G.R. Nos.
173654-765             August 28, 2008 After perusing the Informations in these cases, the trial court did not find the
PEOPLE OF THE PHILIPPINES, petitioner,
vs.
TERESITA PUIG and ROMEO PORRAS, respondents.
DECISION
CHICO-NAZARIO, J.:
This is a Petition for Review under Rule 45 of the Revised Rules of Court with
petitioner People of the Philippines, represented by the Office of the Solicitor
General, praying for the reversal of the Orders dated 30 January 2006 and 9
June 2006 of the Regional Trial Court (RTC) of the 6th Judicial Region, Branch 68,
Dumangas, Iloilo, dismissing the 112 cases of Qualified Theft filed against
respondents Teresita Puig and Romeo Porras, and denying petitioner’s Motion
for Reconsideration, in Criminal Cases No. 05-3054 to 05-3165.
The following are the factual antecedents:
On 7 November 2005, the Iloilo Provincial Prosecutor’s Office filed before
Branch 68 of the RTC in Dumangas, Iloilo, 112 cases of Qualified Theft against
respondents Teresita Puig (Puig) and Romeo Porras (Porras) who were the
Cashier and Bookkeeper, respectively, of private complainant Rural Bank of
Pototan, Inc. The cases were docketed as Criminal Cases No. 05-3054 to 05-
3165.
The allegations in the Informations1 filed before the RTC were uniform and pro-
forma, except for the amounts, date and time of commission, to wit:
INFORMATION
That on or about the 1st day of August, 2002, in the Municipality of Pototan,
Province of Iloilo, Philippines, and within the jurisdiction of this Honorable
Court, above-named [respondents], conspiring, confederating, and helping one
another, with grave abuse of confidence, being the Cashier and Bookkeeper of
the Rural Bank of Pototan, Inc., Pototan, Iloilo, without the knowledge and/or
consent of the management of the Bank and with intent of gain, did then and
there willfully, unlawfully and feloniously take, steal and carry away the sum of
FIFTEEN THOUSAND PESOS (P15,000.00), Philippine Currency, to the damage
and prejudice of the said bank in the aforesaid amount.
existence of probable cause that would have necessitated the issuance of a
warrant of arrest based on the following grounds:
(1) the element of ‘taking without the consent of the owners’ was missing on
the ground that it is the depositors-clients, and not the Bank, which filed the
complaint in these cases, who are the owners of the money allegedly taken by
respondents and hence, are the real parties-in-interest; and
(2) the Informations are bereft of the phrase alleging "dependence,
guardianship or vigilance between the respondents and the offended
party that would have created a high degree of confidence between them
which the respondents could have abused."
It added that allowing the 112 cases for Qualified Theft filed against the
respondents to push through would be violative of the right of the respondents
under Section 14(2), Article III of the 1987 Constitution which states that in all
criminal prosecutions, the accused shall enjoy the right to be informed of the
nature and cause of the accusation against him. Following Section 6, Rule 112 of
the Revised Rules of Criminal Procedure, the RTC dismissed the cases on 30
January 2006 and refused to issue a warrant of arrest against Puig and Porras.
A Motion for Reconsideration2 was filed on 17 April 2006, by the petitioner.
On 9 June 2006, an Order3 denying petitioner’s Motion for Reconsideration was
issued by the RTC, finding as follows:
Accordingly, the prosecution’s Motion for Reconsideration should be, as it
hereby, DENIED. The Order dated January 30, 2006 STANDS in all respects.
Petitioner went directly to this Court via Petition for Review on Certiorari under
Rule 45, raising the sole legal issue of:
WHETHER OR NOT THE 112 INFORMATIONS FOR QUALIFIED THEFT
SUFFICIENTLY ALLEGE THE ELEMENT OF TAKING WITHOUT THE CONSENT
OF THE OWNER, AND THE QUALIFYING CIRCUMSTANCE OF GRAVE ABUSE OF
CONFIDENCE.
Petitioner prays that judgment be rendered annulling and setting aside the
Orders dated 30 January 2006 and 9 June 2006 issued by the trial court, and
that it be directed to proceed with Criminal Cases No. 05-3054 to 05-3165.
Petitioner explains that under Article 1980 of the New Civil Code, "fixed,
savings, and current deposits of money in banks and similar institutions shall be
governed by the provisions concerning simple loans." Corollary thereto, Article
1953 of the same Code provides that "a person who receives a loan of money or
any other fungible thing acquires the ownership thereof, and is bound to pay to
the creditor an equal amount of the same kind and quality." Thus, it posits that
the depositors who place their money with the bank are considered creditors of
the bank. The bank acquires ownership of the money deposited by its clients,
making the money taken by respondents as belonging to the bank.
Petitioner also insists that the Informations sufficiently allege all the elements
of the crime of qualified theft, citing that a perusal of the Informations will show
that they specifically allege that the respondents were the Cashier and
Bookkeeper of the Rural Bank of Pototan, Inc., respectively, and that they took
various amounts of money with grave abuse of confidence, and without the
knowledge and consent of the bank, to the damage and prejudice of the bank.
Parenthetically, respondents raise procedural issues. They challenge the
petition on the ground that a Petition for Review on Certiorari via Rule 45 is the
wrong mode of appeal because a finding of probable cause for the issuance of a
warrant of arrest presupposes evaluation of facts and circumstances, which is
not proper under said Rule.
Respondents further claim that the Department of Justice (DOJ), through the
Secretary of Justice, is the principal party to file a Petition for Review on
Certiorari, considering that the incident was indorsed by the DOJ.
We find merit in the petition.
The dismissal by the RTC of the criminal cases was allegedly due to insufficiency
of the Informations and, therefore, because of this defect, there is no basis for
the existence of probable cause which will justify the issuance of the warrant of
arrest. Petitioner assails the dismissal contending that the Informations for
Qualified Theft sufficiently state facts which constitute (a) the qualifying
circumstance of grave abuse of confidence; and (b) the element of taking, with
intent to gain and without the consent of the owner, which is the Bank.
In determining the existence of probable cause to issue a warrant of arrest, the
RTC judge found the allegations in the Information inadequate. He ruled that the
Information failed to state facts constituting the qualifying circumstance
of grave abuse of confidence and the element of taking without the consent of the
owner, since the owner of the money is not the Bank, but the depositors therein.
He also cites People v. Koc Song,4 in which this Court held:
There must be allegation in the information and proof of a relation, by reason of
dependence, guardianship or vigilance, between the respondents and the
offended party that has created a high degree of confidence between them,
which the respondents abused.
At this point, it needs stressing that the RTC Judge based his conclusion that there
was no probable cause simply on the insufficiency of the allegations in the
Informations concerning the facts constitutive of the elements of the offense
charged. This, therefore, makes the issue of sufficiency of the allegations in the
Informations the focal point of discussion.
Qualified Theft, as defined and punished under Article 310 of the Revised Penal
Code, is committed as follows, viz:
ART. 310. Qualified Theft. – The crime of theft shall be punished by the penalties
next higher by two degrees than those respectively specified in the next
preceding article, if committed by a domestic servant, or with grave abuse of
confidence, or if the property stolen is motor vehicle, mail matter or large cattle
or consists of coconuts taken from the premises of a plantation, fish taken from
a fishpond or fishery or if property is taken on the occasion of fire, earthquake,
typhoon, volcanic eruption, or any other calamity, vehicular accident or civil
disturbance. (Emphasis supplied.)
Theft, as defined in Article 308 of the Revised Penal Code, requires the physical
taking of another’s property without violence or intimidation against persons or
force upon things. The elements of the crime under this Article are:
1. Intent to gain;
2. Unlawful taking;
3. Personal property belonging to another;
4. Absence of violence or intimidation against persons or force upon things.
To fall under the crime of Qualified Theft, the following elements must concur:
1. Taking of personal property;
2. That the said property belongs to another;
3. That the said taking be done with intent to gain;
4. That it be done without the owner’s consent;
5. That it be accomplished without the use of violence or intimidation against
persons, nor of force upon things;
6. That it be done with grave abuse of confidence.
On the sufficiency of the Information, Section 6, Rule 110 of the Rules of Court
requires, inter alia, that the information must state the acts or omissions
complained of as constitutive of the offense.
On the manner of how the Information should be worded, Section 9, Rule 110 of
the Rules of Court, is enlightening:
Section 9. Cause of the accusation. The acts or omissions complained of as
constituting the offense and the qualifying and aggravating circumstances must
be stated in ordinary and concise language and not necessarily in the language
used in the statute but in terms sufficient to enable a person of common
understanding to know what offense is being charged as well as its qualifying
and aggravating circumstances and for the court to pronounce judgment.
It is evident that the Information need not use the exact language of the statute
in alleging the acts or omissions complained of as constituting the offense. The
test is whether it enables a person of common understanding to know the
charge against him, and the court to render judgment properly.5
The portion of the Information relevant to this discussion reads:
A]bove-named [respondents], conspiring, confederating, and helping one another, with grave abuse of confidence, being the Cashier
and Bookkeeper of the Rural Bank of Pototan, Inc., Pototan, Iloilo, without the knowledge and/or consent of the management of the Bank
x x x.
It is beyond doubt that tellers, Cashiers, Bookkeepers and other employees of a
Bank who come into possession of the monies deposited therein enjoy the
confidence reposed in them by their employer. Banks, on the other hand, where
monies are deposited, are considered the owners thereof. This is very clear not
only from the express provisions of the law, but from established jurisprudence.
The relationship between banks and depositors has been held to be that of
creditor and debtor. Articles 1953 and 1980 of the New Civil Code, as
appropriately pointed out by petitioner, provide as follows:
Article 1953. A person who receives a loan of money or any other fungible thing
acquires the ownership thereof, and is bound to pay to the creditor an equal
amount of the same kind and quality.
Article 1980. Fixed, savings, and current deposits of money in banks and similar
institutions shall be governed by the provisions concerning loan.
In a long line of cases involving Qualified Theft, this Court has firmly established
the nature of possession by the Bank of the money deposits therein, and the
duties being performed by its employees who have custody of the money or
have come into possession of it. The Court has consistently considered the
allegations in the Information that such employees acted with grave abuse of
confidence, to the damage and prejudice of the Bank, without particularly
referring to it as owner of the money deposits, as sufficient to make out a case of
Qualified Theft. For a graphic illustration, we cite Roque v. People,6 where the
accused teller was convicted for Qualified Theft based on this Information:
That on or about the 16th day of November, 1989, in the municipality of
Floridablanca, province of Pampanga, Philippines and within the jurisdiction of
his Honorable Court, the above-named accused ASUNCION GALANG ROQUE,
being then employed as teller of the Basa Air Base Savings and Loan Association
Inc. (BABSLA) with office address at Basa Air Base, Floridablanca, Pampanga,
and as such was authorized and reposed with the responsibility to receive and
collect capital contributions from its member/contributors of said corporation,
and having collected and received in her capacity as teller of the BABSLA the
sum of TEN THOUSAND PESOS (P10,000.00), said accused, with intent of
gain, with grave abuse of confidence and without the knowledge and
consent of said corporation, did then and there willfully, unlawfully and
feloniously take, steal and carry away the amount of P10,000.00, Philippine
currency, by making it appear that a certain depositor by the name of Antonio
Salazar withdrew from his Savings Account No. 1359, when in truth and in fact
said Antonio Salazar did not withdr[a]w the said amount of P10,000.00 to the
damage and prejudice of BABSLA in the total amount of P10,000.00, Philippine
currency.
In convicting the therein appellant, the Court held that:
[S]ince the teller occupies a position of confidence, and the bank places money
in the teller’s possession due to the confidence reposed on the teller, the felony
of qualified theft would be committed.7
Also in People v. Sison,8 the Branch Operations Officer was convicted of the
crime of Qualified Theft based on the Information as herein cited:
That in or about and during the period compressed between January 24, 1992
and February 13, 1992, both dates inclusive, in the City of Manila, Philippines,
the said accused did then and there wilfully, unlawfully and feloniously, with
intent of gain and without the knowledge and consent of the owner thereof,
take, steal and carry away the following, to wit:
Cash money amounting to P6,000,000.00 in different denominations belonging
to the PHILIPPINE COMMERCIAL INTERNATIONAL BANK (PCIBank for
brevity), Luneta Branch, Manila represented by its Branch Manager, HELEN U.
FARGAS, to the damage and prejudice of the said owner in the aforesaid amount
of P6,000,000.00, Philippine Currency.
That in the commission of the said offense, herein accused acted with grave
abuse of confidence and unfaithfulness, he being the Branch Operation Officer of
the said complainant and as such he had free access to the place where the said
amount of money was kept.
The judgment of conviction elaborated thus:
The crime perpetuated by appellant against his employer, the Philippine
Commercial and Industrial Bank (PCIB), is Qualified Theft. Appellant could not
have committed the crime had he not been holding the position of Luneta
Branch Operation Officer which gave him not only sole access to the bank vault
xxx. The management of the PCIB reposed its trust and confidence in the
appellant as its Luneta Branch Operation Officer, and it was this trust and
confidence which he exploited to enrich himself to the damage and prejudice of
PCIB x x x.9
From another end, People v. Locson,10 in addition to People v. Sison, described
the nature of possession by the Bank. The money in this case was in the
possession of the defendant as receiving teller of the bank, and the possession of
the defendant was the possession of the Bank. The Court held therein that when
the defendant, with grave abuse of confidence, removed the money and
appropriated it to his own use without the consent of the Bank, there was taking
as contemplated in the crime of Qualified Theft.11
Conspicuously, in all of the foregoing cases, where the Informations merely
alleged the positions of the respondents; that the crime was committed with
grave abuse of confidence, with intent to gain and without the knowledge and
consent of the Bank, without necessarily stating the phrase being assiduously
insisted upon by respondents, "of a relation by reason of dependence,
guardianship or vigilance, between the respondents and the offended party
that has created a high degree of confidence between them, which
respondents abused,"12 and without employing the word "owner" in lieu of the
"Bank" were considered to have satisfied the test of sufficiency of allegations.
As regards the respondents who were employed as Cashier and Bookkeeper of
the Bank in this case, there is even no reason to quibble on the allegation in the
Informations that they acted with grave abuse of confidence. In fact, the
Information which alleged grave abuse of confidence by accused herein is even
more precise, as this is exactly the requirement of the law in qualifying the
crime of Theft.
In summary, the Bank acquires ownership of the money deposited by its clients;
and the employees of the Bank, who are entrusted with the possession of money
of the Bank due to the confidence reposed in them, occupy positions of
confidence. The Informations, therefore, sufficiently allege all the essential
elements constituting the crime of Qualified Theft.
On the theory of the defense that the DOJ is the principal party who may file the
instant petition, the ruling in Mobilia Products, Inc. v. Hajime Umezawa13 is
instructive. The Court thus enunciated:
In a criminal case in which the offended party is the State, the interest of the
private complainant or the offended party is limited to the civil liability arising
therefrom. Hence, if a criminal case is dismissed by the trial court or if there is
an acquittal, a reconsideration of the order of dismissal or acquittal may be
undertaken, whenever legally feasible, insofar as the criminal aspect thereof is
concerned and may be made only by the public prosecutor; or in the case of an
appeal, by the State only, through the OSG. x x x.
On the alleged wrong mode of appeal by petitioner, suffice it to state that the
rule is well-settled that in appeals by certiorari under Rule 45 of the Rules of
Court, only errors of law may be raised,14 and herein petitioner certainly raised
a question of law.
As an aside, even if we go beyond the allegations of the Informations in these
cases, a closer look at the records of the preliminary investigation conducted
will show that, indeed, probable cause exists for the indictment of herein
respondents. Pursuant to Section 6, Rule 112 of the Rules of Court, the judge
shall issue a warrant of arrest only upon a finding of probable cause after
personally evaluating the resolution of the prosecutor and its supporting
evidence. Soliven v. Makasiar,15 as reiterated in Allado v. Driokno,16 explained
that probable cause for the issuance of a warrant of arrest is the existence of
such facts and circumstances that would lead a reasonably discreet and prudent
person to believe that an offense has been committed by the person sought to
be arrested.17 The records reasonably indicate that the respondents may have,
indeed, committed the offense charged.
Before closing, let it be stated that while it is truly imperative upon the fiscal or
the judge, as the case may be, to relieve the respondents from the pain of going
through a trial once it is ascertained that no probable cause exists to form a
sufficient belief as to the guilt of the respondents, conversely, it is also equally
imperative upon the judge to proceed with the case upon a showing that there is
a prima facie case against the respondents.
WHEREFORE, premises considered, the Petition for Review on Certiorari is
hereby GRANTED. The Orders dated 30 January 2006 and 9 June 2006 of the
RTC dismissing Criminal Cases No. 05-3054 to 05-3165 are REVERSED and SET
ASIDE. Let the corresponding Warrants of Arrest issue against herein
respondents TERESITA PUIG and ROMEO PORRAS. The RTC Judge of Branch 68,
in Dumangas, Iloilo, is directed to proceed with the trial of Criminal Cases No.
05-3054 to 05-3165, inclusive, with reasonable dispatch. No pronouncement as
to costs.
SO ORDERED.
G.R. No. 123498               November 23, 2007
BPI FAMILY BANK, Petitioner,
vs.
AMADO FRANCO and COURT OF APPEALS, Respondents.
DECISION
NACHURA, J.:
Banks are exhorted to treat the accounts of their depositors with meticulous
care and utmost fidelity. We reiterate this exhortation in the case at bench.
Before us is a Petition for Review on Certiorari seeking the reversal of the Court
of Appeals (CA) Decision1 in CA-G.R. CV No. 43424 which affirmed with
modification the judgment2 of the Regional Trial Court, Branch 55, Manila
(Manila RTC), in Civil Case No. 90-53295.
This case has its genesis in an ostensible fraud perpetrated on the petitioner BPI
Family Bank (BPI-FB) allegedly by respondent Amado Franco (Franco) in
conspiracy with other individuals,3 some of whom opened and maintained
separate accounts with BPI-FB, San Francisco del Monte (SFDM) branch, in a
series of transactions.
On August 15, 1989, Tevesteco Arrastre-Stevedoring Co., Inc. (Tevesteco)
opened a savings and current account with BPI-FB. Soon thereafter, or on
August 25, 1989, First Metro Investment Corporation (FMIC) also opened a time
deposit account with the same branch of BPI-FB with a deposit of
₱100,000,000.00, to mature one year thence.
Subsequently, on August 31, 1989, Franco opened three accounts, namely, a
current,4 savings,5 and time deposit,6 with BPI-FB. The current and savings
accounts were respectively funded with an initial deposit of ₱500,000.00 each,
while the time deposit account had ₱1,000,000.00 with a maturity date of
August 31, 1990. The total amount of ₱2,000,000.00 used to open these
accounts is traceable to a check issued by Tevesteco allegedly in consideration
of Franco’s introduction of Eladio Teves,7 who was looking for a conduit bank to
facilitate Tevesteco’s business transactions, to Jaime Sebastian, who was then
BPI-FB SFDM’s Branch Manager. In turn, the funding for the ₱2,000,000.00
check was part of the ₱80,000,000.00 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 on the Authority to
Debit were forged.8 On September 4, 1989, Antonio Ong,9 upon being shown the
Authority to Debit, personally declared his signature therein to be a forgery.
Unfortunately, Tevesteco had already effected several withdrawals from its
current account (to which had been credited the ₱80,000,000.00 covered by the
forged Authority to Debit) amounting to ₱37,455,410.54, including the
₱2,000,000.00 paid to Franco.
On September 8, 1989, impelled by the need to protect its interests in light of
FMIC’s forgery claim, BPI-FB, thru its Senior Vice-President, Severino
Coronacion, instructed Jesus Arangorin10 to debit Franco’s savings and current
accounts for the amounts remaining therein.11 However, Franco’s time deposit
account could not be debited due to the capacity limitations of BPI-FB’s
computer.12
In the meantime, two checks13 drawn by Franco against his BPI-FB current
account were dishonored upon presentment for payment, and stamped with a
notation "account under garnishment." Apparently, Franco’s current account
was garnished by virtue of an Order of Attachment issued by the Regional Trial
Court of Makati (Makati RTC) in Civil Case No. 89-4996 (Makati Case), which
had been filed by BPI-FB against Franco et al.,14 to recover the ₱37,455,410.54
representing Tevesteco’s total withdrawals from its account.
Notably, the dishonored checks were issued by Franco and presented for
payment at BPI-FB prior to Franco’s receipt of notice that his accounts were
under garnishment.15 In fact, at the time the Notice of Garnishment dated
September 27, 1989 was served on BPI-FB, Franco had yet to be impleaded in
the Makati case where the writ of attachment was issued.
It was only on May 15, 1990, through the service of a copy of the Second
Amended Complaint in Civil Case No. 89-4996, that Franco was impleaded in
the Makati case.16 Immediately, upon receipt of such copy, Franco filed a Motion
to Discharge Attachment which the Makati RTC granted on May 16, 1990. The
Order Lifting the Order of Attachment was served on BPI-FB on even date, with
Franco demanding the release to him of the funds in his savings and current
accounts. Jesus Arangorin, BPI-FB’s new manager, could not forthwith comply
with the demand as the funds, as previously stated, had already been debited
because of FMIC’s forgery claim. As such, BPI-FB’s computer at the SFDM
Branch indicated that the current account record was "not on file."
With respect to Franco’s savings account, it appears that Franco agreed to an
arrangement, as a favor to Sebastian, whereby ₱400,000.00 from his savings
account was temporarily transferred to Domingo Quiaoit’s savings account,
subject to its immediate return upon issuance of a certificate of deposit which
Quiaoit needed in connection with his visa application at the Taiwan Embassy.
As part of the arrangement, Sebastian retained custody of Quiaoit’s savings
account passbook to ensure that no withdrawal would be effected therefrom,
and to preserve Franco’s deposits.
On May 17, 1990, Franco pre-terminated his time deposit account. BPI-FB
deducted the amount of ₱63,189.00 from the remaining balance of the time
deposit account representing advance interest paid to him.
These transactions spawned a number of cases, some of which we had already
resolved.
FMIC filed a complaint against BPI-FB for the recovery of the amount of
₱80,000,000.00 debited from its account.17 The case eventually reached this
Court, and in BPI Family Savings Bank, Inc. v. First Metro Investment
Corporation,18 we upheld the finding of the courts below that BPI-FB failed to
exercise the degree of diligence required by the nature of its obligation to treat
the accounts of its depositors with meticulous care. Thus, BPI-FB was found
liable to FMIC for the debited amount in its time deposit. It was ordered to pay
₱65,332,321.99 plus interest at 17% per annum from August 29, 1989 until
fully restored. In turn, the 17% shall itself earn interest at 12% from October 4,
1989 until fully paid.
In a related case, Edgardo Buenaventura, Myrna Lizardo and Yolanda Tica
(Buenaventura, et al.),19 recipients of a ₱500,000.00 check proceeding from the
₱80,000,000.00 mistakenly credited to Tevesteco, likewise filed suit.
Buenaventura et al., as in the case of Franco, were also prevented from effecting
withdrawals20 from their current account with BPI-FB, Bonifacio Market, Edsa,
Caloocan City Branch. Likewise, when the case was elevated to this Court
docketed as BPI Family Bank v. Buenaventura,21 we ruled that BPI-FB had no
right to freeze Buenaventura, et al.’s accounts and adjudged BPI-FB liable
therefor, in addition to damages.
Meanwhile, BPI-FB filed separate civil and criminal cases against those believed
to be the perpetrators of the multi-million peso scam.22 In the criminal case,
Franco, along with the other accused, except for Manuel Bienvenida who was
still at large, were acquitted of the crime of Estafa as defined and penalized
under Article 351, par. 2(a) of the Revised Penal Code.23 However, the civil
case24 remains under litigation and the respective rights and liabilities of the
parties have yet to be adjudicated.
Consequently, in light of BPI-FB’s refusal to heed Franco’s demands to unfreeze
his accounts and release his deposits therein, the latter filed on June 4, 1990
with the Manila RTC the subject suit. In his complaint, Franco prayed for the
following reliefs: (1) the interest on the remaining balance25 of his current
account which was eventually released to him on October 31, 1991; (2) the
balance26 on his savings account, plus interest thereon; (3) the advance
interest27 paid to him which had been deducted when he pre-terminated his
time deposit account; and (4) the payment of actual, moral and exemplary
damages, as well as attorney’s fees.
BPI-FB traversed this complaint, insisting that it was correct in freezing the
accounts of Franco and refusing to release his deposits, claiming that it had a
better right to the amounts which consisted of part of the money allegedly
fraudulently withdrawn from it by Tevesteco and ending up in Franco’s
accounts. BPI-FB asseverated that the claimed consideration of ₱2,000,000.00
for the introduction facilitated by Franco between George Daantos and Eladio
Teves, on the one hand, and Jaime Sebastian, on the other, spoke volumes of
Franco’s participation in the fraudulent transaction.
On August 4, 1993, the Manila RTC rendered judgment, the dispositive portion
of which reads as follows:
WHEREFORE, in view of all the foregoing, judgment is hereby rendered in favor
of [Franco] and against [BPI-FB], ordering the latter to pay to the former the
following sums:
1. ₱76,500.00 representing the legal rate of interest on the amount of
₱450,000.00 from May 18, 1990 to October 31, 1991;
2. ₱498,973.23 representing the balance on [Franco’s] savings account as of
May 18, 1990, together with the interest thereon in accordance with the bank’s
guidelines on the payment therefor;
3. ₱30,000.00 by way of attorney’s fees; and
4. ₱10,000.00 as nominal damages.
The counterclaim of the defendant is DISMISSED for lack of factual and legal
anchor.
Costs against [BPI-FB].
SO ORDERED.28
Unsatisfied with the decision, both parties filed their respective appeals before
the CA. Franco confined his appeal to the Manila RTC’s denial of his claim for
moral and exemplary damages, and the diminutive award of attorney’s fees. In
affirming with modification the lower court’s decision, the appellate court
decreed, to wit:
WHEREFORE, foregoing considered, the appealed decision is hereby AFFIRMED
with modification ordering [BPI-FB] to pay [Franco] ₱63,189.00 representing
the interest deducted from the time deposit of plaintiff-appellant. ₱200,000.00
as moral damages and ₱100,000.00 as exemplary damages, deleting the award
of nominal damages (in view of the award of moral and exemplary damages)
and increasing the award of attorney’s fees from ₱30,000.00 to ₱75,000.00.
Cost against [BPI-FB].
SO ORDERED.29
In this recourse, BPI-FB ascribes error to the CA when it ruled that: (1) Franco
had a better right to the deposits in the subject accounts which are part of the
proceeds of a forged Authority to Debit; (2) Franco is entitled to interest on his
current account; (3) Franco can recover the ₱400,000.00 deposit in Quiaoit’s
savings account; (4) the dishonor of Franco’s checks was not legally in order;
(5) BPI-FB is liable for interest on Franco’s time deposit, and for moral and
exemplary damages; and (6) BPI-FB’s counter-claim has no factual and legal
anchor.
The petition is partly meritorious.
We are in full accord with the common ruling of the lower courts that BPI-FB
cannot unilaterally freeze Franco’s accounts and preclude him from
withdrawing his deposits. However, contrary to the appellate court’s ruling, we
hold that Franco is not entitled to unearned interest on the time deposit as well
as to moral and exemplary damages.
First. On the issue of who has a better right to the deposits in Franco’s accounts,
BPI-FB urges us that the legal consequence of FMIC’s forgery claim is that the
money transferred by BPI-FB to Tevesteco is its own, and considering that it
was able to recover possession of the same when the money was redeposited by
Franco, it had the right to set up its ownership thereon and freeze Franco’s
accounts.
BPI-FB contends that its position is not unlike that of an owner of personal
property who regains possession after it is stolen, and to illustrate this point,
BPI-FB gives the following example: where X’s television set is stolen by Y who
thereafter sells it to Z, and where Z unwittingly entrusts possession of the TV set
to X, the latter would have the right to keep possession of the property and
preclude Z from recovering possession thereof. To bolster its position, BPI-FB
cites Article 559 of the Civil Code, which provides:
Article 559. The possession of movable property acquired in good faith is
equivalent to a title. Nevertheless, one who has lost any movable or has been
unlawfully deprived thereof, may recover it from the person in possession of the
same.
If the possessor of a movable lost or of which the owner has been unlawfully
deprived, has acquired it in good faith at a public sale, the owner cannot obtain
its return without reimbursing the price paid therefor.
BPI-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.30 A
determinate or specific thing is one that is individualized and can be identified
or distinguished from others of the same kind.31
In this case, the deposit in Franco’s accounts consists of money which, albeit
characterized as a movable, is generic and fungible.32 The quality of being
fungible depends upon the possibility of the property, because of its nature or
the will of the parties, being substituted by others of the same kind, not having a
distinct individuality.33
Significantly, while Article 559 permits an owner who has lost or has been
unlawfully deprived of a movable to recover the exact same thing from the
current possessor, BPI-FB simply claims ownership of the equivalent amount of
money, i.e., the value thereof, which it had mistakenly debited from FMIC’s
account and credited to Tevesteco’s, and subsequently traced to Franco’s
account. In fact, this is what BPI-FB did in filing the Makati Case against Franco,
et al. It staked its claim on the money itself which passed from one account to
another, commencing with the forged Authority to Debit.
It bears emphasizing that money bears no earmarks of peculiar
ownership,34 and this characteristic is all the more manifest in the instant case
which involves money in a banking transaction gone awry. Its primary function
is to pass from hand to hand as a medium of exchange, without other evidence
of its title.35 Money, which had passed through various transactions in the
general course of banking business, even if of traceable origin, is no exception.
Thus, inasmuch as what is involved is not a specific or determinate personal
property, BPI-FB’s illustrative example, ostensibly based on Article 559, is
inapplicable to the instant case.
There is no doubt that BPI-FB owns the deposited monies in the accounts of
Franco, but not as a legal consequence of its unauthorized transfer of FMIC’s
deposits to Tevesteco’s account. BPI-FB conveniently forgets that the deposit of
money in banks is governed by the Civil Code provisions on simple loan or
mutuum.36 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.37 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.
More importantly, BPI-FB does not have a unilateral right to freeze the accounts
of Franco based on its mere suspicion that the funds therein were proceeds of
the multi-million peso scam Franco was allegedly involved in. To grant BPI-FB,
or any bank for that matter, the right to take whatever action it pleases on
deposits which it supposes are derived from shady transactions, would open the
floodgates of public distrust in the banking industry.
Our pronouncement in Simex International (Manila), Inc. v. Court of
Appeals38 continues to resonate, thus:
The banking system is an indispensable institution in the modern world and
plays a vital role in the economic life of every civilized nation. Whether as mere
passive entities for the safekeeping and saving of money or as active
instruments of business and commerce, banks have become an ubiquitous
presence among the people, who have come to regard them with respect and
even gratitude and, most of all, confidence. Thus, even the humble wage-earner
has not hesitated to entrust his life’s savings to the bank of his choice, knowing
that they will be safe in its custody and will even earn some interest for him.
The ordinary person, with equal faith, usually maintains a modest checking
account for security and convenience in the settling of his monthly bills and the
payment of ordinary expenses. x x x.
In every case, the depositor expects the bank to treat his account with the
utmost fidelity, whether such account consists only of a few hundred pesos or of
millions. The bank must record every single transaction accurately, down to the
last centavo, and as promptly as possible. This has to be done if the account is to
reflect at any given time the amount of money the depositor can dispose of as he
sees fit, confident that the bank will deliver it as and to whomever directs. A
blunder on the part of the bank, such as the dishonor of the check without good
reason, can cause the depositor not a little embarrassment if not also financial
loss and perhaps even civil and criminal litigation.
The point is that as a business affected with public interest and because of the
nature of its functions, the bank is under obligation to treat the accounts of its
depositors with meticulous care, always having in mind the fiduciary nature of
their relationship. x x x.
Ineluctably, BPI-FB, as the trustee in the fiduciary relationship, is duty bound to
know the signatures of its customers. Having failed to detect the forgery in the
Authority to Debit and in the process inadvertently facilitate the FMIC-
Tevesteco transfer, BPI-FB cannot now shift liability thereon to Franco and the
other payees of checks issued by Tevesteco, or prevent withdrawals from their
respective accounts without the appropriate court writ or a favorable final
judgment.
Further, it boggles the mind why BPI-FB, even without delving into the
authenticity of the signature in the Authority to Debit, effected the transfer of
₱80,000,000.00 from FMIC’s to Tevesteco’s account, when FMIC’s account was a
time deposit and it had already paid advance interest to FMIC. Considering that
there is as yet no indubitable evidence establishing Franco’s participation in the
forgery, he remains an innocent party. As between him and BPI-FB, the latter,
which made possible the present predicament, must bear the resulting loss or
inconvenience.
Second. With respect to its liability for interest on Franco’s current account,
BPI-FB argues that its non-compliance with the Makati RTC’s Order Lifting the
Order of Attachment and the legal consequences thereof, is a matter that ought
to be taken up in that court.
The argument is tenuous. We agree with the succinct holding of the appellate
court in this respect. The Manila RTC’s order to pay interests on Franco’s
current account arose from BPI-FB’s unjustified refusal to comply with its
obligation to pay Franco pursuant to their contract of mutuum. In other words,
from the time BPI-FB refused Franco’s demand for the release of the deposits in
his current account, specifically, from May 17, 1990, interest at the rate of 12%
began to accrue thereon.39
Undeniably, the Makati RTC is vested with the authority to determine the legal
consequences of BPI-FB’s non-compliance with the Order Lifting the Order of
Attachment. However, such authority does not preclude the Manila RTC from
ruling on BPI-FB’s liability to Franco for payment of interest based on its
continued and unjustified refusal to perform a contractual obligation upon
demand. After all, this was the core issue raised by Franco in his complaint
before the Manila RTC.
Third. As to the award to Franco of the deposits in Quiaoit’s account, we find no
reason to depart from the factual findings of both the Manila RTC and the CA.
Noteworthy is the fact that Quiaoit himself testified that the deposits in his
account are actually owned by Franco who simply accommodated Jaime
Sebastian’s request to temporarily transfer ₱400,000.00 from Franco’s savings
account to Quiaoit’s account.40 His testimony cannot be characterized as hearsay
as the records reveal that he had personal knowledge of the arrangement made
between Franco, Sebastian and himself.41
BPI-FB makes capital of Franco’s belated allegation relative to this particular
arrangement. It insists that the transaction with Quiaoit was not specifically
alleged in Franco’s complaint before the Manila RTC. However, it appears that
BPI-FB had impliedly consented to the trial of this issue given its extensive
cross-examination of Quiaoit.
Section 5, Rule 10 of the Rules of Court provides:
Section 5. Amendment to conform to or authorize presentation of evidence.—
When issues not raised by the pleadings are tried with the express or implied
consent of the parties, they shall be treated in all respects as if they had been
raised in the pleadings. Such amendment of the pleadings as may be necessary
to cause them to conform to the evidence and to raise these issues may be made
upon motion of any party at any time, even after judgment; but failure to amend
does not affect the result of the trial of these issues. If evidence is objected to at
the trial on the ground that it is now within the issues made by the pleadings,
the court may allow the pleadings to be amended and shall do so with liberality
if the presentation of the merits of the action and the ends of substantial justice
will be subserved thereby. The court may grant a continuance to enable the
amendment to be made. (Emphasis supplied)
In all, BPI-FB’s argument that this case is not the right forum for Franco to
recover the ₱400,000.00 begs the issue. To reiterate, Quiaoit, testifying during
the trial, unequivocally disclaimed ownership of the funds in his account, and
pointed to Franco as the actual owner thereof. Clearly, Franco’s action for the
recovery of his deposits appropriately covers the deposits in Quiaoit’s account.
Fourth. Notwithstanding all the foregoing, BPI-FB continues to insist that the
dishonor of Franco’s checks respectively dated September 11 and 18, 1989 was
legally in order in view of the Makati RTC’s supplemental writ of attachment
issued on September 14, 1989. It posits that as the party that applied for the
writ of attachment before the Makati RTC, it need not be served with the Notice
of Garnishment before it could place Franco’s accounts under garnishment.
The argument is specious. In this argument, we perceive BPI-FB’s clever but
transparent ploy to circumvent Section 4,42 Rule 13 of the Rules of Court. It
should be noted that the strict requirement on service of court papers upon the
parties affected is designed to comply with the elementary requisites of due
process. Franco was entitled, as a matter of right, to notice, if the requirements
of due process are to be observed. Yet, he received a copy of the Notice of
Garnishment only on September 27, 1989, several days after the two checks he
issued were dishonored by BPI-FB on September 20 and 21, 1989. Verily, it was
premature for BPI-FB to freeze Franco’s accounts without even awaiting service
of the Makati RTC’s Notice of Garnishment on Franco.
Additionally, it should be remembered that the enforcement of a writ of
attachment cannot be made without including in the main suit the owner of the
property attached by virtue thereof. Section 5, Rule 13 of the Rules of Court
specifically provides that "no levy or attachment pursuant to the writ issued x x
x shall be enforced unless it is preceded, or contemporaneously accompanied,
by service of summons, together with a copy of the complaint, the application
for attachment, on the defendant within the Philippines."
Franco was impleaded as party-defendant only on May 15, 1990. The Makati
RTC had yet to acquire jurisdiction over the person of Franco when BPI-FB
garnished his accounts.43 Effectively, therefore, the Makati RTC had no authority
yet to bind the deposits of Franco through the writ of attachment, and
consequently, there was no legal basis for BPI-FB to dishonor the checks issued
by Franco.
Fifth. Anent the CA’s finding that BPI-FB was in bad faith and as such liable for
the advance interest it deducted from Franco’s time deposit account, and for
moral as well as exemplary damages, we find it proper to reinstate the ruling of
the trial court, and allow only the recovery of nominal damages in the amount of
₱10,000.00. However, we retain the CA’s award of ₱75,000.00 as attorney’s fees.
In granting Franco’s prayer for interest on his time deposit account and for
moral and exemplary damages, the CA attributed bad faith to BPI-FB because it
(1) completely disregarded its obligation to Franco; (2) misleadingly claimed
that Franco’s deposits were under garnishment; (3) misrepresented that
Franco’s current account was not on file; and (4) refused to return the
₱400,000.00 despite the fact that the ostensible owner, Quiaoit, wanted the
amount returned to Franco.
In this regard, we are guided by Article 2201 of the Civil Code which provides:
Article 2201. In contracts and quasi-contracts, the damages for which the
obligor who acted in good faith is liable shall be those that are the natural and
probable consequences of the breach of the obligation, and which the parties
have foreseen or could have reasonable foreseen at the time the obligation was
constituted.
In case of fraud, bad faith, malice or wanton attitude, the obligor shall be
responsible for all damages which may be reasonably attributed to the non-
performance of the obligation. (Emphasis supplied.)
We find, as the trial court did, that BPI-FB acted out of the impetus of self-
protection and not out of malevolence or ill will. BPI-FB was not in the corrupt
state of mind contemplated in Article 2201 and should not be held liable for all
damages now being imputed to it for its breach of obligation. For the same
reason, it is not liable for the unearned interest on the time deposit.
Bad faith does not simply connote bad judgment or negligence; it imports a
dishonest purpose or some moral obliquity and conscious doing of wrong; it
partakes of the nature of fraud.44 We have held that it is a breach of a known
duty through some motive of interest or ill will.45 In the instant case, we cannot
attribute to BPI-FB fraud or even a motive of self-enrichment. As the trial court
found, there was no denial whatsoever by BPI-FB of the existence of the
accounts. The computer-generated document which indicated that the current
account was "not on file" resulted from the prior debit by BPI-FB of the
deposits. The remedy of freezing the account, or the garnishment, or even the
outright refusal to honor any transaction thereon was resorted to solely for the
purpose of holding on to the funds as a security for its intended court
action,46 and with no other goal but to ensure the integrity of the accounts.
We have had occasion to hold that in the absence of fraud or bad faith,47 moral
damages cannot be awarded; and that the adverse result of an action does not
per se make the action wrongful, or the party liable for it. One may err, but error
alone is not a ground for granting such damages.48
An award of moral damages contemplates the existence of the following
requisites: (1) there must be an injury clearly sustained by the claimant,
whether physical, mental or psychological; (2) there must be a culpable act or
omission factually established; (3) the wrongful act or omission of the
defendant is the proximate cause of the injury sustained by the claimant; and
(4) the award for damages is predicated on any of the cases stated in Article
2219 of the Civil Code.49
Franco could not point to, or identify any particular circumstance in Article
2219 of the Civil Code,50 upon which to base his claim for moral
damages.1âwphi1
Thus, not having acted in bad faith, BPI-FB cannot be held liable for moral
damages under Article 2220 of the Civil Code for breach of contract.51
We also deny the claim for exemplary damages. Franco should show that he is
entitled to moral, temperate, or compensatory damages before the court may
even consider the question of whether exemplary damages should be awarded
to him.52 As there is no basis for the award of moral damages, neither can
exemplary damages be granted.
While it is a sound policy not to set a premium on the right to litigate,53 we,
however, find that Franco is entitled to reasonable attorney’s fees for having
been compelled to go to court in order to assert his right. Thus, we affirm the
CA’s grant of ₱75,000.00 as attorney’s fees.
Attorney’s fees may be awarded when a party is compelled to litigate or incur
expenses to protect his interest,54 or when the court deems it just and
equitable.55 In the case at bench, BPI-FB refused to unfreeze the deposits of
Franco despite the Makati RTC’s Order Lifting the Order of Attachment and
Quiaoit’s unwavering assertion that the ₱400,000.00 was part of Franco’s
savings account. This refusal constrained Franco to incur expenses and litigate
for almost two (2) decades in order to protect his interests and recover his
deposits. Therefore, this Court deems it just and equitable to grant Franco
₱75,000.00 as attorney’s fees. The award is reasonable in view of the complexity
of the issues and the time it has taken for this case to be resolved.56
Sixth. As for the dismissal of BPI-FB’s counter-claim, we uphold the Manila
RTC’s ruling, as affirmed by the CA, that BPI-FB is not entitled to recover
₱3,800,000.00 as actual damages. BPI-FB’s alleged loss of profit as a result of
Franco’s suit is, as already pointed out, of its own making. Accordingly, the
denial of its counter-claim is in order.
WHEREFORE, the petition is PARTIALLY GRANTED. The Court of Appeals
Decision dated November 29, 1995 is AFFIRMED with the MODIFICATION that
the award of unearned interest on the time deposit and of moral and exemplary
damages is DELETED.
No pronouncement as to costs.
SO ORDERED.
G.R. No. 195166
SPOUSES SALVADOR ABELLA AND ALMA ABELLA, Petitioners,
vs.
SPOUSES ROMEO ABELLA AND ANNIE ABELLA, Respondents.
DECISION
LEONEN, J.:
This resolves a Petition for Review on Certiorari under Rule 45 of the Rules of
Court praying that judgment be rendered reversing and setting aside the
September 30, 2010 Decision1 and the January 4, 2011 Resolution2 of the Court
of Appeals Nineteenth Division in CA-G.R. CV No. 01388. The Petition also prays
that respondents Spouses Romeo and Annie Abella be ordered to pay
petitioners Spouses Salvador and Alma Abella 2.5% monthly interest plus the
remaining balance of the amount loaned.
The assailed September 30, 2010 Decision of the Court of Appeals reversed and
set aside the December 28, 2005 Decision3 of the Regional Trial Court, Branch
8, Kalibo, Aklan in Civil Case No. 6627. It directed petitioners to pay
respondents P148,500.00 (plus interest), which was the amount respondents
supposedly overpaid. The assailed January 4, 2011 Resolution of the Court of
Appeals denied petitioners’ Motion for Reconsideration.
The Regional Trial Court’s December 28, 2005 Decision ordered respondents to
pay petitioners the supposedly unpaid loan balance of P300,000.00 plus the
allegedly stipulated interest rate of 30% per annum, as well as litigation
expenses and attorney’s fees.4
On July 31, 2002, petitioners Spouses Salvador and Alma Abella filed a
Complaint5 for sum of money and damages with prayer for preliminary
attachment against respondents Spouses Romeo and Annie Abella before the
Regional Trial Court, Branch 8, Kalibo, Aklan. The case was docketed as Civil
Case No. 6627.6
In their Complaint, petitioners alleged that respondents obtained a loan from
them in the amount of P500,000.00. The loan was evidenced by an
acknowledgment receipt dated March 22, 1999 and was payable within one (1)
year. Petitioners added that respondents were able to pay a total of
P200,000.00— P100,000.00 paid on two separate occasions—leaving an unpaid
balance of P300,000.00.7
In their Answer8 (with counterclaim and motion to dismiss), respondents
alleged that the amount involved did not pertain to a loan they obtained from
petitioners but was part of the capital for a joint venture involving the lending
of money.9
Specifically, respondents claimed that they were approached by petitioners,
who proposed that if respondents were to "undertake the management of
whatever money [petitioners] would give them, [petitioners] would get 2.5% a
month with a 2.5% service fee to [respondents]."10 The 2.5% that each party
would be receiving represented their sharing of the 5% interest that the joint
venture was supposedly going to charge against its debtors. Respondents
further alleged that the one year averred by petitioners was not a deadline for
payment but the term within which they were to return the money placed by
petitioners should the joint venture prove to be not lucrative. Moreover, they
claimed that the entire amount of P500,000.00 was disposed of in accordance
with their agreed terms and conditions and that petitioners terminated the joint
venture, prompting them to collect from the joint venture’s borrowers. They
were, however, able to collect only to the extent of P200,000.00; hence, the
P300,000.00 balance remained unpaid.11
In the Decision12 dated December 28, 2005, the Regional Trial Court ruled in
favor of petitioners. It noted that the terms of the acknowledgment receipt
executed by respondents clearly showed that: (a) respondents were indebted to
the extent of P500,000.00; (b) this indebtedness was to be paid within one (1)
year; and (c) the indebtedness was subject to interest. Thus, the trial court
concluded that respondents obtained a simple loan, although they later invested
its proceeds in a lending enterprise.13 The Regional Trial Court adjudged
respondents solidarily liable to petitioners. The dispositive portion of its
Decision reads:
WHEREFORE, premises considered, judgment is hereby rendered:
1. Ordering the defendants jointly and severally to pay the plaintiffs the sum of
P300,000.00 with interest at the rate of 30% per annum from the time the
complaint was filed on July 31, 2002 until fully paid;
2. Ordering the defendants to pay the plaintiffs the sum of P2,227.50 as
reimbursement for litigation expenses, and another sum of P5,000.00 as
attorney’s fees.
For lack of legal basis, plaintiffs’ claim for moral and exemplary damages has to
be denied, and for lack of merit the counter-claim is ordered dismissed.14
In the Order dated March 13, 2006,15 the Regional Trial Court denied
respondents’ Motion for Reconsideration.
On respondents’ appeal, the Court of Appeals ruled that while respondents had
indeed entered into a simple loan with petitioners, respondents were no longer
liable to pay the outstanding amount of P300,000.00.16
The Court of Appeals reasoned that the loan could not have earned interest,
whether as contractually stipulated interest or as interest in the concept of
actual or compensatory damages. As to the loan’s not having earned stipulated
interest, the Court of Appeals anchored its ruling on Article 1956 of the Civil
Code, which requires interest to be stipulated in writing for it to be due.17 The
Court of Appeals noted that while the acknowledgement receipt showed that
interest was to be charged, no particular interest rate was specified.18 Thus, at
the time respondents were making interest payments of 2.5% per month, these
interest payments were invalid for not being properly stipulated by the parties.
As to the loan’s not having earned interest in the concept of actual or
compensatory damages, the Court of Appeals, citing Eusebio-Calderon v.
People,19 noted that interest in the concept of actual or compensatory damages
accrues only from the time that demand (whether judicial or extrajudicial) is
made. It reasoned that since respondents received petitioners’ demand letter
only on July 12, 2002, any interest in the concept of actual or compensatory
damages due should be reckoned only from then. Thus, the payments for the
2.5% monthly interest made after the perfection of the loan in 1999 but before
the demand was made in 2002 were invalid.20
Since petitioners’ charging of interest was invalid, the Court of Appeals
reasoned that all payments respondents made by way of interest should be
deemed payments for the principal amount of P500,000.00.21
The Court of Appeals further noted that respondents made a total payment of
P648,500.00, which, as against the principal amount of P500,000.00, entailed an
overpayment of P148,500.00. Applying the principle of solutio indebiti, the
Court of Appeals concluded that petitioners were liable to reimburse
respondents for the overpaid amount of P148,500.00.22 The dispositive portion
of the assailed Court of Appeals Decision reads:
WHEREFORE, the Decision of the Regional Trial Court is
hereby REVERSED and SET ASIDE, and a new one issued, finding that the
Spouses Salvador and Alma Abella are DIRECTED to jointly and severally pay
Spouses Romeo and Annie Abella the amount of P148,500.00, with interest of
6% interest (sic) per annum to be computed upon receipt of this decision, until
full satisfaction thereof. Upon finality of this judgment, an interest as the rate of
12% per annum, instead of 6%, shall be imposed on the amount due, until full
payment thereof.23
In the Resolution24 dated January 4, 2011, the Court of Appeals denied
petitioners’ Motion for Reconsideration.
Aggrieved, petitioners filed the present appeal25 where they claim that the Court
of Appeals erred in completely striking off interest despite the parties’ written
agreement stipulating it, as well as in ordering them to reimburse and pay
interest to respondents.
In support of their contentions, petitioners cite Article 1371 of the Civil
Code,26 which calls for the consideration of the contracting parties’
contemporaneous and subsequent acts in determining their true intention.
Petitioners insist that respondents’ consistent payment of interest in the year
following the perfection of the loan showed that interest at 2.5% per month was
properly agreed upon despite its not having been expressly stated in the
acknowledgment receipt. They add that during the proceedings before the
Regional Trial Court, respondents admitted that interest was due on the loan.27
In their Comment,28 respondents reiterate the Court of Appeals’ findings that no
interest rate was ever stipulated by the parties and that interest was not due
and demandable at the time they were making interest payments.29
In their Reply,30 petitioners argue that even though no interest rate was
stipulated in the acknowledgment receipt, the case fell under the exception to
the Parol Evidence Rule. They also argue that there exists convincing and
sufficiently credible evidence to supplement the imperfection of the
acknowledgment receipt.31
For resolution are the following issues:
First, whether interest accrued on respondents’ loan from petitioners. If so, at
what rate?
Second, whether petitioners are liable to reimburse respondents for the latter’s
supposed excess payments and for interest.
I (P500,000.00) Pesos from Mrs. Alma R. Abella, payable within one (1) year from
As noted by the Court of Appeals and the Regional Trial Court, respondents
entered into a simple loan or mutuum, rather than a joint venture, with
petitioners.
Respondents’ claims, as articulated in their testimonies before the trial court,
cannot prevail over the clear terms of the document attesting to the relation of
the parties. "If the terms of a contract are clear and leave no doubt upon the
intention of the contracting parties, the literal meaning of its stipulations shall
control."32
Articles 1933 and 1953 of the Civil Code provide the guideposts that determine
if a contractual relation is one of simple loan or mutuum:
Art. 1933. By the contract of loan, one of the parties delivers to another, either
something not consumable so that the latter may use the same for a certain time
and return it, in which case the contract is called a commodatum; or money or
other consumable thing, upon the condition that the same amount of the same
kind and quality shall be paid, in which case the contract is simply called a loan
or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum the bailor retains the ownership of the thing loaned, while in
simple loan, ownership passes to the borrower.
....
Art. 1953. A person who receives a loan of money or any other fungible thing
acquires the ownership thereof, and is bound to pay to the creditor an equal
amount of the same kind and quality. (Emphasis supplied)
On March 22, 1999, respondents executed an acknowledgment receipt to
petitioners, which states:
Batan, Aklan
March 22, 1999
This is to acknowledge receipt of the Amount of Five Hundred Thousand
date hereof with interest.
Annie C. Abella (sgd.) Romeo M. Abella (sgd.)33 (Emphasis supplied)
The text of the acknowledgment receipt is uncomplicated and straightforward.
It attests to: first, respondents’ receipt of the sum of P500,000.00 from
petitioner Alma Abella; second, respondents’ duty to pay back this amount
within one (1) year from March 22, 1999; and third, respondents’ duty to pay
interest. Consistent with what typifies a simple loan, petitioners delivered to
respondents with the corresponding condition that respondents shall pay the
same amount to petitioners within one (1) year.
II
Although we have settled the nature of the contractual relation between
petitioners and respondents, controversy persists over respondents’ duty to
pay conventional interest, i.e., interest as the cost of borrowing money.34
Article 1956 of the Civil Code spells out the basic rule that "[n]o interest shall be
due unless it has been expressly stipulated in writing."
On the matter of interest, the text of the acknowledgment receipt is simple,
plain, and unequivocal. It attests to the contracting parties’ intent to subject to
interest the loan extended by petitioners to respondents. The controversy,
however, stems from the acknowledgment receipt’s failure to state the exact
rate of interest.
Jurisprudence is clear about the applicable interest rate if a written instrument
fails to specify a rate. In Spouses Toring v. Spouses Olan,35 this court clarified the
effect of Article 1956 of the Civil Code and noted that the legal rate of interest
(then at 12%) is to apply: "In a loan or forbearance of money, according to the
Civil Code, the interest due should be that stipulated in writing, and in the
absence thereof, the rate shall be 12% per annum."36
Spouses Toring cites and restates (practically verbatim) what this court settled
in Security Bank and Trust Company v. Regional Trial Court of Makati, Branch 61:
"In a loan or forbearance of money, the interest due should be that stipulated in
writing, and in the absence thereof, the rate shall be 12% per annum."37
Security Bank also refers to Eastern Shipping Lines, Inc. v. Court of Appeals,
which, in turn, stated:38
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.39 (Emphasis supplied)
The rule is not only definite; it is cast in mandatory language. From Eastern
Shipping to Security Bank to Spouses Toring, jurisprudence has repeatedly used
the word "shall," a term that has long been settled to denote something
imperative or operating to impose a duty.40 Thus, the rule leaves no room for
alternatives or otherwise does not allow for discretion. It requires  the
application of the legal rate of interest.
Our intervening Decision in Nacar v. Gallery Frames41 recognized that the legal
rate of interest has been reduced to 6% per annum:
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 2 of Circular No. 905, Series of 1982 and, accordingly, issued Circular
No. 799, 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 X305.1 of the Manual of Regulations
for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of
Regulations for
Non-Bank Financial Institutions are hereby amended accordingly.
This Circular shall take effect on 1 July 2013.
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 Lines and Subsection X305.1 of the Manual of Regulations for
Banks and Sections 4305Q.1,= 4305S.3 and 4303P.1 of the Manual of
Regulations for Non- Bank Financial Institutions, before its amendment by BSP-
MB Circular No. 799 — but will now be six percent (6%) per annum effective July
1, 2013. It should be noted, nonetheless, that the new rate could only be applied
prospectively and not retroactively. Consequently, the twelve percent (12%)
per annum legal interest shall apply only until June 30, 2013. Come July 1, 2013
the new rate of six percent (6%) per annum shall be the prevailing rate of
interest when applicable.42 (Emphasis supplied, citations omitted)
Nevertheless, both Bangko Sentral ng Pilipinas Circular No. 799, Series of 2013
and Nacar retain the definite and mandatory framing of the rule articulated
in Eastern Shipping, Security Bank, and Spouses Toring. Nacar even
restates Eastern Shipping:
To recapitulate and for future guidance, the guidelines laid down in the case
of Eastern Shipping Lines are accordingly modified to embody BSP-MB Circular
No. 799, as follows:
....
1. When the obligation is breached, and it consists in the payment of a sum of
money, i.e., a loan or forbearance of money, the interest due should be that
which may have been stipulated in writing. Furthermore, the interest due shall
itself earn legal interest from the time it is judicially demanded. In the absence
of stipulation, the rate of interest shall be 6% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.43 (Emphasis supplied, citations
omitted)
Thus, it remains that where interest was stipulated in writing by the debtor and
creditor in a simple loan or mutuum, but no exact interest rate was mentioned,
the legal rate of interest shall apply. At present, this is 6% per annum, subject
to Nacar’s qualification on prospective application.
Applying this, the loan obtained by respondents from petitioners is deemed
subjected to conventional interest at the rate of 12% per annum, the legal rate of
interest at the time the parties executed their agreement. Moreover, should
conventional interest still be due as of July 1, 2013, the rate of 12% per annum
shall persist as the rate of conventional interest.
This is so because interest in this respect is used as a surrogate for the parties’
intent, as expressed as of the time of the execution of their contract. In this
sense, the legal rate of interest is an affirmation of the contracting parties’
intent; that is, by their contract’s silence on a specific rate, the then prevailing
legal rate of interest shall be the cost of borrowing money. This rate, which by
their contract the parties have settled on, is deemed to persist regardless of
shifts in the legal rate of interest. Stated otherwise, the legal rate of
interest, when applied as conventional interest, shall always be the legal rate at
the time the agreement was executed and shall not be susceptible to shifts in
rate.
Petitioners, however, insist on conventional interest at the rate of 2.5% per
month or 30% per annum. They argue that the acknowledgment receipt fails to
show the complete and accurate intention of the contracting parties. They rely
on Article 1371 of the Civil Code, which provides that the contemporaneous and
subsequent acts of the contracting parties shall be considered should there be a
need to ascertain their intent.44 In addition, they claim that this case falls under
the exceptions to the Parol Evidence Rule, as spelled out in Rule 130, Section 9
of the Revised Rules on Evidence.45
It is a basic precept in legal interpretation and construction that a rule or
provision that treats a subject with specificity prevails over a rule or provision
that treats a subject in general terms.46
The rule spelled out in Security Bank and Spouses Toring  is anchored on Article
1956 of the Civil Code and specifically governs simple loans or mutuum.
Mutuum is a type of nominate contract that is specifically recognized by the
Civil Code and for which the Civil Code provides a specific set of governing
rules: Articles 1953 to 1961. In contrast, Article 1371 is among the Civil Code
provisions generally dealing with contracts. As this case particularly involves a
simple loan, the specific rule spelled out in Security Bank and Spouses
Toring finds preferential application as against Article 1371.
Contrary to petitioners’ assertions, there is no room for entertaining extraneous
(or parol) evidence. In Spouses Bonifacio and Lucia Paras v. Kimwa Construction
and Development Corporation,47 we spelled out the requisites for the admission
of parol evidence:
In sum, two (2) things must be established for parol evidence to be admitted:
first, that the existence of any of the four (4) exceptions has been put in issue in
a party’s pleading or has not been objected to by the adverse party; and second,
that the parol evidence sought to be presented serves to form the basis of the
conclusion proposed by the presenting party.48
The issue of admitting parol evidence is a matter that is proper to the trial, not
the appellate, stage of a case. Petitioners raised the issue of applying the
exceptions to the Parol Evidence Rule only in the Reply they filed before this
court. This is the last pleading that either of the parties has filed in the entire
string of proceedings culminating in this Decision. It is, therefore, too late for
petitioners to harp on this rule. In any case, what is at issue is not admission of
evidence per se, but the appreciation given to the evidence adduced by the
parties. In the Petition they filed before this court, petitioners themselves
acknowledged that checks supposedly attesting to payment of monthly interest
at the rate of 2.5% were admitted by the trial court (and marked as Exhibits "2,"
"3," "4," "5," "6," "7," and "8").49 What petitioners have an issue with is not the
admission of these pieces of evidence but how these have not been appreciated
in a manner consistent with the conclusions they advance.
Even if it can be shown that the parties have agreed to monthly interest at the
rate of 2.5%, this is unconscionable. As emphasized in Castro v. Tan,50 the
willingness of the parties to enter into a relation involving an unconscionable
interest rate is inconsequential to the validity of the stipulated rate:
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.51
The imposition of an unconscionable interest rate is void ab initio for being
"contrary to morals, and the law."52
In determining whether the rate of interest is unconscionable, the mechanical
application of pre-established floors would be wanting. The lowest rates that
have previously been considered unconscionable need not be an impenetrable
minimum. What is more crucial is a consideration of the parties’ contexts.
Moreover, interest rates must be appreciated in light of the fundamental nature
of interest as compensation to the creditor for money lent to another, which he
or she could otherwise have used for his or her own purposes at the time it was
lent. It is not the default vehicle for predatory gain. As such, interest need only
be reasonable. It ought not be a supine mechanism for the creditor’s unjust
enrichment at the expense of another.
Petitioners here insist upon the imposition of 2.5% monthly or 30% annual
interest. Compounded at this rate, respondents’ obligation would have more
than doubled—increased to 219.7% of the principal—by the end of the third
year after which the loan was contracted if the entire principal remained
unpaid. By the end of the ninth year, it would have multiplied more than tenfold
(or increased to 1,060.45%). In 2015, this would have multiplied by more than
66 times (or increased to 6,654.17%). Thus, from an initial loan of only
P500,000.00, respondents would be obliged to pay more than P33 million. This
is grossly unfair, especially since up to the fourth year from when the loan was
obtained, respondents had been assiduously delivering payment. This reduces
their best efforts to satisfy their obligation into a protracted servicing of a
rapacious loan.
The legal rate of interest is the presumptive reasonable compensation for
borrowed money. While parties are free to deviate from this, any deviation must
be reasonable and fair. Any deviation that is far-removed is suspect. Thus, in
cases where stipulated interest is more than twice the prevailing legal rate of
interest, it is for the creditor to prove that this rate is required by prevailing
market conditions. Here, petitioners have articulated no such justification.
In sum, Article 1956 of the Civil Code, read in light of established jurisprudence,
prevents the application of any interest rate other than that specifically
provided for by the parties in their loan document or, in lieu of it, the legal rate.
Here, as the contracting parties failed to make a specific stipulation, the legal
rate must apply. Moreover, the rate that petitioners adverted to is
unconscionable. The conventional interest due on the principal amount loaned
by respondents from petitioners is held to be 12% per annum.
III
Apart from respondents’ liability for conventional interest at the rate of 12%
per annum, outstanding conventional interest—if any is due from respondents
—shall itself earn legal interest from the time judicial demand was made by
petitioners, i.e., on July 31, 2002, when they filed their Complaint. This is
consistent with Article 2212 of the Civil Code, which provides:
Art. 2212. Interest due shall earn legal interest from the time it is judicially
demanded, although the obligation may be silent upon this point.
So, too, Nacar states that "the interest due shall itself earn legal interest from
the time it is judicially demanded."53
Consistent with Nacar,  as well as with our ruling in Rivera v. Spouses Chua,54 the
interest due on conventional interest shall be at the rate of 12% per annum
from July 31, 2002 to June 30, 2013. Thereafter, or starting July 1, 2013, this
shall be at the rate of 6% per annum.
IV
Proceeding from these premises, we find that respondents made an
overpayment in the amount of P3,379.17.
As acknowledged by petitioner Salvador Abella, respondents paid a total of
P200,000.00, which was charged against the principal amount of P500,000.00.
The first payment of P100,000.00 was made on June 30, 2001,55 while the
second payment of P100,000.00 was made on December 30, 2001.56
The Court of Appeals’ September 30, 2010 Decision stated that respondents
paid P6,000.00 in March 1999.57
The Pre-Trial Order dated December 2, 2002,58 stated that the parties admitted
that "from the time the principal sum of P500,000.00 was borrowed from
[petitioners], [respondents] ha[d] been religiously paying"59 what was
supposedly interest "at the rate of 2.5% per month."60
From March 22, 1999 (after the loan was perfected) to June 22, 2001 (before
respondents’ payment of P100,000.00 on June 30, 2001, which was deducted
from the principal amount of P500,000.00), the 2.5% monthly "interest" was
pegged to the principal amount of P500,000.00. These monthly interests, thus,
amounted to P12,500.00 per month. Considering that the period from March
1999 to June 2001 spanned twenty seven (27) months, respondents paid a total
of P337,500.00.61
From June 22, 2001 up to December 22, 2001 (before respondents’ payment of
another P100,000.00 on December 30, 2001, which was deducted from the
remaining principal amount of P400,000.00), the 2.5% monthly "interest" was
pegged to the remaining principal amount of P400,000.00. These monthly
interests, thus, amounted to P10,000.00 per month. Considering that this period
spanned six (6) months, respondents paid a total of P60,000.00.62
From after December 22, 2001 up to June 2002 (when petitioners filed their
Complaint), the 2.5% monthly "interest" was pegged to the remaining principal
amount of P300,000.00. These monthly interests, thus, amounted to P7,500.00
per month. Considering that this period spanned six (6) months, respondents
paid a total of P45,000.00.63
Applying these facts and the properly applicable interest rate (for conventional
interest, 12% per annum; for interest on conventional interest, 12% per annum
from July 31, 2002 up to June 30, 2013 and 6% per annum henceforth), the
following conclusions may be drawn:
By the end of the first year following the perfection of the loan, or as of March
21, 2000, P560,000.00 was due from respondents. This consisted of the
principal of P500,000.00 and conventional interest of P60,000.00.
Within this first year, respondents made twelve (12) monthly payments
totalling P150,000.00 (P12,500.00 each from April 1999 to March 2000). This
was in addition to their initial payment of P6,000.00 in March 1999.
Application of payments must be in accordance with Article 1253 of the Civil
Code, which reads:
Art. 1253. If the debt produces interest, payment of the principal shall not be
deemed to have been made until the interests have been covered.
Thus, the payments respondents made must first be reckoned as interest
payments. Thereafter, any excess payments shall be charged against the
principal. As respondents paid a total of P156,000.00 within the first year, the
conventional interest of P60,000.00 must be deemed fully paid and the
remaining amount that respondents paid (i.e., P96,000.00) is to be charged
against the principal. This yields a balance of P404,000.00. By the end of the
second year following the perfection of the loan, or as of March 21, 2001,
P452,480.00 was due from respondents. This consisted of the outstanding
principal of P404,000.00 and conventional interest of P48,480.00.
Within this second year, respondents completed another round of twelve (12)
monthly payments totaling P150,000.00.
Consistent with Article 1253 of the Civil Code, as respondents paid a total of
P156,000.00 within the second year, the conventional interest of P48,480.00
must be deemed fully paid and the remaining amount that respondents paid
(i.e., P101,520.00) is to be charged against the principal. This yields a balance of
P302,480.00.
By the end of the third year following the perfection of the loan, or as of March
21, 2002, P338,777.60 was due from respondents. This consists of the
outstanding principal of P302,480.00 and conventional interest of P36,297.60.
Within this third year, respondents paid a total of P320,000.00, as follows:
(a) Between March 22, 2001 and June 30, 2001, respondents completed three
(3) monthly payments of P12,500.00 each, totaling P37,500.00.
(b) On June 30, 2001, respondents paid P100,000.00, which was charged as
principal payment.
(c) Between June 30, 2001 and December 30, 2001, respondents delivered
monthly payments of P10,000.00 each. At this point, the monthly payments no
longer amounted to P12,500.00 each because the supposed monthly interest
payments were pegged to the supposedly remaining principal of P400,000.00.
Thus, during this period, they paid a total of six (6) monthly payments totaling
P60,000.00.
(d) On December 30, 2001, respondents paid P100,000.00, which, like the June
30, 2001 payment, was charged against the principal.
(e) From the end of December 2002 to the end of February 2002, respondents
delivered monthly payments of P7,500.00 each. At this point, the supposed
monthly interest payments were now pegged to the supposedly remaining
principal of P300,000.00. Thus, during this period, they delivered three (3)
monthly payments totaling P22,500.00.
Consistent with Article 1253 of the Civil Code, as respondents paid a total of
P320,000.00 within the third year, the conventional interest of P36,927.50 must
be deemed fully paid and the remaining amount that respondents paid (i.e.,
P283,702.40) is to be charged against the principal. This yields a balance of
P18,777.60.
By the end of the fourth year following the perfection of the loan, or as of March
21, 2003, P21,203.51 would have been due from respondents. This consists of:
(a) the outstanding principal of P18,777.60, (b) conventional interest of
P2,253.31, and (c) interest due on conventional interest starting from July 31,
2002, the date of judicial demand, in the amount of P172.60. The last (i.e.,
interest on interest) must be pro-rated. There were only 233 days from July 31,
2002 (the date of judicial demand) to March 21, 2003 (the end of the fourth
year); this left 63.83% of the fourth year, within which interest on interest
might have accrued. Thus, the full annual interest on interest of 12% per annum
could not have been completed, and only the proportional amount of 7.66% per
annum may be properly imposed for the remainder of the fourth year.
From the end of March 2002 to June 2002, respondents delivered three (3)
more monthly payments of P7,500.00 each. Thus, during this period, they
delivered three (3) monthly payments totalling P22,500.00.
At this rate, however, payment would have been completed by respondents even
before the end of the fourth year. Thus, for precision, it is more appropriate to
reckon the amounts due as against payments made on a monthly, rather
than an annual, basis.
By April 21, 2002, _18,965.38 (i.e., remaining principal of P18,777.60 plus pro-
rated monthly conventional interest at 1%, amounting to P187.78) would have
been due from respondents. Deducting the monthly payment of P7,500.00 for
the preceding month in a manner consistent with Article 1253 of the Civil Code
would yield a balance of P11,465.38.
By May 21, 2002, _11,580.03 (i.e., remaining principal of P11,465.38 plus pro-
rated monthly conventional interest at 1%, amounting to P114.65) would have
been due from respondents. Deducting the monthly payment of P7,500.00 for
the preceding month in a manner consistent with Article 1253 of the Civil Code
would yield a balance of P4,080.03.
By June 21, 2002, P4,120.83 (i.e., remaining principal of P4,080.03 plus pro-
rated monthly conventional interest at 1%, amounting to P40.80) would have
been due from respondents. Deducting the monthly payment of P7,500.00 for
the preceding month in a manner consistent with Article 1253 of the Civil Code
would yield a negative balance of P3,379.17.
Thus, by June 21, 2002, respondents had not only fully paid the principal and all
the conventional interest that had accrued on their loan. By this date, they also
overpaid P3,379.17. Moreover, while hypothetically, interest on conventional
interest would not have run from July 31, 2002, no such interest accrued since
there was no longer any conventional interest due from respondents by then.
V from their quasi-contractual obligation.
As respondents made an overpayment, the principle of solutio indebiti as
provided by Article 2154 of the Civil Code64 applies. Article 2154 reads:
Article 2154. If something is received when there is no right to demand it, and it
was unduly delivered through mistake, the obligation to return it arises.
In Moreno-Lentfer v. Wolff,65 this court explained the application of solutio
indebiti:
The quasi-contract of solutio indebiti harks back to the ancient principle that no
one shall enrich himself unjustly at the expense of another. It applies where (1)
a payment is made when there exists no binding relation between the payor,
who has no duty to pay, and the person who received the payment, and (2) the
payment is made through mistake, and not through liberality or some other
cause.66
As respondents had already fully paid the principal and all conventional interest
that had accrued, they were no longer obliged to make further payments.1awp+
+i1 Any further payment they made was only because of a mistaken impression
that they were still due. Accordingly, petitioners are now bound by a quasi-
contractual obligation to return any and all excess payments delivered by
respondents.
Nacar provides that "[w]hen 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."67 This applies to obligations arising from quasi-contracts such
as solutio indebiti.
Further, Article 2159 of the Civil Code provides:
Art. 2159. Whoever in bad faith accepts an undue payment, shall pay legal
interest if a sum of money is involved, or shall be liable for fruits received or
which should have been received if the thing produces fruits.
He shall furthermore be answerable for any loss or impairment of the thing
from any cause, and for damages to the person who delivered the thing, until it
is recovered.
Consistent however, with our finding that the excess payment made by
respondents were borne out of a mere mistake that it was due, we find it in the
better interest of equity to no longer hold petitioners liable for interest arising
Nevertheless, Nacar also provides:
3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 6% per annum from such finality until its
satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of credit.68
Thus, interest at the rate of 6% per annum may be properly imposed on the
total judgment award. This shall be reckoned from the finality of this Decision
until its full satisfaction.
WHEREFORE, the assailed September 30, 2010 Decision and the January 4,
2011 Resolution of the Court of Appeals Nineteenth Division in CA-G.R. CV No.
01388 are SET ASIDE. Petitioners Spouses Salvador and Alma Abella
are DIRECTED to jointly and severally reimburse respondents Spouses Romeo
and Annie Abella the amount of P3,379.17, which respondents have overpaid.
A legal interest of 6% per annum shall likewise be imposed on the total
judgment award from the finality of this Decision until its full satisfaction.
SO ORDERED.
G.R. No. 199161
PHILIPPINE NATIONAL BANK, Petitioner
vs
JAMES T. CUA, Respondent
DECISION
MARTIRES, J.:
This petition for review on certiorari seeks to reverse and set aside the 26
October 2011 Decision1 of the Court of Appeals (CA) in CA-G.R. CV No. 91386,
which affirmed with modification the 28 November 2007 Decision2 of the
Regional Trial Court of Parañ aque City, Branch 195, in Civil Case No. 05-0066, a
case for sum of money with damages.
THE FACTS
On 9 February 2005, herein respondent James T. Cua (James) filed a Complaint
for Sum of Money with Damages3 against herein petitioner Philippine National
Bank (PNB), docketed as Civil Case No. CV-05-0066.
In the said complaint, James averred that since 1996, he and his brother,
Antonio T. Cua (Antonio)  maintained a US Dollar Savings Time Deposit with
PNB, Sucat, Parañ aque branch, evidenced by Certificate of Time
Deposit (CTD) No. B-630178 issued on 9 December 2002 and which replaced
CTD No. B-658788. CTD No. B-630178 has a face value of US$50,860.53. James
continued that he and Antonio had the practice of presigning loan application
documents with PNB for the purpose of having a standby loan or ready money
available anytime.
On 6 May 2004, James learned that he had a loan obligation with PNB which had
allegedly become due and demandable. He maintained, however, that although
he had pre-signed loan documents for pre-arranged loans with his time deposit
as collateral, he had never availed of its proceeds. Sometime in September 2004,
to see if his dollar time deposit was still existing and in order to revive his cash-
strapped machine shop business, James requested from PNB the release of
₱500,000.00 to be secured by CTD No. B-630178. To his surprise, PNB rejected
his loan application which refusal, he claims, caused damage and prejudice in
terms of lost business opportunity and loss of income in the amount of more or
less ₱1,000,000.00.
James inquired about the reason for the denial of his application. In a letter-
reply dated 17 November 2004, PNB, through its vice president, explained that
his dollar time deposit had been applied in payment to the loans he had with the
bank, in accordance with the loan application and other documents he had
executed.
Thereafter, James demanded the release of his entire dollar time deposit
asserting that he never made use of any loan amount from his pre-arranged
loan from the time he was issued CTD No. B-630178; and that it was only in
September 2004 that he requested the release of the proceeds of his pre-
arranged loan. After PNB failed to heed his demand, James filed a complaint for
sum of money praying that PNB return to him the entire amount of the account.
In its Answer, 4 PNB admitted that James had applied for a loan. Contrary to his
claim, however, he already made use of his hold-out facility with PNB and
received the proceeds of his loan. PNB further denied James’ allegation that he
merely pre-signed the loan documents in order to have a stand-by loan. As its
affirmative defense, PNB claimed that James, in fact, applied for and was
extended four (4) separate loans including one on 14 February 2001 as
evidenced by Promissory Note (PN) No. 0011628152240004 dated 14 February
2001. On 26 February 2002, the parties renewed the 14 February 2001 loan for
which James executed PN No. 0011628152240006 dated 26 February 2002.
PNB further explained that James was considered as one of its valued clients
such that when he came to the bank on said dates inquiring if he could use the
hold-out loan facilities of the bank, the latter gladly obliged. Hence, immediately
after James applied for the respective loans, the same were granted on the very
same day, and the proceeds released in the form of manager's checks.
PNB averred that when the subject loan fell due, demands to pay were made on
James who, however, failed to heed the demands. Thus, it was prompted to set
off James' obligations with his dollar time deposit with the bank, in accordance
with the provisions of the promissory notes.
PNB further alleged that it suffered besmirched reputation because of James'
groundless suit. Thus, it prayed that James be ordered to pay the amount of
₱1,000,000.00 as moral damages; the amount of ₱500,000.00 as exemplary
damages; and the amount of ₱100,000.00 by way of and as attorney's fees.
Trial on the merits thereafter ensued, during which James testified for his cause.
He stated that he was a businessman and a college graduate. He affirmed the
allegations in his Complaint and asserted that he did not sign any document
evidencing receipt of the loan referred to by PNB and for which his dollar time
deposit had been applied in payment.5To further substantiate his claim, he
presented the following documents: ( 1) a photocopy of CTD No. B-630178,6 to
show that James and his brother have a US Dollar Time Deposit with PNB; (2)
letter dated 9 September 2004,7 to show that James complained against an
alleged loan charged against his time deposit; (3) PNB's letter-reply dated 17
November 2004,8 explaining the reason for the denial of his request; and (d) the
letter of James' counsel to PNB demanding the release of his dollar time
deposit.9
evidentiary value to PN No. 0011628152240006, dated 26 February 2002,
noting that the promissory note it purportedly renewed was not presented in
evidence.
Since it has not been established that James had an outstanding debt to PNB, the
latter's application of the former's time deposit to the alleged loan is improper.
Necessarily, James is entitled to the return of his dollar time deposit. The
dispositive portion of the RTC decision provides:
WHEREFORE, defendant is directed to pay plaintiff the following:

On its part, PNB presented two witnesses: Edna Palomares (Edna), PNB's loans 1. The amount of US$50,860.53 or its peso equivalent plus interest of
officer at its Sucat branch; and Alxis Manalili. Edna testified that on various 1.09375% per annum from December 14, 2004 until fully paid;
dates, James entered into loan transactions with PNB. One of these loans was a
dollar loan dated 14 February 2001 in the amount of US$50,000.00. 10 This loan
2. Attorney's fees in the amount of ₱500,000.00 plus appearance fee of
was secured by James' CTD No. 629914 as evidenced by PN No.
₱2,000.00 per hearing; and
0011628152240004. When the loan matured, James failed to pay despite
demand which prompted PNB to apply his time deposit under CTD No. B-
630178 as payment. Edna clarified that when James applied for the subject loan, 3. Costs of suit.
the CTD was still numbered as CTD No. 629914. However, when the loan
matured, CTD No. 629914 had already been replaced by CTD No. B-630178. 11 Defendant's counter-claims are dismissed for lack of merit.16

To further support its defense and counterclaims, PNB presented, among PNB moved for reconsideration, 17 but the same was denied by the RTC in its
others, the following pieces of documentary evidence: (1) duly notarized Order, 18 dated 28 April 2008.
renewal Loan Application/Approval Form 12 dated 26 February 2002; (2) PN
No. 0011628152240004 13 dated 14 February 2001 in the amount of Undaunted, PNB elevated an appeal before the CA.19
US$50,000.00; (3) PN No. 0011628152240006 14 dated 26 February 2002 in the
amount of US$50,000.00; and (4) a machine-validated Miscellaneous The CA Ruling
Ticket15 dated 14 February 2001 which purportedly indicates that James
received the proceeds of the loan in the amount ofUS$49,655.34.
In its appealed decision, the CA affirmed with modification the 28 November
2007 decision and 28 April 2008 order of the RTC.
The RTC Ruling
The appellate court concurred with the trial court that the burden of proof
In its decision, the RTC ruled in favor of James. It explained that the burden of shifted to PNB. Unfortunately, PNB failed to substantiate its claims. The
proof shifted from James to PNB when the latter asserted an affirmative defense appellate court, thus, found no reversible error in the trial court's disquisition
- that the loan proceeds were released to James and, thus, PNB properly applied that PNB should be held liable to James.
his time deposit as payment of his unpaid loan in accordance with the
provisions of the promissory note. PNB, however, failed to substantiate this
The appellate court, however, modified the RTC decision by reducing the
affirmative defense.
amount of attorney's fees to ₱50,000.00 from the original award of ₱500,000.00
finding the latter to be exorbitant.
The trial court observed that aside from Edna's bare testimony, no other
evidence was presented to prove that the proceeds of the loan subject of the
The fallo of the appealed decision provides:
pre-signed loan application were released to and duly received by James. It did
not give evidentiary weight to the miscellaneous ticket presented by PNB
because it did not bear James' signature. The trial court did not also give any
WHEREFORE, the Decision dated 28 November 2007 of the Regional Trial
Court of Paranaque City, Branch 195, in Civil Case No. 05-0066, is
hereby AFFIRMED WITH MODIFICATION in that the award of attorney's fees
is reduced to Fifty Thousand Pesos (₱50,000.00).20
Hence, this petition for review where PNB raised the following issues:
ISSUES
I.
WHETHER THE COURT OF APPEALS GRAVELY ERRED WHEN IT HELD THAT
THERE WAS NO EVIDENCE SHOWING THAT RESPONDENT RECEIVED THE
PROCEEDS OF SUBJECT LOAN, THUS, IGNORING APPLICABLE DECISIONS OF
THIS HONORABLE COURT HOLDING THAT THE PROMISSORY NOTE IS THE
BEST EVIDENCE THAT THE BORROWER HAS RECEIVED THE LOAN PROCEEDS.
II.
WHETHER THE COURT OF APPEALS GRAVELY ERRED WHEN IT DISREGARDED
THE CONTENTS OF THE NOTARIZED PROMISSORY NOTES, DESPITE THE
DEARTH OF CLEAR AND CONCLUSIVE EVIDENCE SUFFICIENT TO
OVERTHROW THE PAROL EVIDENCE RULE AND THE PRESUMPTION IN FAVOR
OF PUBLIC DOCUMENTS UNDER RULE 132, SECTION 23 OF THE RULES OF
COURT.
III.
WHETHER THE COURT OF APPEALS GRAVELY ERRED WHEN IT DID NOT RULE
THAT RESPONDENT WAS BOUND BY HIS PROMISSORY NOTES, EVEN IF THERE
WAS NO EVIDENCE TO OVERCOME THE PRESUMPTION THAT EVERY PERSON
TAKES ORDINARY CARE OF HIS CONCERNS, ON THE CONTRARY, THE
EVIDENCE ON RECORD SHOWS THAT RESPONDENT VOLUNTARILY AND
INTELLIGENTLY EXECUTED SUCH PROMISSORY NOTES.21
Essentially the issue in this case is whether PNB sufficiently established James'
receipt of the loan proceeds.
THE COURT'S RULING
The appeal is meritorious.
Before going into the merits of the case, it must be underscored that the loan
subject of this case is the loan secured by CTD No. B-658788 whichwas later
replaced by CTD No. B-630178. Although PNB insists that the subject loan and
the 14 February 2001 loan are one and the same, the documentary evidence it
submitted does not support this point.
There is no indication that PN No. 0011628152240006 dated 26 February 2002
is a renewal of PN No. 0011628152240004 dated 14 February 2001. Instead, PN
No. 0011628152240006 clearly indicates that it is a renewal of PN No.
0011628152240005.
Furthermore, a reading of PN No. 0011628152240006 dated 26 February 2002
plainly states that it is secured by CTD No. B-658788 (now CTD No. B-630178).
In contrast, PN No. 0011628152240004 dated 14 February 2001 states that it is
secured by CTD No. 629914. Although PNB's witness, Edna, testified that CTD
No. 629914 and CTD No. B-630178 represent the same time deposit account,
the latter being a mere replacement of the former, nothing on record would
support this claim. Indeed, it is clear from the annotation on CTD No. B-630178
that it replaced CTD No. B-658788, not CTD No. 629914.
While there is a possibility that when Edna testified that CTD No. B-630178
replaced CTD No. 629914, she meant that CTD No. 629914 was first replaced by
CTD No. B-658788 which was in turn replaced by CTD No. B-630178, no
concrete evidence was offered to prove this point. Thus, the Court opines that
the subject loan, which was renewed on 26 February 2002, is independent and
distinct from the 14 February 2001 loan. Consequently, and as aptly stated by
the trial court, PN No. 0011628152240004 dated 14 February 2001 is
immaterial to the present case.
Promissory note is the best evidence of the existence of the loan.
A promissory note is a solemn acknowledgment of a debt and a formal
commitment to repay it on the date and under the conditions agreed upon by
the borrower and the lender. A person who signs such an instrument is bound
to honor it as a legitimate obligation duly assumed by him through the signature
he affixes thereto as a token of his good faith. If he reneges on his promise
without cause, he forfeits the sympathy and assistance of this Court and
deserves instead its sharp repudiation.22 The promissory note is the best
evidence to prove the existence of the loan.23
In this case, James does not deny that he executed several promissory notes in
favor of PNB. In fact, during the pre-trial 24 as well as in his
Comment/Opposition, 25 dated 18 July 2007, to PNB's formal offer of
documentary evidence, James admitted the genuineness of his signatures as
appearing on several promissory notes, including PN No. 0011628152240006,
dated 26 February 2002, albeit with the caveat that the same were pre-signed
for pre-arranged loans which he allegedly never availed of.
The trial court apparently believed James' claim that the loan documents were
just pre-signed for pre-arranged loans despite the absence of any corroborating
evidence to support it. As a result, it ruled that PNB, indeed, failed to prove that
the proceeds of the loan subject of the pre-signed loan application were
released to James. The trial court's reliance on James' self-serving allegation,
however, is erroneous.
Nothing in PN No. 0011628152240006 dated 26 February 2002 would suggest
that it was executed merely to secure future loans.1âwphi1 In fact, it is clear
from the wordings used therein that James acknowledged receipt of the
proceeds of the loan. The said promissory note provides:
FOR VALUE RECEIVED, I/We, solidarily promise to pay to the order of the
PHILIPPINE NATIONAL BANK (the "BANK") on the stipulated due date/s the
sum of Pesos DOLLARS: FIFTY THOUSAND ONLY (P $50,000.00) (the "Loan"),
together with interest at 3.85% p.a. per annum. 26 xx x (emphasis supplied)
In Ycong v. Court of Appeals,27 the petitioners alleged that they did not receive
the proceeds of the loan despite executing a promissory note containing the
words "for a loan received today xxx." The trial court ruled in favor of the
petitioners holding that they were merely intimidated, pressured and coerced
into signing the promissory note. On appeal, the appellate court reversed the
factual findings by the trial court. In sustaining the reversal by the appellate
court, the Court ratiocinated that the promissory note is the best evidence to
prove the existence of the loan and there was no need for the respondent to
submit a separate receipt to prove that the petitioners received the proceeds
thereof.
Similarly, by affixing his signature on PN No. 0011628152240006, dated 26
February 2002, which contained the words "FOR VALUE RECEIVED," James
acknowledged receipt of the proceeds of the loan in the stated amount and
committed to pay the same under the conditions stated therein. As a
businessman, James cannot claim unfamiliarity with commercial documents. He
could not also pretend not understanding the contents of the promissory note
he signed considering that he is a lettered-person and a college graduate. He
certainly understood the import and was fully aware of the consequences of
signing a promissory note. Indeed, no reasonable and prudent man would
acknowledge a debt, and even secure it with valuable assets, if the same does
not exist.
The fact that PN No. 0011628152240006, dated 26 February 2002, is only a
renewal of a previous promissory note identified as PN No. 0011628152240005
does not adversely affect the fact that it is an acknowledgment of a loan duly
received. It would be inconceivable for a reasonably diligent person to renew a
promissory note if the loan it purportedly evidences is inexistent. As such, the
Court rules that PNB sufficiently established that James received the proceeds of
the loan subject of PN No. 0011628152240006 (originally PN No.
0011628152240005).
Parol evidence must be clear
and convincing.
Rule 130, Section 9 of the Rules of Court provides for the parol evidence rule
which states that when the terms of an agreement have been reduced into
writing, it is considered as containing all the terms agreed upon and there can
be, between the parties and their successors in interest, no evidence of such
terms other than the contents of the written agreement.
This rule admits of exceptions. A party may present evidence to modify, explain
or add to the terms of a written agreement if he puts in issue in his pleading any
of the following: (a) an ir1trinsic ambiguity, mistake or imperfection in the
written agreement; (b) the failure of the written agreement to express the true
intent and agreement of the parties thereto; (c) the validity of the written
agreement; or (d) the existence of other terms agreed to by the parties or their
successors-in-interest after the execution of the written agreement.
However, to overcome the presumption that the written agreement contains all
the terms of the agreement, the parol evidence must be clear and convincing
and of such sufficient credibility as to overturn the written agreement.28
In this case, James' uncorroborated allegation that the loan documents were
merely pre-signed for future loans is far from being the clear and convincing
evidence necessary to defeat the terms of the written instrument. Thus, there is
no reason to deviate from the terms of the loan as appearing on PN No.
0011628152240006. Consequently, the trial and appellate courts erred when
they considered James' unsubstantiated claim over the terms of the promissory
note and ruled that PNB failed to prove James' receipt of the loan proceeds.
WHEREFORE, the present petition for review on certiorari is GRANTED. The 26
October 2011 Decision of the Court of Appeals in CA-G.R. CV No. 91386 is
hereby REVERSED and SET ASIDE. The case is further REMANDED to the
court of origin for further proceedings on petitioner Philippine National Bank's
counterclaim.
SO ORDERED.
G.R. No. 133877      November 14, 2001
RIZAL COMMERCIAL BANKING CORPORATION, petitioner,
vs.
ALFA RTW MANUFACTURING CORPORATION, BA FINANCE CORPORATION,
NORTH AMERICAN GARMENTS CORPORATION, JOHNNY TENG, RAMON
LEE, ANTONIO LACDAO, RAMON LUY and ALFA INTEGRATED TEXTILE
MILLS, respondents.
SANDOVAL-GUTIERREZ, J.:
Petitioner for review on certiorari assailing the decision of the Court of Appeals
in CA-G.R. C.V. no. 42293.
On March 12, 1982, Rizal Banking Corporation (RCBC) filed with the Regional
Trial Court of Makati, Branch 145, Civil Case No. 2624 for a sum of money
against Alfa RTW Manufacturing Corporation, Johnny Teng, Ramon Lee, Antonio
Lacdao, Ramon Luy and Alfa Integrated Textile Mills. Asserting a superior right
over the property involved in the suit, North Atlantic Garments Corporation
filed a complaint in intervention. BA Finance Corporation, claiming as
mortgagee of the same property, filed an answer in intervention. After hearing,
the trial court rendered judgment on August 19, 1991, the dispositive
portion1 of which reads:
"WHEREFORE, judgment is rendered in favor of plaintiff as follows:
1. Ordering all defendants to pay, jointly and severally, to plaintiff the amount of
Eighteen Million Nine Hundred Sixty-one Thousand Three Hundred Seventy-
two Pesos and Forty-three Centavos (P18,961,372.43), Philippine Currency,
(inclusive of interest, service charges, litigation expenses and attorney’s fees),
with interest thereon at the legal rate from February 15, 1988 until fully paid.
The proceeds from the sale of defendant Alfa’s ready to wear apparel, in the
sum of P73,133.70, should be deducted from the principal obligation of
P18,961,372.43;
2. Declaring that the respective liens of intervenors BA Finance Corporation and
North American Garments Corporation over the properties attached by the
sheriff are inferior to that of plaintiff.
3. Ordering defendants and intervenors to pay the proportionate costs.
"SO ORDERED."
On appeal, the Court of Appeals affirmed with modification2 the RTC decision,
thus:
"WHEREFORE, premises considered, the decision appealed from is hereby
AFFIRMED, with the modification that instead of P18,961,372.43, all the
defendants are hereby ordered to pay, jointly and severally to plaintiff the
amount of P3,060,406.25, Philippine Currency, inclusive of stipulated interest,
service charges, litigation expenses and attorney’s fees, with interest thereon at
the legal rate from February 15, 1988, until fully paid.
"All other disquisitions of the trial court are hereby AFFIRMED.
"SO ORDERED."
In this petition, RCBC questions the Court of Appeals decision insofar as it
modified the RTC decision by decreasing the award in its favor from
P18,961.372.43 to P3,060,406.25. In assailing the Court of Appeals decision,
petitioner RCBC raises a question of law, that is, whether or not the Court of
Appeals can deviate from the provisions of the contract between the parties,
which contract is the law between them.
The facts as summarized by the Court of Appeals are:
"From the records of the case, it appears that defendant Alfa RTW
Manufacturing Corporation (Alfa RTW), on separate instances, had applied for
and was granted by the plaintiff Rizal Commercial Banking Corporation (RCBC)
four Letters of Credit (RO-80/2487, RO-80/2789, RO-80/D-1795 and RO-81/D-
1800 marked as Exhibits "A", "D", "G", and "J", respectively) to facilitate its
purchase of raw materials for its garments business. Upon such letters of credit,
corresponding bills of exchange (Exhibits "B", "E", "H", and "K") of various
amounts were drawn, and charged to the account of said defendants.
The defendant Alfa RTW, in turn, had executed four Trust Receipts (Exhibits "C",
"F", "I" and "L"), stipulating that it had received in trust for the plaintiff bank the
goods and merchandise described therein, and which were purchased with the
drawings upon the letters of credit.
When the obligations upon the said commercial documents became due, the
plaintiff demanded payment of the defendants’ undertakings, citing two
documents allegedly executed by the individual defendants Johnny Teng,
Ramon Lee, Antonio D. Lacdao and Ramon Uy and Alfa Integrated Textile Mills
Inc. (Alfa ITM), labeled Comprehensive Surety Agreements (Exhibits "N" and
"M") dated September 8, 1978 and October 10, 1979.
Under such Comprehensive Surety Agreements, it was essentially agreed that
for and in consideration of any existing indebtedness to plaintiff bank of
defendant Alfa RTW and/or in order to induce the plaintiff bank at any time
thereafter to make loans or advances or increases thereof or to extend credit in
any other manner to or for the account of defendant, Alfa ITM and the signatory
officers agreed to guarantee in joint and several capacity the punctual payment
at maturity to plaintiff bank of any and all such indebtedness and/or other
obligations and also any and all indebtedness of every kind which was then or
may thereafter become due or owing to plaintiff bank by the defendant Alfa
RTW, together with any and all expenses of collection, etc., provided, however,
that the liability of individual defendants and defendant Alfa Integrated Textile
Mills, Inc. thereunder shall not exceed the sum of P4,000,000.00 and
P7,500,000.00 and such interest as may accrue thereon and expenses as may be
incurred by plaintiff bank. (p. 4, Complaint)"
Petitioner RCBC contends that the Court of Appeals erred in awarding to it the
minimal sum of P3,060,406.25 instead of P18,961,372.43 granted by the trial
court.
The rule is well settled that the jurisdiction of this Court in cases brought before
it from the Court of Appeals via Rule 45 of the 1997 Rules of Civil Procedure, as
amended, is limited to reviewing errors of law. Findings of fact of the latter
court are conclusive, except in a number of instances. In Siguan vs. Lim3 this
Court enumerated those instances when the factual findings of the Court of
Appeals are not deemed conclusive, to wit: (1) when the conclusion is a finding
grounded entirely on speculations, surmises or conjectures; (2) when the
inference made is manifestly mistaken, absurd or impossible; (3) when there is
grave abuse of discretion; (4) when the judgment is based on a
misapprehension of facts; (5) when the findings of facts are conflicting; (6)
when the Court of Appeals, in making its findings, went beyond the issues of the
case and the same is contrary to the admissions of both the appellant and
appellee; (7) when the findings are contrary to those of the trial court; (8) when
the findings are conclusions without citation of specific evidence on which they
are based; (9) when the facts set forth in the petition as well as in the
petitioner’s main and reply briefs are not disputed by the respondent; and (10)
when the findings of fact are premised on the supposed absence of evidence and
contradicted by the evidence on record.
In the case at bar, exception No. 6 is present. Here, the Court of Appeals made
findings "contrary to the admissions" of the parties. We refer to the terms and
conditions agreed upon by petitioner RCBC and respondent borrowers in the
Trust Receipts4 and the Comprehensive Surety Agreements.5
Significantly, the validity of those contracts is not being questioned. It follows
that the very terms and conditions of the same contracts become the law
between the parties.
Herein lies the reversible error on the part of the Court of Appeals. When it
ruled that only P3,060,406.25 should be awarded to petitioner RCBC, the
Appellate Court disregarded the parties’ stipulations in their contracts of loan,
more specifically, those pertaining to the agreed (1) interest rates, (2) service
charges and (3) penalties in case of any breach thereof.6 Indeed, the Court of
Appeals failed to apply this time-honored doctrine:
"That which is agreed to in a contract is the law between the parties. Thus,
obligations arising from contracts have the force of law between the contracting
parties and should be complied with in good faith."7
"The Court cannot vary the terms and conditions therein stipulated unless such
stipulation is contrary to law, morals, good customs, public order or public
policy."8
In relation to the determination and computation of interest payments, this
Court, in Eastern Shipping Lines, Inc. vs. Court of Appeals,9 through Mr. Justice
Jose C. Vitug, held:
"The ostensible discord is not difficult to explain. The factual circumstances may
have called for different applications, guided by the rule that the courts are
vested with discretion, depending on the equities of each case, on the award of
interest. Nonetheless, it may not be unwise, by way of clarification and
reconciliation, to suggest the following rules of thumb for future guidance.
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-
contracts, delicts or quasi-delicts 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.." (Emphasis supplied).
The case now before us involves an obligation arising from a letter of credit-
trust receipt transaction. Under this arrangement, a bank extends to a borrower
a loan covered by the letter of credit, with the trust receipt as security of the
loan.10 A trust receipt is "a security transaction intended to aid in financing
importers and retail dealers who do not have sufficient funds or resources to
finance the importation or purchase of merchandise, and who may not be able
to acquire credit except thru utilization, as collateral, of the merchandise
imported or purchased."11
In contracts contained in trust receipts, the contracting parties may establish
agreements, terms and conditions they may deem advisable, provided they are
not contrary to law, morals or public order.12 In the case at bar, there are
specific amounts of interest, service charges and penalties agreed upon by the
parties. Pertinent provisions in the four (4) trust receipts (TR. No. 1909, TR. No.
1932, TR. No. 1732, and TR No. 2065)13 read:
"All obligations of the undersigned under this Trust Receipt shall bear interest
at the rate of sixteen per centum (16%) per annum plus service charge of
two per centum (2%) per annum from the date of the execution of this Trust
Receipt until paid. It is expressly agreed and understood that regardless of the
maturity date hereof, I/we hereby authorize the said Bank to correspondingly
increase the interest of this Trust Receipt to the extent allowed by law without
notice to me/us whenever the Central Bank of the Philippines raises the interest
on borrowings of Banks or the interest provided for in the Usury Law, or
whenever, in the sole judgment of the holder of this Trust Receipt is warranted
by the increase in money market rates or by similar events.
Without prejudice to the criminal action that may be brought by the Bank
against the entrustee by reason of default or breach of this Trust Receipt, I/we
agree to pay a penalty and/or liquidated damages equivalent to six per
centum (6%) per annum of the amount due and unpaid.
In the event of the bringing of any action or suit by you or any default of the
undersigned hereunder: I/we shall on demand pay you reasonable attorney’s
and other fees and cost of collection, which shall in no case be less than ten per
centum (10%) of the value of the property and the amount involved by the
action or suit.
If there are two or more signatories on this Trust Receipt, our obligations
hereunder shall in all cases be joint and several."
Applying the above-quoted rules of thumb in the computation of interest, as
enunciated by this Court in Eastern Shipping Lines, Inc.,14 the principal amount
of loans corresponding to each trust receipt must earn an interest at the rate of
sixteen percent (16%) per annum15 with the stipulated service charge of two
percent (2%) per annum on the loan principal or the outstanding balance
thereof,16 from the date of execution until finality of this Decision.17 A penalty of
six percent (6%) per annum of the amount due and unpaid must also be
imposed computed from the date of demand (in this case on March 9,
1982),18 until finality of Judgment.19 The interest of 16% percent per annum, as
long as unpaid, also earns interest, computed from the date of the filing of the
complaint (March 12, 1982) until finality of this Court’s Decision.20 From such
date of finality, the total unpaid amount (principal + interest + service charge +
penalty + interest on the interest) computed shall earn interest of 12% per
annum until satisfied.1âwphi1.nêt
The Court of Appeals awarded only the sum of P3,060,406.25 as it was the
amount prayed for in the complaint. The Appellate Court, however, failed to
consider that the complaint was filed on March 12, 1982, or just a year after the
execution of the trust receipts. The computed interests then, the service charge,
the penalty and the attorney’s fees corresponded only to one year. The interest
on the interest could not have been computed then since the finality of
judgment could not yet be ascertained. Significantly, from the filing of the
complaint on March 12, 1982 up to the time the Appellate Court’s decision was
promulgated, on May 14, 1998, there had been a lapse of sixteen years. The
computed interest in 1982 would no longer be true in 1998. What the Appellate
Court should have done then was to compute the total amount due in
accordance with the rules of thumb laid down by this Court in Eastern Shipping
Lines, Inc.,21 the resulting formula of which is as follows:
TOTAL AMOUNT DUE = principal + interest + service charge + penalty + interest
on interest
Interest = principal x 16 % per annum x no. of years from date of execution until
finality of judgment
Service charge = principal x 2% per annum x no. of years from date of execution
until finality of judgment
Penalty = principal x 6% per annum x no. of years from demand (March 9,
1982) until finality of judgment
Interest on interest = Interest computed as of the filing of the complaint (March
12, 1982) x 12% x no. of years until finality of judgment
Attorney’s fees is 10% of the total amount computed as of finality of judgment
Total amount due as of the date of finality of judgment will earn an interest of
12% per annum until fully paid.
The total amount due corresponding to each of the four (4) contracts of loan
may be easily determined by the trial court through a simple mathematical
computation based on the formula specified above. Mathematics is an exact
science, the application of which needs no further proof from the parties.
WHEREFORE, the petition is hereby GRANTED. The assailed decision of the
Court of Appeals is MODIFIED in the sense that the award to petitioner RCBC of
P3,060,406.25 is SET ASIDE and substituted with an amount to be computed by
the trial court, upon finality of this Decision, in accordance with the formula
indicated above.
G.R. No. 155223             April 4, 2007
BOBIE ROSE V. FRIAS, represented by her Attorney-in-fact, MARIE F.
FUJITA, Petitioner,
vs.
FLORA SAN DIEGO-SISON, Respondent.
DECISION
AUSTRIA-MARTINEZ, J.:
Before us is a Petition for Review on Certiorari filed by Bobie Rose V. Frias
represented by her Attorney-in-fact, Marie Regine F. Fujita (petitioner) seeking
to annul the Decision1 dated June 18, 2002 and the Resolution2 dated September
11, 2002 of the Court of Appeals (CA) in CA-G.R. CV No. 52839.
Petitioner is the owner of a house and lot located at No. 589 Batangas East,
Ayala Alabang, Muntinlupa, Metro Manila, which she acquired from Island
Masters Realty and Development Corporation (IMRDC) by virtue of a Deed of
Sale dated Nov. 16, 1990.3 The property is covered by TCT No. 168173 of the
Register of Deeds of Makati in the name of IMRDC.4
On December 7, 1990, petitioner, as the FIRST PARTY, and Dra. Flora San Diego-
Sison (respondent), as the SECOND PARTY, entered into a Memorandum of
Agreement5 over the property with the following terms:
NOW, THEREFORE, for and in consideration of the sum of THREE MILLION
PESOS (₱3,000,000.00) 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 (₱6,400,000.00). Upon notice to the FIRST PARTY of the
SECOND PARTY’s intention to purchase the same, the latter has a period of
another six months within which to pay the remaining balance of ₱3.4 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 ₱3,000,000.00 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 ₱7,000,000.00 should the property be sold at a price more than ₱7
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
₱3 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 letter8 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 complaint10 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
report11 of the loss of her owner’s copy of TCT No. 168173 to the Tagig Police
Station on June 3, 1991, executing an affidavit of loss and by filing a
petition12 for the issuance of a new owner’s duplicate copy of said title with the
RTC of Makati, Branch 142; that the petition was granted in an Order13 dated
August 31, 1991; that said Order was subsequently set aside in an Order dated
April 10, 199214 where the RTC Makati granted respondent’s petition for relief
from judgment due to the fact that respondent is in possession of the owner’s
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, ₱100,000.00 moral, corrective and exemplary damages
and ₱200,000.00 for attorney’s fees.
In an Order dated April 6, 1993, the Executive Judge of the RTC of Manila issued
a writ of preliminary attachment upon the filing of a bond in the amount of two
million pesos.15
Petitioner filed an Amended Answer16 alleging that the Memorandum of
Agreement was conceived and arranged by her lawyer, Atty. Carmelita Lozada,
who is also respondent’s 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 respondent’s
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 owner’s duplicate copy; that the petition for the
issuance of a new owner’s 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 attorney’s 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 ₱70,000.00 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 ₱100,000.00 by way of moral,
corrective and exemplary damages.
4) Ordering defendant to pay plaintiff attorney’s fees of ₱100,000.00 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 owner’s duplicate title knowing the same was in respondent’s possession,
entitled respondent to moral damages; and that petitioner’s 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 respondent’s knowledge thus it is
not binding on respondent; that respondent had also proven that in 1993, she
initially paid the sum of ₱30,000.00 as premium for the issuance of the
attachment bond, ₱20,000.00 for its renewal in 1994, and ₱20,000.00 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 owner’s copy, she
executed an affidavit of loss of TCT No. 168173 when she knew all along that
said title was in respondent’s possession; petitioner’s claim that she thought the
title was lost when the brown envelope given to her by Atty. Lozada was stolen
from her car was hollow; that such deceitful conduct caused respondent serious
anxiety and emotional distress.
The CA concluded that there was no basis for petitioner to say that the interest
should be charged for six months only and no more; that a loan always bears
interest otherwise it is not a loan; that interest should commence on June 7,
199120 with compounded bank interest prevailing at the time the two million
was considered as a loan which was in June 1991; that the bank interest rate for
loans secured by a real estate mortgage in 1991 ranged from 25% to 32% per
annum as certified to by Prudential Bank,21 that in fairness to petitioner, the rate
to be charged should be 25% only.
Petitioner’s 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 ATTORNEY’S 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
CA’s 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 CA’s 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 CA’s
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-appellant’s (petitioner's) property. The
second six-month period was given to defendant-appellant to pay the P2 million
loan in the event that plaintiff-appellee decided not to buy the subject property
in which case interest will be charged "for the last six months only", referring to
the second six-month period. This means that no interest will be charged for the
first six-month period while appellee was making up her mind whether to buy
the property, but only for the second period of six months after appellee had
decided not to buy the property. This is the meaning of the phrase "for the last
six months only". Certainly, there is nothing in their agreement that suggests
that interest will be charged for six months only even if it takes 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
Petitioner and respondent stipulated that the loaned amount shall earn
compounded bank interests, and per the certification issued by Prudential Bank,
the interest rate for loans in 1991 ranged from 25% to 32% per annum. The CA
reduced the interest rate to 25% instead of the 32% awarded by the trial court
which petitioner no longer assailed.1awphi1.nét
In Bautista v. Pilar Development Corp.,30 we upheld the validity of a 21% per
annum interest on a ₱142,326.43 loan. In Garcia v. Court of Appeals,31 we
sustained the agreement of the parties to a 24% per annum interest on an
₱8,649,250.00 loan. Thus, the interest rate of 25% per annum awarded by the
CA to a ₱2 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 petitioner’s 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 owner’s
duplicate copy of TCT No. 168173 entitles respondent to moral
damages.1a\^/phi1.net Moral damages may be awarded in culpa contractual or
breach of contract cases when the defendant acted fraudulently or in bad faith.
Bad faith does not simply connote bad judgment or negligence; it imports a
dishonest purpose or some moral obliquity and conscious doing of wrong. It
partakes of the nature of fraud.33
The Memorandum of Agreement provides that in the event that respondent
opts not to buy the property, the money given by respondent to petitioner shall
be treated as a loan and the property shall be considered as the security for the
mortgage. It was testified to by respondent that after they executed the
agreement on December 7, 1990, petitioner gave her the owner’s 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 respondent’s possession, petitioner executed an affidavit of loss that the
owner’s 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 petitioner’s 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 petitioner’s attaché case36 and did not bother to look at the
envelope.37
It is clear therefrom that petitioner’s execution of the affidavit of loss became
the basis of the filing of the petition with the RTC for the issuance of new
owner’s duplicate copy of TCT No. 168173. Petitioner’s actuation would have
deprived respondent of the security for her loan were it not for respondent’s
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 ₱100,000.00 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 attorney’s fees because the trial
court’s decision did not explain the findings of facts and law to justify the award
of attorney’s fees as the same was mentioned only in the dispositive portion of
the RTC decision.
We agree.
41
Article 2208  of the New Civil Code enumerates the instances where such may
be awarded and, in all cases, it must be reasonable, just and equitable if the
same were to be granted.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
attorney’s 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 attorney’s
fees is DELETED.
No pronouncement as to costs.
SO ORDERED.
G.R. No. 175139               April 18, 2012
HERMOJINA ESTORES, Petitioner,
vs.
SPOUSES ARTURO and LAURA SUPANGAN, Respondents.
DECISION
DEL CASTILLO, J.:
The only issue posed before us is the propriety of the imposition of interest and
attorney’s fees.
Assailed in this Petition for Review1 filed under Rule 45 of the Rules of Court is
the May 12, 2006 Decision2 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
attorney’s fees is hereby reduced to ₱100,000.00. Costs against the defendants-
appellants.
SO ORDERED.3
Also assailed is the August 31, 2006 Resolution4 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 Sale5 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 ₱4.7 million. The parties likewise stipulated, among others,
to wit:
xxxx
1. Vendor will secure approved clearance from DAR requirements of which are
(sic):
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

a) Letter request After almost seven years from the time of the execution of the contract and
notwithstanding payment of ₱3.5 million on the part of respondent-spouses,
b) Title 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 letter7 dated September
c) Tax Declaration 27, 2000, respondent-spouses demanded the return of the amount of ₱3.5
million within 15 days from receipt of the letter. In reply,8 petitioner
acknowledged receipt of the ₱3.5 million and promised to return the same
d) Affidavit of Aggregate Landholding – Vendor/Vendee within 120 days. Respondent-spouses were amenable to the proposal provided
an interest of 12% compounded annually shall be imposed on the ₱3.5
e) Certification from the Prov’l. Assessor’s as to Landholdings of million.9 When petitioner still failed to return the amount despite demand,
Vendor/Vendee respondent-spouses were constrained to file a Complaint10 for sum of money
before the Regional Trial Court (RTC) of Malabon against herein petitioner as
f) Affidavit of Non-Tenancy well as Roberto U. Arias (Arias) who allegedly acted as petitioner’s agent. The
case was docketed as Civil Case No. 3201-MN and raffled off to Branch 170. In
g) Deed of Absolute Sale their complaint, respondent-spouses prayed that petitioner and Arias be
ordered to:
xxxx
1. Pay the principal amount of ₱3,500,000.00 plus interest of 12% compounded
4. Vendee shall be informed as to the status of DAR clearance within 10 days annually starting October 1, 1993 or an estimated amount of ₱8,558,591.65;
upon signing of the documents.
2. Pay the following items of damages:
a) Moral damages in the amount of ₱100,000.00;
b) Actual damages in the amount of ₱100,000.00;
c) Exemplary damages in the amount of ₱100,000.00;
d) [Attorney’s] fee in the amount of ₱50,000.00 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 ₱3.5 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 Order15 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
attorney’s fees."16
Trial ensued thereafter. After the presentation of the respondent-spouses’
evidence, the trial court set the presentation of Arias and petitioner’s 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
19 
On May 7, 2004, the RTC rendered its Decision 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 attorney’s 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 (₱3,500,000.00) with an interest of 6% compounded
annually starting October 1, 1993 and attorney’s fee in the amount of Fifty
Thousand pesos (₱50,000.00) 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 RTC’s ruling
as regards the liability of Arias. It held that Arias could not be held solidarily
liable with petitioner because he merely acted as agent of the latter. Moreover,
there was no showing that he expressly bound himself to be personally liable or
that he exceeded the limits of his authority. More importantly, there was even
no showing that Arias was authorized to act as agent of petitioner.26 Anent the
award of attorney’s fees, the CA found the award by the trial court (₱50,000.00
plus 20% of the recoverable amount) excessive27 and thus reduced the same to
₱100,000.00.28
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
attorney’s fees is hereby reduced to ₱100,000.00. 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 attorney’s fees is proper.
Petitioner’s Arguments
Petitioner insists that she is not bound to pay interest on the ₱3.5 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 attorney’s 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 ₱3.5 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 attorney’s 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 ₱3.5 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 ₱3.5 million but has not
actually done so. Petitioner enjoyed the use of the money from the time it was
given to her30 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.
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.
Petitioner’s 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 Appeals38 and its predecessor case,
Reformina v. Tongol39 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.1âwphi1
The award of attorney’s fees is warranted.
Under Article 2208 of the Civil Code, attorney’s fees may be recovered:
xxxx
(2) When the defendant’s act or omission has compelled the plaintiff to litigate
with third persons or to incur expenses to protect his interest;
xxxx
(11) In any other case where the court deems it just and equitable that
attorney’s fees and expenses of litigation should be recovered.
In all cases, the attorney’s fees and expenses of litigation must be reasonable.
Considering the circumstances of the instant case, we find respondent-spouses
entitled to recover attorney’s 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 ₱50,000.00 more appropriate in line with the policy enunciated
in Article 2208 of the Civil Code that the award of attorney’s 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
attorney’s fees is further reduced to ₱50,000.00.
SO ORDERED.
G.R. No. 187678               April 10, 2013
SPOUSES IGNACIO F. JUICO and ALICE P. JUICO, Petitioners,
vs.
CHINA BANKING CORPORATION, Respondent.
DECISION
VILLARAMA, JR., J.:
Before us is a petition for review on certiorari under Rule 45 of the 1997 Rules
of Civil Procedure, as amended, assailing the February 20, 2009 Decision1 and
April 27, 2009 Resolution2 of the Court of Appeals (CA) in CA G.R. CV No. 80338.
The CA affirmed the April 14, 2003 Decision3 of the Regional Trial Court (RTC)
of Makati City, Branch 147.
The factual antecedents:
Spouses Ignacio F. Juico and Alice P. Juico (petitioners) obtained a loan from
China Banking Corporation (respondent) as evidenced by two Promissory Notes
both dated October 6, 1998 and numbered 507-001051-34 and 507-001052-
0,5 for the sums of !!6,216,000 and ₱4, 139,000, respectively. The loan was
secured by a Real Estate Mortgage (REM) over petitioners’ property located at
49 Greensville St., White Plains, Quezon City covered by Transfer Certificate of
Title (TCT) No. RT-103568 (167394) PR-412086 of the Register of Deeds of
Quezon City.
When petitioners failed to pay the monthly amortizations due, respondent
demanded the full payment of the outstanding balance with accrued monthly
interests. On September 5, 2000, petitioners received respondent’s last demand
letter7 dated August 29, 2000.
As of February 23, 2001, the amount due on the two promissory notes totaled
₱19,201,776.63 representing the principal, interests, penalties and attorney’s
fees. On the same day, the mortgaged property was sold at public auction, with
respondent as highest bidder for the amount of ₱10,300,000.
On May 8, 2001, petitioners received8 a demand letter9 dated May 2, 2001 from
respondent for the payment of ₱8,901,776.63, the amount of deficiency after
applying the proceeds of the foreclosure sale to the mortgage debt. As its
demand remained unheeded, respondent filed a collection suit in the trial court.
In its Complaint,10 respondent prayed that judgment be rendered ordering the
petitioners to pay jointly and severally: (1) ₱8,901,776.63 representing the
amount of deficiency, plus interests at the legal rate, from February 23, 2001
until fully paid; (2) an additional amount equivalent to 1/10 of 1% per day of
the total amount, until fully paid, as penalty; (3) an amount equivalent to 10% of
the foregoing amounts as attorney’s fees; and (4) expenses of litigation and
costs of suit.
In their Answer,11 petitioners admitted the existence of the debt but interposed,
by way of special and affirmative defense, that the complaint states no cause of
action considering that the principal of the loan was already paid when the
mortgaged property was extrajudicially foreclosed and sold for ₱10,300,000.
Petitioners contended that should they be held liable for any deficiency, it
should be only for ₱55,000 representing the difference between the total
outstanding obligation of ₱10,355,000 and the bid price of ₱10,300,000.
Petitioners also argued that even assuming there is a cause of action, such
deficiency cannot be enforced by respondent because it consists only of the
penalty and/or compounded interest on the accrued interest which is generally
not favored under the Civil Code. By way of counterclaim, petitioners prayed
that respondent be ordered to pay ₱100,000 in attorney’s fees and costs of suit.
At the trial, respondent presented Ms. Annabelle Cokai Yu, its Senior Loans
Assistant, as witness. She testified that she handled the account of petitioners
and assisted them in processing their loan application. She called them monthly
to inform them of the prevailing rates to be used in computing interest due on
their loan. As of the date of the public auction, petitioners’ outstanding balance
was ₱19,201,776.6312 based on the following statement of account which she
prepared:
STATEMENT OF ACCOUNT
As of FEBRUARY 23, 2001
IGNACIO F. JUICO
PN# 507-0010520 due on 04-07-2004
1âwphi1
Principal balance of PN# 5070010520. . . . . . . . . . . . . . 4,139,000.00
 Interest on ₱6,216,000.00 fr. 04-Feb-2001
Interest on ₱4,139,000.00 fr. 04-Nov-99 23-Feb-2001 19 days @ 18.00%. . . . . . . . . . . . . . . . . . 58,243.07
Penalty charge @ 1/10 of 1% of the total amount due
04-Nov-2000 366 days @ 15.00%. . . . . . . . . . . . . . . . . 622,550.96 (₱6,216,000.00 from 10-06-99 to 02-23-2001 @
1/10 of 1% per day). . . . . . . . . . . . . . . . . 3,145,296.00
Interest on ₱4,139,000.00 fr. 04-Nov-2000
Subtotal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,770,199.23
04-Dec-2000 30 days @ 24.50%. . . . . . . . . . . . . . . . . . 83,346.99
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,772,309.96
Interest on ₱4,139,000.00 fr. 04-Dec-2000
Less: A/P applied to balance of principal (55,000.00)
04-Jan-2001 31 days @ 21.50%. . . . . . . . . . . . . . . . . . . 75,579.27
Less: Accounts payable L & D (261,149.39) 17,456,160.57
Interest on ₱4,139,000.00 fr. 04-Jan-2001
Add: 10% Attorney’s Fee 1,745,616.06
04-Feb-2001 31 days @ 19.50%. . . . . . . . . . . . . . . . . . 68,548.64
Total amount due 19,201,776.63
Interest on ₱4,139,000.00 fr. 04-Feb-2001
Less: Bid Price 10,300,000.00
23-Feb-2001 19 days @ 18.00%. . . . . . . . . . . . . . . . . . 38,781.86
TOTAL DEFICIENCY AMOUNT AS OF
13
Penalty charge @ 1/10 of 1% of the total amount due FEB. 23, 2001 8,901,776.63
(₱4,139,000.00 from 11-04-99 to 02-23-2001 @
1/10 of 1% per day). . . . . . . . . . . . . . . . . 1,974,303.00 Petitioners thereafter received a demand letter14 dated May 2, 2001 from
respondent’s counsel for the deficiency amount of ₱8,901,776.63. Ms. Yu further
Sub-total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,002,110.73 testified that based on the Statement of Account15 dated March 15, 2002 which
she prepared, the outstanding balance of petitioners was ₱15,190,961.48.16
PN# 507-0010513 due on 04-07-2004
Principal balance of PN# 5070010513. . . . . . . . . . . . . . 6,216,000.00
On cross-examination, Ms. Yu reiterated that the interest rate changes every
Interest on ₱6,216,000.00 fr. 06-Oct-99 month based on the prevailing market rate and she notified petitioners of the
04-Nov-2000 395 days @ 15.00%. . . . . . . . . . . . . . . . . 1,009,035.62 prevailing rate by calling them monthly before their account becomes past due.
When asked if there was any written authority from petitioners for respondent
Interest on ₱6,216,000.00 fr. 04-Nov-2000 to increase the interest rate unilaterally, she answered that petitioners signed a
04-Dec-2000 30 days @ 24.50%. . . . . . . . . . . . . . . . . . 125,171.51 promissory note indicating that they agreed to pay interest at the prevailing
rate.17
Interest on ₱6,216,000.00 fr. 04-Dec-2000
04-Jan-2001 31 days @ 21.50%. . . . . . . . . . . . . . . . . . . 113,505.86
Petitioner Ignacio F. Juico testified that prior to the release of the loan, he was
Interest on ₱6,216,000.00 fr. 04-Jan-2001 required to sign a blank promissory note and was informed that the interest
04-Feb-2001 31 days @ 19.50%. . . . . . . . . . . . . . . . . . 102,947.18 rate on the loan will be based on prevailing market rates. Every month,
respondent informs him by telephone of the prevailing interest rate. At first, he
was able to pay his monthly amortizations but when he started to incur delay in
his payments due to the financial crisis, respondent pressured him to pay in full,
including charges and interests for the delay. His property was eventually
foreclosed and was sold at public auction.18
On cross-examination, petitioner testified that he is a Doctor of Medicine and
also engaged in the business of distributing medical supplies. He admitted
having read the promissory notes and that he is aware of his obligation under
them before he signed the same.19
In its decision, the RTC ruled in favor of respondent. The fallo of the RTC
decision reads:
WHEREFORE, premises considered, the Complaint is hereby sustained, and
Judgment is rendered ordering herein defendants to pay jointly and severally to
plaintiff, the following:
1. ₱8,901,776.63 representing the amount of the deficiency owing to the
plaintiff, plus interest thereon at the legal rate after February 23, 2001;
2. An amount equivalent to 10% of the total amount due as and for attorney’s
fees, there being stipulation therefor in the promissory notes;
3. Costs of suit.
SO ORDERED.20
The trial court agreed with respondent that when the mortgaged property was
sold at public auction on February 23, 2001 for ₱10,300,000 there remained a
balance of ₱8,901,776.63 since before foreclosure, the total amount due on the
two promissory notes aggregated to ₱19,201,776.63 inclusive of principal,
interests, penalties and attorney’s fees. It ruled that the amount realized at the
auction sale was applied to the interest, conformably with Article 1253 of the
Civil Code which provides that if the debt produces interest, payment of the
principal shall not be deemed to have been made until the interests have been
covered. This being the case, petitioners’ principal obligation subsists but at a
reduced amount of ₱8,901,776.63.
The trial court further held that Ignacio’s claim that he signed the promissory
notes in blank cannot negate or mitigate his liability since he admitted reading
the promissory notes before signing them. It also ruled that considering the
substantial amount involved, it is unbelievable that petitioners threw all caution
to the wind and simply signed the documents without reading and
understanding the contents thereof. It noted that the promissory notes,
including the terms and conditions, are pro forma and what appears to have
been left in blank were the promissory note number, date of the instrument,
due date, amount of loan, and condition that interest will be at the prevailing
rates. All of these details, the trial court added, were within the knowledge of
the petitioners.
When the case was elevated to the CA, the latter affirmed the trial court’s
decision. The CA recognized respondent’s right to claim the deficiency from the
debtor where the proceeds of the sale in an extrajudicial foreclosure of
mortgage are insufficient to cover the amount of the debt. Also, it found as valid
the stipulation in the promissory notes that interest will be based on the
prevailing rate. It noted that the parties agreed on the interest rate which was
not unilaterally imposed by the bank but was the rate offered daily by all
commercial banks as approved by the Monetary Board. Having signed the
promissory notes, the CA ruled that petitioners are bound by the stipulations
contained therein.
Petitioners are now before this Court raising the sole issue of whether the
interest rates imposed upon them by respondent are valid. Petitioners contend
that the interest rates imposed by respondent are not valid as they were not by
virtue of any law or Bangko Sentral ng Pilipinas (BSP) regulation or any
regulation that was passed by an appropriate government entity. They insist
that the interest rates were unilaterally imposed by the bank and thus violate
the principle of mutuality of contracts. They argue that the escalation clause in
the promissory notes does not give respondent the unbridled authority to
increase the interest rate unilaterally. Any change must be mutually agreed
upon.
Respondent, for its part, points out that petitioners failed to show that their case
falls under any of the exceptions wherein findings of fact of the CA may be
reviewed by this Court. It contends that an inquiry as to whether the interest
rates imposed on the loans of petitioners were supported by appropriate
regulations from a government agency or the Central Bank requires a
reevaluation of the evidence on records. Thus, the Court would in effect, be
confronted with a factual and not a legal issue.
The appeal is partly meritorious.
The principle of mutuality of contracts is expressed in Article 1308 of the Civil
Code, which provides:
Article 1308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them. Article 1956 of the Civil
Code likewise ordains that "no interest shall be due unless it has been expressly
stipulated in writing."
The binding effect of any agreement between parties to a contract is premised
on two settled principles: (1) that any obligation arising from contract has the
force of law between the parties; and (2) that there must be mutuality between
the parties based on their essential equality. Any contract which appears to be
heavily weighed in favor of one of the parties so as to lead to an unconscionable
result is void. Any stipulation regarding the validity or compliance of the
contract which is left solely to the will of one of the parties, is likewise, invalid.21
Escalation clauses refer to stipulations allowing an increase in the interest rate
agreed upon by the contracting parties. This Court has long recognized that
there is nothing inherently wrong with escalation clauses which are valid
stipulations in commercial contracts to maintain fiscal stability and to retain the
value of money in long term contracts.22 Hence, such stipulations are not void
per se.23
Nevertheless, an escalation clause "which grants the creditor an unbridled right
to adjust the interest independently and upwardly, completely depriving the
debtor of the right to assent to an important modification in the agreement" is
void. A stipulation of such nature violates the principle of mutuality of
contracts.24 Thus, this Court has previously nullified the unilateral
determination and imposition by creditor banks of increases in the rate of
interest provided in loan contracts.25
In Banco Filipino Savings & Mortgage Bank v. Navarro,26 the escalation clause
stated: "I/We hereby authorize Banco Filipino to correspondingly increase the
interest rate stipulated in this contract without advance notice to me/us in the
event a law should be enacted increasing the lawful rates of interest that may be
charged on this particular kind of loan." While escalation clauses in general are
considered valid, we ruled that Banco Filipino may not increase the interest on
respondent borrower’s loan, pursuant to Circular No. 494 issued by the
Monetary Board on January 2, 1976, because said circular is not a law although
it has the force and effect of law and the escalation clause has no provision for
reduction of the stipulated interest "in the event that the applicable maximum
rate of interest is reduced by law or by the Monetary Board" (de-escalation
clause).
Subsequently, in Insular Bank of Asia and America v. Spouses Salazar27 we
reiterated that escalation clauses are valid stipulations but their enforceability
are subject to certain conditions. The increase of interest rate from 19% to 21%
per annum made by petitioner bank was disallowed because it did not comply
with the guidelines adopted by the Monetary Board to govern interest rate
adjustments by banks and non-banks performing quasi-banking functions.
In the 1991 case of Philippine National Bank v. Court of Appeals,28 the
promissory notes authorized PNB to increase the stipulated interest per annum
"within the limits allowed by law at any time depending on whatever policy
PNB may adopt in the future; Provided, that, the interest rate on this note shall
be correspondingly decreased in the event that the applicable maximum
interest rate is reduced by law or by the Monetary Board." This Court declared
the increases (from 18% to 32%, then to 41% and then to 48%) unilaterally
imposed by PNB to be in violation of the principle of mutuality essential in
contracts.29
A similar ruling was made in a 1994 case30 also involving PNB where the credit
agreement provided that "PNB reserves the right to increase the interest rate
within the limits allowed by law at any time depending on whatever policy it
may adopt in the future: Provided, that the interest rate on this accommodation
shall be correspondingly decreased in the event that the applicable maximum
interest is reduced by law or by the Monetary Board x x x".
Again, in 1996, the Court invalidated escalation clauses authorizing PNB to raise
the stipulated interest rate at any time without notice, within the limits allowed
by law. The Court observed that there was no attempt made by PNB to secure
the conformity of respondent borrower to the successive increases in the
interest rate. The borrower’s assent to the increases cannot be implied from
their lack of response to the letters sent by PNB, informing them of the
increases.31
In the more recent case of Philippine Savings Bank v. Castillo,32 we sustained the
CA in declaring as unreasonable the following escalation clause: "The rate of
interest and/or bank charges herein stipulated, during the terms of this
promissory note, its extensions, renewals or other modifications, may be
increased, decreased or otherwise changed from time to time within the rate of
interest and charges allowed under present or future law(s) and/or
government regulation(s) as the PSBank may prescribe for its debtors." Clearly,
the increase or decrease of interest rates under such clause hinges solely on the
discretion of petitioner as it does not require the conformity of the maker
before a new interest rate could be enforced. We also said that respondents’
assent to the modifications in the interest rates cannot be implied from their
lack of response to the memos sent by petitioner, informing them of the
amendments, nor from the letters requesting for reduction of the rates. Thus:
… the validity of the escalation clause did not give petitioner the unbridled right
to unilaterally adjust interest rates. The adjustment should have still been
subjected to the mutual agreement of the contracting parties. In light of the
absence of consent on the part of respondents to the modifications in the
interest rates, the adjusted rates cannot bind them notwithstanding the
inclusion of a de-escalation clause in the loan agreement.33
It is now settled that an escalation clause is void where the creditor unilaterally
determines and imposes an increase in the stipulated rate of interest without
the express conformity of the debtor. Such unbridled right given to creditors to
adjust the interest independently and upwardly would completely take away
from the debtors the right to assent to an important modification in their
agreement and would also negate the element of mutuality in their
contracts.34 While a ceiling on interest rates under the Usury Law was already
lifted under Central Bank Circular No. 905, nothing therein "grants lenders carte
blanche authority to raise interest rates to levels which will either enslave their
borrowers or lead to a hemorrhaging of their assets."35
The two promissory notes signed by petitioners provide:
I/We hereby authorize the CHINA BANKING CORPORATION to increase or
decrease as the case may be, the interest rate/service charge presently
stipulated in this note without any advance notice to me/us in the event a law
or Central Bank regulation is passed or promulgated by the Central Bank of the
Philippines or appropriate government entities, increasing or decreasing such
interest rate or service charge.36
Such escalation clause is similar to that involved in the case of Floirendo, Jr. v.
Metropolitan Bank and Trust Company37 where this Court ruled:
The provision in the promissory note authorizing respondent bank to increase,
decrease or otherwise change from time to time the rate of interest and/or bank
charges "without advance notice" to petitioner, "in the event of change in the
interest rate prescribed by law or the Monetary Board of the Central Bank of the
Philippines," does not give respondent bank unrestrained freedom to charge
any rate other than that which was agreed upon. Here, the monthly
upward/downward adjustment of interest rate is left to the will of respondent
bank alone. It violates the essence of mutuality of the contract.38
More recently in Solidbank Corporation v. Permanent Homes,
Incorporated,39 we upheld as valid an escalation clause which required a written
notice to and conformity by the borrower to the increased interest rate. Thus:
The Usury Law had been rendered legally ineffective by Resolution No. 224
dated 3 December 1982 of the Monetary Board of the Central Bank, and later by
Central Bank Circular No. 905 which took effect on 1 January 1983. These
circulars removed the ceiling on interest rates for secured and unsecured loans
regardless of maturity. The effect of these circulars is to allow the parties to
agree on any interest that may be charged on a loan. The virtual repeal of the
Usury Law is within the range of judicial notice which courts are bound to take
into account. Although interest rates are no longer subject to a ceiling, the
lender still does not have an unbridled license to impose increased interest
rates. The lender and the borrower should agree on the imposed rate, and such
imposed rate should be in writing.
The three promissory notes between Solidbank and Permanent all contain the
following provisions:
"5. We/I irrevocably authorize Solidbank to increase or decrease at any time the
interest rate agreed in this Note or Loan on the basis of, among others,
prevailing rates in the local or international capital markets. For this purpose,
We/I authorize Solidbank to debit any deposit or placement account with
Solidbank belonging to any one of us. The adjustment of the interest rate shall
be effective from the date indicated in the written notice sent to us by the bank,
or if no date is indicated, from the time the notice was sent.
6. Should We/I disagree to the interest rate adjustment, We/I shall prepay all
amounts due under this Note or Loan within thirty (30) days from the receipt
by anyone of us of the written notice. Otherwise, We/I shall be deemed to have
given our consent to the interest rate adjustment."
The stipulations on interest rate repricing are valid because (1) the parties
mutually agreed on said stipulations; (2) repricing takes effect only upon
Solidbank’s written notice to Permanent of the new interest rate; and (3)
Permanent has the option to prepay its loan if Permanent and Solidbank do not
agree on the new interest rate. The phrases "irrevocably authorize," "at any
time" and "adjustment of the interest rate shall be effective from the date
indicated in the written notice sent to us by the bank, or if no date is indicated,
from the time the notice was sent," emphasize that Permanent should receive a
written notice from Solidbank as a condition for the adjustment of the interest
rates. (Emphasis supplied.)
In this case, the trial and appellate courts, in upholding the validity of the
escalation clause, underscored the fact that there was actually no fixed rate of
interest stipulated in the promissory notes as this was made dependent on
prevailing rates in the market. The subject promissory notes contained the
following condition written after the first paragraph:
With one year grace period on principal and thereafter payable in 54 equal
monthly instalments to start on the second year. Interest at the prevailing rates
payable quarterly in arrears.40
In Polotan, Sr. v. CA (Eleventh Div.),41 petitioner cardholder assailed the trial
and appellate courts in ruling for the validity of the escalation clause in the
Cardholder’s Agreement. On petitioner’s contention that the interest rate was
unilaterally imposed and based on the standards and rate formulated solely by
respondent credit card company, we held:
The contractual provision in question states that "if there occurs any change in
the prevailing market rates, the new interest rate shall be the guiding rate in
computing the interest due on the outstanding obligation without need of
serving notice to the Cardholder other than the required posting on the monthly
statement served to the Cardholder." This could not be considered an escalation
clause for the reason that it neither states an increase nor a decrease in interest
rate. Said clause simply states that the interest rate should be based on the
prevailing market rate.
Interpreting it differently, while said clause does not expressly stipulate a
reduction in interest rate, it nevertheless provides a leeway for the interest rate
to be reduced in case the prevailing market rates dictate its reduction.
Admittedly, the second paragraph of the questioned proviso which provides
that "the Cardholder hereby authorizes Security Diners to correspondingly
increase the rate of such interest in the event of changes in prevailing market
rates x x x" is an escalation clause. However, it cannot be said to be dependent
solely on the will of private respondent as it is also dependent on the prevailing
market rates.
Escalation clauses are not basically wrong or legally objectionable as long as
they are not solely potestative but based on reasonable and valid grounds.
Obviously, the fluctuation in the market rates is beyond the control of private
respondent.42 (Emphasis supplied.)
In interpreting a contract, its provisions should not be read in isolation but in
relation to each other and in their entirety so as to render them effective, having
in mind the intention of the parties and the purpose to be achieved. The various
stipulations of a contract shall be interpreted together, attributing to the
doubtful ones that sense which may result from all of them taken jointly.43
Here, the escalation clause in the promissory notes authorizing the respondent
to adjust the rate of interest on the basis of a law or regulation issued by the
Central Bank of the Philippines, should be read together with the statement
after the first paragraph where no rate of interest was fixed as it would be based
on prevailing market rates. While the latter is not strictly an escalation clause,
its clear import was that interest rates would vary as determined by prevailing
market rates. Evidently, the parties intended the interest on petitioners’ loan,
including any upward or downward adjustment, to be determined by the
prevailing market rates and not dictated by respondent’s policy. It may also be
mentioned that since the deregulation of bank rates in 1983, the Central Bank
has shifted to a market-oriented interest rate policy.44
There is no indication that petitioners were coerced into agreeing with the
foregoing provisions of the promissory notes. In fact, petitioner Ignacio, a
physician engaged in the medical supply business, admitted having understood
his obligations before signing them. At no time did petitioners protest the new
rates imposed on their loan even when their property was foreclosed by
respondent.
This notwithstanding, we hold that the escalation clause is still void because it
grants respondent the power to impose an increased rate of interest without a
written notice to petitioners and their written consent. Respondent’s monthly
telephone calls to petitioners advising them of the prevailing interest rates
would not suffice. A detailed billing statement based on the new imposed
interest with corresponding computation of the total debt should have been
provided by the respondent to enable petitioners to make an informed decision.
An appropriate form must also be signed by the petitioners to indicate their
conformity to the new rates. Compliance with these requisites is essential to
preserve the mutuality of contracts. For indeed, one-sided impositions do not
have the force of law between the parties, because such impositions are not
based on the parties’ essential equality.45
Modifications in the rate of interest for loans pursuant to an escalation clause
must be the result of an agreement between the parties. Unless such important
change in the contract terms is mutually agreed upon, it has no binding
effect.46 In the absence of consent on the part of the petitioners to the
modifications in the interest rates, the adjusted rates cannot bind them. Hence,
we consider as invalid the interest rates in excess of 15%, the rate charged for
the first year.
Based on the August 29, 2000 demand letter of China Bank, petitioners’ total
principal obligation under the two promissory notes which they failed to settle
is ₱10,355,000. However, due to China Bank’s unilateral increases in the
interest rates from 15% to as high as 24.50% and penalty charge of 1/10 of 1%
per day or 36.5% per annum for the period November 4, 1999 to February 23,
2001, petitioners’ balance ballooned to ₱19,201,776.63. Note that the original
amount of principal loan almost doubled in only 16 months. The Court also finds
the penalty charges imposed excessive and arbitrary, hence the same is hereby
reduced to 1% per month or 12% per annum.1âwphi1
Petitioners’ Statement of Account, as of February 23, 2001, the date of the
foreclosure proceedings, should thus be modified as follows:
 Principal ₱10,355,000.00 DEL CASTILLO, J.:

Interest at 15% per annum
₱10,355,000 x .15 x 477 days/365 days
Penalty at 12% per annum
₱10,355,000 x .12 x 477days/365 days
Sub-Total
Less: A/P applied to balance of principal
Less: Accounts payable L & D
Add: Attorney's Fees
Total Amount Due
Less: Bid Price
In loan agreements, it cannot be denied that the rate of interest is a principal
2,029,863.70 condition, if not the most important component. Thus, any modification thereof
1,623 ,890. 96 must be mutually agreed upon; otherwise, it has no binding effect. Moreover,
the Court cannot consider a stipulation granting a party the option to prepay the
loan if said party is not agreeable to the arbitrary interest rates imposed.
Premium may not be placed upon a stipulation in a contract which grants one
14,008,754.66 party the right to choose whether to continue with or withdraw from the
(55,000.00) agreement if it discovers that what the other party has been doing all along is
improper or illegal.
(261,149.39)
13,692,605.27 This Petition for Review on Certiorari1 questions the May 8, 2007 Decision2 of
the Court of Appeals (CA) in CA-G.R. CV No. 79650, which affirmed with
1,369,260.53 modifications the February 28, 2003 Decision3 and the June 4, 2003 Order4 of
the Regional Trial Court (RTC), Branch 6 of Kalibo, Aklan in Civil Case No. 5975.
15,061,865.79
10,300,000.00 Factual Antecedents

TOTAL DEFICIENCY AMOUNT 4,761,865.79
WHEREFORE, the petition for review on certiorari is PARTLY GRANTED. The
February 20, 2009 · Decision and April 27, 2009 Resolution of the Court of
Appeals in CA G.R. CV No. 80338 are hereby MODIFIED. Petitioners Spouses
Ignacio F. Juico and Alice P. Juico are hereby ORDERED to pay jointly and
severally respondent China Banking Corporation ₱4, 7 61 ,865. 79 representing
the amount of deficiency inclusive of interest, penalty charge and attorney's
fees. Said amount shall bear interest at 12% per annum, reckoned from the time
of the filing of the complaint until its full satisfaction.
No pronouncement as to costs.
SO ORDERED.
G.R. No. 181045               July 2, 2014
SPOUSES EDUARDO and LYDIA SILOS, Petitioners,
vs.
PHILIPPINE NATIONAL BANK, Respondent.
DECISION
Spouses Eduardo and Lydia Silos (petitioners) have been in business for about
two decades of operating a department store and buying and selling of ready-to-
wear apparel. Respondent Philippine National Bank (PNB) is a banking
corporation organized and existing under Philippine laws.
To secure a one-year revolving credit line of ₱150,000.00 obtained from PNB,
petitioners constituted in August 1987 a Real Estate Mortgage5 over a 370-
square meter lot in Kalibo, Aklan covered by Transfer Certificate of Title No.
(TCT) T-14250. In July 1988,the credit line was increased to ₱1.8 million and
the mortgage was correspondingly increased to ₱1.8 million.6
And in July 1989, a Supplement to the Existing Real Estate Mortgage7 was
executed to cover the same credit line, which was increased to ₱2.5 million, and
additional security was given in the form of a 134-square meter lot covered by
TCT T-16208. In addition, petitioners issued eight Promissory Notes8 and
signed a Credit Agreement.9 This July 1989 Credit Agreement contained a
stipulation on interest which provides as follows:
1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5% per
annum. Interest shall be payable in advance every one hundred twenty days at
the rate prevailing at the time of the renewal.
(b) The Borrower agrees that the Bank may modify the interest rate in the Loan
depending on whatever policy the Bank may adopt in the future, including
without limitation, the shifting from the floating interest rate system to the fixed
interest rate system, or vice versa. Where the Bank has imposed on the Loan Under this Amendment to Credit Agreement, petitioners issued in favor of PNB
interest at a rate per annum, which is equal to the Bank’s spread over the the following 18 Promissory Notes, which petitioners settled – except the last
current floating interest rate, the Borrower hereby agrees that the Bank may, (the note covering the principal) – at the following interest rates:
without need of notice to the Borrower, increase or decrease its spread over the
floating interest rate at any time depending on whatever policy it may adopt in 1. 9th Promissory Note dated November 8, 1991 – 26%;
the future.10 (Emphases supplied)
2. 10th Promissory Note dated March 19, 1992 – 25%;
The eight Promissory Notes, on the other hand, contained a stipulation granting
PNB the right to increase or reduce interest rates "within the limits allowed by 3. 11th Promissory Note dated July 11, 1992 – 23%;
law or by the Monetary Board."11
4. 12th Promissory Note dated November 10, 1992 – 21%;
The Real Estate Mortgage agreement provided the same right to increase or
reduce interest rates "at any time depending on whatever policy PNB may adopt
5. 13th Promissory Note dated March 15, 1993 – 21%;
in the future."12

6. 14th Promissory Note dated July 12, 1993 – 17.5%;

Petitioners religiously paid interest on the notes at the following rates:

7. 15th Promissory Note dated November 17, 1993 – 21%;

1. 1st Promissory Note dated July 24, 1989 – 19.5%;

8. 16th Promissory Note dated March 28, 1994 – 21%;

2. 2nd Promissory Note dated November 22, 1989 – 23%;

9. 17th Promissory Note dated July 13, 1994 – 21%;

3. 3rd Promissory Note dated March 21, 1990 – 22%;

10. 18th Promissory Note dated November 16, 1994 – 16%;

4. 4th Promissory Note dated July 19, 1990 – 24%;

11. 19th Promissory Note dated April 10, 1995 – 21%;

5. 5th Promissory Note dated December 17, 1990 – 28%;

12. 20th Promissory Note dated July 19, 1995 – 18.5%;

6. 6th Promissory Note dated February 14, 1991 – 32%;

13. 21st Promissory Note dated December 18, 1995 – 18.75%;

7. 7th Promissory Note dated March 1, 1991 – 30%; and

14. 22nd Promissory Note dated April 22, 1996 – 18.5%;

8. 8th Promissory Note dated July 11, 1991 – 24%.13

15. 23rd Promissory Note dated July 22, 1996 – 18.5%;

In August 1991, an Amendment to Credit Agreement14 was executed by the
parties, with the following stipulation regarding interest:
16. 24th Promissory Note dated November 25, 1996 – 18%;
1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on
each Availment from date of each Availment up to but not including the date of 17. 25th Promissory Note dated May 30, 1997 – 17.5%; and
full payment thereof at the rate per annum which is determined by the Bank to
be prime rate plus applicable spread in effect as of the date of each 18. 26th Promissory Note (PN 9707237) dated July 30, 1997 – 25%.16
Availment.15 (Emphases supplied)
The 9th up to the 17th promissory notes provide for the payment of interest at
the "rate the Bank may at any time without notice, raise within the limits
allowed by law x x x."17
On the other hand, the 18th up to the 26th promissory notes – including PN
9707237, which is the 26th promissory note – carried the following provision:
x x x For this purpose, I/We agree that the rate of interest herein stipulated may
be increased or decreased for the subsequent Interest Periods, with prior notice
to the Borrower in the event of changes in interest rate prescribed by law or the
Monetary Board of the Central Bank of the Philippines, or in the Bank’s overall
cost of funds. I/We hereby agree that in the event I/we are not agreeable to the
interest rate fixed for any Interest Period, I/we shall have the option top repay
the loan or credit facility without penalty within ten (10) calendar days from the
Interest Setting Date.18 (Emphasis supplied)
Respondent regularly renewed the line from 1990 up to 1997, and petitioners
made good on the promissory notes, religiously paying the interests without
objection or fail. But in 1997, petitioners faltered when the interest rates soared
due to the Asian financial crisis. Petitioners’ sole outstanding promissory note
for ₱2.5 million – PN 9707237 executed in July 1997 and due 120 days later or
on October 28, 1997 – became past due, and despite repeated demands,
petitioners failed to make good on the note.
Incidentally, PN 9707237 provided for the penalty equivalent to 24% per
annum in case of default, as follows:
Without need for notice or demand, failure to pay this note or any installment
thereon, when due, shall constitute default and in such cases or in case of
garnishment, receivership or bankruptcy or suit of any kind filed against me/us
by the Bank, the outstanding principal of this note, at the option of the Bank and
without prior notice of demand, shall immediately become due and payable and
shall be subject to a penalty charge of twenty four percent (24%) per annum
based on the defaulted principal amount. x x x19 (Emphasis supplied)
PNB prepared a Statement of Account20 as of October 12, 1998, detailing the
amount due and demandable from petitioners in the total amount of
₱3,620,541.60, broken down as follows:
Principal P 2,500,000.00
Interest 538,874.94
Penalties 581,666.66
Total P 3,620,541.60
Despite demand, petitioners failed to pay the foregoing amount. Thus, PNB
foreclosed on the mortgage, and on January 14, 1999, TCTs T-14250 and T-
16208 were sold to it at auction for the amount of ₱4,324,172.96.21 The sheriff’s
certificate of sale was registered on March 11, 1999.
More than a year later, or on March 24, 2000, petitioners filed Civil Case No.
5975, seeking annulment of the foreclosure sale and an accounting of the PNB
credit. Petitioners theorized that after the first promissory note where they
agreed to pay 19.5% interest, the succeeding stipulations for the payment of
interest in their loan agreements with PNB – which allegedly left to the latter
the sole will to determine the interest rate – became null and void. Petitioners
added that because the interest rates were fixed by respondent without their
prior consent or agreement, these rates are void, and as a result, petitioners
should only be made liable for interest at the legal rate of 12%. They claimed
further that they overpaid interests on the credit, and concluded that due to this
overpayment of steep interest charges, their debt should now be deemed paid,
and the foreclosure and sale of TCTs T-14250 and T-16208 became unnecessary
and wrongful. As for the imposed penalty of ₱581,666.66, petitioners alleged
that since the Real Estate Mortgage and the Supplement thereto did not include
penalties as part of the secured amount, the same should be excluded from the
foreclosure amount or bid price, even if such penalties are provided for in the
final Promissory Note, or PN 9707237.22
In addition, petitioners sought to be reimbursed an alleged overpayment of
₱848,285.00 made during the period August 21, 1991 to March 5,
1998,resulting from respondent’s imposition of the alleged illegal and steep
interest rates. They also prayed to be awarded ₱200,000.00 by way of
attorney’s fees.23
In its Answer,24 PNB denied that it unilaterally imposed or fixed interest rates;
that petitioners agreed that without prior notice, PNB may modify interest rates
depending on future policy adopted by it; and that the imposition of penalties
was agreed upon in the Credit Agreement. It added that the imposition of
penalties is supported by the all-inclusive clause in the Real Estate Mortgage
agreement which provides that the mortgage shall stand as security for any and
all other obligations of whatever kind and nature owing to respondent, which
thus includes penalties imposed upon default or non-payment of the principal
and interest on due date.
On pre-trial, the parties mutually agreed to the following material facts, among
others:
a) That since 1991 up to 1998, petitioners had paid PNB the total amount of
₱3,484,287.00;25 and
b) That PNB sent, and petitioners received, a March 10, 2000 demand letter.26
During trial, petitioner Lydia Silos (Lydia) testified that the Credit Agreement,
the Amendment to Credit Agreement, Real Estate Mortgage and the Supplement
thereto were all prepared by respondent PNB and were presented to her and
her husband Eduardo only for signature; that she was told by PNB that the
latter alone would determine the interest rate; that as to the Amendment to
Credit Agreement, she was told that PNB would fill up the interest rate portion
thereof; that at the time the parties executed the said Credit Agreement, she was
not informed about the applicable spread that PNB would impose on her
account; that the interest rate portion of all Promissory Notes she and Eduardo
issued were always left in blank when they executed them, with respondent’s
mere assurance that it would be the one to enter or indicate thereon the
prevailing interest rate at the time of availment; and that they agreed to such
arrangement. She further testified that the two Real Estate Mortgage
agreements she signed did not stipulate the payment of penalties; that she and
Eduardo consulted with a lawyer, and were told that PNB’s actions were
improper, and so on March 20, 2000, they wrote to the latter seeking a
recomputation of their outstanding obligation; and when PNB did not oblige,
they instituted Civil Case No. 5975.27
On cross-examination, Lydia testified that she has been in business for 20 years;
that she also borrowed from other individuals and another bank; that it was
only with banks that she was asked to sign loan documents with no indicated
interest rate; that she did not bother to read the terms of the loan documents
which she signed; and that she received several PNB statements of account
detailing their outstanding obligations, but she did not complain; that she
assumed instead that what was written therein is correct.28
For his part, PNB Kalibo Branch Manager Diosdado Aspa, Jr. (Aspa), the sole
witness for respondent, stated on cross-examination that as a practice, the
determination of the prime rates of interest was the responsibility solely of
PNB’s Treasury Department which is based in Manila; that these prime rates
were simply communicated to all PNB branches for implementation; that there
are a multitude of considerations which determine the interest rate, such as the
cost of money, foreign currency values, PNB’s spread, bank administrative costs,
profitability, and the practice in the banking industry; that in every repricing of
each loan availment, the borrower has the right to question the rates, but that
this was not done by the petitioners; and that anything that is not found in the
Promissory Note may be supplemented by the Credit Agreement.29
Ruling of the Regional Trial Court
On February 28, 2003, the trial court rendered judgment dismissing Civil Case
No. 5975.30
It ruled that:
1. While the Credit Agreement allows PNB to unilaterally increase its spread
over the floating interest rate at any time depending on whatever policy it may
adopt in the future, it likewise allows for the decrease at any time of the same.
Thus, such stipulation authorizing both the increase and decrease of interest
rates as may be applicable is valid,31 as was held in Consolidated Bank and Trust
Corporation (SOLIDBANK) v. Court of Appeals;32
2. Banks are allowed to stipulate that interest rates on loans need not be fixed
and instead be made dependent on prevailing rates upon which to peg such
variable interest rates;33
3. The Promissory Note, as the principal contract evidencing petitioners’ loan,
prevails over the Credit Agreement and the Real Estate Mortgage.
As such, the rate of interest, penalties and attorney’s fees stipulated in the
Promissory Note prevail over those mentioned in the Credit Agreement and the
Real Estate Mortgage agreements;34
4. Roughly, PNB’s computation of the total amount of petitioners’ obligation is
correct;35
5. Because the loan was admittedly due and demandable, the foreclosure was
regularly made;36
6. By the admission of petitioners during pre-trial, all payments made to PNB
were properly applied to the principal, interest and penalties.37
The dispositive portion of the trial court’s Decision reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of the
respondent and against the petitioners by DISMISSING the latter’s petition.
Costs against the petitioners.
SO ORDERED.38
Petitioners moved for reconsideration. In an Order39 dated June 4, 2003, the
trial court granted only a modification in the award of attorney’s fees, reducing
the same from 10% to 1%. Thus, PNB was ordered to refund to petitioner the
excess in attorney’s fees in the amount of ₱356,589.90, viz:
WHEREFORE, judgment is hereby rendered upholding the validity of the
interest rate charged by the respondent as well as the extra-judicial foreclosure
proceedings and the Certificate of Sale. However, respondent is directed to
refund to the petitioner the amount of ₱356,589.90 representing the excess
interest charged against the latter.
No pronouncement as to costs.
SO ORDERED.40
Ruling of the Court of Appeals
Petitioners appealed to the CA, which issued the questioned Decision with the
following decretal portion:
WHEREFORE, in view of the foregoing, the instant appeal is PARTLY GRANTED.
The modified Decision of the Regional Trial Court per Order dated June 4, 2003
is hereby AFFIRMED with MODIFICATIONS, to wit:
1. [T]hat the interest rate to be applied after the expiration of the first 30-day
interest period for PN. No. 9707237 should be 12% per annum;
2. [T]hat the attorney’s fees of10% is valid and binding; and
3. [T]hat [PNB] is hereby ordered to reimburse [petitioners] the excess in the
bid price of ₱377,505.99 which is the difference between the total amount due
[PNB] and the amount of its bid price.
SO ORDERED.41
On the other hand, respondent did not appeal the June 4,2003 Order of the trial
court which reduced its award of attorney’s fees. It simply raised the issue in its
appellee’s brief in the CA, and included a prayer for the reversal of said Order.
In effect, the CA limited petitioners’ appeal to the following issues:
1) Whether x x x the interest rates on petitioners’ outstanding obligation were
unilaterally and arbitrarily imposed by PNB;
2) Whether x x x the penalty charges were secured by the real estate mortgage;
and
3) Whether x x x the extrajudicial foreclosure and sale are valid.42
The CA noted that, based on receipts presented by petitioners during trial, the
latter dutifully paid a total of ₱3,027,324.60 in interest for the period August 7,
1991 to August 6, 1997, over and above the ₱2.5 million principal obligation.
And this is exclusive of payments for insurance premiums, documentary stamp
taxes, and penalty. All the while, petitioners did not complain nor object to the
imposition of interest; they in fact paid the same religiously and without fail for
seven years. The appellate court ruled that petitioners are thus estopped from
questioning the same.
The CA nevertheless noted that for the period July 30, 1997 to August 14, 1997,
PNB wrongly applied an interest rate of 25.72% instead of the agreed 25%; thus
it overcharged petitioners, and the latter paid, an excess of ₱736.56 in interest.
On the issue of penalties, the CA ruled that the express tenor of the Real Estate
Mortgage agreements contemplated the inclusion of the PN 9707237-stipulated
24% penalty in the amount to be secured by the mortgaged property, thus –
For and in consideration of certain loans, overdrafts and other credit
accommodations obtained from the MORTGAGEE and to secure the payment of
the same and those others that the MORTGAGEE may extend to the
MORTGAGOR, including interest and expenses, and other obligations owing by
the MORTGAGOR to the MORTGAGEE, whether direct or indirect, principal or
secondary, as appearing in the accounts, books and records of the MORTGAGEE,
the MORTGAGOR does hereby transfer and convey by way of mortgage unto the
MORTGAGEE x x x43 (Emphasis supplied)
The CA believes that the 24% penalty is covered by the phrase "and other
obligations owing by the mortgagor to the mortgagee" and should thus be
added to the amount secured by the mortgages.44
The CA then proceeded to declare valid the foreclosure and sale of properties
covered by TCTs T-14250 and T-16208, which came as a necessary result of
petitioners’ failure to pay the outstanding obligation upon demand.45 The CA
saw fit to increase the trial court’s award of 1% to 10%, finding the latter rate to
be reasonable and citing the Real Estate Mortgage agreement which authorized
the collection of the higher rate.46
Finally, the CA ruled that petitioners are entitled to ₱377,505.09 surplus, which
is the difference between PNB’s bid price of ₱4,324,172.96 and petitioners’ total
computed obligation as of January 14, 1999, or the date of the auction sale, in
the amount of ₱3,946,667.87.47
Hence, the present Petition.
Issues
The following issues are raised in this Petition:
I relegated to PNB the sole power to fix interest rates based on arbitrary criteria
A. THE COURT OF APPEALS AS WELL AS THE LOWER COURT ERRED IN NOT
NULLIFYING THE INTEREST RATE PROVISION IN THE CREDIT AGREEMENT
DATED JULY 24, 1989 X X X AND IN THE AMENDMENT TO CREDIT
AGREEMENT DATEDAUGUST 21, 1991 X X X WHICH LEFT TO THE SOLE
UNILATERAL DETERMINATION OF THE RESPONDENT PNB THE ORIGINAL
FIXING OF INTEREST RATE AND ITS INCREASE, WHICH AGREEMENT IS
CONTRARY TO LAW, ART. 1308 OF THE [NEW CIVIL CODE], AS ENUNCIATED
IN PONCIANO ALMEIDA V. COURT OF APPEALS,G.R. [NO.] 113412, APRIL 17,
1996, AND CONTRARY TO PUBLIC POLICY AND PUBLIC INTEREST, AND IN
APPLYING THE PRINCIPLE OF ESTOPPEL ARISING FROM THE ALLEGED
DELAYED COMPLAINT OF PETITIONER[S], AND [THEIR] PAYMENT OF THE
INTEREST CHARGED.
B. CONSEQUENTLY, THE COURT OF APPEALS AND THE LOWER COURT ERRED
IN NOT DECLARING THAT PNB IS NOT AT ALL ENTITLED TO ANY INTEREST
EXCEPT THE LEGAL RATE FROM DATE OF DEMAND, AND IN NOT APPLYING
THE EXCESS OVER THE LEGAL RATE OF THE ADMITTED PAYMENTS MADE BY
PETITIONER[S] FROM 1991-1998 IN THE ADMITTED TOTAL AMOUNT OF
₱3,484,287.00, TO PAYMENT OF THE PRINCIPAL OF ₱2,500,000.[00] LEAVING
AN OVERPAYMENT OF₱984,287.00 REFUNDABLE BY RESPONDENT TO
PETITIONER[S] WITH INTEREST OF 12% PER ANNUM.
II
THE COURT OF APPEALS AND THE LOWER COURT ERRED IN HOLDING THAT
PENALTIES ARE INCLUDEDIN THE SECURED AMOUNT, SUBJECT TO
FORECLOSURE, WHEN NO PENALTIES ARE MENTIONED [NOR] PROVIDED FOR
IN THE REAL ESTATE MORTGAGE AS A SECURED AMOUNT AND THEREFORE
THE AMOUNT OF PENALTIES SHOULDHAVE BEEN EXCLUDED FROM [THE]
FORECLOSURE AMOUNT.
III
THE COURT OF APPEALS ERRED IN REVERSING THE RULING OF THE LOWER
COURT, WHICH REDUCED THE ATTORNEY’S FEES OF 10% OF THE TOTAL
INDEBTEDNESS CHARGED IN THE X X X EXTRAJUDICIAL FORECLOSURE
TOONLY 1%, AND [AWARDING] 10% ATTORNEY’S FEES.48
Petitioners’ Arguments
Petitioners insist that the interest rate provision in the Credit Agreement and
the Amendment to Credit Agreement should be declared null and void, for they
or factors such as bank policy, profitability, cost of money, foreign currency
values, and bank administrative costs; spaces for interest rates in the two Credit
Agreements and the promissory notes were left blank for PNB to unilaterally
fill, and their consent or agreement to the interest rates imposed thereafter was
not obtained; the interest rate, which consists of the prime rate plus the bank
spread, is determined not by agreement of the parties but by PNB’s Treasury
Department in Manila. Petitioners conclude that by this method of fixing the
interest rates, the principle of mutuality of contracts is violated, and public
policy as well as Circular 90549 of the then Central Bank had been breached.
Petitioners question the CA’s application of the principle of estoppel, saying that
no estoppel can proceed from an illegal act. Though they failed to timely
question the imposition of the alleged illegal interest rates and continued to pay
the loan on the basis of these rates, they cannot be deemed to have acquiesced,
and hence could recover what they erroneously paid.50
Petitioners argue that if the interest rates were nullified, then their obligation to
PNB is deemed extinguished as of July 1997; moreover, it would appear that
they even made an over payment to the bank in the amount of ₱984,287.00.
Next, petitioners suggest that since the Real Estate Mortgage agreements did
not include nor specify, as part of the secured amount, the penalty of 24%
authorized in PN 9707237, such amount of ₱581,666.66 could not be made
answerable by or collected from the mortgages covering TCTs T-14250 and T-
16208. Claiming support from Philippine Bank of Communications [PBCom] v.
Court of Appeals,51 petitioners insist that the phrase "and other obligations
owing by the mortgagor to the mortgagee"52 in the mortgage agreements cannot
embrace the ₱581,666.66 penalty, because, as held in the PBCom case, "[a]
penalty charge does not belong to the species of obligations enumerated in the
mortgage, hence, the said contract cannot be understood to secure the
penalty";53 while the mortgages are the accessory contracts, what items are
secured may only be determined from the provisions of the mortgage contracts,
and not from the Credit Agreement or the promissory notes.
Finally, petitioners submit that the trial court’s award of 1% attorney’s fees
should be maintained, given that in foreclosures, a lawyer’s work consists
merely in the preparation and filing of the petition, and involves minimal
study.54 To allow the imposition of a staggering ₱396,211.00 for such work
would be contrary to equity. Petitioners state that the purpose of attorney’s fees
in cases of this nature "is not to give respondent a larger compensation for the
loan than the law already allows, but to protect it against any future loss or
damage by being compelled to retain counsel x x x to institute judicial
proceedings for the collection of its credit."55 And because the instant case
involves a simple extrajudicial foreclosure, attorney’s fees may be equitably
tempered.
Respondent’s Arguments
For its part, respondent disputes petitioners’ claim that interest rates were
unilaterally fixed by it, taking relief in the CA pronouncement that petitioners
are deemed estopped by their failure to question the imposed rates and their
continued payment thereof without opposition. It adds that because the Credit
Agreement and promissory notes contained both an escalation clause and a de-
escalation clause, it may not be said that the bank violated the principle of
mutuality. Besides, the increase or decrease in interest rates have been
mutually agreed upon by the parties, as shown by petitioners’ continuous
payment without protest. Respondent adds that the alleged unilateral
imposition of interest rates is not a proper subject for review by the Court
because the issue was never raised in the lower court.
As for petitioners’ claim that interest rates imposed by it are null and void for
the reasons that 1) the Credit Agreements and the promissory notes were
signed in blank; 2) interest rates were at short periods; 3) no interest rates
could be charged where no agreement on interest rates was made in writing; 4)
PNB fixed interest rates on the basis of arbitrary policies and standards left to
its choosing; and 5) interest rates based on prime rate plus applicable spread
are indeterminate and arbitrary – PNB counters:
a. That Credit Agreements and promissory notes were signed by petitioner[s] in
blank – Respondent claims that this issue was never raised in the lower court.
Besides, documentary evidence prevails over testimonial evidence; Lydia Silos’
testimony in this regard is self-serving, unsupported and uncorroborated, and
for being the lone evidence on this issue. The fact remains that these documents
are in proper form, presumed regular, and endure, against arbitrary claims by
Silos – who is an experienced business person – that she signed questionable
loan documents whose provisions for interest rates were left blank, and yet she
continued to pay the interests without protest for a number of years.56
b. That interest rates were at short periods – Respondent argues that the law
which governs and prohibits changes in interest rates made more than once
every twelve months has been removed57 with the issuance of Presidential
Decree No. 858.58
c. That no interest rates could be charged where no agreement on interest rates
was made in writing in violation of Article 1956 of the Civil Code, which
provides that no interest shall be due unless it has been expressly stipulated in
writing – Respondent insists that the stipulated 25% per annum as embodied in
PN 9707237 should be imposed during the interim, or the period after the loan
became due and while it remains unpaid, and not the legal interest of 12% as
claimed by petitioners.59
d. That PNB fixed interest rates on the basis of arbitrary policies and standards
left to its choosing – According to respondent, interest rates were fixed taking
into consideration increases or decreases as provided by law or by the
Monetary Board, the bank’s overall costs of funds, and upon agreement of the
parties.60
e. That interest rates based on prime rate plus applicable spread are
indeterminate and arbitrary – On this score, respondent submits there are
various factors that influence interest rates, from political events to economic
developments, etc.; the cost of money, profitability and foreign currency
transactions may not be discounted.61
On the issue of penalties, respondent reiterates the trial court’s finding that
during pre-trial, petitioners admitted that the Statement of Account as of
October 12, 1998 – which detailed and included penalty charges as part of the
total outstanding obligation owing to the bank – was correct. Respondent
justifies the imposition and collection of a penalty as a normal banking practice,
and the standard rate per annum for all commercial banks, at the time, was
24%.
Respondent adds that the purpose of the penalty or a penal clause for that
matter is to ensure the performance of the obligation and substitute for
damages and the payment of interest in the event of non-compliance.62 And the
promissory note – being the principal agreement as opposed to the mortgage,
which is a mere accessory – should prevail. This being the case, its inclusion as
part of the secured amount in the mortgage agreements is valid and necessary.
Regarding the foreclosure of the mortgages, respondent accuses petitioners of
pre-empting consolidation of its ownership over TCTs T-14250 and T-16208;
that petitioners filed Civil Case No. 5975 ostensibly to question the foreclosure
and sale of properties covered by TCTs T-14250 and T-16208 in a desperate
move to retain ownership over these properties, because they failed to timely
redeem them.
Respondent directs the attention of the Court to its petition in G.R. No.
181046,63 where the propriety of the CA’s ruling on the following issues is
squarely raised:
1. That the interest rate to be applied after the expiration of the first 30-day
interest period for PN 9707237 should be 12% per annum; and
2. That PNB should reimburse petitioners the excess in the bid price of
₱377,505.99 which is the difference between the total amount due to PNB and
the amount of its bid price.
Our Ruling
The Court grants the Petition.
Before anything else, it must be said that it is not the function of the Court to re-
examine or re-evaluate evidence adduced by the parties in the proceedings
below. The rule admits of certain well-recognized exceptions, though, as when
the lower courts’ findings are not supported by the evidence on record or are
based on a misapprehension of facts, or when certain relevant and undisputed
facts were manifestly overlooked that, if properly considered, would justify a
different conclusion. This case falls within such exceptions.
The Court notes that on March 5, 2008, a Resolution was issued by the Court’s
First Division denying respondent’s petition in G.R. No. 181046, due to late
filing, failure to attach the required affidavit of service of the petition on the trial
court and the petitioners, and submission of a defective verification and
certification of non-forum shopping. On June 25, 2008, the Court issued another
Resolution denying with finality respondent’s motion for reconsideration of the
March 5, 2008 Resolution. And on August 15, 2008, entry of judgment was
made. This thus settles the issues, as above-stated, covering a) the interest rate
– or 12% per annum– that applies upon expiration of the first 30 days interest
period provided under PN 9707237, and b)the CA’s decree that PNB should
reimburse petitioner the excess in the bid price of ₱377,505.09.
It appears that respondent’s practice, more than once proscribed by the Court,
has been carried over once more to the petitioners. In a number of decided
cases, the Court struck down provisions in credit documents issued by PNB to,
or required of, its borrowers which allow the bank to increase or decrease
interest rates "within the limits allowed by law at any time depending on
whatever policy it may adopt in the future." Thus, in Philippine National Bank v.
Court of Appeals,64 such stipulation and similar ones were declared in violation
of Article 130865 of the Civil Code. In a second case, Philippine National Bank v.
Court of Appeals,66 the very same stipulations found in the credit agreement and
the promissory notes prepared and issued by the respondent were again
invalidated. The Court therein said:
The Credit Agreement provided inter alia, that —
(a) The BANK reserves the right to increase the interest rate within the limits
allowed by law at any time depending on whatever policy it may adopt in the
future; Provided, that the interest rate on this accommodation shall be
correspondingly decreased in the event that the applicable maximum interest is
reduced by law or by the Monetary Board. In either case, the adjustment in the
interest rate agreed upon shall take effect on the effectivity date of the increase
or decrease in the maximum interest rate.
The Promissory Note, in turn, authorized the PNB to raise the rate of interest, at
any time without notice, beyond the stipulated rate of 12% but only "within the
limits allowed by law."
The Real Estate Mortgage contract likewise provided that —
(k) INCREASE OF INTEREST RATE: The rate of interest charged on the
obligation secured by this mortgage as well as the interest on the amount which
may have been advanced by the MORTGAGEE, in accordance with the provision
hereof, shall be subject during the life of this contract to such an increase within
the rate allowed by law, as the Board of Directors of the MORTGAGEE may
prescribe for its debtors.
xxxx
In making the unilateral increases in interest rates, petitioner bank relied on the
escalation clause contained in their credit agreement which provides, as
follows:
The Bank reserves the right to increase the interest rate within the limits
allowed by law at any time depending on whatever policy it may adopt in the
future and provided, that, the interest rate on this accommodation shall be
correspondingly decreased in the event that the applicable maximum interest
rate is reduced by law or by the Monetary Board. In either case, the adjustment
in the interest rate agreed upon shall take effect on the effectivity date of the
increase or decrease in maximum interest rate.
This clause is authorized by Section 2 of Presidential Decree (P.D.) No. 1684
which further amended Act No. 2655 ("The Usury Law"), as amended, thus:
Section 2. The same Act is hereby amended by adding a new section after
Section 7, to read as follows:
Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money,
goods or credits may stipulate that the rate of interest agreed upon may be
increased in the event that the applicable maximum rate of interest is increased
bylaw or by the Monetary Board; Provided, That such stipulation shall be valid
only if there is also a stipulation in the agreement that the rate of interest
agreed upon shall be reduced in the event that the applicable maximum rate of
interest is reduced by law or by the Monetary Board; Provided further, That the
adjustment in the rate of interest agreed upon shall take effect on or after the
effectivity of the increase or decrease in the maximum rate of interest.
Section 1 of P.D. No. 1684 also empowered the Central Bank’s Monetary Board
to prescribe the maximum rates of interest for loans and certain forbearances.
Pursuant to such authority, the Monetary Board issued Central Bank (C.B.)
Circular No. 905, series of 1982, Section 5 of which provides:
Sec. 5. Section 1303 of the Manual of Regulations (for Banks and Other Financial
Intermediaries) is hereby amended to read as follows:
Sec. 1303. Interest and Other Charges.
— The rate of interest, including commissions, premiums, fees and other
charges, on any loan, or forbearance of any money, goods or credits, regardless
of maturity and whether secured or unsecured, shall not be subject to any
ceiling prescribed under or pursuant to the Usury Law, as amended.
P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties
to stipulate freely regarding any subsequent adjustment in the interest rate that
shall accrue on a loan or forbearance of money, goods or credits. In fine, they
can agree to adjust, upward or downward, the interest previously stipulated.
However, contrary to the stubborn insistence of petitioner bank, the said law
and circular did not authorize either party to unilaterally raise the interest rate
without the other’s consent.
It is basic that there can be no contract in the true sense in the absence of the
element of agreement, or of mutual assent of the parties. If this assent is
wanting on the part of the one who contracts, his act has no more efficacy than
if it had been done under duress or by a person of unsound mind.
Similarly, contract changes must be made with the consent of the contracting
parties. The minds of all the parties must meet as to the proposed modification,
especially when it affects an important aspect of the agreement. In the case of
loan contracts, it cannot be gainsaid that the rate of interest is always a vital
component, for it can make or break a capital venture. Thus, any change must be
mutually agreed upon, otherwise, it is bereft of any binding effect.
We cannot countenance petitioner bank’s posturing that the escalation clause at
bench gives it unbridled right to unilaterally upwardly adjust the interest on
private respondents’ loan. That would completely take away from private
respondents the right to assent to an important modification in their agreement,
and would negate the element of mutuality in contracts. In Philippine National
Bank v. Court of Appeals, et al., 196 SCRA 536, 544-545 (1991) we held —
x x x The unilateral action of the PNB in increasing the interest rate on the
private respondent’s loan violated the mutuality of contracts ordained in Article
1308 of the Civil Code:
Art. 1308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.
In order that obligations arising from contracts may have the force of law
between the parties, there must be mutuality between the parties based on
their essential equality. A contract containing a condition which makes its
fulfillment dependent exclusively upon the uncontrolled will of one of the
contracting parties, is void . . . . Hence, even assuming that the . . . loan
agreement between the PNB and the private respondent gave the PNB a license
(although in fact there was none) to increase the interest rate at will during the
term of the loan, that license would have been null and void for being violative
of the principle of mutuality essential in contracts. It would have invested the
loan agreement with the character of a contract of adhesion, where the parties
do not bargain on equal footing, the weaker party’s (the debtor) participation
being reduced to the alternative "to take it or leave it" . . . . Such a contract is a
veritable trap for the weaker party whom the courts of justice must protect
against abuse and imposition.67 (Emphases supplied)
Then again, in a third case, Spouses Almeda v. Court of Appeals,68 the Court
invalidated the very same provisions in the respondent’s prepared Credit
Agreement, declaring thus:
The binding effect of any agreement between parties to a contract is premised
on two settled principles: (1) that any obligation arising from contract has the
force of law between the parties; and (2) that there must be mutuality between
the parties based on their essential equality. Any contract which appears to be
heavily weighed in favor of one of the parties so as to lead to an unconscionable
result is void. Any stipulation regarding the validity or compliance of the
contract which is left solely to the will of one of the parties, is likewise, invalid.
It is plainly obvious, therefore, from the undisputed facts of the case that
respondent bank unilaterally altered the terms of its contract with petitioners
by increasing the interest rates on the loan without the prior assent of the latter.
In fact, the manner of agreement is itself explicitly stipulated by the Civil Code
when it provides, in Article 1956 that "No interest shall be due unless it has
been expressly stipulated in writing." What has been "stipulated in writing"
from a perusal of interest rate provision of the credit agreement signed between
the parties is that petitioners were bound merely to pay 21% interest, subject to
a possible escalation or de-escalation, when 1) the circumstances warrant such
escalation or de-escalation; 2) within the limits allowed by law; and 3) upon
agreement.
Indeed, the interest rate which appears to have been agreed upon by the parties
to the contract in this case was the 21% rate stipulated in the interest provision.
Any doubt about this is in fact readily resolved by a careful reading of the credit
agreement because the same plainly uses the phrase "interest rate agreed
upon," in reference to the original 21% interest rate. x x x
xxxx
Petitioners never agreed in writing to pay the increased interest rates
demanded by respondent bank in contravention to the tenor of their credit
agreement. That an increase in interest rates from 18% to as much as 68% is
excessive and unconscionable is indisputable. Between 1981 and 1984,
petitioners had paid an amount equivalent to virtually half of the entire
principal (₱7,735,004.66) which was applied to interest alone. By the time the
spouses tendered the amount of ₱40,142,518.00 in settlement of their
obligations; respondent bank was demanding ₱58,377,487.00 over and above
those amounts already previously paid by the spouses.
Escalation clauses are not basically wrong or legally objectionable so long as
they are not solely potestative but based on reasonable and valid grounds. Here,
as clearly demonstrated above, not only [are] the increases of the interest rates
on the basis of the escalation clause patently unreasonable and unconscionable,
but also there are no valid and reasonable standards upon which the increases
are anchored.
xxxx
In the face of the unequivocal interest rate provisions in the credit agreement
and in the law requiring the parties to agree to changes in the interest rate in
writing, we hold that the unilateral and progressive increases imposed by
respondent PNB were null and void. Their effect was to increase the total
obligation on an eighteen million peso loan to an amount way over three times
that which was originally granted to the borrowers. That these increases,
occasioned by crafty manipulations in the interest rates is unconscionable and
neutralizes the salutary policies of extending loans to spur business cannot be
disputed.69 (Emphases supplied)
Still, in a fourth case, Philippine National Bank v. Court of Appeals,70 the above
doctrine was reiterated:
The promissory note contained the following stipulation:
For value received, I/we, [private respondents] jointly and severally promise to
pay to the ORDER of the PHILIPPINE NATIONAL BANK, at its office in San Jose
City, Philippines, the sum of FIFTEEN THOUSAND ONLY (₱15,000.00),
Philippine Currency, together with interest thereon at the rate of 12% per
annum until paid, which interest rate the Bank may at any time without notice,
raise within the limits allowed by law, and I/we also agree to pay jointly and
severally ____% per annum penalty charge, by way of liquidated damages should
this note be unpaid or is not renewed on due dated.
Payment of this note shall be as follows:
*THREE HUNDRED SIXTY FIVE DAYS* AFTER DATE
On the reverse side of the note the following condition was stamped:
All short-term loans to be granted starting January 1, 1978 shall be made
subject to the condition that any and/or all extensions hereof that will leave any
portion of the amount still unpaid after 730 days shall automatically convert the
outstanding balance into a medium or long-term obligation as the case may be
and give the Bank the right to charge the interest rates prescribed under its
policies from the date the account was originally granted.
To secure payment of the loan the parties executed a real estate mortgage
contract which provided:
(k) INCREASE OF INTEREST RATE:
The rate of interest charged on the obligation secured by this mortgage as well
as the interest on the amount which may have been advanced by the
MORTGAGEE, in accordance with the provision hereof, shall be subject during
the life of this contract to such an increase within the rate allowed by law, as the
Board of Directors of the MORTGAGEE may prescribe for its debtors.
xxxx
To begin with, PNB’s argument rests on a misapprehension of the import of the
appellate court’s ruling. The Court of Appeals nullified the interest rate
increases not because the promissory note did not comply with P.D. No. 1684 by
providing for a de-escalation, but because the absence of such provision made
the clause so one-sided as to make it unreasonable.
That ruling is correct. It is in line with our decision in Banco Filipino Savings &
Mortgage Bank v. Navarro that although P.D. No. 1684 is not to be retroactively
applied to loans granted before its effectivity, there must nevertheless be a de-
escalation clause to mitigate the one-sidedness of the escalation clause. Indeed
because of concern for the unequal status of borrowers vis-à -vis the banks, our
cases after Banco Filipino have fashioned the rule that any increase in the rate
of interest made pursuant to an escalation clause must be the result of
agreement between the parties.
Thus in Philippine National Bank v. Court of Appeals, two promissory notes
authorized PNB to increase the stipulated interest per annum" within the limits
allowed by law at any time depending on whatever policy [PNB] may adopt in
the future; Provided, that the interest rate on this note shall be correspondingly
decreased in the event that the applicable maximum interest rate is reduced by
law or by the Monetary Board." The real estate mortgage likewise provided:
The rate of interest charged on the obligation secured by this mortgage as well
as the interest on the amount which may have been advanced by the
MORTGAGEE, in accordance with the provisions hereof, shall be subject during
the life of this contract to such an increase within the rate allowed by law, as the
Board of Directors of the MORTGAGEE may prescribe for its debtors.
Pursuant to these clauses, PNB successively increased the interest from 18% to
32%, then to 41% and then to 48%. This Court declared the increases
unilaterally imposed by [PNB] to be in violation of the principle of mutuality as
embodied in Art.1308 of the Civil Code, which provides that "[t]he contract
must bind both contracting parties; its validity or compliance cannot be left to
the will of one of them." As the Court explained:
In order that obligations arising from contracts may have the force of law
between the parties, there must be mutuality between the parties based on
their essential equality. A contract containing a condition which makes its
fulfillment dependent exclusively upon the uncontrolled will of one of the
contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence,
even assuming that the ₱1.8 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.
A similar ruling was made in Philippine National Bank v. Court of Appeals. The
credit agreement in that case provided:
The BANK reserves the right to increase the interest rate within the limits
allowed by law at any time depending on whatever policy it may adopt in the
future: Provided, that the interest rate on this accommodation shall be
correspondingly decreased in the event that the applicable maximum interest is
reduced by law or by the Monetary Board. . . .
As in the first case, PNB successively increased the stipulated interest so that
what was originally 12% per annum became, after only two years, 42%. In
declaring the increases invalid, we held:
We cannot countenance petitioner bank’s posturing that the escalation clause at
bench gives it unbridled right to unilaterally upwardly adjust the interest on
private respondents’ loan. That would completely take away from private
respondents the right to assent to an important modification in their agreement,
and would negate the element of mutuality in contracts.
Only recently we invalidated another round of interest increases decreed by
PNB pursuant to a similar agreement it had with other borrowers:
[W]hile the Usury Law ceiling on interest rates was lifted by C.B. Circular 905,
nothing in the said circular could possibly be read as granting respondent bank
carte blanche authority to raise interest rates to levels which would either
enslave its borrowers or lead to a hemorrhaging of their assets.
In this case no attempt was made by PNB to secure the conformity of private
respondents to the successive increases in the interest rate. Private
respondents’ assent to the increases can not be implied from their lack of
response to the letters sent by PNB, informing them of the increases. For as
stated in one case, no one receiving a proposal to change a contract is obliged to
answer the proposal.71 (Emphasis supplied)
We made the same pronouncement in a fifth case, New Sampaguita Builders
Construction, Inc. v. Philippine National Bank,72 thus –
Courts have the authority to strike down or to modify provisions in promissory
notes that grant the lenders unrestrained power to increase interest rates,
penalties and other charges at the latter’s sole discretion and without giving
prior notice to and securing the consent of the borrowers. This unilateral
authority is anathema to the mutuality of contracts and enable lenders to take
undue advantage of borrowers. Although the Usury Law has been effectively
repealed, courts may still reduce iniquitous or unconscionable rates charged for
the use of money. Furthermore, excessive interests, penalties and other charges
not revealed in disclosure statements issued by banks, even if stipulated in the
promissory notes, cannot be given effect under the Truth in Lending
Act.73 (Emphasis supplied)
Yet again, in a sixth disposition, Philippine National Bank v. Spouses
Rocamora,74 the above pronouncements were reiterated to debunk PNB’s
repeated reliance on its invalidated contract stipulations:
We repeated this rule in the 1994 case of PNB v. CA and Jayme Fernandez and
the 1996 case of PNB v. CA and Spouses Basco. Taking no heed of these rulings,
the escalation clause PNB used in the present case to justify the increased
interest rates is no different from the escalation clause assailed in the 1996 PNB
case; in both, the interest rates were increased from the agreed 12% per annum
rate to 42%. x x x
xxxx
On the strength of this ruling, PNB’s argument – that the spouses Rocamora’s
failure to contest the increased interest rates that were purportedly reflected in
the statements of account and the demand letters sent by the bank amounted to
their implied acceptance of the increase – should likewise fail.
Evidently, PNB’s failure to secure the spouses Rocamora’s consent to the
increased interest rates prompted the lower courts to declare excessive and
illegal the interest rates imposed. Togo around this lower court finding, PNB
alleges that the ₱206,297.47 deficiency claim was computed using only the
original 12% per annum interest rate. We find this unlikely. Our examination of
PNB’s own ledgers, included in the records of the case, clearly indicates that
PNB imposed interest rates higher than the agreed 12% per annum rate. This
confirmatory finding, albeit based solely on ledgers found in the records,
reinforces the application in this case of the rule that findings of the RTC, when
affirmed by the CA, are binding upon this Court.75 (Emphases supplied)
Verily, all these cases, including the present one, involve identical or similar
provisions found in respondent’s credit agreements and promissory notes.
Thus, the July 1989 Credit Agreement executed by petitioners and respondent
contained the following stipulation on interest:
1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5% [per
annum]. Interest shall be payable in advance every one hundred twenty days at
the rate prevailing at the time of the renewal.
(b) The Borrower agrees that the Bank may modify the interest rate in the Loan
depending on whatever policy the Bank may adopt in the future, including
without limitation, the shifting from the floating interest rate system to the fixed
interest rate system, or vice versa. Where the Bank has imposed on the Loan
interest at a rate per annum which is equal to the Bank’s spread over the
current floating interest rate, the Borrower hereby agrees that the Bank may,
without need of notice to the Borrower, increase or decrease its spread over the
floating interest rate at any time depending on whatever policy it may adopt in
the future.76 (Emphases supplied)
while the eight promissory notes issued pursuant thereto granted PNB the right
to increase or reduce interest rates "within the limits allowed by law or the
Monetary Board"77 and the Real Estate Mortgage agreement included the same
right to increase or reduce interest rates "at any time depending on whatever
policy PNB may adopt in the future."78
On the basis of the Credit Agreement, petitioners issued promissory notes
which they signed in blank, and respondent later on entered their
corresponding interest rates, as follows:
1st Promissory Note dated July 24, 1989 – 19.5%;
2nd Promissory Note dated November 22, 1989 – 23%;
3rd Promissory Note dated March 21, 1990 – 22%;
4th Promissory Note dated July 19, 1990 – 24%;
5th Promissory Note dated December 17, 1990 – 28%;
6th Promissory Note dated February 14, 1991 – 32%;
7th Promissory Note dated March 1, 1991 – 30%; and
8th Promissory Note dated July 11, 1991 – 24%.79
On the other hand, the August 1991 Amendment to Credit Agreement contains
the following stipulation regarding interest:
1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on
each Availment from date of each Availment up to but not including the date of
full payment thereof at the rate per annum which is determined by the Bank to
be prime rate plus applicable spread in effect as of the date of each
Availment.80 (Emphases supplied)
and under this Amendment to Credit Agreement, petitioners again executed and
signed the following promissory notes in blank, for the respondent to later on
enter the corresponding interest rates, which it did, as follows:
9th Promissory Note dated November 8, 1991 – 26%;
10th Promissory Note dated March 19, 1992 – 25%;
11th Promissory Note dated July 11, 1992 – 23%;
12th Promissory Note dated November 10, 1992 – 21%;
13th Promissory Note dated March 15, 1993 – 21%;
14th Promissory Note dated July 12, 1993 – 17.5%;
15th Promissory Note dated November 17, 1993 – 21%;
16th Promissory Note dated March 28, 1994 – 21%;
17th Promissory Note dated July 13, 1994 – 21%;
18th Promissory Note dated November 16, 1994 – 16%;
19th Promissory Note dated April 10, 1995 – 21%;
20th Promissory Note dated July 19, 1995 – 18.5%;
21st Promissory Note dated December 18, 1995 – 18.75%;
22nd Promissory Note dated April 22, 1996 – 18.5%;
23rd Promissory Note dated July 22, 1996 – 18.5%;
24th Promissory Note dated November 25, 1996 – 18%;
25th Promissory Note dated May 30, 1997 – 17.5%; and
26th Promissory Note (PN 9707237) dated July 30, 1997 – 25%.81
The 9th up to the 17th promissory notes provide for the payment of interest at
the "rate the Bank may at any time without notice, raise within the limits
allowed by law x x x."82 On the other hand, the 18th up to the 26th promissory
notes – which includes PN 9707237 – carried the following provision:
x x x For this purpose, I/We agree that the rate of interest herein stipulated may
be increased or decreased for the subsequent Interest Periods, with prior notice
to the Borrower in the event of changes in interest rate prescribed by law or the
Monetary Board of the Central Bank of the Philippines, or in the Bank’s overall
cost of funds. I/We hereby agree that in the event I/we are not agreeable to the
interest rate fixed for any Interest Period, I/we shall have the option to prepay
the loan or credit facility without penalty within ten (10) calendar days from the
Interest Setting Date.83 (Emphasis supplied)
These stipulations must be once more invalidated, as was done in previous
cases. The common denominator in these cases is the lack of agreement of the
parties to the imposed interest rates. For this case, this lack of consent by the
petitioners has been made obvious by the fact that they signed the promissory
notes in blank for the respondent to fill. We find credible the testimony of Lydia
in this respect. Respondent failed to discredit her; in fact, its witness PNB Kalibo
Branch Manager Aspa admitted that interest rates were fixed solely by its
Treasury Department in Manila, which were then simply communicated to all
PNB branches for implementation. If this were the case, then this would explain
why petitioners had to sign the promissory notes in blank, since the imposable
interest rates have yet to be determined and fixed by respondent’s Treasury
Department in Manila.
Moreover, in Aspa’s enumeration of the factors that determine the interest rates
PNB fixes – such as cost of money, foreign currency values, bank administrative
costs, profitability, and considerations which affect the banking industry – it can
be seen that considerations which affect PNB’s borrowers are ignored. A
borrower’s current financial state, his feedback or opinions, the nature and
purpose of his borrowings, the effect of foreign currency values or fluctuations
on his business or borrowing, etc. – these are not factors which influence the
fixing of interest rates to be imposed on him. Clearly, respondent’s method of
fixing interest rates based on one-sided, indeterminate, and subjective criteria
such as profitability, cost of money, bank costs, etc. is arbitrary for there is no
fixed standard or margin above or below these considerations.
The stipulation in the promissory notes subjecting the interest rate to review
does not render the imposition by UCPB of interest rates on the obligations of
the spouses Beluso valid. According to said stipulation:
The interest rate shall be subject to review and may be increased or decreased
by the LENDER considering among others the prevailing financial and monetary
conditions; or the rate of interest and charges which other banks or financial
institutions charge or offer to charge for similar accommodations; and/or the
resulting profitability to the LENDER after due consideration of all dealings with
the BORROWER.
It should be pointed out that the authority to review the interest rate was given
[to] UCPB alone as the lender. Moreover, UCPB may apply the considerations
enumerated in this provision as it wishes. As worded in the above provision,
UCPB may give as much weight as it desires to each of the following
considerations: (1) the prevailing financial and monetary condition;(2) the rate
of interest and charges which other banks or financial institutions charge or
offer to charge for similar accommodations; and/or(3) the resulting
profitability to the LENDER (UCPB) after due consideration of all dealings with
the BORROWER (the spouses Beluso). Again, as in the case of the interest rate
provision, there is no fixed margin above or below these considerations.
In view of the foregoing, the Separability Clause cannot save either of the two
options of UCPB as to the interest to be imposed, as both options violate the
principle of mutuality of contracts.84 (Emphases supplied)
To repeat what has been said in the above-cited cases, any modification in the
contract, such as the interest rates, must be made with the consent of the
contracting parties.1âwphi1 The minds of all the parties must meet as to the
proposed modification, especially when it affects an important aspect of the
agreement. In the case of loan agreements, the rate of interest is a principal
condition, if not the most important component. Thus, any modification thereof
must be mutually agreed upon; otherwise, it has no binding effect.
What is even more glaring in the present case is that, the stipulations in
question no longer provide that the parties shall agree upon the interest rate to
be fixed; -instead, they are worded in such a way that the borrower shall agree
to whatever interest rate respondent fixes. In credit agreements covered by the
above-cited cases, it is provided that:
The Bank reserves the right to increase the interest rate within the limits
allowed by law at any time depending on whatever policy it may adopt in the
future: Provided, that, the interest rate on this accommodation shall be
correspondingly decreased in the event that the applicable maximum interest
rate is reduced by law or by the Monetary Board. In either case, the adjustment
in the interest rate agreed upon shall take effect on the effectivity date of the
increase or decrease in maximum interest rate.85 (Emphasis supplied)
Whereas, in the present credit agreements under scrutiny, it is stated that:
IN THE JULY 1989 CREDIT AGREEMENT
(b) The Borrower agrees that the Bank may modify the interest rate on the Loan
depending on whatever policy the Bank may adopt in the future, including
without limitation, the shifting from the floating interest rate system to the fixed
interest rate system, or vice versa. Where the Bank has imposed on the Loan
interest at a rate per annum, which is equal to the Bank’s spread over the
current floating interest rate, the Borrower hereby agrees that the Bank may,
without need of notice to the Borrower, increase or decrease its spread over the
floating interest rate at any time depending on whatever policy it may adopt in
the future.86 (Emphases supplied)
IN THE AUGUST 1991 AMENDMENT TO CREDIT AGREEMENT
1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on
each Availment from date of each Availment up to but not including the date of
full payment thereof at the rate per annum which is determined by the Bank to
be prime rate plus applicable spread in effect as of the date of each
Availment.87 (Emphasis supplied)
Plainly, with the present credit agreement, the element of consent or agreement
by the borrower is now completely lacking, which makes respondent’s unlawful
act all the more reprehensible.
Accordingly, petitioners are correct in arguing that estoppel should not apply to
them, for "[e]stoppel cannot be predicated on an illegal act. As between the
parties to a contract, validity cannot be given to it by estoppel if it is prohibited
by law or is against public policy."88
It appears that by its acts, respondent violated the Truth in Lending Act, or
Republic Act No. 3765, which was enacted "to protect x x x citizens from a lack
of awareness of the true cost of credit to the user by using a full disclosure of
such cost with a view of preventing the uninformed use of credit to the
detriment of the national economy."89 The law "gives a detailed enumeration of
the specific information required to be disclosed, among which are the interest
and other charges incident to the extension of credit."90 Section 4 thereof
provides that a disclosure statement must be furnished prior to the
consummation of the transaction, thus:
SEC. 4. Any creditor shall furnish to each person to whom credit is extended,
prior to the consummation of the transaction, a clear statement in writing
setting forth, to the extent applicable and in accordance with rules and
regulations prescribed by the Board, the following information:
(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2);
(4) the charges, individually itemized, which are paid or to be paid by such
person in connection with the transaction but which are not incident to the
extension of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be financed
expressed as a simple annual rate on the outstanding unpaid balance of the
obligation.
Under Section 4(6), "finance charge" represents the amount to be paid by the
debtor incident to the extension of credit such as interest or discounts,
collection fees, credit investigation fees, attorney’s fees, and other service
charges. The total finance charge represents the difference between (1) the
aggregate consideration (down payment plus installments) on the part of the
debtor, and (2) the sum of the cash price and non-finance charges.91
By requiring the petitioners to sign the credit documents and the promissory
notes in blank, and then unilaterally filling them up later on, respondent
violated the Truth in Lending Act, and was remiss in its disclosure obligations.
In one case, which the Court finds applicable here, it was held:
UCPB further argues that since the spouses Beluso were duly given copies of the
subject promissory notes after their execution, then they were duly notified of
the terms thereof, in substantial compliance with the Truth in Lending Act.
Once more, we disagree. Section 4 of the Truth in Lending Act clearly provides
that the disclosure statement must be furnished prior to the consummation of
the transaction:
SEC. 4. Any creditor shall furnish to each person to whom credit is extended,
prior to the consummation of the transaction, a clear statement in writing
setting forth, to the extent applicable and in accordance with rules and
regulations prescribed by the Board, the following information:
(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2);
(4) the charges, individually itemized, which are paid or to be paid by such
person in connection with the transaction but which are not incident to the
extension of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be financed
expressed as a simple annual rate on the outstanding unpaid balance of the
obligation.
The rationale of this provision is to protect users of credit from a lack of
awareness of the true cost thereof, proceeding from the experience that banks
are able to conceal such true cost by hidden charges, uncertainty of interest
rates, deduction of interests from the loaned amount, and the like. The law
thereby seeks to protect debtors by permitting them to fully appreciate the true
cost of their loan, to enable them to give full consent to the contract, and to
properly evaluate their options in arriving at business decisions. Upholding
UCPB’s claim of substantial compliance would defeat these purposes of the
Truth in Lending Act. The belated discovery of the true cost of credit will too
often not be able to reverse the ill effects of an already consummated business
decision.
In addition, the promissory notes, the copies of which were presented to the
spouses Beluso after execution, are not sufficient notification from UCPB. As
earlier discussed, the interest rate provision therein does not sufficiently
indicate with particularity the interest rate to be applied to the loan covered by
said promissory notes.92 (Emphases supplied)
However, the one-year period within which an action for violation of the Truth
in Lending Act may be filed evidently prescribed long ago, or sometime in 2001,
one year after petitioners received the March 2000 demand letter which
contained the illegal charges.
The fact that petitioners later received several statements of account detailing
its outstanding obligations does not cure respondent’s breach. To repeat, the
belated discovery of the true cost of credit does not reverse the ill effects of an
already consummated business decision.93
Neither may the statements be considered proposals sent to secure the
petitioners’ conformity; they were sent after the imposition and application of
the interest rate, and not before. And even if it were to be presumed that these
are proposals or offers, there was no acceptance by petitioners. "No one
receiving a proposal to modify a loan contract, especially regarding interest, is
obliged to answer the proposal."94
Loan and credit arrangements may be made enticing by, or "sweetened" with,
offers of low initial interest rates, but actually accompanied by provisions
written in fine print that allow lenders to later on increase or decrease interest
rates unilaterally, without the consent of the borrower, and depending on
complex and subjective factors. Because they have been lured into these
contracts by initially low interest rates, borrowers get caught and stuck in the
web of subsequent steep rates and penalties, surcharges and the like. Being
ordinary individuals or entities, they naturally dread legal complications and
cannot afford court litigation; they succumb to whatever charges the lenders
impose. At the very least, borrowers should be charged rightly; but then again
this is not possible in a one-sided credit system where the temptation to abuse
is strong and the willingness to rectify is made weak by the eternal desire for
profit.
Given the above supposition, the Court cannot subscribe to respondent’s
argument that in every repricing of petitioners’ loan availment, they are given
the right to question the interest rates imposed. The import of respondent’s line
of reasoning cannot be other than that if one out of every hundred borrowers
questions respondent’s practice of unilaterally fixing interest rates, then only
the loan arrangement with that lone complaining borrower will enjoy the
benefit of review or re-negotiation; as to the 99 others, the questionable
practice will continue unchecked, and respondent will continue to reap the
profits from such unscrupulous practice. The Court can no more condone a view
so perverse. This is exactly what the Court meant in the immediately preceding
cited case when it said that "the belated discovery of the true cost of credit does
not reverse the ill effects of an already consummated business decision;"95 as to
the 99 borrowers who did not or could not complain, the illegal act shall have
become a fait accompli– to their detriment, they have already suffered the
oppressive rates.
Besides, that petitioners are given the right to question the interest rates
imposed is, under the circumstances, irrelevant; we have a situation where the
petitioners do not stand on equal footing with the respondent. It is doubtful that
any borrower who finds himself in petitioners’ position would dare question
respondent’s power to arbitrarily modify interest rates at any time. In the
second place, on what basis could any borrower question such power, when the
criteria or standards – which are really one-sided, arbitrary and subjective – for
the exercise of such power are precisely lost on him?
For the same reasons, the Court cannot validly consider that, as stipulated in the
18th up to the 26th promissory notes, petitioners are granted the option to
prepay the loan or credit facility without penalty within 10 calendar days from
the Interest Setting Date if they are not agreeable to the interest rate fixed. It
has been shown that the promissory notes are executed and signed in blank,
meaning that by the time petitioners learn of the interest rate, they are already
bound to pay it because they have already pre-signed the note where the rate is
subsequently entered.
Besides, premium may not be placed upon a stipulation in a contract which
grants one party the right to choose whether to continue with or withdraw from
the agreement if it discovers that what the other party has been doing all along
is improper or illegal.
Thus said, respondent’s arguments relative to the credit documents – that
documentary evidence prevails over testimonial evidence; that the credit
documents are in proper form, presumed regular, and endure, against arbitrary
claims by petitioners, experienced business persons that they are, they signed
questionable loan documents whose provisions for interest rates were left
blank, and yet they continued to pay the interests without protest for a number
of years – deserve no consideration.
With regard to interest, the Court finds that since the escalation clause is
annulled, the principal amount of the loan is subject to the original or stipulated
rate of interest, and upon maturity, the amount due shall be subject to legal
interest at the rate of 12% per annum. This is the uniform ruling adopted in
previous cases, including those cited here.96 The interests paid by petitioners
should be applied first to the payment of the stipulated or legal and unpaid
interest, as the case may be, and later, to the capital or principal.97 Respondent
should then refund the excess amount of interest that it has illegally imposed
upon petitioners; "[t]he amount to be refunded refers to that paid by petitioners
when they had no obligation to do so."98 Thus, the parties’ original agreement
stipulated the payment of 19.5% interest; however, this rate was intended to
apply only to the first promissory note which expired on November 21, 1989
and was paid by petitioners; it was not intended to apply to the whole duration
of the loan. Subsequent higher interest rates have been declared illegal; but
because only the rates are found to be improper, the obligation to pay interest
subsists, the same to be fixed at the legal rate of 12% per annum. However, the
12% interest shall apply only until June 30, 2013. Starting July1, 2013, the
prevailing rate of interest shall be 6% per annum pursuant to our ruling in
Nacar v. Gallery Frames99 and Bangko Sentral ng Pilipinas-Monetary Board
Circular No. 799.
Now to the issue of penalty. PN 9707237 provides that failure to pay it or any
installment thereon, when due, shall constitute default, and a penalty charge of
24% per annum based on the defaulted principal amount shall be imposed.
Petitioners claim that this penalty should be excluded from the foreclosure
amount or bid price because the Real Estate Mortgage and the Supplement
thereto did not specifically include it as part of the secured amount. Respondent
justifies its inclusion in the secured amount, saying that the purpose of the
penalty or a penal clause is to ensure the performance of the obligation and
substitute for damages and the payment of interest in the event of non-
compliance.100 Respondent adds that the imposition and collection of a penalty
is a normal banking practice, and the standard rate per annum for all
commercial banks, at the time, was 24%. Its inclusion as part of the secured
amount in the mortgage agreements is thus valid and necessary.
The Court sustains petitioners’ view that the penalty may not be included as
part of the secured amount. Having found the credit agreements and
promissory notes to be tainted, we must accord the same treatment to the
mortgages. After all, "[a] mortgage and a note secured by it are deemed parts of
one transaction and are construed together."101 Being so tainted and having the
attributes of a contract of adhesion as the principal credit documents, we must
construe the mortgage contracts strictly, and against the party who drafted it.
An examination of the mortgage agreements reveals that nowhere is it stated
that penalties are to be included in the secured amount. Construing this silence
strictly against the respondent, the Court can only conclude that the parties did
not intend to include the penalty allowed under PN 9707237 as part of the
secured amount. Given its resources, respondent could have – if it truly wanted
to – conveniently prepared and executed an amended mortgage agreement with
the petitioners, thereby including penalties in the amount to be secured by the
encumbered properties. Yet it did not.
With regard to attorney’s fees, it was plain error for the CA to have passed upon
the issue since it was not raised by the petitioners in their appeal; it was the
respondent that improperly brought it up in its appellee’s brief, when it should
have interposed an appeal, since the trial court’s Decision on this issue is
adverse to it. It is an elementary principle in the subject of appeals that an
appellee who does not himself appeal cannot obtain from the appellate court
any affirmative relief other than those granted in the decision of the court
below.
x x x [A]n appellee, who is at the same time not an appellant, may on appeal be
permitted to make counter assignments of error in ordinary actions, when the
purpose is merely to defend himself against an appeal in which errors are
alleged to have been committed by the trial court both in the appreciation of
facts and in the interpretation of the law, in order to sustain the judgment in his
favor but not when his purpose is to seek modification or reversal of the
judgment, in which case it is necessary for him to have excepted to and
appealed from the judgment.102
Since petitioners did not raise the issue of reduction of attorney’s fees, the CA
possessed no authority to pass upon it at the instance of respondent. The ruling
of the trial court in this respect should remain undisturbed.
For the fixing of the proper amounts due and owing to the parties – to the
respondent as creditor and to the petitioners who are entitled to a refund as a
consequence of overpayment considering that they paid more by way of
interest charges than the 12% per annum103 herein allowed – the case should be
remanded to the lower court for proper accounting and computation, applying
the following procedure:
1. The 1st Promissory Note with the 19.5% interest rate is deemed proper and
paid;
2. All subsequent promissory notes (from the 2nd to the 26th promissory notes)
shall carry an interest rate of only 12% per annum.104 Thus, interest payment
made in excess of 12% on the 2nd promissory note shall immediately be
applied to the principal, and the principal shall be accordingly reduced. The
reduced principal shall then be subjected to the 12%105 interest on the 3rd
promissory note, and the excess over 12% interest payment on the 3rd
promissory note shall again be applied to the principal, which shall again be
reduced accordingly. The reduced principal shall then be subjected to the 12%
interest on the 4th promissory note, and the excess over12% interest payment
on the 4th promissory note shall again be applied to the principal, which shall
again be reduced accordingly. And so on and so forth;
3. After the above procedure is carried out, the trial court shall be able to
conclude if petitioners a) still have an OUTSTANDING BALANCE/OBLIGATION
or b) MADE PAYMENTS OVER AND ABOVE THEIR TOTAL OBLIGATION
(principal and interest);
4. Such outstanding balance/obligation, if there be any, shall then be subjected
to a 12% per annum interest from October 28, 1997 until January 14, 1999,
which is the date of the auction sale;
5. Such outstanding balance/obligation shall also be charged a 24% per annum
penalty from August 14, 1997 until January 14, 1999. But from this total
penalty, the petitioners’ previous payment of penalties in the amount of
₱202,000.00made on January 27, 1998106 shall be DEDUCTED;
6. To this outstanding balance (3.), the interest (4.), penalties (5.), and the final
and executory award of 1% attorney’s fees shall be ADDED;
7. The sum total of the outstanding balance (3.), interest (4.) and 1% attorney’s
fees (6.) shall be DEDUCTED from the bid price of ₱4,324,172.96. The penalties
(5.) are not included because they are not included in the secured amount;
8. The difference in (7.) [₱4,324,172.96 LESS sum total of the outstanding
balance (3.), interest (4.), and 1% attorney’s fees (6.)] shall be DELIVERED TO
THE PETITIONERS;
9. Respondent may then proceed to consolidate its title to TCTs T-14250 and T-
16208;
10. ON THE OTHER HAND, if after performing the procedure in (2.), it turns out
that petitioners made an OVERPAYMENT, the interest (4.), penalties (5.), and
the award of 1% attorney’s fees (6.) shall be DEDUCTED from the overpayment.
There is no outstanding balance/obligation precisely because petitioners have
paid beyond the amount of the principal and interest;
11. If the overpayment exceeds the sum total of the interest (4.), penalties (5.),
and award of 1% attorney’s fees (6.), the excess shall be RETURNED to the
petitioners, with legal interest, under the principle of solutio indebiti;107
12. Likewise, if the overpayment exceeds the total amount of interest (4.) and
award of 1% attorney’s fees (6.), the trial court shall INVALIDATE THE
EXTRAJUDICIAL FORECLOSURE AND SALE;
13. HOWEVER, if the total amount of interest (4.) and award of 1% attorney’s
fees (6.) exceed petitioners’ overpayment, then the excess shall be DEDUCTED
from the bid price of ₱4,324,172.96;
14. The difference in (13.) [₱4,324,172.96 LESS sum total of the interest (4.) and
1% attorney’s fees (6.)] shall be DELIVERED TO THE PETITIONERS;
15. Respondent may then proceed to consolidate its title to TCTs T-14250 and
T-16208. The outstanding penalties, if any, shall be collected by other means.
From the above, it will be seen that if, after proper accounting, it turns out that
the petitioners made payments exceeding what they actually owe by way of
principal, interest, and attorney’s fees, then the mortgaged properties need not
answer for any outstanding secured amount, because there is not any; quite the
contrary, respondent must refund the excess to petitioners.1âwphi1 In such
case, the extrajudicial foreclosure and sale of the properties shall be declared
null and void for obvious lack of basis, the case being one of solutio indebiti
instead. If, on the other hand, it turns out that petitioners’ overpayments in
interests do not exceed their total obligation, then the respondent may
consolidate its ownership over the properties, since the period for redemption
has expired. Its only obligation will be to return the difference between its bid
price (₱4,324,172.96) and petitioners’ total obligation outstanding – except
penalties – after applying the latter’s overpayments.
WHEREFORE, premises considered, the Petition is GRANTED. The May 8, 2007
Decision of the Court of Appeals in CA-G.R. CV No. 79650 is ANNULLED and SET
ASIDE. Judgment is hereby rendered as follows:
1. The interest rates imposed and indicated in the 2nd up to the 26th
Promissory Notes are DECLARED NULL AND VOID, and such notes shall instead
be subject to interest at the rate of twelve percent (12%) per annum up to June
30, 2013, and starting July 1, 2013, six percent (6%) per annum until full
satisfaction;
2. The penalty charge imposed in Promissory Note No. 9707237 shall be
EXCLUDED from the amounts secured by the real estate mortgages;
3. The trial court’s award of one per cent (1%) attorney’s fees is REINSTATED;
4. The case is ordered REMANDED to the Regional Trial Court, Branch 6 of
Kalibo, Aklan for the computation of overpayments made by petitioners spouses
Eduardo and Lydia Silos to respondent Philippine National Bank, taking into
consideration the foregoing dispositions, and applying the procedure
hereinabove set forth;
5. Thereafter, the trial court is ORDERED to make a determination as to the
validity of the extrajudicial foreclosure and sale, declaring the same null and
void in case of overpayment and ordering the release and return of Transfer
Certificates of Title Nos. T-14250 and TCT T-16208 to petitioners, or ordering
the delivery to the petitioners of the difference between the bid price and the
total remaining obligation of petitioners, if any;
6. In the meantime, the respondent Philippine National Bank is ENJOINED from
consolidating title to Transfer Certificates of Title Nos. T-14250 and T-16208
until all the steps in the procedure above set forth have been taken and applied;
7. The reimbursement of the excess in the bid price of ₱377,505.99, which
respondent Philippine National Bank is ordered to reimburse petitioners,
should be HELD IN ABEYANCE until the true amount owing to or owed by the
parties as against each other is determined;
8. Considering that this case has been pending for such a long time and that
further proceedings, albeit uncomplicated, are required, the trial court is
ORDERED to proceed with dispatch.
SO ORDERED
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.
Correspondingly, as to the second issue, it follows that the losses/damages were
sustained while in the respective and/or successive custody and possession of
defendants carrier (Eastern), arrastre operator (Metro Port) and broker (Allied
Brokerage). This becomes evident when the Marine Cargo Survey Report (Exh.
G), with its "Additional Survey Notes", are considered. In the latter notes, it is
stated that when the shipment was "landed on vessel" to dock of Pier # 15,
South Harbor, Manila on December 12, 1981, it was observed that "one (1) fiber
drum (was) in damaged condition, covered by the vessel's Agent's Bad Order Tally
Sheet No. 86427." The report further states that when defendant Allied
Brokerage withdrew the shipment from defendant arrastre operator's custody
on January 7, 1982, one drum was found opened without seal, cello bag partly
torn but contents intact. Net unrecovered spillages was
15 kgs. The report went on to state that when the drums reached the consignee,
one drum was found with adulterated/faked contents. It is obvious, therefore,
that these losses/damages occurred before the shipment reached the consignee
while under the successive custodies of defendants. Under Art. 1737 of the New
Civil Code, the common carrier's duty to observe extraordinary diligence in the
vigilance of goods remains in full force and effect even if the goods are
temporarily unloaded and stored in transit in the warehouse of the carrier at
the place of destination, until the consignee has been advised and has had
reasonable opportunity to remove or dispose of the goods (Art. 1738, NCC).
Defendant Eastern Shipping's own exhibit, the "Turn-Over Survey of Bad Order
Cargoes" (Exhs. 3-Eastern) states that on December 12, 1981 one drum was
found "open".
and thus held:
WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered:
A. Ordering defendants to pay plaintiff, jointly and severally:
1. The amount of P19,032.95, with the present legal interest of 12% per
annum from October 1, 1982, the date of filing of this complaints, until fully paid
(the liability of defendant Eastern Shipping, Inc. shall not exceed US$500 per
case or the CIF value of the loss, whichever is lesser, while the liability of
defendant Metro Port Service, Inc. shall be to the extent of the actual invoice
value of each package, crate box or container in no case to exceed P5,000.00
each, pursuant to Section 6.01 of the Management Contract);
2. P3,000.00 as attorney's fees, and
3. Costs.
B. Dismissing the counterclaims and crossclaim of defendant/cross-claimant
Allied Brokerage Corporation.
SO ORDERED. (p. 207, Record).
Dissatisfied, defendant's recourse to US.
The appeal is devoid of merit.
After a careful scrutiny of the evidence on record. We find that the conclusion
drawn therefrom is correct. As there is sufficient evidence that the shipment
sustained damage while in the successive possession of appellants, and
therefore they are liable to the appellee, as subrogee for the amount it paid to
the consignee. (pp. 87-89, Rollo.)
The Court of Appeals thus affirmed in toto the judgment of the court
a quo.
In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes
error and grave abuse of discretion on the part of the appellate court when —
I. IT HELD PETITIONER CARRIER JOINTLY AND SEVERALLY LIABLE WITH THE
ARRASTRE OPERATOR AND CUSTOMS BROKER FOR THE CLAIM OF PRIVATE
RESPONDENT AS GRANTED IN THE QUESTIONED DECISION;
II. IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF PRIVATE
RESPONDENT SHOULD COMMENCE FROM THE DATE OF THE FILING OF THE
COMPLAINT AT THE RATE OF TWELVE PERCENT PER ANNUM INSTEAD OF
FROM THE DATE OF THE DECISION OF THE TRIAL COURT AND ONLY AT THE
RATE OF SIX PERCENT PER ANNUM, PRIVATE RESPONDENT'S CLAIM BEING
INDISPUTABLY UNLIQUIDATED.
The petition is, in part, granted.
In this decision, we have begun by saying that the questions raised by petitioner
carrier are not all that novel. Indeed, we do have a fairly good number of
previous decisions this Court can merely tack to.
The common carrier's duty to observe the requisite diligence in the shipment of
goods lasts from the time the articles are surrendered to or unconditionally
placed in the possession of, and received by, the carrier for transportation until
delivered to, or until the lapse of a reasonable time for their acceptance by, the
person entitled to receive them (Arts. 1736-1738, Civil Code; Ganzon vs. Court
of Appeals, 161 SCRA 646; Kui Bai vs. Dollar Steamship Lines, 52 Phil. 863).
When the goods shipped either are lost or arrive in damaged condition, a
presumption arises against the carrier of its failure to observe that diligence,
and there need not be an express finding of negligence to hold it liable (Art.
1735, Civil Code; Philippine National Railways vs. Court of Appeals, 139 SCRA
87; Metro Port Service vs. Court of Appeals, 131 SCRA 365). There are, of
course, exceptional cases when such presumption of fault is not observed but
these cases, enumerated in Article 17341 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 decided3 on 15 May 1969, involved a suit for recovery of money arising
out of short deliveries and pilferage of goods. In this case, appellee Malayan
Insurance (the plaintiff in the lower court) averred in its complaint that the total
amount of its claim for the value of the undelivered goods amounted to
P3,947.20. This demand, however, was neither established in its totality nor
definitely ascertained. In the stipulation of facts later entered into by the
parties, in lieu of proof, the amount of P1,447.51 was agreed upon. The trial
court rendered judgment ordering the appellants (defendants) Manila Port
Service and Manila Railroad Company to pay appellee Malayan Insurance the
sum of P1,447.51 with legal interest thereon from the date the complaint was
filed on 28 December 1962 until full payment thereof. The appellants then
assailed, inter alia, the award of legal interest. In sustaining the appellants, this
Court ruled:
Interest upon an obligation which calls for the payment of money, absent a
stipulation, is the legal rate. Such interest normally is allowable from the date of
demand, judicial or extrajudicial. The trial court opted for judicial demand as
the starting point.
But then upon the provisions of Article 2213 of the Civil Code, interest "cannot
be recovered upon unliquidated claims or damages, except when the demand
can be established with reasonable certainty." And as was held by this Court
in Rivera vs. Perez,4 L-6998, February 29, 1956, if the suit were for
damages, "unliquidated and not known until definitely ascertained, assessed and
determined by the courts after proof (Montilla c. Corporacion de P.P. Agustinos,
25 Phil. 447; Lichauco v. Guzman,
38 Phil. 302)," then, interest "should be from the date of the decision." (Emphasis
supplied)
The case of Reformina vs. Tomol,5 rendered on 11 October 1985, was for
"Recovery of Damages for Injury to Person and Loss of Property." After trial, the
lower court decreed:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and third
party defendants and against the defendants and third party plaintiffs as
follows:
Ordering defendants and third party plaintiffs Shell and Michael, Incorporated
to pay jointly and severally the following persons:
xxx xxx xxx
(g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of
P131,084.00 which is the value of the boat F B Pacita III together with its
accessories, fishing gear and equipment minus P80,000.00 which is the value of
the insurance recovered and the amount of P10,000.00 a month as the
estimated monthly loss suffered by them as a result of the fire of May 6, 1969 up
to the time they are actually paid or already the total sum of P370,000.00 as of
June 4, 1972 with legal interest from the filing of the complaint until paid and to
pay attorney's fees of P5,000.00 with costs against defendants and third party
plaintiffs. (Emphasis supplied.)
On appeal to the Court of Appeals, the latter modified the amount of damages
awarded but sustained the trial court in adjudging legal interest from the filing
of the complaint until fully paid. When the appellate court's decision became
final, the case was remanded to the lower court for execution, and this was
when the trial court issued its assailed resolution which applied the 6%
interest per annum prescribed in Article 2209 of the Civil Code. In their petition
for review on certiorari, the petitioners contended that Central Bank Circular
No. 416, providing thus —
By virtue of the authority granted to it under Section 1 of Act 2655, as amended,
Monetary Board in its Resolution No. 1622 dated July 29, 1974, has prescribed
that the rate of interest for the loan, or forbearance of any money, goods, or
credits and the rate allowed in judgments, in the absence of express contract as
to such rate of interest, shall be twelve (12%) percent per annum. This Circular
shall take effect immediately. (Emphasis found in the text) —
should have, instead, been applied. This Court6 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 Court8 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 Court10 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 Court11 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 Court12 thus set aside the decision of the appellate court and rendered
a new one, "ordering the petitioner to pay private respondent the sum of One
Hundred Thousand (P100,000.00) Pesos as moral damages, with
six (6%) percent interest thereon computed from the finality of this decision until
paid. (Emphasis supplied)
Reformina came into fore again in the 21 February 1989 case of Florendo
v. Ruiz13 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,14 decided on 08 May 1992, involved the
expropriation of certain parcels of land. After conducting a hearing on the
complaints for eminent domain, the trial court ordered the petitioner to pay the
private respondents certain sums of money as just compensation for their lands
so expropriated "with legal interest thereon . . . until fully paid." Again, in
applying the 6% legal interest  per annum under the Civil Code, the
Court15 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 forbearance16 of money, goods or credits, as well
as to judgments involving such loan or forbearance of money, goods or credits,
and that the 6% interest under the Civil Code governs when the transaction
involves the payment of indemnities in the concept of damage arising from the
breach or a delay in the performance of obligations in general. Observe, too, that
in these cases, a common time frame in the computation of the 6% interest per
annum has been applied, i.e., from the time the complaint is filed until the
adjudged amount is fully paid.
The "second group", did not alter the pronounced rule on the application of the
6% or 12% interest per annum,17 depending on whether or not the amount
involved is a loan or forbearance, on the one hand, or one of indemnity for
damage, on the other hand. Unlike, however, the "first group" which remained
consistent in holding that the running of the legal interest should be from the
time of the filing of the complaint until fully paid, the "second group" varied on
the commencement of the running of the legal interest.
Malayan held that the amount awarded should bear legal interest from the date
of the decision of the court a quo, explaining that "if the suit were for damages,
'unliquidated and not known until definitely ascertained, assessed and
determined by the courts after proof,' then, interest 'should be from the date of
the decision.'" American Express International v. IAC, introduced a different time
frame for reckoning the 6% interest by ordering it to be "computed from the
finality of (the) decision until paid." The Nakpil and Sons case ruled that 12%
interest  per annum should be imposed from the finality of the decision until the
judgment amount is paid.
The ostensible discord is not difficult to explain. The factual circumstances may
have called for different applications, guided by the rule that the courts are
vested with discretion, depending on the equities of each case, on the award of
interest. Nonetheless, it may not be unwise, by way of clarification and
reconciliation, to suggest the following rules of thumb for future guidance.
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-
contracts, delicts or quasi-delicts18 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 116923 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 court24 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.
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 ₱158,919.92. 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 complainant’s 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:

WHEREFORE, the petition is partly GRANTED. The appealed decision is SEPARATION PAY
AFFIRMED with the MODIFICATION that the legal interest to be paid is SIX
PERCENT (6%) on the amount due computed from the decision, dated Date Hired = August 1990
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 Rate = ₱198/day
this decision until the payment thereof. Date of Decision = Aug. 18, 1998

G.R. No. 189871               August 13, 2013 Length of Service = 8 yrs. & 1 month
₱198.00 x 26 days x 8 months = ₱41,184.00
DARIO NACAR, PETITIONER,
vs. BACKWAGES
GALLERY FRAMES AND/OR FELIPE BORDEY, JR., RESPONDENTS. Date Dismissed = January 24, 1997

DECISION Rate per day = ₱196.00

Date of Decisions = Aug. 18, 1998
PERALTA, J.:
a) 1/24/97 to 2/5/98 = 12.36 mos.
1
This is a petition for review on certiorari assailing the Decision  dated ₱196.00/day x 12.36 mos. = ₱62,986.56
September 23, 2008 of the Court of Appeals (CA) in CA-G.R. SP No. 98591, and
the Resolution2 dated October 9, 2009 denying petitioner’s motion for b) 2/6/98 to 8/18/98 = 6.4 months
reconsideration.
Prevailing Rate per day = ₱62,986.00
The factual antecedents are undisputed. ₱198.00 x 26 days x 6.4 mos. = ₱32,947.20
TOTAL = ₱95.933.76
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 xxxx
NCR Case No. 01-00519-97.
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 (₱62,986.56) 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 (₱95,933.36) representing his
backwages; and
All other claims are hereby dismissed for lack of merit.
SO ORDERED.4
Respondents appealed to the NLRC, but it was dismissed for lack of merit in the
Resolution5 dated February 29, 2000. Accordingly, the NLRC sustained the
decision of the Labor Arbiter. Respondents filed a motion for reconsideration,
but it was denied.6
Dissatisfied, respondents filed a Petition for Review on Certiorari before the CA.
On August 24, 2000, the CA issued a Resolution dismissing the petition.
Respondents filed a Motion for Reconsideration, but it was likewise denied in a
Resolution dated May 8, 2001.7
Respondents then sought relief before the Supreme Court, docketed as G.R. No.
151332. Finding no reversible error on the part of the CA, this Court denied the
petition in the Resolution dated April 17, 2002.8
An Entry of Judgment was later issued certifying that the resolution became
final and executory on May 27, 2002.9 The case was, thereafter, referred back to
the Labor Arbiter. A pre-execution conference was consequently scheduled, but
respondents failed to appear.10
On November 5, 2002, petitioner filed a Motion for Correct Computation,
praying that his backwages be computed from the date of his dismissal on
January 24, 1997 up to the finality of the Resolution of the Supreme Court on
May 27, 2002.11 Upon recomputation, the Computation and Examination Unit of
the NLRC arrived at an updated amount in the sum of ₱471,320.31.12
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
₱471,320.31. Respondents filed a Motion to Quash Writ of Execution, arguing,
among other things, that since the Labor Arbiter awarded separation pay of
₱62,986.56 and limited backwages of ₱95,933.36, 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 ₱471,320.31.18
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 ₱147,560.19.
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
₱147,560.19, 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 ₱11,459.73. 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 ₱158,919.92
that should be executed. Thus, since petitioner already received ₱147,560.19, he
is only entitled to the balance of ₱11,459.73.
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 Resolution23 dated January
31, 2007.
Aggrieved, petitioner then sought recourse before the CA, docketed as CA-G.R.
SP No. 98591.
On September 23, 2008, the CA rendered a Decision24 denying the petition. The
CA opined that since petitioner no longer appealed the October 15, 1998
Decision of the Labor Arbiter, which already became final and executory, a
belated correction thereof is no longer allowed. The CA stated that there is
nothing left to be done except to enforce the said judgment. Consequently, it can
no longer be modified in any respect, except to correct clerical errors or
mistakes.
Petitioner filed a Motion for Reconsideration, but it was denied in the
Resolution25 dated October 9, 2009.
Hence, the petition assigning the lone error:
I computation of the monetary awards up to the time of the finality of the
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 Arbiter’s decision, the same is not final until
reinstatement is made or until finality of the decision, in case of an award of
separation pay. Petitioner maintains that considering that the October 15, 1998
decision of the Labor Arbiter did not become final and executory until the April
17, 2002 Resolution of the Supreme Court in G.R. No. 151332 was entered in the
Book of Entries on May 27, 2002, the reckoning point for the computation of the
backwages and separation pay should be on May 27, 2002 and not when the
decision of the Labor Arbiter was rendered on October 15, 1998. Further,
petitioner posits that he is also entitled to the payment of interest from the
finality of the decision until full payment by the respondents.
On their part, respondents assert that since only separation pay and limited
backwages were awarded to petitioner by the October 15, 1998 decision of the
Labor Arbiter, no more recomputation is required to be made of said awards.
Respondents insist that since the decision clearly stated that the separation pay
and backwages are "computed only up to [the] promulgation of this decision,"
and considering that petitioner no longer appealed the decision, petitioner is
only entitled to the award as computed by the Labor Arbiter in the total amount
of ₱158,919.92. 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
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 computation, if no previous
computation has been made) is a part of the law – specifically, Article 279 of the
Labor Code and the established jurisprudence on this provision – that is read
into the decision. By the nature of an illegal dismissal case, the reliefs continue
to add up until full satisfaction, as expressed under Article 279 of the Labor
Code. The recomputation of the consequences of illegal dismissal upon
execution of the decision does not constitute an alteration or amendment of the
final decision being implemented. The illegal dismissal ruling stands; only the
computation of monetary consequences of this dismissal is affected, and this is
not a violation of the principle of immutability of final judgments.30
That the amount respondents shall now pay has greatly increased is a
consequence that it cannot avoid as it is the risk that it ran when it continued to
seek recourses against the Labor Arbiter's decision. Article 279 provides for the
consequences of illegal dismissal in no uncertain terms, qualified only by
jurisprudence in its interpretation of when separation pay in lieu of
reinstatement is allowed. When that happens, the finality of the illegal dismissal
decision becomes the reckoning point instead of the reinstatement that the law
decrees. In allowing separation pay, the final decision effectively declares that
the employment relationship ended so that separation pay and backwages are
to be computed up to that point.31
Finally, anent the payment of legal interest. In the landmark case of Eastern
Shipping Lines, Inc. v. Court of Appeals,32 the Court laid down the guidelines
regarding the manner of computing legal interest, to wit:
II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is
imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of
money, i.e., a loan or forbearance of money, the interest due should be that
which may have been stipulated in writing. Furthermore, the interest due shall
itself earn legal interest from the time it is judicially demanded. In the absence
of stipulation, the rate of interest shall be 12% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is
breached, an interest on the amount of damages awarded may be imposed at
the discretion of the court at the rate of 6% per annum. No interest, however,
shall be adjudged on unliquidated claims or damages except when or until the
demand can be established with reasonable certainty. Accordingly, where the
demand is established with reasonable certainty, the interest shall begin to run
from the time the claim is made judicially or extrajudicially (Art. 1169, Civil
Code) but when such certainty cannot be so reasonably established at the time
the demand is made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of damages may
be deemed to have been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the amount finally
adjudged.
3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its
satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of credit.33
Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB),
in its Resolution No. 796 dated May 16, 2013, approved the amendment of
Section 234 of Circular No. 905, Series of 1982 and, accordingly, issued Circular
No. 799,35 Series of 2013, effective July 1, 2013, the pertinent portion of which
reads:
The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved
the following revisions governing the rate of interest in the absence of
stipulation in loan contracts, thereby amending Section 2 of Circular No. 905,
Series of 1982:
Section 1. The rate of interest for the loan or forbearance of any money, goods
or credits and the rate allowed in judgments, in the absence of an express
contract as to such rate of interest, shall be six percent (6%) per annum.
Section 2. In view of the above, Subsection X305.136 of the Manual of
Regulations for Banks and Sections 4305Q.1,37 4305S.338 and 4303P.139 of the
Manual of Regulations for Non-Bank Financial Institutions are hereby amended
accordingly.
This Circular shall take effect on 1 July 2013.
Thus, from the foregoing, in the absence of an express stipulation as to the rate
of interest that would govern the parties, the rate of legal interest for loans or
forbearance of any money, goods or credits and the rate allowed in judgments
shall no longer be twelve percent (12%) per annum - as reflected in the case of
Eastern Shipping Lines40 and Subsection X305.1 of the Manual of Regulations for
Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations
for Non-Bank Financial Institutions, before its amendment by BSP-MB Circular
No. 799 - but will now be six percent (6%) per annum effective July 1, 2013. It
should be noted, nonetheless, that the new rate could only be applied
prospectively and not retroactively. Consequently, the twelve percent (12%)
per annum legal interest shall apply only until June 30, 2013. Come July 1, 2013
the new rate of six percent (6%) per annum shall be the prevailing rate of
interest when applicable.
Corollarily, in the recent case of Advocates for Truth in Lending, Inc. and
Eduardo B. Olaguer v. Bangko Sentral Monetary Board,41 this Court affirmed the
authority of the BSP-MB to set interest rates and to issue and enforce Circulars
when it ruled that "the BSP-MB may prescribe the maximum rate or rates of
interest for all loans or renewals thereof or the forbearance of any money,
goods or credits, including those for loans of low priority such as consumer
loans, as well as such loans made by pawnshops, finance companies and similar
credit institutions. It even authorizes the BSP-MB to prescribe different
maximum rate or rates for different types of borrowings, including deposits and
deposit substitutes, or loans of financial intermediaries."
Nonetheless, with regard to those judgments that have become final and
executory prior to July 1, 2013, said judgments shall not be disturbed and shall
continue to be implemented applying the rate of interest fixed therein.1awp++i1
To recapitulate and for future guidance, the guidelines laid down in the case of
Eastern Shipping Lines42 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.1âwphi1
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.
G.R. No. 173227               January 20, 2009
SEBASTIAN SIGA-AN, Petitioner,
vs.
ALICIA VILLANUEVA, Respondent.
DECISION
CHICO-NAZARIO, J.:
Before Us is a Petition1 for Review on Certiorari under Rule 45 of the Rules of
Court seeking to set aside the Decision,2 dated 16 December 2005, and
Resolution,3 dated 19 June 2006 of the Court of Appeals in CA-G.R. CV No.
71814, which affirmed in toto the Decision,4 dated 26 January 2001, of the Las
Pinas City Regional Trial Court, Branch 255, in Civil Case No. LP-98-0068.
The facts gathered from the records are as follows:
On 30 March 1998, respondent Alicia Villanueva filed a complaint5 for sum of
money against petitioner Sebastian Siga-an before the Las Pinas City Regional
Trial Court (RTC), Branch 255, docketed as Civil Case No. LP-98-0068.
Respondent alleged that she was a businesswoman engaged in supplying office
materials and equipments to the Philippine Navy Office (PNO) located at Fort
Bonifacio, Taguig City, while petitioner was a military officer and comptroller of
the PNO from 1991 to 1996.
Respondent claimed that sometime in 1992, petitioner approached her inside
the PNO and offered to loan her the amount of ₱540,000.00. Since she needed
capital for her business transactions with the PNO, she accepted petitioner’s
proposal. The loan agreement was not reduced in writing. Also, there was no
stipulation as to the payment of interest for the loan.6
On 31 August 1993, respondent issued a check worth ₱500,000.00 to petitioner
as partial payment of the loan. On 31 October 1993, she issued another check in
the amount of ₱200,000.00 to petitioner as payment of the remaining balance of
the loan. Petitioner told her that since she paid a total amount of ₱700,000.00
for the ₱540,000.00 worth of loan, the excess amount of ₱160,000.00 would be
applied as interest for the loan. Not satisfied with the amount applied as
interest, petitioner pestered her to pay additional interest. Petitioner
threatened to block or disapprove her transactions with the PNO if she would
not comply with his demand. As all her transactions with the PNO were subject
to the approval of petitioner as comptroller of the PNO, and fearing that
petitioner might block or unduly influence the payment of her vouchers in the
PNO, she conceded. Thus, she paid additional amounts in cash and checks as
interests for the loan. She asked petitioner for receipt for the payments but
petitioner told her that it was not necessary as there was mutual trust and
confidence between them. According to her computation, the total amount she
paid to petitioner for the loan and interest accumulated to ₱1,200,000.00.7
Thereafter, respondent consulted a lawyer regarding the propriety of paying
interest on the loan despite absence of agreement to that effect. Her lawyer told
her that petitioner could not validly collect interest on the loan because there
was no agreement between her and petitioner regarding payment of interest.
Since she paid petitioner a total amount of ₱1,200,000.00 for the ₱540,000.00
worth of loan, and upon being advised by her lawyer that she made
overpayment to petitioner, she sent a demand letter to petitioner asking for the
return of the excess amount of ₱660,000.00. Petitioner, despite receipt of the
demand letter, ignored her claim for reimbursement.8
Respondent prayed that the RTC render judgment ordering petitioner to pay
respondent (1) ₱660,000.00 plus legal interest from the time of demand; (2)
₱300,000.00 as moral damages; (3) ₱50,000.00 as exemplary damages; and (4)
an amount equivalent to 25% of ₱660,000.00 as attorney’s fees.9
In his answer10 to the complaint, petitioner denied that he offered a loan to
respondent. He averred that in 1992, respondent approached and asked him if
he could grant her a loan, as she needed money to finance her business venture
with the PNO. At first, he was reluctant to deal with respondent, because the
latter had a spotty record as a supplier of the PNO. However, since respondent
was an acquaintance of his officemate, he agreed to grant her a loan.
Respondent paid the loan in full.11
Subsequently, respondent again asked him to give her a loan. As respondent had
been able to pay the previous loan in full, he agreed to grant her another loan.
Later, respondent requested him to restructure the payment of the loan because
she could not give full payment on the due date. He acceded to her request.
Thereafter, respondent pleaded for another restructuring of the payment of the
loan. This time he rejected her plea. Thus, respondent proposed to execute a
promissory note wherein she would acknowledge her obligation to him,
inclusive of interest, and that she would issue several postdated checks to
guarantee the payment of her obligation. Upon his approval of respondent’s
request for restructuring of the loan, respondent executed a promissory note
dated 12 September 1994 wherein she admitted having borrowed an amount of
₱1,240,000.00, inclusive of interest, from petitioner and that she would pay said
amount in March 1995. Respondent also issued to him six postdated checks
amounting to ₱1,240,000.00 as guarantee of compliance with her obligation.
Subsequently, he presented the six checks for encashment but only one check
was honored. He demanded that respondent settle her obligation, but the latter
failed to do so. Hence, he filed criminal cases for Violation of the Bouncing
Checks Law (Batas Pambansa Blg. 22) against respondent. The cases were
assigned to the Metropolitan Trial Court of Makati City, Branch 65 (MeTC).12
Petitioner insisted that there was no overpayment because respondent
admitted in the latter’s promissory note that her monetary obligation as of 12
September 1994 amounted to ₱1,240,000.00 inclusive of interests. He argued
that respondent was already estopped from complaining that she should not
have paid any interest, because she was given several times to settle her
obligation but failed to do so. He maintained that to rule in favor of respondent
is tantamount to concluding that the loan was given interest-free. Based on the
foregoing averments, he asked the RTC to dismiss respondent’s complaint.
After trial, the RTC rendered a Decision on 26 January 2001 holding that
respondent made an overpayment of her loan obligation to petitioner and that
the latter should refund the excess amount to the former. It ratiocinated that
respondent’s obligation was only to pay the loaned amount of ₱540,000.00, and
that the alleged interests due should not be included in the computation of
respondent’s total monetary debt because there was no agreement between
them regarding payment of interest. It concluded that since respondent made
an excess payment to petitioner in the amount of ₱660,000.00 through mistake,
petitioner should return the said amount to respondent pursuant to the
principle of solutio indebiti.13
The RTC also ruled that petitioner should pay moral damages for the sleepless
nights and wounded feelings experienced by respondent. Further, petitioner
should pay exemplary damages by way of example or correction for the public
good, plus attorney’s fees and costs of suit.
The dispositive portion of the RTC Decision reads:
WHEREFORE, in view of the foregoing evidence and in the light of the
provisions of law and jurisprudence on the matter, judgment is hereby rendered
in favor of the plaintiff and against the defendant as follows:
(1) Ordering defendant to pay plaintiff the amount of ₱660,000.00 plus legal
interest of 12% per annum computed from 3 March 1998 until the amount is
paid in full;
(2) Ordering defendant to pay plaintiff the amount of ₱300,000.00 as moral
damages;
(3) Ordering defendant to pay plaintiff the amount of ₱50,000.00 as exemplary
damages;
(4) Ordering defendant to pay plaintiff the amount equivalent to 25% of
₱660,000.00 as attorney’s fees; and
(5) Ordering defendant to pay the costs of suit.14
Petitioner appealed to the Court of Appeals. On 16 December 2005, the
appellate court promulgated its Decision affirming in toto the RTC Decision,
thus:
WHEREFORE, the foregoing considered, the instant appeal is hereby DENIED
and the assailed decision [is] AFFIRMED in toto.15
Petitioner filed a motion for reconsideration of the appellate court’s decision
but this was denied.16 Hence, petitioner lodged the instant petition before us
assigning the following errors:
I.
THE RTC AND THE COURT OF APPEALS ERRED IN RULING THAT NO INTEREST
WAS DUE TO PETITIONER;
II.
THE RTC AND THE COURT OF APPEALS ERRED IN APPLYING THE PRINCIPLE
OF SOLUTIO INDEBITI.17
Interest is a compensation fixed by the parties for the use or forbearance of
money. This is referred to as monetary interest. Interest may also be imposed
by law or by courts as penalty or indemnity for damages. This is called
compensatory interest.18 The right to interest arises only by virtue of a contract
or by virtue of damages for delay or failure to pay the principal loan on which
interest is demanded.19
Article 1956 of the Civil Code, which refers to monetary interest,20 specifically
mandates that no interest shall be due unless it has been expressly stipulated in
writing. As can be gleaned from the foregoing provision, payment of monetary
interest is allowed only if: (1) there was an express stipulation for the payment
of interest; and (2) the agreement for the payment of interest was reduced in
writing. The concurrence of the two conditions is required for the payment of
monetary interest. Thus, we have held that collection of interest without any
stipulation therefor in writing is prohibited by law.21
It appears that petitioner and respondent did not agree on the payment of
interest for the loan. Neither was there convincing proof of written agreement
between the two regarding the payment of interest. Respondent testified that
although she accepted petitioner’s offer of loan amounting to ₱540,000.00,
there was, nonetheless, no verbal or written agreement for her to pay interest
on the loan.22
Petitioner presented a handwritten promissory note dated 12 September
199423 wherein respondent purportedly admitted owing petitioner "capital and
interest." Respondent, however, explained that it was petitioner who made a
promissory note and she was told to copy it in her own handwriting; that all her
transactions with the PNO were subject to the approval of petitioner as
comptroller of the PNO; that petitioner threatened to disapprove her
transactions with the PNO if she would not pay interest; that being unaware of
the law on interest and fearing that petitioner would make good of his threats if
she would not obey his instruction to copy the promissory note, she copied the
promissory note in her own handwriting; and that such was the same
promissory note presented by petitioner as alleged proof of their written
agreement on interest.24 Petitioner did not rebut the foregoing testimony. It is
evident that respondent did not really consent to the payment of interest for the
loan and that she was merely tricked and coerced by petitioner to pay interest.
Hence, it cannot be gainfully said that such promissory note pertains to an
express stipulation of interest or written agreement of interest on the loan
between petitioner and respondent.
Petitioner, nevertheless, claims that both the RTC and the Court of Appeals
found that he and respondent agreed on the payment of 7% rate of interest on
the loan; that the agreed 7% rate of interest was duly admitted by respondent in
her testimony in the Batas Pambansa Blg. 22 cases he filed against respondent;
that despite such judicial admission by respondent, the RTC and the Court of
Appeals, citing Article 1956 of the Civil Code, still held that no interest was due
him since the agreement on interest was not reduced in writing; that the
application of Article 1956 of the Civil Code should not be absolute, and an
exception to the application of such provision should be made when the
borrower admits that a specific rate of interest was agreed upon as in the
present case; and that it would be unfair to allow respondent to pay only the
loan when the latter very well knew and even admitted in the Batas Pambansa
Blg. 22 cases that there was an agreed 7% rate of interest on the loan.25
We have carefully examined the RTC Decision and found that the RTC did not
make a ruling therein that petitioner and respondent agreed on the payment of
interest at the rate of 7% for the loan. The RTC clearly stated that although
petitioner and respondent entered into a valid oral contract of loan amounting
to ₱540,000.00, they, nonetheless, never intended the payment of interest
thereon.26 While the Court of Appeals mentioned in its Decision that it
concurred in the RTC’s ruling that petitioner and respondent agreed on a
certain rate of interest as regards the loan, we consider this as merely an
inadvertence because, as earlier elucidated, both the RTC and the Court of
Appeals ruled that petitioner is not entitled to the payment of interest on the
loan. The rule is that factual findings of the trial court deserve great weight and
respect especially when affirmed by the appellate court.27 We found no
compelling reason to disturb the ruling of both courts.
Petitioner’s reliance on respondent’s alleged admission in the Batas Pambansa
Blg. 22 cases that they had agreed on the payment of interest at the rate of 7%
deserves scant consideration. In the said case, respondent merely testified that
after paying the total amount of loan, petitioner ordered her to pay
interest.28 Respondent did not categorically declare in the same case that she
and respondent made an express stipulation in writing as regards payment of
interest at the rate of 7%. As earlier discussed, monetary interest is due only if
there was an express stipulation in writing for the payment of interest.
There are instances in which an interest may be imposed even in the absence of
express stipulation, verbal or written, regarding payment of interest. Article
2209 of the Civil Code states that if the obligation consists in the payment of a
sum of money, and the debtor incurs delay, a legal interest of 12% per annum
may be imposed as indemnity for damages if no stipulation on the payment of
interest was agreed upon. Likewise, Article 2212 of the Civil Code provides that
interest due shall earn legal interest from the time it is judicially demanded,
although the obligation may be silent on this point.
All the same, the interest under these two instances may be imposed only as a
penalty or damages for breach of contractual obligations. It cannot be charged
as a compensation for the use or forbearance of money. In other words, the two
instances apply only to compensatory interest and not to monetary
interest.29 The case at bar involves petitioner’s claim for monetary interest.
Further, said compensatory interest is not chargeable in the instant case
because it was not duly proven that respondent defaulted in paying the loan.
Also, as earlier found, no interest was due on the loan because there was no
written agreement as regards payment of interest.
Apropos the second assigned error, petitioner argues that the principle
of solutio indebiti does not apply to the instant case. Thus, he cannot be
compelled to return the alleged excess amount paid by respondent as interest.30
Under Article 1960 of the Civil Code, if the borrower of loan pays interest when
there has been no stipulation therefor, the provisions of the Civil Code
concerning solutio indebiti shall be applied. Article 2154 of the Civil Code
explains the principle of solutio indebiti. Said provision provides that if
something is received when there is no right to demand it, and it was unduly
delivered through mistake, the obligation to return it arises. In such a case, a
creditor-debtor relationship is created under a quasi-contract whereby the
payor becomes the creditor who then has the right to demand the return of
payment made by mistake, and the person who has no right to receive such
payment becomes obligated to return the same. The quasi-contract of solutio
indebiti harks back to the ancient principle that no one shall enrich himself
unjustly at the expense of another.31 The principle of solutio indebiti applies
where (1) a payment is made when there exists no binding relation between the
payor, who has no duty to pay, and the person who received the payment; and
(2) the payment is made through mistake, and not through liberality or some
other cause.32 We have held that the principle of solutio indebiti applies in case
of erroneous payment of undue interest.33
It was duly established that respondent paid interest to petitioner. Respondent
was under no duty to make such payment because there was no express
stipulation in writing to that effect. There was no binding relation between
petitioner and respondent as regards the payment of interest. The payment was
clearly a mistake. Since petitioner received something when there was no right
to demand it, he has an obligation to return it.
We shall now determine the propriety of the monetary award and damages
imposed by the RTC and the Court of Appeals.
Records show that respondent received a loan amounting to ₱540,000.00 from
petitioner.34 Respondent issued two checks with a total worth of ₱700,000.00 in
favor of petitioner as payment of the loan.35 These checks were subsequently
encashed by petitioner.36 Obviously, there was an excess of ₱160,000.00 in the
payment for the loan. Petitioner claims that the excess of ₱160,000.00 serves as
interest on the loan to which he was entitled. Aside from issuing the said two
checks, respondent also paid cash in the total amount of ₱175,000.00 to
petitioner as interest.37 Although no receipts reflecting the same were presented
because petitioner refused to issue such to respondent, petitioner, nonetheless,
admitted in his Reply-Affidavit38 in the Batas Pambansa Blg. 22 cases that
respondent paid him a total amount of ₱175,000.00 cash in addition to the two
checks. Section 26 Rule 130 of the Rules of Evidence provides that the
declaration of a party as to a relevant fact may be given in evidence against him.
Aside from the amounts of ₱160,000.00 and ₱175,000.00 paid as interest, no
other proof of additional payment as interest was presented by respondent.
Since we have previously found that petitioner is not entitled to payment of
interest and that the principle of solutio indebiti applies to the instant case,
petitioner should return to respondent the excess amount of ₱160,000.00 and
₱175,000.00 or the total amount of ₱335,000.00. Accordingly, the reimbursable
amount to respondent fixed by the RTC and the Court of Appeals should be
reduced from ₱660,000.00 to ₱335,000.00.
As earlier stated, petitioner filed five (5) criminal cases for violation of Batas
Pambansa Blg. 22 against respondent. In the said cases, the MeTC found
respondent guilty of violating Batas Pambansa Blg. 22 for issuing five
dishonored checks to petitioner. Nonetheless, respondent’s conviction therein
does not affect our ruling in the instant case. The two checks, subject matter of
this case, totaling ₱700,000.00 which respondent claimed as payment of the
₱540,000.00 worth of loan, were not among the five checks found to be
dishonored or bounced in the five criminal cases. Further, the MeTC found that
respondent made an overpayment of the loan by reason of the interest which
the latter paid to petitioner.39
Article 2217 of the Civil Code provides that moral damages may be recovered if
the party underwent physical suffering, mental anguish, fright, serious anxiety,
besmirched reputation, wounded feelings, moral shock, social humiliation and
similar injury. Respondent testified that she experienced sleepless nights and
wounded feelings when petitioner refused to return the amount paid as interest
despite her repeated demands. Hence, the award of moral damages is justified.
However, its corresponding amount of ₱300,000.00, as fixed by the RTC and the
Court of Appeals, is exorbitant and should be equitably reduced. Article 2216 of
the Civil Code instructs that assessment of damages is left to the discretion of
the court according to the circumstances of each case. This discretion is limited
by the principle that the amount awarded should not be palpably excessive as to
indicate that it was the result of prejudice or corruption on the part of the trial
court.40 To our mind, the amount of ₱150,000.00 as moral damages is fair,
reasonable, and proportionate to the injury suffered by respondent.
Article 2232 of the Civil Code states that in a quasi-contract, such as solutio
indebiti, exemplary damages may be imposed if the defendant acted in an
oppressive manner. Petitioner acted oppressively when he pestered respondent
to pay interest and threatened to block her transactions with the PNO if she
would not pay interest. This forced respondent to pay interest despite lack of
agreement thereto. Thus, the award of exemplary damages is appropriate. The
amount of ₱50,000.00 imposed as exemplary damages by the RTC and the Court
is fitting so as to deter petitioner and other lenders from committing similar and
other serious wrongdoings.41
Jurisprudence instructs that in awarding attorney’s fees, the trial court must
state the factual, legal or equitable justification for awarding the same.42 In the
case under consideration, the RTC stated in its Decision that the award of
attorney’s fees equivalent to 25% of the amount paid as interest by respondent
to petitioner is reasonable and moderate considering the extent of work
rendered by respondent’s lawyer in the instant case and the fact that it dragged
on for several years.43 Further, respondent testified that she agreed to
compensate her lawyer handling the instant case such amount.44 The award,
therefore, of attorney’s fees and its amount equivalent to 25% of the amount
paid as interest by respondent to petitioner is proper.
Finally, the RTC and the Court of Appeals imposed a 12% rate of legal interest
on the amount refundable to respondent computed from 3 March 1998 until its
full payment. This is erroneous.
We held in Eastern Shipping Lines, Inc. v. Court of Appeals,45 that when an
obligation, not constituting a loan or forbearance of money is breached, an
interest on the amount of damages awarded may be imposed at the rate of 6%
per annum. We further declared that when the judgment of the court awarding
a sum of money becomes final and executory, the rate of legal interest, whether
it is a loan/forbearance of money or not, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed equivalent to a
forbearance of credit.
In the present case, petitioner’s obligation arose from a quasi-contract of solutio
indebiti and not from a loan or forbearance of money. Thus, an interest of 6%
per annum should be imposed on the amount to be refunded as well as on the
damages awarded and on the attorney’s fees, to be computed from the time of
the extra-judicial demand on 3 March 1998,46 up to the finality of this Decision.
In addition, the interest shall become 12% per annum from the finality of this
Decision up to its satisfaction.
WHEREFORE, the Decision of the Court of Appeals in CA-G.R. CV No. 71814,
dated 16 December 2005, is hereby AFFIRMED with the
following MODIFICATIONS: (1) the amount of ₱660,000.00 as refundable
amount of interest is reduced to THREE HUNDRED THIRTY FIVE THOUSAND
PESOS (₱335,000.00); (2) the amount of ₱300,000.00 imposed as moral
damages is reduced to ONE HUNDRED FIFTY THOUSAND PESOS (₱150,000.00);
(3) an interest of 6% per annum is imposed on the ₱335,000.00, on the damages
awarded and on the attorney’s fees to be computed from the time of the extra-
judicial demand on 3 March 1998 up to the finality of this Decision; and (4) an
interest of 12% per annum is also imposed from the finality of this Decision up
to its satisfaction. Costs against petitioner.
SO ORDERED.
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 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. On 30 September 1982,
the bank sent a final demand letter to petitioners informing them that they had
five days within which to make full payment. Since petitioners still defaulted on
their obligation, the bank filed on 3 November 1982, with the Regional Trial
Court of Makati, Branch 143, a complaint for recovery of the due amount.
After petitioners had filed a joint answer to the complaint, the bank presented
its evidence and, on 27 March 1985, rested its case. Petitioners, instead of
introducing their own evidence, had the hearing of the case reset on two
consecutive occasions. In view of the absence of petitioners and their counsel on
28 August 1985, the third hearing date, the bank moved, and the trial court
resolved, to consider the case submitted for decision.
Two years later, or on 23 October 1987, petitioners filed a motion for
reconsideration of the order of the trial court declaring them as having waived
their right to present evidence and prayed that they be allowed to prove their
case. The court a quo  denied the motion in an order, dated 5 September 1988,
and on 20 October 1989, it rendered its decision,1 the dispositive portion of
which read:
"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against
the defendants, ordering the latter to pay, jointly and severally, to the plaintiff,
as follows:
"1. The sum of P114,416.00 with interest thereon at the rate of 15.189% per
annum, 2% service charge and 5% per month penalty charge, commencing on
20 May 1982 until fully paid;
"2. To pay the further sum equivalent to 10% of the total amount of
indebtedness for and as attorney’s fees; and
"3. To pay the costs of the suit."2
Petitioners interposed an appeal with the Court of Appeals, questioning the
rejection by the trial court of their motion to present evidence and assailing the
imposition of the 2% service charge, the 5% per month penalty charge and 10%
attorney's fees. In its decision3 of 7 March 1996, the appellate court affirmed the
judgment of the trial court except on the matter of the 2% service charge which
was deleted pursuant to Central Bank Circular No. 783. Not fully satisfied with
the decision of the appellate court, both parties filed their respective motions
for reconsideration.4 Petitioners prayed for the reduction of the 5% stipulated
penalty for being unconscionable. The bank, on the other hand, asked that the
payment of interest and penalty be commenced not from the date of filing of
complaint but from the time of default as so stipulated in the contract of the
parties.
On 28 October 1998, the Court of Appeals resolved the two motions thusly:
"We find merit in plaintiff-appellee’s claim that the principal sum of
P114,416.00 with interest thereon must commence not on the date of filing of
the complaint as we have previously held in our decision but on the date when
the obligation became due.
"Default generally begins from the moment the creditor demands the
performance of the obligation. However, demand is not necessary to render the
obligor in default when the obligation or the law so provides.
"In the case at bar, defendants-appellants executed a promissory note where
they undertook to pay the obligation on its maturity date 'without necessity of
demand.' They also agreed to pay the interest in case of non-payment from the
date of default.
"x x x           x x x          x x x
"While we maintain that defendants-appellants must be bound by the contract
which they acknowledged and signed, we take cognizance of their plea for the
application of the provisions of Article 1229 x x x.
"Considering that defendants-appellants partially complied with their
obligation under the promissory note by the reduction of the original amount of
P120,000.00 to P114,416.00 and in order that they will finally settle their
obligation, it is our view and we so hold that in the interest of justice and public
policy, a penalty of 3% per month or 36% per annum would suffice.
"x x x           x x x          x x x
"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 attorney’s fees."5
On 16 November 1998, petitioners filed an omnibus motion for reconsideration
and to admit newly discovered evidence,6 alleging that while the case was
pending before the trial court, petitioner Tolomeo Ligutan and his wife
Bienvenida Ligutan executed a real estate mortgage on 18 January 1984 to
secure the existing indebtedness of petitioners Ligutan and dela Llana with the
bank. Petitioners contended that the execution of the real estate mortgage had
the effect of novating the contract between them and the bank. Petitioners
further averred that the mortgage was extrajudicially foreclosed on 26 August
1986, that they were not informed about it, and the bank did not credit them
with the proceeds of the sale. The appellate court denied the omnibus motion
for reconsideration and to admit newly discovered evidence, ratiocinating that
such a second motion for reconsideration cannot be entertained under Section
2, Rule 52, of the 1997 Rules of Civil Procedure. Furthermore, the appellate
court said, the newly-discovered evidence being invoked by petitioners had
actually been known to them when the case was brought on appeal and when
the first motion for reconsideration was filed.7
Aggrieved by the decision and resolutions of the Court of Appeals, petitioners
elevated their case to this Court on 9 July 1999 via a petition for review
on certiorari under Rule 45 of the Rules of Court, submitting thusly -
"I. The respondent Court of Appeals seriously erred in not holding that the
15.189% interest and the penalty of three (3%) percent per month or thirty-six
(36%) percent per annum imposed by private respondent bank on petitioners’
loan obligation are still manifestly exorbitant, iniquitous and unconscionable.
"II. The respondent Court of Appeals gravely erred in not reducing to a
reasonable level the ten (10%) percent award of attorney’s 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 respondent’s complaint in the
instant case due to the subsequent execution of the real estate mortgage during
the pendency of this case and the subsequent foreclosure of the mortgage."8
Respondent bank, which did not take an appeal, would, however, have it that
the penalty sought to be deleted by petitioners was even insufficient to fully
cover and compensate for the cost of money brought about by the radical
devaluation and decrease in the purchasing power of the peso, particularly vis-
a-vis the U.S. dollar, taking into account the time frame of its occurrence. The
Bank would stress that only the amount of P5,584.00 had been remitted out of
the entire loan of P120,000.00.9
A penalty clause, expressly recognized by law,10 is an accessory undertaking to
assume greater liability on the part of an obligor in case of breach of an
obligation. It functions to strengthen the coercive force of the obligation11 and to
provide, in effect, for what could be the liquidated damages resulting from such
a breach. The obligor would then be bound to pay the stipulated indemnity
without the necessity of proof on the existence and on the measure of damages
caused by the breach.12 Although a court may not at liberty ignore the freedom
of the parties to agree on such terms and conditions as they see fit that
contravene neither law nor morals, good customs, public order or public policy,
a stipulated penalty, nevertheless, may be equitably reduced by the courts if it is
iniquitous or unconscionable or if the principal obligation has been partly or
irregularly complied with.13
The question of whether a penalty is reasonable or iniquitous can be partly
subjective and partly objective. Its resolution would depend on such factors as,
but not necessarily confined to, the type, extent and purpose of the penalty, the
nature of the obligation, the mode of breach and its consequences, the
supervening realities, the standing and relationship of the parties, and the like,
the application of which, by and large, is addressed to the sound discretion of
the court. In Rizal Commercial Banking Corp. vs. Court of Appeals,14 just an
example, the Court has tempered the penalty charges after taking into account
the 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.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
attorney’s 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% attorney’s fees to be reasonable.
Neither can the appellate court be held to have erred in rejecting petitioners'
call for a new trial or to admit newly discovered evidence. As the appellate court
so held in its resolution of 14 May 1999 -
"Under Section 2, Rule 52 of the 1997 Rules of Civil Procedure, no second
motion for reconsideration of a judgment or final resolution by the same party
shall be entertained. Considering that the instant motion is already a second
motion for reconsideration, the same must therefore be denied.
"Furthermore, it would appear from the records available to this court that the
newly-discovered evidence being invoked by defendants-appellants have
actually been existent when the case was brought on appeal to this court as well
as when the first motion for reconsideration was filed.1âwphi1 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 party’s 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 Samuel and Odette Beluso (spouses Beluso) in favor of petitioner United
and the bank.21 Respondent bank has correctly postulated that the mortgage is Coconut Planters Bank (UCPB).
but an accessory contract to secure the loan in the promissory note.
The procedural and factual antecedents of this case are as follows:
Extinctive novation requires, first, a previous valid obligation; second, the
agreement of all the parties to the new contract; third, the extinguishment of the On 16 April 1996, UCPB granted the spouses Beluso a Promissory Notes Line
obligation; and fourth, the validity of the new one.22 In order that an obligation under a Credit Agreement whereby the latter could avail from the former credit
may be extinguished by another which substitutes the same, it is imperative of up to a maximum amount of ₱1.2 Million pesos for a term ending on 30 April
that it be so declared in unequivocal terms, or that the old and the new 1997. The spouses Beluso constituted, other than their promissory notes, a real
obligation be on every point incompatible with each other.23 An obligation to estate mortgage over parcels of land in Roxas City, covered by Transfer
pay a sum of money is not extinctively novated by a new instrument which Certificates of Title No. T-31539 and T-27828, as additional security for the
merely changes the terms of payment or adding compatible covenants or where obligation. The Credit Agreement was subsequently amended to increase the
the old contract is merely supplemented by the new one.24 When not expressed, amount of the Promissory Notes Line to a maximum of ₱2.35 Million pesos and
incompatibility is required so as to ensure that the parties have indeed intended to extend the term thereof to 28 February 1998.
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 spouses Beluso availed themselves of the credit line under the following
the obligation, i.e., (1) the juridical relation or tie, such as from a Promissory Notes:
mere commodatum to lease of things, or from negotiorum gestio to agency, or
25  26 
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 Date of PN Maturity Date Amount Secured
subjects, such as the substitution of a debtor27 or the subrogation of the creditor.
8314-96-00083-3 29 April 1996 27 August 1996 ₱ 700,0
Extinctive novation does not necessarily imply that the new agreement should
be complete by itself; certain terms and conditions may be carried, expressly 8314-96-00085-0
or 2 May 1996 30 August 1996 ₱ 500,0
by implication, over to the new obligation.
8314-96-000292-2 20 November 1996 20 March 1997 ₱ 800,0
WHEREFORE, the petition is DENIED.
The three promissory notes were renewed several times. On 30 April 1997, the
G.R. No. 159912               August 17, 2007 payment of the principal and interest of the latter two promissory notes were
debited from the spouses Beluso’s account with UCPB; yet, a consolidated loan
UNITED COCONUT PLANTERS BANK, Petitioner, for ₱1.3 Million was again released to the spouses Beluso under one promissory
vs. note with a due date of 28 February 1998.
SPOUSES SAMUEL and ODETTE BELUSO, Respondents.
To completely avail themselves of the ₱2.35 Million credit line extended to them
DECISION by UCPB, the spouses Beluso executed two more promissory notes for a total of
₱350,000.00:
CHICO-NAZARIO, J.:
Date of PN Maturity Date Amount Secured
This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court,
97-00363-1 11 December 1997 28 February 1998 ₱ 200,0
which seeks to annul the Court of Appeals Decision1 dated 21 January 2003 and
2
its Resolution  dated 9 September 2003 in CA-G.R. CV No. 67318. The assailed98-00002-4 2 January 1998 28 February 1998 ₱ 150,0
Court of Appeals Decision and Resolution affirmed in turn the Decision3 dated
23 March 2000 and Order4 dated 8 May 2000 of the Regional Trial Court (RTC),
Branch 65 of Makati City, in Civil Case No. 99-314, declaring void the interest
rate provided in the promissory notes executed by the respondents Spouses
 However, the spouses Beluso alleged that the amounts covered by these last On 8 May 2000, the RTC denied UCPB’s Motion for Reconsideration,6 prompting
two promissory notes were never released or credited to their account and, UCPB to appeal the RTC Decision with the Court of Appeals. The Court of
thus, claimed that the principal indebtedness was only ₱2 Million. Appeals affirmed the RTC Decision, to wit:

In any case, UCPB applied interest rates on the different promissory notes WHEREFORE, premises considered, the decision dated March 23, 2000 of the
ranging from 18% to 34%. From 1996 to February 1998 the spouses Beluso Regional Trial Court, Branch 65, Makati City in Civil Case No. 99-314 is hereby
were able to pay the total sum of ₱763,692.03. AFFIRMED subject to the modification that defendant-appellant UCPB is not
liable for attorney’s fees or the costs of suit.7
From 28 February 1998 to 10 June 1998, UCPB continued to charge interest and
penalty on the obligations of the spouses Beluso, as follows: On 9 September 2003, the Court of Appeals denied UCPB’s Motion for
Reconsideration for lack of merit. UCPB thus filed the present petition,
submitting the following issues for our resolution:
# Amount Secured Interest Penalty Total
-00363-1 ₱ 200,000 31% 36% ₱ 225,313.24 I
-00366-6 ₱ 700,000 30.17% 32.786% ₱ 795,294.72
(7 days) (102 days) WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED
SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF
-00368-2 ₱ 1,300,000 28% 30.41% THE TRIAL COURT WHICH DECLARED VOID THE PROVISION ON INTEREST
₱ 1,462,124.54
(2 days) (102 days) RATE AGREED UPON BETWEEN PETITIONER AND RESPONDENTS
-00002-4 ₱ 150,000 33% 36% ₱ 170,034.71
II
(102 days)

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED

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 ₱2,932,543.00 plus 25% attorney’s 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 ₱3,784,603.00.
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 Sheriff’s 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 ₱50,000.00
by way of attorney’s fees; and to pay the costs of suit. [The spouses Beluso] are
hereby ordered to pay [UCPB] the sum of ₱1,560,308.00.5
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
(₱1,560,308.00)
III
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED
SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF
THE TRIAL COURT WHICH ANNULLED THE FORECLOSURE BY PETITIONER OF
THE SUBJECT PROPERTIES DUE TO AN ALLEGED "INCORRECT
COMPUTATION" OF RESPONDENTS’ INDEBTEDNESS
IV
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED
SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF
THE TRIAL COURT WHICH FOUND PETITIONER LIABLE FOR VIOLATION OF
THE TRUTH IN LENDING ACT
 V declared invalid, illegal or unenforceable in any respect, the validity, legality and
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED
SERIOUS AND REVERSIBLE ERROR WHEN IT FAILED TO ORDER THE
DISMISSAL OF THE CASE BECAUSE THE RESPONDENTS ARE GUILTY OF
FORUM SHOPPING8
Validity of the Interest Rates
The Court of Appeals held that the imposition of interest in the following
provision found in the promissory notes of the spouses Beluso is void, as the
interest rates and the bases therefor were determined solely by petitioner
UCPB:
FOR VALUE RECEIVED, I, and/or We, on or before due date, SPS. SAMUEL AND
ODETTE BELUSO (BORROWER), jointly and severally promise to pay to UNITED
COCONUT PLANTERS BANK (LENDER) or order at UCPB Bldg., Makati Avenue,
Makati City, Philippines, the sum of ______________ PESOS, (P_____), Philippine
Currency, with interest thereon at the rate indicative of DBD retail rate or as
determined by the Branch Head.9
UCPB asserts that this is a reversible error, and claims that while the interest
rate was not numerically quantified in the face of the promissory notes, it was
nonetheless categorically fixed, at the time of execution thereof, at the "rate
indicative of the DBD retail rate." UCPB contends that said provision must be
read with another stipulation in the promissory notes subjecting to review the
interest rate as fixed:
The interest rate shall be subject to review and may be increased or decreased
by the LENDER considering among others the prevailing financial and monetary
conditions; or the rate of interest and charges which other banks or financial
institutions charge or offer to charge for similar accommodations; and/or the
resulting profitability to the LENDER after due consideration of all dealings with
the BORROWER.10
In this regard, UCPB avers that these are valid reference rates akin to a
"prevailing rate" or "prime rate" allowed by this Court in Polotan v. Court of
Appeals.11 Furthermore, UCPB argues that even if the proviso "as determined by
the branch head" is considered void, such a declaration would not ipso facto
render the connecting clause "indicative of DBD retail rate" void in view of the
separability clause of the Credit Agreement, which reads:
Section 9.08 Separability Clause. If any one or more of the provisions contained
in this AGREEMENT, or documents executed in connection herewith shall be
enforceability of the remaining provisions hereof shall not in any way be
affected or impaired.12
According to UCPB, the imposition of the questioned interest rates did not
infringe on the principle of mutuality of contracts, because the spouses Beluso
had the liberty to choose whether or not to renew their credit line at the new
interest rates pegged by petitioner.13 UCPB also claims that assuming there was
any defect in the mutuality of the contract at the time of its inception, such
defect was cured by the subsequent conduct of the spouses Beluso in availing
themselves of the credit line from April 1996 to February 1998 without airing
any protest with respect to the interest rates imposed by UCPB. According to
UCPB, therefore, the spouses Beluso are in estoppel.14
We agree with the Court of Appeals, and find no merit in the contentions of
UCPB.
Article 1308 of the Civil Code provides:
Art. 1308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.
We applied this provision in Philippine National Bank v. Court of
Appeals,15 where we held:
In order that obligations arising from contracts may have the force of law
between the parties, there must be mutuality between the parties based on
their essential equality. A contract containing a condition which makes its
fulfillment dependent exclusively upon the uncontrolled will of one of the
contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence,
even assuming that the P1.8 million loan agreement between the PNB and the
private respondent gave the PNB a license (although in fact there was none) to
increase the interest rate at will during the term of the loan, that license would
have been null and void for being violative of the principle of mutuality essential
in contracts. It would have invested the loan agreement with the character of a
contract of adhesion, where the parties do not bargain on equal footing, the
weaker party's (the debtor) participation being reduced to the alternative "to
take it or leave it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a
contract is a veritable trap for the weaker party whom the courts of justice must
protect against abuse and imposition.
The provision stating that the interest shall be at the "rate indicative of DBD
retail rate or as determined by the Branch Head" is indeed dependent solely on
the will of petitioner UCPB. Under such provision, petitioner UCPB has two
choices on what the interest rate shall be: (1) a rate indicative of the DBD retail
rate; or (2) a rate as determined by the Branch Head. As UCPB is given this
choice, the rate should be categorically determinable in both choices. If either of
these two choices presents an opportunity for UCPB to fix the rate at will, the
bank can easily choose such an option, thus making the entire interest rate
provision violative of the principle of mutuality of contracts.
Not just one, but rather both, of these choices are dependent solely on the will of
UCPB. Clearly, a rate "as determined by the Branch Head" gives the latter
unfettered discretion on what the rate may be. The Branch Head may choose
any rate he or she desires. As regards the rate "indicative of the DBD retail rate,"
the same cannot be considered as valid for being akin to a "prevailing rate" or
"prime rate" allowed by this Court in Polotan. The interest rate in Polotan reads:
The Cardholder agrees to pay interest per annum at 3% plus the prime rate of
Security Bank and Trust Company. x x x.16
In this provision in Polotan, there is a fixed margin over the reference rate: 3%.
Thus, the parties can easily determine the interest rate by applying simple
arithmetic. On the other hand, the provision in the case at bar does not specify
any margin above or below the DBD retail rate. UCPB can peg the interest at any
percentage above or below the DBD retail rate, again giving it unfettered
discretion in determining the interest rate.
The stipulation in the promissory notes subjecting the interest rate to review
does not render the imposition by UCPB of interest rates on the obligations of
the spouses Beluso valid. According to said stipulation:
The interest rate shall be subject to review and may be increased or decreased
by the LENDER considering among others the prevailing financial and monetary
conditions; or the rate of interest and charges which other banks or financial
institutions charge or offer to charge for similar accommodations; and/or the
resulting profitability to the LENDER after due consideration of all dealings with
the BORROWER.17
It should be pointed out that the authority to review the interest rate was given
UCPB alone as the lender. Moreover, UCPB may apply the considerations
enumerated in this provision as it wishes. As worded in the above provision,
UCPB may give as much weight as it desires to each of the following
considerations: (1) the prevailing financial and monetary condition; (2) the rate
of interest and charges which other banks or financial institutions charge or
offer to charge for similar accommodations; and/or (3) the resulting
profitability to the LENDER (UCPB) after due consideration of all dealings with
the BORROWER (the spouses Beluso). Again, as in the case of the interest rate
provision, there is no fixed margin above or below these considerations.
In view of the foregoing, the Separability Clause cannot save either of the two
options of UCPB as to the interest to be imposed, as both options violate the
principle of mutuality of contracts.
UCPB likewise failed to convince us that the spouses Beluso were in estoppel.
Estoppel cannot be predicated on an illegal act. As between the parties to a
contract, validity cannot be given to it by estoppel if it is prohibited by law or is
against public policy.18
The interest rate provisions in the case at bar are illegal not only because of the
provisions of the Civil Code on mutuality of contracts, but also, as shall be
discussed later, because they violate the Truth in Lending Act. Not disclosing the
true finance charges in connection with the extensions of credit is, furthermore,
a form of deception which we cannot countenance. It is against the policy of the
State as stated in the Truth in Lending Act:
Sec. 2. Declaration of Policy. – It is hereby declared to be the policy of the State
to protect its citizens from a lack of awareness of the true cost of credit to the
user by assuring a full disclosure of such cost with a view of preventing the
uninformed use of credit to the detriment of the national economy.19
Moreover, while the spouses Beluso indeed agreed to renew the credit line, the
offending provisions are found in the promissory notes themselves, not in the
credit line. In fixing the interest rates in the promissory notes to cover the
renewed credit line, UCPB still reserved to itself the same two options – (1) a
rate indicative of the DBD retail rate; or (2) a rate as determined by the Branch
Head.
Error in Computation
UCPB asserts that while both the RTC and the Court of Appeals voided the
interest rates imposed by UCPB, both failed to include in their computation of
the outstanding obligation of the spouses Beluso the legal rate of interest of
12% per annum. Furthermore, the penalty charges were also deleted in the
decisions of the RTC and the Court of Appeals. Section 2.04, Article II on
"Interest and other Bank Charges" of the subject Credit Agreement, provides:
Section 2.04 Penalty Charges. In addition to the interest provided for in Section
2.01 of this ARTICLE, any principal obligation of the CLIENT hereunder which is
not paid when due shall be subject to a penalty charge of one percent (1%) of
the amount of such obligation per month computed from due date until the
obligation is paid in full. If the bank accelerates teh (sic) payment of availments
hereunder pursuant to ARTICLE VIII hereof, the penalty charge shall be used on
the total principal amount outstanding and unpaid computed from the date of
acceleration until the obligation is paid in full.20
Paragraph 4 of the promissory notes also states:
In case of non-payment of this Promissory Note (Note) at maturity, I/We, jointly
and severally, agree to pay an additional sum equivalent to twenty-five percent
(25%) of the total due on the Note as attorney’s 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 attorney’s 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 attorney’s 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 Beluso’s payments in the
disputed computation does not reflect the parties’ agreement.1avvphi1 The RTC
deducted the payment made by the spouses Beluso amounting to ₱763,693.00
from the principal of ₱2,350,000.00. 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 Beluso’s Manifestation and Motion on
Proposed Stipulation of Facts and Issues vis-à -vis UCPB’s Manifestation, the
parties agreed that the amount of ₱763,693.00 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, Attorney’s 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 attorney’s
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 Beluso’s defense as to all these issues is that the demand made by
UCPB is for a considerably bigger amount and, therefore, the demand should be
considered void. There being no valid demand, according to the spouses Beluso,
there would be no default, and therefore the interests and penalties would not
commence to run. As it was likewise improper to foreclose the mortgaged
properties or file a case against the spouses Beluso, attorney’s 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 Bank’s 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 Beluso’s
obligation if both the interest and the penalty charge are reduced to 12%.
As regards the attorney’s 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 116932 of the Civil Code, which would put the obligor in
delay.
The RTC, however, also held UCPB liable for attorney’s 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 attorney’s 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 attorney’s fees from the other, practical reasons dictate that we set off
or compensate both parties’ liabilities for attorney’s fees. Therefore, instead of
awarding attorney’s fees in favor of petitioner, we shall merely affirm the
deletion of the award of attorney’s 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 attorney’s fees in favor of
petitioner, we shall merely affirm the deletion of the award of attorney’s 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 Beluso’s
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 Beluso’s 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 ₱26,000.00 for
UCPB’s 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 ₱100 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 ₱2,000 on any credit transaction. Action to recover such
penalty may be brought by such person within one year from the date of the
occurrence of the violation, in any court of competent jurisdiction. x x x
(Emphasis ours.)
According to UCPB, the Court of Appeals even stated that "[a]dmittedly the
original complaint did not explicitly allege a violation of the ‘Truth in Lending
Act’ and no action to formally admit the amended petition [which expressly
alleges violation of the Truth in Lending Act] was made either by [respondents]
spouses Beluso and the lower court. x x x."35
UCPB further claims that the action to recover the penalty for the violation of
the Truth in Lending Act had been barred by the one-year prescriptive period
provided for in the Act. UCPB asserts that per the records of the case, the latest
of the subject promissory notes had been executed on 2 January 1998, but the
original petition of the spouses Beluso was filed before the RTC on 9 February
1999, which was after the expiration of the period to file the same on 2 January
1999.
On the matter of allegation of the violation of the Truth in Lending Act, the Court
of Appeals ruled:
Admittedly the original complaint did not explicitly allege a violation of the
‘Truth in Lending Act’ and no action to formally admit the amended petition was
made either by [respondents] spouses Beluso and the lower court. In such
transactions, the debtor and the lending institutions do not deal on an equal
footing and this law was intended to protect the public from hidden or
undisclosed charges on their loan obligations, requiring a full disclosure thereof
by the lender. We find that its infringement may be inferred or implied from
allegations that when [respondents] spouses Beluso executed the promissory
notes, the interest rate chargeable thereon were left blank. Thus, [petitioner]
UCPB failed to discharge its duty to disclose in full to [respondents] Spouses
Beluso the charges applicable on their loans.36
We agree with the Court of Appeals. The allegations in the complaint, much
more than the title thereof, are controlling. Other than that stated by the Court
of Appeals, we find that the allegation of violation of the Truth in Lending Act
can also be inferred from the same allegation in the complaint we discussed
earlier:
b.) In unilaterally imposing an increased interest rates (sic) respondent bank
has relied on the provision of their promissory note granting respondent bank
the power to unilaterally fix the interest rates, which rate was not determined in
the promissory note but was left solely to the will of the Branch Head of the
respondent Bank, x x x.37
The allegation that the promissory notes grant UCPB the power to unilaterally
fix the interest rates certainly also means that the promissory notes do not
contain a "clear statement in writing" of "(6) the finance charge expressed in
terms of pesos and centavos; and (7) the percentage that the finance charge
bears to the amount to be financed expressed as a simple annual rate on the
outstanding unpaid balance of the obligation."38 Furthermore, the spouses
Beluso’s 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.
UCPB’s 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 ₱100 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 ₱2,000.00 on
any credit transaction.39 As this penalty depends on the finance charge required
of the borrower, the borrower’s 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 ₱100 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 ₱2,000 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 attorney’s 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 ₱1,000 or more than ₱5,000 or
imprisonment for not less than 6 months, nor more than one year or both.
As can be gleaned from Section 6(a) and (c) of the Truth in Lending Act, the
violation of the said Act gives rise to both criminal and civil liabilities. Section
6(c) considers a criminal offense the willful violation of the Act, imposing the
penalty therefor of fine, imprisonment or both. Section 6(a), on the other hand,
clearly provides for a civil cause of action for failure to disclose any information
of the required information to any person in violation of the Act. The penalty
therefor is an amount of ₱100 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 ₱2,000.00 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 RTC’s disposition on the violation of the Truth in Lending Act
since the same was not alleged in the complaint, UCPB is actually asserting a
violation of due process. Indeed, due process mandates that a defendant should
be sufficiently apprised of the matters he or she would be defending himself or
herself against. However, in the 1 July 1999 pre-trial brief filed by the spouses
Beluso before the RTC, the claim for civil sanctions for violation of the Truth in
Lending Act was expressly alleged, thus:
Moreover, since from the start, respondent bank violated the Truth in Lending
Act in not informing the borrower in writing before the execution of the
Promissory Notes of the interest rate expressed as a percentage of the total
loan, the respondent bank instead is liable to pay petitioners double the amount
the bank is charging petitioners by way of sanction for its violation.41
In the same pre-trial brief, the spouses Beluso also expressly raised the
following issue:
b.) Does the expression indicative rate of DBD retail (sic) comply with the Truth
in Lending Act provision to express the interest rate as a simple annual
percentage of the loan?42
These assertions are so clear and unequivocal that any attempt of UCPB to feign
ignorance of the assertion of this issue in this case as to prevent it from putting
up a defense thereto is plainly hogwash.
Petitioner further posits that it is the Metropolitan Trial Court which has
jurisdiction to try and adjudicate the alleged violation of the Truth in Lending
Act, considering that the present action allegedly involved a single credit
transaction as there was only one Promissory Note Line.
We disagree. We have already ruled that the action to recover the penalty under
Section 6(a) of the Truth in Lending Act had been jointly instituted with (1) the
action to declare the interests in the promissory notes void, and (2) the action
to declare the foreclosure void. There had been no question that the above
actions belong to the jurisdiction of the RTC. Subsection (c) of the above-quoted
Section 5 of the Rules of Court on Joinder of Causes of Action provides:
(c) Where the causes of action are between the same parties but pertain to
different venues or jurisdictions, the joinder may be allowed in the Regional
Trial Court provided one of the causes of action falls within the jurisdiction of
said court and the venue lies therein.
Furthermore, opening a credit line does not create a credit transaction of loan
or mutuum, since the former is merely a preparatory contract to the contract of
loan or mutuum. Under such credit line, the bank is merely obliged, for the
considerations specified therefor, to lend to the other party amounts not
exceeding the limit provided. The credit transaction thus occurred not when the
credit line was opened, but rather when the credit line was availed of. In the
case at bar, the violation of the Truth in Lending Act allegedly occurred not
when the parties executed the Credit Agreement, where no interest rate was
mentioned, but when the parties executed the promissory notes, where the
allegedly offending interest rate was stipulated.
UCPB further argues that since the spouses Beluso were duly given copies of the
subject promissory notes after their execution, then they were duly notified of
the terms thereof, in substantial compliance with the Truth in Lending Act.
Once more, we disagree. Section 4 of the Truth in Lending Act clearly provides
that the disclosure statement must be furnished prior to the consummation of
the transaction:
SEC. 4. Any creditor shall furnish to each person to whom credit is extended,
prior to the consummation of the transaction, a clear statement in writing
setting forth, to the extent applicable and in accordance with rules and
regulations prescribed by the Board, the following information:
(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2)
(4) the charges, individually itemized, which are paid or to be paid by such
person in connection with the transaction but which are not incident to the
extension of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be financed
expressed as a simple annual rate on the outstanding unpaid balance of the
obligation.
The rationale of this provision is to protect users of credit from a lack of
awareness of the true cost thereof, proceeding from the experience that banks
are able to conceal such true cost by hidden charges, uncertainty of interest
rates, deduction of interests from the loaned amount, and the like. The law
thereby seeks to protect debtors by permitting them to fully appreciate the true
cost of their loan, to enable them to give full consent to the contract, and to
properly evaluate their options in arriving at business decisions. Upholding
UCPB’s 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 Beluso’s properties, it poses
issues which are similar to those of the present case.43 To prove its point, UCPB
cited the spouses Beluso’s Amended Petition in Civil Case No. V-7227, which
contains similar allegations as those in the present case. The RTC of Makati
denied UCPB’s Motion to Dismiss Case No. 99-314 for lack of merit. Petitioner
UCPB raised the same issue with the Court of Appeals, and is raising the same
issue with us now.
The spouses Beluso claim that the issue in Civil Case No. V-7227 before the RTC
of Roxas City, a Petition for Injunction Against Foreclosure, is the propriety of
the foreclosure before the true account of spouses Beluso is determined. On the
other hand, the issue in Case No. 99-314 before the RTC of Makati City is the
validity of the interest rate provision. The spouses Beluso claim that Civil Case
No. V-7227 has become moot because, before the RTC of Roxas City could act on
the restraining order, UCPB proceeded with the foreclosure and auction sale. As
the act sought to be restrained by Civil Case No. V-7227 has already been
accomplished, the spouses Beluso had to file a different action, that of
Annulment of the Foreclosure Sale, Case No. 99-314 with the RTC, Makati City.
Even if we assume for the sake of argument, however, that only one cause of
action is involved in the two civil actions, namely, the violation of the right of
the spouses Beluso not to have their property foreclosed for an amount they do
not owe, the Rules of Court nevertheless allows the filing of the second action.
Civil Case No. V-7227 was dismissed by the RTC of Roxas City before the filing of
Case No. 99-314 with the RTC of Makati City, since the venue of litigation as
provided for in the Credit Agreement is in Makati City.
Rule 16, Section 5 bars the refiling of an action previously dismissed only in the
following instances:
SEC. 5. Effect of dismissal.—Subject to the right of appeal, an order granting a
motion to dismiss based on paragraphs (f), (h) and (i) of section 1 hereof shall
bar the refiling of the same action or claim. (n)
Improper venue as a ground for the dismissal of an action is found in paragraph
(c) of Section 1, not in paragraphs (f), (h) and (i):
SECTION 1. Grounds.—Within the time for but before filing the answer to the
complaint or pleading asserting a claim, a motion to dismiss may be made on
any of the following grounds:
(a) That the court has no jurisdiction over the person of the defending party;
(b) That the court has no jurisdiction over the subject matter of the claim;
(c) That venue is improperly laid;
(d) That the plaintiff has no legal capacity to sue;
(e) That there is another action pending between the same parties for the same
cause;
(f) That the cause of action is barred by a prior judgment or by the statute of
limitations;
(g) That the pleading asserting the claim states no cause of action;
(h) That the claim or demand set forth in the plaintiff’s pleading has been paid,
waived, abandoned, or otherwise extinguished;
(i) That the claim on which the action is founded is unenforceable under the
provisions of the statute of frauds; and
(j) That a condition precedent for filing the claim has not been complied
with.44 (Emphases supplied.)
When an action is dismissed on the motion of the other party, it is only when
the ground for the dismissal of an action is found in paragraphs (f), (h) and (i)
that the action cannot be refiled. As regards all the other grounds, the
complainant is allowed to file same action, but should take care that, this time, it
is filed with the proper court or after the accomplishment of the erstwhile
absent condition precedent, as the case may be.
UCPB, however, brings to the attention of this Court a Motion for
Reconsideration filed by the spouses Beluso on 15 January 1999 with the RTC of
Roxas City, which Motion had not yet been ruled upon when the spouses Beluso
filed Civil Case No. 99-314 with the RTC of Makati. Hence, there were allegedly
two pending actions between the same parties on the same issue at the time of
the filing of Civil Case No. 99-314 on 9 February 1999 with the RTC of Makati.
This will still not change our findings. It is indeed the general rule that in cases
where there are two pending actions between the same parties on the same
issue, it should be the later case that should be dismissed. However, this rule is
not absolute. According to this Court in Allied Banking Corporation v. Court of
Appeals45 :
In these cases, it is evident that the first action was filed in anticipation of the
filing of the later action and the purpose is to preempt the later suit or provide a
basis for seeking the dismissal of the second action.
Even if this is not the purpose for the filing of the first action, it may
nevertheless be dismissed if the later action is the more appropriate vehicle for
the ventilation of the issues between the parties. Thus, in Ramos v. Peralta, it
was held:
[T]he rule on litis pendentia does not require that the later case should yield to
the earlier case. What is required merely is that there be another pending
action, not a prior pending action. Considering the broader scope of inquiry
involved in Civil Case No. 4102 and the location of the property involved, no
error was committed by the lower court in deferring to the Bataan court's
jurisdiction.
Given, therefore, the pendency of two actions, the following are the relevant
considerations in determining which action should be dismissed: (1) the date of
filing, with preference generally given to the first action filed to be retained; (2)
whether the action sought to be dismissed was filed merely to preempt the later
action or to anticipate its filing and lay the basis for its dismissal; and (3)
whether the action is the appropriate vehicle for litigating the issues between
the parties.
In the case at bar, Civil Case No. V-7227 before the RTC of Roxas City was an
action for injunction against a foreclosure sale that has already been held, while
Civil Case No. 99-314 before the RTC of Makati City includes an action for the
annulment of said foreclosure, an action certainly more proper in view of the
execution of the foreclosure sale. The former case was improperly filed in Roxas
City, while the latter was filed in Makati City, the proper venue of the action as
mandated by the Credit Agreement. It is evident, therefore, that Civil Case No.
99-314 is the more appropriate vehicle for litigating the issues between the
parties, as compared to Civil Case No. V-7227. Thus, we rule that the RTC of
Makati City was not in error in not dismissing Civil Case No. 99-314.
WHEREFORE, the Decision of the Court of Appeals is hereby AFFIRMED with
the following MODIFICATIONS:
1. In addition to the sum of ₱2,350,000.00 as determined by the courts a quo,
respondent spouses Samuel and Odette Beluso are also liable for the following
amounts:
a. Penalty of 12% per annum on the amount due46 from the date of demand; and
b. Compounded legal interest of 12% per annum on the amount due47 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 ₱763,692.00. 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 ₱26,000.00. 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.