
necessary to render the obligor in default when the obligation or the law so provides.
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.
x x x

xxx

xxx

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.
x x x

xxx

xxx

WHEREFORE, the decision sought to be reconsidered is hereby MODIFIED. The defendantsappellants Tolomeo Ligutan and Leonidas dela Llana are hereby ordered to pay the plaintiff-appellee Security Bank and Trust
Company the following:
1. The sum of P114,416.00 with interest thereon at the rate of 15.189% per annum and 3% per month
penalty charge commencing May 20, 1982 until fully paid;
2. The sum equivalent to 10% of the total amount of the indebtedness as and for attorneys fees. [5]
On 16 November 1998, petitioners filed an omnibus motion for reconsideration and to admit newly discovered
evidence,[6] alleging that while the case was pending before the trial court, petitioner Tolomeo Ligutan and his
wife Bienvenida Ligutan executed a real estate mortgage on 18 January 1984 to secure the existing indebtedness of
petitioners Ligutan and dela Llana with the bank. Petitioners contended that the execution of the real estate mortgage
had the effect of novating the contract between them and the bank. Petitioners further averred that the mortgage
was extrajudicially foreclosed on 26 August 1986, that they were not informed about it, and the bank did not credit
them with the proceeds of the sale. The appellate court denied the omnibus motion for reconsideration and to admit
newly discovered evidence, ratiocinating that such a second motion for reconsideration cannot be entertained under
Section 2, Rule 52, of the 1997 Rules of Civil Procedure. Furthermore, the appellate court said, the newly-discovered
evidence being invoked by petitioners had actually been known to them when the case was brought on appeal and
when the first motion for reconsideration was filed. [7]
Aggrieved by the decision and resolutions of the Court of Appeals, petitioners elevated their case to this Court on
9 July 1999 via a petition for review on certiorari under Rule 45 of the Rules of Court, submitting thusly -

I.

The respondent Court of Appeals seriously erred in not holding that the 15.189% interest and the
penalty of three (3%) percent per month or thirty-six (36%) percent per annum imposed by
private respondent bank on petitioners loan obligation are still manifestly exorbitant, iniquitous
and unconscionable.

II.

The respondent Court of Appeals gravely erred in not reducing to a reasonable level the ten
(10%) percent award of attorneys fees which is highly and grossly excessive, unreasonable and
unconscionable.

III.

The respondent Court of Appeals gravely erred in not admitting petitioners newly discovered
evidence which could not have been timely produced during the trial of this case.

IV.

The respondent Court of Appeals seriously erred in not holding that there was a novation of the
cause of action of private respondents complaint in the instant case due to the subsequent
execution of the real estate mortgage during the pendency of this case and the subsequent
foreclosure of the mortgage.[8]

Respondent bank, which did not take an appeal, would, however, have it that the penalty sought to be deleted by
petitioners was even insufficient to fully cover and compensate for the cost of money brought about by the radical
devaluation and decrease in the purchasing power of the peso, particularly vis-a-vis the U.S. dollar, taking into
account the time frame of its occurrence. The Bank would stress that only the amount of P5,584.00 had been
remitted out of the entire loan of P120,000.00. [9]
A penalty clause, expressly recognized by law,[10] is an accessory undertaking to assume greater liability on the
part of an obligor in case of breach of an obligation. It functions to strengthen the coercive force of the
obligation[11] and to provide, in effect, for what could be the liquidated damages resulting from such a breach. The
obligor would then be bound to pay the stipulated indemnity without the necessity of proof on the existence and on the
measure of damages caused by the breach. [12] Although a court may not at liberty ignore the freedom of the parties to
agree on such terms and conditions as they see fit that contravene neither law nor morals, good customs, public order
or public policy, a stipulated penalty, nevertheless, may be equitably reduced by the courts if it is iniquitous or
unconscionable or if the principal obligation has been partly or irregularly complied with. [13]
The question of whether a penalty is reasonable or iniquitous can be partly subjective and partly objective. Its
resolution would depend on such factors as, but not necessarily confined to, the type, extent and purpose of the
penalty, the nature of the obligation, the mode of breach and its consequences, the supervening realities, the standing
and relationship of the parties, and the like, the application of which, by and large, is addressed to the sound
discretion of the court. In Rizal Commercial Banking Corp. vs. Court of Appeals,[14] just an example, the Court has
tempered the penalty charges after taking into account the debtors pitiful situation and its offer to settle the entire
obligation with the creditor bank. The stipulated penalty might likewise be reduced when a partial or irregular
performance is made by the debtor.[15] The stipulated penalty might even be deleted such as when there has been
substantial performance in good faith by the obligor,[16] when the penalty clause itself suffers from fatal infirmity, or
when exceptional circumstances so exist as to warrant it. [17]
The Court of Appeals, exercising its good judgment in the instant case, has reduced the penalty interest from 5%
a month to 3% a month which petitioner still disputes. Given the circumstances, not to mention the repeated acts of
breach by petitioners of their contractual obligation, the Court sees no cogent ground to modify the ruling of the
appellate court..
Anent the stipulated interest of 15.189% per annum, petitioners, for the first time, question its reasonableness
and prays that the Court reduce the amount. This contention is a fresh issue that has not been raised and ventilated
before the courts below. In any event, the interest stipulation, on its face, does not appear as being that
excessive. The essence or rationale for the payment of interest, quite often referred to as cost of money, is not
exactly the same as that of a surcharge or a penalty. A 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 prescribed in loan financing arrangements is a fundamental part of the banking business and the core of a
bank's existence.[19]

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' or 'newly discovered errors' therein, or thinking up some injury or prejudice to the rights of the movant for
reconsideration.[20]
At any rate, the subsequent execution of the real estate mortgage as security for the existing loan would not have
resulted in the extinguishment of the original contract of loan because of novation. Petitioners acknowledge that the
real estate mortgage contract does not contain any express stipulation by the parties intending it to supersede the
existing loan agreement between the petitioners and the bank. [21] Respondent bank has correctly postulated that the
mortgage is but an accessory contract to secure the loan in the promissory note.
Extinctive novation requires, first, a previous valid obligation; second, the agreement of all the parties to the new
contract; third, the extinguishment of the obligation; and fourth, the validity of the new one.[22] In order that an
obligation may be extinguished by another which substitutes the same, it is imperative that it be so declared in
unequivocal terms, or that the old and the new obligation be on every point incompatible with each other. [23] An
obligation to pay a sum of MONEY is not extinctively novated by a new instrument which merely changes the terms
of payment or adding compatible covenants or where the old contract is merely supplemented by the new one.
[24]
When not expressed, incompatibility is required so as to ensure that the parties have indeed intended
such novation despite their failure to express it in categorical terms. The incompatibility, to be sure, should take place
in any of the essential elements of the obligation, i.e., (1) the juridical relation or tie, such as from a
mere commodatum to lease of things, or from negotiorum gestio to agency, or from a mortgage toantichresis,[25] or
from a sale to one of loan; [26] (2) the object or principal conditions, such as a change of the nature of the prestation; or
(3) the subjects, such as the substitution of a debtor [27] or the subrogation of the creditor. Extinctive novation does not
necessarily imply that the new agreement should be complete by itself; certain terms and conditions may be carried,
expressly or by implication, over to the new obligation.
WHEREFORE, the petition is DENIED.
SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-40824 February 23, 1989
GOVERNMENT SERVICE INSURANCE SYSTEM, petitioner,
vs.
COURT OF APPEALS and MR. & MRS. ISABELO R. RACHO, respondents.
The Government Corporate Counsel for petitioner.
Lorenzo A. Sales for private respondents.

REGALADO , J.:
Private respondents, Mr. and Mrs. Isabelo R. Racho, together with the spouses Mr. and Mrs Flaviano Lagasca,
executed a deed of mortgage, dated November 13, 1957, in favor of petitioner Government
Service InsuranceSystem (hereinafter referred to as GSIS) and subsequently, another deed of mortgage, dated
April 14, 1958, in connection with two loans granted by the latter in the sums of P 11,500.00 and P 3,000.00,
respectively. 1 A parcel of land covered by Transfer Certificate of Title No. 38989 of the Register of Deed of Quezon
City, co-owned by said mortgagor spouses, was given as security under the aforesaid two deeds. 2 They also
executed a 'promissory note" which states in part:
... for value received, we the undersigned ... JOINTLY, SEVERALLY and SOLIDARILY, promise
to pay the GOVERNMENT SERVICE INSURANCE SYSTEM the sum of . . . (P 11,500.00)
Philippine Currency, with interest at the rate of six (6%) per centum compounded monthly
payable in . . . (120)equal monthly installments of . . . (P 127.65) each. 3
On July 11, 1961, the Lagasca spouses executed an instrument denominated "Assumption of Mortgage" under
which they obligated themselves to assume the aforesaid obligation to the GSIS and to secure the release of the
mortgage covering that portion of the land belonging to herein private respondents and which was mortgaged to
the GSIS. 4 This undertaking was not fulfilled. 5

Upon failure of the mortgagors to comply with the conditions of the mortgage, particularly the payment of the
amortizations due, GSIS extrajudicially foreclosed the mortgage and caused the mortgaged property to be sold
at public auction on December 3, 1962. 6
More than two years thereafter, or on August 23, 1965, herein private respondents filed a complaint against the
petitioner and the Lagasca spouses in the former Court of
First Instance of Quezon City, 7 praying that the extrajudicial foreclosure "made on, their property and all other
documents executed in relation thereto in favor of the Government Service Insurance System" be declared null and
void. It was further prayed that they be allowed to recover said property, and/or the GSIS be ordered to pay them the
value thereof, and/or they be allowed to repurchase the land. Additionally, they asked for actual and moral damages
and attorney's fees.
In their aforesaid complaint, private respondents alleged that they signed the mortgage contracts not as sureties
or guarantors for the Lagasca spouses but they merely gave their common property to the said co-owners who
were solely benefited by the loans from the GSIS.
The trial court rendered judgment on February 25, 1968 dismissing the complaint for failure to establish a cause
of action. 8
Said decision was reversed by the respondent Court of Appeals 9 which held that:
... although formally they are co-mortgagors, they are so only for accomodation (sic) in that the
GSIS required their consent to the mortgage of the entire parcel of land which was covered with
only one certificate of title, with full knowledge that the loans secured thereby were solely for the
benefit of the appellant (sic) spouses who alone applied for the loan.
xxxx
'It is, therefore, clear that as against the GSIS, appellants have a valid cause for having
foreclosed the mortgage without having given sufficient notice to them as required either as to
their delinquency in the payment of amortization or as to the subsequent foreclosure of the
mortgage by reason of any default in such payment. The notice published in the newspaper,
'Daily Record (Exh. 12) and posted pursuant to Sec 3 of Act 3135 is not the notice to which the
mortgagor is entitled upon the application being made for an extrajudicial foreclosure. ... 10
On the foregoing findings, the respondent court consequently decreed thatIn view of all the foregoing, the judgment appealed from is hereby reversed, and another one
entered (1) declaring the foreclosure of the mortgage void insofar as it affects the share of the
appellants; (2) directing the GSIS to reconvey to appellants their share of the mortgaged
property, or the value thereof if already sold to third party, in the sum of P 35,000.00, and (3)
ordering the appellees Flaviano Lagasca and Esther Lagasca to pay the appellants the sum of P
10,00.00 as moral damages, P 5,000.00 as attorney's fees, and costs. 11
The case is now before us in this petition for review.
In submitting their case to this Court, both parties relied on the provisions of Section 29 of Act No. 2031,
otherwise known as the Negotiable Instruments Law, which provide that an accommodation party is one who
has signed an instrument as maker, drawer, acceptor of indorser without receiving value therefor, but is held
liable on the instrument to a holder for value although the latter knew him to be only an accommodation party.
This approach of both parties appears to be misdirected and their reliance misplaced. The promissory note
hereinbefore quoted, as WELL as the mortgage deeds subject of this case, are clearly not negotiable
instruments. These documents do not comply with the fourth requisite to be considered as such under Section 1
of Act No. 2031 because they are neither payable to order nor to bearer. The note is payable to a specified

party, the GSIS. Absent the aforesaid requisite, the provisions of Act No. 2031 would not apply; governance shall
be afforded, instead, by the provisions of the Civil Code and special laws on mortgages.
As earlier indicated, the factual findings of respondent court are that private respondents signed the documents
"only to give their consent to the mortgage as required by GSIS", with the latter having full knowledge that the
loans secured thereby were solely for the benefit of the Lagasca spouses. 12 This appears to be duly supported by
sufficient evidence on record. Indeed, it would be unusual for the GSIS to arrange for and deduct the monthly
amortizations on the loans from the salary as an army officer of Flaviano Lagasca without likewise affecting
deductions from the salary of Isabelo Racho who was also an army sergeant. Then there is also the undisputed fact,
as already stated, that the Lagasca spouses executed a so-called "Assumption of Mortgage" promising to exclude
private respondents and their share of the mortgaged property from liability to the mortgagee. There is no intimation
that the former executed such instrument for a consideration, thus confirming that they did so pursuant to their original
agreement.
The parol evidence rule 13 cannot be used by petitioner as a shield in this case for it is clear that there was no
objection in the court below regarding the admissibility of the testimony and documents that were presented to prove
that the private respondents signed the mortgage papers just to accommodate their co-owners, the Lagasca spouses.
Besides, the introduction of such evidence falls under the exception to said rule, there being allegations in the
complaint of private respondents in the court below regarding the failure of the mortgage contracts to express the true
agreement of the parties.14
However, contrary to the holding of the respondent court, it cannot be said that private respondents are without
liability under the aforesaid mortgage contracts. The factual context of this case is precisely what is
contemplated in the last paragraph of Article 2085 of the Civil Code to the effect that third persons who are not
parties to the principal obligation may secure the latter by pledging or mortgaging their own property
So long as valid consent was given, the fact that the loans were solely for the benefit of the Lagasca spouses
would not invalidate the mortgage with respect to private respondents' share in the property. In consenting
thereto, even assuming that private respondents may not be assuming personal liability for the debt, their share
in the property shall nevertheless secure and respond for the performance of the principal obligation. The parties
to the mortgage could not have intended that the same would apply only to the aliquot portion of the Lagasca
spouses in the property, otherwise the consent of the private respondents would not have been required.
The supposed requirement of prior demand on the private respondents would not be in point here since the
mortgage contracts created obligations with specific terms for the compliance thereof. The facts further show
that the private respondents expressly bound themselves as solidary debtors in the promissory note
hereinbefore quoted.
Coming now to the extrajudicial foreclosure effected by GSIS, We cannot agree with the ruling of respondent
court that lack of notice to the private respondents of the extrajudicial foreclosure sale impairs the validity
thereof. InBonnevie, et al. vs. Court of appeals, et al., 15 the Court ruled that Act No. 3135, as amended, does not
require personal notice on the mortgagor, quoting the requirement on notice in such cases as follows:
Section 3. Notice shall be given by posting notices of sale for not less than twenty days in at
least three public places of the municipality where the property is situated, and if such property is
worth more than four hundred pesos, such notice shall also be published once a week for at
least three consecutive weeks in a newspaper of general circulation in the municipality or city.
There is no showing that the foregoing requirement on notice was not complied with in the foreclosure sale
complained of .
The respondent court, therefore, erred in annulling the mortgage insofar as it affected the share of private
respondents or in directing reconveyance of their property or the payment of the value thereof Indubitably,
whether or not private respondents herein benefited from the loan, the mortgage and the extrajudicial
foreclosure proceedings were valid.

WHEREFORE, judgment is hereby rendered REVERSING the decision of the respondent Court of Appeals and
REINSTATING the decision of the court a quo in Civil Case No. Q-9418 thereof.
SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 154878

March 16, 2007

CAROLYN M. GARCIA, Petitioner,


vs.
RICA MARIE S. THIO, Respondent.
DECISION
CORONA, J.:
Assailed in this petition for review on certiorari1 are the June 19, 2002 decision2 and August 20, 2002
resolution3 of the Court of Appeals (CA) in CA-G.R. CV No. 56577 which set aside the February 28, 1997
decision of the Regional Trial Court (RTC) of Makati City, Branch 58.
Sometime in February 1995, respondent Rica Marie S. Thio received from petitioner Carolyn M. Garcia a
crossed check4 dated February 24, 1995 in the amount of US$100,000 payable to the order of a certain Marilou
Santiago.5Thereafter, petitioner received from respondent every month (specifically, on March 24, April 26, June
26 and July 26, all in 1995) the amount of US$3,0006 and P76,5007 on July 26,8 August 26, September 26 and
October 26, 1995.

In June 1995, respondent received from petitioner another crossed check 9 dated June 29, 1995 in the amount
ofP500,000, also payable to the order of Marilou Santiago.10 Consequently, petitioner received from respondent
the amount of P20,000 every month on August 5, September 5, October 5 and November 5, 1995. 11
According to petitioner, respondent failed to pay the principal amounts of the loans (US$100,000 and P500,000)
when they fell due. Thus, on February 22, 1996, petitioner filed a complaint for sum of money and damages in
the RTC of Makati City, Branch 58 against respondent, seeking to collect the sums of US$100,000, with interest
thereon at 3% a month from October 26, 1995 and P500,000, with interest thereon at 4% a month from
November 5, 1995, plus attorneys fees and actual damages.12
Petitioner alleged that on February 24, 1995, respondent borrowed from her the amount of US$100,000 with
interest thereon at the rate of 3% per month, which loan would mature on October 26, 1995. 13 The amount of this
loan was covered by the first check. On June 29, 1995, respondent again borrowed the amount of P500,000 at
an agreed monthly interest of 4%, the maturity date of which was on November 5, 1995. 14 The amount of this
loan was covered by the second check. For both loans, no promissory note was executed since petitioner and
respondent were close friends at the time.15 Respondent paid the stipulated monthly interest for both loans but
on their maturity dates, she failed to pay the principal amounts despite repeated demands. 16
1awphi1.nt

Respondent denied that she contracted the two loans with petitioner and countered that it was Marilou Santiago
to whom petitioner lent the money. She claimed she was merely asked by petitioner to give the crossed checks
to Santiago.17 She issued the checks for P76,000 and P20,000 not as payment of interest but to accommodate
petitioners request that respondent use her own checks instead of Santiagos. 18
In a decision dated February 28, 1997, the RTC ruled in favor of petitioner.19 It found that respondent borrowed
from petitioner the amounts of US$100,000 with monthly interest of 3% and P500,000 at a monthly interest of
4%:20
WHEREFORE, finding preponderance of evidence to sustain the instant complaint, judgment is hereby rendered
in favor of [petitioner], sentencing [respondent] to pay the former the amount of:
1. [US$100,000.00] or its peso equivalent with interest thereon at 3% per month from October 26, 1995
until fully paid;
2. P500,000.00 with interest thereon at 4% per month from November 5, 1995 until fully paid.
3. P100,000.00 as and for attorneys fees; and
4. P50,000.00 as and for actual damages.
For lack of merit, [respondents] counterclaim is perforce dismissed.
With costs against [respondent].
IT IS SO ORDERED.21
On appeal, the CA reversed the decision of the RTC and ruled that there was no contract of loan between the
parties:
A perusal of the record of the case shows that [petitioner] failed to substantiate her claim that [respondent]
indeed borrowed money from her. There is nothing in the record that shows that [respondent] received
money from [petitioner]. What is evident is the fact that [respondent] received a MetroBank [crossed] check
dated February 24, 1995 in the sum of US$100,000.00, payable to the order of Marilou Santiago and a CityTrust
[crossed] check dated June 29, 1995 in the amount of P500,000.00, again payable to the order of Marilou
Santiago, both of which were issued by [petitioner]. The checks received by [respondent], being crossed,
may not be encashed but only deposited in the bank by the payee thereof, that is, by Marilou Santiago
herself.

It must be noted that crossing a check has the following effects: (a) the check may not be encashed but only
deposited in the bank; (b) the check may be negotiated only onceto one who has an account with the bank;
(c) and the act of crossing the check serves as warning to the holder that the check has been issued for a
definite purpose so that he must inquire if he has received the check pursuant to that purpose, otherwise, he is
not a holder in due course.
Consequently, the receipt of the [crossed] check by [respondent] is not the issuance and delivery to the payee in
contemplation of law since the latter is not the person who could take the checks as a holder, i.e., as a payee or
indorsee thereof, with intent to transfer title thereto. Neither could she be deemed as an agent of Marilou
Santiago with respect to the checks because she was merely facilitating the transactions between the former
and [petitioner].
With the foregoing circumstances, it may be fairly inferred that there were really no contracts of loan that existed
between the parties. x x x (emphasis supplied) 22
Hence this petition.23
As a rule, only questions of law may be raised in a petition for review on certiorari under Rule 45 of the Rules of
Court. However, this case falls under one of the exceptions, i.e., when the factual findings of the CA (which held
thatthere were no contracts of loan between petitioner and respondent) and the RTC (which held that there
werecontracts of loan) are contradictory.24
The petition is impressed with merit.
A loan is a real contract, not consensual, and as such is perfected only upon the delivery of the object of the
contract.25 This is evident in Art. 1934 of the Civil Code which provides:
An accepted promise to deliver something by way of commodatum or simple loan is binding upon the parties,
but the commodatum or simple loan itself shall not be perfected until the delivery of the object of the
contract. (Emphasis supplied)
Upon delivery of the object of the contract of loan (in this case the money received by the debtor when the
checks were encashed) the debtor acquires ownership of such money or loan proceeds and is bound to pay the
creditor an equal amount.26
It is undisputed that the checks were delivered to respondent. However, these checks were crossed and payable
not to the order of respondent but to the order of a certain Marilou Santiago. Thus the main question to be
answered is: who borrowed money from petitioner respondent or Santiago?
Petitioner insists that it was upon respondents instruction that both checks were made payable to
Santiago.27 She maintains that it was also upon respondents instruction that both checks were delivered to her
(respondent) so that she could, in turn, deliver the same to Santiago. 28 Furthermore, she argues that once
respondent received the checks, the latter had possession and control of them such that she had the choice to
either forward them to Santiago (who was already her debtor), to retain them or to return them to petitioner.29
We agree with petitioner. Delivery is the act by which the res or substance thereof is placed within the actual or
constructive possession or control of another.30 Although respondent did not physically receive the proceeds of
the checks, these instruments were placed in her control and possession under an arrangement whereby she
actually re-lent the amounts to Santiago.
Several factors support this conclusion.
First, respondent admitted that petitioner did not personally know Santiago. 31 It was highly improbable that
petitioner would grant two loans to a complete stranger without requiring as much as promissory notes or any
written acknowledgment of the debt considering that the amounts involved were quite big. Respondent, on the
other hand, already had transactions with Santiago at that time. 32

Second, Leticia Ruiz, a friend of both petitioner and respondent (and whose name appeared in both parties list
of witnesses) testified that respondents plan was for petitioner to lend her money at a monthly interest rate of
3%, after which respondent would lend the same amount to Santiago at a higher rate of 5% and realize a profit
of 2%.33 This explained why respondent instructed petitioner to make the checks payable to Santiago.
Respondent has not shown any reason why Ruiz testimony should not be believed.
Third, for the US$100,000 loan, respondent admitted issuing her own checks in the amount of P76,000 each
(peso equivalent of US$3,000) for eight months to cover the monthly interest. For the P500,000 loan, she also
issued her own checks in the amount of P20,000 each for four months.34 According to respondent, she merely
accommodated petitioners request for her to issue her own checks to cover the interest payments since
petitioner was not personally acquainted with Santiago.35 She claimed, however, that Santiago would replace the
checks with cash.36Her explanation is simply incredible. It is difficult to believe that respondent would put herself
in a position where she would be compelled to pay interest, from her own funds, for loans she allegedly did not
contract. We declared in one case that:
In the assessment of the testimonies of witnesses, this Court is guided by the rule that for evidence to be
believed, it must not only proceed from the mouth of a credible witness, but must be credible in itself such as the
common experience of mankind can approve as probable under the circumstances. We have no test of the truth
of human testimony except its conformity to our knowledge, observation, and experience. Whatever is
repugnant to these belongs to the miraculous, and is outside of juridical cognizance. 37
Fourth, in the petition for insolvency sworn to and filed by Santiago, it was respondent, not petitioner, who was
listed as one of her (Santiagos) creditors.38
Last, respondent inexplicably never presented Santiago as a witness to corroborate her story.39 The presumption
is that "evidence willfully suppressed would be adverse if produced."40 Respondent was not able to overturn this
presumption.
We hold that the CA committed reversible error when it ruled that respondent did not borrow the amounts of
US$100,000 and P500,000 from petitioner. We instead agree with the ruling of the RTC making respondent
liable for the principal amounts of the loans.
We do not, however, agree that respondent is liable for the 3% and 4% monthly interest for the US$100,000
andP500,000 loans respectively. There was no written proof of the interest payable except for
the verbal agreement that the loans would earn 3% and 4% interest per month. Article 1956 of the Civil Code
provides that "[n]o interest shall be due unless it has been expressly stipulated in writing."
Be that as it may, while there can be no stipulated interest, there can be legal interest pursuant to Article 2209 of
the Civil Code. It is well-settled that:
When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of
interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under
and subject to the provisions of Article 1169 of the Civil Code.41
Hence, respondent is liable for the payment of legal interest per annum to be computed from November 21,
1995, the date when she received petitioners demand letter.42 From the finality of the decision until it is fully
paid, the amount due shall earn interest at 12% per annum, the interim period being deemed equivalent to a
forbearance of credit.43
The award of actual damages in the amount of P50,000 and P100,000 attorneys fees is deleted since the RTC
decision did not explain the factual bases for these damages.
WHEREFORE, the petition is hereby GRANTED and the June 19, 2002 decision and August 20, 2002
resolution of the Court of Appeals in CA-G.R. CV No. 56577 are REVERSED and SET ASIDE. The February 28,
1997 decision of the Regional Trial Court in Civil Case No. 96-266 is AFFIRMED with the MODIFICATION that

respondent is directed to pay petitioner the amounts of US$100,000 and P500,000 at 12% per annum interest
from November 21, 1995 until the finality of the decision. The total amount due as of the date of finality will earn
interest of 12% perannum until fully paid. The award of actual damages and attorneys fees is deleted.
SO ORDERED.
RENATO C. CORONA
Associate Justice
WE CONCUR:
REYNATO S. PUNO
Chief Justice
Chairperson
ANGELINA SANDOVAL-GUTIERREZ
Associate Justice

ADOLFO S. AZCUNA
Asscociate Justice

CANCIO C. GARCIA
Associate Justice
C E R TI F I C ATI O N
Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in the above decision had
been reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.
REYNATO S. PUNO
Chief Justice

Garcia vs Thio
16 March 2007J. Corona
FACTS:
Petitioner

GarciaRespondent

Thio- In February 1995, Thio received from Garcia a crossed check amounting to $100,000 payable tothe
order of Marilou Santiago.

o
Garcia the received from Thio $3,000 for 4 months and P76,500 on July, August,September and October
(Representing interest due)- In June 1995, Thio received again from Garcia P500,000
o
Garcia the received from Thio P20,000 on August, September October and November.(Represent interest
due)- According to Garcia, Thio failed to pay the $100,000 and P500,000 amount opting him to file acase
for sum of money and damages.- Both loans are not covered by a promissory note as the two are
close friends- Thio countered that it was Marilou Santiago whom the money was lent
by Garcia.- She issued the checks for P76,000 and P20,000 not as payment of interest but to
accommodate
petitioners request that respondent use her own checks instead of Santiago
- RTC ruled in favor of Garcia- CA reversed RTC.
ISSUE:1. Who borrowed the money (Santiago or Thio)HELD:1. ThioRATIO:
A loan is a real contract as it is perfected upon delivery of the object. This is differentfrom a consensual
contract which only requires consent.
An accepted promise to deliver by way of commodatum or simple loan is binding uponparties, however, the
loan itself is only perfected upon delivery of the object.
Petitioner insisted that it
was upon respondents instruction that both checks were
made payable to Santiago.
o
It was also argued that upon delivery of the checks, respondents acquiredcontrol and possession of it and
can choose to retain or delivery it to Santiago
Factors that supported the conclusions are:
o
Petitioner did not know Santiago personally
o
Leticia Ruiz (friend of both petitioner and respondent) testified that the plan ofThio is to borrow money
from Garcia then subsequently lend it out to Santiago.
o
for the US$100,000 loan, respondent admitted issuing her own checks in theamount of P76,000 each
(peso equivalent of US$3,000) for eight months to cover

GSIS V. CA
FACTS:
Two deeds of mortgages were issued by spouses Racho in favor of GSIS as security for two loans obtained by them.
They also executed a promissory note. Due to the failure to comply with the terms of the mortgage, the
mortgages were extrajudicially foreclosed. The foreclosure was being assailed by the spouses as they alleged
that the mortgage contracts were signed not as guarantees or sureties but merely gave their common property
for the sole benefit of the other spouses. Both sides of the case
used the provisions on accommodation parties in the Negotiable Instruments Law.
The trial court dismissed the action but this was reversed by the appellate court.

HELD:
Both parties rely on the Negotiable Instruments Law but this is misplaced. The promissory note and the
deeds of mortgage are not negotiable instruments as they lack the fourth requisite which is it must be payable to order
or bearer.