Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-48349 December 29, 1986
FRANCISCO HERRERA, plaintiff-appellant,
vs.
PETROPHIL CORPORATION, defendant-appellee.
Paterno R. Canlas Law Offices for plaintiff-appellant.
CRUZ, J.:
This is an appeal by the plaintiff-appellant from a decision rendered by the
then Court of First Instance of Rizal on a pure question of law. 1
The judgment appealed from was rendered on the pleadings, the parties
having agreed during the pretrial conference on the factual antecedents.
The facts are as follows: On December 5, 1969, the plaintiff-appellant and
ESSO Standard Eastern. Inc., (later substituted by Petrophil Corporation)
entered into a "Lease Agreement" whereby the former leased to the latter
a portion of his property for a period of twenty (20) years from said date,
subject inter alia to the following conditions:
3. Rental: The LESSEE shall pay the LESSOR a rental of Pl.40
sqm. per month on 400 sqm. and are to be expropriated later on
(sic) or P560 per month and Fl.40 per sqm. per month on 1,693
sqm. or P2,370.21 per month or a total of P2,930.20 per month
2,093 sqm. more or less, payable yearly in advance within the 1st
twenty days of each year; provided, a financial aid in the sum of
P15,000 to clear the leased premises of existing improvements
thereon is paid in this manner; P10,000 upon execution of this
lease and P5,000 upon delivery of leased premises free and clear
of improvements thereon within 30 days from the date of
execution of this agreement. The portion on the side of the leased
premises with an area of 365 sqrm. more or less, will be occupied
by LESSEE without rental during the lifetime of this lease.
PROVIDED FINALLY, that the Lessor is paid 8 years advance
rental based on P2,930.70 per month discounted at 12% interest

per annum or a total net amount of P130,288.47 before

registration of lease. Leased premises shall be delivered within 30
days after 1st partial payment of financial aid. 2
On December 31, 1969, pursuant to the said contract, the defendantappellee paid to the plaintfff-appellant advance rentals for the first eight
years, subtracting therefrom the amount of P101,010.73, the amount it
computed as constituting the interest or discount for the first eight years,
in the total sum P180,288.47. On August 20, 1970, the defendantappellee, explaining that there had been a mistake in computation, paid to
the appellant the additional sum of P2,182.70, thereby reducing the
deducted amount to only P98,828.03. 3
On October 14, 1974, the plaintiff-appellant sued the defendant-appellee
for the sum of P98,828.03, with interest, claiming this had been illegally
deducted from him in violation of the Usury Law. 4 He also prayed for
moral damages and attorney's fees. In its answer, the defendant-appellee
admitted the factual allegations of the complaint but argued that the
amount deducted was not usurious interest but a given to it for paying the
rentals in advance for eight years. 5 Judgment on the pleadings was
rendered for the defendant. 6
Plaintiff-appellant now prays for a reversal of that judgment, insisting that
the lower court erred in the computation of the interest collected out of
the rentals paid for the first eight years; that such interest was excessive
and violative of the Usury Law; and that he had neither agreed to nor
accepted the defendant-appellant's computation of the total amount to be
deducted for the eight years advance rentals. 7
The thrust of the plaintiff-appellant's position is set forth in paragraph 6 of
his complaint, which read:
6. The interest collected by defendant out of the rentals for the
first eight years was excessive and beyond that allowable by law,
because the total interest on the said amount is only P33,755.90
at P4,219.4880 per yearly rental; and considering that the interest
should be computed excluding the first year rental because at the
time the amount of P281, 199.20 was paid it was already due
under the lease contract hence no interest should be collected
from the rental for the first year, the amount of P29,536.42 only as
the total interest should have been deducted by defendant from
the sum of P281,299.20.

The defendant maintains that the correct amount of the discount is

P98,828.03 and that the same is not excessive and above that allowed by
law.

and (4) a corrupt intent to take more than the legal rate for the use of
money loaned. Unless these four things concur in every transaction, it is
safe to affirm that no case of usury can be declared. 12

As its title plainly indicates, the contract between the parties is one of
lease and not of loan. It is clearly denominated a "LEASE AGREEMENT."
Nowhere in the contract is there any showing that the parties intended a
loan rather than a lease. The provision for the payment of rentals in
advance cannot be construed as a repayment of a loan because there was
no grant or forbearance of money as to constitute an indebtedness on the
part of the lessor. On the contrary, the defendant-appellee was
discharging its obligation in advance by paying the eight years rentals,
and it was for this advance payment that it was getting a rebate or
discount.

Concerning the computation of the deductible discount, the trial court

declared:

The provision for a discount is not unusual in lease contracts. As to its

validity, it is settled that the parties may establish such stipulations,
clauses, terms and condition as they may want to include; and as long as
such agreements are not contrary to law, morals, good customs, public
policy or public order, they shall have the force of law between them. 8
There is no usury in this case because no money was given by the
defendant-appellee to the plaintiff-appellant, nor did it allow him to use its
money already in his possession. 9 There was neither loan nor forbearance
but a mere discount which the plaintiff-appellant allowed the defendantappellee to deduct from the total payments because they were being made
in advance for eight years. The discount was in effect a reduction of the
rentals which the lessor had the right to determine, and any reduction
thereof, by any amount, would not contravene the Usury Law.
The difference between a discount and a loan or forbearance is that the
former does not have to be repaid. The loan or forbearance is subject to
repayment and is therefore governed by the laws on usury. 10
To constitute usury, "there must be loan or forbearance; the loan must be
of money or something circulating as money; it must be repayable
absolutely and in all events; and something must be exacted for the use of
the money in excess of and in addition to interest allowed by law." 11
It has been held that the elements of usury are (1) a loan, express or
implied; (2) an understanding between the parties that the money lent
shall or may be returned; that for such loan a greater rate or interest that
is allowed by law shall be paid, or agreed to be paid, as the case may be;

As above-quoted, the 'Lease Agreement' expressly provides that

the lessee (defendant) shag pay the lessor (plaintiff) eight (8)
years in advance rentals based on P2,930.20 per month
discounted at 12% interest per annum. Thus, the total rental for
one-year period is P35,162.40 (P2,930.20 multiplied by 12
months) and that the interest therefrom is P4,219.4880
(P35,162.40 multiplied by 12%). So, therefore, the total interest
for the first eight (8) years should be only P33,755.90
(P4,129.4880 multiplied by eight (8) years and not P98,828.03 as
the defendant claimed it to be.
The afore-quoted manner of computation made by plaintiff is
patently erroneous. It is most seriously misleading. He just
computed the annual discount to be at P4,129.4880 and then
simply multiplied it by eight (8) years. He did not take into
consideration the naked fact that the rentals due on the eight year
were paid in advance by seven (7) years, the rentals due on the
seventh year were paid in advance by six (6) years, those due on
the sixth year by five (5) years, those due on the fifth year by four
(4) years, those due on the fourth year by three (3) years, those
due on the third year by two (2) years, and those due on the
second year by one (1) year, so much so that the total number of
years by which the annual rental of P4,129.4880 was paid in
advance is twenty-eight (28), resulting in a total amount of
P118,145.44 (P4,129.48 multiplied by 28 years) as the discount.
However, defendant was most fair to plaintiff. It did not simply
multiply the annual rental discount by 28 years. It computed the
total discount with the principal diminishing month to month as
shown by Annex 'A' of its memorandum. This is why the total
discount amount to only P 8,828.03.
The allegation of plaintiff that defendant made the computation in
a compounded manner is erroneous. Also after making its own
computations and after examining closely defendant's Annex 'A' of
its memorandum, the court finds that defendant did not charge
12% discount on the rentals due for the first year so much so that
the computation conforms with the provision of the Lease

Agreement to the effect that the rentals shall be 'payable yearly in

advance within the 1st 20 days of each year. '
We do not agree. The above computation appears to be too much
technical mumbo-jumbo and could not have been the intention of the
parties to the transaction. Had it been so, then it should have been clearly
stipulated in the contract. Contracts should be interpreted according to
their literal meaning and should not be interpreted beyond their obvious
intendment. 13
The plaintfff-appellant simply understood that for every year of advance
payment there would be a deduction of 12% and this amount would be the
same for each of the eight years. There is no showing that the intricate
computation applied by the trial court was explained to him by the
defendant-appellee or that he knowingly accepted it.
The lower court, following the defendant-appellee's formula, declared that
the plaintiff-appellant had actually agreed to a 12% reduction for advance
rentals for all of twenty eight years. That is absurd. It is not normal for a
person to agree to a reduction corresponding to twenty eight years
advance rentals when all he is receiving in advance rentals is for only
eight years.
The deduction shall be for only eight years because that was plainly what
the parties intended at the time they signed the lease agreement.
"Simplistic" it may be, as the Solicitor General describes it, but that is
how the lessor understood the arrangement. In fact, the Court will reject
his subsequent modification that the interest should be limited to only
seven years because the first year rental was not being paid in advance.
The agreement was for auniform deduction for the advance rentals for
each of the eight years, and neither of the parties can deviate from it now.
On the annual rental of P35,168.40, the deducted 12% discount was
P4,220.21; and for eight years, the total rental was P281,347.20 from
which was deducted the total discount of P33,761.68, leaving a difference
of P247,585.52. Subtracting from this amount, the sum of P182,471.17
already paid will leave a balance of P65,114.35 still due the plaintiffappellant.
The above computation is based on the more reasonable interpretation of
the contract as a whole rather on the single stipulation invoked by the
respondent for the flat reduction of P130,288.47.

WHEREFORE, the decision of the trial court is hereby modified, and the
defendant-appellee Petrophil Corporation is ordered to pay plaintiffappellant the amount of Sixty Five Thousand One Hundred Fourteen
pesos and Thirty-Five Centavos (P65,114.35), with interest at the legal
rate until fully paid, plus Ten Thousand Pesos (P10,000.00) as attorney's
fees. Costs against the defendant-appellee.SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-32471

December 29, 1930

SEVERINO JAYME and LEONARDA RAMOS, plaintiffs-appellees,

vs.
JUAN D. SALVADOR, ET AL., defendants-appellants.
Treas and Laserna and Rosauro R. Borromeo for appellant spouses
Salvador and Zuiga.
Roman J. Lacson and Francisco Fuentes for appellant National Bank.
Jose Evangelista and Godofredo Escalona for appellees.

ROMUALDEZ, J.:
The dispositive part of the judgment appealed from is as follows:
(a) Holding the deeds Exhibits D, E, F, and G to be null and void
and without effect;
(b) Ordering the cancellation of the transfer certificates of title
Exhibits 9 and 18, and the issuance by the registrar of deeds of
Iloilo of new transfer certificates of title to the land or hacienda in
Supang, municipality of Buenavista, in the name of Leonarda
Ramos, married to Severino Jayme, and of lot 69-C of the
cadastral survey of Iloilo in the name of Juan D. Salvador, married
to Remegia Zuiga;

(c) Holding the portion of the mortgage deed Exhibit 24 referring

to the estate in Supang, municipality of Buenavista, with an area
of 330.8733 hectares to be null and void;
(d) Sentencing the plaintiff spouses to pay the defendant spouses
the amount of eighteen thousand pesos (P18,000) which is the
principal loaned, plus two thousand one hundred sixty pesos
(P2,160), one year's interest thereon at twelve per centum (12%);
(e) Sentencing the plaintiffs to pay the defendants Juan D.
Salvador and Remigia Zuiga the sum of three hundred eighty
three pesos and forty-six centavos (P383.46);
( f ) The mortgage evidenced by Exhibit 24 being held null and
void in so far at it refers to the estate of 330.8733 hectares in
Supang, the defendant spouses Juan D. Salvador and Remigia
Zuiga are hereby sentenced to pay the Philippine National Bank
the sum of twenty thousand pesos (P20,000) with interest thereon
at nine per centum (9%) from the date of the contract, November
12, 1928, until fully paid;
(g) Absolving the plaintiffs from the counterclaim and the crosscomplaint set up by defendants Juan D. Salvador and Remigia
Zuiga.
Without express pronouncement of costs. So ordered .(Pages 57
and 58, Bill of Exceptions.)
From this judgment an appeal was taken by the Philippine National Bank,
and by the spouses Juan D. Salvador and Remigia Zuiga.
The appellants Juan D. Salvador and wife made the following assignments
of error:
1. In not holding that Exhibit D of the plaintiffs, or Exhibit 11 of
the defendants, is a real contract of final sale.
2. In not holding that Exhibit E of the plaintiffs or Exhibit 12 of the
defendants is another actual contract final sale.
3. In not holding the Exhibit F of the plaintiffs or Exhibit 14 of the
defendants is an actual contract of lease.

4. In not holding that Exhibit G of the plaintiffs or Exhibit 13 of

the defendants is an actual option to purchase.
5. In declaring said contracts Exhibit D, E, F, and G of the
plaintiffs or Exhibits 11, 12, 14, and 13, of the defendants,
respectively, to be null and void, and without effect.
6. In ordering that the defendants Juan D. Salvador and Remigia
Zuiga receive from the plaintiffs the sum of P18,000 only, with
interest at twelve per cent per annum.
7. In not sentencing the plaintiffs to pay the defendant spouses
Juan D. Salvador and Remigia Zuiga the sum of P6,240 as rental
for the land leased by said plaintiffs from said defendants, during
the first two years of the lease, with interest thereon.
8. In not sentencing the plaintiffs to pay the defendant spouses
Juan D. Salvador and Remigia Zuiga the sum of P5,000 by way of
liquidated damages.
9. In not holding that the contract of lease evidenced by Exhibit F
of the plaintiffs or Exhibit 14 of the defendants has been
rescinded; and in not compelling said plaintiffs to deliver to the
defendant spouses Juan D. Salvador and Remigia Zuiga the
possession of the land leased by them, with all the seeds and
products.
10. In not holding that the option to purchase evidenced by
Exhibit G of the plaintiffs or Exhibit 13 of the defendants has been
rescinded and ceased to exist.
The Philippine National Bank makes the following assignments of error:
1. In holding that the deed of sale of the Supang estate executed
on May 22, 1928, by the spouses Severino Jayme and Leonarda
Ramos in favor of the spouses Juan D .Salvador and Remigia
Zuiga is null and void on account of fraud.
2. In holding that the mortgage deed upon the Supang estate
executed on November 12, 1928, by the spouses Juan D. Salvador
and Remigia Zuiga in favor of the Philippine National Bank is
null and void; and.

3. In not absolving the Philippine National Bank from the

complaint, with costs against the plaintiffs.
The facts of the case as shown by the evidence are as follows:
The plaintiff spouses owed Presentacion Hofilena de Evangelista
P14,381.13, with interest at 12 per cent per annum, payment of which
was secured by a mortgage upon the realty covered by transfer certificate
of title No. 2336. Upon being pressed for payment, said plaintiffs, through
broker Abaya went to the defendant herein, Juan D. Salvador, from whom
they obtained a loan of P18,000 on condition that their realty referred to
above should appear to have been sold to the defendants for P26,000
(Exhibit D), the plaintiffs would purchase of the defendants lot No. 69-C of
the cadastre of Iloilo for P8,000 (Exhibit E), and said plaintiffs would
further appear as lessees of said Supang estate at an annual rental of
P3,120 (Exhibit F), although in reality such conveyance of the land was
not the real intention of the parties and the aforesaid rental of P3,120 was
no such rent, but the interest thus cloaked, at 12 per cent per annum of
the sum of P26,000 stated as the selling price of the said
estate.lawphi1>net
It was agreed between the parties that the plaintiffs could repurchase
said estate by returning the principal loaned and the interest thereon, and
for this purpose the option, Exhibit G, was executed, the defendants
agreeing to accept the return of said lot No. 69-C.
The amount of P26,000 was represented in these transactions by two
checks, one for P18,000 (Exhibit 1) and the other for P8,000 (Exhibit 2).
Immediately upon receipt of the latter check by the plaintiffs, upon
instructions from the defendant Salvador, they endorsed it and returned it
to the defendants to pass for the price of said lot No. 69-C.
The check Exhibit 1 for the amount of P18,000 finally reached the hands
of the plaintiffs who deposited it in the National Bank (Exhibit N).
The plaintiff Severino Jayme then paid his debt to Presentacion Hofilena
de Evangelista, and in consequence the mortgage upon said Supang
estate was cancelled.
A few days later, the plaintiff Severino Jayme asked the defendant Juan D.
Salvador to increase the loan. The latter answered he had not money, and
suggested that he secure a loan from somebody else upon the security of
lot 69-C, for which reason Severino Jayme obtained a transfer certificate

to said lot in his name, and mortgaged it to Go Tiang Tin for a loan of
P600, and another of P320 in favor of said Severino Jayme (Exhibit 4 and
5). These loans were later paid, the mortgage upon lot no. 69-C being
cancelled (Exhibit CC).
Having obtained the transfer certificate of title No. 6212 to the estate
referred to (Exhibit 18), on November 12, 1928, the defendants succeed
in obtaining a loan of P20,000 from the Philippine National Bank,
mortgaging said estate.lawphi1>net
Some months later, having obtained the loan of P22,000 from Vicente
Lopez, the plaintiff offered to pay the defendant Juan D. Salvador his debt
of P18,000, plus the interest amount to P3,120. Said defendant refused to
accept it, claiming that the sum due from Severino Jayme was P29,320. As
the latter would not admit said claim, he brought this action, depositing
with the clerk of the court below the amount of P6,240 on May 22, 1928
(Exhibit AA), representing the rental for two years.
To prove the first six errors, the defendants contend that the plaintiffs
voluntarily and definitely entered into the aforementioned contracts
according to their proper deeds, and, furthermore, conveyed to the
defendant Juan D. Salvador 80 hectares of land in payment of the rental of
the Supang estate leased to them; that on September 11, 1928, the
defendants together with the plaintiffs made a donation to the
municipality of Buenavista of 25,000 square meters of the land in Supang,
evidenced by Exhibit 7; that the defendants conveyed to said municipality
the use of the house located thereon, and that the plaintiffs acquiesced
therein, and that the defendant Salvador paid the land tax upon the estate
in Supang for the years 1928 and 1929.
The defendants contend that inasmuch as the plaintiffs read all said
contracts and will full knowledge of the contents and conditions thereof
signed Exhibit D and E, which are deeds of final sale, as well as Exhibit F,
which is a contract of lease, we must take these documents literally, since
they are set forth in clear terms and leave no room for doubt as to the
intention of the contracting parties, citing in support thereof, articles
1281 and 1283 of the Civil Code, and the decision in Tolentino and Mario
vs. Gonzales Sy Chiam (50 Phil., 558). With respect to the real intention of
the parties in executing said contracts, the defendants invoke the
testimony of broker Abaya, witness for the plaintiffs. The defendants do
not deny that the plaintiffs' first intention was to obtain from them a loan
secured by a mortgage upon said estate; but they allege that they rejected
the proposal and in turn proposed to the plaintiffs the purchase of said
estate, which was agreed to by the plaintiffs; the defendants also attempt

to show the validity of said contracts by the plaintiffs' subsequent acts in

paying the land tax of the Tansa lot bought by them from the defendants;
and in mortgaging said lot several times in favor of Go Julian. The
defendants argue that these acts performed at the time of the contract
and subsequent thereto indicate, according to article 1282 of the Civil
Code, the intention of the plaintiffs. Among the acts performed by the
plaintiffs subsequent to the contract, the defendants point out those
evidenced by Exhibits 3, 4, 5, 6, 7 and 8, which the defendants contend
amount to a ratification of the contracts set forth in Exhibits D, E, F, and
G, a ratification which, according to article 1313 of the Civil Code, purges
these contracts of all defects to which they may have been subject.
After examining the record, we have reached the conclusion that the
transactions alluded to between the plaintiffs and the defendants
constitute a loan of P18,000 granted by the latter to the former with
interest at 12 per cent per annum .We agree with the court below, that the
plaintiffs did not intend to sell their Supang estate. It is true that the
plaintiffs were aware of the contents of the contracts, but the
preponderance of the evidence shows that they signed them knowing that
said contracts did not express their real intention, and if they did so
notwithstanding this, it was due to the urgent necessity of obtaining
funds. Therefore article 1282 of the Civil Code and those cognate thereto
cannot be applied to the case before us, where it sufficiently appears that
what the parties really intended was different from what appears in said
contracts.
Plaintiff Severino Jayme paid the land tax upon the Tansa lot, according to
him, with money furnished him, by the defendant Juan D. Salvador.
As to the mortgage of the Tansa lot, we here quote and adopt the findings
of the lower court, being supported by the evidence of record:
Exhibit 6, executed on September 5, 1928, shows that the
mortgage of lot 69-C to Go Julian or Go Tiang Tin was made, not
only with the knowledge of the defendant Juan D. Salvador, but at
his suggestion, as testified by the plaintiff Severino Jayme (pages
97 and 98, t. s. n.), for, as said lot 69-C appeared as security of the
payment of the yearly rental of the contract of lease, Exhibit F,
and in order that said lot 69-C might appear to be free and
unencumbered on being mortgaged to Go Tiang Tin or Go Julian,
the defendant Juan D. Salvador, through said Exhibit 6, succeeded
in making plaintiff Severino Jayme substitute the lot 69-C for his
other land located in Bamban, San Pedro, municipality of
Buenavista, with an area of 83.3156 hectares, to secure the

payment of the yearly rental of said contract of lease Exhibit F.

(Pages 38 and 39, Bill of Exceptions.)
With respect to the donation of the 25,000 square meters of land in
Supang in favor of the municipality of Buenavista, the evidence shows
that said gift was an offer made by the plaintiffs in exchange of the
condition that the residential part of the municipality of Buenavista should
be transferred to the barrio of Supang, where said estate of the plaintiffs
is situated; the latter having promised said municipality before May 22,
1928, that when said transactions took place with the defendants, they
would convey a part of said estate gratis, as also the use of the building of
strong materials located thereon; and this donation and cession was
respected by the defendants, being the ones who executed Exhibits 7 and
8, in compliance with a promise not made by them, but by the plaintiffs,
this act of theirs constituting an open acknowledgment of the fact that
said estate belonged to said plaintiffs.
This latter is one of the most salient facts showing that the real intention
of both parties in executing the principal contracts referred to heretofore,
was that of a loan granted by the defendants to the plaintiffs in the
amount of P18,000 with interest thereon at 12 per cent per annum,
secured by a mortgage on said estate situated in Supang .Among these
circumstances may be mentioned the assessed value of the land, which,
even taking that of P19,920 in May, 1928, is already greater than the
P18,000 received by the plaintiffs. The fact that upon the same date were
executed the sale of the said Supang Estate (Exhibit D), the option in
favor of the plaintiffs to repurchase said estate (Exhibit G), the lease of
said estate in favor of said plaintiffs (Exhibit F), and the transfer of the lot
in Tansa (Exhibit E), in exchange of the endorsement or return to the
defendant Salvador of his check for P8,000 (Exhibit 2), taken together
with the remainder of the circumstances of the case, corroborate and
strengthen the conclusion set forth above.
The Philippine National Bank impugns the judgment appealed from in so
far as it holds that the deed of sale of the Supang estate is null and void
on account of fraud. By virtue of the foregoing, it is held that the court
below committed no such error.
In its second assignment of error the bank refers to the mortgage deed
upon the said estate, executed in its favor.
There is some merit in this allegation of the bank's although said
mortgage ought not to appear in the transfer certificate of title issued to

the defendants (which certificate is void and must be cancelled), but in

the former certificate issued in favor of the plaintiffs.

remaining on account of the interest on said P20,000 in accordance with

the mortgage deed, Exhibit 24;

This mortgage must be respected as a whole because the Philippine

National Bank in the case before us is an innocent creditor perfectly
entitled to believe the apparent validity of the transfer certificate of title
presented to it by the defendants. And for the same reasons, the whole
P20,000 must be noted as a mortgage upon said estate because as to the
plaintiffs, although it is true that their debt to the defendants only
amounts of P18,000, nevertheless as between said plaintiffs and the bank,
the latter's right must be deemed preferential, said entity being entirely
innocent, whereas the plaintiffs, having signed the fictitious transfer of
said estate to the defendants, though compelled thereto by necessity,
have, under the circumstances, made it possible that said transfer
certificate of title should be issued in the name of the defendants, thereby
cooperating in inducing the Philippine National Bank to believe in the
validity and enforceability of said certificate of title.

(4) The defendants are hereby sentenced to reimburse the plaintiffs for
any amount which the latter may have to pay to the Philippine National
Bank hereafter in order to make up the balance of the interest due upon
said P20,000 in accordance with the Exhibit 24, deducting from such
reimbursement the amount of P383.46 which the plaintiffs were by the
judgment appealed from sentenced to pay to the defendants; and
(5) The judgment appealed from is affirmed as regards the remainder, in
so far as no incompatible with this decision.
Without express pronouncement of costs. So ordered.

Republic of the Philippines

SUPREME COURT
Manila

The third error assigned by the bank is a consequence of the preceding

ones.

SECOND DIVISION

By virtue of the foregoing considerations, the judgment appealed from is

modified as follows:
(1) The deeds Exhibits D, E, F, and G, are hereby held null and void;
(2) It is ordered that transfer certificates of title Exhibits 9 and 18 be
cancelled and that the registrar of deeds of Iloilo issue to Juan D.
Salvador, married to Remigia Zuiga, a new transfer certificate of title to
lot 69-C of the Iloilo cadastre, and to Leonarda Ramos, married to
Severino Jayme, a new transfer certificate of title to the land or estate in
Supang, according to the result after the donation and conveyance
appearing in Exhibits 7 and 8 in this case, and noting in said new transfer
certificate of title to the land or estate in Supang, a mortgage in favor of
the Philippine National Bank to answer for the payment of the sum of
P20,000 subject to the conditions stipulated in the deed, Exhibit 24, with
the understanding that the mortgagors are the plaintiffs herein;

ALLIED BANKING G.R. No. 133179

CORPORATION,
Petitioner, Present:
QUISUMBING, J., Chairperson,
- versus - CARPIO MORALES,
TINGA,
VELASCO, JR., and
CHICO-NAZARIO,* JJ.
LIM SIO WAN, METROPOLITAN
BANK AND TRUST CO., and Promulgated:
PRODUCERS BANK,
Respondents. March 27, 2008
x-----------------------------------------------------------------------------------------x
DECISION

(3) The plaintiffs are hereby sentenced to pay the Philippine National
Bank the sum of P18,000 (which they received from the defendants), plus
P2,160 (interest thereon) taking the total, or P20,000 as the payment of
the principal owed to the bank aforesaid by the defendants, and the P160

VELASCO, JR., J.:

To ingratiate themselves to their valued depositors, some banks at
times bend over backwards that they unwittingly expose themselves to
great risks.

The Case
This Petition for Review on Certiorari under Rule 45 seeks to
reverse the Court of Appeals (CAs) Decision promulgated on March 18,
1998[1] in CA-G.R. CV No. 46290 entitled Lim Sio Wan v. Allied Banking
Corporation, et al. The CA Decision modified the Decision
dated November 15, 1993[2] of the Regional Trial Court (RTC), Branch 63
inMakati City rendered in Civil Case No. 6757.
The Facts
The facts as found by the RTC and affirmed by the CA are as follows:
On November 14, 1983, respondent Lim Sio Wan deposited with petitioner
Allied Banking Corporation (Allied) at its Quintin Paredes Branch
in Manila a money market placement of PhP 1,152,597.35 for a term of 31
days to mature on December 15, 1983,[3] as evidenced by Provisional
Receipt No. 1356 dated November 14, 1983.[4]
On December 5, 1983, a person claiming to be Lim Sio Wan called up
Cristina So, an officer of Allied, and instructed the latter to pre-terminate
Lim Sio Wans money market placement, to issue a managers check
representing the proceeds of the placement, and to give the check to one
Deborah Dee Santos who would pick up the check. [5] Lim Sio Wan
described the appearance of Santos so that So could easily identify her.[6]
Later, Santos arrived at the bank and signed the application form for a
managers check to be issued.[7] The bank issued Managers Check No.
035669 for PhP 1,158,648.49, representing the proceeds of Lim Sio Wans
money market placement in the name of Lim Sio Wan, as payee. [8] The
check was cross-checked For Payees Account Only and given to Santos.[9]
Thereafter, the managers check was deposited in the account of Filipinas
Cement Corporation (FCC) at respondent Metropolitan Bank and Trust
Co. (Metrobank),[10] with the forged signature of Lim Sio Wan as indorser.
[11]

Earlier, on September 21, 1983, FCC had deposited a money market

placement for PhP 2 million with respondent Producers Bank. Santos was
the money market trader assigned to handle FCCs account. [12] Such
deposit is evidenced by Official Receipt No. 317568 [13] and a Letter
dated September 21, 1983 of Santos addressed to Angie Lazo of FCC,
acknowledging receipt of the placement.[14] The placement matured
on October 25, 1983 and was rolled-over until December 5, 1983 as
evidenced by a Letter dated October 25, 1983.[15] When the placement

matured, FCC demanded the payment of the proceeds of the placement.

[16]
On December 5, 1983, the same date that So received the phone call
instructing her to pre-terminate Lim Sio Wans placement, the managers
check in the name of Lim Sio Wan was deposited in the account of FCC,
purportedly representing the proceeds of FCCs money market placement
with Producers Bank.[17] In other words, the Allied check was deposited
with Metrobank in the account of FCC as Producers Banks payment of its
obligation to FCC.
To clear the check and in compliance with the requirements of the
Philippine Clearing House Corporation (PCHC) Rules and Regulations,
Metrobank stamped a guaranty on the check, which reads: All prior
endorsements and/or lack of endorsement guaranteed.[18]
The check was sent to Allied through the PCHC. Upon the presentment of
the check, Allied funded the check even without checking the authenticity
of Lim Sio Wans purported indorsement. Thus, the amount on the face of
the check was credited to the account of FCC.[19]
On December 9, 1983, Lim Sio Wan deposited with Allied a second money
market placement to mature on January 9, 1984.[20]
On December 14, 1983, upon the maturity date of the first money market
placement, Lim Sio Wan went to Allied to withdraw it. [21] She was then
informed that the placement had been pre-terminated upon her
instructions. She denied giving any instructions and receiving the
proceeds thereof. She desisted from further complaints when she was
assured by the banks manager that her money would be recovered. [22]
When Lim Sio Wans second placement matured on January 9, 1984, So
called Lim Sio Wan to ask for the latters instructions on the second
placement. Lim Sio Wan instructed So to roll-over the placement for
another 30 days.[23] On January 24, 1984, Lim Sio Wan, realizing that the
promise that her money would be recovered would not materialize, sent a
demand letter to Allied asking for the payment of the first placement.
[24]
Allied refused to pay Lim Sio Wan, claiming that the latter had
authorized the pre-termination of the placement and its subsequent
release to Santos.[25]
Consequently, Lim Sio Wan filed with the RTC a Complaint dated February
13, 1984[26] docketed as Civil Case No. 6757 against Allied to recover the
proceeds of her first money market placement. Sometime in February
1984, she withdrew her second placement from Allied.

Allied filed a third party complaint [27] against Metrobank and Santos. In
turn, Metrobank filed a fourth party complaint [28] against FCC. FCC for its
part filed a fifth party complaint [29] against Producers Bank. Summonses
were duly served upon all the parties except for Santos, who was no
longer connected with Producers Bank.[30]
On May 15, 1984, or more than six (6) months after funding the check,
Allied informed Metrobank that the signature on the check was forged.
[31]
Thus, Metrobank withheld the amount represented by the check from
FCC. Later on, Metrobank agreed to release the amount to FCC after the
latter executed an Undertaking, promising to indemnify Metrobank in
case it was made to reimburse the amount.[32]
Lim Sio Wan thereafter filed an amended complaint to include
Metrobank as a party-defendant, along with Allied. [33] The RTC admitted
the amended complaint despite the opposition of Metrobank.
[34]
Consequently, Allieds third party complaint against Metrobank was
converted into a cross-claim and the latters fourth party complaint against
FCC was converted into a third party complaint.[35]

The Decision of the Court of Appeals

Allied appealed to the CA, which in turn issued the assailed Decision
on March 18, 1998, modifying the RTC Decision, as follows:
WHEREFORE, premises considered, the decision appealed
from is MODIFIED. Judgment is rendered ordering and
sentencing
defendant-appellant
Allied
Banking
Corporation to pay sixty (60%) percent and defendantappellee Metropolitan Bank and Trust Company forty
(40%) of the amount of P1,158,648.49 plus 12% interest
per annum from March 16, 1984 until fully paid. The
moral damages, attorneys fees and costs of suit adjudged
shall likewise be paid by defendant-appellant Allied
Banking Corporation and defendant-appellee Metropolitan
Bank and Trust Company in the same proportion of 60-40.
Except as thus modified, the decision appealed from is
AFFIRMED.

After trial, the RTC issued its Decision, holding as follows:

SO ORDERED.[37]
WHEREFORE, judgment is hereby rendered as follows:
1. Ordering defendant Allied Banking Corporation to pay
plaintiff the amount of P1,158,648.49 plus 12% interest
per annum from March 16, 1984 until fully paid;
2. Ordering defendant Allied Bank to pay plaintiff the
amount of P100,000.00 by way of moral damages;
3. Ordering defendant Allied Bank to pay plaintiff the
amount of P173,792.20 by way of attorneys fees; and,
4. Ordering defendant Allied Bank to pay the costs of suit.
Defendant Allied Banks cross-claim against defendant
Metrobank is DISMISSED.
Likewise defendant Metrobanks third-party complaint as
against Filipinas Cement Corporation is DISMISSED.
Filipinas Cement Corporations fourth-party complaint
against Producers Bank is also DISMISSED.
SO ORDERED.[36]

Hence, Allied filed the instant petition.

The Issues
Allied raises the following issues for our consideration:

The Honorable Court of Appeals erred in holding

that Lim Sio Wan did not authorize [Allied] to preterminate the initial placement and to deliver the check to
Deborah Santos.
The Honorable Court of Appeals erred in absolving
Producers Bank of any liability for the reimbursement of
amount adjudged demandable.
The Honorable Court of Appeals erred in holding
[Allied] liable to the extent of 60% of amount adjudged
demandable in clear disregard to the ultimate liability of

Metrobank as guarantor of all endorsement on the check,

it being the collecting bank.[38]

The petition is partly meritorious.

Thus, we have ruled in a line of cases that a bank deposit is in the

nature of a simple loan or mutuum.[42] More succinctly, in Citibank,
N.A. (Formerly First National City Bank) v. Sabeniano, this Court ruled
that a money market placement is a simple loan or mutuum. [43] Further,
we defined a money market in Cebu International Finance Corporation v.
Court of Appeals, as follows:

A Question of Fact
Allied questions the finding of both the trial and appellate courts that
Allied was not authorized to release the proceeds of Lim Sio Wans money
market placement to Santos.Allied clearly raises a question of fact. When
the CA affirms the findings of fact of the RTC, the factual findings of both
courts are binding on this Court.[39]
We also agree with the CA when it said that it could not disturb the trial
courts findings on the credibility of witness So inasmuch as it was the trial
court that heard the witness and had the opportunity to observe closely
her deportment and manner of testifying. Unless the trial court had
plainly overlooked facts of substance or value, which, if considered, might
affect the result of the case, [40] we find it best to defer to the trial court on
matters pertaining to credibility of witnesses.
Additionally, this Court has held that the matter of negligence is also a
factual question.[41] Thus, the finding of the RTC, affirmed by the CA, that
the respective parties were negligent in the exercise of their obligations is
also conclusive upon this Court.
The Liability of the Parties
As to the liability of the parties, we find that Allied is liable to Lim Sio
Wan. Fundamental and familiar is the doctrine that the relationship
between a bank and a client is one of debtor-creditor.

[A]
money
market
is
a
market
dealing
in
standardized short-term
credit instruments
(involving
large amounts) where lenders and borrowers do not deal
directly with each other but through a middle man or
dealer in open market. In a money market transaction, the
investor is a lender who loans his money to a borrower
through a middleman or dealer.
In the case at bar, the money market transaction
between the petitioner and the private respondent is in
the nature of a loan.[44]

Lim Sio Wan, as creditor of the bank for her money market
placement, is entitled to payment upon her request, or upon maturity of
the placement, or until the bank is released from its obligation as
debtor. Until any such event, the obligation of Allied to Lim Sio Wan
remains unextinguished.
Art. 1231 of the Civil Code enumerates the instances when
obligations are considered extinguished, thus:

Art. 1231. Obligations are extinguished:

(1)
(2)
(3)

Articles 1953 and 1980 of the Civil Code provide:

Art. 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.
Art. 1980. Fixed, savings, and current deposits of money
in banks and similar institutions shall be governed by the
provisions concerning simple loan.

By payment or performance;
By the loss of the thing due;
By the condonation or remission of the

debt;
(4)
By the confusion or merger of the
rights of creditor and debtor;
(5)
By compensation;
(6)
By novation.

Other causes of extinguishment of obligations,

such as annulment, rescission, fulfillment of a resolutory
condition, and prescription, are governed elsewhere in
this Code. (Emphasis supplied.)

From the factual findings of the trial and appellate courts that Lim
Sio Wan did not authorize the release of her money market placement to
Santos and the bank had been negligent in so doing, there is no question
that the obligation of Allied to pay Lim Sio Wan had not been
extinguished. Art. 1240 of the Code states that payment shall be made to
the person in whose favor the obligation has been constituted, or his
successor in interest, or any person authorized to receive it. As
commented by Arturo Tolentino:
Payment made by the debtor to a wrong party
does not extinguish the obligation as to the creditor, if
there is no fault or negligence which can be imputed to
the latter. Even when the debtor acted in utmost good
faith and by mistake as to the person of his creditor, or
through error induced by the fraud of a third person, the
payment to one who is not in fact his creditor, or
authorized to receive such payment, is void, except as
provided in Article 1241. Such payment does not
prejudice the creditor, and accrual of interest is not
suspended by it.[45](Emphasis supplied.)
Since there was no effective payment of Lim Sio Wans money market
placement, the bank still has an obligation to pay her at six percent (6%)
interest from March 16, 1984 until the payment thereof.

in the present case, which thereby leads to the conclusion

that it is the collecting bank, Metrobank that is the
proximate cause of the alleged loss of the plaintiff in the
instant case.[46]

We are not persuaded.

Proximate cause is that cause, which, in natural and continuous sequence,
unbroken by any efficient intervening cause, produces the injury and
without which the result would not have occurred. [47] Thus, there is an
efficient supervening event if the event breaks the sequence leading from
the cause to the ultimate result. To determine the proximate cause of a
controversy, the question that needs to be asked is: If the event did not
happen, would the injury have resulted? If the answer is NO, then the
event is the proximate cause.

In the instant case, Allied avers that even if it had not issued the check
payment, the money represented by the check would still be lost because
of Metrobanks negligence in indorsing the check without verifying the
genuineness of the indorsement thereon.
Section 66 in relation to Sec. 65 of the Negotiable Instruments
Law provides:
Section 66. Liability of general indorser.Every indorser
who indorses without qualification, warrants to all
subsequent holders in due course;
a)

The matters and things mentioned in

subdivisions (a), (b) and (c) of the next
preceding section; and

b)

That the instrument is at the time of his

indorsement valid and subsisting;

We cannot, however, say outright that Allied is solely liable to Lim Sio
Wan.
Allied claims that Metrobank is the proximate cause of the loss of Lim Sio
Wans money. It points out that Metrobank guaranteed all prior
indorsements inscribed on the managers check, and without Metrobanks
guarantee, the present controversy would never have occurred. According
to Allied:
Failure on the part of the collecting bank to ensure that
the proceeds of the check is paid to the proper party is,
aside from being an efficient intervening cause, also the
last negligent act, x x x contributory to the injury caused

And in addition, he engages that on due

presentment, it shall be accepted or paid, or both, as the
case may be according to its tenor, and that if it be
dishonored, and the necessary proceedings on dishonor be
duly taken, he will pay the amount thereof to the holder,
or to any subsequent indorser who may be compelled to
pay it.

Section 65. Warranty where negotiation by

delivery, so forth.Every person negotiating an instrument
by delivery or by a qualified indorsement, warrants:
a)

That the instrument is genuine and

in all respects what it purports to be;
b)
That he has a good title of it;
c)
That all prior parties had capacity to
contract;
d)
That he has no knowledge of any fact
which would impair the validity of the
instrument or render it valueless.
But when the negotiation is by delivery only, the
warranty extends in favor of no holder other than the
immediate transferee.
The provisions of subdivision (c) of this section do
not apply to persons negotiating public or corporation
securities, other than bills and notes. (Emphasis supplied.)

The warranty that the instrument is genuine and in all respects what it
purports to be covers all the defects in the instrument affecting the
validity thereof, including a forged indorsement. Thus, the last indorser
will be liable for the amount indicated in the negotiable instrument even if
a previous indorsement was forged. We held in a line of cases that a
collecting bank which indorses a check bearing a forged indorsement and
presents it to the drawee bank guarantees all prior indorsements,
including the forged indorsement itself, and ultimately should be held
liable therefor.[48]
However, this general rule is subject to exceptions. One such exception is
when the issuance of the check itself was attended with negligence. Thus,
in the cases cited above where the collecting bank is generally held liable,
in two of the cases where the checks were negligently issued, this Court
held the institution issuing the check just as liable as or more liable than
the collecting bank.
In isolated cases where the checks were deposited in an account other
than that of the payees on the strength of forged indorsements, we held
the collecting bank solely liable for the whole amount of the checks
involved for having indorsed the same. In Republic Bank v. Ebrada,[49] the

check was properly issued by the Bureau of Treasury. While inBanco de

Oro Savings and Mortgage Bank (Banco de Oro) v. Equitable Banking
Corporation,[50] Banco de Oro admittedly issued the checks in the name of
the correct payees.And in Traders Royal Bank v. Radio Philippines
Network, Inc.,[51] the checks were issued at the request of Radio
Philippines Network, Inc. from Traders Royal Bank.
However, in Bank of the Philippine Islands v. Court of Appeals, we said
that the drawee bank is liable for 60% of the amount on the face of the
negotiable instrument and the collecting bank is liable for 40%. We also
noted the relative negligence exhibited by two banks, to wit:
Both banks were negligent in the selection and
supervision of their employees resulting in the
encashment of the forged checks by an impostor. Both
banks were not able to overcome the presumption of
negligence in the selection and supervision of their
employees. It was the gross negligence of the employees
of both banks which resulted in the fraud and the
subsequent loss. While it is true that petitioner BPIs
negligence may have been the proximate cause of the loss,
respondent CBCs negligence contributed equally to the
success of the impostor in encashing the proceeds of the
forged checks. Under these circumstances, we apply
Article 2179 of the Civil Code to the effect that while
respondent CBC may recover its losses, such losses are
subject to mitigation by the courts. (See Phoenix
Construction Inc. v. Intermediate Appellate Courts, 148
SCRA 353 [1987]).
Considering the comparative negligence of the
two (2) banks, we rule that the demands of substantial
justice are satisfied by allocating the loss of P2,413,215.16
and the costs of the arbitration proceeding in the amount
of P7,250.00 and the cost of litigation on a 60-40 ratio. [52]

Similarly, we ruled in Associated Bank v. Court of Appeals that the issuing

institution and the collecting bank should equally share the liability for
the loss of amount represented by the checks concerned due to the
negligence of both parties:

The Court finds as reasonable, the proportionate sharing

of fifty percent-fifty percent (50%-50%). Due to the

negligence of the Province of Tarlac in releasing the

checks to an unauthorized person (Fausto Pangilinan), in
allowing the retired hospital cashier to receive the checks
for the payee hospital for a period close to three years and
in not properly ascertaining why the retired hospital
cashier was collecting checks for the payee hospital in
addition to the hospitals real cashier, respondent Province
contributed to the loss amounting to P203,300.00 and
shall be liable to the PNB for fifty (50%) percent thereof.
In effect, the Province of Tarlac can only recover fifty
percent (50%) of P203,300.00 from PNB.
The collecting bank, Associated Bank, shall be
liable to PNB for fifty (50%) percent of P203,300.00. It is
liable on its warranties as indorser of the checks which
were deposited by Fausto Pangilinan, having guaranteed
the genuineness of all prior indorsements, including that
of the chief of the payee hospital, Dr. Adena Canlas.
Associated Bank was also remiss in its duty to ascertain
the genuineness of the payees indorsement.[53]
A reading of the facts of the two immediately preceding cases would
reveal that the reason why the bank or institution which issued the check
was held partially liable for the amount of the check was because of the
negligence of these parties which resulted in the issuance of the checks.
In the instant case, the trial court correctly found Allied negligent in
issuing the managers check and in transmitting it to Santos without even
a written authorization.[54] In fact, Allied did not even ask for the
certificate evidencing the money market placement or call up Lim Sio Wan
at her residence or office to confirm her instructions. Both actions could
have prevented the whole fraudulent transaction from unfolding. Allieds
negligence must be considered as the proximate cause of the resulting
loss.
To reiterate, had Allied exercised the diligence due from a financial
institution, the check would not have been issued and no loss of funds
would have resulted. In fact, there would have been no issuance of
indorsement had there been no check in the first place.
The liability of Allied, however, is concurrent with that of Metrobank as
the last indorser of the check. When Metrobank indorsed the check in
compliance with the PCHC Rules and Regulations [55] without verifying the
authenticity of Lim Sio Wans indorsement and when it accepted the check
despite the fact that it was cross-checked payable to payees account only,

its negligent and cavalier indorsement contributed to the easier

release of Lim Sio Wans money and perpetuation of the fraud. Given the
relative participation of Allied and Metrobank to the instant case, both
banks cannot be adjudged as equally liable. Hence, the 60:40 ratio of the
liabilities of Allied and Metrobank, as ruled by the CA, must be upheld.
[56]

FCC, having no participation in the negotiation of the check and in the

forgery of Lim Sio Wans indorsement, can raise the real defense of forgery
as against both banks.[57]
As to Producers Bank, Allied Banks argument that Producers Bank
must be held liable as employer of Santos under Art. 2180 of the Civil
Code is erroneous. Art. 2180 pertains to the vicarious liability of an
employer for quasi-delicts that an employee has committed. Such
provision of law does not apply to civil liability arising from delict.
One also cannot apply the principle of subsidiary liability in Art.
103 of the Revised Penal Code in the instant case. Such liability on the
part of the employer for the civil aspect of the criminal act of the
employee is based on the conviction of the employee for a crime. Here,
there has been no conviction for any crime.
As to the claim that there was unjust enrichment on the part of
Producers Bank, the same is correct. Allied correctly claims in its petition
that Producers Bank should reimburse Allied for whatever judgment that
may be rendered against it pursuant to Art. 22 of the Civil Code, which
provides: Every person who through an act of performance by another, or
any other means, acquires or comes into possession of something at the
expense of the latter without just cause or legal ground, shall return the
same to him.

The above provision of law was clarified in Reyes v. Lim, where

we ruled that [t]here is unjust enrichment when a person unjustly retains
a benefit to the loss of another, or when a person retains money or
property of another against the fundamental principles of justice, equity
and good conscience.[58]
In Tamio v. Ticson, we further clarified the principle of unjust
enrichment, thus: Under Article 22 of the Civil Code, there is unjust
enrichment when (1) a person is unjustly benefited, and (2) such benefit is
derived at the expense of or with damages to another.[59]

In the instant case, Lim Sio Wans money market placement in

Allied Bank was pre-terminated and withdrawn without her consent.
Moreover, the proceeds of the placement were deposited in Producers
Banks account in Metrobank without any justification. In other words,
there is no reason that the proceeds of Lim Sio Wans placement should be
deposited in FCCs account purportedly as payment for FCCs money
market placement and interest in Producers Bank. With such payment,
Producers Banks indebtedness to FCC was extinguished, thereby
benefitting the former. Clearly, Producers Bank was unjustly enriched at
the expense of Lim Sio Wan. Based on the facts and circumstances of the
case, Producers Bank should reimburse Allied and Metrobank for the
amounts the two latter banks are ordered to pay Lim Sio Wan.

sentencing
defendant-appellant
Allied
Banking
Corporation to pay sixty (60%) percent and defendantappellee Metropolitan Bank and Trust Company forty
(40%) of the amount of P1,158,648.49 plus 12% interest
per annum from March 16, 1984 until fully paid. The
moral damages, attorneys fees and costs of suit adjudged
shall likewise be paid by defendant-appellant Allied
Banking Corporation and defendant-appellee Metropolitan
Bank and Trust Company in the same proportion of 60-40.
Except as thus modified, the decision appealed from is
AFFIRMED.
SO ORDERED.

It cannot be validly claimed that FCC, and not Producers Bank,

should be considered as having been unjustly enriched. It must be
remembered that FCCs money market placement with Producers Bank
was already due and demandable; thus, Producers Banks payment thereof
was justified. FCC was entitled to such payment. As earlier stated, the fact
that the indorsement on the check was forged cannot be raised
against FCC which was not a part in any stage of the negotiation of the
check. FCC was not unjustly enriched.

Additionally and by way of MODIFICATION, Producers Bank is

hereby ordered to pay Allied and Metrobank the aforementioned amounts.
The liabilities of the parties are concurrent and independent of each other.
SO ORDERED.

From the facts of the instant case, we see that Santos could be the
architect of the entire controversy. Unfortunately, since summons had not
been served on Santos, the courts have not acquired jurisdiction over her.
[60]
We, therefore, cannot ascribe to her liability in the instant case.
Clearly, Producers Bank must be held liable to Allied and
Metrobank for the amount of the check plus 12% interest per annum,
moral damages, attorneys fees, and costs of suit which Allied and
Metrobank are adjudged to pay Lim Sio Wan based on a proportion of
60:40.
WHEREFORE, the petition is PARTLY GRANTED. The March
18, 1998 CA Decision in CA-G.R. CV No. 46290 and the November 15,
1993
RTC
Decision
in
Civil
Case
No.
6757
are AFFIRMED with MODIFICATION.
Thus, the CA Decision is AFFIRMED, the fallo of which is
reproduced, as follows:

WHEREFORE, premises considered, the decision appealed

from is MODIFIED. Judgment is rendered ordering and

Republic of the Philippines

SUPREME COURT
ManilaEN BANC

G.R. No. L-38745 August 6, 1975

LUCIA TAN, plaintiff-appellee,
vs.
ARADOR VALDEHUEZA and REDICULO VALDEHUEZA, defendantsappellants.
Alaric P. Acosta for plaintiff-appellee.
Lorenzo P. de Guzman for defendants-appellants.

CASTRO, J.:
This appeal was certified to this Court by the Court of Appeals as
involving questions purely of law.
The decision a quo was rendered by the Court of First Instance of Misamis
Occidental (Branch I) in an action instituted by the plaintiff-appellee Lucia
Tan against the defendants-appellants Arador Valdehueza and Rediculo
Valdehueza (docketed as civil case 2574) for (a) declaration of ownership
and recovery of possession of the parcel of land described in the first
cause of action of the complaint, and (b) consolidation of ownership of two
portions of another parcel of (unregistered) land described in
the second cause of action of the complaint, purportedly sold to the
plaintiff in two separate deeds of pacto de retro.
After the issues were joined, the parties submitted the following
stipulation of facts:
1. That parties admit the legal capacity of plaintiff to sue;
that defendants herein, Arador, Rediculo, Pacita,
Concepcion and Rosario, all surnamed Valdehueza, are
brothers and sisters; that the answer filed by Arador and
Rediculo stand as the answer of Pacita, Concepcion and
Rosario.
2. That the parties admit the identity of the land in the
first cause of action.
3. That the parcel of land described in the first cause of
action was the subject matter of the public auction sale
held on May 6, 1955 at the Capitol Building in Oroquieta,
Misamis Occidental, wherein the plaintiff was the highest
bidder and as such a Certificate of Sale was executed by
MR. VICENTE D. ROA who was then the Ex-Officio
Provincial Sheriff in favor of LUCIA TAN the herein
plaintiff. Due to the failure of defendant Arador
Valdehueza to redeem the said land within the period of
one year as being provided by law, MR. VICENTE D. ROA
who was then the Ex-Officio Provincial Sheriff executed an
ABSOLUTE DEED OF SALE in favor of the plaintiff LUCIA
TAN.

A copy of the NOTICE OF SHERIFFS SALE is hereby

marked as 'Annex A', the CERTIFICATE OF SALE is
marked as 'Annex B' and the ABSOLUTE DEED OF SALE
is hereby marked as Annex C and all of which are made as
integral parts of this stipulation of facts.
4. That the party-plaintiff is the same plaintiff in Civil Case
No. 2002; that the parties defendants Arador, Rediculo
and Pacita, all Valdehueza were the same partiesdefendants in the same said Civil Case No. 2002; the
complaint in Civil Case No. 2002 to be marked as Exhibit
1; the answer as Exhibit 2 and the order dated May 22,
1963 as Exhibit 3, and said exhibits are made integral part
of this stipulation.
5. That defendants ARADOR VALDEHUEZA and
REDICULO VALDEHUEZA have executed two documents
of DEED OF PACTO DE RETRO SALE in favor of the
plaintiff herein, LUCIA TAN of two portions of a parcel of
land which is described in the second cause of action with
the total amount of ONE THOUSAND FIVE HUNDRED
PESOS (P1,500.00), Philippine Currency, copies of said
documents are marked as 'Annex D' and Annex E',
respectively and made as integral parts of this stipulation
of facts.
6. That from the execution of the Deed of Sale with right
to repurchase mentioned in the second cause of action,
defendants Arador Valdehueza and Rediculo Valdehueza
remained in the possession of the land; that land taxes to
the said land were paid by the same said defendants.
Civil case 2002 referred to in stipulation of fact no. 4 was
a complaint for injunction filed by Tan on July 24, 1957
against the Valdehuezas, to enjoin them "from entering
the above-described parcel of land and gathering the nuts
therein ...." This complaint and the counterclaim were
subsequently dismissed for failure of the parties "to seek
for the immediate trial thereof, thus evincing lack of
interest on their part to proceed with the case. 1

The Deed of Pacto de Retro referred to in stipulation of fact no. 5 as

"Annex D" (dated August 5, 1955) was not registered in the Registry of
Deeds, while the Deed of Pacto de Retro referred to as "Annex E" (dated
March 15, 1955) was registered.
On the basis of the stipulation of facts and the annexes, the trial court
rendered judgment, as follows:
WHEREFORE, judgment is hereby rendered in favor of the
plaintiff:
1. Declaring Lucia Tan the absolute owner of the property
described in the first cause of action of the amended
complaint; and ordering the herein defendants not to
encroach and molest her in the exercise of her proprietary
rights; and, from which property they must be
dispossessed;
2. Ordering the defendants, Arador Valdehueza and
Rediculo Valdehueza jointly and severally to pay to the
plaintiff, Lucia Tan, on Annex 'E' the amount of P1,200,
with legal interest of 6% as of August 15, 1966, within 90
days to be deposited with the Office of the Court within 90
days from the date of service of this decision, and that in
default of such payment the property shall be sold in
accordance with the Rules of Court for the release of the
mortgage debt, plus costs;
3. And as regards the land covered by deed of pacto de
retro annex 'D', the herein defendants Arador Valdehueza
and Rediculo Valdehueza are hereby ordered to pay the
plaintiff the amount of P300 with legal interest of 6% from
August 15, 1966, the said land serving as guaranty of the
said amount of payment;
4. Sentencing the defendants Arador Valdehueza and
Rediculo Valdehueza to pay jointly and severally to the
herein plaintiff Lucia Tan the amount of 1,000.00 as
attorney's fees; and .
5. To pay the costs of the proceedings.
The Valdehuezas appealed, assigning the following errors:

That the lower court erred in failing to adjudge on the first

cause of action that there exists res judicata; and
That the lower court erred in making a finding on the
second cause of action that the transactions between the
parties were simple loan, instead, it should be declared as
equitable mortgage.
We affirm in part and modify in part.
1. Relying on Section 3 of Rule 17 of the Rules of Court which pertinently
provides that a dismissal for failure to prosecute "shall have the effect of
an adjudication upon the merits," the Valdehuezas submit that the
dismissal of civil case 2002 operated, upon the principle of res judicata, as
a bar to the first cause of action in civil case 2574. We rule that this
contention is untenable as the causes of action in the two cases are not
identical. Case 2002 was for injunction against the entry into and the
gathering of nuts from the land, while case 2574 seeks to "remove any
doubt or cloud of the plaintiff's ownership ..." (Amended complaint, Rec.
on App., p. 27), with a prayer for declaration of ownership and recovery of
possession.
Applying the test of absence of inconsistency between prior and
subsequent judgments, 2 we hold that the failure of Tan, in case 2002, to
secure an injunction against the Valdehuezas to prevent them from
entering the land and gathering nuts is not inconsistent with her being
adjudged, in case 2574, as owner of the land with right to recover
possession thereof. Case 2002 involved only the possession of the land
and the fruits thereof, while case 2574 involves ownership of the land,
with possession as a mere attribute of ownership. The judgment in the
first case could not and did not encompass the judgment in the second,
although the second judgment would encompass the first. Moreover, the
new Civil Code provides that suitors in actions to quiet title "need not be
in possession of said property. 3
2. The trial court treated the registered deed of pacto de retro as an
equitable mortgage but considered the unregistered deed of pacto de
retro "as a mere case of simple loan, secured by the property thus sold
under pacto de retro," on the ground that no suit lies to foreclose an
unregistered mortgage. It would appear that the trial judge had not
updated himself on law and jurisprudence; he cited, in support of his
ruling, article 1875 of the old Civil Code and decisions of this Court circa
1910 and 1912.

Under article 1875 of the Civil Code of 1889, registration was a necessary
requisite for the validity of a mortgage even as between the parties, but
under article 2125 of the new Civil Code (in effect since August 30,1950),
this is no longer so. 4
If the instrument is not recorded, the mortgage is
nonetheless binding between the parties. (Article 2125,
2nd sentence).
The Valdehuezas having remained in possession of the land and the realty
taxes having been paid by them, the contracts which purported to
be pacto de retro transactions are presumed to be equitable
mortgages, 5 whether registered or not, there being no third parties
involved.
3. The Valdehuezas claim that their answer to the complaint of the
plaintiff affirmed that they remained in possession of the land and gave
the proceeds of the harvest to the plaintiff; it is thus argued that they
would suffer double prejudice if they are to pay legal interest on the
amounts stated in the pacto de retro contracts, as the lower court has
directed, and that therefore the court should have ordered evidence to be
adduced on the harvest.
The record does not support this claim. Nowhere in the original and the
amended complaints is an allegation of delivery to the plaintiff of the
harvest from the land involved in the second cause of action. Hence, the
defendants' answer had none to affirm.
In submitting their stipulation of facts, the parties prayed "for its approval
and maybe made the basis of the decision of this Honorable Court. "
(emphasis supplied) This, the court did. It cannot therefore be faulted for
not receiving evidence on who profited from the harvest.
4. The imposition of legal interest on the amounts subject of the equitable
mortgages, P1,200 and P300, respectively, is without legal basis, for, "No
interest shall be due unless it has been expressly stipulated in writing."
(Article 1956, new Civil Code) Furthermore, the plaintiff did not pray for
such interest; her thesis was a consolidation of ownership, which was
properly rejected, the contracts being equitable mortgages.
With the definitive resolution of the rights of the parties as discussed
above, we find it needless to pass upon the plaintiffs petition for

receivership. Should the circumstances so warrant, she may address the

said petition to the court a quo.
ACCORDINGLY, the judgment a quo is hereby modified, as follows: (a) the
amounts of P1,200 and P300 mentioned in Annexes E and D shall bear
interest at six percent per annum from the finality of this decision; and (b)
the parcel of land covered by Annex D shall be treated in the same
manner as that covered by Annex E, should the defendants fail to pay to
the plaintiff the sum of P300 within 90 days from the finality of this
decision. In all other respects the judgment is affirmed. No costs.

SECOND DIVISION
SPOUSES JOVENAL TORING and CECILIA
ESCALONA-TORING,
Petitioners,

G.R. No. 168782

Present:

QUISUMBING, J., Chairperson

CARPIO MORALES,
TINGA,
VELASCO, JR., and
BRION, JJ.

- versus -

SPOUSES ROSALIE GANZON-OLAN

GILBERT OLAN, and ROWENA OLAN,
Respondents.

and
Promulgated:

October 10, 2008

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
DECISION
QUISUMBING, J.:
This petition for review on certiorari assails the Decision [1] and
Resolution,[2] dated March 28, 2005 and June 30, 2005, respectively, of
the Court of Appeals in CA-G.R. CV No. 76831. The Court of Appeals
affirmed the Resolution[3] dated June 10, 2002 of the Regional Trial Court,
Branch 276, Muntinlupa City, in Civil Case No. 00-137 which had ordered
petitioners to pay respondents the sum of P20,000,000 representing the
total amount of petitioners loan and interest due.

The facts are as follows:

On September 4, 1998, petitioner Jovenal Toring obtained from
respondents a loan amounting to P6,000,000 at 3% interest per
month. The loan was secured by a mortgage on a parcel of land covered
by Transfer Certificate of Title No. T-27418,[4] as evidenced by a Deed of
Real Estate Mortgage[5] dated September 8, 1998.
On September 23, 1998, the parties executed a Deed of Absolute
Sale[6] conveying
the
mortgaged
property
in
favor
of
respondents. Subsequently, respondents gave petitioners an exclusive
option to repurchase the land for P10,000,000. This was embodied in a
document denominated as an Option to Buy [7] dated September 28,
1998. On this same document, respondents acknowledged receipt of a
total sum of P10,000,000 as consideration for the purchase of the land.
[8]
The Option to Buy provided that if the option is exercised after
December 5, 1998, the purchase price shall increase at the rate
of P300,000 or 3% of the purchase price every month until September 5,
1999 and thereafter at the rate of P381,000 or 3.81% of the purchase
price every month, with the fifth of every month as the cut-off date for
said increases.[9]
On July 28, 2000, petitioners filed a Complaint[10] docketed as Civil
Case No. 00-137 for reformation of instruments, abuse of rights and
damages against respondents.Petitioners prayed that the Deed of
Absolute Sale dated September
23,
1998 and
Option
to
Buy
dated September 28, 1998, be treated as an equitable mortgage instead of
a sale.
At the pre-trial, the parties made the following stipulations: (1) the
principal amount of P10,000,000 has long become overdue; (2) no
payment has been made; (3) the parties had agreed on an equitable
mortgage and not a sale.[11] The parties limited the issues on the amount
of interest due and the time of payment of the entire
obligation.Thereafter, the court ordered the parties to submit their
respective position papers, but only respondents complied. All other
claims for damages were waived by the parties.[12]
On June 10, 2002, the trial court issued its Resolution, the
pertinent portion of which reads:

...the document of mortgage specified the

interest at 3.81% per month from the time it was
obtained,
and
which
was
now
estimated
to
be P7,239,000.00. This sum should be added to the total
loan of TEN MILLION PESOS, . . .
xxxx
Therefore, judgment is rendered for defendants
ROSALIE GANZON OLAN and GILBERT OLAN [and]
ROWENA
GANZON since
the
loan
is
not
denied, directing
spouses
[p]laintiffs
JOVENAL
TORING and CECILIA ESCALONA TORING, to pay
the sum of TWENTY MILLION PESOS within one
month from receipt of this decision.
xxxx
It [i]s SO ORDERED.[13] (Emphasis supplied.)

Petitioners appealed, contending that the trial court erred in

awarding interest. Petitioners stress that Article 1602 [14] of the Civil Code
governing equitable mortgages provides that any money, fruits or other
benefit to be received by the vendee as rent or otherwise shall be
considered as interest which shall be subject to the usury laws. Thus,
there should have been no award of interest.
On March 28, 2005, the Court of Appeals affirmed the trial courts
ruling, as follows:
WHEREFORE, the June 10, 2002 Resolution of the
Regional Trial Court, Branch 276, Muntinlupa City, is
hereby AFFIRMED.
SO ORDERED.[15]

Their motion for reconsideration having been denied, petitioners

now come before us raising the sole issue:
WHETHER OR NOT THE HONORABLE COURT OF
APPEALS COMMITTED A REVERSIBLE ERROR IN
DENYING PETITIONERS APPEAL AND IN AFFIRMING

THE DECISION OF [THE] TRIAL COURT DATED JUNE 10,

2002.[16]

Simply put, the issue is: Did the Court of Appeals err in sustaining the
trial courts ruling upholding the 3% and 3.81% stipulated monthly
interest?
Petitioners contend that they are not liable to pay interest as the
stipulated
monthly
rates
of
3%
and
3.81%[17] are
unconscionable. Petitioners
further
contend
that
the
reformed
instrument, i.e., the Option to Buy dated September 28, 1998, did not
mention any rate of interest chargeable to the loan but rather, an
escalation[18] of the purchase price.
On the other hand, respondents maintain that petitioners are liable to pay
interest based on the Deed of Absolute Sale and Option to Buy executed
by the parties. Respondents assert that the P300,000 and P381,000
differences per month as stated in the Option to Buy represents the 3% or
3.81% interest to be charged on the loan. Respondents further assert that
the 3% or 3.81% interest is not usurious since Central Bank Circular No.
905-82[19] removed the ceiling on interest rates on secured and unsecured
loans.
In resolving the issue in this controversy, we have agreed to focus our
attention on the basic provisions of statutes as well as the prior decisions
of this Court bearing on rates of interest on monetary obligations.
In a loan or forbearance of money, according to the Civil Code, the
interest due should be that stipulated in writing, [20] and in the absence
thereof, the rate shall be 12% per annum.[21]
The first time that the parties in this case entered into a loan
transaction was on September 4, 1998 when petitioners obtained
the P6,000,000 loan from respondents. Based on the Deed of Real Estate
Mortgage dated September 8, 1998 embodying the promissory note
dated September 4, 1998, the parties agreed on an interest rate of 3% per
month.
The second and third times that the parties transacted were on
September 23 and 28, 1998 when they executed the Deed of Absolute

Sale and the Option to Buy, respectively. These two documents were the
instruments reformed in Civil Case No. 00-137, where both parties agreed
that the transactions embodied therein were really that of an equitable
mortgage. The stipulation in a contract sharply escalating the repurchase
price every month is for the purpose of securing the return of money
invested
with
substantial
profit
or
interest. [22] Undoubtedly,
the P300,000 and P381,000 successive increases stated in the Option to
Buy represent the monthly interest which respondents sought to recover
from petitioners.
While the parties are free to stipulate on the interest to be
imposed on monetary obligations, the Court will temper interest rates if
they are unconscionable.[23] Even if the Usury Law has been suspended by
Central Bank Circular No. 905-82, and parties to a loan agreement have
been given wide latitude to agree on any interest rate, we have held that
stipulated interest rates are illegal if they are unconscionable.
[24]
Consequently, in our view, the Court of Appeals erred in sustaining the
trial courts decision upholding the stipulated interest of 3% and
3.81%. Thus, we are unanimous now in our ruling to reduce the above
stipulated interest rates to 1% per month, in conformity with our ruling
inRuiz v. Court of Appeals.[25] For as well stressed in that case:
Nothing in the said circular [CB Circular No. 905,
s. 1982] 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.

Undeniably, in the present case, petitioners failed to pay the

principal loan on its maturity and upon demand by respondents, as well as
the interest payments thereafter.Indeed, petitioners cannot turn their
backs on their obligation; they have to comply with what is incumbent
upon them. All other claims for damages having been waived by the
parties, petitioners are bound to pay respondents the principal loan
of P10,000,000, plus what we have repeatedly held as the appropriate
rate of interest of 1% per month, fromDecember 6, 1998 [26] until fully
paid.
WHEREFORE, the assailed Decision and Resolution dated March
28, 2005 and June 30, 2005, respectively, of the Court of Appeals in CAG.R. CV No. 76831 areMODIFIED to the effect that the stipulated
interest rate of 3% or 3.81% per month on the subject equitable mortgage

is hereby ordered REDUCED to 1% per month only. No pronouncement

as to costs.

installments due, the stipulated interest of six percent (6%) per annum on
the outstanding balance is null and void; and that the amount of 650.00
representing overpayment be returned to her.

SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 76518 July 13, 1990
IRENE P. RELUCIO, petitioner,
vs.
ZEIDA B. BRILLANTE-GARFIN and COURT OF
APPEALS, respondents.
Orlando A. Martizano for petitioner.
Sivestre V. Garfin for private respondent.
RESOLUTION

FELICIANO, J.:
On 22 October 1979, private respondent Zeida B. Brillante-Garfin filed a
complaint in the lower court for specific performance with damages
against petitioner Irene P. Relucio, to compel the latter to: (a) execute, in
compliance with the Contract to Buy and Sell in question, a final deed of
sale in favor of the former over two (2) residential subdivision lots in the
Mariano Village Subdivision, Naga City; and (b) construct paved roads on
the northern and southern sides of the lots, as "necessary facilities,
improvements, infrastructures and other forms of development of the
subdivision area." Private respondent alleged that the lots, which have a
total contract price of P10,800.00, have already been paid for, as she had
already paid P200.00 as down payment, and had subsequently completed
payment of 128 equal monthly installments of P89.45 each amounting to
P11,450.00; that as the law allows the charging of interest only as
monetary interest or as compensatory interest, none of which have
obtained in her case, as she had never incurred in delay in the payment of

Petitioner resisted the complaint, maintaining that private respondent,

contrary to the latter's allegations, is obliged to pay interest on the
installment payments of the unpaid outstanding balance even if paid on
their "due dates" per schedule of payments; that private respondent had
actually been in arrears in the amount of P4,269.40, representing such
interest as of June 1979, which therefore entitled petitioner to cancel the
contract in question. Petitioner then prayed for judicial affirmance of her
Notarial Notice of Cancellation over the said contract in question.
The lower court ordered petitioner:
1. To execute a deed of absolute sale of the two lots
described in the complaint in favor of the plaintiff to
enable the latter to secure the corresponding certificate of
title in her name within thirty (30) days from the finality of
this Decision;
2. To construct or cause the construction of roads on the
Northern and Southern sides of the said two lots in
accordance with the contract if any, and in conformity
with the City of Naga planning ordinance relative to this
case;
3. The return to the plaintiff the excess payment of
P650.00, plus 6% interest per annum from the date of the
filing of the complaint; and
To pay to the plaintiff attorney's fees in the sum of P
l,000.00 and the costs of suit. 1
The Court of Appeals affirmed in A.C.-GR CV No. 03194 by a
Decision 2 dated 17 July 1986.
Petitioner now comes to this Court, arguing that she has the right to
rescind the contract for private respondent's continued refusal to pay the
monthly installments on the contract price.
Two issues are presented for resolution in this petition: (1) whether or not
private respondent has fully paid the stipulated price in the contract so as

to be entitled lawfully to demand the execution of a deed of absolute sale

in her favor. This issue in turn will depend on the question of whether or
not petitioner may validly charge interest on installment payments,
notwithstanding that private respondent had been prompt in her monthly
payments; and (2) whether or not petitioner's notice of cancellation was
valid and effective.
Examination of the record shows that the questioned Contract to Buy and
Sell the subdivision lots provided for payment by private respondent of
the sum of P200.00 as downpayment, and that "the balance [of
P10,600.00] shall be paid in 180 monthly installments at P89.45 per
month, including interest rate at six percent (6%) per annum, until the
purchase price is fully paid." 3 This stipulation clearly specified that an
interest charge of six percent (6%) per annum was included in the
monthly installment price: private respondent could not have helped
noticing that P89.45 multiplied by 180 monthly installments equals
P16,101.00, and not P10,600.00. The contract price of P10,800.00 may
thus be seen to be the cash price of the subdivision lots, that is, the
amount payable if the price of the lots were to be paid in cash and in full
at the execution of the contract; it is not the amount that the vendor will
have received in the aggregate after fifteen (15) years if the vendee shall
have religiously paid the monthly installments. The installment
price, upon the other hand, of the subdivision lots-the sum total of the
monthly installments (i.e., P16,101.00) typically, as in the instant case, has
an interest component which compensates the vendor for waiting fifteen
(15) years before receiving the total principal amount of P10,600.00.
Economically or financially, P10,600.00 delivered in full today is simply
worth much more than a long series of small payments totalling, after
fifteen (15) years, P10,600.00. For the vendor, upon receiving the full cash
price, could have deposited that amount in a bank, for instance, and
earned interest income which at six percent (6%) per year and for fifteen
(15) years, would precisely total P5,501.00 (the difference between the
installment price of P16,101.00 and the cash price of P10,600.00) To
suppose, as private respondent argues, that mere prompt payment of the
monthly installments as they fell due would obviate application of the
interest charge of six percent (6%) per annum, is to ignore that simple
economic fact. That economic fact is, of course, recognized by law, which
authorizes the payment of interest when contractually stipulated for by
the parties 4 or when implied in recognized commercial custom or usage.
Vendor and vendee are legally free to stipulate for the payment of either
the cash price of a subdivision lot or its installment price. Should the
vendee opt to purchase a subdivision lot via the installment payment
system, he is in effect paying interest on the cash price, whether the fact

and rate of such interest payment is disclosed in the contract or not. The
contract for the purchase and sale of a piece of land on the installment
payment system in the case at bar is not only quite lawful; it also reflects
a very wide spread usage or custom in our present day commercial life.
Applying the foregoing analysis to the case at bar: when private
respondent started paying monthly installments in September 1968, the
initial P89.45 was apportioned between the principal and the interest,
with P53.00 5 being allocated to service the interest charge and
P36.45 6 being credited to the principal. During the succeeding monthly
payments, however, as the outstanding balance on the principal gradually
declined, the interest component (in absolute terms) correspondingly fell
while the component credited to the principal increased proportionately,
thus amortizing the balance of the principal purchase prize as that
balance gradually declined. 7 This explains petitioner's theory of declining
balance, which unfortunately was not appreciated by both the trial and
appellate courts.
Despite private respondent's failure to fully pay the stipulated price of the
two lots in question, petitioner, however, could not validly rescind the
contract not being lawfully entitled to do so. Petitioner failed to rebut
private respondents' allegations that the former had failed to introduce
required improvements in the subdivision; the former's bare allegation
that the improvements have already been donated to the city government
was not accepted by the trial court. Section 23 of Presidential Decree No.
957, otherwise known as The Subdivision and Condominium Buyers'
Protective Decree, provides:
Section 23. Non-forfeiture of Payments. No installment
payment made by the buyer in a subdivision or
condominium project for the lot or unit he contracted to
buy shall be forfeited in favor of the owner or developer
when the buyer, after due notice to the owner or
developer desists front further payment due to the failure
of the owner or developer to develop the subdivision or
condominium project according to the approved plans and
within the time limit for complying with the same. Such
buyer may, at his option, be reimbursed the total amount
paid. . . (Emphasis supplied)
In this respect, the trial court was correct in holding that
petitioner could not rescind the contract. As the law vests upon
the buyer the option to demand reimbursement of the total
amount paid, or to wait for further development of the

subdivision, private respondent who opted for the latter

alternative by waiting for the proper development of the site, may
not be ousted from the subdivision. 8
ACCORDINGLY, the Court Resolved to GRANT the Petition due course and
to SET ASIDE and NULLIFY the Decision of the Court of Appeals. In lieu
thereof, a new Decision is hereby RENDERED requiring
1. the petitioner to complete the necessary improvements
and developments in the subdivision area in accordance
with the approved subdivision plans and applicable
provisions of P.D. No. 957 as well as applicable
implementing administrative regulations and City of Naga
zoning ordinances, if any;
2. private respondent immediately to resume paying
installment payments under her Contract to Buy and Sell
with petitioner, subject to her right to proceed against
petitioner should petitioner fail again to comply with her
obligations under P.D. No. 957; and
3. petitioner to execute the Deed of Absolute Sale when
private respondent shall have fully paid the purchase price
in accordance with the mentioned Contract to Buy and
Sell.
No pronouncement as to costs.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 90676

June 19, 1991

STATE INVESTMENT HOUSE, INC., petitioner,

vs.
THE HONORABLE COURT OF APPEALS, HON. JUDGE PERLITA J.
TRIA TIRONA, Presiding Judge of the Regional Trial Court of

Quezon City, Branch CII and SPS. RAFAEL and REFUGIO

AQUINO, respondents.
Padilla Law Office for petitioner.
Rodolfo T. Galing and Chaves, Hechanova & Lim Law Offices for private
respondents.

FELICIANO, J.:
On 5 April 1982, respondent spouses Rafael and Refugio Aquino pledged
certain shares of stock to petitioner State Investment House, Inc. ("State")
in order to secure a loan of P120,000.00 designated as Account No. IF-820631-AA. Prior to the execution of the pledge, respondent-spouses, as an
accommodation to and together with the spouses Jose and Marcelina
Aquino, signed an agreement (Account No. IF-82-1379-AA) with petitioner
State for the latter's purchase of receivables amounting to P375,000.00.
When Account No. IF-82-0631-AA fell due, respondent spouses paid the
same partly with their own funds and partly from the proceeds of another
loan which they obtained also from petitioner State designated as Account
No. IF-82-0904-AA. This new loan was secured by the same pledge
agreement executed in relation to Account No. IF-820631-AA. When the
new loan matured, State demanded payment. Respondents expressed
willingness to pay, requesting that upon payment, the shares of stock
pledged be released. Petitioner State denied the request on the ground
that the loan which it had extended to the spouses Jose and Marcelina
Aquino (Account No. IF-82-1379- AA) had remained unpaid.
On 29 June 1984, Atty. Rolando Salonga sent to respondent spouses a
Notice of Notarial Sale stating that upon request of State and by virtue of
the pledge agreement, he would sell at public auction the shares of stock
pledged to State. This prompted respondents to file a case before the
Regional Trial Court of Quezon City alleging that the intended foreclosure
sale was illegal because from the time the obligation under Account No.
IF-82-0904-AA became due, they had been able and willing to pay the
same, but petitioner had insisted that respondents pay even the loan
account of Jose and Marcelina Aquino which had not been secured by the
pledge. It was further alleged that their failure to pay their loan (Account
No. IF-82-0904-AA) was excused because the petitioner State itself had
prevented the satisfaction of the obligation.

The trial court, in a decision dated 14 December 1984 rendered by Judge

Willelmo Fortun, initially dismissed the complaint. Respondent spouses
filed a motion for reconsideration praying for a new decision ordering
petitioner State to release the shares upon payment of respondents' loan
"without interest," as the latter had not been in delay in the performance
of their obligation. State countered that the pledge executed by
respondent spouses also covered the loan extended to Jose and Marcelina
Aquino, which too should be paid before the shares may be released.
Acting on the motion for reconsideration, Judge Fortun set aside his
original decision and rendered a new judgment dated 29 January 1985,
ordering State to immediately release the pledge and to deliver to
respondents the share of stock "upon payment of the loan under Code No.
82-0904-AA."
On appeal, the Court of Appeals affirmed in toto the new decision of the
trial court, holding that the loan extended to Jose and Marcelina Aquino,
having been executed prior to the pledge was not covered by the pledge
which secured only loans executed subsequently. Thus, upon payment of
the loan under Code No. IF-0904-AA, the shares of stock should be
released. The decisions of the Court of Appeals and of Judge Fortun
became final and executory.
Upon remand of the records of the case to the trial court for execution,
there developed disagreement over the amount which respondent spouses
Rafael and Refugio Aquino should pay to secure the release of the shares
of stock petitioner State contending that respondents should also pay
interest and respondents arguing they should not. Respondent spouses
then filed a motion with the trial court to clarify the Fortun decision
praying that an order issue clarifying the phrase "upon payment of
plaintiffs' loan" to mean upon payment of plaintiff' loan in the principal
amount of P110,000.00 alone, "without interest, penalties and other
charges."
On 17 February 1989, the trial court, speaking this time through Judge
Perlita Tria Tirona, rendered a decision purporting to clarify the decision
of Judge Fortun and ruling that petitioner State shall release respondents'
shares of stock upon payment by respondents of the principal of the loan
as set forth in PN No. 82-0904-AA in the amount of P110,000.00, without
interest, penalties and other charges.
Petitioner State appealed Judge Tirona's decision to the Court of Appeals;
the appeal was dismissed. The Court of Appeals agreed with Judge Tirona
that no interest need be paid and added that the clarificatory (Tirona)

decision of the trial court merely restated what had been provided for in
the earlier (Fortun) decision; that the Tirona decision did not go beyond
what had been adjudged in the earlier decision. The motion for
reconsideration filed by petitioner was accordingly denied.
Hence, this Petition for Review contending that no manifest ambiguity
existed in the decision penned by Judge Fortun; that the trial court
through Judge Tirona, erred in clarifying the decision of Judge Fortun; and
that the amendment sought to be introduced in the Fortun decision by
respondents may not be made as the same was substantial in nature and
the Fortun decision had become final.
We begin by noting that the trial court has asserted authority to issue the
clarificatory order in respect of the decision of Judge Fortun, even though
that judgment had become final and executory. In Reinsurance Company
of the Orient, Inc. v. Court of Appeals,1 this Court had occasion to deal
with the applicable doctrine to some extent:
- - - [E]ven a judgment which has become final and executory may
be clarified under certain circumstances. The dispositive portion
of the judgment may, for instance, contain an error clearly clerical
in nature (perhaps best illustrated by an error in arithmetical
computation) or an ambiguity arising from inadvertent omission,
which error may be rectified or ambiguity clarified and the
omission supplied by reference primarily to the body of the
decision itself Supplementary reference to the pleadings
previously filed in the case may also be resorted to by way of
corroboration of the existence of the error or of the ambiguity in
the dispositive part of the judgment. In Locsin, et al. v. Parades, et
al., this Court allowed a judgment which had become final and
executory to be clarified by supplying a word which had been
inadvertently omitted and which, when supplied, in effect changed
the literal import of the original phraseology:
. . . it clearly appears from the allegations of the
complaint, the promissory note reproduced therein and
made a part thereof, the prayer and the conclusions of fact
and of law contained in the decision of the respondent
judge, that the obligation contracted by the petitioners is
joint and several and that the parties as well as the trial
judge so understood it. Under the juridical rule that the
judgment should be in accordance with the allegations,
the evidence and the conclusions of fact and law, the
dispositive part of the judgment under consideration

should have ordered that the debt be paid 'severally' and

in omitting the word or adverb 'severally' inadvertently,
said judgment became ambiguous. This ambiguity may be
clarified at any time after the decision is rendered and
even after it had become final (34 Corpus Juris, 235, 326).
This respondent judge did not, therefore, exceed his
jurisdiction in clarifying the dispositive part of the
judgment by supplying the omission. (Emphasis supplied)
In Filipino Legion Corporation vs. Court of Appeals, et al., the applicable
principle was set out in the following terms:
[W]here there is ambiguity caused by an omission or mistake in the
dispositive portion of a decision, the court may clarify such ambiguity by
an amendment even after the judgment had become final, and for this
purpose it may resort to the pleadings filed by the parties, the court's
findings of facts and conclusions of law as expressed in the body of the
decision. (Emphasis supplied)
In Republic Surety and Insurance Company, Inc. v. Intermediate Appellate
Court, the Court, in applying the above doctrine, said:
. . . We clarify, in other words, what we did affirm. That is involved here is
not what is ordinarily regarded as a clerical error in the dispositive part of
the decision of the Court of First Instance, . . . At the same time, what is
involved here is not a correction of an erroneous judgment or dispositive
portion of a judgment. What we believe is involved here is in the nature of
an inadvertent omission on the part of the Court of First Instance (which
should have been noticed by private respondents' counsel who had
prepared the complaint), of what might be described as a logical followthrough of something set forth both in the body of the decision and in the
dispositive portion thereof; the inevitable follow-through, or translation
into, operational or behavioral terms, of the annulment of the Deed of
Sale with Assumption of Mortgage, from which petitioners' title or claim
of title embodied in TCT 133153 flows. (Emphasis
supplied)2 (Underscoring in the original; citations omitted)
The question we must resolve is thus whether or not there is an ambiguity
or clerical error or inadvertent omission in the dispositive portion of the
decision of Judge Fortun which may be legitimately clarified by referring
to the body of the decision and perhaps even the pleadings filed before
him. The decision of Judge Fortun disposing of the motion for
reconsideration filed by respondent spouses Rafael and Refugio Aquino

consisted basically of quoting practically the whole motion for

reconsideration. In its dispositive portion, Judge Fortun's decision stated:
WHEREFORE, plaintiffs "Motion for Reconsideration" dated
January 3, 1985, is granted and the decision of this Court dated
December 14, 1984 is hereby revoked and set aside and another
judgment is hereby rendered in favor of plaintiffs as follows:
(1) Ordering defendants to immediately release the pledge on, and
to deliver to plaintiffs, the shares of stocks enumerated and
described in paragraph 4 of plaintiffs' complaint dated July 17,
1984, upon payment of plaintiffs loan under Code No. 82-0904-AA
to defendants;
(2) Ordering defendant State Investment House, Inc. to pay to
plaintiffs P10,000.00 as moral damages, P5,000.00 as exemplary
damages, P6,000.00 as attorney's fees, plus costs;
(3) Dismissing defendants' counterclaim, for lack of merit and
making the preliminary injunction permanent.
SO ORDERED.3
Judge Fortun evidently meant to act favorably on the motion for
reconsideration of the respondent Aquino spouses and in effect accepted
respondent spouses' argument that they
had not incurred mora considering that their failure to pay PN No. IF820904-AA on time had been due to petitioner State's unjustified refusal to
release the shares pledged to it. It is not, however, clear to what precise
extent Judge Fortun meant to grant the motion for reconsideration. The
promissory note in Account No. IF-82-0904-AA had three (3) components:
(a) principal of the loan in the amount of P110,000.00; (b) regular interest
in the amount of seventeen percent (17%) per annum; and (c) additional
or penalty interest in case of non-payment at maturity, at the rate of two
percent (2%) per month or twenty-four percent (24%) per annum. In the
dispositive part of his resolution, Judge Fortun did not specify which of
these components of the loan he was ordering respondent spouses to pay
and which component or components he was in effect deleting. We cannot
assume that Judge Fortun meant to grant the relief prayed for by
respondent spouses in all its parts. For one thing, respondent spouses in
their motion for reconsideration asked for "at least P50,000.00" for moral
damages and "at least P50,000.00" for exemplary damages, as well as
P20,000.00 by way of attorney's fees and litigation expenses. Judge

Fortun granted respondent spouses only P10,000.00 as moral damages

and P5,000.00 as exemplary damages, plus P6,000.00 as attorney's fees
and costs. For another, respondent spouses asked Judge Fortun to order
the release of the shares pledged "upon payment of [respondent spouses']
loan under Code No. 82-0904-AA without interest, as plaintiffs were not in
delay in accordance with Article 69 of the New Civil Code " (Emphasis
supplied). In other words, respondent spouses did not themselves become
very clear what they were asking Judge Fortun to grant them; they did not
apparently distinguish between regular interest or "monetary interest" in
the amount of seventeen percent (17%) per annum and penalty charges or
"compensatory interest" in the amount of two percent (2%) per month or
twenty-four percent (24%) per annum.
It thus appears that the Fortun decision was ambiguous in the sense that
it was cryptic. We believe that in these circumstances, we must assume
that Judge Fortun meant to decide in accordance with law, that we cannot
fairly assume that Judge Fortun was grossly ignorant of the law, or that he
intended to grant the respondent spouses relief to which they were not
entitled under law. Thus, the ultimate question which arises is: if
respondent Aquino spouses were not in delay, what should they have been
held liable for in accordance with law?
We believe and so hold that since respondent Aquino spouses were held
not to have been in delay, they were properly liable only for: (a) the
principal of the loan or P110,000.00; and (b) regular or monetary interest
in the amount of seventeen percent (17%) per annum. They
were not liable for penalty or compensatory interest, fixed by the
promissory note in Account No. IF-82-0904-AA at two percent (2%) per
month or twenty-four (24%) per annum. It must be stressed in this
connection that under Article 2209 of the Civil Code which provides that
. . . [i]f the obligation consists in the payment of a sum of money,
and the debtor incurs in delay. the indemnity for damages, there
being no stimulation to the contrary. shall be the payment of the
interest agreed upon, and in the absence of stipulation, the legal
interest, which is six per cent per annum.
the appropriate measure for damages in case of delay in discharging an
obligation consisting of the payment of a sum or money, is the payment of
penalty interest at the rate agreed upon; and in the absence of a
stipulation of a particular rate of penalty interest, then the payment of
additional interest at a rate equal to the regular monetary interest; and if
no regular interest had been agreed upon, then payment of legal interest
or six percent (6%) per annum.4

The fact that the respondent Aquino spouses were not in default
did not mean that they, as a matter of law, were relieved from the
payment not only of penalty or compensatory interest at the rate of
twenty-four percent (24%) per annum but also of regular or monetary
interest of seventeen percent (17%) per annum. The regular or monetary
interest continued to accrue under the terms of the relevant promissory
note until actual payment is effected. 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. The
relevant rule is set out in Article 1256 of the Civil Code which provides as
follows:
Art. 1256. If the creditor to whom tender of payment has been
made refuses without just cause to accept it, the debtor shall be
released from responsibility by the consignation of the thing or
sum due.
Consignation alone shall produce the same effect in the following
cases:
(1) When the creditor is absent or unknown, or does not appear at
the place of payment;
(2) When he is incapacitated to receive the payment at the time it
is due;
(3) When, without just cause, he refuses to give a receipt;
(4) When two or more persons claim the same right to collect;
(5) When the title of the obligation has been lost. (Emphasis
supplied)
Where the creditor unjustly refuses to accept payment, the debtor
desirous of being released from his obligation must comply with two (2)
conditions: (a) tender of payment; and (b) consignation of the sum due.
Tender of payment must be accompanied or followed by consignation in
order that the effects of payment may be produced. Thus, in Llamas v.
Abaya,5 the Supreme Court stressed that a written tender of payment
alone, without consignation in court of the sum due, does not suspend the
accruing of regular or monetary interest.

In the instant case, respondent spouses Aquino, while they are properly
regarded as having made a written tender of payment to petitioner State,
failed to consign in court the amount due at the time of the maturity of
Account No. IF-820904-AA. It follows that their obligation to pay principalcum-regular or monetary interest under the terms and conditions of
Account No. IF-82-0904-AA was not extinguished by such tender of
payment alone.
For the respondent spouses to continue in possession of the principal of
the loan amounting to P110,000.00 and to continue to use the same after
maturity of the loan without payment of regular or monetary interest,
would constitute unjust enrichment on the part of the respondent spouses
at the expense of petitioner State even though the spouses had not been
guilty of mora. It is precisely this unjust enrichment which Article 1256 of
the Civil Code prevents by requiring, in addition to tender of payment, the
consignation of the amount due in court which amount would thereafter
be deposited by the Clerk of Court in a bank and earn interest to which
the creditor would be entitled.

SO ORDERED.
Fernan, C.J., Gutierrez, Jr., Bidin and Davide, Jr., JJ., concur.

Republic of the Philippines

Supreme Court
Manila

THIRD DIVISION

INTERNATIONAL CONTAINER

G.R. No. 161539

TERMINAL SERVICES, INC.,

WHEREFORE, the Petition for Review is hereby GRANTED DUE COURSE.
The Decision of the Court of Appeals dated 30 August 1989 in C.A.G.R. No. 17954 and the Decision of the Regional Trial Court dated 17
February 1989 in Civil Case No. Q-42188 are hereby REVERSED and SET
ASIDE. The dispositive portion of the decision of Judge Fortun is hereby
clarified so as to read as follows:
(1) Ordering defendants to immediately release the pledge and to deliver
to the plaintiff spouses Rafael and Refugio Aquino the shares of stock
enumerated and described in paragraph 4 of said spouses' complaint
dated 17 July 1984, upon full payment of the amount of P110,000.00 plus
seventeen percent (17%) per annum regular interest computed from the
time of maturity of the plaintiffs' loan (Account No. IF-82-0904-AA) and
until full payment of such principal and interest to defendants;

Petitioner,

Present:

YNARES-SANTIAGO, J.,
Chairperson,
- versus -

AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
NACHURA, and
REYES, JJ.

FGU INSURANCE
(2) Ordering defendant State Investment House, Inc. to pay to the plaintiff
spouses Rafael and Refugio Aquino P10,000.00 as moral damages,
P5,000.00 as exemplary damages, P6,000.00 as attorney's fees, plus costs;
and

CORPORATION,

Promulgated:

Respondent.

June 27, 2008

x------------------- ---------------------------------x
(3) Dismissing defendants' counterclaim for lack of merit and making the
preliminary injunction permanent."
No pronouncement as to costs.

DECISION

AUSTRIA-MARTINEZ, J.:

In a Decision dated July 1, 1999 in Civil Case No. 95-73532, the Regional Trial
Court (RTC) of Manila, Branch 30, ordered International Container Terminal
Services, Inc. (petitioner) to pay FGU Insurance Corporation (respondent) the
following sums: (1) P1,875,068.88 with 12% interest per annum from January 3,
1995 until fully paid; (2) P50,000.00 as attorney's fees; and (3)P10,000.00 as
litigation expenses.[1]

Petitioner's liability arose from a lost shipment of 14 Cardboards 400 kgs. of Silver
Nitrate 63.53 FCT Analytically Pure (purity 99.98 PCT), shipped by Hapag-Lloyd
AG through the vesselHannover Express from Hamburg, Germany on July 10,
1994, with Manila, Philippines as the port of discharge, and Republic Asahi Glass
Corporation (RAGC) as consignee. Said shipment was insured by FGU Insurance
Corporation (FGU). When RAGC's customs broker, Desma Cargo Handlers, Inc.,
was claiming the shipment, petitioner, which was the arrastre contractor, could
not find it in its storage area. At the behest of petitioner, the National Bureau of
Investigation (NBI) conducted an investigation. The AAREMA Marine and Cargo
Surveyors, Inc. also conducted an inquiry. Both found that the shipment was lost
while in the custody and responsibility of petitioner.

As insurer, FGU paid RAGC the amount of P1,835,068.88 on January 3, 1995.[2] In

turn, FGU sought reimbursement from petitioner, but the latter refused. This
constrained FGU to file with the RTC of Manila Civil Case No. 95-73532 for a sum
of money.
After trial, the RTC rendered its Decision dated July 1, 1999 finding
petitioner liable.

Petitioner appealed to the Court of Appeals (CA), which, in the assailed

Decision[3] dated October 22, 2003, affirmed the RTC Decision. Petitioner filed a
motion for reconsideration which the CA denied in its Resolution dated January 8,
2004.[4]

Hence, the present petition for review on certiorari under Rule 45 of the Rules of
Court, with the following assignment of errors:

1. THE COURT OF APPEALS SERIOUSLY ERRED IN FAILING

TO APPLY THE LIMITATION OF LIABILITY OF P3,5000
PER PACKAGE WHICH LIMITS PETITIONER'S LIABILITY,
IF ANY, TO A TOTAL OF ONLY P49,000.00 PURSUANT TO
PPA ADMINISTRATIVE ORDER NO. 10-81.
2. THE COURT OF APPEALS SERIOUSLY ERRED IN
UPHOLDING THE MARINE OPEN POLICY DESPITE THE
FACT THAT THE SAME WAS NO LONGER IN FORCE AT
THE TIME THE SHIPMENT WAS LOADED ON BOARD
THE CARRYING VESSEL.
3. THE COURT OF APPEALS SERIOUSLY ERRED IN FAILING
TO DISMISS THE COMPLAINT ON THE GROUND OF
RESPONDENT'S FAILURE TO OFFER THE INSURANCE
POLICY IN EVIDENCE PURSUANT TO THIS HONORABLE
COURT'S
DECISION
IN
HOME
INSURANCE
CORPORATION VS. COURT OF APPEALS (225 SCRA 411)
AND THE FAIRLY RECENT DECISION IN WALLEM
PHILIPPINES SHIPPING, INC. AND SEACOAST MARITIME
CORP. VS. PRUDENTIAL GUARANTEE AND ASSURANCE,
INC. AND COURT OF APPEALS, G.R. NO. 152158, 07
FEBRUARY 2003.
4. ASSUMING ARGUENDO THAT PETITIONER IS LIABLE,
THE COURT OF APPEALS SERIOUSLY ERRED IN
AFFIRMING THE AWARD OF 12% INTEREST DESPITE
THE FACT THAT THE OBLIGATION PURPORTEDLY
BREACHED DOES NOT CONSTITUTE A LOAN OF
FORBEARANCE OF MONEY AND DESPITE THE CLEAR
GUIDELINES SET FORTH BY THIS HONORABLE COURT
IN EASTERN SHIPPING LINES, INC. VS. COURT OF
APPEALS. (234 SCRA 78).[5]

The rule in our jurisdiction is that only questions of law may be entertained by this
Court in a petition for review on certiorari. This rule, however, is not ironclad and
admits certain exceptions, such as when (1) the conclusion is grounded on
speculations, surmises or conjectures; (2) the inference is manifestly mistaken,
absurd or impossible; (3) there is grave abuse of discretion; (4) the judgment is
based on a misapprehension of facts; (5) the findings of fact are conflicting; (6)
there is no citation of specific evidence on which the factual findings are based; (7)
the findings of absence of facts are contradicted by the presence of evidence on
record; (8) the findings of the CA are contrary to those of the trial court; (9) the CA
manifestly overlooked certain relevant and undisputed facts that, if properly
considered, would justify a different conclusion; (10) the findings of the CA are
beyond the issues of the case; and (11) such findings are contrary to the

admissions of both parties.[6] In the present case, there is nothing on record which
will show that it falls within the exceptions. Hence, the petition must be denied.

Petitioner posits that its liability for the lost shipment should be limited
to P3,500.00 per package as provided in Philippine Ports Authority Administrative
Order No. 10-81 (PPA AO 10-81), under Article VI, Section 6.01 of which provides:

Section 6.01. Responsibility and Liability for Losses and

Damages; Exceptions - The CONTRACTOR shall at its own
expense handle all merchandise in all work undertaken by it
hereunder deligently [sic] and in a skillful, workman-like and
efficient manner; that the CONTRACTOR shall be solely
responsible as an independent CONTRACTOR, and hereby
agrees to accept liability and to promptly pay to the shipping
company consignees, consignors or other interested party or
parties for the loss, damage, or non-delivery of cargoes to the
extent of the actual invoice value of each package which in no
case shall be more than THREE THOUSAND FIVE HUNDRED
PESOS (P3,500.00) (for import cargo) x x x for each
package unless the value of the cargo importation is
otherwise specified or manifested or communicated in
writing together with the declared bill of lading value and
supported by a certified packing list to the CONTRACTOR
by the interested party or parties before the discharge

x x x of the goods, as well as all damage that may be suffered

on account of loss, damage, or destruction of any merchandise
while in custody or under the control of the CONTRACTOR in
any pier, shed, warehouse facility or other designated place
under the supervision of the AUTHORITY x x x.[7] (Emphasis
supplied)

The CA summarily ruled that PPA AO 10-81 is not applicable to this case without
laying out the reasons therefor.

PPA AO 10-81 is the management contract between by the Philippine

Ports Authority and the cargo handling services providers. In Summa Insurance
Corporation v. Court of Appeals,[8]the Court ruled that:

In the performance of its job, an arrastre operator is bound by

the management contract it had executed with the Bureau of
Customs. However, a management contract, which is a sort of a
stipulation pour autruiwithin the meaning of Article 1311 of the
Civil Code, is also binding on a consignee because it is
incorporated in the gate pass and delivery receipt which must be
presented by the consignee before delivery can be effected to it.
The insurer, as successor-in-interest of the consignee, is likewise
bound by the management contract. Indeed, upon taking delivery
of the cargo, a consignee (and necessarily its successor-ininterest) tacitly accepts the provisions of the management
contract, including those which are intended to limit the liability
of one of the contracting parties, the arrastre operator.

However, a consignee who does not avail of the services of

the arrastre operator is not bound by the management contract.
Such an exception to the rule does not obtain here as the
consignee did in fact accept delivery of the cargo from
the arrastre operator.[9]

While it appears in the present case that the RAGC availed itself of petitioner's
services and therefore, PPA AO 10-81 should apply, the Court finds that the extent
of petitioner's liability should cover the actual value of the lost shipment and not
the P3,500.00 limit per package as provided in said Order.

It is borne by the records that when Desma Cargo Handlers was negotiating for
the discharge of the shipment, it presented Hapag-Lloyd's Bill of Lading,
[10]
Degussa's Commercial Invoice, which indicates that value of the shipment,
including seafreight charges,
was
DM94.960,00
(CFR
Manila);
[11]
and Degussa's Packing List, which likewise notes that the value of the shipment
was DM94.960,00.[12] It is highly unlikely that petitioner was not made aware of the
actual value of the shipment, since it had to examine the pertinent documents for
stripping purposes and, later on, for the discharge of the shipment to the
consignee or its representative. In fact, the NBI Report dated September 26,
1994 on the investigation conducted by it regarding the loss of the shipment shows
that petitioner's Admeasurer Rosco Esquibal was shown the Bill of Lading
by Desma Brokerage's representative, Rey Villanueva.[13] Esquibal also stated that
another representative ofDesma Brokerage, Joey Laurente, went to their office
and furnished him a copy of the processed papers of the fourteen cartons of Asahi
Glass cargoes.[14]

By its own act of not charging the corresponding arrastre fees based on the value
of the shipment after it came to know of such declared value from the marine
insurance policy, petitioner cannot escape liability for the actual value of the
shipment. The value of the merchandise or shipment may be declared or stated
not only in the bill of lading or shipping manifest, but also in other documents
required by law before the shipment is cleared from the piers.[15]

Petitioner insists that Marine Open Policy No. MOP-12763 under which the
shipment was insured was no longer in force at the time it was loaded on
board the Hannover Express on June 10, 1994, as provided in the Endorsement
portion of the policy, which states: IT IS HEREBY DECLARED AND AGREED that
effective June 10, 1994, this policy is deemed CANCELLED.[16]FGU, on the other
hand, insists that it was under Marine Risk Note No. 9798, which was executed
on May 26, 1994, that said shipment was covered.

It must be emphasized that a marine risk note is not an insurance policy. It is only
an acknowledgment or declaration of the insurer confirming the specific shipment
covered by its marine open policy, the evaluation of the cargo and the chargeable
premium.[17] It is the marine open policy which is the main insurance contract. In
other words, the marine open policy is the blanket insurance to be undertaken by
FGU on all goods to be shipped by RAGC during the existence of the contract,
while the marine risk note specifies the particular goods/shipment insured by FGU
on that specific transaction, including the sum insured, the shipment particulars as
well as the premium paid for such shipment. In any event, as it stands, it is evident
that even prior to the cancellation by FGU of Marine Open Policy No. MOP-12763
on June 10, 1994, it had already undertaken to insure the shipment of the
400 kgs. of silver nitrate, specially since RAGC had already paid the premium on
the insurance of said shipment.

Indeed, jurisprudence has it that the marine insurance policy needs to be

presented in evidence before the trial court or even belatedly before the appellate
court. In Malayan Insurance Co., Inc. v. Regis Brokerage Corp.,[18] the Court stated
that the presentation of the marine insurance policy was necessary, as the issues
raised therein arose from the very existence of an insurance contract between
Malayan Insurance and its consignee, ABB Koppel, even prior to the loss of the
shipment. In Wallem Philippines Shipping, Inc. v. Prudential Guarantee and
Assurance, Inc.,[19] the Court ruled that the insurance contract must be presented
in evidence in order to determine the extent of the coverage. This was also the
ruling of the Court in Home Insurance Corporation v. Court of Appeals.[20]

However,
as
in
every
general
rule,
there
are
admitted
exceptions. In Delsan Transport Lines, Inc. v. Court of Appeals,[21] the Court stated
that the presentation of the insurance policy was not fatal because the loss of the
cargo undoubtedly occurred while on board the petitioner's vessel, unlike in Home
Insurance in which the cargo passed through several stages with different parties
and it could not be determined when the damage to the cargo occurred, such that
the insurer should be liable for it.
As in Delsan, there is no doubt that the loss of the cargo in the present case
occurred while in petitioner's custody. Moreover, there is no issue as regards the
provisions of Marine Open Policy No.MOP-12763, such that the presentation of the
contract itself is necessary for perusal, not to mention that its existence was
already admitted by petitioner in open court.[22] And even though it was not offered
in evidence, it still can be considered by the court as long as they have been

properly identified by testimony duly recorded and they have themselves been
incorporated in the records of the case.[23]

Finally, petitioner questions the imposition of a 12% interest rate, instead of 6%, on
its adjudged liability. The ruling in Prudential Guarantee and Assurance Inc. v.
Trans-Asia Shipping Lines, Inc.,[24] to wit:

WHEREFORE, the petition is DENIED. The Decision dated October 22, 2003
and Resolution dated January 8, 2004 of the Court of Appeals are AFFIRMED,
with the modification that the award in the RTC Decision dated July 1, 1999 should
be P1,835,068.88 instead of P1,875,068.88.

Costs against petitioner.

This Court in Eastern Shipping Lines, Inc. v. Court of Appeals,
inscribed the rule of thumb in the application of interest to be
imposed
on
obligations,
regardless
of
their
source. Eastern emphasized beyond cavil that when the
judgment of the court awarding a sum of money becomes final
and executory, the rate of legal interest, regardless of whether
the obligation involves a loan or forbearance of money, 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.
We find application of the rule in the case at bar proper, thus, a
rate of 12% per annum from the finality of judgment until the full
satisfaction thereof must be imposed on the total amount of
liability adjudged to PRUDENTIAL. It is clear that the interim
period from the finality of judgment until the satisfaction
of the same is deemed equivalent to a forbearance of
credit, hence, the imposition of the aforesaid interest.
[25]
(Emphasis supplied)

SO ORDERED.

SECOND DIVISION
[G.R. No. 115821. October 13, 1999]
JESUS T. DAVID, petitioner, vs. THE COURT OF APPEALS, HON.
EDGARDO P. CRUZ, MELCHOR P. PEA, and VALENTIN
AFABLE, JR., respondents.
DECISION
QUISUMBING, J.:
This is a petition for review, under Rule 45 of the Rules of Court,
seeking the reversal of the Decision dated May 30, 1994, of the Court of
Appeals, Ninth Division, in CA-G.R. SP No. 32782.

is instructive. The CA did not commit any error in applying the same.

The parties do not dispute the facts in this case. The dispute
concerns only the execution of the Decision of the Regional Trial Court of
Manila, Branch 27, in Civil Case No. 94781, dated October 31, 1979, as
amended by an Order dated June 20, 1980.

The Court notes, however, an apparent clerical error made in

the dispositive portion of the RTC Decision. While it appears that FGU paid RAGC
the amount of P1,835,068.88, as shown in the Subrogation Receipt,[26] as prayed
for in its Complaint,[27] the RTC awarded the sum of P1,875,068.88. Thus, a
necessary modification should be made on this score.

The Regional Trial Court of Manila, Branch 27, with Judge Ricardo
Diaz, then presiding, issued a writ of attachment over real properties
covered by TCT Nos. 80718 and 10289 of private respondents. In his
Decision dated October 31, 1979, Judge Diaz ordered private respondent
Afable to pay petitioner P66,500.00 plus interest from July 24, 1974, until
fully paid, plus P5,000.00 as attorneys fees, and to pay the costs of suit.

On June 20, 1980, however, Judge Diaz issued an Order amending

said Decision, so that the legal rate of interest should be computed from
January 4, 1966, instead of from July 24, 1974. The amended Decision in
the decretal portion reads:
WHEREFORE, judgment is hereby rendered against the defendant,
Valentin Afable Jr., ordering him to pay to the plaintiff the sum of
P66,500.00 plus the legal rate of interest thereon from January 4, 1966
up to the time the same is fully paid plus the amount of P5,000.00 as and
for attorneys fees and to pay the costs of the suit. ordering the private
respondent Afable to pay the petitioner the sum of P66,500.00 plus the
legal rate of interest thereon from July 24, 1974, plus the amount of
P5,000.00 as attorneys fees and to pay the costs of suit[1] (Emphasis ours.)

In accordance with CB Circular No. 416 and as construed in Reformina vs.

Tomol (139 SCRA 260), legal interest on P66,500.00 corresponds to 6%
per annum for the period January 4, 1966 to July 28, 1974 and 12% per
annum from July 29, 1974 up to April 26, 1993, amounting to P34,180.92
and P149,582.32, respectively, or a grand total of P183,763.24.
Conformably with the Sheriffs Computation of Interest dated April 26,
1993 and Supplemental Report dated June 14, 1993, the judgment as of
April 26, 1993 amounted to P271,039.84, broken down as follows:
Principal P 66,500.00
Interest 183,763.24

Respondent Afable appealed to the Court of Appeals and then to the

Supreme Court. In both instances, the decision of the lower court was
affirmed. Entries of judgment were made and the record of the case was
remanded to Branch 27, presided at that time by respondent Judge
Edgardo P. Cruz, for the final execution of the Decision dated October 31,
1979, as amended by the Order dated June 20, 1980.

Attorneys fees 5,000.00

Upon petitioners motion, respondent Judge issued an Alias Writ of

Execution by virtue of which respondent Sheriff Melchor P. Pea conducted
a public auction. Sheriff Pea informed the petitioner that the total amount
of the judgment is P270,940.52. The amount included a computation of
simple interest. Petitioner, however, claimed that the judgment award
should be P3,027,238.50, because the amount due ought to be based on
compounded interest.

Total P271,039.84

Although the auctioned properties were sold to the petitioner, Sheriff

Pea did not issue the Certificate of Sale because there was an excess in
the bid price in the amount of P2,941,524.47, which the petitioner failed
to pay despite notice. This excess was computed by the Sheriff on the
basis of petitioners bid price of P3,027,238.50 minus the amount of
P270,940.52 computed in the judgment award.
On May 18, 1993, petitioner filed a Motion praying that respondent
Judge Cruz issue an order directing respondent Sheriff Pea to prepare and
execute a certificate of sale in favor of the petitioner, placing therein the
amount of the judgment as P3,027,238.50, the amount he bid during the
auction which he won. His reason is that compound interest, which is
allowed by Article 2212 of the Civil Code, should apply in this case.
On July 5, 1993, respondent Judge issued an Order denying
petitioners Motion dated May 18, 1993, which pertinently states:

Publication expenses 15,500.00

Costs of suit 276.60

Considering that plaintiffs P3,027,238.50 bid exceeds the amount of his

judgment, then he is not entitled to a certificate of sale without paying the
excess in the sum of P2,756,198.66 (Secs. 22 and 23 Rule 39, Rules of
Court). And since plaintiff did not pay the excess, then the sale did not
materialize and the sheriff may again sell the property to the highest
bidder (Sec. 22, Rule 39, id.).[2]
On August 11, 1993, petitioner moved for reconsideration of the
Order dated July 5, 1993, reiterating his Motion dated May 18, 1993.
On November 17, 1993, respondent Judge issued his Order denying
the petitioners motion for reconsideration.
Petitioner elevated said Orders to the Court of Appeals in a petition
for certiorari, prohibition and mandamus. However, respondent appellate
court dismissed the petition in a Decision dated May 30, 1994. Pertinent
portions of said decision reads:
. . . In this case, the records show that no interest was stipulated by the
parties. In the promissory note denominated as Compromise Agreement
signed by private respondent which was duly accepted by petitioner, no
interest was mentioned. In his complaint, petitioner merely prayed that

defendant be ordered to pay plaintiff the sum of P66,500.00 with

interest thereon at the legal rate from the date of filing of the complaint
until fully paid. Clearly, there was no accrued conventional interest which
could further earn interest when plaintiff-appellant made his judicial
demand, thus, the respondent court awarded x x x the sum of
P66,500.00 plus the legal rate of interest thereon x x x.

Third Assigned Error

THE RESPONDENT COURT OF APPEALS ERRED IN REFUSING TO
APPLY THE SIMPLE MANDATE OF ARTICLE 2212 OF THE CIVIL CODE
TO THE CASE AT BAR.
Fourth Assigned Error

Further the Supreme Court in the same case [Referring to Philippine

American Accident Insurance Company, Inc. vs. the Hon. Jose P. Flores
and Concordia G. Navalta, 97 SCRA 811; Rollo, p.9.] stressed that when
the judgment ordered payment of simple legal interest only and nothing
said about payment of compound interest, said interest should not be
compounded. In this case, the decretal portion is clearly worded, that is,
the legal rate of interest thereon from January 4, 1966. No mention or
reference was made regarding compound interest. Ergo, the judgment
award must be computed as simple legal interest only. (Emphasis
ours.)
Foregoing considered, We find no grave abuse of discretion amounting to
lack or excess of jurisdiction committed by public respondent judge in
issuing the assailed orders
WHEREFORE, the petition is DENIED due course and is hereby
DISMISSED.
SO ORDERED.

[3]

Petitioner now comes before the Court, claiming the appellate court
committed the following errors in the abovecited decision:
First Assigned Error
THE RESPONDENT COURT OF APPEALS ERRED IN RULING THAT
ARTICLE 2212 OF THE CIVIL CODE APPLIES ONLY WHERE THE
PARTIES TO AN OBLIGATION STIPULATED OR AGREED TO PAY
COMPOUNDED INTEREST.
Second Assigned Error
THE RESPONDENT COURT OF APPEALS ERRED IN CONFUSING LEGAL
INTEREST (AS DISTINGUISHED FROM CONSENSUAL INTEREST) WITH
SIMPLE INTEREST, JUST AS IT ALSO ERRED IN CONFUSING THE
INTEREST ON THE PRINCIPAL WITH INTEREST ON THE INTEREST.

THE RESPONDENT COURT OF APPEALS ERRED IN PROMULGATING

ITS DECISION WHICH IS CLEARLY CONTRARY TO LAW.
Essentially, we find that the issue here is whether respondent
appellate court erred in affirming respondent Judges order for the
payment of simple interest only rather than compounded interest.
Petitioner insists that in computing the interest due of the
P66,500.00, interest should be computed at 6% on the principal sum of
P66,500.00 pursuant to Article 2209 and then interest on the legal
interest should also be computed in accordance with the language of
Article 2212 of the Civil Code. [4] In his view, said article meant compound
interest.
However, this Court has already interpreted Article 2212, and
defined the standards for its application in Philippine American Accident
Insurance vs. Flores, 97 SCRA 811. As therein held, Article 2212
contemplates the presence of stipulated or conventional interest which
has accrued when demand was judicially made. In cases where no interest
had been stipulated by the parties, as in the case of Philippine American
Accident Insurance, no accrued conventional interest could further earn
interest upon judicial demand.[5]
In the said case, we further held that when the judgment sought to
be executed ordered the payment of simple legal interest only and said
nothing about payment of compound interest, but the respondent judge
orders payment of compound interest, then, he goes beyond the confines
of a judgment which had become final. Thus:
The judgment which was sought to be executed ordered the payment of
simple legal interest only. It said nothing about the payment of compound
interest. Accordingly, when the respondent judge ordered the payment of
compound interest he went beyond the confines of his own judgment
which had been affirmed by the Court of Appeals and which had become
final. Fundamental is the rule that execution must conform to that
ordained or decreed in the dispositive part of the decision. Likewise, a
court can not, except for clerical errors or omissions amend a judgment

that has become final (Jabon et. al. vs. Alo, et al.,91 Phil. 750
[1952]; Robles vs. Timario, et al., 107 Phil. 809 [1960]; Collector of
Internal Revenue vs. Gutierrez, et al., 108 Phil 215[1960]; Ablaza vs.
Sycip, et al., 110 Phil 4 [1060].)
Private respondent invokes Sec.5 of the Usury Law . . . as well
as Art.2212 of the Civil Code which stipulates: Interest due shall earn
legal interest from the time it is judicially demanded, although the
obligation may be silent upon this point. Both legal provisions are in
applicable (sic) for they contemplate the presence of stipulated or
conventional interest which has accrued when demand was
judicially made. (Sunico v. Ramirez, 14 Phil. 500 [1909]; Salvador vs.
Palencia, 25 Phil. 661 [1913]; Bachrach vs. Golingco, 39 Phil 912 [1919];
Robinson vs. Sackermann, 46 Phil. 539 [1924]; Philippine Engineering Co.
vs. Green, 48 Phil. 466 [1925]; and Cu Unjieng vs. Mabalacat Sugar Co.,
54 Phil. 916 [1930].) ... In other words, there was no accrued
conventional interests which could further earn interest upon
judicial demand.
Note that in the case now before us, the Court of Appeals made the
factual finding that . . . no interest was stipulated by the parties. In the
promissory note denominated as Compromise Agreement signed by the
private respondent which was duly accepted by petitioner no interest was
mentioned. In his complaint, petitioner merely prayed that defendant be
ordered to pay plaintiff the sum of P66,500.00 with interest thereon at the
legal rate from the date of the filing of the complaint until fully paid.
[6]
Clearly here the Philippine American Accident Insurance ruling applies.
Petitioner also alleges that when the case was remanded to the trial
court, respondent Judge, abused his discretion when he modified the
Decision and amended its dispositive portion. He argues that when a
decision has become final and executory, the court may no longer amend,
revoke, nor alter the dispositive portion, and the only power of the court
is to order its execution.
But the rule that once a judgment has become final and executory, it
is the ministerial duty of the courts to order its execution is not
absolute. It admits of certain exceptions.[7] One exception is that where
facts and/or events transpire after a decision has become executory,
which facts and/or events present a supervening cause or reason which
renders the final and executory decision of the court no longer
enforceable.[8] Under the law, the court may modify or alter a judgment
even after the same has become executory whenever circumstances
transpire rendering its execution unjust and inequitable, as where certain

facts and circumstances justifying or requiring such modification or

alteration transpired after the judgment has become final and executory. [9]
We earlier held that a case, in which an execution order has been
issued, is still pending, so that all proceedings on the execution are still
proceedings in the suit.[10] In the present case, after the case was
remanded to the lower court, petitioner filed a motion for the issuance of
an alias Writ of Execution. The motion was only finally resolved on July 5,
1993. When Central Bank Circular No. 416 took effect on July 29, 1974,
the suit was still pending. Hence, when respondent Judge ordered the
computation of legal interest for the execution of the amended October
31,1979 order, he correctly took judicial notice of the Courts
pronouncement in Reformina vs. Tomol, Jr., 139 SCRA 260.
In Reformina, the Court applied Central Bank Circular No. 416 which
took effect on July 29,1974, pursuant to P.D. 116, amending Act. 2655
(Usury Law) and raising the legal rate of interest from 6% to 12% per
annum. Respondent Judge followed Reformina and did not err in
modifying the Order of October 31, 1979. The passage of the Central
Bank Circular No. 416 was a supervening event which happened after the
decision had become executory. Had respondent Judge failed to order the
assailed amendment, the result would have been iniquitous. Hence, here,
no error nor grave abuse of discretion could be ascribed to respondent
Judges order dated June 30, 1980. Likewise, respondent appellate court
could not be faulted for affirming said order of respondent Judge.
WHEREFORE, the instant petition is DENIED. The Decision of the
Court of Appeals dated May 30, 1994, in CA-G.R. SP NO. 32782 is hereby
AFFIRMED. The records of the case are ordered remanded to the
Regional Trial Court of Manila, Branch 27, for execution of the Decision in
due course.
Costs against petitioner.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 129227. May 30, 2000
BANCO FILIPINO SAVINGS AND MORTGAGE BANK, petitioners, vs. THE
HON. COURT OF APPEALS, and CALVIN & ELSA ARCILLA, respondents.

DECISION

x x x

GONZAGA_REYES, J.:

3. The maximum rate of interest, including commissions, premiums, fees

and other charges on loans with maturity of more than seven hundred
thirty (730) days, by banking institutions, including thrift banks, or by
financial intermediaries authorized to engage in quasi-banking functions
shall be nineteen percent (19%) per annum.

Before us is a Petition for Review on Certiorari of the Decision of the

Court of Appeals1 in CA-G.R. CV No. 45891 entitled CALVIN S. ARCILLA
and ELSA B. ARCILLA vs. BANCO FILIPINO SAVINGS and MORTGAGE
BANK, ET. AL. which affirmed the decision of the Regional Trial Court
(RTC), Branch 33, Manila ordering BANCO FILIPINO to pay CALVIN and
ELSA ARCILLA the amount of P126,139.00 with interest thereon at 12%
per annum from the filing of the complaint.
The undisputed facts as found by the Court of Appeals are as follows:
"Elsa Arcilla and her husband, Calvin Arcilla, the Appellees in the present
recourse, secured, on three (3) occasions, loans from the Banco Filipino
Savings and Mortgage Bank, the Appellant in the present recourse, in the
total amount of P107,946.00 as evidenced by "Promissory Note" executed
by the Appellees in favor of the Appellant. To secure the payment of said
loans, the Appellees executed "Real Estate Mortgages" in favor of the
Appellants over their parcels of land located in BF-Paraaque, covered by
Transfer Certificate of Title Nos. 444645, 450406, 450407 and 455410 of
the Registry of Deeds of Paraaque (Annexes "B" to "B-2", Amended
Complaint). Under said deeds, the Appellant may increase the rate of
interest, on said loans, within the limits allowed by law, as Appellants
Board of Directors may prescribe for its borrowers. At that time, under
the Usury Law, Act 2655, as amended, the maximum rate of interest for
loans secured by real estate mortgages was 12% per annum. On January
10, 1975, the Appellees and the Appellant executed a "Deed of
Consolidation and Amendment of Real Estate Mortgage" whereby the
aforementioned loans of the Appellees and the "Real Estate Mortgage"
executed by them as security for the payment of said loans were
consolidated (pages 33-35, Record). Likewise, under said deed, the loan of
the Appellees from the Appellant was increased to P188,000.00. The
Appellees executed a "Promissory Note", dated January 15, 1975, whereby
they bound and obliged themselves, jointly and severally, to pay the
Appellant the aforesaid amount of P188,000.00 with interest at the rate of
12% per annum, in nineteen (19) years from date thereof, in stated
installments of P2,096.93 a month (page 32, Records).
On January 2, 1976, the Central Bank of the Philippines issued Central
Bank Circular No. 494, quoted infra, as follows:

x x x
7. Except as provided in this Circular and Circular No. 493, loans or
renewals thereof shall continue to be governed by the Usury Law, as
amended. (idem, supra)
In the meantime, the Skyline Builders, Inc., through its President,
Appellee Calvin Arcilla, secured loans from the Bank of the Philippine
Islands in the total amount of P450,000.00. To insure payment of the
aforesaid loan, the FGU Insurance Corporation, issued PG Bond No. 1003
for the amount of P225,000.00 (pages 434-436, Records) in favor of the
Bank of the Philippine Islands. Skyline Buildings, Inc., and the Appellees
executed an "Agreement of Counter-Guaranty with Mortgage" in favor of
the FGU Insurance Corporation covering the aforesaid parcels of land to
assure payment of any amount that the insurance company may pay on
account of said loans (pages 429-436, Records). The mortgage was
annotated as Entry No. 58009 at the dorsal portion of Appellees titles.
After October 30, 1978, the Appellant prepared and issued a "Statement
of Account" to the Appellees on their loan account to the effect that, as of
October 30, 1978, the balance of their loan account, inclusive of interests,
computed at 17% per annum, amounted to 284,490.75 (page 555,
Records). It turned out that the Appellant unilaterally increased the rate
of interest on the loan account of the Appellees from 12% per annum, as
covenanted in the "Real Estate Mortgage" and "Deed of Consolidated and
Amended Real Estate Mortgage" to 17% per annum on the authority of
the aforequoted Central Bank Circular.
The Appellees failed to pay their monthly amortizations to Appellant. The
latter forthwith filed, on April 3, 1979, a petition, with the Provincial
Sheriff, for the extrajudicial foreclosure of Appellees "Real Esate
Mortgage" in favor of the Appellant for the amount of P342,798.00
inclusive of the 17% per annum which purportedly was the totality of
Appellees account with the Appellant on their loans. The Appellant was
the purchaser of the property at public auction for the aforesaid amount

of P324,798.00. On May 25, 1979, the Sheriff executed a "Certificate of

Sale" over the aforesaid properties in favor of the Appellant for the
aforesaid amount (pages 37-38, Records).

Corporation and the City Sheriff of Pasay City, MM, or any of his deputies
or anyone acting in their behalf from enforcing the writ of possession;
c) After trial

The Appellant filed a "Petition for a Writ of Possession" with the Regional
Trial Court entitled "Banco Filipino Savings and Mortgage Bank vs. Elsa
Arcilla, et al., LRC Case No. P-7757-P". On February 28, 1980, the Court
rendered a Decision granting the Petition of the Appellant. The Appellees
appealed to the Court of Appeals but the latter Court, on June 29, 1985,
promulgated a Decision affirming the Decision of the Regional Trial Court
(pages 190-198, Records).
In the meantime, the FGU Insurance Corporation, Inc., redeemed the
aforesaid properties from the Appellant by paying to the latter the amount
of P389,289.41 inclusive of interest computed at 17% per annum. The
Appellant and FGU Insurance Corp., Inc., executed, on May 27, 1980, a
"Deed of Redemption" (pages 126-129, Records).

1) To make the injunction permanent;

2) Declare the loan contracts null and void;
3) Declare the extrajudicial foreclosure null and void;
4) Ordering the defendants to pay the plaintiffs the sums of P100,000.00
as moral damages; P50,000.00 as attorney fees; and, costs of suit.
PLAINTIFFS further pray for such other reliefs and remedies just and
equitable in the premises." (pages 88-89, Records)

On September 2, 1985, the Appellees filed a complaint in the Court a quo

for the "Annulment of the Loan Contracts, Foreclose Sale with Prohibition
and Injunction, Etc." entitled "Calvin Arcilla, et al. vs. Banco Filipino
Savings and Mortgage Bank, et al." (pages 1-38, Records).

In its Answer to the Complaint, the Appellant averred that the interests
charged by it on Appellees loan accounts and that the said loan contracts
and mortgages were lawful. The Appellant further averred that the
Appellees action had already prescribed.

The Appellees averred, in their complaint, inter alia, that the loan
contracts and mortgages between the Appellees and the Appellant were
null and void because: (a) the interests, charges, etc., were deducted in
advance from the face value of the "Promissory Notes" executed by the
Appellees; and (b) the rate of interests charged by the Appellant were
usurious. The Appellees prayed that judgment be rendered in their favor
as follows:

In the interim, the Supreme Court promulgated its Decision in the

precedent - setting case of "Banco Filipino Savings and Mortgage Bank vs.
Hon. Miguel Navarro, et al., 152 SCRA 346" where it declared that
Central Bank Circular No. 494 was not the "law" envisaged in the
mortgage deeds of borrowers of the Bank; that the escalation clause
incorporated in said deeds giving authority to the Appellant to increase
the rate of interests without the corresponding deescalation clause should
not be given effect because of its one-sidedness in favor of the Appellant;
that the aforesaid Central Bank Circular did not apply to loans secured by
real estate mortgages, and that, therefore, the Appellant cannot rely said
Circular as authority for it to unilaterally increase the rate of interests on
loans secured by Real Estate Mortgages.

"x x x
WHEREFORE, it is respectfully prayed
a) Pending hearing on the prayer for the issuance of the Writ of
Preliminary Injunction, a restraining order be immediately issued against
the defendants or anyone acting in their behalf from enforcing the writ of
possession issued against the plaintiffs;
b) After notice and hearing, a writ of preliminary injunction be issued
against the defendants, particularly defendants FGU Insurance

In the meantime, the FGU Insurance Corp., Inc., filed a "Motion for
Substitution" with the Regional Trial Court, in LRC Case No. Pq-7757-P
praying that it be substituted as the Petitioner in said case (pages 354356, Records). The Appellees were served with a copy of said motion and
filed their Opposition thereto. However, on November 10, 1987, the
Regional Trial Court rendered a Decision granting the motion of FGU
Insurance Company (page 369, Records)

On December 3, 1987, the Appellees filed a Motion, with the Court a quo,
for leave to file an "Amended Complaint" to implead FGU Insurance
Corporation as party defendant (pages 83-129, Records). The Court
granted said motion and admitted Appellees Amended Complaint.
After the requisite pre-trial, the Court a quo issued a Pre-Trial Order
which defined, inter alia, Appellees action against the Appellant, and the
latters defenses, to wit:
"x x x
On the part of the defendants Banco Filipino Savings to simplify the case,
it seeks to declare as null and void plaintiffs loan contract with Banco
Filipino obtained in May 1974, on the ground that the interest agreed in
the contract was usurious. Plaintiffs also seek to declare as null and void
the foreclosure of their mortgage by Banco Filipino on the ground that the
loan with the said mortgagee foreclosure maybe validly done.
DEFENSES
1. Prescription
2. Laches
3. Estoppel" (page 496, Records)
In the meantime, the Appellees and FGU Insurance Corporation entered
into and forged a "Compromise Agreement." The Court a quo promulgated
a Decision, dated April 3, 1991, based on said "Compromise Agreement."
Under the "Compromise Agreement", the Appellees bound and obliged
themselves, jointly and severally, to pay to FGU Insurance Corporation the
amount of P1,964,117.00 in three (3) equal installments and that:
"x x x
6. Upon faithful compliance by plaintiffs Calvin S. Arcilla and Elsa B.
Arcilla with their Agreement, defendant FGU Insurance Corporation shall
renounce in their favor all its rights, interests and claims to the four (4)
parcels of land mentioned in paragraph No. 4 of this Compromise
Agreement, together with all the improvements thereon, and plaintiffs
Calvin S. Arcilla and Elsa B. Arcilla shall be subrogated to all such rights,
interests and claims. In addition, defendant FGU Insurance Corporation
shall execute in favor of plaintiffs Calvin S. Arcilla and Elsa B. Arcilla a

deed of cancellation of the real estate mortgage constituted in its favor on

the above-mentioned four (4) parcels of land, together with all the
improvements thereon. All documentary stamps and expenses for
registration of the said deed of cancellation of mortgage shall be for the
account of plaintiffs Calvin S. Arcilla and Elsa B. Arcilla.
7. Subject to the provisions of paragraph No. 4 of this Compromise
Agreement, the execution of this Compromise Agreement shall be without
prejudice to the prosecution of the claims of plaintiffs Calvin S. Arcilla and
Elsa B. Arcilla. (pages 543-544, Records)
Thereafter, the Appellees and the Appellant agreed, upon the prodding of
the Court a quo, that the only issue to be resolved by the Court a quo was,
whether or not the Appellees were entitled to the refund, under the
Decision of the Supreme Court in "Banco Filipino Savings and Mortgage
Bank vs. Hon. Miguel Navarro, et al.," supra. On November 8, 1991, the
Appellees filed a "Motion for Summary Judgment" appending thereto,
inter alia, the Affidavit of Appellee Calvin S. Arcilla and the appendages
thereof (pages 550-555, Records). Appellant filed its Opposition but did
not append any affidavit to said Opposition. On March 26, 1993, the Court
a quo promulgated a Decision, the decretal portion of which reads as
follows:
WHEREFORE, premises considered, judgment is hereby rendered in
favor of the plaintiffs and against defendant Banco Filipino ordering
defendant Banco Filipino to pay spouses Calvin S. Arcilla and Elsa B.
Arcilla the sum of P126,139.00 with interest thereon at 12% per annum
reckoned from the filing of the complaint.
SO ORDERED. (pages 584-585, Records)"2
Petitioner appealed to the Court of Appeals, which affirmed the decision
of the RTC the dispositive portion of which reads:
"IN THE LIGHT OF ALL THE FOREGOING, the assailed Decision is
AFFIRMED. Appellants appeal is DISMISSED. With costs against the
Appellant.
SO ORDERED."3
Their Motion for Reconsideration4 was denied hence this petition where
the petitioner assigns the following errors:

"I. THE HONORABLE COURT OF APPEALS ERRED WHEN IT HELD

THAT THE CAUSE OF ACTION OF THE PRIVATE RESPONDENTS
ACCRUED ON OCTOBER 30, 1978, AND THEREFORE THE FILING OF
THEIR COMPLAINT FOR ANNULMENT OF THEIR LOAN CONTRACTS
WITH THE PETITIONER IN 1985 WAS NOT YET BARRED BY
PRESCRIPTION.
II. THE HONORABLE COURT OF APPEALS ERRED WHEN IT HELD
THAT THE MATERIAL ALLEGATIONS OF THE PRIVATE RESPONDENTS
COMPLAINT WERE SUFFICIENT TO WARRANT THE RELIEFS
GRANTED TO THEM BY THE LOWER COURT, PATICULARLY THE
REFUND OF P126,139.00 REPRESENTING ALLEGED EXCESS
INTEREST PAID ON THEIR LOAN.

Conversely, private respondents allege that their action has not

prescribed considering that prescription begins to run from the day the
action may be brought; the date their right of action accrued. It is their
contention that the period of prescription of their action should
commence to run from October 30, 1978 when the petitioner unilaterally
increased the rate of interest on private respondents loan to 17% per
annum. Thus, when private respondents filed their action against the
petitioner on September 2, 1985 or almost eight years thereafter, their
action had not yet prescribed. Moreover, private respondents aver that
they are entitled to the refund inasmuch as the escalation clause
incorporated in the loan contracts do not have a corresponding deescalation clause and is therefore illegal.
The appeal is unmeritorious.

III. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT

THE PRIVATE RESPONDENTS WERE ENTITLED TO THE SAID REFUND
OF P126,139.00 CLAIMED BY THEM."5
The petitioner maintains that the complaint filed by herein private
respondents was an action for Annulment of Loan Contracts, foreclosure
sale with prohibition and injunction. It is contended that these causes of
action accrued on the date of the execution of the promissory note and
deed of mortgage on January 15, 1975 and not October 30, 1978 as found
by the Court of Appeals. Thus, private respondents cause of action has
already prescribed inasmuch as the case was filed on September 2, 1985
or more than ten years thereafter. Petitioner further contends that private
respondents cannot rely on the ruling in the case of Banco Filipino
Savings & Mortgage Bank vs. Navarro6considering that they were not
parties to said case. Petitioner also maintains that the order of the lower
court, which was affirmed by the Court of Appeals ordering the petitioner
to refund the excess interest paid by private respondents in the amount of
P126,318.00 was without any legal basis since private respondents never
raised the issue of interest nor prayed for any relief with respect thereto.
Moreover, the private respondents never paid said amount to the
petitioner. While the amount was included in the bid price of the bank
when it bought the mortgaged properties during the public auction, said
bid price did not prejudice the private respondents because when the
private respondents repurchased the properties, the amount they paid
was different and independent of the redemption price of the bank.
Besides, the agreement between the private respondents and FGU
Insurance Corporation was one of sale and not redemption. Thus, any
amount paid by the private respondents to FGU was voluntarily entered
into by them and was not a consequence of the foreclosure of the
mortgage properties.

There are only two issues, which must be resolved in the present appeal.
First, has the action of the private respondents prescribed; and second,
are the respondents entitled to the refund of the alleged interest
overpayments.
Petitioners claim that the action of the private respondents has
prescribed is bereft of merit. Under Article 1150 of the Civil Code, the
time for prescription of all kinds of actions, when there is no special
provision which ordains otherwise, shall be counted from the day they
may be brought. Thus, the period of prescription of any cause of action is
reckoned only from the date the cause of action accrued.7 And a cause of
action arises when that which should have been done is not done, or that
which should not have been done is done.8 The period should not be made
to retroact to the date of the execution of the contract on January 15,
1975 as claimed by the petitioner for at that time, there would be no way
for the respondents to know of the violation of their rights.9 The Court of
Appeals therefore correctly found that respondents cause of action
accrued on October 30, 1978, the date they received the statement of
account showing the increased rate of interest, for it was only from that
moment that they discovered the petitioners unilateral increase thereof.
We quote with approval the pertinent portions of the Court of Appeals
decision as follows:
"It is the legal possibility of bringing the action that determines the
starting point for the computation of the period of prescription
(Constancia C. Telentino vs. Court of Appeals, et al., 162 SCRA 66). In
fine, the ten-year prescriptive period is to be reckoned from the accrual of
Appellees right of action, not necessarily on the very date of the
execution of the contracts subject of the action (Naga Telepone Co. Inc.

vs. Court of Appeals, et al., 230 SCRA 351). A partys right of action
accrues only when the confluence of the following elements is established:

pray that said contracts be declared null and void. The amended
complaint reads:

"xxx: a) a right in favor of the plaintiff by whatever means and under

whatever law it arises or is created; b) an obligation on the part of
defendant to respect such right; and c) an act or omission on the part of
such defendant violative of the right of the plaintiff (Cole vs. Vda. de
Gregorio, 116 SCRA 670 [1982]; Mathay vs. Consolidated Bank & Trust
Co., 58 SCRA 559 [1974]; Vda. de Enriquez vs. Dela Cruz, 54 SCRA 1
[1973]. It is only when the last element occurs or takes place that it can
be said in law that a cause of action has arisen (Cole vs. Vda. De Gregorio,
supra)" (Maria U. Espaol vs. Chairman, etc., et al.,, 137 SCRA 314, page
318)

"6. The aforementioned loans granted by defendant Banco Filipino to the

plaintiffs as stated on the face of the promissory note and real estate
mortgage (Annexes "B" to "D", inclusive) were not actually received by the
plaintiffs because interests, charges, etc. were deducted in advance from
the face value of the loans not in accordance with the contracts;

More, the aggrieved must have either actual or presumptive knowledge of

the violation, by the guilty party of his rights either by an act or omission.
The question that now comes to the fore is when the Appellees became
precisely aware of the unilateral increase, by the Appellant, of the rate of
interest on their loan account to 17% per annum. As can be ascertained
from the records, the Appellees discovered or should have discovered, for
the first time, the unilateral increase by the Appellant of the rate of
interest to 17% per annum when they received the "Statement of
Account" of the Appellant as of October 30, 1978. Hence, it was only then
that the prescriptive period for the Appellees to institute their action in
the Court a quo commenced. Since the Appellees filed their complaint in
the Court a quo on September 2, 1985, the same was seasonably filed
within the ten-year prescriptive period."10
Anent the second issue as to whether the respondents are entitled to
recover the alleged overpayments of interest, we find that they are
despite the absence of any prayer therefor. This Court has ruled that it is
the material allegations of fact in the complaint, not the legal conclusion
made therein or the prayer that determines the relief to which the
plaintiff is entitled.11 It is the allegations of the pleading which determine
the nature of the action and the Court shall grant relief warranted by the
allegations and the proof even if no such relief is prayed for. 12 Thus, even
if the complaint seeks the declaration of nullity of the contract, the Court
of Appeals correctly ruled that the factual allegations contained therein
ultimately seek the return of the excess interests paid.
The amended complaint13 of herein private respondents specifically allege
that the contracts of loan entered into by them and the petitioner were
contrary to and signed in violation of the Usury Law14 and consequentially

7. Even the loan contracts (Annexes "B" to "D", inclusive) required by

defendant Banco Filipino to be signed by the plaintiffs were contrary to
and in violation of the then Usury Law, as amended;
8. Assuming arguendo that the loan contracts between plaintiffs and
defendant Banco Filipino are valid, the extra-judicial foreclosure of the
properties of the plaintiffs on May 24, 1979 was null and void for having
been conducted in clear violation of the law (Act 3135), namely: a) lack of
roper notice to the plaintiffs; b) lack of proper publication and posting as
required by law; c) the alleged sale was conducted at the place other than
that prescribed by law, among others;
9. On May 27, 1990, defendant Banco Filipino purportedly executed in
favor of defendant FGU Insurance Corporation a Deed of Redemption over
the foreclosed properties of the plaintiffs, again, without notice to the
latter, as evidenced by the said Deed of Redemption, copy of which is
hereto attached and marked as Annex "F".
10. The Deed of Redemption (Annex "F") is clearly null and void for having
been executed in violation of Rule 39, Rules of Court, and other related
provisions of the Rules of Court."15
The loan contracts with real estate mortgage entered into by and between
the petitioner and respondent stated that the petitioner may increase the
interest on said loans, within the limits allowed by law, as petitioners
Board of Directors may prescribe for its borrowers. At the time the
contracts were entered into, said escalation clause was valid.16 It was only
pursuant to P.D. No. 1684 which became effective March 17, 1980
wherein to be valid, escalation clauses should provide: 1.) that there can
be an increase in interest if increased by law or by the Monetary Board;
and 2.) in order for such stipulation to be valid, it must include a provision
for the reduction of the stipulated interest in the event that the maximum
rate of interest is reduced by law or by the Monetary Board.17

Given the validity of the escalation clause, could the petitioner increase
the stipulated interest pursuant to the Central Bank Circular 494 from
12% to 17%.
We rule that it may not.
The escalation clause in the loan contracts reads as follows:
"xxx g) The rate of interest charged on the obligation secured by this
mortgage, as well as the interest on the amount which may have been
advanced by the Mortgagee in accordance with paragraph (b) and (d)
hereof, shall be subject, during the terms of this contract, to such an
increase, within the limits allowed by law, as the Board of Directors of the
Mortgagee may prescribe for its debtors; xxx" (emphasis supplied) 18
In Banco Filipino Savings & Mortgage Bank vs. Navarro, 19 which involved
a similar escalation clause20, we ruled that Central Bank Circular 494,
although it has the force and effect of law, is not a law and is not the law
contemplated by the parties which authorizes the petitioner to unilaterally
raise the interest rate of the loan.21Consequently, the reliance by the
petitioner on Central Bank Circular 494 to unilaterally raise the interest
rates on the loan in question was without any legal basis.
Petitioners argument that the Banco Filipino case cannot be applied to
the present case since the respondents were not intervenors therein is
flawed. Only the judgment in said case cannot bind the respondents as
they were not parties thereto, however, the doctrine enunciated therein is
a judicial decision and forms part of the legal system of the land. 22 It
forms a precedent, which must be adhered to under the doctrine of stare
decisis.23 Thus, even if the respondents were not parties to the abovementioned case, the doctrine enunciated therein may be applied to the
present case.
WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No.
45891 is AFFIRMED and the instant petition is hereby DENIED.
No pronouncement as to costs.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION
G.R. No. L-66826 August 19, 1988
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) forsafekeeping, 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

MR. RIZALDY T. ZSHORNACK

&/OR MRS SHIRLEY E. ZSHORNACK

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
December
8, The
1975bank alleges that Garcia exceeded his powers when he entered
into.
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.

Sir/Madam:
We acknowledged (sic) having received
from you today the sum of US DOLLARS:
THREE THOUSAND ONLY (US$3,000.00)
for safekeeping.

It was also alleged in the complaint that despite demands, the bank
refused to return the money.

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
of Garcia to bind the corporation; and (2) to deny its capacity to
Receivedauthority
by:
enter into such contract. [See, E.B. Merchant v. International Banking
Corporation,
(Sgd.) VIRGILIO
V. 6 Phil. 314 (1906).] No sworn answer denying the due
GARCIAexecution 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.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 90027 March 3, 1993

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 17 which is supposed to expound on the prevailing
rule in the United States, to wit:
The prevailing rule appears to be that where a safedeposit 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 safe-deposit 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 safedeposit 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 23pertinently 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.

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:

xxx xxx xxx

The banks shall perform the services permitted under
subsections (a), (b) and (c) of this section
asdepositories 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:

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.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 4015

August 24, 1908

ANGEL JAVELLANA, plaintiff-appellee,

vs.
JOSE LIM, ET AL., defendants-appellants.
R. Zaldarriaga for appellants.
B. Montinola for appellee.
TORRES, J.:
The attorney for the plaintiff, Angel Javellana, file a complaint on the 30th
of October, 1906, with the Court of First Instance of Iloilo, praying that
the defendants, Jose Lim and Ceferino Domingo Lim, he sentenced to
jointly and severally pay the sum of P2,686.58, with interest thereon at
the rate of 15 per cent per annum from the 20th of January, 1898, until
full payment should be made, deducting from the amount of interest due
the sum of P1,102.16, and to pay the costs of the proceedings.
Authority from the court having been previously obtained, the complaint
was amended on the 10th of January, 1907; it was then alleged, on the
26th of May, 1897, the defendants executed and subscribed a document in
favor of the plaintiff reading as follows:
We have received from Angel Javellana, as a deposit without interest, the
sum of two thousand six hundred and eighty-six cents of pesos fuertes,
which we will return to the said gentleman, jointly and severally, on the
20th of January, 1898. Jaro, 26th of May, 1897. Signed Jose Lim.
Signed: Ceferino Domingo Lim.
That, when the obligation became due, the defendants begged the plaintiff
for an extension of time for the payment thereof, building themselves to
pay interest at the rate of 15 per cent on the amount of their

indebtedness, to which the plaintiff acceded; that on the 15th of May,

1902, the debtors paid on account of interest due the sum of P1,000
pesos, with the exception of either capital or interest, had thereby been
subjected to loss and damages.
A demurrer to the original complaint was overruled, and on the 4th of
January, 1907, the defendants answered the original complaint before its
amendment, setting forth that they acknowledged the facts stated in Nos.
1 and 2 of the complaint; that they admitted the statements of the plaintiff
relative to the payment of 1,102.16 pesos made on the 15th of November,
1902, not, however, as payment of interest on the amount stated in the
foregoing document, but on account of the principal, and denied that
there had been any agreement as to an extension of the time for payment
and the payment of interest at the rate of 15 per cent per annum as
alleged in paragraph 3 of the complaint, and also denied all the other
statements contained therein.
As a counterclaim, the defendants alleged that they had paid to the
plaintiff sums which, together with the P1,102.16 acknowledged in the
complaint, aggregated the total sum of P5,602.16, and that, deducting
therefrom the total sum of P2,686.58 stated in the document transcribed
in the complaint, the plaintiff still owed the defendants P2,915.58;
therefore, they asked that judgment be entered absolving them, and
sentencing the plaintiff to pay them the sum of P2,915.58 with the costs.
Evidence was adduced by both parties and, upon their exhibits, together
with an account book having been made of record, the court below
rendered judgment on the 15th of January, 1907, in favor of the plaintiff
for the recovery of the sum of P5,714.44 and costs.
The defendants excepted to the above decision and moved for a new trial.
This motion was overruled and was also excepted to by them; the bill of
exceptions presented by the appellants having been approved, the same
was in due course submitted to this court.
The document of indebtedness inserted in the complaint states that the
plaintiff left on deposit with the defendants a given sum of money which
they were jointly and severally obliged to return on a certain date fixed in
the document; but that, nevertheless, when the document appearing as
Exhibits 2, written in the Visayan dialect and followed by a translation
into Spanish was executed, it was acknowledged, at the date thereof, the
15th of November, 1902, that the amount deposited had not yet been
returned to the creditor, whereby he was subjected to losses and damages
amounting to 830 pesos since the 20th of January, 1898, when the return

was again stipulated with the further agreement that the amount
deposited should bear interest at the rate of 15 per cent per annum, from
the aforesaid date of January 20, and that the 1,000 pesos paid to the
depositor on the 15th of May, 1900, according to the receipt issued by him
to the debtors, would be included, and that the said rate of interest would
obtain until the debtors on the 20th of May, 1897, it is called a deposit
consisted, and they could have accomplished the return agreed upon by
the delivery of a sum equal to the one received by them. For this reason it
must be understood that the debtors were lawfully authorized to make use
of the amount deposited, which they have done, as subsequent shown
when asking for an extension of the time for the return thereof, inasmuch
as, acknowledging that they have subjected the letter, their creditor, to
losses and damages for not complying with what had been stipulated, and
being conscious that they had used, for their own profit and gain, the
money that they received apparently as a deposit, they engaged to pay
interest to the creditor from the date named until the time when the
refund should be made. Such conduct on the part of the debtors is
unquestionable evidence that the transaction entered into between the
interested parties was not a deposit, but a real contract of loan.
Article 1767 of the Civil Code provides that
The depository can not make use of the thing deposited without
the express permission of the depositor.
Otherwise he shall be liable for losses and damages.
Article 1768 also provides that
When the depository has permission to make use of the thing
deposited, the contract loses the character of a deposit and
becomes a loan or bailment.
The permission shall not be presumed, and its existence must be
proven.
When on one of the latter days of January, 1898, Jose Lim went to the
office of the creditor asking for an extension of one year, in view of the
fact the money was scare, and because neither himself nor the other
defendant were able to return the amount deposited, for which reason he
agreed to pay interest at the rate of 15 per cent per annum, it was
because, as a matter of fact, he did not have in his possession the amount
deposited, he having made use of the same in his business and for his own

profit; and the creditor, by granting them the extension, evidently

confirmed the express permission previously given to use and dispose of
the amount stated as having bee deposited, which, in accordance with the
loan, to all intents and purposes gratuitously, until the 20th of January,
1898, and from that dated with interest at 15 per cent per annum until its
full payment, deducting from the total amount of interest the sum of 1,000
pesos, in accordance with the provisions of article 1173 of the Civil Code.
Notwithstanding that it does not appear that Jose Lim signed the
document (Exhibit 2) executed in the presence of three witnesses on the
15th of November, 1902, by Ceferino Domingo Lim on behalf of himself
and the former, nevertheless, the said document has not been contested
as false, either by a criminal or by a civil proceeding, nor has any doubt
been cast upon the authenticity of the signatures of the witnesses who
attested the execution of the same; and from the evidence in the case one
is sufficiently convinced that the said Jose Lim was perfectly aware of and
authorized his joint codebtor to liquidate the interest, to pay the sum of
1,000 pesos, on account thereof, and to execute the aforesaid document
No. 2. A true ratification of the original document of deposit was thus
made, and not the least proof is shown in the record that Jose Lim had
ever paid the whole or any part of the capital stated in the original
document, Exhibit 1.
If the amount, together with interest claimed in the complaint, less 1,000
pesos appears as fully established, such is not the case with the
defendant's counterclaim for P5,602.16, because the existence and
certainty of said indebtedness imputed to the plaintiff has not been
proven, and the defendants, who call themselves creditors for the said
amount have not proven in a satisfactory manner that the plaintiff had
received partial payments on account of the same; the latter alleges with
good reason, that they should produce the receipts which he may have
issued, and which he did issue whenever they paid him any money on
account. The plaintiffs allegation that the two amounts of 400 and 1,200
pesos, referred to in documents marked "C" and "D" offered in evidence
by the defendants, had been received from Ceferino Domingo Lim on
account of other debts of his, has not been contradicted, and the fact that
in the original complaint the sum of 1,102.16 pesos, was expressed in lieu
of 1,000 pesos, the only payment made on account of interest on the
amount deposited according to documents No. 2 and letter "B" above
referred to, was due to a mistake.
Moreover, for the reason above set forth it may, as a matter of course, be
inferred that there was no renewal of the contract deposited converted
into a loan, because, as has already been stated, the defendants received

said amount by virtue of real loan contract under the name of a deposit,
since the so-called bailees were forthwith authorized to dispose of the
amount deposited. This they have done, as has been clearly shown.
The original joint obligation contracted by the defendant debtor still
exists, and it has not been shown or proven in the proceedings that the
creditor had released Joe Lim from complying with his obligation in order
that he should not be sued for or sentenced to pay the amount of capital
and interest together with his codebtor, Ceferino Domingo Lim, because
the record offers satisfactory evidence against the pretension of Jose Lim,
and it further appears that document No. 2 was executed by the other
debtor, Ceferino Domingo Lim, for himself and on behalf of Jose Lim; and
it has also been proven that Jose Lim, being fully aware that his debt had
not yet been settled, took steps to secure an extension of the time for
payment, and consented to pay interest in return for the concession
requested from the creditor.
In view of the foregoing, and adopting the findings in the judgment
appealed from, it is our opinion that the same should be and is hereby
affirmed with the costs of this instance against the appellant, provided
that the interest agreed upon shall be paid until the complete liquidation
of the debt. So ordered.

FIRST DIVISION
EQUITABLE PCI BANK,* G.R. No. 171545
AIMEE YU and BEJAN
LIONEL APAS,
Petitioners, Present:
PUNO, C.J., Chairperson,
- v e r s u s - SANDOVAL-GUTIERREZ,
CORONA,
AZCUNA and
LEONARDO-DE
CASTRO, JJ.
NG SHEUNG NGOR** doing
business under the name
and style KEN MARKETING, Promulgated:
KEN APPLIANCE DIVISION,
INC. and BENJAMIN E. GO,
Respondents. December 19, 2007

A)

Ordering [Equitable] to reinstate and return the

amount of [respondents'] deposit placed on hold
status;

B)

Ordering [Equitable] to pay [respondents] the

sum of P12 [m]illion [p]esos as moral damages;

This petition for review on certiorari[1] seeks to set aside the decision[2] of
the Court of Appeals (CA) in CA-G.R. SP No. 83112 and its
resolution[3] denying reconsideration.
On October 7, 2001, respondents Ng Sheung Ngor, [4] Ken
Appliance Division, Inc. and Benjamin E. Go filed an action for annulment
and/or reformation of documents and contracts[5] against petitioner
Equitable PCI Bank (Equitable) and its employees, Aimee Yu and Bejan
Lionel Apas, in the Regional Trial Court (RTC), Branch 16 of Cebu City.
[6]
They claimed that Equitable induced them to avail of its peso and dollar
credit facilities by offering low interest rates [7] so they accepted
Equitable's proposal and signed the bank's pre-printed promissory notes
on various dates beginning 1996. They, however, were unaware that the
documents contained identical escalation clauses granting Equitable
authority to increase interest rates without their consent.[8]

C)

Ordering [Equitable] to pay [respondents] the

sum of P10 [m]illion [p]esos as exemplary
damages;

D)

Ordering defendants Aimee Yu and Bejan [Lionel]

Apas to pay [respondents], jointly and severally,
the sum of [t]wo [m]illion [p]esos as moral and
exemplary damages;

E)

Ordering [Equitable, Aimee Yu and Bejan Lionel

Apas], jointly and severally, to pay [respondents']
attorney's fees in the sum of P300,000; litigation
expenses in the sum of P50,000 and the cost of
suit;

Equitable, in its answer, asserted that respondents knowingly accepted all

the terms and conditions contained in the promissory notes. [9] In fact, they
continuously availed of and benefited from Equitable's credit facilities for
five years.[10]

F)

x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- - - - --x
DECISION
CORONA, J.:

After trial, the RTC upheld the validity of the promissory notes. It found
that, in 2001 alone, Equitable restructured respondents' loans amounting
to US$228,200 and P1,000,000.[11] The trial court, however, invalidated
the escalation clause contained therein because it violated the principle of
mutuality of contracts.[12] Nevertheless, it took judicial notice of the steep
depreciation of the peso during the intervening period [13] and declared the
existence of extraordinary deflation.[14] Consequently, the RTC ordered the
use of the 1996 dollar exchange rate in computing respondents' dollardenominated loans.[15] Lastly, because the business reputation of
respondents was (allegedly) severely damaged when Equitable froze their
accounts,[16] the trial court awarded moral and exemplary damages to
them.[17]
The dispositive portion of the February 5, 2004 RTC decision [18] provided:
WHEREFORE, premises considered, judgment is hereby
rendered:

Directing plaintiffs Ng Sheung Ngor and Ken

Marketing to pay [Equitable] the unpaid principal
obligation for the peso loan as well as the unpaid
obligation for the dollar denominated loan;
G) Directing plaintiff Ng Sheung Ngor and Ken
Marketing to pay [Equitable] interest as follows:
1)
2)

H)

12% per annum for the peso loans;

8% per annum for the dollar loans. The basis
for the payment of the dollar obligation is the
conversion rate of P26.50 per dollar availed of
at the time of incurring of the obligation in
accordance with Article 1250 of the Civil Code
of the Philippines;

Dismissing [Equitable's] counterclaim except the

payment of the aforestated unpaid principal loan
obligations and interest.

SO ORDERED.[19]

Equitable and respondents filed their respective notices of appeal. [20]

In the March 1, 2004 order of the RTC, both notices were denied due
course because Equitable and respondents failed to submit proof that
they paid their respective appeal fees.[21]
WHEREFORE, premises considered, the appeal
interposed by defendants from the Decision in the aboveentitled case is DENIED due course. As of February 27,
2004, the Decision dated February 5, 2004, is
considered
final
and
executory
in
so
far
as [Equitable, Aimee Yu and Bejan Lionel Apas] are
concerned.[22] (emphasis supplied)

Equitable moved for the reconsideration of the March 1, 2004 order of the
RTC[23] on the ground that it did in fact pay the appeal fees. Respondents,
on the other hand, prayed for the issuance of a writ of execution.[24]
On March 24, 2004, the RTC issued an omnibus order denying Equitable's
motion for reconsideration for lack of merit [25] and ordered the issuance of
a writ of execution in favor of respondents. [26] According to the RTC,
because respondents did not move for the reconsideration of the previous
order (denying due course to the parties notices of appeal), [27] the
February 5, 2004 decision became final and executory as to both parties
and a writ of execution against Equitable was in order.[28]

On August 10, 2004, Equitable moved to annul the July 1, 2004 auction
sale and to cite the sheriffs who conducted the sale in contempt for
proceeding with the auction despite the injunction order of the CA. [36]
On October 28, 2005, the CA dismissed the petition for certiorari. [37] It
found Equitable guilty of forum shopping because the bank filed its
petition for certiorari in the CA several hours before withdrawing its
petition for relief in the RTC.[38] Moreover, Equitable failed to disclose,
both in the statement of material dates and certificate of non-forum
shopping (attached to its petition for certiorari in the CA), that it had a
pending petition for relief in the RTC.[39]
Equitable moved for reconsideration[40] but it was denied.[41] Thus, this
petition.
Equitable asserts that it was not guilty of forum shopping because the
petition for relief was withdrawn on the same day the petition for
certiorari was filed.[42] It likewise avers that its petition for certiorari was
meritorious because the RTC committed grave abuse of discretion in
issuing the March 24, 2004 omnibus order which was based on an
erroneous assumption. The March 1, 2004 order denying its notice of
appeal for non payment of appeal fees was erroneous because it had in
fact paid the required fees. [43] Thus, the RTC, by issuing its March 24,
2004 omnibus order, effectively prevented Equitable from appealing the
patently wrong February 5, 2004 decision.[44]
This petition is meritorious.

A writ of execution was thereafter issued [29] and three real properties of
Equitable were levied upon.[30]
On March 26, 2004, Equitable filed a petition for relief in the RTC from
the March 1, 2004 order.[31] It, however, withdrew that petition on March
30, 2004[32] and instead filed a petition for certiorari with an application
for an injunction in the CA to enjoin the implementation and execution of
the March 24, 2004 omnibus order.[33]
On June 16, 2004, the CA granted Equitable's application for injunction. A
writ of preliminary injunction was correspondingly issued. [34]
Notwithstanding the writ of injunction, the properties of Equitable
previously levied upon were sold in a public auction on July 1, 2004.
Respondents were the highest bidders and certificates of sale were issued
to them.[35]

EQUITABLE
WAS
NOT
GUILTY
OF
FORUM
SHOPPING

Forum shopping exists when two or more actions involving the same
transactions, essential facts and circumstances are filed and those actions
raise identical issues, subject matter and causes of action. [45] The test is
whether, in two or more pending cases, there is identity of parties, rights
or causes of actions and reliefs.[46]

Equitable's petition for relief in the RTC and its petition for certiorari in
the CA did not have identical causes of action. The petition for relief from
the denial of its notice of appeal was based on the RTCs judgment or final
order preventing it from taking an appeal by fraud, accident, mistake or
excusable negligence.[47] On the other hand, its petition for certiorari in
the CA, a special civil action, sought to correct the grave abuse of
discretion amounting to lack of jurisdiction committed by the RTC. [48]
In a petition for relief, the judgment or final order is rendered by a
court with competent jurisdiction. In a petition for certiorari, the order is
rendered by a court without or in excess of its jurisdiction.
Moreover, Equitable substantially complied with the rule on non-forum
shopping when it moved to withdraw its petition for relief in the RTC on
the same day (in fact just four hours and forty minutes after) it filed the
petition for certiorari in the CA. Even if Equitable failed to disclose that it
had a pending petition for relief in the RTC, it rectified what was
doubtlessly a careless oversight by withdrawing the petition for relief just
a few hours after it filed its petition for certiorari in the CA a clear
indication that it had no intention of maintaining the two actions at the
same time.

THE
TRIAL
COURT
COMMITTED
GRAVE
ABUSE
OF
DISCRETION
IN
ISSUING
ITS
MARCH
1, 2004 AND
MARCH 24, 2
004 ORDERS
Section 1, Rule 65 of the Rules of Court provides:
Section 1. Petition for Certiorari. When any tribunal,
board or officer exercising judicial or quasi-judicial
function has acted without or in excess of its or his
jurisdiction, or with grave abuse of discretion
amounting to lack or excess of jurisdiction, and there
is no appeal, nor any plain, speedy or adequate
remedy in the ordinary course of law, a person

aggrieved thereby may file a verified petition in the proper

court, alleging the facts with certainty and praying that
judgment be rendered annulling or modifying the
proceedings of such tribunal, board or officer, and
granting such incidental reliefs as law and justice may
require.
The petition shall be accompanied by a certified true copy
of the judgment, order or resolution subject thereof,
copies of all pleadings and documents relevant and
pertinent thereto, and a sworn certificate of non-forum
shopping as provided in the third paragraph of Section 3,
Rule 46.
There are two substantial requirements in a petition for certiorari. These
are:
1.

that the tribunal, board or officer exercising

judicial or quasi-judicial functions acted without
or in excess of his or its jurisdiction or with grave
abuse of discretion amounting to lack or excess of
jurisdiction; and

2.

that there is no appeal or any plain, speedy and

adequate remedy in the ordinary course of law.

For a petition for certiorari premised on grave abuse of discretion to

prosper, petitioner must show that the public respondent patently and
grossly abused his discretion and that abuse amounted to an evasion of
positive duty or a virtual refusal to perform a duty enjoined by law or to
act at all in contemplation of law, as where the power was exercised in an
arbitrary and despotic manner by reason of passion or hostility. [49]
The March 1, 2004 order denied due course to the notices of appeal of
both Equitable and respondents. However, it declared that the February 5,
2004 decision was final and executory only with respect to Equitable.
[50]
As expected, the March 24, 2004 omnibus order denied Equitable's
motion for reconsideration and granted respondents' motion for the
issuance of a writ of execution.[51]
The March 1, 2004 and March 24, 2004 orders of the RTC were
obviously intended to prevent Equitable, et al. from appealing the
February 5, 2004 decision. Not only that. The execution of the decision
was undertaken with indecent haste, effectively obviating or defeating

Equitable's right to avail of possible legal remedies. No matter how we

look at it, the RTC committed grave abuse of discretion in rendering those
orders.
With regard to whether Equitable had a plain, speedy and adequate
remedy in the ordinary course of law, we hold that there was none. The
RTC denied due course to its notice of appeal in the March 1, 2004 order.
It affirmed that denial in the March 24, 2004 omnibus order. Hence, there
was no way Equitable could have possibly appealed the February 5, 2004
decision.[52]
Although Equitable filed a petition for relief from the March 24, 2004
order, that petition was not a plain, speedy and adequate remedy in the
ordinary course of law.[53] A petition for relief under Rule 38 is an
equitable remedy allowed only in exceptional circumstances or where
there is no other available or adequate remedy.[54]
Thus, we grant Equitable's petition for certiorari and consequently give
due course to its appeal.

EQUITABLE
RAISED PURE
QUESTIONS
OF LAW IN
ITS
PETITION FO
R REVIEW
The jurisdiction of this Court in Rule 45 petitions is limited to questions of
law.[55] There is a question of law when the doubt or controversy concerns
the correct application of law or jurisprudence to a certain set of facts; or
when the issue does not call for the probative value of the evidence
presented, the truth or falsehood of facts being admitted.[56]

NOTES
WERE VALID
The RTC upheld the validity of the promissory notes despite
respondents assertion that those documents were contracts of adhesion.
A contract of adhesion is a contract whereby almost all of its provisions
are drafted by one party.[58] The participation of the other party is limited
to affixing his signature or his adhesion to the contract. [59] For this reason,
contracts of adhesion are strictly construed against the party who drafted
it.[60]
It is erroneous, however, to conclude that contracts of adhesion are
invalid per se. They are, on the contrary, as binding as ordinary contracts.
A party is in reality free to accept or reject it. A contract of adhesion
becomes void only when the dominant party takes advantage of the
weakness of the other party, completely depriving the latter of the
opportunity to bargain on equal footing.[61]
That was not the case here. As the trial court noted, if the terms and
conditions offered by Equitable had been truly prejudicial to respondents,
they would have walked out and negotiated with another bank at the first
available instance. But they did not. Instead, they continuously availed of
Equitable's credit facilities for five long years.
While the RTC categorically found that respondents had outstanding
dollar- and peso-denominated loans with Equitable, it, however, failed to
ascertain the total amount due (principal, interest and penalties, if any) as
of July 9, 2001. The trial court did not explain how it arrived at the
amounts of US$228,200 and P1,000,000.[62] In Metro Manila Transit
Corporation v. D.M. Consunji, [63] we reiterated that this Court is not a trier
of facts and it shall pass upon them only for compelling reasons which
unfortunately are not present in this case.[64] Hence, we ordered the
partial remand of the case for the sole purpose of determining the amount
of actual damages.[65]

Equitable does not assail the factual findings of the trial court. Its
arguments essentially focus on the nullity of the RTCs February 5, 2004
decision. Equitable points out that that decision was patently
erroneous, specially the exorbitant award of damages, as it was
inconsistent with existing law and jurisprudence. [57]

THE
PROMISSORY

ESCALATION
CLAUSE

VIOLATED
THE
PRINCIPLE
OF
MUTUALITY
OF CONTRAC
TS
Escalation clauses are not void per se. However, one 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. Clauses of that nature
violate the principle of mutuality of contracts. [66] Article 1308[67] of the
Civil Code holds that a contract must bind both contracting parties; its
validity or compliance cannot be left to the will of one of them. [68]

With regard to the proper rate of interest, in New Sampaguita Builders v.

Philippine National Bank[71] we held that, because the escalation clause
was annulled, the principal amount of the loan was subject to the original
or stipulated rate of interest. Upon maturity, the amount due was subject
to legal interest at the rate of 12% per annum.[72]
Consequently, respondents should pay Equitable the interest rates of
12.66% p.a. for their dollar-denominated loans and 20% p.a. for their
peso-denominated loans from January 10, 2001 to July 9, 2001. Thereafter,
Equitable was entitled to legal interest of 12% p.a. on all amounts due.

THERE WAS
NO
EXTRAORDIN
ARY DEFLATI
ON

For this reason, we have consistently held that a valid escalation clause
provides:
1.

that the rate of interest will only be increased

if the applicable maximum rate of interest is
increased by law or by the Monetary Board; and

2.

that the stipulated rate of interest will be

reduced if the applicable maximum rate of interest
is reduced by law or by the Monetary Board (deescalation clause).[69]

The RTC found that Equitable's promissory notes uniformly stated:

If subject promissory note is extended, the interest for
subsequent extensions shall be at such rate as shall be
determined by the bank.[70]
Equitable dictated the interest rates if the term (or period for
repayment) of the loan was extended. Respondents had no choice but to
accept them. This was a violation of Article 1308 of the Civil Code.
Furthermore, the assailed escalation clause did not contain the necessary
provisions for validity, that is, it neither provided that the rate of interest
would be increased only if allowed by law or the Monetary Board, nor
allowed de-escalation. For these reasons, the escalation clause was void.

Extraordinary inflation exists when there is an unusual decrease in the

purchasing power of currency (that is, beyond the common fluctuation in
the value of currency) and such decrease could not be reasonably
foreseen or was manifestly beyond the contemplation of the parties at the
time of the obligation. Extraordinary deflation, on the other hand, involves
an inverse situation.[73]
Article 1250 of the Civil Code provides:

Article 1250. In case an extraordinary inflation or

deflation of the currency stipulated should intervene, the
value of the currency at the time of the establishment of
the obligation shall be the basis of payment, unless there
is an agreement to the contrary.

For extraordinary inflation (or deflation) to affect an obligation,

the following requisites must be proven:
1.
that there was an official declaration of
extraordinary inflation or deflation from the
Bangko Sentral ng Pilipinas (BSP);[74]
2.

that the obligation was contractual in nature;

and

[75]

3.

that the parties expressly agreed to consider

the effects of the extraordinary inflation or
deflation.[76]

Despite the devaluation of the peso, the BSP never declared a situation of
extraordinary inflation. Moreover, although the obligation in this instance
arose out of a contract, the parties did not agree to recognize the effects
of extraordinary inflation (or deflation).[77] The RTC never mentioned that
there was a such stipulation either in the promissory note or loan
agreement. Therefore, respondents should pay their dollar-denominated
loans at the exchange rate fixed by the BSP on the date of maturity. [78]

THE AWARD OF
MORAL
AND
EXEMPLARY
DAMAGES
LACKED BASIS
Moral damages are in the category of an award designed to compensate
the claimant for actual injury suffered, not to impose a penalty to the
wrongdoer.[79] To be entitled to moral damages, a claimant must prove:

In culpa contractual or breach of contract, moral damages are

recoverable only if the defendant acted fraudulently or in bad faith or in
wanton disregard of his contractual obligations.[83] The breach must be
wanton, reckless, malicious or in bad faith, and oppressive or abusive. [84]
The RTC found that respondents did not pay Equitable the interest due on
February 9, 2001 (or any month thereafter prior to the maturity of the
loan)[85] or the amount due (principal plus interest) due on July 9, 2001.
[86]
Consequently, Equitable applied respondents' deposits to their loans
upon maturity.
The relationship between a bank and its depositor is that of creditor and
debtor.[87] For this reason, a bank has the right to set-off the deposits in its
hands for the payment of a depositor's indebtedness.[88]
Respondents indeed defaulted on their obligation. For this reason,
Equitable had the option to exercise its legal right to set-off or
compensation. However, the RTC mistakenly (or, as it now appears,
deliberately) concluded that Equitable acted fraudulently or in bad faith
or in wanton disregard of its contractual obligations despite the absence
of proof. The undeniable fact was that, whatever damage respondents
sustained was purely the consequence of their failure to pay their
loans. There was therefore absolutely no basis for the award of moral
damages to them.
Neither was there reason to award exemplary damages. Since
respondents were not entitled to moral damages, neither should they be
awarded exemplary damages.[89] And if respondents were not entitled to
moral and exemplary damages, neither could they be awarded attorney's
fees and litigation expenses.[90]

1.

That he or she suffered besmirched reputation,

or physical, mental or psychological suffering
sustained by the claimant;

2.

That the defendant committed a wrongful act or

omission;

ACCORDINGLY, the petition is hereby GRANTED.

3.

That the wrongful act or omission was the

proximate cause of the damages the claimant
sustained;

The October 28, 2005 decision and February 3, 2006 resolution of the
Court
of
Appeals
in
CA-G.R.
SP
No.
83112
are
hereby REVERSED and SET ASIDE.

4.

The case is predicated on any of the instances

expressed or envisioned by Article 2219[80] and
2220[81]. [82]

The March 24, 2004 omnibus order of the Regional Trial Court, Branch
16, Cebu City in Civil Case No. CEB-26983 is hereby ANNULLED for
being rendered with grave abuse of discretion amounting to lack or
excess of jurisdiction. All proceedings undertaken pursuant thereto are
likewise declared null and void.
The March 1, 2004 order of the Regional Trial Court, Branch 16 of Cebu
City in Civil Case No. CEB-26983 is hereby SET ASIDE. The appeal of

petitioners Equitable PCI Bank, Aimee Yu and Bejan Lionel Apas is

therefore given due course.
The February 5, 2004 decision of the Regional Trial Court, Branch 16 of
Cebu City in Civil Case No. CEB-26983 is accordingly SET ASIDE. New
judgment is hereby entered:
1.

ordering respondents Ng Sheung Ngor, doing

business under the name and style of Ken Marketing, Ken
Appliance Division, Inc. and Benjamin E. Go to pay
petitioner Equitable PCI Bank the principal amount of
their dollar- and peso-denominated loans;
2.
ordering respondents Ng Sheung Ngor, doing
business under the name and style of Ken Marketing, Ken
Appliance Division, Inc. and Benjamin E. Go to pay
petitioner Equitable PCI Bank interest at:
a)
12.66% p.a. with respect to their dollardenominated loans from January 10, 2001 to July
9, 2001;
b)
20% p.a. with
respect
to
their
pesodenominated loans from January 10, 2001 to July
9, 2001;[91]
c)
pursuant to our ruling in Eastern Shipping
Lines v. Court of Appeals, [92] the total amount due
on July 9, 2001 shall earn legal interest at
12% p.a. from the time petitioner Equitable PCI
Bank demanded payment, whether judicially or
extra-judicially; and
d)
after this Decision becomes final and
executory,
the
applicable
rate
shall
be
12% p.a. until full satisfaction;
3.
all other claims and counterclaims are dismissed.
As a starting point, the Regional Trial Court, Branch 16 of Cebu City shall
compute the exact amounts due on the respective dollar-denominated and
peso-denominated loans, as of July 9, 2001, of respondents Ng Sheung
Ngor, doing business under the name and style of Ken Marketing, Ken
Appliance Division and Benjamin E. Go.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION
G.R. No. L-30511 February 14, 1980
MANUEL M. SERRANO, petitioner,
vs.
CENTRAL BANK OF THE PHILIPPINES; OVERSEAS BANK OF
MANILA; EMERITO M. RAMOS, SUSANA B. RAMOS, EMERITO B.
RAMOS, JR., JOSEFA RAMOS DELA RAMA, HORACIO DELA RAMA,
ANTONIO B. RAMOS, FILOMENA RAMOS LEDESMA, RODOLFO
LEDESMA, VICTORIA RAMOS TANJUATCO, and TEOFILO
TANJUATCO, respondents.
Rene Diokno for petitioner.
F.E. Evangelista & Glecerio T. Orsolino for respondent Central Bank of the
Philippines.
Feliciano C. Tumale, Pacifico T. Torres and Antonio B. Periquet for
respondent Overseas Bank of Manila.
Josefina G. Salonga for all other respondents.

CONCEPCION, JR., J.:

Petition for mandamus and prohibition, with preliminary injunction, that
seeks the establishment of joint and solidary liability to the amount of
Three Hundred Fifty Thousand Pesos, with interest, against respondent
Central Bank of the Philippines and Overseas Bank of Manila and its
stockholders, on the alleged failure of the Overseas Bank of Manila to
return the time deposits made by petitioner and assigned to him, on the
ground that respondent Central Bank failed in its duty to exercise strict
supervision over respondent Overseas Bank of Manila to protect
depositors and the general public. 1 Petitioner also prays that both
respondent banks be ordered to execute the proper and necessary
documents to constitute all properties fisted in Annex "7" of the Answer of
respondent Central Bank of the Philippines in G.R. No. L-29352,
entitled "Emerita M. Ramos, et al vs. Central Bank of the
Philippines," into a trust fund in favor of petitioner and all other
depositors of respondent Overseas Bank of Manila. It is also prayed that
the respondents be prohibited permanently from honoring, implementing,

or doing any act predicated upon the validity or efficacy of the deeds of
mortgage, assignment. and/or conveyance or transfer of whatever nature
of the properties listed in Annex "7" of the Answer of respondent Central
Bank in G.R. No. 29352. 2
A sought for ex-parte preliminary injunction against both respondent
banks was not given by this Court.
Undisputed pertinent facts are:
On October 13, 1966 and December 12, 1966, petitioner made a time
deposit, for one year with 6% interest, of One Hundred Fifty Thousand
Pesos (P150,000.00) with the respondent Overseas Bank of
Manila. 3 Concepcion Maneja also made a time deposit, for one year with
6-% interest, on March 6, 1967, of Two Hundred Thousand Pesos
(P200,000.00) with the same respondent Overseas Bank of Manila. 4
On August 31, 1968, Concepcion Maneja, married to Felixberto M.
Serrano, assigned and conveyed to petitioner Manuel M. Serrano, her
time deposit of P200,000.00 with respondent Overseas Bank of Manila.

Notwithstanding series of demands for encashment of the aforementioned

time deposits from the respondent Overseas Bank of Manila, dating from
December 6, 1967 up to March 4, 1968, not a single one of the time
deposit certificates was honored by respondent Overseas Bank of
Manila. 6
Respondent Central Bank admits that it is charged with the duty of
administering the banking system of the Republic and it exercises
supervision over all doing business in the Philippines, but denies the
petitioner's allegation that the Central Bank has the duty to exercise a
most rigid and stringent supervision of banks, implying that respondent
Central Bank has to watch every move or activity of all banks, including
respondent Overseas Bank of Manila. Respondent Central Bank claims
that as of March 12, 1965, the Overseas Bank of Manila, while operating,
was only on a limited degree of banking operations since the Monetary
Board decided in its Resolution No. 322, dated March 12, 1965, to
prohibit the Overseas Bank of Manila from making new loans and
investments in view of its chronic reserve deficiencies against its deposit
liabilities. This limited operation of respondent Overseas Bank of Manila
continued up to 1968. 7

Respondent Central Bank also denied that it is guarantor of the

permanent solvency of any banking institution as claimed by petitioner. It
claims that neither the law nor sound banking supervision requires
respondent Central Bank to advertise or represent to the public any
remedial measures it may impose upon chronic delinquent banks as such
action may inevitably result to panic or bank "runs". In the years 19661967, there were no findings to declare the respondent Overseas Bank of
Manila as insolvent. 8
Respondent Central Bank likewise denied that a constructive trust was
created in favor of petitioner and his predecessor in interest Concepcion
Maneja when their time deposits were made in 1966 and 1967 with the
respondent Overseas Bank of Manila as during that time the latter was
not an insolvent bank and its operation as a banking institution was being
salvaged by the respondent Central Bank. 9
Respondent Central Bank avers no knowledge of petitioner's claim that
the properties given by respondent Overseas Bank of Manila as additional
collaterals to respondent Central Bank of the Philippines for the former's
overdrafts and emergency loans were acquired through the use of
depositors' money, including that of the petitioner and Concepcion
Maneja. 10
In G.R. No. L-29362, entitled "Emerita M. Ramos, et al. vs. Central Bank
of the Philippines," a case was filed by the petitioner Ramos, wherein
respondent Overseas Bank of Manila sought to prevent respondent
Central Bank from closing, declaring the former insolvent, and liquidating
its assets. Petitioner Manuel Serrano in this case, filed on September 6,
1968, a motion to intervene in G.R. No. L-29352, on the ground that
Serrano had a real and legal interest as depositor of the Overseas Bank of
Manila in the matter in litigation in that case. Respondent Central Bank in
G.R. No. L-29352 opposed petitioner Manuel Serrano's motion to
intervene in that case, on the ground that his claim as depositor of the
Overseas Bank of Manila should properly be ventilated in the Court of
First Instance, and if this Court were to allow Serrano to intervene as
depositor in G.R. No. L-29352, thousands of other depositors would follow
and thus cause an avalanche of cases in this Court. In the resolution dated
October 4, 1968, this Court denied Serrano's, motion to intervene. The
contents of said motion to intervene are substantially the same as those of
the present petition. 11
This Court rendered decision in G.R. No. L-29352 on October 4, 1971,
which became final and executory on March 3, 1972, favorable to the
respondent Overseas Bank of Manila, with the dispositive portion to wit:

WHEREFORE, the writs prayed for in the petition are

hereby granted and respondent Central Bank's resolution
Nos. 1263, 1290 and 1333 (that prohibit the Overseas
Bank of Manila to participate in clearing, direct the
suspension of its operation, and ordering the liquidation of
said bank) are hereby annulled and set aside; and said
respondent Central Bank of the Philippines is directed to
comply with its obligations under the Voting Trust
Agreement, and to desist from taking action in violation
therefor. Costs against respondent Central Bank of the
Philippines. 12
Because of the above decision, petitioner in this case filed a motion for
judgment in this case, praying for a decision on the merits, adjudging
respondent Central Bank jointly and severally liable with respondent
Overseas Bank of Manila to the petitioner for the P350,000 time deposit
made with the latter bank, with all interests due therein; and declaring all
assets assigned or mortgaged by the respondents Overseas Bank of
Manila and the Ramos groups in favor of the Central Bank as trust funds
for the benefit of petitioner and other depositors. 13
By the very nature of the claims and causes of action against respondents,
they in reality are recovery of time deposits plus interest from respondent
Overseas Bank of Manila, and recovery of damages against respondent
Central Bank for its alleged failure to strictly supervise the acts of the
other respondent Bank and protect the interests of its depositors by virtue
of the constructive trust created when respondent Central Bank required
the other respondent to increase its collaterals for its overdrafts said
emergency loans, said collaterals allegedly acquired through the use of
depositors money. These claims shoud be ventilated in the Court of First
Instance of proper jurisdiction as We already pointed out when this Court
denied petitioner's motion to intervene in G.R. No. L-29352. Claims of
these nature are not proper in actions for mandamus and prohibition as
there is no shown clear abuse of discretion by the Central Bank in its
exercise of supervision over the other respondent Overseas Bank of
Manila, and if there was, petitioner here is not the proper party to raise
that question, but rather the Overseas Bank of Manila, as it did in G.R.
No. L-29352. Neither is there anything to prohibit in this case, since the
questioned acts of the respondent Central Bank (the acts of dissolving and

liquidating the Overseas Bank of Manila), which petitioner here intends to

use as his basis for claims of damages against respondent Central Bank,
had been accomplished a long time ago.
Furthermore, both parties overlooked one fundamental principle in the
nature of bank deposits when the petitioner claimed that there should be
created a constructive trust in his favor when the respondent Overseas
Bank of Manila increased its collaterals in favor of respondent Central
Bank for the former's overdrafts and emergency loans, since these
collaterals were acquired by the use of depositors' money.
Bank deposits are in the nature of irregular deposits. They are really loans
because they earn interest. All kinds of bank deposits, whether fixed,
savings, or current are to be treated as loans and are to be covered by the
law on loans. 14 Current and savings deposit are loans to a bank because it
can use the same. The petitioner here in making time deposits that earn
interests with respondent Overseas Bank of Manila was in reality a
creditor of the respondent Bank and not a depositor. The respondent Bank
was in turn a debtor of petitioner. Failure of he respondent Bank to honor
the time deposit is failure to pay s obligation as a debtor and not a breach
of trust arising from depositary's failure to return the subject matter of
the deposit
WHEREFORE, the petition is dismissed for lack of merit, with costs
against petitioner.
SO ORDERED.
Antonio, Abad Santos, JJ., concur.
Barredo (Chairman) J., concur in the judgment on the of the concurring
opinion of Justice Aquino.