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PEOPLE OF THE PHILIPPINES, petitioner,

vs.
TERESITA PUIG and ROMEO PORRAS, respondents.
CHICO-NAZARIO, J.:
This is a Petition for Review under Rule 45 of the Revised Rules of Court with petitioner People of the
Philippines, represented by the Office of the Solicitor General, praying for the reversal of the Orders dated
30 January 2006 and 9 June 2006 of the Regional Trial Court (RTC) of the 6 th Judicial Region, Branch 68,
Dumangas, Iloilo, dismissing the 112 cases of Qualified Theft filed against respondents Teresita Puig and
Romeo Porras, and denying petitioners Motion for Reconsideration, in Criminal Cases No. 05-3054 to 053165.
The following are the factual antecedents:
On 7 November 2005, the Iloilo Provincial Prosecutors Office filed before Branch 68 of the RTC in
Dumangas, Iloilo, 112 cases of Qualified Theft against respondents Teresita Puig (Puig) and Romeo Porras
(Porras) who were the Cashier and Bookkeeper, respectively, of private complainant Rural Bank of Pototan,
Inc. The cases were docketed as Criminal Cases No. 05-3054 to 05-3165.
The allegations in the Informations1 filed before the RTC were uniform and pro-forma, except for the
amounts, date and time of commission, to wit:
INFORMATION
That on or about the 1st day of August, 2002, in the Municipality of Pototan, Province of Iloilo,
Philippines, and within the jurisdiction of this Honorable Court, above-named [respondents],
conspiring, confederating, and helping one another, with grave abuse of confidence, being the
Cashier and Bookkeeper of the Rural Bank of Pototan, Inc., Pototan, Iloilo, without the knowledge
and/or consent of the management of the Bank and with intent of gain, did then and there willfully,
unlawfully and feloniously take, steal and carry away the sum of FIFTEEN THOUSAND PESOS
(P15,000.00), Philippine Currency, to the damage and prejudice of the said bank in the aforesaid
amount.
After perusing the Informations in these cases, the trial court did not find the existence of probable cause
that would have necessitated the issuance of a warrant of arrest based on the following grounds:
(1) the element of taking without the consent of the owners was missing on the ground that
it is the depositors-clients, and not the Bank, which filed the complaint in these cases, who are the
owners of the money allegedly taken by respondents and hence, are the real parties-in-interest; and
(2) the Informations are bereft of the phrase alleging "dependence, guardianship or vigilance
between the respondents and the offended party that would have created a high degree
of confidence between them which the respondents could have abused."
It added that allowing the 112 cases for Qualified Theft filed against the respondents to push through
would be violative of the right of the respondents under Section 14(2), Article III of the 1987 Constitution
which states that in all criminal prosecutions, the accused shall enjoy the right to be informed of the nature
and cause of the accusation against him. Following Section 6, Rule 112 of the Revised Rules of Criminal
Procedure, the RTC dismissed the cases on 30 January 2006 and refused to issue a warrant of arrest
against Puig and Porras.
A Motion for Reconsideration2 was filed on 17 April 2006, by the petitioner.
On 9 June 2006, an Order3 denying petitioners Motion for Reconsideration was issued by the RTC, finding
as follows:
Accordingly, the prosecutions Motion for Reconsideration should be, as it hereby, DENIED. The
Order dated January 30, 2006 STANDS in all respects.
Petitioner went directly to this Court via Petition for Review on Certiorari under Rule 45, raising the sole
legal issue of:
WHETHER OR NOT THE 112 INFORMATIONS FOR QUALIFIED THEFT SUFFICIENTLY ALLEGE THE
ELEMENT OF TAKING WITHOUT THE CONSENT OF THE OWNER, AND THE QUALIFYING
CIRCUMSTANCE OF GRAVE ABUSE OF CONFIDENCE.
Petitioner prays that judgment be rendered annulling and setting aside the Orders dated 30 January 2006
and 9 June 2006 issued by the trial court, and that it be directed to proceed with Criminal Cases No. 053054 to 05-3165.

Petitioner explains that under Article 1980 of the New Civil Code, "fixed, savings, and current deposits of
money in banks and similar institutions shall be governed by the provisions concerning simple loans."
Corollary thereto, Article 1953 of the same Code provides that "a person who receives a loan of money or
any other fungible thing acquires the ownership thereof, and is bound to pay to the creditor an equal
amount of the same kind and quality." Thus, it posits that the depositors who place their money with the
bank are considered creditors of the bank. The bank acquires ownership of the money deposited by its
clients, making the money taken by respondents as belonging to the bank.
Petitioner also insists that the Informations sufficiently allege all the elements of the crime of qualified
theft, citing that a perusal of the Informations will show that they specifically allege that the respondents
were the Cashier and Bookkeeper of the Rural Bank of Pototan, Inc., respectively, and that they took
various amounts of money with grave abuse of confidence, and without the knowledge and consent of the
bank, to the damage and prejudice of the bank.
Parenthetically, respondents raise procedural issues. They challenge the petition on the ground that a
Petition for Review on Certiorari via Rule 45 is the wrong mode of appeal because a finding of probable
cause for the issuance of a warrant of arrest presupposes evaluation of facts and circumstances, which is
not proper under said Rule.
Respondents further claim that the Department of Justice (DOJ), through the Secretary of Justice, is the
principal party to file a Petition for Review on Certiorari, considering that the incident was indorsed by the
DOJ.
We find merit in the petition.
The dismissal by the RTC of the criminal cases was allegedly due to insufficiency of the Informations and,
therefore, because of this defect, there is no basis for the existence of probable cause which will justify the
issuance of the warrant of arrest. Petitioner assails the dismissal contending that the Informations for
Qualified Theft sufficiently state facts which constitute (a) the qualifying circumstance of grave abuse of
confidence; and (b) the element of taking, with intent to gain and without the consent of the owner, which
is the Bank.
In determining the existence of probable cause to issue a warrant of arrest, the RTC judge found the
allegations in the Information inadequate. He ruled that the Information failed to state facts constituting
the qualifying circumstance of grave abuse of confidence and the element of taking without the consent of
the owner, since the owner of the money is not the Bank, but the depositors therein. He also cites People
v. Koc Song,4 in which this Court held:
There must be allegation in the information and proof of a relation, by reason of dependence,
guardianship or vigilance, between the respondents and the offended party that has created a high
degree of confidence between them, which the respondents abused.
At this point, it needs stressing that the RTC Judge based his conclusion that there was no probable cause
simply on the insufficiency of the allegations in the Informations concerning the facts constitutive of the
elements of the offense charged. This, therefore, makes the issue of sufficiency of the allegations in the
Informations the focal point of discussion.
Qualified Theft, as defined and punished under Article 310 of the Revised Penal Code, is committed as
follows, viz:
ART. 310. Qualified Theft. The crime of theft shall be punished by the penalties next higher by two
degrees than those respectively specified in the next preceding article, if committed by a domestic
servant, or with grave abuse of confidence, or if the property stolen is motor vehicle, mail matter or
large cattle or consists of coconuts taken from the premises of a plantation, fish taken from a
fishpond or fishery or if property is taken on the occasion of fire, earthquake, typhoon, volcanic
eruption, or any other calamity, vehicular accident or civil disturbance. (Emphasis supplied.)
Theft, as defined in Article 308 of the Revised Penal Code, requires the physical taking of anothers
property without violence or intimidation against persons or force upon things. The elements of the crime
under this Article are:
1. Intent to gain;
2. Unlawful taking;
3. Personal property belonging to another;
4. Absence of violence or intimidation against persons or force upon things.
To fall under the crime of Qualified Theft, the following elements must concur:

1. Taking of personal property;


2. That the said property belongs to another;
3. That the said taking be done with intent to gain;
4. That it be done without the owners consent;
5. That it be accomplished without the use of violence or intimidation against persons, nor of force
upon things;
6. That it be done with grave abuse of confidence.
On the sufficiency of the Information, Section 6, Rule 110 of the Rules of Court requires, inter alia, that the
information must state the acts or omissions complained of as constitutive of the offense.
On the manner of how the Information should be worded, Section 9, Rule 110 of the Rules of Court, is
enlightening:
Section 9. Cause of the accusation. The acts or omissions complained of as constituting the offense
and the qualifying and aggravating circumstances must be stated in ordinary and concise language
and not necessarily in the language used in the statute but in terms sufficient to enable a person of
common understanding to know what offense is being charged as well as its qualifying and
aggravating circumstances and for the court to pronounce judgment.
It is evident that the Information need not use the exact language of the statute in alleging the acts or
omissions complained of as constituting the offense. The test is whether it enables a person of common
understanding to know the charge against him, and the court to render judgment properly. 5
The portion of the Information relevant to this discussion reads:
A]bove-named [respondents], conspiring, confederating, and helping one another, with grave abuse of confidence, being the Cashier and Bookkeeper of the Rural
Bank of Pototan, Inc., Pototan, Iloilo, without the knowledge and/or consent of the management of the Bank x x x.

It is beyond doubt that tellers, Cashiers, Bookkeepers and other employees of a Bank who come into
possession of the monies deposited therein enjoy the confidence reposed in them by their employer.
Banks, on the other hand, where monies are deposited, are considered the owners thereof. This is very
clear not only from the express provisions of the law, but from established jurisprudence. The relationship
between banks and depositors has been held to be that of creditor and debtor. Articles 1953 and 1980 of
the New Civil Code, as appropriately pointed out by petitioner, provide as follows:
Article 1953. A person who receives a loan of money or any other fungible thing acquires the
ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and
quality.
Article 1980. Fixed, savings, and current deposits of money in banks and similar institutions shall be
governed by the provisions concerning loan.
In a long line of cases involving Qualified Theft, this Court has firmly established the nature of possession
by the Bank of the money deposits therein, and the duties being performed by its employees who have
custody of the money or have come into possession of it. The Court has consistently considered the
allegations in the Information that such employees acted with grave abuse of confidence, to the damage
and prejudice of the Bank, without particularly referring to it as owner of the money deposits, as sufficient
to make out a case of Qualified Theft. For a graphic illustration, we cite Roque v. People,6 where the
accused teller was convicted for Qualified Theft based on this Information:
That on or about the 16th day of November, 1989, in the municipality of Floridablanca, province of
Pampanga, Philippines and within the jurisdiction of his Honorable Court, the above-named accused
ASUNCION GALANG ROQUE, being then employed as teller of the Basa Air Base Savings and Loan
Association Inc. (BABSLA) with office address at Basa Air Base, Floridablanca, Pampanga, and as
such was authorized and reposed with the responsibility to receive and collect capital contributions
from its member/contributors of said corporation, and having collected and received in her capacity
as teller of the BABSLA the sum of TEN THOUSAND PESOS (P10,000.00), said accused, with intent of
gain, with grave abuse of confidence and without the knowledge and consent of said
corporation, did then and there willfully, unlawfully and feloniously take, steal and carry away the
amount of P10,000.00, Philippine currency, by making it appear that a certain depositor by the
name of Antonio Salazar withdrew from his Savings Account No. 1359, when in truth and in fact said
Antonio Salazar did not withdr[a]w the said amount of P10,000.00 to the damage and prejudice of
BABSLA in the total amount of P10,000.00, Philippine currency.

In convicting the therein appellant, the Court held that:


[S]ince the teller occupies a position of confidence, and the bank places money in the tellers
possession due to the confidence reposed on the teller, the felony of qualified theft would be
committed.7
Also in People v. Sison,8 the Branch Operations Officer was convicted of the crime of Qualified Theft
based on the Information as herein cited:
That in or about and during the period compressed between January 24, 1992 and February 13,
1992, both dates inclusive, in the City of Manila, Philippines, the said accused did then and there
wilfully, unlawfully and feloniously, with intent of gain and without the knowledge and consent of
the owner thereof, take, steal and carry away the following, to wit:
Cash money amounting to P6,000,000.00 in different denominations belonging to the PHILIPPINE
COMMERCIAL INTERNATIONAL BANK (PCIBank for brevity), Luneta Branch, Manila represented by its
Branch Manager, HELEN U. FARGAS, to the damage and prejudice of the said owner in the aforesaid
amount of P6,000,000.00, Philippine Currency.
That in the commission of the said offense, herein accused acted with grave abuse of confidence
and unfaithfulness, he being the Branch Operation Officer of the said complainant and as such he
had free access to the place where the said amount of money was kept.
The judgment of conviction elaborated thus:
The crime perpetuated by appellant against his employer, the Philippine Commercial and Industrial
Bank (PCIB), is Qualified Theft. Appellant could not have committed the crime had he not been
holding the position of Luneta Branch Operation Officer which gave him not only sole access to the
bank vault xxx. The management of the PCIB reposed its trust and confidence in the appellant as its
Luneta Branch Operation Officer, and it was this trust and confidence which he exploited to enrich
himself to the damage and prejudice of PCIB x x x.9
From another end, People v. Locson,10 in addition to People v. Sison, described the nature of possession
by the Bank. The money in this case was in the possession of the defendant as receiving teller of the bank,
and the possession of the defendant was the possession of the Bank. The Court held therein that when the
defendant, with grave abuse of confidence, removed the money and appropriated it to his own use without
the consent of the Bank, there was taking as contemplated in the crime of Qualified Theft. 11
Conspicuously, in all of the foregoing cases, where the Informations merely alleged the positions of the
respondents; that the crime was committed with grave abuse of confidence, with intent to gain and
without the knowledge and consent of the Bank, without necessarily stating the phrase being assiduously
insisted upon by respondents, "of a relation by reason of dependence, guardianship or vigilance,
between the respondents and the offended party that has created a high degree of confidence
between them, which respondents abused,"12 and without employing the word "owner" in lieu of the
"Bank" were considered to have satisfied the test of sufficiency of allegations.
As regards the respondents who were employed as Cashier and Bookkeeper of the Bank in this case, there
is even no reason to quibble on the allegation in the Informations that they acted with grave abuse of
confidence. In fact, the Information which alleged grave abuse of confidence by accused herein is even
more precise, as this is exactly the requirement of the law in qualifying the crime of Theft.
In summary, the Bank acquires ownership of the money deposited by its clients; and the employees of the
Bank, who are entrusted with the possession of money of the Bank due to the confidence reposed in them,
occupy positions of confidence. The Informations, therefore, sufficiently allege all the essential elements
constituting the crime of Qualified Theft.
On the theory of the defense that the DOJ is the principal party who may file the instant petition, the ruling
in Mobilia Products, Inc. v. Hajime Umezawa13 is instructive. The Court thus enunciated:
In a criminal case in which the offended party is the State, the interest of the private complainant or
the offended party is limited to the civil liability arising therefrom. Hence, if a criminal case is
dismissed by the trial court or if there is an acquittal, a reconsideration of the order of dismissal or
acquittal may be undertaken, whenever legally feasible, insofar as the criminal aspect thereof is
concerned and may be made only by the public prosecutor; or in the case of an appeal, by the
State only, through the OSG. x x x.
On the alleged wrong mode of appeal by petitioner, suffice it to state that the rule is well-settled that in
appeals by certiorari under Rule 45 of the Rules of Court, only errors of law may be raised, 14 and herein
petitioner certainly raised a question of law.

As an aside, even if we go beyond the allegations of the Informations in these cases, a closer look at the
records of the preliminary investigation conducted will show that, indeed, probable cause exists for the
indictment of herein respondents. Pursuant to Section 6, Rule 112 of the Rules of Court, the judge shall
issue a warrant of arrest only upon a finding of probable cause after personally evaluating the resolution of
the prosecutor and its supporting evidence. Soliven v. Makasiar,15 as reiterated in Allado v. Driokno,16
explained that probable cause for the issuance of a warrant of arrest is the existence of such facts and
circumstances that would lead a reasonably discreet and prudent person to believe that an offense has
been committed by the person sought to be arrested.17 The records reasonably indicate that the
respondents may have, indeed, committed the offense charged.
Before closing, let it be stated that while it is truly imperative upon the fiscal or the judge, as the case may
be, to relieve the respondents from the pain of going through a trial once it is ascertained that no probable
cause exists to form a sufficient belief as to the guilt of the respondents, conversely, it is also equally
imperative upon the judge to proceed with the case upon a showing that there is a prima facie case
against the respondents.
WHEREFORE, premises considered, the Petition for Review on Certiorari is hereby GRANTED. The Orders
dated 30 January 2006 and 9 June 2006 of the RTC dismissing Criminal Cases No. 05-3054 to 05-3165 are
REVERSED and SET ASIDE. Let the corresponding Warrants of Arrest issue against herein respondents
TERESITA PUIG and ROMEO PORRAS. The RTC Judge of Branch 68, in Dumangas, Iloilo, is directed to
proceed with the trial of Criminal Cases No. 05-3054 to 05-3165, inclusive, with reasonable dispatch. No
pronouncement as to costs.
SO ORDERED.

BPI FAMILY BANK vs FRANCO


Banks are exhorted to treat the accounts of their depositors with meticulous care and utmost
fidelity. We reiterate this exhortation in the case at bench.
Before us is a Petition for Review on Certiorari seeking the reversal of the Court of Appeals (CA)
Decision1[1] in CA-G.R. CV No. 43424 which affirmed with modification the judgment 2[2] of the Regional
Trial Court, Branch 55, Manila (Manila RTC), in Civil Case No. 90-53295.
This case has its genesis in an ostensible fraud perpetrated on the petitioner BPI Family Bank (BPI-FB)
allegedly by respondent Amado Franco (Franco) in conspiracy with other individuals, 3[3] some of whom
opened and maintained separate accounts with BPI-FB, San Francisco del Monte (SFDM) branch, in a series
of transactions.
On August 15, 1989, Tevesteco Arrastre-Stevedoring Co., Inc. (Tevesteco) opened a savings and current
account with BPI-FB. Soon thereafter, or on August 25, 1989, First Metro Investment Corporation (FMIC)
also opened a time deposit account with the same branch of BPI-FB with a deposit of P100,000,000.00, to
mature one year thence.
Subsequently, on August 31, 1989, Franco opened three accounts, namely, a current, 4[4] savings,5
[5] and time deposit,6[6] with BPI-FB. The current and savings accounts were respectively funded with an
initial deposit of P500,000.00 each, while the time deposit account had P1,000,000.00 with a maturity date
of August 31, 1990. The total amount of P2,000,000.00 used to open these accounts is traceable to a
check issued by Tevesteco allegedly in consideration of Francos introduction of Eladio Teves, 7[7] who was
looking for a conduit bank to facilitate Tevestecos business transactions, to Jaime Sebastian, who was then

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BPI-FB SFDMs Branch Manager. In turn, the funding for the P2,000,000.00 check was part of the
P80,000,000.00 debited by BPI-FB from FMICs time deposit account and credited to Tevestecos current
account pursuant to an Authority to Debit purportedly signed by FMICs officers.
It appears, however, that the signatures of FMICs officers on the Authority to Debit were forged. 8[8] On
September 4, 1989, Antonio Ong,9[9] upon being shown the Authority to Debit, personally declared his
signature therein to be a forgery. Unfortunately, Tevesteco had already effected several withdrawals from
its current account (to which had been credited the P80,000,000.00 covered by the forged Authority to
Debit) amounting to P37,455,410.54, including the P2,000,000.00 paid to Franco.

On September 8, 1989, impelled by the need to protect its interests in light of FMICs forgery claim,
BPI-FB, thru its Senior Vice-President, Severino Coronacion, instructed Jesus Arangorin 10[10] to debit
Francos savings and current accounts for the amounts remaining therein. 11[11] However, Francos time
deposit account could not be debited due to the capacity limitations of BPI-FBs computer. 12[12]

In the meantime, two checks13[13] drawn by Franco against his BPI-FB current account were dishonored
upon presentment for payment, and stamped with a notation account under garnishment. Apparently,
Francos current account was garnished by virtue of an Order of Attachment issued by the Regional Trial
Court of Makati (Makati RTC) in Civil Case No. 89-4996 (Makati Case), which had been filed by BPI-FB
against Franco et al.,14[14] to recover the P37,455,410.54 representing Tevestecos total withdrawals from
its account.

Notably, the dishonored checks were issued by Franco and presented for payment at BPI-FB prior to
Francos receipt of notice that his accounts were under garnishment. 15[15] In fact, at the time the Notice of
Garnishment dated September 27, 1989 was served on BPI-FB, Franco had yet to be impleaded in the
Makati case where the writ of attachment was issued.

It was only on May 15, 1990, through the service of a copy of the Second Amended Complaint in Civil Case
No. 89-4996, that Franco was impleaded in the Makati case.16[16] Immediately, upon receipt of such copy,
Franco filed a Motion to Discharge Attachment which the Makati RTC granted on May 16, 1990. The Order
Lifting the Order of Attachment was served on BPI-FB on even date, with Franco demanding the release to
him of the funds in his savings and current accounts. Jesus Arangorin, BPI-FBs new manager, could not
forthwith comply with the demand as the funds, as previously stated, had already been debited because of
FMICs forgery claim. As such, BPI-FBs computer at the SFDM Branch indicated that the current account
record was not on file.

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With respect to Francos savings account, it appears that Franco agreed to an arrangement, as a favor to
Sebastian, whereby P400,000.00 from his savings account was temporarily transferred to Domingo
Quiaoits savings account, subject to its immediate return upon issuance of a certificate of deposit which
Quiaoit needed in connection with his visa application at the Taiwan Embassy. As part of the arrangement,
Sebastian retained custody of Quiaoits savings account passbook to ensure that no withdrawal would be
effected therefrom, and to preserve Francos deposits.

On May 17, 1990, Franco pre-terminated his time deposit account. BPI-FB deducted the amount of
P63,189.00 from the remaining balance of the time deposit account representing advance interest paid to
him.

These transactions spawned a number of cases, some of which we had already resolved.

FMIC filed a complaint against BPI-FB for the recovery of the amount of P80,000,000.00 debited
from its account.17[17] The case eventually reached this Court, and in BPI Family Savings Bank, Inc. v. First
Metro Investment Corporation,18[18] we upheld the finding of the courts below that BPI-FB failed to
exercise the degree of diligence required by the nature of its obligation to treat the accounts of its
depositors with meticulous care. Thus, BPI-FB was found liable to FMIC for the debited amount in its time
deposit. It was ordered to pay P65,332,321.99 plus interest at 17% per annum from August 29, 1989 until
fully restored. In turn, the 17% shall itself earn interest at 12% from October 4, 1989 until fully paid.

In a related case, Edgardo Buenaventura, Myrna Lizardo and Yolanda Tica (Buenaventura, et al.),19
[19] recipients of a P500,000.00 check proceeding from the P80,000,000.00 mistakenly credited to
Tevesteco, likewise filed suit. Buenaventura et al., as in the case of Franco, were also prevented from
effecting withdrawals20[20] from their current account with BPI-FB, Bonifacio Market, Edsa, Caloocan City
Branch. Likewise, when the case was elevated to this Court docketed as BPI Family Bank v.
Buenaventura,21[21] we ruled that BPI-FB had no right to freeze Buenaventura, et al.s accounts and
adjudged BPI-FB liable therefor, in addition to damages.

Meanwhile, BPI-FB filed separate civil and criminal cases against those believed to be the perpetrators of
the multi-million peso scam.22[22] In the criminal case, Franco, along with the other accused, except for
Manuel Bienvenida who was still at large, were acquitted of the crime of Estafa as defined and penalized

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under Article 351, par. 2(a) of the Revised Penal Code.23[23] However, the civil case24[24] remains under
litigation and the respective rights and liabilities of the parties have yet to be adjudicated.

Consequently, in light of BPI-FBs refusal to heed Francos demands to unfreeze his accounts and release his
deposits therein, the latter filed on June 4, 1990 with the Manila RTC the subject suit. In his complaint,
Franco prayed for the following reliefs: (1) the interest on the remaining balance 25[25] of his current
account which was eventually released to him on October 31, 1991; (2) the balance 26[26] on his savings
account, plus interest thereon; (3) the advance interest27[27] paid to him which had been deducted when
he pre-terminated his time deposit account; and (4) the payment of actual, moral and exemplary damages,
as well as attorneys fees.

BPI-FB traversed this complaint, insisting that it was correct in freezing the accounts of Franco and refusing
to release his deposits, claiming that it had a better right to the amounts which consisted of part of the
money allegedly fraudulently withdrawn from it by Tevesteco and ending up in Francos accounts. BPI-FB
asseverated that the claimed consideration of P2,000,000.00 for the introduction facilitated by Franco
between George Daantos and Eladio Teves, on the one hand, and Jaime Sebastian, on the other, spoke
volumes of Francos participation in the fraudulent transaction.

On August 4, 1993, the Manila RTC rendered judgment, the dispositive portion of which reads as
follows:

WHEREFORE, in view of all the foregoing, judgment is hereby rendered in favor of


[Franco] and against [BPI-FB], ordering the latter to pay to the former the following sums:
1.
P76,500.00 representing the legal rate of interest on the amount of P450,000.00 from
May 18, 1990 to October 31, 1991;
2.
P498,973.23 representing the balance on [Francos] savings account as of May 18,
1990, together with the interest thereon in accordance with the banks guidelines on the
payment therefor;
3.

P30,000.00 by way of attorneys fees; and

4.

P10,000.00 as nominal damages.


The counterclaim of the defendant is DISMISSED for lack of factual and legal anchor.
Costs against [BPI-FB].
SO ORDERED.28[28]

Unsatisfied with the decision, both parties filed their respective appeals before the CA. Franco confined his
appeal to the Manila RTCs denial of his claim for moral and exemplary damages, and the diminutive award

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of attorneys fees. In affirming with modification the lower courts decision, the appellate court decreed, to
wit:

WHEREFORE, foregoing considered, the appealed decision is hereby AFFIRMED with


modification ordering [BPI-FB] to pay [Franco] P63,189.00 representing the interest deducted
from the time deposit of plaintiff-appellant. P200,000.00 as moral damages and P100,000.00
as exemplary damages, deleting the award of nominal damages (in view of the award of
moral and exemplary damages) and increasing the award of attorneys fees from P30,000.00
to P75,000.00.
Cost against [BPI-FB].
SO ORDERED.29[29]

In this recourse, BPI-FB ascribes error to the CA when it ruled that: (1) Franco had a better right to the
deposits in the subject accounts which are part of the proceeds of a forged Authority to Debit; (2) Franco is
entitled to interest on his current account; (3) Franco can recover the P400,000.00 deposit in Quiaoits
savings account; (4) the dishonor of Francos checks was not legally in order; (5) BPI-FB is liable for interest
on Francos time deposit, and for moral and exemplary damages; and (6) BPI-FBs counter-claim has no
factual and legal anchor.

The petition is partly meritorious.

We are in full accord with the common ruling of the lower courts that BPI-FB cannot unilaterally
freeze Francos accounts and preclude him from withdrawing his deposits. However, contrary to the
appellate courts ruling, we hold that Franco is not entitled to unearned interest on the time deposit as well
as to moral and exemplary damages.

First. On the issue of who has a better right to the deposits in Francos accounts, BPI-FB urges us
that the legal consequence of FMICs forgery claim is that the money transferred by BPI-FB to Tevesteco is
its own, and considering that it was able to recover possession of the same when the money was
redeposited by Franco, it had the right to set up its ownership thereon and freeze Francos accounts.

BPI-FB contends that its position is not unlike that of an owner of personal property who regains
possession after it is stolen, and to illustrate this point, BPI-FB gives the following example: where Xs
television set is stolen by Y who thereafter sells it to Z, and where Z unwittingly entrusts possession of the
TV set to X, the latter would have the right to keep possession of the property and preclude Z from
recovering possession thereof. To bolster its position, BPI-FB cites Article 559 of the Civil Code, which
provides:

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Article 559. The possession of movable property acquired in good faith is equivalent
to a title. Nevertheless, one who has lost any movable or has been unlawfully deprived
thereof, may recover it from the person in possession of the same.
If the possessor of a movable lost or of which the owner has been unlawfully
deprived, has acquired it in good faith at a public sale, the owner cannot obtain its return
without reimbursing the price paid therefor.

BPI-FBs argument is unsound. To begin with, the movable property mentioned in Article 559 of the
Civil Code pertains to a specific or determinate thing.30[30] A determinate or specific thing is one that is
individualized and can be identified or distinguished from others of the same kind. 31[31]

In this case, the deposit in Francos accounts consists of money which, albeit characterized as a
movable, is generic and fungible.32[32] The quality of being fungible depends upon the possibility of the
property, because of its nature or the will of the parties, being substituted by others of the same kind, not
having a distinct individuality.33[33]

Significantly, while Article 559 permits an owner who has lost or has been unlawfully deprived of a
movable to recover the exact same thing from the current possessor, BPI-FB simply claims ownership of
the equivalent amount of money, i.e., the value thereof, which it had mistakenly debited from FMICs
account and credited to Tevestecos, and subsequently traced to Francos account. In fact, this is what BPIFB did in filing the Makati Case against Franco, et al. It staked its claim on the money itself which passed
from one account to another, commencing with the forged Authority to Debit.

It bears emphasizing that money bears no earmarks of peculiar ownership, 34[34] and this
characteristic is all the more manifest in the instant case which involves money in a banking transaction
gone awry. Its primary function is to pass from hand to hand as a medium of exchange, without other
evidence of its title.35[35] Money, which had passed through various transactions in the general course of
banking business, even if of traceable origin, is no exception.

Thus, inasmuch as what is involved is not a specific or determinate personal property, BPI-FBs
illustrative example, ostensibly based on Article 559, is inapplicable to the instant case.

There is no doubt that BPI-FB owns the deposited monies in the accounts of Franco, but not as a
legal consequence of its unauthorized transfer of FMICs deposits to Tevestecos account. BPI-FB
conveniently forgets that the deposit of money in banks is governed by the Civil Code provisions on simple
loan or mutuum.36[36] As there is a debtor-creditor relationship between a bank and its depositor, BPI-FB

30
31
32
33
34
35
36

ultimately acquired ownership of Francos deposits, but such ownership is coupled with a corresponding
obligation to pay him an equal amount on demand. 37[37] Although BPI-FB owns the deposits in Francos
accounts, it cannot prevent him from demanding payment of BPI-FBs obligation by drawing checks against
his current account, or asking for the release of the funds in his savings account. Thus, when Franco issued
checks drawn against his current account, he had every right as creditor to expect that those checks would
be honored by BPI-FB as debtor.

More importantly, BPI-FB does not have a unilateral right to freeze the accounts of Franco based on
its mere suspicion that the funds therein were proceeds of the multi-million peso scam Franco was
allegedly involved in. To grant BPI-FB, or any bank for that matter, the right to take whatever action it
pleases on deposits which it supposes are derived from shady transactions, would open the floodgates of
public distrust in the banking industry.

Our pronouncement in Simex International (Manila), Inc. v. Court of Appeals38[38] continues to


resonate, thus:

The banking system is an indispensable institution in the modern world and plays a vital role
in the economic life of every civilized nation. Whether as mere passive entities for the
safekeeping and saving of money or as active instruments of business and commerce, banks
have become an ubiquitous presence among the people, who have come to regard them
with respect and even gratitude and, most of all, confidence. Thus, even the humble wageearner has not hesitated to entrust his lifes savings to the bank of his choice, knowing that
they will be safe in its custody and will even earn some interest for him. The ordinary
person, with equal faith, usually maintains a modest checking account for security and
convenience in the settling of his monthly bills and the payment of ordinary expenses. x x x.
In every case, the depositor expects the bank to treat his account with the utmost
fidelity, whether such account consists only of a few hundred pesos or of millions. The bank
must record every single transaction accurately, down to the last centavo, and as promptly
as possible. This has to be done if the account is to reflect at any given time the amount of
money the depositor can dispose of as he sees fit, confident that the bank will deliver it as
and to whomever directs. A blunder on the part of the bank, such as the dishonor of the
check without good reason, can cause the depositor not a little embarrassment if not also
financial loss and perhaps even civil and criminal litigation.
The point is that as a business affected with public interest and because of the nature
of its functions, the bank is under obligation to treat the accounts of its depositors with
meticulous care, always having in mind the fiduciary nature of their relationship. x x x.

Ineluctably, BPI-FB, as the trustee in the fiduciary relationship, is duty bound to know the signatures
of its customers. Having failed to detect the forgery in the Authority to Debit and in the process
inadvertently facilitate the FMIC-Tevesteco transfer, BPI-FB cannot now shift liability thereon to Franco and
the other payees of checks issued by Tevesteco, or prevent withdrawals from their respective accounts
without the appropriate court writ or a favorable final judgment.

Further, it boggles the mind why BPI-FB, even without delving into the authenticity of the signature
in the Authority to Debit, effected the transfer of P80,000,000.00 from FMICs to Tevestecos account, when

37
38

FMICs account was a time deposit and it had already paid advance interest to FMIC. Considering that there
is as yet no indubitable evidence establishing Francos participation in the forgery, he remains an innocent
party. As between him and BPI-FB, the latter, which made possible the present predicament, must bear the
resulting loss or inconvenience.

Second. With respect to its liability for interest on Francos current account, BPI-FB argues that its
non-compliance with the Makati RTCs Order Lifting the Order of Attachment and the legal consequences
thereof, is a matter that ought to be taken up in that court.

The argument is tenuous. We agree with the succinct holding of the appellate court in this respect.
The Manila RTCs order to pay interests on Francos current account arose from BPI-FBs unjustified refusal to
comply with its obligation to pay Franco pursuant to their contract of mutuum. In other words, from the
time BPI-FB refused Francos demand for the release of the deposits in his current account, specifically,
from May 17, 1990, interest at the rate of 12% began to accrue thereon. 39[39]

Undeniably, the Makati RTC is vested with the authority to determine the legal consequences of BPIFBs non-compliance with the Order Lifting the Order of Attachment. However, such authority does not
preclude the Manila RTC from ruling on BPI-FBs liability to Franco for payment of interest based on its
continued and unjustified refusal to perform a contractual obligation upon demand. After all, this was the
core issue raised by Franco in his complaint before the Manila RTC.

Third. As to the award to Franco of the deposits in Quiaoits account, we find no reason to depart
from the factual findings of both the Manila RTC and the CA.

Noteworthy is the fact that Quiaoit himself testified that the deposits in his account are actually
owned by Franco who simply accommodated Jaime Sebastians request to temporarily transfer P400,000.00
from Francos savings account to Quiaoits account.40[40] His testimony cannot be characterized as hearsay
as the records reveal that he had personal knowledge of the arrangement made between Franco,
Sebastian and himself.41[41]

BPI-FB makes capital of Francos belated allegation relative to this particular arrangement. It insists
that the transaction with Quiaoit was not specifically alleged in Francos complaint before the Manila RTC.
However, it appears that BPI-FB had impliedly consented to the trial of this issue given its extensive crossexamination of Quiaoit.

Section 5, Rule 10 of the Rules of Court provides:

39
40
41

Section 5.
Amendment to conform to or authorize presentation of evidence. When
issues not raised by the pleadings are tried with the express or implied consent of
the parties, they shall be treated in all respects as if they had been raised in the
pleadings. Such amendment of the pleadings as may be necessary to cause them
to conform to the evidence and to raise these issues may be made upon motion of
any party at any time, even after judgment; but failure to amend does not affect
the result of the trial of these issues. If evidence is objected to at the trial on the
ground that it is now within the issues made by the pleadings, the court may allow the
pleadings to be amended and shall do so with liberality if the presentation of the merits of
the action and the ends of substantial justice will be subserved thereby. The court may grant
a continuance to enable the amendment to be made. (Emphasis supplied)

In all, BPI-FBs argument that this case is not the right forum for Franco to recover the P400,000.00
begs the issue. To reiterate, Quiaoit, testifying during the trial, unequivocally disclaimed ownership of the
funds in his account, and pointed to Franco as the actual owner thereof. Clearly, Francos action for the
recovery of his deposits appropriately covers the deposits in Quiaoits account.

Fourth. Notwithstanding all the foregoing, BPI-FB continues to insist that the dishonor of Francos
checks respectively dated September 11 and 18, 1989 was legally in order in view of the Makati RTCs
supplemental writ of attachment issued on September 14, 1989. It posits that as the party that applied for
the writ of attachment before the Makati RTC, it need not be served with the Notice of Garnishment before
it could place Francos accounts under garnishment.

The argument is specious. In this argument, we perceive BPI-FBs clever but transparent ploy to
circumvent Section 4,42[42] Rule 13 of the Rules of Court. It should be noted that the strict requirement on
service of court papers upon the parties affected is designed to comply with the elementary requisites of
due process. Franco was entitled, as a matter of right, to notice, if the requirements of due process are to
be observed. Yet, he received a copy of the Notice of Garnishment only on September 27, 1989, several
days after the two checks he issued were dishonored by BPI-FB on September 20 and 21, 1989. Verily, it
was premature for BPI-FB to freeze Francos accounts without even awaiting service of the Makati RTCs
Notice of Garnishment on Franco.

Additionally, it should be remembered that the enforcement of a writ of attachment cannot be made
without including in the main suit the owner of the property attached by virtue thereof. Section 5, Rule 13
of the Rules of Court specifically provides that no levy or attachment pursuant to the writ issued x x x shall
be enforced unless it is preceded, or contemporaneously accompanied, by service of summons, together
with a copy of the complaint, the application for attachment, on the defendant within the Philippines.

Franco was impleaded as party-defendant only on May 15, 1990. The Makati RTC had yet to acquire
jurisdiction over the person of Franco when BPI-FB garnished his accounts. 43[43] Effectively, therefore, the
Makati RTC had no authority yet to bind the deposits of Franco through the writ of attachment, and
consequently, there was no legal basis for BPI-FB to dishonor the checks issued by Franco.

42
43

Fifth. Anent the CAs finding that BPI-FB was in bad faith and as such liable for the advance interest it
deducted from Francos time deposit account, and for moral as well as exemplary damages, we find it
proper to reinstate the ruling of the trial court, and allow only the recovery of nominal damages in the
amount of P10,000.00. However, we retain the CAs award of P75,000.00 as attorneys fees.

In granting Francos prayer for interest on his time deposit account and for moral and exemplary
damages, the CA attributed bad faith to BPI-FB because it (1) completely disregarded its obligation to
Franco; (2) misleadingly claimed that Francos deposits were under garnishment; (3) misrepresented that
Francos current account was not on file; and (4) refused to return the P400,000.00 despite the fact that the
ostensible owner, Quiaoit, wanted the amount returned to Franco.

In this regard, we are guided by Article 2201 of the Civil Code which provides:

Article 2201. In contracts and quasi-contracts, the damages for which the obligor
who acted in good faith is liable shall be those that are the natural and probable
consequences of the breach of the obligation, and which the parties have foreseen or could
have reasonable foreseen at the time the obligation was constituted.
In case of fraud, bad faith, malice or wanton attitude, the obligor shall be
responsible for all damages which may be reasonably attributed to the nonperformance of the obligation. (Emphasis supplied.)

We find, as the trial court did, that BPI-FB acted out of the impetus of self-protection and not out of
malevolence or ill will. BPI-FB was not in the corrupt state of mind contemplated in Article 2201 and should
not be held liable for all damages now being imputed to it for its breach of obligation. For the same reason,
it is not liable for the unearned interest on the time deposit.

Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or
some moral obliquity and conscious doing of wrong; it partakes of the nature of fraud. 44[44] We have held
that it is a breach of a known duty through some motive of interest or ill will. 45[45] In the instant case, we
cannot attribute to BPI-FB fraud or even a motive of self-enrichment. As the trial court found, there was no
denial whatsoever by BPI-FB of the existence of the accounts. The computer-generated document which
indicated that the current account was not on file resulted from the prior debit by BPI-FB of the deposits.
The remedy of freezing the account, or the garnishment, or even the outright refusal to honor any
transaction thereon was resorted to solely for the purpose of holding on to the funds as a security for its
intended court action,46[46] and with no other goal but to ensure the integrity of the accounts.

44
45
46

We have had occasion to hold that in the absence of fraud or bad faith, 47[47] moral damages cannot be
awarded; and that the adverse result of an action does not per se make the action wrongful, or the party
liable for it. One may err, but error alone is not a ground for granting such damages. 48[48]

An award of moral damages contemplates the existence of the following requisites: (1) there must
be an injury clearly sustained by the claimant, whether physical, mental or psychological; (2) there must
be a culpable act or omission factually established; (3) the wrongful act or omission of the defendant is the
proximate cause of the injury sustained by the claimant; and (4) the award for damages is predicated on
any of the cases stated in Article 2219 of the Civil Code. 49[49]

Franco could not point to, or identify any particular circumstance in Article 2219 of the Civil Code, 50[50]
upon which to base his claim for moral damages.

Thus, not having acted in bad faith, BPI-FB cannot be held liable for moral damages under Article 2220 of
the Civil Code for breach of contract. 51[51]

We also deny the claim for exemplary damages. Franco should show that he is entitled to moral,
temperate, or compensatory damages before the court may even consider the question of whether
exemplary damages should be awarded to him.52[52] As there is no basis for the award of moral damages,
neither can exemplary damages be granted.

While it is a sound policy not to set a premium on the right to litigate, 53[53] we, however, find that Franco
is entitled to reasonable attorneys fees for having been compelled to go to court in order to assert his
right. Thus, we affirm the CAs grant of P75,000.00 as attorneys fees.

Attorneys fees may be awarded when a party is compelled to litigate or incur expenses to protect his
interest,54[54] or when the court deems it just and equitable.55[55] In the case at bench, BPI-FB refused to
unfreeze the deposits of Franco despite the Makati RTCs Order Lifting the Order of Attachment and Quiaoits
unwavering assertion that the P400,000.00 was part of Francos savings account. This refusal constrained
Franco to incur expenses and litigate for almost two (2) decades in order to protect his interests and
recover his deposits. Therefore, this Court deems it just and equitable to grant Franco P75,000.00 as

47
48
49
50
51
52
53
54
55

attorneys fees. The award is reasonable in view of the complexity of the issues and the time it has taken
for this case to be resolved.56[56]

Sixth. As for the dismissal of BPI-FBs counter-claim, we uphold the Manila RTCs ruling, as affirmed by the
CA, that BPI-FB is not entitled to recover P3,800,000.00 as actual damages. BPI-FBs alleged loss of profit as
a result of Francos suit is, as already pointed out, of its own making. Accordingly, the denial of its counterclaim is in order.

WHEREFORE, the petition is PARTIALLY GRANTED. The Court of Appeals Decision dated
November 29, 1995 is AFFIRMED with the MODIFICATION that the award of unearned interest on the
time deposit and of moral and exemplary damages is DELETED.

No pronouncement as to costs.

SO ORDERED.
G.R. No. 155223

April 4, 2007

BOBIE ROSE V. FRIAS, represented by her Attorney-in-fact, MARIE F. FUJITA, Petitioner,


vs.
FLORA SAN DIEGO-SISON, Respondent.
DECISION
AUSTRIA-MARTINEZ, J.:
Before us is a Petition for Review on Certiorari filed by Bobie Rose V. Frias represented by her Attorney-infact, Marie Regine F. Fujita (petitioner) seeking to annul the Decision 1 dated June 18, 2002 and the
Resolution2 dated September 11, 2002 of the Court of Appeals (CA) in CA-G.R. CV No. 52839.
Petitioner is the owner of a house and lot located at No. 589 Batangas East, Ayala Alabang, Muntinlupa,
Metro Manila, which she acquired from Island Masters Realty and Development Corporation (IMRDC) by
virtue of a Deed of Sale dated Nov. 16, 1990.3 The property is covered by TCT No. 168173 of the Register of
Deeds of Makati in the name of IMRDC.4
On December 7, 1990, petitioner, as the FIRST PARTY, and Dra. Flora San Diego-Sison (respondent), as the
SECOND PARTY, entered into a Memorandum of Agreement5 over the property with the following terms:
NOW, THEREFORE, for and in consideration of the sum of THREE MILLION PESOS (P3,000,000.00) receipt of
which is hereby acknowledged by the FIRST PARTY from the SECOND PARTY, the parties have agreed as
follows:
1. That the SECOND PARTY has a period of Six (6) months from the date of the execution of this
contract within which to notify the FIRST PARTY of her intention to purchase the aforementioned
parcel of land together within (sic) the improvements thereon at the price of SIX MILLION FOUR
HUNDRED THOUSAND PESOS (P6,400,000.00). Upon notice to the FIRST PARTY of the SECOND
PARTYs intention to purchase the same, the latter has a period of another six months within which
to pay the remaining balance of P3.4 million.
2. That prior to the six months period given to the SECOND PARTY within which to decide whether
or not to purchase the above-mentioned property, the FIRST PARTY may still offer the said property
to other persons who may be interested to buy the same provided that the amount of
P3,000,000.00 given to the FIRST PARTY BY THE SECOND PARTY shall be paid to the latter including

56

interest based on prevailing compounded bank interest plus the amount of the sale in excess of
P7,000,000.00 should the property be sold at a price more than P7 million.
3. That in case the FIRST PARTY has no other buyer within the first six months from the execution of
this contract, no interest shall be charged by the SECOND PARTY on the P3 million however, in the
event that on the sixth month the SECOND PARTY would decide not to purchase the aforementioned
property, the FIRST PARTY has a period of another six months within which to pay the sum of P3
million pesos provided that the said amount shall earn compounded bank interest for the last six
months only. Under this circumstance, the amount of P3 million given by the SECOND PARTY shall
be treated as [a] loan and the property shall be considered as the security for the mortgage which
can be enforced in accordance with law.
x x x x.6
Petitioner received from respondent two million pesos in cash and one million pesos in a post-dated check
dated February 28, 1990, instead of 1991, which rendered said check stale. 7 Petitioner then gave
respondent TCT No. 168173 in the name of IMRDC and the Deed of Absolute Sale over the property
between petitioner and IMRDC.
Respondent decided not to purchase the property and notified petitioner through a letter 8 dated March 20,
1991, which petitioner received only on June 11, 1991, 9 reminding petitioner of their agreement that the
amount of two million pesos which petitioner received from respondent should be considered as a loan
payable within six months. Petitioner subsequently failed to pay respondent the amount of two million
pesos.
On April 1, 1993, respondent filed with the Regional Trial Court (RTC) of Manila, a complaint 10 for sum of
money with preliminary attachment against petitioner. The case was docketed as Civil Case No. 93-65367
and raffled to Branch 30. Respondent alleged the foregoing facts and in addition thereto averred that
petitioner tried to deprive her of the security for the loan by making a false report 11 of the loss of her
owners copy of TCT No. 168173 to the Tagig Police Station on June 3, 1991, executing an affidavit of loss
and by filing a petition12 for the issuance of a new owners duplicate copy of said title with the RTC of
Makati, Branch 142; that the petition was granted in an Order13 dated August 31, 1991; that said Order was
subsequently set aside in an Order dated April 10, 1992 14 where the RTC Makati granted respondents
petition for relief from judgment due to the fact that respondent is in possession of the owners duplicate
copy of TCT No. 168173, and ordered the provincial public prosecutor to conduct an investigation of
petitioner for perjury and false testimony. Respondent prayed for the ex-parte issuance of a writ of
preliminary attachment and payment of two million pesos with interest at 36% per annum from December
7, 1991, P100,000.00 moral, corrective and exemplary damages and P200,000.00 for attorneys fees.
In an Order dated April 6, 1993, the Executive Judge of the RTC of Manila issued a writ of preliminary
attachment upon the filing of a bond in the amount of two million pesos. 15
Petitioner filed an Amended Answer16 alleging that the Memorandum of Agreement was conceived and
arranged by her lawyer, Atty. Carmelita Lozada, who is also respondents lawyer; that she was asked to
sign the agreement without being given the chance to read the same; that the title to the property and the
Deed of Sale between her and the IMRDC were entrusted to Atty. Lozada for safekeeping and were never
turned over to respondent as there was no consummated sale yet; that out of the two million pesos cash
paid, Atty. Lozada took the one million pesos which has not been returned, thus petitioner had filed a civil
case against her; that she was never informed of respondents decision not to purchase the property within
the six month period fixed in the agreement; that when she demanded the return of TCT No. 168173 and
the Deed of Sale between her and the IMRDC from Atty. Lozada, the latter gave her these documents in a
brown envelope on May 5, 1991 which her secretary placed in her attache case; that the envelope
together with her other personal things were lost when her car was forcibly opened the following day; that
she sought the help of Atty. Lozada who advised her to secure a police report, to execute an affidavit of
loss and to get the services of another lawyer to file a petition for the issuance of an owners duplicate
copy; that the petition for the issuance of a new owners duplicate copy was filed on her behalf without her
knowledge and neither did she sign the petition nor testify in court as falsely claimed for she was abroad;
that she was a victim of the manipulations of Atty. Lozada and respondent as shown by the filing of
criminal charges for perjury and false testimony against her; that no interest could be due as there was no
valid mortgage over the property as the principal obligation is vitiated with fraud and deception. She
prayed for the dismissal of the complaint, counter-claim for damages and attorneys fees.
Trial on the merits ensued. On January 31, 1996, the RTC issued a decision, 17 the dispositive portion of
which reads:
WHEREFORE, judgment is hereby RENDERED:
1) Ordering defendant to pay plaintiff the sum of P2 Million plus interest thereon at the rate of thirty
two (32%) per cent per annum beginning December 7, 1991 until fully paid.

2) Ordering defendant to pay plaintiff the sum of P70,000.00 representing premiums paid by
plaintiff on the attachment bond with legal interest thereon counted from the date of this decision
until fully paid.
3) Ordering defendant to pay plaintiff the sum of P100,000.00 by way of moral, corrective and
exemplary damages.
4) Ordering defendant to pay plaintiff attorneys fees of P100,000.00 plus cost of litigation.18
The RTC found that petitioner was under obligation to pay respondent the amount of two million pesos with
compounded interest pursuant to their Memorandum of Agreement; that the fraudulent scheme employed
by petitioner to deprive respondent of her only security to her loaned money when petitioner executed an
affidavit of loss and instituted a petition for the issuance of an owners duplicate title knowing the same
was in respondents possession, entitled respondent to moral damages; and that petitioners bare denial
cannot be accorded credence because her testimony and that of her witness did not appear to be credible.
The RTC further found that petitioner admitted that she received from respondent the two million pesos in
cash but the fact that petitioner gave the one million pesos to Atty. Lozada was without respondents
knowledge thus it is not binding on respondent; that respondent had also proven that in 1993, she initially
paid the sum of P30,000.00 as premium for the issuance of the attachment bond, P20,000.00 for its
renewal in 1994, and P20,000.00 for the renewal in 1995, thus plaintiff should be reimbursed considering
that she was compelled to go to court and ask for a writ of preliminary attachment to protect her rights
under the agreement.
Petitioner filed her appeal with the CA. In a Decision dated June 18, 2002, the CA affirmed the RTC decision
with modification, the dispositive portion of which reads:
WHEREFORE, premises considered, the decision appealed from is MODIFIED in the sense that the rate of
interest is reduced from 32% to 25% per annum, effective June 7, 1991 until fully paid. 19
The CA found that: petitioner gave the one million pesos to Atty. Lozada partly as her commission and
partly as a loan; respondent did not replace the mistakenly dated check of one million pesos because she
had decided not to buy the property and petitioner knew of her decision as early as April 1991; the award
of moral damages was warranted since even granting petitioner had no hand in the filing of the petition for
the issuance of an owners copy, she executed an affidavit of loss of TCT No. 168173 when she knew all
along that said title was in respondents possession; petitioners claim that she thought the title was lost
when the brown envelope given to her by Atty. Lozada was stolen from her car was hollow; that such
deceitful conduct caused respondent serious anxiety and emotional distress.
The CA concluded that there was no basis for petitioner to say that the interest should be charged for six
months only and no more; that a loan always bears interest otherwise it is not a loan; that interest should
commence on June 7, 199120 with compounded bank interest prevailing at the time the two million was
considered as a loan which was in June 1991; that the bank interest rate for loans secured by a real estate
mortgage in 1991 ranged from 25% to 32% per annum as certified to by Prudential Bank, 21 that in fairness
to petitioner, the rate to be charged should be 25% only.
Petitioners motion for reconsideration was denied by the CA in a Resolution dated September 11, 2002.
Hence the instant Petition for Review on Certiorari filed by petitioner raising the following issues:
(A) WHETHER OR NOT THE COMPOUNDED BANK INTEREST SHOULD BE LIMITED TO SIX (6) MONTHS
AS CONTAINED IN THE MEMORANDUM OF AGREEMENT.
(B) WHETHER OR NOT THE RESPONDENT IS ENTITLED TO MORAL DAMAGES.
(C) WHETHER OR NOT THE GRANT OF CORRECTIVE AND EXEMPLARY DAMAGES AND ATTORNEYS
FEES IS PROPER EVEN IF NOT MENTIONED IN THE TEXT OF THE DECISION. 22
Petitioner contends that the interest, whether at 32% per annum awarded by the trial court or at 25% per
annum as modified by the CA which should run from June 7, 1991 until fully paid, is contrary to the parties
Memorandum of Agreement; that the agreement provides that if respondent would decide not to purchase
the property, petitioner has the period of another six months to pay the loan with compounded bank
interest for the last six months only; that the CAs ruling that a loan always bears interest otherwise it is
not a loan is contrary to Art. 1956 of the New Civil Code which provides that no interest shall be due unless
it has been expressly stipulated in writing.
We are not persuaded.
While the CAs conclusion, that a loan always bears interest otherwise it is not a loan, is flawed since a
simple loan may be gratuitous or with a stipulation to pay interest, 23 we find no error committed by the CA

in awarding a 25% interest per annum on the two-million peso loan even beyond the second six months
stipulated period.
The Memorandum of Agreement executed between the petitioner and respondent on December 7, 1990 is
the law between the parties. In resolving an issue based upon a contract, we must first examine the
contract itself, especially the provisions thereof which are relevant to the controversy. 24 The general rule is
that if the terms of an agreement are clear and leave no doubt as to the intention of the contracting
parties, the literal meaning of its stipulations shall prevail. 25 It is further required that the various
stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which
may result from all of them taken jointly.26
In this case, the phrase "for the last six months only" should be taken in the context of the entire
agreement. We agree with and adopt the CAs interpretation of the phrase in this wise:
Their agreement speaks of two (2) periods of six months each. The first six-month period was given to
plaintiff-appellee (respondent) to make up her mind whether or not to purchase defendant-appellants
(petitioner's) property. The second six-month period was given to defendant-appellant to pay the P2 million
loan in the event that plaintiff-appellee decided not to buy the subject property in which case interest will
be charged "for the last six months only", referring to the second six-month period. This means that no
interest will be charged for the first six-month period while appellee was making up her mind whether to
buy the property, but only for the second period of six months after appellee had decided not to buy the
property. This is the meaning of the phrase "for the last six months only". Certainly, there is nothing in
their agreement that suggests that interest will be charged for six months only even if it takes defendantappellant an eternity to pay the loan.27
The agreement that the amount given shall bear compounded bank interest for the last six months only,
i.e., referring to the second six-month period, does not mean that interest will no longer be charged after
the second six-month period since such stipulation was made on the logical and reasonable expectation
that such amount would be paid within the date stipulated. Considering that petitioner failed to pay the
amount given which under the Memorandum of Agreement shall be considered as a loan, the monetary
interest for the last six months continued to accrue until actual payment of the loaned amount.
The payment of regular interest constitutes the price or cost of the use of money and thus, until the
principal sum due is returned to the creditor, regular interest continues to accrue since the debtor
continues to use such principal amount.28 It has been held that for a debtor to continue in possession of
the principal of the loan and to continue to use the same after maturity of the loan without payment of the
monetary interest, would constitute unjust enrichment on the part of the debtor at the expense of the
creditor.29
Petitioner and respondent stipulated that the loaned amount shall earn compounded bank interests, and
per the certification issued by Prudential Bank, the interest rate for loans in 1991 ranged from 25% to 32%
per annum. The CA reduced the interest rate to 25% instead of the 32% awarded by the trial court which
petitioner no longer assailed.1awphi1.nt
In Bautista v. Pilar Development Corp.,30 we upheld the validity of a 21% per annum interest on a
P142,326.43 loan. In Garcia v. Court of Appeals,31 we sustained the agreement of the parties to a 24% per
annum interest on an P8,649,250.00 loan. Thus, the interest rate of 25% per annum awarded by the CA to
a P2 million loan is fair and reasonable.
Petitioner next claims that moral damages were awarded on the erroneous finding that she used a
fraudulent scheme to deprive respondent of her security for the loan; that such finding is baseless since
petitioner was acquitted in the case for perjury and false testimony filed by respondent against her.
We are not persuaded.
Article 31 of the Civil Code provides that when the civil action is based on an obligation not arising from
the act or omission complained of as a felony, such civil action may proceed independently of the criminal
proceedings and regardless of the result of the latter.32
While petitioner was acquitted in the false testimony and perjury cases filed by respondent against her,
those actions are entirely distinct from the collection of sum of money with damages filed by respondent
against petitioner.
We agree with the findings of the trial court and the CA that petitioners act of trying to deprive respondent
of the security of her loan by executing an affidavit of loss of the title and instituting a petition for the
issuance of a new owners duplicate copy of TCT No. 168173 entitles respondent to moral
damages.1a\^/phi1.net Moral damages may be awarded in culpa contractual or breach of contract cases
when the defendant acted fraudulently or in bad faith. Bad faith does not simply connote bad judgment or
negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of wrong. It
partakes of the nature of fraud.33

The Memorandum of Agreement provides that in the event that respondent opts not to buy the property,
the money given by respondent to petitioner shall be treated as a loan and the property shall be
considered as the security for the mortgage. It was testified to by respondent that after they executed the
agreement on December 7, 1990, petitioner gave her the owners copy of the title to the property, the
Deed of Sale between petitioner and IMRDC, the certificate of occupancy, and the certificate of the
Secretary of the IMRDC who signed the Deed of Sale.34 However, notwithstanding that all those documents
were in respondents possession, petitioner executed an affidavit of loss that the owners copy of the title
and the Deed of Sale were lost.
Although petitioner testified that her execution of the affidavit of loss was due to the fact that she was of
the belief that since she had demanded from Atty. Lozada the return of the title, she thought that the
brown envelope with markings which Atty. Lozada gave her on May 5, 1991 already contained the title and
the Deed of Sale as those documents were in the same brown envelope which she gave to Atty. Lozada
prior to the transaction with respondent.35 Such statement remained a bare statement. It was not proven
at all since Atty. Lozada had not taken the stand to corroborate her claim. In fact, even petitioners own
witness, Benilda Ynfante (Ynfante), was not able to establish petitioner's claim that the title was returned
by Atty. Lozada in view of Ynfante's testimony that after the brown envelope was given to petitioner, the
latter passed it on to her and she placed it in petitioners attach case 36 and did not bother to look at the
envelope.37
It is clear therefrom that petitioners execution of the affidavit of loss became the basis of the filing of the
petition with the RTC for the issuance of new owners duplicate copy of TCT No. 168173. Petitioners
actuation would have deprived respondent of the security for her loan were it not for respondents timely
filing of a petition for relief whereby the RTC set aside its previous order granting the issuance of new title.
Thus, the award of moral damages is in order.
The entitlement to moral damages having been established, the award of exemplary damages is proper. 38
Exemplary damages may be imposed upon petitioner by way of example or correction for the public
good.39 The RTC awarded the amount of P100,000.00 as moral and exemplary damages. While the award
of moral and exemplary damages in an aggregate amount may not be the usual way of awarding said
damages,40 no error has been committed by CA. There is no question that respondent is entitled to moral
and exemplary damages.
Petitioner argues that the CA erred in awarding attorneys fees because the trial courts decision did not
explain the findings of facts and law to justify the award of attorneys fees as the same was mentioned
only in the dispositive portion of the RTC decision.
We agree.
Article 220841 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. 42 Attorney's fees as part of
damages are not meant to enrich the winning party at the expense of the losing litigant. They are not
awarded every time a party prevails in a suit because of the policy that no premium should be placed on
the right to litigate.43 The award of attorney's fees is the exception rather than the general rule. As such, it
is necessary for the trial court to make findings of facts and law that would bring the case within the
exception and justify the grant of such award. The matter of attorney's fees cannot be mentioned only in
the dispositive portion of the decision.44 They must be clearly explained and justified by the trial court in
the body of its decision. On appeal, the CA is precluded from supplementing the bases for awarding
attorneys fees when the trial court failed to discuss in its Decision the reasons for awarding the same.
Consequently, the award of attorney's fees should be deleted.
WHEREFORE, in view of all the foregoing, the Decision dated June 18, 2002 and the Resolution dated
September 11, 2002 of the Court of Appeals in CA-G.R. CV No. 52839 are AFFIRMED with
MODIFICATION that the award of attorneys fees is DELETED.
No pronouncement as to costs.
SO ORDERED.

ESTORES VS SUPANGAN
DEL CASTILLO, J.:

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

Assailed in this Petition for Review57[1] filed under Rule 45 of the Rules of Court is the May 12, 2006
Decision58[2] of the Court of Appeals (CA) in CA-G.R. CV No. 83123, the dispositive portion of which reads:

WHEREFORE, the appealed decision is MODIFIED. The rate of interest shall be six percent
(6%) per annum, computed from September 27, 2000 until its full payment before finality of the
judgment. If the adjudged principal and the interest (or any part thereof) remain unpaid thereafter,
the interest rate shall be adjusted to twelve percent (12%) per annum, computed from the time the
judgment becomes final and executory until it is fully satisfied. The award of attorneys fees is hereby
reduced to P100,000.00. Costs against the defendants-appellants.
SO ORDERED.59[3]
Also assailed is the August 31, 2006 Resolution60[4] denying the motion for reconsideration.

Factual Antecedents

On October 3, 1993, petitioner Hermojina Estores and respondent-spouses Arturo and Laura Supangan entered into
a Conditional Deed of Sale61[5] whereby petitioner offered to sell, and respondent-spouses offered to buy, a parcel
of land covered by Transfer Certificate of Title No. TCT No. 98720 located at Naic, Cavite for the sum of P4.7 million.
The parties likewise stipulated, among others, to wit:

xxxx
1.Vendor will secure approved clearance from DAR requirements of which are (sic):
a) Letter request
b) Title
c) Tax Declaration
d) Affidavit of Aggregate Landholding Vendor/Vendee
e) Certification from the Provl. Assessors as to Landholdings of Vendor/Vendee
f) Affidavit of Non-Tenancy
g) Deed of Absolute Sale
xxxx
4. Vendee shall be informed as to the status of DAR clearance within 10 days upon signing of the
documents.
xxxx
6. Regarding the house located within the perimeter of the subject [lot] owned by spouses
[Magbago], said house shall be moved outside the perimeter of this subject property to the 300
sq. m. area allocated for [it]. Vendor hereby accepts the responsibility of seeing to it that such
agreement is carried out before full payment of the sale is made by vendee.
7. If and after the vendor has completed all necessary documents for registration of the title and
the vendee fails to complete payment as per agreement, a forfeiture fee of 25% or
downpayment, shall be applied. However, if the vendor fails to complete necessary documents
within thirty days without any sufficient reason, or without informing the vendee of its status,
vendee has the right to demand return of full amount of down payment.

57
58
59
60
61

xxxx
9. As to the boundaries and partition of the lots (15,018 sq. m. and 300 sq. m.) Vendee shall be
informed immediately of its approval by the LRC.
10. The vendor assures the vendee of a peaceful transfer of ownership.
x x x x 62[6]

After almost seven years from the time of the execution of the contract and notwithstanding payment of
P3.5 million on the part of respondent-spouses, petitioner still failed to comply with her obligation as expressly
provided in paragraphs 4, 6, 7, 9 and 10 of the contract. Hence, in a letter63[7] dated September 27, 2000,
respondent-spouses demanded the return of the amount of P3.5 million within 15 days from receipt of the letter. In
reply,64[8] petitioner acknowledged receipt of the P3.5 million and promised to return the same within 120 days.
Respondent-spouses were amenable to the proposal provided an interest of 12% compounded annually shall be
imposed on the P3.5 million.65[9] When petitioner still failed to return the amount despite demand, respondentspouses were constrained to file a Complaint66[10] for sum of money before the Regional Trial Court (RTC) of
Malabon against herein petitioner as well as Roberto U. Arias (Arias) who allegedly acted as petitioners agent. The
case was docketed as Civil Case No. 3201-MN and raffled off to Branch 170. In their complaint, respondent-spouses
prayed that petitioner and Arias be ordered to:

1.

Pay the principal amount of P3,500,000.00 plus interest of 12% compounded


annually starting October 1, 1993 or an estimated amount of P8,558,591.65;

2.

Pay the following items of damages:

a)

Moral damages in the amount of P100,000.00;

b)

Actual damages in the amount of P100,000.00;

c)

Exemplary damages in the amount of P100,000.00;

d)
e)

[Attorneys] fee in the amount of P50,000.00 plus 20% of recoverable amount


from the [petitioner].
[C]ost of suit.67[11]

In their Answer with Counterclaim,68[12] petitioner and Arias averred that they are willing to return the
principal amount of P3.5 million but without any interest as the same was not agreed upon. In their Pre-Trial Brief,69
[13] they reiterated that the only remaining issue between the parties is the imposition of interest. They argued that
since the Conditional Deed of Sale provided only for the return of the downpayment in case of breach, they cannot
be held liable to pay legal interest as well.70[14]

62
63
64
65
66
67
68
69
70

In its Pre-Trial Order71[15] dated June 29, 2001, the RTC noted that the parties agreed that the principal
amount of 3.5 million pesos should be returned to the [respondent-spouses] by the [petitioner] and the issue
remaining [is] whether x x x [respondent-spouses] are entitled to legal interest thereon, damages and attorneys
fees.72[16]

Trial ensued thereafter. After the presentation of the respondent-spouses evidence, the trial court set the
presentation of Arias and petitioners evidence on September 3, 2003.73[17] However, despite several
postponements, petitioner and Arias failed to appear hence they were deemed to have waived the presentation of
their evidence. Consequently, the case was deemed submitted for decision.74[18]

Ruling of the Regional Trial Court

On May 7, 2004, the RTC rendered its Decision75[19] finding respondent-spouses entitled to interest but only at the
rate of 6% per annum and not 12% as prayed by them.76[20] It also found respondent-spouses entitled to attorneys
fees as they were compelled to litigate to protect their interest.77[21]

The dispositive portion of the RTC Decision reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the [respondentspouses] and ordering the [petitioner and Roberto Arias] to jointly and severally:
1.
Pay [respondent-spouses] the principal amount of Three Million Five Hundred
Thousand pesos (P3,500,000.00) with an interest of 6% compounded annually starting October 1,
1993 and attorneys fee in the amount of Fifty Thousand pesos (P50,000.00) plus 20% of the
recoverable amount from the defendants and cost of the suit.
The Compulsory Counter Claim is hereby dismissed for lack of factual evidence.
SO ORDERED.78[22]

Ruling of the Court of Appeals

Aggrieved, petitioner and Arias filed their notice of appeal.79[23] The CA noted that the only issue submitted for its
resolution is whether it is proper to impose interest for an obligation that does not involve a loan or forbearance of

71
72
73
74
75
76
77
78
79

money in the absence of stipulation of the parties.80[24]

On May 12, 2006, the CA rendered the assailed Decision affirming the ruling of the RTC finding the
imposition of 6% interest proper.81[25] However, the same shall start to run only from September 27, 2000 when
respondent-spouses formally demanded the return of their money and not from October 1993 when the contract
was executed as held by the RTC. The CA also modified the RTCs ruling as regards the liability of Arias. It held that
Arias could not be held solidarily liable with petitioner because he merely acted as agent of the latter. Moreover,
there was no showing that he expressly bound himself to be personally liable or that he exceeded the limits of his
authority. More importantly, there was even no showing that Arias was authorized to act as agent of petitioner.82[26]
Anent the award of attorneys fees, the CA found the award by the trial court (P50,000.00 plus 20% of the
recoverable amount) excessive83[27] and thus reduced the same to P100,000.00.84[28]
The dispositive portion of the CA Decision reads:

WHEREFORE, the appealed decision is MODIFIED. The rate of interest shall be six percent
(6%) per annum, computed from September 27, 2000 until its full payment before finality of the
judgment. If the adjudged principal and the interest (or any part thereof) remain[s] unpaid
thereafter, the interest rate shall be adjusted to twelve percent (12%) per annum, computed from
the time the judgment becomes final and executory until it is fully satisfied. The award of attorneys
fees is hereby reduced to P100,000.00. Costs against the [petitioner].
SO ORDERED.85[29]

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

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

Petitioners Arguments

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

Respondent-spouses Arguments

80
81
82
83
84
85

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

Our Ruling

The petition lacks merit.

Interest may be imposed even in the absence of


stipulation in the contract.

We sustain the ruling of both the RTC and the CA that it is proper to impose interest notwithstanding the
absence of stipulation in the contract. Article 2210 of the Civil Code expressly provides that [i]nterest may, in the
discretion of the court, be allowed upon damages awarded for breach of contract. In this case, there is no question
that petitioner is legally obligated to return the P3.5 million because of her failure to fulfill the obligation under the
Conditional Deed of Sale, despite demand. She has in fact admitted that the conditions were not fulfilled and that
she was willing to return the full amount of P3.5 million but has not actually done so. Petitioner enjoyed the use of
the money from the time it was given to her86[30] until now. Thus, she is already in default of her obligation from
the date of demand, i.e., on September 27, 2000.

The interest at the rate of 12% is applicable in the


instant case.

Anent the interest rate, the general rule is that the applicable rate of interest shall be computed in
accordance with the stipulation of the parties.87[31] Absent any stipulation, the applicable rate of interest shall be
12% per annum when the obligation arises out of a loan or a forbearance of money, goods or credits. In other cases,
it shall be six percent (6%).88[32] In this case, the parties did not stipulate as to the applicable rate of interest. The
only question remaining therefore is whether the 6% as provided under Article 2209 of the Civil Code, or 12% under
Central Bank Circular No. 416, is due.

86
87
88

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

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

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

In Crismina Garments, Inc. v. Court of Appeals,89[33] forbearance was defined as a contractual obligation of
lender or creditor to refrain during a given period of time, from requiring the borrower or debtor to repay a loan or
debt then due and payable. This definition describes a loan where a debtor is given a period within which to pay a
loan or debt. In such case, forbearance of money, goods or credits will have no distinct definition from a loan. We
believe however, that the phrase forbearance of money, goods or credits is meant to have a separate meaning
from a loan, otherwise there would have been no need to add that phrase as a loan is already sufficiently defined in
the Civil Code.90[34] Forbearance of money, goods or credits should therefore refer to arrangements other than loan
agreements, where a person acquiesces to the temporary use of his money, goods or credits pending happening of
certain events or fulfillment of certain conditions. In this case, the respondent-spouses parted with their money
even before the conditions were fulfilled. They have therefore allowed or granted forbearance to the seller
(petitioner) to use their money pending fulfillment of the conditions. They were deprived of the use of their money
for the period pending fulfillment of the conditions and when those conditions were breached, they are entitled not
only to the return of the principal amount paid, but also to compensation for the use of their money. And the
compensation for the use of their money, absent any stipulation, should be the same rate of legal interest
applicable to a loan since the use or deprivation of funds is similar to a loan.

Petitioners unwarranted withholding of the money which rightfully pertains to respondent-spouses amounts
to forbearance of money which can be considered as an involuntary loan. Thus, the applicable rate of interest is
12% per annum. In Eastern Shipping Lines, Inc. v. Court of Appeals,91[35]cited in Crismina Garments, Inc. v. Court of
Appeals,92[36] the Court suggested the following guidelines:

89
90
91
92

I.

When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts,


delicts or quasi-delicts is breached, the contravenor can be held liable for damages. The
provisions under Title XVIII on Damages of the Civil Code govern in determining the
measure of recoverable damages.

II.

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


and compensatory damages, the rate of interest, as well as the accrual
thereof, is imposed, as follows:

1.

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


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

2.

When an obligation, not constituting a loan or forbearance of money, is


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

3.

When the judgment of the court awarding a sum of money becomes final
and executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its satisfaction,
this interim period being deemed to be by then an equivalent to a forbearance of
credit.93[37]

Eastern Shipping Lines, Inc. v. Court of Appeals94[38]and its predecessor case, Reformina v. Tongol95[39]
both involved torts cases and hence, there was no forbearance of money, goods, or credits. Further, the amount
claimed (i.e., damages) could not be established with reasonable certainty at the time the claim was made. Hence,
we arrived at a different ruling in those cases.

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

The award of attorneys fees is warranted.

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

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

93
94
95

xxxx
(11)

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

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

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

SO ORDERED.

SPOUSES IGNACIO F. JUICO and ALICE P. JUICO, Petitioners,


vs.
CHINA BANKING CORPORATION, Respondent.
DECISION
VILLARAMA, JR., J.:
Before us is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as
amended, assailing the February 20, 2009 Decision 1 and April 27, 2009 Resolution2 of the Court of Appeals
(CA) in CA G.R. CV No. 80338. The CA affirmed the April 14, 2003 Decision 3 of the Regional Trial Court (RTC)
of Makati City, Branch 147.
The factual antecedents:
Spouses Ignacio F. Juico and Alice P. Juico (petitioners) obtained a loan from China Banking Corporation
(respondent) as evidenced by two Promissory Notes both dated October 6, 1998 and numbered 507001051-34 and 507-001052-0,5 for the sums of !!6,216,000 and P4, 139,000, respectively. The loan was
secured by a Real Estate Mortgage (REM) over petitioners property located at 49 Greensville St., White
Plains, Quezon City covered by Transfer Certificate of Title (TCT) No. RT-103568 (167394) PR-41208 6 of the
Register of Deeds of Quezon City.
When petitioners failed to pay the monthly amortizations due, respondent demanded the full payment of
the outstanding balance with accrued monthly interests. On September 5, 2000, petitioners received
respondents last demand letter7 dated August 29, 2000.
As of February 23, 2001, the amount due on the two promissory notes totaled P19,201,776.63
representing the principal, interests, penalties and attorneys fees. On the same day, the mortgaged
property was sold at public auction, with respondent as highest bidder for the amount of P10,300,000.
On May 8, 2001, petitioners received8 a demand letter9 dated May 2, 2001 from respondent for the
payment of P8,901,776.63, the amount of deficiency after applying the proceeds of the foreclosure sale to
the mortgage debt. As its demand remained unheeded, respondent filed a collection suit in the trial court.
In its Complaint,10 respondent prayed that judgment be rendered ordering the petitioners to pay jointly and
severally: (1) P8,901,776.63 representing the amount of deficiency, plus interests at the legal rate, from
February 23, 2001 until fully paid; (2) an additional amount equivalent to 1/10 of 1% per day of the total
amount, until fully paid, as penalty; (3) an amount equivalent to 10% of the foregoing amounts as
attorneys fees; and (4) expenses of litigation and costs of suit.

In their Answer,11 petitioners admitted the existence of the debt but interposed, by way of special and
affirmative defense, that the complaint states no cause of action considering that the principal of the loan
was already paid when the mortgaged property was extrajudicially foreclosed and sold for P10,300,000.
Petitioners contended that should they be held liable for any deficiency, it should be only for P55,000
representing the difference between the total outstanding obligation of P10,355,000 and the bid price of
P10,300,000. Petitioners also argued that even assuming there is a cause of action, such deficiency cannot
be enforced by respondent because it consists only of the penalty and/or compounded interest on the
accrued interest which is generally not favored under the Civil Code. By way of counterclaim, petitioners
prayed that respondent be ordered to pay P100,000 in attorneys fees and costs of suit.
At the trial, respondent presented Ms. Annabelle Cokai Yu, its Senior Loans Assistant, as witness. She
testified that she handled the account of petitioners and assisted them in processing their loan application.
She called them monthly to inform them of the prevailing rates to be used in computing interest due on
their loan. As of the date of the public auction, petitioners outstanding balance was P19,201,776.6312
based on the following statement of account which she prepared:
STATEMENT OF ACCOUNT
As of FEBRUARY 23, 2001
IGNACIO F. JUICO
PN# 507-0010520 due on 04-07-2004
1wphi1
Principal balance of PN# 5070010520. . . . . . . . . . . . . .

4,139,000.00

Interest on P4,139,000.00 fr. 04-Nov-99


04-Nov-2000 366 days @ 15.00%. . . . . . . . . . . . . . . . .

622,550.96

Interest on P4,139,000.00 fr. 04-Nov-2000


04-Dec-2000 30 days @ 24.50%. . . . . . . . . . . . . . . . . .

83,346.99

Interest on P4,139,000.00 fr. 04-Dec-2000


04-Jan-2001 31 days @ 21.50%. . . . . . . . . . . . . . . . . . .

75,579.27

Interest on P4,139,000.00 fr. 04-Jan-2001


04-Feb-2001 31 days @ 19.50%. . . . . . . . . . . . . . . . . .

68,548.64

Interest on P4,139,000.00 fr. 04-Feb-2001


23-Feb-2001 19 days @ 18.00%. . . . . . . . . . . . . . . . . .

38,781.86

Penalty charge @ 1/10 of 1% of the total amount due


(P4,139,000.00 from 11-04-99 to 02-23-2001 @
1/10 of 1% per day). . . . . . . . . . . . . . . . .

1,974,303.00

Sub-total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7,002,110.73

PN# 507-0010513 due on 04-07-2004


Principal balance of PN# 5070010513. . . . . . . . . . . . . .

6,216,000.00

Interest on P6,216,000.00 fr. 06-Oct-99


04-Nov-2000 395 days @ 15.00%. . . . . . . . . . . . . . . . .

1,009,035.62

Interest on P6,216,000.00 fr. 04-Nov-2000


04-Dec-2000 30 days @ 24.50%. . . . . . . . . . . . . . . . . .

125,171.51

Interest on P6,216,000.00 fr. 04-Dec-2000


04-Jan-2001 31 days @ 21.50%. . . . . . . . . . . . . . . . . . .

113,505.86

Interest on P6,216,000.00 fr. 04-Jan-2001


04-Feb-2001 31 days @ 19.50%. . . . . . . . . . . . . . . . . .

102,947.18

Interest on P6,216,000.00 fr. 04-Feb-2001


23-Feb-2001 19 days @ 18.00%. . . . . . . . . . . . . . . . . .

58,243.07

Penalty charge @ 1/10 of 1% of the total amount due


(P6,216,000.00 from 10-06-99 to 02-23-2001 @
1/10 of 1% per day). . . . . . . . . . . . . . . . .

3,145,296.00

Subtotal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10,770,199.23

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17,772,309.96

Less: A/P applied to balance of principal

(55,000.00)

Less: Accounts payable L & D (261,149.39)

17,456,160.57

Add: 10% Attorneys Fee

1,745,616.06

Total amount due

19,201,776.63

Less: Bid Price

10,300,000.00

TOTAL DEFICIENCY AMOUNT AS OF


FEB. 23, 2001

8,901,776.63

13

Petitioners thereafter received a demand letter14 dated May 2, 2001 from respondents counsel for the
deficiency amount of P8,901,776.63. Ms. Yu further testified that based on the Statement of Account 15
dated March 15, 2002 which she prepared, the outstanding balance of petitioners was P15,190,961.48.16
On cross-examination, Ms. Yu reiterated that the interest rate changes every month based on the
prevailing market rate and she notified petitioners of the prevailing rate by calling them monthly before
their account becomes past due. When asked if there was any written authority from petitioners for
respondent to increase the interest rate unilaterally, she answered that petitioners signed a promissory
note indicating that they agreed to pay interest at the prevailing rate. 17
Petitioner Ignacio F. Juico testified that prior to the release of the loan, he was required to sign a blank
promissory note and was informed that the interest rate on the loan will be based on prevailing market
rates. Every month, respondent informs him by telephone of the prevailing interest rate. At first, he was
able to pay his monthly amortizations but when he started to incur delay in his payments due to the
financial crisis, respondent pressured him to pay in full, including charges and interests for the delay. His
property was eventually foreclosed and was sold at public auction. 18
On cross-examination, petitioner testified that he is a Doctor of Medicine and also engaged in the business
of distributing medical supplies. He admitted having read the promissory notes and that he is aware of his
obligation under them before he signed the same.19
In its decision, the RTC ruled in favor of respondent. The fallo of the RTC decision reads:
WHEREFORE, premises considered, the Complaint is hereby sustained, and Judgment is rendered ordering
herein defendants to pay jointly and severally to plaintiff, the following:
1. P8,901,776.63 representing the amount of the deficiency owing to the plaintiff, plus interest
thereon at the legal rate after February 23, 2001;
2. An amount equivalent to 10% of the total amount due as and for attorneys fees, there being
stipulation therefor in the promissory notes;
3. Costs of suit.
SO ORDERED.20
The trial court agreed with respondent that when the mortgaged property was sold at public auction on
February 23, 2001 for P10,300,000 there remained a balance of P8,901,776.63 since before foreclosure,
the total amount due on the two promissory notes aggregated to P19,201,776.63 inclusive of principal,
interests, penalties and attorneys fees. It ruled that the amount realized at the auction sale was applied to
the interest, conformably with Article 1253 of the Civil Code which provides that if the debt produces
interest, payment of the principal shall not be deemed to have been made until the interests have been
covered. This being the case, petitioners principal obligation subsists but at a reduced amount of
P8,901,776.63.
The trial court further held that Ignacios claim that he signed the promissory notes in blank cannot negate
or mitigate his liability since he admitted reading the promissory notes before signing them. It also ruled
that considering the substantial amount involved, it is unbelievable that petitioners threw all caution to the
wind and simply signed the documents without reading and understanding the contents thereof. It noted
that the promissory notes, including the terms and conditions, are pro forma and what appears to have
been left in blank were the promissory note number, date of the instrument, due date, amount of loan, and
condition that interest will be at the prevailing rates. All of these details, the trial court added, were within
the knowledge of the petitioners.
When the case was elevated to the CA, the latter affirmed the trial courts decision. The CA recognized
respondents right to claim the deficiency from the debtor where the proceeds of the sale in an
extrajudicial foreclosure of mortgage are insufficient to cover the amount of the debt. Also, it found as
valid the stipulation in the promissory notes that interest will be based on the prevailing rate. It noted that
the parties agreed on the interest rate which was not unilaterally imposed by the bank but was the rate
offered daily by all commercial banks as approved by the Monetary Board. Having signed the promissory
notes, the CA ruled that petitioners are bound by the stipulations contained therein.

Petitioners are now before this Court raising the sole issue of whether the interest rates imposed upon
them by respondent are valid. Petitioners contend that the interest rates imposed by respondent are not
valid as they were not by virtue of any law or Bangko Sentral ng Pilipinas (BSP) regulation or any regulation
that was passed by an appropriate government entity. They insist that the interest rates were unilaterally
imposed by the bank and thus violate the principle of mutuality of contracts. They argue that the
escalation clause in the promissory notes does not give respondent the unbridled authority to increase the
interest rate unilaterally. Any change must be mutually agreed upon.
Respondent, for its part, points out that petitioners failed to show that their case falls under any of the
exceptions wherein findings of fact of the CA may be reviewed by this Court. It contends that an inquiry as
to whether the interest rates imposed on the loans of petitioners were supported by appropriate
regulations from a government agency or the Central Bank requires a reevaluation of the evidence on
records. Thus, the Court would in effect, be confronted with a factual and not a legal issue.
The appeal is partly meritorious.
The principle of mutuality of contracts is expressed in Article 1308 of the Civil Code, which provides:
Article 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to
the will of one of them. Article 1956 of the Civil Code likewise ordains that "no interest shall be due unless
it has been expressly stipulated in writing."
The binding effect of any agreement between parties to a contract is premised on two settled principles:
(1) that any obligation arising from contract has the force of law between the parties; and (2) that there
must be mutuality between the parties based on their essential equality. Any contract which appears to be
heavily weighed in favor of one of the parties so as to lead to an unconscionable result is void. Any
stipulation regarding the validity or compliance of the contract which is left solely to the will of one of the
parties, is likewise, invalid.21
Escalation clauses refer to stipulations allowing an increase in the interest rate agreed upon by the
contracting parties. This Court has long recognized that there is nothing inherently wrong with escalation
clauses which are valid stipulations in commercial contracts to maintain fiscal stability and to retain the
value of money in long term contracts.22 Hence, such stipulations are not void per se.23
Nevertheless, an escalation clause "which grants the creditor an unbridled right to adjust the interest
independently and upwardly, completely depriving the debtor of the right to assent to an important
modification in the agreement" is void. A stipulation of such nature violates the principle of mutuality of
contracts.24 Thus, this Court has previously nullified the unilateral determination and imposition by creditor
banks of increases in the rate of interest provided in loan contracts. 25
In Banco Filipino Savings & Mortgage Bank v. Navarro,26 the escalation clause stated: "I/We hereby
authorize Banco Filipino to correspondingly increase the interest rate stipulated in this contract without
advance notice to me/us in the event a law should be enacted increasing the lawful rates of interest that
may be charged on this particular kind of loan." While escalation clauses in general are considered valid,
we ruled that Banco Filipino may not increase the interest on respondent borrowers loan, pursuant to
Circular No. 494 issued by the Monetary Board on January 2, 1976, because said circular is not a law
although it has the force and effect of law and the escalation clause has no provision for reduction of the
stipulated interest "in the event that the applicable maximum rate of interest is reduced by law or by the
Monetary Board" (de-escalation clause).
Subsequently, in Insular Bank of Asia and America v. Spouses Salazar 27 we reiterated that escalation
clauses are valid stipulations but their enforceability are subject to certain conditions. The increase of
interest rate from 19% to 21% per annum made by petitioner bank was disallowed because it did not
comply with the guidelines adopted by the Monetary Board to govern interest rate adjustments by banks
and non-banks performing quasi-banking functions.
In the 1991 case of Philippine National Bank v. Court of Appeals, 28 the promissory notes authorized PNB to
increase the stipulated interest per annum "within the limits allowed by law at any time depending on
whatever policy PNB may adopt in the future; Provided, that, the interest rate on this note shall be
correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by
the Monetary Board." This Court declared the increases (from 18% to 32%, then to 41% and then to 48%)
unilaterally imposed by PNB to be in violation of the principle of mutuality essential in contracts. 29
A similar ruling was made in a 1994 case30 also involving PNB where the credit agreement provided that
"PNB reserves the right to increase the interest rate within the limits allowed by law at any time depending
on whatever policy it may adopt in the future: Provided, that the interest rate on this accommodation shall
be correspondingly decreased in the event that the applicable maximum interest is reduced by law or by
the Monetary Board x x x".
Again, in 1996, the Court invalidated escalation clauses authorizing PNB to raise the stipulated interest
rate at any time without notice, within the limits allowed by law. The Court observed that there was no

attempt made by PNB to secure the conformity of respondent borrower to the successive increases in the
interest rate. The borrowers assent to the increases cannot be implied from their lack of response to the
letters sent by PNB, informing them of the increases.31
In the more recent case of Philippine Savings Bank v. Castillo, 32 we sustained the CA in declaring as
unreasonable the following escalation clause: "The rate of interest and/or bank charges herein stipulated,
during the terms of this promissory note, its extensions, renewals or other modifications, may be
increased, decreased or otherwise changed from time to time within the rate of interest and charges
allowed under present or future law(s) and/or government regulation(s) as the PSBank may prescribe for
its debtors." Clearly, the increase or decrease of interest rates under such clause hinges solely on the
discretion of petitioner as it does not require the conformity of the maker before a new interest rate could
be enforced. We also said that respondents assent to the modifications in the interest rates cannot be
implied from their lack of response to the memos sent by petitioner, informing them of the amendments,
nor from the letters requesting for reduction of the rates. Thus:
the validity of the escalation clause did not give petitioner the unbridled right to unilaterally adjust
interest rates. The adjustment should have still been subjected to the mutual agreement of the contracting
parties. In light of the absence of consent on the part of respondents to the modifications in the interest
rates, the adjusted rates cannot bind them notwithstanding the inclusion of a de-escalation clause in the
loan agreement.33
It is now settled that an escalation clause is void where the creditor unilaterally determines and imposes
an increase in the stipulated rate of interest without the express conformity of the debtor. Such unbridled
right given to creditors to adjust the interest independently and upwardly would completely take away
from the debtors the right to assent to an important modification in their agreement and would also negate
the element of mutuality in their contracts. 34 While a ceiling on interest rates under the Usury Law was
already lifted under Central Bank Circular No. 905, nothing therein "grants lenders carte blanche authority
to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their
assets."35
The two promissory notes signed by petitioners provide:
I/We hereby authorize the CHINA BANKING CORPORATION to increase or decrease as the case may be, the
interest rate/service charge presently stipulated in this note without any advance notice to me/us in the
event a law or Central Bank regulation is passed or promulgated by the Central Bank of the Philippines or
appropriate government entities, increasing or decreasing such interest rate or service charge. 36
Such escalation clause is similar to that involved in the case of Floirendo, Jr. v. Metropolitan Bank and Trust
Company37 where this Court ruled:
The provision in the promissory note authorizing respondent bank to increase, decrease or otherwise
change from time to time the rate of interest and/or bank charges "without advance notice" to petitioner,
"in the event of change in the interest rate prescribed by law or the Monetary Board of the Central Bank of
the Philippines," does not give respondent bank unrestrained freedom to charge any rate other than that
which was agreed upon. Here, the monthly upward/downward adjustment of interest rate is left to the will
of respondent bank alone. It violates the essence of mutuality of the contract. 38
More recently in Solidbank Corporation v. Permanent Homes, Incorporated, 39 we upheld as valid an
escalation clause which required a written notice to and conformity by the borrower to the increased
interest rate. Thus:
The Usury Law had been rendered legally ineffective by Resolution No. 224 dated 3 December 1982 of the
Monetary Board of the Central Bank, and later by Central Bank Circular No. 905 which took effect on 1
January 1983. These circulars removed the ceiling on interest rates for secured and unsecured loans
regardless of maturity. The effect of these circulars is to allow the parties to agree on any interest that may
be charged on a loan. The virtual repeal of the Usury Law is within the range of judicial notice which courts
are bound to take into account. Although interest rates are no longer subject to a ceiling, the lender still
does not have an unbridled license to impose increased interest rates. The lender and the borrower should
agree on the imposed rate, and such imposed rate should be in writing.
The three promissory notes between Solidbank and Permanent all contain the following provisions:
"5. We/I irrevocably authorize Solidbank to increase or decrease at any time the interest rate agreed in this
Note or Loan on the basis of, among others, prevailing rates in the local or international capital markets.
For this purpose, We/I authorize Solidbank to debit any deposit or placement account with Solidbank
belonging to any one of us. The adjustment of the interest rate shall be effective from the date indicated in
the written notice sent to us by the bank, or if no date is indicated, from the time the notice was sent.
6. Should We/I disagree to the interest rate adjustment, We/I shall prepay all amounts due under this Note
or Loan within thirty (30) days from the receipt by anyone of us of the written notice. Otherwise, We/I shall
be deemed to have given our consent to the interest rate adjustment."

The stipulations on interest rate repricing are valid because (1) the parties mutually agreed on said
stipulations; (2) repricing takes effect only upon Solidbanks written notice to Permanent of the new
interest rate; and (3) Permanent has the option to prepay its loan if Permanent and Solidbank do not agree
on the new interest rate. The phrases "irrevocably authorize," "at any time" and "adjustment of the
interest rate shall be effective from the date indicated in the written notice sent to us by the bank, or if no
date is indicated, from the time the notice was sent," emphasize that Permanent should receive a written
notice from Solidbank as a condition for the adjustment of the interest rates. (Emphasis supplied.)
In this case, the trial and appellate courts, in upholding the validity of the escalation clause, underscored
the fact that there was actually no fixed rate of interest stipulated in the promissory notes as this was
made dependent on prevailing rates in the market. The subject promissory notes contained the following
condition written after the first paragraph:
With one year grace period on principal and thereafter payable in 54 equal monthly instalments to start on
the second year. Interest at the prevailing rates payable quarterly in arrears. 40
In Polotan, Sr. v. CA (Eleventh Div.),41 petitioner cardholder assailed the trial and appellate courts in ruling
for the validity of the escalation clause in the Cardholders Agreement. On petitioners contention that the
interest rate was unilaterally imposed and based on the standards and rate formulated solely by
respondent credit card company, we held:
The contractual provision in question states that "if there occurs any change in the prevailing market rates,
the new interest rate shall be the guiding rate in computing the interest due on the outstanding obligation
without need of serving notice to the Cardholder other than the required posting on the monthly statement
served to the Cardholder." This could not be considered an escalation clause for the reason that it neither
states an increase nor a decrease in interest rate. Said clause simply states that the interest rate should be
based on the prevailing market rate.
Interpreting it differently, while said clause does not expressly stipulate a reduction in interest rate, it
nevertheless provides a leeway for the interest rate to be reduced in case the prevailing market rates
dictate its reduction.
Admittedly, the second paragraph of the questioned proviso which provides that "the Cardholder hereby
authorizes Security Diners to correspondingly increase the rate of such interest in the event of changes in
prevailing market rates x x x" is an escalation clause. However, it cannot be said to be dependent solely on
the will of private respondent as it is also dependent on the prevailing market rates.
Escalation clauses are not basically wrong or legally objectionable as long as they are not solely
potestative but based on reasonable and valid grounds. Obviously, the fluctuation in the market rates is
beyond the control of private respondent.42 (Emphasis supplied.)
In interpreting a contract, its provisions should not be read in isolation but in relation to each other and in
their entirety so as to render them effective, having in mind the intention of the parties and the purpose to
be achieved. The various stipulations of a contract shall be interpreted together, attributing to the doubtful
ones that sense which may result from all of them taken jointly. 43
Here, the escalation clause in the promissory notes authorizing the respondent to adjust the rate of
interest on the basis of a law or regulation issued by the Central Bank of the Philippines, should be read
together with the statement after the first paragraph where no rate of interest was fixed as it would be
based on prevailing market rates. While the latter is not strictly an escalation clause, its clear import was
that interest rates would vary as determined by prevailing market rates. Evidently, the parties intended
the interest on petitioners loan, including any upward or downward adjustment, to be determined by the
prevailing market rates and not dictated by respondents policy. It may also be mentioned that since the
deregulation of bank rates in 1983, the Central Bank has shifted to a market-oriented interest rate policy. 44
There is no indication that petitioners were coerced into agreeing with the foregoing provisions of the
promissory notes. In fact, petitioner Ignacio, a physician engaged in the medical supply business, admitted
having understood his obligations before signing them. At no time did petitioners protest the new rates
imposed on their loan even when their property was foreclosed by respondent.
This notwithstanding, we hold that the escalation clause is still void because it grants respondent the
power to impose an increased rate of interest without a written notice to petitioners and their written
consent. Respondents monthly telephone calls to petitioners advising them of the prevailing interest rates
would not suffice. A detailed billing statement based on the new imposed interest with corresponding
computation of the total debt should have been provided by the respondent to enable petitioners to make
an informed decision. An appropriate form must also be signed by the petitioners to indicate their
conformity to the new rates. Compliance with these requisites is essential to preserve the mutuality of
contracts. For indeed, one-sided impositions do not have the force of law between the parties, because
such impositions are not based on the parties essential equality. 45

Modifications in the rate of interest for loans pursuant to an escalation clause must be the result of an
agreement between the parties. Unless such important change in the contract terms is mutually agreed
upon, it has no binding effect.46 In the absence of consent on the part of the petitioners to the
modifications in the interest rates, the adjusted rates cannot bind them. Hence, we consider as invalid the
interest rates in excess of 15%, the rate charged for the first year.
Based on the August 29, 2000 demand letter of China Bank, petitioners total principal obligation under the
two promissory notes which they failed to settle is P10,355,000. However, due to China Banks unilateral
increases in the interest rates from 15% to as high as 24.50% and penalty charge of 1/10 of 1% per day or
36.5% per annum for the period November 4, 1999 to February 23, 2001, petitioners balance ballooned to
P19,201,776.63. Note that the original amount of principal loan almost doubled in only 16 months. The
Court also finds the penalty charges imposed excessive and arbitrary, hence the same is hereby reduced
to 1% per month or 12% per annum.1wphi1
Petitioners Statement of Account, as of February 23, 2001, the date of the foreclosure proceedings, should
thus be modified as follows:
Principal

P10,355,000.00

Interest at 15% per annum


P10,355,000 x .15 x 477 days/365 days

2,029,863.70

Penalty at 12% per annum

1,623 ,890. 96

P10,355,000 x .12 x 477days/365 days


Sub-Total

14,008,754.66

Less: A/P applied to balance of principal

(55,000.00)

Less: Accounts payable L & D

(261,149.39)
13,692,605.27

Add: Attorney's Fees

1,369,260.53

Total Amount Due

15,061,865.79

Less: Bid Price

10,300,000.00

TOTAL DEFICIENCY AMOUNT

4,761,865.79

WHEREFORE, the petition for review on certiorari is PARTLY GRANTED. The February 20, 2009 Decision
and April 27, 2009 Resolution of the Court of Appeals in CA G.R. CV No. 80338 are hereby MODIFIED.
Petitioners Spouses Ignacio F. Juico and Alice P. Juico are hereby ORDERED to pay jointly and severally
respondent China Banking Corporation P4, 7 61 ,865. 79 representing the amount of deficiency inclusive of
interest, penalty charge and attorney's fees. Said amount shall bear interest at 12% per annum, reckoned
from the time of the filing of the complaint until its full satisfaction.
No pronouncement as to costs.
SO ORDERED.
SPOUSES EDUARDO and LYDIA SILOS, Petitioners,
vs.
PHILIPPINE NATIONAL BANK, Respondent.
DECISION
DEL CASTILLO, J.:
In loan agreements, it cannot be denied that the rate of interest is a principal condition, if not the most
important component. Thus, any modification thereof must be mutually agreed upon; otherwise, it has no
binding effect. Moreover, the Court cannot consider a stipulation granting a party the option to prepay the
loan if said party is not agreeable to the arbitrary interest rates imposed. Premium may not be placed upon
a stipulation in a contract which grants one party the right to choose whether to continue with or withdraw
from the agreement if it discovers that what the other party has been doing all along is improper or illegal.
This Petition for Review on Certiorari1 questions the May 8, 2007 Decision2 of the Court of Appeals (CA) in
CA-G.R. CV No. 79650, which affirmed with modifications the February 28, 2003 Decision3 and the June 4,
2003 Order4 of the Regional Trial Court (RTC), Branch 6 of Kalibo, Aklan in Civil Case No. 5975.

Factual Antecedents
Spouses Eduardo and Lydia Silos (petitioners) have been in business for about two decades of operating a
department store and buying and selling of ready-to-wear apparel. Respondent Philippine National Bank
(PNB) is a banking corporation organized and existing under Philippine laws.
To secure a one-year revolving credit line of P150,000.00 obtained from PNB, petitioners constituted in
August 1987 a Real Estate Mortgage5 over a 370-square meter lot in Kalibo, Aklan covered by Transfer
Certificate of Title No. (TCT) T-14250. In July 1988,the credit line was increased to P1.8 million and the
mortgage was correspondingly increased to P1.8 million.6
And in July 1989, a Supplement to the Existing Real Estate Mortgage7 was executed to cover the same
credit line, which was increased to P2.5 million, and additional security was given in the form of a 134square meter lot covered by TCT T-16208. In addition, petitioners issued eight Promissory Notes8 and
signed a Credit Agreement.9 This July 1989 Credit Agreement contained a stipulation on interest which
provides as follows:
1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5% per annum. Interest shall be
payable in advance every one hundred twenty days at the rate prevailing at the time of the renewal.
(b) The Borrower agrees that the Bank may modify the interest rate in the Loan depending on whatever
policy the Bank may adopt in the future, including without limitation, the shifting from the floating interest
rate system to the fixed interest rate system, or vice versa. Where the Bank has imposed on the Loan
interest at a rate per annum, which is equal to the Banks spread over the current floating interest rate, the
Borrower hereby agrees that the Bank may, without need of notice to the Borrower, increase or decrease
its spread over the floating interest rate at any time depending on whatever policy it may adopt in the
future.10 (Emphases supplied)
The eight Promissory Notes, on the other hand, contained a stipulation granting PNB the right to increase
or reduce interest rates "within the limits allowed by law or by the Monetary Board."11
The Real Estate Mortgage agreement provided the same right to increase or reduce interest rates "at any
time depending on whatever policy PNB may adopt in the future."12
Petitioners religiously paid interest on the notes at the following rates:
1. 1st Promissory Note dated July 24, 1989 19.5%;
2. 2nd Promissory Note dated November 22, 1989 23%;
3. 3rd Promissory Note dated March 21, 1990 22%;
4. 4th Promissory Note dated July 19, 1990 24%;
5. 5th Promissory Note dated December 17, 1990 28%;
6. 6th Promissory Note dated February 14, 1991 32%;
7. 7th Promissory Note dated March 1, 1991 30%; and
8. 8th Promissory Note dated July 11, 1991 24%.13
In August 1991, an Amendment to Credit Agreement14 was executed by the parties, with the following
stipulation regarding interest:
1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each Availment from date of
each Availment up to but not including the date of full payment thereof at the rate per annum which is
determined by the Bank to be prime rate plus applicable spread in effect as of the date of each
Availment.15 (Emphases supplied)
Under this Amendment to Credit Agreement, petitioners issued in favor of PNB the following 18 Promissory
Notes, which petitioners settled except the last (the note covering the principal) at the following
interest rates:
1. 9th Promissory Note dated November 8, 1991 26%;
2. 10th Promissory Note dated March 19, 1992 25%;
3. 11th Promissory Note dated July 11, 1992 23%;

4. 12th Promissory Note dated November 10, 1992 21%;


5. 13th Promissory Note dated March 15, 1993 21%;
6. 14th Promissory Note dated July 12, 1993 17.5%;
7. 15th Promissory Note dated November 17, 1993 21%;
8. 16th Promissory Note dated March 28, 1994 21%;
9. 17th Promissory Note dated July 13, 1994 21%;
10. 18th Promissory Note dated November 16, 1994 16%;
11. 19th Promissory Note dated April 10, 1995 21%;
12. 20th Promissory Note dated July 19, 1995 18.5%;
13. 21st Promissory Note dated December 18, 1995 18.75%;
14. 22nd Promissory Note dated April 22, 1996 18.5%;
15. 23rd Promissory Note dated July 22, 1996 18.5%;
16. 24th Promissory Note dated November 25, 1996 18%;
17. 25th Promissory Note dated May 30, 1997 17.5%; and
18. 26th Promissory Note (PN 9707237) dated July 30, 1997 25%.16
The 9th up to the 17th promissory notes provide for the payment of interest at the "rate the Bank may at
any time without notice, raise within the limits allowed by law x x x."17
On the other hand, the 18th up to the 26th promissory notes including PN 9707237, which is the 26th
promissory note carried the following provision:
x x x For this purpose, I/We agree that the rate of interest herein stipulated may be increased or decreased
for the subsequent Interest Periods, with prior notice to the Borrower in the event of changes in interest
rate prescribed by law or the Monetary Board of the Central Bank of the Philippines, or in the Banks
overall cost of funds. I/We hereby agree that in the event I/we are not agreeable to the interest rate fixed
for any Interest Period, I/we shall have the option top repay the loan or credit facility without penalty within
ten (10) calendar days from the Interest Setting Date.18 (Emphasis supplied)
Respondent regularly renewed the line from 1990 up to 1997, and petitioners made good on the
promissory notes, religiously paying the interests without objection or fail. But in 1997, petitioners faltered
when the interest rates soared due to the Asian financial crisis. Petitioners sole outstanding promissory
note for P2.5 million PN 9707237 executed in July 1997 and due 120 days later or on October 28, 1997
became past due, and despite repeated demands, petitioners failed to make good on the note.
Incidentally, PN 9707237 provided for the penalty equivalent to 24% per annum in case of default, as
follows:
Without need for notice or demand, failure to pay this note or any installment thereon, when due, shall
constitute default and in such cases or in case of garnishment, receivership or bankruptcy or suit of any
kind filed against me/us by the Bank, the outstanding principal of this note, at the option of the Bank and
without prior notice of demand, shall immediately become due and payable and shall be subject to a
penalty charge of twenty four percent (24%) per annum based on the defaulted principal amount. x x x19
(Emphasis supplied)
PNB prepared a Statement of Account20 as of October 12, 1998, detailing the amount due and
demandable from petitioners in the total amount of P3,620,541.60, broken down as follows:
Principal

P 2,500,000.00

Interest

538,874.94

Penalties

581,666.66

Total

P 3,620,541.60

Despite demand, petitioners failed to pay the foregoing amount. Thus, PNB foreclosed on the mortgage,
and on January 14, 1999, TCTs T-14250 and T-16208 were sold to it at auction for the amount of
P4,324,172.96.21 The sheriffs certificate of sale was registered on March 11, 1999.
More than a year later, or on March 24, 2000, petitioners filed Civil Case No. 5975, seeking annulment of
the foreclosure sale and an accounting of the PNB credit. Petitioners theorized that after the first
promissory note where they agreed to pay 19.5% interest, the succeeding stipulations for the payment of
interest in their loan agreements with PNB which allegedly left to the latter the sole will to determine the
interest rate became null and void. Petitioners added that because the interest rates were fixed by
respondent without their prior consent or agreement, these rates are void, and as a result, petitioners
should only be made liable for interest at the legal rate of 12%. They claimed further that they overpaid
interests on the credit, and concluded that due to this overpayment of steep interest charges, their debt
should now be deemed paid, and the foreclosure and sale of TCTs T-14250 and T-16208 became
unnecessary and wrongful. As for the imposed penalty of P581,666.66, petitioners alleged that since the
Real Estate Mortgage and the Supplement thereto did not include penalties as part of the secured amount,
the same should be excluded from the foreclosure amount or bid price, even if such penalties are provided
for in the final Promissory Note, or PN 9707237.22
In addition, petitioners sought to be reimbursed an alleged overpayment of P848,285.00 made during the
period August 21, 1991 to March 5, 1998,resulting from respondents imposition of the alleged illegal and
steep interest rates. They also prayed to be awarded P200,000.00 by way of attorneys fees.23
In its Answer,24 PNB denied that it unilaterally imposed or fixed interest rates; that petitioners agreed that
without prior notice, PNB may modify interest rates depending on future policy adopted by it; and that the
imposition of penalties was agreed upon in the Credit Agreement. It added that the imposition of penalties
is supported by the all-inclusive clause in the Real Estate Mortgage agreement which provides that the
mortgage shall stand as security for any and all other obligations of whatever kind and nature owing to
respondent, which thus includes penalties imposed upon default or non-payment of the principal and
interest on due date.
On pre-trial, the parties mutually agreed to the following material facts, among others:
a) That since 1991 up to 1998, petitioners had paid PNB the total amount of P3,484,287.00;25 and
b) That PNB sent, and petitioners received, a March 10, 2000 demand letter.26
During trial, petitioner Lydia Silos (Lydia) testified that the Credit Agreement, the Amendment to Credit
Agreement, Real Estate Mortgage and the Supplement thereto were all prepared by respondent PNB and
were presented to her and her husband Eduardo only for signature; that she was told by PNB that the
latter alone would determine the interest rate; that as to the Amendment to Credit Agreement, she was
told that PNB would fill up the interest rate portion thereof; that at the time the parties executed the said
Credit Agreement, she was not informed about the applicable spread that PNB would impose on her
account; that the interest rate portion of all Promissory Notes she and Eduardo issued were always left in
blank when they executed them, with respondents mere assurance that it would be the one to enter or
indicate thereon the prevailing interest rate at the time of availment; and that they agreed to such
arrangement. She further testified that the two Real Estate Mortgage agreements she signed did not
stipulate the payment of penalties; that she and Eduardo consulted with a lawyer, and were told that PNBs
actions were improper, and so on March 20, 2000, they wrote to the latter seeking a recomputation of their
outstanding obligation; and when PNB did not oblige, they instituted Civil Case No. 5975.27
On cross-examination, Lydia testified that she has been in business for 20 years; that she also borrowed
from other individuals and another bank; that it was only with banks that she was asked to sign loan
documents with no indicated interest rate; that she did not bother to read the terms of the loan documents
which she signed; and that she received several PNB statements of account detailing their outstanding
obligations, but she did not complain; that she assumed instead that what was written therein is correct.28
For his part, PNB Kalibo Branch Manager Diosdado Aspa, Jr. (Aspa), the sole witness for respondent, stated
on cross-examination that as a practice, the determination of the prime rates of interest was the
responsibility solely of PNBs Treasury Department which is based in Manila; that these prime rates were
simply communicated to all PNB branches for implementation; that there are a multitude of considerations
which determine the interest rate, such as the cost of money, foreign currency values, PNBs spread, bank
administrative costs, profitability, and the practice in the banking industry; that in every repricing of each
loan availment, the borrower has the right to question the rates, but that this was not done by the
petitioners; and that anything that is not found in the Promissory Note may be supplemented by the Credit
Agreement.29
Ruling of the Regional Trial Court
On February 28, 2003, the trial court rendered judgment dismissing Civil Case No. 5975.30
It ruled that:

1. While the Credit Agreement allows PNB to unilaterally increase its spread over the floating
interest rate at any time depending on whatever policy it may adopt in the future, it likewise allows
for the decrease at any time of the same. Thus, such stipulation authorizing both the increase and
decrease of interest rates as may be applicable is valid,31 as was held in Consolidated Bank and
Trust Corporation (SOLIDBANK) v. Court of Appeals;32
2. Banks are allowed to stipulate that interest rates on loans need not be fixed and instead be made
dependent on prevailing rates upon which to peg such variable interest rates;33
3. The Promissory Note, as the principal contract evidencing petitioners loan, prevails over the
Credit Agreement and the Real Estate Mortgage.
As such, the rate of interest, penalties and attorneys fees stipulated in the Promissory Note prevail
over those mentioned in the Credit Agreement and the Real Estate Mortgage agreements;34
4. Roughly, PNBs computation of the total amount of petitioners obligation is correct;35
5. Because the loan was admittedly due and demandable, the foreclosure was regularly made;36
6. By the admission of petitioners during pre-trial, all payments made to PNB were properly applied
to the principal, interest and penalties.37
The dispositive portion of the trial courts Decision reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of the respondent and against the
petitioners by DISMISSING the latters petition.
Costs against the petitioners.
SO ORDERED.38
Petitioners moved for reconsideration. In an Order39 dated June 4, 2003, the trial court granted only a
modification in the award of attorneys fees, reducing the same from 10% to 1%. Thus, PNB was ordered to
refund to petitioner the excess in attorneys fees in the amount of P356,589.90, viz:
WHEREFORE, judgment is hereby rendered upholding the validity of the interest rate charged by the
respondent as well as the extra-judicial foreclosure proceedings and the Certificate of Sale. However,
respondent is directed to refund to the petitioner the amount of P356,589.90 representing the excess
interest charged against the latter.
No pronouncement as to costs.
SO ORDERED.40
Ruling of the Court of Appeals
Petitioners appealed to the CA, which issued the questioned Decision with the following decretal portion:
WHEREFORE, in view of the foregoing, the instant appeal is PARTLY GRANTED. The modified Decision of the
Regional Trial Court per Order dated June 4, 2003 is hereby AFFIRMED with MODIFICATIONS, to wit:
1. [T]hat the interest rate to be applied after the expiration of the first 30-day interest period for PN.
No. 9707237 should be 12% per annum;
2. [T]hat the attorneys fees of10% is valid and binding; and
3. [T]hat [PNB] is hereby ordered to reimburse [petitioners] the excess in the bid price of
P377,505.99 which is the difference between the total amount due [PNB] and the amount of its bid
price.
SO ORDERED.41
On the other hand, respondent did not appeal the June 4,2003 Order of the trial court which reduced its
award of attorneys fees. It simply raised the issue in its appellees brief in the CA, and included a prayer
for the reversal of said Order.
In effect, the CA limited petitioners appeal to the following issues:

1) Whether x x x the interest rates on petitioners outstanding obligation were unilaterally and
arbitrarily imposed by PNB;
2) Whether x x x the penalty charges were secured by the real estate mortgage; and
3) Whether x x x the extrajudicial foreclosure and sale are valid.42
The CA noted that, based on receipts presented by petitioners during trial, the latter dutifully paid a total
of P3,027,324.60 in interest for the period August 7, 1991 to August 6, 1997, over and above the P2.5
million principal obligation. And this is exclusive of payments for insurance premiums, documentary stamp
taxes, and penalty. All the while, petitioners did not complain nor object to the imposition of interest; they
in fact paid the same religiously and without fail for seven years. The appellate court ruled that petitioners
are thus estopped from questioning the same.
The CA nevertheless noted that for the period July 30, 1997 to August 14, 1997, PNB wrongly applied an
interest rate of 25.72% instead of the agreed 25%; thus it overcharged petitioners, and the latter paid, an
excess of P736.56 in interest.
On the issue of penalties, the CA ruled that the express tenor of the Real Estate Mortgage agreements
contemplated the inclusion of the PN 9707237-stipulated 24% penalty in the amount to be secured by the
mortgaged property, thus
For and in consideration of certain loans, overdrafts and other credit accommodations obtained from the
MORTGAGEE and to secure the payment of the same and those others that the MORTGAGEE may extend to
the MORTGAGOR, including interest and expenses, and other obligations owing by the MORTGAGOR to the
MORTGAGEE, whether direct or indirect, principal or secondary, as appearing in the accounts, books and
records of the MORTGAGEE, the MORTGAGOR does hereby transfer and convey by way of mortgage unto
the MORTGAGEE x x x43 (Emphasis supplied)
The CA believes that the 24% penalty is covered by the phrase "and other obligations owing by the
mortgagor to the mortgagee" and should thus be added to the amount secured by the mortgages.44
The CA then proceeded to declare valid the foreclosure and sale of properties covered by TCTs T-14250 and
T-16208, which came as a necessary result of petitioners failure to pay the outstanding obligation upon
demand.45 The CA saw fit to increase the trial courts award of 1% to 10%, finding the latter rate to be
reasonable and citing the Real Estate Mortgage agreement which authorized the collection of the higher
rate.46
Finally, the CA ruled that petitioners are entitled to P377,505.09 surplus, which is the difference between
PNBs bid price of P4,324,172.96 and petitioners total computed obligation as of January 14, 1999, or the
date of the auction sale, in the amount of P3,946,667.87.47
Hence, the present Petition.
Issues
The following issues are raised in this Petition:
I
A. THE COURT OF APPEALS AS WELL AS THE LOWER COURT ERRED IN NOT NULLIFYING THE
INTEREST RATE PROVISION IN THE CREDIT AGREEMENT DATED JULY 24, 1989 X X X AND IN
THE AMENDMENT TO CREDIT AGREEMENT DATEDAUGUST 21, 1991 X X X WHICH LEFT TO
THE SOLE UNILATERAL DETERMINATION OF THE RESPONDENT PNB THE ORIGINAL FIXING OF
INTEREST RATE AND ITS INCREASE, WHICH AGREEMENT IS CONTRARY TO LAW, ART. 1308 OF
THE [NEW CIVIL CODE], AS ENUNCIATED IN PONCIANO ALMEIDA V. COURT OF APPEALS,G.R.
[NO.] 113412, APRIL 17, 1996, AND CONTRARY TO PUBLIC POLICY AND PUBLIC INTEREST,
AND IN APPLYING THE PRINCIPLE OF ESTOPPEL ARISING FROM THE ALLEGED DELAYED
COMPLAINT OF PETITIONER[S], AND [THEIR] PAYMENT OF THE INTEREST CHARGED.
B. CONSEQUENTLY, THE COURT OF APPEALS AND THE LOWER COURT ERRED IN NOT
DECLARING THAT PNB IS NOT AT ALL ENTITLED TO ANY INTEREST EXCEPT THE LEGAL RATE
FROM DATE OF DEMAND, AND IN NOT APPLYING THE EXCESS OVER THE LEGAL RATE OF THE
ADMITTED PAYMENTS MADE BY PETITIONER[S] FROM 1991-1998 IN THE ADMITTED TOTAL
AMOUNT OF P3,484,287.00, TO PAYMENT OF THE PRINCIPAL OF P2,500,000.[00] LEAVING AN
OVERPAYMENT OFP984,287.00 REFUNDABLE BY RESPONDENT TO PETITIONER[S] WITH
INTEREST OF 12% PER ANNUM.
II

THE COURT OF APPEALS AND THE LOWER COURT ERRED IN HOLDING THAT PENALTIES ARE INCLUDEDIN
THE SECURED AMOUNT, SUBJECT TO FORECLOSURE, WHEN NO PENALTIES ARE MENTIONED [NOR]
PROVIDED FOR IN THE REAL ESTATE MORTGAGE AS A SECURED AMOUNT AND THEREFORE THE AMOUNT
OF PENALTIES SHOULDHAVE BEEN EXCLUDED FROM [THE] FORECLOSURE AMOUNT.
III
THE COURT OF APPEALS ERRED IN REVERSING THE RULING OF THE LOWER COURT, WHICH REDUCED THE
ATTORNEYS FEES OF 10% OF THE TOTAL INDEBTEDNESS CHARGED IN THE X X X EXTRAJUDICIAL
FORECLOSURE TOONLY 1%, AND [AWARDING] 10% ATTORNEYS FEES.48
Petitioners Arguments
Petitioners insist that the interest rate provision in the Credit Agreement and the Amendment to Credit
Agreement should be declared null and void, for they relegated to PNB the sole power to fix interest rates
based on arbitrary criteria or factors such as bank policy, profitability, cost of money, foreign currency
values, and bank administrative costs; spaces for interest rates in the two Credit Agreements and the
promissory notes were left blank for PNB to unilaterally fill, and their consent or agreement to the interest
rates imposed thereafter was not obtained; the interest rate, which consists of the prime rate plus the
bank spread, is determined not by agreement of the parties but by PNBs Treasury Department in Manila.
Petitioners conclude that by this method of fixing the interest rates, the principle of mutuality of contracts
is violated, and public policy as well as Circular 90549 of the then Central Bank had been breached.
Petitioners question the CAs application of the principle of estoppel, saying that no estoppel can proceed
from an illegal act. Though they failed to timely question the imposition of the alleged illegal interest rates
and continued to pay the loan on the basis of these rates, they cannot be deemed to have acquiesced, and
hence could recover what they erroneously paid.50
Petitioners argue that if the interest rates were nullified, then their obligation to PNB is deemed
extinguished as of July 1997; moreover, it would appear that they even made an over payment to the bank
in the amount of P984,287.00.
Next, petitioners suggest that since the Real Estate Mortgage agreements did not include nor specify, as
part of the secured amount, the penalty of 24% authorized in PN 9707237, such amount of P581,666.66
could not be made answerable by or collected from the mortgages covering TCTs T-14250 and T-16208.
Claiming support from Philippine Bank of Communications [PBCom] v. Court of Appeals,51 petitioners insist
that the phrase "and other obligations owing by the mortgagor to the mortgagee"52 in the mortgage
agreements cannot embrace the P581,666.66 penalty, because, as held in the PBCom case, "[a] penalty
charge does not belong to the species of obligations enumerated in the mortgage, hence, the said contract
cannot be understood to secure the penalty";53 while the mortgages are the accessory contracts, what
items are secured may only be determined from the provisions of the mortgage contracts, and not from
the Credit Agreement or the promissory notes.
Finally, petitioners submit that the trial courts award of 1% attorneys fees should be maintained, given
that in foreclosures, a lawyers work consists merely in the preparation and filing of the petition, and
involves minimal study.54 To allow the imposition of a staggering P396,211.00 for such work would be
contrary to equity. Petitioners state that the purpose of attorneys fees in cases of this nature "is not to
give respondent a larger compensation for the loan than the law already allows, but to protect it against
any future loss or damage by being compelled to retain counsel x x x to institute judicial proceedings for
the collection of its credit."55 And because the instant case involves a simple extrajudicial foreclosure,
attorneys fees may be equitably tempered.
Respondents Arguments
For its part, respondent disputes petitioners claim that interest rates were unilaterally fixed by it, taking
relief in the CA pronouncement that petitioners are deemed estopped by their failure to question the
imposed rates and their continued payment thereof without opposition. It adds that because the Credit
Agreement and promissory notes contained both an escalation clause and a de-escalation clause, it may
not be said that the bank violated the principle of mutuality. Besides, the increase or decrease in interest
rates have been mutually agreed upon by the parties, as shown by petitioners continuous payment
without protest. Respondent adds that the alleged unilateral imposition of interest rates is not a proper
subject for review by the Court because the issue was never raised in the lower court.
As for petitioners claim that interest rates imposed by it are null and void for the reasons that 1) the Credit
Agreements and the promissory notes were signed in blank; 2) interest rates were at short periods; 3) no
interest rates could be charged where no agreement on interest rates was made in writing; 4) PNB fixed
interest rates on the basis of arbitrary policies and standards left to its choosing; and 5) interest rates
based on prime rate plus applicable spread are indeterminate and arbitrary PNB counters:
a. That Credit Agreements and promissory notes were signed by petitioner[s] in blank Respondent
claims that this issue was never raised in the lower court. Besides, documentary evidence prevails

over testimonial evidence; Lydia Silos testimony in this regard is self-serving, unsupported and
uncorroborated, and for being the lone evidence on this issue. The fact remains that these
documents are in proper form, presumed regular, and endure, against arbitrary claims by Silos
who is an experienced business person that she signed questionable loan documents whose
provisions for interest rates were left blank, and yet she continued to pay the interests without
protest for a number of years.56
b. That interest rates were at short periods Respondent argues that the law which governs and
prohibits changes in interest rates made more than once every twelve months has been removed57
with the issuance of Presidential Decree No. 858.58
c. That no interest rates could be charged where no agreement on interest rates was made in
writing in violation of Article 1956 of the Civil Code, which provides that no interest shall be due
unless it has been expressly stipulated in writing Respondent insists that the stipulated 25% per
annum as embodied in PN 9707237 should be imposed during the interim, or the period after the
loan became due and while it remains unpaid, and not the legal interest of 12% as claimed by
petitioners.59
d. That PNB fixed interest rates on the basis of arbitrary policies and standards left to its choosing
According to respondent, interest rates were fixed taking into consideration increases or decreases
as provided by law or by the Monetary Board, the banks overall costs of funds, and upon
agreement of the parties.60
e. That interest rates based on prime rate plus applicable spread are indeterminate and arbitrary
On this score, respondent submits there are various factors that influence interest rates, from
political events to economic developments, etc.; the cost of money, profitability and foreign
currency transactions may not be discounted.61
On the issue of penalties, respondent reiterates the trial courts finding that during pre-trial, petitioners
admitted that the Statement of Account as of October 12, 1998 which detailed and included penalty
charges as part of the total outstanding obligation owing to the bank was correct. Respondent justifies
the imposition and collection of a penalty as a normal banking practice, and the standard rate per annum
for all commercial banks, at the time, was 24%.
Respondent adds that the purpose of the penalty or a penal clause for that matter is to ensure the
performance of the obligation and substitute for damages and the payment of interest in the event of noncompliance.62 And the promissory note being the principal agreement as opposed to the mortgage,
which is a mere accessory should prevail. This being the case, its inclusion as part of the secured amount
in the mortgage agreements is valid and necessary.
Regarding the foreclosure of the mortgages, respondent accuses petitioners of pre-empting consolidation
of its ownership over TCTs T-14250 and T-16208; that petitioners filed Civil Case No. 5975 ostensibly to
question the foreclosure and sale of properties covered by TCTs T-14250 and T-16208 in a desperate move
to retain ownership over these properties, because they failed to timely redeem them.
Respondent directs the attention of the Court to its petition in G.R. No. 181046,63 where the propriety of
the CAs ruling on the following issues is squarely raised:
1. That the interest rate to be applied after the expiration of the first 30-day interest period for PN
9707237 should be 12% per annum; and
2. That PNB should reimburse petitioners the excess in the bid price of P377,505.99 which is the
difference between the total amount due to PNB and the amount of its bid price.
Our Ruling
The Court grants the Petition.
Before anything else, it must be said that it is not the function of the Court to re-examine or re-evaluate
evidence adduced by the parties in the proceedings below. The rule admits of certain well-recognized
exceptions, though, as when the lower courts findings are not supported by the evidence on record or are
based on a misapprehension of facts, or when certain relevant and undisputed facts were manifestly
overlooked that, if properly considered, would justify a different conclusion. This case falls within such
exceptions.
The Court notes that on March 5, 2008, a Resolution was issued by the Courts First Division denying
respondents petition in G.R. No. 181046, due to late filing, failure to attach the required affidavit of service
of the petition on the trial court and the petitioners, and submission of a defective verification and
certification of non-forum shopping. On June 25, 2008, the Court issued another Resolution denying with
finality respondents motion for reconsideration of the March 5, 2008 Resolution. And on August 15, 2008,
entry of judgment was made. This thus settles the issues, as above-stated, covering a) the interest rate

or 12% per annum that applies upon expiration of the first 30 days interest period provided under PN
9707237, and b)the CAs decree that PNB should reimburse petitioner the excess in the bid price of
P377,505.09.
It appears that respondents practice, more than once proscribed by the Court, has been carried over once
more to the petitioners. In a number of decided cases, the Court struck down provisions in credit
documents issued by PNB to, or required of, its borrowers which allow the bank to increase or decrease
interest rates "within the limits allowed by law at any time depending on whatever policy it may adopt in
the future." Thus, in Philippine National Bank v. Court of Appeals,64 such stipulation and similar ones were
declared in violation of Article 130865 of the Civil Code. In a second case, Philippine National Bank v. Court
of Appeals,66 the very same stipulations found in the credit agreement and the promissory notes prepared
and issued by the respondent were again invalidated. The Court therein said:
The Credit Agreement provided inter alia, that
(a) The BANK reserves the right to increase the interest rate within the limits allowed by law at any time
depending on whatever policy it may adopt in the future; Provided, that the interest rate on this
accommodation shall be correspondingly decreased in the event that the applicable maximum interest is
reduced by law or by the Monetary Board. In either case, the adjustment in the interest rate agreed upon
shall take effect on the effectivity date of the increase or decrease in the maximum interest rate.
The Promissory Note, in turn, authorized the PNB to raise the rate of interest, at any time without notice,
beyond the stipulated rate of 12% but only "within the limits allowed by law."
The Real Estate Mortgage contract likewise provided that
(k) INCREASE OF INTEREST RATE: The rate of interest charged on the obligation secured by this mortgage
as well as the interest on the amount which may have been advanced by the MORTGAGEE, in accordance
with the provision hereof, shall be subject during the life of this contract to such an increase within the rate
allowed by law, as the Board of Directors of the MORTGAGEE may prescribe for its debtors.
xxxx
In making the unilateral increases in interest rates, petitioner bank relied on the escalation clause
contained in their credit agreement which provides, as follows:
The Bank reserves the right to increase the interest rate within the limits allowed by law at any time
depending on whatever policy it may adopt in the future and provided, that, the interest rate on this
accommodation shall be correspondingly decreased in the event that the applicable maximum interest
rate is reduced by law or by the Monetary Board. In either case, the adjustment in the interest rate agreed
upon shall take effect on the effectivity date of the increase or decrease in maximum interest rate.
This clause is authorized by Section 2 of Presidential Decree (P.D.) No. 1684 which further amended Act No.
2655 ("The Usury Law"), as amended, thus:
Section 2. The same Act is hereby amended by adding a new section after Section 7, to read as follows:
Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may
stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum
rate of interest is increased bylaw or by the Monetary Board; Provided, That such stipulation shall be valid
only if there is also a stipulation in the agreement that the rate of interest agreed upon shall be reduced in
the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board;
Provided further, That the adjustment in the rate of interest agreed upon shall take effect on or after the
effectivity of the increase or decrease in the maximum rate of interest.
Section 1 of P.D. No. 1684 also empowered the Central Banks Monetary Board to prescribe the maximum
rates of interest for loans and certain forbearances. Pursuant to such authority, the Monetary Board issued
Central Bank (C.B.) Circular No. 905, series of 1982, Section 5 of which provides:
Sec. 5. Section 1303 of the Manual of Regulations (for Banks and Other Financial Intermediaries) is hereby
amended to read as follows:
Sec. 1303. Interest and Other Charges.
The rate of interest, including commissions, premiums, fees and other charges, on any loan, or
forbearance of any money, goods or credits, regardless of maturity and whether secured or unsecured,
shall not be subject to any ceiling prescribed under or pursuant to the Usury Law, as amended.
P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate freely regarding
any subsequent adjustment in the interest rate that shall accrue on a loan or forbearance of money, goods

or credits. In fine, they can agree to adjust, upward or downward, the interest previously stipulated.
However, contrary to the stubborn insistence of petitioner bank, the said law and circular did not authorize
either party to unilaterally raise the interest rate without the others consent.
It is basic that there can be no contract in the true sense in the absence of the element of agreement, or of
mutual assent of the parties. If this assent is wanting on the part of the one who contracts, his act has no
more efficacy than if it had been done under duress or by a person of unsound mind.
Similarly, contract changes must be made with the consent of the contracting parties. The minds of all the
parties must meet as to the proposed modification, especially when it affects an important aspect of the
agreement. In the case of loan contracts, it cannot be gainsaid that the rate of interest is always a vital
component, for it can make or break a capital venture. Thus, any change must be mutually agreed upon,
otherwise, it is bereft of any binding effect.
We cannot countenance petitioner banks posturing that the escalation clause at bench gives it unbridled
right to unilaterally upwardly adjust the interest on private respondents loan. That would completely take
away from private respondents the right to assent to an important modification in their agreement, and
would negate the element of mutuality in contracts. In Philippine National Bank v. Court of Appeals, et al.,
196 SCRA 536, 544-545 (1991) we held
x x x The unilateral action of the PNB in increasing the interest rate on the private respondents loan
violated the mutuality of contracts ordained in Article 1308 of the Civil Code:
Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the
will of one of them.
In order that obligations arising from contracts may have the force of law between the parties, there must
be mutuality between the parties based on their essential equality. A contract containing a condition which
makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is
void . . . . Hence, even assuming that the . . . loan agreement between the PNB and the private respondent
gave the PNB a license (although in fact there was none) to increase the interest rate at will during the
term of the loan, that license would have been null and void for being violative of the principle of mutuality
essential in contracts. It would have invested the loan agreement with the character of a contract of
adhesion, where the parties do not bargain on equal footing, the weaker partys (the debtor) participation
being reduced to the alternative "to take it or leave it" . . . . Such a contract is a veritable trap for the
weaker party whom the courts of justice must protect against abuse and imposition.67 (Emphases
supplied)
Then again, in a third case, Spouses Almeda v. Court of Appeals,68 the Court invalidated the very same
provisions in the respondents prepared Credit Agreement, declaring thus:
The binding effect of any agreement between parties to a contract is premised on two settled principles:
(1) that any obligation arising from contract has the force of law between the parties; and (2) that there
must be mutuality between the parties based on their essential equality. Any contract which appears to be
heavily weighed in favor of one of the parties so as to lead to an unconscionable result is void. Any
stipulation regarding the validity or compliance of the contract which is left solely to the will of one of the
parties, is likewise, invalid.
It is plainly obvious, therefore, from the undisputed facts of the case that respondent bank unilaterally
altered the terms of its contract with petitioners by increasing the interest rates on the loan without the
prior assent of the latter. In fact, the manner of agreement is itself explicitly stipulated by the Civil Code
when it provides, in Article 1956 that "No interest shall be due unless it has been expressly stipulated in
writing." What has been "stipulated in writing" from a perusal of interest rate provision of the credit
agreement signed between the parties is that petitioners were bound merely to pay 21% interest, subject
to a possible escalation or de-escalation, when 1) the circumstances warrant such escalation or deescalation; 2) within the limits allowed by law; and 3) upon agreement.
Indeed, the interest rate which appears to have been agreed upon by the parties to the contract in this
case was the 21% rate stipulated in the interest provision. Any doubt about this is in fact readily resolved
by a careful reading of the credit agreement because the same plainly uses the phrase "interest rate
agreed upon," in reference to the original 21% interest rate. x x x
xxxx
Petitioners never agreed in writing to pay the increased interest rates demanded by respondent bank in
contravention to the tenor of their credit agreement. That an increase in interest rates from 18% to as
much as 68% is excessive and unconscionable is indisputable. Between 1981 and 1984, petitioners had
paid an amount equivalent to virtually half of the entire principal (P7,735,004.66) which was applied to
interest alone. By the time the spouses tendered the amount of P40,142,518.00 in settlement of their
obligations; respondent bank was demanding P58,377,487.00 over and above those amounts already
previously paid by the spouses.

Escalation clauses are not basically wrong or legally objectionable so long as they are not solely
potestative but based on reasonable and valid grounds. Here, as clearly demonstrated above, not only
[are] the increases of the interest rates on the basis of the escalation clause patently unreasonable and
unconscionable, but also there are no valid and reasonable standards upon which the increases are
anchored.
xxxx
In the face of the unequivocal interest rate provisions in the credit agreement and in the law requiring the
parties to agree to changes in the interest rate in writing, we hold that the unilateral and progressive
increases imposed by respondent PNB were null and void. Their effect was to increase the total obligation
on an eighteen million peso loan to an amount way over three times that which was originally granted to
the borrowers. That these increases, occasioned by crafty manipulations in the interest rates is
unconscionable and neutralizes the salutary policies of extending loans to spur business cannot be
disputed.69 (Emphases supplied)
Still, in a fourth case, Philippine National Bank v. Court of Appeals,70 the above doctrine was reiterated:
The promissory note contained the following stipulation:
For value received, I/we, [private respondents] jointly and severally promise to pay to the ORDER of the
PHILIPPINE NATIONAL BANK, at its office in San Jose City, Philippines, the sum of FIFTEEN THOUSAND ONLY
(P15,000.00), Philippine Currency, together with interest thereon at the rate of 12% per annum until paid,
which interest rate the Bank may at any time without notice, raise within the limits allowed by law, and
I/we also agree to pay jointly and severally ____% per annum penalty charge, by way of liquidated
damages should this note be unpaid or is not renewed on due dated.
Payment of this note shall be as follows:
*THREE HUNDRED SIXTY FIVE DAYS* AFTER DATE
On the reverse side of the note the following condition was stamped:
All short-term loans to be granted starting January 1, 1978 shall be made subject to the condition that any
and/or all extensions hereof that will leave any portion of the amount still unpaid after 730 days shall
automatically convert the outstanding balance into a medium or long-term obligation as the case may be
and give the Bank the right to charge the interest rates prescribed under its policies from the date the
account was originally granted.
To secure payment of the loan the parties executed a real estate mortgage contract which provided:
(k) INCREASE OF INTEREST RATE:
The rate of interest charged on the obligation secured by this mortgage as well as the interest on the
amount which may have been advanced by the MORTGAGEE, in accordance with the provision hereof, shall
be subject during the life of this contract to such an increase within the rate allowed by law, as the Board
of Directors of the MORTGAGEE may prescribe for its debtors.
xxxx
To begin with, PNBs argument rests on a misapprehension of the import of the appellate courts ruling.
The Court of Appeals nullified the interest rate increases not because the promissory note did not comply
with P.D. No. 1684 by providing for a de-escalation, but because the absence of such provision made the
clause so one-sided as to make it unreasonable.
That ruling is correct. It is in line with our decision in Banco Filipino Savings & Mortgage Bank v. Navarro
that although P.D. No. 1684 is not to be retroactively applied to loans granted before its effectivity, there
must nevertheless be a de-escalation clause to mitigate the one-sidedness of the escalation clause. Indeed
because of concern for the unequal status of borrowers vis--vis the banks, our cases after Banco Filipino
have fashioned the rule that any increase in the rate of interest made pursuant to an escalation clause
must be the result of agreement between the parties.
Thus in Philippine National Bank v. Court of Appeals, two promissory notes authorized PNB to increase the
stipulated interest per annum" within the limits allowed by law at any time depending on whatever policy
[PNB] may adopt in the future; Provided, that the interest rate on this note shall be correspondingly
decreased in the event that the applicable maximum interest rate is reduced by law or by the Monetary
Board." The real estate mortgage likewise provided:
The rate of interest charged on the obligation secured by this mortgage as well as the interest on the
amount which may have been advanced by the MORTGAGEE, in accordance with the provisions hereof,

shall be subject during the life of this contract to such an increase within the rate allowed by law, as the
Board of Directors of the MORTGAGEE may prescribe for its debtors.
Pursuant to these clauses, PNB successively increased the interest from 18% to 32%, then to 41% and
then to 48%. This Court declared the increases unilaterally imposed by [PNB] to be in violation of the
principle of mutuality as embodied in Art.1308 of the Civil Code, which provides that "[t]he contract must
bind both contracting parties; its validity or compliance cannot be left to the will of one of them." As the
Court explained:
In order that obligations arising from contracts may have the force of law between the parties, there must
be mutuality between the parties based on their essential equality. A contract containing a condition which
makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is
void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the P1.8 million loan
agreement between the PNB and the private respondent gave the PNB a license (although in fact there
was none) to increase the interest rate at will during the term of the loan, that license would have been
null and void for being violative of the principle of mutuality essential in contracts. It would have invested
the loan agreement with the character of a contract of adhesion, where the parties do not bargain on equal
footing, the weaker partys (the debtor) participation being reduced to the alternative "to take it or leave
it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for the weaker
party whom the courts of justice must protect against abuse and imposition.
A similar ruling was made in Philippine National Bank v. Court of Appeals. The credit agreement in that
case provided:
The BANK reserves the right to increase the interest rate within the limits allowed by law at any time
depending on whatever policy it may adopt in the future: Provided, that the interest rate on this
accommodation shall be correspondingly decreased in the event that the applicable maximum interest is
reduced by law or by the Monetary Board. . . .
As in the first case, PNB successively increased the stipulated interest so that what was originally 12% per
annum became, after only two years, 42%. In declaring the increases invalid, we held:
We cannot countenance petitioner banks posturing that the escalation clause at bench gives it unbridled
right to unilaterally upwardly adjust the interest on private respondents loan. That would completely take
away from private respondents the right to assent to an important modification in their agreement, and
would negate the element of mutuality in contracts.
Only recently we invalidated another round of interest increases decreed by PNB pursuant to a similar
agreement it had with other borrowers:
[W]hile the Usury Law ceiling on interest rates was lifted by C.B. Circular 905, nothing in the said circular
could possibly be read as granting respondent bank carte blanche authority to raise interest rates to levels
which would either enslave its borrowers or lead to a hemorrhaging of their assets.
In this case no attempt was made by PNB to secure the conformity of private respondents to the
successive increases in the interest rate. Private respondents assent to the increases can not be implied
from their lack of response to the letters sent by PNB, informing them of the increases. For as stated in one
case, no one receiving a proposal to change a contract is obliged to answer the proposal.71 (Emphasis
supplied)
We made the same pronouncement in a fifth case, New Sampaguita Builders Construction, Inc. v.
Philippine National Bank,72 thus
Courts have the authority to strike down or to modify provisions in promissory notes that grant the lenders
unrestrained power to increase interest rates, penalties and other charges at the latters sole discretion
and without giving prior notice to and securing the consent of the borrowers. This unilateral authority is
anathema to the mutuality of contracts and enable lenders to take undue advantage of borrowers.
Although the Usury Law has been effectively repealed, courts may still reduce iniquitous or unconscionable
rates charged for the use of money. Furthermore, excessive interests, penalties and other charges not
revealed in disclosure statements issued by banks, even if stipulated in the promissory notes, cannot be
given effect under the Truth in Lending Act.73 (Emphasis supplied)
Yet again, in a sixth disposition, Philippine National Bank v. Spouses Rocamora,74 the above
pronouncements were reiterated to debunk PNBs repeated reliance on its invalidated contract
stipulations:
We repeated this rule in the 1994 case of PNB v. CA and Jayme Fernandez and the 1996 case of PNB v. CA
and Spouses Basco. Taking no heed of these rulings, the escalation clause PNB used in the present case to
justify the increased interest rates is no different from the escalation clause assailed in the 1996 PNB case;
in both, the interest rates were increased from the agreed 12% per annum rate to 42%. x x x

xxxx
On the strength of this ruling, PNBs argument that the spouses Rocamoras failure to contest the
increased interest rates that were purportedly reflected in the statements of account and the demand
letters sent by the bank amounted to their implied acceptance of the increase should likewise fail.
Evidently, PNBs failure to secure the spouses Rocamoras consent to the increased interest rates
prompted the lower courts to declare excessive and illegal the interest rates imposed. Togo around this
lower court finding, PNB alleges that the P206,297.47 deficiency claim was computed using only the
original 12% per annum interest rate. We find this unlikely. Our examination of PNBs own ledgers, included
in the records of the case, clearly indicates that PNB imposed interest rates higher than the agreed 12%
per annum rate. This confirmatory finding, albeit based solely on ledgers found in the records, reinforces
the application in this case of the rule that findings of the RTC, when affirmed by the CA, are binding upon
this Court.75 (Emphases supplied)
Verily, all these cases, including the present one, involve identical or similar provisions found in
respondents credit agreements and promissory notes. Thus, the July 1989 Credit Agreement executed by
petitioners and respondent contained the following stipulation on interest:
1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5% [per annum]. Interest shall be
payable in advance every one hundred twenty days at the rate prevailing at the time of the renewal.
(b) The Borrower agrees that the Bank may modify the interest rate in the Loan depending on whatever
policy the Bank may adopt in the future, including without limitation, the shifting from the floating interest
rate system to the fixed interest rate system, or vice versa. Where the Bank has imposed on the Loan
interest at a rate per annum which is equal to the Banks spread over the current floating interest rate, the
Borrower hereby agrees that the Bank may, without need of notice to the Borrower, increase or decrease
its spread over the floating interest rate at any time depending on whatever policy it may adopt in the
future.76 (Emphases supplied)
while the eight promissory notes issued pursuant thereto granted PNB the right to increase or reduce
interest rates "within the limits allowed by law or the Monetary Board"77 and the Real Estate Mortgage
agreement included the same right to increase or reduce interest rates "at any time depending on
whatever policy PNB may adopt in the future."78
On the basis of the Credit Agreement, petitioners issued promissory notes which they signed in blank, and
respondent later on entered their corresponding interest rates, as follows:
1st Promissory Note dated July 24, 1989 19.5%;
2nd Promissory Note dated November 22, 1989 23%;
3rd Promissory Note dated March 21, 1990 22%;
4th Promissory Note dated July 19, 1990 24%;
5th Promissory Note dated December 17, 1990 28%;
6th Promissory Note dated February 14, 1991 32%;
7th Promissory Note dated March 1, 1991 30%; and
8th Promissory Note dated July 11, 1991 24%.79
On the other hand, the August 1991 Amendment to Credit Agreement contains the following stipulation
regarding interest:
1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each Availment from date of
each Availment up to but not including the date of full payment thereof at the rate per annum which is
determined by the Bank to be prime rate plus applicable spread in effect as of the date of each
Availment.80 (Emphases supplied)
and under this Amendment to Credit Agreement, petitioners again executed and signed the following
promissory notes in blank, for the respondent to later on enter the corresponding interest rates, which it
did, as follows:
9th Promissory Note dated November 8, 1991 26%;
10th Promissory Note dated March 19, 1992 25%;

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


12th Promissory Note dated November 10, 1992 21%;
13th Promissory Note dated March 15, 1993 21%;
14th Promissory Note dated July 12, 1993 17.5%;
15th Promissory Note dated November 17, 1993 21%;
16th Promissory Note dated March 28, 1994 21%;
17th Promissory Note dated July 13, 1994 21%;
18th Promissory Note dated November 16, 1994 16%;
19th Promissory Note dated April 10, 1995 21%;
20th Promissory Note dated July 19, 1995 18.5%;
21st Promissory Note dated December 18, 1995 18.75%;
22nd Promissory Note dated April 22, 1996 18.5%;
23rd Promissory Note dated July 22, 1996 18.5%;
24th Promissory Note dated November 25, 1996 18%;
25th Promissory Note dated May 30, 1997 17.5%; and
26th Promissory Note (PN 9707237) dated July 30, 1997 25%.81
The 9th up to the 17th promissory notes provide for the payment of interest at the "rate the Bank may at
any time without notice, raise within the limits allowed by law x x x."82 On the other hand, the 18th up to
the 26th promissory notes which includes PN 9707237 carried the following provision:
x x x For this purpose, I/We agree that the rate of interest herein stipulated may be increased or decreased
for the subsequent Interest Periods, with prior notice to the Borrower in the event of changes in interest
rate prescribed by law or the Monetary Board of the Central Bank of the Philippines, or in the Banks
overall cost of funds. I/We hereby agree that in the event I/we are not agreeable to the interest rate fixed
for any Interest Period, I/we shall have the option to prepay the loan or credit facility without penalty within
ten (10) calendar days from the Interest Setting Date.83 (Emphasis supplied)
These stipulations must be once more invalidated, as was done in previous cases. The common
denominator in these cases is the lack of agreement of the parties to the imposed interest rates. For this
case, this lack of consent by the petitioners has been made obvious by the fact that they signed the
promissory notes in blank for the respondent to fill. We find credible the testimony of Lydia in this respect.
Respondent failed to discredit her; in fact, its witness PNB Kalibo Branch Manager Aspa admitted that
interest rates were fixed solely by its Treasury Department in Manila, which were then simply
communicated to all PNB branches for implementation. If this were the case, then this would explain why
petitioners had to sign the promissory notes in blank, since the imposable interest rates have yet to be
determined and fixed by respondents Treasury Department in Manila.
Moreover, in Aspas enumeration of the factors that determine the interest rates PNB fixes such as cost of
money, foreign currency values, bank administrative costs, profitability, and considerations which affect
the banking industry it can be seen that considerations which affect PNBs borrowers are ignored. A
borrowers current financial state, his feedback or opinions, the nature and purpose of his borrowings, the
effect of foreign currency values or fluctuations on his business or borrowing, etc. these are not factors
which influence the fixing of interest rates to be imposed on him. Clearly, respondents method of fixing
interest rates based on one-sided, indeterminate, and subjective criteria such as profitability, cost of
money, bank costs, etc. is arbitrary for there is no fixed standard or margin above or below these
considerations.
The stipulation in the promissory notes subjecting the interest rate to review does not render the
imposition by UCPB of interest rates on the obligations of the spouses Beluso valid. According to said
stipulation:
The interest rate shall be subject to review and may be increased or decreased by the LENDER considering
among others the prevailing financial and monetary conditions; or the rate of interest and charges which

other banks or financial institutions charge or offer to charge for similar accommodations; and/or the
resulting profitability to the LENDER after due consideration of all dealings with the BORROWER.
It should be pointed out that the authority to review the interest rate was given [to] UCPB alone as the
lender. Moreover, UCPB may apply the considerations enumerated in this provision as it wishes. As worded
in the above provision, UCPB may give as much weight as it desires to each of the following
considerations: (1) the prevailing financial and monetary condition;(2) the rate of interest and charges
which other banks or financial institutions charge or offer to charge for similar accommodations; and/or(3)
the resulting profitability to the LENDER (UCPB) after due consideration of all dealings with the BORROWER
(the spouses Beluso). Again, as in the case of the interest rate provision, there is no fixed margin above or
below these considerations.
In view of the foregoing, the Separability Clause cannot save either of the two options of UCPB as to the
interest to be imposed, as both options violate the principle of mutuality of contracts.84 (Emphases
supplied)
To repeat what has been said in the above-cited cases, any modification in the contract, such as the
interest rates, must be made with the consent of the contracting parties.1wphi1 The minds of all the
parties must meet as to the proposed modification, especially when it affects an important aspect of the
agreement. In the case of loan agreements, the rate of interest is a principal condition, if not the most
important component. Thus, any modification thereof must be mutually agreed upon; otherwise, it has no
binding effect.
What is even more glaring in the present case is that, the stipulations in question no longer provide that
the parties shall agree upon the interest rate to be fixed; -instead, they are worded in such a way that the
borrower shall agree to whatever interest rate respondent fixes. In credit agreements covered by the
above-cited cases, it is provided that:
The Bank reserves the right to increase the interest rate within the limits allowed by law at any time
depending on whatever policy it may adopt in the future: Provided, that, the interest rate on this
accommodation shall be correspondingly decreased in the event that the applicable maximum interest
rate is reduced by law or by the Monetary Board. In either case, the adjustment in the interest rate agreed
upon shall take effect on the effectivity date of the increase or decrease in maximum interest rate.85
(Emphasis supplied)
Whereas, in the present credit agreements under scrutiny, it is stated that:
IN THE JULY 1989 CREDIT AGREEMENT
(b) The Borrower agrees that the Bank may modify the interest rate on the Loan depending on whatever
policy the Bank may adopt in the future, including without limitation, the shifting from the floating interest
rate system to the fixed interest rate system, or vice versa. Where the Bank has imposed on the Loan
interest at a rate per annum, which is equal to the Banks spread over the current floating interest rate, the
Borrower hereby agrees that the Bank may, without need of notice to the Borrower, increase or decrease
its spread over the floating interest rate at any time depending on whatever policy it may adopt in the
future.86 (Emphases supplied)
IN THE AUGUST 1991 AMENDMENT TO CREDIT AGREEMENT
1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each Availment from date of
each Availment up to but not including the date of full payment thereof at the rate per annum which is
determined by the Bank to be prime rate plus applicable spread in effect as of the date of each
Availment.87 (Emphasis supplied)
Plainly, with the present credit agreement, the element of consent or agreement by the borrower is now
completely lacking, which makes respondents unlawful act all the more reprehensible.
Accordingly, petitioners are correct in arguing that estoppel should not apply to them, for "[e]stoppel
cannot be predicated on an illegal act. As between the parties to a contract, validity cannot be given to it
by estoppel if it is prohibited by law or is against public policy."88
It appears that by its acts, respondent violated the Truth in Lending Act, or Republic Act No. 3765, which
was enacted "to protect x x x citizens from a lack of awareness of the true cost of credit to the user by
using a full disclosure of such cost with a view of preventing the uninformed use of credit to the detriment
of the national economy."89 The law "gives a detailed enumeration of the specific information required to
be disclosed, among which are the interest and other charges incident to the extension of credit."90
Section 4 thereof provides that a disclosure statement must be furnished prior to the consummation of the
transaction, thus:

SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the consummation of
the transaction, a clear statement in writing setting forth, to the extent applicable and in accordance with
rules and regulations prescribed by the Board, the following information:
(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2);
(4) the charges, individually itemized, which are paid or to be paid by such person in connection
with the transaction but which are not incident to the extension of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be financed expressed as a simple
annual rate on the outstanding unpaid balance of the obligation.
Under Section 4(6), "finance charge" represents the amount to be paid by the debtor incident to the
extension of credit such as interest or discounts, collection fees, credit investigation fees, attorneys fees,
and other service charges. The total finance charge represents the difference between (1) the aggregate
consideration (down payment plus installments) on the part of the debtor, and (2) the sum of the cash
price and non-finance charges.91
By requiring the petitioners to sign the credit documents and the promissory notes in blank, and then
unilaterally filling them up later on, respondent violated the Truth in Lending Act, and was remiss in its
disclosure obligations. In one case, which the Court finds applicable here, it was held:
UCPB further argues that since the spouses Beluso were duly given copies of the subject promissory notes
after their execution, then they were duly notified of the terms thereof, in substantial compliance with the
Truth in Lending Act.
Once more, we disagree. Section 4 of the Truth in Lending Act clearly provides that the disclosure
statement must be furnished prior to the consummation of the transaction:
SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the consummation of
the transaction, a clear statement in writing setting forth, to the extent applicable and in accordance with
rules and regulations prescribed by the Board, the following information:
(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2);
(4) the charges, individually itemized, which are paid or to be paid by such person in connection
with the transaction but which are not incident to the extension of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be financed expressed as a simple
annual rate on the outstanding unpaid balance of the obligation.
The rationale of this provision is to protect users of credit from a lack of awareness of the true cost thereof,
proceeding from the experience that banks are able to conceal such true cost by hidden charges,
uncertainty of interest rates, deduction of interests from the loaned amount, and the like. The law thereby
seeks to protect debtors by permitting them to fully appreciate the true cost of their loan, to enable them
to give full consent to the contract, and to properly evaluate their options in arriving at business decisions.
Upholding UCPBs claim of substantial compliance would defeat these purposes of the Truth in Lending Act.
The belated discovery of the true cost of credit will too often not be able to reverse the ill effects of an
already consummated business decision.
In addition, the promissory notes, the copies of which were presented to the spouses Beluso after
execution, are not sufficient notification from UCPB. As earlier discussed, the interest rate provision therein

does not sufficiently indicate with particularity the interest rate to be applied to the loan covered by said
promissory notes.92 (Emphases supplied)
However, the one-year period within which an action for violation of the Truth in Lending Act may be filed
evidently prescribed long ago, or sometime in 2001, one year after petitioners received the March 2000
demand letter which contained the illegal charges.
The fact that petitioners later received several statements of account detailing its outstanding obligations
does not cure respondents breach. To repeat, the belated discovery of the true cost of credit does not
reverse the ill effects of an already consummated business decision.93
Neither may the statements be considered proposals sent to secure the petitioners conformity; they were
sent after the imposition and application of the interest rate, and not before. And even if it were to be
presumed that these are proposals or offers, there was no acceptance by petitioners. "No one receiving a
proposal to modify a loan contract, especially regarding interest, is obliged to answer the proposal."94
Loan and credit arrangements may be made enticing by, or "sweetened" with, offers of low initial interest
rates, but actually accompanied by provisions written in fine print that allow lenders to later on increase or
decrease interest rates unilaterally, without the consent of the borrower, and depending on complex and
subjective factors. Because they have been lured into these contracts by initially low interest rates,
borrowers get caught and stuck in the web of subsequent steep rates and penalties, surcharges and the
like. Being ordinary individuals or entities, they naturally dread legal complications and cannot afford court
litigation; they succumb to whatever charges the lenders impose. At the very least, borrowers should be
charged rightly; but then again this is not possible in a one-sided credit system where the temptation to
abuse is strong and the willingness to rectify is made weak by the eternal desire for profit.
Given the above supposition, the Court cannot subscribe to respondents argument that in every repricing
of petitioners loan availment, they are given the right to question the interest rates imposed. The import
of respondents line of reasoning cannot be other than that if one out of every hundred borrowers
questions respondents practice of unilaterally fixing interest rates, then only the loan arrangement with
that lone complaining borrower will enjoy the benefit of review or re-negotiation; as to the 99 others, the
questionable practice will continue unchecked, and respondent will continue to reap the profits from such
unscrupulous practice. The Court can no more condone a view so perverse. This is exactly what the Court
meant in the immediately preceding cited case when it said that "the belated discovery of the true cost of
credit does not reverse the ill effects of an already consummated business decision;"95 as to the 99
borrowers who did not or could not complain, the illegal act shall have become a fait accompli to their
detriment, they have already suffered the oppressive rates.
Besides, that petitioners are given the right to question the interest rates imposed is, under the
circumstances, irrelevant; we have a situation where the petitioners do not stand on equal footing with the
respondent. It is doubtful that any borrower who finds himself in petitioners position would dare question
respondents power to arbitrarily modify interest rates at any time. In the second place, on what basis
could any borrower question such power, when the criteria or standards which are really one-sided,
arbitrary and subjective for the exercise of such power are precisely lost on him?
For the same reasons, the Court cannot validly consider that, as stipulated in the 18th up to the 26th
promissory notes, petitioners are granted the option to prepay the loan or credit facility without penalty
within 10 calendar days from the Interest Setting Date if they are not agreeable to the interest rate fixed. It
has been shown that the promissory notes are executed and signed in blank, meaning that by the time
petitioners learn of the interest rate, they are already bound to pay it because they have already presigned the note where the rate is subsequently entered.
Besides, premium may not be placed upon a stipulation in a contract which grants one party the right to
choose whether to continue with or withdraw from the agreement if it discovers that what the other party
has been doing all along is improper or illegal.
Thus said, respondents arguments relative to the credit documents that documentary evidence prevails
over testimonial evidence; that the credit documents are in proper form, presumed regular, and endure,
against arbitrary claims by petitioners, experienced business persons that they are, they signed
questionable loan documents whose provisions for interest rates were left blank, and yet they continued to
pay the interests without protest for a number of years deserve no consideration.
With regard to interest, the Court finds that since the escalation clause is annulled, the principal amount of
the loan is subject to the original or stipulated rate of interest, and upon maturity, the amount due shall be
subject to legal interest at the rate of 12% per annum. This is the uniform ruling adopted in previous cases,
including those cited here.96 The interests paid by petitioners should be applied first to the payment of the
stipulated or legal and unpaid interest, as the case may be, and later, to the capital or principal.97
Respondent should then refund the excess amount of interest that it has illegally imposed upon
petitioners; "[t]he amount to be refunded refers to that paid by petitioners when they had no obligation to
do so."98 Thus, the parties original agreement stipulated the payment of 19.5% interest; however, this
rate was intended to apply only to the first promissory note which expired on November 21, 1989 and was
paid by petitioners; it was not intended to apply to the whole duration of the loan. Subsequent higher

interest rates have been declared illegal; but because only the rates are found to be improper, the
obligation to pay interest subsists, the same to be fixed at the legal rate of 12% per annum. However, the
12% interest shall apply only until June 30, 2013. Starting July1, 2013, the prevailing rate of interest shall
be 6% per annum pursuant to our ruling in Nacar v. Gallery Frames99 and Bangko Sentral ng PilipinasMonetary Board Circular No. 799.
Now to the issue of penalty. PN 9707237 provides that failure to pay it or any installment thereon, when
due, shall constitute default, and a penalty charge of 24% per annum based on the defaulted principal
amount shall be imposed. Petitioners claim that this penalty should be excluded from the foreclosure
amount or bid price because the Real Estate Mortgage and the Supplement thereto did not specifically
include it as part of the secured amount. Respondent justifies its inclusion in the secured amount, saying
that the purpose of the penalty or a penal clause is to ensure the performance of the obligation and
substitute for damages and the payment of interest in the event of non-compliance.100 Respondent adds
that the imposition and collection of a penalty is a normal banking practice, and the standard rate per
annum for all commercial banks, at the time, was 24%. Its inclusion as part of the secured amount in the
mortgage agreements is thus valid and necessary.
The Court sustains petitioners view that the penalty may not be included as part of the secured amount.
Having found the credit agreements and promissory notes to be tainted, we must accord the same
treatment to the mortgages. After all, "[a] mortgage and a note secured by it are deemed parts of one
transaction and are construed together."101 Being so tainted and having the attributes of a contract of
adhesion as the principal credit documents, we must construe the mortgage contracts strictly, and against
the party who drafted it. An examination of the mortgage agreements reveals that nowhere is it stated
that penalties are to be included in the secured amount. Construing this silence strictly against the
respondent, the Court can only conclude that the parties did not intend to include the penalty allowed
under PN 9707237 as part of the secured amount. Given its resources, respondent could have if it truly
wanted to conveniently prepared and executed an amended mortgage agreement with the petitioners,
thereby including penalties in the amount to be secured by the encumbered properties. Yet it did not.
With regard to attorneys fees, it was plain error for the CA to have passed upon the issue since it was not
raised by the petitioners in their appeal; it was the respondent that improperly brought it up in its
appellees brief, when it should have interposed an appeal, since the trial courts Decision on this issue is
adverse to it. It is an elementary principle in the subject of appeals that an appellee who does not himself
appeal cannot obtain from the appellate court any affirmative relief other than those granted in the
decision of the court below.
x x x [A]n appellee, who is at the same time not an appellant, may on appeal be permitted to make
counter assignments of error in ordinary actions, when the purpose is merely to defend himself against an
appeal in which errors are alleged to have been committed by the trial court both in the appreciation of
facts and in the interpretation of the law, in order to sustain the judgment in his favor but not when his
purpose is to seek modification or reversal of the judgment, in which case it is necessary for him to have
excepted to and appealed from the judgment.102
Since petitioners did not raise the issue of reduction of attorneys fees, the CA possessed no authority to
pass upon it at the instance of respondent. The ruling of the trial court in this respect should remain
undisturbed.
For the fixing of the proper amounts due and owing to the parties to the respondent as creditor and to
the petitioners who are entitled to a refund as a consequence of overpayment considering that they paid
more by way of interest charges than the 12% per annum103 herein allowed the case should be
remanded to the lower court for proper accounting and computation, applying the following procedure:
1. The 1st Promissory Note with the 19.5% interest rate is deemed proper and paid;
2. All subsequent promissory notes (from the 2nd to the 26th promissory notes) shall carry an
interest rate of only 12% per annum.104 Thus, interest payment made in excess of 12% on the 2nd
promissory note shall immediately be applied to the principal, and the principal shall be accordingly
reduced. The reduced principal shall then be subjected to the 12%105 interest on the 3rd
promissory note, and the excess over 12% interest payment on the 3rd promissory note shall again
be applied to the principal, which shall again be reduced accordingly. The reduced principal shall
then be subjected to the 12% interest on the 4th promissory note, and the excess over12% interest
payment on the 4th promissory note shall again be applied to the principal, which shall again be
reduced accordingly. And so on and so forth;
3. After the above procedure is carried out, the trial court shall be able to conclude if petitioners a)
still have an OUTSTANDING BALANCE/OBLIGATION or b) MADE PAYMENTS OVER AND ABOVE THEIR
TOTAL OBLIGATION (principal and interest);
4. Such outstanding balance/obligation, if there be any, shall then be subjected to a 12% per
annum interest from October 28, 1997 until January 14, 1999, which is the date of the auction sale;

5. Such outstanding balance/obligation shall also be charged a 24% per annum penalty from August
14, 1997 until January 14, 1999. But from this total penalty, the petitioners previous payment of
penalties in the amount of P202,000.00made on January 27, 1998106 shall be DEDUCTED;
6. To this outstanding balance (3.), the interest (4.), penalties (5.), and the final and executory
award of 1% attorneys fees shall be ADDED;
7. The sum total of the outstanding balance (3.), interest (4.) and 1% attorneys fees (6.) shall be
DEDUCTED from the bid price of P4,324,172.96. The penalties (5.) are not included because they
are not included in the secured amount;
8. The difference in (7.) [P4,324,172.96 LESS sum total of the outstanding balance (3.), interest (4.),
and 1% attorneys fees (6.)] shall be DELIVERED TO THE PETITIONERS;
9. Respondent may then proceed to consolidate its title to TCTs T-14250 and T-16208;
10. ON THE OTHER HAND, if after performing the procedure in (2.), it turns out that petitioners
made an OVERPAYMENT, the interest (4.), penalties (5.), and the award of 1% attorneys fees (6.)
shall be DEDUCTED from the overpayment. There is no outstanding balance/obligation precisely
because petitioners have paid beyond the amount of the principal and interest;
11. If the overpayment exceeds the sum total of the interest (4.), penalties (5.), and award of 1%
attorneys fees (6.), the excess shall be RETURNED to the petitioners, with legal interest, under the
principle of solutio indebiti;107
12. Likewise, if the overpayment exceeds the total amount of interest (4.) and award of 1%
attorneys fees (6.), the trial court shall INVALIDATE THE EXTRAJUDICIAL FORECLOSURE AND SALE;
13. HOWEVER, if the total amount of interest (4.) and award of 1% attorneys fees (6.) exceed
petitioners overpayment, then the excess shall be DEDUCTED from the bid price of P4,324,172.96;
14. The difference in (13.) [P4,324,172.96 LESS sum total of the interest (4.) and 1% attorneys fees
(6.)] shall be DELIVERED TO THE PETITIONERS;
15. Respondent may then proceed to consolidate its title to TCTs T-14250 and T-16208. The
outstanding penalties, if any, shall be collected by other means.
From the above, it will be seen that if, after proper accounting, it turns out that the petitioners
made payments exceeding what they actually owe by way of principal, interest, and attorneys
fees, then the mortgaged properties need not answer for any outstanding secured amount, because
there is not any; quite the contrary, respondent must refund the excess to petitioners.1wphi1 In
such case, the extrajudicial foreclosure and sale of the properties shall be declared null and void for
obvious lack of basis, the case being one of solutio indebiti instead. If, on the other hand, it turns
out that petitioners overpayments in interests do not exceed their total obligation, then the
respondent may consolidate its ownership over the properties, since the period for redemption has
expired. Its only obligation will be to return the difference between its bid price (P4,324,172.96) and
petitioners total obligation outstanding except penalties after applying the latters
overpayments.
WHEREFORE, premises considered, the Petition is GRANTED. The May 8, 2007 Decision of the Court of
Appeals in CA-G.R. CV No. 79650 is ANNULLED and SET ASIDE. Judgment is hereby rendered as follows:
1. The interest rates imposed and indicated in the 2nd up to the 26th Promissory Notes are
DECLARED NULL AND VOID, and such notes shall instead be subject to interest at the rate of twelve
percent (12%) per annum up to June 30, 2013, and starting July 1, 2013, six percent (6%) per
annum until full satisfaction;
2. The penalty charge imposed in Promissory Note No. 9707237 shall be EXCLUDED from the
amounts secured by the real estate mortgages;
3. The trial courts award of one per cent (1%) attorneys fees is REINSTATED;
4. The case is ordered REMANDED to the Regional Trial Court, Branch 6 of Kalibo, Aklan for the
computation of overpayments made by petitioners spouses Eduardo and Lydia Silos to respondent
Philippine National Bank, taking into consideration the foregoing dispositions, and applying the
procedure hereinabove set forth;
5. Thereafter, the trial court is ORDERED to make a determination as to the validity of the
extrajudicial foreclosure and sale, declaring the same null and void in case of overpayment and
ordering the release and return of Transfer Certificates of Title Nos. T-14250 and TCT T-16208 to

petitioners, or ordering the delivery to the petitioners of the difference between the bid price and
the total remaining obligation of petitioners, if any;
6. In the meantime, the respondent Philippine National Bank is ENJOINED from consolidating title to
Transfer Certificates of Title Nos. T-14250 and T-16208 until all the steps in the procedure above set
forth have been taken and applied;
7. The reimbursement of the excess in the bid price of P377,505.99, which respondent Philippine
National Bank is ordered to reimburse petitioners, should be HELD IN ABEYANCE until the true
amount owing to or owed by the parties as against each other is determined;
8. Considering that this case has been pending for such a long time and that further proceedings,
albeit uncomplicated, are required, the trial court is ORDERED to proceed with dispatch.
SO ORDERED.
EASTERN SHIPPING LINES, INC., petitioner,
vs.
HON. COURT OF APPEALS AND MERCANTILE INSURANCE COMPANY, INC., respondents.
Alojada & Garcia and Jimenea, Dala & Zaragoza for petitoner.
Zapa Law Office for private respondent.

VITUG, J.:
The issues, albeit not completely novel, are: (a) whether or not a claim for damage sustained on a
shipment of goods can be a solidary, or joint and several, liability of the common carrier, the arrastre
operator and the customs broker; (b) whether the payment of legal interest on an award for loss or
damage is to be computed from the time the complaint is filed or from the date the decision appealed from
is rendered; and (c) whether the applicable rate of interest, referred to above, is twelve percent (12%) or
six percent (6%).
The findings of the court a quo, adopted by the Court of Appeals, on the antecedent and undisputed facts
that have led to the controversy are hereunder reproduced:
This is an action against defendants shipping company, arrastre operator and brokerforwarder 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 "TurnOver 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 defendantsappellants, except defendant-appellant Merton Munn, are ordered to pay, jointly and
severally, the amounts stated in the dispositive portion of the decision, including the sum of
P1,400.00 in concept of compensatory damages, with interest at the legal rate from the
date of the filing of the complaint until fully paid (Emphasis supplied.)
The petition for review to this Court was denied. The records were thereupon transmitted to the trial
court, and an entry of judgment was made. The writ of execution issued by the trial court directed
that only compensatory damages should earn interest at 6% per annum from the date of the filing
of the complaint. Ascribing grave abuse of discretion on the part of the trial judge, a petition for
certiorari assailed the said order. This Court said:
. . . , it is to be noted that the Court of Appeals ordered the payment of interest "at the legal
rate" from the time of the filing of the complaint. . . Said circular [Central Bank Circular No.
416] does not apply to actions based on a breach of employment contract like the case at
bar. (Emphasis supplied)
The Court reiterated that the 6% interest per annum on the damages should be computed from the
time the complaint was filed until the amount is fully paid.
Quite recently, the Court had another occasion to rule on the matter. National Power Corporation vs.
Angas, 14 decided on 08 May 1992, involved the expropriation of certain parcels of land. After conducting a
hearing on the complaints for eminent domain, the trial court ordered the petitioner to pay the private
respondents certain sums of money as just compensation for their lands so expropriated "with legal
interest thereon . . . 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, 17 depending on whether or not the amount involved is a loan or forbearance, on the one hand, or
one of indemnity for damage, on the other hand. Unlike, however, the "first group" which remained
consistent in holding that the running of the legal interest should be from the time of the filing of the
complaint until fully paid, the "second group" varied on the commencement of the running of the legal
interest.
Malayan held that the amount awarded should bear legal interest from the date of the decision of the
court a quo, explaining that "if the suit were for damages, 'unliquidated and not known until definitely
ascertained, assessed and determined by the courts after proof,' then, interest 'should be from the date of
the decision.'" American Express International v. IAC, introduced a different time frame for reckoning the
6% interest by ordering it to be "computed from the finality of (the) decision until paid." The Nakpil and
Sons case ruled that 12% interest per annum should be imposed from the finality of the decision until the
judgment amount is paid.
The ostensible discord is not difficult to explain. The factual circumstances may have called for different
applications, guided by the rule that the courts are vested with discretion, depending on the equities of
each case, on the award of interest. Nonetheless, it may not be unwise, by way of clarification and
reconciliation, to suggest the following rules of thumb for future guidance.
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts 18
is breached, the contravenor can be held liable for damages. 19 The provisions under Title XVIII on
"Damages" of the Civil Code govern in determining the measure of recoverable damages. 20
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the
rate of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing. 21
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. 22 In the
absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of Article 1169 23 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the discretion of the court 24 at the rate of 6% per annum.
25
No interest, however, shall be adjudged on unliquidated claims or damages except when or until the
demand can be established with reasonable certainty. 26 Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the
time the demand is made, the interest shall begin to run only from the date the judgment of the court is
made (at which time the quantification of damages may be deemed to have been reasonably ascertained).
The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of
legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum
from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of credit.
WHEREFORE, the petition is partly GRANTED. The appealed decision is AFFIRMED with the MODIFICATION
that the legal interest to be paid is SIX PERCENT (6%) on the amount due computed from the decision,
dated
03 February 1988, of the court a quo. A TWELVE PERCENT (12%) interest, in lieu of SIX PERCENT (6%), shall
be imposed on such amount upon finality of this decision until the payment thereof.
SO ORDERED.
DARIO NACAR, PETITIONER,
vs.
GALLERY FRAMES AND/OR FELIPE BORDEY, JR., RESPONDENTS.
DECISION
PERALTA, J.:
This is a petition for review on certiorari assailing the Decision 1 dated September 23, 2008 of the Court of
Appeals (CA) in CA-G.R. SP No. 98591, and the Resolution2 dated October 9, 2009 denying petitioners
motion for reconsideration.

The factual antecedents are undisputed.


Petitioner Dario Nacar filed a complaint for constructive dismissal before the Arbitration Branch of the
National Labor Relations Commission (NLRC) against respondents Gallery Frames (GF) and/or Felipe
Bordey, Jr., docketed as NLRC NCR Case No. 01-00519-97.
On October 15, 1998, the Labor Arbiter rendered a Decision3 in favor of petitioner and found that he was
dismissed from employment without a valid or just cause. Thus, petitioner was awarded backwages and
separation pay in lieu of reinstatement in the amount of P158,919.92. The dispositive portion of the
decision, reads:
With the foregoing, we find and so rule that respondents failed to discharge the burden of showing that
complainant was dismissed from employment for a just or valid cause. All the more, it is clear from the
records that complainant was never afforded due process before he was terminated. As such, we are
perforce constrained to grant complainants prayer for the payments of separation pay in lieu of
reinstatement to his former position, considering the strained relationship between the parties, and his
apparent reluctance to be reinstated, computed only up to promulgation of this decision as follows:
SEPARATION PAY
Date Hired

August 1990

Rate

P198/day

Date of Decision

Aug. 18, 1998

Length of Service

8 yrs. & 1 month

P198.00 x 26 days x 8 months = P41,184.00


BACKWAGES
Date Dismissed

January 24, 1997

Rate per day

P196.00

Date of Decisions

Aug. 18, 1998

a) 1/24/97 to 2/5/98 = 12.36 mos.


P196.00/day x 12.36 mos.

= P62,986.56

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


Prevailing Rate per day

= P62,986.00

P198.00 x 26 days x 6.4 mos.

= P32,947.20

TOTAL

= P95.933.76
xxxx

WHEREFORE, premises considered, judgment is hereby rendered finding respondents guilty of constructive
dismissal and are therefore, ordered:
To pay jointly and severally the complainant the amount of sixty-two thousand nine hundred eighty-six
pesos and 56/100 (P62,986.56) Pesos representing his separation pay;
To pay jointly and severally the complainant the amount of nine (sic) five thousand nine hundred thirtythree and 36/100 (P95,933.36) representing his backwages; and
All other claims are hereby dismissed for lack of merit.
SO ORDERED.4
Respondents appealed to the NLRC, but it was dismissed for lack of merit in the Resolution 5 dated February
29, 2000. Accordingly, the NLRC sustained the decision of the Labor Arbiter. Respondents filed a motion for
reconsideration, but it was denied.6
Dissatisfied, respondents filed a Petition for Review on Certiorari before the CA. On August 24, 2000, the
CA issued a Resolution dismissing the petition. Respondents filed a Motion for Reconsideration, but it was
likewise denied in a Resolution dated May 8, 2001.7
Respondents then sought relief before the Supreme Court, docketed as G.R. No. 151332. Finding no
reversible error on the part of the CA, this Court denied the petition in the Resolution dated April 17, 2002. 8

An Entry of Judgment was later issued certifying that the resolution became final and executory on May 27,
2002.9 The case was, thereafter, referred back to the Labor Arbiter. A pre-execution conference was
consequently scheduled, but respondents failed to appear. 10
On November 5, 2002, petitioner filed a Motion for Correct Computation, praying that his backwages be
computed from the date of his dismissal on January 24, 1997 up to the finality of the Resolution of the
Supreme Court on May 27, 2002.11 Upon recomputation, the Computation and Examination Unit of the
NLRC arrived at an updated amount in the sum of P471,320.31.12
On December 2, 2002, a Writ of Execution13 was issued by the Labor Arbiter ordering the Sheriff to collect
from respondents the total amount of P471,320.31. Respondents filed a Motion to Quash Writ of Execution,
arguing, among other things, that since the Labor Arbiter awarded separation pay of P62,986.56 and
limited backwages of P95,933.36, no more recomputation is required to be made of the said awards. They
claimed that after the decision becomes final and executory, the same cannot be altered or amended
anymore.14 On January 13, 2003, the Labor Arbiter issued an Order15 denying the motion. Thus, an Alias
Writ of Execution16 was issued on January 14, 2003.
Respondents again appealed before the NLRC, which on June 30, 2003 issued a Resolution 17 granting the
appeal in favor of the respondents and ordered the recomputation of the judgment award.
On August 20, 2003, an Entry of Judgment was issued declaring the Resolution of the NLRC to be final and
executory. Consequently, another pre-execution conference was held, but respondents failed to appear on
time. Meanwhile, petitioner moved that an Alias Writ of Execution be issued to enforce the earlier
recomputed judgment award in the sum of P471,320.31.18
The records of the case were again forwarded to the Computation and Examination Unit for recomputation,
where the judgment award of petitioner was reassessed to be in the total amount of only P147,560.19.
Petitioner then moved that a writ of execution be issued ordering respondents to pay him the original
amount as determined by the Labor Arbiter in his Decision dated October 15, 1998, pending the final
computation of his backwages and separation pay.
On January 14, 2003, the Labor Arbiter issued an Alias Writ of Execution to satisfy the judgment award that
was due to petitioner in the amount of P147,560.19, which petitioner eventually received.
Petitioner then filed a Manifestation and Motion praying for the re-computation of the monetary award to
include the appropriate interests.19
On May 10, 2005, the Labor Arbiter issued an Order20 granting the motion, but only up to the amount of
P11,459.73. The Labor Arbiter reasoned that it is the October 15, 1998 Decision that should be enforced
considering that it was the one that became final and executory. However, the Labor Arbiter reasoned that
since the decision states that the separation pay and backwages are computed only up to the
promulgation of the said decision, it is the amount of P158,919.92 that should be executed. Thus, since
petitioner already received P147,560.19, he is only entitled to the balance of P11,459.73.
Petitioner then appealed before the NLRC,21 which appeal was denied by the NLRC in its Resolution 22 dated
September 27, 2006. Petitioner filed a Motion for Reconsideration, but it was likewise denied in the
Resolution23 dated January 31, 2007.
Aggrieved, petitioner then sought recourse before the CA, docketed as CA-G.R. SP No. 98591.
On September 23, 2008, the CA rendered a Decision24 denying the petition. The CA opined that since
petitioner no longer appealed the October 15, 1998 Decision of the Labor Arbiter, which already became
final and executory, a belated correction thereof is no longer allowed. The CA stated that there is nothing
left to be done except to enforce the said judgment. Consequently, it can no longer be modified in any
respect, except to correct clerical errors or mistakes.
Petitioner filed a Motion for Reconsideration, but it was denied in the Resolution 25 dated October 9, 2009.
Hence, the petition assigning the lone error:
I
WITH DUE RESPECT, THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED, COMMITTED GRAVE ABUSE
OF DISCRETION AND DECIDED CONTRARY TO LAW IN UPHOLDING THE QUESTIONED RESOLUTIONS OF THE
NLRC WHICH, IN TURN, SUSTAINED THE MAY 10, 2005 ORDER OF LABOR ARBITER MAGAT MAKING THE
DISPOSITIVE PORTION OF THE OCTOBER 15, 1998 DECISION OF LABOR ARBITER LUSTRIA SUBSERVIENT TO
AN OPINION EXPRESSED IN THE BODY OF THE SAME DECISION.26

Petitioner argues that notwithstanding the fact that there was a computation of backwages in the Labor
Arbiters decision, the same is not final until reinstatement is made or until finality of the decision, in case
of an award of separation pay. Petitioner maintains that considering that the October 15, 1998 decision of
the Labor Arbiter did not become final and executory until the April 17, 2002 Resolution of the Supreme
Court in G.R. No. 151332 was entered in the Book of Entries on May 27, 2002, the reckoning point for the
computation of the backwages and separation pay should be on May 27, 2002 and not when the decision
of the Labor Arbiter was rendered on October 15, 1998. Further, petitioner posits that he is also entitled to
the payment of interest from the finality of the decision until full payment by the respondents.
On their part, respondents assert that since only separation pay and limited backwages were awarded to
petitioner by the October 15, 1998 decision of the Labor Arbiter, no more recomputation is required to be
made of said awards. Respondents insist that since the decision clearly stated that the separation pay and
backwages are "computed only up to [the] promulgation of this decision," and considering that petitioner
no longer appealed the decision, petitioner is only entitled to the award as computed by the Labor Arbiter
in the total amount of P158,919.92. Respondents added that it was only during the execution proceedings
that the petitioner questioned the award, long after the decision had become final and executory.
Respondents contend that to allow the further recomputation of the backwages to be awarded to petitioner
at this point of the proceedings would substantially vary the decision of the Labor Arbiter as it violates the
rule on immutability of judgments.
The petition is meritorious.
The instant case is similar to the case of Session Delights Ice Cream and Fast Foods v. Court of Appeals
(Sixth Division),27 wherein the issue submitted to the Court for resolution was the propriety of the
computation of the awards made, and whether this violated the principle of immutability of judgment. Like
in the present case, it was a distinct feature of the judgment of the Labor Arbiter in the above-cited case
that the decision already provided for the computation of the payable separation pay and backwages due
and did not further order the computation of the monetary awards up to the time of the finality of the
judgment. Also in Session Delights, the dismissed employee failed to appeal the decision of the labor
arbiter. The Court clarified, thus:
In concrete terms, the question is whether a re-computation in the course of execution of the labor
arbiter's original computation of the awards made, pegged as of the time the decision was rendered and
confirmed with modification by a final CA decision, is legally proper. The question is posed, given that the
petitioner did not immediately pay the awards stated in the original labor arbiter's decision; it delayed
payment because it continued with the litigation until final judgment at the CA level.
A source of misunderstanding in implementing the final decision in this case proceeds from the way the
original labor arbiter framed his decision. The decision consists essentially of two parts.
The first is that part of the decision that cannot now be disputed because it has been confirmed with
finality. This is the finding of the illegality of the dismissal and the awards of separation pay in lieu of
reinstatement, backwages, attorney's fees, and legal interests.
The second part is the computation of the awards made. On its face, the computation the labor arbiter
made shows that it was time-bound as can be seen from the figures used in the computation. This part,
being merely a computation of what the first part of the decision established and declared, can, by its
nature, be re-computed. This is the part, too, that the petitioner now posits should no longer be recomputed because the computation is already in the labor arbiter's decision that the CA had affirmed. The
public and private respondents, on the other hand, posit that a re-computation is necessary because the
relief in an illegal dismissal decision goes all the way up to reinstatement if reinstatement is to be made, or
up to the finality of the decision, if separation pay is to be given in lieu reinstatement.
That the labor arbiter's decision, at the same time that it found that an illegal dismissal had taken place,
also made a computation of the award, is understandable in light of Section 3, Rule VIII of the then NLRC
Rules of Procedure which requires that a computation be made. This Section in part states:
[T]he Labor Arbiter of origin, in cases involving monetary awards and at all events, as far as practicable,
shall embody in any such decision or order the detailed and full amount awarded.
Clearly implied from this original computation is its currency up to the finality of the labor arbiter's
decision. As we noted above, this implication is apparent from the terms of the computation itself, and no
question would have arisen had the parties terminated the case and implemented the decision at that
point.
However, the petitioner disagreed with the labor arbiter's findings on all counts - i.e., on the finding of
illegality as well as on all the consequent awards made. Hence, the petitioner appealed the case to the
NLRC which, in turn, affirmed the labor arbiter's decision. By law, the NLRC decision is final, reviewable
only by the CA on jurisdictional grounds.

The petitioner appropriately sought to nullify the NLRC decision on jurisdictional grounds through a timely
filed Rule 65 petition for certiorari. The CA decision, finding that NLRC exceeded its authority in affirming
the payment of 13th month pay and indemnity, lapsed to finality and was subsequently returned to the
labor arbiter of origin for execution.
It was at this point that the present case arose. Focusing on the core illegal dismissal portion of the original
labor arbiter's decision, the implementing labor arbiter ordered the award re-computed; he apparently read
the figures originally ordered to be paid to be the computation due had the case been terminated and
implemented at the labor arbiter's level. Thus, the labor arbiter re-computed the award to include the
separation pay and the backwages due up to the finality of the CA decision that fully terminated the case
on the merits. Unfortunately, the labor arbiter's approved computation went beyond the finality of the CA
decision (July 29, 2003) and included as well the payment for awards the final CA decision had deleted specifically, the proportionate 13th month pay and the indemnity awards. Hence, the CA issued the
decision now questioned in the present petition.
We see no error in the CA decision confirming that a re-computation is necessary as it essentially
considered the labor arbiter's original decision in accordance with its basic component parts as we
discussed above. To reiterate, the first part contains the finding of illegality and its monetary
consequences; the second part is the computation of the awards or monetary consequences of the illegal
dismissal, computed as of the time of the labor arbiter's original decision. 28
Consequently, from the above disquisitions, under the terms of the decision which is sought to be
executed by the petitioner, no essential change is made by a recomputation as this step is a necessary
consequence that flows from the nature of the illegality of dismissal declared by the Labor Arbiter in that
decision.29 A recomputation (or an original computation, if no previous computation has been made) is a
part of the law specifically, Article 279 of the Labor Code and the established jurisprudence on this
provision that is read into the decision. By the nature of an illegal dismissal case, the reliefs continue to
add up until full satisfaction, as expressed under Article 279 of the Labor Code. The recomputation of the
consequences of illegal dismissal upon execution of the decision does not constitute an alteration or
amendment of the final decision being implemented. The illegal dismissal ruling stands; only the
computation of monetary consequences of this dismissal is affected, and this is not a violation of the
principle of immutability of final judgments. 30
That the amount respondents shall now pay has greatly increased is a consequence that it cannot avoid as
it is the risk that it ran when it continued to seek recourses against the Labor Arbiter's decision. Article 279
provides for the consequences of illegal dismissal in no uncertain terms, qualified only by jurisprudence in
its interpretation of when separation pay in lieu of reinstatement is allowed. When that happens, the
finality of the illegal dismissal decision becomes the reckoning point instead of the reinstatement that the
law decrees. In allowing separation pay, the final decision effectively declares that the employment
relationship ended so that separation pay and backwages are to be computed up to that point. 31
Finally, anent the payment of legal interest. In the landmark case of Eastern Shipping Lines, Inc. v. Court of
Appeals,32 the Court laid down the guidelines regarding the manner of computing legal interest, to wit:
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.33
Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its Resolution No. 796
dated May 16, 2013, approved the amendment of Section 234 of Circular No. 905, Series of 1982 and,

accordingly, issued Circular No. 799,35 Series of 2013, effective July 1, 2013, the pertinent portion of which
reads:
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 X305.136 of the Manual of Regulations for Banks and Sections
4305Q.1,37 4305S.338 and 4303P.139 of the Manual of Regulations for Non-Bank Financial Institutions are
hereby amended accordingly.
This Circular shall take effect on 1 July 2013.
Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest that would
govern the parties, the rate of legal interest for loans or forbearance of any money, goods or credits and
the rate allowed in judgments shall no longer be twelve percent (12%) per annum - as reflected in the case
of Eastern Shipping Lines40 and Subsection X305.1 of the Manual of Regulations for Banks and Sections
4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for Non-Bank Financial Institutions, before its
amendment by BSP-MB Circular No. 799 - but will now be six percent (6%) per annum effective July 1,
2013. It should be noted, nonetheless, that the new rate could only be applied prospectively and not
retroactively. Consequently, the twelve percent (12%) per annum legal interest shall apply only until June
30, 2013. Come July 1, 2013 the new rate of six percent (6%) per annum shall be the prevailing rate of
interest when applicable.
Corollarily, in the recent case of Advocates for Truth in Lending, Inc. and Eduardo B. Olaguer v. Bangko
Sentral Monetary Board,41 this Court affirmed the authority of the BSP-MB to set interest rates and to issue
and enforce Circulars when it ruled that "the BSP-MB may prescribe the maximum rate or rates of interest
for all loans or renewals thereof or the forbearance of any money, goods or credits, including those for
loans of low priority such as consumer loans, as well as such loans made by pawnshops, finance
companies and similar credit institutions. It even authorizes the BSP-MB to prescribe different maximum
rate or rates for different types of borrowings, including deposits and deposit substitutes, or loans of
financial intermediaries."
Nonetheless, with regard to those judgments that have become final and executory prior to July 1, 2013,
said judgments shall not be disturbed and shall continue to be implemented applying the rate of interest
fixed therein.1awp++i1
To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping Lines 42 are
accordingly modified to embody BSP-MB Circular No. 799, as follows:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasidelicts is breached, the contravenor can be held liable for damages. The provisions under Title XVIII
on "Damages" of the Civil Code govern in determining the measure of recoverable
damages.1wphi1
II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 6% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.
When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum.
No interest, however, shall be adjudged on unliquidated claims or damages, except when or until the
demand can be established with reasonable certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code), but when such certainty cannot be so reasonably established at the
time the demand is made, the interest shall begin to run only from the date the judgment of the court is
made (at which time the quantification of damages may be deemed to have been reasonably ascertained).
The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged.
When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per annum from

such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of credit.
And, in addition to the above, judgments that have become final and executory prior to July 1, 2013, shall
not be disturbed and shall continue to be implemented applying the rate of interest fixed therein.
WHEREFORE, premises considered, the Decision dated September 23, 2008 of the Court of Appeals in CAG.R. SP No. 98591, and the Resolution dated October 9, 2009 are REVERSED and SET ASIDE. Respondents
are Ordered to Pay petitioner:
(1) backwages computed from the time petitioner was illegally dismissed on January 24, 1997 up to
May 27, 2002, when the Resolution of this Court in G.R. No. 151332 became final and executory;
(2) separation pay computed from August 1990 up to May 27, 2002 at the rate of one month pay
per year of service; and
(3) interest of twelve percent (12%) per annum of the total monetary awards, computed from May
27, 2002 to June 30, 2013 and six percent (6%) per annum from July 1, 2013 until their full
satisfaction.
The Labor Arbiter is hereby ORDERED to make another recomputation of the total monetary benefits
awarded and due to petitioner in accordance with this Decision.
SO ORDERED.
SEBASTIAN SIGA-AN, Petitioner,
vs.
ALICIA VILLANUEVA, Respondent.
DECISION
CHICO-NAZARIO, J.:
Before Us is a Petition1 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 CAG.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 the P540,000.00 worth of loan, the excess amount of P160,000.00 would be applied as
interest for the loan. Not satisfied with the amount applied as interest, petitioner pestered her to pay
additional interest. Petitioner threatened to block or disapprove her transactions with the PNO if she would
not comply with his demand. As all her transactions with the PNO were subject to the approval of petitioner
as comptroller of the PNO, and fearing that petitioner might block or unduly influence the payment of her
vouchers in the PNO, she conceded. Thus, she paid additional amounts in cash and checks as interests for
the loan. She asked petitioner for receipt for the payments but petitioner told her that it was not necessary
as there was mutual trust and confidence between them. According to her computation, the total amount
she paid to petitioner for the 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 answer10 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:
I.
THE RTC AND THE COURT OF APPEALS ERRED IN RULING THAT NO INTEREST WAS DUE TO PETITIONER;
II.
THE RTC AND THE COURT OF APPEALS ERRED IN APPLYING THE PRINCIPLE OF SOLUTIO INDEBITI.17
Interest is a compensation fixed by the parties for the use or forbearance of money. This is referred to as
monetary interest. 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 to
P540,000.00, 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 ReplyAffidavit38 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 of P50,000.00 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 following MODIFICATIONS: (1) the amount of P660,000.00 as refundable
amount of interest is reduced to THREE HUNDRED THIRTY FIVE THOUSAND PESOS (P335,000.00); (2) the
amount of P300,000.00 imposed as moral damages is reduced to ONE HUNDRED FIFTY THOUSAND PESOS
(P150,000.00); (3) an interest of 6% per annum is imposed on the P335,000.00, on the damages awarded
and on the attorneys fees to be computed from the time of the extra-judicial demand on 3 March 1998 up
to the finality of this Decision; and (4) an interest of 12% per annum is also imposed from the finality of
this Decision up to its satisfaction. Costs against petitioner.
SO ORDERED.
TOLOMEO LIGUTAN and LEONIDAS DE LA LLANA, petitioners,
vs.
HON. COURT OF APPEALS & SECURITY BANK & TRUST COMPANY, respondents.
DECISION
VITUG, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court, assailing the
decision and resolutions of the Court of Appeals in CA-G.R. CV No. 34594, entitled "Security Bank and Trust
Co. vs. Tolomeo Ligutan, et al."
Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained on 11 May 1981 a loan in the amount of
P120,000.00 from respondent Security Bank and Trust Company. Petitioners executed a promissory note
binding themselves, jointly and severally, to pay the sum borrowed with an interest of 15.189% per annum
upon maturity and to pay a penalty of 5% every month on the outstanding principal and interest in case of
default. In addition, petitioners agreed to pay 10% of the total amount due by way of attorneys fees if the
matter were indorsed to a lawyer for collection or if a suit were instituted to enforce payment. The

obligation matured on 8 September 1981; the bank, however, granted an extension but only up until 29
December 1981.
Despite several demands from the bank, petitioners failed to settle the debt which, as of 20 May 1982,
amounted to P114,416.10. On 30 September 1982, the bank sent a final demand letter to petitioners
informing them that they had five days within which to make full payment. Since petitioners still defaulted
on their obligation, the bank filed on 3 November 1982, with the Regional Trial Court of Makati, Branch 143,
a complaint for recovery of the due amount.
After petitioners had filed a joint answer to the complaint, the bank presented its evidence and, on 27
March 1985, rested its case. Petitioners, instead of introducing their own evidence, had the hearing of the
case reset on two consecutive occasions. In view of the absence of petitioners and their counsel on 28
August 1985, the third hearing date, the bank moved, and the trial court resolved, to consider the case
submitted for decision.
Two years later, or on 23 October 1987, petitioners filed a motion for reconsideration of the order of the
trial court declaring them as having waived their right to present evidence and prayed that they be
allowed to prove their case. The court a quo denied the motion in an order, dated 5 September 1988, and
on 20 October 1989, it rendered its decision,1 the dispositive portion of which read:
"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants, ordering
the latter to pay, jointly and severally, to the plaintiff, as follows:
"1. The sum of P114,416.00 with interest thereon at the rate of 15.189% per annum, 2% service
charge and 5% per month penalty charge, commencing on 20 May 1982 until fully paid;
"2. To pay the further sum equivalent to 10% of the total amount of indebtedness for and as
attorneys fees; and
"3. To pay the costs of the suit."2
Petitioners interposed an appeal with the Court of Appeals, questioning the rejection by the trial court of
their motion to present evidence and assailing the imposition of the 2% service charge, the 5% per month
penalty charge and 10% attorney's fees. In its decision3 of 7 March 1996, the appellate court affirmed the
judgment of the trial court except on the matter of the 2% service charge which was deleted pursuant to
Central Bank Circular No. 783. Not fully satisfied with the decision of the appellate court, both parties filed
their respective motions for reconsideration.4 Petitioners prayed for the reduction of the 5% stipulated
penalty for being unconscionable. The bank, on the other hand, asked that the payment of interest and
penalty be commenced not from the date of filing of complaint but from the time of default as so
stipulated in the contract of the parties.
On 28 October 1998, the Court of Appeals resolved the two motions thusly:
"We find merit in plaintiff-appellees claim that the principal sum of P114,416.00 with interest thereon must
commence not on the date of filing of the complaint as we have previously held in our decision but on the
date when the obligation became due.
"Default generally begins from the moment the creditor demands the performance of the obligation.
However, demand is not necessary to render the obligor in default when the obligation or the law so
provides.
"In the case at bar, defendants-appellants executed a promissory note where they undertook to pay the
obligation on its maturity date 'without necessity of demand.' They also agreed to pay the interest in case
of non-payment from the date of default.
"x x x

xxx

xxx

"While we maintain that defendants-appellants must be bound by the contract which they acknowledged
and signed, we take cognizance of their plea for the application of the provisions of Article 1229 x x x.
"Considering that defendants-appellants partially complied with their obligation under the promissory note
by the reduction of the original amount of P120,000.00 to P114,416.00 and in order that they will finally
settle their obligation, it is our view and we so hold that in the interest of justice and public policy, a
penalty of 3% per month or 36% per annum would suffice.
"x x x

xxx

xxx

"WHEREFORE, the decision sought to be reconsidered is hereby MODIFIED. The defendants-appellants


Tolomeo Ligutan and Leonidas dela Llana are hereby ordered to pay the plaintiff-appellee Security Bank
and Trust Company the following:

"1. The sum of P114,416.00 with interest thereon at the rate of 15.189% per annum and 3% per
month penalty charge commencing May 20, 1982 until fully paid;
"2. The sum equivalent to 10% of the total amount of the indebtedness as and for attorneys fees." 5
On 16 November 1998, petitioners filed an omnibus motion for reconsideration and to admit newly
discovered evidence,6 alleging that while the case was pending before the trial court, petitioner Tolomeo
Ligutan and his wife Bienvenida Ligutan executed a real estate mortgage on 18 January 1984 to secure the
existing indebtedness of petitioners Ligutan and dela Llana with the bank. Petitioners contended that the
execution of the real estate mortgage had the effect of novating the contract between them and the bank.
Petitioners further averred that the mortgage was extrajudicially foreclosed on 26 August 1986, that they
were not informed about it, and the bank did not credit them with the proceeds of the sale. The appellate
court denied the omnibus motion for reconsideration and to admit newly discovered evidence,
ratiocinating that such a second motion for reconsideration cannot be entertained under Section 2, Rule
52, of the 1997 Rules of Civil Procedure. Furthermore, the appellate court said, the newly-discovered
evidence being invoked by petitioners had actually been known to them when the case was brought on
appeal and when the first motion for reconsideration was filed. 7
Aggrieved by the decision and resolutions of the Court of Appeals, petitioners elevated their case to this
Court on 9 July 1999 via a petition for review on certiorari under Rule 45 of the Rules of Court, submitting
thusly "I. The respondent Court of Appeals seriously erred in not holding that the 15.189% interest and the
penalty of three (3%) percent per month or thirty-six (36%) percent per annum imposed by private
respondent bank on petitioners loan obligation are still manifestly exorbitant, iniquitous and
unconscionable.
"II. The respondent Court of Appeals gravely erred in not reducing to a reasonable level the ten
(10%) percent award of attorneys fees which is highly and grossly excessive, unreasonable and
unconscionable.
"III. The respondent Court of Appeals gravely erred in not admitting petitioners newly discovered
evidence which could not have been timely produced during the trial of this case.
"IV. The respondent Court of Appeals seriously erred in not holding that there was a novation of the
cause of action of private respondents complaint in the instant case due to the subsequent
execution of the real estate mortgage during the pendency of this case and the subsequent
foreclosure of the mortgage."8
Respondent bank, which did not take an appeal, would, however, have it that the penalty sought to be
deleted by petitioners was even insufficient to fully cover and compensate for the cost of money brought
about by the radical devaluation and decrease in the purchasing power of the peso, particularly vis-a-vis
the U.S. dollar, taking into account the time frame of its occurrence. The Bank would stress that only the
amount of P5,584.00 had been remitted out of the entire loan of P120,000.00. 9
A penalty clause, expressly recognized by law,10 is an accessory undertaking to assume greater liability on
the part of an obligor in case of breach of an obligation. It functions to strengthen the coercive force of the
obligation11 and to provide, in effect, for what could be the liquidated damages resulting from such a
breach. The obligor would then be bound to pay the stipulated indemnity without the necessity of proof on
the existence and on the measure of damages caused by the breach. 12 Although a court may not at liberty
ignore the freedom of the parties to agree on such terms and conditions as they see fit that contravene
neither law nor morals, good customs, public order or public policy, a stipulated penalty, nevertheless,
may be equitably reduced by the courts if it is iniquitous or unconscionable or if the principal obligation
has been partly or irregularly complied with.13
The question of whether a penalty is reasonable or iniquitous can be partly subjective and partly objective.
Its resolution would depend on such factors as, but not necessarily confined to, the type, extent and
purpose of the penalty, the nature of the obligation, the mode of breach and its consequences, the
supervening realities, the standing and relationship of the parties, and the like, the application of which, by
and large, is addressed to the sound discretion of the court. In Rizal Commercial Banking Corp. vs. Court of
Appeals,14 just an example, the Court has tempered the penalty charges after taking into account the
debtors pitiful situation and its offer to settle the entire obligation with the creditor bank. The stipulated
penalty might likewise be reduced when a partial or irregular performance is made by the debtor. 15 The
stipulated penalty might even be deleted such as when there has been substantial performance in good
faith by the obligor,16 when the penalty clause itself suffers from fatal infirmity, or when exceptional
circumstances so exist as to warrant it.17
The Court of Appeals, exercising its good judgment in the instant case, has reduced the penalty interest
from 5% a month to 3% a month which petitioner still disputes. Given the circumstances, not to mention
the repeated acts of breach by petitioners of their contractual obligation, the Court sees no cogent ground
to modify the ruling of the appellate court..

Anent the stipulated interest of 15.189% per annum, petitioners, for the first time, question its
reasonableness and prays that the Court reduce the amount. This contention is a fresh issue that has not
been raised and ventilated before the courts below. In any event, the interest stipulation, on its face, does
not appear as being that excessive. The essence or rationale for the payment of interest, quite often
referred to as cost of money, is not exactly the same as that of a surcharge or a penalty. A penalty
stipulation is not necessarily preclusive of interest, if there is an agreement to that effect, the two being
distinct concepts which may separately be demanded. 18 What may justify a court in not allowing the
creditor to impose full surcharges and penalties, despite an express stipulation therefor in a valid
agreement, may not equally justify the non-payment or reduction of interest. Indeed, the interest
prescribed in loan financing arrangements is a fundamental part of the banking business and the core of a
bank's existence.19
Petitioners next assail the award of 10% of the total amount of indebtedness by way of attorney's fees for
being grossly excessive, exorbitant and unconscionable vis-a-vis the time spent and the extent of services
rendered by counsel for the bank and the nature of the case. Bearing in mind that the rate of attorneys
fees has been agreed to by the parties and intended to answer not only for litigation expenses but also for
collection efforts as well, the Court, like the appellate court, deems the award of 10% attorneys fees to be
reasonable.
Neither can the appellate court be held to have erred in rejecting petitioners' call for a new trial or to admit
newly discovered evidence. As the appellate court so held in its resolution of 14 May 1999 "Under Section 2, Rule 52 of the 1997 Rules of Civil Procedure, no second motion for reconsideration of a
judgment or final resolution by the same party shall be entertained. Considering that the instant motion is
already a second motion for reconsideration, the same must therefore be denied.
"Furthermore, it would appear from the records available to this court that the newly-discovered evidence
being invoked by defendants-appellants have actually been existent when the case was brought on appeal
to this court as well as when the first motion for reconsideration was filed.1wphi1 Hence, it is quite
surprising why defendants-appellants raised the alleged newly-discovered evidence only at this stage
when they could have done so in the earlier pleadings filed before this court.
"The propriety or acceptability of such a second motion for reconsideration is not contingent upon the
averment of 'new' grounds to assail the judgment, i.e., grounds other than those theretofore presented and
rejected. Otherwise, attainment of finality of a judgment might be stayed off indefinitely, depending on the
partys ingenuousness or cleverness in conceiving and formulating 'additional flaws' or 'newly discovered
errors' therein, or thinking up some injury or prejudice to the rights of the movant for reconsideration." 20
At any rate, the subsequent execution of the real estate mortgage as security for the existing loan would
not have resulted in the extinguishment of the original contract of loan because of novation. Petitioners
acknowledge that the real estate mortgage contract does not contain any express stipulation by the
parties intending it to supersede the existing loan agreement between the petitioners and the bank. 21
Respondent bank has correctly postulated that the mortgage is but an accessory contract to secure the
loan in the promissory note.
Extinctive novation requires, first, a previous valid obligation; second, the agreement of all the parties to
the new contract; third, the extinguishment of the obligation; and fourth, the validity of the new one.22 In
order that an obligation may be extinguished by another which substitutes the same, it is imperative that
it be so declared in unequivocal terms, or that the old and the new obligation be on every point
incompatible with each other.23 An obligation to pay a sum of money is not extinctively novated by a new
instrument which merely changes the terms of payment or adding compatible covenants or where the old
contract is merely supplemented by the new one.24 When not expressed, incompatibility is required so as
to ensure that the parties have indeed intended such novation despite their failure to express it in
categorical terms. The incompatibility, to be sure, should take place in any of the essential elements of the
obligation, i.e., (1) the juridical relation or tie, such as from a mere commodatum to lease of things, or from
negotiorum gestio to agency, or from a mortgage to antichresis,25 or from a sale to one of loan;26 (2) the
object or principal conditions, such as a change of the nature of the prestation; or (3) the subjects, such as
the substitution of a debtor27 or the subrogation of the creditor. Extinctive novation does not necessarily
imply that the new agreement should be complete by itself; certain terms and conditions may be carried,
expressly or by implication, over to the new obligation.
WHEREFORE, the petition is DENIED.
SO ORDERED.
UNITED COCONUT PLANTERS BANK, Petitioner,
vs.
SPOUSES SAMUEL and ODETTE BELUSO, Respondents.
DECISION

CHICO-NAZARIO, J.:
This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, which seeks to annul the
Court of Appeals Decision1 dated 21 January 2003 and its Resolution2 dated 9 September 2003 in CA-G.R.
CV No. 67318. The assailed Court of Appeals Decision and Resolution affirmed in turn the Decision 3 dated
23 March 2000 and Order4 dated 8 May 2000 of the Regional Trial Court (RTC), Branch 65 of Makati City, in
Civil Case No. 99-314, declaring void the interest rate provided in the promissory notes executed by the
respondents Spouses Samuel and Odette Beluso (spouses Beluso) in favor of petitioner United Coconut
Planters Bank (UCPB).
The procedural and factual antecedents of this case are as follows:
On 16 April 1996, UCPB granted the spouses Beluso a Promissory Notes Line under a Credit Agreement
whereby the latter could avail from the former credit of up to a maximum amount of P1.2 Million pesos for
a term ending on 30 April 1997. The spouses Beluso constituted, other than their promissory notes, a real
estate mortgage over parcels of land in Roxas City, covered by Transfer Certificates of Title No. T-31539
and T-27828, as additional security for the obligation. The Credit Agreement was subsequently amended to
increase the amount of the Promissory Notes Line to a maximum of P2.35 Million pesos and to extend the
term thereof to 28 February 1998.
The spouses Beluso availed themselves of the credit line under the following Promissory Notes:
PN #

Date of PN

Maturity Date

Amount Secured

8314-96-00083-3

29 April 1996

27 August 1996

P 700,000

8314-96-00085-0

2 May 1996

30 August 1996

P 500,000

8314-96-000292-2

20 November 1996

20 March 1997

P 800,000

The three promissory notes were renewed several times. On 30 April 1997, the payment of the principal
and interest of the latter two promissory notes were debited from the spouses Belusos account with UCPB;
yet, a consolidated loan for P1.3 Million was again released to the spouses Beluso under one promissory
note with a due date of 28 February 1998.
To completely avail themselves of the P2.35 Million credit line extended to them by UCPB, the spouses
Beluso executed two more promissory notes for a total of P350,000.00:
PN #

Date of PN

Maturity Date

Amount Secured

97-00363-1

11 December 1997

28 February 1998

P 200,000

98-00002-4

2 January 1998

28 February 1998

P 150,000

However, the spouses Beluso alleged that the amounts covered by these last two promissory notes were
never released or credited to their account and, thus, claimed that the principal indebtedness was only P2
Million.
In any case, UCPB applied interest rates on the different promissory notes ranging from 18% to 34%. From
1996 to February 1998 the spouses Beluso were able to pay the total sum of P763,692.03.
From 28 February 1998 to 10 June 1998, UCPB continued to charge interest and penalty on the obligations
of the spouses Beluso, as follows:
PN #

Amount Secured

Interest

Penalty

Total

97-00363-1

P 200,000

31%

36%

P 225,313.24

97-00366-6

P 700,000

30.17%
(7 days)

32.786%
(102 days)

P 795,294.72

97-00368-2

P 1,300,000

28%
(2 days)

30.41%
(102 days)

P 1,462,124.54

98-00002-4

P 150,000

33%
(102 days)

36%

P 170,034.71

The spouses Beluso, however, failed to make any payment of the foregoing amounts.
On 2 September 1998, UCPB demanded that the spouses Beluso pay their total obligation of
P2,932,543.00 plus 25% attorneys fees, but the spouses Beluso failed to comply therewith. On 28

December 1998, UCPB foreclosed the properties mortgaged by the spouses Beluso to secure their credit
line, which, by that time, already ballooned to P3,784,603.00.
On 9 February 1999, the spouses Beluso filed a Petition for Annulment, Accounting and Damages against
UCPB with the RTC of Makati City.
On 23 March 2000, the RTC ruled in favor of the spouses Beluso, disposing of the case as follows:
PREMISES CONSIDERED, judgment is hereby rendered declaring the interest rate used by [UCPB] void and
the foreclosure and Sheriffs Certificate of Sale void. [UCPB] is hereby ordered to return to [the spouses
Beluso] the properties subject of the foreclosure; to pay [the spouses Beluso] the amount of P50,000.00 by
way of attorneys fees; and to pay the costs of suit. [The spouses Beluso] are hereby ordered to pay [UCPB]
the sum of P1,560,308.00.5
On 8 May 2000, the RTC denied UCPBs Motion for Reconsideration, 6 prompting UCPB to appeal the RTC
Decision with the Court of Appeals. The Court of Appeals affirmed the RTC Decision, to wit:
WHEREFORE, premises considered, the decision dated March 23, 2000 of the Regional Trial Court, Branch
65, Makati City in Civil Case No. 99-314 is hereby AFFIRMED subject to the modification that defendantappellant UCPB is not liable for attorneys fees or the costs of suit. 7
On 9 September 2003, the Court of Appeals denied UCPBs Motion for Reconsideration for lack of merit.
UCPB thus filed the present petition, submitting the following issues for our resolution:
I
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND REVERSIBLE ERROR
WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT WHICH DECLARED VOID THE PROVISION ON
INTEREST RATE AGREED UPON BETWEEN PETITIONER AND RESPONDENTS
II
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND REVERSIBLE ERROR
WHEN IT AFFIRMED THE COMPUTATION BY THE TRIAL COURT OF RESPONDENTS INDEBTEDNESS AND
ORDERED RESPONDENTS TO PAY PETITIONER THE AMOUNT OF ONLY ONE MILLION FIVE HUNDRED SIXTY
THOUSAND THREE HUNDRED EIGHT PESOS (P1,560,308.00)
III
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND REVERSIBLE ERROR
WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT WHICH ANNULLED THE FORECLOSURE BY
PETITIONER OF THE SUBJECT PROPERTIES DUE TO AN ALLEGED "INCORRECT COMPUTATION" OF
RESPONDENTS INDEBTEDNESS
IV
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND REVERSIBLE ERROR
WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT WHICH FOUND PETITIONER LIABLE FOR VIOLATION
OF THE TRUTH IN LENDING ACT
V
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND REVERSIBLE ERROR
WHEN IT FAILED TO ORDER THE DISMISSAL OF THE CASE BECAUSE THE RESPONDENTS ARE GUILTY OF
FORUM SHOPPING8
Validity of the Interest Rates
The Court of Appeals held that the imposition of interest in the following provision found in the promissory
notes of the spouses Beluso is void, as the interest rates and the bases therefor were determined solely by
petitioner UCPB:
FOR VALUE RECEIVED, I, and/or We, on or before due date, SPS. SAMUEL AND ODETTE BELUSO
(BORROWER), jointly and severally promise to pay to UNITED COCONUT PLANTERS BANK (LENDER) or
order at UCPB Bldg., Makati Avenue, Makati City, Philippines, the sum of ______________ PESOS, (P_____),
Philippine Currency, with interest thereon at the rate indicative of DBD retail rate or as determined by the
Branch Head.9
UCPB asserts that this is a reversible error, and claims that while the interest rate was not numerically
quantified in the face of the promissory notes, it was nonetheless categorically fixed, at the time of

execution thereof, at the "rate indicative of the DBD retail rate." UCPB contends that said provision must
be read with another stipulation in the promissory notes subjecting to review the interest rate as fixed:
The interest rate shall be subject to review and may be increased or decreased by the LENDER considering
among others the prevailing financial and monetary conditions; or the rate of interest and charges which
other banks or financial institutions charge or offer to charge for similar accommodations; and/or the
resulting profitability to the LENDER after due consideration of all dealings with the BORROWER. 10
In this regard, UCPB avers that these are valid reference rates akin to a "prevailing rate" or "prime rate"
allowed by this Court in Polotan v. Court of Appeals.11 Furthermore, UCPB argues that even if the proviso
"as determined by the branch head" is considered void, such a declaration would not ipso facto render the
connecting clause "indicative of DBD retail rate" void in view of the separability clause of the Credit
Agreement, which reads:
Section 9.08 Separability Clause. If any one or more of the provisions contained in this AGREEMENT, or
documents executed in connection herewith shall be declared invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions hereof shall not in any way be
affected or impaired.12
According to UCPB, the imposition of the questioned interest rates did not infringe on the principle of
mutuality of contracts, because the spouses Beluso had the liberty to choose whether or not to renew their
credit line at the new interest rates pegged by petitioner. 13 UCPB also claims that assuming there was any
defect in the mutuality of the contract at the time of its inception, such defect was cured by the
subsequent conduct of the spouses Beluso in availing themselves of the credit line from April 1996 to
February 1998 without airing any protest with respect to the interest rates imposed by UCPB. According to
UCPB, therefore, the spouses Beluso are in estoppel.14
We agree with the Court of Appeals, and find no merit in the contentions of UCPB.
Article 1308 of the Civil Code provides:
Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the
will of one of them.
We applied this provision in Philippine National Bank v. Court of Appeals, 15 where we held:
In order that obligations arising from contracts may have the force of law between the parties, there must
be mutuality between the parties based on their essential equality. A contract containing a condition which
makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is
void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the P1.8 million loan
agreement between the PNB and the private respondent gave the PNB a license (although in fact there
was none) to increase the interest rate at will during the term of the loan, that license would have been
null and void for being violative of the principle of mutuality essential in contracts. It would have invested
the loan agreement with the character of a contract of adhesion, where the parties do not bargain on equal
footing, the weaker party's (the debtor) participation being reduced to the alternative "to take it or leave
it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for the weaker
party whom the courts of justice must protect against abuse and imposition.
The provision stating that the interest shall be at the "rate indicative of DBD retail rate or as determined by
the Branch Head" is indeed dependent solely on the will of petitioner UCPB. Under such provision,
petitioner UCPB has two choices on what the interest rate shall be: (1) a rate indicative of the DBD retail
rate; or (2) a rate as determined by the Branch Head. As UCPB is given this choice, the rate should be
categorically determinable in both choices. If either of these two choices presents an opportunity for UCPB
to fix the rate at will, the bank can easily choose such an option, thus making the entire interest rate
provision violative of the principle of mutuality of contracts.
Not just one, but rather both, of these choices are dependent solely on the will of UCPB. Clearly, a rate "as
determined by the Branch Head" gives the latter unfettered discretion on what the rate may be. The
Branch Head may choose any rate he or she desires. As regards the rate "indicative of the DBD retail rate,"
the same cannot be considered as valid for being akin to a "prevailing rate" or "prime rate" allowed by this
Court in Polotan. The interest rate in Polotan reads:
The Cardholder agrees to pay interest per annum at 3% plus the prime rate of Security Bank and Trust
Company. x x x.16
In this provision in Polotan, there is a fixed margin over the reference rate: 3%. Thus, the parties can easily
determine the interest rate by applying simple arithmetic. On the other hand, the provision in the case at
bar does not specify any margin above or below the DBD retail rate. UCPB can peg the interest at any
percentage above or below the DBD retail rate, again giving it unfettered discretion in determining the
interest rate.

The stipulation in the promissory notes subjecting the interest rate to review does not render the
imposition by UCPB of interest rates on the obligations of the spouses Beluso valid. According to said
stipulation:
The interest rate shall be subject to review and may be increased or decreased by the LENDER considering
among others the prevailing financial and monetary conditions; or the rate of interest and charges which
other banks or financial institutions charge or offer to charge for similar accommodations; and/or the
resulting profitability to the LENDER after due consideration of all dealings with the BORROWER. 17
It should be pointed out that the authority to review the interest rate was given UCPB alone as the lender.
Moreover, UCPB may apply the considerations enumerated in this provision as it wishes. As worded in the
above provision, UCPB may give as much weight as it desires to each of the following considerations: (1)
the prevailing financial and monetary condition; (2) the rate of interest and charges which other banks or
financial institutions charge or offer to charge for similar accommodations; and/or (3) the resulting
profitability to the LENDER (UCPB) after due consideration of all dealings with the BORROWER (the spouses
Beluso). Again, as in the case of the interest rate provision, there is no fixed margin above or below these
considerations.
In view of the foregoing, the Separability Clause cannot save either of the two options of UCPB as to the
interest to be imposed, as both options violate the principle of mutuality of contracts.
UCPB likewise failed to convince us that the spouses Beluso were in estoppel.
Estoppel cannot be predicated on an illegal act. As between the parties to a contract, validity cannot be
given to it by estoppel if it is prohibited by law or is against public policy. 18
The interest rate provisions in the case at bar are illegal not only because of the provisions of the Civil
Code on mutuality of contracts, but also, as shall be discussed later, because they violate the Truth in
Lending Act. Not disclosing the true finance charges in connection with the extensions of credit is,
furthermore, a form of deception which we cannot countenance. It is against the policy of the State as
stated in the Truth in Lending Act:
Sec. 2. Declaration of Policy. It is hereby declared to be the policy of the State to protect its citizens from
a lack of awareness of the true cost of credit to the user by assuring a full disclosure of such cost with a
view of preventing the uninformed use of credit to the detriment of the national economy. 19
Moreover, while the spouses Beluso indeed agreed to renew the credit line, the offending provisions are
found in the promissory notes themselves, not in the credit line. In fixing the interest rates in the
promissory notes to cover the renewed credit line, UCPB still reserved to itself the same two options (1) a
rate indicative of the DBD retail rate; or (2) a rate as determined by the Branch Head.
Error in Computation
UCPB asserts that while both the RTC and the Court of Appeals voided the interest rates imposed by UCPB,
both failed to include in their computation of the outstanding obligation of the spouses Beluso the legal
rate of interest of 12% per annum. Furthermore, the penalty charges were also deleted in the decisions of
the RTC and the Court of Appeals. Section 2.04, Article II on "Interest and other Bank Charges" of the
subject Credit Agreement, provides:
Section 2.04 Penalty Charges. In addition to the interest provided for in Section 2.01 of this ARTICLE, any
principal obligation of the CLIENT hereunder which is not paid when due shall be subject to a penalty
charge of one percent (1%) of the amount of such obligation per month computed from due date until the
obligation is paid in full. If the bank accelerates teh (sic) payment of availments hereunder pursuant to
ARTICLE VIII hereof, the penalty charge shall be used on the total principal amount outstanding and unpaid
computed from the date of acceleration until the obligation is paid in full. 20
Paragraph 4 of the promissory notes also states:
In case of non-payment of this Promissory Note (Note) at maturity, I/We, jointly and severally, agree to pay
an additional sum equivalent to twenty-five percent (25%) of the total due on the Note as attorneys fee,
aside from the expenses and costs of collection whether actually incurred or not, and a penalty charge of
one percent (1%) per month on the total amount due and unpaid from date of default until fully paid. 21
Petitioner further claims that it is likewise entitled to attorneys fees, pursuant to Section 9.06 of the Credit
Agreement, thus:
If the BANK shall require the services of counsel for the enforcement of its rights under this AGREEMENT,
the Note(s), the collaterals and other related documents, the BANK shall be entitled to recover attorneys
fees equivalent to not less than twenty-five percent (25%) of the total amounts due and outstanding
exclusive of costs and other expenses.22

Another alleged computational error pointed out by UCPB is the negation of the Compounding Interest
agreed upon by the parties under Section 2.02 of the Credit Agreement:
Section 2.02 Compounding Interest. Interest not paid when due shall form part of the principal and shall be
subject to the same interest rate as herein stipulated.23 and paragraph 3 of the subject promissory notes:
Interest not paid when due shall be added to, and become part of the principal and shall likewise bear
interest at the same rate.24
UCPB lastly avers that the application of the spouses Belusos payments in the disputed computation does
not reflect the parties agreement.1avvphi1 The RTC deducted the payment made by the spouses Beluso
amounting to P763,693.00 from the principal of P2,350,000.00. This was allegedly inconsistent with the
Credit Agreement, as well as with the agreement of the parties as to the facts of the case. In paragraph 7
of the spouses Belusos Manifestation and Motion on Proposed Stipulation of Facts and Issues vis--vis
UCPBs Manifestation, the parties agreed that the amount of P763,693.00 was applied to the interest and
not to the principal, in accord with Section 3.03, Article II of the Credit Agreement on "Order of the
Application of Payments," which provides:
Section 3.03 Application of Payment. Payments made by the CLIENT shall be applied in accordance with
the following order of preference:
1. Accounts receivable and other out-of-pocket expenses
2. Front-end Fee, Origination Fee, Attorneys Fee and other expenses of collection;
3. Penalty charges;
4. Past due interest;
5. Principal amortization/Payment in arrears;
6. Advance interest;
7. Outstanding balance; and
8. All other obligations of CLIENT to the BANK, if any. 25
Thus, according to UCPB, the interest charges, penalty charges, and attorneys fees had been erroneously
excluded by the RTC and the Court of Appeals from the computation of the total amount due and
demandable from spouses Beluso.
The spouses Belusos defense as to all these issues is that the demand made by UCPB is for a considerably
bigger amount and, therefore, the demand should be considered void. There being no valid demand,
according to the spouses Beluso, there would be no default, and therefore the interests and penalties
would not commence to run. As it was likewise improper to foreclose the mortgaged properties or file a
case against the spouses Beluso, attorneys fees were not warranted.
We agree with UCPB on this score. Default commences upon judicial or extrajudicial demand. 26 The excess
amount in such a demand does not nullify the demand itself, which is valid with respect to the proper
amount. A contrary ruling would put commercial transactions in disarray, as validity of demands would be
dependent on the exactness of the computations thereof, which are too often contested.
There being a valid demand on the part of UCPB, albeit excessive, the spouses Beluso are considered in
default with respect to the proper amount and, therefore, the interests and the penalties began to run at
that point.
As regards the award of 12% legal interest in favor of petitioner, the RTC actually recognized that said legal
interest should be imposed, thus: "There being no valid stipulation as to interest, the legal rate of interest
shall be charged."27 It seems that the RTC inadvertently overlooked its non-inclusion in its computation.
The spouses Beluso had even originally asked for the RTC to impose this legal rate of interest in both the
body and the prayer of its petition with the RTC:
12. Since the provision on the fixing of the rate of interest by the sole will of the respondent Bank is null
and void, only the legal rate of interest which is 12% per annum can be legally charged and imposed by
the bank, which would amount to only about P599,000.00 since 1996 up to August 31, 1998.
xxxx

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


xxxx
2. By way of example for the public good against the Banks taking unfair advantage of the weaker party
to their contract, declaring the legal rate of 12% per annum, as the imposable rate of interest up to
February 28, 1999 on the loan of 2.350 million.28
All these show that the spouses Beluso had acknowledged before the RTC their obligation to pay a 12%
legal interest on their loans. When the RTC failed to include the 12% legal interest in its computation,
however, the spouses Beluso merely defended in the appellate courts this non-inclusion, as the same was
beneficial to them. We see, however, sufficient basis to impose a 12% legal interest in favor of petitioner in
the case at bar, as what we have voided is merely the stipulated rate of interest and not the stipulation
that the loan shall earn interest.
We must likewise uphold the contract stipulation providing the compounding of interest. The provisions in
the Credit Agreement and in the promissory notes providing for the compounding of interest were neither
nullified by the RTC or the Court of Appeals, nor assailed by the spouses Beluso in their petition with the
RTC. The compounding of interests has furthermore been declared by this Court to be legal. We have held
in Tan v. Court of Appeals,29 that:
Without prejudice to the provisions of Article 2212, interest due and unpaid shall not earn interest.
However, the contracting parties may by stipulation capitalize the interest due and unpaid, which as added
principal, shall earn new interest.
As regards the imposition of penalties, however, although we are likewise upholding the imposition thereof
in the contract, we find the rate iniquitous. Like in the case of grossly excessive interests, the penalty
stipulated in the contract may also be reduced by the courts if it is iniquitous or unconscionable. 30
We find the penalty imposed by UCPB, ranging from 30.41% to 36%, to be iniquitous considering the fact
that this penalty is already over and above the compounded interest likewise imposed in the contract. If a
36% interest in itself has been declared unconscionable by this Court, 31 what more a 30.41% to 36%
penalty, over and above the payment of compounded interest? UCPB itself must have realized this, as it
gave us a sample computation of the spouses Belusos obligation if both the interest and the penalty
charge are reduced to 12%.
As regards the attorneys fees, the spouses Beluso can actually be liable therefor even if there had been no
demand. Filing a case in court is the judicial demand referred to in Article 1169 32 of the Civil Code, which
would put the obligor in delay.
The RTC, however, also held UCPB liable for attorneys fees in this case, as the spouses Beluso were forced
to litigate the issue on the illegality of the interest rate provision of the promissory notes. The award of
attorneys fees, it must be recalled, falls under the sound discretion of the court. 33 Since both parties were
forced to litigate to protect their respective rights, and both are entitled to the award of attorneys fees
from the other, practical reasons dictate that we set off or compensate both parties liabilities for
attorneys fees. Therefore, instead of awarding attorneys fees in favor of petitioner, we shall merely affirm
the deletion of the award of attorneys fees to the spouses Beluso.
In sum, we hold that spouses Beluso should still be held liable for a compounded legal interest of 12% per
annum and a penalty charge of 12% per annum. We also hold that, instead of awarding attorneys fees in
favor of petitioner, we shall merely affirm the deletion of the award of attorneys fees to the spouses
Beluso.
Annulment of the Foreclosure Sale
Properties of spouses Beluso had been foreclosed, titles to which had already been consolidated on 19
February 2001 and 20 March 2001 in the name of UCPB, as the spouses Beluso failed to exercise their right
of redemption which expired on 25 March 2000. The RTC, however, annulled the foreclosure of mortgage
based on an alleged incorrect computation of the spouses Belusos indebtedness.
UCPB alleges that none of the grounds for the annulment of a foreclosure sale are present in the case at
bar. Furthermore, the annulment of the foreclosure proceedings and the certificates of sale were mooted
by the subsequent issuance of new certificates of title in the name of said bank. UCPB claims that the
spouses Belusos action for annulment of foreclosure constitutes a collateral attack on its certificates of
title, an act proscribed by Section 48 of Presidential Decree No. 1529, otherwise known as the Property
Registration Decree, which provides:
Section 48. Certificate not subject to collateral attack. A certificate of title shall not be subject to
collateral attack. It cannot be altered, modified or cancelled except in a direct proceeding in accordance
with law.

The spouses Beluso retort that since they had the right to refuse payment of an excessive demand on their
account, they cannot be said to be in default for refusing to pay the same. Consequently, according to the
spouses Beluso, the "enforcement of such illegal and overcharged demand through foreclosure of
mortgage" should be voided.
We agree with UCPB and affirm the validity of the foreclosure proceedings. Since we already found that a
valid demand was made by UCPB upon the spouses Beluso, despite being excessive, the spouses Beluso
are considered in default with respect to the proper amount of their obligation to UCPB and, thus, the
property they mortgaged to secure such amounts may be foreclosed. Consequently, proceeds of the
foreclosure sale should be applied to the extent of the amounts to which UCPB is rightfully entitled.
As argued by UCPB, none of the grounds for the annulment of a foreclosure sale are present in this case.
The grounds for the proper annulment of the foreclosure sale are the following: (1) that there was fraud,
collusion, accident, mutual mistake, breach of trust or misconduct by the purchaser; (2) that the sale had
not been fairly and regularly conducted; or (3) that the price was inadequate and the inadequacy was so
great as to shock the conscience of the court.34
Liability for Violation of Truth in Lending Act
The RTC, affirmed by the Court of Appeals, imposed a fine of P26,000.00 for UCPBs alleged violation of
Republic Act No. 3765, otherwise known as the Truth in Lending Act.
UCPB challenges this imposition, on the argument that Section 6(a) of the Truth in Lending Act which
mandates the filing of an action to recover such penalty must be made under the following circumstances:
Section 6. (a) Any creditor who in connection with any credit transaction fails to disclose to any person any
information in violation of this Act or any regulation issued thereunder shall be liable to such person in the
amount of P100 or in an amount equal to twice the finance charge required by such creditor in connection
with such transaction, whichever is greater, except that such liability shall not exceed P2,000 on any credit
transaction. Action to recover such penalty may be brought by such person within one year from the date
of the occurrence of the violation, in any court of competent jurisdiction. x x x (Emphasis ours.)
According to UCPB, the Court of Appeals even stated that "[a]dmittedly the original complaint did not
explicitly allege a violation of the Truth in Lending Act and no action to formally admit the amended
petition [which expressly alleges violation of the Truth in Lending Act] was made either by [respondents]
spouses Beluso and the lower court. x x x."35
UCPB further claims that the action to recover the penalty for the violation of the Truth in Lending Act had
been barred by the one-year prescriptive period provided for in the Act. UCPB asserts that per the records
of the case, the latest of the subject promissory notes had been executed on 2 January 1998, but the
original petition of the spouses Beluso was filed before the RTC on 9 February 1999, which was after the
expiration of the period to file the same on 2 January 1999.
On the matter of allegation of the violation of the Truth in Lending Act, the Court of Appeals ruled:
Admittedly the original complaint did not explicitly allege a violation of the Truth in Lending Act and no
action to formally admit the amended petition was made either by [respondents] spouses Beluso and the
lower court. In such transactions, the debtor and the lending institutions do not deal on an equal footing
and this law was intended to protect the public from hidden or undisclosed charges on their loan
obligations, requiring a full disclosure thereof by the lender. We find that its infringement may be inferred
or implied from allegations that when [respondents] spouses Beluso executed the promissory notes, the
interest rate chargeable thereon were left blank. Thus, [petitioner] UCPB failed to discharge its duty to
disclose in full to [respondents] Spouses Beluso the charges applicable on their loans. 36
We agree with the Court of Appeals. The allegations in the complaint, much more than the title thereof, are
controlling. Other than that stated by the Court of Appeals, we find that the allegation of violation of the
Truth in Lending Act can also be inferred from the same allegation in the complaint we discussed earlier:
b.) In unilaterally imposing an increased interest rates (sic) respondent bank has relied on the provision of
their promissory note granting respondent bank the power to unilaterally fix the interest rates, which rate
was not determined in the promissory note but was left solely to the will of the Branch Head of the
respondent Bank, x x x.37
The allegation that the promissory notes grant UCPB the power to unilaterally fix the interest rates
certainly also means that the promissory notes do not contain a "clear statement in writing" of "(6) the
finance charge expressed in terms of pesos and centavos; and (7) the percentage that the finance charge
bears to the amount to be financed expressed as a simple annual rate on the outstanding unpaid balance
of the obligation."38 Furthermore, the spouses Belusos prayer "for such other reliefs just and equitable in
the premises" should be deemed to include the civil penalty provided for in Section 6(a) of the Truth in
Lending Act.

UCPBs contention that this action to recover the penalty for the violation of the Truth in Lending Act has
already prescribed is likewise without merit. The penalty for the violation of the act is P100 or an amount
equal to twice the finance charge required by such creditor in connection with such transaction, whichever
is greater, except that such liability shall not exceed P2,000.00 on any credit transaction.39 As this penalty
depends on the finance charge required of the borrower, the borrowers cause of action would only accrue
when such finance charge is required. In the case at bar, the date of the demand for payment of the
finance charge is 2 September 1998, while the foreclosure was made on 28 December 1998. The filing of
the case on 9 February 1999 is therefore within the one-year prescriptive period.
UCPB argues that a violation of the Truth in Lending Act, being a criminal offense, cannot be inferred nor
implied from the allegations made in the complaint.40 Pertinent provisions of the Act read:
Sec. 6. (a) Any creditor who in connection with any credit transaction fails to disclose to any person any
information in violation of this Act or any regulation issued thereunder shall be liable to such person in the
amount of P100 or in an amount equal to twice the finance charge required by such creditor in connection
with such transaction, whichever is the greater, except that such liability shall not exceed P2,000 on any
credit transaction. Action to recover such penalty may be brought by such person within one year from the
date of the occurrence of the violation, in any court of competent jurisdiction. In any action under this
subsection in which any person is entitled to a recovery, the creditor shall be liable for reasonable
attorneys fees and court costs as determined by the court.
xxxx
(c) Any person who willfully violates any provision of this Act or any regulation issued thereunder shall be
fined by not less than P1,000 or more than P5,000 or imprisonment for not less than 6 months, nor more
than one year or both.
As can be gleaned from Section 6(a) and (c) of the Truth in Lending Act, the violation of the said Act gives
rise to both criminal and civil liabilities. Section 6(c) considers a criminal offense the willful violation of the
Act, imposing the penalty therefor of fine, imprisonment or both. Section 6(a), on the other hand, clearly
provides for a civil cause of action for failure to disclose any information of the required information to any
person in violation of the Act. The penalty therefor is an amount of P100 or in an amount equal to twice the
finance charge required by the creditor in connection with such transaction, whichever is greater, except
that the liability shall not exceed P2,000.00 on any credit transaction. The action to recover such penalty
may be instituted by the aggrieved private person separately and independently from the criminal case for
the same offense.
In the case at bar, therefore, the civil action to recover the penalty under Section 6(a) of the Truth in
Lending Act had been jointly instituted with (1) the action to declare the interests in the promissory notes
void, and (2) the action to declare the foreclosure void. This joinder is allowed under Rule 2, Section 5 of
the Rules of Court, which provides:
SEC. 5. Joinder of causes of action.A party may in one pleading assert, in the alternative or otherwise, as
many causes of action as he may have against an opposing party, subject to the following conditions:
(a) The party joining the causes of action shall comply with the rules on joinder of parties;
(b) The joinder shall not include special civil actions or actions governed by special rules;
(c) Where the causes of action are between the same parties but pertain to different venues or
jurisdictions, the joinder may be allowed in the Regional Trial Court provided one of the causes of
action falls within the jurisdiction of said court and the venue lies therein; and
(d) Where the claims in all the causes of action are principally for recovery of money, the aggregate
amount claimed shall be the test of jurisdiction.
In attacking the RTCs disposition on the violation of the Truth in Lending Act since the same was not
alleged in the complaint, UCPB is actually asserting a violation of due process. Indeed, due process
mandates that a defendant should be sufficiently apprised of the matters he or she would be defending
himself or herself against. However, in the 1 July 1999 pre-trial brief filed by the spouses Beluso before the
RTC, the claim for civil sanctions for violation of the Truth in Lending Act was expressly alleged, thus:
Moreover, since from the start, respondent bank violated the Truth in Lending Act in not informing the
borrower in writing before the execution of the Promissory Notes of the interest rate expressed as a
percentage of the total loan, the respondent bank instead is liable to pay petitioners double the amount
the bank is charging petitioners by way of sanction for its violation. 41
In the same pre-trial brief, the spouses Beluso also expressly raised the following issue:
b.) Does the expression indicative rate of DBD retail (sic) comply with the Truth in Lending Act provision to
express the interest rate as a simple annual percentage of the loan? 42

These assertions are so clear and unequivocal that any attempt of UCPB to feign ignorance of the assertion
of this issue in this case as to prevent it from putting up a defense thereto is plainly hogwash.
Petitioner further posits that it is the Metropolitan Trial Court which has jurisdiction to try and adjudicate
the alleged violation of the Truth in Lending Act, considering that the present action allegedly involved a
single credit transaction as there was only one Promissory Note Line.
We disagree. We have already ruled that the action to recover the penalty under Section 6(a) of the Truth
in Lending Act had been jointly instituted with (1) the action to declare the interests in the promissory
notes void, and (2) the action to declare the foreclosure void. There had been no question that the above
actions belong to the jurisdiction of the RTC. Subsection (c) of the above-quoted Section 5 of the Rules of
Court on Joinder of Causes of Action provides:
(c) Where the causes of action are between the same parties but pertain to different venues or
jurisdictions, the joinder may be allowed in the Regional Trial Court provided one of the causes of action
falls within the jurisdiction of said court and the venue lies therein.
Furthermore, opening a credit line does not create a credit transaction of loan or mutuum, since the former
is merely a preparatory contract to the contract of loan or mutuum. Under such credit line, the bank is
merely obliged, for the considerations specified therefor, to lend to the other party amounts not exceeding
the limit provided. The credit transaction thus occurred not when the credit line was opened, but rather
when the credit line was availed of. In the case at bar, the violation of the Truth in Lending Act allegedly
occurred not when the parties executed the Credit Agreement, where no interest rate was mentioned, but
when the parties executed the promissory notes, where the allegedly offending interest rate was
stipulated.
UCPB further argues that since the spouses Beluso were duly given copies of the subject promissory notes
after their execution, then they were duly notified of the terms thereof, in substantial compliance with the
Truth in Lending Act.
Once more, we disagree. Section 4 of the Truth in Lending Act clearly provides that the disclosure
statement must be furnished prior to the consummation of the transaction:
SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the consummation of
the transaction, a clear statement in writing setting forth, to the extent applicable and in accordance with
rules and regulations prescribed by the Board, the following information:
(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2)
(4) the charges, individually itemized, which are paid or to be paid by such person in connection
with the transaction but which are not incident to the extension of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be financed expressed as a simple
annual rate on the outstanding unpaid balance of the obligation.
The rationale of this provision is to protect users of credit from a lack of awareness of the true cost thereof,
proceeding from the experience that banks are able to conceal such true cost by hidden charges,
uncertainty of interest rates, deduction of interests from the loaned amount, and the like. The law thereby
seeks to protect debtors by permitting them to fully appreciate the true cost of their loan, to enable them
to give full consent to the contract, and to properly evaluate their options in arriving at business decisions.
Upholding UCPBs claim of substantial compliance would defeat these purposes of the Truth in Lending Act.
The belated discovery of the true cost of credit will too often not be able to reverse the ill effects of an
already consummated business decision.
In addition, the promissory notes, the copies of which were presented to the spouses Beluso after
execution, are not sufficient notification from UCPB. As earlier discussed, the interest rate provision therein
does not sufficiently indicate with particularity the interest rate to be applied to the loan covered by said
promissory notes.
Forum Shopping

UCPB had earlier moved to dismiss the petition (originally Case No. 99-314 in RTC, Makati City) on the
ground that the spouses Beluso instituted another case (Civil Case No. V-7227) before the RTC of Roxas
City, involving the same parties and issues. UCPB claims that while Civil Case No. V-7227 initially appears
to be a different action, as it prayed for the issuance of a temporary restraining order and/or injunction to
stop foreclosure of spouses Belusos properties, it poses issues which are similar to those of the present
case.43 To prove its point, UCPB cited the spouses Belusos Amended Petition in Civil Case No. V-7227,
which contains similar allegations as those in the present case. The RTC of Makati denied UCPBs Motion to
Dismiss Case No. 99-314 for lack of merit. Petitioner UCPB raised the same issue with the Court of Appeals,
and is raising the same issue with us now.
The spouses Beluso claim that the issue in Civil Case No. V-7227 before the RTC of Roxas City, a Petition for
Injunction Against Foreclosure, is the propriety of the foreclosure before the true account of spouses Beluso
is determined. On the other hand, the issue in Case No. 99-314 before the RTC of Makati City is the validity
of the interest rate provision. The spouses Beluso claim that Civil Case No. V-7227 has become moot
because, before the RTC of Roxas City could act on the restraining order, UCPB proceeded with the
foreclosure and auction sale. As the act sought to be restrained by Civil Case No. V-7227 has already been
accomplished, the spouses Beluso had to file a different action, that of Annulment of the Foreclosure Sale,
Case No. 99-314 with the RTC, Makati City.
Even if we assume for the sake of argument, however, that only one cause of action is involved in the two
civil actions, namely, the violation of the right of the spouses Beluso not to have their property foreclosed
for an amount they do not owe, the Rules of Court nevertheless allows the filing of the second action. Civil
Case No. V-7227 was dismissed by the RTC of Roxas City before the filing of Case No. 99-314 with the RTC
of Makati City, since the venue of litigation as provided for in the Credit Agreement is in Makati City.
Rule 16, Section 5 bars the refiling of an action previously dismissed only in the following instances:
SEC. 5. Effect of dismissal.Subject to the right of appeal, an order granting a motion to dismiss based on
paragraphs (f), (h) and (i) of section 1 hereof shall bar the refiling of the same action or claim. (n)
Improper venue as a ground for the dismissal of an action is found in paragraph (c) of Section 1, not in
paragraphs (f), (h) and (i):
SECTION 1. Grounds.Within the time for but before filing the answer to the complaint or pleading
asserting a claim, a motion to dismiss may be made on any of the following grounds:
(a) That the court has no jurisdiction over the person of the defending party;
(b) That the court has no jurisdiction over the subject matter of the claim;
(c) That venue is improperly laid;
(d) That the plaintiff has no legal capacity to sue;
(e) That there is another action pending between the same parties for the same cause;
(f) That the cause of action is barred by a prior judgment or by the statute of limitations;
(g) That the pleading asserting the claim states no cause of action;
(h) That the claim or demand set forth in the plaintiffs pleading has been paid, waived, abandoned,
or otherwise extinguished;
(i) That the claim on which the action is founded is unenforceable under the provisions of the
statute of frauds; and
(j) That a condition precedent for filing the claim has not been complied with. 44 (Emphases
supplied.)
When an action is dismissed on the motion of the other party, it is only when the ground for the dismissal
of an action is found in paragraphs (f), (h) and (i) that the action cannot be refiled. As regards all the other
grounds, the complainant is allowed to file same action, but should take care that, this time, it is filed with
the proper court or after the accomplishment of the erstwhile absent condition precedent, as the case may
be.
UCPB, however, brings to the attention of this Court a Motion for Reconsideration filed by the spouses
Beluso on 15 January 1999 with the RTC of Roxas City, which Motion had not yet been ruled upon when the
spouses Beluso filed Civil Case No. 99-314 with the RTC of Makati. Hence, there were allegedly two pending
actions between the same parties on the same issue at the time of the filing of Civil Case No. 99-314 on 9
February 1999 with the RTC of Makati. This will still not change our findings. It is indeed the general rule

that in cases where there are two pending actions between the same parties on the same issue, it should
be the later case that should be dismissed. However, this rule is not absolute. According to this Court in
Allied Banking Corporation v. Court of Appeals45 :
In these cases, it is evident that the first action was filed in anticipation of the filing of the later action and
the purpose is to preempt the later suit or provide a basis for seeking the dismissal of the second action.
Even if this is not the purpose for the filing of the first action, it may nevertheless be dismissed if the later
action is the more appropriate vehicle for the ventilation of the issues between the parties. Thus, in Ramos
v. Peralta, it was held:
[T]he rule on litis pendentia does not require that the later case should yield to the earlier case. What is
required merely is that there be another pending action, not a prior pending action. Considering the
broader scope of inquiry involved in Civil Case No. 4102 and the location of the property involved, no error
was committed by the lower court in deferring to the Bataan court's jurisdiction.
Given, therefore, the pendency of two actions, the following are the relevant considerations in determining
which action should be dismissed: (1) the date of filing, with preference generally given to the first action
filed to be retained; (2) whether the action sought to be dismissed was filed merely to preempt the later
action or to anticipate its filing and lay the basis for its dismissal; and (3) whether the action is the
appropriate vehicle for litigating the issues between the parties.
In the case at bar, Civil Case No. V-7227 before the RTC of Roxas City was an action for injunction against a
foreclosure sale that has already been held, while Civil Case No. 99-314 before the RTC of Makati City
includes an action for the annulment of said foreclosure, an action certainly more proper in view of the
execution of the foreclosure sale. The former case was improperly filed in Roxas City, while the latter was
filed in Makati City, the proper venue of the action as mandated by the Credit Agreement. It is evident,
therefore, that Civil Case No. 99-314 is the more appropriate vehicle for litigating the issues between the
parties, as compared to Civil Case No. V-7227. Thus, we rule that the RTC of Makati City was not in error in
not dismissing Civil Case No. 99-314.
WHEREFORE, the Decision of the Court of Appeals is hereby AFFIRMED with the following MODIFICATIONS:
1. In addition to the sum of P2,350,000.00 as determined by the courts a quo, respondent spouses
Samuel and Odette Beluso are also liable for the following amounts:
a. Penalty of 12% per annum on the amount due46 from the date of demand; and
b. Compounded legal interest of 12% per annum on the amount due 47 from date of demand;
2. The following amounts shall be deducted from the liability of the spouses Samuel and Odette
Beluso:
a. Payments made by the spouses in the amount of P763,692.00. These payments shall be
applied to the date of actual payment of the following in the order that they are listed, to
wit:
i. penalty charges due and demandable as of the time of payment;
ii. interest due and demandable as of the time of payment;
iii. principal amortization/payment in arrears as of the time of payment;
iv. outstanding balance.
b. Penalty under Republic Act No. 3765 in the amount of P26,000.00. This amount shall be
deducted from the liability of the spouses Samuel and Odette Beluso on 9 February 1999 to
the following in the order that they are listed, to wit:
i. penalty charges due and demandable as of time of payment;
ii. interest due and demandable as of the time of payment;
iii. principal amortization/payment in arrears as of the time of payment;
iv. outstanding balance.

3. The foreclosure of mortgage is hereby declared VALID. Consequently, the amounts which the
Regional Trial Court and the Court of Appeals ordered respondents to pay, as modified in this
Decision, shall be deducted from the proceeds of the foreclosure sale.
SO ORDERED.
ADVOCATES FOR TRUTH IN LENDING, INC. and EDUARDO B. OLAGUER, Petitioners,
vs.
BANGKO SENTRAL MONETARY BOARD, represented by its Chairman, GOVERNOR ARMANDO M.
TETANGCO, JR., and its incumbent members: JUANITA D. AMATONG, ALFREDO C. ANTONIO,
PETER FA VILA, NELLY F. VILLAFUERTE, IGNACIO R. BUNYE and CESAR V. PURISIMA, Respondents.
DECISION
REYES, J.:
Petitioners, claiming that they are raising issues of transcendental importance to the public, filed directly
with this Court this Petition for Certiorari under Rule 65 of the 1997 Rules of Court, seeking to declare that
the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), replacing the Central Bank Monetary Board (CBMB) by virtue of Republic Act (R.A.) No. 7653, has no authority to continue enforcing Central Bank Circular
No. 905,1 issued by the CB-MB in 1982, which "suspended" Act No. 2655, or the Usury Law of 1916.
Factual Antecedents
Petitioner "Advocates for Truth in Lending, Inc." (AFTIL) is a non-profit, non-stock corporation organized to
engage in pro bono concerns and activities relating to money lending issues. It was incorporated on July 9,
2010,2 and a month later, it filed this petition, joined by its founder and president, Eduardo B. Olaguer,
suing as a taxpayer and a citizen.
R.A. No. 265, which created the Central Bank (CB) of the Philippines on June 15, 1948, empowered the CBMB to, among others, set the maximum interest rates which banks may charge for all types of loans and
other credit operations, within limits prescribed by the Usury Law. Section 109 of R.A. No. 265 reads:
Sec. 109. Interest Rates, Commissions and Charges. The Monetary Board may fix the maximum rates of
interest which banks may pay on deposits and on other obligations.
The Monetary Board may, within the limits prescribed in the Usury Law fix the maximum rates of interest
which banks may charge for different types of loans and for any other credit operations, or may fix the
maximum differences which may exist between the interest or rediscount rates of the Central Bank and
the rates which the banks may charge their customers if the respective credit documents are not to lose
their eligibility for rediscount or advances in the Central Bank.
Any modifications in the maximum interest rates permitted for the borrowing or lending operations of the
banks shall apply only to future operations and not to those made prior to the date on which the
modification becomes effective.
In order to avoid possible evasion of maximum interest rates set by the Monetary Board, the Board may
also fix the maximum rates that banks may pay to or collect from their customers in the form of
commissions, discounts, charges, fees or payments of any sort. (Underlining ours)
On March 17, 1980, the Usury Law was amended by Presidential Decree (P.D.) No. 1684, giving the CB-MB
authority to prescribe different maximum rates of interest which may be imposed for a loan or renewal
thereof or the forbearance of any money, goods or credits, provided that the changes are effected
gradually and announced in advance. Thus, Section 1-a of Act No. 2655 now reads:
Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or rates of interest for
the loan or renewal thereof or the forbearance of any money, goods or credits, and to change such rate or
rates whenever warranted by prevailing economic and social conditions: Provided, That changes in such
rate or rates may be effected gradually on scheduled dates announced in advance.
In the exercise of the authority herein granted the Monetary Board may prescribe higher maximum rates
for loans of low priority, such as consumer loans or renewals thereof as well as such loans made by
pawnshops, finance companies and other similar credit institutions although the rates prescribed for these
institutions need not necessarily be uniform. The Monetary Board is also authorized to prescribe different
maximum rate or rates for different types of borrowings, including deposits and deposit substitutes, or
loans of financial intermediaries. (Underlining and emphasis ours)
In its Resolution No. 2224 dated December 3, 1982,3 the CB-MB issued CB Circular No. 905, Series of 1982,
effective on January 1, 1983. Section 1 of the Circular, under its General Provisions, removed the ceilings
on interest rates on loans or forbearance of any money, goods or credits, to wit:

Sec. 1. The rate of interest, including commissions, premiums, fees and other charges, on a loan or
forbearance of any money, goods, or credits, regardless of maturity and whether secured or unsecured,
that may be charged or collected by any person, whether natural or juridical, shall not be subject to any
ceiling prescribed under or pursuant to the Usury Law, as amended. (Underscoring and emphasis ours)
The Circular then went on to amend Books I to IV of the CBs "Manual of Regulations for Banks and Other
Financial Intermediaries" (Manual of Regulations) by removing the applicable ceilings on specific interest
rates. Thus, Sections 5, 9 and 10 of CB Circular No. 905 amended Book I, Subsections 1303, 1349, 1388.1
of the Manual of Regulations, by removing the ceilings for interest and other charges, commissions,
premiums, and fees applicable to commercial banks; Sections 12 and 17 removed the interest ceilings for
thrift banks (Book II, Subsections 2303, 2349); Sections 19 and 21 removed the ceilings applicable to rural
banks (Book III, Subsection 3152.3-c); and, Sections 26, 28, 30 and 32 removed the ceilings for non-bank
financial intermediaries (Book IV, Subsections 4303Q.1 to 4303Q.9, 4303N.1, 4303P). 4
On June 14, 1993, President Fidel V. Ramos signed into law R.A. No. 7653 establishing the Bangko Sentral
ng Pilipinas (BSP) to replace the CB. The repealing clause thereof, Section 135, reads:
Sec. 135. Repealing Clause. Except as may be provided for in Sections 46 and 132 of this Act, Republic
Act No. 265, as amended, the provisions of any other law, special charters, rule or regulation issued
pursuant to said Republic Act No. 265, as amended, or parts thereof, which may be inconsistent with the
provisions of this Act are hereby repealed. Presidential Decree No. 1792 is likewise repealed.
Petition for Certiorari
To justify their skipping the hierarchy of courts and going directly to this Court to secure a writ of certiorari,
petitioners contend that the transcendental importance of their Petition can readily be seen in the issues
raised therein, to wit:
a) Whether under R.A. No. 265 and/or P.D. No. 1684, the CB-MB had the statutory or constitutional
authority to prescribe the maximum rates of interest for all kinds of credit transactions and
forbearance of money, goods or credit beyond the limits prescribed in the Usury Law;
b) If so, whether the CB-MB exceeded its authority when it issued CB Circular No. 905, which
removed all interest ceilings and thus suspended Act No. 2655 as regards usurious interest rates;
c) Whether under R.A. No. 7653, the new BSP-MB may continue to enforce CB Circular No. 905. 5
Petitioners attached to their petition copies of several Senate Bills and Resolutions of the 10th Congress,
which held its sessions from 1995 to 1998, calling for investigations by the Senate Committee on Banks
and Financial Institutions into alleged unconscionable commercial rates of interest imposed by these
entities. Senate Bill (SB) Nos. 376 and 1860,7 filed by Senator Vicente C. Sotto III and the late Senator Blas
F. Ople, respectively, sought to amend Act No. 2655 by fixing the rates of interest on loans and
forbearance of credit; Philippine Senate Resolution (SR) No. 1053, 8 10739 and 1102,10 filed by Senators
Ramon B. Magsaysay, Jr., Gregorio B. Honasan and Franklin M. Drilon, respectively, urged the aforesaid
Senate Committee to investigate ways to curb the high commercial interest rates then obtaining in the
country; Senator Ernesto Maceda filed SB No. 1151 to prohibit the collection of more than two months of
advance interest on any loan of money; and Senator Raul Roco filed SR No. 1144 11 seeking an investigation
into an alleged cartel of commercial banks, called "Club 1821", reportedly behind the regime of high
interest rates. The petitioners also attached news clippings 12 showing that in February 1998 the banks
prime lending rates, or interests on loans to their best borrowers, ranged from 26% to 31%.
Petitioners contend that under Section 1-a of Act No. 2655, as amended by P.D. No. 1684, the CB-MB was
authorized only to prescribe or set the maximum rates of interest for a loan or renewal thereof or for the
forbearance of any money, goods or credits, and to change such rates whenever warranted by prevailing
economic and social conditions, the changes to be effected gradually and on scheduled dates; that nothing
in P.D. No. 1684 authorized the CB-MB to lift or suspend the limits of interest on all credit transactions,
when it issued CB Circular No. 905. They further insist that under Section 109 of R.A. No. 265, the authority
of the CB-MB was clearly only to fix the banks maximum rates of interest, but always within the limits
prescribed by the Usury Law.
Thus, according to petitioners, CB Circular No. 905, which was promulgated without the benefit of any prior
public hearing, is void because it violated Article 5 of the New Civil Code, which provides that "Acts
executed against the provisions of mandatory or prohibitory laws shall be void, except when the law itself
authorizes their validity."
They further claim that just weeks after the issuance of CB Circular No. 905, the benchmark 91-day
Treasury bills (T-bills),13 then known as "Jobo" bills14 shot up to 40% per annum, as a result. The banks
immediately followed suit and re-priced their loans to rates which were even higher than those of the
"Jobo" bills. Petitioners thus assert that CB Circular No. 905 is also unconstitutional in light of Section 1 of
the Bill of Rights, which commands that "no person shall be deprived of life, liberty or property without due
process of law, nor shall any person be denied the equal protection of the laws."

Finally, petitioners point out that R.A. No. 7653 did not re-enact a provision similar to Section 109 of R.A.
No. 265, and therefore, in view of the repealing clause in Section 135 of R.A. No. 7653, the BSP-MB has
been stripped of the power either to prescribe the maximum rates of interest which banks may charge for
different kinds of loans and credit transactions, or to suspend Act No. 2655 and continue enforcing CB
Circular No. 905.
Ruling
The petition must fail.
A. The Petition is procedurally infirm.
The decision on whether or not to accept a petition for certiorari, as well as to grant due course thereto, is
addressed to the sound discretion of the court.15 A petition for certiorari being an extraordinary remedy,
the party seeking to avail of the same must strictly observe the procedural rules laid down by law, and
non-observance thereof may not be brushed aside as mere technicality. 16
As provided in Section 1 of Rule 65, a writ of certiorari is directed against a tribunal exercising judicial or
quasi-judicial functions.17 Judicial functions are exercised by a body or officer clothed with authority to
determine what the law is and what the legal rights of the parties are with respect to the matter in
controversy. Quasi-judicial function is a term that applies to the action or discretion of public administrative
officers or bodies given the authority to investigate facts or ascertain the existence of facts, hold hearings,
and draw conclusions from them as a basis for their official action using discretion of a judicial nature. 18
The CB-MB (now BSP-MB) was created to perform executive functions with respect to the establishment,
operation or liquidation of banking and credit institutions, and branches and agencies thereof. 19 It does not
perform judicial or quasi-judicial functions. Certainly, the issuance of CB Circular No. 905 was done in the
exercise of an executive function. Certiorari will not lie in the instant case. 20
B. Petitioners have no locus standi to file the Petition
Locus standi is defined as "a right of appearance in a court of justice on a given question." In private suits,
Section 2, Rule 3 of the 1997 Rules of Civil Procedure provides that "every action must be prosecuted or
defended in the name of the real party in interest," who is "the party who stands to be benefited or injured
by the judgment in the suit or the party entitled to the avails of the suit." Succinctly put, a partys standing
is based on his own right to the relief sought. 21
Even in public interest cases such as this petition, the Court has generally adopted the "direct injury" test
that the person who impugns the validity of a statute must have "a personal and substantial interest in the
case such that he has sustained, or will sustain direct injury as a result." 22 Thus, while petitioners assert a
public right to assail CB Circular No. 905 as an illegal executive action, it is nonetheless required of them to
make out a sufficient interest in the vindication of the public order and the securing of relief. It is significant
that in this petition, the petitioners do not allege that they sustained any personal injury from the issuance
of CB Circular No. 905.
Petitioners also do not claim that public funds were being misused in the enforcement of CB Circular No.
905. In Kilosbayan, Inc. v. Morato,23 involving the on-line lottery contract of the PCSO, there was no
allegation that public funds were being misspent, which according to the Court would have made the
action a public one, "and justify relaxation of the requirement that an action must be prosecuted in the
name of the real party-in-interest." The Court held, moreover, that the status of Kilosbayan as a peoples
organization did not give it the requisite personality to question the validity of the contract. Thus:
Petitioners do not in fact show what particularized interest they have for bringing this suit. It does not
detract from the high regard for petitioners as civic leaders to say that their interest falls short of that
required to maintain an action under the Rule 3, Sec. 2. 24
C. The Petition raises no issues of transcendental importance.
In the 1993 case of Joya v. Presidential Commission on Good Government, 25 it was held that no question
involving the constitutionality or validity of a law or governmental act may be heard and decided by the
court unless there is compliance with the legal requisites for judicial inquiry, namely: (a) that the question
must be raised by the proper party; (b) that there must be an actual case or controversy; (c) that the
question must be raised at the earliest possible opportunity; and (d) that the decision on the constitutional
or legal question must be necessary to the determination of the case itself.
In Prof. David v. Pres. Macapagal-Arroyo,26 the Court summarized the requirements before taxpayers,
voters, concerned citizens, and legislators can be accorded a standing to sue, viz:
(1) the cases involve constitutional issues;

(2) for taxpayers, there must be a claim of illegal disbursement of public funds or that the tax
measure is unconstitutional;
(3) for voters, there must be a showing of obvious interest in the validity of the election law in
question;
(4) for concerned citizens, there must be a showing that the issues raised are of transcendental
importance which must be settled early; and
(5) for legislators, there must be a claim that the official action complained of infringes upon their
prerogatives as legislators.
While the Court may have shown in recent decisions a certain toughening in its attitude concerning the
question of legal standing, it has nonetheless always made an exception where the transcendental
importance of the issues has been established, notwithstanding the petitioners failure to show a direct
injury.27 In CREBA v. ERC,28 the Court set out the following instructive guides as determinants on whether a
matter is of transcendental importance, namely: (1) the character of the funds or other assets involved in
the case; (2) the presence of a clear case of disregard of a constitutional or statutory prohibition by the
public respondent agency or instrumentality of the government; and (3) the lack of any other party with a
more direct and specific interest in the questions being raised. Further, the Court stated in Anak Mindanao
Party-List Group v. The Executive Secretary29 that the rule on standing will not be waived where these
determinants are not established.
In the instant case, there is no allegation of misuse of public funds in the implementation of CB Circular No.
905. Neither were borrowers who were actually affected by the suspension of the Usury Law joined in this
petition. Absent any showing of transcendental importance, the petition must fail.
More importantly, the Court notes that the instant petition adverted to the regime of high interest rates
which obtained at least 15 years ago, when the banks prime lending rates ranged from 26% to 31%, 30 or
even 29 years ago, when the 91-day Jobo bills reached 40% per annum. In contrast, according to the BSP,
in the first two (2) months of 2012 the bank lending rates averaged 5.91%, which implies that the banks
prime lending rates were lower; moreover, deposit interests on savings and long-term deposits have also
gone very low, averaging 1.75% and 1.62%, respectively. 31
Judging from the most recent auctions of T-bills, the savings rates must be approaching 0%.1wphi1 In the
auctions held on November 12, 2012, the rates of 3-month, 6-month and 1-year T-bills have dropped to
0.150%, 0.450% and 0.680%, respectively. 32 According to Manila Bulletin, this very low interest regime has
been attributed to "high liquidity and strong investor demand amid positive economic indicators of the
country."33
While the Court acknowledges that cases of transcendental importance demand that they be settled
promptly and definitely, brushing aside, if we must, technicalities of procedure, 34 the delay of at least 15
years in the filing of the instant petition has actually rendered moot and academic the issues it now raises.
For its part, BSP-MB maintains that the petitioners allegations of constitutional and statutory violations of
CB Circular No. 905 are really mere challenges made by petitioners concerning the wisdom of the Circular.
It explains that it was in view of the global economic downturn in the early 1980s that the executive
department through the CB-MB had to formulate policies to achieve economic recovery, and among these
policies was the establishment of a market-oriented interest rate structure which would require the
removal of the government-imposed interest rate ceilings.35
D. The CB-MB merely suspended the effectivity of the Usury Law when it issued CB Circular No. 905.
The power of the CB to effectively suspend the Usury Law pursuant to P.D. No. 1684 has long been
recognized and upheld in many cases. As the Court explained in the landmark case of Medel v. CA, 36 citing
several cases, CB Circular No. 905 "did not repeal nor in anyway amend the Usury Law but simply
suspended the latters effectivity;"37 that "a CB Circular cannot repeal a law, [for] only a law can repeal
another law;"38 that "by virtue of CB Circular No. 905, the Usury Law has been rendered ineffective;" 39 and
"Usury has been legally non-existent in our jurisdiction. Interest can now be charged as lender and
borrower may agree upon."40
In First Metro Investment Corp. v. Este Del Sol Mountain Reserve, Inc. 41 cited in DBP v. Perez,42 we also
belied the contention that the CB was engaged in self-legislation. Thus:
Central Bank Circular No. 905 did not repeal nor in any way amend the Usury Law but simply suspended
the latters effectivity. The illegality of usury is wholly the creature of legislation. A Central Bank Circular
cannot repeal a law. Only a law can repeal another law. x x x. 43
In PNB v. Court of Appeals,44 an escalation clause in a loan agreement authorized the PNB to unilaterally
increase the rate of interest to 25% per annum, plus a penalty of 6% per annum on past dues, then to 30%

on October 15, 1984, and to 42% on October 25, 1984. The Supreme Court invalidated the rate increases
made by the PNB and upheld the 12% interest imposed by the CA, in this wise:
P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate freely regarding
any subsequent adjustment in the interest rate that shall accrue on a loan or forbearance of money, goods
or credits. In fine, they can agree to adjust, upward or downward, the interest previously stipulated. x x x. 45
Thus, according to the Court, by lifting the interest ceiling, CB Circular No. 905 merely upheld the parties
freedom of contract to agree freely on the rate of interest. It cited Article 1306 of the New Civil Code,
under which the contracting parties may establish such stipulations, clauses, terms and conditions as they
may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public
policy.
E. The BSP-MB has authority to enforce CB Circular No. 905.
Section 1 of CB Circular No. 905 provides that "The rate of interest, including commissions, premiums, fees
and other charges, on a loan or forbearance of any money, goods, or credits, regardless of maturity and
whether secured or unsecured, that may be charged or collected by any person, whether natural or
juridical, shall not be subject to any ceiling prescribed under or pursuant to the Usury Law, as amended." It
does not purport to suspend the Usury Law only as it applies to banks, but to all lenders.
Petitioners contend that, granting that the CB had power to "suspend" the Usury Law, the new BSP-MB did
not retain this power of its predecessor, in view of Section 135 of R.A. No. 7653, which expressly repealed
R.A. No. 265. The petitioners point out that R.A. No. 7653 did not reenact a provision similar to Section 109
of R.A. No. 265.
A closer perusal shows that Section 109 of R.A. No. 265 covered only loans extended by banks, whereas
under Section 1-a of the Usury Law, as amended, the BSP-MB may prescribe the maximum rate or rates of
interest for all loans or renewals thereof or the forbearance of any money, goods or credits, including those
for loans of low priority such as consumer loans, as well as such loans made by pawnshops, finance
companies and similar credit institutions. It even authorizes the BSP-MB to prescribe different maximum
rate or rates for different types of borrowings, including deposits and deposit substitutes, or loans of
financial intermediaries.
Act No. 2655, an earlier law, is much broader in scope, whereas R.A. No. 265, now R.A. No. 7653, merely
supplemented it as it concerns loans by banks and other financial institutions. Had R.A. No. 7653 been
intended to repeal Section 1-a of Act No. 2655, it would have so stated in unequivocal terms.
Moreover, the rule is settled that repeals by implication are not favored, because laws are presumed to be
passed with deliberation and full knowledge of all laws existing pertaining to the subject. 46 An implied
repeal is predicated upon the condition that a substantial conflict or repugnancy is found between the new
and prior laws. Thus, in the absence of an express repeal, a subsequent law cannot be construed as
repealing a prior law unless an irreconcilable inconsistency and repugnancy exists in the terms of the new
and old laws.47 We find no such conflict between the provisions of Act 2655 and R.A. No. 7653.
F. The lifting of the ceilings for interest rates does not authorize stipulations charging excessive,
unconscionable, and iniquitous interest.
It is settled that nothing in CB Circular No. 905 grants lenders a carte blanche authority to raise interest
rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets. 48 As held
in Castro v. Tan:49
The imposition of an unconscionable rate of interest on a money debt, even if knowingly and voluntarily
assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an iniquitous deprivation of
property, repulsive to the common sense of man. It has no support in law, in principles of justice, or in the
human conscience nor is there any reason whatsoever which may justify such imposition as righteous and
as one that may be sustained within the sphere of public or private morals. 50
Stipulations authorizing iniquitous or unconscionable interests have been invariably struck down for being
contrary to morals, if not against the law. 51 Indeed, under Article 1409 of the Civil Code, these contracts
are deemed inexistent and void ab initio, and therefore cannot be ratified, nor may the right to set up their
illegality as a defense be waived.
Nonetheless, the nullity of the stipulation of usurious interest does not affect the lenders right to recover
the principal of a loan, nor affect the other terms thereof. 52 Thus, in a usurious loan with mortgage, the
right to foreclose the mortgage subsists, and this right can be exercised by the creditor upon failure by the
debtor to pay the debt due. The debt due is considered as without the stipulated excessive interest, and a
legal interest of 12% per annum will be added in place of the excessive interest formerly
imposed,53following the guidelines laid down in the landmark case of Eastern Shipping Lines, Inc. v. Court
of Appeals,54 regarding the manner of computing legal interest:

II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the
rate of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded.
In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article
1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on
the amount of damages awarded may be imposed at the discretion of the court at the rate of 6%
per annum. No interest, however, shall be adjudged on unliquidated claims or damages except
when or until the demand can be established with reasonable certainty. Accordingly, where the
demand is established with reasonable certainty, the interest shall begin to run from the time the
claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be
so reasonably established at the time the demand is made, the interest shall begin to run only from
the date the judgment of the court is made (at which time the quantification of damages may be
deemed to have been reasonably ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate
of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per
annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.55 (Citations omitted)
The foregoing rules were further clarified in Sunga-Chan v. Court of Appeals,

56

as follows:

Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest, if proper, and the
applicable rate, as follows: The 12% per annum rate under CB Circular No. 416 shall apply only to loans or
forbearance of 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." 57
(Citations omitted)
WHEREFORE, premises considered, the Petition for certiorari is DISMISSED.
SO ORDERED.
BANK OF THE PHILIPPINE ISLANDS, petitioner,
vs.
THE INTERMEDIATE APPELLATE COURT and ZSHORNACK respondents.
Pacis & Reyes Law Office for petitioner.
Ernesto T. Zshornack, Jr. for private respondent.

CORTES, J.:
The original parties to this case were Rizaldy T. Zshornack and the Commercial Bank and Trust Company of
the Philippines [hereafter referred to as "COMTRUST."] In 1980, the Bank of the Philippine Islands (hereafter
referred to as BPI absorbed COMTRUST through a corporate merger, and was substituted as party to the
case.
Rizaldy Zshornack initiated proceedings on June 28,1976 by filing in the Court of First Instance of Rizal
Caloocan City a complaint against COMTRUST alleging four causes of action. Except for the third cause of
action, the CFI ruled in favor of Zshornack. The bank appealed to the Intermediate Appellate Court which
modified the CFI decision absolving the bank from liability on the fourth cause of action. The pertinent
portions of the judgment, as modified, read:
IN VIEW OF THE FOREGOING, the Court renders judgment as follows:
1. Ordering the defendant COMTRUST to restore to the dollar savings account of plaintiff (No.
25-4109) the amount of U.S $1,000.00 as of October 27, 1975 to earn interest together with

the remaining balance of the said account at the rate fixed by the bank for dollar deposits
under Central Bank Circular 343;
2. Ordering defendant COMTRUST to return to the plaintiff the amount of U.S. $3,000.00
immediately upon the finality of this decision, without interest for the reason that the said
amount was merely held in custody for safekeeping, but was not actually deposited with the
defendant COMTRUST because being cash currency, it cannot by law be deposited with
plaintiffs dollar account and defendant's only obligation is to return the same to plaintiff
upon demand;
xxx xxx xxx
5. Ordering defendant COMTRUST to pay plaintiff in the amount of P8,000.00 as damages in
the concept of litigation expenses and attorney's fees suffered by plaintiff as a result of the
failure of the defendant bank to restore to his (plaintiffs) account the amount of U.S.
$1,000.00 and to return to him (plaintiff) the U.S. $3,000.00 cash left for safekeeping.
Costs against defendant COMTRUST.
SO ORDERED. [Rollo, pp. 47-48.]
Undaunted, the bank comes to this Court praying that it be totally absolved from any liability to Zshornack.
The latter not having appealed the Court of Appeals decision, the issues facing this Court are limited to the
bank's liability with regard to the first and second causes of action and its liability for damages.
1. We first consider the first cause of action, On the dates material to this case, Rizaldy Zshornack and his
wife, Shirley Gorospe, maintained in COMTRUST, Quezon City Branch, a dollar savings account and a peso
current account.
On October 27, 1975, an application for a dollar draft was accomplished by Virgilio V. Garcia, Assistant
Branch Manager of COMTRUST Quezon City, payable to a certain Leovigilda D. Dizon in the amount of
$1,000.00. In the application, Garcia indicated that the amount was to be charged to Dollar Savings Acct.
No. 25-4109, the savings account of the Zshornacks; the charges for commission, documentary stamp tax
and others totalling P17.46 were to be charged to Current Acct. No. 210465-29, again, the current account
of the Zshornacks. There was no indication of the name of the purchaser of the dollar draft.
On the same date, October 27,1975, COMTRUST, under the signature of Virgilio V. Garcia, issued a check
payable to the order of Leovigilda D. Dizon in the sum of US $1,000 drawn on the Chase Manhattan Bank,
New York, with an indication that it was to be charged to Dollar Savings Acct. No. 25-4109.
When Zshornack noticed the withdrawal of US$1,000.00 from his account, he demanded an explanation
from the bank. In answer, COMTRUST claimed that the peso value of the withdrawal was given to Atty.
Ernesto Zshornack, Jr., brother of Rizaldy, on October 27, 1975 when he (Ernesto) encashed with
COMTRUST a cashier's check for P8,450.00 issued by the Manila Banking Corporation payable to Ernesto.
Upon consideration of the foregoing facts, this Court finds no reason to disturb the ruling of both the trial
court and the Appellate Court on the first cause of action. Petitioner must be held liable for the
unauthorized withdrawal of US$1,000.00 from private respondent's dollar account.
In its desperate attempt to justify its act of withdrawing from its depositor's savings account, the bank has
adopted inconsistent theories. First, it still maintains that the peso value of the amount withdrawn was
given to Atty. Ernesto Zshornack, Jr. when the latter encashed the Manilabank Cashier's Check. At the same
time, the bank claims that the withdrawal was made pursuant to an agreement where Zshornack allegedly
authorized the bank to withdraw from his dollar savings account such amount which, when converted to
pesos, would be needed to fund his peso current account. If indeed the peso equivalent of the amount
withdrawn from the dollar account was credited to the peso current account, why did the bank still have to
pay Ernesto?
At any rate, both explanations are unavailing. With regard to the first explanation, petitioner bank has not
shown how the transaction involving the cashier's check is related to the transaction involving the dollar
draft in favor of Dizon financed by the withdrawal from Rizaldy's dollar account. The two transactions
appear entirely independent of each other. Moreover, Ernesto Zshornack, Jr., possesses a personality
distinct and separate from Rizaldy Zshornack. Payment made to Ernesto cannot be considered payment to
Rizaldy.
As to the second explanation, even if we assume that there was such an agreement, the evidence do not
show that the withdrawal was made pursuant to it. Instead, the record reveals that the amount withdrawn
was used to finance a dollar draft in favor of Leovigilda D. Dizon, and not to fund the current account of the
Zshornacks. There is no proof whatsoever that peso Current Account No. 210-465-29 was ever credited
with the peso equivalent of the US$1,000.00 withdrawn on October 27, 1975 from Dollar Savings Account
No. 25-4109.

2. As for the second cause of action, the complaint filed with the trial court alleged that on December 8,
1975, Zshornack entrusted to COMTRUST, thru Garcia, US $3,000.00 cash (popularly known as
greenbacks) for safekeeping, and that the agreement was embodied in a document, a copy of which was
attached to and made part of the complaint. The document reads:
Makati Cable Address:
Philippines "COMTRUST"
COMMERCIAL BANK AND TRUST COMPANY
of the Philippines
Quezon City Branch
Decem
ber 8,
1975
MR. RIZALDY T. ZSHORNACK
&/OR MRS SHIRLEY E. ZSHORNACK
Sir/Madam:
We acknowledged (sic) having received from you today the sum of US
DOLLARS: THREE THOUSAND ONLY (US$3,000.00) for safekeeping.
Received by:
(Sgd.) VIRGILIO V.
GARCIA
It was also alleged in the complaint that despite demands, the bank refused to return the money.
In its answer, COMTRUST averred that the US$3,000 was credited to Zshornack's peso current account at
prevailing conversion rates.
It must be emphasized that COMTRUST did not deny specifically under oath the authenticity and due
execution of the above instrument.
During trial, it was established that on December 8, 1975 Zshornack indeed delivered to the bank US
$3,000 for safekeeping. When he requested the return of the money on May 10, 1976, COMTRUST
explained that the sum was disposed of in this manner: US$2,000.00 was sold on December 29, 1975 and
the peso proceeds amounting to P14,920.00 were deposited to Zshornack's current account per deposit
slip accomplished by Garcia; the remaining US$1,000.00 was sold on February 3, 1976 and the peso
proceeds amounting to P8,350.00 were deposited to his current account per deposit slip also accomplished
by Garcia.
Aside from asserting that the US$3,000.00 was properly credited to Zshornack's current account at
prevailing conversion rates, BPI now posits another ground to defeat private respondent's claim. It now
argues that the contract embodied in the document is the contract of depositum (as defined in Article
1962, New Civil Code), which banks do not enter into. The bank alleges that Garcia exceeded his powers
when he entered into the transaction. Hence, it is claimed, the bank cannot be liable under the contract,
and the obligation is purely personal to Garcia.
Before we go into the nature of the contract entered into, an important point which arises on the
pleadings, must be considered.
The second cause of action is based on a document purporting to be signed by COMTRUST, a copy of
which document was attached to the complaint. In short, the second cause of action was based on an
actionable document. It was therefore incumbent upon the bank to specifically deny under oath the due
execution of the document, as prescribed under Rule 8, Section 8, if it desired: (1) to question the authority
of Garcia to bind the corporation; and (2) to deny its capacity to enter into such contract. [See, E.B.
Merchant v. International Banking Corporation, 6 Phil. 314 (1906).] No sworn answer denying the due
execution of the document in question, or questioning the authority of Garcia to bind the bank, or denying
the bank's capacity to enter into the contract, was ever filed. Hence, the bank is deemed to have admitted
not only Garcia's authority, but also the bank's power, to enter into the contract in question.
In the past, this Court had occasion to explain the reason behind this procedural requirement.

The reason for the rule enunciated in the foregoing authorities will, we think, be readily
appreciated. In dealing with corporations the public at large is bound to rely to a large extent
upon outward appearances. If a man is found acting for a corporation with the external
indicia of authority, any person, not having notice of want of authority, may usually rely
upon those appearances; and if it be found that the directors had permitted the agent to
exercise that authority and thereby held him out as a person competent to bind the
corporation, or had acquiesced in a contract and retained the benefit supposed to have been
conferred by it, the corporation will be bound, notwithstanding the actual authority may
never have been granted
... Whether a particular officer actually possesses the authority which he assumes to
exercise is frequently known to very few, and the proof of it usually is not readily accessible
to the stranger who deals with the corporation on the faith of the ostensible authority
exercised by some of the corporate officers. It is therefore reasonable, in a case where an
officer of a corporation has made a contract in its name, that the corporation should be
required, if it denies his authority, to state such defense in its answer. By this means the
plaintiff is apprised of the fact that the agent's authority is contested; and he is given an
opportunity to adduce evidence showing either that the authority existed or that the
contract was ratified and approved. [Ramirez v. Orientalist Co. and Fernandez, 38 Phil. 634,
645- 646 (1918).]
Petitioner's argument must also be rejected for another reason. The practical effect of absolving a
corporation from liability every time an officer enters into a contract which is beyond corporate powers,
even without the proper allegation or proof that the corporation has not authorized nor ratified the officer's
act, is to cast corporations in so perfect a mold that transgressions and wrongs by such artificial beings
become impossible [Bissell v. Michigan Southern and N.I.R. Cos 22 N.Y 258 (1860).] "To say that a
corporation has no right to do unauthorized acts is only to put forth a very plain truism but to say that such
bodies have no power or capacity to err is to impute to them an excellence which does not belong to any
created existence with which we are acquainted. The distinction between power and right is no more to be
lost sight of in respect to artificial than in respect to natural persons." [Ibid.]
Having determined that Garcia's act of entering into the contract binds the corporation, we now determine
the correct nature of the contract, and its legal consequences, including its enforceability.
The document which embodies the contract states that the US$3,000.00 was received by the bank for
safekeeping. The subsequent acts of the parties also show that the intent of the parties was really for the
bank to safely keep the dollars and to return it to Zshornack at a later time, Thus, Zshornack demanded
the return of the money on May 10, 1976, or over five months later.
The above arrangement is that contract defined under Article 1962, New Civil Code, which reads:
Art. 1962. A deposit is constituted from the moment a person receives a thing belonging to
another, with the obligation of safely keeping it and of returning the same. If the safekeeping
of the thing delivered is not the principal purpose of the contract, there is no deposit but
some other contract.
Note that the object of the contract between Zshornack and COMTRUST was foreign exchange. Hence, the
transaction was covered by Central Bank Circular No. 20, Restrictions on Gold and Foreign Exchange
Transactions, promulgated on December 9, 1949, which was in force at the time the parties entered into
the transaction involved in this case. The circular provides:
xxx xxx xxx
2. Transactions in the assets described below and all dealings in them of whatever nature,
including, where applicable their exportation and importation, shall NOT be effected, except
with respect to deposit accounts included in sub-paragraphs (b) and (c) of this paragraph,
when such deposit accounts are owned by and in the name of, banks.
(a) Any and all assets, provided they are held through, in, or with banks or
banking institutions located in the Philippines, including money, checks,
drafts, bullions bank drafts, deposit accounts (demand, time and savings), all
debts, indebtedness or obligations, financial brokers and investment houses,
notes, debentures, stocks, bonds, coupons, bank acceptances, mortgages,
pledges, liens or other rights in the nature of security, expressed in foreign
currencies, or if payable abroad, irrespective of the currency in which they are
expressed, and belonging to any person, firm, partnership, association, branch
office, agency, company or other unincorporated body or corporation residing
or located within the Philippines;
(b) Any and all assets of the kinds included and/or described in subparagraph
(a) above, whether or not held through, in, or with banks or banking

institutions, and existent within the Philippines, which belong to any person,
firm, partnership, association, branch office, agency, company or other
unincorporated body or corporation not residing or located within the
Philippines;
(c) Any and all assets existent within the Philippines including money, checks,
drafts, bullions, bank drafts, all debts, indebtedness or obligations, financial
securities commonly dealt in by bankers, brokers and investment houses,
notes, debentures, stock, bonds, coupons, bank acceptances, mortgages,
pledges, liens or other rights in the nature of security expressed in foreign
currencies, or if payable abroad, irrespective of the currency in which they are
expressed, and belonging to any person, firm, partnership, association, branch
office, agency, company or other unincorporated body or corporation residing
or located within the Philippines.
xxx xxx xxx
4. (a) All receipts of foreign exchange shall be sold daily to the Central Bank by those
authorized to deal in foreign exchange. All receipts of foreign exchange by any person, firm,
partnership, association, branch office, agency, company or other unincorporated body or
corporation shall be sold to the authorized agents of the Central Bank by the recipients
within one business day following the receipt of such foreign exchange. Any person, firm,
partnership, association, branch office, agency, company or other unincorporated body or
corporation, residing or located within the Philippines, who acquires on and after the date of
this Circular foreign exchange shall not, unless licensed by the Central Bank, dispose of such
foreign exchange in whole or in part, nor receive less than its full value, nor delay taking
ownership thereof except as such delay is customary; Provided, further, That within one day
upon taking ownership, or receiving payment, of foreign exchange the aforementioned
persons and entities shall sell such foreign exchange to designated agents of the Central
Bank.
xxx xxx xxx
8. Strict observance of the provisions of this Circular is enjoined; and any person, firm or
corporation, foreign or domestic, who being bound to the observance thereof, or of such
other rules, regulations or directives as may hereafter be issued in implementation of this
Circular, shall fail or refuse to comply with, or abide by, or shall violate the same, shall be
subject to the penal sanctions provided in the Central Bank Act.
xxx xxx xxx
Paragraph 4 (a) above was modified by Section 6 of Central Bank Circular No. 281, Regulations on Foreign
Exchange, promulgated on November 26, 1969 by limiting its coverage to Philippine residents only. Section
6 provides:
SEC. 6. All receipts of foreign exchange by any resident person, firm, company or
corporation shall be sold to authorized agents of the Central Bank by the recipients within
one business day following the receipt of such foreign exchange. Any resident person, firm,
company or corporation residing or located within the Philippines, who acquires foreign
exchange shall not, unless authorized by the Central Bank, dispose of such foreign exchange
in whole or in part, nor receive less than its full value, nor delay taking ownership thereof
except as such delay is customary; Provided, That, within one business day upon taking
ownership or receiving payment of foreign exchange the aforementioned persons and
entities shall sell such foreign exchange to the authorized agents of the Central Bank.
As earlier stated, the document and the subsequent acts of the parties show that they intended the bank
to safekeep the foreign exchange, and return it later to Zshornack, who alleged in his complaint that he is
a Philippine resident. The parties did not intended to sell the US dollars to the Central Bank within one
business day from receipt. Otherwise, the contract of depositum would never have been entered into at all.
Since the mere safekeeping of the greenbacks, without selling them to the Central Bank within one
business day from receipt, is a transaction which is not authorized by CB Circular No. 20, it must be
considered as one which falls under the general class of prohibited transactions. Hence, pursuant to Article
5 of the Civil Code, it is void, having been executed against the provisions of a mandatory/prohibitory law.
More importantly, it affords neither of the parties a cause of action against the other. "When the nullity
proceeds from the illegality of the cause or object of the contract, and the act constitutes a criminal
offense, both parties being in pari delicto, they shall have no cause of action against each other. . ." [Art.
1411, New Civil Code.] The only remedy is one on behalf of the State to prosecute the parties for violating
the law.
We thus rule that Zshornack cannot recover under the second cause of action.

3. Lastly, we find the P8,000.00 awarded by the courts a quo as damages in the concept of litigation
expenses and attorney's fees to be reasonable. The award is sustained.
WHEREFORE, the decision appealed from is hereby MODIFIED. Petitioner is ordered to restore to the dollar
savings account of private respondent the amount of US$1,000.00 as of October 27, 1975 to earn interest
at the rate fixed by the bank for dollar savings deposits. Petitioner is further ordered to pay private
respondent the amount of P8,000.00 as damages. The other causes of action of private respondent are
ordered dismissed.
SO ORDERED.
[G.R. No. 160544. February 21, 2005]
TRIPLE-V vs. FILIPINO MERCHANTS
THIRD DIVISION
Gentlemen:
Quoted hereunder, for your information, is a resolution of this Court dated FEB 21 2005.
G.R. No. 160544 (Triple-V Food Services, Inc. vs. Filipino Merchants Insurance Company, Inc.)
Assailed in this petition for review on certiorari is the decision[1] dated October 21, 2003 of the Court of
Appeals in CA-G.R. CV No. 71223, affirming an earlier decision of the Regional Trial Court at Makati City,
Branch 148, in its Civil Case No. 98-838, an action for damages thereat filed by respondent Filipino
Merchants Insurance, Company, Inc., against the herein petitioner, Triple-V Food Services, Inc.
On March 2, 1997, at around 2:15 o'clock in the afternoon, a certain Mary Jo-Anne De Asis (De Asis) dined
at petitioner's Kamayan Restaurant at 15 West Avenue, Quezon City. De Asis was using a Mitsubishi Galant
Super Saloon Model 1995 with plate number UBU 955, assigned to her by her employer Crispa Textile Inc.
(Crispa). On said date, De Asis availed of the valet parking service of petitioner and entrusted her car key
to petitioner's valet counter. A corresponding parking ticket was issued as receipt for the car. The car was
then parked by petitioner's valet attendant, a certain Madridano, at the designated parking area. Few
minutes later, Madridano noticed that the car was not in its parking slot and its key no longer in the box
where valet attendants usually keep the keys of cars entrusted to them. The car was never recovered.
Thereafter, Crispa filed a claim against its insurer, herein respondent Filipino Merchants Insurance
Company, Inc. (FMICI). Having indemnified Crispa in the amount of P669.500 for the loss of the subject
vehicle, FMICI, as subrogee to Crispa's rights, filed with the RTC at Makati City an action for damages
against petitioner Triple-V Food Services, Inc., thereat docketed as Civil Case No. 98-838 which was raffled
to Branch 148.
In its answer, petitioner argued that the complaint failed to aver facts to support the allegations of
recklessness and negligence committed in the safekeeping and custody of the subject vehicle, claiming
that it and its employees wasted no time in ascertaining the loss of the car and in informing De Asis of the
discovery of the loss. Petitioner further argued that in accepting the complimentary valet parking service,
De Asis received a parking ticket whereunder it is so provided that "[Management and staff will not be
responsible for any loss of or damage incurred on the vehicle nor of valuables contained therein", a
provision which, to petitioner's mind, is an explicit waiver of any right to claim indemnity for the loss of the
car; and that De Asis knowingly assumed the risk of loss when she allowed petitioner to park her vehicle,
adding that its valet parking service did not include extending a contract of insurance or warranty for the
loss of the vehicle.
During trial, petitioner challenged FMICI's subrogation to Crispa's right to file a claim for the loss of the car,
arguing that theft is not a risk insured against under FMICI's Insurance Policy No. PC-5975 for the subject
vehicle.
In a decision dated June 22, 2001, the trial court rendered judgment for respondent FMICI, thus:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff (FMICI) and
against the defendant Triple V (herein petitioner) and the latter is hereby ordered to pay plaintiff the
following:
1. The amount of P669,500.00, representing actual damages plus compounded (sic);
2. The amount of P30,000.00 as acceptance fee plus the amount equal to 25% of the total amount due as
attorney's fees;
3. The amount of P50,000.00 as exemplary damages;
4. Plus, cost of suit.

Defendant Triple V is not therefore precluded from taking appropriate action against defendant Armando
Madridano.
SO ORDERED.
Obviously displeased, petitioner appealed to the Court of Appeals reiterating its argument that it was not a
depositary of the subject car and that it exercised due diligence and prudence in the safe keeping of the
vehicle, in handling the car-napping incident and in the supervision of its employees. It further argued that
there was no valid subrogation of rights between Crispa and respondent FMICI.
In a decision dated October 21, 2003,[2] the Court of Appeals dismissed petitioner's appeal and affirmed
the appealed decision of the trial court, thus:
WHEREFORE, based on the foregoing premises, the instant appeal is hereby DISMISSED. Accordingly, the
assailed June 22, 2001 Decision of the RTC of Makati City - Branch 148 in Civil Case No. 98-838 is
AFFIRMED.
SO ORDERED.
In so dismissing the appeal and affirming the appealed decision, the appellate court agreed with the
findings and conclusions of the trial court that: (a) petitioner was a depositary of the subject vehicle; (b)
petitioner was negligent in its duties as a depositary thereof and as an employer of the valet attendant;
and (c) there was a valid subrogation of rights between Crispa and respondent FMICI.
Hence, petitioner's present recourse.
We agree with the two (2) courts below.
When De Asis entrusted the car in question to petitioners valet attendant while eating at petitioner's
Kamayan Restaurant, the former expected the car's safe return at the end of her meal. Thus, petitioner
was constituted as a depositary of the same car. Petitioner cannot evade liability by arguing that neither a
contract of deposit nor that of insurance, guaranty or surety for the loss of the car was constituted when
De Asis availed of its free valet parking service.
In a contract of deposit, a person receives an object belonging to another with the obligation of safely
keeping it and returning the same.[3] A deposit may be constituted even without any consideration. It is
not necessary that the depositary receives a fee before it becomes obligated to keep the item entrusted
for safekeeping and to return it later to the depositor.
Specious is petitioner's insistence that the valet parking claim stub it issued to De Asis contains a clear
exclusion of its liability and operates as an explicit waiver by the customer of any right to claim indemnity
for any loss of or damage to the vehicle.
The parking claim stub embodying the terms and conditions of the parking, including that of relieving
petitioner from any loss or damage to the car, is essentially a contract of adhesion, drafted and prepared
as it is by the petitioner alone with no participation whatsoever on the part of the customers, like De Asis,
who merely adheres to the printed stipulations therein appearing. While contracts of adhesion are not void
in themselves, yet this Court will not hesitate to rule out blind adherence thereto if they prove to be onesided under the attendant facts and circumstances.[4]
Hence, and as aptly pointed out by the Court of Appeals, petitioner must not be allowed to use its parking
claim stub's exclusionary stipulation as a shield from any responsibility for any loss or damage to vehicles
or to the valuables contained therein. Here, it is evident that De Asis deposited the car in question with the
petitioner as part of the latter's enticement for customers by providing them a safe parking space within
the vicinity of its restaurant. In a very real sense, a safe parking space is an added attraction to petitioner's
restaurant business because customers are thereby somehow assured that their vehicle are safely kept,
rather than parking them elsewhere at their own risk. Having entrusted the subject car to petitioner's valet
attendant, customer De Asis, like all of petitioner's customers, fully expects the security of her car while at
petitioner's premises/designated parking areas and its safe return at the end of her visit at petitioner's
restaurant.
Petitioner's argument that there was no valid subrogation of rights between Crispa and FMICI because theft
was not a risk insured against under FMICI's Insurance Policy No. PC-5975 holds no water.
Insurance Policy No. PC-5975 which respondent FMICI issued to Crispa contains, among others things, the
following item: "Insured's Estimate of Value of Scheduled Vehicle- P800.000".[5] On the basis of such item,
the trial court concluded that the coverage includes a full comprehensive insurance of the vehicle in case
of damage or loss. Besides, Crispa paid a premium of P10,304 to cover theft. This is clearly shown in the
breakdown of premiums in the same policy.[6] Thus, having indemnified CRISPA for the stolen car, FMICI, as
correctly ruled by the trial court and the Court of Appeals, was properly subrogated to Crispa's rights
against petitioner, pursuant to Article 2207 of the New Civil Code[7].

Anent the trial court's findings of negligence on the part of the petitioner, which findings were affirmed by
the appellate court, we have consistently ruled that findings of facts of trial courts, more so when affirmed,
as here, by the Court of Appeals, are conclusive on this Court unless the trial court itself ignored,
overlooked or misconstrued facts and circumstances which, if considered, warrant a reversal of the
outcome of the case.[8] This is not so in the case at bar. For, we have ourselves reviewed the records and
find no justification to deviate from the trial court's findings.
WHEREFORE, petition is hereby DENIED DUE COURSE.
SO ORDERED.
CA AGRO-INDUSTRIAL DEVELOPMENT CORP., petitioner,
vs.
THE HONORABLE COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents.
Dolorfino & Dominguez Law Offices for petitioner.
Danilo B. Banares for private respondent.

DAVIDE, JR., J.:


Is the contractual relation between a commercial bank and another party in a contract of rent of a safety
deposit box with respect to its contents placed by the latter one of bailor and bailee or one of lessor and
lessee?
This is the crux of the present controversy.
On 3 July 1979, petitioner (through its President, Sergio Aguirre) and the spouses Ramon and Paula Pugao
entered into an agreement whereby the former purchased from the latter two (2) parcels of land for a
consideration of P350,625.00. Of this amount, P75,725.00 was paid as downpayment while the balance
was covered by three (3) postdated checks. Among the terms and conditions of the agreement embodied
in a Memorandum of True and Actual Agreement of Sale of Land were that the titles to the lots shall be
transferred to the petitioner upon full payment of the purchase price and that the owner's copies of the
certificates of titles thereto, Transfer Certificates of Title (TCT) Nos. 284655 and 292434, shall be deposited
in a safety deposit box of any bank. The same could be withdrawn only upon the joint signatures of a
representative of the petitioner and the Pugaos upon full payment of the purchase price. Petitioner,
through Sergio Aguirre, and the Pugaos then rented Safety Deposit Box No. 1448 of private respondent
Security Bank and Trust Company, a domestic banking corporation hereinafter referred to as the
respondent Bank. For this purpose, both signed a contract of lease (Exhibit "2") which contains, inter alia,
the following conditions:
13. The bank is not a depositary of the contents of the safe and it has neither the possession
nor control of the same.
14. The bank has no interest whatsoever in said contents, except herein expressly provided,
and it assumes absolutely no liability in connection therewith. 1
After the execution of the contract, two (2) renter's keys were given to the renters one to Aguirre (for
the petitioner) and the other to the Pugaos. A guard key remained in the possession of the respondent
Bank. The safety deposit box has two (2) keyholes, one for the guard key and the other for the renter's
key, and can be opened only with the use of both keys. Petitioner claims that the certificates of title were
placed inside the said box.
Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner the two (2) lots at a price of
P225.00 per square meter which, as petitioner alleged in its complaint, translates to a profit of P100.00 per
square meter or a total of P280,500.00 for the entire property. Mrs. Ramos demanded the execution of a
deed of sale which necessarily entailed the production of the certificates of title. In view thereof, Aguirre,
accompanied by the Pugaos, then proceeded to the respondent Bank on 4 October 1979 to open the safety
deposit box and get the certificates of title. However, when opened in the presence of the Bank's
representative, the box yielded no such certificates. Because of the delay in the reconstitution of the title,
Mrs. Ramos withdrew her earlier offer to purchase the lots; as a consequence thereof, the petitioner
allegedly failed to realize the expected profit of P280,500.00. Hence, the latter filed on 1 September 1980
a complaint 2 for damages against the respondent Bank with the Court of First Instance (now Regional Trial
Court) of Pasig, Metro Manila which docketed the same as Civil Case No. 38382.
In its Answer with Counterclaim, 3 respondent Bank alleged that the petitioner has no cause of action
because of paragraphs 13 and 14 of the contract of lease (Exhibit "2"); corollarily, loss of any of the items
or articles contained in the box could not give rise to an action against it. It then interposed a counterclaim

for exemplary damages as well as attorney's fees in the amount of P20,000.00. Petitioner subsequently
filed an answer to the counterclaim. 4
In due course, the trial court, now designated as Branch 161 of the Regional Trial Court (RTC) of Pasig,
Metro Manila, rendered a decision 5 adverse to the petitioner on 8 December 1986, the dispositive portion
of which reads:
WHEREFORE, premises considered, judgment is hereby rendered dismissing plaintiff's
complaint.
On defendant's counterclaim, judgment is hereby rendered ordering plaintiff to pay
defendant the amount of FIVE THOUSAND (P5,000.00) PESOS as attorney's fees.
With costs against plaintiff. 6
The unfavorable verdict is based on the trial court's conclusion that under paragraphs 13 and 14 of the
contract of lease, the Bank has no liability for the loss of the certificates of title. The court declared that
the said provisions are binding on the parties.
Its motion for reconsideration 7 having been denied, petitioner appealed from the adverse decision to the
respondent Court of Appeals which docketed the appeal as CA-G.R. CV No. 15150. Petitioner urged the
respondent Court to reverse the challenged decision because the trial court erred in (a) absolving the
respondent Bank from liability from the loss, (b) not declaring as null and void, for being contrary to law,
public order and public policy, the provisions in the contract for lease of the safety deposit box absolving
the Bank from any liability for loss, (c) not concluding that in this jurisdiction, as well as under American
jurisprudence, the liability of the Bank is settled and (d) awarding attorney's fees to the Bank and denying
the petitioner's prayer for nominal and exemplary damages and attorney's fees. 8
In its Decision promulgated on 4 July 1989, 9 respondent Court affirmed the appealed decision principally
on the theory that the contract (Exhibit "2") executed by the petitioner and respondent Bank is in the
nature of a contract of lease by virtue of which the petitioner and its co-renter were given control over the
safety deposit box and its contents while the Bank retained no right to open the said box because it had
neither the possession nor control over it and its contents. As such, the contract is governed by Article
1643 of the Civil Code 10 which provides:
Art. 1643. In the lease of things, one of the parties binds himself to give to another the
enjoyment or use of a thing for a price certain, and for a period which may be definite or
indefinite. However, no lease for more than ninety-nine years shall be valid.
It invoked Tolentino vs. Gonzales 11 which held that the owner of the property loses his control
over the property leased during the period of the contract and Article 1975 of the Civil Code
which provides:
Art. 1975. The depositary holding certificates, bonds, securities or instruments which earn
interest shall be bound to collect the latter when it becomes due, and to take such steps as
may be necessary in order that the securities may preserve their value and the rights
corresponding to them according to law.
The above provision shall not apply to contracts for the rent of safety deposit boxes.
and then concluded that "[c]learly, the defendant-appellee is not under any duty to maintain the
contents of the box. The stipulation absolving the defendant-appellee from liability is in accordance
with the nature of the contract of lease and cannot be regarded as contrary to law, public order and
public policy." 12 The appellate court was quick to add, however, that under the contract of lease of
the safety deposit box, respondent Bank is not completely free from liability as it may still be made
answerable in case unauthorized persons enter into the vault area or when the rented box is forced
open. Thus, as expressly provided for in stipulation number 8 of the contract in question:
8. The Bank shall use due diligence that no unauthorized person shall be admitted to any
rented safe and beyond this, the Bank will not be responsible for the contents of any safe
rented from it. 13
Its motion for reconsideration 14 having been denied in the respondent Court's Resolution of 28 August
1989, 15 petitioner took this recourse under Rule 45 of the Rules of Court and urges Us to review and set
aside the respondent Court's ruling. Petitioner avers that both the respondent Court and the trial court (a)
did not properly and legally apply the correct law in this case, (b) acted with grave abuse of discretion or in
excess of jurisdiction amounting to lack thereof and (c) set a precedent that is contrary to, or is a
departure from precedents adhered to and affirmed by decisions of this Court and precepts in American
jurisprudence adopted in the Philippines. It reiterates the arguments it had raised in its motion to
reconsider the trial court's decision, the brief submitted to the respondent Court and the motion to
reconsider the latter's decision. In a nutshell, petitioner maintains that regardless of nomenclature, the

contract for the rent of the safety deposit box (Exhibit "2") is actually a contract of deposit governed by
Title XII, Book IV of the Civil Code of the
Philippines. 16 Accordingly, it is claimed that the respondent Bank is liable for the loss of the certificates of
title pursuant to Article 1972 of the said Code which provides:
Art. 1972. The depositary is obliged to keep the thing safely and to return it, when required,
to the depositor, or to his heirs and successors, or to the person who may have been
designated in the contract. His responsibility, with regard to the safekeeping and the loss of
the thing, shall be governed by the provisions of Title I of this Book.
If the deposit is gratuitous, this fact shall be taken into account in determining the degree of
care that the depositary must observe.
Petitioner then quotes a passage from American Jurisprudence
the prevailing rule in the United States, to wit:

17

which is supposed to expound on

The prevailing rule appears to be that where a safe-deposit company leases a safe-deposit
box or safe and the lessee takes possession of the box or safe and places therein his
securities or other valuables, the relation of bailee and bail or is created between the parties
to the transaction as to such securities or other valuables; the fact that the
safe-deposit company does not know, and that it is not expected that it shall know, the
character or description of the property which is deposited in such safe-deposit box or safe
does not change that relation. That access to the contents of the safe-deposit box can be
had only by the use of a key retained by the lessee ( whether it is the sole key or one to be
used in connection with one retained by the lessor) does not operate to alter the foregoing
rule. The argument that there is not, in such a case, a delivery of exclusive possession and
control to the deposit company, and that therefore the situation is entirely different from
that of ordinary bailment, has been generally rejected by the courts, usually on the ground
that as possession must be either in the depositor or in the company, it should reasonably
be considered as in the latter rather than in the former, since the company is, by the nature
of the contract, given absolute control of access to the property, and the depositor cannot
gain access thereto without the consent and active participation of the company. . . .
(citations omitted).
and a segment from Words and Phrases 18 which states that a contract for the rental of a bank
safety deposit box in consideration of a fixed amount at stated periods is a bailment for hire.
Petitioner further argues that conditions 13 and 14 of the questioned contract are contrary to law and
public policy and should be declared null and void. In support thereof, it cites Article 1306 of the Civil Code
which provides that parties to a contract 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.
After the respondent Bank filed its comment, this Court gave due course to the petition and required the
parties to simultaneously submit their respective Memoranda.
The petition is partly meritorious.
We agree with the petitioner's contention that the contract for the rent of the safety deposit box is not an
ordinary contract of lease as defined in Article 1643 of the Civil Code. However, We do not fully subscribe
to its view that the same is a contract of deposit that is to be strictly governed by the provisions in the Civil
Code on deposit; 19 the contract in the case at bar is a special kind of deposit. It cannot be characterized as
an ordinary contract of lease under Article 1643 because the full and absolute possession and control of
the safety deposit box was not given to the joint renters the petitioner and the Pugaos. The guard key of
the box remained with the respondent Bank; without this key, neither of the renters could open the box.
On the other hand, the respondent Bank could not likewise open the box without the renter's key. In this
case, the said key had a duplicate which was made so that both renters could have access to the box.
Hence, the authorities cited by the respondent Court 20 on this point do not apply. Neither could Article
1975, also relied upon by the respondent Court, be invoked as an argument against the deposit theory.
Obviously, the first paragraph of such provision cannot apply to a depositary of certificates, bonds,
securities or instruments which earn interest if such documents are kept in a rented safety deposit box. It
is clear that the depositary cannot open the box without the renter being present.
We observe, however, that the deposit theory itself does not altogether find unanimous support even in
American jurisprudence. We agree with the petitioner that under the latter, the prevailing rule is that the
relation between a bank renting out safe-deposit boxes and its customer with respect to the contents of
the box is that of a bail or and bailee, the bailment being for hire and mutual benefit. 21 This is just the
prevailing view because:

There is, however, some support for the view that the relationship in question might be more
properly characterized as that of landlord and tenant, or lessor and lessee. It has also been
suggested that it should be characterized as that of licensor and licensee. The relation
between a bank, safe-deposit company, or storage company, and the renter of a safedeposit box therein, is often described as contractual, express or implied, oral or written, in
whole or in part. But there is apparently no jurisdiction in which any rule other than that
applicable to bailments governs questions of the liability and rights of the parties in respect
of loss of the contents of safe-deposit boxes. 22 (citations omitted)
In the context of our laws which authorize banking institutions to rent out safety deposit boxes, it is clear
that in this jurisdiction, the prevailing rule in the United States has been adopted. Section 72 of the
General Banking Act 23 pertinently provides:
Sec. 72. In addition to the operations specifically authorized elsewhere in this Act, banking
institutions other than building and loan associations may perform the following services:
(a) Receive in custody funds, documents, and valuable objects, and rent
safety deposit boxes for the safeguarding of such effects.
xxx xxx xxx
The banks shall perform the services permitted under subsections (a), (b) and (c) of this
section as depositories or as agents. . . . 24 (emphasis supplied)
Note that the primary function is still found within the parameters of a contract of deposit, i.e., the
receiving in custody of funds, documents and other valuable objects for safekeeping. The renting out of the
safety deposit boxes is not independent from, but related to or in conjunction with, this principal function.
A contract of deposit may be entered into orally or in writing 25 and, pursuant to Article 1306 of the Civil
Code, the parties thereto 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. The
depositary's responsibility for the safekeeping of the objects deposited in the case at bar is governed by
Title I, Book IV of the Civil Code. Accordingly, the depositary would be liable if, in performing its obligation,
it is found guilty of fraud, negligence, delay or contravention of the tenor of the agreement. 26 In the
absence of any stipulation prescribing the degree of diligence required, that of a good father of a family is
to be observed. 27 Hence, any stipulation exempting the depositary from any liability arising from the loss
of the thing deposited on account of fraud, negligence or delay would be void for being contrary to law and
public policy. In the instant case, petitioner maintains that conditions 13 and 14 of the questioned contract
of lease of the safety deposit box, which read:
13. The bank is not a depositary of the contents of the safe and it has neither the possession
nor control of the same.
14. The bank has no interest whatsoever in said contents, except herein expressly provided,
and it assumes absolutely no liability in connection therewith. 28
are void as they are contrary to law and public policy. We find Ourselves in agreement with this
proposition for indeed, said provisions are inconsistent with the respondent Bank's responsibility as
a depositary under Section 72(a) of the General Banking Act. Both exempt the latter from any
liability except as contemplated in condition 8 thereof which limits its duty to exercise reasonable
diligence only with respect to who shall be admitted to any rented safe, to wit:
8. The Bank shall use due diligence that no unauthorized person shall be admitted to any
rented safe and beyond this, the Bank will not be responsible for the contents of any safe
rented from it. 29
Furthermore, condition 13 stands on a wrong premise and is contrary to the actual practice of the
Bank. It is not correct to assert that the Bank has neither the possession nor control of the contents
of the box since in fact, the safety deposit box itself is located in its premises and is under its
absolute control; moreover, the respondent Bank keeps the guard key to the said box. As stated
earlier, renters cannot open their respective boxes unless the Bank cooperates by presenting and
using this guard key. Clearly then, to the extent above stated, the foregoing conditions in the
contract in question are void and ineffective. It has been said:
With respect to property deposited in a safe-deposit box by a customer of a safe-deposit
company, the parties, since the relation is a contractual one, may by special contract define
their respective duties or provide for increasing or limiting the liability of the deposit
company, provided such contract is not in violation of law or public policy. It must clearly
appear that there actually was such a special contract, however, in order to vary the
ordinary obligations implied by law from the relationship of the parties; liability of the
deposit company will not be enlarged or restricted by words of doubtful meaning. The
company, in renting

safe-deposit boxes, cannot exempt itself from liability for loss of the contents by its own
fraud or negligence or that of its agents or servants, and if a provision of the contract may
be construed as an attempt to do so, it will be held ineffective for the purpose. Although it
has been held that the lessor of a safe-deposit box cannot limit its liability for loss of the
contents thereof through its own negligence, the view has been taken that such a lessor
may limits its liability to some extent by agreement or stipulation. 30 (citations omitted)
Thus, we reach the same conclusion which the Court of Appeals arrived at, that is, that the petition should
be dismissed, but on grounds quite different from those relied upon by the Court of Appeals. In the instant
case, the respondent Bank's exoneration cannot, contrary to the holding of the Court of Appeals, be based
on or proceed from a characterization of the impugned contract as a contract of lease, but rather on the
fact that no competent proof was presented to show that respondent Bank was aware of the agreement
between the petitioner and the Pugaos to the effect that the certificates of title were withdrawable from
the safety deposit box only upon both parties' joint signatures, and that no evidence was submitted to
reveal that the loss of the certificates of title was due to the fraud or negligence of the respondent Bank.
This in turn flows from this Court's determination that the contract involved was one of deposit. Since both
the petitioner and the Pugaos agreed that each should have one (1) renter's key, it was obvious that either
of them could ask the Bank for access to the safety deposit box and, with the use of such key and the
Bank's own guard key, could open the said box, without the other renter being present.
Since, however, the petitioner cannot be blamed for the filing of the complaint and no bad faith on its part
had been established, the trial court erred in condemning the petitioner to pay the respondent Bank
attorney's fees. To this extent, the Decision (dispositive portion) of public respondent Court of Appeals
must be modified.
WHEREFORE, the Petition for Review is partially GRANTED by deleting the award for attorney's fees from
the 4 July 1989 Decision of the respondent Court of Appeals in CA-G.R. CV No. 15150. As modified, and
subject to the pronouncement We made above on the nature of the relationship between the parties in a
contract of lease of safety deposit boxes, the dispositive portion of the said Decision is hereby AFFIRMED
and the instant Petition for Review is otherwise DENIED for lack of merit.
No pronouncement as to costs.
SO ORDERED.
THE ROMAN CATHOLIC BISHOP OF JARO, plaintiff-appellee,
vs.
GREGORIO DE LA PEA, administrator of the estate of Father Agustin de la Pea, defendantappellant.
J. Lopez Vito, for appellant.
Arroyo and Horrilleno, for appellee.

MORELAND, J.:
This is an appeal by the defendant from a judgment of the Court of First Instance of Iloilo, awarding to the
plaintiff the sum of P6,641, with interest at the legal rate from the beginning of the action.
It is established in this case that the plaintiff is the trustee of a charitable bequest made for the
construction of a leper hospital and that father Agustin de la Pea was the duly authorized representative
of the plaintiff to receive the legacy. The defendant is the administrator of the estate of Father De la Pea.
In the year 1898 the books Father De la Pea, as trustee, showed that he had on hand as such trustee the
sum of P6,641, collected by him for the charitable purposes aforesaid. In the same year he deposited in his
personal account P19,000 in the Hongkong and Shanghai Bank at Iloilo. Shortly thereafter and during the
war of the revolution, Father De la Pea was arrested by the military authorities as a political prisoner, and
while thus detained made an order on said bank in favor of the United States Army officer under whose
charge he then was for the sum thus deposited in said bank. The arrest of Father De la Pea and the
confiscation of the funds in the bank were the result of the claim of the military authorities that he was an
insurgent and that the funds thus deposited had been collected by him for revolutionary purposes. The
money was taken from the bank by the military authorities by virtue of such order, was confiscated and
turned over to the Government.
While there is considerable dispute in the case over the question whether the P6,641 of trust funds was
included in the P19,000 deposited as aforesaid, nevertheless, a careful examination of the case leads us to
the conclusion that said trust funds were a part of the funds deposited and which were removed and
confiscated by the military authorities of the United States.

That branch of the law known in England and America as the law of trusts had no exact counterpart in the
Roman law and has none under the Spanish law. In this jurisdiction, therefore, Father De la Pea's liability
is determined by those portions of the Civil Code which relate to obligations. (Book 4, Title 1.)
Although the Civil Code states that "a person obliged to give something is also bound to preserve it with
the diligence pertaining to a good father of a family" (art. 1094), it also provides, following the principle of
the Roman law, major casus est, cui humana infirmitas resistere non potest, that "no one shall be liable for
events which could not be foreseen, or which having been foreseen were inevitable, with the exception of
the cases expressly mentioned in the law or those in which the obligation so declares." (Art. 1105.)
By placing the money in the bank and mixing it with his personal funds De la Pea did not thereby assume
an obligation different from that under which he would have lain if such deposit had not been made, nor
did he thereby make himself liable to repay the money at all hazards. If the had been forcibly taken from
his pocket or from his house by the military forces of one of the combatants during a state of war, it is
clear that under the provisions of the Civil Code he would have been exempt from responsibility. The fact
that he placed the trust fund in the bank in his personal account does not add to his responsibility. Such
deposit did not make him a debtor who must respond at all hazards.
We do not enter into a discussion for the purpose of determining whether he acted more or less negligently
by depositing the money in the bank than he would if he had left it in his home; or whether he was more or
less negligent by depositing the money in his personal account than he would have been if he had
deposited it in a separate account as trustee. We regard such discussion as substantially fruitless,
inasmuch as the precise question is not one of negligence. There was no law prohibiting him from
depositing it as he did and there was no law which changed his responsibility be reason of the deposit.
While it may be true that one who is under obligation to do or give a thing is in duty bound, when he sees
events approaching the results of which will be dangerous to his trust, to take all reasonable means and
measures to escape or, if unavoidable, to temper the effects of those events, we do not feel constrained to
hold that, in choosing between two means equally legal, he is culpably negligent in selecting one whereas
he would not have been if he had selected the other.
The court, therefore, finds and declares that the money which is the subject matter of this action was
deposited by Father De la Pea in the Hongkong and Shanghai Banking Corporation of Iloilo; that said
money was forcibly taken from the bank by the armed forces of the United States during the war of the
insurrection; and that said Father De la Pea was not responsible for its loss.
The judgment is therefore reversed, and it is decreed that the plaintiff shall take nothing by his complaint.
YHT REALTY CORPORATION, ERLINDA LAINEZ and ANICIA PAYAM, petitioners,
vs.
THE COURT OF APPEALS and MAURICE McLOUGHLIN, respondents.
DECISION
TINGA, J.:
The primary question of interest before this Court is the only legal issue in the case: It is whether a hotel
may evade liability for the loss of items left with it for safekeeping by its guests, by having these guests
execute written waivers holding the establishment or its employees free from blame for such loss in light
of Article 2003 of the Civil Code which voids such waivers.
Before this Court is a Rule 45 petition for review of the Decision1 dated 19 October 1995 of the Court of
Appeals which affirmed the Decision2 dated 16 December 1991 of the Regional Trial Court (RTC), Branch
13, of Manila, finding YHT Realty Corporation, Brunhilda Mata-Tan (Tan), Erlinda Lainez (Lainez) and Anicia
Payam (Payam) jointly and solidarily liable for damages in an action filed by Maurice McLoughlin
(McLoughlin) for the loss of his American and Australian dollars deposited in the safety deposit box of
Tropicana Copacabana Apartment Hotel, owned and operated by YHT Realty Corporation.
The factual backdrop of the case follow.
Private respondent McLoughlin, an Australian businessman-philanthropist, used to stay at Sheraton Hotel
during his trips to the Philippines prior to 1984 when he met Tan. Tan befriended McLoughlin by showing
him around, introducing him to important people, accompanying him in visiting impoverished street
children and assisting him in buying gifts for the children and in distributing the same to charitable
institutions for poor children. Tan convinced McLoughlin to transfer from Sheraton Hotel to Tropicana where
Lainez, Payam and Danilo Lopez were employed. Lopez served as manager of the hotel while Lainez and
Payam had custody of the keys for the safety deposit boxes of Tropicana. Tan took care of McLoughlin's
booking at the Tropicana where he started staying during his trips to the Philippines from December 1984
to September 1987.3
On 30 October 1987, McLoughlin arrived from Australia and registered with Tropicana. He rented a safety
deposit box as it was his practice to rent a safety deposit box every time he registered at Tropicana in

previous trips. As a tourist, McLoughlin was aware of the procedure observed by Tropicana relative to its
safety deposit boxes. The safety deposit box could only be opened through the use of two keys, one of
which is given to the registered guest, and the other remaining in the possession of the management of
the hotel. When a registered guest wished to open his safety deposit box, he alone could personally
request the management who then would assign one of its employees to accompany the guest and assist
him in opening the safety deposit box with the two keys.4
McLoughlin allegedly placed the following in his safety deposit box: Fifteen Thousand US Dollars
(US$15,000.00) which he placed in two envelopes, one envelope containing Ten Thousand US Dollars
(US$10,000.00) and the other envelope Five Thousand US Dollars (US$5,000.00); Ten Thousand Australian
Dollars (AUS$10,000.00) which he also placed in another envelope; two (2) other envelopes containing
letters and credit cards; two (2) bankbooks; and a checkbook, arranged side by side inside the safety
deposit box.5
On 12 December 1987, before leaving for a brief trip to Hongkong, McLoughlin opened his safety deposit
box with his key and with the key of the management and took therefrom the envelope containing Five
Thousand US Dollars (US$5,000.00), the envelope containing Ten Thousand Australian Dollars
(AUS$10,000.00), his passports and his credit cards.6 McLoughlin left the other items in the box as he did
not check out of his room at the Tropicana during his short visit to Hongkong. When he arrived in
Hongkong, he opened the envelope which contained Five Thousand US Dollars (US$5,000.00) and
discovered upon counting that only Three Thousand US Dollars (US$3,000.00) were enclosed therein. 7
Since he had no idea whether somebody else had tampered with his safety deposit box, he thought that it
was just a result of bad accounting since he did not spend anything from that envelope. 8
After returning to Manila, he checked out of Tropicana on 18 December 1987 and left for Australia. When
he arrived in Australia, he discovered that the envelope with Ten Thousand US Dollars (US$10,000.00) was
short of Five Thousand US Dollars (US$5,000). He also noticed that the jewelry which he bought in
Hongkong and stored in the safety deposit box upon his return to Tropicana was likewise missing, except
for a diamond bracelet.9
When McLoughlin came back to the Philippines on 4 April 1988, he asked Lainez if some money and/or
jewelry which he had lost were found and returned to her or to the management. However, Lainez told him
that no one in the hotel found such things and none were turned over to the management. He again
registered at Tropicana and rented a safety deposit box. He placed therein one (1) envelope containing
Fifteen Thousand US Dollars (US$15,000.00), another envelope containing Ten Thousand Australian Dollars
(AUS$10,000.00) and other envelopes containing his traveling papers/documents. On 16 April 1988,
McLoughlin requested Lainez and Payam to open his safety deposit box. He noticed that in the envelope
containing Fifteen Thousand US Dollars (US$15,000.00), Two Thousand US Dollars (US$2,000.00) were
missing and in the envelope previously containing Ten Thousand Australian Dollars (AUS$10,000.00), Four
Thousand Five Hundred Australian Dollars (AUS$4,500.00) were missing. 10
When McLoughlin discovered the loss, he immediately confronted Lainez and Payam who admitted that Tan
opened the safety deposit box with the key assigned to him. 11 McLoughlin went up to his room where Tan
was staying and confronted her. Tan admitted that she had stolen McLoughlin's key and was able to open
the safety deposit box with the assistance of Lopez, Payam and Lainez. 12 Lopez also told McLoughlin that
Tan stole the key assigned to McLoughlin while the latter was asleep. 13
McLoughlin requested the management for an investigation of the incident. Lopez got in touch with Tan
and arranged for a meeting with the police and McLoughlin. When the police did not arrive, Lopez and Tan
went to the room of McLoughlin at Tropicana and thereat, Lopez wrote on a piece of paper a promissory
note dated 21 April 1988. The promissory note reads as follows:
I promise to pay Mr. Maurice McLoughlin the amount of AUS$4,000.00 and US$2,000.00 or its equivalent in
Philippine currency on or before May 5, 1988.14
Lopez requested Tan to sign the promissory note which the latter did and Lopez also signed as a witness.
Despite the execution of promissory note by Tan, McLoughlin insisted that it must be the hotel who must
assume responsibility for the loss he suffered. However, Lopez refused to accept the responsibility relying
on the conditions for renting the safety deposit box entitled "Undertaking For the Use Of Safety Deposit
Box,"15 specifically paragraphs (2) and (4) thereof, to wit:
2. To release and hold free and blameless TROPICANA APARTMENT HOTEL from any liability arising from
any loss in the contents and/or use of the said deposit box for any cause whatsoever, including but not
limited to the presentation or use thereof by any other person should the key be lost;
...
4. To return the key and execute the RELEASE in favor of TROPICANA APARTMENT HOTEL upon giving up
the use of the box.16

On 17 May 1988, McLoughlin went back to Australia and he consulted his lawyers as to the validity of the
abovementioned stipulations. They opined that the stipulations are void for being violative of universal
hotel practices and customs. His lawyers prepared a letter dated 30 May 1988 which was signed by
McLoughlin and sent to President Corazon Aquino. 17 The Office of the President referred the letter to the
Department of Justice (DOJ) which forwarded the same to the Western Police District (WPD). 18
After receiving a copy of the indorsement in Australia, McLoughlin came to the Philippines and registered
again as a hotel guest of Tropicana. McLoughlin went to Malacaang to follow up on his letter but he was
instructed to go to the DOJ. The DOJ directed him to proceed to the WPD for documentation. But
McLoughlin went back to Australia as he had an urgent business matter to attend to.
For several times, McLoughlin left for Australia to attend to his business and came back to the Philippines
to follow up on his letter to the President but he failed to obtain any concrete assistance. 19
McLoughlin left again for Australia and upon his return to the Philippines on 25 August 1989 to pursue his
claims against petitioners, the WPD conducted an investigation which resulted in the preparation of an
affidavit which was forwarded to the Manila City Fiscal's Office. Said affidavit became the basis of
preliminary investigation. However, McLoughlin left again for Australia without receiving the notice of the
hearing on 24 November 1989. Thus, the case at the Fiscal's Office was dismissed for failure to prosecute.
Mcloughlin requested the reinstatement of the criminal charge for theft. In the meantime, McLoughlin and
his lawyers wrote letters of demand to those having responsibility to pay the damage. Then he left again
for Australia.
Upon his return on 22 October 1990, he registered at the Echelon Towers at Malate, Manila. Meetings were
held between McLoughlin and his lawyer which resulted to the filing of a complaint for damages on 3
December 1990 against YHT Realty Corporation, Lopez, Lainez, Payam and Tan (defendants) for the loss of
McLoughlin's money which was discovered on 16 April 1988. After filing the complaint, McLoughlin left
again for Australia to attend to an urgent business matter. Tan and Lopez, however, were not served with
summons, and trial proceeded with only Lainez, Payam and YHT Realty Corporation as defendants.
After defendants had filed their Pre-Trial Brief admitting that they had previously allowed and assisted Tan
to open the safety deposit box, McLoughlin filed an Amended/Supplemental Complaint20 dated 10 June
1991 which included another incident of loss of money and jewelry in the safety deposit box rented by
McLoughlin in the same hotel which took place prior to 16 April 1988. 21 The trial court admitted the
Amended/Supplemental Complaint.
During the trial of the case, McLoughlin had been in and out of the country to attend to urgent business in
Australia, and while staying in the Philippines to attend the hearing, he incurred expenses for hotel bills,
airfare and other transportation expenses, long distance calls to Australia, Meralco power expenses, and
expenses for food and maintenance, among others.22
After trial, the RTC of Manila rendered judgment in favor of McLoughlin, the dispositive portion of which
reads:
WHEREFORE, above premises considered, judgment is hereby rendered by this Court in favor of plaintiff
and against the defendants, to wit:
1. Ordering defendants, jointly and severally, to pay plaintiff the sum of US$11,400.00 or its
equivalent in Philippine Currency of P342,000.00, more or less, and the sum of AUS$4,500.00 or its
equivalent in Philippine Currency of P99,000.00, or a total of P441,000.00, more or less, with 12%
interest from April 16 1988 until said amount has been paid to plaintiff (Item 1, Exhibit CC);
2. Ordering defendants, jointly and severally to pay plaintiff the sum of P3,674,238.00 as actual and
consequential damages arising from the loss of his Australian and American dollars and jewelries
complained against and in prosecuting his claim and rights administratively and judicially (Items II,
III, IV, V, VI, VII, VIII, and IX, Exh. "CC");
3. Ordering defendants, jointly and severally, to pay plaintiff the sum of P500,000.00 as moral
damages (Item X, Exh. "CC");
4. Ordering defendants, jointly and severally, to pay plaintiff the sum of P350,000.00 as exemplary
damages (Item XI, Exh. "CC");
5. And ordering defendants, jointly and severally, to pay litigation expenses in the sum of
P200,000.00 (Item XII, Exh. "CC");
6. Ordering defendants, jointly and severally, to pay plaintiff the sum of P200,000.00 as attorney's
fees, and a fee of P3,000.00 for every appearance; and
7. Plus costs of suit.

SO ORDERED.23
The trial court found that McLoughlin's allegations as to the fact of loss and as to the amount of money he
lost were sufficiently shown by his direct and straightforward manner of testifying in court and found him
to be credible and worthy of belief as it was established that McLoughlin's money, kept in Tropicana's
safety deposit box, was taken by Tan without McLoughlin's consent. The taking was effected through the
use of the master key which was in the possession of the management. Payam and Lainez allowed Tan to
use the master key without authority from McLoughlin. The trial court added that if McLoughlin had not lost
his dollars, he would not have gone through the trouble and personal inconvenience of seeking aid and
assistance from the Office of the President, DOJ, police authorities and the City Fiscal's Office in his desire
to recover his losses from the hotel management and Tan.24
As regards the loss of Seven Thousand US Dollars (US$7,000.00) and jewelry worth approximately One
Thousand Two Hundred US Dollars (US$1,200.00) which allegedly occurred during his stay at Tropicana
previous to 4 April 1988, no claim was made by McLoughlin for such losses in his complaint dated 21
November 1990 because he was not sure how they were lost and who the responsible persons were. But
considering the admission of the defendants in their pre-trial brief that on three previous occasions they
allowed Tan to open the box, the trial court opined that it was logical and reasonable to presume that his
personal assets consisting of Seven Thousand US Dollars (US$7,000.00) and jewelry were taken by Tan
from the safety deposit box without McLoughlin's consent through the cooperation of Payam and Lainez. 25
The trial court also found that defendants acted with gross negligence in the performance and exercise of
their duties and obligations as innkeepers and were therefore liable to answer for the losses incurred by
McLoughlin.26
Moreover, the trial court ruled that paragraphs (2) and (4) of the "Undertaking For The Use Of Safety
Deposit Box" are not valid for being contrary to the express mandate of Article 2003 of the New Civil Code
and against public policy.27 Thus, there being fraud or wanton conduct on the part of defendants, they
should be responsible for all damages which may be attributed to the non-performance of their contractual
obligations.28
The Court of Appeals affirmed the disquisitions made by the lower court except as to the amount of
damages awarded. The decretal text of the appellate court's decision reads:
THE FOREGOING CONSIDERED, the appealed Decision is hereby AFFIRMED but modified as follows:
The appellants are directed jointly and severally to pay the plaintiff/appellee the following amounts:
1) P153,200.00 representing the peso equivalent of US$2,000.00 and AUS$4,500.00;
2) P308,880.80, representing the peso value for the air fares from Sidney [sic] to Manila and back
for a total of eleven (11) trips;
3) One-half of P336,207.05 or P168,103.52 representing payment to Tropicana Apartment Hotel;
4) One-half of P152,683.57 or P76,341.785 representing payment to Echelon Tower;
5) One-half of P179,863.20 or P89,931.60 for the taxi xxx transportation from the residence to
Sidney [sic] Airport and from MIA to the hotel here in Manila, for the eleven (11) trips;
6) One-half of P7,801.94 or P3,900.97 representing Meralco power expenses;
7) One-half of P356,400.00 or P178,000.00 representing expenses for food and maintenance;
8) P50,000.00 for moral damages;
9) P10,000.00 as exemplary damages; and
10) P200,000 representing attorney's fees.
With costs.
SO ORDERED.29
Unperturbed, YHT Realty Corporation, Lainez and Payam went to this Court in this appeal by certiorari.
Petitioners submit for resolution by this Court the following issues: (a) whether the appellate court's
conclusion on the alleged prior existence and subsequent loss of the subject money and jewelry is
supported by the evidence on record; (b) whether the finding of gross negligence on the part of petitioners

in the performance of their duties as innkeepers is supported by the evidence on record; (c) whether the
"Undertaking For The Use of Safety Deposit Box" admittedly executed by private respondent is null and
void; and (d) whether the damages awarded to private respondent, as well as the amounts thereof, are
proper under the circumstances.30
The petition is devoid of merit.
It is worthy of note that the thrust of Rule 45 is the resolution only of questions of law and any peripheral
factual question addressed to this Court is beyond the bounds of this mode of review.
Petitioners point out that the evidence on record is insufficient to prove the fact of prior existence of the
dollars and the jewelry which had been lost while deposited in the safety deposit boxes of Tropicana, the
basis of the trial court and the appellate court being the sole testimony of McLoughlin as to the contents
thereof. Likewise, petitioners dispute the finding of gross negligence on their part as not supported by the
evidence on record.
We are not persuaded.l^vvphi1.net We adhere to the findings of the trial court as affirmed by the appellate
court that the fact of loss was established by the credible testimony in open court by McLoughlin. Such
findings are factual and therefore beyond the ambit of the present petition.1awphi1.nt
The trial court had the occasion to observe the demeanor of McLoughlin while testifying which reflected
the veracity of the facts testified to by him. On this score, we give full credence to the appreciation of
testimonial evidence by the trial court especially if what is at issue is the credibility of the witness. The oftrepeated principle is that where the credibility of a witness is an issue, the established rule is that great
respect is accorded to the evaluation of the credibility of witnesses by the trial court. 31 The trial court is in
the best position to assess the credibility of witnesses and their testimonies because of its unique
opportunity to observe the witnesses firsthand and note their demeanor, conduct and attitude under
grilling examination.32
We are also not impressed by petitioners' argument that the finding of gross negligence by the lower court
as affirmed by the appellate court is not supported by evidence. The evidence reveals that two keys are
required to open the safety deposit boxes of Tropicana. One key is assigned to the guest while the other
remains in the possession of the management. If the guest desires to open his safety deposit box, he must
request the management for the other key to open the same. In other words, the guest alone cannot open
the safety deposit box without the assistance of the management or its employees. With more reason that
access to the safety deposit box should be denied if the one requesting for the opening of the safety
deposit box is a stranger. Thus, in case of loss of any item deposited in the safety deposit box, it is
inevitable to conclude that the management had at least a hand in the consummation of the taking, unless
the reason for the loss is force majeure.
Noteworthy is the fact that Payam and Lainez, who were employees of Tropicana, had custody of the
master key of the management when the loss took place. In fact, they even admitted that they assisted
Tan on three separate occasions in opening McLoughlin's safety deposit box. 33 This only proves that
Tropicana had prior knowledge that a person aside from the registered guest had access to the safety
deposit box. Yet the management failed to notify McLoughlin of the incident and waited for him to discover
the taking before it disclosed the matter to him. Therefore, Tropicana should be held responsible for the
damage suffered by McLoughlin by reason of the negligence of its employees.
The management should have guarded against the occurrence of this incident considering that Payam
admitted in open court that she assisted Tan three times in opening the safety deposit box of McLoughlin
at around 6:30 A.M. to 7:30 A.M. while the latter was still asleep. 34 In light of the circumstances
surrounding this case, it is undeniable that without the acquiescence of the employees of Tropicana to the
opening of the safety deposit box, the loss of McLoughlin's money could and should have been avoided.
The management contends, however, that McLoughlin, by his act, made its employees believe that Tan
was his spouse for she was always with him most of the time. The evidence on record, however, is bereft of
any showing that McLoughlin introduced Tan to the management as his wife. Such an inference from the
act of McLoughlin will not exculpate the petitioners from liability in the absence of any showing that he
made the management believe that Tan was his wife or was duly authorized to have access to the safety
deposit box. Mere close companionship and intimacy are not enough to warrant such conclusion
considering that what is involved in the instant case is the very safety of McLoughlin's deposit. If only
petitioners exercised due diligence in taking care of McLoughlin's safety deposit box, they should have
confronted him as to his relationship with Tan considering that the latter had been observed opening
McLoughlin's safety deposit box a number of times at the early hours of the morning. Tan's acts should
have prompted the management to investigate her relationship with McLoughlin. Then, petitioners would
have exercised due diligence required of them. Failure to do so warrants the conclusion that the
management had been remiss in complying with the obligations imposed upon hotel-keepers under the
law.
Under Article 1170 of the New Civil Code, those who, in the performance of their obligations, are guilty of
negligence, are liable for damages. As to who shall bear the burden of paying damages, Article 2180,
paragraph (4) of the same Code provides that the owners and managers of an establishment or

enterprise are likewise responsible for damages caused by their employees in the service of the branches
in which the latter are employed or on the occasion of their functions. Also, this Court has ruled that if an
employee is found negligent, it is presumed that the employer was negligent in selecting and/or
supervising him for it is hard for the victim to prove the negligence of such employer. 35 Thus, given the fact
that the loss of McLoughlin's money was consummated through the negligence of Tropicana's employees in
allowing Tan to open the safety deposit box without the guest's consent, both the assisting employees and
YHT Realty Corporation itself, as owner and operator of Tropicana, should be held solidarily liable pursuant
to Article 2193.36
The issue of whether the "Undertaking For The Use of Safety Deposit Box" executed by McLoughlin is
tainted with nullity presents a legal question appropriate for resolution in this petition. Notably, both the
trial court and the appellate court found the same to be null and void. We find no reason to reverse their
common conclusion. Article 2003 is controlling, thus:
Art. 2003. The hotel-keeper cannot free himself from responsibility by posting notices to the effect that he
is not liable for the articles brought by the guest. Any stipulation between the hotel-keeper and the guest
whereby the responsibility of the former as set forth in Articles 1998 to 2001 37 is suppressed or diminished
shall be void.
Article 2003 was incorporated in the New Civil Code as an expression of public policy precisely to apply to
situations such as that presented in this case. The hotel business like the common carrier's business is
imbued with public interest. Catering to the public, hotelkeepers are bound to provide not only lodging for
hotel guests and security to their persons and belongings. The twin duty constitutes the essence of the
business. The law in turn does not allow such duty to the public to be negated or diluted by any contrary
stipulation in so-called "undertakings" that ordinarily appear in prepared forms imposed by hotel keepers
on guests for their signature.
In an early case,38 the Court of Appeals through its then Presiding Justice (later Associate Justice of the
Court) Jose P. Bengzon, ruled that to hold hotelkeepers or innkeeper liable for the effects of their guests, it
is not necessary that they be actually delivered to the innkeepers or their employees. It is enough that
such effects are within the hotel or inn.39 With greater reason should the liability of the hotelkeeper be
enforced when the missing items are taken without the guest's knowledge and consent from a safety
deposit box provided by the hotel itself, as in this case.
Paragraphs (2) and (4) of the "undertaking" manifestly contravene Article 2003 of the New Civil Code for
they allow Tropicana to be released from liability arising from any loss in the contents and/or use of the
safety deposit box for any cause whatsoever.40 Evidently, the undertaking was intended to bar any claim
against Tropicana for any loss of the contents of the safety deposit box whether or not negligence was
incurred by Tropicana or its employees. The New Civil Code is explicit that the responsibility of the hotelkeeper shall extend to loss of, or injury to, the personal property of the guests even if caused by servants
or employees of the keepers of hotels or inns as well as by strangers, except as it may proceed from any
force majeure.41 It is the loss through force majeure that may spare the hotel-keeper from liability. In the
case at bar, there is no showing that the act of the thief or robber was done with the use of arms or
through an irresistible force to qualify the same as force majeure.42
Petitioners likewise anchor their defense on Article 2002 43 which exempts the hotel-keeper from liability if
the loss is due to the acts of his guest, his family, or visitors. Even a cursory reading of the provision would
lead us to reject petitioners' contention. The justification they raise would render nugatory the public
interest sought to be protected by the provision. What if the negligence of the employer or its employees
facilitated the consummation of a crime committed by the registered guest's relatives or visitor? Should
the law exculpate the hotel from liability since the loss was due to the act of the visitor of the registered
guest of the hotel? Hence, this provision presupposes that the hotel-keeper is not guilty of concurrent
negligence or has not contributed in any degree to the occurrence of the loss. A depositary is not
responsible for the loss of goods by theft, unless his actionable negligence contributes to the loss. 44
In the case at bar, the responsibility of securing the safety deposit box was shared not only by the guest
himself but also by the management since two keys are necessary to open the safety deposit box. Without
the assistance of hotel employees, the loss would not have occurred. Thus, Tropicana was guilty of
concurrent negligence in allowing Tan, who was not the registered guest, to open the safety deposit box of
McLoughlin, even assuming that the latter was also guilty of negligence in allowing another person to use
his key. To rule otherwise would result in undermining the safety of the safety deposit boxes in hotels for
the management will be given imprimatur to allow any person, under the pretense of being a family
member or a visitor of the guest, to have access to the safety deposit box without fear of any liability that
will attach thereafter in case such person turns out to be a complete stranger. This will allow the hotel to
evade responsibility for any liability incurred by its employees in conspiracy with the guest's relatives and
visitors.
Petitioners contend that McLoughlin's case was mounted on the theory of contract, but the trial court and
the appellate court upheld the grant of the claims of the latter on the basis of tort. 45 There is nothing
anomalous in how the lower courts decided the controversy for this Court has pronounced a jurisprudential
rule that tort liability can exist even if there are already contractual relations. The act that breaks the
contract may also be tort.46

As to damages awarded to McLoughlin, we see no reason to modify the amounts awarded by the appellate
court for the same were based on facts and law. It is within the province of lower courts to settle factual
issues such as the proper amount of damages awarded and such finding is binding upon this Court
especially if sufficiently proven by evidence and not unconscionable or excessive. Thus, the appellate court
correctly awarded McLoughlin Two Thousand US Dollars (US$2,000.00) and Four Thousand Five Hundred
Australian dollars (AUS$4,500.00) or their peso equivalent at the time of payment, 47 being the amounts
duly proven by evidence.48 The alleged loss that took place prior to 16 April 1988 was not considered since
the amounts alleged to have been taken were not sufficiently established by evidence. The appellate court
also correctly awarded the sum of P308,880.80, representing the peso value for the air fares from Sydney
to Manila and back for a total of eleven (11) trips;49 one-half of P336,207.05 or P168,103.52 representing
payment to Tropicana;50 one-half of P152,683.57 or P76,341.785 representing payment to Echelon Tower;51
one-half of P179,863.20 or P89,931.60 for the taxi or transportation expenses from McLoughlin's residence
to Sydney Airport and from MIA to the hotel here in Manila, for the eleven (11) trips; 52 one-half of P7,801.94
or P3,900.97 representing Meralco power expenses;53 one-half of P356,400.00 or P178,000.00 representing
expenses for food and maintenance.54
The amount of P50,000.00 for moral damages is reasonable. Although trial courts are given discretion to
determine the amount of moral damages, the appellate court may modify or change the amount awarded
when it is palpably and scandalously excessive.l^vvphi1.net Moral damages are not intended to enrich a
complainant at the expense of a defendant.l^vvphi1.net They are awarded only to enable the injured party
to obtain means, diversion or amusements that will serve to alleviate the moral suffering he has
undergone, by reason of defendants' culpable action.55
The awards of P10,000.00 as exemplary damages and P200,000.00 representing attorney's fees are
likewise sustained.
WHEREFORE, foregoing premises considered, the Decision of the Court of Appeals dated 19 October 1995
is hereby AFFIRMED. Petitioners are directed, jointly and severally, to pay private respondent the following
amounts:
(1) US$2,000.00 and AUS$4,500.00 or their peso equivalent at the time of payment;
(2) P308,880.80, representing the peso value for the air fares from Sydney to Manila and back for a
total of eleven (11) trips;
(3) One-half of P336,207.05 or P168,103.52 representing payment to Tropicana Copacabana
Apartment Hotel;
(4) One-half of P152,683.57 or P76,341.785 representing payment to Echelon Tower;
(5) One-half of P179,863.20 or P89,931.60 for the taxi or transportation expense from McLoughlin's
residence to Sydney Airport and from MIA to the hotel here in Manila, for the eleven (11) trips;
(6) One-half of P7,801.94 or P3,900.97 representing Meralco power expenses;
(7) One-half of P356,400.00 or P178,200.00 representing expenses for food and maintenance;
(8) P50,000.00 for moral damages;
(9) P10,000.00 as exemplary damages; and
(10) P200,000 representing attorney's fees.
With costs.
SO ORDERED.