A.
Simple Loan (Articles 1953-1961) • RFC wrote a letter to Saura that it will release the loan
Saura Import & Export Co., Inc. v.
Development Bank of the Phil.,
G.R. No. L-24968, April 27, 1972
FACTS:
• Saura applied to RFC an industrial loan of P500k.
250k for construction of a factory building
o 240,900 balance of the purchase price of jute
mill
o 9100 additional working capta
• The jute mill machinery was already purchased by Saura
via letter of credit extended by PBTC, and to secure such, a trust
receipt was executed in favor of the said bank
• RFC passed Reso 145 approving the loan for P500k to
be secured by a first mortgage on the factory building to be
constructed, the land site, and the machinery and equipment to be
installed.
• Before the day Saura was officially notified, Saura
wrote a letter to RFC requesting a modification:
o Instead of China Engineers as a co-maker,
Saura
would put up a bond for P123,500
o Maria Roca would be substituted for Inocencia
Arellano
• In view of such request, Saura approved Reso 736 – to
reexamine all the aspects of the approved loan
• But Saura wrote to RFC stating that China had agreed
and asked that the necessary documents be prepared in
accordance with the terms of Reso 145
• Loan documents were executed
• Despite the formal execution, reexamination still
proceeded. o The loan was reduced to P300k
• FR Hauling who signed the PN for China informed RFC
that his company is no longer involved therefore considered the
same as cancelled
• RFC requested RFC to grant the P500k loan
• Denied by RFC
o As they are constrained to consider as
cancelled the loan of P300k and in view of the notification from
China
• Saura informed RFC that China will reinstate their
signature if RFC will release the P500k loan
• Reso 9083 was approved restoring the P500k loan
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from time to time but Saura did not pursue the matter. Instead, it
requested RFC to cancel the mortgage
• RFC cancelled the mortgage
• After almost 9 years, Saura commenced the present suit
alleging failure of RFC to comply with its obligation to release the
proceeds of the loan
ISSUES: (1) WON there is a perfected consensual contract (2)
WON the contract is still existing.
RULING: There was perfected consensual contract, but the
contract is no longer existing.
Article 1934. An accepted promise to deliver something by way of
commodatum or simple loan is binding upon parties, but the
commodatum or simple loan itself shall not be perfected until the
delivery of the object of the contract.
In the case at bar, there was offer and acceptance. However,
when Saura asked that the mortgage be cancelled, there was a
mutual desistance –“mutuo disenso”- which is mode of
extinguishing the obligations. Since mutual agreement can create
a contract, mutual disagreement by the parties can cause its
extinguishment.
Civil Law; Obligations and Contracts; When contract of
simple loan perfected.—Where an application for a loan of
money was approved by resolution of the defendant corporation
and the corresponding mortgage was executed and registered,
there arises a perfected-consensual contract of loan.
Same; Extinguishment of obligations by mutual desistance.—
Where after approval of his loan, the borrower, instead of insisting
for its release, asked that the mortgage given as security be
cancelled and the creditor acceded thereto, the action taken by
both parties was in the nature of mutual desistance—what
Manresa terms “mutuo disenso”—which is a mode of
extinguishing obligations. It is a concept that derives from, the
principle that since mutual agreement can create a contract,
mutual disagreement by the parties can cause its extinguishment.
BPI Investment Corporation v. Court of
Appeals,
G.R. No. 133632, February 15, 2002
FACTS:
• Frank Roa obtained a loan at an interest rate of 16
1/4% per annum from AIDC, for the construction of a house in
his lot
o The house and lot were mortgaged to AIDC to
secure the loan.
• Roa sold the house and lot to ALS for P850k
• ALS paid P350k cash and assumed the P500k balance
of Roa’s indebtedness with AIDC
• AIDC proposed to ALS that it will grant them a new loan
of

P500k to be applied to Roa’s debt and secured by the
same property, with an increased interest rate of 20% per
annum and service fee of 1% per annum on the
outstanding principal balance payable within 10 years
• AIDC also added a penalty interest at the rate of 21%
per day from the date of the amortization
• 3/31/1981 – ALS executed a mortgage deed containing
the above stipulations and the monthly amortization commence on
5/1/1981
• ALS paid Roa’s loan and arrearages amounting to
P190k on
8/19/1982 and applying the loan proceeds of P500k to
the principal balance of Roa’s loan amounting to
P457,204.9
• 9/13/1982 – BPIIC released to ALS P7146.87
purporting to be what was left of their loan after full payment of
Roa’s loan.
• BPIIC instituted a foreclosure proceeding against ALS on
the ground that they failed to pay the mortgage indebtedness from
5/1/1981 to 6/30/1984 amounting to P475,585.31
• ALS argued that they were not in arrears in their payment
but in fact made an overpayment as of 6/30/184. They maintained
that they should not be made to pay amortization before the actual
release of the loan in August and September 1982.
ISSUES / RULING:
(1) WON the contract of simple loan in this case was perfected on
9/13/1982, when BPIIC delivered the purported net proceeds of
the loan to ALS
• YES. A loan contract is not a consensual contract but a
real contract.
• It is perfected only upon the delivery of the object of the
contract
• A simple loan is perfected upon the delivery of the
object of the contract, hence a real contract
• In this case, even though the loan contract was signed
on 3/31/1981, it was perfected only on 9/13/1982 when the full
loan was released to ALS
(2) WON the payment of monthly amortization should commence
on 5/1/1982 as stipulated
• NO. ALS obligation to pay commence only on
10/13/1982, a month after the perfection of the contract
• As averred by private respondents, the promise of BPIIC
to extend and deliver the loan is upon the consideration that ALS
and Litonjua shall pay the monthly amortization commencing on
May 1, 1981, one month after the supposed release of the loan. It
is a basic principle in reciprocal obligations that neither party
incurs in delay, if the other does not comply or is not ready to
comply in a proper manner with what is incumbent upon him. Only
when a party has performed his part of the contract can he
demand that the other party also fulfills his own obligation and if
the latter fails, default sets in. Consequently, petitioner could only
2
demand for the payment of the monthly amortization after
September 13, 1982 for it was only then when it complied with its
obligation under the loan contract. Therefore, in computing the
amount due as of the date when BPIIC extrajudicially caused the
foreclosure of the mortgage, the starting date is October 13, 1982
and not May 1, 1981.
Obligations and Contracts; Loans; A loan contract is not a
consensual contract but a real contract, perfected only upon
the delivery of the object of the contract.—We agree with
private respondents. A loan contract is not a consensual contract
but a real contract. It is perfected only upon the delivery of the
object of the contract. Petitioner misapplied Bonnevie. The
contract in Bonnevie declared by this Court as a perfected
consensual contract falls under the first clause of Article 1934,
Civil Code. It is an accepted promise to deliver something by way
of simple loan.
Same; Same; While a perfected loan contract can give rise to
an action for damages, said contract does not constitute the
real contract of loan which requires the delivery of the object
of the contract for its perfection and which gives rise to
obligations only on the part of the borrower.—In Saura Import
and Export Co. Inc. vs. Development Bank of the
Philippines,44 SCRA 445, petitioner applied for a loan of
P500,000 with respondent bank. The latter approved the
application through a board resolution. Thereafter, the
corresponding mortgage was executed and registered. However,
because of acts attributable to petitioner, the loan was not
released. Later, petitioner instituted an action for damages. We
recognized in this case, a perfected consensual contract which
under normal circumstances could have made the bank liable for
not releasing the loan. However, since the fault was attributable to
petitioner therein, the court did not award it damages. A perfected
consensual contract, as shown above, can give rise to an action
for damages. However, said contract does not constitute the real
contract of loan which requires the delivery of the object of the
contract for its perfection and which gives rise to obligations only
on the part of the borrower.
Same; Same; A contract of loan involves a reciprocal
obligation, wherein the obligation or promise of each party is
the consideration for that of the other; It is a basic principle
in reciprocal obligations that neither party incurs in delay, if
the other does not comply or is not ready to comply in a
proper manner with what is incumbent upon him.—We also
agree with private respondents that a contract of loan involves a
reciprocal obligation, wherein the obligation or promise of each
party is the consideration for that of the other. As averred by
private respondents, the promise of BPIIC to extend and deliver
the loan is upon the consideration that ALS and Litonjua shall pay
the monthly amortization commencing on May 1, 1981, one month
after the supposed release of the loan. It is a basic principle in
reciprocal obligations that neither party incurs in delay, if the other
does not comply or is not ready to comply in a proper manner with
what is incumbent upon him. Only when a party has performed his
part of the contract can he demand that the other party also fulfills
his own obligation and if the latter fails, default sets in.
Consequently, petitioner could only demand for the payment of the
monthly amortization after September 13, 1982 for it was only then
when it complied with its obligation under the loan contract.
Therefore, in computing the amount due as of the date when
BPIIC extrajudicially caused the foreclosure of the mortgage, the
starting date is October 13, 1982 and not May 1, 1981.
Same; Same; Foreclosure of Mortgage; Damages; Where the
borrower was irregular in the payment of its monthly
amortization, it may not claim moral and exemplary damages
due to the erroneous foreclosure proceedings initiated by the
creditor-mortgagor.—Private respondents counter that BPIIC
was guilty of bad faith and should be liable for said damages
because it insisted on the payment of amortization on the loan
even before it was released. Further, it did not make the
corresponding deduction in the monthly amortization to conform
to the actual amount of loan released, and it immediately initiated
foreclosure proceedings when private respondents failed to make
timely payment. But as admitted by private respondents
themselves, they were irregular in their payment of monthly
amortization. Conformably with our ruling in SSS, we can not
properly declare BPIIC in bad faith. Consequently, we should rule
out the award of moral and exemplary damages.
Same; Same; Same; Same; The negligence of the creditor-
mortgagor in relying merely on the entries found in the deed
of mortgage, without checking and correspondingly
adjusting its records on the amount actually released to the
borrower and the date when it was released, which
negligence resulted in damages to the latter, entitles the
borrower to an award of nominal damages in recognition of
its rights which were violated.—In our view, BPIIC was
negligent in relying merely on the entries found in the deed of
mortgage, without checking and correspondingly adjusting its
records on the amount actually released to private respondents
and the date when it was released. Such negligence resulted in
damage to private respondents, for which an award of nominal
damages should be given in recognition of their rights which were
violated by BPIIC. For this purpose, the amount of P25,000 is
sufficient.
Naguiat v. Court of Appeals,
G.R. No. 118375, October 3, 2003
FACTS:
• Queaño applied with Naguiat for a loan in the amount of
P200k, which Naguiat granted.
o Naguiat indorsed to Queaño Associated Bank
Check for the amount P95k, which was earlier
issued to Naguiat by the Corporate Resources
Financing Corporation. She also issued her
own Filmanbank Check, to the order of
Queaño, and for the amount of P95k. The
proceeds of these checks were to constitute
the loan granted by Naguiat to Queaño.
o To secure the loan, Queaño executed a Deed of
Real Estate Mortgage in favor of Naguiat, and
surrendered to the latter the owner’s duplicates
of the titles covering the mortgaged properties
o Queaño issued to Naguiat a promissory note for
the amount of P200,000.00, with interest at
12% per annum. Queaño also issued a
Security Bank and Trust Company check,
postdated for the amount of P200,000.00 and
payable to the order of Naguiat.
• Upon presentment on its maturity date, the Security
Bank check was dishonored for insufficiency of funds.
3
• Queaño received a letter from Naguiat’s lawyer,
demanding settlement of the loan.
• Queaño and Ruebenfeldt met with Naguiat. At the
meeting, Queaño told Naguiat that she did not receive the
proceeds of the loan, adding that the checks were retained by
Ruebenfeldt, who purportedly was Naguiat’s agent.
• Naguiat applied for the extrajudicial foreclosure of the
mortgage. Before the scheduled sale, Queaño filed annulment of
the mortgage deed.
ISSUE: WON there was a perfected contract of loan between the
parties
RULING: NO.
• There was no evidence submitted by Naguiat that the
checks she issued or endorsed were actually encashed or
deposited.
• The mere issuance of the checks did not result in the
perfection of the contract of loan.
• For the Civil Code provides that the delivery of bills of
exchange and mercantile documents such as checks shall
produce the effect of payment only when they have been cashed.
o It is only after the checks have produced the
effect of payment that the contract of loan may
be deemed perfected.
• A loan contract is a real contract, not consensual, and,
as such, is perfected only upon the delivery of the object of the
contract.
• In this case, the objects of the contract are the loan
proceeds which Queaño would enjoy only upon the encashment
of the checks signed or indorsed by Naguiat.
• Since Naguiat presented no such proof, it follows that the
checks were not encashed or credited to Queaño’s account.
Civil Law; Estoppel; Court of Appeals is correct in invoking
the said rule on agency by estoppel.—The Court of Appeals
recognized the existence of an “agency by estoppel” citing Article
1873 of the Civil Code. Apparently, it considered that at the very
least, as a consequence of the interaction between Naguiat and
Ruebenfeldt, Queaño got the impression that Ruebenfeldt was the
agent of Naguiat, but Naguiat did nothing to correct Queaño’s
impression. In that situation, the rule is clear. One who clothes
another with apparent authority as his agent, and holds him out to
the public as such, cannot be permitted to deny the authority of
such person to act as his agent, to the prejudice of innocent third
parties dealing with such person in good faith, and in the honest
belief that he is what he appears to be. The Court of Appeals is
correct in invoking the said rule on agency by estoppel.
Same; Mortgages; A mortgage contract being a mere
accessory contract, its validity would depend on the validity
of the loan secured by it.—All told, we find no compelling reason
to disturb the finding of the courts a quo that the lender did not
remit and the borrower did not receive the proceeds of the loan.
That being the case, it follows that the mortgage which is
supposed to secure the loan is null and void. 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. A mortgage contract being a mere
accessory contract, its validity would depend on the validity of the
loan secured by it.
Cebu International Finance Corporation v.
Court of Appeals,
G.R. No. 123031, October 12, 1999
FACTS:
• Alegre invested with CIFC P500k in cash
• CIFC issued a promissory note for P516,238.67 to
mature on May 27, 1991
o CIFC issued BPI Check
o The check was drawn from CIFC’s current
account with BPI
• When Alegre’s wife deposited the check, BPI dishonored
it with the annotation that the check is subject of an investigation
• BPI took custody of the check and used it to trace the
perpetrators of the forgery
• Alegre notified CIFC of the dishonored check and
demanded that he be paid in cash
o CIFC refused
• Alegre made a formal demand for the payment
o CIFC promised to replace the check but
required an impossible condition that the original must first be
surrendered
• Alegre filed a complaint for recovery of a sum of money
against CIFC
• When BPI deducted the full amount of the forged
checks, including that issued to Alegre, CIFC sued BPI for
collection
o BPI did not deliver to Alegre the amount
deducted from CIFC’s current account
• The parties then entered into a compromise agreement
to the effect that BPI will debit the amount of the check issued to
Alegre from CIFC’s current account representing
payment/discharge and that BPI will have no more liability in case
petitioner is adjudged liable to Alegre.
• BPI encashed and deducted the said amount from the
account of CIFC, but the proceed as well as the check remained
in BPI’s custody
ISSUE: WON there is a contract of loan between Alegre and
CIFC. / WON CIFC is discharged from its liability
RULING: YES / NO
• The private respondent accepted the CHECK, instead of
requiring payment in money. Yet, when he presented it to RCBC
4
for encashment, as early as June 17, 1991, the same was
dishonored by non-acceptance, with BPIs annotation: Check is
subject of an investigation. These facts were testified to by BPIs
manager.
• Under these circumstances, and after the notice of
dishonor, the holder has an immediate right of recourse against
the drawer, and consequently could immediately file an action for
the recovery of the value of the check.
• In a loan transaction, the obligation to pay a sum certain
in money may be paid in money, which is the legal tender or, by
the use of a check. A check is not a legal tender, and therefore
cannot constitute valid tender of payment.
• Mere delivery of checks does not discharge the
obligation under a judgment. The obligation is not extinguished
and remains suspended until the payment by commercial
document is actually realized (Art. 1249)
• when the bank deducted the amount of the CHECK from
CIFCs current account, this did not ipso facto operate as a
discharge or payment of the instrument. Although the value of the
CHECK was deducted from the funds of CIFC, it was not delivered
to the payee, Vicente Alegre. Instead, BPI offset the amount
against the losses it incurred from forgeries of CIFC checks,
allegedly committed by Alegre. The confiscation of the value of the
check was agreed upon by CIFC and BPI. The parties intended to
amicably settle the collection suit filed by CIFC with the RTC-
Makati, Branch 147, by entering into a compromise agreement
• A compromise is a contract whereby the parties, by
making reciprocal concessions, avoid a litigation or put an end to
one already commenced. It is an agreement between two or more
persons who, for preventing or putting an end to a lawsuit, adjust
their difficulties by mutual consent in the manner which they agree
on, and which everyone of them prefers in the hope of gaining,
balanced by the danger of losing. The compromise agreement
could not bind a party who did not sign the compromise agreement
nor avail of its benefits. Thus, the stipulations in the compromise
agreement is unenforceable against Vicente Alegre, not a party
thereto. His money could not be the subject of an agreement
between CIFC and BPI. Although Alegre’s money was in custody
of the bank, the banks possession of it was not in the concept of
an owner. BPI cannot validly appropriate the money as its own.
Civil Law; Commercial Law; Loan; In a money market
transaction, the investor is a lender who loans his money to
a borrower through a middleman or dealer.—Considering the
nature of a money market transaction, the above-quoted provision
should be applied in the present controversy. As held in Perez vs.
Court of Appeals, a “money market is a market dealing in
standardized short-term credit instruments (involving large
amounts) where lenders and borrowers do not deal directly with
each other but through a middle man or dealer in open market. In
a money market transaction, the investor is a lender who loans his
money to a borrower through a middleman or dealer.
Same; Same; Same; Check; A check is not a legal tender, and
therefore cannot constitute valid tender of payment.—In a
loan transaction, the obligation to pay a sum certain in money may
be paid in money, which is the legal tender or, by the use of a
check. A check is not a legal tender, and therefore cannot
constitute valid tender of payment. In the case of Philippine
Airlines, Inc. vs. Court of Appeals, this Court held: “Since a
negotiable instrument is only a substitute for money and not
money, the delivery of such an instrument does not, by itself,
operate as payment (citation omitted). A check, whether a
manager’s check or ordinary check, is not legal tender, and an
offer of a check in payment of a debt is not a valid tender of
payment and may be refused receipt by the obligee or creditor.
Mere delivery of checks does not discharge the obligation under a
judgment. The obligation is not extinguished and remains
suspended until the payment by commercial document is actually
realized (Art. 1249, Civil Code, par. 3.)”
Same; Actions; Compromise Agreement; Nature of
Compromise Agreement; The compromise agreement could
not bind a party who did not sign the compromise agreement
nor avail of its benefits.—A compromise is a contract whereby
the parties, by making reciprocal concessions, avoid a litigation or
put an end to one already commenced. It is an agreement
between two or more persons who, for preventing or putting an
end to a lawsuit, adjust their difficulties by mutual consent in the
manner which they agree on, and which everyone of them prefers
in the hope of gaining, balanced by the danger of losing. The
compromise agreement could not bind a party who did not sign
the compromise agreement nor avail of its benefits. Thus, the
stipulations in the compromise agreement is unenforceable
against Vicente Alegre, not a party thereto. His money could not
be the subject of an agreement between CIFC and BPI. Although
Alegre’s money was in custody of the bank, the bank’s possession
of it was not in the concept of an owner. BPI cannot validly
appropriate the money as its own.
Same; Same; Garnishment; Garnishment is an attachment by
means of which the plaintiff seeks to subject to his claim the
property of the defendant in the hands of a third person or
money owed to such third person or a garnishee to the
defendant; Tender of payment involves a positive and
unconditional act by the obligor of offering legal tender
currency as payment to the obligee for the former’s obligation
and demanding that the latter accept the same.—BPI’s
confiscation of Alegre’s money constitutes garnishment without
the parties going through a valid proceeding in court. Garnishment
is an attachment by means of which the plaintiff seeks to subject
to his claim the property of the defendant in the hands of a third
person or money owed to such third person or a garnishee to the
defendant. The garnishment procedure must be upon proper order
of RTC-Makati, Branch 62, the court who had jurisdiction over the
collection suit filed by BPI against Alegre. In effect, CIFC has not
yet tendered a valid payment of its obligation to the private
respondent. Tender of payment involves a positive and
unconditional act by the obligor of offering legal tender currency
as payment to the obligee for the former’s obligation and
demanding that the latter accept the same.
Tender of payment cannot be presumed by a mere inference from
surrounding circumstances.
Same; Same; Litis Pendentia; Requisites for litis pendentia to
be a ground for the dismissal of an action.—With regard to
the third issue, for litis pendentia to be a ground for the dismissal
of an action, the following requisites must concur: (a) identity of
parties or at least such as to represent the same interest in both
actions; (b) identity of rights asserted and relief prayed for, the
relief being founded on the same acts; and (c) the identity in the
two cases should be such that the judgment which may be
rendered in one would, regardless of which party is successful,
amount to res judicata in the other.
Same; Same; Res Judicata; The general rule is that a
compromise has upon the parties the effect and authority of
res judicata, with respect to the matter definitely stated
5
therein, or which by implication from its terms should be
deemed to have been included therein even if the agreement
has not been judicially approved.—The compromise agreement
between CIFC and BPI, categorically provided that “In case
plaintiff is adjudged liable to Vicente Alegre in Civil Case No. 92-
515 arising from the alleged dishonor of BPI Check No. 513397,
plaintiff (CIFC) cannot go after the defendant (BPI); otherwise
stated, the defendant shall not be liable to the plaintiff.” Clearly,
this stipulation expressed that CIFC had already abandoned any
further claim against BPI with respect to the value of BPI Check
No. 513397. To ask this Court to allow BPI to be a party in the
case at bar, would amount to res judicata and would violate terms
of the compromise agreement between CIFC and BPI. The
general rule is that a compromise has upon the parties the effect
and authority of res judicata, with respect to the matter definitely
stated therein, or which by implication from its terms should be
deemed to have been included therein. This holds true even if the
agreement has not been judicially approved.
BPI Family Bank v. Franco,
538 SCRA 184 (2007)
FACTS:
• On Aug 16, 1989 Tevesteco opened a savings and
current account with BPI-FB. FMIC also opened a time
deposit account with the same branch of BPI-FB
• On Aug 31, 1989 Franco opened 3 accounts – current,
savings and time deposit – with BPI-FB amounting to
P2M
o In opening these accounts he used a check
issued by Tevesteco
▪
Check was part of the P80M debited
by BPI-FB from FMIC’s time deposit
account and credited to Tevesteco’s
current account pursuant to an
Authority to Debit purportedly signed
by FMIC’s officers
• It appears however, that the signatures of FMIC’s
officers were forged.
• BPI-FB debited Franco’s savings and current accounts
for the amounts remaining therein
• The 2 checks drawn by Franco against his BPI-FB were
dishonored and stamped with a notation “account under
garnishment”
ISSUE: WON the amounts shall be given to Franco
RULING: YES
• the deposit of money in banks is governed by the Civil
Code provisions on simple loan or mutuum.
• As there is a debtor-creditor relationship between a bank
and its depositor, BPI-FB ultimately acquired ownership of
Franco's deposits, but such ownership is coupled with a
corresponding obligation to pay him an equal amount on demand.
• Although BPI-FB owns the deposits in Franco's
accounts, it cannot prevent him from demanding payment of BPI-
FB's obligation by drawing checks against his current account, or
asking for the release of the funds in his savings account.
• Thus, when Franco issued checks drawn against his
current account, he had every right as creditor to expect that those
checks would be honored by BPI-FB as debtor.
Civil Law; Property; The movable property mentioned in
Article 559 of the Civil Code pertains to a specific or
determinate thing—a determinate or specific thing is one that
is individualized and can be identified or distinguished from
others of the same kind.—BPI-FB’s argument is unsound. To
begin with, the movable property mentioned in Article 559 of the
Civil Code pertains to a specific or determinate thing. A
determinate or specific thing is one that is individualized and can
be identified or distinguished from others of the same kind.
Same; Same; In this case, the deposit in Franco’s accounts
consists of money which, albeit characterized as a movable,
is generic and fungible.—In this case, the deposit in Franco’s
accounts consists of money which, albeit characterized as a
movable, is generic and fungible. The quality of being fungible
depends upon the possibility of the property, because of its nature
or the will of the parties, being substituted by others of the same
kind, not having a distinct individuality.
Mercantile Law; Banking Laws; Money as a Medium of
Exchange; Money, which had passed through various
transactions in the general course of banking business, even
if of traceable origin, bears no earmarks of peculiar
ownership.—It bears emphasizing that money bears no earmarks
of peculiar ownership, and this characteristic is all the more
manifest in the instant case which involves money in a banking
transaction gone awry. Its primary function is to pass from hand to
hand as a medium of exchange, without other evidence of its title.
Money, which had passed through various transactions in the
general course of banking business, even if of traceable origin,
bears no earmarks of peculiar ownership.
Same; Same; Nature of a Bank; As a business affected with
public interest and because of the nature of its functions, the
bank is under obligation to treat the accounts of its
depositors with meticulous care, always having in mind the
fiduciary nature of the relation-ship.—In every case, the
depositor expects the bank to treat his account with the utmost
fidelity, whether such account consists only of a few hundred
pesos or of millions. The bank must record every single
transaction accurately, down to the last centavo, and as promptly
as possible. This has to be done if the account is to reflect at any
given time the amount of money the depositor can dispose of as
he sees fit, confident that the bank will deliver it as and to
whomever directs. A blunder on the part of the bank, such as the
dishonor of the check without good reason, can cause the
depositor not a little embarrassment if not also financial loss and
perhaps even civil and criminal litigation. The point is that as a
6
business affected with public interest and because of the nature
of its functions, the bank is under obligation to treat the accounts
of its depositors with meticulous care, always having in mind the
fiduciary nature of their relationship. x x x.
Tolentino v. Gonzales Sy Chiam,
G.R. No. 26085, August 12, 1927
FACTS:
• Sometime prior to the 28th day of November, 1922, the
Tolentino and Manio purchased to the Luzon Rice Mills, Inc., a
piece or parcel of land with the camarin located thereon for the
price of P25k, promising to pay therefor in three installments.
• One of the conditions of that contract of purchase was
that on failure of the purchaser to pay the balance of said purchase
price or any of the installments on the date agreed upon, the
property bought would revert to the original owner.
• For the last installment, upon receiving the letter of the
vendor of said property, the purchasers, the appellants herein,
realizing that they would be unable to pay the balance due, began
to make an effort to borrow money with which to pay the balance
due, began to make an effort to borrow money with which to pay
the balance of their indebtedness on the purchase price of the
property involved.
• an application was made to the defendant for a loan for
the purpose of satisfying their indebtedness to the vendor of said
property. After some negotiations the defendants agreed to loan
the plaintiffs to loan the plaintiffs the sum of P17,500 upon
condition that the plaintiffs execute and deliver to him a pacto de
retro of said property.
ISSUE: WON the contract in question is a mortgage
RULING: NO
• The contract is a pacto de retro and not a mortgage.
There is not a word, a phrase, a sentence or a paragraph in the
entire record, which justifies this court in holding that the said
contract of pacto de retro is a mortgage and not a sale with the
right to repurchase.
• The purpose of the contract is expressed clearly that
there can certainly be no doubt as to the purpose of the Tolentino
to sell the property in question, reserving the right only to
repurchase the same
• First, that the contract of pacto de retro is an absolute
sale of the property with the right to repurchase and not a
mortgage; and, second, that by virtue of the said contract the
vendor became the tenant of the purchaser, under the conditions
mentioned in paragraph 3 of said contact. When the vendor of
property under a pacto de retro rents the property and agrees to
pay a rental value for the property during the period of his right to
repurchase, he thereby becomes a "tenant" and in all respects
stands in the same relation with the purchaser as a tenant under
any other contract of lease.
• In the present case the property in question was sold. It
was an absolute sale with the right only to repurchase.
During the period of redemption the purchaser was the
 absolute owner of the property. During the period of
redemption the vendor was not the owner of the property.
During the period of redemption the vendor was a tenant
of the purchaser. During the period of redemption the
relation which existed between the vendor and the
vendee was that of landlord and tenant. That relation can
only be terminated by a repurchase of the property by the
vendor in accordance with the terms of the said contract.
The contract was one of rent. The contract was not a
loan, as that word is used in Act No. 2655.
Loan vs Rent as discussed under Usury Law in relation to Act No.
2655 "An Act fixing rates of interest upon 'loans' and declaring the
effect of receiving or taking usurious rates."
Usury, generally speaking, may be defined as contracting for or
receiving something in excess of the amount allowed by law for
the loan or forbearance of money—the taking of more interest for
the use of money than the law allows.
It will be noted that said statute imposes a penalty upon a "loan"
or forbearance of any money, goods, chattels or credits, etc. The
central idea of said statute is to prohibit a rate of interest on
"loans." A contract of "loan," is very different contract from that of
"rent".
1. CONTRACTS; "PACTO DE RETRO;" MORTGAGE.—
Held,That the con-tract which is copied in full in the
decision is a pacto de retro and not a mortgage; that at
the time of its execution and delivery the parties thereto
intended to execute a pacto de retro (a conditional sale)
and not a mortgage (a loan); that the vendor became a
tenant of the purchaser and not a mortgagor.
1. 2.ID. ; ID.—It has been the uniform rule of this court, due
to the severity of a contract of pacto de retro, to declare
the same to be a mortgage and not a sale whenever the
interpretation of such a contract justifies that conclusion.
There must be something, however, in the language of
the contract or in the conduct of the parties which shows
clearly and beyond doubt that they intended the contract
to be a mortgage and not a pacto de retro.
2. 3.ID.; EVIDENCE TO VARY TERMS OF.—While it is a
general rule that parol evidence is not admissible for the
purpose of varying the terms of a contract, yet when an
issue is squarely presented, that a contract does not
express the intention of the parties, the courts will, when
a proper foundation is laid therefor, hear evidence for the
purpose of ascertaining the true intention of the parties.
In every case in which the court has considered a
contract to be a mortgage or a loan instead of a sale
with pacto de retro, it has done so, either because the
terms of such contract are ambiguous or because the
circumstances surround-ing the execution or the
performance of the contract were incompatible or
inconsistent with the theory that said contract was one of
purchase and sale.
3. 4.ID. ; WHEN MAY BE REFORMED.—It is a well settled
rule of law that courts of equity will reform a written
contract where, owing to mutual mistake, the language
used therein did not fully or accurately express the
agreement and intention of the parties. Relief, however,
7
by way of reformation will not be granted unless the proof
of mutual mistake be of the clearest and most
satisfactory character.
4. 5.ID.; RENTAL CONTRACTS; USURY.—A contract for
the lease of property is not a "loan." Under the Usury Law
the defense of usury cannot be based thereon. The
Usury Law in this jurisdiction prohibits a certain rate of
interest on "loans." A contract of "loan" is a very different
contract from that of "rent." A "loan," as that term is used
in the statute, signifies the giving of a sum of money,
goods or credit to another, with a promise to repay, but
not a promise to return the same thing. In a con-tract of
"rent' the owner of the property does not lose his
ownership. He simply loses his control over the property
rented during the period of the contract. In a contract of
rent the relation between the contractors is that of
landlord and tenant. In a contract of loan of money,
goods, chattels or credits, the relation between the
parties is that of obligor and obligee.
5. 6.RENTS, CONTRACT OF ; DEFINED.—A contract of
"rent" may be defined as the compensation either in
money, provisions, chattels or labor, received by the
owner of the soil or the property rented, f rom the
occupant thereof.
LOAN, CONTRACT OF; DEFINED.—A contract of
"loan," as that term is used in the statute, signifies the
giving of a sum of money, goods or credits to another,
with a promise to repay, but not a promise to return the
same thing. It has been defined as an advancement of
money, goods or credits upon a contract or stipulation to
repay, not to return, the thing loaned at some future day
in accordance with the terms of the contract. The
moment the contract is completed, the money, goods or
chattels given cease to be the property of the former
owner and become the property of the obligor to be used
according to his own will, unless the contract itself
expressly provides for a special or specific use of the
same. At all events, the money, goods or chattels, the
moment the contract is executed, cease to be the
property of the former owner and become the sole
property of the obligor. A contract of "loan" differs
materially and essentially from a contract of "rent."
8.USURY; DEFINED.—Usury may be defined as
contracting for or receiving something in excess of the
amount allowed by law for the loan or forbearance of
money, goods or chattels. It is the taking of more interest
for the use of money, goods or chattels or credits than
the law allows. Usury has been regarded with
abhorrence from the earliest times.
 B. Interest and The Usury Law (Act No. 2655, as
amended)
Jadenil v. Salas,
G.R. No. 47878, July 24, 1942
FACTS:
ISSUE: WON defendant-appellee bound to pay the stipulated
interest only up to the date of maturity as fixed in the promissory
note, or up to the date payment is effected? This question is, in
our opinion controlled by the express stipulation of the parties.
RULING: Defendant-appellee has, therefore, clearly agreed to
pay interest only up to the date of maturity, or until March 31,
1934. As the contract is silent as to whether after that date, in the
event of non-payment, the debtor would continue to pay interest,
we cannot in law, indulge in any presumption as to such interest;
otherwise, we would be imposing upon the debtor an obligation
that the parties have not chosen to agree upon. Article 1755 of
the Civil Code provides that "interest shall be due only when it
has been expressly stipulated."
There is nothing in the mortgage deed to show that the terms
employed by the parties thereto are at war with their evident
intent. On the contrary the act of the mortgage of granting to the
mortgagor on the same date of execution of the deed of
mortgage, an extension of one year from the date of maturity
within which to make payment, without making any mention of
any interest which the mortgagor should pay during the additional
period (see Exhibit B attached to the complaint), indicates that
the true intention of the parties was that no interest should be
paid during the period of grace. What reason the parties may
have therefore, we need not here seek to explore.
1.Interest; Article 1765 of the Civil Code; Interpretation of
Contracts.—Defendant has agreed to pay interest only up to the
date of maturity, or until March 31, 1934. As the contract is silent
as to whether after that date, in the event of non-payment, the
debtor would continue to pay interest, no legal presumption as to
such interest can be indulged, for this would be imposing upon the
debtor an obligation that the parties have not chosen to agree
upon. Article 1755 of the Civil Code provides that "interest shall be
due only when it" has been expressly stipulated."
2.Id.; Id.; Id.—As the contract is clear and unmistakable and the
terms employed therein have not been shown to belie or otherwise
fail to express the true intention of the parties, and that the deed
has not been assailed on the ground of mutual mistake which
would require its reformation, same should be given its full force
and effect. When a party sues on a written contract and no attempt
is made to show any vice therein, he cannot be allowed to lay any
claim more than what its clear stipulations accord. His omission,
to which the law attaches a definite meaning as in the instant case,
cannot by the courts be arbitrarily supplied by what their own
notions of justice or equity may dictate.
8
Cu Unjieng e Hijos v. Mabalacat Sugar, Co.,
G.R. No. 23644, October 4, 1930
FACTS:
• Case was Instituted in the Court of First Instance of Pampanga
by Cu Unjieng e Hijos, for the purpose of recovering from the
Mabalacat Sugar Company an indebtedness amounting to
more than P163.00, with interest, and to foreclose a mortgage
given by the debtor to secure the same, as well as to recover
stipulated attorney's fee and the sum of P1,206, paid by the
plaintiff for insurance upon the mortgaged property, with
incidental relief.
• In the complaint Siuliong & Co., Inc., was joined as defendant,
as a surety of the Mabalacat Sugar Company, and as having
a third mortgage on the mortgaged property. The Philippine
National Bank was also joined by reason of its interest as
second mortgagee of the land covered by the mortgage to the
plaintiff.
• Cu Unjieng e Hijos, agreed to extend the time for payment of
the indebtedness until June 30, 1929, with certain interim
payments prior to the contemplated final liquidation of the whole
indebtedness. But the debtor party failed to make the interim
payments due and failed altogether to pay the balance due,
according to the terms of this extension, on June 30, 1929.
• it is insisted for the appellant that this agreement for the
extension
of the time of payment had the effect of abrogating the
stipulation
of the original contract with respect to the acceleration of the
maturity of the debt by non-compliance with the terms of the
mortgage
• Under the second clause of the mortgage, interest should be
calculated upon the indebtedness at the rate of 12 per cent per
annum. In the same clause, but in a separate paragraph, there is
another provision with respect to the payment of interest
expressed in Spanish. In English this provision reads
substantially as follows:
"Interest, to be computed upon the still unpaid capital of the
loan, shall be paid monthly, at the end of each month."
ISSUE: WON it is correct for interest charges be made by the
plaintiff by estimating the amount of the indebtedness?
RULING: It is well settled that, under Article 1109 of the Civil
Code, as well as under section 5 of the Usury Law (Act No.
2655), the parties may stipulate that interest shall be
compounded; AND rests for the computation of compound interest
can certainly be made monthly, as well as quarterly, semi-
annually, or annually. BUT in the absence of express
stipulation for the accumulation of compound interest, no
interest can be collected upon interest until the debt is
judicially claimed, and then the rate at which interest upon
accrued interest must be computed is fixed AT 6 PER CENT PER
ANNUM.

In the present case, however, the language which we have
quoted above DOES NOT JUSTIFY THE CHARGING OF
INTEREST UPON INTEREST, so far as interest on the capital is
concerned. The provision quoted merely requires the debtor to
pay interest monthly at the end of each month, such interest to be
computed upon the capital of the loan not yet paid. Clearly this
provision does not justify the charging of compound interest
upon the interest accruing upon the capital monthly. It is true
that in subsections (a), (b) and (c) of article IV of the mortgage, it
is stipulated that the interest can be thus COMPUTED UPON
SUMS which the creditor would have to pay out (a) to maintain
insurance upon the mortgaged property, (b) to pay the land tax
upon the same property, and (c) upon disbursements that might
be made by the mortgagee to maintain the property in good
condition. BUT THE
CHIEF THING IS THAT INTEREST CANNOT BE THUS
ACCUMULATED ON UNPAID INTEREST ACCRUING UPON
THE CAPITAL OF THE DEBT.
The exhibit referred to is merely a receipt showing that the sum of
P256.28 was, on March 19, 1928, paid by the debtor to the plaintiff
as interest upon interest. But where interest is improperly charged,
at an unlawful rate, the mere voluntary payment of it to the creditor
by the debtor is not binding. Such payment, in the case before
us, was usurious, being in excess of 12 per cent which is
allowed to be
charged, under section 2 of the Usury Law, when a debt is
secured by mortgage upon real property.
1. 1,INTEREST; COMPOUND INTEREST; STIPULATION
FOR PAYMENT OF INTEREST AT STATED
INTERVALS DURING YEAR.—A stipulation to the effect
that interest shell be at the rate of 12 per centum per
annum payable at the end of each month upon the
unpaid capital of the loan, does not authorize the
compounding of interest payments at intervals of one
month.
1. 2.USURY; INTEREST IN EXCESS OF LEGAL
RATE; VOLUNTARY PAYMENT NOT BINDING ON
DEBTOR.—Where interest is charged at an unlawful
rate, in excess of the limit allowed by the Usury Law, the
mere voluntary payment of it to the creditor by the debtor
is not binding.
GSIS v. Court of Appeals,
G.R. No. L-52478, October 30, 1986
FACTS: Sps. Medina applied for a loan with GSIS in the amount
of P600,000. But only P350,000 had been approved (BR 5041)
subject to the conditions: a. that 9% per annum shall be the
interest rate, compounded monthly; b. that the loan shall be
repayable in 10 years at a monthly mortization of P4,433.65
including principal and interest, and that any installment or
amortization due and unpaid shall bear an interest of 9%/12 per
month.
The Office of the Economic Coordinator, in a 2nd Indorsement,
further reduced the approved amount to P295,000. The Medinas
9
accepted the reduced amount, executed a promissory note and a
REM in favor of GSIS.
On June 6, 1962, the approved loan was restored to P350,000
and was denominated as Account No. 31055. As a consequence,
the Medinas subsequently executed an Amendment of Real
Estate Mortgage. Upon application by the Medinas, GSIS adopted
Resolution No. 121, as amended by Resolution No. 348, granting
an additional loan of P230,000 on the security of the same
mortgaged properties and additional properties. The loan was
denominated as Account No. 31442.
Beginning 1965, the Medinas defaulted in their payments and in
1967, they began defaulting in the payment of their fire insurance
premiums. On May 3, 1974, GSIS informed the debtors that they
had arrearages in the amount of P575,652.42 as of April 18, 1974
and demanded payment within 7 days, otherwise, it would
foreclose the mortgage.
On Apr. 21, 1975, GSIS applied for foreclosure of the mortgage.
The Medinas filed a complaint, praying for the issuance of a
restraining order or writ of PI, but no such RO or WPI was issued
in view of PD No. 385.
On Apr. 25, 1975, the Medinas made a last partial payment in the
amount of P209, 662.80. The properties of the medinas were sold
at public auction with GSIS as the highest bidder. Hence, the
Medinas filed an amended complaint, praying for the declaration
of nullity of their 2 REM contracts with the GSIS, as well as of the
EJ foreclosure proceedings, and for the refund of excess
payments, damages and AF. TC: N&V + Medinas to pay GSIS
P1,611.12 in fully payment of their obligation with 9% p.a. interest
from Dec. 11, 1975 CA: Affirmed: GSIS to reimburse P9,580 OP
and pay Sp Medina P3,000 AF and P1,000 litigation exp; SC: PRC
↓; MR: due course
ISSUE/ RULING:
# 1 WON the CA erred in holding that the amendment of the REM
dated July 6, 1962 superseded the mortgage contract dated Apr.
4, 1962, particularly with the compounding of interest
Said Amendment was never intended to completely supersede the
mortgage contract dated April 4, 1962. In fact, GSIS, as a matter
of policy, imposes uniform terms and conditions for all its real
estate loans, particularly with respect to compounding of interest.
• GSIS: Did not supersede; amended only wrt the amount secured
thereby and the amount of monthly amortizations; others –
deemed rewritten
• Medinas: no express stipulation on the compounded interest →
OP o The difference in the computation lies in the inclusion of the
compounded interest as demanded by the GSIS on the one hand
and the exclusion thereof, as insisted by the Medinas on the other.
ISSUE # 2 WON the CA erred in sustaining the Sp. Medinas’
claim of OP, by crediting the fire insurance proceeds in the sum of
P11,152.02 to the total payment made by said spouses as of Dec.
11, 1975
YES. The plaintiffs were not entitled to a credit of P19,381.07 as
FI proceeds, as they were only entitled to and were credited with
P11,152.02.
ISSUE # 3 WON the CA erred in holding that the interest rates
on the loan accounts of the Medinas are usurious
NO. Usury Law applies only to interest by way of compensation
for the use or forbearance of money. Interest by way of damages
is governed by Article 2209 of the Civil Code
ISSUE # 4: WON the CA erred in affirming the annulment of the
subject EJ foreclosure and sheriff’s Certificate of Sale
Since the Medinas failed to settle their accounts with the GSIS,
the latter had a perfect right to foreclose the mortgage. →
Reversed and set aside…VALID.
Civil Law; Credit Transactions; Mortgage; Rule in the
interpretation ofcontract that if the terms there of are clear,
the literal meaning of the stipulations shatt
control; Exception—It is a basic and fundamental rule in the
interpretation of contract that if the terms thereof are clear and
leave no doubt as to the intention of the contracting parties, the
literal meaning of the stipulations shall control but when the words
appear contrary to the evident intention of the parties, the latter
shall prevail over the former. In order to judge the intention of the
parties, their contemporaneous and subsequent acts shall be
principally considered. (Sy v. Court of Appeals, 131 SCRA 116;
July 31,1984).
Same; Same; Same; Amendment ofmortgage contract, never
intended to completely supersede the original mortgage
contract—As correctly stated by the GSIS in its brief (Rollo, pp.
162–166), a careful perasa! of the title, preamble and body of the
Amenelment of Real Estate Mortgage dated July 6, 1962, taking
into account the prior, contemporaneous, and subsequent acts of
the parties, ineluctably shows that said Amendment was never
intended to completely supersede the mortgage contract dated
April 4,1962.
Same; Same; Same; Same; Intention of the parties to be
bound by the unaffected provisions of the mortgage
contract—In fact the intention of the parties to be bound by the
unaffected provisions of the mortgage contract of April 4, 1962
expressed in umnistakable language is clearly evident in the last
provision of the Amendment of Real Estate Mortgage dated July
6,1962.
Same; Same; Usury Law, applicable only to interest by way of
compensation for use or forbearance of money.—As to
whether or not the interest rates on the loan accounts of the
Medinas are usurious, it has already been settled that the Usury
Law applies only to interest by way of compensation f or the use
or forbearance of money (Lopez v. Hernaez, 32 PhiL 631;
Bachrach Motor Co. v. Espiritu, 52 PhiL 346; Equitabie Banking
Corporation v. Liwanag. 32 SCRA 293, March 30, 1970).
Same; Same; Same; Interest; Stipulation about payment
ofadditional rate of interest partakes ofthe nature of a penalty
clause.—In the Bachrach case (supra) the Supreme Court ruled
that the Civil Code permits the agreement upon a penalty apart
from the interest. Should there be such an agreement, the penalty
does not include the interest, and as such the two are different and
distinct things which may be demanded separately. Reiterating the
same principle in the later case of Equitable Banking Corp.
(supra), where this Court held that the stipulation about payment
of such additional rate partakes of the nature of a penalty clause,
which is sanctioned by law.
Same; Same; Same; Sheriffs certificate of sale, not intended
to operate as an ubsolute transfer of the property.—There is
merit in GSIS' contention that the Sheriff s Certificate of Sale is
merely provisional in character and is not intended to operate as
an absolute transfer of the subject property, but merely to identify
10
the property, to show the price paid and the date when the right of
redemption expires (Section 27, Rule 39, Rules of Oourt,
Francisco, The Revised Rules of Court, 1972 VoL, IV-B, Part I, p.
681). Hence the date of the foreclosed mortgage is not even a
material content of the said Certificate. (Rollo, p. 174)
Ligutan v. Court of Appeals,
G.R. No. 138677, February 12, 2002
FACTS:
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 them, 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 attorney’s 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.
RTC- rendered in favor of the plaintiff and against the
defendants, ordering the latter to pay, jointly and severally, to the
plaintiff
CA- 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.
ISSUE: WON the imposed interest to the mortgage loan precludes
the creditor from imposing a penalty stipulation?
RULING: 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.
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.
Obligations and Contracts; Penalty Clauses; Words and
Phrases; A penalty clause, expressly recognized by law, is an
accessory undertaking to assume greater liability on the part
of an obligor in case of breach of an obligation; 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.—A penalty clause, expressly
recognized by law, 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 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.
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.
Same; Same; The question of whether a penalty is reasonable or
iniquitous can be partly subjective and partly objective.—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, just an example, the Court has tempered the
penalty charges after taking into account the debtor’s 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. The
stipulated penalty might even be deleted such as when there has
been substantial performance in good faith by the obligor, when
the penalty clause itself suffers from fatal infirmity, or when
exceptional circumstances so exist as to warrant it.
Same; Same; Interests; 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,
and 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; 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.—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
11
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. 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.
Same; Novation; Requisites; 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; 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.—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. 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. 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 com patible covenants or where the old
contract is merely supplemented by the new one. 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, or from a sale
to one of loan; (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 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.
Tan v. Court of Appeals,
G.R. No. 116285, October 19, 2001
FACTS:
• 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 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) instalments.

• Petitioner Tan failed to pay any instalment on the said
restructured loan.
• 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
instalments until fully paid.
• 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.
• RTC-rendered in favor of plaintiff and against defendant,
ordering defendant to pay plaintiff, the amount of
P7,996,314.67, representing defendant’s outstanding account
as of August 28,
1986, with the corresponding stipulated interest and charges
thereof, until fully paid, plus attorney’s fees in an amount
equivalent to 25% of said outstanding account, plus
P50,000.00, as exemplary damages, plus costs
• CA- Given the circumstances of the case, plus the fact that
plaintiff was represented by a government lawyer, We believe
the award of
25% as attorney’s 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.
ISSUE: WON computation of the private respondent whereby the
interest, surcharge and the principal were added together and that
on the total sum interest is VALID?
RULING: We find no merit in the petitioner’s 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 fulfilment 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.
12
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 payadditional 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.
Loans; Interest Rates; Penal Clauses; Interests and penalties
may both be awarded where the promissory note expressly
provides for the imposition of both in cases of default.—We
find no merit in the petitioner’s 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.
Same; Same; Same; Words and Phrases; The New Civil Code
permits an agreement upon a penalty apart from the monetary
interest, and 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; The penalty charge is also
called penalty or compensatory interest.—Penalty on
delinquent loans may take different forms. In Government Service
Insurance System v. Court of Appeals, 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, 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.
Same; Same; Same; The compounding of the penalty or
compensatory interest is sanctioned by and allowed
pursuant to Article 1959 of the New Civil Code.—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.
Same; Same; Same; Equity; Equity cannot be considered
where there is a contractual stipulation in the promissory
note whereby the borrower expressly agreed to the
compounding of interest in case of failure on his part to pay
the loan at maturity, and since the said stipulation 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 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, 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 in 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.
Same; Same; Same; Same; Inasmuch as the borrower 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 Article 1229 of the New Civil Code—the Court finds
the continued monthly accrual of the 2% penalty charge on the
total amount due to be unconscionable inasmuch as the same
appeared to have been compounded monthly.—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
13
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 petitioner’s 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 respondent’s long overdue deprivation of the use of its money
collectible from the petitioner.
RCBC v. Court of Appeals,
G.R. Nos. 128833, 128834 and 128866, April 20,
1998
FACTS:
• GOYU applied for credit facilities and accommodations with
RCBC at its Binondo Branch.
• Credit facility in the amount of P30 million was initially granted.
Upon GOYU’s application and Uy’s and Lao’s
recommendation, RCBC’s executive committee increased
GOYU’s credit facility to P50 million, then to P90 million, and
finally to P117 million.
• For its credit facilities with RCBC, GOYU executed two real
estate mortgages and two chattel mortgages.
• 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.
• On April 27, 1992, one of GOYU’s 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.
• Manila RTC rendered judgment in favor of GOYU
• The Court of Appeals partly granted GOYU’s appeal,
but sustained the findings of the trial court with respect
to MICO and RCBC’s liabilities.
 • 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.
ISSUE: 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?
WON payment of interest should be included in the insurance to
be paid by MICO?
RULING: 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 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.
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 RCBC’s existence
and being, was duly recognized by the trial court when it ruled
favorably on RCBC’s 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).
Regarding defendant RCBC’s 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 latter’s pitiful situation.
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. There being
written stipulations as to the rate of interest owing on each
specific promissory note as summarized and tabulated by the
14
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 GOYU’s 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 GOYU’s 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.
Civil Law; Insurance Law; Mortgages; It is settled that a mort-
gagor 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; 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
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.

Same; Same; Same; It is basic and fundamental that the first

mortgagee has superior rights over junior mortgagees or
attaching creditors.—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 attaching creditors.

Same; Same; 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.—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 GOYU’s other creditors up to the extent of the
GOYU’s outstanding obligation in RCBC’s 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 GOYU’s obligation with RCBC, the interest of
GOYU in the subject policies had been transferred to RCBC
effective as of the time of the endorsement.

Same; Same; 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.—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.

Same; Same; Interests; The essence or rationale for the

payment of interest or cost of money is separate and distinct
from that of surcharges and penalties; Court fails to find
justification for the Court of Appeals’ outright deletion of the
payment of interest as agreed upon in the respective
promissory notes.—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.

15