Time Value of Money - TVM

What is the 'Time Value of Money - TVM'

The time value of money (TVM) is the idea that money available at the present time is worth more than the same
amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money
can earn interest, any amount of money is worth more the sooner it is received. TVM is also referred to as present
discounted value.
BREAKING DOWN 'Time Value of Money - TVM'
Money deposited in a savings account earns a certain interest rate. Rational investors prefer to receive money today
rather than the same amount of money in the future because of money's potential to grow in value over a given
period of time. Money earning an interest rate is said to be compounding in value.
Basic Time Value of Money Formula and Example
Depending on the exact situation in question, the TVM formula may change slightly. For example, in the case of
annuity or perpetuity payments, the generalized formula has additional or less factors. But in general, the most
fundamental TVM formula takes into account the following variables:
FV = Future value of money
PV = Present value of money
i = interest rate
n = number of compounding periods per year
t = number of years
Based on these variables, the formula for TVM is:
FV = PV x (1 + (i / n)) ^ (n x t)
For example, assume a sum of $10,000 is invested for one year at 10% interest. The future value of that money is:
FV = $10,000 x (1 + (10% / 1) ^ (1 x 1) = $11,000
The formula can also be rearranged to find the value of the future sum in present day dollars. For example, the value
of $5,000 one year from today, compounded at 7% interest, is:
PV = $5,000 / (1 + (7% / 1) ^ (1 x 1) = $4,673
Effect of Compounding Periods on Future Value
The number of compounding periods can have a drastic effect on the TVM calculations. Taking the $10,000 example
above, if the number of compounding periods is increased to quarterly, monthly or daily, the ending future value
calculations are:
Quarterly Compounding: FV = $10,000 x (1 + (10% / 4) ^ (4 x 1) = $11,038
Monthly Compounding: FV = $10,000 x (1 + (10% / 12) ^ (12 x 1) = $11,047
Daily Compounding: FV = $10,000 x (1 + (10% / 365) ^ (365 x 1) = $11,052
This shows TVM depends not only on interest rate and time horizon, but how many times the compounding
calculations are computed each year.

1
Usury
From Wikipedia, the free encyclopedia

"Usura" redirects here. For the electronic dance music group, see U.S.U.R.A.

Of Usury, from Brant's Stultifera Navis (the Ship of Fools), 1494; woodcut attributed to Albrecht Drer
Usury (/juri/[1][2]) is, as defined today, the practice of making unethical or immoral monetary loans that unfairly
enrich the lender. Originally, usury meant interest of any kind. A loan may be considered usurious because of
excessive or abusive interest rates or other factors. Historically in Christian societies, and still in many Islamic
societies today, charging any interest at all would be considered usury. [3][4][5] Someone who practices usury can be
called a usurer, but a more common term in contemporary English is loan shark.
The term may be used in a moral sensecondemning, taking advantage of others' misfortunesor in a legal sense
where interest rates may be regulated by law. Historically, some cultures (e.g., Christianity in much of Medieval
Europe, and Islam in many parts of the world today) have regarded charging any interest for loans as sinful.
Some of the earliest known condemnations of usury come from the Vedic texts of India.[6] Similar condemnations are
found in religious texts from Buddhism, Judaism, Christianity, and Islam (the term is riba in Arabic and ribbit in
Hebrew).[7] At times, many nations from ancient Greece to ancient Rome have outlawed loans with any interest.
Though the Roman Empire eventually allowed loans with carefully restricted interest rates, the Catholic Church in
medieval Europe banned the charging of interest at any rate (as well as charging a fee for the use of money, such as
at a bureau de change).
Public speaker Charles Eisenstein has argued that pivotal change in the English-speaking world came with lawful
rights to charge interest on lent money,[8] particularly the 1545 Act, "An Act Against Usurie" (37 H. viii 9) of King
Henry VIII of England.

Banking during Roman times was different from modern banking. During the Principate, most banking activities were
conducted by private individuals, much like the large banking firms that exist today. Since almost all moneylenders in
the Empire were private individuals, anybody that had any additional capital and wished to lend it out could easily do
so.[9]
The annual rates of interest on loans varied in the range of 412 percent; but when the interest rate was higher, it
typically was not 1516 percent but either 24 percent or 48 percent. The apparent absence of intermediate rates
suggests that the Romans may have had difficulty calculating the interest due on anything other than mathematically
convenient rates. They quoted them on a monthly basis, and the most common rates were multiples of twelve.
Monthly rates tended to range from simple fractions to 34 percent, perhaps because lenders used Roman
numerals.[10]
Moneylending during this period was largely a matter of private loans advanced to persons short of cash, whether
persistently in debt or temporarily until the next harvest. Mostly, it was undertaken by exceedingly rich men who were
prepared to take on a high risk if the profit looked good; interest rates were fixed privately and were almost entirely
unrestricted by law. Investment was always regarded as a matter of seeking personal profit, often on a large scale.
Banking was of the small, back-street variety, run by the urban lower-middle class of petty shopkeepers. By the 3rd
century, acute currency problems in the Empire drove them into decline.[11] The rich who were in a position to take
advantage of the situation became the moneylenders when the ever-increasing tax demands in the last declining days
of the Empire crippled and eventually destroyed the peasant class by reducing tenant-farmers to serfdom. It was
evident that usury meant exploitation of the poor.[12]
The First Council of Nicaea, in 325, forbade clergy from engaging in usury[13] (canon 17). At the time, usury was
interest of any kind, and the canon forbade the clergy to lend money at interest rates even as low as 1 percent per
year. Later ecumenical councils applied this regulation to the laity.[13][14]
Lateran III decreed that persons who accepted interest on loans could receive neither the sacraments nor Christian
burial.[15] Pope Clement V made the belief in the right to usury a heresy in 1311, and abolished all secular legislation
which allowed it.[16] Pope Sixtus V condemned the practice of charging interest as "detestable to God and man,
damned by the sacred canons and contrary to Christian charity."[16]
Theological historian John Noonan argues that "the doctrine [of usury] was enunciated by popes, expressed by three
ecumenical councils, proclaimed by bishops, and taught unanimously by theologians."[14]
Certain negative historical renditions of usury carry with them social connotations of perceived "unjust" or
"discriminatory" lending practices. The historian Paul Johnson, comments:
Most early religious systems in the ancient Near East, and the secular codes arising from them, did not forbid usury.
These societies regarded inanimate matter as alive, like plants, animals and people, and capable of reproducing itself.
Hence if you lent 'food money', or monetary tokens of any kind, it was legitimate to charge interest. [17] Food money in
the shape of olives, dates, seeds or animals was lent out as early as c. 5000 BC, if not earlier. ...Among the
Mesopotamians, Hittites, Phoenicians and Egyptians, interest was legal and often fixed by the state. But the Hebrew
took a different view of the matter.[18]
The Hebrew Bible regulates interest taking. Interest can be charged to strangers but not between Hebrews.
2
Deuteronomy 23:19 Thou shalt not lend upon interest to thy brother: interest of money, interest of victuals, interest
of any thing that is lent upon interest.
Deuteronomy 23:20 Unto a foreigner thou mayest lend upon interest; but unto thy brother thou shalt not lend upon
interest; that the LORD thy God may bless thee in all that thou puttest thy hand unto, in the land whither thou goest
in to possess it.[19]
Israelites were forbidden to charge interest on loans made to other Israelites, but allowed to charge interest on
transactions with non-Israelites, as the latter were often amongst the Israelites for the purpose of business anyway;
but in general, it was seen as advantageous to avoid getting into debt at all, to avoid being bound to someone else.
Debt was to be avoided and not used to finance consumption, but only taken on when in need. However, the laws
against usury were among many laws which the prophets condemn the people for breaking. [20]
Johnson contends that the Torah treats lending as philanthropy in a poor community whose aim was collective
survival, but which is not obliged to be charitable towards outsiders.
A great deal of Jewish legal scholarship in the Dark and the Middle Ages was devoted to making business dealings
fair, honest and efficient.[21]
Usury (in the original sense of any interest) was at times denounced by a number of religious leaders and
philosophers in the ancient world, including Moses,[22] Plato, Aristotle, Cato, Cicero, Seneca,[23] Aquinas,[24]
Muhammad,[25] Jesus,[26] Philo[citation needed] and Gautama Buddha.[27] For example, Cato said:
"And what do you think of usury?""What do you think of murder?"
Interest of any kind is forbidden in Islam. As such, specialized codes of banking have developed to cater to investors
wishing to obey Qur'anic law. (See Islamic banking)
As the Jews were ostracized from most professions by local rulers, the Western churches and the guilds[citation needed],
they were pushed into marginal occupations considered socially inferior, such as tax and rent collecting and
moneylending. Natural tensions between creditors and debtors were added to social, political, religious, and economic
strains.[citation needed]
...financial oppression of Jews tended to occur in areas where they were most disliked, and if Jews reacted by
concentrating on moneylending to non-Jews, the unpopularityand so, of course, the pressurewould increase. Thus
the Jews became an element in a vicious circle. The Christians, on the basis of the Biblical rulings, condemned
interest-taking absolutely, and from 1179 those who practiced it were excommunicated. Catholic autocrats frequently
imposed the harshest financial burdens on the Jews. The Jews reacted by engaging in the one business where
Christian laws actually discriminated in their favor, and became identified with the hated trade of moneylending. [28]
In England, the departing Crusaders were joined by crowds of debtors in the massacres of Jews at London and York
in 11891190. In 1275, Edward I of England passed the Statute of the Jewry which made usury illegal and linked it to
blasphemy, in order to seize the assets of the violators. Scores of English Jews were arrested, 300 were hanged and
their property went to the Crown. In 1290, all Jews were expelled from England, and allowed to take only what they
could carry; the rest of their property became the Crown's. Usury was cited as the official reason for the Edict of
Expulsion. However, not all Jews were expelled: it was easy to convert to Christianity and thereby avoid expulsion.
Many other crowned heads of Europe expelled the Jews, although again converts to Christianity were no longer
considered Jewish (see the articles on marranos or crypto-Judaism).
The growth of the Lombard bankers and pawnbrokers, who moved from city to city, was along the pilgrim routes.
Die Wucherfrage is the title of a Lutheran ChurchMissouri Synod work against usury from 1869. Usury is condemned
in 19th-century Missouri Synod doctrinal statements.[29]
In the 16th century, short-term interest rates dropped dramatically (from around 2030% p.a. to around 910%
p.a.). This was caused by refined commercial techniques, increased capital availability, the Reformation, and other
reasons. The lower rates weakened religious scruples about lending at interest, although the debate did not cease
altogether.
The papal prohibition on usury meant that it was a sin to charge interest on a money loan. As set forth by Thomas
Aquinas, the natural essence of money was as a measure of value or intermediary in exchange. The increase of
money through usury violated this essence and according to the same Thomistic analysis, a just transaction was one
characterized by an equality of exchange, one where each side received exactly his due. Interest on a loan, in excess
of the principal, would violate the balance of an exchange between debtor and creditor and was therefore unjust.
Religious context[edit]
Judaism[edit]
Main article: Usury in Jewish Law
Jews are forbidden to use usury in dealing with fellow Jews; however, they are permitted to charge interest on loans
to non-Jews.[30] This is outlined in the Jewish scriptures known as the Torah and other books of the Tanakh, also held
by Christians to be scripture as part of the Old Testament. From the Jewish Publication Society's 1917 Tanakh,[31] with
Christian verse numbers, where different, in parentheses:
Exodus 22:24 (25)If thou lend money to any of My people, even to the poor with thee, thou shalt not be to him as
a creditor; neither shall ye lay upon him interest.
Leviticus 25:36 Take thou no interest of him or increase; but fear thy God; that thy brother may live with thee.
Leviticus 25:37 Thou shalt not give him thy money upon interest, nor give him thy victuals for increase.
Deuteronomy 23:20 (19)Thou shalt not lend upon interest to thy brother: interest of money, interest of victuals,
interest of any thing that is lent upon interest.
3
Deuteronomy 23:21 (20)Unto a foreigner thou mayest lend upon interest; but unto thy brother thou shalt not lend
upon interest; that the LORD thy God may bless thee in all that thou puttest thy hand unto, in the land whither thou
goest in to possess it.
Ezekiel 18:17that hath withdrawn his hand from the poor, that hath not received interest nor increase, hath
executed Mine ordinances, hath walked in My statutes; he shall not die for the iniquity of his father, he shall surely
live.
Psalm 15:5He that putteth not out his money on interest, nor taketh a bribe against the innocent. He that doeth
these things shall never be moved.

Christianity[edit]

Christ drives the Usurers out of the Temple, a woodcut by Lucas Cranach the Elder in Passionary of Christ and
Antichrist.[32]
The New Testament contains references to usury, notably in the Parable of the talents:
"Well then, you should have put my money on deposit with the bankers, so that when I returned I would have
received it back with interest.."
Matthew 25:27
"Out of thine own mouth will I judge thee, thou wicked servant. Thou knewest that I was an austere man, taking up
that I laid not down, and reaping that I did not sow. Wherefore then gavest not thou my money into the bank, that at
my coming I might have required mine own with usury?"
Luke 19:22-23
The following scriptures teach about lending:
"Give to the one who asks you, and do not turn away from the one who wants to borrow from you."
Matthew 5:42
"And if you lend to those from whom you expect repayment, what credit is that to you? Even sinners lend to sinners,
expecting to be repaid in full. But love your enemies, do good to them, and lend to them without expecting to get
anything back. Then your reward will be great, and you will be children of the Most High, because he is kind to the
ungrateful and wicked."
Luke 6:34-35
"Give, and it will be given to you. A good measure, pressed down, shaken together and running over, will be poured
into your lap. For with the measure you use, it will be measured to you."
Luke 6:38
Islam[edit]
Main articles: Riba and Islamic banking
The following quotations are English translations from the Qur'an:
Those who charge usury are in the same position as those controlled by the devil's influence. This is because they
claim that usury is the same as commerce. However, God permits commerce, and prohibits usury. Thus, whoever
heeds this commandment from his Lord, and refrains from usury, he may keep his past earnings, and his judgment
rests with God. As for those who persist in usury, they incur Hell, wherein they abide forever (Al-Baqarah 2:275)
God condemns usury, and blesses charities. God dislikes every disbeliever, guilty. Those who believe and do good
works and establish worship and pay the poor-due, their reward is with their Lord and there shall no fear come upon
them neither shall they grieve. O you who believe, you shall observe God and refrain from all kinds of usury, if you
are believers. If you do not, then expect a war from God and His messenger. But if you repent, you may keep your
capitals, without inflicting injustice, or incurring injustice. If the debtor is unable to pay, wait for a better time. If you
give up the loan as a charity, it would be better for you, if you only knew. ( Al-Baqarah 2:276-280)
O you who believe, you shall not take usury, compounded over and over. Observe God, that you may succeed. ( Al-
'Imran 3:130)
And for practicing usury, which was forbidden, and for consuming the people's money illicitly. We have prepared for
the disbelievers among them painful retribution. (Al-Nisa 4:161)
The usury that is practiced to increase some people's wealth, does not gain anything at God. But if people give to
charity, seeking God's pleasure, these are the ones who receive their reward many fold. ( Ar-Rum 30:39)
The attitude of Muhammad to usury is articulated in his Last Sermon
O People, just as you regard this month, this day, this city as Sacred, so regard the life and property of every Muslim
as a sacred trust. Return the goods entrusted to you to their rightful owners. Hurt no one so that no one may hurt
you. Remember that you will indeed meet your LORD, and that HE will indeed reckon your deeds. ALLAH has
forbidden you to take usury (interest), therefore all interest obligation shall henceforth be waived. Your capital,
however, is yours to keep. You will neither inflict nor suffer any inequity. Allah has Judged that there shall be no
interest and that all the interest due to Abbas ibn 'Abd'al Muttalib (Prophet's uncle) shall henceforth be waived...
[33]

Scholastic theology[edit]
The first of the scholastic Christian theologians, Saint Anselm of Canterbury, led the shift in thought that labeled
charging interest the same as theft. Previously usury had been seen as a lack of charity.
St. Thomas Aquinas, the leading scholastic theologian of the Roman Catholic Church, argued charging of interest is
4
wrong because it amounts to "double charging", charging for both the thing and the use of the thing. Aquinas said
this would be morally wrong in the same way as if one sold a bottle of wine, charged for the bottle of wine, and then
charged for the person using the wine to actually drink it.[34] Similarly, one cannot charge for a piece of cake and for
the eating of the piece of cake. Yet this, said Aquinas, is what usury does. Money is a medium of exchange, and is
used up when it is spent. To charge for the money and for its use (by spending) is therefore to charge for the money
twice. It is also to sell time since the usurer charges, in effect, for the time that the money is in the hands of the
borrower. Time, however, is not a commodity that anyone can charge. In condemning usury Aquinas was much
influenced by the recently rediscovered philosophical writings of Aristotle and his desire to assimilate Greek
philosophy with Christian theology. Aquinas argued that in the case of usury, as in other aspects of Christian
revelation, Christian doctrine is reinforced by Aristotelian natural law rationalism. Aristotle's argument is that interest
is unnatural, since money, as a sterile element, cannot naturally reproduce itself. Thus, usury conflicts with natural
law just as it offends Christian revelation: see Thought of Thomas Aquinas.
Outlawing usury did not prevent investment, but stipulated that in order for the investor to share in the profit he must
share the risk. In short he must be a joint-venturer. Simply to invest the money and expect it to be returned
regardless of the success of the venture was to make money simply by having money and not by taking any risk or by
doing any work or by any effort or sacrifice at all, which is usury. St Thomas quotes Aristotle as saying that "to live by
usury is exceedingly unnatural". Islam likewise condemns usury but allowed commerce (Al-Baqarah 2:275) - an
alternative that suggests investment and sharing of profit and loss instead of sharing only profit through interests.
Judaism condemns usury towards Jews, but allows it towards non-Jews. (Deut 23:19-20)[citation needed] St Thomas
allows, however, charges for actual services provided. Thus a banker or credit-lender could charge for such actual
work or effort as he did carry out e.g. any fair administrative charges. The Catholic Church, in a decree of the Fifth
Council of the Lateran, expressly allowed such charges in respect of credit-unions run for the benefit of the poor
known as "montes pietatis".[35]
In the 13th century Cardinal Hostiensis enumerated thirteen situations in which charging interest was not immoral. [36]
The most important of these was lucrum cessans (profits given up) which allowed for the lender to charge interest "to
compensate him for profit foregone in investing the money himself." (Rothbard 1995, p. 46) This idea is very similar
to opportunity cost. Many scholastic thinkers who argued for a ban on interest charges also argued for the legitimacy
of lucrum cessans profits (e.g. Pierre Jean Olivi and St. Bernardino of Siena). However, Hostiensis' exceptions,
including for lucrum cessans, were never accepted as official by the Roman Catholic Church.
The Roman Catholic Church has always condemned usury, but in modern times, with the rise of capitalism and the
disestablishment of the Catholic Church in majority Catholic countries, this prohibition on usury has not been
enforced.
Pope Benedict XIV's encyclical Vix Pervenit gives the reasons why usury is sinful:[37]
The nature of the sin called usury has its proper place and origin in a loan contract [which] demands, by its very
nature, that one return to another only as much as he has received. The sin rests on the fact that sometimes the
creditor desires more than he has given, but any gain which exceeds the amount he gave is illicit and usurious.

One cannot condone the sin of usury by arguing that the gain is not great or excessive, but rather moderate or small;
neither can it be condoned by arguing that the borrower is rich; nor even by arguing that the money borrowed is not
left idle, but is spent usefully[38]
Other contexts[edit]
Usury in literature[edit]
In The Divine Comedy Dante places the usurers in the inner ring of the seventh circle of hell.
Interest on loans, and the contrasting views on the morality of that practice held by Jews and Christians, is central to
the plot of Shakespeare's play "The Merchant of Venice". Antonio is the merchant of the title, a Christian, who is
forced by circumstance to borrow money from "Shylock", a Jew. Shylock customarily charges interest on loans, seeing
it as good business, while Antonio does not, viewing it as morally wrong. When Antonio defaults on his loan, Shylock
famously demands the agreed upon penalty-a measured quantity of muscle from Antonio's chest. This is the source of
the phrase "a pound of flesh" often used to describe the dear price of a loan or business transaction. Shakespeare's
play is a vivid portrait of the competing views of loans and use of interest, as well as the cultural strife between Jews
and Christians that overlaps it.[citation needed]
By the 18th century, usury was more often treated as a metaphor than a crime in itself, so Jeremy Bentham's
Defense of Usury was not as shocking as it would have appeared two centuries earlier.
In Honor de Balzac's 1830 novel Gobseck, the title character, who is a usurer, is described as both "petty and
greata miser and a philosopher..."[39] The character Daniel Quilp in The Old Curiosity Shop by Charles Dickens is a
usurer.
In the early 20th century Ezra Pound's anti-usury poetry was not primarily based on the moral injustice of interest
payments but on the fact that excess capital was no longer devoted to artistic patronage, as it could now be used for
capitalist business investment.[40]
Usury and royalties[edit]
Royalties are contractual obligations of the Issuer of the royalty, made for the benefit of the holder of the royalty.
Royalties require the payment of an agreed percentage of revenue of the Issuer, for an agreed period of time. In the
event a royalty is purchased from an Issuer, the future revenue upon which the royalty is based is unknown at the
5
time of the original transaction. Therefore, the cumulative amount of the future royalty payments is also an unknown.
Royalty payments are not interest and royalties expire without value at their maturity. To be usurious payments made
and received for the use of funds must be considered interest for loaned funds which require repayment at the
maturity of the loan. The value in gains by the use of the royalty should equal its payment value, excess cost or
interest beyond its tangible value is illicit interest or usury.
Usury and slavery in present day[edit]
While the practice of direct slavery is widely banned across the world, in some places debt-slavery is still practiced.[41]
A debtor who is found unable to repay a loan can be placed in a state of debt-slavery, a situation whereby their life
and labors are directed by the lender until the debt is considered repaid. [42] Usury is often a major part of extending
this slavery, not uncommonly assisting in extending the debt-slavery onto the children of the debtor, thus making
slaves of multiple generations and promoting child labor.[43] Another form of or name for this practice is debt
bondage.
Usury law[edit]
Usury and the law[edit]

Magna Carta commands, "If any one has taken anything, whether much or little, by way of loan from Jews, and if he
dies before that debt is paid, the debt shall not carry usury so long as the heir is under age, from whomsoever he
may hold. And if that debt falls into our hands, we will take only the principal contained in the note." [44]
"When money is lent on a contract to receive not only the principal sum again, but also an increase by way of
compensation for the use, the increase is called interest by those who think it lawful, and usury by those who do not."
(William Blackstone's Commentaries on the Laws of England).
United States[edit]
In the United States, the primary legal power to regulate usury rests with the states. Usury laws are state laws that
specify the maximum legal interest rate at which loans can be made. Each U.S. state has its own statute which
dictates how much interest can be charged before it is considered usurious or unlawful.
If a lender charges above the lawful interest rate, a court will not allow the lender to sue to recover the debt because
the interest rate was illegal anyway. In some states (such as New York) such loans are voided ab initio.[45]
On a federal level, Congress has never attempted to federally regulate interest rates on purely private transactions,
but on the basis of past U.S. Supreme Court decisions, arguably the U.S. Congress might have the power to do so
under the interstate commerce clause of Article I of the Constitution. Congress opted to put a federal criminal limit on
interest rates by the Racketeer Influenced and Corrupt Organizations Act (RICO Statute) definitions of "unlawful
debt", which make it a federal felony to lend money at an interest rate more than twice the local state usury rate and
then try to collect that "unlawful debt".[46] It is a federal offense to use violence or threats to collect usurious interest
(or any other sort) (Extortionate Credit Transactions statute, chapter 42, title 18, U.S. Code). Such activity is referred
to as loan sharking, but that term is also applied to non-coercive usurious lending or even to the practice of making
consumer loans without a license in jurisdictions that require licenses.
However, there are separate rules applied to most banks. The U.S. Supreme Court held unanimously in the 1978
Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp. case that the National Banking Act of 1863
allowed nationally chartered banks to charge the legal rate of interest in their state regardless of the borrower's state
of residence.[47] In 1980, Congress passed the Depository Institutions Deregulation and Monetary Control Act. Among
the Act's provisions, it exempted federally chartered savings banks, installment plan sellers and chartered loan
companies from state usury limits. Combined with the Marquette decision that applied to National Banks, this
effectively overrode all state and local usury laws.[48][49] The 1968 Truth in Lending Act does not regulate rates, except
for some mortgages, but requires uniform or standardized disclosure of costs and charges. [50]
In the 1996 Smiley v. Citibank case, the Supreme Court further limited states' power to regulate credit card fees and
extended the reach of the Marquette decision. The court held that the word "interest" used in the 1863 banking law
included fees and, therefore, states could not regulate fees.[51]
Some members of Congress have tried to create a federal usury statute that would limit the maximum allowable
interest rate, but the measures have not progressed. In July 2010, the DoddFrank Wall Street Reform and Consumer
Protection Act, was signed into law by President Obama. The act provides for a Consumer Financial Protection Bureau
to regulate some credit practices but has no interest rate limit. [51]
Canada[edit]
Canada's Criminal Code limits the interest rate to 60% per year. [52] The law is broadly written and Canada's courts
have often intervened to remove ambiguity.[53]
Japan[edit]
Japan has various laws restricting interest rates. Under civil law, the maximum interest rate is between 15% and 20%
per year depending upon the principal amount (larger amounts having a lower maximum rate). Interest in excess of
20% is subject to criminal penalties (the criminal law maximum was 29.2% until it was lowered by legislation in
2010).[54] Default interest on late payments may be charged at up to 1.46 times the ordinary maximum (i.e., 21.9%
to 29.2%), while pawn shops may charge interest of up to 9% per month (i.e., 108% per year).
Avoidance mechanisms and interest-free lending[edit]
Islamic banking[edit]
6
Main article: Islamic banking
In a partnership or joint venture where money is lent, the creditor only provides the capital yet is guaranteed a fixed
amount of profit. The debtor, however, puts in time and effort, but is made to bear the risk of loss. Muslim scholars
argue that such practice is unjust.[55] As an alternative to usury, Islam strongly encourages charity and direct
investment in which the creditor shares whatever profit or loss the business may incur (in modern terms, this
amounts to an equity stake in the business).
Non-recourse mortgages[edit]
A non-recourse loan is secured by the value of property (usually real estate) owned by the debtor. However, unlike
other loans, which oblige the debtor to repay the amount borrowed, a non-recourse loan is fully satisfied merely by
the transfer of the property to the creditor, even if the property has declined in value and is worth less than the
amount borrowed. When such a loan is created, the creditor bears the risk that the property will decline sharply in
value (in which case the creditor is repaid with property worth less than the amount borrowed), and the debtor does
not bear the risk of decrease in property value (because the debtor is guaranteed the right to use the property,
regardless of value, to satisfy the debt.)
Interest-free banks[edit]
The JAK members bank is a usury-free saving and loaning system.
Interest-free micro-lending[edit]
Growth of the Internet internationally has enabled both business micro-lending through sites such as Kickstarter as
well as through global micro-lending charities where lenders make small sums of money available on zero-interest
terms. Persons lending money to on-line micro-lending charity Kiva for example do not get paid any interest,[56]
although the end users to whom the loans are made may be charged interest by Kiva's partners in the country where
the loan is used.[57]

7
G.R. No. 192986 January 15, 2013
ADVOCATES FOR TRUTH IN LENDING, INC. and EDUARDO B. OLAGUER, Petitioners,
vs.
BANGKO SENTRAL MONETARY BOARD, represented by its Chairman, GOVERNOR ARMANDO M.
TETANGCO, JR., and its incumbent members: JUANITA D. AMATONG, ALFREDO C. ANTONIO, PETER FA
VILA, NELLY F. VILLAFUERTE, IGNACIO R. BUNYE and CESAR V. PURISIMA, Respondents.
DECISION
REYES, J.:
Petitioners, claiming that they are raising issues of transcendental importance to the public, filed directly with this
Court this Petition for Certiorari under Rule 65 of the 1997 Rules of Court, seeking to declare that the Bangko Sentral
ng Pilipinas Monetary Board (BSP-MB), replacing the Central Bank Monetary Board (CB-MB) by virtue of Republic Act
(R.A.) No. 7653, has no authority to continue enforcing Central Bank Circular No. 905, 1 issued by the CB-MB in 1982,
which "suspended" Act No. 2655, or the Usury Law of 1916.
Factual Antecedents
Petitioner "Advocates for Truth in Lending, Inc." (AFTIL) is a non-profit, non-stock corporation organized to engage in
pro bono concerns and activities relating to money lending issues. It was incorporated on July 9, 2010, 2 and a month
later, it filed this petition, joined by its founder and president, Eduardo B. Olaguer, suing as a taxpayer and a citizen.
R.A. No. 265, which created the Central Bank (CB) of the Philippines on June 15, 1948, empowered the CB-MB to,
among others, set the maximum interest rates which banks may charge for all types of loans and other credit
operations, within limits prescribed by the Usury Law. Section 109 of R.A. No. 265 reads:
Sec. 109. Interest Rates, Commissions and Charges. The Monetary Board may fix the maximum rates of interest
which banks may pay on deposits and on other obligations.
The Monetary Board may, within the limits prescribed in the Usury Law fix the maximum rates of interest which banks
may charge for different types of loans and for any other credit operations, or may fix the maximum differences which
may exist between the interest or rediscount rates of the Central Bank and the rates which the banks may charge their
customers if the respective credit documents are not to lose their eligibility for rediscount or advances in the Central
Bank.
Any modifications in the maximum interest rates permitted for the borrowing or lending operations of the banks shall
apply only to future operations and not to those made prior to the date on which the modification becomes effective.
In order to avoid possible evasion of maximum interest rates set by the Monetary Board, the Board may also fix the
maximum rates that banks may pay to or collect from their customers in the form of commissions, discounts, charges,
fees or payments of any sort. (Underlining ours)
On March 17, 1980, the Usury Law was amended by Presidential Decree (P.D.) No. 1684, giving the CB-MB authority
to prescribe different maximum rates of interest which may be imposed for a loan or renewal thereof or the
forbearance of any money, goods or credits, provided that the changes are effected gradually and announced in
advance. Thus, Section 1-a of Act No. 2655 now reads:
Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or rates of interest for the loan or
renewal thereof or the forbearance of any money, goods or credits, and to change such rate or rates whenever
warranted by prevailing economic and social conditions: Provided, That changes in such rate or rates may be effected
gradually on scheduled dates announced in advance.
In the exercise of the authority herein granted the Monetary Board may prescribe higher maximum rates for loans of
low priority, such as consumer loans or renewals thereof as well as such loans made by pawnshops, finance
companies and other similar credit institutions although the rates prescribed for these institutions need not necessarily
be uniform. The Monetary Board is also authorized to prescribe different maximum rate or rates for different types of
borrowings, including deposits and deposit substitutes, or loans of financial intermediaries. (Underlining and emphasis
ours)
In its Resolution No. 2224 dated December 3, 1982,3 the CB-MB issued CB Circular No. 905, Series of 1982, effective
on January 1, 1983. Section 1 of the Circular, under its General Provisions, removed the ceilings on interest rates on
loans or forbearance of any money, goods or credits, to wit:
Sec. 1. The rate of interest, including commissions, premiums, fees and other charges, on a loan or forbearance of
any money, goods, or credits, regardless of maturity and whether secured or unsecured, that may be charged or
collected by any person, whether natural or juridical, shall not be subject to any ceiling prescribed under or pursuant to
the Usury Law, as amended. (Underscoring and emphasis ours)
The Circular then went on to amend Books I to IV of the CBs "Manual of Regulations for Banks and Other Financial
Intermediaries" (Manual of Regulations) by removing the applicable ceilings on specific interest rates. Thus, Sections
5, 9 and 10 of CB Circular No. 905 amended Book I, Subsections 1303, 1349, 1388.1 of the Manual of Regulations,
by removing the ceilings for interest and other charges, commissions, premiums, and fees applicable to commercial
banks; Sections 12 and 17 removed the interest ceilings for thrift banks (Book II, Subsections 2303, 2349); Sections
19 and 21 removed the ceilings applicable to rural banks (Book III, Subsection 3152.3-c); and, Sections 26, 28, 30
and 32 removed the ceilings for non-bank financial intermediaries (Book IV, Subsections 4303Q.1 to 4303Q.9,
4303N.1, 4303P).4
On June 14, 1993, President Fidel V. Ramos signed into law R.A. No. 7653 establishing the Bangko Sentral ng
Pilipinas (BSP) to replace the CB. The repealing clause thereof, Section 135, reads:
Sec. 135. Repealing Clause. Except as may be provided for in Sections 46 and 132 of this Act, Republic Act No.
265, as amended, the provisions of any other law, special charters, rule or regulation issued pursuant to said Republic

8
Act No. 265, as amended, or parts thereof, which may be inconsistent with the provisions of this Act are hereby
repealed. Presidential Decree No. 1792 is likewise repealed.
Petition for Certiorari
To justify their skipping the hierarchy of courts and going directly to this Court to secure a writ of certiorari, petitioners
contend that the transcendental importance of their Petition can readily be seen in the issues raised therein, to wit:
a) Whether under R.A. No. 265 and/or P.D. No. 1684, the CB-MB had the statutory or constitutional authority
to prescribe the maximum rates of interest for all kinds of credit transactions and forbearance of money,
goods or credit beyond the limits prescribed in the Usury Law;
b) If so, whether the CB-MB exceeded its authority when it issued CB Circular No. 905, which removed all
interest ceilings and thus suspended Act No. 2655 as regards usurious interest rates;
c) Whether under R.A. No. 7653, the new BSP-MB may continue to enforce CB Circular No. 905.5
Petitioners attached to their petition copies of several Senate Bills and Resolutions of the 10th Congress, which held
its sessions from 1995 to 1998, calling for investigations by the Senate Committee on Banks and Financial Institutions
into alleged unconscionable commercial rates of interest imposed by these entities. Senate Bill (SB) Nos. 37 6 and
1860,7 filed by Senator Vicente C. Sotto III and the late Senator Blas F. Ople, respectively, sought to amend Act No.
2655 by fixing the rates of interest on loans and forbearance of credit; Philippine Senate Resolution (SR) No.
1053,8 10739 and 1102,10 filed by Senators Ramon B. Magsaysay, Jr., Gregorio B. Honasan and Franklin M. Drilon,
respectively, urged the aforesaid Senate Committee to investigate ways to curb the high commercial interest rates
then obtaining in the country; Senator Ernesto Maceda filed SB No. 1151 to prohibit the collection of more than two
months of advance interest on any loan of money; and Senator Raul Roco filed SR No. 114411seeking an
investigation into an alleged cartel of commercial banks, called "Club 1821", reportedly behind the regime of high
interest rates. The petitioners also attached news clippings 12 showing that in February 1998 the banks prime lending
rates, or interests on loans to their best borrowers, ranged from 26% to 31%.
Petitioners contend that under Section 1-a of Act No. 2655, as amended by P.D. No. 1684, the CB-MB was authorized
only to prescribe or set the maximum rates of interest for a loan or renewal thereof or for the forbearance of any
money, goods or credits, and to change such rates whenever warranted by prevailing economic and social conditions,
the changes to be effected gradually and on scheduled dates; that nothing in P.D. No. 1684 authorized the CB-MB to
lift or suspend the limits of interest on all credit transactions, when it issued CB Circular No. 905. They further insist
that under Section 109 of R.A. No. 265, the authority of the CB-MB was clearly only to fix the banks maximum rates
of interest, but always within the limits prescribed by the Usury Law.
Thus, according to petitioners, CB Circular No. 905, which was promulgated without the benefit of any prior public
hearing, is void because it violated Article 5 of the New Civil Code, which provides that "Acts executed against the
provisions of mandatory or prohibitory laws shall be void, except when the law itself authorizes their validity."
They further claim that just weeks after the issuance of CB Circular No. 905, the benchmark 91-day Treasury bills (T-
bills),13 then known as "Jobo" bills14 shot up to 40% per annum, as a result. The banks immediately followed suit and
re-priced their loans to rates which were even higher than those of the "Jobo" bills. Petitioners thus assert that CB
Circular No. 905 is also unconstitutional in light of Section 1 of the Bill of Rights, which commands that "no person
shall be deprived of life, liberty or property without due process of law, nor shall any person be denied the equal
protection of the laws."
Finally, petitioners point out that R.A. No. 7653 did not re-enact a provision similar to Section 109 of R.A. No. 265, and
therefore, in view of the repealing clause in Section 135 of R.A. No. 7653, the BSP-MB has been stripped of the
power either to prescribe the maximum rates of interest which banks may charge for different kinds of loans and credit
transactions, or to suspend Act No. 2655 and continue enforcing CB Circular No. 905.
Ruling
The petition must fail.
A. The Petition is procedurally infirm.
The decision on whether or not to accept a petition for certiorari, as well as to grant due course thereto, is addressed
to the sound discretion of the court.15 A petition for certiorari being an extraordinary remedy, the party seeking to avail
of the same must strictly observe the procedural rules laid down by law, and non-observance thereof may not be
brushed aside as mere technicality.16
As provided in Section 1 of Rule 65, a writ of certiorari is directed against a tribunal exercising judicial or quasi-judicial
functions.17 Judicial functions are exercised by a body or officer clothed with authority to determine what the law is and
what the legal rights of the parties are with respect to the matter in controversy. Quasi-judicial function is a term that
applies to the action or discretion of public administrative officers or bodies given the authority to investigate facts or
ascertain the existence of facts, hold hearings, and draw conclusions from them as a basis for their official action
using discretion of a judicial nature.18
The CB-MB (now BSP-MB) was created to perform executive functions with respect to the establishment, operation or
liquidation of banking and credit institutions, and branches and agencies thereof.19 It does not perform judicial or
quasi-judicial functions. Certainly, the issuance of CB Circular No. 905 was done in the exercise of an executive
function. Certiorari will not lie in the instant case. 20
B. Petitioners have no locus standi to file the Petition
Locus standi is defined as "a right of appearance in a court of justice on a given question." In private suits, Section 2,
Rule 3 of the 1997 Rules of Civil Procedure provides that "every action must be prosecuted or defended in the name
of the real party in interest," who is "the party who stands to be benefited or injured by the judgment in the suit or the
party entitled to the avails of the suit." Succinctly put, a partys standing is based on his own right to the relief sought. 21

9
Even in public interest cases such as this petition, the Court has generally adopted the "direct injury" test that the
person who impugns the validity of a statute must have "a personal and substantial interest in the case such that he
has sustained, or will sustain direct injury as a result."22 Thus, while petitioners assert a public right to assail CB
Circular No. 905 as an illegal executive action, it is nonetheless required of them to make out a sufficient interest in
the vindication of the public order and the securing of relief. It is significant that in this petition, the petitioners do not
allege that they sustained any personal injury from the issuance of CB Circular No. 905.
Petitioners also do not claim that public funds were being misused in the enforcement of CB Circular No. 905. In
Kilosbayan, Inc. v. Morato,23 involving the on-line lottery contract of the PCSO, there was no allegation that public
funds were being misspent, which according to the Court would have made the action a public one, "and justify
relaxation of the requirement that an action must be prosecuted in the name of the real party-in-interest." The Court
held, moreover, that the status of Kilosbayan as a peoples organization did not give it the requisite personality to
question the validity of the contract. Thus:
Petitioners do not in fact show what particularized interest they have for bringing this suit. It does not detract from the
high regard for petitioners as civic leaders to say that their interest falls short of that required to maintain an action
under the Rule 3, Sec. 2.24
C. The Petition raises no issues of transcendental importance.
In the 1993 case of Joya v. Presidential Commission on Good Government, 25 it was held that no question involving
the constitutionality or validity of a law or governmental act may be heard and decided by the court unless there is
compliance with the legal requisites for judicial inquiry, namely: (a) that the question must be raised by the proper
party; (b) that there must be an actual case or controversy; (c) that the question must be raised at the earliest possible
opportunity; and (d) that the decision on the constitutional or legal question must be necessary to the determination of
the case itself.
In Prof. David v. Pres. Macapagal-Arroyo,26 the Court summarized the requirements before taxpayers, voters,
concerned citizens, and legislators can be accorded a standing to sue, viz:
(1) the cases involve constitutional issues;
(2) for taxpayers, there must be a claim of illegal disbursement of public funds or that the tax measure is
unconstitutional;
(3) for voters, there must be a showing of obvious interest in the validity of the election law in question;
(4) for concerned citizens, there must be a showing that the issues raised are of transcendental importance
which must be settled early; and
(5) for legislators, there must be a claim that the official action complained of infringes upon their prerogatives
as legislators.
While the Court may have shown in recent decisions a certain toughening in its attitude concerning the question of
legal standing, it has nonetheless always made an exception where the transcendental importance of the issues has
been established, notwithstanding the petitioners failure to show a direct injury. 27 In CREBA v. ERC,28 the Court set
out the following instructive guides as determinants on whether a matter is of transcendental importance, namely: (1)
the character of the funds or other assets involved in the case; (2) the presence of a clear case of disregard of a
constitutional or statutory prohibition by the public respondent agency or instrumentality of the government; and (3)
the lack of any other party with a more direct and specific interest in the questions being raised. Further, the Court
stated in Anak Mindanao Party-List Group v. The Executive Secretary29 that the rule on standing will not be waived
where these determinants are not established.
In the instant case, there is no allegation of misuse of public funds in the implementation of CB Circular No. 905.
Neither were borrowers who were actually affected by the suspension of the Usury Law joined in this petition. Absent
any showing of transcendental importance, the petition must fail.
More importantly, the Court notes that the instant petition adverted to the regime of high interest rates which obtained
at least 15 years ago, when the banks prime lending rates ranged from 26% to 31%, 30 or even 29 years ago, when
the 91-day Jobo bills reached 40% per annum. In contrast, according to the BSP, in the first two (2) months of 2012
the bank lending rates averaged 5.91%, which implies that the banks prime lending rates were lower; moreover,
deposit interests on savings and long-term deposits have also gone very low, averaging 1.75% and 1.62%,
respectively.31
Judging from the most recent auctions of T-bills, the savings rates must be approaching 0%.1wphi1 In the auctions
held on November 12, 2012, the rates of 3-month, 6-month and 1-year T-bills have dropped to 0.150%, 0.450% and
0.680%, respectively.32 According to Manila Bulletin, this very low interest regime has been attributed to "high liquidity
and strong investor demand amid positive economic indicators of the country."33
While the Court acknowledges that cases of transcendental importance demand that they be settled promptly and
definitely, brushing aside, if we must, technicalities of procedure,34 the delay of at least 15 years in the filing of the
instant petition has actually rendered moot and academic the issues it now raises.
For its part, BSP-MB maintains that the petitioners allegations of constitutional and statutory violations of CB Circular
No. 905 are really mere challenges made by petitioners concerning the wisdom of the Circular. It explains that it was
in view of the global economic downturn in the early 1980s that the executive department through the CB-MB had to
formulate policies to achieve economic recovery, and among these policies was the establishment of a market-
oriented interest rate structure which would require the removal of the government-imposed interest rate ceilings.35
D. The CB-MB merely suspended the effectivity of the Usury Law when it issued CB Circular No. 905.
The power of the CB to effectively suspend the Usury Law pursuant to P.D. No. 1684 has long been recognized and
upheld in many cases. As the Court explained in the landmark case of Medel v. CA, 36 citing several cases, CB
Circular No. 905 "did not repeal nor in anyway amend the Usury Law but simply suspended the latters
10
effectivity;"37that "a CB Circular cannot repeal a law, [for] only a law can repeal another law;" 38 that "by virtue of CB
Circular No. 905, the Usury Law has been rendered ineffective;"39 and "Usury has been legally non-existent in our
jurisdiction. Interest can now be charged as lender and borrower may agree upon."40
In First Metro Investment Corp. v. Este Del Sol Mountain Reserve, Inc.41 cited in DBP v. Perez,42 we also belied the
contention that the CB was engaged in self-legislation. Thus:
Central Bank Circular No. 905 did not repeal nor in any way amend the Usury Law but simply suspended the latters
effectivity. The illegality of usury is wholly the creature of legislation. A Central Bank Circular cannot repeal a law. Only
a law can repeal another law. x x x.43
In PNB v. Court of Appeals,44 an escalation clause in a loan agreement authorized the PNB to unilaterally increase the
rate of interest to 25% per annum, plus a penalty of 6% per annum on past dues, then to 30% on October 15, 1984,
and to 42% on October 25, 1984. The Supreme Court invalidated the rate increases made by the PNB and upheld the
12% interest imposed by the CA, in this wise:
P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate freely regarding any
subsequent adjustment in the interest rate that shall accrue on a loan or forbearance of money, goods or credits. In
fine, they can agree to adjust, upward or downward, the interest previously stipulated. x x x. 45
Thus, according to the Court, by lifting the interest ceiling, CB Circular No. 905 merely upheld the parties freedom of
contract to agree freely on the rate of interest. It cited Article 1306 of the New Civil Code, under which the contracting
parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they
are not contrary to law, morals, good customs, public order, or public policy.
E. The BSP-MB has authority to enforce CB Circular No. 905.
Section 1 of CB Circular No. 905 provides that "The rate of interest, including commissions, premiums, fees and other
charges, on a loan or forbearance of any money, goods, or credits, regardless of maturity and whether secured or
unsecured, that may be charged or collected by any person, whether natural or juridical, shall not be subject to any
ceiling prescribed under or pursuant to the Usury Law, as amended." It does not purport to suspend the Usury Law
only as it applies to banks, but to all lenders.
Petitioners contend that, granting that the CB had power to "suspend" the Usury Law, the new BSP-MB did not retain
this power of its predecessor, in view of Section 135 of R.A. No. 7653, which expressly repealed R.A. No. 265. The
petitioners point out that R.A. No. 7653 did not reenact a provision similar to Section 109 of R.A. No. 265.
A closer perusal shows that Section 109 of R.A. No. 265 covered only loans extended by banks, whereas under
Section 1-a of the Usury Law, as amended, the BSP-MB may prescribe the maximum rate or rates of interest for all
loans or renewals thereof or the forbearance of any money, goods or credits, including those for loans of low priority
such as consumer loans, as well as such loans made by pawnshops, finance companies and similar credit institutions.
It even authorizes the BSP-MB to prescribe different maximum rate or rates for different types of borrowings, including
deposits and deposit substitutes, or loans of financial intermediaries.
Act No. 2655, an earlier law, is much broader in scope, whereas R.A. No. 265, now R.A. No. 7653, merely
supplemented it as it concerns loans by banks and other financial institutions. Had R.A. No. 7653 been intended to
repeal Section 1-a of Act No. 2655, it would have so stated in unequivocal terms.
Moreover, the rule is settled that repeals by implication are not favored, because laws are presumed to be passed
with deliberation and full knowledge of all laws existing pertaining to the subject. 46 An implied repeal is predicated
upon the condition that a substantial conflict or repugnancy is found between the new and prior laws. Thus, in the
absence of an express repeal, a subsequent law cannot be construed as repealing a prior law unless an irreconcilable
inconsistency and repugnancy exists in the terms of the new and old laws. 47 We find no such conflict between the
provisions of Act 2655 and R.A. No. 7653.
F. The lifting of the ceilings for interest rates does not authorize stipulations charging excessive, unconscionable, and
iniquitous interest.
It is settled that nothing in CB Circular No. 905 grants lenders a carte blanche authority to raise interest rates to levels
which will either enslave their borrowers or lead to a hemorrhaging of their assets. 48 As held in Castro v. Tan:49
The imposition of an unconscionable rate of interest on a money debt, even if knowingly and voluntarily assumed, is
immoral and unjust. It is tantamount to a repugnant spoliation and an iniquitous deprivation of property, repulsive to
the common sense of man. It has no support in law, in principles of justice, or in the human conscience nor is there
any reason whatsoever which may justify such imposition as righteous and as one that may be sustained within the
sphere of public or private morals.50
Stipulations authorizing iniquitous or unconscionable interests have been invariably struck down for being contrary to
morals, if not against the law.51 Indeed, under Article 1409 of the Civil Code, these contracts are deemed inexistent
and void ab initio, and therefore cannot be ratified, nor may the right to set up their illegality as a defense be waived.
Nonetheless, the nullity of the stipulation of usurious interest does not affect the lenders right to recover the principal
of a loan, nor affect the other terms thereof.52 Thus, in a usurious loan with mortgage, the right to foreclose the
mortgage subsists, and this right can be exercised by the creditor upon failure by the debtor to pay the debt due. The
debt due is considered as without the stipulated excessive interest, and a legal interest of 12% per annum will be
added in place of the excessive interest formerly imposed,53following the guidelines laid down in the landmark case of
Eastern Shipping Lines, Inc. v. Court of Appeals,54 regarding the manner of computing legal interest:
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the
11
 absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No
interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can
be established with reasonable certainty. Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169,
Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the
interest shall begin to run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of
credit.55 (Citations omitted)
The foregoing rules were further clarified in Sunga-Chan v. Court of Appeals, 56 as follows:
Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest, if proper, and the applicable rate, as
follows: The 12% per annum rate under CB Circular No. 416 shall apply only to loans or forbearance of money,
goods, or credits, as well as to judgments involving such loan or forbearance of money, goods, or credit, while the 6%
per annum under Art. 2209 of the Civil Code applies "when the transaction involves the payment of indemnities in the
concept of damage arising from the breach or a delay in the performance of obligations in general," with the
application of both rates reckoned "from the time the complaint was filed until the [adjudged] amount is fully paid." In
either instance, the reckoning period for the commencement of the running of the legal interest shall be subject to the
condition "that the courts are vested with discretion, depending on the equities of each case, on the award of
interest."57 (Citations omitted)
WHEREFORE, premises considered, the Petition for certiorari is DISMISSED.

12
 [G.R. No. 116285. October 19, 2001]
ANTONIO TAN, petitioner, vs. COURT OF APPEALS and the CULTURAL CENTER OF THE
PHILIPPINES, respondents.
DECISION
DE LEON, JR., J.:
Before us is a petition for review of the Decision[1] dated August 31, 1993 and Resolution[2] dated July 13, 1994 of the Court
of Appeals affirming the Decision[3] dated May 8, 1991 of the Regional Trial Court (RTC) of Manila, Branch 27.
The facts are as follows:
On May 14, 1978 and July 6, 1978, petitioner Antonio Tan obtained two (2) loans each in the principal amount of Two Million
Pesos (P2,000,000.00), or in the total principal amount of Four Million Pesos (P4,000,000.00) from respondent Cultural Center of
the Philippines (CCP, for brevity) evidenced by two (2) promissory notes with maturity dates on May 14, 1979 and July 6, 1979,
respectively. Petitioner defaulted but after a few partial payments he had the loans restructured by respondent CCP, and petitioner
accordingly executed a promissory note (Exhibit A) on August 31, 1979 in the amount of Three Million Four Hundred Eleven
Thousand Four Hundred Twenty-One Pesos and Thirty-Two Centavos (P3,411,421.32) payable in five (5) installments. Petitioner
Tan failed to pay any installment on the said restructured loan of Three Million Four Hundred Eleven Thousand Four Hundred
Twenty-One Pesos and Thirty-Two Centavos (P3,411,421.32), the last installment falling due on December 31, 1980. In a letter
dated January 26, 1982, petitioner requested and proposed to respondent CCP a mode of paying the restructured loan, i.e., (a) twenty
percent (20%) of the principal amount of the loan upon the respondent giving its conformity to his proposal; and (b) the balance on
the principal obligation payable in thirty-six (36) equal monthly installments until fully paid. On October 20, 1983, petitioner again
sent a letter to respondent CCP requesting for a moratorium on his loan obligation until the following year allegedly due to a
substantial deduction in the volume of his business and on account of the peso devaluation. No favorable response was made to said
letters. Instead, respondent CCP, through counsel, wrote a letter dated May 30, 1984 to the petitioner demanding full payment,
within ten (10) days from receipt of said letter, of the petitioners restructured loan which as of April 30, 1984 amounted to Six
Million Eighty-Eight Thousand Seven Hundred Thirty-Five Pesos and Three Centavos (P6,088,735.03).
On August 29, 1984, respondent CCP filed in the RTC of Manila a complaint for collection of a sum of money, docketed as
Civil Case No. 84-26363, against the petitioner after the latter failed to settle his said restructured loan obligation. The petitioner
interposed the defense that he merely accommodated a friend, Wilson Lucmen, who allegedly asked for his help to obtain a loan
from respondent CCP. Petitioner claimed that he has not been able to locate Wilson Lucmen. While the case was pending in the
trial court, the petitioner filed a Manifestation wherein he proposed to settle his indebtedness to respondent CCP by proposing to
make a down payment of One Hundred Forty Thousand Pesos (P140,000.00) and to issue twelve (12) checks every beginning of
the year to cover installment payments for one year, and every year thereafter until the balance is fully paid. However, respondent
CCP did not agree to the petitioners proposals and so the trial of the case ensued.
On May 8, 1991, the trial court rendered a decision, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendant, ordering defendant to pay plaintiff, the
amount of P7,996,314.67, representing defendants outstanding account as of August 28, 1986, with the corresponding stipulated
interest and charges thereof, until fully paid, plus attorneys fees in an amount equivalent to 25% of said outstanding account, plus
P50,000.00, as exemplary damages, plus costs.
Defendants counterclaims are ordered dismissed, for lack of merit.
SO ORDERED.[4]
The trial court gave five (5) reasons in ruling in favor of respondent CCP. First, it gave little weight to the petitioners contention
that the loan was merely for the accommodation of Wilson Lucmen for the reason that the defense propounded was not credible in
itself. Second, assuming, arguendo, that the petitioner did not personally benefit from the said loan, he should have filed a third
party complaint against Wilson Lucmen, the alleged accommodated party but he did not. Third, for three (3) times the petitioner
offered to settle his loan obligation with respondent CCP. Fourth, petitioner may not avoid his liability to pay his obligation under
the promissory note (Exh. A) which he must comply with in good faith pursuant to Article 1159 of the New Civil Code. Fifth,
petitioner is estopped from denying his liability or loan obligation to the private respondent.
The petitioner appealed the decision of the trial court to the Court of Appeals insofar as it charged interest, surcharges, attorneys
fees and exemplary damages against the petitioner. In his appeal, the petitioner asked for the reduction of the penalties and charges
on his loan obligation. He abandoned his alleged defense in the trial court that he merely accommodated his friend, Wilson Lucmen,
in obtaining the loan, and instead admitted the validity of the same. On August 31, 1993, the appellate court rendered a decision,
the dispositive portion of which reads:
WHEREFORE, with the foregoing modification, the judgment appealed from is hereby AFFIRMED.
SO ORDERED.[5]
In affirming the decision of the trial court imposing surcharges and interest, the appellate court held that:
We are unable to accept appellants (petitioners) claim for modification on the basis of alleged partial or irregular performance,
there being none. Appellants offer or tender of payment cannot be deemed as a partial or irregular performance of the contract, not
a single centavo appears to have been paid by the defendant.
However, the appellate court modified the decision of the trial court by deleting the award for exemplary damages and reducing
the amount of awarded attorneys fees to five percent (5%), by ratiocinating as follows:
Given the circumstances of the case, plus the fact that plaintiff was represented by a government lawyer, We believe the award of
25% as attorneys fees and P500,000.00 as exemplary damages is out of proportion to the actual damage caused by the non-
performance of the contract and is excessive, unconscionable and iniquitous.
In a Resolution dated July 13, 1994, the appellate court denied the petitioners motion for reconsideration of the said decision.
Hence, this petition anchored on the following assigned errors:
I

13
 THE HONORABLE COURT OF APPEALS COMMITTED A MISTAKE IN GIVING ITS IMPRIMATUR TO
THE DECISION OF THE TRIAL COURT WHICH COMPOUNDED INTEREST ON SURCHARGES.
II
THE HONORABLE COURT OF APPEALS ERRED IN NOT SUSPENDING IMPOSITION OF INTEREST FOR
THE PERIOD OF TIME THAT PRIVATE RESPONDENT HAS FAILED TO ASSIST PETITIONER IN
APPLYING FOR RELIEF OF LIABILITY THROUGH THE COMMISSION ON AUDIT AND THE OFFICE OF
THE PRESIDENT.
III
THE HONORABLE COURT OF APPEALS ERRED IN NOT DELETING AWARD OF ATTORNEYS FEES AND
IN REDUCING PENALTIES.
Significantly, the petitioner does not question his liability for his restructured loan under the promissory note marked Exhibit
A. The first question to be resolved in the case at bar is whether there are contractual and legal bases for the imposition of the
penalty, interest on the penalty and attorneys fees.
The petitioner imputes error on the part of the appellate court in not totally eliminating the award of attorneys fees and in not
reducing the penalties considering that the petitioner, contrary to the appellate courts findings, has allegedly made partial payments
on the loan. And if penalty is to be awarded, the petitioner is asking for the non-imposition of interest on the surcharges inasmuch
as the compounding of interest on surcharges is not provided in the promissory note marked Exhibit A. The petitioner takes
exception to the computation of the private respondent whereby the interest, surcharge and the principal were added together and
that on the total sum interest was imposed. Petitioner also claims that there is no basis in law for the charging of interest on the
surcharges for the reason that the New Civil Code is devoid of any provision allowing the imposition of interest on surcharges.
We find no merit in the petitioners contention. Article 1226 of the New Civil Code provides that:
In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of
non-compliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the
penalty or is guilty of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance with the provisions of this Code.
In the case at bar, the promissory note (Exhibit A) expressly provides for the imposition of both interest and penalties in case
of default on the part of the petitioner in the payment of the subject restructured loan. The pertinent[6] portion of the promissory note
(Exhibit A) imposing interest and penalties provides that:
For value received, I/We jointly and severally promise to pay to the CULTURAL CENTER OF THE PHILIPPINES at its office
in Manila, the sum of THREE MILLION FOUR HUNDRED ELEVEN THOUSAND FOUR HUNDRED + PESOS
(P3,411,421.32) Philippine Currency, xxx.
xxx xxx xxx
With interest at the rate of FOURTEEN per cent (14%) per annum from the date hereof until paid. PLUS THREE PERCENT
(3%) SERVICE CHARGE.
In case of non-payment of this note at maturity/on demand or upon default of payment of any portion of it when due, I/We jointly
and severally agree to pay additional penalty charges at the rate of TWO per cent (2%) per month on the total amount due until
paid, payable and computed monthly. Default of payment of this note or any portion thereof when due shall render all other
installments and all existing promissory notes made by us in favor of the CULTURAL CENTER OF THE PHILIPPINES
immediately due and demandable. (Underscoring supplied)
xxx xxx xxx
The stipulated fourteen percent (14%) per annum interest charge until full payment of the loan constitutes the monetary interest
on the note and is allowed under Article 1956 of the New Civil Code. [7] On the other hand, the stipulated two percent (2%) per
month penalty is in the form of penalty charge which is separate and distinct from the monetary interest on the principal of the loan.
Penalty on delinquent loans may take different forms. In Government Service Insurance System v. Court of Appeals,[8] this
Court has ruled that the New Civil Code permits an agreement upon a penalty apart from the monetary interest. If the parties stipulate
this kind of agreement, the penalty does not include the monetary interest, and as such the two are different and distinct from each
other and may be demanded separately. Quoting Equitable Banking Corp. v. Liwanag,[9] the GSIS case went on to state that such a
stipulation about payment of an additional interest rate partakes of the nature of a penalty clause which is sanctioned by law, more
particularly under Article 2209 of the New Civil Code which provides that:
If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there
being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal
interest, which is six per cent per annum.
The penalty charge of two percent (2%) per month in the case at bar began to accrue from the time of default by the
petitioner. There is no doubt that the petitioner is liable for both the stipulated monetary interest and the stipulated penalty
charge. The penalty charge is also called penalty or compensatory interest. Having clarified the same, the next issue to be resolved
is whether interest may accrue on the penalty or compensatory interest without violating the provisions of Article 1959 of the New
Civil Code, which provides that:
Without prejudice to the provisions of Article 2212, interest due and unpaid shall not earn interest. However, the contracting
parties may by stipulation capitalize the interest due and unpaid, which as added principal, shall earn new interest.
According to the petitioner, there is no legal basis for the imposition of interest on the penalty charge for the reason that the
law only allows imposition of interest on monetary interest but not the charging of interest on penalty. He claims that since there is
no law that allows imposition of interest on penalties, the penalties should not earn interest. But as we have already explained,
penalty clauses can be in the form of penalty or compensatory interest. Thus, the compounding of the penalty or compensatory
interest is sanctioned by and allowed pursuant to the above-quoted provision of Article 1959 of the New Civil Code considering
that:

14
 First, there is an express stipulation in the promissory note (Exhibit A) permitting the compounding of interest. The fifth
paragraph of the said promissory note provides that: Any interest which may be due if not paid shall be added to the total amount
when due and shall become part thereof, the whole amount to bear interest at the maximum rate allowed by law. [10] Therefore, any
penalty interest not paid, when due, shall earn the legal interest of twelve percent (12%) per annum, [11] in the absence of express
stipulation on the specific rate of interest, as in the case at bar.
Second, Article 2212 of the New Civil Code provides that Interest due shall earn legal interest from the time it is judicially
demanded, although the obligation may be silent upon this point. In the instant case, interest likewise began to run on the penalty
interest upon the filing of the complaint in court by respondent CCP on August 29, 1984. Hence, the courts a quo did not err in
ruling that the petitioner is bound to pay the interest on the total amount of the principal, the monetary interest and the penalty
interest.
The petitioner seeks the elimination of the compounded interest imposed on the total amount based allegedly on the case
of National Power Corporation v. National Merchandising Corporation, [12] wherein we ruled that the imposition of interest on the
damages from the filing of the complaint is unjust where the litigation was prolonged for twenty-five (25) years through no fault of
the defendant. However, the ruling in the said National Power Corporation (NPC) case is not applicable to the case at bar inasmuch
as our ruling on the issue of interest in that NPC case was based on equitable considerations and on the fact that the said case lasted
for twenty-five (25) years through no fault of the defendant. In the case at bar, however, equity cannot be considered inasmuch as
there is a contractual stipulation in the promissory note whereby the petitioner expressly agreed to the compounding of interest in
case of failure on his part to pay the loan at maturity. Inasmuch as the said stipulation on the compounding of interest has the force
of law between the parties and does not appear to be inequitable or unjust, the said written stipulation should be respected.
The private respondents Statement of Account (marked Exhibits C to C-2)[13] shows the following breakdown of the petitioners
indebtedness as of August 28, 1986:
Principal P2,838,454.68
Interest P 576,167.89
Surcharge P4,581,692.10
P7,996,314.67
The said statement of account also shows that the above amounts stated therein are net of the partial payments amounting to a total
of Four Hundred Fifty-Two Thousand Five Hundred Sixty-One Pesos and Forty-Three Centavos (P452,561.43) which were made
during the period from May 13, 1983 to September 30, 1983. [14] The petitioner now seeks the reduction of the penalty due to the
said partial payments.The principal amount of the promissory note (Exhibit A) was Three Million Four Hundred Eleven Thousand
Four Hundred Twenty-One Pesos and Thirty-Two Centavos (P3,411,421.32) when the loan was restructured on August 31, 1979. As
of August 28, 1986, the principal amount of the said restructured loan has been reduced to Two Million Eight Hundred Thirty-Eight
Thousand Four Hundred Fifty-Four Pesos and Sixty-Eight Centavos (P2,838,454.68). Thus, petitioner contends that reduction of
the penalty is justifiable pursuant to Article 1229 of the New Civil Code which provides that: The judge shall equitably reduce the
penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no
performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable. Petitioner insists that the penalty
should be reduced to ten percent (10%) of the unpaid debt in accordance with Bachrach Motor Company v. Espiritu.[15]
There appears to be a justification for a reduction of the penalty charge but not necessarily to ten percent (10%) of the unpaid
balance of the loan as suggested by petitioner. Inasmuch as petitioner has made partial payments which showed his good faith, a
reduction of the penalty charge from two percent (2%) per month on the total amount due, compounded monthly, until paid can
indeed be justified under the said provision of Article 1229 of the New Civil Code.
In other words, we find the continued monthly accrual of the two percent (2%) penalty charge on the total amount due to be
unconscionable inasmuch as the same appeared to have been compounded monthly.
Considering petitioners several partial payments and the fact he is liable under the note for the two percent (2%) penalty charge
per month on the total amount due, compounded monthly, for twenty-one (21) years since his default in 1980, we find it fair and
equitable to reduce the penalty charge to a straight twelve percent (12%) per annum on the total amount due starting August 28,
1986, the date of the last Statement of Account (Exhibits C to C-2). We also took into consideration the offers of the petitioner to
enter into a compromise for the settlement of his debt by presenting proposed payment schemes to respondent CCP. The said offers
at compromise also showed his good faith despite difficulty in complying with his loan obligation due to his financial
problems. However, we are not unmindful of the respondents long overdue deprivation of the use of its money collectible from the
petitioner.
The petitioner also imputes error on the part of the appellate court for not declaring the suspension of the running of the interest
during that period when the respondent allegedly failed to assist the petitioner in applying for relief from liability. In this connection,
the petitioner referred to the private respondents letter[16] dated September 28, 1988 addressed to petitioner which partially reads:
Dear Mr. Tan:
xxx xxx xxx
With reference to your appeal for condonation of interest and surcharge, we wish to inform you that the center will assist you in
applying for relief of liability through the Commission on Audit and Office of the President xxx.
While your application is being processed and awaiting approval, the center will be accepting your proposed payment scheme
with the downpayment of P160,000.00 and monthly remittances of P60,000.00 xxx.
xxx xxx xxx
The petitioner alleges that his obligation to pay the interest and surcharge should have been suspended because the obligation
to pay such interest and surcharge has become conditional, that is dependent on a future and uncertain event which consists of
whether the petitioners request for condonation of interest and surcharge would be recommended by the Commission on Audit and
the Office of the President to the House of Representatives for approval as required under Section 36 of Presidential Decree No.
1445. Since the condition has not happened allegedly due to the private respondents reneging on its promise, his liability to pay the
interest and surcharge on the loan has not arisen. This is the petitioners contention.
15
 It is our view, however, that the running of the interest and surcharge was not suspended by the private respondents promise
to assist the petitioners in applying for relief therefrom through the Commission on Audit and the Office of the President.
First, the letter dated September 28, 1988 alleged to have been sent by the respondent CCP to the petitioner is not part of the
formally offered documentary evidence of either party in the trial court. That letter cannot be considered evidence pursuant to Rule
132, Section 34 of the Rules of Court which provides that: The court shall consider no evidence which has not been formally offered
xxx. Besides, the said letter does not contain any categorical agreement on the part of respondent CCP that the payment of the
interest and surcharge on the loan is deemed suspended while his appeal for condonation of the interest and surcharge was being
processed.
Second, the private respondent correctly asserted that it was the primary responsibility of petitioner to inform the Commission
on Audit and the Office of the President of his application for condonation of interest and surcharge. It was incumbent upon the
petitioner to bring his administrative appeal for condonation of interest and penalty charges to the attention of the said government
offices.
On the issue of attorneys fees, the appellate court ruled correctly and justly in reducing the trial courts award of twenty-five
percent (25%) attorneys fees to five percent (5%) of the total amount due.
WHEREFORE, the assailed Decision of the Court of Appeals is hereby AFFIRMED with MODIFICATION in that the
penalty charge of two percent (2%) per month on the total amount due, compounded monthly, is hereby reduced to a straight twelve
percent (12%) per annum starting from August 28, 1986. With costs against the petitioner.
SO ORDERED.

16
 [G.R. Nos. 128833. April 20, 1998]
RIZAL COMMERCIAL BANKING CORPORATION, UY CHUN BING AND ELI D. LAO, petitioners, vs. COURT OF
APPEALS and GOYU & SONS, INC.,respondents.
[G.R. No. 128834. April 20, 1998]
RIZAL COMMERCIAL BANKING CORPORATION, petitioners, vs. COURT OF APPEALS, ALFREDO C.
SEBASTIAN, GOYU & SONS, INC., GO SONG HIAP, SPOUSES GO TENG KOK and BETTY CHIU SUK
YING alias BETTY GO, respondents.
[G.R. No. 128866. April 20, 1998]
MALAYAN INSURANCE INC., petitioner, vs. GOYU & SONS, INC. respondent.
D EC I S I O N
MELO, J.:
The issues relevant to the herein three consolidated petitions revolve around the fire loss claims of respondent
Goyu & Sons, Inc. (GOYU) with petitioner Malayan Insurance Company, Inc. (MICO) in connection with the mortgage
contracts entered into by and between Rizal Commercial Banking Corporation (RCBC) and GOYU.
The Court of Appeals ordered MICO to pay GOYU its claims in the total amount of P74,040,518.58, plus 37%
interest per annum commencing July 27, 1992. RCBC was ordered to pay actual and compensatory damages in the
amount of P5,000,000.00. MICO and RCBC were held solidarily liable to pay GOYU P1,500,000.00 as exemplary
damages and P1,500,000.00 for attorneys fees. GOYUs obligation to RCBC was fixed at P68,785,069.04 as of April
1992, without any interest, surcharges, and penalties. RCBC and MICO appealed separately but, in view of the common
facts and issues involved, their individual petitions were consolidated.
The undisputed facts may be summarized as follows:
GOYU applied for credit facilities and accommodations with RCBC at its Binondo Branch. After due evaluation,
RCBC Binondo Branch, through its key officers, petitioners Uy Chun Bing and Eli D. Lao, recommended GOYUs
application for approval by RCBCs executive committee. A credit facility in the amount of P30 million was initially
granted. Upon GOYUs application and Uys and Laos recommendation, RCBCs executive committee increased GOYUs
credit facility to P50 million, then to P90 million, and finally to P117 million.
As security for its credit facilities with RCBC, GOYU executed two real estate mortgages and two chattel mortgages
in favor of RCBC, which were registered with the Registry of Deeds at Valenzuela, Metro Manila. Under each of these
four mortgage contracts, GOYU committed itself to insure the mortgaged property with an insurance company approved
by RCBC, and subsequently, to endorse and deliver the insurance policies to RCBC.
GOYU obtained in its name a total of ten insurance policies from MICO. In February 1992, Alchester Insurance
Agency, Inc., the insurance agent where GOYU obtained the Malayan insurance policies, issued nine endorsements in
favor of RCBC seemingly upon instructions of GOYU (Exhibits 1-Malayan to 9-Malayan).
On April 27, 1992, one of GOYUs factory buildings in Valenzuela was gutted by fire. Consequently, GOYU
submitted its claim for indemnity on account of the loss insured against. MICO denied the claim on the ground that the
insurance policies were either attached pursuant to writs of attachments/garnishments issued by various courts or that
the insurance proceeds were also claimed by other creditors of GOYU alleging better rights to the proceeds than the
insured. GOYU filed a complaint for specific performance and damages which was docketed at the Regional Trial Court
of the National Capital Judicial Region (Manila, Branch 3) as Civil Case No. 93-65442, now subject of the present G.R.
No. 128833 and 128866.
RCBC, one of GOYUs creditors, also filed with MICO its formal claim over the proceeds of the insurance policies,
but said claims were also denied for the same reasons that MICO denied GOYUs claims.
In an interlocutory order dated October 12, 1993 (Record, pp. 311-312), the Regional Trial Court of Manila (Branch
3), confirmed that GOYUs other creditors, namely, Urban Bank, Alfredo Sebastian, and Philippine Trust Company
obtained their respective writs of attachments from various courts, covering an aggregate amount of P14,938,080.23,
and ordered that the proceeds of the ten insurance policies be deposited with the said court minus the aforementioned
P14,938,080.23. Accordingly, on January 7, 1994, MICO deposited the amount of P50,505,594.60 with Branch 3 of the
Manila RTC.
In the meantime, another notice of garnishment was handed down by another Manila RTC sala (Branch 28) for the
amount of P8,696,838.75 (Exhibit 22-Malayan).
After trial, Branch 3 of the Manila RTC rendered judgment in favor of GOYU, disposing:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant, Malayan Insurance
Company, Inc. and Rizal Commercial Banking Corporation, ordering the latter as follows:
1. For defendant Malayan Insurance Co., Inc.:
a. To pay the plaintiff its fire loss claims in the total amount of P74,040,518.58 less the amount of
P50,000,000.00 which is deposited with this Court;
b. To pay the plaintiff damages by way of interest for the duration of the delay since July 27, 1992 (ninety
days after defendant insurers receipt of the required proof of loss and notice of loss) at the rate of
twice the ceiling prescribed by the Monetary Board, on the following amounts:
1) P50,000,000.00 from July 27, 1992 up to the time said amount was deposited with this Court on
January 7, 1994;
2) P24,040,518.58 from July 27, 1992 up to the time when the writs of attachments were received by
defendant Malayan;
2. For defendant Rizal Commercial Banking Corporation:
a. To pay the plaintiff actual and compensatory damages in the amount of P2,000,000.00;
3. For both defendants Malayan and RCBC:
17
a. To pay the plaintiff, jointly and severally, the following amounts:
1) P1,000,000.00 as exemplary damages;
2) P1,000,000.00 as, and for, attorneys fees;
3) Costs of suit.
and on the Counterclaim of defendant RCBC, ordering the plaintiff to pay its loan obligations with defendant
RCBC in the amount of P68,785,069.04, as of April 27, 1992, with interest thereon at the rate stipulated in
the respective promissory notes (without surcharges and penalties) per computation, pp. 14-A, 14-B & 14-
C.
FURTHER, the Clerk of Court of the Regional Trial Court of Manila is hereby ordered to release immediately to the
plaintiff the amount of P50,000,000.00 deposited with the Court by defendant Malayan, together with all the interests
earned thereon.
(Record, pp. 478-479.)
From this judgment, all parties interposed their respective appeals. GOYU was unsatisfied with the amounts
awarded in its favor. MICO and RCBC disputed the trial courts findings of liability on their part. The Court of Appeals
partly granted GOYUs appeal, but sustained the findings of the trial court with respect to MICO and RCBCs liabilities,
thusly:
WHEREFORE, the decision of the lower court dated June 29, 1994 is hereby modified as follows:
1. FOR DEFENDANT MALAYAN INSURANCE CO., INC:
a) To pay the plaintiff its fire loss claim in the total amount of P74,040,518.58 less the amount of P50,505,594.60 (per
O.R. No. 3649285) plus deposited in court and damages by way of interest commencing July 27, 1992 until the time
Goyu receives the said amount at the rate of thirty-seven (37%) percent per annum which is twice the ceiling
prescribed by the Monetary Board.
2. FOR DEFENDANT RIZAL COMMERCIAL BANKING CORPORATION:
a) To pay the plaintiff actual and compensatory damages in the amount of P5,000,000.00.
3. FOR DEFENDANTS MALAYAN INSURANCE CO., INC., RIZAL COMMERCIAL BANKING CORPORATION, UY
CHUN BING AND ELI D. LAO:
a) To pay the plaintiff jointly and severally the following amounts:
1. P1,500,000.00 as exemplary damages;
2. P1,500,000.00 as and for attorneys fees.
4. And on RCBCs Counterclaim, ordering the plaintiff Goyu & Sons, Inc. to pay its loan obligation with RCBC in the
amount of P68,785,069.04 as of April 27, 1992 without any interest, surcharges and penalties.
The Clerk of the Court of the Regional Trial Court of Manila is hereby ordered to immediately release to Goyu & Sons,
Inc. the amount of P50,505,594.60 (per O.R. No. 3649285) deposited with it by Malayan Insurance Co., Inc., together
with all the interests thereon.
(Rollo, p. 200.)
RCBC and MICO are now before us in G.R. No. 128833 and 128866, respectively, seeking review and consequent
reversal of the above dispositions of the Court of Appeals.
In G.R. No. 128834, RCBC likewise appeals from the decision in C.A. G.R. No. CV-48376, which case, by virtue
of the Court of Appeals resolution dated August 7, 1996, was consolidated with C.A. G.R. No. CV-46162 (subject of
herein G.R. No. 128833). At issue in said petition is RCBCs right to intervene in the action between Alfredo C. Sebastian
(the creditor) and GOYU (the debtor), where the subject insurance policies were attached in favor of Sebastian.
After a careful review of the material facts as found by the two courts below in relation to the pertinent and applicable
laws, we find merit in the submissions of RCBC and MICO.
The several causes of action pursued below by GOYU gave rise to several related issues which are now submitted
in the petitions before us. This Court, however, discerns one primary and central issue, and this is, whether or not RCBC,
as mortgagee, has any right over the insurance policies taken by GOYU, the mortgagor, in case of the occurrence of
loss.
As earlier mentioned, accordant with the credit facilities extended by RCBC to GOYU, the latter executed several
mortgage contracts in favor of RCBC. It was expressly stipulated in these mortgage contracts that GOYU shall insure
the mortgaged property with any of the insurance companies acceptable to RCBC. GOYU indeed insured the mortgaged
property with MICO, an insurance company acceptable to RCBC. Based on their stipulations in the mortgage contracts,
GOYU was supposed to endorse these insurance policies in favor of, and deliver them, to RCBC. Alchester Insurance
Agency, Inc., MICOs underwriter from whom GOYU obtained the subject insurance policies, prepared the nine
endorsements (see Exh. 1-Malayan to 9-Malayan; also Exh. 51-RCBC to 59-RCBC), copies of which were delivered to
GOYU, RCBC, and MICO. However, because these endorsements do not bear the signature of any officer of GOYU,
the trial court, as well as the Court of Appeals, concluded that the endorsements are defective.
We do not quite agree.
It is settled that a mortgagor and a mortgagee have separate and distinct insurable interests in the same mortgaged
property, such that each one of them may insure the same property for his own sole benefit. There is no question that
GOYU could insure the mortgaged property for its own exclusive benefit. In the present case, although it appears that
GOYU obtained the subject insurance policies naming itself as the sole payee, the intentions of the parties as shown
by their contemporaneous acts, must be given due consideration in order to better serve the interest of justice and
equity.
It is to be noted that nine endorsement documents were prepared by Alchester in favor of RCBC. The Court is in a
quandary how Alchester could arrive at the idea of endorsing any specific insurance policy in favor of any particular
beneficiary or payee other than the insured had not such named payee or beneficiary been specifically disclosed by the
18
insured itself. It is also significant that GOYU voluntarily and purposely took the insurance policies from MICO, a sister
company of RCBC, and not just from any other insurance company. Alchester would not have found out that the subject
pieces of property were mortgaged to RCBC had not such information been voluntarily disclosed by GOYU itself. Had
it not been for GOYU, Alchester would not have known of GOYUs intention of obtaining insurance coverage in
compliance with its undertaking in the mortgage contracts with RCBC, and verily, Alchester would not have endorsed
the policies to RCBC had it not been so directed by GOYU.
On equitable principles, particularly on the ground of estoppel, the Court is constrained to rule in favor of mortgagor
RCBC. The basis and purpose of the doctrine was explained in Philippine National Bank vs. Court of Appeals (94 SCRA
357 [1979]), to wit:
The doctrine of estoppel is based upon the grounds of public policy, fair dealing, good faith and justice, and its
purpose is to forbid one to speak against his own act, representations, or commitments to the injury of one to whom
they were directed and who reasonably relied thereon. The doctrine of estoppel springs from equitable principles and
the equities in the case. It is designed to aid the law in the administration of justice where without its aid injustice might
result. It has been applied by this Court wherever and whenever special circumstances of a case so demand.
(p. 368.)
Evelyn Lozada of Alchester testified that upon instructions of Mr. Go, through a certain Mr. Yam, she prepared in
quadruplicate on February 11, 1992 the nine endorsement documents for GOYUs nine insurance policies in favor of
RCBC. The original copies of each of these nine endorsement documents were sent to GOYU, and the others were
sent to RCBC and MICO, while the fourth copies were retained for Alchesters file (tsn, February 23, pp. 7-8). GOYU
has not denied having received from Alchester the originals of these endorsements.
RCBC, in good faith, relied upon the endorsement documents sent to it as this was only pursuant to the stipulation
in the mortgage contracts. We find such reliance to be justified under the circumstances of the case. GOYU failed to
seasonably repudiate the authority of the person or persons who prepared such endorsements. Over and above this,
GOYU continued, in the meantime, to enjoy the benefits of the credit facilities extended to it by RCBC. After the
occurrence of the loss insured against, it was too late for GOYU to disown the endorsements for any imagined or
contrived lack of authority of Alchester to prepare and issue said endorsements. If there had not been actually an implied
ratification of said endorsements by virtue of GOYUs inaction in this case, GOYU is at the very least estopped from
assailing their operative effects. To permit GOYU to capitalize on its non-confirmation of these endorsements while it
continued to enjoy the benefits of the credit facilities of RCBC which believed in good faith that there was due
endorsement pursuant to their mortgage contracts, is to countenance grave contravention of public policy, fair dealing,
good faith, and justice. Such an unjust situation, the Court cannot sanction. Under the peculiar circumstances obtaining
in this case, the Court is bound to recognize RCBCs right to the proceeds of the insurance policies if not for the actual
endorsement of the policies, at least on the basis of the equitable principle of estoppel.
GOYU cannot seek relief under Section 53 of the Insurance Code which provides that the proceeds of insurance
shall exclusively apply to the interest of the person in whose name or for whose benefit it is made. The peculiarity of the
circumstances obtaining in the instant case presents a justification to take exception to the strict application of said
provision, it having been sufficiently established that it was the intention of the parties to designate RCBC as the party
for whose benefit the insurance policies were taken out. Consider thus the following:
1. It is undisputed that the insured pieces of property were the subject of mortgage contracts entered into between
RCBC and GOYU in consideration of and for securing GOYUs credit facilities from RCBC. The mortgage contracts
contained common provisions whereby GOYU, as mortgagor, undertook to have the mortgaged property properly
covered against any loss by an insurance company acceptable to RCBC.
2. GOYU voluntarily procured insurance policies to cover the mortgaged property from MICO, no less than a sister
company of RCBC and definitely an acceptable insurance company to RCBC.
3. Endorsement documents were prepared by MICOs underwriter, Alchester Insurance Agency, Inc., and copies
thereof were sent to GOYU, MICO, and RCBC. GOYU did not assail, until of late, the validity of said endorsements.
4. GOYU continued until the occurrence of the fire, to enjoy the benefits of the credit facilities extended by RCBC
which was conditioned upon the endorsement of the insurance policies to be taken by GOYU to cover the mortgaged
properties.
This Court can not over stress the fact that upon receiving its copies of the endorsement documents prepared by
Alchester, GOYU, despite the absence of its written conformity thereto, obviously considered said endorsement to be
sufficient compliance with its obligation under the mortgage contracts since RCBC accordingly continued to extend the
benefits of its credit facilities and GOYU continued to benefit therefrom. Just as plain too is the intention of the parties
to constitute RCBC as the beneficiary of the various insurance policies obtained by GOYU.The intention of the parties
will have to be given full force and effect in this particular case. The insurance proceeds may, therefore, be exclusively
applied to RCBC, which under the factual circumstances of the case, is truly the person or entity for whose benefit the
policies were clearly intended.
Moreover, the laws evident intention to protect the interests of the mortgagee upon the mortgaged property is
expressed in Article 2127 of the Civil Code which states:
ART. 2127. The mortgage extends to the natural accessions, to the improvements, growing fruits, and the rents or
income not yet received when the obligation becomes due, and to the amount of the indemnity granted or owing to the
proprietor from the insurers of the property mortgaged, or in virtue of expropriation for public use, with the
declarations, amplifications and limitations established by law, whether the estate remains in the possession of the
mortgagor, or it passes into the hands of a third person.

19
 Significantly, the Court notes that out of the 10 insurance policies subject of this case, only 8 of them appear to
have been subject of the endorsements prepared and delivered by Alchester for and upon instructions of GOYU as
shown below:
INSURANCE POLICY PARTICULARS ENDORSEMENT
a. Policy Number : F-114-07795 None
Issue Date : March 18, 1992
Expiry Date : April 5, 1993
Amount : P9,646,224.92

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Policy Number F-114-07795 [(a) above] has not been endorsed. This fact was admitted by MICOs witness, Atty.
Farolan (tsn, February 16, 1994, p. 25). Likewise, the record shows no endorsement for Policy Number CI/F-128-03341
[(h) above]. Also, one of the endorsement documents, Exhibit 5-Malayan, refers to a certain insurance policy number
ACIA-F-07066, which is not among the insurance policies involved in the complaint.
The proceeds of the 8 insurance policies endorsed to RCBC aggregate to P89,974,488.36. Being exclusively
payable to RCBC by reason of the endorsement by Alchester to RCBC, which we already ruled to have the force and
effect of an endorsement by GOYU itself, these 8 policies can not be attached by GOYUs other creditors up to the
extent of the GOYUs outstanding obligation in RCBCs favor. Section 53 of the Insurance Code ordains that the
insurance proceeds of the endorsed policies shall be applied exclusively to the proper interest of the person for whose
benefit it was made. In this case, to the extent of GOYUs obligation with RCBC, the interest of GOYU in the subject
policies had been transferred to RCBC effective as of the time of the endorsement. These policies may no longer be
20
attached by the other creditors of GOYU, like Alfredo Sebastian in the present G.R. No. 128834, which may nonetheless
forthwith be dismissed for being moot and academic in view of the results reached herein. Only the two other policies
amounting to P19,646,224.92 may be validly attached, garnished, and levied upon by GOYUs other creditors. To the
extent of GOYUs outstanding obligation with RCBC, all the rest of the other insurance policies above-listed which were
endorsed to RCBC, are, therefore, to be released from attachment, garnishment, and levy by the other creditors of
GOYU.
This brings us to the next relevant issue to be resolved, which is, the extent of GOYUs outstanding obligation with
RCBC which the proceeds of the 8 insurance policies will discharge and liquidate, or put differently, the actual amount
of GOYUs liability to RCBC.
The Court of Appeals simply echoed the declaration of the trial court finding that GOYUS total obligation to RCBC
was only P68,785,060.04 as of April 27, 1992, thus sanctioning the trial courts exclusion of Promissory Note No. 421-
92 (renewal of Promissory Note No. 908-91) and Promissory Note No. 420-92 (renewal of Promissory Note No. 952-
91) on the ground that their execution is highly questionable for not only are these dated after the fire, but also because
the signatures of either GOYU or any its representative are conspicuously absent. Accordingly, the Court of Appeals
speculated thusly:
Hence, this Court is inclined to conclude that said promissory notes were pre-signed by plaintiff in blank terms, as
averred by plaintiff, in contemplation of the speedy grant of future loans, for the same practice of procedure has
always been adopted in its previous dealings with the bank.
(Rollo, pp. 181-182.)
The fact that the promissory notes bear dates posterior to the fire does not necessarily mean that the documents
are spurious, for it is presumed that the ordinary course of business had been followed (Metropolitan Bank and Trust
Company vs. Quilts and All, Inc., 222 SCRA 486 [1993]). The obligor and not the holder of the negotiable instrument
has the burden of proof of showing that he no longer owes the obligee any amount (Travel-On, Inc. vs. Court of Appeals,
210 SCRA 351 [1992]).
Even casting aside the presumption of regularity of private transactions, receipt of the loan amounting to
P121,966,058.67 (Exhibits 1-29, RCBC) was admitted by GOYU as indicated in the testimony of Go Song Hiap when
he answered the queries of the trial court:
ATTY. NATIVIDAD
Q: But insofar as the amount stated in Exhibits 1 to 29-RCBC, you received all the amounts stated therein?
A: Yes, sir, I received the amount.
COURT
He is asking if he received all the amounts stated in Exhibits 1 to 29-RCBC?
WITNESS:
Yes, Your Honor, I received all the amounts.
COURT
Indicated in the Promissory Notes?
WITNESS
A. The promissory Notes they did not give to me but the amount I asked which is correct, Your Honor.
COURT
Q: You mean to say the amounts indicated in Exhibits 1 to 29-RCBC is correct?
A: Yes, Your Honor.
(tsn, Jan. 14, 1994, p. 26.)
Furthermore, aside from its judicial admission of having received all the proceeds of the 29 promissory notes as
hereinabove quoted, GOYU also offered and admitted to RCBC that its obligation be fixed at P116,301,992.60 as shown
in its letter dated March 9, 1993, which pertinently reads:
We wish to inform you, therefore that we are ready and willing to pay the current past due account of this company in
the amount of P116,301,992.60 as of 21 January 1993, specified in pars. 15, p. 10, and 18, p. 13 of your affidavits of
Third Party Claims in the Urban case at Makati, Metro Manila and in the Zamboanga case at Zamboanga city,
respectively, less the total of P8,851,519.71 paid from the Seaboard and Equitable insurance companies and other
legitimate deductions. We accept and confirm this amount of P116,301,992.60 as stated as true and correct.
(Exhibit BB.)
The Court of Appeals erred in placing much significance on the fact that the excluded promissory notes are dated
after the fire. It failed to consider that said notes had for their origin transactions consummated prior to the fire. Thus,
careful attention must be paid to the fact that Promissory Notes No. 420-92 and 421-92 are mere renewals of Promissory
Notes No. 908-91 and 952-91, loans already availed of by GOYU.
The two courts below erred in failing to see that the promissory notes which they ruled should be excluded for
bearing dates which are after that of the fire, are mere renewals of previous ones. The proceeds of the loan represented
by these promissory notes were admittedly received by GOYU. There is ample factual and legal basis for giving GOYUs
judicial admission of liability in the amount of P116,301,992.60 full force and effect
It should, however, be quickly added that whatever amount RCBC may have recovered from the other insurers of
the mortgaged property will, nonetheless, have to be applied as payment against GOYUs obligation. But, contrary to
the lower courts findings, payments effected by GOYU prior to January 21, 1993 should no longer be deducted. Such
payments had obviously been duly considered by GOYU, in its aforequoted letter dated March 9, 1993, wherein it
admitted that its past due account totaled P116,301,992.60 as of January 21, 1993.
The net obligation of GOYU, after deductions, is thus reduced to P107,246,887.90 as of January 21, 1993, to wit:
Total Obligation as admitted by GOYU as of January 21, 1993: P116,301,992.60
21
Broken down as follows
Principal[1] Interest
Regular 80,535,946.32
FDU 7,548,025.17
____________ _____________
Total: 108,083,971.49 8,218,021.11[2]
LESS:
1) Proceeds from
Seaboard Eastern
Insurance Company: 6,095,145.81
2) Proceeds from
Equitable Insurance
Company: 2,756,373.00
3) Payment from
foreign department
negotiation: 203,584.89
9,055,104.70[3]
NET AMOUNT as of January 21, 1993: P 107,246,887.90
The need for the payment of interest due upon the principal amount of the obligation, which is the cost of money
to RCBC, the primary end and the ultimate reason for RCBCs existence and being, was duly recognized by the trial
court when it ruled favorably on RCBCs counterclaim, ordering GOYU to pay its loan obligation with RCBC in the amount
of P68,785,069.04, as of April 27,1992, with interest thereon at the rate stipulated in the respective promissory
notes (without surcharges and penalties) per computation, pp. 14-A, 14-B, 14-C (Record, p. 479).Inexplicably, the Court
of Appeals, without even laying down the factual or legal justification for its ruling, modified the trial courts ruling and
ordered GOYU to pay the principal amount of P68,785,069.04 without any interest, surcharges and penalties (Rollo, p.
200).
It is to be noted in this regard that even the trial court hedgingly and with much uncertainty deleted the payment
of additional interest, penalties, and charges, in this manner:
Regarding defendant RCBCs commitment not to charge additional interest, penalties and surcharges, the same does
not require that it be embodied in a document or some form of writing to be binding and enforceable. The principle is
well known that generally a verbal agreement or contract is no less binding and effective than a written one. And the
existence of such a verbal agreement has been amply established by the evidence in this case. In any event,
regardless of the existence of such verbal agreement, it would still be unjust and inequitable for defendant RCBC to
charge the plaintiff with surcharges and penalties considering the latters pitiful situation. (Emphasis supplied.)
(Record, p. 476)
The essence or rationale for the payment of interest or cost of money is separate and distinct from that of
surcharges and penalties. What may justify a court in not allowing the creditor to charge surcharges and penalties
despite express stipulation therefor in a valid agreement, may not equally justify non-payment of interest. The charging
of interest for loans forms a very essential and fundamental element of the banking business, which may truly be
considered to be at the very core of its existence or being. It is inconceivable for a bank to grant loans for which it will
not charge any interest at all. We fail to find justification for the Court of Appeals outright deletion of the payment of
interest as agreed upon in the respective promissory notes.This constitutes gross error.
For the computation of the interest due to be paid to RCBC, the following rules of thumb laid down by this Court
in Eastern Shipping Lines, Inc. vs. Court of Appeals (234 SCRA 78 [1994]), shall apply, to wit:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for damages. The provisions under Title XVIII on Damages of the Civil
Code govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall
itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall
be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of
damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however,
shall be adjudged on unliquidated claims or damages except when or until the demand can be established with
reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin
to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty
cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date
of the judgment of the court is made (at which time the quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount
finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest,
whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its
satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.
22
 (pp. 95-97.)
There being written stipulations as to the rate of interest owing on each specific promissory note as summarized
and tabulated by the trial court in its decision (pp.470 and 471, Record) such agreed interest rates must be followed. This
is very clear from paragraph II, sub-paragraph 1 quoted above.
On the issue of payment of surcharges and penalties, we partly agree that GOYUs pitiful situation must be taken
into account. We do not agree, however, that payment of any amount as surcharges and penalties should altogether be
deleted. Even assuming that RCBC, through its responsible officers, herein petitioners Eli Lao and Uy Chun Bing, may
have relayed its assurance for assistance to GOYU immediately after the occurrence of the fire, we cannot accept the
lower courts finding that RCBC had thereby ipso facto effectively waived collection of any additional interests,
surcharges, and penalties from GOYU. Assurances of assistance are one thing, but waiver of additional interests,
surcharges, and penalties is another.
Surcharges and penalties agreed to be paid by the debtor in case of default partake of the nature of liquidated
damages, covered by Section 4, Chapter 3, Title XVIII of the Civil Code.Article 2227 thereof provides:
ART. 2227. Liquidated damages, whether intended as a indemnity or penalty, shall be equitably reduced if they are
iniquitous and unconscionable.
In exercising this vested power to determine what is iniquitous and unconscionable, the Court must consider the
circumstances of each case. It should be stressed that the Court will not make any sweeping ruling that surcharges and
penalties imposed by banks for non-payment of the loans extended by them are generally iniquitous and
unconscionable. What may be iniquitous and unconscionable in one case, may be totally just and equitable in
another. This provision of law will have to be applied to the established facts of any given case. Given the circumstances
under which GOYU found itself after the occurrence of the fire, the Court rules the surcharges rates ranging anywhere
from 9% to 27%, plus the penalty charges of 36%, to be definitely iniquitous and unconscionable. The Court tempers
these rates to 2% and 3%, respectively. Furthermore, in the light of GOYUs offer to pay the amount of P116,301,992.60
to RCBC as March 1993 (See: Exhibit BB), which RCBC refused, we find it more in keeping with justice and equity for
RCBC not to charge additional interest, surcharges, and penalties from that time onward.
Given the factual milieu spread hereover, we rule that it was error to hold MICO liable in damages for denying or
withholding the proceeds of the insurance claim to GOYU.
Firstly, by virtue of the mortgage contracts as well as the endorsements of the insurance policies, RCBC has the
right to claim the insurance proceeds, in substitution of the property lost in the fire. Having assigned its rights, GOYU
lost its standing as the beneficiary of the said insurance policies.
Secondly, for an insurance company to be held liable for unreasonably delaying and withholding payment of
insurance proceeds, the delay must be wanton, oppressive, or malevolent (Zenith Insurance Corporation vs. CA, 185
SCRA 403 [1990]). It is generally agreed, however, that an insurer may in good faith and honesty entertain a difference
of opinion as to its liability.Accordingly, the statutory penalty for vexatious refusal of an insurer to pay a claim should not
be inflicted unless the evidence and circumstances show that such refusal was willful and without reasonable cause as
the facts appear to a reasonable and prudent man (Buffalo Ins. Co. vs. Bommarito [CCA 8th] 42 F [2d] 53, 70 ALR
1211; Phoenix Ins. Co. vs. Clay, 101 Ga. 331, 28 SE 853, 65 Am St Rep 307; Kusnetsky vs. Security Ins. Co., 313 Mo.
143, 281 SW 47, 45 ALR 189). The case at bar does not show that MICO wantonly and in bad faith delayed the release
of the proceeds. The problem in the determination of who is the actual beneficiary of the insurance policies, aggravated
by the claim of various creditors who wanted to partake of the insurance proceeds, not to mention the importance of the
endorsement to RCBC, to our mind, and as now borne out by the outcome herein, justified MICO in withholding payment
to GOYU.
In adjudging RCBC liable in damages to GOYU, the Court of Appeals said that RCBC cannot avail itself of two
simultaneous remedies in enforcing the claim of an unpaid creditor, one for specific performance and the other for
foreclosure. In doing so, said the appellate court, the second action is deemed barred, RCBC having split a single cause
of action (Rollo, pp. 195-199).The Court of Appeals was too accommodating in giving due consideration to this argument
of GOYU, for the foreclosure suit is still pending appeal before the same Court of Appeals in CA G.R CV No. 46247, the
case having been elevated by RCBC.
In finding that the foreclosure suit cannot prosper, the Fifteenth Division of the Court of Appeals pre-empted the
resolution of said foreclosure case which is not before it. This is plain reversible error if not grave abuse of discretion.
As held in Pea vs. Court of Appeals (245 SCRA 691[1995]):
It should have been enough, nonetheless, for the appellate court to merely set aside the questioned orders of the trial
court for having been issued by the latter with grave abuse of discretion.In likewise enjoining permanently herein
petitioner from entering in and interfering with the use or occupation and enjoyment of petitioners (now private
respondent) residential house and compound, the appellate court in effect, precipitately resolved with finality the case
for injunction that was yet to be heard on the merits by the lower court. Elevated to the appellate court, it might be
stressed, were mere incidents of the principal case still pending with the trial court. In Municipality of Bian, Laguna vs.
Court of Appeals, 219 SCRA 69, we ruled that the Court of Appeals would have no jurisdiction in
a certiorari proceeding involving an incident in a case to rule on the merits of the main case itself which was not on
appeal before it.
(pp. 701-702.)
Anent the right of RCBC to intervene in Civil Case No. 1073, before the Zamboanga Regional Trial Court, since it
has been determined that RCBC has the right to the insurance proceeds, the subject matter of intervention is rendered
moot and academic. Respondent Sebastian must, however, yield to the preferential right of RCBC over the MICO
insurance policies. It is basic and fundamental that the first mortgagee has superior rights over junior mortgagees or

23
attaching creditors (Alpha Insurance & Surety Co. vs. Reyes, 106 SCRA 274 [1981]; Sun Life Assurance Co. of Canada
vs. Gonzales Diaz, 52 Phil. 271 [1928]).
WHEREFORE, the petitions are hereby GRANTED and the decision and resolution of December 16, 1996 and
April 3, 1997 in CA-G.R. CV No. 46162 are hereby REVERSED and SET ASIDE, and a new one entered:
1. Dismissing the Complaint of private respondent GOYU in Civil Case No. 93-65442 before Branch 3 of the Manila
Regional Trial Court for lack of merit;
2. Ordering Malayan Insurance Company, Inc. to deliver to Rizal Commercial Banking Corporation the proceeds of the
insurance policies in the amount of P51,862,390.94 (per report of adjuster Toplis & Harding (Far East), Inc., Exhibits 2
and 2-1), less the amount of P50,505,594.60 (per O.R. No. 3649285);
3. Ordering the Clerk of Court to release the amount of P50,505,594.60 including the interests earned to Rizal
Commercial Banking Corporation;
4. Ordering Goyu & Sons, Inc. to pay its loan obligation with Rizal Commercial Banking Corporation in the principal
amount of P107,246,887.90, with interest at the respective rates stipulated in each promissory note from January 21,
1993 until finality of this judgment, and surcharges at 2% and penalties at 3% from January 21, 1993 to March 9,
1993, minus payments made by Malayan Insurance Company, Inc. and the proceeds of the amount deposited with
the trial court and its earned interest. The total amount due RCBC at the time of the finality of this judgment shall earn
interest at the legal rate of 12% in lieu of all other stipulated interests and charges until fully paid.
The petition of Rizal Commercial Banking Corporation against the respondent Court in CA-GR CV 48376 is
DISMISSED for being moot and academic in view of the results herein arrived at. Respondent Sebastians right as
attaching creditor must yield to the preferential rights of Rizal Commercial Banking Corporation over the Malayan
insurance policies as first mortgagee.
SO ORDERED.
Regalado, (Chairman), Puno, Mendoza, and Martinez, JJ., concur.

24
 [G.R. No. 160533. January 12, 2005]
FIRST FIL-SIN LENDING CORPORATION, petitioner, vs. GLORIA D. PADILLO, respondent.
DECISION
YNARES-SANTIAGO, J.:
Before us is a petition for review under Rule 45 of the Rules of Court, seeking a reversal of the Court of Appeals
decision in CA-G.R. CV No. 75183[1] dated October 16, 2003, which reversed and set aside the decision of the Regional
Trial Court of Manila, Branch 21 in Civil Case No. 00-96235.
On July 22, 1997, respondent Gloria D. Padillo obtained a P500,000.00 loan from petitioner First Fil-Sin Lending
Corp. On September 7, 1997, respondent obtained another P500,000.00 loan from petitioner. In both instances,
respondent executed a promissory note and disclosure statement. [2]
For the first loan, respondent made 13 monthly interest payments of P22,500.00 each before she settled the
P500,000.00 outstanding principal obligation on February 2, 1999. As regards the second loan, respondent made 11
monthly interest payments of P25,000.00 each before paying the principal loan of P500,000.00 on February 2, 1999. [3] In
sum, respondent paid a total of P792,500.00 for the first loan and P775,000.00 for the second loan.
On January 27, 2000, respondent filed an action for sum of money against herein petitioner before the Regional
Trial Court of Manila. Alleging that she only agreed to pay interest at the rates of 4.5% and 5% per annum, respectively,
for the two loans, and not 4.5% and 5% per month, respondent sought to recover the amounts she allegedly paid in
excess of her actual obligations.
On October 12, 2001,[4] the trial court dismissed respondents complaint, and on the counterclaim, ordered her to
pay petitioner P311,125.00 with legal interest from February 3, 1999 until fully paid plus 10% of the amount due as
attorneys fees and costs of the suit.[5] The trial court ruled that by issuing checks representing interest payments at 4.5%
and 5% monthly interest rates, respondent is now estopped from questioning the provisions of the promissory notes.
On appeal, the Court of Appeals (CA) reversed and set aside the decision of the court a quo, the dispositive portion
of which reads:
IN VIEW OF ALL THE FOREGOING, the appealed decision is REVERSED and SET ASIDE and a new one entered: (1)
ordering First Fil-Sin Lending Corporation to return the amount of P114,000.00 to Gloria D. Padillo, and (2) deleting the award of
attorneys fees in favor of appellee. Other claims and counterclaims are dismissed for lack of sufficient causes. No pronouncement
as to cost.
SO ORDERED.[6]
The appellate court ruled that, based on the disclosure statements executed by respondent, the interest rates
should be imposed on a monthly basis but only for the 3-month term of the loan. Thereafter, the legal interest rate will
apply. The CA also found the penalty charges pegged at 1% per day of delay highly unconscionable as it would translate
to 365% per annum. Thus, it was reduced to 1% per month or 12% per annum.
Hence, the instant petition on the following assignment of errors:
I
THE COURT OF APPEALS ERRED IN FINDING THAT THE APPLICABLE INTEREST SHOULD BE THE
LEGAL INTEREST OF TWELVE PER CENT (12%) PER ANNUM DESPITE THE CLEAR AGREEMENT
OF THE PARTIES ON ANOTHER APPLICABLE RATE.
II
THE COURT OF APPEALS ERRED IN IMPOSING A PENALTY COMPUTED AT THE RATE OF TWELVE
PER CENT (12%) PER ANNUM DESPITE THE CLEAR AGREEMENT OF THE PARTIES ON ANOTHER
APPLICABLE RATE.
III
THE COURT OF APPEALS ERRED IN DELETING THE ATTORNEYS FEES AWARDED BY THE
REGIONAL TRIAL COURT.[7]
Petitioner maintains that the trial court and the CA are correct in ruling that the interest rates are to be imposed on
a monthly and not on a per annum basis. However, it insists that the 4.5% and 5% monthly interest shall be imposed
until the outstanding obligations have been fully paid.
As to the penalty charges, petitioner argues that the 12% per annum penalty imposed by the CA in lieu of the 1%
per day as agreed upon by the parties violates their freedom to stipulate terms and conditions as they may deem proper.
Petitioner finally contends that the CA erred in deleting the trial courts award of attorneys fees arguing that the
same is anchored on sound and legal ground.
Respondent, on the other hand, avers that the interest on the loans is per annum as expressly stated in the
promissory notes and disclosure statements. The provision as to annual interest rate is clear and requires no room for
interpretation. Respondent asserts that any ambiguity in the promissory notes and disclosure statements should not
favor petitioner since the loan documents were prepared by the latter.
We agree with respondent.
Perusal of the promissory notes and the disclosure statements pertinent to the July 22, 1997 and September 7,
1997 loan obligations of respondent clearly and unambiguously provide for interest rates of 4.5% per annum and 5%
per annum, respectively. Nowhere was it stated that the interest rates shall be applied on a monthly basis.
Thus, when the terms of the agreement are clear and explicit that they do not justify an attempt to read into it any
alleged intention of the parties, the terms are to be understood literally just as they appear on the face of the contract. [8] It
is only in instances when the language of a contract is ambiguous or obscure that courts ought to apply certain
established rules of construction in order to ascertain the supposed intent of the parties. However, these rules will not
be used to make a new contract for the parties or to rewrite the old one, even if the contract is inequitable or harsh.
They are applied by the court merely to resolve doubts and ambiguities within the framework of the agreement. [9]
25
 The lower court and the CA mistook the Loan Transactions Summary for the Disclosure Statement. The former
was prepared exclusively by petitioner and merely summarizes the payments made by respondent and the income
earned by petitioner. There was no mention of any interest rates and having been prepared exclusively by petitioner,
the same is self serving. On the contrary, the Disclosure Statements were signed by both parties and categorically
stated that interest rates were to be imposed annually, not monthly.
As such, since the terms and conditions contained in the promissory notes and disclosure statements are clear
and unambiguous, the same must be given full force and effect. The expressed intention of the parties as laid down on
the loan documents controls.
Also, reformation cannot be resorted to as the documents have not been assailed on the ground of mutual mistake.
When a party sues on a written contract and no attempt is made to show any vice therein, he cannot be allowed to lay
claim for more than what its clear stipulations accord. His omission cannot be arbitrarily supplied by the courts by what
their own notions of justice or equity may dictate.[10]
Notably, petitioner even admitted that it was solely responsible for the preparation of the loan documents, and that
it failed to correct the pro forma note p.a. to per month.[11] Since the mistake is exclusively attributed to petitioner, the
same should be charged against it. This unilateral mistake cannot be taken against respondent who merely affixed her
signature on the pro forma loan agreements. As between two parties to a written agreement, the party who gave rise to
the mistake or error in the provisions of the same is estopped from asserting a contrary intention to that contained
therein. The checks issued by respondent do not clearly and convincingly prove that the real intent of the parties is to
apply the interest rates on a monthly basis. Absent any proof of vice of consent, the promissory notes and disclosure
statements remain the best evidence to ascertain the real intent of the parties.
The same promissory note provides that x x x any and all remaining amount due on the principal upon maturity
hereof shall earn interest at the rate of _____ from date of maturity until fully paid. The CA thus properly imposed the
legal interest of 12% per annum from the time the loans matured until the same has been fully paid on February 2, 1999.
As decreed in Eastern Shipping Lines, Inc. v. Court of Appeals,[12] in the absence of stipulation, the rate of interest shall
be 12% per annum to be computed from default.
As regards the penalty charges, we agree with the CA in ruling that the 1% penalty per day of delay is highly
unconscionable. Applying Article 1229 of the Civil Code, courts shall equitably reduce the penalty when the principal
obligation has been partly or irregularly complied with, or if it is iniquitous or unconscionable.
With regard to the attorneys fees, the CA correctly deleted the award in favor of petitioner since the trial courts
decision does not reveal any explicit basis for such an award. Attorneys fees are not automatically awarded to every
winning litigant. It must be shown that any of the instances enumerated under Art. 2208 [13] of the Civil Code exists to
justify the award thereof.[14]Not one of such instances exists here. Besides, by filing the complaint, respondent was
merely asserting her rights which, after due deliberations, proved to be lawful, proper and valid.
WHEREFORE, in view of the foregoing, the October 16, 2003 decision of the Court of Appeals in CA-G.R. CV No.
75183 is AFFIRMED with the MODIFICATION that the interest rates on the July 22, 1997 and September 7, 1997 loan
obligations of respondent Gloria D. Padillo from petitioner First Fil-Sin Lending Corporation be imposed and computed
on a per annum basis, and upon their respective maturities, the interest rate of 12% per annum shall be imposed until
full payment. In addition, the penalty at the rate of 12% per annum shall be imposed on the outstanding obligations from
date of default until full payment.
SO ORDERED.

26
G.R. No. L-60705 June 28, 1989
INTEGRATED REALTY CORPORATION and RAUL L. SANTOS, petitioners,
vs.
PHILIPPINE NATIONAL BANK, OVERSEAS BANK OF MANILA and THE HON. COURT OF
APPEALS, respondents.
G.R. No. L-60907 June 28, 1989
OVERSEAS BANK OF MANILA, petitioner,
vs.
COURT OF APPEALS, INTEGRATED REALTY CORPORATION, and RAUL L. SANTOS, respondents.

REGALADO, J.:
In these petitions for review on certiorari, Integrated Realty Corporation and Raul Santos (G.R. No. 60705), and
Overseas Bank of Manila (G.R. No. 60907) appeal from the decision of the Court of Appeals, 1 the decretal portion of
which states:
WHEREFORE, with the modification that appellee Overseas Bank of Manila is ordered to pay to the
appellant Raul Santos the sum of P 700,000.00 due under the time deposit certificates Nos. 2308 and
2367 with 6 1/2 (sic) interest per annum from date of issue until fully paid, the appealed decision is
affirmed in all other respects.
In G.R. No. 60705, petitioners Integrated Realty Corporation (hereafter, IRC and Raul L. Santos (hereafter, Santos)
seek the dismissal of the complaint filed by the Philippine National Bank (hereafter, PNB), or in the event that they be
held liable thereunder, to revive and affirm that portion of the decision of the trial court ordering Overseas Bank of
Manila (hereafter, OBM) to pay IRC and Santos whatever amounts the latter will pay to PNB, with interest from the
date of payment. 2
On the other hand, in G.R. No. 60907, petitioner OBM challenges the decision of respondent court insofar as it holds
OBM liable for interest on the time deposit with it of Santos corresponding to the period of its closure by order of the
Central Bank. 3
In its assailed decision, the respondent Court of Appeals, quoting from the decision of the lower court, 4 narrated the
antecedents of this case in this wise:
The facts of this case are not seriously disputed by any of the parties. They are set forth in the
decision of the trial court as follows:
Under date 11 January 1967 defendant Raul L. Santos made a time deposit with defendant OBM in
the amount of P 500,000.00. (Exhibit-10 OBM) and was issued a Certificate of Time Deposit No. 2308
(Exhibit 1 Santos, Exhibit D). Under date 6 February 1967 defendant Raul L. Santos also made a time
deposit with defendant OBM in the amount of P 200,000.00 (Exhibit 11 OBM and was issued
certificate of Time Deposit No. 2367 (Exhibit 2 Santos, Exhibit E).
Under date 9 February 1967 defendant IRC thru its President-defendant Raul L. Santos, applied for a
loan and/or credit line (Exhibit A) in the amount of P 700,000.00 with plaintiff bank. To secure the said
loan, defendant Raul L. Santos executed on August 11, 1967 a Deed of Assignment (Exhibit C) of the
two time deposits (Exhibits 1-Santos and 2 Santos, also Exhibits D and E) in favor of plaintiff.
Defendant OBM gave its conformity to the assignment thru letter dated 11 August 1967 (Exhibit F).
On the same date, defendant IRC thru its President Raul L. Santos, also executed a Deed of
Conformity to Loan Conditions (Exhibit G).
The defendant OBM after the due dates of the time deposit certificates, did not pay plaintiff PNB.
Plaintiff demanded payment from defendants IRC and Raul L. Santos (Exhibit K) and from defendant
OBM (Exhibit L). Defendants IRC and Raul L. Santos replied that the obligation (loan) of defendant
IRC was deemed paid with the irrevocable assignment of the time deposit certificates (Exhibits 5
Santos, 6 Santos and 7 Santos).
On April 6, 1969 (sic), ** PNB filed a complaint to collect from IRC and Santos the loan of P
700,000.00 with interest as well as attomey's fees. It impleaded OBM as a defendant to compel it to
redeem and pay to it Santos' time deposit certificates with interest, plus exemplary and corrective
damages, attorney's fees, and cost.
In their answer to the complaint, IRC and Santos alleged that PNB has no cause of action against
them because their obligation to PNB was fully paid or extinguished upon the' irrevocable' assignment
of the time deposit certificates, and that they are not answerable for the insolvency of OBM They filed
a counterclaim for damages against PNB and a cross-claim against OBM alleging that OBM acted
fraudulently in refusing to pay the time deposit certificates to PNB resulting in the filing of the suit
against them by PNB, and that, therefore, OBM should pay them whatever amount they may be
ordered by the court to pay PNB with interest. They also asked that OBM be ordered to pay them
compensatory, moral, exemplary and corrective damages.
In its answer to the complaint, OBM denied knowledge of the time deposit certificates because the
alleged time deposit of Santos 'does not appear in its books of account.
Whereupon, IRC and Santos, with leave of court, filed a third-party complaint against Emerito B.
Ramos, Jr., president of OBM and Rodolfo R. Sunico, treasurer of said bank, who allegedly received
the time deposits of Santos and issued the certificates therefor.

27
 Answering the third-party complaint, Ramos and Sunico alleged that IRC and Santos have no cause
of action against them because they received and signed the time deposit certificates as officers of
OBM that the time deposits are recorded in the subsidiary ledgers of the bank and are 'civil liabilities
of the defendant OBM
On November 18, 1970, OBM filed an amended or supplemental answer to the complaint,
acknowledging the certificates of time deposit that it issued to Santos, and admitting its failure to pay
the same due to its distressed financial situation. As affirmative defenses, it alleged that by reason of
its state of insolvency its operations have been suspended by the Central Bank since August 1, 1968;
that the time deposits ceased to earn interest from that date; that it may not give preference to any
depositor or creditor; and that payment of the plaintiffs claim is prohibited.
On January 30, 1976, the lower court rendered judgment for the plaintiff, the dispositive portion of
which reads as foIlows
WHEREFORE, judgment is hereby rendered, ordering:
1. The defendant Integrated Realty Corporation and Raul L. Santos to pay the plaintiff, jointly and
solidarily, the total amount of P 700,000.00 plus interest at the rate of 9% per annum from maturity
dates of the two promissory notes on January 11 and February 6, 1968, respectively (Exhibits M and
I), plus 1-1/ 2% additional interest effective February 28, 1968 and additional penalty interest of 1%
per annum of the Id amount of P 700,000.00 from the time of maturity of Id loan up to the time the
said amount of P 700,000.00 is actually paid to the plaintiff;
2. The defendants topay l0% of the amount of P 700,000.00 as and for attorney's fees;
3. The defendant Overseas Bank of Manila to pay cross-plaintiffs Integrated Realty Corporation and
Raul L. Santos whatever amounts the latter will pay to the plaintiff with interest from date of payment;
4. The defendant Overseas Bank of Manila to pay cross-plaintiffs Integrated Realty Corporation and
Raul L. Santos the amount of P 10,000.00 as and for attorney's fees;
5. The third-party complaint and cross-claim dismissed;
6. The defendant Overseas Bank of Manila to pay the costs.
SO ORDERED. 5
IRC Santos and OBM all appealed to the respondent Court of Appeals. As stated in limine, on March 16, 1982
respondent court promulgated its appealed decision, with a modification and the deletion of that portion of the
judgment of the trial court ordering OBM to pay IRC and Santos whatever amounts they will pay to PNB with interest
from the date of payment.
Therein defendants-appellants, through separate petitions, have brought the said decision to this Court for review.
1. The first issue posed before us for resolution is whether the liability of IRC and Santos with PNB
should be deemed to have been paid by virtue of the deed of assignment made by the former in favor
of PNB, which reads:
KNOW ALL MEN BY THESE PRESENTS;
I, RAUL L. SANTOS, of legal age, Filipino, with residence and postal address at 661 Richmond St.,
Mandaluyong, Rizal for and in consideration of certain loans, overdrafts and other credit
accommodations granted or those that may hereafter be granted to me/us by the PHILIPPINE
NATIONAL BANK, have assigned, transferred and conveyed and by these presents, do hereby
assign, transfer and convey by way of security unto said PHILIPPINE NATIONAL BANK its
successors and assigns the following Certificates of Time Deposit issued by the OVERSEAS BANK
OF MANILA, its CONFORMITY issued on August 11, 1967, hereto enclosed as Annex ' A', in favor of
RAUL L. SANTOS and/or NORA S. SANTOS, in the aggregate sum of SEVEN HUNDRED
THOUSAND PESOS ONLY (P 700,000.00), Philippine Currency, ....
xxx xxx xxx
It is also understood that the herein Assignor/s shall remain hable for any outstanding balance of
his/their obligation if the Bank is unable to actually receive or collect the above assigned sums ,
monies or properties resulting from any agreements, orders or decisions of the court or for any other
cause whatsoever. 6
xxx xxx xxx
Respondent Court of Appeals did not consider the aforesaid assignment as payment, thus:
The contention of IRC and Santos that the irrevocable assignment of the time deposit certificates to
PNB constituted payment' of their obligation to the latter is not well taken.
Where a certificate of deposit in a bank, payable at a future day, was handed over by a debtor to his
creditor, it was not payment, unless there was an express agreement on the part of the creditor to
receive it as such, and the question whether there was or was not such an agreement, was one of
facts to be decided by the jury. (Downey vs. Hicks, 55 U.S. [14 How.] 240 L. Ed. 404; See also
Michie, Vol. 5-B Banks and Banking, p. 200). 7
We uphold respondent court on this score.
In Lopez vs. Court of appeals, et al., 8 petitioner Benito Lopez obtained a loan for P 20,000.00 from the Prudential
Bank and Trust Company. On the same day, he executed a promissory note in favor of the bank and, in addition, he
executed a surety bond in which he, as principal, and Philippine American General Insurance Co., Inc. (Philamgen),
as surety, bound themselves jointly and severally in favor of the bank for the payment of the loan. On the same
occasion, Lopez also executed in favor of Philamgen an indemnity agreement whereby he agreed to indemnify the
company against any damages which the latter may sustain in consequence of having become a surety upon the
28
bond. At the same time, Lopez executed a deed of assignment of his shares of stock in the Baguio Military Institute,
Inc. in favor of Philamgen. When Lopez' obligation matured without being settled, Philamgen caused the transfer of
the shares of stocks to its name in order that it may sell the same and apply the proceeds thereof in payment of the
loan to the bank. However, when no payment was still made by the principal debtor or surety, the bank filed a
complaint which compelled Philamgen to pay the bank. Thereafter, Philamgen filed an action to recover the amount of
the loan against Lopez. The trial court therein held that the obligation of Lopez was deemed paid when his shares of
stocks were transferred in the name of Philamgen. On appeal, the Court of Appeals ruled that Lopez was still liable to
Philamgen because, pending payment, Philamgen was merely holding the stock as security for the payment of Lopez'
obligation.
In upholding the finding therein of the Court of Appeals, We held that:
Notwithstanding the express terms of the 'Stock Assignment Separate from Certificate', however, We
hold and rule that the transaction should not be regarded as an absolute conveyance in view of the
circumstances obtaining at the time of the execution thereof.
It should be remembered that on June 2, 1959, the day Lopez obtained a loan of P 20,000.00 from
Prudential Bank, Lopez executed a promissory note for P 20,000.00, plus interest at the rate of ten
(10%) per cent per annum, in favor of said Bank. He likewise posted a surety bond to secure his full
and faithful performance of his obligation under the promissory note with Philamgen as his surety. In
return for the undertaking of Philamgen under the surety bond, Lopez executed on the same day not
only an indemnity agreement but also a stock assignment.
The indemnity agreement and stock assignment must be considered together as related transactions
because in order to judge the intention of the contracting parties, their contemporaneous and
subsequent acts shall be principally considered. (Article 1371, New Civil Code). Thus, considering
that the indemnity agreement connotes a continuing obligation of Lopez towards Philamgen while the
stock assignment indicates a complete discharge of the same obligation, the existence of the
indemnity agreement whereby Lopez had to pay a premium of P l,000.00 for a period of one year and
agreed at all times to indemnify Philamgen of any and all kinds of losses which the latter might sustain
by reason of it becoming a surety, is inconsistent with the theory of an absolute sale for and in
consideration of the same undertaking of Philamgen. There would have been no necessity for the
execution of the indemnity agreement if the stock assignment was really intended as an absolute
conveyance. ...
Along the same vein, in the case at bar it would not have been necessary on the part of IRC and Santos to execute
promissory notes in favor of PNB if the assignment of the time deposits of Santos was really intended as an absolute
conveyance.
There are cogent reasons to conclude that the parties intended said deed of assignment to complement the
promissory notes. In declaring that the deed of assignment did not operate as payment of the loan so as to extinguish
the obligations of IRC and Santos with PNB, the trial court advanced several valid bases, to wit:
a. It is clear from the Deed of Assignment that it was only by way of security;
xxx xxx xxx
b. The promissory notes (Exhibits H and I) were executed on August 16, 1967. If defendants IRC and
Raul L. Santos, upon executing the Deed of Assignment on August 11, 1967 had already paid their
loan of P 700,000.00 or otherwise extinguished the same, why were the promissory notes made on
August 16, 1967 still executed by IRC and signed by Raul L. Santos as President?
c. In the application for a credit line (Exhibit A),the time deposits were offered as collateral. 9
For all intents and purposes, the deed of assignment in this case is actually a pledge. Adverting again to the Court's
pronouncements in Lopez, supra, we quote therefrom:
The character of the transaction between the parties is to be determined by their intention, regardless
of what language was used or what the form of the transfer was. If it was intended to secure the
payment of money, it must be construed as a pledge; but if there was some other intention, it is not a
pledge. However, even though a transfer, if regarded by itself, appears to have been absolute, its
object and character might still be qualified and explained by a contemporaneous writing declaring it
to have been a deposit of the property as collateral security. It has been said that a transfer of
property by the debtor to a creditor, even if sufficient on its face to make an absolute conveyance,
should be treated as a pledge if the debt continues in existence and is not discharged by the transfer,
and that accordingly, the use of the terms ordinarily importing conveyance, of absolute ownership will
not be given that effect in such a transaction if they are also commonly used in pledges and
mortgages and therefore do not unqualifiedly indicate a transfer of absolute ownership, in the
absence of clear and unambiguous language or other circumstances excluding an intent to pledge. 10
The facts and circumstances leading to the execution of the deed of assignment, as found by the court a quo and the
respondent court, yield said conclusion that it is in fact a pledge. The deed of assignment has satisfied the
requirements of a contract of pledge (1) that it be constituted to secure the fulfillment of a principal obligation; (2) that
the pledgor be the absolute owner of the thing pledged; (3) that the persons constituting the pledge have the free
disposal of their property, and in the absence thereof, that they be legally authorized for the purpose. 11 The further
requirement that the thing pledged be placed in the possession of the creditor, or of a third person by common
agreement 12 was complied with by the execution of the deed of assignment in favor of PNB.
It must also be emphasized that Santos, as assignor, made an express undertaking that he would remain liable for
any outstanding balance of his obligation should PNB be unable to actually receive or collect the assigned sums
29
resulting from any agreements, orders or decisions of the court or for any other cause whatsoever. The term "for any
cause whatsoever" is broad enough to include the situation involved in the present case.
Under the foregoing circumstances and considerations, the unavoidable conclusion is that IRC and Santos should be
held liable to PNB for the amount of the loan with the corresponding interest thereon.
2. We find nothing illegal in the interest of one and one-half percent (1-1/2%) imposed by PNB
pursuant to the resolution of its Board which presumably was done in accordance with ordinary
banking procedures. Not only did IRC and Santos fail to overcome the presumption of regularity of
business transactions, but they are likewise estopped from questioning the validity thereof for the first
time in this petition. There is nothing in the records to show that they raised this issue during the trial
by presenting countervailing evidence. What was merely touched upon during the proceedings in the
court below was the alleged lack of notice to them of the board resolution, but not the veracity or
validity thereof.
3. On the issue of whether OBM should be held liable for interests on the time deposits of IRC and
Santos from the time it ceased operations until it resumed its business, the answer is in the negative.
We have held in The Overseas Bank of Manila vs. Court of Appeals and Tony D. Tapia, 13 that:
It is a matter of common knowledge, which We take judicial notice of, that what enables a bank to pay stipulated
interest on money deposited with it is that thru the other aspects of its operation it is able to generate funds to
cover the payment of such interest. Unless a bank can lend money, engage in international transactions, acquire
foreclosed mortgaged properties or their proceeds and generally engage in other banking and financing activities
from which it can derive income, it is inconceivable how it can carry on as a depository obligated to pay stipulated
interest. Conventional wisdom dictated; this inexorable fair and just conclusion. And it can be said that all who
deposit money in banks are aware of such a simple economic proposition petition. Consequently, it should be
deemed read into every contract of deposit with a bank that the obligation to pay interest on the deposit ceases
the moment the operation of the bank is completely suspended by the duly constituted authority, the Central
Bank.
We consider it of trivial consequence that the stoppage of the bank's operation by the Central Bank has been
subsequently declared illegal by the Supreme Court, for before the Court's order, the bank had no alternative
under the law than to obey the orders of the Central Bank. Whatever be the juridical significance of the
subsequent action of the Supreme Court, the stubborn fact remained that the petitioner was totally crippled from
then on from earning the income needed to meet its obligations to its depositors. If such a situation cannot,
strictly speaking, be legally denominated as 'force majeure', as maintained by private respondent, We hold it is a
matter of simple equity that it be treated as such.
The Court further adjured that:
Parenthetically, We may add for the guidance of those who might be concerned, and so that unnecessary
litigations be avoided from further clogging the dockets of the courts, that in the light of the considerations
expounded in the above opinion, the same formula that exempts petitioner from the payment of interest to its
depositors during the whole period of factual stoppage of its operations by orders of the Central Bank, modified in
effect by the decision as well as the approval of a formula of rehabilitation by this Court, should be, as a matter of
consistency, applicable or followed in respect to all other obligations of petitioner which could not be paid during
the period of its actual complete closure.
We cannot accept the holding of the respondent Court of Appeals that the above-cited decisions apply only where the
bank is in a state of liquidation. In the very case aforecited, this issue was likewise raised and We resolved:
Thus, Our task is narrowed down to the resolution of the legal problem of whether or not, for purposes of the
payment of the interest here in question, stoppage of the operations of a bank by a legal order of liquidation may
be equated with actual cessation of the bank's operation, not different, factually speaking, in its effects, from legal
liquidation the factual cessation having been ordered by the Central Bank.
In the case of Chinese Grocer's Association, et al. vs. American Apothecaries, 65 Phil. 395, this Court held:
As to the second assignment of error, this Court, in G.R. No. 43682, In re Liquidation of the Mercantile Bank of
China, Tan Tiong Tick, claimant and appellant vs. American Apothecaries, C., et al., claimants and appellees,
through Justice Imperial, held the following:
4. The court held that the appellant is not entitled to charge interest on the amounts of his claims, and this is the
object of the second assignment of error, Upon this point a distinction must be made between the interest which
the deposits should earn from their existence until the bank ceased to operate, and that which they may earn
from the time the bank's operations were stopped until the date of payment of the deposits. As to the first-class,
we hold that it should be paid because such interest has been earned in the ordinary course of the bank's
businesses and before the latter has been declared in a state of liquidation. Moreover, the bank being authorized
by law to make use of the deposits with the limitation stated, to invest the same in its business and other
operations, it may be presumed that it bound itself to pay interest to the depositors as in fact it paid interest prior
to the dates of the Id claims. As to the interest which may be charged from the date the bank ceased to do
business because it was declared in a state of liquidation, we hold that the said interest should not be paid.
The Court of Appeals considered this ruling inapplicable to the instant case, precisely because, as contended by
private respondent, the said Apothecaries case had in fact in contemplation a valid order of liquidation of the
bank concerned, whereas here, the order of the Central Bank of August 13, 1968 completely forbidding herein
petitioner to do business preparatory to its liquidation was first restrained and then nullified by this Supreme
Court. In other words, as far as private respondent is concerned, it is the legal reason for cessation of operations,
not the actual cessation thereof, that matters and is decisive insofar as his right to the continued payment of the
interest on his deposit during the period of cessation is concerned.
In the light of the peculiar circumstances of this particular case, We disagree. It is Our considered view, after
mature deliberation, that it is utterly unfair to award private respondent his prayer for payment of interest on his
deposit during the period that petitioner bank was not allowed by the Central Bank to operate.

30
 4. Lastly, IRC and Santos claim that OBM should reimburse them for whatever amounts they may be adjudged to
pay PNB by way of compensation for damages incurred, pursuant to Articles 1170 and 2201 of the Civil Code.
It appears that as early as April, 1967, the financial situation of OBM had already caused mounting concern in the
Central Bank. 14 On December 5, 1967, new directors and officers drafted from the Central Bank (CB) itself, the
Philippine National Bank (PNB) and the Development Bank of the Philippines (DBP) were elected and installed and
they took over the management and control of the Overseas Bank. 15 However, it was only on July 31, 1968 when
OBM was excluded from clearing with the CB under Monetary Board Resolution No. 1263. Subsequently, on August
2, 1968, pursuant to Resolution No. 1290 of the CB OBM's operations were suspended. 16 These CB resolutions were
eventually annulled and set aside by this Court on October 4, 1971 in the decision rendered in the herein cited case
of Ramos.
Thus, when PNB demanded from OBM payment of the amounts due on the two time deposits which matured on
January 11, 1968 and February 6, 1968, respectively, there was as yet no obstacle to the faithful compliance by OBM
of its liabilities thereunder. Consequently, for having incurred in delay in the performance of its obligation, OBM should
be held liable for damages. 17 When respondent Santos invested his money in time deposits with OBM they entered
into a contract of simple loan or mutuum, 18 not a contract of deposit.
While it is true that under Article 1956 of the Civil Code no interest shall be due unless it has been expressly stipulated
in writing, this applies only to interest for the use of money. It does not comprehend interest paid as damages. 19 OBM
contends that it had agreed to pay interest only up to the dates of maturity of the certificates of time deposit and that
respondent Santos is not entitled to interest after the maturity dates had expired, unless the contracts are renewed.
This is true with respect to the stipulated interest, but the obligations consisting as they did in the payment of money,
under Article 1108 of the Civil Code he has the right to recover damages resulting from the default of OBM and the
measure of such damages is interest at the legal rate of six percent (6%) per annum on the amounts due and unpaid
at the expiration of the periods respectively provided in the contracts. In fine, OBM is being required to pay such
interest, not as interest income stipulated in the certificates of time deposit, but as damages for failure and delay in the
payment of its obligations which thereby compelled IRC and Santos to resort to the courts.
The applicable rule is that legal interest, in the nature of damages for non-compliance with an obligation to pay a sum
of money, is recoverable from the date judicial or extra-judicial demand is made, 20 Which latter mode of demand was
made by PNB, after the maturity of the certificates of time deposit, on March 1, 1968. 21 The measure of such
damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon in the
certificates of deposit 22Which is six and onehalf percent (6-1/2%). Such interest due or accrued shall further earn
legal interest from the time of judicial demand. 23
We reject the proposition of IRC and Santos that OBM should reimburse them the entire amount they may be
adjudged to pay PNB. It must be noted that their liability to pay the various interests of nine percent (9%) on the
principal obligation, one and one-half percent (1-1/2%) additional interest and one percent (1%) penalty interest is an
offshoot of their failure to pay under the terms of the two promissory notes executed in favor of PNB. OBM was never
a party to Id promissory notes. There is, therefore, no privity of contract between OBM and PNB which will justify the
imposition of the aforesaid interests upon OBM whose liability should be strictly confined to and within the provisions
of the certificates of time deposit involved in this case. In fact, as noted by respondent court, when OBM assigned as
error that portion of the judgment of the court a quo requiring OBM to make the disputed reimbursement, IRC and
Santos did not dispute that objection of OBM Besides, IRC and Santos are not without fault. They likewise acted in
bad faith when they refuse to comply with their obligations under the promissory notes, thus incurring liability for all
damages reasonably attributable to the non-payment of said obligations. 24
WHEREFORE, judgment is hereby rendered, ordering:
1. Integrated Realty Corporation and Raul L. Santos to pay Philippine National Bank, jointly and severally, the
total amount of seven hundred thousand pesos (P 700,000.00), with interest thereon at the rate of nine percent
(9%) per annum from the maturity dates of the two promissory notes on January 11 and February 6, 1968,
respectively, plus one and one-half percent (1-1/2%) additional interest per annum effective February 28, 1968
and additional penalty interest of one percent (1%) per annum of the said amount of seven hundred thousand
pesos (P 700,000.00) from the time of maturity of said loan up to the time the said amount of seven hundred
thousand pesos (P 700,000.00) is fully paid to Philippine National Bank.
2. Integrated Realty Corporation and Raul L. Santos to pay solidarily Philippine National Bank ten percent (10%)
of the amount of seven hundred thousand pesos (P 700,000.00) as and for attorney's fees.
3. Overseas Bank of Manila to pay Integrated Realty Corporation and Raul L. Santos the sum of seven hundred
thousand pesos (P 700,000.00) due under Time Deposit Certificates Nos. 2308 and 2367, with interest thereon
of six and one-half percent (6-1/2%) per annum from their dates of issue on January 11, 1967 and February 6,
1967, respectively, until the same are fully paid, except that no interest shall be paid during the entire period of
actual cessation of operations by Overseas Bank of Manila;
4. Overseas Bank of Manila to pay Integrated Realty Corporation and Raul L. Santos six and one-half per cent
(6-1/2%) interest in the concept of damages on the principal amounts of said certificates of time deposit from the
date of extrajudicial demand by PNB on March 1, 1968, plus legal interest of six percent (6%) on said interest
from April 6, 1968, until fifth payment thereof, except during the entire period of actual cessation of operations of
said bank.
5. Overseas Bank of Manila to pay Integrated Realty Corporation and Raul L. Santos ten thousand pesos (P
l0,000.00) as and for attorney's fees. SO ORDERED.

31
 [G.R. No. 141009. July 2, 2002]
BATAAN SEEDLING ASSOCIATION, INC. and CARLOS VALENCIA, petitioners, vs. REPUBLIC OF THE
PHILIPPINES, represented by the DEPARTMENT OF ENVIRONMENT and NATURAL
RESOURCES, respondent.
RESOLUTION
AUSTRIA-MARTINEZ, J.:
Before us is a petition for review on certiorari under Rule 45 of the Rules of Court which seeks to set aside the
Decision promulgated on October 14, 1998 by the Court of Appeals in CA-G.R. CV No. 52545,[1] affirming with
modification the decision of the Regional Trial Court of Quezon City. The dispositive portion of the assailed Decision
reads:
IN THE LIGHT OF ALL THE FOREGOING, the Decision appealed from is AFFIRMED with the following modifications:
1. The Appellants are hereby ordered to pay, jointly and severally, to the Republic of the Philippines, the principal
amount of P56,290.69, with interest thereon at the rate of 12% per annum, from January 27, 1994 until the said
amount is paid in full;
2. The Appellant BSAI is hereby ordered to pay to the appellant Republic of the Philippines the amount of P50,000.00
as and by way of exemplary damages.
No pronouncement as to cost.
SO ORDERED.[2]
Petitioner Bataan Seedling Association, Inc. (BSAI for brevity) entered into a Community Based Reforestation
Contract on October 26, 1990 with the Republic of the Philippines, represented by the Department of Environment and
Natural Resources (DENR). Under said contract, BSAI, in consideration of the amount of Nine Hundred Seventy Five
Thousand One Hundred Twenty Six Pesos and Sixty One Centavos (P975,126.61), bound itself to undertake the
reforestation of a fifty-hectare open/denuded forest land in Barangay Liyang, Pilar, Bataan within a period of three (3)
years.[3] BSAI likewise undertook to report to the DENR any event or condition which delays or may delay or prevent
completion of the work,[4] and submit progress billings and accomplishment reports. [5] Concomitant with the contract is
the Project Development Plan and the Approved Schedule of Progress Payments detailing the annual cash flow and
schedule of activities within the three-year period,[6] and the Contract of Undertaking providing for the mobilization fund
in the amount of Seventy Five Thousand Fifty Four Pesos and Sixty Six Centavos (P75,054.66).[7] Said fund was allotted
and released by respondent to enable BSAI to start with the project, but the fund was to be returned to respondent upon
completion of the project or deducted from the periodic release of moneys to petitioners. [8]
Believing that petitioners failed to comply with their obligations under the contract, respondent sent a notice of
cancellation dated July 31, 1992 to petitioner Carlos Valencia, President of BSAI, asking the latter to show cause why
the contract should not be terminated on the following grounds:
1. Willful violation of the material terms and conditions, stipulations and covenants of the Contract, to wit: a) The
association failed to fully plant/establish the whole 50-hectare contracted area during the first year of operations as
provided for in the Contract; b) The seedlings raised in the nursery were disposed of to other contractors and the
seedlings left were practically overgrown indicating lack of proper care and maintenance; c) Inspite of the fact that a
forest fire occurred sometime in December, 1991, no report was ever made to the DENR in violation of Article 1.1.5 of
the Contract; d) The Association even failed to submit to the DENR accomplishment reports and other relevant
information required and expected from it.
2. Abandonment of the project area. The PENRO/CENRO monitoring and Evaluation Team which inspected the
project area on March 18, 25 and 31, 1992 reported that except for the family that actually resides in the bunkhouse,
no laborers were observed at the project area during the time of the field inspections. Even you failed to show up
despite written and verbal notices served to you. Finally, the photodocuments taken on the plantation illustrates clearly
the abandoned project area.[9]
Due to their failure to respond to the notice of cancellation, as well as return the mobilization fund, respondent filed
a Complaint for Damages against petitioners,[10] praying that the latter jointly and solidarily pay actual damages in the
amount of Seventy Five Thousand Fifty Four Pesos and Twenty Five Centavos (P75,054.25) representing the portion
of the mobilization fund released to them, and Sixty Two Thousand Pesos Four Hundred Fifty Pesos and Twenty Two
Centavos (P62,450.22) as the amount paid under the accomplishment bills, totaling One Hundred Thirty Seven
Thousand Five Hundred Four Pesos and Forty Seven Centavos (P137,504.47). Respondent also sought liquidated
damages equivalent to 0.1% of the total contract cost due to BSAIs delay in the performance of its obligations, and
exemplary damages in the amount of Fifty Thousand Pesos (P50,000.00).[11]
In their Amended Answer, petitioners deny the allegations, arguing that: (1) the whole area was totally destroyed
by a forest fire in December 1991 without their fault and negligence, which incident was duly reported to respondent,
and (2) the cancellation was arbitrary. [12]
The Regional Trial Court of Quezon City, Branch 217, rendered its decision ordering petitioners to pay the amount
of Fifty Thousand Pesos (P50,000.00) as exemplary damages.[13] The trial court held that respondent had sufficient
grounds to cancel the contract but saw no reason why the mobilization fund and the advance payments should be
refunded, or that petitioners should be liable for liquidated damages.
Not satisfied, both respondent and petitioners appealed the decision to the Court of Appeals. The appellate court
affirmed with modification the decision of the trial court, adjudicating the balance of the mobilization fund refunded by
petitioners in the amount of Fifty Six Thousand Two Hundred Ninety Pesos and Sixty Nine Centavos (P56,290.69) with
12% interest.[14]
Hence, the petition for review on certiorari.
Petitioners submit that the issues to be resolved are as follows:
32
 1. Whether the unilateral cancellation by the respondent of the Community-Based Reforestation Contract is
invalid, being without factual and legal basis.
2. Whether the order to refund the amount of P56,290.69 with interest at the rate of 12% per annum,
representing the balance of the mobilization fund, is palpably erroneous as being contrary to the facts. [15]
At the outset, it must be stated that the foregoing issues and the respective arguments in support thereof have
been raised by the parties and passed upon by both the trial court and the appellate court.
Petitioners deny that they were bound to fully plant the fifty (50) hectares during the first (1st) year of the program
as their commitment under clause 1.1.9 of the Reforestation Contract was to turn-over to the DENR at the end of the
third (3rd) year the contracted area of fifty hectares, fully planted and properly maintained. Petitioners also refute the
finding that they abandoned the project area, arguing that the investigation conducted by the PENCO/CENRO
Monitoring and Evaluation Team is suspect; and that its report ignored the fact that a forest fire occurred sometime in
December 1991 destroying the plants and seedlings already introduced in the area. Petitioners further claim that their
failure to immediately report the fire and submit progress reports is not a substantial breach of their undertaking to
warrant the cancellation of the contract; and that they cannot be made to refund the balance of the mobilization fund
because these correspond to the work already done in the area. Finally, petitioners object to the award of exemplary
damages for being without legal and factual basis.[16]
On the issue of whether or not respondent had sufficient basis to cancel the contract, both the trial and appellate
courts found that there was basis for the cancellation. A perusal of the records of this case confirms such finding.
True, under the reforestation contract, petitioners were to turn over at the end of the third year the project area fully
planted and properly maintained.[17] However, the Project Development Plan, appended and made integral part of the
contract,[18] specifically defines and details petitioners undertaking. Under the Plan, the following tasks were to be
completed during the first year of the project: (1) survey and mapping of the whole fifty (50) hectares; (2) nursery
operations for fast-growth, medium-growing, and slow-growth species; (3) plantation establishment, including site
preparation, spot hoeing, staking, holing, and planting and seed transporting of 83,333 pieces, medium-sized seedlings
and sucklers in planting holes; and (4) infrastructure work, including the development of footpath, graded trail, plantation
road, bunkhouse and look-out tower.[19] Spread out during the three-year period is the annual maintenance, protection,
administration and supervision, and, monitoring and evaluation of the project area. [20] Clearly, based on said schedule,
petitioners were to undertake the principal task of planting the fifty (50) hectare-project area during the 1st year of the
project. What is to be carried out during the entire 3-year period is the maintenance and aftercare of the project site,
and petitioners were to turn over the project at the end of the third year fully planted and established. Therefore,
petitioners argument that they are not bound to fully plant/establish the whole fifty (50) hectares during the 1st year of
operations is without merit.
Moreover, contrary to petitioners posture, there was a material breach of the contract warranting its cancellation.
One (1) year after the commencement of the project or sometime in December, 1991, a fire razed the reforestation area.
As admitted by petitioners, they failed to inform respondent of said incident. Neither did they attempt to submit progress
reports on the project, which duties were expressly required of them under the contract. Thus, the appellate court
correctly observed, viz.:
x x x The Appellant BSAI unabashedly admitted failing to establish/plant the project area. Under Section 1.1.5 of the
Contract, the Appellant BSAI was obliged to report to the DENR any event or condition which delayed or may delay
the progress or prevent the completion, of the work under the time-table set forth under the contract or any relevant
facts known to the Appellant BSAI. A fire in the area which gutted the improvements in contract area occurred in
December, 1991. However, the Appellant BSAI never informed the DENR of said fire. Worse, the Appellant BSAI did
not anymore conduct any replanting activities on the area, thus accounting, in part, for the failure of the said Appellant
to submit periodic progress reports on its activities in said area. Even before the fire occurred, in December 1991, the
Appellant BSAI already failed to submit any periodic reports of progress of its activities in the area. This prompted the
DENR to conduct an on the site inspection of the subject project area. Indeed, Carlos Valencia and Hernani Salaya
Jr., even ignored the requests of DENR for them to be present during the said inspections. The DENR inspection
team found and discovered that the Appellant BSAI failed to fully establish planting on the subject project area.
Instead of planting the seedlings on the project area, the Appellant BSAI sold some of the seedlings because of its
failure to pay the nursery owner, Anilao Satellite Nursery, located in Pilar, Bataan for said seedlings. x x x [21]
Petitioners attempt to trivialize their lapse, but the Court believes that this is not merely a slight or casual breach, but a
substantial one giving sanction to the cancellation. Under Clause 4.1 of the contract, respondents shall have the right
to suspend, terminate or cancel the contract upon petitioners substantial failure to fulfill their obligations, or a willful
violation of the material conditions, stipulations and covenants thereof. It can be concluded from the tenor of said clause
that the parties intended mandatory compliance with all the provisions of the contract. As stated previously, among such
provisions requiring strict adherence are the submission of progress reports and the reporting of such event which may
delay or prevent the project. Hence, upon petitioners failure to comply with said obligations, respondent was well within
its right to cancel the contract by express grant of Clause 4.1.
Anent the refund of the mobilization fund, the Contract of Undertaking signed by petitioners is explicit in this regard,
to wit:
THAT BATAAN SEEDLING ASSOCIATION, INCORPORATED x x x, for and in consideration of the sum of Seventy
Five Thousand Fifty four pesos and sixty six centavos (P75,054.66) representing advance payment under said
contract receipt of which is hereby acknowledge in full, as hereby bind ourselves;
xxx
3. To repay the amount advanced in accordance with the Contract of Reforestation and DENR Administration
order No. 14 Series of 1989 as amended;[22] (Emphasis Ours)
33
The amount of Seventy Five Thousand Fifty Four Pesos and Sixty Six Centavos (P75,054.66) advanced to BSAI,
represents 15% of Five Hundred Thousand Three Hundred Sixty One Pesos and Seventy Two Centavos (P500,361.72),
the contract cost for the 1st year.[23] When initial payment was made by respondent to petitioners on February 25, 1991,
the amount of Eighteen Thousand Seven Hundred Sixty Three Pesos and Fifty Six Centavos (P18,763.56), or 1/4 of
the mobilization fund, was deducted,[24] leaving a balance of Fifty Six Thousand Two Hundred Ninety Pesos and Sixty
Nine Centavos (P56,290.69). Respondent thereafter made no deductions on the subsequent payments of the contract
price remitted to petitioners. Hence, they remain liable on the balance of said fund in the amount of Fifty Six Thousand
Two Hundred Ninety Pesos and Sixty Nine Centavos (P56,290.69). We find no error committed by the Appellate Court
on this matter.
Nevertheless, the appellate court erred in imposing a 12% interest on the amount due. In Eastern Shipping Lines,
Inc. vs. Court of Appeals, we enunciated the following rules:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for damages. The provisions under Title XVIII on Damages of the Civil
Code govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall
itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall
be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of
damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however,
shall be adjudged on unliquidated claims or damages except when or until the demand can be established with
reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin
to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty
cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date
the judgment of the court is made (at which time the quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount
finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest,
whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its
satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit. [25]
Interest at the rate of 12% per annum is imposable if there is no stipulation in the contract. Herein subject contract does
not contain any stipulation as to interest. However, the amount that is due the respondent does not represent a loan or
forbearance of money. The word forbearance is defined, within the context of usury law, as a contractual obligation of
lender or creditor to refrain, during given period of time, from requiring borrower or debtor to repay loan or debt then
due and payable.[26] The contract between petitioner and respondent is a Community Based Reforestation Contract by
virtue of which petitioner undertook the reforestation of a fifty-hectare open/denuded forest land. The amount of Fifty
Six Thousand Two Hundred Ninety Pesos and Sixty Nine Centavos (P56,290.69) due to respondent, represents the
balance of the mobilization fund which petitioner is obliged to return because of its failure to fully comply with its
undertaking to plant the entire area with seedlings within the period contracted for reforestation. Under the reforestation
contract, the fund released to petitioner was supposed to be returned to respondent upon completion of the project or
deducted from the periodic releases of money. Clearly therefrom, the amount of Fifty Six Thousand Two Hundred Ninety
Pesos and Sixty Nine Centavos (P56,290.69) was neither a loan nor forbearance of money.
Thus, the above-quoted paragraph II, sub-paragraph 1, applies to the present case. In the absence of stipulation,
the legal interest is six percent (6%) per annum [27] on the amount finally adjudged by the Court.[28]
In addition, under the above-quoted paragraph II, sub-paragraph 3, the amount of Fifty Six Thousand Two Hundred
Ninety Pesos and Sixty Nine Centavos (P56,290.69) shall earn 12% interest per annum from date of finality of herein
judgment.
Finally, the Court finds the award of Fifty Thousand Pesos (P50,000.00) as exemplary damages to be excessive
and should therefore be reduced to Twenty Thousand Pesos (P20,000.00). Exemplary damages are imposed not to
enrich one party or impoverish another but to serve as a deterrent against or as a negative incentive to curb socially
deleterious actions.[29]
WHEREFORE, the petition is partly GRANTED and the assailed Decision is AFFIRMED with the following
MODIFICATIONS:
1) The interest to be paid on the amount of Fifty Six Thousand Two Hundred Ninety Pesos and Sixty Nine
Centavos (P56,290.69) shall be at the rate of 6% per annum from the Court of Appeals Decision dated
October 14, 1998. A twelve percent (12% ) interest, in lieu of six percent (6%) shall be imposed upon
finality of this decision, until full payment thereof.
2) The award of exemplary damages is reduced from Fifty Thousand Pesos (P50,000.00) to Twenty Thousand
Pesos (P20,000.00).
SO ORDERED.

34
 [G.R. No. 134972. March 22, 2001]
SPS. ERNESTO and MINA CATUNGAL, petitioners, vs. DORIS HAO, respondent.
DECISION
KAPUNAN, J.:
This is a petition for review of the Decision of the Court of Appeals dated 10 March 1998 and Resolution dated 30 July 1998
in the case entitled Doris Hao vs. Sps. Ernesto and Mina Catungal docketed as CA-G.R. SP No. 46158. Said decision affirmed with
modification the judgment rendered by the Regional Trial Court.
The antecedents of this case are as follows:
On December 28, 1972, the original owner, Aniana Galang, leased a three-storey building situated at Quirino Avenue,
Baclaran, Paraaque, Metro Manila, to the Bank of the Philippine Islands (BPI) for a period of about fifteen (15) years, to expire on
June 20, 1986. During the existence of the lease, BPI subleased the ground floor of said building to respondent Doris Hao.
On August 24, 1984, Galang and respondent executed a contract of lease on the second and third floors of the building. The
lease was for a term of four (4) years commencing on August 15, 1984 and ending on August 15, 1988. On August 15, 1986,
petitioner spouses Ernesto and Mina Catungal bought the property from Aniana Galang.
Invoking her right of first refusal purportedly based on the lease contract between her and Aniana Galang, respondent filed a
complaint for Annulment of Sale with Damages docketed as Civil Case No. 88-491 of the Regional Trial Court (RTC) of Makati,
Metro Manila.
Meanwhile, the lease agreement between BPI and Galang expired.
Upon expiration of the lease agreements, petitioner spouses sent demand letters to respondent for her to vacate the
building. The demand letters were unheeded by respondent causing petitioners to file two complaints for ejectment, docketed as
Civil Cases Nos. 7666 and 7667 of the Metropolitan Trial Court (MeTC) of Paraaque, Metro Manila.
The institution of the ejectment cases prompted respondent to file an action for injunction docketed as Civil Case No. 90-758
of the RTC of Makati, to stop the MeTC of Paraaque from proceeding therewith pending the settlement of the issue of ownership
raised in Civil Case No. 88-491. These two cases for annulment of sale and for injunction were also consolidated before Branch 63
of the RTC of Makati which rendered a Decision dated September 19, 1991, granting the injunction and annulling the contract of
sale between Aniana Galang and petitioners.
On appeal,[1] the Court of Appeals reversed and set aside the decision of the RTC and the complaints in Civil Cases Nos. 88-
491 and 90-758 were accordingly dismissed.
Not satisfied, respondent elevated the above decision of the CA before this Court. We, however, denied respondent's petition
on April 10, 1996.[2]
The MeTC of Paraaque, after the reversal of the decision in Civil Case No. 90-758 for injunction, proceeded with the trial of
the ejectment cases.
On January 22, 1997, the MeTC of Paraaque rendered a Decision, the dispositive portion of which reads:
In view of the foregoing, judgment is hereby rendered ordering the defendant Doris T. Hao who is in actual possession of the
property and all persons claiming rights under her to vacate the premises in question and to pay the plaintiffs the amount
of P20,000.00 a month from June 28, 1988, until she finally vacates the premises and to pay attorneys fees of P20,000.00. With
costs against the defendant.[3]
Petitioners filed a motion for clarificatory or amended judgment on the ground that although MeTC "ordered the defendant to
vacate the entire subject property, it only awarded rent or compensation for the use of said property and attorney's fees for said
ground floor and not the entire subject property. Compensation for the use of the subject property's second and third floors and
attorney's fees as prayed for in Civil Case No. 7767 were not awarded." [4] In response to said motion, the MeTC issued an Order
dated March 3, 1997, the dispositive portion of which reads:
In view of the foregoing, the Decision of this Court is hereby clarified in such a way that the dispositive portion would read as
follows: in view of the foregoing, judgment is hereby rendered ordering the defendant Doris T. Hao who is in actual possession of
the property and all persons claiming rights under her to vacate the premises and to pay the plaintiffs the amount of P8,000.00 a
month in Civil Case No. 7666 for the use and occupancy of the first floor of the premises in question from June 28, 1998 until she
finally vacates the premises and to pay the plaintiff a rental of P5,000.00 a month in Civil Case No. 7667 from June 28, 1988,
until she finally vacates the premises and to pay attorneys fees of P20,000.00. With costs against defendant.
So ordered.[5]
Petitioners sought reconsideration of the above order, praying that respondent be ordered to pay P20,000.00 monthly for the
use and occupancy of the ground floor and P10,000.00 each monthly for the second and third floors.
Respondent, on the other hand, filed a notice of appeal.
Instead of resolving the motion for reconsideration, on May 7, 1997, the MeTC of Paraaque issued an Order, elevating the
case to the Regional Trial Court:
Considering the Motion for Reconsideration of the Order of this Court dated March 3, 1997 and the Comment and Opposition
thereto of the counsel for the defendant, the Court finds that the said Motion for Reconsideration should already be addressed to the
Regional Trial Court considering that whatever disposition that this Court will award will still be subject to the appeal taken by the
defendant and considering further that the supersedeas bond posted by the defendant covered the increased rental. [6]
On September 30, 1997, the RTC of Paraaque, Branch 259, rendered a Decision modifying that of the MeTC, the dispositive
portion of which reads:
In the Light of the foregoing, the appealed decision, being in accordance with law, is hereby affirmed as to the order to vacate the
property in question and modified as to the amount of rentals which is hereby increased to P20,000.00 a month for the ground
floor starting June 28, 1988 and P10,000.00 a month for the second floor and also P10,000.00 a month for the third floor (or) a
total of P40,000.00 monthly rentals commencing June 28, 1988 until the subject property has been vacated and possession thereof
turner [sic] over to the plaintiffs-appellees; to pay attorneys fees in the amount of P20,000.00; and with costs. [7]

35
 In her Motion dated October 6, 1997, respondent sought a reconsideration of the above ruling of the RTC. The same was
denied on November 25, 1997.
Respondent elevated her case to the Court of Appeals. The CA rendered the Decision subject of this petition the dispositive
portion thereof reads:
Wherefore, the decision appealed from is hereby modified by reducing the amount of rentals for both the second and third floors
from P20,000.00 to P10,000.00 monthly. With this modification, the judgment below is AFFIRMED in all other respects.[8]
The parties filed their respective motions for reconsideration to the Court of Appeals. Petitioners asked that the decision of the
Regional Trial Court fixing the total monthly rentals at P40,000.00 be sustained. On the other hand, respondent sought a revival of
the decision of the MeTC on the ground that since petitioners did not interpose an appeal from the amended judgment of the MeTC,
the RTC could not validly increase the amount of rentals awarded by the former.
In its Resolution dated 30 July 1998, the Court of Appeals resolved the parties motions for reconsideration in favor of the
respondent. It ruled that the motion for reconsideration filed by the petitioners before the MeTC was a prohibited pleading under
the Rules of Summary Procedure. Such being the case, said motion for reconsideration did not produce any legal effect and thus the
amended judgment of the MeTC had become final and executory insofar as the petitioners are concerned. The dispositive portion
of the CA's resolution reads as follows:
Wherefore, the decision appealed from is hereby MODIFIED by reducing the monthly rentals for the first/ground floor from
P20,000.00 to P8,000.00 and for the second and third floors from P10,000.00 each to P5,000.00 for both floors. With this
modification the judgment below is affirmed in all other respects.
No pronouncement as to costs.
So ordered.[9]
Petitioners now come before this Court assigning the following errors:
A.
IN THE ASSAILED DECISION, THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN REVERSING THE
FINDINGS OF THE REGIONAL TRIAL COURT BY USING AS BASIS FOR REDUCING THE RENTAL ONLY THE
EVIDENCE SUBMITTED BY THE PARTIES AND IGNORING CIRCUMSTANCES OF WHICH THE REGIONAL
TRIAL COURT PROPERLY TOOK JUDICIAL NOTICE.
B.
IN THE ASSAILED DECISION, THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN ITS FINDINGS
THAT THE REGIONAL TRIAL COURT HAD NO JURISDICTION TO MODIFY THE APPEALED JUDGMENT BY
INCREASING THE AWARD OF MONTHLY RENTALS FROM P13,000.00 TO P40,000.00. [10]
We required respondent to comment on the petition.[11] In her Comment/Compliance, respondent contends that the petition
should be dismissed and the resolution of the case should be based on the following issues:
1. DID THE RESPONDENT APPELLATE COURT COMMITTED [sic] ANY REVERSIBLE ERROR WHEN IT
CONSIDERED PETITIONERS' "MOTION FOR RECONSIDERATION" (ANNEX "I" - PETITION) FILED WITH
THE MTC-COURT AS A PROHIBITVE [sic] PLEADING IN A SUMMARY PROCEDURE CASE SUCH AS
THE ONE AT BAR[?]
2. DID THE RESPONDENT APPELLATE COURT COMMITTED [sic] ANY REVERSIBLE ERROR WHEN IT
RESOLVED TO RESTORE, REINSTATE, AFFIRM AND UPHOLD THE MTC - AMENDEDJUDGMENT OF
MARCH 3, 1997 FIXING THE TOTAL AWARD OF P13,000.00 GROUNDED ON A PROHIBITIVE [sic]
PLEADING AND FAILURE TO FILE A NOTICE OF APPEAL[?]
3. DID THE APPELLATE COURT COMMITTED [sic] ANY REVERSIBLEERROR WHEN IT RESOLVED TO
SUSTAIN RESPONDENT'S POSITION CONSISTENT WITH THE LAW AND JURISPRUDENCE THAT FOR
PETITIONERS' FAILURE TO APPEAL AND HAVING FILED A PROHIBITIVE [sic] PLEADING, THEY
CANNOT ASK FOR AFFIRMATIVE RELIEF SUCH AS INCREASE IN RENTAL[?] [12]
There is no question that after the expiration of the lease contracts which respondent contracted with Aniana Galang and BPI,
she lost her right to possess the property since, as early as the actual expiration date of the lease contract, petitioners were not
negligent in enforcing their right of ownership over the property.
While respondent was finally evicted from the leased premises, the amount of monthly rentals which respondent should pay
the petitioners as forced lessors of said property from 20 June 1988 (for the ground floor) and 15 August 1988 until 6 January 1998
(for the second and third floors), or a period of almost ten years remains to be resolved.
Petitioners, in the main, posit that there should be a reinstatement of the decision of the regional trial court which fixed the
monthly rentals to be paid by herein respondent at the total of P40,000.00, P20,000.00 for the occupancy of the first floor,
and P10,000.00 each for the occupancy of the second and third floors of the building, effective after the lapse of the original lease
contract between respondent and the original owner of the building.
On the other hand, respondent insists on the ruling of the Metropolitan Trial Court, which was thereafter reinstated by the
Court of Appeals in its 30 July 1998 Resolution, that the monthly rental rates of only P8,000.00 for the first floor and P5,000.00 for
each of the second and third floors should prevail.
At the outset, it should be recalled that there existed no consensual lessor-lessee relationship between the parties. At most,
what we have is a forced lessor-lessee relationship inasmuch as the respondent, by way of detaining the property without the consent
of herein petitioners, was in unlawful possession of the property belonging to petitioner spouses.
We cannot allow the respondent to insist on the payment of a measly sum of P8,000 for the rentals of the first floor of the
property in question and P5,000.00 for each of the second and the third floors of the leased premises. The plaintiff in an ejectment
case is entitled to damages caused by his loss of the use and possession of the premises. [13] Damages in the context of Section
17, Rule 70 of the 1997 Rules of Civil Procedure is limited to rent or fair rental value or the reasonable compensation for the use
and occupation of the property.[14] What therefore constitutes the fair rental value in the case at bench?

36
 In ruling that the increased rental rates of P40,000.00 should be awarded the petitioners, the regional trial court based its
decision on the doctrine of judicial notice. The RTC held, thus:
While this Court is fully in agreement with the Court of Origin that plaintiffs-appellees have the better right to the possession of
the premises in question being the present owners and the contract of lease between the former owner and herein defendant-
appellant had already expired, the amount of rentals as laid down in the Clarificatory Order dated 3 March 1997 is inadequate, if
not unreasonable.
The Court a quo misappreciated the nature of the property, its location and the business practice in the vicinity and indeed
committed an error in fixing the amount of rentals in the aforementioned Order.Said premises is situated along Quirino Avenue, a
main thoroughfare in Barangay Baclaran, Paraaque, Metro Manila, a fully developed commercial area and the place where the
famous shrine of the Mother of Perpetual Help stands. Withal, devotees, traders, tourists and practically people from all walks of
life visit said barangay making it suitable for commerce, not to mention thousand of residents therein.Needless to say, every square
meter of said community is valuable for all kinds of business or commerce of man.
Further, considering that the questioned property has three floors and strategically located along the main road and consistent
with the prevailing rental rates in said business area which is between P20,000.00 and P30,000.00 as testified to by Divina Q. Roco,
a real estate agent and Mina Catungal, this Court finds the amount of P20,000.00 a month for the ground floor and P10,000.00 a
month each for the second floor and third floor or a total of P40,000.00 monthly rentals as appropriate and reasonable rentals for
the use and occupation of said premises.
Finally, worth mentioning here as parallel is [the] ruling of the Supreme Court in the case of Manila Bay Club Corporation vs.
Court of Appeals, 245 SCRA 715 and 731-732 citing Licmay vs. Court of Appeals, 215 SCRA 1 (1992) and Commander Realty
Inc. v. Court of Appeals, 168 SCRA 181. It reads as follows:
It is worth stressing at this juncture that the trial court had the authority to fix the reasonable value for the continued use and
occupancy of the leased premises after the termination of the lease contract, and that it was not bound by the stipulated rental in
the contract of lease since it is equally settled that upon termination or expiration of the Contract of Lease, the rental stipulated
therein may no longer be the reasonable value for the use and occupation of the premises as a result or by reason of the change or
rise in values. Moreover, the trial court can take judicial notice of the general increase in rentals of real estate especially of
business establishments like the leased building owned by the private respondents. [15]
We find that the RTC correctly applied and construed the legal concept of judicial notice in the case at bench. Judicial
knowledge may be defined as the cognizance of certain facts which a judge under rules of legal procedure or otherwise may properly
take or act upon without proof because they are already known to him, or is assumed to have, by virtue of his office. [16] Judicial
cognizance is taken only of those matters that are commonly known. The power of taking judicial notice is to be exercised by courts
with caution; care must be taken that the requisite notoriety exists; and every reasonable doubt on the subject should be promptly
resolved in the negative.[17] Matters of judicial notice have three material requisites: (1) the matter must be one of common and
general knowledge; (2) it must be well and authoritatively settled and not doubtful or uncertain; and (3) it must be known to be
within the limits of jurisdiction of the court.
The RTC correctly took judicial notice of the nature of the leased property subject of the case at bench based on its location
and the commercial viability. The above quoted assessment by the RTC of the Baclaran area, where the subject property is located,
is fairly grounded.
Furthermore, the RTC also had factual basis in arriving at the said conclusion, the same being based on testimonies of
witnesses, such as real estate broker Divina Roco and the petitioner Mina Catungal.
The RTC rightly modified the rental award from P13,000.00 to P40,000.00, considering that it is settled jurisprudence that
courts may take judicial notice of the general increase in rentals of lease contract renewals much more with business
establishments. Thus, We held in Manila Bay Club Corporation vs. Court of Appeals:[18]
It is worth stressing at this juncture that the trial court had the authority to fix the reasonable value for the continued use and
occupancy of the leased premises after the termination of the lease contract, and that it was not bound by the stipulated rental in
the contract of lease since it is equally settled that upon termination or expiration of the contract of lease, the rental stipulated
therein may no longer be the reasonable value for the use and occupation of the premises as a result or by reason of the change or
rise in values. Moreover, the trial court can take judicial notice of the general increase in rentals of real estate especially of
business establishments like the leased building owned by the private respondent.[19]
The increased award of rentals ruled by the RTC is reasonable given the circumstances of the case at bench. We note that
respondent was able to deny petitioners the benefits, including possession, of their rightful ownership over the subject property for
almost a decade.
The Court of Appeals failed to justify its reduction of the P40,000.00 fair rental value as determined by the RTC. Neither has
respondent shown that the rental pegged by the RTC is exorbitant or unconscionable. This is because the burden of proof to show
that the rental demanded is unconscionable or exorbitant rests upon private respondent as the lessee. [20] Here, respondent neither
discharged this burden when she omitted to present any evidence at all on what she considers to be fair rental value, nor did she
controvert the evidence submitted by petitioners by way of testimonies of the real estate broker and petitioner Mina Catungal. Thus,
in Sia v. CA, we ruled:
xxx On the contrary, the records bear out that the P5,000.00 monthly rental is a reasonable amount, considering that the subject lot
is prime commercial real property whose value has significantly increased and that P5,000.00 is within the range of prevailing
rental rates in that vicinity. Moreover, petitioner has not proffered controverting evidence to support what he believes to be the
fair rental value of the leased building since the burden of proof to show that the rental demanded is unconscionable or exorbitant
rests upon the lessee. Thus, here and now we rule, as we did in the case of Manila Bay Club v. Court of Appeals, that petitioner
having failed to prove its claim of excessive rentals, the valuation made by the Regional Trial Court, as affirmed by the
respondent Court of Appeals, stands.[21]
The Court of Appeals merely anchored its decision to reduce the P40,000.00 rental on procedural grounds. According to the
Court of Appeals, the motion for reconsideration filed by petitioners before the MeTC is a prohibited pleading under the Rule on
37
Summary Procedure and did not have any effect in stalling the running of the period to appeal the decision nor could it be considered
as notice of appeal and consequently this affected the elevation of the case to the RTC. Not having appealed the case to the RTC,
the amended judgment of the MeTC fixing the rental rate at P13,000.00 is final and executory as far as petitioners are concerned.
We disagree. A reading of the order issued by the MeTC will show that said court elevated the issue on the amount of rentals
raised by the petitioner to the RTC because the appeal of respondent had already been perfected, thus:
Considering the Motion for Reconsideration of the Order of this Court dated March 3, 1997 and the Comment and Opposition
thereto of the counsel for the defendant, the Court finds the said Motion for Reconsideration should already be addressed to the
Regional Trial Court considering that whatever disposition that this Court will award will still be subject to the appeal taken by
the defendant and considering further that the supersedeas bond posted by the defendant covered the increased rental.
In order that this case will be immediately forwarded to the Regional Trial Court in view of the appeal of the defendant, the Court
deemed it wise not to act on the said motion for reconsideration and submit the matter to the Regional Trial Court who has the
final say on whether the rental or the premises in question will be raised or not.
It will be to the advantage of both parties that this Court refrain from acting on the said Motion for Reconsideration so as to
expedite the remanding (sic) of this Court to the Regional Trial Court. [22]
When the MeTC referred petitioners motion to the RTC for its disposition, respondent could have opposed such irregularity
in the proceeding.
This respondent failed to do. Before this Court, respondent now insists that the petition should be denied on the ground that
the Motion for Reconsideration filed before the MeTC is a prohibited pleading and hence could not be treated as a notice of
appeal. Respondent is precluded by estoppel from doing so. To grant respondents prayer will not only do injustice to the petitioners,
but also it will make a mockery of the judicial process as it will result in the nullity of the entire proceedings already had on a mere
technicality, a practice frowned upon by the Court. Our ruling in Martinez, et al. vs. De la Merced, et al.[23] is illustrative :
xxx In fine, these are acts amounting to a waiver of the irregularity of the proceedings. For it has been consistently held by this
Court that while lack of jurisdiction may be assailed at any stage, a party's active participation in the proceedings before a court
without jurisdiction will estop such party from assailing such lack of jurisdiction.
The Court of Appeals in the assailed Decision correctly observed that the peculiar circumstances attendant to the ejectment
cases warrant departure from the presumption that a party who did not interject an appeal is satisfied with the adjudication made by
the lower court:
As regard the issue on the propriety of the increase in the award of damages/rentals made by the RTC, the Court notes that, while
respondent spouses did not formally appeal the decision in the ejectment cases, their motion for reconsideration assailing the
clarificatory order reducing the award of damages/rentals was, by order of the MTC, referred to the RTC for appropriate
action. Reason for such action is stated in the Order of May 7, 1997, thus:
xxx
Neither petitioner nor respondent spouses assailed the above order. In fact, in their appeal memorandum, respondent spouses
reiterated their claim, first ventilated in their motion for reconsideration dated March 24, 1997, that the MTC grievously erred in
finding that plaintiffs-appellees are only entitled to a meager monthly rental of P8,000.00 for the ground floor and P5,000.00 for
the second and third floors.
Hence, while the entrenched procedure in this jurisdiction is that a party who has not himself appealed cannot obtain from the
appellate court affirmative relief other than those granted in the decision of the lower court, the peculiar circumstances attendant
to the ejectment cases warrant a departure therefrom. The rule is premised on the presumption that a party who did not interpose
an appeal is satisfied with the adjudication made by the lower court. Respondent spouses, far from showing satisfaction with the
clarificatory order of March 3, 1997, assailed it in their motion for reconsideration which, however, was referred to the RTC for
appropriate action in view of the appeal taken by the petitioner. Clearly, the increase in the damages/rentals awarded by the MTC
was an issue the RTC could validly resolve in the ejectment cases. [24]
Respondent, argues that ejectment cases are tried under the Revised Rule on Summary Procedure, [25] hence, the motion for
reconsideration filed by petitioner was a prohibited pleading and could not take the place of the required notice of appeal.
The argument by respondent is misleading. Simply because the case was one for ejectment does not automatically mean that
the same was triable under the Rules of Summary Procedure. At the time of the filing of the complaint by petitioner in 1989, said
Rules provide:
SECTION 1. SCOPE - THIS RULE SHALL GOVERN THE PROCEDURE IN THE METROPOLITAN TRIAL COURTS, THE
MUNICIPAL CIRCUIT TRIAL COURTS IN THE FOLLOWING CASES:
A. CIVIL CASES:
(1) CASES OF FORCIBLE ENTRY AND UNLAWFUL DETAINER, EXCEPT WHERE THE QUESTION OF OWNERSHIP
IS INVOLVED, OR WHERE THE DAMAGES OR UNPAID RENTALS SOUGHT TO BE RECOVERED BY THE
PLAINTIFF EXCEED TWENTY THOUSAND PESOS (P20,000.00) AT THE TIME OF THE FILING OF COMPLAINT. x x x
In their complaint, petitioners prayed, among others, for rentals for the period covering June 1988 to April 1989, at a rate of
P20,000.00 for the first floor alone, as well as P10,000.00 for attorney's fees.Clearly, considering the amount of rentals and
damages claimed by petitioners, said case before the MeTC was not governed by the Rules on Summary Procedure. Said case was
governed by the ordinary rules where the general proposition is that the filing of a motion for reconsideration of a final judgment is
allowed. In the interest of substantial justice, in this particular case, we rule that the MeTC did not err in treating the motion for
reconsideration filed by petitioner as a notice of appeal.
Finally, respondent questions why petitioners would want to reinstate the RTC decision when in fact they had already applied
for a writ of execution of the 8 March 1997 Decision. Respondent is of the view that since petitioners had already moved for the
execution of the decision awarding a smaller amount of damages or fair rental value, the same is inconsistent with a petition asking
for a greater fair rental value and, therefore, a possible case of unjust enrichment in favor of the petitioners. We are not persuaded.
In order to avoid further injustice to a lawful possessor, an immediate execution of a judgment is mandated and the courts duty
to order such execution is practically ministerial.[26] In City of Manila, et al. vs. CA, et al.,[27] We held that Section 8 (now Section
38
19), Rule 70, on execution pending appeal, also applies even if the plaintiff-lessor appeals where, as in that case, judgment was
rendered in favor of the lessor but it was not satisfied with the increased rentals granted by the trial court, hence the appeal xxx.
As above discussed, the petitioners have long been deprived of the exercise of their proprietary rights over the leased premises
and the rightful amount of rentals at the rate of P40,000.00 a month.Consequently, petitioners are entitled to accrued monthly rentals
of P27,000.00, which is the difference between P40,000.00 awarded by the Regional Trial Court and P13,000.00 awarded by the
MeTC and affirmed by the Court of Appeals. Said amount of P27,000.00 should rightly be the subject of another writ of execution
being distinct from the subject of the first writ of execution filed by petitioners.
The Court also awards interest in favor of petitioners. In Eastern Shipping Lines, Inc. vs. Court of Appeals, we gave the
following guidelines in the award of interest:
xxx
II With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well
as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the
interest due should be that which may have been stipulated in writing.Furthermore, the interest due shall itself earn legal interest
from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed
from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.
The back rentals in this case being equivalent to a loan or forbearance of money, the interest due thereon in twelve percent
(12%) per annum from the time of extra-judicial demand on September 27, 1988.
WHEREFORE, premises considered, judgment is hereby rendered in favor of petitioners by reinstating the decision of the
RTC, with modifications, and ordering respondent to further pay:
1. The sum of Twenty Seven Thousand Pesos (P27,000.00), corresponding to the difference between the P40,000.00 awarded by
the Regional Trial Court and the P13,000.00 awarded by the Metropolitan Trial Court, as monthly arrears, computed from
respondents unlawful detainer, 20 June 1988 (for the ground floor) and 15 August 1988 (for the second and third floors) of the
subject property until the time she vacated the premises on 7 January 1998;
2. Legal interest of twelve percent (12%) per annum on the foregoing sum from the date of notice of demand on 27 September
1988 until fully paid;
3. The sum of Twenty Thousand Pesos (P20,000.00) as and for attorneys fees and;
4. The costs of suit.
SO ORDERED.

39
 [G.R. No. 132703. June 23, 2000]
BANCO FILIPINO SAVINGS and MORTGAGE BANK, petitioner, vs. COURT OF APPEALS, HON. EDGAR D.
GUSTILO, Presiding Judge, Branch 28, Regional Trial Court, Iloilo City, TALA REALTY SERVICES
CORPORATION, NANCY L. TY, PEDRO B. AGUIRRE, REMEDIOS A. DUPASQUIER, PILAR D. ONGKING,
ELIZABETH H. PALMA, DOLLY W. LIM, RUBENCITO M. DEL MUNDO, ADD INTERNATIONAL SERVICES,
INC., respondents.
DECISION
DE LEON, JR., J.:
Before us is a special civil action for certiorari to set aside and annul the Decision [1] of the Court of Appeals dated
December 18, 1996, which sustained the dismissal [2] of the complaint of petitioner Banco Filipino Savings and
Mortgage Bank (hereafter, Banco Filipino) for recovery of real properties filed against Tala Realty Services
Corporation (hereafter, Tala Realty) on the grounds of litis pendentia and forum-shopping.
The antecedent facts are the following:
The General Banking Act [3] regulates the number of branches that a bank may operate. Under the said law, a bank is
allowed to own the land and the improvements thereon used as branch sites but only up to a maximum of fifty percent
(50%) of the banks net worth.
In 1979, Banco Filipino had reached the allowable limit in branch site holdings but contemplated further expansion of
its operations. Consequently, it unloaded some of its holdings to Tala Realty. Banco Filipino thereafter leased the
same branch sites from Tala Realty which was conceived and organized precisely as a transferee corporation by the
major stockholders [4] of Banco Filipino. On March 26, 1979, the Securities and Exchange Commission (SEC) issued
Tala Realtys certificate of registration.[5]
Shortly thereafter, the board of directors of Banco Filipino authorized negotiations for
the sale of some of its branch sites, through a Board Resolution [6]
dated April 17, 1979 (hereafter, Board Resolution).
On August 25, 1981, respondent Banco Filipino sold the above branch sites to Tala Realty under separate deeds of
sale for each branch site. On the same date, Tala Realty leased the same branch sites to Banco Filipino under
separate instruments for each branch site.[7]
The instant case originated from the sale by Banco Filipino to Tala Realty of four (4) lots in Iloilo City, covered and
described in the aforementioned TCT Nos. 62273 and 62274, for two million one hundred ten thousand pesos
(P2,110,000.00).[8] Tala Realty then leased them back to Banco Filipino for a monthly rental of twenty one thousand
pesos (P21,000.00) /for a period of twenty (20) years and renewable for another twenty (20) years.[9] The lease
contracts of the other branch sites sold to Tala Realty have substantially similar terms and conditions, except for the
amount of the rent.
Banco Filipino alleges that a trust was created by virtue of the above transactions. Tala Realty was allegedly
established to serve as a corporate medium to warehouse the legal title of the said properties for the beneficial
interest of Banco Filipino and to purchase properties to be held in trust for the latter. [10]
However, sometime in August 1992, Tala Realty demanded payment of increased rentals, deposits and goodwill from
Banco Filipino, with a threat of ejectment in case of failure to comply thereto. On April 20, 1994, some stockholders of
Banco Filipino filed a derivative suit against Tala Realty before the SEC for the reconveyance of the properties sold by
the former to the latter. However, on March 6, 1995, the SEC dismissed the case on the ground of lack of
jurisdiction.[11]
Due to Banco Filipinos failure to comply with Tala Realtys terms, the latter carried out its threat by filing numerous
ejectment suits against Banco Filipino.[12] This prompted Banco Filipino to file, on August 16, 1995, an action for
recovery of real properties[13] before the Regional Trial Court of Iloilo, Branch 28, on the ground of breach of trust.
Incidentally, during the period from August to September 1995, Banco Filipino also filed sixteen (16) other complaints
for recovery of real properties which it had previously sold to Tala Realty. [14]
These complaints, including the one filed in the Regional Trial Court of Iloilo City, Branch 28, were uniformly worded in
their material allegations.[15]
As regards Banco Filipinos complaint in the Regional Trial Court of Iloilo City, Tala Realty filed on October 9, 1995 a
motion to dismiss on the following grounds: (1) forum-shopping; (2) litis pendentia; (3) pari delicto; (4) failure to
implead indispensable parties; and (5) failure to state a cause of action. [16] On the same date, private repondents Pilar
D. Ongking, Elizabeth H. Palma, Dolly W. Lim and Rubencito del Mundo filed a separate motion to dismiss in the
same case on the following grounds: (1) lack of jurisdiction over the subject matter; (2) litis pendentia; and (3) failure
to state a cause of action.[17] Likewise, on November 10, 1995, private respondent Nancy L. Ty filed a separate motion
to dismiss, alleging the same grounds as those invoked by private respondents Ongking, et. al.[18]
These motions to dismiss alleged, among others, that aside from the said suit before the Regional Trial Court of Iloilo
City, Branch 28, other suits involving certain Quezon City, Lucena City, Malolos and Manila branches of Banco
Filipino are also pending in other Regional Trial Courts.
Banco Filipino filed separate oppositions, dated October 14, 1995, October 31, 1995 and November 21, 1995
respectively, to the motions to dismiss.[19] After a protracted exchange of pleadings, the trial court dismissed the
complaint on April 22, 1996 in this wise:[20]
A thorough and careful perusal was made by the undersigned Presiding Judge of the arguments of
opposing counsels, ventilated in their respective memoranda. Opposing counsels cited the pertinent
Supreme Court Circulars, provisions of the Rules of Court and related Decisions of the Supreme
Court in support of their arguments.

40
 After weighing the foregoing, this Court is of the opinion and so holds that the contention of the
defendants in their motions to dismiss, etc., is meritorious.
Wherefore, in view of the foregoing, the defendants separate motions to dismiss are hereby granted.
Therefore, let this case be, as it is hereby Dismissed.
SO ORDERED.
On June 27, 1996, the trial court denied Banco Filipinos motion for reconsideration. [21] Banco Filipino received a copy
of said order of denial on July 5, 1996 but instead of filing an appeal, it filed, on July 24, 1996, a petition
for certiorari under Rule 65 before the Court of Appeals.[22] Banco Filipino alleged in its petition that the trial courts
decision was issued with grave abuse of discretion because it did not comply with the constitutional mandate on the
form of decisions.
However, the Court of Appeals dismissed Banco Filipinos petition on the ground, among others, that the "[p]etitioners
recourse to Rule 65 of the Revised Rules of Court is patently malapropos." [23] It reiterated the rule that a special civil
action for certiorari may be resorted to only when there is no appeal, nor any plain, speedy and adequate remedy in
the ordinary course of law. Banco Filipinos failure to appeal by writ of error within the reglementary period and its
belated recourse to a petition for certiorari under Rule 65 was interpreted by the Court of Appeals as a desperate
attempt by Banco Filipino to resurrect what was otherwise already a lost appeal. [24] Furthermore, the Court of Appeals
debunked Banco Filipinos theory that the assailed order of the RTC did not comply with the substantive requirements
of the Constitution, and was thus, rendered with grave abuse of discretion.
On December 28, 1996, Banco Filipino received a copy of the Court of Appeals decision dismissing its petition
thereby prompting the latter to file a motion for reconsideration on January 10, 1997. The Court of Appeals denied the
said motion for reconsideration on December 19, 1997 in a resolution, a copy of which was received by Banco Filipino
on January 7, 1998.[25]Banco Filipino then filed with this Court its subject petition for certiorari under Rule 65 of the
Revised Rules of Court on March 9, 1998.[26]
Petitioner advances the following arguments:
I......RESPONDENT COURT GRAVELY ABUSED ITS DISCRETION IN FAILING TO CORRECT BY
CERTIORARI THE DISMISSAL ORDER BY THE RTC WHICH PATENTLY DISREGARDED THE
CONSTITUTIONAL PRESCRIPTION AS TO FORM AND JUDGMENT, AND EFFECTIVELY DENIED
PETITIONER DUE PROCESS OF LAW;[27]
II......BANCO FILIPINO WAS DENIED THE OPPORTUNITY TO PROVE ITS CAUSE OF ACTION OF
AN IMPLIED TRUST;[28]
III......RESPONDENT COURT GRAVELY ERRED IN RULING THAT A WRIT OF ERROR SHOULD
BE THE PROPER REMEDY INSTEAD OF A PETITION FOR CERTIORARI UNDER RULE 65;[29]
IV......RESPONDENT CA GRAVELY ABUSED ITS DISCRETION IN FINDING THAT BANCO
FILIPINO IS GUILTY OF SPLITTING CAUSES OF ACTION MERELY ON THE BASIS OF THE
PLEADINGS THUS FILED.[30]
Without need of delving into the merits of the case, this Court hereby dismisses the instant petition. For in filing a
special civil action for certiorari instead of an ordinary appeal before this Court, Banco Filipino violated basic tenets of
remedial law that merited the dismissal of its petition.
First. Banco Filipinos proper remedy from the adverse resolutions of the Court of Appeals is an ordinary appeal to this
Court via a petition for review under Rule 45 and not a petition for certiorari under Rule 65.
A petition for certiorari under Rule 65 is proper if a tribunal, board or officer exercising judicial or quasi-judicial
functions has acted without or in excess of jurisdiction or with grave abuse of discretion amounting to lack or excess of
jurisdiction and there is no appeal, or any plain, speedy and adequate remedy in the ordinary course of law. [31]
We have said time and again that for the extraordinary remedy of certiorari to lie by reason of grave abuse of
discretion, the abuse of discretion, must be so patent and gross as to amount to an evasion of a positive duty, or a
virtual refusal to perform the duty enjoined or act in contemplation of law, or where the power is exercised in an
arbitrary and despotic manner by reason of passion and personal hostility. [32]
Nothing in the record of this case supports Banco Filipinos bare assertion that the Court of Appeals rendered its
assailed resolutions with grave abuse of discretion. On the contrary, Banco Filipino even admitted that the Court of
Appeals painstakingly "labored to defend in thirty-three (33) [single spaced] pages"[33] the rationale behind its decision,
clearly setting forth therein the applicable provisions of law and jurisprudence. In other words, there being no grave
abuse of discretion on its part, the Court of Appeals rendered the assailed resolutions in the proper exercise of its
jurisdiction. Hence, even if erroneous, the Court of Appeals resolutions can only be assailed by means of a petition for
review. The distinction is clear: a petition for certiorariseeks to correct errors of jurisdiction while a petition for review
seeks to correct errors of judgment committed by the court. Errors of judgment include errors of procedure or mistakes
in the courts findings.[34] Where a court has jurisdiction over the person and the subject matter, the decision on all
other questions arising in the case is an exercise of that jurisdiction. Consequently, all errors committed in the
exercise of such jurisdiction are merely errors of judgment.[35]
Second. The availability to Banco Filipino of the remedy of a petition for review from the decision of the Court of
Appeals effectively foreclosed its right to resort to a petition for certiorari. This Court has often enough reminded
members of the bench and bar that a special civil action for certiorari under Rule 65 lies only when there is no appeal
nor plain, speedy and adequate remedy in the ordinary course of law. Certiorari is not allowed when a party to a case
fails to appeal a judgment despite the availability of that remedy. The remedies of appeal and certiorariare mutually
exclusive and not alternative or successive. [36]
The antithetic character of the remedies of appeal and certiorari has been generally observed by this Court save only
in those rare instances where appeal is satisfactorily shown to be an inadequate remedy. In the case at bar, Banco
41
Filipino has failed to show any valid reason why the issues raised in its petition for certiorari could not have been
raised on appeal. To justify its resort to a special civil action for certiorari under Rule 65, it erroneously claims that an
appeal is not a speedy and adequate remedy because further delay in the disposition of this case would effectively
deprive Banco Filipino of the full use and enjoyment of its properties. [37] However, the further delay that would
inadvertently result from the dismissal of the instant petition is one purely of Banco Filipinos own doing. We cannot
countenance an intentional departure from established rules of procedure simply to accommodate a case that has
long been pending in the courts of law because of the partys own fault or negligence.
Third. Certiorari cannot be used as a substitute for the lapsed or lost remedy of appeal. Banco Filipinos recourse to a
special civil action for certiorari was borne not out of the conviction that grave abuse of discretion attended the
resolution of its petition before the Court of Appeals but simply because of its failure to file a timely appeal to this
Court. This observation is shared by the Court of Appeals which was quick to point out that when Banco Filipino filed
its petition for certiorari assailing the RTC order, the reglementary period for filing a petition for review before the Court
of Appeals had already lapsed.
It is true that this Court may treat a petition for certiorari as having been filed under Rule 45 to serve the higher
interest of justice, but not when the petition is filed well beyond the reglementary period for filing a petition for review
and without offering any reason therefor.
Concomitant to a liberal application of the rules of procedure should be an effort on the part of the party invoking
liberality to at least explain its failure to comply with the rules. In the case at bar, Banco Filipinos petition is bereft of
any valid reason or explanation as to why it failed to properly observe the rules of procedure. The record shows that
Banco Filipino failed, not once but twice, and for an unreasonable length of time, to file an appeal within the period
required by law. From the order of the RTC, it filed its petition for certiorari some fourteen (14) days after the lapse of
the reglementary period to appeal to the Court of Appeals. Likewise, when Banco Filipino filed its petition
for certiorari before this Court, forty five (45) days have already passed since the end of the fifteen (15) day
reglementary period for filing an appeal to the Supreme Court.
Allowing appeals, although filed late in some rare cases, may not be applied to Banco Filipino in the case at bar for
this rule is qualified by the requirement that there must be exceptional circumstances to justify the relaxation of the
rules.[38] We cannot find any such exceptional circumstances in this case and neither has Banco Filipino endeavored
to prove the existence of any. This being so, another elementary rule of procedure applies and that is the doctrine that
perfection of an appeal within the reglementary period is not only mandatory but also jurisdictional so that failure to do
so renders the questioned decision final and executory, and deprives the appellate court of jurisdiction to alter the final
judgment, much less to entertain the appeal.[39]
As a final word, we quote herein our relevant pronouncement in the case of Bank of America, NT and SA v. Gerochi,
Jr. that:
The case at bench, given its own factual settings cannot come close to those extraordinary
circumstances that have indeed justified a deviation from an otherwise stringent rule. Let it not be
overlooked that the timeliness of an appeal is a jurisdictional caveat that not even this Court can trifle
with.[40] (Underscoring provided.)
WHEREFORE, the instant petition for certiorari is hereby DISMISSED.
SO ORDERED.

42
 [G.R. No. 114286. April 19, 2001]
THE CONSOLIDATED BANK AND TRUST CORPORATION (SOLIDBANK), petitioner, vs. THE COURT OF
APPEALS, CONTINENTAL CEMENT CORPORATION, GREGORY T. LIM and SPOUSE, respondents.
DECISION
YNARES-SANTIAGO, J.:
The instant petition for review seeks to partially set aside the July 26, 1993 Decision[1] of respondent Court of Appeals in CA-
G.R. CV No. 29950, insofar as it orders petitioner to reimburse respondent Continental Cement Corporation the amount of
P490,228.90 with interest thereon at the legal rate from July 26, 1988 until fully paid. The petition also seeks to set aside the March
8, 1994 Resolution[2] of respondent Court of Appeals denying its Motion for Reconsideration.
The facts are as follows:
On July 13, 1982, respondents Continental Cement Corporation (hereinafter, respondent Corporation) and Gregory T. Lim
(hereinafter, respondent Lim) obtained from petitioner Consolidated Bank and Trust Corporation Letter of Credit No. DOM-23277
in the amount of P1,068,150.00 On the same date, respondent Corporation paid a marginal deposit of P320,445.00 to petitioner. The
letter of credit was used to purchase around five hundred thousand liters of bunker fuel oil from Petrophil Corporation, which the
latter delivered directly to respondent Corporation in its Bulacan plant. In relation to the same transaction, a trust receipt for the
amount of P1,001,520.93 was executed by respondent Corporation, with respondent Lim as signatory.
Claiming that respondents failed to turn over the goods covered by the trust receipt or the proceeds thereof, petitioner filed a
complaint for sum of money with application for preliminary attachment [3]before the Regional Trial Court of Manila. In answer to
the complaint, respondents averred that the transaction between them was a simple loan and not a trust receipt transaction, and that
the amount claimed by petitioner did not take into account payments already made by them. Respondent Lim also denied any
personal liability in the subject transactions. In a Supplemental Answer, respondents prayed for reimbursement of alleged
overpayment to petitioner of the amount of P490,228.90.
At the pre-trial conference, the parties agreed on the following issues:
1) Whether or not the transaction involved is a loan transaction or a trust receipt transaction;
2) Whether or not the interest rates charged against the defendants by the plaintiff are proper under the letter of credit, trust receipt
and under existing rules or regulations of the Central Bank;
3) Whether or not the plaintiff properly applied the previous payment of P300,456.27 by the defendant corporation on July 13,
1982 as payment for the latters account; and
4) Whether or not the defendants are personally liable under the transaction sued for in this case.[4]
On September 17, 1990, the trial court rendered its Decision, [5] dismissing the Complaint and ordering petitioner to pay
respondents the following amounts under their counterclaim: P490,228.90 representing overpayment of respondent Corporation,
with interest thereon at the legal rate from July 26, 1988 until fully paid; P10,000.00 as attorneys fees; and costs.
Both parties appealed to the Court of Appeals, which partially modified the Decision by deleting the award of attorneys fees
in favor of respondents and, instead, ordering respondent Corporation to pay petitioner P37,469.22 as and for attorneys fees and
litigation expenses.
Hence, the instant petition raising the following issues:
1. WHETHER OR NOT THE RESPONDENT APPELLATE COURT ACTED INCORRECTLY OR COMMITTED
REVERSIBLE ERROR IN HOLDING THAT THERE WAS OVERPAYMENT BY PRIVATE RESPONDENTS TO THE
PETITIONER IN THE AMOUNT OF P490,228.90 DESPITE THE ABSENCE OF ANY COMPUTATION MADE IN THE
DECISION AND THE ERRONEOUS APPLICATION OF PAYMENTS WHICH IS IN VIOLATION OF THE NEW CIVIL
CODE.
2. WHETHER OR NOT THE MANNER OF COMPUTATION OF THE MARGINAL DEPOSIT BY THE RESPONDENT
APPELLATE COURT IS IN ACCORDANCE WITH BANKING PRACTICE.
3. WHETHER OR NOT THE AGREEMENT AMONG THE PARTIES AS TO THE FLOATING OF INTEREST RATE IS
VALID UNDER APPLICABLE JURISPRUDENCE AND THE RULES AND REGULATIONS OF THE CENTRAL BANK.
4. WHETHER OR NOT THE RESPONDENT APPELLATE COURT GRIEVOUSLY ERRED IN NOT CONSIDERING THE
TRANSACTION AT BAR AS A TRUST RECEIPT TRANSACTION ON THE BASIS OF THE JUDICIAL ADMISSIONS OF
THE PRIVATE RESPONDENTS AND FOR WHICH RESPONDENTS ARE LIABLE THEREFOR.
5. WHETHER OR NOT THE RESPONDENT APPELLATE COURT GRIEVOUSLY ERRED IN NOT HOLDING PRIVATE
RESPONDENT SPOUSES LIABLE UNDER THE TRUST RECEIPT TRANSACTION. [6]
The petition must be denied.
On the first issue respecting the fact of overpayment found by both the lower court and respondent Court of Appeals, we stress
the time-honored rule that findings of fact by the Court of Appeals especially if they affirm factual findings of the trial court will
not be disturbed by this Court, unless these findings are not supported by evidence. [7]
Petitioner decries the lack of computation by the lower court as basis for its ruling that there was an overpayment made. While
such a computation may not have appeared in the Decision itself, we note that the trial courts finding of overpayment is supported
by evidence presented before it. At any rate, we painstakingly reviewed and computed the payments together with the interest and
penalty charges due thereon and found that the amount of overpayment made by respondent Bank to petitioner, i.e., P563,070.13,
was more than what was ordered reimbursed by the lower court. However, since respondents did not file an appeal in this case, the
amount ordered reimbursed by the lower court should stand.
Moreover, petitioners contention that the marginal deposit made by respondent Corporation should not be deducted outright
from the amount of the letter of credit is untenable. Petitioner argues that the marginal deposit should be considered only after
computing the principal plus accrued interests and other charges. However, to sustain petitioner on this score would be to
countenance a clear case of unjust enrichment, for while a marginal deposit earns no interest in favor of the debtor-depositor, the
bank is not only able to use the same for its own purposes, interest-free, but is also able to earn interest on the money loaned to
respondent Corporation. Indeed, it would be onerous to compute interest and other charges on the face value of the letter of credit
43
which the petitioner issued, without first crediting or setting off the marginal deposit which the respondent Corporation paid to
it. Compensation is proper and should take effect by operation of law because the requisites in Article 1279 of the Civil Code are
present and should extinguish both debts to the concurrent amount.[8]
Hence, the interests and other charges on the subject letter of credit should be computed only on the balance of P681,075.93,
which was the portion actually loaned by the bank to respondent Corporation.
Neither do we find error when the lower court and the Court of Appeals set aside as invalid the floating rate of interest exhorted
by petitioner to be applicable. The pertinent provision in the trust receipt agreement of the parties fixing the interest rate states:
I, WE jointly and severally agree to any increase or decrease in the interest rate which may occur after July 1, 1981, when the
Central Bank floated the interest rate, and to pay additionally the penalty of 1% per month until the amount/s or installment/s due
and unpaid under the trust receipt on the reverse side hereof is/are fully paid. [9]
We agree with respondent Court of Appeals that the foregoing stipulation is invalid, there being no reference rate set either by
it or by the Central Bank, leaving the determination thereof at the sole will and control of petitioner.
While it may be acceptable, for practical reasons given the fluctuating economic conditions, for banks to stipulate that interest
rates on a loan not be fixed and instead be made dependent upon prevailing market conditions, there should always be a reference
rate upon which to peg such variable interest rates. An example of such a valid variable interest rate was found in Polotan, Sr. v.
Court of Appeals.[10] In that case, the contractual provision stating that if there occurs any change in the prevailing market rates,
the new interest rate shall be the guiding rate in computing the interest due on the outstanding obligation without need of serving
notice to the Cardholder other than the required posting on the monthly statement served to the Cardholder [11] was considered
valid. The aforequoted provision was upheld notwithstanding that it may partake of the nature of an escalation clause, because at
the same time it provides for the decrease in the interest rate in case the prevailing market rates dictate its reduction. In other words,
unlike the stipulation subject of the instant case, the interest rate involved in the Polotan case is designed to be based on the
prevailing market rate. On the other hand, a stipulation ostensibly signifying an agreement to any increase or decrease in the interest
rate, without more, cannot be accepted by this Court as valid for it leaves solely to the creditor the determination of what interest
rate to charge against an outstanding loan.
Petitioner has also failed to convince us that its transaction with respondent Corporation is really a trust receipt transaction
instead of merely a simple loan, as found by the lower court and the Court of Appeals.
The recent case of Colinares v. Court of Appeals[12] appears to be foursquare with the facts obtaining in the case at bar. There,
we found that inasmuch as the debtor received the goods subject of the trust receipt before the trust receipt itself was entered into,
the transaction in question was a simple loan and not a trust receipt agreement. Prior to the date of execution of the trust receipt,
ownership over the goods was already transferred to the debtor. This situation is inconsistent with what normally obtains in a pure
trust receipt transaction, wherein the goods belong in ownership to the bank and are only released to the importer in trust after the
loan is granted.
In the case at bar, as in Colinares, the delivery to respondent Corporation of the goods subject of the trust receipt occurred
long before the trust receipt itself was executed. More specifically, delivery of the bunker fuel oil to respondent Corporations
Bulacan plant commenced on July 7, 1982 and was completed by July 19, 1982. [13] Further, the oil was used up by respondent
Corporation in its normal operations by August, 1982. [14] On the other hand, the subject trust receipt was only executed nearly two
months after full delivery of the oil was made to respondent Corporation, or on September 2, 1982.
The danger in characterizing a simple loan as a trust receipt transaction was explained in Colinares, to wit:
The Trust Receipts Law does not seek to enforce payment of the loan, rather it punishes the dishonesty and abuse of confidence in
the handling of money or goods to the prejudice of another regardless of whether the latter is the owner. Here, it is crystal clear
that on the part of Petitioners there was neither dishonesty nor abuse of confidence in the handling of money to the prejudice of
PBC. Petitioners continually endeavored to meet their obligations, as shown by several receipts issued by PBC acknowledging
payment of the loan.
The Information charges Petitioners with intent to defraud and misappropriating the money for their personal use. The mala
prohibita nature of the alleged offense notwithstanding, intent as a state of mind was not proved to be present in Petitioners
situation. Petitioners employed no artifice in dealing with PBC and never did they evade payment of their obligation nor attempt
to abscond. Instead, Petitioners sought favorable terms precisely to meet their obligation.
Also noteworthy is the fact that Petitioners are not importers acquiring the goods for re-sale, contrary to the express provision
embodied in the trust receipt. They are contractors who obtained the fungible goods for their construction project. At no time did
title over the construction materials pass to the bank, but directly to the Petitioners from CM Builders Centre. This impresses upon
the trust receipt in question vagueness and ambiguity, which should not be the basis for criminal prosecution in the event of
violation of its provisions.
The practice of banks of making borrowers sign trust receipts to facilitate collection of loans and place them under the threats of
criminal prosecution should they be unable to pay it may be unjust and inequitable, if not reprehensible. Such agreements are
contracts of adhesion which borrowers have no option but to sign lest their loan be disapproved. The resort to this scheme leaves
poor and hapless borrowers at the mercy of banks, and is prone to misinterpretation, as had happened in this case. Eventually,
PBC showed its true colors and admitted that it was only after collection of the money, as manifested by its Affidavit of
Desistance.
Similarly, respondent Corporation cannot be said to have been dishonest in its dealings with petitioner. Neither has it been
shown that it has evaded payment of its obligations. Indeed, it continually endeavored to meet the same, as shown by the various
receipts issued by petitioner acknowledging payment on the loan. Certainly, the payment of the sum of P1,832,158.38 on a loan
with a principal amount of only P681,075.93 negates any badge of dishonesty, abuse of confidence or mishandling of funds on the
part of respondent Corporation, which are the gravamen of a trust receipt violation. Furthermore, respondent Corporation is not an
importer which acquired the bunker fuel oil for re-sale; it needed the oil for its own operations. More importantly, at no time did
title over the oil pass to petitioner, but directly to respondent Corporation to which the oil was directly delivered long before the

44
trust receipt was executed. The fact that ownership of the oil belonged to respondent Corporation, through its President, Gregory
Lim, was acknowledged by petitioners own account officer on the witness stand, to wit:
Q - After the bank opened a letter of credit in favor of Petrophil Corp. for the account of the defendants thereby paying the
value of the bunker fuel oil what transpired next after that?
A - Upon purchase of the bunker fuel oil and upon the requests of the defendant possession of the bunker fuel oil were
transferred to them.
Q - You mentioned them to whom are you referring to?
A - To the Continental Cement Corp. upon the execution of the trust receipt acknowledging the ownership of the bunker fuel
oil this should be acceptable for whatever disposition he may make.
Q - You mentioned about acknowledging ownership of the bunker fuel oil to whom by whom?
A - By the Continental Cement Corp.
Q - So by your statement who really owns the bunker fuel oil?
ATTY. RACHON:
Objection already answered.
COURT:
Give time to the other counsel to object.
ATTY. RACHON:
He has testified that ownership was acknowledged in favor of Continental Cement Corp. so that question has already been
answered.
ATTY. BAAGA:
That is why I made a follow up question asking ownership of the bunker fuel oil.
COURT:
Proceed.
ATTY. BAAGA:
Q - Who owns the bunker fuel oil after purchase from Petrophil Corp.?
A - Gregory Lim.[15]
By all indications, then, it is apparent that there was really no trust receipt transaction that took place. Evidently, respondent
Corporation was required to sign the trust receipt simply to facilitate collection by petitioner of the loan it had extended to the
former.
Finally, we are not convinced that respondent Gregory T. Lim and his spouse should be personally liable under the subject
trust receipt. Petitioners argument that respondent Corporation and respondent Lim and his spouse are one and the same cannot be
sustained. The transactions sued upon were clearly entered into by respondent Lim in his capacity as Executive Vice President of
respondent Corporation.We stress the hornbook law that corporate personality is a shield against personal liability of its
officers. Thus, we agree that respondents Gregory T. Lim and his spouse cannot be made personally liable since respondent Lim
entered into and signed the contract clearly in his official capacity as Executive Vice President. The personality of the corporation
is separate and distinct from the persons composing it.[16]
WHEREFORE, in view of all the foregoing, the instant Petition for Review is DENIED. The Decision of the Court of Appeals
dated July 26, 1993 in CA-G.R. CV No. 29950 is AFFIRMED.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Puno, and Kapunan, JJ., concur.
Pardo J., no part.

45
 [G.R. No. 116710. June 25, 2001]
DANILO D. MENDOZA, also doing business under the name and style of ATLANTIC EXCHANGE
PHILIPPINES, petitioner, vs. COURT OF APPEALS, PHILIPPINE NATIONAL BANK, FERNANDO
MARAMAG, JR., RICARDO G. DECEPIDA and BAYANI A. BAUTISTA, respondents.
DECISION
DE LEON, JR., J.:
Before us is a petition for review on certiorari of the Decision[1] dated August 8, 1994 of the respondent Court of Appeals
(Tenth Division) in CA-G.R. CV No. 38036 reversing the judgment[2] of the Regional Trial Court (RTC) and dismissing the
complaint therein.
Petitioner Danilo D. Mendoza is engaged in the domestic and international trading of raw materials and chemicals. He operates
under the business name Atlantic Exchange Philippines (Atlantic), a single proprietorship registered with the Department of Trade
and Industry (DTI). Sometime in 1978 he was granted by respondent Philippine National Bank (PNB) a Five Hundred Thousand
Pesos (P500,000.00) credit line and a One Million Pesos (P1,000,000.00) Letter of Credit/Trust Receipt (LC/TR) line.
As security for the credit accommodations and for those which may thereinafter be granted, petitioner mortgaged to respondent
PNB the following: 1) three (3) parcels of land[3] with improvements in F. Pasco Avenue, Santolan, Pasig; 2) his house and lot in
Quezon City; and 3) several pieces of machinery and equipment in his Pasig coco-chemical plant.
The real estate mortgage[4] provided the following escalation clause:
(f) The rate of interest charged on the obligation secured by this mortgage as well as the interest on the amount which may have
been advanced by the Mortgagee in accordance with paragraph (d) of the conditions herein stipulated shall be subject during the
life of this contract to such increase within the rates allowed by law, as the Board of Directors of the Mortgagee may prescribe for
its debtors.
Petitioner executed in favor of respondent PNB three (3) promissory notes covering the Five Hundred Thousand Pesos
(P500,000.00) credit line, one dated March 8, 1979 for Three Hundred Ten Thousand Pesos (P310,000.00); another dated March
30, 1979 for Forty Thousand Pesos (P40,000.00); and the last dated September 27, 1979 for One Hundred Fifty Thousand Pesos
(P150,000.00). The said 1979 promissory notes uniformly stipulated: "with interest thereon at the rate of 12% per annum, until paid,
which interest rate the Bank may, at any time, without notice, raise within the limits allowed by law xxx." [5]
Petitioner made use of his LC/TR line to purchase raw materials from foreign importers. He signed a total of eleven (11)
documents denominated as "Application and Agreement for Commercial Letter of Credit," [6] on various dates from February 8 to
September 11, 1979, which uniformly contained the following clause: "Interest shall be at the rate of 9% per annum from the date(s)
of the draft(s) to the date(s) of arrival of payment therefor in New York. The Bank, however, reserves the right to raise the interest
charges at any time depending on whatever policy it may follow in the future." [7]
In a letter dated January 3, 1980 and signed by Branch Manager Fil S. Carreon Jr., respondent PNB advised petitioner Mendoza
that effective December 1, 1979, the bank raised its interest rates to 14% per annum, in line with Central Bank's Monetary Board
Resolution No. 2126 dated November 29, 1979.
On March 9, 1981, he wrote a letter to respondent PNB requesting for the restructuring of his past due accounts into a five-
year term loan and for an additional LC/TR line of Two Million Pesos (P2,000,000.00). [8] According to the letter, because of the
shut-down of his end-user companies and the huge amount spent for the expansion of his business, petitioner failed to pay to
respondent bank his LC/TR accounts as they became due and demandable.
Ceferino D. Cura, Branch Manager of PNB Mandaluyong replied on behalf of the respondent bank and required petitioner to
submit the following documents before the bank would act on his request: 1) Audited Financial Statements for 1979 and 1980; 2)
Projected cash flow (cash in - cash out) for five (5) years detailed yearly; and 3) List of additional machinery and equipment and
proof of ownership thereof. Cura also suggested that petitioner reduce his total loan obligations to Three Million Pesos
(P3,000,000.00) "to give us more justification in recommending a plan of payment or restructuring of your accounts to higher
authorities of the Bank."[9]
On September 25, 1981, petitioner sent another letter addressed to PNB Vice-President Jose Salvador, regarding his request
for restructuring of his loans. He offered respondent PNB the following proposals: 1) the disposal of some of the mortgaged
properties, more particularly, his house and lot and a vacant lot in order to pay the overdue trust receipts; 2) capitalization and
conversion of the balance into a 5-year term loan payable semi-annually or on annual installments; 3) a new Two Million Pesos
(P2,000,000.00) LC/TR line in order to enable Atlantic Exchange Philippines to operate at full capacity; 4) assignment of all his
receivables to PNB from all domestic and export sales generated by the LC/TR line; and 5) maintenance of the existing Five Hundred
Thousand Pesos (P500,000.00) credit line.
The petitioner testified that respondent PNB Mandaluyong Branch found his proposal favorable and recommended the
implementation of the agreement. However, Fernando Maramag, PNB Executive Vice-President, disapproved the proposed release
of the mortgaged properties and reduced the proposed new LC/TR line to One Million Pesos (P1,000,000.00).[10] Petitioner claimed
he was forced to agree to these changes and that he was required to submit a new formal proposal and to sign two (2) blank
promissory notes.
In a letter dated July 2, 1982, petitioner offered the following revised proposals to respondent bank: 1) the restructuring of past
due accounts including interests and penalties into a 5-year term loan, payable semi-annually with one year grace period on the
principal; 2) payment of Four Hundred Thousand Pesos (P400,000.00) upon the approval of the proposal; 3) reduction of penalty
from 3% to 1%; 4) capitalization of the interest component with interest rate at 16% per annum; 5) establishment of a One Million
Pesos (P1,000,000.00) LC/TR line against the mortgaged properties; 6) assignment of all his export proceeds to respondent bank to
guarantee payment of his loans.
According to petitioner, respondent PNB approved his proposal. He further claimed that he and his wife were asked to sign
two (2) blank promissory note forms. According to petitioner, they were made to believe that the blank promissory notes were to
be filled out by respondent PNB to conform with the 5-year restructuring plan allegedly agreed upon. The first Promissory
Note,[11] No. 127/82, covered the principal while the second Promissory Note, [12] No. 128/82, represented the accrued interest.
46
 Petitioner testified that respondent PNB allegedly contravened their verbal agreement by 1) affixing dates on the two (2)
subject promissory notes to make them mature in two (2) years instead of five (5) years as supposedly agreed upon; 2) inserting in
the first Promissory Note No. 127/82 an interest rate of 21% instead of 18%; 3) inserting in the second Promissory Note No. 128/82,
the amount stated therein representing the accrued interest as One Million Five Hundred Thirty Six Thousand Four Hundred Ninety
Eight Pesos and Seventy Three Centavos (P1,536,498.73) when it should only be Seven Hundred Sixty Thousand Three Hundred
Ninety Eight Pesos and Twenty Three Centavos (P760,398.23) and pegging the interest rate thereon at 18% instead of 12%.
The subject Promissory Notes Nos. 127/82 and 128/82 both dated December 29, 1982 in the principal amounts of Two Million
Six Hundred Fifty One Thousand One Hundred Eighteen Pesos and Eighty Six Centavos (P2,651,118.86) and One Million Five
Hundred Thirty Six Thousand Seven Hundred Ninety Eight and Seventy Three Centavos (P1,536,798.73) respectively and marked
Exhibits BB and CC respectively, were payable on equal semi-annual amortization and contained the following escalation clause:
x x x which interest rate the BANK may increase within the limits allowed by law at any time depending on whatever policy it
may adopt in the future; Provided, that, the interest rate on this note shall be correspondingly decreased in the event that the
applicable maximum interest rate is reduced by law or by the Monetary Board. In either case, the adjustment in the interest rate
agreed upon shall take effect on the effectivity date of the increase or decrease in the maximum interest rate. x x x
It appears from the record that the subject Promissory Notes Nos. 127/82 and 128/82 superseded and novated the three (3)
1979 promissory notes and the eleven (11) 1979 Application and Agreement for Commercial Letter of Credit which the petitioner
executed in favor of respondent PNB.
According to the petitioner, sometime in June 1983 the new PNB Mandaluyong Branch Manager Bayani A. Bautista suggested
that he sell the coco-chemical plant so that he could keep up with the semi-annual amortizations. On three (3) occasions, Bautista
even showed up at the plant with some unidentified persons who claimed that they were interested in buying the plant.
Petitioner testified that when he confronted the PNB management about the two (2) Promissory Notes Nos. 127/82 and 128/82
(marked Exhibits BB and CC respectively) which he claimed were improperly filled out, Bautista and Maramag assured him that
the five-year restructuring agreement would be implemented on the condition that he assigns 10% of his export earnings to the
Bank.[13] In a letter dated August 22, 1983, petitioner Mendoza consented to assign 10% of the net export proceeds of a Letter of
Credit covering goods amounting to One Hundred Fourteen Thousand Dollars ($114,000.00). [14] However, petitioner claimed that
respondent PNB subsequently debited 14% instead of 10% from his export proceeds. [15]
Pursuant to the escalation clauses of the subject two (2) promissory notes, the interest rate on the principal amount in
Promissory Note No. 127/82 was increased from 21% to 29% on May 28, 1984, and to 32% on July 3, 1984 while the interest rate
on the accrued interest per Promissory Note No. 128/82 was increased from 18% to 29% on May 28, 1984, and to 32% on July 3,
1984.
Petitioner failed to pay the subject two (2) Promissory Notes Nos. 127/82 and 128/82 (Exhibits BB and CC) as they fell
due. Respondent PNB extra-judicially foreclosed the real and chattel mortgages, and the mortgaged properties were sold at public
auction to respondent PNB, as highest bidder, for a total of Three Million Seven Hundred Ninety Eight Thousand Seven Hundred
Nineteen Pesos and Fifty Centavos (P3,798,719.50).
The petitioner filed in the RTC in Pasig, Rizal a complaint for specific performance, nullification of the extra-judicial
foreclosure and damages against respondents PNB, Fernando Maramag Jr., Ricardo C. Decepida, Vice-President for Metropolitan
Branches, and Bayani A. Bautista. He alleged that the Extrajudicial Foreclosure Sale of the mortgaged properties was null and void
since his loans were restructured to a five-year term loan; hence, it was not yet due and demandable; that the escalation clauses in
the subject two (2) Promissory Notes Nos. 127/82 and 128/82 were null and void, that the total amount presented by PNB as basis
of the foreclosure sale did not reflect the actual loan obligations of the plaintiff to PNB; that Bautista purposely delayed payments
on his exports and caused delays in the shipment of materials; that PNB withheld certain personal properties not covered by the
chattel mortgage; and that the foreclosure of his mortgages was premature so that he was unable to service his foreign clients,
resulting in actual damages amounting to Two Million Four Thousand Four Hundred Sixty One Pesos (P2,004,461.00).
On March 16, 1992, the trial court rendered judgment in favor of the petitioner and ordered the nullification of the extrajudicial
foreclosure of the real estate mortgage, the Sheriffs sale of the mortgaged real properties by virtue of consolidation thereof and the
cancellation of the new titles issued to PNB; that PNB vacate the subject premises in Pasig and turn the same over to the petitioner;
and also the nullification of the extrajudicial foreclosure and sheriff's sale of the mortgaged chattels, and that the chattels be returned
to petitioner Mendoza if they were removed from his Pasig premises or be paid for if they were lost or rendered unserviceable.
The trial court also ordered respondent PNB to restructure to five-years petitioner's principal loan of Two Million Six Hundred
Fifty One Thousand One Hundred Eighteen Pesos and Eighty Six Centavos (P2,651,118.86) and the accumulated capitalized interest
on the same in the amount of Seven Hundred Sixty Thousand Three Hundred Eighty Nine Pesos and Twenty Three Centavos
(P760,389.23) as of December 1982, and that respondent PNB should compute the additional interest from January 1983 up to
October 15, 1984 only when respondent PNB took possession of the said properties, at the rate of 12% and 9% respectively.
The trial court also ordered respondent PNB to grant petitioner Mendoza an additional Two Million Pesos (P2,000,000.00)
loan in order for him to have the necessary capital to resume operation. It also ordered respondents PNB, Bayani A. Bautista and
Ricardo C. Decepida to pay to petitioner actual damages in the amount of Two Million One Hundred Thirteen Thousand Nine
Hundred Sixty One Pesos (P2,113,961.00) and the peso equivalent of Six Thousand Two Hundred Fifteen Dollars ($6,215.00) at
the prevailing foreign exchange rate on October 11, 1983; and exemplary damages in the amount of Two Hundred Thousand Pesos
(P200,000.00).
Respondent PNB appealed this decision of the trial court to the Court of Appeals. And the Court of Appeals reversed the
decision of the trial court and dismissed the complaint. Hence, this petition.
It is the petitioners contention that the PNB management restructured his existing loan obligations to a five-year term loan and
granted him another Two Million Pesos (P2,000,000.00) LC/TR line; that the Promissory Notes Nos. 127/82 and 128/82 evidencing
a 2-year restructuring period or with the due maturity date December 29, 1984 were filled out fraudulently by respondent PNB, and
contrary to his verbal agreement with respondent PNB; hence, his indebtedness to respondent PNB was not yet due and the
extrajudicial foreclosure of his real estate and chattel mortgages was premature. On the other hand, respondent PNB denies that
47
petitioner's loan obligations were restructured to five (5) years and maintains that the subject two (2) Promissory Notes Nos. 127/82
and 128/82 were filled out regularly and became due as of December 29, 1984 as shown on the face thereof.
Respondent Court of Appeals held that there is no evidence of a promise from respondent PNB, admittedly a banking
corporation, that it had accepted the proposals of the petitioner to have a five-year restructuring of his overdue loan obligations. It
found and held, on the basis of the evidence adduced, that "appellee's (Mendoza) communications were mere proposals while the
bank's responses were not categorical that the appellee's request had been favorably accepted by the bank."
Contending that respondent PNB had allegedly approved his proposed five-year restructuring plan, petitioner presented three
(3) documents executed by respondent PNB officials. The first document is a letter dated March 16, 1981 addressed to the petitioner
and signed by Ceferino D. Cura, Branch Manager of PNB Mandaluyong, which states:
x x x In order to study intelligently the feasibility of your above request, please submit the following documents/papers within
thirty (30) days from the date thereof, viz:
1. Audited Financial Statements for 1979 and 1980;
2. Projected cash flow (cash in - cash out) for five years detailed yearly; and
3. List of additional machinery and equipment and proof of ownership thereof.
We would strongly suggest, however, that you reduce your total obligations to at least P3 million (principal and interest and other
charges) to give us more justification in recommending a plan of payment or restructuring of your accounts to higher authorities
of this bank.
The second document is a letter dated May 11, 1981 addressed to Mr. S. Pe Benito, Jr., Managing Director of the Technological
Resources Center and signed by said PNB Branch Manager, Ceferino D. Cura. According to petitioner, this letter showed that
respondent PNB seriously considered the restructuring of his loan obligations to a five-year term loan, to wit:
xxx
At the request of our client, we would like to furnish you with the following information pertinent to his accounts with us:
xxx
We are currently evaluating the proposal of the client to re-structure his accounts with us into a five-year plan.
We hope that the above information will guide you in evaluating the proposals of Mr. Danilo Mendoza.
xxx
The third document is a letter dated July 8, 1981 addressed to petitioner and signed by PNB Assistant Vice-President Apolonio
B. Francisco.
xxx
Considering that your accounts/accommodations were granted and carried in the books of our Mandaluyong Branch, we would
suggest that your requests and proposals be directed to Ceferino Cura, Manager of our said Branch.
We feel certain that Mr. Cura will be pleased to discuss matters of mutual interest with you.
xxx
Petitioner also presented a letter which he addressed to Mr. Jose Salvador, Vice-President of the Metropolitan Branches of
PNB, dated September 24, 1981, which reads:
Re: Restructuring of our Account into a 5-year Term Loan and Request for the Establishment of a P2.0 Million LC/TR Line
Dear Sir:
In compliance with our discussion last September 17, we would like to formalize our proposal to support our above requested
assistance from the Philippine National Bank.
xxx
Again we wish to express our sincere appreciation for your open-minded approach towards the solution of this problem which we
know and will be beneficial and to the best interest of the bank and mutually advantageous to your client.
xxx
Petitioner argues that he submitted the requirements according to the instructions given to him and that upon submission
thereof, his proposed five-year restructuring plan was deemed automatically approved by respondent PNB.
We disagree.
Nowhere in those letters is there a categorical statement that respondent PNB had approved the petitioners proposed five-year
restructuring plan. It is stretching the imagination to construe them as evidence that his proposed five-year restructuring plan has
been approved by the respondent PNB which is admittedly a banking corporation. Only an absolute and unqualified acceptance of
a definite offer manifests the consent necessary to perfect a contract. [16] If anything, those correspondences only prove that the
parties had not gone beyond the preparation stage, which is the period from the start of the negotiations until the moment just before
the agreement of the parties.[17]
There is nothing in the record that even suggests that respondent PNB assented to the alleged five-year restructure of petitioners
overdue loan obligations to PNB. However, the trial court ruled in favor of petitioner Mendoza, holding that since petitioner has
complied with the conditions of the alleged oral contract, the latter may not renege on its obligation to honor the five-year
restructuring period, under the rule of promissory estoppel. Citing Ramos v. Central Bank,[18] the trial court said:
The broad general rule to the effect that a promise to do or not to do something in the future does not work an estoppel must be
qualified, since there are numerous cases in which an estoppel has been predicated on promises or assurances as to future
conduct. The doctrine of promissory estoppel is by no means new, although the name has been adopted only in comparatively
recent years. According to that doctrine, an estoppel may arise from the making of a promise, even though without consideration,
if it was intended that the promise should be relied upon and in fact it was relied upon, and if a refusal to enforce it would be
virtually to sanction the perpetration of fraud or would result in other injustice. In this respect, the reliance by the promisee is
generally evidenced by action or forbearance on his part, and the idea has been expressed that such action or forbearance would
reasonably have been expected by the promissor. xxx
The doctrine of promissory estoppel is an exception to the general rule that a promise of future conduct does not constitute an
estoppel. In some jurisdictions, in order to make out a claim of promissory estoppel, a party bears the burden of establishing the
48
following elements: (1) a promise reasonably expected to induce action or forebearance; (2) such promise did in fact induce such
action or forebearance, and (3) the party suffered detriment as a result. [19]
It is clear from the forgoing that the doctrine of promissory estoppel presupposes the existence of a promise on the part of one
against whom estoppel is claimed. The promise must be plain and unambiguous and sufficiently specific so that the Judiciary can
understand the obligation assumed and enforce the promise according to its terms. [20] For petitioner to claim that respondent PNB
is estopped to deny the five-year restructuring plan, he must first prove that respondent PNB had promised to approve the plan in
exchange for the submission of the proposal. As discussed earlier, no such promise was proven, therefore, the doctrine does not
apply to the case at bar. A cause of action for promissory estoppel does not lie where an alleged oral promise was conditional, so
that reliance upon it was not reasonable.[21] It does not operate to create liability where it does not otherwise exist. [22]
Since there is no basis to rule that petitioner's overdue loan obligations were restructured to mature in a period of five (5) years,
we see no other option but to respect the two-year period as contained in the two (2) subject Promissory Notes Nos. 127/82 and
128/82, marked as Exhibits BB and CC respectively which superseded and novated all prior loan documents signed by petitioner in
favor of respondent PNB. Petitioner argues, in his memorandum, that "respondent Court of Appeals had no basis in saying that the
acceptance of the five-year restructuring is totally absent from the record." [23] On the contrary, the subject Promissory Notes Nos.
127/82 and 128/82 are clear on their face that they were due on December 29, 1984 or two (2) years from the date of the signing of
the said notes on December 29, 1982.
Petitioner claims that the two (2) subject Promissory Notes Nos. 127/82 and 128/82 were signed by him in blank with the
understanding that they were to be subsequently filled out to conform with his alleged oral agreements with PNB officials, among
which is that they were to become due only after five (5) years. If petitioner were to be believed, the PNB officials concerned
committed a fraudulent act in filling out the subject two (2) promissory notes in question. Private transactions are presumed to be
fair and regular.[24] The burden of presenting evidence to overcome this presumption falls upon petitioner.Considering that petitioner
imputes a serious act of fraud on respondent PNB, which is a banking corporation, this court will not be satisfied with anything but
the most convincing evidence. However, apart from petitioner's self-serving verbal declarations, we find no sufficient proof that the
subject two (2) Promissory Notes Nos. 127/82 and 128/82 were completed irregularly. Therefore, we rule that the presumption has
not been rebutted.
Besides, it could be gleaned from the record that the petitioner is an astute businessman who took care to reduce in writing his
business proposals to the respondent bank. It is unthinkable that the same person would commit the careless mistake of leaving his
subject two (2) promissory notes in blank in the hands of other persons. As the respondent Court of Appeals correctly pointed out:
Surely, plaintiff-appellee who is a C.P.A and a Tax Consultant (p. 3 TSN, January 9, 1990) will insist that the details of the two
promissory notes he and his wife executed in 1982 should be specific to enable them to make the precise computation in the event
of default as in the case at bench. In fact, his alleged omission as a C.P.A. and a Tax Consultant to insist that the two promissory
notes be filled up on important details like the rates of interest is inconsistent with the legal presumption of a person who takes
ordinary care of his concerns (Section 3 (c), Rule 131, Revised Rules on Evidence).
As pointed out by the Court of Appeals, Orlando Montecillo, Chief, Loans and Discounts, PNB Mandaluyong Branch, testified that
the said Promissory Notes Nos. 127/82 and 128/82 were completely filled out when Danilo Mendoza signed them (Rollo, p. 14).
In a last-ditch effort to save his five-year loan restructuring theory, petitioner contends that respondent PNB's action of
withholding 10% from his export proceeds is proof that his proposal had been accepted and the contract had been partially
executed. He claims that he would not have consented to the additional burden if there were no corresponding benefit. This
contention is not well taken. There is no credible proof that the 10% assignment of his export proceeds was not part of the conditions
of the two-year restructuring deal. Considering that the resulting amount obtained from this assignment of export proceeds was not
even enough to cover the interest for the corresponding month, [25] we are hard-pressed to construe it as the required proof that
respondent PNB allegedly approved the proposed five-year restructuring of petitioners overdue loan obligations.
It is interesting to note that in his Complaint, petitioner made no mention that the assignment of his export proceeds was a
condition for the alleged approval of his proposed five-year loan restructuring plan. The Complaint merely alleged that "plaintiff in
a sincere effort to make payments on his obligations agreed to assign 10% of his export proceeds to defendant PNB." This curious
omission leads the court to believe that the alleged link between the petitioners assignment of export proceeds and the alleged five-
year restructuring of his overdue loans was more contrived than real.
It appears that respondent bank increased the interest rates on the two (2) subject Promissory Notes Nos. 127/82 and 128/82
without the prior consent of the petitioner. The petitioner did not agree to the increase in the stipulated interest rate of 21% per
annum on Promissory Note No. 127/82 and 18% per annum on Promissory Note No. 128/82. As held in several cases, the unilateral
determination and imposition of increased interest rates by respondent bank is violative of the principle of mutuality of
contracts ordained in Article 1308 of the Civil Code.[26] As held in one case:[27]
It is basic that there can be no contract in the true sense in the absence of the element of agreement, or of mutual assent of the
parties. If this assent is wanting on the part of one who contracts, his act has no more efficacy than if it had been done under
duress or by a person of unsound mind.
Similarly, contract changes must be made with the consent of the contracting parties. The minds of all the parties must meet as to
the proposed modification, especially when it affects an important aspect of the agreement. In the case of loan contracts, it cannot
be gainsaid that the rate of interest is always a vital component, for it can make or break a capital venture.
It has been held that no one receiving a proposal to change a contract to which he is a party is obliged to answer the proposal,
and his silence per se cannot be construed as an acceptance. [28] Estoppel will not lie against the petitioner regarding the increase in
the stipulated interest on the subject Promissory Notes Nos. 127/82 and 128/82 inasmuch as he was not even informed beforehand
by respondent bank of the change in the stipulated interest rates. However, we also note that the said two (2) subject Promissory
Notes Nos. 127/82 and 128/82 expressly provide for a penalty charge of 3% per annum to be imposed on any unpaid amount when
due.
Petitioner prays for the release of some of his movables[29] being withheld by respondent PNB, alleging that they were not
included among the chattels he mortgaged to respondent bank. However, petitioner did not present any proof as to when he acquired
49
the subject movables and hence, we are not disposed to believe that the same were after-acquired chattels not covered by the chattel
and real estate mortgages.
In asserting its rights over the subject movables, respondent PNB relies on a common provision in the two (2) subject
Promissory Notes Nos. 127/82 and 128/82 which states:
In the event that this note is not paid at maturity or when the same becomes due under any of the provisions hereof, we hereby
authorized the BANK at its option and without notice, to apply to the payment of this note, any and all moneys, securities and
things of value which may be in its hands on deposit or otherwise belonging to me/us and for this purpose. We hereby, jointly and
severally, irrevocably constitute and appoint the BANK to be our true Attorney-in-Fact with full power and authority for us in our
name and behalf and without prior notice to negotiate, sell and transfer any moneys securities and things of value which it may
hold, by public or private sale and apply the proceeds thereof to the payment of this note.
It is clear, however, from the above-quoted provision of the said promissory notes that respondent bank is authorized, in case
of default, to sell things of value belonging to the mortgagor which may be on its hands for deposit or otherwise belonging to me/us
and for this purpose. Besides the petitioner executed not only a chattel mortgage but also a real estate mortgage to secure his loan
obligations to respondent bank.
A stipulation in the mortgage, extending its scope and effect to after-acquired property is valid and binding where the after-
acquired property is in renewal of, or in substitution for, goods on hand when the mortgage was executed, or is purchased with the
proceeds of the sale of such goods.[30] As earlier pointed out, the petitioner did not present any proof as to when the subject movables
were acquired.
More importantly, respondent bank makes a valid argument for the retention of the subject movables. Respondent PNB asserts
that those movables were in fact "immovables by destination" under Art. 415 (5) of the Civil Code. [31] It is an established rule that
a mortgage constituted on an immovable includes not only the land but also the buildings, machinery and accessories installed at
the time the mortgage was constituted as well as the buildings, machinery and accessories belonging to the mortgagor, installed
after the constitution thereof.[32]
Petitioner also contends that respondent PNBs bid prices for this foreclosed properties in the total amount of Three Million
Seven Hundred Ninety Eight Thousand Seven Hundred Nineteen Pesos and Fifty Centavos (P3,798,719.50), were allegedly
unconscionable and shocking to the conscience of men. He claims that the fair market appraisal of his foreclosed plant site together
with the improvements thereon located in Pasig, Metro Manila amounted to Five Million Four Hundred Forty One Thousand Six
Hundred Fifty Pesos (P5,441,650.00) while that of his house and lot in Quezon City amounted to Seven Hundred Twenty Two
Thousand Pesos (P722,000.00) per the appraisal report dated September 20, 1990 of Cuervo Appraisers, Inc. [33] That contention is
not well taken considering that:
1. The total of the principal amounts alone of petitioners subject Promissory Notes Nos. 127/82 and 128/82 which are
both overdue amounted to Four Million One Hundred Eighty Seven Thousand Nine Hundred Seventeen Pesos and
Fifty Nine Centavos (P4,187,917.59).
2. While the appraisal of Cuervo Appraisers, Inc. was undertaken in September 1990, the extrajudicial foreclosure of
petitioners real estate and chattel mortgages have been effected way back on October 15, 1984, October 23, 1984 and
December 21, 1984.[34] Common experience shows that real estate values especially in Metro Manila tend to go
upward due to developments in the locality.
3. In the public auction/foreclosure sales, respondent PNB, as mortgagee, was not obliged to bid more than its claims or
more than the amount of petitioners loan obligations which are all overdue. The foreclosed real estate and chattel
mortgages which petitioner earlier executed are accessory contracts covering the collaterals or security of his loans
with respondent PNB. The principal contracts are the Promissory Notes Nos. 127/82 and 128/82 which superseded
and novated the 1979 promissory notes and the 1979 eleven (11) Applications and Agreements for Commercial Letter
of Credit.
Finally, the record shows that petitioner did not even attempt to tender any redemption price to respondent PNB, as highest
bidder of the said foreclosed real estate properties, during the one-year redemption period.
In view of all the foregoing, it is our view and we hold that the extrajudicial foreclosure of petitioners real estate and chattel
mortgages was not premature and that it was in fact legal and valid.
WHEREFORE, the petition is hereby DENIED. The challenged Decision of the Court of Appeals in CA-G.R. CV No. 38036
is AFFIRMED with modification that the increase in the stipulated interest rates of 21% per annum and 18% per annum appearing
on Promissory Notes Nos. 127/82 and 128/82 respectively is hereby declared null and void.
SO ORDERED.

50
 [G.R. No. 141811. November 15, 2001]
FIRST METRO INVESTMENT CORPORATION, petitioner, vs. ESTE DEL SOL MOUNTAIN RESERVE, INC.,
VALENTIN S. DAEZ, JR., MANUEL Q. SALIENTES, MA. ROCIO A. DE VEGA, ALEXANDER G. ASUNCION,
ALBERTO* M. LADORES, VICENTE M. DE VERA, JR., and FELIPE B. SESE, respondents.
DECISION
DE LEON, JR., J.:
Before us is a petition for review on certiorari of the Decision[1] of the Court of Appeals[2] dated November 8, 1999 in CA-
G.R. CV No. 53328 reversing the Decision[3] of the Regional Trial Court of Pasig City, Branch 159 dated June 2, 1994 in Civil Case
No. 39224. Essentially, the Court of Appeals found and declared that the fees provided for in the Underwriting and Consultancy
Agreements executed by and between petitioner First Metro Investment Corp. (FMIC) and respondent Este del Sol Mountain
Reserve, Inc. (Este del Sol) simultaneously with the Loan Agreement dated January 31, 1978 were mere subterfuges to camouflage
the usurious interest charged by petitioner FMIC.
The facts of the case are as follows:
It appears that on January 31, 1978, petitioner FMIC granted respondent Este del Sol a loan of Seven Million Three Hundred
Eighty-Five Thousand Five Hundred Pesos (P7,385,500.00) to finance the construction and development of the Este del Sol
Mountain Reserve, a sports/resort complex project located at Barrio Puray, Montalban, Rizal. [4]
Under the terms of the Loan Agreement, the proceeds of the loan were to be released on staggered basis. Interest on the loan
was pegged at sixteen (16%) percent per annum based on the diminishing balance. The loan was payable in thirty-six (36) equal
and consecutive monthly amortizations to commence at the beginning of the thirteenth month from the date of the first release in
accordance with the Schedule of Amortization.[5] In case of default, an acceleration clause was, among others, provided and the
amount due was made subject to a twenty (20%) percent one-time penalty on the amount due and such amount shall bear interest at
the highest rate permitted by law from the date of default until full payment thereof plus liquidated damages at the rate of two (2%)
percent per month compounded quarterly on the unpaid balance and accrued interests together with all the penalties, fees, expenses
or charges thereon until the unpaid balance is fully paid, plus attorneys fees equivalent to twenty-five (25%) percent of the sum
sought to be recovered, which in no case shall be less than Twenty Thousand Pesos (P20,000.00) if the services of a lawyer were
hired.[6]
In accordance with the terms of the Loan Agreement, respondent Este del Sol executed several documents [7] as security for
payment, among them, (a) a Real Estate Mortgage dated January 31, 1978 over two (2) parcels of land being utilized as the site of
its development project with an area of approximately One Million Twenty-Eight Thousand and Twenty-Nine (1,028,029) square
meters and particularly described in TCT Nos. N-24332 and N-24356 of the Register of Deeds of Rizal, inclusive of all
improvements, as well as all the machineries, equipment, furnishings and furnitures existing thereon; and (b) individual Continuing
Suretyship agreements by co-respondents Valentin S. Daez, Jr., Manuel Q. Salientes, Ma. Rocio A. De Vega, Alexander G.
Asuncion, Alberto M. Ladores, Vicente M. De Vera, Jr. and Felipe B. Sese, all dated February 2, 1978, to guarantee the payment
of all the obligations of respondent Este del Sol up to the aggregate sum of Seven Million Five Hundred Thousand Pesos (P7,500,000
00) each.[8]
Respondent Este del Sol also executed, as provided for by the Loan Agreement, an Underwriting Agreement on January 31,
1978 whereby petitioner FMIC shall underwrite on a best-efforts basis the public offering of One Hundred Twenty Thousand
(120,000) common shares of respondent Este del Sols capital stock for a one-time underwriting fee of Two Hundred Thousand
Pesos (P200,000.00). In addition to the underwriting fee, the Underwriting Agreement provided that for supervising the public
offering of the shares, respondent Este del Sol shall pay petitioner FMIC an annual supervision fee of Two Hundred Thousand Pesos
(P200,000.00) per annum for a period of four (4) consecutive years. The Underwriting Agreement also stipulated for the payment
by respondent Este del Sol to petitioner FMIC a consultancy fee of Three Hundred Thirty-Two Thousand Five Hundred Pesos
(P332,500.00) per annum for a period of four (4) consecutive years. Simultaneous with the execution of and in accordance with the
terms of the Underwriting Agreement, a Consultancy Agreement was also executed on January 31, 1978 whereby respondent Este
del Sol engaged the services of petitioner FMIC for a fee as consultant to render general consultancy services. [9]
In three (3) letters all dated February 22, 1978 petitioner billed respondent Este del Sol for the amounts of [a] Two Hundred
Thousand Pesos (P200,000.00) as the underwriting fee of petitioner FMIC in connection with the public offering of the common
shares of stock of respondent Este del Sol; [b] One Million Three Hundred Thirty Thousand Pesos (P1,330,000.00) as consultancy
fee for a period of four (4) years; and [c] Two Hundred Thousand Pesos (P200,000.00) as supervision fee for the year beginning
February, 1978, in accordance to the Underwriting Agreement. [10] The said amounts of fees were deemed paid by respondent Este
del Sol to petitioner FMIC which deducted the same from the first release of the loan.
Since respondent Este del Sol failed to meet the schedule of repayment in accordance with a revised Schedule of Amortization,
it appeared to have incurred a total obligation of Twelve Million Six Hundred Seventy-Nine Thousand Six Hundred Thirty Pesos
and Ninety-Eight Centavos (P12,679,630.98) per the petitioners Statement of Account dated June 23, 1980, [11] to wit:
STATEMENT OF ACCOUNT OF
ESTE DEL SOL MOUNTAIN RESERVE, INC.
AS OF JUNE 23, 1980
PARTICULARS AMOUNT
Total amount due as of 11-22-78 per
revised amortization schedule dated
1-3-78 P7,999,631.42
Interest on P7,999,631.42 @ 16% p.a. from
11-22-78 to 2-22-79 (92 days) 327,096.04
Balance 8,326,727.46
One time penalty of 20% of the entire unpaid
obligations under Section 6.02 (ii) of
51
Loan Agreement 1,665,345.49
Past due interest under Section 6.02 (iii)
of loan Agreement:
@ 19% p.a. from 2-22-79 to 11-30-79
(281 days) 1,481,879.93
@ 21% p.a. from 11-30-79 to 6-23-80
(206 days) 1,200,714.10
Other charges publication of extra judicial
foreclosure of REM made on
5-23-80 & 6-6-80 4,964.00
Total Amount Due and Collectible as of
June 23, 1980 P12,679,630.98
Accordingly, petitioner FMIC caused the extrajudicial foreclosure of the real estate mortgage on June 23, 1980. [12] At the
public auction, petitioner FMIC was the highest bidder of the mortgaged properties for Nine Million Pesos (P9,000,000.00). The
total amount of Three Million One Hundred Eighty-Eight Thousand Six Hundred Thirty Pesos and Seventy-Five Centavos
(P3,188,630.75) was deducted therefrom, that is, for the publication fee for the publication of the Sheriffs Notice of Sale, Four
Thousand Nine Hundred Sixty-Four Pesos (P4,964.00); for Sheriffs fees for conducting the foreclosure proceedings, Fifteen
Thousand Pesos (P15,000.00); and for Attorneys fees, Three Million One Hundred Sixty-Eight Thousand Six Hundred Sixty-Six
Pesos and Seventy-Five Centavos (P3,168,666.75). The remaining balance of Five Million Eight Hundred Eleven Thousand Three
Hundred Sixty-Nine Pesos and Twenty-Five Centavos (P5,811,369.25) was applied to interests and penalty charges and partly
against the principal, due as of June 23, 1980, thereby leaving a balance of Six Million Eight Hundred Sixty-Three Thousand Two
Hundred Ninety-Seven Pesos and Seventy-Three Centavos (P6,863,297.73) on the principal amount of the loan as of June 23,
1980.[13]
Failing to secure from the individual respondents, as sureties of the loan of respondent Este del Sol by virtue of their continuing
surety agreements, the payment of the alleged deficiency balance, despite individual demands sent to each of them, [14] petitioner
instituted on November 11, 1980 the instant collection suit[15]against the respondents to collect the alleged deficiency balance of Six
Million Eight Hundred Sixty-Three Thousand Two Hundred Ninety-Seven Pesos and Seventy-Three Centavos (P6,863,297.73) plus
interest thereon at twenty-one (21%) percent per annum from June 24, 1980 until fully paid, and twenty-five (25%) percent thereof
as and for attorneys fees and costs.
In their Answer, the respondents sought the dismissal of the case and set up several special and affirmative defenses, foremost
of which is that the Underwriting and Consultancy Agreements executed simultaneously with and as integral parts of the Loan
Agreement and which provided for the payment of Underwriting, Consultancy and Supervision fees were in reality subterfuges
resorted to by petitioner FMIC and imposed upon respondent Este del Sol to camouflage the usurious interest being charged by
petitioner FMIC.[16]
The petitioner FMIC presented as its witnesses during the trial: Cesar Valenzuela, its former Senior Vice-President, Felipe
Neri, its Vice-President for Marketing, and Dennis Aragon, an Account Manager of its Account Management Group, as well as
documentary evidence. On the other hand, co-respondents Vicente M. De Vera, Jr. and Valentin S. Daez, Jr., and Perfecto Doroja,
former Senior Manager and Assistant Vice-President of FMIC, testified for the respondents.
After the trial, the trial court rendered its decision in favor of petitioner FMIC, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendants, ordering defendants jointly and severally
to pay to plaintiff the amount of P6,863,297.73 plus 21% interest per annum, from June 24, 1980, until the entire amount is fully
paid, plus the amount equivalent to 25% of the total amount due, as attorneys fees, plus costs of suit.
Defendants counterclaims are dismissed, for lack of merit.
Finding the decision of the trial court unacceptable, respondents interposed an appeal to the Court of Appeals. On November
8, 1999, the appellate court reversed the challenged decision of the trial court.The appellate court found and declared that the fees
provided for in the Underwriting and Consultancy Agreements were mere subterfuges to camouflage the excessively usurious
interest charged by the petitioner FMIC on the loan of respondent Este del Sol; and that the stipulated penalties, liquidated damages
and attorneys fees were excessive, iniquitous, unconscionable and revolting to the conscience, and declared that in lieu thereof, the
stipulated one time twenty (20%) percent penalty on the amount due and ten (10%) percent of the amount due as attorneys fees
would be reasonable and suffice to compensate petitioner FMIC for those items. Thus, the appellate court dismissed the complaint
as against the individual respondents sureties and ordered petitioner FMIC to pay or reimburse respondent Este del Sol the amount
of Nine Hundred Seventy-One Thousand Pesos (P971,000.00) representing the difference between what is due to the petitioner and
what is due to respondent Este del Sol, based on the following computation:[17]
A: DUE TO THE [PETITIONER]
Principal of Loan P7,382,500.00
Add: 20% one-time
Penalty 1,476,500.00
Attorneys fees 900,000.00 P9,759,000.00
Less: Proceeds of foreclosure
Sale 9,000,000.00
Deficiency P 759,000.00
B. DUE TO [RESPONDENT ESTE DEL SOL]
Return of usurious interest in the form of:
Underwriting fee P 200,000.00
Supervision fee 200,000.00
Consultancy fee 1,330,000.00
52
Total amount due Este P 1,730,000.00
The appellee is, therefore, obliged to return to the appellant Este del Sol the difference of P971,000.00 or (P1,730,000.00
less P759,000.00).
Petitioner moved for reconsideration of the appellate courts adverse decision. However, this was denied in a Resolution[18]dated
February 9, 2000 of the appellate court.
Hence, the instant petition anchored on the following assigned errors:[19]
THE APPELLATE COURT HAS DECIDED QUESTIONS OF SUBSTANCE IN A WAY NOT IN ACCORD WITH
LAW AND WITH APPLICABLE DECISIONS OF THIS HONORABLE COURT WHEN IT:
a] HELD THAT ALLEGEDLY THE UNDERWRITING AND CONSULTANCY AGREEMENTS SHOULD NOT BE
CONSIDERED SEPARATE AND DISTINCT FROM THE LOAN AGREEMENT, AND INSTEAD, THEY SHOULD BE
CONSIDERED AS A SINGLE CONTRACT.
b] HELD THAT THE UNDERWRITING AND CONSULTANCY AGREEMENTS ARE MERE SUBTERFUGES TO
CAMOUFLAGE THE USURIOUS INTEREST CHARGED BY THE PETITIONER.
c] REFUSED TO CONSIDER THE TESTIMONIES OF PETITIONERS WITNESSES ON THE SERVICES
PERFORMED BY PETITIONER.
d] REFUSED TO CONSIDER THE FACT [i] THAT RESPONDENTS HAD WAIVED THEIR RIGHT TO SEEK
RECOVERY OF THE AMOUNTS THEY PAID TO PETITIONER, AND [ii]THAT RESPONDENTS HAD ADMITTED
THE VALIDITY OF THE UNDERWRITING AND CONSULTANCY AGREEMENTS.
e] MADE AN ERRONEOUS COMPUTATION ON SUPPOSEDLY WHAT IS DUE TO EACH PARTY AFTER THE
FORECLOSURE SALE, AS SHOWN IN PP. 34-35 OF THE ASSAILED DECISION, EVEN GRANTING JUST FOR
THE SAKE OF ARGUMENT THAT THE APPELLATE COURT WAS CORRECT IN STIGMATIZING [i] THE
PROVISIONS OF THE LOAN AGREEMENT THAT REFER TO STIPULATED PENALTIES, LIQUIDATED
DAMAGES AND ATTORNEYS FEES AS SUPPOSEDLY EXCESSIVE, INIQUITOUS AND UNCONSCIONABLE
AND REVOLTING TO THE CONSCIENCE AND [ii] THE UNDERWRITING, SUPERVISION AND CONSULTANCY
SERVICES AGREEMENT AS SUPPOSEDLY MERE SUBTERFUGES TO CAMOUFLAGE THE USURIOUS
INTEREST CHARGED UPON THE RESPONDENT ESTE BY PETITIONER.
f] REFUSED TO CONSIDER THE FACT THAT RESPONDENT ESTE, AND THUS THE INDIVIDUAL
RESPONDENTS, ARE STILL OBLIGATED TO THE PETITIONER.
Petitioner essentially assails the factual findings and conclusion of the appellate court that the Underwriting and Consultancy
Agreements were executed to conceal a usurious loan. Inquiry upon the veracity of the appellate courts factual findings and
conclusion is not the function of this Court for the Supreme Court is not a trier of facts. Only when the factual findings of the trial
court and the appellate court are opposed to each other does this Court exercise its discretion to re-examine the factual findings of
both courts and weigh which, after considering the record of the case, is more in accord with law and justice.
After a careful and thorough review of the record including the evidence adduced, we find no reason to depart from the findings
of the appellate court.
First, there is no merit to petitioner FMICs contention that Central Bank Circular No. 905 which took effect on January 1,
1983 and removed the ceiling on interest rates for secured and unsecured loans, regardless of maturity, should be applied
retroactively to a contract executed on January 31, 1978, as in the case at bar, that is, while the Usury Law was in full force and
effect. It is an elementary rule of contracts that the laws, in force at the time the contract was made and entered into, govern
it.[20] More significantly, Central Bank Circular No. 905 did not repeal nor in any way amend the Usury Law but simply suspended
the latters effectivity.[21] The illegality of usury is wholly the creature of legislation. A Central Bank Circular cannot repeal a
law. Only a law can repeal another law.[22] Thus, retroactive application of a Central Bank Circular cannot, and should not, be
presumed.[23]
Second, when a contract between two (2) parties is evidenced by a written instrument, such document is ordinarily the best
evidence of the terms of the contract. Courts only need to rely on the face of written contracts to determine the intention of the
parties. However, this rule is not without exception.[24] The form of the contract is not conclusive for the law will not permit a
usurious loan to hide itself behind a legal form. Parol evidence is admissible to show that a written document though legal in form
was in fact a device to cover usury. If from a construction of the whole transaction it becomes apparent that there exists a corrupt
intention to violate the Usury Law, the courts should and will permit no scheme, however ingenious, to becloud the crime of usury. [25]
In the instant case, several facts and circumstances taken altogether show that the Underwriting and Consultancy Agreements
were simply cloaks or devices to cover an illegal scheme employed by petitioner FMIC to conceal and collect excessively usurious
interest, and these are:
a) The Underwriting and Consultancy Agreements are both dated January 31, 1978 which is the same date of the Loan
Agreement.[26] Furthermore, under the Underwriting Agreement payment of the supervision and consultancy fees was set for a
period of four (4) years[27] to coincide ultimately with the term of the Loan Agreement. [28] This fact means that all the said
agreements which were executed simultaneously were set to mature or shall remain effective during the same period of time.
b) The Loan Agreement dated January 31, 1978 stipulated for the execution and delivery of an underwriting agreement [29]and
specifically mentioned that such underwriting agreement is a condition precedent[30]for petitioner FMIC to extend the loan to
respondent Este del Sol, indicating and as admitted by petitioner FMICs employees, [31] that such Underwriting Agreement is part
and parcel of the Loan Agreement.[32]
c) Respondent Este del Sol was billed by petitioner on February 28, 1978 One Million Three Hundred Thirty Thousand Pesos
(P1,330,000.00)[33] as consultancy fee despite the clear provision in the Consultancy Agreement that the said agreement is for Three
Hundred Thirty-Two Thousand Five Hundred Pesos (P332,500.00) per annum for four (4) years and that only the first year
consultancy fee shall be due upon signing of the said consultancy agreement.[34]
d) The Underwriting, Supervision and Consultancy fees in the amounts of Two Hundred Thousand Pesos (P200,000.00), Two
Hundred Thousand Pesos (P200,000.00) and One Million Three Hundred Thirty Thousand Pesos (P1,330,000.00), respectively,
53
were billed by petitioner to respondent Este del Sol on February 22, 1978, [35] that is, on the same occasion of the first partial release
of the loan in the amount of Two Million Three Hundred Eighty-Two Thousand Five Hundred Pesos (P2,382,500.00).[36] It is from
this first partial release of the loan that the said corresponding bills for Underwriting, Supervision and Consultancy fees were
deducted and apparently paid, thus, reverting back to petitioner FMIC the total amount of One Million Seven Hundred Thirty
Thousand Pesos (P1,730,000.00) as part of the amount loaned to respondent Este del Sol. [37]
e) Petitioner FMIC was in fact unable to organize an underwriting/selling syndicate to sell any share of stock of respondent
Este del Sol and much less to supervise such a syndicate, thus failing to comply with its obligation under the Underwriting
Agreement.[38] Besides, there was really no need for an Underwriting Agreement since respondent Este del Sol had its own licensed
marketing arm to sell its shares and all its shares have been sold through its marketing arm. [39]
f) Petitioner FMIC failed to comply with its obligation under the Consultancy Agreement,[40] aside from the fact that there was
no need for a Consultancy Agreement, since respondent Este del Sols officers appeared to be more competent to be consultants in
the development of the projected sports/resort complex. [41]
All the foregoing established facts and circumstances clearly belie the contention of petitioner FMIC that the Loan,
Underwriting and Consultancy Agreements are separate and independent transactions.The Underwriting and Consultancy
Agreements which were executed and delivered contemporaneously with the Loan Agreement on January 31, 1978 were exacted
by petitioner FMIC as essential conditions for the grant of the loan. An apparently lawful loan is usurious when it is intended that
additional compensation for the loan be disguised by an ostensibly unrelated contract providing for payment by the borrower for
the lenders services which are of little value or which are not in fact to be rendered, such as in the instant case. [42] In this connection,
Article 1957 of the New Civil Code clearly provides that:
Art. 1957. Contracts and stipulations, under any cloak or device whatever, intended to circumvent the laws against usury shall be
void. The borrower may recover in accordance with the laws on usury.
In usurious loans, the entire obligation does not become void because of an agreement for usurious interest; the unpaid
principal debt still stands and remains valid but the stipulation as to the usurious interest is void, consequently, the debt is
to be considered without stipulation as to the interest.[43] The reason for this rule was adequately explained in the case of Angel
Jose Warehousing Co., Inc. v. Child Enterprises[44]where this Court held:
In simple loan with stipulation of usurious interest, the prestation of the debtor to pay the principal debt, which is the cause of the
contract (Article 1350, Civil Code), is not illegal. The illegality lies only as to the prestation to pay the stipulated interest; hence,
being separable, the latter only should be deemed void, since it is the only one that is illegal.
Thus, the nullity of the stipulation on the usurious interest does not affect the lenders right to receive back the principal amount
of the loan. With respect to the debtor, the amount paid as interest under a usurious agreement is recoverable by him, since the
payment is deemed to have been made under restraint, rather than voluntarily. [45]
This Court agrees with the factual findings and conclusion of the appellate court, to wit:
We find the stipulated penalties, liquidated damages and attorneys fees, excessive, iniquitous and unconscionable and revolting to
the conscience as they hardly allow the borrower any chance of survival in case of default. And true enough, ESTE folded up
when the appellee extrajudicially foreclosed on its (ESTEs) development project and literally closed its offices as both the
appellee and ESTE were at the time holding office in the same building. Accordingly, we hold that 20% penalty on the amount
due and 10% of the proceeds of the foreclosure sale as attorneys fees would suffice to compensate the appellee, especially so
because there is no clear showing that the appellee hired the services of counsel to effect the foreclosure; it engaged counsel only
when it was seeking the recovery of the alleged deficiency.
Attorneys fees as provided in penal clauses are in the nature of liquidated damages. So long as such stipulation does not
contravene any law, morals, or public order, it is binding upon the parties.Nonetheless, courts are empowered to reduce the amount
of attorneys fees if the same is iniquitous or unconscionable. [46] Articles 1229 and 2227 of the New Civil Code provide that:
Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with
by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or
unconscionable.
Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or
unconscionable.
In the case at bar, the amount of Three Million One Hundred Eighty-Eight Thousand Six Hundred Thirty Pesos and Seventy-
Five Centavos (P3,188,630.75) for the stipulated attorneys fees equivalent totwenty-five (25%) percent of the alleged amount due,
as of the date of the auction sale on June 23, 1980, is manifestly exorbitant and unconscionable. Accordingly, we agree with the
appellate court that a reduction of the attorneys fees to ten (10%) percent is appropriate and reasonable under the facts and
circumstances of this case.
Lastly, there is no merit to petitioner FMICs contention that the appellate court erred in awarding an amount allegedly not
asked nor prayed for by respondents. Whether the exact amount of the relief was not expressly prayed for is of no moment for the
reason that the relief was plainly warranted by the allegations of the respondents as well as by the facts as found by the appellate
court. A party is entitled to as much relief as the facts may warrant. [47]
In view of all the foregoing, the Court is convinced that the appellate court committed no reversible error in its challenged
Decision.
WHEREFORE, the instant petition is hereby DENIED, and the assailed Decision of the Court of Appeals is
AFFIRMED. Costs against petitioner.
SO ORDERED.
Bellosillo, (Chairman), Mendoza, Quisumbing, and Buena, JJ., concur.

54
G.R. No. 155223
BOBIE ROSE V. FRIAS,
- versus -
FLORA SAN DIEGO-SISON,

April 4, 2007

DECISION

AUSTRIA-MARTINEZ, J.:

Before us is a Petition for Review on Certiorari filed by Bobie Rose V. Frias represented by her Attorney-in-fact,
Marie Regine F. Fujita (petitioner) seeking to annul the Decision[1] dated June 18, 2002 and the Resolution[2] dated September 11,
2002 of the Court of Appeals (CA) in CA-G.R. CV No. 52839.

Petitioner is the owner of a house and lot located at No. 589 Batangas East, Ayala Alabang, Muntinlupa, Metro Manila,
which she acquired from Island Masters Realty and Development Corporation (IMRDC) by virtue of a Deed of Sale dated Nov.
16, 1990.[3] The property is covered by TCT No. 168173 of the Register of Deeds of Makati in the name of IMRDC.[4]

On December 7, 1990, petitioner, as the FIRST PARTY, and Dra. Flora San Diego-Sison (respondent), as the SECOND PARTY,
entered into a Memorandum of Agreement[5]over the property with the following terms:

NOW, THEREFORE, for and in consideration of the sum of THREE MILLION PESOS (P3,000,000.00)
receipt of which is hereby acknowledged by the FIRST PARTY from the SECOND PARTY, the parties have
agreed as follows:

1. That the SECOND PARTY has a period of Six (6) months from the date of the execution of this
contract within which to notify the FIRST PARTY of her intention to purchase the aforementioned parcel of land
together within (sic) the improvements thereon at the price of SIX MILLION FOUR HUNDRED THOUSAND
PESOS (P6,400,000.00). Upon notice to the FIRST PARTY of the SECOND PARTYs intention to purchase the
same, the latter has a period of another six months within which to pay the remaining balance of P3.4 million.

2. That prior to the six months period given to the SECOND PARTY within which to decide whether
or not to purchase the above-mentioned property, the FIRST PARTY may still offer the said property to other
persons who may be interested to buy the same provided that the amount of P3,000,000.00 given to the FIRST
PARTY BY THE SECOND PARTY shall be paid to the latter including interest based on prevailing compounded
bank interest plus the amount of the sale in excess of P7,000,000.00 should the property be sold at a price more
than P7 million.

3. That in case the FIRST PARTY has no other buyer within the first six months from the execution
of this contract, no interest shall be charged by the SECOND PARTY on the P3 million however, in the event
that on the sixth month the SECOND PARTY would decide not to purchase the aforementioned property, the
FIRST PARTY has a period of another six months within which to pay the sum of P3 million pesos provided that
the said amount shall earn compounded bank interest for the last six months only. Under this circumstance, the
amount of P3 million given by the SECOND PARTY shall be treated as [a] loan and the property shall be
considered as the security for the mortgage which can be enforced in accordance with law.

x x x x.[6]

Petitioner received from respondent two million pesos in cash and one million pesos in a post-dated check dated February
28, 1990, instead of 1991, which rendered said check stale. [7] Petitioner then gave respondent TCT No. 168173 in the name of
IMRDC and the Deed of Absolute Sale over the property between petitioner and IMRDC.

Respondent decided not to purchase the property and notified petitioner through a letter [8] dated March 20, 1991, which petitioner
received only on June 11, 1991,[9] reminding petitioner of their agreement that the amount of two million pesos which petitioner
received from respondent should be considered as a loan payable within six months. Petitioner subsequently failed to pay respondent
the amount of two million pesos.

On April 1, 1993, respondent filed with the Regional Trial Court (RTC) of Manila, a complaint[10] for sum of money with
preliminary attachment against petitioner. The case was docketed as Civil Case No. 93-65367 and raffled to Branch 30. Respondent
alleged the foregoing facts and in addition thereto averred that petitioner tried to deprive her of the security for the loan by making
a false report[11] of the loss of her owners copy of TCT No. 168173 to the Tagig Police Station on June 3, 1991, executing an affidavit

55
of loss and by filing a petition[12] for the issuance of a new owners duplicate copy of said title with the RTC of Makati, Branch 142;
that the petition was granted in an Order[13] dated August 31, 1991; that said Order was subsequently set aside in an Order dated
April 10, 1992[14] where the RTC Makati granted respondents petition for relief from judgment due to the fact that respondent is in
possession of the owners duplicate copy of TCT No. 168173, and ordered the provincial public prosecutor to conduct
an investigation of petitioner for perjury and false testimony. Respondent prayed for the ex-parte issuance of a writ of preliminary
attachment and payment of two million pesos with interest at 36% per annum from December 7, 1991, P100,000.00 moral,
corrective and exemplary damages and P200,000.00 for attorneys fees.

In an Order dated April 6, 1993, the Executive Judge of the RTC of Manila issued a writ of preliminary attachment upon the filing
of a bond in the amount of two million pesos. [15]

Petitioner filed an Amended Answer[16] alleging that the Memorandum of Agreement was conceived and arranged by her
lawyer, Atty. Carmelita Lozada, who is also respondents lawyer; that she was asked to sign the agreement without being given the
chance to read the same; that the title to the property and the Deed of Sale between her and the IMRDC were entrusted to
Atty. Lozada for safekeeping and were never turned over to respondent as there was no consummated sale yet; that out of the two
million pesos cash paid, Atty. Lozada took the one million pesos which has not been returned, thus petitioner had filed a civil case
against her; that she was never informed of respondents decision not to purchase the property within the six month period fixed in
the agreement; that when she demanded the return of TCT No. 168173 and the Deed of Sale between her and the IMRDC from
Atty. Lozada, the latter gave her these documents in a brown envelope on May 5, 1991 which her secretary placed in
her attache case; that the envelope together with her other personal things were lost when her car was forcibly opened the following
day; that she sought the help of Atty. Lozada who advised her to secure a police report, to execute an affidavit of loss and to get the
services of another lawyer to file a petition for the issuance of an owners duplicate copy; that the petition for the issuance of a new
owners duplicate copy was filed on her behalf without her knowledge and neither did she sign the petition nor testify in court as
falsely claimed for she was abroad; that she was a victim of the manipulations of Atty. Lozada and respondent as shown by the
filing of criminal charges for perjury and false testimony against her; that no interest could be due as there was no valid mortgage
over the property as the principal obligation is vitiated with fraud and deception. She prayed for the dismissal of the complaint,
counter-claim for damages and attorneys fees.

Trial on the merits ensued. On January 31, 1996, the RTC issued a decision,[17] the dispositive portion of which reads:
WHEREFORE, judgment is hereby RENDERED:

1) Ordering defendant to pay plaintiff the sum of P2 Million plus interest thereon at the rate of thirty
two (32%) per cent per annum beginning December 7, 1991 until fully paid.

2) Ordering defendant to pay plaintiff the sum of P70,000.00 representing premiums paid by plaintiff
on the attachment bond with legal interest thereon counted from the date of this decision until fully paid.

3) Ordering defendant to pay plaintiff the sum of P100,000.00 by way of moral, corrective and
exemplary damages.

4) Ordering defendant to pay plaintiff attorneys fees of P100,000.00 plus cost of litigation.[18]

The RTC found that petitioner was under obligation to pay respondent the amount of two million pesos with compounded
interest pursuant to their Memorandum of Agreement; that the fraudulent scheme employed by petitioner to deprive respondent of
her only security to her loaned money when petitioner executed an affidavit of loss and instituted a petition for the issuance of an
owners duplicate title knowing the same was in respondents possession, entitled respondent to moral damages; and that petitioners
bare denial cannot be accorded credence because her testimony and that of her witness did not appear to be credible.

The RTC further found that petitioner admitted that she received from respondent the two million pesos in cash but the
fact that petitioner gave the one million pesos to Atty. Lozada was without respondents knowledge thus it is not binding on
respondent; that respondent had also proven that in 1993, she initially paid the sum of P30,000.00 as premium for the issuance of the
attachment bond, P20,000.00 for its renewal in 1994, and P20,000.00 for the renewal in 1995, thus plaintiff should be reimbursed
considering that she was compelled to go to court and ask for a writ of preliminary attachment to protect her rights under the
agreement.

Petitioner filed her appeal with the CA. In a Decision dated June 18, 2002, the CA affirmed the RTC decision with modification,
the dispositive portion of which reads:

WHEREFORE, premises considered, the decision appealed from is MODIFIED in the sense that the rate of
interest is reduced from 32% to 25% per annum, effective June 7, 1991 until fully paid.[19]
The CA found that: petitioner gave the one million pesos to Atty. Lozada partly as her commission and partly as a loan; respondent
did not replace the mistakenly dated check of one million pesos because she had decided not to buy the property and petitioner knew
of her decision as early as April 1991; the award of moral damages was warranted since even granting petitioner had no hand in the
filing of the petition for the issuance of an owners copy, she executed an affidavit of loss of TCT No. 168173 when she knew all
along that said title was in respondents possession; petitioners claim that she thought the title was lost when the brown envelope

56
given to her by Atty. Lozada was stolen from her car was hollow; that such deceitful conduct caused respondent serious anxiety and
emotional distress.

The CA concluded that there was no basis for petitioner to say that the interest should be charged for six months only and no more;
that a loan always bears interest otherwise it is not a loan; that interest should commence on June 7, 1991[20] with compounded bank
interest prevailing at the time the two million was considered as a loan which was in June 1991; that the bank interest rate for loans
secured by a real estate mortgage in 1991 ranged from 25% to 32% per annum as certified to by Prudential Bank, [21] that in fairness
to petitioner, the rate to be charged should be 25% only.

Petitioners motion for reconsideration was denied by the CA in a Resolution dated September 11, 2002.

Hence the instant Petition for Review on Certiorari filed by petitioner raising the following issues:

(A) WHETHER OR NOT THE COMPOUNDED BANK INTEREST SHOULD BE LIMITED TO SIX (6)
MONTHS AS CONTAINED IN THE MEMORANDUM OF AGREEMENT.

(B) WHETHER OR NOT THE RESPONDENT IS ENTITLED TO MORAL DAMAGES.

(C) WHETHER OR NOT THE GRANT OF CORRECTIVE AND EXEMPLARY DAMAGES AND
ATTORNEYS FEES IS PROPER EVEN IF NOT MENTIONED IN THE TEXT OF THE DECISION. [22]
Petitioner contends that the interest, whether at 32% per annum awarded by the trial court or at 25% per annum as modified
by the CA which should run from June 7, 1991 until fully paid, is contrary to the parties Memorandum of Agreement; that the
agreement provides that if respondent would decide not to purchase the property, petitioner has the period of another six months to
pay the loan with compounded bank interest for the last six months only; that the CAs ruling that a loan always bears interest
otherwise it is not a loan is contrary to Art. 1956 of the New Civil Code which provides that no interest shall be due unless it has
been expressly stipulated in writing.

We are not persuaded.

While the CAs conclusion, that a loan always bears interest otherwise it is not a loan, is flawed since a simple loan may be
gratuitous or with a stipulation to pay interest,[23] we find no error committed by the CA in awarding a 25% interest per annum on
the two-million peso loan even beyond the second six months stipulated period.

The Memorandum of Agreement executed between the petitioner and respondent on December 7, 1990 is the law between
the parties. In resolving an issue based upon a contract, we must first examine the contract itself, especially the provisions thereof
which are relevant to the controversy.[24] The general rule is that if the terms of an agreement are clear and leave no doubt as to the
intention of the contracting parties, the literal meaning of its stipulations shall prevail. [25] It is further required that the various
stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may result from all of them
taken jointly.[26]

In this case, the phrase for the last six months only should be taken in the context of the entire agreement. We agree with
and adopt the CAs interpretation of the phrase in this wise:

Their agreement speaks of two (2) periods of six months each. The first six-month period was
given to plaintiff-appellee (respondent) to make up her mind whether or not to purchase defendant-
appellants (petitioner's) property. The second six-month period was given to defendant-appellant to pay
the P2 million loan in the event that plaintiff-appelleedecided not to buy the subject property in which
case interest will be charged for the last six months only, referring to the second six-month period. This
means that no interest will be charged for the first six-month period while appellee was making up her
mind whether to buy the property, but only for the second period of six months after appellee had decided
not to buy the property. This is the meaning of the phrase for the last six months only. Certainly, there is
nothing in their agreement that suggests that interest will be charged for six months only even if it takes
defendant-appellant an eternity to pay the loan.[27]

The agreement that the amount given shall bear compounded bank interest for the last six months only, i.e., referring to the
second six-month period, does not mean that interest will no longer be charged after the second six-month period since such
stipulation was made on the logical and reasonable expectation that such amount would be paid within the date
stipulated. Considering that petitioner failed to pay the amount given which under the Memorandum of Agreement shall be
considered as a loan, the monetary interest for the last six months continued to accrue until actual payment of the loaned amount.

The payment of regular interest constitutes the price or cost of the use of money and thus, until the principal sum due is
returned to the creditor, regular interest continues to accrue since the debtor continues to use such principal amount. [28] It has been
held that for a debtor to continue in possession of the principal of the loan and to continue to use the same after maturity of the loan
without payment of the monetary interest, would constitute unjust enrichment on the part of the debtor at the expense of the
creditor.[29]

57
 Petitioner and respondent stipulated that the loaned amount shall earn compounded bank interests, and per the certification
issued by Prudential Bank, the interest rate for loans in 1991 ranged from 25% to 32% per annum. The CA reduced the interest rate
to 25% instead of the 32% awarded by the trial court which petitioner no longer assailed.
In Bautista v. Pilar Development Corp.,[30] we upheld the validity of a 21% per annum interest on a P142,326.43
loan. In Garcia v. Court of Appeals,[31] we sustained the agreement of the parties to a 24% per annum interest on an P8,649,250.00
loan. Thus, the interest rate of 25% per annum awarded by the CA to a P2 million loan is fair and reasonable.

Petitioner next claims that moral damages were awarded on the erroneous finding that she used a fraudulent scheme to
deprive respondent of her security for the loan; that such finding is baseless since petitioner was acquitted in the case for perjury
and false testimony filed by respondent against her.
We are not persuaded.

Article 31 of the Civil Code provides that when the civil action is based on an obligation not arising from the act or omission
complained of as a felony, such civil action may proceed independently of the criminal proceedings and regardless of the result of
the latter.[32]
While petitioner was acquitted in the false testimony and perjury cases filed by respondent against her, those actions are
entirely distinct from the collection of sum of money with damages filed by respondent against petitioner.

We agree with the findings of the trial court and the CA that petitioners act of trying to deprive respondent of the security
of her loan by executing an affidavit of loss of the title and instituting a petition for the issuance of a new owners duplicate copy of
TCT No. 168173 entitles respondent to moral damages. Moral damages may be awarded in culpacontractual or breach of contract
cases when the defendant acted fraudulently or in bad faith. Bad faith does not simply connote bad judgment or negligence; it
imports a dishonest purpose or some moral obliquity and conscious doing of wrong. It partakes of the nature of fraud.[33]
The Memorandum of Agreement provides that in the event that respondent opts not to buy the property, the money given
by respondent to petitioner shall be treated as a loan and the property shall be considered as the security for the mortgage. It was
testified to by respondent that after they executed the agreement on December 7, 1990, petitioner gave her the owners copy of the
title to the property, the Deed of Sale between petitioner and IMRDC, the certificate of occupancy, and the certificate of the Secretary
of the IMRDC who signed the Deed of Sale.[34] However, notwithstanding that all those documents were in respondents possession,
petitioner executed an affidavit of loss that the owners copy of the title and the Deed of Sale were lost.
Although petitioner testified that her execution of the affidavit of loss was due to the fact that she was of the belief that
since she had demanded from Atty. Lozada the return of the title, she thought that the brown envelope with markings which
Atty. Lozada gave her on May 5, 1991 already contained the title and the Deed of Sale as those documents were in the same brown
envelope which she gave to Atty. Lozada prior to the transaction with respondent.[35] Such statement remained a bare statement. It
was not proven at all since Atty. Lozada had not taken the stand to corroborate her claim. In fact, even petitioners own
witness, Benilda Ynfante (Ynfante), was not able to establish petitioner's claim that the title was returned by Atty. Lozada in view
of Ynfante's testimony that after the brown envelope was given to petitioner, the latter passed it on to her and she placed it in
petitioners attach case[36] and did not bother to look at the envelope.[37]
It is clear therefrom that petitioners execution of the affidavit of loss became the basis of the filing of the petition with the
RTC for the issuance of new owners duplicate copy of TCT No. 168173. Petitioners actuation would have deprived respondent of
the security for her loan were it not for respondents timely filing of a petition for relief whereby the RTC set aside its previous order
granting the issuance of new title. Thus, the award of moral damages is in order.
The entitlement to moral damages having been established, the award of exemplary damages is proper. [38] Exemplary
damages may be imposed upon petitioner by way of example or correction for the public good. [39] The RTC awarded the amount
of P100,000.00 as moral and exemplary damages. While the award of moral and exemplary damages in an aggregate amount may
not be the usual way of awarding said damages,[40] no error has been committed by CA. There is no question that respondent is
entitled to moral and exemplary damages.
Petitioner argues that the CA erred in awarding attorneys fees because the trial courts decision did not explain the findings
of facts and law to justify the award of attorneys fees as the same was mentioned only in the dispositive portion of the RTC decision
We agree.
Article 2208[41] of the New Civil Code enumerates the instances where such may be awarded and, in all cases, it must be
reasonable, just and equitable if the same were to be granted.[42] Attorney's fees as part of damages are not meant to enrich the
winning party at the expense of the losing litigant. They are not awarded every time a party prevails in a suit because of the policy
that no premium should be placed on the right to litigate. [43] The award of attorney's fees is the exception rather than the general
rule. As such, it is necessary for the trial court to make findings of facts and law that would bring the case within the exception and
justify the grant of such award. The matter of attorney's fees cannot be mentioned only in the dispositive portion of the
decision.[44] They must be clearly explained and justified by the trial court in the body of its decision. On appeal, the CA is precluded
from supplementing the bases for awarding attorneys fees when the trial court failed to discuss in its Decision the reasons for
awarding the same. Consequently, the award of attorney's fees should be deleted.
WHEREFORE, in view of all the foregoing, the Decision dated June 18, 2002 and the Resolution dated September 11,
2002 of the Court of Appeals in CA-G.R. CV No. 52839 are AFFIRMED with MODIFICATION that the award of attorneys fees
is DELETED.

No pronouncement as to costs.

SO ORDERED.

58
G.R. Nos. 150773 & 153599
SPOUSES DAVID B. CARPO
and RECHILDA S. CARPO, v. ELEANOR CHUA
September 30, 2005

DECISION

TINGA, J.:

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

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

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

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

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

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

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

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

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

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

In G.R. No. 150773, petitioners claim that following the Courts ruling in Medel v. Court of Appeals[6] the rate
of interest stipulated in the principal loan agreement is clearly null and void. Consequently, they also argue

59
that the nullity of the agreed interest rate affects the validity of the real estate mortgage. Notably, while
petitioners were silent in their petition on the issues of prescription and laches on which the RTC grounded
the dismissal of the complaint, they belatedly raised the matters in their Memorandum. Nonetheless, these
points warrant brief comment.

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

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

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

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

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

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

There is no need to unsettle the principle affirmed in Medel and like cases. From that perspective, it is
apparent that the stipulated interest in the subject loan is excessive, iniquitous, unconscionable and
exorbitant. Pursuant to the freedom of contract principle embodied in Article 1306 of the Civil Code,
contracting parties may establish such stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. In
the ordinary course, the codal provision may be invoked to annul the excessive stipulated interest.

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

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

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

60
The Courts ultimate affirmation in the cases cited of the validity of the principal loan obligation side by side
with the invalidation of the interest rates thereupon is congruent with the rule that a usurious loan
transaction is not a complete nullity but defective only with respect to the agreed interest.

We are aware that the Court of Appeals, on certain occasions, had ruled that a usurious loan is wholly null
and void both as to the loan and as to the usurious interest. [17] However, this Court adopted the contrary
rule, as comprehensively discussed in Briones v. Cammayo:[18]

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

....

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

Other cases upholding the same principle are Palileo vs. Cosio, 97 Phil. 919 and Pascua
vs. Perez, L-19554, January 31, 1964, 10 SCRA 199, 200-202. In the latter We expressly held
that when a contract is found to be tainted with usury "the only right of the respondent (creditor)
. . . was merely to collect the amount of the loan, plus interest due thereon."

The view has been expressed, however, that the ruling thus consistently adhered to should
now be abandoned because Article 1957 of the new Civil Code a subsequent law provides that
contracts and stipulations, under any cloak or device whatever, intended to circumvent the laws
against usury, shall be void, and that in such cases "the borrower may recover in accordance
with the laws on usury." From this the conclusion is drawn that the whole contract is void and
that, therefore, the creditor has no right to recover not even his capital.

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

....

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

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

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

61
 We do not agree with such reasoning. Article 1411 of the New Civil Code is
not new; it is the same as Article 1305 of the Old Civil Code. Therefore, said
provision is no warrant for departing from previous interpretation that, as provided
in the Usury Law (Act No. 2655, as amended), a loan with usurious interest is not
totally void only as to the interest.

. . . [a]ppellants fail to consider that a contract of loan with usurious

interest consists of principal and accessory stipulations; the principal one is
to pay the debt; the accessory stipulation is to pay interest thereon.

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

The question therefore to resolve is whether the illegal terms as to

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

In simple loan with stipulation of usurious interest, the prestation of

the debtor to pay the principal debt, which is the cause of the contract
(Article 1350, Civil Code), is not illegal. The illegality lies only as to the
prestation to pay the stipulated interest; hence, being separable, the latter
only should be deemed void, since it is the only one that is illegal.

....

The principal debt remaining without stipulation for payment of interest

can thus be recovered by judicial action. And in case of such demand, and the
debtor incurs in delay, the debt earns interest from the date of the demand (in this
case from the filing of the complaint). Such interest is not due to stipulation, for
there was none, the same being void. Rather, it is due to the general provision of
law that in obligations to pay money, where the debtor incurs in delay, he has to
pay interest by way of damages (Art. 2209, Civil Code). The court a quo therefore,
did not err in ordering defendants to pay the principal debt with interest thereon
at the legal rate, from the date of filing of the complaint." [19]

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

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

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

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

62
 There is undue influence when a person takes improper advantage of his power over
the will of another, depriving the latter of a reasonable freedom of choice. The following
circumstances shall be considered: the confidential, family, spiritual and other relations
between the parties or the fact that the person alleged to have been unduly influenced was
suffering from mental weakness, or was ignorant or in financial distress.

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

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

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

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

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

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

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

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

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

63
from receipt thereof by respondents. It is axiomatic that an interlocutory order cannot be challenged by an
appeal,

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

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

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

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

SO ORDERED.

64
 [G.R. No. 138677. February 12, 2002]
TOLOMEO LIGUTAN and LEONIDAS DE LA LLANA, petitioners, vs. HON. COURT OF APPEALS & SECURITY
BANK & TRUST COMPANY, respondents.
DECISION
VITUG, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court, assailing the decision
and resolutions of the Court of Appeals in CA-G.R. CV No. 34594, entitled "Security Bank and Trust Co.
vs. Tolomeo Ligutan, et al."
Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained on 11 May 1981 a loan in the amount of
P120,000.00 from respondent Security Bank and Trust Company. Petitioners executed a promissory note binding
themselves, jointly and severally, to pay the sum borrowed with an interest of 15.189% per annum upon maturity and
to pay a penalty of 5% every month on the outstanding principal and interest in case of default. In addition, petitioners
agreed to pay 10% of the total amount due by way of attorneys fees if the matter were indorsed to a lawyer for collection
or if a suit were instituted to enforce payment. The obligation matured on 8 September 1981; the bank, however, granted
an extension but only up until 29 December 1981.
Despite several demands from the bank, petitioners failed to settle the debt which, as of 20 May 1982, amounted
to P114,416.10. On 30 September 1982, the bank sent a final demand letter to petitioners informing them that they had
five days within which to make full payment. Since petitioners still defaulted on their obligation, the bank filed on 3
November 1982, with the Regional Trial Court of Makati, Branch 143, a complaint for recovery of the due amount.
After petitioners had filed a joint answer to the complaint, the bank presented its evidence and, on 27 March 1985,
rested its case. Petitioners, instead of introducing their own evidence, had the hearing of the case reset on two
consecutive occasions. In view of the absence of petitioners and their counsel on 28 August 1985, the third hearing
date, the bank moved, and the trial court resolved, to consider the case submitted for decision.
Two years later, or on 23 October 1987, petitioners filed a motion for reconsideration of the order of the trial court
declaring them as having waived their right to present evidence and prayed that they be allowed to prove their case. The
court a quo denied the motion in an order, dated 5 September 1988, and on 20 October 1989, it rendered its
decision,[1] the dispositiveportion of which read:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants, ordering the latter to pay, jointly
and severally, to the plaintiff, as follows:
"1. The sum of P114,416.00 with interest thereon at the rate of 15.189% per annum, 2% service charge and
5% per month penalty charge, commencing on 20 May 1982 until fully paid;
"2. To pay the further sum equivalent to 10% of the total amount of indebtedness for and as attorneys fees;
and
"3. To pay the costs of the suit.[2]
Petitioners interposed an appeal with the Court of Appeals, questioning the rejection by the trial court of their motion
to present evidence and assailing the imposition of the 2% service charge, the 5% per month penalty charge and 10%
attorney's fees. In its decision[3] of 7 March 1996, the appellate court affirmed the judgment of the trial court except on
the matter of the 2% service charge which was deleted pursuant to Central Bank Circular No. 783. Not fully satisfied
with the decision of the appellate court, both parties filed their respective motions for reconsideration. [4] Petitioners
prayed for the reduction of the 5% stipulated penalty for being unconscionable. The bank, on the other hand, asked that
the payment of interest and penalty be commenced not from the date of filing of complaint but from the time of default
as so stipulated in the contract of the parties.
On 28 October 1998, the Court of Appeals resolved the two motions thusly:
We find merit in plaintiff-appellees claim that the principal sum of P114,416.00 with interest thereon must commence not on the
date of filing of the complaint as we have previously held in our decision but on the date when the obligation became due.
Default generally begins from the moment the creditor demands the performance of the obligation. However, demand is not
necessary to render the obligor in default when the obligation or the law so provides.
In the case at bar, defendants-appellants executed a promissory note where they undertook to pay the obligation on its maturity
date 'without necessity of demand.' They also agreed to pay the interest in case of non-payment from the date of default.
xxxxxxxxx
While we maintain that defendants-appellants must be bound by the contract which they acknowledged and signed, we take
cognizance of their plea for the application of the provisions of Article 1229 x x x.
Considering that defendants-appellants partially complied with their obligation under the promissory note by the reduction of the
original amount of P120,000.00 to P114,416.00 and in order that they will finally settle their obligation, it is our view and we so
hold that in the interest of justice and public policy, a penalty of 3% per month or 36% per annum would suffice.
xxxxxxxxx
WHEREFORE, the decision sought to be reconsidered is hereby MODIFIED. The defendants-
appellants Tolomeo Ligutan and Leonidas dela Llana are hereby ordered to pay the plaintiff-appellee Security Bank and Trust
Company the following:
1. The sum of P114,416.00 with interest thereon at the rate of 15.189% per annum and 3% per month
penalty charge commencing May 20, 1982 until fully paid;
2. The sum equivalent to 10% of the total amount of the indebtedness as and for attorneys fees.[5]
On 16 November 1998, petitioners filed an omnibus motion for reconsideration and to admit newly discovered
evidence,[6] alleging that while the case was pending before the trial court, petitioner Tolomeo Ligutan and his
65
wife Bienvenida Ligutan executed a real estate mortgage on 18 January 1984 to secure the existing indebtedness of
petitioners Ligutan and dela Llanawith the bank. Petitioners contended that the execution of the real estate mortgage
had the effect of novating the contract between them and the bank. Petitioners further averred that the mortgage
was extrajudicially foreclosed on 26 August 1986, that they were not informed about it, and the bank did not credit them
with the proceeds of the sale. The appellate court denied the omnibus motion for reconsideration and to admit newly
discovered evidence, ratiocinating that such a second motion for reconsideration cannot be entertained under Section
2, Rule 52, of the 1997 Rules of Civil Procedure. Furthermore, the appellate court said, the newly-discovered evidence
being invoked by petitioners had actually been known to them when the case was brought on appeal and when the first
motion for reconsideration was filed.[7]
Aggrieved by the decision and resolutions of the Court of Appeals, petitioners elevated their case to this Court on
9 July 1999 via a petition for review on certiorari under Rule 45 of the Rules of Court, submitting thusly -
I. The respondent Court of Appeals seriously erred in not holding that the 15.189% interest and the penalty of
three (3%) percent per month or thirty-six (36%) percent per annum imposed by private respondent
bank on petitioners loan obligation are still manifestly exorbitant, iniquitous and unconscionable.
II. The respondent Court of Appeals gravely erred in not reducing to a reasonable level the ten (10%) percent
award of attorneys fees which is highly and grossly excessive, unreasonable and unconscionable.
III. The respondent Court of Appeals gravely erred in not admitting petitioners newly discovered evidence
which could not have been timely produced during the trial of this case.
IV. The respondent Court of Appeals seriously erred in not holding that there was a novation of the cause of
action of private respondents complaint in the instant case due to the subsequent execution of the
real estate mortgage during the pendency of this case and the subsequent foreclosure of the
mortgage.[8]
Respondent bank, which did not take an appeal, would, however, have it that the penalty sought to be deleted by
petitioners was even insufficient to fully cover and compensate for the cost of money brought about by the radical
devaluation and decrease in the purchasing power of the peso, particularly vis-a-vis the U.S. dollar, taking into account
the time frame of its occurrence. The Bank would stress that only the amount of P5,584.00 had been remitted out of the
entire loan of P120,000.00.[9]
A penalty clause, expressly recognized by law,[10] is an accessory undertaking to assume greater liability on the
part of an obligor in case of breach of an obligation. It functions to strengthen the coercive force of the obligation[11] and
to provide, in effect, for what could be the liquidated damages resulting from such a breach. The obligor would then be
bound to pay the stipulated indemnity without the necessity of proof on the existence and on the measure of damages
caused by the breach.[12] Although a court may not at liberty ignore the freedom of the parties to agree on such terms
and conditions as they see fit that contravene neither law nor morals, good customs, public order or public policy, a
stipulated penalty, nevertheless, may be equitably reduced by the courts if it is iniquitous or unconscionable or if the
principal obligation has been partly or irregularly complied with.[13]
The question of whether a penalty is reasonable or iniquitous can be partly subjective and partly objective. Its
resolution would depend on such factors as, but not necessarily confined to, the type, extent and purpose of the penalty,
the nature of the obligation, the mode of breach and its consequences, the supervening realities, the standing and
relationship of the parties, and the like, the application of which, by and large, is addressed to the sound discretion of
the court. In Rizal Commercial Banking Corp. vs. Court of Appeals,[14] just an example, the Court has tempered the
penalty charges after taking into account the debtors pitiful situation and its offer to settle the entire obligation with the
creditor bank. The stipulated penalty might likewise be reduced when a partial or irregular performance is made by the
debtor.[15] The stipulated penalty might even be deleted such as when there has been substantial performance in good
faith by the obligor,[16] when the penalty clause itself suffers from fatal infirmity, or when exceptional circumstances so
exist as to warrant it.[17]
The Court of Appeals, exercising its good judgment in the instant case, has reduced the penalty interest from 5%
a month to 3% a month which petitioner still disputes. Given the circumstances, not to mention the repeated acts of
breach by petitioners of their contractual obligation, the Court sees no cogent ground to modify the ruling of the appellate
court..
Anent the stipulated interest of 15.189% per annum, petitioners, for the first time, question its reasonableness and
prays that the Court reduce the amount. This contention is a fresh issue that has not been raised and ventilated before
the courts below. In any event, the interest stipulation, on its face, does not appear as being that excessive. The essence
or rationale for the payment of interest, quite often referred to as cost of money, is not exactly the same as that of a
surcharge or a penalty. A penalty stipulation is not necessarily preclusive of interest, if there is an agreement to that
effect, the two being distinct concepts which may separately be demanded. [18] What may justify a court in not allowing
the creditor to impose full surcharges and penalties, despite an express stipulation therefor in a valid agreement, may
not equally justify the non-payment or reduction of interest. Indeed, the interest prescribed in loan financing
arrangements is a fundamental part of the banking business and the core of a bank's existence. [19]
Petitioners next assail the award of 10% of the total amount of indebtedness by way of attorney's fees for being
grossly excessive, exorbitant and unconscionable vis-a-vis the time spent and the extent of services rendered by
counsel for the bank and the nature of the case. Bearing in mind that the rate of attorneys fees has been agreed to by
the parties and intended to answer not only for litigation expenses but also for collection efforts as well, the Court, like
the appellate court, deems the award of 10% attorneys fees to be reasonable.
Neither can the appellate court be held to have erred in rejecting petitioners' call for a new trial or to admit newly
discovered evidence. As the appellate court so held in its resolution of 14 May 1999 -

66
Under Section 2, Rule 52 of the 1997 Rules of Civil Procedure, no second motion for reconsideration of a judgment or final
resolution by the same party shall be entertained. Considering that the instant motion is already a second motion for
reconsideration, the same must therefore be denied.
Furthermore, it would appear from the records available to this court that the newly-discovered evidence being invoked by
defendants-appellants have actually been existent when the case was brought on appeal to this court as well as when the first
motion for reconsideration was filed. Hence, it is quite surprising why defendants-appellants raised the alleged newly-discovered
evidence only at this stage when they could have done so in the earlier pleadings filed before this court.
The propriety or acceptability of such a second motion for reconsideration is not contingent upon the averment of 'new' grounds to
assail the judgment, i.e., grounds other than those theretofore presented and rejected. Otherwise, attainment of finality of a
judgment might be stayed off indefinitely, depending on the partys ingenuousness or cleverness in conceiving and formulating
'additional flaws' or 'newly discovered errors' therein, or thinking up some injury or prejudice to the rights of the movant for
reconsideration.[20]
At any rate, the subsequent execution of the real estate mortgage as security for the existing loan would not have
resulted in the extinguishment of the original contract of loan because of novation. Petitioners acknowledge that the real
estate mortgage contract does not contain any express stipulation by the parties intending it to supersede the existing
loan agreement between the petitioners and the bank. [21] Respondent bank has correctly postulated that the mortgage
is but an accessory contract to secure the loan in the promissory note.
Extinctive novation requires, first, a previous valid obligation; second, the agreement of all the parties to the new
contract; third, the extinguishment of the obligation; and fourth, the validity of the new one.[22] In order that an obligation
may be extinguished by another which substitutes the same, it is imperative that it be so declared in unequivocal terms,
or that the old and the new obligation be on every point incompatible with each other. [23] An obligation to pay a sum of
money is not extinctively novated by a new instrument which merely changes the terms of payment or adding compatible
covenants or where the old contract is merely supplemented by the new one.[24] When not expressed, incompatibility is
required so as to ensure that the parties have indeed intended such novation despite their failure to express it in
categorical terms. The incompatibility, to be sure, should take place in any of the essential elements of the obligation,
i.e., (1) the juridical relation or tie, such as from a mere commodatum to lease of things, or from negotiorum gestio to
agency, or from a mortgage to antichresis,[25] or from a sale to one of loan;[26] (2) the object or principal conditions, such
as a change of the nature of the prestation; or (3) the subjects, such as the substitution of a debtor[27] or the subrogation
of the creditor. Extinctive novation does not necessarily imply that the new agreement should be complete by itself;
certain terms and conditions may be carried, expressly or by implication, over to the new obligation.
WHEREFORE, the petition is DENIED.
SO ORDERED.

67
G.R. No. 97412 July 12, 1994
EASTERN SHIPPING LINES, INC., petitioner,
vs.
HON. COURT OF APPEALS AND MERCANTILE INSURANCE COMPANY, INC., respondents.
Alojada & Garcia and Jimenea, Dala & Zaragoza for petitoner.
Zapa Law Office for private respondent.

VITUG, J.:
The issues, albeit not completely novel, are: (a) whether or not a claim for damage sustained on a shipment of goods
can be a solidary, or joint and several, liability of the common carrier, the arrastre operator and the customs broker;
(b) whether the payment of legal interest on an award for loss or damage is to be computed from the time the
complaint is filed or from the date the decision appealed from is rendered; and (c) whether the applicable rate of
interest, referred to above, is twelve percent (12%) or six percent (6%).
The findings of the court a quo, adopted by the Court of Appeals, on the antecedent and undisputed facts that have
led to the controversy are hereunder reproduced:
This is an action against defendants shipping company, arrastre operator and broker-forwarder for
damages sustained by a shipment while in defendants' custody, filed by the insurer-subrogee who
paid the consignee the value of such losses/damages.
On December 4, 1981, two fiber drums of riboflavin were shipped from Yokohama, Japan for delivery
vessel "SS EASTERN COMET" owned by defendant Eastern Shipping Lines under Bill of Lading
No. YMA-8 (Exh. B). The shipment was insured under plaintiff's Marine Insurance Policy No.
81/01177 for P36,382,466.38.
Upon arrival of the shipment in Manila on December 12, 1981, it was discharged unto the custody of
defendant Metro Port Service, Inc. The latter excepted to one drum, said to be in bad order, which
damage was unknown to plaintiff.
On January 7, 1982 defendant Allied Brokerage Corporation received the shipment from defendant
Metro Port Service, Inc., one drum opened and without seal (per "Request for Bad Order Survey."
Exh. D).
On January 8 and 14, 1982, defendant Allied Brokerage Corporation made deliveries of the shipment
to the consignee's warehouse. The latter excepted to one drum which contained spillages, while the
rest of the contents was adulterated/fake (per "Bad Order Waybill" No. 10649, Exh. E).
Plaintiff contended that due to the losses/damage sustained by said drum, the consignee suffered
losses totaling P19,032.95, due to the fault and negligence of defendants. Claims were presented
against defendants who failed and refused to pay the same (Exhs. H, I, J, K, L).
As a consequence of the losses sustained, plaintiff was compelled to pay the consignee P19,032.95
under the aforestated marine insurance policy, so that it became subrogated to all the rights of action
of said consignee against defendants (per "Form of Subrogation", "Release" and Philbanking check,
Exhs. M, N, and O). (pp. 85-86, Rollo.)
There were, to be sure, other factual issues that confronted both courts. Here, the appellate court said:
Defendants filed their respective answers, traversing the material allegations of the complaint
contending that: As for defendant Eastern Shipping it alleged that the shipment was discharged in
good order from the vessel unto the custody of Metro Port Service so that any damage/losses
incurred after the shipment was incurred after the shipment was turned over to the latter, is no longer
its liability (p. 17, Record); Metroport averred that although subject shipment was discharged unto its
custody, portion of the same was already in bad order (p. 11, Record); Allied Brokerage alleged that
plaintiff has no cause of action against it, not having negligent or at fault for the shipment was already
in damage and bad order condition when received by it, but nonetheless, it still exercised extra
ordinary care and diligence in the handling/delivery of the cargo to consignee in the same condition
shipment was received by it.
From the evidence the court found the following:
The issues are:
1. Whether or not the shipment sustained losses/damages;
2. Whether or not these losses/damages were sustained while in the custody of
defendants (in whose respective custody, if determinable);
3. Whether or not defendant(s) should be held liable for the losses/damages (see
plaintiff's pre-Trial Brief, Records, p. 34; Allied's pre-Trial Brief, adopting plaintiff's
Records, p. 38).
As to the first issue, there can be no doubt that the shipment sustained
losses/damages. The two drums were shipped in good order and condition, as clearly
shown by the Bill of Lading and Commercial Invoice which do not indicate any
damages drum that was shipped (Exhs. B and C). But when on December 12, 1981
the shipment was delivered to defendant Metro Port Service, Inc., it excepted to one
drum in bad order.
68
 Correspondingly, as to the second issue, it follows that the losses/damages were
sustained while in the respective and/or successive custody and possession of
defendants carrier (Eastern), arrastre operator (Metro Port) and broker (Allied
Brokerage). This becomes evident when the Marine Cargo Survey Report (Exh. G),
with its "Additional Survey Notes", are considered. In the latter notes, it is stated that
when the shipment was "landed on vessel" to dock of Pier # 15, South Harbor, Manila
on December 12, 1981, it was observed that "one (1) fiber drum (was) in damaged
condition, covered by the vessel's Agent's Bad Order Tally Sheet No. 86427." The
report further states that when defendant Allied Brokerage withdrew the shipment
from defendant arrastre operator's custody on January 7, 1982, one drum was found
opened without seal, cello bag partly torn but contents intact. Net unrecovered
spillages was
15 kgs. The report went on to state that when the drums reached the consignee, one
drum was found with adulterated/faked contents. It is obvious, therefore, that these
losses/damages occurred before the shipment reached the consignee while under
the successive custodies of defendants. Under Art. 1737 of the New Civil Code, the
common carrier's duty to observe extraordinary diligence in the vigilance of goods
remains in full force and effect even if the goods are temporarily unloaded and stored
in transit in the warehouse of the carrier at the place of destination, until the
consignee has been advised and has had reasonable opportunity to remove or
dispose of the goods (Art. 1738, NCC). Defendant Eastern Shipping's own exhibit,
the "Turn-Over Survey of Bad Order Cargoes" (Exhs. 3-Eastern) states that on
December 12, 1981 one drum was found "open".
and thus held:
WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered:
A. Ordering defendants to pay plaintiff, jointly and severally:
1. The amount of P19,032.95, with the present legal interest of 12% per annum from
October 1, 1982, the date of filing of this complaints, until fully paid (the liability of
defendant Eastern Shipping, Inc. shall not exceed US$500 per case or the CIF value
of the loss, whichever is lesser, while the liability of defendant Metro Port Service,
Inc. shall be to the extent of the actual invoice value of each package, crate box or
container in no case to exceed P5,000.00 each, pursuant to Section 6.01 of the
Management Contract);
2. P3,000.00 as attorney's fees, and
3. Costs.
B. Dismissing the counterclaims and crossclaim of defendant/cross-
claimant Allied Brokerage Corporation.
SO ORDERED. (p. 207, Record).
Dissatisfied, defendant's recourse to US.
The appeal is devoid of merit.
After a careful scrutiny of the evidence on record. We find that the conclusion drawn therefrom is
correct. As there is sufficient evidence that the shipment sustained damage while in the successive
possession of appellants, and therefore they are liable to the appellee, as subrogee for the amount it
paid to the consignee. (pp. 87-89, Rollo.)
The Court of Appeals thus affirmed in toto the judgment of the court
a quo.
In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes error and grave abuse of discretion on the
part of the appellate court when
I. IT HELD PETITIONER CARRIER JOINTLY AND SEVERALLY LIABLE WITH THE ARRASTRE
OPERATOR AND CUSTOMS BROKER FOR THE CLAIM OF PRIVATE RESPONDENT AS
GRANTED IN THE QUESTIONED DECISION;
II. IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF PRIVATE RESPONDENT
SHOULD COMMENCE FROM THE DATE OF THE FILING OF THE COMPLAINT AT THE RATE OF
TWELVE PERCENT PER ANNUM INSTEAD OF FROM THE DATE OF THE DECISION OF THE
TRIAL COURT AND ONLY AT THE RATE OF SIX PERCENT PER ANNUM, PRIVATE
RESPONDENT'S CLAIM BEING INDISPUTABLY UNLIQUIDATED.
The petition is, in part, granted.
In this decision, we have begun by saying that the questions raised by petitioner carrier are not all that novel. Indeed,
we do have a fairly good number of previous decisions this Court can merely tack to.
The common carrier's duty to observe the requisite diligence in the shipment of goods lasts from the time the articles
are surrendered to or unconditionally placed in the possession of, and received by, the carrier for transportation until
delivered to, or until the lapse of a reasonable time for their acceptance by, the person entitled to receive them (Arts.
1736-1738, Civil Code; Ganzon vs. Court of Appeals, 161 SCRA 646; Kui Bai vs. Dollar Steamship Lines, 52 Phil.
863). When the goods shipped either are lost or arrive in damaged condition, a presumption arises against the carrier
of its failure to observe that diligence, and there need not be an express finding of negligence to hold it liable (Art.
1735, Civil Code; Philippine National Railways vs. Court of Appeals, 139 SCRA 87; Metro Port Service vs. Court of
69
Appeals, 131 SCRA 365). There are, of course, exceptional cases when such presumption of fault is not observed but
these cases, enumerated in Article 1734 1 of the Civil Code, are exclusive, not one of which can be applied to this
case.
The question of charging both the carrier and the arrastre operator with the obligation of properly delivering the goods
to the consignee has, too, been passed upon by the Court. In Fireman's Fund Insurance vs. Metro Port Services (182
SCRA 455), we have explained, in holding the carrier and the arrastre operator liable in solidum, thus:
The legal relationship between the consignee and the arrastre operator is akin to that of a depositor
and warehouseman (Lua Kian v. Manila Railroad Co., 19 SCRA 5 [1967]. The relationship between
the consignee and the common carrier is similar to that of the consignee and the arrastre operator
(Northern Motors, Inc. v. Prince Line, et al., 107 Phil. 253 [1960]). Since it is the duty of the
ARRASTRE to take good care of the goods that are in its custody and to deliver them in good
condition to the consignee, such responsibility also devolves upon the CARRIER. Both the
ARRASTRE and the CARRIER are therefore charged with the obligation to deliver the goods in good
condition to the consignee.
We do not, of course, imply by the above pronouncement that the arrastre operator and the customs broker are
themselves always and necessarily liable solidarily with the carrier, or vice-versa, nor that attendant facts in a given
case may not vary the rule. The instant petition has been brought solely by Eastern Shipping Lines, which, being the
carrier and not having been able to rebut the presumption of fault, is, in any event, to be held liable in this particular
case. A factual finding of both the court a quo and the appellate court, we take note, is that "there is sufficient
evidence that the shipment sustained damage while in the successive possession of appellants" (the herein petitioner
among them). Accordingly, the liability imposed on Eastern Shipping Lines, Inc., the sole petitioner in this case, is
inevitable regardless of whether there are others solidarily liable with it.
It is over the issue of legal interest adjudged by the appellate court that deserves more than just a passing remark.
Let us first see a chronological recitation of the major rulings of this Court:
The early case of Malayan Insurance Co., Inc., vs. Manila Port
Service, 2 decided 3 on 15 May 1969, involved a suit for recovery of money arising out of short deliveries and pilferage
of goods. In this case, appellee Malayan Insurance (the plaintiff in the lower court) averred in its complaint that the
total amount of its claim for the value of the undelivered goods amounted to P3,947.20. This demand, however, was
neither established in its totality nor definitely ascertained. In the stipulation of facts later entered into by the parties, in
lieu of proof, the amount of P1,447.51 was agreed upon. The trial court rendered judgment ordering the appellants
(defendants) Manila Port Service and Manila Railroad Company to pay appellee Malayan Insurance the sum of
P1,447.51 with legal interest thereon from the date the complaint was filed on 28 December 1962 until full payment
thereof. The appellants then assailed, inter alia, the award of legal interest. In sustaining the appellants, this Court
ruled:
Interest upon an obligation which calls for the payment of money, absent a stipulation, is the legal
rate. Such interest normally is allowable from the date of demand, judicial or extrajudicial. The trial
court opted for judicial demand as the starting point.
But then upon the provisions of Article 2213 of the Civil Code, interest "cannot be recovered upon
unliquidated claims or damages, except when the demand can be established with reasonable
certainty." And as was held by this Court in Rivera vs. Perez, 4 L-6998, February 29, 1956, if the suit
were for damages, "unliquidated and not known until definitely ascertained, assessed and determined
by the courts after proof (Montilla c. Corporacion de P.P. Agustinos, 25 Phil. 447; Lichauco
v. Guzman,
38 Phil. 302)," then, interest "should be from the date of the decision." (Emphasis supplied)
The case of Reformina vs. Tomol, 5 rendered on 11 October 1985, was for "Recovery of Damages for Injury to Person
and Loss of Property." After trial, the lower court decreed:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and third party defendants and
against the defendants and third party plaintiffs as follows:
Ordering defendants and third party plaintiffs Shell and Michael, Incorporated to pay jointly and
severally the following persons:
xxx xxx xxx
(g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of P131,084.00 which is the value
of the boat F B Pacita III together with its accessories, fishing gear and equipment minus P80,000.00
which is the value of the insurance recovered and the amount of P10,000.00 a month as the
estimated monthly loss suffered by them as a result of the fire of May 6, 1969 up to the time they are
actually paid or already the total sum of P370,000.00 as of June 4, 1972 with legal interest from the
filing of the complaint until paid and to pay attorney's fees of P5,000.00 with costs against defendants
and third party plaintiffs. (Emphasis supplied.)
On appeal to the Court of Appeals, the latter modified the amount of damages awarded but sustained the trial
court in adjudging legal interest from the filing of the complaint until fully paid. When the appellate court's
decision became final, the case was remanded to the lower court for execution, and this was when the trial
court issued its assailed resolution which applied the 6% interest per annum prescribed in Article 2209 of the
Civil Code. In their petition for review on certiorari, the petitioners contended that Central Bank Circular
No. 416, providing thus
By virtue of the authority granted to it under Section 1 of Act 2655, as amended, Monetary Board in its
Resolution No. 1622 dated July 29, 1974, has prescribed that the rate of interest for the loan, or
70
 forbearance of any money, goods, or credits and the rate allowed in judgments, in the absence of
express contract as to such rate of interest, shall be twelve (12%) percent per annum. This Circular
shall take effect immediately. (Emphasis found in the text)
should have, instead, been applied. This Court 6 ruled:
The judgments spoken of and referred to are judgments in litigations involving loans or forbearance of
any money, goods or credits. Any other kind of monetary judgment which has nothing to do with, nor
involving loans or forbearance of any money, goods or credits does not fall within the coverage of the
said law for it is not within the ambit of the authority granted to the Central Bank.
xxx xxx xxx
Coming to the case at bar, the decision herein sought to be executed is one rendered in an Action for
Damages for injury to persons and loss of property and does not involve any loan, much less
forbearances of any money, goods or credits. As correctly argued by the private respondents, the law
applicable to the said case is Article 2209 of the New Civil Code which reads
Art. 2209. If the obligation consists in the payment of a sum of money, and the
debtor incurs in delay, the indemnity for damages, there being no stipulation to the
contrary, shall be the payment of interest agreed upon, and in the absence of
stipulation, the legal interest which is six percent per annum.
The above rule was reiterated in Philippine Rabbit Bus Lines, Inc., v. Cruz, 7 promulgated on 28 July 1986. The case
was for damages occasioned by an injury to person and loss of property. The trial court awarded private respondent
Pedro Manabat actual and compensatory damages in the amount of P72,500.00 with legal interest thereon from the
filing of the complaint until fully paid. Relying on the Reformina v. Tomol case, this Court 8 modified the interest award
from 12% to 6% interest per annum but sustained the time computation thereof, i.e., from the filing of the complaint
until fully paid.
In Nakpil and Sons vs. Court of Appeals, 9 the trial court, in an action for the recovery of damages arising from the
collapse of a building, ordered,
inter alia, the "defendant United Construction Co., Inc. (one of the petitioners)
. . . to pay the plaintiff, . . . , the sum of P989,335.68 with interest at the legal rate from November 29, 1968, the date
of the filing of the complaint until full payment . . . ." Save from the modification of the amount granted by the lower
court, the Court of Appeals sustained the trial court's decision. When taken to this Court for review, the case, on 03
October 1986, was decided, thus:
WHEREFORE, the decision appealed from is hereby MODIFIED and considering the special and
environmental circumstances of this case, we deem it reasonable to render a decision imposing, as
We do hereby impose, upon the defendant and the third-party defendants (with the exception of
Roman Ozaeta) a solidary (Art. 1723, Civil Code, Supra.
p. 10) indemnity in favor of the Philippine Bar Association of FIVE MILLION (P5,000,000.00) Pesos to
cover all damages (with the exception to attorney's fees) occasioned by the loss of the building
(including interest charges and lost rentals) and an additional ONE HUNDRED THOUSAND
(P100,000.00) Pesos as and for attorney's fees, the total sum being payable upon the finality of this
decision. Upon failure to pay on such finality, twelve (12%) per cent interest per annum shall be
imposed upon aforementioned amounts from finality until paid. Solidary costs against the defendant
and third-party defendants (Except Roman Ozaeta). (Emphasis supplied)
A motion for reconsideration was filed by United Construction, contending that "the interest of twelve (12%)
per cent per annum imposed on the total amount of the monetary award was in contravention of law." The
Court 10 ruled out the applicability of the Reformina and Philippine Rabbit Bus Lines cases and, in its
resolution of 15 April 1988, it explained:
There should be no dispute that the imposition of 12% interest pursuant to Central Bank Circular No.
416 . . . is applicable only in the following: (1) loans; (2) forbearance of any money, goods or credit;
and
(3) rate allowed in judgments (judgments spoken of refer to judgments involving loans or forbearance
of any money, goods or credits. (Philippine Rabbit Bus Lines Inc. v. Cruz, 143 SCRA 160-161 [1986];
Reformina v. Tomol, Jr., 139 SCRA 260 [1985]). It is true that in the instant case, there is neither a
loan or a forbearance, but then no interest is actually imposed provided the sums referred to in the
judgment are paid upon the finality of the judgment. It is delay in the payment of such final judgment,
that will cause the imposition of the interest.
It will be noted that in the cases already adverted to, the rate of interest is imposed on the total sum,
from the filing of the complaint until paid; in other words, as part of the judgment for damages. Clearly,
they are not applicable to the instant case. (Emphasis supplied.)
The subsequent case of American Express International, Inc., vs. Intermediate Appellate Court 11 was a petition for
review on certiorari from the decision, dated 27 February 1985, of the then Intermediate Appellate Court reducing the
amount of moral and exemplary damages awarded by the trial court, to P240,000.00 and P100,000.00, respectively,
and its resolution, dated 29 April 1985, restoring the amount of damages awarded by the trial court, i.e.,
P2,000,000.00 as moral damages and P400,000.00 as exemplary damages with interest thereon at 12% per annum
from notice of judgment, plus costs of suit. In a decision of 09 November 1988, this Court, while recognizing the right
of the private respondent to recover damages, held the award, however, for moral damages by the trial court, later
sustained by the IAC, to be inconceivably large. The Court 12 thus set aside the decision of the appellate court and
rendered a new one, "ordering the petitioner to pay private respondent the sum of One Hundred Thousand
71
(P100,000.00) Pesos as moral damages, with
six (6%) percent interest thereon computed from the finality of this decision until paid. (Emphasis supplied)
Reformina came into fore again in the 21 February 1989 case of Florendo v. Ruiz 13 which arose from a breach of
employment contract. For having been illegally dismissed, the petitioner was awarded by the trial court moral and
exemplary damages without, however, providing any legal interest thereon. When the decision was appealed to the
Court of Appeals, the latter held:
WHEREFORE, except as modified hereinabove the decision of the CFI of Negros Oriental dated
October 31, 1972 is affirmed in all respects, with the modification that defendants-appellants, except
defendant-appellant Merton Munn, are ordered to pay, jointly and severally, the amounts stated in the
dispositive portion of the decision, including the sum of P1,400.00 in concept of compensatory
damages, with interest at the legal rate from the date of the filing of the complaint until fully
paid(Emphasis supplied.)
The petition for review to this Court was denied. The records were thereupon transmitted to the trial court, and
an entry of judgment was made. The writ of execution issued by the trial court directed that only
compensatory damages should earn interest at 6% per annum from the date of the filing of the complaint.
Ascribing grave abuse of discretion on the part of the trial judge, a petition for certiorari assailed the said
order. This Court said:
. . . , it is to be noted that the Court of Appeals ordered the payment of interest "at the legal rate" from
the time of the filing of the complaint. . . Said circular [Central Bank Circular No. 416] does not apply
to actions based on a breach of employment contract like the case at bar. (Emphasis supplied)
The Court reiterated that the 6% interest per annum on the damages should be computed from the time the
complaint was filed until the amount is fully paid.
Quite recently, the Court had another occasion to rule on the matter. National Power Corporation vs. Angas, 14decided
on 08 May 1992, involved the expropriation of certain parcels of land. After conducting a hearing on the complaints
for eminent domain, the trial court ordered the petitioner to pay the private respondents certain sums of money as just
compensation for their lands so expropriated "with legal interest thereon . . . until fully paid." Again, in applying the 6%
legal interest per annum under the Civil Code, the Court 15 declared:
. . . , (T)he transaction involved is clearly not a loan or forbearance of money, goods or credits but
expropriation of certain parcels of land for a public purpose, the payment of which is without
stipulation regarding interest, and the interest adjudged by the trial court is in the nature of indemnity
for damages. The legal interest required to be paid on the amount of just compensation for the
properties expropriated is manifestly in the form of indemnity for damages for the delay in the
payment thereof. Therefore, since the kind of interest involved in the joint judgment of the lower court
sought to be enforced in this case is interest by way of damages, and not by way of earnings from
loans, etc. Art. 2209 of the Civil Code shall apply.
Concededly, there have been seeming variances in the above holdings. The cases can perhaps be classified into two
groups according to the similarity of the issues involved and the corresponding rulings rendered by the court. The "first
group" would consist of the cases of Reformina v. Tomol (1985), Philippine Rabbit Bus Lines v. Cruz(1986), Florendo
v. Ruiz (1989)
and National Power Corporation v. Angas (1992). In the "second group" would be Malayan Insurance Company
v.Manila Port Service (1969), Nakpil and Sons v. Court of Appeals (1988), and American Express International
v.Intermediate Appellate Court (1988).
In the "first group", the basic issue focuses on the application of either the 6% (under the Civil Code) or 12% (under
the Central Bank Circular) interest per annum. It is easily discernible in these cases that there has been a consistent
holding that the Central Bank Circular imposing the 12% interest per annum applies only to loans or forbearance 16of
money, goods or credits, as well as to judgments involving such loan or forbearance of money, goods or credits, and
that the 6% interest under the Civil Code governs when the transaction involves the payment of indemnities in the
concept of damage arising from the breach or a delay in the performance of obligations in general. Observe, too, that
in these cases, a common time frame in the computation of the 6% interest per annum has been applied, i.e., from the
time the complaint is filed until the adjudged amount is fully paid.
The "second group", did not alter the pronounced rule on the application of the 6% or 12% interest per
annum, 17depending on whether or not the amount involved is a loan or forbearance, on the one hand, or one of
indemnity for damage, on the other hand. Unlike, however, the "first group" which remained consistent in holding that
the running of the legal interest should be from the time of the filing of the complaint until fully paid, the "second group"
varied on the commencement of the running of the legal interest.
Malayan held that the amount awarded should bear legal interest from the date of the decision of the court a
quo,explaining that "if the suit were for damages, 'unliquidated and not known until definitely ascertained, assessed
and determined by the courts after proof,' then, interest 'should be from the date of the decision.'" American Express
International v. IAC, introduced a different time frame for reckoning the 6% interest by ordering it to be "computed
from the finality of (the) decision until paid." The Nakpil and Sons case ruled that 12% interest per annum should be
imposed from the finality of the decision until the judgment amount is paid.
The ostensible discord is not difficult to explain. The factual circumstances may have called for different applications,
guided by the rule that the courts are vested with discretion, depending on the equities of each case, on the award of
interest. Nonetheless, it may not be unwise, by way of clarification and reconciliation, to suggest the following rules of
thumb for future guidance.

72
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts 18 is
breached, the contravenor can be held liable for damages. 19 The provisions under Title XVIII on "Damages" of the
Civil Code govern in determining the measure of recoverable damages. 20
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been stipulated in writing. 21 Furthermore, the interest due
shall itself earn legal interest from the time it is judicially demanded. 22 In the absence of stipulation, the rate of interest
shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to
the provisions of Article 1169 23 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of
damages awarded may be imposed at the discretion of the court 24 at the rate of 6% per annum. 25 No interest,
however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established
with reasonable certainty. 26 Accordingly, where the demand is established with reasonable certainty, the interest shall
begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty
cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date
the judgment of the court is made (at which time the quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount
finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest,
whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its
satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.
WHEREFORE, the petition is partly GRANTED. The appealed decision is AFFIRMED with the MODIFICATION that
the legal interest to be paid is SIX PERCENT (6%) on the amount due computed from the decision, dated
03 February 1988, of the court a quo. A TWELVE PERCENT (12%) interest, in lieu of SIX PERCENT (6%), shall be
imposed on such amount upon finality of this decision until the payment thereof.
SO ORDERED.

73
G.R. No. 189871 August 13, 2013
DARIO NACAR, PETITIONER,
vs.
GALLERY FRAMES AND/OR FELIPE BORDEY, JR., RESPONDENTS.
DECISION
PERALTA, J.:
This is a petition for review on certiorari assailing the Decision1 dated September 23, 2008 of the Court of Appeals
(CA) in CA-G.R. SP No. 98591, and the Resolution2 dated October 9, 2009 denying petitioners motion for
reconsideration.
The factual antecedents are undisputed.
Petitioner Dario Nacar filed a complaint for constructive dismissal before the Arbitration Branch of the National Labor
Relations Commission (NLRC) against respondents Gallery Frames (GF) and/or Felipe Bordey, Jr., docketed as
NLRC NCR Case No. 01-00519-97.
On October 15, 1998, the Labor Arbiter rendered a Decision3 in favor of petitioner and found that he was dismissed
from employment without a valid or just cause. Thus, petitioner was awarded backwages and separation pay in lieu of
reinstatement in the amount of P158,919.92. The dispositive portion of the decision, reads:
With the foregoing, we find and so rule that respondents failed to discharge the burden of showing that complainant
was dismissed from employment for a just or valid cause. All the more, it is clear from the records that complainant
was never afforded due process before he was terminated. As such, we are perforce constrained to grant
complainants prayer for the payments of separation pay in lieu of reinstatement to his former position, considering the
strained relationship between the parties, and his apparent reluctance to be reinstated, computed only up to
promulgation of this decision as follows:
SEPARATION PAY

Date Hired = August 1990

Rate = P198/day

Date of Decision = Aug. 18, 1998

Length of Service = 8 yrs. & 1 month

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

BACKWAGES

Date Dismissed = January 24, 1997

Rate per day = P196.00

Date of Decisions = Aug. 18, 1998

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

P196.00/day x 12.36 mos. = P62,986.56

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

Prevailing Rate per day = P62,986.00

P198.00 x 26 days x 6.4 mos. = P32,947.20

TOTAL = P95.933.76
xxxx
WHEREFORE, premises considered, judgment is hereby rendered finding respondents guilty of constructive
dismissal and are therefore, ordered:
To pay jointly and severally the complainant the amount of sixty-two thousand nine hundred eighty-six pesos and
56/100 (P62,986.56) Pesos representing his separation pay;
To pay jointly and severally the complainant the amount of nine (sic) five thousand nine hundred thirty-three and
36/100 (P95,933.36) representing his backwages; and
All other claims are hereby dismissed for lack of merit.
SO ORDERED.4

74
Respondents appealed to the NLRC, but it was dismissed for lack of merit in the Resolution 5 dated February 29, 2000.
Accordingly, the NLRC sustained the decision of the Labor Arbiter. Respondents filed a motion for reconsideration,
but it was denied.6
Dissatisfied, respondents filed a Petition for Review on Certiorari before the CA. On August 24, 2000, the CA issued a
Resolution dismissing the petition. Respondents filed a Motion for Reconsideration, but it was likewise denied in a
Resolution dated May 8, 2001.7
Respondents then sought relief before the Supreme Court, docketed as G.R. No. 151332. Finding no reversible error
on the part of the CA, this Court denied the petition in the Resolution dated April 17, 2002. 8
An Entry of Judgment was later issued certifying that the resolution became final and executory on May 27, 2002.9The
case was, thereafter, referred back to the Labor Arbiter. A pre-execution conference was consequently scheduled, but
respondents failed to appear.10
On November 5, 2002, petitioner filed a Motion for Correct Computation, praying that his backwages be computed
from the date of his dismissal on January 24, 1997 up to the finality of the Resolution of the Supreme Court on May
27, 2002.11 Upon recomputation, the Computation and Examination Unit of the NLRC arrived at an updated amount in
the sum of P471,320.31.12
On December 2, 2002, a Writ of Execution13 was issued by the Labor Arbiter ordering the Sheriff to collect from
respondents the total amount of P471,320.31. Respondents filed a Motion to Quash Writ of Execution, arguing,
among other things, that since the Labor Arbiter awarded separation pay of P62,986.56 and limited backwages
of P95,933.36, no more recomputation is required to be made of the said awards. They claimed that after the decision
becomes final and executory, the same cannot be altered or amended anymore.14 On January 13, 2003, the Labor
Arbiter issued an Order15 denying the motion. Thus, an Alias Writ of Execution16 was issued on January 14, 2003.
Respondents again appealed before the NLRC, which on June 30, 2003 issued a Resolution17 granting the appeal in
favor of the respondents and ordered the recomputation of the judgment award.
On August 20, 2003, an Entry of Judgment was issued declaring the Resolution of the NLRC to be final and
executory. Consequently, another pre-execution conference was held, but respondents failed to appear on time.
Meanwhile, petitioner moved that an Alias Writ of Execution be issued to enforce the earlier recomputed judgment
award in the sum of P471,320.31.18
The records of the case were again forwarded to the Computation and Examination Unit for recomputation, where the
judgment award of petitioner was reassessed to be in the total amount of only P147,560.19.
Petitioner then moved that a writ of execution be issued ordering respondents to pay him the original amount as
determined by the Labor Arbiter in his Decision dated October 15, 1998, pending the final computation of his
backwages and separation pay.
On January 14, 2003, the Labor Arbiter issued an Alias Writ of Execution to satisfy the judgment award that was due
to petitioner in the amount of P147,560.19, which petitioner eventually received.
Petitioner then filed a Manifestation and Motion praying for the re-computation of the monetary award to include the
appropriate interests.19
On May 10, 2005, the Labor Arbiter issued an Order20 granting the motion, but only up to the amount of P11,459.73.
The Labor Arbiter reasoned that it is the October 15, 1998 Decision that should be enforced considering that it was
the one that became final and executory. However, the Labor Arbiter reasoned that since the decision states that the
separation pay and backwages are computed only up to the promulgation of the said decision, it is the amount
of P158,919.92 that should be executed. Thus, since petitioner already received P147,560.19, he is only entitled to
the balance of P11,459.73.
Petitioner then appealed before the NLRC,21 which appeal was denied by the NLRC in its Resolution22 dated
September 27, 2006. Petitioner filed a Motion for Reconsideration, but it was likewise denied in the Resolution 23dated
January 31, 2007.
Aggrieved, petitioner then sought recourse before the CA, docketed as CA-G.R. SP No. 98591.
On September 23, 2008, the CA rendered a Decision24 denying the petition. The CA opined that since petitioner no
longer appealed the October 15, 1998 Decision of the Labor Arbiter, which already became final and executory, a
belated correction thereof is no longer allowed. The CA stated that there is nothing left to be done except to enforce
the said judgment. Consequently, it can no longer be modified in any respect, except to correct clerical errors or
mistakes.
Petitioner filed a Motion for Reconsideration, but it was denied in the Resolution 25 dated October 9, 2009.
Hence, the petition assigning the lone error:
I
WITH DUE RESPECT, THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED, COMMITTED GRAVE
ABUSE OF DISCRETION AND DECIDED CONTRARY TO LAW IN UPHOLDING THE QUESTIONED
RESOLUTIONS OF THE NLRC WHICH, IN TURN, SUSTAINED THE MAY 10, 2005 ORDER OF LABOR ARBITER
MAGAT MAKING THE DISPOSITIVE PORTION OF THE OCTOBER 15, 1998 DECISION OF LABOR ARBITER
LUSTRIA SUBSERVIENT TO AN OPINION EXPRESSED IN THE BODY OF THE SAME DECISION.26
Petitioner argues that notwithstanding the fact that there was a computation of backwages in the Labor Arbiters
decision, the same is not final until reinstatement is made or until finality of the decision, in case of an award of
separation pay. Petitioner maintains that considering that the October 15, 1998 decision of the Labor Arbiter did not
become final and executory until the April 17, 2002 Resolution of the Supreme Court in G.R. No. 151332 was entered
in the Book of Entries on May 27, 2002, the reckoning point for the computation of the backwages and separation pay
should be on May 27, 2002 and not when the decision of the Labor Arbiter was rendered on October 15, 1998.

75
Further, petitioner posits that he is also entitled to the payment of interest from the finality of the decision until full
payment by the respondents.
On their part, respondents assert that since only separation pay and limited backwages were awarded to petitioner by
the October 15, 1998 decision of the Labor Arbiter, no more recomputation is required to be made of said awards.
Respondents insist that since the decision clearly stated that the separation pay and backwages are "computed only
up to [the] promulgation of this decision," and considering that petitioner no longer appealed the decision, petitioner is
only entitled to the award as computed by the Labor Arbiter in the total amount of P158,919.92. Respondents added
that it was only during the execution proceedings that the petitioner questioned the award, long after the decision had
become final and executory. Respondents contend that to allow the further recomputation of the backwages to be
awarded to petitioner at this point of the proceedings would substantially vary the decision of the Labor Arbiter as it
violates the rule on immutability of judgments.
The petition is meritorious.
The instant case is similar to the case of Session Delights Ice Cream and Fast Foods v. Court of Appeals (Sixth
Division),27 wherein the issue submitted to the Court for resolution was the propriety of the computation of the awards
made, and whether this violated the principle of immutability of judgment. Like in the present case, it was a distinct
feature of the judgment of the Labor Arbiter in the above-cited case that the decision already provided for the
computation of the payable separation pay and backwages due and did not further order the computation of the
monetary awards up to the time of the finality of the judgment. Also in Session Delights, the dismissed employee
failed to appeal the decision of the labor arbiter. The Court clarified, thus:
In concrete terms, the question is whether a re-computation in the course of execution of the labor arbiter's original
computation of the awards made, pegged as of the time the decision was rendered and confirmed with modification by
a final CA decision, is legally proper. The question is posed, given that the petitioner did not immediately pay the
awards stated in the original labor arbiter's decision; it delayed payment because it continued with the litigation until
final judgment at the CA level.
A source of misunderstanding in implementing the final decision in this case proceeds from the way the original labor
arbiter framed his decision. The decision consists essentially of two parts.
The first is that part of the decision that cannot now be disputed because it has been confirmed with finality. This is the
finding of the illegality of the dismissal and the awards of separation pay in lieu of reinstatement, backwages,
attorney's fees, and legal interests.
The second part is the computation of the awards made. On its face, the computation the labor arbiter made shows
that it was time-bound as can be seen from the figures used in the computation. This part, being merely a computation
of what the first part of the decision established and declared, can, by its nature, be re-computed. This is the part, too,
that the petitioner now posits should no longer be re-computed because the computation is already in the labor
arbiter's decision that the CA had affirmed. The public and private respondents, on the other hand, posit that a re-
computation is necessary because the relief in an illegal dismissal decision goes all the way up to reinstatement if
reinstatement is to be made, or up to the finality of the decision, if separation pay is to be given in lieu reinstatement.
That the labor arbiter's decision, at the same time that it found that an illegal dismissal had taken place, also made a
computation of the award, is understandable in light of Section 3, Rule VIII of the then NLRC Rules of Procedure
which requires that a computation be made. This Section in part states:
[T]he Labor Arbiter of origin, in cases involving monetary awards and at all events, as far as practicable, shall embody
in any such decision or order the detailed and full amount awarded.
Clearly implied from this original computation is its currency up to the finality of the labor arbiter's decision. As we
noted above, this implication is apparent from the terms of the computation itself, and no question would have arisen
had the parties terminated the case and implemented the decision at that point.
However, the petitioner disagreed with the labor arbiter's findings on all counts - i.e., on the finding of illegality as well
as on all the consequent awards made. Hence, the petitioner appealed the case to the NLRC which, in turn, affirmed
the labor arbiter's decision. By law, the NLRC decision is final, reviewable only by the CA on jurisdictional grounds.
The petitioner appropriately sought to nullify the NLRC decision on jurisdictional grounds through a timely filed Rule
65 petition for certiorari. The CA decision, finding that NLRC exceeded its authority in affirming the payment of 13th
month pay and indemnity, lapsed to finality and was subsequently returned to the labor arbiter of origin for execution.
It was at this point that the present case arose. Focusing on the core illegal dismissal portion of the original labor
arbiter's decision, the implementing labor arbiter ordered the award re-computed; he apparently read the figures
originally ordered to be paid to be the computation due had the case been terminated and implemented at the labor
arbiter's level. Thus, the labor arbiter re-computed the award to include the separation pay and the backwages due up
to the finality of the CA decision that fully terminated the case on the merits. Unfortunately, the labor arbiter's
approved computation went beyond the finality of the CA decision (July 29, 2003) and included as well the payment
for awards the final CA decision had deleted - specifically, the proportionate 13th month pay and the indemnity
awards. Hence, the CA issued the decision now questioned in the present petition.
We see no error in the CA decision confirming that a re-computation is necessary as it essentially considered the
labor arbiter's original decision in accordance with its basic component parts as we discussed above. To reiterate, the
first part contains the finding of illegality and its monetary consequences; the second part is the computation of the
awards or monetary consequences of the illegal dismissal, computed as of the time of the labor arbiter's original
decision.28
Consequently, from the above disquisitions, under the terms of the decision which is sought to be executed by the
petitioner, no essential change is made by a recomputation as this step is a necessary consequence that flows from
the nature of the illegality of dismissal declared by the Labor Arbiter in that decision.29 A recomputation (or an original
76
computation, if no previous computation has been made) is a part of the law specifically, Article 279 of the Labor
Code and the established jurisprudence on this provision that is read into the decision. By the nature of an illegal
dismissal case, the reliefs continue to add up until full satisfaction, as expressed under Article 279 of the Labor Code.
The recomputation of the consequences of illegal dismissal upon execution of the decision does not constitute an
alteration or amendment of the final decision being implemented. The illegal dismissal ruling stands; only the
computation of monetary consequences of this dismissal is affected, and this is not a violation of the principle of
immutability of final judgments.30
That the amount respondents shall now pay has greatly increased is a consequence that it cannot avoid as it is the
risk that it ran when it continued to seek recourses against the Labor Arbiter's decision. Article 279 provides for the
consequences of illegal dismissal in no uncertain terms, qualified only by jurisprudence in its interpretation of when
separation pay in lieu of reinstatement is allowed. When that happens, the finality of the illegal dismissal decision
becomes the reckoning point instead of the reinstatement that the law decrees. In allowing separation pay, the final
decision effectively declares that the employment relationship ended so that separation pay and backwages are to be
computed up to that point.31
Finally, anent the payment of legal interest. In the landmark case of Eastern Shipping Lines, Inc. v. Court of
Appeals,32 the Court laid down the guidelines regarding the manner of computing legal interest, to wit:
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No
interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can
be established with reasonable certainty. Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169,
Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the
interest shall begin to run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of
credit.33
Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its Resolution No. 796 dated May
16, 2013, approved the amendment of Section 234 of Circular No. 905, Series of 1982 and, accordingly, issued
Circular No. 799,35 Series of 2013, effective July 1, 2013, the pertinent portion of which reads:
The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the following revisions governing the
rate of interest in the absence of stipulation in loan contracts, thereby amending Section 2 of Circular No. 905, Series
of 1982:
Section 1. The rate of interest for the loan or forbearance of any money, goods or credits and the rate allowed in
judgments, in the absence of an express contract as to such rate of interest, shall be six percent (6%) per annum.
Section 2. In view of the above, Subsection X305.136 of the Manual of Regulations for Banks and Sections
4305Q.1,37 4305S.338 and 4303P.139 of the Manual of Regulations for Non-Bank Financial Institutions are hereby
amended accordingly.
This Circular shall take effect on 1 July 2013.
Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest that would govern the
parties, the rate of legal interest for loans or forbearance of any money, goods or credits and the rate allowed in
judgments shall no longer be twelve percent (12%) per annum - as reflected in the case of Eastern Shipping
Lines40and Subsection X305.1 of the Manual of Regulations for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1
of the Manual of Regulations for Non-Bank Financial Institutions, before its amendment by BSP-MB Circular No. 799 -
but will now be six percent (6%) per annum effective July 1, 2013. It should be noted, nonetheless, that the new rate
could only be applied prospectively and not retroactively. Consequently, the twelve percent (12%) per annum legal
interest shall apply only until June 30, 2013. Come July 1, 2013 the new rate of six percent (6%) per annum shall be
the prevailing rate of interest when applicable.
Corollarily, in the recent case of Advocates for Truth in Lending, Inc. and Eduardo B. Olaguer v. Bangko Sentral
Monetary Board,41 this Court affirmed the authority of the BSP-MB to set interest rates and to issue and enforce
Circulars when it ruled that "the BSP-MB may prescribe the maximum rate or rates of interest for all loans or renewals
thereof or the forbearance of any money, goods or credits, including those for loans of low priority such as consumer
loans, as well as such loans made by pawnshops, finance companies and similar credit institutions. It even authorizes
the BSP-MB to prescribe different maximum rate or rates for different types of borrowings, including deposits and
deposit substitutes, or loans of financial intermediaries."

77
Nonetheless, with regard to those judgments that have become final and executory prior to July 1, 2013, said
judgments shall not be disturbed and shall continue to be implemented applying the rate of interest fixed
therein.1awp++i1
To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping Lines 42 are
accordingly modified to embody BSP-MB Circular No. 799, as follows:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for damages. The provisions under Title XVIII on "Damages" of
the Civil Code govern in determining the measure of recoverable damages.1wphi1
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the
rate of interest, as well as the accrual thereof, is imposed, as follows:
When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall
itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall
be 6% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.
When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of
damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however,
shall be adjudged on unliquidated claims or damages, except when or until the demand can be established with
reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin
to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty
cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date
the judgment of the court is made (at which time the quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount
finally adjudged.
When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest,
whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per annum from such finality until its
satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.
And, in addition to the above, judgments that have become final and executory prior to July 1, 2013, shall not be
disturbed and shall continue to be implemented applying the rate of interest fixed therein.
WHEREFORE, premises considered, the Decision dated September 23, 2008 of the Court of Appeals in CA-G.R. SP
No. 98591, and the Resolution dated October 9, 2009 are REVERSED and SET ASIDE. Respondents are Ordered to
Pay petitioner:
(1) backwages computed from the time petitioner was illegally dismissed on January 24, 1997 up to May 27,
2002, when the Resolution of this Court in G.R. No. 151332 became final and executory;
(2) separation pay computed from August 1990 up to May 27, 2002 at the rate of one month pay per year of
service; and
(3) interest of twelve percent (12%) per annum of the total monetary awards, computed from May 27, 2002 to
June 30, 2013 and six percent (6%) per annum from July 1, 2013 until their full satisfaction.
The Labor Arbiter is hereby ORDERED to make another recomputation of the total monetary benefits awarded and
due to petitioner in accordance with this Decision.
SO ORDERED.
DIOSDADO M. PERALTA
Associate Justice

78
G.R. No. 175139
HERMOJINA ESTORES,- versus - SPOUSES ARTURO and LAURA SUPANGAN

DECISION

DEL CASTILLO, J.:

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

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

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

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

Factual Antecedents

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

xxxx

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

xxxx

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

xxxx

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

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

xxxx

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

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

x x x x [6]

79
 After almost seven years from the time of the execution of the contract and notwithstanding payment of P3.5 million on the part of
respondent-spouses, petitioner still failed to comply with her obligation as expressly provided in paragraphs 4, 6, 7, 9 and 10 of the contract. Hence,
in a letter[7] dated September 27, 2000, respondent-spouses demanded the return of the amount of P3.5 million within 15 days from receipt of the
letter. In reply,[8] petitioner acknowledged receipt of the P3.5 million and promised to return the same within 120 days. Respondent-spouses were
amenable to the proposal provided an interest of 12% compounded annually shall be imposed on the P3.5 million.[9] When petitioner still failed to
return the amount despite demand, respondent-spouses were constrained to file a Complaint[10] for sum of money before the Regional Trial Court
(RTC) of Malabon against herein petitioner as well as Roberto U. Arias (Arias) who allegedly acted as petitioners agent. The case was docketed
as Civil Case No. 3201-MN and raffled off to Branch 170. In their complaint, respondent-spouses prayed that petitioner and Arias be ordered to:

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

2. Pay the following items of damages:

a) Moral damages in the amount of P100,000.00;

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

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

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

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

Ruling of the Regional Trial Court

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

The dispositive portion of the RTC Decision reads:

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

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

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

SO ORDERED.[22]

Ruling of the Court of Appeals

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

On May 12, 2006, the CA rendered the assailed Decision affirming the ruling of the RTC finding the imposition of 6% interest
proper.[25] However, the same shall start to run only from September 27, 2000 when respondent-spouses formally demanded the return of their
money and not from October 1993 when the contract was executed as held by the RTC. The CA also modified the RTCs ruling as regards the
liability of Arias. It held that Arias could not be held solidarily liable with petitioner because he merely acted as agent of the latter. Moreover, there
was no showing that he expressly bound himself to be personally liable or that he exceeded the limits of his authority. More importantly, there

80
was even no showing that Arias was authorized to act as agent of petitioner.[26] Anent the award of attorneys fees, the CA found the award by the
trial court (P50,000.00 plus 20% of the recoverable amount) excessive[27] and thus reduced the same to P100,000.00.[28]
The dispositive portion of the CA Decision reads:

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

SO ORDERED.[29]

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

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

Petitioners Arguments

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

Respondent-spouses Arguments

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

Our Ruling

The petition lacks merit.

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

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

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

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

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

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

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

81
 In Crismina Garments, Inc. v. Court of Appeals,[33] forbearance was defined as a contractual obligation of lender or creditor to refrain
during a given period of time, from requiring the borrower or debtor to repay a loan or debt then due and payable. This definition describes a loan
where a debtor is given a period within which to pay a loan or debt. In such case, forbearance of money, goods or credits will have no distinct
definition from a loan. We believe however, that the phrase forbearance of money, goods or credits is meant to have a separate meaning from a
loan, otherwise there would have been no need to add that phrase as a loan is already sufficiently defined in the Civil Code.[34] Forbearance of
money, goods or credits should therefore refer to arrangements other than loan agreements, where a person acquiesces to the temporary use of his
money, goods or credits pending happening of certain events or fulfillment of certain conditions. In this case, the respondent-spouses parted with
their money even before the conditions were fulfilled. They have therefore allowed or granted forbearance to the seller (petitioner) to use their
money pending fulfillment of the conditions. They were deprived of the use of their money for the period pending fulfillment of the conditions
and when those conditions were breached, they are entitled not only to the return of the principal amount paid, but also to compensation for the
use of their money. And the compensation for the use of their money, absent any stipulation, should be the same rate of legal interest applicable
to a loan since the use or deprivation of funds is similar to a loan.

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

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for damages. The provisions under Title XVIII on Damages of the
Civil Code govern in determining the measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and compensatory damages,
the rate of interest, as well as the accrual thereof, is imposed, as follows:

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

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

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

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

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

The award of attorneys fees is warranted.

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

xxxx

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

82
 xxxx

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

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

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

SO ORDERED.

83
G.R. No. 159912
UNITED COCONUT PLANTERS BANK, Petitioner, - versus -SPOUSES SAMUEL and ODETTE BELUSO,
Respondents.
DECISION

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

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

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

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

PN # Date of PN Maturity Date Amount Secured

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

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

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

PN # Date of PN Maturity Date Amount Secured

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

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

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

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

PN # Amount Secured Interest Penalty Total

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

84
 The spouses Beluso, however, failed to make any payment of the foregoing amounts.

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

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

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

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

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

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

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

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

II

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

III

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

IV

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

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

Validity of the Interest Rates

85
 The Court of Appeals held that the imposition of interest in the following provision found in the promissory notes of the
spouses Beluso is void, as the interest rates and the bases therefor were determined solely by petitioner UCPB:

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

UCPB asserts that this is a reversible error, and claims that while the interest rate was not numerically quantified in the
face of the promissory notes, it was nonetheless categorically fixed, at the time of execution thereof, at the rate indicative of the
DBD retail rate. UCPB contends that said provision must be read with another stipulation in the promissory notes subjecting to
review the interest rate as fixed:
The interest rate shall be subject to review and may be increased or decreased by the LENDER
considering among others the prevailing financial and monetary conditions; or the rate of interest and charges
which other banks or financial institutions charge or offer to charge for similar accommodations; and/or the
resulting profitability to the LENDER after due consideration of all dealings with the BORROWER. [10]

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

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

According to UCPB, the imposition of the questioned interest rates did not infringe on the principle of mutuality of
contracts, because the spouses Beluso had the liberty to choose whether or not to renew their credit line at the new interest rates
pegged by petitioner.[13] UCPB also claims that assuming there was any defect in the mutuality of the contract at the time of its
inception, such defect was cured by the subsequent conduct of the spouses Beluso in availing themselves of the credit line from
April 1996 to February 1998 without airing any protest with respect to the interest rates imposed by UCPB. According to UCPB,
therefore, the spouses Beluso are in estoppel.[14]

We agree with the Court of Appeals, and find no merit in the contentions of UCPB.

Article 1308 of the Civil Code provides:

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

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

In order that obligations arising from contracts may have the force of law between the parties, there
must be mutuality between the parties based on their essential equality. A contract containing a condition which
makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void
(Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the P1.8 million loan agreement between
the PNB and the private respondent gave the PNB a license (although in fact there was none) to increase the
interest rate at will during the term of the loan, that license would have been null and void for being violative of
the principle of mutuality essential in contracts. It would have invested the loan agreement with the character of
a contract of adhesion, where the parties do not bargain on equal footing, the weaker party's (the debtor)
participation being reduced to the alternative "to take it or leave it" (Qua vs. Law Union & Rock Insurance Co., 95
Phil. 85). Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against
abuse and imposition.

The provision stating that the interest shall be at the rate indicative of DBD retail rate or as determined by the Branch
Head is indeed dependent solely on the will of petitioner UCPB. Under such provision, petitioner UCPB has two choices on what
the interest rate shall be: (1) a rate indicative of the DBD retail rate; or (2) a rate as determined by the Branch Head. As UCPB is
given this choice, the rate should be categorically determinable in both choices. If either of these two choices presents an

86
opportunity for UCPB to fix the rate at will, the bank can easily choose such an option, thus making the entire interest rate
provision violative of the principle of mutuality of contracts.

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

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

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

The stipulation in the promissory notes subjecting the interest rate to review does not render the imposition by UCPB of interest
rates on the obligations of the spouses Beluso valid. According to said stipulation:

The interest rate shall be subject to review and may be increased or decreased by the LENDER
considering among others the prevailing financial and monetary conditions; or the rate of interest and charges
which other banks or financial institutions charge or offer to charge for similar accommodations; and/or the
resulting profitability to the LENDER after due consideration of all dealings with the BORROWER. [17]

It should be pointed out that the authority to review the interest rate was given UCPB alone as the lender. Moreover, UCPB may
apply the considerations enumerated in this provision as it wishes. As worded in the above provision, UCPB may give as much
weight as it desires to each of the following considerations: (1) the prevailing financial and monetary condition; (2) the rate of
interest and charges which other banks or financial institutions charge or offer to charge for similar accommodations; and/or (3)
the resulting profitability to the LENDER (UCPB) after due consideration of all dealings with the BORROWER (the spouses
Beluso). Again, as in the case of the interest rate provision, there is no fixed margin above or below these considerations.

In view of the foregoing, the Separability Clause cannot save either of the two options of UCPB as to the interest to be
imposed, as both options violate the principle of mutuality of contracts.

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

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

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

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

Moreover, while the spouses Beluso indeed agreed to renew the credit line, the offending provisions are found in the
promissory notes themselves, not in the credit line. In fixing the interest rates in the promissory notes to cover the renewed credit
line, UCPB still reserved to itself the same two options (1) a rate indicative of the DBD retail rate; or (2) a rate as determined by
the Branch Head.

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

87
 Section 2.04 Penalty Charges. In addition to the interest provided for in Section 2.01 of this ARTICLE,
any principal obligation of the CLIENT hereunder which is not paid when due shall be subject to a penalty charge
of one percent (1%) of the amount of such obligation per month computed from due date until the obligation is
paid in full. If the bank accelerates teh (sic) payment of availments hereunder pursuant to ARTICLE VIII hereof,
the penalty charge shall be used on the total principal amount outstanding and unpaid computed from the date
of acceleration until the obligation is paid in full.[20]

Paragraph 4 of the promissory notes also states:

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

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

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

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

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

and paragraph 3 of the subject promissory notes:

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

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

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

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

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

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

The spouses Belusos defense as to all these issues is that the demand made by UCPB is for a considerably bigger amount
and, therefore, the demand should be considered void. There being no valid demand, according to the spouses Beluso, there
88
would be no default, and therefore the interests and penalties would not commence to run. As it was likewise improper to
foreclose the mortgaged properties or file a case against the spouses Beluso, attorneys fees were not warranted.

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

There being a valid demand on the part of UCPB, albeit excessive, the spouses Beluso are considered in default with
respect to the proper amount and, therefore, the interests and the penalties began to run at that point.

As regards the award of 12% legal interest in favor of petitioner, the RTC actually recognized that said legal interest
should be imposed, thus: There being no valid stipulation as to interest, the legal rate of interest shall be charged.[27] It seems that
the RTC inadvertently overlooked its non-inclusion in its computation.

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

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

xxxx

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

xxxx

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

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

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

Without prejudice to the provisions of Article 2212, interest due and unpaid shall not earn
interest. However, the contracting parties may by stipulation capitalize the interest due and unpaid, which as
added principal, shall earn new interest.

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

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

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

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

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

Annulment of the Foreclosure Sale

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

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

Section 48. Certificate not subject to collateral attack. A certificate of title shall not be subject to
collateral attack. It cannot be altered, modified or cancelled except in a direct proceeding in accordance with
law.

The spouses Beluso retort that since they had the right to refuse payment of an excessive demand on their account, they
cannot be said to be in default for refusing to pay the same. Consequently, according to the spouses Beluso, the enforcement of
such illegal and overcharged demand through foreclosure of mortgage should be voided.

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

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

Liability for Violation of Truth in Lending Act

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

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

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

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

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

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

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

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

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

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

UCPBs contention that this action to recover the penalty for the violation of the Truth in Lending Act has already
prescribed is likewise without merit. The penalty for the violation of the act is P100 or an amount equal to twice the finance charge
required by such creditor in connection with such transaction, whichever is greater, except that such liability shall not
exceed P2,000.00 on any credit transaction.[39] As this penalty depends on the finance charge required of the borrower, the
borrowers cause of action would only accrue when such finance charge is required. In the case at bar, the date of the demand for
payment of the finance charge is 2 September 1998, while the foreclosure was made on 28 December 1998. The filing of the case
on 9 February 1999 is therefore within the one-year prescriptive period.

UCPB argues that a violation of the Truth in Lending Act, being a criminal offense, cannot be inferred nor implied from
the allegations made in the complaint.[40]Pertinent provisions of the Act read:

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

xxxx

(c) Any person who willfully violates any provision of this Act or any regulation issued
thereunder shall be fined by not less than P1,000 or more than P5,000 or imprisonment for not less than 6
months, nor more than one year or both.
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As can be gleaned from Section 6(a) and (c) of the Truth in Lending Act, the violation of the said Act gives rise to both criminal and
civil liabilities. Section 6(c) considers a criminal offense the willful violation of the Act, imposing the penalty therefor of fine,
imprisonment or both. Section 6(a), on the other hand, clearly provides for a civil cause of action for failure to disclose any
information of the required information to any person in violation of the Act. The penalty therefor is an amount of P100 or in an
amount equal to twice the finance charge required by the creditor in connection with such transaction, whichever is greater,
except that the liability shall not exceed P2,000.00 on any credit transaction. The action to recover such penalty may be instituted
by the aggrieved private person separately and independently from the criminal case for the same offense.

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

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

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

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

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

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

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

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

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

Furthermore, opening a credit line does not create a credit transaction of loan or mutuum, since the former is merely a
preparatory contract to the contract of loan or mutuum. Under such credit line, the bank is merely obliged, for the considerations
specified therefor, to lend to the other party amounts not exceeding the limit provided. The credit transaction thus occurred not
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when the credit line was opened, but rather when the credit line was availed of. In the case at bar, the violation of the Truth in
Lending Act allegedly occurred not when the parties executed the Credit Agreement, where no interest rate was mentioned, but
when the parties executed the promissory notes, where the allegedly offending interest rate was stipulated.

UCPB further argues that since the spouses Beluso were duly given copies of the subject promissory notes after their
execution, then they were duly notified of the terms thereof, in substantial compliance with the Truth in Lending Act.

Once more, we disagree. Section 4 of the Truth in Lending Act clearly provides that the disclosure statement must be
furnished prior to the consummation of the transaction:

SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the consummation
of the transaction, a clear statement in writing setting forth, to the extent applicable and in accordance with
rules and regulations prescribed by the Board, the following information:

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

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

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

(4) the charges, individually itemized, which are paid or to be paid by such person in connection with
the transaction but which are not incident to the extension of credit;

(5) the total amount to be financed;

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

(7) the percentage that the finance bears to the total amount to be financed expressed as a simple
annual rate on the outstanding unpaid balance of the obligation.

The rationale of this provision is to protect users of credit from a lack of awareness of the true cost thereof, proceeding
from the experience that banks are able to conceal such true cost by hidden charges, uncertainty of interest rates, deduction of
interests from the loaned amount, and the like. The law thereby seeks to protect debtors by permitting them to fully appreciate
the true cost of their loan, to enable them to give full consent to the contract, and to properly evaluate their options in arriving at
business decisions.Upholding UCPBs claim of substantial compliance would defeat these purposes of the Truth in Lending Act. The
belated discovery of the true cost of credit will too often not be able to reverse the ill effects of an already consummated business
decision.

In addition, the promissory notes, the copies of which were presented to the spouses Beluso after execution, are not
sufficient notification from UCPB. As earlier discussed, the interest rate provision therein does not sufficiently indicate with
particularity the interest rate to be applied to the loan covered by said promissory notes.

Forum Shopping

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

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

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

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

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

SECTION 1. Grounds.Within the time for but before filing the answer to the complaint or pleading
asserting a claim, a motion to dismiss may be made on any of the following grounds:

(a) That the court has no jurisdiction over the person of the defending party;

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

(c) That venue is improperly laid;

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

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

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

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

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

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

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

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

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

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

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

[T]he rule on litis pendentia does not require that the later case should yield to the
earlier case. What is required merely is that there be another pending action, not a prior
pending action. Considering the broader scope of inquiry involved in Civil Case No. 4102 and

94
 the location of the property involved, no error was committed by the lower court in deferring
to the Bataan court's jurisdiction.

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

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

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

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

SO ORDERED.

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