G. R. No.
146364 - June 3, 2004 The application of the pari delicto principle
COLITO T. PAJUYO, Petitioner, vs.
COURT OF APPEALS and EDDIE
GUEVARRA, Respondents.
FACTS:
1… In June 1979, petitioner paid P400 to a
certain Pedro Perez for the rights over a
250-square meter lot in Barrio Payatas,
Quezon City. Petitioner then constructed a
house made of light materials on the lot. He
and his family lived in the house from 1979
to 1985.
2. On 8 December 1985, Petitioner and
private respondent executed a Kasunduan
or agreement. Petitioner, as owner of the
house, allowed respondent to live in the
house
for free provided he would maintain the
cleanliness and orderliness of the house.
Respondent promised that he would
voluntarily vacate the premises on
petitioner’s
demand.
3. In 1994, petitioner informed respondent
of his need of the house and demanded
that respondent vacate the house. respondent
refused.
4. Pajuyo filed an ejectment case against
Guevarra with the MTC of Quezon City,
5. Respondent’s Answer:
Respondent claimed that petitioner had no
valid title or right of possession over
the lot where the house stands because the
lot is within the 150 hectares set aside by
Proclamation No. 137 for socialized
housing.
Respondent pointed out that from December
1985 to September 1994, petitioner
did not show up or communicate with him.
Respondent insisted that neither he nor
petitioner has valid title to the lot.
LEGAL ISSUE:
Whether or not the parties are in pari delicto
being both squatters, therefore, illegal
occupants of the contested parcel of land.
RULING:
The SC said No. The Principle of Pari
Delicto is not Applicable to Ejectment
Cases.
Articles 1411 and 1412 of the Civil Code
embody the principle of pari delicto. We
explained the principle of pari delicto in
these words:
The rule of pari delicto is expressed in the
maxims “The law will not aid either party to
an illegal agreement. It leaves the parties
where it finds them”.
is not absolute, as there are exceptions to its
application.
One of these exceptions is where the
application of the pari delicto rule would
violate
well-established public policy.
The application of the principle of pari
delicto to a case of ejectment between
squatters
is fraught (full of) with danger. To shut out
relief to squatters on the ground of pari
delicto would openly invite mayhem (chaos)
and lawlessness.
A squatter would oust another squatter from
possession of the lot that the latter had
illegally occupied, emboldened by the
knowledge that the courts would leave them
where they are. Nothing would then stand in
the way of the ousted squatter from re-
claiming his prior possession at all cost.
Petty warfare over possession of properties
is precisely what ejectment cases or actions
for recovery of possession seek to prevent.
Even the owner who has title over the
disputed property cannot take the law into
his own hands to regain possession of his
property. The owner must go to court.
Courts must resolve the issue of possession
even if the parties to the ejectment suit are
squatters. The determination of priority and
superiority of possession is a serious and
urgent matter that cannot be left to the
squatters to decide. To do so would make
squatters receive better treatment under the
law. The law restrains property owners
from taking the law into their own hands.
However, the principle of pari delicto as
applied by the Court of Appeals would give
squatters free rein to dispossess fellow
squatters or violently retake possession of
properties usurped from them. Courts should
not leave squatters to their own devices in
cases involving recovery of possession.
The only question that the courts must
resolve in ejectment proceedings is - who is
entitled to the physical possession of the
premises, that is, to the possession de facto
and not to the possession de jure.
37
Regardless of the actual condition of the title
to the property, the party in peaceable
quiet possession shall not be thrown out by a
strong hand, violence or terror.
40
Neither
is the unlawful withholding of property
allowed. Courts will always uphold respect
for
prior possession.
Thus, a party who can prove prior
possession can recover such possession even
against the owner himself.
he has the security that entitles him to
remain on the property until a person with a
better right lawfully ejects him.
42
To repeat, the only issue that the court has to
settle in an ejectment suit is the right to
physical possession.
In Pitargue v. Sorilla,
The plaintiff, by priority of his application
and of his entry, acquired prior physical
possession over the public land applied for
as against other private claimants. That prior
physical possession enjoys legal protection
against other private claimants because
only a court can take away such physical
possession in an ejectment case.
The party deprived of possession must not
take the law into his own hands.
46
Ejectment
proceedings are summary in nature so the
authorities can settle speedily actions to
recover possession because of the overriding
need to quell social disturbances.
47
the appellate court held that the pivotal issue
in this case is who between Pajuyo and
Guevarra has the "priority right as
beneficiary of the contested land under
Proclamation
No. 137."
54
According to the Court of Appeals,
Guevarra enjoys preferential right under
Proclamation No. 137 because Article VI of
the Code declares that the actual occupant
or caretaker is the one qualified to apply for
socialized housing.
The ruling of the Court of Appeals has no
factual and legal basis.
Pajuyo is Entitled to Physical Possession of
the Disputed Property
Guevarra does not dispute Pajuyos prior
possession of the lot and ownership of the
house built on it. Guevarra expressly
admitted the existence and due execution of
the
Kasunduan.
EQUITABLE PCI BANK vs NG SHEUNG NGOR
Case Digest
EQUITABLE PCI BANK, YU and APAS v. NG
SHEUNG NGOR
G.R.NO. 171545, December 19, 2007
FACTS: On October 7, 2001, respondents Ngor
and Go filed an action for amendment and/or
reformation of documents and contracts against
Equitable and its employees. They claimed that
they were induced by the bank to avail of its
peso and dollar credit facilities by offering low
interests so they accepted and signed
Equitable’s proposal. They alleged that they
were unaware that the documents contained
escalation clauses granting Equitable authority
to increase interest without their consent.
These were rebutted by the bank. RTC ordered
the use of the 1996 dollar exchange rate in
computing respondent’s dollar-denominated
loans. CA granted the Bank’s application for
injunction but the properties were sold to
public auction.
ISSUE: Whether or not there was an
extraordinary deflation
RULING: Extraordinary inflation exists when
there is an unusual decrease in the purchasing
power of currency and such decrease could not
be reasonably foreseen or was beyond the
contemplation of the parties at the time of the
obligation. Deflation is an inverse situation.
Despite the devaluation of the peso, BSP never
declared a situation of extraordinary inflation.
Respondents should pay their dollar
denominated loans at the exchange rate fixed
by the BSP on the date of maturity.
Decision of lower courts are reversed and set
aside.
ALMEDA v. BATHALA MARKETING Case Digest
EUFEMIA and ROMEL ALMEDA v. BATHALA
MARKETING
G.R.No. 150806, January 28, 2008
FACTS: In May 1997, Bathala Marketng,
renewed its Contract of Lease with Ponciano
Almeda. Under the contract, Ponciano agreed
to lease a porton of Almeda Compound for a
monthly rental of P1,107,348.69 for four years.
On January 26, 1998, petitioner informed
respondent that its monthly rental be increased
by 73% pursuant to the condition No. 7 of the
contract and Article 1250. Respondent refused
the demand and insisted that there was no
extraordinary inflation to warrant such
application. Respondent refused to pay the VAT
and adjusted rentals as demanded by the
petitioners but continually paid the stipulated
amount. RTC ruled in favor of the respondent
and declared that plaintiff is not liable for the
payment of VAT and the adjustment rental,
there being no extraordinary inflation or
devaluation. CA affirmed the decision deleting
the amounts representing 10% VAT and rental
adjustment.
ISSUE: Whether the amount of rentals due the
petitioners should be adjusted by reason of
extraordinary inflation or devaluation
RULING: Petitioners are stopped from shifting to
respondent the burden of paying the VAT. 6th
Condition states that respondent can only be
held liable for new taxes imposed after the
effectivity of the contract of lease, after 1977,
VAT cannot be considered a “new tax”. Neither
can petitioners legitimately demand rental
adjustment because of extraordinary inflation
or devaluation. Absent an official
pronouncement or declaration by competent
authorities of its existence, its effects are not to
be applied.
Petition is denied. CA decision is affirmed.
G.R. No. 183204 January 13, 2014
THE METROPOLITAN BANK AND TRUST
COMPANY, Petitioner,
vs.
ANA GRACE ROSALES AND YO YUK TO,
Respondents.
Bank deposits, which are in the nature of a
simple loan or mutuum,1 must be paid upon
demand by the depositor.2
This Petition for Review on Certiorari3 under
Rule 45 of the Rules of Court assails the April 2,
2008 Decision4 and the May 30, 2008
Resolution5 of he Court of Appeals CA) in CA-
G.R. CV No. 89086.
Factual Antecedents
Petitioner Metropolitan Bank and Trust
Company is a domestic banking corporation
duly organized and existing under the laws of
the Philippines.6 Respondent Ana Grace Rosales
(Rosales) is the owner of China Golden Bridge
Travel Services,7 a travel agency.8 Respondent
Yo Yuk To is the mother of respondent Rosales.9
In 2000, respondents opened a Joint Peso
Account10 with petitioner’s Pritil-Tondo
Branch.11 As of August 4, 2004, respondents’
Joint Peso Account showed a balance of
₱2,515,693.52.12
In May 2002, respondent Rosales accompanied
her client Liu Chiu Fang, a Taiwanese National
applying for a retiree’s visa from the Philippine
Leisure and Retirement Authority (PLRA), to
petitioner’s branch in Escolta to open a savings
account, as required by the PLRA.13 Since Liu
Chiu Fang could speak only in Mandarin,
respondent Rosales acted as an interpreter for
her.14
On March 3, 2003, respondents opened with
petitioner’s Pritil-Tondo Branch a Joint Dollar
Account15 with an initial deposit of
US$14,000.00.16
On July 31, 2003, petitioner issued a "Hold Out"
order against respondents’ accounts.17
On September 3, 2003, petitioner, through its
Special Audit Department Head Antonio Ivan
Aguirre, filed before the Office of the
Prosecutor of Manila a criminal case for Estafa
through False Pretences, Misrepresentation,
Deceit, and Use of Falsified Documents,
docketed as I.S. No. 03I-25014,18 against
respondent Rosales.19 Petitioner accused
respondent Rosales and an unidentified woman
as the ones responsible for the unauthorized
and fraudulent withdrawal of US$75,000.00
from Liu Chiu Fang’s dollar account with
petitioner’s Escolta Branch.20 Petitioner alleged
that on February 5, 2003, its branch in Escolta
received from the PLRA a Withdrawal Clearance
for the dollar account of Liu Chiu Fang;21 that in
the afternoon of the same day, respondent
Rosales went to petitioner’s Escolta Branch to
inform its Branch Head, Celia A. Gutierrez
(Gutierrez), that Liu Chiu Fang was going to
withdraw her dollar deposits in cash;22 that
Gutierrez told respondent Rosales to come back
the following day because the bank did not
have enough dollars;23 that on February 6,
2003, respondent Rosales accompanied an
unidentified impostor of Liu Chiu Fang to the
bank;24 that the impostor was able to withdraw
Liu Chiu Fang’s dollar deposit in the amount of
US$75,000.00;25 that on March 3, 2003,
respondents opened a dollar account with
petitioner; and that the bank later discovered
that the serial numbers of the dollar notes
deposited by respondents in the amount of
US$11,800.00 were the same as those
withdrawn by the impostor.26
Respondent Rosales, however, denied taking
part in the fraudulent and unauthorized
withdrawal from the dollar account of Liu Chiu
Fang.27 Respondent Rosales claimed that she
did not go to the bank on February 5, 2003.28
Neither did she inform Gutierrez that Liu Chiu
Fang was going to close her account.29
Respondent Rosales further claimed that after
Liu Chiu Fang opened an account with
petitioner, she lost track of her.30 Respondent
Rosales’ version of the events that transpired
thereafter is as follows:
On February 6, 2003, she received a call from
Gutierrez informing her that Liu Chiu Fang was
at the bank to close her account.31 At noon of
the same day, respondent Rosales went to the
bank to make a transaction.32 While she was
transacting with the teller, she caught a glimpse
of a woman seated at the desk of the Branch
Operating Officer, Melinda Perez (Perez).33
After completing her transaction, respondent
Rosales approached Perez who informed her
that Liu Chiu Fang had closed her account and
had already left.34 Perez then gave a copy of
the Withdrawal Clearance issued by the PLRA to
respondent Rosales.35 On June 16, 2003,
respondent Rosales received a call from Liu Chiu
Fang inquiring about the extension of her PLRA
Visa and her dollar account.36 It was only then
that Liu Chiu Fang found out that her account
had been closed without her knowledge.37
Respondent Rosales then went to the bank to
inform Gutierrez and Perez of the unauthorized
withdrawal.38 On June 23, 2003, respondent
Rosales and Liu Chiu Fang went to the PLRA
Office, where they were informed that the
Withdrawal Clearance was issued on the basis
of a Special Power of Attorney (SPA) executed
by Liu Chiu Fang in favor of a certain Richard
So.39 Liu Chiu Fang, however, denied executing
the SPA.40 The following day, respondent
Rosales, Liu Chiu Fang, Gutierrez, and Perez met
at the PLRA Office to discuss the unauthorized
withdrawal.41 During the conference, the bank
officers assured Liu Chiu Fang that the money
would be returned to her.42
On December 15, 2003, the Office of the City
Prosecutor of Manila issued a Resolution
dismissing the criminal case for lack of probable
cause.43 Unfazed, petitioner moved for
reconsideration.
On September 10, 2004, respondents filed
before the Regional Trial Court (RTC) of Manila
a Complaint44 for Breach of Obligation and
Contract with Damages, docketed as Civil Case
No. 04110895 and raffled to Branch 21, against
petitioner. Respondents alleged that they
attempted several times to withdraw their
deposits but were unable to because petitioner
had placed their accounts under "Hold Out"
status.45 No explanation, however, was given
by petitioner as to why it issued the "Hold Out"
order.46 Thus, they prayed that the "Hold Out"
order be lifted and that they be allowed to
withdraw their deposits.47 They likewise prayed
for actual, moral, and exemplary damages, as
well as attorney’s fees.48
Petitioner alleged that respondents have no
cause of action because it has a valid reason for
issuing the "Hold Out" order.49 It averred that
due to the fraudulent scheme of respondent
Rosales, it was compelled to reimburse Liu Chiu
Fang the amount of US$75,000.0050 and to file
a criminal complaint for Estafa against
respondent Rosales.51
While the case for breach of contract was being
tried, the City Prosecutor of Manila issued a
Resolution dated February 18, 2005, reversing
the dismissal of the criminal complaint.52 An
Information, docketed as Criminal Case No. 05-
236103,53 was then filed charging respondent
Rosales with Estafa before Branch 14 of the RTC
of Manila.54
Ruling of the Regional Trial Court
On January 15, 2007, the RTC rendered a
Decision55 finding petitioner liable for damages
for breach of contract.56 The RTC ruled that it is
the duty of petitioner to release the deposit to
respondents as the act of withdrawal of a bank
deposit is an act of demand by the creditor.57
The RTC also said that the recourse of petitioner
is against its negligent employees and not
against respondents.58 The dispositive portion
of the Decision reads:
WHEREFORE, premises considered, judgment is
hereby rendered ordering [petitioner]
METROPOLITAN BANK & TRUST COMPANY to
allow [respondents] ANA GRACE ROSALES and
YO YUK TO to withdraw their Savings and Time
Deposits with the agreed interest, actual
damages of ₱50,000.00, moral damages of
₱50,000.00, exemplary damages of ₱30,000.00
and 10% of the amount due [respondents] as
and for attorney’s fees plus the cost of suit.
The counterclaim of [petitioner] is hereby
DISMISSED for lack of merit.
SO ORDERED.59
Ruling of the Court of Appeals
Aggrieved, petitioner appealed to the CA.
On April 2, 2008, the CA affirmed the ruling of
the RTC but deleted the award of actual
damages because "the basis for [respondents’]
claim for such damages is the professional fee
that they paid to their legal counsel for
[respondent] Rosales’ defense against the
criminal complaint of [petitioner] for estafa
before the Office of the City Prosecutor of
Manila and not this case."60 Thus, the CA
disposed of the case in this wise:
WHEREFORE, premises considered, the Decision
dated January 15, 2007 of the RTC, Branch 21,
Manila in Civil Case No. 04-110895 is AFFIRMED
with MODIFICATION that the award of actual
damages to [respondents] Rosales and Yo Yuk
To is hereby DELETED.
SO ORDERED.61
Petitioner sought reconsideration but the same
was denied by the CA in its May 30, 2008
Resolution.62
Issues
Hence, this recourse by petitioner raising the
following issues:
A. THE [CA] ERRED IN RULING THAT THE "HOLD-
OUT" PROVISION IN THE APPLICATION AND
AGREEMENT FOR DEPOSIT ACCOUNT DOES NOT
APPLY IN THIS CASE.
B. THE [CA] ERRED WHEN IT RULED THAT
PETITIONER’S EMPLOYEES WERE NEGLIGENT IN
RELEASING LIU CHIU FANG’S FUNDS.
C. THE [CA] ERRED IN AFFIRMING THE AWARD
OF MORAL DAMAGES, EXEMPLARY DAMAGES,
AND ATTORNEY’S FEES.63
Petitioner’s Arguments
Petitioner contends that the CA erred in not
applying the "Hold Out" clause stipulated in the
Application and Agreement for Deposit
Account.64 It posits that the said clause applies
to any and all kinds of obligation as it does not
distinguish between obligations arising ex
contractu or ex delictu.65 Petitioner also
contends that the fraud committed by
respondent Rosales was clearly established by
evidence;66 thus, it was justified in issuing the
"Hold-Out" order.67 Petitioner likewise denies
that its employees were negligent in releasing
the dollars.68 It claims that it was the deception
employed by respondent Rosales that caused
petitioner’s employees to release Liu Chiu
Fang’s funds to the impostor.69
Lastly, petitioner puts in issue the award of
moral and exemplary damages and attorney’s
fees. It insists that respondents failed to prove
that it acted in bad faith or in a wanton,
fraudulent, oppressive or malevolent
manner.70
Respondents’ Arguments
Respondents, on the other hand, argue that
there is no legal basis for petitioner to withhold
their deposits because they have no monetary
obligation to petitioner.71 They insist that
petitioner miserably failed to prove its
accusations against respondent Rosales.72 In
fact, no documentary evidence was presented
to show that respondent Rosales participated in
the unauthorized withdrawal.73 They also
question the fact that the list of the serial
numbers of the dollar notes fraudulently
withdrawn on February 6, 2003, was not signed
or acknowledged by the alleged impostor.74
Respondents likewise maintain that what was
established during the trial was the negligence
of petitioner’s employees as they allowed the
withdrawal of the funds without properly
verifying the identity of the depositor.75
Furthermore, respondents contend that their
deposits are in the nature of a loan; thus,
petitioner had the obligation to return the
deposits to them upon demand.76 Failing to do
so makes petitioner liable to pay respondents
moral and exemplary damages, as well as
attorney’s fees.77
Our Ruling
The Petition is bereft of merit.
At the outset, the relevant issues in this case
are (1) whether petitioner breached its contract
with respondents, and (2) if so, whether it is
liable for damages. The issue of whether
petitioner’s employees were negligent in
allowing the withdrawal of Liu Chiu Fang’s dollar
deposits has no bearing in the resolution of this
case. Thus, we find no need to discuss the same.
The "Hold Out" clause does not apply
to the instant case.
Petitioner claims that it did not breach its
contract with respondents because it has a valid
reason for issuing the "Hold Out" order.
Petitioner anchors its right to withhold
respondents’ deposits on the Application and
Agreement for Deposit Account, which reads:
Authority to Withhold, Sell and/or Set Off:
The Bank is hereby authorized to withhold as
security for any and all obligations with the
Bank, all monies, properties or securities of the
Depositor now in or which may hereafter come
into the possession or under the control of the
Bank, whether left with the Bank for
safekeeping or otherwise, or coming into the
hands of the Bank in any way, for so much
thereof as will be sufficient to pay any or all
obligations incurred by Depositor under the
Account or by reason of any other transactions
between the same parties now existing or
hereafter contracted, to sell in any public or
private sale any of such properties or securities
of Depositor, and to apply the proceeds to the
payment of any Depositor’s obligations
heretofore mentioned.
xxxx
JOINT ACCOUNT
xxxx
The Bank may, at any time in its discretion and
with or without notice to all of the Depositors,
assert a lien on any balance of the Account and
apply all or any part thereof against any
indebtedness, matured or unmatured, that may
then be owing to the Bank by any or all of the
Depositors. It is understood that if said
indebtedness is only owing from any of the
Depositors, then this provision constitutes the
consent by all of the depositors to have the
Account answer for the said indebtedness to
the extent of the equal share of the debtor in
the amount credited to the Account.78
Petitioner’s reliance on the "Hold Out" clause in
the Application and Agreement for Deposit
Account is misplaced.
The "Hold Out" clause applies only if there is a
valid and existing obligation arising from any of
the sources of obligation enumerated in Article
115779 of the Civil Code, to wit: law, contracts,
quasi-contracts, delict, and quasi-delict. In this
case, petitioner failed to show that respondents
have an obligation to it under any law, contract,
quasi-contract, delict, or quasi-delict. And
although a criminal case was filed by petitioner
against respondent Rosales, this is not enough
reason for petitioner to issue a "Hold Out" order
as the case is still pending and no final judgment
of conviction has been rendered against
respondent Rosales. In fact, it is significant to
note that at the time petitioner issued the "Hold
Out" order, the criminal complaint had not yet
been filed. Thus, considering that respondent
Rosales is not liable under any of the five
sources of obligation, there was no legal basis
for petitioner to issue the "Hold Out" order.
Accordingly, we agree with the findings of the
RTC and the CA that the "Hold Out" clause does
not apply in the instant case.
In view of the foregoing, we find that petitioner
is guilty of breach of contract when it
unjustifiably refused to release respondents’
deposit despite demand. Having breached its
contract with respondents, petitioner is liable
for damages.
Respondents are entitled to moral and
exemplary damages and attorney’s
fees.1âwphi1
In cases of breach of contract, moral damages
may be recovered only if the defendant acted
fraudulently or in bad faith,80 or is "guilty of
gross negligence amounting to bad faith, or in
wanton disregard of his contractual
obligations."81
In this case, a review of the circumstances
surrounding the issuance of the "Hold Out"
order reveals that petitioner issued the "Hold
Out" order in bad faith. First of all, the order
was issued without any legal basis. Second,
petitioner did not inform respondents of the
reason for the "Hold Out."82 Third, the order
was issued prior to the filing of the criminal
complaint. Records show that the "Hold Out"
order was issued on July 31, 2003,83 while the
criminal complaint was filed only on September
3, 2003.84 All these taken together lead us to
conclude that petitioner acted in bad faith when
it breached its contract with respondents. As we
see it then, respondents are entitled to moral
damages.
As to the award of exemplary damages, Article
222985 of the Civil Code provides that
exemplary damages may be imposed "by way of
example or correction for the public good, in
addition to the moral, temperate, liquidated or
compensatory damages." They are awarded
only if the guilty party acted in a wanton,
fraudulent, reckless, oppressive or malevolent
manner.86
In this case, we find that petitioner indeed
acted in a wanton, fraudulent, reckless,
oppressive or malevolent manner when it
refused to release the deposits of respondents
without any legal basis. We need not belabor
the fact that the banking industry is impressed
with public interest.87 As such, "the highest
degree of diligence is expected, and high
standards of integrity and performance are
even required of it."88 It must therefore "treat
the accounts of its depositors with meticulous
care and always to have in mind the fiduciary
nature of its relationship with them."89 For
failing to do this, an award of exemplary
damages is justified to set an example.
The award of attorney's fees is likewise proper
pursuant to paragraph 1, Article 220890 of the
Civil Code.
In closing, it must be stressed that while we
recognize that petitioner has the right to
protect itself from fraud or suspicions of fraud,
the exercise of his right should be done within
the bounds of the law and in accordance with
due process, and not in bad faith or in a wanton
disregard of its contractual obligation to
respondents.
WHEREFORE, the Petition is hereby DENIED.
The assailed April 2, 2008 Decision and the May
30, 2008 Resolution of the Court of Appeals in
CA-G.R. CV No. 89086 are hereby AFFIRMED. SO
ORDERED.
G.R. No. 195889 September 24, 2014
PHILIPPINE NATIONAL BANK, Petitioner,
vs.
SPOUSES EDUARDO AND MA. ROSARIO
TAJONERA and EDUAROSA REALTY
DEVELOPMENT, INC., Respondents.
DECISION
MENDOZA, J.:
This is a petition for review on certiorari under
Rule 45 of the 1997 Rules of Civil Procedure
seeking to reverse and set aside the November
30, 2010 Decision1 of the Court of Appeals (CA),
and its March 2, 2011 Resolution,2 in CA-G.R.
CV No. 85458, entitled "Spouses Eduardo & Ma.
Rosario Tajonera and Eduarosa Realty &
Development, Inc. v. Philippine National Bank,"
which affirmed with modification the December
8, 2003 Decision3 of the Regional Trial Court,
Branch 71, Pasig City (RTC), in a case for
annulment of sale, cancellation of title,
cancellation of mortgage and damages.

The Facts
Respondent Eduarosa Realty Development, Inc.
(ERDI) was engaged in realty construction and
sale of condominium buildings. Respondent Ma.
Rosario Tajonera (Rosario),as the Vice President
ofERDI, also performed the duties of president
and marketing director dealing with banks,
suppliers and contractors. ERDI, through
Rosario, obtained loans from petitioner
Philippine National Bank (PNB)and entered into
several credit agreements to finance the
completion of the construction of their 20-
storey Eduarosa Tower Condominium located in
Roxas Boulevard, Paranaque City.
Pursuant to the Credit Agreement,4 dated
March 5, 1991, the principal amount of loan
extended by PNB to ERDI was Sixty Million
Pesos (60,000,000.00). As security for the initial
loan, ERDI executed the Real Estate Mortgage
(REM) consisting of three (3) parcels of land
covered by Transfer Certificate of Title (TCT)
Nos. 38845, 38846 and 38847 with an aggregate
area of 1,352 square meters situated in Roxas
Boulevard, Tambo, Paranaque, Metro Manila,
registered in the name of ERDI (Paranaque
properties).In addition, the loan was secured by
the assignment of proceeds of contract
receivables arising from the sale of
condominium units to be constructed on the
mortgaged Paranaque properties.
On January 31, 1992, ERDI executed an
amendment to the Credit Agreement5 (First
Amendment)and obtained an additional loan of
Forty Million Pesos (₱40,000,000.00). As
additional security to the increased amounts of
loan, the respondent spouses’ 958-square
meter lot and the improvements thereon,
situated in Greenhills, San Juan, Metro Manila
(Greenhills property)and covered by TCT No.
29733, was mortgaged in favor of PNB as
evidencedby the Supplement to REM.6 On
October 28, 1992, a Second Amendment to
Credit Agreement7 (Second Amendment)was
executed by the parties to extend the
repayment dates of the loan and the additional
loan subject to the terms set forth in the said
agreement.
The following year, or on November 3, 1993, a
Third Amendment to the Credit Agreement8
(Third Agreement)was entered into by the
parties wherein PNB granted an additional loan
of Fifty Five Million Pesos (₱55,000,000.00) to
ERDI, subject to several conditions stated in the
said agreement.
As of September 30, 1994, ERDI’s outstanding
loan obligation with PNB amounted to
₱211,935,067.40.9
ERDI failed to settle its obligation.As a
consequence, PNB filed an application for
foreclosure of the Greenhills property. As the
highest bidder, PNB was issued the Certificate
of Sale,10 dated October 9, 1997. Upon ERDI’s
failure to redeem the property, PNB
consolidated its title and caused the
cancellation of TCT No. 29733.11 A new title,
TCT No. 9424-R, was issued in the name of
PNB.12
The Complaint
This prompted the respondents to file a
complaint against PNB for annulment of sale,
cancellation oftitle, cancellation of mortgage,
and damages before the RTC. In the complaint,
the respondents alleged that: the title to the
mortgaged property that was transferred to
PNB as a consequence of the foreclosure
proceedings was null and void as their mortgage
obligation had been novated and no new loans
were released to them, in violation of the
provisions of the Supplement to REM; the
foreclosure proceedings were defective due to
PNB’s failure to send personal notice to the
respondent spouses; PNB’s delay in the release
of loan proceeds under the credit agreements
caused the non-completion of the condominium
project; and the properties mortgaged under
the original mortgage contract covering the
respondents’ condominium titles should now be
discharged, as the property of the respondent
spouses had already been foreclosed.13
PNB’s Answer
In its Answer with Counterclaim, PNB denied
the respondents’ allegations and raised the
following defenses: 1) the mortgage contract
was supported by valuable consideration asthe
loan proceeds under the credit agreements
were fully released to them; 2) there was no
novation of the contract; 3) demand letters
were given to and duly received by the
respondents; and 4) the sufficiency of the
mortgage over the condominium titles cannot
be determined because the court has no
jurisdiction over such issue.14
The RTC Decision
On December 8, 2003, the RTC rendered its
judgment in favor of the respondents and
disposed as follows:
WHEREFORE, judgment is hereby rendered in
favor of plaintiffs and against the defendant:
1. NULLIFYING and CANCELLING the
Supplement to Real Estate Mortgage dated
January 28, 1992 and the Certificate of Sale
dated October 9, 1997.
2. NULLIFYING and CANCELLING the Transfer
Certificate of Title No. 9424-R, Registry of Deeds
for San Juan, Metro Manila, and REINSTATING
Transfer Certificate of Title No. 29733, Registry
of Deeds for San Juan, Metro Manila.
3. ORDERING the defendant to pay the plaintiffs
the amount of ₱500,000.00 as moral damages.
4. ORDERING the defendant to pay the plaintiffs
the amount of ₱200,000.00 as exemplary
damages.
5. ORDERING the defendant to pay the plaintiffs
the amount of ₱100,000.00 as and by way of
attorney’s fees.
6. Costs of suit.
Counterclaims are hereby DISMISSED for lack of
merit.
SO ORDERED.15
The RTC annulled the mortgage contract
constituted over the Greenhills property on the
ground of breach of contract on the part of PNB
by violating the credit agreements.
The CA Decision
Aggrieved, PNB elevated the matter to the CA.
In its Decision, dated November 30, 2010, the
CA affirmed the decision of the RTC, but deleted
the award of moral and exemplary damages. In
the dispositive portion of its assailed decision,
the CA declared:
WHEREFORE, the challenged Decision dated 08
December 2003 is AFFIRMED with Modification
in that the awards for moral and exemplary
damages are deleted.
SO ORDERED.16
The CA agreed with the RTC ruling that
inasmuch as PNB did not release the remaining
balance of the approved loan amounting to
₱39,503,088.84 under the Third Amendment,
there was no sufficient valuable consideration in
the execution of the Supplement to REM that
secured the said credit agreement. There was,
according to the CA, breach of contract on the
part of PNB that warranted the annulment and
cancellation of the Supplement to REM covering
the Greenhills property. Further, the CA
rejected PNB’s claim that its refusal to release
the balance of the last loan was due to the
respondents’ failureto comply with the
undertaking of bringing new investors with
additional collaterals to secure the additional
loan as such requirement was not categorically
stated in the terms of the credit agreement.
Also, such claim was belied by PNB’s own
witness who testified that the reason for its
refusal to release was simply the respondents’
failure to settle their amortization.
PNB filed a motion for reconsideration of the
said decision, but the same was denied by the
CA in its assailed Resolution, dated March 2,
2011.
Hence, this petition.
The Issues:
In its Memorandum,17 PNB submits the
following issues for consideration:
Whether or not the CA decided in accordance
with the applicable laws and jurisprudence
when:
(1) it ruled that the Supplement to Real Estate
Mortgage, dated 28 January 1992, lacked
sufficient valuable consideration even when the
loan proceeds secured by it under the Third
Amendment, dated 03 November 1993, had balance of the approved loan to the
been substantially released by PNB, and the respondents considering that the latter had no
Credit Agreement, dated 05 March 1991, as history of any payment either on interest or
well as the First and Second Amendments principal of the loan. PNB, thus, asserts that the
thereto, dated 31 January 1992 and 28 October CA erred when it affirmed the RTC in ordering
1992, respectively, upon which the same the annulment and cancellation of the
Supplement to Real Estate Mortgagewas supplement REM covering the Greenhills
similarly constituted as additional security, had property.
all been duly executed and consummated;
PNB’s arguments fail to persuade.
(2) it ruled that PNB breached its contractual
obligation when it supposedly failed to release Record shows that ERDI obtained loans from,
the remaining balance of the approved loan in and entered into, several credit agreements
the amount of ₱39,503,088.84 to the with PNB to finance the completion of the
respondents even when the latterhad not had a construction of its 20-storey condominium
single history of payment and did not need the project, the Eduarosa Towers. Pertinent details
entire amount for the purpose-specific loan of the said credit agreements are summarized
grant under the Credit Agreement and its as follows:
Amendments; Amount of Loan ( ) Grant Date of
Execution
(3) upon a finding of breach of contractual Credit Agreement ₱60,000,000.00
obligation on the part of PNB due to its ₱5,000,000.00 Loan
supposed unjustified release of a portion of the Domestic Bills
loan proceeds, it ruled for the annulment and Purchased (DBP) March 5, 1991
cancellation of supplement to real mortgage Amendment to
(the accessory contract) yet ratiocinated that Credit Agreement ₱40,000,000.00
the Third Amendment (the principal contract) Additional Loan January 31,
became unenforceable only to the extent of 1992
unreleased portion of the loan proceeds.18 2nd Amendment to
Credit Agreement None Extension of
The Court’s Ruling repayment dates
of the loan and
PNB’s assignment of errors boils down to the additional loan October 28, 1992
sole issue of whether the CA erred in annulling 3rd Amendment to
the mortgage contract constituted over the Credit Agreement ₱55,000,000.00
Greenhills property of the respondents. Additional Loan November 3,
1993
PNB contends that the Supplement to REM was
supported by sufficient and valuable As recited earlier, on March 5, 1991, ERDI
consideration because the loan proceeds obtained from PNB a loan in the amount of
secured by it under the Third Amendment had ₱60,000,000.00 plus ₱5,000,000.00 Domestic
been substantially released to the respondents. Bills. To secure this initial loan, ERDI mortgaged
It avers that had it not been for the additional in favor of PNB its Paranaque properties
collateral over the Greenhills property, PNB together with the 20-storey condominium
would not have made the respondents’ loan building to be erected thereon.
account current under the First Amendment.
This consideration, according to it, must be Thereafter or on January 31, 1992,ERDI and PNB
deemed valuable and sufficient enough to entered into The First Amendment wherein the
uphold the validity of the Supplement to the former obtained an additional loan of
REM. ₱40,000,000.00. As security for the additional
loan, the respondents’ Greenhills property was
PNB insists that there was no breach, mortgaged as evidenced by the Supplement to
substantial or otherwise, of its contractual REM executed by the parties on January
obligation when it did not release the remaining 28,1992. The Second Amendment was likewise
entered into by the parties for the purpose of
extending the repayment dates of the loan and
the additional loan.
On November 3, 1993, the Third Amendment
was entered into by the parties wherein the
respondents were granted a second additional
loan of ₱55,000,000.00.
The agreement between PNB and the
respondents was one of a loan. Under the law, a
loan requires the delivery of money or any
other consumable object by one party to
another who acquires ownership thereof, on
the condition that the same amount orquality
shall be paid. Loan is a reciprocal obligation, as
it arises from the same causewhere one party is
the creditor, and the other the debtor. The
obligation of one party in a reciprocal obligation
is dependent upon the obligation of the other,
and the performance should ideally be
simultaneous. This means that in a loan, the
creditor should release the full loan amountand
the debtor repays it when it becomes due and
demandable.19
PNB, not having released the balance of the last
loan proceeds in accordance with the Third
Amendment had no right to demand from the
respondents compliance with their own
obligation under the loan. Indeed, if a party in a
reciprocal contract like a loan does not perform
its obligation, the other party cannot be obliged
to perform what is expected of them while the
other's obligation remains unfulfilled.20
When PNB and the respondents entered into
the First, Second and Third Amendments on
January 31, 1992, October 28,1992 and
November 3, 1993, respectively, they undertook
reciprocal obligations. In reciprocal obligations,
the obligation or promise ofeach party is the
consideration for that of the other; and when
one party has performed or is ready and willing
to perform his part of the contract, the other
party who has not performed or is not ready
and willing to perform incurs in delay.21 The
promise of the respondents to pay was the
consideration for the obligation of PNB to
furnish the ₱40,000,000.00 additional loan
under the First Amendment as well as the
₱55,000,000.00 the second additional loan
under the Third Amendment. When the
respondents executed the Supplement to REM
covering their Greenhills property, they
signified their willingness to pay the additional
loans. It should be noted, as correctly found by
the CA, that the Supplement to REM was
constituted not only as security for the
execution of the First Amendment but also in
consideration of the Second and Third
Amendments. The provisions of the Third
Amendment read in part:
SECTION 2. THE AMENDMENTS
xxx
2.05 The full payment of the Loans and any and
all sums payable by the Borrower hereunder
and under the Notes and the other documents
contemplated hereby and the faithful
compliance by the Borrower with the terms and
conditions hereof and thereof and the Notes
shall be secured by the following collaterals:
xxx
b) Existing real estate mortgageon a parcel of
land with an area of 958 sq. m., more or less,
together with the improvements thereon,
situated in San Juan, Metro Manila, covered by
TCT No. 29733 of the land records for Metro
Manila (D-11) and registered in the name of
Rosario M. Mendoza married to Eduardo
Tajonera (the "Accommodation Mortgagors"),
as evidenced by that Supplement to Real Estate
Mortgage dated January 28, 1992 and
acknowledged before Notary Public for the City
ofManila, Rowena Fe N. Suarez as Doc. No. 300,
Page No. 61, Book No. II Series of 1992;22
xxx
The obligation of PNB was to furnish the
₱55,000,000.00 additional loan accrued on
November 3, 1993, the date the parties entered
into the Third Amendment. Thus, PNB’s delay in
furnishing the entire additional loan started
from the said date.
Considering that PNB refused to release the
total amount of the additional loan granted to
ERDI under the Third Amendment amounting to
₱39,503,088.84, the CA was correct in affirming
the RTC’s conclusion that there was no
sufficient valuable consideration in the
execution of the Supplement to REM. In the
assailed decision, the CA wrote:
Indeed, the execution of the subject
Supplement to Real Estate Mortgage dated
January 28, 1992 lacks sufficient valuable
consideration since PNB did not release the
balance of the Php160,000,000.00 approved
loan in the amount of Php39,503,038.54,
pursuant to the Third Amendment to Credit
Agreement of the parties. As the records would
show, the subject Supplement to Real Estate
Mortgage, supra, was constituted by Appellees
as additional security for the execution of the
1st, 2nd as well as the 3rd Amendment to Credit
Agreements.
To elucidate, the Greenhills property was first
mortgaged by Appellees in favor of PNB as
collateral security to the additional loan of
Php40,000,000.00, evidenced by the provisions
of the 1st Amendment to Credit Agreement,
reading as follows:
xxx
We agree with the court a quowhen it correctly
ruled that the subject supplement mortgage
over Appellees’ Greenhills property was
likewise constituted in consideration of the
Third Amendment to Credit Agreement, supra,
as evidenced by 2.05 (b), Section 2 thereof
which provides, to wit: xxx
In view of the foregoing,We hold that the court
a quoaptly ruled that the refusal of PNB to
release portion of the additional loan granted
under the Third Amendment to Credit
Transaction is not justified. In this jurisdiction,
breach of contract is defined as follows:
xxx
[It] is the "failure without legal reason to
comply with the terms of a contract." Itis also
defined as the "[f]ailure, without legal excuse,
to perform any promise which forms the whole
or part of the contract."
xxx
Undoubtedly, PNB breached its contractual
obligation when it failed to release to Appellees
the remaining balance of the approved loan
amounting to Php39,503,088.84.23
The RTC found that PNB was guilty of breach of
contract as the credit agreements had been
violated. For its failure to release the balance of
the approved loan, the construction of the
Eduarosa Towers Condominium project was not
finished, transgressing the very purpose of the
credit agreements, that is, to finance the
completion of the construction of Eduarosa
Towers. This factual findingwas affirmed by the
CA. Thus, the Court is bound to uphold such
finding. "The settled rule is that conclusions and
findings of fact of the trial court are entitled to
great weight on appeal and should not be
disturbed unless for strong and cogent reasons
because the trial court is in a better position to
examine real evidence, as well as observe the
demeanor of the witnesses while testifying in
the case. The fact that the CA adopted the
findings of fact of the trial court makes the
same binding upon this Court."24
At any rate, the Court finds no merit in PNB’s
claim that its refusal to release the balance of
the approved additional loan was justified on
the ground of the respondents’failure to settle
their amortization. PNB’s own witness, Mr.
Mallari, testified, thus:
Cross Examination
xxx
ATTY. LLAUDER:
Q. Now, what happened to the balance of the
loan that was yet to be released to plaintiff
corporation?
A: The bank did not allow further availments
because of the failure of the borrower to pay
the maturing obligation.
xxx
Redirect Examination
xxx
ATTY. BALDONO:
xxx

Q: What was the reason, Mr. Witness, why the
PNB withheld the release of the additional loan?
A: Because the borrower failed to settle the
quarterly amortization June 30, 1994. Even the
June 30, the amortization were never settled by
the borrower.
COURT:
What year?
A: June 30, 1994, your Honor.25
Evidently and as aptly observed by the CA, PNB
cannot justify its failure to release the balance
of the last loan executed with the respondents
under the Third Amendment on November 3,
1993 considering that the latter’s liability to pay
their first amortization arose only on June 30,
1994.
As expressly provided in the terms ofthe second
additional loan embodied in the Third
Amendment, to wit:
SECTION 1. TERMS OF THE SECOND
ADDITIONAL LOAN
xxx
1.05 Repayment Dates. The Borrower agrees to
repay the Second Additional Loan in full in
eleven (11) equal (or as nearly equal as
possible) consecutive quarterly installments
("Repayment Dates"), the first installment to
commence on June 30, 1994 and every quarter
thereafter up to December 31, 1996.
SECTION 2. THE AMENDMENTS
2.01 The Interest Payment Dates and
Repayment Dates of the Loan, the Additional
Loan and the Second Additional Loan
(Collectively the "Loans") shall be the same.
Accordingly, the Credit Documents are hereby
amended to change the Interest Payment Dates
and Repayment Dates in the following manner:
xxx
First principal payment on the Loans shall
commence on June 30, 1994 and every quarter
thereafter until maturity of all the loans on
December 31, 1996.26 [Underscoring Supplied]
Equally without merit is PNB’s reliance on the
case of Sps. Omengan v. Philippine National
Bank.27 The said case finds no application
inasmuch as the circumstances in that case are
not in all fours with the present case. In
Omengancase, there was no actual meeting of
the minds with respect to the conditionally
approved additional loan as the condition
attached to the increase in borrowers’ credit
line was not acknowledged and accepted by
them. Hence, there being no perfectedcontract
over the increase in credit line, it was held that
no breach of contract could be attributed to
PNB in not releasing the additional loan. In the
present case, there was a perfected contract in
so far as the Third Amendment was concerned.
Thus, PNB’s action in not releasing the entire
amount of the additional loan was not justified.
Still in the said case, atthe time the original loan
was approved, the title to the property offered
as collateral appeared topertain exclusively to
Spouses Omengan. By the time the application
for increase was considered, PNB had acquired
information that the said property, although in
the name of spouses petitioners was owned in
co-ownership. The Court justified PNB’s act of
withholding the release of the additional loan
because it already had reason to suspect the
spouses’ claim of exclusive ownership over the
mortgaged collateral. Inthis case, the
respondents were unquestionably the exclusive
owners ofthe mortgaged property (Greenhills
property) at the time the initial and the
additional loans were approved.
For said reasons, the Court holds that PNB was
indeed guilty of breach of contract of its
reciprocal obligation under the credit
agreements.
Considering that there was no sufficient
valuable consideration in the execution of the
Supplement to REM on the Third Amendment
as the balance of the last approved additional
loan in the amount of ₱39,503,088.54 remained
unreleased, the cancellation of the Supplement
to REM constituted over the respondents’
Greenhills property was in order.
It is true that loans are often secured by a
mortgage constituted on real or personal
property to protect the creditor's interest in
case of the default of the debtor. By its nature,
however, a mortgage remains an accessory
contract dependent on the principal obligation,
such that enforcement of the mortgage
contract depends on whether or not there has
been a violation of the principal obligation.
While a creditor and a debtor could regulate the
order in which they should comply with their
reciprocal obligations, it is presupposed that in
a loan the lender should perform its obligation –
the release of the full loan amount.28
In this case, to repeat, PNB did not fulfill its
principal obligation under the Third
Amendment by failing torelease the amount of
the last additional loan in full. Consequently,
the Supplement to REM covering the Greenhills
property became unenforceable, as the said
property could not be entirely foreclosed to
satisfy the respondents’ total debts to PNB.
Moreover, the Supplement to REM was no
longer necessary because PNB’s interest was
amply protected as the loans had been
sufficiently secured by the Paranaque
properties. As aptly found by the RTC, the
Paranaque properties together with the 20-
storey condominium building to be erected
thereon would have been sufficient security in
the execution of the REM even without the
Greenhills property as additional collateral.
Thus, under the circumstances, PNB’s actuation
in foreclosing the Greenhills property was
legally unfounded.
Being a banking institution, PNB owes it to the
respondents to observe the high standards of
integrity and performance in all its transactions
because its business is imbued with public
interest. The high standards are also necessary
to ensure public confidence in the banking
system, for, according to Philippine National
Bank v. Pike,29 "[t]he stability of banks largely
depends on the confidence of the people in the
honesty and efficiency of banks."30 Thus, PNB
was duty bound tocomply with the terms and
stipulations under its credit agreements with
the respondents, specifically the release of the
amount ofthe additional loan in its entirety, lest
it erodes public confidence.1âwphi1 Yet, PNB
failed in this regard.
Regarding the award of damages, the CA ruled
that the RTC erred in awarding moral and
exemplary damages for failure of the
respondents to prove with convincing evidence
malice or bad faith on the part of PNB. The
Court finds no reason to overturn this finding.
Moral damages are explicitly authorized in
breaches of contract when the defendant has
acted fraudulently or in bad faith.31 Exemplary
damages, on the other hand, are intended to
serve as an example or a correction for the
public good. Courts may award them if the
defendant is found to have acted in a wanton,
fraudulent, reckless, oppressive, or malevolent
manner.32 Concededly, PNB was remiss in its
obligation to release the balance of the
additional loan it extended to the respondents.
Nothing in the records or findings of the RTC
and the CA, however, would show that PNB
acted with a deliberate intent to maliciously
cause damage or harm to the respondents. And,
inasmuch as the respondents were also found
to h;we been remiss in their obligation to pay
their loan amortization, the CA was correct in
deleting the award for moral and exemplary
damages in favor of the respondents.
Finally, the Court sustains the award for
attorney's fees because the same is just and
equitable under the circumstances.33
Considering PNB 's failure to release the
remaining balance of the approved loan, the
Court agrees that the respondents were
compelled to litigate for the purpose of
recovering their property and to protect their
interest, making the awmd or attorney's fees
proper.
WHEREFORE, the petition is DENIED. The
November 30, 2010 Decision and the March 2,
2011 Resolution of the Court of Appeals in
CAG.R. CV No. 85458 are AFFIRMED.
BENAVIDEZ V. CA
6 Sept. 1999
Facts: P filed a forcible entry case against
D. D argued that he owned the property. D
surmised that since the issue of ownership is
involved and only in resolving it can the
issue of possession be finally settled, the
MTC has no jurisdiction over the case.
Issue: Whether the MTC retains jurisdiction
Held: Yes. Following B. P. 129, the MTC
now retains jurisdiction over ejectment cases
even if the question of possession cannot be
resolved without passing upon the issue of
ownership provided that such issue of
ownership shall be resolved only for the
purpose of determining possession.
FLORPINA BENAVIDEZ PETITIONER
VS. NESTOR SALVADOR
RESPONDENT.
This is a petition for review on certiorari
assailing the November 22, 2005
Decision[1] and the June 8, 2006 Amended
Decision[2] of the Court of Appeals (CA), in
CA-G.R. CV No. 73487, which affirmed
and modified the June 1, 2001 Decision[3]
of the Regional Trial Court, Branch 74,
Antipolo City (RTC-Antipolo) in Civil Case
No. 00-5660.
The Facts:
Sometime in February 1998, petitioner
Florpina Benavidez (Benavidez) approached
and asked respondent Nestor Salvador
(Salvador) for a loan that she would use to
repurchase her property in Tanay, Rizal
which was foreclosed by the Farmers
Savings and Loan Bank, Inc. (Farmers
Savings). After inspecting the said property,
Salvador agreed to lend the money subject to
certain conditions. To secure the loan,
Benavidez was required to execute a real
estate mortgage, a promissory note and a
deed of sale. She was also required to submit
a special power of attorney (SPA) executed
and signed by Benavidez's daughter,
Florence B. Baning (Baning), whom she
named as the vendee in the deed of absolute
sale of the repurchased property. In the SPA,
Baning would authorize her mother to obtain
a loan and to constitute the said property as
security of her indebtedness to Salvador.
Pursuant to the agreement, Salvador issued a
manager's check in favor of Benavidez in
the amount of One Million Pesos
(P1,000,000.00) and released Five Hundred
Thousand Pesos (P500,000.00) in cash. For
the loan obtained, Benavidez executed a
promissory note, dated March 11, 1998.
Benavidez, however, failed to deliver the
required SPA. She also defaulted in her
obligation under the promissory note. All the
postdated checks which she had issued to
pay for the interests were dishonored. This
development prompted Salvador to send a
demand letter with a corresponding
statement of account, dated January 11,
2000. Unfortunately, the demand fell on
deaf ears which constrained Salvador to file
a complaint for sum of money with damages
with prayer for issuance of preliminary
attachment.
On May 4, 2000, Benavidez filed a motion
to dismiss on the ground of litis pendentia.
She averred that prior to the filing of the
case before the RTC-Antipolo, she had filed
a Complaint for Collection for Sum of
Money, Annulment of Contract and Checks
with Prayer for Preliminary Injunction and
Temporary Restraining Order against
Salvador; his counsel, Atty. Nepthalie
Segarra; Almar Danguilan; and Cris
Marcelino, before the Regional Trial Court,
Branch 80, Morong, Rizal (RTC-Morong).
The motion to dismiss, however, was denied
by RTC-Antipolo on July 31, 2000. On
September 15, 2000, Benavidez filed her
answer with counterclaim. A pre-trial
conference was scheduled on May 2, 2001
but she and her counsel failed to appear
despite due notice. Resultantly, upon
motion, Salvador was allowed by the trial
court to present evidence ex parte.
On June 1, 2001, RTC-Antipolo decided the
subject case for Salvador. It found that
indeed Benavidez obtained a loan from
Salvador in the amount of P1,500,000.00. It
also noted that up to the time of the rendition
of the judgment, she had failed to settle her
obligation despite having received oral and
written demands from Salvador. Also, the
trial court pointed out that the evidence had
shown that as of January 11, 2000,
Benavidez's obligation had already reached
the total amount of P4,810,703.21.[4] Thus,
the fallo of the said decision reads:
WHEREFORE, in view of the foregoing
premises, defendant is hereby directed to
pay plaintiff the following:
1. The amount of P4,810,703.21, covering
the period from June 11, 1998 to January 11,
2000, exclusive of interest and penalty
charges until the said amount is fully paid;
2. The amount of P50,000.00 as
exemplary damages;
3. The sum of 25% of the total obligation
as and by way of attorney's fees; and,
4. Cost of suit.
SO ORDERED.[5]
Benavidez filed a motion for reconsideration
but unfortunately for her, RTC-Antipolo, in
its August 10, 2001 Order,[6] denied her
motion for lack of merit.
Frustrated, Benavidez appealed the June 1,
2001 Decision and the August 10, 2001
Order of RTC-Antipolo to the CA. She
argued, in chief, that early on, the trial court
should have dismissed the complaint for
collection of sum of money filed by
Salvador on grounds of litis pendentia and
erroneous certification against forum
shopping. She claimed that prior to the filing
of the said complaint against her, she had
already filed a complaint for the annulment
of the promissory note evidencing her
obligation against Salvador. According to
her, there was substantial identity in the
causes of action and any result of her
complaint for annulment would necessarily
affect the complaint for collection of sum of
money filed against her. She added that
Salvador never informed RTC-Antipolo
about the pending case before RTC-Morong,
rendering his certification on forum
shopping erroneous.[7]
Benavidez also argued that RTC-Antipolo
erred in refusing to re-open the case for pre-
trial conference and disallowing her to
present evidence. She added that the absence
of her counsel on the scheduled pre-trial
conference caused her substantial prejudice.
Though she was not unmindful of the
general rule that a client was bound by the
mistake or negligence of her counsel, she
insisted that since the incompetence or
ignorance of her counsel was so great and
the error committed was so serious as it
prejudiced her and denied her day in court,
the litigation should have been reopened to
give her the opportunity to present her case.
[8]
The CA was not moved.
The CA reasoned out that RTC-Antipolo did
not err in allowing Salvador to present his
evidence ex-parte in accordance with
Section 5, Rule 18 of the 1997 Rules of
Court.[9] Benavidez and her counsel failed
to show a valid reason for their non-
appearance at the pre-trial and so their
absence was not excusable. Her counsel's
negligence, as Benavidez cited, was not
among the grounds for new trial or
reconsideration as required under Section 1,
Rule 37 of the Rules of Civil Procedure. The
CA emphasized that well-entrenched was
the rule that negligence of counsel bound his
client. She was bound by the action of his
counsel in the conduct of the trial. The
appellate court also took note that she
herself was guilty of negligence because she
was also absent during the pre-trial despite
due notice. Thus, Benavidez's position that
the trial court should have reopened the case
was untenable.[10]
With regards to the grounds of litis
pendentia and forum shopping cited by
Benavidez, the CA wrote that there was no
identity of the rights asserted in the cases
filed before RTC-Morong and RTC-
Antipolo. The reliefs prayed for in those
cases were different. One case was for the
annulment of the promissory note while the
other one was a complaint for sum of
money. There could be identity of the
parties, but all the other requisites to warrant
the dismissal of the case on the ground of
litis pendentia were wanting.[11] Thus, on
November 22, 2005, the CA affirmed in toto
the decision of RTC-Antipolo.[12]
Feeling aggrieved by the affirmance,
Benavidez filed a motion for reconsideration
on the ground that the same was contrary to
law and jurisprudence; that litis pendentia
existed which resultantly made his
certification on non-forum shopping
untruthful; and, that her absence during the
pre-trial was justified.
On June 08, 2006, the CA issued the
Amended Decision, holding that the motion
was partly meritorious. Accordingly, it
modified its earlier decision by deleting the
award of exemplary damages and attorney's
fees because the award thereof was not
supported by any factual, legal and equitable
justification. Thus, the decretal portion of
the Amended Decision reads:
WHEREFORE, the motion for
reconsideration is PARTIALLY
GRANTED. The Decision dated November
22, 2005 is MODIFIED by DELETING the
award of exemplary damages and attorney's
fees.
SO ORDERED.[13]
Still unsatisfied, Benavidez comes before
the Court via a petition for review under
Rule 45 of the Rules of Court, raising the
following issues:[14]
1. Whether or not the present case is
barred by Civil Case No. 00-05660 which is
pending before the RTC-Morong, Rizal.
2. Whether or not the case is dismissible
because the certification against forum
shopping was defective.
3. Whether or not the executed
promissory note is void for being
unconscionable and shocking to the
conscience.
4. Whether or not the CA erred in holding
that the order allowing respondent to present
evidence ex-parte and submitting the case
for decision is valid despite the fact that
default judgment is looked upon with
disfavor by this Court.
In fine, the core issue is whether or not the
present case should have been dismissed on
the ground of litis pendentia.
Benavidez argues that the outcome of the
case, before RTC-Morong, where the
annulment of the promissory note was
sought, would have been determinative of
the subject case before RTC-Antipolo where
the enforcement of the promissory note was
sought. If RTC-Morong would rule that the
promissory note was null and void, then the
case with RTC-Antipolo would have no
more leg to stand on. He concludes that the
requisites of litis pendentia were indeed
present: first, both Benavidez and Salvador
were parties to both complaints; second,
both complaints were concerned with the
promissory note; and third, the judgment in
either of the said complaints would have
been determinative of the other.[15]
Benavidez further claims that the case
should have been dismissed because the
certification on forum shopping which
accompanied Salvador's complaint was
defective. He declared therein that he was
not aware of any pending case before any
court similar to the one he was filing, when
in truth and in fact, there was one. This fact
could not be denied because summons in the
case before RTC-Morong was served on him
and he even filed his answer to the said
complaint.[16]
Benavidez also pushes the argument that
RTC-Antipolo committed an error of law
when it allowed Salvador to present
evidence ex-parte and eventually decided the
case without waiting to hear her side. The
trial court should have been more lenient. If
there was any one to be blamed for her
predicament, it should have been his
counsel, Atty. Rogelio Jakosalem
(Jakosalem). His counsel was negligent in
his duties when he did not bother to file the
necessary pre-trial brief and did not even
appear at the pre-trial conference. He did not
assist her either in filing a motion for
reconsideration. Benavidez explains that
Atty. Jakosalem did not appear on the
scheduled pre-trial conference because he
got mad at her when she refused to heed his
advice to settle when the trial court granted
Salvador's motion for issuance of
preliminary attachment. Under the
circumstances, she should have been
exempted from the rule that the negligence
of counsel binds the client.[17]
For her part, she failed to appear because she
was then suffering from illness. Contrary to
the finding of the CA, her medical certificate
was not belatedly submitted. She submitted
it within a reasonable period after she
received the order allowing Salvador to
present evidence ex-parte and considering
the case for resolution thereafter.[18]
The Court's Ruling
In litis pendentia, there is no hard and fast
rule in determining which of the two actions
should be abated
Litis pendentia is a Latin term, which
literally means "a pending suit" and is
variously referred to in some decisions as lis
pendens and auter action pendant. As a
ground for the dismissal of a civil action, it
refers to the situation where two actions are
pending between the same parties for the
same cause of action, so that one of them
becomes unnecessary and vexatious. It is
based on the policy against multiplicity of
suits.[19]
Litis pendentia exists when the following
requisites are present: identity of the parties
in the two actions; substantial identity in the
causes of action and in the reliefs sought by
the parties; and the identity between the two
actions should be such that any judgment
that may be rendered in one case, regardless
of which party is successful, would amount
to res judicata in the other.[20]
On the other hand, forum shopping exists
when, as a result of an adverse decision in
one forum, or in anticipation thereof, a party
seeks a favorable opinion in another forum
through means other than appeal or
certiorari.[21]
There is forum shopping when the elements
of litis pendentia are present or where a final
judgment in one case will amount to res
judicata in another.[22]
In the present controversy, the Court is of
the view that litis pendentia exists. All the
elements are present: first, both Benavidez
and Salvador are parties in both cases;
second, both complaints are concerned with
the same promissory note; and third, the
judgment in either case would be
determinative of the other.
 rules and consideration in determining
which case to dismiss in such situations. It
With the foregoing, which case then should
included its analysis of Abines. Thus:
be dismissed? At first glance, it would seem
that Civil Case No. 00-5660 or the
complaint filed with RTC-Antipolo should
Early on, we applied the principle of Qui
have been dismissed applying the "priority-
prior est tempore, potior est jure (literally, he
in-time rule." This rule, however, is not
who is before in time is better in right) in
ironclad. The rule is not applied if the first
dismissing a case on the ground of litis
case was filed merely to pre-empt the later
pendentia. This was exemplified in the
action or to anticipate its filing and lay the
relatively early case of Del Rosario v.
basis for its dismissal. A crucial
Jacinto where two complaints for
consideration is the good faith of the parties.
reconveyance and/or recovery of the same
In recent rulings, the more appropriate case
parcel of land were filed by substantially the
is preferred and survives. In Spouses Abines
same parties, with the second case only
v. BPI,[23] it was written:
impleading more party-plaintiffs. The Court
held that "parties who base their contention
upon the same rights as the litigants in a
There is no hard and fast rule in
previous suit are bound by the judgment in
determining which of the actions should be
the latter case." Without expressly saying so
abated on the ground of litis pendentia, but
in litis pendentia terms, the Court gave
through time, the Supreme Court has
priority to the suit filed earlier.
endeavored to lay down certain criteria to
guide lower courts faced with this legal
dilemma. As a rule, preference is given to
In Pampanga Bus Company, Inc. v.
the first action filed to be retained. This is in
Ocfemia, complaints for damages arising
accordance with the maxim Qui prior est
from a collision of a cargo truck and a bus
tempore, potior est jure. There are, however,
were separately filed by the owners of the
limitations to this rule. Hence, the first
colliding vehicles. The complaint of the
action may be abated if it was filed merely
owners of the cargo truck prevailed and the
to pre-empt the later action or to anticipate
complaint of the owners of the bus had to
its filing and lay the basis for its dismissal.
yield, as the cargo truck owners first filed
Thus, the bona fides or good faith of the
their complaint. Notably, the first and
parties is a crucial element. A later case shall
prevailing case was far advanced in
not be abated if not brought to harass or vex;
development, with an answer with
and the first case can be abated if it is
counterclaim and an answer to the
merely an anticipatory action or, more
counterclaim having been already filed, thus
appropriately, an anticipatory defense
fully joining the issues.
against an expected suit a clever move to
steal the march from the aggrieved party.

In Lamis Ents. v. Lagamon, the first case

was a complaint for specific performance of
Another exception to the priority in time
obligations under a Memorandum of
rule is the criterion of the more appropriate
Agreement, while the second case was a
action. Thus, an action, although filed later,
complaint for sums of money arising from
shall not be dismissed if it is the more
obligations under a promissory note and a
appropriate vehicle for litigating the issues
chattel mortgage, and damages. We
between the parties. [Underscoring supplied]
dismissed the second case because the
claims for sums of money therein arose from
the Memorandum of Agreement sued upon
In the relatively recent case of Dotmatrix
in the first case.
Trading v. Legaspi,[24] the Court had the
occasion to extensively discuss the various
 Ago Timber Corporation v. Ruiz offered
an insightful reason after both parties had
each pleaded the pendency of another action
between the same parties for the same cause.
The Court ruled that the second action
should be dismissed, "not only as a matter of
comity with a coordinate and co-equal court
(Laureta & Nolledo, Commentaries &
Jurisprudence on Injunction, p. 79, citing
Harrison v. Littlefield, 57 Tex. Div. A. 617,
619, 124 SW 212), but also to prevent
confusion that might seriously hinder the
administration of justice. (Cabigao, et al. v.
Del Rosario, et al., 44 Phil. 182)."
In all these cases, we gave preference to
the first action filed to be retained. The
"priority-in-time rule," however, is not
absolute.
In the 1956 case of Teodoro v. Mirasol,
we deviated from the "priority-in-time rule"
and applied the "more appropriate action
test" and the "anticipatory test."
The "more appropriate action test"
considers the real issue raised by the
pleadings and the ultimate objective of the
parties; the more appropriate action is the
one where the real issues raised can be fully
and completely settled. In Teodoro, the
lessee filed an action for declaratory relief to
fix the period of the lease, but the lessor
moved for its dismissal because he had
subsequently filed an action for ejectment
against the lessee. We noted that the
unlawful detainer suit was the more
appropriate action to resolve the real issue
between the parties - whether or not the
lessee should be allowed to continue
occupying the land under the terms of the
lease contract; this was the subject matter of
the second suit for unlawful detainer, and
was also the main or principal purpose of the
first suit for declaratory relief.
In the "anticipatory test," the bona fides or
good faith of the parties is the critical
element. If the first suit is filed merely to
preempt the later action or to anticipate its
filing and lay the basis for its dismissal, then
the first suit should be dismissed. In
Teodoro, we noted that the first action,
declaratory relief, was filed by the lessee to
anticipate the filing of the second action,
unlawful detainer, considering the lessor's
letter informing the lessee that the lease
contract had expired.
We also applied the "more appropriate
action test" in Ramos v. Peralta. In this case,
the lessee filed an action for consignation of
lease rentals against the new owner of the
property, but the new owner moved to
dismiss the consignation case because of the
quieting of title case he had also filed
against the lessee. Finding that the real issue
between the parties involved the right to
occupy/possess the subject property, we
ordered the dismissal of the consignation
case, noting that the quieting of title case is
the more appropriate vehicle for the
ventilation of the issues between them; the
consignation case raised the issue of the
right to possession of the lessee under the
lease contract, an issue that was effectively
covered by the quieting of title case which
raised the issue of the validity and effectivity
of the same lease contract.
In University Physician Services, Inc. v.
Court of Appeals, we applied both the "more
appropriate action test" and "anticipatory
test." In this case, the new owner of an
apartment sent a demand letter to the lessee
to vacate the leased apartment unit. When
the lessee filed an action for damages and
injunction against the new owner, the new
owner moved for the dismissal of the action
for damages on account of the action for
ejectment it had also filed. We noted that
ejectment suit is the more appropriate action
to resolve the issue of whether the lessee had
the right to occupy the apartment unit, where
the question of possession is likewise the
primary issue for resolution. We also noted
that the lessee, after her unjustified refusal to
vacate the premises, was aware that an
ejectment case against her was forthcoming;
the lessee's filing of the complaint for
damages and injunction was but a canny and
preemptive maneuver intended to block the
new owner's action for ejectment.
We also applied the "more appropriate
action test" in the 2003 case Panganiban v.
Pilipinas Shell Petroleum Corp., where the
lessee filed a petition for declaratory relief
on the issue of renewal of the lease of a
gasoline service station, while the lessor
filed an unlawful detainer case against the
lessee. On the question of which action
should be dismissed, we noted that the
interpretation of a provision in the lease
contract as to when the lease would expire is
the key issue that would determine the
lessee's right to possess the gasoline service
station. The primary issue - the physical
possession of the gasoline station - is best
settled in the ejectment suit that directly
confronted the physical possession issue,
and not in any other case such as an action
for declaratory relief.
A more recent case - Abines v. Bank of
the Philippine Islands in 2006 - saw the
application of both the "priority-in-time
rule" and the "more appropriate action test."
In this case, the respondent filed a complaint
for collection of sum of money against the
petitioners to enforce its rights under the
promissory notes and real estate mortgages,
while the petitioners subsequently filed a
complaint for reformation of the promissory
notes and real estate mortgages. We held
that the first case, the collection case, should
subsist because it is the first action filed and
the more appropriate vehicle for litigating all
the issues in the controversy. We noted that
in the second case, the reformation case, the
petitioners acknowledged their indebtedness
to the respondent; they merely contested the
amounts of the principal, interest and the
remaining balance. We observed, too, that
the petitioners' claims in the reformation
case were in the nature of defenses to the
collection case and should be asserted in this
latter case.
Under this established jurisprudence on
litis pendentia, the following considerations
predominate in the ascending order of
importance in determining which action
should prevail: (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.[25] [Underscoring supplied]
In the complaint filed before RTC-Morong,
Benavidez alleged, among others, that it was
defendant Atty. Nepthalie Segarra (Atty.
Segarra) who arranged the loan in the
amount of P1,500,000.00 for her at his own
initiative; that he was the one who received
the amount for her on or about March 10,
1998 from defendant Salvador; that he paid
Farmers Bank the amount of P1,049,266.12
leaving a balance of more than P450,000.00
in his possession; and that he made her sign
a promissory note. Benavidez prayed,
among others, that Atty. Segarra be ordered
to give her the balance of the amount loaned
and that the promissory note that Salvador
allegedly executed be declared null and void
because she was just duped into signing the
said document through machinations and
that the stipulated interest therein was
shocking to the conscience. Salvador, on the
other hand, filed the subject case for the
collection of a sum of money before RTC-
Antipolo to enforce his rights under the
promissory note.
Considering the nature of the transaction
between the parties, the Court believes that
the case for collection of sum of money filed
before RTC-Antipolo should be upheld as
the more appropriate case because the
judgment therein would eventually settle the
issue in the controversy - whether or not
Benavidez should be made accountable for
the subject loan. In the complaint that she
filed with RTC- Morong, Benavidez never
denied that she contracted a loan with
Salvador. Under her second cause of action,
she alleged:
SECOND CAUSE OF ACTION
11. Defendant Atty. Nepthalie Segarra
arranged a loan in the amount of ONE
MILLION AND FIVE HUNDRED
THOUSAND (P1,500,000.00) PESOS for
plaintiff at his own initiative;
12. Defendant Atty. Nepthalie Segarra
received the P1,500,000.00 on or about
March 10, 1998 from defendant Nestor
Salvador in behalf of and for delivery to
plaintiff;
13. Defendant Atty. Nepthalie Segarra
paid Farmers Bank the amount of
P1,049,266.12 leaving a balance of more
than P450,000.00 in his possession. A copy
of the receipt evidencing payment is
herewith attached as Annex "A" and made
an integral part hereof;
14. Defendant Atty. Nepthalie Segarra
made plaintiff sign a Promissory Note
evidencing the loan of P1,500,000.00. A
copy of said Promissory Note is herewith
attached as Annex "B" and made an integral
part hereof;[26] [Underscoring supplied]
From the foregoing, it is clear that there was
an amount of money borrowed from
Salvador which was used in the repurchase
of her foreclosed property. Whether or not it
was Atty. Segarra who arranged the loan is
immaterial. The fact stands that she
borrowed from Salvador and she benefited
from it. Her insistence that the remaining
balance of P450,000.00 of the money loaned
was never handed to her by Atty. Segarra is
a matter between the two of them. As far as
she and Salvador are concerned, there is
admittedly an obligation. Whether the
promissory note was void or not could have
been proven by her during the trial but she
forfeited her right to do so when she and her
lawyer failed to submit a pre-trial brief and
to appear at the pre-trial as will be discussed
hereafter.
At this point, to dismiss Civil Case No. 00-
5660 would only result in needless delay in
the resolution of the parties' dispute and
bring them back to square one. This
consequence will defeat the public policy
reasons behind litis pendentia which, like the
rule on forum shopping, aim to prevent the
unnecessary burdening of our courts and
undue taxing of the manpower and financial
resources of the Judiciary; to avoid the
situation where co-equal courts issue
conflicting decisions over the same cause;
and to preclude one party from harassing the
other party through the filing of an
unnecessary or vexatious suit.[27]
The failure of a party to file a pre-trial brief
or to appear at a pre-trial conference shall be
cause to allow the other party to present
evidence ex parte.
Benavidez basically contends that she
should not be made to suffer the
irresponsibility of her former counsel, Atty.
Jakosalem, and that the trial court should
have relaxed the application of the Rules of
Court, reopened the case and allowed her to
present evidence in her favor.
The Court is not moved.
Section 4, Rule 18 of the Rules of Court
provides that it is the duty of the parties and
their counsel to appear at the pre-trial
conference. The effect of their failure to
appear is provided by Section 5 of the same
rule where it states:
Sec. 5. Effect of failure to appear.- The
failure of the plaintiff to appear when so
required pursuant to the next preceding
section shall be cause for dismissal of the
action. The dismissal shall be with
prejudice, unless otherwise ordered by the
court. A similar failure on the part of the
defendant shall be cause to allow the
plaintiff to present his evidence ex parte and
the court to render judgment on the basis
thereof. [Emphasis supplied]
Furthermore, Section 6 thereof provides:
Sec. 6. Pre-trial brief.-The parties shall
file with the court and serve on the adverse
party, in such manner as shall ensure their
receipt thereof at least three (3) days before
the date of the pre-trial, their respective pre-
trial briefs which shall contain, among
others:
xxx
Failure to file the pre-trial brief shall have
the same effect as failure to appear at the
pre-trial.
From the foregoing, it is clear that the failure
of a party to appear at the pre-trial has
adverse consequences. If the absent party is
the plaintiff, then his case shall be
dismissed. If it is the defendant who fails to
appear, then the plaintiff is allowed to
present his evidence ex parte and the court
shall render judgment on the basis thereof.
Thus, the plaintiff is given the privilege to
present his evidence without objection from
the defendant, the likelihood being that the
court will decide in favor of the plaintiff, the
defendant having forfeited the opportunity to
rebut or present its own evidence.[28]
RTC-Antipolo then had the legal basis to
allow Salvador to present evidence ex parte
upon motion. Benavidez and her counsel
were not present at the scheduled pre-trial
conference despite due notice. They did not
file the required pre-trial brief despite
receipt of the Order. The rule explicitly
provides that both parties and their counsel
are mandated to appear thereat except for:
(1) a valid excuse; and (2) appearance of a
representative on behalf of a party who is
fully authorized in writing to enter into an
amicable settlement, to submit to alternative
modes of dispute resolution, and to enter
into stipulations or admissions of facts and
documents.[29] In this case, Benavidez's
lawyer was already negligent, but she
compounded this by being negligent herself.
She was aware of the scheduled pre-trial
conference, but she did not make any move
to prevent the prejudicial consequences of
her absence or that of her counsel. If she
knew that her lawyer would not appear and
could not because she was ill, she should
have sent a representative in court to inform
the judge of her predicament.
Also, her failure to file the pre-trial brief
warranted the same effect because the rules
dictate that failure to file a pre-trial brief
shall have the same effect as failure to
appear at the pre-trial. Settled is the rule that
the negligence of a counsel binds his clients.
[30] Neither Benavidez nor her counsel can
now evade the effects of their misfeasance.
Stipulated interest should be reduced for
being iniquitous and unconscionable.
This Court is not unmindful of the fact that
parties to a loan contract have wide latitude
to stipulate on any interest rate in view of
the Central Bank Circular No. 905 s. 1982
which suspended the Usury Law ceiling on
interest effective January 1, 1983. It is,
however, worth stressing that interest rates
whenever unconscionable may still be
declared illegal. There is nothing in said
circular which 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.[31] In
Menchavez v. Bermudez,[32] the interest
rate of 5% per month, which when summed
up would reach 60% per annum, is null and
void for being excessive, iniquitous,
unconscionable and exorbitant, contrary to
morals, and the law.[33]
Accordingly, in this case, the Court
considers the compounded interest rate of
5% per month as iniquitous and
unconscionable and void and inexistent from
the beginning. The debt is to be considered
without the stipulation of the iniquitous and
unconscionable interest rate.[34] In line with
the ruling in the recent case of Nacar v.
Gallery Frames,[35] the legal interest of 6%
per annum must be imposed in lieu of the
excessive interest stipulated in the
agreement.
WHEREFORE, the petition is DENIED.
The November 22, 2005 Decision and the
June 8, 2006 Amended Decision of the
Court of Appeals are AFFIRMED with
MODIFICATION. The interest rate of 5%
per month which was the basis in computing
Benavidez's obligation is reduced to 6% per
annum.
SO ORDERED.
First Metro vs Este del Sol
GR No. 141811, 15 November 2001
369 SCRA 99
FACTS
FMIC granted Este del Sol a loan to
finance a sports/resort complex in
Montalban, Rizal. Under the agreement, the
interest was 16% pa based on the
diminishing balance. In case of default, an
acceleration clause was provided and the
amount due is subject to 20% one-time
penalty on the amount due and such amount
shall bear interest at the highest rate
permitted by law. respondent executed a
REM, individual continuing suretyship and
an underwriting agreement whereby FMIC
shall underwrite the public offering of one
P120,000 common shares of respondent’s
capital stock for one-time underwriting fee
of P200,000. For failure to pay its
obligation, FMIC caused the foreclosure of
the REM. At the public auction, FIC was the
highest bidder. Petitioner filed to collect for
alleged deficiency balance against
respondents since it failed to collect from the
sureties, plus interest at 21% pa. the trial
court ruled in favor of FMIC. Respondents
appealed before the CA which held that the
fees provided for in the Underwriting and
Consultacy Agreements were mere
subterfuges to camouflage the excessively
usurious interest charged. The CA ordered
FMIC to reimburse petitioner representing
what is ue to petitioner and what is due to
respondent.
ISSUE
Whether or not the interests are
lawful
HELD
No. an apparently lawful loan is
usurious when it is intended that additional
compensation for the loan be disguised by
an ostensibly unrelated contract for the
payment by the borrower for the lender’s
services which re of little value or which are
not in fact to be rendered. Article 1957
clearly provides: contracts and stipulations,
under any cloak or device whatever,
intended to circumvent the law agaistn usury
shall be void. The borrower may recover in
accordance with the laws on usury.
Medel vs Court of Appeals, 299 SCRA
481; GR No. 131622, November 27, 1998,
digested
Facts: Defendants obtained a loan from
Plaintiff in the amount P50, 000.00, payable
in 2 months and executed a promissory note.
Plaintiff gave only the amount of P47,
000.00 to the borrowers and retained P3,
000.00 as advance interest for 1 month at
6% per month.
 interest per annum and 1% per month as
penalty.
Defendants obtained another loan from
Defendant in the amount of P90, 000.00,
payable in 2 months, at 6% interest per
On appeal, Plaintiff-appellants argued that
month. They executed a promissory note to
the promissory note, which consolidated all
evidence the loan and received only P84,
the unpaid loans of the defendants, is the law
000.00 out of the proceeds of the loan.
that governs the parties.

For the third time, Defendants secured from

The Court of Appeals ruled in favor of the
Plaintiff another loan in the amount of P300,
Plaintiff-appellants on the ground that the
000.00, maturing in 1 month, and secured by
Usury Law has become legally inexistent
a real estate mortgage. They executed a
with the promulgation by the Central Bank
promissory note in favor of the Plaintiff.
in 1982 of Circular No. 905, the lender and
However, only the sum of P275, 000.00,
the borrower could agree on any interest that
was given to them out of the proceeds of the
may be charged on the loan, and ordered the
loan.
Defendants to pay the Plaintiffs the sum of
P500,000, plus 5.5% per month interest and
2& service charge per annum , and 1% per
Upon maturity of the three promissory notes,
month as penalty charges.
Defendants failed to pay the indebtedness.

Defendants filed the present case via petition

Defendants consolidated all their previous
for review on certiorari.
unpaid loans totalling P440, 000.00, and
sought from Plaintiff another loan in the
amount of P60, 000.00, bringing their
Issue: WON the stipulated 5.5% interest rate
indebtedness to a total of P50,000.00. They
per month on the loan in the sum of P500,
executed another promissory note in favor of
000.00 is usurious.
Plaintiff to pay the sum of P500, 000.00
with a 5.5% interest per month plus 2%
service charge per annum, with an additional
amount of 1% per month as penalty charges. Held: No.

On maturity of the loan, the Defendants
failed to pay the indebtedness which prompt
the Plaintiffs to file with the RTC a
complaint for collection of the full amount
of the loan including interests and other
charges.
Declaring that the due execution and
genuineness of the four promissory notes
has been duly proved, the RTC ruled that
although the Usury Law had been repealed,
the interest charged on the loans was
unconscionable and “revolting to the
conscience” and ordered the payment of the
amount of the first 3 loans with a 12%
A stipulated rate of interest at 5.5% per
month on the P500, 000.00 loan is
excessive, iniquitous, unconscionable and
exorbitant, but it cannot be considered
“usurious” because Central Bank Circular
No. 905 has expressly removed the interest
ceilings prescribed by the Usury Law and
that the Usury Law is now “legally
inexistent.”
Doctrine: A CB Circular cannot repeal a
law. Only a law can repeal another law.
Jurisprudence provides that CB Circular did
not repeal nor in a way amend the Usury
Law but simply suspended the latter’s
effectivity (Security Bank and Trust Co vs
RTC). Usury has been legally non-existent
in our jurisdiction. Interest can now be
charged as lender and borrower may agree
upon.
Law: Article 2227, Civil Code
The courts shall reduce equitably liquidated
damages, whether intended as an indemnity
or a penalty if they are iniquitous or
unconscionable.
Note: While the Usury Law ceiling on
interest rates was lifted by the CB Circular
905, nothing in the said circular could
possibly be read as granting carte blanche
authority to lenders to raise interest rates to
levels which would either enslave their
borrowers or lead to a haemorrhaging of
their assets (Almeda vs. CA, 256 SCRA 292
[1996]).
FUCC vs. Bayanihan Auto (G.R. No.
164985; January 15, 2014)
CASE DIGEST: FIRST UNITED
CONSTRUCTORS CORPORATION
AND BLUE STAR CONSTRUCTION
CORPORATION, Petitioners, v.
BAYANIHAN AUTOMOTIVE
CORPORATION, Respondent. G.R. No.
164985; January 15, 2014.
FACTS: Petitioner First United Constructors
Corporation (FUCC) and petitioner Blue
Star Construction Corporation (Blue Star)
were associate construction firms sharing
financial resources, equipment and technical
personnel on a case-to-case basis. From May
27, 1992 to July 8, 1992, they ordered six
units of dump trucks from the respondent, a
domestic corporation engaged in the
business of importing and reconditioning
used Japan-made trucks, and of selling the
trucks to interested buyers who were mostly
engaged in the construction business.
On September 19, 1992, FUCC ordered
from the respondent one unit of Hino Prime
Mover that the respondent delivered on the
same date. On September 29, 1992, FUCC
again ordered from the respondent one unit
of Isuzu Transit Mixer that was also
delivered to the petitioners. For the two
purchases, FUCC partially paid in cash, and
the balance through post-dated checks.
Upon presentment of the checks for
payment, the respondent learned that FUCC
had ordered the payment stopped.The
respondent immediately demanded the full
settlement of their obligation from the
petitioners, but to no avail. Instead, the
petitioners informed the respondent that they
were withholding payment of the checks due
to the breakdown of one of the dump trucks
they had earlier purchased from respondent,
specifically the second dump truck delivered
on May 27, 1992.
Due to the refusal to pay, the respondent
commenced this action for collection on
April 29, 1993, seeking payment of the
unpaid balance in the amount of
P735,000.00 represented by the two checks.
ISSUE: Did the petitioners validly exercise
the right of recoupment through the
withholding of payment of the unpaid
balance of the purchase price of the two
purchases?
HELD: The Supreme Court affirms the
decision of the CA.
Article 1599. Where there is a breach of
warranty by the seller, the buyer may, at his
election: (1) Accept or keep the goods and
set up against the seller, the breach of
warranty by way of recoupment in
diminution or extinction of the price; (2)
Accept or keep the goods and maintain an
action against the seller for damages for the
breach of warranty; (3) Refuse to accept the
goods, and maintain an action against the
seller for damages for the breach of
warranty; (4) Rescind the contract of sale
and refuse to receive the goods or if the
goods have already been received, return
them or offer to return them to the seller and
recover the price or any part thereof which
has been paid. When the buyer has claimed
and been granted a remedy in anyone of
these ways, no other remedy can thereafter
be granted, without prejudice to the
provisions of the second paragraph of article
1191.
Recoupment (reconvencion) is the act of
rebating or recouping a part of a claim upon
which one is sued by means of a legal or
equitable right resulting from a counterclaim
arising out of the same transaction.7It is the
setting up of a demand arising from the
same transaction as the plaintiff claim, to
abate or reduce that claim. DENIED.
Encarnacion Lumantas v. Hanz Calapiz,
G.R. No. 163753, 15 January 2014.
FACTS:
In 1995, Spouses Hilario Calapiz, Jr. and
Herlita Calapiz brought their 8-year-old son,
Hanz Calapiz (Hanz), to the Misamis
Occidental Provincial Hospital, Oroquieta
City, for an emergency appendectomy. Hanz
was attended to by the petitioner, who
suggested to the parents that Hanz also
undergo circumcision at no added cost to
spare him the pain. With the parents’
consent, the petitioner performed the coronal
type of circumcision on Hanz after his
appendectomy. On the following day, Hanz
complained of pain in his penis, which
exhibited blisters. His testicles were swollen.
The parents noticed that the child urinated
abnormally after the petitioner forcibly
removed the catheter, but the petitioner
dismissed the abnormality as normal. Hanz
was discharged from the hospital over his
parents’ protestations, and was directed to
continue taking antibiotics. After a few days,
Hanz was confined in a hospital because of
the abscess formation between the base and
the shaft of his penis. Presuming that the
ulceration was brought about by Hanz’s
appendicitis, the petitioner referred him to
Dr. Henry Go, an urologist, who diagnosed
the boy to have a damaged urethra. Thus,
Hanz underwent cystostomy, and thereafter
was operated on three times to repair his
damaged urethra.
When his damaged urethra could not be
fully repaired and reconstructed, Hanz’s
parents brought a criminal charge against the
petitioner for reckless imprudence resulting
to serious physical injuries. In his defense,
the petitioner denied the charge. He
contended that at the time of his examination
of Hanz, he had found an accumulation of
pus at the vicinity of the appendix two to
three inches from the penis that had required
immediate surgical operation; that after
performing the appendectomy, he had
circumcised Hanz with his parents’ consent
by using a congo instrument, thereby
debunking the parents’ claim that their child
had been cauterized; that he had then cleared
Hanz once his fever had subsided; that he
had found no complications when Hanz
returned for his follow up check-up; and that
the abscess formation between the base and
the shaft of the penis had been brought about
by Hanz’s burst appendicitis.
The RTC acquitted the petitioner of the
crime charged for insufficiency of the
evidence. It held that the Prosecution’s
evidence did not show the required standard
of care to be observed by other members of
the medical profession under similar
circumstances. Nonetheless, the RTC ruled
that the petitioner was liable for moral
damages because there was a preponderance
of evidence showing that Hanz had received
the injurious trauma from his circumcision
by the petitioner. The Petitioner appealed his
case to the CA contending that he could not
be held civilly liable because there was no
proof of his negligence. The CA affirmed
the RTC, sustaining the award of moral
damages.
ISSUE:

Whether the CA erred in affirming the
petitioner’s civil liability despite his
acquittal of the crime of reckless
imprudence resulting in serious physical
injuries.
HELD:
NO.
It is axiomatic that every person criminally
liable for a felony is also civilly liable. xxx
Our law recognizes two kinds of acquittal,
with different effects on the civil liability of
the accused. First is an acquittal on the
ground that the accused is not the author of
the act or omission complained of. This
instance closes the door to civil liability, for
a person who has been found to be not the
perpetrator of any act or omission cannot
and can never be held liable for such act or
omission. There being no delict, civil
liability ex delicto is out of the question, and
the civil action, if any, which may be
instituted must be based on grounds other
than the delict complained of. This is the
situation contemplated in Rule 111 of the
Rules of Court. The second instance is an
acquittal based on reasonable doubt on the
guilt of the accused. In this case, even if the
guilt of the accused has not been
satisfactorily established, he is not exempt
from civil liability which may be proved by
preponderance of evidence only.
The petitioner’s contention that he could not
be held civilly liable because there was no
proof of his negligence deserves scant
consideration. The failure of the Prosecution
to prove his criminal negligence with moral
certainty did not forbid a finding against him
that there was preponderant evidence of his
negligence to hold him civilly liable. With
the RTC and the CA both finding that Hanz
had sustained the injurious trauma from the
hands of the petitioner on the occasion of or
incidental to the circumcision, and that the
trauma could have been avoided, the Court
must concur with their uniform findings. In
that regard, the Court need not analyze and
weigh again the evidence considered in the
proceedings a quo. The Court, by virtue of
its not being a trier of facts, should now
accord the highest respect to the factual
findings of the trial court as affirmed by the
CA in the absence of a clear showing by the
petitioner that such findings were tainted
with arbitrariness, capriciousness or palpable
error.
Every person is entitled to the physical
integrity of his body. Although we have long
advocated the view that any physical injury,
like the loss or diminution of the use of any
part of one’s body, is not equatable to a
pecuniary loss, and is not susceptible of
exact monetary estimation, civil damages
should be assessed once that integrity has
been violated. The assessment is but an
imperfect estimation of the true value of
one’s body. The usual practice is to award
moral damages for the physical injuries
sustained. In Hanz’s case, the undesirable
outcome of the circumcision performed by
the petitioner forced the young child to
endure several other procedures on his penis
in order to repair his damaged urethra.
Surely, his physical and moral sufferings
properly warranted the amount of
P50,000.00 awarded as moral damages.
Many years have gone by since Hanz
suffered the injury. Interest of 6% per
annum should then be imposed on the award
as a sincere means of adjusting the value of
the award to a level that is not only
reasonable but just and commensurate.
Unless we make the adjustment in the
permissible manner by prescribing legal
interest on the award, his sufferings would
be unduly compounded. For that purpose,
the reckoning of interest should be from the
filing of the criminal information on April
17, 1997, the making of the judicial demand
for the liability of the petitioner.
FEDERAL BUILDERS, INC., Petitioner,
vs.
FOUNDATION SPECIALISTS, INC.,
Respondent,
Before the Court are two consolidated cases,
namely: (1) Petition for review on certiorari
under Rule 45 of the Rules of Court,
docketed as G.R. No. 194507, filed by
Federal Builders, Inc., assailing the
Decision1 and Resolution,2 dated July 15,
2010 and November 23, 2010, respectively,
of the Court of Appeals (CA) in CA-G.R.
CV No. 70849, which affirmed with
modification the Decision3 dated May 3,
2001 of the Regional Trial Court (RTC) in
Civil Case No. 92-075; and (2) Petition for
review on certiorari under Rule 45 of the
Rules of Court,docketed as G.R. No.
194621, filed by Foundation Specialists,
Inc., assailing the same Decision4 and
Resolution,5 dated July 15, 2010 and
November 23, 2010,respectively, of the CA
in CA- G.R. CV No. 70849, which affirmed
with modification the Decision6 dated May
3, 2001 of the RTC in Civil Case No. 92-
075.
The antecedent facts are as follows:
On August 20, 1990, Federal Builders, Inc.
(FBI) entered into an agreement with
Foundation Specialists, Inc. (FSI) whereby
the latter, as subcontractor, undertook the
construction of the diaphragm wall, capping
beam, and guide walls of the Trafalgar Plaza
located at Salcedo Village, Makati City (the
Project), for a total contract price of Seven
Million Four Hundred Thousand Pesos
(₱7,400,000.00).7 Under the agreement,8
FBI was to pay a downpayment equivalent
to twenty percent (20%) of the contract price
and the balance, through a progress billing
every fifteen (15) days, payable not later
than one (1) week from presentation of the
billing.
On January 9, 1992, FSI filed a complaint
for Sum of Money against FBI before the
RTC of Makati City seeking to collect the
amount of One Million Six Hundred Thirty-
Five Thousand Two Hundred Seventy-Eight
Pesos and Ninety-One Centavos
(₱1,635,278.91), representing Billings No. 3
and 4, with accrued interest from August 1,
1991 plus moral and exemplary damages
with attorney’s fees.9 In its complaint,FSI
alleged that FBI refused to pay said amount
despite demand and itscompletion of ninety-
seven percent (97%) of the contracted
works.
In its Answer with Counterclaim, FBI
claimed that FSI completed only eighty-five
percent (85%) of the contracted works,
failing to finish the diaphragm wall and
component works in accordance with the
plans and specifications and abandoning the
jobsite. FBI maintains that because of FSI’s
inadequacy, its schedule in finishing the
Project has been delayed resulting in the
Project owner’s deferment of its own
progress billings.10 It further interposed
counterclaims for amounts it spent for the
remedial works on the alleged defects in
FSI’s work.
On May 3, 2001, after evaluating the
evidence of both parties, the RTC ruled in
favor of FSI, the dispositive portion of its
Decision reads:
WHEREFORE, on the basis of the
foregoing, judgment is rendered ordering
defendant to pay plaintiff the following:
1. The sum of ₱1,024,600.00 representing
billings 3 and 4, less the amount of
₱33,354.40 plus 12% legal interest from
August 30, 1991;
2. The sum of ₱279,585.00 representing the
cost of undelivered cement;
3. The sum of ₱200,000.00 as attorney’s
fees; and
 claims withthis Court via petitions for
review on certiorari.
4. The cost of suit.

On the one hand, FSI asserted that the CA

Defendant’s counterclaim is deniedfor lack
should not have deleted the sum of
of factual and legal basis.
₱279,585.00 representing the cost of
undelivered cement and reduced the award
of attorney’s fees to ₱50,000.00, since it was
SO ORDERED.11 an undisputed fact that FBI failed to deliver
the agreed quantity of cement. On the other
hand, FBI faulted the CA for affirming the
On appeal, the CA affirmed the Decision of decision of the lower court insofar as the
the lower court, but deleted the sum of award of the sum representing Billings 3 and
₱279,585.00 representing the cost of 4, the interest imposed thereon, and the
undelivered cement and reduced the award rejection of his counterclaim were
of attorney’s fees to ₱50,000.00. In its concerned. In a Resolution15 dated February
Decision12 dated July 15, 2010, the CA 21, 2011, however, this Court denied, with
explained that FSI failed to substantiate how finality, the petition filed by FSI in G.R. No.
and in what manner it incurred the cost of 194621 for having been filed late.
cement by stressing that its claim was not
supported by actual receipts. Also, it found
that while the trial court did not err in Hence, the present petition filed byFBI in
awarding attorney’s fees, the same should be G.R. No. 194507 invoking the following
reduced for being unconscionable and arguments:
excessive. On FBI’s rejection of the 12%
annual interest rate on the amount of
Billings 3 and 4, the CA ruled that the lower
I.
court did not err in imposing the same in the
following wise:
THE COURT OF APPEALS COMMITTED
A CLEAR, REVERSABLE ERROR
x x x The rule is well-settled that when an
WHEN IT AFFIRMED THE TRIAL
obligation is breached, and it consists in the
COURT’S JUDGMENT THAT FEDERAL
payment of a sum of money, the interest due
BUILDERS, INC. WAS LIABLE TO PAY
shall itself earn legal interest from the time it
THE BALANCE OF ₱1,024,600.00 LESS
is judicially demanded (BPI Family Savings
THE AMOUNT OF ₱33,354.40
Bank, Inc. vs. First Metro Investment
NOTWITHSTANDING THAT THE
Corporation, 429 SCRA 30). When there is
DIAPHRAGM WALL CONSTRUCTED
no rate of interest stipulated, such as in the
BY FOUNDATION SPECIALIST, INC.
present case, the legal rate of interest shall
WAS CONCEDEDLY DEFECTIVE AND
be imposed, pursuant to Article 2209 of the
OUT-OF-SPECIFICATIONS AND THAT
New Civil Code. In the absence of a
PETITIONER HAD TO REDO IT AT ITS
stipulated interest rate on a loan due, the
OWN EXPENSE.
legal rate of interest shall be 12% per
annum.13
II.
Both parties filed separate Motions for
Reconsideration assailing different portions
THE COURT OF APPEALS COMMITTED
of the CADecision, but to no avail.14
SERIOUS, REVERSABLE ERROR WHEN
Undaunted, they subsequently elevated their
IT IMPOSED THE 12% LEGAL
INTEREST FROM AUGUST 30, 1991 ON
THE DISPUTED CLAIM OF
₱1,024,600.00 LESS THE AMOUNT OF
₱33,354.40 DESPITE THE FACT THAT
THERE WAS NO STIPULATION IN THE
AGREEMENT OF THE PARTIES WITH
REGARD TO INTEREST AND DESPITE
THE FACT THAT THEIR AGREEMENT
WAS NOT A "LOAN OR
FORBEARANCE OF MONEY."
III.
THE COURT OF APPEALS COMMITTED
GRAVE AND SERIOUS REVERSABLE
ERROR WHEN IT DISMISSED THE
COUNTERCLAIM OF PETITIONER
NOTWITHSTANDING
OVERWHELMING EVIDENCE
SUPPORTING ITS CLAIM OF
₱8,582,756.29 AS ACTUAL DAMAGES.
The petition is partly meritorious.
We agree with the courts below and reject
FBI’s first and third arguments. Well-
entrenched in jurisprudence is the rule that
factual findings of the trial court, especially
when affirmed by the appellate court, are
accorded the highest degree of respectand
considered conclusive between the parties,
save for the following exceptional and
meritorious circumstances: (1) when the
factual findings of the appellate court and
the trial court are contradictory; (2) whenthe
findings of the trial court are grounded
entirely on speculation, surmises or
conjectures; (3) when the lower court’s
inference from its factual findings is
manifestly mistaken, absurd or impossible;
(4) when there is grave abuse of discretion
in the appreciation of facts; (5) when the
findings of the appellate court go beyond the
issues of the case, or fail to notice certain
relevant facts which, if properly considered,
will justify a different conclusion; (6) when
there is a misappreciation of facts; (7) when
the findings of fact are themselves
conflicting; and (8) when the findings of fact
are conclusions without mention of the
specific evidence on which they are based,
are premised on the absence of evidence, or
are contradicted by evidence on record.16
None of the aforementioned exceptions are
present herein. In the assailed Decision, the
RTC meticulouslydiscussed the obligations
of each party, the degree of their compliance
therewith, as well as their respective
shortcomings, all of which were properly
substantiated with the corresponding
documentary and testimonial evidence.
Under the construction agreement, FSI’s
scope of workconsisted in (1) the
construction of the guide walls, diaphragm
walls, and capping beam; and (2) the
installation of steel props.17 As the lower
courts aptly observed from the records at
hand, FSI had, indeed, completed ninety-
seven percent (97%) of its contracted works
and the non-completion of the remaining
three percent (3%), as well as the alleged
defects in the said works, are actually
attributable to FBI’s own fault such as, but
not limited to, the failure to deliver the
needed cement as agreed upon in the
contract, to wit:
On March 8, 1991, plaintiff had finished the
construction of the guide wall and
diaphragm wall (Exh. "R") but had not yet
constructed the capping beam as of April 22,
1991 for defendant’s failure to deliver the
needed cement in accordance with their
agreement(Exhibit "I"). The diaphragm wall
had likewise been concrete tested and was
found to have conformed with the required
design strength (Exh. "R").
Subsequently, plaintiff was paid the
aggregate amount of ₱5,814,000.00. But as
of May 30, 1991, plaintiff’s billings
numbers 3 and 4 had remained unpaid
(Exhs. "L", "M", and "M-1").
xxxx
On the misaligned diaphragm wall from top
to bottom and inbetween panels, plaintiff
explained thatin the excavation of the soil
where the rebar cages are lowered and later
poured with concrete cement, the
characteristics of the soil is not the same or
homogenous all throughout. Because of this
property of the soil,in the process of
excavation, it may erode in some places that
may cause spaces that the cement may fill or
occupy which would naturally cause bulges,
protrusions and misalignment in the concrete
cast into the excavated ground(tsn., June 1,
2000, pp 14-18). This, in fact was
anticipated when the agreement was
executed and included as provision 6.4
thereof.
The construction of the diaphragm wall
panel by panel caused misalignment and the
chipping off of the portions misaligned is
considered a matter of course. Defendant, as
the main contractor of the project, has the
responsibility of chopping or chipping off of
bulges(tsn., ibid, pp 20-21). Wrong location
of rebar dowels was anticipated by both
contractor and subcontractor as the latter
submitted a plan called "Detail of Sheer
Connectors" (Exh "T") which was
approved.The plan provided two alternatives
by which the wrong location of rebar dowels
may be remedied. Hence, defendant, aware
of the possibility of inaccurate location of
these bars, cannot therefore ascribe the same
to the plaintiff as defective work.
Construction of the capping beam required
the use of cement. Records, however, show
that from September 14, 1990 up to May 30,
1991 (Exhs. "B" to "L"), plaintiff had
repeatedly requested defendant to deliver
cement. Finally, on April 22, 1991, plaintiff
notified defendant of its inability to
construct the capping beam for the latter’s
failure to deliver the cement as provided in
their agreement(Exh. "I"). Although records
show that there was mention of revision of
design, there was no evidence presented to
show such revision required less amount of
cement than what was agreed on by plaintiff
and defendant.
The seventh phase of the construction of the
diaphragm wall is the construction of the
steel props which could be installed only
after the soil has been excavated by the main
contractor. When defendant directed
plaintiff to install the props, the latter
requested for a site inspection to determine
if the excavation of the soil was finished up
to the 4th level basement. Plaintiff, however,
did not receive any response.It later learned
that defendant had contracted out that
portion of work to another sub-contractor
(Exhs. "O" and "P"). Nevertheless, plaintiff
informed defendant of its willingness to
execute that portion of its work.18
It is clear from the foregoing that contrary to
the allegations of FBI, FSI had indeed
completed its assigned obligations, with the
exception of certain assigned tasks, which
was due to the failure of FBI to fulfil its end
of the bargain.
It can similarly be deduced that the defects
FBI complained of, such as the misaligned
diaphragm wall and the erroneous location
of the rebar dowels, were not only
anticipated by the parties, having stipulated
alternative plans to remedy the same, but
more importantly, are also attributable to the
very actions of FBI. Accordingly,
considering that the alleged defects in FSI’s
contracted works were not so much due to
the fault or negligence of the FSI, but were
satisfactorily proven to be caused by FBI’s
own acts, FBI’s claim of ₱8,582,756.29
representing the cost of the measures it
undertook to rectify the alleged defects must
necessarily fail. In fact, as the lower court
noted, at the time when FBI had evaluated
FSI’s works, it did not categorically pose
any objection thereto, viz:
Defendant admitted that it had paid ₱6
million based on its evaluation of plaintiff’s
accomplishments (tsn., Sept. 28, 2000, p.
17) and its payment was made without
objection on plaintiff’s works, the majority
of which were for the accomplishments in
the construction of the diaphragm wall (tsn.,
ibid, p. 70).
xxxx
While there is no evidence to show the
scope of work for these billings, it is safe to
assume that these were also works in the
construction of the diaphragm wall
considering that as of May 16, 1991,
plaintiff had only the installation of the steel
props and welding works to complete (Exh.
"H"). If defendant was able to evaluate the
work finished by plaintiff the majority of
which was the construction of the diaphragm
wall and paid it about ₱6 million as
accomplishment, there was no reason why it
could not evaluate plaintiff’s works covered
by billings 3 and 4.In other words,
defendants did nothave to excavate in order
to determine and evaluate plaintiff’s works.
Hence, defendant’s refusal to pay was not
justified and the alleged defects of the
diaphragm wall (tsn, Sept. 28, 2000, p. 17)
which it claims to have discovered only after
January 1992 were mere afterthoughts.19
Thus, in the absence of any record to
otherwise prove FSI’s neglect in the
fulfilment of its obligations under the
contract, this Court shall refrain from
reversing the findings of the courts below,
which are fully supported by and deducible
from, the evidence on record. Indeed, FBI
failed to present any evidence to justify its
refusal to pay FSI for the works it was
contracted to perform. As such, We do not
see any reason to deviate from the assailed
rulings.
Anent FBI’s second assignment of error,
however, We find merit in the argument that
the 12% interest rateis inapplicable, since
this case does not involve a loan or
forbearance ofmoney. In the landmark case
of Eastern Shipping Lines, Inc. v. Court of
Appeals,20 We laid down the following
guidelines in computing legal interest:
II. With regard particularly to an award of
interest in the concept of actual and
compensatory damages, the rate of interest,
as well as the accrual thereof, is imposed, as
follows:
1. When the obligation is breached, and it
consists in the payment of a sum of money,
i.e., a loan or forbearance of money, the
interest due should be that which may have
been stipulated in writing. Furthermore, the
interest due shall itself earn legal interest
from the time it is judicially demanded. In
the absence of stipulation, the rate of interest
shall be 12% per annum to be computed
from default, i.e., from judicial or
extrajudicial demand under and subject to
the provisions of Article1169 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.21
In line, however, with the recent circular of
the Monetary Board of the Bangko Sentral
ng Pilipinas (BSP-MB) No. 799, we have
modified the guidelines in Nacar v. Gallery
Frames,22 as follows:
I. When an obligation, regardless of
itssource, i.e., law, contracts, quasicontracts,
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 6% per annumto 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 6% per
annumfrom 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.23
It should be noted, however, 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. Thus, the need to
determine whether the obligation involved
herein is a loanand forbearance of money
nonetheless exists.
In S.C. Megaworld Construction and
Development Corporation v. Engr.
Parada,24 We clarified the meaning of
obligations constituting loans or forbearance
of money in the following wise:
As further clarified in the case of Sunga-
Chan v. CA, a loan or forbearance of money,
goods or credit describes a contractual
obligation whereby a lender or creditor has
refrained during a given period from
requiring the borrower or debtor to repay the
loan or debt then due and payable. Thus:
In Reformina v. Tomol, Jr., the Court held
that the legal interest at 12% per annum
under Central Bank (CB) Circular No. 416
shall be adjudged only in cases involving the
loan or forbearance of money. And for
transactions involving payment of
indemnities in the concept of damages
arising from default in the performance of
obligations in general and/or for money
judgment not involving a loan or
forbearance of money, goods, or credit, the
governing provision is Art. 2209 of the Civil
Code prescribing a yearly 6% interest. Art.
2209 pertinently provides:
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 the interest agreed
upon, and in the absence of stipulation, the
legal interest, which is six per cent per
annum.
The term "forbearance," within the context
of usury law, has been described as a
contractual obligation ofa lender or creditor
to refrain, during a given period of time,
from requiring the borrower or debtor to
repay the loan or debt then due and
payable.25
Forbearance of money, goods or credits,
therefore, refers to arrangements other than
loan agreements, where a person acquiesces
to the temporary use of his money, goods
orcredits pending the happening of certain
events or fulfilment of certain conditions.26
Consequently, if those conditions are
breached, said person is entitled not only to
the return of the principal amount paid, but
also to compensation for the use of his
money which would be the same rateof legal
interest applicable to a loan since the use or
deprivation of funds therein is similar to a
loan.27
This case, however, does not involve an
acquiescence to the temporary use of a
party’s money but a performance of a
particular service, specifically the
construction of the diaphragm wall, capping
beam, and guide walls of the Trafalgar
Plaza.
A review of similar jurisprudence would tell
us that this Court had repeatedly recognized
this distinction and awarded interest at a rate
of 6% on actual or compensatory damages
arising from a breach not only of
construction contracts,28 such as the one
subject ofthis case, but also of contracts
wherein one of the parties reneged on its
obligation to perform messengerial
services,29 deliver certain quantities of
molasses,30 undertake the reforestation of a
denuded forest land,31 as well as breaches
of contracts of carriage,32 and trucking
agreements.33 We have explained therein
that the reason behind such is that said
contracts do not partake of loans or
forbearance of money but are more in the
nature of contracts of service.
Thus, in the absence of any stipulation as to
interest in the agreement between the parties
herein, the matter of interest award arising
from the dispute in this case would actually
fall under the second paragraph of the
above-quoted guidelines inthe landmark
case of Eastern Shipping Lines, which
necessitates the imposition of interestat the
rate of 6%, instead of the 12% imposed by
the courts below.
The 6% interest rate shall further be imposed
from the finality of the judgment herein until
satisfaction thereof, in light of our recent
ruling in Nacar v. Gallery Frames.34
Note, however, that contrary to
FBI’sassertion, We find no error in the
RTC’s ruling that the interest shall begin to
run from August 30, 1991 as this is the date
when FSI extrajudicially made its claim
against FBI through a letter demanding
payment for its services.35
In view of the foregoing, therefore, We find
no compelling reason to disturb the factual
findings of the RTC and the CA, which are
fully supported by and deducible from, the
evidence on record, insofar as the sum
representing Billings 3 and 4 is concerned.
As to the rate of interest due thereon,
however, We note that the same should be
reduced to 6% per annum considering the
fact that the obligation involved herein does
not partake of a loan or forbearance of
money.
WHEREFORE, premises considered, the
instant petition is DENIED. The Decision
and Resolution, dated July 15, 2010 and
November 23, 2010, respectively, of the
Court of Appeals in CA-G.R. CV No. 70849
are hereby AFFIRMED with
MODIFICATION. Federal Builders, Inc. is
ORDERED to pay Foundation Specialists,
Inc. the sum of Pl ,024,600.00 representing
billings 3 and 4, less the amount of
₱33,354.40, plus interest at six percent (6%)
per annum reckoned from August 30, 1991
until full payment thereof.
SUN LIFE OF CANADA
(PHILIPPINES), INC., Petitioner,
vs.
SANDRA TAN KIT and The Estate of the
Deceased NORBERTO TAN KIT,
respondents.
The Court of Appeals' (CA) imposition of
12o/o interest on the ₱13,080.93 premium
refund is the only matter in question in this
case.
This Petition for Review on Certiorari1
assails the October 17, 2007 Decision2 of
CA in CA-GR. CV No. 86923, which,
among others, imposed a 12% per annum
rate of interest reckoned from the time of
death of the insured until fully paid, on the
premium to be reimbursed by petitioner Sun
Life of Canada (Philippines), Inc.
(petitioner) to respondents Sandra Tan Kit
(respondent Tan Kit) and the Estate of the
Deceased Norberto Tan Kit (respondent
estate). Likewise assailed in this Petition is
the CA's June 12, 2008 Resolution3 denying
petitioner's Motion for Reconsideration of
the said Decision.
Factual Antecedents
Respondent Tan Kit is the widow and
designated beneficiary of Norberto Tan Kit
(Norberto), whose application for a life
insurance policy,4 with face value of
₱300,000.00, was granted by petitioner on
October 28, 1999. On February 19, 2001, or
within the two-year contestability period,5
Norberto died of disseminated gastric
carcinoma.6 Consequently, respondent Tan
Kit filed a claim under the subject policy.
In a Letter7 dated September 3, 2001,
petitioner denied respondent Tan Kit’s claim
on account of Norberto’s failure to fully and
faithfully disclose in his insurance
application certain material and relevant
information about his health and smoking
history. Specifically, Norberto answered
"No" to the question inquiring whether he
had smoked cigarettes or cigars within the
last 12 months prior to filling out said
application.8 However, the medical report of
Dr. Anna Chua (Dr. Chua), one of the
several physicians that Norberto consulted
for his illness, reveals that he was a smoker
and had only stopped smoking in August
1999. According to petitioner, its
underwriters would not have approved
Norberto’s application for life insurance had
they been given the correct information.
Believing that the policy is null and void,
petitioner opined that its liability is limited
to the refund of all the premiums paid.
Accordingly, it enclosed in the said letter a
check for ₱13,080.93 representing the
premium refund.
In a letter9 dated September 13, 2001,
respondent Tan Kit refused to accept the
check and insisted on the payment of the
insurance proceeds.
On October 4, 2002, petitioner filed a
Complaint10 for Rescission of Insurance
Contract before the Regional Trial Court
(RTC) of Makati City.
Ruling of the Regional Trial Court
In its November 30, 2005 Decision,11 the
RTC noted that petitioner’s physician, Dr.
Charity Salvador (Dr. Salvador), conducted
medical examination on Norberto.
Moreover, petitioner’s agent, Irma Joy E.
Javelosa (Javelosa), answered "NO" to the
question "Are you aware of anything about
the life to be insured’s lifestyle, hazardous
sports, habits, medical history, or any risk
factor that would have an adverse effect on
insurability?" in her Agent’s Report.
Javelosa also already knew Norberto two
years prior to the approval of the latter’s
application for insurance. The RTC
concluded that petitioner, through the above-
mentioned circumstances, had already
cleared Norberto of any misrepresentation
that he may have committed. The RTC also
opined that the affidavit of Dr. Chua,
presented as part of petitioner’s evidence
and which confirmed the fact that the
insured was a smoker and only stopped
smoking a year ago [1999], is hearsay since
Dr. Chua did not testify in court. Further,
since Norberto had a subsisting insurance
policy with petitioner during his application
for insurance subject of this case, it was
incumbent upon petitioner to ascertain the
health condition of Norberto considering the
additional burden that it was assuming.
Lastly, petitioner did not comply with the
requirements for rescission of insurance
contract as held in Philamcare Health
Systems, Inc. v. Court of Appeals.12 Thus,
the dispositive portion of the RTC Decision:
WHEREFORE, in view of the foregoing
considerations, this court hereby finds in
favor of the [respondents and] against the
[petitioner], hence it hereby orders the
[petitioner] to pay the [respondent], Sandra
Tan Kit, the sum of Philippine Pesos:
THREE HUNDRED THOUSAND
(₱300,000.00), representing the face value
of the insurance policy with interest at six
percent (6%) per annum from October 4,
2002 until fully paid.
Cost de oficio.
SO ORDERED.13
Petitioner moved for reconsideration,14 but
was denied in an Order15 dated February
15, 2006.
Hence, petitioner appealed to the CA.
Ruling of the Court of Appeals
On appeal, the CA reversed and set aside the
RTC’s ruling in its Decision16 dated
October 17, 2007.
From the records, the CA found that prior to
his death, Norberto had consulted two
physicians, Dr. Chua on August 19, 2000,
and Dr. John Ledesma (Dr. Ledesma) on
December 28, 2000, to whom he confided
that he had stopped smoking only in 1999.
At the time therefore that he applied for
insurance policy on October 28, 1999, there
is no truth to his claim that he did not smoke
cigarettes within 12 months prior to the said
application. The CA thus held that Norberto
is guilty of concealment which misled
petitioner in forming its estimates of the
risks of the insurance policy. This gave
petitioner the right to rescind the insurance
contract which it properly exercised in this
case.
In addition, the CA held that the content of
Norberto’s medical records are deemed
admitted by respondents since they failed to
deny the same despite having received from
petitioner a Request for Admission pursuant
to Rule 26 of the Rules of Court.17 And
since an admission is in the nature of
evidence the legal effects of which form part
of the records, the CA discredited the RTC’s
ruling that the subject medical records and
the affidavits executed by Norberto’s
physicians attesting to the truth of the same
were hearsay.
The dispositive portion of the CA Decision
reads:
WHEREFORE, the foregoing considered,
the instant appeal is hereby GRANTED and
the appealed Decision REVERSED and SET
ASIDE, and in lieu thereof, a judgment is
hereby rendered GRANTING the complaint
a quo.
Accordingly, [petitioner] is ordered to
reimburse [respondents] the sum of
₱13,080.93 representing the [premium] paid
by the insured with interest at the rate of
12% per annum from the time of the death
of the insured until fully paid.
SO ORDERED.18
The parties filed their separate motions for
reconsideration.19 While respondents
questioned the factual and legal bases of the
CA Decision, petitioner, on the other hand,
assailed the imposition of interest on the
premium ordered refunded to respondents.
However, the appellate court denied the
motions in its June 12, 2008 Resolution,20
viz:
WHEREFORE, the foregoing considered,
the separate motions for reconsideration
filed by the [petitioner] and the
[respondents] are hereby DENIED.
SO ORDERED.21
Only petitioner appealed to this Court
through the present Petition for Review on
Certiorari.
Issue
The sole issue in this case is whether
petitioner is liable to pay interest on the
premium to be refunded to respondents.
The Parties’ Arguments
Petitioner argues that no interest should have
been imposed on the premium to be
refunded because the CA Decision does not
provide any legal or factual basis therefor;
that petitioner directly and timely tendered
to respondents an amount representing the
premium refund but they rejected it since
they opted to pursue their claim for the
proceeds of the insurance policy; that
respondents should bear the consequence of
their unsound decision of rejecting the
refund tendered to them; and, that petitioner
is not guilty of delay or of invalid or unjust
rescission as to make it liable for interest.
Hence, following the ruling in Tio Khe Chio
v. Court of Appeals,22 no interest can be
assessed against petitioner.
Respondents, on the other hand, contend that
the reimbursement of premium is clearly a
money obligation or one that arises from
forbearance of money, hence, the imposition
of 12% interest per annum is just, proper and
supported by jurisprudence. While they
admit that they refused the tender of
payment of the premium refund, they aver
that they only did so because they did not
want to abandon their claim for the proceeds
of the insurance policy. In any case, what
petitioner should have done under the
circumstances was to consign the amount of
payment in court during the pendency of the
case.
Our Ruling
Tio Khe Chio is not applicable in this case.
Petitioner avers that Tio Khe Chio, albeit
pertaining to marine insurance, is instructive
on the issue of payment of interest.1âwphi1
There, the Court pointed to Sections 243 and
244 of the Insurance Code which explicitly
provide for payment of interest when there is
unjustified refusal or withholding of
payment of the claim by the insurer, 23 and
to Article 220924 of the New Civil Code
which likewise provides for payment of
interest when the debtor is in delay.
The Court finds, however, that Tio Khe Chio
is not applicable here as it deals with
payment of interest on the insurance
proceeds in which the claim therefor was
either unreasonably denied or withheld or
the insurer incurred delay in the payment
thereof. In this case, what is involved is an
order for petitioner to refund to respondents
the insurance premium paid by Norberto as a
consequence of the rescission of the
insurance contract on account of the latter’s
concealment of material information in his
insurance application. Moreover, petitioner
did not unreasonably deny or withhold the
insurance proceeds as it was satisfactorily
established that Norberto was guilty of
concealment.
Nature of interest imposed by the CA
There are two kinds of interest – monetary
and compensatory.
"Monetary interest refers to the
compensation set by the parties for the use
or forbearance of money."25 No such
interest shall be due unless it has been
expressly stipulated in writing.26 "On the
other hand, compensatory interest refers to
the penalty or indemnity for damages
imposed by law or by the courts."27 The
interest mentioned in Articles 2209 and
221228of the Civil Code applies to
compensatory interest.29
Clearly and contrary to respondents’
assertion, the interest imposed by the CA is
not monetary interest because aside from the
fact that there is no use or forbearance of
money involved in this case, the subject
interest was not one which was agreed upon
by the parties in writing. This being the case
and judging from the tenor of the CA, to wit:
Accordingly, [petitioner] is ordered to
reimburse [respondents] the sum of
₱13,080.93 representing the [premium] paid
by the insured with interest at the rate of
12% per annum from time of death of the
insured until fully paid.30
there can be no other conclusion than that
the interest imposed by the appellate court is
in the nature of compensatory interest.
The CA incorrectly imposed compensatory
interest on the premium refund reckoned
from the time of death of the insured until
fully paid
As a form of damages, compensatory
interest is due only if the obligor is proven to
have failed to comply with his obligation.31
In this case, it is undisputed that
simultaneous to its giving of notice to
respondents that it was rescinding the policy
due to concealment, petitioner tendered the
refund of premium by attaching to the said
notice a check representing the amount of
refund. However, respondents refused to
accept the same since they were seeking for
the release of the proceeds of the policy.
Because of this discord, petitioner filed for
judicial rescission of the contract. Petitioner,
after receiving an adverse judgment from the
RTC, appealed to the CA. And as may be
recalled, the appellate court found Norberto
guilty of concealment and thus upheld the
rescission of the insurance contract and
consequently decreed the obligation of
petitioner to return to respondents the
premium paid by Norberto. Moreover, we
find that petitioner did not incur delay or
unjustifiably deny the claim.
Based on the foregoing, we find that
petitioner properly complied with its
obligation under the law and contract.
Hence, it should not be made liable to pay
compensatory interest.
Considering the prevailing circumstances of
the case, we hereby direct petitioner to
reimburse the premium paid within 15 days
from date of finality of this Decision. If
petitioner fails to pay within the said period,
then the amount shall be deemed equivalent
to a forbearance of credit.32 In such a case,
the rate of interest shall be 6% per annum.33
WHEREFORE, the assailed October 17,
2007 Decision of the Court of Appeals in
CA-G.R. CV No. 86923 is MODIFIED in
that petitioner Sun Life of Canada
(Philippines), Inc. is ordered to reimburse to
respondents Sandra Tan Kit and the Estate
of the Deceased Norberto Tan Kit the sum
of ~13,080.93 representing the premium
paid by the insured within fifteen (15) days
from date of finality of this Decision. If the
amount is not reimbursed within said period,
the same shall earn interest of 6% per annum
until fully paid.
SO ORDERED.
YHT REALTY CORPORATION,
ERLINDA LAINEZ and ANICIA
PAYAM, petitioners
VS.
THE COURT OF APPEALS and
MAURICE McLOUGHLIN,
respondents.G.R. No. 126780
FACTS
Respondent McLoughlin would always stay
at Tropicana Hotel every time he is here in
thePhilippines and would rent a safety
deposit box. The safety deposit box could
only be openedthrough the use of 2 keys,
one of which is given to the registered guest,
and the other remaining inthe possession of
the management of the hotel.McLoughlin
allegedly placed the following in his safety
deposit box – 2 envelopes containingUS
Dollars, one envelope containing Australian
Dollars, Letters, credit cards, bankbooks and
acheckbook.On 12 December 1987, before
leaving for a brief trip, McLoughlin took
some items from thesafety box which
includes the ff: envelope containing Five
Thousand US Dollars (US$5,000.00),
theother envelope containing Ten Thousand
Australian Dollars (AUS$10,000.00), his
passports and hiscredit cards. The other
items were left in the deposit box. Upon
arrival, he found out that a fewdollars were
missing and the jewelry he bought was
likewise missing.Eventually, he confronted
Lainez and Paiyam who admitted that Tan
opened the safetydeposit box with the key
assigned to him. McLoughlin went up to his
room where Tan was stayingand confronted
her. Tan admitted that she had stolen
McLouglin’s key and was able to open
thesafety deposit box with the assistance of
Lopez, Paiyam and Lainez. Lopez also told
McLoughlinthat Tan stole the key assigned
to McLouglin while the latter was
asleep.McLoughlin insisted that it must be
the hotel who must assume responsibility for
the loss hesuffered. Lopez refused to accept
responsibility relying on the conditions for
renting the safetydeposit box entitled
“Undertaking For the Use of Safety Deposit
Box”
ISSUE
WON the “Undertaking for the Use of
Safety Deposit Box” admittedly executed by
privaterespondent is null and void.
HELD
YES Article 2003 was incorporated in the
New Civil Code as an expression of public
policyprecisely to apply to situations such as
that presented in this case. The hotel
business like thecommon carrier’s business
is imbued with public interest. Catering to
the public, hotelkeepers arebound to provide
not only lodging for hotel guests and
security to their persons and belongings. The
twin duty constitutes the essence of the
business. The law in turn does not allow
such duty tothe public to be negated or
diluted by any contrary stipulation in so-
called “undertakings” thatordinarily appear
in prepared forms imposed by hotel keepers
on guests for their signature.In an early case
(De Los Santos v. Tan Khey), CA ruled that
to hold hotelkeepers orinnkeeper liable for
the effects of their guests, it is not necessary
that they be actually delivered tothe
innkeepers or their employees. It is enough
that such effects are within the hotel or inn.
Withgreater reason should the liability of the
hotelkeeper be enforced when the missing
items aretaken without the guest’s
knowledge and consent from a safety
deposit box provided by the hotelitself, as in
this case.Paragraphs (2) and (4) of the
“undertaking” manifestly contravene Article
2003, CC for theyallow Tropicana to be
released from liability arising from any loss
in the contents and/or use of thesafety
deposit box for any cause whatsoever.
Evidently, the undertaking was intended to
bar anyclaim against Tropicana for any loss
of the contents of the safety deposit box
whether or notnegligence was incurred by
Tropicana or its employees. The New Civil
Code is explicit that theresponsibility of the
hotel-keeper shall extend to loss of, or injury
to, the personal property of theguests even if
caused by servants or employees of the
keepers of hotels or inns as well as
bystrangers, except as it may proceed from
any force majeure.
G.R. No. L-7593 March 27, 1913
THE UNITED STATES, plaintiff-appellee,
vs.
JOSE M. IGPUARA, defendant-appellant.
W. A. Kincaid, Thos. L. Hartigan, and Jose
Robles Lahesa for appellant.
Office of the Solicitor-General Harvey for
appellee.
ARELLANO, C.J.:
The defendant therein is charged with the
crime of estafa, for having swindled Juana
Montilla and Eugenio Veraguth out of
P2,498 Philippine currency, which he had
take on deposit from the former to be at the
latter's disposal. The document setting forth
the obligation reads:
We hold at the disposal of Eugenio Veraguth
the sum of two thousand four hundred and
ninety-eight pesos (P2,498), the balance
from Juana Montilla's sugar. — Iloilo, June
26, 1911, — Jose Igpuara, for Ramirez and
Co.
The Court of First Instance of Iloilo
sentenced the defendant to two years of
presidio correccional, to pay Juana Montilla
P2,498 Philippine currency, and in case of
insolvency to subsidiary imprisonment at
P2.50 per day, not to exceed one-third of the
principal penalty, and the costs.
The defendant appealed, alleging as errors:
(1) Holding that the document executed by
him was a certificate of deposit; (2) holding
the existence of a deposit, without precedent
transfer or delivery of the P2,498; and (3)
classifying the facts in the case as the crime
of estafa.
A deposit is constituted from the time a
person receives a thing belonging to another
with the obligation of keeping and returning
it. (Art. 1758, Civil Code.)
That the defendant received P2,498 is a fact
proven. The defendant drew up a document
declaring that they remained in his
possession, which he could not have said
had he not received them. They remained in
his possession, surely in no other sense than
to take care of them, for they remained has
no other purpose. They remained in the
defendant's possession at the disposal of
Veraguth; but on August 23 of the same year
Veraguth demanded for him through a
notarial instrument restitution of them, and
to date he has not restored them.
The appellant says: "Juana Montilla's agent
voluntarily accepted the sum of P2,498 in an
instrument payable on demand, and as no
attempt was made to cash it until August 23,
1911, he could indorse and negotiate it like
any other commercial instrument. There is
no doubt that if Veraguth accepted the
receipt for P2,498 it was because at that time
he agreed with the defendant to consider the
operation of sale on commission closed,
leaving the collection of said sum until later,
which sum remained as a loan payable upon
presentation of the receipt." (Brief, 3 and 4.)
Then, after averring the true facts: (1) that a
sales commission was precedent; (2) that
this commission was settled with a balance
of P2,498 in favor of the principal, Juana
Montilla; and (3) that this balance remained
in the possession of the defendant, who drew
up an instrument payable on demand, he has
drawn two conclusions, both erroneous:
One, that the instrument drawn up in the
form of a deposit certificate could be
indorsed or negotiated like any other
commercial instrument; and the other, that
the sum of P2,498 remained in defendant's
possession as a loan.
It is erroneous to assert that the certificate of
deposit in question is negotiable like any
other commercial instrument: First, because
every commercial instrument is not
negotiable; and second, because only
instruments payable to order are negotiable.
Hence, this instrument not being to order but
to bearer, it is not negotiable.
It is also erroneous to assert that sum of
money set forth in said certificate is,
according to it, in the defendant's possession
as a loan. In a loan the lender transmits to
the borrower the use of the thing lent, while
in a deposit the use of the thing is not
transmitted, but merely possession for its
custody or safe-keeping.
In order that the depositary may use or
dispose oft he things deposited, the
depositor's consent is required, and then:
The rights and obligations of the depositary
and of the depositor shall cease, and the
rules and provisions applicable to
commercial loans, commission, or contract
which took the place of the deposit shall be
observed. (Art. 309, Code of Commerce.)
The defendant has shown no authorization
whatsoever or the consent of the depositary
for using or disposing of the P2,498, which
the certificate acknowledges, or any contract
entered into with the depositor to convert the
deposit into a loan, commission, or other
contract.
That demand was not made for restitution of
the sum deposited, which could have been
claimed on the same or the next day after the
certificate was signed, does not operate
against the depositor, or signify anything
except the intention not to press it. Failure to
claim at once or delay for sometime in
demanding restitution of the things
deposited, which was immediately due, does
not imply such permission to use the thing
deposited as would convert the deposit into a
loan.
Article 408 of the Code of Commerce of
1829, previous to the one now in force,
provided:
The depositary of an amount of money
cannot use the amount, and if he makes use
of it, he shall be responsible for all damages
that may accrue and shall respond to the
depositor for the legal interest on the
amount.
Whereupon the commentators say:
In this case the deposit becomes in fact a
loan, as a just punishment imposed upon
him who abuses the sacred nature of a
deposit and as a means of preventing the
desire of gain from leading him into
speculations that may be disastrous to the
depositor, who is much better secured while
the deposit exists when he only has a
personal action for recovery.
According to article 548, No. 5, of the Penal
Code, those who to the prejudice of another
appropriate or abstract for their own use
money, goods, or other personal property
which they may have received as a deposit,
on commission, or for administration, or for
any other purpose which produces the
obligation of delivering it or returning it, and
deny having received it, shall suffer the
penalty of the preceding article," which
punishes such act as the crime of estafa. The
corresponding article of the Penal Code of
the Philippines in 535, No. 5.
In a decision of an appeal, September 28,
1895, the principle was laid down that:
"Since he commits the crime of estafa under
article 548 of the Penal Code of Spain who
to another's detriment appropriates to
himself or abstracts money or goods
received on commission for delivery, the
court rightly applied this article to the
appellant, who, to the manifest detriment of
the owner or owners of the securities, since
he has not restored them, willfully and
wrongfully disposed of them by
appropriating them to himself or at least
diverting them from the purpose to which he
was charged to devote them."
It is unquestionable that in no sense did the
P2,498 which he willfully and wrongfully
disposed of to the detriments of his
principal, Juana Montilla, and of the
depositor, Eugenio Veraguth, belong to the
defendant.
Likewise erroneous is the construction
apparently at tempted to be given to two
decisions of this Supreme Court (U. S. vs.
Dominguez, 2 Phil. Rep., 580, and U. S. vs.
Morales and Morco, 15 Phil. Rep., 236) as
implying that what constitutes estafa is not
the disposal of money deposited, but denial
of having received same. In the first of said
cases there was no evidence that the
defendant had appropriated the grain
deposited in his possession.

On the contrary, it is entirely probable that,

after the departure of the defendant from
Libmanan on September 20, 1898, two days
after the uprising of the civil guard in Nueva
Caceres, the rice was seized by the
revolutionalists and appropriated to their
own uses.

In this connection it was held that failure to

return the thing deposited was not sufficient,
but that it was necessary to prove that the
depositary had appropriated it to himself or
diverted the deposit to his own or another's
benefit. He was accused or refusing to
restore, and it was held that the code does
not penalize refusal to restore but denial of
having received. So much for the crime of
omission; now with reference to the crime of
commission, it was not held in that decision
that appropriation or diversion of the thing
deposited would not constitute the crime of
estafa.

In the second of said decisions, the accused

"kept none of the proceeds of the sales.
Those, such as they were, he turned over to
the owner;" and there being no proof of the
appropriation, the agent could not be found
guilty of the crime of estafa.

Being in accord and the merits of the case,

the judgment appealed from is affirmed,
with costs.