Philippine National Bank vs.

Court of Appeals
G.R. No. 121597, 360 SCRA 370, June 29, 2001
This petition assails the decision1 of the Court of Appeals dated July 25, 1995 in CA-G.R. CV No. 36546,
affirming the decision dated September 4, 1991 of the Regional Trial Court of Balayan, Batangas, Branch
10 in Civil Case No. 1988.
The facts, as found by the trial court and by the Court of Appeals, are not disputed.
The spouses Antonio M. Chua and Asuncion M. Chua were the owners of a parcel of land covered by
Transfer Certificate of Title No. P-142 and registered in their names. Upon Antonios death, the probate
court appointed his son, private respondent Allan M. Chua, special administrator of Antonios intestate
estate. The court also authorized Allan to obtain a loan accommodation of five hundred fifty thousand
(P550,000.00) pesos from petitioner Philippine National Bank to be secured by a real estate mortgage over
the above-mentioned parcel of land.
On June 29, 1989, Allan obtained a loan of P450,000.00 from petitioner PNB evidenced by a promissory
note, payable on June 29, 1990, with interest at 18.8 percent per annum. To secure the loan, Allan
executed a deed of real estate mortgage on the aforesaid parcel of land.
On December 27, 1990, for failure to pay the loan in full, the bank extrajudicially foreclosed the real estate
mortgage, through the Ex-Officio Sheriff, who conducted a public auction of the mortgaged property
pursuant to the authority provided for in the deed of real estate mortgage. During the auction, PNB was
the highest bidder with a bid price P306, 360.00. Since PNBs total claim as of the date of the auction sale
was P679, 185.63, the loan had a payable balance of P372,825.63. To claim this deficiency, PNB instituted
an action with the RTC, Balayan, Batangas, Branch 10, docketed as Civil Case No. 1988, against both Mrs.
Asuncion M. Chua and Allan Chua in his capacity as special administrator of his fathers intestate estate.
Despite summons duly served, private respondents did not answer the complaint. The trial court declared
them in default and received evidence ex parte.
On September 4, 1991, the RTC rendered its decision, ordering the dismissal of PNBs complaint.2
On appeal, the Court of Appeals affirmed the RTC decision by dismissing PNBs appeal for lack of merit.3
Hence, the present petition for review on certiorari under Rule 45 of the Rules of Court. Petitioner cites two
grounds:
THE CA ERRED IN HOLDING THAT PNB CAN NO LONGER PURSUE ITS DEFICIENCY CLAIM AGAINST THE
ESTATE OF DECEASED ANTONIO M. CHUA, HAVING ELECTED ONE OF ITS ALTERNATIVE RIGHT PURSUANT TO
SECTION 7 RULE 86 OF THE RULES OF COURT DESPITE A SPECIAL ENACTMENT (ACT. NO. 3135) COVERING
EXTRAJUDICIAL FORECLOSURE SALE ALLOWING RECOURSE FOR A DEFICIENCY CLAIM AS SUPPORTED BY
CONTEMPORARY JURISPRUDENCE.
THE CA ERRED IN HOLDING THAT ALLAN M. CHUA, AS SPECIAL ADMINISTRATOR OF THE INTESTATE ESTATE
OF HIS DECEASED FATHER ANTONIO M. CHUA ON ONE HAND, AND HIM AND HIS MOTHER ASUNCION CHUA
AS HEIRS ON THE OTHER HAND ARE NO LONGER LIABLE FOR THE DEBTS OF THE ESTATE.
The primary issue posed before us is whether or not it was error for the Court of Appeals to rule that
petitioner may no longer pursue by civil action the recovery of the balance of indebtedness after having
foreclosed the property securing the same. A resolution of this issue will also resolve the secondary issue
concerning any further liability of respondents and of the decedents estate.
Petitioner contends that under prevailing jurisprudence, when the proceeds of the sale are insufficient to
pay the debt, the mortgagee has the right to recover the deficiency from the debtor.5 It also contends that
Act 3135, otherwise known as "An Act to Regulate the Sale of Property under Special Powers Inserted in or
Annexed to Real Estate Mortgages," is the law applicable to this case of foreclosure sale and not Section 7
of Rule 86 of the Revised Rules of Court6 as held by the Court of Appeals.7
Private respondents argue that having chosen the remedy of extrajudicial foreclosure of the mortgaged
property of the deceased, petitioner is precluded from pursuing its deficiency claim against the estate of
Antonio M. Chua. This they say is pursuant to Section 7, Rule 86 of the Rules of Court, which states that:
Sec. 7. Rule 86. Mortgage debt due from estate. A creditor holding a claim against the deceased secured
by mortgage or other collateral security, may abandon the security and prosecute his claim in the manner
provided in this rule, and share in the general distribution of the assets of the estate; or he may foreclose
his mortgage or realize upon his security, by action in court, making the executor or administrator a party
defendant, and if there is a judgment for a deficiency, after the sale of the mortgaged premises, or the
property pledged, in the foreclosure or other proceeding to realize upon the security, he may claim his
deficiency judgment in the manner provided in the preceding section; or he may rely upon his mortgage or
other security alone and foreclose the same at any time within the period of the statute of limitations, and
in that event he shall not be admitted as a creditor, and shall receive no share in the distribution of the

other assets of the estate; but nothing herein contained shall prohibit the executor or administrator from
redeeming the property mortgaged or pledged by paying the debt for which it is hold as security, under
the direction of the court if the court shall adjudge it to be for the interest of the estate that such
redemption shall be made.
Pertinent to the issue at bar, according to petitioner, are our decisions he cited.8 Prudential Bank v.
Martinez, 189 SCRA 612, 615 (1990), is particularly cited by petitioner as precedent for holding that in
extrajudicial foreclosure of mortgage, when the proceeds of the sale are insufficient to pay the debt, the
mortgagee has the right to recover the deficiency from the mortgagor.
However, it must be pointed out that petitioners cited cases involve ordinary debts secured by a
mortgage. The case at bar, we must stress, involves a foreclosure of mortgage arising out of a settlement
of estate, wherein the administrator mortgaged a property belonging to the estate of the decedent,
pursuant to an authority given by the probate court. As the Court of Appeals correctly stated, the Rules of
Court on Special Proceedings comes into play decisively.
To begin with, it is clear from the text of Section 7, Rule 89, that once the deed of real estate mortgage is
recorded in the proper Registry of Deeds, together with the corresponding court order authorizing the
administrator to mortgage the property, said deed shall be valid as if it has been executed by the
deceased himself. Section 7 provides in part:
Sec. 7. Rule 89. Regulations for granting authority to sell, mortgage, or otherwise encumber estate The
court having jurisdiction of the estate of the deceased may authorize the executor or administrator to sell
personal estate, or to sell, mortgage, or otherwise encumber real estate, in cases provided by these rules
when it appears necessary or beneficial under the following regulations:
(f) There shall be recorded in the registry of deeds of the province in which the real estate thus sold,
mortgaged, or otherwise encumbered is situated, a certified copy of the order of the court, together with
the deed of the executor or administrator for such real estate, which shall be valid as if the deed had been
executed by the deceased in his lifetime.
In the present case, it is undisputed that the conditions under the aforecited rule have been complied with.
It follows that we must consider Sec. 7 of Rule 86, appropriately applicable to the controversy at hand.
Case law now holds that this rule grants to the mortgagee three distinct, independent and mutually
exclusive remedies that can be alternatively pursued by the mortgage creditor for the satisfaction of his
credit in case the mortgagor dies, among them:
(1) to waive the mortgage and claim the entire debt from the estate of the mortgagor as an ordinary claim;
(2) to foreclose the mortgage judicially and prove any deficiency as an ordinary claim; and
(3) to rely on the mortgage exclusively, foreclosing the same at any time before it is barred by prescription
without right to file a claim for any deficiency.9
In Perez v. Philippine National Bank,10 reversing Pasno vs. Ravina,11 we held:
The ruling in Pasno vs. Ravina not having been reiterated in any other case, we have carefully reexamined
the same, and after mature deliberation have reached the conclusion that the dissenting opinion is more in
conformity with reason and law. Of the three alternative courses that section 7, Rule 87 (now Rule 86),
offers the mortgage creditor, to wit, (1) to waive the mortgage and claim the entire debt from the estate of
the mortgagor as an ordinary claim; (2) foreclose the mortgage judicially and prove any deficiency as an
ordinary claim; and (3) to rely on the mortgage exclusively, foreclosing the same at any time before it is
barred by prescription, without right to file a claim for any deficiency, the majority opinion in Pasno vs.
Ravina, in requiring a judicial foreclosure, virtually wipes out the third alternative conceded by the Rules to
the mortgage creditor, and which would precisely include extra-judicial foreclosures by contrast with the
second alternative.
The plain result of adopting the last mode of foreclosure is that the creditor waives his right to recover any
deficiency from the estate.12 Following the Perez ruling that the third mode includes extrajudicial
foreclosure sales, the result of extrajudicial foreclosure is that the creditor waives any further deficiency
claim. The dissent in Pasno, as adopted in Perez, supports this conclusion, thus:
When account is further taken of the fact that a creditor who elects to foreclose by extrajudicial sale
waives all right to recover against the estate of the deceased debtor for any deficiency remaining unpaid
after the sale it will be readily seen that the decision in this case (referring to the majority opinion) will
impose a burden upon the estates of deceased persons who have mortgaged real property for the security
of debts, without any compensatory advantage.
Clearly, in our view, petitioner herein has chosen the mortgage-creditors option of extrajudicially
foreclosing the mortgaged property of the Chuas. This choice now bars any subsequent deficiency claim
against the estate of the deceased, Antonio M. Chua. Petitioner may no longer avail of the complaint for
the recovery of the balance of indebtedness against said estate, after petitioner foreclosed the property

securing the mortgage in its favor. It follows that in this case no further liability remains on the part of
respondents and the late Antonio M. Chuas estate.
WHEREFORE, finding no reversible error committed by respondent Court of Appeals, the instant petition is
hereby DENIED. The assailed decision of the Court of Appeals in CA-G.R. CV No. 36546 is AFFIRMED. Costs
against petitioner
[G.R. No. 128661. August 8, 2000]
PHILIPPINE NATIONAL BANK/NATIONAL INVESTMENT DEVELOPMENT CORPORATION, petitioners, vs. THE
COURT OF APPEALS, CHINA BANKING CORPORATION, respondents.
In this petition for review on certiorari under Rule 45 of the Rules of Court, petitioners seek the reversal of
the 21 March 1997 decision[1] of the Court of Appeals in C.A.-G.R. No. CV-38131. The assailed decision set
aside the Order[2] dated 4 March 1992 of the Regional Trial Court of Makati City, Branch 146 in Civil Case
No. 7119 insofar as it dismissed the complaint-in-intervention of private respondent China Banking
Corporation.
The facts of the case are as follows:
To finance the acquisition of seven (7) ocean-going vessels, namely M/V Asean Liberty,
Independence, M/V Asean Mission, M/V Asean Knowledge, M/V Asean Nations,
Greatness, and M/V Asean Objectives, the Philippine International Shipping Corporation
PISC) applied for and was granted by petitioner National Investment and Development
(hereinafter NIDC) the following guaranty accommodations:

M/V Asean
M/V Asean
(hereinafter
Corporation

a. US$9.44 Million in favor of Ultrafin A.G. of Zurich, Switzerland as Agent for the banks/financial
institutions as evidenced by and subject to the terms and conditions of a Guaranty Agreement dated
December 7, 1978 to partly finance the acquisition of two (2) ocean-going vessels;
b. US$23.60 Million in favor of the Philippine National Bank (hereinafter PNB as evidenced by and
subject to the terms and conditions of a Consolidated Amendatory Agreement dated January 25, 1979 to
finance the acquisition cost of four (4) additional ocean-going vessels; and
c. US$1.291 Million in favor of PNB as evidenced by and subject to the terms and conditions of that
Second Consolidated Amendatory Agreement dated July 17, 1979 to finance the additional acquisition cost
of one (1) ocean-going vessel.[3]
As security for these guaranty accommodations, PISC executed in favor of petitioners the following
mortgage documents:
a. Deed of Chattel Mortgage dated September 14, 1979 constituted on M/V Asean Liberty and M/V
Asean Nation and recorded on September 25, 1979 with the Philippine Coast Guard Headquarters;
b. Supplemental Chattel Mortgage dated October 2, 1979 constituted on M/V Asean Independence, M/V
Asean Mission, M/V Asean Knowledge, and M/V Asean Objectives and recorded with the Philippine
Coast Guard Headquarters on February 13, 1980; and
c. Supplemental Chattel Mortgage constituted on M/V Asean Greatness and recorded with the Philippine
Coast Guard Headquarters on February 3, 1981.[4]
Meanwhile, on March 12, 1979, PISC entered into a Contract Agreement with Hong Kong United Dockyards,
Ltd. for the repair and conversion of the vessel M/V Asean Liberty at a contract price of HK$2,200,000.00
variable as provided therein.[5]
On May 28, 1979, the Central Bank of the Philippines authorized PISC to open with private respondent
China Banking Corporation (hereinafter CBC) a standby letter of credit for US$545,000.00 in favor of
Citibank, N.A. (hereinafter Citibank) to cover the repair and partial conversion of the vessel M/V Asean
Liberty. This was pursuant to the letter of the Central Bank of the Philippines dated May 28, 1979 as
amended on June 20, 1979.[6]
On June 15, 1979, PISC executed an Application and Agreement for Commercial Letter of Credit for
$545,000.00 with private respondent CBC in favor of Citibank. Pursuant to this application and agreement,
private respondent CBC issued on September 12, 1979 its Irrevocable Standby Letter of Credit No. 79/4174
for US$545,000.00 in favor of Citibank for account of PISC.
On September 17, 1979, a Promissory note for US$545,000.00 was executed by PISC in favor of Citibank
pursuant to the Loan Agreement for US$545,000.00 between PISC, as borrower, and Citibank, as lender.[7]
Upon failure of PISC to fulfill its obligations under the said promissory note, Citibank sent to private
respondent CBC a letter dated March 25, 1983 drawing on Letter of Credit No. 79/4174. In this letter,
Citibank certified that the draft attached thereto for US$242,225.00 represented the principal balance due
to Citibank as of March 17, 1983 under the promissory note executed by PISC, the proceeds of which were
used for the repair and conversion of M/V Asean Liberty. Thus, on March 30, 1983, CBC instructed its

correspondent Irving Trust Co., by cable, to pay to Citibank the amount of US$242,225.00. On the same
date, Irving Trust Co. advised private respondent CBC by mail that the amount of US$242,225.00 had been
debited against CBCs Account No. 8033278269 and remitted to Citibank.[8]
On May 10, 1983, for failure of PISC to settle its obligations in the amount of US$64,789,470.96, petitioner
PNB conducted, thru the Sheriffs Office, an auction sale of the mortgaged vessels, except for the vessel
M/V Asean Objective. Petitioner NIDC emerged as the highest bidder in these auctions.[9]
On May 27, 1983, claiming that the foreclosure sale of its mortgaged vessels was illegal, unjust, irregular,
and oppressive, PISC instituted before the Regional Trial Court of Makati, a civil case[10] against petitioners
for the annulment of the foreclosure and auction sale of its vessels and damages.
As accurately narrated in the trial courts Order and adopted by the Court of Appeals in its Decision of
March 21, 1997, the following proceedings transpired in the lower court:
Records show that on May 27, 1983, PISC (Philippine International Shipping Corporation) filed suit against
National Investment and Development Corporation (NIDC, for short) and Philippine National Bank (PNB, for
short) for annulment of foreclosure of mortgage and auction sale with damages vis--vis the sale on
foreclosure of vessels Asean Mission, Asean Knowledge, Asean Nations and Asean Greatness (as well as
Asean Liberty and Asean Independence). NIDC answered the complaint, and in an amended answer
impleaded additional counterclaim defendants. In an Order dated September 29, 1984, then Judge Jose L.
Coscolluela, Jr. dismissed the complaint as against PNB and the counterclaimed defendants. And under
date of November 3, 1986, the complaint itself against and the NIDC counterclaims were dismissed with
prejudice.
In the meantime, NIDC acquired the vessels as highest bidder in the foreclosure thereof initiated by PNB,
NIDC having thereafter disposed of said vessels in favor of the National Steel Corporation (NSC).
Complaints in intervention were filed by and for Unitor Ships Services PTE, Ltd., IMO Industries AB,
UDDVALLARVARVET AB, Hyundai, Shipyard Co., Lloyds, China bank, Chiang Tung Enterprises Co., Ltd., Pan
Asia, Inc., and HANMF Marine Service, Co., Ltd., for recovery upon maritime liens against the proceeds of
the sale of the foreclosed vessels. The parties concerned, except for intervenors Lloyds and China Bank,
eventually submitted a Compromise Agreement dated July 12, 1989, and made the basis for the Decision
of August 23, 1989.
As first stated, there now remain only Lloyds and China Bank claims in intervention, recovery upon which
is covered by a PNB bank guarantee therefor if found matters of entitlement (sic) by said intervenors.
Intervenor Lloyds claim is for the service of herein intervenor Lloyds Register of Shipping to class
aforementioned vessels (M/V Asean Nations and Asean Greatness) during the period covering July 22, 1981
to July 14, 1983 and the cost for said maritime surveys in the sum of HK$65,930.00, UKC10,363.45 and
P9,653.00 said to have been unpaid by PISC despite demands. NIDC traversed the Lloyds claim as not
being preferred maritime liens and in any event inferior in nature.
Intervenor China Banks claims are predicated on (i) a China Bank Standby Letter of Credit in favor of
Citibank, N. A. purportedly to cover repair and partial conversion of M/V Asean Liberty, to the extent of
US$242,225.00 paid by China Bank to Citibank, and said to be now owing by PISC together with stipulated
interest; (ii) a China Bank loan of US$2,700,000.00 as evidenced by a promissory note, the loan proceeds
said to have allowed PISC to reduce overhead expenses and afford it competitive advantage in overseas
shipping, and to pay for bunker fuel, defray port expenses and storage, container rental and insurance, as
well as salaries and wages of crew members; and (iii) a China bank commercial letter of credit to PISC in
favor of Bank of America, particularly a BA Draft for US$648,002.54 said to have been applied towards
vessel repair and conversion by the China Shipbuilding Corporation of Taiwan, together with stipulated
interests due from PISC. China Banks claims are premised on the above as being preferred maritime liens.
NIDC rejects said claims as not being maritime liens, much less preferred maritime liens.
Shortly after the undersigned penning Judge assumed his duties in this Court, Lloyds and China Bank were
enjoined to furnish opposite counsel with copies of the documentation of their respective claims, to obviate
the necessity of adducing evidence in point on matters capable of stipulation. Thus, failing formulation of
any amicable settlement in the manner arrived at by all other intervenors, pre-trial proceedings for the
subject last remaining claims in intervention by and for Lloyds and China Bank resulted in an August 9,
1991 Pre-Trial Order which set forthA. NATURE OF THE CASE
Claimant-intervenor Lloyds Register of Shipping seeks recovery as unpaid creditor of HK$65,930., UK
Pounds C10,363.45 and P9,653.00 as being in the nature of preferred maritime liens on the vessels M/V
ASEAN NATIONS and ASEAN GREATNESS, representing costs for maritime services rendered for said
vessels for the period July 22, 1981 to July 14, 1983.
Intervenor-claimant China Banking Corporation seeks recovery, as being in the nature of a preferred
maritime lien, of the sum of US$3,890,227.53, representing the totality of loans extended by said
intervenor-claimant said to have been expended in financing repair and conversion costs, for expenses and
storage container rentals and insurance premium paid out by it.

Plaintiffs admit the recoverability of said claims as being in the nature of preferred maritime liens, whereas
PNB-NIDC contests the said claims.
B. STIPULATIONS AND ADMISSIONS.
Plaintiffs, PNB-NIDC and intervenor-claimant Lloyds Register of Shipping stipulate and admit that the
totality of its claims as fully supported by documentation already verified by the parties are in the sums of
HK$65,930,00, UKC10,363.45 and P9,653.00.
Plaintiffs, PNB-NIDC and intervenor-claimant China Banking Corporation stipulate and admit that the
totality of its claim is in the sum of US$3,870,227.53 as fortified by documentation already verified in
point.
C. ISSUES.
The parties have agreed to limit the resolution of the last two remaining claims in intervention
aforementioned to the following legal questions:
i.
Whether or not said claims, in the context in which they sought to be recovered, are preferred
maritime lien as would entitle said claims to recover, and
ii.
Whether or not assuming recoverability thereon as being in the nature of maritime liens, such
recovery may be allowed in relation with PNBs being the mortgagee of the assets from which recovery is
sought.
Considering that the issues to be addressed are purely legal in nature, presentation of evidence and/or
witnesses in point is unnecessary.[11]
After the parties submitted their respective memoranda, the trial court issued on March 4, 1992 an Order
dismissing the complaint-in-intervention filed by private respondent CBC for lack of merit. In dismissing
the complaint-in-intervention, the trial court ruled that the claim of private respondent CBC was not a
preferred maritime lien but was merely a loan extended to PISC by CBC.
Private respondent CBC appealed the Order of the trial court to the Court of Appeals. In its appeal, private
respondent CBC imputed the following errors allegedly committed by the trial court:
a) the trial court erred in holding that the loans extended by China Banking Corporation to the Philippine
International Shipping Corporation did not create maritime liens.
b) assuming that the loans are not themselves maritime liens, the trial court erred in holding that the
China Banking Corporation did not acquire the maritime liens of Philippine International Shipping
Corporation's creditors by subrogation.
For its part, herein petitioners PNB/NIDC raised as an issue in its Appellees Brief before the Court of
Appeals the lack of jurisdiction of the appellate court to entertain and pass upon the appeal interposed by
CBC on the ground that the issues raised therein were purely legal; and that the appeal of CBC should have
been lodged with the Supreme Court by petition for review on certiorari.[12]
On March 21, 1997, the Court of Appeals promulgated its questioned decision, the dispositive portion of
which states:
WHEREFORE, insofar as the appellant CBC is concerned, the appealed Order is hereby SET ASIDE and
judgment is rendered:
(a) Directing the appellee Philippine National Bank/National Investment and Development Corporation to
pay the appellant China Banking Corporation from the proceeds of the foreclosure sale of M/V Asean
Liberty the amount of US$242,225.00 or its Philippine Peso Equivalent at the time of payment, with
interest thereon at the legal rate from November 7, 1984, the date of filing of CBCs complaint-inintervention, until fully paid; and
(b) Ordering the appellee Philippine International Shipping Corporation to pay the same CBC the amounts
of US$648,002.54 and US$2.7 Million plus stipulated interests, arrangement fees, swap premiums,
expenses, losses, taxes and penalties,
In the said decision, the appellate court held petitioners PNB/NIDC liable to CBC only for the amount of
US$242,225.00, which was used for the repair and conversion of the M/V Asean Liberty, as it was only
this amount which CBC was able to prove as being a preferred maritime lien. Moreover, such amount was
to be paid by petitioners PNB/NIDC from the proceeds of the foreclosure sale of the vessel M/V Asean
Liberty. Private respondent CBCs other claims of US$648,000.54 and US$2.7 Million were found by the
appellate court as not being in the nature of maritime liens and as such, recoverable only from PISC, not
from herein petitioners PNB/NIDC.
Not satisfied with the decision of the appellate court, petitioners PNB/NIDC institute the present petition for
review on certiorari where they raise the following issues:

WHETHER OR NOT THE COURT OF APPEALS HAS APPELLATE JURISDICTION TO ENTERTAIN AND PASS UPON
THE APPEAL INTERPOSED BY PRIVATE RESPONDENT CBC FROM THE ORDER OF THE TRIAL COURT OF
MARCH 4, 1992 WHICH INVOLVED PURE QUESTIONS OF LAW.
WHETHER OR NOT PRIVATE RESPONDENT CBCS CLAIM FOR US$242,225.OO AS EVIDENCED BY ITS
IRREVOCABLE LETTER OF CREDIT NO. 79/4174 OF SEPTEMBER 12, 1979 IS IN THE NATURE OF A MARITIME
LIEN UNDER THE PROVISIONS OF P.D. NO. 1521; AND IF SO, WHETHER OR NOT SAID MARITIME LIEN IS
PREFERRED OVER THE MORTGAGE LIEN OF PETITIONER PNB/NIDC ON THE FORECLOSED VESSEL M/V
ASEAN LIBERTY.
On the first issue, petitioners argue that the Court of Appeals committed grave error in law in taking
cognizance of the appeal interposed by private respondent CBC from the Order of the trial court dated 4
March 1992 involving as it does pure questions of law. They claim that the Court of Appeals had no
jurisdiction to entertain and pass upon the appeal interposed by private respondent CBC as the issues
raised therein are purely legal. As such, petitioners continue, the appeal of CBC should have been lodged
directly with the Supreme Court by way of petition for review on certiorari under Rule 45 of the Revised
Rules of Court. Citing the pronouncement of this Court en banc in Anacleto Murillo vs. Rodolfo Consul[14],
the petitioners conclude that the appeal made by private respondent CBC to the Court of Appeals should
have been dismissed by the respondent court for lack of jurisdiction.
It is true that the decisions of the Regional Trial Court may be directly reviewed by the Supreme Court on
petition for review if pure questions of law are raised. Circular 2-90,[15]which petitioners cite and which
outlined the applicable rules of procedure on this matter at that time, indirectly states that cases from the
Regional Trial Court raising only questions of law should be taken to the Supreme Court. Paragraphs No.
4(c) and (d) of the said Circular provide as follows:
4. Erroneous Appeals. An appeal taken to either the Supreme Court of the Court of Appeals by the wrong
or inappropriate mode shall be dismissed.
(c) Raising issues purely of law in the Court of Appeals or appeal by wrong mode. If an appeal under Rule
41 is taken from the Regional Trial Court to the Court of Appeals and therein the appellant raises only
questions of law, the appeal shall be dismissed, issues purely of law not being reviewable by said court.
xxx
(d) No transfer of appeals erroneously taken. No transfers of appeals erroneously taken to the Supreme
Court or to the Court of Appeals to whichever of these Tribunals has appropriate appellate jurisdiction will
be allowed; continued ignorance or willful disregard of the law on appeals will not be tolerated.
From the cited provisions, it is clear that the Court of Appeals does not have jurisdiction over appeals from
the Regional Trial Court that raise purely questions of law. Appeals of this nature should be raised to the
Supreme Court.[16] Furthermore, transfer of erroneous appeals is not allowed and the tribunal which
receives the erroneous appeal should perforce dismiss the same for lack of jurisdiction.
Notwithstanding this legal rule, the appeal brought before the Court of Appeals by the private respondent
CBC must first be analyzed as to whether the same raised questions or errors of law alone. If the petition
raised only questions of law, then the Court of Appeals had no jurisdiction to take cognizance of the case
and should have dismissed the case outright. On the other hand, if the petition raised only questions of
fact or questions of both fact and law, then the Court of Appeals correctly exercised jurisdiction over the
issue.[17]
As such, even if, as in this case, the documentary evidence adduced by the parties was admitted without
objection, a question of fact is still involved when the query necessarily invites the calibration of the whole
evidence including the relevancy of surrounding circumstances and their relation to each other.
On this point, we note with approval the following justification made by the respondent court in assuming
jurisdiction over the case:
A question of fact has been distinguished from a question of law in this wise:
At this point, the distinction between a question of fact and a question of law must be clear. As
distinguished from a question of law which exists when the doubt or difference arises as to what the law is
on certain state of facts there is a question of fact when the doubt or difference arises as to the truth or
the falsehood of alleged facts; or when the query necessarily invites calibration of the whole evidence
considering mainly the credibility of witnesses, existence and relevancy of specific surrounding
circumstances, their relation to each other and to the whole and probabilities of the situation.(Bernardo
vs. Court of Appeals, 216 SCRA 224)
Stated differently, a question of law does not involve an examination of the probative value of the
evidence presented by the litigants or any of them; otherwise, if such examination and re-evaluation of the
evidence is called for, a question of fact is raised.
In the decision from which the CBC appealed, the trial court primarily held that the former is a mere
money lender and not a maritime lienor. In its appeal, the CBC argues that in so holding, the trial court
disregarded the maritime purposes for which the loans it extended to the Philippine International Shipping

Corporation (PISC) were availed of and used. The issue thus raised cannot be judiciously resolved without
reviewing the probative weight of the evidence on record consisting in the main of the various documents,
contracts and transactions attached to CBCs complaint-in-intervention. It is, therefore, indubitable that
mixed questions of fact and of law are involved over which this Court has jurisdiction.[18]
Thus, in resolving the issues raised by private respondent in the Court of Appeals, the appellate court had
to make a factual inquiry, among others, on the nature and terms of the contracts among the different
parties, the relationship of the different parties with one another and with respect to the vessels involved
in the case, how the proceeds of the loans were used, and the correct dates when the maritime and
mortgage liens were constituted on the vessels. The determination of these facts is crucial as it will
resolve whether the amount advanced by respondent CBC is in the nature of a maritime lien and if so,
whether the lien is superior to the mortgage lien of petitioners. If the appellate court, in the exercise of its
review power, finds that the amount advanced by CBC was used for the repair of the vessels, then a
mortgage lien was indubitably established over the shipping vessels. Moreover, a determination of the
dates when the respective liens of the parties were constituted over the vessels will answer the question
as to which lien is preferred over the other. In short, in order to address fully the issues raised by the
parties in their pleadings, the appellate court necessarily had to make factual findings.
Verily, the issues raised by private respondent in the appellate court were cognizable by the said court, the
issues being mixed questions of fact and law. Respondent court was therefore acting within its jurisdiction
when it promulgated its questioned decision.
The next issue brought up by petitioners is whether or not private respondent CBCs claim for
US$242,225.00 is in the nature of a maritime lien. It is the contention of petitioners that (t)he Court of
Appeals gravely erred in law in holding that private respondent CBCs claim under its Standby Letter of
Credit No. 79/4174 is a maritime lien, and that said maritime lien is preferred over the mortgage lien of
petitioners PNB/NIDC on the foreclosed vessel M/V Asean Liberty.[19]
The applicable law on the matter is Presidential Decree No. 1521, otherwise known as the Ship Mortgage
Decree of 1978. Sections 17 and 21 of the said Presidential Decree provides as follows:
Sec. 17. Preferred Maritime Liens, Priorities, Other Liens (a) Upon the sale of any mortgaged vessel in
any extra-judicial sale or by order of a district court of the Philippines in any suit in rem in admiralty for the
enforcement of a preferred mortgage lien thereon, all pre-existing claims on the vessel, including any
possessory common-law lien of which a lienor is deprived under the provisions of Section 16 of this Decree,
shall be held terminated and shall thereafter attach, in like amount and in accordance with the priorities
established herein to the proceeds of the sale. The preferred mortgage lien shall have priority over all
claims against the vessel, except the following claims in the order stated: (1) expenses and fees allowed
and costs taxed by the court and taxes due to the government; (2) crews wages; (3) general average; (4)
salvage; including contract salvage; (5) maritime liens arising prior in time to the recording of the preferred
mortgage; and (6) damages arising out of tort; and (7) preferred mortgage registered prior in time.
(b) If the proceeds of the sale should not be sufficient to pay all creditors included in one number or grade,
the residue shall be divided among them pro rata. All credits not paid, whether fully or partially shall
subsist as ordinary credits enforceable by personal action against the debtor. The record of judicial sale or
sale by public auction shall be recorded in the Record of Transfers & Encumbrances of Vessels in the port of
documentation.
Sec. 21. Maritime Lien for Necessaries; persons entitled to such lien. Any person furnishing repairs,
supplies, towage, use of dry dock or maritime railway, or other necessaries to any vessel, whether foreign
or domestic, upon the order of the owner, shall have a maritime lien on the vessel, which may be enforced
by suit in rem, and it shall be necessary to allege or prove that credit was given to the vessel.
Under these provisions, any person furnishing repairs, supplies, or other necessaries to a vessel on credit
will have a maritime lien on the said vessel. Such maritime lien, if it arose prior to the recording of a
preferred mortgage lien, shall have priority over the said mortgage lien.
In the instant case, it was Hongkong United Dockyards, Ltd. which originally possessed a maritime lien
over the vessel M/V Asean Liberty by virtue of its repair of the said vessel on credit. Under the Contract
Agreement dated March 12, 1979 between Hongkong United Dockyards, Ltd. and PISC, the former, as
contractor, obligated itself to repair and convert the vessel M/V Asean Liberty, which was owned by PISC.
Section 7 of the said Agreement provides as follows:
(7) a)
The Owner will, before the commencement of work, provide an Irrevocable Documentary Credit
for the Contract Price plus an estimate to cover the cost of extra work. The banks and wording of the
Credit are to be agreed by the Contractor.
b)

Payment will be:

(1)

Before departure of vessel from Contractors yard: 20% of contract price;

(2)

60 days from departure of vessel from Contractors yard: 40% of contract price;

(3)

90 days from departure of vessel from Contractors yard: 40% of contract price.[20]

The foregoing provision of the contract agreement indubitably shows that credit was given to the vessel
M/V Asean Liberty by Hongkong United Dockyards, Ltd. and as a result, a maritime lien in favor of
Hongkong United Dockyards, Ltd. was constituted on the said vessel by virtue of Section 21 of the Ship
Mortgage Decree of 1978.
It is the contention of private respondent CBC however, that it ultimately acquired the maritime lien of
Hongkong United Dockyards, Ltd. over the vessel M/V Asean Liberty. As shown by the documentary
evidence offered by private respondent CBC, its proof that it acquired said maritime lien is as follows:
(a) On March 12, 1979, PISC entered into a Contract Agreement with Hongkong United Dockyards, Ltd., as
contractor, for the repair and conversion of its vessel M/V Asean Liberty for a contract price of
HK$2,200,000.00[21];
(b) On May 28, 1979, the Central Bank of the Philippines approved PISCs request to open with private
respondent China Banking Corporation a Standby Letter of Credit for US$545,000.00 in favor of Hongkong
United Dockyards, Ltd. This May 28, 1979 letter stated that the credit for US$545,000 would be used to
cover the partial conversion cost of the vessel Asean Liberty. On June 20, 1979, the Central Bank
approved the request of PISC to change the beneficiary of the said Standby Letter of Credit from Hongkong
United Dockyards, Ltd. to Citibank[22];
(c) On June 15, 1979, PISC executed an Application and Agreement with private respondent CBC for the
opening of a Standby Letter of Credit for US$545,000.00 in favor of Citibank, N.A., Makati, Metro Manila as
beneficiary. The agreement confirmed that the letter of credit would be used to guarantee the loan in the
amount of US$545,000.00, the proceeds of which will be used to finance partially the conversion cost of
the vessel MV ASIAN LIBERTY[23];
(d) On September 12, 1979, private respondent CBC issued an Irrevocable Standby Letter of Credit in favor
of Citibank for any sum or sums not exceeding a total of US$545,000.00. Per express terms of the Letter of
Credit, its purpose was to guarantee (Citibanks) loan to Philippine International Shipping Corporation, the
proceeds of which loan, according to accountee, are to finance partially the conversion cost of the vessel
M/V ASIAN LIBERTY[24];
(e) Pursuant to its loan agreement with Citibank, PISC executed on September 17, 1979 a promissory note
for US$545,000.00 in favor of Citibank, promising to pay the latter the principal sum of US$545,000.00 in
nine (9) consecutive semi-annual installments of US$60,555.00 commencing one (1) year from date hereof
or on September 17, 1980 until September 17, 1984[25];
(f) On March 25, 1983, Citibank sent a letter to private respondent CBC calling and drawing on CBCs Letter
of Credit No. 79/4174 and certifying that the draft attached thereto for US$242,225.00 represents the
principal balance due to Citibank as of March 17, 1983 under PISCs Promissory Note of September 17,
1979[26]. This March 25, 1983 letter likewise indicated that the loan due from PISC was used to finance
partially the conversion cost of the vessel M/V Asian Liberty;
(g) On March 30, 1983, private respondent CBC instructed by cable its correspondent, Irving Trust Co., to
pay Citibank US$242,225.00. On the same date, Irving Trust Co., advised private respondent CBC by mail
that the sum of US$242,225.00 was debited against CBCs Account No. 8033278269 and remitted to the
Citibank Foreign Currency Deposit Unit, Makati[27];
From the documentary evidence thus presented, it is clear that private respondents claim is predicated on
the payment it made to Citibank by virtue of the Irrevocable Letter of Credit it established in the latters
favor. Per express provisions of the Letter of Credit, the same was established to guarantee your
(Citibank) loan in the principal amount of US$545,000.00 to Philippine International Shipping Corporation,
the proceeds of which loan, according to accountee, are to finance partially the conversion cost of the
vessel M/V Asean Liberty.[28]
In short, private respondent CBC was a guarantor of the loan extended by Citibank to PISC. It was
Citibank, which advanced the money to PISC. It was only upon the failure of PISC to fulfill its obligations
under its promissory note to Citibank that private respondent CBC was called upon by Citibank to exercise
its duties under the Standby Letter of Credit.
It is the holding of the appellate court, however, that private respondent stepped into the shoes of
Hongkong United Dockyards, Ltd. by legal subrogation and thus acquired the maritime lien of the latter
over the vessel M/V Asean Liberty. Thus:
It is not disputed that CBCs claim for US$242,225.00 and US$648,002.54 refer to the repair and
conversion of two (2) of PISCs vessels, namely M/V Asean Liberty and M/V Asean Mission, undertaken by
Hongkong United Dockyards, Ltd. and the China Shipbuilding Corporation of Taiwan, respectively, upon the
order of the owner, as deposed by George Lim, the President of the PISC. Such being the case, maritime
liens on the vessels concerned arose conformably with the aforequoted provision of Section 21 of P.D. No.
1521. True it is that under the law the persons entitled to the lien are the Hongkong United Dockyards,
Ltd. and the China Shipbuilding Corporation of Taiwan, they being the ones who furnished the repair works.
However, since it was CBC who paid off these lienors, it stepped into the shoes of the latter by subrogation.
This is the prevailing doctrine in American jurisprudence which holds that: A creditor who advances money
specifically for the purpose of discharging a maritime lien is subrogated to the lienors rights.
Significantly, the Federal Maritime Lien Act, like our Ship Mortgage Decree of 1978, provides that, any

person furnishing repairs, supplies, towage, use of drydock or marine railway, or other necessaries, to any
foreign or domestic vessel on the order of the owner of such vessel, or of a person authorized by the owner
of such vessel, or of a person authorized by the owner has a maritime lien on the vessel which may be
enforced by suit in rem. The only difference is that under the Federal Maritime Lien Act, it is not necessary
to allege or prove that the credit was given to the vessel. Hence, insofar as the creation of the lien and the
persons entitled to the lien are concerned, American jurisprudence is highly persuasive. Furthermore,
Article 1302 (2) of our Civil Code explicitly provides:
Art. 1302 (2). It is presumed that there is legal subrogation:
(2) When a third person not interested in the obligation pays with the express or tacit approval of the
debtor;
Accordingly, since CBCs payment to the lienors was with the express consent of the debtor owner of the
vessels repaired, legal subrogation took place in CBCs favor.
Petitioners do not question the abovequoted rationale of the Court of Appeals. It takes exception however
to the appellate courts finding and conclusion that it was ultimately private respondent CBC which paid off
the maritime lienor and that the US$545,000.00 advanced by Citibank was actually paid to the persons
who furnished the repairs on the vessels. On this point, petitioners argue that the entirety of the
documentary evidence of private respondent CBC does not show that the latter actually paid off the
maritime lienholder for the repair of M/V Asean Liberty as required by Section 21 of the Ship Mortgage
Act of 1978.[29] Furthermore, petitioners claim that the respondent court committed serious error in law
when it considered and gave credence to the written deposition of Mr. George Lim, the President of PISC,
as basis for the said finding considering that the same had earlier been denied admission by the trial court.
There is no merit in the contentions of petitioners.
The provisions of our Ship Mortgage Decree of 1978 were patterned quite closely after the U.S. Ship
Mortgage Act of 1920.[30] Significantly, the Federal Maritime Lien Act of the United States, like our Ship
Mortgage Decree of 1978, provides that any person furnishing repairs, supplies, towage, use of drydock,
or marine railway, or other necessaries, to any foreign or domestic vessel on the order of the owner of
such vessel, or of a person authorized by the owner has a maritime lien on the vessel, which may be
enforced by suit in rem.[31]Being of foreign origin, the provisions of the Ship Mortgage Decree of 1978
may thus be construed with the aid of foreign jurisprudence from which they are derived except insofar as
they conflict with existing laws or are inconsistent with local customs and institutions.
As held by the public respondent Court of Appeals, those who provide credit to a master of a vessel for the
purpose of discharging a maritime lien also acquire a lien over the said vessel. Under American
jurisprudence, (f)urnishing money to a master in good faith to obtain repairs or supplies or to remove
liens, in order to forward the voyage of the vessel, raises a lien just as though the things (for which) money
was obtained to pay for had been furnished by the lender.[32] Likewise, (a)dvances to discharge
maritime liens create a lien on the vessel, and one advancing money to discharge a valid lien gets a lien of
equal dignity with the one discharged.[33] There is no reason why these doctrines cannot be given
persuasive application in the instant case considering that they do not violate or contravene any of our
existing laws. Moreover, as pointed out by the appellate court, these doctrines are in accord with our
provisions on subrogation particularly Art. 1302, paragraph 2 of the New Civil Code which provides that
there is legal subrogation when a third person, not interested in the fulfillment in the obligation, pays with
the express or tacit approval of the debtor.
Under these doctrines, a person who extends credit for the purpose of discharging a maritime lien is not
entitled to the said lien where the funds were not furnished to the ship on the order of the master and
there was no evidence that the money was actually used to pay debts secured by the lien.[34] As applied
in the instant case, it becomes necessary to prove that the credit advanced by Citibank to PISC was
actually utilized for the repair and conversion of the vessel M/V Asean Liberty. Otherwise, Citibank could
not have acquired the maritime lien of Hongkong United Dockyards, Ltd. over the vessel M/V Asean
Liberty.
On this point, we agree with the position of private respondent that the question of whether or not the
proceeds of the loans extended by Citibank were used for the repair and conversion of M/V Asean Liberty
is a factual issue[35] which the Court cannot review absent a showing that it was arbitrarily resolved.[36]
Contrary to the assertions of petitioners, the records are replete with documents that show that the
proceeds of the loans were used for the repair and conversion of the vessel M/V Asean Liberty. Even
without the written deposition of Mr. George Lim, there is still sufficient documentary evidence in the
records supporting the appellate courts findings. The correspondences between PISC and the Central
Bank, the Application and Agreement, and the Standby Letter of Credit itself explicitly state that the
proceeds of the loan applied for by PISC are to be used to finance partially the conversion cost of the
vessel M/V Asean Liberty. Moreover, the March 25, 1983 letter of Citibank to private respondent CBC
drawing on the latters letter of credit, confirmed that the loan due from PISC was used to finance partially
the conversion cost of the said vessel.
In the presence of such documentary evidence, which were admitted without objection from the
petitioners, we cannot say that the Court of Appeals resolved the issue arbitrarily. The appellate courts

finding that the amount sought to be recovered by petitioner was actually used for the repair and
conversion of the vessel M/V Asean Liberty is based on substantial evidence.
From the foregoing, it is clear that the amount used for the repair of the vessel M/V Asean Liberty was
advanced by Citibank and was utilized for the purpose of paying off the original maritime lienor, Hongkong
United Dockyards, Ltd. As a person not interested in the fulfillment of the obligation between PISC and
Hongkong United Dockyards, Ltd., Citibank was subrogated to the rights of Hongkong United Dockyards,
Ltd. as maritime lienor over the vessel, by virtue of Article 1302, par. 2 of the New Civil Code. By
definition, subrogation is the transfer of all the rights of the creditor to a third person, who substitutes him
in all his rights.[37] Considering that Citibank paid off the debt of PISC to Hongkong United Dockyards, Ltd.
it became the transferee of all the rights of Hongkong United Dockyards, Ltd. as against PISC, including the
maritime lien over the vessel M/V Asean Liberty.
Private respondent CBC, as guarantor, was itself subrogated to all the rights of Citibank as against PISC,
the latters debtor. Article 2067 of the New Civil Code provides that (t)he guarantor who pays is
subrogated by virtue thereof to all the rights which the creditor had against the debtor. Private
respondent, having paid off the debt of PISC to Citibank, was therefore, subrogated to all the rights
Citibank had against its debtor PISC. Considering that Citibank had a maritime lien over the vessel M/V
Asean Liberty, private respondent was likewise subrogated to this right when it paid off Citibank under
the contract of guarantee.
Having thus established that private respondent CBC possessed a maritime lien over the vessel M/V Asean
Liberty, the next issue is whether the said maritime lien is preferred over the mortgage lien of petitioners.
In the case at bench, petitioners mortgage lien arose on September 25, 1979 when the said mortgage was
registered with the Philippine Coast Guard Headquarters.[38] As such, in order for the maritime lien of
private respondent CBC to be preferred over the mortgage lien of petitioners, the same must have arisen
prior to the recording of the mortgage on September 25, 1979.
On this point, petitioners argue that inasmuch as the Standby Letter of Credit was in the nature of a
guarantee, the right of private respondent CBC to claim or to collect the maritime lien arose only at the
time CBC actually paid off the said lien to Citibank on March 30, 1983. Otherwise stated, it is the
contention of petitioners that private respondent CBCs maritime lien under its Standby Letter of Credit No.
79/4174 arose only on March 30, 1983 when CBC actually paid off the outstanding obligation of PISC to
Citibank.[39]Considering that its mortgage lien arose on September 25, 1979, petitioners thus conclude
that its lien is preferred as against private respondent CBCs maritime lien.
There is no merit in this contention.
As stated by a noted commentator on the subject, a maritime lien constitutes a present right of property
in the ship, a jus in re, to be afterward enforced in admiralty by process in rem. From the moment the
claim or privilege attaches, it is inchoate, and when carried into effect by legal process, by a proceeding in
rem, it relates back to the period when it first attached.[40]
In the case at bench, the maritime lien over the vessel M/V Asean Liberty arose or was constituted at the
time Hongkong United Drydocks, Ltd. made repairs on the said vessel on credit. As such, as early as March
12, 1979, the date of the contract for the repair and conversion of M/V Asean Liberty, a maritime lien had
already attached to the said vessel. When Citibank advanced the amount of US$242,225.00 for the
purpose of paying off PISCs debt to Hongkong United Dockyards, Ltd., it acquired the existing maritime
lien over the vessel. When private respondent honored its contract of guarantee with Citibank on March
30, 1983, it likewise acquired by subrogation the maritime lien that was already existing over the vessel
M/V Asean Liberty. Thus, when private respondent CBC chose to exercise its right to the maritime lien
during the proceedings in the trial court, it was actually enforcing a privilege that attached to the ship as
early as March 12, 1979.
The maritime lien of private respondent CBC thus arose prior in time to the recording of petitioners
mortgage on September 25, 1979. As such, the said maritime lien has priority over the said mortgage
lien. Pursuant to Section 17 of the Ship Mortgage Decree of 1978, a preferred mortgage lien shall have
priority over all claims against the vessel except, among others, maritime liens arising prior in time to
the recording of the preferred mortgage. The respondent court thus committed no reversible error when it
ruled that the maritime lien of private respondent CBC is superior to the mortgage lien of petitioners.
WHERFORE, in view of the foregoing, the petition is denied and the decision of the Court of Appeals dated
March 21, 1997 in CA-G.R. CV. No. 38131 is hereby AFFIRMED.
SPOUSES DAVID B. CARPO
and RECHILDA S. CARPO,

G.R. Nos. 150773 &

153599

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

The second, docketed as G.R. No. 153599, seeks to annul the Court of Appeals Decision[3] dated 30
April 2002 in CA-G.R. SP No. 57297. The Court of Appeals Third Division annulled and set aside the orders
of Judge Corazon A. Tordilla to suspend the sheriffs enforcement of the writ of possession.
The cases stemmed from a loan contracted by petitioners. On 18 July 1995, they borrowed from
Eleanor Chua and Elma Dy Ng (respondents) the amount of One Hundred Seventy-Five Thousand Pesos
(P175,000.00), payable within six (6) months with an interest rate of six percent (6%) per month. To
secure the payment of the loan, petitioners mortgaged their residential house and lot situated at San
Francisco, Magarao, Camarines Sur, which lot is covered by Transfer Certificate of Title (TCT) No. 23180.
Petitioners failed to pay the loan upon demand.
Consequently, the real estate mortgage was
extrajudicially foreclosed and the mortgaged property sold at a public auction on 8 July 1996. The house
and lot was awarded to respondents, who were the only bidders, for the amount of Three Hundred SixtySeven Thousand Four Hundred Fifty-Seven Pesos and Eighty Centavos (P367,457.80).
Upon failure of petitioners to exercise their right of redemption, a certificate of sale was issued on 5
September 1997 by Sheriff Rolando A. Borja. TCT No. 23180 was cancelled and in its stead, TCT No. 29338
was issued in the name of respondents.
Despite the issuance of the TCT, petitioners continued to occupy the said house and lot, prompting
respondents to file a petition for writ of possession with the RTC docketed as Special Proceedings (SP) No.
98-1665. On 23 March 1999, RTC Judge Ernesto A. Miguel issued an Order[4] for the issuance of a writ of
possession.
On 23 July 1999, petitioners filed a complaint for annulment of real estate mortgage and the consequent
foreclosure proceedings, docketed as Civil Case No. 99-4376 of the RTC. Petitioners consigned the amount
of Two Hundred Fifty-Seven Thousand One Hundred Ninety-Seven Pesos and Twenty-Six Centavos
(P257,197.26) with the RTC.
Meanwhile, in SP No. 98-1665, a temporary restraining order was issued upon motion on 3 August 1999,
enjoining the enforcement of the writ of possession. In an Order[5] dated 6 January 2000, the RTC
suspended the enforcement of the writ of possession pending the final disposition of Civil Case No. 994376. Against this Order, respondents filed a petition for certiorari and mandamus before the Court of
Appeals, docketed as CA-G.R. SP No. 57297.
During the pendency of the case before the Court of Appeals, RTC Judge Filemon B. Montenegro dismissed
the complaint in Civil Case No. 99-4376 on the ground that it was filed out of time and barred by laches.
The RTC proceeded from the premise that the complaint was one for annulment of a voidable contract and
thus barred by the four-year prescriptive period. Hence, the first petition for review now under
consideration was filed with this Court, assailing the dismissal of the complaint.

The second petition for review was filed with the Court after the Court of Appeals on 30 April 2002 annulled
and set aside the RTC orders in SP No. 98-1665 on the ground that it was the ministerial duty of the lower
court to issue the writ of possession when title over the mortgaged property had been consolidated in the
mortgagee.
This Court ordered the consolidation of the two cases, on motion of petitioners.
In G.R. No. 150773, petitioners claim that following the Courts ruling in Medel v. Court of Appeals[6]
the rate of interest stipulated in the principal loan agreement is clearly null and void. Consequently, they
also argue that the nullity of the agreed interest rate affects the validity of the real estate mortgage.
Notably, while petitioners were silent in their petition on the issues of prescription and laches on which the
RTC grounded the dismissal of the complaint, they belatedly raised the matters in theirMemorandum.
Nonetheless, these points warrant brief comment.
On the other hand, petitioners argue in G.R. No. 153599 that the RTC did not commit any grave
abuse of discretion when it issued the orders dated 3 August 1999 and 6 January 2000, and that these
orders could not have been the proper subjects of a petition for certiorari and mandamus. More
accurately, the justiciable issues before us are whether the Court of Appeals could properly entertain the
petition for certiorari from the timeliness aspect, and whether the appellate court correctly concluded that
the writ of possession could no longer be stayed.
We first resolve the petition in G.R. No. 150773.
Petitioners contend that the agreed rate of interest of 6% per month or 72% per annum is so excessive,
iniquitous, unconscionable and exorbitant that it should have been declared null and void. Instead of
dismissing their complaint, they aver that the lower court should have declared them liable to respondents
for the original amount of the loan plus 12% interest per annum and 1% monthly penalty charge as
liquidated damages,[7] in view of the ruling in Medel v. Court of Appeals.[8]
In Medel, the Court found that the interest stipulated at 5.5% per month or 66% per annum was so
iniquitous or unconscionable as to render the stipulation void.

Nevertheless, we find the interest at 5.5% per month, or 66% per annum, stipulated upon by the parties in
the promissory note iniquitous or unconscionable, and, hence, contrary to morals (contra bonos mores),
if not against the law. The stipulation is void. The Court shall reduce equitably liquidated damages,
whether intended as an indemnity or a penalty if they are iniquitous or unconscionable.[9]
In a long line of cases, this Court has invalidated similar stipulations on interest rates for being excessive,
iniquitous, unconscionable and exorbitant. In Solangon v. Salazar,[10] we annulled the stipulation of 6%
per month or 72% per annum interest on a P60,000.00 loan. In Imperial v. Jaucian,[11] we reduced the
interest rate from 16% to 1.167% per month or 14% per annum. In Ruiz v. Court of Appeals,[12] we
equitably reduced the agreed 3% per month or 36% per annum interest to 1% per month or 12% per
annum interest. The 10% and 8% interest rates per month on a P1,000,000.00 loan were reduced to 12%
per annum inCuaton v. Salud.[13] Recently, this Court, in Arrofo v. Quino,[14] reduced the 7% interest per
month on a P15,000.00 loan amounting to 84% interest per annum to 18% per annum.
There is no need to unsettle the principle affirmed in Medel and like cases. From that perspective, it
is apparent that the stipulated interest in the subject loan is excessive, iniquitous, unconscionable and
exorbitant. Pursuant to the freedom of contract principle embodied in Article 1306 of the Civil Code,
contracting parties may establish such stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. In
the ordinary course, the codal provision may be invoked to annul the excessive stipulated interest.

In the case at bar, the stipulated interest rate is 6% per month, or 72% per annum. By the standards set in
the above-cited cases, this stipulation is similarly invalid. However, the RTC refused to apply the principle
cited and employed in Medel on the ground that Medel did not pertain to the annulment of a real estate
mortgage,[15] as it was a case for annulment of the loan contract itself. The question thus sensibly arises
whether the invalidity of the stipulation on interest carries with it the invalidity of the principal obligation.
The question is crucial to the present petition even if the subject thereof is not the annulment of the loan
contract but that of the mortgage contract. The consideration of the mortgage contract is the same as that
of the principal contract from which it receives life, and without which it cannot exist as an independent
contract. Being a mere accessory contract, the validity of the mortgage contract would depend on the
validity of the loan secured by it.[16]
Notably in Medel, the Court did not invalidate the entire loan obligation despite the inequitability of
the stipulated interest, but instead reduced the rate of interest to the more reasonable rate of 12% per
annum. The same remedial approach to the wrongful interest rates involved was employed or affirmed by
the Court in Solangon, Imperial, Ruiz, Cuaton, and Arrofo.
The Courts ultimate affirmation in the cases cited of the validity of the principal loan obligation side
by side with the invalidation of the interest rates thereupon is congruent with the rule that a usurious loan
transaction is not a complete nullity but defective only with respect to the agreed interest.
We are aware that the Court of Appeals, on certain occasions, had ruled that a usurious loan is wholly
null and void both as to the loan and as to the usurious interest.[17] However, this Court adopted the
contrary rule,
as comprehensively discussed in Briones v. Cammayo:[18]
In Gui Jong & Co. vs. Rivera, et al., 45 Phil. 778, this Court likewise declared that, in any event, the debtor
in a usurious contract of loan should pay the creditor the amount which he justly owes him, citing in
support of this ruling its previous decisions in Go Chioco, Supra, Aguilar vs. Rubiato, et al., 40 Phil. 570, and
Delgado vs. Duque Valgona, 44 Phil. 739.
Then in Lopez and Javelona vs. El Hogar Filipino, 47 Phil. 249, We also held that the standing jurisprudence
of this Court on the question under consideration was clearly to the effect that the Usury Law, by its letter
and spirit, did not deprive the lender of his right to recover from the borrower the money actually loaned to
and enjoyed by the latter. This Court went further to say that the Usury Law did not provide for the
forfeiture of the capital in favor of the debtor in usurious contracts, and that while the forfeiture might
appear to be convenient as a drastic measure to eradicate the evil of usury, the legal question involved
should not be resolved on the basis of convenience.
Other cases upholding the same principle are Palileo vs. Cosio, 97 Phil. 919 and Pascua vs. Perez, L-19554,
January 31, 1964, 10 SCRA 199, 200-202. In the latter We expressly held that when a contract is found to
be tainted with usury "the only right of the respondent (creditor) . . . was merely to collect the amount of
the loan, plus interest due thereon."
The view has been expressed, however, that the ruling thus consistently adhered to should now be
abandoned because Article 1957 of the new Civil Code a subsequent law provides that contracts and
stipulations, under any cloak or device whatever, intended to circumvent the laws against usury, shall be
void, and that in such cases "the borrower may recover in accordance with the laws on usury." From this
the conclusion is drawn that the whole contract is void and that, therefore, the creditor has no right to
recover not even his capital.

The meaning and scope of our ruling in the cases mentioned heretofore is clearly stated, and the view
referred to in the preceding paragraph is adequately answered, in Angel Jose, etc. vs. Chelda Enterprises,
et al. (L-25704, April 24, 1968). On the question of whether a creditor in a usurious contract may or may
not recover the principal of the loan, and, in the affirmative, whether or not he may also recover interest
thereon at the legal rate, We said the following:
Appealing directly to Us, defendants raise two questions of law: (1) In a loan with usurious interest, may
the creditor recover the principal of the loan? (2) Should attorney's fees be awarded in plaintiff's favor?"
Great reliance is made by appellants on Art. 1411 of the New Civil Code . . . .
Since, according to the appellants, a usurious loan is void due to illegality of cause or object, the rule of
pari delicto expressed in Article 1411, supra, applies, so that neither party can bring action against each
other. Said rule, however, appellants add, is modified as to the borrower, by express provision of the law
(Art. 1413, New Civil Code), allowing the borrower to recover interest paid in excess of the interest allowed
by the Usury Law. As to the lender, no exception is made to the rule; hence, he cannot recover on the
contract. So they continue the New Civil Code provisions must be upheld as against the Usury Law,
under which a loan with usurious interest is not totally void, because of Article 1961 of the New Civil Code,
that: "Usurious contracts shall be governed by the Usury Law and other special laws, so far as they are not
inconsistent with this Code."
We do not agree with such reasoning. Article 1411 of the New Civil Code is not new; it is the same as
Article 1305 of the Old Civil Code. Therefore, said provision is no warrant for departing from previous
interpretation that, as provided in the Usury Law (Act No. 2655, as amended), a loan with usurious interest
is not totally void only as to the interest.
. . . [a]ppellants fail to consider that a contract of loan with usurious interest consists of principal and
accessory stipulations; the principal one is to pay the debt; the accessory stipulation is to pay interest
thereon.
And said two stipulations are divisible in the sense that the former can still stand without the latter. Article
1273, Civil Code, attests to this: "The renunciation of the principal debt shall extinguish the accessory
obligations; but the waiver of the latter shall leave the former in force."
The question therefore to resolve is whether the illegal terms as to payment of interest likewise renders a
nullity the legal terms as to payments of the principal debt. Article 1420 of the New Civil Code provides in
this regard: "In case of a divisible contract, if the illegal terms can be separated from the legal ones, the
latter may be enforced."
In simple loan with stipulation of usurious interest, the prestation of the debtor to pay the principal debt,
which is the cause of the contract (Article 1350, Civil Code), is not illegal. The illegality lies only as to the
prestation to pay the stipulated interest; hence, being separable, the latter only should be deemed void,
since it is the only one that is illegal.
The principal debt remaining without stipulation for payment of interest can thus be recovered by judicial
action. And in case of such demand, and the debtor incurs in delay, the debt earns interest from the date
of the demand (in this case from the filing of the complaint). Such interest is not due to stipulation, for
there was none, the same being void. Rather, it is due to the general provision of law that in obligations to
pay money, where the debtor incurs in delay, he has to pay interest by way of damages (Art. 2209, Civil
Code). The court a quo therefore, did not err in ordering defendants to pay the principal debt with interest
thereon at the legal rate, from the date of filing of the complaint."[19]
The Courts wholehearted affirmation of the rule that the principal obligation subsists despite the
nullity of the stipulated interest is evinced by its subsequent rulings, cited above, in all of which the main
obligation was upheld and the offending interest rate merely corrected. Hence, it is clear and settled that
the principal loan obligation still stands and remains valid. By the same token, since the mortgage contract
derives its vitality from the validity of the principal obligation, the invalid stipulation on interest rate is
similarly insufficient to render void the ancillary mortgage contract.
It should be noted that had the Court declared the loan and mortgage agreements void for being
contrary to public policy, no prescriptive period could have run.[20] Such benefit is obviously not available
to petitioners.
Yet the RTC pronounced that the complaint was barred by the four-year prescriptive period provided in
Article 1391 of the Civil Code, which governs voidable contracts. This conclusion was derived from the
allegation in the complaint that the consent of petitioners was vitiated through undue influence. While the
RTC correctly acknowledged the rule of prescription for voidable contracts, it erred in applying the rule in
this case. We are hard put to conclude in this case that there was any undue influence in the first place.
There is ultimately no showing that petitioners consent to the loan and mortgage agreements was vitiated
by undue influence. The financial condition of petitioners may have motivated them to contract with
respondents, but undue influence cannot be attributed to respondents simply because they had lent
money. Article 1391, in relation to Article 1390 of the Civil Code, grants the aggrieved party the right to
obtain the annulment of contract on account of factors which vitiate consent. Article 1337 defines the
concept of undue influence, as follows:

There is undue influence when a person takes improper advantage of his power over the will of another,
depriving the latter of a reasonable freedom of choice. The following circumstances shall be considered:
the confidential, family, spiritual and other relations between the parties or the fact that the person alleged
to have been unduly influenced was suffering from mental weakness, or was ignorant or in financial
distress.
While petitioners were allegedly financially distressed, it must be proven that there is deprivation of
their free agency. In other words, for undue influence to be present, the influence exerted must have so
overpowered or subjugated the mind of a contracting party as to destroy his free agency, making him
express the will of another rather than his own.[21] The alleged lingering financial woes of petitioners per
se cannot be equated with the presence of undue influence.
The RTC had likewise concluded that petitioners were barred by laches from assailing the validity of the
real estate mortgage. We wholeheartedly agree. If indeed petitioners unwillingly gave their consent to the
agreement, they should have raised this issue as early as in the foreclosure proceedings. It was only when
the writ of possession was issued did petitioners challenge the stipulations in the loan contract in their
action for annulment of mortgage. Evidently, petitioners slept on their rights. The Court of Appeals
succinctly made the following observations:
In all these proceedings starting from the foreclosure, followed by the issuance of a provisional certificate
of sale; then the definite certificate of sale; then the issuance of TCT No. 29338 in favor of the defendants
and finally the petition for the issuance of the writ of possession in favor of the defendants, there is no
showing that plaintiffs questioned the validity of these proceedings. It was only after the issuance of the
writ of possession in favor of the defendants, that plaintiffs allegedly tendered to the defendants the
amount of P260,000.00 which the defendants refused. In all these proceedings, why did plaintiffs sleep on
their rights?[22]
Clearly then, with the absence of undue influence, petitioners have no cause of action. Even
assuming undue influence vitiated their consent to the loan contract, their action would already be barred
by prescription when they filed it. Moreover, petitioners had clearly slept on their rights as they failed to
timely assail the validity of the mortgage agreement. The denial of the petition in G.R. No. 150773 is
warranted.
We now resolve the petition in G.R. No. 153599.
Petitioners claim that the assailed RTC orders dated 3 August 1999 and 6 January 2000 could no
longer be questioned in a special civil action for certiorari and mandamus as the reglementary period for
such action had already elapsed.
It must be noted that the Order dated 3 August 1999 suspending the enforcement of the writ of
possession had a period of effectivity of only twenty (20) days from 3 August 1999, or until 23 August
1999. Thus, upon the expiration of the twenty (20)-day period, the said Order became functus officio. Thus,
there is really no sense in assailing the validity of this Order, mooted as it was. For the same reason, the
validity of the order need not have been assailed by respondents in their special civil action before the
Court of Appeals.
On the other hand, the Order dated 6 January 2000 is in the nature of a writ of injunction whose
period of efficacy is indefinite. It may be properly assailed by way of the special civil action for certiorari,
as it is interlocutory in nature.
As a rule, the special civil action for certiorari under Rule 65 must be filed not later than sixty (60)
days from notice of the judgment or order.[23] Petitioners argue that the 3 August 1999 Order could no
longer be assailed by respondents in a special civil action for certiorari before the Court of Appeals, as the
petition was filed beyond sixty (60) days following respondents receipt of theOrder. Considering that the 3
August 1999 Order had become functus officio in the first place, this argument deserves scant
consideration.
Petitioners further claim that the 6 January 2000 Order could not have likewise been the subject of a
special civil action for certiorari, as it is according to them a final order, as opposed to an interlocutory
order. That the 6 January 2000 Order is interlocutory in nature should be beyond doubt. An order is
interlocutory if its effects would only be provisional in character and would still leave substantial
proceedings to be further had by the issuing court in order to put the controversy to rest.[24] The
injunctive relief granted by the order is definitely final, but merely provisional, its effectivity hinging on the
ultimate outcome of the then pending action for annulment of real estate mortgage. Indeed, an
interlocutory order hardly puts to a close, or disposes of, a case or a disputed issue leaving nothing else to
be done by the court in respect thereto, as is characteristic of a final order.
Since the 6 January 2000 Order is not a final order, but rather interlocutory in nature, we cannot agree
with petitioners who insist that it may be assailed only through an appeal perfected within fifteen (15) days
from receipt thereof by respondents. It is axiomatic that an interlocutory order cannot be challenged by
an appeal,
but is susceptible to review only through the special civil action of certiorari.[25] The sixty (60)-day
reglementary period for special civil actions under Rule 65 applies, and respondents petition was filed with
the Court of Appeals well within the period.

Accordingly, no error can be attributed to the Court of Appeals in granting the petition for certiorari
and mandamus. As pointed out by respondents, the remedy of mandamus lies to compel the performance
of a ministerial duty. The issuance of a writ of possession to a purchaser in an extrajudicial foreclosure is
merely a ministerial function.[26]
Thus, we also affirm the Court of Appeals ruling to set aside the RTC orders enjoining the enforcement of
the writ of possession.[27] The purchaser in a foreclosure sale is entitled as a matter of right to a writ of
possession, regardless of whether or not there is a pending suit for annulment of the mortgage or the
foreclosure proceedings. An injunction to prohibit the issuance or enforcement of the writ is entirely out of
place.[28]
One final note. The issue on the validity of the stipulated interest rates, regrettably for petitioners, was not
raised at the earliest possible opportunity. It should be pointed out though that since an excessive
stipulated interest rate may be void for being contrary to public policy, an action to annul said interest rate
does not prescribe. Such indeed is the remedy; it is not the action for annulment of the ancillary real estate
mortgage. Despite the nullity of the stipulated interest rate, the principal loan obligation subsists, and
along with it the mortgage that serves as collateral security for it.
WHEREFORE, in view of all the foregoing, the petitions are DENIED. Costs against petitioners.
G.R. No. 183804

September 11, 2013

S.C. MEGAWORLD CONSTRUCTION and DEVELOPMENT CORPORATION, Petitioner,

vs.
ENGR. LUIS U. PARADA, represented by ENGR.
Before us on appeal by certiorari1 is the Decision2 dated April 30, 2008 of the Court of Appeals (CA) in CAG.R. CV No. 83811 which upheld the Decision3 dated May 8, 2004 of the Regional Trial Court (RTC) of
Quezon City, Branch 100, in Civil Case No. Q-01-45212.
Factual Antecedents
S.C. Megaworld Construction and Development Corporation (petitioner) bought electrical lighting materials
from Gentile Industries, a sole proprietorship owned by Engineer Luis U. Parada (respondent), for its ReadRite project in Canlubang, Laguna. The petitioner was unable to pay for the above purchase on due date,
but blamed it on its failure to collect under its sub-contract with the Enviro KleenTechnologies, Inc. (Enviro
Kleen). It was however able to persuade Enviro Kleen to agree to settle its above purchase, but after
paying the respondent P250,000.00 on June 2, 1999,4 Enviro Kleen stopped making further payments,
leaving an outstanding balance of P816,627.00. It also ignored the various demands of the respondent,
who then filed a suit in the RTC, docketed as Civil Case No.Q-01-45212, to collect from the petitioner the
said balance, plus damages, costs and expenses, as summarized in the RTCs decision, as follows:
The petitioner in its answer denied liability, claiming that it was released from its indebtedness to the
respondent by reason of the novation of their contract, which, it reasoned, took place when the latter
accepted the partial payment of Enviro Kleen in its behalf, and thereby acquiesced to the substitution of
Enviro Kleen as the new debtor in the petitioners place. After trial, the RTC rendered judgment6 on May
28, 2004 in favor of the respondent, the fallo of which reads, as follows:
WHEREFORE, judgment is hereby rendered for the respondent. The petitioner is hereby ordered to pay the
respondent the following:
A. the sum of P816,627.00 representing the principal obligation due;
B. the sum equivalent to twenty percent (20%)per month of the principal obligation due from date of
judicial demand until fully paid as and for interest; and
C. the sum equivalent to twenty-five percent (25%) of the principal sum due as and for attorneys fees and
other costs of suits. The compulsory counterclaim interposed by the petitioner is hereby ordered dismissed
for lack of merit.
SO ORDERED.7 (Emphasis supplied)
On appeal to the CA, the petitioner maintained that the trial court erred in ruling that no novation of the
contract took place through the substitution of Enviro Kleen as the new debtor. But for the first time, it
further argued that the trial court should have dismissed the complaint for failure of the respondent to
implead Genlite Industries as "a proper party in interest", as provided in Section 2 of Rule 3 of the 1997
Rules of Civil Procedure. The said section provides:
SEC. 2. Parties in interest. A real party in interest is the party who stands to be benefited or injured by
the judgment in the suit, or the party entitled to the avails of the suit. Unless otherwise authorized by law
or these Rules, every action must be prosecuted or defended in the name of the real party in interest.

In Section 1(g) of Rule 16 of the Rules of Court, it is also provided that the defendant may move to dismiss
the suit on the ground that it was not brought in the name of or against the real party in interest, with the
effect that the complaint is then deemed to state no cause of action.
In dismissing the appeal, the CA noted that the petitioner in its answer below raised only the defense of
novation, and that at no stage in the proceedings did it raise the question of whether the suit was brought
in the name of the real party in interest. Moreover, the appellate court found from the sales invoices and
receipts that the respondent is the sole proprietor of Genlite Industries, and therefore the real partyplaintiff. Said the CA:
Settled is the rule that litigants cannot raise an issue for the first time on appeal as this would contravene
the basic rules of fair play and justice.
In any event, there is no question that respondent Engr.Luis U. Parada is the proprietor of Genlite
Industries, as shown on the sales invoice and delivery receipts. There is also no question that a special
power of attorney was executed by respondent Engr.Luis U. Parada in favor of Engr. Leonardo A. Parada
authorizingthe latter to file a complaint against the petitioner.8 (Citations omitted)
The petitioner also contended that a binding novation of the purchase contract between the parties took
place when the respondent accepted the partial payment of Enviro Kleen of P250,000.00 in its behalf, and
thus acquiesced to the substitution by Enviro Kleen of the petitioner as the new debtor. But the CA noted
that there is nothing in the two (2) letters of the respondent to Enviro Kleen, dated April 14, 1999 and June
16, 1999, which would imply that he consented to the alleged novation, and, particularly, that he intended
to release the petitioner from its primary obligation to pay him for its purchase of lighting materials. The
appellate court cited the RTCs finding9 that the respondent informed Enviro Kleen in his first letter that he
had served notice to the petitioner that he would take legal action against it for its overdue account, and
that he retained his option to pull out the lighting materials and charge the petitioner for any damage they
might sustain during the pull-out:
Respondent x x x has served notice to the petitioner that unless the overdue account is paid, the matter
will be referred to its lawyers and there may be a pull-out of the delivered lighting fixtures. It was likewise
stated therein that incidental damages that may result to the structure in the course of the pull-out will be
to the account of the petitioner.10
The CA concurred with the RTC that by retaining his option to seek satisfaction from the petitioner, any
acquiescence which the respondent had made was limited to merely accepting Enviro Kleen as an
additional debtor from whom he could demand payment, but without releasing the petitioner as the
principal debtor from its debt to him.
On motion for reconsideration,11 the petitioner raised for the first time the issue of the validity of the
verification and certification of non-forum shopping attached to the complaint. On July 18, 2008, the CA
denied the said motion for lack of merit.12
Petition for Review in the Supreme Court
In this petition, the petitioner insists, firstly, that the complaint should have been dismissed outright by the
trial court for an invalid non-forum shopping certification; and, secondly, that the appellate court erred in
not declaring that there was a novation of the contract between the parties through substitution of the
debtor, which resulted in the release of the petitioner from its obligation to pay the respondent the amount
of its purchase.13
The trial court found that the respondent never agreed to release the petitioner from its obligation, and
this conclusion was upheld by the CA. We generally accord utmost respect and great weight to factual
findings of the trial court and the CA, unless there appears in the record some fact or circumstance of
weight and influence which has been overlooked, or the significance of which has been misinterpreted,
that if considered would have affected the result of the case.41 We find no such oversight in the
appreciation of the facts below, nor such a misinterpretation thereof, as would otherwise provide a clear
and unequivocal showing that a novation has occurred in the contract between the parties resulting in the
release of the petitioner.
Pursuant to Article 2209 of the
Civil Code, except as provided
under Central Bank Circular
No. 905, and now under Bangko
Sentral ng Pilipinas Circular
No. 799, which took effect on
July 1, 2013, the respondent may

be awarded interest of six percent

(6%) of the judgment amount by
way of actual and compensatory
damages.
It appears from the recital of facts in the trial courts decision that the respondent demanded interest of
two percent (2%) per month upon the balance of the purchase price of P816,627.00, from judicial demand
until full payment. There is then an obvious clerical error committed in the fallo of the trial courts decision,
for it incorrectly ordered the defendant there into pay "the sum equivalent to twenty percent (20%) per
month of the principal obligation due from date of judicial demand until fully paid as and for interest."42
A clerical mistake is one which is visible to the eyes or obvious to the understanding; an error made by a
clerk or a transcriber; a mistake in copying or writing.43 The Latin maxims Error placitandi aequitatem non
tollit ("A clerical error does not take away equity"), and Error scribentis nocere non debit ("An error made
by a clerk ought not to injure; a clerical error may be corrected") are apt in this case.44 Viewed against the
landmark case of Medel v. CA45, an award of interest of 20% per month on the amount due is clearly
excessive and iniquitous. It could not have been the intention of the trial court, not to mention that it is
way beyond what the plaintiff had prayed for below.
It is settled that other than in the case of judgments which are void ab initio for lack of jurisdiction, or
which are null and void per se, and thus may be questioned at any time, when a decision is final, even the
court which issued it can no longer alter or modify it, except to correct clerical errors or mistakes.46
The foregoing notwithstanding, of more important consideration in the case before us is the fact that it is
nowhere stated in the trial courts decision that the parties had in fact stipulated an interest on the amount
due to the respondent. Even granting that there was such an agreement, there is no finding by the trial
court that the parties stipulated that the outstanding debt of the petitioner would be subject to two
percent (2%) monthly interest. The most that the decision discloses is that the respondent demanded a
monthly interest of 2% on the amount outstanding.
Article 2209 of the Civil Code provides that "if the obligation consists in the payment of a sum of money,
and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall
be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is
six percent per annum." Pursuant to the said provision, then, since there is no finding of a stipulation by
the parties as to the imposition of interest, only the amount of 12% per annum47 may be awarded by the
court by way of damages in its discretion, not two percent(2%) per month, following the guidelines laid
down in the landmark case of Eastern Shipping Lines v. Court of Appeals,48 to wit:
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the
rate of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum.
No interest, however, shall be adjudged on unliquidated claims or damages except when or until the
demand can be established with reasonable certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the
time the demand is made, the interest shall begin to run only from the date the judgment of the court is
made (at which time the quantification of damages may be deemed to have been reasonably
ascertained).The actual base for the computation of legal interest shall, in any case, be on the amount
finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of
legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum
from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of credit.49 (Citations omitted)
As further clarified in the case of Sunga-Chan v. CA,50 a loan or forbearance of money, goods or credit
describes a contractual obligation whereby a lender or creditor has refrained during a given period from
requiring the borrower or debtor to repay the loan or debt then due and payable.51 Thus:
In Reformina v. Tomol, Jr., the Court held that the legal interest at 12% per annum under Central Bank (CB)
Circular No. 416 shall be adjudged only in cases involving the loan or forbearance of money. And for
transactions involving payment of indemnities in the concept of damages arising from default in the
performance of obligations in general and/or for money judgment not involving a loan or forbearance of

money, goods, or credit, the governing provision is Art. 2209 of the Civil Code prescribing a yearly 6%
interest. Art. 2209 pertinently provides:
"Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the
indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest
agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per annum."
The term "forbearance," within the context of usury law, has been described as a contractual obligation of
a lender or creditor to refrain, during a given period of time, from requiring the borrower or debtor to repay
the loan or debt then due and payable.
Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest, if proper, and the
applicable rate, as follows: The12% per annum rate under CB Circular No. 416 shall apply only to loans or
forbearance of money, goods, or credits, as well as to judgments involving such loan or forbearance of
money, goods, or credit, while the 6% per annum under Art. 2209 of the Civil Code applies "when the
transaction involves the payment of indemnities in the concept of damage arising from the breach or a
delay in the performance of obligations in general," with the application of both rates reckoned "from the
time the complaint was filed until the adjudged amount is fully paid." In either instance, the reckoning
period for the commencement of the running of the legal interest shall be subject to the condition "that the
courts are vested with discretion, depending on the equities of each case, on the award of interest."52
(Citations omitted and emphasis ours)
Pursuant, then, to Central Bank Circular No. 416, issued on July 29,1974,53 in the absence of a written
stipulation, the interest rate to be imposed in judgments involving a forbearance of credit shall be 12% per
annum, up from 6% under Article 2209 of the Civil Code. This was reiterated in Central Bank Circular No.
905, which suspended the effectivity of the Usury Law from January 1, 1983.54 But if the judgment refers
to payment of interest as damages arising from a breach or delay in general, the applicable interest rate is
6% per annum, following Article 2209 of the Civil Code.55 Both interest rates apply from judicial or
extrajudicial demand until finality of the judgment. But from the finality of the judgment awarding a sum of
money until it is satisfied, the award shall be considered a forbearance of credit, regardless of whether the
award in fact pertained to one, and therefore during this period, the interest rate of 12% per annum for
forbearance of money shall apply.56
But notice must be taken that in Resolution No. 796 dated May 16,2013, the Monetary Board of the Bangko
Sentral ng Pilipinas approved the revision of the interest rate to be imposed for the loan or forbearance of
any money, goods or credits and the rate allowed in judgments, in the absence of an express contract as
to such rate of interest. Thus, under BSP Circular No.799, issued on June 21, 2013 and effective on July 1,
2013, the said rate of interest is now back at six percent (6%), viz:
BANGKO SENTRAL NG PILIPINAS
OFFICE OF THE GOVERNOR
CIRCULAR NO. 799
Series of 2013
Subject: Rate of interest in the absence of stipulation
The monetary Board, in its Resolution No. 796 dated 16 May 2013,approved the following revisions
governing the rate of interest in the absence of stipulation in loan contracts, thereby amending Section 2
of Circular No. 905, Series of 1982:
Section 1. The rate of interest for the loan or forbearance of any money, goods or credits and the rate
allowed in judgments, in the absence of an express contract as to such rate of interest, shall be six percent
(6%) per annum.
Section 2. In view of the above, Subsection X305.1 of the Manual of Regulations for Banks and Sections
4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for Non-Bank Financial Institutions are hereby
amended accordingly.
This Circular shall take effect on 1 July 2013.
FOR THE MONETARY BOARD:
DIWA C. GUINIGUNDO
Officer-In-Charge
The award of attorneys fees is not proper.
Other than to say that the petitioner "unjustifiably failed and refused to pay the respondent," the trial court
did not state in the body of its decision the factual or legal basis for its award of attorneys fees to the
respondent, as required under Article 2208 of the New Civil Code, for which reason we have resolved to

delete the same. The rule is settled that the trial court must state the factual, legal or equitable
justification for its award of attorneys fees.57Indeed, the matter of attorneys fees cannot be stated only
in the dispositive portion, but the reasons must be stated in the body of the courts decision.58 This failure
or oversight of the trial court cannot even be supplied by the CA. As concisely explained in Frias v. San
Diego-Sison59:
Article 2208 of the New Civil Code enumerates the instances where such may be awarded and, in all cases,
it must be reasonable, just and equitable if the same were to be granted. Attorneys fees as part of
damages are not meant to enrich the winning party at the expense of the losing litigant. They are not
awarded every time a party prevails in a suit because of the policy that no premium should be placed on
the right to litigate. The award of attorneys fees is the exception rather than the general rule. As such, it is
necessary for the trial court to make findings of facts and law that would bring the case within the
exception and justify the grant of such award. The matter of attorneys fees cannot be mentioned only in
the dispositive portion of the decision. They must be clearly explained and justified by the trial court in the
body of its decision. On appeal, the CA is precluded from supplementing the bases for awarding attorneys
fees when the trial court failed to discuss in its Decision the reasons for awarding the same.1wphi1
Consequently, the award of attorneys fees should be deleted.60 (Citations omitted)
WHEREFORE, premises considered, the Decision dated April 30, 2008 of the Court of Appeals in CA-G.R. CV
No. 83811 is AFFIRMED with MODIFICATION. Petitioner S.C. Megaworld Construction and Development
Corporation is ordered to pay respondent Engr. Luis A. Parada, represented by Engr. Leonardo A. Parada,
the principal amount due of P816,627.00, plus interest at twelve percent (12%) per annum, reckoned from
judicial demand until June 30, 2013, and six percent (6%) per an own from July 1, 2013 until finality hereof,
by way of actual and compensatory damages. Thereafter, the principal amount due as adjusted by interest
shall likewise earn interest at six percent (6%) per annum until fully paid. The award of attorney's fees is
DELETED.
G.R. No. 186332

October 23, 2013

PLANTERS DEVELOPMENT BANK, Petitioner,

vs.
SPOUSES ERNESTO LOPEZ
We resolve the petition for review on certiorari1 filed by petitioner Planters Development Bank Planters
Bank) to challenge the July 30, 2007 amended decision2 and the February 5, 2009 resolution3 of the Court
of Appeals CA) in CA-G.R. CV No. 61358.
The Factual Antecedents
Sometime in 1983, the spouses Emesto and Florentina Lopez applied for and obtained a real estate loan in
the amount of 3,000,000.00 from Planters Bank. The loan was intended to finance the construction of a
four-story concrete dormitory building. The loan agreement4 dated May 18, 1983 provided that the loan is
payable for fourteen (14) years and shall bear a monetary interest at twenty-one percent (21%) per annum
(p.a.). Furthermore, partial drawdowns on the loan shall be based on project completion, and shall be
allowed upon submission of job accomplishment reports by the project engineer. To secure the payment of
the loan, the spouses Lopez mortgaged a parcel of land covered by Transfer Certificate of Title No. T16233.5
On July 21, 1983, the parties signed an amendment to the loan agreement. Accordingly, the interest rate
was increased to twenty-three percent (23%) p.a. and the term of the loan was shortened to three years.6
On March 9, 1984, the parties executed a second amendment to the loan agreement. The interest rate was
further increased to twenty-five percent (25%) p.a. The contract also provided that releases on the loan
shall be subject to Planters Banks availability of funds.7
Meanwhile, the Philippine economy deteriorated as the political developments in the country worsened.
The value of the peso plunged. The price of the materials and the cost of labor escalated.8 Eager to finish
the project, the spouses Lopez obtained an additional loan in the amount of P1,200,000.00 from Planters
Bank.
On April 25, 1984, they entered into a third amendment to the loan agreement. The amount of the loan
and the interest rate were increased to P4,200,000.00 and twenty-seven percent (27%) p.a., respectively.
Furthermore, the term of the loan was shortened to one year. The contract also provided that the
remaining loan shall only be available to the spouses Lopez until June 30, 1984.9 On the same date, the
spouses Lopez increased the amount secured by the mortgage to P4,200,000.00.10 On August 15, 1984,
Planters Bank unilaterally increased the interest rate to thirty-two percent (32%) p.a.11
The spouses Lopez failed to avail the full amount of the loan because Planters Bank refused to release the
remaining amount of P700,000.00. On October 13, 1984, the spouses Lopez filed against Planters Bank
complaint for rescission of the loan agreements and for damages with the Regional Trial Court (RTC) of
Makati City.12 They alleged that they could not continue the construction of the dormitory building
because Planters Bank had refused to release the remaining loan balance.

In defense, Planters Bank argued that the spouses Lopez had no cause of action. It pointed out that its
refusal to release the loan was the result of the spouses Lopezs violations of the loan agreement, namely:
(1) non-submission of the accomplishment reports; and (2) construction of a six-story building. As a
counterclaim, Planters Bank prayed for the payment of the overdue released loan in the amount of
P3,500,000.00, with interest and damages.13
On November 16, 1984, Planters Bank foreclosed the mortgaged properties in favor of third parties after
the spouses Lopez defaulted on their loan.14
The RTC Ruling
In a decision15 dated August 18, 1997, the RTC ruled in Planters Banks favor. It held that the spouses
Lopez had no right to rescind the loan agreements because they were not the injured parties. It maintained
that the spouses Lopez violated the loan agreement by failing to submit accomplishment reports and by
deviating from the construction project plans. It further declared that rescission could not be carried out
because the mortgaged properties had already been sold in favor of third parties. The dispositive portion
of the RTC decision provides:
IN VIEW OF THE FOREGOING, judgment is hereby rendered ordering the plaintiffs to pay the defendantbank the amount of Three Million Five Hundred Thousand Pesos (P3,500,000.00) plus the 27% stipulated
interest per annum commencing on June 22, 1994 until fully paid minus the proceeds of the foreclosed
mortgaged property in the auction sale.16 (emphasis ours) Subsequently, the RTC amended17 its decision,
upon Planters Banks filing of a Motion for Partial Reconsideration and/or Amendment of the Decision dated
August 18, 1997.18 It clarified that the interest rate shall commence on June 22, 1984, as proven during
trial, thus:
IN VIEW OF THE FOREGOING, judgment is hereby rendered ordering the plaintiffs to pay the defendantbank the amount of Three Million Five Hundred Thousand Pesos (P3,500,000.00) plus the 27% stipulated
interest per annum commencing on June 22, 1984 until fully paid minus the proceeds of the foreclosed
mortgaged property in the auction sale.19 (emphasis ours)
CA Ruling
The spouses Lopez died during the pendency of the case. On appeal to the CA, compulsory heirs Joseph
Wilfred, Joseph Gilbert and Marlyn, all surnamed Joven20 (respondents) substituted for the deceased
Florentina Lopez.
On November 27, 2006, the CA reversed the RTC ruling.21 It held that Planters Banks refusal to release
the loan was a substantial breach of the contract. It found that the spouses Lopez submitted
accomplishment reports. It gave weight to Engineer Edgard Fianzas testimony that he prepared
accomplishment reports prior to the release of the funds. Moreover, Planters Banks appraisal department
head, Renato Marayag, testified that accomplishment reports were a prerequisite for the release of the
loan.
It also declared that Planters Bank was estopped from raising the issue of the spouses Lopezs deviation
from the construction project. Planters Bank conducted several ocular inspections of the building from
1983 to 1987. Planters Bank continuously released partial amounts of the loan despite its knowledge of the
construction of a six-story building.
It further concluded that Planters Bank did not release the loan because the Development Bank of the
Philippines (DBP) lacked funds. Ma. Agnes Jopson Angeles, Planters Banks senior accountant for the
marketing group, testified that Planters Banks source of funds in real estate loans was DBP. According to
the CA, Angeles admitted DBPs non-availability of funds in her testimony. The dispositive ruling of the CA
decision provides:
WHEREFORE, the appealed Decision is MODIFIED in that the loan interest to be paid by plaintiff-appellant
to defendant-appellee is hereby reduced to 12% per annum computed from finality of this Decision until
full payment of the amount of P3.5 million, minus the proceeds of auction sale of the foreclosed mortgaged
property.22
Subsequently, the respondents filed a motion for reconsideration. They sought clarification of the
dispositive portion which does not declare the rescission of the loan and accessory contracts. On the other
hand, Planters Bank filed a Comment on March 2, 2007, praying for the reinstatement of the RTC ruling.
The CA re-examined the case and treated the comment as a motion for reconsideration. It affirmed its
previous decision but modified the dispositive portion, thus:
ACCORDINGLY, defendant-appellees motion for reconsideration is DENIED while plaintiffs-appellants
motion for reconsideration is PARTLY GRANTED. The dispositive part of Our Decision dated November 27,
2006 is hereby clarified and corrected to read as follows:
WHEREFORE, the appealed Decision is REVERSED and SET ASIDE. The loan agreement between the
parties, including all its accessory contracts, is declared RESCINDED.

Plaintiffs-appellants are ordered to return to defendant-appellee bank the amount of P2,885,830.56 with
interest of twelve percent (12%) per annum from the time this Decision becomes final and executory until
it is fully paid.
Defendant-appellee bank is ordered to convey and restore to plaintiffs-appellants the foreclosed
property.23(emphases and underscores supplied)
The CA also denied Planters Banks Motion for Reconsideration dated August 22, 2007, prompting it to file
the present petition.
The Petitioners Position
Planters Bank reiterates in its petition before this Court that the respondents had no cause of action. It
posits that the spouses Lopez violated the loan agreements for their failure to submit accomplishment
reports and by constructing a six-story building instead of a four-story building. It maintains that there was
no estoppel because only one year and twenty days have elapsed from the violation of the contract until
the spouses Lopezs filing of the complaint. It argues that there must be an unjustifiable neglect for an
unreasonable period of time for estoppel to apply. It also avers that even assuming that it breached the
contract, it was only a slight breach because onlyP700,000.00 of the P4,200,000.00 loan was not released.
Moreover, it highlights that it cannot convey the foreclosed properties because they were already sold to
third parties.24
Planters Bank also clarifies its date of receipt of the CA amended decision in a Manifestation dated March
13, 2009.25 It states that it received the amended decision on August 7, 2007, as evidenced by the
attached certifications from the Makati and Manila Central Post Offices.
The Respondents Position
In their Comments,26 the respondents reiterate the CAs arguments. They also assert that the amended
decision has already become final and executory due to Planters Banks belated filing of a motion for
reconsideration on August 22, 2007. They point out that Planters Bank unequivocably stated in the
pleadings that it received a copy of the amended decision on August 2, 2007. Furthermore, they aver that
Planters Banks motion for reconsideration is a second motion for reconsideration disallowed by the Rules
of Court. They highlight that Planters Banks comment to the respondents motion for reconsideration
sought the reinstatement of the RTC ruling. Consequently, the comment is Planters Banks first motion for
reconsideration.
The Issues
This case presents to us the following issues:
1) Whether the CAs amended decision dated July 30, 2007 is final and executory;
2) Whether the spouses Lopez violated the loan agreement;
a) Whether the spouses Lopez submitted accomplishment reports, and
b) Whether the spouses Lopez deviated from the construction project;
3) Whether Planters Bank substantially breached the loan agreement; and
4) Whether the amount of awards rendered by the CA is proper.
The Courts Ruling
We reverse the CAs decision.
The CAs amended decision dated July 30, 2007 is not yet final and executory
Section 13, Rule 13 of the Rules of Court provides that if service is made by registered mail, proof shall be
made by an affidavit of the person mailing of facts showing compliance with Section 7, Rule 13 of the Rules
of Court and the registry receipt issued by the mailing office. However, the presentation of an affidavit and
a registry receipt is not indispensable in proving service by registered mail. Other competent evidence,
such as the certifications from the Philippine Post Office, may establish the fact and date of actual service.
These certifications are direct and primary pieces of evidence of completion of service.27
We believe Planters Banks assertion that its motion for reconsideration dated August 22, 2007 was filed
on time. The Manila Central Post Offices certification states that the amended decision was only
dispatched from the Manila Central Post Office to the Makati Central Post Office on August 2, 2007.28 On
the other hand, the Makati Central Post Offices certification provides that Planters Banks actual receipt of
the decision was on August 7, 2007.29 These certifications conclusively show that Planters Banks counsel
received the amended decision on August 7, 2007 and not on August 2, 2007.

There is also no merit to the respondents argument that Planters Banks motion for reconsideration is
disallowed under Section 2, Rule 52 of the Rules of Court.30 We point out in this respect that there is a
difference between an amended judgment and a supplemental judgment. In an amended judgment, the
lower court makes a thorough study of the original judgment and renders the amended and clarified
judgment only after considering all the factual and legal issues. The amended and clarified decision is an
entirely new decision which supersedes or takes the place of the original decision. On the other hand, a
supplemental decision does not take the place of the original; it only serves to add to the original
decision.31
In the present case, the CA promulgated an amended decision because it re-examined its factual and legal
findings in its original decision. Thus, Planters Bank may file a motion for reconsideration. The amended
decision is an entirely new decision which replaced the CAs decision dated November 27, 2006.
In sum, the amended decision is not yet final and executory because Planters Bank filed a motion for
reconsideration on time; its filing is allowed by the Rules of Court.
The spouses Lopez submitted accomplishment reports
We see no reason to disturb the CAs finding that the spouses Lopez religiously submitted accomplishment
reports. The evidence on record32 shows that Engr. Fianza submitted accomplishment reports from
November 19, 1983 until June 9, 1984. Engr. Fianza also testified that he prepared these accomplishment
reports.33 His testimony is corroborated by the testimony of Marayag, Planters Banks appraisal
department head.
This latter testimony shows that the spouses Lopez indeed submitted accomplishment reports.
Planters Bank is estopped from opposing the spouses Lopezs deviation from the construction project
We also affirm the CAs finding that Planters Bank is estopped from opposing the spouses Lopezs
construction of a six-story building. Section 2, Rule 131 of the Rules of Court provides that whenever a
party has, by his own declaration, act, or omission, intentionally and deliberately led another to believe
that a particular thing is true, and to act upon such belief, he cannot, in any litigation arising out of such
declaration, act or omission, be permitted to falsify it.
The concurrence of the following requisites is necessary for the principle of equitable estoppel to apply: (a)
conduct amounting to false representation or concealment of material facts or at least calculated to
convey the impression that the facts are otherwise than, and inconsistent with, those which the party
subsequently attempts to assert; (b) intent, or at least expectation that this conduct shall be acted upon,
or at least influenced by the other party; and (c) knowledge, actual or constructive, of the actual facts.
Inaction or silence may under some circumstances amount to a misrepresentation, so as to raise an
equitable estoppel. When the silence is of such a character and under such circumstances that it would
become a fraud on the other party to permit the party who has kept silent to deny what his silence has
induced the other to believe and act on, it will operate as an estoppel. This doctrine rests on the principle
that if one maintains silence, when in conscience he ought to speak, equity will debar him from speaking
when in conscience he ought to remain silent.
The principle of equitable estoppel prevents Planters Bank from raising the spouses Lopezs violation of the
loan agreement. Planters Bank was already aware that the spouses Lopez were building six floors as early
as September 30, 1983. Records disclose that Planters Bank also conducted a series of ocular
inspections.35Despite such knowledge, the bank kept silent on the violation of the loan agreement as
Planters Bank still continued to release the loan in partial amounts to the spouses Lopez. As the CA
correctly pointed out, Planters Bank only raised this argument during trial a move that highly appears to
be an afterthought.
Planters Bank only committed a slight or casual breach of the contract
Despite our affirmation of the CAs factual findings, we disagree with the CAs conclusion that rescission is
proper. Planters Bank indeed incurred in delay by not complying with its obligation to make further loan
releases.36 Its refusal to release the remaining balance, however, was merely a slight or casual breach as
shown below. In other words, its breach was not sufficiently fundamental to defeat the object of the parties
in entering into the loan agreement. The well-settled rule is that rescission will not be permitted for a slight
or casual breach of the contract. The question of whether a breach of contract is substantial depends upon
the attending circumstances.37
The factual circumstances of this case lead us to the conclusion that Planters Bank substantially complied
with its obligation. To reiterate, Planters Bank released P3,500,000.00 of the P4,200,000.00 loan. Only the
amount ofP700,000.00 was not released. This constitutes 16.66% of the entire loan. Moreover, the
progress report dated May 30, 1984 states that 85% of the six-story building was already completed by the
spouses Lopez.38 It is also erroneous to solely impute the non-completion of the building to Planters Bank.
Planters Bank is not an insurer of the buildings construction. External factors, such as the steep price of
the materials and the cost of labor, affected the erection of the building. More importantly, the spouses
Lopez took the risk that the project would not be finished when they constructed a six-story building
instead of four-story structure.

Even assuming that Planters Bank substantially breached its obligation, the fourth paragraph of Article
1191 of the Civil Code expressly provides that rescission is without prejudice to the rights of third persons
who have acquired the thing, in accordance with Article 1385 of the Civil Code. In turn, Article 1385 states
that rescission cannot take place when the things which are the object of the contract are legally in the
possession of third persons who did not act in bad faith.
In the present case, the mortgaged properties had already been foreclosed. They were already sold to the
highest bidder at a public auction. We recognize that transferees pendente lite are proper, but not
indispensable, parties in this case, as they would, in any event, be bound by the judgment against Planters
Bank.39 However, the respondents did not overcome the presumption that the buyers bought the
foreclosed properties in good faith.40The spouses Lopez did not cause the annotation of notice of lis
pendens at the back of the title of the mortgaged lot.41 Moreover, the respondents did not adduce any
evidence that would show that the buyers bought the property with actual knowledge of the pendency of
the present case. Furthermore, the spouses Lopezs failure to pay the overdue loan made them parties in
default, not entitled to rescission under Article 1191 of the Civil Code.
The estate of Florentina Lopez shall pay Planters Bank the amount of P3,500,000.00 with 12% monetary
interest p.a. from June 22, 1984 until full payment of the obligation
Planters Bank and the spouses Lopez undertook reciprocal obligations when they entered into a loan
agreement. In reciprocal obligations, the obligation or promise of each party is the consideration for that of
the other. The mere pecuniary inability of one contracting party to fulfill an engagement does not
discharge the other contracting party of the obligation in the contract.42 Planters Banks slight breach
does not excuse the spouses Lopez from paying the overdue loan in the amount of P3,500,000.00. Despite
this finding, however, we cannot sustain the imposition of the interest rate in the loan contract.
We are aware that the parties did not raise this issue in the pleadings. However, it is a settled rule that an
appeal throws the entire case open for review once accepted by this Court. This Court has thus the
authority to review matters not specifically raised or assigned as error by the parties, if their consideration
is necessary in arriving at a just resolution of the case.43
In the present case, Planters Bank unilaterally increased the monetary interest rate to 32% p.a. after the
execution of the third amendment to the loan agreement. This is patently violative of the element of
mutuality of contracts. Our Civil Code has long entrenched the basic principle that the validity of or
compliance to the contract cannot be left to the will of one party.44
Even if we disregard the 32% p.a., the interest rate of 27% p.a. in the third amended agreement is still
excessive. In Trade & Investment Devt Corp. of the Phil. v. Roblett Industrial Construction Corp.,45 we
lowered the interest resulting charge for being excessive in the context of its computation period . We
equitably reduced the interest rate from 18% p.a. to 12% p.a. because the case was decided with finality
sixteen years after the filing of the complaint. We noted that the amount of the loan swelled to a
considerably disproportionate sum, far exceeding the principal debt.
A parallel situation prevails in the present case. Almost 29 years have elapsed since the filing of the
complaint in 1984. The amount of the principal loan already ballooned to an exorbitant amount
unwarranted in fact and in operation. While the Court recognizes the right of the parties to enter into
contracts, this rule is not absolute. We are allowed to temper interest rates when necessary. We have thus
ruled in several cases that when the agreed rate is iniquitous, it is considered as contrary to morals, if not
against the law. Such stipulation is void.46
The manifest unfairness caused to the respondents by this ruling and our sense of justice dictate that we
judiciously reduce the monetary interest rate. Our imposition of the lower interest rate is based on the
demands of substantial justice and in the exercise of our equity jurisdiction.
We thus equitably reduce the monetary interest rate to 12% p.a. on the amount due computed from June
22, 1984 until full payment of the obligation. We point out in this respect that the monetary interest
accrues under the terms of the loan agreement until actual payment is effected47 for the reason that its
imposition is based on the stipulation of the parties.48
In the present case, the lower courts found that the monetary interest accrued on June 22, 1984.
Incidentally, the lower courts also found that June 22, 1984 is also the spouses Lopezs date of default.
The estate of Florentina Lopez shall further be liable for compensatory interest at the rates of 12% p.a.
from June 22, 1984 until June 30, 2013 and 6% p.a. from July 1, 2013 until the finality of this Decision
With respect to the computation of compensatory interest, Section 1 of Bangko Sentral ng Pilipinas (BSP)
Circular No. 799, Series of 2013, which took effect on July 1, 2013, provides:
Section 1. The rate of interest for the loan or forbearance of any money, goods or credits and the rate
allowed in judgments, in the absence of an express contract as to such rate of interest, shall be six percent
(6%) per annum. [emphasis ours]
This provision amends Section 2 of Central Bank (CB) Circular No. 905-82, Series of 1982, which took effect
on January 1, 1983. Notably, we recently upheld the constitutionality of CB Circular No. 905-82 in

Advocates for Truth in Lending, Inc., et al. v. Bangko Sentral ng Pilipinas Monetary Board, etc.49 Section 2
of CB Circular No. 905-82 provides:
Section 2. 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 continue to be
twelve percent (12%) per annum. [emphasis ours]
Pursuant to these changes, this Court modified the guidelines in Eastern Shipping Lines, Inc. v. Court of
Appeals50 in the case of Dario Nacar v. Gallery Frames, et al.51 (Nacar). In Nacar, we established the
following guidelines:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi- contracts, delicts or quasi-delicts
is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on "Damages"
of the Civil Code govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the
rate of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 6% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum.
No interest, however, shall be adjudged on unliquidated claims or damages, except when or until the
demand can be established with reasonable certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code), but when such certainty cannot be so reasonably established at the
time the demand is made, the interest shall begin to run only from the date the judgment of the court is
made (at which time the quantification of damages may be deemed to have been reasonably ascertained).
The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of
legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per annum
from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of credit. And, in addition to the above, judgments that have become final and executory prior
to July 1, 2013, shall not be disturbed and shall continue to be implemented applying the rate of interest
fixed therein. [emphasis ours]
Since we declare void the monetary interest agreed upon by the parties, we impose a compensatory
interest of 12% p.a. which accrues from June 22, 1984 until June 30, 2013, pursuant to CB Circular No. 90582.52 As we have earlier stated, June 22, 1984 is the spouses Lopezs established date of default. In
recognition of the prospective application of BSP Circular No. 799, we reduce the compensatory interest of
12% p.a. to 6% p.a. from July 1, 2013 until the finality of this Decision. Furthermore, the interest due shall
earn legal interest from the time it is judicially demanded, pursuant to Article 2212 of the Civil Code.
The estate of Florentina Lopez shall further be liable for interest at the rate of 6% p.a. from the finality of
this decision until full payment of the obligation
Also, pursuant to the above-quoted Section 1 of BSP Circular No. 799, we impose an interest rate of 6%
p.a. from the finality of this Decision until the obligation is fully paid, the interim period being deemed
equivalent to a forbearance of credit.
Lastly, to prevent future litigation in the enforcement of the award, we clarify that the respondents are not
personally responsible for the debts of their predecessor. The respondents extent of liability to Planters
Bank is limited to the value of the estate which they inherited from Florentina Lopez.53 In our jurisdiction,
"it is the estate or mass of the property left by the decedent, instead of the heirs directly, that becomes
vested and charged with his rights and obligations which survive after his death."54To rule otherwise
would unduly deprive the respondents of their properties.
WHEREFORE, premises considered, the assailed amended decision dated July 30, 2007 and resolution
dated February 5, 2009 of the Court of Appeals are hereby REVERSED. Respondents Joseph Wilfred, Joseph
Gilbert and Marlyn, all surnamed Joven, are ordered to pay THREE MILLION FIVE HUNDRED THOUSAND
PESOS (1 3,500,000.00) with 12% monetary interest per annum commencing on June 22, 1984 until fully
paid; 12% compensatory interest per annum commencing on June 22, 1984 until June 30, 2013; 6%
compensatory interest per annum commencing on July 1 2013 until the finality of this Decision; and 6%
interest rate per annum commencing from the finality of this Decision until fully paid. The proceeds of the
foreclosed mortgaged property in the auction sale shall be deducted from the principal of the loan from the
time payment was made to Planters Bank and the remainder shall be the new principal from which the
computation shall thereafter be made. Furthermore, the respondents' liability is limited to the value of the
inheritance they received from the deceased Florentina Lopez.
G.R. No. 182209

October 3, 2012

LAND BANK OF THE PHILIPPINES, Petitioner,

vs.
EMILIANO R. SANTIAGO, JR., Respondent.
This is a Petition for Review on Certiorari1 seeking to annul and set aside the September 28, 2007
Decision2 and March 14, 2008 Resolution3 of the Court of Appeals in CA-G.R. SP No. 82467, which affirmed
the January 21, 2000 Decision4 of the Regional Trial Court of Cabanatuan City, Branch 23, sitting as a
Special Agrarian Court (SAC Branch 23 ), as modified by the January 28, 2004 Resolution5 of the Regional
Trial Court of Cabanatuan City, Branch 29 (SAC Branch 29) in Agrarian Case No. 125-AF.
The antecedents of this case, as culled from the records, are as follows:
Petitioner Land Bank of the Philippines (LBP) is a government financial institution6 designated under
Section 64 of Republic Act No. 66577 as the financial intermed iary of the agrarian reform program of the
government.8
Respondent Emiliano R. Santiago, Jr. (respondent) is one of the heirs of Emiliano F. Santiago (Santiago), the
registered owner of an 18.5615-hectare parcel of land (subject property) in Laur, Nueva Ecija, covered by
Transfer Certificate of Title (TCT) No. NT-60359.9
Pursuant to the governments Operation Land Transfer (OLT) Program under Presidential Decree No. 27,10
the Department of Agrarian Reform (DAR) acquired 17.4613 hectares of the subject property.11
In determining the just compensation payable to Santiago, the LBP and the DAR used the following formula
under Presidential Decree No. 27, which states:
For the purpose of determining the cost of the land to be transferred to the tenant- farmer pursuant to this
Decree, the value of the land shall be equivalent to two and one-half (2-1/2) times the average harvest of
three normal crop years immediately preceding the promulgation of this Decree.
and Executive Order No. 228, which reads:
Sec. 2. Henceforth, the valuation of rice and corn lands covered by P.D. No. 27 shall be based on the
average gross production determined by the Barangay Committee on Land Production in accordance with
Department Memorandum Circular No. 26, series of 1973 and related issuances and regulation of the
Department of Agrarian Reform. The average gross production per hectare shall be multiplied by two and a
half (2.5), the product of which shall be multiplied by Thirty-Five Pesos (P 35.00), the government support
price for one cavan of 50 kilos of palay on October 21, 1972, or Thirty One Pesos (P 31.00), the
government support price for one cavan of 50 kilos of corn on October 21, 1972, and the amount arrived at
shall be the value of the rice and corn land, as t he case may be, for the purpose of determining its cost to
the farmer and compensation to t he land owner.
The above formula in equation form is :
Land Value (LV) =

(Average Gross Production [AGP] x 2.5 Hectares x Government Support Price [GSP])

Using the foregoing formula, the land value of the subject property was pegged at 3,915 cavans of palay,
using 90 cavans of palay per year for the irrigated portion and 44.33 cavans of palay per year for the
unirrigated portio n, as the AGP per hectare in San Joseph, Laur, Nueva Ecija, as established by the
Barangay Committee on Land Production (BCLP), based on three normal crop years immediately preceding
the promulgation of Presidential Decree No. 27.12
As Santiago had died earlier on November 1, 1987,13 the LBP , in 1992, reserved in trust for his heirs the
amount of One Hundred Thirty-Five Thousand Four Hundred Eighty-Two Pesos and 12/100 (P 135,482.12),
as just compensation computed by LBP and DAR using the above formula with P 35.00 as the GSP per
cavan of palay for the year 1972 under Executive Order No. 228.14
The land valuation of the subject property is broken down as follows15:
This amount was released to Santiagos heirs on April 28, 1998,18 pursuant to this Courts decision in Land
Bank of the Philippines v. Court of Appeals.19 LBP, on May 21, 1998 and June 1, 1998, also paid the heirs
the sum of P353,122.62, representing the incremental interest of 6% on the preliminary compensation,
compounded annually for 22 years,20 pursuant to Provincial Agrarian Reform Council (PARC) Resolution No.
94-24-121 and DAR Administrative Order (AO) No. 13, series of 1994.22
However, on November 20, 1998, respondent, as a co-owner and administrator of the subject property,
filed a petition before the RTC of Cabanatuan City, Branch 23, acting as a Special Agrarian Court (SAC
Branch 23), for the "approval and appraisal of just compensation" due on the subject property. This was
docketed as SAC Case No. 125-AF.23
While respondent was in total agreement with the land valuation of the subject property at 3,915 cavans of
palay, he contended that the 1998 GSP per cavan, which was P 400.00, should be used in the computation

of the just compensation for the subject property. Moreover, the incremental interest of 6% compounded
annually, as per PARC Resolution No. 94-24-1, should be imposed on the principal amount from 1972 to
1998 or for 26 years.24
On January 21, 2000, the SAC Branch 23 rendered its Decision, the dispositive portion of which reads:
WHEREFORE, the defendant Land Bank of the Philippines is hereby ordered to pay the plaintiff in the sum
of P 1,039,017.88 representing the balance of the land valuation of the plaintiff with legal interest at 12 %
from the yea r 1998 until the same is fully paid subject to the modes of compensation under R.A. No.
6657.25
The SAC Branch 23 arrived at its ruling, ratiocinating in this wise:
The defendant LBP arrived at this aforesaid amount by pegging the price at the rate of P 35.00 per cavan,
which was the government support price GSP in 1972, pursuant to E.O. No. 228.
With the GSP of palay in 1992 being already P 300.00 per cavan x x x, it is ver y clear, the n, that the
respondent was denied the true, current actual money equivalence of the land valuation of 3,915 cavans
of palay mutually agreed upon by the parties.
Aptly, plaintiff had been s hort-paid. x x x.
xxxx
The sum of P 135,482.12 as the money value o f 3,915 ca vans did not, therefore, amount to "just
compensation" to respondent since what was due to him of 3,915 cavans was diluted when t he defendant
LBP gave a money value at the rate of P 35.00 per cavan, which was a far cry from the pre vailing true and
actual GSP o f P 300.00 per cavan in 1992 x x x.26
Discontented with the ruling, respondent filed a Motion for Reconsideration27 of the SACs decision on
February 16, 2000, arguing that the GSP per cavan of palay should be computed at P 400.00 instead of P
300.00 because payment of the preliminary compensation was made by LBP in 1998 and not in 1992.
Respondent likewise ins isted that in addition to the 12% legal interest ordered by the SAC, a compounded
annual interest of 6% of the principal amount should be awarded to them pursuant to the PARC Resolution
and DAR AO No. 13. Furthermore, respondent asked that the DAR be ordered to return to him the
unacquired portion of the subject property.28
On February 10, 2000, Judge Andres R. Amante, Jr., the presiding judge of SAC Branch 23, inhibited himself
from resolving the motion for reconsideration,29 thus, the case was re-raffled to the RTC of Cabanatuan
City, Branch 29, acting as Special Agrarian Court (SAC Branch 29).30
On January 28, 2004, the SAC Branch 29 issued a Resolution, with the following fallo:
WHEREFORE, the decision is reconsidered as follows:
1. The defendant Land Bank of the Philippines is hereby ordered to pay the petitioner the sum of
P1,039,017.88 representing the land valuation of the petitioner with legal interest of six percent (6%) per
annum beginning year 1998 until the same is fully paid subject to the modes of compensation under
Republic Act No. 6657.
2. The Land Bank of the Philippines is ordered to return to the petitioner the unacquired area embraced
and covered by TCT No. NT-60359 after segregating the area taken by the DAR.31
In denying respondents claim over the 6% compounded annual interest, the SAC Branch 29 explained that
the purpose of the compounded interest was to compensate the landowners for unearned interest, as their
money would have earned if they had been paid in 1972, when the GSP for a cavan of palay was still at P
35.00. The SAC Branch 29 said that since a higher GSP was already used in the computation of the subject
propertys land value, there was no more justification in adding any compounded interest to the principal
amount.32
The SAC Branch 29 also lowered the legal interest from 12% to 6% on the ground that respondents claim
cannot be considered as a forbearance of money. Furthermore, since the government only acquired 17.4
hectares of the subject property, it ordered LBP to return the unacquired portion to respondent.33
Respondent filed a Petit io n for Review before this Court, questioning the SAC Branch 29s ruling on his
non-entitlement to the incremental interest of 6%. The case, entitled Heirs of Emiliano F. Santiago,
represented by Emiliano R. Santiago, Jr. as administrator of the land covered by TCT No. NT 60354 v.
Republic of the Philippines, represented by the Department of Agrarian Reform, and Land Bank of the
Philippines, and docketed as G.R. No. 162055, was, however, denied by this Court on March 31, 2004, for
lack of merit.34
Meanwhile, LBP filed a Petition for Review35 before the Court of Appeals, questioning the just
compensation fixed and the legal interest granted by the SAC Branch 23 in its January 21, 2000 Decision
and by the SAC Branch 29 in its January 28, 2004 Resolution.

On September 28, 2007, the Court of Appeals, in CA-G.R. SP No. 82467, affirmed the SAC Branch 23s
Decision as modified by the SAC Branch 29s Resolution. The dispositive portion of that Decision reads:
WHEREFORE, based on the fore going, the instant petition for review filed pursuant to Section 60 of
Republic Act No. 6657 is hereby DISMISSED. ACCORDINGLY, the Decision dated January 21, 2000 of the
Regional Trial Court of Cabanatuan City, Branch 23, sitting as Special Agrarian Court, as modified by the
Resolution dated January 28, 2004 of the Regional Trial Court of Cabanatuan City, Branch 29, is hereby
AFFIRM ED.36
The Court of Appeals held that the formula in DAR AO No. 13 could no longer be applied since the
Provincial Agrarian Reform Ad judicator (PARAD) had already been using a higher GSP. Since the formula
could no longer be applied, as a higher GSP was used in the computation of respondents just
compensation, the Court of Appeals ruled that he was no longer entitled to the incremental interest of
6%.37
The LBP38 moved to reconsider the foregoing decis ion on October 25, 2007. However, the Court of
Appeals, find ing no new argument worthy of its reconsideration, denied such motion in a Resolution dated
March 14, 2008.
The LBP is now before us, claiming that its petition should be allowed for the following reason:
THE COURT OF APPEALS COMMI TTED A S ERIOUS ERROR OF LAW IN AFFIRMING THE JANUARY 21, 2000
DECISION OF THE REGIONAL TRIAL COURT (RTC) OF CABANATUAN CITY, BR. 23, SITTING AS SPECIAL
AGRARIAN COURT (AS M ODIFI ED BY THE RESOLUTION DATED JANUARY 28, 2004 OF THE RTC OF CABAN
ATUAN CITY, BRANCH 29) WHICH FIXED THE JUST COMPENSATION OF SUBJECT PROPERTIES ACQUIRED
UNDER P.D. 27 WITHOUT OBS ERVING THE PRESCRI BED FORM ULA UNDER P.D. 27 AND E.O. 228.39
Issues
The following are the issues propounded by the LBP for this Courts Resolution:
1. WHETHER OR NOT THE COURT OF APPEALS CAN DISREGARD THE FORMULA PRESCRIBED UNDER P.D. 27
AND E.O. 228 IN FIXING THE JUST COMPENSATION OF SUBJECT P.D. 27-ACQUIRED LAN D.
2. WHETHER OR NOT THE COURT OF APPEALS ERRED IN AFFIRMING THE GRAN T BY THE COURT A QUO O F
6% INTERES T TO THE RESPONDENT. 40
1st Issue
Computation of Just Compensation
LBP has been consistent in its position that the formula prescribed in Presidential Decree No. 27 and
Executive Order No. 228 is the only formula that should be applied in the computation of the valuation of
lands acquired under Presidential Decree No. 27. In support of its position, LBP cites this Courts ruling in
Gabatin v. Land Bank of the Philippines,41 wherein we held that the GSP should be pegged at the time of
the taking of the properties, which in this case was deemed effected on October 21, 1972, the effectivity
date of Presidential Decree No. 27.
This Court notes that even before respondent filed a petition for the judicial determination of the just
compensation due him for the subject property before the SAC Branch 23 on November 20, 1998, Republic
Act No. 6657, otherwise known as the Comprehensive Agrarian Reform Law of 1988, already took effect on
June 15, 1988.
The determination of the just compensation therefore in this case depends on the valuation formula to be
applied: the formula under Presidential Decree No. 27 and Executive Order No. 228 or the formula under
Republic Act No. 6657? This Court finds the case of Meneses v. Secretary of Agrarian Reform42 applicable
insofar as it has determined what formula should be used in computing the just compensation for property
expropriated under Presidential Decree No. 27 under the factual milieu of this case, viz:
Respondent correctly cited the case of Gabatin v. Land Bank of the Philippines, where the Court ruled that
"incomputing the just compensation for expropriation proceedings, it is the value of the land at the time of
the taking or October 21, 1972, the effectivity date of P.D. No. 27, not at the time of the rendition of
judgment, which should be take n into consideration. " Under P.D. No. 27 and E.O. No. 228, the following
formula is used to compute the land value for palay:
LV (land value) = 2.5 x AGP x GSP x (1.06)n
It should also be pointed out, however, that in the more recent case of Land Bank of the Philippines vs.
Natividad, the Court categorically ruled: "the seizure of the landholding did not take place on the date of
effectivity of P.D. No. 27 but would take effect on the payment of just compensation." Under Section 17 of
R.A. No. 6657, the following factors are considered in de termining just compensation, to wit:
Sec. 17. Determination of Just Compensation. - In determining just compensation, the cost of acquisition of
the land, the current value of like properties , its nature, actual use and income, the sworn valuation by the

owner, the tax de clarations , and the assessment made by government assessors shall be considered. The
social and economic benefits contributed by the farmers and the farm-workers and by the Government to
the property as well as the non-payment of taxes or loans secured from any government financing
institution on the said land shall be considered as additional factors to determine its valuation.
Consequently, the question that arises is which o f these two rulings should be applied?
Under the circumstances of this case, the Court deems it more equitable to apply the ruling in the
Natividad case. In said case, the Court applied the provisions of R.A. No. 6657 in computing just
compensation for property expropriated under P.D. No. 27, stating, viz:
Land Bank's contention that the property was acquired for purposes of agrarian reform on October 21,
1972, the time of the effectivity of PD 27, ergo just compensation should be based on the value of the
property as of that time and not at the time of possession in 1993, is like wise erroneous. In Office of the
President, Malacaang, Manila v. Court of Appeals, we ruled that the seizure of the land holding did not
take place on the date of effectivity of PD 27 but would take effect on the payment of just compensation.
Under the factual circumstances of this case, the agrarian reform process is still incomplete as the just
compensation to be paid private respondents has yet to be settled. Considering the pass age of Republic
Act No. 6657 (RA 6657) before the completion of this process, the just compensation should be determined
and the process concluded under the said law. Indeed, RA 6657 is the applicable law, with PD 27 and EO
228 having only suppletory effect, conformably with our ruling in Paris v. Alfeche.
xxxx
It would certainly be inequitable to determine just compensation based on the guideline provided by PD 27
and EO 228 considering the DAR's failure to determine the just compensation for a considerable length of
time. That just compensation should be determined in accordance with RA 6657, and not PD 27 or EO 228,
is especially imperative considering that just compensation should be the full and fair equivalent of the
property taken from its owner by the expropriator, the equivalent being real, substantial, full and ample.43
(Emphases supplied, citations omitted.)
The ruling in Land Bank of the Philippines v. Natividad44 was likewise applied in Land Bank of the
Philippines v. Heirs of Angel T. Domingo,45 when the landowner Domingo filed a Petition for the
Determination and Payment of Just Compensation despite his receipt of LBPs partial payment. This Court
held that since the amount of just compensation to be paid Domingo had yet to be settled, then the
agrarian reform process was still incomplete; thus, it should be completed under Republic Ac t No. 6657.
Based on the foregoing, when the agrarian reform process is still incomplete as the just compensation due
the landowner has yet to be settled, such just compensation should be determined and the process
concluded under Republic Act No. 6657.46
Elucidating on this pronouncement, this Court, in Land Bank of the Philippines v. Puyat,47 held
In the case at bar, respondents title to the property was cancelled and awarded to farmer-beneficiaries on
March 20, 1990. In 1992, Land Bank approved the initial valuation for the just compensation that will be
given to respondents. Both the taking of respondents property and the valuation occurred during the
effectivity of RA 6657. When t he acquisition process under PD 27 remains incomplete and is overtaken by
RA 6657, the process should be completed under RA 6657, with PD 27 and EO 228 having suppletory effect
only. This means that PD 27 applies only insofar as there are gaps in RA 6657; where RA 6657 is sufficient,
PD 27 is superseded. Among the matters where RA 6657 is sufficient is the determination of just
compensation. In Section 17 thereof, the legislature has provided for the factors that are determinative of
just compensation. Petitioner cannot insist on applying PD 27 which would render Section 17 of RA 6657
inutile. ( Emphases ours, citation omitted.)
Similarly, in the case before us, the emancipation patents were issued to the farmer-beneficiaries from
1992 to 1994. While the preliminary compensation of P 135,482.12 was reserved in trust at LBP for the
heirs of Santiago in 1992, this amount was not received by the heirs until 1998, as its release, pending the
final determination of the land valuation, became the subject of a petition in this Court in Land Bank of the
Philippines v. Court of Appeals.48Like in the case cited above, both the taking and the valuation of the
subject property occurred after Republic Ac t No. 6657 had already become effective. Until now, the issue
of just compensation for the subject property has not been settled and the process has yet to be
completed; thus, the provisions of Republic Act No. 6657 shall apply.
Section 17 of Republic Ac t No. 6657 or the Comprehensive Agrarian Reform Law of 1988 provides:
SEC. 17. Determination of Just compensation. - In determining just compensation, the cost of acquisition of
the land, the current value of like properties, its nature, actual use and income, the sworn valuation by the
owner, the tax declarations, and the assessment made by government assessors shall be considered. The
social and economic benefits contributed by the farmers and the farm workers and by the Government to
the property as well as the non-payment of taxes or loans secured from any government financing
institution on the said land shall be considered as additional factors to determine its valuation.

This Court is not unaware of the new agrarian reform law, Republic Act No. 9700 or the CARPER Law,
entitled "An Act Strengthening the Comprehensive Agrarian Reform Program (CARP), Extending the
Acquisition and Distribution of all Agricultural Lands, Instituting Necessary Reforms, Amending for the
Purpose Certain Provisions of Republic Act No. 6657, Otherwise Known as the Comprehensive Agrarian
Reform Law of 1988, as amended, and Appropriating Funds Therefor," passed by the Congress on July 1,
2009,49 further amending Republic Act No. 6657, as amended.
That this case, despite the new law, still falls under Section 17 of Republic Ac t No. 6657 is supported even
by Republic Act No. 9700, which states that "previously acquired lands wherein valuation is subject to
challenge shall be completed and resolved pursuant to Section 17 of Republic Act No. 6657, as amended,"
viz:
Section 5. Section 7 of Republic Act No. 6657, as amended, is hereby further amended to read as follows:
SEC. 7. Priorities. - The DAR, in coordination with the Presidential Agrarian Reform Council (P ARC) shall
plan and pro ram the final acquisition and distribution of all remaining unacquired and undistributed
agricultural lands from the effectivity o f this Ac t until June 30, 2014. Lands shall be acquired and
distributed as follows:
Phase One : During t he five (5)-year extension period hereafter all remaining lands above fifty (50)
hectares shall be covered for purposes of agrarian reform upon the effectivity of this Act. All private
agricultural lands of landowners with aggregate land holdings in excess of fifty (50) hectares which have
already been subjected to a notice of coverage issued on or before December 10, 2008; rice and corn
lands under Presidential Decree No. 27; all idle or abandoned lands; all private lands voluntarily offered by
the owners for agrarian reform: x x x Provided, furthermore, That al l previously acquired lands where in
valuation is subject to challenge by landowners s hall be completed and finally resolved pursuant to
Section 17 of Republic Act No. 6657, as amended: x x x. (Emphases supplied.)
Section 7 of Republic Act No. 9700, further amending Section 17 of Republic Ac t No. 6657, as amended,
reads:
Section 7. Section 17 of Republic Act No. 6657, as amended, is hereby further amended to read as follows:
SEC. 17. Determination of Just Compensation. In determining just compensation, the cost of acquisition of
the land, the value of the standing crop, the current value of like properties, its nature, actual use and
income, the sworn valuation by the owner, the tax declarations, the assessment made by government
assessors, and seventy percent (70%) of t he zonal valuation of the Bureau of Internal Revenue (BIR),
translated into a basic formula by t he DAR shall be considered, subject to the final decision of the proper
court. The social and economic benefits contributed by the farmers and the farm workers and by the
Government to the property as well as the nonpayment of taxes or loans secured from any government
financing institution on the said land shall be considered as additional factors to determine its valuation.
(Emphases supplied; further amendments made to Section 17 of R.A. N o. 6657, as amended, are
italicized.)
The foregoing shows that the Section 17 referred to in Section 5 of Republic Act No. 9700 is the old Section
17 under Republic Act No. 6657, as amended; that is, prior to further amendment by Republic Ac t No.
9700.
A reading of the provisions of Republic Ac t No. 9700 will readily show that the old provisions, under
Republic Act No. 6657, are referred to as Sections under "Republic Act No. 6657, as amended," as
distinguished from "further amendments" under Republic Act No. 9700.
DAR AO No. 02-09, the Implementing Rules of Republic Act No. 9700, which DAR formulated pursuant to
Section 3150 of Republic Act No. 9700, makes the above distinction even clearer, to wit:
VI. Transitory Provision
With respect to cases where the Master List of ARBs has been finalized on or before July 1, 2009 pursuant
to Administrative Order No. 7, Series of 2003, the acquisition and distribution of landholdings shall
continue to be processed under the provisions of R.A. No. 6657 prior to its amendment by R.A. No. 9700.
However, with respect to land valuation, all Claim Folders received by LBP prior to July 1, 2009 shall be
valued in accordance with Section 17 of R.A. No. 6657 prior to its amendment by R.A. No. 9700. (Emphasis
supplied.)
Thus, DAR AO No. 02-09 authorizes the valuation of lands in accordance with the old Section 17 of Republic
Act No. 6657, as amended (prior to further amendment by Republic Act No. 9700), so long as the claim
folders for such lands have been received by LBP before its amendment by Republic Act No. 9700 in
2009.51
2nd Issue
Imposition of 6% Legal Interest

All the courts a quo imposed a legal interest on the just compensation due respondent, albeit the SAC
Branch 29 lowered it from 12% to 6% per annum.
LBP argues that DARAO No. 13, which provides for an incremental interest of 6%, compounded annually,
should be the governing rule when it comes to the grant of interest.52
Respondent on the other hand, prays that the original award of 12% interest be reinstated as the
unreasonable delay in the payment of his just compensation constitutes forbearance of money.53
This Court notes that the award of 6% legal interest was not given under DAR AO No. 13, as the courts a
quo explicitly stated that DARAO No. 13 was not applicable, albeit citing a n incorrect reason, i.e., that this
was because a higher GSP was already used. As we have discussed above, "the law and jurisprudence on
the determination of just compensation of agrarian lands are settled,"54 and the courts below deviated
from them when they simply used a higher GSP in the computation of respondents just
compensation.1wphi1
The Court has allowed the grant of interest in expropriation cases where there is delay in the payment of
just compensation.55 In fact, the interest imposed in case of delay in payments in agrarian cases is 12%
per annum and not 6%56 as "the imposition x x x is in the nature of damages for delay in payment which
in effect makes the obligation on the part of the government one of forbearance."57
Quoting Republic v. Court of Appeals58 this Court, in Land Bank of the Philippines v. Rivera,59 held :
The constitutional limitation of "just compensation" is considered to be the sum equivalent to the market
value of the property, broadly described to be the price fixed by the seller in open market in the usual and
ordinary course of legal action and competition or the fair value of the property as between one who
receives, and one who desires to sell, if fixed at the time of the actual taking by the government. Thus, if
property is taken for public use before compensation is deposited with the court having jurisdiction over
the case , the final compensation must include interest on its jus t value to be computed from the time the
property is taken to the time when compensation is actually paid or deposited with the court. In fine ,
between the taking of the property and the actual payment, legal interests accrue in order to place the
owner in a position as good as (but not better than) the position he was in before the taking occurred.
The Bulacan trial court, in its 1979 decision, was correct in imposing interest on the zonal value of the
property to be computed from the time petitioner instituted condemnation proceedings and "took" the
property in September 1969. This allowance of interest on the amount found to be the value of the
property as of the time of the taking computed, being an effective forbearance, at 12% per annum should
help eliminate the issue of the constant fluctuation and inflation of the value of the currency over time. 60
(Citation omitted, emphasis in the original.)
The Court, in Republic, recognized that "the just compensation due to the landowners for their
expropriated property amounted to an effective forbearance on the part of the State."61 In fixing the
interest rate at 12%, it followed the guidelines on the award of interest that we enumerated in Eastern
Shipping Lines, In c. v. Court of Appeals,62 to wit:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts
is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on "Damages"
o f the Civil Code govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the
rate of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing. Fur t her
more, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence
of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial
or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at t he discretion of the court at the rate of 6% per annum.
N o interest, however, shall be adjudged on unliquidated claims or damages except when or until the
demand can be established with reasonable certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extra
judicially (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 d ate the judgment o f the court is made
(at which time the quantification of damages ma y 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.63 (Citations omitted.)

This Court therefore deems it proper to impose a 12% legal interest per annum, computed from the date of
the "taking" of the subject property on the just compensation to be determined by the SAC, due to
respondent, less whatever he and his co-owners had already received.
Rem and of the Case
Given that the only factor considered by the SAC in the determination of just compensation was the
changing government support price for a cavan of palay, this Court is constrained to remand the case to
the SAC Branch 29 for the reception of evidence and determination of just compensation in accordance
with Section 17 of Republic Act No. 665764 and DAR AO No. 02-09 dated October 15, 2009, the latest DAR
issuance on fixing just compensation.65
Guidelines in the Remand of the Case
In Land Bank of the Philippines v. Heirs of Salvador Encinas and Jacoba Delgado,66 we said that "the taking
of private lands under the agrarian reform program partakes of the nature of an expropriation proceeding."
Thus, the SAC is "reminded to adhere strictly to the doctrine that just compensation must be valued at the
time of taking"67and not at the time of the rendition of judgment.68
In the same case, this Court also required the trial court to consider the following factors as enumerated in
Section 17 of Republic Ac t No. 6657, as amended :
(1) the acquisition cost of the land ; (2) the current value of the properties; (3) its nature, actual use, and
income ; (4) the sworn valuation by the owner; (5) the tax declarations ; (6) the assessment made by
government assessors; (7) the social and economic benefits contributed by the farmers and the
farmworkers, and by the government to the property; and (8) the non-payment of taxes or loans secured
from any government financing institution on the said land, if any.69
It is stressed that the foregoing factors, and the formula as translated by the DAR in its implementing
rules, are mandatory and not mere guides that the SAC may disregard.70 This Court has held:
While the de termination o f just compensation is essentially a judicial function vested in the RTC acting as
a SAC, the judge cannot abuse his discretion by not taking into full consideration the factors specifically
identified by law and implementing rules. SACs are not at liberty to disregard the formula laid down by the
DAR, because unless an administrative order is declared invalid, courts have no option but to apply it. The
SAC cannot ignore, without violating the agrarian law, the formula provided by the DAR for the
determination of just compensation.71 (Emphasis in the original, citation omitted.)
WHEREFORE, premises considered, the petition is DENIED insofar as it seeks to have the Land Bank of the
Philippines valuation of the subject property sustained. The assailed September 28, 2007 Decision and
March 14, 2008 Resolution of the Court of Appeals in CA-G.R. SP No. 82467 are REVERSED and SET ASIDE
for lack of factual and legal basis. Agrarian Case No. 125-AF is REMANDED back to the Regional Trial Court
of Cabanatuan City, Branch 29, to determine the just compensation due Emiliano R. Santiago, Jr., less
whatever payments he and his co-owners had received, strictly in accordance with the guidelines in this
Decision; Section 17 of Republic Act No. 6657, as amended; and Department of Agrarian Reform
Administrative Order No. 02-09 dated October 15, 2009.
G.R. No. 194201

November 27, 2013

SPOUSES BAYANI H. ANDAL AND GRACIA G. ANDAL, Petitioners,

vs.
PHILIPPINE NATIONAL BANK REGISTER OF DEEDS OF BATANGAS CITY JOSE C. CORALES, Respondents.
DECISION
PEREZ, J.:
Before the Court is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court seeking to
partially set aside the Decision,2 dated 30 March 2010, and the Resolution,3 dated 13 October 2010, of the
Court of Appeals (CA) in CA-G.R. CV No. 91250. The challenged Decision dismissed the appeal of herein
respondent Philippine National Bank (respondent bank) and affirmed the decision of the Regional Trial
Court (RTC), Branch 84, Batangas City with the modification that the interest rate to be applied by
respondent bank on the principal loan obligation of petitioners Spouses Bayani H. Andal and Gracia G.
Andal (petitionersspouses) shall be 12% per annum, to be computed from default.
As found by the CA, the facts of this case are as follows:
x x x on September 7, 1995, [petitioners-spouses] obtained a loan from [respondent bank] in the amount
ofP21,805,000.00, for which they executed twelve (12) promissory notes x x x [undertaking] to pay
[respondent bank] the principal loan with varying interest rates of 17.5% to 27% per interest period. It was
agreed upon by the parties that the rate of interest may be increased or decreased for the subsequent

interest periods, with prior notice to [petitioners-spouses], in the event of changes in interest rates
prescribed by law or the Monetary Board x x x, or in the banks overall cost of funds.
To secure the payment of the said loan, [petitioners-spouses] executed in favor of [respondent bank] a real
estate mortgage using as collateral five (5) parcels of land including all improvements therein, all situated
in Batangas City and covered by Transfer Certificate of Title (TCT) Nos. T-641, T-32037, T-16730, T-31193
and RT 363 (3351) of the Registry of Deeds of Batangas City, in the name of [petitioners-spouses].
Subsequently, [respondent bank] advised [petitioners-spouses] to pay their loan obligation, otherwise the
former will declare the latters loan due and demandable. On July 17, 2001, [petitioners-spouses] paid
P14,800,000.00 to [respondent bank] to avoid foreclosure of the properties subject of the real estate
mortgage. Accordingly, [respondent bank] executed a release of real estate mortgage over the parcels of
land covered by TCT Nos. T-31193 and RT-363 (3351). However, despite payment x x x, [respondent bank]
proceeded to foreclose the real estate mortgage, particularly with respect to the three (3) parcels of land
covered by TCT Nos. T-641, T-32037 and T-16730 x x x.
x x x [A] public auction sale of the properties proceeded, with the [respondent bank] emerging as the
highest and winning bidder. Accordingly, on August 30, 2002, a certificate of sale of the properties involved
was issued. [Respondent bank] consolidated its ownership over the said properties and TCT Nos. T-52889,
T-52890, and T-52891 were issued in lieu of the cancelled TCT[s] x x x. This prompted [petitioners-spouses]
to file x x x a complaint for annulment of mortgage, sheriffs certificate of sale, declaration of nullity of the
increased interest rates and penalty charges plus damages, with the RTC of Batangas City.
In their amended complaint, [petitioners-spouses] alleged that they tried to religiously pay their loan
obligation to [respondent bank], but the exorbitant rate of interest unilaterally determined and imposed by
the latter prevented the former from paying their obligation. [Petitioners-spouses] also alleged that they
signed the promissory notes in blank, relying on the representation of [respondent bank] that they were
merely proforma [sic] bank requirements. Further, [petitioners-spouses] alleged that the unilateral increase
of interest rates and exorbitant penalty charges are akin to unjust enrichment at their expense, giving
[respondent bank] no right to foreclose their mortgaged properties. x x x.
xxxx
On August 27, 2004 [respondent bank] filed its answer, denying the allegations in the complaint. x x x
[respondent bank] alleged that: the penalty charges imposed on the loan was expressly stipulated under
the credit agreements and in the promissory notes; although [petitioners-spouses] paid to [respondent
bank] P14,800,000.00 on July 10, 2001, the former was still indebted to the latter in the amount of
P33,960,633.87; assuming arguendo that the imposition was improper, the foreclosure of the mortgaged
properties is in order since [respondent banks] bid in the amount of P28,965,100.00 was based on the
aggregate appraised rates of the foreclosed properties. x x x4
After trial, the RTC rendered judgment5 in favor of petitioners-spouses and against respondent bank,
ordering that:
1. The rate of interest should be reduced as it is hereby reduced to 6% in accordance with Article 2209 of
the Civil Code effective the next 30, 31 and 180 days respectively from the date of the twelve (12)
promissory notes x x x covered by the real estate x x x mortgages, to be applied on a declining balance of
the principal after the partial payments of P14,800,00.00 (paid July 17, 2001) and P2,000,000.006
(payments of P300,000.00 on October 1, 1999, P1,800,000.00 as [of] December 1, 1999, P700,000.00 [on]
January 31, 2000) per certification of [respondent bank] to be reckoned at (sic) the dates the said
payments were made, thus the corrected amounts of the liability for principal balance and the said 6%
charges per annum shall be the new basis for the [petitioners-spouses] to make payments to the
[respondent bank] x x x which shall automatically extinguish and release the mortgage contracts and the
outstanding liabilities of the [petitioners-spouses]; [respondent bank] shall then surrender the new transfer
certificates of title x x x in its name to the [c]ourt x x x, [c]anceling the penalty charges.
xxxx
3. Declaring as illegal and void the foreclosure sales x x x, the Certificates of Sales and the consolidation of
titles of the subject real properties, including the cancellation of the new Transfer Certificates of Title x x x
in the name of the [respondent] bank and reinstating Transfer Certificates of Title Nos. T-641, T-32037 and
T-16730 in the names of the [petitioners-spouses]; the latter acts to be executed by the Register of Deeds
of Batangas City.7
The foregoing disposition of the RTC was based on the following findings of fact:
As of this writing the [respondent] bank have (sic) not complied with the said orders as to the interest rates
it had been using on the loan of [petitioners-spouses] and the monthly computation of interest vis a vis
(sic) the total shown in the statement of account as of Aug 30, 2002. Such refusal amounts to suppression
of evidence thus tending to show that the interest used by the bank was unilaterally increased without the
written consent of the [petitioners-spouses]/borrower as required by law and Central Bank Circular No.
1171. The latter circular provides that any increase of interest in a given interest period will have to be
expressly agreed to in writing by the borrower. The mortgaged properties were subject of foreclosure and
were sold on August 30, 2002 and the [respondent] banks statement of account as of August 30, 2002 x x
x shows unpaid interest up to July 17, 2001 ofP12,695,718.99 without specifying the rate of interest for

each interest period of thirty days. Another statement of account of [respondent bank] x x x as [of] the
date of foreclosure on August 30, 2002 shows account balance ofP20,505,916.51 with a bid price of
P28,965,100.00 and showing an interest of P16,163,281.65. Again, there are no details of the interest used
for each interest period from the time these loans were incurred up to the date of foreclosure. These
statements of account together with the stated interest and expenses after foreclosure were furnished by
the [respondent] bank during the court hearings. The central legal question is that there is no agreement
in writing from the [petitioners-spouses]/borrowers for the interest rate for each interest period neither
from the data coming from the Central Bank or the cost of money which is understood to mean the interest
cost of the bank deposits form the public. Such imposition of the increased interest without the consent of
the borrower is null and void pursuant to Article 1956 of the Civil Code and as held in the pronouncement
of the Supreme Court in several cases and C.B. Circular No. 1191 that the interest rate for each re-pricing
period under the floating rate of interest is subject to mutual agreement in writing. Art. 1956 states that no
interest is due unless it has been expressly stipulated and agreed to in writing.

Any stipulation where the fixing of interest rate is the sole prerogative of the creditor/mortgagee, belongs
to the class of potestative condition which is null and void under Art. 1308 of the New Civil Code. The
fulfillment of a condition cannot be left to the sole will of [one of] the contracting parties.
xxxx
In the instant case, if the interest is declared null and void, the foreclosure sale for a higher amount than
what is legally due is likewise null and void because under the Civil Code, a mortgage may be foreclosed
only to enforce the fulfillment of the obligation for whose security it was constituted (Art. 2126, Civil Code).
xxxx
Following the declaration of nullity of the stipulation on floating rate of interest since no interest may be
collected based on the stipulation that is null and void and legally inexistent and unenforceable. x x x.
Since the interest imposed is illegal and void only the rate of 6% interest per month shall be imposed as
liquidated damages under Art. 2209 of the Civil Code.
It is worth mentioning that these forms used by the bank are pre- printed forms and therefore contracts of
adhesion and x x x any dispute or doubt concerning them shall be resolved in favor of the x x x borrower.
This (sic) circumstances tend to support the contention of the [petitioners-spouses] that they were made to
sign the real estate mortgages/promissory notes in blank with respect to the interest rates.
xxxx
[Respondent bank has] no right to foreclose [petitioners-spouses] property and any foreclosure thereof is
illegal, unreasonable and void, since [petitioners-spouses] are not and cannot be considered in default for
their inability to pay the arbitrarily, illegally, and unconscionably adjusted interest rates and penalty
charges unilaterally made and imposed by [respondent] bank.
The [petitioners-spouses] submitted to the court certified copies of the weighted average of Selected
Domestic Interest Rates of the local banks obtained from the Bangko Sentral ng Pilipinas Statistical Center
and it shows a declining balance of interest rates x x x.
xxxx
There is no showing by the [respondent bank] that any of the foregoing rate was ever used to increase or
decrease the interest rates charged upon the [petitioners-spouses] mortgage loan for the 30 day repricing period subsequent to the first 30 days from [the] dates of the promissory notes. These documents
submitted being certified public documents are entitled to being taken cognizance of by the court as an
aid to its decision making. x x x.8
Respondent bank appealed the above judgment of the trial court to the CA. Its main contention is that the
lower court erred in ordering the re-computation of petitioners-spouses loans and applying the interest
rate of 6% per annum. According to respondent bank, the stipulation on the interest rates of 17.5% to
27%, subject to periodic adjustments, was voluntarily agreed upon by the parties; hence, it was not left to
the sole will of respondent bank. Thus, the lower court erred in reducing the interest rate to 6% and in
setting aside the penalty charges, as such is contrary to the principle of the obligatory force of contracts
under Articles 1315 and 1159 of the Civil Code.9
The CA disposed of the issue in the following manner:
We partly agree with [respondent banks] contention.
Settled is the rule that the contracting parties are free to enter into stipulations, clauses, terms and
conditions as they may deem convenient, as long as these are not contrary to law, morals, good customs,
public order or public policy. Pursuant to Article 1159 of the Civil Code, these obligations arising from such
contracts have the force of law between the parties and should be complied with in good faith. x x x.

xxxx
In the case at bar, [respondent bank] and [petitioners-spouses] expressly stipulated in the promissory
notes the rate of interest to be applied to the loan obtained by the latter from the former, x x x.
xxxx
[Respondent bank] insists that [petitioner-spouses] agreed to the interest rates stated in the promissory
notes since the latter voluntarily signed the same. However, we find more credible and believable the
version of [petitioners-spouses] that they were made to sign the said promissory notes in blank with
respect to the rate of interest and penalty charges, and subsequently, [respondent] bank filled in the
blanks, imposing high interest rate beyond which they were made to understand at the time of the signing
of the promissory notes.
xxxx
The signing by [petitioners-spouses] of the promissory notes in blank enabled [respondent] bank to impose
interest rates on the loan obligation without prior notice to [petitioners-spouses]. The unilateral
determination and imposition of interest rates by [respondent] bank without [petitioners-spouses] assent
is obviously violative of the principle of mutuality of contracts ordained in Article 1308 of the Civil Code x x
x.
xxxx
[Respondent banks] act converted the loan agreement into a contract of adhesion where the parties do
not bargain on equal footing, the weaker partys participation, herein [petitioners-spouses], being reduced
to the alternative to take it or leave it. [Respondent] bank tried to sidestep this issue by averring that
[petitioners-spouses], as businessmen, were on equal footing with [respondent bank] as far as the subject
loan agreements are concerned. That may be true insofar as entering into the original loan agreements
and mortgage contracts are concerned. However, that does not hold true when it comes to the unilateral
determination and imposition of the escalated interest rates imposed by [respondent] bank.
xxxx
The Court further notes that in the case at bar, [respondent] bank imposed different rates in the twelve
(12) promissory notes: interest rate of 18% in five (5) promissory notes; 17.5% in two (2) promissory notes;
23% in one (1) promissory note; and 27% in three (3) promissory notes. Obviously, the interest rates are
excessive and arbitrary. Thus, the foregoing interest rates imposed on [petitioners-spouses] loan
obligation without their knowledge and consent should be disregarded, not only for being iniquitous and
exorbitant, but also for being violative of the principle of mutuality of contracts.
However, we do not agree with the trial court in fixing the rate of interest of 6%. It is well-settled that when
an obligation is breached and consists in the payment of a sum of money, i.e., loan or forbearance of
money, the interest due shall be that which may have been stipulated in writing. In the absence of
stipulation, the rate of interest shall be 12% interest per annum to be computed from default, i.e., from
judicial or extra-judicial demand and subject to the provisions of Article 1169 of the Civil Code. Since the
interest rates printed in the promissory notes are void for the reasons above-stated, the rate of interest to
be applied to the loan should be 12% per annum only.10
The CA, consequently, dismissed respondent banks appeal and affirmed the decision of the trial court with
the modification that the rate of interest shall be 12% per annum instead of 6%. Respondent bank filed a
Motion for Reconsideration of the CA decision. Petitioners-spouses, on the other hand, filed a comment
praying for the denial of respondent banks motion for reconsideration. They also filed an "Urgent
Manifestation"11 calling the attention of the CA to its respective decisions in the cases of Spouses Enrique
and Epifania Mercado v. China Banking Corporation, et. al. (CA-GR CV No. 75303)12 and Spouses Bonifacio
Caraig and Ligaya Caraig v. The Ex-Officio Sheriff of RTC, Batangas City, et. al. (CA-G.R. CV No. 76029).13
According to petitioners-spouses, in Spouses Mercado v. China Banking, the Special Seventh Division of the
CA held that where the interest rate is potestative, the entire interest is null and void and no interest is
due.
On the other hand, in the case of Spouses Caraig v. The Ex-Officio Sheriff of RTC, Batangas City, the then
Ninth Division of the CA ruled that under the doctrine of operative facts, no interest is due after the auction
sale because the loan is paid in kind by the auction sale, and interest shall commence to run again upon
finality of the judgment declaring the auction sale null and void.14
The CA denied respondent banks Motion for Reconsideration for lack of merit. It likewise found no merit in
petitioners-spouses contention that no interest is due on their principal loan obligation from the time of
foreclosure until finality of the judgment annulling the foreclosure sale. According to the CA:
x x x Notably, this Court disregarded the stipulated rate[s] of interest on the subject promissory notes after
finding that the same are iniquitous and exorbitant, and for being violative of the principle of mutuality of
contracts. Nevertheless, in Equitable PCI Bank v. Ng Sheung Ngor, the Supreme Court ruled that because
the escalation clause was annulled, the principal amount of the loan was subject to the original or

stipulated interest rate of interest, and that upon maturity, the amount due was subject to legal interest at
the rate of 12% per annum. In this case, while we similarly annulled the escalation clause contained in the
promissory notes, this Court opted not to impose the original rates of interest stipulated therein for being
excessive, the same being 17.5% to 27% per interest period.
Relevantly, the High Court held in Asian Cathay Finance and Leasing Corporation v. Spouses Cesario
Gravador and Norma De Vera, et. al. that stipulations authorizing the imposition of iniquitous or
unconscionable interest are contrary to morals, if not against the law. x x x. The nullity of the stipulation on
the usurious interest does not, however, affect the lenders right to recover the principal of the loan. The
debt due is to be considered without the stipulation of the excessive interest. A legal interest of 12% per
annum will be added in place of the excessive interest formerly imposed.
Following the foregoing rulings of the Supreme Court, it is clear that the imposition by this Court of a 12%
rate of interest per annum on the principal loan obligation of [petitioners-spouses], computed from the
time of default, is proper as it is consistent with prevailing jurisprudence.
While the decisions of the Special Seventh Division and the Ninth Division of this Court in CA-G.R. CV No.
75303 and in CA-G.R. No. 76029 are final and executory, the same merely have persuasive effect but do
not outweigh the decisions of the Supreme Court which we are duty-bound to follow, conformably with the
principle of stare decisis.
The doctrine of stare decisis enjoins adherence to judicial precedents.1wphi1 It requires courts in a
country to follow the rule established in a decision of the Supreme Court thereof. That decision becomes a
judicial precedent to be followed in subsequent cases by all courts in the land. The doctrine of stare decisis
is based on the principle that once a question of law has been examined and decided, it should be deemed
settled and closed to further argument.15 (Emphasis supplied.)
Petitioners-spouses are now before us, reiterating their position that no interest should be imposed on their
loan, following the respective pronouncements of the CA in the Caraig and Mercado Cases. Petitionersspouses insist that "if the application of the doctrine of operative facts is upheld, as applied in Caraig vs.
Alday, x x x, interest in the instant case would be computed only from the finality of judgment declaring
the foreclosure sale null and void. If Mercado vs. China Banking Corporation x x x, applying by analogy the
rule on void usurious interest to void potestative interest rate, is further sustained, no interest is due when
the potestative interest rate stipulation is declared null and void, as in the instant case.16
Our Ruling
We dismiss the appeal.
We cannot subscribe to the contention of petitioners-spouses that no interest should be due on the loan
they obtained from respondent bank, or that, at the very least, interest should be computed only from the
finality of the judgment declaring the foreclosure sale null and void, on account of the exorbitant rate of
interest imposed on their loan.
It is clear from the contract of loan between petitioners-spouses and respondent bank that petitionersspouses, as borrowers, agreed to the payment of interest on their loan obligation. That the rate of interest
was subsequently declared illegal and unconscionable does not entitle petitioners-spouses to stop
payment of interest.1wphi1 It should be emphasized that only the rate of interest was declared void. The
stipulation requiring petitioners-spouses to pay interest on their loan remains valid and binding. They are,
therefore, liable to pay interest from the time they defaulted in payment until their loan is fully paid.
It is worth mentioning that both the RTC and the CA are one in saying that "[petitioners-spouses] cannot be
considered in default for their inability to pay the arbitrary, illegal and unconscionable interest rates and
penalty charges unilaterally imposed by [respondent] bank."17 This is precisely the reason why the
foreclosure proceedings involving petitioners-spouses properties were invalidated. As pointed out by the
CA, "since the interest rates are null and void, [respondent] bank has no right to foreclose [petitionersspouses] properties and any foreclosure thereof is illegal. x x x. Since there was no default yet, it is
premature for [respondent] bank to foreclose the properties subject of the real estate mortgage
contract."18
Thus, for the purpose of computing the amount of liability of petitioners-spouses, they are considered in
default from the date the Resolution of the Court in G.R. No. 194164 (Philippine National Bank v. Spouses
Bayani H. Andal and Gracia G. Andal) which is the appeal interposed by respondent bank to the Supreme
Court from the judgment of the CA became final and executory. Based on the records of G.R. No. 194164,
the Court denied herein respondent banks appeal in a Resolution dated 10 January 2011. The Resolution
became final and executory on 20 May 2011.19
In addition, pursuant to Circular No. 799, series of 2013, issued by the Office of the Governor of the Bangko
Sentral ng Pilipinas on 21 June 2013, and in accordance with the ruling of the Supreme Court in the recent
case of Dario Nacar v. Gallery Frames and/or Felipe Bordey, Jr.,20 effective 1 July 2013, the rate of interest
for the loan or forbearance of any money, goods or credits and the rate allowed in judgments, in the
absence of an express contract as to such rate of interest, shall be six percent (6%) per annum.
Accordingly, the rate of interest of 12% per annum on petitioners-spouses obligation shall apply from 20
May 2011 the date of default until 30 June 2013 only. From 1 July 2013 until fully paid, the legal rate of
6% per annum shall be applied to petitioners-spouses unpaid obligation.

IN VIEW OF THE FOREGOING, the Petition is DENIED and the Judgment of the Court of Appeals in CA-G.R.
CV No. 91250 is AFFIRMED with the MODIFICATION that the 12% interest per annum shall be applied from
the date of default until 30 June 2013 only, after which date and until fully paid, the outstanding obligation
of petitioners-spouses shall earn interest at 6% per annum. Let the records of this case be remanded to the
trial court for the proper computation of the amount of liability of petitioners Spouses Bayani H. Andal and
Gracia G. Andal, in accordance with the pronouncements of the Court herein and with due regard to the
payments previously made by petitioners-spouses.
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.
The issues, albeit not completely novel, are: (a) whether or not a claim for damage sustained on a
shipment of goods can be a solidary, or joint and several, liability of the common carrier, the arrastre
operator and the customs broker; (b) whether the payment of legal interest on an award for loss or
damage is to be computed from the time the complaint is filed or from the date the decision appealed from
is rendered; and (c) whether the applicable rate of interest, referred to above, is twelve percent (12%) or
six percent (6%).
The findings of the court a quo, adopted by the Court of Appeals, on the antecedent and undisputed facts
that have led to the controversy are hereunder reproduced:
This is an action against defendants shipping company, arrastre operator and broker-forwarder for
damages sustained by a shipment while in defendants' custody, filed by the insurer-subrogee who paid the
consignee the value of such losses/damages.
On December 4, 1981, two fiber drums of riboflavin were shipped from Yokohama, Japan for delivery vessel
"SS EASTERN COMET" owned by defendant Eastern Shipping Lines under Bill of Lading
No. YMA-8 (Exh. B). The shipment was insured under plaintiff's Marine Insurance Policy No. 81/01177 for
P36,382,466.38.
Upon arrival of the shipment in Manila on December 12, 1981, it was discharged unto the custody of
defendant Metro Port Service, Inc. The latter excepted to one drum, said to be in bad order, which damage
was unknown to plaintiff.
On January 7, 1982 defendant Allied Brokerage Corporation received the shipment from defendant Metro
Port Service, Inc., one drum opened and without seal (per "Request for Bad Order Survey." Exh. D).
On January 8 and 14, 1982, defendant Allied Brokerage Corporation made deliveries of the shipment to the
consignee's warehouse. The latter excepted to one drum which contained spillages, while the rest of the
contents was adulterated/fake (per "Bad Order Waybill" No. 10649, Exh. E).
Plaintiff contended that due to the losses/damage sustained by said drum, the consignee suffered losses
totaling P19,032.95, due to the fault and negligence of defendants. Claims were presented against
defendants who failed and refused to pay the same (Exhs. H, I, J, K, L).
As a consequence of the losses sustained, plaintiff was compelled to pay the consignee P19,032.95 under
the aforestated marine insurance policy, so that it became subrogated to all the rights of action of said
consignee against defendants (per "Form of Subrogation", "Release" and Philbanking check, Exhs. M, N,
and O). (pp. 85-86, Rollo.)
There were, to be sure, other factual issues that confronted both courts. Here, the appellate court said:
Defendants filed their respective answers, traversing the material allegations of the complaint contending
that: As for defendant Eastern Shipping it alleged that the shipment was discharged in good order from the
vessel unto the custody of Metro Port Service so that any damage/losses incurred after the shipment was
incurred after the shipment was turned over to the latter, is no longer its liability (p. 17, Record); Metroport
averred that although subject shipment was discharged unto its custody, portion of the same was already
in bad order (p. 11, Record); Allied Brokerage alleged that plaintiff has no cause of action against it, not
having negligent or at fault for the shipment was already in damage and bad order condition when
received by it, but nonetheless, it still exercised extra ordinary care and diligence in the handling/delivery
of the cargo to consignee in the same condition shipment was received by it.
From the evidence the court found the following:

The issues are:

1. Whether or not the shipment sustained losses/damages;
2. Whether or not these losses/damages were sustained while in the custody of defendants (in whose
respective custody, if determinable);
3. Whether or not defendant(s) should be held liable for the losses/damages (see plaintiff's pre-Trial Brief,
Records, p. 34; Allied's pre-Trial Brief, adopting plaintiff's Records, p. 38).
As to the first issue, there can be no doubt that the shipment sustained losses/damages. The two drums
were shipped in good order and condition, as clearly shown by the Bill of Lading and Commercial Invoice
which do not indicate any damages drum that was shipped (Exhs. B and C). But when on December 12,
1981 the shipment was delivered to defendant Metro Port Service, Inc., it excepted to one drum in bad
order.
Correspondingly, as to the second issue, it follows that the losses/damages were sustained while in the
respective and/or successive custody and possession of defendants carrier (Eastern), arrastre operator
(Metro Port) and broker (Allied Brokerage). This becomes evident when the Marine Cargo Survey Report
(Exh. G), with its "Additional Survey Notes", are considered. In the latter notes, it is stated that when the
shipment was "landed on vessel" to dock of Pier # 15, South Harbor, Manila on December 12, 1981, it was
observed that "one (1) fiber drum (was) in damaged condition, covered by the vessel's Agent's Bad Order
Tally Sheet No. 86427." The report further states that when defendant Allied Brokerage withdrew the
shipment from defendant arrastre operator's custody on January 7, 1982, one drum was found opened
without seal, cello bag partly torn but contents intact. Net unrecovered spillages was
15 kgs. The report went on to state that when the drums reached the consignee, one drum was found with
adulterated/faked contents. It is obvious, therefore, that these losses/damages occurred before the
shipment reached the consignee while under the successive custodies of defendants. Under Art. 1737 of
the New Civil Code, the common carrier's duty to observe extraordinary diligence in the vigilance of goods
remains in full force and effect even if the goods are temporarily unloaded and stored in transit in the
warehouse of the carrier at the place of destination, until the consignee has been advised and has had
reasonable opportunity to remove or dispose of the goods (Art. 1738, NCC). Defendant Eastern Shipping's
own exhibit, the "Turn-Over Survey of Bad Order Cargoes" (Exhs. 3-Eastern) states that on December 12,
1981 one drum was found "open".
and thus held:
WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered:
A. Ordering defendants to pay plaintiff, jointly and severally:
1. The amount of P19,032.95, with the present legal interest of 12% per annum from October 1, 1982, the
date of filing of this complaints, until fully paid (the liability of defendant Eastern Shipping, Inc. shall not
exceed US$500 per case or the CIF value of the loss, whichever is lesser, while the liability of defendant
Metro Port Service, Inc. shall be to the extent of the actual invoice value of each package, crate box or
container in no case to exceed P5,000.00 each, pursuant to Section 6.01 of the Management Contract);
2. P3,000.00 as attorney's fees, and
3. Costs.
B. Dismissing the counterclaims and crossclaim of defendant/cross-claimant Allied Brokerage Corporation.
SO ORDERED. (p. 207, Record).
Dissatisfied, defendant's recourse to US.
The appeal is devoid of merit.
After a careful scrutiny of the evidence on record. We find that the conclusion drawn therefrom is correct.
As there is sufficient evidence that the shipment sustained damage while in the successive possession of
appellants, and therefore they are liable to the appellee, as subrogee for the amount it paid to the
consignee. (pp. 87-89, Rollo.)
The Court of Appeals thus affirmed in toto the judgment of the court
a quo.
In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes error and grave abuse of
discretion on the part of the appellate court when
I. IT HELD PETITIONER CARRIER JOINTLY AND SEVERALLY LIABLE WITH THE ARRASTRE OPERATOR AND
CUSTOMS BROKER FOR THE CLAIM OF PRIVATE RESPONDENT AS GRANTED IN THE QUESTIONED DECISION;

II. IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF PRIVATE RESPONDENT SHOULD COMMENCE
FROM THE DATE OF THE FILING OF THE COMPLAINT AT THE RATE OF TWELVE PERCENT PER ANNUM
INSTEAD OF FROM THE DATE OF THE DECISION OF THE TRIAL COURT AND ONLY AT THE RATE OF SIX
PERCENT PER ANNUM, PRIVATE RESPONDENT'S CLAIM BEING INDISPUTABLY UNLIQUIDATED.
The petition is, in part, granted.
In this decision, we have begun by saying that the questions raised by petitioner carrier are not all that
novel. Indeed, we do have a fairly good number of previous decisions this Court can merely tack to.
The common carrier's duty to observe the requisite diligence in the shipment of goods lasts from the time
the articles are surrendered to or unconditionally placed in the possession of, and received by, the carrier
for transportation until delivered to, or until the lapse of a reasonable time for their acceptance by, the
person entitled to receive them (Arts. 1736-1738, Civil Code; Ganzon vs. Court of Appeals, 161 SCRA 646;
Kui Bai vs. Dollar Steamship Lines, 52 Phil. 863). When the goods shipped either are lost or arrive in
damaged condition, a presumption arises against the carrier of its failure to observe that diligence, and
there need not be an express finding of negligence to hold it liable (Art. 1735, Civil Code; Philippine
National Railways vs. Court of Appeals, 139 SCRA 87; Metro Port Service vs. Court of Appeals, 131 SCRA
365). There are, of course, exceptional cases when such presumption of fault is 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 defendantappellant 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 16 of money, goods or credits, as well as to judgments involving such loan or
forbearance of money, goods or credits, and that the 6% interest under the Civil Code governs when the
transaction involves the payment of indemnities in the concept of damage arising from the breach or a
delay in the performance of obligations in general. Observe, too, that in these cases, a common time
frame in the computation of the 6% interest per annum has been applied, i.e., from the time the complaint
is filed until the adjudged amount is fully paid.
The "second group", did not alter the pronounced rule on the application of the 6% or 12% interest per
annum, 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.
SEBASTIAN SIGA-AN,
-versus
ALICIA VILLANUEVA,
G.R. No. 173227
January 20, 2009
Before Us is a Petition[1] for Review on Certiorari under Rule 45 of the Rules of Court seeking to set aside
the Decision,[2] dated 16 December 2005, and Resolution,[3] dated 19 June 2006 of the Court of Appeals
in CA-G.R. CV No. 71814, which affirmed in toto the Decision,[4] dated 26 January 2001, of the Las Pinas
City Regional Trial Court, Branch 255, in Civil Case No. LP-98-0068.
The facts gathered from the records are as follows:
On 30 March 1998, respondent Alicia Villanueva filed a complaint[5] for sum of money against petitioner
Sebastian Siga-an before the Las Pinas City Regional Trial Court (RTC), Branch 255, docketed as Civil Case
No. LP-98-0068. Respondent alleged that she was a businesswoman engaged in supplying office materials
and equipments to the Philippine Navy Office (PNO) located at Fort Bonifacio, Taguig City, while petitioner
was a military officer and comptroller of the PNO from 1991 to 1996.
Respondent claimed that sometime in 1992, petitioner approached her inside the PNO and offered to loan
her the amount of P540,000.00. Since she needed capital for her business transactions with the PNO, she
accepted petitioners proposal. The loan agreement was not reduced in writing. Also, there was no
stipulation as to the payment of interest for the loan.[6]
On 31 August 1993, respondent issued a check worth P500,000.00 to petitioner as partial payment of the
loan. On 31 October 1993, she issued another check in the amount of P200,000.00 to petitioner as
payment of the remaining balance of the loan. Petitioner told her that since she paid a total amount of
P700,000.00 for theP540,000.00 worth of loan, the excess amount of P160,000.00 would be applied as
interest for the loan. Not satisfied with the amount applied as interest, petitioner pestered her to pay
additional interest. Petitioner threatened to block or disapprove her transactions with the PNO if she would
not comply with his demand. As all her transactions with the PNO were subject to the approval of
petitioner as comptroller of the PNO, and fearing that petitioner might block or unduly influence the
payment of her vouchers in the PNO, she conceded. Thus, she paid additional amounts in cash and checks
as interests for the loan. She asked petitioner for receipt for the payments but petitioner told her that it
was not necessary as there was mutual trust and confidence between them. According to her computation,
the total amount she paid to petitioner for the loan and interest accumulated to P1,200,000.00.[7]
Thereafter, respondent consulted a lawyer regarding the propriety of paying interest on the loan despite
absence of agreement to that effect. Her lawyer told her that petitioner could not validly collect interest
on the loan because there was no agreement between her and petitioner regarding payment of interest.
Since she paid petitioner a total amount of P1,200,000.00 for the P540,000.00 worth of loan, and upon
being advised by her lawyer that she made overpayment to petitioner, she sent a demand letter to
petitioner asking for the return of the excess amount of P660,000.00. Petitioner, despite receipt of the
demand letter, ignored her claim for reimbursement.[8]
Respondent prayed that the RTC render judgment ordering petitioner to pay respondent (1) P660,000.00
plus legal interest from the time of demand; (2)P300,000.00 as moral damages; (3) P50,000.00 as
exemplary damages; and (4) an amount equivalent to 25% of P660,000.00 as attorneys fees.[9]

In his answer[10] to the complaint, petitioner denied that he offered a loan to respondent. He averred that
in 1992, respondent approached and asked him if he could grant her a loan, as she needed money to
finance her business venture with the PNO. At first, he was reluctant to deal with respondent, because the
latter had a spotty record as a supplier of the PNO. However, since respondent was an acquaintance of his
officemate, he agreed to grant her a loan. Respondent paid the loan in full.[11]
Subsequently, respondent again asked him to give her a loan. As respondent had been able to pay the
previous loan in full, he agreed to grant her another loan. Later, respondent requested him to restructure
the payment of the loan because she could not give full payment on the due date. He acceded to her
request. Thereafter, respondent pleaded for another restructuring of the payment of the loan. This time he
rejected her plea. Thus, respondent proposed to execute a promissory note wherein she would
acknowledge her obligation to him, inclusive of interest, and that she would issue several postdated

checks to guarantee the payment of her obligation. Upon his approval of respondents request for
restructuring of the loan, respondent executed a promissory note dated 12 September 1994 wherein she
admitted having borrowed an amount of P1,240,000.00, inclusive of interest, from petitioner and that she
would pay said amount in March 1995. Respondent also issued to him six postdated checks amounting to
P1,240,000.00 as guarantee of compliance with her obligation. Subsequently, he presented the six checks
for encashment but only one check was honored. He demanded that respondent settle her obligation, but
the latter failed to do so. Hence, he filed criminal cases for Violation of the Bouncing Checks Law (Batas
Pambansa Blg. 22) against respondent. The cases were assigned to the Metropolitan Trial Court of Makati
City, Branch 65 (MeTC).[12]
Petitioner insisted that there was no overpayment because respondent admitted in the latters promissory
note that her monetary obligation as of 12 September 1994 amounted to P1,240,000.00 inclusive of
interests. He argued that respondent was already estopped from complaining that she should not have
paid any interest, because she was given several times to settle her obligation but failed to do so. He
maintained that to rule in favor of respondent is tantamount to concluding that the loan was given
interest-free. Based on the foregoing averments, he asked the RTC to dismiss respondents complaint.
After trial, the RTC rendered a Decision on 26 January 2001 holding that respondent made an overpayment
of her loan obligation to petitioner and that the latter should refund the excess amount to the former. It
ratiocinated that respondents obligation was only to pay the loaned amount of P540,000.00, and that the
alleged interests due should not be included in the computation of respondents total monetary debt
because there was no agreement between them regarding payment of interest. It concluded that since
respondent made an excess payment to petitioner in the amount of P660,000.00 through mistake,
petitioner should return the said amount to respondent pursuant to the principle of solutio indebiti.[13]
The RTC also ruled that petitioner should pay moral damages for the sleepless nights and wounded
feelings experienced by respondent. Further, petitioner should pay exemplary damages by way of
example or correction for the public good, plus attorneys fees and costs of suit.
The dispositive portion of the RTC Decision reads:
WHEREFORE, in view of the foregoing evidence and in the light of the provisions of law and jurisprudence
on the matter, judgment is hereby rendered in favor of the plaintiff and against the defendant as follows:
(1)
Ordering defendant to pay plaintiff the amount of P660,000.00 plus legal interest of 12% per
annum computed from 3 March 1998 until the amount is paid in full;
(2) Ordering defendant to pay plaintiff the amount of P300,000.00 as moral damages;
(3) Ordering defendant to pay plaintiff the amount of P50,000.00 as exemplary damages;
(4) Ordering defendant to pay plaintiff the amount equivalent to 25% of P660,000.00 as attorneys fees;
and
(5) Ordering defendant to pay the costs of suit.[14]

Petitioner appealed to the Court of Appeals. On 16 December 2005, the appellate court promulgated its
Decision affirming in toto the RTC Decision, thus:
WHEREFORE, the foregoing considered, the instant appeal is hereby DENIED and the assailed decision [is]
AFFIRMED in toto.[15]
Petitioner filed a motion for reconsideration of the appellate courts decision but this was denied.[16]
Hence, petitioner lodged the instant petition before us assigning the following errors:
THE RTC AND THE COURT OF APPEALS ERRED IN RULING THAT NO INTEREST WAS DUE TO PETITIONER;
THE RTC AND THE COURT OF APPEALS ERRED IN APPLYING THE PRINCIPLE OF SOLUTIO INDEBITI.[17]
Interest is a compensation fixed by the parties for the use or forbearance of money. This is referred to as
monetary interest. Interest may also be imposed by law or by courts as penalty or indemnity for damages.
This is called compensatory interest.[18] The right to interest arises only by virtue of a contract or by
virtue of damages for delay or failure to pay the principal loan on which interest is demanded.[19]
Article 1956 of the Civil Code, which refers to monetary interest,[20] specifically mandates that no interest
shall be due unless it has been expressly stipulated in writing. As can be gleaned from the foregoing
provision, payment of monetary interest is allowed only if: (1) there was an express stipulation for the
payment of interest; and (2) the agreement for the payment of interest was reduced in writing. The
concurrence of the two conditions is required for the payment of monetary interest. Thus, we have held
that collection of interest without any stipulation therefor in writing is prohibited by law.[21]

It appears that petitioner and respondent did not agree on the payment of interest for the loan. Neither
was there convincing proof of written agreement between the two regarding the payment of interest.
Respondent testified that although she accepted petitioners offer of loan amounting to P540,000.00, there
was, nonetheless, no verbal or written agreement for her to pay interest on the loan.[22]
Petitioner presented a handwritten promissory note dated 12 September 1994[23] wherein respondent
purportedly admitted owing petitioner capital and interest. Respondent, however, explained that it was
petitioner who made a promissory note and she was told to copy it in her own handwriting; that all her
transactions with the PNO were subject to the approval of petitioner as comptroller of the PNO; that
petitioner threatened to disapprove her transactions with the PNO if she would not pay interest; that being
unaware of the law on interest and fearing that petitioner would make good of his threats if she would not
obey his instruction to copy the promissory note, she copied the promissory note in her own handwriting;
and that such was the same promissory note presented by petitioner as alleged proof of their written
agreement on interest.[24] Petitioner did not rebut the foregoing testimony. It is evident that respondent
did not really consent to the payment of interest for the loan and that she was merely tricked and coerced
by petitioner to pay interest. Hence, it cannot be gainfully said that such promissory note pertains to an
express stipulation of interest or written agreement of interest on the loan between petitioner and
respondent.
Petitioner, nevertheless, claims that both the RTC and the Court of Appeals found that he and respondent
agreed on the payment of 7% rate of interest on the loan; that the agreed 7% rate of interest was duly
admitted by respondent in her testimony in the Batas Pambansa Blg. 22 cases he filed against respondent;
that despite such judicial admission by respondent, the RTC and the Court of Appeals, citing Article 1956 of
the Civil Code, still held that no interest was due him since the agreement on interest was not reduced in
writing; that the application of Article 1956 of the Civil Code should not be absolute, and an exception to
the application of such provision should be made when the borrower admits that a specific rate of interest
was agreed upon as in the present case; and that it would be unfair to allow respondent to pay only the
loan when the latter very well knew and even admitted in the Batas Pambansa Blg. 22 cases that there
was an agreed 7% rate of interest on the loan.[25]
We have carefully examined the RTC Decision and found that the RTC did not make a ruling therein that
petitioner and respondent agreed on the payment of interest at the rate of 7% for the loan. The RTC
clearly stated that although petitioner and respondent entered into a valid oral contract of loan amounting
toP540,000.00, they, nonetheless, never intended the payment of interest thereon.[26] While the Court of
Appeals mentioned in its Decision that it concurred in the RTCs ruling that petitioner and respondent
agreed on a certain rate of interest as regards the loan, we consider this as merely an inadvertence
because, as earlier elucidated, both the RTC and the Court of Appeals ruled that petitioner is not entitled to
the payment of interest on the loan. The rule is that factual findings of the trial court deserve great weight
and respect especially when affirmed by the appellate court.[27] We found no compelling reason to
disturb the ruling of both courts.
Petitioners reliance on respondents alleged admission in the Batas Pambansa Blg. 22 cases that they had
agreed on the payment of interest at the rate of 7% deserves scant consideration. In the said case,
respondent merely testified that after paying the total amount of loan, petitioner ordered her to pay
interest.[28] Respondent did not categorically declare in the same case that she and respondent made an
express stipulation in writing as regards payment of interest at the rate of 7%. As earlier discussed,
monetary interest is due only if there was an express stipulation in writing for the payment of interest.
There are instances in which an interest may be imposed even in the absence of express stipulation, verbal
or written, regarding payment of interest. Article 2209 of the Civil Code states that if the obligation
consists in the payment of a sum of money, and the debtor incurs delay, a legal interest of 12% per annum
may be imposed as indemnity for damages if no stipulation on the payment of interest was agreed upon.
Likewise, Article 2212 of the Civil Code provides that interest due shall earn legal interest from the time it
is judicially demanded, although the obligation may be silent on this point.
All the same, the interest under these two instances may be imposed only as a penalty or damages for
breach of contractual obligations. It cannot be charged as a compensation for the use or forbearance of
money. In other words, the two instances apply only to compensatory interest and not to monetary
interest.[29] The case at bar involves petitioners claim for monetary interest.
Further, said compensatory interest is not chargeable in the instant case because it was not duly proven
that respondent defaulted in paying the loan. Also, as earlier found, no interest was due on the loan
because there was no written agreement as regards payment of interest.
Apropos the second assigned error, petitioner argues that the principle of solutio indebiti does not apply to
the instant case. Thus, he cannot be compelled to return the alleged excess amount paid by respondent
as interest.[30]
Under Article 1960 of the Civil Code, if the borrower of loan pays interest when there has been no
stipulation therefor, the provisions of the Civil Code concerning solutio indebiti shall be applied. Article
2154 of the Civil Code explains the principle of solutio indebiti. Said provision provides that if something is
received when there is no right to demand it, and it was unduly delivered through mistake, the obligation
to return it arises. In such a case, a creditor-debtor relationship is created under a quasi-contract whereby
the payor becomes the creditor who then has the right to demand the return of payment made by mistake,
and the person who has no right to receive such payment becomes obligated to return the same. The

quasi-contract of solutio indebiti harks back to the ancient principle that no one shall enrich himself
unjustly at the expense of another.[31] The principle of solutio indebiti applies where (1) a payment is
made when there exists no binding relation between the payor, who has no duty to pay, and the person
who received the payment; and (2) the payment is made through mistake, and not through liberality or
some other cause.[32] We have held that the principle of solutio indebiti applies in case of erroneous
payment of undue interest.[33]
It was duly established that respondent paid interest to petitioner. Respondent was under no duty to make
such payment because there was no express stipulation in writing to that effect. There was no binding
relation between petitioner and respondent as regards the payment of interest. The payment was clearly a
mistake. Since petitioner received something when there was no right to demand it, he has an obligation
to return it.
We shall now determine the propriety of the monetary award and damages imposed by the RTC and the
Court of Appeals.
Records show that respondent received a loan amounting to P540,000.00 from petitioner.[34] Respondent
issued two checks with a total worth of P700,000.00 in favor of petitioner as payment of the loan.[35]
These checks were subsequently encashed by petitioner.[36] Obviously, there was an excess of
P160,000.00 in the payment for the loan. Petitioner claims that the excess of P160,000.00 serves as
interest on the loan to which he was entitled. Aside from issuing the said two checks, respondent also paid
cash in the total amount of P175,000.00 to petitioner as interest.[37] Although no receipts reflecting the
same were presented because petitioner refused to issue such to respondent, petitioner, nonetheless,
admitted in his Reply-Affidavit[38] in the Batas Pambansa Blg. 22 cases that respondent paid him a total
amount of P175,000.00 cash in addition to the two checks. Section 26 Rule 130 of the Rules of Evidence
provides that the declaration of a party as to a relevant fact may be given in evidence against him. Aside
from the amounts of P160,000.00 and P175,000.00 paid as interest, no other proof of additional payment
as interest was presented by respondent. Since we have previously found that petitioner is not entitled to
payment of interest and that the principle of solutio indebiti applies to the instant case, petitioner should
return to respondent the excess amount of P160,000.00 and P175,000.00 or the total amount of
P335,000.00. Accordingly, the reimbursable amount to respondent fixed by the RTC and the Court of
Appeals should be reduced from P660,000.00 to P335,000.00.
As earlier stated, petitioner filed five (5) criminal cases for violation of Batas Pambansa Blg. 22 against
respondent. In the said cases, the MeTC found respondent guilty of violating Batas Pambansa Blg. 22 for
issuing five dishonored checks to petitioner. Nonetheless, respondents conviction therein does not affect
our ruling in the instant case. The two checks, subject matter of this case, totaling P700,000.00 which
respondent claimed as payment of the P540,000.00 worth of loan, were not among the five checks found
to be dishonored or bounced in the five criminal cases. Further, the MeTC found that respondent made an
overpayment of the loan by reason of the interest which the latter paid to petitioner.[39]
Article 2217 of the Civil Code provides that moral damages may be recovered if the party underwent
physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral
shock, social humiliation and similar injury. Respondent testified that she experienced sleepless nights and
wounded feelings when petitioner refused to return the amount paid as interest despite her repeated
demands. Hence, the award of moral damages is justified. However, its corresponding amount of
P300,000.00, as fixed by the RTC and the Court of Appeals, is exorbitant and should be equitably reduced.
Article 2216 of the Civil Code instructs that assessment of damages is left to the discretion of the court
according to the circumstances of each case. This discretion is limited by the principle that the amount
awarded should not be palpably excessive as to indicate that it was the result of prejudice or corruption on
the part of the trial court.[40] To our mind, the amount of P150,000.00 as moral damages is fair,
reasonable, and proportionate to the injury suffered by respondent.
Article 2232 of the Civil Code states that in a quasi-contract, such as solutio indebiti, exemplary damages
may be imposed if the defendant acted in an oppressive manner. Petitioner acted oppressively when he
pestered respondent to pay interest and threatened to block her transactions with the PNO if she would not
pay interest. This forced respondent to pay interest despite lack of agreement thereto. Thus, the award of
exemplary damages is appropriate. The amount ofP50,000.00 imposed as exemplary damages by the RTC
and the Court is fitting so as to deter petitioner and other lenders from committing similar and other
serious wrongdoings.[41]
Jurisprudence instructs that in awarding attorneys fees, the trial court must state the factual, legal or
equitable justification for awarding the same.[42] In the case under consideration, the RTC stated in its
Decision that the award of attorneys fees equivalent to 25% of the amount paid as interest by respondent
to petitioner is reasonable and moderate considering the extent of work rendered by respondents lawyer
in the instant case and the fact that it dragged on for several years.[43] Further, respondent testified that
she agreed to compensate her lawyer handling the instant case such amount.[44] The award, therefore, of
attorneys fees and its amount equivalent to 25% of the amount paid as interest by respondent to
petitioner is proper.

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

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

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

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

versus -

LAND BANK OF THE PHILIPPINES,

G.R. No. 164195
October 12, 2010
We resolve the petitioners motion for reconsideration addressing our Resolution of December 4,
2009 whose dispositive portion directs:

WHEREFORE, the Court denies the petitioners second motion for reconsideration (with respect to
the denial of the award of legal interest and attorneys fees), and reiterates the decision dated February 6,
2007 and the resolution dated December 19, 2007 of the Third Division.
For a fuller and clearer presentation and appreciation of this Resolution, we hark back to the roots of this
case.
Factual Antecedents
Apo Fruits Corporation (AFC) and Hijo Plantation, Inc. (HPI), together also referred to as petitioners, were
registered owners of vast tracks of land; AFC owned 640.3483 hectares, while HPI owned 805.5308
hectares. On October 12, 1995, they voluntarily offered to sell these landholdings to the government
viaVoluntary Offer to Sell applications filed with the Department of Agrarian Reform (DAR).
On October 16, 1996, AFC and HPI received separate notices of land acquisition and valuation of their
properties from the DARs Provincial Agrarian Reform Officer (PARO). At the assessed valuation of
P165,484.47 per hectare, AFCs land was valued at P86,900,925.88, while HPIs property was valued
atP164,478,178.14. HPI and AFC rejected these valuations for being very low.
In its follow through action, the DAR requested the Land Bank of the Philippines (LBP) to deposit
P26,409,549.86 in AFCs bank account and P45,481,706.76 in HPIs bank account, which amounts the
petitioners then withdrew. The titles over AFC and HPIs properties were thereafter cancelled, and new
ones were issued on December 9, 1996 in the name of the Republic of the Philippines.
On February 14, 1997, AFC and HPI filed separate petitions for determination of just compensation
with the DAR Adjudication Board (DARAB). When the DARAB failed to act on these petitions for more than
three years, AFC and HPI filed separate complaints for determination and payment of just compensation
with the Regional Trial Court (RTC) of Tagum City, acting as a Special Agrarian Court. These complaints
were subsequently consolidated.

On September 25, 2001, the RTC resolved the consolidated cases, fixing the just compensation for
the petitioners 1,338.6027 hectares of land[1] atP1,383,179,000.00, with interest on this amount at the
prevailing market interest rates, computed from the taking of the properties on December 9, 1996 until
fully paid, minus the amounts the petitioners already received under the initial valuation. The RTC also
awarded attorneys fees.
LBP moved for the reconsideration of the decision. The RTC, in its order of December 5, 2001,
modified its ruling and fixed the interest at the rate of 12% per annum from the time the complaint was
filed until finality of the decision. The Third Division of this Court, in its Decision of February 6, 2007,
affirmed this RTC decision.
On motion for reconsideration, the Third Division issued its Resolution of December 19, 2007,
modifying its February 6, 2007 Decision by deleting the 12% interest due on the balance of the awarded
just compensation. The Third Division justified the deletion by the finding that the LBP did not delay the
payment of just compensation as it had deposited the pertinent amounts due to AFC and HPI within
fourteen months after they filed their complaints for just compensation with the RTC. The Court also
considered that AFC had already collected approximately P149.6 million, while HPI had already collected
approximately P262 million from the LBP. The Third Division also deleted the award of attorneys fees.
All parties moved for the reconsideration of the modified ruling. The Court uniformly denied all the
motions in its April 30, 2008 Resolution. Entry of Judgment followed on May 16, 2008.
Notwithstanding the Entry of Judgment, AFC and HPI filed the following motions on May 28, 2008: (1)
Motion for Leave to File and Admit Second Motion for Reconsideration; (2) Second Motion for
Reconsideration, with respect to the denial of the award of legal interest and attorneys fees; and (3)
Motion to Refer the Second Motion for Reconsideration to the Honorable Court En Banc.
The Third Division found the motion to admit the Second Motion for Reconsideration and the motion to
refer this second motion to the Court En Bancmeritorious, and accordingly referred the case to the Court
En Banc. On September 8, 2009, the Court En Banc accepted the referral.
The Court En Banc Resolution
On December 4, 2009, the Court En Banc, by a majority vote, denied the petitioners second motion
for reconsideration based on two considerations.
First, the grant of the second motion for reconsideration runs counter to the immutability of final
decisions. Moreover, the Court saw no reason to recognize the case as an exception to the immutability
principle as the petitioners private claim for the payment of interest does not qualify as either a
substantial or transcendental matter or an issue of paramount public interest.
Second, on the merits, the petitioners are not entitled to recover interest on the just compensation and
attorneys fees because they caused the delay in the payment of the just compensation due them; they
erroneously filed their complaints with the DARAB when they should have directly filed these with the RTC
acting as an agrarian court. Furthermore, the Court found it significant that the LBP deposited the pertinent
amounts in the petitioners favor within fourteen months after the petitions were filed with the RTC. Under
these circumstances, the Court found no unreasonable delay on the part of LBP to warrant the award of
12% interest.
The Chico-Nazario Dissent
Justice Minita V. Chico-Nazario,[2] the ponente of the original December 19, 2007 Resolution
(deleting the 12% interest), dissented from the Court En Bancs December 4, 2009 Resolution.
On the issue of immutability of judgment, Justice Chico-Nazario pointed out that under extraordinary
circumstances, this Court has recalled entries of judgment on the ground of substantial justice. Given the
special circumstances involved in the present case, the Court En Banc should have taken a second hard
look at the petitioners positions in their second motion for reconsideration, and acted to correct the clearly
erroneous December 19, 2007 Resolution.
Specifically, Justice Chico-Nazario emphasized the obligation of the State, in the exercise of its inherent
power of eminent domain, to pay just compensation to the owner of the expropriated property. To be just,
the compensation must not only be the correct amount to be paid; it must also be paid within a reasonable
time from the time the land is taken from the owner. If not, the State must pay the landowner interest, by
way of damages, from the time the property was taken until just compensation is fully paid. This interest,
deemed a part of just compensation due, has been established by prevailing jurisprudence to be 12% per
annum.
On these premises, Justice Nazario pointed out that the government deprived the petitioners of their
property on December 9, 1996, and paid the balance of the just compensation due them only on May 9,
2008. The delay of almost twelve years earned the petitioners interest in the total amount of
P1,331,124,223.05.

Despite this finding, Justice Chico-Nazario did not see it fit to declare the computed interest to be totally
due; she found it unconscionable to apply the full force of the law on the LBP because of the magnitude of
the amount due. She thus reduced the awarded interest to P400,000,000.00, or approximately 30% of the
computed interest.
The Present Motion for Reconsideration
In their motion to reconsider the Court En Bancs December 4, 2009 Resolution (the present Motion
for Reconsideration), the petitioners principally argue that: (a) the principle of immutability of judgment
does not apply since the Entry of Judgment was issued even before the lapse of fifteen days from the
parties receipt of the April 30, 2008 Resolution and the petitioners timely filed their second motion for
reconsideration within fifteen days from their receipt of this resolution; (b) the April 30, 2008 Resolution
cannot be considered immutable considering the special and compelling circumstances attendant to the
present case which fall within the exceptions to the principle of immutability of judgments; (c) the legal
interest due is at 12% per annum, reckoned from the time of the taking of the subject properties and this
rate is not subject to reduction. The power of the courts to equitably reduce interest rates applies solely to
liquidated damages under a contract and not to interest set by the Honorable Court itself as due and owing
in just compensation cases; and (d) the Honorable Courts fears that the interest payments due to the
petitioners will produce more harm than good to the system of agrarian reform are misplaced and are
based merely on conjectures.
The Comment of the Land Bank of the Philippines
The LBP commented on the petitioners motion for reconsideration on April 28, 2010. It maintained
that: (a) the doctrine of immutability of the decisions of the Supreme Court clearly applies to the present
case; (b) the LBP is not guilty of undue delay in the payment of just compensation as the petitioners were
promptly paid once the Court had determined the final value of the properties expropriated; (c) the
Supreme Court rulings invoked by the petitioners are inapplicable to the present case; (d) since the
obligation to pay just compensation is not a forbearance of money, interest should commence only after
the amount due becomes ascertainable or liquidated, and the 12% interest per annum applies only to the
liquidated amount, from the date of finality of judgment; (e) the imposition of 12% interest on the balance
of P971,409,831.68 is unwarranted because there was no unjustified refusal by LBP to pay just
compensation, and no contractual breach is involved; (f) the deletion of the attorneys fees equivalent to
10% of the amount finally awarded as just compensation is proper; (g) this case does not involve a
violation of substantial justice to justify the alteration of the immutable resolution dated December 19,
2007 that deleted the award of interest and attorneys fees.
The Courts Ruling
We find the petitioners arguments meritorious and accordingly GRANT the present motion for
reconsideration.

Just compensation a Basic Limitation on the States

Power of Eminent Domain

At the heart of the present controversy is the Third Divisions December 19, 2007 Resolution which held
that the petitioners are not entitled to 12% interest on the balance of the just compensation belatedly paid
by the LBP. In the presently assailed December 4, 2009 Resolution, we affirmed the December 19, 2007
Resolutions findings that: (a) the LBP deposited pertinent amounts in favor of the petitioners within
fourteen months after they filed their complaint for determination of just compensation; and (b) the LBP
had already paid the petitioners P411,769,168.32. We concluded then that these circumstances refuted
the petitioners assertion of unreasonable delay on the part of the LBP.

A re-evaluation of the circumstances of this case and the parties arguments, viewed in light of the just
compensation requirement in the exercise of the States inherent power of eminent domain, compels us to
re-examine our findings and conclusions.

Eminent domain is the power of the State to take private property for public use.[3] It is an inherent power
of State as it is a power necessary for the States existence; it is a power the State cannot do without.[4]
As an inherent power, it does not need at all to be embodied in the Constitution; if it is mentioned at all, it
is solely for purposes of limiting what is otherwise an unlimited power. The limitation is found in the Bill of
Rights[5] that part of the Constitution whose provisions all aim at the protection of individuals against the
excessive exercise of governmental powers.

Section 9, Article III of the 1987 Constitution (which reads No private property shall be taken for public use
without just compensation.) provides two essential limitations to the power of eminent domain, namely,
that (1) the purpose of taking must be for public use and (2) just compensation must be given to the owner
of the private property.

It is not accidental that Section 9 specifies that compensation should be just as the safeguard is there to
ensure a balance property is not to be taken for public use at the expense of private interests; the public,
through the State, must balance the injury that the taking of property causes through compensation for
what is taken, value for value.

Nor is it accidental that the Bill of Rights is interpreted liberally in favor of the individual and strictly
against the government. The protection of the individual is the reason for the Bill of Rights being; to keep
the exercise of the powers of government within reasonable bounds is what it seeks.[6]

The concept of just compensation is not new to Philippine constitutional law,[7] but is not original to the
Philippines; it is a transplant from the American Constitution.[8] It found fertile application in this country
particularly in the area of agrarian reform where the taking of private property for distribution to landless
farmers has been equated to the public use that the Constitution requires. In Land Bank of the
Philippines v. Orilla,[9] a valuation case under our agrarian reform law, this Court had occasion to state:

Constitutionally, "just compensation" is the sum equivalent to the market value of the property,
broadly described as the price fixed by the seller in open market in the usual and ordinary course of legal
action and competition, or the fair value of the property as between the one who receives and the one who
desires to sell, it being fixed at the time of the actual taking by the government. Just compensation is
defined as the full and fair equivalent of the property taken from its owner by the expropriator. It has been
repeatedly stressed by this Court that the true measure is not the taker's gain but the owner's loss. The
word "just" is used to modify the meaning of the word "compensation" to convey the idea that the
equivalent to be given for the property to be taken shall be real, substantial, full and ample.[10] [Emphasis
supplied.]

In the present case, while the DAR initially valued the petitioners landholdings at a total of
P251,379,104.02,[11] the RTC, acting as a special agrarian court, determined the actual value of the
petitioners landholdings to be P1,383,179,000.00. This valuation, a finding of fact, has subsequently
been affirmed by this Court, and is now beyond question. In eminent domain terms, this amount is the
real, substantial, full and ample compensation the government must pay to be just to the landowners.

Significantly, this final judicial valuation is far removed from the initial valuation made by the DAR; their
values differ by P1,131,799,897.00 in itself a very substantial sum that is roughly four times the original
DAR valuation. We mention these valuations as they indicate to us how undervalued the petitioners lands
had been at the start, particularly at the time the petitioners landholdings were taken. This reason
apparently compelled the petitioners to relentlessly pursue their valuation claims all they way up to the
level of this Court.

While the LBP deposited the total amount of P71,891,256.62 into the petitioners accounts
(P26,409,549.86 for AFC and P45,481,706.76 for HPI) at the time the landholdings were taken, these
amounts were mere partial payments that only amounted to 5% of the P1,383,179,000.00 actual value of
the expropriated properties. We point this aspect out to show that the initial payments made by the LBP
when the petitioners landholdings were taken, although promptly withdrawn by the petitioners, could not
by any means be considered a fair exchange of values at the time of taking; in fact, the LBPs actual
deposit could not be said to be substantial even from the original LBP valuation of P251,379,103.90.

Thus, the deposits might have been sufficient for purposes of the immediate taking of the landholdings but
cannot be claimed as amounts that would excuse the LBP from the payment of interest on the unpaid
balance of the compensation due. As discussed at length below, they were not enough to compensate the
petitioners for the potential income the landholdings could have earned for them if no immediate taking
had taken place. Under the circumstances, the State acted oppressively and was far from just in their

position to deny the petitioners of the potential income that the immediate taking of their properties
entailed.

Just Compensation from the

Prism of the Element of Taking.

Apart from the requirement that compensation for expropriated land must be fair and reasonable,
compensation, to be just, must also be made without delay.[12] Without prompt payment, compensation
cannot be considered "just" if the property is immediately taken as the property owner suffers the
immediate deprivation of both his land and its fruits or income.

This is the principle at the core of the present case where the petitioners were made to wait for more than
a decade after the taking of their property before they actually received the full amount of the principal of
the just compensation due them.[13] What they have not received to date is the income of their
landholdingscorresponding to what they would have received had no uncompensated taking of these lands
been immediately made. This income, in terms of the interest on the unpaid principal, is the subject of the
current litigation.

We recognized in Republic v. Court of Appeals[14] the need for prompt payment and the necessity of the
payment of interest to compensate for any delay in the payment of compensation for property already
taken. We ruled in this case that:

The constitutional limitation of just compensation is considered to be the sum equivalent to the market
value of the property, broadly described to be the price fixed by the seller in open market in the usual and
ordinary course of legal action and competition or the fair value of the property as between one who
receives, and one who desires to sell, i[f] fixed at the time of the actual taking by the government. Thus, if
property is taken for public use before compensation is deposited with the court having jurisdiction over
the case, the final compensation must include interest[s] on its just value to be computed from the time
the property is taken to the time when compensation is actually paid or deposited with the court. In fine,
between the taking of the property and the actual payment, legal interest[s] accrue in order to place the
owner in a position as good as (but not better than) the position he was in before the taking occurred.[15]
[Emphasis supplied.]

Aside from this ruling, Republic notably overturned the Courts previous ruling in National Power
Corporation v. Angas[16] which held that just compensation due for expropriated properties is not a loan or
forbearance of money but indemnity for damages for the delay in payment; since the interest involved is in
the nature of damages rather than earnings from loans, then Art. 2209 of the Civil Code, which fixes legal
interest at 6%, shall apply.

In Republic, the Court recognized that the just compensation due to the landowners for their
expropriated property amounted to an effective forbearance on the part of the State. Applying the Eastern
Shipping Lines ruling,[17] the Court fixed the applicable interest rate at 12% per annum, computed from
the time the property was taken until the full amount of just compensation was paid, in order to eliminate
the issue of the constant fluctuation and inflation of the value of the currency over time. In the Courts own
words:

The Bulacan trial court, in its 1979 decision, was correct in imposing interest[s] on the zonal value
of the property to be computed from the time petitioner instituted condemnation proceedings and took
the property in September 1969. This allowance of interest on the amount found to be the value of the
property as of the time of the taking computed, being an effective forbearance, at 12% per annum should
help eliminate the issue of the constant fluctuation and inflation of the value of the currency over time.[18]
[Emphasis supplied.]

We subsequently upheld Republics 12% per annum interest rate on the unpaid expropriation
compensation in the following cases: Reyes v. National Housing Authority,[19] Land Bank of the Philippines
v. Wycoco,[20] Republic v. Court of Appeals,[21] Land Bank of the Philippines v. Imperial,[22] Philippine
Ports Authority v. Rosales-Bondoc,[23] and Curata v. Philippine Ports Authority.[24]

These were the established rulings that stood before this Court issued the currently assailed Resolution of
December 4, 2009. These would be the rulings this Court shall reverse and de-establish if we maintain and
affirm our ruling deleting the 12% interest on the unpaid balance of compensation due for properties
already taken.

Under the circumstances of the present case, we see no compelling reason to depart from the rule that
Republic firmly established. Let it be remembered that shorn of its eminent domain and social justice
aspects, what the agrarian land reform program involves is the purchase by the government, through the
LBP, of agricultural lands for sale and distribution to farmers. As a purchase, it involves an exchange of
values the landholdings in exchange for the LBPs payment. In determining the just compensation for this
exchange, however, the measure to be borne in mind is not the taker's gain but the owner's loss[25] since
what is involved is the takeover of private property under the States coercive power. As mentioned
above, in the value-for-value exchange in an eminent domain situation, the State must ensure that the
individual whose property is taken is not shortchanged and must hence carry the burden of showing that
the just compensation requirement of the Bill of Rights is satisfied.

The owners loss, of course, is not only his property but also its income-generating potential. Thus, when
property is taken, full compensation of its value must immediately be paid to achieve a fair exchange for
the property and the potential income lost. The just compensation is made available to the property owner
so that he may derive income from this compensation, in the same manner that he would have derived
income from his expropriated property. If full compensation is not paid for property taken, then the State
must make up for the shortfall in the earning potential immediately lost due to the taking, and the absence
of replacement property from which income can be derived; interest on the unpaid compensation becomes
due as compliance with the constitutional mandate on eminent domain and as a basic measure of fairness.

In the context of this case, when the LBP took the petitioners landholdings without the corresponding full
payment, it became liable to the petitioners for the income the landholdings would have earned had they
not immediately been taken from the petitioners. What is interesting in this interplay, under the
developments of this case, is that the LBP, by taking landholdings without full payment while holding on at
the same time to the interest that it should have paid, effectively used or retained funds that should go to
the landowners and thereby took advantage of these funds for its own account.

From this point of view, the December 19, 2007 Resolution deleting the award of 12% interest is not only
patently and legally wrong, but is also morally unconscionable for being grossly unfair and unjust. If the
interest on the just compensation due in reality the equivalent of the fruits or income of the landholdings
would have yielded had these lands not been taken would be denied, the result is effectively a
confiscatory action by this Court in favor of the LBP. We would be allowing the LBP, for twelve long years,
to have free use of the interest that should have gone to the landowners. Otherwise stated, if we continue
to deny the petitioners present motion for reconsideration, we would illogically and without much
thought to the fairness that the situation demands uphold the interests of the LBP, not only at the
expense of the landowners but also that of substantial justice as well.

Lest this Court be a party to this monumental unfairness in a social program aimed at fostering balance in
our society, we now have to ring the bell that we have muted in the past, and formally declare that the
LBPs position is legally and morally wrong. To do less than this is to leave the demands of the
constitutional just compensation standard (in terms of law) and of our own conscience (in terms of
morality) wanting and unsatisfied.

The Delay in Payment Issue

Separately from the demandability of interest because of the failure to fully pay for property already taken,
a recurring issue in the case is the attribution of the delay.

That delay in payment occurred is not and cannot at all be disputed. While the LBP claimed that it made
initial payments of P411,769,168.32 (out of the principal sum due of P1,383,179,000.00), the undisputed
fact is that the petitioners were deprived of their lands on December 9, 1996 (when titles to their
landholdings were cancelled and transferred to the Republic of the Philippines), and received full payment
of the principal amount due them only on May 9, 2008.

In the interim, they received no income from their landholdings because these landholdings had been
taken. Nor did they receive adequate income from what should replace the income potential of their
landholdings because the LBP refused to pay interest while withholding the full amount of the principal of
the just compensation due by claiming a grossly low valuation. This sad state continued for more than a
decade. In any language and by any measure, a lengthy delay in payment occurred.

An important starting point in considering attribution for the delay is that the petitioners voluntarily offered
to sell their landholdings to the governments land reform program; they themselves submitted their
Voluntary Offer to Sell applications to the DAR, and they fully cooperated with the governments program.
The present case therefore is not one where substantial conflict arose on the issue of whether
expropriation is proper; the petitioners voluntarily submitted to expropriation and surrendered their
landholdings, although they contested the valuation that the government made.

Presumably, had the landholdings been properly valued, the petitioners would have accepted the payment
of just compensation and there would have been no need for them to go to the extent of filing a valuation
case. But, as borne by the records, the petitioners lands were grossly undervalued by the DAR, leaving the
petitioners with no choice but to file actions to secure what is justly due them.

The DARs initial gross undervaluation started the cycle of court actions that followed, where the LBP
eventually claimed that it could not be faulted for seeking judicial recourse to defend the governments
and its own interests in light of the petitioners valuation claims. This LBP claim, of course, conveniently
forgets that at the root of all these valuation claims and counterclaims was the initial gross undervaluation
by DAR that the LBP stoutly defended. At the end, this undervaluation was proven incorrect by no less
than this Court; the petitioners were proven correct in their claim, and the correct valuation more than
five-fold the initial DAR valuation was decreed and became final.

All these developments cannot now be disregarded and reduced to insignificance. In blunter terms, the
government and the LBP cannot now be heard to claim that they were simply protecting their interests
when they stubbornly defended their undervalued positions before the courts. The more apt and accurate
statement is that they adopted a grossly unreasonable position and the adverse developments that
followed, particularly the concomitant delay, should be directly chargeable to them.

To be sure, the petitioners were not completely correct in the legal steps they took in their valuation
claims. They initially filed their valuation claim before the DARAB instead of immediately seeking judicial
intervention. The DARAB, however, contributed its share to the petitioners error when it failed or refused
to act on the valuation petitions for more than three (3) years. Thus, on top of the DAR undervaluation
was the DARAB inaction after the petitioners landholdings had been taken. This Courts Decision of
February 6, 2007 duly noted this and observed:

It is not controverted that this case started way back on 12 October 1995, when AFC and HPI voluntarily
offered to sell the properties to the DAR. In view of the failure of the parties to agree on the valuation of
the properties, the Complaint for Determination of Just Compensation was filed before the DARAB on 14
February 1997. Despite the lapse of more than three years from the filing of the complaint, the DARAB
failed to render a decision on the valuation of the land. Meantime, the titles over the properties of AFC and
HPI had already been cancelled and in their place a new certificate of title was issued in the name of the
Republic of the Philippines, even as far back as 9 December 1996. A period of almost 10 years has lapsed.
For this reason, there is no dispute that this case has truly languished for a long period of time, the delay
being mainly attributable to both official inaction and indecision, particularly on the determination of the
amount of just compensation, to the detriment of AFC and HPI, which to date, have yet to be fully
compensated for the properties which are already in the hands of farmer-beneficiaries, who, due to the
lapse of time, may have already converted or sold the land awarded to them.

Verily, these two cases could have been disposed with dispatch were it not for LBPs counsel causing
unnecessary delay. At the inception of this case, DARAB, an agency of the DAR which was commissioned
by law to determine just compensation, sat on the cases for three years, which was the reason that AFC
and HPI filed the cases before the RTC. We underscore the pronouncement of the RTC that the delay by
DARAB in the determination of just compensation could only mean the reluctance of the Department of
Agrarian Reform and the Land Bank of the Philippines to pay the claim of just compensation by corporate
landowners.

To allow the taking of landowners properties, and to leave them empty-handed while government
withholds compensation is undoubtedly oppressive. [Emphasis supplied.]

These statements cannot but be true today as they were when we originally decided the case and awarded
12% interest on the balance of the just compensation due. While the petitioners were undisputedly
mistaken in initially seeking recourse through the DAR, this agency itself hence, the government
committed a graver transgression when it failed to act at all on the petitioners complaints for
determination of just compensation.

In sum, in a balancing of the attendant delay-related circumstances of this case, delay should be laid at the
doorsteps of the government, not at the petitioners. We conclude, too, that the government should not be
allowed to exculpate itself from this delay and should suffer all the consequences the delay caused.

The LBPs arguments on the applicability of cases imposing

12% interest

The LBP claims in its Comment that our rulings in Republic v. Court of Appeals,[26] Reyes v. National
Housing Authority,[27] and Land Bank of the Philippines v. Imperial,[28] cannot be applied to the present
case.

According to the LBP, Republic is inapplicable because, first, the landowners in Republic remained unpaid,
notwithstanding the fact that the award for just compensation had already been fixed by final judgment; in
the present case, the Court already acknowledged that pertinent amounts were deposited in favor of the
landowners within 14 months from the filing of their complaint. Second, while Republic involved an
ordinary expropriation case, the present case involves expropriation for agrarian reform. Finally, the just
compensation in Republic remained unpaid notwithstanding the finality of judgment, while the just
compensation in the present case was immediately paid in full after LBP received a copy of the Courts
resolution

We find no merit in these assertions.

As we discussed above, the pertinent amounts allegedly deposited by LBP were mere partial payments
that amounted to a measly 5% of the actual value of the properties expropriated. They could be the basis
for the immediate taking of the expropriated property but by no stretch of the imagination can these
nominal amounts be considered pertinent enough to satisfy the full requirement of just compensation
i.e., the full and fair equivalent of the expropriated property, taking into account its income potential and
the foregone income lost because of the immediate taking.

We likewise find no basis to support the LBPs theory that Republic and the present case have to be treated
differently because the first involves a regular expropriation case, while the present case involves
expropriation pursuant to the countrys agrarian reform program. In both cases, the power of eminent
domain was used and private property was taken for public use. Why one should be different from the

other, so that the just compensation ruling in one should not apply to the other, truly escapes us. If there is
to be a difference, the treatment of agrarian reform expropriations should be stricter and on a higher plane
because of the governments societal concerns and objectives. To be sure, the government cannot
attempt to remedy the ills of one sector of society by sacrificing the interests of others within the same
society.

Finally, we note that the finality of the decision (that fixed the value of just compensation) in Republic was
not a material consideration for the Court in awarding the landowners 12% interest. The Court, in Republic,
simply affirmed the RTC ruling imposing legal interest on the amount of just compensation due. In the
process, the Court determined that the legal interest should be 12% after recognizing that the just
compensation due was effectively a forbearance on the part of the government. Had the finality of the
judgment been the critical factor, then the 12% interest should have been imposed from the time the RTC
decision fixing just compensation became final. Instead, the 12% interest was imposed from the time that
the Republic commenced condemnation proceedings and took the property.

The LBP additionally asserts that the petitioners erroneously relied on the ruling in Reyes v. National
Housing Authority. The LBP claims that we cannot applyReyes because it involved just compensation that
remained unpaid despite the finality of the expropriation decision. LBPs point of distinction is that just
compensation was immediately paid in the present case upon the Courts determination of the actual
value of the expropriated properties. LBP claims, too, that in Reyes, the Court established that the refusal
of the NHA to pay just compensation was unfounded and unjustified, whereas the LBP in the present case
clearly demonstrated its willingness to pay just compensation. Lastly, in Reyes, the records showed that
there was an outstanding balance that ought to be paid, while the element of an outstanding balance is
absent in the present case.

Contrary to the LBPs opinion, the imposition of the 12% interest in Reyes did not depend on either
the finality of the decision of the expropriation court, or on the finding that the NHAs refusal to pay just
compensation was unfounded and unjustified. Quite clearly, the Court imposed 12% interest based on the
ruling inRepublic v. Court of Appeals that x x x if property is taken for public use before compensation is
deposited with the court having jurisdiction over the case, the final compensation must include interest[s]
on its just value to be computed from the time the property is taken to the time when compensation is
actually paid or deposited with the court. In fine, between the taking of the property and the actual
payment, legal interest[s] accrue in order to place the owner in a position as good as (but not better than)
the position he was in before the taking occurred.[29] This is the same legal principle applicable to the
present case, as discussed above.

While the LBP immediately paid the remaining balance on the just compensation due to the
petitioners after this Court had fixed the value of the expropriated properties, it overlooks one essential
fact from the time that the State took the petitioners properties until the time that the petitioners were
fully paid, almost 12 long years passed. This is the rationale for imposing the 12% interest in order to
compensate the petitioners for the income they would have made had they been properly compensated
for their properties at the time of the taking.

Finally, the LBP insists that the petitioners quoted our ruling in Land Bank of the Philippines v.
Imperial out of context. According to the LBP, the Court imposed legal interest of 12% per annum only after
December 31, 2006, the date when the decision on just compensation became final.

The LBP is again mistaken. The Imperial case involved land that was expropriated pursuant to
Presidential Decree No. 27,[30] and fell under the coverage of DAR Administrative Order (AO) No. 13.[31]
This AO provided for the payment of a 6% annual interest if there is any delay in payment of just
compensation. However, Imperial was decided in 2007 and AO No. 13 was only effective up to December
2006. Thus, the Court, relying on our ruling in the Republic case, applied the prevailing 12% interest ruling
to the period when the just compensation remained unpaid after December 2006. It is for this reason that
December 31, 2006 was important, not because it was the date of finality of the decision on just
compensation.

The 12% Interest Rate and

the Chico-Nazario Dissent

To fully reflect the concerns raised in this Courts deliberations on the present case, we feel it appropriate
to discuss the Justice Minita Chico-Nazarios dissent from the Courts December 4, 2009 Resolution.

While Justice Chico-Nazario admitted that the petitioners were entitled to the 12% interest, she saw it
appropriate to equitably reduce the interest charges fromP1,331,124,223.05 to P400,000,000.00. In
support of this proposal, she enumerated various cases where the Court, pursuant to Article 1229 of the
Civil Code,[32]equitably reduced interest charges.

We differ with our esteemed colleagues views on the application of equity.

While we have equitably reduced the amount of interest awarded in numerous cases in the past, those
cases involved interest that was essentially consensual in nature, i.e., interest stipulated in signed
agreements between the contracting parties. In contrast, the interest involved in the present case runs as
a matter of law and follows as a matter of course from the right of the landowner to be placed in as good a
position as money can accomplish, as of the date of taking.[33]

Furthermore, the allegedly considerable payments made by the LBP to the petitioners cannot be a proper
premise in denying the landowners the interest due them under the law and established jurisprudence. If
the just compensation for the landholdings is considerable, this compensation is not undue because the
landholdings the owners gave up in exchange are also similarly considerable AFC gave up an aggregate
landholding of 640.3483 hectares, while HPIs gave up 805.5308 hectares. When the petitioners
surrendered these sizeable landholdings to the government, the incomes they gave up were likewise
sizeable and cannot in any way be considered miniscule. The incomes due from these properties,
expressed as interest, are what the government should return to the petitioners after the government took
over their lands without full payment of just compensation. In other words, the value of the landholdings
themselves should be equivalent to the principal sum of the just compensation due; interest is due and
should be paid to compensate for the unpaid balance of this principal sum after taking has been
completed. This is the compensation arrangement that should prevail if such compensation is to satisfy the
constitutional standard of being just.

Neither can LBPs payment of the full compensation due before the finality of the judgment of this Court
justify the reduction of the interest due them. To rule otherwise would be to forget that the petitioners had
to wait twelve years from the time they gave up their lands before the government fully paid the principal
of the just compensation due them. These were twelve years when they had no income from their
landholdings because these landholdings have immediately been taken; no income, or inadequate income,
accrued to them from the proceeds of compensation payment due them because full payment has been
withheld by government.

If the full payment of the principal sum of the just compensation is legally significant at all under the
circumstances of this case, the significance is only in putting a stop to the running of the interest due
because the principal of the just compensation due has been paid. To close our eyes to these realities is to
condone what is effectively a confiscatory action in favor of the LBP.

That the legal interest due is now almost equivalent to the principal to be paid is not per se an inequitable
or unconscionable situation, considering the length of time the interest has remained unpaid almost
twelve long years. From the perspective of interest income, twelve years would have been sufficient for the
petitioners to double the principal, even if invested conservatively, had they been promptly paid the
principal of the just compensation due them. Moreover, the interest, however enormous it may be, cannot
be inequitable and unconscionable because it resulted directly from the application of law and
jurisprudence standards that have taken into account fairness and equity in setting the interest rates due
for the use or forebearance of money.

If the LBP sees the total interest due to be immense, it only has itself to blame, as this interest piled up
because it unreasonably acted in its valuation of the landholdings and consequently failed to promptly pay
the petitioners. To be sure, the consequences of this failure i.e., the enormity of the total interest due
and the alleged financial hemorrhage the LBP may suffer should not be the very reason that would

excuse it from full compliance. To so rule is to use extremely flawed logic. To so rule is to disregard the
question of how the LBP, a government financial institution that now professes difficulty in paying interest
at 12% per annum, managed the funds that it failed to pay the petitioners for twelve long years.

It would be utterly fallacious, too, to argue that this Court should tread lightly in imposing liabilities on the
LBP because this bank represents the government and, ultimately, the public interest. Suffice it to say that
public interest refers to what will benefit the public, not necessarily the government and its agencies
whose task is to contribute to the benefit of the public. Greater public benefit will result if government
agencies like the LBP are conscientious in undertaking its tasks in order to avoid the situation facing it in
this case. Greater public interest would be served if it can contribute to the credibility of the governments
land reform program through the conscientious handling of its part of this program.

As our last point, equity and equitable principles only come into full play when a gap exists in the law and
jurisprudence.[34] As we have shown above, established rulings of this Court are in place for full
application to the present case. There is thus no occasion for the equitable consideration that Justice
Chico-Nazario suggested.

The Amount Due the Petitioners

as Just Compensation

As borne by the records, the 12% interest claimed is only on the difference between the price of the
expropriated lands (determined with finality to beP1,383,179,000.00) and the amount of P411,769,168.32
already paid to the petitioners. The difference between these figures amounts to the remaining balance
ofP971,409,831.68 that was only paid on May 9, 2008.
WHEREFORE, premises considered, we GRANT the petitioners motion for reconsideration. The Court En
Bancs Resolution dated December 4, 2009, as well as the Third Divisions Resolutions dated April 30, 2008
and December 19, 2007, are hereby REVERSED and SET ASIDE.

The respondent Land Bank of the Philippines is hereby ORDERED to pay petitioners Apo Fruits Corporation
and Hijo Plantation, Inc. interest at the rate of 12% per annum on the unpaid balance of the just
compensation, computed from the date the Government took the properties on December 9, 1996, until
the respondent Land Bank of the Philippines paid on May 9, 2008 the balance on the principal amount.

Unless the parties agree to a shorter payment period, payment shall be in monthly installments at the rate
of P60,000,000.00 per month until the whole amount owing, including interest on the outstanding balance,
is fully paid.

G.R. No. 200868

November 12, 2012

ANITA A. LEDDA, Petitioner,

vs.
BANK OF THE PHILIPPINE ISLANDS, Respondent.
DECISION
CARPIO, J.:
The Case
This petition for rebiew1 assails the 15 July 2011 Decision2 and 9 February 2012 Resolution3 of the Court
of Appeals in CA-G.R. CV No. 93747. The Court of Appeals partially granted the appeal filed by petitioner
Anita A. Ledda (Ledda) and modified the 4 June 2009 Decision4 of the Regional Trial Court, Makati City,
Branch 61. The Court of Appeals denied the motion for reconsideration.
The Facts

This case arose from a collection suit filed by respondent Bank of the Philippine Islands (BPI) against Ledda
for the latters unpaid credit card obligation.
BPI, through its credit card system, extends credit accommodations to its clientele for the purchase of
goods and availment of various services from accredited merchants, as well as to secure cash advances
from authorized bank branches or through automated teller machines.
As one of BPIs valued clients, Ledda was issued a pre-approved BPI credit card under Customer Account
Number 020100-9-00-3041167. The BPI Credit Card Package, which included the Terms and Conditions
governing the use of the credit card, was delivered at Leddas residence on 1 July 2005. Thereafter, Ledda
used the credit card for various purchases of goods and services and cash advances.
Ledda defaulted in the payment of her credit card obligation, which BPI claimed in their complaint
amounted to P548,143.73 per Statement of Account dated 9 September 2007.5 Consequently, BPI sent
letters6 to Ledda demanding the payment of such amount, representing the principal obligation with
3.25% finance charge and 6% late payment charge per month.
Despite BPIs repeated demands, Ledda failed to pay her credit card obligation constraining BPI to file an
action for collection of sum of money with the Regional Trial Court, Makati City, Branch 61. The trial court
declared Ledda in default for failing to file Answer within the prescribed period, despite receipt of the
complaint and summons. Upon Leddas motion for reconsideration, the trial court lifted the default order
and admitted Leddas Answer Ad Cautelam.
While she filed a Pre-Trial Brief, Ledda and her counsel failed to appear during the continuation of the PreTrial. Hence, the trial court allowed BPI to present its evidence ex-parte.
In its Decision of 4 June 2009, the trial court ruled in favor of BPI, thus:
WHEREFORE, premises duly considered, the instant "Complaint" of herein plaintiff Bank of the Philippine
Islands (BPI) is hereby given DUE COURSE/GRANTED.
Accordingly, judgment is hereby rendered against herein defendant ANITA A. LEDDA and in favor of the
plaintiff.
Ensuably, the herein defendant ANITA A. LEDDA is hereby ordered to pay the herein plaintiff Bank of the
Philippine Islands (BPI) the following sums, to wit:
1. Five Hundred Forty-Eight Thousand One Hundred Forty-Three Pesos and Seventy-Three Centavos
(P548,143.73) as and for actual damages, with finance and late-payment charges at the rate of three and
one-fourth percent (3.25%) and six percent (6%) per month, respectively, to be counted from 19 October
2007 until the amount is fully paid;
2. Attorneys fees equivalent to twenty-five percent (25%) of the total obligation due and demandable,
exclusive of appearance fee for every court hearing, and
3. Costs of suit.
SO ORDERED.7 (Emphasis in the original)
The Ruling of the Court of Appeals
The Court of Appeals rejected Leddas argument that the document containing the Terms and Conditions
governing the use of the BPI credit card is an actionable document contemplated in Section 7, Rule 8 of the
1997 Rules of Civil Procedure. The Court of Appeals held that BPIs cause of action is based on "Leddas
availment of the banks credit facilities through the use of her credit/plastic cards, coupled with her refusal
to pay BPIs outstanding credit for the cost of the goods, services and cash advances despite lawful
demands."
Citing Macalinao v. Bank of the Philippine Islands,8 the Court of Appeals held that the interest rates and
penalty charges imposed by BPI for Leddas non-payment of her credit card obligation, totalling 9.25% per
month or 111% per annum, are exorbitant and unconscionable. Accordingly, the Court of Appeals reduced
the monthly finance charge to 1% and the late payment charge to 1%, or a total of 2% per month or 24%
per annum.
The Court of Appeals recomputed Leddas total credit card obligation by deducting P226,000.15,
representing interests and charges, from P548,143.73, leaving a difference of P322,138.58 as the principal
amount, on which the reduced interest rates should be imposed.
The Court of Appeals awarded BPI P10,000 attorneys fees, pursuant to the ruling in Macalinao.
The dispositive portion of the Court of Appeals Decision reads:
WHEREFORE, premises considered, the appeal is PARTLY GRANTED, and accordingly the herein assailed
June 4, 2009 Decision of the trial court is hereby MODIFIED, ordering defendant-appellant Anita Ledda to

pay plaintiff-appellee BPI the amount of Php322,138.58, with 1% monthly finance charges from date of
availment of the plaintiffs credit facilities, and penalty charge at 1% per month of the amount due from
the date the amount becomes due and payable, until full payment. The award of attorneys fees is fixed at
Php10,000.00.
SO ORDERED.9 (Emphasis in the original)
The Issues
Ledda raises the following issues:
1. Whether the Court of Appeals erred in holding that the document containing the Terms and Conditions
governing the issuance and use of the credit card is not an actionable document contemplated in Section
7, Rule 8 of the 1997 Rules of Civil Procedure.
2. Whether the Court of Appeals erred in applying Macalinao v. Bank of the Philippine Islands instead of
Alcaraz v. Court of Appeals10 as regards the imposition of interest and penalty charges on the credit card
obligation.
3. Whether the Court of Appeals erred in awarding attorneys fees in favor of BPI.
The Ruling of the Court
The petition is partially meritorious.
I.
Whether the document containing the
Terms and Conditions is an actionable document.
Section 7, Rule 8 of the 1997 Rules of Civil Procedure provides:
SEC. 7. Action or defense based on document. Whenever an action or defense is based upon a written
instrument or document, the substance of such instrument or document shall be set forth in the pleading,
and the original or a copy thereof shall be attached to the pleading as an exhibit, which shall be deemed to
be a part of the pleading, or said copy may with like effect be set forth in the pleading.
Clearly, the above provision applies when the action is based on a written instrument or document.
In this case, the complaint is an action for collection of sum of money arising from Leddas default in her
credit card obligation with BPI. BPIs cause of action is primarily based on Leddas (1) acceptance of the BPI
credit card, (2) usage of the BPI credit card to purchase goods, avail services and secure cash advances,
and (3) non-payment of the amount due for such credit card transactions, despite demands.11 In other
words, BPIs cause of action is not based only on the document containing the Terms and Conditions
accompanying the issuance of the BPI credit card in favor of Ledda. Therefore, the document containing
the Terms and Conditions governing the use of the BPI credit card is not an actionable document
contemplated in Section 7, Rule 8 of the 1997 Rules of Civil Procedure. As such, it is not required by the
Rules to be set forth in and attached to the complaint.
At any rate, BPI has sufficiently established a cause of action against Ledda, who admits having received
the BPI credit card, subsequently used the credit card, and failed to pay her obligation arising from the use
of such credit card.12
II.
Whether Alcaraz v. Court of Appeals,
instead of Macalinao v. BPI, is applicable.
Ledda contends that the case of Alcaraz v. Court of Appeals,13 instead of Macalinao v. Bank of the
Philippine Islands14 which the Court of Appeals invoked, is applicable in the computation of the interest
rate on the unpaid credit card obligation. Ledda claims that similar to Alcaraz, she was a "pre-screened"
client who did not sign any credit card application form or terms and conditions prior to the issuance of the
credit card. Like Alcaraz, Ledda asserts that the provisions of the Terms and Conditions, particularly on the
interests, penalties and other charges for non-payment of any outstanding obligation, are not binding on
her as such Terms and Conditions were never shown to her nor did she sign it.
We agree with Ledda. The ruling in Alcaraz v. Court of Appeals15 applies squarely to the present case. In
Alcaraz, petitioner there, as a pre-screened client of Equitable Credit Card Network, Inc., did not submit or
sign any application form or document before the issuance of the credit card. There is no evidence that
petitioner Alcaraz was shown a copy of the terms and conditions before or after the issuance of the credit
card in his name, much less that he has given his consent thereto.

In this case, BPI issued a pre-approved credit card to Ledda who, like Alcaraz, did not sign any credit card
application form prior to the issuance of the credit card. Like the credit card issuer in Alcaraz, BPI, which
has the burden to prove its affirmative allegations, failed to establish Leddas agreement with the Terms
and Conditions governing the use of the credit card. It must be noted that BPI did not present as evidence
the Terms and Conditions which Ledda allegedly received and accepted.16 Clearly, BPI failed to prove
Leddas conformity and acceptance of the stipulations contained in the Terms and Conditions. Therefore, as
the Court held in Alcaraz, the Terms and Conditions do not bind petitioner (Ledda in this case) "without a
clear showing that x x x petitioner was aware of and consented to the provisions of such document."17
On the other hand, Macalinao v. Bank of the Philippine Islands,18 which the Court of Appeals cited,
involves a different set of facts. There, petitioner Macalinao did not challenge the existence of the Terms
and Conditions Governing the Issuance and Use of the BPI Credit Card and her consent to its provisions,
including the imposition of interests and other charges on her unpaid BPI credit card obligation. Macalinao
simply questioned the legality of the stipulated interest rate and penalty charge, claiming that such
charges are iniquitous. In fact, one of Macalinaos assigned errors before this Court reads: "The reduction
of interest rate, from 9.25% to 2%, should be upheld since the stipulated rate of interest was
unconscionable and iniquitous, and thus illegal."19 Therefore, there is evidence that Macalinao was fully
aware of the stipulations contained in the Terms and Conditions Governing the Issuance and Use of the
Credit Card, unlike in this case where there is no evidence that Ledda was aware of or consented to the
Terms and Conditions for the use of the credit card.
Since there is no dispute that Ledda received, accepted and used the BPI credit card issued to her and that
she defaulted in the payment of the total amount arising from the use of such credit card, Ledda is liable to
pay BPI P322,138.58 representing the principal amount of her unpaid credit card obligation.20
Consistent with Alcaraz, Ledda must also pay interest on the total unpaid credit card amount at the rate of
12% per annum since her credit card obligation consists of a loan or forbearance of money.21 In Eastern
Shipping Lines, Inc. v. Court of Appeals,22 the Court explained:
1. When an 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.
We reject Leddas contention that, since there was no written agreement to pay a higher interest rate, the
interest rate should only be 6%. Ledda erroneously invokes Article 2209 of the Civil Code.23 Article 2209
refers to indemnity for damages and not interest on loan or forbearance of money, which is the case here.
In Sunga-Chan v. Court of Appeals,24 the Court held:
Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest, if proper, and the
applicable rate, as follows: The 12% per annum rate under CB Circular No. 416 shall apply only to loans or
forbearance of money, goods, or credits, as well as to judgments involving such loan or forbearance of
money, goods, or credit, while the 6% per annum under Art. 2209 of the Civil Code applies "when the
transaction involves the payment of indemnities in the concept of damage arising from the breach or a
delay in the performance of obligations in general," with the application of both rates reckoned "from the
time the complaint was filed until the adjudged amount is fully paid." In either instance, the reckoning
period for the commencement of the running of the legal interest shall be subject to the condition "that the
courts are vested with discretion, depending on the equities of each case, on the award of interest.
(Emphasis supplied)
In accordance with Eastern Shipping Lines, Inc., the 12% legal interest shall be reckoned from the date BPI
extrajudicially demanded from Ledda the payment of her overdue credit card obligation. Thus, the 12%
legal interest shall be computed from 2 October 2007, when Ledda, through her niece Sally D. Gancea,25
received BPIs letter26 dated 26 September 2007 demanding the payment of the alleged overdue amount
of P548,143.73.
III.
Whether the award of attorneys fees is proper.
Ledda assails the award of attorneys fees in favor of BPI on the grounds of (1) erroneous reliance by the
Court of Appeals on the case of Macalinao and (2) failure by the trial court to state the reasons for the
award of attorneys fees.
Settled is the rule that the trial court must state the factual, legal or equitable justification for the award of
attorneys fees.27 The matter of attorneys fees cannot be stated only in the dispositive portion of the
decision.28The body of the courts decision must state the reasons for the award of attorneys fees.29 In
Frias v. San Diego-Sison,30 the Court held:
Article 2208 of the New Civil Code enumerates the instances where such may be awarded and, in all cases,
it must be reasonable, just and equitable if the same were to be granted. Attorneys fees as part of
damages are not meant to enrich the winning party at the expense of the losing litigant. They are not
awarded every time a party prevails in a suit because of the policy that no premium should be placed on
the right to litigate. The award of attorneys fees is the exception rather than the general rule.1wphi1 As

such, it is necessary for the trial court to make findings of facts and law that would bring the case within
the exception and justify the grant of such award. The matter of attorneys fees cannot be mentioned only
in the dispositive portion of the decision. They must be clearly explained and justified by the court in the
body of its decision. On appeal, the CA is precluded from supplementing the bases for awarding attorneys
fees when the trial court failed to discuss in its Decision the reasons for awarding the same. Consequently,
the award of attorneys fees should be deleted.1wphi1
In this case, the trial court failed to state in the body of its decision the factual or legal reasons for the
award of attorneys fees in favor of BPI. Therefore, the same must be deleted.
WHEREFORE, we GRANT the petition IN PART. Petitioner Anita A. Ledda is ORDERED to pay respondent
Bank of the Philippine Islands the amount of .P322, 138.58, representing her unpaid credit card obligation,
with interest thereon at the rate of 12% per annum to be computed from 2 October 2007, until full
payment thereof. The award of attorney's fees is DELETED for lack of basis.

REPUBLIC OF THE PHILIPPINES, represented by theCHIEF OF THE PHILIPPINE NATIONAL POLICE,

Petitioner,

- versus -

THI THU THUY T. DE GUZMAN,

Respondent. G.R. No. 175021

Present:

VELASCO, JR .,*
Acting Chairperson,
LEONARDO-DE CASTRO,
BERSAMIN,**
DEL CASTILLO, and
PEREZ, JJ.

Promulgated:

June 15, 2011

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

DECISION

LEONARDO-DE CASTRO, J.:

This is a Petition for Review on Certiorari[1] filed by Republic of the Philippines, as represented by the Chief
of the Philippine National Police (PNP), of the September 27, 2006 Decision[2] of the Court of Appeals in
CA-G.R. CV No. 80623, which affirmed with modification the September 8, 2003 Decision[3] of the Regional
Trial Court (RTC), Branch 222, of Quezon City in Civil Case No. Q99-37717.

Respondent is the proprietress of Montaguz General Merchandise (MGM),[4] a contractor accredited by the
PNP for the supply of office and construction materials and equipment, and for the delivery of various
services such as printing and rental, repair of various equipment, and renovation of buildings, facilities,
vehicles, tires, and spare parts.[5]

On December 8, 1995, the PNP Engineering Services (PNPES), released a Requisition and Issue Voucher[6]
for the acquisition of various building materials amounting to Two Million Two Hundred Eighty-Eight
Thousand Five Hundred Sixty-Two Pesos and Sixty Centavos (P2,288,562.60) for the construction of a fourstorey condominium building with roof deck at Camp Crame, Quezon City.[7]

Respondent averred that on December 11, 1995, MGM and petitioner, represented by the PNP, through its
chief, executed a Contract of Agreement[8] (the Contract) wherein MGM, for the price of P2,288,562.60,
undertook to procure and deliver to the PNP the construction materials itemized in the purchase
order[9]attached to the Contract. Respondent claimed that after the PNP Chief approved the Contract and
purchase order,[10] MGM, on March 1, 1996, proceeded with the delivery of the construction materials, as
evidenced by Delivery Receipt Nos. 151-153,[11] Sales Invoice Nos. 038 and 041,[12] and the Report of
Public Property Purchase[13] issued by the PNPs Receiving and Accounting Officers to their Internal
Auditor Chief. Respondent asseverated that following the PNPs inspection of the delivered materials on
March 4, 1996,[14] the PNP issued two Disbursement Vouchers; one in the amount of P2,226,147.26 in
favor of MGM,[15] and the other,[16] in the amount of P62,415.34, representing the three percent (3%)
withholding tax, in favor of the Bureau of Internal Revenue (BIR).[17]

On November 5, 1997, the respondent, through counsel, sent a letter dated October 20, 1997[18] to the
PNP, demanding the payment of P2,288,562.60 for the construction materials MGM procured for the PNP
under their December 1995 Contract.

On November 17, 1997, the PNP, through its Officer-in-Charge, replied[19] to respondents counsel,
informing her of the payment made to MGM via Land Bank of the Philippines (LBP) Check No. 0000530631,
[20] as evidenced by Receipt No. 001, [21] issued by the respondent to the PNP on April 23, 1996.[22]

On November 26, 1997, respondent, through counsel, responded by reiterating her demand[23] and
denying having ever received the LBP check, personally or through an authorized person. She also
claimed that Receipt No. 001, a copy of which was attached to the PNPs November 17, 1997 letter, could
not support the PNPs claim of payment as the aforesaid receipt belonged to Montaguz Builders, her other
company, which was also doing business with the PNP, and not to MGM, with which the contract was made.

On May 5, 1999, respondent filed a Complaint for Sum of Money against the petitioner, represented by the
Chief of the PNP, before the RTC, Branch 222 of Quezon City.[24] This was docketed as Civil Case No. Q9937717.

The petitioner filed a Motion to Dismiss[25] on July 5, 1999, on the ground that the claim or demand set
forth in respondents complaint had already been paid or extinguished,[26] as evidenced by LBP Check No.
0000530631 dated April 18, 1996, issued by the PNP to MGM, and Receipt No. 001, which the respondent
correspondingly issued to the PNP. The petitioner also argued that aside from the fact that the respondent,
in her October 20, 1997 letter, demanded the incorrect amount since it included the withholding tax paid
to the BIR, her delay in making such demand [did] not speak well of the worthiness of the cause she
espouse[d].[27]

Respondent opposed petitioners motion to dismiss in her July 12, 1999 Opposition[28]and September 10,
1999 Supplemental Opposition to Motion to Dismiss.[29] Respondent posited that Receipt No. 001, which
the petitioner claimed was issued by MGM upon respondents receipt of the LBP check, was, first, under
the business name Montaguz Builders, an entity separate from MGM. Next, petitioners allegation that
she received the LBP check on April 19, 1996 was belied by the fact that Receipt No. 001, which was
supposedly issued for the check, was dated four days later, or April 23, 1996. Moreover, respondent
averred, the PNPs own Checking Account Section Logbook or the Warrant Register, showed that it was one
Edgardo Cruz (Cruz) who signed for the check due to MGM, [30] contrary to her usual practice of
personally receiving and signing for checks payable to her companies.

After conducting hearings on the Motion to Dismiss, the RTC issued an Order[31] on May 4, 2001, denying
the petitioners motion for lack of merit. The petitioner thereafter filed its Answer,[32] wherein it restated
the same allegations in its Motion to Dismiss.

Trial on the merits followed the pre-trial conference, which was terminated on June 25, 2002 when the
parties failed to arrive at an amicable settlement.[33]

On September 3, 2002, shortly after respondent was sworn in as a witness, and after her counsel formally
offered her testimony in evidence, Atty. Norman Bueno, petitioners counsel at that time, made the
following stipulations in open court:

Atty. Bueno

(To Court)

Your Honor, in order to expedite the trial, we will admit that this witness was contracted to
deliver the construction supplies or materials. We will admit that she complied, that she actually delivered
the materials. We will admit that Land Bank Corporation check was issued although we will not admit that
the check was not released to her, as [a] matter of fact, we have the copy of the check. We will admit that
Warrant Register indicated that the check was released although we will not admit that the check was not
received by the [respondent].

Court

(To Atty. Albano)

So, the issues here are whether or not the [respondent] received the check for the payment
of the construction materials or supplies and who received the same. That is all.

Atty. Albano (To Court)

Yes, your Honor.

Court

(To Atty. Albano)

I think we have an abbreviated testimony here. Proceed.[34] (Emphasis ours.)

The stipulations made by the petitioner through Atty. Bueno were in consonance with the admissions it had
previously made, also through Atty. Bueno, in its Answer,[35] and pre-trial brief[36]:

Answer:
IX
It ADMITS the allegation in paragraph 9 of the Complaint that [respondent] delivered to the PNP
Engineering Service the construction materials. It also ADMITS the existence of Receipt Nos. 151, 152 and
153 alleged in the same paragraph, copies of which are attached to the Complaint as Annexes G, G-1
and G-2.[37] (Emphasis ours.)

Pre-trial Brief:

III

ADMISSIONS

3.1.

Facts and/or documents admitted

For brevity, [petitioner] admit[s] only the allegations in [respondents] Complaint and the annexes
thereto that were admitted in the Answer.[38] (Emphases ours.)

With the issue then confined to whether respondent was paid or not, the RTC proceeded with the trial.

Respondent, in her testimony, narrated that on April 18, 1996, she went to the PNP Finance Center to claim
a check due to one of her companies, Montaguz Builders. As the PNP required the issuance of an official
receipt upon claiming its checks, respondent, in preparation for the PNP check she expected, already
signed Montaguz Builders Official Receipt No. 001, albeit the details were still blank. However, upon
arriving at the PNP Finance Center, respondent was told that the check was still with the LBP, which could
not yet release it. Respondent then left for the Engineering Services Office to see Captain Rama, along
with Receipt No. 001, which she had not yet issued.[39] Respondent claimed that after some time, she left
her belongings, including her receipt booklet, at a bench in Captain Ramas office when she went around
the Engineering Office to talk to some other people.[40] She reasoned that since she was already familiar
and comfortable with the people in the PNPES Office, she felt no need to ask anyone to look after her
belongings, as it was her normal practice[41] to leave her belongings in one of the offices there. The
next day, respondent alleged that when she returned for the check due to Montaguz Builders that she was
not able to claim the day before, she discovered for the first time that Receipt No. 001, which was meant
for that check, was missing. Since she would not be able to claim her check without issuing a receipt, she
just informed the releaser of the missing receipt and issued Receipt No. 002 in its place.[42] After a few
months, respondent inquired with the PNP Finance Center about the payment due to MGM under the
Contract of December 1995 and was surprised to find out that the check payable to MGM had already been
released. Upon making some inquiries, respondent learned that the check, payable to MGM, in the amount

of P2,226,147.26, was received by Cruz, who signed the PNPs Warrant Register. Respondent admitted to
knowing Cruz, as he was connected with Highland Enterprises, a fellow PNP-accredited contractor.
However, she denied ever having authorized Cruz or Highland Enterprises to receive or claim any of the
checks due to MGM or Montaguz Builders.[43] When asked why she had not filed a case against Cruz or
Herminio Reyes, the owner of Highland Enterprises, considering the admitted fact that Cruz claimed the
check due to her, respondent declared that there was no reason for her to confront them as it was the
PNPs fault that the check was released to the wrong person. Thus, it was the PNPs problem to find out
where the money had gone, while her course of action was to go after the PNP, as the party involved in the
Contract.[44]

On April 29, 2003, petitioner presented Ms. Jesusa Magtira, who was then the check releaser[45] of the
PNP, to prove that the respondent received the LBP check due to MGM, and that respondent herself gave
the check to Cruz.[46] Ms. Magtira testified that on April 23, 1996, she released the LBP check payable to
the order of MGM, in the amount of P2,226,147.26, to the respondent herein, whom she identified in open
court. She claimed that when she released the check to respondent, she also handed her a voucher, and a
logbook also known as the Warrant Register, for signing.[47] When asked why Cruz was allowed to sign for
the check, Ms. Magtira explained that this was allowed since the respondent already gave her the official
receipt for the check, and it was respondent herself who gave the logbook to Cruz for signing.[48]

The petitioner next presented Edgardo Cruz for the purpose of proving that the payment respondent was
claiming rightfully belonged to Highland Enterprises. Cruz testified that Highland Enterprises had been an
accredited contractor of the PNP since 1975. In 1995, Cruz claimed that the PNPES was tasked to
construct by administration a condominium building. This meant that the PNPES had to do all the work,
from the canvassing of the materials to the construction of the building. The PNPES allegedly lacked the
funds to do this and so asked for Highland Enterprisess help.[49] In a meeting with its accredited
contractors, the PNPES asked if the other contractors would agree to the use of their business name[50]
for a two percent (2%) commission of the purchase order price to avoid the impression that Highland
Enterprises was monopolizing the supply of labor and materials to the PNP.[51] Cruz alleged that on April
23, 1996, he and the respondent went to the PNP Finance Center to claim the LBP check due to MGM. Cruz
said that the respondent handed him the already signed Receipt No. 001, which he filled up. He claimed
that the respondent knew that the LBP check was really meant for Highland Enterprises as she had already
been paid her 2% commission for the use of her business name in the concerned transaction.[52]

On September 8, 2003, the RTC rendered its Decision, the dispositive of which reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of [respondent] and

against [petitioner] ordering the latter to pay [respondent] the following sums:

(1) P2,226,147.26 representing the principal sum plus interest at 14% per annum from April 18, 1996
until the same shall have been fully paid;

(2) 20% of the sum to be collected as attorneys fees; and,

(3) Costs of suit.[53]

The RTC declared that while Cruzs testimony seemed to offer a plausible explanation on how and why the
LBP check ended up with him, the petitioner, already admitted in its Answer, and Pre-trial Brief, that MGM,
did in fact deliver the construction materials worth P2,288,562.60 to the PNP. The RTC also pointed out the
fact that the petitioner made the same admissions in open court to expedite the trial, leaving only one
issue to be resolved: whether the respondent had been paid or not. Since this was the only issue, the RTC
said that it had no choice but to go back to the documents and the documentary evidence clearly
indicates that the check subject of this case was never received by [respondent].[54] In addition, the
PNPs own Warrant Register showed that it was Edgardo Cruz who received the LBP check, and Receipt No.
001 submitted by the petitioner to support its claim was not issued by MGM, but by Montaguz Builders, a
different entity. Finally, the RTC held that Cruzs testimony, which appeared to be an afterthought to cover

up the PNPs blunder, were irreconcilable with the petitioners earlier declarations and admissions, hence,
not credit-worthy.

The petitioner appealed this decision to the Court of Appeals, which affirmed with modification the RTCs
ruling on September 27, 2006:

WHEREFORE, the decision appealed from is AFFIRMED with the MODIFICATION that the 14% interest per
annum imposed on the principal amount is ordered reduced to 12%, computed from November 16, 1997
until fully paid. The order for the payment of attorneys fees and costs of the suit is DELETED.[55]

The Court of Appeals, in deciding against the petitioner, held that the petitioners admissions and
declarations, made in various stages of the proceedings are express admissions, which cannot be
overcome by allegations of respondents implied admissions. Moreover, petitioner cannot controvert its
own admissions and it is estopped from denying that it had a contract with MGM, which MGM duly
complied with. The Court of Appeals agreed with the RTC that the real issue for determination was
whether the petitioner was able to discharge its contractual obligation with the respondent. The Court of
Appeals held that while the PNPs own Warrant Register disclosed that the payment due to MGM was
received by Cruz, on behalf of Highland Enterprises, the PNPs contract was clearly with MGM, and not with
Highland Enterprises. Thus, in order to extinguish its obligation, the petitioner should have directed its
payment to MGM unless MGM authorized a third person to accept payment on its behalf.

The petitioner is now before this Court, praying for the reversal of the lower courts decisions on the
ground that the Court of Appeals committed a serious error in law by affirming the decision of the trial
court.[56]

THE COURTS RULING:

This case stemmed from a contract executed between the respondent and the petitioner. While the
petitioner, in proclaiming that the respondents claim had already been extinguished, initially insisted on
having fulfilled its contractual obligation, it now contends that the contract it executed with the respondent
is actually a fictitious contract to conceal the fact that only one contractor will be supplying all the
materials and labor for the PNP condominium project.

Both the RTC and the Court of Appeals upheld the validity of the contract between the petitioner and the
respondent on the strength of the documentary evidence presented and offered in Court and on
petitioners own stipulations and admissions during various stages of the proceedings.

It is worthy to note that while this petition was filed under Rule 45 of the Rules of Court, the assertions and
arguments advanced herein are those that will necessarily require this Court to re-evaluate the evidence
on record.

It is a well-settled rule that in a petition for review under Rule 45, only questions of law may be raised by
the parties and passed upon by this Court.[57]

This Court has, on many occasions, distinguished between a question of law and a question of fact. We
held that when there is doubt as to what the law is on a certain state of facts, then it is a question of law;
but when the doubt arises as to the truth or falsity of the alleged facts, then it is a question of fact.[58]
Simply put, when there is no dispute as to fact, the question of whether or not the conclusion drawn
therefrom is correct, is a question of law.[59] To elucidate further, this Court, in Hko Ah Pao v. Ting[60]
said:

One test to determine if there exists a question of fact or law in a given case is whether the Court can
resolve the issue that was raised without having to review or evaluate the evidence, in which case, it is a
question of law; otherwise, it will be a question of fact. Thus, the petition must not involve the calibration
of the probative value of the evidence presented. In addition, the facts of the case must be undisputed,
and the only issue that should be left for the Court to decide is whether or not the conclusion drawn by the
CA from a certain set of facts was appropriate.[61] (Emphases ours.)

In this case, the circumstances surrounding the controversial LBP check are central to the issue before us,
the resolution of which, will require a perusal of the entire records of the case including the transcribed
testimonies of the witnesses. Since this is an appeal via certiorari, questions of fact are not reviewable. As
a rule, the findings of fact of the Court of Appeals are final and conclusive[62] and this Court will only
review them under the following recognized exceptions: (1) when the inference made is manifestly
mistaken, absurd or impossible; (2) when there is a grave abuse of discretion; (3) when the finding is
grounded entirely on speculations, surmises or conjectures; (4) when the judgment of the Court of Appeals
is based on misapprehension of facts; (5) when the findings of fact are conflicting; (6) when the Court of
Appeals, in making its findings, went beyond the issues of the case and the same is contrary to the
admissions of both appellant and appellee; (7) when the findings of the Court of Appeals are contrary to
those of the trial court; (8) when the findings of fact are conclusions without citation of specific evidence
on which they are based; (9) when the Court of Appeals manifestly overlooked certain relevant facts not
disputed by the parties and which, if properly considered, would justify a different conclusion; and (10)
when the findings of fact of the Court of Appeals are premised on the absence of evidence and are
contradicted by the evidence on record.[63]

Although petitioners sole ground to support this petition was stated in such a manner as to impress upon
this Court that the Court of Appeals committed an error in law, what the petitioner actually wants us to do
is to review and re-examine the factual findings of both the RTC and the Court of Appeals.

Since the petitioner has not shown this Court that this case falls under any of the enumerated exceptions
to the rule, we are constrained to uphold the facts as established by both the RTC and the Court of
Appeals, and, consequently, the conclusions reached in the appealed decision.

Nonetheless, even if we were to exercise utmost liberality and veer away from the rule, the records will
show that the petitioner had failed to establish its case by a preponderance of evidence.[64] Section 1,
Rule 133 of the Revised Rules of Court provides the guidelines in determining preponderance of evidence:

SECTION 1. Preponderance of evidence, how determined. In civil cases, the party having the burden of
proof must establish his case by a preponderance of evidence. In determining where the preponderance or
superior weight of evidence on the issues involved lies, the court may consider all the facts and
circumstances of the case, the witnesses manner of testifying, their intelligence, their means and
opportunity of knowing the facts to which they are testifying, the nature of the facts to which they testify,
the probability or improbability of their testimony, their interest or want of interest, and also their personal
credibility so far as the same may legitimately appear upon the trial. The court may also consider the
number of witnesses, though the preponderance is not necessarily with the greater number.

Expounding on the concept of preponderance of evidence, this Court in Encinas v. National Bookstore, Inc.,
[65] held:

Preponderance of evidence is the weight, credit, and value of the aggregate evidence on either side and
is usually considered to be synonymous with the term greater weight of the evidence or greater weight
of the credible evidence. Preponderance of evidence is a phrase which, in the last analysis, means
probability of the truth. It is evidence which is more convincing to the court as worthy of belief than that
which is offered in opposition thereto.[66]

The petitioner avers that the Court of Appeals should not have relied heavily, if not solely[67] on the
admissions made by petitioners former counsel, thereby losing sight of the secret agreement between
the respondent and Highland Enterprises, which explains why all the documentary evidence were in
respondents name.[68]

The petitioner relies mainly on Cruzs testimony to support its allegations. Not only did it not present any
other witness to corroborate Cruz, but it also failed to present any documentation to confirm its story. It is
doubtful that the petitioner or the contractors would enter into any secret agreement involving millions
of pesos based purely on verbal affirmations. Meanwhile, the respondent not only presented all the
documentary evidence to prove her claims, even the petitioner repeatedly admitted that respondent had
fully complied with her contractual obligations.

The petitioner argued that the Court of Appeals should have appreciated the clear and adequate testimony
of Cruz, and should have given it utmost weight and credit especially since his testimony was a judicial
admission against interest a primary evidence which should have been accorded full evidentiary
value.[69]

The trial courts appreciation of the witnesses testimonies is entitled to the highest respect since it was in
a better position to assess their credibility.[70] The RTC held Cruzs testimony to be not credit
worthy[71] for being irreconcilable with petitioners earlier admissions.
Contrary to petitioners
contentions, Cruzs testimony cannot be considered as a judicial admission against his interest as he is
neither a party to the case nor was his admission against his own interest, but actually against either the
petitioners or the respondents interest. Petitioners statements on the other hand, were deliberate, clear,
and unequivocal and were made in the course of judicial proceedings; thus, they qualify as judicial
admissions.[72] In Alfelor v. Halasan,[73] this Court held that:

A party who judicially admits a fact cannot later challenge that fact as judicial admissions are a waiver of
proof; production of evidence is dispensed with. A judicial admission also removes an admitted fact from
the field of controversy. Consequently, an admission made in the pleadings cannot be controverted by the
party making such admission and are conclusive as to such party, and all proofs to the contrary or
inconsistent therewith should be ignored, whether objection is interposed by the party or not. The
allegations, statements or admissions contained in a pleading are conclusive as against the pleader. A
party cannot subsequently take a position contrary of or inconsistent with what was pleaded.[74]

The petitioner admitted to the existence and validity of the Contract of Agreement executed between the
PNP and MGM, as represented by the respondent, on December 11, 1995. It likewise admitted that
respondent delivered the construction materials subject of the Contract, not once, but several times during
the course of the proceedings. The only matter petitioner assailed was respondents allegation that she
had not yet been paid. If Cruzs testimony were true, the petitioner should have put respondent in her
place the moment she sent a letter to the PNP, demanding payment for the construction materials she had
allegedly delivered. Instead, the petitioner replied that it had already paid respondent as evidenced by the
LBP check and the receipt she supposedly issued. This line of defense continued on, with the petitioner
assailing only the respondents claim of nonpayment, and not the rest of respondents claims, in its motion
to dismiss, its answer, its pre-trial brief, and even in open court during the respondents testimony. Section
4, Rule 129 of the Rules of Court states:

SECTION 4. Judicial Admissions.An admission, verbal or written, made by a party in the course of the
proceedings in the same case, does not require proof. The admission may be contradicted only by showing
that it was made through palpable mistake or that no such admission was made.

Petitioners admissions were proven to have been made in various stages of the proceedings, and since
the petitioner has not shown us that they were made through palpable mistake, they are conclusive as to
the petitioner. Hence, the only question to be resolved is whether the respondent was paid under the
December 1995 Contract of Agreement.

The RTC and the Court of Appeals correctly ruled that the petitioners obligation has not been extinguished.
The petitioners obligation consists of payment of a sum of money. In order for petitioners payment to be
effective in extinguishing its obligation, it must be made to the proper person. Article 1240 of the Civil
Code states:

Art. 1240. Payment shall be made to the person in whose favor the obligation has been constituted, or his
successor in interest, or any person authorized to receive it.

In Cembrano v. City of Butuan,[75] this Court elucidated on how payment will effectively extinguish an
obligation, to wit:

Payment made by the debtor to the person of the creditor or to one authorized by him or by the law to
receive it extinguishes the obligation. When payment is made to the wrong party, however, the obligation
is not extinguished as to the creditor who is without fault or negligence even if the debtor acted in utmost
good faith and by mistake as to the person of the creditor or through error induced by fraud of a third
person.

In general, a payment in order to be effective to discharge an obligation, must be made to the proper
person. Thus, payment must be made to the obligee himself or to an agent having authority, express or
implied, to receive the particular payment. Payment made to one having apparent authority to receive the
money will, as a rule, be treated as though actual authority had been given for its receipt. Likewise, if
payment is made to one who by law is authorized to act for the creditor, it will work a discharge. The
receipt of money due on a judgment by an officer authorized by law to accept it will, therefore, satisfy the
debt.[76]

The respondent was able to establish that the LBP check was not received by her or by her authorized
personnel. The PNPs own records show that it was claimed and signed for by Cruz, who is openly known
as being connected to Highland Enterprises, another contractor. Hence, absent any showing that the
respondent agreed to the payment of the contract price to another person, or that she authorized Cruz to
claim the check on her behalf, the payment, to be effective must be made to her.[77]

The petitioner also challenged the RTCs findings, on the ground that it overlooked material fact and
circumstance of significant weight and substance.[78] Invoking the doctrine of adoptive admission, the
petitioner pointed out that the respondents inaction towards Cruz, whom she has known to have claimed
her check as early as 1996, should be taken against her. Finally, the petitioner contends that Cruzs
testimony should be taken against respondent as well, under Rule 130, Sec. 32 of the Revised Rules on
Evidence, since she has not presented any controverting evidence x x x notwithstanding that she
personally heard it.[79]

The respondent has explained her inaction towards Cruz and Highland Enterprises. Both the RTC and the
Court of Appeals have found her explanation sufficient and this Court finds no cogent reason to overturn
the assessment by the trial court and the Court of Appeals of the respondents testimony. It may be
recalled that the respondent argued that since it was the PNP who owed her money, her actions should be
directed towards the PNP and not Cruz or Highland Enterprises, against whom she has no adequate proof.
[80] Respondent has also adequately explained her delay in filing an action against the petitioner,
particularly that she did not want to prejudice her other pending transactions with the PNP.[81]

The petitioner claims that the RTC overlooked material fact and circumstance of significant weight and
substance,[82] but it ignores all the documentary evidence, and even its own admissions, which are
evidence of the greater weight and substance, that support the conclusions reached by both the RTC and
the Court of Appeals.

We agree with the Court of Appeals that the RTC erred in the interest rate and other monetary sums
awarded to respondent as baseless. However, we must further modify the interest rate imposed by the
Court of Appeals pursuant to the rule laid down in Eastern Shipping Lines, Inc. v. Court of Appeals[83]:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts
is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on "Damages"
of the Civil Code govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the
rate of interest, as well as the accrual thereof, is imposed, as follows:

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

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

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of
legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum
from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of credit.[84]

Since the obligation herein is for the payment of a sum of money, the legal interest rate to be imposed,
under Article 2209 of the Civil Code is six percent (6%)per annum:

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.

Following the guidelines above, the legal interest of 6% per annum is to be imposed from November 16,
1997, the date of the last demand, and 12% in lieu of 6% from the date this decision becomes final until
fully paid.

Petitioners allegations of sham dealings involving our own government agencies are potentially disturbing
and alarming. If Cruzs testimony were true, this should be a lesson to the PNP not to dabble in spurious
transactions. Obviously, if it can afford to give a 2% commission to other contractors for the mere use of
their business names, then the petitioner is disbursing more money than it normally would in a legitimate
transaction. It is recommended that the proper agency investigate this matter and hold the involved
personnel accountable to avoid any similar occurrence in the future.

WHEREFORE, the Petition is hereby DENIED and the Decision of the Court of Appeals in C.A. G.R. CV No.
80623 dated September 27, 2006 isAFFIRMED with the MODIFICATION that the legal interest to be paid is
SIX PERCENT (6%) per annum on the amount of P2,226,147.26, computed from the date of the last
demand or on November 16, 1997. A TWELVE PERCENT (12%) per annum interest in lieu of SIX PERCENT
(6%) shall be imposed on such amount upon finality of this decision until the payment thereof.